From Floods to Finance: Combating Climate Change Impacts on Cambodia's Economy

A World Bank study highlights Cambodia's vulnerability to cascading climate risks, including severe floods, disease outbreaks, and financial instability, urging proactive investments in preparedness, resilient infrastructure, and disaster risk finance to safeguard its economy and society. The research emphasizes integrating climate adaptation into national strategies to mitigate long-term impacts.

A recent study by the World Bank’s Macroeconomics, Trade, and Investment Global Practice, led by Hector Pollitt and Migle Petrauskaite, explores the cascading impacts of climate change on Cambodia. The paper constructs a plausible worst-case scenario to illustrate how a severe, once-in-a-decade flood could trigger widespread disruptions, including disease outbreaks and financial instability. Drawing on Cambodia’s historical vulnerability to extreme weather events and lessons from similar crises globally, the researchers stress the urgent need for proactive risk management to protect the country’s economy and society from escalating climate risks. With climate change increasing the frequency and intensity of extreme weather, Cambodia faces a heightened risk of cascading disasters affecting multiple sectors.

Rising Flood Risks Threaten Cambodia's Stability

Cambodia’s history of destructive floods underscores the severity of its climate vulnerability. The 2011 floods, one of the worst in recent memory, impacted over 10% of the population and caused damages amounting to 5.3% of GDP, heavily affecting agriculture and infrastructure. The report warns that the frequency and severity of such events are projected to rise due to climate change, with the Mekong River Basin being particularly at risk. By 2040, an estimated 25% of Cambodia’s population could face extreme flooding, particularly in rural areas where adaptive capacity is weakest. Despite the clear risks, the country still lacks robust flood hazard mapping and critical infrastructure to mitigate damage. This gap in preparedness significantly heightens the likelihood of prolonged economic and social disruptions following major flooding events.

Disease Outbreaks: A Looming Secondary Crisis

Flooding is not just a standalone disaster; it often sets the stage for cascading crises, such as disease outbreaks. The study highlights the increased risk of waterborne illnesses, including cholera, dengue, and malaria, which are already prevalent in Cambodia. Children, who face high mortality rates from diarrhea and malaria, are particularly vulnerable. Stagnant floodwaters create breeding grounds for disease vectors, amplifying health risks. Healthcare systems, already strained in rural areas, are further compromised during floods, with damaged facilities and disrupted access to services exacerbating the situation. The economic toll of these health crises is significant, as increased disease incidence reduces labor productivity and places further strain on resources needed for recovery. The researchers emphasize that without stronger health infrastructure and sanitation improvements, the human and economic costs of such secondary crises could escalate dramatically.

Financial Risks Amplified by Climate Disasters

The financial implications of cascading disasters are a critical concern. Natural disasters can push vulnerable economies toward fiscal instability, particularly when economic activity is concentrated in sensitive sectors like agriculture. While Cambodia’s financial systems currently show resilience, with moderate debt levels and strong foreign exchange reserves, the risks posed by the sovereign-bank nexus are growing. Banks’ exposure to government debt could amplify the impacts of crises, creating feedback loops that threaten overall stability. The report draws parallels with Pakistan’s 2022 floods, which triggered economic shocks, reduced GDP growth, and heightened fiscal vulnerabilities. Cambodia faces similar risks if disasters disrupt production and exports, potentially widening fiscal deficits and increasing borrowing costs. Without proactive measures, the economic fallout from cascading climate risks could undermine the country’s long-term development goals.

Building Resilience Through Preparedness and Innovation

To address these risks, the researchers advocate for a proactive shift from crisis response to preparedness. Enhancing flood forecasting and early warning systems is a key recommendation, as these tools can provide communities with critical time to respond to impending disasters. Investments in flood-proof infrastructure, such as transport networks and healthcare facilities, are essential for maintaining continuity during crises. The study also stresses the importance of integrating climate risk considerations into urban planning and development to build resilience against future events. Improvements in water, sanitation, and hygiene (WASH) initiatives in health centers and communities are highlighted as critical measures to reduce the likelihood of disease outbreaks. Cambodia’s innovative use of technology during the COVID-19 pandemic, such as the Hotline-115 system, demonstrates its capacity to manage health crises and offers a model for addressing future challenges.

Financial Strategies for Climate Resilience

Strengthening financial resilience is another crucial focus. The study recommends exploring disaster risk finance instruments, such as catastrophe bonds and parametric insurance, to provide rapid liquidity in the aftermath of disasters. Cambodia’s Disaster Risk Financing Strategy, which includes establishing a national reserve fund, represents a critical step toward economic resilience. These measures, coupled with prudent fiscal management, could help Cambodia navigate the economic fallout of cascading climate risks while maintaining financial stability. The researchers underscore the importance of maintaining strong foreign exchange reserves and leveraging innovative financial tools to ensure quick recovery and minimize disruptions to public services.

A Call for Systemic Change in Climate Risk Management

The study concludes that while Cambodia cannot control global climate change, it can take significant steps to reduce its vulnerability to cascading disasters. Early investments in preparedness and resilience measures not only mitigate immediate impacts but also reduce the likelihood of secondary crises, such as disease outbreaks and financial instability. The researchers emphasize that integrating climate risks into national development strategies is essential for ensuring long-term economic and social stability. By adopting a systems approach that prioritizes multi-sectoral collaboration and adaptation, Cambodia can build a more resilient future in the face of escalating climate challenges. The World Bank’s research highlights the urgency of a paradigm shift in disaster management, advocating for a focus on prevention and preparedness to safeguard Cambodia’s development trajectory.