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Kelly Bird and Edimon Ginting

Presentation to the Cambodia Economic Forum

5 February 2009
Phnom Penh
1.  Surge in inflation in 2008 provides opportunity to take stock of range of
available policy levers to address shocks to the Cambodian economy and to
mitigate the effects on the poor

2.  The 2008 inflation episode also reminds us that Cambodia like any small open
economy is vulnerable to external food price shocks

5.  The global economy right now is highly uncertain

i.  The threat of deflation in some economies in 2009/2010

ii.  The threat of subsequent bouts of inflation in the medium term associated with the
large amounts of liquidity pumped into banking systems of developed countries

7.  It also helps to educate the community about inflation, how to measure it
and the role of policy

9.  It also helps to design appropriate programs to mitigate the effects on the
1.  Food price inflation explains most of the variation in Cambodia’s
inflation (about 80%)
2.  And this is primarily linked to food price developments in major trading
partners in the region (Thailand and Viet Nam)
3.  Core inflation – excludes volatile food and energy prices from the index
- is the better measure of underlying inflation in Cambodia and this
should be monitored closely
4.  Money supply growth matters in influencing core inflation, especially in
2007 when the economy showed signs of ‘overheating’.
5.  The exchange rate does not appear to be a significant factor
influencing domestic inflation - outcome of heavily dollarized economy
6.  While currently limited, there is a role for monetary policy, and
especially over the longer term. Fiscal policy is an important policy
1)  Some Facts About Cambodia’s Price
2)  Core Inflation as a Measure of Underlying
Inflation in the Domestic Economy
3)  Demand Pressures on Core Inflation
4)  Causes of Inflation in Cambodia – Empirical
5)  Policy Implications
i.  Short term
ii.  Long term
iii.  Mitigating the Impacts on the Poor
•  Three measures of inflation used in the paper

1)  Headline inflation rate – calculated from the

monthly consumer price index or CPI (survey
carried out by NIS in Phnom Penh every month)

3)  Food price inflation calculated from the food

index in the CPI

5)  Core inflation – ADB calculated two core inflation

(i) Core_EF = CPI excluding food
items (ii) Core_ EFFT = CPI excluding
food, fuel and transportation

•  Core inflation is more likely to be driven by domestic

and demand factors
•  Demand factors – two measures used in the

1)  The Output Gap, measures the difference between actual

GDP and estimated potential GDP.
•  If the output gap is positive then this tells us that there
are excessive demand pressures in the economy, which
in turn may increase inflation

3)  Monetary Aggregates and private sector lending.

Monetary aggregates include:

•  M1= riel currency in circulation and demand deposits
•  M2 = M1 plus term deposits and foreign currency deposits
in commercial banks
•  Faster growth in money supply, higher inflation
1.  Historically, low inflation with rates
ranging between 2% and 7%, per
annum (Figure 1).

2.  Food is the main contributor to

inflation, accounting for over 80% of
inflation between 2002 and 2008.
3.  Food price inflation in Cambodia closely
tracks inflation in Thailand and Vietnam
more than other countries.

•  Therefore, price developments in these two

countries are more directly relevant in
explaining domestic inflation in Cambodia
than international food indicators.
4.  Core inflation has been relatively low,
averaging about 2.5% from 2003 to
•  It surged above 5% in early 2008
suggesting second round effects were
beginning to emerge from the global
food price shock
In assessing inflation in Cambodia the following factors are taken
into account:
1)  Cambodia is a small, open economy so domestic inflation will
be influenced by international prices.
2)  Cambodian economy is integrated with economies of Thailand
and Viet Nam through trade, so we expect price developments
in these two economies to be more relevant to Cambodia than
international price indicators
3)  The tradable goods sector dominates the economy and the
CPI index (so expect international prices to be dominant in
domestic inflation).
4)  Cambodia’s economy is substantially dollarized – limited role
for monetary policy and limited exchange rate pass-through to
the economy
5)  Financial sector, whilst improved a lot in the last decade, is
less developed and financial intermediation still shallow – this
limits the kinds of monetary instruments available to
•  Complete transmission from Thai and Viet Nam inflation to
Cambodia’s inflation
–  10% increase in trading partners’ inflation leads to about
10.7% increase in Cambodia’s headline and food inflation

•  Money supply M1 does matter for influencing core inflation,

especially in 2007, i.e., the period associated with the possibility
of ‘economic overheating’
–  A 10% increase in money supply growth leads to a 1.7%
increase in core inflation in 2006/07; prior to 2007 the impact
was 0.8%

•  Exchange rate did not have any impact on inflation

–  Might be due to exchange rate effects transmitting through
Thailand and Viet Nam’s inflation rates
–  International studies show that exchange rate pass-through
effects are reduced/diminished when countries participate in
common currency arrangements or currency boards, and this
may be true for Cambodia
•  Food price developments, which explain most of the
variation in headline inflation is linked to price
developments in major trading partners (Esp.
Thailand and Viet Nam).
•  Core inflation is a better measure of underlying
inflation/deflation and should be closely monitored –
useful to publish the core measure like the Thai and
Philippines central banks.
•  The transmission of domestic macroeconomic policy
(monetary and fiscal policy) to domestic inflation is
through the prices of non-tradable goods and
services, and reflected by movements in the core
inflation measure.
•  Fiscal policy is an important policy lever to influence
inflation in the short term (i.e., fiscal policy should be
•  As the Cambodian economy develops and gets more sophisticated it may be
essential for authorities to expand monetary instruments.

•  In this context, international experience suggests that the move towards

money market instruments for the conduct of monetary policy requires
three initial conditions to be fulfilled over the longer term:
–  Continued sound fiscal policy
–  Sound and competitive financial system with adequate supervisory
framework, and
–  Operational capacity and a sufficient degree of institutional autonomy of
the central bank

•  To establish these three initial conditions in the longer term the paper
–  NBC take stock of existing market infrastructure, develop action plan to
address existing weaknesses, and adjust the mix of policy instruments
as progress is made
–  NBC develops a medium term action plan for developing its mix of
instruments, which would include actions to stimulate the development
of an inter-bank market.
•  Fiscal policy can be used to mitigate effects on the poor.
•  In designing relief measures the paper suggests:
–  Indirect tax relief is poorly targeted and not recommended
–  Export bans or taxes redistribute gains from farmers to
consumers and are not recommended as it undermines
longer term domestic supply
–  Food subsidies are poorly targeted and not recommended
except in food emergencies
–  Direct social assistance such as unconditional cash transfers
(UCT) and or conditional cash transfers (CCT) as in
Indonesia and other countries have shown to be more
effective in reaching target groups and generally cheaper to
–  The conditional cash transfer -which links assistance with
school attendance and or immunization of children in the
household promotes human capital development of children
and escape from poverty.