The Asian Development Bank sees cooperation between Vietnam, Laos and Cambodia as vital to their economic future.
The issue of dollarization in the three nations was the subject of a recent study. The study, Dealing with Multiple Currencies in Transitional Economies: The Scope for Cooperation in Cambodia, the Lao People’s Democratic Republic, and Vietnam is a pioneering work on the multiple-currency phenomenon with important recommendations for promoting regional monetary and financial cooperation.
Vietnam, Laos and Cambodia stand to benefit from regional cooperation in monetary and financial issues to exploit economies of scale, introduce practices, and facilitate the adoption of common regulatory standards, according to a new study published by the Asian Development Bank (ADB).
In Vietnam, Laos and Cambodia, currency of other countries, particularly the US dollar, are widely used. The share of foreign currency ranges from about 20% of all currency in circulation in Vietnam, about 50% in Laos, and more than 90% in Cambodia.
“Dealing with the dollarization and multiple currencies is ultimately an issue of national economic policy, and in this regard, Vietnam has made good progress in de-dollarization,” said Mr. Ayumi Konishi, ADB Country Director for Vietnam. “Yet, authorities, especially the State Bank of Vietnam, are fully aware that administrative measures alone cannot be effective: in order to de-dollarize the Vietnamese economy, it is essential to enhance people’s confidence in the Vietnamese dong through sustainable and high economic growth, stabilization of the foreign exchange rate, reforms in monetary policies, and strengthening of the capacity of financial institutions.”
The study highlights the costs and benefits associated with dollarization. On the plus side, it can impose discipline on governments since they cannot easily finance budget shortfalls by printing money, rather than raising taxes. Also, if dollarization leads to a near fixed exchange rate, prices can be less volatile. However, the use of multiple currencies reduces government control over monetary and exchange rate policies; it also restricts the power of central banks as “the lender of last resort” in the event of a banking crisis.
"Dollarization blunts the tools for macroeconomic stabilization, especially monetary and exchange rate policy, that a country like Vietnam needs in order to tackle a variety of economic and developmental challenges, such as rising inflation. Adjustment to external shocks can also be more prolonged and painful in the presence of dollarization, even if partial," said a co-editor of the book, Mr. Jayant Menon, Principal Economist in ADB's Office of Regional Economic Integration.
The other co-editor of the book, Mr. Giovanni Capannelli, principal economist in the ADB Institute added, "Sharing information and experiences would help the monetary authorities of Cambodia, Laos, and Vietnam to find a solution to the dollarization issue. The three countries have a lot to gain from closer cooperation, both among themselves and with the rest of the members of the Association of Southeast Asian Nations."
The issue of dollarization in the three nations was the subject of a recent study. The study, Dealing with Multiple Currencies in Transitional Economies: The Scope for Cooperation in Cambodia, the Lao People’s Democratic Republic, and Vietnam is a pioneering work on the multiple-currency phenomenon with important recommendations for promoting regional monetary and financial cooperation.
Vietnam, Laos and Cambodia stand to benefit from regional cooperation in monetary and financial issues to exploit economies of scale, introduce practices, and facilitate the adoption of common regulatory standards, according to a new study published by the Asian Development Bank (ADB).
In Vietnam, Laos and Cambodia, currency of other countries, particularly the US dollar, are widely used. The share of foreign currency ranges from about 20% of all currency in circulation in Vietnam, about 50% in Laos, and more than 90% in Cambodia.
“Dealing with the dollarization and multiple currencies is ultimately an issue of national economic policy, and in this regard, Vietnam has made good progress in de-dollarization,” said Mr. Ayumi Konishi, ADB Country Director for Vietnam. “Yet, authorities, especially the State Bank of Vietnam, are fully aware that administrative measures alone cannot be effective: in order to de-dollarize the Vietnamese economy, it is essential to enhance people’s confidence in the Vietnamese dong through sustainable and high economic growth, stabilization of the foreign exchange rate, reforms in monetary policies, and strengthening of the capacity of financial institutions.”
The study highlights the costs and benefits associated with dollarization. On the plus side, it can impose discipline on governments since they cannot easily finance budget shortfalls by printing money, rather than raising taxes. Also, if dollarization leads to a near fixed exchange rate, prices can be less volatile. However, the use of multiple currencies reduces government control over monetary and exchange rate policies; it also restricts the power of central banks as “the lender of last resort” in the event of a banking crisis.
"Dollarization blunts the tools for macroeconomic stabilization, especially monetary and exchange rate policy, that a country like Vietnam needs in order to tackle a variety of economic and developmental challenges, such as rising inflation. Adjustment to external shocks can also be more prolonged and painful in the presence of dollarization, even if partial," said a co-editor of the book, Mr. Jayant Menon, Principal Economist in ADB's Office of Regional Economic Integration.
The other co-editor of the book, Mr. Giovanni Capannelli, principal economist in the ADB Institute added, "Sharing information and experiences would help the monetary authorities of Cambodia, Laos, and Vietnam to find a solution to the dollarization issue. The three countries have a lot to gain from closer cooperation, both among themselves and with the rest of the members of the Association of Southeast Asian Nations."
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