Rising inflation threatens to overwhelm Cambodian households – The diplomat

After the end of the financial crisis in 2009, the Cambodian economy experienced vigorous growth, with GDP growth rates reaching 7% or more every year. But that growth has dropped dramatically due to the COVID-19 pandemic. Hundreds of thousands of workers in clothing and footwear manufacturing, as well as transportation, tourism and construction, have been hit by a severe recession that has resulted in widespread job and income losses.

The shock was caused in part by sharp declines in household consumption expenditure, household savings, new FDI investments and the quantity and range of products exported. Cambodia’s economic output declined by an unprecedented 3.1% rate in 2020 due to the pandemic. At the time, the Consumer Price Index (CPI) for December reflected a improvement 2.9 percent, which at first glance appears to be an uncomfortably high rate of inflation.

At this point in the pandemic, Cambodia – like much of the world – is in a position to The uncertainty signet, in which we do not know the outcome of a given situation and cannot know all the information we need to accurately assess the future. When we talk about inflation and interest rates, we are doing it in a context where there is a lot that we don’t know that will likely remain unknown for a very long time.

There is uncertainty about the Phillips curve, the real unemployment rate and its relation to the inflation rate. There is also uncertainty over multipliers, uncertainty over central bank reconciliation, uncertainty over what share of the budget will support vulnerable people, and uncertainty over the size and funding of the government’s economic stimulus package. All of these uncertainties negatively impact the ability of governments and economists to produce policy recommendations aimed at solving the problem.

Despite all the uncertainties, however, rising inflation is an issue Cambodian economists and relevant government officials must focus on. The issue emerges as a serious concern, especially for low-income households, the unemployed and those who earn their living in the informal economy.

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Inflation, or the rate of change in the prices of a basket of goods and services, changes over time; it is not a simple phenomenon to measure and interpret. Perpetually too high inflation can be detrimental to household well-being, especially when offset by a comparable increase in income, creating a vicious cycle. However, when inflation is consistently too low, it can be difficult for the central bank to adjust its monetary policy by setting interest and exchange rates to support the economy. It is a sign that the economy is below capacity. It can also negatively affect some investment decisions.

The International Monetary Fund (IMF) has forecast that inflation in Cambodia growth rate at 3.1% in 2021 and 2.8% in 2022. Although we do not yet have monthly price data from January to April of this year, we can anticipate an acceleration in inflation which will pose challenges policy makers, investors and family savings throughout the year. come.

In April 2020, at a time of relative economic paralysis in and around Phnom Penh as COVID-19 began to hit, the CPI was 1.9 percent higher compared to the same month in 2019. For example, “core” CPI items such as food and non-alcoholic beverages represented a significant change of 4.4%, while the price of housing, water, electricity, gas and other fuels rose only 0.1% due to lower world oil prices.

Twelve months later, in April this year, Phnom Penh and the neighboring city of Takhmau were placed on lockdown with strict travel restrictions. On April 14, an audio message from Prime Minister Hun Sen about his decision to close the city was escape before the official announcement. In the absence of immediate clarification from the government, the leak caused many citizens to rush to buy food, causing the prices of some products to rise sharply.

Even before this strict lockdown, starting in late February, some essential daily items were already rising in price significantly, according to a report of the Ministry of Commerce. The report showed that rice prices in Siem Reap and Preah Sihanouk provinces have increased as dramatically as 33.33 percent and 17.56 percent, respectively. At the same time, in Kandal, Svay Rieng, Kampong Cham and Battambang provinces, the price of beef has increased by around 10 percent and the price of pork has increased by 59 percent. In addition to food, the price of basic medical products has also increased. Prices for surgical masks, hand sanitizers and temperature kits, in high demand at the time, have climbed 30% to 100%, depending on the region.

The problem is compounded by the fact that Cambodian households have clearly experienced a decline in their purchasing power. The World Bank recently published a fourth round result of its High Frequency Household Telephone Survey (HFPS) ​​in Cambodia. HFPS is a follow-up telephone interview with over 1,680 respondents, including 1,277 representative households with an IDPoor participation card – which allows beneficiaries to access services such as subsidized schooling and free health care, as well as making them eligible for the government’s COVID-19 money transfer program – and 410 representative households without an IDPoor participation card. The result revealed that in December, 32 percent of households with an IDPoor card experienced moderate to severe food insecurity. The same is true for 17% of these families without an IDPoor card.

Also according to the results of the HFPS, 10% of those polled said they had lost their jobs compared to the pre-pandemic period in January 2020. The report also noted that almost one in two households reported a loss of income: 48% of households without ID The poor and 46% of households with a poor ID reported a decline in household income in December.

At the same time, a third round A COVID-19 economic impact study conducted by Angkor Research and Consulting, in partnership with Future Forum, found that 12% of households reported a reduction in their savings between January and October 2020 and that families with any type of loan increased their borrowing by 10 percent over the same period. It seems that the loans are mainly used for daily expenses such as food, to repay other loans and to pay for health services.

Indeed, from the first positive case of the virus in January last year and the resulting restrictions imposed to deal with the pandemic, the demand for many services has decreased significantly. This phenomenon may have prompted open-ended restaurants, hotels and travel agencies to raise their prices. Macroeconomists call the inflation caused by such spending spurts “demand-driven inflation”.

On the other hand, several inputs in agriculture and other industries have increased the cost of products due to lack of production and some problems in value chains and supply chains. Economists classify this type of inflation as “cost-driven inflation”.

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Comprehensive policy measures taken by the Cambodian government to control the pandemic have not focused on the problem of rising prices, especially for food products. Competent authorities should turn their attention to this problem and to the broader issue of inflation, with an emphasis on rapid reaction and monetary policy reform in response to any transitory price hikes. If they can do this, of course, it will benefit the overall consumption of Cambodian households.

Given the precarious situation of many Cambodian households, the administration should carefully monitor actual price changes and inflation expectations for any signs of unexpected price pressures that may arise, even Cambodia leaves the pandemic and enters. in the next economic expansion.

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