4,090 AND RISING?

With elections and accompanying political uncertainty looming, the riel has dropped about 17% in value to the dollar since November. Experts say the national bank can do little to stop its slide.

THE Cambodian economy has been whipsawed by two events that occurred almost simultaneously last July: the seizure of power by Second Prime Minister Hun Sen and the collapse of the Thai baht. Both had spectacular repercussions.

Before these two July events, the Cambodian currency was 2,769 riel to the dollar. Over the past year, the riel has slid steadily to reach its current psychological low point: 4,000 riel to $1. The punishment, as usual, has fallen hardest on the poor.

At Phnom Penh's Tuol Tom Pong market, 48-year-old Chi Saran peers down into her shopping basket: vegetables, a packet of rice, some small fish. "These past few weeks everything's getting more expensive," she complains. "My husband is a construction worker, making 10,000 riel a day. To feed the ten people in my family, I used to spend 7,000-8,000 riel a day. Now I'm spending 10,000. There's nothing left."

Clutching a few hundred riel in one hand, Meas Ponn shakes her head in despair. "Rice, vegetables, meat - they all cost too much now but what can we do? Either you buy food at these prices or you go hungry. I just spent 12,000 riel for food for the 12 people in my family. Now I'm buying cheaper-quality food but that still costs 15,000. My sons who are schoolboys work as market porters after class now."

The market vendors have their own complaints. At a meat stall, vendor Muoy Leng listens patiently to a steady customer who demands to know why the price of pork has jumped 500 riel to 4,500. "I have no choice," Muoy Leng replies. "Everybody knows the daily exchange rate. The dollar is more expensive now and the butchers want me to pay in dollars. If I buy at a higher price, I have to sell at a higher price to survive."

Muoy Leng adds that she is losing customers because they can't afford to pay the new prices. Instead of buying pork, they settle for cheaper staples.

Sok Na, a rice vendor, faces the same dilemma. "These prices are just not normal," she maintains. "In just one month, the price of Somali {top-quality rice] has jumped from 1,200 riel per kilogram to 1,800. As a result, people are buying lower-quality rice."

Blaming the increases on the currency exchange and on Vietnamese traders who have scoured rice stocks in the provinces, she sees no hope for a price downturn until the December harvest.

Grocer Chiep Hiek, 24, tells a similar tale. "I have to pay my suppliers in dollars and baht and sell to my customers in riel. My customers try to bargain me down to the old prices but I can't help them."

Further down the food chain are the squatters, the new arrivals in Phnom Penh. Chap Phon, 61, came to Phnom Penh three years ago from Takeo province. "My wife and I sold firewood, making 8,000-10,000 riel a day. Until last year, that used to be enough to support my seven children. But no more. All my children have to work now."

"Back in Takeo you could find your own rice and firewood," his wife adds. "In Phnom Penh, you have to buy everything. I'd like to go back to my village but we sold our house and land to come here."

Tep Honn, 40, is caught in the same trap. In front of her small hut, she swings a baby in a hammock while keeping an eye on a pot of boiling soybean milk. Tep Honn, her husband and three children came to the capital from Prey Veng last November. They got into the pushcart business, her husband peddling ice cream to schoolchildren.

Then things turned sour: "In the past three weeks the ingredients for ice cream - flour, sugar, soybeans - have gotten so much more expensive but we're stuck selling ice cream at the same price, 100 riel. If we raised the price to 200, none of the schoolchildren would buy."

From a daily income of 5,000-6,000 riel, Tep Honn skimps on food, spending 4,000 riel. Much of the rest goes to rent, 25,000 riel for a 3x5 meter hut. "No one is going to help me," Tep Honn concludes. "If I don't struggle, I'll starve."

So what's the real story behind the riel?

A recent report by the International Monetary Fund details the reasons for the riel's sickness: some self-inflicted, some imposed from outside.

The self-inflicted wounds are obvious. The IMF report states flatly: "Macroeconomic performance... deteriorated sharply in the aftermath of Second Prime Minister Hun Sen's seizure of power in July. Subsequently, output growth stagnated, inflation accelerated, the exchange rate against the US dollar depreciated, and fiscal performance weakened."

Ironically, the riel bucked up better to the other July crisis: the implosion of the Thai baht, followed shortly by the falling financial dominos of almost every other Asian currency.

For a while, in fact, Cambodia seemed immune to the financial epidemic sweeping the region. As the IMF report notes: "In 1997, the effects of the political crisis on Cambodia's macroeconomic performance seem to have been much stronger than those of the regional financial crisis. The July events and the ensuing political uncertainty greatly undermined growth as well as investors' confidence. In contrast, short-term effects of the unfolding regional crisis were to a large extent mitigated by the high degree of dollarization of Cambodia's economy, primarily because the riel depreciated less relative to other currencies in the region and the limited use of the riel minimized the impact of its depreciation on the real economy."

Dependence on the dollar, however, severely limits the effectiveness of any government monetary policy. In recent months, the dollar lifejacket has turned into a lead straitjacket. In November the riel traded at 3,430 to the dollar, in February, 3,740; in April, 3,820; and now has sunk below 4,000. Periodic National Bank of Cambodia auctions of dollars for riel - the most recent being the $500,000 offering of June 3 - have only temporarily slowed the sinking of the riel.

Sok Hach, technical adviser to the Ministry of Finance, identifies three reasons for the recent battering of the riel. The government has been spending too much money too fast, on integrating defecting KR cadre, for example. Secondly, there is the psychological pressure of being close to elections. Thirdly, there is no real mechanism to control the exchange rate. "As the riel supply rises, people convert riels into dollars," Sok Hach comments. "Even in the rural areas."

Ultimately, there is nowhere to hide from the international currency debacle. "The latest auction of dollars will help," Sok Hach concludes. "But I'm not sure of the effects in the longer term. We'll just have to wait and see."