PHNOM PENH, CAMBODIA - The National Bank of Cambodia, the country's central bank, is aiming to reduce the country's dependence on the U.S. dollar with the introduction of digital currencies and the phasing out of small-denomination U.S. currency - $1, $2 and $5 bills - in favor of the local currency, the riel.
Cambodia has run a dual-currency system since United Nations peacekeepers arrived to oversee elections in 1993, bringing with them U.S. dollars, which circulated in tandem with riel, providing much-needed currency stability amid postwar reconstruction.
National Bank of Cambodia Governor Chea Chanto said in September that demand for the riel had increased an average of 16% a year for two decades, with annual economic growth rates of 7.8%, adding that fewer U.S. dollars in circulation would give the central bank greater control over the economy.
"I firmly believe all ministries, institutions, companies, enterprises and those who actively participate in the process of developing the banking system promote the use of the riel, which is our national currency," he said in January.
The central bank has introduced small- and large-denomination riel notes ranging from 100 to 100,000 riel (about $25), but their arrival caused confusion and rumors among traders in the local markets that U.S. $1 and $5 notes had been banned.
That started a rush to offload dollars and prompted Prime Minister Hun Sen to step in and say, "There is no prohibition like the rumors being spread."
Targeting 'unbanked population'
Cambodia's first digital currency, Bakong, is designed to allow payments between traditional banks and other financial institutions on smart phones and computers and was introduced late last year.
Developed by Japanese financial technology firm Soramitsu, the government is hoping Bakong will bring the "unbanked population" -- about 70% of the population who never or rarely use a bank now -- into the banking system.
Bakong is also aimed at enabling the central bank to crack down on money laundering and the black economy, and stabilize the riel in the absence of the U.S. dollars.
David Totten, a financial analyst with Emerging Markets Consulting, said Bakong would facilitate faster, cheaper and more secure payments between clients of different financial institutions.
"The idea behind that is that it will facilitate more financial inclusion, so more Cambodians will sign up for financial services," he said.
"That will facilitate the development of e-commerce and in the longer term it is hoped that that will encourage adoption of the riel and eventual replacement of the U.S. dollar for all financial transactions in Cambodia."
A unique history
Money has a unique history in Cambodia, with the riel introduced following independence in 1953 and an end to French colonialism.
Under the 1975-79 rule of the Khmer Rouge, money was abandoned, banks abolished and the central bank blown up as Khmer Rouge leader Pol Pot tried to force an agrarian society on Cambodians, resulting in a genocide that claimed about 2 million lives.
A dual currency economy also recalls the days when Cambodia was seen as an economic disaster and struggling to rebuild after a 30-year war that ended in 1998. It is that type of history that politicians and bureaucrats negotiating offshore investments would prefer to leave behind.
Brendan Lalor, a director with Ernst & Young in Cambodia, said the central bank had raised eyebrows by becoming the first central bank in the region to embrace a digital currency, enabling Cambodians who work in the cities to send money back to the provinces at cheaper rates.
He said almost $60 billion was transferred within the country through different payment options in 2019 and the adoption of Bakong is "a very important development for the Cambodian economy."
"What they're trying to achieve with Bakong is to effectively bring all the currencies, platforms, the Apps, etcetera, e-payments, e-wallets onto one platform that the central bank, the NBC, can control through the blockchain technology.
"Blockchain is basically like a ledger. It records all transactions and that will facilitate instantaneous transactions, both for the payments of goods and services but also for transferring from one account to another," Lalor said.
Adding to a sense of urgency is the state of the Cambodian economy, which has buckled under the COVID-19 pandemic and withdrawal of some trade perks by the European Union because of the country's human rights record.
Chea Chanto also noted Cambodia holds international reserves of $20 billion, more than the three-month minimum for developing countries. He was voted central banker of the Year, Asia-Pacific, for 2020 by the financial magazine The Banker.
"I am confident that we are on the right track to catch up quickly, and, with some pioneering infrastructure such as Bakong, Cambodia is leading the region and even presents an example of a revolutionary payment platform led by a central bank on the global scene," he said.