Over the two decades before COVID-19 struck in 2020, Cambodia blossomed economically. Having reached lower middle-income status in 2015, it set its sights on attaining upper middle-income status by 2030. Thanks to garment exports and tourism, Cambodia’s economy grew at an average annual rate of 7.7 percent between 1998 and 2019, making it one of the fastest-growing economies in the world.
Cambodia’s economy continued to recover in 2022. The recovery of the services sector is strengthening, driven largely by pent-up consumer demand. The economic growth for 2023 is projected to reach 5.2 percent. Downside risks include a marked slowdown in external demand, further global financial tightening, and a renewed oil price shock. On the upside, China’s reopening presents an opportunity for Cambodia to boost its travel and tourism industry and to attract FDI inflows.
Initially led by a recovery of export-oriented manufacturing, growth drivers have started rotating to the services sector, which is accelerating, driven by pent-up consumer demand and the return of foreign tourists. This is offsetting a recent decline in Cambodia’s goods exports hit by the recent slowdown in external demand. Domestic consumption is also being boosted by the easing of inflation which declined to 2.9 percent y/y in December 2022 as energy and food prices stabilized.
Over the medium term, the economy is expected to trend back to potential, growing at 6 percent. Goods and services exports and strong FDI inflows are expected to be bolstered by the newly ratified free trade agreements, a substantial increase in private and public investment, especially under public-private partnership, in key physical infrastructure such as seaports and roads that the country experienced during the COVID-19 period and beyond, and structural reforms.
Over the period 2009-2019/20, poverty rates declined by 1.6 percentage points a year, driven substantially by rising labor (especially wage) earnings. However, the COVID-19 pandemic led to increases in unemployment, and poverty. The scale-up of social assistance to poor and vulnerable households, launched in June 2020, has moderated income losses. The increase in the poverty rate in 2020 is projected to have been limited to an increase of 2.8 percentage points. Poverty nevertheless remains higher than pre-pandemic levels.
In addition, the energy and food price hikes due to the Russian-Ukraine conflict had imposed an additional burden as they weighed on household budget. The simulation analysis, which did not account for implications of COVID-19 or for the fiscal policy response implemented between 2020 and 2022 to support households, suggests that inflation could increase poverty 4 percentage points from the national poverty rate of about 18 percent, measured in 2019/20. Poverty is expected to decline due to the projected economic recovery and moderating inflation.
Cambodia has made considerable strides in improving health outcomes, early childhood development, and primary education in rural areas. Life expectancy at birth and maternal, under-five, and infant mortality rates have been improved significantly between 2000 and 2021. Despite this progress, human capital indicators lag other lower middle-income countries. In 2020, a child born in Cambodia would be expected to be only 49 percent as productive when grown as she or he could be if she or he enjoyed full quality education, good health, and proper nutrition during childhood. In the 2021-2022 academic year, net enrollment rates for primary, lower secondary, and upper secondary education (both public and private) reached 93 percent, 46.7 percent, and 28.6 percent, respectively.
Key reforms are needed for Cambodia to sustain pro-poor growth, foster competitiveness, sustainably manage natural resource wealth, and improve access to and quality of public services. Cambodia continues to have a serious infrastructure gap and would benefit from greater connectivity and investments in rural and urban infrastructure. Further diversification of the economy will require fostering entrepreneurship, expanding the use of technology, and building new skills to address emerging labor market needs. Accountable and responsive public institutions will also be critical. Boosting investments in human capital will be of utmost importance to achieve Cambodia’s ambitious goal of reaching middle-income status by 2030.
Last Updated: Apr 12, 2023