After experiencing a relatively strong economic expansion during the past decade, Cambodia will face great challenges in the coming years, sharp economic slowdown, and dramatic increase of unemployed young people.

     Based on qualitative interviews with some top business people and senior policy makers, the progress of critical reforms, such as civil services and judicial system, will be very moderate. Current political tensions and forthcoming electoral agenda are the main causes of this weakness.

     Without achieving these institutional reforms, the success of government's "war against corruption" will be doubtful. As a result, other economic reforms, such as trade facilitation and fiscal and banking reforms would become merely useless. Therefore, government budget revenue will be flat, resulting in a moderate increase in civil servant salaries, and social spending. Moreover, flows of foreign aid and of foreign direct investment will be limited, as reform progress is not visible.

     In addition, with the elimination of the worldwide garment export quota system in early 2005, Cambodia 's foreign currency surplus generated by the garment sector will turn down. The expected robust expansion of the tourism sector will not be sufficient to compensate for this decline. Therefore, the nation's rich stock of foreign currencies, especially the US dollar, is expected to go significantly down.

     For these reasons, EIC expects that Cambodia 's economic growth for 2005-2008 will drop by about half, to just around 3 percent per annum, from about 6 percent per annum during the past ten years. Industry will no longer be a source of growth, while agriculture will continue to expand erratically depending on the weather.

     Consequently, it is not surprising that an additional 1 million jobless will be added to the already high stocks of jobless (or underemployed) people. Poverty will be more obvious. Therefore, the government's Millennium Development Goal will likely not be met. Cambodian top politicians must focus more on development, if they want to move their country out of poverty. Back to Top

Economic Growth

     The Economic Institute of Cambodia estimated that the country's economic growth rebounded to 6.5 percent in 2004, after continuously slowing during 2001-2003. As expected, data released by the Ministry of Commerce showed that Cambodia 's garment exports were very strong, reaching almost US$ 2 billion in 2004, and the number of foreign tourists visiting Cambodia reached about 1 million people. These two sectors alone have contributed more than 80 percent of total GDP growth. However, unfavorable climatic conditions and weak management of natural resources have significantly impacted the agriculture sector in 2004.

     However, we continue to expect that the tourism sector will continue to grow steadily, while agriculture production will remain strongly dependent on weather. As a result, Cambodia 's economic growth will drop to just 3.2 percent in 2005, and around 3 percent per annum in the coming years. Back to Top

1.1. Agriculture

     The Cambodian agriculture sector is characterized by a sharp decline of natural resources, including forestry and fish stocks, and low and erratic growth of paddy production, because of a lack of an effective irrigation system. Employing more than 70 percent of Cambodia 's workers, and accounting for about 30 percent of the economy, the agricultural sector grew only about 2.5 percent per annum during the last five years. Due to the very low productivity, incomes generated by the agriculture sector could not support enough rural livelihoods. A Poverty Profile of Cambodia in 1999 revealed that about 80 percent of the poor derived their main source of income from agriculture.

     The 2004 drought has caused significant damage to rice production. A recent report by the Ministry of Agriculture showed that about 12 percent of the crop of cultivated areas has been totally destroyed, and large parts of the rest of the land have been partly affected by lack of water. As a result, production of paddy during last year's wet season reached only 3.13 million tons, against 3.84 million tons of same season of 2003, which represents a decline of 18 percent. Despite this sharp decline, the government estimated that Cambodia will still enjoy a large rice surplus for local consumption and exports this year. To some extent, other crops also suffered from the last year drought. Its production growth is estimated to slow down from 8.8 percent in 2003 to 2.3 percent in 2004.

     Livestock production was basically flat in 2004 because of bird flu disease and sharp competition from neighboring imports. In 2004, Cambodia 's nascent poultry industry has been strongly affected by the disease. Although most of the country's poultry production comes from traditional breeding, which has not been impacted by the disease, some Cambodian consumers still avoid eating poultry meat.                                                  

     However, fish production slightly recovered from the previous year's decline. According to a recent EIC and Cambodian Parliament joint field study, production of small fish that are used to produce popular salt fish pâté Prahok significantly increased, but normal commercial fish production remained low. In 2004, small fish production increased by 25 percent, leading to a price decline of almost the same proportion.

     For 2005 and beyond, Cambodian crop production will still depend on unpredictable weather conditions, because an effective irrigation system will not be in place. Given the very low government budget revenue expected for the next coming years, prospects for a rapid improvement of agriculture infrastructure will be dim. As a result, rice production will expand moderately by about 2 percent per annum, almost the same rate as the population growth. Back to Top

     Thanks to the expansion of new cultivated land however, non-rice crop production will continue to grow significantly (5 to 6 percent per annum). The non-rice crops are expected to contribute more substantially to rural livelihoods and to the Cambodian balance of payments. Official statistics do not show any information on external trade of these types of products, as they were informally traded with neighboring countries.

     Statistics of the Ministry of Agriculture showed that production of corn, cassava, and beans was doubled during the last few years. In addition, prices also steadily increased. As a result, the income of Cambodian farmers who grow these types of crops significantly improved. Some of them who hold at least 5 ha of land become even relatively rich. Nevertheless, production of vegetables remained flat or declined, because of sharp competition with the neighboring countries. The government should encourage Cambodian farmers to switch from their rice growing to non-rice crops, especially corn and beans, which can be exported easily to Thailand , Vietnam and China . Moreover, these crops do not need so much water as rice for growing.

     The decline in forestry and fish stocks pose serious problems. Government efforts to halt illegal logging and strengthen forest concession practices have thus far been insufficient to halt unabated exploitation. Small scale, community based forests with strict adherence to technical standards may be enough to cover demand for domestic wood consumption, but any continuance of large scale commercial logging will need to have transparent and credible management and to show compliance with environmental and social impact regulations.

     A jump in the international price of rubber in 2004 helped rubber production to increase in nominal terms but to post negative growth in real terms because of the previous felling of older rubber trees. Newly planted trees have not yet reached maturity. With fertile land suitable for rubber expansion and some prospects for privatization of state-owned rubber companies, production and quality could improve. Moreover, capital investments in rubber processing are expected. Better prices and higher production would benefit both companies and the workers and farmers living nearby. A re-emergence of rubber plantations and production would be a meaningful growth aid in the agricultural sector. Back to Top

1.2. Industry & Construction

     However, expectations of continued growth in the garment industry will need to be tempered in the face of the quota phase-out by the end of 2004 that will increasingly hurt the industry due to inadequate competitiveness and prevailing high transaction costs. Preliminary results of a study on labor competitiveness in the Cambodian garment industry show that, out of 80 factories surveyed, about half remain optimistic for the future, as they expect to increase their production capacity in the coming years. Only about 20 percent feel that they would reduce their production, while the remaining 30 percent take the position of "wait and see".

     Nevertheless, based on another survey conducted in the same period with the 100 top CEOs in Cambodia , which included about 34 from garment factories, most garment factory managers expressed some concern after the elimination of the quota system in early 2005. Most of them feel that 2005 will be more difficult than the previous years, although the situation remains under control. Most of factories that are facing order problems now produce garment products that were protected by the quota system.

     On the price side, we expect that Cambodian exporters will be forced to reduce prices, especially on the products that were under US quota system because of tight competition after the quota system elimination. As a result, prices of garment exports to the US market will continue to decline by 3 to 4 percent per year between 2005 and 2008. However, price pressure will not be so high in other markets, because Cambodian producers are accustomed to competition in these markets. Back to Top

     For these reasons, EIC projects a bottoming out of growth in the garment industry in 2005. Even though Cambodia is a full member of the World Trade Organization (WTO) and could theoretically reap some growth benefits through the market access that membership offers, the reality is that quota elimination also means stiffer competition for a garment sector that came to life in an environment protected by world-wide quotas.

     Unfortunately, in the last several years, the industry and the rest of the economy have benefited from only sporadic attempts at real reform, and it seems unlikely that there will be sudden comprehensive measures reducing the costs of doing business that would offer Cambodia a more competitive edge. Back to Top

     As a result, EIC projects that the garment industry will decrease slightly in 2005, pulling down overall growth figures. Prospects for the following years will be entirely dependent on how aggressive the reform process is. External factors will no longer be a panacea for the garment industry. Whether it lives or dies will depend on the nature of domestic factors and reforms. Broad based industrial development, particularly in agro-industry, must accompany the diversification of the agricultural sector. This will require huge initial investments by the government in infrastructure, rationalization of agricultural land concessions, and clear and enforceable laws and regulations, before the private sector can be enticed to bring in capital and technology. In plain terms, this dual track policy can only be achieved as long as the environment is conducive to investments and markets for both domestic consumption and export.

     However, the decline in production of forestry and fisheries may hinder the prospects of high value-added diversification. Wood processing may not be viable if the current downturn in forestry continues. Effective implementation of both social and commercial concession policies in these natural resource sectors will provide the ability to move forward. Therefore, there is an urgent need for immediate action to tackle these multifaceted constraints. No one will invest in the agricultural sector if the overall environmental background of the country is allowed to deteriorate.

     Construction, the second biggest industrial sub-sector, constituting more than 19 percent of the sector's value , significantly slowed in 2004 (only 1.5 percent increase), after experiencing a strong growth of 7.5 percent in 2003, and 12 percent in 2002 . Non-residential private construction increased but development of public infrastructure was hindered by l ower capital expenditures by the government and donors. Residential construction growth figures are likely underestimated, as many new construction projects went unregistered due to loose management during the political stagnation of mid-2003 to mid-2004. It is worth noting that the boom in residential construction, although contributing to growth, is not seen as a substantial aid to broad-based development and poverty reduction.

     Growth is anticipated to be somewhat negative in the next coming years, because of sharp decline in new investment in both garment and tourism sectors. The stock of hotel rooms in Siem Reap greatly exceeds what is needed. Development of public infrastructure will not be as strong as the past, anticipating low government budget revenue and foreign aid. Back to Top

1.3. Services

     The service industry represents the biggest share of the economy and increased by 8.4 percent in 2004, up from only 2.8 percent in 2003. That recovery can in part be attributed to the rebound in international tourist arrivals during 2004. The recovery of transportation, trade, and other private service sectors also played a role in expanding the whole service sector. Except for public services (basically flat in 2004 because of political deadlock after the general elections), Cambodian service sectors expanded more than 9 percent last year.

     The growth in the service sector in 2004 was on an accelerating trend, as the tourism sub-sector rebounded from the lows of 2003 and continued to expand. The total number of foreign visitors during the first eight months of 2004 increased by 41 percent compared with the same period of 2003, reaching the level of almost 1 million. The number of tourists arriving through Siem Reap airport so far in 2004 has been up by 66 percent and arrivals by land and boat have been up 47 percent. In 2005, the number of foreign tourists arriving through Siem Reap will very likely exceed that through Phnom Penh .

     Cambodia will need to sustain this growth by finding ways to diversify its tourism offerings. Certain areas of Cambodia which thus far remain "unspoiled" could potentially be turned into ecotourism sites. The presence of foreign tourists exploring Cambodia 's nature resources could serve to help prevent illegal exploitation and destruction of these areas. Tourists may want, for example, to visit hill tribes living near forested areas to see how they utilize the area around them in a sustainable way. Making new areas of Cambodia beyond Angkor Temples into true tourist destinations will rest in large part on whether the government will be able to provide sufficient security and infrastructure.

     Domestic trade, transportation, and financial services are potential contributors to growth. But increased production would be pointless without correlated attention to infrastructure development, in particular roads and railways. Further rehabilitation and reconstruction of roads will link products to markets. This will open trading opportunities to remote areas of the country that are currently unable to access outside markets. Increased mobility of people, goods and services will in turn create a positive circle of market dynamics.

     Financial services also are still rudimentary, which handicaps an important channel of capital transfers from unused funds to productive investments. Major financial services are concentrated in Cambodia 's main cities. Credit in rural areas is available through a few commercial banks and specialized microfinance institutions, but the dominant source of credit appears to be informal lending (usurers). Ironically, there are excess funds lying idle in the vaults of commercial banks, which could be otherwise used for more productive purposes. Back to Top