Cambodia Takes Aim at the Dominant Dollar

April 11, 2012
By MARTIN VAUGHAN
The Wall Street Journal

PHNOM PENH—In its home country, the Cambodian riel has long played second fiddle to the U.S. dollar—but a new stock exchange and government de-dollarization policies could bolster it in coming years, policy makers and experts say.

Dollars change hands with greater frequency than riel in the capital city, though both are universally accepted. Some taxi drivers say they prefer the U.S. currency simply because it means handling fewer bills; there are 4,000 riel to the dollar.

A 2011 report from the International Monetary Fund estimated that dollars make up about 80% of Cambodia's money supply, up from less than 70% a decade ago.

That worries the National Bank of Cambodia because it renders monetary policy ineffective as a brake or cushion for the economy. And the global flood of dollars and euros can leave a tiny country like Cambodia exposed to large swings in capital flow.

"In other countries, if there is a danger of overheating, you can raise interest rates to tighten liquidity," central bank Director-General Nguon Sokha told Dow Jones Newswires in an interview. But given the preponderance of dollars in Cambodia's economy, "our hands are bound when it comes to implementing monetary policy."

Some unique factors are at play in Cambodia. The reluctance to embrace the riel is rooted in the memory of the communist Khmer Rouge regime, which outlawed private property and abolished the currency in 1975. The Khmer Rouge were driven from power in 1979 and riel was reintroduced in the 1980s.

"The concern about currency is much more acute compared to other post-conflict countries. Cambodia has had to start from scratch," said Faisal Ahmed, the IMF's resident representative here.

The largely agricultural country of 14 million people is also a major recipient of U.S. humanitarian aid and a supplier to U.S. apparel importers—both steady sources of dollars. Garment workers, like most nonfarm private-sector workers, are paid in dollars, which limits exchange-rate risk for factory owners.

Neighboring Vietnam's central bank imposed a cap on dollar deposit rates, but Cambodia's won't follow suit, predicted In Channy, chief executive of Cambodia's largest retail bank, Acleda Bank PLC.

"The government wants to move to the riel, but they don't want to do it by using blunt regulatory force," he said.

The IMF emphasizes that gradual, market-based de-dollarization was effective in countries such as Israel, Poland and Chile, while more heavy-handed tactics had ill effects in Mexico and Peru.

The central bank does use some tools to limit the dollar. It imposes capital-reserve requirements of 12% on dollar assets, compared with 8% on riel assets. Civil servants are paid in riel, as are taxes and utility bills.

The government is asking business owners to begin pricing goods in riel in addition to dollars, said Moniroth Lee, owner of a souvenir shop in Phnom Penh's touristy river district.

"They said they won't fine us if we accept dollars, but they advised that we live in Cambodia, we should encourage use of the local currency," Ms. Lee said.

Acleda's Mr. Channy said the local stock exchange, by requiring foreign investors to use the riel, should help support the currency's value and prestige. The first listed company, the Phnom Penh Water Supply Authority, completed a $20 million offering last week, and Mr. Channy predicted as many as 10 companies will be listed by 2017.