Logo of Phnom Penh Post newspaper Phnom Penh Post - Economic outlook already brighter after tranquil polls

Economic outlook already brighter after tranquil polls

Economic outlook already brighter after tranquil polls

JUST days after polling day, the election appears to have had a positive impact on

the floundering riel. On July 29 the Cambodian currency exchanged at 3,850 to the

dollar, its strongest position since May this year.

"Before the election everybody worried about the riel, now the situation is

better" explained Chea Sok, the general director of the National Bank of Cambodia

(NBC).

Economist Bit Seanglim said the reason behind the recent appreciation was that there

have been "no disturbances, no fighting in the street".

However, the election result is not settled yet. Prince Norodom Ranariddh and Sam

Rainsy have already criticized the counting process and want re-runs in some provinces.

Sok Hach, an economic adviser at the Ministry of Finance, warned that if the Cambodian

People's Party (CPP) cannot find a partner willing to join them in a coalition government,

a constitutional crisis may emerge, which could have a negative effect on the riel.

On the contrary, if a coalition government can be worked out the riel could appreciate

even more, possibly up to 3,500 to the dollar, Sok Hach said.

According to a researcher at the Cambodia Development Resource Institute (CDRI) political

stability and an approval of the election from the international community is needed

to facilitate economic reform in the country.

Reforms such as combating corruption and decreasing the size of the public sector

will increase the confidence in the riel, he said.

However, a smooth election process is not the only factor that determines the value

of the riel. The CDRI researcher also said that the location of King Norodom Sihanouk

might be important. Historically, he said, when the King is in Phnom Penh the riel

has been stable or appreciated, while it has depreciated during the King's stays

in Beijing.

He speculated that the King instills confidence among people when he is in the capital,

while people fear that something terrible is going to happen when he goes abroad.

After a prolonged period of stability, the riel has fallen by more than 40% since

June 1997. Starting at 2,766 to the US dollar, it reached 3,518 by the New Year and

was down to 3,937 to the dollar by July 10. The lowest exchange rate of the riel

was reported May 31 this year at 4,125 to the dollar.

The depreciation of the riel began shortly after last July's fighting. The ouster

of Prince Ranariddh not only lowered the confidence in the riel, according to a NBC

report published in May, but also decreased the number of tourists and thus the amount

of dollars entering the country.

Sok Hach said an increase in the amount of riel circulating in the Cambodian economy

has been a major cause of the depreciation. "I cannot confirm that [the NBC

is printing money]. What we know is that government officials get their salaries

in very new notes."

This increase has occurred twice, Sok Hach explained. In August 1997 the government

needed money to fight General Nhek Bun Chhay's resistance forces and then in March

and April the cost of the New Year's festivities and outstanding salaries required

more local currency.

In total there has been an increase of 50 billion riel, Sok Hach said - quite significant

in an economy which, according to the NBC, has a total money supply of about 400

billion riel.

In an attempt to maintain the value of the riel the NBC has sold off about $6.6 million

in foreign reserves since February 1998. Between $300,000 and $500,000 have been

sold at 18 separate dollar auctions in order to increase the supply of dollars in

the Cambodian economy and prevent the riel from depreciating against the dollar.

Chea Sok defended the policy, arguing that "if we don't take action the riel

will not stabilize".

However, economist Bit Seanglim criticized the sale of dollars. "It will only

result in an empty state coffer," he said.

It is difficult to judge how long the NBC will be able to continue to sell dollars

since the exact amount of dollar reserves is a closely guarded secret.

And despite the action taken by the NBC the fall of the riel has not been avoided,

but it has fallen at a slower rate. The riel depreciated 13% over the first six months

in 1998, less than half of the 27% depreciation that occurred over the last six months

in 1997.

Additionally, structural problems in the nation's underdeveloped financial sector

have handicapped the NBC's ability to control the value of the riel.

Instead of having a two-tier banking system in which commercial banks act as a middleman

between the central bank and the private sector, the Cambodian central bank lends

directly to the private sector. Because of this the money supply is not properly

controlled by the NBC, a CDRI researcher explained.

Also, with no treasury bills or bond market it is not possible for the NBC to conduct

open market operations, he said. The monetary instruments available to the NBC are

restricted to two it already uses: printing riel and intervening in the foreign exchange

market by selling dollars.

An additional problem is the high level of dollarization of the Cambodian economy,

according to Chea Sok. It is estimated that the riel accounts for only 30% of the

total money supply in the country. Moreover, 95% of the total deposits with commercial

banks are held in foreign currency. Because of this "our monetary policy is

difficult to control," he said.

MOST VIEWED

  • NY sisters inspired by Khmer heritage

    Growing up in Brooklyn, New York, Cambodian-American sisters Edo and Eyen Chorm have always felt a deep affinity for their Cambodian heritage and roots. When the pair launched their own EdoEyen namesake jewellery brand in June, 2020, they leaned heavily into designs inspired by ancient Khmer

  • Omicron patients can stay home: PM

    Prime Minister Hun Sen has given the green light for anyone who contracts the SARS-CoV-2 Omicron mutation or any other variant to convalesce or receive treatment at home or in any other reasonable non-healthcare setting. The new decision supersedes a restriction on home care for

  • The effects of the USD interest rate hike on Cambodian economy

    Experts weigh in on the effect of a potential interest rate expansion by the US Federal Reserve on a highly dollarised Cambodia Anticipation of the US Federal Reserve’s interest rate hike in March is putting developing economies on edge, a recent blog post by

  • Cambodia’s first ever anime festival kicks off Jan 22 at capital’s F3 centre

    Phnom Penh's first ever Anime Festival will bring together fans, artists, shops and other local businesses with ties to the Japanese animation style for cosplay competitions, online games, pop-up shops and more on January 22, with Friends Futures Factory (F3) hosting. F3 is a project that

  • PM eyes Myanmar peace troika

    Prime Minister Hun Sen has suggested that ASEAN member states establish a tripartite committee or diplomatic troika consisting of representatives from Cambodia, Brunei and Indonesia that would be tasked with mediating a ceasefire in Myanmar. The premier also requested that Nippon Foundation chairman Yohei Sasakawa

  • Demining rat ‘hero’ Magawa dead at 8

    A landmine-hunting rat that was awarded a gold medal for heroism for clearing ordnance from the Cambodian countryside has died, his charity said on January 11. Magawa, a giant African pouched rat originally from Tanzania, helped clear mines from about 225,000sqm of land – the equivalent of 42