Cambodia's riel survives alongside the dollar

People use the Cambodian currency for anything less than a dollar

30 March 2011
By Guy De Launey
BBC News, Phnom Penh

In Cambodia, money talks as loudly as it does anywhere else in the world - but at least it never burns a hole in your pocket.

That's because there aren't any coins. You can't talk about coppers or nickels in Cambodian riel. The national bank gave up striking anything metallic more than a decade ago.

Instead there's a lot of paper. Right down to the seldom-seen 50 riel note. That's worth all of a cent and a quarter - and it's regarded with about as much affection as the pitifully lightweight one yen coin in Japan.

So wallets, billfolds and purses bulge with dozens of notes - ranging from the crisply-minted to the well-used and filthy. But to many people, the riel is simply small change.

SE Asia should 'de-dollarise', but slowly: experts

Sunday, October 17, 2010
By Michelle Fitzpatrick (AFP)

PHNOM PENH — Southeast Asian countries that rely heavily on the dollar might be alarmed at its recent steep decline, but analysts warn against sudden moves to reduce their dependence on the greenback.

In Cambodia, the dollar is far more prevalent than the riel, the local currency, while neighbouring communist-run Laos sees shoppers paying for goods in kip, dollars or even Thai baht.

In communist Vietnam, the local dong is popular enough, but dollars still account for 20 percent of all currency in circulation there. And in Myanmar (Burma) a volatile domestic currency has left locals distrustful of the kyat.

"Not a single Burmese person I have ever met has savings in the local currency," said Myanmar economics expert Sean Turnell from Australia's Macquarie University.

Such heavy reliance on the greenback is known as "dollarisation" and reflects "a general lack of confidence in the local currency", said Jayant Menon, principal economist at the Asian Development Bank (ADB).

The dollar has fallen sharply in recent weeks, but analysts say the US currency's woes are unlikely to immediately affect the use of domestic currencies much in these Asian nations.

It might, however, influence the way people in these countries save or store wealth.

"In Vietnam it could result in a greater switch to gold. In Laos, a move to baht," said Menon.

"The long-term objective for these countries should be to de-dollarise," said the economist, who has co-authored a new book about dollarisation in Cambodia, Laos and Vietnam.

But reducing reliance on the greenback can only work if governments address the underlying problems that caused the shift in the first place, he said, and for now the dollar is still "a safer bet".

Reliance on the dollar has benefits -- it can bring stability to an otherwise volatile market and makes it more difficult for governments to simply print money to make up for budget shortfalls, according to experts.

But it also limits the power of central banks to control the money supply or determine exchange rate policies.

"Before the global financial crisis, a lot of these countries, especially Cambodia and Vietnam, had inflation building up and central banks couldn't do much in terms of mopping up the extra liquidity to try and keep inflation in check," said Menon.

"In a funny way, the global crisis was a bit of a blessing when it comes to controlling inflation because demand fell off sharply and these countries were then able to control inflation."

Another downside to dollarisation is that these countries lose out on seigniorage -- the revenue accrued when the cost of printing money is lower than the face value of that money.

The ADB estimates that Cambodia, Laos and Vietnam miss out on 20 to 90 million dollars a year this way, with impoverished Cambodia being the biggest loser. That income instead goes to the United States, where the money is printed.

But Hang Chuon Naron, secretary general of the Cambodian government's Supreme National Economic Council, defended his country's reliance on the US currency.

"Because of dollarisation, people are not scared to put money in the bank," he said. "And it imposes discipline on the government."

Still, while "de-dollarisation" -- moving away from the greenback -- is not a priority, Hang Chuon Naron said he can see a time when the riel will be the dominant currency in Cambodia.

"The issue is to accumulate national reserves, and promote a high growth rate and long-term confidence. We have to do this step by step."

Menon said he agreed with a long-term approach to reducing dependence on the greenback.

"If governments try to change the system overnight, by requiring the use of domestic currency, the experience is that it's actually counterproductive and delays further the process of de-dollarisation," he said.

But there are shorter-term measures available to governments to lessen their dollar reliance.

In Cambodia, for instance, the government "could try to increase the incentive for people to save in the domestic currency", Menon suggested, or some private-sector wages could be paid in riel.

In the medium term, Menon said all these countries could benefit from a Currency Board Arrangement -- a pegged exchange-rate system, where countries can only issue currency that is fully backed by foreign exchange reserves.

"Long term, it's about improving institutions, financial markets, capital markets, political and economic stability," he said.

Microfinance industry wants more Riel to lend

By Susan Postlewaite
Phnom Penh Post, Issue 16 / 25, December 14 - 28, 2007

Microfinance industry leaders are planning to ask the National Bank of Cambodia to loosen the purse strings on Riel in 2008 and put more Riel in circulation.

The predominant use of the U.S. dollar in the economy is preventing the lenders who specialize in Riel loans from getting the funds they need, industry leaders said. "For our clients the dollar is not appropriate. We have to have Riel," said Paul Luchtenburg, chief executive officer of Angkor Microfinance (AMK) and a UNDP advisor.

"We need $10 million worth of Riel next year."

He said AMK specializes in tiny loans with an average loan size of $85 to more than 120,000 clients in 15 provinces.

He estimated the industry will need about Riel 120 billion next year and that amount is not available in the market for a variety of reasons. For one, Cambodia's commercial banks don't save in Riel; they save in dollars so there is not a lot of Riel in the banking system. Some say the National Bank is sitting on a large amount of Riel that they don't want to put into circulation due to fears that too much Riel could lead to the currency's depreciation.

Margarete Biallas of International Finance Corp. said she would like to see the government pay civil servants in Riel, not dollars, to get more local currency in circulation.

The central bank is "not entirely enthusiastic" about the idea, she said. "I don't think you're talking about a total de-dollarization just by paying government employees in Riel," she said, but "I'm not sure it would be slow enough for them."

The decision to approach the National Bank about the shortage of Riel was one of the conclusions of a microfinance workshop in early December sponsored by the IFC and UNDP.

The workshop participants also said they want to move ahead with setting up a credit information bureau so microfinance lenders can share confidential loan information about their customers to help ensure that borrowers aren't getting in too deep with loans from different MFIs. "The microfinance industry doesn't know if somebody has taken out loans from another lender. We need a system that looks at $10 to $100,000 loans," said Biallas.

Another development for the industry coming in 2008 is a Prakas being drafted by the National Bank to allow microfinance institutions to accept savings deposits from a variety of customers, not just their own borrowers. Bun Mony, chairman and general manager of Cambodia Entrepreneur Building Ltd., said the measure would help the industry grow.

Although the microfinance industry is growing by 200,000 clients per year, it is hampered not only by the lack of Riel, but by a lack of access to funds in general, said Mony.

Mony said that the commercial banking industry in Cambodia has never cooperated well with the microfinance industry, forcing the MFIs to go outside the country to get funds for their credit operations. Although the foreign borrowers are charging interest rates of 10 to 11 percent, that is cheaper than the money available locally, which is more like 13 percent, he said.

The high cost of getting funds translates into higher loan rates. The MFIs must charge interest rates of 24 to 36 percent per annum.

Get riel: move to ban US dollar

By Charles McDermid and Cheang Sokha
Phnom Penh Post, Issue 16 / 12, June 15 - 28, 2007

Renewed calls to remove the US dollar from widespread circulation in Cambodia are drawing bipartisan support, and some high-ranking government officials are calling the ban a pressing matter of national sovereignty and pride.

A positive progression to some, an inconvenient eventuality to others, the move to finally "de-dollarize" the Cambodian economy has been sidelined for years by the government and monetary groups reluctant to heap hiccups into an otherwise bullish economy.

"Cambodia has extremely high levels of dollarization-our estimates are something in reality close to 90 to 95 percent," said Jeremy Carter, advisor to the Asia and Pacific Department of the International Monetary Fund. "This makes it an exceptional country."

A recent National Assembly presentation by Sam Rainsy Party lawmaker and economist Tioulong Saumura has re-surfaced the state currency debate.

Saumura is unequivocal on the issue, and has given rationales ranging from interest rates, to money laundering, to Cambodians' trust in their own economy and government.

"Decree it. Ban it! This is unthinkable in other places," Saumura said. "One of the accomplishments of the [European Union] was that member states surrendered part of their national sovereignty to adopt the Euro. This is a huge thing to give away. In our case we gave it away without getting anything in return. It's like we're funding the trade deficit of the US."

Now, politicians and economists are studying initial ways to embark on the de-dollarization gambit, and some are saying policies to rid border regions of an increasing infiltration of Vietnamese dong, Thai baht and Lao kip, are long overdue.

"When I made my statement a lot of MPS, especially from the CPP, were nodding their heads in agreement. It's a matter of principle: when you're in a country you're only supposed to use the national currency," said Saumura, a former vice-governor of the National Bank of Cambodia and the current chair of the Inter-ministerial Committee Against Money Laundering. "Monetary policy is an important tool for the stability of the macroeconomic situation. It allows a central bank to steer the amount of liquidities put at the disposal of the economy. At present we are not in control of our money supply. The Cambodian Bank and the government is not in control of the mass of money in circulation."

Saumura, a member of the 150-nation Inter-Parliamentary Union's Standing Committee for Sustainable Development, Finance and Trade, first published a report on banning the dollar in 1994.

"To de-dollarize is even more important now: there's more trade. In 1993 we had no garment factories. We have more tourists now and the economy is more internationalized and more accelerated," she told the Post. "Cash, usually the US dollar, is still used for big transactions. What's more surprising is the dollar is used for small purchases, too. It's psychedelic."

Gathering support

Fiscal prudence is crossing political party lines, with support for a foreign currency crackdown coming from the highest ranks of the CPP.

"I have raised the idea of banning dollar since nine years ago. I have talked about this issue many times with the minister of finance and economy Keat Chhon and National Bank governor Chea Chanto -how to dedollarize," said Cheam Yeap, chairman of Finance and Banking Commission of the National Assembly, and member of the Standing Committee of the CPP.

" No country is allowed to use dollars in the market like our country. Using dollars causes inflation to the riel, but as we do not have economic instability that we previously had, we don't have the possibility to ban the dollar on the market. This is the problem and it is hard to eliminate. I think it will be difficult to change people using riel from dollars. But riel is our formal state currency, and it is a shame that dollars are used all over the country."

Even the ban's strongest supporters admit it's a dicey prospect.

"The government's policy will not allow the dollar to be popularized much longer, but this must be done step by step. Our measure is to encourage people to use the riel, not force. What we must do is not shock the market," said Tal Nay Im, director-general of the National Bank of Cambodia. "If we force them to use riel immediately, people will lose a lot of convenience. If we use riel right away investors will think it's a risk to exchange currencies, and our economy will struggle."

According to Nay Im, the government has taken a positive first step. He said it is government policy to require public utility fees and taxes to be paid in riel.

"We are also thinking of lowering the prices of goods in the markets and shops if they purchased in riel," he told the Post. "I think changing people's minds should start with the government and its institutions first. Using riel will have both advantages and disadvantages. As I know, in Vietnam and China dollars can be used on the black market in a way that is very difficult to control."

Illegal activity is the other side of the coin: transnational trafficking of drugs and weapons, money laundering and terrorism. The US dollar, according to experts, is the lingua franca of crime.

"Using riel would prevent many crimes because criminals involved in smuggling and organized crime use the dollar because it's easy to transfer abroad," said SRP lawmaker Yim Sovann, chairman of the investigation and corruption commission of the National Assembly.

Past Khmer currency

Thun Saray, founder of rights group ADHOC and a historian on Cambodian currency, strikes a more cultural note.

According to his book History of Cambodia's Currency, the Kingdom first began using national currency in the 16th Century, before then Cambodians traded in gold weights.

"It was a symbol of national pride during the anti-colonial times," Saray said "The French
introduced the Indochine banknote to be used not only in Cambodia, but also in Vietnam and Laos. After independence they used riel all over the country into the 1960s."

According to Saray, at this time US dollars were used only for exchange activities and by big spending, high-ranking government officials. The Khmer Rouge banned all currency as part of their ultra-Maoist reform.

"From the 1980s, Cambodians have not trusted the riel. People don't trust their own economy, due to bad experiences with inflation in the 80s and 90s," he said. "During the UNTAC time, Cambodians only trusted the dollar. They're still using the same habit now."

Nay Im of the National Bank, concurs that dollarization became de rigueur in 1991 or 1992, and since then convenience and concern have kept Cambodians spending and saving solely in greenbacks.

But Saumura isn't buying it. "Why has this been going on for so long? Because of UNTAC? That's their argument? They must be kidding. People have no trust in our country, no trust in our economy and no trust in our government. That's the crux of the matter," she said.

"To place the blame on UNTAC 15 years ago is shameful."

Coin of the realm controversy

The widespread use of the US dollar across Cambodia began during the UNTAC era. Now the ruling party has joined calls by economists and the opposition to re-introduce the debate over de-dollarization.

"In the short run dollarization has helped the economy in certain respects, but over the long time you would probably want to look at that sort of issue. But we haven't taken a position. It's not a priority. It's not an issue where we've thought 'we've got to de-dollarize the economy straight away.' I don't think that would be a prudent approach at all."

- Arjun Goswani, Asian Development Bank country head


"There are many advantages of having your own vibrant exchange rate and your own vibrant currency. But we also have to look at the pros and cons for Cambodia. Dollarization has produced some disadvantages. It means, for example, the central bank has less flexibility over monetary policy. However, on the other side, dollarization combined with reasonably prudent fiscal policy has generated stability. It has given a tremendous buttress to keeping inflation relatively low. When we compare Cambodia's performance to other countries in the region you will find it is a very good performer in the last 5 to 10 years in terms of inflation. Overall we support efforts to increase the natural use of the currency.

- Jeremy Carter, advisor to the International Monetary Fund


"To use the dollar is a good thing because we can avoid bureaucracy. It's a good thing for investors in Cambodia. Using US dollars on the market is not a bad thing. For example, in France they stopped using the franc and started using the Euro."
"Why can't we use the dollar? I think it's better to use both - the riel and the dollar."

- Sok Hach, director of Economic Institute of Cambodia

Compiled by Cheang Sokha and Allister Hayman