Cambodia Laos

COUNTRY REPORT

Cambodia Laos

1st quarter 1999

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.

London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 15 Regent Street The Economist Building 25/F, Dah Sing Financial Centre London 111 West 57th Street 108 Gloucester Road SW1Y 4LR New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.171) 830 1000 Tel: (1.212) 554 0600 Tel: (852) 2802 7288 Fax: (44.171) 499 9767 Fax: (1.212) 586 1181/2 Fax: (852) 2802 7638 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]

Website: http://www.eiu.com

Electronic delivery EIU Electronic Publishing New York: Lou Celi or Lisa Hennessey Tel: (1.212) 554 0600 Fax: (1.212) 586 0248 London: Jeremy Eagle Tel: (44.171) 830 1183 Fax: (44.171) 830 1023 This publication is available on the following electronic and other media: Online databases Microfilm FT Profile (UK) NewsEdge Corporation (US) World Microfilms Publications (UK) Tel: (44.171) 825 8000 Tel: (1.781) 229 3000 Tel: (44.171) 266 2202 DIALOG (US) Tel: (1.415) 254 7000 CD-ROM LEXIS-NEXIS (US) The Dialog Corporation (US) Tel: (1.800) 227 4908 SilverPlatter (US) M.A.I.D/Profound (UK) Tel: (44.171) 930 6900

Copyright © 1999 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author’s and the publisher’s ability. However, the EIU does not accept responsibility for any loss arising from reliance on it.

ISSN 1361-1437

Symbols for tables “n/a” means not available; “–” means not applicable

Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK 1

Contents

3 Summary

Cambodia 5 Political structure 6 Economic structure 7 Outlook for 1999-2000 11 Review 11 The political scene 17 Economic policy and the economy 21 Agriculture 22 Industry 22 Infrastructure 22 Tourism 23 Foreign trade and payments

Laos 25 Political structure 26 Economic structure 27 Outlook for 1999-2000 29 Review 29 The political scene 31 Economic policy and the economy 32 Agriculture 32 Industry 33 Infrastructure 34 Energy and mining 35 Money and finance 35 Tourism 35 Foreign trade and payments

38 Quarterly indicators and trade data

List of tables 18 Cambodia: the 1999 budget 21 Cambodia: consumer price inflation 21 Cambodia: money supply 24 Cambodia: international reserves 37 Laos: international reserves 38 Cambodia: quarterly indicators of economic activity 38 Laos: quarterly indicators of economic activity 39 Cambodia and Laos: French trade 39 Laos: foreign trade

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 2

List of figures 10 Cambodia: gross domestic product 10 Cambodia: riel real exchange rates 23 Cambodia: exchange rates, 1998 28 Laos: gross domestic product 28 Laos: kip real exchange rates

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 3

February 22nd 1999 Summary

1st quarter 1999

Cambodia Outlook for 1999-2000: The new government formed in November may last throughout 1999, allowing Cambodia to join the Association of South-East Asian Nations (ASEAN) later this year. But tensions between the two ruling parties will re-emerge in 2000, and could erupt into violence. The government may not deliver on its reform pledges, but GDP growth will nevertheless pick up in 1999 and 2000, boosted by new inflows of aid and foreign investment. Inflationary pressure will persist in 1999, easing in 2000 as the riel stabilises.

The political scene: A new coalition government has been formed, comprising the Cambodian People’s Party (CPP) and the National United Front for an Independent, Neutral, Peaceful and Co-operative Cambodia (FUNCINPEC). A new cabinet has been named. Royal pardons have been granted to several enemies of the previous administration. Formation of the newly proposed Senate has been delayed. In accordance with new regulations, 30 MPs have resigned. The key opposition leader, Sam Rainsy, has promised to keep up pressure on the government. The Son Sann Party has merged with FUNCINPEC. The Khmer Rouge leaders, Khieu Samphan and Nuon Chea, have given up armed struggle. There is doubt about the government’s commitment to a Khmer Rouge war crimes trial, although there is popular support for one and international pressure has been building. Troop cuts have been promised, but may be tough to fulfil. Hun Sen has resigned as armed forces commander- in-chief. Cambodia has regained its UN seat, and is expected to join ASEAN soon. Hun Sen has visited China.

The economy and economic policy: The 1999 budget has been passed; defence still consumes the lion’s share of expenditure. The revenue target may be optimistic, and the introduction of value-added tax has caused some headaches. The government is hoping for new aid commitments; the IMF and Japan have discussed new lending, but some donors want to wait for the results of a new crackdown on illegal logging. The economy showed no growth in 1998, although foreign investment approvals rose. Inflation eased in late 1998. Money supply growth has remained rapid.

Sectoral trends: Flooding has followed drought, hitting the main rice crop. Workers have gone on strike in the garment sector. The Asian Development Bank has approved a loan for a key road link. The tourism industry has remained depressed.

Foreign trade and payments: The US has imposed quota restrictions on Cambodian garments. The government will have to make tariff reductions once it joins the ASEAN Free-Trade Area. The riel has stabilised and international reserves have strengthened.

Laos Outlook for 1999-2000: Political stability will endure, and economic reform will proceed gradually. GDP growth will remain sluggish in 1999 before picking up in 2000. Inflation will remain in double digits, but the kip will not repeat

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 4

the falls of 1997-98. Export growth will recover as regional demand picks up from 2000.

The political scene: The prime minister, General Sisavat Keobounphan, has called for efforts to tackle red tape and corruption. The 50th anniversary of the Lao People’s Army has been celebrated. Laos is seeking to lessen its reliance on Thailand by building on its close ties with China and Vietnam. Laos has backed Cambodia’s ASEAN membership. The prime minister has visited Myanmar and the president has visited Vietnam. Border talks with Thailand have made some progress. The US has continued to provide anti-narcotics assistance.

Economic policy and the economy: The government wants to cut back expenditure. The official target of 6-7% GDP growth in 1998/99 looks optimistic. New state enterprise reforms have been announced. Inflation has soared.

Sectoral trends: The main 1998 rice harvest has been hit by drought. An agricultural census has been announced. The start-date for construction of a new cement plant has been put back. General Sisavat has sought to revive interest in a trans-Asian railway. Japan has announced extra funding for bridge renovation. Road links to the Vietnamese coast have continued to receive attention. Japan has committed finance for the second Mekong bridge. The Nam Theun 2 hydropower plant has still not received the go-ahead. Foreign investors have signed agreements on prospecting for gold and sapphires. A joint-venture bank with Vietnam has been planned. Visa formalities have been eased for Visit Lao Year.

Foreign trade and payments: Laos has agreed to faster tariff cuts under the ASEAN Free-Trade Area, but progress may be slower than planned. The US has still not granted Laos normal trade relations. Red tape has remained a problem. Barter trade with Vietnam has been discussed. The kip has stabilised, as have reserves. India has extended a $2m soft loan.

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

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 Cambodia 5

Cambodia

Political structure

Official name Cambodia

Form of government Constitutional monarchy

The executive The cabinet is constitutionally responsible to the National Assembly

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

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

National elections Last National Assembly election held on July 26th 1998; next election due May 2003

National government The Cambodian People’s Party (CPP) won 64 seats in the July 1998 election, followed by the National United Front for an Independent, Neutral, Peaceful and Co-operative Cambodia (FUNCINPEC) with 43 and the Sam Rainsy Party (15). A coalition government was formed in November 1998, comprising the CPP and FUNCINPEC.

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

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

Key ministers Agriculture, forestry & fisheries Chhea Son (CPP) Commerce Cham Prasidh CPP) Defence General Tea Banh (CPP) Prince Sisowath Sirirath (FUNCINPEC) Finance & economy Keat Chhon (CPP) Foreign affairs Hor Nam Hong (CPP) Health Hong Sun-huot (FUNCINPEC) Industry, energy & mines Suy Sem (CPP) Information Lou Lay Sreng (FUNCINPEC) Interior Sar Kheng (CPP) Yu Hockry (FUNCINPEC) Justice Ouk Vithun (FUNCINPEC) Planning Chhay Than (CPP) Public works & transport Khy Taing Lim (FUNCINPEC) Tourism Veng Sereyvuth (FUNCINPEC)

Central bank governor Chea Chanto (CPP)

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 6 Cambodia

Economic structure

Latest available figures

Economic indicators 1994 1995 1996 1997 1998 GDP at current prices (CR bn) 6,131 7,200 8,251 9,251a 10,639b Real GDP growth (%) 4.0 7.6 7.0 2.0a 0.0a Consumer price inflation (av; %) n/a 2.9c 7.2 8.2 15.0b Population (m) 10.0 10.3 10.7 10.9b 11.1b Exports fobd ($ m) 489.9 855.2 643.6 736.0 n/a Imports fobe ($ m) 744.4 1,186.8 1,072.0 1,064.0 n/a Current-account balance ($ m) –156.7 –185.7 –184.9 –209.9 n/a Reserves excl gold ($ m) 118.5 192.0 265.6 298.6 324.3 Total external debt ($ m) 1,915 2,041 2,111 n/a n/a Debt-service ratio, paid (%) 0.3 0.6 1.2 n/a n/a Exchange ratef (av; CR:$) 2,545 2,451 2,624 2,946 3,297b

February 22nd 1999 CR3,770:$1

Origins of gross domestic product 1997a % of total Expenditure of domestic product 1997a % of total Agriculture 50.9 Private consumption 86.4 Industry (incl construction) 15.4 Public consumption 8.8 Services 33.7 Gross fixed investment 16.5 Total 100.0 Exports of goods & services 18.7 Imports of goods & services –30.4 Total 100.0

Principal exports 1997d $ m Principal imports 1997g $ m Sawn timber 65.4 Cigarettes 183.4 Logs 37.8 Gold 132.1 Rubber 36.2 Petrol & diesel 109.9 Fishery products 5.1 Vehicles & motorcycles 39.5 Non-traditional items 257.7 Food products 19.9 Total incl others 736.0 Total incl others 768.4

Main destinations of exports 1993d % of total Main origins of imports 1993e % 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 Official estimates. b EIU estimate. c Average year-on-year rate for the 4th quarter. d Including re-exports. e Including non-retained imports. f Official rate. g Excluding non-retained imports.

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 Cambodia 7

Outlook for 1999-2000

The new government will On November 13th an agreement on forming a new government was finally probably last through reached (almost four months after the election), resulting in the formation of a 1999— coalition between the Cambodian People’s Party (CPP) and the National United Front for an Independent, Neutral, Peaceful, and Co-operative Cambodia (FUNCINPEC). The reconvening of the National Assembly (parliament), the appointment of the new cabinet, and the allocation of various other posts all took place without incident. The formation of the new upper house of parliament, or Senate, which formed part of the mid-November agreement, has been delayed, but is likely to proceed soon.

—but difficulties may However, there is doubt over the prospects for political stability given the poor emerge in 2000 track record of the last CPP-FUNCINPEC coalition. The two parties governed together in 1993-97, until the CPP’s so-called second prime minister, Hun Sen, deposed his FUNCINPEC rival, the first prime minister, Prince Norodom Ranariddh, in a bloody coup. Some of the problems that plagued this last coalition no longer apply. The previous power-sharing agreement has ended, and Hun Sen is now sole prime minister. The CPP is also now definitely the dominant force, with 64 seats in the 122-seat National Assembly (compared with FUNCINPEC’s 43). However, power-sharing has continued at the defence and interior ministries, which potentially could lead to problems. The two co-interior ministers, Sar Kheng and Yu Hockry, have already served together in the previous government. Relations between the co-defence ministers may be more tense, particularly since CPP dominance of the military and security apparatus continues.

The precise role that the new Senate will play remains unclear and there is still a considerable risk that Hun Sen and Prince Ranariddh, in his new capacity as National Assembly chairman, will spar. Since his appointment, Prince Ranariddh has emphasised the assembly’s role of scrutinising government policy. In sum, while Cambodia is likely to remain stable politically during 1999, it is hard to offer such a forecast beyond this date with much confidence.

A Khmer Rouge war Formation of the new government was followed by further collapse in the crimes trial is unlikely to already much-weakened Khmer Rouge. The defection of eight senior Khmer happen soon Rouge commanders in early December was followed later in the month by the decision of the top Khmer Rouge leaders, Khieu Samphan and Nuon Chea, to end their armed struggle. The other surviving leader, the military commander, Ta Mok, is still at large but is said to be looking for the right moment to capitulate. These latest developments represent the death throes of the Khmer Rouge which now bears little relation to the form in which came to power in 1975.

There has been renewed pressure both inside and outside the country to try to organise a Khmer Rouge war crimes trial. The issue is highly sensitive and there are a large number of questions that need to be resolved before such a trial can take place. Even though Hun Sen has said publicly that he supports a trial, his comments and actions are so ambiguous that one suspects that he may be against a trial altogether. At the very least, he may oppose its being organised

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 8 Cambodia

along the lines that the US and the UN are beginning to advocate. Many of those serving in the current government are former Khmer Rouge and some of them are reluctant for past activities to be scrutinised. Outside the country, for similar reasons, China and Thailand are not keen on a trial; China may veto any proposals on the issue if they come before the UN Security Council. Given the strength of international feeling, a war crimes trial is more likely to take place than not but reaching agreement on the nature and scope of the proceedings could take a very long time. Although there are different views within Cambodia on the question of a trial, the issue looks unlikely to be divisive within the government to the point of threatening stability in the short term.

Overt opposition to a trial by the government could lead to a deterioration of relations with the US and the EU, ultimately with repercussions for aid. How- ever, this is unlikely to interfere with our forecast of a resumption of aid in the short term (see below).

Cambodia will join ASEAN The establishment of the new government has created a climate in which later in 1999 Cambodia’s diplomatic standing, hurt by Hun Sen’s use of military force to oust Prince Ranariddh in July 1997, can now improve. This has already begun to happen, notably with the re-admission of the Cambodian delegation to the UN. The issue of membership of the Association of South-East Asian Nations (ASEAN) has proved more difficult, dividing the group at its mid-December summit in Hanoi. Cambodia was thus not admitted at the summit but it was agreed that a membership ceremony would take place shortly. A date has yet to be specified but it is likely to be before the end of 1999 at the latest. The countries which opposed Cambodia’s joining in Hanoi—namely Singapore, Thailand, and the Philippines—have said that they want to see the Senate established and the new government put to the test at least for a short period before Cambodia is admitted.

The government may not The first few months of the Hun Sen government have been accompanied by a be able to deliver on its flurry of new reform initiatives, including: plans to reduce the size of the armed reform pledges— forces and to reform the bureaucracy; the introduction of a value-added tax (VAT); and a pledge to crack down on illegal logging. This is an encouraging start. The retention from the previous government of the economy and finance minister, Keat Chhon, the commerce minister, Cham Prasidh, and the central bank governor, Chea Chanto, has also enabled a degree of continuity as the new administration settles in.

However, these initiatives have been announced very much with an eye to securing fresh aid commitments from the international donor community, which is meeting in Tokyo in late February. (Many of Cambodia’s main aid donors suspended aid following the July 1997 coup, while an IMF structural adjustment programme was abandoned due to concern over corruption and environmental problems.) Doubt persists about the government’s ability to implement these changes. Hun Sen may in time demonstrate an ability to push through radical changes but he has yet to do so. Furthermore, some of the government’s pledges are simply not realistic in the short term. The pledge to cut spending on defence will be resisted by senior members of the military,

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 Cambodia 9

who argue that planned cutbacks in the number of troops will be costly to implement.

—but GDP growth will The World Bank estimates that the economy recorded no GDP growth at all in pick up in 1999 and 2000— 1998, compared with real GDP growth of 2% in 1997 and 7% in 1996. The poor 1998 performance reflected weak agricultural output, as the main harvest was hit by drought. Also, political uncertainty before and after the July 1998 election subdued consumer confidence and disrupted trade, hitting retail trade and industrial output. Continued fallout from the Asian economic crisis along with much-reduced aid levels also contributed to last year’s poor economic performance, hitting investment. In 1999 the EIU expects a modest rise in GDP growth of 2.5-3% (below the government’s target of 4%), picking up to 4-4.5% in 2000.

—boosted by new inflows A resumption of aid by those donors who suspended it in 1997 looks likely at of aid— the February donor meeting although it will be loosely linked to progress on economic reform. The IMF is also exploring the resumption of lending in the form of an enhanced structural adjustment facility and this could be in place by the second half of 1999. Given the time lag in disbursing new aid money, the impact of this resumption of aid will be felt more strongly in 2000 than in 1999, which partly underpins our higher growth forecast for that year.

—and foreign investment— Foreign direct investment (FDI) inflows are also likely to pick up in 1999, boosted by improved business confidence thanks to Cambodia’s return to political stability. However, inflows will remain constrained by difficulties stemming from the Asian economic crisis; many of Cambodia’s key Asian investors are scaling back investment plans across the region as recessions continue to bite. As a regional recovery takes hold in 2000, FDI inflows will pick up more strongly. However, performance will be mixed. The surge seen in the mid-1990s in FDI in the garment sector may slow somewhat following the imposition of more stringent quota restrictions by the US in January. The tourism industry is likely to see a stronger period of recovery from 2000, although this will be constrained somewhat by the country’s limited tourism infrastructure.

—although agricultural The EIU’s GDP forecast for 1999-2000 assumes reasonable agricultural growth. performance will If this is not the case economic growth is likely to be slower than we have be critical predicted. Agriculture contributes some 50% of current-price GDP, but has been hampered recently by unfavourable weather conditions as well as the poor state of rural infrastructure and the lack of farm inputs such as fertiliser. Our forecasts would also need to be revised downwards if inadequate progress on reform results in the cancellation of aid programmes. This is unlikely to happen in 1999 but cannot be ruled out in 2000 as donors begin looking for results from earlier reform pledges.

Inflationary pressure will Inflation is likely to remain in double digits in 1999 fuelled by rising food prices ease slowly— (caused by the poor harvest in late 1998) and by continued rapid money-supply growth. The introduction of VAT in January 1999 is likely to have an initial inflationary impact. Although downward pressure on the riel has eased recently, Cambodia will still experience imported inflation in 1999. Inflationary pressure

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 10 Cambodia

is likely to ease in 2000 as higher aid inflows enable the government to correct the loosening of monetary policy which occurred in 1998.

—as the riel stabilises The riel came under pressure in mid-1998 because of political uncertainty. It has since stabilised somewhat, but will continue to depreciate during 1999, because of quite high inflation, and a possible widening of the merchandise trade deficit (see below)—although there is unlikely to be a repeat of the magnitude of falls witnessed over the last year or so. Although Cambodia’s foreign-exchange reserves remain low, they have strengthened recently and will rise further once aid inflows resume. In 2000 the riel is likely to strengthen as exports start to pick up and foreign capital inflows increase as the regional recovery gathers momentum.

Exports and imports will Although there are still no trade data for 1998, anecdotal evidence suggests that remain depressed exports fell more rapidly than imports in dollar terms, leading to a widening of until 2000 the merchandise trade deficit. Imports from Thailand, however, kept robust, as Thai producers sold off goods to Cambodia at very low prices following the steep fall by the baht in 1997. In 1999 demand for exports will remain depressed in Asian markets. In addition, the recent quota restrictions imposed by the US on Cambodian garment exports will result in slower growth in this sector in 1999, compared with 1998. However, as economic growth begins to recover, imports will also rise, resulting in a trade deficit in 1999 of similar magnitude to 1998. In 2000 export growth will accelerate as the region recovers but so too will that of imports, resulting in a widening of the trade deficit. However, the current-account deficit will ease in 2000 as tourism and aid inflows pick up momentum.

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

10 140 Cambodia CR:DM Asia excl Japan 8 120

6 100

4 80

CR:$ 2 60

nil 0 1994 95 96 97(a) 98(a) 40 CR:¥ (a) Official estimates. (b) Nominal exchange rates adjusted for changes in relative consumer prices. Sources: EIU; IMF, International Financial Statistics; World 1990 91 92 93 94 95 96 97 98(a) Economic Outlook.

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 Cambodia 11

Review

The political scene

A new coalition An agreement on forming a government was finally reached on November 13th, government is formed— four months after the last national election. Although the Cambodian People’s Party (CPP) had won 41% of the vote in the election, giving it 64 seats in the National Assembly, it lacked the two-thirds majority needed to pass legislation (3rd quarter 1998, pages 12-13), resulting in protected negotiations over the formation of a coalition. After numerous rounds of talks the CPP reached an agreement with the National United Front for an Independent, Neutral, Peaceful and Co-operative Cambodia (FUNCINPEC), which came second in the 1998 election, with 31.7% of the vote (giving it 43 seats).

According to the November coalition agreement, the CPP’s so-called second prime minister from the last government, Hun Sen, was again nominated to hold the post of prime minister while the former first prime minister in the previous government, Prince Norodom Ranariddh, was appointed chairman of the National Assembly (parliament). This will be the second time that the two men have governed together; the last, uneasy coalition ended in July 1997 when Hun Sen seized power, ousting his rival in a violent coup. Despite this unpromising background, FUNCINPEC members would prefer to be in government rather than out of it, not least since they complained that vote-rigging denied them victory in the 1998 election.

—after agreement was The November agreement was made possible following a decision to turn the reached on setting up a National Assembly into a lower house and to form a new upper house, or new Senate Senate, headed by the previous National Assembly chairman, the CPP president, Chea Sim. Earlier, talks had stalled as FUNCINPEC pushed for Prince Ranariddh to be given the post of National Assembly chairman, while the CPP was unwilling to concede Chea Sim’s post.

As part of the November 13th accord, the two parties also agreed to:

• appoint four Senate vice-chairmen, two each from the CPP and FUNCINPEC;

• establish nine National Assembly commissions, four to be chaired by the CPP, four by FUNCINPEC and one by the opposition Sam Rainsy Party (SRP)— the so-called “four plus four plus one” principle; and

• prepare a “joint platform” and a protocol on co-operation between the two parties, and to amend the constitution to enable the Senate to be formed (see below).

The National Assembly On November 25th the National Assembly reconvened, formally electing reconvenes— Prince Ranariddh as National Assembly chairman and nominating Hun Sen as prime minister. Two National Assembly vice-chairmen, Heng Samrin and Chem Snguon—both from the CPP—were also elected. On November 27th the nine National Assembly commissions were formed as agreed on the “four plus four plus one” formula. CPP and FUNCINPEC members sit on all the commissions while the SRP is represented on just two—the public works commission,

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 12 Cambodia

The new National Assembly commissions

Nine National Assembly commissions have been formed. Four are chaired by the Cambodian People’s Party (CPP), four by FUNCINPEC, and one by the Sam Rainsy Party (SRP). The nine commissions cover the following areas:

• human rights and petitions;

• finance and banking;

• economics, planning, investment and agriculture;

• interior, national defence, investigation and internal security;

• foreign affairs, international co-operation, information and press;

• legislative matters;

• education, religious affairs, culture and tourism

• public health, social welfare, labour and women’s affairs;

• public works, transport and telecommunications, posts, industry, energy and trade (the only commission chaired by an SRP member).

which it chairs, and the finance and banking commission, where a SRP member is the secretary.

—and Hun Sen announces After some minor hiccups, the National Assembly approved Hun Sen and his his new cabinet new cabinet on November 30th. The allocation of cabinet posts had earlier proved a sticking point in coalition talks. Initially, Hun Sen had said that the CPP should have exclusive control of five key ministries, namely defence, finance, interior, justice and foreign affairs. In the end, however, he compro- mised. The CPP and FUNCINPEC have agreed to share the defence and interior ministry portfolios, with both parties appointing a co-minister. Both parties will also appoint a deputy prime minister. The total of 29 ministries have been split more or less evenly between the two parties, with 15 going to the CPP and 14 to FUNCINPEC. Among the key ministries, the CPP has control of finance, commerce, planning, foreign affairs, agriculture, and industry. FUNCINPEC is in charge of justice, information, and rural development.

Many ministries have new incumbents, some of whom are rather unknown quantities. However, the new foreign minister, Hor Nam Hong, served in the post in the early 1990s prior to the UN-supervised election in 1993. He most recently served as ambassador to Paris and is close to Hun Sen. The new co- defence minister, Prince Sisowath Sirirath, was previously Cambodia’s UN representative in New York. A number of ministers have also retained their posts from the previous government, including the CPP economy and finance minister, Keat Chhon, who is well respected by the business and diplomatic community. Also retained were the commerce minister, Cham Prasidh, the co-interior ministers, Sar Kheng and Yu Hockry, and one of the co-defence ministers, General Tea Banh. Sar Kheng has also been reappointed as one of two deputy prime ministers. (For the other main cabinet posts see Political structure.)

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 Cambodia 13

Prince Ranariddh’s Another important element of the November 13th breakthrough was Hun Sen’s military allies have been acquiescence to King Norodom Sihanouk’s plan to offer royal pardons to two pardoned Prince Ranariddh loyalists—his top military officer, Lieutenant-General Neak Bounchay, and the former governor of Battambang province, Serei Kosal. The two had been convicted in absentia of “security crimes” in March 1998 after they had continued to hold out against Hun Sen in the north-west of the country following his ousting of Prince Ranariddh in July 1997 (2nd quarter 1998, page 11). King Sihanouk (who is Prince Ranariddh’s father) had been unable to grant pardons to the two because of objections from the Hun Sen camp. Prince Ranariddh refused to abandon his allies, and for a while after the election the issue was a key sticking point to negotiations on forming a government.

Three others were also pardoned, including the former foreign minister, Prince Norodom Sirivudh. Prince Sirivudh was convicted in February 1996 on charges (widely believed to be trumped up) of plotting to kill Hun Sen. In January 1999 Prince Sirivudh returned to Cambodia from France where he had been living in exile. He has said he is not planning to return to politics but rather intends to spend time as a Buddhist monk and to devote himself to humanitarian issues.

Formation of the Senate is By mid-February the new Senate had still not been formed. A draft amendment delayed— to the constitution was drawn up in early December, a copy of which was sent both to King Sihanouk and to the National Assembly commission on legislative matters. However, it was delayed by changes in the commission line-up: its four members were all awarded posts in the new cabinet and as government appointees were deemed unsuitable to continue as commission members as well, and they had to be replaced. There was then a delay in choosing their replacements, and the passage of the legislation has stalled.

—and its size and role are The size and formation of the Senate is still being debated. The initial plan was unclear for members to be appointed rather than elected, at least to begin with. How- ever, King Sihanouk said that he only wanted to select two Senate members, and that the remainder should be chosen by the government and National Assembly. It is also unclear how many members the new Senate will have. In late November it was suggested it would have around 60 members, and this seems to be the CPP’s preferred number. In addition, the precise role the Senate will play once it is set up is not entirely clear. Prince Ranariddh said shortly after the idea of creating an upper house was announced that he thought its powers should be limited to scrutinising legislation passed by the lower house.

The CPP’s Chea Sim will be the Senate president. This means that he will also serve as acting head of state when the king is abroad, or if the king abdicates or dies. This responsibility formerly fell to the National Assembly chairman. Since King Sihanouk spends a lot of time in China, partly because of ongoing medi- cal treatment, Chea Sim can be expected to perform this role often.

Constitutional changes According to a report in December in the newspaper Reaksmei Kampuchea, the may allow the king to draft amendment to the constitution also seeks to have the king’s right to abdicate abdicate stated more clearly. Chapter two of the 1993 constitution, which covers the role of the king in Cambodia, makes no mention of abdication. King Sihanouk has expressed a wish to step down on a number of occasions.

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 14 Cambodia

Thirty MPs resign to avoid The assessment that holding a government position presented a conflict of conflict of interest interest for those sitting on the National Assembly legislative commission (see above) has been applied to all MPs holding ministerial and other official posts. Hence in December 30 National Assembly members voluntarily resigned their seats. This included 11 government ministers, four from FUNCINPEC and seven from the CPP. The balance of power in the National Assembly has been preserved, however, as the deputies who resigned were replaced by other members of their parties. Prince Ranariddh said that the move would enable the National Assembly to perform its role of scrutinising government policy better. The CPP president, Chea Sim, and the FUNCINPEC co-defence minister, Prince Sirirath, were among those who resigned.

Sam Rainsy promises a The SRP has not joined the government. With only 15 seats in the National feisty opposition Assembly, there is a limit to what the SRP can achieve, although its leader, Sam performance Rainsy, has pledged to play a full role in opposition. When the National Assembly reconvened in November, the SRP put up two candidates to contest the posts of first and second vice-chairman of the legislature, although neither was elected. Sam Rainsy has also pledged to set up a shadow cabinet, and has called for a government debate to examine the state of the economy and allegations of corruption ahead of the next meeting of Cambodia’s aid donors, scheduled for February 25th-26th in Japan. The opposition, including the SRP, suffered considerable harassment in the run-up to the election, and supporters of the SRP again clashed briefly with police when Sam Rainsy returned to Cambodia in November. Sam Rainsy said in an interview with the magazine Asiaweek in December, that a key test of the new government will be whether the rights of his party’s MPs are respected.

The Son Sann Party In January the Son Sann Party merged with FUNCINPEC. The party was merges with FUNCINPEC founded—as the Buddhist Liberal Democratic Party—by Son Sann, who was prime minister in the 1960s, and changed its name in 1998. The Son Sann Party did not win any seats in the 1998 election and has a small following. Prince Ranariddh emphasised that the merger was in the interests of national reconciliation and not intended as an anti-CPP front.

Some of the last senior On December 25th Hun Sen announced that two top Khmer Rouge leaders, Khmer Rouge leaders give Khieu Samphan and Nuon Chea, had left the movement. This followed the up armed struggle— defection on December 4th of 500 guerrillas and eight other senior Khmer Rouge leaders—including Ta Mok’s chief-of-staff, Khem Nguon (Ta Mok is the chief military leader of the Khmer Rouge), and Non Nou, who is believed to have been responsible for financial affairs. Ta Mok himself remains at large somewhere on the Thai-Cambodian border. In January he was said to want to surrender but nothing has yet come of this. He may be waiting to see what treatment his one-time compatriots receive.

—receiving a warm On December 29th Khieu Samphan and Nuon Chea came to Phnom Penh, welcome from Hun Sen accompanied by another senior Khmer Rouge leader, Ieng Sary, who made peace with the government in 1996. Hun Sen gave the three a warm welcome,, embracing them and giving them flowers. Khieu Samphan and Nuon Chea both offered muted apologies for the suffering and destruction that occurred

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 Cambodia 15

during Khmer Rouge rule, although the impact of their remarks was rather lost when Khieu Samphan suggested that people should “forget the past”.

There are doubts about Within Cambodia, the subject of a war crimes trial for the Khmer Rouge is the government’s extremely contentious. Prince Ranariddh has repeatedly said that he favours a commitment to a trial— trial. The position of Hun Sen and the CPP is more ambiguous. The warm reception afforded to Khieu Samphan and Nuon Chea by Hun Sen in December inevitably fuelled doubts about his commitment to such a trial. In January Hun Sen repeated his support for a trial but said that it was a matter for the courts to decide. At other times, he has been more lukewarm, questioning whether a trial would be in Cambodia’s interests and emphasising the need for national reconciliation. Advocates of a trial have also expressed concern that Khieu Samphan and Nuon Chea may receive a royal pardon like Ieng Sary. However, King Sihanouk said on December 30th that he would not grant them an amnesty.

—and although there is A poll of 1,503 Cambodians by the Institute of Statistics and Research on popular support for one— Cambodia in January 1999 found that 81% were in favour of Khmer Rouge leaders being prosecuted. However, despite this popular support, a trial risks uncovering a past which many would rather stayed hidden. This includes a large number of current government ministers and other officials, many of whom are former Khmer Rouge cadres. Hun Sen was himself a Khmer Rouge battalion commander. Chea Sim, who is to head the Senate once it is established, and one of the deputy prime ministers, Sar Kheng, were both senior Khmer Rouge cadres, while the economy and finance minister, Keat Chhon, served as Pol Pot’s translator.

—and international There has been increased international pressure for a Khmer Rouge war crimes pressure is building— trial, driven particularly by the US although there is also European support. In November a UN team led by Sir Ninian Stephen, who had been a judge at the war crimes tribunal for the former Yugoslavia in The Hague, visited Cambodia. This team is to report to the UN secretary-general, Kofi Annan, in February, with proposals for legal action. The UN General Assembly’s special representative for human rights in Cambodia, Thomas Hammarberg, said in January that he hoped trial proceedings could start in 2000.

—many obstacles remain However, there are many issues that need to be resolved before a trial can take place. These include whether a trial should take place inside or outside Cambodia, whether the tribunal should comprise Cambodian or foreign jurists or both, and whether legal proceedings should be conducted according to Cambodian or international law. Also unresolved is who should face trial and who should decide this.

The period to be covered by a trial is also contentious. A common view is that the trial should concentrate just on the years of Pol Pot’s rule (1975-78). How- ever, Hun Sen suggested in January—possibly to try to scupper it altogether— that a trial should cover a broader period to explore the extent to which countries such as China, Thailand and the US are implicated. Hun Sen mentioned the US with reference to the US bombing of Cambodia in the early 1970s, which many have argued created conditions which aided Pol Pot’s rise to power. As former backers of the Khmer Rouge, both China and Thailand are

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 16 Cambodia

uneasy about plans for a trial, although publicly they have been largely non- committal. As a permanent member of the Security Council, China would be able to exercise its right to veto any motion on the issue if it came before the UN.

Troop cuts are promised— In December Hun Sen announced plans to reduce the size of the armed forces (the Royal Cambodian Armed Forces, the RCAF). Current estimates put the combined size of the three services (army, air force and navy) at around 140,000. Of this, the army comprises 90,000 although some of these are probably so-called “ghost soldiers”—names registered by senior officers who then draw their salaries. Hun Sen has said that the government plans to demobilise some 55,000 soldiers and 24,000 policemen. In January the information spokesman, Khieu Kanharith, gave a target of cutting the armed forces to 30,000-40,000 by 2005.

—but will be hard to Achieving troop cuts of this magnitude is not going to be easy. Recently, the achieve in the short term army has been swelled by Khmer Rouge defectors who have been given the opportunity to be integrated into the RCAF. Soldiers loyal to General Nheak Bun Chhay are also due to rejoin the RCAF shortly. Finding them employment—or land if demobilised soldiers wish to return to farming—is a major consideration if the proposed cutbacks are to be attained. The government has asked the World Bank, the International Labour Organisation and Japan for assistance with the provision of vocational training courses, housing and land. The cost of implementing the proposed troop cuts is likely to rule out a reduction in public expenditure on defence in the short term (see Economic policy and the economy).

Hun Sen resigns as On January 15th Hun Sen announced his resignation as RCAF commander- commander-in-chief in-chief, arguing that his holding of this office is incompatible with the goal of a neutral military. His replacement has been named as General Ke Kimyan, who previously held the post of armed forces chief-of-staff. However, General Ke is also a senior member of the CPP, and both the armed forces and the police have a strong bias towards the CPP.

Cambodia will join ASEAN Cambodia had hoped to be admitted as a full member of the Association of soon— South-East Asian Nations (ASEAN) at the group’s summit meeting in Hanoi in mid-December. However, on the eve of the meeting, there was still no consensus among ASEAN’s nine members on whether to admit Cambodia. (Cambodia was due to join in July 1997, together with Myanmar and Laos, but was kept out because ASEAN leaders wanted to wait for political stability to return, following Hun Sen’s coup.) Malaysia, Indonesia, Laos and Vietnam were in favour of Cambodia’s admission, but Thailand, Singapore and the Philippines were hesi- tant. They argued that Cambodia had yet to prove it was politically stable, and also emphasised the fact that the Senate (a precondition of the new coalition agreement) had not been created. In the end, a compromise was reached. In a speech to the closing ceremony the Vietnamese prime minister, Phan Van Khai, announced that agreement had been reached to admit Cambodia “at an early special admission ceremony to be held in Hanoi”. The date of this ceremony has not been set although it is likely to take place later this year, possibly once the Senate is formed.

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 Cambodia 17

—and has its seat back at On December 7th Cambodia regained its seat at the UN. Its seat was left empty the UN in September 1997 in the wake of Hun Sen’s ousting of Prince Ranariddh (4th quarter 1997, page 13). The UN waited until another elected government was in place before re-admitting Cambodia. Cambodia’s new ambassador to the UN is Ouch Borith, who was previously Cambodia’s deputy UN representative.

Hun Sen cements ties with On February 9th-12th Hun Sen made an official visit to China accompanied by China a large official delegation. The Chinese prime minister, Zhu Rongji, welcomed the installation of the new Cambodian government. Hun Sen’s visit also saw the signing of five agreements: on economic, tourism and cultural co-operation, an extradition treaty, and a lending framework for aid to Cambodia.

China continued to provide aid after Hun Sen ousted Prince Ranariddh in July 1997. Hun Sen has also shown himself willing to jeopardise relations with Taiwan, which is a sizeable economic partner, in the interests of good relations with Beijing (4th quarter 1997, page 20). For Cambodia, China is not only an important economic partner—it was the largest foreign investor in 1998—it is also strategically important. Developing close relations with China is seen as a way of increasing Cambodia’s leverage both within ASEAN and outside it.

Economic policy and the economy

Defence eats up the lion’s The National Assembly approved the 1999 budget (which runs on a calendar- share of the 1999 budget— year basis) on December 31st 1998. Expenditure is forecast to be CR1.50trn ($395m), slightly down compared with forecast expenditure last year. Of this, CR330bn has been allocated to defence and CR132bn to security, together accounting for 31% of total expenditure. According to Keat Chhon, the economy and finance minister, defence expenditure will be reduced by 6.4% compared with the amount spent last year. Although the government has been criticised for continuing to allocate too much to defence, Keat Chhon justified the current high level by saying that the government needed the money to integrate Khmer Rouge defectors and fund demobilisation (see The political scene). Forecast expenditure on agriculture is up by 59% compared with last year while spending targets for health and education have been increased by 47% and 13% respectively.

—and the revenue target According to press reports, revenue is targeted to reach CR650bn. The budget may be optimistic— included a number of new measures designed to boost revenue, including:

• the introduction of a value-added tax (VAT) of 10% in January (see below), designed to raise CR250bn in 1999; and

• a small increase in the price of petrol and diesel, with the extra revenue to be spent on road repairs (see Infrastructure).

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 18 Cambodia

Cambodia: the 1999 budget (CR bn) Revenue 650 of which: VAT 250 Expenditure 1,495 of which: defence 330 security 132 Balance –845 Source: Press reports.

—as the introduction of The government has also introduced VAT as part of its efforts to boost revenue VAT causes headaches collection, effective from January 1st 1999. The VAT, which is being levied at a standard 10%, is expected to bring in CR250bn in revenue in 1999—almost 40% of total revenue. By introducing VAT the government is seeking to reduce its reliance on customs duties, which typically account for more than 40% of total revenue. This revenue source will be gradually lost as Cambodia lowers tariff barriers in line with its commitments to the ASEAN Free-Trade Area once it formally joins ASEAN (see Foreign trade and payments). The government has also emphasised that the introduction of VAT is an important step towards creating a more transparent tax system.

However, the implementation of VAT has encountered teething problems. The government has distributed VAT registration forms and provided training for the officials tasked with implementing the tax. However, businesses have complained of insufficient warning. Some companies said the first they heard about the plan to introduce VAT was in early December when the forms were sent out. Firms have also complained that the forms are not clear, while foreign companies have expressed concern that they will be pursued more vigorously, in terms of VAT implementation, than local companies.

The government is The government needs to secure new international assistance to help cover its counting on new aid wide budget deficit (typically, around 40% of the budget is funded by external commitments— assistance). Now that the new administration in place and the seat at the UN has been regained, the government is hoping for a full resumption of aid from the international donor community. A meeting of the Consultative Group (CG) comprising Cambodia’s main multilateral and bilateral donors, is scheduled to take place in Tokyo on February 25th-26th. The economy and finance minister, Keat Chhon, announced in early January that the government was hoping to receive aid pledges totalling $1.3bn over the next three years at the meeting, but added that even $150m in 1999 would be a “great success” for the government. Earlier, Keat Chhon estimated that Cambodia needed in the region of $1bn a year to revive the economy, of which 50% would come from foreign aid and 50% from foreign investment.

—trying to address donor In the run-up to the CG meeting, the new government has been asserting its concerns— “reformist” credentials. This has included the announcement of plans to:

• reduce the size of the armed forces (see The political scene);

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 Cambodia 19

• overhaul the administrative apparatus, including reducing the size of the bureaucracy; and

• clamp down on illegal logging (see below).

Heavy public expenditure on defence and security to the detriment of other areas and the loss of potential budget revenue as a result of illegal logging have been major donor concerns both past and present.

—and the IMF and Japan The dominant view among those donors who suspended aid in 1997 is that, have discussed new with the new government in place, aid should now be resumed, but disburse- lending ment should be linked to progress on economic reform. How closely it should be linked varies somewhat among donors. On January 25th an IMF delegation visited Phnom Penh. The IMF emphasised that it was just an annual mission but talks were held on the government’s reform programme and the possibility of a new structural adjustment facility. The talks specifically covered logging management. The IMF suspended aid to Cambodia in mid-1997 because of dissatisfaction over reforms, including the government’s failure to clamp down on illegal logging and to channel the associated revenue to the national budget. In the wake of the decision, it closed its office in Phnom Penh and has yet to re-open it. However, one IMF official was quoted as saying that a resumption of aid could be as little as three months away.

The Japanese government, which maintained its aid programmes after Hun Sen ousted Prince Ranariddh in July 1997, has been less demanding. Japan announced in February the first new aid programme since 1997, pledging $100m in new aid.

The government has Hun Sen has called repeatedly for a renewed campaign against illegal logging. ordered a crackdown on On January 6th he ordered the ministries of defence, interior and agriculture as illegal logging— well as provincial authorities to take immediate action, including the use of “military measures” if necessary. Later in the month, he instructed the newly appointed armed forces commander-in-chief, General Ke Kimyan, to crack down hard on illegal logging, saying that the drive must succeed in three months. Hun Sen’s statements have been backed up by some high-profile activities. On December 11th trucks confiscated from illegal loggers in Kratie province were set on fire; the forestry director in the province said that the trucks were burnt so that donor agencies “could see the facts”. In late January the agriculture minister, Chhea Son, announced the cancellation of 12 logging concessions which had been awarded to nine Cambodian and foreign companies. He said that the logging companies were not respecting the terms on which the concessions were granted.

—but not everyone Notwithstanding these well-publicised actions, eliminating illegal logging is believes it is serious likely to prove very difficult, particularly because powerful vested interests are at stake. Speaking shortly before the government announced the cancellation of the 12 logging contracts, the UN human rights special representative, Thomas Hammarberg, said that logging was still continuing, including with the participation of the military. A British environmental and human rights group, Global Witness, released documents in November bearing the signatures of Hun Sen authorising the export of 20,000 cu metres of illegally

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 20 Cambodia

cut timber to Thailand via Laos. It argued that this had cost the government millions of dollars in lost revenue. The World Bank (using a below market price estimate as used by the Cambodian government) has estimated that illegal logging in 1997 cost the government in excess of $60m. Nevertheless, Mr Ham- marberg came away from his meeting with Hun Sen mildly encouraged, saying that he felt that the government was taking the matter seriously.

The government’s logging policy has also been criticised on environmental grounds. The World Bank has said that, under a sustainable logging policy, no more than 500,000 cu metres would be felled a year—but that around 4m cu metres were cut in 1998, over 90% illegally. Mr Hammarberg has also high- lighted the way in which logging is having a devastating impact on the livelihood of indigenous people.

The economy has In the last quarter of 1998 the government conceded that its real GDP growth stagnated target of 3.5% for the year would not be achieved. In November the economy and finance minister, Keat Chhon, suggested that growth of less than 3% was possible. However, even this has not been reached. In a report issued ahead of the donor meeting in Tokyo, the World Bank has estimated that GDP did not grow at all in 1998. This is lower than the EIU’s estimate in the last quarter of 2% growth for 1998. The economy was hit in 1998 by a combination of a poor harvest (see Agriculture) and political uncertainty in the run-up to the July election. Much-reduced inflows of foreign direct investment (FDI) and aid also contributed to last year’s poor economic performance.

The government’s GDP growth target for 1999 is 4%. Keat Chhon said that this assumed a resumption of aid and increased foreign investment. However, even if substantial new aid is agreed at the end of February, it will take time for projects to be resumed, while the regional economic slowdown will continue to depress FDI inflows. Hence growth is likely to be rather slower than 4%.

FDI approvals picked up According to the Council for the Development of Cambodia (CDC), a total of in 1998— 130 foreign-invested projects worth $840m were approved in the first ten months of 1998. This compares with a figure of $760m for the whole of 1997. The largest amount of investment is being targeted at the textile and garment sector although food- and wood-processing, shoe manufacturing, and hotel and tourism projects also attracted foreign investment. In 1998 China overtook South Korea as the largest source of foreign investment.

—but utilisation rates The secretary-general of the CDC, Sok Chenda, asserted in December that the are low utilisation rates of FDI are higher than in previous years but did not provide any figures to substantiate his claim. Although some garment projects are being implemented quite quickly it is doubtful that Cambodia’s overall utilisation rate is much higher than 30%. The recent imposition of quota restrictions on garment exports to the US could have a dampening effect on FDI into the garment and textile sector (see Foreign trade and payments).

Inflation continues to rise According to data from the central bank, the National Bank of Cambodia, the consumer price index rose by an average of 14.8% year on year in the first 11 months of 1998, compared with an annual average of 8% in the same period of

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 Cambodia 21

1997. A combination of factors pushed up inflation in 1998, including rising food prices caused by the poor harvest, and the weakness of the riel (which led to a rise in the cost of imported goods). Inflation peaked at an average of 17% year on year in the second quarter of 1998, and then slowed during the second half of last year. By November, inflation had eased to 12.2% year on year. Price rises may have picked up again following the introduction of VAT in January 1999, as companies are likely to have passed some of the cost on to consumers. However, the government’s target for single-digit inflation in 1999 may be achievable.

Cambodia: consumer price inflation

1997 1998 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Oct Nov Index 114.9 125.2 127.3 129.7 134.4 141.5 143.7 143.1 % change, year on year 6.8 10.2 9.1 15.9 17.0 13.0 12.4 12.2 Source: National Bank of Cambodia, Economic and Monetary Statistics Review.

The money supply has Persistent inflationary pressure also reflects continued fast growth in money risen strongly supply. M1 growth accelerated in the first three quarters of 1998, rising by 36.1% year on year at the end of the third quarter. M2 growth slowed in the first quarter of 1998 but climbed by close to 20% year on year in both the second and third quarters. Rapid money supply growth has resulted from the government’s monetisation of the budget deficit, following the loss of aid in 1997.

Foreign-currency deposits accounted for 54.7% of M2 at the end of September. This, however, reflects people withdrawing dollars from the banking system to hold as cash (foreign exchange has risen as a share of M1), rather than a concerted improvement in confidence in the riel or the banks.

Cambodia: money supply (CR m unless otherwise stated) 1997 1998 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr M1 332,904 330,595 348,731 384,761 419,578 428,546 474,576 % change, year on year 7.5 6.2 10.6 17.0 26.0 29.6 36.1 M2 978,563 902,074 902,276 1,062,871 1,076,286 1,081,306 1,080,536 % change, year on year 32.1 15.8 9.5 16.6 10.0 19.9 19.8 Memorandum item Foreign-currency deposits 636,941 560,569 543,225 664,901 645,629 639,036 590,718 % of M2 65.1 62.1 60.2 62.6 60.0 59.1 54.7 Source: National Bank of Cambodia, Economic and Monetary Statistics Review.

Agriculture

Flooding follows drought, Cambodia’s rice crop is generally harvested towards the end of each calendar hitting the main rice crop year continuing to as late as February. Complete figures for the 1998/99 harvest are not yet available although there have continued to be anecdotal reports suggesting that output will be below the 2.8m tonnes harvested in 1997/98. Much of the crop was damaged by drought (4th quarter 1998, page 19). This was followed by unusually heavy monsoon rains in some provinces. Takeo province, for example, suffered crop damage from flooding following 11 consecutive days

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 22 Cambodia

of rain. According to the provincial agriculture department, at least 3,153 ha of the sown area was damaged by flooding. Cambodia has already requested food aid to counter shortages in some areas (4th quarter 1998, page 19).

Industry

Workers strike in the Cambodia’s textile and garment manufacturing sector has grown rapidly over garment sector the last few years. In late 1998 there were an estimated 110 factories nation- wide, compared with just 30 in 1996. However, fast growth has been accompanied by problems over pay and working conditions, prompting strikes at fairly frequent intervals. In January around 1,000 workers at a Malaysian- owned garment factory went on strike in Phnom Penh after their overtime wages were cut to $0.5 an hour from $0.8. Workers at the factory said that their wages were never more than $45 a month.

Poor working conditions were discussed in January with a delegation from the US Trade Representative (USTR) Office during talks on quota restrictions. The Free Trade Union of Workers of the Kingdom of Cambodia, which is closely aligned to the opposition Sam Rainsy Party, has urged the USTR to revoke Cambodia’s trade privileges on the grounds of labour abuses, although this has not been heeded (see Foreign trade and payments). The commerce minister, Cham Prasidh, has said that the government is committed to improving labour conditions. However, monitoring of factories is currently poor.

Infrastructure

The ADB finances In December the Asian Development Bank (ADB) gave its approval to a $140m repairing a road link loan to repair sections of the road linking Phnom Penh with Ho Chi Minh City with Vietnam in Vietnam. Some $40m of the loan is funding work on the Cambodian side of the border, with the Cambodian government contributing a further $10m. Although the distance between the two cities is small, the poor state of the road, difficulties encountered with visa formalities on the border, and concerns about security mean that most business people make the journey by plane.

Tourism

The tourism industry Tourist arrivals fell by 14.8% in 1998 to 186,333, according to tourism ministry remains depressed figures released in February. The tourism industry has been suffering a downturn since the political violence in July 1997, exacerbated by the Asian economic crisis. Tourism officials have expressed optimism that recovery is round the corner now that a new government is in place, lessening fears over instability in Cambodia. The sector’s potential as a foreign-exchange earner is evident from 1996 when tourist arrivals peaked at 260,489 (revised figures), and revenue from tourism reached $184m in balance-of-payments terms— before dipping to $73m in 1997.

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 Cambodia 23

Foreign trade and payments

The US imposes quota In January agreement was reached with the US imposing new quota restrictions restrictions on Cambodian on garment exports for 1999-2001. Exports of garments to the US have grown garments rapidly since Cambodia was awarded normal trade relations (NTR, formerly most favoured nation trading status) in October 1996. In the first ten months of 1998, garment exports earned $298m, up from $227m for the whole of 1997.

Until the January agreement, the US only imposed very limited restrictions on Cambodian garments, targeting exports of cotton and man-made fibre gloves. However, the Committee for the Implementation of Textile Agreements (CITA), a Washington-based inter-agency body that oversees the US textile programme, said in October 1998 that there had been a sharp increase in Cambodian imports of cotton-knit shirts and blouses and cotton sweaters during the year. In November the commerce minister, Cham Prasidh, went to the US for talks on the issue and in January negotiators for the USTR came to Cambodia. Under the agreement, exports of blouses and shirts have been limited at 2.5m dozen, and the quota on cotton sweaters has been set at 94,000 dozen. Quotas have been imposed on a range of other garments, including trousers and coats. Although the new restrictions are intended to allow continued growth in 1999, the use of quotas could reduce the foreign investment the sector has had recently (see Economic policy and the economy).

The government will have Cambodian membership of ASEAN moved a step closer at its summit in Hanoi to prepare for AFTA in mid-December (see The political scene). It will require the country to begin lowering tariff barriers in line with the ASEAN Free-Trade Area. The newest members of ASEAN (Vietnam, Myanmar and Laos) have been given slightly longer to achieve the tariff cuts than its economically stronger members; this is likely to apply to Cambodia when it does join.

The riel has stabilised— After strengthening briefly for a period following last year’s election, the riel has fallen again. However, the rate of depreciation has slowed. In early Cambodia: exchange rates, 1998 December the riel dipped to CR3,900:$1, compared with CR3,800:$1 the pre- CR:$; inverted scale vious month, and by early February the riel had regained some ground, to

Parallel market rate CR3,775:$1. Confidence in the riel has improved somewhat following the Official rate agreement on the coalition government and also greater stability in regional 3,500 currencies. Improving confidence has closed the gap between the parallel 3,600 market and official market exchange rates, which emerged ahead of the July 3,700 election (see graph). There have also been anecdotal reports of a slump in

3,800 imports towards the end of the year, reducing demand for foreign exchange.

3,900

4,000

4,100 Jan . Mar . May . Jul . Sep . Nov

Source: National Bank of Cambodia, Economic and Monetary Statistics Review.

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 24 Cambodia

—and reserves have International reserves (excluding gold) strengthened in late 1998 to end the year strengthened at an historic high of $324.3m, according to the IMF’s International Financial Statistics (IFS). This compares with $291.6m reached at the end of the third quarter. This is the highest level since the IFS began reporting data in 1993. However, compared with the level of imports (which reached $1.1bn in 1997, according to the latest available data), the level of reserves remains fairly low.

Cambodia: international reserves ($ m) 1997 1998 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Total reserves (excl gold) 274.2 281.6 284.8 298.6 300.2 284.9 291.6 324.3 Source: IMF, International Financial Statistics.

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 Laos 25

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.

Head of state The president, General Khamtai Siphandon. The post of vice-president, created in April 1996, is occupied by Oudom Khatthigna

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

National elections December 1997; next election due in December 2002

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

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

Main members of Council Prime minister General Sisavat Keobounphan of Ministers Deputy prime ministers Khamphoui Keoboulapha Bounnyang Volachith Lieutenant-General Choumali Saignason Somsavat Lengsavat

Key ministers Agriculture & forestry Siene Sapangthong Commerce & tourism Phoumy Thipphavone Communications, transport, posts & construction Phao Bounnaphol Defence Lieutenant-General Choumali Sayasone Education Phimmason Leuangkhamma Finance Khamphoui Keoboulapha Foreign affairs Somsavat Lengsavat Health Ponemek Daraloy Industry & handicrafts Soulivong Daravong Information & culture Sileua Bounkham Interior Major-General Asang Laoly Justice Kham Ouane Boupha Labour & social welfare Somphan Phengkhammi State planning Bouathong Vonglokham

Central bank governor Cheuang Sombounkhan

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 26 Laos

Economic structure

Latest available figures

Economic indicators 1994 1995 1996 1997a 1998a GDP at current prices (K bn) 1,108 1,419 1,726 2,173 n/a Real GDP growth (%) 8.1 7.0 6.9 6.5 6.0 Consumer price inflation (%) 6.8 19.4 13.0 19.3 n/a Population (m) 4.93 4.87 n/a n/a n/a Exports fobb($ m) 305.5 310.9 322.8 317.0c n/a Imports fobb ($ m) 519.2 626.8 643.7 599.1c n/a Current-account balance ($ m) –284.0 –346.2 –346.8 –316.0c n/a Reserves excl gold ($ m) 61.0 92.1 169.5 143.2c 121.1d Total external debt ($ m) 2,080 2,165 2,263 n/a n/a Debt-service ratio, paid (%) 5.0 5.8 6.3 n/a n/a Exchange rate (av; K:$) 718 805 921 1,257c 3,297d

February 22nd 1999 K3,941:$1 (average official reference rate)

Origins of gross domestic product 1997e % of total Agriculture & forestry 51.8 Industry (incl construction) 20.5 Services 25.6 Total incl adjustments 100.0

Principal exports 1997 $ m Principal imports 1997 $ m Garments 90.5 Construction & electrical equipment 82.8 Timber & wood products 89.7 Materials for garment industry 73.7 Electricity 20.8 Vehicles 53.8 Coffee 19.2 Machinery & equipment 52.0 Total incl others 317.0 Total incl others 599.1

Main destinations of exports 1997 % of total Main origins of imports 1997 % of total Vietnam 42.7 Thailand 56.2 Thailand 22.1 Vietnam 4.2 France 6.3 Japan 1.6 Belgium 5.6 Hong Kong 1.5 Germany 5.1 China 0.8 a Official estimates. b Balance-of-payments basis. c Actual. d EIU estimate. e Constant prices.

Sources: GDP in current prices, GDP growth, inflation: IMF, Lao People’s Democratic Republic: Recent Economic Developments. Exports and imports (fob): IMF, International Financial Statistics. Breakdown of GDP, principal exports and imports, direction of trade: IMF, Lao People’s Democratic Republic: Recent Economic Developments.

Outlook for 1999-2000

Political stability will Laos is likely to remain politically stable in 1999-2000. The current leadership endure line-up—centred on the president, General Khamtai Siphandon, and the prime minister, General Sisavat Keobounphan—is a strong combination; the two are believed to share a good working relationship. Further leadership changes are unlikely before the ruling Lao People’s Revolutionary Party (LPRP) holds its seventh party congress, due in 2001. The preceding year may be accompanied by a slight increase in political uncertainty as contenders for political office position themselves in the hope of an appointment but this will not result in a loss of overall political stability.

The economic downturn that has affected Laos, bringing sharp price increases and a weakening of the exchange rate, carries a slightly heightened risk of social unrest but this should not be exaggerated. Moreover, any incidents of unrest would be likely to remain localised and focused on specific grievances rather than representing a concerted attack on the LPRP. Organised dissent within the country will remain almost non-existent.

Reform will proceed Economic reform will continue but the pace will be gradual. There may be a gradually slight slowdown ahead of the seventh congress as politically difficult decisions are put on hold. The regional financial crisis is also having a mixed impact on reform. In some areas, the government is pushing ahead with renewed vigour. The move to overhaul the Customs Department in order to facilitate international trade is one example. The government also remains committed to implementing tariff cuts in line with the ASEAN Free-Trade Area (AFTA). In other areas, the government is likely to proceed more carefully in the wake of the regional crisis. These areas include moves towards greater currency convertibility and state enterprise reform. However, the government announced in late 1998 new plans to privatise a number of large state enterprises. Progress in this respect is possible towards the end of the forecast period.

Another major thrust of policy will be efforts to reduce Laos’s economic dependence on Thailand, a key investor and trade partner. However, breaking into new markets and attracting foreign investment from other countries will not be easy and no rapid change is expected.

Growth is likely to remain The government has set a GDP growth target of 6-7% for the current 1998/99 sluggish in 1999— financial year (October-September), little change compared with GDP growth of 6.7% in 1997/98. However, the 1998/99 target looks optimistic. The Asian Development Bank (ADB) estimates that real GDP growth slowed to 6% in the 1998 calendar year. For 1999 the EIU is forecasting growth of around 4%, rising to 5% in 2000. Both forecasts are premised on a reasonable rice harvest and could fall further if this is not the case. Agriculture still accounts for more than half of GDP in constant price terms. During 1999, growth will remain sluggish following the poor rice harvest in late 1998, which was hit by drought. In addition, industry and services growth will remain depressed in the face of continued low levels of foreign investment stemming from the regional financial crisis. During 1999, the government has also called for an austerity drive in

administrative expenditure and for non-essential construction projects to be put on hold, slowing growth in the construction sector.

—before picking up in GDP growth will pick up in 2000, boosted by the return to growth in Thailand. 2000 This will lead to increased foreign investment inflows and more buoyant export demand, which will boost both industry and services. Capital expenditure is also likely to pick up in 2000 as some of the postponed construction projects are revived. The tourism sector could also pick up as the more buoyant regional economy results in a rise in tourist arrivals from within Asia.

Inflation will come down Inflation accelerated rapidly in 1998 and is possibly in triple digits, boosted by slowly— high food prices, increases in administered prices, a steep fall in the kip, strong government spending and rapid money supply growth. There is likely to be some easing of inflationary pressure in 1999. Higher food prices, following the poor 1998 main rice harvest, will continue to exert upwards pressure on inflation. However, the kip will depreciate more slowly, curbing imported inflation—which was very severe in 1998. Inflation should begin to ease more mark- edly in 2000, although it will remain in double digits.

—as the kip depreciates The rate of depreciation of the kip slowed in late 1998 after sharp falls earlier in more slowly the year. The kip is likely to come under further downward pressure in 1999, given continued rapid inflation. However, the depreciation of the kip this year will be much less rapid than in 1998 (when the currency dropped by around 60% compared with the 1997 average rate). In 2000 the kip is likely to stabilise, and may even appreciate slightly as inflation begins to decelerate and increased capital inflows boost dollar liquidity.

Exports and imports will During 1998 both exports and imports are thought to have fallen (although pick up in 1999-2000 full-year data are not yet available). Figures for trade with Thailand—Laos’s largest trading partner—suggest that import growth fell less steeply than exports, leading to a widening of the merchandise trade deficit. Export demand from key Asian markets will remain weak in 1999, and world commodity prices for Laos’s commodity exports (which include timber and coffee) will remain soft. However, Laos’s exports should benefit in 1999-2000 from the award of normal trade relations (NTR) by the US, which has been delayed, while existing

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

K:DM 4 110

100 0 1994 95 96 97(a) 98(a) K:¥

(a) Official estimates. (b) Nominal exchange rates adjusted for changes in relative consumer prices. Sources: EIU; IMF, International Financial Statistics; World 1990 91 92 93 94 95 96 97 Economic Outlook.

market access agreements with the EU are likely to be maintained. Export growth should begin to accelerate in 2000 as the regional recovery takes hold and commodity prices firm up. However, imports may also pick up more rapidly, possibly resulting in a further widening of the merchandise trade deficit. Continued aid inflows will be adequate to make up for any shortfalls on the balance of payments in 1999-2000, but Laos’s external reserves will remain low.

Review

The political scene

The prime minister calls In a policy speech in mid-October the prime minister, General Sisavat for increased efficiency Keobounphan, called for the bureaucracy to be streamlined in a bid to increase efficiency and raise output. He also spoke of the need to tackle corruption, calling for “responsible committees” to be set up at the local level, and to be attached to specific government projects. General Sisavat also called for efforts to tackle price rises and to stabilise the currency (see Economic policy and the economy), as well as to diversify Laos’s economic ties—currently centred on Thailand, its main trade partner and source of investment—particularly with China and Vietnam. The leaders of the ruling Lao People’s Revolutionary Party (LPRP) have been alarmed by the impact on Laos of the regional economic crisis, and are seeking ways to lessen Laos’s reliance on crisis-hit South-east Asian countries, and to boost domestic production.

A military anniversary is In January large-scale celebrations were held to commemorate the 50th anniver- celebrated sary of the founding of the Lao People’s Army (LPA). The president, General Khamtai Siphandon, called for the LPA to deepen its ties with the armed forces of China and Vietnam. The annual meeting of the Ministry of Defence was also held in January, at which discussions included the organisation of party cells within the military (there are strong links between the LPRP and the armed forces, while the LPRP dominates all levels of the government and bureaucracy).

Laos backs Cambodia’s On December 15th-16th General Sisavat attended the annual summit of the ASEAN membership Association of South-East Asian Nations (ASEAN) in Hanoi. One of the main topics of discussion was the admission of Cambodia. (Cambodia was due to join ASEAN in July 1997, when Laos and Myanmar were admitted, but was excluded at the last minute in protest at a coup held that month.) General Sisavat expressed Laos’s support for Cambodia’s admission. Laos’s strong support reflects a growing recognition among the newer ASEAN members (namely Laos, Myanmar and Vietnam) that they need to stick together to represent their interests where they differ from those of their more developed counterparts.

ASEAN membership aside, relations between Laos and Cambodia are uncom- plicated. There is occasional friction along their shared border resulting from illegal logging. However, there are no serious problems affecting ties.

The prime minister visits On November 23rd-26th General Sisavat and a delegation visited Myanmar. Myanmar— Ministerial-level meetings were held on a range of issues, and two relatively

minor agreements were signed during the visit, including one on the lifting of visa requirements for official and diplomatic passport holders from both countries. Relations with Myanmar are close. A major breakthrough occurred in 1994 when the Treaty on the Demarcation of Boundaries, settling differences along the border, was signed. Since then, there have been no serious incidents on the border. In November a separate joint meeting on the border was held, which is expected to lead to the opening of a number of new border-crossing points.

—and the president visits On January 4th-7th the Lao president visited Vietnam. General Khamtai was Vietnam accompanied by a 13-member delegation including three Politburo members. Meetings were held with most of the top Vietnamese leadership and the Vietnam-Laos Inter-Governmental Committee on Economic, Cultural, Scientific and Technological Co-operation met on January 5th. It reviewed the areas where co-operation is taking place, including education and training, agriculture, and infrastructure. As a measure of its commitment, Vietnam pledged K22.3bn ($5.3m) in grant aid for 1999. Both sides also agreed to press ahead with the completion of the road linking Laos to the Vietnamese coast (see Infrastructure). General Khamtai’s visit follows that of the Lao prime minister in July. Political relations between the two countries continue to be close (although both countries have diversified ties since the 1980s).

Border talks with The eighth session of the Joint Commission on Lao-Thai Co-operation was Thailand make progress held in Bangkok in November, attended by the Lao foreign minister, Somsavat Lengsavat, and his Thai counterpart, Surin Pitsuwan. Progress on demarcation of the long shared border was discussed, and a pledge to settle all border disputes by 2003 was reiterated. Although progress is being made, relations with Laos’s large neighbour, and main trade partner, remain troubled by occasional border disputes and by the presence of several thousand Hmong ethnic minority Lao refugees in Thailand. There is an anti-Communist element among the refugees, and the Lao government has also complained of Hmong involvement in drug-trafficking across the border. Thailand is seeking to re- patriate the refugees, but the Lao government has said that it will accept only those who return voluntarily (4th quarter 1998, page 27).

The US continues the war In November the US embassy in Vientiane organised a seminar covering drug on drugs enforcement policy in the region. It was conducted in co-operation with the Lao National Commission for Drug Control (LNCDC) with instruction at the seminar provided by officers from the US Drug Enforcement Administration. Speaking at the time of the meeting, the US embassy released a statement expressing appreciation at the co-operation it had received from the Lao government. In addition to targeting drug smuggling, the US is also supporting projects designed to help Lao farmers growing opium to shift to producing other crops. However, progress would appear to be slow, based on statistics for opium production. According to the LNCDC, opium output in 1998 was 123 tonnes, only slightly down on the 140 tonnes produced in 1996.

In mid-December the assistant secretary at the US State Department with responsibility for East Asia and Pacific Affairs, Ralph Boyce, visited Laos. Discussions mainly focused on trade relations, notably the prospects for the award of normal trade relations (NTR), which has been delayed (see Foreign

trade and payments). On January 15th-17th a US Congressman, Tony Hall, visited Laos; following the visit, he warned that progress on NTR could be delayed by human rights issues, particularly the arrest in 1998 of several Lao Christians who took part in a religious service at which several foreigners were present.

Economic policy and the economy

The government plans to Following a sharp increase in the budget deficit during the 1997/98 fiscal year tighten its belt (October-September), the government is trying to implement a policy of fiscal tightening (4th quarter 1998, pages 28-29). Although total expenditure was targeted to rise by 33% in the 1998/99 budget, in October the prime minister, General Sisavat, called for the postponement of non-essential construction projects such as houses and new offices. Government ministries have also been asked to cut back on administrative expenditure.

The government defends A cutback in official construction spending will hit GDP growth. The govern- its estimates for economic ment announced a GDP growth rate of 6.7% for the financial year 1997/98 growth— (October-September), which some analysts felt was on the high side. According to Dr Souphan Keomisay at the National Economic Research Institute, this reasonable performance reflected the fact that, despite the impact of the Asian economic crisis, government investment in infrastructure has been held at around 16% of GDP while the private sector, including some foreign investors, have continued to build new houses and factories. Hence a slowdown in construction spending will hit the overall rate of growth.

—but the target for The government’s 6-7% economic growth target for 1998/99 looks ambitious. 1998/99 looks ambitious Foreign direct investment (FDI) inflows have been hit by economic difficulties in Thailand, the largest investor in Laos. (FDI approvals collapsed to only $114m in 1997, from $1.3bn in 1996—4th quarter 1998, page 35.) Slowing FDI inflows will curb industrial output. Meanwhile the important agricultural sector (which accounted for 52% of constant-price GDP in 1997) has been hit by a severe drought (see Agriculture). Dr Souphan reiterated earlier government estimates that agriculture grew by 5.1% and industry by 8.9% in 1997/98. The Asian Development Bank (ADB) has estimated that GDP growth in the 1998 calendar year was 6%.

New state enterprise In late 1998 the government announced plans to overhaul some of the reforms are planned country’s largest state-owned enterprises. Three have been specifically mentioned, namely the Phattana Khet Phoudoi Group, Lao Fuel and Lao Aviation. Few details of the reform programme have yet emerged although Lao Aviation is known to have been suffering financial problems (4th quarter 1998, page 33). By 1995 over 500 state-owned enterprises had been at least partially privatised. However, only 75 of these enterprises were sold outright; the preferred option has been to lease state firms on a fixed-term basis. This has kept down the revenue raised from privatisation; in 1989-95 total revenue raised from privatisation amounted to a modest $72.6m.

Inflation may be in triple Since the onset of the Asian economic crisis, inflation has risen steeply. Data digits are patchy, but in January the state National Economic Research Institute (NERI) said that inflation in the 12 months to December 1998 was 142%. IMF officials have also commented that inflation is now in triple digits. The sharp fall in the value of the kip during 1997 and 1998 (which boosted the price of imports) has been the main cause of the sharp inflationary pressure witnessed in recent months. Higher food prices resulting from successive poor harvests have also fuelled inflation. However, according to the NERI, prices stabilised somewhat towards the end of 1998, despite increases in the price of a number of items including petrol and electricity.

Agriculture

The rice harvest was poor The main rainfed rice crop, which was harvested in late 1998, was badly damaged by drought and as a result output was well below target (although as yet there are no official production figures). The rains arrived in drought-affected areas too late to save much of the crop. Worst affected are the central and southern provinces. In some cases, crop damage is as high as 70% of the expected harvest. In January the EU announced a donation of $1m in food relief.

Some northern provinces have been less affected by the unfavourable weather. Bokeo, for instance, reported in January that it had recorded a good harvest although its contribution to the total harvest is small. Many provinces are now focusing on trying to produce a satisfactory dry season crop. In an article in the November 27th edition of the government daily newspaper, Vientiane Mai, the provincial Agricultural and Forestry Service was reported as assisting with the repair of irrigation facilities to promote dry season rice cultivation.

An agricultural census is The government will conduct its first agricultural census between February 22nd in progress and March 19th. It is being carried out by the State Planning Committee and the Ministry of Agriculture and Forestry with financial and technical assistance from the Swedish International Development Co-operation Authority (SIDA). A broad range of data will be collected in all of the country’s 141 districts, including the type of crops cultivated, dependence on inputs such as farm machinery, farm size, the use of labour, and livestock. The lack of detailed, up-to-date statistics has made policy planning difficult.

Industry

The start-date for In November it was announced that construction of a new Lao-Chinese joint- construction of a new venture cement plant would begin in February 2000. Construction was origi- cement plant is put back nally due to begin in mid-1999 but was postponed reportedly because the design work has taken longer than expected. The Lao Cement Company, which is a joint venture between two state-owned Lao companies and China Yunnan Corporation for International Techno-Economic Co-operation, received approval for the project in May 1998 (3rd quarter 1998, page 34). The plant, which will have a capacity of 200,000 tonnes annually, is due to be finished in 2003. Laos currently has one cement plant with a capacity of 80,000

tonnes a year. However, annual demand is 450,000 to 500,000 tonnes, resulting in heavy demand for cement imports.

Infrastructure

Laos wants to revive the In his address to the ASEAN summit in Hanoi in December, General Sisavat trans-Asian railway emphasised Laos’s desire to see progress in plans to develop a trans-Asian railway (an idea which has been mooted at various times in the last few years). As a landlocked country, Laos could benefit more than most from such regional infrastructure projects. However, little has been heard about the trans- Asian railway since the region was hit by the Asian economic crisis. Given current shortages of project finance it is unlikely that the project will move ahead in the short term.

Japan announces extra In November Japan announced that it would provide $46m in new funding to funding for bridge repair 40 bridges on a southern stretch of Laos’s National Route 13, running renovation— from Savannakhet province to Pakse, in Champassak province. (National Route 13 is the backbone of Laos’s road system, running from Luang Prabang in the north to the Cambodian border in the south, but much of it is in a poor state.) This follows the $39m already committed to bridge repairs on the northern section on of this road. The bridge project is expected to be completed in 2001.

—and road links to the The ADB is funding the repair of National Routes 8, 9, 12, and 18. Routes 8, 9 Vietnamese coast continue and 12 are all planned to link up with roads in Vietnam, providing Laos’s to receive attention exports with access to the South China Sea (goods from Laos are mainly shipped through Thailand at present). During the recent visit of the Lao president, General Khamtai, to Vietnam (see The political scene), the two sides pledged to press ahead with work on Vung Ang port in Vietnam’s central Ha Tinh province and on the related road works. Both the port and the road projects are due to be completed in 2000. In September Lao and Vietnamese officials also reached an agreement to complete an east-west road corridor linking Laos’s Route 12 with the adjacent Vietnamese road and coast, although no timescale was made public (4th quarter 1998, page 31).

Finance for the second Since the first bridge across the Mekong River was completed in 1994, there Mekong bridge is falling have been plans to build additional bridges. However, progress has been slower into place than had been hoped. Construction of the second bridge has been delayed by financing problems as a result of the regional economic crisis. Work on the bridge—due to begin in December 1997—has still not begun. However, finance for the project is now beginning to fall into place. In December the Japanese prime minister, Keizo Obuchi, reiterated that Japan will provide ¥8bn ($71m) in soft loans split equally between Laos and Thailand to fund the bridge.

Lao Telecommunications In November Lao Telecommunications (LT), which is a joint venture between may seek a third partner the state-owned Enterprise des Postes et Telecommunications de Laos and a Thai company, Shinawatra International, announced anticipated revenue for 1998 of K60bn ($18m). LT has been operating in Laos since 1994. It is the only company allowed to provide the full range of telecommunications services although other companies have been awarded one-off contracts—the latest

being Alcatel (4th quarter 1998, page 31). By late 1998, LT’s fixed-line service had 27,000 subscribers while mobile phone and pager users numbered 6,000 and 1,000 respectively. In 1999 the company is forecasting revenue of K120bn. It is planning to extend its coverage to 50 townships from 39 at present. By 2001, it expects to have 49,000 telephone lines.

LT has recently been exploring the possibility of introducing a third foreign partner to the company. LT’s director-general, Nakorn Anantachai, has said that this course of action was being considered because of difficulties in assem- bling project finance, a result of Thailand’s economic difficulties. If a third party came on board, he suggested that the Lao government would retain its 51% stake with Shinawatra reducing its share in the company.

Energy and mining

Nam Theun 2 has still not Construction of the 681-mw Nam Theun 2 hydroelectric power plant, which got the all-clear has been mired in controversy on both environmental and economic grounds, has still not begun. On November 18th-25th the International Advisory Group (IAG), commissioned by the World Bank to assess the environmental and social consequences of the project, visited Laos. According to the Vientiane Times, the IAG has come out in favour of the project. However, the World Bank, which is due to act as financial guarantor of the $1.4bn project, has yet to give it the green light. The project could face further delays even after the World Bank gives it the all-clear because the developers, Nam Theun 2 Electricity Consortium (NTEC), have not agreed a price with the Electricity Generating Authority of Thailand (EGAT) for the electricity. During the visit of the Asian Development Bank (ADB) vice-president, Shin Myong-ho, to Laos in November discussions were held with the government on the possibility of ADB financing for two other hydroelectric power projects, Nam Ngum 3 and Nam Leuk.

Foreign investors dig for In October a Korean company, Buhae Industrial Corporation, signed a 15-year gold and sapphires contract with the Lao government to explore for sapphires in a 107-sq-km area in Bokeo province. The company is also expected to establish facilities to process the raw stones. The government is expected to take a 10% share of the profits. In November a Chinese company, Yunnan Geology and Mineral Industry, was awarded a 26-year concession to explore for gold in a 392-sq-km area in Luang Prabang (also in northern Laos). The company is investing $2.7m in the project. The Lao government is due to take 20% of all profits.

The mining sector in Laos has been open to foreign investment since 1990. However, the number of projects that have been successfully implemented is very low. Poor infrastructure and the country’s mountainous terrain often make extraction difficult and expensive.

Money and finance

A joint venture bank with In December a Memorandum of Understanding was signed between the state- Vietnam is planned owned Banque pour le Commerce Exterieur Lao and Vietnam’s state-owned Bank for Investment and Development, to establish a joint-venture bank. Also in December the central bank, the Bank of the Lao People’s Democratic Republic, signed an agreement with its counterpart, the State Bank of Vietnam, to increase co-operation in areas such as trade finance and training.

Assistance to Laos’s banking sector has also been forthcoming from further afield. In March 1998 the Australian government pledged A$200,000 (US$125,300) to pay for an independent audit of the country’s state-owned banks in the wake of the Asian economic crisis. The bad debt situation in the Lao banking sector was significantly improved in 1994 by the injection of K18bn ($25m) through a combination of ADB finance and government bond sales. However, bank regulation remains a cause for concern against a backdrop of still widespread politically-motivated lending.

Tourism

Visa formalities are eased The government has eased visa formalities to coincide with Visit Lao Year for Visit Lao Year (VLY), which began in January. However, this only applies to tourists visiting Laos on organised tours. Under the new arrangements, visas can be obtained at an increased number of designated international crossing points, including the airport. The visa is valid for 15 days and costs $20.

The Lao National Tourism Agency hopes to attract 700,000 tourists in 1999 and 900,000 in 2000 (the two years of the VLY campaign). Given the current difficult economic climate in the region, which has reduced arrivals from Asian countries, this target may prove difficult to reach (4th quarter 1998, page 32). It would certainly mark a significant increase compared with tourist arrivals of 463,000 in 1997.

Foreign trade and payments

Laos agrees to faster AFTA At the ASEAN summit in Hanoi in December the member countries agreed to tariff cuts accelerate the tariff cuts planned under the ASEAN Free-Trade Area (AFTA). The Lao government (together with Myanmar) had originally agreed to reduce tariffs on goods covered by the Inclusion List (IL) to 0-5% by 2008. In the December announcement, both countries agreed to bring this forward to 2005 and to expand the number of zero-rated items by 2008. The six more developed ASEAN countries have committed to reduce tariffs on at least 85% of the IL to 0-5% by 2000, 90% by 2001 and 100% “with some flexibility” by 2002. This compares with an original 2003 target date for reducing tariffs on IL goods to 0-5%.

The new targets are voluntary, raising doubts about whether they will be met at a time when economic crisis has rocked the region and disrupted trade. Laos’s own exports and imports fell in the first half of 1998, according to the latest available data (4th quarter 1998, page 34).

Efforts are made to reduce In January customs officials met with companies from the state and private red tape sectors to discuss last year’s introduction of a new import-export declaration form. The form, which was introduced in early 1998, has replaced 11 separate forms. In theory, goods should now be able to clear customs in three days compared with the three weeks it usually took. However, delays are still occur- ring. A particular problem is that the approval of many different ministries is usually required before goods can proceed through customs.

Barter trade with In October the Lao commerce and tourism minister, Phoumy Thipphavone, Vietnam is discussed held talks with his Vietnamese counterpart, Truong Dinh Tuyen, on ways to boost trade between the countries. One of the issues discussed was the possibility of trade being conducted on a barter basis. Given the non-convertibility of the kip and the dong, a lot of the trade across the border is conducted in hard currency, especially dollars. A barter arrangement would potentially overcome the shortages of foreign exchange currently affecting both countries.

The goods which Laos may export to Vietnam in this way include motorbike parts, timber, fertiliser, iron, steel and cement. Bilateral trade is very important for Laos (although less so for Vietnam). In 1997 Vietnam was the destination for some 43% of Laos’s exports, although imports from Vietnam accounted for only around 4% of the total.

The rate of depreciation For the whole of 1998, the official kip rate quoted by the IFS depreciated by of the kip has slowed— 62%, to an estimated average of K3,297:$1. However, during the last quarter of 1998 and in early 1999 the rate of depreciation of the kip has slowed. The kip reached K4,235:$1 on November 30th, according to Banque pour le Commerce Extérieur Lao (BCEL) data, and continued to slide slowly through late 1998 and into 1999. By the start of February, BCEL was quoting an average buying/selling rate of K4,374:$1.

The rate of depreciation of the kip against the baht has also slowed; the kip was trading on February 1st at around K118:Bt1 compared with K107.5:Bt1 in early October, a drop of 8.8%. This compares with depreciation against the baht of 25.6% between June and October 1998.

Parallel market trading became less intense during the last quarter of 1998. A small premium between the parallel market rate and the official rate often emerges, in part because the heavy use of the dollar and baht in the Lao economy has continued, despite official efforts to clamp down on the use of foreign currencies.

—and the reserves have Efforts to defend the kip have been constrained by the lack of foreign-exchange started to stabilise reserves. From $173m in the first quarter of 1997, the reserves (excluding gold) fell to only $120.3m in the second quarter of 1998, remaining little changed at $120.9m by the end of October (according to the latest available data from the IFS). The fall in reserves thus seems to have bottomed out—perhaps because of a slowdown in import growth, which had been rapid.

Laos: international reserves ($ m) 1997 1998 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Oct Foreign exchange 173.0 171.7 164.7 143.2 130.8 120.3 120.7 120.9 Gold 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 Total 173.6 172.3 165.3 143.8 131.4 120.9 121.3 121.5 Source: IMF, International Financial Statistics.

India extends a $2m soft In January India’s minister of state for external affairs, Vasundhra Raje, led a loan four-member delegation to Laos for the second meeting of the India-Laos joint commission. During Mrs Raje’s visit, an agreement was signed under which India will extend a $2m soft loan to Laos for co-operation in science, technology and trade.

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 38 Quarterly indicators and trade data

Quarterly indicators and trade data

Cambodia: quarterly indicators of economic activity

1996 1997 1998 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Production Annual totals Rice ’000 tonnes ( 3,390 ) ( 3,415 ) ( 3,415a ) Exports Qtrly totals Rubber: net ’000 tonnes 9.5 11.5 3.5 2.5 12.0 14.0 4.0 3.0 6.0b n/a Prices Monthly av Consumer prices Jul-Sep 1994=100 112.7 116.7 111.9 114.9 124.2 127.3 129.7 134.4 141.4 143.3 change year on year % 6.8 9.0 5.5 6.8 10.2 9.1 15.9 17.0 13.8 12.6 Money End-Qtr M1 CR bn 315.4 328.9 332.9 330.6 348.7 384.8 414.6 428.5 474.6 478.5c change year on year % 30.8 18.1 7.5 6.2 10.6 17.0 24.5 29.6 36.1 n/a Foreign traded Qtrly totals Goods exports fob $ m 159.0 172.7 213.1 211.2 152.6 159.1 n/a n/a n/a n/a Goods imports fob ” 266.6 264.9 317.8 288.7 212.9 244.6 n/a n/a n/a n/a Exchange holdings End-Qtr Foreign exchange $ m 217.7 251.9 261.2 268.9 272.50 286.7 288.3 274.4 281.1 314.5 Exchange rate Official rate CR:$ 2,687 2,713 2,735 2,761 3,192 3,452 3,580 3,995 3,800 3,770

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

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

Laos: quarterly indicators of economic activity

1996 1997 1998 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 tonnes ( 1,414 ) ( 1,660 ) ( 1,700 ) Prices Monthly av Consumer prices 1990=100 190.5 193.9 195.6 n/a n/a n/a n/a n/a n/a n/a change year on year % 15.5 6.2 6.7 n/a n/a n/a n/a n/a n/a n/a Money End-Qtr M1 K m 67,454 66,892 75,558 70,360 76,869 73,495 79,935 87,883 96,812 n/a change year on year % 0.1 2.0 12.5 1.2 14.0 9.9 5.8 24.9 25.9 n/a Foreign trade Qtrly totals Exports $ m 78.1 89.8 81.1 85.0 90.0 48.0 93.0 65.0 82.0 n/a Imports “ 178.7 156.6 175.9 182.1 169.9 133.0 163.0 139.0 181.0 n/a Exchange holdings End-Qtr Foreign exchange $ m 91.79 113.19 159.19 155.78 155.84 149.89 130.64 119.16 110.83 111.80a Exchange rate Official rate K:$ 919 919 935 1,004 1,021 1,343 2,009 2,418 3,408 3,941b

Note. Annual figures for most of the series shown above will be found in the Country Profile. a End-October, 112.96. b End-November, 420.0.

Sources: FAO; IMF, International Financial Statistics.

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999 Quarterly indicators and trade data 39

Cambodia and Laos: French trade ($ ’000) Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec 1991 1992 1993 1994 1995 1996 1997 French exports fob Cambodia 4,278 13,374 21,457 42,745 60,483 48,387 40,261 Laos 3,039 3,003 3,893 20,187 24,154 8,118 9,445 French imports cif Cambodia 2,871 3,362 845 4,025 7,493 12,764 18,303 Laos 9,083 13,308 19,255 20,347 29,599 22,273 24,406 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 1995 1996 1997 Exports fob 1995 1996 1997 Thailand 287.8 310.0 336.6 Vietnam 87.7 157.6 135.2 Vietnam 23.9 25.8 25.1 Thailand 83.3 96.7 70.1 Japan 48.8 52.5 10.4 France 11.1 8.2 20.0 Hong Kong 7.5 8.1 9.5 Belgium 1.3 2.0 17.9 China 21.5 23.2 4.9 Germany 12.7 4.8 16.2 Taiwan 4.9 5.3 4.3 UK 0.9 6.6 14.9 Total incl others 588.8 689.6 647.9 Total incl others 312.8 320.7 316.9 Source: IMF, Lao PDR: Recent Economic Developments.