Who decides on current fiscal expenditures and how does the NBC take part in this aspect given that the MEF controls budgets while the NBC controls fiscal money and its stability?
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Fiscal expenditure formulation is an important task that requires careful consideration at both the technical and political levels to ensure efficient budget allocation. The MEF plays a leading role in coordinating and formulating fiscal expenditures. As indicated in Budget System Reform Strategy, the annual budget preparation aims to ensure that budget policy links within constrained resources.
Although, there is no direct involvement in this work, the NBC has a role in the macroeconomic policy to support our annual budget preparation. The NBC has put in place appropriate monetary tools to ensure economic and financial stability. With a broadly stable exchange rate, the NBC has helped the government to effectively implement expenditure policy.
Q: Do you feel there is any overlap between the roles and responsibilities of the MEF and the NBC over matters such as interest rate policies which has a direct impact on the Khmer riel stability as well as financial liquidity?
Vongsey Vissoth: It is an important question. In terms of our roles, we have a clear division of duties and responsibilities. However, I believe that no country has the perfect separation of responsibilities between fiscal and monetary policy authorities because of the intertwined nature of causes, effects and macroeconomic objectives. We are all working towards the same goals: consisting of employment, price stability and sustainable economic growth. Complementary roles between fiscal and monetary policies is crucial.
The MEF and NBC have complementary roles. Firstly, Cambodia’s economy is highly dollarized – which limits space for monetary policy manoeuvre. Thus, in some circumstances, fiscal policy remains an important tool. For example, the MEF reduced the withholding tax from 14 percent to 10 percent for microfinance institutions (MFIs), when the NBC introduced the interest rate cap at 18 percent for MFIs. Secondly, government expansionary fiscal policy would affect interest rates because Cambodia does not have a bond market. In this connection, the MEF is currently preparing the regulatory infrastructures to establish a bond market in Khmer riel, which would support the NBC’s objective to promote the use of local currency.
More importantly, as the global economy is evolving with more challenges to our economy, we understand that further deepening collaboration and co-ordination between our institutions are even more necessary.
Q: How effective is the co-ordination and collaboration between the MEF and the NBC because this is of crucial importance to investors, particularly in periods of financial stress?
Vongsey Vissoth: Over the past several years, these two institutions have greatly enhanced the co-ordination and collaboration to ensure the effectiveness of the policy formulation and policy implementation. The NBC has taken a more active role in policy discussion with the MEF to enhance the relevance of their policies and measures to promote macroeconomic and financial stability.
Effective co-ordination is a must to address pressing issues hindering Cambodia’s competitiveness and diversification in order to support sustainable growth and monetary stability. The majority of banking transactions are dollarised, meaning that we have minimal impact on the exchange rate stabilisation and international reserve position through the use of interest policy.
Instead, foreign exchange intervention has been applied in the condition of free capital flow. Policy response co-ordination, through the Committee for Economy and Finance Policy, is critically important in this dollarised economy, meaning monetary policy and fiscal policy have to be in line to ensure the sustainable economic growth with sound monetary stability.
The National Committee on Cambodian Financial Stability will serve as a formal platform for policy dialogue and co-ordination in ensuring the stability of the Cambodian financial system and protect it against internal and external shocks. Both the MEF and the NBC will be leading institutions in this endeavour.
Macroeconomic Framework (FPP) Core Technical Working Group has – under the support of the International Monetary Fund (IMF), the MEF, the NBC and the National Institute of Statistics – committed to hold regular core group meetings every quarter to review, update, and assess the current economic performance and develop a coherent macroeconomic projection known as Financial Programming and Policies version 1.0 (FPP 1.0). Currently, the core working groups is developing a more advanced macroeconomic modelling known as FPP 2.0, which can generate shock scenarios as well as policy response scenarios for evidence-based analysis and informed policy decisions.
On top of that, co-operation and coordination between the two institutions is not enough to ensure that the RGC will achieve the policy objectives of sustainable economic growth with monetary stability. Therefore, effective policy coordination, as well as accountability and transparency in terms of data and information sharing among all relevant stakeholders are vitally important in ensuring the credibility of economic and financial policies, which enhances the confidence of investors, particularly in periods of financial stress.
At the same time, we recognise that we need to further exert our efforts to strengthen our joint policy responses to overcome domestic challenges and cope with heightened global risks.
Q: How often does the NBC call on the MEF for advice and assistance in executing its regulatory functions or advisory responsibilities which may call for close coordination with the government?
Vongsey Vissoth: The MEF and the NBC perform different roles of fiscal policy and monetary policy. However, we share mutual goals to ensure macro-financial stability for economic growth and development, which are the RGC’s objectives. Hence, there are cross-cutting tasks on which both institutions must co-operate and coordinate. Both the NBC and the MEF have also contributed to the annual IMF Article IV consultation reports for Cambodia, which reflects the efforts that have been made by the MEF, the NBC and other relevant government agencies.
The NBC has worked with the MEF through the Committee on Economy and Finance Policy, which is chaired by the MEF, on the following issues:
- Dated June 11, 2019: “Consultation meeting on the Draft Royal Decree on Establishment of the National Committee for Cambodian Financial Stability.” That will play a critical role in managing financial crises in a timely and efficient manner and limit the effects of shocks to the financial system, of which the NBC will play the leading role with the support of the MEF.
- Dated June 4, 2019: “Consultation meeting on the Draft of National Strategy for Financial Inclusiveness 2019-2025.” This sets out visions to enhance delivery of quality, competitive and legal financial services to improve social welfare and contribute to socioeconomic development.
iii. Dated April 26, 2017: “Meeting on measures of the government intervention in microfinance sector.” This aims to protect customers from high interest rates and the cost of borrowing, as well as promoting effective use and management of credit.
- Dated Aug 17, 2016: “Consultation meeting on the Draft of Financial Sector Development Strategy 2016-2025” aims to upgrade from the previous strategy to a new long-term strategy to address challenges and respond to the rapid development of the financial market in Cambodia and changes in the international financial architecture.
- Dated Feb 27, 2015: “Consultation meeting on the situation and seeking mitigation measures on current and future challenges of microfinance sector in cities and provinces, especially in rural areas”.
vi.Dated Feb 24, 2015, on “Consultation meeting on the Draft National Policy Promoting the Use of Riel in Cambodia for 2015-2020.” This aims to promote the widespread and reliable use of the riel in public and to gradually reduce the dependence of the national economy on foreign currencies.
What is the level of co-ordination of monetary and fiscal policy and is the MEF fully cognisant of the central bank’s policy reaction function and its formal or informal analytical model?
The MEF is familiar with the central bank’s policy reaction function because we regularly have inter-institutional meetings to decide on key policy interventions, especially in financial sectors.
One of the platforms for such policy discussion is the Committee on Economy and Finance Policy, and, in the near future, the National Committee on Cambodian Financial Stability will be established to provide an even more focused and regular discussion on related financial issues and policy co-ordination for intervention. Technical teams from both institutions have been working closely in exchanging their macroeconomic and financial sector analytical skills and tools, especially in terms of forecasting and scenario analyses under the technical support from the IMF.
As I mentioned before, we have a common goal of improving socioeconomic development, which is the key mandate of the RGC. For instance, Cambodia has maintained robust economic growth of around 7 percent per annum over the last two decades while inflation has been kept at a manageable rate of around 3 percent. This is the result from a coherent fiscal and monetary policy with a high level of co-ordination and communication from policy to technical levels. Without proper communication and co-ordination at different levels, it would be very difficult for Cambodia to maintain such a high level of economic growth.
When formulating monetary policy, who is the first mover? The Ministry of Economy and Finance or the NBC?
Primarily, the NBC is the first mover in charge of formulating the monetary policy.