CHAPTER II LITERATURE REVIEW. This chapter, researcher would like to provide in generally information on factors affecting rice

Transcription

1 CHAPTER II LITERATURE REVIEW This chapter, researcher would like to provide in generally information on factors affecting rice sector in Cambodia and the growth of Cambodia s economy, and also overview of rice industry that is currently operating in welcome ASEAN regions. It consists of two parts, namely; focus on the background and economic development and the focus on the general overview of rice industry. It s also studying the current operation of rice industry as well as the market share in providing credit services towards in ASEAN and international areas. The study covers the development of rice industry between the periods with special attention to Cambodia s rice sector penetration within Asian Economic Community in year of : History of Rice Production in Cambodia The rice production evolved remarkably over the period of time and was driven by political environment. According to Lambert (2012), farming was introduced into Cambodia about 2,300BC; the first Cambodian farmers used stone tools but from about 1,500 BC the Cambodians used tools and weapons made from bronze; by about 500 BC they had learned to use iron. Remarkably, after green revolution in 1940s and French colonial regime in 1953, Cambodian farmers started to use chemical fertilizers for their field until the present. During the period between 1979 and 1993, the government of Cambodia implemented agricultural inputs subsidy program that provide fertilizers and pesticides to farmers to enhance rice production and in turn farmers need to sell their rice which was beyond the household requirement to the government. From the first national election in 1993, the markets for rice was opened and 21

2 diversified due to an increasing in the number of investors in this sector. Currently, rice is sold to local miller factories and then is exported to overseas. 2.2: Rice Production in Cambodia According to MAFF (2010) in general the cultivated area for rice production gradually increases over the period of time between 2000 and 2011; in 2000 just below 2 million hectares of land was used for rice cultivation, this number increase about 45 percent in Figure 1: Rice Cultivated Area from Source: Ministry of Agriculture Forestry and Fisheries This is showed that, the national average yield of rice in Cambodia varies between 1.9 and 3.0 t/ha which is low compared to other rice producing countries in the region like Vietnam 4.8t/ha and Lao PDR with 3.29t/ha in 2007(Mund, 2010). According to MAFF(2010) the average yield 22

3 of rice in 2000 was 2.12 t/ha; this number fluctuated over three years period between 2000 and 2003 and started to surge in 2004; after that the average yield gradually increased from 2.49 t/ha in 2006 to 3.17 t/ha in Figure 2: Rice Yield from Source: Ministry of Agriculture Forestry and Fisheries Rice-based farming has existed in Cambodia for around 2,000 years. Eighty percent of its farmers grow rice, which is planted on about 80% of the total cultivated land in the country. Cambodia s economy is now largely driven by agriculture a sector that is dominated by rice. According to a 2011 International Food Policy Research Institute (IFPRI) report, between 2000 and 2008, when the country s agricultural sector consistently grew at an average of 5.6% every year, the country s economy was also registering an impressive 9.8% growth. As a result of an increasing in cultivated area and yield; since 2000, Cambodia has achieved overall national rice self sufficiency, although there are still regional and local deficit regions (Mund, 2010). In 2000, approximately 4 million tons of paddy rice was produced; this 23

4 production gradually went up to nearly 9 million tons in 2011, even though there were some fluctuations between 2001 and Figure 3: Rice Product from Source: Ministry of Agriculture Forestry and Fisheries According to a report produced by VVOB-an international NGO (2011) on rice demonstration, farmers spend between USD750 and USD 1,000 on one hectare of rice cultivation. Their expenditure covers land preparation, seed, fertilizers, pesticides, weeding, irrigation, harvesting and transportation of rice product to their home. 2.3: Strengths and constraints analysis of rice production Cambodia is known for its abundant agricultural land and water resources. Moreover, according to FAO (2000) cite in Bingxin and Xinshen (2011) in terms of absolute area, Cambodia has more potential arable land than both Laos and Vietnam; Cambodia currently only uses less than 30 percent of its total potential arable land, which is substantially lower than other countries. Productivity is another source of rice development potential in Cambodia. Rice yield and 24

5 farmers income could increase substantially through intensification techniques which is not only involves application of fertilizer and irrigation, but also better farming practices. For instance, under the program of the system of rice intensification (SRI), various rice cultivation techniques with less use of modern inputs and inexpensive method of planting in relatively dry area could result in an average yield of 3.6 ton/ha, while under a similar situation the yield with traditional practice is only 2.4 ton/ha (Bingxin Yu and Xinshen Diao, 2011). In term of economic return, a report from VVOB (2011) suggest that farmers who practice SRI can get net income between USD 500 and USD 800 per one hectare of rice whereas the conventional practice can bring net income between USD 300 and USD 380 at the same area to farmers. Beside this potential, agricultural development, especially rice production has been stated as the first priority development strategies for country policy. Stakeholders, development partners and especially farmers have endeavored to develop this sector. Law and regulations have been revised, for example the government has implemented a tax free for all agricultural materials importation and encouraged local and international investors to invest in this sector. In addition to this, physical infrastructures, especially irrigation system and flooding protection have been progressing; quality research and extension technique are progressively improved, for example, instead of letting farmers to grow their traditional varieties which have less economic return, the government encourages farmers to use the varieties, released by the Cambodian agricultural research and development institute-cardi, that have economical benefit because of high yield and market requirement. Furthermore, human capacity is being strengthened; especially farmers have been trained with new technique of rice growing for example System of Rice Intensification (MAFF, 2006). Although some positive points have been found as the strengths for the development of rice production, some constraints still exist to hinder this development. Inadequate fertilizer use and under-developed irrigation facilities are seen as the most binding constraints (Bingxin Yu and 25

6 Xinshen Diao, 2011). The entire production is based on the rainfall which irregularly changes and limit irrigation capacity has resulted in unbalance growth of rice production (MAFF, 2006). Most farmers are still using their traditional technique in growing rice, especially they are still using traditional varieties, long term varieties that require lots of production cost and result in very low yield. In addition to this, farmers are holding very small of land between 0.5 and 3ha per family and most of them are lack of access to quality inputs (seeds, fertilizers and pesticides), credit system, markets and markets opportunity information due to limit rural infrastructure and information technology (Agrifood Consulting International and CamConsult, 2006); adulteration and below recommended use of fertilizers due to higher price are the constraints to boost the rice production growth (Bingxin Yu and Xinshen Diao, 2011). Furthermore, an agrarian country like Cambodia is particularly vulnerable to the effects of climate change, such as rising temperatures and increased annual rainfall, and is also more at risk of pest infestations, erosion, inundation and salinization (Sothorn Kem. et al., 2011). Beside the constraints in rice production, there are some constraints related to rice trading. The most common constraints faced by traders is the lack of capital to buy a huge amount of paddy during harvest time and using of the low levels of milling technology by millers result in broken rice which cannot meet the requirement of the international markets (Ishikawa, 2008). 2.4: Research-development and technology dissemination Rice research is playing an important role in developing rice industry in Cambodia. By realizing this importance, the government established a research institute called CARDI-Cambodia Agricultural Research and Development Institute in This institute s mission was focusing on food security through increase rice production and crops diversification (CARDI, 2009). CARDI has contributed to a dramatic change in rice industry buy conducting a lot of research, especially rice soil identification and classification; and recently ten rice varieties namely Sen pidor, Chulsa, IR66, Phka rumdoul, phka rumdeng, phka romeat, phka chan sen sar, Rang Chey, 26

7 CAR4 and CAR6 were identified and recommended to farmers. Some of these varieties are aromatic, high yield (3.5-4t/ha) and resistant to some insects pest and tolerate drought and flood. From the past until now, farmer field school (FFS) has been playing an important role in disseminating agricultural techniques to farmers. According to food and agriculture organization of the united nation-fao (2012), FFS was introduced to Cambodia in the late 1980 s, as a key method to introduce and disseminate integrated pest management (IPM) technology aiming at reducing farmers dependence on pesticides and educating farmers on ecological farming by developing farmers skills in monitoring and analyzing field situations enabling them to manage crops effectively and to promote income generation activities (Agriculture technology services association, 2012). Currently this approach is being used widely not for only IPM but for other agricultural technique by many development agencies and NGOs. By 2005, 2500 people was trained to be trainer/facilitator in farmer field school approach, approximately 92,000 farmers were trained by using this approach and more than 1,550 FFS were conducted (Arnoud Braun and Deborah Duveskog, 2008). FFS is a suitable approach for rice technique dissemination in Cambodia because most Cambodian farmers are illiterate; through this approach qualified trainers can use more pictures instead of text and lead practical field activities to teach farmers. 2.5: Key issues influencing the sustainability of rice industry Following the emergence of green revolution in the 1940s, most Cambodian farmers have used a huge amount of fertilizers and pesticides for their rice fields. According to (Koma, n.d) from 1980 to 1994, when the government implemented fertilizer subsidized program, on average, about 31,000 tons of fertilizer were imported annually; this number increased gradually to approximately 200,000 tons in The reason behind this increase is that the availability of loan program provided by both local and international NGOs and credit institutes. On the other hand, farmers used a lot of pesticides for their rice production. A huge amount of pesticides, between 23,128 liters and 73,762 liters, was imported into Cambodia, especially from Vietnam 27

8 and Thailand between 1985 and This number continues to increase in according to an introduction of free market policy by the government in As chemical fertilizer and pesticides used by farmers increase, a number of problem has been revealed and influenced the sustainability of rice production in Cambodia. The clear explanation to this suggested by Koma is that farmers apply both fertilizer and pesticides at inappropriate time and in the wrong amounts which contribute to an overuse in the next season, and this raises a problem of economic efficiency since the production cost increases; in addition, most of pesticides are very hazardous to human health and to aquatic life such as fish and frogs which are the most important source of protein for poor people in rural area. The efficiency of fertilizer comes into question, since farmers cannot control water (during flood or drought). It has been reported that soil has become harder after the increased use of fertilizer in rainfed rice-fields; furthermore, most pesticides do not only target the insect pest but also kill beneficial insect, this could lead to pest outbreak. Many farmers who have started using agrochemicals now have to use it every year, often in the increasing rates. Beside this, lack of irrigation system, rural infrastructure, and credit institution place rice industry in unsustainable way. 2.6: Rice market According to Ishikawa (2008), farmers traditionally choose local mills at provincial center to directly sell their products because it is easy for them to access. However, if there are no rice mills nearby, or if poor road conditions which induce high transportation costs, farmers sell their products to paddy collectors or traders. Paddy collectors/ traders usually come to purchase paddy in villages, then transport and sell it for a profit either to millers or to foreign market. In the surplus producing provinces bordering Thailand or Vietnam such as Battambang, Banteay Meanchey and Takeo, paddy collectors and traders sometimes buy paddy from rice millers and sell it directly to foreign market (foreign traders). 28

9 Farmer Collector (Local Middleman) Rice-Miller Trader Foreign Market Western Countries Wholesaler (Battambang) Wholesaler (Phnom Penh) ASEAN countries Retailer (Phnom Penh) Retailer (Other regions) Paddy Flow Rice Flow Local Consumer (Battambang) Urban Consumer (Phnom Penh) Local Consumer (Other Regions) Table 3: Rice Market Flow Chart Source: Ishikawa, 2008 At the rice miller s level, rice millers can be divided into two types of rice mills: village mills and medium-large commercial mills. Each type of mill plays a slightly different role in the marketing system. Village mills are found in almost all rice producing villages. Typically, the village miller will mill the farmer s paddy free of charge in exchange for the rice bran. When the farmer requests the return of the bran from the miller, the farmer is generally assessed a small amount of milling fee. By and large, given the limited working capital and capacity of the milling machine, their business is relatively small. Medium and large scale mills are found in the large rice production regions. They play two main roles: milling rice and supplying paddy/ milled rice to wherever there is high market demand and better prices. These include urban areas, 29

10 populous areas, rice-deficit areas, and traders. The millers usually purchase paddy either directly from farmers or collectors who bring it to the mill. They mill paddy and then supply the market either through wholesaler/trader or through retailers. Milled rice is packed into bags labeled with millers particulars, and then rice is sold to wholesale markets or retail markets. For export, both paddy and milled rice are exported directly to neighboring countries during and after harvesting season. Rice is exported both officially as well as unofficially. 2.7: Cambodia Rice and Economy Cambodia is a South East Asian country, characterized by a developing economy. With an area of approximately 181,035 square kilometers and a population of over 14 million, Cambodia s economy is primarily agriculture based. The country (Cambodia-The kingdom of wonders) borders Thailand, Vietnam and Laos. The densely populated plains are dedicated to rice and are the heartland of Cambodia. So, Cambodia has identified job creation as its major challenge in the coming decade. It is now trying to establish an economic environment to enable the private sector to create enough jobs to bring some balance in the country s demography. In order to fulfill its major requirement, the Cambodian government has approached the World Bank, IMF and other bilateral and multilateral donors. By the end of the first decade of the 21st century, various international aid organizations are helping farmers to adopt crop diversification. Cambodia's economy was almost completely abolished under Khmer Rouge regime. Following the Vietnamese invasion in 1979, Cambodia was also denied international aids. During the last decade, however, the economy grew about 10% per year, driven largely by an expansion in the garment sector, construction, agriculture, and tourism. GDP contracted slightly in 2009 as a result of the global economic slowdown, but climbed more than 4% in 2010, driven by renewed ex-ports. 30

11 With the January 2005 expiration of a WTO Agree-ment on Textiles and Clothing, Cambodian textile producers were forced to compete directly with lower-priced countries such as China, India,Vietnam, and Bangladesh. The garment industry currently employs more than 280,000 people - about 5% of the work force - and contributes more than 70% of Cambodia's exports. In 2005, exploitable oil deposits were found beneath Cambodia's territorial waters, representing a new revenue stream for the government if commercial extraction be-gins. Mining also is attracting significant investor interest, particularly in the northern parts of the country. Opportunities for mining bauxite, gold, iron and gems also exist.the tourism industry has continued to grow rapidly, with foreign arrivals exceeding 2 million per year in ; however, economic troubles abroad dampened growth in Yet, as of 2011, the number has risen to almost 3 million again. Currently, the Cambodian government is working with bilateral and multilateral donors, including the World Bank and IMF, to address the country's many pressing needs. The major economic challenge for Cambodia over the next decade will be fashioning an economic environment in which the private sector can create enough jobs to handle Cambodia's demographic imbalance. More than 50% of the population is less than 25 years old. Although human resource development is still a challenge, continuing investment in education by both the state and private sectors provide encouraging signs.the Cambodian government has also placed more emphasis on supporting more investment in the agriculture sector, especially rice export. However, Cambodia s Gross Domestic Product (GDP) is projected to grow at a modest 6.2 percent in 2012, accordingly to its growth forecast of last January, the Economic Institute of Cambodia (EIC) said in its latest Cambodia Economic Watch report, jointly published with Economics Today in July

12 Figure 4: Cambodia s GDP Growth by Sector Source: NIS ( EIC ( ) The Cambodia s rice sector in an industry is projected to grow at just 8.8 percent, a slower rate than expected, while the growth rates of the agriculture and service sectors have been revised upward to 4.6 and 5.4 percent respectively. Export growth of Cambodian garment products and milled rice has already markedly slowed down as of April 2012 and is likely to continue decelerating throughout the year, said Khin Pisey, an EIC researcher and the lead author of the report. The slowdown cuts half a percentage point from EIC s initial growth projection of the industry sector, which was offset by a 0.5 percentage point upward revision of the service sector s growth. In the agriculture sector, the growth estimate has been slightly revised upward as prices of non paddy crops turned out to be less bearish than EIC s expectation earlier this year, especially the price of cassava and soybeans. In the paddy subsector, local prices have been largely influenced by Thailand s stockpiling of paddy, which aims at improving international prices of milled rice. We foresee a similar modest growth outlook in 2013, said Khin Pisey (EIC researcher).cambodian export sectors are expected to face challenges for another while, 32

13 he added, mentioning that weak external demands and rising production cost would hamper the textile and garment subsector next year. A weakening euro and high milling cost will also make Cambodian milled rice less competitive on the international market, Khin Pisey said. On the other hand, he Cambodian government is working with bilateral and multilateral donors, including the World Bank and IMF, to address the country's many pressing needs; more than 50% of the government budget comes from donor assistance. The major economic challenge for Cambodia over the next decade will be fashioning an economic environment in which the private sector can create enough jobs to handle Cambodia's demographic imbalance. 2.8: Topography and Climate in Cambodia Cambodia is located in the southwestern part of the Indo-Chinese peninsular. It has a land area of 181,535km2, of which about 20 percent is used for agriculture. The country comprises 24 provinces in four geophysical zones: the Plains Region, the Tonle Sap Region, the Plateau and Mountainous Region, and the Coastal Region (see Figure 3 and Figure 4). The Central Plains are a result of long-term deposition originating from the mountains within Cambodia and from sediments carried into the plains by the Mekong River. The height of the Mekong River varies approximately 9 meters each year, and is influenced by melting snow in the Himalayas and rainfall in China, Myanmar, Northern Vietnam, Lao PDR and Thailand. As the water level rises, some water also flows back up northwesterly along the Tonle Sap River into the Tonle Sap Lake. The lake expands to approximately 25,000km2 between the months of May and November. Receding water flows primarily down the Bassak River and feeds many irrigation areas in the provinces of Kandal and Takaev. To a large extent the agricultural economy is built around this annual cycle of inundation and recession of these waters (Japan International Cooperation Agency 2001). The climate of Cambodia is tropical monsoon, with a wet season from May to November, caused by the southwest monsoon, and a dry season from December to April when the country is under the influence of the northwest monsoon. Rainfall distribution varies between 33

14 regions. Average annual rainfall is more than 3,000mm in the western region, while to the east of the Mekong River it is generally 1,800-3,000mm. The central area, comprising the lower Mekong and the basin of the Tonle Sap Lake, is drier with rainfall averaging 1,200-1,500m. This is to show that, Cambodia s rice sectors in the country very successfully in the last decade. 2.9: Cambodia Demographics and Agricultural Sector Cambodia is still a largely agrarian society with agriculture representing the major share of GDP (37 percent) and most of the population living in rural areas (84 percent). As Table 10 shows, productivity of agricultural production is low, being US$166/worker and US$480/ha, while GDP per capita for the rural population is US$119 compared with a country wide US$271. Approximately 74 percent of households in Cambodia are classified as farm households and, excluding Phnom Penh, this is consistent across provinces in Cambodia. Therefore this is shows; most of the population in rural areas is employed in agricultural, forestry or fishery activities (85 percent), with most of the rural population selfemployed (71 percent). There are over 1.6 million farm households, most of whom are involved in rice production to some extent. With a population growth rate of 2.5 percent and 42 percent of the population under the age of 14, there is a need for improvements in productivity of agriculture and rapid growth in employment to absorb the imminent increases in the labor force. There is a significant difference in the proportion of the population in each age group. For example, the cohort comprises only a small proportion of the total population (6.4 and 6.6 percent of males and females respectively), while the 5-9 cohort represents a larger proportion (16.4 and 14.7 percent of males and females respectively). The other unique feature is the striking imbalance of males to females. The 1998 census determined that there were 93 males for every 100 females, which translates into 415,000 more women than men in the population. This gender imbalance means that gender equality is an integral part of the development process. While increases in industrial activity (particularly in the textile, clothing and footwear sector) have absorbed large numbers of the labor force, the largest 34

15 sector absorbing labor has still been the agricultural sector. This implies that unless there is a large and relatively immediate shift in the structure of the economy away from agricultural production, agriculture will continue to be the main labor utilizing sector in the economy. As Table 11 shows, agriculture s share of GDP has been declining slowly over time, from a peak of 51.4 percent in 1995 down to 39 percent in This has major implications for the role agriculture has in the Cambodian economy, and the ability of agriculture to absorb the increasing labor force and improve standards of living. In 2001 the majority of agricultural activities (as a percentage of GDP) were crop production (46.4 percent) followed by fisheries (31.7 percent). These two sectors had average growth rates of over 4 percent, compared with 2 percent for livestock and forestry. Crop and fishery activities not only had higher growth rates, but were more stable, with standard deviations of 5 and 3 percent respectively, compared with 6 and 41 percent for livestock and forestry activities respectively. Forestry has been negatively affected by changes in logging policy while livestock has been affected by the floods of which resulted in heavy stock losses. 2.10: Cambodia s Rice and Rural Poverty Cambodia is one of the poorest countries in Asia. According to the Second Five Yea Socioeconomic Development Plan (Ministry of Planning 2001), Cambodia ranked 136 th out of 174 countries in terms of the UN Human Development Index, with only Bangladesh and Laos having lower indices among Asian countries (see Table 18). Cambodia also ranks poorly with respect to the Human Poverty Index (HPI), which measures factors such as the proportion of children under 5 that are severely stunted and underweight, percentage of the population with limited access to safe drinking water and medical services, illiteracy rates, and percentages of the population with low life expectancy rates. In comparison with the rest of Asia, Cambodia had an HPI score of 38 that was exceeded by Pakistan and Bangladesh alone (Ministry of Planning 2001). Due to war and armed conflict a relatively large proportion of the population is living in 35

16 female-headed households (17 percent). These households are not necessarily poorer than male headed households because, on average, female-headed households are larger and may have more income earning members. However, women generally are more constrained than men in their access to resources and there is a perception that female-headed households constitute a major vulnerable group in the community (International Trade Center 2002). The most recent socioeconomic survey results (National Institute of Statistics 1999) show significant inequities between rural areas and urban areas and among income deciles. In US dollar terms, per capita monthly expenditure has declined among all groups between 1997 and Moreover, the gap in expenditures between urban and rural areas has grown, with expenditure levels in rural areas that are less than 30 percent of expenditure levels in Phnom Penh and about 63 percent of the expenditure levels in other urban areas. The share of food expenditure as a proportion of total expenditure is significantly higher among lower income declines. The bottom three deciles devote 76 percent of their expenditures on food and between 23 percent and 28 percent on rice. The bottom eight deciles allocate over 70 percent of their expenditures on food, while the top decile allocates just 39 percent on food and only 6 percent on rice. Therefore, the significant income disparities are also prevalent in Cambodia. Overall, the top income docile earns nearly 30 percent of income, while the lower half of the income deciles receives just 29 percent. The Gini coefficient is 0.42 and is higher than in most other Asian countries at Cambodia's level of economic development (International Trade Center 2002). For the poor, expenditures on rice are the single most important item of all expenditures (about 30 percent). Thus policies affecting food prices, especially rice, have important implications on households' welfare. The poor are generally disadvantaged by various factors such as inadequate food supplies, poor health, physical disabilities, lack of access to land, insecure land titles, lack of skills, inadequate information, and poor access to input and product markets (International Trade Center 2002). There is substantially less income inequality in rural areas, though rural income levels are just 61 36

17 percent of other urban areas and 28 percent the level in Phnom Penh, kingdom of Cambodia. The proportion of income from self-employment and rice cultivation is highest among middle deciles, as the bottom decile receives less income from rice cultivation and more income from wages. This suggests that the poorest households have a greater propensity to augment their agricultural income with non-farm work. The 1997 socioeconomic survey reported that 36 percent of Cambodia s population of over 11 million was below the national poverty line, defined as the level of income required to purchase food allowances of 2,100 calories with a small level of non-food expenditures (Asian Development Bank 2000). ADB notes the majority of the population in Cambodia subsists slightly above or slightly below the poverty line (Asian Development Bank 2000). The difference between the poverty line and actual expenditure was relatively small at 8.7 percent, while average caloric intake in Cambodia in 1997 was estimated at just 162 calories above the national poverty line (2,262 calories) (Asian Development Bank 2000). Eighteen percent of the population was reported to be below the food-only poverty line in 1997 (Ministry of Planning 2001). Almost 90 percent of the poor are concentrated in rural areas, with farm households having the highest poverty rate at 44 percent. The distribution of income at or near the poverty line is magnified by a CHDR study (Ministry of Planning 1997) cited by ADB which found that an income transfer of less than $20 per day ($190 million for Cambodia) would be required to lift the poor above the absolute poverty line; this transfer was reported to be 40 percent of the total quantity of development assistance received by Cambodia in 1995 (Asian Development Bank 2000). Despite surplus production in rice since 1995, nearly one-half of the provinces in Cambodia are in food deficit, with access to rice compromised by low incomes, poor roads, limited marketing and distribution channels, and agricultural production that is weather-dependent and utilizes low levels of technology (Ministry of Planning 2001). While majority of farmers produce rice mainly for own consumption, many face a deficit situation for one to two months per year, as agricultural productivity remains relatively low. About 20 percent 37

18 of the rural population does not have adequate or reliable access to food supplies to meet the nutritional poverty line of 2,100 calories per day and many poor families are in constant debt for buying rice (International Trade Center 2002). With respect to farm production, many farmers are particularly income-constrained with respect to fertilizer usage and use inadequate quantities of fertilizer and/or resort to the acquisition of credit by moneylenders who charge interest rates as high as 20 percent per month. The combination of income demands to repay loans and the lack of inadequate storage facilities means that farmers often have to sell paddy production at times of low prices. Poverty has a significant regional element as well, as indicated by the HDI measure at a provincial level. Poverty mapping undertaken by the United Nations World Food Program (WFP) during found that over 40 percent of households live below the poverty line in rural areas. According to ADB, the Tonle Sap region (including Kampong Thom, Siem Reap, Battambang, Pursat, Kampong Chhnang, Banteay Meanchey, Oddar Meanchey, and Krong Pailin) has the highest incidence of poverty (38 percent) (Asian Development Bank 2000). The Plains region (Phnom Penh, Kandal, Kampong Cham, Svay Rieng, Prey Veng, and Takeo) has a poverty incidence level of 29 percent. In Phnom Penh poverty is lowest, with 11 percent of all households below the poverty line. In other urban areas, this percentage is considerably higher (30 percent). Economic growth in recent years was concentrated in urban areas, in particular in Phnom Penh, driven by reconstruction efforts, and an increase in tourism. Growth of rural activities, particularly agriculture, lagged behind. Hence, there is huge potential to reduce poverty in rural areas, especially through expanding economic opportunities through rapid growth in the agricultural sector (International Trade Center 2002). 38

19 2.11: Cambodia s Rice Trade Exports of rice from Cambodia have increased in recent years. Between 1990 and 2000 official exports of rice and paddy have been minimal of Cambodia. These data do not tell the whole story, as there are disparities in export statistics collected by different government agencies involved in regulating the export trade. As discussed in Section , the Study Team identified two exporters who exported 54,000 tonnes of rice in when official exports only identified 6,000 tonnes of rice in total. While production has been increasing over this period, the low level of exports has meant that, firstly, reliance on food aid has been dramatically reduced (with the exception of district and commune level food shortages in isolated parts of the country). Secondly, the amount of rice available for domestic consumption has increased, potentially increasing the number of calories available. Thirdly, surplus production has been diverted from domestic mills to foreign mills through unofficial exports of paddy into Thailand and VietNam. The Study Team estimates that in 2001 approximately 10 percent of the rice marketed domestically was exported officially (nearly 60,000 tonnes), and 33 percent of the paddy sold by farmers was exported unofficially (over 450,000 tonnes). The majority of the rice is exported by private firms, who provide high-quality, single variety rice to niche markets in Europe, North America, the Middle East, Singapore, Malaysia, China and Australia. Cambodian rice obtains a price premium above standard Thai rice of around US$80-90/tonne. Imports of rice into Cambodia are small but significant. The major official imports of rice have been food aid rice imported under the auspices of the World Food Program. These were 44,000 tonnes in 2001, substantially up on previous years. In addition, up to ,000 tonnes of Thai Jasmine rice are imported unofficially for urban consumers in Seam Reap, Phnom Penh and the surrounding areas. 39

20 2.12: Credit Services in Cambodia Limited access to rural finance is a major impediment to agricultural development. The extremely limited spread of formal rural financial services means that farmers cannot borrow from the formal sector to purchase inputs even if they wanted to do so. Farmers rely on many sources of informal credit in the villages and many credit arrangements are based on an agreement to provide inputs for a share to the creditor of the produce at harvest. Although there has been a significant spread of formal banking/credit services in rural areas from 1996, individual Cambodian farmers still tend to have poor access to formal credit because of the short term interest cycle charged by most formal credit sources. Credit is still more usually accessed by small village businesses than by single farmers as the repayments are geared to a monthly business cycle not to a seasonal production cycle. Increasingly, groups of farmers are accessing credit although they are reported to still be a minority category for lending. There are three categories of financial institutions in Cambodia: 1. State-Owned Banks National Bank of Cambodia (NBC), Foreign Trade Bank of Cambodia ((FTBC), and Rural Development Bank (RDB). The NBC has the role of the central bank, while the FTBC carries out a commercial banking function as a department within NBC, and the RDB has the role of a wholesaler bank (under the supervision of the Ministry of Finance) lending to micro-finance institutions. 2. Private Commercial Banks 7 foreign bank branches and 22 locally incorporated banks, several of which are under suspension (as at November 2001). 3. Micro-finance institutions about 72 NGOs (local and international) are carrying out lending and saving operations in rural areas, some of which are under the supervision of the NBC. 40

21 Registration and operation of credit providers/mfi s in Cambodia is covered by the Law on Banking and Financial Institutions (1999) under which the National Bank of Cambodia has the power to register and license credit operators who wish to become MFI s and join the formal banking system. Such registration potentially gives these MFI s access to funds from the Rural Development Bank of Cambodia. Within the actual credit provision sector, credit providers in Cambodia can be divided into two main categories: micro-finance services, including nongovernmental organizations (NGOs) and licensed microfinance institutions (MFIs), and informal credit sources, such as moneylenders and in-kind lending from shopkeepers, traders, and millers. While commercial banks in Cambodia lend to industrial enterprises, including agro-industrial enterprises such as mills, they do not lend to farmers, making microfinance operations the only source of formal credit to the rural sector. However, it should be noted that even commercial lending to agro-industrial enterprises is low and declining, despite an increase in liquidity in the banking system (in nominal terms) over the last few years. Agriculture compromises only 3 percent to 4 percent of commercial lending, down from 5 percent to 6 percent only a few years previously. Microfinance operations are funded by the mobilization of savings from their members and from various donor funds. The Rural Development Bank (RDB), a Government finance source, also serves as a source of funds for microfinance operations, but does not lend directly. ACLEDA is the only microfinance operation to be licensed by the Government as an MFI, which allows for the greater expansion of banking services and the receipt of funds from commercial sources in a similar manner as commercial banks (Enterprise Development Cambodia 2001); EMT has applied for such a license. Microfinance operations specialize in the provision of small loans to individuals, groups, and small businesses for activities such as the acquisition of agricultural inputs and equipment as well as for business expansion (Enterprise Development Cambodia 2001). Loans are typically 41

22 limited to members of a village-level savings association. Most microfinance operations lend two types of loans. Individual loans require collateral and are typically aimed at small enterprises, with loan amounts ranging from US$ Group loans, by contrast, are made by groups of 3 to 10 persons and do not require collateral, as they are backed by the group. Group loans tend to be smaller than individual loans (US$20-100). In addition, many microfinance operations require a deposit prior to receiving a loan that is used to bolster association-level funds (Enterprise Development Cambodia 2001); the interest rate on these deposits is 1 percent to 2 percent per month, Interest rates on microfinance loans tend to be high, ranging from 3 percent to 5 percent per month. Loan terms are almost always 12 months or less for repayment. Such interest rates are much higher than interest rates provided to commercial borrowers. However, it has been argued that costs for microfinance operations are considerable, given the large volume of lowvalue loans, poor infrastructure, lack of collateral, and high operation costs (up to 60 percent of total costs according to EDC (Enterprise Development Cambodia 2001)). Many of these costs are subsidized by NGOs (Japan International Cooperation Agency 2001). There has been a move by a few microfinance operations, particularly ACLEDA and PRASAC, towards becoming commercially sustainable. According to JICA, 72 NGOs and 2 international organizations were involved in the provision of credit in Cambodia (Japan International Cooperation Agency 2001). In kingdom of Cambodia, the top ten organizations providing credit to the rural sector are listed. The data reveal that the number of borrowers receiving credit from the formal financial sector is relatively small. Only 340,000 people borrow from microfinance sources (less than 5 percent of the total population in rural areas) suggesting sizable shortfalls in credit access for farmers. Indeed, one informant interview remarked that only 9 provincial capitals have banks (World Bank Study Team Interview, 15 July 2002). With respect to the rice sector, JICA reports that just 18 percent of rice farmers surveyed borrowed money from microfinance sources (Japan International Cooperation 42

23 Agency 2001). Informal sources of credit include moneylenders and lenders in-kind, such as shopkeepers, middlemen, and traders. The latter provide loans for agricultural inputs (typically fertilizer) in exchange for rice at harvest. The implicit interest rate charged by in kind lenders is substantial. Moneylenders are the lender of last resort in Cambodia, though for some borrowers, they are also the only source of credit. Moneylenders specialize in short-term (sometimes daily) credit at extremely high interest rates World Bank study team interviews found that interest rates of 20 percent to 40 percent per month were not uncommon. 43