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We are indebted for useful comments and suggestions to Tom Rumbaugh, as well as Philippe Callier, Ed Frydl, Balazs Horvath, Vitale Kramarenko, Tola May, Johannes Mueller, Gabriel Sensenbrenner, and other IMF colleagues. We are grateful to Mrs. Chanthana Neav from the National Bank of Cambodia for providing data and insightful comments, to Marc Paoletti (IMF resident Advisor) for budgetary data, and to Paolo Guarda (Central Bank of Luxemburg) for comments. Chenda Pich offered superb secretarial assistance. We bear responsibility for any remaining errors.
Cambodia had its first experience with limited dollarization during the Lon Nol regime (1970-75), as increases in U.S. military personnel and assistance brought dollars into the country.
It is noteworthy that, although the capital was forcibly emptied of all inhabitants a few days after it fell to the Khmers Rouges, the latter destroyed only two buildings in Phnom Penh, one of which was the National Bank of Cambodia’s (NBC) headquarters.
In view of the shortcomings of their economic management, the Khmers Rouges considered reintroducing money in 1976, and went as far as printing bank notes, but they stopped short of proceeding. They later introduced a parallel currency, the Khmer riel, in March 1993 in the western border areas of the country under their control. This currency had only a limited circulation.
The domleung, the unit for gold widely used in Cambodia, weighs 37.5 grams.
During 1993-98, the NBC auctioned off a total of $177 million to strengthen the riel; however, since 1999, the NBC has refrained from doing so, except for the sale of a small amount of dollars in April-May 2001 to relieve temporary pressure on the riel’s exchange rate.
No GDP estimates exist for earlier years.
However, there continue to be variations, divergences, and inconsistencies among authors on the notions of “dollarization,” “currency substitution,” and “asset substitution.”
For simplicity’s sake, from this point on we use the term dollarization for both currency and asset substitution, unless otherwise specified.
It seems that because of its continued depreciation in recent years, the Lao kip is not used/accepted in Cambodian border areas with the Lao PDR.
The old CP1, used until end-2001, covered only the capital city and suffered from a number of structural weaknesses, as well as excessive sensitivity to seasonal fluctuations in food prices. It is thus possible that it slightly underestimated the underlying inflation. It was replaced in January 2002 by a new, updated, and expanded index
During 1998-2000, $530 million worth of banknotes were deposited overseas by Cambodian commercial banks.
A similar table is presented by Liang (2000), although time coverage and results differ slightly for the reserve-money method. For the central-bank-profit method, we use actual interest earnings data.
Such a move would probably not prevent Thai baht continuing to circulate in some border areas.
Current transactions in Cambodia are free of restrictions, and the authorities adopted IMF Article VIII status on January 1, 2002.
We do not consider the hypothetical issues related to a Central Bank conducting monetary policy with dollar-denominated instruments or using its foreign reserves and correspondent accounts.
Reserve requirements on riel and foreign currency deposits at commercial banks are payable in riels and in foreign currency, respectively. Since most commercial banks are fully dollarized, they meet their reserve requirements in dollars, except the Foreign Trade Bank (FTB), which meets them in riels.
As the banking system in Cambodia is almost fully dollarized, interest rates for transactions in riels are largely irrelevant for analytical purposes.
However, if international bank exposure to Cambodia had been high relative to GDP, then withdrawal of such funding might have had more pronounced contagion-like effects.
Technically, the Government can have recourse to the monetization of fiscal deficits through riel emission, but given the narrow riel base, the inflationary and exchange rate impacts provide a deterrent.
Excluding exchange rate adjustments and outstanding operations.
Riels in circulation have been relatively stable since end-1999.
They are however included in the calculation of official reserves.
Some particularly strong CBA backing rules require foreign currency coverage of deposits in domestic currency in the banking system. Considering the low amount of deposits in riels in Cambodia, even if the coverage had been augmented to include such deposits, net official reserves would still have been equivalent to 2 and 3/4 times all riel components of broad money at end-December 2001.
The recently approved Land Law, the prospect of a land registry, forthcoming laws on corporate insolvency and secured transactions, and the ongoing reform of the judiciary system will make the taking of collateral eventually easier, and thus may lead to new long-term lending activities. In the mean time, short-term credit is the most likely to develop.
Commercial banks currently sterilize some of their dollar deposits by investing them abroad.
For the first time, the MEF issued government bonds in February 2002 to bring the capital of the FTB to the statutory threshold
Most checks clear immediately, hence no lags are used. There are virtually no electronic payments.
This component includes all cash foreign currencies circulating in Cambodia. There are no sufficient time series for checks denominated in dollars.
Relaxing this hypothesis leads to a nonlinear specification, which is hardly tractable, owing to the mathematical complexity of the resulting equations.
We also tried using CPI all items less food, beverages, and tobacco, and found similar results.
We experimented with different initial values and found that they led to similar results.