Cambodia graduates from Low Income Country status – how will that affect international aid?July 4, 2016
A popular discussion topic around Phnom Penh in recent months has been the news that Cambodia was to ‘graduate’ to middle-income country status on July 1 last week. I heard about this during my first meeting here in February, with a EuroCham Board of Director; I listened as the US Ambassador discussed the challenges and opportunities this will bring with AmCham general members; it is the opening line in the Asia Development Bank’s Country Operations Business Plan; and I even had a discussion about this at the bar late one night the other week.
But I’ve also found that there is a great misunderstanding about this classification – given by the World Bank – and how it differs from similar statuses given by, for example, the WTO, and also a lot of misunderstanding about what this means for Cambodia as a whole.
The World Bank divides countries into four different income groups according to their 2016 GNI per capita:
Low income countries (LICs) below $1,045;
Lower middle income countries (LMICs) between $1,046- $4,125;
Upper middle income countries (UMICs) between $4,126-$12,735;
High income countries (HICs), $12,736 or higher.
Countries are automatically reassigned on July 1 each year, based on the estimate of their GNI per capita for the previous calendar year. After registering a $1,020 GNI per capita for 2014, Cambodia surpassed the threshold for 2015 and was accordingly reassigned at the end of last week.
The World Bank classification differs from the United Nation (and WTO) classification, which relies upon additional factors and is more subjective rather than based purely on numbers. The UN classifies the lowest level of developing countries as “Least Developed Countries” (LDCs). It reviews the list every three years, and takes into account three criteria: Gross national income per capita; Human assets; and Economic vulnerability. Only four countries have ever graduated from LDC status, with three more due to graduate in coming years. Once a determination is made to graduate a country, they normally set a date for it (maybe five years in the future) to give time to assess any changes that would effect that determination.
The WTO generally adheres to the UN’s determination, although there are no actual WTO definitions of ‘developed’ or ‘developing’ countries. LDCs in the WTO are designated on the basis of self-selection, meaning that Cambodia will never be forcibly and suddenly removed that list, and the benefits that come with it.
There are two main rankings at play here. Cambodia has moved from a lower income country to a lower-middle income country under the World Bank definition. When that happens the country loses some of the privileges and preferences in terms of Official Development Assistance (ODA), and that may also have an adverse effect on private donations. However, for the foreseeable future, Cambodia will remain a “Least Developed Country” according to both the UN and WTO. Within the WTO framework, it will continue to be able to use the special provisions provided through that agreement, which include the Everything But Arms tariff and duty free exports to the EU, amongst others. It will take some time for its UN status to change.
So what does this mean for development aid?
There is a concern that Cambodia’s graduation to LMIC status means it is likely to lose a large amount of much needed aid. A number of leading international NGOs have spoken out recently about the classification process in general, and how it is linked to aid. It is feared that by ‘graduating’ and losing access to still very much needed aid dollars, there is an increased risk to reverse growth trends and then ‘reverse graduate’ and fall back down the ladder.
However, this does not appear to be the case with Cambodia. The two main donor programs affected by changing classifications are the World Bank’s ODA and the World Banks’s International Development Association (IDA), which offer grants and loans respectively. When some countries graduate to LMIC status they stop receiving both the grants and loans on favorable terms, and even need to accelerate repayment of existing debt. It is easy to see how this could create an immediate hurdle to overcome. But Cambodia will not fall into this category; it has not been benefiting from World Bank grants or loans since the World Bank ceased funding programs in Cambodia for political reasons in 2011. This has just changed, as it was announced on May 19th of this year that the World Bank would cease its punitive stance, and the Bank approved the 2016-2017 Country Engagement Note for Cambodia, which includes seven investment projects totaling around $250 million of funding.
The World Bank is not the only donor to begin, continue, or increase its funding to Cambodia this year. The ongoing ADB portfolio for Cambodia has a value of $1.176 billion, comprising 63 loans and grants implemented through 35 projects. The ADB also operates its own classification system, using the World Bank’s same financial cutoff amount, but including an assessment of the country’s credit worthiness also. It is not known when Cambodia will graduate from the ADB’s Group A category, but when it does the graduation normally takes about 4 years to complete, leaving substantial time for contingency planning.
There have also been large amounts of bilateral aid from donor countries. Between 2000 and 2011 it is estimated that China loaned $1.16 billion while Japan loaned Cambodia $386 million. In May it was announced that China will provide $450 million in development aid over the next few years, on top of the over $2 billion that China has invested in hydroelectric power in Cambodia. The European Union is the self-professed largest donor of development aid in Cambodia, and the overall development assistance to Cambodia by the European partners from 2014-2018 is estimated at 892 million euros in grants and 478 million euros in loans (totaling of 1.37 billion euros). Included in that sum is more than 410 million euros allocated for 2014-2020 to enhance Cambodia’s own national development policies. Additionally, at the ASEAN-Russia conference in May Cambodia and Russia signed eight separate agreements, focussing on developing trade, while Cambodia continues to lobby for the conversion of $1.5 billion in debt to Russia to development aid.
Other factors to consider are that both foreign direct investment (FDI) and tax revenue are growing rapidly. In 2013 FDI into Cambodia reached $1.2 billion, climbing to $1.8 billion in 2015 (or 10% of GDP). Tax revenue increased from 10% of GDP in 2010 to 15.1% in 2015, and is projected to continue to grow due to improved administration and continued economic growth.
Cambodia is home to thousands of NGOs which operate on their own agenda, some focused on Cambodia, some allocating resources where they see the most need. There is a chance the new classification will make both private donors and NGOs find it less desirable to donate to Cambodia. Doctors Without Borders recently said that “there is a tendency to perceive NGO programmes and in particular humanitarian programs as being synonymous with low-income-countries. In the evolving aid architecture this is no longer the case.” With the number of LICs decreasing (a projected level of about 20 will remain by 2025), donors will still need to focus on LMICs heavily.
The main takeaway should be that this is not a pivotal, dire moment for Cambodia. The many sources of funding will not be affected immediately, especially with pledged donations for at least the next four years, and the Everything But Arms scheme will continue for exports to Europe. Graduating from the LIC category can have drastic effects for some countries, especially those heavily dependent on the World Bank’s grants and loans, but Cambodia is not one of them. There are still several challenges that need to be continually overcome for development in the Kingdom to continue, but this should be considered a positive milestone, one that will increase private sector investment, help Cambodia establish a credit rating, and advance it towards its self stated goal of reaching Upper Middle Income status in the next ten years.
 Asian Development Bank Country Operations Business Plan, Cambodia 2016-2018 [Dec 2015]
 ‘Warning: Becoming a Middle-Income Country can seriously damage your health’ [Jan 2015]