THE Kingdom’s financial regulators this week launched their latest Financial Sector Development Strategy for the coming decade, with so-called de-dollarisation as a long-term goal. But while the aim of a riel-dominated economy is the right one, Cambodia must be careful not to make the same mistakes as Vietnam and Laos.
Dollarisation, of course, has proved beneficial to the Kingdom’s economic development. With most measures estimating over 90 percent of currency in Cambodia is the US dollar, widespread use of the greenback for a long time offered monetary stability when there was little to be had in the country’s political and financial arenas. That in turn attracted much-needed investment and allowed easy transactions among international businesses.
Also, the greenback has done its part to protect Cambodia against inflation. Granted there are exceptions to be had, such as with the recent spikes in oil and food prices, but then this is affecting everyone. In the very least, though, the domestic economy has been spared hyperinflation thanks in part to the dollar.
But Cambodia is changing, with a stablising political situation and emerging financial institutions, and a dollarised Kingdom has left the National Bank of Cambodia hampered in its ability to employ monetary and exchange-rate policy to the country’s benefit.
Widespread use of the riel would allow the NBC to use monetary policy to stimulate or cool down the country’s economy when necessary. However, the central bank’s effectiveness in doing so is constrained in an environment where dollars are so dominant.
Dollarisation also leaves Cambodia susceptible to any downturns affecting the US and its currency. That is of special concern now given the risk of credit ratings agencies downgrading America’s debt, which would further hurt the dollar.
It is for these reasons that de-dollarisation is crucial for the Kingdom’s ongoing economic development – but it must be done, not only over the long term, but also with extreme care. Otherwise the country could suffer the same kinds of setbacks as those seen by its neighbours.
Jayant Menon, a principal economist for the Asian Development Bank and an expert on dollarisation, yesterday spoke of the lessons Cambodia must learn from Laos and Vietnam.
In the late 1990s, the Laos government cracked down on transactions that were conducted in dollars, a practice that was illegal. The end result was that savings in foreign currencies began to shift en masse to Thai banks, as people feared restrictions on capital outflows were next.
The loss of confidence in the kip sent the currency plummeting in value, so much so that the kip was the only currency to fall against the Thai baht during the Asian financial crisis, Menon said.
De-dollarisation cannot be forced. Government intervention highlights the differences between the dollar and a local currency, when it’s the lack of difference that boosts confidence among a country’s population.
Cambodia needs to see equal stability in and usefulness from both currencies, which in turn builds confidence in the local currency and allows for de-dollarisation.
“Perceptions matter a lot,” Menon said.
In Vietnam, de-dollarisation did happen naturally. The problem, though, was a lack of experience with monetary policy, which resulted in poor decision-making.
The government’s focus on rapid growth allowed inflation to get out of control, leaving Vietnam with a greatly devalued dong. Its central bank has made questionable decisions, such as cutting a key interest rate on July 4 even as inflation reached a two and a half year high. The continued erosion of confidence in the dong has made the Vietnamese among the largest consumers of gold in the world. A mature central bank would have prevented that problem, and Cambodia’s NBC must be prepared to handle the complexities that will come with wider use of the riel.
Menon was quick to point out that dollarisation in and of itself is not the problem. Instead it’s merely a symptom of the underlying institutional and other weaknesses reflected in the perceived instability in the riel. Building confidence in the currency will take some time.
“The key lesson is patience,” he said.
ANZ Royal Bank Chief Executive Officer Stephen Higgins yesterday stressed the same point. He noted that it was the presence of the United Nations Transitional Authority in Cambodia in the early 1990s that brought with it an immediate influx of dollars. Only a similar-sized event could make the riel the dominant currency in the short term.
“It’s taken 20 years to get to this point, and it’ll take at least 20 years to get back to where it was,” he said, “which is all the more reason to get started on it now.”