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Advantage And Disadvantage Of Dollarization In Cambodia Pdf

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Economic Policy in a Highly Dollarized Economy : The Case of Cambodia

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Log In Sign Up. Download Free PDF. Dollarization and Dedollarization: The typical dilemma of economic in Cambodia. Phon Sophat. Download PDF. A short summary of this paper. However ,By in Khmer Republic system which was already circulated the some amount of dollars in market But domestic currency was still used as major one in daily transactions. Gradually events were pushed Cambodia to new dilemma in ,it was called " Khmer rouge regime". There were bad melancholy for Cambodia societies and economy too.

Everything was tremendously smashed as well as financial and physical infrastructures too. Banking system was automatically destroyed while some financial institutions closed and crushed down.

Later on, after conquered and alliance the nation, The biggest financial authority has been re-established as a Central Bank of the Country by sub-decree No dated October 10, of the Council of the Revolutionary People of Cambodia and titled as "Bank of Cambodia" which was existing the head office in our capital city.

The commercial transactions were made up by barters or rice and gold or even other currency. In the Central Bank was transformed under the name of the People's Bank of Kampuchea and the Riel was again the country's legal currency.

During the s, the People's Bank of Kampuchea provided a multitude of services, including acting as the monetary authority, the cashier of the Government, and the only institution providing banking services, such as deposits, loans, and payment instruments. However, confidence in the Riel remained low, given the political structure and the security situation, with the consequence that dollar and baht and above all gold were largely considered as a refuge by Cambodians.

In January 30, , in the 22nd ordinary session, the 1st legislature, the National Assembly of the State of Cambodia adopted the Law on the Change of Organization's name and duty of the Bank of Cambodia from the People's Bank of Kampuchea to the National Bank of Cambodia, which was promulgated by the council of state in February 8, Cause of dollarization and Capital flow into CambodiaBy understanding well of some disvantages and Advantages of the centrally planned economy which was an economic system in which the government controls and regulates production, distribution , prices.

Cambodia had changed from centrally planned economy to market economy in late s. It mean that trade border is free and opened globalization in diplomatic with all nations around the worlds. In early , Cambodia's GDP grew by at least 8 percent making it one of the fastest growing economies of the region according to a United Nations UN report released at the end of February.

But despite this dramatic figure, all the more impressive for being recorded during times of continued political uncertainty, such growth had largely been stimulated by the U. The US flooded flow into country which was creating the risks or new socks facing with national currency without sense from central bank in advance to deal with. Cambodia has become Asia's most dollarized economy. In contrast, dollarization in neighboring Lao P. Somewhat paradoxically, growing dollarization in Cambodia has occurred against the backdrop of greater macroeconomic and political stability.

The usual motive, currency substitution, does not appear to have been a factor. As the volume of dollars increased over the years, so has the volume of riel. A strong inward flow of dollars related to garments sector exports, tourism receipts, foreign direct investment, and aid, has benefitted the dollar based urban economy.

The riel based rural economy has, however, lagged behind. Expenditures and Perils of DollarizationThe financial authority has lost the lender of last resort and lacks instruments to influence monetary aggregates and anchor private sector expectations of inflation.

Movements in private sector credit tend to be outside the control of the NBC. Figure 1 illustrates that macroeconomic variables in Cambodia respond significantly to changes in U. While the NBC uses from time to time the dollar reserve requirement ratio RRR as a monetary policy tool to control liquidity, its effectiveness has proven limited.

When the RRR was reduced in early to provide liquidity to banks and help boost economic activity in the wake of the global crisis, banks instead accumulated more reserves at the NBC. Excess reserves rose to their highest levels in history and credit to the private sector contracted. The loss of seigniorageDollarization has resulted in loss of seigniorage revenue. Seigniorage revenue is the difference between the value of money and the cost to produce it.

When the cost of producing money exceeds is below its value, seigniorage is negative positive. Given the nature of dollarization in Cambodia and the way it was acquired-that it was not a conscious choice to adopt the dollar calculation of seigniorage loss using the continuing flow method is more appropriate.

Through the creation of base money, the NBC buys real resources for nothing in return considering the cost of printing money and any remuneration of bank reserves by the monetary authorities. Estimates of seigniorage loss for Cambodia are broadly comparable with those of other countries. Similarly, Humpage estimated seigniorage loss for Latin American countries to range from 0. Cambodia's loss of seigniorage, the value of a country gains in producing its own currency equates to about 2 per cent of total GDP Jayant Menon, ADB economist, Cambodia is currently the most dollarized economy in all of Asia, with an estimated 85 percent of all currency in circulation being US dollars.

In , however, when the US dollar circulation was at 80 per cent, the International Monetary Fund estimated Cambodia's seigniorage losses to be as high as 19 percent of GDP.

Dollarization did not result from a policy decision. It emerged because confidence of the public in the national currency and in the government policy was eroded. Chang argues that in cases where policy credibility has been a problem, interpreting seigniorage loss becomes delicate.

In countries where dollarization has increased, credibility of policies had been an issue. In these cases, the increase in dollarization could in fact have been associated with an increase in social welfare provided, which would otherwise not have been realized if dollarization had not taken place. Chang further argues that purely considering computed seigniorage loss can only be unambiguously interpreted as "real losses" to the economy if policy credibility problems are assumed away.

The Monetary Policy and dollarization in CambodiaIn case of dollarization of Cambodia, Cambodia might have suffered with some issues as well as increasing the balance sheet risks too. The direct exchange rate risks that results from currency mismatches in banks' balance sheets. Also, indirect credit risk might increase in case of devaluations in the presence of substantial dollar lending to non hedged borrowers Kokenyne, Ley, and Veyrune, To the extent that currency mismatches exist in banks' balance sheet such as where, balance sheet risk remains.

High dollarization requires that the NBC maintains an adequate level of dollar liquidity both at the macro level and at the individual financial institution level. In the early s, while tax revenues were very limited due to inactive economy, low profile of the fiscal policy and lack of international support, the budget was mainly financing by central bank, which caused banks' net claims on government be multiplied by four between and Residents" foreign currency deposits increased KHR 4, billion This resulted in a sharp devaluation of the riel and in a three-digit hyperinflation which created additional shocks for potential users of the riel.

This drop reflected reductions in net claims on banks of KHR 70 billion The decrease in net claims on government resulted entirely from an increase in government deposits. This growth was due to an increase in foreign assets NBC, Furthermore, Cambodia's economy has been strongly connecting with US economy and it is very vulnerable while the US might change its monetary policy. This poses constraints on the tools available domestically with which to respond to external shocks.

Monetary expansion in the United States tends to result in economic booms in other countries Kim, , including in dollarized economies Goux and Cordahi, During late and early , Cambodia experienced an increase in inflation pressures as commodity prices and foreign inflows rose.

Coincidentally, U. The federal funds rate had declined from about 5. This means that Cambodia is importing seriously the US monetary policy while its country is still poor. The advantage of DollarizationThe dollarization demolishes strongly the public confidents with domestic currency and dollarization in Cambodia has been helping Cambodia's payment capacity. Cambodia has extremely high levels of dollarization-our estimates are something in reality close to 90 to 95 percent Jeremy Carter, IMF, The large quantities of banknotes in dollars, at the beginning of the s, allowed the public to switch from using gold to banknotes for transactions and to store wealth.

Until then, using unproductive physical assets such as gold was common practice in Cambodia. Subsequently, the progress of monetization has encouraged savings within the middle class. Dollarization prevented capital flight and promoted financial deepening. The elimination of incentives to place savings abroad encouraged domestic financial intermediation, which resulted in the growth of the financial system.

Only over the past three years, the volume of bank activity has roughly doubled, and the loan to deposit ratio has grown regularly.

And Cambodia has given that the Cambodia loan-to-deposit ratio was already about per cent at the end of , then the fact that commercial bank loans are growing at twice the rate of deposits is actually quite concerning, Grant Knuckey , To Bargain the financial stabilityActuality that a dollarizing country gives up the ability to conduct its own monetary policy controlling means that monetary policy in the adopting country will mimic the policy of the issuing country.

From the optimal currency area perspective, this is presented as a potential cost to dollarization. But in many maybe most cases, countries that dollarize are also countries that have high inflation rates, and in these cases the benefits of dollarization are assumed to arise precisely because domestic monetary policy is jettisoned.

Evidence suggests countries that experience medium to high inflation rates have low growth rates. Boyd, Levine, and Smith argue that this correlation may in large in part operate through the deleterious effects of inflation on financial markets. Dollarization thus enables a country to "import" a credible monetary policy of low and stable inflation rates, contributing to the strength and stability of the economy's financial markets and institutions and enhancing the growth prospects for the adopting country.

Here again, we argue that, to the extent that dollarization works to promote growth and trade, financial market integration and stability, and so on, these affects would inevitably work to the benefit of the issuing country as well as the adopting country.

Some might argue to the contrary that closer integration, particularly in financial markets, represents a significant potential cost to the issuing country, because with integration comes greater responsibility for, and exposure to, risk in the rest of the world.

In this view, one cost to the issuing country is the possibility that domestic policy decisions of the central bank or federal government will at times be dominated by shocks in other economies. I argue that this does not represent a "new" cost. It is a cost that large countries such as the U. For example, U. We have for some time lived in a world where foreign and domestic markets have been tightly integrated and where U. Hence, it is our belief that the marginal cost of dollarization-driven integration of domestic and foreign markets is easy to overstate because these markets are already highly integrated IMF, The disadvantage of DollarizationDollarization in economy will be having the good and bad points for Cambodia.

By this experience, it undermines the effective conduct of monetary policy.

Dollarization and De-dollarization in Transitional Economies of Southeast Asia

Currency substitution , dollarization see English spelling differences is the use of a foreign currency in parallel to or instead of the domestic currency. Currency substitution can be full or partial. Most, if not all, full currency substitution has taken place after a major economic crisis, for example, Ecuador and El Salvador in Latin America and Zimbabwe in Africa. Some small economies, for whom it is impractical to maintain an independent currency, use those of their larger neighbours; for example Liechtenstein uses the Swiss franc. Partial currency substitution occurs when residents of a country choose to hold a significant share of their financial assets denominated in a foreign currency.

Dollarization and Dedollarization: The typical dilemma of economic in Cambodia

Currency substitution occurs when an economy uses an alternative currency to the domestic currency. The alternative currency maybe used in parallel to the domestic currency or some cases may completely replace it. Usually, this will involve using an internationally recognised major currency like the dollar or Euro. For example, Zimbabwe used the American Dollar after a period of hyperinflation.

Ahigh degree of dollarization can yield both costs and benefits. This section examines how dollarization can help or hurt an economy. A main cost of high dollarization in Cambodia is the loss of seigniorage revenue for the government. Box 5 presents recent methods used in the literature to measure seigniorage. Interest income series from the National Bank of Cambodia overseas deposits are available since and were used to compute seigniorage.

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Currency substitution

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