COUNTRY REPORT Cambodia Laos 4th quarter 1999

Transcription

1 COUNTRY REPORT Cambodia Laos The full publishing schedule for Country Reports is now available on our website at 4th quarter 1999 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom

2 The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through subscription products ranging from newsletters to annual reference works; through specific research reports, whether for general release or for particular clients; through electronic publishing; and by organising conferences and roundtables. The firm is a member of The Economist Group. London The Economist Intelligence Unit 15 Regent St London SW1Y 4LR United Kingdom Tel: (44.20) Fax: (44.20) london@eiu.com Website: New York The Economist Intelligence Unit The Economist Building 111 West 57th Street New York NY 10019, US Tel: (1.212) Fax: (1.212) /2 newyork@eiu.com Hong Kong The Economist Intelligence Unit 25/F, Dah Sing Financial Centre 108 Gloucester Road Wanchai Hong Kong Tel: (852) Fax: (852) hongkong@eiu.com Electronic delivery EIU Electronic New York: Lou Celi or Lisa Hennessey Tel: (1.212) Fax: (1.212) London: Jeremy Eagle Tel: (44.20) Fax: (44.20) This publication is available on the following electronic and other media: Online databases FT Profile (UK) Tel: (44.20) DIALOG (US) Tel: (1.415) LEXIS-NEXIS (US) Tel: (1.800) M.A.I.D/Profound (UK) Tel: (44.20) NewsEdge Corporation (US) Tel: (1.718) CD-ROM The Dialog Corporation (US) SilverPlatter (US) Microfilm World Microfilms Publications (UK) Tel: (44.20) Copyright 1999 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the EIU does not accept responsibility for any loss arising from reliance on it. ISSN Symbols for tables n/a means not available; means not applicable Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK

3 Contents 3 Summary Cambodia 5 Political structure 6 Economic structure 7 Outlook for The political scene 15 Economic policy 18 The domestic economy 18 Economic trends 20 Industry 21 Agriculture 21 Infrastructure 22 Financial and other services 24 Foreign trade and payments Laos 26 Political structure 27 Economic structure 28 Outlook for The political scene 33 Economic policy 35 The domestic economy 35 Economic trends 38 Agriculture 38 Infrastructure and services 40 Foreign trade and payments 42 Quarterly indicators and trade data List of tables 17 Cambodia: tax revenue, Jan-Jun 18 Cambodia: government growth forecasts, Cambodia: consumer prices 20 Cambodia: average exchange rates, Cambodia: investment projects, Jan-Sep 23 Cambodia: tourism 24 Cambodia: merchandise trade

4 2 36 Laos: exchange rates 36 Laos: consumer prices, Laos: consumer prices, quarterly data 37 Laos: money supply 42 Cambodia: quarterly indicators of economic activity 43 Laos: quarterly indicators of economic activity 43 Cambodia: direction of trade 43 Laos: direction of trade List of figures 9 Cambodia: gross domestic product 9 Cambodia: riel real exchange rate 16 Cambodia: tax revenue 19 Cambodia: components of the CPI basket 20 Cambodia: no. of private investment projects 30 Laos: gross domestic product 30 Laos: kip real exchange rates 37 Laos: consumer prices and exchange rate

5 3 November 19th 1999 Summary 4th quarter 1999 Cambodia Outlook for The political scene Economic policy The domestic economy The unusually stable political environment of the past year is likely to prevail. An agreement will eventually be reached with the UN on the form of the Khmer Rouge tribunal but there is some way to go. The government will continue with its reform agenda but not without opposition, and this will secure loans from international donors. The economy will benefit from the better political climate and an improved regional economic climate. GDP growth of % in is feasible. Private investment, which slumped in 1999, will recover in 2000 as a consequence. Inflation could return to double digits by 2001, but the currency will stay stable or even appreciate slightly. Financing the currentaccount deficit will present few problems during Differences with the UN on aspects of a Khmer Rouge tribunal, specifically whether judges should be predominantly Cambodia- or UN-nominated, have yet to be resolved. The commune (local government) elections, due in March 2000, are likely to be delayed again. The government has been accused of being behind the kidnapping of an opposition MP, and the prime minister s wife of being behind the murder of a popular actress. Corruption in the security forces is endemic. There have been fresh concerns about King Sihanouk s health. Hun Sen has held talks with his Lao and Vietnamese counterparts, prompting fears within ASEAN that an Indochinese caucus is forming. The Khmer Rouge has been dropped from the US terrorist list. The IMF has approved lending worth $81.6m; Japan has resumed yen loans; and the international donor community as a whole has expressed cautious optimism with progress on reforms. However, the government s forestry policy remains under the spotlight. The government has reiterated its commitment to military reforms but defence and security spending is still above target. The value-added tax introduced in January has bolstered the fiscal position, but smuggling is costing the government revenue. There is concern over the population growth rate. The government is aiming for 6% growth in Inflationary pressure remains weak despite a continued rise in the money supply. The riel is depreciating by about 0.4% per month. Foreign reserves remain steady. Private investment seems to have fallen sharply, particularly in textiles and garments. Investment is particularly needed in rice processing, but land disputes are putting off investors. Prospects for the 1999/2000 rice harvest are good. Tourism is showing a strong recovery. Siem Reap airport is being extended, as is Sihanoukville port, and a third airline has been established. The state telecoms utility is to be partially privatised. France is assisting the state electricity company. Microfinance initiatives have received donor support.

6 4 Foreign trade and payments There is evidence of an improvement in the merchandise trade position. Garment exports remain Cambodia s largest export earner, and talks with the US on a possible easing of quota restrictions on garments are continuing. The government has reiterated its commitment to lowering tariff barriers. Laos Outlook for The political scene Economic policy The domestic economy The risk of social unrest has increased but political stability is likely to persist in The government will tighten up fiscal and monetary policy in the forecast period. Reform will move forward only when macroeconomic stability has been achieved. GDP growth of 5-5.5% is realistic in Hyperinflation is likely to ease from 2000 while the kip will achieve greater stability. Exports will benefit from the pick-up in regional demand and preferential access to the US market in There have been reports of unrest in Vientiane, which was quickly suppressed. The National Assembly has passed the 1999/2000 budget. The Lao prime minister has hosted trilateral prime ministerial talks with his counterparts in Vietnam and Cambodia. Two US delegations have paid visits, as the award of normal trade relations is around the corner. Laos has accused Thailand of not fully co-operating on border surveying. Lao refugees in Thailand have been repatriated. HIV/AIDS is a growing problem. The prime minister has called for stronger macroeconomic management and has pledged to tighten fiscal and monetary policy. Japan s government has said no to yen loans and other donors are being cautious with their lending. Preparations are under way for a new Public Investment Programme. Red tape is slowing the foreign investment approval process. Population growth remains rapid. Growth fell to 5.2% in 1998/99, according to the government. Private investment remains flat. After a brief rally, the kip has slumped again. There has been no let-up in either rapid inflation or money supply growth. Foreign reserves are steady. The main rice harvest has largely survived the late monsoon rains. Farmers are finding rural credit expensive. The Visit Laos Year 1999/2000 has been launched. Financial and safety concerns remain at Lao Aviation. Conflicts of interest have arisen over Internet regulation. Private education is moving to fill gaps in public provision. The new Lao-Viet Bank is open for business. Thailand has made new aid commitments for infrastructure development. Foreign trade and payments High prices in Laos are sucking in imports. Thailand has cut import duty on Lao products. A government committee has met to discuss membership of the World Trade Organisation. Tourism earnings have overtaken those from garments and electricity for the first time. Editor: Jennifer Miles Davis All queries: Tel: (44.20) Fax: (44.20) Next report: Our next Country Report will be published in March

7 Cambodia 5 Cambodia Political structure Official name Form of government The executive Head of state National legislature National elections National government Main political organisations and groups Cambodia Constitutional monarchy The cabinet is constitutionally responsible to the National Assembly King Norodom Sihanouk. The king is selected by the Throne Council and holds office for life The 122-seat National Assembly has a term of five years and consists of 120 directly elected members Last National Assembly election held on July 26th 1998; next election due May 2003 The Cambodian People s Party (CPP) won 64 seats in the July 1998 election, followed by the National United Front for an Independent, Neutral, Peaceful and Co-operative Cambodia (FUNCINPEC) with 43 and the Sam Rainsy Party with 15. A coalition government was formed in November 1998, comprising the CPP and FUNCINPEC Cambodian People s Party (CPP); National United Front for an Independent, Neutral, Peaceful and Co-operative Cambodia (FUNCINPEC); Sam Rainsy Party (SRP) Main members of the government Key ministers Central bank governor Prime minister Deputy prime ministers Agriculture, forestry & fisheries Commerce Construction Defence Education Finance & economy Foreign affairs Health Hydroelectricity & meteorology Industry, energy & mines Information Interior Justice Planning Public works & transport Rural development Tourism Chea Chanto (CPP) Hun Sen (CPP) Tol Lah (FUNCINPEC) Sar Kheng (CPP) Chhea Song (CPP) Cham Prasidh CPP) Im Chhun Lim (CPP) Tea Banh (CPP) Prince Sisowath Sirirath (FUNCINPEC) Tol Lah (FUNCINPEC) Keat Chhon (CPP) Hor Nam Hong (CPP) Hong Son Huot (FUNCINPEC) Lim Kean Huor (FUNCINPEC) Suy Sem (CPP) Lou Laysreng (FUNCINPEC) Sar Kheng (CPP) Yu Hokkry (FUNCINPEC) Ouk Vithun (FUNCINPEC) Chhay Than (CPP) Khy Taing Lim (FUNCINPEC) Chhim Seak Leng (FUNCINPEC) Veng Sereyvuth (FUNCINPEC)

8 6 Cambodia Economic structure Latest available figures Economic indicators GDP at current prices (CR bn) 6,131 7,200 8,251 9,100 10,750 a Real GDP growth (%) a Consumer price inflation (av; %) n/a Population (m) Exports fob ($ m) Imports fob ($ m) , , , ,092.2 Current-account balance ($ m) Reserves excl gold ($ m) Total external debt ($ m) 1,915 2,035 2,100 2,129 n/a Debt-service ratio, paid (%) n/a Exchange rate b (av; CR:$) 2, , , , ,744.4 November 15th 1999 CR3,782:$1 Origins of gross domestic product 1998 a % of total Expenditure of gross domestic product 1997 a % of total Agriculture 43.0 Private consumption 86.4 Industry (incl construction) 20.1 Public consumption 8.8 Services 36.9 Gross fixed investment 16.5 Total Exports of goods & services 18.7 Imports of goods & services 30.4 Total Principal exports 1998 c $ m Principal imports 1998 d $ m Garments 390 Cigarettes 149 Logs & sawn timber 178 Petroleum products 139 Rubber 25 Vehicles & motorcycles 53 Fishery products 3 Clothing & cloth 24 Re-exports 396 Construction materials, cement & steel 22 Total incl others 999 Total incl others 1,227 Main destinations of exports 1997 c % of total Main origins of imports 1997 d % of total Vietnam 18.0 Thailand 15.9 Thailand 15.1 Vietnam 8.7 US 9.8 Japan 6.8 Singapore 8.5 Hong Kong 5.4 China 5.3 China 4.6 a Official estimates. b Official rate. c Including re-exports. d Excluding non-retained imports.

9 Cambodia 7 Outlook for Major political shocks are unlikely in the short term Agreement with the UN on a Khmer Rouge tribunal is more likely than not The coalition government consisting of the Cambodian People s Party (CPP) and the National United Front for an Independent, Neutral, Peaceful and Cooperative Cambodia (FUNCINPEC), has now been in power for a year. For Cambodia, this has been a period of unusual stability. This is likely to continue in the short term, but it is harder to be confident about the longer term. The current stability in Cambodia rests on the fact that the CPP has the upper hand. FUNCINPEC and the opposition, the Sam Rainsy Party (SRP), are weak, and civil society groups, while plentiful, are vulnerable to intimidation, notably by the security forces. Furthermore, although FUNCINPEC has agreed to join the government for the time being, its mistrust of the CPP runs deep. These differences are likely to resurface, certainly in the run-up to the next general election, due in May 2003, and quite possibly during the forecast period ( ). One potential flash point is the commune (local government) elections, which are likely to take place in late 2000 or early For FUNCINPEC and the SRP, making inroads at the commune level is important if they are to build up a support base from which eventually to challenge the CPP nationally. Already there have been allegations that the CPP is trying to gerrymander the process. Discussions with the UN on the form of the proposed Khmer Rouge tribunal have dragged on without resolution. The UN says it is only prepared to be involved with a Cambodian-run trial if minimum international judicial standards are met. For the UN, this means that a large number of the judges, and possibly the prosecutor, should be UN-nominated. The Cambodian government wants the exact opposite, that is for the majority of judges and the prosecutor to be nominated by itself. In October Hun Sen indicated that he would be prepared to go along with an initiative suggested by the US, that three out of five judges would be Cambodian but that decisions would be taken by a super majority of at least four out of five judges. The UN has yet to agree to the compromise, and Sok An, the senior minister heading the tribunal team, said in early November that the positions of the Cambodian government and the UN were still far apart. The EIU believes that ultimately Hun Sen will be prepared to accept a tribunal with a substantial UN role. A trial with the UN seal of approval could greatly enhance his international standing. However, there are domestic political imperatives which require that the government is seen to stand up to international pressure on the Khmer Rouge tribunal. In a radio interview in November, Hun Sen stressed that although the UN was very welcome in assisting the trial, it cannot be the master. Furthermore, Hun Sen needs to consider the political implications of putting the likes of Ieng Sary and his supporters on trial, as they effectively control the territory around the old Khmer Rouge stronghold in Pailin, and it may be advantageous to keep them on side. There have often been suggestions that a tribunal may be politically destabilising. Although raking over the Khmer Rouge years is undoubtedly a highly charged process, we believe the risks of instability from a trial, which is in any case inevitable now, are exaggerated.

10 8 Cambodia The government s reforms will encounter opposition but will ensure that international donor assistance is maintained The economy will benefit from an improved regional economic climate Economic growth of % in is feasible Investment will recover from 2000 Since coming to power, the government has outlined an ambitious reformist agenda. Since joining the Association of South-East Asian Nations (ASEAN), Cambodia is now committed to lowering tariff barriers on most imports to below 5% by The prospect of lower tariff barriers has been an important factor behind the introduction of value-added tax (VAT) in January, which has already strengthened the public finances. The government has also announced plans to privatise or partially privatise the rubber industry, the state telecommunications utility and the Foreign Trade Bank. The international donor community has adopted a tone of cautious optimism regarding reform. However, the obstacles should not be underestimated; many, if not all, of the government s reforms will generate conflict with powerful political and business interests. In terms of international lending, the economy will benefit in from the new aid pledges made in February 1999, and more recently from the resumption of Japanese yen loans in September and agreement on a new enhanced structural adjustment facility (ESAF) with the IMF in October. The IMF loan is worth $81.6m and will be disbursed in seven instalments over three years. A large proportion of this money is dependent on progress being made on key reforms. In this respect, we do not foresee the government falling out with international donors during either on good governance issues or over the pace of reform. This does not mean there will not be periodic problems, but they will not affect aid. Differences between the government and the UN over the holding of a Khmer Rouge tribunal will also not affect international aid. Stronger regional economic growth has already begun to translate into increased export demand and this is likely to continue throughout the forecast period. The tourism industry is also recovering strongly and this is likely to continue. Domestic demand is not showing such a strong recovery but is likely to strengthen in the year ahead, particularly if the government forecast of a good 1999/2000 harvest proves correct. Nevertheless, purchasing power will remain weak given low incomes per head. Real GDP growth is likely to be around 3.5-4% in 1999 after 1% growth in In we are forecasting annual GDP growth of %. This compares with a government target of 5.5% for growth in 2000 and agreement with the IMF that it will work towards 6% annual growth for Our forecast is based on three main premises: continued political stability, good harvests and continued international donor lending. With 43% of GDP derived from agriculture, the sector s performance is very important for overall growth. The prospects are good for the 1999/2000 harvest but in general the sector remains vulnerable to bad weather and pests. If the harvest is poor, our forecast of % annual growth in may need to be revised downwards. Despite the improved political situation and economic recovery in the region, domestic and foreign investment has yet to pick up. In 1999 private investment is likely to be some 60% lower than However, investor caution will gradually diminish the longer political stability persists and as the

11 Cambodia 9 regional recovery takes hold. This should lead to faster growth in private investment from There have been some reports that investment in the key textile and garment sector is faltering after the imposition of quota restrictions by the US in January. Whether or not this is true, achieving a higher industrial growth rate in the future will depend on the government being more successful in attracting investment in a broader range of manufacturing subsectors. Inflationary pressure is likely to build up with faster economic growth The riel will be largely stable Cambodia is currently experiencing very little inflation. In 1999 the inflation rate is likely to be around 5%, reflecting still weak demand following the economic downturn of It is also the result of a good harvest in 1998/99, which has put downward pressure on food prices. As economic growth accelerates in , inflation is likely to rise. It could return to double digits by 2001, but much depends on the performance of the agricultural sector. The relative weakness of the National Bank of Cambodia (the central bank) in influencing money supply growth is of particular concern in this respect. During 1999 the Cambodian riel has depreciated at a rate of around 0.4% per month. During we expect the riel to be more stable. As growth picks up and foreign capital inflows increase, the currency may even appreciate. We are not ruling out periodic falls in the event of political uncertainty but these are likely to be followed by a correction. Financing the current account deficit will present few problems Since the last quarter of 1998 there have been signs of a recovery in Cambodia s external sector, notably of exports. During the external sector will continue to recover in tandem with the regional recovery. Textile and garment exports are continuing to expand rapidly and will remain the country s main export earner in the foreseeable future despite market access problems with the US. Ongoing negotiations with the US government point to the possibility that current quota restrictions will be eased. Moreover, the EU has said it will not impose quota restrictions on Cambodian textiles and garments at least until As economic growth accelerates import growth will become more rapid. This points to the likelihood of larger trade and

12 10 Cambodia current-account deficits in This will be offset by continued donor aid, increased foreign investment and improved receipts from tourism, eliminating any balance-of-payment problems. The political scene Differences with the UN on a Khmer Rouge tribunal continue Long-standing differences between the Cambodian government and the UN over the form of the proposed Khmer Rouge tribunal are close to resolution. Although there are a number of issues at stake, the focus of the dispute has centred on whether the majority of the judges along with the prosecutor should be Cambodian- or UN-nominated. The UN has insisted that it will only participate in a trial on Cambodian soil if minimum international judicial standards are met. Because of its doubts about judicial independence in Cambodia, it has argued that this could be achieved only if the majority of judges and the chief prosecutor are UN-nominated. The Cambodian government has taken the opposite position, saying that it must control the trial process as a matter of Cambodian sovereignty. Chronology of the Khmer Rouge tribunal June 1997: Pol Pot is captured by a faction of the Khmer Rouge; discussion of a trial is first raised inside Cambodia and abroad. October 1997: Ieng Sary visits Phnom Penh; he is well received by Hun Sen. April 1998: Pol Pot dies; the UN says there is still overwhelming Cambodian support for a trial. December 1998: Khieu Samphan and Nuon Chea defect from the Khmer Rouge; they are given a warm welcome by Hun Sen in Phnom Penh. February 1999: A team of UN jurists reports to the UN secretary-general, Kofi Annan, on the possibilities for a trial; doubts are expressed about the ability of the Cambodian judiciary to conduct a trial to international standards. March 1999: The last top Khmer Rouge leader, Ta Mok, is arrested; the government pledges to try him in Cambodia. April 1999: Kang Kek Ieu, or Duch, the former director of Tuol Sleng, a Khmer Rouge interrogation centre in Phnom Penh, is found alive. August 1999: Hun Sen moves to delay a trial; agreement on UN involvement in a trial proves elusive; the government wants to appoint the majority of judges and the chief prosecutor. October 1999: Hun Sen expresses support for a US compromise plan.

13 Cambodia 11 On August 29th the assistant UN secretary-general for legal affairs, Ralph Zacklin, visited Phnom Penh where he held talks with Sok An, the senior minister who heads the government s working group on the tribunal. Both sides were positive about the meeting but it did not lead to a breakthrough. The prime minister, Hun Sen, then held talks with the UN secretary-general, Kofi Annan, in New York on September 16th. This meeting also failed to break the deadlock. In a speech to the UN General Assembly, Hun Sen said the government was firmly resolved to do whatever is needed to provide an open trial. However, he repeated the government line that it needed to find a balance between providing justice and fostering national reconciliation. although a US initiative offers a possible breakthrough The possibility of a breakthrough emerged in October following talks between Hun Sen and the US ambassador to Cambodia, Kent Wiedemann. This led to the issuing of a four-point US proposal, the centrepiece of which was that the majority of judges (three out of five) would be Cambodian but that decisions would be taken by a super majority involving more than the number of Cambodian judges (at least four). Hun Sen stated that he was satisfied with the US proposal, saying that agreement on the formation of the tribunal could now be reached. However, the UN secretary-general s special representative for human rights in Cambodia, Thomas Hammarberg, was more cautious. He said that the UN was hopeful that the US intervention offered a way forward, but emphasised that the UN still needed to analyse the whole picture to see whether the planned trial would meet international standards. Mr Hammarberg also said that the US proposal did not address the key issue of who would appoint the prosecutor. With or without the UN, it is still not entirely clear what the scope of the tribunal will be. There are currently only two former Khmer Rouge leaders in custody Ta Mok and Kang Kek Ieu (known as Duch ). In September and October respectively, they were charged with genocide by a military court. This follows a change to the law under which anyone charged with genocide or crimes against humanity can be detained without trial for longer than six months (3rd quarter 1999, page 10). Researchers on the Khmer Rouge period believe there are around ten other Khmer Rouge leaders apart from Ta Mok and Duch who could be indicted. These include the other main surviving leaders, Ieng Sary, Nuon Chea and Khieu Samphan, as well as another top Khmer Rouge general, Keo Pauk. The government and the UN are in agreement that any future tribunal will focus only on events which occurred during , during which up to 1.7m people died. Commune elections face further delays In August the secretary of state for the Ministry of Interior, Prum Sokha, said that he expected that the draft law on commune (local government) elections would be complete some time in the first six months of The polls were originally supposed to take place prior to the 1998 general election but were then put back to November The latest official date suggested was March 2000, but now even this looks unlikely; once the draft law is agreed it still has to be approved by the National Assembly. Drafting of the legislation for the commune elections has proven controversial with both the National United Front for an Independent, Neutral, Peaceful and Co-operative Cambodia

14 12 Cambodia (FUNCINPEC) which is in the government coalition along with the Cambodian People s Party (CPP), and the opposition Sam Rainsy Party (SRP). The CPP has been accused of gerrymandering the process, by putting forward changes in its favour. Prum Sokha has said that the government remains committed to holding the commune elections as part of its public administrative reform programme, including notably its commitment to decentralisation (see Economic policy). It had been thought that only commune chiefs would be elected in the polls. However, recent press reports suggest that commune councils will be elected, whereby the three candidates with the most votes would assume the roles of commune chief and his two deputies. Mr Rainsy accuses the government of kidnapping An opposition SRP member of parliament, Lon Phon, was kidnapped in October. He was later released after just under half of a $300,000 ransom was reportedly paid. Sam Rainsy blamed the government directly, saying that the kidnapping was politically motivated. The government has denied any part in his kidnapping, saying its members were working to arrest those responsible. According to his family, Lon Phon, who represents Battambang province but also has substantial business interests, was seized outside his home in Phnom Penh by four men in military uniforms. His kidnapping follows the arrest of two other SRP activists in Battambang in September in connection with government investigations into a rocket attack on Hun Sen in In general, intimidation of government critics remains widespread. According to human rights groups, it is rare that intimidators are brought to justice. After Lon Phon s kidnapping, the head of the Khmer Institute for Democracy, Lao Mong Hay, said that it was a signal to all of us upholding liberal principles to beware. In September soldiers reportedly surrounded and ransacked the home of a leading FUNCINPEC general, Nhiek Bun Chhay, assaulting his wife and a bodyguard. Although formally reintegrated into the political process, Nhiek Bun Chhay was convicted in absentia of security crimes in 1998 after he continued to hold out against Hun Sen in the north-west of the country after the ousting of Prince Norodom Ranariddh in July Hun Sen s wife is implicated in the death of a popular actress Corruption in the security forces is endemic Following the murder of a Cambodian actress, Piseth Pelika, in July allegations have been made in the French magazine, L Express, that Hun Sen s wife, Bun Rany, ordered her to be killed after discovering she was having an affair with Hun Sen. L Express has produced a variety of evidence to supports its claims, including alleged diaries of the late actress. Hun Sen s party, the CPP, has rejected the allegations, saying they represent an attempt by the SRP to discredit Hun Sen. The CPP has alleged that a relative of the SRP leader works for L Express. The involvement of the security forces in illegal activities has come to light. In October the deputy director of the interior ministry s criminal department, Colonel Kim Pinnarath, said that military personnel have been linked to nearly every case in which the smuggling of Cambodian artefacts abroad has been uncovered. A report produced by the interior ministry on the subject said that military officials involved in the illegal trade were frequently heavily armed. In

15 Cambodia 13 September a representative of a local charity, Krousar Thmey, told a news conference that military forces were involved in the trafficking of children to Thailand. Furthermore, one of the main reasons why it has proved so difficult to clamp down on illegal logging has been the involvement of powerful interests connected to the security forces. King Sihanouk s health is in the spotlight The health of King Norodom Sihanouk was again placed in the spotlight as he celebrated his 77th birthday on 31st October. Although there is no indication that the monarch s health has suddenly deteriorated, he announced on television in September that he would be cutting down his public appearances because of ill heath. King Sihanouk has long been receiving medical treatment in China for a variety of illnesses, including cancer, which is now thought to be in remission. He also mentioned on television that he periodically suffered convulsions. Although King Sihanouk has played a less prominent role in politics in recent years largely because of ill health, he still commands immense respect among Cambodians and can intervene decisively at moments of crisis. As recently as November 1998, for example, the king was credited with forcing the CPP and FUNCINPEC to set aside their differences to form a government. The constitution states that when the king dies his successor is to be chosen by the Throne Council within seven days. There has been much speculation in recent years who will succeed King Sihanouk. Prince Norodom Ranariddh is one possibility, although his long-standing conflict with the CPP could make him too controversial a candidate. An alternative would be Prince Norodom Sihamoni, King Sihanouk s son by his sixth and current wife, Queen Monique. Hun Sen initiates tripartite talks with Laos and Vietnam prompting analysis of the three countries ASEAN role On October 19th-20th Hun Sen visited Laos for three-way talks with his Lao and Vietnamese counterparts, Sisavat Keobounphan and Phan Van Khai. The meeting, said to be an initiative of Hun Sen, has been described as an informal get-together by the three leaders to discuss matters of mutual concern. Formally, the focus of the meeting was on proposals for the establishment of a development triangle, which would involve sharing resources such as energy, transport and labour. Such a scheme could also involve the joint management of rare flora and fauna. Similar schemes have been aired before, notably in connection with the Greater Mekong River Area. However, such schemes tend to move forward slowly, mainly because of continued mistrust between the three countries and bureaucratic weakness. The Lao foreign minister, Somsavat Lengsavat, took trouble to reassure the three countries fellow members in the Association of South-East Asian Nations (ASEAN), saying that the meeting should not be misunderstood and that they neither discussed any matter relating to the upcoming informal ASEAN summit in Manila, nor any general issue about ASEAN. However, the meeting has led to renewed suggestions that subgroups are forming within the expanded ASEAN, perhaps to discourage any initiative that would overturn the grouping s principle of non-interference in members affairs. After the informal meeting, Hun Sen stayed on in Laos until October 23rd for an official visit. This saw the signing of three agreements covering power

16 14 Cambodia generation, land transport and extradition. On the whole relations with Laos are good, despite unresolved differences relating to their shared border. The two sides have agreed to settle these by the end of Vietnam rejects Cambodian border encroachment allegations Illegal Chinese immigrants are arrested The Khmer Rouge is dropped from the US terrorist list The UK development minister visits The same deadline has been agreed between Cambodia and Vietnam, but differences over the two countries shared border surface frequently. Cambodia recently alleged that border violations had occurred in Takeo and Prey Veng provinces, which included the moving of border posts deeper into Cambodia. The Vietnamese government rejected the claims, saying that a joint Vietnam- Cambodia border committee had inspected the sites of the alleged violations in August and found no evidence to support the claims. Settlement of border disputes between the two countries is made difficult by the fact that the issues are not only complex but emotive, particularly as anti-vietnamese sentiment runs high in Cambodia. The government has arrested a large number of illegal Chinese immigrants in recent months. In August a total of 225 suspected illegal immigrants were arrested in Phnom Penh. In October a further 217 were detained after a raid on two houses close to Phnom Penh s international airport. Government officials have been implicated in the smuggling rings; in the October case the two houses were alleged to belong to defence ministry officials. Foreign governments have expressed concern that Cambodia is being used as a transit point for illegal immigrants intent on travelling on to third countries such as the US or in Europe. The government has said that illegal immigrants will be deported. The US State Department has removed the Khmer Rouge from its list of foreign terrorist organisations, which is reviewed every two years. According to the report, released in October, the Khmer Rouge was dropped because it no longer exists as a viable terrorist organisation. On October 10th-12th, the UK minister for international development, George Foulkes, visited Cambodia. Mr Foulkes held talks with a number of senior government officials, including Hun Sen, as well as visiting UK-funded aid projects in Phnom Penh and Siem Reap. He said that the aim of the Department for International Development (DFID) was to channel more resources into health, education and water supplies. This year the DFID is spending $8.27m on development projects in Cambodia. Mr Foulkes also pledged $300,000 for the Cambodian Mine Action Centre (CMAC), as long as the money is used for clearing land mines. He said that any further funding would be conditional on the agency implementing management changes, as CMAC has been embroiled in allegations of corruption and mismanagement over the course of 1999.

17 Cambodia 15 Economic policy The IMF resumes lending In October the IMF approved a new enhanced structural adjustment facility (ESAF) worth $81.6m. According to the IMF first deputy managing director, Stanley Fischer, the main goal of the loan is to protect macroeconomic stability, rebuild the Cambodian economy, and reduce poverty. The money will be disbursed in seven instalments over three years, with the first instalment available immediately. The resumption of lending by the IMF is also expected to unlock fresh lending from the World Bank. Both organisations suspended financial assistance in 1997 following Hun Sen s coup d état. The decision to resume lending follows a series of visits to Cambodia by IMF delegations, most recently in June and August, in which they examined progress on reforms. The IMF has not resumed lending until now because it was dissatisfied with the government s management of logging concessions and the losses it represented for the state budget. Therefore fiscal discipline and the government s logging policy were two of the areas under scrutiny before the new lending was approved. Other areas included the government s plans for public administrative reform, including reducing the size of the armed forces and police and cutting the number of civil servants. Following a visit in August the assistant director of the IMF s Asia and Pacific department, Chanpen Puckahtikom, who has been heading the negotiations for the IMF, said that overall she was encouraged by the government s reform programme. Japan resumes yen loans and international donors appear satisfied with reforms so far but government forestry policy remains under the spotlight In September Japan s Overseas Economic Co-operation Fund (OECF) signed an agreement with the Cambodian government to provide 4.142bn ($39.4m) in overseas development aid so-called yen loans. The resumption of yen loans, which have been suspended since 1968, has been rumoured for some time (2nd quarter 1999, page 16). The money is to be spent mainly on the upgrading of Sihanoukville port (see Infrastructure). The interest on the loan ranges from %, with repayment taking place over a year period. Shortly after the IMF s approval of the new ESAF, multilateral and bilateral aid donors assembled in Phnom Penh for the latest in its quarterly reviews of reforms agreed in February (2nd quarter 1999, pages 15-16). At the review meeting, the finance ministry presented a report to donors in which it described 1999 as the year of a return to economic growth and macroeconomic stability, proclaiming that it had rigorously implemented its policy platform and reform measures. In the wake of the IMF decision to resume lending, international donors did not express any particular concerns regarding the reforms at this stage. The German ambassador to Cambodia, Harald Loeschner, representing the EU, said at the meeting that the EU was encouraged by the reform programme. However, no one is under any illusions regarding the extent of the challenge facing the government and the likelihood of resistance to reform across the board. With regard to the forestry sector, the finance ministry report said that timber royalties have increased this year (see The economy) and that felling had been reduced to sustainable levels. However, there is no up-to-date independent

18 16 Cambodia verification of trends in the sector. Global Witness, a British environmental group, has in the past highlighted the gap between rhetoric and reality in an area where enforcement is notoriously difficult (2nd quarter 1999, page 16). When the IMF announced the resumption of lending, IMF directors formally encouraged the government to ensure the effectiveness of the Forest Crime Monitoring Unit, to overhaul forest concession management and to co-operate fully with the World Bank, other multilateral and bilateral donors, and civil society. The Forest Crime Monitoring Unit is the government department responsible for overseeing that logging policy is implemented. The government reiterates its commitment to civil service reform Defence and security expenditure are still above target VAT continues to boost the tax take In August the senior minister without portfolio, Sok An, reiterated that the government was committed to reducing the size of its civil service, but that it was yet to be decided how extensive the reduction would be. This is indicative of the fact that public administration reform is still at an early stage. There are currently an estimated 164,000 state employees (excluding the military and police). Sok An also said that the government is planning to conduct a census of civil servants and to computerise government payrolls and identification card records. However, he said that the government does not have the necessary finance and hence is seeking foreign aid. The 1999 budget (which runs on a calendar-year basis) is still expected to be in deficit, despite some revenue gains (see below). Public expenditure in the first half of 1999 was 46% of the annual target at CR686bn ($180.5m). Defence and security accounted for 33% of this, down by 4.3% on the same period last year. However, the original target was for a 6.4% reduction in defence and security expenditure in In its report to international donors, the government conceded that defence spending had not fallen as hoped. Despite government pledges to cut the size of the military and police (1st quarter 1999, page 16), thereby reducing expenditure, the reality is that these reforms will be expensive. The government is reporting a more buoyant fiscal position following the introduction of value-added tax (VAT) in January this year. According to the Ministry of Finance and Economy, domestic revenue rose by 58% in the first nine months of the year, which the ministry attributed mainly to the introduction of VAT. Fiscal data for the first half of 1999 show revenue from VAT amounting to CR168bn compared with total tax revenue in the same period of CR499.7bn (see table). When VAT was introduced, the government said it was hoping to raise CR250bn in 1999, and this looks well within reach. Customs revenue also picked up in the first half, reflecting stronger growth in external trade this year. Over January-June customs revenue amounted to CR230bn, up from CR185bn in The government is seeking to lower its dependence on customs as a source of revenue in anticipation of expected tariff cuts required by its membership of ASEAN (see Foreign trade and payments). According to the finance ministry, timber royalties rose by 7% year on year in the first nine months of 1999 as a result of government efforts to curb illegal logging in combination with a shift to a more sustainable forestry policy (see Economic policy).

19 Cambodia 17 Cambodia: tax revenue, Jan-Jun CR bn $ m CR bn $ m Total tax revenue of which: VAT customs revenue Public expenditure of which: security & defence Source: Ministry of Finance and Economy; press reports. Petrol smuggling costs the government up to $10m a year Census results have prompted concerns over population growth In October Hun Sen drew attention to major losses to the public purse caused by the smuggling of petrol and other refined oil products. In a meeting with national and provincial leaders, customs officials and senior military and police personnel, he called for renewed efforts to curb the smuggling. According to the finance and economy minister, Keat Chhon, smuggling of petroleum products across the Thai border cost the government as much as $800,000 per month in revenue last year. A large part of the problem is that import tariffs on petroleum products are high, which encourages smuggling. The National Petroleum Authority recently called for tariffs to be lowered, in part to reduce the smuggling (3rd quarter 1999, page 20). The government is turning its attention to the need to check the country s rapid population growth. Results of the first nationwide census since 1962, conducted in March 1998, were released in September. They indicate that annual population growth is a high 2.5%. Neighbouring Laos is estimated to have a population growth rate of 2.6% per year and Vietnam s is around 1.7%. In September the deputy prime minister, Sar Kheng, said that Cambodia does not yet have an official population policy but that it urgently needed one. He said the government planned to work with the UN Population Fund to draw up a strategy involving wide-ranging measures, including improvement of access to education and healthcare, especially for women. On the basis of the recent census Cambodia s population is currently estimated at 11.4m. The census also revealed that women outnumber men by 414,840 nationwide. This is to be expected in a country which has experienced so many years of conflict. In age groups above 40 years (those who were adults or reached adulthood during the Khmer Rouge period) the ratio of men to women is as low as 67:100.

20 18 Cambodia The domestic economy Economic trends The government is aiming for 6% growth in The IMF lending programme (see Economic policy) is accompanied by a number of macroeconomic targets. For the duration of the programme ( ), the government has agreed to work towards increasing economic growth to 6%, reducing inflation to 4% and keeping the current-account deficit below 13% of GDP. In 1999 the IMF expects real GDP growth of 4% with inflation at 5%. In October the finance ministry issued its own revised growth forecasts for 1999 (see table). Cambodia: government growth forecasts, 1999 (%) Agriculture 3.8 Fisheries 14.8 Manufacturing 3.7 Services 4.2 GDP 4.0 Source: Ministry of Finance. The low growth forecast for manufacturing is attributed largely to the imposition of quota restrictions on garment exporters by the US (see Foreign trade and payments). However, it is likely that other factors are also relevant, notably the slow recovery in private investment following the Asian financial crisis (see below). The government shares the IMF view that real GDP growth will be around 4% in Inflationary pressure remains weak The decline in inflation witnessed in the first half of 1999 is continuing. Complete third quarter inflation figures are not yet available but monthly data from the National Bank of Cambodia (the central bank), supported by the IMF s International Financial Statistics (IFS) show consumer prices rising by just 0.1% month on month in July before falling by 0.5% in August (see table). Lower inflation this year reflects a combination of relatively slack demand following the Asian financial crisis, a good 1998/99 harvest which has held down prices, and greater stability in the riel which has taken the pressure off import prices. Faced with this drop-off in inflationary pressure, the government has repeatedly lowered its inflation target for It was lowered from 9% to 6.5% in September and in October it was suggested that 4-5% was realistic. Average inflation reached 14.7% in 1998.

21 Cambodia 19 Cambodia: consumer prices Weighting (%) Mar Apr May Jun Jul Aug Index (1994=100) % change month on month % change year on year Components (% change year on year) Food, beverages & tobacco Housing & utilities Transport and communications Medical care Clothing & footwear Recreation & education Personal care & effects Home furnishing & operations Sources: National Bank of Cambodia, Economic & Monetary Statistics Review; press reports. M2 continues to grow The riel is depreciating gradually Complete second or third quarter money supply data are not available. However, trends in money supply in April and May 1999 based on the IMF s IFS suggest no substantive changes since the first quarter. M1 growth continued to contract in April and May, falling by 5.8% in May compared with the first quarter of M2 growth, however, continued its rise, climbing 2.9% in May compared with the first quarter. The ongoing weakness in the riel is reflected in a further rise in the ratio of foreign-currency deposits as a percentage of M2. In May the ratio stood at 61.6% compared with 58.2% in the first quarter of This indicates a continuing preference for dollars as a hedge against future falls in the domestic currency. In mid-november the riel was trading at CR3,782:$1, representing a 3.7% depreciation since the beginning of the year. After a large fall in the riel associated with the onset of the Asian financial crisis in 1997, downward pressure on the currency has continued, although the rate of depreciation has slowed. This year s depreciation compares with a 11.4% fall in Greater stability in the riel reflects the improved political situation combined with a more stable regional economic climate. That the riel continues to weaken is in part a feature of the slow pace at which foreign investment is returning