Cambodia Still Unable to ‘De-Dollarize’

Currency trader counts Cambodian money, the Riel, to exchange with U.S. dollars from a customer at a money exchange stall on a roadside in the capital. (Photo: AP)

Ros Sothea, VOA Khmer
Phnom Penh Wednesday, 07 July 2010

“The most important thing is to have a discrete economic policy to encourage more use of riel and promote economic growth, low inflation and high riel value.”

After nearly a decade of government efforts to de-dollarize its economy, Cambodia remains one of the most heavily dollarized economies in the world.

The greenback is used in nearly 90 percent of transactions, alongside the riel, and experts say this won’t change without more administrative reform.

Meanwhile, people’s trust in the riel has been shaken by recent inflation, making the dollar, which was introduced during the UN’s rebuilding efforts, more attractive.

There are of course benefits to dollarization. It attracts foreign investment, stabilizes the exchange rate and prevents devaluation of the riel while promoting growth in the banking sector.

But dollarization also undermines monetary policies conducted by the central bank, limiting its role as a lender of last resort and creating losses in revenue from the printing and issuing of new currency.

Such losses cost the government between $20 million and $90 million annually.

Overall, many regional experts warn against continued dollarization.

Analysts from South Korea, India, Thailand and Vietnam all said at an economic conference last month that dollarization left Cambodia vulnerable to changes in US currency policy, especially in a currency crisis. These experts urged increased efforts to make the riel the sole currency of the country.

But the process must happen in a sustainable and natural way, argues Jaynanat Menon, a senior economist for the Asian Development Bank. Menon said it may not be time yet to move away from the dollar.

There are ways to facilitate the process of natural de-dollarization, he said, driven by economic reform, macroeconomic stability, improved institutions, political stability and others.

“If the government could accelarate these reforms...when these things start improving, people will naturally prefer to use the riel,” he said.

As part of the process, the government requires all taxes and government salaries to be paid in riel. And some major banks pay higher interest for riel deposits.

Hall Hill, a professor of Southeast Asian econonomies at the Australian National University, said in an e-mail the central bank must be of high quality and independent before de-dollarization can occur.

And while the ADB has pointed out constraints such as inequality, poverty, political uncertainty and other insecurities as reasons de-dollarizing hasn’t occurred, there are ways the government can help the process.

“This country can now gradually move away from the dollar by giving various incentives to hold domestic currency,” R. Nagaraj, a professor at the Indira Gandhi Institute of Development Research, said in an interview. “You can have the admistrator rule that all transactions of certain kinds have to be done in local currency, for example in every airport, and gradually push firms to use more locally currency.”

The government could also force private companies to pay employess in up to 40 percent riel, rather than the dollar, the ADB’s Menon said.

At last month’s economic workshop, Neav Chanthana, deputy governor of the National Bank, called on the private sector to help with de-dollarization, but she did not give any precise instructions on how they might do it.

“The most important thing is to have a discrete economic policy to encourage more use of riel and promote economic growth, low inflation and high riel value,” said Hang Chuon Naron, secretary general of Ministry of Economy and Finance. “This will solve the problem of dollarization, but it could take five years or more.”

Another way Cambodia could de-dollarize is to work closely with Laos and Vietnam in financial policymaking. All three countries have multiple currencies that cooperation could help with, according to a new ADB report.

That could include expanding a common network of policymakers, bureaucrats and researchers in government and economic institutions, creating research teams and other forms of cooperation.

The three countries could also improve their capital markets, or allow companies in Laos and Cambodia to list on Vietnam’s stock exchange.

“These countries are facing many problems, such as smuggling, informal goods, capital and labor across the borders which impact the financial system,” the ADB’s Menon said.

“So if they can reduce these, it will make the financial system develop and go faster, and this is a part of strengthening the macroeconomic systems of the three countries.”

Cheam Yiep, head of the National Assembly’s finance committee, said he was confident that “step by step” Cambodia will move toward de-dollarization.

The ADB report recommends simplified policy management without interference from politicians and more independence of central banks.

But Kang Chandararoth, president of the Cambodian Institute for Development and Study, has less confidence in cooperation. What matters, he said, is confidence.

“It does depend on each country’s policy on how to make people confident in their local currency,” he said. “So such cooperation can’t make people turn their confidence to riel, dong and kip more than dollar.”

Cambodia's central bank to take measure to stabilize riel

June 01, 2010
Xinhua

The National Bank of Cambodia (NBC) has been putting another 3 million U.S. dollars to buy in riel currency in a bid to stabilize riel currency which is depreciated in recent weeks.

According to a Monday's announcement, seen Tuesday, from the NBC signed by the NBC's Director General Tal Nay Im, NBC has been putting each of 1 million U.S. dollars for bidding on Monday, Wednesday and Friday this week. Bidders can be commercial banks, licensed money changers and companies, it stated.

"On Monday's bidding for 1 million U.S. dollars, there were nine money changers joined. As a result, Vong Rithy Exchange shop near Phnom Penh's Olympic Market won the bidding at 4,232 riel a U.S. dollar," a central bank official who asked not to be named said Tuesday.

Riel currency is depreciated 1.67 percent to 4,260 riel a U.S. dollar on Tuesday from 4,190 riel a U.S. dollar in mid-April.

This is the second intervention from NBC to stabilize riel currency after the first dollar currency bidding of 4 million dollars in the last two weeks.

Analysts estimated that there is around 500 million U.S. dollars of riel currency has been in circulation in Cambodia and recent depreciation of riel currency is due to the appreciation of U.S. dollar and to the fewer inflows of U.S. dollar into Cambodia through trade and investment, as well as to the recent depreciation of EU currency.

Local Banks at Risk, Top Institutes Warn

By Ros Sothea, VOA Khmer
Original report from Phnom Penh
18 March 2009

The World Bank and International Monetary Fund both warn that three of Cambodia’s nine largest banks are at risk of succumbing to the global financial crisis and a national recession.

Neither institution will name the banks in question, but both say new economic conditions in global finance have weakened Cambodia’s highly dollarized banking system.

Cambodia’s banks are at risk from a liquidity shortage, the slowdown of deposit growth and a rise in non-performing loans.

Since September 2008, shortly after the global financial crisis, bank deposit growth slowed significantly, turning negative, the report says, while large withdrawals have reportedly been made by firms concentrated in the property sector.

John Nelmes, IMF’s representative in Cambodia, told VOA Khmer in an interview Thursday that several of Cambodia’s banks are at risk. The banks are among the country’s nine largest, which together control nearly 90 percent of deposits.

“The risk in the banking system is now higher than previously,” Nelmes said. “The banking system is coming under increasing strain.”

The World Bank’s report shows similar concerns.

The report, received by VOA Khmer on Thursday, points out that growth in credit has been largely directed at consumption, working capital and real estate, but less at fixed investment.

“The rapid growth of credit for real estate development and construction represents even more risks,” the World Bank report says. “A fall in property prices could create problems for the involved banks, some of which already have high NPLs [non-performing loans].”

“The concentration of NPLs in two banks is also a major concern,” the report warns, without naming the banks.

“Our recent report indicated our general concern about non-performing loans in the financial sector,” Stephane Gimberk, senior economist expert of the World Bank, told VOA by email. “We feel it is critical for the central bank to deepen its efforts at bank supervision.”

Tal Nay Im, Director of the National Bank of Cambodia, agreed with the concern. But she claimed that the central bank has been paying much attention to all financial institutions. She said she was optimistic that Cambodia’s banks are in a good standing.

Some of Cambodia’s top banking executives say they remain in good shape.

Acleda CEO In Channy, ANZ Royal CEO Stephen Higgin and Canadia Bank Vice President Chhor Vann all claimed their banks were stable.

Khmer Intelligence News - 11 March 2009

11 March 2009

Nearly 80 percent of Cambodians live under poverty line (2)

Government and aid officials claim that the percentage of Cambodians living below the poverty line dropped from 47% to 35% between 1996 and 2006. The fact is that, during that period, the “poverty line” used to assess the number of poor people and defined as a threshold of daily income, was surreptitiously lowered from US$1.00 to US$0.75. Had the “poverty line” not been changed, the percentage of Cambodians living with less than US$1.00 a day would be close to 50%. Moreover, had the “poverty line” been set at US$2.00 income a day as it is in the Philippines and some African countries, the percentage of Cambodians considered as poor would be 77.7% according to the UNDP. See “Over 75 percent of Cambodians live under poverty line” (KI News, 13 January 2008).

Poverty to worsen in 2009 (2)

Given the population increase, inequality in revenue distribution and gross misallocation of resources in Cambodia, a minimum 5 percent annual GDP growth is required to prevent poverty from worsening. For 2009, the IMF has predicted that Cambodia’s economy would shrink by 0.5%, meaning a negative growth leading to a marked increase in poverty.

Sharp drop in customs revenue (2)

In the 2008 state budget, the Customs Department accounted for over 60 percent of all tax revenue, which is a relatively high figure in the region. For 2009, it should collect US$585 million, a figure that now looks impossible to achieve given the ongoing economic slowdown.

For the first two months of 2009, customs revenue reached only US$64 million compared to US$86 million for the same period last year, which represents a 25 percent drop [adjusted for the collection of a US$7 million duty pertaining to 2008].

State budget for 2009 in jeopardy (2)

The government will soon be obliged to revise downward the state budget for 2009 that was adopted last December because it is unable to collect the projected revenue. See above news “Sharp drop in customs revenue” while knowing that the fall in revenue also holds for other sources of income. The projected 2009 budget amounts to US$1.75 billion compared to US$1.37 billion for the 2008 budget, representing a 28 percent increase. This 28 percent increase will likely evaporate and be replaced by a decrease instead. Cambodia is facing the world economic crisis with a collapsing budget, let alone a strong budget with an appropriate economic stimulus package.

Cambodia losing competitiveness because of its dollarized economy (2)

A dollarized economy puts Cambodia in a weak position in the face of the global economic crisis. The fact that Cambodia’s currency, the riel, is pegged to the US dollar is putting pressure on its economic competitiveness as its neighbors’ currencies (Thai baht, Vietnamese dong) depreciate vis-à-vis the US dollar. Little can be done about this in the short term since 95 percent of Cambodia’s money supply consists of US dollars. Paradoxically for the poorer country, the cost of living is higher in Cambodia than in Thailand and Vietnam. For instance, a factory worker can live on a monthly salary of US$60 in Vietnam but not in Cambodia. Cambodia’s economy has been dollarized as a result of weak economic foundations (low productivity, lack of diversification, over-reliance on foreign remittances, shady foreign investors/speculators, cash economy) and poor governance.
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13 January 2008

Over 75 percent of Cambodians live under poverty line (1)

According to the latest official statistics, 35 percent of Cambodians live below the "national poverty line", which is defined as $0.75 of income a day. But if the poverty line is raised to $2 a day, which is the level used to measure poverty in most developing countries in Asia and Africa, 77.7 percent of Cambodia's population live under this more realistic poverty line. The 35 percent of Cambodians identified above through our "national poverty line", are actually those who survive under a "starvation line" of $0.75 a day.

Source: 2007/2008 Reports, Human Development Reports, UNDP.

Banker: Trust in Finance Growing

By Sok Khemara, VOA Khmer
Washington
04 February 2008

Many Cambodians still misunderstand the benefits of banking and finance, preferring the dollar to the riel and avoiding savings accounts to their detriment, a bank official said Monday.

Channy Ung, director of Acleda Bank, the third largest in bank in Cambodia, said that putting just a little money in the country’s banks would increase their ability to distribute credit. At the same time, people would earn interest, he said, something they cannot get from money stashed at home.

The Khmer Rouge abolished banks and money, in an era that saw several regime and currency changes, leading to a deep-rooted distrust of banks.

But a large increase in the number of people making deposits meant trust was returning, Channy Ung said, as a guest on “Hello VOA.”

About 90 percent of the money deposited in 2007 was in US dollars, however, he said, showing that people still did not trust the national currency.

The riel had not lost its value, he said, and inflation has been steady for a long time. But the national bank still does not require the sole use of the riel.

Channy Ung said the banks existed as a place for financial safety, which could include freezing assets of criminals at the behest of the national bank and courts.

“But so far there is no money freezing against any company without reason and without proper authorization from the Central Bank,” he said.

Inflation rises to 6.5% in Sept

By Kang Chan Amrak
Phnom Penh Post, Issue 16 / 24, November 30 – December 13, 2007

While the complaints about gas prices soaring to 4,450 riels per liter continue, another crescendo of worries is coming from consumers about hikes in the cost of food and other commodities.

"Now everything is so expensive! Before one kilo of pork is 10,000 riel but now it's 16,000 riel," said Kang Ling Hua, who runs a small food shop O'Russey market. She had just added 1,000 riel per meal on her previous price of $1 for a plate of food, because she said inflation had eroded all of her profit.

"What is even more terrible is the price of gas," she said.

As businesspeople like Hua complained about "no profit," vulnerable salaried workers were worrying about how to stretch their wages to cover their needs.

"It's getting hard for me now because the price of goods keeps on increasing but not much my salary," said Chay Ty Hui, a worker who earns $80 per month.

According to statistics from the National Institute of Statistics, the inflation rate in Cambodia this year has risen to 6.5% in September. At the end of 2006, it was 2.8%.

Among the 200 items in Cambodia's Consumer Price Index, the price increases in the Food, Beverage and Tobacco category saw the most dramatic increases. That category was up 13% in September, compared with 6.4% in September 2006.

Several economists said Cambodia's increased inflation is being caused by high international food prices, currency inflation as well as the sharp increase in oil prices.

"The main factor is higher international food prices, including, importantly, China where food price inflation rose to 18% in August," John Nelmes, IMF Resident Representative in Cambodia, told the Post.

Nelmes said the effect of the weak U.S. dollar is hard to separate from other factors, but it is also a factor that affects inflation because it make goods imported from neighboring countries more expensive for Cambodians.

"Another factor is the recent sharp increase in international price of oil, which has recently fed through to higher fuel prices in Cambodia."

Another view came from Neou Seiha, Economic Researcher of the Economic Institute of Cambodia, who said the limited local supply of food contributes to inflation because the agricultural sector in Cambodia increased only about 2-3% this year, not enough to meet increased demand.

Some local suppliers are choosing to export agricultural products to other countries due to the higher international food prices, making domestic food prices increase even more sharply.

Tal Nay Im, Director General of the National Bank of Cambodia, said the depreciation of the dollar affects inflation in Cambodia because Cambodia is a dollarized economy. But she put the greater blame on the appreciation of Thai Baht in relation to the riel and the dollar.

"Cambodia imports a lot of things from Thailand, so when the Baht appreciates, even if the value of the goods stays the same we still need to pay more riel or dollar for that same product. We don't produce so much stuff, not even daily products, so we need imported goods. Inflation is inevitable."

Nay Im said inflation wouldn't affect the garment industry because the transactions are done in dollars.

Nay Im said with inflation still in single digits, no monetary policy changes are needed.

Nelmes reiterated that, "The appropriate policy response is to allow the economy to adjust to those higher prices by its own accord," he said.

The National Institute of Statistics projected inflation in 2008 at 5.5% and said it will stay at about that level for the next few years depending on international oil supply and the U.S economy.

Meanwhile, for the average Cambodian, the situation is tough.

"I hope the goods prices will not increase anymore. I can't afford to pay for food that gets expensive month by month with the same money my children give me," said Liang Phalla, 56, negotiating a price for some dried fish at O'Russey market.