Riel or dollar: which currency for Cambodia, in a context of crisis?

Phnom Penh (Cambodia). 25/11/2007. Lottery prizes. (Photo: John Vink/ Magnum)

09-12-2008
By Corinne Callebaut
Ka-set in English
Click here to read the article in French
Click here to read the article in Khmer

Cambodia's dependence on the United States, home to the main clients of its textile industry, is illustrated by the country's reliance on the American currency, the dollar, used for monetary exchanges with other countries and, on a more local level, for Cambodians' everyday expenses. But as the economy of Uncle Sam's country finds itself crisis-stricken, the country's dependence on the dollar has its own consequences. Huot Pum, deputy director general of the Securities and Exchange Commission of Cambodia (SECC) and author of a PhD thesis obtained at the French University of Lyons II on “de-dollarisation and its economic consequences” in Cambodia, explained in an interview granted to Ka-set how the dollar came to impose its might in the Kingdom, the issues at stake concerning a return to a “rielised” economy in the current context, as well as those relating to the potential creation of a single regional currency.

Ka-set: When did the dollar start being used in Cambodia?
Huot Pum: The dollar arrived in Cambodia at the same time as the international aid, from 1953 onwards, after the country gained its independence. The American currency was hardly used in the country's monetary practices but was rather used as a reserve currency for the National Bank of Cambodia (NBC) and as the international currency, like in all other countries who took part in international exchanges at that time. The dollar arrived much more massively in Cambodians' everyday life in the 1970s when the American government granted the country millions of dollars to help contain the “communist threat”; then, twenty years later, at the beginning of the 1990s, the UNTAC [United Nations Transitional Authority in Cambodia] arrived, stayed less than three months altogether in Cambodia and injected more than 2.8 billion dollars, out of which 806 million dollars for expatriates' salaries. The country was at that time torn by war, the riel was worth next-to-nothing and Cambodians did not trust their national currency any longer. Therefore, the dollar became the most-accepted currency among inhabitants and all private economic protagonists in the Kingdom.

K7: Why didn't the riel resist the arrival of the dollar?
H.P.: Because of the country's political and economic instability. The only period of time which saw Cambodia enjoying a thriving economy was just after the French protectorate, between 1954 and 1970. As a matter of fact, the riel was created in 1955 when Norodom Sihanouk became head of the government. Cambodians began to feel very attached to their currency. To them, it was the symbol of a newly-acquired autonomy and independence. But with the 1970 military coup, which forced Norodom Sihanouk to step down, and the establishment of the Khmer Republic regime, the riel started suffering devaluation and eventually disappeared under the Khmer Rouge regime between 1975 and 1979. The political and economic instability of the various regimes that followed did not allow the riel to regain enough value to supplant or even compete with the dollar. The riel did come back on the market, but Cambodians never saw again in it the worth that made them appreciate Norodom's Sihanouk's riel, to such an extent that before the 1990s, they even preferred using gold for their expenses.

K7: In the current world economic context, what are the drawbacks, for Cambodia, of the dollarisation process?
H.P.: The predominance of the dollar in the country has an economic and social cost. First of all, it affects the country's seigniorage. Seigniorage corresponds to the difference between the intrinsic value of a currency [the real cost of production and issuing of a coin or banknote] and its value on the market [nominal value]. Losing seigniorage means depriving the state of the revenue linked with the issuing of the currency. Then, dollarisation leads to a necessary fall in the official amounts of money in reserve and limits the efficiency of the monetary policies launched by the National Bank of Cambodia (NBC) as well as the influence it has on exchange rates. The NBC is becoming more and more permeable to external shocks. On the social level too, dollarisation plays a negative part by widening the existing gap between the rich and the poor: big expenses require the use of the dollar, and Cambodians with financial resources specified in dollars are the only ones, together with expatriates, who can claim to do so. Only them can have a bank account in dollars. Furthermore, Cambodians who receive their salary in riels lose out a lot on exchange rates when they convert them into dollars. They are more dependent on the exchange market. This is why very poor Cambodians are those who need most the de-dollarisation process in Cambodia.

K7: Conversely, what benefits did the dollar bring to Cambodian economy, and still does, to some extent?
H.P.: First of all, dollarisation gave way to the stabilisation of exchange rates and therefore to the establishment of foreign investors' trust. It offers Cambodians the possibility of getting used to banking systems, saving money and using more banking services. The dollar allows Cambodia, very simply, to integrate global economy.

K7: Do you think that one day the de-dollarisation of Cambodian economy will be possible? Is it advisable for the country?
H.P.: No, I do not think it is possible or at least not during the next decades. To start with, de-dollarisation is not the right term to use here, but it is more advisable to talk about a reinforcement of the national currency. The distinction is important since restoring people's trust in the riel is the only way for the country to make the dollar possibly disappear from the market. What is certain is that there is nothing to expect from the forced conversion of dollars into riels. Such a measure would lead to the vanishing of funds and to the development of an underground dollarisation. De-dollarisation can only result in an increase in the demand of riels from the public. And this can only happen provided that peace and institutional stability continue to remain stable. When riels start being used more and more as a method of payment, unit of account and reserve money, then the process of de-dollarisation might happen and succeed. The feasibility of de-dollarisation will depend on the Cambodian authorities' ability to put in place the measures that will restore the public's trust in the national currency.

K7: Are there other solutions that may help Cambodia reduce its dependence on the American dollar?
H.P.: One of the solutions to contemplate would be to create a regional common currency for all the ASEAN [Association of Southeast Asian Nations] country-members, like the euro in the European community. I do not think that Cambodia will manage to have a strong currency on its own. But if the country belonged to a community monetary system, it would benefit from a double advantage: it would promote its regional integration and would also go towards global integration.