Prime Minister Hun Sen and financial experts from around the region warned yesterday that rising commodity prices and growing inflation rates in Asia risked spilling over into Cambodia and adversely affecting the country’s poor.
Unlike most other countries in the region—which have been grappling with rising food prices and inflation spurred by large capital in-flows from developed countries—Cambodia’s inflation rate has so far remained stable, reaching just 3.1 percent in January. But that could soon change.
“In the coming years, we need to carefully watch inflation as a rapid rise of regional inflationary pressures coupled with the hike in food and oil prices could have an adverse spillover into our domestic economy,” Mr Hun Sen said yesterday at a conference in Phnom Penh on the economy’s prospects.
Though Mr Hun Sen revised 2010’s GDP growth figure upward form 5.5 to 5.9 percent, and forecast future growth at somewhere between 6 and 7 percent, he also said high demand in the region for agricultural products would result in “prevailing high prices of food” and “persisting food security concerns.”
Oil prices are again hovering at about the $100-per-barrel mark, while corn prices are up 74.34 percent on the year at $6.40 a bushel on the Chicago board of trade, a mercantile exchange. So far, rice prices are stable at more than $500 a ton, but the success of this year’s harvests will determine the future course of prices.
Still, the premier’s words were a long way from remarks last year when the focus was on how Cambodia would respond to the impacts of the global financial crisis that saw both exports and air arrivals to the country fall by about 20 percent.
Mr Hun Sen said rapid growth in Asia—estimated at 6.8 percent by the International Monetary Fund—would likely have positive effects for Cambodia, such as more demand for agricultural products and higher returns for farmers
“It is expected that Cambodia will benefit from future global investment and credit flows, which favors Asia due to the weakening of demand in other parts of the world,” the premier said, adding that the government would be focusing on better training of the labor force and further improvements to the business environment.
He also recounted long-standing objectives for Cambodia’s economy to create new industrial sectors in vehicle assembly and electrical appliances.
Economists say that while Cambodia’s growth rate would appear strong, the global recovery is still very fragile, with sovereign debt risks in Europe and high unemployment in the US still a reality.
“Unlike in the rest of Asia, there has been no increase in inflation,” said Milan Zavadjil, senior resident representative for the International Monetary Fund in Cambodia, while speaking at the conference. “But unfortunately, I am not sure this will last.
“I would expect inflation to edge up slowly,” he added.
Mr Zavadjil said Cambodia was already taking advantage of regional growth with more foreign investment entering the country and better transport connections being made with neighboring countries.
“Asian corporations with the strong balance sheets…can invest in Cambodia and seem to be starting to do so,” he said. Government figures show that foreign investment increased 8.22 percent to $553 million last year.
Mr Zavadjil added that while labor productivity was on the rise in Cambodia, the country was still lagging in areas such as health, education and infrastructure when compared to most other countries in the region.
Revenue collection in Cambodia is also still very weak, which greatly limits spending. The IMF’s stance is that using tax holidays—of which there are many in Cambodia—to entice businesses is not that beneficial when trying to attract investors. Improving the overall business environment proves more successful.
During the course of yesterday’s conference, members of the audience raised concerns about the possible effects that rising food prices could have on Cambodia’s poor, who in 2008 suffered an average inflation rate of 25 percent.
In its February food price index, the UN Food and Agriculture Organization reported that global food prices had increased for the eighth consecutive month.
Hang Chuon Naron, secretary of state at the Finance Ministry, said that putting controls on food prices was not part of government policy. Instead encouraging competition among local producers and delivering better market information to traders would help keep prices down.
“We always try to make sure the producer can enjoy high prices,” he said, adding that developing a processing industry capable of storing food over longer periods would also help to keep prices down.
According to figures presented by Mr Chuon Naron yesterday, the agricultural sector grew by 4 percent last year and the industrial and services sectors posted increases of 13.5 percent and 3.1 percent respectively.
However, land prices registered an overall decline of between 10 to 15 percent.
On the brighter side, revenue collection increased by 23.8 percent to 6,292 billion riel, or about $1.57 billion, in 2010. Credit growth in the banking sector reached $3.3 billion in 2010 compared to $2.54 billion the previous year.
Despite a growing economy, experts say that the government will have to act now in order to protect the poor from an eventual rise in prices.
“Ultimately there will be some pressure as food prices increase,” said Putu Kamayana, country director for the Asian Development Bank.