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 in 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.

“This measure is aimed at reducing credit to the private sector,” he said.

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

In Channy, president and CEO of Acleda Bank, said in an interview Tuesday that just 75 percent of do­mestic bank deposits are used for lending, a low level by international standards.

Doubling the reserve re­quire­ment, which applies only to foreign currency deposits, was “not a good idea,” he said. Foreign currency de­posits account for more than 90 percent of deposits in Cambodian banks.

“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.”

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, said participants at the conference, sponsored by NGO Forum.

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

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, the 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 a 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 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 said.

 

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