Dollarization Dilemma: Price Stability at the Cost of External Competitiveness in Cambodia

Abstract

Cambodia has recorded both rapid economic growth and macroeconomic stability in recent decades despite (or thanks to) high levels of dollarization. Previous studies on dollarization in Cambodia have largely focused on examining its causes and estimating seigniorage losses. As an attempt to further explore the effects of dollarization in Cambodia, this paper examines its impact on the competitiveness of the export sector. The main results, based on a vector autoregression estimation of quarterly data over 1994Q4-2016Q4, indicate that a positive US interest rate shock has a negative impact on Cambodia's trade balance with the European Union, its main trading partner, as it leads to appreciation of the US dollar. Furthermore, this shock also leads to a significant decrease in Cambodia's international reserve levels during the first two quarters following the shock. The surrendering of monetary and exchange rate independence seems to affect the competitiveness of the tradable sector negatively as well as exacerbate financial sector vulnerability to solvency and liquidity risks.

Dollarization and macroeconomic performance in Cambodia since the first 1993 general election

“…prices in Cambodia at the expense of competitiveness. Samreth et al (2019) find that a positive US interest rate shock dampens trade balance of Cambodia with the EU through appreciation of the US dollar and the shock also leads to significant decrease in Cambodia's international reserve level. Those previous studies about dollarization in Cambodia lack the comprehensive description of macroeconomic performance in Cambodia.…”

Uncovered Interest Parity and Expected Depreciation in a Dollarized Cambodian Economy

“…Dollarisation can stabilize prices in Cambodia at the expense of competitiveness. Samreth et al (2019) find that a positive US interest rate shock dampens trade balance of Cambodia with the EU through appreciation of the US dollar and the shock also leads to significant decrease in Cambodia's international reserve level. Those literatures overlooked the relationship between interest rate differential and nominal exchange rate.…”

Financial Inclusion or Subordination? The Monetary Politics of Debt in Cambodia

“…Far from an unexpected outcome, proponents of financial inclusion in Cambodia have actively argued that dollarisation is crucial for the country's financial market development, a key plank in the government's broader neoliberal development agenda (Pum and Vanak 2010; Samreth et al. 2019).…”

“…As a result, Cambodia's foreign reserves dropped significantly (Samreth et al. 2019:2). The NBC has thus accumulated large reserves in US dollars to protect against such exchange volatility, with its reserves growing rapidly from US$611 million to US$21.3 billion between 2000 and 2020 (World Bank 2022).…”

“…Alongside this rapid growth of microfinance, US dollars have been the primary currency circulating in Cambodia since the late 1990s. Today, Cambodia is the most dollarised economy in Asia, with more than 90% of bank assets denominated in US dollars (Saing 2020).…”