Cambodia Shifts as Lao Languishes
Cambodia Export Revival and Trade Shifts, Lao Economic Growth Remains Subdued
Cambodia Export Revival and Trade Shifts
By World Bank
Cambodia’s economic activity picked up in the first quarter of 2024, driven by a revival of services and goods exports, and despite subdued domestic demand. Economic growth is expected to improve marginally to 5.8% in 2024, up from 5.6% in 2023, and should further strengthen by 6.1% in 2025 and 6.4% in 2026 as revival in garment, travel goods, and footwear exports and tourism propel the ongoing recovery.
"To sustain economic growth, Cambodia needs to maintain macro-financial stability by restoring fiscal space and safeguarding its financial sector,” said World Bank Country Manager for Cambodia Maryam Salim. “Cambodia can also strengthen competitiveness by improving the business climate, streamlining trade procedures at borders, making the energy supply more reliable, and strengthening education."
International tourist arrivals continued to improve in the first quarter to 84% of pre-pandemic levels. Exports of garments, travel goods, and footwear rebounded, while non-garment exports, especially of agricultural commodities, remained resilient.
The Association of Southeast Asian Nations (ASEAN) region has emerged as Cambodia's second largest export market after the United States. Rising foreign investment in manufacturing and agriculture also contributed to the recovery.
Inflation declined to zero in March as food prices decelerated, while the current account recorded an unprecedented surplus in 2023 as the trade deficit narrowed and tourism receipts rose.
Construction activity remains subdued, however, as the property market correction continues. As a result, domestic credit growth has slowed significantly, weighing on private consumption and domestic revenue collection.
A special focus section examines how Cambodia can strengthen its education system to increase worker skills and boost productivity.
Recommendations include stepping up investment in early childhood and primary education, enhancing teacher effectiveness, and making the distribution of resources more equitable.
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Lao Economic Growth Remains Subdued
By World Bank
Economic growth in the Lao PDR is estimated to have been below 2019 levels in 2023 and is forecast to remain below that pace in 2024, weighed down by economic instability, low worker skills, out-migration of labor, and a challenging business environment.
Lao GDP is estimated to have grown 3.7% in 2023, with positive contributions from tourism, transport, logistics, and mining, according to the Lao Economic Monitor for April 2024, Accelerating Reforms for Growth, Foreign investment increased substantially, mainly in electricity and mining, while improved revenue collection has offset increased public spending. In 2019, growth stood at 5.5%.
Continued high inflation, caused by the falling value of the kip, means that consumption remains constrained. In 2023, the annual average official kip/US dollar exchange rate weakened by 31%.
Given Laos’ high import dependence, depreciation brings changes in domestic prices. Headline inflation averaged 31% over 2023 and remains high, with food, transport, hotel, and restaurant price increases the main contributors.
“While average household incomes improved in 2023, about a third of Lao households, especially low-income families, have seen their purchasing power fall behind inflation,” said Alex Kremer, World Bank Country Manager for the Lao PDR. “Our monitoring surveys show over 30% of families have reduced their spending on health and education, while in urban areas where fewer people grow their own food, food security is becoming an increasing problem.”
In 2024, GDP is projected to grow by 4%. Economic activity is expected to benefit from further growth in services, plus investment in the power sector and some special economic zones. However, kip depreciation and high inflation are likely to persist due to a lack of foreign exchange and the need to repay high external debts.
Between 2020 and 2023, about $2 billion (around 15% of GDP at the 2023 rate) of principal and interest payments on debts owed to China was deferred. Nevertheless, debt payments will still require large amounts of foreign currency, and access to international capital markets has deteriorated with loss of access to the Thai bond market.
Recent regulations requiring the repatriation and conversion of export proceeds from mining, power, agriculture, and services may bring more foreign currency into the economy in the short-run but could be counter-productive if they deter future investment.
The report recommends restoring macroeconomic stability through a strong commitment to five critical reform areas: debt management, revenue mobilization, public investment management, financial sector stability, and business environment reforms. Recent revenue reforms will help balance finances, but the overall pace of reform needs to accelerate.
This edition of the Monitor includes a thematic section on education, which finds that public education funding has fallen, with the 2023 budget allocation for education 38% down from the 2013 figure in real terms.
While strong human capital and education are fundamental to putting Laos on a sustainable high-growth trajectory, primary education is no longer universal across the country: an increasing number of children are dropping out and those who stay are not learning.
This has follow-on effects for subsequent education levels. Most Lao secondary students score below expected levels, especially in mathematics and science. If learning outcomes are to improve, the education sector needs urgent re-prioritisation and increased budget allocation.
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