Overview of dollarization in the world and Cambodia
Dollar which is the main currency of US spreading since 20th century is the main currency of exchange rate in world in order to keep economic growth and financial stability. It serve as the medium of exchange, store of value, and unit of account which can facilitate international trade, financial flow, and capital flow and other economic activities. Therefore, developing country like Cambodia also gets influenced. But how this dollar evaluated and dominated in Cambodia? What Cambodian government has done against it and it is successful or not?
Since the end of World War II and Cold War, US economics and politics influenced the world particularly developing countries. Large amount of dollar has been injected to the countries and becomes the main currency for exchange market benefiting to US and those dollar holders. US dollar had been stored to avoid crisis and recession as well as insolvency problems such as the financial crisis in Mexico in 1994-95, Russia 1998, Brazil 1999, Asian financial crisis 1997, Ecuador and El Salvador economic instability late 1990s to early 2000s, Argentinean economic turmoil in 2000 and the East Timor under the Indonesian controlling, and some of the Latin America. Thus, power of dollarization increasingly took place all around the world to bring those states' economic and financial stabilities and sound currency policy making.
Actually, "dollarization" is a phenomenon which foreign currency especially, US dollar, is used as the medium of exchange, store of value, and unit of account. [1] It occurs in two ways; the first way is that de facto dollarization is adopted in the private transaction but it is not legal tender and the second one is official dollarization which government of one country makes a conscious decision to substitute its own currency to US dollar. However, dollarization is divided to commonly two folds: currency substitution and assets substitution. Currency Substitution happens when foreign currency is used as the means of payment and Assets Substitution is in place when foreign currency denominated assets serve as financial assets (store of value function). [2] Dollar influence in Cambodia began with US-Cambodian relation in 1950s; however, dollarization was less concern because well after independence reconstructed economy and the dominated riel currency. Later on, in 1970-1975 Cambodia fell into civil war after which Khmer Rough came to power in 1975 and dollar was disappeared. Next, in 1980s, riel was reintroduced to Cambodian market but it seemed less effective on the account of the instability and insecurity of four parties' power conflict. Significantly, when Cambodia transformed from planned economy to market-oriented economy during United Nation Transnational Authority in Cambodia (UNTAC)
assistance, dollarization play a larger in Cambodian market due to much dollar provided by UNTAC, the free flow of foreign investment and increased in dollar bank deposits. As result, financial sector was reformed for good governance and numbers of bank increase that contribute to economic growth and stability in inflation and more regional and global economic integration. In addition to this, the historical change of dollar influence and the confidence in US dollar have made Cambodian people use U.S dollar for main currency functions except small cash payment, government payment including civil services salary.
In conclusion, we have seen that potential U.S currency have played the vital role in the global economy which becomes factor of growth and stability. In regard to Cambodia, it functionalizes as mean for payment, value storage and unit of account in private sector. By accepting the dollar Cambodia will increase the investment, trade, financial stability following the dollar, and accession to WTO. In term of economy, good governance will be seen in Cambodia even Cambodia pegs to U.S currency.
Mini Composition (MC#2):
Why Cambodia adopted Dollarization?
Raged by Khmer Rouge and war, the economic slumped and currency was malfunction; therefore, the restructuring since 1993 to transformed the economy from planned economy to free market economy. However, the governance which was still weak when the civil war and Asian Financial Crisis happened in 1997 pulled Cambodia economy and politic instability down. Thus, the dollarization in Cambodia rose drastically since there are many reasons behind.
Firstly, due to the fact that Cambodia needed to restructure his economy, it had to adopt dollarization. From 1980 to 1992, Cambodia weak macroeconomic led to the triple-digit inflation and the loss of confidence to riel while the FDI and capital flew freely to Cambodia. [3] Plus, the presence of UNTAC brought much amount of was done immediately.
Second, Cambodia exercised the dollar in business transaction because the people wanted to prevent the loss from dollar appreciation over riel both in the bank and on hand. Foreign deposits grew rapidly $1 million in 1991 to $318 million as of end 2000, equivalent to 1 and 68% of broad money in 1991 and 2000, respectively; furthermore, foreign currency deposits at the end of 2000 were equivalent to about 66% of gross official reserves. [4] Therefore, if Cambodia had solely used the riel, Cambodia would have lost the purchase of power bringing high inflation and unemployment.
Thirdly, Cambodia benefitted from dollarization in international trade avoiding from the inflation in the world as consequence of financial crisis even in the Asian Financial Crisis in which Asia suffered gravely.
Fourthly, politically, Cambodia can get political benefit by making the close relationship with other countries, adopting easily globalized and integrated markets and getting much aids. United States is most powerful state, so if Cambodia has U.S as a friend, Cambodia can extend power indirectly from the U.S. Cambodia will be more active in international politics.
In short, Cambodia should adopt dollar as the main currency for business transaction because of above benefits.
Mini Composition (MC#3):
Effect of Dollarization to Cambodia: Inflation, trade or other ways
The recovery of the several decades of war and tension, Cambodia has developed itself to the world affair in order to gain benefits to continuously expand the economic growth. One of the main factors that reflected to Cambodia is dollarization in all business transaction which has brought a lot of benefits to Cambodia. Therefore, dollarization is the best way that Cambodia can use as a tool to combat against economic and politics troubles. But the question is that is there only positive effects of dollarization in Cambodia? This part will be interpreted some of the positive effects and negative effects to Cambodia.
Concerning with the inflation, dollarization will help the domestic economic stable avoiding from effects from chronic inflation and hyperinflation which lead Cambodia to the big trouble; as illustrated, during the Asian financial Crisis, some of the Asian countries fell into the serious inflation. [5] However, by using dollar, Cambodia was isolated from the effect of this inflation from the financial crisis. However, the adopt of dollarization has left loss of our local people who have been holding the lost of it from local currency depreciated which can not buy goods and services due to high price. Probably this situation may cause the economic down if no action from the government.
Secondly, the trade stability of Cambodia will keep growth follow by the exchange rate floating along the US currency rate. [6] As you have been seen already, trade will drive a very important factor to accelerate growth. Therefore, Cambodian trade with the other countries will raise the revenue by exchange rate in the world. For instance, trade in Cambodia flourished dramatically accounted with the export share in GDP rising from around 30% in 1998 to about 70% in 2008. Nonetheless, the above case will be useful only when the currency of U.S appreciate against the others. So what if dollar depreciate? Cambodia will get the server hurt.
Thirdly, because Cambodia adopted the dollarization, it has brought Cambodia to the world globalization and integration especially involving with the ASEAN and WTO. [7] For example, Cambodia became a member of the World Trade Organization (WTO) in 2004, and today is much more open and outward-oriented than it was 10 years ago. This has been brought a lot of investment which increased from $38 million in 1990 to $1.6 billion in 2000, to about $3.5billion in 2007. The annual inflow in 2007 of $820 million is more than five times the average annual inflow for 1990-2000. Nevertheless, the more dollarization and integration implement, the more Cambodia lose. The much amount flow of dollar over the Riel will reduce the task of NBC to be responsible for the monetary system.
Fourthly, it is the significantly shown about the effect of the dollarization in Cambodia is the financial re-intermediation. [8] This will be explained that in the countries which experienced a higher inflation and macroeconomic instability, residents tend to deposits a lot of money into the domestic bank which encouraged people to use bank services. More particularly, dollar deposit in Cambodia was low in 1998 about 1 percent but in 1999-2001 it was higher up to 25 percent. Due to the demand of using bank services, the number of banks also increase will lead to the free flow of capital around the world. In contradictory, Cambodia herself will lose her seigniorage's revenues come from issuing currency note. Neglecting the minor cost of printing money, seigniorage is simply the increase in the volume of domestic currency." In other words, seigniorage represents the profit accruing to the monetary authorities from their right to issue the legal tender. Like in Cambodia, this would correspond to 4 percent of the estimated 2001 GDP, and using the end-2001 exchange rate, the cost would be US$139 million, or about one-third of net official reserves.
Finally, It is inevitably historical events that we can not forget about it is that Cambodia has become a democratic country and are given to Cambodia a good tie with the superpower especially United State whose relationship with Cambodia in the 1990s was in trouble. As seen that UNTAC in Cambodia and the relation between Cambodia and UNTAC and US have been good. However, dollarization does not intentionally take Cambodia to good relation with those kinds of States, but it takes Cambodia to balance the power with the non-democratic countries. For instance, Cambodia has not been only contacting with US and Western Europe but also making friends with China and Russia.
In conclusion, I have to say that dollarization has a plenty of effects to Cambodia both positive and negative points. However, Perhaps the positive effects is much greater than negative effects in term of the Cambodia context right now because Cambodia's political and economic stability are not strong enough to give the dollar and Cambodia needs to be supported from those kind of Countries to push economics and political forward.
Mini Composition (MC#4):
What ways does government do against dollarization?
Due to the weak of monetary policy and economic structure, the influence of dollar dominates over riel which leads to the lack of confidence of riel is dramatically rose. Even though dollarization protects Cambodia from the inflation and some economic downturn, Cambodia is losing the sovereignty over the monetary system; therefore, the action from the governmental institution must taken to reduce dollar and bring the value of riel appreciate against dollar. Several policy choices below will be the premier selected mechanism to de dollarization.
First of all, the action or policy should be toward the banking system because of the lack of structure and managing. The first action is that NBC should have role in refinancing the riel, and operation conducted in riel by monetary authority should be refrained from the financing in dollar. [9] If such a policy is done, bank credit will be operated in the riel increasing demand and value of riel over dollar. Plus, the bank should render the operation in riel in a more attractively secure and the cost wise rather than operation in dollar. [10] After such a good mechanism is achieved, the Cambodian people will strongly trust riel and demand riel more than dollar. Another strategy to de dollarization is that to create the financial instrument particularly treasury bills to denominate in riel. [11]
The second method is that Cambodia should dedollarize by budget execution in the foreign policy and issue the legislation to all payment to riel. [12] Since some of revenue of government comes from abroad in dollar and the government expenditure also related to the dollar as well. This would be concluded that the more public spending in dollar, the more dollarization increased. Reversely, the more real use, the more appreciate it is.
Thirdly, the easy approach is to inject riel to the market to buy dollar and lead the Cambodia market using the riel as the transaction of the economy. [13] This will lead more demand of Cambodian Currency over dollar.
Fourthly, because Cambodian trade is deficient meaning import is more than export. Cambodia should be strengthening its domestic products which can be exported to the foreign countries. The more we export the more money in riel in circulation.
In conclusion, in order to de dollarization, government institution should use various mechanisms such as restructure of banking system, budget execution in foreign countries, buying dollar in the market by injecting riel, and expanding the domestic product. If Cambodia can reach all of them, the dollar dominate in Cambodia no longer exist and people in Cambodia have the purchase power parity larger than before.
Mini Composition (MC#5):
Will dollarization be disappeared or continued?
As might be known that Cambodia adopted dollarization at least more than a decade because of the confidence of dollar over the riel; therefore, every transaction would use dollar as the unit of value, medium of exchange, and store of value. Theoretically, in order to be independent of monetary policy and avoid from the influence of dollar in Cambodia, many policy choices would be raised to challenge against dollarization; however, practically, it would be probably hard to do so due to the various reasons, one of them particularly, currency board. We will further explain the possible reasons including a little bit detail of currency board arrange for Cambodia.
First of all, the solution based on the banking system by refinancing riel instead of dollar, operation using riel, would be not clear or can not guarantee that people will not borrow or save money as the dollar or riel. [14] The only thing is that in the people mind dollar has become their way of life, and they use them for every activities except small expenditure or transaction. In addition to this, one argument has been raised that in order to reduce dollarization, Cambodia should use the financial instrument such as treasury bill denominated in riel and such instrument need to be offered the higher yield than deposits. But how Cambodia authority can restore the public confidence over such instrument and how strong financial market in Cambodia can respond to very high liquidity when such instrument is introduced. [15] This becomes blurred to use this mechanism as an effective way and probably the coming soon stock market will be in dollar.
The second reason is that in order to eliminate dollar, Cambodia should conduct the budget execution in the foreign policy which is legislation in Market. [16] Actually, even regulation issues such a great obligation which is unavoidable and can be an effective way to do so, Cambodia will lose another thing; much or less it is the FDI which is their tender to ward dollar as the easier transaction of all business. If we Cambodian, would like to do so, we should make sure that our economy, finance and business environment are strong enough in its own domestic as well as internationality.
Thirdly, by strengthening the local currency and reduce dollarization, Cambodia needs to inject riel to market to buy dollar and let the Cambodian market involve using riel as the transaction of economy. [17] Of course, it could be done so, but we still reduce the value of money over dollar because there are a lot of quantity of riel in the market which mean that money would become surplus and lead the price of goods up or shortly referred to inflation. Thus, people may see another benefit that if they hold dollar, they will get benefits from that and will not lose from the floating rate. This would be reflected that the demand of dollar is increased.
Finally, because Cambodia has a vision to arrange and to create the Currency Board, it will become the possible answer to this question above. [18] This policy would be ensured that currency board will not exhaust its reserve to keep the peg. On the other hand, for Cambodia, currency board is just theory which is ideal to have it. As may be seen clearly that currency board would represent the drastic shift in time when it is not a totally necessity and would not yield any benefits over the currency mix. But if currency board is happened, it have to be shown that its role must be separated from the National Bank of Cambodia; otherwise, the conflict of interest would be escalated to the problem of good governance.
In conclusion, we have seen the prospect to reduce dollar in Cambodia is very tough case and difficult to achieve. This does not mean that government of Cambodia can not do this, but it mean that so as to reduce dollarization or de-dollarization must be require more time and more actions to go to accomplish all of them even we have several choices to do. Shortly, we should say step-by-step strategy would be received good results rather than fast forward but a little effective even not.
