The US dollar remains in widespread use throughout Cambodia, despite the stability of the local currency, the Khmer riel. Post Staff
During the early 20th century, the US dollar rose to become the leading global currency.
Apparently, this status has been more evident in Cambodia than elsewhere. In 2016, the New York Times featured the headline “In Cambodia, the Ghosts Prefer Dollars”, indicating that the dollar is the most preferred currency in the country: it has been extensively used for pricing goods and services, and for paying salaries across various sectors, including the private sector, non-profit organisations and even some government institutions. This raises the question: What are the root causes, effects and interventions of the dollar’s dominance in the Kingdom?
The cause of the dollar’s dominance
There are two main causes behind the dollar’s increasing dominance in Cambodia. First, the currency risk – the possibility that currency loses its value due to its inflation rate – triggered the use of foreign currencies in Cambodia, such as the dollar, the Thai baht and the Vietnamese dong.
Cambodians had already lost faith in their domestic currency, the riel, when the riel and economic institutions like banks were abolished during the Khmer Rouge regime, well known for the Cambodia Genocide, from 1975 to 1979.
The riel’s substantial depreciation from 1988 to 1991 further eroded this already dwindling confidence. Despite maintaining an average depreciation rate of about 2% since the early 1990s, alongside political stability and an average economic growth rate of around 7%, Cambodia has continued to increasingly embrace the dollar, which has puzzled economists and policymakers alike.
This persistent growth can be attributed to the second cause – network externality, the notion that a person’s decision is influenced by the choices of others.
In the context of dollar usage, the network externality refers to the effect resulting from the fact that the more people use the dollar, the easier it is to operate with the dollar in an economy. Nowhere is this effect more profound than in Cambodia. In other highly dollarised economies such as Laos, Vietnam or Argentina, the externality originates from only one source: an economy’s accumulated experience in using the dollar as a medium of payment.
However, in Cambodia, this effect stems from two factors: the use of the dollar as a medium of exchange and a unit of account. When an economy allows foreign currencies to be displayed on price tags, it explicitly encourages their usage over the domestic currency.
Additionally, dollar-denominated products are so pervasive that people subconsciously accept the dollar in most business transactions. Whenever they think of which currency to use, the dollar typically springs to mind first. This subtle encouragement has undoubtedly established the dollar as the most sought-after currency in Cambodia.
Effects of the use of the dollar
When Cambodia or other countries adopt a foreign currency (usually the US dollar) instead of or along with the domestic currency, this process, commonly known as “dollarisation,” provides Cambodia with both benefits and costs.
On the plus side, it can help deal with inflation; provide stability in times of economic, social and political chaos; and facilitate international trade by reducing the currency risk – no need to exchange currencies.
In addition, it can attract foreign investment because investors generally feel more confident with the use of the US dollar, which is the global currency. This kind of investment can lead to economic growth and development, and integration into the global market.
Moreover, for a country with a history of financial instability, dollarisation can impose fiscal discipline, as the government of Cambodia cannot print money and must adhere to the US Federal Reserve (Fed). However, while dollarisation can offer these advantages, it also comes with high costs.
One of the main drawbacks is the loss of seigniorage, the profit generated by a government by printing currency. Additionally, it can cause a greater vulnerability within the banking sector, because Cambodia simply loses control over its monetary policy, such as the ability to manage exchange rates and interest rates in response to political or economic shocks.
This loss of sovereignty means that Cambodia cannot manipulate its own currency to deal with trade imbalances or fiscal crises. Furthermore, the National Bank of Cambodia is unable to act as a lender of last resort to help other financial institutions in times of trouble.
These key disadvantages have driven developing countries, such as BRICS, to craft policies to de-dollarise their economies. One such measure, as discussed below, can effectively reduce the use of the dollar.
Policy: The US dollar is not quoted on price tags
For dollarised economies to reduce the prevalent use of the dollar, they must do more than just stabilise their macroeconomic conditions, such as lowering inflation. They must also increase the transaction cost of using the dollar, effectively making it more expensive for business transactions.
One way to do this is by banning the dollar from being quoted in price tags. When products are priced in local currency, buyers are forced to spend time converting the dollar into the local currency before conducting any transaction. As the old saying goes, “time is money”.
Consider the case of de-dollarisation in Laos. Similar to Cambodia, firms and households in Laos commonly used foreign currencies as a medium of exchange and a unit of account, rather than its local currency, the Kip.
The use of Thai baht and the US dollar was widespread throughout the country, particularly in urban areas, tourism sites, and near the Thai border.
To counter this dollarisation, in the 2000s, the Laotian government-imposed regulations on dollar-denominated bank lending and prohibited pricing in dollars. The Bank of Laos even established a committee to conduct regular inspections to monitor the price quotation of products in markets, shops, companies and trade fairs or exhibitions. This restriction is among the factors responsible for reducing the degree of dollarisation in Laos.
Laos’ success serves as an excellent blueprint for Cambodia. On March 22, 2023, Cambodia’s Ministry of Commerce issued a decree, known as a “prakas” in Cambodia, mandating that all vendors, traders and service providers display prices in the local currency, the riel. In addition to this regulation, the National Bank of Cambodia (NBC) has also implemented other policies:
● Enhancing Confidence in the Riel: The NBC has adopted the managed floated exchange rate regime (pegged regime) to ensure the stability of the exchange rate between the riel and USD. This regime has served as the anchor of price stability and has promoted public confidence in the riel.
● Promotion of Loan Disbursement in Riel: The NBC, in 2016, announced that banks and financial institutions would be required to have at least 10% of their loan portfolio in riel, a policy that needed to be fully implemented by the end of 2019. It is observed that there is a gradual increase of riel in total loans, yet further action should be taken to keep up the trend. In addition, the NBC has also specifically designed its monetary policies, namely the reserve requirement, to localise Cambodia’s context by differentiating the riel and USD interest rates.
● Developing and Modernising Payment Systems: Based on the leapfrogging of technology, NBC has continued to develop and digitise payment systems, for instance, “Fast Payment”, “Retail Pay”, and “Bakong Project”, which have encouraged payments to be made in riel. In addition, the NBC has also modernised the cross-border payment system by initiating the “Interoperable QR Payment”, in collaboration with the Bank of Thailand since 2020, to enable payment in riel in Thailand through mobile banking. Recently, NBC has also launched the “DuitNow QR,” which allows Khmer riel account holders to make payments for goods and services in Malaysia.
● Budget and Fiscal Management: The government has rolled out the measures to promote the riel currency by using the riel in government expenditures, tax and debt management. Those include wages for civil servants, government subsidies, government support for infrastructure development and domestic public procurement, as well as tax collection on public services and other revenue collection.
● Money Market Development: Since 2022, the government has issued government bonds in riel currency for the sake of diversification of financing sources and to promote the use of Khmer currency.
These policies – particularly price tags in Riel – are undoubtedly a step in the right direction to decrease dollarisation, provided enforcement is adequately monitored, as in Laos. Regrettably, as the dollar has been ingrained in Cambodians’ hearts and minds for an extended period, the de-dollarisation process in Cambodia is likely to take longer than in other countries. Nevertheless, it is “better late than never,” especially when it comes to taking control of one’s own destiny
Dr Veasna Kheng is an economics professor at Monash University in Melbourne, Australia. Dr Mao Sonariddh is a senior economist at the Ministry of Economy and Finance. The views and opinions expressed are their own.
