Southeast Asia’s dollar addicts seek cure in their own currencies

Chy Sila told the paper that his restaurants had been displaying prices in riel for months but customers still preferred to pay in dollars, which accounted for over half of total receipts. He planned to offer discounts of 5-10 per cent for riel payments to encourage use of the local currency step by step.

He admitted that the impact of his move was small, and that real change would only come with measures from the government and the National Bank of Cambodia. 

The central bank is indeed planning to increase riel transactions: Aside from encouraging private sector participation, it is set to launch a banking system this year to facilitate transfers of the currency between accounts as well as between different banks.

The moves come 36 years after the local currency was introduced in 1980, following four years without a central bank and any form of currency under the Khmer Rouge.

Today an estimated 83 per cent of all transactions are still made in US dollars.

However, a recent trip to Siem Reap offered evidence that the figure could be even higher. The entrance fee at the Unesco heritage site of Angkor is still in dollars – US$20 per person. Inside, a young girl approaches with postcards, yelling “one dollar”. A street vendor is touting roast corn and eggs for the same. Back in the nearby city, a short tuk-tuk ride typically costs $3 (outrageous compared to the price of an air-conditioned cab in Bangkok.)

Supermarkets also display prices in dollars, as do hotels and massage shops. 

Even beer sold on the street to visitors who don’t speak the local language but use their taxi driver as a go-between is sold in … you guessed it. 

Want to pay in baht? It’s still possible, but at a price. Two years ago when the rate was Bt32 to the dollar, street vendors here were asking Bt40 for every dollar. 

It’s no surprise then that Cambodia has the highest rate of dollarisation in Asia. The baht and Vietnam’s dong are also used along its borders, leaving little space for the riel.

Dollarisation in Cambodia was 60 per cent in the late 1990s and has been gradually increasing ever since. In contrast, neighbouring Laos has seen a decline from 80 per cent in the 2000s to less than 50 per cent today. Other low-income countries in Asia have more modest and stable rates: 30 per cent in Mongolia and 20 per cent in Vietnam.

The roots of Cambodia’s dollar addiction lie in the Khmer Rouge era (1975–79) when barter, private commercial activity, private ownership and wealth, and means of exchange were prohibited with violations punishable by death. Savings and property were lost to the regime, and cash holdings were made worthless. Between 1975 and 1980, Cambodia was without a monetary system and without money. When the riel was reintroduced, acceptance was understandably low with memories of Khmer Rouge still fresh. The public preferred other stores of value and means of payment, such as the US dollar, gold, and even rice.

Full or partial dollarisation can bring benefits though.

It can reduce transaction costs for trade with countries that use the dollar. It can also stimulate greater confidence among international investors, inducing greater investment and growth. And when local people use dollars to buy goods imported in the currency, inflation tends to stay low while local currencies tend not to depreciate.

Cambodia’s economic growth has risen from an average 7 per cent in the mid-to-late 1990s to over 9 per cent in the 2000s, surpassing that of other low-income countries in Asia, reports the International Monetary Fund in a paper entitled “Dollarisation in Cambodia: Causes and Policy Implications”.

Nevertheless, preference for the greenback comes at a price: It limits a country’s ability to manage the macro-economy. Without the ability to print dollars, the central bank cannot act as lender of last resort to commercial banks by printing money.

In 2013, Cambodia reaped $2.8 billion from exports to the US. But in the same year, its imports of new stamps; stamp-impressed paper; and banknotes were worth $978.5 million.

The central bank uses a dollar reserve requirement ratio (RRR) as a monetary tool to control liquidity. But when the ratio was reduced in early 2009 to provide liquidity to banks and help boost economic activities in the wake of the global financial crisis, banks instead accumulated more reserves. Excess reserves rose to their highest levels in history, and credit to the private sector contracted.

Deputy central bank governor Neav Chanthana noted in March that Cambodia has reaped many benefits from dollarisation – attracting more foreign investors, developing the financial sector, enhancing the economy’s integration regionally and globally and being shielded from the Asian financial crisis in 1997.

Yet, wider use of the national currency would give the central bank broader ability to use monetary tools to keep the economy stable, she added.

That desire for monetary control also lies behind Myanmar’s recent directive to end dollar transactions and promote the kyat, and the move made by Laos towards more use of its kip.   

As long as it still depends on foreign inflows, Cambodia’s moves to wean itself off dollars are bound to happen gradually. But they will involve those of us who visit the country for business or pleasure.