Riel stability key to curb rising inflation

[PHNOM PENH POST]

IN the Asian Development Bank’s latest outlook for the region, there was no mistaking the biggest threat to economies in East Asia – inflation. Although inflationary pressure is growing in Cambodia as fuel and commodity prices continue to climb, the recent stability and strength of the riel should help cushion the country from the kind of inflation witnessed in Vietnam.

While Cambodia is expected to see inflation rise to 5.5 percent this year, a rate the ADB said would remain the same in 2012, Vietnam recorded annualised price rises of nearly 14 percent last month.

Much of this inflationary pressure is derived from the sliding dong, which slumped to 20,713 to the dollar last month, the lowest reference rate since June 1993. ANZ Global Markets analysis shows that for every one-percentage point rise in the dollar-dong rate, inflation climbs 0.3 percentage points.

Meanwhile, the riel has strengthened against the dollar over the past fortnight, finishing last week at 3,989 to the dollar, according to the National Bank of Cambodia. The weak dong means the Vietnamese government has had to raise the minimum wage, a measure which will come into effect on May 1. But in Cambodia the local currency is responsible for little or no inflationary pressure right now.

This is partly due to a weak dollar, which slumped to its lowest level against the struggling euro in more than a year on Friday, as well as seasonal demand for the riel as rice dealers buy up supplies at the end of the harvest. However, it remains to be seen whether the riel can maintain its current strength. Traditionally Cambodia’s currency slumps in the middle of the year, but as ever the riel’s fortunes will largely depend on the performance of the greenback.

Other inflationary factors remain, however. “Upward pressure on prices will be generated by the strengthening domestic demand, generally expansionary fiscal policy, and higher global prices for food and fuel,” the ADB noted in its Cambodia outlook last week.

The key to Cambodia avoiding spiralling inflation will be its ability to keep food prices as stable as possible, particularly for rice as the country drastically raises exports.

In this regard, Cambodia should examine how other rice-exporting countries have managed this difficult balancing act.

Thailand, the world’s largest rice exporter, uses price controls and subsidies, for example, to tame inflationary pressure on rice prices prompted by the demand created by a high level of exports.

The other major threat to rising inflation in Cambodia is fuel prices. In the short term, oil will surely continue to rise as long as turmoil continues in the Middle East. There is nothing Cambodia can do about this.

But now the riel is at about 4,000 to the dollar, the NBC should do everything it can to keep the currency at this level. Inflation – along with a host of other economic variables – depend on it.