Cambodia, one of the developing nations in Southeast Asia, faces an intriguing phenomenon regarding the use of foreign currency in its economy.
This phenomenon, known as dollarization, demonstrates how dominant the US dollar is in Cambodia's economic transactions, even though the country has its official currency, the riel.
Dollarization in Cambodia did not happen as a result of official policy but emerged spontaneously in response to economic instability and the loss of confidence in the riel, which began to take root after the Khmer Rouge era (1975–1979).
The History of Dollarization in Cambodia
The process of dollarization in Cambodia began following the collapse of the financial system during the Khmer Rouge regime. As a result, the Cambodian people lost confidence in the riel and began to rely heavily on the US dollar, as well as other foreign currencies like the Thai baht and Vietnamese dong.
In the early 1990s, the arrival of the United Nations Transitional Authority in Cambodia (UNTAC) further accelerated this process by flooding the country with US dollars.
In the following decades, high inflation and the depreciation of the riel made the US dollar an increasingly popular choice for large transactions, savings, and even wages in sectors managed by foreign NGOs.
By 2007, around 95-97% of bank loans and deposits in Cambodia were denominated in US dollars, while the riel was predominantly used for small transactions, particularly in rural areas.
The Benefits of Dollarization for Cambodia
Dollarization has provided several economic benefits for Cambodia, both in terms of short-term financial stability and long-term fiscal management. One of the most significant advantages is price stability, which has helped control inflation and safeguard purchasing power.
In this context, the use of the US dollar has prevented the Cambodian people from experiencing the volatility typically associated with the riel. Additionally, dollarization has reduced the risk of capital flight, keeping money circulating within the country and maintaining confidence in the economy.
The widespread use of the US dollar has also facilitated international trade, particularly in industries such as textiles and garments. With the presence of the US dollar in Cambodia’s economy, the country has been able to engage in smoother transactions with global markets, attracting foreign investment and enabling economic growth.
The Disadvantages of Dollarization in Cambodia
However, despite its benefits, dollarization in Cambodia has some significant drawbacks, particularly concerning monetary policy. One of the biggest challenges is that the National Bank of Cambodia (NBC) has limited control over monetary policy. This limits the bank’s ability to implement effective monetary tools to stabilize the economy.
Additionally, Cambodia has lost the potential for seigniorage, or the profits generated from printing its own currency, with the benefit of these profits going to the United States. It is estimated that Cambodia loses between USD 20–90 million annually due to this lost opportunity.
The widespread use of the US dollar also impacts the symbol of sovereignty. The riel, which should serve as a symbol of Cambodian national identity, has lost much of its significance among the population, who prefer using the US dollar for savings, large transactions, and investments.
The Efforts Toward De-dollarization: Challenges and Solutions
As a country highly dependent on the US dollar, Cambodia's efforts to de-dollarize are far from easy. However, the Cambodian government has been working towards reducing its reliance on the dollar and gradually restoring confidence in the riel.
Some of the measures already implemented include requiring taxes and public services to be paid in riel, as well as paying civil servant salaries in riel.
Other initiatives have included improving the quality of riel banknotes and encouraging banks and microfinance institutions to extend loans in riel. Despite these efforts, a significant challenge remains: the inflation trauma of the past continues to make the public wary of the riel, making the transition difficult.
Learning from Other Countries
The experiences of other nations that have undergone dollarization provide valuable insights into what works and what doesn’t.
Many countries have attempted de-dollarization, but the majority have failed, with a few exceptions like Israel and Poland, where strong disinflation policies and high credibility helped to reduce dependence on foreign currency.
In addition, some countries, such as Panama, El Salvador, and Timor-Leste, have opted for full dollarization, which has provided greater stability in their financial systems.
Cambodia’s Path Forward: Gradual De-dollarization
Dollarization in Cambodia is deeply entrenched in the country's economy, but the challenge of full de-dollarization remains substantial.
The Cambodian government does not aim for a forced de-dollarization; instead, it seeks to gradually build confidence in the riel over time.
Measures like improving the quality of riel notes and encouraging the use of riel for savings and transactions are seen as key to reducing dependence on the US dollar in the long term. With political stability, disciplinary fiscal policies, and banking reforms, Cambodia can make progress in reintroducing the riel as the country’s primary currency.
Reference:
Im, T. N., & Dabadie, M. (2007). Dollarization in Cambodia. Retrieved from https://www.nbc.gov.kh/download_files/publication/others_eng/notemd117-14_article_dollarization.pdf
