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De-dollarisation no quick fix for currency control

A switch to Cambodia’s riel as the sole currency will be achieved over the long term, officials say, but they warn against ‘drastic’ monetary change

CAMBODIA remains committed to allowing transactions in either the US dollar or the riel despite pressure to favour the domestic currency and give the Kingdom control over its money supply, Ministry of Finance Secretary General Hang Chuon Naron said last week.

The Kingdom intends to eventually “de-dollarise” and transition to the riel, but the pace of change hinges on growing investor confidence in the currency, he said at launch of the UN Development Project economic and social survey of Asia and the Pacific.

“We want to change but we’re not sure what step to take,” he said, and added that more than 90 percent of Cambodian transactions are denominated in US dollars.

“We cannot change drastically because it would affect foreign investments and our economy. We are using more of the riel currency through tax payments and salaries, but are not forcing people to use it. We leave it to the market to decide,” he said.

Many economists support the country’s plan to de-dollarise at a slow pace.

Chief economist at Asian Development Bank (ADB) Office of Regional Economic Integration, Jayant Menon, said he believes it would be beneficial for the Kingdom to de-dollarise gradually in order to gain more control over its own economy.

“Since the country’s central bank is now effectively the [US Federal Reserve], domestic control over monetary policy ... is lost,” he wrote in a 2008 report.

This constraint, he said, became apparent in 2007 when the US Federal Reserve printed more money at a time when Cambodia needed to tighten its money supply to fight price inflation.

WE CANNOT CHANGE DRASTICALLY BECAUSE IT WOULD AFFECT FOREIGN INVESMENT....”

“The problem emanates from an underdeveloped monetary system, improving but continued political and economic uncertainty, and weak legal and institutional structures [in Cambodia]. When these problems are addressed, then the symptom, which is lack of confidence in the riel, will also cease to be a constraint,” he told the Post last week in an email.
The benefits of de-dollarisation are also being considered by the business community. While some are proponents of the use of the riel – which for some is a symbol of national prestige – others remain concerned about its stability.

Kong Triv, chairman of the Cambodia branch of British American Tobacco and chairman of KT Pacific Group Co, said: “Cambodia should use riel currency to show the sovereignty of our currency in the international arena.”

Douglas Clayton, CEO of Leopard Capital investment fund, said he believes that savings denominated in dollars may risk succumbing to “runaway inflation” created by mounting US public debt.

Meanwhile Wing Huor, managing director of City Power Group Corporation and developer of a Special Economic Zone in Kampot province, warned: “This country needs the most foreign investors, so the policy of dollarisation is rational. The riel is not stable – it irregularly fluctuates.”
According to the ADB, the National Bank of Cambodia should resist pressure to enforce dollarisation through legislation.

“While it may be politically advantageous to cry out about the evils of dollarisation from time to time, it is encouraging to see that in practice, the government has refrained from instituting any serious attempts at enforced de-dollarisation,” Menon said.

And, in reality, Cambodian banks have seen little demand for the riel.

CEO of ANZ Royal Bank, Stephen Higgins, said that although his company provides KHR banking facilities to customers, “Riel currency represents around 1 percent of our balance sheet, and there are no loans in riels”.

He said that, though it is in Cambodia’s long-term interest to de-dollarise, international investors would pursue business opportunities regardless of the currency.

The currency debate is becoming increasingly important, as Cambodia has committed to opening a stock exchange by the end of this year.

International Monetary Fund (IMF) Cambodia mission chief David Cowen said earlier this year that it would make sense that new endeavours like the securities market start off with the riel, rather than trying to reverse course later on.

But the ADB’s Menon added: “I think the important thing here is to leave the option open to list in either riel or dollars”.

“I suspect all the initial listings will be in dollars, but, over time, as Cambodia gradually de-dollarises, we could see listings in riel emerge,” Menon said.

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