Inter-Coninentel Hotel, October 8, 2009
Your Excellencies, Ladies and Gentlemen!
Today, I have a great pleasure to be here at the 30th Anniversary of the Re-establishment of the National Bank of Cambodia, October 1979-2009. The National Bank of Cambodia (NBC) was re-established on October 10th 1979, nine months after a Grand Historic Victory over the Democratic Kampuchea regime on 7 January 1979. It was very important for a country in re-establishing and operationalizing a central bank to build and develop national economy and gradually progressed to this modern day. For this auspicious day of our gathering to celebrate 30th Anniversary of the Banking sector, we jointly examine strengths and weaknesses, which allow us to see what we have don’t well and what we have not, in order to set vigorous and effective direction for future implementation.
On behalf of the Royal Government of Cambodia, I am greatly appreciate and extend compliment to leadership, management and staff of the NBC of all promotions, particularly to H.E. Chan Phin, H.E. Jar Rieng, H.E. Thor Peng Leath and H.E. Chea Chanto. They are the governor of NBC, who found, contribute and lead the banking sector to a remarkable progress to date. I would like also extend gratitude to members of board director and staff of NBC as well as management and staff of relevant institutions and national and international organizations, that have cooperated well and in responsible manner to implement Financial Sector Development Strategy and Rectangular Strategy, which is the factor explaining this prideful achievement.
After the fallen of Pol Pot genocide regime, our motherland has went through countless difficulties, complexities and challenges both in political and economic landscape. In 1979, I was one of the founders, the leaders of a movement for liberation country and salvation people from the genocide regime and the practitioners who reorganize all form of authorities to govern the country as well as reorganized government institutions from scratch. The job at time was tremendously difficult, exacerbated by lack of both human resources and supported facilities.
Taking this opportunity, I would like to flash back to the history of socio-economic development since 1979 and highlight 30-year progress of NBC for your information.
I. Fourteen Years (1979-1993) of Miserable Struggling, Building Force and Governing Structure, Restoring and Developing Society and Economy during Concurrent Time of Peace and War.
(1) The situation from 1979 to 1985: Survival, protection and restoration
From the beginning, previous regimes left no legacies to this government. Different from Lon Nol’s government that obtained legacies from Sangkum Reast Niyum, Pol Pot followed with legacies from Lon Nol, Government of People Republic of Cambodia that succeeded Pol Pot did not inherited anything, but it leaves us with separation and ruins due to mass killing and abolishing of social and economic infrastructures as well as innumerable unsolved problems.
During Pol Pot Regime, people were evacuated from capital city and urban area to remote area and wandered from one to another place without clear station. Communal work and eatery were introduced. There were no private property, currency, market, inter-relation and exchange of goods in all forms. Working place for all is rice field. People has an only right to exert effort working for Angkar, they have no right to manage their destinies.
Cambodian people possessed no assets, including agriculture mean and tool, house and even utensils such as spoon and cooking pot, except a black torn dress in wearing. Right of people was defined as exerting overloaded labour in exchange for extremely little food ration and hungry. Outputs of our labour were exclusively managed by the Angkar.
Factories, enterprises, commercial buildings, markets, schools, pagodas and state organizations were either closed or destroyed at city and other areas alike. National currency was eliminated, which was no currency for exchange, no market and no exchange of goods. We can say that it was a ancient slavery regime which defined by production relationship between slave owners and slaveries, in which the Angkar played role a slave owner and Cambodia people including children and elders were slaveries, who were living without hope and awaiting death from slaughtering, hungriness and illness.
January 7, 1979 was an end day of Pol Pot’s regime and victory day for liberating the country and people of Cambodia. Therefore, our people of Cambodia have regarded the day of January 7 as Grand Historic Victory and their second birthday, the day of when army of Cambodia National Solidarity and Liberation Front (CNSLF) leaded by national patriots, including Samdech Agga Moha Dhammar Bhodhisal Chea Sim, Samdech Agga Ponhea Chakkri Heng Samrin, other dignified and independent fighters and myself, together with Vietnam Volunteer Army to liberate people and save our country and everything from genocide regime of Pol Pot.
After liberation day, Cambodia National Solidarity and Liberation Front had played role either to protect lives of people, to prevent the return of Khmer Rouge regime, to defence its boundary, to address catastrophes or to create environment for family reunion and returning to their homeland. An immediate task was to organize a people authority for all fields and structure to govern the country when there was no even a single village chief. During such difficulties, People Republic of Cambodia emerged and the new authority has highly committed to protect and restore Cambodia in every dimensions and to create environment of peace and development for our people.
After liberation day of January 7, 1979, devastations had threatened lives of our people, not to a family, a village, a commune, a district or a province, but to the country. So, another immediate task was to restore living condition of people into stability and reliability. The view along small or big street, city, urban or rural area and all over the country were similar. Our people were travelling in group and looked tired, weak, thin, pale, hopeless and shabby dress. They were travelling without shoe and carrying some bags of their properties from areas occupied by Pol Pot and brought their survival children and relatives heading to their homeland and seeking family reunion. After liberation day, survivors demolished communal practices and distributed production means and tools and remaining foods in communal storage collected by Pol Pot to make their living.
After we rescued the country and people from the genocide regime, with bare hands and empty stomach, we did not even know where to go and what to do. We could not even undertake agriculture activities due to the lack of water in the dry season. Although, at places where there was enough water for dry season farming there was not enough equipments and seeds. Therefore, for each family, the first thing to do back then was to return to their respective homeland to meet other family members such as husbands, wives, mothers and fathers after years of separation and massive killings.
This severe problem posed tremendous pressure on the government in rescuing the people from hardship and building a new people’s state from the scratch when there were little basic necessities and human resources to start with. Back then our government used total measure to address such hardship. The government had nothing but those basic necessities and little budget seized from Pol Pot’s regime, in which a part of it had to be used to feed soldiers and for state support while another part was for helping the people. In such tense situation, aid provided by the people of Vietnam was critical. The Vietnamese government had provided our people with urgent food supplies, medicines, and other equipments. After that, in 1980, in addition to humanitarian aid provided by the government and people of Vietnam, there were Laos PDR, Russian Federation, India, International and Non-government organizations who continued to provide us with humanitarian aid.
Our own efforts coupled with those assistances being provided by the international communities, we have gradually overcame hunger from 1979-1980. Despite having faced with natural disaster, in 1981 we have achieved a historical mission in eradicating hunger across the country. These achievements enabled us to emerge from the hardship and gradually made our people healthier, stronger and brighter since.
The issue of development and management of the economy had been difficult because it was new to our government back then. Despite having been in the situation of peace and internal conflict at the same time, we still faced with many other difficulties such as weak labor force and poor means of production and the lack of leaders in the field of economics.
During that period, there were conflicting views as to how the economy should be managed. There were some views that since we have achieved democratic people revolution, we can build a socialist economy by allowing only the state and collective economies whereas the household economy was complementary. Therefore, there was no need for the market economy because such economic system has collapsed during the Pol Pot’s regime and should not be brought to life again.
This opposing view has been in existence for quite a long time even though in reality we did not even recognize the fact that the market economy has taken place since the beginning and gradually flourished in the agriculture sector, handicraft, trade, service, business and transportation etc. Then, such view was common until the end of 1984 when there was a rectification to recognize the state of market economy.
Issues and ideas relating to the development of the economy have been the common agenda in every major meeting. Leading and managing the economy has been difficult because we were not clear about the issue. While our country was under economic embargo and political isolation, we have urged our people to increase their farming activities. Back then, the government allocated land according to solidarity group for rice farming. Urging the people to undertake farming activities was not hard because it was their job, but the problem was that our people were in a state of hunger and food shortages while they have to travel back to their homelands to find surviving family members and friends. On the other hand, people had to start farming with insufficient equipments and with poor seeds. Before the war we have more than three million cattle, but after the Pol Pot’s regime there was about one million left, hence some families only have one cattle or a pair of cattle for farming while most of the people had to use their own force. Some families who have lost their male members in the Pol Pot’s regime have to use women to undertake men’s job for farming.
We have concentrated in food production, especially rice paddy, and we fully understood the people’s real situation and the production foundation which required urging people to be united in daily living and in production. We have provided people with agriculture equipments and established the solidarity farming groups.
As for the agro-industry sector during Pol Pot’s regime, almost all factories and enterprises were abandoned and in complete ruined. There were only a few factories were in production but then broken due to poor technical operation or were destroyed by Pol Pot’s soldiers before they left. Many engineers, technicians, labors, were killed and those who survived were living separately and unorganized. At the same time, almost all factory’s owners were killed while some fled the country.
Therefore, the industrial sector that we have restored was placed under the direct management and support of the state. We did not have sufficient capacity to implement privatization policy yet. We have changed from using old equipments to new and modern ones coupled with creative ideas of technicians and a small group of workers who survived and repaired a number of damaged factories and put them back in operation. Back then we had not considered the quality of the production and economic efficiency yet, we only thought of the operation of those factories.
Since 1984, the government adopted the policy to expand and promote the industrial and handicraft sector within the framework of market economy and collective economy. During that time, the handicraft sector was restored and achieved remarkable improvement, especially, since 1984 the handicraft sector was very productive and coupled with robust industrial production of the state we could meet a major portion of social demand, reduced a number of imports from oversea, and reduced supply and demand imbalance.
After that, food supply increased every year, however it could not support the population growth which was around 3% per annum. We have implemented three measures to increase food production which included expanding agricultural land, increasing farming activity, and agriculture intensification. Rice paddy was the prime economic target. We have used our labor force to produce around 2 million tons of rice in 1984 and one farmer could produce up to 350 kilos on average. At the same time, the government also gave priority to investment in irrigation which was a key factor for boosting production.
In order to create a smooth running people power’s state, the government has established a chain of personnel from top-down within the management of all fields by trying to mobilize students, scholars, intellectuals, professors, teachers, and other competent individuals who survived the regime and fled the country to Thailand, and those who worked in various institutions to contribute to country rehabilitation.
During this first stage, the establishment, strengthening and expanding competent leaders at all levels has been done smoothly.
- Stage One (1979 – 1981) – The workforce size was very limited, more specifically, we employed around 200 to 900 core personnel.
- Stage Two (1981 – 1985) – The number of core personnel rose to 7,500 but deemed inadequate and they were unable to help people at local level.
- Stage Three (from 1985 onwards) – We successfully managed to increase our workforce size at local level, thanks to the strong participation from the public. Later on, the workforce started to expand deeper into the local level. To ensure that the local workforce was capable for their duties, the national-level agencies continued to dispatch additional workforce to support factories, enterprises, hospitals, schools, farms, armed force, and commune guards at the local level. The then local level was a battleground for protecting the people and national benefits, and various groups were competing to persuade people to own side. The prolonged underestimation of the significance of local workforce was a big mistake. After having strengthened local-level workforce, the general conditions and people’s living standard were significantly improved, and the enemies’ attempt to persuade local people was crushed.
Building and strengthening workforce structure from the national to local level was our win strategy during that time. We managed to train our core workforce through the principle of “highly educated people teach the less educated ones, and the less educated people teach the uneducated”. By implementing this principle, we were able to expand our workforce at all levels, strengthen the administration structure, and successfully manage to administer ministries and other state entities.
In 1979, a number of ministries, public institutions, and state entities were reestablished. Among those, the People’s Revolutionary Council reestablished its central bank called the “People’s Bank of Cambodia” which acted as the most important monetary authority and was tasked to provide loans to solidarity groups and state enterprises to restore agricultural land, crop cultivation, handicraft work, fisheries, rubber plantation, and timber production in order to revive the economy.
Usually, practiced everywhere in the world, when a country changes its regime, the administration is basically based on the existing system with some adjustments to match the new policy. Although obsolete currency notes are replaced by new ones, people are still able to retain the value of their belongings while some countries do not even print new currency notes and continue to use the existing ones for exchange transactions. However, that is not the case in Cambodia. We have to reestablish an entirely new economic structure both in terms of market mechanisms and monetary structure; everything was rebuilt from scratch, including the allocation of land title and construction of production lines.
When the exchange of goods resumed while currency notes had not been printed, we observed the exchange of “items for items” or “commodities for commodities”, for instance, rice was exchanged for karmas or blankets, rice for chicken, duck, pork or fish and so forth. Valuable gems or gold were exchanged for food and other items. Some families used their hided gold during the Pol Pot Regime to exchange for other items. Small urban and rural markets and family-based groceries started their operation. Gold acted as a currency note and “medium” of exchange.
On June 20, 1980, due to the requirement of the country and economic entities, and with support from friend countries, new “Riel” currency notes were printed and circulated to act as medium of exchange, unit of account and store of value. People warmly welcomed the recirculation of “Riel”. That was one of post-7 January historic events.
The printing and recirculation of Riel contributed to the revival of the economy in all sectors and allowed state-operated enterprises to switch to profit basis, the operation of private companies and the market economy were restored, and business activities mushroomed. We also see the rebirth of the state budget system and banking services. The supply of Riel was channeled through – (i) payment of salaries and wages for state officials, workers, armed forces, (ii) loans to solidarity groups and state enterprises for economic restoration, (iii) exchange of Vietnamese Dong and Thai Bath. Cambodian Riel expanded its role steadily and replaced gold as the “medium of exchange” in Cambodia. That was one of our major achievements in the implementation of economic policies during that time. The founding of the central bank and the circulation of Riel were considered a part of building national sovereignty and economic power as the national currency is the core of economic power and sovereignty. State has the sole authority to print currency notes. The destruction of the central bank and elimination of currency during the Pol Pot Regime could be considered the destruction of national sovereignty and economic power, more generally, self-destruction. In terms of war strategies, currency is weapons and food. A strong country requires a sound financial system. In particular, the fall of the global financial system, which is caused by the global financial crisis, has hindered the regional economic development, including Cambodia. Due to our awareness of the importance of currency, the then government strived to reestablish the People’s Bank of Cambodia and managed to put currency into circulation to promote economic activities.
I would like to recall a little bit the circulation of Riel at that time. When we printed the currency notes, everyone was joyful and welcome the move. However, some did not receive the notes immediately. State officials, workers, and armed forces in Phnom Penh and other major provinces are the first group of people who received the notes. Later on, the notes were transferred to merchandisers in urban areas.
Some people did not either receive or know the existence of the notes, except those who had sold commodities. Rural people generally did not know the existence of our notes at that time. We can say that, more or less, people knew and used Riel currency notes in late 1981. According to our observation, during the first few years, the supply of Riel banknotes was very limited and only centered in some areas including Phnom Penh, Kandal, Battambang, Kampongcham, Kampongsom, and Koh Kong. These areas accounted for nearly 60% of the total currency.
The pace of Riel circulation was rather slow. However, if compared to the market development, domestic production and people’s curiosity of the currency notes, we can say the circulation of Riel currency notes was in parallel with the pace of production and exchange of goods in urban and rural areas. The use of money for buying commodities then become the norm and facilitated the distribution of goods among economic entities, state and people.
During this period, business activities and financial and banking transactions were restored in response to the requirement of national economic restoration. The exchange of goods resumed by itself.
Along with that, the state has assigned to create commercial structure starting from central to local trade. The division system and trafficking of domestic products, import-export goods, and the management of official development assistance from other countries have been implemented through centralized system and the central trade plays role as a provider to the local trade in serving the needs of civil servants and the people. The export-import is the state monopoly even though the people at that time started to actively deal with unofficial trading along a number of border passes or corridors.
(2) Phase II from 1986 - 1990: Political Resolution, National Reconciliation and State Reforms:
In this stage, starvation which was the challenge during the first and second years after liberation day, the living condition of the people was more stable and the local service delivery was prepared and continuously improved such as health service extended to the rural areas, education expanded from kindergarten to higher education level, providing opportunities for every children to start their schooling. These achievements were the significant foundation for development in the later stage. We had continued to strengthen the state management and built forces for further development in the situation that our country was in the state of peace and war.
A. Seeking Political Resolution
In the midst of armed fighting, the political resolution also started through the first meeting between Samdech Norodom Sihanouk and me at Fer-en-Tardenois, France in 1987 in order to start negotiation process to seek for joint political solution toward peace and national reconciliation.
After then, there was an official meeting in Jakarta for the first and second times and on-going meetings to search for joint political settlement through negotiation rather than using forces for peace seeking. Therefore, war and peace became a vital issue, which were to be jointly solved. The question of how to end the war and seek peace is that there were severe controversial conflicts among all related political factions; especially Pol Pot issue was the hot spot and obstacle for resolution.
Through the revolution of local and international politics, it was estimated that at that time there could be three possible options for Cambodia:
First, there was a complete solution, which was to settle national and international issues.
Second, there was a sectoral solution, which was to settle the international issues first to be followed by national ones.
Third, there was no resolution because in 1990 Vietnam withdrew all soldiers from Cambodia and at that time Cambodian conflict was settled in which the issue of Vietnamese soldiers were at least solved by ourselves and if there were further negotiation there would be only Pol Pot to be discussed as well as the ending of the assistance to the rival parties. It was estimated at that time that Vietnamese soldiers were totally withdrawn in 1990, while, in fact, in 1989.
The political deadlock had been dragged until 1990 and then we had more possibilities to be developed according to the 3rd resolution. At that time we could assume that negotiation stage was a dangerous road passage because the national destiny was on political negotiation table and the conflicting parties were trying their utmost to eliminate the achievements made by the people in more than 10 years. We had fighting and negotiation at the same time, but we could not still find the political resolution. In the year 1989, the voluntary Vietnamese soldiers were withdrawn from Cambodia, meaning that the issue of Vietnamese soldiers in Cambodia was solved, but the war still continued. It reflected that from 1979 to late 1989, they staged war against Cambodian people by sheltering under the pretext of fighting against Vietnamese in Cambodia. The reality was shown in late 1989 when all Vietnamese soldiers withdrew because at that time they had no other reasons for war, but the war was not ended. So, if the war continued, it meant that they staged direct war against Cambodian people.
We hate war, but we have to accept it when we are forced to do so by our enemy. If not, there will be no one to die and suffer on behalf of Cambodian people upon the return of Pol Pot. Therefore, our fighting at that time was not war favored, but a war to bring about peace and welfare for our people. The road toward peace mainly relies on the force of Cambodian people and support from outside friends in the world, who truly love peace and justice. After that, the rival parties agreed to sign a ceasefire agreement, proceeding to the process of Paris Peace Accord in 1991.
B. Economic Reforms
As for the economic sector, although the war continued we did not slow down our commitment in restoring and rebuilding our national economy. The Government had been using and expanding economic potential in the country to continue renovating the socio-economic development and economic reform by gradually moving from centralized planning economy to planning economy mechanism linked to markets with the end objective to reach market economy. The economic reform was a necessary and the most urgent issue. We could not stand still on a point, but kept changing with firm commitment in order to seek solution to eradicate the poverty of our people. In order to move on to the self-governed economy of profit-loss business, one of the necessities is to be brave enough to provide sufficient rights to the production businesses.
In actuality, the significant notions for economic reform at that time were:
1. Recognizing the private ownership
The state gave rights on land ownership, production means, and agriculture. The measure to improve productivity was land extension, the increase of cultivation seasons, and the implementation of extensive farming as well as the gradual inclusion of modern technology in the production. The state also prioritized the investment on irrigation network, which was the key factor to promote agriculture production.
The economic reform based on liberalization policy has made substantial progress to Cambodian production sector. Gradually, the family and private production has become the core in the nation wide production. The recognition of private ownership and rights of land use truly made the people works harder on their businesses and farms. As a result, it could be seen that the agricultural outputs, production efficiency as well as the level of living standard of the people have been constantly rising. Stemming from this recognition of private ownership, the private sector has come into real being.
2. Reducing the roles of state ownership
The state started privatization process on the state-owned enterprises. Since 1987, the state has gradually conducted reform on the management of industrial sector to make sure it is conforming to the pace of economic development. The reform on economic management in the production business unit, the state followed three phases: phase 1- the implementation of the financial ownership regime, phase 2- the implementation of self-governed economic regime, and phase 3- the implementation of the privatization for smaller and economically inefficient factories and enterprises.
3. Ending of state monopoly on international trade
During this phase, the state was extending cooperation with foreign countries, and also changed from role of monopoly in import-export to the management of local and international trade. The image of goods exchange and payment between goods and goods has been changed from time to time to meet the international standard. After the state has ended this monopoly, the private import-export companies have been booming and import-export with foreign trade partners has notably increased.
4. The adoption on foreign investment law
The law aims at opening Cambodian economy to foreign investor in contributing to the economic development. In this sense, the Government acted as strategist and development manager, and had strong determination to work with private sector in the role of partner and dialogue counterpart.
After the adoption and the promulgation of the foreign investment law, we had seen the foreign investment inflows became vital source of national economic growth. Vibrant economic activities and increase in economic growth were basic foundation enabling regional and international integration.
As for the financial system, the Government improved it continuously. The Government separated the role of Treasury from the National Bank. The latter was responsible for printing money and monetary policy control while government specialized banks at municipal-provincial level were responsible for providing credit to contribute to the economic development. The National Treasury controlled over the government budget.
In summary, this stage consisted of peace and war which required us to resolve through negotiation to avoid civil war. The solution to the political impasse was to withdraw Vietnamese soldiers from Cambodia, leaving conflicted parties solved the problem by themselves. The most important thing in the economic sector were reforms in financial and economic system through acknowledgement of private ownership, privatizing stated-owned enterprises, and changing government role from monopolist exporter-importer to monitor and facilitator in external trades. Moreover, the adoption on foreign investment law attracted more foreign direct investments which encouraged the economic growth while the role of National Bank as monetary authority was strengthened.
In the social sector, the Government established education system at all levels from kindergarten to graduate school, reduced the analphabetism while the number of schools and students increased higher than the war period. In the health sector, the Government established hospitals, clinics and pharmaceutical enterprises and expanded the health care coverage to rural area.
(3) From 1991-1993: Unification and Reconciliation
In the year 1991-1993, political situation strongly changed. Conflicted parties ceased fire and established Paris Peace Agreement on 23rd October 1991. This agreement leaded to the decline in army confrontation and opened new historical era for Cambodia to multiparty democracies and relieved the economic embargo. This favored socio-economic development and rehabilitation. The domestic market growth and open policy resulted in gradual increase in private investments. In this stage, socialist countries that used to provide credit to Cambodia discontinued the aid. As such, we had to develop our own economy and encouraged economic communication. Economic activities were still not strong enough. Government revenues were less than expenditures; along with lack of international aids the Government faced heavy budget deficit. The Government received financing from NBC resulted in debt increase 4 times and money supply rised by more than 200% between 1990 and 1993. As a result, riel highly depreciated and inflation rate increased up to three digits. At the same time, the inflow of dollar, roughly 1700 million dollars, which UNTAC used in peace keeping operation and prepared the first election in Cambodia, transformed Cambodian economy into dollarized economy from that point onward. Meanwhile, social structure also changed by the return of 300 000 refugees from Cambodia-Thailand border, adding new burden on the Government that needed immediate solution.
The government has been gradually preparing the economic reform; the initial result of the reform was a crucial foundation in moving toward market economy. These were the positive factors in the investment activities for our national economic development.
The government has been amending its judiciary reform order to widely open up for the international economic cooperation, encouraging the privatisation and widening the circulation of the agricultural products. By implementation of market economic mechanism, trade, finance and banking activities faced high competition from different economic angles; domestic and international trade strongly improved. International trade has been carried out according to international standard. During that period, banking system has been deregulated, hence allowed the existence of branch of foreign banks and many more banks. Taxation policy has been improved and refined according to the market economy. There are many new taxes established to increase the government revenue.
It's to note that, this period marked the banking sector development as we were implementing the planned economy combining with market economy. Concretely, in 1991, Cambodian Commercial Bank (CCB) was the first foreign bank to invest in Cambodia, then in 1992 came the Cambodian Public Bank (Campu), afterward there were many more commercial banks established. The international investment law is an important factor in attracting the inflows of foreign fund to compensate the low amount of domestic fund. These indicated the beginning of the inflows of the foreign fund into Cambodian economy in time when some donor countries stopped providing aids, especially from the year 1990 onward.
In conclusion, over the first 14 years, even though people talked about planned economy, but in real practice we were operating in the market economy system. The production of all sectors has been increased in response to the market demand, hence induction in the rising of product price. The efforts in overturning our economy means the improvement for our people in term of welfare, freedom, living standard, schooling, hospital, and living with dignity and honour.
Even with many past achievements, those were yet to response sufficiently to the need of all Cambodia people in the country as we were at the initial development stage. If comparing to the neighbour countries, our development and improvement were far behind theirs.
Also, our whole economy remains yet in serious macro-economic imbalances. In this stage, we could conclude that Cambodian economy had four major imbalances 1) the imbalance between demand and supply, 2) the imbalance between government revenues and its expenditures, 3) the imbalance between import and export and 4) the imbalance between currency and merchandise. Those four imbalances were tightly related to each other and required immediate solutions.
The current and the only solution which we must carry out was to encourage the growth of domestic production. This was not a simple task; it's a serious issue which required time and efforts as Cambodia was imposed economic embargo, and politically marginalised, during the time when our country was facing mixture of peace and war. In these 14 years, even though, we had economic imbalances, we had established the foundation for peace in many multi-parties democratic manner and market economy for the country and people as a whole.
II. 16 years (1993-2009) of peace building and economic development
1. 1993-1998: Building key foundation of Democracy, Peace and Market Economy System
By following the 1991 Paris Peace Accord, which was supported by UNTAC, Cambodia had its first National Election on 23-28 May 1993. This enabled Cambodia to have its national reconciliation and built the foundation of the multi-party democracy. The result of the election had created a National Assembly to adopt a national constitution which is the top legislation of Cambodia. The form of coalition government, symbolized a reunited nation, had been created in a better political climate that made Cambodia a country being recognized internationally. Instantly, in 1993 the International Monetary Fund (IMF) opened its office branch in Cambodia.
In the last decade, Cambodia had two markets with three prices. The two markets were the state market and the free market. The three prices included the supportive price, business guaranteed price and the market price. This created a lot of difficulties in the Cambodian economy and, therefore the direction of our reform was to find a mechanism that could lead us to have a single price market.
The national constitution in 1993 stated clearly that Cambodia follow the free market economy regime which transformed from the planned economy to legal base market economy. Then the government started to improve its economic mechanism by continued to strengthen private ownership and privatizing public enterprises. The market mechanism was determined in accordance to demand and supply which were the cause for stirring up the competition in the market. However, in this stage, we still lacked a number of legislative bases to make competition become an effective force for economic growth.
Political and peace factors were the key to the economic development. In 1994, after achieving the average economic growth of around 6% and inflation declined to about 26% (31% comparing to the 1993’s figure), and the good implementation of social-economic structural reform, the International Monetary Fund (IMF) provided funds to boost up the structural reform (ESAF) for the Royal Government in the amount of about US$ 81.6 million. That was to also build and develop the country’s infrastructure.
In 1997 the financial crisis hit Asia; the influence of this crisis had some effects on the country’s balance of payment when the export sector of the country was relatively smaller than import during the 1990s. The import sector grew and the trade deficit increased by a little more than before. Foreign direct investment to Cambodia declined quite significantly especially the direct investment from those countries that were strongly affected by the Asian crisis. The banking system in Cambodia was slightly affected; caused by the small amount of fund borrowing from abroad. At the same time, the Cambodian economy was a dollarized one and most of the bank’s current and non-current assets were in US Dollars.
It is noted that from 1993 to 1998 there was a high increase in the number of private commercial banks (up to 32) which were authorized to operate in Cambodia. During that period, the fund provided by commercial banks to private sector had dramatically increased when the fund to the government decreased. This reflected the increasing role of private sector in economic development and the cautious implementation of public financial policies of the Royal Government.
The good progress of the banking sector was in parallel with the economic reform and political stability of Cambodia which required relevant authorities to strengthen their own structural reform; by preparing basic regulation to manage economic activity to be competitive under legal framework. In order to effectively manage the development activities of the private sector, relevant authorities have to strengthen the management mechanism and their own operations. Thus in 1996 the Law on the Operation of National Bank of Cambodia (NBC) had been adopted as the legal foundation to strengthen the mechanism of the NBC management. This was to also strengthen the responsibilities of the NBC in directing monetary policies and the major authority of banking system to maintain price and financial stability in order to support macro economic stability and contributing to the sustainability of national economic development.
During that time, the economic sector was in good progress and the political situation was also stable but the internal affair is still fragile because of the weak political tied in the coalition government. At the same time the country was not perfectly peaceful because of the Khmer Rouge issue. The political tied was implemented by unity, fight bravely, compromise and development. In 1997, the political crisis was exploded which lead to have military force in Phnom Penh municipality.
2. 1998-2003: The Economic progress during the stage of full peace
In 1998, Cambodia had its own second national election, which was upheld as open free and fair, with the intention of combine reconcile and protecting its existing success by following the “Win-Win Policy” thus there was no winner or loser. This policy ended the Khmer Rough “Angka” both politically and militarily to bring 100% peace to the country citizen. This is one of the most remarkable historical events for our Cambodia nation. This event brought national and international committee especially Cambodia people to appreciate with the “Win-Win Policy” from the royal government.
With all this economic success and “Win-Win Policy” the Cambodian People Party won the election to lead the royal government. I was elected to be a single prime minister from that time onward. The political sector became more and more stable. Internationally, Cambodia became popular and well recognized and it also played an important role in the region. Immediately, the International Monetary Fund (IMF) started to provide more fund to help with poverty reduction and economic growth to the royal government. This fund was eliminated in 1997.
The Royal Government had reformed its public sector, demobilization, strengthening governance sector and national resource management. Furthermore, the royal government also investigated on public spending and strengthening on revenue collecting in order to develop on social and economy sector including education, health and rural agriculture development etc. These gave favor to the economic growth, instantly; from 1998 to 2003 Cambodia had its economic growth on average of 8.15%.
For the banking sector development, in the stage of strong influence to the world from the Asia financial crisis, and during the preparation stage of the 2nd National Election on March 1998 I designated H.E Chea Chanto from the minister of planning to work as the governor to guide the National Bank of Cambodia, especially leading monetary policy aiming at price stability toward sustainable economic development. In order to reform the banking sector, the first step is to strengthen the management and operation mechanism of the National Bank of Cambodia. These consisted of strengthening supervision capability and legal framework. In 1999, the law on banking and financial institution had been adopted by the Assembly.
This Law was used as the legal foundation for managing the activities of banking and financial institutions, which were operating in Cambodia, and were also a starting point of banking reform in Cambodia.
Under the spirit of the law on banking and financial sectors, in order to promote health, efficiency and confidence of public in Cambodia’s banking systems, the National Bank of Cambodia started to reform the banking system by reissuing new licenses. According to the law, the new license requires all banking and financial institutions to add more of their capitals in order to meet the standard of minimum capital and also required those institutions to properly prepare their internal structures aiming to reduce risk.
During the new license provision, 16 commercial banks among 32 banks, which operated in 2000, in Cambodia, were closed and liquidated. 11 banks were voluntarily closed, one bank downgraded to representative office; and other 15 banks, which were able to fill more capital and fulfilled other requirements under the law, could receive new license to continue their activities in Cambodia. At the same time, NGOs, which provided rural credit, were also required to apply for license from the National Bank of Cambodia so that they can be easily controlled and monitored. Therefore, some NGOs applied for licenses as micro-financial institutions and some were registered to operate, as required by the law.
Two years later, the first step of the banking system reform, the movement of providing new licenses was successfully completed. All banking systems continued to progress remarkably. The growth was reflected through the progress in public saving at banks and credit provision to private sectors. Through banking mediation, investors could mobilize much of domestic savings to expand their investment projects. Therefore, it contributed to promoting economic activities. It could be seen that, public confidence in the banking sectors have been strengthened after the reform, or it could be said that our reform were successful and effective.
In order to continue to reinforce and develop financial and banking sectors to run smoothly, safely and effectively; and to upgrade and to be able to integrate them into the regional standard, in 2001, the Cambodian Government adopted “vision and financial development plan 2001-2010” as a guide line for implementing in 3 steps:
- Step 1 from 2001-2004 building basic foundation for banking development
- Step 2 from 2005-2007 strengthening mediation through competition
- Step 3 from 2008-2010 promoting efficiency through integrating and profoundly strengthening financial system development.
For the banking sector, NBC completed step 1 successfully. Then, the Cambodian Government has updated the vision as “financial development strategy 2006-2015” aiming to comprehensively implementing other programs.
The National Bank of Cambodia developed a common accounting record, where banking and financial institutions have to comply with law on international accounting standard and audit. Whereas, banking registration has previously been conducted differently, making it difficult to control and audit. At the same time, document and work place examination has been strengthened. Examination on financial banking statement has been performed by independent auditors and has been publicly published, aiming at promoting financial transparency.
As a result, banking sectors in Cambodia were orderly improved; and banking monitoring were more accurate. Therefore, it would allow us to carry out deeply the first basic policy on banking supervision prepared by Basel I committee. The implementation of the concrete policy on market participants in line with market regulations would help Cambodia to attract giant international banking institutions from Australia, Korea, Japan and Malaysia to invest in Cambodia.
3. From 2003 to Present: Strengthening political stability and economic development
In 2003, Cambodia conducted the third National Election by itself. Although, there was little political stand-off, but economic situation remained stable. Political stability and peace attributed to economic development. In the last several years, economic growth has been progressed beyond our expectation, reflecting by double digits growth, approximately 10% per num between 2004 and 2008. Therefore, this contributed to the reduction of poverty to out ab1% per num.
For banking sector, in order to carry out public financial reform program in first step, since 2004, NBC has improved and expanded its branch operation across the country, aiming at facilitating to open and control all public institutions’ accounting service from Communes, Sangkats up to Ministries and public Institutions, in order to easily transact national currency for offsetting trade, paying tax and issuing salary to civil servants, arm forces through all type of banking and financial institutions across the country.
Improving and establishing of NBC’s branches and banking and financial institutions across the country are very important both for political and financial reasons. This not only illustrates the increase of public confidence in the banking system, development of banking institutions and attraction of investments in various sectors, but also represents the livelihood of Cambodian people with hope and peace and with firm confidence towards the Government’s policies after Cambodia attained 100% peace in the whole country.
Aware of fact that the microfinance sector is playing a very important role in reducing poverty and improving leaving standards of rural inhabitants; and after the United Nation, in 2006, has announced that the year of 2005 was a year of the world-microfinance - on behalf of the Royal Government of Cambodia I announced that the year of 2006 was a year of Cambodia-microfinance. Micro-finance sector in Cambodia has been recognized by national and international communities as a key sector contributing to the poverty reduction of Cambodian people. Currently this sector is progressing and strengthening both in the structure and coverage that has expanded far into rural areas and has positively transformed the livelihood of rural population. The amount of people that have been receiving the micro-finance services are steadily increasing. This progress highlights the increasing confidence of the Cambodians and the awareness of the importance of micro-finance services and the credit culture.
At the end of 2007 and the beginning of 2008, the entire world has been faced with the global financial crisis as the result of credit crisis in the US that has spilled over to European, Asian and other regions as well. At the same time the rise in food and petroleum prices also have posed additional challenges to the global world. These crises have adversely impacted on the Cambodia economy leading to a dramatic increase of the food and petroleum prices. In 2008, Cambodia had smoothly held the general election for the 4th time despite some unfavourable environments and through this election the new government has been formed without any delay.
In fact, the 4th Royal Government of Cambodia was elected when the world is facing the storm of global financial crisis which has a strong affect to Cambodia’s economic growth, especially the export of garment, tourism, investment and construction, but the banking system has not been affected by this global financial crisis, because Cambodia’s banking system does not integrate significantly into international financial market. However, in order to cope with the challenges of financial crisis, the Royal Government of Cambodia has introduced comprehensive measures to ensure sustainable macro-economy which includes: fiscal policy, monetary policy and sectoral supported policy. The National Bank of Cambodia (NBC) has introduced the prudential monetary policy measures by increasing reserve requirement from 8% to 16% on currency deposit in order to reduce high growth rate of credit to non-productive sector and inflation rate and credit ceiling to 15% for real estate sector which exposes high risks during this financial crisis.
As a result, inflationary pressures has decreased from 30% in the first semester 2008 to 13.5% from the second semester in 2008, it also projected that the inflation will continue to decrease to a single digit in 2009. Because of the inflation rate is under control, each banking institution can manage their own risks, we have also reduced capital reserve requirements from 16% to 12% and cancelled credit ceiling 15% for the real estate sector. At the same time, the National Bank of Cambodia has also pays full attention to the strengthening of supervision of banking and financial institutions, especially the major banks that have strong impacts on an entire banking system to increase soundness of banking and financial institutions.
At present, banking sector in Cambodia has rapidly developed in both scale and transaction. In term of scale, it has shown through the establishment of the banking system including the National Bank of Cambodia, which is the competence authority and other banking and financial institutions who have established branches in cities, provinces and some districts within the country that provide the banking and financial services from urban to rural areas. In term of transaction, it reflected by the increase of assets in the banking system and deposits of the public clients and credits of banking institutions for private sector.
Through banking intermediary system during the last few years, investors could mobilize domestic loans of $ 600 million per year for investment expansion. In addition, the payment system has also improved and modernizes at the same level as other countries within the region. All banking institutions have tried their best to offer new products and services networks, such as introduction of ATM, credit card, POS and Mobile phone banking services.
Of course, this rapid development of financial services is the key indicator, showing that Cambodia people have more confidence on banking system and will continue to use banking system for their commercial transactions and businesses.
The best efforts to continue to develop banking financial sector as mentioned above, plus the implementation of prudential monetary policy has significantly contributed to the sustainability of macro-economy of Cambodia in a good shape, exchange rate between Riel and US Dollar has been stable in the last few years, with inflation rate is under control. Despite the affects of the global economic and financial crisis, we are able to ensure and increase our international reserve remarkably. Until August 2009, our international reserve has increased to over US$ 2.522 millions increased 21.48% compared to 2008, with only US$ 2.076 million.
In short, for the period of thirty years from having nothing, from empty hand up to now, Cambodia has achieved development of all sectors in politics, economy and social affairs. Particularly, banking sector in Cambodia has developed rapidly in term of scale and transactions which have played an important role in the national economic development of Cambodia, and have also helped in poverty reduction and increased the standard of living for Cambodian people as outlined in the Financial Sector Development Strategy and Rectangular Strategy of the Royal Government of Cambodia.
Of course, the outcomes of National Bank of Cambodia has resulted from combined forces of all sectors that has supported and collaborated in the implementation of the Financial Sector Development Strategy of the Royal Government of Cambodia, phase by phase, with clarity, firmness and flexibility. There is no doubt, these outcomes must be come from hard works and strong commitments of staff and officers at all level of the National Bank of Cambodia.
For the last thirty years, Cambodia banking system has developed in scales and transactions, with good reputations, and has delivered good and trusted services to public clients, though we should not be so proud and careless by the outcomes so far, we have the duties to increase the level of confidence on banking and financial system from the public clients as this sector is the key component for the sustainability of macro economy as well as the national development of Cambodia.
Within these contexts, I would like to suggest some recommendations to the National Bank of Cambodia, which is the national monetary authority and authority in-charge of the development of banking and financial institutions to incorporate, the below recommendations into its short-term, medium-term and long-term priority action plan:
First: Professional training for human resources, especially capacity building on supervisory system for inspectors and regulators in response to the fast development of banking and financial system in the region and the world. Capacity building of supervisory the soundness of banking and financial institutions and cooperate closely with other regulatory units in the financial market, which is key factor for Cambodia moving towards the bond and stock market in the future. When the stock market is fully established and function, I expect that the banking institutions are the first institutions that have qualifications to enter the stock market.
To achieve these, we should be extremely cautious, because the banking institutions are the one who will leverage or use depositors’ money from the public clients for their business purposes. To avoid any unexpected financial crisis, we must have regulatory measures, risk managements and good governance in place.
Second: Continue to implement the prudential monetary policy to ensure price stability, exchange rate stability and manage variables of inflation rate in a manageable manner.
Third: Continue to strengthen the soundness and effectiveness of the banking system as outlined in the Financial Sector Development Strategy for 2006-2015 by the Royal Government of Cambodia, to ensure the sustainability of macro economy and national development of Cambodia.
Fourth: Last but not least, May I advise the National Bank of Cambodia to establish the National Monetary Museum to archive the development of banking system and monetary structure in Cambodia for public understanding and usage.
Finally, on behalf of Royal Government of Cambodia, I would like to congratulate H.E Dr. Chea Chanto and all Ex-governors, Board of Directors and officers of the National Bank of Cambodia who have participated strongly with the Royal Government of Cambodia and Cambodian people to bring more outcomes for our country, especially the establishment of the National Bank of Cambodia and rapid development within the last thirty years.
May I wish Your Excellencies, Ladies and Gentlemen, national and international distinguished guests the four Gems of Buddha Blessings.
Thank you for your kind attentions!