The Phnom Penh Post recently published an article based on the reflections of Veasna Kheng, professor of economics at Monash University in Melbourne, Australia, and Mao Sonariddh, senior economist at the Ministry of Economy and Finance of Cambodia. They wondered what are the causes and consequences of the dollarization of the Cambodian economy.
A story of monetary domination
According to them, at the beginning of the 20th century, the American dollar established itself as the world’s reference currency. This reality is particularly palpable in Cambodia. In 2016, an article from New York Times headline: “In Cambodia, the Ghosts Prefer Dollars”, illustrating the omnipresence of this motto. Salaries, goods, services and even certain public institutions favor the dollar, raising the question of its deep anchoring within the Kingdom.
The causes of marked dollarization
the two economists cite two main reasons which explain this domination. First, the risk linked to inflation of local currencies pushed Cambodians to turn to foreign currencies such as the dollar, the Thai baht or the Vietnamese dong. Confidence in the riel had already been broken when this currency was abolished during the Khmer Rouge regime (1975-1979). The significant depreciation of the riel between 1988 and 1991 only worsened the situation, although its rate of depreciation has stabilized at around 2% since the 1990s.
The second cause, the network effect, plays a key role: the more people use the dollar, the more practical its use becomes. Unlike other highly dollarized economies such as Laos or Argentina, in Cambodia, the dollar is both a means of exchange and a unit of account, strengthening its hold on the economy.
The impacts of dollarization
There are advantages and disadvantages to using the dollar. Among the benefits, it stabilizes the economy in times of crisis, reduces the exchange risk for international transactions, and attracts foreign investment thanks to the confidence inspired by the American currency. In addition, dollarization imposes budgetary discipline by preventing the government from resorting to printing money.
However, the costs are high. Cambodia loses seigniorage (profit generated by printing money), as well as control over its monetary policy. The lack of monetary sovereignty prevents the country from responding effectively to trade imbalances or financial crises. In addition, the National Bank of Cambodia (BNC) cannot play the role of lender of last resort.
-Policies to promote the riel
Faced with these challenges, Cambodia draws inspiration from the successful experience of Laos. Since 2023, the Ministry of Commerce requires that all prices be displayed in riel. Other measures reinforce this initiative:
- Exchange rate stability : The BNC adopted a controlled floating exchange rate regime to anchor confidence in the riel.
- Promotion of riel loans : Since 2016, financial institutions must devote at least 10% of their loan portfolios to riel.
- Payment Modernization : Digital systems like Bakong and cross-border QR payment facilitate the use of the riel.
- Budget and tax management : The riel is prioritized in public spending, civil servant salaries and tax collection.
- Development of the bond market : Since 2022, government bonds in riel have diversified sources of financing.
A long-term challenge
For both economists, despite these efforts, dollarization is deeply entrenched in Cambodia, making the dedollarization process slower. However, with rigorous policies and strict monitoring, Cambodia could gradually regain monetary autonomy. As the saying goes, “better late than never” to regain control of your destiny.
In addition to Laos cited by the two researchers, several countries, such as Vietnam, Peru, Israel and Russia, have taken steps to reduce their dependence on the American dollar by favoring the use of their national currency. These initiatives aimed to strengthen their economic sovereignty, limit their vulnerability to dollar fluctuations or even stabilize their finances after periods of crisis.
If notable successes, such as those of Vietnam and Israel, show that a rigorous monetary policy and appropriate incentives can promote a successful transition, other experiences, like Zimbabwe, highlight the pitfalls linked to a loss of confidence in the national currency. These examples highlight the importance of a gradual approach, a solid economic framework and lasting stability to ensure the success of such a transition.
