Thursday, June 15, 2017

To Use or Not To Use the U. S. Dollar

Visitors to Cambodia know that about 80% of all trade and money transactions are conducted in U. S. dollars. Recently the governor of the National Bank, responsible for monetary policies in Cambodia, stated that the continuing use of the U.S. dollar is detrimental to the Cambodian economy. She mentioned as underlying cause the strengthening of the dollar against the Khmer Riel (KHR).

Now this is indeed the case. Officially the KHR is valued at KHR 4080, unofficially it is KHR 4000. Currency markets on the other hand haven't seen a strengthening in the past few months. The two world currencies, the dollar and the Euro, hover pretty much at the same level.

Now how the dollarization of the Cambodian economy is harmful is not really understandable. The major industries are garments/shoes, tourism, construction, and agriculture. The main markets for Cambodian-made garments are the U. S. and Europe. These markets pay in their own currencies, in other words, those capital inflows are not in KHR and will be credited to the manufacturers foreign exchange accounts. The majority of the products used in garments and shoes are imported, meaning they are paid in foreign exchange. Only the labor cost is in KHR; the minimum wage is set in U. S. dollars, so even if the dollar strengthens the manufacturers benefit from this as they exchange their foreign currency at the official rate. They get more Riels for their dollars or Euros. Prices are calculated and billed to foreign customers in dollars. No harm here for the manufacturers.

Tourism brings in foreign exchange, mostly dollars, as tourists usually exchange their home currency in dollars at home or they get it from an ATM here at the official rate. So in effect, any fluctuations tend to hurt the tourists but not the tourism trade in Cambodia. The hotels and restaurants pay in either dollars or riel, so it really doesn't matter to them either.

The situation is pretty much similar in the construction industry as most materials have to be imported, although the last few years have seen an increase in domestic production of cement and bricks. Iron in whatever shape or form is imported, as is gasoline, oil, etc.; only sand is dredged locally. Trucks and any other machinery used is also imported too. All these goods are paid in foreign currency, mostly dollars again. Builders calculate their prices in dollars as well and offer them to the market in dollars or riels, which is irrelevant to the consumer as they will use whatever is convenient for them.

The greatest benefit of the dollarization is for agricultural products that are exported, e. g. rice and rubber. We have the same effect here as in the garment industry. The big difference is that no foreign materials go into the production of their products excepting fertilizer and other chemicals used.

As long as Cambodia has no manufacturing base which would make its products truly made in Cambodia as opposed to being processed it doesn't really matter which currency is used. Almost all items for daily use are imported. Consequently, the trade balance is negative.

Let's not forget: the main reason investors open factories here is for the low labor cost, relative ease of conducting business with the government, and lax enforcement of international regulations.

And finally, the National Bank pegs the KHR to the dollar anyway. On what this is based I haven't fathomed yet - how many dollars are in circulation?  It seems that this discussion is rather moot at this point in time. So  except for national pride this issue is not really important. It remains a mystery what the opposition would gain from abolishing the dollar as an official tender as they recently promised if they were to win the next election.

3 comments:

Anonymous said...

I have read your blog over the years and you seem knowledgeable in areas of finance, import, export, and so many things.

I was wondering if you could someday give your thoughts and observations with regard to the One Belt One Road Initiative, the Shanghai Cooperation Organization, and how Cambodia may play a role in the future.

What sort of start-up import-export business ventures might be considered appealing for both young folks and seasoned investors? Glad to see you blogging again.

Cheers ...

KJE said...

I am sure the New Silk Road would improve trade along its route. But up to now it is more of a lofty concept than anything else as no tangible implementation has been initiated. Currently the one country benefiting from this would be China as this would increase its access to those markets. As far as I know only developing countries, like Cambodia, Myanmar, Maldives, are on that route. What do these countries have to offer in terms of export products to the other markets. If you take Cambodia with its narrow economic base this would not really mean any significant change in its trade balance. Of course, this is a long-term project and with further development, especially in the manufacturing sector, it may hold more benefits for Cambodia too.

I started out in the import-export business here in 1990. It was easy then as Cambodia needed everything and but then, conversely, had only few natural resources to sell. These days there is a wider variety of products for export but in my view nothing is worthwhile investing in as margins are rather slim. Rubber might turn around again one day when the Chinese demand increases again. No matter at which agro product you look what's a good investment today might turn sour tomorrow. One needs a long breath in that sector.
I believe the only viable sector would be in manufacturing. Find a product that is needed, with a demand for it and which can be produced here. Get a license from a German/European/U. S. manufacturer of a well-known brand/make. The product might be here already but a domestic production might give it a competitive edge.

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