Cambodia's consumer Price Index inflation last year stood at a satisfactory 4 percent, below an economic growth rate of more than 5 percent and well within the bounds of acceptability.
In 2011, however, inflationary pressures will rise leaving the Kingdom in a familiar Catch-22 scenario: Although almost all key indicators including GDP growth and bank lending will likely move in the right direction, in turn this will only fuel inflation.
The Cambodian government has increasingly used fiscal measures such as new taxes and tax enforcement along with a sober budget to help prevent runaway price rises. But with few monetary options at its disposal due to persistently high dollarisation, the state still lacks the most useful tool to control rising prices – interest rates.
Economists have predicted India will join Thailand and South Korea in raising interest rates this month to fight rising food and commodity prices, but in Cambodia no such luxury exists given the United States Federal Reserve remains the Kingdom’s default formulator of monetary policy.
This familiar situation posed few problems in 2010 as the economy started its recovery. But this year inflation will become a much greater threat.
“Inflationary pressures are increasing,” said Nick Owen, a Beijing-based economist specialising in Cambodia for the Economist Intelligence Unit.
The price of diesel in Cambodia has already risen 6.2 percent since December 1 at Sokimex, Tela, Caltex and Total petrol stations while premium gasoline is up 5.3 percent.
“Fuel is certainly going to have an impact, but I would be a lot more concerned about food prices, which globally are trending upwards,” Stephen Higgins, the CEO of ANZ Royal bank, said yesterday.
Prices for the national staple rice have steadily climbed in recent months and will likely retain upwards momentum as exporters look to raise the volume of overseas shipments this year. Paddy was up 1.72 percent on average at markets in Phnom Penh this month up to Wednesday.
With major banks reporting lending growth of over 30 percent last year and the micro-finance industry experiencing a similar rise in loans, most financial analysts have predicted liquidity will continue to expand in 2011 exerting further inflationary pressure.
Higgins said it may therefore be time for the National Bank of Cambodia to consider raising the reserve requirement again to help put a break on this influx of cash.
This would seem prudent, given the country’s outlook. The likes of the Asian Development Bank and the International Monetary Fund are predicting inflation of between 5 and 7.7 percent this year, while the EIU raised its outlook by 0.2 percentage points this month to 6.2 percent.
With inflationary pressures mounting and scarce monetary tools available to address the problem, Cambodia will be doing well if inflation is kept at the lower end of this scale.