The head of Cambodia’s central bank pledged Tuesday to keep the riel stable at about 4,000 to the US dollar by auctioning dollars every week and by increasing the interest rate of the riel.
National Bank of Cambodia Governor Chea Chanto also said he would welcome any other ideas by bank experts to defend the country’s currency between now and the scheduled July 26 elections.
“We cannot allow the riel to drop or rise too much,” he said in an interview at the bank.
The National Bank on Tuesday held its second dollar auction in less than a week, selling $500,000 at a rate of 4,012 riel to the dollar. Such auctions are designed to reduce the supply of riel in the market, thus increasing its value.
Strong demand for dollars, government tax-collection problems and general economic weakness in Cambodia and the region have contributed to the riel’s slide, experts say. The riel has slipped 10 percent against the dollar in the past month, and nearly 50 percent since the factional fighting last July.
Such depreciation especially hurts poor Cambodians who buy in riel or are paid in riel. Prices for commodities have increased by as much as 20 percent at many local markets in recent weeks.
Without government intervention, several economic experts have said that it is likely the riel could fall to 5,000 to the dollar by the elections, following a similar track as during the 1993 polls.
While Chea Chanto listed the usual economic and political factors for the weakened riel, he added lack of trust as a major culprit.
“Psychology is the most important,” he said in a statement issued in conjunction with the interview. “The consequence of Cambodia’s bitter history is that Cambodians did not use money in the Pol Pot [Khmer Rouge] time and people keep that in their heart. They consider the dollar a better means for payment.”
Chea Chanto, the former minister of planning who replaced Thor Peng Leath as National Bank Governor in March, said an increase in the interest rate, which is still being negotiated, would encourage Cambodians to use the riel more and deposit more riel into local banks.
An operator of a Phnom Penh currency exchange shop said Tuesday that she believes the National Bank will be successful in stabilizing the riel. She said customers seem to believe in the riel more than they did in 1993, when they rushed to get dollars.
“At that time, there was a rumor that the government would no longer accept the big 50 riel note and the old 500 riel note, so people flocked to buy dollars,” said the woman, who asked not to be named.
But Bit Seanglim, a government economist who is running in the elections, questioned the central bank’s strategy, which he said “pretends” that the riel is not tied to the dollar and Thai baht.
“It’s not helpful to intervene. Leave it to the market,” said Bit Seanglim. “No government in Asia should try to fight it,” he added, noting the unsuccessful intervention of Thailand, Indonesia and others.
Bit Seanglim said the riel is weak in large part because the economy isn’t running well and that the government is spending more than it is taking in. “Ideally, we should have a balanced budget….We should improve our revenue and expand our economy so the tax base expands.”
While economists debate over whether a budget deficit is a bad thing, auctions have become a common method of defending a currency in lieu of the politically unpopular approach of raising taxes. Since the mid-1980s, such government intervention has increased, especially among major industrialized countries such as the US.
But the problem with auctions is that they reduce reserves. And once a central bank’s reserves run low, a country must turn to other restrictive measures or stop trying to stabilize its currency.
It was unclear Tuesday how much the National Bank has in reserve in dollars.
The increase in the interest rate theoretically will make it more attractive for Cambodians to deposit riel into banks, and make it more expensive for borrowers.
But several executives from private banks said the interest rate change is likely to have little practical impact. They noted that few transactions are in riel.
The preference of dollars over riel has been a long-standing issue in Cambodia, in part because of the unique history of the Khmer Rouge outlawing money during its 1975-78 reign.
In 1996, the National Bank led a campaign to eliminate foreign currency or “de-dollarize” the economy to rebuild national pride in the riel.
But as recently as last December, Finance Minister Keat Chhon told lawmakers that the reliance on the dollar actually had helped the riel from plummeting like other Southeast Asian currencies.
“Some countries’ currencies have dropped 80 percent or more [against the dollar],” he said in a speech at the National Assembly. “We have a lot of dollars being used in Cambodia….This is why our currency is more balanced.”
Keat Chhon added then: “We wanted to eliminate [dollarization], but we have not been successful and, in this circumstance, it [the dollar] has been positive for us.”
(Additional reporting by Kim Chan)