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Cambodia: Riel effort to help local currency
The governor of the National Bank of Cambodia, the nation’s central bank, Chea Chanto, has opened his heart about the future of the domestic currency and the dollar.
He says the use of the riel will increase further compared with last year by introducing several measures including the development of policy instruments such as providing a collateralised operation to boost its liquidity.
Read about that and much more in our exclusive interview.
The conclusion is trust in the currency is increasing dramatically and access to credit is becoming easier.
Cambodia wants to become the master of its own currency and take more control of its economic future.
KT: Will the NBC implement new financial policies to continue supporting the government’s policy to promote sustainable economic growth and reduce poverty?
Chea Chanto: Of course, the NBC has greatly contributed in making access to finance easy for private sector. It has been recognized in the World Bank Doing Business 2020 report that Cambodia was ranked 25 out of 190 nations on access to credit, which is recognised as an important tool for poverty reduction. The NBC has made significant stride over the years with more than 50 per cent of the adult population has access to financial services.
KT: The printing of riel notes increased 50.4 percent last year. What do you think the increase would be in 2020?
Chea Chanto: I expect that the use of riel will increase further compared with last year. As we can see the confidence in the local currency has been increasing year-by-year given that more Cambodians become aware of the benefits of the riel in the economy. In addition, the NBC has been active in promoting the use of riel by introducing several measures including the development of policy instruments such as the liquidity-providing collateralised operation (LPCO) to boost the riel liquidity as well as the requirement of 10 percent loan in riel (KHR) to the total loan portfolio of each bank and MFI [microfinance institutions). The recent issuance of corporate bonds in the KHR by financial institutions such as banks and microfinance institutions also contribute to the increase in the usage of riel.
KT: Will the NBC implement new financial policies to continue supporting the government’s policy to promote sustainable economic growth and reduce poverty?
Chea Chanto: Of course, the NBC has greatly contributed in making access to finance easy for the private sector. It has been recognised in the World Bank Doing Business 2020 report that Cambodia was ranked 25 out of 190 nations on access to credit, which is recognised as an important tool for poverty reduction. The NBC has made significant strides over the years with more than 50 per cent of the adult population having access to financial services.
KT: What have some of the challenges been like for the NBC in terms of reducing dependence on the dollar?
Chea Chanto: Indeed, reducing the US dollar in the Cambodian economy is very challenging. There are two main factors limiting our ability to reducing the degree of dollarisation – psychological and policy factors. Firstly, in terms of psychological factors, it has been difficult to change the mindset of the people to instantly switch from the US dollar to riel. Given the fact that the confidence in the riel eroded from the chaotic past and people have been familiar with earning and spending in US dollars for decades since the early 1990s, it could take a longer time to rebuild trust among the public in the local currency.
Secondly, in terms of policy factor, there have not been any concrete strategies or policies to promote the local currency at the national level. Consequently, there is a lack of coordination from relevant authorities to concurrently implement riel strategies at the national level.
On top of that, there is some form of resistance from foreign investors who invested in US dollars and prefer it to remain so.
KT: How will the country benefit if the riel is adopted as the currency in the Kingdom?
Chea Chanto: Having the riel adopted as the sole currency in the Kingdom is the ultimate goal of the NBC. If we are able to master our own currency, we will be able to achieve full economic and political sovereignty.
The riel represents the culture, history, national pride and solidarity of Cambodia and it helps the central bank to enhance the effectiveness of conducting monetary policy to maintain price stability and support economic growth. In other words, if the riel is widely used, we can influence economic activities by raising or lowering the interest rate. What is more, using only riel will help people to make payments in their daily transactions more conveniently because they do not need to think of conversion from one currency to another.
Furthermore, the benefit of using local currency is that the NBC can act as the lender of last resort to financial institutions with liquidity support, especially during periods of downturn. This means that the central bank can provide emergency credit in riel to financial institutions that face liquidity shortages.
KT: What are the NBC’s efforts to further boost riel circulation in the country?
Chea Chanto: So far, NBC has been implementing two approaches – soft and hard – to boost the riel circulation.
The soft one refers to a campaign in raising public awareness about the importance of the riel in the economy through organising different events including Riel Day, the NBC’s anniversary, exchanging old banknotes and so on, plus producing promotion materials such as videos and booklets that could easily be communicated to the public.
On the other hand, the hard approach basically refers to the NBC’s policies to stabilise the exchange rate and inflation rate, to build public confidence and to impose some measures including the 10 percent of total loan portfolio in KHR.
KT: How effective have the current policies been in terms of boosting riel circulation in the country?
Chea Chanto: We observe that the riel in circulation has gradually increased from around 7 trillion riels at the end of 2016 to 13 trillion riels at the end of 2019. Meanwhile, the riel deposits at banks also increased from around 3.3 trillion to 7.5 trillion riels during the same period.
At a micro level, results from NBC-JICA [Japan International Cambodia Agency] surveys in 2014 and 2017 also showed an improvement of the riel usage in incomes and expenditures of households, especially the proportion of riels in savings that increased from 70 to 72 percent, showing a stronger confidence in riels.
Among 535 firms that participated in both surveys, there were 297 firms that used the riel in price quotations in 2014 and the number increased up to 359 firms in 2017. These results reflect the effectiveness of the NBC’s implemented policies as well as the peace and macroeconomic stability that Cambodia has achieved in the last two decades, which build the public’s trust in and demand for the local currency.
KT: If efforts towards promoting riel circulation in the country continue to be effective, how will this contribute towards the exchange rate?
Chea Chanto: Promoting the local currency by increasing riel circulation will not put pressure on the exchange rate because the NBC has managed the exchange rate according to economic fundamentals and to benefit growth.
Higher riel circulation will also enhance long-term economic development particularly in the sectors that use riel the most as a means of payment (i.e. agriculture and the retail sector).
In terms of policy perspective, the wide use of local currency provides more options for the NBC to implement effectively the monetary policy tools that can tackle problems in an economic downturn if it is needed.
KT: How have the banks in Cambodia responded to the 10 percent loan portfolio requirement by the end of 2019?
Chea Chanto: We have seen positive response and significant progress from banks in complying with the 10 percent loans in local currency.
Particularly, the KHR loans portfolio of the banking sector increased from 2 percent in 2017 to 4 percent in 2018 and more than doubled to 10 percent in 2019, which reflects the 10 percent overall level of KHR portfolio has been achieved as required by prakas [directives] on Provision of Credit in National Currency of Banking and Financial Institutions.
However, there are only two thirds of commercial banks that have fully obeyed the regulation, while some commercial banks and specialised banks still lag behind the target.
With this situation, the NBC acknowledges the difficulties that banks face in disbursing loans
in KHR because they have different characteristics and customer bases or sectors, but we still need
those institutions to have a clear updated plan in increasing loans
in KHR to meet the requirements, because they are all obliged
to adhere to the prakas, without exception.
KT: How will a riel-based economy empower the NBC when it comes to managing monetary policy affairs more prudently?
Chea Chanto: The NBC will not only fully implement its monetary policy, but also perform one of its functions as the lender of last resort.
Through the policy rate, the NBC can influence the level of economic growth and inflation and control the credit growth. Meanwhile, in a period of downturn, the NBC can also respond more effectively and swiftly to liquidity needs by lending directly to banks that are illiquid but solvent.
Source: https://www.khmertimeskh.com/50709853/riel-effort-to-help-local-currency/