Economy: Cambodia at a crossroads, navigating uncertainty

For Cambodia, the Cambodia Economic Update report published in June 2025 by the World Bank paints a mixed picture: robust but uneven growth, a resilient export sector, and an urgent need for fiscal reforms to ensure a sustainable future. However, the data was processed before the diplomatic tensions between the Kingdom and its neighbor Thailand, the outcome of which remains uncertain.

This report, carefully compiled by a team of economists and public policy experts, offers insight into the complexities and opportunities that define Cambodia's present and shape its future.

Recent economic developments – The pace of progress

Strong exports despite a challenging global environment

In the first quarter of 2025, the Cambodian economy showed remarkable resilience. Exports of clothing, travel goods, footwear, and bicycles, which form the backbone of the country's manufacturing sector, rose by 11.6% year-on-year, supported by strong demand from the United States and the European Union. Tourism, another pillar of the economy, saw international visitor numbers rise by 16.1%, demonstrating Cambodia's enduring appeal. However, these figures mask underlying vulnerabilities. The number of international tourists, excluding business travelers and cross-border workers, remains below pre-pandemic levels, highlighting the sector's incomplete recovery.

Uneven growth and challenges for local investment

Beneath the surface, the economic landscape reveals disparities. While manufacturing and services have boosted job creation and consumer confidence, local investment has weakened. The real estate sector, once a powerful engine of growth, is mired in a prolonged recession. Domestic investment approved under the Qualified Investment Project (QIP) program fell by 96.7% year-on-year in the first quarter of 2025, reducing its share of total investment to just 2.1%, a sharp contrast to the one-third share it accounted for before COVID-19.

This contraction has spilled over to the banking sector, where credit growth slowed to 5.0% in March 2025, only slightly up from 4.0% a year earlier. The slowdown in construction, a key driver of private investment and credit demand, continues to weigh heavily on economic activity.

Consumption and inflation: a double-edged sword

Improved consumer confidence fueled a sharp rise in imports: food products and clothing increased by 25.3% and 29.1%, respectively, while imports of cars and motorcycles jumped by 79.1% and 19.0%. However, this recovery in consumption has contributed to widening the current account deficit and pushing up inflation, mainly due to higher food prices. The riel has appreciated slightly and interest rates have fallen, but these trends provide only partial relief.

Foreign direct investment: a ray of hope

Despite domestic challenges, foreign direct investment (FDI) remains a bright spot. FDI inflows, particularly from China, have increased, partially offsetting the decline in domestic investment. This underscores Cambodia's continued attractiveness as a destination for international capital, even as changes in global trade policy introduce new uncertainties.

Strengthening revenues for Cambodia's future

The revenue challenge: a structural weakness

Cambodia's fiscal health is at a crossroads. After years of impressive progress, fiscal performance has weakened. The country's tax structure is heavily skewed toward indirect taxes, mainly value-added tax (VAT) and excise duties, while direct taxes such as corporate income tax (CIT) and personal income tax (PIT) remain underdeveloped.

This reliance on indirect taxes poses two challenges. First, it exposes public revenues to volatility in consumption and imports. Second, it limits the redistributive potential of the tax system, as indirect taxes tend to be regressive and disproportionately affect low-income households.

The cost of tax compliance: a barrier to business

The World Bank report highlights the considerable burden of tax compliance for Cambodian businesses. They spend an excessive amount of time fulfilling their tax obligations, diverting resources that could be allocated to productive activities. This not only undermines competitiveness, but also discourages formalization, perpetuating a cycle of low tax revenues and limited fiscal space.

Equity and social impact

Fiscal interventions have a measurable impact on poverty and inequality. The report's analysis reveals that, while fiscal policy has reduced the number of people living in poverty and lowered the Gini index, the gains are modest. There is considerable room to improve the equity of Cambodia's tax and transfer system to ensure that the benefits of growth are more widely shared.

Policy recommendations: building a resilient fiscal future

The World Bank presents a comprehensive reform program aimed at strengthening Cambodia's tax base and promoting inclusive growth:

Broaden the tax base

Strengthen direct taxation: expand the coverage and enforcement of corporate and personal income taxes, aligning Cambodia's tax structure with international best practices.

Reduce dependence on indirect taxes: diversify revenue sources to mitigate vulnerability to external shocks.

Modernize tax administration

Simplify compliance: streamline procedures and leverage digital platforms to reduce the administrative burden on businesses.

Fight tax evasion: strengthen enforcement and close loopholes to improve collection efficiency.

Promote equity

Targeted transfers: expand social protection programs to cushion the regressive effects of indirect taxation on vulnerable groups.

Progressive taxation: introduce or strengthen progressive elements of the tax system to reduce inequality.

Leverage excise duties for health and revenue

Tobacco and alcohol taxes: increase excise rates on harmful products to generate revenue and improve public health.

Sugary drinks: consider new excise taxes to address growing health concerns and diversify revenue sources.

Promote investment and diversification

Encourage productive investment: rebalance incentives to favor high value-added sectors with high job creation potential.

Support SMEs: facilitate access to finance and reduce compliance costs for small and medium-sized enterprises.

Outlook: navigating uncertainty

Cambodia's economic outlook is shaped by a complex interaction of global and domestic forces. The global environment remains challenging, with trade policy changes and geopolitical tensions introducing new risks. Domestically, the sluggish real estate sector and moderate credit growth weigh on the outlook.

However, fundamentals remain solid. Strong exports, rising FDI, and a young and dynamic workforce provide the basis for future growth. The key will be to build on these strengths while addressing structural weaknesses in the fiscal system.

Call to action

Cambodia is at a pivotal moment. The choices made today will determine the country's trajectory for decades to come. By adopting fiscal reforms, broadening the tax base, and investing in equity and efficiency, Cambodia can build a more resilient, inclusive, and prosperous future.

The June 2025 Cambodia Economic Update is both a diagnosis and a roadmap, a testament to progress made and a call for bold action. As the Kingdom navigates a period of uncertainty, the imperative is clear: strengthen revenues, promote inclusion, and chart a path toward sustainable development.