Currency Substitution in Cambodia

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Currency Substitution in Cambodia ________________
__________________________________________________
___ KEM REAT VISETH Cambodia Institute for
Cooperation and Peace, and Office of the Council
of Ministers Phnom Penh, CAMBODIA Prepared for
the 9th Academic Forum on East Asian
Economy Nanning, November 24-25, 2005
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OUTLINE

• What is currency substitution (CS) and why is it
  important for economic development
• Stylized facts of CS in Cambodia
• Model of CS and empirical results
• Conclusion

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1.a. What is CS?
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1. b. Dollarization and its types

• Official dollarization
• Semi-official dollarization
• Unofficial dollarization

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1. c. Measurements of CS

• i. Stock concept
• measures the volume of FC in an economy.
• Normally, measured by a ratio of FCD/M, called CS
  or dollarization ratio.
• ii. Process or behavioral concept
• measures the propensity of substituting FC for
  domestic currency by an economic agent.

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1. d. Importance of CS

• i. Benefits of CS
• Promote financial reintermediation and financial
  deepening
• Promote confidence in the domestic banks
• Impose discipline on the government to finance
  spending though inflation tax

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• ii. Costs of CS
• Loss of seigniorage
• Limit the conduct of monetary policy
• Nominal exchange rate cannot be used to respond
  to economic shocks
• Exacerbate inequality of income distribution

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2. Stylized facts of CS in Cambodia

• ? US dollar is widely used as
• Store of value
• Means of payment
• Unit of account
• Thai baht and Vietnamese dong is used as medium
  of exchange in main cities and some areas
  bordering with Thailand and Vietnam.

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Foreign Currency Deposit 1988-2001
Source Data provided by the NBC
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Causes of CS in Cambodia

• Low confidence in the riel, as a result of the
  two decades of war
• Smuggling activities
• UNTAC arrival
• Remittances
• Under-developed financial market
• Inflation, and
• Exchange rate depreciation

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Monthly Exchange Rates and Inflation Rates
January 1993-April 2001
Source Data provided by the NBC
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3.a. Model of CS

• The estimated equation can be written as
• This equation states that the ratio of holdings
  of FC to domestic currency and the change in
  depreciation rate are positively related.

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3. b. Empirical Results
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4. Conclusions Future Research

• There is strong presence of CS in Cambodia, thus
  limiting the power of the monetary authority. In
  view of this, should Cambodia officially
  dollarized or de-dollarized?
• Given preliminary studies, the costs of
  dollarization in Cambodia seems to outweighs the
  benefits.

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Conclusion (contd)

• Therefore, the National Bank of Cambodia
  (Cambodias Central Bank) suggests the gradual
  de-dollarization process.
• However, a thorough study ought to be conducted
  to investigate the quantitative costs and
  benefits of dollarization. This is a topic for
  further research.

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• THANK YOU!!!