Dollarization in Cambodia: Causes and Policy Implications

IMF Working Papers, March 1, 2011

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Over the past decade, Cambodia has become Asia’s most dollarized economy.
In contrast, dollarization in neighboring Lao P.D.R., Mongolia, and Vietnam has been either declining or broadly stable.
Growing dollarization in Cambodia has occurred against the backdrop of greater macroeconomic and political stability.
The usual motive, currency substitution, does not appear to have been a factor.
As the volume of dollars increased over the years, so has the volume of riel.
A strong inward flow of dollars related to garments sector exports, tourism receipts, foreign direct investment, and aid has benefitted the dollar based urban economy.
The riel based rural economy has lagged behind.

External and sectoral dollar inflows:
- Garments sector exports.
- Tourism receipts.
- Foreign direct investment.
- Aid.
Limited role for traditional currency substitution motives.
Dual expansion:
- Both dollar supply and riel supply increased over the period, indicating parallel currency growth rather than substitution.

De-dollarization should follow international experience emphasizing:
- A carefully managed market based strategy.
- Continued stable macroeconomic environment to support such a strategy.
Policy focus needed on:
- Strengthening riel use in the rural economy to address the urban–rural divide in currency usage.
- Market-based measures rather than heavy-handed administrative controls.