Analyse the impact of Dollarization on Cambodia’s Foreign Trade

Since the economic system reform and gap during the early 1990s, Cambodia has been actively involved with many south-east Asia states and the full Asia-Pacific part for touting economic activities. In this MC, the authorities utilized a scheme that targeted at pulling foreign investing to better the state ‘s exports. Therefore, it would be appropriate to see whether the usage of US dollar as a method of payment is related to the aims or non and how the US dollar have deductions for exports and imports.

5.1 Deductions for exports

Talking about Cambodia ‘s external trade public presentation during the last 10 old ages, we can see that the trade has expanded aggressively from 1993 to 2001. Cambodia ‘s domestic exports were seen to travel up more than eleven-fold during 1993-2001. Therefore, one interesting point to come to the inquiry is that whether riel/dollar exchange rate motions have played a critical histrion in the export roar.

The value of the riel to Dollar which was assessed by the one-year mean market-buying rate, has increased well since early 1993. In the early 1993, the value of it slumped to 2,906 riels/ $ from 1,363 in 1992. Later on, due to the stable politic and betterment of macroeconomic public presentation every bit good as the banking and fiscal policies, the monetary value appreciated and stayed comparatively healthy ( at around 2,570 riel/ $ ) during 1994-1996. However, the exchange rate fluctuated and become much depreciated as the Asia fiscal crisis in the 1997-1998 got worse. During that period, riel ‘s value went down rapidly, by about 27 per centum. Confronting the strong power of the US Dollar, the riel continued shriveling, but easy, and traded at around 3,930 riel/ $ in December 2001.

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Harmonizing to economic theory, the devaluation tends to better international monetary value fight. Meanwhile, the imports ever decrease as the domestic currency monetary value of imported merchandises rises. Through this mean, one can anticipate an betterment in the trade balance.

However, this mechanism is difficult to implement in the instance of extremely dollarized Cambodia. Under such state of affairss, the riel/dollar exchange rate is seldom applicable to the state ‘s exports and imports. It is besides factual that the value of this exchange rate reflects demand and supply conditions in the market for riel and US dollar. The job of this fact is that this foreign exchange market is really thin and this exchange rate is defined by international economic conditions.

In Sum, the export fight of Cambodia can be hazardous non by grasp of the riel, but by the lifting value of the dollar. Cambodia is a state that has to accept the monetary value the universe sets for it and due to the fact that local costs are measured in US dollars, Cambodia might has lost its export competition with other states, unless the costs are wholly lower than other. However, owing to high dollarization, monetary values are “ gluey ” in dollar footings ; therefore even the nominal exchange rate or the existent effectual exchange rate is non an appropriate measuring of the state ‘s export fight. This is considered as an obvious restriction on the Kampuchean governments ‘ entree to policy instrument.

Deductions for imports

For the ends of analysing deductions of dollarization on Cambodia ‘s imports, we tend to hold a brief expression on the motion of the riel and the currencies of Cambodia ‘s two largest providers, Singapore and Thailand, against the US dollar.

We all should cognize that Cambodia has a really limited production capableness. The state merely survives over the imports of exterior for domestic ingestion. The power of the US dollar against the Singapore dollar and tical contributed to vouch inexpensive imports and tends to promote higher imports.

All the goods imported from Singapore are charged in Singapore dollars. When the goods were introduced to the market, the monetary value was set in US dollars for big value merchandises, and in riel for little value merchandise.

The inspecting of dollarization effects on Cambodia ‘s import is made into complex by the fact that one can non keep with confidence that the motions in the value of the riel/US dollar exchange rate do non interfere with imported merchandises monetary value determination for the local market.

What would go on to Cambodia ‘s trade if the governments started to de-dollarize the economic system in the current context?

For the short clip, exporting companies would take full advantage. We made an premise that de-dollarization would transform to the devaluation of the national currency. We believe that riels could non go stronger or every bit strong as US dollar, due to weak or ill-defined fiscal policy and the weak economic system and the governments to back up a strong riel. Therefore, the garments exports can be expected to go cheaper in the short clip.

However, there is another inquiry to what should go on to the export returns? If the governments do non let exporters to keep foreign exchange histories, they will face a foreign exchange hazard that could take to the consequence of capital flight.

In contrast to the garment industry, exports of agricultural merchandises seem to really little and even have no import content. Therefore, it is unaffected by dollarization. From this point of position, agribusiness of de-dollarization economic system seems to be a long-run victor from the de-dollarization.



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