MANILA, PHILIPPINES - Closer cooperation on monetary and financial issues would enable Cambodia, the Lao People's Democratic Republic (Lao PDR), and Viet Nam to effectively address challenges arising from the use of multiple currencies in their respective economies, says a new book from the Asian Development Bank (ADB).
The book, Dealing with Multiple Currencies in Transitional Economies: The Scope for Cooperation in Cambodia, the Lao People's Democratic Republic, and Viet Nam, says working closely together on monetary and financial issues would allow the three Southeast Asian countries to increase stability and introduce common best practices and regulatory standards. Greater regional dialogue on these issues could also help them to improve the effectiveness of their monetary and exchange rate policies, while reaping greater benefits from their increasing economic interdependence.
As well as the local currency, people in Cambodia, Lao PDR, and Viet Nam often use other countries’ currencies to conduct business. The US dollar is the main alternative currency, in a practice called dollarization, although additional currencies are also in wide circulation. It is believed that the share of foreign currencies range from around 20% of all currency in circulation in Viet Nam, about 50% in Lao PDR, and more than 90% in Cambodia.
Dollarization has costs and benefits. On the plus side, it can impose discipline on governments since they cannot easily finance budget shortfalls by printing money and imposing fresh taxes. If dollarization leads to a near fixed exchange rate, prices are also less volatile. However, the use of multiple currencies can result in economic authorities losing control over monetary and exchange rate policies. It also restricts the power of central banks as the lender of last resort given they print only one of the many currencies that the public is willing to hold.
"Sharing information and experiences would help the monetary authorities of Cambodia, Lao PDR, and Viet Nam to find a solution to the dollarization issue,” said Giovanni Capannelli, Principal Economist in ADB's Office of Regional Economic Integration (OREI) and a co-editor of the book. “The three countries need to take into account the various degrees of dollarization in their economies and try to improve regional cooperation, both among themselves and with the rest of the members of the Association of Southeast Asian Nations."
The book says that future proposals for a common monetary or exchange rate framework among the three countries should take account of the multiple currencies used in their economies. The book also highlights the importance of regional macroeconomic surveillance to preserve financial stability and ensure monetary policy and exchange rate regimes in the three countries remain consistent with their long-term economic development goals.
"Dollarization blunts the tools for macroeconomic stabilization, especially monetary and exchange rate policy, that countries need to tackle a variety of economic and developmental issues, such as spiraling inflation. The adjustment to external shocks can also be more prolonged and painful in the presence of the multiple currency phenomenon," said Jayant Menon, Principal Economist in ADB's OREI and the book's other co-author.
The US dollar is widely used in Cambodia in addition to the national currency, the riel. In Lao PDR, the kip is used together with the dollar and the Thai baht. In Viet Nam, the dong is the only official currency, but the dollar can be used as a store of value, so a considerable share of bank deposits is denominated in dollars. The Vietnamese also hold more gold on average, on a per dollar of income basis, than anyone else in the world, underlining the lack of confidence in the local currency.
http://www.adb.org/Media/Articles/2010/13271-southeast-asian-dollarization-issues/
