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."

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.”

The Rielisation Of The Dollarised Economy

Opinion by Khmerization
13th December, 2008

“The Riel of today is heading the way toward its demise. Unless we “Rielise” this dollarised Cambodian economy any sooner, the Riel will lose its relevance in the Cambodian economy and the poor peasants, who are unable to have their hands on the dollar, will be the ones to bear the greatest brunt of this financial model of the foreign economic mastery.”

For the last 17 years or so, the Cambodian people have lost faith in the Riel, the Cambodian currency, and depended on the U.S dollar in their everyday livelihood. Most of Cambodian financial transactions, from multi-national transactions down to the petty transactions in the local economy, have been carried out in U.S dollar since the time of the United Nations Transitional Authority in Cambodia (UNTAC) in 1991. Since then, the Cambodian economy has become a dollarised economy- the sort of a dollar-dependent economy. And since then, there have been calls for the Rielisation - the use of the Riel in all financial transactions - and the de-dollarisation of this dollarised economy by restricting the use of the dollar in the local economy.

The Cambodian economy has always been at the mercy of the world economy. Since Cambodia gained independence from France in 1953, Cambodia had, one way or the other, depended on international aid in order to survive. The 1950s was when Cambodia became dependent on French aid to sustain the national economy. In the 1960s, at the time when America was vying for Cambodia’s supports for the Vietnam War, America had injected substantial amount of aid to Cambodia.

During the Khmer Republic regime of Marshall Lon Nol from 1970-1975, Cambodia had almost totally depended on American aid to support the survival of a regime that was facing an onslaught by the ultra-nationalist Khmer Rouge and the North Vietnamese Army.

When the Khmer Rouge ruled the country from 1975-1979, in trying to establish an agrarian Utopia, Pol Pot had abolished the money, which have seen the demise of the Riel, and Cambodia became heavily dependent on Chinese aid. When the Khmer Rouge regime was toppled in 1979, Cambodia was again heavily depended on the Russian and Vietnamese aid until 1991. The Vietnamese-backed regime of Prime Minister Hun Sen had tried to re-energise the Cambodian currency and stimulate the defunct Cambodian economy by re-introducing the money into the national economy but the people don’t have the confidence in the local currency and gold had become the only most trusted unit of currency for most financial transactions.

From 1991, during the time of UNTAC rule until today, Cambodia had survived on an average of $700 million of foreign aid annually. The U.S dollar flooded the Cambodian economy and it had become the most single trusted currency beside gold in the Cambodian financial transactions.

This sort of aid-dependency and a dollarised economy has put Cambodia at the mercy of world economic situations and makes the Cambodian economy susceptible and prone to world economic woes.

The Cambodian economy, if it is to survive competitively, must Rielise and de-dolarise all financial transactions. After all, our neighbours, like Laos, Vietnam and Thailand have, for decades, never allowed foreign currencies to flood their financial markets and their economies have survived and thrived until today. The de-dollarisation and the Rielisation of the Cambodian financial markets is essential to boost local confidence in the national currency during the time of world economic slowdown, precipitated by the perceived collapse of the U.S economy that could cause the Domino Effect. With a dollar-dependent economy, Cambodia could suffer adverse economic effects and financial collapse, dragged down by the apparent collapse of the U.S economy of which Cambodia is heavily dependent on its dollar for all major financial transactions.

Cambodia, if it is to sustain deep financial crisis, must devise plans to tackle the anticipated world economic meltdown, similar to the measures taken by Malaysia during the 1997 Asian financial crisis. During that time, George Sorros, the American financier and financial speculator was flooding the U.S dollar in the Malaysian financial markets. Realising that George Sorros was deliberately attempting to destroy the Malaysian economy and fearing the collapse of the Malaysian financial markets, Prime Minister Mahathir Mohamad restricted the U.S dollar from the Malaysian financial markets and banned the exchange between the Malaysian Ringgit and the U.S dollar. The Malaysian economy had survived the Asian financial crisis unscathed.

The Cambodian currency, the Riel, had suffered image problems and confidence since Cambodia plunged into civil strife in the 1970s. Since then, people depended on gold, and foreign currencies for their financial transactions instead of the local currency.

Currently, Cambodia, to a certain degree, has been flooded with three foreign currencies. In Phnom Penh and provincial towns and even in the rural areas, the U.S dollar is widely used and are in large circulations, at the expense of the Riel. In the eastern provinces of Kampong Cham, Svay Rieng, Ratanakiri, Mondulkiri, Takeo and parts of Kampot, the Vietnamese currency, the Dong, has been widely used. And in the western provinces of Battambang, Siem Reap, Pursat, Pailin, Koh Kong, Oddor Meanchey and Preah Vihear, the Thai currency, the Baht, had become the de facto local currency. This has caused the Cambodian Riel to become worthless, idle and unacceptable currency in most parts of its own financial markets. As a result, people have refused to accept the Riel in financial transactions. In one example, during the UNTAC period, foreign businesses jokingly asked to be paid in “real money”, not “Riel money”. This is because they do not have the confidence in the unstable Cambodian currency and due to the fluctuations in the Riel-dollar exchange rate and the instability of the Riel.

There are legitimate reasons and rational arguments for the restrictions of the circulations of foreign currency, in particular the U.S dollar, the Thai Baht and the Vietnamese Dong, in the Cambodian financial markets, in order to boost confidence in the Riel. The de-dollarisation, the de-Dongisation and the de-Bahtisation in the Cambodian financial transactions is essential if the Cambodian currency, the Riel, is to have any chance of survival and maintain its significance and relevance in the Cambodian financial markets at all. The widespread circulations of foreign currencies in the Cambodian financial markets have eroded the confidence in the Riel and if measures are not taken to re-energise and re-articulate the use of the Cambodian currency by local people, we could see the demise of the Riel in the not too distant future.

For argument’s sake, there are valid reasons to revitalise the use of the Cambodian Riel. Cambodia, by allowing the widespread circulations of the foreign currencies in the local economy, has lost its economic independence. Instead it will be at the mercy of those countries whom their currencies flooded the Cambodian economy. If the economies of those countries go under, by the theory of the Domino Effect, the Cambodian economy will follow suit.

One other subtle evidence for the revitalisation of the Riel was the important role it played in the stabilisation of the Cambodian economy during the Sangkum Reatr Niyum in the 1950s and 1960s. The Cambodian economic growth was slow then, but due to the ban of foreign currencies in the local economy and the widely use of the Riel, its valuation was very stable and it was widely acceptable as a single unit of currency in the local economy. The Riel exchange rate was on par with the Thai Baht. Teachers, public servants, bureaucrats and ordinary workers were well paid. The living standards for most families were similar to the living standards of the people of Thailand.

On the contrary, there are also legitimate arguments for not allowing the circulations of foreign currencies in the Cambodian local economy. Currently, the Cambodian economy is a dollar-dependent economy. And presently, most dollars are hoarded in the hands of a few privileged people in Phnom Penh and the provincial towns. Most of these people, mostly businesspeople, politicians and bureaucrats, have foreign bank accounts. Most of the dollars that have been injected into the local Cambodian economy will end up in the foreign bank accounts of those few people. And as such, most of the money and funds that are supposed to be in circulations to support and stimulate the Cambodian economy are sitting idle in the foreign bank accounts of those privileged few Cambodians in Switzerland or in Singapore. As a result, the Cambodian economy has been deprived of its much needed fund injection and a stimulus factor to stimulate the growth.

The Riel of today is heading the way toward its demise. Unless we “Rielise” this dollarised Cambodian economy any sooner, the Riel will lose its relevance in the Cambodian economy and the poor peasants, who are unable to have their hands on the dollar, will be the ones to bear the greatest brunt of this financial model of the foreign economic mastery.
-------------------------------------------
Khmerization is not an economist nor has he claimed to be one. The views expressed here are not arguments based on economic rationale, but rather they are purely the personal opinions of the author.