Cambodia: Dollar use hurting national economy

• Jun 08, 2017

Dollarisation in Cambodia’s economy remains very high, leading to increased local costs and reducing the appeal of the Kingdom’s exports, Chea Serey, director general of the National Bank of Cambodia (NBC), said at a business conference in Phnom Penh yesterday.

The majority of transactions in Cambodia, between 82 to 84 percent of them, are still done in dollars, according to Serey. She explained the use of dollars made transacting in the local currency more expensive, effectively penalising those who used riel.

“It makes transaction costs more costly for the users, but it also makes transaction costs for merchants higher because you have to maintain two different accounting sets – one for local currency and one for foreign currency,” she said.

The high level of dollarisation continues to have a negative impact on the country’s major economic sectors, particularly exports and tourism, she said. As the dollar grows in value, exporting goods from Cambodia becomes more expensive relative to the exports of other export-driven economies.

“Currently what is happening is that the dollar is very high and a lot of countries are betting on this because when the dollar gets higher the local currency is cheaper,” she explained. “Therefore, they can bring more tourists and they can export more.”

In the case of Cambodia, however, that does not happen because the widespread use of dollars means that “when the dollar goes higher that means products produced here in Cambodia also become more expensive”.

In addition, dollarisation severely limited the reach of the NBC’s fiscal policy, Serey said, leaving the country with few tools to mitigate exposure to external economic risks. She added that the NBC provides liquidity in local currency to commercial banks, which if utilised could significantly reduce the cost of lending.

“If everyone [banks] lends in the local currency, they can actually come and borrow liquidity from us at 3 percent per annum and, even with operations costs and legal costs factored in, you can probably lend at about 6 percent and still make money,” she said. “Local currency lending at the moment stands at about 18 percent, so it is quite high.”

Source: http://www.phnompenhpost.com/business/dollar-use-hurting-national-economy