Cambodia’s Persistent Dollarization: Causes and Policy Options

For a long time it seemed that the extent of … dollarization was impervious to improved economic performance. Now however we have several examples of countries that have dedollarized successfully …, including Israel, Poland, Mexico, Egypt, and Turkey. And some signs of declining dollarization are evident in Latin American countries where it seemed that dollarization was impossible to reverse.

Stanley Fischer (2006), Governor, Bank of Israel

I. Introduction

Cambodia has had a spectacular decade. The economic and social achievements over the past ten years have been the most impressive in Cambodia’s history. GDP growth has averaged close to 10 per cent over this period, resulting in an almost doubling of income per capita (Table 1). Poverty incidence is estimated to have fallen by about 1 per cent per annum (from 47 to 35 per cent, for the decade up to 2004), even though inequality has worsened (World Bank 2007). Consumer price inflation has fallen sharply from an average of 56 per cent over 1990–98 to an average 3.5 per cent over 1998–2007. Inflation has started rising again recently, with the spike in food and energy prices, but this is happening almost everywhere. ¹Government revenue collections have recently consistently exceeded expectations, and the budget deficit has fallen to manageable levels. The recent discovery of oil and gas could be a significant boon for the country, and should provide the resources necessary to address a range of socio-economic issues, providing of course that the resources are not mismanaged.

It is against this backdrop that we find that Cambodia today is still as dollarized, if not more so, than it was ten years ago. The U.S. dollar still serves all the three functions of money: it is widely used as a medium of exchange, store of wealth and unit of account. ²The IMF estimates the share of dollars in currency in circulation to be about 90 per cent, little changed from what it was a decade ago. The National Bank of Cambodia estimates the share of foreign currency deposits (FCDs) in broad money (M2) to have risen to its highest level ever of 75 per cent in 2006, and significantly higher than the 54 per cent recorded in 1998 (Table 1). Currently, about 97 per cent of banking deposits are in U.S. dollars.

The apparent lack of progress with de-dollarization has led to frustration among a number of commentators, some of whom are pressing the government to play a more direct, interventionist role. There is growing concern that

Table 1.

Selected Macroeconomic and Monetary indicators, 1998–2007

	98–07 Ave	1998	1999	2000	2001	2002	2003	2004	2005	2006	2007
GDP growth, %	9.3	5.0	12.6	8.4	7.7	6.9	8.5	10.0	13.5	10.8	9.6 a
Per capita income growth, %	5.5	−2.4	4.2	5.0	3.3	3.6	6.7	8.2	11.2	8.2	7.2
Inflation, % per year	3.8	12.6	0.0	0.5	0.3	3.3	1.2	3.8	5.9	4.7	5.9
Budget deficit, % of GDP	4.9	5.5	3.9	5.3	6.6	6.4	6.7	4.6	3.4	3.0	3.2
FDI, $mil	252	121	144	112	142	139	74	121	375	475	820
FCD\M2, %	67.5	54.0	60.0	68.0	70.0	69.0	69.0	71.1	71.4	75 b	NA

N otes:

a. ADB estimate from Asian Development Outlook2008.

b. Data from National Bank of Cambodia

S ources: Asian Development Outlook, various issues. IMF Country Reports, various issues. National Bank of Cambodia

the process may be irreversible, unless forced. At the launching of the Cambodia Economic Forum on 17 January 2006, Finance Minister Keat Chhon concluded his opening remarks by stating that “The combination of economic and political instability, which is disturbing the world now, requires Cambodia to be more proactive in enforcing de-dollarization policy…”. An article in the June 2007 Phnom Penh Posttitled “Moves to Ban...