Economy of Cambodia

by CamboGuide | August 28, 2010 4:32 pm

Economy of CambodiaThe Cambodian economy grew at a rate of 10% between 2004 and 2007. This was mainly driven by industries such as garment, tourism construction and agriculture. Due to the global economic crisis GDP dropped to below 7% growth in 2008, and stayed just in the positive in 2009, 0.1 percent, while the growth in 2010 is expected to be around 5 percent.

Clothing, timber, rubber, rice, fish, tobacco, and footwear are the main exports; petroleum products, cigarettes, gold, construction materials, machinery, motor vehicles, and pharmaceuticals are the main imports. The chief trade partners are the United States, Hong Kong, China, and France.

Agriculture

With 59% of the Cambodian population engaged in agriculture, this is the primary industry of the country. Rice is the principal food crop, while rubber is the principal commercial crop in Cambodia. Many international aid organizations are supporting farmers through crop diversification programs to cultivate other crops. Rubber exports increased about 25% in 2009 due to rising global demand. Agriculture sector contributed 29% of the country’s GDP in 2007.

Tourism

Tourism has been the second largest source of foreign exchange for Cambodia for decades after textile. The industry saw a setback in 1997-98 due to internal troubles in the country. However, the number of visitors rose to 1,055,000 in 2004, from 219,000 in 1997. In 2008, 2 million foreign tourists arrived in Cambodia, which was 5.5% more than the 2007 level. Economic troubles abroad dampened growth in 2009, but tourism arrivals were on the rise again in 2010 and are expected to keep growing by around 5% per year.

The major tourist destinations in the country are Siem Reap, Phnom Penh, Sihanoukville, Kampot and Kep.

Garment

Cambodian garment industry workers

Traditionally, Cambodia’s garment industry has been the biggest foreign exchange earner. According to Cambodia’s Ministry of Commerce, the global economic downturn had a huge impact on this sector. During 2008-09, Cambodia had to shut down over 30 garment factories due to recession and lay off more than 30,000 laborers in the garment industry. 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.

Minerals

In 2005, exploitable oil deposits were found beneath Cambodia’s territorial waters, representing a new revenue stream for the government if commercial extraction begins. Cambodia will begin pumping oil for the first time in December 2012. It remains unclear how much can actually be recovered, or if potential revenue would be used to benefit Cambodia. London-based corruption watchdog Global Witness said revenues from Cambodia’s oil and mineral wealth were ‘jeopardised by high-level corruption, nepotism and patronage’ in allocating and managing the assets.

Mining also is attracting significant investor interest, particularly in the northern parts of the country. The government has said opportunities exist for mining bauxite, gold, iron and gems.

Special Economic Zones (SEZ)

Cambodia has approved a total of 21 Special Economic Zones located along the border with Thailand and Vietnam (Koh Kong, Poipet, Savet, Phnom Den), at Sihanoukville and Phnom Penh. Of the 21, 6 have commenced operations.

Aiming to attract more investors, the SEZs offer a ‘One-Stop Service’ for imports and exports, with government officials stationed on-site providing administrative services. Applications to establish factories within the SEZs are dealt with on-site as well as all administrative clearances, permits, authorisations, etc.

Businesses within the SEZs also benefit from a number of fiscal incentives, including income tax, customs, and VAT benefits.

Economic Challenges

Cambodia's annual GDP growth

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 21 years old. The population lacks education and productive skills, particularly in the poverty-ridden countryside, which suffers from an almost total lack of basic infrastructure.

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. However, corruption and instability at the political level discourage donors and foreign investment.

According to the 2009 Index of Economic Freedom by the Heritage Foundation in the US, Cambodia is ranked 21st out of 41 countries in the Asia-Pacific region. The country scores noticeably well in fiscal freedom and government size, and moderately well in monetary freedom. Low rates for income and corporate tax contribute to a low overall tax burden, giving the country a high fiscal freedom score. Other institutional weakness still holds down Cambodia’s overall economic freedom score, however. Business freedom, trade freedom, property rights, and freedom from corruption all receive notably low scores. Cambodia’s overall economic freedom score is 56.6 and ranked at 106th in the 2009 Index.

Unemployment

About 300,000 people are added to Cambodia’s labour force each year [8.4], but the country’s economic growth generates only between 20,000 and 30,000 new jobs each year.

Unemployment in Cambodia is officially defined by the government as working less than one hour (formally or informally) per week. By this measure, Cambodia has a 3.5% unemployment rate. However, this greatly contradicts with the figures from the Economic Institute of Cambodia which estimates that 85% of Cambodians hold no formal job.

Poverty

Poor kid scavenging a dump site

35% of Cambodians live below the national poverty line (the poverty line deemed appropriate for a country by its authorities) of $0.45 per day.

Between 1993 and 2004 the number of people living on less than $0.45 per day fell from 47% to 35% of the population. During the same period, per capita consumption of the richest 20% of the population grew by 45%, compared to a growth of 8% for the poorest 20%. Phnom Penh, the capital city of Cambodia, has 564 slum areas housing 300,000 people, one quarter of the city’s population.

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