Cambodia aims to reduce dollarization

Cambodia has designed strategies to give riel (local currency) a boost so as to reduce dollarization, which represents about 80 percent of the currencies circulated in the country, the Central Bank's senior officials said Tuesday.

Dollarization in Cambodia measured by the ratio of foreign currency deposit to broad money augmented from 36 percent in 1993 to 70 percent in 2003 and continued to increase to around 80 percent in 2013, Neav Chanthana, deputy governor of the National Bank of Cambodia (NBC), or Central Bank, said at the Second Annual NBC Macroeconomic Conference.

"The government and the NBC have prepared policies and action plans on the promotion of the use of riel in order to reduce dollarization in a long term. These action plans will be implemented soon," she told the conference, which was attended by about 200 policymakers, bankers, economists, and researchers, among others.

Chanthana said financial sector plays a very important role in promoting the use of local currency through strengthening the financial infrastructure and financial market development, including foreign exchange market, interbank and money market, capital market, and debt market.

"Local currency savings and other payment transactions in local currency will increase the usage of riel," she said. "The establishment of local currency deposit insurance was also found to increase the public's confidence on the banking system and encourage local currency deposits."

U.S. dollars flooded into the Cambodian economy through the intervention of the United Nations Transitional Authority in Cambodia (UNTAC) in their peace operations in the country in 1993.

Chanthana said the Cambodian economy has reaped many benefits of dollarization by attracting more foreign investors, developing the financial sector, enhancing the Cambodian economic integration regionally and globally as well as protecting the economy from the Asian financial crisis in 1997.

"However, dollarization also presents risks and vulnerabilities since the speed and size of the economy and the financial sector have grown remarkably," she said.

She added that although dollarization is a key challenge for the Cambodian economy, immediate de-dollarization by conducting administrative measures is not an optional choice since Cambodia's economy operates as a free market economy and still depends on foreign capital inflows.

"Implementing these measures too soon and all at once would cause the capital outflow and a black market which circulates foreign currency. Thus, the result of vigorous administrative measures would lead to the imbalance of macroeconomic growth," she said.

NBC's director general Chea Serey said over 90 percent of bank deposits and loans are made in U.S. dollars. Endi