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【JICA-RI Focus Vol.26】 Interview with Executive Senior Research Fellow Ken Odajima

February 24, 2014

Interview with Executive Senior Research Fellow Ken Odajima

Executive Senior Research Fellow Odajima had engaged in economic research including development policies in developing countries at the research departments of the Japan Bank for International Cooperation (JBIC) and the Overseas Economic Cooperation Fund (OECF). He also had taught at the Graduate School of Economics of Hitotsubashi University as an Associate Professor. At the University, he was in charge of a class on the Vietnamese economy as part of the area studies course.

Odajima is currently engaged in a joint study to prepare the strategy to promote the use of riel, the home currency, with a focus on the “dollarization” in Cambodia. “Dollarization” is a situation where an internationally trusted currency such as the dollar is widely used or held instead of the home currency. In Cambodia, lack of trust in the riel is attributed to a wide use of the US dollar, as well as the Thai baht and the Vietnamese dong. The dollarization rate is calculated with the percentage of foreign currency deposited in banks against M2, which in this case is the total amount of home currency circulating in cash and deposit and foreign currency deposits. This method is used because it is difficult to accurately estimate the amount of circulating foreign currency. As of the end of 2011, the dollarization rate was 80.9 % in Cambodia (cf. 44.8 % in Laos and 17.2 % in Vietnam), while 97.2 % of total deposits are in foreign currencies.

Odajima explained why Cambodia continues to have a heavily dollarized economy, with a focus on the study overview and its objectives.

Could you explain how you came up with this study?

Let me start with the current situation for a transaction currency in Cambodia. The National Bank of Cambodia issues the riel as legal tender. People, however, mainly use dollar bills, while the riel is used only for small transactions worth less than about five dollars in urban areas. The home currency only plays a supplementary role. The employees’ salaries are usually paid in dollars and international transactions are of course settled in dollars. The dollar is also used for transactions between domestic companies. It means that the dollar is the currency accounted for the majority of the economic activities in Cambodia.

Riel coins also exist, but they are unpopular among Cambodians and are rarely used. For example, when a person buys a product that costs more than five dollars, the transaction is normally conducted in dollars. The change is given in riel. If a person refuses to accept the change in riel, the person may have to cut the fraction, or to accept goods such as candies worth the change. When the price of a product is shown in dollars, a fraction of the price less than one dollar is in multiples of a quarter in order to make it easier to calculate. As part of the efforts to encourage the use of the home currency, the Bank collected low-value dollar bills such as one dollar and five dollar bills, and issued higher-value riel bills. However, it was reported that this measure did not have any effect on reducing the use of dollar bills. The fact that dollar bills flow into Cambodia via various routes including exports and tourism, and that Cambodians do not use the newly issued high-value riel bills, which block the promotion of the home currency.

In case failed economic policies results in extreme inflation, people generally move from the home currency to trusted ones to avoid a considerable dip in the value of assets they hold such as their deposits in the home currency. This happened in Latin-American economies as well as in Iraq and East Timor in the process of reconstruction. Cambodia, on the contrary, keeps stable commodity prices and a stable riel to dollar exchange rate under its steady economic growth. Thus the extreme dollarization in Cambodia may have different factors.

Focusing on how the currencies are being used may find reasons for the dollarization in Cambodia. Employees, paid in dollars, pay their living expenses in dollars. Companies operate business in dollars because their trading partners ask for settlement in dollars. It is, therefore, more convenient for companies to trade in dollars, and they can sign contracts under better conditions also in dollars. As Cambodian people use dollars in their daily life, the currency becomes more popular, which results in establishing and expanding dollar-based systems or institutions. This will make it costly to use the riel. With these factors, dollarization eventually has taken root in its flow of money in Cambodia.

When examining dollarization in Cambodia, its historical background should be taken into consideration. During the Khmer Rouge period (1975-1980), the currency and the banking system were abolished. The riel was re-introduced in 1980, but people did not accept it due to their experiences under the Khmer Rouge regime. Instead, they used the dollar, gold, and rice. After a long period of conflict, large quantities of dollars were brought into the country by the United Nations Transitional Authority in Cambodia (UNTAC) in 1992. Based on the premise of dollar circulation, the economy was reconstructed and the financial system was rebuilt in the post-conflict period.

JICA, a bilateral aid agency, focuses research on the issues that aid recipient countries are facing. The Empirical Study on the Promotion of Home Currency in Cambodia started in response to a request from the National Bank of Cambodia to the JICA Cambodia Office. The Bank asked for help in establishing a system that promotes the use of the home currency in Cambodia. I thought that it would be interesting to comprehensively study the reasons: why the Cambodian economy is so heavily dollarized from corporate transactions to people’s lives; and why there are no signs of de-dollarization in Cambodia. We started our discussions with concerned parties in April 2013 and launched the research project at JICA-RI.

The Study Methods and the study organization

While JICA-RI takes an initiative in the study, we collaborate with: Professor Hidenobu Okuda at the Graduate School of Economics of Hitotsubashi University; and Director Khou Vouthy and seven young personnel members at the Economic Research and International Cooperation of the National Bank of Cambodia.

The study aims to conduct three surveys (at a frequency of once a year), where we will interview households, companies, and financial institutions about the currency they use in their various economic transactions. We will conduct panel data analysis with the micro data that will be gathered in cooperation with Cambodia, and AMRO (the ASEAN+3 Macroeconomic Research Office). We will explore why people choose to use specific currencies and why there are no signs of the de-dollarization seen in Cambodia. AMRO has already collected data once in the period between June and August 2013, but our study will expand the scope of the surveys.

The National Bank of Cambodia created a road map for promoting the use of the home currency in April 2013. The road map includes an action plan for the above-mentioned sectors (households, companies, and financial institutions). We plan to conduct our study in line with the plan, aiming to steadily increase the use of the riel in Cambodia.

The Utilization of the Study Results and the Next Step

Study findings are to be published as a JICA-RI Working Paper. We also plan to hold workshops as part of the PR activities in Cambodia as well as workshops outside of Cambodia with international organizations.

It is believed that efforts to encourage the use of home currencies require a long-term period of decades. After our study ends, the study team at the National Bank of Cambodia will continue to conduct surveys and follow-up activities while monitoring the effectiveness of the measures.

My message

The world is full of interesting inquiries. So, it is important to start asking “why.” Research and any other intellectual activities start with asking why. When questioning what has generally been believed in society, it is intriguing to look into the background or causes of the questions.


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