Constraints' Monetary Policy, A Case of Cambodia

Monetary policy plays a stabilizing role in promoting economic growth through a number of channels. The monetary policy applies its tools to effectively manage the money supply to sustain price stability, which is the final goal of a central bank. Alternatively, in the context of dollarized economy, it will hinder the reserve bank from achieving this goal. So, this dissertation focuses on determining the causes of dollarization, the constraints of implementing monetary policies for Cambodia’s National Bank, and the approaches to promote the greater use of domestic currency. Resultantly, it will assist it in minimizing the predominance of the greenback and reducing the country’s exposure to the US dollar. Historically, as the U.N dispatched humanitarian and emergency relief, international nongovernmental organizations, were allowed to return, and remittances from overseas restarted, funds began to trickle into Cambodia’s economy in the mid-1980s. The dollar-based urban economy has benefited from a steady inflow of dollars tied to apparel sector exports, tourism revenues, foreign direct investment, and aid. On the other hand, the riel-based rural economy has failed. Furthermore, Cambodia achieved nearly total defector dollarization between 1991 and 1995, and the situation has remained unchanged. The primary constraint to monetary policy would be a central bank’s role as a last-resort lender to assist domestic banks in the event of a bank run or a liquidity shortage, inability to finance fiscal budgets with seigniorage, political costs, loss of independence, and the government’s ability to issue medium and long term debt in domestic currency. In other words, we have designed some strategies and measures based on successful dedollarized countries, international finance organizations, and research scholars for Cambodia to diminish dollarization in the economy. Those strategies should comprise research bank independence, which is vital for credibility; the government should strengthen the credible fiscal position, achieve a macroeconomic environment, and develop a liquid and sound financial market for domestic currency-dominated assets. In addition to the central bank should perform a critical role in improving intermediate roles serving as imposing higher reserve requirements on foreign currency, establishing a deposit insurance system to boost banking system confidence, improving quotations and payments of goods and services in home currency, and encouraging private businesses to open bank accounts and pay salaries in riel as well. In addition, the National Bank should advance payments system and financial instruments in domestic currency and elaborate interbank and money markets to better manage national currency liquidity. Importantly, related parties should commit to involvement in lessening the dollarization in Cambodia’s economy.