Cambodia’s real growth is projected to reach 4.5 percent in 2022 as anticipated impacts from negative terms of trade are caused by rising oil prices and a cyclical slowdown in America and China. Over the medium term, the economy is expected to trend back to potential, growing at around 6%.
In response, the development bank recommended the Cambodian government continues efforts to contain COVID-19 infection, strengthen consumer and investor confidence, promotion of exports and particularly in agricultural commodities as well as facilitate trade and reduce the costs of doing business, and stabilization of retail prices.
To read more about Cambodia’s 2022 inflation outlook click here.
Speaking at the launch of the June 2022 biannual economic report, World Bank Country Manager for Cambodia Maryam Salim lauded the Cambodian government’s successful Living with COVID-19 strategy which has allowed, Cambodia to reopen and enable economic recovery.
However, she warned that the road ahead remains uncertain citing rising energy and food prices due to the war in Ukraine are imposing additional burdens on the poor, and this will slow the pace of poverty reduction. “The government’s cash transfer program, which has been vital to poor households during the pandemic, will continue to be needed,” she said.
Strong medium-term outlook
According to the report, Cambodia’s economic recovery picked up during the first quarter of 2022. The report shows that during the first quarter of 2022, goods exports rose to $4.8 billion, up by 26 percent from last year.
This increase in trade was attributed to the traditional growth drivers, especially the garment, travel goods, and footwear manufacturing industries, which continue to expand. The service sector, especially the travel, tourism, and hospitality industries, is recovering, underpinned initially by a revival of domestic demand and domestic tourism was also highlighted.
In addition, the report found the path of the economy continues to depend on the course of the virus. Thanks to continued progress on vaccinations, further relaxations of travel restrictions support continued gains in economic activity and employment. Domestic economic activity and agricultural commodity exports are expected to remain robust, contributing to economic recovery.
To read more about Cambodia’s post-COVID economic agenda click here.
Over the medium term, the economy is expected to trend back to potential, growing at around 6 percent. The new Law on Investment, together with the newly ratified Cambodia-China Free Trade Agreement and Regional Comprehensive Economic Partnership, is expected to boost investment and trade in the coming years, and were considered contributing factors.
Similarly, the report forecast that trade and investment will be further boosted when the Cambodia-Republic of Korea free trade agreement is ratified. However, the negative impacts of the coronavirus on jobs and welfare are expected to continue as the services sector, especially the travel, tourism, and hospitality industries, continue to face persistent headwinds.
Government policy must help sustain the economy
The report recommends the Cambodian government implement policies that can help sustain economic recovery. These include continued efforts to contain COVID-19 infection, strengthening consumer and investor confidence, promotion of exports, particularly in agricultural commodities, by facilitating trade and reducing the costs of doing business, and stabilization of retail prices.
The report found that more efforts were needed to promote agricultural commodity exports to maximize the benefit of the newly ratified bilateral and multilateral free trade agreements, namely the Cambodia-China Free Trade Agreement (CCFTA) and the Regional Comprehensive Economic Partnership (RCEP).
To read more about Cambodia’s rising shipping costs click here.
In this regard, incentives currently introduced under the new investment law to support agro-processing and agricultural value chains could play a key role. While Cambodia’s agricultural commodity prices at farmgate remain competitive, interest rates on loans, costs of energy for agro-processing industries, and logistics and transportation costs for agricultural commodity exports are not.
Unlike electronics, equipment, and parts, agricultural commodities are heavy and relatively cheap cargos, which are being affected disproportionally by rising ocean freight costs. Therefore, further efforts must be made to strengthen trade facilitation, while implementing multimodal transport connectivity. This is particularly crucial for Cambodia’s agricultural commodity exports if the country is committed to taking full advantage of the CCFTA and RCEP.
At the same time, it is essential to continue addressing supply-side bottlenecks by reducing the costs of doing business, energy, and licensing, while promoting access to finance, especially for the export sector to revive external competitiveness.
In addition, an important policy consideration is to take advantage of continued FDI inflows. Backward linkages between the FDI sector and the domestic small and medium-sized enterprise sector must be further fostered to boost job creation and growth, the report concluded.