Tips and Tricks from Cambodia

September 28, 2012

Drawbacks of Dollarization by Thierry Schwarz

The content you are going to read below is wholly written by Thierry Schwarz, on May 10, 2012. This is his sample answer of a final exam : Monetary and Fiscal Policies: Implication for Cambodia, one of the subjects that I learned during my master in Public Management. 

I believe that it is important for all Cambodians to know about some pertinent history, drawbacks of the dollarization, and the some suggestions on how to de-dollarize. Thus, I would like to share them here. 

Dollarization in Cambodia
ADB Report

Cambodia is a country typical of what economies call the Multiple-Currency Phenomenon (MCP). Four currencies are used in Cambodia, one of them - the US dollar (USD) - being predominant: 

The national currency, the riel, represents now less than 10% the money circulating in the country; the riel is a declining currency in the Cambodian economy. The share of the dollar among the currencies used in Cambodia has increased with the growth of the country; Cambodia is now a "dollarized" economy.

The situation is not the result of an explicit decision made by the RGC; it is the consequence of a loss of trust in the value of the riel dating back to the period of very high inflation during the years 1988-1991. Massive Central Bank financing of current budget deficit led to inflation in the range of 90-177% a year. Inflation and devaluation eroded public confidence in the national currency, and economic agents looked for a substitute currency capable of being used as a reliable unit of account, mean of payment and store of value.

The trend was reinforced by the arrival of UNTAC whose spending reached about 2 billion USD - when the GDP of Cambodia was no more than 4 billion USD. The dollar then became the de facto curerncy of the country.

Dollarizaiton has one main drawback: a loss of a part of our sovereignty in the determination of our monetary policy. It has one main benefit: macroeconomic and financial stability, but this benefit can one day a handicap if Cambodia stops being a net receipt of USD and if growth does not materialize for a few consecutive years.

1/ Dollarization reduces the independence of Cambodia monetary authorities and imposes on all economic agents discipline and competitiveness.

2/ Because dollarization can be sustained only in a context of continued inflow of dollars and high growth, Cambodia must strengthen confidence in the riel in order to be ready to face possible deterioration of the international and/or of the domestic economic context.

Since dollarization can be sustained only in a context of continued inflow of dollars and high growth, Cambodia must strengthen confidence in the riel in order to be ready to face a possible deterioration of the internatioal and/or domestic economic context. 

a/ a dollarized country must permanently attract dollars and sustain growth
Since USD cannot be 'printed' in Cambodia, dollarization can only be maintained by a permanent inflow of USD. That inflow of USD allows the Central Bank, the RGC and the commercial banks to keep a stock of USD to stabilize the value of the riel, to balance the capital account, repay the debt, pay the imports and provide liquidity to the economy; it allows the RGC to balance its budget deficit with grants and loans in USD. The inflow is provided by exports, tourism, development partners, Foreign Direct Investment (FDI) and remittances from Cambodian working or residing abroad.

Exports in 2010, mostly paid in USD, reached 5 bilion USD; almost 3 million tourists visited Cambodia in 2011; funding by development partners was about 1 billion USD; FDI was around 800 million USD. Amount of remittances are not known.

But among these five sources of USD, at least three of them are fragile:

  • Cambodia exports have a very narrow based - mostly garments - and depend on trade arrangement with the US and the E.U;
  • Development assistance will gradually decline in line with Cambodia development;
  • FDI are mostly dedicated to the garment sector and are as fragile as the sector itself.
In short, the system works as long as US dollars continue to flow in, but it will show its weaknesses as soon as the favorable current international context will start to deteriorate.

The sample applies to growth; if growth came to a halt, or slowdown for two or three consecutive years, Cambodia would be confronted to a brutal decline of its GDP/capita. Cambodia would be in a position to conduct a monetary and a fiscal policy that would smooth the impact of a crisis. Demand driven policy or monetary easing would not be an option for Cambodia. 

b/ Cambodia must strengthen confidence in the riel in order to be ready to face deterioration of the international context and/or of the domestic economic context. 

Dollarization can only be a temporary solution. At one point or another Cambodia will have to engage a "re-rielization" policy. But experiences of other countries have shown that de-dollarization is a long-term process that requires, first, restoring the confidence in the local currency and, second, more sophisticated financial markets.

Some measures into that direction have already been taken:

  • Civil servants and public contracts are paid in riels;
  • The price of listed companies at the Phnom Penh stock exchange is in riels (although actual transaction are USD dominated or USD based);
  • Interest rates on deposits in riels are higher than for USD deposits. 
But the RGC and the NBC could in due time take further steps:
  • Expand the obligation to quote all prices of goods and services in riels;
  • Create a new riel that would be worth 4 or 40 USD instead of 4000 today;
  • Expand the means of interbanking payment demoniated in riels; check-books and banking cards;
  • Abandon the "near fixed exchanged rate" and move towards a Currency Board Arrangement (CBA): the NBC would issue currency that is fully backed by foreign assets at a fixed exchange rate;
  • Make operations in riels more attractive in terms of security and costs;
  • Issue treasurey bills in riels;
  • Set Reserve Requirement Ratio (RRR) and deposit ration in riels;
  • Provide bank refinancing in riels and help foster lending in the national currency.
  • And, expand regional cooperation in order to protect our currency from sudden crisis or speculative attacks. 
Monetary experts use the expression "seigniorage revenue" to name the difference between the face value of a currency and the cost of producing it. A dollarized country does not benefit from seigniorage revenue; but that loss revenue is not the main issue. The real issue is that by abandoning our seigniorage rights we also abandon part of our sovereignty. A carefully and gradually managed "re-rielizaiton" process would take us on the path towards a fully recovered sovereignty.


  1. Thanks for sharing this precious information!
    Keep up the good work!


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