Opinion: The Economics of [Cambodia’s] Five Percent Future

By Arnaud Darc

Cambodia’s real GDP growth is projected at 5.2% in 2025 and 5% in 2026. These figures represent a convergence between earlier domestic expectations and more conservative projections from the IMF, the World Bank and the ADB. They also mark a transition. For two decades the economy expanded through preferential market access, low labour costs, substantial capital inflows and an extended construction cycle. That pattern has reached its limits. The prevailing growth rate now reflects structural constraints rather than cyclical recovery. Regional peers face related adjustments. Vietnam is expected to grow by about 5.8% in 2025 and Thailand by approximately 3%. Cambodia’s outlook therefore aligns with a wider regional trend. Cambodia is discovering that sustaining growth is considerably harder than restarting it.

The post pandemic rebound is complete. Exports reached 26.2 billion dollars in 2024. International tourist arrivals rose to 6.7 million, surpassing their pre pandemic level. Yet real GDP growth remains below the seven percent average recorded in the previous decade. This reflects supply side limitations. Productivity growth has averaged below two percent. Competitiveness has weakened. Private debt stands at 111.76 % of GDP. Non performing loans have risen to 7.9% in the banking sector. Remittances, which account for between twenty and thirty percent of rural household income in some provinces, declined sharply during the Thailand border closure. These conditions constrain the contribution of Credit Driven Expansion In Consumption And Investment.

19% Percent Tariff Applies To Most Cambodian Exports

External developments reinforce these constraints. Under the reciprocal trade agreement with the United States, a nineteen percent tariff applies to most Cambodian exports. The United States absorbed more than 9.9 billion dollars of Cambodian goods in 2024. An escalation of the tariff to thirty six percent would reduce GDP by around one percentage point and lead to an estimated loss of one hundred and thirty thousand jobs. The closure of the Cambodia Thailand border in 2025 sharply interrupted cross border activity. Trade fell by ninety seven percent. Tourism inflows from neighbouring countries declined by about forty percent. These events illustrate the country’s exposure to regional geopolitical conditions.

China remains central to Cambodia’s economic performance. It accounted for more than 52% of foreign direct investment inflows in 2024 and supplied over 8% of textile inputs. Chinese GDP growth is projected to moderate to 4.8% percent in 2025 and about 4.3% percent in 2026. This affects export demand, investment flows and real estate development. These channels matter given Cambodia’s role in regional production networks and its dependence on Chinese financed infrastructure. Agriculture is also vulnerable to climate variability. Drought cycles and flooding periodically affect yields and rural incomes, limiting the sector’s stabilising role during periods of urban labour market weakness.

Disproportionate Burden On Commercial Consumers

Domestic cost structures present further limitations. Industrial electricity prices average 13.7 cents per kilowatt hour, compared with 7.4 cents in Vietnam and about 12 cents in Thailand. Reductions in industrial tariffs would require expansion of lower cost renewable generation, greater reliance on regional grid connections and a rebalancing of cross subsidies that currently place a disproportionate burden on commercial consumers. Cambodia ranks one hundred and fifteenth in global logistics performance, below Vietnam at forty three and Indonesia at sixty one. Improvements in logistics performance depend on reducing port clearance times, digitising customs procedures and expanding capacity on the main road corridors that connect factories to Sihanoukville and Phnom Penh. Firms report informal payments averaging one point six percent of sales. These factors reduce the competitiveness of labour intensive manufacturing despite monthly wages of two hundred and four dollars, which remain below those of Vietnam. Some diversification is occurring. Electronics components manufacturing has expanded, led by firms such as Minebea and Sumitronics. Electronics exports reached approximately one billion dollars in 2024 and now account for a growing share of non garment manufacturing. These investments demonstrate potential for gradual integration into higher value regional supply chains.

Policy has responded within available fiscal space. The fiscal deficit is expected to remain near two point five percent of GDP in 2025, with public debt below thirty percent of GDP. This supports continued investment in infrastructure and human capital. Investment approvals reached seven point eight billion dollars in the first nine months of 2025. Major components include ongoing construction at Techo International Airport and expansions of expressways and logistics corridors. The digital economy is also expanding. It was valued at one point 62 billion dollars in 2024 and is projected to reach two point eight 7 billion by 2027, growing at about fifteen percent annually. The economic impact of these developments depends on reductions in energy and logistics costs and improvements in administrative efficiency. Achieving industrial electricity prices below 10 cents per kilowatt hour and improving the logistics ranking by at least twenty places would materially enhance competitiveness.

Raising The Productivity Contribution To Growth

The short term outlook is shaped increasingly by structural factors. A downside scenario combines higher US tariffs, renewed border frictions and an increase in non performing loans. Each factor could reduce growth by between zero point three and zero point five percentage points. Combined, they would bring annual growth into the 3.5 to 4 percent range. An upside scenario depends on cost reductions, improvements in governance and continued diversification. If electricity prices fall to between 8 and 10 cents per kilowatt hour, if logistics performance improves to rank ninety and if the digital economy continues expanding at around fifteen percent annually, growth could move toward six percent by 2029 or 2030.

Sectoral composition reinforces the new equilibrium. Manufacturing accounts for 32.8 of GDP, services for 41.9% and agriculture for around twenty five percent. The contribution of garment manufacturing to GDP growth has declined from roughly two point five percentage points before the pandemic to about zero point five percentage points in recent years. The capital output ratio has risen to about 4.8, indicating diminishing returns on investment. The increase in the capital output ratio reflects a prolonged period of debt financed investment in construction and real estate, where marginal returns have declined as supply has outpaced demand. Raising the productivity contribution to growth from 0.8 to 2 percentage points and reducing informal costs to below zero point five percent of sales would strengthen efficiency. These improvements are necessary to sustain higher long term growth.

Cambodia has entered a five percent growth environment consistent with its current economic structure and with global conditions. Cambodia’s long post-war catch-up phase has run its course. The trajectory from 2025 to 2027 will depend on the country’s ability to reduce structural costs, raise productivity and strengthen institutions. Whether five percent becomes a ceiling or a platform for a more resilient growth path hinges on measurable progress in these areas.

Arnaud Darc is Co-Chair, Government–Private Sector Forum, Working Group D and CEO of Thalias Co., Ltd.