In Cambodia’s economy, which is currently predominately dollarised, there are concerns that the oversupply of riel banknotes could affect the stability of the foreign exchange rate of the local currency against the US dollar. So what has the National Bank of Cambodia (NBC) done to stabilise the exchange rate?
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The Central Bank claims that every year it prints high-quality banknotes in response to a higher demand for riel, as a result of increasing business activities and to replace damaged banknotes that have been in circulation for a long time.
For instance, Cambodia has experienced an average economic annual growth rate of around 7 percent over the last decade and, to support this growth, the local currency in circulation has also increased 16 percent per year on average during the same period, without putting any pressure on the depreciation of riel.
Indeed, the exchange rate of the local currency against the US dollar has been stable at around 4,050 riel, thanks to a prudential monetary policy adopted by the NBC. This was observed by Bun Mony, an adviser to Cambodia Microfinance Association, who said that the exchange rate of riel against US dollars remained stable despite an increase
of both currencies in circulation in the country.
He said that a fine balance was needed to get things right: “If the central bank allows too many riel in circulation, leading to oversupply, this will cause its depreciation. But, so far, in Cambodia, we have not seen the exchange rate exceed 4,200 riels or fall below 3,800 riels to $1, for a very long time,” Bun said. “So this means the National Bank of Cambodia has managed the level of riels in circulation well.
“It is a complicated task because when people don’t use the riel enough, this may also cause a depreciation of the KHR [riel].” Bun is also chairman of Vithey Microfinance Plc.
A wide usage of local currency is necessary to improve the effectiveness of Cambodia’s macroeconomic and financial policies. Bun is thus also calling for further use of the riel, particularly in the financial sector. He suggests that the 10 percent required by the NBC for microfinance institutions and banks to lend in riel should be adjusted up to 30 percent.
“If we want to add further value to the riel, we must all work together. What we have seen from the current 10 percent required by the NBC is that we are some way off meeting the [30 percent) target yet,” Bun said.
He noted that the NBC regulation that requires all banks and financial institutions to have at least 10 percent of their loan portfolio in riel by the end of 2019 was an effort to promote the use of riel in the banking system.
This measure also responded to the government’s recognition that an increase in riel circulation will not only ensure a stable economy but also create a sense of national pride and sovereignty.