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Advantage And Disadvantage Of Dollarization In Cambodia Pdf

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Economic Policy in a Highly Dollarized Economy : The Case of Cambodia

Currency substitution occurs when an economy uses an alternative currency to the domestic currency. The alternative currency maybe used in parallel to the domestic currency or some cases may completely replace it. Usually, this will involve using an internationally recognised major currency like the dollar or Euro.

For example, Zimbabwe used the American Dollar after a period of hyperinflation. However, it can also become a partial substitution due to unofficial reasons. Provides a means to deal with inflation — the government cannot print foreign currency to create inflationary pressures. This provides an incentive to deal with inflationary pressures — such as cost-push factors and supply constraints.

The government cannot print money to finance a deficit and this creates an incentive to tackle overspending. Encourages foreign investment. Foreign investors will be attracted by the stability of a substitute currency and have a greater willingness to be paid in dollars than domestic currency — which might be subject to losses on foreign exchange markets. Reduces transaction costs.

A substitute currency like the dollar creates the ability for frictionless trade and investment between the US and developing economies. Many small European economies use the Euro for similar reasons — it is not worth the costs of managing a currency — Andorra, San Marino and Lichtenstein. WIth a foreign currency, the economy is unlikely to face a balance of payments crisis, when speculators take flight and sell domestic currency. Loss of lender of last resort. With using full currency substitution, a Central Bank cannot print foreign money to act as lender of last resort — e.

This can increase uncertainty and lead to higher bond yields in times of poor liquidity. To some extent, it can be dealt with if international bodies agree to lend money if necessary. The process of currency substitution could wipe out the savings of domestic savers who have been saving in the local currency. Those who can save their assets in dollar assets may be those with more significant economic power. However, countries often move to currency substitution precisely because they have liquidity problems and struggle to provide certainty for the banking system.

Loss of exchange rate flexibility. Using another currency means the exchange rate is dependent on the dollar. This provides greater certainty. However, it could cause exports to become uncompetitive if the dollar appreciates, but the local economy faces rising costs.

In this case, the country loses the ability to effectively devalue the currency to restore competitiveness. This over-valuation of the currency can lead to a fall in exports and limit economic growth. Loss of monetary policy flexibility. If the developing economy is in recession, but the US raise interest rates — monetary policy will be counter-cyclical i.

Rounding up. This can affect the poorest who see rising prices but not rising wages. Hard to go back. Once the dollar is established in an economy, it is hard to go back to a domestic currency because there will inevitably greater trust and desire to hold dollars rather than the new untried domestic currency. Examples of countries with official currency substitution include Ecuador El Salvador Panama Usually, this will involve using an internationally recognised major currency like the dollar or Euro.

Author Crosswords. Partial currency substitution includes Haiti uses the U. S dollar alongside its domestic currency, the gourde Cambodia The local currency Cambodian Riel for many official transactions but most businesses deal exclusively in dollars for all but the cheapest items.

Reasons for currency substitution Rampant inflation causing the domestic currency to become worthless and people lose confidence. The higher and more erratic domestic inflation is — the more unofficial currency substitution will occur.

During capital flight, a foreign currency holds its value better. A dollar can become a store of wealth. Dollars may be needed to buy certain inputs from other countries.

A country may adopt official currency substitution as a policy to deal with inflation that has got out of control. Benefits of currency substitution Provides a means to deal with inflation — the government cannot print foreign currency to create inflationary pressures. Currency substitution has been effective in keeping inflation lower in countries such as Zimbabwe, Ecuador and El Salvador who have undergone currency substitution.

Low inflation, in turn, encourages more bank lending and business investment. Foreign investors will be attracted by the stability of a substitute currency and have a greater willingness to be paid in dollars than domestic currency — which might be subject to losses on foreign exchange markets Reduces transaction costs. Costs of currency substitution Loss of lender of last resort. Related Costs of inflation Hyperinflation.

Dollarization and De-dollarization in Transitional Economies of Southeast Asia

Currency substitution , dollarization see English spelling differences is the use of a foreign currency in parallel to or instead of the domestic currency. Currency substitution can be full or partial. Most, if not all, full currency substitution has taken place after a major economic crisis, for example, Ecuador and El Salvador in Latin America and Zimbabwe in Africa. Some small economies, for whom it is impractical to maintain an independent currency, use those of their larger neighbours; for example Liechtenstein uses the Swiss franc. Partial currency substitution occurs when residents of a country choose to hold a significant share of their financial assets denominated in a foreign currency. It can also occur as a gradual conversion to full currency substitution, for example, Argentina and Peru were both in the process of converting to the U. After the gold standard was abandoned at the outbreak of World War I and the Bretton Woods Conference following World War II , some countries sought exchange rate regimes to promote global economic stability, and hence their own prosperity.

Tourism is another large contributor to growth, with tourist arrivals reaching 6. The government has made it a priority to attract investment from abroad. Foreign direct investment FDI incentives available to investors include percent foreign ownership of companies, corporate tax holidays of up to eight years, a 20 percent corporate tax rate after the incentive period ends, duty-free import of capital goods, and no restrictions on capital repatriation. Failure to consult the business community on new economic policies and regulations has also created difficulties for domestic and foreign investors alike. In recent years, Chinese FDI has surged and become a significant driver of growth. Physical infrastructure projects, including commercial and residential real estate developments, continue to attract the bulk of FDI.

Ahigh degree of dollarization can yield both costs and benefits. This section examines how dollarization can help or hurt an economy. A main cost of high dollarization in Cambodia is the loss of seigniorage revenue for the government. Box 5 presents recent methods used in the literature to measure seigniorage. Interest income series from the National Bank of Cambodia overseas deposits are available since and were used to compute seigniorage.


In an article examining the pros and cons of dollarization in Cambodia, and policy options on the de-dollarization; and (i) dollarization has more costs than benefits. ebezpieczni.org —​——.


Dollarization and Dedollarization: The typical dilemma of economic in Cambodia

Currency substitution occurs when an economy uses an alternative currency to the domestic currency. The alternative currency maybe used in parallel to the domestic currency or some cases may completely replace it. Usually, this will involve using an internationally recognised major currency like the dollar or Euro. For example, Zimbabwe used the American Dollar after a period of hyperinflation.

Moving beyond the tendency to focus on the Latin American experience of dollarization and prolonged high inflation, the chapters in this book compare how payment dollarization has been more persistent than other types of dollarization in this region due to network externalities. The book illustrates that dollarization started in the underdeveloped financial system in these countries and that dollarization interacted with financial development, which is in contrast to dollarization in Latin America. This project extends the frontiers of empirical studies on dollarization.

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Currency Substitution – Pros and Cons

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3 Comments

Mason H. 28.03.2021 at 07:19

Advantages of dollarization. 2. Disadvantages of dollarization. 3. International Experience. 4. What to do in Cambodia? 5. How to Promote the Use of Riel?

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