When Vietnamese and Cambodian forces ousted Pol Pot’s Khmer Rouge regime in 1979, Cambodia had no national currency. It spent the next decade trading with socialist states like the former Soviet Union, leaving a patchwork of currencies flowing through the country’s re-emerging economy.
But in 1989, when the last Vietnamese troops left Cambodian soil, Cambodia quickly started to embrace private enterprise and open its doors to a market economy. Aid also started to flow—and so did US dollars, marking the beginning of the country’s now-firmly entrenched dollarized economy.
Cambodia’s economic achievements over the last decade had been the most impressive in its modern history, but the country is still as dollarized as it was 10 years ago. And as the country has grown, so has its vulnerability to fluctuations in global currency markets, creating difficulties for the government when trying to control the financial health of the nation.
According to experts, the US dollar ensures confidence, but a de-dollarized economy could provide the government with heightened leverage to act against fluctuations in the value of the dollar, and its knock-on effects on local businesses and workers.
Steven Higgins, CEO of ANZ Royal Bank, said that having a dollarized economy has many positives but that it “takes away the economic tools that the government has, like changing interest rates.”
Because Cambodia trades in a currency that isn’t its own, its economy can become vulnerable to external forces. The recent rise in the value of the dollar has meant that exports coming from Cambodia have become more expensive resulting in a downturn of interest from foreign buyers, Higgins said.
Brett Sciaroni, president of the legal firm Sciaroni and Associates in Phnom Penh said, “the benefit of using the US dollar is that it is a stable currency world over.” However, a de-dollarized economy would bring benefits too.
He explained how South Koreans, who must first exchange the won into dollars before investing in Cambodia, are at a serious disadvantage when the dollar is strong, resulting in a consequent dip in Korean investments and tourists. The recent rise of the dollar, Sciaroni said, contributed to the 30 percent drop in South Korean visitors to Cambodia in February compared to 12 months earlier.
If the Cambodian government had greater controls over the value of its currency, such situations could be prevented, Sciaroni said.
Since July 2008 the dollar has risen by 18 percent against the Euro.
Inflation in Cambodia, which hit record highs in mid-2008, has also contributed to the rising costs of exports as well as every day purchases.
“De-dollarization provides a tool for the government to regulate the economy, especially through providing a fair exchange rate for workers,” said SRP lawmaker Tioulong Saumura, former deputy governor of the National Bank of Cambodia and Member of Parliament.
The ability to control exchange rates in the country would (in the same way that China has done) allow Cambodia to “boost their exports” and “conquer market shares,” she said
The onus, she added, is on the government to bring about a change in monetary policy.
“At the moment, Cambodian people use the dollar because they have no confidence in their own currency,” she said. “They need to be convinced (by the government) that the value of their currency will remain stable over time.”
For Neang Keamontha, an export manager for the Phnom Penh-based INSM Garment Company, dealing in the dollar hasn’t increased his fortunes despite its growing strength.
After having exported 480,000 pairs of trousers a week in early 2008, this week the company will only send 120,000, leaving its warehouse somewhat more spacious.
Overall the company’s exports have dropped about 70 percent since mid-2008.
“The drop in the company’s exports is the result of a lack of demand,” he said. “And my clients paid with US dollars lent to them by banks.”
According to the government’s Supreme National Economic Council, Cambodian exports fell by 4 percent in 2008 and analysts say the trend is set to continue.
Many of the financial assets currently held by both individuals and organizations in Cambodia are dominated by the dollar reducing the significance of the riel.
In the space of 10 years Cambodia’s international currency reserves have risen from $0.4 billion in 1999 to $2.3 billion in 2009, according to the Supreme National Economic Council.
Higgins said that it is impossible to be definitive about the future of Cambodian exports in the light of the recent rises in the dollar.
“I’m not sure that the government favors the dollar over the riel,” he said. “But they are facing the reality of a dollarized economy. De-dollarizing the economy would take a long time,” he added.
Nonetheless countries like Poland, Israel, Chili and Egypt have, by and large, successfully de-dollarized over time.
But for other nations it has proven to be a costly and lengthy process. In 1985 when Bolivia attempted to reduce the dollarization of its economy by converting foreign currency deposits in to domestic currency deposits it resulted in a tight credit squeeze.
Cambodia’s apparent lack of progress with de-dollarization has lead to frustration among a number of commentators who want the government to play a more interventionist role, said the Asian Development Bank in a 2008 report.
For now, the dollar remains the principal currency for trading within Cambodia. But, the government is starting to look at measures that aim toward a stronger domestic currency.
An official with the National Bank of Cambodia, who spoke on condition of anonymity, said that initiatives to bring about de-dollarization are in the pipeline, but no formal plan has been agreed upon.
“We want to promote public confidence in the local currency,” the official said.
The official added that this wasn’t the first time that the dollar had risen in value and that Cambodia has seen more severe rises in the past. However, the official said, such rises have not been a concern in the past because the Cambodian economy was growing.
“The only reason it is an issue [now] is because the global environment has deteriorated,” said the official.