Phnom Penh: Dollarization In Cambodia

3.0 Introduction

Cambodia which is officially known as the kingdom of Cambodia is a country situated in the south east of Asia with neighbouring countries; Vietnam, Laos and Thailand. Cambodia is 181,035-kilometer square in area with a population over 15 million people. Phnom Penh is the capital city of Cambodia and it is also the largest city of the country. Their official language is Khmer and the currency is Riel.

While gross national income (GNI) per capita reaching US$1,070 remains low compared to the neighboring countries, Cambodia has one of the fastest growing economies in Asia with growth averaging 6% over the last decade. Agriculture remains the leading economic sector, with active growth in textiles, construction, garments, and tourism

During the Khmer Republic (1970-1975) there were already some amounts of US dollars (USD) circulating in Cambodia however Riel the national currency remained the main currency used for daily transaction. During the Khmer Rouge (1975–1979), all barter, private commercial activity, private ownership, means of exchange and stores of value were made illegal and condemned by death. Cash holdings were made worthless, peoples savings and property were lost. From 1975–80, Cambodia was without a monetary system and without money. In 1980 the Central Bank was re-established and Riel was reintroduced but the experience during the Khmer Rouge led to its very low acceptance by the public. Instead the people preferred other products of value and means of payment such as the U.S. dollar(USD), gold, and even rice. Note: even the Vietnam dong and Thai baht (THB)were highly used, but their use has declined over time and become

The elimination of incentives to place savings abroad encouraged domestic financial intermediation, resulting in the growth of the financial system. Only over the past three years, the volume of bank activity has roughly doubled, and the loan to deposit ratio has grown regularly.

In addition, dollarization lowered the risk of currency(Riel) devaluation. There was little incentive for speculators to try and gain from short term changes in the price Riel since the demand of Riel remained low and the market was very small.

Moreover, dollarization promoted the need to avoid bank financing of public deficits. Eventually, the use of dollar helped the integration process of Cambodian trade in the international economy. Currency stability improved macroeconomic stability and a predictable business environment. It reduced the transaction costs by avoiding currency conversions. It also allowed the boom in the garment industry in Cambodia by international