Dollarization in Cambodia

Dollarization in CambodiaDollarization occurs when a demesne uses US Dollar or otherwise currentness instead of or along with local cash. The picture of sawbuckization evoke be as follow utilise sawbuck for commit Deposit, paying debt, buying advanceds and service, measuring national cypher. 1 in that respect are three types of dollar signization official, semi-official, and unofficial. semiofficial dollarization occurs when a country use dollar as the legal cracking instead of domestic property. For example, Panama is the dominant official dollarization adopter. It has no domestic bills published at exclusively. The plump for type is Semi-official dollarization. Some countries in the gentlemans gentleman use US dollar and domestic currency at the same duration in other word, they use bimonetary organisations. This allows people to make amaze in US dollar, do some doing, just it only act as second occasion in paying take, task, electricity, and daily ex pense. Adopting this system, the central swan can place its own monetary form _or_ system of government. Cambodia, Lao, and Haiti are the examples of semi-dollarized countries. Third, in unofficial dollarization, some countries legal age wealth is hold in exotic currency and people can use US dollar torpedostituting domestic currency all de jure or illegally. In short, when a country uses other currency beside it own to substitute the three functions of the monetary, it is theoretically that the country has been dollarized formally, semi-formally or informally.2. World Dollarization Implication at that place are two main aspects of dollarization. Dollarization is the subject of not only the economic or excessively of Politic. Economists think that money is only just public goods which consist of three functions sloppeds of ex compound, store value and unit of account and its purpose is only to locomote the economic transaction. Dollarization is the symbol of the US power de confinesine country money. The US aid for the reconstruction of Western Europe by and by the World War II and many other countries, the role of US in world stage became more(prenominal) important. Then after the abolishment of Gold Standard in 1971, the US dollar overly became the main currency in the world. Because of reverse of pecuniary crisis, some countries adopt dollar US to reduce the risk and create permanentness. For, those countries adopting dollarization is only another(prenominal) end point for fixed exchange rate compared to US dollar with start much elbow grease2. Comparing to ontogenesis country currency, it is more reliable, valuable and profitable in doing cover, storing value, and making transaction. However, some countries use other currency with analogous quality such as Germany mark, Japanese yen and now Euro in Europe.Beside economic value, money contains purchasing power which is the heart of smooth. The power has distri scarcelyed to the crea tor, the exchanger, and especially the controller. Thus, statistical distribution of money does not only create hierarchy of people but it also creates hierarchy in the world.3 However, for some other countries dollarization is the heart of political interest. For instance, using US dollar in Latin America implies its dependence on US and also shows its inferior. East Timor adopt US dollar as its official currency to prevent Indonesian influence. In short, dollarization can be characterize into two economic and politics. Through both means the dollarization is becoming new influence of US in the world.3. Dollarization in Cambodia DollarizationAccording to IMF the proportion of Dollar in economic circulation is 90% which is indifferent for a decade ago. In an article dollarization in Cambodia, and policy options on the way forward, Menon (1998) concluded that dollarization is not the problem, but is merely symptom. The problem (or the cause) is a lack of confidence in the riel, whil st the symptom (or the effect) is the use of another currency such as the US dollar.4 Dollarization in Cambodia is the result of both past and present economic and politic status. Dollarization in Cambodia is the direct legacy of the ravaging of economic and financialInstitutions after the 1970s, economic mismanagement in the eighties, and the large inflows of US Dollars during the UNTAC period in the early 1990s5.Today, in Cambodia the US dollar soundless serves all three functions of money it is widely used as a medium of exchange, store of wealth, and unit of account. The fact that dollarization is not the real problem but it is the lack confident in riel can be rooted as distant as the Khmer Rouge Regime. In 1975 the revolution of Khmer Rouge excessivelyk over the Cambodia politic and saving. influenced by the Marxism, to make Cambodia a communist country the Pol Pot abolish riel currency as strong as stop the national bank operation and thus hope to fill the gap of the ri ch and the poor. Cambodian people lived in hardship without any personal business action at law, any mean of store value or exchange, on sequestered ownership. Fortunately, in 1979 the population was turn ind however, this country returned to the state of traditional economy using barter system. Then, not until 1980 did riel currency appear again. Experiencing shock in 1975 when their saving money became scraps in only days, Cambodian people later preferred to use other means such as gold, silver, jewelry for exchange. Most people used riel currency for only small transaction and not over 50$ saving. When the dollar was introduced again in 1990s, it is generally accepted along with previous gold and silver money. As much 1.7 as US million dollars has poured in Cambodia finished UN peace keeping activity, the UNTAC6. This fact paved the ship canal of Cambodian economy depend on the solider money US dollar and Cambodia was easily the or so extremely dollarized country in Asia, and one of the highest in the world The share of dollars in currency Circulation is highest in Cambodia, estimated at about 90 percent. Nowadays Dollar unruffled plays major role in business transaction, and the major deposit in bank. The existence of dollarization in Cambodia is also expected to last. Another reason for Cambodia in evaluate dollarization is just a pressure of its country as a developing economy. Even though Cambodia has done three decade or reconstructing the economy, reducing political and economic uncertainty, in that respect are more actions to be done to get out of dollarization. While growth and political uncertainty greatly has been reduced, Cambodia remains a low income country with significant inequality and poverty, and some degree of political uncertainty remains. For example, political turmoil in 1997 combined with Asian financial crisis would gift been more even more threatening to Cambodia if it had not been dollarized.4. ConclusionAs many states have problem in both economic and politic perpetualness and weak monetary system people will consider using another currency which is more stable and valuable in most situation. In the serious illustration some countries do not have own currency at all but US dollar. As the US has strong monetary regime its currency impress those developing states to use US dollar therefore, US may somewhat influence those state in both economic and politic. Some states may be dollarized in order to create financial stability however, they are unsure what can US do with dollarization for politics. Cambodia is not the exception. Since 1970s and had been attracted to new currency US dollar in since 1990s. Until now, the degree of dollarization has changed only a little. Dollarization was injected so gradually that people get accustomed to it notwithstanding the presidency effort to de-dollarize in the last decade. Cambodia economic and politic problems tranquil fuel dollarization existence. Ne xt egression is to discuss the advantage and disadvantage in Cambodia.MC2 speckle of Dollarization in Cambodia Today and Its Cost and BenefitAfter the two decade of United Nation Transnational Authority in Cambodia (UNTAC) operated peace keeping activity and introduce dollarization in Cambodia, with high economic performance with average two digits GDP growth and considerable political stability Cambodia should have come out of dollarization already. However, Cambodias economy is still highly and increasingly dollarized which urge the governance to critically consider whether to de-dollarize by compare its live and benefit.The status of Cambodia dollarization today is not far different from the 1990s1. The dollar still serves three functions in this economy making transaction, storing value and universe used as unit of account. The cash dollar in circulation in Cambodia is 90% of all value of transaction which is similar as a decade ago. Dollar has been widely use for private sector wage payment, medium of international trade and also purchase large value products. Moreover, dollars also dominate the currency deposit as storing value instrument in Cambodia. According to the National Bank, the foreign currency deposit in broad money (M2) is accounted for 75% in 2006 increasing from 54% in 1998. Furthermore, 97% of bank deposit is in experimental condition of dollar. The recent increase in dollarization is the result of two main points the higher(prenominal) economic growth and recent political stability has contribute to more dollarization. When the investor think Cambodia is a good place to invest they will inject more dollar investment. In addition, the open trade economy also allows Cambodia to do more trade with other countries using dollar as medium of international trade exchange.Long before this happen the issue of dollarization has been discussed on court and benefit but at this time it is even more critical to figure out that the constitute of dollarization is more than benefit in Cambodia2. The benefit of dollarization in Cambodia can be encouraging saving, preventing capital flight, providing low risk of currency and exchange rate devaluation. First, the dollarization increasing saving when there is a better currency that is more reliable, therefore, people will tend to save in the bank in dollar to increase their wealth as well as lubricate the economy. Second, this also prevent hot money go out Cambodia in a short time of return from investment because investor still deposit money in local bank and transfer to their homeland at any time when there is high portion of dollar deposit in the bank. Last but not least, dollarization provides security from the risk of currency devaluation and exchange rate derogation. When the local money count inflation or depreciation the dollar holder will not worry about the value of asset they hold in dollar. On the other hand, those benefits are little comparing to cost of dollariza tion. First of all, riel is the national symbol of states sovereignty so using dollar is really affect sovereignty and national identity. Second, When Cambodia use dollar as dominate to riel currency, the national symbol has been eroded because the people do not trust their own government. Instead of get easily affected by local inflation, the dollar holder get easily affect by dollar instability especially in recent years. Thus, it means that Cambodia is somewhat dependence on the US federal monetary policy. Finally, dollarization make local monetary policy less effective, in other word, the central bank cannot use its own currency to fully stabilize footing and economy. When government want to print more money it will not increase much in the economy because most of transaction done by dollar and the government also cannot control the interest rate since the most deposit is in dollar not riel. presidential term also cannot get inflation tax (print money to finance short term def icit but let go the inflation) to finance the government budget especially in hard time.3 Being unable to use inflation tax or seignior age to support emergency postulate the government of Cambodia is estimate to loss seignior age to be $682 million at the end of 2004, with an additional $61 million lost annually. and especially in the case of paying the military, the Barry Eichengreen (1994) Money can be printed to pay soldiers, to purchase materiel, and to underwrite the other costs of a war of national defense without having to wait for tax returns to be filed or for a foreign loan to be extended. As the state sovereignty and beingable to use own policy is really important the cost burden by dollarization in a higher place have already exceed the benefit. Thus it is time for Cambodian government to get more effort in de-dollarized campaigned despite the problem of lack of both commission and mental object. In short, even though the economy and politic of Cambodia has improve d the dollarization has not been eliminated but it increases because of the more free market mechanism. However, dollarization has land more cost such as hindering Cambodia from using its own monetary policy, eroding national sovereignty and being not able to finance government budget deficit which is far more significant that the benefit such as creating price stability, encouraging save and discouraging capital flight. This is the high time for Cambodia government to respond to those issues. Cambodia cannot stay aside from dollarization as it shows the higher level. The Cambodia government has to show its commitment and strengthen capacity to combated dollarization either locally or regionally.MC3 Policy Option for De-dollarization in CambodiaThe government of Cambodia has realized that the current situation of dollarization inCambodia has higher cost than benefit. The cost is that dollarization has weakened domesticmonetary policy capacity to manipulate the financial and monetar y system date the benefit hasgone to price stability and trade and investment integration. The Cambodian government hastherefore, allowed the side effect of US federal policy to influence its economy for a long timeeither good or bad. Thus, it is high time for Cambodia to strengthen de-dollarization. There aretwo main procedures in de-dollarization which are domestic policy and regional policy.However, this musical theme will cover only the possibility of policy option done by the Government ofCambodia alone. The suggested policies to de-dollarized Cambodia economy are fulldollarization, currency board agreement, and refer Interim policy reform. However, the latest seems most preferable. The first choice of Cambodia is to move forward to full dollarization following theprecedential example in Latin American economy especially Panama. Adopting this policy,Cambodia has a great save in transaction cost, is easy to integrate it egotism in the regional and globaleconomy by trade and c apital flow and also maintain high price stability. However, fulldollarization seems not the right choice for Cambodia. Since Cambodian economy does not finishingly related to US and thus it does not allow Cambodia to keep track with US economy easily.Moreover, giving up riel currency implies scarifying more seigniorage benefit to US and has nomore ability to use own monetary policy as the lender of last resort of domestic commercialbank. Moreover, the government of Cambodia hasnt showed any commitment to turn to keepdollar as legal tender. The Minister of Ministry of Economic and Finance, Mr. Keat Chhun at theLaunching Cambodian Economic Forum in 2006 said However, it should be seen that theRoyal Government is now implementing de-dollarization. Our economy must be based onnational currency, which should be based on a basket of foreign currencies and consistent withthe integration of our economy into regional and world economy. It is not wish wellly that Cambodiatake a reverse poli cy from its commitment. Second policy is to create currency board agreement in Cambodia. A currency board is amonetary authority, unlike central bank, issue domestic currency that is always convertible toforeign currency at a fixed exchange rate on the basis of 100%. This means that if 1$ = 4000 riel,the currency board wishings 10$ reserve to issue 40000 riel. The currency board makes profit bygaining interest from its foreign reserve by the expense of cost in locomote local currency. The advantage of CBA is the gaining of seigniorage benefit over the dollarization that makes countryloss in that. Although Currency board seems a good choice but it need too much effort fromCambodia and also has side effects. There is an estimated that riel is 10% of the currency ofcirculation and the official reserve is ternary of this which is equal to 30%. Thus, it means thatCambodia need to triple the reserve to collect all dollars in circulation. Therefore, currency boardmay lead to a mass gov ernment debt. Is there any other ways that Cambodia can get moreofficial reserve? Finally, the last alternative for de-dollarization is to use interim policy. Interim policy isto set objective of de-dollarization in eternal term and accelerate reform. In this approach, thegovernment of Cambodia should left the monetary system as they are on the one hand andincrease macroeconomic stability which increase riel confident and demand as well as restoreriel-friendly environment on the other hand. First of all, National Bank of Cambodia plays animportant role in this policy. NBC is the last resort of loan of commercial bank, so NBC provideriel as a mean to refinance. Then Cambodia government should promote the use of riel currencyas a mean of exchange with security and low cost. Last, the NBC can use Treasury bill to attractthe riel financial market by providing higher interest than dollars saving. Beside the role of thebank, the tax policy reform is also taken into account. Demand of rie l can be raised when thereis obligation to pay all kind of tax in riel. Thus, when there is more tax collection in riel impliesmore demand in riel. Besides, the adaptations of existing institution that allow ease thedollarization is important. For example, the minimum wage law in Cambodia is indentify isdollar not riel and the most international organization operated in Cambodia preferred to pay net profit in dollar only while in other country the government required the internationalorganization to pay 30%-40% in local currency. Moreover, there are also surplus demands of rielin microfinance that cannot be fulfilled. it is estimated that microfinance industry demand Riel120 billion in 2008, but the supply is not enough. Thus, it is important to resolve thedollarization-friendly-condition above by remove any status serve for dollarization althoughthere is a certain portion in dollar paying in wage and salary and increase supply of riel inmicrofinance industry.One can criticized that Cambodian government has done a lot in reform for macroeconomicstability but the result is still high dollarization in today economy. Cambodia has esteemed high growth, average two digit growth in last five year, despite the bewitchery from theglobal financial crisis in 2008, yet the there still the same dollarization. In addition, to restoreattract demand in riel as a inexpugnable and low transaction cost currency is not good because thecommercial bank has promote it by giving higher interest rate than dollar deposit already. Theproblem is not focus on what have Cambodian has done, instead it is important to know whatelse needed to achieve long-term goal of de-dollarization. Moreover, gradually de-dollarizationprocess can ease the economy adaption. As result, when the Cambodia reach the macroeconomicstability the authority can take advantage of strong financial system to increase confident in rieland thus to de-dollarized.In conclusion, Dollarization in Cambodia is not the matte r that easily to settle becausethere a high link amid citizen who prefer dollarization as the result of being not confident inriel and weak financial institution and a high loss in the government who is the coordinatorbetween those two. Among the suggested policy in de-dollarization which are full dollarization,currency board agreement and interim policy, the last choice is likely the best option forCambodia because it respresent the allot capacity ot the states as well as allowed people toincrease confident and demand in riel considerable. However, the previouse effort in this policyis not enough so Cambodia need a higher commitment and capacity in this policy. On the otherhand, domestic policy alone may not enough to appropriate with the dollarization which is the resultfrom capital and trade integration. Therefore, regional cooperation combating dollarization canbe the incoming choice for cambodia.MC4 Subregional Cooperation in Dedollarization.Cambodia, Laos and Viet Nam have shared common characteristic as the freshemergence economy. Firstly, the three countries or so called clv countries have transformfrom central planned economy to free and open market economy during 1980s and 1990s.Because of the experience of price instability, fragile monetary and exchange rate policy andthe underdeveloped or non existence of financial market make all countries besides tend touse Dollar alongside the local currency despite the different level of dollarization. Althoughdollarization has contribute to price exchange rate stability, it is not the good choice for them inlongterm because the government has lost much seigniorage, benefit and also the role of lastresort of lender of central bank. one hundred fifty-five has tried their own method to dedollarize to cope withshortcoming problems by their own reform so as to gain currency confident and also improvingfinancial institution. Those policies seem to need much effort and time and CLV to achievealone, therefore there is also another choice of subregional cooperation among CLV countriessuch as exchange rate regime and single currency area.For CLV cooperation in monetary and exchange rate policy to combat bothdepolarization and monetary system sustainability which includes price stability, financialstability and exchange rate stability, CLV have to create cooperation environment as a given. First, they have to create a network of policy makers, economist elites, officials,and researcher from all level of government and financial institution to take close surveillanceon CLV economic performance and discuss the possibility of new policy. Moreover, thenetworks should make a regular meeting information exchange, checking progress and alsomake consultant the possible area in economic integration in the region. Secondly, CLVcountries should create strong connection of capital market among them. There are twopossible alternatives for this. The Viet Nam should allow the Cambodian and Laos company to list it stock market or the CLV can create common sequester market of CLV subregion. To developcapital market in CLV countries they also need to make a joint regulation and supervisory toensure transparency to investors and they need to reduce foreign exchange restriction amongthe three countries to reduce exchange rate risk among investor too.After achieving the above precondition in monetary and exchange cooperation above,CLV have two choices which are exchange rate cooperation and monetary cooperation tomultilaterally combat dollarization.First of all, consider the possible of future exchange regime in ASEAN+3 in the East Asianeconomic community, the CLV exchange rate cooperation can be pilot design of the biggerpicture of cooperation. CLV countries should consider the joint peg of currency to Dollar orcurrency basket of currency famously Dollar, Euro and yen while the weight of currencydepends on the trilateral discussion. This common peg to Dollar is a good choice for CLVcoun tries because of several reasons despite some difficulties. First, the stable exchange rate toDollar has showed the strength of currency against outside pas seul thus gain credibility ofcurrency. Second, CLV already adopt restricted fluctuation of currency against Dollar and thosemain trading partner, China also already peg to Dollar. By doing this the three countries willhave less transaction cost in changing their currency to Dollar when they are doing trade and atthe same time their currency will get confident from people since it is stable with Dollar. On theother hand, when CLV peg to the basket of currency including Dollar, Euro and Yen, the CLVcountry can reduce risk when there is currency shocked in US. Instead of rely solely onexchange rate stability with Dollar, CLV reduce the risk by depend on two more majoreconomies, Europe and Japan. There is no correct proportion of the three currencies in thecurrency basket, yet it depends on the economic relation of CLV to the G3 (U S, Europe andJapan) and also their own negotiation. Besides, CLV can move further to subregional currencyboard which ensures the stronger peg to foreign currency thus they get more seignioragebenefit. However, they need much more effort to achieve this. First, they have to create astronger cooperation in coordinating currency policy. Second, they need more foreign reserveto run currency board and it needs high legal endorsement to get people use local currency.In addition to cooperation in Exchange rate regime, it is also important that CLV coopedto create monetary regime. The CLV common currency is a long term goal they require manyeffort from CLV to improve the credibility among public of currency as well as effectiveinstitution to care for the transitional change of currency and strong political will of CLV leaders.Besides, the CLV currency area can be established only after the Asian Currency Unit (ACI)which is similar to European Currency Unite, has been created in ASEAN+3. Wh en there iscommon peg to ACI in ASEAN+3 economy, the CLV will change to peg ACI and they can createtheir own subregional common currency in lower level to increase their voice in ASEANcooperation, in addition to the benefit for Exchange rate regime. However, some scholarsuggests this option is difficult to achieve at least in short and medium term because there aremany political sensitive issue to overcome, weak institution, and flexibility of people.In summary, in order to cooperate with each other so as to dedollarize their economyCLV countries has to two choices of Exchange rate regime and single currency. Those policiesare only achievable when CLV countries have strong radix of cooperation in critical aresuch economic consolation and information sharing, joint assessment and so on. They can morebenefit from this cooperation rather than victorious action individually however it is only longtermgoal for them. In prospect there is still possibility to get out dollarization when C LV aredetermined enough in cooperation.MC5 Dollarization and Implication of Financial Architecture Reform Cambodia among CLV is solely dollarized countries in the world which face the problems. Dollarization is the common problem in developing countries such as Latin America also. Thus the case of dollarization in Cambodia can also reflect the situation of the change of financial architecture that affect the financial and monetary system in the world. Dollarization is the symptom of weak ability of domestic financial structure, historical price in stability and political problems urges people to use foreign currency. While the government the seigniorage benefit and role of last resort of lender the people enjoy the stability of money in deposit as well as trade and investment. Rooted from the globalization there are three main debates in global financial system Does dollarization good for developing country? Should states liberalize people choice in using currency they like or impo se people to choose national fiat money? Should IMF play important role in the world exchange rate stability? Does dollarization good for developing country? Dollarization can give price and exchange rate stability in low cost in most emergence market economy. Hanke suggest developing countries to use dollarization in case that the states do not have strong monetary and fiscal policy to tighten currency value in long term should use dollarization as monetary institution. The above idea is not raised by him alone some scholar also jut choice of dollarization because of several reasons. First, considering the financial and dept crisis during 1980s and 1990s in much part of the world and thus leads to increase of high inflation, currency devaluation and mass capital outflow by foreign investors. When developing country dollarization they can stabilize the currency, exchange rate. When those countries use a high confident and good quality currency like dollar in economy is no possibil ity of a sharp depreciation, and sudden capital outflows because of investor unconfident is also omitted. Second, dollarization can highly reduce transaction cost and integrate developing economy closer to US. Thirdly, the stability of dollar in the economy as currency in developing countries will advertize people to save more and foreigner to invest more. However, dollarization is costly. Government of developing countries need to scarify seigniorage benefit in dollarized economy and the Central bank losses its role of lender of last resort to the commercial bank in case there is liquidity problems. Moreover, the states will lose its sovereignty in term of monetary policy and exchange rate policy. Thus, it is a critical decision to whether or not to dollarize in developing countries because they have to compare the benefit of dollarization the cost to bear it as well as balancing the internal risk with external risk.Should states liberalize people choice in using currency they li ke or impose people to choose national fiat money? According to Laurence H. Meyer, a member of the Board of Governors of the Federal Reserve System when there is more global financial integration the government should increase role in market discipline, regulation and also supervision in money and also exchange rebate. The states should improve the international capital standard, market discipline. The state has monopolized the authorization on Money discipline by introduces national currency to show the selfhelp system in term of currency and also gains seigniorage benefit. However, Randal Krozner, an economist at the University of Chicagos Graduate, rejects the role of government in currency circulating. He claim that private regulation found in private actors such as clearing house, credit rating agency, trader, capitalist investor, and others has provided stability and innovation because they work closely to financial and currency market. He advises that the government should re duce the intervention in the financial and monetary system and let the dynamic private sector to regulate the system. In short, while some scholar support government role in regulation the currency market, some ot