Information about Asia and the Pacific Asia y el Pacífico

Chapter 8. International Experience of De-Dollarization

Sumio Ishikawa, Sibel Beadle, Damien Eastman, Srobona Mitra, Alejandro Lopez Mejia, Wafa Abdelati, Koji Nakamura, Il Lee, Sònia Muñoz, Robert Hagemann, David Coe, and Nadia Rendak
Published Date:
February 2006
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Information about Asia and the Pacific Asia y el Pacífico
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Wafa Fahmi Abdelati

This chapter summarizes recent research by IMF staff on country experiences of de-dollarization. Section A describes recent global trends of increasing dollarization and the experience with price stability and exchange rate pass-through in dollarized economies. Section B outlines various de-dollarization approaches countries have pursued. Section C reports that there are only a few cases of successful dollarization. The final section discusses options for Cambodia.

A. Dollarization Trends and Implications

Dollarization has been on the rise in the past two decades. A recent IMF study covering some 117 countries found that financial dollarization, as measured by the share of foreign currency deposits (FCD) in broad money, doubled in the last decade (Table 8.1).47 This trend partly reflects the return of deposits previously held abroad following the easing of FCD restrictions in most countries. Financial dollarization (the use of foreign currency as a store of value) is easy to measure because data are readily available in financial statistics. However, the true extent of dollarization, which should encompass payment dollarization (the use of foreign currency for transactions purposes) and real dollarization (the use of foreign currency for denominating prices and wages), is more difficult to assess because information is not readily available.

Table 8.1.Increasing Trend of Dollarization(In percent of foreign currency deposits to broad money)
Country Group (Number of countries)1980–851988–931996–01
Africa (48)027
Emerging Asia (26)3811
Middle East (14)112021
Transition economies (26)1729
Western Hemisphere (29)51323
of which: South America (11)102335

Some countries, however, were able to avoid or contain dollarization. The IMF study found that those countries in Asia that did not experience periods of high inflation or severe macroeconomic instability, including India, Sri Lanka, and Bangladesh (as well as more advanced economies such as Singapore, Malaysia, and Taiwan Province of China), retained domestic currency–denominated private savings. Some countries, including Chile and Colombia, that did experience large macroeconomic imbalances barely escaped dollarization by introducing financial indexation that helped contain the erosion of financial savings. Yet another group of countries, such as the República Bolivariana de Venezuela, Nigeria, and many countries in sub-Saharan Africa, relied on financial repression and capital controls. However, these measures led to waves of capital flight, financial disintermediation, and high levels of dollarization.

B. Approaches to De-Dollarization

The approaches taken by countries to reverse dollarization can be broken down into three types.

  • Macroeconomic policies: Pursuit of policies aimed at maintaining exchange rate and price stability (to avoid erosion of local currency value), including through inflation targeting to arrest inflation expectations. Financial liberalization that resulted in higher domestic interest rates also contributed to limiting dollarization.Example:
    • Following price stabilization, the FCD ratio declined substantially in Poland and Israel. In Armenia, Estonia, and Lithuania, financial liberalization led to an increase in domestic interest rates, thereby helping to contain dollarization.
  • Regulatory/legal reforms: Changing the regulatory incentive structure through the setting of differential reserve requirements or remuneration rates, or adjusting provisioning and liquidity requirements, introducing alternative financial instruments, and requiring all or certain payments or contracts to be conducted in local currency.Examples:
    • In Nicaragua, a premium was paid on dollar-indexed deposits over dollar deposits. Price and interest-rate indexation were broadly used in Brazil to contain dollarization.
    • Peru, in the late 1980s, imposed a 2 percent transaction tax on check payments in foreign currency. Lao P.D.R. introduced a decree requiring all domestic transactions to be carried out in local currency, supplemented by improvements in the payments, clearing, and settlement systems and the issuance of large-denomination banknotes.
    • Bolivia, Honduras, Nicaragua, and Peru had higher reserve requirements for FCD than for local currency deposits, although Uruguay refrained from imposing the higher reserve requirement to avoid driving dollar deposits offshore. Israel used differential remuneration rates and imposed a one-year holding period for all FCD to encourage the use of dollar-indexed deposits over dollar deposits.
  • Administrative enforcements: Direct administrative measures such as prohibition of FCD for residents, restrictions on residents holding accounts abroad, and forced conversions of dollar to local currency deposits.Examples:
    • Israel limited payments in foreign currency by imposing a ban on direct transfers of FCD among residents (Table 8.2).
    • Lebanon limited foreign currency lending to 60 percent of FCD, forcing banks to keep the remainder offshore. Vietnam, Malaysia, and the Philippines restricted foreign currency loans to particular uses or borrowers.
    • Peru, Bolivia, and Mexico had forced conversions of FCD in the 1980s. In many African countries, FCD are still not allowed or are severely restricted. But in most cases there are indications of extensive (unmeasured) use of dollars as cash in circulation.
Table 8.2.Use of Foreign Currency in Selected Countries(In percent of foreign currency bank deposits to broad money)
Bosnia and Herzegovina60
Lao P.D.R.4375
Yemen, Rep. of2331
Sources: Reinhardt, Rogoff, and Savastano (2003), p. 46; Baliño and others (1990), pp. 4–6; and Leung and Kompas (2005); pp. 7–8.
Sources: Reinhardt, Rogoff, and Savastano (2003), p. 46; Baliño and others (1990), pp. 4–6; and Leung and Kompas (2005); pp. 7–8.

C. Successful De-Dollarization Experiences

However, only four out of 85 countries surveyed during 1980–2001 succeeded in de-dollarization.48 Of those, only two countries, Poland and Israel, appear to have had lasting reversals with minimal side effects. For Mexico and Pakistan, it is too early to tell if de-dollarization will be sustained. Moreover, Mexico experienced doubling of capital flight and a drastic reduction of bank credit to the private sector.

In the cases of Poland and Israel, both countries embarked on a successful disinflation program initially built around a strong exchange rate anchor. In Israel, the domestic financial system offered alternative forms of indexed assets, including dollar-indexed deposits (Patzams) with higher reserve remuneration rates. The Patzams proved an effective substitute for dollar deposits. In Poland, interest rates on domestic currency assets were raised to maintain a differential in favor of local currency deposits. But it is not at all clear that the conditions in Israel and Poland can be replicated by other countries, especially since the initial level of dollarization was not high in the first place.

In contrast to the few successes, there have been many more countries with unsuccessful attempts at de-dollarization. Often, these attempts involved administrative enforcements without fully restoring confidence in the local currency or eliminating the underlying instability that led to dollarization in the first place. In both Peru and Bolivia, foreign currency deposits accounted for about 30 percent of total deposits in the early 1980s. Both countries attempted forced conversion that led to an increase in cross-border deposits, capital flight, and reduced financial intermediation. Eventually, by the end of the 1980s, foreign currency deposit in both countries increased further, to 70–80 percent.

There are also several countries that have intentionally opted to maintain a high level of foreign currency as part of their broad money. In Asia, Bhutan allows free use of the Indian rupee and Brunei Darussalam the Singapore dollar to facilitate trade and economic cooperation with their larger neighbors, and to benefit from stable macroeconomic conditions. For similar reasons, Lesotho and Namibia allow the use of the South African rand, Bosnia and Herzegovina the euro, and Haiti and The Bahamas maintain use of the U.S. dollar alongside their own currency. A few other countries, including Panama, El Salvador, and Timor-Leste, opted for full dollarization.

D. Steps Toward De-Dollarization in Cambodia

De-dollarization is a long-term objective for Cambodia. Country experience has shown that de-dollarization is a long-term process that, foremost, requires restoring confidence in the local currency. Confidence is restored when the private sector is sure that it will not be financially penalized for holding the local currency. Accordingly, only when continued macroeconomic stability and relative exchange rate stability are maintained will financial deepening be brought about by an increase in the use of domestic currency.49

Exchange rate stability is important in maintaining price stability in highly dollarized countries. The 2003 IMF Executive Board paper found systematic differences in the pass-through from exchange rate to prices.50 The impact of exchange rate changes on inflation was found to be largest for countries with a high degree of dollarization and where there was little private liability dollarization (low share of private sector debt in total external debt). However, the impact was the lowest in countries where overall dollarization is low and domestic dollarization was negligible.51 These results were consistent with the reluctance of central banks to tolerate large exchange rate changes, and also support Cambodia’s pursuit of a stable exchange rate.

Policies could be pursued that encourage the use of local cash without recourse to administrative controls that might result in capital flight. Such policies would comprise measures to conduct all public sector transactions in local currency, including an increase in the use of riel in the collection of tax and nontax revenue and in payments for capital expenditure. In 2001, 74 percent of nontax revenues and 67 percent of capital expenditure were collected in foreign currency. Creating a wedge in reserve requirements between FCD and local currency deposits could be another potential instrument. Introducing riel-denominated treasury bills could he useful in the future but is not an immediate measure to facilitate de-dollarization since banks have little need to manage riel liquidity given the low demand for riel. Finally, introducing a larger denomination of riel currency would enable payment of larger transactions in riel.


The criteria used to identify successful de-dollarization include reducing the foreign currency deposit to broad money ratio by 20 percent and remaining below that level until the end of the sample period.


In a recent paper, Ize and Levy-Yeyati (1998) argued that greater real exchange rate flexibility would reduce incentives for dollarization. They advocated a floating exchange rate combined with an inflation targeting approach to foster the use of the local currency, based on a theoretical model that derives depositors’ optimal portfolios.


The Board paper was later published as Reinhardt, Rogoff, and Savastano (2003).


Domestic dollarization in this case refers to the ratio of foreign currency deposits in broad money and the share of government debt that is foreign currency–denominated.

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