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Central bank to shun small US banknotes

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NBC is considering not accepting smaller denominated US dollar banknotes – $1, $2 and $5 – from banks and microfinance institutions (MFIs). Hong Menea

Central bank to shun small US banknotes

The National Bank of Cambodia (NBC) is considering not accepting smaller denominated US dollar banknotes – $1, $2 and $5 – from banks and microfinance institutions (MFIs) which it said are flooding its stockpile as the demand for those notes is low.

While some banking insiders welcomed the move as an effort to enhance monetary policy by promoting local currency, the NBC stressed that the measure is not aimed at stopping the banknotes’ circulation in the market.

“The NBC is flooded with US banknotes of $1, $2 and $5, which means there is little demand.

“We will give banks [and MFIs] three months starting June 1 until August 31 to take all those notes to the NBC for transport abroad without a service fee. Financial institutions will be charged if they take the notes to the NBC after the deadline,” it said in a statement.

The central bank made the announcement during a meeting with banks and MFIs on Thursday to study the issue and collect input about not accepting the smaller US banknotes.

“The NBC will continue to discuss the issue with banks and financial institutions as a step to set a suitable timeframe for completely not accepting these banknotes,” it said.

PPCBank president Shin Chang-moo told The Post on Thursday that the move will contribute to the promotion of local currency.

“I expect, in the longer term, the use of KHR [Khmer riel] will increase to a great extent. We are already observing equivalent KHR notes quickly replacing the $1 and $5 notes, which are usually old and in a worn condition, often creating disputes about acceptance.

“I believe that NBC’s new guideline will accelerate the process,” he said.

Stephen Higgins, a managing partner at Mekong Strategic Partners, agreed. He said the NBC’s goal is to promote the local currency and it is a significant step to encouraging people to use it.

“This is a sensible move by the NBC to support its goal of promoting the riel. It will essentially result in a smaller influx of quality USD notes coming into the country so the notes you see circulating will be older and eventually rare.

“People will start to prefer a nice crisp KHR20,000 note over an old $5 note. It doesn’t legally stop banks and businesses from accepting those notes and giving them back to customers, but it will push them towards preferring cleaner KHR notes.

“The US dollar is legal tender in the US. There is absolutely no legal requirement for Cambodia to treat it as legal tender, so the NBC is entirely within its right to do this,” Higgins said.

The Centre for Policy Studies (CPS) director Chan Sophal said the NBC’s move is part of the de-dollarisation goal.

“There is basically no sense in keeping lots of dollar notes at the expense of monetary policy which can be used at a time of crisis like now.

“As the Cambodian economy gets bigger, the loss of monetary instruments to effect the economy becomes quite costly.

“De-dollarisation should not be done overnight as an autonomous monetary policy has to match the central bank’s competency. But it has to start with some practical steps,” he said.

According to NBC’s 2019 annual report, the share of riel in circulation in the Kingdom grew by about 33 per cent year-on-year by last year’s end as deposits in riel increased by 37 per cent.

The report noted a steady rise in demand for the local currency, with the dollar deposit ratio dropping to 82.9 per cent last year from 2018’s 84.8 per cent.

Last year, the exchange rate was relatively stable, with an average of 4,065 riel per greenback compared to 4,051 riel in 2018. The context of the value of the riel has always been subject to slight fluctuations, especially the increase in the demand for taxes paid in riel, NBC said.

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