Total garment exports during the first half of 2005 reached US$ 820 million, rising by 1.4 percent in nominal terms over the same period in 2004, suggesting significantly slower growth this year compared to prior years. The garment industry, the single largest foreign exchange earner, grew by 25 percent in 2004, with 65 percent shipped to the US, 29 percent to the EU, and 6 percent to other markets.

The continued though moderated expansion of Cambodia’s garment exports coupled with soaring oil prices in 2004-2005 has led to deterioration in the country’s terms-of-trade as the cost of oil imports has risen considerably.

Average oil and diesel prices in Cambodia grew by 19.3 percent and 26.8 percent, respectively, in June 2005 as compared to June 2004. Consumers were buffered from the full world market price hike by the Government’s intervention, which lowered the effective petroleum tax rate. By applying taxes and duties to an administrative price (set equal to market prices in January 2004), for example, the Government reduced the effective tax on gasoline by 36 percent to provide relief for consumers.

However, Cambodia, a low-income oil importing country, suffered an estimated terms-of-trade loss of 0.8 percent of GDP in 2004. As a result the current account deficit (excluding official transfers) is expected to worsen slightly from 10 percent in 2004 to 11 percent in 2005. The current account deficit is likely to remain at around 10.5 percent of GDP next year as average world oil prices are projected to be slightly higher than this year.

Tourism and construction, the source of much of Cambodia’s non-garment growth, has continued to expand. Visitor arrivals rose by 41 percent in 2004 over 2003, though higher oil prices will likely dampen expansion in 2005. The construction sector contributed 10.4 percent to economic growth in 2004. Growth of residential construction in Phnom Penh was remarkably strong in 2004, rising by 31 percent over 2003, and commercial construction also increased markedly.

Growth in the construction sector is projected to remain strong in 2005 at about 11 percent. Overall agricultural growth is expected to be below average in 2005, owing in part to weakness in the fisheries sub-sector. FDI is expected to recover this year after a disappointing performance in 2004. During the first half of 2005, 66 new investment and expansion projects were approved by the CDC; this was a highest number ever approved since 1999 for a 6-month period.