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Keeping it riel: Shaking Cambodia's dollar dependency

Amid shift toward local currency, some ask if the transition is worth the trouble

Cambodian riel: Common denominations of the riel come in 100, 1,000, 2,000, 5,000, 10,000 and 20,000 notes.

PHNOM PENH -- Cambodia is a country split between two currencies: the riel, with notes bearing representations of kings past and present, historical landmarks and other figures, and the U.S. dollar, in its ubiquitous green glory. That may be about to change.

The dollar has been in common use in Cambodia since United Nations peacekeeping forces arrived in the early 1990s with a mission to instill democracy. Now, roughly 84% of economic transactions are conducted in dollars, according to an estimate by the National Bank of Cambodia, the central bank.

In Phnom Penh, the capital, it is generally more common to use the greenback -- especially for expensive transactions, since the exchange rate of about 4,100 riel to the dollar can make high-ticket riel purchases dizzying.

But there is growing official pressure to move Cambodia entirely to the riel. Use of the currency is up in 2017, with the central bank injecting about 2 trillion riel ($488 million) into the economy during the first half of the year, up by 18% from 2016.

The currency is increasingly being used for paying taxes, wages, and goods and services, as well as in banking. The central bank has published booklets promoting the riel, especially among young people, and urged businesses to pay wages in riel. More recently, the Ministry of Commerce issued a decree requiring all businesses to price products and services in riel to boost the use of the currency.

Yim Sovann, a spokesman for the Cambodia National Rescue Party, the country's main opposition group, said that a victory for his party at the next general election would lead to a complete switch to the riel within a year. While economists said his promise would be a "disaster," or "impossible," it points to a strong desire to shake the country's dependency on the dollar.

"If we don't have our own currency, can we call it our own country?" Sovann told local media. "To use Khmer riel in our own economy is a must."

A complete switch to the riel would provide some benefits to Cambodia. Currently, Phnom Penh is subject to monetary policy set by the U.S. Federal Reserve in Washington -- which does not have Cambodia's interest at the top of its agenda. That can have destabilizing effects on Cambodia's economy.

"There are monetary advantages to issuing more of your own currency," said Sophal Ear, author of "Aid Dependence in Cambodia: How Foreign Assistance Undermines Democracy." Ear added: " The riel cannot benefit Cambodia in terms of letting the country set its own monetary policy; that is increase money supply or decrease money supply, set an interest rate, etcetera. It also can't enjoy as much seignorage [the profit made by central banks from issuing currency] as it could were the economy 100% riel-denominated."

National pride

A leading local banker, In Channy, president of Acleda Bank, Cambodia's largest bank, said the use of the riel was a matter of national pride and self-reliance. "How can Cambodia, as a country, rely on the monetary policy of [an]other country?" he asked. "We cannot do anything to make the monetary policy of another country stable. We have no control, no ability to manage the monetary policy of the other currency."

In Channy, president and group managing director of Acleda Bank, Cambodia's largest bank. (Photo by Acleda)

Over-reliance on another country's currency sapped legitimacy from the Cambodian government itself, he argued. "The riel is our sovereign currency," he said. "We reduce our own sovereignty by relying on [a] foreign currency."

Cambodia is not the only country in the region that has had an ambivalent relationship with the dollar. In 2015, Myanmar revoked foreign exchange licenses to hundreds of businesses using the dollar in an effort to control dollarization of its economy and increase the value of the kyat, the local currency. Vietnam last year replaced a fixed dollar exchange rate for the dong with a more flexible regime in an attempt to stop dollar hoarding.

David Totten, director of Emerging Markets Consulting, a Phnom Penh-based regional consultancy, said the widespread use of the dollar in Cambodia is comforting to investors, helping the country to maintain a stable exchange rate and control inflation. But he said moving toward the national currency was an important step in establishing trust in Cambodia's banks.

"At a certain point, without the ability to manage your own currency, what does that say?" he noted. "Are you effectively saying that you don't trust in your own federal reserve?"

If Cambodia chooses to give priority to the riel, the process will be long and difficult -- likely taking much longer than the year promised by Sovann. In addition to most economic transactions being conducted in dollars, many private sector salaries are paid using the U.S. currency. Compulsory use of the riel could lead to enforcement problems, since laws are often flouted.

"Even now things are not easy," said Ear. "De-dollarization has been floated since UNTAC (the United Nations Transitional Authority in Cambodia, 1992-1993). Right now, you have gasoline and some salaries computed in riel," he said. "You need way more than that. The dollar would have to be banned as legal tender. Good luck with that."

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