The Cambodian Economy: Outlook, Risks and Reforms

June 7, 2017


Thank you so much, Excellency Luy, for your kind welcome. I am very pleased to visit the Royal University of Law and Economics. As one of the oldest higher education institutions in Cambodia, RULE maintains a position as the premier national university.

It is always a highlight for me to spend time with university students during my travels for the IMF. It is especially meaningful to have this opportunity in Cambodia, where 65 percent of the population is 30 years of age or younger.

Talking to you, I know that you represent the bright future of a country that has come so far in less than four decades. From the ruins of tyranny and genocide, Cambodia has made profoundly impressive economic and social progress.

Your country has been one of the 10 fastest-growing economies in the world over the past 20 years. Poverty has fallen sharply—from 50 percent of the population in 2005 to 13.5 percent in 2014. The World Bank now classifies Cambodia as a lower-middle income economy, and no longer low income.

Cambodia’s growth performance is the result of hard-won macroeconomic stability. This is reflected in relatively low inflation, increasing international reserves, modest fiscal deficits and low public debt, and prudent economic policies.

Cambodia has every reason to be proud of its economic performance. We estimate that real GDP will expand about 7 percent this year because of garment exports and activity in the real estate and construction sectors.

Nonetheless, many economic challenges remain. There is always more that must be done to maintain economic stability, build sustained growth, and to ensure that all Cambodians benefit. First and foremost, that means creating good jobs for your country’s young population.

You, as soon-to-be university graduates, certainly need and will benefit from some of these good jobs. But before long, it will also be your responsibility to help create employment for those who with fewer opportunities than you.

That means building the infrastructure to support the next stage of development. It means providing the skills needed to succeed in a modern economy. And it means giving all Cambodians a stake in the financial system.

So, this is what I would like to talk about today: the economic challenges that Cambodia faces, and what you can do to ensure that your country can continue to climb the ladder of economic development.

The Global Economic Setting

Let’s set the stage with a brief overview of developments in the global economy and Asia.

The most important development is that the global economy is gaining momentum after nearly a decade of disappointing growth. Our projection for world growth in 2017 is 3.5 percent and 3.6 percent in 2018. That compares with last year’s 3.4 percent.

This improvement largely comes from expectations of higher growth in the U.S., and stronger indicators in Europe. Asia is also projected to grow faster. This is key as Asia has been the most dynamic region since the 2008 Global Financial Crisis.

The IMF expects growth in this region to reach 5.5 percent this year and 5.4 percent in 2018. The outlooks for both China and Japan have been revised upward this year (China at 6.6 percent; Japan at 1.2 percent).

As I just outlined, Cambodia is experiencing solid economic growth. As a highly open economy, with a young population compared with other countries in Southeast Asia, Cambodia will benefit from the better global and regional prospects. This is where the challenges facing the country become so important.

Growth has been built with a few industries, especially low value-added clothing. But in the medium term, growth likely will decline (to about 6.25 percent a year), if the economy does not become more diversified.

Historically, the global garment industry has thrived by relocating production to countries offering the lowest costs. Cambodia’s recent success as a clothing maker has benefited from China’s rising labor costs, and its transformation towards higher value-added production. However, as your wages and other costs rise, there will be countries happy to lure your garment factories away. Competition in this market is tough.

Challenges to Cambodia’s Growth

So how can we ensure stronger medium-term growth? There are several challenges:

· First, is infrastructure. Despite increasing public investment, Cambodia still faces high energy costs, insufficient supply of electricity, and shortcomings in its transportation network.

· Second, Cambodia ranks low among the Southeast Asian countries in terms of ease of doing business and in competitiveness. The cost of doing business also is high because of sometimes burdensome government procedures.

· Good governance is essential if Cambodia is to compete against other countries that also aspire to move up the ladder of development.

In this context, I am happy to hear that the government has launched an Industrial Development Policy to tackle many of these issues. The policy aims to upgrade Cambodia’s industrial structure from labor intensive production to one driven by skills by 2025. If implemented in timely and effective fashion, this policy could promote diversification and sustained growth.

There is one other area that needs to be addressed. Despite great progress over the past several years, Cambodia’s financial system remains underdeveloped.

Vulnerabilities in the banking industry have emerged at a time of rapid credit growth. This comes from large exposure to the real estate sector, over-reliance on foreign borrowing, and the rapid expansion of microfinance institutions. Dollarization of the economy limits the policy options to respond to the situation.

These issues may appear to pose less risk at this moment of strong growth, but they can become more critical if circumstances change—here in Cambodia or in the outside world.

So, that is one set of challenges. Some of them may appear a bit distant from the everyday concerns of the average Cambodian who is earning a decent living. (Or even students trying to juggle reading assignments and exams.)

Implications for Cambodians

So, let’s take a moment to look at a few issues that do have clear implications in cities, towns, and villages.

Are Cambodians equipped to face the demands of a highly competitive global economy?

As I said at the start, your country has made great progress in terms of the standard of living. But a large share of the population lives just above the poverty line.

Education and health standards need more progress. For example, schools need to provide up-to-date training that can equip young people with the skills needed to obtain good jobs. Keep in mind that Cambodians are competing against hundreds of millions of young people around the world.

Financial inclusion is key to the future of many Cambodians who strive to raise their living standard. It is striking that only 13 percent of your countrymen have bank accounts, and most small businesses do not have access to financial services. Small and medium-sized enterprises face serious constraints due to high transaction costs, limited services, and poor financial literacy.

The government understands the importance of financial inclusion to create economic opportunity and reduce poverty. Progress is being made. For example, the National Bank of Cambodia has launched programs to promote financial literacy.

Financial inclusion expands the possibilities of financial development. Together, they can increase growth and strengthen a country’s resilience in the face of powerful international economic forces.

But this also requires financial stability. Inclusion can strengthen the financial system if banks and other financial institutions are well regulated. That means vigilance against too much risk-taking and too much lending. The key is appropriate regulation and supervision.

Challenge for Young People

So what does all this mean for you?

Each of the issues I have described today presents opportunities—diversifying the economy, advancing financial inclusion, upgrading labor force skills, and strengthening government regulation.

It may be a bit difficult to imagine where you will be 10 or 20 years from now. But I am sure that you will be Cambodia’s leaders in your chosen field. You can be the reformers and innovators who bring Cambodia to the next stage of development.

If you look at the world beyond Cambodia’s borders, you will see young people providing the spark of creativity to the knowledge economy. Your generation is bringing new ideas to old problems—designing apps and building new businesses.

Let’s look at what you might be able to do for financial inclusion. One of the buzz-words of finance these days is Fintech. This can translate into many things, including high tech online transactions in the advanced economies.

But for many developing countries, Fintech simply means mobile banking. This is something that Cambodia has experienced already with the rapid growth of mobile accounts for remittances and payments.

As you know, many people who have left the countryside to work in the cities now use these accounts to send money home. I would imagine some of you know this from your own lives.

However, the available mobile services are still limited. There are many areas of business where expansion of Fintech could have a significant impact across the country. For example, this might include online lending and accounting services.

Many of these services already are established in other developing countries. The internet-based platforms exist. With a relatively young population of around 7 million internet users and 20 million mobile subscriptions, Cambodia offers great market potential.

The fact is that many of you will one day have jobs that do not yet exist anywhere in the world. You must be open to technological change—and be ready to take it to the next level.

Silicon Valley or Bangalore do not have a monopoly on innovation. It can happen here in Cambodia.

The question is who will provide the ideas that can be translated into progress. I believe the solutions—to these and other challenges—lie with your generation.


In conclusion, I am not naive about the obstacles that may stand in the way of innovation. But I am also an optimist.

Asia has emerged as a driving force of the global economy over the past generation because of drive, commitment and creativity. Cambodia has already demonstrated an extraordinary determination to raise itself into the ranks of economic success stories.

The issues I have described today are not unique to Cambodia. Many countries face the same challenges. What is needed is the appropriate response. That means reforms to stimulate diversification and improved governance, or business solutions that create good jobs.

All of this is part of the process of economic development. What is required is the commitment that your generation can bring.

I look forward to returning to Cambodia to see the economic progress that I believe is possible. And I look forward to witnessing the contributions you can make. Thank you!

IMF Communications Department


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