Increasing the usage of the Khmer riel and moving away from a dollarised economy is on the cards for Cambodia. Historically dollarisation was rehabilitative and constructive, but as the country moves towards the ASEAN Economic Community and seeks to enhance its competitiveness regionally, is sticking with the greenback such a sound idea, or will it instead endanger future economic stability and growth? BY JESSICA SANDER
The introduction of large quantities of US dollars by the United Nations Transitional Authority in Cambodia (UNTAC) in the early 1990s, following the destruction of the country’s monetary system, was pivotal in kick-starting economic activities within the kingdom. This move allowed a public that had lost all faith in the local currency to switch from gold to the greenback for daily transactions and savings.
According to Chea Serey, director-general of the National Bank of Cambodia (NBC), dollarisation has been an asset for Cambodia. In the short term, dollarisation was positive for inter-regional trade, removing exchange rate risks for imports and exports. Further, it stimulated the development of the domestic financial system by eliminating the incentive to place foreign currency savings in accounts abroad. This in turn fostered the growth of the financial system in Cambodia.
Having a dollarised economy has helped shield the country from extreme inflation rate movements and attract foreign investment by those who want to hedge against exchange rate risk. Dollarisation protected Cambodia against contagion in the face of the Asian crisis (1997-2000), and has sustained the confidence of investors with operations here, according to an NBC report examining the historical impact of the greenback in the kingdom.
However, the importance of the dollar’s stabilising effect diminishes as Cambodia’s economy grows. In the long term, it exposes Cambodia to external risks such as uncompetitive exports to other markets, including the EU, whenever the dollar grows in strength.
“I think dollarisation has been a net benefit for Cambodia for the last decade or so,” says Grant Knuckey, CEO of ANZ Royal Cambodia. “It has helped the country avoid some of the volatility that emerging markets and other neighbours have had. Inflation has been easier to manage, reducing investors’ exposure to risk and making them somewhat more comfortable.”
Serey believes that the continued use of the dollar could impede the central bank from implementing efficient fiscal and monetary policies. She says that the government has plans to establish a national strategy on promotion of the use of the local currency.
“This is called promotion of the use of local currency and not de-dollarisation, because we want people to turn back and use our national currency, the Khmer riel, out of trust and not out of administrative measures,” she says. “Cambodia strongly believes in a free-market economy, and our policy decision is carefully designed as not to distort the market and yet still preserve its integrity and efficiency.”
Stephen Higgins, managing partner at Mekong Strategic Partners, agrees with the NBC strategy.
“Long term, it makes sense for Cambodia to strengthen and grow the usage of its own currency. It takes time to build up confidence in the Khmer riel, and this might be a 20- or 30-year process.”
Knuckey believes that you do not have to look far to realise how long it could take for the riel to establish itself.
“Vietnam, which was a lot less dollarised than Cambodia, took a decade to get to a point where their local currency is dominant,” he says. “There’s still a reasonably heavy US dollar influence there, but nothing like here. Here it’s probably more than a 20-year process.”
Further evidence supporting the advocacy of the riel can be found in Europe. What would happen if Cambodian banks were to get into trouble and face liquidity problems, much like Greece is experiencing at the moment? How would a bail-out work in a dollarised economy where the government and central bank are greatly constrained in their monetary policy?
Serey says this is another challenge of operating under a dollarised economy.
“For this reason, the NBC and the government is closely cooperating with each other on preventive measures,” she says. “Banking supervision has to step up its effort in supervising and regulating banks in a safe and sound manner while at the same time cooperating and coordinating closely with other financial markets authorities – insurance and stock exchange markets – to better monitor and identify early warnings for prompt corrective action.”
The government is also concerned over its lack of control of its own currency.
“What can we do to influence the market when we have no control over our monetary policy?” asks Vongsey Vissoth, secretary of state of the Ministry of Economy and Finance. “In response, we rely very heavily on non-fiscal policy and how we collect taxes. We have been affected in terms of exports with a strengthening dollar. Although it doesn’t hurt us in terms of imports or inflation.”
Although he advocates a movement away from the dollar, Vissoth does not advocate any unhealthy rush.
“It’s a long-term strategy done cautiously but not forcefully,” he says. “I’m suggesting we establish a currency board to deal with this.”