To sustain current economic expansion and increase the provision of financial services, officers of the Central Bank and foreign experts agree there is a need to de-dollarise the economy and promote the use of the local currency.
For in depth analysis of Cambodian Business, visit Capital Cambodia
Speaking at an event to commemorate the re-introduction of the Cambodian riel 38 years ago, Ouk Maly, vice-governor of the National Bank of Cambodia (NBC), said it is pivotal to promote the use of the local currency to make current economic growth rates sustainable.
“As the size of the economy grows, dollarisation increases costs and vulnerabilities to the Cambodian economy,” Ms Maly said.
“It limits the effectiveness of our monetary policy, which plays a key role in contributing to maintaining price stability and setting appropriate levels of interest rates to support investment as well as economic growth.”
The NBC official pointed out that Cambodia has been growing at a rate of 8 percent during the last two decades, enjoying an inflation rate of just 3 percent as well as a stable US dollar-riel exchange rate. Moreover, foreign-exchange reserves have expanded and now equal six months of imported goods and services, which is much higher than other developing nations.
“These factors of macroeconomic stability are a solid foundation and a precondition for Cambodia to increase its use of the riel more widely,” she said.
“However, presently the use of riel is still limited. The participation and cooperation of all sectors to promote the riel is required, especially the relevant ministries, institutions, the private sector and the people,” Ms Maly said, adding that, as international experience has shown, reducing the level of dollarisation is a long-term endeavour.
She placed the current dollarisation level of the economy at 83 percent, explaining that most US dollars flow into the local economy through foreign investment, international aid, exports and tourism activity.
The findings of a study released in 2016 by NBC in cooperation with the Japan International Cooperation Agency (Jica) were presented during the event.
It found that just one third of loans are being taken in riel, with the majority of business lending done in US dollars, despite the fact that most Cambodians support riel-promotion policies.
For the study, the NBC-Jica team surveyed 2,000 households, 800 enterprises, 5 microfinance organisations, as well as 500 branches of 10 different commercial banks. The research revealed that the riel is most commonly used in rural areas.
It also found out that most wholesale and retail businesses needed to convert riel to US dollar in their day-to-day operations.
27 percent of enterprises that take out loans is US dollars operate mostly in riel, according to the study.
“Since most financial institutions are in the capital, we believe promoting the riel will increase financial deepening in rural areas,” said Daiju Aiba, a researcher for Jica.
“Our goal is to expand access to loans in riel in rural areas. This will promote the use of the riel without any negative side effects,” he said.
“Financial inclusion will help make huge strides towards the promotion of the riel.”
The study also found out that dollarisation in Phnom Penh, Siem Reap and the country’s Northwest has reached 65 percent, highlighting a gap in the use of the riel in urban centres.
According to the report, the US dollar is the most traded currency, followed by the Thai baht, the Vietnamese dong, and the euro. While exchanges in Japanese yen and Chinese yuan also take place, the amounts transacted are relatively small.