Cambodia: Government Doubles Bank Reserve Requirement In Bid To Tame Inflation

PHNOM PENH, CAMBODIA: The Cambodian government has decided to double the private bank reserve requirement in a bid to reduce cash flow in the economy and tame inflation, a Finance Ministry official said Wednesday (7 May).
The measure will take effect in July when all private banks will have to raise their reserve requirement from 8% to 16%, said Hang Chuon Naron, secretary-general of Cambodia's Finance Ministry.
He said the move is necessary to cut back on loans made to the private sector and help cool down the economy, which "has been heating due to too much cash circulation ... that has spurred investment but also driven up prices on property and general commodities."
The Cambodian economy grew an average of 11.1% a year in the 2004-7 period. Inflation rose along with the growth, with sharp increases in foods and fuel.
Through the end of January, measuring from the end of 2006, the food price index increased 20.9% and the transportation cost index rose 13.5%, the Finance Ministry said in a report last month.
Officials at the Association of Banks in Cambodia could not be reached for comment Wednesday.
In Channy, the president and CEO of ACLEDA Bank Plc., said the reserve measure "is not a good idea at all." He said it would slow growth and limit business and employment opportunities.
Banks should lend out 100% of the deposits made by the public, he said.
"The more they lend the more investment can be generated, as well as more employment, more income for both companies and private individuals," he said.
Cambodia has a cashed-based economy in which 90% of bank deposits and the money in circulation is in foreign currency, mostly the U.S. dollar.
In Channy said current bank deposits in Cambodia total about US$2.4 billion. ACLEDA is holding 21% of the total deposits, making it the second largest commercial bank in the country.
He said banks' loans _ which are already less than 80% of the total deposits _ will effectively shrink by another 8% as a result of the government measure. The reduction, he predicted, would result in a decline in investment and employment.
Even if the measure was necessary, it should have been gradual and "not jumped straight to 16%" from 8%, In Channy said. "I believe we need more growth," he added.
Hang Chuon Naron, the Finance Ministry official, did not say how long the measure would stay in place. He stressed that the government's "goal is to cool (the economy) down to avoid too much inflation."
"When it grows too strongly, it generates inflation, so we cannot tackle both" at the same time, he said. (AP)