The riel in free-fall against the dollar. Olympic Market money traders abruptly closing

shop. Sudden activity by the economic police looking for speculators. Such was the

news Mar. 18-19. Wild rumors in the street, puzzlement among the experts.

Within the space of days the riel was caught in an economic crossfire. Throughout

February the riel remained stable showing only a tiny overall depreciation of 2 percent

(vis-a-vis 6.5 percent in January). Trading ranged from 2,470 to 2,580 for U.S. $1.

Without warning the foreign exchange rate collapsed. Riels against the dollar slid

from 2,600 to the "greenback" to 3,700, then 4,000, finally touching 4,700

for a few late buyers the evening of Mar. 19. An unprecedented drop of 80 percent

since the end of last month.

At the same time, the price of gold "chi" (3.75 grams)-the average Cambodian's

benchmark and currency hedge-shot up from 94,000 to 160,000, and then to 200,000.

And this against a dull, inactive market.

The only thing comparable was over the last quarter of 1991 when the dollar rate

reversed direction from 1,125 to 550 per dollar. At the same time, the chi appreciated

from 47,000 to 24,000 riels, an almost 50 percent up-valuation. There was evidence

then, of a deliberate market squeeze.

How to explain such extraordinary volatility? Fifteen months ago, the last time there

was a seemingly inexplicable U-turn, there was evidence of market manipulation for

profit. This time the situation seems more serious. Massive credibility loss combined

with an attempt at political destabilization.

As W.B. Yeats wrote:

"Things fall apart,

The center cannot hold,

Mere anarchy is loosed upon

the world...

Surely some revelation is at hand."

With only eight weeks left before Cambodia's first elections since 1955, the words

seem apt; the signs are disquieting.

Two elements have proved determinant. A series of episodes that have shaken public

confidence plus rumors of an attempt at deliberate destabilization of the State of

Cambodia's credibility through discrediting the currency.

There have been a number of recent confidence-sapping instances. Certain recent political

party radio broadcasts have said that once they have decision-making power, there

will be a change in the domestic money. On the critical two days last week a rumor

was spread saying that the SOC's riel would not be accepted after elections. With

the Khmer Rouge issuing their own currency notes in zones under their control and

Cambodia's monetary history over the last two decades, it is little wonder that ordinary

people do not totally disbelieve such statements.

Then, over the last couple of days, rice traders from Battambang-the top quality

producing region of the country-arrived in Phnom Penh saying they would only accept

dollars or baht for their produce. News that factional dissension at the SNC meeting

had put an end to the World Bank's pre-election bridging loan, thus tightening SOC's

cash flow problems, merely added fuel to the flames.

As if that was not enough, recent market talk attests to a flood of riels brought

into Phnom Penh from Kompong Cham in particular, and from Battambang province. Money

to be changed into dollars. In other words, riels were to be switched regardless

of the rate.

For money changers this was contrary to the norm. Cambodian peasants buy whatever

units of gold they can afford when they feel they need to protect their cash capital.

With the gold market flat-the huge price increase in the "chi" merely reflects

the unofficial exchange rate, not increased demand-it became clear that the riel

was being dumped.

As there was no sudden change in the stock of dollars the result was predictable.

Businessmen in the know say that over the last month or so there have been steady

purchases of riel by small groups of buyers selling baht or dollars. These riels

have then been taken out of circulation.

Because the amount of riels available to the market more or less compensated for

the off-take, the exchange rate showed no perceptible indication of these activities.

The unofficial stockpile together with recent National Bank purchases of riels for

dollars to keep the riel-to-dollar rate steady soon assumed a sizeable amount of

siphoned-off money. Riels had also been pumped into various provinces as a result

of political campaigns.

With the market thin (U.S. $500,000 a day), and no great influx of dollars-as there

was in the last quarter of December 1991-there was scope for deliberate manipulation.

But manipulation of a particular kind.

Speculators operate to make a profit. Here it seems there was no question of making

a quick dollar; rather a loss.

According to the story, Khmer Rouge dollars are back-stopping the operation. By using

party or business intermediaries, part of their considerable dollar war chest (Thai

estimates suggest that gem mining alone has generated U.S. $120 million since 1989,

of which the Khmer Rouge have had their cut) has been used to deliberately buy riel.

Then, at a given moment, riel were dumped on to the market. While ostensibly to buy

dollars as a hedge, it was clear that the idea was to savagely reduce the value of

the riel and thus cut living standards of all those on riel incomes. A costly but

effective way of hitting at the current administration's competence and thereby negatively

influencing voters' perceptions-reportedly becoming pro-State of Cambodia (SOC) again.

Obviously the greater the flight of domestic money, the more such a strategy's dynamic

is effective. With the Phnom Penh administration strapped for cash and unable to

raise credit to take lasting effective defensive measures, the attack on the national

currency-the money indelibly associated with the SOC-has immense political implications

in the run-up to the elections.

History is not supposed to repeat itself. Nevertheless, it is sobering to note that

when the Lon Nol regime was overthrown by the Khmer Rouge in April 1975 the riel

had depreciated over five years from 35 to 3,000 per dollar.

It may sound far-fetched-speculation at a deliberate loss-but the political stakes

in Cambodia are high today. The Khmer Rouge have amply demonstrated that the election

results are not just dependent on the voting booth. If large sums of money can normally

be spent to influence voters, there is no logical reason why money cannot be lost

with exactly the same aim to discomfit their traditional enemy.

Whatever the truth, and even if the above thesis is discarded, the explanation offered

is still far too plausible for comfort. Suddenly, the UNTAC mandate to create a neutral

electoral environment looks that much harder. Should matters stabilize in the next

few days, as no doubt they will with the Administration taking such steps as selling

off rice and halving the riel price of petrol, it should not give grounds for complacency.

All those who wish Cambodia's democracy well should hope that there is no riel repeat

during voting week.