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To dollarise or de-dollarise: Consequences for Monetary Policy in Cambodia
A year after Cambodia’s Independence from the French protectorate, National Bank of Cambodia (NBC) was established on December 23, 1954, to gain autonomy in printing riel as the national currency and managing the banking system in the country. However, NBC was closed due to the Khmer Rouge regime (1975 – 1979) that destroyed the central bank’s building and Cambodia’s banking system, resulting in putting an end to the usage of Khmer Riel.
NBC was rebuilt from scratch and re-issued the Khmer riel in circulation during the period from 1979-1993 when Cambodia’s economy had transformed from a centrally planned economy to a free market economy and the United Nations Transitory Authority in Cambodia (UNTAC) oversaw the country’s political and economic management from 1991 to 1993.
Cambodia is a highly dollarized economy due to a historical event that UNTAC spent USD 17 billion in preparing Cambodia’s first national election. With this huge amount of money in the small economy, the National Bank of Cambodia at that time could not manage to print local currency to substitute USD circulation. Hence, people accepted the use of USD in the market since then.
Due to high dollarization, there are a large amount of foreign currency deposits in its banking system, which is revealed through the ratio of foreign currency deposits to total deposits in all currencies or the ratio of foreign currency deposits to broad money—total money in circulations in the country’s economy.
According to NBC’s Annual Report 2022, the ratio of foreign currency deposits to broad money stood at 84.1 percent last year, which increased 1.1 percent compared to 83 percent in 2021, while riel in circulations stayed at 7.7 percent compared to broad money, deposits and loans in riel was 8.9 percent of total deposits and 11.2 percent of the total loan portfolio in Cambodia.
Chea Serey, Deputy Governor of the National Bank of Cambodia, said the country’s national currency riel was printed in 1955, about a year after the central bank was established and it had been used by consumers until most probably 1975. However, they had lost almost full confidence on riel, central banking system and the government due to the war.
Serey also said the Royal Government of Cambodia issued riel in re-circulations to facilitate the goods and services exchange in the economy on March 20, 1980, about six months after NBC was re-established on October 10, 1979, but Cambodia’s economy was still weak in the early 1980s as the prices of goods went up, while the riel depreciated and not largely used due to the war.
“Huge inflow of dollar into the economy… has created a habit for our people and private sector to use dollar thus far,” said Serey, adding that US dollar started to flow into Cambodia’s economy in the early 1990s and the government and NBC have released policies to promote the use of riel, especially in early 2000s thanks to macroeconomic stability.
NBC’s principal mission is to determine and direct the monetary policy aimed at maintaining price stability in order to facilitate economic development, within the framework of the country’s economic and financial policy. In the context of a highly dollarised economy, the effective conduct of monetary policy is constrained and NBC has the limited role of lender of last resort.
Those measures include setting and payment of salaries of civil servants, utilities and taxes in riel. The government issued proclamations for businesspeople to set their prices of goods and services in riel, while NBC has developed a digital system for consumers and businesspeople to make payments in riel easily, safely and effectively, especially through Bakong and KHQR.
Currently, the monetary policy instruments used to achieve price stability are setting reserve requirement rate and conducting foreign exchange intervention. At the same time, NBC has developed additional monetary policy instruments to enhance monetary policy effectiveness through issuing Negotiable Certificates of Deposit (NCDs), developing interbank and monetary markets, promoting the use of riel, and so on.
“In our history, people paid foreign coins for anything. Our country also had trade exchanges with other countries in the world and when they came and sold their goods here, they also brought their coins to spend in our country … Strangely, they would use their coins for spending without connectedness with the former kings and governments at that time. So, the most important point was to do trading with their partners from other countries without caring about what would happen in our country,” Serey said.
“Comparatively, in the present time, much payment in dollar also constrains us. Firstly, economically when we do not use our own national currency, it would be much more difficult to manage the economy or set policies to boost our economic growth, especially when our economy is facing a crisis,” Serey said, during an event to promote riel in Kampong Cham.
During a courtesy visit paid by British Ambassador to Cambodia Dominic Williams on Tuesday last week, Serey said the policy of the government and the central bank does not allow for forced de-dollarisation, but promotes using riels increasingly based on the market situation and enhancement of the economic resilience. Williams applauded Cambodia’s ability in effective macroeconomic management.
The average value of Riel between buy and sale in the domestic foreign exchange market fell 0.6 percent to 4,115 riel per dollar in November 2022 from 4,140 riel per dollar in October, while the official exchange rate declined slower by 0.46 percent to 4,122 riel per dollar from 4,141 riel per dollar, according to the latest report of NBC.
Cambodia’s official currency as the report also indicates that the market buys rate of riel against US dollar appreciated by 0.6 percent to 4,110 riel per dollar in November 2022 from 4,135 riel per dollar in the previous month of the same year, while the sale rate fell to 4,120 riel from 4,145 riel per dollar. However, the report does not reveal the reason behind the first appreciation of riel in the market buy rate in November after it had depreciated from April to October 2022. The exchange rate of riel against US dollars rose about 1.65 percent to 4,135 riel per dollar in October compared to 4,068 riel per dollar in April 2022 after the exchange rate stayed stable from January to April.
Chan Sophal, Executive Director of think thank Centre for Policy Study (CPS) told Khmer Times last week that riel against US dollar normally shifts to an appreciation point during the period from October to April, which is a dry season in Cambodia when the dry north-east monsoon characterised by hot wind blowing across the entire country.
“According to my observations,” Sophal said, “the riel has been appreciating a bit in almost every dry season against the dollar. The reason could be the bigger demand for riel in the dry season compared to the wet season.” The southwesterly monsoon from May to October brings the rainy season, humidity and strong winds. The northeasterly monsoon brings sunshine.
The statistics report also shows that the interest rates — average weighted according to banking transactions for the new loans in November — for loans in US dollar and riel provided by banks fell 0.2 percent to 8.85 percent per annum and 0.57 percent to 10.89 percent per annum respectively, while the weighted average interest rate for deposits in riel rose 0.03 percent to 0.89 percent per month, but that in US dollar fell 0.11 percent to 0.49 percent per month.
The total amount of loans provided to different sectors, especially retail, housing, wholesale, real estate, construction, personal items and agriculture, increased slightly 0.23 percent to approximately $46.84 billion in November from 46.73 in the previous month of 2022, said the report.
The rising interest rate of 0.22 percent for deposits at slower pace between October-November and September-October 2022 reflects the slightly slower inflow of deposits into the banking system in Cambodia as the total amount of deposits in banks fell to $37.24 billion in November from $37.32 billion in October last year, according to the report.
The report’s graphic shows that the deposits in riel rose to 11 percent of the total amount of deposits in all currencies in November last year, while the deposits in dollars and other currencies fell to 89 percent, which contributed 50.3 percent by fixed or termed deposits, 19.8 percent by current deposits, 28.5 percent by savings deposits and 1.5 percent by other categories of deposits.
On October 13, 2016, Serey also chaired a forum attended by representatives of banks and Microfinance Institutions (MFIs) on Liquidity-Providing Collateralised Operation (LPCO). The purpose of the LPCO is to establish a benchmark rate for the market so as to serve the conduct of the monetary policy based on the market mechanism, promote NCDs, which then be used as collateral in interbank market transactions, promote the use of Riel, support agricultural sector development and contribute to lower the current high-interest rate in riel.
Source: https://www.khmertimeskh.com/501272597/to-dollarise-or-de-dollarise-consequences-for-monetary-policy-in-cambodia-2/