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Handling inflation

Handling inflation

Cambodia’s annualized rate of food inflation hit 24 percent last month – the highest in almost a decade, and one of the highest in the region.

The price of staple goods has fluctuated week by week. Rice, pork, cooking gas and even beer have all leapt in price. A case of Angkor beer has gone from an average $8 to $15 in a matter of weeks.

The government has released tons of surplus rice onto the market and lifted a pork import ban in a successful bid to stabilize prices.

On March 28, the National Bank of Cambodia – the Kingdom’s de facto central bank – met representatives from private banks to consider various options to combat rising inflation. One option – to raise the reserve rate was debated and then rejected.

While policy moves can mitigate the worst impact of price rises on Cambodia’s poorest households, subsidies and short-term fiscal adjustments cannot make overall economic growth more stable.

“As a starting point the financial system is handicapped,” said economist Kang Chandararot of the Cambodian Institute of Development Study.

“Domestic production is inflexible and it can’t respond to the crisis. The price of rice increases and we watch.”

For a decade, the Cambodian economy has grown on the same narrow base of garments, tourism and agriculture. There has been little industrial development and few attempts to diversify the economy.

“The lack of diversification, especially on food products, makes it more difficult for the economy to adjust to [external] price pressures,” said Stephane Guimbert, World Bank senior country economist.

Global factors such as rising oil prices and a depreciating US dollar have contributed to rising prices across the region, Guimbert said.

Cambodia’s food price inflation rate for 2007 was largely in line with the rest of the region: China had 18 percent, Sri Lanka 34 percent and Vietnam 25.2 percent.

But internal factors are also at play, Guimbert said. “Issues relating to the investment climate have constrained non-real estate investment over the years.

“And part of today’s inflation is the result of supply constraints, i.e. the demand for goods and services is growing faster than the economy is able to supply,” he said.

The government and the opposition have responded with politically charged rhetoric: “Dishonest men” are driving rice prices up, charged Prime Minister Hun Sen. “Corruption, mismanagement and incompetence on the part of the government” have caused inflation to rise, shot back opposition leader Sam Rainsy.

“At the macroeconomic level the situation is quite arbitrary politicized, which is dangerous,” said economist Chandararot.

The heated rhetoric of politicians could be making price changes worse said Chan Sophal, director of the Cambodian Economics Association. He said the dramatic fluctuations in the price of basic goods are fueled, at least in part, by rumors.

For some, such as Son Soubert, a member of the Constitutional Council, politics and economics are inseparable.

“If you mismanage something it becomes political,” he said. “Why are they so sensitive about inflation? It could have been foreseen that this would happen but they did nothing.”

The Sam Rainsy Party, which is organizing a mass demonstration in Phnom Penh on April 6 to demand that the government take action on inflation or provide salary increases for workers, says the problem is due entirely to economic mismanagement.

“What the government has been doing [with subsidies] is superficial and not effective at all – they don’t address the real issues, which are the mismanagement, the corruption of officials who allow some business men to abuse their commercial monopolies,” Sam Rainsy told the Post on April 2.

He called the April 1 agreement to add $6 to workers wages – as an additional allowance rather than an across-the-board increase – “a joke” and said that pay rises had to be “of the same magnitude” as inflation to offset the impact on quality of living.

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