Commitment to Excellence

Passtra University of Cambodia

IMPLICATIONS OF DOLLARIZATION ON
CAMBODIAS 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 Passtra University of Cambodia
Herewith accept the Senior Project Report
in consistent with the facultys writing format and content
Entitled

Implications of Dollarization on Cambodias 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

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Chairperson

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Project Advisor

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Member

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Member

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Presentation Date:

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Approved by Dean

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Academic Program Office

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

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 Cambodias 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 NBCs 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

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 Passtra 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, Passtra 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.
ii

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

iii

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
iv

Figure 24: Menu of Domino's Pizza in Cambodia (Source: Dominos 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

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

vi

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 Cambodias Economy ....................................... 5

1.3.

Negative Impacts of Dollarization on Cambodias Economy ..................................... 6

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

1.1.

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

1.2.

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

vii

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

1.1.

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

1.1.1.

French Indochina Currency during Frances 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.

Cambodias 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 Cambodias Banking System ................................. 33

1.4.4.

Costs of Dollarization in Cambodias Banking System ..................................... 37

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

REFERENCES ......................................................................................................................... 42
viii

APPENDIX I ............................................................................................................................ 46
APPENDIX II ........................................................................................................................... 48

ix

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).

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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 Cambodias 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
Cambodias 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 Cambodias 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 Cambodias banking system

1.5.

Significances of Research

This study aims to investigate the implication of dollarization on Cambodias 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
Page 2

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 Cambodias 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
Cambodias financial market as the whole but only focuses on banking system because of the
inactiveness of Cambodias 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

Page 3

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, &
Nicol, 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).

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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 Cambodias Economy

Dollarization has impacted on Cambodias 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
Page 5

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; Zamarczy 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 Cambodias 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; Zamarczy & 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 (Zamarczy & Sa, 2002; Im and Dabadie, 2007; United
Nations Development Programme, 2004)..

1.3.

Negative Impacts of Dollarization on Cambodias Economy

Despite those benefits offered by dollarization, dollarization does negatively affects

Cambodias 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 (Zamarczy & 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 (Zamarczy & Sa, 2002).
Additionally, dollarization undermines the effectiveness of monetary policy by the National

Page 6

Bank of Cambodia and fiscal policy by Cambodias Ministry of Economic and Finance due to
the fact that Cambodia tends to surrender to the United States economic policy and their
economic health (Zamarczy & 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).

Page 7

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.

Page 8

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, Cambodias civil wars began and the regime
has been shifted from one to another. Cambodias national currency has significantly changed
from one regime to another, in terms of form and name. In this paper, Cambodias national
currency was classified into six different phases, since French colonization until today.

1.1.1. French Indochina Currency during Frances 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

Page 9

1 Piastre

1 Piastre

1 Piastre

5 Piastres

5 Piastres

5 Piastres

10 Piastres

20 Piastres

Page 10

20 Piastres

50 Piastres

100 Piastres

100 Piastres

200 Piastres

500 Piastres

1,000
Piastres

Source: National Bank Cambodia

Page 11

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 Cambodias national currency in 1955 when it replaced the
Indochina Piastre.
Figure 2: National Currency during 1956 1970
Currency

Front Side

Back Side

1 Riel

5 Riels

10 Riels

20 Riels

50 Riels

Page 12

100 Riels

100 Riels

100 Riels

500 Riels

Source: National Bank Cambodia

1.1.3. National Currency during Khmer Republic (1970 1975)

Figure 3 National Currency during 1970 1975
Currency

Front Side

Back Side

100 Riels

500 Riels

Page 13

1,000
Riels

5,000
Riels

Source: National Bank Cambodia

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
Currency

Front Side

Back Side

1 Riels

5 Riels

Page 14

10 Riels

50 Riels

Source: National Bank Cambodia

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

Figure 5: National Currency during 1991-1992
Currency

Front Side

Back Side

50 Riels

100 Riels

200 Riels

500 Riels

Page 15

1,000
Riels

2,000
Riels

Source: National Bank Cambodia

1.1.6. National Currency Circulation 1993 Present

Figure 6: National Currency 1993 Present
Currency

Front Side

Back Side

50 Riels

100 Riels

100 Riels

100 Riels

Page 16

200 Riels

500 Riels

500 Riels

500 Riels

1,000
Riels

1,000
Riels

1,000
Riels

Page 17

1,000
Riels

2,000
Riels

2,000
Riels

2,000
Riels

5,000
Riels

5,000
Riels

10,000
Riels

Page 18

10,000
Riels

20,000
Riels

20,000
Riels

50,000
Riels

50,000
Riels

50,000
Riels

100,000
Riels

Page 19

100,000
Riels

Source: National Bank Cambodia

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
Cambodias role was to print Cambodias 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 banks history.
Figure 7: The Photo of NBC Building Destroyed by Pol Pot

Photo by: Ben Kiernan, 1980

Page 20

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

Page 21

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.

Page 22

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).

Page 23

Figure 9: GDP Growth Rate of Cambodia from 1994 2013

GDP Growth Rate

14
12
10
8
6
4
2
0

GDP Growth Rate

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.
Page 24

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

Page 25

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)

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

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
Page 26

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 Cambodias market.
Page 27

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, Cambodias 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 governments 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;
Fernndez-Arias, 2005). With no other options, both countries again had to abandon dedollarization 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
Page 28

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.

Cambodias 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
Page 29

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

Page 30

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

Page 31

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

Page 32

1.4.3. Benefits of Dollarization in Cambodias 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, Cambodias 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

100%
90%
80%

46%

47%

42%

53%

58%

48%

44%

33%

29%

27%

30%

27%

31%

67%

71%

73%

70%

73%

69%

70%
60%
50%
40%
30%

54%

52%

56%

20%
10%
0%
2003

2004

2005

2006

2007

Foreign Share

2008

2009

2010

2011

2012

2013

Cambodian Share

Source: National Bank of Cambodia

Page 33

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.

Page 34

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

Deposits in Banking System (Thousand USD), 2004

2009
3,500,000

10,000

3,000,000

8,000

2,500,000
2,000,000

6,000

1,500,000

4,000

1,000,000
2,000

500,000
-

2004

2005

2006

Deposits

2007

2008

2009

Deposits (MFIs)

Source: National Bank of Cambodia

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

Loans to Customers (Thousand USD), 2004 2009

3,000,000

350,000

2,500,000

300,000
250,000

2,000,000

200,000
1,500,000
150,000
1,000,000

100,000

500,000

50,000

2004

2005

2006
Loans

2007

2008

2009

Loans (MFIs)

Source: National Bank of Cambodia

Page 35

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 Cambodias
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, Cambodias 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 Westerns sanctions.

Page 36

1.4.4. Costs of Dollarization in Cambodias Banking System

1.4.4.1. Less Effectiveness of Central Banks 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

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

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

Page 37

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 USs
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.

Page 38

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).

Page 39

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 Cambodias 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 NBCs roles in
regulating monetary policy and achieving monetary objectives. Dollarization makes banks in
Page 40

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.

Page 41

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Cambodia, Available:
http://www.nbc.org.kh/english/about_the_bank/overview_of_functions_and_opertation.php
25. National Bank of Cambodia, n.d., Indochina Banknotes, Available:
http://www.nbc.org.kh/english/nbc_gallery/indochina_banknotes.php
26. National Bank of Cambodia, n.d., National Bank of Cambodia Brief History, Available:
http://www.nbc.org.kh/english/about_the_bank/history_of_nbc.php

Page 44

27. National Bank of Cambodia, n.d., Previously Used Banknotes, Available:

http://www.nbc.org.kh/english/nbc_gallery/previously_used_banknotes.php
28. National Bank of Cambodia, 2014, The Review of the National Bank of Cambodia,
http://www.nbc.org.kh/download_files/publication/quar_bul_eng/Quarter_Bul_No_452nd_2014.pdf
29. Ngoun S., 2014, Financial Liberalization and Capital Flows: Cambodian Experiences,
Available:
http://www.adbi.org/files/2014.03.13.cpp.sess3.4.sokha.financial.liberalization.cambodian.p
df
30. Siregar R. Y., & Chan N., 2014, Factors behind foreign currency holding by household in
Cambodia, Centre for Applied Macroeconomic Analysis, Available:
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. Zamarczy 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

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

Inflation
30
25
20
15
10
5
0
-5
Inflation
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

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

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

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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

Deposits and Loans of Commercial Banks

35,000
30,000

Billion KHR

25,000
20,000
15,000
10,000
5,000
-

2003
Deposits 2,632
Loans
1,334

2004
3,328
1,814

2005
3,927
2,347

2006
5,687
3,579

2007
9,922
6,336

2008
2009
2010
2011
2012
2013
10,287 13,842 17,479 20,974 26,911 30,204
9,804 10,467 13,135 17,474 23,354 29,370

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

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APPENDIX II

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

Page 48

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

Page 49

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)

Page 50

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)

Page 51