Cambodia's dollarization; Help or handicap ?

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Cambodia's dollarization; Help or handicap ?

Postby CEOCambodiaNews » Tue Mar 14, 2017 12:34 pm

There is a love/hate relationship between Cambodia and the US dollar. On the one hand, as a foreign currency, widespread use of the $US restricts national control over monetary policy, on the other hand dollarization has given much-needed confidence to investors. But,at the end of the day, the Cambodian riel is the national currency, and it is to be expected that there will be increasing efforts to promote use of the riel over the dollar.

Cambodia is ‘handicapped’ by dollarization

The dominance of the US dollar in the banking system prevents the central bank from lowering interest rates to spur investment and create jobs.
Cambodia is handicapped by the dollarization of its economy in three ways, according to Kith Sovannarith, Deputy Director General of Banking Supervision at the National Bank of Cambodia.

First, the NBC has minimal influence on lending rates charged by banks and microfinance institutions because more than 80 percent of their savings and loans are in US dollars. “We cannot directly use rates to increase jobs and investment,” Mr. Sovannarith says.

Most central banks, like the US Federal Reserve, are able to lower the interest rate they charge for loans to banks – the so-called “policy rate” – when there is a need to encourage investment and job creation, but the NBC can only lower the policy rate on the riel, he explains.

Second, the cost of the loss of seigniorage – the profit the government makes from issuing its currency (the difference between its production costs and face value) – is equivalent to about 10 percent of annual GDP, Mr. Sovannarith explains, citing a study by the International Monetary Fund. This lost money could be used to fund infrastructure and social development projects, he notes.

Third, dollarization prevents the NBC from regaining full control of its monetary policy.

He describes dollarization as a more than 25-year habit, pointing to the arrival of the United Nations Transitional Authority in Cambodia (UNTAC) as the starting point. Research shows that during 1991-92, UNTAC spent $1.7 billion, equivalent to about 75 percent of Cambodia’s GDP at the time. It also led to more foreign currency deposits at Cambodian banks.

As the NBC continues its efforts to promote the national currency this is gradually changing. Banks and MFIs will be required to ensure that at least 10 percent of their lending is in riel by the end of 2019...
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