Country Report Cambodia February 2010

Outlook for 2010-11: Monetary policy

In response to consumer price deflation and the weakness of the economy, the NBC has attempted to support domestic demand and stimulate credit growth by means of looser monetary policy. However, policy will have to be tightened soon, as the pace of money supply growth is already beginning to accelerate, with broad money (M2) expanding by 29.4% year on year in October, compared with a low of 0.5% in February. After reducing the banking sector's reserve requirement to 12% in January 2009, the authorities are likely to raise the proportion of commercial bank deposits that must be held as reserves, although it will be some time before the reserve requirement returns to its previous high of 16%. Credit is still scarce and banks are reluctant to lend, with claims on the private sector up by only 2.8% year on year in August-the slowest pace of growth on record. The effectiveness of monetary policy will remain limited, owing to the high degree of dollarisation of the economy. Debate on the subject of when steps should be taken to de-dollarise the economy will continue, but there is unlikely to be any such move in the next two years.

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