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CHAPTER II

LITERATURE REVIEW

This chapter, researcher would like to provide in generally information on factors affecting rice

sector in Cambodia 2000-2013 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 2000-2013 with special attention to

Cambodia’s rice sector penetration within Asian Economic Community in year of 2015.

2.1: 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

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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 2011.

Figure 1: Rice Cultivated Area from 2000-2011

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

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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 2011.

Figure 2: Rice Yield from 2000-2011

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

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production gradually went up to nearly 9 million tons in 2011, even though there were some

fluctuations between 2001 and 2005.

Figure 3: Rice Product from 2000-2011

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

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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

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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 1999. 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,

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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 2000. 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

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and Thailand between 1985 and 1993. This number continues to increase in according to an

introduction of free market policy by the government in 1993. 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).

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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,

Farmer

Collector

(Local Middleman)

Local Consumer (Battambang)

Rice-Miller Foreign Market

Western Countries

ASEAN countries

Trader

Wholesaler

(Battambang)

Wholesaler (Phnom Penh)

Retailer (Phnom Penh)

Retailer (Other regions)

Urban Consumer (Phnom Penh)

Local Consumer (Other Regions)

Paddy Flow

Rice Flow

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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.

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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 2007-08;

however, economic troubles abroad dampened growth in 2009. 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 2012.

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Figure 4: Cambodia’s GDP Growth by Sector

Source: NIS (1993-2000 EIC (2011-2013)

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,

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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

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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 20-24 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

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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 2001. 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 1999-2000 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 136th

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

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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 1999. 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

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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

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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 1997-2000 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).

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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 5.2.4.2, the Study Team

identified two exporters who exported 54,000 tonnes of rice in 2001-2002 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 120-

135,000 tonnes of Thai Jasmine rice are imported unofficially for urban consumers in Seam

Reap, Phnom Penh and the surrounding areas.

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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.

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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 non-

governmental 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

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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$100-500. 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 low-

value 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

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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.