In February, the European Commission launched an official process that could see Cambodia being temporarily withdrawn from Everything But Arms (EBA) benefits, due to a significant decline in human rights and democratic standards.
Cambodia enjoys preferential access to the European Union under the EBA program, which allows what the bloc calls “vulnerable developing countries” to pay fewer or no duties on all their exports to the bloc, except weapons and ammunition.
This matters to Cambodia’s MFI borrowers because so many of them now count on money they earn in the nation’s apparel, footwear and sporting goods manufacturing sectors, direct EBA beneficiaries. The 28-member EU is Cambodia’s largest trading partner, and accounted for 45% of its exports worth about $5.5 billion in 2018.
But the EBA program stipulates that in order to receive benefits countries must meet international norms of human rights and democracy, requirements which have challenged the increasingly authoritarian Cambodian government.
After Cambodia’s highest court dissolved the Cambodia National Rescue Party (CNRP), the main opposition, Prime Minister Hun Sen’s Cambodian People’s Party won the 2018 elections, creating what is in effect, a one-party system because the high court also banned 118 officials from politics for five years. The government has arrested opposition members who have not fled the country, closed almost all independent media outlets and seemingly ignored calls by the U.S. and the European Union to restore democracy or face economic sanctions.
Further human rights violations include “unlawful or arbitrary killings carried out by the government or on its behalf; forced disappearance carried out by the government; torture by the government; arbitrary arrests by the government; political prisoners; arbitrary interference in the private lives of citizens, including pervasive electronic media surveillance; censorship and selectively enforced criminal libel laws; interference with the rights to peaceful assembly and freedom of association; restrictions on political participation; pervasive corruption, including in the judiciary; and use of forced or compulsory child labor,” according to a 2019 U.S. State Department report on human rights in Cambodia.
Any change to EBA in the garment, footwear and sporting goods sectors could result in collapse of the microfinance sector, according to Milford Bateman, a freelance consultant on local economic development policy who has written several books about microfinance.
“There could be very damaging knock-on impacts here as poor families [would be] unable to repay microloans because their families no longer work on the garment factories in Phnom Penh and/or have had to return from Thailand,” he said.
Further ripples could see the Cambodian government bailing out one or more MFIs if “collapse would threaten the integrity of the entire financial system because this would mean, among other things, that Cambodia’s credit rating would be negatively affected,” he said.