dollarization in cambodia: a review of recent empirical

24 アジア研究　Vol. 65, No. 1, January 2019

【特集：カンボジアのドル化―政治・経済の実相】

Dollarization in Cambodia: A Review of Recent Empirical Findings from a Nation-Wide Survey

ODAJIMA Ken and AIBA Daiju

Introduction

Cambodia is one of the most dollarized economies in the world. When the US dollar (USD) surged into the economy in early 1990s, it started to take on two functions of currencies, acting as both a store of value and means of payment because of the limited local currency in circulation in the economy. Since then, dollarization in Cambodia has evolved both in terms of asset substitution and currency substitutions. Several studies point out that dollarization could limit the effectiveness of monetary policy, while to some extent dollarization complements the function of the untrusted local currency in the financial system. De-dollarization is generally needed for the sake of the resilience of a financial sector to act as a policy tool to stabilize the economy. However, given that dollarization also contributes to the development of the financial system to some extent in place of the local currency, a careful investigation is required to minimize harmful consequences before implementing measures to reverse dollarization.1)

However, empirical research on dollarization has commonly faced a fundamental problem: there is limited available data on the usage of foreign currency (FX currency) by households/enterprises. Aggregated data, i.e. the proportion of FX currency denominated by deposit against M2, have been used as a proxy in analyses on dollarization. However, the dollarization in Cambodia also prevailed in the real sector, along with the financial sector. Since there is an interdependency between the dollarization in the financial sector and in the real sector, dollar-ization in the financial sector could be also affected by the dollarization in the real sector. In addition, one of the reasons for the persistence of dollarization in Cambodia could be the widespread use of USD as a means of payment by households and enterprises. Thus, any de-dollarization policy must be shaped with careful consideration for its effect on the real sector apart from the financial sector, and systematic empirical analysis on households and enterprises is necessary.

In order to provide policy recommendations for de-dollarization and to suggest a direction for future research, our paper provides an overview of the dollarization in households and enter-prises of Cambodia by reviewing empirical findings from the nation-wide survey by the National Bank of Cambodia (NBC) and JICA Research Institute (JICA-RI). While most studies have been done with aggregated data or anecdotal evidence due to limited data, a recent nation-wide survey enabled researchers to analyze the detailed behavior of economic agents. In 2014, the NBC and JICA-RI conducted a survey, which was the first attempt to reveal the real picture of dollarization in the entire country and covers information on basic characteristics and usage of currencies in households and enterprises. The research based on the survey data have pro-vided new evidence on what factors drive dollarization. In this paper, we particularly review and assess empirical evidences of current studies based on the NBC-JICA survey data.

Recently, there have been an increasing number of studies which use survey-based data to

Dollarization in Cambodia: A Review of Recent Empirical Findings from a Nation-Wide Survey 25

analyze the behavior of households and enterprises.2) The survey-based data enable researchers to assess the causes and consequences of currency choice by individual economic agents. Like those recent studies in other dollarized economies, the NBC-JICA survey provides detailed information on currency choices in transactions and the denomination of asset and liabilities of individual Cambodian economic agents. Because of rich and wide coverage of the survey, sev-eral studies have investigated the real picture of Cambodian dollarization in households, enter-prises, and financial institutions (Odajima & Khou, 2017; Aiba & Tha, 2017; Aiba & Pagna, 2017), and also investigated currency choices in household’s borrowing (Aiba et al., 2018), cur-rency choices for payment by households (Odajima et al., 2018), and capital structure decision by enterprises (Okuda & Aiba, 2018).

In this paper, we provide empirical findings from this prior research of the NBC-JICA survey, and we summarize the main findings to understand the features of dollarization in Cambodia as follows. First, though the conventional measurement of dollarization, FX currency deposits over M2, shows a very high ratio of over 80%, households that are far from near complete dol-larization. FX currency is used intensively for income, expenditures, and saving. As for borrow-ing, FX currency dominates the currency choice but still the local currency has some role there. Second, in contrast to households’ behavior, enterprises are in the well dollarized environment. Enterprises have almost no choice of currency in borrowing but in USD. Dollarization is perva-sive not only in loans but also in revenue, expenditures, and price quotations. The Cambodian enterprises have to deal with both FX currency and the local currency. Thirdly, there exists a significant difference in FX currency usage by areas and by type of transactions. In rural areas they use the local currency more intensively than those in urban areas do. Households in rural areas use the local currency more intensively than those in urban areas do. Enterprises in rural area accumulate revenues in the local currency and expenditures in FX currency. Regarding the difference by type of transaction, FX currency is used intensively for wages and salary com-pared to other sources of income. Also, for larger transactions, FX currency is preferred and used. Lastly, as for borrowing, both households and enterprises try to hedge the currency mis-match risk using the limited measures of hedging available to them. This is presumably why lenders induce borrowers to take out loans in FX currency.

The remaining sections are structured as follows: Section II presents historical background and the development path of dollarization in the country. In the same section we review studies with aggregated data and discuss some features of dollarization in the country. Section III reviews results of empirical works using the NBC-JICA survey data. Section IV concludes with some remarks on policy recommendations for de-dollarization in Cambodia.

I. Development of Dollarization in Cambodia

1. History of Dollarization in CambodiaCambodia once experienced the abolishment of its own currency during the Khmer Rouge regime. In 1975, the local currency was abolished and the banking system including the central bank was abandoned. When the People’s Republic of Kampuchea was officially proclaimed on January 12, 1979, initially there was no currency. Payment was made in gold, jewellery, tobacco, and rice, except for a few Vietnam dong brought by the Vietnamese troops and Thai baht at the border. On March 20, 1980, the riel, renamed the “Kampuchean riel” printed in Moscow returned to circulation after a five year disappearance. However, there were two major obstacles hampering the recirculation: the valuation of a new currency and a limited deployment channel under the centrally planned economy.3) Even after the reintroduction of local currency, the country went through a period of great monetary confusion resulting in bartering still being the basis for transactions. The most widely used and relatively most


practical commodity money was rice. In the 1980s, the country achieved very limited monetization and most domestic transactions were based on bartering, with gold being the universal means of transacting and hoarding (De Zamaroczy and Sa, 2002). The people in Cambodia had to wait until a massive inflow of USD by the United Nations Transitional Authority of Cambodia (UNTAC) to obtain a widely circulating currency.

In fact, the circulation of riel was quite limited even a decade after its reintroduction. At the end of 1991, the volume of narrow money (local currency in circulation plus demand deposit in local currency) was 77.6 billion riels, only 5.9% of nominal GDP (IMF, 1994). In addition, the volume of FX currency was also limited. FX currency deposits totalled the equivalent of only 0.7 billion riels, or 0.005% of GDP as of the end of 1991 (IMF, 1994). The volume of USD brought by the UNTAC operation far exceeded that of the local currency in circulation. During 1991–92, UNTAC brought US$1.7 billion, the equivalent of about 75% of GDP at that time, mostly spent for rent and local services for its peacekeeping operation (De Zamaroczy and Sa, 2002). Given the fact that the volume of local currency was less than one-tenth of the in-flow of USD, eventually USD was to bear functions of the currency from the beginning of dollarization.

After the UNTAC operation, the country started to pave the way for the reconstruction of the economy. The wide usage and acceptance of FX currency as means of payment resulted from the development process. After the general election in 1993, several reforms and reconstruction of the economy took place using the dollar, which had high confidence from the public. As the reconstruction process started to move, a monetization process and re-establishment of the banking system began. At that time, the country started to seek the two-tier banking system, a gradual reform to separate the commercial banking function from the NBC. In fact, the first pri-vately owned commercial bank, Cambodian Commercial Bank, was established as a joint ven-ture between Siam Commercial Bank and the National Bank of Cambodia on July 1, 1991 to attract investors and facilitate the activities of UNTAC (Pum and Vanak, 2010). To establish pri-vate commercial banks, the FX currency became an important component for deposit base (Rumbaugh et al., 2000). The number of people using the dollar for transactions increased along with economic recovery and development of the financial system. The country experienced sus-tained development of dollarization since then (Figure 1). FX currency deposits as a percentage of broad money was around 60% in 1995; this level has continued to increase and has remained at more than 80% since 2010.

2. Limitation of Analysis from the Macroeconomic PerspectiveIn general, dollarization, measured by aggregated figures, may cease or decline in pace during times of economic and political stability. But in the case of Cambodia, given the stable macroeconomic conditions as well as political situation in recent years, the persistence or even progress of dollarization is puzzling.

One of the possible explanations for the persistence of dollarization is the widespread use of USD as a means of payment.4) In fact, dollarization in Cambodia resulted from sudden and mas-sive FX currency inflows in 1991–93 coupled with a lack of confidence in the domestic cur-rency and political uncertainty. Since the government adopted an open economy with a liberal exchange rate system, USD became a de facto second legal tender along with KHR (De Zamaroczy & Sa, 2002). De Zamaroczy and Sa (2002) argued that the intensive usage of FX currency as a means of payment might have resulted in the persistence or hysteresis of high dol-larization despite macroeconomic stabilization and resumption of growth. The authors acknowl-edged that there is an inherent problem measuring the true degree of dollarization with aggregated data extracted from monetary statistics. Though Cambodia is essentially a cash-based economy, FX cash in circulation could not be covered by the monetary statistics. Alternatively, the authors estimated USD cash in circulation between 1995–2000, and derived that FX currency amounted to 96% of the total currency in circulation (KHR plus FX currency


outside banks). The results suggested that USD played a major role as a means of payment in addition to being a store of value. However, they emphasised that their results should be consid-ered only as a rough estimate for illustrative purposes because their attempt was hampered by severe data limitations.

Since there was a limitation on data available, there were attempts to explain the dollarization in the country based on anecdotal observations. Duma (2011, 2014) argues that the country was not at near complete dollarization. Some sectors of the economy are using the local currency intensively, although the financial sector is at near complete dollarization. Duma further argues that Cambodia has two parallel worlds. One is an urban dollar-based economy that has greatly benefited from the growth of the garment sector, tourism, foreign direct investment, and foreign assistance. The author argued that all these elements contributed to a large inflow of USD into the economy. The other is a rural riel-based economy relying on the agricultural sector. The growth in the dollar-based economy had far surpassed that of the riel-based economy, resulting in the development of dollarization. Rungcharoenkitkul (2014) described the development path of dollarization of the country and argued that dollarization was multi-faceted and interdepen-dent. The author argued that these different aspects of dollarization could help reinforce each other. Widespread currency substitution might make it easier for asset substitution to develop further, and vice versa. Under a currency substitution environment, households and enterprises might use USD as means of payment and as a unit of account in daily transactions. As USD comprises more than 90% of deposits, asset substitution occurred on the part of households. The dollarization on the liability side prompted financial institutions to extend loans in USD. As both sides of the balance sheets of financial institutions were to be denominated in USD, it was to be accepted as a means for transactions among financial institutions, causing financial dollar-ization to occur and to develop further. Thus, from anecdotal observation the author argued that dollarization in the real sector is a key to understanding the persistence of dollarization in Cambodia. Though the author provided a clear explanation on the current nature of dollariza-tion, further data may be necessary to support the argument.

Source: Odajima (2017)

Figure 1 Composition of Broad Money, Ratios of FX Deposit to Broad Money


In sum, those previous studies suggest the following features of Cambodian dollarization. First, FX currency has been used widely for payment from the beginning of the reconstruction and development process. Second, Cambodia may have two parallel worlds, with the dollar-based segment of economy potentially leading economic growth, resulting in the development of dollarization. Cambodian dollarization could not be characterized only by the high degree of FX currency in the financial system. However, since aggregated data, i.e. foreign currency deposits, were only available for analysis, previous studies employed their own limited estima-tion results or anecdotal observations to support their arguments. Therefore, the detailed analy-sis on the real sector, i.e. households and enterprises, has been quite limited.

II. Dollarization in Households and Enterprises

1. The NBC-JICA Survey in 2014The NBC-JICA survey collected information from all 25 provinces of Cambodia. It is noted that the survey covered provinces in which the usage of FX currency was not widely observed in general in order to see the entire situation in the country. The survey on households covered 2,273 households. To simplify the data collection process and to avoid sampling biases, stratified sampling at the provincial level was employed based on the actual regional population from the 2008 General Population Census (covering 2,841,897 households). The survey covers income, expenditures, tangible and financial assets, borrowings, and demographical variables such as age and the education levels of household heads.5)

The survey on enterprises covers 856 firms that were randomly sampled from all 25 prov-inces of Cambodia, ranging from microenterprises to SMEs to large enterprises. Based on actual distributions of enterprise sizes and actual geographical distributions extracted from the Economic Census 2011, the target sample sizes were determined in each province and in each size. The survey covered information relating to operations and financial activities in 2013 including information on currency compositions of income, expenditures, assets, and liabilities. When enterprises rejected an interview, the sample was replaced with enterprises of the same size in the same region.6)

2. Dollarization and Household(1) FX currency in transactionIn this subsection, we will see how households use FX currency for income and expenditure transactions. Since households in Cambodia still heavily rely on cash for transactions, these aspects of dollarization cannot sufficiently be captured by the conventional aggregated measurement data on the level of dollarization, i.e. the ratio of FX currency deposit over M2 being over 80%. Though the ratio is high, people mainly use local currency. This is one of the major findings of analysis based on micro data.① IncomeNormally households in Cambodia have several sources for income: income from sales of agricultural products by farming, income from micro/small personal business, and income from employee wages/salary from work in a factory or in a company. If they sell agricultural products in local market at a small scale, we can expect a lower ratio of FX currency for income from agriculture. If they sell the products outside of the country directly or through middlemen, there may be a higher ratio of FX currency usage. Income from personal business may depend on the environment in which they run it, since personal small scale businesses tend to deal with people nearby. Since the minimum wage of the leading industry, the garment sector, is set in USD, wages/salary in general may have higher ratio of FX usage. FX ratio of wages/salary may depend on the nature of the employer’s operation, i.e. the industry type, whether it is FDI or not,


as well as the employee’s preference.In the survey, households were asked about the currency composition of their income by

source. Table 1 shows the average ratios of FX currency usage by income source. In general, income from agriculture showed lower ratios, but in North-West and South-West areas, the ratios were exceptionally high. The possible explanation for the higher ratios is that the major agriculture product, rice, is traded in Thai baht in those areas because of their vicinity to the Thai border. Rice is traded via middlemen for export to Thailand. In other areas, agricultural products may be sold mainly in the local market, resulting in lower ratios of FX currency.

The FX ratios for income from personal business had lower ratios in general, except in Phnom Penh, Siem Reap, and in the North-West area. The possible explanation would be that in these areas local people use more FX currencies for transactions. In the North-West area people use Thai baht for transactions in addition to USD.

The FX ratios for wages/salary were high compared to that of other sources of income in most areas. As shown in the next enterprise section, in most cases FX currency was the major currency for expenditures for enterprises. In Phnom Penh and in Siem Reap the ratios were par-ticularly high, at above 50%. The possible explanation for the higher ratios is that FDI or the tourism sector are the major opportunities for jobs in these areas. Phnom Penh attracts FDIs with relatively well organized economic infrastructure, and Siem Reap attracts foreign visitors to the famous tourist destination Angkor Wat.

It is noted that the FX ratio of total income ranges from 15% to 44%. Though we have to consider potential bias in the sampling, these levels are far lower than that of the conventional measurement of dollarization, foreign currency deposits over M2. Though there are differences by area and source, households mainly receive local currency for income.②ExpenditureAs theoretically shown, currency choice for payment may depend on purchasing power risk, transaction cost, or on network effect. If people perceive a currency has a risk of losing purchasing power due to possible devaluation, a seller may not accept the currency. Or if it is inconvenient to fulfil transactions using a currency, a seller or a buyer would avoid using that currency. If a currency is known to be used widely in transactions, a seller may accept the currency for payment knowing that it would be accepted smoothly in future transaction. According to Uribe (1997), people’s accumulated experiences using FX currency as a means of payment entails a network effect that reduces the marginal costs of buying goods and services with FX currency. If households experience a higher level of FX currency usage for payment,

Table 1 Average Ratios of FX currency Income of Households by Income Source

Area Income from Agriculture Income from Business Ownership Income from Wage/Salary Total Income

Phnom Penh 5% 34% 66% 44%Siem Reap 3% 27% 51% 33%North-West Area 49% 25% 27% 33%North-East Area 12% 17% 11% 15%Central Area 3% 13% 49% 24%South-West Area 37% 20% 43% 30%South-East Area 5% 16% 33% 21%All areas 16% 19% 40% 26%

Note: The Northeast Area includes Kratie, Modul Kiri, Ratanak Kiri, and Stung Treng. The Northwest Area includes Banteay Meanchey, Otdar Meanchey, and Preah Vihear. Central Area includes Kampong Cham, Kampong Chhnang, Kampong Speu, Kampong Thom, and Kandal. The Southeast Area includes Kampot, Kep, Prey Veng, Svay Rieng, Takeo, and Tboung Khmum. The Southwest Area includes Koh Kong, Preah Sihanouk, Pursat, Battambang and Pailin.Source: Prepared by authors.


then they recognize FX currency as a better one to fulfil the relevant transaction.In Cambodia, households use several different currencies for daily transactions, depending on

what they purchase or for what they fulfil. Purchasing power risk may depend on the currency itself. This affects preference of the currency choice in general. As people use currencies differ-ently depending on the type of transaction, other factors, for example the transaction cost or network effect, may have a stronger influence for the currency choice. Transaction cost may be affected by the mode of the transaction, i.e. cash, credit card, or bank account transfer, or by the size of the transaction in question. The network effects differ by area in which the transaction takes place or the business practice of the transaction in concern.

In the survey, households were asked to report on the currency composition of expenditures. Expenditures were categorized in 13 items from food to furniture/appliances and including mis-cellaneous payments. The results are shown in Table 2. From the survey data, first, it was found that FX currency has a very minor role in total expenditures while the local currency plays the major role in expenditures. This is far different from the near complete dollarization level shown by the aggregated data. The ratios of FX usage in total expenditure ranged from 6% to 17% at most. Second, it was found that for large transactions, such as house rent, furniture, and

Table 2 Average Ratios of FX currency use in Expenditure (by Area, by item)

AreaTotal

ExpenditureFood &

BeverageRice

Alcohol & Tobacco

House RentWater &

ElectricityRecreation &

CultureClothing & Footware

Phnom Penh 17% 2% 4% 18% 76% 0% 42% 55%Siem Reap 11% 2% 1% 7% 85% 1% 21% 25%North-West

Area16% 11% 14% 14% 41% 35% 29% 25%

North-East Area

6% 1% 0% 3% 20% 15% 15% 13%

Central Area 6% 0% 0% 3% 36% 1% 33% 16%South-West

Area 8% 1% 3% 4% 31% 22% 30% 20%

South-East Area

7% 3% 3% 3% 50% 0% 21% 11%

All areas 9% 2% 3% 5% 48% 7% 19% 19%

AreaRestaurant &

Eating outCommunication Education

Health incl. Toiletry

TransportationFurniture & Appliances

Miscellaneous

Phnom Penh 34% 83% 21% 14% 8% 79% 48%Siem Reap 10% 58% 6% 7% 4% 78% 60%North-West

Area17% 25% 9% 17% 7% 59% 33%

North-East Area

7% 33% 7% 2% 1% 65% 18%

Central Area 8% 38% 11% 3% 3% 51% 21%South-West

Area 4% 32% 7% 5% 2% 50% 25%

South-East Area

9% 38% 9% 4% 4% 51% 17%

All areas 11% 39% 10% 6% 4% 57% 24%

Note: The Northeast Area includes Kratie, Modul Kiri, Ratanak Kiri, and Stung Treng. The Northwest Area includes Banteay Meanchey, Otdar Meanchey, and Preah Vihear. Central Area includes Kampong Cham, Kampong Chhnang, Kampong Speu, Kampong Thom, and Kandal. The Southeast Area includes Kampot, Kep, Prey Veng, Svay Rieng, Takeo, and Tboung Khmum. The Southwest Area includes Koh Kong, Preah Sihanouk, Pursat, Battambang and Pailin.Source: Prepared by authors.


appliances, households use more FX currency, in particular USD, for payment. The local cur-rency is sometime not the major currency in these payments. The possible explanation is that transaction size may matter for the currency choice for payment. Since the transaction cost of the local currency increases as the transaction size gets larger, people may avoid using the local currency for larger transactions. Thirdly, it was found that there are regional differences in FX usage. In Phnom Penh, Siem Reap, or in the North-West area, the ratio of FX was higher than in other areas.

It is noted that the choice of currency for a particular expenditure may not depend simply on the preference of the household as a buyer. Rather it is affected by seller’s preference as well. Depending on the balance of bargaining power between buyer and seller, the choice would reflect the preference of either the buyer or seller. In a multi-currency circulating environment like Cambodia, it occasionally happens that a currency used in the price quotation by a seller is different from the currency a buyer wants to use. The survey asked household how they react such situation (Figure 2). The responses to the question show that households generally tend to keep different currencies with them in order to pay in the currency the seller requests; other-wise, they suffer losses due to exchange rates fixed by the sellers when using different curren-cies for payment (Odajima & Khou, 2017). Sellers set unfavourable exchange rates in cases where a buyer would like to use a currency not used for quotation. Therefore, we could hypoth-esize that realized currency choices for expenditures are mainly affected by sellers’ preferences. Households are quite passive about currency choices for expenditures and normally accept the currency used in the price quotation set by the seller.

As seen in the previous paragraph, the actual realized currency choice in expenditures are

Note: Question: Do you ever pay goods and services in different currency from the seller’s request?Answers to the above question:QA: Yes, I do and I can negotiate the exchange rate or have an arrangement on the exchange rate.QB: Yes, I do but I cannot negotiate the exchange rate. The seller fixes it.QC: Yes, I pay by ATM transfer from my bank account and the bank does the currency exchange.QD: Yes, I pay by transferring from a Mobile account and the bank does the currency exchange.QE: No, I always pay in the currency of the bill or request.QF: No, I change the currency at the market/bank/MFI, and then pay seller in the currency of the bill.QG: No, I generally have sufficient currencies needed for payments and pay in the currency they request.QH: No, I pay by doing ATM transfer from my bank account to the seller in the currency they request.QI: No, I pay by doing transferring from a mobile account to the seller in the currency they request.Source: Odajima & Khou (2017)

Figure 2 Price Quotation Currency and Household Reactions


likely to be determined by sellers’ preference. In order to see pure currency preference for trans-action by household, detangling the influence of sellers, in the survey respondents were asked hypothetical questions about the currency they would want to receive if they were to sell assets they currently own. Such a pure currency preference for transactions could be more suitable to analyze factors behind the currency choice for transaction: purchasing power risk, transaction cost, or network effect.

The survey covered six types of assets: real estate, furniture & appliances, motorcycles & cars, machinery & equipment for business and personal use, livestock, and inventories for small business/farming. For each category of asset, the respondents selected the currency that they would like to receive in exchange for the assets they own (Table 3). The preference to receive FX currency in exchange differed by type of assets. For real estate, motorcycles & cars, and machinery & equipment the local currency was not the major currency choice. But for furniture & appliances, livestock and inventory for small business/farming, the local currency was the major currency choice to receive in exchange.

Table 4 shows the regional difference in local currency preferences to receive in the exchange of assets. There are no areas in which the local currency is preferred for the sale of real estate or for motorcycles and cars. On the contrary, for livestock and for inventories in all areas the local currency was a major currency. For furniture and appliances, the local currency was a major currency for preference in all areas except in Phnom Penh. For machinery and equipment the result was mixed.

The data on the stated choice7) of currency to receive for sales of assets was used,8) and con-firmed some potential determinants discussed earlier in this subsection. It was found that expected exchange rate depreciation, which affects the purchasing power of the local currency, was not affecting the currency choice for transactions. The negligence of depreciation risk is understood in the stable foreign exchange environment for decades.9) Secondly, it was found that transaction cost, through transaction size, significantly affected the currency choice regard-less of type of assets. Since the transaction cost of currency is assumed as proportional to the size of transaction, the larger the transaction size, the larger the cost. This is consistent with the anecdotal observation that the local currency is regarded as being not practical and inconvenient because of the cumbersome nature of preparing large amounts of cash. It is time consuming to verify the large volume of notes at the time of transaction in a cash-based environment like Cambodia. Thirdly, it was found that the network effect significantly affects the choice. The network effect, measured by the ratio of FX currency denominated expenditures to total expen-ditures, affected respondents’ choices. The accumulated experience in using FX currency as a means of payment acts as an externality that reduces the transaction cost of the currency (Uribe, 1997). With the experience of FX currency usage in daily life, people perceive FX currency to be used widely in transactions. In Cambodia people are free to choose whatever currency they

Table 3 Currency Preferred to Receive for Sales of Assets

Real EstateFurniture & Applicances

Motorcycles & CarsMachinery & Equipment

LivestockInventory for small business/farming

Frequency Percent Frequency Percent Frequency Percent Frequency Percent Frequency Percent Frequency Percent

KHR 301 14 1,335 62 285 15 488 47 744 84 1,114 79USD 1,789 82 740 34 1,555 81 474 46 121 14 218 16THB 73 3 74 3 71 4 67 6 18 2 62 4VND 0 0 7 0 0 0 3 0 3 0 8 1Gold 6 0 0 0 0 0 0 0 0 0 0 0Total 2,169 100 2,156 100 1,911 100 1,032 100 886 100 1,402 100

Source: Odajima et al. (2018)


think appropriate to execute individual transactions. Based on the experience and those with whom they transact, households identify the better currency for the purpose.(2) FX currency in financial activitiesIn this subsection, we will see how FX currency is used in financial activities: namely, saving, deposit and borrowing. It is noted that financial inclusion in Cambodia is still in the early stage of development. A significant portion of financial activities are conducted outside of the banking system. Looking only the aggregated data, i.e. monetary survey data, misleads the real picture of households. In this respect, the survey micro data would well complement the aggregated figures.① SavingCash saving of household is normally done through a combination of cash at home, cash deposits in financial institutions, and cash kept in some other financial scheme. According to the World Bank’s Global Index, only 4% of Cambodian households had savings in formal financial institutions as of 2014. A significant part of cash saving by household would be kept outside the financial system. Since the conventional measurement of dollarization figures covers FX currency usage in the formal financial system, the aggregated figures may not capture the entire picture of saving including the direct cash holdings of households. Therefore, cash saving data, inclusive of cash held outside the financial system, collected by the survey shows a more realistic picture of FX currency usage in cash saving by household.

As observed in currency choices for payments, for larger transactions households use FX cur-rency, but for smaller transactions they use the local currency. If a household saves cash for consumption smoothing or for precautionary purposes, they may likely follow the same princi-ple for making a currency choice as they do for transactions. That is, for large transactions, they may be more likely to save in FX currency while for smaller transactions, they may be more likely to save in local currency.

Panel A of Figure 3 shows the currency choice of savings with some details on amounts. Though the amount is smaller, saving cash in the local currency is more popular than saving in FX currencies. To save larger amounts households tend to choose FX currencies. Panel B of Figure 3 shows Ratio of FX Currency Cash Saving to Total Cash Saving by area. The local cur-rency is the major currency for cash saving except in Phnom Penh. Since the financial inclusion

Table 4 Prefer to Receive KHR for Sales of Assets by Area (frequency and % to area total)

Prefer KHR

Phnom Penh

Siem Reap

North-East

North-West Central South-

EastSouth-West Total

Real Estate(obs) 7 5 37 39 81 86 46 301(%) 5 4 16 19 15 15 13 14

Furniture & Appliances(obs) 47 65 129 110 342 392 250 1,335(%) 32 56 56 55 64 71 67 62

Motorcycles & Cars(obs) 7 6 42 46 55 94 35 285(%) 5 6 20 26 12 19 11 15

Machinery & Equipment for Business/Personal Use

(obs) 8 21 45 51 118 177 68 488(%) 16 35 41 39 51 62 41 47

Livestock(obs) 23 28 60 61 201 254 117 744(%) 79 56 87 74 80 92 91 84

Inventories for Small Business/Farming

(obs) 73 50 146 80 250 309 206 1,114(%) 69 69 80 63 86 87 77 79

All Assets(obs) 165 175 459 387 1047 1312 722 4,267(%) 27 34 45 42 45 52 45 45

Source: Odajima et al. (2018)


level is still low, households keep this cash outside the banking system. Absorbing the cash sav-ings kept outside of financial system would expand deposits in the local currency in the finan-cial system. This may result in lowering the level of dollarization in the financial system, resulting in the recovery of the effectiveness of monetary policy as well as an increase in the resilience of the financial sector.②DepositAs of June 2013, 96% of deposits in the banking sector were denominated in FX currencies (Aiba et al., 2018). As mentioned before, the level of financial inclusion was still low in Cambodia. Therefore, it is possible to assume that a limited number of account holders with large value amounts might be influencing the high ratio of FX deposits in financial system. Given the popularity of the local currency in saving in general mentioned in the previous section, looking only the aggregated figures derived from monetary statistics may misrepresent the real picture.

Table 5 shows currency choice of bank accounts in financial institutions. In the survey, respondents were asked whether they save cash or not, and then asked whether they use a bank account for it. Out of 2273 respondents only 325 households had bank accounts for saving. It is noted that at least in terms of frequency, the local currency account played a comparable role to that of USD. Promoting the opening of bank accounts in the local currency would be helpful to reduce the dollarization level in the financial system. Because the low ratio of bank accounts held could be a result of paperwork needed to open the account, maintenance costs, or a mini-mum balance needed, preferential treatment for the service in the local currency would worth considering. Of course, facilitating general access to financial services may also serve the purpose.③BorrowingUnder the current financial market, in Cambodia people can borrow in USD or Thai baht in addition to the local currency. At a financial institution counter, they are free to choose a loan currency that fits their needs and preferences. The theoretical framework suggests that people choose a loan currency considering interest differentials, exchange rate risks of currencies, or risk hedging factors. However, in the aggregated level, the role of the local currency was almost

Figure 3 FX usage in Savings


negligible. This is a little puzzling giving the level of FX currency usage in income or in expenditures. As of June 2013, 99% of loans were denominated in FX currencies in the formal financial market (Aiba et al., 2018).

In the survey respondents were asked details about loans they had. Panel A of Figure 4 shows the currency choice for borrowing in frequency by lenders. It is well noted that different from the picture derived from the aggregated figure, the local currency was not marginalized; it was used in 31% of total loans. Even in the formal financial system it was not negligible. The local currency was used in 19% of loans provided by commercial banks, and 32% of loans by micro-finance. The possible explanation for the discrepancy with aggregated figures would be loan sizes. A loan in the local currency must be smaller than those in FX currencies. In fact, Panel B of Figure 4 shows that loan amount in FX was larger than that in the local currency. In addition, loans in the local currency had higher monthly interest rates, and shorter maturity.

As discussed earlier, a household may consider risk hedging elements when choosing a loan currency. To hedge risks, a household may have FX currency income or FX currency saving. In addition to FX currency use in income and saving, they are exposed to expenditures in FX cur-rency. Both risk-hedging and the purpose of the loan may impact the currency choice in bor-rowing.

Table 6 shows households’ characteristics by loan currency. The local currency loan holders had lower ratios of FX currency usage in all three aspects: saving in FX, income in FX, and expenditure in FX. From this fact we can conjecture that at least households must be engaged in risk-hedging when making choices about loan currency.

In fact, using the loan currency data and other relevant characteristics of the respondents it is possible to test the theoretically derived determinants for currency choice in borrowing.10) It was found that Cambodian households are likely to borrow in FX currency if FX currency makes up the major portion of the currency composition of their income. Cambodian households are engaged in risk-hedging behaviors when borrowing, and FX currency choice is a consequence of risk-hedging by households with FX currency income. It is noted that FX currency income is particularly high for income from wages/salary as we have seen in the previous section. Currency choice in wages/salary may be determined by enterprises, depending on the balance

Table 5 Frequency of Account Holder (by area)

KHR account (%) USD account (%) Having any account (%)

Phnom Penh 17 11 16 11 29 19Siem Reap 5 4 12 10 15 13North-West Area 19 9 13 6 31 14North-East Area 29 12 23 10 41 17Central Area 44 8 44 8 76 13South-West Area 33 9 27 7 48 12South-East Area 57 10 38 7 85 15Total 204 9 173 8 325 14

Note 1: Numbers of households having KHR account, USD account, or having account in any currency are shown in each column respectively. After each frequency figures, ratios of households having respective account to sample size in each area are shown.Note 2: The Northeast Area includes Kratie, Modul Kiri, Ratanak Kiri, and Stung Treng. The Northwest Area includes Banteay Meanchey, Otdar Meanchey, and Preah Vihear. Central Area includes Kampong Cham, Kampong Chhnang, Kampong Speu, Kampong Thom, and Kandal. The Southeast Area includes Kampot, Kep, Prey Veng, Svay Rieng, Takeo, and Tboung Khmum. The Southwest Area includes Koh Kong, Preah Sihanouk, Pursat, Battambang and Pailin.Source: Odajima & Khou (2017)


of bargaining power between employers (enterprise) and employees (household). If the power of the employer dominates that of employee, the wages/salary currency may be influenced by the preference of employer. Given that FX currency dominates revenue, this in turn results in an incentive to make expenditures including wages/salary for employees in FX currency as well. Thus, there is a possibility that currency preferences of wages/salary by employers are indi-rectly influencing the borrowing currency choices of households.

Another determinant of currency choice for borrowing is exchange rate risk. Expectations of local currency depreciation make households more likely to borrow in the local currency. This was confirmed in the results of Aiba et al. (2018), in line with the theoretical models developed in the portfolio view. As a loan involves a longer process of repayment compared to that of a

Figure 4 FX usage in Borrowings

Table 6 Breakdown of Ratios of FX Currency by Currency Choices

All Loan Holders

KHR Loan Holders

FX Loan Holders

Households with No Loans

Ratio of Foreign Currency Savings to Total Savings

Mean 0.37 0.22 0.43 0.33Std.Error (0.42) (0.35) (0.43) (0.41)

Observations 308 88 225 790

Ratio of Foreign Currency Income to Total Income

Mean 0.28 0.19 0.32 0.25Std.Error (0.33) (0.30) (0.33) (0.31)


Ratio of Foreign Currency Expenditure to Total Expenditure

Mean 0.09 0.03 0.12 0.09Std.Error (0.16) (0.08) (0.18) (0.17)


Note: Ratio of foreign currency saving to total saving is defined as the ratio of total amount of foreign currency saving to total savings, ratio of foreign currency income to total income defined as the ratio of total amount of foreign currency income to total income, and ratio of foreign currency expenditure to total expenditure defined as the ratio of total amount of foreign currency expenditure to total expenditure.Source: Aiba et al. (2018)


transaction, it is understandable that a household would care greatly about future exchange rate movement in case of borrowing.

It is noted that choice of currency in borrowing by households also seems to be determined by the currency composition of their expenditures. If a household uses more FX currency in expenditures, they were prone to borrow in FX currency. Through the accumulation of experi-ences with FX currency usage in expenditures, households recognize the better currency for transactions. In fact, in the survey the households were asked reasons for their borrowing cur-rency choice (Table 7). The large number of them responded that the purpose of loan required them to have that currency or the transaction involved required that currency. For those who borrowed in FX currency, 69% said that their purpose required it, and 27% said that the transac-tion required it. For those who borrowed in the local currency, 45% said that their transaction required the local currency. The recognition that a specific currency is needed to fulfil the trans-action for borrowing purposes could be formulated via accumulation of experience with FX usage in transactions. The influence of FX currency use for expenditures on currency choice for loans is one aspect of the interdependence of dollarization in Cambodia.

In general households were found to choose a particular loan currency to minimize the exchange rate risk. However, it was found that there is heterogeneity in the magnitude of risk-hedging. That is, level of educational attainment of the household head plays a significant role in prompting households to engage in risk-hedging. The higher the education level, the more likely the household will engage in risk-hedging by matching currency composition of the loan and income. The less-educated households were not likely to be engaged in risk-hedging when borrowing. Rather they were prone to match the chosen loan currency with that of expenditures, instead of income.

It is noted that a realized currency for borrowing may not necessarily directly reflect the pref-erence of borrower. It may reflect the preference of the lender as well. Depending on the bal-ance of bargaining power between the lender and borrower, the realized currency choice for borrowing could result from lender’s choice. As discussed in Aiba and Sok (2017), the assets and liabilities of financial institution are heavily dollarized even in rural areas. One of the inter-pretations of this result could be that financial institutions lend in FX currency to minimize the currency mismatch between the asset-side and liability-side of their balance sheet. Under the net

Table 7 Reasons for Currency Choice

I borrowed in foreign currency because…(782 respondents) YesIt is easier to borrow large amounts of money in FX 146The purpose of my loan requires FX currency amount 537I cannnot find a loan in KHR for the amount I need 33The interest rate of foreign currency is better 34The transactions I am involved in require that I pay in foreign currency 211Don’t want to risk exchange rate losses 15Others 21

I borrowed in KHR because… (476 respondents) YesI would borrow KHR if the amount was less than 1,000 dollars 57Interest rates are better than USD 5Transactions are in KHR 216Don’t want to risk exchange rate losses 40Others 232

Note: Respondents were able to pick maxim three reasons.Source: Odajima & Khou (2017)


open position requirement imposed on financial institutions, there would be a strong incentive to extend a loan in USD to minimize currency mismatch.

3. Dollarization and Enterprises(1) FX currency in TransactionCurrency usage in the enterprise sector is important to understanding the mechanism of Cambodian dollarization. Currency choices in wages and price quotations significantly affect the currency usage of households. In addition, since enterprise operations often occur across provinces, enterprise behaviors play an important role in spreading dollarization in a country.

Furthermore, there is a need to investigate the currency usage of Cambodian enterprises, in order to assess the vulnerability of the Cambodian economy to potential external shocks. The vast literature on dollarization has investigated the influence of dollarization on enterprise’s per-formance. In particular, several studies point out that currency mismatches in balance sheets make enterprises vulnerable to financial crisis, such as the Tequila crisis (Gero, 2002) and the currency crisis in Argentina (Kamil, 2012). In the countries where financial markets are under-developed, enterprises borrow in FX currency from international funding sources directly and/or through commercial banks. This leads to dollarization on the liabilities side of enterprises. In the cases of Argentina and Mexico, enterprises still operate in local currency in domestic mar-kets. Therefore, the depreciation of the local currency caused an immediate decline in enter-prises’ profitability and damaged their investment (Kamil, 2012).

However, as is true in the household sector, there has been no study on the Cambodian enter-prise sector investigating the currency usage. The debate on dollarization has long relied on the measure of FX currency deposits over M2 or total deposits, and the FX currency usage of enter-prises has been unclear. Aiba and Tha (2017) first gave a whole picture of dollarization and enterprises’ behaviors by using data from the NBC-JICA survey from 2014. Though their analy-sis is descriptive and explanatory, their findings could have a plenty of implications for policy making.

Importantly, the authors show that, in the case of Cambodia, dollarization is not pervasive only in loans, but also in revenues, expenditures, and price quotations of enterprises. They also emphasize that this is the case even for domestic enterprises. While enterprises in Latin American and Central East European countries mostly faced dollarization in their debt, the Cambodian enterprises have to deal with multiple currencies in their entire operation. The authors suggest that these points are specific to Cambodia.

Further, Duma (2014) argues that the Cambodian economy is bi-polarized. The author further argues that dollarization is pervasive in urban areas, while people tend to use the local currency in rural areas of Cambodia. Aiba and Tha (2017) empirically gave supporting evidence for Duma’s perspective in the enterprise sector (Panel B of Figure 5). Aiba and Tha (2017) also point out that in some regions, gaps between revenues and expenditure are large, in particular in rural regions.

One of the possible explanations for the regional difference in dollarization within a country could be the difference in industrial distribution among regions. Presumably, there would be a higher usage of FX currency in areas equipped with key drivers of economic growth: garment factories, tourist attractions, destinations of foreign direct investment, or areas benefitting from large foreign assistance inflows. Additionally, enterprises of the same industry categorization tend to concentrate in the same regions. For example, manufacturing firms concentrate in urban areas, and if manufacturing firms uniquely export goods abroad and pay wages in FX currency, the regional difference might appear between urban and rural areas. However, Aiba and Tha (2017) revealed that there is huge variation in the extent of dollarization even within the same industry categorizations (Panel A and B of Figure 5). In particular, this trend is prominent in the manufacturing sector. Some enterprises in this sector only use local currency while others never


do. The reason for the regional difference in dollarization is not explained only by the difference in industrial distributions among regions.(2) Borrowing in USD by enterprisesWhy do Cambodian enterprises borrow in FX currency in Cambodia? The vast literature suggests that it is partly a consequence of banks’ risk-hedging behaviors (Brown et al., 2014). Commercial banks collect FX currency funds from abroad (ex. parent banks or firms) due to cheaper funding costs. They in turn extend FX currency loans to domestic enterprises to circumvent the currency risks. In addition, other previous studies find that the country-level interest rate differentials induce enterprises to choose FX currency debts which are in favorable terms (Brown et al., 2011). If the financial market were perfect, arbitrage would adjust the demand for high-yield-loan/cheaper-debt currency (‘interest rate parity’). Meanwhile, if there is friction in the adjustment of interest rates, that is the case. So Brown et al. (2011) empirically tested this hypothesis using cross-country firms’ data, and find the supporting evidence.

In Cambodia, using the NBC-JICA survey data, Okuda and Aiba (2018) empirically investi-gated the features and determinants of the capital structure decisions of enterprises. The authors first find that Cambodian enterprises borrow only USD from formal financial institutions, while formal financial institutions are the primary funding sources for Cambodian enterprises. This suggests that loan markets for enterprises are almost completely dollarized. Table 8 shows the currency choices of the Cambodian enterprises by funding sources, the calculations on which calculation were done by Okuda and Aiba (2018). The result shows that there were 237 loans

Figure 5 Usage of FX currencies by business types

Source: Aiba & Tha (2017)Note: The agricultural sector includes (1) agriculture, forestry, and fishing sectors and (2) mining. The Manufacturing sector includes (3) manufacturing. The wholesale and retail sector includes (4) wholesale and retail trades. The tourism sector includes (5) transportation and storage and (6) accommodation and food service activities. Others includes all the other categories.


taken out by Cambodian enterprises at the time of survey, and 231 of them were denominated in USD. Further, the authors mentioned that most of loans were taken out from commercial banks, suggesting that commercial banks are a significant funding source for Cambodian enterprises.

This environment for Cambodian enterprises is unique even compared with other dollarized economies examined in previous studies. Cambodian enterprises have almost no choice of cur-rency in borrowing but USD. Their choice of currency is not induced by deviation from interest rate parity, but presumably banks induce enterprises to borrow in FX currency.

Nonetheless, Okuda and Aiba (2018) further investigated whether capital structure is affected by currency risks in Cambodia. The authors find that, in cases where bank debts are totally denominated in USD, enterprises choose lower amounts of bank debt if the enterprise’s reve-nues are in local currency. This means that enterprises with local currency revenues cannot hedge the risk of currency mismatch between revenue and borrowings in Cambodia, so that they adjust the risks by borrowing lower amounts. Their findings suggest that dollarization dis-torts the enterprises’ capital structure decision in the sense that banks leave no hedging options for enterprises that are operating in th local currency. And importantly, many enterprises that have USD loans usually operate in local currency, as shown in Table 9. Thus, findings from Okuda and Aiba (2018) rather suggest that the hedging purpose of currency mismatch risks induce Cambodian enterprises’ borrowing in USD.

Interestingly Okuda and Aiba (2018) further test whether access to loan markets is affected by the currency composition of enterprises’ revenues, and find the positive results. The results suggest that, in highly dollarized economies with underdeveloped financial systems such as Cambodia, enterprises with currency mismatch risks tend not to access loan markets in which USD loans are the only ones available. Therefore, development of a local currency loan market would allow Cambodian enterprises with local currency revenues to hedge their currency mis-match risks, leading to improvements in financial deepening and inclusion.

Table 8 Currency Choices in Loans (by Funding Sources)

KHR USD TotalCommercial Banks 0 172 172Microfinance Institutions 0 19 19Family, Frieands, and Relatives 4 38 42Informal lenders 2 1 3Others 0 1 1Toal 6 231 237

Source: Okuda & Aiba (2018).

Table 9 Main Currencies Used by Firms with Loans

Frequency Percent.KHR 60 26.91USD 126 56.5Other currency 15 6.73N.A. 21 9.42Don’t Know 1 0.45Total 223 100

Source: Okuda & Aiba (2018)


Conclusion

Cambodia is one of the most dollarized economies in the world. Conventional measurements of dollarization, such as foreign currency deposit over M2, suggest that the country is almost completely dollarized with its ratio reaching 83% in 2014 (NBC, 2015). The World Bank (2015) reported that the ratio of USD deposits to the commercial bank’s total deposits has ranged from 92% to 98% over the last 20 years, and about 95% of the loans provided by the commercial banks are denominated in USD. The high ratios of FX currency in the financial system give an impression that most economic activities are done in a foreign currency.

However, since the country’s financial system is less developed and financial inclusion is limited in Cambodia, the conventional measurements could not explain the whole situation of Cambodian dollarization. In particular, the dollarization in Cambodia also prevailed in the real sector, along with the financial sector. Since there is an interdependency between the dollariza-tion in these two sectors, dollarization in the financial sector could be also affected by the dollarization in the real sector. Thus, the systematic empirical analysis on dollarization in households and enterprises is needed in order to provide policy recommendations for de-dollarization in Cambodia.

Thanks to the nation-wide large-scale survey conducted jointly by the National Bank of Cambodia and JICA Research Institute, several studies investigate the real picture of dollariza-tion in the real sector. We reviewed the previous empirical studies from the survey and summa-rized the main features of the Cambodian dollarization. First, though the conventional measurement of dollarization, FX currency deposit over M2, shows a very high ratio of over 80%, households are far from near complete dollarization. The local currency is used inten-sively for income, expenditures, and saving. As for borrowing, FX currency dominates the cur-rency choice but still the local currency has some role there. Second, in contrast to households’ behavior, enterprises are in the well dollarized environment. The enterprises have almost no choice of currency in borrowing but in USD. The dollarization is pervasive not only in loans but also in revenues, expenditures, and price quotations. The Cambodian enterprises have to deal with both FX currency and the local currency. Thirdly, there exists significant differences in FX currency usage by areas and by type of transactions. In rural areas they use the local currency more intensively than people in urban areas. Households in rural areas use the local currency more intensively than those in urban areas. But enterprises in rural areas accumulate revenues in the local currency but expenditures in FX currency. Regarding the difference by type of transac-tion, FX currency is used intensively for wages and salary compared to other sources of income. Also, for larger transactions, FX currency is preferred and used. Lastly, as for borrowing, both households and enterprises try to hedge the currency mismatch risk using the limited measures of hedging available for them. It is presumably lenders that induce borrower to take out loans in FX currency.

Finally, we conclude the paper with several useful policy recommendations for to promote the local currency. First, promoting financial inclusion in rural areas could also be a possible strategy to promote local currency deposits and then to mitigate FX loan provisions. Even though the degree of dollarization is very high in Cambodia on the whole, the local currency is intensively used particularly in rural areas, where the financial system is less developed. Promoting financial inclusion allows those people in rural areas to have deposits and loans, which would increase the local currency deposits in the banking sector. In addition, economic development in the rural areas also facilitates local currency usage and deposits for those people in rural areas. Second, development of a local currency loan market would allow Cambodian enterprises with local currency revenues to hedge their currency mismatch risks, leading to improvements in financial deepening and inclusion. In highly dollarized economies with under-developed financial systems in Cambodia, enterprises with currency mismatch risks tend not to


access loan markets in which only USD loans are available. Promotion of local currency loans could push the demand of loans for enterprises and improve financial inclusion. However, the high dollarization of the loan market could result from the dollarization of the liability side of financial institutions. To minimize the currency mismatch between the asset-side and liability-side of their balance sheets, financial institutions might have an incentive to extend loans in USD. If the bargaining power of lender is dominant over the borrower in the loan market, the loan currency will end up being USD. Thus, the development of a local currency loan market is necessary along with an increase in local currency deposits through the financial inclusion. Third, it may be necessary to design the promotion policy for households, enterprises, and financial institutions in a coordinated manner focusing on reducing the network effect of FX currency. Given the interdependent nature of dollarization between the financial sector and the real sector, encouraging only financial institutions to use local currency will not always succeed to de-dollarize the economy. Policy implementations on the financial sector should also con-sider the effect on and feedback effect from households and enterprises. Or some additional policy should be taken for households and enterprises to facilitate dollarization. However, radi-cal changes could bring harmful effects and reverse financial development. Thus, the gradual changes or nudging to push the economic agents is preferred. For example, nudging households to pay in the local currency increases the revenue of enterprises in the local currency, which in turn motivates enterprises to use the local currency, keep deposits, and borrow in the local cur-rency. In this case, differentiating the rule on price tags, (for example, a value-added tax has to be included in the USD price tag and excluded from KHR price tag), could be one of the possi-ble strategies to nudge households to use KHR. Or there could be another strategy to stimulate the enterprise usage of the local currency. As for enterprises, policy measures to facilitate the pricing currency to shift from the FX currency to the local currency might in turn motivate household to use the local currency. As for households, assuming that pricing behavior of enter-prises shifts to the local currency, the currency for wages/salary needs to be guided towards the local currency denomination. In addition, policy measures to give preferential treatment for local currency deposits may reduce the incentive of financial institutions to extend loans in FX currency.

Acknowledgement

The authors acknowledge financial supports from JICA Research Institute under the project “Empirical Study on the Promotion of Home Currency in Cambodia”.

Notes1) Historically, some countries, such as Laos and Vietnam, have carried out de-dollarization measures, and de-dollarization caused deterioration in the financial development of those countries.

2) For households, see Beer et al. (2010) in Hungary, Valev (2010) in Bulgaria, Fidrmuc et al. (2013) in Central and Eastern Europe, Beckmann and Stix (2015) in Central and Eastern Europe; for enterprises, see Gelos (2003) in Mexico, Cowan (2006) in Chile, Kamil (2012) in Latin America, and Mora et al. (2013) in Lebanon.

3) For details of the abolishment and reintroduction process of the local currency, see Gardère (2010).4) There is another hypothesis to address the puzzling hysteresis of dollarization in the country. Samreth (2011) empirically examined whether the recent asset substitution in Cambodia was a consequence of hysteresis. He showed evidence supporting the existence of a network externality, thereby implying the hysteresis of the currency substitution phenomenon.

5) For detail, see Odajima and Khou (2017).6) For detail, see Aiba & Tha (2017).7) Fidrmuc et al. (2013) suggest that, instead of using realized choices, using stated preference on currency choice

can circumvent this endogeneity problem.


8) See Odajima et al. (2018) for detailed analysis.9) It experienced high devaluation of its currency (i.e. over 10% depreciation) only in 1997 and 1998.

10) Determinants of loan currency choice was analyzed in Aiba et al. (2018). They examined determinants derived from the theoretical frameworks of the portfolio selection model (Ize & Levy-Yetagi, 2003; Jeanne, 2005).

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(Ken Odajima, JICA Research Institute, [email protected])(Daiju Aiba, JICA Research Institute, [email protected])

dollarization in cambodia: a review of recent empirical

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