Harmonizing to Ortiz ( 1983 ) , ‘dollarization ‘ is defined as the grade to which existent and fiscal minutess are performed in dollars comparative to those performed in domestic currency. Within the Kampuchean context, dollarization can be defined as the usage of the US dollar in any of the three maps of money in an economic system: unit of history, medium of exchange and, in peculiar, shop of value. The term dollarization is specifically used to depict the currency government in Cambodia where the US dollar is the dominant currency in circulation notwithstanding the handiness of the local currency, the riel. So how did this phenomenon get down?

Between 1975 and 1979, the Kampuchean economic system fell under the control of the genocidal government of Pol Pot, a government that overpoweringly destroyed the substructure of an already weak economic system. Under this government, there was no market and no trade. Money and banking were abolished, and National Bank of Cambodia was blown up. In the early period after the Pol Pot government was ousted in 1979, commercial minutess were chiefly conducted in the signifier of swap. The remainder was settled utilizing Vietnamese dong and gold. The latter was used as unit of history, medium of exchange and nest eggs instrument. Subsequent to the reestablishment of the NBC in 1980, the riel was issued once more and circulated as the state ‘s legal currency. However, assurance in the riel was low since the political construction and security state of affairs remained unsettled. Henceforth, Kampuchean people were introduced to US dollar and Thai tical, but these currencies were originally restricted by the closed nature of the centrally planned economic system and by the fact that the state was linked politically to the socialist axis. More of import than this first ground was the presence of the United Nations Transnational Authority in Cambodia for the peacekeeping, peacemaking, economic and societal care, and nation-building procedure during 1991-1992. The operation in this state was reported to be one of the largest and most expensive United nations operations at a cost of1.7 billion US dollar. Not surprisingly, the banking system started to enter a singular addition in foreign currency sedimentations in 1992. Besides, the usage of foreign currencies has increased bit by bit since the state opened its door to the outside universe. US dollars flooded the Kampuchean market when the authorities stimulated foreign investing since 1989 in concurrence with its free market policy. To heighten the wellbeing of Cambodians, macroeconomic policies must conducted in such a manner that they foster sustained and loosely distributed economic growing – by making conditions that favor lifting end product, employment, incomes and a sustainable macroeconomic environment. Not unusually, the usage of foreign currencies started to flux into Kampuchean economic system from those foreign concern, investing, and exports. The last cause of the phenomenon is that the US dollar is used by both occupants and non-residents of Cambodia. Of class, foreign houses, assistance bureaus, embassies, and non-government organisations spend in dollars, including the payment to the employees. Labor contracts, including those with the domestic labour force, are besides in dollars in most local houses. Banks as good prefer to transport out foreign currency minutess because they have troubles happening a suited plus signifier for riel-denominated liabilities. In drumhead, the low public assurance subsequent to the prostration of the Pol Pot government, the UN ‘s peacekeeping operation, the opened-economy policies, and the people ‘s inclination towards the widely recognized US dollar are the major factors lending to the high grade of dollarization in Cambodia notwithstanding its rapid development in footings of economic and fiscal sectors.

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Having a expression at the positive side of the affair, the followerss are alleged good intelligence or advantages gained from the increasing dollarization in Cambodia. Facilitating Cambodia ‘s integrating procedure is the first benefit resulted from the circulation of the US dollar. It is widely accepted that the US dollar is a currency with high buying power and has comparatively lower exchange rate hazard compared with many other currencies in the universe. Stable currency promotes macroeconomic stableness and a predictable concern environment, which is of extreme importance for Cambodia, peculiarly from the point of position of international investors. In add-on, stemmed partially from the difference between the purchasing and merchandising rates for change overing domestic currency to foreign currency, dollarization lowers dealing costs for both local and foreign investors. By cut downing trade dealing costs through avoiding currency transition, it has contributed to the rapid growing of the flourishing garment industry, which is worth over $ 1000 million, and provides employment chances for legion adult females, who would otherwise be unpaid household farm workers, lending to increased underemployment in the agricultural sector. This tendency portions its most of import function in poorness decrease in Cambodia. In a extremely dollarized economic system, international militias will be used more to guarantee the unity of the banking system, and less to guarantee exchange rate stableness. Dollarization can therefore be used to advance institutional alteration, promote fiscal answerability and transparence. Second, dollarization helps lower the hazard of currency devaluation in the state. Besides the cardinal causes for a given to devaluate such as in-house rising prices or persistent, big current history shortages, fluctuations of a currency value can be inflamed by contagious effects of rising prices and devaluation abroad. Since demand for the riel remains comparatively low and the market for it is really little, one can reason convincingly that there is small or no inducement for speculators to seek to derive from short-run alterations in the monetary value of riel. Dollarization sustained assurance of investors in their operations in Cambodian, therefore alleviating force per unit area on the exchange rate. A comparatively low degree of rising prices during the crisis period was, without uncertainty, the most of import societal accomplishment of dollarization, although we should besides stress that other factors, particularly the little and undeveloped fiscal sector and the long-run nature of private capital influx played an of import portion in relieving the crisis effects, particularly strong export and touristry public presentation that helped add some dynamism to economic activities. The 3rd positive point about the usage of US dollars is that it promotes monetary value stableness. As a affair of fact, guaranting monetary value stableness and economic growing is one of the aims of macroeconomic policy and it is besides undeniable that there is strong correlativity between the degree of rising prices and economic growing. Within the context of dollarized economic system, monetary value stableness can be achieved through exchange rate stableness. As Cambodia imports the majority of consumer goods for domestic ingestion, exchange rate fluctuations can interpret instantly into monetary value fluctuations. Therefore, budget direction can be used as a channel to guarantee monetary value stableness. Following, dollarization helps enlarge the domain of the pecuniary economic system by detering the accretion of wealth in the signifier of unproductive physical assets such as gold, which was a common pattern in Cambodia until the early 1990s. The procedure of monetisation of economic system in bend enables little nest eggs, in peculiar within the in-between income category, which was non possible with the usage of gold. Monetization implies a decrease in comparative size of subsistence activities in entire activities. This procedure of monetisation manifests itself in phenomena such as increased end product and the addition in hard currency minutess in labour, land and recognition markets. Last, the circulation of US dollar in Kampuchean economic system prevents capital flight and promotes fiscal intensifying. Dollarization provides the chance for the domestic fiscal system to heighten domestic intermediation by extinguishing the inducement to put foreign currency nest eggs in histories abroad. Asset permutation accordingly permits the growing of the fiscal system in Cambodia. In decision, optimistically the benefits of dollarization include easing Cambodia ‘s integrating procedure, take downing the hazard of currency devaluation, advancing monetary value stableness, enlarging the domain of the pecuniary economic system, forestalling capital flight and advancing fiscal deepening.

On the other manus, the drawbacks of dollarization can besides be legion. The first and most concerned impact is that dollarization undermines the effectual behavior of pecuniary and financial policy. As a affair of fact, dollarization does non extinguish the hazard of a banking crisis. During a banking crisis, the cardinal bank should work as a loaner of last resort to the commercial Bankss by supplying progress or recognition lines to solvent but non liquid commercial Bankss. Dollarization prevents the pecuniary governments from supplying short-run liquidness to the banking system to turn to the liquidness crunch. The usage of dollars by the commercial Bankss in their minutess undermines the ability of the cardinal bank in vouching the payment system and the bank sedimentations since the cardinal bank can non shoot the riel into a system dominated by dollars. Second, dollarization amendss the pride of the state. Deprived of pecuniary and exchange rate flexibleness every bit good as of an independent financial policy, Cambodia tends to give up to the United States economic policy and their economic wellness although Cambodia ‘s economic system is structurally to the full different from that of the United States. This will go forth Cambodia limited room to strike its ain balance between rising prices and unemployment aims in the finding of macroeconomic policy. The cardinal point is that Cambodia can non insulate itself from external dazes and that those dazes require a domestic accommodation, one manner or another. As good, the current state of affairs in Cambodia does non give the feeling of a entire loss of assurance in the local currency. The concluding job rooted from the dollarization is that it widens the spread between rich and hapless. We know that buying power of a currency fluctuates with its exchange rate. The being of co-currencies will connote differences in buying power brought approximately by the different denomination of nominal incomes. First, since the U.S. dollar is by and large strong currency, there might be a benefit for those sections of the Kampuchean population who received income in difficult currency. And the contrary effects can be expected for those who earned in local currency. Depreciation of the riel leads to a rise in monetary value and consumers need more riel to purchase the same goods and services. The monetary value and exchange rate development can exert different effects on different categories of population depending on the currency they hold and this is the pattern now in Cambodia that income in the signifier of corporate net incomes, rental, and rewards for employees in many private companies, international organisations and NGOs is denominated in US dollars. Second, the exchange rate alterations themselves may impact the monetary values of some tradable goods and services that enter into trade good basket specifying the monetary value degree. However, there are large differences in monetary value motions between Phnom Penh and the rural countries that are non reflected in the current measuring of monetary value degree. As a effect, this complicates the appraisal of the societal conditions of the hapless. In short, on the negative side, dollarization agencies sabotaging the effectual behavior of pecuniary and financial policy, damaging the pride of the state, cut downing the chance to gain income from seigniorage every bit good as widening the spread between the urban dollar-based economic system and hapless rural countries where riel are usually used.

What is clear to everyone is that dollarization in Cambodia is non the consequence of a policy determination, but is a effect of a low assurance in the political and economic ambiance, which drove economic agents toward voluntarily replacing of their local currency retentions with US dollars. Without assurance in the environment, people can neither move expeditiously in the short tally, nor can they do proper long-run programs. Hence, the jobs we have considered in relation to dollarization clearly do non acknowledge of an easy solution. The followerss will cover the policy implicated by Kampuchean authorities in cut downing the negative effects of the denominated dollars and some policy options suggested by UNDP. Removing the usage of the dollar can non continue by force transition of foreign currency sedimentations into domestic currency. While this may at first seem attractive and appear to hold speedy consequences, there is a high possibility that such a step would excite capital flight and drive the dollarized economic system resistance. Execution of a de-dollarization policy is non a affair for statute law, but implies the creative activity of an economic and fiscal environment in which it is clearly to people ‘s advantage to exchange to the riel. The de-dollarization procedure should be implemented, without harming growing of economic activities, by doing attempts to increase demand of the general populace for the riel. Alongside the attempts implemented by the authorities, in the context of the de-dollarization procedure, the governments might take the following farther options into consideration. Harmonizing to UNDP ( 2004 ) , to excite riel nest eggs there is a demand to reexamine the proviso of the jurisprudence on revenue enhancement that imposes a revenue enhancement rate of 5 % on involvement income on sedimentations. Although the jurisprudence was adopted in 1997, the proviso on revenue enhancement of involvement income was merely scheduled to come into force in August 2002. This step might impact adversely on nest eggs, particularly little nest eggs. To ease the state of affairs, the authorities might see set uping a threshold, below which little depositors could bask a revenue enhancement freedom. It should besides see distinguishing between net incomes generated from sedimentations which might be helpful in exciting the credence of riel as a shop of value. To travel towards de-dollarization, the governments need to set up a mechanism, harmonizing to UNDP, to develop intermediation in local currency by the commercial banking system. Banks would be more willing to accept riel sedimentations, if they could happen riel-denominated fiscal assets against which to fit their riel liabilities. In this respect, the debut of exchequer measures seems to supply an appropriate solution. In peculiar, in the current fortunes that commercial Bankss have extra liquidness, exchequer measures could function as a tool to wipe up up extra financess. In add-on, by the purchase or sale of exchequer measures, the cardinal bank would hold the chance to set unfastened market policy into consequence, while the measures would besides assist to advance the development of money market or interbank markets. As for the authorities, raising money through such a domestic debt instrument would avoid inflationary force per unit area and the financess could be used independently of donor-funded resources which are normally tied to undertakings the givers themselves have approved. Consultation with commercial Bankss and representatives of the private sector is really important in specifying the mode, colony regulations etc. , for the Treasury measures. Initially the measure could be designed for subscription by commercial Bankss and merely subsequently offered to the public once it has been seen to work good and credibleness of the authorities additions. It is of import that the instrument guarantees rescuers the handiness of a existent positive involvement rate. Another applicable method to take into history is that the authorities should present a public instruction run to supply the general public with cognition on banking services and to cut down their uncertainness. To sum up, in order to spread out the range of riel-denominated minutess from the point of position of poorness decrease, pecuniary and exchange rate policies need to back up increasing economic integrating of the rural countries into the national market, in peculiar, by back uping higher growing that is more equitably distributed which means more employment chances, increased banking intermediation, and a reduced spread between rich and hapless. Improved fiscal intermediation with enhanced public assurance in the fiscal system and in the domestic currency would hasten the de-dollarization procedure.

Even though the advantages of following US dollars, to a big extent, are more likely to heighten Kampuchean economic growing, the Kampuchean authorities is suggested to take pressing actions in order to avoid an overexploitation of this foreign currency because the effects in the hereafter might non be steadfastly expected. Furthermore, the lifting economic system of Cambodia is non noticed every bit dependent as before and therefore the US dollars, to some extent, should be replaced by the national currency, the Riel. Reflected to the planetary administration, the macroeconomic-related issues such as dollarization and exchange rate stableness have been in the centre of many het treatments among the developed every bit good as the development universe today. In peculiar, dollarization is one of the nucleus jobs in relation to the poorness decrease and answerability of the capitalist provinces in planetary administration due to the fact that the fiscal aid, investing, income from exports and other commercial minutess are denominated in foreign currency. More or less, every individual province should see taking this job into history and should besides seek to equilibrate the positive and negative effects of the dollarization on their economic wellbeing of the people prior to a determination to follow it.