Can Cambodians cope with the rising cost of living?

Poovenraj Kanagaraj

The consumer price index at its highest in five years last October, has been on an uptrend, reflecting an expanding cost of living in a nation that is still categorised as a least developed country

The consumer price index at its highest in five years last October, has been on an uptrend, reflecting an expanding cost of living in a nation that is still categorised as a least developed country

For the latest Cambodian Business news, visit Khmer Times Business

Cambodia has experienced one of the major transformations over the decades in ASEAN, going from one of the world’s poorest countries to a lower middle-income country. The past decade has all been about robust economic growth averaging seven percent per year.

The country is also ranked well in terms of fastest poverty reduction over the years. However, this pace of growth, while evidently positive for the economy, has its downside in the form of increasing cost of living which is becoming more apparent on the ground.

Last October, the consumer price index (CPI) stood at a five-year high of 176 since 2013, driven by food and non-alcoholic beverages, housing and utilities, and transport. In fact, 11 out of 12 major items measured showed a year-on-year rise in its index.

The CPI measures the weighted average changes in the price of a basket of 12 consumer items such as food and non-alcoholic beverages, alcoholic beverages, tobacco and narcotics, clothing and footwear, transport, housing and utilities, and health. It is basically the average price a person would pay for a good or service, making it a marked measure for inflation.

Year-on-year, food and non-alcoholic beverages rose 3.2 percent. It made up nearly half the weighted percentage of the CPI basket with housing and utilities representing 17.08 percent of the index.

Independent think tank Asian Vision Institute’s centre for governance innovation and democracy director Dr Kimlong Chheng says reliance on consumer product imports to cater to rising domestic demands and income has attracted high-end products from overseas that might have pushed up the CPI.

According to the Commerce Ministry, Cambodia recorded $13.77 billion worth of imports in 2018, an increase of 5.78 percent from $13.02 billion a year ago, and 14.10 percent from 2016. The imports mostly comprise automotive vehicles, petroleum, fabric and electronics.

As for exports, namely garment, footwear, bicycles, electronic components and auto parts, and agricultural products such as rice, palm oil, pepper, cassava, rubber, mango and banana, saw a 4.05 percent growth to $11.21 billion in 2018 compared to $10.78 billion a year ago, and 16.87 percent from 2016.

“The price of rice and cooking oil with other items in the CPI basket are the determinant factors for the rise,” says Economy and Finance Ministry’s macroeconomic and fiscal policy department deputy director Kruy Narin.

The retail price of popular Jasmine rice Somali (Pka Malis) and Phka Khnei from Battambang shows that the average price per kilogram dipped 3.18 percent to 3,527 riel and 2.78 percent to 2,654 riel in 2017 from 2016, respectively. On December 13, 2018, average retail price per kilo for Somali stood at 3,540 riel while Phka Khnei rice was 2,600 riel.

Apart from imports, fluctuation in global fuel price is also an influencer of the CPI. Between 2016 and 2017, the average gasoline pump price expanded 10.09 percent to 3,685 riel while diesel climbed 10.68 percent to 3,388 riel. The average retail price of fuel amounted to 3,440 riel (gasoline) and 3,500 (diesel) on December 13, 2018.

Kimlong says all of these have an impact on the cost of living which is dealt differently by different income classes. Often, this affects the lower and lower middle income wage earners who are mostly blue collar workers.

In Cambodia, where a third of the adult working population is employed by the garment and footwear industry, the issue of coping with higher living cost is a constant niggle. This, despite monthly minimum wage of industry workers rising by seven percent to $182 this January. Minimum wages in the country averaged $130.25 per month from 2014 until 2017 when it reached $153 a month.

“Those whose income has risen faster than the inflation rate will fare well, and those whose income has grown less than the inflation rate will suffer whereas people whose income has not risen or has declined will suffer more,” he tells Capital Cambodia via email.

A riel effort in a dollarised economy

In the past few years, National Bank of Cambodia has been actively pushing for the widespread usage of the riel amid de-dollarisation efforts in the country. Observers say de-dollarisation might push up inflation as the local currency reacts to major currencies globally.

Dr Jayant Menon, lead economist in the office of the chief economist of the Asian Development Bank says assuming Cambodia is fully de-dollarised, the riel would become the formal currency of transaction.

If the government decides to run a deficit budget, and chooses to finance it by printing money rather than raising taxes, the government would be able to purchase additional goods and services without increasing taxes as it would be the first to spend the money that it prints.

However, Menon says, if someone has to pay as there is no such thing as a “free lunch”, the additional purchases by the government are paid for by citizens who hold their wealth in nominal balances.“If the printing of money results in the doubling of the money supply, the general price level also doubles. Citizens who hold nominal balances or have incomes that are not indexed to the inflation rate will find that their purchasing power has halved due to the doubling of the price level in the long run,” he adds.

Menon explains that inflation tax, which is a hidden tax, results in the redistribution of resources away from the public and towards the government.

“At the moment, dollarisation limits NBC’s capacity to finance spending through inflation tax. (Meaning that) … dollarisation imposes discipline by limiting the ability of the central bank to finance spending by printing money.

“Eliminating access to inflationary finance of this type reduces the risk of currency and balance of payment crises, which in return can reduce the level and volatility of interest rates and may ultimately stimulate growth. It also avoids distributional or equity concerns associated with the impact of government-induced inflation on different groups in society,” he adds.

But Narin opines that if de-dollarisation materialises, it would apply to salary and daily transactions, thus increasing people’s purchasing power.

Having said that, Kimlong believes that international trade would remain reliant on the use of US dollars in large volume, so any impact on the cost of living depends on the exchange rate of the riel against the greenback.

Soothing the situation

Therefore, Kimlong says potential issues posed by rising cost of living can be tackled firstly by raising the wage of workers in the formal economy and the income level of the population.

Expansion of employment and job security would provide ways for Cambodians to prepare for potential issues posed by the rising cost of living.

“The government should expand food production for domestic consumption and export. At the same time, it should also reduce imports that are vulnerable to price changes or inflation shock in foreign countries, and reduce import tax on those imports,” Kimlong says.

In the meantime, the government has implemented measures to reduce food price by exempting value added tax for import and consumption of basic food items, and promoting competition in slaughterhouses and fish distribution centres.

“But as income per capita grows which is about 5.2 percent now with three percent inflation rate, we feel Cambodians would be able to cope with the rising cost of living,” he adds.

 

Related articles