Dear All Researchers, these are slides for central bank course

1. University of Management and Economics (UME),
Kratie Campus
Course on Central Bank
Lecturer: Nguon Mengsong
(MPP/ED,MFB,BBA)
April, 2022

2. University of Management and Economics
(UME), Kraties Campus
Course on Central Bank
Taught by Mr.Nguon Mengsong
(BBA, MBF,MPP/ED)
April,2022

3. Central Bank
Theory and Practice in Sustaining
Monetary and Financial Stability
Price Stability, Economic Growth, and
Employment Creation

4. Central Banking and Monetary Policy
LEARNING OUTCOMES
➢ This course studies the purpose and the functions of central banks and
monetary policies and how they have evolved over time. Students are
introduced to the tools of monetary policy and to the rules that central
banks follow, with special attention to inflation targets.
➢ At the end of the course students know the effects of the main policy
tools and understand how central banks affect the financial system and
the economy more generally and the role they have played in the
recent financial crisis.

5. CONTENTS
➢ CHAPTER I A BRIEF HISTORY OF CENTRAL BANKS
➢ CHAPTER II ROLE OF CENTRAL BANK
➢ CHAPTER III MONEY GROWTH AND INFLATION
➢ CHAPTER IV EXCHANGE RATE SYSTEM
➢ CHAPTER V GLOBAL MONEY SYSTEM
➢ CHAPTER VI MONETARY POLICY
➢ CHAPTER VII BANKING SYSTEM IN CAMBODIA

6. CHAPTER I
A BRIEF HISTORY OF
CENTRAL BANKS

7.  One of the world’s foremost economic historians explains
the forces behind the development of modern central banks,
providing insight into their role in the financial system and
the economy.
 A central bank is the term used to describe the authority
responsible for policies that affect a country’s supply of
money and credit. More specifically, a central bank uses its
tools of monetary policy—open market operations, discount
window lending, changes in reserve requirements—to affect
short-term interest rates and the monetary base (currency
held by the public plus bank reserves) and to achieve
important policy goals.

8. ❖ There are three key goals of modern monetary policy
➢ The first and most important is price stability or stability in the
value of money. Today this means maintaining a sustained low
rate of inflation.
➢ The second goal is a stable real economy, often interpreted as
high employment and high and sustainable economic growth.
Another way to put it is to say that monetary policy is expected
to smooth the business cycle and offset shocks to the economy.
➢ The third goal is financial stability. This encompasses an
efficient and smoothly running payments system and the
prevention of financial crises.

9. Beginnings
➢ The story of central banking goes back at least to the seventeenth century, to the
founding of the first institution recognized as a central bank, the Swedish
Riksbank. Established in 1668 as a joint stock bank, it was chartered to lend the
government funds and to act as a clearing house for commerce.
➢ A few decades later (1694), the most famous central bank of the era, the Bank of
England, was founded also as a joint stock company to purchase government
debt. Other central banks were set up later in Europe for similar purposes,
though some were established to deal with monetary disarray.
➢ For example, the Banque de France was established by Napoleon in 1800 to
stabilize the currency after the hyperinflation of paper money during the French
Revolution, as well as to aid in government finance. Early central banks issued
private notes which served as currency, and they often had a monopoly over
such note issue.

10.  While these early central banks helped fund the government’s debt, they
were also private entities that engaged in banking activities. Because
they held the deposits of other banks, they came to serve as banks for
bankers, facilitating transactions between banks or providing other
banking services.
 hey became the repository for most banks in the banking system
because of their large reserves and extensive networks of correspondent
banks. These factors allowed them to become the lender of last resort in
the face of a financial crisis. In other words, they became willing to
provide emergency cash to their correspondents in times of financial
distress.

11. Transition
➢The Federal Reserve System belongs to a later wave
of central banks, which emerged at the turn of the
twentieth century. These banks were created primarily
to consolidate the various instruments that people
were using for currency and to provide financial
stability. Many also were created to manage the gold
standard, to which most countries adhered.

12.  Central banks adhered to the gold standard’s rule of maintaining gold
convertibility above all other considerations. Gold convertibility served as
the economy’s nominal anchor.
 That is, the amount of money banks could supply was constrained by the
value of the gold they held in reserve, and this in turn determined the
prevailing price level. And because the price level was tied to a known
commodity whose long-run value was determined by market forces,
expectations about the future price level were tied to it as well.
 In a sense, early central banks were strongly committed to price stability.
They did not worry too much about one of the modern goals of central
banking—the stability of the real economy—because they were
constrained by their obligation to adhere to the gold standard.

13. Financial Stability
Financial stability can be defined as “a condition in
which the financial system is not unstable". It can
also mean a condition in which the three components
of the financial system -- financial institutions,
financial markets and financial infrastructure -- are
stable.
An increasingly important role for central banks is
financial stability. The evolution of this responsibility
has been similar across the advanced countries.

14. Challenges for the Future
 The key challenge I see facing central banks in the future will be to balance their
three policy goals.
 The primary goal of the central bank is to provide price stability (currently viewed
as low inflation over a long-run period). This goal requires credibility to work.
 The second policy goal is stability and growth of the real economy. Considerable
evidence suggests that low inflation is associated with better growth and overall
macroeconomic performance.
 The third policy goal is financial stability. Research has shown that it also will be
improved in an environment of low inflation, although some economists argue that
asset price booms are spawned in such an environment.

15. ❖ History of the National Bank of Cambodia
The National Bank of Cambodia has a rich and complex history which can be
divided into four distinct periods.

19. ❖ INDEPENDENCE AND ESTABLISHMENT (1954-1964)
The National Bank of Cambodia was established on December 23, 1954,
after the country gained independence from the French Protectorate and
after the Institut d Émission (the printing house for the three Indochine
countries was closed).
 Before then, the Institute d'Émission, located in Cambodia, printed one
currency for the three Indochine countries (Cambodia, Laos and Vietnam).
 After independence, the NBC printed its own national currency, the Khmer
riel in order to have complete sovereignty of Cambodia's monetary stability
and to help build the identity of the nation. At the same time, the local
banking system was being established, in which state banks and private
banks started operating together.

20.  Under King Norodom Sihanouk's Sangkum Reastr Niyum era in the 1960s, development
flourished in the kingdom. In 1964, the banking system was reformed to meet the nation's
growing economic and development needs. As such, the National Bank of Cambodia
became a semi-autonomous institution to the state-owned bank, under the form of the
public entity with characteristics of industry and commerce. Meanwhile national and
foreign private banks were closed, and the government established some state-owned banks
such as the Inatean cheat Development Bank, and the Rural Agricultural Bank.
❖ KHMER ROUGE (1975 - 1979)
On April 17th, 1975, the National Bank of Cambodia was closed when the Khmer Rouge
regime came into power. The NBC building was destroyed, the banking system was
eliminated, and the use of riel banknotes was abolished. On January 7, 1979 the Khmer
Rouge regime collapsed and the NBC was reestablished as the central bank of the country
on October 10, 1979. It was renamed the "People's Bank of Kampuchea" by the Council of
the Revolutionary People of Cambodia. However, rebuilding the bank and the nation was
extremely difficult soon after the war. With an effort in overcoming the obstacles of
reconstructing a new banking system from scratch, H.E. Chea Chanto, Senior Minister and
Governor of the National Bank of Cambodia (and one of the initial founders of the NBC),
along with a few of the staff who survived, committed to rebuilding the NBC.

21.  The challenges soon after the Khmer Rouge regime were enormous. Since many
intellectuals were killed by the Khmer Rouge or fled the country after the war,
there was very little knowledge, expertise, and experience to draw from. Some
qualified survivors that did remain in the country were mentally frightful of
working since they feared the Khmer Rouge could return. In addition, there was a
severe lack of financial resources.
As the economy was still weak and money supply was virtually non-existent due
to the Khmer Rouge's policy, economic activities were still largely conducted on a
trade and barter system, and civil servant salaries were paid in available local
commodities (rice, fish, oil, gas, etc.). It wasn't until March 20th, 1980 when the
People's Bank of Kampuchea reissued the riel banknotes to facilitate the exchange
of goods and the payment of civil servant salaries. Despite these challenges with
every day, month and year that passed the NBC staff continued to move forward in
reestablishing the nation's bank piece by piece.

22.  REBUILDING THE NATIONAL BANK OF CAMBODIA (1979 - 1993)
During the 1980s, the People's Bank of Kampuchea had three basic functions; be the monetary
authority, serve as the National Treasury, and provide banking services including credit, deposits,
and a payment system. Since the NBC building was nearly demolished by the Khmer Rouge, the
temporary head office of the bank was opened on the upper floor of the Khmer Bank of
Commerce.
 The People's Bank of Kampuchea set up the leadership structure as well as the operational
activities. Furthermore, the bank extended to 20-provincial and municipal networks across the
country. Since 1989 the banking system was gradually reformed through transforming the 20-
provincial and municipal banks into specialized provincial and municipal banks and operating
with economic and financial autonomy in their territory.
 As the monetary authority, the People's Bank of Kampuchea supervised the operations of these
banks. As for the ruined NBC building, it was removed and rebuilt in 1990.

23.  In 1991, the first commercial bank (Cambodia Commercial Bank "CCB") was established
under the form of a state joint venture bank to attract investors and serve the activities of the
United Nations Transitional Authority in Cambodia (UNTAC). The Paris Peace Accord on
October 23, 1991 transformed the economic regime from a planning economy to a free market
economy.
On January 30, 1992, the National Assembly of Cambodia adopted the Law on the Change of
Organization's name and duty of the bank of Cambodia from the "People's Bank of
Kampuchea" back to the "National Bank of Cambodia", which was promulgated by the council
of state in February 8, 1992.
The NBC compiled and prepared the Financial Sector Blueprint for 2001-2010. The document
served as the foundations for the Financial Sector Development Strategy to increase the
public's confidence of the banking system and how Cambodia can be better integrated into the
global financial system. As the nation's central bank, in order to raise its influence and prestige,
the NBC building was again renovated in 2003.
Cambodia's banking system has made remarkable progress since the second half of the 1990's
when the Law of Organization and Conduct of the National Bank of Cambodia, the Law on
Banking and Financial Institutions, and other laws and regulations, as well as other key
banking reforms were implemented.

24.  MODERNIZATION OF THE BANKING SYSTEM (1993 - PRESENT)
Presently, the banking system in Cambodia comprises of 36
commercial banks, 11 specialized banks, 7 foreign bank
representative offices, 39 microfinance institutions (including 7
microfinance deposit taking institutions), 38 rural credit
operators, 6 leasing companies, 1 credit bureau company, 6 third
party processers, and 1,770 money changers. Banking and
financial institutions have continued to expand their operating
networks through the opening of representative branches and
offices in the capital and provinces, and installing Automatic
Teller Machines (ATM) in addition to electronic payment
services.

25.  Cambodia's banking system has come a long way; from
building the foundations of a banking system soon after
independence, to the destruction of a monetary system
during the Khmer Rouge regime, to paying civil servant
salaries with rice and fish soon after the regime, to building
an increasingly well managed and sophisticated banking and
financial sector from scratch.

26.  Structure
The board of directors is the highest decision making body of the NBC and consists
of five representatives from government, academia, the private sector, and NBC staff.
The Governor is the Chairman of the board and serves as the Chief Executive Officer
of the central bank, reports to the board, and is responsible for implementing the
policy and conduct of day-to-day operations. The Governor is appointed, replaced,
and dismissed by a royal decree on the recommendation of the Royal Government.
At the operational level there are five divisions that are responsible for executing the
day to day functions of the NBC's central banking operations which are divided into
the following: Secretariat General, Directorate General of Central Banking,
Directorate General Supervision, Cash General and Inspector General. There are 21
departments that are supervised by a director, which implements NBC policy on a day
to day basis.

28. The board of directors is the highest decision making body of the
National Bank of Cambodia. The board consists of seven
members. The Governor is the Chairman of the board and serves
as the Chief Executive Officer of the central bank, reports to the
board, and is responsible for implementing the policy and the
conduct of day-to-day operations. The Governor is appointed,
replaced, and dismissed by a royal decree on the recommendation
of the Royal Government. The board holds meetings not less than
once every two months.

29. The National Bank of Cambodia's headquarters is in Phnom Penh, the
capital of Cambodia. The NBC has 21 branches in 25 provinces and
cities. There are a total of 1,384 staff in total with 979 in headquarters
and 405 in provinces. Below are the list of branches and contacts for your
information.
All - Phnom Penh - Kandal - Kampong Cham - Battambang - Prey Veng -
Siem Reap - Kampong Thom - Takeo - Pursat - Kampong Chhnang -
Kampong Spue - Kampot - Sihanoukville - Koh Kong - Preah Vihear -
Kratie - Ratanakiri - Mondulkiri - Stung Treng - Banteay Meanchey -
Svay Rieng

32. Reserve Requirements
Reserve Requirement is one of the monetary policy instruments used by the National Bank
of Cambodia in order to control the speed of credit growth. Currently, the reserve
requirement rate for foreign currency (esp. USD) and local currency have been treated
differently. The reserve requirement rate in foreign currency and domestic currency are set
at 12.5 percent and 8 percent, respectively. The National Bank of Cambodia has offered
interest rates on the 4.5 percent of reserve requirement in foreign currency, while the
remaining 8 percent is not offered interest. No interest is offered to the reserve requirement
in riel.