Focus on & Economy: Strengthening Cambodia's economic foundations for a prosperous future
- Eco News
- 2 days ago
- 3 min read
Cambodia's economy at the start of 2025 presents a complex array of challenges and opportunities, reflecting the situation of a country at a decisive turning point in its growth.
Despite a global environment marked by uncertainty and changing trade policies, Cambodia's economic performance remains relatively solid, albeit unevenly distributed across sectors and regions. This nuanced reality underlines the urgent need for strategic fiscal reforms to ensure sustainable growth and equitable development.
Sectors
Apparel, travel goods, footwear and bicycles continue to be the mainstays of Cambodia's exports, with merchandise exports to the US and EU up 11.6% year-on-year in the first quarter of 2025.
Complementing this, the services sector, driven largely by tourism, saw a 16.1% increase in international arrivals over the same period. However, the number of international tourists remains below pre-pandemic levels, suggesting scope for recovery and growth.
This strength in exports boosted consumer confidence, stimulating an increase in imports of non-durable and durable goods, including food, clothing, cars and motorcycles, which rose by 25.3%, 29.1%, 79.1% and 19.0% respectively1.
Tensions
However, beneath these positive indicators lurks a major drag on the economy: the domestic investment landscape is under considerable strain. The real estate sector, once a solid engine of growth, is experiencing a prolonged slowdown, exacerbated by the tightening of the credit cycle.
This has precipitated a dramatic 96.7% year-on-year fall in domestic investment approved under the Qualified Investment Project scheme in the first quarter of 2025.
As a result, domestic investment's share of total approved investment fell to just 2.1%, in stark contrast to its one-third share prior to the COVID-19 pandemic. Credit growth has also slowed, with March 2025 figures showing a modest 5.0% year-on-year increase, reflecting lender caution and weak demand.
Inflationary pressures, mainly due to rising food prices, have also emerged, helping to widen the current account deficit as imports rebound. A slight appreciation of the riel and a fall in interest rates have accompanied these developments, while money supply has expanded against a backdrop of moderate credit growth. Public debt remains manageable, at 25.9% of GDP at the end of 2024, and fiscal consolidation efforts have begun to strengthen Cambodia's economic resilience.
World Bank report
The latest World Bank report highlights a key policy priority: strengthening revenue mobilization to support Cambodia's future development. The current tax structure is heavily weighted towards indirect taxes, in particular the value-added tax (VAT) on imports, which, while effective, may not be sustainable or equitable in the long term. Income tax and excise duties, particularly on tobacco and alcohol, offer potential avenues for reform that could increase revenues without imposing excessive burdens on businesses or households. In addition, reducing the cost of tax compliance could improve the business climate and encourage formalization, thereby broadening the tax base.
Crossroads
Equity considerations are at the heart of these tax reforms. Uneven economic recovery has led to disparities in household welfare, requiring targeted interventions to ensure that tax policies contribute to poverty reduction and social inclusion. The report also highlights the importance of balancing income generation and social protection measures to mitigate inequalities and promote shared prosperity.
Cambodia is at a crossroads.
The resilience demonstrated by exports and consumer spending provides a foundation, but the challenges of domestic investment and fiscal sustainability demand decisive action. Strengthening revenue systems, improving tax fairness and creating an environment conducive to domestic investment are essential steps in overcoming the uncertainties ahead and ensuring a prosperous future for Cambodia.
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