Cambodia’s economy showed unexpected strength in 2005 with 7.0 percent GDP growth, an expansion of international trade, and stable fiscal and monetary performance, despite an increase in consumer price inflation to 6.7 percent because of higher oil prices. The growth drivers in 2005 were garments and textiles, tourism, construction, and agriculture. Garment exports, the country’s largest foreign exchange earner, increased by 10.6 percent to US$ 2.2 billion, of which 71 percent was shipped to the United States and 23 percent to EU markets, both of which had effectively restricted garment imports from China in mid-2005. Tourist arrivals expanded by 35 percent compared to 2004. GDP growth in 2006 is projected to decline slightly to 6.0 percent, while inflation should return to a more normal level of about 3.5 percent. The narrow base of growth remains a concern, however, though Cambodia has made efforts to diversify its economy through development of small and medium enterprises. The microfinance institution loan portfolio grew by about 50 percent to US$ 60 million in 2005, while credit to the private sector as a whole expanded 21.3 percent. | |
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Trade facilitation has improved and special economic zones were introduced. The legal and regulatory framework for investment was substantially improved in 2005 due to the adoption of the Law on Commercial Enterprises, passage of the amended Law on Concessions, and issuance of the sub-decree for the Law on Investment. Approvals for new FDI rose from an estimated US$ 121 million in 2004 to US$ 216 million in 2005. On the fiscal front progress tax revenues grew from 11.3 percent of GDP in 2004 to 11.7 percent in 2005, with particularly significant growth in VAT and customs duties. Non-tax revenue collections were somewhat disappointing, falling as a percentage of GDP, although the Ministry of Economy and Finance has established a Non-Tax Revenue Department to develop policy and strategy. Total expenditure fell from 16.3 percent of GDP in 2004 to 14.8 percent in 2005, owing to a decline in externally-financed capital spending. The net impact was a notable fall in the overall fiscal deficit (excluding grants) from -5.1 to -3.1 percent of GDP. In 2006 revenues are projected to increase further to 12.2 percent of GDP while expenditures are also expected to return to recent levels by growing to 17.1 percent of GDP. In the external sector both export and import growth moderated in 2005, and growth is expected to slow further in 2006. The current account deficit (excluding transfers) remained steady at 10.3 percent of GDP in 2005 and is expected to grow slightly to 11.7 percent in 2006. Gross foreign reserves continued to expand, reaching US$923 million (up from US$809 million in 2004). The exchange rate remained relatively stable at 4,150 riel per US$ (end of period). The monetary sector saw broad money increase by about 20 percent in 2005, with the same growth projected for 2006. The government continued to pursue financial sector reform, including privatization of the state-owned Foreign Trade Bank and adoption of the Law on Negotiable Instruments and Payment Transactions, which aims to improve payment transactions, eliminates legal uncertainties, and reduce payment system risks. The Bank’s Poverty Assessment 2006, based on new survey data, indicates that poverty has fallen over the last decade: the percentage of Cambodians living below the national poverty line fell from 47 percent in 1993/4 to 35 percent in 2004, owing in large part to the restoration of peace and stability as well as high growth. At the same time, inequality has increased as measured by Cambodia’s Gini coefficient, which is up from 0.35 to 0.42 over the same period, making Cambodia one of the more unequal countries in the region. Both garments and tourism, Cambodia's main sources of growth, are concentrated in Phnom Penh and Siem Reap, respectively, while the economic linkages between urban centers and rural areas have been limited. The most important link may have been in the form of remittances. However, only 13 percent of rural households received remittances from family members working in the cities. Back to top
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