C mbodi Economic Upd t D c mb r 2024 SPECIAL FOCUS Structural, firm and business barriers to labor productivity Cambodia Economic Update December 2024 FROM RECOVERY TO RESILIENCE: HARNESSING TOURISM AND TRADE AS DRIVERS OF GROWTH SPECIAL FOCUS Structural, firm, and business barriers to labor productivity TABLE OF CONTENTS ACKNOWLEDGMENTS..................................V Budget consolidation efforts began to contain expenditure ...................................................... 21 ABBREVIATIONS ........................................... VI The overall fiscal deficit narrowed................... 21 EXECUTIVE SUMMARY................................... 1 Public debt stock reached 24.4 percent of GDP ................................................................. 22 PART 1. RECENT ECONOMIC Outlook............................................................... 22 DEVELOPMENTS AND OUTLOOK.............. 6 Challenges and risks......................................... 24 Recent developments Global economic activity has picked up...................................................... 7 Policy options..................................................... 24 Amid external tailwinds, Cambodia’s economy improved marginally ......................................... 9 PART 2.STRUCTURAL, FIRM, AND Foreign tourists visiting Siem Reap remained BUSINESS BARRIERS TO LABOR well below 2019 levels...................................... 10 PRODUCTIVITY..............................................25 Goods exports accelerated................................ 10 I. Introduction.................................................. 26 Manufacturing jobs increased, thanks to the II. Structural and firm-level foundations of expansion of GTF exports................................ 11 labor productivity............................................ 26 Investor appetite strengthened........................ 11 III. Overview of obstacles to doing business... 30 Downbeat domestic investor appetite to invest IV. External obstacles to doing business ......... 32 in the tradable sector........................................ 12 A. Informal firms ............................................ 32 The downturn in the property sector continued.......................................................... 13 B. Infrastructure............................................... 32 Steel imports rose rapidly, boosted by C. Access to skills................................................ 33 investment in physical infrastructure.............. 13 D. Access to finance ........................................... 35 Agricultural exports slowed............................. 14 V. Bureaucratic obstacles to doing business ... 36 Private consumption has improved................. 14 A. Taxes ............................................................. 36 Inflation remained subdued............................. 16 B. Corruption .................................................... 37 Amid a recovery of import growth, a current C. Courts............................................................ 39 account deficit reemerged................................ 17 D. Business documents and processes .............. 39 The riel marginally appreciated against the dollar................................................................. 17 VI. Policy implications and recommendations.41 Money supply continued to increase............... 17 Domestic interest rates eased........................... 17 ANNEX. CAMBODIA – SELECTED INDICATORS................................................... 46 Credit sharply decelerated as housing development activity stalled............................. 18 BIBLIOGRAPHY.............................................. 48 Domestic revenue collection remained sluggish ............................................................. 20 ii Cambodia Economic Update December 2024 BOXES Box 1. Navigating the risks of the downturn in the property market ...................................................................15 Box 2. Rising household debt .................................................................................................................................19 Box 3. 2024 Business-Ready report*.......................................................................................................................20 FIGURES Figure ES.1. Cambodia’s Recent Developments at a Glance..................................................................................5 Figure 1. Global headline PMIs................................................................................................................................7 Figure 2. Global goods trade.....................................................................................................................................7 Figure 3. Economic activity marginally improved...................................................................................................9 Figure 4. Eight-month arrival and tourism receipts.................................................................................................9 Figure 5. Revenue from Angkor temple................................................................................................................10 Figure 6. Contribution to export growth by product...........................................................................................10 Figure 7. Manufacturing sector jobs and factories.................................................................................................11 Figure 8. Approved QIP project value...................................................................................................................11 Figure 9. Approved FDI-financed project by sector..............................................................................................12 Figure 10. Approved property project permits......................................................................................................12 Figure 11. Agricultural commodity exports..........................................................................................................14 Figure 12. Imports of consumer goods improved.................................................................................................14 Figure B.1.1. Real estate price indexes ...................................................................................................................15 Figure B.1.2. Property investment in China and Chinese FDI inflows into Cambodia.....................................15 Figure 13. Inflation dipped Contribution to 12-month inflation........................................................................16 Figure 14. Broad money growth recovered Contribution to broad money growth............................................16 Figure 15. Interest rates remained elevated Domestic interest rates.....................................................................18 Figure 16. Domestic credit growth plummeted Credit growth ...........................................................................18 Figure B2.1. Average outstanding household debt................................................................................................19 Figure B2.2. Debt service payment ........................................................................................................................19 Figure B.3.1. Cambodia’s performance, by topic and pillar.....................................................................................................................................................20 Figure B.3.2. Regional comparison........................................................................................................................20 Figure 17. Domestic revenue collection improved ...............................................................................................21 Cambodia Economic Update December 2024 iii Figure 18. Expenditure was contained ..................................................................................................................21 Figure 19. General government operations............................................................................................................22 Figure 20. General government surplus/deficit and financing..............................................................................22 Figure S.1. Labor productivity among Cambodian firms compared to peers, by sector.....................................27 Figure S.2. Variation in labor productivity among Cambodian firms based on their characteristics..................27 Figure S.3. Variation in labor productivity among Cambodian firms by practice ..............................................28 Figure S.4. Variation in labor productivity among Cambodian firms based on their performance tier and compared to peers.....................................................................................................................................................29 Figure S.5. Ranking of obstacles to doing business in Cambodia over time and compared to peers..................30 Figure S.6. Ranking of obstacles to doing business in Cambodia by firm characteristics ..................................31 Figure S.7. Informal sector obstacles in Cambodia by firm characteristics..........................................................32 Figure S.8. Electricity obstacles in Cambodia by firm characteristics ..................................................................33 Figure S.9. Skills obstacles among Cambodian firms based on their characteristics ...........................................34 Figure S.10. Summary of workforce education characteristics among Cambodian firms over time and compared to peers ....................................................................................................................................................34 Figure S.11. Access to finance variables among Cambodian firms compared to peers and by sector.................35 Figure S.12. Tax administration obstacles among Cambodian firms based on their characteristics...................36 Figure S.13. Potential drivers of tax concerns among Cambodian firms over time and compared to peers.......37 Figure S.14. Drivers of corruption concerns among Cambodian firms over time and compared to peers.........38 Figure S.15. Incidence of informal payments among Cambodian firms by their characteristics........................38 Figure S.16. Perceptions about court independence in commercial disputes among Cambodian firms over time and compared to peers......................................................................................................................................39 Figure S.17. Timeliness of business services for firms in Cambodia over time and compared to peers..............40 TABLES Table ES1. Macro outlook1/(percent of GDP unless otherwise indicated)...........................................................3 Table 2. The macro outlook indicates continued economic improvements ........................................................23 iv Cambodia Economic Update December 2024 ACKNOWLEDGMENTS The December 2024 Cambodia Economic Update (CEU) was prepared by Sodeth Ly and Faya Hayati, with contributions from Samuel Christopher Hill, Hassan Noura, Aka Kyaw Min Maw, Kimsun Tong, Runsinarith Phim, and Tim L. De Vann. Chankesey Heav served as a research assistant. Sina Oum provided administrative support. Saroeun Bou helped with the press release, web display, and dissemination events. The team worked under the overall guidance of Sebastian Eckardt. The team is grateful for the advice and comments provided by Lalita M. Moorty, Mariam Sherman, and Tania Meyer. Several colleagues, including Aaditya Mattoo and Ergys Islamaj, provided comments on the draft version. The team is grateful to the Cambodian authorities, particularly the Ministry of Economy and Finance and the National Bank of Cambodia, for their cooperation and support. The authorities have just rebased1 Cambodia’s gross domestic product (GDP). The rebased GDP data with a 2014 base year have been used, starting from this edition of the CEU. The report also benefitted from the advice, comments, and views of various stakeholders in Cambodia, including its enthusiastic readers and critics. The CEU, produced biannually, provides up-to-date information on macroeconomic developments in Cambodia. It is distributed and discussed widely, including among Cambodian authorities, development partners, the private sector, think tanks, civil society organizations, and academia. For information about the World Bank and its activities in Cambodia, please visit our website at www.worldbank. org/cambodia. To be included in the email distribution list of the CEU and related publications, please contact Sina Oum (soum1@worldbank.org). For questions on the contents of this publication, please contact Saroeun Bou (sbou@ worldbank.org). The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 1 Rebasing GDP involves replacing an old base year with a more recent base year to keep up with the evolution of prices.  Cambodia Economic Update December 2024 v ABBREVIATIONS ASEAN Association of Southeast Asian Nations B-READY Business Ready CEO Chief executive officer CEU Cambodia Economic Update COVID-19 Coronavirus disease 2019 CPI Consumer Price Index CSES Cambodia Socio-Economic Survey DTI Debt-to-income EAP East Asia and Pacific region EMDE Emerging market and developing economies EU European Union FDI Foreign direct investment Fed U.S. Federal Reserve GDP Gross domestic product GTF Garment, travel goods, and footwear MFI Micro-finance institution PMI Purchasing Managers’ Index QIP Qualified Investment Project SMEs Small and medium-sized enterprises SDR Special drawing rights US$ United States dollar USDA United States Department of Agriculture VAT Value-added tax y/y Year-on-year vi Cambodia Economic Update December 2024 This deficit continues to be financed by sustained EXECUTIVE SUMMARY capital inflows. During the first eight months of 2024, continued strong capital inflows, especially Recent developments FDI, have helped ease pressures on the exchange Economic activity held steady in 2024, but rate and boosted gross international reserves, which performance remains uneven across sectors. rose to US$20.7 billion, an 11.3 percent year-on-year The rebound in external demand and trade drove increase, covering about seven months of prospective a revival in goods and services exports. During the imports. first eight months of 2024, goods exports expanded Inflation remained subdued, owing to the by 13.9 percent year-on-year (y/y), driven largely by deceleration of food and oil prices. Cambodia’s garment, travel goods, and footwear (GTF) products. Consumer Price Index (CPI) registered a 0.3 percent Meanwhile, international tourist arrivals continued year-on-year increase in August 2024, a 15-year low. to rise, expanding by 22.5 percent y/y to 4.3 million The easing of food prices, particularly for meat, fish, tourists. While tourist spending also improved, vegetables, and fruits, subdued inflation, given that as indicated by Angkor temple revenue collection the food component (subindex) captures a 43 percent growing by 31.4 percent y/y, it has lagged behind weight in the inflation basket. tourist arrivals. Although the average length of stay for tourists increased to 7.6 days in 2023, compared to Monetary policy remained accommodative, with 6.2 days in 2019, the estimated total tourism receipts a recent uptick in money supply. Reflecting rising declined to US$3.08 billion, down from US$4.9 capital inflows, broad money expanded, growing at billion, due to a decrease in the average expenditure 14.3 percent over the 12 months ending in August per tourist. 2024, up from 11.0 percent during the same period in 2023, owing to improved foreign currency deposits. In addition, a recovery of private consumption Given that the economy is highly dollarized, foreign is underpinning improved domestic economic currency deposits contribute the most to broad activity. During the first eight months of 2024, money growth. imported consumer goods, including diesel, electronic equipment, gasoline, foodstuff, garments, and soft Upward pressures on domestic interest rates drinks, expanded by 23.6 percent y/y. Indicating are starting to moderate as Cambodia’s highly improved investor sentiment, the value of approved dollarized economy imports U.S. monetary FDI-financed investments (outside special economic policy, which has begun to ease following the U.S. zones) under the Qualified Investment Project (QIP) Federal Reserve (Fed) cutting the Fed funds rate by scheme accelerated, reaching US$1.12 billion—a 24.3 50 basis points in September and 25 basis points in percent y/y increase during the first eight months of November 2024. Despite this, the marked slowdown 2024. Investments under public-private partnerships in domestic credit growth has continued amid in large physical infrastructure projects such as weak credit demand related to the downturn in the roads and ports have boosted construction services. property sector, with credit sharply decelerating to During the first eight months of 2024, imports of 3.4 percent year-on-year, a 14-year low in August construction equipment and steel grew by 20.1 2024, down from 7.7 percent during the same period percent and 59.2 percent, respectively. in 2023. Meanwhile, nonperforming loan ratios in Cambodia rose to 6.8 percent for the banking sector In contrast, real estate and property investment and 8.3 percent for the microfinance sector by mid- remained subdued. The downturn in the property 2024, up from 5.4 percent and 6.7 percent in 2023, sector continued reflecting overcapacity in the respectively. property market and a continued housing market correction. The value of approved private property Amid the downturn in the credit cycle, banking development permits contracted by 29.1 percent y/y sector balance sheets are weakening. Rising during the first eight months of 2024. nonperforming loan ratios, which increased to 6.8 percent for the banking sector and 8.3 percent The current account balance is projected to for the microfinance sector by mid-2024 indicate turn negative this year, reflecting the recovery a further deterioration in asset quality amid the of import demand, which is only partially offset ongoing downturn in the property sector. The return by rising remittances and tourism receipts. on assets of the banking and microfinance sectors Cambodia Economic Update December 2024 1 declined to 0.6 percent and 1.5 percent, respectively, In the short term, Cambodia’s real GDP growth in 2023, down from 1.9 percent and 2.8 percent in is projected to marginally improve, reaching 5.5 2019. Similarly, during the same period, the return percent in 2025 and 2026. Even though domestic on equity shrank to 3.4 percent and 5.9 percent, demand is expected to further improve in the next respectively, down from 9.8 percent and 14.8 percent. two years, supported by an improved job market and well-anchored inflation expectations, the recovery While fiscal pressures persisted, domestic remains incomplete. This is because a rebound in revenue showed a marginal improvement. During domestic consumption, which accounts for about the first eight months of 2024, central government two-thirds of GDP, will be dampened by subdued domestic revenue expanded by 4.5 percent y/y, up domestic credit growth caused by a prolonged from 0.4 percent during the same period in 2023. downturn in the construction and real estate sector. This improvement was underpinned by the recovery In addition, the negative wealth effects of falling of private consumption, which boosted taxes on house prices and notably high household debt, with goods and services and on international trade. In debt service payments close to 50% of income, are addition, a revival of tourism activity contributed to likely to constrain consumption going forward. an increase in nontax revenues. On the production side, the tourism and To maintain fiscal sustainability, the authorities hospitality industries are likely to improve have begun to contain spending, particularly further, with projected increases in international capital expenditure. During the first eight months arrivals. While manufacturing exports—especially of 2024, central government expenditure was in garments, travel goods, and footwear—will contained, growing at a negative rate of 0.3 percent remain susceptible to external demand, agricultural (y/y), down from 15.1 percent during the same production and agroprocessing industries continue period in 2023. Government deposits (fiscal reserves), to be boosted by bilateral and multilateral free trade however, remained relatively healthy at 11.4 percent agreements. The travel, transport, and logistics of gross domestic product (GDP) in August 2024, industry should benefit from strong private and public debt remained low at around 27 percent investment in several key infrastructure projects, such of GDP in 2023. as a newly built expressway linking Phnom Penh to The export recovery has led to improved labor Sihanoukville, where a deep-sea port is located; new market conditions. In August 2024, jobs in the logistics complex and multimodal port development formal manufacturing sector, which accounted for projects in Kampot and Phnom Penh; and a new 19.4 percent of nonfarm employment, grew by 9.5 expressway project linking Phnom Penh to Bavet, on percent y/y, supporting household consumption the Cambodia-Vietnam border, among others. and partly reversing pandemic-related increases in With subdued private consumption due to the poverty. Figure ES.1 graphically presents Cambodia’s prolonged downturn in the property sector, recent economic developments. external imbalances are expected to improve in the short to medium term. While remittances Outlook and tourism receipts will continue to boost net Using the newly rebased national accounts data, income and services, FDI should continue to finance this year’s economic growth is projected to reach the projected modest current account deficit going 5.3 percent (table ES.1.), compared to 5.0 percent forward. In the short to medium term, the authorities’ in 2023, driven mainly by services and goods exports. efforts to improve revenue collection, implement The surge in manufacturing exports—especially in fiscal consolidation, and enhance spending efficiency garment, travel goods, and footwear manufacturing; under the Public Financial Management Reform the revival of the travel and tourism industries; and Program should narrow the overall fiscal deficit, continued FDI inflows have helped sustain this year’s which is targeted to be equal to or below 5 percent economic recovery. of GDP. 2 Cambodia Economic Update December 2024 Table ES1. Macro outlook1/ be a top priority. Ongoing fiscal consolidation (percent of GDP unless otherwise indicated) due to slow revenue collection will likely impact social spending and basic education and health Projections Change from June 2024 services unless fiscal space is restored in the short 2024 2025 2026 2024 2025 2026 term. First, pandemic-induced fiscal interventions Real 5.3 5.5 5.5 -0.5 -0.6 -0.9 and tax incentives should be discontinued. Second, growth introducing stricter governance of tax incentives (percent) should minimize the unnecessary revenue losses they CPI 2.2 2.2 2.2 -0.6 -0.5 -0.8 may cause. In this regard, developing the capacity to (period track, manage, and control tax expenditures within average, medium-term fiscal and budgetary decision-making percent) is particularly important. Third, taxes on goods Current -1.0 -1.5 -1.8 -3.7 -4.1 -3.4 and services should be strengthened by reviewing accounts the VAT rate, exemptions, and zero rating, while -3.0 -3.3 -3.2 2.5 1.1 1.0 introducing ambitious excise tax increases on alcohol Overall fiscal deficit and tobacco, benchmarking against good practices in middle-income countries. Introducing a personal Public debt 26.9 27.4 27.4 -8.6 -8.1 -7.4 income tax should be a medium-term objective of Note: 1/ The comparisons indicated in the 'Change from June 2024' the next revenue mobilization strategy. Fourth, as column are illustrative only. This is because the data, except for CPI, in the authorities are now embarking on a gradual the 'Projections' column, which are based on the 2014 base year of the national accounts data, are not directly comparable to the data published fiscal consolidation policy, strengthening spending in the June 2024 edition, which employed the 2000 base year of the efficiency or value for money is essential. national accounts data. To safeguard financial stability, the immediate focus should be on intensified bank supervision: Challenges and risks stress testing of individual institutions, systematic onsite inspections, further alignment Despite continued improvements, the economy of the regulatory framework with international is facing downside risks, including weaker-than- standards, and thorough assessments of the expected global demand amid rising debt and quality of loan portfolios, among others. There elevated borrowing costs, and a sharper-than- was a rapidly growing number of financial institutions anticipated slowdown in China. Cambodia’s in Cambodia until 2022. A consolidation of the small, open economy, with a trade-to-GDP ratio of financial sector through mergers and acquisitions 112 percent in 2023, faces risks from geo-economic should help preserve profit margins by improving fragmentation and rising protectionism. their efficiency and increasing market share. To prepare for increasing levels of nonperforming loans, Domestically, a faster-than-expected increase it is crucial to ensure that resolution options are now in nonperforming loans could affect macro- ready to be deployed as needed, and to strengthen financial stability as the housing market the country’s insolvency regime. Efforts to prepare correction continues. Falling house prices are legislation on deposit insurance and bank resolution negatively impacting the health and stability of the must continue. banking sector by increasing the risk of loan defaults and reducing the value of the collateral held by banks. Finally, to avoid a slowdown in economic However, the housing market correction can also be growth, Cambodia should transition to a more seen as a natural part of the credit cycle, potentially sustainable growth pattern through further enabling Cambodian families to enter the housing structural reforms to boost and diversify exports market at a lower price point. of goods, especially manufactured products and agroprocessing, as well as services, particularly Policy options travel and hospitality. Further efforts are needed to fast-track ease-of-doing-business reforms. As Building on the ongoing improvement in post- indicated in the 2024 Business-Ready report, the pandemic fiscal management, fiscal reforms to most challenging issue is that Cambodia lacks quality boost domestic revenue mobilization should Cambodia Economic Update December 2024 3 public services to support businesses, especially in Cambodia’s frontier firms are lagging far behind their areas such as business insolvency, market competition, regional peers and operating significantly below the and business entry. Therefore, strengthening the regional productivity frontier. Specific policy ideas country’s institutions to ensure that regulations are include: greater government support for medium- effectively implemented and enforced will help create sized firms to navigate business obstacles and build a predictable and stable business environment, which their capabilities; targeted infrastructure investment is essential for promoting trade and investment. That and government service extension programs in is the focus of this edition’s special topic section. rural areas; and reforms that increase competition (especially in services and digital sectors) and Structural, firm, and business incentivize frontier firms to invest in advanced barriers to labor productivity technologies, skills development and global networks. Cambodia will need to significantly improve its Third, Cambodia should incentivize greater productivity performance in the coming decades and faster modernization and digitalization to sustain high rates of economic growth and of its firms as well as a greater international realize its vision of rapidly becoming a high- orientation. Cambodian firms with more modern income country. Productivity growth has not been personnel practices (for example, a professional CEO, a major driver of growth historically and Cambodia’s better management, provision of formal employee levels of labor productivity are very low compared to training programs) and that leverage technology (for its peers across all sectors of the economy. The Special example, have a website, use electronic payments) as Focus section of this report highlights four priority well as firms that are export-oriented, typically have reform areas to support a rapid transition to a more higher labor productivity. Specific policy ideas include: productivity-led growth model in Cambodia. (i) incentivizing firms to upgrade their organizational, management, and workforce development practices First, Cambodia needs to accelerate structural as well as adopt productivity-enhancing technologies; transformation toward higher value-added and (ii) addressing infrastructure barriers to trade, products, value-chains, and activities. There reducing customs clearance times, and improving is wide variation in labor productivity among services to help firms access new markets. Cambodian firms both within and across sectors, with some sectors and subsectors significantly more Fourth, Cambodia should prioritize and productive than others. Improving Cambodia’s address the most pressing obstacles to doing productivity performance requires reigniting and business cited by its firms. The most pressing accelerating the country’s structural transformation needs include (a) ensuring the benefits of firm toward higher value-added activities and firms registration outweigh the costs, especially for small both within sectors and from lower- to higher- firms, by reducing registration costs and enhancing productivity sectors and from rural to urban areas. the associated benefits; (b) improving transport and This is aligned with a broader need to pursue greater logistics infrastructure; (c) improving investment in economic diversification in Cambodia to reduce skills and the uptake of modern financial instruments the risks associated with the high concentration among more sophisticated firms; (d) streamlining the of products and markets. Specific policy ideas cumbersome and costly tax administration regime; include: making it easier and faster for new firms to (e) reducing corruption and informal payments open and for underperforming firms to close; and (especially in tax administration) by investing encouraging the development of new industries and in detection, increasing penalties and digitizing the transformation of existing ones into higher value- processes; (f) improving the efficiency and impartiality added segments. of court arbitration in commercial matters, including by establishing specialized commercial courts and Second, Cambodia needs to address specific increasing transparency and digitalization; and (g) structural barriers and/or disincentives faced improving the provision and efficiency of government by its medium-sized, rural, and frontier firms. services related to business authorizations, including Cambodia’s medium-sized firms and firms located in by fully digitizing the business registration portal and mountainous regions (and to a lesser extent in Tonle introducing and implementing risk-based approaches Sap) have lower labor productivity and appear to face to licensing. a more challenging business environment. Moreover, 4 Cambodia Economic Update December 2024 0 10 20 30 40 50 60 0 10 20 30 40 50 60 0 10 20 30 40 50 60 -20 -10 0 10 20 30 40 -20 -10 0 10 20 30 40 -20 -10 0 10 20 30 40 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 Jan-13 Jan-13 Jan-13 Jan-20 Jan-20 Jan-20 2009 Jul-13 Jul-13 Jul-13 Mar-20 Mar-20 2009 2009 Mar-20 Jan-14 Jan-14 Jan-14 May-20 May-20 May-20 2010 2010 2010 Jul-14 Jul-14 Jul-14 Jul-20 Jul-20 Jul-20 Sep-20 Sep-20 Sep-20 2011 2011 2011 Jan-15 Jan-15 Jan-15 Nov-20 Nov-20 Nov-20 2012 2012 2012 Jul-15 Jul-15 Jul-15 Jan-21 Jan-21 Jan-21 Mar-21 Mar-21 Mar-21 2013 2013 2013 Jan-16 Jan-16 Jan-16 May-21 May-21 May-21 GDP GDP Jul-16 Jul-16 2014 2014 2014 M2 Jul-16 M2 Jul-21 Jul-21 Jul-21 Jan-17 Sep-21 2015 2015 Exports Jan-17 Sep-21 2015 Exports Jan-17 Sep-21 Exports M2 y/y, Nov-21 Nov-21 Nov-21 Pre-COVID Jul-17 Jul-17 Jul-17 growth GDP growth growth Jan-22 Jan-22 2016 2016 2016 Jan-22 Pre-COVID Pre-COVID Jan-18 Jan-18 Jan-18 Mar-22 Mar-22 Mar-22 2017 2017 2017 Jul-18 Jul-18 Jul-18 May-22 May-22 May-22 y/y, percent Jul-22 Jul-22 Jul-22 2018 2018 2018 Jan-19 Jan-19 Jan-19 Pre-COVID historical Cambodia Economic Update December 2024 Sep-22 Sep-22 Sep-22 2019 2019 2019 Pre-COVID historical Jul-19 Jul-19 Jul-19 Pre-COVID historical Nov-22 Nov-22 Nov-22 y/y, percent change percent change change Jan-20 Jan-20 Jan-20 Jan-23 Jan-23 Jan-23 2020 2020 2020 Real growth (percent) Note: e = estimate; p = projection; y/y = year-on-year. historical average Jul-20 Jul-20 Jul-20 Mar-23 Mar-23 Mar-23 2021 2021 2021 historical average May-23 May-23 May-23 historical average Jan-21 average (10 Jan-21 Jan-21 average (5 Jul-23 Jul-23 Jul-23 2022 2022 2022 average (5 Jul-21 Jul-21 Jul-21 Sep-23 Sep-23 Sep-23 2023e 2023e 2023e Sources: Cambodian authorities; World Bank staff projections. …And a revival of goods exports… Jan-22 Jan-22 Jan-22 Nov-23 Nov-23 Nov-23 Pre-COVID historical average (10 years) (10 years) years) Pre-COVID historical average (5 years) (5 years) years) Jan-24 Jan-24 Jan-24 Pre-COVID historical average (5 years) (5 years) 2024p years) Jul-22 Jul-22 Jul-22 2024p 2024p Broad money liabilities (y/y percent change) …Broad money (M2) growth picked up… Mar-24 Mar-24 Mar-24 Economic activity continued to improve… Goods exports (year-to-date, y/y percent change) Jan-23 Jan-23 Jan-23 May-24 May-24 May-24 2025p 2025p 2025p Jul-23 Jul-23 Jul-23 Jul-24 Jul-24 Jul-24 2026p projection 2026p projection 2026p projection Jan-24 Jan-24 Jan-24 Figure ES.1. Cambodia’s Recent -1 0 1 2 3 4 5 6 7 8 9 -1 0 1 2 3 4 5 6 7 8 9 -1 0 1 2 3 4 5 6 7 8 9 -0.1 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 -0.1 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 -0.1 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 -15 -10 -5 0 5 10 15 20 25 30 -15 -10 -5 0 5 10 15 20 25 30 -15 -10 -5 0 5 10 15 20 25 30 Jan-15 Jan-15 Jan-15 Apr-15 Apr-15 Apr-15 Jan-19 Jan-19 Jan-19 Jul-15 Jul-15 Jul-15 Mar-19 Mar-19 Mar-19 Oct-15 Oct-15 Oct-15 May-19 May-19 May-19 Jan-16 Jan-16 Jan-16 Apr-16 Jul-19 Jul-19 Jul-19 Apr-16 Apr-16 Jul-16 Jul-16 Sep-19 Sep-19 Sep-19 8-m Jul-16 8-m 8-m 2019 2019 Nov-19 2019 Oct-16 Oct-16 Oct-16 Nov-19 Nov-19 Jan-17 Jan-17 Jan-17 Jan-20 Jan-20 Jan-20 Apr-17 Apr-17 Apr-17 Mar-20 Mar-20 Mar-20 Jul-17 Jul-17 Jul-17 May-20 May-20 May-20 Oct-17 Oct-17 Oct-17 Jul-20 Jul-20 Jul-20 Jan-18 8-m Jan-18 8-m Jan-18 8-m Sep-20 Sep-20 Sep-20 2020 2020 2020 Apr-18 GDP Apr-18 GDP Apr-18 Nov-20 Jul-18 Nov-20 Nov-20 Arrivals Jul-18 Arrivals Jul-18 Oct-18 Oct-18 Oct-18 Jan-21 Jan-21 Jan-21 Jan-19 Jan-19 Jan-19 Mar-21 Mar-21 Mar-21 Domestic Domestic May-21 Pre-COVID Apr-19 Apr-19 Apr-19 May-21 May-21 Pre-COVID growth GDP growth Developments at a Glance growth 8-m Jul-19 8-m Jul-19 8-m Jul-19 Jul-21 Jul-21 Jul-21 2021 2021 2021 Oct-19 Oct-19 Oct-19 Sep-21 Sep-21 Sep-21 (million) Arrivals (million) (million) Jan-20 Jan-20 Jan-20 Nov-21 Nov-21 Nov-21 Pre-COVID-19 Apr-20 Apr-20 Apr-20 revenue Domestic revenue revenue Jul-20 Jan-22 Jan-22 Jan-22 Jul-20 Jul-20 Mar-22 Pre-COVID historical Oct-20 Mar-22 Mar-22 Pre-COVID historical Oct-20 Oct-20 May-22 May-22 May-22 8-m 8-m (y/y percent change) (y/y percent change) Jan-21 8-m Jan-21 Jan-21 2022 2022 2022 Apr-21 Apr-21 Apr-21 Jul-22 Jul-22 Jul-22 Jul-21 Jul-21 Jul-21 Sep-22 Sep-22 Sep-22 Pre-COVID-19 historical Oct-21 Oct-21 Oct-21 Nov-22 Nov-22 Nov-22 historical average historical average Jan-22 Jan-22 Jan-22 Jan-23 Jan-23 Jan-23 average (5 International arrivals (million) Apr-22 Apr-22 Apr-22 Mar-23 Mar-23 Mar-23 8-m 8-m 8-m average (10 Jul-22 Jul-22 Jul-22 historical aveage 2023 2023 2023 Oct-22 Oct-22 May-23 May-23 May-23 Oct-22 Jan-23 Jul-23 Jul-23 Jul-23 aveage (5 Jan-23 Jan-23 Pre-COVID historical average (5 years) (5 years) years) Apr-23 Sep-23 Sep-23 Sep-23 …Supported by rising services exports… Apr-23 Apr-23 ending September 2024, a 15-year low… Pre-COVID historical average (10 years) (10 years) years) Jul-23 Jul-23 Jul-23 Nov-23 Nov-23 Nov-23 Oct-23 Oct-23 Oct-23 Jan-24 Jan-24 Jan-24 Pre-COVID-19 historical aveage (5 years) (5 years) 8-m years) 8-m 8-m Jan-24 Jan-24 Jan-24 Mar-24 Mar-24 Mar-24 2024 2024 2024 Apr-24 Apr-24 Apr-24 May-24 May-24 May-24 Jul-24 Jul-24 Jul-24 …while improving, domestic revenue remained slow 5 Jul-24 Jul-24 Jul-24 …Inflation declined to 0.8 percent over the 12 months PART 1. RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 6 Cambodia Economic Update December 2024 developing economy (EMDE) goods trade has been RECENT DEVELOPMENTS buoyant in recent months but, in contrast, except GLOBAL ECONOMIC for the United States, trade has been anemic in advanced economies, in part reflecting weak activity ACTIVITY HAS PICKED UP in the euro area. Global growth is holding steady after having Yet, more than four years after the upheavals of slowed for three consecutive years. Inflation has the COVID-19 pandemic and subsequent global been cut to a three-year low, and financial conditions shocks, it’s clear the world—and developing have brightened. The world economy, in short, economies, in particular—has yet to rediscover appears to be in a final approach toward a “soft a reliable path to prosperity. Trade policy landing.”2 uncertainty has reached this century’s highest level, Global economic activity continues to stabilize if years involving major elections are considered. following several years of overlapping shocks. From 2013 through 2023, investment growth In the first half of 2024, global growth was stable, at in developing economies more than halved, on around 3 percent annualized, and leading indicators average, from the pace of the 2000s. Global growth of activity point to further steady growth ahead. is stabilizing at a rate insufficient for progress on key In September, the global composite Purchasing development goals—2.7 percent a year on average Managers’ Index (PMI) remained in expansionary through 2026—well below the 3.1 percent average territory, at 52, albeit with continued divergence in the decade before COVID-19. Against this between services and manufacturing (figure 1). backdrop, nearly half of developing economies will Although the services PMI remained buoyant, the see their per capita income gap relative to advanced manufacturing PMI was in contractionary territory economies widen over the first half of the 2020s— for the third consecutive month. While generally the highest share since the 1990s. picking up this year, global trade growth also remains uneven (figure 2). Emerging market and Figure 1. Global headline PMIs Figure 2. Global goods trade 50+ = 50+ Index,Index, expansion = expansion Composite Composite WorldWorld AEs AEs EMDEs EMDEs Manufacturing Manufacturing Percent Percent 56 56 Services Services 8 8 Series4 Series4 54 54 6 6 4 4 52 52 2 2 50 50 0 0 -2 -2 48 48 -4 -4 46 46 -6 -6 Oct-22 Oct-22 Dec-22 Feb-23 Dec-22 Feb-23 Apr-23 Apr-23 Jun-23 Aug-23 Jun-23 Aug-23 Oct-23 Oct-23 Dec-23 Feb-24 Dec-23 Feb-24 Apr-24 Apr-24 Jun-24 Aug-24 Jun-24 Aug-24 Jan-22 Mar-22 Jan-22 May-22 Mar-22 Jul-22 May-22 Sep-22 Jul-22 Nov-22 Sep-22 Jan-23 Nov-22 Mar-23 Jan-23 May-23 Mar-23 Jul-23 May-23 Sep-23 Jul-23 Nov-23 Sep-23 Jan-24 Nov-23 Mar-24 Jan-24 May-24 Mar-24 Jul-24 May-24 Jul-24 Sources: Haver; World Bank. Source: CPB Netherland Bureau of Economic Policy Analysis. Note: Shows global composite, manufacturing and services PMIs. Note: Figure shows y/y percent change in goods trade volumes. Trade Readings above the line indicate expansion, and readings below show in goods is measured as the average of export and import volumes. Last contraction. observation is August 2024. 2 World Bank 2024a. Cambodia Economic Update December 2024 7 Looking ahead, global growth is expected to For over three decades, China has led growth in remain tepid, at 2.7 percent in 2025 and 2026. the region, but in 2025, the rest of the region is This pace is similar to 2024 but almost half a percentage likely to grow faster. New empirical analysis reveals point below the pre-pandemic average, reflecting a that, in the past, growth in other EAP economies variety of anticipated headwinds. These include the benefitted more on average from China’s increasing lagged effects of monetary tightening, resumed fiscal demand for imports than it was hurt by China’s consolidation, and moderate consumption growth increasing competition in export markets. Despite in the context of receding savings buffers. Globally, China’s slower growth, developing countries still investment growth is also expected to remain received a positive boost, estimated to be between subdued, constrained by elevated real interest rates 0.5 and 1 percentage points, because of the increased and policy uncertainty amid heightened geopolitical similarity of their exports to China’s import demand tensions. Trade growth is expected to firm to 3.4 patterns. percent in 2025, in tandem with a pickup in growth in the euro area and many EMDEs, and to remain steady Risks to the global outlook remain tilted to in 2026. Assuming no escalation of existing conflicts, the downside amid heightened uncertainty. commodity prices are expected to moderate, mainly Worsening conflict, notably in the Middle East, or reflecting improving supply conditions, but remain escalating geopolitical tensions, could have adverse well above pre-pandemic levels.3 impacts on global growth through commodity markets, trade, and financial linkages. Against the The economies of developing East Asia and backdrop of increasing trade protectionist measures Pacific (EAP), however, continue to outperform and inward-looking industrial policies, further economies in the rest of the world. Regional trade fragmentation carries the risk of additional growth is projected to be 4.8 percent in 2024, disruptions to trade networks, supply chains, compared to an average growth of 3.3 percent in other and economic activity. Stubbornly elevated core EMDEs and 1.5 percent in advanced economies.4 In inflation could forestall anticipated monetary easing, EAP countries, private consumption and services tightening financial conditions, including in EMDEs, exports helped sustain growth, but private investment and dampen global growth. Weaker-than-expected and goods exports remained weak. growth in China could have negative global spillovers through commodity markets and trade channels, EAP growth is anticipated to slow to 4.4 percent while more frequent climate-change-related natural in 2025. That is mostly because growth in China, the disasters pose risks to both near- and long-term region’s largest economy, is projected to decline from growth. On the upside, U.S. growth could be stronger 4.8 percent this year to 4.3 percent in 2025. China’s than expected, in part on account of continued strong growth in 2024 was supported by the bounce back of labor supply dynamics, underpinned by rising labor services consumption and exports in the early part of force participation and absorption of working-age the year. But growth is expected to slow in 2025 in migrants. the face of persistent property market weakness, low consumer and investor confidence, and the challenges In contrast, slower growth in China could have a of aging and global tensions. Recently signaled fiscal negative impact on Cambodia’s economy. China is support may lift short-term growth, but longer-term one of Cambodia’s major trading partners, especially growth will depend on deeper structural reforms. The for imports of intermediate goods used in the rest of the EAP region is forecast to grow at 4.7 percent production of garments, travel goods, and footwear in 2024 and 4.9 percent in 2025. Growth in 2024 products for export. Furthermore, China is a key benefitted from increasing domestic consumption, source of FDI and tourism revenue for Cambodia. recovering goods exports, and a tourism rebound. Chinese FDI continues to account for about half Growth in 2025 is expected to be sustained by of FDI inflows, and before the pandemic, Chinese continued export recovery and more benign financial tourists comprised a third of total international conditions. tourist arrivals to Cambodia. 3 World Bank 2024c. 4 World Bank 2024b. 8 Cambodia Economic Update December 2024 associated with relatively higher tourist expenditure, AMID EXTERNAL accounted for two-thirds of total arrivals, while TAILWINDS, CAMBODIA’S land arrivals accounted for one-third. The opposite was true in the post-COVID-19 period. During the ECONOMY IMPROVED first eight months of 2024, international arrivals MARGINALLY by land accounted for 2.8 million, while air arrivals accounted for the remaining 1.5 million. Using Economic activity in Cambodia has shown revenue collection from Angkor temple entrance fees marginal improvements. The improvements are as a proxy for tourist spending also indicates a slow largely driven by a revival in services and goods exports. recovery of tourism receipts. During the first eight As depicted in figure 3, overall improvements in the months of 2024, revenue collection from Angkor services sector, especially the tourism sector, along temple entrance fees stood at only 43.6 percent of the with the expansion of the garment, travel goods, and 2019 level, although it grew by 31.4 percent year-on- footwear manufacturing sector, continued to drive year, reaching US$30.3 million during this period.5 this year’s economic improvements. International tourist arrivals continued to rise, expanding by 23.4 In addition, the share of Chinese tourists, who percent y/y, and reached 4.3 million tourists during were the largest group of visitors during the the first eight months of 2024. The arrival number pre-pandemic period, amounting to almost 40 has already reached pre-COVID-19 levels (figure 4). percent of total arrivals, has decreased to 12.0 percent, now ranking third after Thai and Due to a change in the composition of arrivals, Vietnamese visitors. Thai tourists now comprise tourist spending has lagged despite a quick 30.7 percent of total arrivals, up from 5.6 percent recovery in the number of arrivals. In 2023, in 2019, while Vietnamese tourists account for 20.2 Cambodia’s tourism receipts were estimated by the percent, up from 10.0 percent in 2019. Cambodian authorities to have reached only 62.9 percent of the amount collected in 2019. While the The recovery of international tourist arrivals average length of stay for tourists increased to 7.6 in Cambodia is broadly comparable to that of days in 2023, compared to 6.2 days in 2019, the its neighboring countries. During the first eight estimated total tourism receipts declined to US$3.08 months of 2024, arrivals to Cambodia, Vietnam, and billion, down from US$4.9 billion, due to a decrease Thailand grew y/y by 25.6 percent, 26.2 percent, and in the average expenditure per tourist. During the 31.9 percent, respectively. However, Cambodia has pre-pandemic period, air arrivals, which tend to be been less successful in attracting Chinese tourists. As Figure 3. Economic activity marginally improved Figure 4. Eight-month arrival and tourism receipts Contribution to real GDP growth (percent, 2019 = 100) (percent) 99.1 99.1 Agriculture Agriculture GTF - GTF Indus - Indus construction Indus - Indus - construction Serv - trade Serv - trade Serv - accomm Serv - accomm Taxes & food & food Taxes less less subsidies subsidies others- others Serv - others Indus - Indus Serv - others GDP growtht GDP growtht Revenue from Angkor Revenue templetemple from Angkor entrance fees fees entrance 80.3 80.3 10 10 Angkor revenue Angkor revenue 2019 2019 5 5 43.7 43.7 33.2 33.2 0 0 26.4 28.2 26.4 28.2 22.9 22.9 -5 -5 2.8 2.86.2 6.2 0.3 0.3 2009 2010 2009 2011 2010 2012 2011 2013 2012 2014 2013 2015 2014 2016 2015 2017 2016 2018 2017 2019 2018 2020 2019 2021 2020 2022 2021 2023 2022 2024p 2023 2024p 8-m 2020 8-m 2020 8-m 2021 8-m 2021 8-m 2022 8-m 2022 8-m 2023 8-m 2024 8-m 2023 8-m 2024 Sources: Cambodian authorities and World Bank staff projections. Source: Cambodian authorities. Note: GTF: garment, travel goods and footwear; p = projections. Note: m = month. 5 Angkor Enterprise 2024. Cambodia Economic Update December 2024 9 a share of the total arrivals during the same period in 2019, arrivals from China to Cambodia, Vietnam, GOODS EXPORTS and Thailand accounted for 31.6 percent, 72.5 ACCELERATED percent, and 67.8 percent, respectively. Driven by stronger external demand, Cambodia’s merchandise exports expanded significantly. FOREIGN TOURISTS During the first eight months of 2024, goods exports (including gold) rose by 13.9 percent y/y, reaching VISITING SIEM REAP US$17.8 billion. This year’s acceleration in goods REMAINED WELL BELOW exports has been largely boosted by a revival in the exports of garment, travel goods, and footwear 2019 LEVELS products (figure 6). Among non-GTF products, agricultural commodities and wood production The change in tourist composition has exports continued to be resilient. However, exports significantly affected arrivals to Siem Reap, of electronics and electrical parts, bicycles, and the largest tourist attraction site in Cambodia. solar panels eased. The revival of garment product During the first eight months of 2024, total exports has also been reflected in the recovery of main international tourist arrivals to Siem Reap were intermediate goods imports, used for manufacturing significantly lower than in 2019, reaching only 23.2 GTF products, especially fabric. Fabric imports grew percent of the 2019 level. International arrivals to by 24.9 percent y/y during the first eight months of Siem Reap reached 0.4 million, accounting for 9.0 2024, up from a negative 16.9 percent during the percent of the total during the first eight months of same period in 2023. 2024, compared to 1.67 million or 38.5 percent of the total during the same period in 2019. Cambodia has experienced improvements in goods exports to all major markets. Of the 13.9 As a share of the 2019 level, monthly revenue percent goods exports increase, the U.S. and EU, from Angkor temple entrance fees rose from which are the largest and third-largest markets 29.4 percent in January 2023, peaked at 46.0 and primarily import finished GTF products, percent in March 2023, and then declined to contributed 4.1 percentage points and 2.7 percentage 43.7 percent in August 2024 (figure 5). The points, respectively. The ASEAN market, which deceleration in tourism receipts reflects a structural is the second-largest market and mainly imports issue—a shift in the composition of tourists—rather agricultural commodities, electrical components, and than a cyclical one, necessitating reforms in the electronic parts, contributed 2.0 percentage points tourism sector to further boost revenue. Figure 5. Revenue from Angkor temple Figure 6. Contribution to export growth by product (% share of 2019 collection, YTD) (YTD, percentage point) GTF GTF Bicycles Bicycles & parts & parts Agricultural Agricultural products products 50.0 50.0 Gold Gold OthersOthers Total exports Total exports 46.0 46.0 40 40 45.0 45.0 43.7 43.7 30 30 40.0 40.0 20 20 10 10 35.0 35.0 0 0 29.4 29.4 30.0 30.0 -10 -10 25.0 25.0 -20 -20 -30 -30 20.0 20.0 Jan-20 Mar-20 May-20 Jan-20 Jul-20 Mar-20 Sep-20 May-20 Nov-20 Jul-20 Jan-21 Sep-20 Mar-21 Nov-20 May-21 Jan-21 Jul-21 Mar-21 Sep-21 May-21 Nov-21 Jul-21 Jan-22 Sep-21 Mar-22 Nov-21 May-22 Jan-22 Jul-22 Mar-22 Sep-22 May-22 Nov-22 Jul-22 Jan-23 Sep-22 Mar-23 Nov-22 May-23 Jan-23 Jul-23 Mar-23 Sep-23 May-23 Nov-23 Jul-23 Jan-24 Sep-23 Mar-24 Nov-23 May-24 Jan-24 Jul-24 Mar-24 May-24 Jul-24 Jan-23 Feb-23 Mar-23 Jan-23 Apr-23 Feb-23 May-23 Mar-23 Jun-23 Apr-23 Jul-23 May-23 Aug-23 Jun-23 Sep-23 Jul-23 Oct-23 Aug-23 Nov-23 Sep-23 Dec-23 Oct-23 Jan-24 Nov-23 Feb-24 Dec-23 Mar-24 Jan-24 Apr-24 Feb-24 May-24 Mar-24 Jun-24 Apr-24 Jul-24 May-24 Aug-24 Jun-24 Jul-24 Aug-24 Source: Cambodian authorities. Source: Cambodian authorities. Note: YTD = year-to-date. Note: GTF=garment, travel goods and footwear; YTD = year-to-date.ư 10 Cambodia Economic Update December 2024 of the increase. The Chinese market, which is the the minimum wage. The minimum wage continues fourth-largest and mostly imports dressed furskins, to gradually increase, rising to US$204 per month GTF products, agricultural products, and electrical in 2024, up from US$182 per month in 2019. This and vehicle parts, contributed 1.3 percentage points increase should support private consumption. of the increase. The Japanese market, which is the fifth largest, contributed 1.0 percentage point. In addition, there have been some gains in labor productivity of Cambodia’s garment During the first eight months of 2024, goods manufacturing industry before and after the exports to the U.S., ASEAN, the EU, China, and pandemic. While jobs in the industry declined by Japan reached US$6.7 billion (37.8 percent of total 28.9 percent, decreasing to 0.64 million in August goods exports), US$3.4 billion (19.2 percent), US$2.9 2024, down from 0.90 million during the same billion (16.3 percent), US$1.1 billion (6.4 percent), period in 2019, the value of garment exports rose by and US$0.9 billion (5.2 percent), respectively. 14.8 percent, increasing to US$6.4 billion, up from US$5.6 billion during the same period. MANUFACTURING JOBS INCREASED, THANKS TO INVESTOR APPETITE THE EXPANSION OF GTF STRENGTHENED EXPORTS As economic activity improved, the appetite for investment in the real sector increased, indicating The expansion of goods exports has led to rising heightened investor confidence in the economy. employment in the manufacturing sector. After The approved project value classified under the some easing in labor market conditions during the first Qualified Investment Project (QIP) scheme rose to half of 2023, manufacturing jobs began to recover. The US$2.44 billion, an 89.4 percent increase during the manufacturing sector added 97,229 new jobs, reaching first eight months of 2024, up from US$1.28 billion 1.12 million (19.4 percent of nonfarm employment or during the same period in 2023. Of this, the approved 12.5 percent of total employment)6 in August 2024, FDI projects reached US$1.13 billion, a 24.3 percent marking a 9.5 percent year-over-year increase as goods year-over-year increase, while the approved domestic exports accelerated (figure 7). During the first eight investment value reached US$1.31 billion (figure 8), a months of 2024, employment gains were recorded in 244.4 percent increase. most manufacturing industries where workers receive Figure 7. Manufacturing sector jobs and factories Figure 8. Approved QIP project value (US$ billion, fixed asset) 1,130 1,130 Workers Workers Factories (RHS) Factories (RHS) 2,400 2,400 6.0 6.0 Domestic Domestic FDI FDI 1,110 1,110 2,300 2,300 5.0 5.0 1,090 1,090 2,200 2,200 Thousands Thousands 1,070 1,070 2,100 2,100 4.0 4.0 1,050 1,050 2,000 2,000 3.0 3.0 1,030 1,030 1,900 1,900 1,010 1,010 1,800 1,800 2.0 2.0 1.13 1.13 990 990 1,700 1,700 970 970 1,600 1,600 1.0 1.0 0.91 0.91 1.31 1.31 950 950 1,500 1,500 0.38 0.38 0.0 0.0 Sep-19 Nov-19 Sep-19 20 Nov-19 Mar-20 Jan- 20 May-20 Mar-20 Jul-20 Sep-20 May-20 Jul-20 Nov-20 Sep-20 21 Nov-20 Mar-21 Jan- 21 May-21 Mar-21 Jul-21 Sep-21 May-21 Jul-21 Nov-21 Sep-21 22 Nov-21 Mar-22 Jan- 22 May-22 Mar-22 Jul-22 Sep-22 May-22 Jul-22 Nov-22 Sep-22 23 Nov-22 Mar-23 Jan- 23 May-23 Mar-23 Jul-23 Sep-23 May-23 Jul-23 Nov-23 Sep-23 Jan-24 Nov-23 Mar-24 Jan-24 May-24 Mar-24 Jul-24 May-24 Jul-24 8-m 2019 8-m 2019 8-m 2020 8-m 2020 8-m 2021 8-m 2021 8-m 2022 8-m 2022 8-m 2023 8-m 2023 8-m 2024 8-m 2024 Jan- Jan- Jan- Jan- Source: Cambodian authorities. Source: Cambodian authorities. Note: RHS = right-hand scale. Note: QIP = Qualified Investment Project. 6 Ministry of Planning 2021. Cambodia Economic Update December 2024 11 However, the approved investment project value remained well below the peak of US$5.4 billion DOWNBEAT DOMESTIC recorded during the same period in 2019, when INVESTOR APPETITE TO the approved domestic and FDI-financed project values accounted for US$3.8 billion and US$1.5 INVEST IN THE TRADABLE billion, respectively. While improving, domestic SECTOR investor appetite to invest in the real sector remained relatively weak in 2024. The domestic investment FDI-financed components accounted for 98.1 project value accounted for 53.8 percent of the total percent and 70.1 percent of the investment approved project value in 2024, down from 71.5 in the garment and the agricultural and agro- percent in 2019. processing sectors, respectively. This indicates that, similar to the period before the pandemic, there Of the total US$2.44 billion, the garment is little interest from Cambodian domestic investors industry received US$360 million, accounting in investing in the main export sector and the key for 14.7 percent of the total, partly reflecting primary agriculture sector. This lack of interest the relocation of supply chains from Bangladesh. is likely due to the challenges in the ease of doing The agricultural and agro-processing sector received business (see also the monetary section, below). US$121 million, or 5.0 percent of the total, as export demand for processed agricultural products increases. Of the US$1.5 billion approved FDI-financed The non-garment manufacturing sector accounted project value recorded during the first eight for US$1.37 billion, or 56.2 percent of the total, months of 2024, the non-garment industries and consisting of several large investment projects, which utilities received US$601.2 million (53.3 percent include two energy projects—a hydropower plant of the total) (figure 9). The garment manufacturing valued at US$441.5 million, and a solar energy project industry received US$353.1 million (31.3 percent), valued at US$65.5 million, reflecting continued the tourism industry received US$88.9 million (7.9 demand for investing in the energy sector, as percent), and agriculture and food processing received electricity costs in the country remain relatively high. US$84.8 million (7.5 percent). Chinese-financed In addition, there are steel processing and steel pipe projects continued to account for the majority of the manufacturing projects totaling US$42.0 million. total approved FDI-financed project value. During The property sector received the remaining US$0.57 the first eight months of 2024, the value of Chinese- billion, or 24.1 percent of the total. financed projects as a share of the total approved FDI project value remained as high as 86.3 percent, Figure 9. Approved FDI-financed project by sector Figure 10. Approved property project permits (US$ million, 8 months of 2024) (US$ million) Agriculture Agriculture & food & food o/wo/w value value for SHV for SHV Approved Approved value value Property Property (tourism) processing (tourism) processing 700700 Approved value (y/y, RHS) 220.0 220.0 Approved value (y/y, RHS) 186.2 88.988.9 84.8 186.2 84.8 600600 170.0 170.0 7.9% 7.5% 500500 120.0 7.9% 7.5% 120.0 Garment Garment 400400 31.3% 353.1 70.0 70.0 31.3% 353.1 300300 52.952.9 53.3% 53.3% 20.0 20.0 200200 -15.1 -15.1 100100 -29.2 -29.2 -30 -30 -29.1 -29.1 -53.8 -53.8 0 0 -80 -80 Industry 8-m8-m 8-m8-m 8-m8-m 8-m8-m 8-m8-m 8-m8-m Industry and and utilities utilities 2019 2020 2019 2020 2021 2022 2023 20212022 2024 2023 2024 601.2 601.2 Source: Cambodian authorities. Source: Cambodian authorities. Note: RHS = right-hand scale; SHV = Sihanoukville province. 12 Cambodia Economic Update December 2024 amounting to US$974 million. This is a substantial Province 2024.” The program applies to (i) project- increase over the average of 40.0 percent during related buildings that are stalled; (ii) new projects; the five years preceding the pandemic, indicating and (iii) expansion of existing investment projects, increased dependency on Chinese FDI. Some studies responding to the Royal Government’s strategies have pointed out that Chinese investors tend to and policies, in particular, the implementation of the be generally less risk-averse,7 which may be one of masterplan to transform Preah Sihanouk Province the reasons for Cambodia to continue attracting into a multipurpose model special economic zone. Chinese FDI. In addition, understanding Chinese The program provides exemption from income taxes, FDI requires analyzing China’s strategic priorities. the VAT, withholding taxes, and property taxes, Improved corruption control in the destination among others.9 Owing to the program, there has been country boosts investment flows more from cleaner a significant renewed interest in the area. See further countries than from more corrupt ones.8 discussion on the property sector in box 1. THE DOWNTURN IN STEEL IMPORTS ROSE THE PROPERTY SECTOR RAPIDLY, BOOSTED CONTINUED BY INVESTMENT Overinvestment in the property sector has led to IN PHYSICAL ongoing corrections in the housing market. This has resulted in a downward trend in the approved INFRASTRUCTURE permit value for real estate development projects. Although privately financed real estate and During the first eight months of 2024, the approved property construction activities remain subdued, property development project value reached US$3.3 investments under public-private partnerships billion, marking a 29.1 percent y/y decline (figure in large physical infrastructure projects such as 10), driven by a decline in investment in residential roads, bridges, and ports, including a US$1.7 property. The number of approved square meters billion canal, have boosted construction services. of property development permits has decreased This shift toward infrastructure projects indicates significantly, reaching 8.0 million square meters, a strategic focus on enhancing connectivity and which is a 30.1 percent y/y decline. Regardless of the supporting economic activities through improved overall decline in property development permits, the infrastructure. As a result, the performance of approved industrial building area is trending upward basic construction material imports improved after and now accounts for the largest share. Specifically, experiencing a steep decline during the past few years the approved industrial building area rose to 3.0 since the pandemic hit. million square meters, or a 7.1 percent y/y increase during the first eight months of 2024, representing During the first eight months of 2024, imports of 37.5 percent of the total approved area. steel used for all types of construction industries surged, growing by 31.9 percent y/y in value Despite the overall downbeat investment, terms and 58.6 percent y/y in volume terms. there has been a notable interest in investing in Imports of construction equipment also saw a rapid Sihanoukville, a seaside town that experienced increase, growing by 20.1 percent y/y in value terms. a rapid construction boom during the pre- Meanwhile, imports of cement contracted by 15.4 pandemic period. Of the total approved permit value, percent in value terms and 14.5 percent in volume approved property development permits for projects terms, likely due to rising domestic production. in Sihanoukville accounted for US$875.5 million, Investments under public-private partnerships and marking a 132.4 percent y/y increase. In January 2024, private investments in commercial property and the Cambodian authorities introduced a “Special physical infrastructure, such as factories, offices, Program to Promote Investment in Preah Sihanouk roads, bridges, logistics, and port infrastructure, 7 “What determines Chinese outward FDI?”; https://www.sciencedirect.com/science/article/pii/S109095161000074X. 8 “Does corruption matter for sources of foreign direct investment?,” European Bank for Reconstruction and Development; https://www.ebrd.com/ documents/oce/does-corruption-matter-for-sources-of-foreign-direct-investment.pdf. 9 Special Investment Promotion Program in Sihanouk Province; 2024https://pressocm.gov.kh/en/archives/90596. Cambodia Economic Update December 2024 13 continue. This is indicated by an increase in industrial other agricultural products eased, declining by 56.7 building permits and approved FDI-financed non- percent. Consequently, total exports of agricultural garment QIP projects. commodities, wood products, furniture, and other agricultural exports declined by 11.9 percent y/y during the first eight months of 2024 (figure 11). AGRICULTURAL EXPORTS According to the Ministry of Agriculture, SLOWED Forestry and Fisheries’ monthly report, the wet Cambodia has shown significant growth in its season rice planting area reached 2.89 million agricultural commodity exports, particularly in hectares, representing a 4.7 percent y/y increase cassava, cashew nuts, rubber, and rice. During during the first nine months of 2024. However, the first eight months of 2024, cassava exports grew the harvesting of the short-duration wet season rice by 14.1 percent to US$557.0 million. Cashew nut crop amounted to only 2.3 million metric tons, exports increased by 32.6 percent to US$491.6 marking a 5.7 percent y/y decline. million. Rubber exports expanded by 50.0 percent to US$348.9 million. Rice exports rose by 9 percent to US$303.8 million. Combined, these four main PRIVATE CONSUMPTION commodities accounted for US$1.9 billion in exports, HAS IMPROVED reflecting a growth rate of 21.2 percent. Cashew nut exports have particularly surged, growing at an Private consumption, which significantly eased average annual rate of 40.9 percent over the last three in 2023 when one-off, pent-up domestic demand years, making it the second-largest agricultural export ran out of steam, partly recovered in 2024, driven after cassava. by several factors. Manufacturing exports started to recover in the fourth quarter of 2023, adding Initially, Cambodia’s agricultural exports jobs and earnings. The manufacturing sector, which were predominantly rice and rubber. However, contributes 19.4 percent of nonfarm employment, over the past decade, the country has diversified its created a net of 97,229 new jobs, or a 9.5 percent agricultural exports to include cassava and, more y/y increase during the first eight months of 2024. recently, cashew nuts. This diversification and growth This has supported consumer spending. Thanks to in agricultural exports are supported by various the central bank’s monetary policy accommodation, factors, including stable prices for paddy and other market liquidity improved despite elevated interest crops and improved trade relations. In addition, the rates (see discussion under the monetary section, Cambodia-China Free Trade Agreement (CCFTA) below). Services exports, especially tourism receipts, has facilitated greater access to the Chinese market, expanded as international arrivals picked up. Workers’ further boosting agricultural exports. However, the remittances also rose. country’s exports of wood products, furniture, and Figure 11. Agricultural commodity exports Figure 12. Imports of consumer goods improved (y/y percent change) (y/y percent change) 120.0 120.0 40 40 8-m 2020 8-m 2020 8-m 2021 8-m 8-m 2021 2023 8-m 2023 8-m 2024 2024 8-m 100.0 100.0 30 30 80.0 80.0 20 20 60.0 60.0 10 10 40.0 40.0 0 0 20.0 20.0 -10 -10 0.00.0 -20 -20 -20.0 -20.0 8-m 8-m 8-m 8-m 8-m8-m 8-m8-m 8-m8-m 8-m8-m 8-m8-m -30 -30 Soft Soft 2018 2019 2018 2019 2020 2020 2021 2021 2022 2023 2024 2022 2023 2024 Diesel DieselElectronics Gasoline Electronics Gasoline Foodstuff Foodstuff Garments Garments drinks drinks Source: Cambodian authorities. Source: Cambodian authorities. Note: m = month. Note: y/y = year-on-year. 14 Cambodia Economic Update December 2024 Box 1. Navigating the risks of the downturn in the property market During 2011–19, Cambodia experienced robust GDP growth, averaging approximately 8.0 percent per year. Alongside the garment, agriculture, and tourism sectors, the construction and real estate sectors emerged as significant contributors to economic expansion. The contribution of the construction and real estate sectors to GDP growth increased from 0.5 percentage points in 2011 to 2.5 percentage points, accounting for 30 percent of real growth during 2016–19. This reflects Cambodia’s urbanization process and broader structural transformation. This has created a heavy dependency on—almost an addiction to—the property sector for economic growth. However, the growth momentum in construction and real estate was severely disrupted by the onset of the COVID-19 pandemic. In 2020, these sectors registered a negative contribution to real growth of 1.2 percentage points for the first time since 2010. This decline was triggered by a global economic downturn, which exacerbated the lingering effects of the pandemic to this day. In 2023, the appetite to invest in the construction and real estate sectors showed some signs of recovery, with a rise in the value of approved construction permits. However, this recovery was short-lived. By the first half of 2024, investment appetite faltered, and the value of approved construction permits decreased by 20 percent. This decrease was most evident in the housing sector, with the commercial sector following suit. The condo market in Phnom Penh saw an addition of 2,400 units, with projections of 14,000 new units by year’s end. Meanwhile, the landed property market shifted its focus to extensions rather than new launches due to more cautious demand. In parallel, demand indicators, especially in housing, signaled contraction. Mortgage lending slowed in the first half of 2024, indicating a reduced willingness to invest amid a restrained economic climate. Price trends further illustrate the softer demand. Global real estate consultancy Knight Frank reported significant land price declines, with average prices for prime residential and office sites down 34.5 percent and 35.7 percent, respectively, from Q2 2020 levels (figure B.1.1). Other critical segments of the property sector, such as condominium, office, and retail rentals, saw continued price declines, according to CBRE, a global leader in commercial real estate services and investments. There appears to be a strong correlation between the value of fixed-asset investment in the property sector in China and Chinese FDI inflows into Cambodia during 2013–20 (figure B.1.2). This indicates that Chinese investors’ strong investment appetite at home contributed to rising Chinese FDI inflows to Cambodia, financing mainly the construction and real estate sectors. During this period, Chinese investments notably transformed Cambodia’s construction, accommodation, and real estate markets, particularly in Sihanoukville and Phnom Penh. While this influx spurred a construction boom, it has also raised concerns about overdependence on foreign capital and socioeconomic imbalances. During 2021–23, however, the correlation weakened. While the value of fixed-asset investment in the property sector in China plummeted, Chinese FDI inflows into Cambodia accelerated. This indicates that Chinese FDI inflows into Cambodia have been diversified, shifting away from the construction and real estate sectors to the garment and non-garment sectors, as indicated in the approved FDI-financed investment projects under the QIP scheme. Cambodia is at risk of a property bubble. The decline in real estate prices, along with the slowdown in lending to the property sector and the value of approved construction permits, signals potential instability in the housing market. To navigate this crisis, stricter lending regulations are needed to curb excessive borrowing and promote sustainable development practices that align supply with genuine demand. Enhancing transparency in property transactions will build investor confidence and ensure informed decision- making, ultimately fostering a more resilient real estate market. Figure B.1.1. Real estate price indexes Figure B.1.2. Property investment in China and (Base = 2019 Q1) Chinese FDI inflows into Cambodia Residential Residential Office Office Affordable Affordable Real estate Real investment estate in China investment (bln in China RMB) (bln RMB) Flat House Flat House Twin Villa Twin Villa Single Villa Single Villa Chinese FDI Chinese (US$ FDI mln, (US$ RHS mln, RHS 130130 120120 19,000 19,000 2,500 2,500 110110 17,000 17,000 2,000 2,000 100100 15,000 15,000 1,500 1,500 90 90 13,000 13,000 80 80 1,00 1,00 11,000 11,000 70 70 500500 9,000 9,000 60 60 50 50 7,000 7,000 - - 2019Q1 2019Q1 2019Q2 2019Q2 2019Q3 2019Q3 2019Q4 2019Q4 2020Q1 2020Q1 2020Q2 2020Q2 2020Q3 2020Q3 2020Q4 2020Q4 2021Q1 2021Q1 2021Q2 2021Q2 2021Q3 2021Q3 2021Q4 2021Q4 2022Q1 2022Q1 2022Q2 2022Q2 2022Q3 2022Q3 2022Q4 2022Q4 2023Q1 2023Q1 2023Q2 2023Q2 2023Q3 2023Q3 2023Q4 2023Q4 2024Q1 2024Q1 2024Q2 2024Q2 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023 Source: CBRE. Sources: Cambodian authorities; China’s National Bureau of Statistics. Cambodia Economic Update December 2024 15 Domestic consumption accounts for about two- due to the nonavailability of actual data on personal thirds of GDP. Its partial recovery has started to consumption expenditure on durable and nondurable support retail and wholesale activities, as reflected goods and services, especially retail sales data, to gauge in improved consumer goods imports. During consumer demand for finished goods. the first eight months of 2024, top ticket items of imported nondurable consumer goods expanded significantly. Imports of diesel, electronics, gasoline, INFLATION REMAINED foodstuff, garments, and soft drinks rose by 16.1 percent, 31.9 percent, 21.1 percent, 14.4 percent, SUBDUED 21.2 percent, and 16.6 percent, respectively (figure Despite some improvements in domestic demand, 12). Similarly, during the first eight months of Cambodia’s Consumer Price Index (CPI) 2024, imports of durable consumer goods, which remained subdued, declining to 0.3 percent y/y in include motorcycles, passenger cars, trucks, buses, August 2024, down from 3.2 percent during the tractors, and other vehicles, increased by 18.0 same period in 2023 (figure 13). Inflation has started percent y/y. Improvements in private consumption to decline after peaking at 7.8 percent in June 2022, a have already led to an increase in taxes on goods 13-year high, triggered largely by global food and oil and services and taxes on international trade (see price shocks. Despite elevated rice prices, average prices the discussion on revenue collection in the fiscal of meat and fish declined, and average prices of fruits sector, below). and vegetables decelerated, leading to a deceleration of the food component (subindex). This helped subdue However, challenges in sustaining domestic Cambodia’s inflation, given that the food subindex demand remain. The initial revival of domestic captures a 43 percent weight in the inflation basket. In demand helped boost goods imports but is not likely addition, prices of petroleum products and housing to be sustained due to the marked slowdown of and utilities have also started to edge down. Domestic domestic credit growth. Boosting household income prices were in line with global prices. Global energy and wage growth faces challenges. Despite a decent prices contracted by 3.2 percent in August, with crude expansion of manufacturing jobs, households still oil leading the decrease (-6.2 percent), according to the face slow wage growth, with only a 2 percent increase World Bank’s Pink Sheet.10 Non-energy prices eased by in the minimum wage of the manufacturing export 1.9 percent. Agricultural prices declined by 1.4 percent sector. Slack growth in the labor market, caused largely in August. Food prices fell by 2.3 percent, driven by oils by stalled construction activity, continues to be a and meals (-5.1 percent). concern. An in-depth analysis cannot be conducted Figure 13. Inflation dipped Contribution to Figure 14. Broad money growth recovered 12-month inflation Contribution to broad money growth (percentage points) (percentage points) Food Food subindex subindex Housing Housing utilities && subindex utilities subindex Foreign Foreign currency currency deposits deposits deposits) (other (other deposits) Transferable Transferable deposits deposits 99 Transport Transportsubindex subindex Others Others Currency Currencyinin circulation circulation M2 M2y/y, percent y/y, change percent change 77 Headline Headlineinflation (y/y) inflation (y/y) 6060 5050 55 4040 33 3030 2020 11 1010 -1-1 00 -10 -10 -3-3 Jan-13 Jan-13 Apr-13 Apr-13 Jul-13 Jul-13 Oct-13 Oct-13 Jan-14 Jan-14 Apr-14 Apr-14 Jul-14 Jul-14 Oct-14 Jan-15 Oct-14 Jan-15 Apr-15 Apr-15 Jul-15 Jul-15 Oct-15 Jan-16 Oct-15 Jan-16 Apr-16 Apr-16 Jul-16 Jul-16 Oct-16 Jan-17 Oct-16 Jan-17 Apr-17 Apr-17 Jul-17 Jul-17 Oct-17 Jan-18 Oct-17 Jan-18 Apr-18 Apr-18 Jul-18 Jul-18 Oct-18 Jan-19 Oct-18 Jan-19 Apr-19 Apr-19 Jul-19 Jul-19 Oct-19 Jan-20 Oct-19 Jan-20 Apr-20 Apr-20 Jul-20 Jul-20 Oct-20 Jan-21 Oct-20 Jan-21 Apr-21 Apr-21 Jul-21 Jul-21 Oct-21 Oct-21 Jan-22 Jan-22 Apr-22 Apr-22 Jul-22 Jul-22 Oct-22 Oct-22 Jan-23 Jan-23 Apr-23 Apr-23 Jul-23 Jul-23 Oct-23 Oct-23 Jan-24 Jan-24 Apr-24 Apr-24 Jul-24 Jul-24 Jan-13 Jan-13 Apr-13 Apr-13 Jul-13 Jul-13 Oct-13 Oct-13 Jan-14 Jan-14 Apr-14 Apr-14 Jul-14 Jul-14 Oct-14 Jan-15 Oct-14 Jan-15 Apr-15 Apr-15 Jul-15 Jul-15 Oct-15 Jan-16 Oct-15 Jan-16 Apr-16 Apr-16 Jul-16 Jul-16 Oct-16 Jan-17 Oct-16 Jan-17 Apr-17 Apr-17 Jul-17 Jul-17 Oct-17 Jan-18 Oct-17 Jan-18 Apr-18 Apr-18 Jul-18 Jul-18 Oct-18 Jan-19 Oct-18 Jan-19 Apr-19 Apr-19 Jul-19 Jul-19 Oct-19 Jan-20 Oct-19 Jan-20 Apr-20 Apr-20 Jul-20 Jul-20 Oct-20 Jan-21 Oct-20 Jan-21 Apr-21 Apr-21 Jul-21 Jul-21 Oct-21 Oct-21 Jan-22 Jan-22 Apr-22 Apr-22 Jul-22 Jul-22 Oct-22 Oct-22 Jan-23 Jan-23 Apr-23 Apr-23 Jul-23 Jul-23 Oct-23 Oct-23 Jan-24 Jan-24 Apr-24 Apr-24 Jul-24 Jul-24 Source: Cambodian authorities. Source: Cambodian authorities. 10 The World Bank’s Pink Sheet provides commodity price data. 16 Cambodia Economic Update December 2024 rate stability helps maintain the purchasing power of AMID A RECOVERY OF those who earn income in riel. IMPORT GROWTH, A CURRENT ACCOUNT MONEY SUPPLY DEFICIT REEMERGED CONTINUED TO During the first eight months of 2024, continued INCREASE strong capital inflows, especially FDI, have helped ease pressures on the exchange rate and boosted gross Indicating a further improvement in capital international reserves, which rose to US$20.7 billion, inflows, the expansion of broad money an 11.3 percent y/y increase, covering about seven continued. Broad money grew at 14.3 percent over months of prospective imports. the 12 months ending in August 2024, up from 11.0 percent during the same period in 2023, owing to Despite the continuation of strong remittances, improved foreign currency deposits (figure 14). which amounted to 6.0 percent of GDP, second only to the Philippines (9.0 percent of GDP) Given that the economy is highly dollarized, in ASEAN and the partial recovery of tourism foreign currency deposits contribute the most receipts, the current account balance is projected to broad money growth. Of the 14.3 percent to show a small deficit of approximately 1.0 broad money growth, the contributions of foreign percent of GDP in 2024, in contrast to a surplus currency deposits (and other deposits) accounted of 1.3 percent in 2023. This deficit continues to for 13.0 percentage points, transferrable deposits for be financed by sustained capital inflows (see more 1.5 percentage points, and currency in circulation discussion on concessional financing and debt for negative 0.2 percentage points in August 2024. disbursement in the fiscal section, below). This is up from 10.8 percentage points, negative 0.5 percentage points, and 0.8 percentage points, respectively, during the same period in 2023. THE RIEL MARGINALLY Although Cambodia’s highly dollarized APPRECIATED AGAINST economy limits the ability of the country’s central bank to influence the money aggregate, THE DOLLAR the decrease in the reserve requirement ratio—one Improvements in the current account balance of the few monetary policy instruments available to contributed to easing pressures on the riel. As a influence the money supply—introduced late last result, the riel-U.S. dollar exchange rate appreciated year, may partially support market liquidity.11 in August 2024, reaching 4,091 riel per U.S. dollar, up from 4,140 riel per U.S. dollar during the same period in 2023. DOMESTIC INTEREST The riel, however, has started to depreciate RATES EASED against the baht and the yuan, reaching 119 riel Domestic U.S. dollar-denominated deposit rates per baht and 571 riel per yuan in August 2024, started to decline in January 2024. As the demand down from 118 riel per baht and 570 riel per for domestic credit eased amid the downturn in the yuan during the same period in 2023. Conversely, property sector, domestic U.S. dollar-denominated the riel appreciated against the dong, reaching 0.163 deposit rates declined to 5.15 percent per year in riel per dong, up from 0.172 riel per dong during the August 2024, down from 5.71 percent during the same period. The central bank, the National Bank of same period in 2023 (figure 15). However, upward Cambodia, targets the riel exchange rate at 4,000 riel pressure on U.S. dollar-denominated loan interest per U.S. dollar. The exchange rate policy is an essential rates remained. The U.S. dollar-denominated loan element of the central bank’s monetary policy, with interest rate in Cambodia rose to 10.82 percent per the objective of achieving price stability. Given that year, up from 9.88 percent during the same period. the economy is highly dollarized, targeting exchange 11 National Bank of Cambodia 2023. Cambodia Economic Update December 2024 17 Cambodia effectively “imports” U.S. monetary Domestic credit growth has experienced a policy due to its highly dollarized economy. significant slowdown since mid-2023, following Rising funding costs have squeezed the profit an extended period of rapid expansion. While margins for banks and microfinance institutions in the tightening of credit conditions due to rising Cambodia. The returns on assets for the banking and global interest rates may also play a role, weaker microfinance institution (MFI) sectors halved to 0.7 credit demand likely accounts for the bulk of the percent and 1.5 percent in 2023, respectively, down slowdown. First, the demand for domestic credit by from 1.4 percent and 3.0 percent in 2022. Similarly, the real estate and construction sector plummeted. the returns on equity for the banking and MFI sectors Second, elevated interest rates and low consumer declined to 3.8 percent and 6.0 percent in 2023, confidence may have contributed to the weak credit respectively, down from 7.0 percent and 13.6 percent demand from households and firms (box 2). As a in 2022. By mid-2024, nonperforming loan ratios in result, credit sharply decelerated to 3.4 percent y/y, a Cambodia rose to 6.8 percent for the banking sector 14-year low in August 2024, down from 7.7 percent and 8.3 percent for the microfinance sector, up from during the same period in 2023 (figure 16). The 5.4 percent and 6.7 percent in 2023, respectively. slowdown in credit growth led to a decline in the credit-to-GDP ratio, which shrank to 126.7 percent Upward pressures on domestic interest rates in August 2024, down from 133.3 percent during are starting to moderate as Cambodia’s highly the same period in 2023. dollarized economy imports U.S. monetary policy, which has started to ease after the U.S. Private sector deposit growth accelerated to 15.8 Federal Reserve (Fed) cut the Fed funds rate by percent year-on-year in August 2024, up from 50 basis points and 25 basis points in September 11.1 percent during the same period in 2023, and November 2024, respectively.12 The negative despite a decline in the U.S. dollar-denominated impact on economic activity caused by the monetary deposit interest rate to 5.15 percent per year in policy tightening cycle should start to ease. August 2024, down from 5.71 percent per year in August 2023. As discussed in the investment section, domestic investor appetite for investing CREDIT SHARPLY in tradable sectors such as export, agriculture, and DECELERATED AS agroprocessing remains muted, reflecting ongoing challenges in the ease of doing business. As indicated HOUSING DEVELOPMENT in the 2024 Business-Ready report (see box 3), the most challenging issue is that Cambodia lacks quality ACTIVITY STALLED public services to support businesses, especially in Figure 15. Interest rates remained elevated Figure 16. Domestic credit growth plummeted Domestic interest rates Credit growth (percent per year) (y/y percent change) U.S. dollar denominated U.S. dollar term deposit denominated rate rate term deposit Credit Credit to CRM to CRM Domestic Domestic creditcredit 9.0 9.0 U.S. prime rate rate U.S. prime 14.0014.00 Historical Historical average average (2020-22) (2020-22) U.S. dollar U.S. dollar denominated denominated term loan termrate loan rate 60.0 60.0 8.0 8.0 (RHS)(RHS) 12.0012.00 50.0 50.0 10.0010.00 40.0 40.0 7.0 7.0 8.00 8.00 30.0 30.0 22.5 22.5 6.0 6.0 20.0 20.0 6.00 6.00 9.6 9.6 5.0 5.0 10.0 10.0 4.00 4.00 3.4 3.4 0.0 0.0 4.0 4.0 2.00 2.00 -10.0 -10.0 3.0 3.0 0.00 0.00 -20.0 -20.0 Jan-19 Apr-19 Jan-19 Jul-19 Oct-19 Apr-19 Jan-20 Jul-19 Apr-20 Oct-19 Jan-20 Jul-20 Oct-20 Apr-20 Jan-21 Jul-20 Apr-21 Oct-20 Jan-21 Jul-21 Oct-21 Apr-21 Jan-22 Jul-21 Apr-22 Oct-21 Jan-22 Jul-22 Oct-22 Apr-22 Jan-23 Jul-22 Apr-23 Oct-22 Jan-23 Jul-23 Oct-23 Apr-23 an-24 J Jul-23 Apr-24 Oct-23 an-24 J Jul-24 Apr-24 Jul-24 Jul-09 Jan-10 Jul-09 Jul-10 Jan-10 Jan-11 Jul-10 Jul-11 Jan-11 Jan-12 Jul-11 Jul-12 Jan-12 Jan-13 Jul-12 Jul-13 Jan-13 Jan-14 Jul-13 Jul-14 Jan-14 Jan-15 Jul-14 Jul-15 Jan-15 Jan-16 Jul-15 Jul-16 Jan-16 Jan-17 Jul-16 Jul-17 Jan-17 Jan-18 Jul-17 Jul-18 Jan-18 Jan-19 Jul-18 Jul-19 Jan-19 Jan-20 Jul-19 Jul-20 Jan-20 Jan-21 Jul-20 Jul-21 Jan-21 Jan-22 Jul-21 Jul-22 Jan-22 Jan-23 Jul-22 Jul-23 Jan-23 Jan-24 Jul-23 Jul-24 Jan-24 Jul-24 Sources: Cambodian authorities and U.S. Federal Reserve. Sources: Cambodian authorities. Note: RHS = right-hand scale. Note: CRM = construction, real estate, and mortgage. 12 Federal Reserve issues FOMC statement, November 7, 2024; https://www.federalreserve.gov/newsevents/pressreleases/monetary20241107a.htm. 18 Cambodia Economic Update December 2024 Box 2. Rising household debt During 2009–21, Cambodia experienced rapid domestic credit growth, averaging 27.2 percent annually, which significantly fueled economic activity. However, since mid-2023, there has been a sharp slowdown in domestic credit growth, dropping to 3.8 percent by mid-2024. Despite this slowdown, the private credit-to-GDP ratio remains elevated at 126.8 percent. Approximately one-third of this credit is directed toward real estate, construction, and personal mortgages. The concentrated exposure to the real estate sector, which has been in a downturn since the pandemic, poses rising risks to financial stability. The nonperforming loan ratios rose to 6.8 percent for the banking sector and 8.3 percent for the microfinance sector by mid-2024, along with declining financial sector profitability. On the flip side, household debt in Cambodia has been on the rise, as indicated by the Cambodia Socio- Economic Surveys (CSES). Average outstanding household debt per household grew rapidly, increasing at an annual rate of 23.2 percent to reach riel 21.3 million in 2021, up from riel 1.7 million in 2009, owing to improved access to finance and declining interest rates on loans. In 2009, the primary sources of loans were informal lenders such as relatives, friends, money lenders, and traders, with an average interest rate of 34.8 percent per year. By 2021, these sources were largely replaced by the formal financial sector, including banks and microfinance institutions, which offered an average interest rate of 18.0 percent per year. While household income also grew, it did so at a slower rate than household debt. The average household income increased at an annual rate of 10.0 percent, reaching 27.9 million riel in 2021, up from 8.8 million riel in 2009. Consequently, the outstanding debt-to-income ratio rose significantly to 76.4 percent, up from 19.7 percent in 2009 (figure B2.1). In addition, there has been a significant shift in the use of household loans from productive to nonproductive purposes. Specifically, the CSES found that the share of loans used for productive activities, such as agricultural and nonagricultural activities, declined to 30 percent in 2021, down from a peak of 42.6 percent in 2012. Conversely, the share of loans used for household consumption purposes, including home purchases and improvements, consumer durables, household consumption needs, and healthcare, increased significantly. The increased borrowing for consumption rather than investment in productive activities could lead to higher levels of indebtedness without corresponding increases in income, thereby exacerbating financial vulnerabilities among indebted households. Despite the average loan maturity rising to 27 months in 2021, up from 8.7 months in 2009, debt service payments rapidly increased, growing at a rate of 13.0 percent per year. As a result, the debt service-to-income (DTI) ratio peaked at 48.4 percent in 2019/20, before marginally declining to 46.5 percent in 2021 (figure B2.2). The peak of 48.4 percent DTI is close to the 50 percent threshold,a which indicates that borrowers struggle to regularly meet all debt obligations as they may not have much money left to save, spend, or handle unforeseen expenses. In August 2024, the central bank introduced regulatory forbearance measures that allow for loan restructuring, similar to those implemented as part of the pandemic response. This initiative aims to provide relief to borrowers and maintain financial stability by allowing more flexible loan terms during the challenging time. Figure B2.1. Average outstanding household debt Figure B2.2. Debt service payment (% of income ) (% of income) 90.0 90.0 Outstanding household Outstanding debt (% of household annual debt (% ofincome) annual income) Debt Debt service service payment payment (% of (% of annual annual income) income) 80.0 80.0 60.0 60.0 50% threshold 50% threshold 70.0 70.0 50.0 50.0 60.0 60.0 40.0 40.0 50.0 50.0 40.0 40.0 30.0 30.0 30.0 30.0 20.0 20.0 20.0 20.0 10.0 10.0 10.0 10.0 0.0 0.0 0.0 0.0 2009 2010 2009 2011 2010 2012 2011 2013 2012 2014 2013 2015 2014 2016 2015 2017 2016 2019/20 2017 2021 2019/20 2021 2009 2010 2009 2011 2010 2012 2011 2013 2012 2014 2013 2015 2014 2016 2015 2017 2016 2019/20 2017 2021 2019/20 2021 Source: Cambodia Socio-Economic Surveys. Source: Cambodia Socio-Economic Surveys. a. “What is a Good Debt-to-Income Ratio?”; https://www.wellsfargo.com/goals-credit/smarter-credit/credit-101/debt-to-income-ratio/ understanding-dti/. Cambodia Economic Update December 2024 19 Box 3. 2024 Business-Ready report* Despite efforts to improve the business environment, the 2023 Enterprise Survey and, more recently, the World Bank October 2024 Business Ready (B-READY) report, revealed significant challenges, with most scores falling into the fourth or bottom quintiles, as illustrated in figure B.3.1. In terms of topic scoring, Cambodia scored 19.63 in Business Insolvency, placing it in the bottom quintile. For Market Competition, the score was 33.1, which falls into the fourth quintile. Business Entry scored 43.8, also in the fourth quintile, while Business Location scored 49.0, again in the fourth quintile. The only exception was Financial Services, where Cambodia scored 86.0, placing it in the top quintile. When compared to the other ASEAN members included in the report (Cambodia, the Philippines, Indonesia, Vietnam, and Singapore), Cambodia’s performance was below its peers on most topics, except for financial services, as shown in figure B.3.2. Figure B.3.1. Cambodia’s performance, Figure B.3.2. Regional comparison by topic and pillar (percent) (percent) CambodiaPhilippines 100 100 Cambodia IndonesiaVietnam PhilippinesIndonesia VietnamSingapore Singapore Pillar Pillar I - Regulatory I - Regulatory Framework Framework entry entry Business Business 90 90 Business Business insolvency insolvency 10 10 80 80 0 0 80 80 70 70 60 62.9 60 62.9 Business Business location location 60 60 Market Market competition competition 40 40 50 50 20 20 40 40 DisputeDispute resolution resolution 0 0 Utility Utility services services 30 30 III - Operational Pillar Pillar Effiency III - Operational Effiency 20 20 54.5 54.5 10 10 39.1 39.1 0 0 Taxation Taxation Labor Labor na e xa de D te r Ta on n ol n o itiion Bu ess imp on s i venon ns cy y Bu ess elss y t ry lists l ion en se s La es InFin ial L r al icer se s es bo v bo tio rad nc tr lutio M t tceore tio io ity vic c na al rtvic nt Tal tra ti l i us en i t sin nsoetit U secrat a ve v xa u sin oce a r r t Pillar Pillar II - Public II - Public Services Services e e ol BuB ess o yo ke msp s s ter n e sin in In atiio tie nc nnc til sin c Bu sin es International International Financial trade tradeFinancial services services u keu U na tera t isp arsp Fi ar i D Bu M Source: World Bank 2024d. Source: World Bank 2024d. areas such as business insolvency, market competition, and business entry. Consequently, the private sector DOMESTIC REVENUE (households and firms) still finds the lower deposit COLLECTION REMAINED interest rate attractive. Despite monetary policy easing and rising foreign currency deposits, sluggish SLUGGISH credit growth persisted due to ongoing challenges in Recent data on Cambodia’s revenue collection the ease of doing business. during the first eight months of 2024 indicate a marginal increase in central government Rising private sector deposits boosted the ratio domestic revenue collection, growing at 4.2 of deposits to nominal GDP to 104.5 percent percent y/y, up from 0.4 percent during the same in August 2024, up from 97.2 percent during period in 2023 (figure 17). This improvement the same period in 2023. The slowdown in credit is consistent with the initial recovery of private growth and the increase in deposit growth helped consumption, as Cambodia’s tax system heavily relies reduce the loan-to-deposit ratio to 120.6 percent in on consumption taxes (taxes on goods and services August 2024, down from 135.0 percent during the or indirect revenues). During the first eight months same period in 2023 of 2024, consistent with the recovery of private consumption, taxes on goods and services grew by 3.7 percent y/y. With an expansion of goods imports, taxes on international trade grew by 6.4 percent. 20 Cambodia Economic Update December 2024 Nontax (and other) revenue surged, growing at 43.7 percent y/y, owing to improved travel and tourism THE OVERALL FISCAL activity. DEFICIT NARROWED During the first eight months of 2024, direct The budget consolidation efforts have effectively revenue, however, shrank by 6.4 percent, owing reduced the overall fiscal deficit. The gap between to the decline in corporate income tax collection. total revenue (including grants) and expenditure Direct revenue, which includes profit and income under Cambodia’s central government operations taxes, remains relatively low, accounting for about narrowed to a deficit of 1.0 percent of GDP during one-third of total tax revenue. This is increasingly the first eight months of 2024, down from a deficit of constrained by the country’s generous tax incentives, 1.6 percent of GDP during the same period in 2023. and the absence of a personal income tax further limits direct revenue growth. Owing to the authorities’ budget consolidation efforts, the projected decline in general government expenditure more than offsets the BUDGET CONSOLIDATION easing of general government revenue (including grants). This results in a reduction in the overall fiscal EFFORTS BEGAN TO deficit, demonstrating the effectiveness of the fiscal CONTAIN EXPENDITURE policies in place to manage and reduce the deficit. The overall fiscal deficit of Cambodia’s general government Budget consolidation efforts contained operations is projected to narrow to 3.0 percent of government outlays, led by lower spending on GDP in 2024, down from an estimated 5.1 percent investment and the wage bill. During the first of GDP in 2023 (figure 19). Revenue (including eight months of 2024, central government budgetary grants) is expected to marginally ease to 15.4 percent expenditure was contained, shrinking by 0.3 percent of GDP in 2024, down from 15.9 percent of GDP in y/y, down from 12.7 percent in 2023 (figure 18). This 2023. Meanwhile, government outlays are projected was driven by a marked decline in capital expenditure, to decline to 18.4 percent of GDP, down from 21.0 which contracted by 30.0 percent y/y. Spending on percent of GDP. wages and compensation also contracted by 10.7 percent, likely caused by a delay in the recruitment External funds have remained crucial in of new civil servants. In contrast, expenditure on financing the fiscal deficit. To finance the projected goods and services grew by 39.7 percent y/y due to overall fiscal deficit of 3.0 percent of GDP, external rising social benefits and transfers to subnational financing, including project and budget support, is administration. expected to cover half of the total (figure 20). The Figure 17. Domestic revenue collection improved Figure 18. Expenditure was contained Central government domestic revenue Central government expenditure (y/y percent change) (y/y percent change) Domestic Domestic revenues revenues Taxes on goods Taxes and services on goods and services Wages Wages and Compensation and Compensation Goods Goods and Services and Services Taxes on international Taxes tradetrade on international Non-tax Non-tax (and (and other) other) revenues revenues Capital Capital expenditures expenditures Expenditures Expenditures Domestic Domestic revenues revenues 25 25 30 30 19.9 19.9 20 20 25 2524.3 24.3 23.8 23.8 20 20 15 15 12.7 12.7 15 15 10 10 8.5 8.5 9.0 9.0 10 10 4.5 4.5 5 5 5 5 0 0 0 0 -2.6 -2.6 0.4 0.4 -0.3 -0.3 -5 -5 -5 -5 -3.6 -3.6 -10 -10 -11.7-11.7 -10 -10 -15 -15 -20 -20 -15 -15 8-m 8-m 8-m 8-m 8-m 8-m 8-m 8-m 8-m 8-m 8-m 8-m 20192019 20202020 20212021 202 202 20232023 20242024 20 208-m 8-m 8-m 8-m 8-m 8-m 8-m 8-m 8-m 8-m 8-m 8-m 20192019 20202020 20212021 20222022 20232023 20242024 Source: Cambodian authorities. Source: Cambodian authorities. Note: m = month. Note: m = month. Cambodia Economic Update December 2024 21 remaining half is expected to be financed by drawing industries; and continued FDI inflows have helped down government deposits (fiscal reserves), which sustain this year’s economic recovery. stood at 11.6 percent of GDP (21.9 trillion riel) by July 2024, down from 12.6 percent of GDP during In the short term, Cambodia’s real GDP growth the same period in 2023. is projected to marginally improve, reaching 5.5 percent in 2025 and 2026. Even though domestic demand is expected to further improve in the next PUBLIC DEBT STOCK two years, supported by an improved job market and well-anchored inflation expectations, the recovery REACHED 24.4 PERCENT remains incomplete. This is because a rebound in OF GDP domestic consumption, which accounts for about two-thirds of GDP, will be dampened by subdued As of mid-2024, Cambodia’s public debt-to- domestic credit growth caused by a prolonged GDP ratio reached 24.4 percent, amounting to downturn in the construction and real estate sector. US$11.27 billion in outstanding debt. Of this In addition, the negative wealth effects of falling total, 99.0 percent, or US$11.16 billion, is public house prices and notably high household debt, with external debt, while the remaining 1.0 percent, debt service payments close to 50% of income, are or US$113 million, is public domestic debt. The likely to constrain consumption going forward. distribution of public external debt shows that 63.0 percent is owed to bilateral creditors and 37.0 percent On the production side, the tourism and to multilateral creditors. During the first half of 2024, hospitality industries are likely to improve the amount of loans signed between Cambodia and further, with projected increases in international its official creditors reached only SDR 237.55 million arrivals. While manufacturing exports—especially (US$313.7 million), compared to the annual ceiling in garments, travel goods, and footwear—will permitted by the 2024 budget law of SDR 1,700 remain susceptible to external demand, agricultural million. production and agroprocessing industries continue to be boosted by bilateral and multilateral free trade Outlook agreements. The travel, transport, and logistics industry should benefit from strong private Using the newly rebased national accounts data, investment in several key infrastructure projects, such this year’s economic growth is projected to reach as a newly built expressway linking Phnom Penh to 5.3 percent (table 2), compared to 5.0 percent Sihanoukville, where a deep-sea port is located; new in 2023, driven mainly by services and goods logistics complex and multimodal port development exports. The surge in manufacturing exports— projects in Kampot and Phnom Penh; and a new especially in garment, travel goods, and footwear expressway project linking Phnom Penh to Bavet, on manufacturing; the revival of the travel and tourism the Cambodia-Vietnam border, among others. Figure 19. General government operations Figure 20. General government surplus/deficit (percent of GDP) and financing (percent of GDP) Total Totalrevenue (and revenue grants) (and grants) Total Totalexpenditure expenditure Overall Overallbalance balance Foreign Foreign financing financing Debt Debt amortization amortization 2525 88 Domestic Domestic financing financing Financing Financing 2020 66 1515 5.1 5.1 5.2 5.2 44 1010 3.4 3.4 3.0 3.0 22 3.2 3.2 55 -0.3 -0.3 00 00 -1.1 -1.1 -5 -5 -2 -2 -10 -10 -4 -4 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023e 2024p 2023e 2024p 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023e 2024p 2023e 2024p Sources: Budget Settlement Laws; World Bank staff estimates and Sources: Budget Settlement Laws; World Bank staff estimates and projections. projections. Note: e = estimate; p = projection. Note: e = estimate; p = projection. 22 Cambodia Economic Update December 2024 Table 2. The macro outlook indicates continued economic improvements Macro outlook 2019 2020 2021 2022 2023e 2024p 2025p 2026p National Accounts and Prices GDP per capita (USD, nominal) 2,258.5 2,131.5 2,217.1 2,357.6 2,524.6 2,696.2 2,886.2 3,089.0 GDP at constant market prices 7.9 -3.6 3.1 5.1 5.0 5.3 5.5 5.5 (% change) Agriculture -0.4 0.6 1.5 0.6 1.6 1.6 1.4 1.5 Industry 13.0 -2.2 8.4 8.2 7.6 7.2 7.1 6.9 Services 6.6 -6.7 -1.8 3.6 3.4 4.5 5.2 5.4 Consumer Price Index (year-average) 1.9 2.9 2.8 5.5 2.1 2.2 2.2 2.2 General Government (% of GDP) Revenue and grants 20.0 17.9 16.2 17.2 15.9 15.4 15.4 15.3 Tax Revenues 14.8 13.6 12.3 13.8 12.4 12.2 12.3 12.5 Taxes on Goods and Services 9.5 8.0 6.9 7.7 6.5 6.3 6.5 6.7 Direct Taxes 3.4 4.1 3.9 4.5 4.5 4.6 4.6 4.7 Taxes on International Trade 2.0 1.6 1.4 1.6 1.5 1.3 1.2 1.1 Grants 1.4 1.4 1.1 0.5 0.8 0.4 0.3 0.1 Expenditure and net lending 18.8 21.3 21.3 20.4 21.0 18.4 18.7 18.5 Overall balance (excluding grants) -0.3 -4.8 -6.3 -3.8 -5.9 -3.4 -3.6 -3.3 Overall balance (including grants) 1.1 -3.4 -5.1 -3.2 -5.1 -3.0 -3.3 -3.2 Foreign financing 2.3 3.5 3.1 3.9 4.0 1.6 2.7 2.7 Net domestic financing -2.8 0.7 2.8 0.2 2.1 2.3 1.4 1.5 (from current savings) Amortization -0.6 -0.8 -0.8 -0.9 -0.9 -0.9 -0.9 -1.0 Money and Credit Broad money (% change) 18.2 15.3 16.4 8.2 12.5 15.0 16.5 17.0 Credit to the private sector (% change) 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 External Sector (US$m unless otherwise indicated) Exports (goods and services) 16,351 16,692 18,566 24,494.7 28,570.2 31,599.6 35,950.2 38,193.9 Imports (goods and services) 18,198 19,955 29,489 40,467.1 32,468.2 34,155.1 37,747.8 39,889.0 Foreign Direct Investment, net inflows -3,561 -3,498 -3,391 -3,425 -3,639 -4,080 -4,351 -4,620 Gross official reserves 18,733 16,237 17,675 17,764.8 19,895.6 20,978.4 22,180.8 23,502.7 (months of imports) 9.7 10.4 8.1 7.0 6.0 5.5 5.0 5.0 Current account (percent of GDP) -5.9 -5.5 -29.1 -18.8 1.3 -1.0 -1.5 -1.8 Exchange rate (riel per US$ average) 4,070 4,077 4,100 4,150 4,110 4,100 4,090 4,080 Total public debt (% of GDP) 20.8 26.6 26.5 27.0 27.5 26.9 27.4 27.4 Memorandum items: Nominal GDP, USD million 36,606 34,949 36,779 39,532 42,779 46,164 49,912 53,934 Sources: Cambodian authorities; World Bank staff estimates and projections. Note: e = estimate; p = projections. Cambodia Economic Update December 2024 23 With subdued private consumption due to the is particularly important. Third, taxes on goods prolonged downturn in the property sector, and services should be strengthened by reviewing external imbalances are expected to improve the VAT rate, exemptions, and zero rating, while in the short to medium term. While remittances introducing ambitious excise tax increases on alcohol and tourism receipts will continue to boost net and tobacco, benchmarking against good practices income and services, FDI should continue to finance in middle-income countries. Introducing a personal the projected modest current account deficit going income tax should be a medium-term objective of forward. In the short to medium term, the authorities’ the next revenue mobilization strategy. Fourth, as efforts to improve revenue collection, implement the authorities are now embarking on a gradual fiscal consolidation, and enhance spending efficiency fiscal consolidation policy, strengthening spending under the Public Financial Management Reform efficiency, or value for money, is essential. Program should narrow the overall fiscal deficit, which is targeted to be equal to or below 5 percent To safeguard financial stability, the immediate of GDP. focus should be on intensified bank supervision: stress testing of individual institutions, Challenges and risks systematic onsite inspections, further alignment of the regulatory framework with international Despite continued improvements, the economy standards, and thorough assessments of the is facing downside risks, including weaker-than- quality of loan portfolios, among others. There expected global demand amid rising debt and was a rapidly growing number of financial institutions elevated borrowing costs, and a sharper-than- in Cambodia until 2022. Therefore, a consolidation of anticipated slowdown in China. Cambodia’s the financial sector through mergers and acquisitions small, open economy, with a trade-to-GDP ratio of should help preserve profit margins by improving 112 percent in 2023, faces risks from geo-economic their efficiency and increasing market share. To fragmentation and rising protectionism. prepare for increasing levels of nonperforming loans, it is crucial to ensure that resolution options are now Domestically, a faster-than-expected increase ready to be deployed as needed, and to strengthen in nonperforming loans could affect macro- the country’s insolvency regime. Efforts to prepare financial stability as the housing market legislation on deposit insurance and bank resolution correction continues. Falling house prices are must continue. negatively impacting the health and stability of the banking sector by increasing the risk of loan defaults Finally, to avoid a slowdown in economic and reducing the value of the collateral held by banks. growth, Cambodia should transition to a more However, the housing market correction can also be sustainable growth pattern through further seen as a natural part of the credit cycle, potentially structural reforms to boost and diversify exports enabling more Cambodian families to enter the of goods, especially manufactured products and housing market at a lower price point. agroprocessing, and services, particularly travel and hospitality. Further efforts are needed to fast- Policy options track ease-of-doing-business reforms. As indicated in the 2024 Business-Ready report, the most challenging Building on the ongoing improvement in post- issue is that Cambodia lacks quality public services to pandemic fiscal management, fiscal reforms to support businesses, especially in areas such as business boost domestic revenue mobilization should insolvency, market competition, and business entry. be a top priority. Ongoing fiscal consolidation Therefore, strengthening the country’s institutions due to slow revenue collection will likely impact to ensure that regulations are effectively implemented social spending and basic education and health and enforced will help create a predictable and services unless fiscal space is restored in the short stable business environment, which is essential for term. First, pandemic-induced fiscal interventions promoting trade and investment. That is the focus of and tax incentives should be discontinued. Second, this edition’s special topic section. introducing stricter governance of tax incentives should minimize the unnecessary revenue losses they may cause. In this regard, developing the capacity to track, manage, and control tax expenditures within medium-term fiscal and budgetary decision-making 24 Cambodia Economic Update December 2024 PART 2. STRUCTURAL, FIRM, AND BUSINESS BARRIERS TO LABOR PRODUCTIVITY Cambodia Economic Update December 2024 25 This Special Focus section of the Cambodia I. INTRODUCTION13 Economic Update provides new, more granular There have been limited contributions to insights on what is required to support a rapid growth from productivity in Cambodia over the transition to a productivity-led economic growth past decade in part due to a disabling business model. The Special Focus explores the underlying environment. Previous World Bank research has structural drivers of firm-level labor productivity in highlighted that Cambodia’s impressive rates of Cambodia as well as the external environment and economic growth over the past decade were largely bureaucratic impediments to higher productivity. driven by factor accumulation (especially from capital) The aim of this work is to help develop and prioritize and that the country’s structural transformation actionable policy recommendations that can inform from agriculture to manufacturing and services government- and private-sector actors. stalled in the past five years.14 One outcome of this growth model is very low levels of labor productivity in Cambodia compared to its peers, across all sectors II. STRUCTURAL of the economy. The previous research traced AND FIRM-LEVEL Cambodia’s poor productivity performance to a relatively difficult business environment and low FOUNDATIONS OF LABOR levels of economic competitiveness, human capital, and governance. PRODUCTIVITY Data from Enterprise Surveys confirms Cambodia will need to significantly improve its relatively low levels of labor productivity among productivity performance in the coming decades Cambodian firms relative to their peers, across to sustain high rates of economic growth and both manufacturing and services (figure S.1). realize its vision of rapidly becoming a high- Median labor productivity among all Cambodian income country. Becoming a high-income country firms is estimated to be US$6,899 per worker and is requires a sixfold increase in income per capita, from higher among services firms (US$8,555) compared around US$2,200 today to around US$13,800. to manufacturing firms (US$4,784). This level of Achieving this goal requires Cambodia to sustain productivity is significantly lower than firms in peer high rates of growth for decades to come and to avoid countries overall (41 percent lower) as well as across the “middle-income trap”—that is, a situation where both the manufacturing (28 percent lower) and a country’s GDP per capita reaches middle-income services sectors (43 percent lower).15 level but it does not develop further into a high- income country—which in turn will likely require Moreover, there is significant variation in labor a transition to a more sustainable, productivity-led productivity among Cambodian firms based growth model. Reaching high‑income status at an on characteristics such as location, sector, and accelerated timeline would likely require Cambodia size (figure S.2). Firms based in the capital, Phnom to match the Republic of Korea’s world‑leading Penh, are 73 percent more productive on average historical productivity performance during its phase than firms based in the more remote, mountainous of rapid development. Korea was at Cambodia’s regions of the north and northeast. In addition, current level of development in 1968 and sustained services firms are 87 percent more productive on total factor productivity growth of 2.2 percent per average than manufacturing firms, with “other year over the subsequent 25 years (1968–93). This services”16 the most productive subsector and “other productivity growth rate is almost two times higher manufacturing” the least productive. Finally, there is than Cambodia’s historical average of 1.3 percent a “U-shaped” relationship between productivity and between 2000 and 2019. firm size, with both small and large firms typically more productive than medium-sized firms. This 13 The Special Focus section was written by Faya Hayati, Hassan Noura and Aka Kyaw Min Maw. 14 Cambodia Economic Update (November 2023) and the Cambodia Second-Generation Systematic Country Diagnostic Update (World Bank 2024). 15 Note that estimates of labor productivity based on Enterprise Survey data differ from estimates based on national accounts and are typically significantly higher. The higher estimate is due to the exclusion from the Enterprise survey of sectors and firms that typically have lower productivity, including agriculture, government, informal firms, and state-owned enterprises. 16 Other services include construction, motor vehicle sales and repair, wholesale, storage, transportation, and communications and information technology. 26 Cambodia Economic Update December 2024 Productivity by sector across countries Figure S.1. Firm-level Labor low data confirms levels of laboramong productivity in Cambodiafirms Cambodian productivity compared vs. peers to peers, byand sector across both manufacturing services firms All firms labor productivity Manufacturing firms labor productivity; Services firms labor productivity Median labor productivity across Median labor productivity across Median labor productivity across all firms based on value-added per employee manufacturing firms, based on value-added per services firms, based (US$, 2022-23) employee (US$, 2022-23) on value-added per employee (US$, 2022-23) Vietnam 24,472 Vietnam 11,071 Vietnam 31,984 Peer Peer Peer 11,679 6,659 14,924 average1 average1 average1 -43% Philippines 7,306 -41% Philippines 6,084 -28% Cambodia 8,555 Cambodia 6,899 Cambodia 4,784 Philippines 7,510 Bangladesh 3,260 Bangladesh 2,821 Bangladesh 5,278 Source: Source: 1. Enterprise Enterprise Peer group Surveys Surveys includes for forBangladesh Vietnam, Bangladesh(2022), Bangladesh Cambodia (2022), Cambodia and Philippines (2023), Philippines (2023), the Philippines (2023), and Vietnam (2023), World Bank. 3 (2023) Note: and Vietnam Enterprise (2023), Surveys World Bank only cover private registered firms in the manufacturing and services sectors. They exclude informal firms and state-owned Productivity by firm characteristics enterprises as well as the agricultural and government sectors. Peer group includes Bangladesh, the Philippines, and Vietnam. Figure S.2. However, thereVariation in is significant labor productivity variation among in labor productivity Cambodian based firms based on firm characteristics on such as their characteristics regional location, sector and size Mean value-added per employee (US$), 2023 By region1 By sector By firm size Other service 14,580 Phnom Penh 11,507 Small 11,215 (5-19) All services 11,809 Plains 11,256 Hospitality 11,632 Total 10,479 Total 10,479 Total 10,479 +73% +87% +68% Retail 9,626 Large 9,500 (100+) Tonle Sap 7,098 Garments 6,865 All manufacturing 6,327 Medium 6,656 Mountains 6,640 (20-99) Other manufacturing 5,974 Source: Source: Enterprise Enterprise Survey Survey for for Cambodia Cambodia (2023), (2023), World World Bank. 1. The Plains includes southern provinces that surround the capital such as Kandal and Prey Bank. 4 Veng. Note: 1.Tonle Sap includes The Plains provinces includes southernsuch as Siem provinces Reap that and Battambang. surround the capitalThe suchMountains as Kandal includes and Preynorthern and Sap Veng. Tonle north-eastern provinces highland such includes provinces such as Siem as Reap and Battambang. The Mountains includes northern and northeastern highland provinces such as Kracheh and Preah Vihear. indicates that medium-sized firms may face unique characteristics such as firm age. These insights point structural barriers to higher productivity. Moreover, to productivity opportunities for Cambodia from econometric analysis indicates that these relationships accelerating the country’s structural transformation between labor productivity and location, sector, toward higher‑productivity sectors and subsectors and size are statistically significant and robust.17 as well as from addressing structural barriers faced by In contrast, there is limited and non-significant medium-sized firms and firms located in more rural variation in average labor productivity by other basic and less developed parts of the country. 17 World Bank, forthcoming (a). Cambodia Economic Update December 2024 27 Productivity by firm practices Figure There S.3. is also Variation in labor in variation labor productivity productivity among based on firm practices Cambodian such firms as management, by practice training, technology and market orientation Mean value-added per employee (USD), 2023 By top manager profile By training programs By website status By market orientation* Top Has Export- Has manager 12,420 training 13,183 10,781 orientated 7,177 website manufacturing not owner program Total Total 10,479 +20% Total 10,479 +29% Total 10,479 +5% 6,327 +29% manufacturing Doesn’t Domestically- Owner Doesn’t have orientated 5,580 also top 10,371 10,184 have 10,231 training manufacturing manager website program Source: Enterprise Survey for Cambodia (2023), 5 Source: World Enterprise Survey for Cambodia (2023), World Bank. Bank. Note: * Manufacturing firms only. There is also significant, albeit smaller, variation Asia,19 Cambodia’s productivity frontier firms (top in labor productivity among Cambodian firms 10th percentile) are significantly more productive based on practices related to personnel, the use than its productivity laggards (bottom 10th of technology, and market orientation (figure percentile), by 13 times, on average (and almost four S.3). Cambodian firms with more advanced personnel times more productive than the “typical” median practices, while still a small share of firms, are typically firms). This pattern is observed across all sectors and more productive. Specifically, firms managed by an subsectors of the economy but is stronger across independent chief executive officer (CEO) (just 5 service sectors, where frontier firms are typically 18 percent of firms), are 20 percent more productive than times more productive than laggard firms (compared firms managed by their owner. There is also a significant to eight times more productive in manufacturing). positive relationship between better management practices and labor productivity. Similarly, firms that Moreover, Cambodia’s frontier firms have offer formal employee training programs (just 10 distinct characteristics and practices. At the percent of firms), are 29 percent more productive. In economy-wide level, frontier firms are overwhelmingly addition, firms that leverage technology—for example, services firms (97 percent), with almost half in the firms that have a website and use electronic payments— “other services” subsector that includes knowledge are typically more productive. Econometric analysis sectors such as information technology (IT). They indicates that these relationships are statistically are also overwhelmingly small (91 percent), located significant in most sectors.18 Finally, manufacturing in Phnom Penh or the Plains (90 percent), fully firms that are export orientated are 29  percent more domestically owned (96 percent), and domestically productive on average than those focused on the orientated (97 percent). Within the manufacturing domestic market. These insights point to productivity sector, however, frontier firms are more likely to be opportunities for Cambodia from encouraging the large (64 percent), have some foreign ownership faster diffusion of best practices across firms as well as (60 percent), and be export-orientated (64 percent). greater international orientation. Moreover, frontier firms are also more likely to have adopted best practices such as having an independent Finally, there is also significant within‑sector CEO (10 percent compared to 5 percent nationally) variation in labor productivity among and employee training programs (15 percent Cambodian firms, with a large gap between compared to 10 percent), and to leverage technology. frontier and laggard firms (figure S.4, panel A). These characteristics are broadly consistent with Consistent with patterns observed globally and in regional research, which identified that frontier 18 World Bank, forthcoming (a). 19 See, for example, World Bank. 2024f. 28 Cambodia Economic Update December 2024 Productivity by performance decile Figure S.4. Variation in labor productivity among Cambodian firms based on their performance tier and compared to peers Finally, consistent with regional findings, Cambodia’s frontier firms are significant more productive than its laggards Panel A Average labor productivity in Cambodia by sector by performance tier Mean value-added per employee by sector (in USD ‘000) Laggard firms (bottom 10%) +15x Median (50th percentile) 46 Frontier firms (top 10%) +18x 35 +10x +18x 30 +13x 26 25 +8x +8x +8x 14 14 14 10 10 9 7 7 5 5 5 2 2 3 3 2 2 2 1 Performance of frontier vs. laggard firms by country Garments Other All Retail Hospitality Other service All Total manufacturing manufacturing services However, Cambodia’s frontier firms are not as far ahead of laggards relative to their peers in other countries (in all sectors) Source: Enterprise Survey for Cambodia (2023), Panel B 6 World Bank. between frontier and laggard firms across countries by sector Multiplier Ratio between mean value-added per employee in frontier firms (top 10%) vs. laggard firms (bottom 10%) Cambodia Peer group average1 -88% -84% -81% 107 -91% 95 -78% 93 -89% 84 81 75 -82% 57 -47% 18 15 18 14 13 8 8 8 10 Garment Other All Retail Hotel and Other service All Total manufacutring manufacturing manufacturing restaurant services Net impact: Source: lower Surveys Enterprise firm averagefor productivity Bangladesh in Cambodia (2022), is driven Cambodia (2023), by the relative C underperformance of its frontier firms Panel Philippines 7 1. Peer group includes Vietnam, Bangladesh and Philippines (2023) and Vietnam (2023), World Bank Laggards (bottom 10%) Median (50th percentile) Mean (All firms) Frontier (top 10%) Average firm labor productivity, Average firm labor productivity, Average firm labor productivity, Average firm labor productivity, mean value-added mean value-added mean value-added mean value-added per employee per employee per employee per employee (USD, 2023 or latest available) (USD, 2023 or latest available) (USD, 2023 or latest available) (USD, 2023 or latest available) Cambodia 1,915 Vietnam 24,472 Vietnam 64,890 Vietnam 306,986 Peer Peer Peer Philippines 1,500 11,679 30,579 153,874 average average average +33% Vietnam 1,439 Philippines 7,306 -41% Philippines 14,066 Bangladesh 82,614 -66% -83% Peer 1,438 Cambodia 6,899 Bangladesh 12,780 Philippines 72,023 average Bangladesh 1,376 Bangladesh 3,260 Cambodia 10,479 Cambodia 25,402 Source: Enterprise Surveys for Bangladesh (2022), Cambodia (2023), Philippines 8 Source: Enterprise Surveys for Bangladesh (2022), Cambodia (2016 and 2023), the Philippines (2023), and Vietnam (2023), World Bank. (2023) and Vietnam (2023), World Bank Note: Peer group includes Bangladesh, the Philippines, and Vietnam. Cambodia Economic Update December 2024 29 firms in Asia are typically concentrated in digital- that Cambodia’s lower productivity levels are driven intensive sectors and are more likely to use advanced by the relative underperformance of its frontier firms. technologies.20 These insights point to productivity These insights point to productivity opportunities opportunities for Cambodia from encouraging and for Cambodia from encouraging and incentivizing its incentivizing laggard and median firms to strive to frontier firms to do even better and to strive harder learn from and catch up to sectoral and national to reach the regional and global productivity frontier. frontier firms on various best practices. Despite their national success, however, III. OVERVIEW OF Cambodia’s frontier firms remain well below the regional productivity frontier, which OBSTACLES TO DOING hinders national innovation and drags down BUSINESS national productivity levels. Despite being few in number, frontier firms play an important role in The top obstacles to doing business cited by driving national innovation and helping establish Cambodian firms today are informal firms, and continuously push out the national productivity taxes, corruption, courts, and transport (figure frontier.21 However, Cambodia’s frontier firms are S.5). Cambodian firms most commonly cite the not as far ahead of laggards compared to their peers in practices of informal competitors (78 percent of other countries, where the productivity gap is much firms) as an “obstacle” to doing business, followed wider (figure S.4, panel B). Moreover, Cambodia’s by tax rates (68  percent), corruption (57 percent), national frontier firms are far below the regional and courts (57 percent). Similarly, Cambodian firms productivity frontier (which itself is below the most commonly cite the informal sector (42 percent global productivity frontier set by firms in advanced of firms) as the ”biggest obstacle” to doing business, economies). For example, the average productivity followed by tax rates (32 percent), tax administration level of Cambodia’s frontier firms (around (9 percent), and transport (6 percent). In contrast, US$25,000 per worker) is approximately the same as access to finance, workforce education, and labor the typical or median firm in Vietnam and 83 percent regulations consistently feature in the bottom five below the average of its peer frontier firms (figure S.4, obstacles cited by Cambodian firms. panel C). One implication of this performance gap is Figure S.5. Ranking Business environment remains to doingvery of obstacles in Cambodiavs. challenging business overpeers time and compared to peers Top 5 Bottom 5 External Bureaucratic Worse Better Obstacles today Biggest obstacles today Relative obstacles, Obstacles over time Share of Cambodian firms choosing Share of Cambodian firms choosing Cambodia vs. peers1 Difference in share of Cambodian this topic as an obstacle (%), 2023 this topic as the biggest obstacle Difference in share of firms firms choosing this as an obstacle, (%), 2023 chooising topic as an obstacle, Percentage points, 2023 vs. 2016 Percentage points, 2022/23 Informal sector 78% Informal sector 42% Courts 39% Informal sector 6% Tax rates 68% Tax rates 32% Corruption 26% Tax rates 6% Corruption 57% Tax administration 9% Tax rates 21% Courts 2% Courts 57% Transport 6% Informal sector 18% Electricity 1% Tax administration 52% Crime 4% Crime 17% Labor regulations -2% Transport 48% Electricity 2% Trade regulations 15% Corruption -9% Business documents 48% Trade regulations 2% Tax administration 14% Tax administration -9% Political instability 45% Courts 1% Business documents 14% Workforce education -10% Crime 45% Land 1% Political instability 14% Political instability -14% Electricity 43% Business documents 1% Labor regulations 10% Business documents -18% Trade regulations 41% Labor regulations 0% Transport 4% Transport -18% Workforce education 39% Workforce education 0% Workforce education 1% Trade regulations -21% Labor regulations 38% Finance 0% Land 1% Crime -23% Land 38% Corruption 0% Finance -8% Land -28% Finance 37% Political Instability 0% Electricity -13% Finance -28% Source: Enterprise Surveys for Bangladesh (2022), Cambodia (2016 and 2023), the Philippines (2023), and Vietnam (2023), World Bank. Source: Enterprise Surveys for Bangladesh (2022), Cambodia (2016 and 2023), Philippines (2023) and Vietnam (2023), World Bank 10 1. Peer group includes Vietnam, Bangladesh and Philippines Note: Peer group includes Bangladesh, the Philippines, and Vietnam. 20 World Bank. 2024f. 21 World Bank. 2024f. 30 Cambodia Economic Update December 2024 Overall, the business environment in Cambodia environment in these less urban, more remote parts remains more challenging than in peer countries, of the country. Similarly, medium-sized firms (which despite significant improvements over time. Most have the lowest productivity) are significantly more topics became less of a concern for Cambodian firms concerned about all topics than small firms (which between 2016 and 2023, except for informal firms have the highest productivity). This suggests that and electricity. However, comparing Cambodian medium-sized firms either objectively face bigger firms with their peers indicates that Cambodian obstacles to doing business, are less capable of firms are more concerned about almost all topics, navigating business obstacles, or both. For example, suggesting they experience a more challenging it might become harder to deal with obstacles as firms business environment. This result is consistent with scale and are no longer small and agile, but do not yet the findings of the World Bank B-Ready Report,22 have the capabilities and organizational processes of which finds that Cambodia has a much worse overall large firms. In addition, manufacturing and frontier business environment than regional leader Singapore, firms are somewhat more concerned about taxes and or than Vietnam, the Philippines, or Bangladesh. electricity compared to services and laggard firms, but That report also found that Cambodia performs less concerned about informal firms. particularly poorly on the provision of public services and on topics such as business insolvency, market The rest of this Special Focus takes a closer look at competition, and business entry. the external and bureaucratic obstacles to doing business. External obstacles indirectly impact firms, Moreover, there is significant variation in while bureaucratic and governance obstacles directly concerns among Cambodian firms based on impact firms when they interact with government characteristics such as location, size, sector, officials and processes and comply with rules. Three and performance tier (figure S.6). Firms located of the top five “biggest obstacles” to doing business in in mountainous regions (and which have the lowest Cambodia are external (figure S.5, above), while four productivity) are significantly more concerned of the top five “obstacles” are bureaucratic. The next about all topics than firms in the capital Phnom two sections of this Special Focus explore external and Penh (which have the highest productivity), bureaucratic obstacles to doing business in Cambodia which indicates a more challenging doing business in more detail. Figure S.6. Ranking Difference of obstacles in obstacles byto firm doing characteristics business in Cambodia by firm characteristics Worse Better Firms in mountains Medium-sized firms Manufacturing firms Frontier firms Difference in share of firms Difference in share of firms Difference in share of firms Difference in share of firms choosing as an obstacle vs Phnom choosing as an obstacle vs choosing as an obstacle vs choosing as the biggest obstacle vs Penh, Percentage points small firms, Percentage points Services firms, Percentage points laggard firms, Percentage points Political instability 36% Crime 31% Tax adminsitration 20% Tax administration 9% Electricity 33% Access to land 26% Electricity 17% Electricity 5% Business documents 30% Access to finance 26% Tax rate 10% Crime 4% Tax adminsitration 29% Tax adminsitration 25% Political instability 8% Tax rates 2% Access to finance 28% Electricity 25% Crime 7% Transport 1% Workforce education 27% Labor regulations 25% Transport 7% Trade regulations 1% Access to land 27% Workforce education 24% Business documents 5% Land 1% Trade regulations 27% Transport 24% Workforce education 4% Political instability 0% Crime 26% Business documents 23% Access to land 4% Labor regulations 0% Tax rate 26% Regulatory environment 22% Access to finance 4% Corruption 0% Labor regulations 26% Corruption 21% Labor regulations 4% Business documents 0% Transport 21% Courts 19% Regulatory environment 4% Courts 0% Corruption 18% Political instability 18% Corruption 4% Finance 0% Courts 16% Tax rate 12% Courts -1% Workforce education -2% Informal firms 12% Informal sector 1% Informal firms -12% Informal firms -22% Source: Enterprise Survey for Cambodia (2023), World Bank 11 Source: Enterprise Survey for Cambodia (2023), World Bank.Note: Peer group includes Bangladesh, the Philippines, and Vietnam. 22 World Bank 2024d. Cambodia Economic Update December 2024 31 direct competition with them (figure S.7). The IV. EXTERNAL OBSTACLES practices of informal firms are a greater concern for TO DOING BUSINESS firms located outside the capital, especially for firms located in the Plains (53 percent). The informal sector This section explores four external obstacles is also more of a concern for laggard firms (68 percent), to doing business: (a) competition with informal hospitality firms (51 percent), retail firms (50 percent), firms; (b) infrastructure (transport, electricity, and small firms (47 percent), and domestically orientated internet services); (c) access to skills; and (d) access to firms (45 percent). In contrast, informal firms are less finance. of a concern for manufacturing (especially garment firms), larger and export‑orientated firms, and firms A. Informal firms based in Phnom Penh. These patterns indicate that Most Cambodian firms are competing with the benefits of registration may not be worth it for informal firms and view this as their top many smaller and less sophisticated firms that are in obstacle to doing business. In 2023, 85 percent of head‑to-head competition with informal firms, which Cambodian firms reported that they were competing likely creates disincentives for firms to formalize. with informal or unregistered firms, ranging from 72 percent among “other manufacturing” firms B. Infrastructure to 96 percent among garment firms, which is not Cambodian firms are moderately concerned surprising given widespread informality across the about basic infrastructure, with transport Cambodian economy. Moreover, Cambodian firms their top concern (figure S.5, above). Transport overwhelmingly view competition with informal is the sixth most cited obstacle to doing business firms as unfair, with “the practices of competitors in Cambodia (48 percent of firms) and remains a from the informal sector” the most cited obstacle (78 bigger concern than peers despite improvements over percent of firms) and biggest obstacle (42 percent) time. In addition, electricity is the 10th most cited to doing business (figure S.5, above). In addition, obstacle for Cambodian firms (43 percent) but is concerns about the informal sector have increased significantly less of a concern than for peers. Internet over time and are a significantly bigger concern for services in Cambodia appear to be comparable to Cambodian firms compared to their overseas peers. peers, with 88 percent of Cambodian firms having Moreover, concerns about informal firms access (compared to 84 percent among peers) and are typically more acute for smaller and less 36 percent experiencing disruptions (like peers). Key sophisticated firms drivers of these concerns about basic infrastructure Competition (with informal sector) that are more likely to be in A Concerns about the informal sector more acute for firms outside the capital as for hospitality, small, Figure S.7. Informal dom-focused sector and laggard obstacles in Cambodia firms by firm characteristics Share of Cambodian firms choosing practices of the informal sector as the biggest obstacle to doing business (%), 2023 By region By sector By firm size By market focus By performance tier Hospitality 51% Plains 53% Small 47% Domestically Laggard (5-19) 45% 68% Retail 50% orientated firms Tonle Sap 46% All services 45% Total 42% Total 42% Frontier Mountains 43% +21 +30 +39 Total 42% +30 46% +26 firms Other manuf. 42% Medium 38% (20-99) Total 42% All manuf. 34% Other service 31% Export Large 15% Total 42% 8% orientated Phnom Penh 32% (100+) Garments 21% Source: Enterprise Survey for Cambodia (2023), World Bank 13 Source: Enterprise Survey for Cambodia (2023), World Bank. 32 Cambodia Economic Update December 2024 Basic infrastructure (electricity) B S.8. electricity Figureabout Concerns Electricity obstacles more in Cambodia acute for firms in mountains by firm as well characteristics as for manufacturing firms who use it as key production input Share of Cambodian firms choosing electricity as an obstacle to doing business (%), 2023 By region By sector By firm size By market focus By performance tier Garments 75% Mountains 80% Large 70% Export Laggard (100+) 70% 60% All manuf. 57% orientated firms Phnom Penh 47% Other manuf. 46% Medium 62% (20-99) Retail 45% Total 43% +42 +41 +33 Total 43% +30 Total 43% +30 Total 43% Total 43% Tonle Sap 39% All services 39% Hospitality 37% Domestically Frontier Small 40% 30% 37% orientated firms Plains 38% (5-19) Other service 34% Source: Enterprise Source: Surveyfor EnterpriseSurvey forCambodia Cambodia(2023), World (2023), Bank World Bank. 14 include poor domestic and international road and rail C. Access to skills connectivity, growing urban congestion in Phenom Penh, relatively high electricity prices, slow internet While most Cambodian firms are not very speeds, and poor digital services for utilities.23 concerned about workforce skills (and less so than peers), they are a bigger concern among However, concerns about infrastructure Cambodia’s larger and export-oriented firms are typically more acute for firms located in (figure S.9). An inadequately educated workforce mountainous provinces of Cambodia and for is one of the five lowest concerns among Cambodian firms where infrastructure is a more critical firms (39 percent of all firms cite this as an obstacle), production input. Transport is more likely to and these concerns have declined over time and are be cited as an obstacle by firms located in the lower than most peers (figure S.5, above). However, mountainous regions of Cambodia (79 percent) there is significant variation in concerns about and medium-sized firms (68 percent), and by firms workforce education levels among Cambodian firms that must physically move goods such as retail firms based on their characteristics. For example, workforce (56 percent) and garment firms (56 percent). There skills are far more likely to be cited as an obstacle by is even more variation in concerns about electricity firms located in the remoter, mountainous regions (figure S.8). Electricity is far more likely to be cited of Cambodia (73 percent), where access to schooling as an obstacle by firms located in the mountainous is poorer. Moreover, skills are also more likely to regions of Cambodia (80 percent), where electricity be cited as an obstacle by medium-sized firms (59 services are poorer. However, electricity is also percent), garment firms (57 percent), export-oriented more of a concern for manufacturing firms (57 firms (50 percent), large firms (48 percent), and firms percent), especially garments (75 percent), which located in the capital (46 percent). This cross-section depend on electricity to run their operations and suggests that skills are in fact a significant concern for which are typically larger and export orientated.24 some firms that are likely among the country’s more Finally, garment firms are also more likely to report sophisticated. This finding is also consistent with disruptions in internet services (51 percent). previous research that found that major Cambodian firms (as well as government officials) view education 23 Cambodia Second-Generation Systematic Country Diagnostic Update (World Bank 2024); and B-Ready Report (World Bank 2024d). 24 There is a strong correlation between garment, large, and export-orientated firms in Cambodia. Cambodia Economic Update December 2024 33 Workforce education C Figure about Concerns S.9. skills Skills acute foramong obstacles more Cambodian firms in remote firms mountainous based regions on their as well characteristics as for garment, larger and laggard firms Share of Cambodian firms choosing inadequately educated workforce as an obstacle to doing business (%), 2023 By region By sector By firm size By market focus By performance tier Garments 57% Mountains 73% Medium 59% Export Laggard (20-99) 50% 56% Retail 49% orientated firms Phnom Penh 46% All manuf. 42% Large 48% (100+) Total 39% Total 39% +43 +29 +24 Total 39% +12 Total 39% +34 All services 38% Total 39% Plains 32% Hospitality 35% Other manuf. 33% Domestically Frontier Small 38% 23% 35% orientated firms Tonle Sap 30% (5-19) Other service 28% Source: Survey for Enterprise Survey Source: Enterprise for Cambodia Cambodia (2023), (2023),World WorldBank Bank. 15 Workforce education C Figure S.10. Summary of workforce education characteristics among Cambodian firms over time and compared Gap to peers in perception vs. reality on skills, with Cambodian firms less concerned than their peers despite having fewer skilled workers Obstacle by country Workforce finished high school Workforce high-skilled Share of firms choosing inadequately educated Average proportion of permanent, full-time Average proportion of high-skilled employees workforce as an obstacle by country (%) employees completing high-school by country by country (%) (%) Cambodia 2016 49% Vietnam 90% Bangladesh 48% Philippines 44% Philippines 87% Peer average1 44% -10 Vietnam 43% Peer average1 69% -1 Philippines 44% Cambodia 2023 39% Cambodia 2023 69% -11 +1 +8 Vietnam 41% Peer average1 38% Cambodia 2016 61% Bangladesh 28% Bangladesh 31% Cambodia 33% Source: 1. Peer Enterprise Enterprise group Surveys Surveys includes forBangladesh for Vietnam,Bangladesh Bangladesh (2022), (2022), Cambodia Cambodia and Philippines (2016 (2016 andand 2023), 2023), the Philippines (2023), and Vietnam (2023), World Bank. Philippines 16 (2023) and Vietnam Note: Peer (2023), World group includes Bank the Philippines, and Vietnam. Bangladesh, and skills as a growing concern and the biggest The average share of full-time employees among obstacle to Cambodia’s development over the next Cambodian firms that have finished high school is five years.25 69 percent, which is an improvement from 2016 (61 percent), but still significantly below Vietnam Moreover, Cambodian firms are less likely in (90 percent) and the Philippines (87 percent). In practice to have skilled workers than their overseas addition, only 33 percent of Cambodian employees peers (figure S.10), due to their positioning are classified as “high skilled,” below the peer average at the low-skilled end of the value chain. of 44 percent. The gap between perception and 25 Cambodia Second-Generation Systematic Country Diagnostic Update (World Bank 2024). 34 Cambodia Economic Update December 2024 reality among Cambodian firms reflects that most D. Access to finance are positioned in segments and value‑chains that primarily rely on low‑skilled workers. In other words, Most Cambodian firms are also not very most Cambodian firms are stuck in a low-skilled, concerned about access to finance (and less so low-wage equilibrium and many foreign investors are than peers), although this is a bigger concern only coming to Cambodia to take advantage of this among Cambodia’s larger and potentially more equilibrium (especially in manufacturing). Ultimately, sophisticated firms. Access to finance is the lowest Cambodia needs to transition to a high-skilled, high- concern for Cambodian firms (cited by 37 percent wage equilibrium to become a high-income country. as an obstacle), and these concerns have declined Access to finance D Cambodian firms less concerned about accessing finance than their peers despite Figure S.11. Access to finance variables among Cambodian firms compared to peers and by sector being less likely to access financial instruments Panel A Access to finance an obstacle by Access to line of credit by country; Leverage ratio country; Share of firms choosing access Share of firms having lines of credit or Average proportion of outstanding loans to finance as an obstacle by country (%) loans from financial institutions by as a share of sales by country (%), country (%), 2022/23 2022/23 Cambodia 2016 66% Peer average1 33% Peer average1 17% -28 Peer average1 45% -19 -14 -8 Cambodia 14% Cambodia 3% Cambodia Access 2023 to finance 37% D Garment firms Source: Enterprise are Surveys for most the (2022), Bangladesh concerned Cambodia about (2016 and 2023), access Philippines to (2023) and finance Vietnam and (2023), World least likely to use financial instruments Bank 17 Peer groupB Panel 1. includes Vietnam, Bangladesh and Philippines Finance an obstacle by sector Share of Line of credit by sector Leverage ratio by sector Cambodian firms choosing access to finance as Share of Cambodian firms having lines of Average proportion of outstanding loans as a an obstacle by sector (%), 2023 credit or loans from financial institutions by share of sales by sector (%), 2023 sector (%), 2023 Garments 54% Hospitality 24% Other service 5.2% All services 17% +2 Retail 45% All services 3.6% +10 +17 Other service 17% All manufacturing 41% Total 3.2% Total 14% Hospitality 3.0% Total 37% Retail 10% All services 36% Other manufacturing 3.0% -3 Other manufacturing 7% -12 Retail 2.7% Hospitality 34% -9 All manufacturing 5% Other manufacturing 33% All manufacturing 2.0% Garments 2% Other service 28% Garments 0.5% Source: Enterprise Survey for Cambodia (2023), World Bank 18 Source: Enterprise Surveys for Bangladesh (2022), Cambodia (2016 and 2023), the Philippines (2023), and Vietnam (2023), World Bank. Note: Peer group includes Bangladesh, the Philippines, and Vietnam. Cambodia Economic Update December 2024 35 significantly over time and are below peers (figure utilization rates. For example, garment firms—which S.5, above). The lack of concern about access to are the most concerned about access to finance—are finance is perhaps not surprising given a credit boom the least likely to have a line of credit (2 percent) and in Cambodia over the past decade. However, access have the lowest average leverage ratios (0.5 percent). to finance is more likely to be cited as an obstacle by firms located in the remoter, mountainous regions of Cambodia (73 percent), where financial services V. BUREAUCRATIC are more limited. Moreover, they are also more likely to be cited as an obstacle by medium-sized firms OBSTACLES TO DOING (59 percent), garment firms (54 percent), export- BUSINESS orientated firms (47 percent), large firms (45 percent), This section explores four bureaucratic and and firms located in the capital (45 percent). This governance factors: (a) taxes, both rates and cross-section suggests that access to finance could in administration; (b) corruption and informal fact be a significant concern for some firms that are payments; (c) courts, including independence in likely to be among the country’s more sophisticated. resolving commercial disputes; and (d) the timeliness Moreover, Cambodian firms are less likely of critical business documents and processes delivered in practice to use financial instruments than by government. their peers and, in turn, have lower leverage ratios (figure S.11, panel A). Only 14 percent of A. Taxes Cambodian firms have a line of credit or a loan from a Most Cambodian firms view taxes, both the financial institution, 19 percentage points below the rates and their administration, as top obstacles peer average of 33 percent. As a result, Cambodian to doing business, especially for larger, export- firms also have much lower average leverage ratios oriented, and manufacturing firms. Tax rates and of just 3 percent, 14 percentage points lower than tax administration are, respectively, the second- and the peer average of 17 percent. This is somewhat third-highest “biggest obstacles” to doing business in counterintuitive amidst a credit boom and given that Cambodia, have become significantly bigger concerns most firms say they are not concerned about access to over time, and tax rates are a bigger concern for finance. There is also significant variation in the use of Cambodian firms than their peers (figure S.5, above). financial instruments (and leverage ratios) by sector Moreover, tax administration is more likely to be (figure S.11, panel B) and, as expected, a negative Tax administration cited as an obstacle to doing business by firms located correlation between concerns about access and A away from the capital (figure S.12), as well as by Concerns about tax admin. more acute for firms in the mountains as well as for garment, export-orientated and larger firms Figure S.12. Tax administration obstacles among Cambodian firms based on their characteristics Share of Cambodian firms choosing tax administration as an obstacle to doing business (%), 2023 By region By sector By firm size By market focus By performance tier* Garments 75% Mountains 79% Large 74% Export Frontier (100+) 77% 16% All manuf. 67% orientated firms Tonle Sap 56% Retail 66% Medium 71% (20-99) Other manuf. 62% Total 52% +29 +45 +28 Total 52% +28 Total 9% +9 Total 52% Total 52% Plains 50% All services 47% Hospitality 40% Domestically Laggard Small 49% 7% 46% orientated firms Phnom Penh 50% (5-19) Other service 30% Source: Enterprise Survey for Cambodia (2023), World Bank. 20 Source: * Enterprise The biggest Survey obstacle for Cambodia to doing (2023), business, as World opposed to anBank. obstacle. Note: *Figures for the ‘biggest’ obstacle to doing business shown (instead of figures for ‘an’ obstacle). 36 Cambodia Economic Update December 2024 manufacturing firms (67 percent), especially garments tax officials, although this has declined over time; (iii) (75 percent), export-orientated firms (77 percent), a higher likelihood of an expectation or request for large firms (74 percent), and medium-sized firms (71 an informal payment or gift to officials in these tax percent). Moreover, tax administration is more of a meetings, although this has declined over time; (iv) a concern for frontier firms (with 16 percent citing it as higher likelihood of involving paid external auditors the biggest obstacle). In contrast, tax administration in these tax meetings; (v) a higher likelihood of is less of a concern for services firms (apart from retail outsourcing tax reporting; and (vi) a lower likelihood firms), domestically orientated firms, and small firms. of filing taxes electronically. There is also considerable A similar pattern of variation is observed among firms variation among Cambodian firms depending on about tax rates. their characteristics. For example, garment firms (90 percent) and large firms (95 percent) are far more likely The concerns about both policy and tax to be inspected by tax officials, and far more likely administration in Cambodia appear to be to report an informal payment. Other contributing driven by a heavy and costly compliance burden, factors to poor tax administration include weaknesses combined with a high incidence of informal around tax audits and related disputes, as well as payments, rather than “tax rates” per se. The transparency.27 For example, there is a lack of a standard corporate income tax rate in Cambodia is dedicated audit quality assurance function, with no 20 percent, which is broadly in line with the average routine evaluation of audit impacts on compliance. in ASEAN (21 percent), Vietnam (20 percent), Bangladesh (22.5 percent), and the Philippines (25 B. Corruption percent).26 In contrast, tax administration is more cumbersome and costly (in terms of time and money) Corruption remains a more widespread concern in Cambodia (figure S.13). This reflects not so much for Cambodian firms relative to their peers, the direct cost of mandatory contributions, but despite significant improvements over time, the large administrative burden and the prevalence reflecting still widespread and large informal of informal payments. Compared to their peers, payments. Most measures of corruption in Cambodian firms report (i) a higher likelihood of Cambodia declined (that is, improved) significantly being visited or inspected by tax officials, and this has between 2016 and 2023, albeit off relatively high increased Tax over time; (ii) a higher number of visits by administration starting points. However, corruption remains A Figure S.13. Cambodian Potential firms experience drivers a more of tax concerns cumbersome among and costly tax Cambodian compliance process vs.firms peers over time and compared to peers Cambodia Peer group average Increased since 2016 Decreased since 2016 +39 +39 64% 64% +5 +5 +1.5 46% +26 44% 41% 3.8 39% 36% 25% 2.3 25% 10% Inspections / visits by Number of meetings with Tax gift incidence Involvment of external Outsourcing of tax Paper-based filing of tax officials (% firms) tax officials during tax meetings auditors in tax meetings reporting (% firms) taxes (% firms) (%) (%) Source: Enterprise Enterprise Surveys Surveys for for Bangladesh Bangladesh (2022), Cambodia (2022), Cambodia (2016 Philippines (2016 and 2023), and 2023), (2023) the Philippines (2023), and Vietnam (2023), World Bank. 21 1. Peer group includes Vietnam, Bangladesh and Philippines Note: and Peer group Vietnam World Bangladesh, includes (2023), Bank. the Philippines, and Vietnam. 26 World Bank, forthcoming (b). 27 B-Ready Report (World Bank 2024d). Cambodia Economic Update December 2024 37 Corruption B Figure Despite S.14. Drivers improvements of corruption over time, concerns informal payments remain 6x more Cambodian among firms prevalent and 3x biggerover time and for Cambodian compared firms vs. peers to peers Incidence by country Size by country Cambodia incidence by setting Share of firms reporting informal payments to Average payment (% of total sales) made to Share of Cambodian firms reporting informal government officials to get things done by government officials to get things done by payments to get things done by topic / setting country (%) country (%) (%) 2016 2023 Cambodia 2016 58% Cambodia 2016 1.8% -13 -0.2 59% Cambodia 2023 45% Cambodia 2023 1.6% Tax -23 36% Vietnam 15% +37 Philippines 0.5% 1.3 63% Import -48 Peer average1 8% Bangladesh 0.4% permits 15% Bangladesh 7% Peer average1 0.3% 50% Business -49 licenses Philippines 3% Vietnam 0.1% 1% Enterprise Source: 1. Surveys Enterprise Peer group for Bangladesh Surveys includes Vietnam, (2022), Cambodia for Bangladesh Bangladesh (2022), (2016 and (2016 Cambodia and Philippines Philippines 2023),and (2023) 2023), the Philippines (2023), and Vietnam (2023), World Bank. 22 and Vietnam Corruption Note: (2023), Peer group Bank. World Bangladesh, includes the Philippines, and Vietnam. B Figure Informal S.15. Incidence payments are more prevalent in some regions of informal paymentsand among amonggarment, retail, young Cambodian and larger firms firms by their characteristics Share of Cambodian firms reporting informal payments to government officials to get things done (%), 2023 By region By sector By firm size By frim age By performance tier Garments 64% Young Mountains 88% Medium 67% 66% (6-10) Laggard (20-99) 67% Retail 53% firms Phnom Penh 51% All manuf. 49% Total 45% Large 57% (100+) Total 45% Old Total 45% +51 +30 +26 41% +33 Total 45% +33 (>21) All services 44% Total 45% Other service 44% New Tonle Sap 39% 39% (<5) Other manuf. 41% Frontier Small 34% 40% Medium firms Plains 37% (5-19) 34% Hospitality 34% (11-20) Source: Enterprise Survey for Cambodia (2023), World Bank. 23 Source: Enterprise Survey for Cambodia (2023), World Bank. the third-highest “obstacle” to doing business in to just 8 percent of peers. Moreover, Cambodian Cambodia and is a significantly bigger concern firms report average payments worth 1.6 percent for Cambodian firms than their peers (figure of total sales compared to just 0.3 percent among S.5, above). Moreover, informal payments to peers. Cambodian firms are most likely to make an government officials “to get things done” remain informal payment during meetings with tax officials roughly six times more prevalent in Cambodia (36 percent report a payment), followed by meetings relative to their peers and roughly three times related to import permits (15 percent). Business larger, despite reductions over time (figure S.14). licenses have the lowest incidence of informal Overall, 45 percent of Cambodian firms reported payments (1 percent), which is a sharp reduction making an informal payment in 2023, compared from 50 percent in 2016. This impressive reduction 38 Cambodia Economic Update December 2024 Commercial courts C Figure S.16. Perceptions about court independence in commercial disputes among Cambodian firms over compared time andfirms Cambodian peers to than more likely their peers to think that courts are biased, especially in some sectors and among smaller firms Perceptions of court bias by country Perceptions of court bias by sector Perceptions of court bias by firm size Share firms that disagree courts are independent Share of Cambodian firms that disagree courts Share Cambodian firms that disagree courts are and impartial in resolving commercial disputes are independent and impartial in resolving independent and impartial in resolving by country (%) commercial disputes commercial disputes by sector (%), 2023 by firm size (%), 2023 Other service 38% Cambodia 2023 25% Small 29% (5-19) Other manufacturing 33% +13 +4 Bangladesh 22% Retail 26% Total 25% +6 Total 25% Philippines 21% All services 25% Medium 13% (20-99) Peer average1 19% All manufacturing 25% Garments 12% Large 9% Vietnam 13% (100+) Hospitality 10% Enterprise 1. Surveys Peer group for Bangladesh includes Vietnam, (2022), Cambodia Bangladesh (2023), Philippines (2023) and and Philippines 24 Source: Enterprise Surveys for Bangladesh (2022), Cambodia (2023), the Philippines (2023), and Vietnam (2023), World Bank. Vietnam (2023), World Bank. Note: Peer group includes Bangladesh, the Philippines, and Vietnam. is likely the result of most business license processes C. Courts moving online during the COVID-19 pandemic, which largely eliminated opportunities for informal Courts also remain a more widespread concern payments. This insight points to the anticorruption for Cambodian firms relative to their peers, as well as productivity opportunities for Cambodia reflecting more widespread perceptions of bias from more rapid digitization of government services. in commercial disputes and various operational issues. Courts were the fourth-highest “obstacle” to Moreover, informal payments are typically doing business in Cambodia (cited by 57 percent of more prevalent and larger among firms located firms), have become a bigger concern over time, and in mountainous regions of Cambodia as well as are a significantly bigger concern for Cambodian young, larger, and garment firms. Corruption firms than their peers (figure S.5, above). Moreover, is more likely to be cited as an obstacle to doing courts are a more prevalent concern for retail firms business by firms located in mountainous regions (78 percent) and for medium-sized firms (74 percent). of Cambodia as well as by retail, garment, and Cambodian firms are also far more likely than their medium-sized firms, and these concerns are roughly peers to think that courts are not independent or correlated with the variation in the incidence impartial when resolving commercial disputes (figure and size of informal payments (figure S.15). For S.16). In 2023, 25 percent of Cambodian firms example, firms located in the mountainous regions disagreed that “courts are independent and impartial of Cambodia are more likely to make an informal in resolving commercial disputes” (compared payment (88 percent), along with young firms to the peer average of 19 percent). There is also (67 percent), laggards (67 percent), medium-sized variation in perceptions about court independence firms (66 percent), and garment firms (64 percent). among Cambodian firms, with frontier firms (40 Similar patterns of variation among firms are also percent), “other service” firms (38 percent), “other observed for the size of payments, with the largest manufacturing” firms (33 percent), and small firms payments made by garment firms in mountainous (29 percent) more likely to think that courts are biased. regions (3.5 percent of sales), medium-sized firms Other contributing factors to poor perceptions (2.4 percent), young firms (2.3 percent), garment about courts include a lack of dedicated commercial firms (2.3 percent), and large firms (2.1 percent). courts in Cambodia and limited digitalization and transparency in court processes.28 28 B-Ready Report (World Bank 2024d). Cambodia Economic Update December 2024 39 Business services D Cambodian Figure experience longer firmsTimeliness S.17. wait times than of business their peers services for for in of a range firms business services Cambodia over provided time andby the government compared to peers Cambodia Peer group average1 Increased since 2016 Decreased since 2016 +7 +8 30 28 +5 +8 22 22 20 20 17 12 Business license Import permit Imports Exports* Days to obtain Days to obtain Days to clear through all border Days to clear through all border control agencies control agencies 1. Peer group includes Vietnam, Bangladesh and Philippines. *Export average for peers excludes Source: Enterprise Enterprise SurveysSurveys foris for Bangladesh Bangladesh (2022), (2022), Cambodia Cambodia (2016 and (2023), (2023)(2023), and Vietnam (2023), World Bank. the Philippines 2023), Philippines 25 Bangladesh, which a significant outlier. Note: Peer group and Vietnam WorldBangladesh, includes (2023), Bank. the Philippines, and Vietnam. D. Business documents and processes 24 days, respectively—to clear their imports through all agencies than manufacturing firms and laggards. Business documents and processes also remain It also takes significantly longer for small firms (26 a more widespread concern for Cambodian days) than large firms (19 days). Other contributing firms relative to their peers, partly reflecting factors to poor scores on business documents significantly longer wait times for services. include weaknesses around digital services, the Business documents were the seventh-highest interoperability of services (across government “obstacle” to doing business in Cambodia (cited by agencies), transparency, and the costs to register 48 percent of firms) and remain a bigger concern a business. For international trade, issues include for Cambodian firms than their peers, despite poor trade infrastructure (for example, equipment, improvements over time (figure S.5, above). facilities, and amenities), border management, and Moreover, business documents are a more prevalent time taken to comply with trade requirements.29 concern for medium-sized firms (67 percent), retail firms (64 percent), and garment firms (59 percent). These concerns partly reflect longer wait times VI. POLICY IMPLICATIONS across critical services provided by governments (figure S.17). Compared to their peers, Cambodian AND RECOMMENDATIONS firms report waiting longer to (i) obtain a business This section outlines the following four priority operating license (30 compared to 22 days, down reform areas to support a rapid transition to a from 33 days in 2016); (ii) obtain an import permit more productivity-led economic growth model in (28 compared to 20 days, up sharply from 16 days in Cambodia: (1) accelerate structural transformation 2016); (iii) to clear imports through border control both within and across sectors toward higher-value agencies (22 compared to 17 days); and (iv) to clear adding products, value-chains, and activities; (2) exports (20 compared to 12 days). Cambodian address structural barriers and/or disincentives faced firms are waiting seven days longer than their peers, by medium-sized firms, frontier firms, and firms in on average, across all these services. There is limited more rural/less urban regions; (3) encourage faster variation among Cambodian firms in days to obtain firm modernization and international orientation; business documents, due to a standardized online and (4) address the most urgent and pressing obstacles process. However, there is some variation in the time to doing business raised by Cambodian firms. These to clear imports and exports. For example, it takes four reform areas are interdependent and mutually frontier firms and services firms longer—34 days and reinforcing. 29 B-Ready Report (World Bank 2024d). 40 Cambodia Economic Update December 2024 Cambodia needs to accelerate structural result in a loss of preferential trade access. A long- transformation both within and across term roadmap could outline how the sector could sectors toward higher value-added products, take advantage of global trends (for example, value-chains, and activities. This Special Focus consumer shifts to more organic and sustainable highlighted wide variation in labor productivity clothing) and Cambodia’s existing expertise to among Cambodian firms both within and across move into higher-quality, more sustainable, and sectors, with some sectors (for example, services) and premium-priced products that are potentially subsectors (for example, other services) significantly locally designed and owned. more productive than others (for example, garment manufacturing). Improving Cambodia’s productivity Cambodia also needs to address specific performance requires reigniting and accelerating the structural barriers and/or disincentives faced by country’s structural transformation toward higher medium-sized, rural/remote, and frontier firms. value-added activities and firms both within sectors This Special Focus highlighted that medium-sized and from lower- to higher-productivity sectors and firms and firms located in the mountainous regions of from rural to urban areas. This is aligned with a broader Cambodia (and to a lesser extent in Tonle Sap) have need to pursue greater economic diversification in lower labor productivity and are significantly more Cambodia to reduce the risks associated with the concerned about all doing business topics. Moreover, high concentration of products and markets. Specific Cambodia’s frontier firms are lagging far behind their policy ideas to accelerate structural transformation regional peers. The cross-sectional analysis in sections include: IV and V also reveal that these firms have distinct concerns, which call for tailored policy interventions. • Making it easier and faster for new firms Policies to support these firms include: to open and for underperforming firms to close, including by fully digitalizing the business • Targeted support to medium-sized firms registration portal; reducing costs and wait times to help them better navigate business in all business services, possibly by mandating obstacles. Medium-sized Cambodian firms are minimum services standards and enabling the the least productive, are more concerned about all capacity to meet these standards; and increasing business topics, are more likely to make informal the provision (and efficiency) of public services payments to government officials to “get things related to business insolvency and bankruptcy.30 done,” and have lower management capabilities See (g) business services below for further details. (which is a significant driver of productivity). Hence, medium-sized firms would benefit from • Encouraging the development of new greater government support to navigate business industries and the transformation of existing obstacles and build their capabilities. Potential ones into higher value-added segments, interventions could include establishing (i) “one- including by providing well-designed incentives stop shops” for firms, with outreach for SMEs; for investment in emerging industries and and (ii) training programs, courses, and grants supporting small and medium-sized enterprises to help SMEs build up their management and (SMEs) in their growth and innovation efforts. business capabilities as they scale.31 This could be supported by the co-development between government and industry of long- • Targeted infrastructure and business service term roadmaps for critical sectors. For example, extension programs in rural/remote areas of in garments, there is a clear need to develop a Cambodia. Firms located in more rural/remoter pathway for the country to move beyond the low- regions of Cambodia are less productive and more value-added assembly of low-priced, fast fashion concerned about all business topics, including products owned by foreign brands, especially electricity and transport. Potential interventions considering Cambodia’s impending graduation to better support these firms could include from least-developed country status, which will new capital projects and initiatives to reduce 30 In the last 15 years, only a handful of high-profile insolvency cases have been handled by the Cambodia municipal courts. All cases processed in Cambodian courts to date have resulted in the piecemeal liquidation of the firm’s assets, leading to a low recovery rate for creditors (14.6 cents on the dollar in Cambodia, compared to 35.5 cents in the EAP, on average, and 70.2 in Organisation for Economic Co-operation and Development countries). In addition, there is a lack of awareness of the benefit of restructuring among businesses and judges, and insolvency administrators lack specialized skills training in insolvency matters. 31 There are many examples of such programs throughout Asia including, for example, the ASEAN SME Academy. Cambodia Economic Update December 2024 41 inequalities in infrastructure and service standards example, a professional CEO, better management, with more urban areas. Examples include (i) provision of formal employee training programs) upgrading provincial and rural roads, which fall and that leverage technology (for example, have a behind national standards; (ii) improving access to website, use electronic payments) as well as firms broadband internet in rural areas; and (iii) opening that are export-oriented, typically have higher labor new centers for government business services in productivity. There would be productivity benefits these regions to better support local firms.32 from promoting the rapid diffusion of these best practices across firms in Cambodia. • Creating an environment for national frontier firms to strive for the regional productivity • Support and incentivize firms to upgrade frontier. Cambodia’s frontier firms are operating their organizational, management, and far below the regional productivity frontier. workforce development practices. Specific ideas Reforms that increase competition could help include (i) encouraging the adoption of globally better incentivize national frontier firms to recognized management practices through upgrade their productivity to better compete public-private partnerships that expose local firms with regional and global frontier firms. Cambodia to international best practices and managerial has already taken steps in this area, approving a methods, especially in sectors where global new competition law in 2021 and establishing a competitors excel; (ii) supporting management Competition Commission, and it may take more training programs by offering government-backed time for the results of these reforms to take effect. training programs or incentives for firms to invest However, Cambodia could consider further in managerial skill development; (iii) incentivizing reforms to increase competition (especially in firm-level training programs through tax credits services and digital sectors) such as reducing or direct subsidies to firms that establish in- trade barriers, opening more sectors to foreign house training programs focused on improving investment, and reducing the influence of state- technical and managerial competencies; and owned enterprises, particularly in sectors where (iv) providing financial incentives or grants for competition is low. companies that focus on process improvements, lean management, and continuous innovation. • In addition, investing in digital and physical infrastructure, especially improving access to high- • Support and incentivize firms to adopt speed broadband, is critical to enabling firms to productivity-enhancing technologies. adopt advanced technologies. Finally, improving Specific ideas include (i) improving workforce education and workforce skills, particularly in technology skills by establishing or improving digital and technical areas, is essential to help skill development programs and public-private firms innovate and stay competitive.33 Frontier training partnerships aimed at boosting digital and firms could also be encouraged and incentivized technical skills (for example, artificial intelligence to invest in advanced technologies (for example, and big data analytics); (ii) providing targeted data analytics, cloud computing), focus on skills tax breaks or grant programs to encourage firms, development (for example, through training especially small and medium-sized enterprises programs and partnerships with educational (SMEs), to invest in technology adoption and institutions to ensure their employees have the digital transformation; (iii) establishing public necessary skills to drive innovation), and to research and development programs and expand their global networks (for example, to technology transfer hubs to help firms access gain insights into global best practices, technology cutting-edge technologies and innovations that adoption, and competitive strategies). they can implement to improve productivity; and (iv) supporting the development and diffusion of In addition, Cambodia should incentivize greater digital platforms that can have positive spillover and faster modernization and digitalization effects on productivity (for example, e-commerce of its firms as well as a greater international platforms or cloud-based services). orientation. This Special Focus highlighted that firms with more modern personnel practices (for • Support firms to increase their international 33 World Bank 2024f. 42 Cambodia Economic Update December 2024 orientation, including by addressing ◦ Increasing the benefits of registration. infrastructure barriers to trade and improving Cambodia could consider offering a range the efficiency of trade processes (see “b. of incentives to encourage informal firms to Infrastructure,” below for further details) and register and to make it worth doing so. For improving services to help firms access new example, Cambodia could offer temporary markets. For example, Cambodia could upgrade its tax breaks or reduced fees for newly registered export promotion, diversification, and connection firms. In addition, registered firms could services to help Cambodian firms better tap into be offered easier access to formal financial and integrate with East Asian markets and supply services, including bank loans, credit lines, chains (Cambodia’s trade is concentrated with the and financial support from government United States and the EU). programs. Cambodia can also provide grants or subsidies (for example, for technological Finally, Cambodia should prioritize and address adoption and capacity building, and the most pressing obstacles cited by its firms. workforce and management training This Special Focus highlighted that the most pressing programs) that are only available to registered needs include (a) ensuring the benefits of firm firms. Finally, the government could give registration outweigh the costs, especially for small small, registered firms preferential access to firms; (b) improving transport infrastructure; (c) government procurement contracts. improving access to skills and finance among pockets of more sophisticated firms; (d) streamlining the b. Infrastructure: address well-known priorities35: cumbersome and costly tax administration regime; (e) reducing corruption; (f) improving the efficiency ◦ In transport, the priority is to address and impartiality of court arbitration in commercial deficiencies along prioritized regional matters; and (g) improving the provision and transport corridors to facilitate efficient efficiency of business services. Specific policy ideas to regional connectivity and trade, improve address each of these issues include: resilient domestic connectivity (provincial and rural roads), and increase funding for a. Informal firms: ensure that the benefits of asset maintenance to ensure sustainability firm registration outweigh the costs, and that of investments. Priority initiatives include formality offers a pathway to higher productivity improving the (i) East-West corridor between and better business opportunities.34 Thailand, Cambodia, and Vietnam (and the only road corridor connecting Cambodia with ◦ Reducing the barriers and costs of firm Lao PDR); (ii) inland waterway connection registration. While the business registration with Vietnam; and (ii) existing railway process largely went online during the operations and infrastructure links with COVID-19 pandemic (helping to significantly Thailand. reduce informal payments and hence costs), it continues to cost more and take longer to ◦ In logistics, there is a need to improve obtain a business license in Cambodia relative resilient and efficient logistic flows by to its peers, which is a clear disincentive to promoting multimodal transport operations register. Cambodia should explore further and advancing the efforts on cross-border opportunities to streamline and accelerate the trade facilitation, such as full automation and process and to reduce costs (see “g. Business transparency in customs clearance in the form documents, below). Cambodia could also of one-stop border posts (OSBPs) focusing consider expanding business registration on Single Stop Inspection (SSI)/Common centers and services in rural and less urbanized Control Area (CCA) with Thailand and areas to make it easier for informal firms Vietnam to smooth cross-border and transit operating in those areas to register, removing shipments. the geographic barriers to formalization. ◦ In telecommunications, there is a need 34 The landscape of informal firms in Cambodia and their constraints will be examined in more detail as part of a forthcoming working paper series, “Leveraging a Dedicated Survey of Informal Firms.” 35 See, for example, the Cambodia Second-Generation Systematic Country Diagnostic Update (World Bank 2024). Cambodia Economic Update December 2024 43 to promote investment in fixed broadband and potentially moving beyond expanding infrastructure, particularly in rural areas, e-filing and e‑payments, to mandating them and improve connectivity speed and quality, introducing prefilled declarations for taxpayers; and improve cybersecurity infrastructure to (iv) improving the tax registration process, detect cyber threats better, protect critical including by expanding or even mandating the use information infrastructures, and safeguard the of Taxpayer Identification Numbers (TINs); (v) country’s digital assets. strengthening tax audit performance, including by implementing random internal and external c. Access to skills and finance: improve uptake/ audits to deter corrupt behavior, establishing utilization among high-skilled/sophisticated appropriate dispute mechanisms to challenge firms: the results of audits, reviewing the quality of ◦ Access to skills, especially for larger and audits periodically, and evaluating the impact of more sophisticated firms, could be enhanced audits on tax compliance; (vi) setting up systems by strengthening partnerships between (for example, hotlines, independent investigation the education sector, especially vocational units) for firms to report solicitation of informal education, and industry. There also needs to payments and other misconduct; (vii) developing be a greater focus on imparting cross-sectoral a comprehensive compliance improvement plan modern and relevant skills to students (digital, (CIP); and (viii) streamlining tax procedures and technological, socioemotional, green, and documents to reduce complexity to reduce the advanced cognitive skills). need for meetings as well as the heavy reliance on external tax advisors, auditors, and agents.36 ◦ Cambodia can improve access to finance and the use of financial instruments, as well as e. Corruption: reduce the high incidence of the greater adoption of electronic payments informal payments among Cambodian firms by by adopting a holistic and strategic approach (i) setting up systems (for example, hotlines) and to promoting transaction account ownership encouraging firms to report solicitation of informal and use of digital payments; streamlining payments; (ii) increasing penalties for public payments infrastructure, including through officials caught soliciting informal payments; promoting and expanding Bakong, the peer- (iii) digitalizing payments for public services to to-peer fund transfer service; expanding the reduce opportunities for informal payments, acceptance network for digital payments; as an initial step along a broader government digitizing government payments; committing digital transformation; and (iv) strengthening adequate public and private sector resources institutions that facilitate constructive dialogue to effective digital and financial education; between the government and citizens to improve and designing products that meet the needs of transparency, accountability, and participation. different market segments. f. Courts: improve the enforcement of commercial d. Tax administration: reduce the cost and contracts by establishing specialized commercial burden of tax compliance, especially by courts and increasing court transparency and minimizing in-person meetings and manual digitalization. Further effort is required to reduce paper-based processes that are heavily prone to the time and resources needed to resolve a case at informal payments. Specific ideas include (i) the court of first instance (trial) court, appellate rationalizing and/or setting limits on the number court, or at arbitration. An electronic case of visits/inspections and moving them online as management system for communication with much as possible (where they can be more easily courts should be established. Allowing e-filing of monitored and audited); (ii) streamlining the court documents and the possibility to conduct use of tax agents that are incentivized through online hearings would facilitate efficiency gains. commissions to aggressively pursue audits, Out-of-court commercial mediation should be which creates incentives for informal payments; promoted, with an established legal basis for its (iii) automating and digitizing the tax system application. 36 World Bank, forthcoming (b). 44 Cambodia Economic Update December 2024 g. Business authorizations: reduce the direct ◦ Establishing a complete inventory of and indirect costs and timelines for business licenses and permits, introducing and documents such as obtaining an operating license implementing risk-based approaches or import permit by increasing transparency and to licensing, and streamlining sectoral making greater use of digital technology. Specific licenses. An inventory of licenses—with ideas include: information on processes, documentation requirements, and fees—would increase ◦ Fully digitizing the business registration transparency and reduce the administrative portal and continuing to expand the list costs of compliance for businesses. However, of institutions connected. Completing the such actions often present coordination implementation of the business registration challenges due to the numerous agencies portal would ensure a fully online process. involved in providing licenses for business New features that could be added to the operations. Cambodia could also consider portal include electronic signatures and transitioning to a risk-based approach to authentication as well as identity document licensing, which would help reduce the verification. The portal should also be compliance burden on low-risk firms and help expanded to include other institutions such direct limited government resources toward as the National Social Security Fund (for regulating and inspecting firms involved in which it could be used to register employees) activities that pose higher risks (environment, and potentially subnational entities (to public health, safety, and so forth). register smaller companies and thereby reduce informality). In addition, allowing automatic exchange of information among public sector agencies connected to the portal would reduce multiple requests for the same information. Cambodia Economic Update December 2024 45 46 ANNEX. CAMBODIA – SELECTED INDICATORS CAMBODIA SELECTED INDICATORS* Avg. '10-19 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 F INCOME AND ECONOMIC GROWTH GDP growth (annual %) 7.6 5.1 7.3 7.7 7.9 8.0 7.2 7.9 8.1 8.8 7.9 -3.6 3.1 5.1 5.0 5.3 GDP per capita growth (annual 6.1 3.6 5.7 6.1 6.3 6.5 5.8 6.5 6.7 7.5 6.7 -4.7 1.9 4.0 3.9 4.2 %, real) GDP per capita (US$, nominal) 1,554 995 1,112 1,206 1,321 1,452 1,585 1,700 1,849 2,060 2,259 2,131 2,217 2,358 2,525 2,696 Private consumption growth 6.4 9.3 10.8 6.0 6.8 5.4 5.7 4.6 6.7 5.5 3.4 -1.9 -2.4 5.2 -0.2 0.7 (annual %) Gross investment ( % of 27.0 21.3 21.4 23.7 25.9 29.1 29.0 29.5 29.8 30.0 30.7 30.6 29.7 34.0 20.4 17.5 nominal GDP) Gross investment - Public ( % of .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. nominal GDP)² MONEY AND PRICES Inflation, consumer prices 2.9 2.9 4.6 2.3 4.5 0.9 2.8 3.8 2.2 1.6 3.1 3.0 3.8 3.0 2.8 0.7 (annual %, EOP or MRV)¹ Inflation, consumer prices 2.9 2.6 5.5 3.0 2.9 3.9 1.2 3.0 2.9 2.5 1.9 2.9 2.8 5.5 2.1 2.2 (annual %, period average) Base money (% of GDP) 54.0 33.9 31.3 39.5 43.3 51.1 54.1 59.7 66.6 74.7 85.9 106.5 95.8 66.2 63.0 62.8 Domestic credit to the private 66.6 27.6 28.3 38.7 52.0 62.7 74.3 81.7 86.7 99.6 114.2 139.6 166.3 180.0 .. .. sector (% of GDP)2 10-year interest rate (annual .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. average)¹ Nominal exchange rate (local 4,043 4,044 4,016 4,033 4,027 4,030 4,025 4,058 4,062 4,067 4,070 4,077 4,100 4,150 4,110 4,100 currency per USD) Real exchange rate index 97.7 91.8 91.1 90.7 91.7 93.1 100.0 105.2 103.1 105.4 105.1 98.4 100.4 94.0 79.6 78.0 (2015=100) FISCAL Revenue (% of GDP) 15.6 14.4 14.1 13.9 14.2 15.2 14.7 15.7 16.5 17.7 20.0 17.9 16.2 17.2 15.9 15.4 Expenditure (% of GDP) 17.0 17.1 18.0 17.1 16.7 16.6 15.1 15.9 17.1 17.4 18.8 21.3 21.3 20.4 21.0 18.4 Interest payments (% of GDP) 0.3 0.2 0.2 0.4 0.6 0.5 0.2 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.4 Non-interest expenditure (% 16.6 16.9 17.7 16.7 16.1 16.1 14.8 15.6 16.8 17.1 18.5 20.9 20.9 20.1 20.7 18.1 of GDP) Overall fiscal balance (% of -1.3 -2.7 -3.9 -3.2 -2.5 -1.3 -0.3 -0.2 -0.6 0.3 1.1 -3.4 -5.1 -3.2 -5.1 -3.0 GDP) Primary fiscal balance (% of -1.0 -2.5 -3.6 -2.8 -1.9 -0.8 -0.1 0.1 -0.3 0.6 1.4 -3.1 -4.8 -2.9 -4.8 -2.6 GDP) General government debt (% 23.1 23.4 23.8 24.9 24.4 24.2 23.3 22.0 22.9 21.0 20.8 26.6 26.5 27.0 27.5 26.9 of GDP) External public debt (% of 29.4 27.2 27.0 30.5 31.6 31.5 31.3 29.2 29.7 28.5 28.0 34.0 35.2 34.1 .. .. GDP)² EXTERNAL ACCOUNTS Export growth, G&S (nominal 12.4 22.9 11.4 16.0 16.8 10.3 7.5 9.0 9.4 12.3 8.5 2.1 11.2 31.9 16.6 10.6 US$, annual %) Import growth, G&S (nominal 12.2 19.1 11.4 14.2 16.9 8.8 7.6 9.0 7.8 9.3 17.4 9.7 47.8 37.2 -19.8 5.2 US$, annual %) Cambodia Economic Update December 2024 CAMBODIA SELECTED INDICATORS* Avg. '10-19 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 F Merchandise exports (% of 33.5 31.1 31.1 32.8 34.8 34.6 33.9 34.3 34.1 34.1 33.9 38.5 46.0 52.7 54.7 57.0 GDP) Merchandise imports (% of 42.1 41.1 40.4 42.3 44.9 43.7 42.8 42.9 42.0 40.9 40.3 48.9 67.7 68.6 54.8 58.4 GDP) Services, net (% of GDP) 5.1 5.5 5.0 5.7 6.1 5.8 5.6 5.3 5.3 5.5 1.3 1.0 -8.0 -24.5 -9.0 -4.2 Current account balance -1602.1 -1165.3 -1309.3 -1390.7 -1489.3 -1899.7 -1680.6 -1756.5 -1634.4 -1540.5 -2155.0 -1938.3 -10711.1 -7437.5 561.4 -450.1 (current US$ millions) Current account balance (% -7.0 -8.2 -8.1 -7.8 -7.5 -8.6 -6.9 -6.6 -5.6 -4.7 -5.9 -5.5 -29.1 -18.8 1.3 -1.0 of GDP) Foreign direct investment, net 9.3 9.6 9.4 11.0 10.1 8.0 7.1 9.0 9.1 9.4 9.7 10.0 9.2 8.7 8.5 8.8 inflows (% of GDP) Multilateral debt (% of total Cambodia Economic Update December 2024 .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. external debt)2 POPULATION, EMPLOYMENT AND POVERTY Population, total (millions) 15.3 14.4 14.6 14.8 15.0 15.2 15.4 15.6 15.8 16.0 16.2 16.4 16.6 16.8 16.9 17.1 Population growth (annual %) 1.4 1.5 1.5 1.5 1.4 1.4 1.4 1.3 1.3 1.2 1.1 1.2 1.2 1.1 1.1 1.0 Unemployment rate² 0.4 0.8 0.6 0.5 0.4 0.7 0.4 0.7 0.1 0.1 0.1 0.2 0.4 0.2 0.2 .. Inequality - Gini coefficient2 .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. Life expectancy2 69.6 67.7 68.4 68.9 69.3 69.7 69.9 70.2 70.5 70.6 70.7 70.4 69.6 69.9 .. .. OTHER GDP (current LCU, millions) 97,180,276 57,788,147 65,068,396 71,894,423 79,768,285 88,992,411 98,334,482 107,784,906 118,907,473 134,279,541 148,984,697 142,502,829 150,792,683 164,059,089 175,822,580 189,270,929 GDP (current US$, millions) 24,010 14,290 16,202 17,827 19,808 22,082 24,431 26,561 29,273 33,017 36,606 34,949 36,779 39,532 42,779 46,164 GDP per capita LCU (real) 6,140,283 4,605,275 4,869,531 5,166,639 5,493,458 5,850,600 6,188,162 6,588,877 7,028,221 7,552,222 8,059,846 7,683,607 7,829,263 8,141,064 8,458,835 8,815,125 Human Development Index 150.0 149 150 150 151 151 150 150 149 150 150 149 147 148 .. .. Ranking³ 2 CPIA (overall rating) 3.4 3.4 3.4 3.5 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.5 3.6 3.6 .. 2 Economic management 4.0 4.0 3.8 3.8 3.8 3.8 4.0 4.0 4.0 4.2 4.2 4.2 4.2 4.2 4.2 .. Structural policies2 3.5 3.3 3.5 3.7 3.7 3.7 3.5 3.5 3.3 3.3 3.3 3.3 3.5 3.5 3.5 .. Policies for social inclusion and 3.4 3.4 3.5 3.5 3.4 3.4 3.4 3.4 3.4 3.4 3.5 3.5 3.6 3.8 3.8 .. equity2 Public sector management and 2.7 2.7 2.8 2.8 2.8 2.8 2.7 2.7 2.7 2.6 2.6 2.7 2.8 2.8 2.8 .. institutions2 Notes: “..” indicates not available. E = estimate, F = forecast. Data from MFMOD unless otherwise noted. 1/ Haver Analytics database; MRV = Most recent value. 2/ World Development Indicators Database and World Bank Staff Estimates. 3/ The HDI ranking in 2001 is in relation to 175 countries and in 2010 in relation to 169 countries. Methodological enhancements in HDI calculations have resulted in notable improvements in the countries’ rankings. Sources: MFMOD Database, World Bank WDI and Haver Analytics databases, IMF. 47 BIBLIOGRAPHY Angkor Enterprise. 2024. “Monthly Revenue from Angkor Entrance Fees 2024.” Angkor Enterprise, Phnom Penh. https:// www.angkorenterprise.gov.kh/. Devadas, S. and N. 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