Cambodia Laos

COUNTRY REPORT

Cambodia Laos

2nd quarter 1997

The Economist Intelligence Unit 15 Regent Street, 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 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.

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Contents

3 Summary

Cambodia 5 Political structure 6 Economic structure 7 Outlook for 1997-98 10 Review 10 The political scene 17 Economic policy 18 The economy 20 Energy 20 Transport and infrastructure 21 Tourism 21 Finance 22 Foreign trade and payments

Laos 24 Political structure 25 Economic structure 26 Outlook for 1997-98 28 Review 28 The political scene 30 Economic policy and the economy 31 Infrastructure 33 Energy 33 Foreign trade and payments

36 Quarterly indicators and trade data

List of tables 22 Cambodia: money supply 22 Cambodia: current account 30 Laos: consumer prices 36 Cambodia: quarterly indicators of economic activity

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36 Laos: quarterly indicators of economic activity 37 Cambodia and Laos: French trade 37 Laos: foreign trade

List of figures 9 Cambodia: gross domestic product 9 Cambodia: riel real exchange rate 21 Cambodia: reserves excluding gold 22 Cambodia: current account 27 Laos: gross domestic product 27 Laos: kip real exchange rate 33 Laos: reserves excluding gold 33 Laos: current account

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April 14, 1997 Summary

2nd quarter 1997

Cambodia Outlook for 1997-98: The political situation will remain fragile in the run-up to next year’s elections. Election preparations are moving forward slowly, but a delay remains possible. The IMF may resume lending. Growth will be below the government’s target in 1997. Politically motivated violence is likely to increase, causing foreign investment to slow. Inflation is likely to be in double digits this year.

The political scene: FUNCINPEC has formed an alliance with opposition parties including the KNP, prompting the CPP to establish new alliances of its own. Important obstacles to holding the commune and national elections have been overcome, although the commune elections have been postponed until early 1998. A draft law determining which parties can stand is promised soon. Sixteen KNP supporters have been killed in a grenade attack. A FUNCINPEC negotiating team has been kidnapped by the Khmer Rouge. The hardliners have been talking to the government. Military units have clashed again, and four officials in Battambang have been recalled as a result. King Sihanouk has spoken about abdication. The nascent labour movement is becoming politicised. ASEAN membership is likely this year as long as the constitutional process remains intact. President Suharto has voiced support for Cambodia’s bid to join ASEAN in 1997. Hun Sen has asked Thailand to respect the log export ban. Talks with Vietnam have not solved the border dispute. The government has received a dressing-down from Beijing for trying to establish air links with Taiwan without permission.

Economic policy and the economy: The IMF may resume lending, although doubts remain about the authorities’ ability to clamp down on illegal logging. The foreign investment law is to be revised. Preparations for membership of the ASEAN Free Trade Area are continuing. Growth and inflation figures for 1996 were better than expected. Anecdotal evidence suggests that foreign investment may be slowing. The Ariston project has again encountered difficulties. An investment accord has been signed with Seoul.

Sectoral trends: Cambodia hopes to buy electricity from Thailand. The opening of air links with Taiwan has been delayed. Hun Sen has criticised the national airline’s monopoly. Attacks on shipping are increasing. Visitor arrivals rose by 19% in 1996. The riel has continued its fall. The money-supply growth rate has slowed.

Foreign trade and payments: The latest IMF trade figures suggest that exports collapsed in the first half of 1996 and the current-account deficit widened. The government hopes to open more border posts with Thailand, giving a boost to legal trade. The ADB has announced a new lending package.

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Laos Outlook for 1997-98: GDP growth will pick up in 1997, but the government’s growth and inflation targets look optimistic. Foreign investment inflows will remain steady, although infrastructure constraints will continue to hamper trade and investment. The government’s reforms will come under scrutiny when the IMF’s Structural Adjustment Programme comes up for renewal later this year.

Review: Preparations for ASEAN membership have been continuing. Indonesia’s president and Singapore’s prime minister have voiced support for Laos’s membership. Another deadline for repatriating Hmong refugees in camps in Thailand has been missed. Border disputes have continued to trouble relations with Thailand. The World Food Programme has appealed for rice aid, to prevent famine in areas hit by flooding last year. ASEAN membership will require tariff cuts and changes to visa policy. Trade and investment ties with Singapore are improving. Japan has offered to assist Thailand in funding the proposed second Mekong bridge. A Thai company has been awarded a contract to build a proposed railway network. The fate of the Nam Theun 2 hydroelectric- power project hangs in the balance. The World Bank will decide soon whether to approve financing for the project. External reserves are strengthening. Efforts are under way to boost trade with Thailand and facilitate use of the cross- Mekong River Mitraphab (Friendship) bridge. The government has proposed improved access for border-pass holders. Upgraded trade ties with Vietnam have been promised. A new trade and tourism triangle linking Laos, Cambodia, and Thailand is being considered.

Editor: Lucy Elkin All queries: Tel: (44.171) 830 1007 Fax: (44.171) 830 1023

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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, which has terms of five years

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

National legislature National Assembly, consisting of 120 directly elected members

National elections May 23-28, 1993; next elections due by 1998

National government The royal government of the Kingdom of Cambodia, a coalition formed in November 1993, in which the two main parties are FUNCINPEC and the Cambodian People’s Party. The prime minister is chosen by the king from the party which wins the most seats in the National Assembly elections

Main political organisations FUNCINPEC (F); Cambodian People’s Party (CPP); Buddhist Liberal Democratic Party (BLDP); Khmer Nation Party (KNP); Party of Democratic Kampuchea (PDK, the Khmer Rouge); Democratic National Union Movement (DNUM)

Main members of the First prime minister Prince Norodom Ranariddh (F) government Second prime minister Hun Sen (CPP) Deputy prime ministers Ing Kieth (F) Sar Kheng (CPP)

Key ministers Agriculture, forestry & fisheries Tao Seng Hour (F) Commerce Cham Prasidh (CPP) Defence General Tea Banh (CPP); Tea Chamrath (F) Finance & economy Keat Chhon (CPP) Foreign affairs Ung Huot (F) Health Chhea Thang (CPP) Industry, energy & mines Pou Sothirak (F) Information Ieng Mouly (BLDP) Interior & national security Sar Kheng (CPP); Yu Hockry (F) Justice Chem Sgnuon (CPP) Planning Chea Chanto (CPP) Public works & transport Ing Kieth (F) Tourism Veng Sereyuuth (CPP) Youth, sport & education Tol Loah (F)

Secretaries Culture & fine arts Nut Narang (CPP) Posts & telecommunications So Khun (CPP) Religion & cults Hean Vanrath (CPP) Social action & veteran affairs Suy Sem (CPP)

Central bank governor Thor Peng Leath

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Economic structure

Latest available figures

Economic indicators 1992 1993 1994 1995 1996a GDP at constant 1989 prices CR bn 2,509.0 5,414.0 6,131.0 7,200.0 8,388.0 Real GDP growth % 7.1 4.1 4.0 7.6 6.5 Consumer price inflation % 75.5 114.3 26.1 9.1 10.0 Population m 9.4 9.7 10.0 10.3 10.7 Exports fobb $ m 264.5 283.7 489.9 854.9 n/a Imports fobc $ m 443.4 471.1 744.5 1,186.8 n/a Current account $ m –93.0 –103.9 –156.7 –185.9 n/a Reserves excl gold $ m 29.2 24.2 118.5 191.9 265.6d Total external debt $ m 393.7 383.2 472.3 n/a n/a Debt-service ratio % 4.1 12.1 0.4 n/a n/a Exchange rate (av)e CR:$ 1,267 2,689 2,545 2,451 2,624d

April 14, 1997 CR2,300:$1 (official visitor rate)

Origins of gross domestic product 1994 % of total Agriculture 51.2 Industry (incl construction) 13.9 Services 34.9 Total 100.0

Principal exports 1994f $ m Principal imports 1993g $ m Timber 33.6 Cigarettes & alcohol 62.6 Rubber 21.1 Petroleum products 52.8 Kapok 1.1 Consumer goods 13.7 Soybeans 0.6 Textiles 12.3 Maize 0.4 Motorcycles 7.3 Total incl others 233.7 Total incl others 222.1

Main destinations of exports 1993b % of total Main origins of imports 1993c % of total Thailand 36.2 Thailand 22.6 Japan 30.0 Japan 6.3 Germany 10.2 Indonesia 5.0 Malaysia 4.6 Hong Kong 3.9 Italy 1.5 China 2.6 a EIU or official estimates. b Including re-exports. c Including non-retained imports. d Actual. e Official rate. f Not including re-exports. g Excluding non-retained imports, January-August.

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Outlook for 1997-98

All eyes are on the The ruling coalition, the chief members of which are FUNCINPEC and the CPP, elections is still formally intact. However, tensions are running high as both parties— and their supporters in the military—seek to build up alliances in preparation for the local and national elections. The national election is scheduled for November 1998, and the local election has now been postponed to early 1998 from late 1997. Uppermost in the minds of Cambodia’s two prime ministers, FUNCINPEC’s Prince Ranariddh and the CPP’s Hun Sen, is the fact that, according to the constitution, the current power-sharing agreement will come to an end after the national election, and only one prime minister will be appointed. Both men are determined to come out on top.

In order to achieve this goal both parties have been forming new alliances. On January 23 a long-expected link-up between FUNCINPEC and other smaller parties including the opposition KNP was established under the name of the National United Front (NUF). This grouping also includes a faction of the BLDP and the smaller Khmer Neutral Party. The Democratic National Union Movement (DNUM), which was established by the former Khmer Rouge commander, Ieng Sary, when he broke away from the Khmer Rouge hardline faction last August, has declared its support for the NUF but has not formally joined the grouping.

Prince Ranariddh has denied suggestions that the NUF is anti-CPP. Not surprisingly, however, the CPP has turned down an invitation to join the alliance. Instead, it has been forming alliances of its own. By early April it had established a loose alliance with several small parties.

The political situation These new alliances have actually entrenched the allegiances formed in the will remain extremely 1980s, when FUNCINPEC and the Khmer Rouge joined forces to oppose the fragile— precursor of the CPP. This time both FUNCINPEC and the CPP are trying to broaden their electoral appeal by joining forces with a wider range of disparate interest groups and opposition parties. However, with the exception of FUNCINPEC’s alliance with the pro-democracy KNP, it is doubtful how successful this approach will be, as most of the smaller parties have few followers, and the parties are unlikely to work well together. The KNP, however, is well- organised and actively campaigning.

It is conceivable that a joint FUNCINPEC-KNP alliance could defeat the CPP in the national election. However, this is by no means certain. Enmity between Prince Ranariddh and the leader of the KNP, Sam Rainsy, who was thrown out of FUNCINPEC in 1995 for his outspoken criticism of the government, may tear the NUF apart, although the two men appear to be making strenuous efforts to patch up past differences. In addition many believe that the CPP will come out on top in the national election by fair means or foul. It is possible that a defeated CPP would resort to violence to retain its grip on power, although it is more probable that it would seek to delay or cancel the elections should a defeat look likely.

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—and violence will Politically motivated violence can be expected to increase in the run-up to the increase elections. In late March an attempt was apparently made to assassinate Mr Rainsy while he was taking part in a protest march. Grenades were thrown into the crowd, 16 people were killed and more than 100 injured. The CPP’s Hun Sen has also claimed that his life is under threat.

The military is also divided along party lines, resulting in occasional armed clashes in the provinces, the latest of which was in Battambang province in mid-February. Occasional clashes may continue, despite the intervention of the two defence ministers. If such military clashes escalate, a complete breakdown of the constitutional process cannot be ruled out. However, the EIU judges that such an eventuality is unlikely. Despite all the antagonism, FUNCINPEC and the CPP have recently shown an ability to step back from the brink. The decision to recall four senior Battambang officials following the February clashes, which was taken by both prime ministers, is a case in point. The desire to join ASEAN later this year is also acting as an incentive for the main players to draw back from settling political differences by force.

Election preparations are Another positive sign is the fact that FUNCINPEC and the CPP have at last now likely to progress reached agreement on terms for the local and national elections, clearing the way for the necessary legislation to be approved. In March both sides conceded ground in areas where there had been longstanding differences. The interior ministry has also said that it will complete the draft political parties law very shortly, which will determine which parties can contest the elections. It is hard to see the KNP, which is still not legally recognised, being excluded, given the poor international response that this would provoke and the fact that it is now in an alliance with one of the ruling parties. The agreement between FUNCINPEC and the CPP allowed a date to be set for the elections. The local election is now due to take place early next year and the national election in late 1998.

Relations with the IMF In March the IMF announced that it would probably resume lending under its will remain difficult Structural Adjustment Programme in May. The programme was suspended last November because of the government’s failure to satisfy IMF concerns about its control of illegal logging and the revenue raised from the logging sector. In making its decision the IMF recognised that there had been some progress on the issue. However, it has made continuation of the programme contingent on the government meeting certain criteria. Some of these relate to transparency over the government’s forestry policy and management of the budget, while others are more general, including streamlining the civil service and the military, and making revisions to the foreign investment law. Changes to the latter are likely to involve a reduction in tax breaks.

The next tranche of IMF money is scheduled to be released in May. However, the broad range of conditions, none of which will be easy to meet given the weakness of central institutions, suggests that there may be further problems with the IMF in the future. Many of the issues currently being raised by the Fund are likely to be on the agenda when the adjustment programme comes up for renewal next year.

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Growth will be below the We expect a real GDP growth rate of 7% in 1997, slightly below the govern- government’s target ment’s target of 7.5%. Although the effect on the economy of the floods last in 1997 year has been less severe than at first predicted, we still expect rural incomes, and hence consumer spending, to be depressed. In 1998 growth of 7% is also likely, assuming a good agricultural performance. The agricultural sector contributes around 45% of GDP (in constant price terms) and employs around 80% of the workforce. The outlook for the sector, largely determined by the weather, is therefore critical for overall growth.

Foreign investment may Political uncertainty and growing violence in the run-up to next year’s elections slow is likely to result in slower foreign investment inflows. The grenade attack on the opposition KNP is just the latest in a series of incidents which have worried investors. The difficulties experienced by a Malaysian firm, Ariston, indicate the extent to which the investment environment is politicised. Ariston recently had contracts that had been agreed by a CPP official annulled by FUNCINPEC’s Prince Ranariddh. The fluid political situation, unpredictable implementation of regulations and contracts, and dangerous operating conditions will continue to deter investors. However, we do not expect foreign investment to dry up completely, and it will continue in small-scale projects in particular.

The garment industry was affected in late 1996 and early 1997 by widespread strikes, which now appear to have stopped. However, further protests are possible, particularly since the government is supportive of workers’ calls to be paid appropriately and treated fairly by foreign employers.

Inflation may stay in Prices eased in the last two months of 1996, bringing the annual rate to 10% for single digits the full year. Prices continued to fall month on month in January. This suggests that inflation may drop into single figures in 1997. However, there is also a risk of imported inflation, given that the riel is depreciating. As with GDP growth, the inflation outlook for 1997-98 will ultimately depend on the performance of the agricultural sector.

Cambodia: gross domestic product Cambodia: riel real exchange rate (b) % change, year on year 1990=100

8 140

7 130

6 120

5 110

4 100 CR:$ 3 90 2 Cambodia CR:DM Asia excl Japan 80 1 70 0 CR:¥ 1992 93 94 95 96(a) 60 (a) EIU and official estimates. (b) Nominal exchange rates adjusted for changes in relative consumer prices. Sources: EIU; IMF, International Financial Statistics; World 1990 91 92 93 94 95 96(a) Economic Outlook.

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Review

The political scene

FUNCINPEC forms an On January 23 the long-expected link-up between one of the two parties which alliance with the form the ruling coalition, FUNCINPEC, led by the first prime minister, Prince opposition KNP— Norodom Ranariddh, and the opposition Khmer Nation Party (KNP), led by the former finance and economy minister, Sam Rainsy, became a reality, with an announcement that the National United Front (NUF) had been formed. Such an alliance had looked increasingly likely as relations between FUNCINPEC and the other main party in the ruling coalition, the Cambodian People’s Party (CPP), continued to deteriorate during the final months of last year (1st quarter 1997, pages 11-12). In addition to FUNCINPEC and the KNP, the new NUF alliance also incorporates a faction of the Buddhist Liberal Democratic Party (BLDP), led by Son Sann, and the small Khmer Neutral Party, lead by Bour Hel. The latter has no seats in parliament, while Son Sann’s faction of the BLDP has just five. (A few days after the formation of the NUF, Son Sann, who is 85, announced his resignation from parliament. He may also give up his position as head of his faction of the BLDP. His son, Son Soubert, who is the vice-chairman of the National Assembly, is expected to succeed him.)

There was a possibility that the Democratic National Union Movement (DNUM), which was formed by Ieng Sary when he split from the Khmer Rouge last August (4th quarter 1996, page 12), might join the NUF. However, it has opted not to do so even though many of its leading supporters, including Sok Peap, who led one of the first divisions to break away from the hardliners in 1996, have voiced support for Prince Ranariddh and FUNCINPEC. Some within the NUF, notably Mr Rainsy, are unwilling to form an election pact with the DNUM given its association with Ieng Sary, who was an important commander under Pol Pot during the latter’s reign of terror in 1975-79. Mr Rainsy has pointed out that the DNUM would be a useful ally should serious fighting break out between the main political factions, as it commands large sections of the rebel troops which have defected to the government. However, should a relatively peaceful election go ahead, an association with the DNUM may be more of a hindrance than a help for the NUF.

—and the CPP forms Prince Ranariddh has insisted that the NUF is not anti-CPP, describing it as a alliances of its own grouping of “patriots” who wish to work together to solve the country’s problems. He even invited the CPP to join. Not surprisingly, it refused. Instead, the CPP has started to form alliances of its own. So far, it has linked up with five parties: the Liberal Democratic Party; Molinaka; the Free Development Republican Party; the Democratic Party; and the other faction of the BLDP, led by the information minister, Ieng Mouly. In electoral terms, none of these parties are of any significance. Only the BLDP and Molinaka are represented in the National Assembly (Ieng Mouly’s faction of the BLDP has five seats and Molinaka has only one seat). However, the CPP obviously calculates that these link-ups will broaden its electoral appeal, and perhaps feels the need to guard against the co-option of yet more parties into the NUF. In February Hun Sen said

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there was a possibility that the CPP would sign further agreements with as many as ten political parties.

The coalition remains On January 24-27 the CPP held its National Congress, at which it voted to intact for the time being enlarge the party’s Central Committee from 65 to 153. Although senior FUNCINPEC members were invited to attend as a courtesy, the party’s distaste for FUNCINPEC’s decision to ally itself with the KNP was never far below the surface. For the time being the response of the CPP’s senior leadership has been to stress that the CPP-FUNCINPEC coalition government should continue. The CPP party president, Chea Sim, adopted a noticeably conciliatory line, calling for a consolidation of the “political alliance” between the two parties, and Hun Sen has also said that he wishes to continue working with FUNCINPEC. FUNCINPEC held its own party congress in March. This was attended by CPP members, as well as FUNCINPEC’s new allies in the KNP and BLDP. Again, there was no direct threat to end the FUNCINPEC-CPP coalition, although Prince Ranariddh demanded the resignation of Ieng Mouly (who leads the pro-CPP faction of the BLDP) and threatened to surround the information ministry with tanks, should it fail to allocate more television airtime to FUNCINPEC.

Election preparations are Preparations for the commune and national elections have been proceeding creeping forwards— very slowly because of wrangling between FUNCINPEC and the CPP (1st quarter 1997, page 14). However, following a meeting of officials from both parties on March 25, some important differences have been resolved. Concessions have been made on both sides. The CPP dropped its insistence that Cambodians with dual nationality should be banned from holding public office, and FUNCINPEC conceded ground on the composition of the electoral commission that will monitor the polls. Both issues have prevented the passage of the draft law on commune elections, which needs to be approved by the cabinet before it can be voted on by the National Assembly. The draft law is now scheduled to come before the National Assembly at some point during its April-June session.

According to the text of the draft law, the commune elections will be run and monitored by a single national election commission, comprising government officials, members of political parties and representatives from local and international non-governmental organisations (NGOs). The commission will be chaired by the co-interior ministers, Sar Kheng and Yu Hockry. Press reports have suggested that the same commission will be responsible for monitoring the general election. A number of local NGOs have been pressing for an independent election-monitoring body, but the CPP in particular is firmly opposed to a large foreign monitoring presence during the elections.

—but commune elections Since the legislation on the elections has still not been passed, the commune have been delayed elections have been postponed from December 1997 to early 1998. A final date until 1998— will be decided once the draft law has been passed by the National Assembly. The delay was not unexpected (1st quarter 1997, page 14). The national election, meanwhile, is currently scheduled to take place in November 1998. However, the secretary-general of FUNCINPEC, Loy Simcheang, said in late

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March that the national election date may need “fine-tuning”. In his view December would be better because November is the peak of the rice harvest.

—and critical legislation is Despite the breakthrough in late March, a number of issues pertaining to the still pending elections are still outstanding. Before either the commune or the national election can take place, the long-delayed political parties law, determining which parties will be legally recognised and hence able to participate in the elections, must be passed. This is particularly controversial given the opposition KNP’s unclear legal position (it has never been legally recognised as a political party). However, the KNP is unlikely to be excluded, not least because of the international criticism that this would generate.

Equally controversial, if for different reasons, is whether the political wing of the Khmer Rouge breakaway movement, the DNUM, will be allowed to participate in either of the elections. There has been no official announcement on the status of the DNUM. However, Ieng Sary has been pardoned and Khmer Rouge defectors have been encouraged to join the Royal Cambodian Armed Forces (RCAF) (1st quarter 1997, page 15). Both facts suggest that the former rebels’ political wing may be permitted to contest the elections. King Norodom Sihanouk has warned against the political rehabilitation of the Khmer Rouge, but his wishes are unlikely to have much influence on the government’s decision. Officials of the interior ministry said on March 25 that it would finalise a draft version of the political party law in April.

Much crucial work remains to be done before the commune elections can be held. Election experts estimate that it will take a minimum of five months to complete basic practicalities such as registering candidates and voters, and preparing ballot sheets. If the commune elections are to take place in January 1998, this activity must begin by August. Time is not the only problem: in February Hun Sen appealed to donor nations for help in financing the elections (some funds have already been promised).

Sixteen KNP supporters The opposition KNP, which has faced increasing intimidation in recent months are killed (1st quarter 1997, page 12), suffered its most serious attack to date on March 30. According to police reports, up to four grenades were thrown into a 200-strong crowd demonstrating outside the National Assembly building. The demonst- ration, which was led by the KNP leader, Mr Rainsy, was being held to protest against alleged corruption in the judiciary. Sixteen people were killed and about 120 wounded. It seemed clear that the attack was an attempt to assassinate Mr Rainsy, one of whose bodyguards was killed. Although there are few leads as to who carried out the attack, the finger has inevitably been pointed at radical CPP elements, who are particularly opposed to the KNP. (It is, however, possible that KNP splinter groups carried out the attack.) Both prime ministers have called for an investigation into the attack, but Mr Rainsy has complained that any enquiry will be manipulated by the CPP, which has a heavy influence over the judiciary.

Inevitably the incident has heightened fears that politically motivated violence will escalate in the run-up to the elections. There is evidence that this is already happening. Last November Kov Samuth, Hun Sen’s brother-in-law and a senior interior ministry official, was assassinated in Phnom Penh (1st quarter 1997,

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page 11). In March police arrested three people in connection with the murder; among them a KNP steering committee member, Strung Vong Vannak, and accusations have been made that Mr Rainsy knew in advance of the attack. Mr Rainsy has accused Hun Sen of attempting to discredit him and his party. In February and March two FUNCINPEC election candidates were shot dead by unidentified attackers. This violence will inevitably have a negative impact on potential investors and tourists (see The economy). In a bid to prevent further incidents, on April 9 interior ministry officials announced that a temporary ban had been imposed on public protests.

Military units clash again Following clashes between rival military units loyal to the CPP and FUNCINPEC in Battambang in November (1st quarter 1997, page 13), tensions in the province have remained high. In mid-February fighting between the two sides resulted in temporary closure of roads in the area. According to some reports, 16 CPP soldiers were killed in the skirmishes. Precisely what caused this latest clash is not clear, although there have been suggestions that it stemmed from problems relating to the integration of Khmer Rouge units into the RCAF (see below). A Radio Australia report on February 19 said that a number of defectors from the Khmer Rouge had objected to pressure put on them by their commanders to align with the CPP. After the fighting in Battambang the CPP and FUNCINPEC formed a joint committee to meet every month to try to iron out problems in relations between the two parties and their supporters. This in itself is positive, but the committee’s efforts are likely to be no more than cosmetic.

Four officials in The joint defence ministers, General Tea Banh and General Tea Chamrath, Battambang are recalled wasted no time trying to defuse the situation in Battambang, flying to the province on February 14 to talk to the combatants. On February 17 Prince Ranariddh and Hun Sen decided to withdraw the province’s top officials, including the pro-CPP governor, Ung Samy, the regional military commander, Hul Savoeun, and the pro-FUNCINPEC deputy governor, Serey Kosal.

On February 26 a directive signed by both prime ministers in their capacity as supreme commanders of the RCAF was issued, forbidding the unauthorised movement of armed forces, the illegal recruitment of military forces and the unauthorised possession of arms. However well meant, it is doubtful that the government is capable of enforcing the directive. On March 24 Prince Ranariddh’s cabinet director, Ly Thuch, was quoted in the Cambodia Daily as saying that the prince had proposed that the governor and deputy governor of Battambang should be reinstated pending the outcome of an investigation into what happened in the province. This has yet to happen, but further clashes are possible, even if the old combatants are not returned to their posts in the province.

King Sihanouk is unlikely The question of whether King Sihanouk, the constitutional monarch, intends to to re-enter politics— abdicate in order to play a more active political role has surfaced once again. (King Sihanouk abdicated in 1955 and, as Prince Sihanouk, played an active political role, only returning to the throne in 1993.) There is no doubt that King Sihanouk is unhappy with his current position: he confirmed as much in an interview in February when he said that he had “never found [himself] at ease as king” and that he had been “seriously thinking of abdicating”. However,

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he went on to say that would not do so before 2000 and would “never stand” in the national election in 1998. Although there is much speculation on the subject, the king is unlikely to re-enter politics, not least because of the deterioration in his health. (In February he left the country for a cataract oper- ation in Beijing, which he frequently visits to seek medical attention.)

—but talk of abdication King Sihanouk’s threat to stand down has angered the CPP. In March Hun Sen angers the CPP threatened to cancel the elections if King Sihanouk abdicated. Hun Sen and the CPP are bitterly opposed to King Sihanouk having any role other than that of constitutional monarch, since they see him as a grave political threat. Although King Sihanouk’s political influence is waning, he remains very popular. While, as king, he is forced to remain neutral, as a private citizen, he could throw his support behind FUNCINPEC or even take over leadership of the party. Hun Sen fears that such a combination would be unstoppable, and would win outright victory in the national elections. The threats to cancel the elections were followed by CPP demands—clearly aimed at the first prime minister, Prince Ranariddh—that members of the royal family should be banned from taking an active part in politics. Such demands are unlikely to come to anything, provided that King Sihanouk remains on the throne. Prince Ranariddh retaliated in early April by suggesting a referendum on whether to keep the monarchy. As this would be highly likely to result in a yes vote, Hun Sen and the CPP are unlikely to support such an idea.

The Khmer Rouge has After considerable successes in 1997 the government is continuing its efforts to kidnapped FUNCINPEC persuade Khmer Rouge hardliners to defect. Latest estimates suggest that the negotiators hardline rump of the Khmer Rouge numbers no more than 2,000 troops; some military analysts suggest there are as few as 800. The government has concen- trated recent efforts on wining over Khmer Rouge from the hardliners’ remaining stronghold at Anlong Veng in the north-west. These efforts bore fruit in mid-February when 150 guerrillas from a village near Anlong Veng defected. However, since then events have taken a turn for the worse. A 15-member FUNCINPEC negotiating team, which was trying to persuade the infamous Khmer Rouge leader, Ta Mok, to defect, was taken hostage on February 14 by the guerrillas. The hostages include the deputy governor of Siem Reap province, Hem Bunheng.

Attempts to secure the release of the hostages have so far failed. On March 16 the head of the Fourth Military Region, General Khann Sovouen, said that the government was considering using force to free the negotiators. One senior military official was quoted as saying that he thought the RCAF could take the stronghold at Anlong Veng within a month if called on to do so. In March there were reports of a build-up of RCAF forces around Anlong Veng, but to date the base has not come under attack.

Negotiations with the Before the FUNCINPEC team was taken hostage, it appears that negotiations Khmer Rouge hardliners— did actually take place with Ta Mok. A press report in early March quoted the deputy commander of the military region covering Anlong Veng as saying that Ta Mok had put forward terms under which he would cease fighting, but that these had been rejected. The terms demanded by Ta Mok are not known, although it is believed that he had demanded a guarantee that he would be

EIU Country Report 2nd quarter 1997 © The Economist Intelligence Unit Limited 1997 Cambodia 15

allowed to retain control over the area around Anlong Veng. On March 10 two senior military officers, including the FUNCINPEC deputy chief of staff, Lieutenant-General Neak Bounchay, were said to have crossed into Thailand to continue negotiations with Khmer Rouge hardliners. A further indication that the hardliners might be considering negotiating an entry into mainstream politics came on March 19, when the Khmer Rouge president, Khieu Samphan, voiced his support for the NUF, although this support may simply be a reflection of the Khmer Rouge’s hostility towards the CPP.

The rump Khmer Rouge sounded a defiant note in late January when it announced on its radio station that it had completed preparations for its own commune elections in June 1997 and national elections in 1998. According to Khieu Samphan, this step was being taken because of the postponement of the official commune elections until 1998 (see above). To supervise the Khmer Rouge-organised polls, a 380-member council (the Cambodian People’s Provisional Consultative Council, or CPPCC) is reported to have been established. It is possible that some kind of vote will go ahead, but only in the dwindling areas where the hardliners retain control.

—are another source of Negotiations with the Khmer Rouge continue to be another source of friction political friction between the CPP and FUNCINPEC. Both parties have sought to curry favour with the former guerrillas in a bid to win new political supporters, as well as to strengthen their respective military positions. In February Hun Sen met Ieng Sary at the former Khmer Rouge stronghold of Phnom Malai. Accompanied by representatives of UNICEF and the World Food Programme, Hun Sen made generous promises of improved housing, infrastructure and food supplies, clearly aimed at consolidating support for the CPP. Intra-coalition tensions were inflamed in March when Hun Sen took a swipe at Prince Ranariddh, saying that he would have resigned if he had been responsible for sending the captured FUNCINPEC negotiating team to Anlong Veng.

Labour becomes politicised The Free Trade Union of Khmer Workers (FTUKW), which was formed in late 1996 amid a surge of labour unrest in the garment industry (1st quarter 1997, page 16), held its inaugural congress in February. The country’s nascent labour movement has become highly politicised. The leader of the KNP, Mr Rainsy, had a prominent role in organising the strikes held in December and January, and he attended the FTUKW congress along with senior figures from the recently formed NUF. The new labour law passed in January has in theory enshrined workers’ rights to form independent trade unions. However, anecdotal reports suggest that workers are being dismissed for distributing FTUKW literature. The FTUKW is one of two independent trade unions, the other being the Free Trade Union of Khmer Civil Servants, which was established last November.

ASEAN membership may Although an official decision has yet to be taken on whether Cambodia will join go ahead this year the Association of South-east Asian Nations (ASEAN) in July, membership, at least before the end of 1997, looks more likely than it did a few months ago (1st quarter 1997, page 16). In February the Indonesian foreign minister, Ali Alatas, said that Jakarta had no objections to Cambodia joining this year. How- ever, he added that the decision must come from the regional grouping as a

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whole. Some ASEAN members are concerned about political instability in Cambodia, a fact which will not have been helped by the recent grenade attack on the opposition KNP. Should the political situation deteriorate further, posing a threat to the elections next year, pressure to delay Cambodia’s membership by some within ASEAN will build.

President Suharto visits On February 17-19 the Indonesian president, Suharto, visited Cambodia for the first time since 1968. On the same trip, he visited the two other prospective ASEAN members, Laos and Myanmar. The visit was seen by many as further endorsement by Jakarta of Cambodia’s ASEAN membership. During the visit, three agreements were signed, including a trade accord, an exchange of notes on establishing a joint commission to oversee economic ties, and a memorandum of understanding (MoU) on cooperation to develop the oil and gas sector. The two sides will also begin negotiations on an investment protection and promotion agreement and on the avoidance of double taxation. A decision was also reached to explore the renegotiation of a 1969 aviation pact, which presumably would result in the establishment of direct air links.

Hun Sen asks Thailand to In February Hun Sen met the Thai prime minister, Chavalit Yongchaiyudh, in respect the log export ban Bangkok to discuss accusations that Thai companies are continuing to export logs from Cambodia despite a government ban last December (see Economic policy). The tone of the meeting was positive: Mr Chavalit offered Hun Sen his assurances that Thailand was cooperating fully with the export ban. However, the ban remains an area of contention. For example, an article in a Cambodian daily newspaper, Reaksmei Kampuchea, on February 14 said that the finance ministry was preparing to send a delegation to Thailand to demand that nine Thai companies pay revenue on upwards of 120,000 cu metres of logs pre- viously exported from Cambodia. By early March the Thai side was reportedly pressing to have the ban lifted for bona fide Thai logging companies.

During his talks with the Thai prime minister, Hun Sen also raised the issue of how Thailand might help with the development of former Khmer Rouge areas along the border between the two countries. This included a request for Thailand to press ahead with construction of a hydroelectric power station in order to sell electricity to Cambodia (see Energy). Hun Sen also requested Bangkok’s agreement to the opening of seven more checkpoints along the Thai- Cambodian border in order to facilitate trade (see Foreign trade and payments).

Tensions remain despite Settlement of Cambodia’s border dispute with Vietnam is proving elusive. talks with Vietnam Cambodia has in the past complained about incursions into its territory, as well as efforts to move the border (3rd quarter 1996, page 12). The issue was discussed at a meeting of the Vietnam-Cambodia intergovernmental commission in Phnom Penh in late January, which was attended by the Cambodian foreign minister, Ung Huot, and his Vietnamese counterpart, Nguyen Manh Cam. Although both men said that they were making progress, they conceded that the dispute would not be resolved overnight. The two sides did, however, sign a bilateral cooperation pact, which among other things expressed a commitment to working towards a settlement of the border issue. Diplomats present at the meeting said that Cambodia and Vietnam were hoping to sign a trade accord later this year, and were exploring ways to improve road and waterway links.

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Taiwan air links are put In early February China reacted angrily to the reported signing of an air agree- on hold ment between Cambodia and Taiwan under which Taiwan’s Eva Airways would begin to operate direct flights to Phnom Penh (see Transport and infrastructure). A statement from the Chinese embassy in Phnom Penh said that Beijing was firmly opposed to those countries with which it had diplomatic relations establishing official air links with Taiwan. Where countries wish to establish such links with Taiwan, the statement continued, “they must get permission from the Chinese government beforehand”. In a bid to head off the dispute, both Hun Sen and Ung Huot responded quickly that Cambodia supported Beijing’s one-China policy. This was reiterated during a visit of a high-level Chinese delegation led by a member of China’s State Council, Luo Gan, which it appears was made solely with the aim of receiving clarification about the planned air links.

Following the Chinese visit a Cambodian delegation was due to travel to Beijing in April to ask formally for permission to open an air link with Taiwan. It is not in Phnom Penh’s interests to upset Beijing. Since the 1993 elections in Cambodia, China, formerly the backer of the Khmer Rouge, has aligned itself wholeheartedly with the Cambodian government. China has provided large amounts of aid, and mainland Chinese companies are also increasingly active investors (1st quarter 1996, page 15).

Economic policy

The IMF may resume On March 7 the IMF announced that it had decided to release the remaining lending— $40m of its $120m Enhanced Structural Adjustment Facility (ESAF), disbursement of which was suspended last November because of concerns over the government’s forestry policy and its inability to raise revenue from forestry exports (1st quarter 1997, page 18). The IMF’s decision to release the funds followed a ten-day mission to Cambodia from January 24 to February 2, led by the assistant director of the IMF’s Central Asia Department, Michael Kuhn. Announcing the decision, Mr Kuhn said that the $40m would be made available in two separate tranches as long as certain conditions were met. A number of these relate to transparency over the government’s forestry policy, where the Fund recognises that there has been some improvement since November, while others are more general. The IMF is looking for progress on efforts to streamline the civil service and the military, reduced exemptions from import taxes, and revisions to the foreign investment law (see below). The IMF has also called on the two prime ministers to grant the finance ministry sole power to approve and control contracts involving state assets. Assuming all goes smoothly, the next tranche of the ESAF is scheduled to be released in May.

—if the crackdown on In an effort to protect Cambodia’s dwindling forestry resources, uncertified illegal logging continues logging was banned in early 1995, while the government imposed bans on the export of freshly cut timber both in 1996 and again this year. However, it has had difficulty enforcing these bans, not least because both the Khmer Rouge and the RCAF have benefited from the illegal logging trade carried out in areas under their control (1st quarter 1997, page 18). A London-based environmental group, Global Witness, has confirmed that the border was closed to prevent log exports

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to Thailand from December 31, as promised. Nevertheless, the government’s logging policy has continued to cause controversy. The group’s latest briefing paper, issued in March, criticised the government’s management of what it referred to as “quasi-legal” logging concessions. In late March the deputy governor of Koh Kong province said that illegal logging was continuing in his province. Doubts about the government’s ability to enforce the log export ban have increased following the decision of a Swiss company, Société Générale de Surveillance (SGS), to withdraw its bid to monitor the timber trade. SGS said that it feared being drawn into a law-enforcement role for which it was not qualified.

The foreign investment The government has signalled its intention to tighten up on tax breaks offered law is to be revised under the current foreign investment law. At present, the law offers tax holidays of up to eight years and full import tax exemption for export-oriented projects. Corporate income tax is levied at a rate of 9%. Many in the government accept that the law is too generous, while pressure to tighten up is also being exerted by the IMF, which has linked revenue reform to a continuation of the ESAF. The need to restructure Cambodia’s revenue has taken on increasing urgency now that membership of ASEAN Free Trade Area (AFTA) is in sight, after which Cambodia will be required to reduce tariffs in line with the other signatories. Other efforts at fiscal reform were outlined in the fiscal law which is due to come into effect in 1998 (1st quarter 1997, page 17).

ASEAN preparations Preparations to ensure that Cambodia is able to fulfil the technical criteria continue required for membership of ASEAN are continuing. The speed at which tariff cuts will be made in line with the AFTA common external preferential tariff (CEPT) arrangements has still not been decided. Vietnam’s experience suggests that ASEAN may require Cambodia to start lowering tariff barriers almost immediately, although it will be given extra time to reach the lowest targeted levels. (Existing ASEAN members, apart from Vietnam, are committed to reducing tariffs on designated products to between 0% and 5% by 2003; Vietnam has until 2006.)

Not surprisingly the prospect of tariff cuts is not universally welcomed. In March the palace issued a memorandum, believed to reflect the views of King Sihanouk, in which it said that ASEAN membership would flood the country with imports and entail the loss of some $250m in tariff duties. However, on March 11 Prince Ranariddh confirmed the government’s commitment to joining ASEAN. Entry this year is looking more likely than it did a few months ago, although a delay until 1998 is possible, if the political situation deteriorates markedly (see The political scene).

The economy

Growth and inflation in The government has revised upwards its estimate of GDP growth last year. The 1996 were better than finance and economy minister, Keat Chhon, said on March 3 that real GDP expected growth was 6.5% in 1996. This compares with an estimate of 5-6% issued by the finance ministry after the country was hit by flooding in late September and early October (1st quarter 1997, page 19) and an original growth target for 1996 of 7%. Mr Chhon said that the latest (upward) revision was attributable to a

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better than expected agricultural performance in the wake of the floods, although full details of the harvest have not yet emerged. Inflation was also better than expected in 1996. Based on the index published by the IMF in International Financial Statistics, month-on-month inflation peaked in October, before falling in the last two months of the year. Annualised monthly data give an annual rate of 10% for 1996, compared with our earlier estimates that average year-on-year inflation could have reached around 15%.

Foreign investment may Anecdotal evidence suggests that foreign investor interest may be waning be slowing slightly. Speaking in late January, the secretary-general of the Council for the Development of Cambodia, Chanthol Sun, said that he had detected a slow- down in enquiries since October and November, when coalition friction esca- lated into military skirmishes. Investor uncertainty about the outlook for political stability in Cambodia has recently been compounded by the grenade attack on the KNP rally in late March (see The political scene). Shell’s repre- sentative in Cambodia was quoted in the press as saying his company was still undecided as to whether the grenade attack was an isolated incident or a sign of things to come. A number of business delegations have reportedly cancelled their visits, and it is likely that many potential investors will hang back until after next year’s general election. According to the most recent foreign investment figures covering investment in the first 11 months of 1996, 156 projects were approved with total capitalisation of $1.5bn. This is lower than the previous year, when 167 projects with capitalisation of $2.3bn were approved, although the 1995 figures were inflated by a single $1.3bn investment by a Malaysian company, Ariston.

Ariston falls foul of Cambodia is by no means unique in having an investment environment that is political tensions plagued by problems of red tape and corruption. The situation is distinctive because of the extent to which the investment environment is politicised. In the run-up to the elections such problems are likely to intensify. One company which appears to have fallen foul of party-politicking is Ariston, which is developing the southern city of Sihanoukville. In March Prince Ranariddh declared two Ariston contracts (to build an airport and golf course) null and void on the grounds that the official who approved the contracts did so without proper authorisation. The official responsible happened to be a member of the CPP. This has inevitably prompted accusations that Prince Ranariddh’s actions were politically motivated. Hun Sen has disputed the decision, on the grounds that the overall Ariston project to develop Sihanoukville had been approved by officials from both FUNCINPEC and the CPP. It is still possible that the smaller projects will be revived, as Prince Ranariddh has not specifically ruled out rene- gotiating the contracts, but the decision does not send a positive signal.

Seoul signs an investment On February 10 an investment promotion agreement and an agreement on pact economic, scientific and technical cooperation were signed with South Korea. Since the establishment of mission-level relations between the two countries in May 1996, there has been a perceptible increase in both political and economic contacts with Seoul. Hun Sen visited South Korea in July, where he explored the prospect of strengthening economic ties. Based on cumulative investment in Cambodia to November 1996, South Korea does not feature among the top

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ten investors by country. Nevertheless, one of South Korea’s largest cement firms, Tong Yang Cement Corporation, announced in March plans to invest $200m in a quarry and cement plant in Kampot province. Construction is scheduled to begin in 1998 for the facility to be operational by 2000.

Energy

Cambodia hopes to buy During a meeting with the Thai prime minister, Chavalit Yongchaiyudh, in electricity from Thailand February, Hun Sen discussed plans for Cambodia to purchase electricity from Thailand. The scheme involves the construction of a hydroelectric power station on the Srung Mnam River in Thailand’s Trat province, which will then supply consumers in bordering Cambodian provinces. Realisation of the project is still a long way off, however. Bangkok has authorised a Swedish company to conduct a feasibility study, and this alone is expected to take two years. Assuming that the go-ahead is given and finance is secured, construction will take a further three to five years.

The proposed Thai plant is part of the current effort to deal with Cambodia’s growing energy shortages. An Australian company, HEC Enterprises, is already working on an electricity-sector master plan (1st quarter 1997, page 22). In March the government awarded contracts to improve Phnom Penh’s electricity distribution system, which is in dire need of repair. Funded by the World Bank, the projects are expected to be completed in 1999. However, it will be a struggle to keep up with rising demand. In 1994 the Asian Development Bank (ADB) forecast that nationwide electricity consumption would reach 125 mw by 2000 (compared with a current officially generated capacity of 35 mw). The ADB’s figure may well prove to be an underestimate. Electricity demand in Phnom Penh alone has already surpassed 75 mw. Power blackouts remain a fact of life, and many companies have resorted to investing in back-up generating facilities.

Transport and infrastructure

The opening of air links Following strong objections from China (see The political scene), the opening of with Taipei is delayed direct air links between Phnom Penh and Taipei has been delayed. Taiwan’s Eva Airways had planned to begin flights on April 10. However, the director-general of Cambodia’s civil aviation authority, Keo Sophol, said in late March that Eva Airways would have to wait until approval from Beijing had been secured.

Hun Sen questions RAC’s In March Hun Sen criticised the “poor quality” of Cambodia’s national airline, monopoly Royal Air Cambodge (RAC), and called for its monopoly on domestic flights to be ended. Although RAC is a joint venture between the government and a Malaysian company, Malaysian Helicopter Services, the airline is very much regarded as a FUNCINPEC concern. Its monopoly position was only assured in 1994 after two Thai-run carriers, established on the basis of agreements signed with Hun Sen prior to the UN-supervised election, were closed down. It is therefore not clear whether the criticism will spark a reassessment of air policy, or merely be treated as part of the current political manoeuvring between the CPP and FUNCINPEC.

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Attacks on shipping are In recent months there have been reports that cargo ships have been fired at off on the rise the Cambodian coast. In February a Singapore-registered oil tanker carrying diesel fuel for a US oil company, Caltex, was tangled up in a stand-off involving two Cambodian navy gunboats. The dispute is alleged to have arisen because the crews of the two ships were of differing loyalties, one supporting FUNCINPEC and the other the CPP. Although such incidents are still relatively rare, they are becoming more common. Three such disputes involving cargo ships have been reported since late last year. If this trend continues, there is a danger that shipping companies will be unwilling to sail to Cambodia, leading to increased delays and higher trading costs.

Tourism

1996 was a good year for In 1996 some 260,489 tourists visited Cambodia, representing a 19% increase tourism compared with 1995. As in Vietnam, tourist figures include business and official visitors. In 1995 just under 75% of foreign visitors to Cambodia declared them- selves to be tourists. Cambodia’s big attraction for tourists is the world- renowned Angkor Wat temple complex, near Siem Reap. The authorities have gone to great lengths to ensure that the temple area is safe. Visitors are required to hire a guide in order to minimise the chance that they will stray into mined areas or too deep into the surrounding jungle, where the Khmer Rouge still holds sway. However, tourists are likely to stay away if political instability worsens in the run-up to the general election, particularly if there are further incidents like the bombing of the opposition KNP rally which took place in March (see The political scene).

Finance

The riel slides further and According to the IMF’s International Financial Statistics, the riel resumed its fall money-supply growth against the dollar in January and February 1997 after briefly strengthening in slows December. In February the official exchange rate averaged CR2,735:$1, which represents a nominal depreciation of 6.5% since the first quarter of 1996. How- ever, concern about the state of the country’s foreign exchange reserves, which affected the exchange rate in the fourth quarter of 1996 (1st quarter 1997, Cambodia: reserves excluding gold $ m pages 23-24), has diminished, as reserves appear to be creeping back up. In 270 February the IMF estimated reserves (excluding gold) at $266.8m compared with 240 $231.7m in September 1996.

210 Cambodia’s money-supply growth rate continued to moderate in the last 180 quarter of 1996. M1 expanded by 18.1% year on year, according to IMF figures, 150 compared with growth of 30.8% in the previous quarter. M2 growth also slowed, 120 expanding by 40.4% year on year, compared with an annual growth rate of 90 44.3% in the previous quarter. The money-supply growth rate remains high, 60 however. The World Bank has suggested that it is primarily driven by an 30 increase in domestic currency holdings and deposits, and foreign currency 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 deposits, which are captured in the money-supply statistics (4th quarter 1996, 1994 95 96 97 page 18). This has been at the expense of foreign currency holdings outside the Source: IMF, International Financial Statistics. formal banking system, which are not recorded by the statistics.

EIU Country Report 2nd quarter 1997 © The Economist Intelligence Unit Limited 1997 22 Cambodia

Cambodia: money supply

1995 1996 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr M1 (CR m) 198,943 225,192 241,122 278,490 309,622 311,365 315,439 328,926 % change, year on year 6.6 21.7 20.2 38.1 55.6 38.3 30.8 18.1 M2 (CR m) 459,100 518,950 571,188 649,106 740,885 779,233 824,073 911,618 % change, year on year 22.4 40.0 45.6 43.6 61.4 50.2 44.3 40.4 Interest rates (%) Deposit rate 7.9 9.1 8.9 8.9 8.8 8.8 8.8 8.8 Lending rate 18.2 18.7 19.0 18.9 18.9 18.8 18.8 18.7 Source: IMF, International Financial Statistics.

Foreign trade and payments

Exports collapsed in the Trade data issued by the IMF now cover the first half of 1996. During this time, first half of 1996 both exports and imports fell drastically compared with the previous year. Total merchandise exports (fob, dollar basis, including re-exports) fell by 48% in the first half of 1996 compared with the first half of 1995, to only $297.3m. Cambodia: current account $ m Merchandise imports (fob) fell by 34% compared with the first half of 1996, to 0 $482m. The drop in imports was not sufficient to prevent the merchandise trade deficit from deteriorating by around $20m in the first half of 1996 com- -10 pared with the first half of 1995. The improvement in the services deficit was -20 insufficient to prevent a deterioration in the current-account deficit in the first two quarters of 1996. -30 The ADB predicted last year that export growth would slow in 1996, mainly -40 because of restrictions on forestry exports, but it did not expect a contraction

-50 in imports (although the latter may have picked up throughout the remainder of 1996). The drop in reserves and in the riel from mid-1996 onwards does -60 Q1 Q2 Q3 Q4 Q1 Q2 indicate that the external deficits may have deteriorated more sharply in the 1995 96 second half of the year. Source: IMF, International Financial Statistics. Cambodia: current account ($ m) 1995 1996 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Exports fob 376.1 191.4 146.0 141.4 150.9 146.4 Imports fob –460.2 –269.9 –220.8 –235.9 –244.5 –237.7 Merchandise trade balance –84.1 –78.5 –74.8 –94.5 –93.6 –91.3 Services (net) –26.9 –14.1 –14.2 –18.6 –16.3 –12.1 Income (net) –12.0 –15.5 –15.7 –14.0 –11.3 –13.3 Transfers (net) 77.1 62.1 63.0 74.8 70.8 58.1 Current-account balance –45.9 –46.0 –41.7 –52.3 –54.1 –58.6

Note. Export figures include re-exports.

Source: IMF, International Financial Statistics.

More border posts will According to figures produced by the Ministry of Commerce in 1995, Thailand boost legal trade is Cambodia’s second largest trading partner after Singapore. However, the

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porous border between the two countries means that much trade is not captured in the official figures. In a bid to expand legal trade the government has requested Bangkok’s agreement to the opening of seven more checkpoints along the Thai-Cambodian border. There are currently three official crossing points: Poipet-Klong Luek, Koh Kong-Had Lek and Kab Choeng-Chong Jom. Although a final decision has yet to be made, the issue was discussed at a meeting of the Thai-Cambodian Joint Commission held in Chiang Mai on March 20-21. Con- cerns over security remain a stumbling block to the opening of more border crossing points: there are frequent reports of shoot-outs between police and smugglers.

Thai-Cambodian trade agreements are also being negotiated at the provincial level. In February an agreement was signed between Cambodia’s Siem Reap and Thailand’s Buri Ram provinces, under which traders of consumer goods would be able to set up a market on two days per week at a designated point on the border.

The ADB announces new On March 26 the ADB announced a new lending programme worth $380m. lending The loans are being targeted at a number of different areas, including physical infrastructure, education, health, agriculture, finance and industry. The loans are of 40 years duration and carry an interest rate of 1%. Disbursement is expected to begin in 1998.

EIU Country Report 2nd quarter 1997 © The Economist Intelligence Unit Limited 1997 24 Laos

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 oversee the work of the ministers. All members of the council are appointed by the chairman of the Council of Ministers. Last reshuffle February 1993

Head of state The president, currently Nouhak Phomsavan. The new post of vice-president, created in April 1996, is occupied by Sisavat Keobounphan

National legislature Unicameral 85-member National Assembly

National elections December 1992; next elections due by 1997

National government The organs of political and administrative power are closely intertwined with the Politburo of the Lao People’s Revolutionary Party (LPRP)

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

Main members of Council of Chairman (prime minister) General Khamtai Siphandon Ministers Vice-chairmen Khamphoui Keoboulapha Bountiem Phissamay

Key ministers Agriculture, forestry, irrigation & cooperatives Hien Sapangthone (acting) Communications, transport, posts & construction Phao Bounnaphon Education Phommason Finance Saysomphone Phomvihan Foreign affairs Somsavat Lengsavat Industry & handicrafts Soulivong Daravong Information & culture Lieutenant-General Osakan Thammatheva Interior Major-General Asang Laoli Justice Kham-ouan Bouppha Labour Thongloune Sisoulith National defence Lieutenant-General Choumali Sai-gnason Public health & social welfare Ponemek Dalaloy Trade & tourism Sompadith Vorasane

Central bank governor Pany Yathotou

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Economic structure

Latest available figures

Economic indicators 1992 1993 1994 1995 1996a GDP at current prices K bn 844 951 1,107 1,395 1,765 Real GDP growth % 7.1 5.9 8.2 7.0 6.5 Consumer price inflation % 9.9 6.3 6.8 19.6 15.0 Population m 4.47 4.60 4.93 4.87 n/a Exports fob $ m 132.6 247.9 300.4 347.8 n/a Imports fob $ m 232.8 397.4 519.2 541.6 n/a Current account $ m –111.3 –139.2 –284.0 –230.0 n/a Reserves excl gold $ m 40.31 62.96 60.93 92.11 171.66 Total external debt $ m 1,917 1,986 2,080 n/a n/a Debt-service ratio % 4.8 8.8 7.7 n/a n/a Exchange rate (av) K:$ 716 716 718 805 921b

April 11, 1997 K961:$1

Origins of gross domestic product 1993 % of total Agriculture & forestry 56.3 Industry (incl construction) 15.8 Services 27.9 Total 100.0

Principal exports 1994 $ m Principal imports 1994 $ m Timber & wood products 97.3 Machinery & raw materials 218.8 Textiles & garments 51.5 Rice & foodstuffs 60.0 Re-exports 43.1 Imports for re-export 43.1 Electricity 24.8 Petroleum products 41.7 Total incl others 281.5 Total incl others 528.0

Main destinations of exports 1995 % of total Main origins of imports 1995 % of total Thailand 25.7 Thailand 60.0 Japan 10.0 Turkey 8.2 France 9.8 Singapore 5.5 Turkey 8.9 Japan 5.0 Germany 7.5 Vietnam 4.3 a EIU estimates. b Actual.

EIU Country Report 2nd quarter 1997 © The Economist Intelligence Unit Limited 1997 26 Laos

Outlook for 1997-98

Political stability will Although last year’s Party Congress revealed a number of areas of weakness in continue the leadership of the LPRP, such problems are not likely to bring about the downfall of the LPRP government. There is no credible opposition and civil society is weak. Potentially more serious for the future are the widening economic inequalities which could exacerbate historically rooted tensions between lowland Lao and highland minorities. The attacks last year on vehicles travelling between Vientiane and Luang Prabang were possibly caused by such tensions. However, these attacks are unlikely to mark the start of wider unrest, and Laos is expected to remain politically stable in 1997-98, although safety will remain a concern in some regions.

The IMF may demand The LPRP has consistently adopted a cautious approach to reform, but the faster progress on reform reform process will continue, albeit at a slow pace. Membership of ASEAN and the associated signing of the AFTA agreement point to the prospect of further trade liberalisation. The USA is also likely to press for concessions in this area before it agrees to grant MFN trading status. The country’s reform programme will shortly come under scrutiny from the IMF. The current Structural Adjustment Programme is due to expire in May and the Fund will expect renewed commitments from the government on reform. Apart from the stand- ard commitments on fiscal and monetary policy, Laos may come under pressure to kick-start the stalled privatisation programme. Since it began in 1991 the privatisation programme has faced numerous delays, due to opposition both from conservative elements in the leadership and from within the state sector itself. In general the authorities have favoured temporary leasing arrangements rather than full privatisation.

Official growth and Following flooding last October, we estimate that real GDP growth in 1996 inflation targets are reached around 6.5%. This compares with an official target of 8-8.5%, which is optimistic also the government’s target for 1997. Growth in 1997 will, however, be constrained by the impact of last year’s flooding, which will have depressed rural incomes and hence consumer demand. Unlike Cambodia, where the agricultural sector appears to have bounced back surprisingly well, in Laos the flooding last year continues to cause widespread hardship in the southern rice- growing regions. Indeed the UN World Food Programme has appealed for emer- gency food aid, stating that around 420,000 people are in danger of starvation. Assuming that this year’s main rice harvest, which is due in November, escapes flood (or pest) damage, GDP growth of 7-7.5% is likely. Growth in 1998 will also depend on the performance of other parts of the agricultural sector, which in total contributes some 56% of GDP (in constant price terms).

The flooding in 1996 has also had an impact on inflation. Before the floods price increases were slowing. However, they started to pick up again in late 1996, and we expect the average year-on-year inflation rate to have reached around 15%. In 1997 and 1998 the government hopes to see inflation return to single figures. Although we do not yet have first quarter 1997 inflation data, we expect that inflation will remain in double digits this year. There are still anecdotal reports of shortages of both food and construction materials, which

will push up prices. Nevertheless, the surge in inflation witnessed in 1995 is unlikely to be repeated.

Nam Theun 2 still hangs One sector that the government is particularly seeking to develop is hydro- in the balance electric power. However, its plans have run into difficulty following environmental objections to the construction of the 681-mw Nam Theun 2 power station, which has cast doubt over similar projects. The main financier of the project, the World Bank, has ordered a second Environmental Impact Assessment and is expected to make a final decision on the project in May. Whatever the outcome, the controversy over Nam Theun 2 is likely to result in a more cautious approach by investors to the sector’s development. If the Bank gives the project the all-clear, construction will begin in 1999, but this is still three years behind schedule.

No take-off in foreign Outside the energy sector foreign investment inflows are likely to remain mod- investment est in 1997-98. Laos’s main attractions for investors include its relative political stability, its low labour costs and its commitment to (gradual) economic reform. Less attractive are the small size of the Lao market and burdensome bureaucratic procedures, although gradual improvements with regard to the latter are likely. The government’s successful negotiation of MFN trading status with the EU in November 1996, and the prospect of a similar agreement with the USA in the near future, should increase Laos’s attractiveness as an export- oriented manufacturing destination. In addition the prospect of improved access to ASEAN markets which will follow membership of the organisation (probably in 1997) can be expected to raise investor interest in Laos. As a condition of membership, Laos will have to agree to lower tariff barriers in line with the AFTA targets, although it may be given an extended deadline for reducing tariffs to 0-5% (a target which existing ASEAN members must meet by 2003).

Laos’s lack of infrastructure will continue to be a problem for investors, although efforts are under way to improve the situation. Numerous infrastructure schemes now under way, or in the pipeline, which promise to improve land- locked Laos’s links to its neighbours. Japan has agreed to share the financing of the second bridge across the Mekong River, linking Laos with Thailand. The

Laos: gross domestic product Laos: kip real exchange rate (b) % change, year on year 1990=100 130 10 Laos Asia excl Japan K:$ 8 120

K:DM 4 110 K:¥

2 100 0 1992 93 94 95 96(a) (a) EIU estimates. (b) Nominal exchange rates adjusted for changes in relative consumer prices. Sources: EIU; IMF, International Financial Statistics; World 1990 91 92 93 94 95 96(a) Economic Outlook.

bridge will link up with Route 9, the so-called East-West highway, stretching across Laos to the Vietnamese coast. A feasibility study is also being conducted on a third cross-Mekong River bridge and progress is being made—admittedly rather slowly—towards developing a railway network in Laos. However, major question marks still hang over many of these large-scale projects.

Review

The political scene

Party plenum brings no On March 10-18 the Central Committee of the ruling Lao People’s Revolutionary surprises Party (LPRP) gathered for its fourth plenary session. The state-owned newspaper, the Vientiane Times, reported that the plenum approved the broad direction of the reforms taken since 1986. The importance of efforts to strengthen both the state and private sector, as well as to boost foreign direct investment, were recognised. The gathering also called for state administration to become more “dextrous”, in order to handle problems faster, indicating some recognition of the difficulties caused by Laos’s extensive red tape.

Laos is expected to join Following a meeting of Association of South-east Asian Nations (ASEAN) foreign ASEAN this year— ministers last November, it looked as if Laos’s expected entry into the organisation in July 1997 might be delayed (1st quarter 1997, pages 31-32). An official decision has yet to be taken. However, a delay now looks less likely. During his visit to Laos in February, the Indonesian foreign minister, Ali Alatas, said that his government had no objection to Laos, Cambodia and Myanmar joining ASEAN at its ministerial meeting due to be held in Kuala Lumpur in July. The Malaysian prime minister, Mahathir Mohamad, and the prime minister of Singapore, Goh Chok Tong, have also supported the move.

—and preparations are If there is any delay, ASEAN leaders are keen to emphasise that it will be on continuing technical grounds. While this is arguably not the case with Myanmar and Cambodia, where concerns about their domestic political environment are much more evident, the technical argument is certainly applicable for Laos. Laos is very short of personnel equipped with the necessary technical and language skills, and the government’s ASEAN department is only 14-strong. However, the government is receiving assistance in this area, notably from the governments of Germany and New Zealand, which are providing relevant courses in Vientiane, with other projects being undertaken by the Lao-German Economic Training and Advisory Project.

Another issue affecting Laos’s membership is the speed at which it falls in line with the ASEAN Free Trade Area (AFTA) common external preferential tariff (CEPT) arrangements. Although the issue has yet to be resolved, Vietnam’s experience suggests that ASEAN may require Laos to start lowering tariff barriers almost immediately, although it will be given extra time to reach the lowest targeted levels (see Economic policy and the economy).

ASEAN leaders drop in The visit of Indonesia’s president, Suharto, to Laos on February 19-21 was widely regarded as an endorsement by Jakarta of Vientiane’s forthcoming ASEAN membership. President Suharto, who also visited Cambodia and Myanmar, oversaw the signing of cooperation agreements on agriculture and forestry and had meetings with the Lao president, Nouhak Phomsavan, and the prime minister, Khamtai Siphandon. Although the two countries have well-established diplomatic relations (Mr Nouhak visited Jakarta in 1994), trade and investment ties are rather undeveloped. At an ASEAN meeting in Jakarta in November, Mr Khamtai expressed interest in purchasing aircraft and helicopters from Indonesia, and the Indonesian government suggested that this could be done on a counter-trade basis (1st quarter 1997, page 36). However, Indonesia did not rank among Laos’s top five trading partners in 1995.

The prime minister of Singapore also paid a visit to Vientiane at the end of March, where he spoke in support of Laos’s entry to ASEAN. In February Singapore opened its first embassy in Laos. Until then, its interests in Laos had been represented by its Bangkok embassy. The opening of the embassy should help to boost Singaporean investors’ interest in Laos, as should Laos’s likely future membership of ASEAN.

The Hmong refugees The issue of the estimated 6,000 Hmong refugees still in camps in Thailand was remain homeless discussed during a meeting of the Thai-Lao border committee held in Vientiane in February. Members of the Hmong ethnic minority formed part of a US-raised army which opposed the communists before they took power in Laos in 1975. Many Hmong have sought (and been granted) asylum in the USA, but thou- sands more live in camps in Thailand. The presence of these refugees has long been a source of friction between the two countries, not least because the Lao authorities allege that Bangkok has turned a blind eye to acts of sabotage carried out against Vientiane by disaffected Hmong living in Thailand (1st quarter 1997, pages 30-31). A number of deadlines for these Hmong to return to Laos, including December 1996 and then March 1997, have already been missed. A new deadline of June 30 has now been set.

Around 2,800 refugees have been accepted for resettlement in the USA. How- ever, the difficulty arises with the remainder. After the February meeting, Thailand reiterated its position that Hmong from Laos would be repatriated. However, no new timetable has been announced, and Laos’s insistence that it will only take back those refugees returning voluntarily remains a sticking point.

Apart from the refugees there are around 10,000 Hmong believed to be Lao nationals settled at Wat Tham Krabok in Saraburi, Thailand. At a meeting between Thai and Lao security officials in late March the Thai side pressed for these non-refugee Hmong (effectively illegal immigrants) to be returned to Laos, but the Lao side indicated that only those Hmong officially designated as refugees would be accepted.

Thai border demarcation It is not just the Hmong issue which continues to cause friction between Laos disputes continue and its larger neighbour. The demarcation of the Thai-Lao border, work on which has now begun, remains an area of contention. Both sides frequently complain about incursions by citizens from the other country. This went one step further in February, when Vientiane alleged that a Thai aircraft had

entered Laos’s airspace without permission on five occasions between February 22 and February 24. Thailand had received permission to conduct aerial survey flights in connection with the border survey, but the Lao government alleges that the aircraft differed from those which had gained clearance. Despite talks, the issue remains unresolved, and permission for further Thai survey flights has been cancelled.

The ruling party In a radio broadcast in February, the LPRP condemned the practice of polygamy, condemns polygamy saying it had created a lot of problems. Polygamy was officially outlawed when the LPRP came to power in 1975, and this position was enshrined in the constitution. Although it is not known how widespread polygamy is, keeping a second wife has apparently gained in popularity in recent years, perhaps as a reflection of the gradual improvements in incomes since the start of market-oriented reforms.

Economic policy and the economy

The World Food The flooding last year badly affected the main rice harvest, and in March the UN Programme appeals for aid World Food Programme (WFP) issued an appeal for $14.9m in aid, to feed an estimated 420,000 people who face famine during the six months before the next rice harvest, in November. The funds will be used to import 43,000 tons of rice to tide families over until the next harvest. The worst affected areas include Khammouane, Savannakhet, Champassak, Salavana, Attapeu and Sekong, which are in central and southern Laos.

The poor 1996 harvest will Government estimates after the flooding suggested that last year’s paddy hit growth and inflation (unmilled rice) crop would be only 1.4m tons, compared with a target of 1.7m tons (1st quarter 1997, page 32). Final figures for the rice harvest have not been made public. Since agriculture contributes some 56% of GDP (in constant price terms) the flooding is likely to have a knock-on effect on GDP growth at least in the first half of 1997, although Laos does not issue quarterly growth figures. Some upward pressure on inflation in late 1996 and into 1997 can also be expected, suggesting that inflation was around 15% in 1996, although the IMF has not released new figures since our last report. The impact of rising inflation on Laos’s exports will be partly offset by the weakening of the kip in 1996. The official rate at the end of 1996 was K935:$1; the average rate for 1996 was K921:$1, a depreciation of 12.6% compared with the average 1995 rate. By early April 1996 the kip had depreciated even further, to Kt961:$1.

Laos: consumer prices

1995 1996 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtra Consumer price index (1990=100) 145.5 165.0 182.6 183.4 184.7 190.5 193.9 197.2 Annual % change 9.0 18.3 23.8 26.5 26.9 15.5 6.2 7.3 a November.

Source: IMF, International Financial Statistics.

Visa and tariff policy is In November the director-general of Laos’s ASEAN department, Somphet still to be decided Khousakoun, said that he hoped to present an initial list of products scheduled for tariff reductions to ASEAN by April 1997. A reduction in import tariffs will increase pressure on the government to secure alternative sources of revenue, as tariffs currently provide some 22% of the total tax take. Efforts to restructure revenue may be on the agenda during talks with the IMF (Laos’s Structural Adjustment Programme ends in May, but a further programme is expected to be negotiated).

Although it will not affect the timing of Laos’s membership of ASEAN, the question of the visa requirements to be imposed by Vientiane on visitors from ASEAN member states is also pending. Laos already waives visas for diplomats and other officials from Malaysia, Thailand and the Philippines. However, it has indicated its reluctance to offer visa-free entry to ordinary citizens of ASEAN states. Laos’s government is not alone in adopting this stance, which it argues is to protect the country’s “traditional culture and security”. Vietnam has not dropped visa requirements for ordinary citizens, although it is currently working on an arrangement which will allow tourists from ASEAN countries a 30-day visa-free stay. Laos has, however, proposed new visa regulations for Thai and Lao holders of border passes, and is pressing Thailand to relax its visa requirements for Lao businessmen (see Foreign trade and payments).

Developing trade and Compared with Thailand, which is Laos’s leading investor and trade partner, investment ties with Singapore’s presence is still relatively small. Bilateral trade last year was worth Singapore $44m, according to figures from Singapore’s Trade Development Board. Com- plete investment data for last year are not yet available, although Singapore does not feature among the top five investors in terms of cumulative approvals from 1988 to mid-1996.

However, Laos’s probable entry into ASEAN has given a new impetus to relations. One Singaporean company which already has commitments in Laos is a property and engineering group, Guthrie GTS, which has spent some $8.7m refurbishing the Novotel Belvedere Hotel in Vientiane. In addition Singapore’s Tiong Seng Contractors will set up a $2.5m joint venture with the Lao Ministry of Communications, Transport, Posts and Construction to bid for infrastructure projects. Tiong Seng will hold a 60% stake, with the Lao ministry taking the rest. As a sign of these growing commitments, Singapore’s prime minister signed an investment protection agreement during his recent visit to Laos (see The political scene).

Infrastructure

Japan offers to help fund The Thai government is continuing to look for investors to finance the construc- a second Mekong bridge tion of a second bridge across the Mekong river, linking Mukdahan in Thailand to Savannakhet in Laos. In February the former Thai prime minister, Chatichai Choonhavan, who heads the second largest party in the governing coalition and is economic and foreign policy adviser to the current prime minister, Chavalit Yongchaiyudh, visited Tokyo and secured an offer from Japan to provide the Thai government with a low-interest loan to cover half of the $56m construction costs. The Thai government has stated that it will provide the

remaining 50% of the money itself. Although Bangkok has not rejected Tokyo’s offer outright, it is continuing to sound out potential investors in South Korea, Germany and France. Given budgetary pressures, the Thai government is reluc- tant to burden itself with the interest payments which would accompany the Japanese loan. However, Thai determination to implement the bridge project was evident in late February when the deputy foreign minister, Pitak Intrawithayanunt, led a 110-member delegation, including a number of Thai-based foreign diplomats, to the proposed construction site and then down Route 9 into Vietnam.

Construction of the proposed bridge will allow Thailand to connect to Vietnam’s seaport at Da Nang via Route 9, crossing both Laos and Vietnam. The Asian Development Bank (ADB) last year approved a $3m loan to cover preparatory upgrading work on Route 9. This work is crucial if the subregion is to be opened up. The ADB is also conducting a feasibility study on a third bridge across the Mekong linking Chiang Khong in northern Thailand with Ban Houayxay in Laos.

A Thai company wins the When the first bridge over the Mekong, the Mitraphab bridge, was constructed Friendship Bridge railway it was envisaged that it would have a railway running across it. Some three years contract— after it was opened, this has yet to happen, although the railway project is moving forward. Thai contractors are expected to complete their section of the railway, from Nong Khai to the middle of the bridge, as early as July. On the Lao side progress is somewhat slower. However, preparatory work has been done and in February the government signed a contract with Thailand’s Sahaviriya Group for it to lay a railway track from the bridge to Vientiane. The work is expected to cost $38m and is due to be completed in August 1998. With this in mind the Thai government announced in March that it had assigned its Transport and Communications ministry to liaise with its Lao counterpart to draw up regulations governing train transport across the bridge.

—but financing could The government intends to follow the construction of the Nong Khai-Vientiane prove difficult line with the development of a comprehensive railway network in Laos. While the French built railways in Vietnam and Cambodia, they did not do so in Laos, which at present has no rail system. The Sahaviriya Group has also been awarded the right to undertake the next phase of the railway project, which will include: a 220-km Vientiane-Luang Prabang route; Luang Prabang to Bor Ten on the Lao-Chinese border (220 km); Vientiane to Kham Muan (337 km); Kham Muan to Champassak (352 km); Champassak to Chong Mek near the Lao- Cambodian border (60 km); Borikhamchai to Muang Vin (60 km); and Chaingkwang to Wang Wien (120 km). No timetable for implementing these projects has been issued, and it is likely that their realisation is many years away. Nevertheless, development of a railway network in Laos fits with regional plans to develop a pan-Asian railway line linking Singapore with Kunming in China’s Yunnan province. The Malaysian government, which is conducting a feasibility study into such a rail-link, has said that it favours the railway passing through Laos (3rd quarter 1996, pages 26-27).

Energy

The government defends The World Bank is expected to make a final decision on the future of the Nam Theun 2 planned Nam Theun 2 681-mw hydroelectric power plant in mid-1997. The Lao government has defended the project, which has been strongly criticised on environmental grounds. The World Bank rejected a first Environmental Impact Assessment (EIA); a second EIA is due for completion shortly. Mean- while, extensive logging of area by the Lao military’s Bolisat Phatthana Khet Phoudi Import-Export Company continues.

The World Bank is the main financier of Nam Theun 2, and its approval is therefore vital if the project is to go ahead. However, the long delay has caused problems for potential private investors, as well as prospective customers. In early March the Electricity Generating Authority of Thailand (EGAT), indicated that it would not start to purchase power from Nam Theun 2 until at least 2004.

Foreign trade and payments

Reserves are strengthening The IMF’s International Financial Statistics contains trade data for Laos only up until the second quarter of 1996. The merchandise trade deficit worsened through the first half of 1996 (1st quarter 1997, page 35). However, the improving trend in reserves seen in 1996 does suggest that the external position remains reasonable. Reserves (excluding gold) rose fairly steadily from $91.5m in the first quarter of 1996, to $171.7m in the last quarter. This trend continued into 1997, with reserves reaching $177m in January (according to the most recent available data).

Laos: reserves excluding gold Laos: current account $ m $ m 180 0

150 -20

120 -40

90 -60

60 -80

30 -100

0 -120 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1(a) Q1 Q2 Q3 Q4 Q1 Q2 1995 96 97 1995 96 (a) January. Source: IMF, International Financial Statistics. Source: IMF, International Financial Statistics.

Efforts to boost trade Thailand is already by far Laos’s largest trading partner, accounting for 25.7% with Thailand— of its exports and 60% of its imports in 1995. However, this trade is heavily in Thailand’s favour, prompting Vientiane to seek to reduce regulatory restrictions hindering two-way trade. For example, efforts are continuing to facilitate the flow of commercial traffic across the Mitraphab bridge linking the two countries, the use of which has been hindered by government restrictions. Speaking in March, the Thai transport and communications minister, Suwat

Liptapallop, said that a joint committee would be formed, with Laos responsible for drawing up a regulatory framework that will encourage greater use of the bridge. Mr Suwat’s comments followed a meeting with his Lao counterpart, Phao Bounnaphon. In January the two sides signed a trade promotion agreement and pledged to speed up work on a bilateral transport accord. The latter has now been in the pipeline for some months (1st quarter 1997, pages 33-34).

—include a rethink In another measure designed to facilitate trade, in March Laos proposed a new on visas visa for Thai and Lao holders of border passes (at present pass holders can travel within only a very limited distance of their point of entry). The visa will last for two weeks and will allow free travel anywhere in the two countries. Pass holders could obtain the visa at one of four entry points in each country: Nong Khai, Mukdahan, Ubon Ratchathani, and Chiang Rai (in Thailand); and Vientiane, Savannakhet, Champassak and Bokeo (in Laos). Although the scheme has still to be approved by Thailand, Vientiane has indicated that such visas could be extended to Vietnam, China, Cambodia and Myanmar if they prove to be a success. Laos is also pressing Thailand to relax its visa requirements for Lao businessmen who do not have border passes. The Thai government currently issues business visitors from Laos a double-entry visa valid for three months. It also requires visa applicants to produce a bank statement showing they have at least Bt10,000 ($390) in their account. The Lao authorities, meanwhile, issue a multiple-entry visa which lasts six months. Thailand’s less generous visa policy reflects a fear of illegal Lao immigration.

Better ties with Vietnam Following a visit of a Politburo member, Boun-gnang Volachit, to Vietnam in early January, the two governments announced plans to upgrade commercial relations. Although vague on detail, the English-language newspaper, Vietnam News, said that new incentives to encourage crossborder trade are to be offered. According to official statistics, which admittedly do not show the whole picture because of widespread smuggling, two-way trade between Laos and Vietnam was worth $137m in 1996. Interestingly, the trade was heavily in Laos’s favour, and there is scope for expansion. Vientiane recently opened a second international border post on Route 8, linking Bolikhamsay with Ha Tinh in Vietnam, which should increase trade between these two provinces. The first international border post links Savannakhet and Quang Ti provinces.

Planned improvements in infrastructure linking the two countries will undoubtedly help to boost trade further. For example, the proposed second bridge over the Mekong River will allow a road link between Thailand and Vietnam, via Laos (see Infrastructure). This will expand Laos’s opportunities for re-export; Lao goods currently transiting Vietnam en route to third countries were worth merely $13m last year, which undoubtedly reflects poor infrastructure.

In 1997 Lao exports to Vietnam are set to receive a boost as Laos is scheduled to start exporting electricity to Vietnam under a memorandum of understanding signed in 1995. Vietnam is also planning to increase aid to Laos. This follows a decision announced last year under which Hanoi agreed to spend $24m in 1996-2000 to help Laos in areas such as education and training, and agricultural development.

A new trade and tourism The ADB is due to report in May on the potential of a planned trade and triangle is being tourism triangle, linking Thailand’s Ubon Ratchathani, Laos’s Champassak and considered Cambodia’s Preah Vihear. As with a number of these schemes, Thailand appears to be the most eager participant. The Thai foreign minister, Prachuab Chaiyasam, raised the issue with his Lao counterpart, Somsavat Lengsavat, during a visit to Vientiane in January. Among the area’s attractions is a water- fall near Khon Phapeng on the Lao-Cambodian border, which is described by the scheme’s supporters as one of the most beautiful in Asia. Again, however, the success of the project depends on the development of appropriate infrastructure. Although the road traversing Champassak from the Thai to the Cambodian border has recently been upgraded with money provided by the ADB, the area’s tourist sites are still rather inaccessible. Furthermore, security in the border areas cannot be guaranteed, particularly since there is still a Khmer Rouge presence along the Thai-Cambodian border. However, tourist arrivals in Laos as a whole are growing strongly, rising by 16% in 1996 to 403,000, according to the National Tourism Authority.

EIU Country Report 2nd quarter 1997 © The Economist Intelligence Unit Limited 1997 36 Quarterly indicators and trade data

Quarterly indicators and trade data

Cambodia: quarterly indicators of economic activity

1994 1995 1996 1997 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Production Annual totals Rice ’000 tons ( 1,817a ) ( n/a ) n/a Exports Qtrly totals Rubber: net ’000 tons 9.0 9.0 7.0 9.0 9.0 9.0 7.0 9.0 6.0b n/a Prices Monthly av Consumer prices Jul-Sep 1994=100 104.1 101.3 99.6 105.5 107.1 106.0 107.6 112.7 116.7 111.9c change year on year % n/a n/a n/a n/a 2.9 4.6 8.0 6.8 9.0 n/a Money End-Qtr M1 CR bn 201.7 198.9 225.2 241.1 278.5 309.6 311.4 315.4 328.9 n/a change year on year % –1.1 6.6 21.7 20.2 38.1 55.6 38.3 30.8 18.1 n/a Foreign traded Annual totals Domestic exports $ m ( 265.1 ) ( n/a ) n/a Re-exports “ ( 582.0 ) ( n/a ) n/a Imports ” ( 1,212.9 ) ( n/a ) n/a Exchange holdings End-Qtr Foreign exchange $ m 102.6 133.1 139.1 158.4 176.8 197.0 203.2 217.7 251.9 253.8e Exchange rate Official rate CR:$ 2,575 2,400 2,341 2,496 2,526 2,558 2,619 2,687 2,713 2,743e

Note. Annual figures of most of the series shown above will be found in the Country Profile. a Estimate. b Total for October-November. c January only. d Balance-of-payments basis. e End-February.

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

Laos: quarterly indicators of economic activity

1994 1995 1996 1997 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Production Annual totals Rice ’000 tons 1,653 ( 1,679 ) ( n/a ) n/a Prices Monthly av Consumer prices 1990=100 145.0 145.5 165.0 182.6 183.4 184.7 190.5 193.9 197.2a n/a change year on year % 6.4 9.0 18.3 23.8 26.5 26.9 15.5 6.2 n/a n/a Money End-Oct M1 K m 61,343 69,660 67,415 65,573 67,177 69,554 67,454 71,023b n/a n/a change year on year % 17.4 44.7 31.3 23.4 9.5 –0.2 0.1 n/a n/a n/a Foreign trade Qtrly totals Exports $ m 104.0 80.9 87.5 85.7 93.8 71.9 82.8 n/a n/a n/a Imports “ 127.2 158.1 149.9 146.3 132.9 178.4 178.7 n/a n/a n/a Exchange holdings End-Qtr Foreign exchange $ m 50.03 73.94 70.96 63.97 78.01 78.52 91.79 124.56 161.35 166.97c Exchange rate Official rate K:$ 719 719 785 925 923 925 919 919 935 961c

Note. Annual figures of most of the series shown above will be found in the Country Profile. a Average for October-November. b End-August. c End-January.

Sources: FAO, Quarterly Bulletin of Statistics; IMF, International Financial Statistics.

EIU Country Report 2nd quarter 1997 © The Economist Intelligence Unit Limited 1997 Quarterly indicators and trade data 37

Cambodia and Laos: French trade ($ ’000) Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec 1990 1991 1992 1993 1994 1995 French exports fob Cambodia 2,624 4,278 13,374 21,457 42,745 60,483 Laos 2,883 3,039 3,003 3,893 20,187 24,154 French imports cif Cambodia 919 2,871 3,362 845 4,025 7,493 Laos 2,700 9,083 13,308 19,255 20,347 29,599 Source: UN, External Trade Statistics, series D.

Laos: foreign trade ($ m) Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Imports cif 1993 1994 1995 Exports fob 1993 1994 1995 Thailand 192.5 320.7 380.8 Thailand 57.4 62.8 68.9 China 40.8 39.6 52.5 Japan 10.6 28.1 26.9 Singapore 11.0 30.5 35.4 France 16.8 18.0 26.3 Japan 40.8 37.2 31.7 Turkey 0.0 160.0 23.9 Vietnam 20.9 23.9 27.7 Germany 12.2 18.6 20.1 France 4.0 21.2 26.4 Netherlands 14.4 10.1 14.1 Total incl others 357.2 642.1 637.1 Total incl others 154.1 353.5 268.1 Source: Asian Development Bank, Key Indicators of Developing Asian and Pacific Countries.