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Cambodia’s account deficit widens significantly but tipped to narrow next year

Pang Socheneath

Cambodia’s account deficit should reduce next year due to the recovery of external demand and the tourism sector as well as financing by short to medium-term inflow of foreign direct investment, according to the Asian Development Bank.

The deficit deteriorated substantially to an estimated 26.9 percent of GDP in 2021, according to the World Bank’s December 2021 Economic Update for Cambodia.

“The trade deficit has substantially widened, largely caused by a surge in imports, while goods (including gold) exports eased. In addition, the balance of payments has been further impacted by the collapse of tourism receipts, which has devastated the country’s services exports,” the report highlighted.

As stated in the same report, gross international reserves declined only marginally to $19.3 billion (about ten months of imports) in September 2021, down from $21.2 billion at the end of 2020.

Anthony Gill, ADB’s Acting Country Director for Cambodia told Cambodia Investment Review, “Cambodia’s account deficit is expected to be fully financed by financial inflows of FDI over the short to medium-term, and is projected to narrow gradually from 2022 as goods and service trade deficit should improve thanks to external demand recovery and the gradual return of tourism”.

Inflows of foreign direct investment (FDI) and other capital continued, a surge in gold imports caused the current account deficit to widen in 2021. A trade deficit occurs when a country imports more than it exports.

“While this led to a modest decline in international reserves to $20.2 billion by end-June it reflects the equivalent of around 9 months of imports which remains sufficient and therefore is not a concern,” Anthony said.

Cambodia’s account deficit
Cambodia’s account deficit widens

Cambodia’s account deficit deteriorated as the trade deficit widened

The trade deficit in 2020 narrowed to the equivalent of 11.4% of GDP, due to the decline by a 5.4% in merchandise imports and 16.5% surge in merchandise exports, particularly private gold sales. Without private gold sales, merchandise exports in 2020 declined by 1.1%, according to the Asian Development Outlook report, issued in April 2021.

However, the same report stated that the trade deficit has substantially widened, largely caused by a surge in imports, while goods (including gold) exports eased.

Large trade deficits have been driven by imports of gold as traders seize profit opportunities and fabric for the garment production and export inputs, according to the World Bank.

Gold imports shot up to $4.0 billion in the first nine months of 2021, a more than tenfold increase, as gold traders increasingly hedged against volatility caused by the pandemic, while imports of fabric rose to $3.5 billion or a 25.1 percent increase.

Cambodia’s account deficit widens
Cambodia’s account deficit widens

Improving Cambodia’s external position as goods and service demand increases

According to a recent World Bank report, Cambodia’s real gross domestic product (GDP) is projected to grow 2.2 percent this year. This relatively slow growth is caused by the resurgence of Covid-19 which affects the tourism, wholesale, and retail sector during the second and third quarters of 2021.

However, manufacturing exports including garments, travel goods, footwear, agriculture, and bicycle are gradually recovering.

Cambodia Investment Review previously reported that industrial, logistics and manufacturing sectors have been increasing despite impacts of the COVID 19 pandemic, according to CBRE Cambodia.

“Continuing diversification of export products and markets and further promoting export-led production in agro-industry and other non-garment manufacturing with higher value-add products such as bicycles, electrical parts, and wiring products will help steadily improve Cambodia external position over the medium-term,” Anthony , ADB’s Acting Country Director for Cambodia said.

The recovery of global demand will be further boosted by the US stimulus package, according to “Road to the Recovery”, the World Bank’s Economic Update for Cambodia in June 2021.

“Quality FDI inflows into these productive sectors would not only generate more jobs, bring in new technology and skills for the Cambodian labor force but also help to sustain Cambodia’s long-term growth,” Anthony added.

According to the World Bank, in 2020, service transactions were abruptly interrupted by the pandemic, which for the first time in many years, the net exports of services registered a deficit of $123 million in 2020, down from a surplus of $2.8 billion in 2019.

In addition, service exports declined by 68 percent in 2020, compared to an increase of 11.6 percent in 2019, caused primarily by a sharp decline in travel exports.

During the first half of 2021, net exports of services registered a negative $700 million, according to the central bank’s balance-of-payments data.

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