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Exchange
rate arrangements Cambodia’s exchange rate arrangements have undergone drastic modifications since the country became independent in 1953. The country maintained a multiple currency practice until 1970. In 1971 a flexible exchange rate system was introduced, while the exchange rate was unified. A dual exchange rate system was reinstated in 1973, including a ‘basic’ rate for most transactions and a ‘preferential rate’ for aid-related imports and services. Under the Khmer Rouge regime (1975–79), the Central Bank was closed and the national currency was abolished. In March 1980, a new transition government reintroduced the Cambodian riel as the domestic currency, together with a dual exchange rate system for the official rate. The official exchange rates, however, were unified in 1990. Since March 1994 the NBC has pursued a flexible exchange rate policy, broadly keeping a fixed spread with the parallel market through interventions on the latter. In parallel, since 1989, Cambodia has gradually switched from a monobank to a two-tiered bank system. In 1990, treasury operations were transferred to the Ministry of Economy and Finance (MEF), and the NBC was created as a ministry mainly responsible for ensuring government budget financing. Foreign exchange management was centralized within the NBC in late 1995 and NBC was established as a central bank in 1996 under the Central Banking Law. The banking system was further strengthened under the 1999 Financial Institutions Law and associated decrees. The 1999 Law has served as the legal framework for a major restructuring that has entailed bank recapitalization, a sharp reduction in the number of banks — from 31 in 1999 to 16 as of mid 2001 — the establishment of sound business plans under close monitoring by the NBC, and a strengthening of banking supervision. There is no securities market in Cambodia. A comprehensive Financial Sector Blueprint (2001–2010) aimed at deepening the financial system has been prepared with ADB support. A liberal exchange system, precluding restrictions on payments and transfers for current international transactions has been operating since early 1996. With full convertibility of the national currency achieved, the authorities intend to accept the International Monetary Fund’s (IMF) obligations under Article VIII, sections 2, 3, and 4 in the near future. The national currency is the Cambodian riel, although the US dollar circulates freely and is predominantly used for payments and asset building. The exchange rate system comprises two rates: the official rate and the market rate. Adjustments to the official rate are made daily by the NBC to limit the spread between the official and parallel market rates to less than 1 per cent. The official exchange rate applies mainly to transactions conducted by the government and state owned enterprises. The NBC quotes daily official rates, at which the Foreign Trade Bank (FTB) buys and sells foreign exchange. Other commercial banks are free to buy and sell foreign exchange at their own rates. Exchange transactions take place at the market rate. Foreign exchange dealers are permitted to buy and sell banknotes and traveler’s checks at the market rate. The responsibility for the management of foreign exchange rests with the MEF and the NBC. The NBC is authorized to license commercial banks and other agents in foreign exchange transactions and to regulate current and capital transactions. In practice, no restrictions apply. Exports and imports of foreign banknotes are not limited but are subject to prior notification beyond $10 000. There are no limits on resident’s balances of foreign currency accounts held in domestic banks, and the deposits may be used to settle all types of domestic obligations. Exporters and importers of goods and services must make payments for their commercial transactions with the rest of the world through authorized intermediaries. The parallel foreign exchange market is very thin, comprising mostly small money changers, and involving limited amounts of daily transactions. Some 30 money changers handle about 80 per cent of foreign exchange transactions in the parallel market. With the exception of the state owned FTB, commercial banks generally do not participate in the foreign exchange market, because their assets and deposits are predominantly in foreign currency. The parallel market has been widely accepted by the authorities since the early 1990s as it provides a key benchmark for setting the official rate. In November 1992, the NBC began maintaining the official exchange rate within a 5 per cent margin of the average parallel market rate over the previous two week period. In August 1993, the maximum spread was limited to 3 per cent. At the beginning of 1994, the spread was redefined and applied to the daily parallel market rate and was further reduced to 2 per cent. From March 1994, the NBC has aimed at setting the daily official rate within a 1 per cent spread of the daily average parallel market rate based on surveys of the rates quoted by three major money changers in the previous day. However, the NBC effectively met that objective from early 1999 onwards (see chart 1.10). Significant deviations from that policy occurred mainly in mid 1997 and mid 1998, largely owing to the political situation, but were short lived. 1.10 Cambodia: exchange rate developments
a
based on the official exchange rate: an upward movement indicates an
appreciation of the exchange rate. Although the authorities are committed to formally unify the exchange market in the medium term, they have so far resisted to do so, on the ground that the official exchange rate has an important signaling effect on a very limited foreign exchange market. NBC’s intervention policy on the foreign exchange market is aimed at smoothing exchange rate fluctuations while strengthening the international reserve position. Accordingly, the NBC is committed not to intervene in the market to support the exchange rate, should sustained downward or upward pressures on the exchange rate arise. However, in the event of a surge in capital inflows, or upward pressure on the exchange rate, the NBC intends to bolster its international reserve position by providing adequate amounts of riel to the market rather than let the exchange rate appreciate excessively. Conversely, with a surge in capital outflows, NBC would not intervene by selling reserves to resist a depreciation of the exchange rate in line with market pressures. NBC’s periodic foreign exchange auctions have generally proven to be effective in smoothing exchange rate fluctuations. Exchange rate developments in Cambodia since the early 1990s have closely mirrored the authorities efforts to establish credible economic management and the impact of unsettled domestic political events. The riel initially appreciated in the early 1990s relative to the US dollar, as confidence returned in the aftermath of the transition government but gradually depreciated during 1994–97. The riel depreciated sharply in the period mid 1997 to late 1998, reflecting waning confidence in the political and economic situation, and increasing inflation. The riel has been broadly stable since mid 1999 relative to the US dollar, and has appreciated slightly since then, both in nominal and real effective terms, largely reflecting the dividends of economic and political stabilization. Policy options for the exchange system While the analysis of costs and benefits of dollarization sheds some light on which country characteristics would likely make dollarization an appropriate choice, the balance of the analysis is difficult to draw, since important considerations are hard to quantify. There is also only limited historical experience to draw from, as most economies that have adopted a foreign currency are small and politically-dependent. In addition, given the near irreversibility of dollarization, considerations must be given to events that may be rare but cannot be ruled out from a long-term perspective, such as extreme terms of trade shocks. There are essentially two monetary and exchange rate options for Cambodia: move to full dollarization, or proceed with policies expected to promote de-dollarization. A currency board arrangement is an obvious option consistent with the government’s stated policy of de-dollarization while maintaining much of the benefits of stability and confidence associated with dollarization. However, any potential choice of monetary and exchange rate regime requires the maintenance of sound fiscal and monetary policies (and political stability) to be effective. At present, neither the fiscal position nor the soundness of the banking system in Cambodia would appear to be sufficiently strong to support a move to full dollarization or a currency board. Therefore, it is crucial for Cambodia to continue to strengthen its fiscal position and the banking system before making any changes in the monetary regime. In view of these circumstances, the authorities’ current policy is to support non-administrative and gradual de-dollarization through continued strengthening of macroeconomic performance. Experiences in other countries have shown that once dollarization has occurred, it usually takes a long time for market perceptions to change. In fact, a return of confidence in the initial stages of reform often leads to an inflow of foreign currency deposits, therefore an increased degree of dollarization, as experienced by several Latin American countries and Cambodia in the 1990s. This points to some form of ‘hysteresis’, as changing the uses and practices regarding the settlement of transactions is a slow process that involves institutional changes. Therefore, direct administrative measures to reverse dollarization, such as regulatory limits on foreign currency usage, will simply drive dollars offshore, further reducing financial intermediation, and are ultimately counterproductive. On the other hand, introducing high quality riel-denominated assets and paying a premium on domestic currency denominated reserves may play a catalytic role in financial deepening in the domestic currency. In addition, increasing economic integration of the rural area may also promote the use of national currency, as the riel is more widely used in the countryside. These steps, together with the maintenance of low inflation, would be expected to lead to a gradual increase in the underlying level of seignorage over time as confidence in the local currency is further strengthened. Medium term technical assistance requirements This section outlines the medium term technical assistance requirements for fostering Cambodia’s macroeconomic environment. Key technical actions in that area would include: i) strengthening macroeconomic management capabilities; ii) developing sound banking and payments systems; and iii) establishing a financial market relying on government securities and other riel denominated assets. Broad technical assistance support aimed at strengthening capacity building within the MEF and the NBC is already being provided by foreign development partners. In this regard, the MEF will benefit shortly from the support of resident advisors on budget management and customs and tax administration assigned under the TCAP (2001–03) jointly sponsored by the IMF, United Nations Development Program (UNDP), ADB and several donors. The WB is also supporting administrative reform through an Economic Capacity Building Operation and a Population and Human Resource Development (PHRD) grant. The IMF’s Monetary Affairs and Exchange Department will continue providing support to bank restructuring and payments system reform in the medium term. Further support would be required to establish a government securities market. The IMF is also in the process of assigning a resident statistical advisor to the Ministry of Planning to enhance the statistical framework in the medium term, including data dissemination. Discussions are also under way with the ADB to develop the financial market over the medium term through a financial sector development program. 1.11 Bilateral exchange rates and inflation in selected ASEAN countries
Source:
Data provided by the Cambodian authorities and IMF staff estimates. |
