Wednesday, 14 May 2008

Dollarization and the Cambodian Economy

I just got back from Cambodia, and something which has definitely changed in the last two years since I first went is that it's gotten a lot more expensive, and things are really escalating right now (they estimate that official inflation is running at about 28% a year right now). There are a few main reasons for that that I can see.

The first thing is the effective and total dollarization of the economy. They use the US dollar for everything, and when I say that, I mean US dollar bills. This is a remnant of the UNTAC era in the early 1990s, when UNTAC employees were paid in dollars and were looking to spend them. These days, everything over a dollar is priced in USD, and the local currency (the Reil) is only used for change at an extremely constant rate of R4000/$1 (so if something costs $2.50, you pay $3, and get R2000 back).

While this has provided in general a far more stable currency and exchange rate than a developing country might otherwise have, these days the primary trading partners of Cambodia (in addition to the US purchasing garments) are all countries which don't have a USD fix (Thailand, Vietnam, China, Australia). All of those countries have seen their currencies against the dollar appreciate over the past few years as the USD has tanked, meaning that everything is more expensive in Cambodia.

Furthermore, inflation is picking up because by adopting the dollar, as we all know, Cambodia has adopted US monetary policy. While the extreme loosening of credit as a result of the credit meltdown has, if anything, only helped to avoid a much more severe and quick economic downturn in the US, in Cambodia it's put way too much money into the building industry, meaning that prices and wages are rising dramatically, putting an upwards pressure on anything that you, as a foreigner, are likely to buy.

In addition, they're getting hit by the global food shortage. Cambodia is a net importer of food, and they're buying from non-dollar economies. That means that they're having to buy food, which is going up in price due to shortage situations, with a weakening currency.

This has left you in a situation where a countryside-raised chicken (very little meat, mostly bones and feathers) costs about $6 in a market. I can buy one here for as little as about $3 (okay, maybe $5 for an organic free-range one).

And then there's oil. I don't need to say any more here, but Cambodia isn't an oil producer of any import. So it's buying in oil and petrol, and that's getting expensive.

Add into this the rapid development of certain parts of the economy (mostly tourism and construction in the major cities), and you have a situation where the places you're likely to go and things you're likely to do are all a heck of a lot more expensive than they were just a few years ago.

Still, for the most part, a bargain compared to anywhere you might live, but not the ultra-bargain that most people would associate with Cambodia in the past.

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