The Cambodian central bank has emphasised a substantial increase in the use of local currency over the last two decades. The surge, it says, demonstrates public confidence and reflects the effectiveness of its monetary policy.
Chea Serey, governor of the National Bank of Cambodia (NBC), made addressed a September 10 book launch and seminar titled, “Cambodian Dollarization: Its Policy Implications for LDCs’ Financial Development”.
She discussed the rise of dollarization in the country, saying that the trend emerged due to diminished confidence in the riel, following nearly three decades of civil war and a substantial influx of US dollars during the first general election held under the UN Transitional Authority in Cambodia’s (UNTAC) in 1993.
She noted that while dollarization had spurred economic recovery and growth, stabilising the macroeconomics of the country over two decades, it also restricted the effectiveness of monetary policy.
She referred to the 2007-2008 global financial crisis and the Covid-19 pandemic, during which central banks globally adopted unconventional monetary policies, such as cutting policy rates and releasing cash to stimulate the economy.
Post-pandemic, she explained, many central banks increased rates to address inflation. However, the success of these policies hinged on the widespread use of their national currencies.
She pointed out that political stability in the last two decades has gradually encouraged the use of the Khmer riel. Nevertheless, the proportion of foreign currency deposits remains high.
“The government and the NBC have consistently worked to enhance public trust in the riel. Since the early 2000s, market-oriented measures have increased riel demand, leading to a 16-fold rise in currency circulation from 0.85 trillion to 14.5 trillion riel,” she stated.
“Promoting riel usage is a collective effort. It requires active and consistent support from all ministries, the private sector and the populace,” she added.
Srun Sopheak, a professor at the Royal University of Law and Economics (RULE), speaking at a ceremony marking the 43rd anniversary of the re-introduction of the riel in March, described the country’s dual-currency system as a “special problem”.
He suggested that a dollar-dominated economy could impede the country’s sovereign monetary policy-making.
“Now is an opportune moment to prioritise the use of the riel, as Cambodia’s macroeconomic indicators signal market readiness for the national currency,” he said.
He noted that high dollarization and free foreign currency movement limit the NBC’s monetary policy efficacy and price stability.
“If Cambodia adopted the riel exclusively, the central bank would gain greater control over monetary policy instruments that could develop the national economy. This would include the ability to devalue the currency to boost exports and adjust base interest rates to stimulate investment,” he said.
He explained that under these circumstances, the NBC could function more effectively as a lender of last resort and offer improved liquidity support to the financial system in emergencies.