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This study examines the challenges and issues facing policymakers in highly dollarized economies. Focusing on Cambodia, which achieved almost complete dollarization during 1991-95, the authors review recent developments in the literature on dollarization and examine the costs and benefits of dollarization in Cambodia, including the ensuing macroeconomic policy implications. They carry out an econometric estimation of cash foreign currency circulation in Cambodia in order to gauge the degree of dollarization. In addition to this analysis, the authors present a short description of Cambodia’s economic, financial, and structural background.
In recent years a number of countries have adopted the U.S. dollar as their official currency. In some other countries the dollar has become a semi-official currency. This “dollarization” occurs in a variety of ways. Some countries allow several currencies to circulate side by side and over time the dollar dominates (so-called “de facto dollarization”). Others make a conscious choice, opting for the dollar because of its traditional stability. In Cambodia, this process has been particularly rapid and extensive.
Cambodia became independent from France in 1953 and experienced a 17-year period of relative political stability and steady economic growth, starting from a development base similar, if not superior, to that of other countries in South East Asia (Box 1). During that period, the riel was the legal tender and was used both for financial transactions and as a store of value. Following the March 1970 coup d’état that toppled the government, the country was quickly drawn into the international turmoil of the subregion, and eventually into a civil war. In 1971, a flexible exchange rate system was introduced, while the exchange rates were unified. However, owing to economic difficulties, a dual exchange rate system was reinstated in 1973 with a “basic” rate for most transactions and a “preferential rate” for aid-related imports and services.1
The notion of dollarization emerged as a novel economic phenomenon in the 1980s in Latin America. Early discussions of this phenomenon in the literature revolved around that region’s experience with the increasing use of the U.S. dollar along with national currencies.
International Monetary Fund. Western Hemisphere Dept.
This 2014 Article IV Consultation highlights that Panama’s economic performance remains buoyant. Real GDP growth averaged about 8.5 percent over the past decade, the highest in Latin America, supported by an ambitious public investment program, and accompanied by strong reduction in unemployment, poverty, and income inequality. After exceeding 10 percent in 2011–2012, growth slowed to 8.4 percent in 2013 reflecting mainly a decline in Colon Free Zone activity and in Canal traffic. Growth is expected to remain strong over the medium term. Inflation is moderating, owing to the deceleration of international food and oil prices. The baseline outlook is favorable, with moderate risks.
International Monetary Fund. Western Hemisphere Dept.
This Selected Issues paper estimates potential output growth and the output gap for Guatemala. Potential output growth averaged 4.4 percent just before the global financial crisis but has since declined to 3.75 percent owing to lower capital accumulation and total factor productivity (TFP) growth. It is estimated at 3.8 percent in 2016, and the output gap has virtually closed. Potential growth is expected to reach 4 percent in the medium term owing to the expected improvements in TFP growth. Policies should also prioritize mobilizing domestic savings to invest and build a higher capital stock.
This paper presents an alternative method for calculating debt targets using the debt intolerance literature of Reinhart, Rogoff, and Savastano (2003) and Reinhart and Rogoff (2009). The methodology presented improves on the previous papers by using a dynamic panel approach, correcting for endogeneity in the regressors and basing the calculation of debt targets on credit ratings, a more objective criteria. In addition the study uses a new data base on general government debt covering 120 countries over 21 years. The paper suggests a ranking of Central America, Panama, and Dominican Republic (CAPDR) countries in terms of debt intolerance - an index which could be used to further investigate the main components of debt intolerance.
This paper examines El Salvador’s transition to official dollarization by comparing aspects of this regime to the fixed exchange rate regime prevailing in the 1990s. Commercial bank interest rates are analyzed under an uncovered interest parity framework, and it is found that dollarization lowered rates by 4 to 5 percent by reducing currency risk. This has generated net annual savings averaging ½ percent of GDP for the private sector and ¼ percent of GDP for the public sector (net of the losses from foregone seigniorage). Estimated Taylor rules show a strong positive association between Salvadoran output and U.S. Federal Reserve policy since dollarization, implying that this policy has served to stabilize economic activity more than it did under the peg and more than policy rates in Central American countries with independent monetary policy have done. Dollarization does not appear to have affected the transmission mechanism, as pass-through of monetary policy to commercial interest rates has been similar to pass-through under the peg and in the rest of Central America.