Thailand: De-dollarisation, a monumental economic shift

Dollarisation often results from a deeper problem — macroeconomic instability. And once dollarisation takes root, it is often difficult to dislodge… To understand what form further de-dollarisation might take in Cambodia, it’s worth taking a look back at what that ‘deeper problem’ was in the Cambodian context

For economists, government finance officials, and bankers, the de-dollarisation of Cambodia represents a monumental economic shift involving a series of challenges for the country’s public institutions, businesses and citizens over decades, resulting in a financial system that is free from all the consequences of using foreign currency, as well as a certain number of drawbacks and risks that come with de-dollarising.

As Anthony Gill of the Asian Development Bank (ADB) explained to the Khmer Times, “Moving towards de-dollarisation is complex, has wide-ranging impacts, and comes with the size of costs and benefits that are difficult to ascertain.”

For those of us less expert on the economic mechanisms involved in de-dollarising, the replacement of the dollar with the Riel for day-to-day transactions can mean simplifying small payments without the need for a calculator at hand. Also, for others, the fear of holding the damage to the larger dollar bills in your wallet and getting rejected at the supermarket might be another perk for ditching the USD perhaps.

However, de-dollarisation also holds cultural and geo-political significance to many around the world, including in Cambodia, and the rate at which the process of removing the dollar out of the economy as a national currency advances reflects a trend of sidelining the dollar that is happening slowly in certain major economies such as China, and also western countries such as those of the EU.

How the dollar came to position itself as a currency in Cambodia also involved a slow process, and as Anthony Gill points out, de-dollarising fully might be even a slower process: “Dollarisation often results from a deeper problem—macroeconomic instability. And once dollarisation takes root, it is often difficult to dislodge,” he said.

To understand what form further de-dollarisation might take in Cambodia, it’s worth taking a look back at what that “deeper problem” was in the Cambodian context.

The dollar established its strength predominantly in the period following the Bretton Woods agreement in 1944 following the Second World War when 44 countries agreed to peg their currencies to the dollar, and the dollar, in turn, was pegged to the price of gold. The dominance of the dollar has meant that gold, oil and most other commodities have been since quoted in dollars and it has been the most sought-after currency by central banks to be kept as reserves, while massive amounts of transactions, investments, and funding are of course made in dollars.

The Bretton Woods Agreement with its pegging of other currencies to the dollar, and of the dollar to gold, gave the currency the stability that made it the perfect candidate as a second currency in several states which had an unstable local currency. Or in the case of Cambodia, where there was no currency at all after the Khmer Rouge had banned the use of money and had bombed the headquarters of the National Bank of Cambodia to the ground, people had been forced to barter using rice and gold in order to conduct transactions. The Riel was then introduced in 1980 alongside the dollar but the country received a massive economic shock when it was flooded with dollars in 1991-1992 with the United Nations Transitional Authority in Cambodia (UNTAC) mission that served to bring back civilian rule in Cambodia, a sum totalling $1.7 billion.

With this influx of dollars from the UNTAC mission, the already weak Riel depreciated, plummeting against the value of the dollar,
and had to spend the subsequent years recovering before finally reaching the stability it has against the dollar today.

However, Cambodia’s relationship with the dollar has had both pros and cons over the years, and the mere fact of it being presented alongside the Riel in the country means it served as a benchmark for the value of the Riel as a study revealed conducted by Jstage, a Japanese electronic journal platform for science and technology: “High dollarisation may have also helped to stabilise price and purchasing power in the domestic economy due to the widespread use of foreign currencies as a unit of account.

This stability helped the national currency only ever fluctuate slightly from the 4,000 Riel per dollar for the most part of the past two decades.  Not to mention the flexibility afforded to Cambodians to choose between using the dollar or the Riel to make favourable transactions during times of volatility of the dollar.

Also perhaps most notably is the role the dollar has played in attracting business, as Anthony Gill again pointed out: “There are benefits to Cambodia being a dollarised open economy in terms of attractiveness to foreign direct investment, facilitating trade and some macroeconomic stability, and contributing to Cambodia’s emerging economic strength,” he said.

As in other countries where the dollar has been competing against the local currency, the Riel has been a source of national pride and a symbol of Cambodia’s growth and establishment of independence.

It is precisely this same sentiment of a
small nation like Cambodia that drives the economic giant of China to take steps such as making bilateral agreements with Australia, Japan, Russia, Iran and Brazil to abandon dollars in favor of trading with national currencies with these nations.

Also, counterbalancing the strength and stability of the dollar, initially brought to countries in difficulty with their currency, has been the tendency of US governments to exploit the dollar’s global dominance for its own political ends, which further dented the reputation of the US around the world. They could wield this power because in order to be able to settle transactions in dollars, even between two parties located outside of the US, access to the US financial system is required, and leveraging on this US governments have imposed sanctions on many countries, most notably China, Russia and Iran. These sanctions have only served to act as a spur for these countries to come up with creative ways of reducing their dependence on the dollar.

The sanctions placed on China by the Trump administration would easily explain the Chinese government’s plans to issue a Central Bank Digital Currency, or CBDC, allowing cross border payments, as well as its buying of oil in Yuan. Even EU countries have joined up to establish a company that has allowed them to make non-USD transactions in order to make payments to Iran without breaking the US sanctions imposed on the country.

As with the international community’s relationship with the dollar, the transition away from its use in Cambodia is a slow process, and according to Gill this can happen without problems only if it is not a forced process, and that all the elements of the economy — from the top down, and vice versa — continue to take steps to embrace the Riel. “Once macroeconomic stability is established, another important element would be the development of local currency markets and instruments,” Gill said. “De-dollarisation can then naturally evolve in a more ‘hands-off’ manner. We’ve learned from the experience of other countries that ‘hands-on’ administrative measures that try to force de-dollarisation when these prerequisites are not in place are rarely successful.”

Source: https://www.khmertimeskh.com/501050412/de-dollarisation-a-monumental-economic-shift-2/