Cambodia, one in all the developing countries in Southeast Asia, is within the face of an intriguing phenomenon regarding using a foreign currency in its economy.
This phenomenon, often called dollarization, shows how the dominant American dollar is in Cambodia’s economic transactions, despite the proven fact that the country has its official currency, Riel.
Dolarization in Cambodia didn’t occur in consequence of official policy, nevertheless it spontaneously appeared in response to economic instability and the lack of confidence in Riel, which began to root across the era of Khmer Rouge (1975–1979).
History of dollarization in Cambodia
The dollarization process in Cambodia began after the collapse of the economic system throughout the Khmer Rouge regime. As a result, the Cambodians lost their confidence in Riel and started to largely depend on the American dollar, in addition to other foreign exchange, comparable to Thai Baht and the Vietnamese Dong.
In the early Nineties, the arrival of the UN transitional body in Cambodia (UNTAC) moreover accelerated this process, flooding the country with American dollars.
In the next a long time, high inflation and depreciation of RIEL meant that the US dollar became an increasingly popular selection of huge transactions, savings and even wages in sectors managed by foreign non -governmental organizations.
Until 2007, about 95–97% of bank loans and deposits in Cambodia were denominated in American dollars, while Riel was mainly used for small transactions, especially in rural areas.
Benefits of dollarization of Cambodia
The dollarization provided several economic advantages for Cambodia, each when it comes to short -term financial stability and long -term fiscal management. One of a very powerful benefits is price stability, which helped control inflation and secure purchasing power.
In this context, using the American dollar prevented Cambodia’s nations from the experience of variability normally related to Riel. In addition, the dollar reduced the danger of capital flight, keeping money within the country and maintaining confidence within the economy.
The widespread use of the American dollar also facilitated international trade, especially in industries comparable to textiles and clothing. Thanks to the presence of the American dollar within the Cambodia economy, the country was able to interact in smoother transactions with global markets, attracting foreign investment and enabling economic growth.
Disadvantages of dollarization in Cambodia
However, despite its advantages, the dollar in Cambodia has some significant flaws, especially regarding monetary policy. One of the largest challenges is that the National Bank of Cambodia (NBC) has limited control over monetary policy. This limits the bank’s ability to implement effective money tools to stabilize the economy.
In addition, Cambodia lost the potential of Seigniorage or profits generated from printing its own currency, for the good thing about these profits to the United States. It is estimated that Cambodia loses between USD 20-90 million annually as a consequence of this lost possibility.
The widespread use of the American dollar also affects the symbol of sovereignty. Riel, which should function an emblem of the Cambodian national identity, lost its significant importance among the many population, which prefer to make use of the American dollar for savings, large transactions and investments.
Efforts to scale back dollarization: challenges and solutions
As a highly depending on the American dollar, the efforts of Cambodia for devotionalization are removed from easy. However, the Cambodia government was working on reducing counting on the dollar and regularly restoring trust in Riel.
Some of the funds already implemented include the requirement for payment of public taxes and services to Riel, in addition to paying the salary of officials in Riel.
Other initiatives included improving the standard of RIEL banknotes and inspiring microfinan banks and institutions to increase loans in Riel. Despite these efforts, there may be a major challenge: the inflation trauma from the past still signifies that the audience is not going to sharpen from Riel, which hinders the passage.
Learning from other countries
The experiences of other nations which have undergone dollards ensure priceless insight into what works and what shouldn’t be.
Many countries have made a dollarization attempt, but most have failed, with a number of exceptions, comparable to Israel and Poland, where the strong disinflation policy and high credibility helped reduce dependence on a foreign currency.
In addition, some countries, comparable to Panama, El Salvador and Timor-Woode, have selected a full dollardity, which ensured greater stability of their financial systems.
Cambodia’s path forward: gradual dollarization
Dollarization in Cambodia is deeply rooted within the country’s economy, however the challenge of full dollarization stays significant.
The Cambodia government doesn’t strive for forced dollarization; Instead, he tries to regularly construct confidence in Riel over time.
Funds comparable to improving the standard of Riel notes and inspiring to make use of RIEL for savings and transactions are seen as crucial to scale back dependence on the US dollar in the long run. Thanks to the political stability, disciplinary fiscal policy and reforms of banking, Cambodia could make progress within the re -introduction of Riel as the essential currency of the country.
Reference:
IM, TN and Dabadie, M. (2007). Dollarization in Cambodia. Source: https://www.nbc.gov.kh/download_files/publication/others_eng/notemd117-14_article_dollarization.pdf
