Long Heng: dollarization in Cambodia

Asia development Bank on July 6 released the book, “Dealing with Multiple Currencies in Transitional Economies: The Scope for Cooperation in Cambodia, the Lao People's Democratic Republic, and Viet Nam,” that is working closely together on monetary and financial issues would allow the three Southeast Asian countries to increase stability and introduce common best practices and regulatory standards.

"Sharing information and experiences would help the monetary authorities of Cambodia,
Lao PDR, and Viet Nam to find a solution to the dollarization issue,” said Giovanni Capannelli, Principal Economist in ADB's Office of Regional Economic Integration (OREI) and a co-editor of the book said in a press conference at ADB office here. “The three countries need to take into account the various degrees of dollarization in their economies and try to improve regional cooperation, both among themselves and with the rest of the members of the Association of Southeast Asian Nations." He said.
"Dollarization blunts the tools for macroeconomic stabilization, especially monetary and exchange rate policy that countries need to tackle a variety of economic and developmental issues, such as spiraling inflation. The adjustment to external shocks can also be more prolonged and painful in the presence of the multiple currency phenomenon," said Jayant Menon, Principal Economist in ADB's OREI and the book's other co-author.
The book says that future proposals for a common monetary or exchange rate framework among the three countries should take account of the multiple currencies used in their economies.
The book also highlights the importance of regional macroeconomic surveillance to preserve financial stability and ensure monetary policy and exchange rate regimes in the three countries remain consistent with their long-term economic development goals.
“Closer cooperation on monetary and financial issues would enable Cambodia, the Lao People's Democratic Republic (Lao PDR), and Viet Nam to effectively address challenges arising from the use of multiple currencies in their respective economies, says the book from the Asian Development Bank (ADB). Greater regional dialogue on these issues could also help them to improve the effectiveness of their monetary and exchange rate policies, while reaping greater benefits from their increasing economic interdependence.
As well as the local currency, people in Cambodia, Lao PDR, and Viet Nam often use other countries’ currencies to conduct business. The US dollar is the main alternative currency, in a practice called dollarization, although additional currencies are also in wide circulatIt is believed that the share of foreign currencies range from around 20% of all currency in circulation in Viet Nam, about 50% in Lao PDR, and more than 90% in Cambodia.
Dollarization has costs and benefits. On the plus side, it can impose discipline on governments since they cannot easily finance budget shortfalls by printing money and imposing fresh taxes. If dollarization leads to a near fixed exchange rate, prices are also less volatile.
However, the use of multiple currencies can result in economic authorities losing control over monetary and exchange rate policies. It also restricts the power of central banks as the lender of last resort given they print only one of the many currencies that the public is willing to hold.

Jayant said that the US dollar is widely used in Cambodia in addition to the national currency, the riel. In Lao PDR, the kip is used together with the dollar and the Thai baht. In Viet Nam, the dong is the only official currency, but the dollar can be used as a store of value, so a considerable share of bank deposits is denominated in dollars. The Vietnamese also hold more gold on average, on a per dollar of income basis, than anyone else in the world, underlining the lack of confidence in the local currency .

H.E Dr.Hang Chuon Narong, secretary of state for ministry of economy and finance said in the event at ADB that in Cambodia, local people used dollar widely in daily transaction. Dollarization and riel issue related situation of Cambodian economy itself. Our goal is to have economic growth even using dollar or riel currency because our export to foreign markets counted in dollar. Local people preferred US currency than euro. It also related to taxation, customs, and business, investment and trade,” he noted. Some people urged and preferred to use riel to show identity and sovereign state but they preferred to keep dollar in bank more than riel. They did not keep gold. “The behavior of people reflected their truth and confidence on the dollar currency,” he added.
He stated in 2006-2008, when South Korea investors came to invest here, tourists and economic growth also rose. We have more dollars in the central bank and our international reserve increased to over 2 billion US dollars late 2008.
Currently, Cambodia is facing depreciation of riel currency and the national bank of Cambodia took intervention to buy riel note back to stabilize value of riel. On July 6, one dollar costs 4,227 riels in bidding and customer sells out 4,235 riel for a dollar, data from the national bank said. Cambodia circulated about 500 million of riel currency. Therefore it needs about 10 million US dollars to stabilize riel. #