[PHNOM PENH POST]
THE Kingdom’s financial regulators this week launched their latest
Financial Sector Development Strategy for the coming decade, with
so-called de-dollarisation as a long-term goal. But while the aim of a
riel-dominated economy is the right one, Cambodia must be careful not to
make the same mistakes as Vietnam and Laos.
Dollarisation, of
course, has proved beneficial to the Kingdom’s economic development.
With most measures estimating over 90 percent of currency in Cambodia is
the US dollar, widespread use of the greenback for a long time offered
monetary stability when there was little to be had in the country’s
political and financial arenas. That in turn attracted much-needed
investment and allowed easy transactions among international businesses.
Also, the greenback has done its part to protect Cambodia
against inflation. Granted there are exceptions to be had, such as with
the recent spikes in oil and food prices, but then this is affecting
everyone. In the very least, though, the domestic economy has been
spared hyperinflation thanks in part to the dollar.
But Cambodia
is changing, with a stablising political situation and emerging
financial institutions, and a dollarised Kingdom has left the National
Bank of Cambodia hampered in its ability to employ monetary and
exchange-rate policy to the country’s benefit.
Widespread use of
the riel would allow the NBC to use monetary policy to stimulate or
cool down the country’s economy when necessary. However, the central
bank’s effectiveness in doing so is constrained in an environment where
dollars are so dominant.
Dollarisation also leaves Cambodia
susceptible to any downturns affecting the US and its currency. That is
of special concern now given the risk of credit ratings agencies
downgrading America’s debt, which would further hurt the dollar.
It
is for these reasons that de-dollarisation is crucial for the Kingdom’s
ongoing economic development – but it must be done, not only over the
long term, but also with extreme care. Otherwise the country could
suffer the same kinds of setbacks as those seen by its neighbours.
Jayant
Menon, a principal economist for the Asian Development Bank and an
expert on dollarisation, yesterday spoke of the lessons Cambodia must
learn from Laos and Vietnam.
In the late 1990s, the Laos
government cracked down on transactions that were conducted in dollars, a
practice that was illegal. The end result was that savings in foreign
currencies began to shift en masse to Thai banks, as people feared
restrictions on capital outflows were next.
The loss of
confidence in the kip sent the currency plummeting in value, so much so
that the kip was the only currency to fall against the Thai baht during
the Asian financial crisis, Menon said.
De-dollarisation cannot
be forced. Government intervention highlights the differences between
the dollar and a local currency, when it’s the lack of difference that
boosts confidence among a country’s population.
Cambodia needs
to see equal stability in and usefulness from both currencies, which in
turn builds confidence in the local currency and allows for
de-dollarisation.
“Perceptions matter a lot,” Menon said.
In
Vietnam, de-dollarisation did happen naturally. The problem, though,
was a lack of experience with monetary policy, which resulted in poor
decision-making.
The government’s focus on rapid growth allowed
inflation to get out of control, leaving Vietnam with a greatly devalued
dong. Its central bank has made questionable decisions, such as cutting
a key interest rate on July 4 even as inflation reached a two and a
half year high. The continued erosion of confidence in the dong has made
the Vietnamese among the largest consumers of gold in the world. A
mature central bank would have prevented that problem, and Cambodia’s
NBC must be prepared to handle the complexities that will come with
wider use of the riel.
Menon was quick to point out that
dollarisation in and of itself is not the problem. Instead it’s merely a
symptom of the underlying institutional and other weaknesses reflected
in the perceived instability in the riel. Building confidence in the
currency will take some time.
“The key lesson is patience,” he said.
ANZ
Royal Bank Chief Executive Officer Stephen Higgins yesterday stressed
the same point. He noted that it was the presence of the United Nations
Transitional Authority in Cambodia in the early 1990s that brought with
it an immediate influx of dollars. Only a similar-sized event could make
the riel the dominant currency in the short term.
“It’s taken 20
years to get to this point, and it’ll take at least 20 years to get
back to where it was,” he said, “which is all the more reason to get
started on it now.”
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