Economic Growth, Trade Imbalances, and External Adjustment in Cambodia

Abstract

This study examines the relationship between economic growth, trade imbalances, and external adjustment in Cambodia using annual time-series data from 2000 to 2024. Cambodia has achieved strong economic growth over the past two decades, supported by export-oriented manufacturing, foreign direct investment, tourism, construction, and increasing integration into regional and global markets. However, despite this growth performance, the country has continued to experience persistent current account deficits and external sector vulnerabilities, reflecting dependence on imported capital goods, intermediate inputs, consumer products, and foreign financing. The objective of this study is to identify the long-run and short-run effects of GDP growth, inflation, gross domestic savings, trade openness, and foreign direct investment on Cambodia's current account balance. To achieve this objective, the study applies the Autoregressive Distributed Lag (ARDL) approach, which is appropriate because the unit root results show that the variables are integrated at mixed orders, I(0) and I(1). A COVID 19 crisis dummy is included to account for the extreme structural break in the current account in 2020–2021. The empirical findings show that, after controlling for the pandemic shock, GDP growth does not have a statistically significant long-run effect on the current account balance, suggesting that sustained economic expansion alone is insufficient to guarantee external improvement without accompanying structural changes. Inflation has a statistically significant negative long-run effect, indicating that higher domestic prices reduce export competitiveness and worsen the current account balance. In the short run, GDP growth has a negative and statistically significant effect on the current account balance, implying that rapid economic expansion initially increases import demand before export capacity adjusts. Gross domestic savings also has a negative short-run effect, while inflation shows a positive short-run effect. The error correction coefficient is negative and statistically significant, indicating that approximately 76.4% of disequilibrium is corrected within one year. Diagnostic tests show that the revised model is free from heteroskedasticity, serial correlation, and severe multicollinearity, and the residuals are normally distributed. Overall, the study concludes that Cambodia's external adjustment depends not only on maintaining economic growth but, more critically, on improving export diversification, controlling inflation, attracting productive FDI, strengthening domestic value chains, and reducing import dependence.