The abolishment of practically all banking services and physical currency in Cambodia by the Khmer Rouge regime in between 1975 and 1979 created a monetary vacuum. It was partly filled in 1992 by the United Nations Transitional Authority in Cambodia (UNTAC), when their peacekeepers, whose relatively large salaries, paid in US currency, brought a massive quantity of American dollars into the country.
Whilst Cambodia never adopted an official dollarization policy, the impact of these two events, combined with the pressing need for foreign investment to rebuild the country, meant that two decades later, Cambodia recorded one of the world’s highest rates of foreign currency deposits. According to the National Bank of Cambodia (NBC) report at the end of 2019, 83 percent of broad money in Cambodia was US dollars.
The benefits that an unofficially dollarized economy have brought Cambodia over the last 20 plus years are evident in the dominantly dollarized cities of Phnom Penh and to a lesser extent Siem Reap, Sihanoukville and Battambang. Yuji Shinohara, spokesman for the Japan International Cooperation Agency (JICA), is in agreement but says there is another, less positive, side to the coin.
“Dollarization has undoubtedly been great for the development of Cambodia, allowing for easy foreign investment and a stable inflation rate that comes with a heavily dollarized economy. However, the Cambodian Government are leaving themselves very vulnerable to external financial pressures because the central bank is limited in their policies because they can’t issue US currency themselves,” Shinohara explained.
JICA has been looking towards a long-term plan for the Cambodian economy as it continues to grow and mature. Stating, more de-dollarization policies are needed to allow the central bank to have more control over its economy.
“The Cambodian Government will face serious policy restrictions as the Cambodian economy grows if they don’t implement stronger de-dollarization policies soon,” Shinohara said.
“Currently, the Cambodian economy is still relatively small, but as this changes there will have to be swap from US dollars to Khmer riels in the near future,” he added.
Two surveys conducted by JICA and in co-operation with the NBC in 2014 and 2017, to understand behaviours and motiva-tions on the usage of dollar by households, enterprises, and financial institutions, found that dollarization was predominately occurring in the country’s financial sector and urban cities. Whilst Khmer riels were commonly used by small and medium-sized enterprises and outside of urban areas.
Based on these findings JICA believes the promotion of the riel currency should be guided by market principals and through improving domestic payment systems as well as effective currency and exchange policies.
Such policies have already worked in the neighbouring nation Laos, which experienced a high increase of dollarization as a result of the Asian financial crisis. The country has made significant progress in de-dollarization by improving domestic payment systems, adjusting foreign currency reserves, and the implementation of foreign exchange policies, according to the nation’s central bank represen-tatives.
“Whilst many countries would struggle to implement such de-dollarization policies and maintain stability in their economy, Cambodia may be a special case. This is because the Cambodian Government has controlled public debt very well and hence is well placed to respond to economic shocks,” Shinohara said.
“Such policies may go against the Cambodian Governments targets of low debt, however, now is the time for the country to take a risk and extend its current debt levels for the long term benefit of the economy,” he added.
The NBC and the Ministry of Economic and Finance will play a vital role in this ongoing transition and will need to advise the Cambodian Government to remain flexible as they are faced with unknown economic variables in the future.
“The role of Cambodia’s financial policymakers will be to keep the Government flexible and the public calm to the inevitable hurdles that will arise from a transition away from a dollarized economy,” Shinohara said.
In summary, JICA believes that as Cambodia transitions away from the US dollar and towards its national Khmer riel currency, there may be short term economic pain. But looking towards the future and towards a long term de-dollarization plan will prove a vital decision to ensure Cambodia can maintain long term control and stability over its economic destiny.
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