Cambodia Laos

COUNTRY REPORT

Cambodia Laos

November 2001

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom 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 our digital portfolio, where our latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.

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Contents

3 Summary

Cambodia

5 Political structure 6 Economic structure 6 Annual indicators 7 Quarterly indicators 8 Outlook for 2002-03 8 Political outlook 9 Economic policy outlook 9 Economic forecast 10 The political scene 14 Economic policy 16 The domestic economy 16 Economic trends 17 Agriculture 17 Industry 17 Services 18 Foreign trade and payments

Laos

19 Political structure 20 Economic structure 20 Annual indicators 21 Quarterly indicators 22 Outlook for 2002-03 22 Political outlook 22 Economic policy outlook 23 Economic forecast 25 The political scene 27 Economic policy 28 The domestic economy 28 Economic trends 29 Agriculture 30 Industry 30 Services 32 Foreign trade and payments

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List of tables

27 Laos: government finances

List of figures

10 Cambodia: gross domestic product 10 Cambodia: riel real exchange rates 15 Cambodia: demobilisation costs 24 Laos: gross domestic product 24 Laos: kip real exchange rates 29 Laos: inflation and exchange-rate depreciation

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Summary

November 2001

Cambodia

Outlook for 2002-03 Politically related violence is likely to continue through to the general election in 2003. While the democratic process will probably stagger on, a repeat of the constitutional crisis that followed the 1998 election cannot be ruled out. Relations with the international donor community also look likely to enter a more difficult phase owing to differences over reform. Real GDP growth is forecast to reach 2-3% a year in 2001-02, picking up to 4-5% in 2003. Investment is likely to remain flat and growth in tourism is expected to slow. Inflation should remain in single digits in 2002-03, although it may be pushed up by the forecast weakening in the riel. Foreign aid inflows will continue to finance forecast merchandise trade and current-account deficits.

The political scene Legislation is now in place for a Khmer Rouge trial, but it is still not clear when it will take place. Voter registration has taken place for the commune elections. Three new cabinet ministers have been appointed. The police have arrested more people suspected of belonging to the Cambodian Freedom Fighters (CFF). A number of people have been charged in connection with a bomb attack on two hotels in Phnom Penh in July 2001. The government wants to send a large group of Vietnamese migrants back to Vietnam. The prime minister, Hun Sen, has pledged to co-operate with the US in its anti-terror campaign, but critical remarks made previously by the US ambassador to Phnom Penh did not go down well.

Economic policy International aid donors have started to be more vocal in their questioning of the government’s commitment to reform. The World Bank has provided a loan to finance demobilisation. The National Assembly has passed a new land law. The Council for the Development of Cambodia has been reorganised. Changes to the foreign investment law are in the pipeline. The government’s logging policy has continued to cause controversy. South Korea has explored ways to develop economic ties.

The domestic economy Approved foreign investment has fallen. Money supply growth has slowed. The riel has weakened after a long period of stability. The south of Cambodia has been hit by floods while there is drought in the north. The Asian Development Bank (ADB) is drawing up a medium-term strategy for agriculture. Garment factories have been closing. Tourist numbers are under threat. A new bridge across the Mekong is almost complete.

Foreign trade and Trade through Phnom Penh slowed in the first half of 2001. Garment exports payments have slumped. Cambodia’s application to join the World Trade Organisation (WTO) has come under initial scrutiny. The Association of South-East Asian Nations (ASEAN) has lowered tariffs on imports from Cambodia.

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Laos

Outlook for 2002-03 Further anti-government activity, including terrorist attacks, is likely during the forecast period. Some changes may be made to the cabinet after the National Assembly election next year but they are unlikely to involve key portfolios. Despite some promising signs, the pace of reform is unlikely to pick up significantly during 2002-03. Economic growth will slow in 2001-02, before picking up in 2003. Inflation is likely to be in double digits for at least part of the forecast period. Laos will continue to run merchandise trade and current- account deficits but financing them will be relatively straightforward.

The political scene The Lao People’s Revolutionary Party (LPRP) is targeting corruption. The National Assembly is preparing for an election next year. New Lao and Vietnamese leaders have been getting to know each other, with a number of state visits. Relations with Thailand remain troubled. Although it pledged to support the international campaign against terrorism following the attacks on the US on September 11th, Laos has questioned the way in which the US is responding. The Lao foreign minister has visited Russia. An Australian couple jailed in connection with the alleged theft of gemstones has been freed.

Economic policy The National Assembly has approved the 2001/02 budget. The government has indicated that it may be planning a new drive to reform state enterprises. The ADB has announced a major new poverty reduction strategy.

The domestic economy The government has announced an ambitious growth target for 2001/02. Inflation looks likely to have risen in the second and third quarters. Money supply growth has slowed. Depreciation of the kip has speeded up. Floods have struck in central and southern Laos. Opium production has fallen. Foreign investment has slumped according to official figures, although Vietnamese investors remain active. The Nam Theun 2 hydroelectric power project is edging forward. Financing for the third bridge over the Mekong is now in place. A new bridge over the Mekong in Cambodia offers potential benefits to Lao traders. Vietnam is funding road repairs. National Route 13 has been damaged by the recent floods. The ADB is financing the second stage of an urban infrastructure project in Vientiane.

Foreign trade and ASEAN has lowered tariffs on Lao imports. Vietnam has announced similar payments cuts. Imports from Thailand picked up sharply in the first half of 2001. Foreign reserves have fallen.

Editors: Graham Richardson (editor); Danny Richards (consulting editor) Editorial closing date: October 31st 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

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Cambodia

Political structure

Official name Cambodia

Form of government Constitutional monarchy

The executive The cabinet is constitutionally responsible to the National Assembly

Head of state King Norodom Sihanouk. The king is selected by the Throne Council and reigns for life

National legislature The 122-seat National Assembly has a term of five years and consists of 120 directly elected members

National elections The last National Assembly election was held on July 26th 1998; the next election is due in July 2003

National government 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

Main political organisations Cambodian People’s Party (CPP); National United Front for an Independent, Neutral, and groups Peaceful and Co-operative Cambodia (FUNCINPEC); Sam Rainsy Party (SRP)

Main members of the Prime minister Hun Sen (CPP) government Deputy prime ministers Tol Lah (FUNCINPEC) Sar Kheng (CPP)

Key ministers Agriculture, forestry & fisheries Chan Sarun (CPP) Commerce Cham Prasidh CPP) Construction Im Chhun Lim (CPP) Defence Tea Banh (CPP) Prince Sisowath Sirirath (FUNCINPEC) Education Tol Lah (FUNCINPEC) Finance & economy Keat Chhon (CPP) Foreign affairs Hor Nam Hong (CPP) Health Hong Son Huot (FUNCINPEC) Hydroelectricity & meteorology Lim Kean Huor (FUNCINPEC) Industry, energy & mines Suy Sem (CPP) Information Lou Laysreng (FUNCINPEC) Interior Sar Kheng (CPP) Yu Hokkry (FUNCINPEC) Justice Neav Sithong (FUNCINPEC) Planning Chhay Than (CPP) Post & communications So Khun (CPP) Public works & transport Khy Taing Lim (FUNCINPEC) Rural development Ly Thuch (FUNCINPEC) Tourism Veng Sereyvuth (FUNCINPEC)

Central bank governor Chea Chanto (CPP)

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Economic structure

Annual indicators

1996 1997 1998 1999 2000 GDP at current prices (CR bn) 8,251 9,149 10,531 11,470 12,406a GDP (US$ bn) 3.1 3.1 2.8 3.0 3.2a Real GDP growth (%) 7.0 3.7 1.8 5.0 5.0b Consumer price inflation (av; %) 10.1 3.2 14.8 4.0 –0.8 Population (m) 9.9 10.2 11.4 12.8 13.1 Merchandise exports fob (US$ m)d 643.6 736.0 705.4 1,002.1 1,049.0c Merchandise imports fob (US$ m)d 1,071.8 1,064.0 1,096.8 1,211.6 1,428.0c Current-account balance (US$ m) –184.9 –209.9 –223.9 –66.0 –387.0 c Reserves excl gold (year-end; US$ m) 265.78 298.53 324.28 393.19 501.68 Exchange rate (av; CR:US$) 2,624.1 2,946.3 3,744.4 3,807.8 3,840.8

October 29th 2001 CR3,835:US$1

Origins of gross domestic product 1998 % of total Expenditure of gross domestic product 1997 % of total Agriculture 43.0 Private consumption 86.4 Services 36.9 Public consumption 8.8 Industry (incl construction) 20.1 Gross fixed investment 16.5 Total 100.0 Exports of goods & services 18.7 Imports of goods & services –30.4 Total 100.0

Principal exports 1999e US$ m Principal imports 1999ef US$ m Garments 536 Petroleum products 153 Logs & sawn timber 105 Cigarettes 119 Rubber 30 Vehicles & motorcycles 63 Fishery products 4 Clothing & cloth 52 Re-exports 238 Construction materials, cement & steel 37 Total incl others 933 Total incl others 1,227

Main destinations of exports 1999 % of total Main origins of imports 1999 % of total Vietnam 29.6 Thailand 15.7 US 17.8 Hong Kong 15.0 Singapore 13.7 Taiwan 12.0 UK 4.0 Singapore 8.0 Germany 3.0 Vietnam 6.9 a IMF estimate. b EIU estimate. c National Bank of Cambodia estimate. d Balance-of-payments basis. e Customs basis. f Including non-retained imports.

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Quarterly indicators

1999 2000 2001 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Prices Consumer prices (1995=100) 136.8 136.2 133.8 132.7 134.8 136.8 132.7 n/a % change, year on year 1.9 0.0 0.1 –2.3 –1.5 0.4 –0.8 n/a Financial indicators Exchange rate CR:US$ (av) 3,844 3,815 3,798 3,811 3,868 3,885 3,910 3,917 CR:US$ (end-period) 3,895 3,770 3,810 3,855 3,870 3,905 3,910 3,915 Interest rates (av; %) Deposit 7.1 7.3 7.3 7.3 6.6 6.2 5.6 5.1 Lending 17.5 17.3 17.3 17.2 17.4 17.4 17.3 17.0 M1 (end-period; CR bn) 501.3 532.0 549.7 545.6 540.2 539.6 547.6 544.3 % change, year on year 5.6 –2.1 4.2 9.2 7.7 1.4 –0.4 –0.2 M2 (end-period; CR bn) 1,405.7 1,442.5 1,733.1 1,831.4 1,791.8 1,830.5 1,899.1 1,985.5 % change, year on year 30.1 17.3 31.8 39.1 27.5 26.9 9.6 8.4 Sectoral trends Rice production (annual totals; ‘000 tonnes) ( 4,041 ) ( 3,762a ) ( n / a ) Rubber exports, net (‘000 tonnes) 10.5 13.5 7.0 4.0 11.0 13.0 8.0 4.5 Foreign trade & payments (US$ m) Goods exports fob 292.2 196.9 272.0 314.7 381.0 359.5 n/a n/a Goods imports fob –312.6 –281.3 –383.9 –394.9 –380.1 –366.2 n/a n/a Merchandise trade balance fob-fob –20.3 –84.4 –111.9 –80.2 0.9 –6.8 n/a n/a Services balance –18.4 –15.7 –16.2 –18.3 –21.0 –18.2 n/a n/a Income balance –5.9 –8.2 –13.4 –6.8 –17.8 –14.0 n/a n/a Net transfer payments 58.8 58.4 71.7 73.1 79.6 80.0 n/a n/a Current-account balance 14.0 –49.9 –69.8 –32.3 41.7 41.1 n/a n/a Reserves excl gold (end-period) 363.1 393.2 480.5 490.9 500.8 501.7 530.7 543.1 a Estimate.

Sources: FAO; International Rubber Study Group, Rubber Statistical Bulletin; IMF, International Financial Statistics.

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Outlook for 2002-03

Political outlook

Domestic politics In our last report the Economist Intelligence Unit forecast that the recent political stability would not last the approach of the commune (local government) elections in February 2002 and the general election, which must be held by July 2003. Recent events support this view.

In July and August 2001 voter registration for the commune elections was accompanied by an upsurge in political activity including violence and intimidation directed at election candidates. Three candidates were killed (see The political scene). The Cambodian election monitoring group, the Committee for Free and Fair Elections (COMFREL), has reported a range of lesser offences, including verbal threats, the tearing down of political party signboards and the prohibition of certain political activities. Alleging malpractice in voter registration, the Sam Rainsy Party (SRP) has called for the process to be extended. However, this has been rejected by the government. Further violence is likely in the run-up to the commune elections in 2002. Moreover, it will then be just seventeen months until the general election, suggesting that the political temperature is unlikely to cool much in the interim.

What FUNCINPEC (the National United Front for an Independent, Neutral, Peaceful and Co-operative Cambodia) does over the forecast period will be crucial. It can be taken for granted that the opposition SRP will be at loggerheads with the CPP (the Cambodian People’s Party), but it will remain relatively weak. Any threats by the SRP to boycott the commune or general elections are unlikely to be taken seriously either inside or outside the country. However, if FUNCINPEC were to adopt such a position, it would be entirely different. Such a step would almost certainly provoke a constitutional crisis similar to that which occurred after the 1998 election. At the moment, such an outcome looks unlikely. However, FUNCINPEC is being targeted by anti- democratic forces, possibly in the CPP-dominated security forces, and much will depend on whether such attacks continue. Assuming that FUNCINPEC contests the general election, its best hope will be to try to win enough seats to remain in coalition with the CPP, since it is unlikely to be able to win the election outright. By contrast, the CPP could form a government on its own following the general election in 2003.

The legislation for holding a Khmer Rouge trial is now in place. The UN still has to decide whether it wants to be involved in the trial. However, a small trial, involving no more than a dozen prominent Khmer Rouge, is likely to take place during the forecast period. The threat to political stability posed by such a trial will be negligible. However, further terrorist attacks by groups such as the Cambodian Freedom Fighters cannot be ruled out over the next two years, compounding what looks likely to be a rather unstable political environment.

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Economic policy outlook

Policy trends Over the forecast period the government will concentrate its efforts on reforms in areas such as trade, banking, the private sector and public administration. It will also seek to press ahead with demobilisation and the implementation of a sustainable forestry policy. However, the reform process is unlikely to be smooth. This reflects a combination of factors including weak state capacity, corruption and the existence of powerful political-business interests whose activities are likely to be disrupted by a concerted move to liberalise the economy. Slow progress on reform could eventually strain relations with donors, possibly jeopardising the IMF’s poverty reduction and growth facility. Since our last report sections of the international donor community have become more outspoken regarding the gap between the government’s pro-reform rhetoric and reality.

Economic forecast

Economic growth GDP growth is forecast to slow from an estimated 5% in 2000 to 2-3% in 2001 and 2002, as regional and global economic growth slows. Growth is likely to pick up to 4-5% in 2003 as the world economy picks up: we are forecasting real world GDP growth in the world economy of 2.2% in 2001 and 2.9% in 2002, rising to 4.2% in 2003. Our forecast for the Cambodian economy allows for a degree of disruption to political stability in the run-up to next year’s commune elections and the general election in 2003. However, if the impact of political events on the economy is more severe than we are currently anticipating, our growth forecast may need to be downgraded further. A loss or partial severing of aid by international donors would also lead to slower growth than we are presently forecasting.

Non-oil commodity prices are expected to recover in 2002-03, which should benefit Cambodia’s agricultural sector, leading to stronger rural demand. The uncertain political situation, however, suggests that a recovery in foreign investment is unlikely over the forecast period. This, in turn, points to rather subdued prospects for industrial growth. The outlook for the garment sector, in particular, is uncertain in the light of labour unrest and increased competition. Nevertheless, there will be some new investment in industry in 2002-03, notably from China. Public investment in infrastructure should also encourage growth in construction. Tourism growth is likely to be slow in the forecast period, in part owing to the general uncertainty caused by the terrorist attacks on the US on September 11th. The uncertain domestic political outlook in Cambodia also does not bode well for tourism in 2002-03.

Inflation Consumer price inflation is currently low. Inflation could pick up later in the forecast period, depending on the strength of the domestic recovery. A weakening of the riel (as forecast) would also push up import prices, in turn leading to higher inflation. However, we do not anticipate that inflation will enter double digits in either 2002 or 2003.

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Exchange rates After nearly three years of relative stability against the US dollar, the riel showed some signs of weakness in August-September, before recovering again in October. A depreciation of the currency in 2002-03 cannot be ruled out, but the high “dollarisation” of the economy, particularly in urban areas, may make this less necessary.

External sector Cambodia’s main exports are garments, logs and sawn timber, rubber and fishery products. There is also a sizeable re-export trade. Over the forecast period export growth is likely to strengthen in tandem with the recovery in the global economy. Export earnings from some commodities (for example, rubber) should benefit from higher average world commodity prices in 2002-03. But earnings from garment exports are likely to record slower growth in 2002-03. The textiles and garments sector, which has seen rapid growth since the early 1990s, has lately seen a decline in investment amid uncertainties over market access, together with evidence of rising costs and labour disputes. China’s forthcoming entry into the World Trade Organisation (WTO), and Vietnam’s anticipated receipt of most favoured nation (MFN) trading status, following ratification of its bilateral trade accord with the US, will increase competitive pressures on textile and garments exporters based in Cambodia.

The anticipated weakening of oil prices during the forecast period will take the pressure off imports by reducing the cost of refined petroleum products, which represent an important component of overall imports. Nevertheless, the import bill will outstrip export earnings throughout the forecast period, with the deficit particularly rising in 2003. Slower tourism growth will result in a weakening of the services balance. However, financing the current-account deficit will not be a problem unless aid inflows are suspended.

The political scene

Legislation is in place for a On August 7th 2001 the Constitutional Court approved the draft law on Khmer Rouge trial setting up a tribunal to try members of the former Khmer Rouge regime. The

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Court had earlier rejected the draft law because of references to the death penalty, use which is forbidden by the Constitution. This had forced the government to begin the legislative process all over again (August 2001, page 11). Following approval by the Constitutional Court, the draft legislation was signed into law by King Norodom Sihanouk on August 10th.

The UN now has to decide what degree of involvement it wants in the trial. The UN and the government earlier signed a memorandum of understanding setting out the conditions under which the UN would be prepared to support the trial, but it now needs to establish whether the law as passed is compatible with this. The law was sent to the UN’s chief legal counsel, Hans Corell, for scrutiny in late August. However, a UN decision has yet to be made.

The government’s official position is that now that the law has been passed, there is nothing to discuss. Nevertheless, there may be scope for clarification regarding aspects of the proposed trial. Speaking just after the Constitutional Court approved the law, a cabinet minister, Sok Ahn, said that there were still some “small problems” between the government and the UN but that he believed the UN would “support the government’s position”. Even if the UN comes on board it is still unclear when the trial will take place or who will face trial. The prime minister, Hun Sen, said in August that no more than ten people should be tried, arguing that prosecution of lower-level cadres would threaten political stability. In addition, the outcome of any trial is by no means a foregone conclusion. Proving prosecution cases beyond reasonable doubt could be difficult.

Voters register for the On July 21st voter registration began for the commune (local government) commune elections elections scheduled for February 3rd 2002. By August 16th, when registration closed, just over 73% of those eligible to vote had registered, according to the National Election Commission (NEC).

This is considerably less than the 90% or so that voted in the general election. The registration process has not been without controversy. The opposition Sam Rainsy Party (SRP) has called for an extension, saying that some people had been unable to register because of irregularities. The NEC has denied this but has said that the process was not as smooth as it might have been owing to a shortage of funds. The NEC secretary-general, Im Suodsey, said on August 6th that the government had given it only US$1.7m of a promised US$18m.

Election-related violence Since late June there has been an upsurge in election-related violence. In the escalates period from late June to August 24th two opposition SRP commune election candidates and one FUNCINPEC candidate were shot dead while another FUNCINPEC candidate was seriously wounded. Moreover, a grenade was thrown into the FUNCINPEC headquarters in Phnom Penh on August 9th, injuring two people. The Cambodian election monitoring group, the Committee for Free and Fair Elections (COMFREL), has also reported a range of lesser offences, including verbal threats, the tearing down of political party signboards and the prohibition of certain political activities. On August 2nd the UN special representative on human rights in Cambodia, Peter Leuprecht,

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expressed grave concern at the increase in violence and intimidation directed at commune election candidates.

Three new ministers are In August the government made three changes to the cabinet. The Cambodian named People’s Party (CPP) politician, Chan Sarun, was appointed as minister of agriculture, forestry and fisheries, replacing Chhea Song. Before his appointment, Chan Sarun was an advisor to Hun Sen. Also replaced was the justice minister, Ouk Vithun, recently sacked by Hun Sen for unspecified irregularities. Ouk Vithun is from FUNCINPEC, as is his replacement, Neav Sithong. Until his appointment, Sithong was the prosecutor-general at the Supreme Court. Human-rights groups have criticised Sithong’s appointment, citing an incident in Kompong Speu province in 1998 when his bodyguards shot dead a youth who had broken into his home, reportedly to steal chickens. Sithong was governor of the province at the time. According to human-rights groups, the incident was never properly investigated although the new minister denies this. The other portfolio effected by the reshuffle was rural development, where the new minister is the FUNCINPEC politician, Ly Thuch. He replaces Chhim Seak Leng, also from FUNCINPEC.

Homeless farmers camp in Following flooding in August (see The domestic economy: agriculture), large Phnom Penh numbers of homeless people have flocked to Phnom Penh. Many have set up camp on a piece of land near the royal palace in the hope of receiving government handouts. In late August the police sought to empty the camp. This led to clashes in which water cannons and electric shock batons were used to disperse the squatters.

Police arrest more CFF In September police arrested 12 people in Phnom Penh and Battambang suspects alleged to be planning an attack on the capital. According to the government, the arrested men belong to the anti-government group, the Cambodian Freedom Fighters (CFF), which launched an attack on the Ministry of Defence in November 2000. The suspects have been charged with terrorism and membership of an illegal group and are expected to face trial. Back in June, the government sentenced 30 people involved in the attack last year to prison terms ranging from three years to life.

On September 10th the leader of the CFF, Chhun Yasith, who lives in the US, was quoted by the Reuters newswire as saying that the recently arrested men did not belong to his group. However, he said a CFF attack on the government was being planned by Cambodian-Americans living in Thailand.

CFF activities could damage In September the head of Cambodia’s police, Hok Lundy, said that he would relations with Thailand ask his counterpart in Thailand to arrest CFF members operating in Thailand. The activities of the CFF threaten to become a thorn in Cambodian-Thai relations. Hok Lundy’s comments follow calls from the Cambodian government in July for an agreement to be drawn up with Thailand under which the two sides would co-operate in cracking down on the activities of anti-government groups, drug traffickers and illegal immigrants. The Thai government has responded that it is willing to co-operate but that no agreement is necessary. Human-rights groups and opposition politicians have

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expressed concern that the putative crackdown on the CFF is being used as a way of clamping down on legitimate opposition to the CPP.

The US government has also come under pressure to arrest Chhun Yasith and other suspected CPP members living in the US. The US ambassador to Phnom Penh, Kent Wiedemann, said in August that the US government could not arrest the men simply because the Cambodian government asked them to, and that, as far as he knew, they had not broken any laws in the US.

Hotel bombers are charged Two men have been charged with planting bombs that exploded in two hotels in Phnom Penh in July (August 2001, page 13). The two men charged are ex-soldiers. Three other men, including a former army colonel, have been arrested for alleged involvement in the attack but they have yet to be charged. A clear motive for the attack has yet to emerge, although the court prosecutor, Ngeth Sarath, said that they were designed to provoke fear and disorder.

Cambodia wants to send Large number of Vietnamese citizens, many from ethnic minorities, are Vietnamese migrants back continuing to cross into north-eastern Cambodia. The influx began in February 2001 following a Vietnamese government crackdown on unrest in two of its Central Highland provinces (August 2001, page 13). In late July the Cambodian government said controversially that it intended to repatriate around 300 people who did not qualify for refugee status. Although the UN High Commission for Refugees (UNHCR) accepts that many of the migrants will need to be repatriated, it has called on the government to put the repatriation on hold until the UNHCR receives permission from Vietnam to monitor the repatriation. However, gaining such permission is not proving straightforward.

Whatever stance the Cambodian government adopts on the Vietnamese migrants is bound to be controversial. If it allows the migrants to stay in Cambodia or go to a third country, it will face criticism from Vietnam. However, if it returns them to Vietnam it will invoke criticism from human- rights groups.

In July a joint operation involving the Cambodian and Australian police intercepted a fishing boat off Sihanoukville holding around 240 suspected illegal immigrants reportedly en route to Australia. The immigrants were mainly from Afghanistan and Pakistan and had previously arrived in Cambodia by air. The Cambodian and Australian authorities have arrested a man who they say is the head of the smuggling ring.

Hun Sen pledges In October 2001 the US embassy in Phnom Penh submitted a list of 27 co-operation with the US companies to the National Bank of Cambodia (the central bank) suspected of financing terrorism. Hun Sen has said that the government will co-operate fully with any US requests.

Before then, relations between Cambodia and the US had been less amicable. In August the government sent a letter to all foreign embassies calling on all ambassadors to “respect the principles concerning the relations between states”. This followed strong criticism of the government at an anti- corruption conference in Phnom Penh by the US ambassador, Kent

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Wiedemann, who reportedly accused the government of making excuses to delay reforms (see Economic policy). The government was clearly angered by Mr Wiedemann’s comments. In its letter to the diplomatic corps, it accused “certain ambassadors” of displaying “arrogant attitudes” and behaving like the opposition.

The UN warns of increased The UN has expressed concern that drug trafficking through Cambodia may drug trafficking increase given recent disruption to the drug trade in Afghanistan following the closure of its borders. According to Sandro Calvani, the head of the UN Drug Control and Crime Prevention office in Asia, who visited Phnom Penh in September, drug traffickers have been “market testing” new routes through Cambodia. The UN estimates that Cambodia is one of the largest marijuana producers in the world.

Economic policy

Aid donors question the In August 2001 there were reports in the media suggesting that the commitment to reform international donor community was becoming impatient at the gulf between the government’s pro-reform rhetoric and reality. In particular, this followed a report sponsored by the Asian Development Bank (ADB) produced by a local think-tank, the Cambodian Development Resource Institute (CDRI), which suggested that greater attention should be paid to reform implementation as a condition for future aid. At an anti-corruption conference in Phnom Penh in August, the US ambassador, Kent Wiedemann, accused officials of “making excuses” in terms of explaining why reforms were behind schedule, provoking strong criticism from the government (see The political scene).

Greater aid conditionality would have a devastating impact on the government’s plans. While it is clear that, behind the scenes, donors are concerned at the lack of reform in some areas—the continued disrespect for the rule of law and corruption have particularly been remarked on—they are by no means ready to cut off or even reduce aid. In the run-up to the annual Consultative Group meeting, held in Tokyo in June 2001, many of the public comments by multilateral institution representatives about the government had been extremely favourable. Moreover, aid pledges were higher than in previous years (August 2001, pages 16-17).

The National Assembly In July the National Assembly passed a new land law. Parts of the law are passes a new land law designed to combat the problem of land-grabbing, whereby powerful individuals take advantage of the lack of clarity over land ownership to seize land from the poor. The new law allows for the prosecution of land grabbers who now can be fined up to CR30m (US$7,800) or jailed for up to five years. In June the UN special representative on Cambodia, Peter Leuprecht, drew attention to the problem of land-grabbing, saying that it risked creating an underclass and threatening stability. In particular, he highlighted the involvement of government officials and the military in the practice. The new land law also includes provisions for foreigners to lease land up to a maximum

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 Cambodia 15

of 10,000 ha for 99 years. The government hopes that this will make Cambodia more attractive to foreign investors.

Donors aid the In August the government signed an agreement with the World Bank for a demobilisation process US$18.4m loan to go towards the costs of demobilisation. In 2001 and 2002 demobilisation costs are expected to total US$42m, of which all but US$7m will come from foreign donors. The plan is for 15,000 soldiers to be discharged in both 2001 and 2002, reducing the armed forces to around 100,000.

In July the government announced changes to the structure of the Council for the Development of Cambodia (CDC), which is responsible inter alia for foreign investment. The main change is to bring the commerce minister, Cham Prasidh, into the CDC structure as deputy chairman with responsibility for private investment, export processing zones and streamlining the one-stop shop investment mechanism. The finance minister, Keat Chhon, who was first deputy chairman at the CDC before the changes, will continue in his position. However, he will now focus on attracting and co-ordinating foreign aid money.

Foreign investment law The government is expected to submit changes to the foreign investment law changes are expected in the near future to the National Assembly for approval. This follows advice from the World Bank/International Finance Corporation-affiliated Foreign Investment Advisory Service (FIAS). However, it is unlikely that the FIAS recommendations will be accepted in full. The FIAS advice included far- reaching changes to the way in which foreign investors received incentives, which would have led to a substantially downgraded role for the CDC. Speaking to the British Chamber of Commerce in Thailand in September, the UK ambassador to Cambodia, Stephen Bridges, suggested that investors should await the outcome of the local government elections in February 2002 before investing.

Logging policy remains In July the government gave its approval to legislation aimed at clamping controversial down on illegal logging. It is now expected to go before the National Assembly. The draft law allows for heavy fines and prison terms of up to ten years for those found guilty of illegal logging. However, there is still a certain ambiguity about the government’s stance on logging. While the government talks tough, non-governmental organisations (NGOs), such as the UK-based environmental group, Global Witness, and the World Wildlife Fund argue that it is not consistent (August 2001, page 17). In September the government began negotiations with logging companies for new contracts. While this in itself is not incompatible with a sustainable forestry policy, NGOs have expressed concern that the logging companies have not provided details of how they will meet sustainable logging criteria.

South Korea considers In September the South Korean finance and economy deputy minister, Kim extending economic relations Jin-pyo, visited Cambodia. South Korea is not a large trading partner or investor in Cambodia. However, both countries are clearly considering ways of expanding links. During Kim’s visit, an agreement was signed whereby Seoul will provide aid worth US$34m. The money is to be spent on repairs to National Route 3, the establishment of a human resources training centre and

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developing information technology. The two governments are also keen to sign an agreement on the avoidance of double taxation and are considering improving air links between the two countries, possibly with direct flights between Phnom Penh and Seoul.

The domestic economy

Economic trends

The economic outlook is In August 2001 the finance and economy minister, Keat Chhon, said that the worse economy was likely to grow by 6.1% in 2001 compared with 5.4% last year. (The Economist Intelligence Unit forecasts growth in 2001 of only 2-3%.) Explaining the growth forecast, Keat Chhon highlighted strong performances in construction and tourism. However, the performance of the garments sector has been less impressive this year (see Foreign trade and payments).

The government’s forecast was made before the terrorist attacks on the US on September 11th, which have already had an impact on the tourism sector (see Services), and before the full extent of the global economic downturn was appreciated. It was also made before the agricultural sector was hit by flooding, although the impact on output may be quite limited (see Agriculture). Speaking in late August, an economist affiliated to the Cambodian Development Resource Institute, Sok Hak, had already suggested that economic growth could be as low as 3-4% in 2001 owing to the global downturn and the impact of the flooding.

Approved foreign Foreign investment approvals fell by 36% year on year in the first half of 2001, investment slumps with just US$56m of investment capital approved in 20 projects, according to government data. Commenting on the figures, the deputy secretary-general of the Council for the Development of Cambodia, Suon Sitthy, blamed the decline on the slowdown in the world economy. However, investors are also wary because of Cambodia’s longstanding reputation for political instability. Although approvals are down, the prime minister, Hun Sen, said in August that actual foreign investment inflows into Cambodia were forecast to reach US$150m per year. This contrasts with figures provided to the IMF showing actual inflows of US$126m in 2000.

Money supply growth slows Growth in narrow money (M1) fell by 1.8% year on year in the second quarter of 2001 compared with a decline of 0.38% in the first quarter. Growth in the supply of broad money (M2) slowed, rising by 5.6% in the second quarter compared with 9.6% in the previous quarter. Foreign-currency deposits accounted for 75.9% of M2, up from 68.6% in the first quarter. There have been no new inflation data since our last report, when inflation was running at historically low levels (August 2001, page 18).

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Agriculture

Floods hit the south and In August the agricultural sector was hit by flooding after the Mekong river droughts the north burst its banks. Initial estimates are that around 300,000 ha of rice paddy, or around 15% of the total area put over to rice cultivation, have been damaged or destroyed. An estimated 700,000 people have been made homeless by the flooding and 37 people are known to have died. Meanwhile, northern and north-western parts of the country are facing drought, which also threatens the rice crop.

The ADB plans a strategy In September the Asian Development Bank approved a US$710,000 project for agriculture that will draw up a medium-term strategy for the agricultural sector. The six- month project, which is due to begin in January 2002, is expected to focus on issues such as crop diversification, developing domestic and foreign markets, and increasing the participation of women in agriculture. Developing rice exports is also likely to be on the agenda (see Foreign trade and payments).

Industry

Garment factories close The number of garment factories has fallen to 188 from 200 in 2000, according to the commerce minister, Cham Prasidh. This partly reflects lower demand from the US, although the garment sector has also experienced labour unrest and strikes. Speaking at the end of June, Cham Prasidh blamed the opposition- aligned Free Trade Union Workers of Cambodia (FTUWC) for inciting unrest in the sector and scaring away investors. The president of the FTUWC, Chea Vichea, has denied this, arguing that investors have been put off by Cambodia’s controversial record on labour rights.

Services

The tourism boom is under In the first half of 2001 tourist arrivals increased by 33.3% year on year to threat 297,583. Siem Reap airport reported a 91% increase in arrivals during the period. (Siem Reap is the gateway to the famous Angkor Wat temple complex.) However, recent growth in tourism is unlikely to be sustained. The first-half statistics pre-date an attack on two hotels in downtown Phnom Penh in July (August 2001, page 13) as well as the terrorist attacks on the US on September 11th. On September 28th a spokesman for the Cambodian Association of Travel Agents (CATA) said that around 4,000 visitors from the US and Europe had cancelled trips booked with CATA members. US citizens have recently constituted the largest group of visitors to Cambodia, followed by those from France and China. The recent upsurge in violence ahead of the local elections scheduled for February 2002 may also deter tourists.

A new bridge across the Cambodia’s first bridge across the Mekong river is expected to open in Kompong Mekong is set to open Cham province shortly. Construction of the 1.36-km bridge began in February 1999. It is being financed with Japanese aid at an estimated cost of US$56m. The opening of the bridge will make it easier for farmers and traders in the north-east

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to access markets in Phnom Penh and Thailand. Until now, most have traded with Vietnam. The bridge may also benefit traders in Laos.

Foreign trade and payments

Trade through Phnom The volume of trade passing through Phnom Penh port fell by 4.2% year on Penh port falls year in the first half of 2001. This reflected lower demand for rubber and saw timber from China. Exports in the first half weighed in at 23,624 tonnes, with over half of this comprised of rubber and timber. The volume of imports passing through Phnom Penh in the same period was 216,356 tonnes, comprising mainly oil and diesel fuel. Phnom Penh is Cambodia’s second largest port after Sihanoukville.

Garment exports slump Earnings from garment exports fell sharply in the first half of 2001. According to the commerce minister, Cham Prasidh, earnings were US$122m lower in the first six months of 2001 than in the year-earlier period. Although the minister did not provide full statistics, the extent of the fall is clearly large. In 2000 export earnings from garments were US$965m, up from US$650m in 1999, based on Ministry of Commerce figures. Cham Prasidh attributed lower export earnings in the sector to the economic slowdown in the US, along with disruption caused by labour unrest. Around 75% of Cambodia’s garment exports go to the US.

Rice exports are set to rise Cambodia currently exports around 200,000 tonnes of rice annually according to official statistics. The government wants to increase this over the next few years and, as noted above, a new Asian Development Bank (ADB) project will look at medium-term strategies for developing agriculture. In July 2001 a Cambodian company, Malimex, signed an agreement with a Malaysian firm, Padiberas Nasional, to export rice. The agreement is for an initial five-year period.

Cambodia’s WTO In August an international team, comprising IMF, World Bank and UN application is scrutinised representatives, visited Cambodia to begin the task of assessing the government’s application to join the World Trade Organisation (WTO). The visit follows a request from the commerce minister, Cham Prasidh, at the Consultative Group meeting in Tokyo in June for technical assistance regarding its application. The team has yet to report on its findings. However, it is expected to be a few years before Cambodia becomes a WTO member.

ASEAN lowers tariffs on In September the Association of South-East Asian Nations (ASEAN) agreed to Cambodian imports remove or lower tariffs on selected imports from Vietnam, Myanmar, Laos and Cambodia. Tariffs on these products are now all between 0% and 5%.

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Laos

Political structure

Official name Lao People’s Democratic Republic

Form of state One-party rule

The executive The Council of Ministers is the highest executive body; the vice-chairmen of the council (deputy prime ministers) oversee the work of ministers; all members of the council are appointed by the chairman of the Council of Ministers (the prime minister)

Head of state The president, General Khamtay Siphandone; the post of vice-president, created in April 1996, is now held by Choummali Sayasone

National legislature A unicameral National Assembly; membership was expanded from 85 to 99 for the 1997 national election

National elections December 1997; the next election is due in December 2002

National government The Lao People’s Revolutionary Party (LPRP) dominates the government and bureaucracy

Main political organisations Lao Front for National Reconstruction (LFNR), an umbrella organisation whose main component is the LPRP

Main members of Council Prime minister Bounyang Vorachit of Ministers Deputy prime ministers Somsavat Lengsavat Thongloun Sisoulith

Key ministers Agriculture & forestry Siene Sapangthong Commerce Phoumy Thipphavone Communications, transport, posts & construction Bouathong Vonglokham Defence Douangchay Pichit Education Phimmasone Leuangkhamma Finance Soukhanh Maharath Foreign affairs Somsavat Lengsavat Public health Ponemek Daraloy Industry & handicrafts Soulivong Daravong Information & culture Phandouangchit Vongsa Interior Asang Laoly Justice Kham Ouane Boupha Labour & social welfare Somphanh Phengkhammy

Central bank governor Vacant

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 20 Laos

Economic structure

Annual indicators

1996 1997 1998 1999 2000 GDP at current prices (K bn) 1,726 2,200 4,240 10,303 13,482 GDP (US$ bn) 1.9 1.7 1.3 1.5 1.7 Real GDP growth (%) 6.9 6.9 3.9 7.3 5.7 Consumer price inflation (av; %) 13.0 27.5 91.0 128.5 25.1 Population (m) 4.9 5.0 5.2 5.3 n/a Merchandise exports fob (US$ m)a 322.8 318.3 342.1 338.2 n/a Merchandise imports fob (US$ m)a 643.7 601.3 506.8 527.7 n/a Current-account balance (US$ m) –346.8 –305.5 –150.1 –121.1 n/a Reserves excl gold (year-end; US$ m) 165.00 112.18 116.82 101.19 138.97 Exchange rate (av; K:$) 921.02 1,259.98 3,298.33 7,102.03 7,887.64

October 29th 2001 K9,560:US$1

Origins of gross domestic product 1999/2000 % of total Agriculture & forestry 51.3 Services 26.1 Industry (incl construction) 22.3 GDP incl adjustments 100.0

Principal exports 1998b US$ m Principal imports cif 1998b US$ m Timber & wood products 115.4 Construction & electrical equipment 81.1 Garments 70.2 Materials for garment industry 66.8 Electricity 60.7 Fuel 61.8 Coffee 48.0 Machinery & equipment 44.4 Motorcycles 17.8 Vehicles 39.4 Total incl others 336.7 Total incl others 552.8

Main destinations of exports 1997 % of total Main origins of imports 1997 % of total Vietnam 42.7 Thailandc 52.0 Thailandc 22.1 Singapore 3.9 France 6.3 Japan 1.6 Belgium 5.6 Hong Kong 1.5 Germany 5.1 China 0.8 a Balance-of-payments basis. b Customs basis. c Data on trade with Thailand may be overstated as they include the transit of goods to and from third countries.

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 Laos 21

Quarterly indicators

1999 2000 2001 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Prices Consumer prices (1995=100) 730.9 723.7 747.4 781.3 808.8 808.1 816.0 839.6 % change, year on year 132.5 99.9 61.4 34.9 10.7 11.7 9.2 7.5 Financial indicators Exchange rate K:US$ (av) 8,909 7,741 7,550 7,664 7,981 8,355 8,534 8,521 K:US$ (end-period) 6,550 7,600 7,560 7,815 8,085 8,218 8,390 8,673 Interest rates (%) Bank (end-period) 35.00 35.00 35.33 35.33 35.33 35.00 35.00 35.00 Deposit (av) 12.00 12.00 12.00 12.00 12.00 12.00 8.00 6.00 Lending (av) 32.00 32.00 32.00 32.00 32.00 32.00 28.67 22.00 Treasury bill (av) 30.00 30.00 30.00 30.00 30.00 29.75 29.62 20.22 M1 (end-period; K bn) 191.70 218.98 231.97 252.93 266.90 344.35 380.00 339.59 % change, year on year 69.4 29.6 12.9 38.0 39.2 57.3 63.8 34.3 M2 (end-period; K bn) 1,410.35 1,544.50 1,758.57 2,047.57 2,110.90 2,255.60 2,303.00 2,413.01 % change, year on year 95.4 78.4 57.8 7.9 49.7 46.0 31.0 17.8 Sectoral trends Rice production (annual totals; ‘000 tonnes) ( 2,103 ) ( 2,155a ) ( n / a ) Foreign trade (US$ m) Exports fob 78.5 81.4 92.1 122.9 91.3 n/a n/a n/a Imports cif –148.3 –148.2 –71.9 –93.0 –165.9 n/a n/a n/a Trade balance –69.8 –66.8 20.2 29.9 –74.6 n/a n/a n/a Foreign payments (US$ m) Merchandise trade balance –56.9 –20.4 n/a n/a n/a n/a n/a n/a Services balance 23.2 16.9 n/a n/a n/a n/a n/a n/a Income balance –9.6 –9.5 n/a n/a n/a n/a n/a n/a Net transfer payments 9.7 8.7 n/a n/a n/a n/a n/a n/a Current-account balance –33.6 –4.3 n/a n/a n/a n/a n/a n/a Reserves excl gold (end-period) 112.28 101.19 99.37 112.44 137.79 138.97 126.12 140.16 a Estimate.

Sources: FAO; IMF, International Financial Statistics.

Outlook for 2002-03

Political outlook

Domestic politics Since the Seventh Congress of the ruling Lao People’s Revolutionary Party (LPRP), held in March 2001, Laos has been relatively quiet politically, in so far as there have been no further bomb attacks. Neither has there been any repeat of the anti-government demonstrations that occurred in October 1999 nor the crossborder raid launched by anti-government forces operating from Thailand in July 2000. Against this backdrop, the ruling party felt confident enough to declare the country “politically stable” following a meeting of the ruling party’s Central Committee in September 2001.

Although the underlying threats to stability have not disappeared, the Economist Intelligence Unit is not expecting any serious challenges to the party’s hold on power during 2002-03. Further bomb attacks and small-scale demonstrations cannot be ruled out, but the party should be able to handle these. While the security forces are not as strong as they were in the early 1990s, their surveillance networks are still extensive. Moreover, opposition to the party within Laos is still relatively weak, whereas opponents of the regime outside the country, notably among the Laotian diaspora, have yet to strike much of a chord with the population in Laos. However, links between foreign and domestic populations need to be watched carefully.

With the Seventh Congress having taken place, the main political event on the horizon is the National Assembly (the legislature) election, which is scheduled to take place before December 2002. A date has yet to be announced, although preparations are under way. As in past years, the party will continue to regulate who can stand in the election, thereby limiting the extent to which the National Assembly can emerge as an alternative locus of power to the ruling party. This task is carried out by the party umbrella organisation, the Lao Front for National Reconstruction, which vets election candidates. The National Assembly election may be followed by a cabinet reshuffle. However, this is unlikely to include the prime minister, the interior minister or the defence minister, the political standing of whom was affirmed at the recent Seventh Congress.

Economic policy outlook

Policy trends There have recently been some promising signs regarding the government’s willingness to address long-standing weaknesses. It is now moving ahead with the creation of the necessary legal framework to establish industrial zones as a way of attracting more foreign investment, with the draft legislation recently being debated in the National Assembly. Also promising is the government’s re-establishment of lending relations with the IMF and its ongoing relationship with the Asian Development Bank (ADB) as shown by the ADB’s announcement in September of a new poverty alleviation strategy. Nevertheless, the pace of reform is unlikely to quicken significantly during the forecast period. This

reflects continued ideological opposition to surrendering too much control to the “market”—or to foreigners—the existence of powerful political-business interests and weak administrative capacity. These factors represent powerful constraints both in terms of policy formulation and implementation. Moreover, they are unlikely to be dislodged quickly notwithstanding greater Laotian engagement in the international economy.

Economic forecast

Economic growth We forecast that GDP growth will slow in 2001-02, but will pick up to 4.5-5.5% in 2003. This reflects the anticipated slowdown in global and regional economic growth in 2001, then a recovery in the global economy later on in 2002 and into 2003. In August and September the agricultural sector was hit by floods. However, the impact on the rice harvest looks likely to be limited, creating a solid base for the economy in 2002-03.

Industrial growth is also likely to slow in 2001-02, before picking up in 2003 as domestic and external demand picks up. A key engine of growth over the forecast period is also likely to be construction, with progress on a number of key bridge and power generation projects. On the negative side, foreign investment inflows are likely to remain at low levels in 2001-02, although they may pick up in 2003. The lack of access to the US market in the absence of normal trade relations (NTR) will put a constraint on garment sector growth. However, there may be some progress on removing this barrier later in the forecast period; this is likely to be helped by the fact that the US now has an ambassador in Vientiane.

Services growth is likely to be more subdued than industrial growth during 2002-03 owing to continued problems in the banking sector and uncertainties surrounding tourism following recent political instability. Nevertheless, services growth will strengthen towards the end of the forecast period, particularly as demand for trade-related services picks up in line with faster export growth.

Inflation Based on data to the end of April 2001 (the most recent available), inflation is continuing to fall. However, more recent anecdotal evidence points to a pick- up in prices in the second and third quarters, a rise that we expect to be confirmed once more up-to-date data become available. We are forecasting an annual average inflation rate of 12% in 2002, picking up possibly to 15% in 2003. This reflects the economy’s vulnerability to agricultural shocks, the government’s historically poor record on fiscal and macroeconomic management and the tendency of the currency to weaken, in turn fuelling import prices.

Exchange rates In the first three quarters of 2001 the kip fell by 15.3% against the US dollar. Further kip weakness is likely during the forecast period, against a backdrop of a continued deficit on the trade account. However, downward pressure on the currency is likely to ease later in the forecast period as foreign investment picks up and export growth strengthens. We do not anticipate a repeat of the large

falls in the currency witnessed in 1997-99 in the aftermath of the Asian financial crisis.

External sector There have been few new trade data published in Laos since our last report. However, trade data from Thailand point to a sharp increase in Thai exports to Laos in the first half of 2001, not matched by an equivalent rise in Laotian exports in the other direction. If correct, this points to a rising overall merchandise trade deficit. (This also appears to be suggested by the recent more rapid depreciation of the kip.) Over the forecast period we expect Laos to continue to run a trade deficit. This is unlikely to narrow significantly later in the forecast period as export growth picks up, since a recovery in exports will be accompanied by rising imports. Financing the current-account deficit will not be a problem as long as foreign aid donors remain engaged.

The main products exported by Laos are garments, timber and wood products, hydroelectric power and coffee. The pick-up in the world economy and the recovery in agricultural prices anticipated in 2002-03 are likely to result in stronger overall export growth. However, the picture is unlikely to be uniform across the export sector. Coffee prices are forecast to fall in 2002-03, which will depress earnings from this source. Garment exports are likely to pick up later in the forecast period as EU demand rises, and more so if Laos receives NTR access to the US market. Electricity exports are likely to recover over the forecast period although Thailand has indicated that it will be purchasing less power than originally suggested prior to the 1997-98 Asian crisis.

Import growth is likely to accelerate in 2002-03, slowly at first but more quickly later in the forecast period. The main imports are construction and electrical equipment, materials for the garment industry, motorcycle parts and petroleum products. The most buoyant area is likely to be construction imports needed for a number of large infrastructure projects. The cost of petroleum products imports is likely to ease, given our expectation of lower oil prices in the forecast period.

The political scene

The ruling party targets On September 10th-19th 2001 the ruling Lao People’s Revolutionary Party corruption (LPRP) Central Committee met for its third plenum under the chairmanship of the party general secretary and president, General Khamtay Siphandone. The meeting included a review of developments since the Seventh Party Congress, which was held in March (May 2001, pages 23-26 and 28-29). Despite the recent upsurge in anti-government activity, the party said in the statement issued after the plenum that it regarded the country as politically stable. However, it said that more attention needs to be paid to ensuring that party members behaved responsibly and did not abuse their position. Corruption, often involving errant party members, is a major problem in Laos—as it is in other Communist states—and one that the party fears could threaten its hold on power if unchecked. The other tasks identified by the Central Committee were largely economic in nature and not particularly new. These included eliminating slash-and-burn agriculture and clamping down on opium production (see The domestic economy: agriculture). More significantly, the government has recently indicated that it wishes to tackle outstanding problems in the state enterprise sector (see Economic policy).

The National Assembly On September 24th-October 11th the eighth ordinary session of the fourth prepares for the 2002 election National Assembly was held in Vientiane. The main business included the passage of the 2001/02 budget (see Economic policy) and discussion of draft legislation on setting up special economic zones (the government is keen to establish one in Savannakhet province on the border with Thailand—see May 2001, pages 29-30).

The National Assembly’s five-year term of office is due to expire next year, at which point an election of new delegates will occur. A date has yet to be announced, although the election is not officially due before December 2002. In preparation for this, the National Assembly agreed a number of amendments to election legislation. A Politburo (political bureau, the ruling party’s executive) resolution on the forthcoming election was also disseminated.

The new leaders of Laos On July 9th-12th the Vietnamese party general secretary, Nong Duc Manh, and Vietnam meet visited Laos. This was followed on July 18th-22nd by a visit of the Laotian prime minister, Bounyang Vorachit, to Vietnam. The talks, predictably, were billed as strengthening the special relationship between the two countries; according to Vietnam’s party newspaper, Nhan Dan, they covered “complicated developments” in the international and regional environment, including extreme nationalism, radical religious sentiment and the negative impact of globalisation. The two leaders also talked about terrorism (although their discussions pre-dated the terrorist attacks on the US on September 11th). Both countries have seen an increase in terrorist activity over the last two years or so.

New agreements are signed Also discussed during Mr Manh’s visit to Laos was the implementation of a with Vietnam major new co-operation pact that Laos and Vietnam signed earlier in 2001. The

so-called framework agreement, which covers 2001-05, aims to extend co-operation in a wide range of areas, including infrastructure, energy, tourism and trade. As part of this agreement, Vietnam has pledged D90bn (US$6.2m) in non-refundable aid. During Mr Bounyang’s visit an agreement on transport co-operation was also signed. On August 26th-September 2nd Vietnam’s party secretary in Ho Chi Minh City, Nguyen Minh Triet, visited Laos, signing an agreement covering a range of industrial and services projects involving Vietnamese businesses.

Relations with Thailand Following his visit to Vietnam, Mr Bounyang also visited Cambodia, Thailand remain troubled and Myanmar. In Thailand he signed three agreements covering co-operation in drug control, investment and transport. Relations between Laos and Thailand have been difficult lately. Progress continues to be slow in connection with the Laotian government’s call for the extradition of 28 anti-government rebels arrested last year in Thailand, where they fled after carrying out a crossborder raid into Laos (August 2001, page 28). The Thai government is insisting that due legal process take its course although the Laotian government has said that the process could be speeded up. Talks on the disputed border between Laos and Thailand are also continuing but with little sign of concrete progress. In August 2001 it was announced that the two sides would try to settle the land border in 2002 and the maritime border by 2003. However, the Laotian foreign minister, Somsavat Lengsavat, indicated in a statement issued at the time that much remained to be done.

Indicative of current sensitivities in Lao-Thai relations, a Thai film, Thao Suranaree, has been widely condemned in the Laotian media and by some government officials. The film depicts an episode in nineteenth-century Thai history when an attack from Laos was allegedly thwarted by getting the Laotian king’s soldiers drunk. Many in Laos regard the film as offensive.

Laos worries about US Following the terrorist attacks on New York and Washington on September intentions 11th, General Khamtay sent a letter of sympathy to the US president, George W Bush. The letter also pledged the government’s co-operation with the international community in the struggle against terrorism. In October the deputy foreign minister, Phongsavath Boupha, said that the government understood the rationale of the US and UK attacks on Afghanistan but said that any action should comply with UN resolutions and that attacks should be targeted at terrorist bases and should avoid civilian casualties. The new US ambassador, Douglas Hartwick, has now taken up residence in Vientiane.

The Russian debt issue On August 26th-28th the Laotian foreign minister, Somsavat Lengsavat, visited remains unresolved Russia. During his visit he said that there were “no disagreements or barriers” to developing co-operation. The focus of the visit was mainly on developing commercial ties. Russia has expressed interest in investing in energy and transport. Trade links have declined since the early 1990s, although they have picked up recently. In 2000 two-way trade was worth US$14m, mainly comprised of Russian exports to Laos. During Mr Lengsavat’s visit an intergovernmental agreement on scientific and technical co-operation was signed. Moscow also raised the possibility of military co-operation.

The main unresolved issue in relations is the lack of an agreement on the Laotian debt to Russia. Over 70% of long-term debt is owed to former Eastern bloc creditors, of which Russia is the largest. Some is being repaid in barter trade but a more comprehensive agreement has eluded the two sides because of disagreement over the rouble-dollar exchange rate according to which the present value of the debt will be estimated. There was no mention of the debt issue in the statements that followed Mr Lengsavat’s visit. After visiting Russia, Mr Lengsavat also visited Belarus.

An Australian couple is In October an Australian couple serving a seven-year prison sentence in Laos freed were released into the custody of the Australian embassy pending their expected departure from Laos. The couple were imprisoned last June in connection with the alleged theft of gem stones (August 2001, page 30). Their release follows intensive negotiations by the Australian government. The Supreme Court of Laos had earlier rejected the couple’s appeal.

Economic policy

The 2001/02 budget is In October the National Assembly (the legislature) approved the fiscal-year approved (October-September) 2001/02 budget. Preliminary data show that revenue will reach K3,979bn, up by 78.1% year on year. Expenditure is forecast to rise by 27.1% to K4,546bn. The budget deficit is therefore forecast to stand at K567bn in 2001/02, equivalent to 7.9% of GDP, representing a slight fall compared with the year-earlier period. However, given the present economic climate, this deficit target could well be overshot.

Laos: government finances (K bn; budget targets) 2000/01 2001/02 % change Revenue 2,234 3,979 78.1 Expenditure 3,578 4,546 27.1 Balance –1,344 –567 n/a Source: official reports.

Areas targeted for increased expenditure increases include education and public-sector wages. However, other government statements on the budget also suggest that infrastructure and agriculture are to receive large shares of total expenditure. It is likely that the 2000/01 budget deficit will be larger than originally forecast. Complete data have yet to be released but the government has said that in the first nine months of the fiscal year (October-June 2001) revenue was below target whereas expenditure overran. This pattern may well continue into 2001/02.

The government refocuses The head of the State Planning Committee, Thongloun Sisoulith, said in July on enterprise reform that the government could not continue subsidising loss-making state enterprises. He was speaking at a government-organised workshop that brought together enterprise directors and officials to discuss strategies for

enterprise reform. Mr Thongloun also said that state assets were being wasted through poor management, adding that, owing to out of date technology and high levels of indebtedness, many companies were unable to compete in the market economy. He also criticised state enterprises for not repaying bank loans and avoiding taxes. Although there is more work to be done, the government has taken significant steps to reform state enterprises since the late 1980s. Since the early 1990s the number of enterprises under state management has been reduced from 800 to 29 in 2000. However, it is far from clear that companies brought out of state ownership are necessarily operating more effectively since this depends on other factors, such as making access to bank loans dependent on enterprise performance rather than political connections and breaking down monopolies and other barriers to competition.

The ADB announces a new In July the Asian Development Bank (ADB) opened a new resident mission in poverty reduction strategy Laos. This was followed in September by the announcement of a new ADB- backed poverty reduction strategy. Its goals are ambitious. By 2010 the proportion of the population living under poverty is to be reduced to 10% from the current level of 39%. Other targets to be achieved by 2005 include providing 60% of rural villages with piped water and electricity, and building all-weather roads to link 80% of rural districts to provincial towns. In addition, infant mortality is to be reduced to 82 per 1,000 live births while adult literacy is to be raised to 80%. The ADB’s efforts, which will include a wide range of carefully targeted projects, will be largely concentrated in northern provinces and Savannakhet, since this is where the need is judged to be greatest. The programme is expected to be backed by US$45-55m annually with a further US$5m each year for technical assistance. The ADB is also financing an urban infrastructure project in Vientiane.

The domestic economy

Economic trends

The government sets an In conjunction with the 2001/02 budget (see Economic policy) the ambitious growth target government has released forecasts for the economy in 2001/02. GDP growth is officially forecast to be 6-6.5%, much higher than is forecast by the Economist Intelligence Unit.

The government is forecasting agricultural growth in 2001/02 of 4-4.5%, industrial growth of 9-10% and services growth of 7-8%. Against the backdrop of the current downturn in the global economy, these sectoral forecasts look optimistic. In 2000/01 the performance of the economy has been generally unimpressive. Weak external demand, low levels of foreign investment and low agricultural prices have suppressed growth in nearly all sectors of the economy. Industrial growth was little more than 9% in 2000/01, which, for an economy at the level of development of Laos, is low. The agricultural sector performed reasonably well despite flooding (May 2001, page 32). However, low world agricultural prices have reduced rural incomes.

Inflation may be rising According to the latest available data from the IMF, in the first quarter of 2001 prices rose by 9.2% year on year compared with 11.7% in the fourth quarter of 2000; this was followed by a 9.4% year-on-year rise in prices in April. According to this data series, inflation has been on a downward trend since the first quarter of 1999, when it peaked at 156.4% year on year.

Nevertheless, the most recent inflation data pre-date the fall in the value of the kip in the second and third quarters, which has pushed up the prices of imported goods, notably foodstuffs, clothing and chemical fertilisers. Rice prices have also climbed following the flooding in August and September. In September rice in Vientiane was selling for up to K4,000 (42 US cents) per kg compared with K2,500 per kg a year ago. Because a large amount of the rice on sale in Vientiane’s markets at this time of year is from Thailand—much of it smuggled—rice prices have also been affected by the kip’s depreciation. In an attempt to stem price rises, the government has increased its anti-smuggling activities and clamped down on traders who are taking advantage of the inflationary climate to force up prices. It has also intensified its efforts to prevent currency speculation.

Money supply growth slows According to the IMF, growth in narrow money slowed in the first quarter of 2001 to 48.4% year on year, compared with 57.3% in the fourth quarter of 2000. Broad money (M2) growth also slowed in the first quarter to 28.3% compared with 46% in the previous quarter. Just over 85% of M2 was comprised of foreign-currency deposits in the first quarter. This represents little change compared with the fourth quarter of 2000.

Kip depreciation In the third quarter of 2001 the kip fell by 8.5% against the US dollar to accelerates K9,520:US$1 on September 27th, according to the Banque pour le Commerce Extérieur Lao. This followed a 2.6% fall in the second quarter. In October the currency stabilised, trading at around K9,560:US$1 on October 29th. Against the Thai baht, the kip also depreciated in the third quarter, falling by 10.6% to K216.75:Bt1 on September 27th. Some strengthening was evident over the following few weeks, with an exchange rate of K214.7:Bt1 on October 29th. Faster currency depreciation probably reflects increased capital outflows, notably through Thailand (see Foreign trade and payments).

Agriculture

Floods hit central and In August and September central and southern provinces were hit by flooding. southern Laos While this has caused hardship to farmers, the overall impact on rice production may be small. According to the Ministry of Agriculture and Forestry, only 14.5% of the total area given over to wet-season rice cultivation nationwide was damaged. The worst affected provinces include Khammouane, Savannakhet and Champassak. Following the floods, the government has been issuing farmers with fresh seed for replanting once the flood waters subside. The UN Food and Agriculture Organisation (FAO) has provided US$400,000 towards the cost of assistance. In 2000 total rice production, including both the rain-fed and the dry-season harvest, was 2.23m tonnes. The rain-fed crop is usually harvested in November.

Opium production falls The opium cultivation area was 17,200 ha in the 2000/01 season, according to the Lao National Commission for Drug Control and Supervision. This represents a 9.5% fall year on year. Opium output, however, fell by 30% year on year to 117.5m tonnes. Although reducing opium production is proving difficult, the cultivated area has now fallen back to levels last recorded in the early 1990s.

Industry

Foreign investment slumps In the first eight months of 2001 the government licensed 31 foreign investment projects with combined capitalisation of just US$6.2m. Since the Asian financial crisis of 1997-98 foreign investment in Laos has slumped—in 1997 a total of 66 projects were licensed, capitalised at US$113.7m.

The reasons behind the fall are complex, with the Asian financial crisis and the current global downturn providing only part of the explanation. Other factors include high levels of red tape, poor infrastructure, hidden costs, and the small size and poverty of the Laotian market. One approach that the government is adopting to try to tackle some of the problems is to build industrial zones, offering special incentives for investors. The first is due to be constructed in Savannakhet province on the border with Thailand. In October the National Assembly discussed draft legislation on industrial zones.

Official foreign investment figures do not entirely capture the whole picture. Vietnamese investment, for instance, is arguably quite buoyant at the moment. Although there are no up-to-date data, five projects were included in a bilateral agreement signed in September during the visit to Laos of the Ho Chi Minh City secretary of Vietnam’s ruling party, Nguyen Minh Triet. The projects were in plastics, animal feed, health care, entertainment and tourism.

Services

Nam Theun 2 edges In September the consortium behind the Nam Theun 2 hydroelectric power forward project, which includes the Laotian government, the French energy group, Electricité de France, the Thai state energy company, Electricity Generating (EGCOMP), and the Thai construction and trading group, Italian-Thai Development, signed an agreement setting out how the company will operate once the project is up and running. This is an important step forward for a project that has been plagued by difficulties from the outset (August 2001, page 33). The signing of the agreement coincides with fresh confirmation from the Thai government that the Electricity Generating Authority of Thailand (EGAT) is now willing to sign a power purchasing agreement (PPA) with Laos. Signing of the PPA has been delayed amid disagreements over the purchasing price as well a dispute over who should pay for the construction of the electricity substations needed to transport the power to Thailand. In August an agreement was reached whereby provinces in northern Laos would buy electricity from China.

Financing for the third The Thai government has accepted the terms of a ¥4bn (US$38m) loan from Mekong bridge is in place the Japan Bank for International Co-operation to finance construction of a third bridge over the Mekong river, linking Savannakhet province in Laos to eastern Thailand. Agreement of the loan terms removes one potential obstacle that threatened to delay the project (August 2001, pages 33-34). Construction work is due to begin in 2002 with completion in 2005. The Laotian government is also contributing towards the cost of the bridge.

A new bridge in Cambodia Completion of a new bridge over the Mekong river in Cambodia’s Kompong offers benefits to Laos Cham province is expected to offer Laotian traders, currently heavily dependent on exporting via Thailand, an alternative route. Laos and Cambodia have already signed a bilateral trade agreement and free seaport agreement that will allow Laotian traders to ship goods along Cambodia’s National Route 7, crossing the Mekong river at the new bridge in Kompong Cham. Once over the Mekong, goods will be able to continue by road to Cambodia’s deepwater port of Sihanoukville on the Gulf of Thailand. Whether this will become a popular route for Laotian exporters remains to be seen. It may prove too expensive, particularly if crossing the border into Cambodia and using Sihanoukville port involves a large array of hidden fees.

Vietnam funds road repairs The visit of the prime minister, Bounyang Vorachit, to Vietnam in July concluded with the signing of a transport co-operation agreement. Central to this was a decision by the Vietnamese government to provide a US$38m loan for improvements to Highway 18 in Laos and allow Laos access to the sea at Vung Anh port in Vietnam’s Ha Tinh province. The agreement follows the Land Transport Co-operation Agreement signed in 1996 and added to in 2001. According to this document, which details proposed co-operation in the transport sector until 2010, the aim is eventually to upgrade all highways leading to the ten border crossing between Laos and Vietnam and improve access to the Vietnamese coast.

National Route 13 suffers As well as damaging the rice crop, the recent flooding has damaged roads in flood damage central and southern parts of Laos. Roads affected include sections of National Route 13 linking Vientiane and Luang Prabang as well as roads in Luang Prabang, Oudomesay and Phong Saly provinces. The government has said that it will provide K4.5bn (US$470,000) towards the cost of repairing the roads.

The ADB lends for urban The Asian Development Bank (ADB) approved a US$25m loan in August for an infrastructure urban infrastructure project in Vientiane. This is the ADB’s second urban infrastructure project in the capital and will focus on areas not covered by the previous one, notably secondary roads and drains. The Laotian government and the French government’s Agence Française de Développement are also contributing to the project, which is due for completion in 2006.

Foreign trade and payments

ASEAN and Vietnam lower In September the Association of South-East Asian Nations (ASEAN) agreed to tariffs on Lao imports remove or lower tariffs on selected imports from Vietnam, Myanmar, Cambodia and Laos. In the case of Laos, the list included 24 goods, including peanuts, camphor seeds, plywood, caster oil seed and leather products. Tariffs on these products are all now between 0% and 5%.

In October Vietnam announced that tariffs on 110 products from Laos would be halved. Affected products include both agricultural and forestry products and industrial goods. According to Vietnam’s Ministry of Trade, if goods are covered by ASEAN tariff reductions, whichever scheme offers the lowest tariff will apply. Vietnam’s lowering of trade tariffs follows the signing of a multifaceted co-operation agreement with Laos last year (see The political scene).

Imports from Thailand According to Thai figures, two-way trade between Thailand and Laos is worth soar around Bt20bn (US$450m) annually. Thailand is the largest trade partner of Laos, although trade has been more erratic since the Asian financial crisis of 1997-98. Earlier in 2001 trade was relatively buoyant. In January-May 2001 two-way trade was valued at Bt10.3bn, up by 49.6% year on year. There is, however, a much larger illegal trade, mainly comprised of Thai exports to Laos. This is causing problems for the balance of payments, which in turn is undermining the exchange rate and fuelling inflation. Nevertheless, government measures to stem the unauthorised trade have, by and large, proven ineffective. Even based on official figures, Thailand exports more to Laos than it imports from Laos.