Cambodia, March, 22 2021 -
The government has identified policies to promote local currency usage as a key priority in its financial sector development strategy.
The stability of the riel is perceived as a key ingredient by the government in establishing public confidence in using the currency as a matter of course over the US dollar. The NBC has decided to adopt the managed floating exchange rate regime and intervene in the foreign exchange market to maintain exchange rate stability when the situation warrants.
Over the last two decades, the NBC has contributed to maintaining the exchange rate around 4,050 riels/USD. This has been achieved while maintaining the inflation rate at below 4 percent. The growth in demand for the riel has been primarily supported by the increase in public confidence that followed the full peace in late 1998 and the nation’s subsequent macroeconomic and financial stability. The majority of the Kingdom’s rural population prefer using riels over foreign currency for their daily living and trading, according to regional authorities.
Him Sothea, the deputy president of the Kampong Chhnang’s Krang Lvea Agriculture Cooperative (AC), said transactions in agricultural commodities, especially paddy, in her community are conducted in riels (KHR).
Sothea added that the 356 members of her AC only accept riels for their paddy sales to the co-operative.
“We always use the KHR here. We withdraw money from the bank in KHR because the company we contract with pays us in KHR,” she said.
She noted that in her community, dollars are available for those who work at the local garment factory.
According to Sothea, riels are easier to spend because the value of the US dollar fluctuates is a main issue and people are very cautious about the potential for accepting fake money as payments.
“We use KHR in our community. We do not care about the USD. Before, we saw many small US banknotes, such as $1 and $5 bills, but they seem to have disappeared now,” Sothea added.
Path Savoeun, president of Takeo’s O’Saray agricultural cooperative, said that transactions for paddy in his AC, as well as in the community, are always conducted in KHR. He added that, in his community, the use of KHR dominates compared with the dollar.
His AC has 63 members and notes that when they have dollars and change it to KHR, they lose money in the exchange rate and that when they pay their bank or other loans in dollars they also lose because they have to absorb the exchange rate expense. This has led to daily spending in riels for paddy because it is much easier.
Kann Kunthy, vice-president of Amru Rice and managing director of the Cambodian Agriculture Cooperative Cooperation (CACC), which works with more than 100 agriculture cooperatives across the country, said that every purchase of paddy made by the CACC is conducted in riels.
“We have observed there are now more KHR transactions in the market, but the challenge for us is that when we import products we pay for them in dollars. Additionally, our exports are paid for in dollars, so we do not have an incentive to use KHR,” he added.
Kunthy added that when trading with overseas partners, sometimes they gain because the exchange rate works in their favour and sometimes not.
“It is not about only the conversion of US dollars to riels. We also trade with European partners who pay us in euros. Therefore, we have to have a few bank accounts – a KHR account and accounts in dollars and euros and even Thai Baht,” Kunthy added.
He continued: “We cannot control the fluctuation of exchange rates. They [the NBC] should have currency hedging to reduce the increase or decrease in the value of an investment due to changes in exchange rates. Not having that is a challenge for us as well as needing two or three accounts.
Kunthy noted that he has observed exchange rates as not having changed much – but, from November to December, the AC spent paid around $8 million (32 billion riels) to farmers which does end up creating a sizeable exchange rate expense.
“In trading with Vietnamese buyers, both parties sign contracts in KHR, but the buyers must convert Vietnamese dong to US dollars with which to pay us. We then have to convert that to KHR to pay our farmers, which loses us a lot through the exchange rate,” he added.
“Some people in Prey Veng sell paddy to Vietnam for which they receive Vietnamese dong. People in Battambang sell the paddy for Thai Baht and pay in that currency for fertiliser.”
The policies promoting the use of riels of the NBC and relevant ministries and institutions have resulted in demand for the notes increasing over the last 20 years by an average of 16 percent per annum.
In May last year, the NBC asked commercial banks and microfinance institutions to send it the smallest US dollar banknotes ($1, $2, $5) because it considers them difficult to manage and “there is little demand for them”.
PRASAC Microfinance Deposit-taking Institution Executive Vice-President and Chief Marketing Officer Say Sony said there is less collection of small dollar denominations now and that it sees more riel notes on the market.
“People don’t care as much about exchange now because prices are listed in KHR,” Sony added.
He said PRASAC’s borrowers and depositors are welcome to one currency transactions. Riel loans are up to 12 percent of its total loan portfolio of $3.22 billion as at Feb 23.
Sony added that PRASAC has rolled-out many programmes maximising riel usage, including riel loans to clients, the joint Bakong system, Retail Pay, Cambodia Shared Switch (CSS) and other NBC initiatives that promote riel payments.
“For our programmes, we promote deposits in KHR with high interest rates and encourage clients to take KHR loans if their business transactions are in KHR. We currently replace $10 notes with KHR 50,000 notes at our ATMs,” he added.