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Regions and Countries Country Economic Reviews Document
Executive SummaryUnusually prolonged and severe seasonal flooding is expected to curb otherwise robust economic growth in 2000. As a result, real gross domestic product (GDP) expansion is projected to slow from 5.0 percent in 1999 to about 4.5 percent in 2000, which equals average real GDP growth performance during 1995-1999. Given the population growth rate of 2.5 percent, this growth performance is not significantly impacting incomes. Real per capita GDP rose less than 10.0 percent during the period. In addition, growth was uneven, with industry growing at an average annual rate of about 15.0 percent, agriculture at 4.0 percent, and services at 1.0 percent. This relatively low, urban-biased growth contributed only modestly to poverty reduction. The incidence of poverty declined only marginally from 39.0 percent of the population in 1994 to 36.0 percent in 1997 and then remained stable from 1997 to 1999, despite aid flows averaging about $20 per capita during 1995-1999. Economic performance continues to have an urban bias in 2000. A contraction in agriculture is anticipated because of the impact of flooding on crop production and because of an ongoing slump in forestry. The expected reduction in crop production is a sharp reversal from the record harvest of 1999, which resulted in a 9.1 percent increase in crop value added as compared with 1998. The decline of forestry since 1997 is a result of a combination of factors including low world timber prices following the regional financial crisis, higher timber royalties since 1999, and stricter enforcement, since 1999, of laws governing the felling and export of logs. Further expansion of fisheries, which has grown rapidly in the past several years, is expected to partially mitigate the negative impact of poor performance in crops and forestry. Rapid expansion of the textile industry, based primarily on exports to the United States, should contribute to double-digit growth for industrial value added in 2000. Manufacturing increasingly dominates the industrial sector, accounting for 75.0 percent of industrial value added and nearly 15.0 percent of GDP in 1999. Construction, which accounted for 4.2 percent of GDP in 1999, should continue to expand in 2000 under the influence of a steadily improving political climate. The strong 1999 recoveries in tourism and domestic demand should persist in 2000, supporting moderate service sector expansion, despite the mitigating effects of the floods on economic activity. The impact of flooding on the economy is likely to slow investment somewhat in 2000 from a high of over 18.0 percent of GDP in 1999, which followed a low of 12.0 percent of GDP in 1998. Reflecting the economic recovery, the substantial increase in investment in 1999 was primarily an expansion of private investment, although public investment reached a high of 6.2 percent of GDP. Local financing became more important as a source of private investment in 1999 as foreign direct investment continued to stagnate, falling from 5.5 percent of GDP in 1997 to 4.3 percent in 1998, and to 4.0 percent in 1999. The main sectors attracting investment projects in the first nine months of 2000 were garments and tourism. Overall, domestic investment is still low as compared with a Southeast Asian average of about 25.0 percent of GDP. Achieving higher rates of investment, rapid economic growth, and job creation is critical because the labor force is expanding rapidly. Over 25.0 percent of the population is currently aged from 10 to 19 years and labor force participation rates for this group are expected to increase rapidly during the next several years. Because past economic growth has not been adequate to productively absorb new entrants to the labor force, there are indications that underemployment is increasing. Between 1997 and 1999, the proportion of the labor force classified as unpaid family labor increased from 30.0 to 45.0 percent, and the real wages of unskilled labor fell by 5.0 to 10.0 percent. Moreover, large income disparities exist. In 1999 per capita income in Phnom Penh was $691, over three and a half times greater than rural per capita income of $197. To promote long-run economic growth, Government is increasing expenditures on socioeconomic development by enhancing fiscal revenues, attracting more foreign financing for public investment, and reducing expenditures on defense and security. Fiscal revenues are projected to fall short of the 2000 budget target by about $14 million, but still increase by more than 7.0 percent to 11.8 percent of GDP as compared with 11.5 percent in 1999. Together with an increase of more than 25.0 percent in expenditures, this should increase the fiscal deficit, excluding transfers, from 4.1 percent of GDP in 1999 to nearly 7.0 percent in 2000. However, foreign financing is expected to more than cover this deficit, increasing from 4.5 percent of GDP in 1999 to an expected 7.0 percent in 2000, so that domestic Government debt will fall. The composition of expenditures continues to improve. Defense and security spending is projected to fall from 4.2 percent of GDP in 1999 to 3.8 percent in 2000, while expenditures on health, education, and rural development should rise from 2.0 percent of GDP in 1999 to 2.6 percent in 2000. Positive developments in money and banking accompany improvements in fiscal performance in 2000. First, the average annual inflation rate should fall from 4.0 percent in 1999 to about zero in 2000. Despite the impact of flooding on agricultural production, food prices were about 7.5 percent lower in September 2000 than in September 1999, in part because of low world rice prices. Since food accounts for about half of the basket of goods used in the consumer price index, falling food prices offset the impact of rising housing and transportation costs. Second, the value of the local currency, the riel, has been stable. It is projected to depreciate by only about 1.0 percent against the dollar in 2000. Third, expansion through September 2000 of foreign currency deposits (by about 39.0 percent) and private sector credit (by about 22.0 percent) reflects increased confidence as political and economic conditions continue to improve. Total liquidity increased by over 24.0 percent through September 2000 yet did not fuel inflation as the velocity of money fell. Cambodia’s external position is expected to continue improving as well in 2000. An increase in gross official reserves from $422 million in 1999 to about $500 million in 2000 is anticipated as strong growth in exports (projected at 28.0 percent in 2000) and tourist arrivals (projected at 35.0 percent) are providing strong foreign currency earnings. The current account deficit, excluding grants, widened from 8.2 percent of GDP in 1998 to 11.5 percent in 1999, and is expected to be of similar magnitude in 2000 as the recovery generates strong import growth. However, official transfers, 7.3 percent of GDP in 1999, reduced the current account deficit to 4.2 percent of GDP in 1999, and a similar outcome is expected in 2000. Weather conditions permitting, the economy should achieve growth of 5.0 to 6.0 percent in 2001, high oil prices and a slowing United States economy notwithstanding. Over the short term, the garment sector should continue to lead the industrial expansion. However, in the long run, the competitive edge that Cambodia enjoys because of preferential access to markets in the United States and Europe may be eroded by the liberalization of world textile trade. Tourism should continue to be a source of employment and income growth, foreign currency earnings, and revenues. As the area cultivated to annual crops expands and investment in rural development increases, modest agricultural growth can be expected in the short term, barring severe weather conditions. The prospects for achieving Government’s long-term goal of moving out of the ranks of least developed countries by 2020 hinge upon the country’s ability to substantially increase agricultural productivity, to maintain high levels of private investment, to increase and improve the efficiency of public investment, and to increase national savings. In the medium term, with increased investment, improved natural resource management, and stronger protection of land-ownership rights, agricultural productivity should begin to grow. If Government continues to improve macroeconomic management and proceeds with trade-liberalizing reforms, new and diversified investment should materialize to continue the export-led industrial expansion. Planned banking reforms should begin to improve access to credit for small- and medium-sized enterprises, relieving a major constraint to service sector expansion. The outlook for continued improvement in macroeconomic management is reasonably good. With planned reforms, fiscal revenues should reach 14.0 percent of GDP in the next few years, public expenditure management should improve, and the proportion of expenditures devoted to socioeconomic development should continue to rise. In money and banking, maintaining a stable exchange rate, building international reserves, and strengthening the banking sector, are the reform focus. In the external sector, a key Government objective is to liberalize trade in conjunction with requirements under membership in the Association of Southeast Asian Nations. Achieving sustained economic development and poverty reduction is subject to several risks. The risk of renewed political instability, although still present, is falling since the political settlement of late 1998. Economic risks include a slowing of progress on reform, a US economic slowdown, a sustained slump in foreign direct investment, and a continuation of high oil prices. Of these, the risk of stagnating foreign investment is the most serious, in part because of the continued regional slump in investment opportunities. Environmental risks are evident as flooding and overexploitation of natural resources jeopardize sustained increases in agricultural productivity. The population growth rate, although high, may be beginning to fall. However, the risk of a debilitating HIVAIDS (human immunodeficiency virus/acquired immunodeficiency syndrome) epidemic that could undermine the beneficial effects of economic growth on poverty reduction is serious.
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