Economic growth in Cambodia accelerated during 2018 – driven primarily by increased garment exports – but the World Bank has warned this momentum could slow as a result of heightened uncertainty over the loss of preferential access to the EU market under the Everything But Arms scheme.
In its World Bank East Asia and Pacific Economic Update, April 2019: Managing Headwinds report, the World Bank indicated that Cambodia’s economic growth achieved a four-year high of 7.5% in 2018 compared to 7% in 2017. This was fuelled by higher demand for garment and footwear exports from the US.
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Garment and footwear exports, which account for more than two-thirds of total merchandise exports, recorded a four-year high, growing by 17.6% in 2018, up from 8.3% in 2017.
The World Bank said as exports moderate in line with deceleration in global demand, real growth is projected to ease to 7% in 2019 while remaining near 7% in the short term. However, the longer-term outlook depends on the country’s ability to absorb rising FDI inflows, while promoting domestic investment. In this regard, cheaper energy and logistics costs, availability of skilled workforce, and improved supply chain linkages will be essential to remain competitive.
One of the main risks to economic growth it added is the potential suspension by the European Union of Cambodia’s preferential access under the Everything But Arms (EBA) scheme, which currently gives Cambodia’s exports duty-free access to the European Union market.
The European Commission in February started the process that could lead to a temporary suspension of preferential EBA tariff arrangements – which can be removed if beneficiary countries fail to respect core human rights and labour rights. The EU has for some time been concerned about human rights violations in Cambodia.
Earlier this month, European and international business associations representing apparel, footwear and travel goods buyers voiced concerns at the labour and human rights situation in Cambodia, noting the potential withdrawal of EU EBA benefits and US GSP benefits are “worrying developments” for companies sourcing from the country. In a joint letter addressed to Samdech Hun Sen, prime minister of Cambodia, eight business associations – including the American Apparel & Footwear Association (AAFA), Amfori, and the Federation of the European Sporting Goods Industry (FESI) – called for a roadmap of timebound commitments to tackle the issues.
“The EU market currently accounts for more than a third of Cambodia’s key exports (including garments, footwear and bicycles),” said the World Bank report. “Therefore, losing EBA preferences, which currently provide Cambodia duty-free and quota-free access to the EU, would likely result in slower export growth. In addition, given Cambodia’s heavy reliance on capital inflows from China, a sharp slowdown in the Chinese economy could dampen growth prospects.”
“It is also crucial for Cambodia to improve external competitiveness. Foreign investors confirm that low labour costs, high tax incentives and preferential access to key export markets are the reasons for their investment in Cambodia. With rapidly rising wages and risks of losing EBA trade preferences, it is critical that the country embarks on structural reforms, especially those that can help improve the investment climate, and reduce the cost of doing business, including introducing competitive energy prices and lowering logistic costs.”
