H.E. Chea Chanto, governor of the National Bank of Cambodia, discusses how and why the central bank is promoting greater use of the riel, and how the currency was reintroduced 37 years ago, after it – and all forms of money – had been banned by the Khmer Rouge.
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KT: What was the initial reaction to the reintroduction of the riel 37 years ago?
H.E. Chea Chanto: The National Bank of Cambodia was reestablished on October 10, 1979 and the riel was re-introduced on March 20, 1980. Back then, the first reactions from the people were that they welcomed and rejoiced over the re-introduction of the riel after its disappearance for quite a long while because of the Pol Pot Regime.
People used gold and rice for trading goods and that caused difficulties in their daily lives. At that time, Cambodia operated a one-tier banking system. The National Bank of Cambodia played three important roles as a central bank, commercial bank, and a national treasury for the government. Riel banknotes were printed and injected into the economy once again through the payment of salaries for government officials and provision of credit to the people in order to restore the country’s economic activities.
KT: It was reintroduced within about 6 months of the reestablishment of the central bank. How was this accomplished so quickly?
H.E. Chea Chanto: Despite the re-introduction of the riel in a short time after the rebirth of the National Bank of Cambodia, it was successful. The success was thanks to technical assistance from our allies, the Union of Soviet Socialist Republics and Vietnam. The banknotes were, at that time, printed overseas and transported to Cambodia.
The banknotes were distributed across the country. The central bank, back then, did an outreach campaign to promote the newly printed riel notes. We reached out to local communities to show people and promoted the notes through government expenditure programs.
KT: How surprised were central bank staff by the impact of the influx of US dollars following the arrival of UNTAC, and were there any measures considered at the time to prevent the dollarization of the Cambodian economy?
H.E. Chea Chanto: Although people welcomed the reintroduction of the riel, at that time the people’s confidence in the currency could not be restored immediately because the country just emerged from the Pol Pot regime.
Therefore, people continued to use gold, and other currencies and goods, as methods of payment, and at the same time, using the riel. In fact, the use of US dollar was not new to Cambodians. The use of dollars has occurred since the Lon Nol regime through loans and aid from the United States. Following the fall of the Pol Pot Regime, Cambodia started economic reforms in the mid-1980s by transforming from a centralized planning economy to a market oriented one. The country allowed some non-governmental organizations to use the US dollar in the form of humanitarian and financial aid to the people but on a small scale.
Use of dollars significantly increased upon the arrival of UNTAC when they injected dollars into Cambodia for payment of staff salaries as well as expenses on accommodations and food and other expenditures. Initially, dollars were accepted as payment currency for goods and services, but then people started to save even in US dollars. Additionally, with the presence of private banks since 1991, the use of dollars increased even more substantially. At that time, dollarization did contribute to the country’s economic restoration and development as well as facilitate the UNTAC operations in strengthening peace in the Kingdom.
However, the National Bank of Cambodia strived to maintain our monetary sovereignty by continuing to print riel notes along with using dollars in the economy.
KT: How quickly did the central bank realize that the economy was becoming dollarized?
H.E. Chea Chanto: The National Bank of Cambodia has realized the presence of dollarization since the early 1990s. As a result of economic growth, political stability and banking sector development, the increase in inflow of foreign currencies, particularly in US dollars, came with foreign investors, tourists, exports and foreign assistance.
KT: What are the most important components of the riel-promotion campaign?
H.E. Chea Chanto: The measures so far introduced and implemented to strengthen the use of the riel include:
• payment of civil servant salaries in riel;
• requirement to quote the prices of goods and services in riel;
• maintaining price and exchange rate stability;
• enhancing the quality and appearance of riel banknotes;
• set lower reserve requirement rate in the riel than that in foreign currencies (riel deposits with the rate of 8 percent; deposits in foreign currencies and loans from non-residents with the rate of 12.5 percent) to enable banking and financial institutions to provide more loans in riel.
• raising the awareness of the importance of riel in the economy and society;
• issuance of NCDs and liquidity-providing collateralized operations (LPCO) to create financial instruments in riel.
• requiring banks and microfinance institutions to provide loans in riel for at least 10 percent of the total credit portfolios;
• celebrating Riel Day;
• introduction of Fast Payment, which allows quick payment and receipt of funds in riel; and “I Love Riel” campaign through exchanging old, torn and worn riel notes with new ones for the public in all municipal and provincial branches of the National Bank of Cambodia.
KT: Realtors report that some foreign investors are investing in the Cambodian property market to hedge against expected depreciation of their currency. Is this having a negative impact on efforts to promote the riel?
H.E. Chea Chanto: Cambodia’s current property market has received more and more investment capital from overseas, but local investment still has the biggest share in the market. Moreover, people invest in property because of the country’s robust economic growth and investors’ positive outlook. Regarding the use of dollars in the property market, since the property investments involve huge amounts of money, it is not surprising to find that it uses the dollar the same as other large transactions in the country.
Therefore, the National Bank of Cambodia will continue to promote the use of riel in all sectors.
KT: In light of the challenges the NBC has overcome, how confident are you and your colleagues will succeed in achieving greater monetary independence?
H.E. Chea Chanto: I am optimistic about the promotion of the use of riel. So far, despite some challenges, the National Bank of Cambodia has injected the currency into the economy based on growing market demand, reflected by an increase in riel currency in circulation averaging 17 percent, and riel deposits averaging 26 percent for the last two decades.
In addition, despite the high rate of dollarization – roughly 83 percent – the rate has been stable over the past six years, and this has reflected the results achieved by the National Bank of Cambodia as well as the government in preventing further growth of dollarization.
In the future, the National Bank of Cambodia together with the government will continue to thrive in achieving further success in the promotion of the use of riel, coupled with the country’s sustainable economic development, conducive investment environment created by political stability and improved macro-economic situation.
This firm foundation has made Cambodians even more confident in the riel with their support and readiness, according to JICA’s survey. The survey shows demand for and use of the riel is highest in rural area while people in the urban areas still use dollars, particularly in Phnom Penh.
KT: Why does the National Bank of Cambodia focus on promoting the use of the riel?
H.E. Chea Chanto: Currently, Cambodia has adequate pre-conditions for strengthening the use of riel, and this is important for the success of this mission.
A number of reasons why the NBC commits to this task include:
• dollarization makes Cambodia lose its national monetary sovereignty and national identity;
• dollarization has imposed a limit on the implementation and effectiveness of monetary policies;
• dollarization has deprived the central bank of a role as lender of last resort to prevent possible crises;
• when the economy is expanding, dollarization increases expenses on the economy through loss of seigniorage (income from printing money); and
• because of dollarization, Cambodia loses its exchange rate policies to contribute to the development of trade, investment and tourism.
Therefore, this is the critical time for the National Bank of Cambodia and the government to continue our efforts to strengthen the use of the riel.
KT: Has the National Bank taken any administrative measures to support the promotion of the riel?
H.E. Chea Chanto: In line with the Royal Government’s policies, the National Bank of Cambodia will not enforce any administrative measures that are contrary to the market mechanism because drastic de-dollarization or administrative measures may affect the country’s macroeconomic stability, as well as financial and economic development as a whole.
Therefore, gradual promotion of the use of riel based on market mechanisms is a wise strategy to tackle the issue of dollarization.
However, it is also necessary for us to take a small number of supporting measures to contribute to the effectiveness of market mechanisms, such as through the adoption of a Prakas of the Ministry of Commerce that requires price tags to be quoted in riel, as well as the Prakas by the National Bank of Cambodia on the requirement for banks and microfinance institutions to provide at least 10 percent of their total credit portfolios in riel.
The National Bank of Cambodia has continued to raise the public’s awareness of the importance of the riel in both the economy and society.
KT: How dangerous would it be for Cambodia’s economy to remain dollarized as it shifts into lower middle-income status? What constraints would this have on further economic growth?
H.E. Chea Chanto: As I mentioned earlier, dollarization has made the country’s economy vulnerable to external shocks or crises because Cambodia cannot fully implement monetary policies.
Therefore, Cambodia doesn’t have credible policy tools at her disposal that contributes to economic growth.
Moreover, in the context of dollarization, if the economy encounters any external shock or crisis, Cambodia will lack tools to quickly restore the economy.