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Cambodia Still Unable to ‘De-Dollarize’

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 Jayant 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.”