Recovering Cambodian Economy Hit by Global Fuel Crisis

The World Bank’s annual economic update has revealed Cambodia’s economy has been stalled by rising oil prices just as it was showing signs of recovery from Covid-19.
View of Phnom Penh skyscrapers. Kiripost/Penh Chamroeun
View of Phnom Penh skyscrapers. Kiripost/Penh Chamroeun

Cambodia is weathering an oil price shock as the economy started to show signs of recovery in the wake of Covid-19 related restrictions, the World Bank said on Thursday.

Negative impacts of the oil price shock are amplified by Cambodia’s already large external imbalance, the bank revealed in its economic update. The country’s refined oil imports amounted to 6.2 percent of 2021’s GDP – larger than in most other East Asia and Pacific economies – covering about 11 percent of total imports.

World Bank’s senior economist Ly Sodeth (left) during the report launch. Kiripost/Penh Chamroeun
World Bank’s senior economist Ly Sodeth (left) during the report launch. Kiripost/Penh Chamroeun

The economy was showing signs of recovery as Cambodia embarked on a living with Covid-19 strategy, reopening the economy late last year.

“The government’s Living with Covid-19 strategy has allowed Cambodia to reopen, enabling economic activity,” said Maryam Salim, World Bank’s country manager for Cambodia.

“However, the road ahead remains unclear. Rising energy and food prices due to the war in Ukraine are imposing additional burdens on the poor, and this will slow the pace of poverty reduction.”

Salim said the government’s cash transfer program, which has been vital for poor households during the pandemic, will continue to be needed.

The nation’s tourism industry received a boost in March, when the visa on arrival program was reinstated and entry restrictions, such as a negative PCR test 72 hours before arrival, were removed, thanks to the successful vaccination program.

This year’s relatively subdued growth projection of 4.5 percent reflects anticipated impacts of the negative terms of trade shock caused by rising oil prices and slowdowns in the world’s two biggest economies – the US and China, Cambodia’s main trading partners.

Cambodia’s largest exports – garment, travel goods and footwear – combined declined further to 64.5 percent in Q1 of 2022 from 65.2 percent in Q1 2021.

However, bicycles, electronics, parts, and cables products rose to 8.9 percent in Q1 2022, up from 7.5 percent during the same period last year.

Cambodia’s exports to the US market skyrocketed, showing a 43.7 percent year-on-year growth. In Q1 2022, it captured 44.7 percent of total exports, despite the GSP program's temporary expiration, World Bank’s senior economist Ly Sodeth said during the report launch.

Goods exports to the EU market grew at 28.5 percent, despite the partial EBA withdrawal. However, the share of the EU market only marginally increased to 19.2 percent in Q1 2022, up from 18.9 percent in Q1 2021.

Good exports to China showed a 3.5 percent year-on-year slump in Q1 2022. Sodeth said this is likely due to China’s strict zero Covid policy.

Foreign Direct Investment (FDI) project value investing in the real estate sector accelerated, reaching $552 million in Q1 2022 – the equivalent of a 162.6 percent year-on-year rise.

The bank added that of the $552 million, the energy sector received $397 million, likely reflecting rising demand for energy for diversification.

Some FDI in producing and packaging agricultural commodities, such as banana and mango products, emerged, taking advantage of China Cambodia Free Trade Agreement, Sodeth said.

China accounted for about 67.6 percent of total approved FDI value in Q1 2022.

Over the long-term, the Cambodian economy is expected to grow at about six percent annually. The new investment law, together with free trade agreements, will help drive investment and trade, the bank said.