Cambodia Laos

COUNTRY REPORT

Cambodia Laos

4th 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 1998-99 12 Review 12 The political scene 21 Economic policy 23 The economy 25 Communications 26 Tourism 26 Foreign trade and payments

Laos 29 Political structure 30 Economic structure 31 Outlook for 1998-99 33 Review 33 The political scene 35 Economic policy and the economy 37 Infrastructure 37 Energy 37 Foreign trade and payments

40 Quarterly indicators and trade data

List of tables 22 Cambodia: government finances 25 Cambodia: money supply 27 Cambodia: current account 40 Cambodia: quarterly indicators of economic activity 40 Laos: quarterly indicators of economic activity 41 Cambodia and Laos: French trade 41 Laos: foreign trade

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List of figures 12 Cambodia: gross domestic product 12 Cambodia: riel real exchange rate 24 Cambodia: consumer prices and the exchange rate, 1997 27 Cambodia: current-account balance 28 Cambodia: reserves excl gold 32 Laos: gross domestic product 32 Laos: kip real exchange rate 38 Laos: reserves excl gold

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October 30, 1997 Summary

4th quarter 1997

Cambodia Outlook for 1998-99: Despite some opposition within the CPP, Hun Sen will retain his hold on power at least until after the election, which will probably go ahead in May 1998, as scheduled. The CPP will have no difficulty in winning. The ousted forces of Prince Ranariddh can be expected to continue to oppose Hun Sen’s takeover, including through armed resistance. GDP growth will slow sharply in 1997-98, and any recovery in 1999 will be modest. Aid and investment inflows will fall, inflation will rise and the riel may be forced into another sharp drop.

The political scene: Ung Huot has been appointed as a new first prime minister. King Sihanouk has refused fully to recognise Ung Huot’s appointment. The UN credentials committee has left Cambodia’s seat at the UN empty. Hun Sen has sought legitimacy by trying to fill vacant FUNCINPEC posts. The government has promised to hold an election in May as planned, but needs to find funds. There have been rumours of splits within the CPP, but the party conference has stressed unity. Prince Ranariddh has been stripped of his immunity and Hun Sen has said that he must be tried. Prince Ranariddh has sought to drum up international support. A new opposition alliance has been formed. Pol Pot has been sentenced to life imprisonment by a Khmer Rouge tribunal.

Economic policy and the economy: Some donors, including the USA, the IMF and the World Bank, have suspended aid, though others, including Japan, have not. Revenue has fallen, and sharp budget cuts have been ordered. The need for improved intellectual property protection has been recognised. GDP growth forecasts have been cut. Foreign business confidence has been badly shaken. Taiwan’s trade office has been closed. Inflation has soared.

Communications and tourism: Air travel and postal services have been disrupted. Royal Air Cambodge, the national carrier, has had its monopoly status revoked. The tourism sector has been hard hit, prompting government efforts to revive it.

Foreign trade and payments: The merchandise trade and current-account deficits widened in 1996, but foreign investment inflows increased. The USA has put GSP into effect. The riel has fallen.

Laos Outlook for 1998-99: The National Assembly election scheduled for December 21 will have little impact on policy. An upturn in GDP growth will be delayed by slower trade and investment with Thailand, and by the impact of flooding. Further depreciation of the kip is likely.

Review: The national election date—December 21—has been announced. An anti-government group has been formed overseas. Laos has been admitted as a full member of ASEAN. Vo Van Kiet has visited from Vietnam. A border dispute with Thailand has been resolved. Chinese visits and trade agreements have strengthened ties. The USA has praised Laos’s anti-drug efforts. Defence ties

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have been forged with India. Relations with Myanmar have remained good. The 1997/98 plan and budget have been adopted. The government has emphasised the importance of developing the manufacturing sector. Plans have been announced for an industrial zone near Vientiane. Inflation has been affected by currency turmoil and energy price rises. A financial cooperation agreement has been signed with Vietnam. Financing problems may delay the second Mekong bridge. An environmental assessment of Nam Theun 2 has been completed. The USA may grant MFN soon. The EU has lifted GSP restrictions for one year. The government has applied to join the WTO. Tariffs will have to be lowered to for the country to join AFTA. The kip has fallen against the US dollar. International reserves have fallen. Plans to develop tourism may be hit by slower Thai investment.

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 election due May 23, 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 election. After the 1993 election, two prime ministers were selected, one from the CPP, and one from FUNCINPEC (see note below)

Main political organisations National United Front for an Independent, Neutral, Peaceful and Cooperative Cambodia (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 ministersa Prince Norodom Ranariddh (F) government Ung Huot (F) 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 Sereyvuth (CPP)

Central bank governor Thor Peng Leath

a In July 1997 Prince Ranariddh was ousted from power, and in August another first prime minister was elected. The UN credentials committee has not switched recognition, and Cambodia’s seat at the UN remains empty.

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Economic structure

Latest available figures

Economic indicators 1992 1993 1994 1995 1996 GDP at current prices CR bn 2,509.0 5,414.0 6,131.0 7,200.0 8,200.0a Real GDP growth % 7.1 4.1 4.0 7.6 6.5a Consumer price inflation %b 112.5 41.0 17.8 3.5 9.0 Population m 9.4 9.7 10.0 10.3 10.7 Exports fobc $ m 264.5 283.7 489.9 855.2 643.6 Imports fobd $ m 443.4 471.1 744.4 1,186.8 1,072.0 Current accountd $ m –93.0 –103.9 –156.7 –185.7 –297.8 Reserves excl gold $ m 29.2 24.2 118.5 192.0 265.6 Total external debt $ m 1,840 1,829 1,915 2,031 n/a Debt-service ratio, paid (%) 4.0 9.6 0.3 0.6 n/a Exchange rate (av)e CR:$ 1,267 2,689 2,545 2,451 2,624

October 24, 1997 CR3,000:$1 (official rate)

Origins of gross domestic product 1996 % of total Agriculture 42.7 Industry (incl construction) 19.9 Services 37.4 Total 100.0

Principal exports 1996f $ m Principal imports 1995g $ m Sawn timber 96 Gold 305 Logs 53 Cigarettes 192 Rubber 32 Petrol & diesel 109 Maize 4 Motorcycles 36 Non-traditional items 113 Vehicles 22 Total incl others 298 Total incl others 929

Main destinations of exports 1993c % of total Main origins of imports 1993d % 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 estimate. b Average year-on-year rate for the last quarter. c Including re-exports. d Including non-retained imports. e Official rate. f Not including re-exports. g Customs basis.

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Outlook for 1998-99

Ung Huot will receive only After two days of fighting in and around the capital, Phnom Penh, on July 6-7, partial backing the second prime minister, Hun Sen, was left in control of the government. His rival, the first prime minister, Prince Norodom Ranariddh, had fled to France just before the coup. Hun Sen rebuffed calls from outside the country that Prince Ranariddh should be allowed to return, saying that if he did so he would be put on trial for illegally negotiating with the Khmer Rouge and for smuggling weapons into the capital.

Hun Sen sought to legitimise the ousting of Prince Ranariddh by continuing with the power-sharing agreement between his party, the Cambodian People’s Party (CPP), and Prince Ranariddh’s National United Front for an Independent, Neutral, Peaceful and Cooperative Cambodia (FUNCINPEC). In August the depleted National Assembly elected the foreign minister, Ung Huot, of FUNCINPEC, as first prime minister in Prince Ranariddh’s place. Hopes that this would quieten international criticism were only partly borne out: the UN left Cambodia’s seat empty at the General Assembly meeting in September. King Norodom Sihanouk signed the credentials for Hun Sen and Ung Huot to attend the UN gathering, but had earlier refused to issue the decree proclaim- ing Ung Huot as first prime minister, passing the task to the president of the National Assembly, Chea Sim, of the CPP.

The international community also has been cautious in recognising Ung Huot and the new government. The USA has refused explicitly to recognise Ung Huot as first prime minister, although the Association of South-east Asian Nations (ASEAN) has tacitly accepted his new role.

Hun Sen wants to hold an Cambodia’s desperate economic situation will keep up the pressure on Hun Sen election— to persuade the international community to resume aid (some major donors, such as the USA, the World Bank and the IMF, suspended lending in the wake of the July coup). To do this, he needs to convince donors that political free- doms are being respected. Hence he has proclaimed on numerous occasions that the national election, due to be held on May 23, 1998, will go ahead.

—but delays are possible There is some doubt as to whether this date is feasible. A political party law was passed in early October, but the all-important election bill was not expected to be debated by the National Assembly until November, leaving only six months to arrange voter lists and other preparations. Funding is also a problem. The government has said that, following budget cuts, it will be able to find only 30-40% of the $21m it needs to pay for the election. However, some donors, including the EU, will want to wait until the conditions under which the election will be held have become clearer before releasing funds.

The two key issues of concern to the international community are whether MPs from all parties will be allowed to take part, and how the election will be monitored. Around 20 MPs from FUNCINPEC and the Buddhist Liberal Democratic Party (BLDP) fled abroad following the coup, as did a number of ministers and government officials. Other pro-FUNCINPEC party members are in hiding. Ung Huot has welcomed an offer from the UN to provide security for

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those wishing to return. Even if they do so in time for the election, however, there is no question that it will be conducted on an uneven playing field. The CPP is in control of most local governments and almost all of the media, and the level of intimidation and violence can be expected to be very high. The election legislation makes provision for an election commission to monitor the polls, and Ung Huot has stressed that his government welcomes the presence of UN and other international observers. However, the short timescale and poor security situation prevailing in much of the country will hamper such efforts. (The local elections, which had been scheduled for January 1998, may also be delayed.)

Hun Sen has reasserted his Following the coup, rumours emerged that powerful figures within the CPP, grip on the CPP— notably the party president, Chea Sim, and the interior minister, Sar Kheng, believed that Hun Sen had miscalculated. A number of newspapers carried comments hinting that Hun Sen need not be the man to lead the CPP into the election; Hun Sen himself felt compelled to threaten to leave the party if he did not have its full support. By late September there were even rumours that he could be toppled in a second coup. However, as Hun Sen began to take a more conciliatory stance, taking part in negotiations with ASEAN, it seemed that the cracks were being papered over. At an October CPP party congress Chea Sim voiced his support for Hun Sen.

—and looks secure for the Hence Hun Sen does not seem to be in immediate danger of being unseated. moment The CPP, now in almost total control of the media and local government, is almost certainly assured of election victory. The constitution does not require the continuation of the “two prime minister” system beyond the next election, but the CPP may decide to bring into government the factions of FUNCINPEC that are no longer allied to Prince Ranariddh. Hun Sen must do more than form a new government, however. Over the months ahead, he must persuade the international donor community to normalise relations and resume aid if he is to be able to consolidate his regime. If he fails, prolonging the country’s economic difficulties, opposition to him—including from within the CPP—is likely to grow.

Cambodia may enter Following the coup, ASEAN refused to admit Cambodia as a full member of the ASEAN in late 1998 association in July. Although still eager to fulfil its plan to admit Cambodia, it will feel unable to do so until there is at least a semblance of stability there. ASEAN is spearheading efforts to find a political solution, and has called for all MPs and opposition groups who fled following the coup to be allowed to return to take part in the election. ASEAN has said that Cambodia’s application to join the regional grouping, which was put on hold in the wake of Hun Sen’s seizure of power, can probably proceed once next year’s election is held, assuming that there is no escalation of the fighting.

Sporadic fighting will Within hours of the coup troops loyal to Prince Ranariddh had been driven out continue of Phnom Penh, and by late July they had been pushed back to the border with Thailand. Prince Ranariddh’s success in negotiating with the hardline faction of the Khmer Rouge was one reason cited for Hun Sen’s move to oust him from power. Following the coup, what was left of Prince Ranariddh’s forces and the

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remnants of the Khmer Rouge retreated into the jungle along the Thai border in a loose alliance reminiscent of the 1980s. The Khmer Rouge and royalist troops control a few towns and surrounding areas along the Thai border in the north, and may also be active in the far west. However, they are less numerous and less well armed than Hun Sen’s forces. Prince Ranariddh has failed to persuade the international community to provide substantive backing for him and his forces. Hence pro-Ranariddh forces are not expected to able to make significant military gains, although they will remain capable of destabilising the border area in 1998-99 and there may be an upsurge in violence during the election.

Cambodia’s neighbours In terms of the regional and international response, the outlook is for a gradual want Hun Sen’s regime to acceptance of the reality of Hun Sen’s power. As noted above, the ASEAN be consolidated countries have moved quite far in this direction already, and so have China and Japan—Cambodia’s largest bilateral aid donor. Japan is continuing to supply aid, as is China, which has called for Phnom Penh’s representation at the UN General Assembly to be switched to the new government. However, whether wider acceptance of the Hun Sen regime can be found will depend very much on the treatment of opposition and pro-Ranariddh groups, and of Prince Ranariddh himself. The prospects here are not good, and so far Prince Ranariddh has not been able to return.

The prospects for reform A number of government ministers have been confidently talking about the are poor prospects for reform in the wake of Hun Sen’s seizure of power. In September the finance minister, Keat Chhon, said that the government was pressing ahead with plans to meet the tariff reductions required by the ASEAN Free Trade Area (AFTA), presumably on the assumption that Cambodia would be admitted to the group sooner rather than later. The government is also in the process of drafting laws to reform the banking sector and foreign exchange trading. They hope that measures such as the establishment of a 1,000-ha tourism development zone and perhaps some privatisation (power generation and the railways have been mentioned as possible candidates) will boost foreign investment inflows, making up for the aid and investment that Cambodia has lost in the wake of the coup.

However, although economic necessity will keep up the impetus for such efforts, progress in their implementation will be slow and patchy. Aside from being preoccupied with domestic and international political issues, bureaucratic weakness—including endemic corruption—imposes major constraints on the effectiveness of the government. There is also a strong body of opinion within the CPP which favours maintaining a strong state presence in the economy.

Economic growth will The outlook for the economy over the next 12-18 months is poor. Since the slow sharply in 1997— July coup, the government has downgraded its GDP growth forecast for 1997 from 6.5% to 3%. The manufacturing sector will be hit by disrupted retail and external trade, as well as a slump in foreign investment inflows and aid. Private demand will be hit by higher inflation, by job losses in the bigger cities resulting from the collapse of the services sector, and by a low level of confidence ahead of the May election. Government demand will not provide a boost to growth, following stringent cutbacks imposed after the coup. In addition, the

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tourist industry is likely to feel the effects of the recent events for many months to come, with a recovery unlikely before end-1998. This year, the government is forecasting a 25% fall-off in tourist revenue compared with 1996. Hence even the revised GDP growth figure may prove on the optimistic side, with growth of 1-2% more realistic.

—and any recovery will be The outlook for GDP growth depends critically on the agricultural sector, weak which accounts for 43% of GDP and employs around 75% of the workforce. Fighting in the north and west may disrupt agricultural activity in 1997, but a bounceback in output could led a modest upturn in GDP growth in 1998-99. The government drive to boost tourism (1998 has been designated “Visit Angkor Year”—Angkor Wat is a temple complex, Cambodia’s most famous tourist attraction) may also bear some fruit. However, the continuation of at least sporadic fighting around the country and tensions in the capital ahead of the May election and possibly beyond will ensure that there is no strong upturn in tourism in 1998. GDP growth will remain subdued, at least until foreign aid and investment starts to flow once more. Assuming that the election does not lead to further political turmoil, GDP growth may pick up to around 3-4% in 1998 and possibly 5% in 1999.

The aid freeze will not be Following the coup, major aid donors—notably the IMF, the World Bank and lifted before the election— the USA—suspended aid to Cambodia, with the exception of some humanitarian projects. The loss of aid—estimated to be worth around $100m for 1997 alone—will have a severe impact on the government’s budgetary position, and a sharp cut in expenditure has been ordered. Although Cambodia will benefit from an increase in assistance from China, this will not plug the gap.

The USA has made the resumption of aid conditional on the holding of a “free and fair” election. The USA will want to see participation by a cross-section of political parties, including probably the Khmer Nation Party (KNP). A string of reports alleging intimidation and violence against opposition politicians in the run-up to the polls would make it difficult for Washington to return to “business as usual”. However, if the election goes ahead in a reasonably orderly manner, normalisation of relations with the USA, including the resumption of aid, is possible, perhaps in the second half of 1998. There is also likely to be a resumption of IMF and World Bank lending, subject to fresh government commitments on reform and tackling corruption.

—and foreign investment Foreign direct investment (FDI) inflows will also be more sluggish in 1997-98 will slow and beyond. Many foreign investment projects in Cambodia have suffered major disruption, and some have been forced to close. Strong FDI approvals in the first half of 1997 are unlikely to translate into real commitments, and actual FDI inflows may slow in 1997-98. Many potential investors will prefer to wait for the results of the election. Although Cambodia is courting Chinese business and may see a rise in investment from this quarter, the closure of the Taiwan representative’s office in July (after Hun Sen accused Taiwan of involvement in the fighting) may jeopardise another important source of foreign capital.

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Future foreign investment in Cambodia will also be affected by the recent regional currency crisis, which will result in economic slowdowns in a number of the country’s key investors, such as Malaysia and Thailand. Cambodia will also lose out from its failure to join ASEAN in July, at the same time as Myanmar and Laos. However, it may join after the election (perhaps by late 1998 or early 1999), and this would give a boost to both trade and investment.

Inflation will rise— In the immediate aftermath of the fighting, price increases were already dis- cernible as the disruption, and hoarding by panicked consumers, resulted in shortages of food and other goods. In July year-on-year inflation surged to 16.5% compared with 7.3% in June. Domestic inflation in Thailand and other factors may negate much of the impact of the Thai baht’s fall in value. Annual average inflation of around 12% is likely for 1997. Inflation will not moderate much, if at all, in 1998. The government’s extremely weak budgetary position following the loss of aid and the economic slowdown may lead to monetisation of the budget deficit, which will fuel inflation next year. Consequently, double-digit annual inflation is likely to continue throughout 1997-99.

—and the riel will drop By the end of August the official riel rate was CR3,000:$1, compared with further CR2,761:$1 at the end of June, before the coup, marking a drop of 9% since January 1997. The riel came under downward pressure as the political upheaval resulted in a flight to US dollars, despite bank efforts to curb the removal of riel deposits. The currency turmoil which spread throughout South-east Asia in July has also had an impact, since there are concerns that the riel will have to drop further if Cambodia’s exports are to remain competitive. At the start of August officials from the National Bank of Cambodia (the central bank) said that they would seek to avoid a sharp devaluation of the riel, but that the low level of Cambodia’s reserves means there is little that the authorities can do if confidence takes another sharp knock and the riel comes under further downward pressure. Hence the riel is likely to slide to CR3,400:$1 by the end of 1997, a depreciation of 20% for the year, with another, smaller drop in 1998 as the capital-account position deteriorates. Stronger foreign investment and, perhaps, the resumption of some suspended foreign aid may occur by late 1998 and into 1999, halting the riel’s slide.

Trade growth will slow Anecdotal evidence suggest that both import and export growth have slowed since July. A number of light industrial manufacturers have said that production was relatively unaffected by the fighting, but it is almost certain that disruption in exporting goods has occurred. Weak consumer demand and slower investment will curb demand for imports. Slow trade growth is likely to continue at least until consumer and investor confidence improves, which we do not expect until after the 1998 election. While sluggish imports may allow an improvement in the merchandise trade deficit in 1997-98, reduced aid inflows may still result in a widening of the current-account deficit, while inflows of FDI will also slow, suggesting that Cambodia’s international reserves will fall in 1997, before a possible recovery by the end of 1998 and into 1999. Actual FDI inflows in 1996 reached $293.6m, up from $150.8m in the previous year. Another $400m in new FDI was approved in the first half of 1997 alone,

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but the drop in confidence since July may result in a dip in FDI inflows in 1997-98.

Cambodia’s debt levels Cambodia is considered to be one of the world’s most severely indebted low- will remain high income countries. In 1995 the total debt external debt stock reached $2.1bn, of which $1.7bn was interest and principal arrears. The World Bank estimated the debt stock to be equivalent to a high 71.3% of GNP, and 225.2% of exports, although the accumulation of arrears and the terms accorded to Cambodia kept the debt-service ratio to a low 2.7%. (In 1995 Cambodia negotiated highly concessional terms on much of its external debt.) According to the World Bank, Cambodia did not conclude any new external debt on non-concessional terms in 1996. However, the freeze on aid by many major donors may mean that the government will have to accept less generous terms on any new debt. The acute shortage of funds Cambodia is now facing means that the government will continue to accumulate arrears in 1997-99. Cambodia has not yet concluded a deal on its outstanding rouble debt (owed to countries of the former Soviet Union).

Cambodia: gross domestic product Cambodia: riel real exchange rate (a) % change, year on year 1990=100 140 10 Cambodia Asia excl Japan 130 8 120

6 110

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

Review

The political scene

A new “first prime The July 6-7 seizure of power by the second prime minister, Hun Sen, brought minister” is appointed— to an end the agreement imposed after the 1993 general election, under the terms of which Hun Sen shared power with his rival, first prime minister Prince Norodom Ranariddh. Following the coup, Hun Sen stressed that the ruling coalition—whose main parties are the Cambodian People’s Party (CPP), of which Hun Sen is vice-president, and Prince Ranariddh’s National United Front for an Independent, Neutral, Peaceful and Cooperative Cambodia (FUNCINPEC)—would continue to govern. FUNCINPEC was consequently called upon to choose a successor to Prince Ranariddh, who had left the country just before the outbreak of fighting. Its choice, the foreign minister,

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Ung Huot, was approved on August 6 by the 99 attending members of the 120-member National Assembly by 86 votes to 13. (When the National Assembly reconvened following the July coup, 20 MPs, including Prince Ranariddh, were absent, and one MP, Ho Sok, had been killed.)

—but is not recognised by Hun Sen hoped that the appointment of Ung Huot—and hence the continu- King Sihanouk— ation of the CPP-FUNCINPEC power-sharing agreement—would help to si- lence critics at home and abroad. However, in August King Norodom Sihanouk said that he did not recognise the newly elected Ung Huot as first prime minister, describing him as a “puppet”. Washing his hands of any responsibility for developments in Cambodia, the king sent a letter from Beijing (where he was undergoing medical treatment) informing the acting head of state, Chea Sim, that he could sign the decree confirming Ung Huot’s appointment if he saw fit. Chea Sim, who is also president of the CPP, signed. In theory, a new prime minister must also be approved by the president and vice-president of the National Assembly. However, the vice-president, Son Soubert, who fled Cambodia after the coup, said in early August that he did not approve Ung Huot’s appointment.

—or the UN On September 2 the king signed a letter to the UN secretary-general, Kofi Annan, authorising Ung Huot—in place of Prince Ranariddh—and Hun Sen to be Cambodia’s representatives at the UN General Assembly session in the USA in mid-September. Speaking shortly after he signed the letter, the king said that he had had no choice in the matter, as he had been in Cambodia at the time. King Sihanouk’s move angered his son, Prince Ranariddh, who described it as “extremely unjust” that the Cambodian people would be represented at the UN by what he described as “a bloodthirsty prime minister, ’Pol Pot II’, and a puppet”. Prince Ranariddh made clear his intention to attend the UN meeting.

UN member states were divided on who to recognise: the USA and Norway favoured Prince Ranariddh, but Russia and China supported Hun Sen and Ung Huot. Given the controversy, the UN credentials committee decided to postpone a decision over who would represent Cambodia, and the country’s seat at the September meeting was left vacant. Mr Annan held separate meetings with Hun Sen and Prince Ranariddh. Following these talks, Hun Sen and Ung Huot issued a statement promising to guarantee that the election would go ahead and that all political parties would be able to participate, but no breakthrough was made in moving towards talks between Prince Ranariddh and Hun Sen.

Hun Sen seeks legitimacy Hun Sen’s efforts to be seen to continue a CPP-FUNCINPEC coalition and to through reviving the restore the normal functioning of the National Assembly were undermined coalition— when around 20 FUNCINPEC and Buddhist Liberal Democratic Party (BLDP) MPs fled the country in the wake of his takeover. These MPs included the vice-chairman of the National Assembly, Son Soubert (who is also leader of one faction of the BLDP). Four FUNCINPEC ministers and three secretaries of state also escaped. The four ministers were: the minister of agriculture, forestry and fisheries, Tao Seng Hour (who returned to Cambodia on October 20); the minister of tourism, Veng Sereyvuth; the minister of rural development, Hong Sun Huot; and the minister of education, Tol Lah. In addition, a secretary of

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state at the interior ministry, Ho Sok, was killed after having been taken pris- oner during the fighting.

Hun Sen sought to find replacements for the missing ministers. The proposed new candidates included FUNCINPEC members well known for their anti- Ranariddh credentials, such as Ung Phan and Toan Chhay, who had split from the party in April (3rd quarter 1997, page 12). However, an attempt to push through the proposed changes at a meeting of the National Assembly on September 16 failed when only 67 out of 97 MPs present voted in favour (80 votes were needed for the motion to be passed). It seems that the changes were rejected because of disagreement among two factions of FUNCINPEC members as to who should be appointed, rather than because they were blocked by Ranariddh loyalists.

Hun Sen quickly sought to turn the defeat to his advantage, saying that it illustrated that democracy was functioning in Cambodia. However, he pledged to hold the vote again, adding that when he did so the National Assembly would vote on each post individually rather than collectively, which he claims was the reason the motion failed.

—but King Sihanouk Hun Sen also sought to win King Sihanouk’s blessing for his new government. withholds his support The blessing of the ailing king is not vital to Hun Sen’s political survival, but he would far rather have it than not, given that the king is immensely respected by ordinary Cambodians. Support from King Sihanouk may also help Hun Sen win international recognition, since many countries take into account what the king says when formulating policy.

After the king’s refusal to sign the decree appointing Ung Huot, on August 11 Hun Sen, Ung Huot and Chea Sim flew to Beijing, meeting King Sihanouk the following day in a further attempt to win his blessing. This was not forthcoming, and instead the king offered to abdicate—an offer rejected by Hun Sen. Hun Sen did, however, secure a pledge by the king to return to Cambodia before the end of August. On August 29 the king flew to the town of Siem Reap, ostensibly to pray for peace at the nearby Angkor Wat temple complex. Seeking to draw legitimacy from his return, Hun Sen was there to meet him, telling the press that the king had returned to work with his government. However, by staying at Siem Reap, rather than the capital, the king made clear that he did not fully recognise the Hun Sen government. The king soon re-entered the political fray, calling on August 31 for Hun Sen to meet Prince Ranariddh—a request which Hun Sen rejected. When further requests for a ceasefire and for talks failed, the king left once again for Beijing on October 25, still without having formally endorsed the new first prime minister.

The government is A critical international community has emphasised the importance of the gen- pressing on with election eral election being held as planned on May 23, 1998, and of all parties being plans— allowed to contest a free and fair poll. The date for the election was set only in June (3rd quarter 1997, page 15). Following the coup, Hun Sen pledged that the election would go ahead and in early September the government announced that it had finished drafting vital election legislation, including an electoral law and a political party law. On October 13 Chea Sim told the UN secretary- general’s special envoy, P L Malhotra, that he hoped the election legislation

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would be passed by the National Assembly by November. On October 27 legislation governing which political parties can contest the election was passed by 84 votes to seven; it was confirmed that the election bill would be debated in early November.

—but funding will be a In early October the interior minister, Sar Kheng, said that the election would problem cost $21m, but that Cambodia could only afford around 30-40% of this sum. The severe downturn in Cambodia’s economy has already forced the government to make cuts in its budget (see Economic policy). Hence Ung Huot has requested foreign technical and financial assistance in order to be able to organise the election; the government will have problems financing it if this external support is not forthcoming.

The donor community has sought assurances that candidates from all parties will be able to contest the election without harassment. The government’s pledge to ensure a free and fair poll received a boost during the September UN meeting in the USA when Hun Sen agreed that the UN may be called upon to protect the 20 MPs still overseas, enabling them to return to contest their seats. However, the donor community has also expressed concern that changes made to the draft election law following the coup would undermine its effectiveness in guaranteeing a free and fair election. The amendments introduced political representatives to the planned election commission (which had been a neutral body in the original draft). In early October the EU said that it would wait for the passage of all election legislation before deciding whether or not to make funding available. (It remains unclear whether local elections, which had been scheduled for January 1998, will go ahead at that time.)

There are rumblings In the aftermath of Hun Sen’s seizure of power there have been signs of tension within the CPP— within the CPP. It was rumoured that leading figures within the CPP, who had apparently not been consulted before Hun Sen seized power, believed that he had profoundly miscalculated the likely regional and international response to the ousting of Prince Ranariddh. Following the coup, the Association of South- east Asian Nations (ASEAN) rejected Cambodia’s application to become a full member of the association (3rd quarter 1997, page 17), and a number of countries suspended aid (see Economic policy). There have long been rumours that a faction in the CPP, based around the party president, Chea Sim, and the deputy prime minister and interior minister, Sar Kheng, are opposed to Hun Sen.

On August 19 Hun Sen, who is the CPP’s vice-president, appeared to be trying to head off internal party criticism when he threatened in comments broadcast on state radio to resign if the party did not back him. A week later he again threatened to step down if a recently announced law and order campaign tackling such issues as the illegal holding of weapons and dismantling of unauthorised checkpoints was not successful. By the end of September a number of foreign embassies had issued warnings to their citizens in Phnom Penh that the tension within the CPP could spill over into further violence, and rumours emerged that another coup was possible.

These tensions were played out in the press. On October 15 the newspaper Angkor Thom reported that Hun Sen had in the past considered setting up a new political party. The article suggested that Hun Sen would be replaced by Sar

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Kheng, who was well-respected abroad, contrasting his behaviour with Hun Sen’s “devilish activities”.

—but the party conference Nevertheless, at the twice-yearly CPP party conference, which opened on stressed unity October 25, rumours of rifts within the CPP were quietened when Chea Sim voiced his support for Hun Sen’s seizure of power (which the latter described as a “timely and successful crackdown” on “anarchists”). Chea Sim reiterated the official line that Prince Ranariddh had been deposed following his attempts to bring weapons and Khmer Rouge soldiers into the capital.

Prince Ranariddh must Prince Ranariddh’s position remains extremely difficult. On August 6 the stand trial, Hun Sen says National Assembly voted to strip him of his parliamentary immunity. Shortly afterwards, the military prosecutor’s office issued a warrant for his arrest. Prince Ranariddh was charged with illegally negotiating with the Khmer Rouge and smuggling weapons into Phnom Penh. To back the allegations, the foreign ministry has produced a “white paper” cataloguing what it calls Prince Ranariddh’s “strategy of provocation”. Hun Sen has said on a number of occasions that Prince Ranariddh will be arrested immediately if he returns to Cambodia.

Prince Ranariddh has Since the coup Prince Ranariddh has been trying to persuade the international sought international community to back him. In late July he left France, where he had been when support Hun Sen took over, to visit Indonesia, Thailand, Singapore and China. While in Bangkok, he met the US special envoy, Stephen Solarz, who was also visiting. After returning briefly to France, Prince Ranariddh made a further trip to South- east Asia in late August, visiting Thailand and the Philippines, before attending the UN General Assembly meeting in the USA in mid-September. The response of the international community has been cool. Japan, in particular, has been less than sympathetic. Bangkok has also sought to remain distant from Prince Ranariddh’s activities; the Thai prime minister, Chavalit Yongchaiyudh, said on July 23 that it was “not appropriate” for the prince to use Thailand as a base for “political manoeuvres” or as a place to meet with his supporters.

A number of others have sought to win international support for an anti-Hun Sen position. In early August the vice-president of the National Assembly, Son Soubert, who is a member of an anti-Hun Sen faction of the BLDP, visited Tokyo, where he met the Japanese deputy foreign minister, Shunji Yanai. Son Soubert requested Japanese help in ensuring that a free and fair election would take place in May 1998. The leader of the opposition Khmer Nation Party (KNP), Sam Rainsy, has also been vocal in condemning Hun Sen.

A new opposition alliance Following the coup, the main parties opposed to Hun Sen united to form the is formed Union of Cambodian Democrats (UCD). This comprises all the parties which formed the National United Front (NUF) in January (2nd quarter 1997, page 10). The four parties are: Prince Ranariddh’s wing of FUNCINPEC; the KNP; the faction of the BLDP led by Son Sann; and the Khmer Neutral Party, led by Bour Hel. In early August the UCD issued a statement condemning Ung Huot’s appointment as first prime minister as “totally illegal”. The group also called for protection from external forces to enable exiled members to return to Cambodia. As noted above, members of the UCD, including Sam Rainsy and Son Soubert,

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have sought to focus international attention on their side of the story, but have been able to do little more.

Pol Pot is sentenced to life By June it had looked as if the remaining hardline faction of the Khmer Rouge, imprisonment based at Anlong Veng in the north of the country, was about to give up its armed struggle against the government. Hun Sen and Prince Ranariddh had competed to lure the fighters to rejoin the legal fold, and in mid-June reports emerged that Khmer Rouge, led by Khieu Samphan, in favour of making some accommodation with the government had turned on their former leader, Pol Pot, denouncing his “treason” (3rd quarter 1997, pages 13-14). In late July reports began to emerge that Pol Pot had been brought to trial by his former comrades. The event was exclusively observed by a Far Eastern Economic Review journalist, Nate Thayer, and his cameraman. In a stage-managed trial, Pol Pot was tried and convicted for the murder in June of the former Khmer Rouge defence chief, Son Sen, and 14 members of his family, the attempted murder of the Khmer Rouge military leader Ta Mok, and the destruction of the policy of “national reconciliation”—a reference to Pol Pot’s opposition to talks with FUNCINPEC. The court ruled out handing over Pol Pot to an international court.

Prince Ranariddh’s forces Since Hun Sen’s takeover and Pol Pot’s downfall, the hardline Khmer Rouge have had Khmer Rouge forces based at Anlong Veng and forces loyal to Prince Ranariddh have moved support— closer together in a repeat of the alliance which opposed the Vietnamese- backed government in Cambodia during the 1980s. A FUNCINPEC officer fighting at O’Smach said on August 19 that he was being supported by a 1,000-strong Khmer Rouge force. There were also reports in late September of a joint royalist-Khmer Rouge attack on Route 69, the supply route used by Hun Sen’s troops in the north-west.

The emergence of the de facto military alliance between anti-Hun Sen royalists and the Khmer Rouge has caused problems for Prince Ranariddh. In the face of criticism from the USA, which has expressed concern over what it called his “flirtation” with the Khmer Rouge, Prince Ranariddh has stressed that no for- mal alliance has been signed between his forces and the guerrillas. He also assured Washington on July 11 that he would not allow the Khmer Rouge to return to power in any government led by him. At the same time, he has described the Khmer Rouge as “nationalists” and said that it was “natural” that they should be fighting alongside his forces.

—but Hun Sen gains the The troops loyal to Prince Ranariddh, who are led by Lieutenant-General Neak upper hand on the Bounchay, are less numerous and less well-equipped than Hun Sen’s forces. In battlefield the aftermath of Hun Sen’s takeover, they were quickly pushed back towards the border with Thailand. In late July fighting briefly took place around the town of Samrong, some 30 km from the Thai border, but the royalist troops soon retreated, taking up positions at O’Smach, which is only a few kilometres from Thailand. Fighting—at times intense—continued around O’Smach throughout August. Towards the end of that month, General Bounchay called for a ceasefire, to be mediated by ASEAN members. This was rejected by the Hun Sen government. There were also reports that the royalist troops were running short of ammunition and supplies. Hun Sen’s forces were in control of parts of the area surrounding O’Smach by the end of August, but sporadic

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fighting continued into October. On October 2 troops clashed just inside Cambodia at Anh Mah, a crossing-point into Thailand.

Hun Sen has vowed to take the Khmer Rouge’s northern stronghold of Anlong Veng by the end of the year, although military analysts believe that this may take considerably longer because it is well-defended. Minor clashes have also been reported around Samlaut and elsewhere in Battambang province in the west.

Refugees flee the The fighting has had a devastating impact on the local population. According fighting— to one estimate, around 20,000 people have left the area around Samrong to avoid the fighting. The majority have crossed into Thailand, where camps have been set up under the supervision of the United Nations High Commission for Refugees (UNHCR).

—and opposition members There is much anecdotal evidence that large numbers of the party rank-and-file and journalists go into of FUNCINPEC and the KNP have gone into hiding. In addition, the work of hiding opposition and independent media has been curtailed. The president of the Khmer Journalists’ Association (KJA), Pin Samkhon, who has himself gone into exile in Thailand, told Reuters that the number of newspapers being published in Cambodia had fallen dramatically from around 60 titles before July to around eight in late August. Of these, around three or four could be classed as “independent”.

A KNP official is sentenced In early September the former chief security officer for the KNP, Strung Vong to 13 years Vannak, was given a 13-year prison sentence by a court in Phnom Penh for allegedly plotting the murder of Hun Sen’s brother-in-law, Kov Samuth, who was killed in November 1996. Two other men, one of whom reportedly con- fessed to being the gunman, were also sentenced. When Strung Vong Vannak was arrested in March 1997, Sam Rainsy protested that the CPP was attempting to discredit his party (2nd quarter 1997, page 13). Strung Vong Vannak has continued to protest his innocence and has criticised the trial (the CPP has strong control over the judiciary). He is expected to appeal against the verdict.

There is evidence of The UN’s Centre for Human Rights (UNCHR) in Cambodia has been seeking to human rights abuses corroborate reports of human rights abuses during and immediately after Hun Sen’s takeover. According to its evidence, at least 40 and possibly 60 of Prince Ranariddh’s supporters were killed extra-judicially. Of these, the majority were senior FUNCINPEC military and intelligence officials and their bodyguards. Some bodies have been found; on October 15 two graves, believed to be those of General Krouch Yoeum, undersecretary of state at the ministry of defence, and General Chao Sambath, a FUNCINPEC military intelligence official, were found by the investigators. Others bodies were reported to have been burned. There were also reports that captured pro-FUNCINPEC soldiers had been tortured.

The release of this information caused relations between the government and the UNCHR to sour—not for the first time. Hun Sen rejected the UN report, called for officials at the UNCHR to be replaced and said he would set up his own committee to investigate reports of human rights abuses. On September 1 the UN’s special representative for human rights, Thomas Hammerberg, flew to

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Phnom Penh, where he had a meeting with Ung Huot. He defended his staff, saying that all reports had been checked against other sources before being used.

Hun Sen at first brushes Having decided in the wake of the coup to postpone Cambodia’s admission to off ASEAN— ASEAN, the regional grouping moved to try to mediate in the political crisis. A top-level delegation, comprising the foreign ministers of Indonesia, Thailand and the Philippines—respectively Ali Alatas, Prachuab Chaiyasarn and Domingo Siazon—was dispatched to Phnom Penh on July 19. This followed meetings with King Sihanouk in Beijing and the ousted first prime minister, Prince Ranariddh, in Bangkok on July 17 and 18. The ASEAN delegation was believed to have proposed various solutions, including the formation of a caretaker government. The reception in Phnom Penh was frosty, with Hun Sen in effect telling them that he saw no role for ASEAN, and the trio left empty- handed. One diplomat described Mr Alatas as furious after he and his counter- parts were “subjected to a two-hour lecture by Hun Sen”.

—before it begins A few days later Ung Huot adopted a more conciliatory tone, telling ASEAN mediation foreign ministers gathered in Kuala Lumpur for their annual ministerial meeting, which he was attending as an observer, that Hun Sen had changed his mind and that he wanted the regional grouping to mediate. The ASEAN delegation returned to Phnom Penh, where it met Hun Sen on August 2 for further talks.

ASEAN’s strategy places The “troika” of Mr Alatas, Mr Prachuab and Mr Siazon briefed other ASEAN the emphasis on elections foreign ministers during their annual meeting, which took place in the USA in mid-September. At that time, the Malaysian foreign minister, Abdullah Badawi, said that Cambodia could be admitted to ASEAN if a free election was held in 1998. When pressed on whether ASEAN recognised the election of Ung Huot as first prime minister, Mr Alatas said that the association recognised “states not governments”, seeming to step back from ASEAN’s earlier recognition that Prince Ranariddh was still first prime minister. The Thai government has adopted a similarly pragmatic position. Its deputy foreign ministry spokesman, Thinankorn Kanasutra, said on August 10 that Bangkok would have no objec- tion to Ung Huot’s appointment as long as it was done in accordance with Cambodia’s constitution and in a free and fair manner.

ASEAN has continued to say publicly that “all political forces” should be allowed to participate in the election, and has called for the MPs in exile to return to participate. The role of Prince Ranariddh remains a stumbling-block, although the tacit acceptance of Ung Huot as first prime minister has cleared the way for ASEAN to work with the Hun Sen-Ung Huot government.

The USA defers to ASEAN Although the USA has strongly criticised Hun Sen’s takeover and suspended aid (see Economic policy), it has opted largely to let ASEAN make the running in pursuing a political solution—a point stressed by State Department spokesman James Rubin on August 7. The US administration has echoed ASEAN’s position that a free and fair election must be allowed to take place. Speaking in Manila in early September, the US assistant secretary of state for East Asian and Pacific affairs, Stanley Roth, said that it would only be business as usual if Hun Sen took preparations to ensure that such an election would be possible. The US

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special envoy on Cambodia, Stephen Solarz—one of the architects of the 1991 Paris peace plan—told Japan’s foreign minister, Yukihiko Ikeda, in late July that Washington would not recognise Ung Huot. Washington has said that it will meet Ung Huot if necessary, but that it does not consider him to have been democratically elected.

The USA has been unimpressed by some of Hun Sen’s allies. On August 14 Mr Rubin said that it had decided to revoke the visa of a prominent Cambodian businessman, Teng Bunma, because it had evidence that he had been involved in drug-trafficking. Mr Bunma is known to be close to Hun Sen; indeed, after the coup he boasted of having given $1m to back him. However, distaste for the Hun Sen government did not stop the USA extending trade privileges to Cambodia in July (see Economic policy).

China backs Hun Sen Although couching its position in terms of the need for rival parties in Cambodia to settle their differences peacefully, China has indicated that it has few problems with the new regime in Phnom Penh. At the UN General Assembly in New York, Beijing made it clear that it favoured Cambodia’s representation being switched to Hun Sen and Ung Huot, citing the fact that King Sihanouk had given his consent for such a change (see above). In the wake of Hun Sen’s takeover, China also continued to make new aid commitments. On August 8 the Chinese ambassador to Phnom Penh, Yang Tin Ai, signed a $2m aid agreement with Cambodia to build 300 wells in rural areas.

Hun Sen, for his part, has been courting China for some time. In July 1996 he visited Beijing—without Prince Ranariddh—where he met both the president, Jiang Zemin, and the prime minister, Li Peng (4th quarter 1996, page 16). While Hun Sen regards China as an important potential economic partner, the principal rationale for moving closer to China is strategic: developing close relations with China is seen as the best way of exerting leverage over ASEAN (which wants to limit China’s influence on its South-east Asian neighbours).

Relations with Taiwan Hun Sen’s determination to cement ties with China is evident from the hard nosedive line he has adopted towards Taiwan, even at the risk of jeopardising sizeable Taiwan investment. In the wake of his seizure of power, Hun Sen accused unidentified “Taiwanese mafia” as having backed the royalist forces. Partly in response to this, Taipei closed down its unofficial trade office in Phnom Penh in late July (see The economy). Earlier this year, direct air links with Taiwan were delayed out of deference to the “one-China” policy (2nd quarter 1997, page 17).

Vietnam denies Given that Hun Sen first came to power in Cambodia as the head of the involvement in the coup government originally installed by Vietnam following its 1978 invasion, there have inevitably been suggestions that Hanoi may have had a hand in Prince Ranariddh’s removal. The fact that Hun Sen was in Vietnam shortly before the fighting—on what was officially referred to as a private visit—has compounded such speculation. Hanoi strongly denies that it had any part in the recent events. In August its foreign ministry described remarks apparently made by Prince Ranariddh suggesting Vietnamese involvement as “groundless and irresponsible”. This may not be disingenuous. Although Hanoi is thought to be

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content to see Prince Ranariddh out of the way, some sources suggest that Vietnam is concerned that Hun Sen has become too much “his own man”.

Economic policy

The USA suspends aid— In the wake of Hun Sen’s takeover, the international donor community has reacted in a number of ways over the question of aid. The USA, which announced a 30-day suspension of aid immediately after Prince Ranariddh was ousted, has adopted the toughest position. On August 8 it announced an indefi- nite freeze on $25m of its aid programme (around two-thirds of the total), with the exception of humanitarian projects. Announcing the decision, the State Department spokesman, Mr Rubin, said that a resumption of aid has been made contingent on progress being made towards a “free and fair” election. Germany also suspended aid, while France delayed announcing new aid commitments.

—as do the IMF and World On September 23 the IMF announced that it had suspended its financial sup- Bank— port to Cambodia indefinitely, citing “problems of governance which concern corruption and logging”. The Fund’s office in Phnom Penh is also being closed. Relations between the government and the IMF have been strained for many months, notably because large amounts of revenue earned from logging have not been reaching the national budget (1st quarter 1997, page 18). Affected by the IMF’s decision is some $40m of undisbursed loans which form part of a three-year $120m Enhanced Structural Adjustment Facility (ESAF) agreed in 1994. The World Bank has said that it will freeze its budgetary support to the Cambodian government, and will not undertake new programmes until the IMF resumes lending, although existing humanitarian projects will continue.

The Phnom Penh Post newspaper quoted finance ministry officials in September as saying that Cambodia had lost out on around $100m in aid for the year. (This seems to tally with the announced cuts discussed above.)

—but others, including Cambodia’s largest bilateral donor, Japan, will continue to extend aid. In the Japan, do not days after Hun Sen seized power, misreporting in the press as to Tokyo’s position prompted its foreign ministry to state categorically that it had neither cut off aid nor threatened to do so, although it admitted its programmes had been disrupted by the fighting. Later in July Japan’s foreign minister, Mr Ikeda, said that continued economic assistance was conditional on the government’s adherence to the 1991 Paris peace accords, the upholding of the constitution and the coalition set-up, respect for basic human rights and a commitment to holding a free and fair election. However, the KNP’s Sam Rainsy has reported that Japan has continued to extend budgetary assistance to Cambodia.

A number of other governments have left their aid programmes partly or totally intact. Echoing Japan’s position on the importance of a free and fair election, Australia has suspended A$2m (US$1.4m) in military aid but main- tained its general aid programme, which is currently worth an annual A$22m. China and South Korea are also continuing aid. South Korea announced on September 11 that it was supplying the government with construction equipment worth US$2m for use on rural road-building projects.

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State finances are in a According to government officials, government revenue collection has been mess— badly affected by the recent political turmoil. Revenue has fallen because imports have slowed—around two-thirds of government revenue is estimated to come from import tariffs—and in mid-October Hun Sen also alleged that customs revenue was being lost due to corruption. Customs revenue from duties on exports will be hit by the decision to waive the “pre-shipment inspection” (PSI) on many classes of exports, including garments. The PSI is designed to reduce under-reporting of the value of exported items; while its removal may make life easier for exporters, there is a risk that it will result in lower customs revenue (although taxes on exports were budgeted to account for only 4% of total customs revenue in 1997). The expected sharp slowdown in GDP growth this year (see The economy) will reduce revenue from non-tariff taxes. On the expenditure side, the government will have to find funds to compensate investors for losses incurred during the coup (see The economy), while defence expenditure will escalate due to the intensification of fighting with the Khmer Rouge, and also now with the resistance forces loyal to Prince Ranariddh.

The loss of bilateral and multilateral aid will also hit Cambodia hard, as around 40% of government expenditure—and all of the budget deficit—is financed by foreign aid. Both direct budget support and project financing have been reduced, leaving Cambodia with a huge shortfall in funding to cover its projected budget deficit, even before the expected drop in revenue is taken into account.

Cambodia: government finances (CR bn) 1997 budget Total revenue 896.4 Tax 673.3 of which: customs duties 437.8 Total expenditure –1,480.8 Budget deficit –584.4 Foreign financinga 597.5 Project aid 488.0 Budget support 111.4

a Totals do not add in original.

Source: World Bank, Cambodia: Progress in Recovery and Reform, 1997.

—prompting severe Due to current and anticipated revenue shortages, Hun Sen has offered to belt-tightening in some compensate investors via import tax exemptions and other tax breaks rather areas than with cash payments. In October the finance ministry called for a 20% cut in budgeted expenditure over the remainder of the year to offset the shortfall in revenue and foreign financing. However, figures indicate that expenditure on education and health have born the brunt of the cuts to date, while military expenditure has increased.

An intellectual property In late August a seminar was held at the trade ministry in Phnom Penh to rights law is planned discuss the drafting of an intellectual property rights law. The commerce minister, Cham Prasidh, called for the law to be drafted quickly as a precondition for Cambodia to become a member of the World Trade Organisation (WTO). This, he hoped, could happen within the next two years. (Cambodia became

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an observer to the WTO in 1995.) Cham Prasidh had earlier indicated that Cambodia hoped to become a WTO member by the end of 1998 (3rd quarter 1997, page 19), a date which his latest statement suggests is too optimistic.

Railways and power According to the newspaper Reaksmei Kampuchea, the government is consider- plants may be privatised ing the privatisation of the state railway and electricity company, presumably to raise urgently needed funds. However, no decision has been taken.

The economy

GDP growth forecasts In late July a committee established to assess the extent of the damage caused have been cut sharply— by the fighting estimated that losses in Phnom Penh alone had reached $100m. This included claims of $26m worth of damage to a garment factory looted in the fighting. However, the cost of recent political upheavals goes far beyond estimates of the extent of damage to buildings and equipment. Loss of aid and lower investment are the key factors likely to affect growth. The government is also reporting a sharp fall-off in the number of tourists visiting the country (see Foreign trade and payments) and a slowdown in the construction and service sectors. Anecdotal evidence suggests that this is having a knock-on effect in terms of lower consumer demand resulting from job losses and lost earnings. Market vendors and small traders are particularly feeling the squeeze. In early September the minister of finance, Keat Chhon, said that GDP growth was unlikely to be above 3% in 1997, compared with the already downgraded forecast of 6.5% before Hun Sen’s takeover. Even this looks overoptimistic; growth of 1-2% is more likely.

—as foreign business The recent political upheavals have caused substantial disruption to business confidence takes a knock activity. Several thousand people were evacuated from Cambodia in the immediate aftermath of the fighting in Phnom Penh, of whom many were expatriate business people and their dependants. A number of companies, including Royal Dutch/Shell and Toyota Motor Corporation, as well as some garment factories, were looted during the fighting. Although expatriate staff have begun to return, it is clear that many companies with an interest in the country but not yet committed have been re-evaluating their investment plans. The managing director of one foreign construction company in Phnom Penh said in early September that seven contracts with his company worth a total of $19.5m had been cancelled and that he had not concluded any new contracts since the fighting. Companies have also been frustrated by the slow progress made in settling claims for compensation following the fighting. According to the Cambodia Times, the committee set up to investigate claims has so far paid out little or nothing, and is refusing to pay the full amount of most claims. The cash-strapped government is hoping it can use tax and other rebates to settle claims, rather than having to find scarce funds up-front.

The impact of the coup has shown up in figures for FDI approvals. In the first half of 1997 the Cambodia Board of Investment (BOI) approved $400m in FDI; in July-October only $97m was approved.

However, some companies—particularly the smaller Asian firms involved in areas such as garments and processing, which argue that low labour costs and

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access to US and EU trade benefits are too good an opportunity to miss—have expressed intentions to press ahead with their investments. A number of larger Asian companies have also pledged to continue their operations. For example, Singapore’s Raffles International is planning to press ahead with the opening of two top-class hotels. The US oil company Caltex (a joint venture between Texaco and Chevron) has said that it will continue with its $8m international marine terminal in Sihanoukville, although it will delay other projects.

Taiwan’s unofficial trade In the aftermath of Prince Ranariddh’s removal from power, Hun Sen alleged office closes that elements of the “Taiwanese mafia” had provided financial support to the royalist forces and even that a Taiwan general had been in Phnom Penh on the day of the coup. This appears to be part of a foreign policy shift in the direction of Beijing (see The political scene). On July 22 Hun Sen announced that the Taipei representative office in Phnom Penh would have to close, saying that the interest of Taiwan citizens could be looked after by China’s embassy in the capital. On July 28 the Taiwan government said that it was closing its unofficial trade office in Phnom Penh, citing the need to protect its “dignity and interests”. It also ordered the closure of the Cambodian trade office in Taipei. A Taiwan foreign ministry spokesman said that it was urging its investors to proceed cautiously.

Hun Sen has sought to moderate the impact on Taiwan investors in Cambodia. In early August he assured a group of them that the investment situation had “returned to normal”. Taiwan is one of the largest foreign investors in the country, and hence a policy which threatens to drive its companies away could prove costly. Taiwan companies have been especially active in the garments industry but are also involved in other areas of light industry and in construction.

Inflationary pressure Revised figures from the IMF’s International Financial Statistics show that con- picks up sumer price inflation shot up in the wake of the coup. Revised figures put average year-on-year inflation at 5.7% in the first quarter, and 6.8% in the second quarter, but show a marked rise to 16.5% year on year in July. Inflation eased only slightly to 14.9% year on year in August. Month-on-month infla- Cambodia: consumer prices and the exchange rate, 1997 tion for July was 13%, up from 0.6% in June and 0.7% in May. Key factors

Consumer prices, % change, year on year; behind the increase in prices included shortages of goods in the wake of the left scale fighting as production and retail trade was disrupted, and as panicked consum- Riel:$; right scale, inverted 20 2,600 ers sought to hoard staples. Another factor was the fall in the value of the riel (see Foreign trade and payments).

15 2,700 The shortfall the government now faces in financing its budget deficit (see Economic policy) increases the risk that it will resort to monetisation of the 10 2,800 budget deficit, pushing up money supply growth in the medium term. The latest data—which covers only the period before the coup—shows that money 5 2,900 supply growth had slowed. Growth in M1 dropped from 18% year on year at

0 3,000 the end of 1996 to 7.5% in the first quarter of 1997 and 6.2% in the second Jan Feb Mar Apr May Jun Jul Aug quarter. Growth in broad money, M2, also slowed, from 40.4% at the end of Source: IMF, International Financial Statistics. 1996 to 32.1% in the first quarter of 1997 and 15.8% in the second quarter.

EIU Country Report 4th quarter 1997 © The Economist Intelligence Unit Limited 1997 Cambodia 25

Cambodia: money supply (CR m unless otherwise stated) 1996 1997 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr M1 309,622 311,365 315,439 328,926 332,905 330,594 % change, year on year 55.6 38.3 30.8 18.1 7.5 6.2 M2 740,885 779,233 824,073 911,618 978,565 902,073 % change, year on year 61.4 50.2 44.3 40.4 32.1 15.8 Interest rates (%) Deposit rate 8.8 8.8 8.8 8.8 8.5 8.8 Lending rate 18.9 18.8 18.8 18.7 18.3 18.4 Source: IMF, International Financial Statistics.

Communications

Air travel is disrupted— Air travel to and from Cambodia was disrupted by the fighting. Phnom Penh’s Pochentong airport was the scene of both fighting and heavy looting, which damaged the control tower and other buildings. Much of the airport’s security equipment, including the only X-ray machine, was carried off. In the immediate aftermath of the fighting, all foreign airlines which fly to Phnom Penh cancelled their services. The disruptions continued into August, with Thai Airlines and Hong Kong’s Dragonair refusing to resume flights until proper security procedures were in place at the airport. The damage to the control tower has been cited as a possible factor in the crash on September 2 of a Vietnam Airlines flight trying to land at Pochentong, in which all but two of the 64 passengers were killed.

—and so are postal In July the courier company DHL announced that it was suspending its oper- communications ations in Cambodia for the foreseeable future. In late August the German post office, Deutsche Post AG, said that it too was no longer accepting letters or parcels for Cambodia.

A new open-skies policy Shortly after Hun Sen took over, he announced the cancellation of the position of Royal Air Cambodge (RAC) as the sole national carrier. This reverses a decision taken in 1993 by Prince Ranariddh, when two other national airlines partly owned by Thai companies and with close ties to Hun Sen were forced to close. No details have yet been announced about the possible formation of new domestic carriers, although it is certain that this will follow.

A number of new air routes are being explored. In late July Orient Thai Airlines announced the formation of Kampuchea Air, a joint venture with the Cambodian government. Talks on establishing direct flights between Phnom Penh and Taipei were put on hold earlier this year following objections from China (2nd quarter 1997, page 20). China’s first deputy minister of foreign affairs, Tang Jiaxuan, reportedly told Hun Sen in August that Beijing was willing to discuss an air link between Phnom Penh and Taipei, although the recent worsening of relations between Taiwan and Cambodia (see The political scene) makes such a link less likely.

EIU Country Report 4th quarter 1997 © The Economist Intelligence Unit Limited 1997 26 Cambodia

Tourism

Tourists stay away— Following July’s fighting in Phnom Penh and battles around Siem Reap, home to the Angkor temple complex, Cambodia’s tourist industry has suffered a severe slump. Visitors in July totalled 6,251, compared with 20,000 the previous month. Moreover, fewer than 4,000 of the July visitors were tourists—the rest being business people or officials—and the majority came in the week before the fighting began. Hotel occupancy rates have plummeted. The nor- mally popular City Inn Hotel in Phnom Penh reported that only around 11% of its rooms were taken in late July. This had improved to 20% in the case of the Hotel Sofitel Cambodian in August. In addition, travel agents reported that most group tours to Angkor Wat had been cancelled.

At the end of October many embassies were still warning their nationals against non-essential travel to Cambodia.

—but efforts are being Nevertheless, the government has already begun work on putting the country made to promote tourism back on the tourist map. In August the tourism ministry unveiled a new plan to develop the industry, concentrating on the development of the following:

• the promotion of Khmer culture at Angkor Wat;

• the beaches around Sihanoukville; and

• eco-tourism in Ratanakiri province.

As a first stage of the plan, 1998 has been declared “Visit Angkor Year”, which will begin in December 1997. Some 1,000 ha have been set aside near the temples for a tourism development zone, which the government hopes will attract investment in hotels and shops.

Foreign trade and payments

The merchandise trade Since our last report, the IMF’s International Financial Statistics has published deficit widened in 1996— balance-of-payments figures for the whole of 1996. The new data confirms a collapse in exports last year; according to the IMF, exports (fob) were worth $643.6m in 1996, a drop of 25% compared with 1995. The fall has been attrib- uted by the Asian Development Bank to a sharp fall in re-exports and by the National Bank of Cambodia to a decline in timber and rubber exports (3rd quarter 1997, pages 21-22). Imports fell by 9.7% (fob dollar terms), to $1.1bn, but the more dramatic collapse in exports resulted in the merchandise trade deficit widening to $428.4m, from $331.6m in 1995.

—as did the A strong performance by the tourism sector in 1996 boosted services inflows, current-account deficit— which rose by 43% to $162.8m, resulting in a drop in the services deficit in 1996 to $59m, from $73.9m in 1995. The deficit on incomes also fell slightly. However, net inflows of current transfers remained positive, but fell slightly to $234.5m. Due largely to the widening merchandise trade deficit, the current- account deficit widened sharply in 1996, to $297.8m from $185.7m in the previous year.

EIU Country Report 4th quarter 1997 © The Economist Intelligence Unit Limited 1997 Cambodia 27

Cambodia: current account Cambodia: current-account balance ($ m) $ m 1995 1996 0 Exports fob 855.2 643.6

-20 Imports fob –1,186.8 –1,072.0 Trade balance –331.6 –428.4 -40 Services credit 114.0 162.8 Services debit –187.9 –221.8 -60 Services balance –73.9 –59.0 Incomes credit 9.7 12.6 -80 Incomes debit –66.9 –57.5

-100 Incomes balance –57.2 –44.9 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1995 96 Current transfers credit 277.9 236.9 Source: IMF, International Financial Statistics. Current transfers debit –0.9 –2.4 Current transfers balance 277.0 234.5 Current-account balance –185.7 –297.8 Source: IMF, International Financial Statistics.

—but FDI inflows On the capital account, stronger inflows of FDI allowed an increase in reserves. increased Actual FDI inflows in 1996 reached $293.6m, up from $150.8m in the previous year. Actual FDI inflows have been increasing steadily from a mere $33m in 1992, to $54m in 1993, and $69m in 1994.

GSP from the USA will In August trade privileges granted to Cambodia under the USA’s General boost exports System of Preferences (GSP) programme came into effect. The measures had been approved by the US president, Bill Clinton, at the end of May, after some delays due to concern over labour rights and political stability (3rd quarter 1997, page 19). The GSP allows some 6,000 items to be exported to the USA free of duty. This should boost exports of manufactured goods, although output and shipping will have been disrupted by the fighting.

Confidence in the riel is The Cambodian riel has taken a knock in the wake of the fighting in July. In weak June the riel averaged CR2,800:$1, down slightly on the second-quarter average of CR2,711:$1. The riel then fell sharply, averaging CR2,850:$1 in July and CR2,910:$1 in August, reaching CR3,000:$1 by the end of August. A major shortage of US dollars was reported in late July, when private money-lenders and the population at large were believed to be hoarding dollars. Banks, many of which were only just beginning to reopen following the fighting, were restricting customers wishing to withdraw hard currency to small amounts, causing difficulties for a number of foreign companies.

The official riel rate remained at CR3,000:$1 at the end of October, a depreciation of 9% since the start of the year. However, rates at private money ex- changes were lower, hitting CR3,400:$1 in mid-October, due to concerns that rising inflation and turmoil in South-east Asian currency markets would result in further downwards pressure on the riel. The sharp devaluations experienced in mid-year by the Thai baht, the Malaysian ringgit, the Indonesian rupiah and the Philippine peso will make it harder for Cambodian exports to remain competitive. Thailand is the main market for Cambodia’s exports, which will be hit by the drop in the baht.

EIU Country Report 4th quarter 1997 © The Economist Intelligence Unit Limited 1997 28 Cambodia

Reserves showed a slight Cambodia’s international reserves (excluding gold) strengthened from improvement $274.2m in the first quarter of 1997 to $279.7m at the end of the second quarter. Reserves dipped briefly in July to $274.6m, before recovering to $281m

Cambodia: reserves excl gold in August. The impact on reserves of the disruption to exports and foreign $ m investment inflows may have been offset by slower imports, as demand for 300 imports is likely to have weakened, and as banks restricted access to foreign

250 exchange. However, the drop in aid and investment inflows expected for the rest of 1997 means that reserves may well weaken by the end of the year. 200

150

100

0 Q1 . Q3 . Q1 . Q3 . Q1 . Q3 . Q1 .Q3(a) . 1994 95 96 97 (a) August. Source: IMF, International Financial Statistics.

EIU Country Report 4th quarter 1997 © The Economist Intelligence Unit Limited 1997 Laos 29

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 General Sisavat Keobounphan

National legislature A unicameral National Assembly. Membership will be expanded from 85 to 99 for the 1997 national election

National elections December 1992; next election due on December 21, 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 Bounnyang Volachith

Key ministers Agriculture & forestry Siene Sapangthong Commerce Sompadith Vorasane Communications, transport, posts & construction Phao Bounnaphol Defence Lieutenant-General Choumali Sayasone Education Phimmason Leuangkhamma Finance Saysomphone Phomvihane Foreign affairs Somsavat Lengsavat Health Ponemek Daraloy Industry & handicrafts Soulivong Daravong Information & culture Lieutenant-General Osakanh Thammatheva Interior General Asang Laoly Justice Kham Ouane Boupha Labour & social welfare Thongloun Sisoulith State planning Bouathong Vonglokham

Central bank governor Pany Yathotou

Economic structure

Latest available figures

Economic indicators 1992 1993 1994 1995 1996a GDP at current prices K bn 844 951 1,107 1,395 1,700 Real GDP growth % 7.1 5.9 8.1 7.0 6.9 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 132.6 247.9 305.5 342.4 309.9 Imports fob $ m 232.8 397.4 519.2 541.6 460.4 Current account $ m –111.3 –139.2 –284.0 –230.0 n/a Reserves excl gold $ m 40.3 63.0 61.0 92.1 169.5b Total external debt $ m 1,917 1,985 2,080 2,165 n/a Debt-service ratio, paid (%) 4.8 8.5 5.1 5.8 n/a Exchange rate (av) K:$ 716 716 718 805 921b

October 24, 1997 K1,138:$1

Origins of gross domestic product 1995 % of total Agriculture & forestry 56.4 Industry (incl construction) 17.8 Services 23.7 Total incl adjustments 100.0

Principal exports 1996a $ m Principal imports 1994 $ m Coffee 225 Machinery & raw materials 218 Timber & wood products 127 Rice & foodstuffs 60 Textiles & garments 65 Imports for re-export 43 Electricity 31 Petroleum products 41 Total incl othersc 310 Total incl othersd 528

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 or official estimates. b Actual. c Component totals include re-exports not included in overall total. d Including non-retained imports.

Outlook for 1998-99

The National Assembly Preparations are under way for the National Assembly election, which is held election will not bring every five years and will take place on December 21. Membership of the ass- policy changes embly has been expanded to 99, and the list of 160 approved candidates contains many younger and better-educated figures than formerly. However, although the powers of the National Assembly have been extended in recent years, it is still the case that both the assembly and policy-making itself are controlled by the ruling Lao People’s Revolutionary Party (LPRP).

ASEAN membership points In July Laos was formally admitted as a full member of the Association of to further economic South-east Asian Nations (ASEAN). This move promises to integrate Laos further reform into the region both politically and economically. It also points to the prospect of further economic reform, particularly in the area of trade liberalisation. In order to meet commitments required by ASEAN’s Free Trade Area (AFTA) agreement, Laos must start reducing tariff barriers in January 1998. Tariffs on most products are scheduled to fall to below 5% by 2008. Although there are still many obstacles to reform—ideological, bureaucratic and technical—there is now a firm consensus that change is necessary. Indeed, Laos at times appears more reformist than some of its neighbours, recognising that as a poor, land- locked country it has to do more to make itself attractive to foreign investors.

The government has In June the government applied to join the World Trade Organisation (WTO), applied to join the WTO which will require further liberalisation—although the US embassy in Vientiane has said that the authorities have essentially put in place a legal framework “in line with the WTO’s guidelines”. Its application may proceed quite quickly. The US ambassador to Laos, Wendy Chamberlain, has said that Washington is impressed by the progress the government has made and consequently is about to award it Most Favoured Nation (MFN) trading status. (In July a US trade subcommittee approved the extension of MFN to Laos.) This will stand it in good stead as negotiations on WTO membership proceed. The bid to join AFTA—which will require gradual reductions in tariffs, starting in 1998—and the WTO indicates that trade liberalisation and improvements in the legal framework can be expected in 1998-99.

GDP growth will slow GDP growth will be determined by the performance of the agriculture sector, which contributes 56% of constant-price GDP. The EIU had expected GDP growth in 1997 to pick up to 7-7.5%, from 6.9% in 1996, on the basis of a modest recovery in the rice harvest. However, heavy flooding in some areas in mid-year suggests that the harvest will once again be affected, with GDP growth unlikely to top 6%.

Growth in 1998-99 will receive a boost from the expected award of MFN by the USA and the recent waiver of restrictions on General System of Preferences (GSP) benefits by the EU, both of which will boost exports and stimulate investment in the manufacturing sector, primarily garments. However, economic troubles in Thailand, Laos’s main trade partner and source of investment, will undermine export and investment growth in 1998-99. The largest share of foreign direct investment (FDI)—over 40%—comes from Thailand,

which is also the source of 60% of Laos’s imports and the destination for nearly 26% of its exports. In light of the economic crisis in Thailand and elsewhere in the region, foreign investment in Laos is unlikely to grow as strongly over the next few years as we had expected. Some infrastructure projects in Laos which were dependent on funding from elsewhere in the region may be delayed. For example, the funding of a second bridge over the Mekong, part of which was to have been provided by Thailand, is now in question. Hence we expect annual GDP growth to remain at around 6-6.5% in 1998 and 1999, picking up in later years in step with the Thai economy.

The Nam Theun 2 The World Bank has recently received a positive environmental study on the hydroelectric power controversial Nam Theun 2 hydroelectric power station. The 681-mw project is station may go ahead due to be completed in 2000, with the Electricity Generating Authority of Thailand (EGAT) expected to begin purchasing power from the plant in 2004. Despite slower growth in Thailand, the country still needs to diversify its energy sources. Hence there will be demand for Laos’s electricity exports, sale of which forms an important plank of the government’s development strategy.

Inflation will remain in Reliable inflation data for 1997 is not yet available, but anecdotal evidence double digits suggests sharply increased prices for a wide range of goods imported from Thailand, including refined petroleum products, machinery and equipment, as well as consumer goods. Despite the fall in the Thai baht, the Lao kip’s weakness will increase import prices. In addition, hikes in taxation and other problems in Thailand since July have increased the prices charged by some Thai traders for their goods. Given this, we are expecting Laos’s inflation rate to be 17% this year, although a solid agricultural performance could ease price pressures in 1998-99.

The kip’s weakness will Heavy reliance on the baht in Laos is complicating matters for the central bank persist as it seeks to manage the exchange rate effectively. Before the financial crisis in Thailand, the kip was depreciating against both the US dollar and the baht, prompting the authorities to introduce new restrictions on the use of foreign currency. The conventional response to the fall in the baht—and indeed other currencies in the region—would be to allow the kip to depreciate in order to

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

K:DM 4 110

2 K:¥ 100 0 1992 93 94 95 96 (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.

ensure that Laos’s exports did not become uncompetitive. Given the ineffec- tiveness of other central bank measures, the outlook during 1998-99 is there- fore for continued downward pressure on the kip against a backdrop of a widening merchandise trade deficit.

Review

The political scene

National Assembly In late October the National Election Organising Committee announced the election candidates are names of 160 candidates who will take part in the National Assembly election announced on December 21. According to a decree issued in October by the president, Nouhak Phomsavan, the National Assembly will be expanded from 85 to 99 members, who will be elected in 18 constituencies. The committee has selected candidates proposed by local party organisations and state bodies. All candidates are members of or approved by the ruling Lao People’s Revolutionary Party (LPRP).

Rare anti-government The LPRP maintains tight control over both the election process and the voices emerge, but not in country as a whole. Dissident voices do occasionally emerge, although gener- Laos itself ally not in Laos itself. In August a group calling itself the Laotian Council for Independence and Democracy surfaced in Poland. Its leader, Bouthanh Thammavong, said that the group planned to conduct a peaceful struggle against the Lao government. Presumably, the group’s origins stem from the days when Laos was sending workers to the Eastern bloc prior to the collapse of communism there. Many of these workers are known to have stayed on. Such groups pose no real threat to LPRP rule, due to their inability to influence public opinion in Laos.

Opposition to Vientiane also exists among the country’s Hmong ethnic minor- ity, some of whom fought with the USA against the government in the 1960s and 1970s. Several thousand Hmong who are Lao nationals but not classified as refugees are currently living in Thailand, but are due to be repatriated by December (3rd quarter 1997, page 29). A Thai interior ministry report in September said that its investigations had uncovered some 300 Hmong with an overtly anti-government agenda in a drug rehabilitation centre in Thailand’s Saraburi province. Apart from apparently conducting periodic attacks on vehicles and personnel—and even here neither the Hmong’s participation nor a coherent anti-government motive is certain—the Hmong’s activities are limited, and do not pose a serious threat to the government.

Laos joins ASEAN— On July 23 Laos, along with Myanmar, was formally admitted as a full member of the Association of South-east Asian Nations (ASEAN). As a full member, Laos is committed to meeting many regional agreements, notably on trade matters (see Foreign trade and payments).

—bringing new challenges There is still concern both inside and outside Laos about its ability to participate fully in the large number of ASEAN meetings and other commitments that

membership entails. In particular, the government is still short of personnel equipped with appropriate technical and language skills. However, it is receiv- ing assistance in both these areas (3rd quarter 1997, pages 28-29).

Vo Van Kiet’s visit is used In August the then Vietnamese prime minister, Vo Van Kiet, visited Laos. The to maintain ties with ostensible reason for the visit was to celebrate the 20th anniversary of the Vietnam signing of the Vietnam-Laos Treaty of Friendship and Cooperation. Although relations between the two countries are still close, Laos has gradually moved out of Vietnam’s shadow. For example, until the late 1980s around 40,000 troops were stationed in Laos and it was hard to speak of Laos having a foreign policy independent of Hanoi. Like Vietnam, Laos is now pursuing a multidirectional foreign policy of which membership of ASEAN is just the latest result. A few years ago, Vientiane was reportedly considering the implications of allowing its friendship treaty with Vietnam to lapse when it expired in 2002, although little has been heard of this recently. Vo Van Kiet also visited Savannakhet and Champassak provinces and discussed the prospects for further economic cooperation (see Economic policy and the economy).

A dispute with Thailand In October relations with Thailand were soured when several Lao fishermen highlights border tensions apparently smuggling goods into Thailand were intercepted by the Thai authorities. Details are unclear, but it seems that shots were traded, and that six of the Thai patrol crew were beached in Lao waters, while several of the Lao fishermen were held in Thailand. However, the incident was resolved in late October when both sides exchanged their nationals. Demarcation of the land border between the two countries has proved fraught, sparking occasional incidents (3rd quarter 1997, page 29) although both sides have proved able to cooperate.

Ties with China are The improvement in Laos’s relations with China in recent years was confirmed strengthened by the visit to China of the Lao foreign minister, Somsavat Lengsavat, in late August. During the visit, which included meetings with his opposite number, Qian Qichen, and with the Chinese prime minister, Li Peng, Mr Somsavat said that there were “no sensitive issues” between the two countries. China’s foreign minister, meanwhile, thanked Laos for its adherence to the “one-China” policy. Mr Somsavat’s visit also saw the signing of a supplementary protocol to the 1993 border agreement. Relatively uncomplicated political ties are matched by a burgeoning economic relationship (see Economic policy and the economy).

The government’s In July the US ambassador to Laos, Wendy Chamberlain, congratulated anti-drug policy receives Vientiane on its cooperation in the search for the remains of US servicemen US praise missing-in-action (MIAs) and in drug suppression. The government last year seized 600 kg of heroin, the largest haul of any country in Asia. Washington is also considering expanding its crop-substitution programmes, which have had some success in curbing opium production. Since 1989 the USA has spent $14m on crop-substitution projects. Ms Chamberlain also said that the US administration was impressed by the government’s moves towards greater economic openness, suggesting that negotiations on MFN trading status were nearly complete (see Foreign trade and payments). The most recent US-Lao meeting on MIAs took place in August; further searches are planned.

Defence ties are forged According to reports in July, Laos has signed an agreement with India under with India which the latter will assist with the maintenance of its MiG-21 fighter-planes. The agreement follows a visit to India by the Lao prime minister, Khamtai Siphandon, earlier this year (3rd quarter 1997, page 30). The move is part of the government’s efforts to diversify military relations. Until the late 1980s Laos received military aid from the former Soviet Union. Although Russia remains an important source of military hardware, defence ties have been broadened, including the establishment of links with China. In late 1993 Laos signed an agreement with China under which Beijing provided a $6m soft loan to service Vientiane’s MiG-21 planes and pay for an anti-aircraft system. Some reports suggest that the decision to go to India for maintenance assistance represented dissatisfaction with the Chinese service. In all likelihood, the government is just seeking to avoid becoming too reliant on one country.

Ministers visit Myanmar In August Mr Somsavat visited the Myanmar capital, Yangon, for a meeting of the Myanmar-Lao Joint Commission. In September his deputy, Phongsavat Boupha, also visited to discuss border matters. Although commercial ties remain undeveloped, relations between the two countries are good. A major breakthrough occurred in June 1994 when the two sides signed a border agreement. This was followed by the signing of a Memorandum of Understanding on political and economic cooperation last year.

Economic policy and the economy

The 1997/98 plan and In its September-October session the National Assembly approved the budget budget are adopted and development plan for the 1997/98 financial year (beginning October 1). The main targets of the plan, according to the Vientiane Times, are to achieve:

• real GDP growth of 7-8%;

• annual average inflation of 10-11%; and

• stabilisation of the exchange rate.

The budget deficit was targeted at 7.5% of GDP. The development plan will focus expenditure on upgrading rural roads, expanding electricity provision, basic education and rice production. Survey work will continue on two railways planned between Vientiane and Vietnam and Thailand.

The government lays out a In the face of intense criticism of the Nam Theun 2 hydroelectric power project broader development on environmental grounds, the government earlier this year defended its em- strategy phasis on developing the hydroelectricity sector (3rd quarter 1997, page 30). However, at the World Bank/IMF meeting in Hong Kong in September, the finance minister, Saysomphone Phomvihane, sought to clarify the government’s development strategy, saying that it recognised the importance of developing other sectors besides hydropower. Mr Saysomphone singled out the garment industry as showing most promise, although the Sixth Party Congress held in 1996 also identified agro-processing as a key sector for development.

The last few years have seen a dramatic expansion of the garment sector, even though some garment factories were forced to close last year when the EU withdrew Laos’s General System of Preferences (GSP) benefits (3rd quarter 1997, page 34). The decision by the EU to renew GSP benefits on garments on a temporary basis will give the sector a boost (see Foreign trade and payments).

An industrial zone is The industry and handicrafts ministry recently made public the results of an planned industrial survey covering the Vientiane municipality. According to the report, there are 1,164 industrial and handicrafts factories in Vientiane and its envi- rons, of which 1,075 are locally owned and 89 incorporate foreign investment. In 1996 some 514 new factories were established, compared with 146 in 1995. The ministry announced plans to establish a 3,000-ha industrial zone in an unspecified area in the Vientiane municipality.

Imported inflation will The IMF has not released any new inflation data for Laos since our last report. emerge as a serious There were reports that price pressures intensified earlier in the year due to problem strong demand around the time of the Lao New Year (3rd quarter 1997, pages 31-32). There is anecdotal evidence that inflationary pressure increased from mid-year. Food supplies have been disrupted by heavy flooding in some regions, causing upward pressure on prices. In addition, according to the Vientiane Times, the price of petrol was increased by 30% between July and September, and oil prices also rose. This was the second hike in energy prices this year, following a rise in May. No official warning was given.

In theory, the fall in the Thai baht since July should have reduced the risk of imported inflation because imported Thai goods, which make up as much as 60% of Laos’s imports, should have become cheaper in kip terms. However, the economic crisis in Thailand has led to hikes in energy and other prices, which have resulted in price increases in some exports, exacerbated by the kip’s weakness against the baht and the dollar.

Expanding commercial In July one of Laos’s deputy prime ministers, Bounnyang Volachith, visited ties with China China to discuss economic ties. Crossborder trade has flourished in recent years, although much of it remains illegal and it is heavily in China’s favour. Official figures, which value two-way trade at around $50m, greatly underesti- mate the true nature of commercial ties. Chinese companies, notably from China’s Yunnan province, are also increasingly looking to Laos as a place to invest. According to Chinese statistics, 60 Chinese firms have had investments in Laos approved, with combined capitalisation of just under $40m.

A financial cooperation Shortly before the visit to Laos in August of the then Vietnamese prime min- agreement is signed with ister, Vo Van Kiet (see The political scene), the Lao finance minister, Vietnam Mr Saysomphone, visited Vietnam. This resulted in the signing of a financial cooperation agreement setting out ways for the two sides to assist each other in maintaining macroeconomic stability. The agreement also agreed to ensure that Vietnamese aid to Laos is used more effectively and to speed the repay- ment of Laos’s debts to Vietnam. Mr Saysomphone also requested assistance from Vietnam for the training of banking officials. Despite the replacement of the monobank system with a two-tier banking structure in 1988 and the establishment of private banks from 1989, Laos’s banking sector remains poorly

developed. The lack of suitably qualified personnel is a serious problem, and the sector suffers from a lack of popular confidence, an absence of rigorous procedures governing lending, and extensive bad debts. How effective the agreement with Vietnam will prove to be remains to be seen; many would argue that Vietnam is not especially skilled in these areas itself.

This latest agreement follows an upsurge in economic cooperation between the two countries in areas such as agriculture, infrastructure and energy (2nd quarter 1997, page 34). Vo Van Kiet also signed an agreement on agriculture and rural development covering the 1998-2001 period during his recent visit to Laos.

Infrastructure

Financing problems delay The financial crisis in Thailand has upset the financing arrangements for the the second Mekong bridge construction of a second bridge over the Mekong River between Mukdahan in Thailand and Savannakhet in Laos. The Thai government had secured a low- interest loan from Japan to cover half of the $56m construction costs (the other half is to be paid for by Laos, using a lower-interest loan from Japan). However, the adjustment programme imposed on Thailand by the IMF requires that the government reconvene talks with Japan on the proposed loan. These are not expected to be concluded before April 1998, when Japan’s new fiscal year begins. This, in turn, will delay the project’s starting date, which had been set for December 1997.

Energy

The World Bank may give After a lengthy process of consultation the World Bank announced in August Nam Theun 2 the go-ahead that it had received a positive environmental study on the 681-mw Nam Theun 2 hydroelectric power project. The proposed power station has been mired in controversy on environmental grounds, prompting the World Bank to commission a number of additional environmental impact studies to assess whether the project could be justified (3rd quarter 1997, page 34). The project is due to be completed by 2000, with the Electricity Generating Authority of Thailand (EGAT) expected to begin purchasing power from the plant in 2004.

Foreign trade and payments

MFN is imminent According to US officials, the negotiation of a bilateral trade accord (necessary before Washington awards Laos MFN trading status) is almost complete. In late July US embassy officials said that Laos had essentially put in place a “legal framework in line with the WTO’s guidelines”. Moreover, in a recent letter to Laos’s foreign minister, Mr Somsavat, the US secretary of state, Madeleine Albright, said that the issue was being considered by various subcommittees in the US Congress and that a final round of negotiations to conclude an agreement was all that was necessary. One such committee has already approved the extension of MFN to Laos.

EU GSP will boost In mid-October the EU decided to grant an exception to Laos, allowing it to garment exports regain GSP benefits on garment exports. Laos had lost these benefits in 1996, when it was found to have failed to comply with local-content regulations (much of the industry was based on the use of imported textiles). The exemp- tion, which will run until the end of 1998, will give a boost to Lao garment exports to the EU, as will the recent weakness of the kip.

The government applies In late June the government formally applied to join the WTO. As indicated by to join the WTO Ms Chamberlain’s comments, some of the necessary preparations have been completed in the course of Vientiane’s negotiation of a trade accord with the USA. However, further work remains to be done. In this regard, Laos’s Ministry of Commerce held a seminar in Vientiane in July to discuss the issue of WTO membership. The seminar was attended by government and business representatives, as well as officials from the WTO. As yet, no time-frame has been put on Laos’s application, although it is likely to proceed quite quickly.

Laos prepares to lower Shortly after Laos was admitted to ASEAN in July, the foreign minister, tariffs for AFTA Mr Somsavat, presented ASEAN’s secretary-general, Ajit Singh, with a prelimi- nary list of products on which tariffs will be lowered when it begins to fall in line with the Common Effective Preferential Tariff (CEPT) arrangements of the ASEAN Free Trade Area (AFTA). The first tariff cuts are due to take place in January 1998. After this, Laos (and Myanmar) have until 2008 to lower tariffs on many goods to 0-5%. The original ASEAN members have until 2003, while Vietnam has until 2006. Lowering tariff barriers will increase pressure on the government to diversify revenue sources.

Currency troubles and a The fall in the kip against the US dollar and the Thai baht in the first half of 1997 fall in reserves prompted the central bank to introduce new curbs in late June on the widespread use of the Thai and US currencies (3rd quarter 1997, page 33). The kip dropped Laos: reserves excl gold from an official average rate of K961:$1 in January 1997 to K1,022:$1 in June, a $ m depreciation of 6%. 180

160 The central bank’s measures briefly stabilised the kip, which averaged

140 K1,039:$1 in July. However, the currency turmoil which swept South-east Asia

120 from July affected the kip, which fell to K1,302:$1 in August, marking a depre-

100 ciation of 26.2% since the start of the year. By October 24 the kip had regained

80 some ground, to K1,138:$1, a 15.6% depreciation from January. The chaos has resulted in a resurgence in black-market trading of the kip. 60 40 The central bank’s ability to defend the currency has never been strong, given 20 the small size of the country’s external reserves. International reserves were 0 stable at $169.8m (excluding gold) in the first quarter of 1997, falling to $163m Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 199596 97 in June, before dropping to $161.8m at the end of July, according to the IMF’s Source: IMF, International Financial Statistics. International Financial Statistics.

Tourism development In 1996 some 403,000 tourists were recorded entering the country, compared plans may be hit by the with just 87,571 in 1992. The Tourism Authority of Thailand (TAT) is assisting Thai crisis Laos with the development of an effective tourism policy. In late July a TAT representative said that work was being carried out on further simplification of visa formalities. The government’s desire to avoid the mass tourism that has

developed in Thailand—because of the impact that this might have on Laos’s small population—has led it to examine the potential for developing eco- tourism and cultural tourism.

However, poor infrastructure remains a major constraint, with hotels and hotel services generally below international standards, although there have been improvements. Thai investment in new hotels, and tourist arrivals from Asia, are likely to slow following the recent sharp falls in the currencies of Malaysia, Thailand, Indonesia and the Philippines.

EIU Country Report 4th quarter 1997 © The Economist Intelligence Unit Limited 1997 40 Quarterly indicators and trade data

Quarterly indicators and trade data

Cambodia: quarterly indicators of economic activity

1995 1996 1997 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Production Annual totals Rice ’000 tons ( 3,448 ) ( 3,500 ) ( n/a ) Exports Qtrly totals Rubber: net ’000 tons 7.0 9.0 9.0 9.0 7.0 8.5 8.5 8.5 5.5a n/a Prices Monthly av Consumer prices Jul-Sep 1994=100 99.6 105.5 107.1 106.0 107.6 112.7 116.7 112.0 114.9 130.1b change year on year % n/a n/a 2.9 4.6 8.0 6.8 9.0 5.7 6.8 n/a Money End-Qtr M1 CR bn 225.2 241.1 278.5 309.6 311.4 315.4 328.9 332.9 330.6 338.7c change year on year % 21.7 20.2 38.1 55.6 38.3 30.8 18.1 7.5 6.2 n/a Foreign traded Annual totals Domestic exports $ m ( 269.0 ) ( 298.0 ) ( n/a ) Re-exports “ ( 540.0 ) ( 361.0 ) ( n/a ) Imports ” ( 1,213.0 ) ( 1,110.0 ) ( n/a ) Exchange holdings End-Qtr Foreign exchange $ m 139.1 158.4 176.8 197.0 203.2 217.7 251.9 261.2 267.0 268.7e Exchange rate Official rate CR:$ 2,341 2,496 2,526 2,558 2,619 2,687 2,713 2,735 2,761 3,000e

Note. Annual figures of most of the series shown above will be found in the Country Profile. a Total for April-May. b Average for July-August. c End-July. d Balance-of-payments basis. e End-August.

Sources: FAO, Quarterly Bulletin of Statistics; International Rubber Study Group, Rubber Statistical Bulletin; IMF, International Financial Statistics; World Bank, Cambodia, Progress in Recovery and Reform.

Laos: quarterly indicators of economic activity

1995 1996 1997 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Production Annual totals Rice ’000 tons ( 1,418 ) ( 1,400a ) ( n/a ) Prices Monthly av Consumer prices 1990=100 145.5 165.0 182.6 183.4 184.7 190.5 193.9 197.2b n/a n/a change year on year % 9.0 18.3 23.8 26.5 26.9 15.5 6.2 n/a n/a n/a Money End-Qtr M1 K m 69,660 67,415 65,573 67,177 69,554 67,454 66,892 75,558 n/a n/a change year on year % 44.7 31.3 23.4 9.5 –0.2 0.1 2.0 12.5 n/a n/a Foreign trade Qtrly totals Exports $ m 80.9 87.5 85.7 93.8 71.9 82.8 n/a n/a n/a n/a Imports “ 158.1 149.9 146.3 132.9 178.4 178.7 n/a n/a n/a n/a Exchange holdings End-Qtr Foreign exchange $ m 73.94 70.96 63.97 78.01 78.52 91.79 113.19 159.19 152.56 147.13c Exchange rate Official rate K:$ 719 785 925 923 925 919 919 935 1,004 1,021d

Note. Annual figures of most of the series shown above will be found in the Country Profile. a Estimate. b Average for October-November. c End-July 146.27. d End-August 1,310.

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

EIU Country Report 4th quarter 1997 © The Economist Intelligence Unit Limited 1997 Quarterly indicators and trade data 41

Cambodia and Laos: French trade ($ ’000) Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec 1991 1992 1993 1994 1995 1996 French exports fob Cambodia 4,278 13,374 21,457 42,745 60,483 48,387 Laos 3,039 3,003 3,893 20,187 24,154 8,118 French imports cif Cambodia 2,871 3,362 845 4,025 7,493 12,764 Laos 9,083 13,308 19,255 20,347 29,599 22,273 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.