Southeast Asian countries are promoting "de dollarization" against the backdrop of contradictions in the US dollar system, negative spillover effects of US monetary policy, and the "weaponization" of the US dollar. ASEAN will strengthen local currency settlement and reduce dependence on the US dollar from 2023 onwards. Cambodia, as a country with a high degree of dollarization, faces the challenge of "de dollarization". Despite government measures, the level of dollarization is still on the rise, and the task is arduous.

1、 Dollarization and literature review

The dollarization phenomenon in Cambodia is caused by various factors, including war, international aid, and hyperinflation. The dollarization of Cambodia has a positive impact on the economy, such as reducing exchange rate risks and increasing investment attractiveness, but there are also costs and risks, such as affecting seigniorage and inflation. Under the global trend of "de dollarization", ASEAN countries are strengthening their local currency settlements and reducing their dependence on the US dollar. This article summarizes the causes of dollarization in Cambodia, analyzes its manifestations at different levels, and explores the "de dollarization" strategy and future prospects in the new situation.

2、 The Evolution and Current Status of Dollarization in Cambodia

After gaining independence in 1953, Cambodia underwent a "golden age" of social reform, with the establishment of the National Bank and the issuance of Riel in 1954. The United States provided economic and military assistance to curb communism, and a large amount of dollars flowed in. After 1970, coups and wars led to the destruction of financial infrastructure, causing the depreciation of the real currency and making the US dollar a better choice. After the 1991 Paris Peace Agreement, the United Nations and foreign aid further increased the inflow of US dollars. The Investment Law of 1994 and the Foreign Exchange Law of 1997 relaxed foreign exchange controls and promoted dollarization. Inflation and financial crisis have accelerated dollarization, causing a significant depreciation of the US dollar and prompting people to turn to the US dollar.

3、 The impact of dollarization in Cambodia

The dollarization of Cambodia has had a significant impact on its economy, promoting foreign investment attraction and international trade integration, but also bringing about fragility in the economic and financial system. Dollarization has reduced exchange rate risks and costs, increased the attractiveness of foreign investment, and promoted trade between Cambodia and major export markets such as the United States. However, this also makes the Cambodian economy highly sensitive to changes in US monetary policy, weakening the independence of monetary policy and increasing liquidity risks in the financial system. The adjustment of US monetary policy, such as the consecutive interest rate hikes in 2022, has had a negative impact on the Cambodian economy, including inflation and capital outflows. In addition, the politicization and weaponization of the US dollar, as well as the instability of Cambodian American relations, have increased Cambodia's distrust of the US dollar and exacerbated the risks to sustainable economic and social development. Cambodia also suffered losses in coinage tax due to high dollarization, which affected the issuance of its currency and the competitiveness of its exported products. The Federal Reserve's interest rate hike policy once led to a decline in Cambodia's export competitiveness, while the quantitative easing policy during the 2008 financial crisis had an impact on Cambodia's economic growth.

4、 Cambodia's "de dollarization" initiative and its effectiveness

The Cambodian government recognizes that dollarization poses a challenge to economic growth and has made "de dollarization" a long-term policy to strengthen the country's currency, the riyal, and enhance economic resilience and crisis response capabilities. Since 2000, the government has elevated Riel's status through financial development strategies such as the "2006-2015 Financial Industry Development Strategy" and the "2016-2025 Financial Industry Development Strategy". The new government's "Five Corners Strategy" also emphasizes reducing the impact of dollarization and encouraging the use of Riel.

5、 Conclusion

The high degree of dollarization in Cambodia stems from historical backgrounds such as wars, social unrest, and international aid. Economic openness and loose foreign exchange policies have promoted the inflow of US dollars. Dollarization has a positive impact on the Cambodian economy, such as reducing exchange risks, promoting international trade, and attracting foreign investment. However, at the same time, dollarization has weakened the effectiveness of monetary policy and increased the vulnerability of the financial system. The politicization and weaponization of the US dollar have brought uncertainty to Cambodia's financial system and macroeconomy. Cambodia is actively promoting de dollarization and taking various measures, but the inertia of dollarization is still strong. De dollarization requires a long-term strategy and involves multiple changes. In the future, Cambodia can promote the circulation and use of Riel through various means.