IF business dictates that spending money is necessary to make money, then Cambodia’s spiraling trade deficit is a case in point. In the short term there is little problem if higher imports of raw materials lead to higher exports, the scenario presented by many economists and trade officials. But the key challenge lies in the fact that Cambodia is currently configuring its economy for longer term deficits that will ultimately put pressure on an already large balance of payments deficit that hit 13.4 percent of GDP last year, among the highest in the region, according to the International Monetary Fund.
Figures for trade with Vietnam released this week highlight the extent of the problem. While Cambodia’s exports to its neighbour in the first five months of this year rose just 3 percent, imports soared 139 percent leading to a trade gap that widened by more than 60 percent to some US$767 million. Given Vietnam is Cambodia’s third-largest trade partner, this is cause for alarm. Certainly skyrocketing imports from a country that recorded 20 percent inflation last month is hardly helping matters – the fact is Cambodia is spending more in Vietnam than any other country except Thailand, a country where prices are out of control, according to the IMF. That’s a bit like doing a significant chunk of your shopping at a store that, far from having special promotions, is instead regularly jacking up its prices.
Meanwhile, with the country’s biggest trade partner Thailand, the deficit jumped 25 percent in the first quarter to $606 million. How sustainable is this?
In terms of the current account, Cambodia is getting away with a widening trade deficit because investment and foreign loan capital inflows have recovered strongly during the recent recovery from the economic crisis.
And with foreign investment in industry booming in Cambodia, these same foreign companies often come with tailor-made export markets. So while this model for development generates capital inflows and demand for Cambodian exports, it also creates demand for raw materials and so far Cambodia has shown it can only supply materials in the rawest sense. Almost all remotely sophisticated components have to be imported.
To reduce pressure on the current account, Cambodia can compensate for the widening trade gap with capital inflows, usually in terms of foreign investment, but that only entrenches a longer term dependence on the import of raw materials which in turn points to the only real solution. Cambodia has to start expanding its ability to produce raw materials and to process them into a usable form, whether it’s silk, cotton, rubber, timber or metals if the reliance on imports is to be reduced in the longer term. This is surely a key goal as industry develops.
So while economists and trade officials are right that rising imports at the moment are a positive sign, in the longer term this burgeoning trade deficit simply cannot continue without harming the current account, which in turn threatens the value of the country’s assets.