Information about Asia and the Pacific Asia y el Pacífico
Chapter

III Dollarization in Cambodia

Author(s):
International Monetary Fund
Published Date:
September 2003
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The notion of dollarization emerged as a novel economic phenomenon in the 1980s in Latin America. Early discussions of this phenomenon in the literature revolved around that region’s experience with the increasing use of the U.S. dollar along with national currencies.

A Synopsis of the Concepts of Dollarization and of Currency Substitution

Dollarization is described in the early literature as a situation where a foreign currency is used for the same purposes as the national currency—that is, as a medium of exchange, a unit of account, and a store of value. The loss of the domestic currency’s external value and appeal as a store of value prompts dollarization and the foreign currency assumes the three classic uses of the national currency. According to Ortiz (1983), dollarization is the degree to which real and financial transactions are performed in dollars relative to those performed in domestic currency.

Broader notions of dollarization also exist. Cuddington (1989) and Calvo and Végh (1992) define currency substitution as the use of cash foreign currency and of foreign currency deposits only as a medium of exchange in the domestic economy. McKinnon (1996) suggests a more extensive definition of currency substitution, distinguishing between direct currency substitution (several currencies compete as means of payment) and indirect currency substitution (several currencies serve as nonmonetary financial assets for stores of value). This distinction between the two motives for the demand for foreign-currency-denominated assets is also known in the literature as currency substitution and asset substitution.7 Currency substitution occurs when foreign-currency-denominated assets are used as means of payment, while asset substitution occurs when they are primarily used as a store of value. Calvo and Végh (1992) point out that asset substitution normally characterizes the late stage of dollarization and that it appears in a high-inflation environment where a foreign currency becomes the unit of account or a store of value.8

Dollarization has elicited a large body of empirical and theoretical studies. Despite difficulties related to the measurement of the degree of dollarization, there is an extensive empirical literature on this subject (Box 2). Among the dollarization factors investigated by authors, the high degree of openness, low transactions costs for acquiring foreign currency, and lingering depreciation concerns are characteristic of Cambodia.

Theoretical models focus on the different purposes of demand for foreign currency (means of payment or store of value—Box 3). They have been developed to describe money-demand behavior in countries like Argentina (Kamin and Ericsson, 1993), Latvia (Sarajevs, 2000), or in a group of developing countries (Agénor and Khan, 1996). However, neither of the two models described applies to Cambodia, as there are no markets offering the possibility of arbitrage among various financial assets.

Measuring Dollarization in Cambodia

According to Baliño, Bennett, and Borensztein (1999), partial or unofficial dollarization “occurs when residents of a country hold a large share of their financial wealth in assets denominated in foreign currency, where foreign currency lacks the legal tender privileges that domestic currency enjoys.” Bogetić (2000) defines full or official dollarization “as a complete monetary union with a foreign country from which a country imports currency, by making the foreign currency full legal tender and reducing its own currency, if any, to a subsidiary role.” In 2001, 27 countries had officially dollarized their economies, 7 of which used the currency of another country and 20 belonged to a currency union.

Box 2.Empirical Models of Dollarization

The empirical studies can be roughly divided into two main groups: qualitative and quantitative analyses. The first group focuses on the costs and benefits of dollarization in terms of economic performance and economic policies—Argentina, Ecuador, Mexico, and Panama are popular references—and so are some transition economies (e.g., the Baltics and the Russian Federation). No consensus has emerged on the performance of dollarized versus nondollarized economies. On the one hand, those who reject dollarization point out the loss of seigniorage, the inability of the central bank to act as a lender of last resort, and—more importantly—the loss of flexibility and independence in monetary and exchange rate policies, On the other hand, those who favor dollarization emphasize that most dollarized countries exhibit low inflation, macroeconomic stability, and enhanced fiscal discipline (e.g., Baliño, Bennett, and Borensztein, 1999; Berg and Borensztein, 2000a; and Edwards, 2001). Covering the period 1970–98, and focusing on IMF member countries with various exchange rate regimes (from pegged to floating, including currency boards), Ghosh, Guide, and Wolf (1998) provide empirical evidence that countries with high levels of dollarization or currency board arrangements may have sacrificed the flexibility of their monetary policy, but gained long-term benefits of lower inflation and a more stable exchange rate. As noted by Bogetić (2000), analysis and evaluation for a single country are relatively rare, except for Panama, which seems to have become a benchmark for related works. It is with regard to growth performance that studies differ most. Edwards (2001) provides evidence that during 1970–98 some dollarized countries (Liberia, Panama, and ten micro-states) experienced: (1) lower inflation; (2) similar fiscal deficits; and (3) lower GDP per capita growth than nondollarized economies (emerging and industrial countries, with a variety of exchange rate regimes, from floating through crawling to pegged but adjustable exchange rates). To emphasize these results, Edwards (2001) takes a closer look at Panama. He finds that Panama did not perform better during 1970–98 compared with nondollarized reference economies, and external shocks generated higher costs in Panama—in terms of lower investment and growth. Conversely, Ghosh. Guide, and Wolf (1998) find that sample economies exhibited faster economic growth than nondollarized ones.

The second group of empirical studies attempts to examine the factors that may explain the emergence of dollarization in a group of countries. Econometric studies investigate the contribution of two sets variables to dollarization: institutional factors and economic factors. Vetlov (2001) identifies the following institutional factors as possibly leading to dollarization: an open economy, great depth and large size of the domestic financial market, and relatively low transaction costs for acquiring foreign currency. He notes that key economic factors are the interest rate spread (between domestic currency and foreign currency deposits), the inflation rate differential (between domestic and foreign inflations), and devaluation expectations. Other variables, which can signal an expected devaluation, are also considered: the real exchange rate, the current account deficit, international reserves, and other related factors. To explain dollarization, most studies are money-demand models, in which the explanatory variables usually include a combination of the aggregates noted above. Agénor and Khan (1996) find that foreign interest rates and the expected depreciation of the exchange rate can be important factors leading to dollarization.

An alternative to full dollarization is the official bimonetary system in which the domestic and a foreign currency are both legal tenders. The foreign currency usually tends to dominate in bank deposits, but the domestic currency is often used for the execution of the budget, including the payment of taxes and of the salaries of civil servants. Transactions can be paid for in one or both currencies, according to different country experiences. Cambodia’s legal tender is the riel, but Cambodia’s monetary system is characterized by a de facto dollarization, resulting in an unofficial multimonetary system. The dollar is widely used by residents but it is not a legal tender. In urban areas the riel is chiefly used for small cash transactions and as divisionary money. In those areas, prices for goods and services are mostly quoted in dollars and transactions are predominantly settled in dollars. In rural areas, far from the borders, the riel remains the main means of payment, and serves also as a store of value, along with gold. The riel is mainly kept in circulation through government payments for goods and services (including civil servants’ salaries). In the border areas with Thailand, the Thai baht is widely circulating and is preferred to the dollar. Along the border with Vietnam, the Vietnamese dong circulates to a limited extent among traders who engage in regular cross-border trading.9

Cambodia is essentially a cash-based economy, with checks used only by large institutions in urban areas, and virtually no electronic payments. Financial intermediation is shallow and transactions in the banking system are predominantly effected in dollars. Most banks (except the state-owned commercial bank) keep their books in dollars, using the daily market exchange rate to convert transactions in riels into dollars. During 1997–98, about 97 percent of bank assets and 95 percent of bank liabilities were denominated in dollars. However, since the 1998 national elections, assets and liabilities of commercial banks denominated in riels have increased modestly, as macroeconomic stabilization and growth led to an expansion of banking operations in riels (Figure 3).

Figure 3.Assets and Liabilities of the Banking System in Foreign Currency

(In percent of total assets and liabilities)

Source: National Bank of Cambodia.

Box 3.Theoretical Models of Dollarization

Giovannini and Turtelboom (1994) provide a useful survey of the theoretical literature on dollarization, which takes money demand in a multicurrency environment as its starting point. The bulk of the analysis can be divided into two broad avenues: cash-in-advance models, and transactions costs models.

In the cash-in-advance models, as reviewed for instance by Giovannini and Turtelboom (1994) and Sarajevs (2000), two currencies exist in the economy, with or without legal restrictions. Both domestic and foreign currencies are used as a medium of exchange. Moreover, the following underlying assumptions are posed: there is perfect substitution between the two currencies and financial assets (to avoid idle cash balances), and the acquisition of foreign currency is costless. Agents are maximizing their utility function (which is increasing in consumption and foreign currency holdings), subject to budget and cash-in-advance constraints, by choosing between domestic and foreign currencies, and domestic and foreign bonds with positive returns. It is assumed that prior to any consumption purchase, agents must acquire domestic or foreign currencies. The return on bonds in foreign currency expressed in domestic currency depends on the expected exchange rate depreciation and will positively affect the demand for foreign bonds and negatively affect the demand for domestic assets. In fact, the differential of real return (nominal return minus inflation rate) from domestic and foreign currencies determines the demand for domestic and foreign currencies. Bogetić (2000) asserts that foreign currency holdings are closely linked to domestic and foreign inflation rates and the credibility of legal restrictions. The higher the domestic inflation rate compared with the foreign one, the higher the level of foreign currency holdings. Conversely, the stronger the legal restrictions, the lower the level of foreign currency holdings. If there are no legal restrictions, there are two possible equilibria in which only one currency circulates: no currency substitution (low inflation) or full substitution (high or hyperinflation). Thus, in this model, the two currencies circulate simultaneously only if there are some credible and effective legal restrictions.

In the transactions costs models, developed by Poloz (1986) and Marshall (1987), it is time consuming to acquire cash (both domestic and foreign) to purchase goods. The inability of agents to acquire cash instantaneously forces them to build up cash balances. The assumptions in this model are as follows: two currencies circulate simultaneously, there are available financial assets, and there are transactions costs, which reduce the agents’ disposable income. The transactions costs function takes into account the time and resources required to acquire cash (i.e., time consumed increasing cash balances decreases the working time and consequently income). Agents maximize their utility function (which is increasing in consumption solely) subject to a budget constraint. This framework differs in two ways from the previous one. First, foreign currency holdings do not appear in the utility function. Second, there are transactions costs that reduce the disposable income of agents. By assumption, the transactions costs function is increasing in domestic and foreign goods consumption and decreasing in real money balances (domestic and foreign). In other words, agents need money (domestic and foreign) to purchase goods; consequently, they will bear transactions costs in converting their assets into cash in both currencies. The “liquidity” of different assets in the agents’ portfolios will determine the demand for different currencies to permit the purchase of goods. Given the specific form of the transactions costs function, this framework leads to different equilibria, depending on consumption levels and transactions costs. If these levels and costs are high, agents will hold foreign assets for the purpose of payment and as a store of value, and thus, currency substitution will occur. Conversely, if consumption levels and transactions costs are low, agents will prefer to use the domestic currency.

Beyond a qualitative description of dollarization occurring in an economy, the main challenge for characterizing this phenomenon more precisely is the measurement of the degree of dollarization. Usually foreign-currency-denominated assets held within a country’s financial system are reasonably well known, but the amount of foreign currency circulating in cash in the economy is unknown. Baliño, Bennett, and Borensztein (1999) report that, based on U.S. Treasury data on net dollar inflows during 1989–96 in selected small open economies—comparable to Cambodia—such inflows represented three to four times the amounts of local currency in circulation.

Authors in this field of research acknowledge the problem of measuring the true degree of dollarization (i.e., foreign cash in circulation plus foreign-currency-denominated assets held in the banking system) and suggest circumventing the lack of data on foreign cash circulation by comparing a monetary aggregate denominated in foreign currency to another monetary aggregate denominated in domestic currency (possibly including a subcomponent denominated in foreign currency). These aggregates are usually extracted from monetary statistics, which are in general among the better statistics, especially in developing countries. For instance, Calvo and Végh (1992) propose to proxy the degree of dollarization by the ratio of foreign currency deposits held in commercial banks to broad money (inclusive of foreign currency deposits). In most cases, the choice of a dollarization index relies on data availability. Commonly, data on foreign banknotes circulating in the economy are unavailable. The only series typically available is residents’ foreign currency deposits in the domestic banking system. Thus, habitual dollarization indices tend to underestimate the true degree of dollarization, as they do not include cash foreign currency in circulation.

Following Vetlov (2001), we start by using three of the most common dollarization ratios (DR) found in the literature (deposits defined as demand, savings, and time deposits):

DR1:residents’ foreign currency deposits to domestic currency deposits;
DR2:residents’ foreign currency deposits to the sum of residents’ domestic currency deposits and domestic currency in circulation; and
DR3:residents’ foreign currency deposits to broad money (M2).

In the case of Cambodia, the main difference between these ratios lies in their respective levels (Figure 4). With an appropriate re-scaling, these three time series follow each other rather closely. The cross-correlation coefficients between the ratios are high: 0.99 between DR3 and DR2; 0.80 between DR3 and DR1 and 0.76 between DR2 and DR1

Figure 4.Dollarization Ratios

Source: National Bank of Cambodia.

Using ratio DR3, the degree of dollarization in Cambodia rose from 50 percent at the end of 1994 to 70 percent at the end of 2001. Between December 1994 and July 1997, DR3 increased from 50 percent to 60 percent. It remained stable around that level for seven months, and then started to rise slightly, reaching 64 percent in January 1998. Between January and December 1998, dollarization declined from 64 percent to 54 percent. As noted in Section II, political uncertainty could explain this episode of “de-dollarization.” In late 1998, after the formation of a coalition government, increased public confidence and heightened economic activity, in particular in the tourism and retail trade sectors, resulted in the return of foreign currency deposits to the domestic banking system. Since the beginning of 1999, the degree of dollarization has constantly increased, reaching a 71 percent peak in November 2001.

Baliño, Bennett, and Borensztein (1999) characterize an economy as highly dollarized when DR3 exceeds 30 percent. According to this definition, Cambodia can be viewed as a “very highly” dollarized economy and finds itself in the uppermost group of dollarized economies (Figure 5). At the end of 2000 or 2001, dollarization in the world—excluding full dollarization—as measured by DR3, ranged from 7 percent in China to 84 percent in Bolivia; Cambodia, at 70 percent, ranked fourth after Bolivia, Lao P.D.R. and Uruguay.

Figure 5.Ratio of Foreign Currency Deposits to Broad Money

(In percent)

Sources: IMF, International Financial Statistics and IMF staff estimates.

1 2000 data.

Sources of Dollarization

By regional standards, the level of dollarization in Cambodia in 2001, as measured by DR3, was between the levels of its two comparable neighbors (Figure 6). In Vietnam, high inflation in the early 1990s can be considered the main factor behind the sudden surge in dollarization, peaking at 41 percent in 1991. As a result of macroeconomic stabilization, dollarization receded somewhat in the following years, but rose again during the last half of the decade, reaching more than 30 percent in 2001. Until the mid-1990s, dollarization in the Lao P.D.R. was higher than in Vietnam, but lower than in Cambodia. However, it has expanded remarkably since 1996 and has now surpassed Cambodia. The main sources of the surge in dollarization in the Lao P.D.R. were the episodes of high inflation (from December 1994 to December 1999) and a concomitant sharp depreciation of the domestic currency. However, since 1999, efforts at stabilizing the economy have resulted in a decrease in the inflation rate and dollarization has leveled off, albeit at a high level (75 percent). Conversely, the recent continued rise in dollarization in Cambodia has clearly not resulted from high inflation, as inflation has all but disappeared since 1999.10 These findings are confirmed by a causality analysis between inflation and dollarization in Cambodia, Lao P.D.R. and Vietnam (Box 4).

Figure 6.Foreign Currency Deposits in Cambodia, Lao P.D.R., and Vietnam

(As percent of broad money)

Source: IMF staff estimates.

Measuring Cash Dollars Circulating Outside Banks in Cambodia

Baliño, Bennett, and Borensztein (1999) contend that “in general terms, dollarization is a response to economic instability and high inflation and to the desire of domestic residents to diversify their asset portfolios.” While in the early 1990s, economic instability and high inflation certainly did prevail in Cambodia, these phenomena would likely not have sufficed to cause such high dollarization, had it not been for the sudden and massive inflow of cash dollars in 1991–93. Given the sheer volume of cash dollar inflows, we feel that the traditional dollarization ratios referred to earlier significantly underestimate the true degree of dollarization in Cambodia, a characteristic that cannot be ignored in economic analysis. We therefore endeavor to estimate cash dollars circulating in Cambodia empirically.

At the outset, we would like to emphasize that our empirical attempt at measuring cash dollars in circulation is hampered by severe data limitations. As in many developing countries, some of the data used are of mediocre quality, especially data on national accounts. To our knowledge there are, however, no other statistical sources that would yield data of better quality. We recognize that our results rely heavily on the data, and we are aware that a revised dataset could result in changes in levels, but it is unlikely that it would change dramatically the trend of the derived cash dollar time series. Accordingly, and as in related works, we emphasize that our results should be considered only as rough estimates. Our intention is not to provide exact cash dollar time estimates, but rather a “baseline” for illustrative purposes that is helpful to assess the policy options available. The empirical results we find are probably on the high end of the range of cash dollars in circulation, but we trust that they buttress the policy considerations and recommendations for Cambodia, laid out in Sections IV and V, in the context of very high dollarization. The empirical model used to estimate cash dollar circulation in Cambodia is presented in the Appendix.

According to our estimates, and as illustrated in Figure 7, cash dollars in circulation amounted to about $1.2 billion in early 1995 and rose to $2.9 billion at the beginning of 2001. The evolution of dollars in circulation can be divided into four phases: a steady increase from February 1995 until March 1996; a relative stabilization from April 1996 to March 1998; a second overall, though erratic, increase until the end of 1998; and a relative stabilization from January 1999 to December 2000. Using dummy variables, the impact of major political events was tested but yielded no significant results.

Figure 7.Dollars in Circulation Outside Banks

(In billions of U.S. dollars)

Source: Authors’ estimates.

The estimated stock of cash dollars at the start of 1995 seems broadly consistent with the infusion of large amounts of cash dollars since the mid-1980s, especially during the UNTAC period, for the purchase of local services and goods; remittances and private transfers from abroad, which started in 1985; and the return of large numbers of refugees who brought cash with them. The steady increase of cash dollars in 1995–96 can be explained by the start of multilateral and bilateral aid disbursements ($335 million in 1995 and $437 million in 1996), the return of foreign investment ($151 million in 1995 and $294 million in 1996), and continued large private transfers. According to the Council of Development for Cambodia, the country received about $2.1 billion from bilateral donors alone during the period 1992–2000. However, as the political situation, in the wider context of the Asian crisis, deteriorated in 1997 and the first half of 1998, cash dollars are estimated to have stabilized, but massive capital flight seems not to have occurred, as one might have expected. During 1997 and early 1998, owing to political uncertainty, international aid inflows and foreign direct investment slowed and the amount of dollars circulating in the economy stabilized at around $2.3 billion. After the general elections in July 1998, a new surge in cash dollars started, fueled by the spectacular increase in foreign direct investment in the garment industry. Between 1995 and 1998, some 165 garment factories were opened and today they employ 160,000 people who receive, in aggregate, an estimated annual salary of $140 million in cash. Since early 1999, the level of cash dollars has leveled off, as the underlying factors described above seem to have stabilized.

Box 4.Causality Analysis Between Inflation and Dollarization in Cambodia, Lao P.D.R., and Vietnam

We examine the relationship between inflation and dollarization in three selected South-East Asian countries (Cambodia, Lao P.D.R., and Vietnam) during the second half of the 1990s, using the Granger (1969) causality methodology. We use monthly data from the Cambodian authorities and from International Financial Statistics (IMF, 2001). We compute dollarization as the ratio of foreign currency deposits to broad money, and inflation as changes in the monthly consumer price index. We use data from October 1995 to August 2001 for Cambodia; from February 1995 to September 2001 for Lao P.D.R.; and from January 1996 to July 2001 for Vietnam. All the variables are specified as growth rates, that is, differenced once.

To test the stationarity of the time series, integration properties are assessed using conventional unit root tests (augmented Dickey-Fuller statistics). The results of the unit root tests are summarized in the table below. All the time series are stationary and the order of integration is zero, so they are 1(0) series. For each time series, there is no unit root.

Unit Root Tests
CountryInflationDollarization
Cambodia–1.69321–3.67042,3
Lao P.D.R.–2.54822–1.97552
Vietnam–2.311422–2.97512,4
Note: The results were obtained using 12-month lags.

Denotes significance at the 10 percent level.

Denotes significance at the 5 percent level.

Includes deterministic elements (intercept and trend).

Includes a deterministic element (intercept).

Note: The results were obtained using 12-month lags.

Denotes significance at the 10 percent level.

Denotes significance at the 5 percent level.

Includes deterministic elements (intercept and trend).

Includes a deterministic element (intercept).

Granger Causality Tests
Null Hypothesis
CountryInflation does not

Granger cause

dollarization
Dollarization

does not Granger

cause inflation
Cambodia0.37381.0158
Lao P.D.R.2.506310.4200
Vietnam0.50970.8023
Note: The results were obtained using 12-month lags.

Denotes significance at the 5 percent level.

Note: The results were obtained using 12-month lags.

Denotes significance at the 5 percent level.

Having established the stationarity of all the variables, we perform Granger causality tests. The statistics reported in the table above are the conventional F-statistics of this method. The test shows that episodes of high inflation in Lao P.D.R. between early-1995 and the end of 1999 had an impact on the surge of dollarization during the same period. Conversely, in Cambodia and in Vietnam, dollarization cannot be explained by inflation during the period under review. In other words, inflation did not predict dollarization in these two countries a year later. As we noted earlier, dollarization in Cambodia seems to be the result, among other things, of a massive exogenous shock during 1991–93. In Vietnam, high inflation in the early 1990s may explain the level of dollarization then. Since 1997. other factors may have contributed to the increase in dollarization: spillovers from the Asian crisis: real interest rate spreads in favor of foreign currency deposits: and strong performance in exports.

If we measure currency substitution by the percentage of the estimated foreign currency in circulation as a share of total currency in circulation (domestic and foreign currencies outside banks), we find an average of 96 percent (Figure 8). Anecdotal evidence cited by Liang and others (2000) and Marciniak and Sa (2002) suggested that foreign currency cash holdings in Cambodia amounted to 85–95 percent of total currency in circulation. Our results are consistent with those earlier estimates.

Figure 8.Estimated Currency Substitution

(In percent of total money circulating)

Source: Authors’ estimates.

The high ratio of dollars in circulation to GDP and to foreign currency deposits can be explained by several reasons (Table 1). First, the lack of public confidence in the domestic banking system and uncertainty about the future lead people to hold high amounts of dollars in cash. Second, the lack of a modern payments system (electronic payments and credit cards) and the limited use of checks promote the use of cash dollars in the economy. Third, banks are overly liquid and a number of them decline taking small deposits.11 Fourth, there are no financial institutions outside major cities, except some micro-finance institutions. Fifth, it is conceivable that large amounts of cash dollars circulate in the economy as a result of smuggling and of illegal activities, which typically transact in cash using a major international currency.

Table 1.Ratio of Dollars Circulating in the Economy
199519961997199819992000
Dollars/GDP0.570.720.761.001.021.01
Dollars/Foreign
currency deposits14.112.611.815.813.910.2
Source: Authors’ estimates.Note: Yearly averages of monthly estimates
Source: Authors’ estimates.Note: Yearly averages of monthly estimates

Figure 9 illustrates the sensitivity of agents’ preference for holding cash dollars versus dollar deposits in the banking system in times of political uncertainty, in a general context of increasing dollarization. During 1995: Q3–1997: Q1, as economic reform took hold and financial intermediation deepened, the ratio of cash dollars over dollar deposits declined from about 14 to about 9½. During most of 1997, owing to political strife, and most of 1998, owing to uncertainty linked to the upcoming general elections, the ratio surged and, at its peak in August 1998, reached 19. Starting from the effective operation of the coalition government in November 1998, the ratio steadily decreased to reach about 9, its lowest value in the period under review.

Figure 9.Ratio of Dollars in Circulation to Foreign Currency Deposits

Source: Authors’ estimates.

We compute a new dollarization ratio, DR4, similar to DR3, but including in the numerator and in the denominator our estimates for cash dollars in circulation. DR4 is thus defined as the ratio of residents’ foreign currency deposits plus cash dollars in circulation to total broad money (including cash dollars in circulation). The result of this computation, shown in Figure 10, is quite remarkable. We find that the degree of dollarization in Cambodia, as measured by DR4, has been stable since early 1995, in the range of 93 to 95 percent. This validates our earlier assertion that Cambodia became very highly dollarized during the period 1991–95 and has stayed so ever since. While the economy has expanded and financial intermediation has deepened since 1995, and while there have been large fluctuations in the composition of agents’ dollar assets, as discussed earlier, the overall degree of dollarization has remained stable. Thus dollarization has persisted despite macroeconomic stabilization, resumption of growth, and relatively stable public finances. This persistence—or hysteresis—has also been noted in other cases of high dollarization (e.g., Mueller, 1994). The continued lack of confidence in the national currency, owing to historical reasons, could be a key factor in explaining this phenomenon. Another reason could stem from the high costs of de-dollarization, in particular the cost associated with the physical replacement of the large volume of dollar banknotes.

Figure 10.Estimated Dollarization

(In percent of broad money)

Source: Authors’ estimates.

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