The National Bank of Cambodia said Monday it may raise its deposit reserve requirement for commercial banks from 8 percent to as much as 20 percent in an effort to check inflation.
NBC Director-General Tal Nay Im confirmed by telephone Monday that the policy was under consideration, but declined to provide details.
“This one is not yet decided. I cannot elaborate,” she said.
But banking industry sources familiar with the proposal said it could slow economic activity without reducing inflation, which rose to a nine-year high of 10.8 percent in 2007.
Central banks around the world often require commercial lenders to keep a portion of their customers’ cash deposits at the central bank as a fund to be used if lenders face bankruptcy or heavy demand for withdrawals. The US requirement, for example, is 10 percent.
Adjusting the minimum reserve requirement can also be used to set monetary policy, as it reduces the amount that can be loaned by banks and encourages lenders to charge higher rates of interest.
Seeking to stabilize soaring prices, the People’s Bank of China last month increased its banking reserve requirement to a record 15.5 percent, the 12th such raise since last year.
“This could be part of the answer, but I wouldn’t expect too much out of it,” World Bank Senior Country Economist Stephane Guimbert said of the proposal Monday.
“Inflation is not only caused by domestic factors,” Guimbert said.
“Because we can see credit is growing very rapidly, it looks like a good idea to make sure the growth isn’t too rapid,” he said, adding that other inflationary pressures include rising demand and the high price of oil.
“Central bank intervention is not going to address all the central causes of inflation,” he added.
Acleda Bank President In Channy said Monday that as of February, Cambodian banks held about $2.5 billion on deposit, meaning a possible reserve requirement of 20 percent would remove about $500 million from circulation.
Setting interest rates, a common monetary policy tool in developed countries, would have little effect in Cambodia, which has a small securities market and little inter-bank lending, he said.
Acleda Bank hopes the NBC will reconsider the proposed raise, he said.
“If you reduce loans, it reduces employment. You reduce employment and it will affect economic growth,” he said. “Normally, to slow down inflation they can do other things, like issuing more bonds.”
“It’s against the principle of free markets,” he added.
However, Guimbert said tackling inflation may require some slowing in the growth rate, which has averaged 9 percent over the past seven years.
“If part of inflation is because the economy is growing too fast, then you can’t have it both ways,” he said.
Cambodian Commercial Bank Director Natthawut Chakanan said Monday that his bank was still considering its position on the new proposal, but another Cambodian banking industry executive who declined to be named said he expected such a move would do little to reduce inflation.
“If the reason were to make the banking industry more stable, that would be more acceptable,” he said.
The ratings agency Standard and Poor’s also announced Friday it was affirming its B/B+ rating for Cambodia’s sovereign debt, which it announced a year ago.
“Supporting the ratings on Cambodia is the country’s record of strong growth and prudent macroeconomic policies,” S&P said in a statement.
“The ratings on Cambodia are constrained by vulnerability of growth and external liquidity due to the country’s underdeveloped and narrow economic profile,” S&P said.