Analysis

As much as $320 million is being lost annually as a result of Cambodia’s reliance on the US dollar, while a longstanding mistrust in the riel means there is less of the local currency in circulation, restricting the national bank’s ability to respond in times of economic crisis, the country’s leading voices on the economy say.

Cambodia’s loss of seigniorage – the vaule a country gains in producing its own currency – equates to about 2 per cent of total GDP, Jayant Menon, lead economist at the ADB’s office of regional integration, estimates.

Menon is urging the National Bank of Cambodia to consider installing a new mechanism that could govern riel exchange rates and assist in de-dollarising Cambodia’s economy.

“There is a lot of money there. This is why I have proposed for Cambodia to consider a currency board arrangement as an interim measure in the effort toward de-dollarisation. That would allow Cambodia to recoup some of the seigniorage losses,” he said.

Cambodia is currently the most dollarised economy in all of Asia, with an estimated 85 per cent of all currency in circulation being US dollars.

In 2010, however, when the US dollar circulation was at 80 per cent, the International Monetary Fund estimated Cambodia’s seigniorage losses to be as high as 19 per cent of GDP.

May Kalyan, senior adviser to the Supreme National Economic Council of Cambodia, said the very idea of large-scale seigniorage losses should trigger a change in thinking from the NBC, the government and the Cambodian people.

“[Dollarisation] is not a bad thing in retrospect,” he said, citing Cambodia’s 7 per cent year-on-year growth and foriegn direct investment inflows as dollarisation’s most positive influences. “But in the grand scheme of things, it’s an issue of trust, first and foremost,” Kalyan said.

A trust that the local currency has struggled to establish for decades.

Following the abolishment of all currencies and trading by the Khmer Rouge in the 1970s, bartering in goods, gold, Thai baht and Vietnamese dong became commonplace before the riel was reinstalled in 1980.

Two subsequent inflation crises – one in 1993, which saw a 100 per cent rise in daily living costs, and another in 2008, which saw a 40 per cent rise in food and fuel prices – combined with an influx of foreign UNTAC workers beginning in 1992 cemented the dollar’s place as Cambodia’s dominant legal tender.

“Trust is the major issue here. When people have confidence in the regulator and the government’s ability to control monetary policy, then people will be willing to hold the local currency in higher regard,” the ADB’s Menon said.

The NBC’s ability to establish firm monetary policies is hampered by the country’s dependence on the US dollar.

Consequently, the NBC’s ability to pull levers – as a reserve bank – in a time of need, also faces increased risk, as the economy matures.

“Being a bank of last resort cannot be achieved if the bank itself cannot get its people to hold its own currency. They may not be able to support the banking system if there is a recession,” Menon said.

Chea Serey, director-general of the National Bank of Cambodia, said the bank is working on a raft of regulatory and policy changes to foster de-dollarisation in Cambodia and promote greater use of national currency, however progress is slow.

“Dollarisation in Cambodia is deeply rooted; therefore, it will only decline gradually over time,” Serey said, adding that an official action plan for de-dollarisation, which will focus on improving the country’s macro-economic stability rather than installing short-term monetary controls, is expected soon.

A foreign exchange market, an inter-bank market – where banks can trade foreign currencies among themselves – a securities market and sufficient regulatory framework in which they operate are all currently lacking, Serey added.

In Channy, CEO of Cambodia’s largest banking firm, Acleda Bank, said that by bolstering Cambodia’s agricultural sector riel acceptance would improve.

“But if we continue to focus exports in garments, which are primarily shipped to the US and rely on imported raw materials, offshore trade will stay dependent on the dollar,” he said.

Faisal Ahmed, the IMF representative for Cambodia, said a gradual approach to de-dollarising is the safest route.

“In Cambodia, continuing macroeconomic stability, promoting intermediation in the riel, building monetary policy tools and establishing an inter-bank market and promoting the use of the riel as a unit of account would support increased usage of riel.”

Hosted by Cambodia Economic Association, economists will meet on Monday to discuss the revival of the riel.