Logo of Phnom Penh Post newspaper Phnom Penh Post - Inflation tops 25pc in first half of year; growth to slow

Inflation tops 25pc in first half of year; growth to slow

Inflation tops 25pc in first half of year; growth to slow

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Roth Ven fills a jerry can with oil outside a garage on Sothearos Boulevard, across from the site of the multipurpose International Finance Centre, on Sunday. New building projects have fuelled strong economic growth but Cambodia remains plagued by record high inflation. RICK VALENZUELA

INFLATION rocketed to more than 25 percent in the first half of the year, driven by unprecedented lending and higher investment, as well as rising global commodities prices, according to the National Bank of Cambodia (NBC).

The bank's biannual report, released on August 14, also projected economic growth would slow to 7.2 percent this year as declines in the garment and construction industries are expected to overshadow the continued rise in tourism.

At the end of the June, gross foreign reserves rose to US$2.2 billion - a 24 percent increase since the beginning of the year and a 62 percent rise over the first half of 2007. Commercial bank deposits held at the NBC, a component of international reserves, rose by $141 million, the report said.  

"International investors see political stability and economic growth. Development has been tremendous within the past decade," NBC Director General Chea Chanto told the Post in an earlier interview.

The downside of robust foreign direct investment, however, was a 25.1 percent inflation rate over the year's first half, a dramatic increase from 6.0 percent and 9.7 percent in the first and second halves of 2007, respectively, as reported by the bank.    

Loans to the private sector by banks and other financial institutions were 83 percent higher in the first half compared with the same period last year. In response, the NBC raised capital reserve requirements in June from 8-16 percent to battle inflation by tightening credit and money supplies and to give banks a hedge against risk.

"The NBC is well aware of the challenges that private sector growth and foreign investment could pose for the stability of the banking sector.... We have observed demand pressure led by increased capital inflows and a resultant sharp credit growth that has contributed to excess liquidity. The new measure on reserve requirements attempts to mop up excess liquidity and ... ease the demand pressure on inflation," Chea Chanto said.

He said that, in the wake of recent spikes in bank lending, "particular efforts are being applied to monitoring the credit risk assessment of banks to ensure that banks are correctly grading loans and making sufficient provisions".

'A global problem'

The report also attributed high inflation rates to rising global costs of commodities and oil.

"This matter is a global problem. The price of crude oil, food prices and the low value of the dollar have all contributed to inflation. Cambodia - as a small, open economy and a price taker - has been very much affected by such developments," Chea Chanto said.

Gross customer deposits were 26 percent higher in the first half of this year compared with the same period last year, and the total number of deposit accounts increased from 456,026 in 2007 to 639,522 accounts as of June 2008.

The riel remained stable in the first half, fluctuating between 4,001 riels and 4,124 riels to the US dollar, according the NBC's tabs. The report also said rural finance in Cambodia continued to expand in size and scope and has played a critical role in the development of agriculture, as well as small and medium enterprises.

Development has been tremendous within the past decade.

Microfinance institutions and registered rural credit operators issued loans to 673,725 customers totaling $212 million in the first half, a dollar increase of 73 percent over the same period last year, according to the NBC.

Deposits with microfinance institutions rose 31 percent over the same period last year to $5.7 million. "Currently, the NBC is enhancing the framework for microfinance institutions to accept deposits," Chea Chanto said.

Chea Chanto told the Post that countrywide access to the formal banking and finance sector was a priority for the bank, in order to protect rural people from being "cheated ... in the countryside with high interest rates from informal money lenders".

ADDITIONAL REPORTING BY BRENDAN BRADY

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