The National Bank of Cambodia has launched many initiatives to boost and circulate more riels – but with US dollars making up more than 80 percent of the economy, the question remains whether investors will retain confident in a de-dollarised Cambodian economy or not.
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While dollarisation has positives and negatives in any emerging economy, Jayant Menon, visiting Senior Fellow of ISEAS in Singapore and former lead economist of the Asian Development Bank, explains the main negatives are loss of seigniorage, loss of control over an independent monetary policy and the exchange-rate policy. However, the positives are increased confidence in the economy, lower inflation and macro stability.
“De-dollarisation will be a good thing for Cambodia in the long run, but it has to happen naturally and cannot be legislated or forced. This is because dollarisation is not the problem, but merely a symptom,” Menon said.
Menon added that the problem (or the cause) is a lack of confidence in the riel, whilst the symptom (or the effect) is the use of another currency such as the US dollar. The causes of the problem generally emanate from an underdeveloped monetary system, political and economic uncertainty and weak legal and institutional structures.
“These are the problems that need to be addressed directly. When these problems are addressed, then the symptom, which is dollarisation, will also cease to be a constraint,” Menon adds.
Vice-Chairman and Chief Operations Officer of the Cambodia Securities Exchange Ha Jong Weon said that most investors (both local and international) do not have confidence in the de-dollarisation of the Cambodian economy. It is still better for foreign investors to invest in Cambodia without exchange-rate risk.High numbers of Cambodian people, particularly in Phnom Penh, receive their salary in US dollars and use the currency for most transactions. He added that in the Cambodian securities market, LOLC (Cambodia) Plc issued two bonds last year. One riel bond and one US dollar-linked bond. The interest rate of the riel bond was issued at 9 percent and the US dollar-linked-bond issued at 8 percent. So, this 1 percent difference shows that investors are more willing to buy the dollarised bond even with a lower interest rate.
“Advantages of a dollarised economy are the attraction of more foreign investors and that leads to more jobs, increases numbers of foreign tourists, reduces transaction costs and eliminates exchange-rate risk. It also engenders more trust from the consumers,” Ha said.
Alternatively, Ha said, the disadvantages of de-dollarisation are that GDP growth rate typically decreases in the short term, because of the decrease of foreign investment and tourism. In addition, most of the transactions in Phnom Penh are in US dollars, including salary payments and other daily purchases because many investors find the currency easier to use in their transactions. In addition, a sudden de-dollarisation would also cause extreme volatility for the riel-to-US dollar exchange rate. For example, if investors were forced to buy large amounts of riels, this would see the riel appreciate. Then, if the central bank began to print money in response and flood the market, this would send the riel to sharply depreciate. “Cambodia’s central bank, the National Bank of Cambodia, has been trying to promote the use of local currency and to finally de-dollarise in order to enhance the effectiveness of monetary policy implementation of the central bank. They will also get a lot of US dollars in their foreign reserves when there are more riels in the market,” Ha added.