A question and answer session with Deputy Prime Minister and Minister of Economy and Finance Dr Aun Pornmoniroth in conjunction with the 40th anniversary celebrations of the reintroduction of the riel.
KT: What is the role of the Ministry of Economy and Finance to regulate the riel and how does it complement the National Bank of Cambodia?
Dr Aun Pornmoniroth: With its mandates in leading the formulation and implementation of fiscal policy, the Ministry of Economy and Finance (MEF) plays a complementary role; while the National Bank of Cambodia (NBC) is playing a leading role in regulating the riel.
In promoting the use of the riel, the MEF has three main functions, including macroeconomic management, fiscal policy and budget management as well as financial sector management.
- a) On macroeconomic management, the MEF and the NBC are working together to ensure financial stability, stabilise the exchange rate and maintain the inflation rate.
- b) For fiscal policy and budget management, the MEF has introduced and implemented a number of measures to promote the use of the riel through government spending, revenue collection and debt management. For instance, wages, government subsidies, government-funded infrastructures, domestic procurement, tax collection, public service fees, utility and other forms of revenue are all settled in riels.
- c) The MEF also takes a leading role in managing the non-banking sector by promoting the use of the riel in the capital market, preparing to issue government securities in riels and planning to impose deposit insurance policy in riels.
KT: What is the Ministry’s stance on de-dollarising the economy or even floating the riel in the future?
Dr Aun Pornmoniroth:The MEF encourages a gradual approach on de-dollarisation as medium and long-term goals, while placing equal importance on maintaining macroeconomic stability, financial stability and enhancing public/investors’ confidence. In the meantime, building public trust and confidence in the riel by promoting its use will pave the way to achieving this objective. Also, de-dollarisation must be done in a cautious manner by taking into account the global and regional economy, domestic economy, trade, financial deepening and evolution of the digital economy.
On the fiscal front, the MEF plays an important role in promoting the use of the riel by means of government expenditure, which represents approximately 27 percent of the gross domestic product via government projects, especially public reform programmes. Therefore, the MEF can use these as effective tools to ensure successful implementation of the de-dollarisation strategy; yet it requires close cooperation with the NBC and all relevant stakeholders.
A floating regime can be a policy option in the future when de-dollarisation is successfully completed. This regime allows a flexible exchange rate which can absorb shocks during moments of crisis and adjust itself with exports so that competitiveness can be maintained at an optimal level. However, volatile exchange rates might not attract foreign direct investment to some extent, and investors might have difficulties in managing their cash flow. To a certain extent, intervention is necessary in certain circumstances.
KT: Is de-dollarising even an option on the table? If so, in what period and, if not, any particular reason why?
Dr Aun Pornmoniroth:De-dollarisation is the ultimate goal, but as mentioned above the process must be carried out gradually over the medium and long term, in
order to maintain favourable macroeconomic environment with low inflation rates and stable exchange rates.
We have witnessed serious macroeconomic consequences of forced de-dollarisation without the strong macroeconomic foundation for the case of some countries in the region. It led the domestic currency to depreciate and caused a loss of public confidence. Thus, the NBC is working on a long-term strategy and plan to gradually promote the use of the riel.
As Cambodia is a small developing economy navigating in an uncertain global environment, it is difficult to determine a specific deadline for de-dollarisation. However, setting a clear milestone and timeframe is important for a medium- and long-term direction on how to move forward with de-dollarisation.
To that end, Cambodia needs to increase public confidence in the domestic economy, financial sector and the riel through robust macroeconomic management. Simultaneously, Cambodia needs to promote the use of the riel through various administrative measures based on a market principle that aligns with stable macroeconomic policy.
KT: How do you see the riel curency performing in the current economic uncertainty and would you be considering intervention in any form with regard to the riel and its exchange rate?
Dr Aun Pornmoniroth: Overall, the exchange rate of the riel is relatively stable at around 4,050 riels to the dollar. For instance, the yearly average exchange rate stood at 4,052 riels to a dollar in 2019. However, in the last two months, the exchange rate for the riel has varied and is now around 4,065 to a dollar, which is slightly higher than the [NBC] official rate last year and is noticeably high for this time of the year. Thus, for the recent economic development, the value of the riel has depreciated against the dollar but is still within a stable range. Nonetheless, the recent COVID-19 pandemic has further created uncertainties of which the impact is hard to quantify.
With increasing gross international reserves available at hand, I believe that the NBC stands ready to take appropriate measures to stabiles the riel if necessary.
KT: Would any laws be proposed to protect the value and integrity of the riel through foreign exchange management?
Dr Aun Pornmoniroth: As a small and open economy, Cambodia has welcomed foreign direct investment through an open sky policy with the aim to promote job creation, enhance economic growth and facilitate exports. In fact, the Cambodia 1997 law on foreign exchange stipulates that there shall be no restriction on foreign exchange operations through authorised banks.
Moreover, the MEF does not have exclusive authority in foreign exchange management. However, we will make concerted efforts in protecting the value of the riel and promoting its use with the NBC. For instance, we have been implementing various administrative measures [as mentioned earlier], promoting macroeconomic stability as well as sustainable debt management. In addition, the MEF is willing to work with the NBC on drafting laws on deposit insurance.