Soaring inflation and reluctance by merchants to take small denomination riel notes

has put an economic squeeze on civil servants, vegetable sellers, cyclo drivers,

and other low-income people throughout Cambodia.

Since mid-July, many markets and shops-particularly those dealing in high-priced

items such as jewelry, motorcycles, or draft animals-have refused to accept 10, 20,

and 100 riel notes. After widespread rumors that counterfeit 500 riel notes were

circulating, merchants began to balk at accepting those notes as well.

UNTAC Economic Advisor Roger Laurence said the problem has been caused by the State

of Cambodia (SOC) issuing too many of the small denomination notes.

"The small bills have relatively high transaction costs and are very inconvenient,"

said Laurence. "So people are trying to get rid of these bills and there are

too few takers."

Laurence, who described the problem as a "temporary glitch," said it could

be addressed by the government re-issuing different proportions of bank notes. "It's

an episode I expect will disappear soon," he said.

Laurence is more concerned about the country's spiraling rates of inflation. For

most of 1991, he said, inflation was at 100 to 150 percent per annum. At the end

of 1991, inflation started to drop, and by the first quarter of 1992 it was at 75

percent.

Recently, however, inflation has made a rapid return to the former rate of 100 to

150 percent.

"That's a matter of concern," Laurence said. "The inflation rate is

too high and the acceleration [of inflation] is worrisome."

To cover its national deficit, the State of Cambodia has had to resort to falling

behind in payments-primarily government salaries-and issuing more currency, Laurence

said.

Recently civil servants have been paid more regularly, he said, causing the full

burden of the deficit to fall on money creation. But because the government is paying

employees in small bills, many civil servants still find it difficult to make ends

meet.

A woman who works in the Interior Ministry confirmed the problem.

"I have a whole suitcase of riel at home that I can't use," she said. "It's

lucky that my husband works another [non-government] job."

KR: Get Rid of the Riel

Chea Sot, a cyclo driver in Phnom Penh, brings in 1,000 to 2,000 riel a day (about

U.S. .66 to $1.30), mostly in small bills. Already the daily costs of renting his

cyclo (500 riel) and buying food (400 riel a meal) take most of his earnings.

But his plight became even more desperate when restaurants and markets wouldn't take

the little money he had.

"I tried to pay for my food but they did not accept the money," said Sot.

"Why do I have to accept the small bills? I wish everyone would use all denominations

because that's all I have to spend."

The soaring prices in Phnom Penh's markets don't help matters much. Vegetables which

sold for 10 or 20 riel just a week ago are now going for 50 to 100 riel. And virtually

overnight the price of pork-previously 2,000-2,500 a kilogram-doubled.

Small vegetable dealers are also hit hard by the problems with the riel. Many leave

their farms at midnight from outlying provinces to cycle into Phnom Penh to sell

their vegetables in the city's markets, where they can get a higher price than in

the countryside.

At best, though, a head of cabbage or half kilo of beans brings in 10 or 20 riel-denominations

that have become almost worthless.

"No one wants to receive these kinds of riels," said Sok Kon, 33, a vegetable

seller at Orasay Market in Phnom Penh. "I can only accept a few. Otherwise I

have to make people pay more than the normal price."

Some vegetable vendors are trying innovative ways to lure larger denominations from

customers. A herb seller in Kandal province says she adds lemon, chilli, scallions

or parsley to her herbs to bring the price up to at least 50 or 100 riels, rather

than 10 or 20.

Chan Thorn, who owns a noodle shop near Independence Monument in Phnom Penh, said

the 30,000 riels she brings in a day comes mostly in small denominations.

"Most of the small notes cannot pay for anything, except the small taxes and

parking," she said. "What can I do with the rest of the 30,000 riels?

"The government should find an immediate solution to this problem," she

added. "As far as I know they have not yet reacted."

On July 23 the Khmer Rouge demanded that the riel be withdrawn completely. They are

threatening to issue their own currency in zones under their control if the Supreme

National Council-the interim body comprising representatives of all four Khmer factions-does

not act on their proposal.

The Khmer Rouge, which is currently campaigning for the dissolution of the Phnom

Penh government, abolished money and blew up the National Bank when it came to power

in Cambodia in 1975.

The Phnom Penh government has issued written bulletins and made announcements over

the loudspeakers in markets in Cambodia's major cities for merchants to accept all

denominations at their face value.

After disgruntled customers resorted to violent retaliation against merchants who

refused small notes in Kompong Thom, Kompong Chhnang, and Battambang, security was

stepped up in the main markets of many cities.

Since late July, a dozen security guards have been posted in Phnom Penh's New Market.

"So far, there have been no serious problems except some complaining and arguing,"

said Sokim Heng, 30, of the market's governing committee.

"We must try to convince the people to keep the riel stable against any political

campaign by the Khmer Rouge," Heng said. "We have to understand that there's

a political struggle going on, with the Khmer Rouge trying to sabotage our government."

Customers say that it's useless to lodge complaints against merchants because most

prices are determined through a bargaining process. It's difficult to prove whether

a merchant is refusing small notes or simply turning down a customer's proposed price.

Technical Glitch

UNTAC Economic Advisor Laurence acknowledged that the arrival of thousands of U.N.

personnel in Cambodia has had an effect on real estate prices and the wages of skilled

workers. But he said UNTAC's deployment was not the sole factor in Cambodia's soaring

inflation rates.

"You have to attribute it to the monetary policy of the current administration,"

he said.

Laurence attributed Cam-bodia's economic problems to a combination of factors: the

U.N. presence, the privatization policies of the Phnom Penh administration, and the

revival of economic activities in general in Cambodia.

"All these factors result in a lot of pressure being put on a number of scarce

resources-such as housing and skilled labor," he said.

For now, Laurence sees no need for UNTAC's civilian administration component to act

on Cambodia's currency and inflation problems.

"If the problem persists for much longer we'll look into it," he said.

"So far we haven't because it's due to a technical glitch requiring a pretty

straight-forward response. People need to be assured that there are institutions

and banks that will take notes of any denomination."

- P. Choeung contributed to this report.