Cambodia: Selected Issues
Author:
International Monetary Fund
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Publication Date:
07 Nov 2000
eISBN:
9781451821758
Language:
English
Keywords:
ISCR; CR; Cambodia; government; rate; export; export quota; export development; garment export; state monopoly; B. export performance; Foreign direct investment; Export performance; Tariffs; Trade policy
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This paper discusses major macroeconomic issues confronting Cambodia. The report also discusses recent growth performance of the economy and presents recently updated national accounts estimates. Revenue mobilization remains a key objective since, despite recent significant improvements, revenue performance is still low by international standards. The costs and benefits of a high degree of dollarization are briefly discussed. Export performance and trade policy are also reviewed. Maintaining export growth will depend on maintaining Cambodia's commitment to an open trade and exchange system.

Abstract

This paper discusses major macroeconomic issues confronting Cambodia. The report also discusses recent growth performance of the economy and presents recently updated national accounts estimates. Revenue mobilization remains a key objective since, despite recent significant improvements, revenue performance is still low by international standards. The costs and benefits of a high degree of dollarization are briefly discussed. Export performance and trade policy are also reviewed. Maintaining export growth will depend on maintaining Cambodia's commitment to an open trade and exchange system.

VI. Export Performance and Trade Policy

A. Introduction

1. With the transition from a communist system in the early 1990s, Cambodia introduced a relatively open and liberal trade policy, and has recorded very high rates of export growth in recent years. A surge in garment exports in the late 1990s has been the main driving force of this growth. Foreign investors began shifting their factories into Cambodia in 1995, and this accelerated during 1997-98. As a result, the Asian crisis in 1997 had only a limited impact on Cambodia’s export performance.

2. Despite this early success, the task of export development will continue to be a challenge for the Cambodian government. First, the high growth in the 1990s partly reflects the very low stating point. Second, Cambodia still has poorly developed infrastructure, which could constrain export growth if further infrastructure investment is not made. Third, tariff reductions in the context of AFTA will underscore the importance of domestic revenue mobilization. Finally, continuing to attract foreign direct investment will be necessary to sustain export development. To make an attractive investment climate, infrastructure development will need to be complemented with a wide range of other reforms including financial sector reform, tax reform, and legal reform. This chapter reviews the recent experience in export development and discuss issues related to trade policy.

B. Export Performance

3. Cambodia’s total exports grew by 29 percent per annum in the 1990s. As political stability was restored, countries in the region generally benefited from a recovery in exports. However Cambodia’s average growth rate in total exports is much higher than that of Vietnam (21 percent) or Laos (20 percent) (Table 1).

Table VI.1.

Selected Asian Countries: Export Performance

article image
Source: International Financial Statistics

4. Despite the recent surge in garment exports, Cambodia’s overall volume of exports remain relatively low compared to other ASEAN countries and its export potential has not been fully exploited. In line with strong export growth, various indicators of trade openness show that Cambodia has been catching up to the more dynamic economies of East Asia. The total export to GDP ratio increased from 12 percent in 1990 to 27 percent in 1999, already surpassing China (20 percent) and close to Indonesia (34 percent), but still much lower than Thailand (46 percent) or Malaysia (105 percent). However, per capita exports (export/population) of Cambodia was still only US$73 in 1999, low compared to China (US$155), Indonesia (US$250), Thailand (US$914), and Malaysia (US$3,826).

5. The surge in garment exports has been the main driving force in export growth. With increased stability, and reflecting the fact that some neighboring countries were close to using all of their quota, foreign investors started to shift their production base to Cambodia. The United States extended general preferential status (GSP) to Cambodia in 1995 following a similar move by the European Union. Duty free access to those markets enabled a surge in garment exports in 1998 while other major garment exporters suffered from the impact of the Asian crisis. China, Hong Kong SAR, Thailand, and Indonesia, all recorded decreases in garment exports. Cambodia thus increased its market share to 1 percent for the US market and 0.5 percent for the European market. Cambodia has still not obtained access to the Japanese market (Table VI.3).

Table VI.2.

Cambodia: Export Destination

(In millions of US dollar)

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Source: Ministry of Commerce
Table VI.3.

International Garment Trade, 1992-98

(In millions of US dollar)

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Source: WTO International Trade Statistics, Cambodian Ministry of Commerce

6. The potential for non-textile exports has yet to be fully exploited. Customs statistics recorded nontextile exports in the amount of US$ 15-20 million per annum in the late 1990s.1 In 1997, one-time exports of wood products (US$20 million) pushed up total non-textile exports to US$50 million. ASEAN countries used to be the main export destination before the Asian crisis, however, this went down to almost zero in 1998 (Table VI.4). Instead, other Asian countries, including Japan, emerged as an important export destination in 1998. Main export items for this region are footwear and processed wood. Europe is the second important destination for nontextile exports consisting mainly of footwear and frozen shrimp. In addition to the official statistics, a significant amount of forest products and rubber are estimated to have been exported in 1997–98; however, full details of these transactions are not available.

Table VI.4.

Cambodia: Major Trading Partners

(In thousands of US dollar)

article image
Source: Ministry of Commerce

7. Competitiveness in terms of the real exchange rate remained broadly constant from 1994 through end-1999. However, the neighboring crisis hit ASEAN countries experienced a devaluation in their real effective exchange rates by 20–30 percent Thus, Cambodia’s real effective exchange rate relative to those competitors has appreciated. However, the real effective exchange rate may not be a good indicator of competitiveness, since the Cambodian economy is highly dollarized and the domestic capital market is not developed. It would be desirable to construct a competitiveness indicator based on wage levels; however, given the dominance of the agricultural sector, the wage index is not available for a sufficiently long period to construct a comparable index. Given the positive aspects of the return to political stability and increased confidence, Cambodia’s underlying productivity has improved, and the current level of the exchange rate is viewed as consistent with continued good performance of exports and with attracting foreign direct investment.

C. Overview of Current Trade Policy

8. The government has made considerable progress in establishing a modernized trade regime. During the 1960s, Cambodia was an exporter of agricultural products (mainly rice, rubber and corn) and the balance of payments was relatively stable. However, as the regional conflict spilled over into Cambodia in the 1970s, foreign trade virtually collapsed. Under the trading system adopted in the early 1980s, foreign trade was under a state monopoly and most transactions were governed by annual protocols with the Council for Mutual Economic Assistance (CMEA) countries (although Cambodia was not a formal member of CMEA). A process of market-oriented liberalization began in the late 1980s. The state monopoly for foreign trade was abolished in 1987 and the foreign investment law was promulgated in 1989, enabling private companies to engage in foreign trade. Multiple exchange rates were unified in 1990 and trade with former CMEA countries shifted to a convertible currency basis by 1991.

Export controls

9. Cambodia has eliminated all export controls except the export ban on logs, the export quota on rice, garment quotas, and export licensing requirements for security and health reasons. There are five items that are subject to the export licensing requirements: rice, wood, garments, weapons, all vehicles and machinery for military purposes, pharmaceutical and medical materials. The export quota on rice has been in place since 1996 as a replacement for a ban on rice exports before 1995. This quota on rice exports is not binding since the actual export volume has never reached the ceiling set by the quota, due to limited capacity to export. For 1996–97, actual rice exports were around 30,000 tons, well below the ceiling set by the quota (100,000–120,000 tons a year). A special inter-ministerial working group decides the annual ceiling for the rice export quota. Individual transactions, which should not exceed 3,000 tons, are granted an export license from the Ministry of Commerce.

10. An export ban has been imposed on specified types of unprocessed timber and sawn logs since May 1995. Buoyant economic growth recorded in the Asian countries in the early 1990s had created a substantial increase in demand for logs. Meanwhile, the neighboring countries such as Malaysia and Thailand strengthened their control on log exports; hence, the prices of logs substantially increased. These elements, together with limited institutional capacity for proper forestry management, created a strong incentive for illegal log exports from Cambodia. The current expert ban is inefficient as it encourages excessive and costly domestic processing, and the government intends to review the log export ban in the future in line with improvements in overall forestry management.

11. An export quota has been in place for garment exports to the United States since 1999, in response to the recent surge in garment exports from Cambodia. The authorities are implementing a flexible management to the quota allocation. Eighty percent of the quota was allocated to the individual exporters based on the previous year’s exports. Ten percent of the quota was allocated as an incentive to factories for quality improvement or improvements in labor conditions, and another 10 percent of the quota was auctioned through open competitive bidding. The export quota for 1999 was based on the export results for 1998 with a 6 percent increase. The quota for 2000 was based on the 1999 results with an 11 percent increase (a 6 percent basic increase and a 5 percent additional increase, awarded as an incentive for improvements in labor conditions).

12. Cambodia currently enjoys GSP status from 26 countries, including the United States since 1995. Under GSP, Cambodia has tariff-free access to its counterparts with markets in annual quotas. The garment sector is the main beneficiary of these arrangements.

13. The authorities place priority on the issue of improving standards since the improved standards will be important for expanding exports from agro-industries. Fulfillment of health requirements and other standards are critical for exports of agricultural products. Cambodia has already successfully exported frozen shrimp to Europe. To facilitate further growth, refrigerating facilities and other health standards need to be recognized by trading partner countries.

Import policy

14. Quantitative restrictions on imports were all eliminated in 1994 as a part of comprehensive trade reform measures. At present, there are no quantitative restrictions on imports. The import license system was also eliminated in 1994, except for selected items such as pharmaceutical products, gold and silver, armaments and ammunitions, and various cultural and medical materials. Ministerial authorization is required for importing these items.

15. The new ASEAN-compliant tariff schedule in Cambodia, which became effective in 2000, comprises 6,807 tariff headings and 12 rate bands, ranging from 0 percent to 120 percent. The simple average tariff rate is about 17.4 percent. Over 90 percent of the tariff headings fall under just three rate bands: 7 percent, 15 percent and 35 percent. Both import and export tariffs consist of only ad valorem duties. At present, there are no preferential tariff duties, although they are expected to be introduced in the context of AFTA. Half of the imports are tariff exempted: aid related, government imports, or investment-related imports. Tariff lines at the eight-digit level in the harmonized system totaled 3,069 as of 1999.

16. Up to now, a large proportion (over 80 percent) of exempted duties have stemmed from provisions in the investment law. The investment law grants partial or complete duty exemptions to projects in specified sectors with or without time limits. Since these exemptions are too generous given a weak tax base in Cambodia, the authorities have started to reduce the scope of these benefits. Since 1999, new investments in the garment and telecommunication sector are not eligible for tax incentives under the investment law. The second largest portion (10 percent) of imports with duty exemption are related to imports financed by external aid.

17. The authorities are gradually eliminating tariff concessions on imports for re-export. There is a significant transit trade with Thailand and Vietnam. Since a duty drawback system is yet to be instituted due to administrative constraints, Cambodian authorities set up a discount system on imports intended for re-export. The Ministry of Economy and Finance set certain ratios on total imports for individual items and this portion was deemed as imports for re-export. The re-export items cover a wide range of goods.2 In October 1999, the tariff treatment for cigarettes was unified.

AFTA and WTO

18. Cambodia was formally admitted to ASEAN in April 1999 and, as a result, has accepted the obligation to implement a number of trade liberalization measures on both the policy and administration fronts according to a specific timetable. The main mechanism for tariff reduction in the AFTA context is the Agreement on Common Effective Preferential Tariff (CEPT). All member countries are required to reduce import tariffs to levels below 5 percent within 10 years3, and to remove non-tariff barriers such as quotas and licenses.

19. Cambodia aims at comprehensive and expedited tariff reductions in the context of AFTA. Cambodia included 47 percent of tariff lines in the list of tariff lines subject to reduction to 0–5 percent over 10 years. This ratio is higher than other new members in ASEAN: Laos (15 percent), Vietnam (28 percent), and Myanmar (43 percent). The Cambodian authorities are considering expediting the timing of completing tariff reduction, since original ASEAN members will complete tariff reductions by 2003.

20. At this time, Cambodia is in a position to implement a comprehensive and fast reduction of tariffs. Tariff revenue is concentrated on a limited number of tariff lines. Moreover, for many tariff items, domestic industries are yet to emerge, thus tariff reduction will not face domestic political objections. Lowered costs of the imported materials will be welcomed as factors for facilitating industrial development given that most domestic industries still need to rely upon imported materials and machinery.

21. Trade liberalization will be facilitated in the context of the recent application for WTO accession. Cambodia has been granted observer status in the WTO since 1995. To apply for full membership, Cambodia has already submitted its Memorandum on Foreign Trade Regime to the WTO secretariat. Future WTO accession will require general tariff reductions and customs administration reforms similar to those required in the AFTA context.

D. Role of Foreign Direct Investment in Export Development

22. Foreign Direct Investment has recently been playing a major role in export development in Cambodia. In the mid 1990s, foreign companies invested in the forestry and wood processing industries. Those companies contributed to the exports of wood products and sawn timber, although some of them are reported to have engaged in illegal log exports. The investment approval statistics indicate foreign direct investment in other manufacturing sectors (mainly wood processing) to be nearly US$1.5 billion during the period 1994–99. However, a substantial portion of these approvals may have not been realized4.

23. There was a surge of foreign direct investment in the garment sector during 1997–98. GSP status given by the European Union and the United States, and prospects for improved political stability, were contributing factors. Foreign investments sought the comparative advantage stemming from an abundant labor force, relatively low wages, and quota free status. Given the announcement that the export quota would be based on the export results in 1998, investors competed to make record exports to secure the quota allocation for 1999. Accordingly, after the second half of 1999, there was a major slowdown of investment approvals.

24. Given the large population in the rural community, foreign direct investment created only a modest number of new jobs directly. According to the investment approval statistics, cumulative figures of potential employment by foreign investments reached 390,000 by 1998. However these figures were based on the plan incorporated in the investment application and therefore overestimate actual job creation since they include the potential employment figures for projects which eventually were not realized. For example, investment approval statistics in the garment sector indicate cumulative total potential employment is 230,000; however a recent industry survey shows about 100,000 are actually employed in the industry. Based on similar ratios, it is likely that foreign direct investment has created around 150,000–200,000 jobs directly. Given a total labor force of six million, direct job creation through foreign direct investment still remains limited. Because of the growth of the garment industry, export generation by these foreign investments has been substantial. The productivity of the export sectors is also high compared to the rest of the economy.

E. Conclusion

25. As evidenced by the recent surge of garment exports, Cambodia has a large potential for export development that remains untapped. The government is aware of the vital importance of increasing exports as a main source of economic development in the future. Membership in AFTA is a major step in terms of trade liberalization; however, the implementation of the tariff reductions will be delayed for several years compared to the original ASEAN six. In the next several years, the rapid pace of trade liberalization in other ASEAN countries may adversely affect the competitive position of Cambodian exports. Development of the export infrastructure, strengthening of the financial market, and enhancing the legal infrastructure, are among priority actions for export development.

Chart VI.1
Chart VI.1

CAMBODIA CONSUMER PRICES AND EXCHANGE RATE DEVELOPMENTS, 1994-2000

Citation: IMF Staff Country Reports 2000, 135; 10.5089/9781451821758.002.A006

Sources: Data, provided by the Cambodian authorities, and Fund staff estimates.1/ National Bank consumer price index through December 1995; thereafter, NBC index based on change in CPI of National Institute of Statistics, which has been adopted as the official consumer price index.2/ Riels per US Dollar, end-period buying rate.3/ Based on the official exchange rate; an upward movement indicates appreciation of the exchange rate.

References

  • Fukase, Emiko and Will Martin (1999), Evaluating the Implications of Cambodia’s Accession to the ASEAN Free Trade Area: A General Equilibrium Model (CGE) Approach (mimeo), (Washington DC: The World Bank)

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    • Export Citation

  • Kato, Toshiyasu, Chan Sophal, Long Vou Piseth (1998), Regional Economic integration for Sustainable Development in Cambodia, CDRI Working Paper 5, (Phnom Penh: CDRI).

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    • Export Citation

  • Keat Chhon, Aun Porn Moniroth (1998), Economic Development of Cambodia in the ASEAN Context, Policies and Strategies, Cambodian Institute for Cooperation and Peace, Phnom Penh.

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  • Sharer, Robert et al., (1998), Trade liberalization in IMF-Supported Programs. World Economic and Financial Surveys (Washington DC: International Monetary Fund)

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  • World Bank (1999), Cambodia Public Expenditure Review, Enhancing the Effectiveness of Public Expenditures (Washington DC: The World Bank)

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1

Domestic exports only. A substantial amount of goods are imported and re-exported that are not fully recorded in customs statistics.

2

Cigarettes (80 percent, Motorcycles (75 percent), Beer (50 percent), VCRs (85 percent), TV sets (92 percent), Audiocassettes (95 percent), gold (90 percent). In 1997, the ratio was reduced to Motorcycles (30 percent), Beer (30 percent), TV sets (20 percent), and Audiocassettes (20 percent).

3

The Sixth ASEAN Summit held in 1998 decided to accelerate the realization of AFTA by one year, from 2003 to 2002. As a result, The six original members (Brunei Darussalam, Indonesia, Philippines, Singapore and Thailand) will reduce tariff rates to be applied to the items in the Inclusion List below 5 percent by 2002. The newer members of ASEAN will proceed according to a somewhat more gradual schedule: tariff reductions will be completed by 2006 for Vietnam and by 2008 for Laos and Myanmar.

4

Statistics on the realization of the foreign direct investment are under compilation and not yet published.

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Cover IMF Staff Country Reports
Cambodia: Selected Issues
Author:
International Monetary Fund
Volume/Issue:
Volume 2000: Issue 135
Publisher:
International Monetary Fund
ISBN:
9781451821758
ISSN:
1934-7685
Pages:
63
DOI:
https://doi.org/10.5089/9781451821758.002
  • Chart VI.1
    View in gallery
    Chart VI.1

    CAMBODIA CONSUMER PRICES AND EXCHANGE RATE DEVELOPMENTS, 1994-2000

Chart VI.1

CAMBODIA CONSUMER PRICES AND EXCHANGE RATE DEVELOPMENTS, 1994-2000