Cambodia

Cambodia

Major Economic Indicators

Table: Major Economic Indicators of Cambodia
Table: Major Economic Indicators of Cambodia

Latest Development

  • After a robust expansion with annual GDP growth averaged 7.5% in 2005-2015, Cambodia’s GDP growth eased to 6.9% in 2015 and is expected to grow by 7% in 2016.
  • Yearly export growth decelerated to 17% in 2015, with the export value reaching US$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 US$1.1 billion in 2010 to US$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 the first three months of 2016, Hong Kong’s total exports to Cambodia dropped by 8.5% YOY to US$218 million. In the same period, Hong Kong's imports from Cambodia increased by 36.5% YOY to US$68 million.

Current Economic Situation

Economy

Cambodia is the second smallest economy in the 10-country ASEAN[1] and 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 slowed to 6.9% in 2015 according to Prime Minister Hun Sen, who also noted that sustainable economic growth in the country contributed to the liberation of millions of people from poverty. With the garment and construction sectors remaining strong, the IMF expects Cambodia to grow by 7% in 2016 and 2017. Yet, many downside risks to the country remain, including in particular strength of the US dollar, slow recovery of Europe and the spillover impact due to a slowing Chinese economy.

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 a prolonged drought. Top support the agricultural sector, the Cambodian government announced in April 2016 to exempt agricultural products from the Value-added Tax (VAT). 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 US$3.5 billion, compared to US$3 billion a year earlier. 

Inflation of Cambodia also eased significantly amid the continued decline in commodity prices. The Consumer Price Index (CPI) increased by 3.1% year-on-year (YOY) in January 2016, according to the National Bank 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 US$128 to US$140, after tense negotiations with the unions. The increase, however, still fell short of the initial demand of US$160. The new minimum wage took effect in January 2016. 

External trade

Cambodia’s merchandise exports expanded by 17% in 2015 to reach US$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.

Foreign 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).

To make the economy more competitive, the Cambodia government announced in April 2016 to remove the estimated tax regime under which the tax was based on negotiations with the tax authorities, replacing it with a self-assessment tax regime that is more transparent.

Foreign Investment

According to UNCTAD, inward FDI stock to Cambodia reached US$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 US$1.1 billion in 2010 to US$3.2 billion in 2014.

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 Value Added Tax (VAT) 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% (i.e. 0%, 7%, 15%, and 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.

Free trade agreements

As a member of ASEAN since 1997, Cambodia together with the trade bloc has concluded a number of free trade agreements (FTAs), 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 US$1 trillion by 2020 from US$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 the first three months of 2016, Hong Kong’s total exports to Cambodia dropped 8.5% YOY to US$218 million. Major export items included knitted or crocheted fabrics (33.6% share), woven cotton fabrics (7.5%) and textile yarn (5.9%). 

Hong Kong's imports from Cambodia increased by 36.5% YOY to US$68 million in the same period. Major import items included telecom equipment & parts (24.4% share), electric power machinery & parts (17.1%) and other articles of apparel of textile fabrics (13.2%).

Table: Hong Kong Trade with Cambodia
Table: Hong Kong Trade with Cambodia

More Information

More information on the Belt and Road countries’ economic and investment environment, tax and other subjects that are important in considering investment and doing business are available in The Belt and Road Initiative: Country Business Guides.


[1] ASEAN consists of 10 members: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam.