implications of dollarization on cambodia's banking system

Commitment to Excellence

សាកលវទិ្យាលយ័បញ្ញា សាស្រ្តកម្ពុជា

Paññāsāstra University of Cambodia

IMPLICATIONS OF DOLLARIZATION ON

CAMBODIA’S BANKING SYSTEM

A Senior Project Report Presented to the Academic Members of

the Faculty of Business and Economics

Submitted by

Ms. LIM Muy Ngim

Submitted to

Prof. LIM Siphat (Advisor)

In Partial Fulfillment of the Requirement for the Degree of

Bachelor of Arts in Finance and Banking

April, 2015

SENIOR PROJECT REPORT

APPROVAL FOR ORAL PRESENTATION

We, the Examination Committee, by virtue of the powers vested in us by the Board of

Trustees and by the Executive Officers of Paññāsāstra University of Cambodia

Herewith accept the Senior Project Report

in consistent with the faculty’s writing format and content

Entitled

“Implications of Dollarization on Cambodia’s Banking System”

Written by

Ms. LIM Muy Ngim ID: 50559

In partial fulfillment of the requirements for

Bachelor of Arts in Finance and Banking, Faculty of Business and Economics

_________________

Chairperson

……………………

Date: ……………..

_________________ _________________

Project Advisor Member

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Date: ........................ Date: ........................

_________________ _________________

Member Member

.................................. ..................................

Date: ........................ Date: ........................

Presentation Date: _________________

Approved by Dean

_____________________ ...................................

Academic Program Office Date: ........................

i

Abstract

Dollarization in Cambodia began in 1992 owing to political and macroeconomic instability

and incapability of the National Bank of Cambodia to cope with the large inflows of US

dollar into the country. Since then, US dollar has been used in parallel with national currency,

Khmer Riel. As capital inflows from investments and donors, together with most of

transactions in private sector, are in US dollars rather Khmer Riels, the dollarization level in

Cambodia is estimated to be over 90 percent. Two main factors are believed as the

motivations to Cambodia remaining the status of highly dollarized economy, namely lack of

support from private sector and the role of the NBC in dealing with this issue.

In Cambodia’s banking system, the US Dollar is accounts for approximately 95 percent of

total deposits. It is like two-face sword that offer both advantages and disadvantages to

banking system in Cambodia. In terms of benefits, dollarization can help reduce foreign

exchange rate risk and at the same time increase more deposits and more credits. In broader

sense, it can also help the banks less vulnerable to the regional financial problem. On the

contrary, the main cost of dollarization to banking system of Cambodia is that it undermines

the NBC’s roles in regulating monetary policy and achieving monetary objectives.

Dollarization makes banks in Cambodia more exposed to liquidity risk and sovereign risk,

especially associated with the situation in the US. As a result, there is a need to foster the

progress of interbank market and security market development. The NBC shall improve her

capacity in supervising the banking system and financial system to minimize some possible

risks associated with current trend of banking system development.

Key words: Dollarization/Banking System/Foreign Exchange Rate Risk/Sovereign Risk/and

Liquidity/Monetary Policies/Interbank Market

ii

Acknowledgement

I would like to thank the following people who have both directly and indirectly

assisted in my completing my senior project. Those following people are presented below:

Dr. KOL Pheng, Founder of the Paññāsāstra University of Cambodia

Prof. LIM Siphat, Senior Project Advisor

Prof. Chiv Ratha, Dean of the Faculty of Business and Economics

Firstly, I would like to express my honor respect Dr. Kol Pheng. Without his

commitment since the beginning, Paññāsāstra University of Cambodia cannot be established

and I would not have such an opportunity to study in a university that offers international

standard of education and sharpens students with skills along with morality. Also, I am so

thankful to Prof. Chiv Ratha. During my four-year study in this university, he has provided

me a lot of assistances in dealing with a lot of problems and has shared a lot of experiences in

related to leadership skills and other workplace strategies.

I would like to express my heartily gratitude and special thanks to my senior project

advisor, Prof. LIM Siphat. He has always motivated and supported my research until the

completion of this report. During the whole process of working on this project, he has

provided a lot of technical advices, guidance, comments, and feedbacks on my works and he

has also kindly shared the documents, which can help improve this paper better. Without him,

I would not be able to accomplish it successfully.

Furthermore, I would like to thank all the instructors who have delivered concrete

lectures, provided guidance, and shared good experiences and resources, and academic staffs

and administrative staffs who have helped facilitated, coordinates, and supports any needs in

the process of pursuing degree here and my senior project. Last but not least, I would like

express my gratitude to our parents and thanks to my brother, sister, and friends who always

take care and assist me in many ways until my graduation.

iii

List of Abbreviation

ATM Automated Teller Machine

KHR Khmer Riel

IMF International Monetary Fund

MDIs Microfinance Deposit-Taking Institution

MFIs Microfinance Institutions

NBC National Bank of Cambodia

NCDs Negotiable Certificates of Deposit

NGOs Nongovernmental Organizations

RGC Royal Government of Cambodia

UNTAC United Nations Transitional Authority in Cambodia

US United States

USD United States Dollar

VAR Model Vector Autoregression Model

iv

List of Figures

Figure 1: Indochina Piastre ......................................................................................................... 9

Figure 2: National Currency during 1956 – 1970 .................................................................... 12

Figure 3 National Currency during 1970 – 1975 ...................................................................... 13

Figure 4: National Currency during 1979-1991 ....................................................................... 14

Figure 5: National Currency during 1991-1992 ....................................................................... 15

Figure 6: National Currency 1993 – Present ............................................................................ 16

Figure 7: The Photo of NBC Building Destroyed by Pol Pot .................................................. 20

Figure 8: The Photo of NBC Building in Phnom Penh Today from the Left .......................... 21

Figure 9: GDP Growth Rate of Cambodia from 1994 – 2013 ................................................. 24

Figure 10: Estimated Dollarization, 1995-2010 (In Percentage of Broad Money) .................. 24

Figure 11: Dollars in Circulation outside Banks, 1995 - 2010 (In billions of US dollar) ........ 26

Figure 12: Banking Structure in Cambodia, as of the 2nd quarter of 2014 ............................... 30

Figure 13: Cambodia's Riel Deposits, 2006 – 2010 ................................................................. 31

Figure 14: Cambodia's US Dollar Deposits, 2006 – 2010 ........................................................ 32

Figure 15: Dollarization 2008 -2013 ........................................................................................ 32

Figure 16: Cambodian and Foreign Shares of Paid-up Capitals .............................................. 33

Figure 17: Deposits in Banking System (Thousand USD), 2004 – 2009 ................................. 35

Figure 18: Loans to Customers (Thousand USD), 2004 – 2009 .............................................. 35

Figure 19: Deposit and Credit Growth, 2009 -2013 ................................................................. 36

Figure 20: Monetary Policy Strategies of NBC ....................................................................... 37

Figure 21: Deposit and Credit Growth, December 2006 – December 2009 ............................ 39

Figure 22: Inflation of Cambodia from 1995 – 2013 based on CPI ......................................... 46

Figure 23: Deposits and Loans of Commercial Banks (measured in Billion KHR), 2005 –

2013 .......................................................................................................................................... 47

v

Figure 24: Menu of Domino's Pizza in Cambodia (Source: Domino’s Pizza Website) ........... 48

Figure 25: Menu of Brown Coffee and Bakery in Cambodia (Source: Brown Coffee App.) .. 49

Figure 26: Product Catalog of Hakse Mobile Phone Center in Cambodia (Source: Hakse

Website) .................................................................................................................................... 50

Figure 27: Flyer of Anana Computer in Cambodia (Source: Anana Computer Website) ....... 50

Figure 28: Real Estate Pricing in Cambodia (Source: Real Estate Website) ........................... 51

Figure 29: Hotel Room Pricing Monorom VIP Hotel in Kampong Cham, Cambodia (Source:

Monorom VIP Hotel Website) ................................................................................................. 51

vi

List of Tables

Table 1: Cash US Dollar Circulation (in Billion), 1995 – 2010 ............................................... 46

Table 2: Average Official Exchange Rate of KHR/USD from 1990-2013 .............................. 46

vii

Table of Contents

Abstract ........................................................................................................................................ i

Acknowledgement ...................................................................................................................... ii

List of Abbreviation .................................................................................................................. iii

List of Figures ............................................................................................................................ iv

List of Tables ............................................................................................................................. vi

CHAPTER 1: INTRODUCTION ............................................................................................... 1

1.1. Background of Study ................................................................................................... 1

1.2. Problem of Statement ................................................................................................... 2

1.3. Research Questions ...................................................................................................... 2

1.4. Research Objectives ..................................................................................................... 2

1.5. Significances of Research ............................................................................................ 2

1.6. Scope and Limitation ................................................................................................... 3

1.7. Definition of Dollarization ........................................................................................... 3

1.7.1. Types of Dollarization .......................................................................................... 4

CHAPTER 02: LITERATURE REVIEW .................................................................................. 5

1.1. The Rationales behind Dollarization in Cambodia ...................................................... 5

1.2. Positive Impacts of Dollarization on Cambodia’s Economy ....................................... 5

1.3. Negative Impacts of Dollarization on Cambodia’s Economy ..................................... 6

CHAPTER 03: RESEARCH METHODOLOGY ...................................................................... 8

1.1. Data Collection ............................................................................................................ 8

1.2. Research Methodology ................................................................................................ 8

viii

CHAPTER 04: FINDINGS ........................................................................................................ 9

1.1. History of National Currency in Cambodia ................................................................. 9

1.1.1. French Indochina Currency during France’s Colonization .................................. 9

1.1.2. National Currency during Cambodia Kingdom (1956 – 1970) .......................... 12

1.1.3. National Currency during Khmer Republic (1970 – 1975) ................................ 13

1.1.4. National Currency during People Republic of Kampuchea (1979 – 1991) ........ 14

1.1.5. National Currency during State of Cambodia (1990-1992) ............................... 15

1.1.6. National Currency Circulation 1993 – Present ................................................... 16

1.2. Overview of the National Bank of Cambodia ............................................................ 20

1.2.1. The Brief History of the National Bank of Cambodia........................................ 20

1.2.2. The Functions of the National Bank of Cambodia ............................................. 22

1.3. Dollarization in Cambodia and its Driving Forces .................................................... 23

1.3.1. Brief History of Dollarization in Cambodia ....................................................... 23

1.3.2. Types of Dollarization in Cambodia .................................................................. 25

1.3.3. Rationales behind Dollarization in Cambodia .................................................... 25

1.4. Cambodia’s Banking System and Dollarization ........................................................ 29

1.4.1. Overview of Banking System in Cambodia ....................................................... 29

1.4.2. Dollarization in Banking System ........................................................................ 31

1.4.3. Benefits of Dollarization in Cambodia’s Banking System ................................. 33

1.4.4. Costs of Dollarization in Cambodia’s Banking System ..................................... 37

CHAPTER 05: CONCLUSION AND RECOMMENDATIONS ............................................ 40

REFERENCES ......................................................................................................................... 42

ix

APPENDIX I ............................................................................................................................ 46

APPENDIX II ........................................................................................................................... 48

CHAPTER 1: INTRODUCTION

1.1. Background of Study

Dollarization exists in developing countries where their citizens’ trust on foreign currency,

especially the US dollar, is higher than their domestic currency. Some countries today,

especially developing countries, are already dollarized, which US dollar is circulated in their

countries instead of or in addition to their national currency. This situation can be found in

Cambodia, Zimbabwe, Panama, and Ecuador.

Similar to other countries, decades of civil wars was the cause of instability in Cambodia and

the series of civil war put Cambodian people under insecurity. Following the Paris Peace

Agreement, in 1992, the arrival of UNTAC (United Nations Transitional Authority in

Cambodia) was to assist Cambodia to restore peace through establishing new legitimate

government via the free and fair election mechanism. The total expenditures of UNTAC to

accomplish its mission in Cambodia was approximately 1.7 billion US dollar, which was one

of the largest operation in the United Nations peace operation history (United Nations, n.d.).

This figure clearly emphasized that the arrival of UNTAC also brought along with large

quantity of US dollar into this country that had yet achieved peace. In other word,

significantly, 1992 marked as the starting year that Cambodian people began to use US dollar

inside the territory. Over two decades, Cambodia has been the most dollarized economy in

Southeast Asia due to the extremely high circulation of the US dollars inside the country. Riel,

which is the official currency of Cambodia, is only used in public transaction, such as salary

payment to government officials, public service fees, and tax payment. However, in private

sector, the US dollar serves all functions of money, particularly a medium of exchange, store

of wealth, and unit of account (Im & Dabadie, 2007; Menon, 2008).

1.2. Problem of Statement

Noticeably, dollarization has significant influences on the operation of financial market in

Cambodia, especially banking system. Hence, dominating public transactions, dollarization

has been an increasing concern on Cambodia’s economy and it seems impossible to reverse at

present (Menon, 2008). With this concern, this study attempts to investigate the root causes of

the persistence of dollarization in Cambodia and its positive and negative impacts on

Cambodia’s banking system.

1.3. Research Questions

This study aims to answer the following questions:

1. Why has the US dollar remained as a dominant currency in Cambodia for more than

two decades?

2. How does dollarization benefit the banking system in Cambodia?

3. What are the costs of dollarization in Cambodia’s banking system?

1.4. Research Objectives

This study aims to achieve the following objectives:

1. To figure out why the US dollar remains as a dominant currency in Cambodia

2. To determine benefit and cost of dollarization in Cambodia’s banking system

1.5. Significances of Research

This study aims to investigate the implication of dollarization on Cambodia’s banking system,

which serves as a new literature for students and other researchers to get to know more about

dollarization of Cambodia. In addition, this study expects to increase the public awareness of

the negative impacts of dollarization on Cambodia and to advance public trust on domestic

currency. This study is also conducted with the purpose to encourage more participation from

businesses and enterprises, especially the actors in banking system, to employ domestic

currency as a medium of exchange. Last but not least, this study will serve as a consultant to

the Royal Government of Cambodia and the National Bank of Cambodia, in formulating more

effective monetary policies in coping dollarization and achieving monetary sovereignty.

1.6. Scope and Limitation

This study possesses several limitations. First, the accessibility to reliable resources is still

limited, especially the official documents related to the National Bank of Cambodia’s policies

in dealing with dollarization in Cambodia and reports on the actual result from the

implementation of those policies. Also, this study could not get the figures about the actual

number and the interest rates of foreign borrowings of all banks in Cambodia. Furthermore,

due to time constraint, this study could not confirm the assumption made by many scholars in

regard to the eroded public confidence on domestic currency through the collection of primary

data from the public. Besides, this study does not define the impacts of dollarization on

Cambodia’s financial market as the whole but only focuses on banking system because of the

inactiveness of Cambodia’s capital market or security market.

1.7. Definition of Dollarization

Before going through this paper, the conceptual understanding of the term “dollarization” is

required. Dollarization can be simply understood as the use of foreign currency by the

residents of one country. Investopedia also defines dollarization is the situation where citizens

of a country officially or unofficially use a foreign currency, especially the US dollar, as legal

tender for conducting transactions. In 1988, Salama defined dollarization as an evolution

where the dollar is the predominant store of value, unit of account, and medium of exchange

for certain goods (Cited in Minda, 2005, pp.4). Similarly, Bourguinat and Dohni, in 2002,

defined dollarization as the process where national currencies are replaced by the dollar as the

unit for the price of goods, the means of payment, and the holding of savings (Cited in Minda,

2005, pp.4).

1.7.1. Types of Dollarization

Dollarization can be divided into three broad categories. The first category classifies

dollarization based on the degree to which foreign currency present as an official currency in

one country. In the first categories, there is the differentiation between official dollarization

and partial dollarization. Official (de jure) dollarization occurs when a foreign currency is

adopted as the exclusive legal tender in one country by the public authority; in contrast,

unofficial (de facto) dollarization occurs when the local currency remains the exclusive legal

tender but financial and payments transactions are allowed to be denominated in dollars,

effectively allowing a bi-currency system to take hold (Gulde, Hoelscher, Ize, Marston, &

Nicoló, 2004, pp.1; Minda, 2005, pp.5).

The second category differentiates dollarization according to the degree to which a foreign

currency is used in the transactions of a country, either in a complete form or a partial form.

Complete dollarization is phenomenon of foreign currency as monetarily exclusive since it

imposes itself as the sole currency of a country. On the other hand, partial dollarization is a

situation of monetary plurality where a foreign currency circulates in parallel with the

domestic currency of a country (Minda, 2005, pp. 4-5)

Lastly, the third category classifies dollarization in accordance to the purposes of foreign

currency being used by the people. In this category, payments dollarization is the use of

foreign currency for transaction purposes; financial dollarization is residents’ holding of

financial assets or liabilities in foreign currency; real dollarization is the indexing, formally or

de facto, of local prices and wages to the dollar (Gulde et al., 2004, pp.1).

CHAPTER 02: LITERATURE REVIEW

1.1. The Rationales behind Dollarization in Cambodia

It is obvious that dollarization in Cambodia is not the product of policy (Chiv, 2013). On the

contrary, the rationale behind dollarization in Cambodia stresses on the eroded public

confidence of Cambodians as the main driving force because the general public does not trust

authorities’ capacity to maintain the value of Riel (Im & Dabadie, 2007; Chiv, 2013). This

eroded public confidence is the results of a series of shocks, events, and experiences happened

in Cambodia, especially when economic and financial systems were totally destroyed by

Khmer Rouge regime during 1970s and the influx of massive quantities of the US dollars

during UNTAC period in the early 1990s. Lim (2011) and Menon (2008) believed that

dollarization was the consequence of large amount of capital inflows in US dollar from

UNTAC in 1992 and 1993 and from investors and foreign donors. In addition, Menon (2008)

stated that persistence of dollarization in Cambodia is because of two main interrelated factors,

namely the degree or magnitude of the reforms and hysteresis or the fact that history matters.

Specifically, Menon (2008) believed that dollarization persists in Cambodia on the account of

lacking of monetary and financial reforms. According to the working paper published by the

Centre for Applied Macroeconomic Analysis in 2014, the three main determinant factors of

the foreign currency holdings by Cambodian households include the income level, economic

sector, and access to finance.

1.2. Positive Impacts of Dollarization on Cambodia’s Economy

Dollarization has impacted on Cambodia’s economy positively in several ways. First of all,

one of the benefit of dollarization in Cambodia is that it switches public practice from

precious metal, particularly gold, to banknotes denominated in US dollar (United Nations

Development Programme, 2004; Lim, 2011l Chiv, 2013). Im and Dabadie (2007) also

claimed that dollarization promotes growth of financial system. It is believed that

dollarization also prevent capital flight from Cambodia and encourages more saving from the

public through foreign currency deposit in the banks in Cambodia (United Nations

Development Programme, 2004; Zamaróczy and Sa 2002; Chiv, 2013). In line with other

researchers, Lim (2011) believed that dollarization encourages more deposits and lending in

US dollar in banking system. In addition to preventing capital flight, dollarization enhances

liberalization by attracting more capital inflows (Ngoun, 2014). Furthermore, dollarization

lowers the risk of currency devaluation and stabilizes Cambodia’s economy (United Nations

Development Programme, 2004; Im and Dabadie, 2007; Chiv, 2013). As the use of national

currency is limited and is only for dealing with small transactions, dollarization also serves as

a mechanism that protects business against exchange rate risk and economic spillover (Chiv

2013; Zamaróczy & Sa, 2002; Lim, 2011). Besides, it reduces the risk of national default and

increases awareness by policymakers of the need to avoid bank financing of public deficits

(Lay, Kakinaka, Kotani, 2010; Chiv, 2013). Last but not least, dollarization can help integrate

Cambodia into global economy and finance since the US dollar has high purchasing power

and relatively low exchange rate risk (Zamaróczy & Sa, 2002; Im and Dabadie, 2007; United

Nations Development Programme, 2004)..

1.3. Negative Impacts of Dollarization on Cambodia’s Economy

Despite those benefits offered by dollarization, dollarization does negatively affects

Cambodia’s economy. One of the main costs of dollarization in Cambodia is the loss of

seigniorage revenue for the government since the National Bank of Cambodia losses revenue

from the right to issue a legal tender currency (Zamaróczy & Sa, 2002; Im & Dabadie, 2007;

United Nations Development Programme, 2004; Chiv, 2013; Lim, 2011). Another drawback

of dollarization in Cambodia is lower official international reserve (Zamaróczy & Sa, 2002).

Additionally, dollarization undermines the effectiveness of monetary policy by the National

Bank of Cambodia and fiscal policy by Cambodia’s Ministry of Economic and Finance due to

the fact that Cambodia tends to surrender to the United States economic policy and their

economic health (Zamaróczy & Sa, 2002; Im & Dabadie, 2007; Chiv, 2013; United Nations

Development Programme, 2004). Significantly, the National Bank of Cambodia cannot play a

role as lender of a last resort owing to most of banks holding cash in US dollars (Lim, 2011).

Although many claimed dollarization can help deepen financial system, Ngoun (2014) viewed

dollarization as a risk factor to financial stability since dollarization can increase more

liquidity risk that lead to insolvency risk. Besides, the UNDP (2004), together with Lay,

Kakinaka, and Kotani (2010), also believed that dollarization widen the gap between the rich

and the poor. In other words, people who earn the profit in US dollars enjoy higher

purchasing power than the earners of Riel, who generally are the poor in rural area, because

weaker Riel is more likely to depreciate against strong US dollars (United Nations

Development Programme, 2004; Lay, Kakinaka, Kotani, 2010).

CHAPTER 03: RESEARCH METHODOLOGY

1.1. Data Collection

The data and information of this paper are mainly collected from secondary sources from the

internet. The information and figures are mainly retrieved from the annual reports and are

consulted with the “Financial Sector Development Strategies 2006-2015”, which are all

available at the official website of National Bank of Cambodia. Also, many figures presented

in the paper are accessed from the data history and the publications from international

organization, such as World Bank and International Monetary Funds (IMF). Furthermore,

those secondary sources are collected from previously published literatures written by Khmer

and foreign authors, related new articles from the Phnom Penh Post, the articles from the Wall

Street Journal, and some other articles that are available in the online sources.

1.2. Research Methodology

This paper mainly adopts qualitative study rather than quantitative research approach since

this study will not employ any economic equation or economic model or conduct any survey.

To be more specific, the study will utilize retrospective study as its study design. By recalling

the events happened in past until today, this paper will analyze the past events influencing on

the present situation. For instance, figures related to economic indicators that appears in this

paper are dated from 1993 to 2013. Observation method will be another main approach in this

study to offer additional analysis to the findings.

CHAPTER 04: FINDINGS

1.1. History of National Currency in Cambodia

Cambodia has experienced up and down in her history. Cambodia had warred and been

invaded by her neighboring countries, Vietnam and Thailand, throughout the history. Before

the end of World War II, Cambodia had ever been under French colonization for 90 years. On

November 09, 1953, Cambodia finally gained her independence from France. Nonetheless,

only 17 years after independence from France, Cambodia’s civil wars began and the regime

has been shifted from one to another. Cambodia’s national currency has significantly changed

from one regime to another, in terms of form and name. In this paper, Cambodia’s national

currency was classified into six different phases, since French colonization until today.

1.1.1. French Indochina Currency during France’s Colonization

In 1887, France decided to consolidate three countries in Southeast Asia that were under her

colony, namely Cambodia, Vietnam, and Laos (Faculty of Social Science and Humanity, n.d.).

These three countries were referred as Indochina Union, and common currency, Piastre, was

established for this union. Though Cambodia had ever been under Japanese colonization

during the Second World War, Japan did not change the Indochina currency and Piastre had

still been used in Cambodia until it was replaced by Khmer Riel in 1955.

Figure 1: Indochina Piastre

Currency Front Side Back Side

1 Piastre

1 Piastre

1 Piastre

1 Piastre

5 Piastres

5 Piastres

5 Piastres

10 Piastres

20 Piastres

20 Piastres

50 Piastres

100 Piastres

100 Piastres

200 Piastres

500 Piastres

1,000

Piastres

Source: National Bank Cambodia

1.1.2. National Currency during Cambodia Kingdom (1956 – 1970)

Soon after independence in 1953, Cambodia did not adopt her own currency immediately.

Khmer Riel first became Cambodia’s national currency in 1955 when it replaced the

Indochina Piastre.

Figure 2: National Currency during 1956 – 1970


1 Riel

5 Riels

10 Riels

20 Riels

50 Riels

100 Riels

100 Riels

100 Riels

500 Riels


1.1.3. National Currency during Khmer Republic (1970 – 1975)

Figure 3 National Currency during 1970 – 1975


100 Riels

500 Riels

1,000

Riels

5,000

Riels


1.1.4. National Currency during People Republic of Kampuchea (1979 – 1991)

In 1975, Pol Pot regime banned monetary circulation, meaning that Khmer Riel was

abandoned and no any other foreign currency took place in Cambodia. The banking system

was also dismissed. Khmer Riel again became national currency in 1979 after the defeat of

Pol Pol government.

Figure 4: National Currency during 1979-1991


1 Riels

5 Riels

10 Riels

50 Riels


1.1.5. National Currency during State of Cambodia (1990-1992)

Figure 5: National Currency during 1991-1992


50 Riels

100 Riels

200 Riels

500 Riels

1,000

Riels

2,000

Riels


1.1.6. National Currency Circulation 1993 – Present

Figure 6: National Currency 1993 – Present


50 Riels

100 Riels

100 Riels

100 Riels

200 Riels

500 Riels

500 Riels

500 Riels

1,000

Riels

1,000

Riels

1,000

Riels

1,000

Riels

2,000

Riels

2,000

Riels

2,000

Riels

5,000

Riels

5,000

Riels

10,000

Riels

10,000

Riels

20,000

Riels

20,000

Riels

50,000

Riels

50,000

Riels

50,000

Riels

100,000

Riels

100,000

Riels


1.2. Overview of the National Bank of Cambodia

1.2.1. The Brief History of the National Bank of Cambodia

The history of central bank of Cambodia can be divided into three different periods. The first

period started from 1954 till 1975. After gaining independence from France, Cambodia

established its central bank in December 23, 1954, given name as National Bank of

Cambodia, to replace the Indochina Printing Institution founded by the French colony. To be

completely monetary independence from Vietnam and Laos, the National Bank of

Cambodia’s role was to print Cambodia’s currency. In 1964, there was a reform to transform

National Bank of Cambodia from semi-autonomous to state-owned bank.

In 1975, National Bank of Cambodia was closed and the building was ruined by Khmer

Rouge regime. Thus, financial and banking system could not be found from 1975 to 1979.

This period of absence marked as the second stage of central bank’s history.

Figure 7: The Photo of NBC Building Destroyed by Pol Pot

Photo by: Ben Kiernan, 1980

The third phase of history of central bank in Cambodia began in 1979 until today. Due to Pol

Pot regime, human resources together with documents and financial resources were destroyed.

Most people lived in extreme poverty with fear of insecurity, weak health, no clothes, and no

foods. Struggling all these difficulties and receiving technical assistances from other countries,

the government back then, in October 10, 1979, was able to reestablish a new central bank,

with a new given-name called the People's Bank of Cambodia or Bank of Cambodia. Its main

functions were monetary authority, the cashier of the government in the form of the National

Treasury, and the provider of banking services.

In 1992, the Bank of Cambodia changed its name back to the National Bank of Cambodia. Its

primary mission is to determine and direct the monetary policy aimed at maintaining price

stability and integrating into the global financial system. At the same time, the NBC played

role in advancing public confidence to monetary and financial system in Cambodia. It is also

publicly known as "Red Bank" or "Banque Rouge”. This short name represents the bravery in

overcoming difficulties and the patriotism of National Bank of Cambodia (National Bank of

Cambodia, n.d.). Currently, National Bank of Cambodia does not only has its office in Phnom

Penh but also has its branch in 20 other provinces except Kep, Tbong Khmom, Oddar

Meanchey, and Pailin.

Figure 8: The Photo of NBC Building in Phnom Penh Today from the Left

Photo by Kimlen, Actlens Photography, 2012

1.2.2. The Functions of the National Bank of Cambodia

The National Bank of Cambodia, as the central bank, is the main regulatory body to conduct

and perform monetary policy, to provide financial services, to supervise and monitor over

financial system, and to maintain the sustainability of financial system in Cambodia. To be

more specific, twelve functions and duties of the NBC are described below:

1. To determine monetary policy objectives, in consultation with the Royal Government

and consideration of the framework of the economic and financial policy of the

Kingdom;

2. To formulate, implement and monitor monetary and exchange policies aimed at the

determined objectives;

3. To conduct regular economic and monetary analysis, make public the results, and

submit proposals and measures to the Royal Government;

4. To license, delicense, regulate and supervise banks and financial institutions and other

relevant establishments such as auditors and liquidators;

5. To oversee payments systems in the Kingdom, and to enhance interbank payments;

6. To act as the sole issuer of national currency of the Kingdom;

7. To undertake and perform, in the name of the Kingdom, transactions resulting from

the participation of the Kingdom in public international institutions in the banking,

credit, and monetary spheres;

8. To establish the balance of payments;

9. To participate in the management of external debt and claims;

10. To participate in the formation and supervision of the money and financial markets;

11. To license, delicense, regulate and supervise all those operating in the securities and

foreign exchange markets, the market for precious stones and precious metals;

12. To set interest rates.

1.3. Dollarization in Cambodia and its Driving Forces

1.3.1. Brief History of Dollarization in Cambodia

In 1970s, Khmer Rouge regime destroyed not only education system but also financial system

in Cambodia. During 1975 till 1979, national currency was completely abolished. However,

the collapse of Khmer Rouge regime did not give rise to peace and security to Cambodians

afterward; instead, decade of civil war brought about instability in Cambodia. These series of

unfavorable events affected the perception and trust of people on national currency. In other

word, as the result of these strokes, Cambodians did not have any confidence in holding

national currency and most people preferred gold as their saving. When UNTAC came to

Cambodia in 1992, large quantity of US dollar flowed into Cambodia. When the state was yet

stable, National Bank of Cambodia was weak and unable to take measurement to cope with

the influx of large amount US dollar inside the country. The arrival of UNTAC was believed

as the beginning of dollarization in the Kingdom.

After the first election in 1993, the establishment of the Kingdom of Cambodia and the

creation of the coalition government with the co-Prime Ministers, Prince Rannarith and Hun

Sen. While peace begins to rise, the reform started to take place in Cambodia, which

transformed Cambodia from state-central economy to free-market economy. Despite the riot

in July 1997, attracting more FDIs and increasing more exports, Cambodia has achieved

significant economic growth over two decades (shown in figure 9). However, high economic

development has not marked the end of dollarization in Cambodia. The level of the

dollarization remains high until today. It was estimated that the dollarization in Cambodia has

been in the range between 94 to 95 percent of broad money from 1995 to 2010 (shown in

figure 10) and the volume of US dollar is account for 97 percent of total banking deposits

(Lim, 2011; The Wall Street Journal, 2011).

Figure 9: GDP Growth Rate of Cambodia from 1994 – 2013

Source: World Bank

Figure 10: Estimated Dollarization, 1995-2010 (In Percentage of Broad Money)

Source: Lim, 2011, “Dollarization and Effectiveness of Monetary Policy”

The US dollar appeared in Cambodia is denominated in banknotes, ranging from 1 USD, to

100 USD. Yet, there are no quarters, dimes or any other American coins in use here. Despite

the fact that the exchange rate between US dollar and Khmer Riel is varied from day to day,

the common exchange rate that most people know is 4,000 Riel per 1 USD.

0

2

4

6

8

10

12

14

GDP Growth Rate

GDP Growth Rate

1.3.2. Types of Dollarization in Cambodia

Based on the first two classifications of dollarization described in the chapter 1 of this paper,

dollarization in Cambodia exists in the forms of both unofficial (de facto) and partial

dollarization. In Cambodia, it is de facto dollarization because the US dollar does not present

as the official currency of Cambodia although it is commonly used in business transactions in

private sector, including financial and payments transactions. Also, the US dollar is not

emerged as the sole currency of Cambodia, but the US dollar is used in parallel with the

domestic currency, Khmer Riel, in the market.

Additionally, according to the third category of dollarization, there are three main purposes of

US dollar being used in Cambodia. Dollarization in Cambodia is existed in all three forms,

which include payment, financial, and real dollarization. As mentioned earlier, the US dollar

can be used in the transaction of business practices in Cambodia since the local prices of

goods and services as well as labor wages are indexed in the unit of US dollar. In other word,

all significant transactions, except public transactions, are priced and paid in US dollar.

Besides, saving in US dollar and lending or borrowing in US dollar are commonly found

among Cambodians people.

1.3.3. Rationales behind Dollarization in Cambodia

Since 1992, though Khmer Riel is known as the legal tender of Cambodia, US dollar has

remained as the dominant currency in the Kingdom. It is true that public trust on national

currency was eroded for decades due to Khmer Rouge regime and civil wars in Cambodia.

Plus, the macroeconomic instability existed during the early 1990s; hyperinflation was about

57 percent in 1990, 121 percent in 1991, 177 percent in 1992 and 80 percent in the first six

months of 1993, together with the depreciation of exchange rate of Khmer Riel against US

dollar nearly 500 percent within three years by increasing from 426.25 Riels per US dollar in

1990 to 2,689 Riels per US dollar in 1993 (Lim, 2011). It implied that the public did not

believe the government in securing their wealth, which was why they shifted to hold foreign

currency, such as US dollar. Nevertheless, after the general election in 1993, Cambodia

gradually updated itself from the context of instability. Say, since 1995, macroeconomic

stability has been restored and sustained in Cambodia, and trust on national currency has been

increased over decades. Yet, the volume of US dollar circulating in Cambodia keeps

increasing, as illustrated in figure 11.

Figure 11: Dollars in Circulation outside Banks, 1995 - 2010 (In billions of US dollar)


Consequently, US dollar remaining as a dominant currency in Cambodia is not because of the

macroeconomic instability and eroded public trust on national currency. However, two main

factors are believed as the rationales behind highly dollarized economy in Cambodia, namely

inadequate support from private sector on national currency and the roles of the National

Bank of Cambodia (NBC), as the central bank of Cambodia.

1.3.3.1. Inadequate Support from Private Sector

The first factor that dollarization remains high in Cambodia is because of inadequate support

from private enterprises or the private sector. Many of those investors, both local and foreign

investors, operated their business in Cambodia, but US dollar is still their preferred currency

against Khmer Riel as the medium of unit and exchange. For instance, most cafe shops in

Phnom Penh, food and drinks in their menu are priced in the US dollar (see Appendix II).

Similarly, the price of stationeries and books in many major book stores are tagged in US

dollar. Moreover, unfair exchange rate between Riel and US dollar can be found in the private

sector. For example, when 1 dollar is worth less than 4,100 Riels, the business owners or

staffs prefer to use the exchange rate of 4,100 Riels/1USD when customers pay the goods

indexed in USD with Khmer Riel. It can be significant that many goods and services are

priced in US dollar and charged with unfair exchange rate, the requirement of US currency is

thus higher than Khmer Riel in Cambodia owing to the fact that over 90 percent of

transactions in Cambodia are conducted in dollars (Kun, 2012).

Meanwhile, dollarization is even more obvious in the banking system of Cambodia. Many

banks in Cambodia, especially foreign commercial banks, do not accept the deposit in Riels,

which encourages people to make their saving in US dollar. Money withdrawn from ATM is

only available in US dollar. Moreover, loans given by most commercial banks are

denominated in US banknotes. With all transactions in banking system, including depositing,

withdrawing, and loan giving, done by foreign currency, US dollar is significantly increased

its values and quantity in the market of Cambodia.

1.3.3.2. The Roles of NBC

The second factor why dollarization still exists in Cambodia is due to the role of central bank.

NBC is a main actor in regulating monetary policy and maintaining healthy financial market.

However, it has not orchestrated the monetary reform that improves the credibility of Riel and

minimizes the presence of foreign currency in Cambodia (The Wall Street Journal, 2011).

Although the government has back and forth claimed that they have implemented many

policies in dealing with the issue of dollarization in Cambodia, the quantity of US dollar has

been increasing circulated in Cambodia’s market.

The main motivation that has inspired the RGC and NBC not to take harsh actions to deal

with dollarization in the kingdom is that the economic benefits that Cambodia can gain from

its dollarized economy. As argued by many researchers, because of dollarization, the RGC

has lost significant amount of seigniorage revenues. Meanwhile, those researchers also agree

that dollarization is important to economic development of Cambodia. Since the reform in the

early 1990s, Cambodia’s economy has been one of the highest growth rate in the region, as

well as in the world. Noticeably, Cambodia has attracted significant FDIs in textile industry

and tourism. These achievements that Cambodia has made shall be partially accredited to the

use of US dollar as the primary currency in addition to government’s open economic and

friendly investment policies. By using US dollar, investors can bare less risk, especially

foreign exchange rate risk, which could undermine their profits.

Not only economic benefits, another rationale behind NBC not taking harsh mechanism in

dealing with dollarization in Cambodia is based on the experiences of other countries who

attempted to dedollarize but failed. The examples of Peru and Bolivia in de-dollarization are

good lessons learnt for Cambodia. The situations of high dollarization in Bolivia and Peru

during 1970s and 1980s were due to the exports and external foreign loans in Bolivia and

hyperinflation of Peru, respectively (Staines, 2014). Then Bolivia in 1982 and Peru in 1985

announced forced-de-dollarization policy, which unexpectedly resulted in extreme

macroeconomic instability, capital flight, and financial disintermediation (Staines, 2014;

Fernández-Arias, 2005). With no other options, both countries again had to abandon de-

dollarization policy and re-dollarized their economy. The same thing would be happened to

Cambodia if harsh public administration is applied to dedollarize its economy.

Nonetheless, recognizing the importance of market mechanism to de-dollarization, the NBC,

over these two decades, can play very little roles in adopting several policies as means to

improve public trusts on Khmer Riel and at least to maintain the survival of Khmer Riel in the

highly dollarized economy, which expect to gradually dedollarize economy in the future. One

of the mechanisms is to manage inflation and exchange rate because hyperinflation can only

depreciate the value of Khmer Riel and undermine the public trust on national currency. As

cited in The Wall Street Journal (2011), the ADB notes that while inflation averaged 56%

from 1990-98, it declined to 3.5% for most of last decade. Also, the NBC employs US Dollar

Auction to manage the exchange rate between Khmer Riel and US dollar when the exchange

rate in Cambodia in far from the set target. When the value of Riel depreciate too much

against US dollar, the NBC would sell the US dollars to the money changers to increase more

supplies of US dollar and decrease the supplies of Riel in the market, so Riel will appreciate

in accordance to the target.

Another mechanism is to promote all public transactions to be done in Khmer Riel. In

addition to salaries of public officials are offered in Khmer Riel, the residents and

nonresidents in Cambodia are required to pay all their taxation, including taxes on immovable

property, taxes on transportation, patent taxes, profit taxes, etc… in Khmer Riel. Besides, all

the transactions in the security market that has been officially launched since 2012 are

executed in Khmer Riel; the stock prices of any listed company are quoted in Khmer Riel

rather than US dollar. Since the NBC cannot function as a lender to a last resort to banks on

the account of dollarization, the introduction of Negotiable Certificates of Deposit (NCDs) in

2013 aims to help develop the interbank market to increase more roles of the NBC in

achieving monetary objectives. Yet, the progress to dedollarization is slow.

1.4. Cambodia’s Banking System and Dollarization

1.4.1. Overview of Banking System in Cambodia

Currently, in Cambodia, the financial institutions in the banking system are divided into three

main categories, Commercial Banks, Specialized Banks, and NGOs and Microfinance

Institutions (MFIs). In the case Microfinance Institutions, they are classified into two different

forms, particularly MDIs or Microfinance Deposit-taking Institutions with the license to

accept deposit from the public and give loans and MFIs with only credit operations. Besides,

there are other business offering similar financial services to the public in Cambodia, such as

Money Changer, Financial Leasing, Third Party Processor, and Credit Bureau.

Figure 12: Banking Structure in Cambodia, as of the 2nd quarter of 2014

Source: National Bank of Cambodia

1.4.2. Dollarization in Banking System

According to figures 13, the deposits in Riel currency keeps increasing all the way from 2006

to 2010, which emphasizes the increase in public confidence and more demands in national

currency. Yet, as seen in figure 14, the volume of US dollar deposits has increased largely

from almost 1 billion USD in 2006 to approximately 3.5 billion USD in April 2010. The ratio

of US dollar deposit to Riel deposit was about 23 times in 2006, while it increased up to 29

times in 2010. As illustrated in figure 15, even when the ratio of foreign deposit to total

deposits declined in 2013 compared to that of in 2008, the ratio remained high (about 95

percent). Obviously, dollarization level in banking system is remarkably high. Dollarization is

like a two-face sword, offering both advantages and disadvantages. In this paper, the costs and

benefits of dollarization will be only discussed in the context banking system of Cambodia.

Figure 13: Cambodia's Riel Deposits, 2006 – 2010

Source: Duma, 2011, “Dollarization in Cambodia: Cause and Policy Implementation”

Figure 14: Cambodia's US Dollar Deposits, 2006 – 2010

Source: Duma, 2011, “Dollarization in Cambodia: Cause and Policy Implementation”

Figure 15: Dollarization 2008 -2013

Source: IMF

1.4.3. Benefits of Dollarization in Cambodia’s Banking System

1.4.3.1. Foreign Exchange Rate Risk

Foreign exchange rate risk is one among ten risks that can be faced by financial institutions

like banks. Foreign exchange rate risk occurs when the adverse change in foreign exchange

rate affects the value of assets. Without dollarized banking system, banks in Cambodia will be

highly exposed to this risk due to the fact that the domestic deposits cannot be adequate

sources of funds for lending. Significantly, as seen in the figure below, Cambodia’s banks

have depended heavily on foreign sources, especially those in US dollar, for their paid-up

capitals. By dollarizing deposit and lending system, the banks can at least reduce the

possibility of the foreign exchange risk that the banks would face. In other words, the banks

do not have to concern too much over this risk because US dollar either appreciates or

depreciates against Khmer Riels does not affect the banks much.

Figure 16: Cambodian and Foreign Shares of Paid-up Capitals


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

54% 53% 58%52% 56%

67% 71% 73% 70% 73% 69%

46% 47% 42%48% 44%

33% 29% 27% 30% 27% 31%

Foreign Share Cambodian Share

1.4.3.2. Increases more Deposits and more Credits

It is believed that dollarization can help banks in Cambodia attract more deposits from both

Cambodian and foreign residents, although increase in deposits are somewhat associated with

the increase in public confidence on sustainability of banking system. Since many business

transactions, including payroll transactions for employees, are conducted in US dollar, the

circulation of US dollar is far more than Khmer Riels, which means that people have more of

US dollar currency than Khmer Riels in hand. High circulation of US dollar also implies the

preference of people, especially investors, to hold US dollar as their saving against

Cambodian Riel. With the excess of US dollar, people would be prefer to save US dollar than

other type of currency because they do not have to bare for any foreign exchange rate risk.

Furthermore, most of the large-amount-value transactions, such as purchasing real estate

items, which prefer to use transferring service of banks are made in US dollar.

Similarly, borrowing funds in US dollar is more preferable than Riel currency. Most money

circulation in Cambodia is in US dollar, so most profits earned by investors, businesspeople,

and workers are also in US dollar currency. Plus, prices of many goods and services are

quoted in US dollar. Then borrowing in US dollar can help debtors avoid possible exchange

rate risk because they do not have to exchange their borrowing funds denominated in US

dollar into Khmer Riel to buy the products quoted in US dollar and repayment of debt in US

dollar is also in line with the currency of the profits they make.

Thus, depositing, withdrawing, transferring, or borrowing in US dollar are prioritized. In other

word, dollarization in banking system can help financial institutions attracts more deposits

and increases lending. As illustrated in the following figures, it has significantly increased the

amount of deposits and credits over years.

Figure 17: Deposits in Banking System (Thousand USD), 2004 – 2009


Figure 18: Loans to Customers (Thousand USD), 2004 – 2009


-

2,000

4,000

6,000

8,000

10,000

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

2004 2005 2006 2007 2008 2009

Deposits in Banking System (Thousand USD), 2004 –

2009

Deposits Deposits (MFIs)

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

2004 2005 2006 2007 2008 2009

Loans to Customers (Thousand USD), 2004 – 2009

Loans Loans (MFIs)

Figure 19: Deposit and Credit Growth, 2009 -2013

Source: IMF

1.4.3.3. Less Vulnerability to Regional Financial Crisis

Financial crisis refers to a situation in which the value of financial institutions or assets drops

rapidly. However, the dollarization in banking system can help reduce Cambodia’s

vulnerability to regional financial crisis since banks in Cambodia do not reserve much

regional currency such as Thai Baht, Chinese Yuan, or Japanese Yen. For instance, in 1997

during the Asian financial crisis that began with Thailand and affected many Asian countries

such as Hong Kong and South Korea, Cambodia’s banks were not impacted much by this

regional issue. Only after the political turmoil in July 1997, the total value of outstanding

credits had been leveled off and Cambodia did only experience the closure of two Thai-owned

commercial banks during 1998 (Chan, Kato, Long, So, Tia, Hang, Kao, Chea, 1999).

Nevertheless, there was a sharp decreased in FDIs and a slight decrease of economic growth

rate to 5%. Then after the second general election in 1998, Cambodia started to recover again

and enjoyed its high economic growth. As a result, these decreases in FDIs and economic

growth were believed as the consequences of political elements, such as political riot in 1997

and the Western’s sanctions.

1.4.4. Costs of Dollarization in Cambodia’s Banking System

1.4.4.1. Less Effectiveness of Central Bank’s Monetary Policy

Using US dollars for most transactions in the banking system, the NBC has less control over

the financial market as its monetary policy is less effective to achieve its result. It is quite hard

for the NBC to implement monetary policies in reducing the circulation of US dollar and

determining the interest rate inside the kingdom.

Central banks in the world generally use three main monetary policies in controlling the

interest rate and money supplies inside their countries. Those three monetary policies are

Open Market Operation, Reserve Requirement, and Discount Rate. However, the NBC cannot

Open Market Operation to control interest rate in the market because there is no issuance of

government securities in the Cambodia. Thus, beside US Dollar Auction as monetary policy

that was mentioned earlier, as other central banks in the world, the NBC also utilizes two

other monetary instruments, which are Reserve Requirement and Discount Rate or

Refinancing Rate, to achieve monetary objectives.

Figure 20: Monetary Policy Strategies of NBC


The dollarization in the banking system minimizes the capacity of the NBC as a lender of a

last resort for the banks; the NBC hardly control interest rate by using Discount Rate

Instrument. Owing to the fact that loans are offered in US dollar, the NBC cannot print out

more money to lend to the banks when they are shortage of funds. Rather than depending on

the NBC as a lender, when there is shortage of funds, banks can only borrow funds from

foreign lenders, which clearly emphasizes ineffective role of the NBC in determining the

interest rates in market.

Therefore, the only tool that can be used to control interest rate in Cambodia is the Reserve

Requirement. By employing Reserve Requirement as a tool to control interest rate, the NBC

set the rate to deposit in Khmer Riel and foreign currency differently. The Reserve

Requirement for deposit in Khmer Riel is 8 percent, while the deposits in US dollar are

required to reserve up to 12.5 percent (Lim, 2011; International Monetary Fund, 2014). This

policy means to provide incentives for banks to accept deposit and providing loans in Khmer

Riel, which they can generate more profits. Yet, the funding from foreign sources is not

subject to this policy. As a result, the effectiveness of this policy is limited due to high foreign

share of paid-up capital in banking system.

1.4.4.2. More Vulnerability to Financial Risks Associated with Shocks in US’s

Monetary Policy

In contrast, the interest rates, both lending and deposit rates, of banking system in Cambodia

are more vulnerable to shocks in monetary policy of the US. By using VAR (Vector

Autoregression) model, Duma (2011) found that an increase in federal fund rates in the US,

there will be an increase in interest rates in Cambodia because local banks attempt to

minimize the spread between domestic and foreign interest rates. Although Cambodia is not

affected much by regional financial turmoil, during the Global Financial Crisis in 2008 that

began in US, banks of Cambodia had gone through a hard time.

Figure 21: Deposit and Credit Growth, December 2006 – December 2009

Source: Jalilian, Chan, Reyes, and Siang, Dalis, Dorina, 2009, “Global Financial Crisis Series:

Cambodia”

On the ground of dollarization, as mentioned earlier, the NBC cannot be the lender of last

resort to banks when there is shortage of fund. With the underdeveloped interbank market,

banks can only seek funds to solve their liquidity from the foreign sources, especially from

the US. As in 2009, the NBC reduced Reserve Requirement to provide more liquidity to

banks after Financial Crisis, the banks instead provided less credits and accumulated more

reserves at the NBC, which is the highest reserves in the history (Duma, 2011).

CHAPTER 05: CONCLUSION AND RECOMMENDATIONS

Dollarization in Cambodia has happened since 1992 owing to political and macroeconomic

instability and incapability of the National Bank of Cambodia to cope with the large inflows of

US dollar into the country during that period. Since then, US dollar has been used in parallel with

national currency, Khmer Riel. On the grounds that large capital inflows from investments and

donors, together with most of transactions in private sector, are in US dollars rather Khmer Riels,

the dollarization level in Cambodia is estimated to be over 90 percent. However, the persistence

of dollarization until today is no longer about the macroeconomic instability and eroded public

trust on national currency. Two main factors are believed as the motivations to Cambodia

remaining the status of highly dollarized economy, namely inadequate support from private

sector and the role of the NBC in dealing with this issue. Firstly, it is obvious that the US dollar is

a more preferable currency against Khmer Riel for private enterprises because it can help them

minimize the cost to foreign exchange rate risk. With most private transactions are made in US

dollar, the demands for US dollar is thus higher than the domestic currency. Secondly, the role of

the NBC in dedollarization is limited to market mechanism which the NBC can play very limited

role in dealing with dollarization.

In Cambodia’s banking system, the US Dollar is accounts for approximately 95 percent of total

deposits. It is like two-face sword that offer both advantages and disadvantages to banking

system in Cambodia. In terms of benefits, dollarization can help reduce foreign exchange rate

risk and at the same time increase more deposits and more credits. In broader sense, it can also

help the banks less vulnerable to the regional financial problem. On the contrary, the main cost

of dollarization to banking system of Cambodia is that it undermines the NBC’s roles in

regulating monetary policy and achieving monetary objectives. Dollarization makes banks in

Cambodia more exposed to liquidity risk and other risks especially associated with the situation

in the US. As a result, there is a need to foster the progress of interbank market and security

market development. The introduction of NCDs by the NBC is a crucial step to development of

interbank market, but it is less attractive to banks in Cambodia. Thus, the NBCs should discuss

with the banks in order to increase the attractiveness of NCDs. The NBC shall improve her

capacity in supervising the banking system and financial system to minimize some possible risks

associated with current trend of banking system development, such as the increase in the number

of banks and mortgage credits.

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https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au

/2014-09/58_2014_siregar_chan.pdf

31. Staines N., 2014, “De-Dollarization: A Cross-Country Perspective”, International

Monetary Funds, Available: http://www.imf.org/external/country/AGO/rr/2014/051314.pdf

32. The Wall Street Journal, 2011, The Cambodian Case for Dollarization, Available:

http://www.wsj.com/articles/SB10001424052748703584804576143631011302612

33. United Nations, n.d., Cambodia-UNTAC: Facts and Figures, Available:

http://www.un.org/en/peacekeeping/missions/past/untacfacts.html

34. United Nations Development Programme, 2004, The Macroeconomics of Poverty

Reduction in Cambodia, Available: http://www.un.org.kh/undp/media/files/macro_en.pdf

35. Zamaróczy M. D., & Sa S., 2002, “Macroeconomic Adjustment in a Highly Dollarized

Economy: The Case of Cambodia”, International Monetary Fund, Available:

https://wsww.imf.org/external/pubs/ft/wp/2002/wp0292.pdf

APPENDIX I

Figure 22: Inflation of Cambodia from 1995 – 2013 based on CPI

Source: World Bank

Table 1: Cash US Dollar Circulation (in Billion), 1995 – 2010

Year 1995 1996 1997 1998 1999 2000 2001 2002

USD 2.10 2.24 2.29 2.18 2.55 2.90 3.22 3.74

Year 2003 2004 2005 2006 2007 2008 2009 2010

USD 4.14 4.95 5.93 7.18 9.39 11.79 12.10 13.64


Table 2: Average Official Exchange Rate of KHR/USD from 1990-2013

Year Exchange Rate Year Exchange Rate

2013 4,043 KHR/USD 2001 3,916 KHR/USD

2012 4,040 KHR/USD 2000 3,841 KHR/USD

2011 4,064 KHR/USD 1999 3,807 KHR/USD

-5

0

5

10

15

20

25

30

Inflation

Inflation

2010 4,198 KHR/USD 1998 2,946 KHR/USD

2009 4,154 KHR/USD 1997 2,946 KHR/USD

2008 4,065 KHR/USD 1996 2,624 KHR/USD

2007 4,062 KHR/USD 1995 2,451 KHR/USD

2006 4,109 KHR/USD 1994 2,545 KHR/USD

2005 4,103 KHR/USD 1993 2,689 KHR/USD

2004 4,019 KHR/USD 1992 1,266 KHR/USD

2003 3,973 KHR/USD 1991 718.30 KHR/USD

2002 3,912 KHR/USD 1990 426.25 KHR/USD

Data Sources: NBC, 2004 – 2013, & Fact Fist, 1990 –2003

Figure 23: Deposits and Loans of Commercial Banks (measured in Billion KHR), 2005 – 2013

Source: National Bank of Cambodia (Lack of data in USD)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Deposits 2,632 3,328 3,927 5,687 9,922 10,287 13,842 17,479 20,974 26,911 30,204

Loans 1,334 1,814 2,347 3,579 6,336 9,804 10,467 13,135 17,474 23,354 29,370

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Bil

lio

n K

HR

Deposits and Loans of Commercial Banks

APPENDIX II

Figure 24: Menu of Domino's Pizza in Cambodia (Source: Domino’s Pizza Website)

Figure 25: Menu of Brown Coffee and Bakery in Cambodia (Source: Brown Coffee App.)

Figure 26: Product Catalog of Hakse Mobile Phone Center in Cambodia (Source: Hakse Website)

Figure 27: Flyer of Anana Computer in Cambodia (Source: Anana Computer Website)

Figure 28: Real Estate Pricing in Cambodia (Source: Real Estate Website)

Figure 29: Hotel Room Pricing Monorom VIP Hotel in Kampong Cham, Cambodia (Source: Monorom VIP Hotel Website)

implications of dollarization on cambodia's banking system

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