The National Bank of Cambodia (NBC) has forecast the country’s annual inflation rate will increase to 4% year-on-year in 2022, as demand post COVID increases and supply chains are squeezed due to logistics pressures and geopolitical crises.
Cambodia’s recent rate has remained steady with an annual average of 3% – 5%, considered stable for a developing economy after 2008 saw a spike of around 30% due to the Global Financial Crisis impact on surging food prices and dependence on foreign energy sources.
Speaking to the International Monetary Fund H.E. Sum Sonthiseth, Deputy Governor of the National Bank of Cambodia recently stated that the rise of inflation in 2022 will be caused by the rising prices of food and fuel, as well as the transportation prices have increased amid disruptions in the supply chain and surging domestic demand.
He added the 4% year-on-year rate was deemed an acceptable level after the COVID pandemic decreased local production and squeezed supply chains adding the country’s financial sector remained stable and resilient.
To read more about Cambodia’s logistic and supply chain issues click here.
Increasing local supply is key
Cambodia’s economy continues to rely on its traditional narrow growth base of four sectors: agriculture, garments, construction and tourism. Lack of diversification and dependence on external markets and foreign investment render Cambodia vulnerable to external economic shocks.
Speaking to Cambodia Investment Review in response Dr. Ky Sereyvath, an Economist from the Royal Academy of Cambodia that the rise in inflation may also be due to higher domestic spending from locals after the COVID-19 crisis and the reduction of small and medium enterprises.
“During the COVID-19 pandemic, inflation was expected to rise just over 3%, but due to low domestic production and a shortage of foreign supply, Cambodia has struggled with rising prices and increasing inflation. The war in Ukraine and the slowdown in the global economy are also factors to boost Cambodia’s inflation up to 4%,” he said.
“Domestic production has been declining for nearly two years due to the pandemic. We face serious challenges with the influx of imports from abroad and our production is cut off from some sectors. This is why we urge the Cambodian government to transform its policy of economic growth and financial support for small and medium enterprises in Cambodia,” he added.
To read more about Cambodia’s economic outlook click here.
Rising the value of Khmer riels
While a highly dollarized economy such as Cambodia can prevent hyperinflation from local currency shocks the dependency on US currency also limits the levers available to the central bank to control the broad money supply and leaves the country highly vulnerable to a global crisis.
Dr. Chheng Kimlong, Director, Center for Innovation, Governance and Democracy, Asian Vision Institute said the current solution is for the government to strengthen its national monetary policy by ensuring that Khmer riel rates are high enough to afford the dollar.
“On the other hand, because Cambodia is importing a lot of goods from abroad and the dollar is depreciating further, the government needs to adjust the exchange rate or increase the value of the Khmer Riel to a higher level to contain this situation,” he said.
“When the Khmer riel is valuable, we can buy dollars and keep buying goods from abroad. This will reduce the price of goods and revitalize the national currency,” he added.
Current inflation levels have not yet had a major impact
Dr. Hong Vannak, an Economist from the Institute of International Relations of the Royal Academy of Cambodia told Cambodia Investment Review that despite this rise in the cost of living he did not expect a large impact on daily life.
“That said for long-term protection the Cambodian government must put in place mechanisms to prevent hyperinflation to ensure the well-being of the Cambodian people at a time when the world is facing many issues and it will be impacted the long-term on Cambodian people, especially in rural areas,” he said.
Before the pandemic, Cambodia had been reducing its total population rate with the latest figures for 2019-2020 by the Ministry of Planning indicating that 17.8% of the total population or more than 2.8 million Cambodians nationwide are living below the poverty line.
Cambodia has three levels of daily poverty rates set at $2.50 for Phnom Penh, $2.30 for urban areas and $2.10 for rural zones.
Sam Oudom is a Prince Foundation Young Business Journalist.