A close look at the economic development of Cambodia

 

A close look at the economic development of Cambodia

The research arm of HKTDC Hong Kong Trade Development Council has recently published a market report on Cambodia. Since this country is considered one of the least developed countries, TextileFuture is presenting today the latest facts and figures on Cambodia, a country that has also a textile industry and information is otherwise not so easily available

map_of_cambodia

Latest Development

After a robust expansion with annual GDP growth averaged 7.5 % in 2005-2015, Cambodia’s GDP growth is expected to moderate to 7.2 % in 2016.

Yearly export growth decelerated to 17 % in 2015, with the export value reaching USD 8.03 billion according to Cambodia’s Ministry of Commence.

Cambodia is part of the China-ASEAN Free Trade Area (CAFTA). It has also commenced negotiations with Thailand and Vietnam on double taxation agreements.

China’s cumulative FDI in Cambodia surged from USD 1.1 billion in 2010 to USD 3.2 billion in 2014, with projects mainly in the sectors of garment manufacturing, banking and finance, agriculture, tourism, energy, mining, real estate, transport and telecom.

In 2015, Hong Kong’s total exports to Cambodia grew 13.9% year to year to USD 1.024 billion. In the same period, Hong Kong’s imports from Cambodia increased by 97.4 % YOY to USD 239 million.

Cambodia 1

Current Economic Situation

Cambodia is the second smallest economy in the 10-country ASEAN (ASEAN consists of 10 members: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam), and it remains one of the Least Developed Countries (LDC) in Asia. Services is the largest sector and contributes to around 40 % of GDP, while agriculture, employing approximately half of the country’s labour force, represents one-third of the economy. The remaining share is attributed to the industry sector, with garments, tourism, and construction being the main industries.

After enjoying a robust expansion with annual GDP growth rate averaged 7.5 % in the past decade (2005-2015), Cambodia’s GDP growth is expected to moderate to 7.2 % in 2016 and 2017. Its agriculture sector, after experiencing remarkable growth driven by a bountiful crop production over the past years, has eased amid falling commodity prices and low yields caused by bad rainfalls. Tourism, which accounts for nearly 20% of the Cambodian economy, enjoyed modest growth with tourist arrivals in 2015 growing by 6% and visitors spent reaching about USD 3.5 billion, compared to USD3 billion a year earlier.

Inflation of Cambodia also eased significantly amid the continued decline in commodity prices. The Consumer Price Index (CPI) increased by 1.9 % year-on-year in November 2015, according to the National Institute of Statistics of Cambodia.

Thanks to relatively low labour costs and costs of the land use, Cambodia has become a preferred production base for light industry such as garment. However, labour cost has been on the rise along with statutory minimum wages amid recurrent strikes. In October 2015, the Cambodian government decided to raise garment workers’ monthly minimum wage by 9.4 % from USD 128 to USD 140, after tense negotiations with the unions. The increase, however, still fell short of the initial demand of USD 160. The new minimum wage took effect in January 2016.

External trade

Cambodia’s merchandise exports expanded by 17 % in 2015 to reach USD 8.03 billion according to Cambodia’s Ministry of Commence. While the garment sector, accounting for more than 80 % of total exports, continued to expand, US dollar appreciation and in part the emergence of other low-wage regional competitors, such as Myanmar, edged down growth to 6.7 % in 2015 from 8.3 % in the year-earlier period.

Cambodia’s major trading partners are the EU, the US, China, Korea, Japan, Thailand, Vietnam, Singapore and Malaysia. The EU and the US combine to absorb about 70 % of Cambodian garment and footwear exports. Since 2011, exports to the EU have grown rapidly due to the latter’s simplified GSP rules, under which Cambodia as a LDC enjoys duty- and quota-free access to the EU bloc.

Investment Policy

Cambodia has a liberal foreign investment regime, with sectors including agriculture, transportation, telecommunication, energy, labour-intensive and export-oriented processing, tourism and human resource development highlighted as priority areas of investment.

Cambodia 3Foreign investment falling under the scheme of Qualified Investment Project (QIP) is approved by the Council for the Development of Cambodia (CDC), which grants incentives including 100% foreign ownership, corporate tax holidays of up to eight years, 20 % corporate income tax (CIT) rate after the incentive period, duty-free import of capital goods and no restrictions on capital repatriation. More information on Cambodia’s investment environment and regulations can be found at the CDC website

Special economic zones (SEZs) were first introduced in Cambodia in 2005. Projects within the SEZs are offered with incentives benefits such as tax holidays, zero rate VAT and import duty exemption for raw materials, machinery, and equipment. As of September 2015, there were 14 zones in the country, providing one-stop services for imports, import, employment and other regulatory matters. The primary authority responsible for SEZs is the Cambodia Special Economic Zone Board (CSEZB).

FDI Foreign Direct Investment

According to UNCTAD, inward FDI stock to Cambodia reached USD 13 billion in 2014, with FDI flow in the same year standing at US$1.7 billion, a 7.6 % decrease from the level in 2013.

China, Malaysia and Japan are Cambodia’s largest investors with projects mainly in the sectors of garment and other manufacturing, banking and finance, agriculture, tourism, energy, mining, real estate, transport and telecom. Based on statistics from China’s Ministry of Commerce, China’s cumulative FDI in Cambodia nearly tripled from USD 1.1 billion in 2010 to USD 3.2 billion in 2014.

Phnom Penh the capital city of Cambodia

Trade Policy

Most goods can be freely imported to Cambodia without licences, except for items covered by the List of Restricted Goods (e.g. certain chemical products and animals). Besides applying a 10 % flat rate of Vat Value Added Tax on all imported goods, imports are also subject to two other types of duties and taxes, namely Customs Import Duties (an ad-valorem rate) and Special Tax for certain goods.

In 2001, Cambodia simplified its tariff structure by reducing the number of tariff bands from 12 to four and lowering the maximum rate from 120 % to 35 %. Currently, the four tariff bands are zero-rated for exempt goods such as medical and educational materials (covering 5% of tariff lines), 7 % for primary products and raw materials, 15 % for capital goods, machinery and equipment, locally available raw materials and 35 % for finished products, alcohol, petroleum products, vehicles, precious metals and stones.

FTA Free Trade Agreements

As a member of ASEAN since 1997, Cambodia, together with the trade bloc has concluded a number of free trade agreements, including the ASEAN-China Free Trade Agreement (ACFTA), the ASEAN-Korea Free Trade Agreement (AKFTA), the ASEAN-Australia-New Zealand FTA (AANZFTA), the ASEAN-Japan Comprehensive Economic Partnership Agreement (AJCEPA) and the ASEAN-India Free Trade Agreement (AIFTA). In November 2015, China and ASEAN concluded an upgraded FTA that covers further liberalisation of trade as well as economic, investment and regulatory cooperation, which is seen as helping to scale up bilateral trade to USD one trillion by 2020 from USD 480 billion in 2014. Beside, ASEAN has embarked on FTA negotiations with other economies, including the EU, Pakistan and Hong Kong.

Being part of ACFTA, the world’s largest free trade area by population, Cambodia will reduce about 86 % of its tariff lines on China-origin products to zero in 2018 from a simple average of 14.4 % in 2005. For example, the average tariff on Chinese shirts and T-shirts will be lowered to zero from 7 % in 2005.

While Cambodia does not have any double taxation agreements (DTA) currently in force, Cambodia has commenced negotiations with Thailand and Vietnam.

Hong Kong’s Trade with Cambodia

In 2015, Hong Kong’s total exports to Cambodia grew 13.9 % year to year to USD 1.024 billion. Major export items included knitted or crocheted fabrics (32.4 % share), raw fur skins (10.0 %) and woven cotton fabrics (6.6 %).

Hong Kong’s imports from Cambodia increased by 97.4 % year to year to USD 239 million in the same period. Major import items included fur skins, tanned or dressed (20.0 % share), other articles of apparel of textile fabrics (19.3 %) and telecom equipment & parts (13.9 %).

Cambodia 2

 

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