Gov’t Doubles Banks’ Reserve Requirements

In an effort to stem rising inflation the government has doubled reserve requirements for private banks from 8 percent to 16 percent, effective July, Hang Chuon Naron, secretary-general of the Ministry of Finance, said at a conference on inflation Tuesday.

Credit to the private sector was $230 million in 2000, $450 million in 2004, and $1.6 billion in 2007, Hang Chuon Naron said at the conference.

“This measure is aimed at reducing credit to the private sector,” he noted in a presentation to the conference.

Some worry the move could curtail the country’s economic growth.

In Channy, president and CEO of Acleda Bank, said in an interview on Tuesday that just 75 percent of domestic bank deposits are used for lending, less than in other countries.

He said doubling the reserve requirement, which applies only to foreign currency deposits, which account for over 90 percent of deposits in Cambodian banks, was “not a good idea.”

“Banks haven’t lent enough to the private sector,” In Channy said. “My idea is to maintain previous reserve requirements and encourage banks to lend more. The more investment in Cambodia, the more you generate employment and economic growth,” he said

In Channy said he would rather see the government issue bonds to help moderate inflation and offer food ration coupons to alleviate the immediate effect of rising prices.

While much inflation is due to rising oil and food prices, the rapid increase in money sloshing around Cambodia, much of it a result of foreign investment, has also played a role, participants at the conference, sponsored by NGO Forum, said Tuesday.

“Inflation is caused by too much money chasing too few goods,” John Nelmes, resident representative of the International Monetary Fund, said Tuesday.

Nelmes said the best thing the government can do to alleviate inflationary pressure is to take some money out of circulation—a challenging task because the country’s dollarized economy means the government can’t easily control money supply and domestic interest rates.

Nelmes praised the move to raise bank reserve requirements and also the government’s push to boost revenues-tax collection grew by 40 percent last year-which have helped cool inflation.

Allowing the riel to appreciate against the dollar could also help lower the cost of imports, he added.

Nget Sovannarith, assistant to the secretary-general of the National Bank of Cambodia, told the conference that in addition to raising the reserve requirement, NBC was working to curtail loans used for real estate speculation.

“We prevent that activity,” he said.

In large part, conference participants said, domestic inflation has been driven by factors beyond Cambodia’s borders: Rising oil prices, shrinking global grain stocks, and a depreciating dollar helped drive food prices up 24.2 percent in the year ended January 2008, the National Institute of Statistics reported.

The retail price of rice rose 66 percent, to 2,933 riel a kilogram, in the year ended March 2008, while the cost of pork and chicken rose 75 percent, the Cambodia Development Resource Institute’s Chan Sophal told the conference.

“In a free market economy, there are some mechanisms to stop food prices from rising. But we can’t command prices. Politicians can make promises about the sun and the moon, but gasoline, fertilizer, imported vegetables we cannot control. I pity our poor,” Hang Chuon Naron said.

“We import inflation,” he added.

Indeed, the government holds little sway over drought in Australia, floods in Bangladesh, pests in Vietnam, bad weather in the Ukraine, rising Chinese demand, spiking oil prices, and increasing bio-diesel production-all of which have contributed to inflation.

The government, Hang Chuon Naron said, has done what it can to mitigate the domestic impact of price shocks in global markets. In March, the government announced a temporary rice export ban, and sold tons of government rice at below market rates.

This year, the government will spend $10 million to stockpile rice, up from $6 million last year, Hang Chuon Naron said.

The government also recently lifted taxes on agricultural equipment imports to help staunch rising farm production costs; continues to subsidize electricity; and is taxing oil at a reduced rate so consumers don’t bear the full brunt of spiking fuel prices, he added.

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