Despite Pitfalls, Dollars Still Rule in Cambodia

If anyone wants to know how Cambodians feel about the situation in the country, they only have to look at the devaluation of the riel on the streets of Phnom Penh in recent weeks.

As economists can explain, there is no better gauge of people’s confidence in their country’s economy than their use of the national currency.

Regardless of the causes, the riel dropping in value against the US dollar shows that Cambo­dians still don’t have enough faith in the future of their country to really trust its money, analysts said in recent interviews.

The political situation has stabilized in the last five years, with the last band of Khmer Rouge rebels surrendering in December 1998. Still at the first sign of uncertainty, people rush to get US dollars, Cambodia’s major currency for more than 10 years.

Numerous explanations have been given for the recent riel devaluation—from worries about the outcome of national elections in July and the slump in tourism due to severe acute respiratory syndrome, to villagers in the provinces having more riel thanks to political campaign gifts. The result has been a surplus of riel on the market, which caused a slide in its value against the dollar in mid-May.

The National Bank of Cambo­dia has since put more dollars on the market to reduce its scarcity now that one source of US currency—foreign tourists visiting the country—has nearly dried out.

This has meant drawing on its dollar reserves, a costly measure for the country. Since the dollar is not Cambodia’s own currency, the government is not in a position of printing that money nor of imposing a monetary policy to control its value against the riel, said Kang Chandararot, economist for the Cambodia Development Resource Institute.

The country gets dollars through outside sources over which the government has little or no control, such as exports, tourism, foreign investment, foreign grants and loans, he said.

“With the economy based on the dollar, Cambodia has no basis for financing its economy. As a result, Cambodia’s economy is always fragile,” Kang Chandararot said.

However, there is no quick solution, and reverting to the riel as the main currency is not an option for the time being, said Tal Nay Im, director-general of the National Bank of Cambodia. “This process should be done very carefully, and not with administrative measures to force de-dollarization [on people],” she said.

From the very start, the government had no choice but to embrace the dollar.

“Dollarization was not a policy measure in the first place, but a spontaneous response from economic agents to low confidence in the national currency,” said Melanie Beresford of Macquarie University in Sydney, who co-authored the 2003 report Macroeconomics of Poverty Reduction in Cambodia for the UN Development Program.

Dollarization goes back to the early 1980s, when Cambodians started to piece their lives together after Vietnamese forces had driven the Khmer Rouge to the Thai border, Kang Chandararot said.

Prior to 1975, Cambodians used the riel for daily purchases as well as for larger transactions. Between 1975 and 1979, the Khmer Rouge abolished money and eliminated all banking and financial institutions.

In the 1980s, the government started printing money again; but since this was done according to policy decisions rather than based on market demand, it failed to put the riel back in use, said Kang Chandararot.

“Confidence in the country’s currency had been destroyed and Cambodians already had chosen alternatives—baht along the Thai border, and gold,” he said. For daily transactions, people bartered.

“This was the real start of dollarization,” said Kang Chandararot, who holds a doctorate in monetary policy and development from the Free University of Berlin and did his thesis on de-dollarization in Cambodia. Could the government of the 1980s have done anything more to restore the value of the riel? Not really, he said.

For people to adopt their country’s currency, they must trust the government and its national banking system; and there must a whole financial structure in place with monetary and fiscal policies, along with a tariff policy for trade, Kang Chandararot said.

“During the 1980s, these requirements were just a dream. So how could people have confidence in the riel?” he said.

By the time the Vietnamese left Cambodia and Untac had arrived, Cambodians were ready for the dollar.

“Untac resulted in a virtually overnight dollarization of [the country’s] urban economy,” said an International Monetary Fund report written last year by Sopanha Sa, economist, and Mario de Zamaroczy, the former IMF representative in Cambodia, called “Macroeconomic Adjustment in a Highly Dollarized Economy: the Case of Cambodia.”

During the two-year operation, which cost nearly $2 billion, Untac brought in about 22,000 military and civilian employees. “The Untac personnel arriving with dollars in cash and needing a wide array of services (local staff, housing, transportation, interpretation, etc) and goods in a largely barterized economy, quickly introduced Cambodia to massive dollarization,” said Sopanha Sa and de Zamaroczy in the report.

Granted, the economic conditions were right for people to switch to US currency, but had not Untac and its staff showered the country with dollars, it may not have been used so quickly nor so much, the IMF report said.

With the government adopting an open economy and a liberal exchange system, the report said, “the dollar has become the dominant currency, with the riel playing a relatively minor role.” The report estimated that about 96 percent of the money now circulating in the country, outside of banks, is in dollars.

This has created both advantages and drawbacks for Cambodia. Because of the high dollarization, Cambodia’s currency depreciated less than other currencies in the region during the Asian economic crisis of 1997, the IMF report said. “The effects of political uncertainties seem to have been stronger than those of the regional crisis.”

While dollarization has helped stabilize the economy throughout difficult years, it also has widened “the gap between the urban dollar-based economy and poor rural areas where riel are normally used,” according to the UNDP report on macroeconomics and poverty reduction.

Generally speaking, dollarization has served Cambodia well, “while taking away the flexibility and independence of the country’s monetary policy and complicating income distribution,” said the UNDP report.

The government has plans to reinstate the riel as the country’s major currency, but not overnight and not by decree, Tal Nay Im said. “It has to be done by gaining the confidence of the public in the national currency, and for this [to happen], a great number of factors come into play,” from stable banking and financial structures to continued economic growth, she said.

In the meantime, the government is taking steps to promote the riel, starting with government agencies that have been asked to use the riel more often in their transactions, Tal Nay Im said. Treasury bills have been issued in riel, and payments of utility bills are done in riel, she said. In addition, the national bank has made an effort to replace old, dirty riel bills with new ones, and has issued attractive bills in different denominations.

The de-dollarization process, which includes developing government services and creating the right environment for trade and investment, may take a decade at the very least, Kang Chandararot said.

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