Dollarization in cambodia case promote riel and de dollarization master thesis of banking and finance

MINISTRY OF EDUCATION THE STATE BANK OF VIETNAM AND TRAINING BANKING UNIVERSITY HO CHI MINH MARY MENDA DOLLARIZATION IN CAMBODIA CASE PROMOTE RIEL AND DE-DOLLARIZATION MAJOR: BANKING AND FINANCE MAJOR CODE: 34 02 01 MASTER THESIS SUPERVISOR: ASSO.PROF.DR ĐOÀN THANH HÀ HO CHI MINH CITY - YEAR 2020 CONTENTS ABSTRACT…………………………………………….……… i RESEARCH GUARANTEE……………………………… …………… ……iii ACKNOWLEDGMENTS…………………………………………….……… .iv TABLE OF CONTENTS…………………………………………….…… …v LIST OF TABLES…………………………………………….… ……vii LIST OF FIGURES…………………………………………….… ……vii LIST OF ABBREVIATIONS…………………………………………….…… .…viii INTRODUCTION Reason to choose a topic………………………………………………….…………1 Research objectives…………………………………………………… ….…………2 2.1 Overall objective……………………………………………… ………… ……2 2.2 Specific objectives……………………………………….………… …….……2 Research questions……………………………………………………….….… ……2 Research Methodology…………………………………………………… ….….…3 The structure of the thesis………………………………………….………….…… CHAPTER LITERATURE REVIEW 1.1 The concept of dollarization………………………………………………….……6 1.2 Dollarization classification…………… …………………………………….……6 1.3 The method of measuring the degree of dollarization…………………………… 1.4 The causes of dollarization……………………………………………………….11 1.5 The effects of dollarization on the economy……………………………… ……12 1.5.1 Positive impact…………………………………………………… ……12 1.5.2 Negative impact……………………………………… …………… ……13 1.6 International Experiences………………………………………………… ……14 1.7 Summary Chapter 1………………………………………………………………16 CHAPTER CURRENT SITUATION OF DOLLARIZATION OF THE ECONOMY IN CAMBODIA 2.1 Analyze the current situation of dollarization in Cambodia 2000-2019…………18 2.1.1 The situation of dollarization of the economy in Cambodia …… …………18 2.1.2 The causes of dollarization in Cambodia……….…………………………….28 2.1.2.1 People's faith in the Riel…………………………………………………32 2.1.2.2 Measuring Dollarization in Cambodia……………………………….….35 2.1.2.3 Foreign exchange control 42 2.2 The impact of dollarization on the Cambodian economy…………………………43 2.2.1 Positive impact……………………………………………………… ….… 44 2.2.2 Negative impact………………………………………………………………46 2.3 Summary Chapter 2………………………………………………………………48 CHAPTER SOLUTIONS TO OVERCOME THE DOLLARIZATION SITUATION IN CAMBODIA 3.1 The Cambodian government's view of dollarizing the economy…………….……49 3.2 Solutions to overcome the dollarization of the Cambodian economy……….……51 3.2.1 Riel empowering………………………… …………………………………51 3.2.2 Interest rate policy……………………………………………………………52 3.2.3 Foreign exchange management policy……………………………………….52 3.3 Proposals to regulatory agencies…………………………………………….……53 3.4 Summary Chapter 3…………………………………………………………….…56 CONCLUSION………………………………………………………………………………58 RECOMMENDATION …………………………………………….………… ………… 59 REFERENCES……………………………………….………… … .……i ABSTRACT THESIS Title: Dollarization in the Cambodia case promotes riel and de-dollarization Abstract: Dollarization occurs when residents of a country extensively use foreign currency alongside or instead of the domestic currency Dollarization can occur unofficially, without formal legal approval, or it can be official, as when a country ceases to issue a domestic currency and uses only foreign currency Dollarization emerged spontaneously in Cambodia, because public confidence in the riel eroded, following a series of shocks that ranged from the destruction of all infrastructures by the Khmers Rouges to the subsequent mismanagement of the economy The lack of public confidence in institutions and in the banking system remains high and dollarization is still in progress, in spite of recent improvements in macroeconomic stability and of measures taken by the authorities to restore confidence If this trend continues, the country may eventually become fully dollarized No harsh action should certainly be taken against the use of the dollar However, there is a need to build up a consensus on how to promote the use of the national currency There are two priorities Cambodia needs to in the next 5-10 years The first priority is developing a comprehensive plan to promote Riel and de-dollarization Such a plan would need to be developed by relevant authorities, who would be responsible for the implementation The second priority is the establishment of a task force that has sufficient capacity to respond to the market’s reactions when the de-dollarization plan is enforced From the experience of countries that have attempted to de-dollarize their economies, the success or failure depends very much on whether the market looks at the plan and the authority who implements the plan that is credible or not Therefore, stronger efforts need to be made to build the capacities of relevant institutions that would be responsible for the formulation and implementation of the de-dollarization plan This paper is one step in that direction Keywords: Dollarization, De-dollarization, Riel, Khmers Rouges i LUẬN VĂN TĨM TẮT Tiêu đề: Đơ la hóa trường hợp Campuchia thúc đẩy đồng riel phi đô la hóa Tóm tắt: Đơ la hóa xảy cư dân quốc gia sử dụng rộng rãi ngoại tệ với thay nội tệ Đơ la hóa xảy khơng thức, khơng có chấp thuận pháp lý thức thức, quốc gia ngừng phát hành nội tệ sử dụng ngoại tệ Đơ la hóa lên cách tự phát Campuchia, niềm tin công chúng vào đồng riel bị xói mịn, sau loạt cú sốc từ việc phá hủy tất sở hạ tầng Khmers Rouge dẫn đến quản lý yếu kinh tế sau Sự thiếu tin tưởng công chúng vào tổ chức hệ thống ngân hàng mức cao tình trạng la hóa diễn ra, Bất chấp cải thiện gần ổn định kinh tế vĩ mô biện pháp mà quyền thực để khơi phục niềm tin Nếu xu hướng tiếp tục, đất nước cuối trở thành la hóa hồn tồn Chắc chắn khơng nên thực hành động khắc nghiệt chống lại việc sử dụng đồng đô la Tuy nhiên, cần phải xây dựng đồng thuận cách thức thúc đẩy việc sử dụng đồng tiền quốc gia Có hai ưu tiên Campuchia cần thực 5-10 năm tới Ưu tiên phát triển kế hoạch toàn diện để thúc đẩy Riel phi la hóa Một kế hoạch cần phát triển quan có liên quan, người chịu trách nhiệm thực Ưu tiên thứ hai thành lập lực lượng đặc nhiệm có đủ lực để đối phó với phản ứng thị trường kế hoạch phi đô la hóa thực thi Theo kinh nghiệm nước nỗ lực phi la hóa kinh tế họ, thành công hay thất bại phụ thuộc nhiều vào việc thị trường nhìn vào kế hoạch quan thực kế hoạch có đáng tin cậy hay khơng Do đó, cần phải có nỗ lực mạnh mẽ để xây dựng lực tổ chức có liên quan chịu trách nhiệm xây dựng thực kế hoạch phi la hóa Bài báo bước theo hướng Từ khóa: Đơla hóa, Khử đơla hóa, Riel, Khmers Rouges ii RESEARCH GUARANTEE I hereby declare that all information in this document has been obtained and presented in accordance with academic rules and ethical conduct I also declare that this thesis has never been submitted for a master's degree at any university This thesis is the author's own research, the research results are honest, in which there are no previously published content or content by others except for fully cited citations in the thesis Ho Chi Minh City, 25 / 12 / 2020 MARY MENDA iii ACKNOWLEDGMENTS I owe my thesis supervisor Asso.Prof.Dr Đoàn Thanh Hà and co-supervisor Asso.Prof Ph.D Hoang Thi Thanh Hang a debt of gratitude for their close supervision and academic support throughout this study I am also grateful to the examining committee members for sharing their precious contributions and criticisms I would like to thank the State Bank of Vietnam for giving me the scholarship to study at Banking University Ho Chi Minh Also, I would like to thank my workplace, the National Bank of Cambodia for giving me a chance to study here too Last but not least, I express my deepest gratitude to my parents for teaching me everything that makes me who I am today Furthermore, I am grateful to my sister for her close support and encouragement throughout this study Ho Chi Minh City, 25 / 12 / 2020 MARY MENDA iv CONTENTS ABSTRACT ACKNOWLEDGMENTS TABLE OF CONTENTS LIST OF TABLES LIST OF FIGURES LIST OF ABBREVIATIONS INTRODUCTION Reason to choose a topic………………………………………………….…………1 Research objectives…………………………………………………… ….…………2 2.1 Overall objective……………………………………………… ………… ……2 2.2 Specific objectives……………………………………….………… …….……2 Research questions……………………………………………………….….… ……2 Research Methodology…………………………………………………… ….….…3 The structure of the thesis………………………………………….………….…… CHAPTER LITERATURE REVIEW 1.1 The concept of dollarization………………………………………………….……6 1.2 Dollarization classification…………… …………………………………….……6 1.3 The method of measuring the degree of dollarization…………………………… 1.4 The causes of dollarization……………………………………………………….11 1.5 The effects of dollarization on the economy……………………………… ……12 1.5.1 Positive impact 12 1.5.2 Negative impact 13 1.6 International Experiences………………………………………………… ……14 1.7 Summary Chapter 1………………………………………………………………16 v CHAPTER CURRENT SITUATION OF DOLLARIZATION OF THE ECONOMY IN CAMBODIA 2.1 Analyze the current situation of dollarization in Cambodia 2000-2019…………18 2.1.1 The situation of dollarization of the economy in Cambodia …… …………18 2.1.2 The causes of dollarization in Cambodia…………………………………….28 2.1.2.1 People's faith in the Riel…………………………………………………32 2.1.2.2 Measuring Dollarization in Cambodia……………………………….….35 2.1.2.3 Foreign exchange control 42 2.2 The impact of dollarization on the Cambodian economy…………………………43 2.2.1 Positive impact……………………………………………………… ….… 44 2.2.2 Negative impact………………………………………………………………46 2.3 Summary Chapter 2………………………………………………………………48 CHAPTER SOLUTIONS TO OVERCOME THE DOLLARIZATION SITUATION IN CAMBODIA 3.1 The Cambodian government's view of dollarizing the economy…………….……49 3.2 Solutions to overcome the dollarization of the Cambodian economy……….……51 3.2.1 Riel empowering………………………… …………………………………51 3.2.2 Interest rate policy……………………………………………………………52 3.2.3 Foreign exchange management policy………………………………….… 52 3.3 Proposals to regulatory agencies…………………………………………….……53 3.4 Summary Chapter 3…………………………………………………………….…56 CONCLUSION………………………………………………………………………………58 RECOMMENDATION …………………………………………….………… ………… 59 REFERENCES………………………………………………………………………………60 vi LIST OF TABLES Table 1- Table 1-International Trend of Dollarization 14 Table 2- Table - Evolution of Dollarization in various 15 Table 3- Estimated Losses on Riel Printing (1998-2001) 42 Table 4- Evolution of Loan to Deposit Ratio 44 LIST OF FIGURES Figure 1- Composition of Broad Money and the Ratio of Foreign Currency Deposits to Broad Money 18 Figure 2- Trends in GDP growth and per capita GDP 19 Figure 3- Currency Composition of Income by Area (Family Unit) 22 Figure 4- Currency Composition of Total Expenditure (family unit) 23 Figure 5- Currency Composition of Loans by Area 23 Figure 6- Currency composition of revenues (Enterprise) 24 Figure Currency composition of expenditures (Enterprise) 24 Figure 8: Currency composition of revenues 25 Figure 9: Currency composition of expenditures 26 Figure 10: Currency composition of revenues 26 Figure 11: Currency composition of expenditures 27 Figure 12: Foreign direct investment net inflows in Cambodia from 2013 to 2019…… 29 Figure 13: Evolution of Net Claims on the Government (NCG) and Broad Money Supply (M2) 30 Figure 14: Evolution of Inflation and Exchange Rate .31 Figure 15: Evolution of Fiscal Deficit and Broad Money Supply (M2) 31 Figure 16: Assets and Liabilities of Banking System in Foreign Currency 36 Figure 17: Dollarization Ratios 38 Figure 18: Ratio of Foreign Currency Deposits to Broad Money (In Percent) 39 Figure 19: Foreign Currency Doposits in Cambodia, Lao P.D.R, and Vietnam (As percent of broad money) 40 Firgure 20: Dollars in circulation Outside Banks (In billions of U.S dollars 41 vii • Measures of the National Bank of Cambodia Price stabilization and exchange rates to strengthen public confidence in the riel - Strengthening the quality and aesthetics of the riel by replacing old, worn, and torn currency with a new currency to facilitate people to use daily payments as well as encourage the saving of the riel as a savings tool - Fixed interest rate reserve requirement in Riel and Currency (8% KHR deposits; Currency Deposits and Non-Resident Loans 12.5%) To enable banks and financial institutions to provide large amounts of credit in Riel - Raising awareness of the importance of Riel in the economy and society through media and social media - Issuance of Securities Trading Securities (NCDs) and Guaranteed Liquidity Transactions (LPCO) to establish financial instruments and liquidity transactions in Riel - Requiring banks and financial institutions to provide at least 10% of the total Riel credit limit by December 31, 2019, to promote national currency operations in the banking system - Celebrate the celebration of the Riel Day to attract the public's interest and use more local currency - Launching of the system for fast payment service that can make immediate payments and funds in Khmer Riel to promote a wider range of Riel payments - Love Money Campaign through the exchange of new currency to the public at the branches of the National Bank of Cambodia The National Bank of Cambodia has partnered with the Japan International Cooperation Institute's Research Institute to investigate the behavior of the riel and currency in Cambodia in 25 provinces to obtain micro-data in addition to existing macro data The US dollar situation in Cambodia and for the development of a strategy to promote the proper and comprehensive use of the riel The survey was conducted from October 2018 to January 2015 on 2,273 family entities, 856 enterprises, 10 banks, and microfinance institutions 55 3.4 Summary Chapter Cambodia has come a long way in the past ten years The economic achievements in particular, but also political, legal and institutional reforms, have surpassed the expectations of most commentators With these achievements, many have expected that a process of de-dollarization would have been set in train by now Instead, what we see is an increase in dollarization over this period This has understandably led to frustration, and increasing calls for more interventionist action In particular, there have been calls for government to try to enforce de-dollarization In this paper, we have tried to explain the recent increase in dollarization, as well as the apparent delay in the process of dedollarization in Cambodia We argued that the recent increase is part of a transition process, being driven by so-called “good news” rather than “bad news” factors This is likely to be temporary in nature, and no cause for alarm What is more worrying to some is the persistence of the dollarization phenomenon in Cambodia, or its apparent irreversibility We attribute this persistence to an unfinished reform agenda, as well as inertia and stickiness in the system in the form of hysteresis The unique circumstances surrounding the introduction of dollars into the Cambodian economy, combined with a very high level of dollarization, suggests that the de-dollarization process is likely to be more protracted than it would otherwise be It is not that it is irreversible without direct intervention; it will just take more time For these reasons, any drastic policy action, such as attempts to enforce de-dollarization, is not only likely to fail, but could prove counterproductive Since the costs of dollarization appear to exceed the benefits, some action is warranted One option is formal dollarization, but this is politically unpalatable, as well as economically questionable Another is the adoption of a currency board, but this too appears premature, if not financially unfeasible at present We therefore advocate a policy option that does not directly interfere with monetary arrangements, but focuses instead on accelerating accommodative reforms, especially in the financial sector and on legal and institutional reforms We also identify a host of institutional barriers that need to be overcome to prepare the groundwork for a natural process of de-dollarization It would be foolish to predict that this policy prescription would lead to de-dollarization within the next decade It is unclear how long it will take, and it may well take longer But it will happen, naturally, as it has in Indonesia, Israel, Poland, Mexico, Egypt, and 56 Turkey (to name just a few) and as it is happening next door in Viet Nam Based on international evidence and an understanding of the Cambodian context, however, one thing is clear: trying to enforce dedollarization will mean that it will take even longer still 57 CONCLUSION AND RECOMMENDATION Dollarization brings benefits and risks to Cambodia The dollar has contributed to the development of the Cambodian economy and financial system, and increased its economic integration into the region and internationally as the economy has grown Those benefits are reflected in reduced operating costs, increased investment, increased fiscal discipline, lower levels of inflation, and reduced foreign exchange risk In this sense, dollarization has helped restore macroeconomic stability from the era of macroeconomic imbalances However, as Cambodia's economy grows and the dollar depreciates, it will not only cause Cambodia to lose its revenue from Seigniorage, but it can also pose a greater risk and disadvantage to the Cambodian economy, especially to the country Sensitive to conflict both by domestic and international factors Besides, dollarization has also become an obstacle to promoting regional integration within the ASEAN Economic Community (AEC), where each country strives to use its currency in regional economic operations by reducing its dependence on the dollar The macroeconomic and financial stability that Cambodia has gained over the past decade is a prerequisite for the successful implementation of the Riel promotion strategy Major policies should be implemented in a variety of ways depending on the situation Many administrative measures may be considered as necessary to support market-based instruments and support the public's use of the riel Also, policy implementation and action plans should be communicated clearly and transparently to the public to demonstrate the position of the government and all stakeholders in promoting the riel And ensuring the public's trust and interest remains a factor for the government to consider the implementation of policies and measures that will be based primarily on market mechanisms to promote the voluntary use of the national currency by the public Implemented as a technical inter-ministerial working group under the chairmanship of the Economic and Financial Policy Committee and to monitor the implementation and reporting of developments and related activities towards the promotion of sustainable use of the Riel All parties must cooperate closely in the implementation of the action plan 58 RECOMMENDATIONS To gradually and effectively mitigate the risks and risks, policies, and measures to promote the use of the riel should be laid down under market mechanism principles, including: - Maintaining macroeconomic stability and confidence in the riel by stabilizing the price and value of the riel to protect the purchasing power of the riel - Strengthening the quality and aesthetics of the riel more attractive, difficult to fake, clean and easy to hold - Meeting the needs of the Riel through injecting fluctuations into the economy - Encourage and encourage banks and financial institutions as well as the public to use the riel, such as the gradual increase of the reserve requirement rate and US $ Borrowings, gradual reduction in rates Interest in KHR loans and other fees in Khmer Riel are lower than the currencies - Taxes and other public services payments are required in Khmer Riel - Disseminate and educate on the importance of the national currency to the economy and the nation to the public and future generations - Encourage traders to set prices of goods and services in Riel 59 REFERENCES Dollarization in Cambodia: Evidence National Bank of Cambodia Survey conducted (Research Papers by Tal Nay Im and Michel Dabadie in 2007) Dollarization in Cambodia: Evidence from a (National Bank of Cambodia) in 2014-2015 Economic Policy in a Highly Dollarized Economy The Case of Cambodia by IMF in 2003 Quarterly and Annual Reports of the National Bank of Cambodia (Department of Economic Research and International Cooperation) in 2016 Monetary and Financial Statistics Data of the National Bank of Cambodia (2014 to 2016 Department of Statistics) Banking Statistics of Cambodia Financial Statistical Data of the Bank of Cambodia in 2015-2016 Documentation at the NBC Library Quarterly Newsletter, Issue 49, 2016, NBC Quarterly Bulletin, No 3, 2016, NBC 10 https://www.nbc.org.kh 11 https://www.mef.gov.kh 12 http://www.cambodiainvestment.gov.kh/investors-information 13 https://www.export.gov/apex/article2?id=Cambodia-foreign-exchange-controls 14 https://asean.elibrary.imf.org/view/IMF084/01966-9781589061897/019669781589061897/C3.xml?redirect=true i TRƯỜNG ĐẠI HỌC NGÂN HÀNG TP HỒ CHÍ MINH CỘNG HÒA XÃ HỘI CHỦ NGHĨA VIỆT NAM Độc lập – Tự – Hạnh phúc TP Hồ Chí Minh, ngày …… tháng …… năm 2020 BẢN CAM ĐOAN CHỈNH SỬA LUẬN VĂN Tôi tên là: MARY MENDA Giới tính: NAM Sinh ngày: 07 / 09 / 1992 Nơi sinh: CAMPUCHIA Ngành: TÀI CHÍNH-NGÂN HÀNG Mã số: 8340201 Khóa: 21 Lớp: CH21B1 Niên khóa: 2019 - 2021 Điện thoại liên lạc: 086 75 85 767 Email: marymenda7@gmail.com Là tác giả luận văn: “DOLLARIZATION IN CAMBODIA CASE PROMOTE RIEL AND DE-DOLLARIZATION” Chuyên ngành: TÀI CHÍNH-NGÂN HÀNG Mã ngành: 8340201 Bảo vệ ngày: 25 tháng 12 năm 2020 Điểm bảo vệ luận văn: 8.5 Tôi cam đoan chỉnh sửa nội dung luận văn thạc sĩ với đề tài theo góp ý Hội đồng đánh giá luận văn Thạc sĩ Các nội dung chỉnh sửa: Đã thêm danh sách bàn Đã thêm danh sách hình thể Đã đổi tên thành chương “Literature review” Đã sửa lại mục tiêu nghiên cứu Đã sửa thêm citations Đã them method of measuring the degree of dollarization Cập nhật nguồn liệu Đã sửa lỗi tả Đã sửa liệu cập nhật - Những bàn - Hình thể 12 Người cam đoan (Ký, ghi rõ họ tên) Người hướng dẫn khoa học (Ký, ghi rõ họ tên) Chủ tịch Hội đồng chấm luận văn (Ký ghi rõ họ tên) TRT'ONG DAI HQC NGAN HANG ceNG HoA xA ugr cnu xcni.l vrET NAM D6clip-Tudo-H anh phtic TP HO CHi MINH H I DONG CHAM LUAN VAN l2 ndm 2020 TP H6 Chi Minh, ngdy 25 thdng BrEN BAN Hep Her DONG CHAM LUAN vAN rH4c Chuy6n nghnh: Tiri chinh - Ngin hirng; Mn s6: 34 02 01 si H6i d6ng ch6m luQn vIn th4c si