Cambodia Laos

COUNTRY REPORT

Cambodia Laos

November 2000

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Contents

3 Summary

Cambodia

5 Political structure 6 Economic structure 6 Annual indicators 7 Quarterly indicators 8 Outlook for 2001-02 8 Political outlook 9 Economic policy outlook 9 Economic forecast 11 The political scene 14 Economic policy 16 The domestic economy 16 Economic trends 17 Agriculture 18 Industry 18 Energy 19 Foreign trade and payments

Laos

20 Political structure 21 Economic structure 21 Annual indicators 22 Quarterly indicators 23 Outlook for 2001-02 23 Political forecast 23 Economic policy outlook 24 Economic forecast 26 The political scene 29 Economic policy 30 The domestic economy 30 Economic trends 31 Agriculture 32 Industry 33 Mining 33 Services 34 Foreign trade and payments

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List of tables

29 Laos: Government finances

List of figures

10 Cambodia: gross domestic product 10 Cambodia: riel real exchange rates 17 Cambodia: money supply 19 Cambodia: balance of trade and current account 26 Laos: gross domestic product 26 Laos: kip real exchange rates 31 Laos: money supply and inflation 32 Laos: foreign investment

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Summary

November 2000

Cambodia

Outlook for 2001-02 The local elections expected in 2001 will pose a test to the stability of the coalition government. However, overall political stability is likely to be maintained during 2001-02. Economic growth is likely to be on a rising trend during 2001-02, averaging 6-6.5% annually. Inflation is expected to remain in single digits in 2001-02 although it is likely to pick up later in the forecast period. A repeat of the exchange-rate instability of 1997-98 during 2001-02 is most unlikely. Import growth is expected to outstrip export growth in the forecast period, pushing up the trade and current-account deficits.

The political scene Hun Sen has appealed to the international community for aid for flood- stricken areas of Cambodia. Prince Norodom Ranariddh is doubtful that the draft law on holding a Khmer Rouge trial will be passed this year. A FUNCINPEC and two SRP politicians have been killed in incidents linked to the run-up to the local election. The SRP has promised a more conciliatory style. The military has been accused of extra-judicial killings. A CPP delegation has visited Vietnam and military ties have been cemented with China. The number of Thai soldiers stationed on the border is to be reduced. Hun Sen has visited the Philippines and Brunei. A new landmines body has been set up. There has been renewed concern over the sexual exploitation of children.

Economic policy The IMF has expressed satisfaction with the pace of reform. Further tax reforms are planned but the government is still struggling to meet revenue targets. Civil service wages have been frozen pending a review of public administration reform. Military demobilisation is effectively a year behind schedule. A ten- year economic master plan is being drafted with Thailand. A Singapore delegation has investigated business opportunities. Business working groups are planned to help improve the investment climate. The natural habitat of the Cardomom mountains is under threat from logging.

The domestic economy Severe floods struck in September which are likely to depress economic growth. There is still very little inflationary pressure in the economy although money supply growth has picked up. The riel continues to be stable. Rural credit is being expanded. Textile and garment manufacturers say Cambodia is too expensive. Nike has backed out amid underage labour allegations. Vietnam is to supply electricity to Cambodia.

Foreign trade and The trade and current-account deficits fell sharply in 1999. Foreign reserves payments remain at healthy levels.

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Laos

Outlook for 2001-02 Despite recent setbacks the ruling Lao People’s Revolutionary Party will retain its hold on power during 2001-02. Leadership changes anticipated at the Seventh Party Congress in 2001 and following the National Assembly elections in 2002 will not alter the government’s cautiously pro-reform stance. However, policy implementation is likely to be painfully slow. Economic growth is forecast to strengthen during 2001-02 but will average a rather modest 5-5.5% GDP growth in the period. Private investment is likely to recover only gradually while the prospect of normal trade relations (NTR) being granted by the US before 2002 look dim. Inflation is likely to remain in double digits during 2001-02. Periodic falls in the kip cannot be ruled out but a repeat of the volatility witnessed in 1997-98 is unlikely. The absence of NTR will act as a constraint on export growth. The trade and current-account deficits will widen but will remain manageable as long as foreign aid inflows are maintained.

The political scene The government has played down the bomb blasts as it prepares for next year’s Seventh Party Congress. The prime minister has rallied National Assembly delegates as a new session opens. A government minister, Khamsay Souphanouvong, may have defected. There is pressure on the US government to show greater support for Lao democracy. Lao soldiers have occupied three islands in a border dispute with Thailand. Relatives of anti-government rebels face extradition from Thailand. The government has strengthened defence ties with China. The foreign minister signed a co-operation agreement with Libya and has visited Myanmar.

Economic policy Large revenue and expenditure increases have been budgeted for 2000/01. Germany and Vietnam have extended technical assistance to the Lao central bank in a bid to strengthen monetary policy. The government has accepted debt relief from Japan.

The domestic economy Growth in Vientiane was much faster than nationwide growth in 1999/2000. Inflation is still high but falling, and growth in broad money has slowed. The kip has remained stable. Severe flooding has hit the agricultural sector. Foreign investment remains small-scale based on cumulative figures for the last 12 years. The textiles and garment sector is seeking to raise quality. Japan has formally handed over the second trans-Mekong bridge. The government is reviewing its tourism targets in light of recent political instability.

Foreign trade and The government is anticipating a smaller trade deficit in 2000/01. Trade with payments Vietnam has continued to rise. The foreign reserves remain small.

Editors: Jen Miles Davies (editor); Graham Richardson (consulting editor) Editorial closing date November 1st 2000 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

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Cambodia

Political structure

Official name Cambodia

Form of government Constitutional monarchy

The executive The cabinet is constitutionally responsible to the National Assembly

Head of state King Norodom Sihanouk. The king is selected by the Throne Council and 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 with 15. A coalition government was formed in November 1998, comprising the CPP and FUNCINPEC

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

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

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

Central bank governor Chea Chanto (CPP)

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Economic structure

Annual indicatorsa

1995 1996 1997 1998 1999 GDP at current prices (CR bn) 7,200 8,251 9,100 10,750 11,670b Real GDP growth (%) 7.6 7.0 1.0 1.0 4.3 Consumer price inflation (av; %) 1.0 10.1 3.2 14.7 4.1 Population (m) 9.7 9.9 10.2 11.4 11.7b Exports fob (US$ m) 855.2 643.6 736 705.4 971.3 Imports fob (US$ m) 1,186.8 1,071.8 1,064.0 1,096.8 1,211.6 Current-account balance (US$ m) –185.7 –184.9 –209.9 –223.9 -96.2 Reserves excl gold (US$ m) 192.0 265.8 298.5 324.3 393.2 Total external debt (US$ m) 2,035 2,100 2,129 n/a n/a Debt-service ratio, paid (%) 0.6 1.2 1.1 n/a n/a Exchange rateb (av; CR:US$) 2,450.8 2,624.1 2,946.3 3,744.4 3,807.8

October 27th 2000 CR3,835:US$1

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

Principal exports 1998c US$ m Principal imports 1998d US$ m Garments 390 Cigarettes 149 Logs & sawn timber 178 Petroleum products 139 Rubber 25 Vehicles & motorcycles 53 Fishery products 3 Clothing & cloth 24 Re-exports 396 Construction materials, cement & steel 22 Total incl others 999 Total incl others 1,227

Main destinations of exports 1997 % of total Main origins of imports 1997 % of total Vietnam 18.0 Thailand 15.9 Thailand 15.1 Vietnam 8.7 US 9.8 Japan 6.8 Singapore 8.5 Hong Kong 5.4 China 5.3 China 4.6 a IMF, International Financial Statistics unless otherwise stated. b EIU estimates. c Including re-exports. d Excluding non-retained imports.

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Quarterly indicators

1998 1999 2000 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Prices Consumer prices (1995=100) 134.3 136.2 133.7 135.8 136.8 136.2 133.8 132.7 % change, year on year 13.9 12.7 8.5 6.3 1.9 0.0 0.1 –2.3 Financial indicators Exchange rate CR:US$ (av) 3,796 3,816 3,778 3,794 3,844 3,815 3,798 3,811 CR:US$ (end-period) 3,800 3,770 3,790 3,800 3,895 3,770 3,810 3,855 Interest rates (av; %) Deposit 7.9 7.5 7.7 7.2 7.1 7.3 7.3 7.3 Lending 18.6 17.7 17.7 17.8 17.5 17.3 17.3 17.2 M1 (end-period; CR bn) 474.6 543.3 527.3 499.7 501.3 532.0 549.7 545.6 % change, year on year 36.1 41.2 27.2 16.6 5.6 –2.1 4.2 9.2 M2 (end-period; CR bn) 1,080.5 1,230.1 1,315.1 1,316.2 1,405.7 1,442.5 1,733.1 1,831.4 % change, year on year 19.8 15.7 22.8 21.7 30.1 17.3 31.8 39.1 Sectoral trends Rice production (annual totals; '000 tonnes) ( 3,510 ) ( 3,800a ) ( n / a ) Rubber exports, net ('000 tonnes) 10.5 12.5 5.5 4.5 11.7 13.5 7.0 n/a Foreign trade & payments (US$ m) Goods exports fob 192.1 204.4 238.8 260.3 269.8 202.4 n/a n/a Goods imports fob –254.2 –302.1 –295.9 –321.8 –312.6 –281.3 n/a n/a Merchandise trade balance –62.1 –97.7 –57.1 –61.5 –42.8 –78.9 n/a n/a Services balance –20.3 –20.8 –26.4 –19.9 –15.9 –13.3 n/a n/a Income balance –21.4 –11.7 –1.3 –9.8 –5.8 –8.0 n/a n/a Current-account balance –29.4 –56.0 –16.3 –32.6 –5.7 –41.6 n/a n/a Reserves excl gold (end-period) 284.9 291.7 324.3 357.5 363.1 393.2 480.5 490.9 a Estimate.

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

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Outlook for 2001-02

Political outlook

Domestic politics Cambodia is unlikely to see a return to the instability that characterised 1993- 98 during the forecast period (2001-02). This in part reflects the dominance of the Cambodian People’s Party (CPP) and the relative weakness of both its coalition partner, the National United Front for an Independent, Neutral, Peaceful and Co-operative Cambodia (FUNCINPEC), and the opposition Sam Rainsy Party (SRP). Moreover, those members of FUNCINPEC who hold government portfolios do not wish to jeopardise their positions so far out from the next general election, which is not due until 2003. It has also been suggested that the FUNCINPEC leader, Prince Norodom Ranariddh, no longer wishes to adopt a confrontational stance towards the CPP, as he did during 1993-98, because he has his eye on the throne when his increasingly frail father, King Norodom Sihanouk, dies. To become king, Prince Ranariddh is likely to need the backing of the prime minister, Hun Sen, as he is expected to hold the balance of power on the Throne Council which is responsible for choosing the new monarch. The opposition SRP has frequently clashed with the government and especially the CPP. However, the SRP leader, Sam Rainsy, has recently suggested that he sees some scope for co-operation with the CPP. Whether this will really lead to reconciliation between the two parties is doubtful since mistrust between them runs deep. This is especially the case at the grass-roots level where political intimidation of SRP activists by the pro- CPP security forces is commonplace.

The main threat to stability during 2001-02 derives from the forthcoming local elections scheduled for mid-2001. The concern is that they will provoke a wave of political violence as FUNCINPEC and the SRP seek to break the long- standing grip of the CPP on local government. There have already been a number of incidents in which FUNCINPEC and SRP politicians have been killed. There is a danger that such violence could have ramifications for coalition stability more generally, although for the reasons outlined above the risk here is probably quite small. Other threats to stability during the forecast period could potentially come from an upsurge in internal CPP rivalry or fallout from the planned Khmer Rouge trial. However, in both cases, the EIU rates the risks as quite small. Although there are different allegiances within the CPP the party has long had a reputation for internal discipline and is likely to resist acts which might threaten its hold on national power. Suggestions that a Khmer Rouge trial might re-open old wounds precipitating open conflict, are generally made by those opposed to a trial and hence are rather self-serving. We believe such dangers are greatly exaggerated.

International relations Compared with a few years ago, the government’s diplomatic standing is much strengthened. The international donor community has resumed lending while multilateral institutions, such as the IMF and the World Bank, speak favourably of the government’s progress on reform. While there are obvious flaws in the democratic process, most governments prefer to work with the Cambodian

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authorities in the hope that they can contribute to a climate in which democratic institutions will more firmly take root. This favourable foreign policy environment is likely to continue during 2001-02. The proposed Khmer Rouge tribunal continues to be a source of potential friction between the government and the UN. However, it is doubtful that even the US or the EU will allow a lack of progress in this respect or a watered-down trial to interfere with the development of relations overall.

Economic policy outlook

Policy trends Economic policy in the forecast period will be centred on improving government finances and maintaining the new-found confidence of the international community. Fiscal reforms will emerge in the form of improved tax revenue, and the introduction of value-added tax (VAT) has created a firm basis for this. Administrative reform and military demobilisation are likely to free up additional revenue for infrastructure, health and education. Inflows of foreign aid, which are likely to be sustained throughout the forecast period, will also give the government more room to manoeuvre in terms of public expenditure.

Economic forecast

Economic growth In light of severe flooding in September, we have downgraded our estimate for GDP growth in 2000 to 5% from 5.5% previously. During 2001-02, we are forecasting GDP growth of 6-6.5%. Slower growth resulting from flood damage to the rice crop will continue into 2001, notably by depressing private consumption. However, if the wet season harvest in late 2001 is a good one, growth can be expected to strengthen in the last quarter of 2001, continuing into 2002. Growth is likely to pick up in 2001-02 on the back of increased government consumption as fiscal reforms lead to stronger public finances. Private investment (both domestic and foreign) has remained rather sluggish throughout 2000. However, it is likely to strengthen during 2001-02 as continued political stability engenders improved business confidence. The strength of the recovery in private investment will depend on whether the government is successful in moving to address investor concerns, which relate to high costs, the weak regulatory framework and corruption. Recent measures to encourage tourism, notably the declaration of an “open skies” policy which allows foreign airlines to fly direct to Siem Reap (the nearest airport to the country’s famous Angkor temple complex), have been successful. Assuming political stability is maintained, there is no reason why this recovery in investment should not continue in 2001-02.

Inflation There is currently very little inflation. In the second quarter of 2000 consumer prices fell 2.5% compared with the year-earlier period, and month-on-month inflation was negative for each of the three months of the second quarter. Despite this inflationary pressure could well mount in 2001-02 as economic growth accelerates. Furthermore, damage to the harvest caused by recent

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flooding is likely to lead to higher food prices during 2001. Nevertheless prices will remain in single digits in 2001 and probably 2002.

Exchange rates In the first ten months of 2000 the riel has remained broadly stable against the US dollar, trading at around CR3,805:US$1 in early October. This is likely to continue during 2001-02 against the backdrop of faster economic growth and strengthening capital inflows. A repeat of the exchange-rate instability which characterised the Asian financial crisis is most unlikely in the forecast period.

External sector In the first three quarters of 2000 both export and import growth has strengthened in the face of stronger regional demand and a pick-up in the domestic economy. During 2001-02 this strengthening of the external sector is likely to be sustained. World trade growth is expected to peak in 2000 but will remain healthy during 2001-02. Export earnings will also benefit from a pick- up in commodity prices although these will not return to the highs of the first half of the 1990s. There is, however, some uncertainty surrounding the textile and garment sector, which is Cambodia’s largest source of export earnings. The sector has recently been hit by labour unrest while there have also been comments by some companies that in light of market access restrictions by the US the country is no longer price competitive. Although the US increased the size of Cambodia’s garment quota in May, and the sector has guaranteed access to the EU until 2002, its performance will need to be watched closely during 2001-02. Stronger economic growth can be expected to lead to higher levels of imports. The high oil price has pushed up the cost of refined petroleum products, most of which have to be imported. However, with oil prices forecast to decline in 2001 this is likely to prove temporary. Nevertheless, the tendency will be towards a widening of both the trade and current-account deficits in 2001-02. Higher tourism receipts should improve the services balance but the government will remain dependent on continued aid inflows and foreign investment to finance the current-account deficit.

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The political scene

Hun Sen appeals for In September the country was hit by severe flooding, mainly in the south-east flood aid (see Agriculture). Touring flood-stricken areas the prime minister, Hun Sen, described the floods as the worst to hit the country in 70 years. They are certainly the worst since 1996 when 169 people lost their lives in flooding which caused an estimated US$85.5m in damage. In collaboration with international agencies, the government has been distributing emergency supplies in the form of food, drinking water, medicine and housing kits to those affected. The International Federation of Red Cross and Red Crescent Societies have launched an appeal for US$1.9m to fund emergency assistance to Cambodia. The UN has appealed for US$10.7m in emergency assistance.

Further delays hit planned Progress towards holding the proposed Khmer Rouge tribunal continues to be Khmer Rouge trial slow. The main obstacle is that the National Assembly has still not approved the draft law on the tribunal. The UN has said it will not participate in the tribunal until it is sure that the law is compatible with a Memorandum of Understanding signed by the UN and the Cambodian government, which sets out the minimum conditions for UN participation (August 2000, pages 10-11). In what many regard as deliberate prevarication, the government has been considering a number of minor amendments to the draft law. In early September it passed the amended legislation to the National Assembly’s legislative committee for its consideration. However, the National Assembly went into recess on August 24th and did not reconvene until October 16th. On that day the National Assembly president, Prince Norodom Ranariddh, said he did not think the law would be passed before the end of the year.

Uncertainties remain over who is likely to face trial if a tribunal is ever convened. The prime minister, Hun Sen, was quoted in September as saying that the former Khmer Rouge leader, Ieng Sary, could face trial. However he later commented that whether Ieng Sary faced trial was up to the courts. It has always been assumed that Hun Sen opposes the prosecution of Ieng Sary, who, following his defection from the Khmer Rouge in 1996, was granted an amnesty by King Norodom Sihanouk. Since then Ieng Sary has lived freely in the north-western town of Pailin where he commands a considerable following. The foreign affairs minister, Hor Nam Hong, has said that Ieng Sary’s amnesty does not exclude him from being indicted by a future tribunal. For his part, Prince Ranariddh has said that he supports the trial of all Khmer Rouge leaders. However, it has often been commented that by the time a tribunal is convened some of those likely to face prosecution will be dead. (It is thought that Ta Mok, one of just two former Khmer Rouge leaders in custody, and Ieng Sary, are both in poor health.)

One FUNCINPEC and two There have been reports of an increase in political intimidation of candidates SRP politicians are killed and activists in the run-up to the commune (local government) elections, scheduled for mid-2001. In August one candidate for the National United Front for an Independent, Neutral, Peaceful and Co-operative Cambodia (FUNCINPEC) and two opposition Sam Rainsy Party (SRP) candidates were shot and killed in Kampot, Kampong Cham and Prey Veng provinces respectively.

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The government has been reluctant to concede that the attacks were politically motivated, although one government spokesman said they might have related to personal disputes. An SRP senator, Meng Rita, described the killing of two of his party’s candidates as a “clear attempt to intimidate the opposition”.

The SRP promises a more Despite the allegations of political intimidation, the opposition SRP leader, conciliatory style Sam Rainsy, in August told the Thai newspaper, The Nation, that he intended to adopt a less confrontational stance towards the government. This turnaround, he claimed, was brought about by his discovery that some members of the CPP were willing to talk to him. In particular he mentioned the CPP governor of Phnom Penh, Chea Sophara, who mediated in the dispute between the SRP and the government over the SRP’s wish to erect a stupa monument in memory of those killed in a grenade attack in 1997. A Cambodian newspaper, Samleng Yuveackchon Khmer, has also picked up a more conciliatory stance by the SRP. Referring to an SRP petition congratulating the government on its negotiations with the UN on the Khmer Rouge tribunal, the newspaper commented that not since 1993 had the party voiced its “full support for the government”. How much room there is for co-operation between the CPP and the SRP remains to be seen. Mr Rainsy may have been pushed into adopting a more conciliatory tone by members of his party, who have long argued that outright hostility towards the CPP and Hun Sen is counterproductive.

The military is accused of In August the Cambodian Human Rights Action Committee (CHRAC), which extra-judicial killings groups 17 non-governmental organisations, issued a report claiming that in May security forces in Kracheh province had killed six members of the Free Khmer (Khmer Serei) Movement (FKM). The FKM was formed in the wake of the July 1997 coup d’etat by FUNCINPEC supporters who took to the jungle to wage a military campaign against the CPP. The six were reportedly killed some six months after they had given up their struggle and surrendered to the government. According to the report a further 25 former FKM members are missing, believed killed. The government response to the report has been dismissive. The chairman of the UN Human Rights Commission, Om Yintieng, has said that the CHRAC has a tendency to politicise such incidents, and the Ministry of Defence has said that it plans to file defamation charges against the organisation. Hun Sen has called for the extradition from France of the Free Khmer Movement leader, Ith Soung.

A CPP delegation visits In August a CPP delegation led by a permanent member of the CPP Central Vietnam Committee Standing Board, Sai Chum, visited Vietnam. The main focus of the visit, which was geared towards maintaining ties with the Vietnamese Communist Party (VCP), was a meeting with a delegation led by a Vietnamese Politburo member, Pham The Duyet. This resulted in the signing of an agreement on party-to-party exchanges during 2001-02. Ties between the CPP and the VCP are close. The CPP is the successor party to the one put in power by Vietnam after its invasion of Cambodia in 1978. Moreover, many of those holding senior positions in the CPP, including Hun Sen, took refuge in Vietnam when they defected from the Khmer Rouge. This legacy makes managing Cambodian-Vietnamese relations more straightforward than they might otherwise be. In August the two countries reached an agreement on the

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search for and repatriation of the remains of Vietnamese soldiers killed in action during the war in Cambodia.

Military ties are cemented In August China’s Ministry of Defence director-general, Zhan Mao Hai, visited with China Cambodia. This was followed in September by a visit of the deputy commander-in-chief of the Royal Cambodian Armed Forces (RCAF), Kun Kim, to China. During Mr Zhan’s visit to Cambodia, an agreement was signed covering a Rmb22m (US$2.7m) unconditional aid package to the Cambodian Ministry of Defence. Military relations between the two countries have developed strongly in recent years with China extending substantial military aid to Cambodia. This included a US$1.5m aid package in November 1999 (1st quarter 2000, page 16). In August Beijing appointed Ning Fukui as its new ambassador to Cambodia. China’s president, Jiang Zemin, is expected to visit Cambodia in November.

Thai troops stand down on Thailand is to reduce the number of soldiers stationed along its border with the Cambodian border Cambodia. According to the commander of the Suranari Task Force in charge of the Thai-Cambodian border, Major-General Vivat Sataraksa, the troop withdrawals are to begin in October. The Suranari Task Force is itself scheduled to be dissolved in 2003, after which only military scout and border police will be deployed. The last major incident on the Thai-Cambodian border occurred just prior to the arrest of the Khmer Rouge leader, Ta Mok, in 1999 when there was a possibility he had fled into Thailand.

Hun Sen visits the On August 16th-21st Hun Sen visited the Philippines and Brunei as part of Philippines and Brunei ongoing efforts to cement ties with fellow member countries of the Association of South East-Asian Nations (ASEAN). His visit to the Philippines resulted in the signing of three Memorandums of Understanding (on tourism, visa exemption for diplomatic passport holders, and rural health), two agreements on the promotion and protection of investments, and the establishment of a joint commission for bilateral co-operation. Economic ties between Cambodia and the Philippines are undeveloped. According to the Philippines trade secretary, Manuel Roxas, bilateral trade was worth just US$3m in 1999. There is also very little Philippine investment in Cambodia. During Hun Sen's visit to Brunei two agreements were signed: one on trade co-operation and the other on civil aviation. The Brunei government also offered to assist Cambodia in training personnel to work in the oil industry.

A new UN human rights In August UN secretary-general, Kofi Annan, appointed a new special representative is appointed representative for human rights in Cambodia, replacing Thomas Hammarberg who relinquished the post in January. The new incumbent, Peter Leuprecht, previously served as the dean of the Faculty of Law at McGill University in Canada. Mr Leuprecht has yet to take up his appointment despite the fact that his predecessor left the post ten months ago.

A new landmines body is In September the government announced the formation of a new body to co- set up ordinate the removal of landmines and tackle landmine-related issues. The Cambodia Mine Action and Victims Assistance Authority (CMAVAA) will oversee the work of the existing government landmine clearing organisation,

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the Cambodian Mine Action Centre (CMAC). Hun Sen has been made chairman of the CMAVAA while the former director-general of the CMAC, Sam Sotha, has been named secretary-general of the new body. The latter appointment has caused consternation in some quarters because Sam Sotha was dismissed in August 1999 amid allegations of fraud. He was eventually cleared of the allegations by a KPMG financial audit, although in its report KPMG referred to “serious managerial deficiencies.” There have been suggestions in the press that donors will not fund landmine clearance activity if Sam Sotha holds office. However, this is unlikely. CMAC, which is currently suffering from a shortage of funds, has an annual budget of around US$13m. In September the UK government announced a donation of US$300,000 to CMAC. Recently there have been suggestions that the government’s estimates for the total number of landmines left in the country exaggerate the true picture (August 2000, page 16).

The sexual exploitation of Both the government and non-governmental organisations have recently children is a concern expressed concern about the sexual exploitation of children in Cambodia. According to the executive director of the Cambodian Women’s Crisis Centre, Chanthol Ung, both Cambodians and foreigners exploit children. However, the centre believes an increasing number of foreigners are visiting the country to exploit children. Their findings are echoed by other organisations. Sebastien Marot, the co-ordinator of an organisation that works with street children in Phnom Penh, has described Cambodia as one of the “hunting grounds” of foreign paedophiles. Moreover, a UNICEF study in 1999 estimated that around one-third of prostitutes in Cambodia were under the age of 18. In September the tourism minister, Veng Sereyvuth, said that the government was determined to stamp out “sex tourism”. The women’s affairs minister, Mu Sochua, said in August that the government would consider drawing up a blacklist of foreigners suspected of committing sex offences, who would be barred entry to the country even if they had not been convicted.

Economic policy

The IMF is happy with the In September the IMF approved the disbursement of US$10.8m as part of its pace of reform three-year poverty reduction and growth facility (PRGF) approved last year. In total, the PRGF is worth US$81.6m. Speaking about the decision to permit disbursal of the next tranche of the loan, the IMF’s resident representative in Cambodia, Mario de Zamaroczy, said that revenue and expenditure benchmarks had been consistently met. Unhappiness over the government’s fiscal policy was the principal reason why the IMF suspended lending in 1997.

Further tax reforms are According to the IMF, the government is looking to increase revenue in fiscal planned 2000 (ending December 31st 2000) by focusing on the following areas:

• broadening of the value-added tax (VAT) base; • increasing royalty payments from tourist service providers;

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• improving customs and tax administration; and • collecting arrears from telecom services and the leasing of state assets.

The government struggles Notwithstanding the IMF’s assessment that fiscal benchmarks are being met, to meet revenue targets some of the government’s own data point to continuing problems in increasing revenue. In the 2000 budget, expenditure is forecast to be CR2.3trn (US$614m). Of this, CR1.47trn (64%) is due to be raised domestically, with the remainder coming from overseas. In the first half of 2000 revenue was up 5.4% on the year-earlier period, according to the Ministry of Finance. However, this was slightly below the target for the period. The shortfall appears to have occurred because of a drop in customs revenue which fell 12% year on year in the first half. Revenue from VAT rose 12% compared with the same period last year. The finance ministry has expressed optimism that measures aimed at strengthening tax administration are likely to result in the revenue shortfall being made up in the second half of the year.

Civil service wages have Public finances remain under close scrutiny since they impinge on so many been frozen areas. Civil service reform and military demobilisation are critical in this respect since expenditure savings in these areas have the potential to free up revenue for health, education and rural development. In terms of civil service reform, the government is drawing up a strategy in conjunction with the World Bank and the aim is for this to be in place by March 2001. Until it is, the government has said there will be no increase in civil service wages. As part of its administrative reform plans the government is also clamping down on the abuse of diplomatic passports. From January 1st 2001 all existing diplomatic passports will be invalid and holders will be required to re-apply. The government says that some 4,000 diplomatic passports have been issued despite the fact that the country has only 28 embassies and consulates abroad.

Military demobilisation is a In the area of military demobilisation, a pilot scheme was completed in July year behind schedule that saw the removal of 1,500 soldiers from the payroll. The plan is for the scheme to extend to the armed forces as a whole but there have been some delays in this respect. The original plan was for a further 10,000 soldiers to be demobilised by the end of 2000 followed by another 10,000 in 2001 and 2002 respectively. However, demobilisation of the 2000 quota has not even begun, effectively putting the project one year behind schedule. Speaking in September, Mario de Zamaroczy nevertheless expressed confidence that demobilisation should start to move forward. In September the World Bank announced an additional US$15m in aid for military demobilisation.

An economic master plan is In August the Thai government approved Bt20m (US$500,000) for the drawing drawn up up of a master plan for co-operation with Cambodia. The Thai-Cambodian Economic Co-operation Action Plan will look at opportunities for co-operation in trade, investment and tourism over the next decade. The work, which is expected to be completed in about a year, is to be conducted by a team at Kasetsart University. The agency responsible for the project on the Cambodian side is the government’s Council for the Development of Cambodia.

EIU Country Report November 2000 © The Economist Intelligence Unit Limited 2000 16 Cambodia

Singapore sniffs for In August the Singapore trade and industry minister, George Yeo, visited business opportunities Cambodia at the head of a large business delegation. His visit coincided with an announcement that Singapore’s Silk Air flight will begin flying directly between Singapore and Siem Reap from November 3rd. Silk Air is the third foreign airline (the others are Bangkok Airways and Vietnam Airlines) to take advantage of the government’s “open skies” policy which permits foreign airlines to fly direct to Siem Reap, which is the gateway to the famous Angkor Wat temple complex (August 2000, page 21). Mr Yeo’s visit also saw the signing of a Memorandum of Understanding on a US$5m sewage treatment and rubbish disposal project involving both Singaporean and Cambodian participation. Singapore is the fourth largest investor in Cambodia with US$224m in approved investment at the end of 1999. Two-way trade was valued at S$780m (US$450m) in 1999, up 31% on the previous year.

Business working groups The Phnom Penh Chamber of Commerce is to set up a series of working groups are planned designed to assist the government in improving the investment climate. The working groups will cover trade, tourism, the garment sector, hotels and banking. They will aim to provide investors with information about business opportunities, the legal system and other aspects of the investment environment.

Logging threatens the A report by the London-based Fauna and Flora International (FFI) has called on Cardomom mountains the government to take tougher action to protect the biodiversity of the Cardomom mountains. According to FFI, which recently conducted a 12-day survey of the area, the Cardomom mountains are home to a wide range of rare and endangered plant, insect and animal life. Until recently the area was controlled by the Khmer Rouge, which has meant that it has been less disturbed than it might otherwise have been. As a “wildlife preserve” the area is already formally protected, but FFI believes more needs to be done, including preventing logging in the area. There are presently five companies which have been granted logging contracts which extend into the Cardomom mountains.

The domestic economy

Economic trends

Flooding is likely to hit The government’s forecast is for 5.5% GDP growth in 2000, rising to 6% in growth 2001. In light of severe flooding in September, economic growth may now be lower. Agriculture is still the largest contributor to national output at 43% of constant price GDP in 1998. Prior to the flooding, the official growth figure looked well within reach given strengthening external demand, a slight pick- up in investment, a buoyant tourism sector and rising foreign aid inflows.

There is still very little In the second quarter of 2000 consumer prices fell 2.5% compared with the inflation second quarter of 1999, according to IMF data. Month-on-month inflation was negative for each of the three months of the second quarter. Prices have now fallen in six out of the last seven consecutive months. In June prices dropped

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only slightly, falling 0.08% month on month. In 1999 consumer prices rose just 4% year on year. Flooding in September, which caused widespread crop damage, is likely to push up food prices in the remainder of the year (see Agriculture). Following the floods, the government appealed to traders not to exploit the situation by inflating food and bottled water prices.

Money supply growth Money supply growth accelerated in the second quarter despite continuing picks up deflation. M1 growth rose 9.2% in the second quarter compared with a 4.2% rise in the first quarter. M2 growth also continued to quicken, rising 57.5% in the second quarter, up from 50.2% in the previous quarter. The ratio of foreign- currency deposits as a percentage of M2 was 68.4% in the second quarter, representing a small increase from the first quarter.

Riel stability persists The riel strengthened slightly in the third quarter, climbing nearly 2% against the US dollar to CR3,805:US$1 in early October, before falling back slightly during that month. The riel has now been broadly stable, or appreciating, since the end of 1998. The currency is almost unchanged on the average exchange rate in 1999 of CR3,808:US$1 although it is some 40% below the exchange rate prior to the Asian financial crisis.

Agriculture

Severe floods have According to the government’s National Committee on Disaster Management devastated the rice harvest severe floods in the Mekong region had by late September claimed 184 lives and destroyed over 100,000 ha of rice and tens of thousands of hectares of other crops. As many 2.2m people, or 20% of the population, have been affected. The cost in terms of crop and property damage has been estimated at US$50m, not including damage to roads, bridges and irrigation systems. The floods are likely to have a very negative impact on agricultural growth this year. Whereas in neighbouring Vietnam, which has also been hit by floods, the harvest was mostly in by the time flooding occurred, in Cambodia the harvest is not due until November. In addition, although government estimates of the area where crops have been destroyed is small as a percentage of the total cultivated area, there have also been reports of severe drought in some parts of

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the country, which is also likely to lead to a smaller harvest. In the 1999/2000 season total rice output was 4.04m tonnes, of which 3.33m tonnes was from the wet season harvest. The area put over to rice cultivation was 2.07m ha.

Rural credit is being According to figures published in September by the Rural Development Bank, expanded an estimated 350,000 households, or 3.2% of the population, have received small loans from microfinance schemes. Some 75% of loans go to farmers, 20% to small businesses and 5% to individuals involved in the processing sector. The average size of the loans is US$71. A total of 70 agencies are involved in microfinance lending. A lack of access to credit is a major problem in rural areas. The government is seeking to address this with the expansion of microfinance schemes. The Asian Development Bank is also active in this area (June 2000, page 16).

Industry

Investors say Cambodia is Government statistics for approved domestic and foreign investment in the too expensive first half of 2000 pointed to a slight pick-up in investment compared with the same period last year (August 2000, pages 16-17). However, there continues to be anecdotal evidence that foreign textile and garment manufacturers are beginning to look for cheaper places to invest. According to one report, a number of Taiwanese manufacturers are planning to open plants in countries such as Nicaragua and El Salvador where the quota system for exports to the US is more relaxed. The decision to begin production in Latin America follows the imposition of quota restrictions on Cambodian textile and garment exports by the US government in November 1998. This reportedly led to an increase in the quota price for garment exports from Cambodia to the US from US$5 per dozen to US$28 per dozen. There was a slight easing of the US restrictions in May when Cambodia’s apparel quota market was increased by 5%, but it is unclear what impact this will have on investment in the sector. The textile and garment sector has also suffered from labour unrest recently and this could also have an adverse effect on investment (August 2000, pages 19-20 and 22).

Nike backs out amid In October Nike cancelled a contract with Phnom Penh-based June Textiles labour allegations Company amid allegations that the firm was using underage labour. The allegations, which arose in the course of the making of a BBC television documentary, were disputed by June Textiles which threatened to sue the BBC if the programme was aired. The BBC has stuck to its story and the programme has been broadcast.

Energy

Vietnam is to supply An agreement has been signed under which the government will purchase electricity to Cambodia electricity from Vietnam from 2003. The plan is for the government to buy 80 mw in 2003, rising to 200 mw in 2005. Electricity of Vietnam (EVN) is to invest US$20m to build a transmission line linking the two countries. In August a Chinese firm, the China Electric Power Technology Import and Export Company (CITIC), signed a US$26m contract with the Ministry of Industry,

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Energy and Mines to renovate the Kirirom hydroelectric power station in Kompong Speu province. The work is due to begin in mid-2001 and is expected to be finished in 2003.

Foreign trade and payments

Trade and current-account According to the IMF’s International Financial Statistics, the trade deficit fell by deficits fell sharply in 1999 38.7% year on year in 1999 to US$240.3m. The sharp fall in the trade deficit reflects a combination of strong export growth as regional demand picked up and sluggish import growth owing to the relative weakness of the domestic economic recovery. Exports rose 37.7% to US$971.3m while imports increased by 10.5% to US$1.2bn. The strength of the export recovery is surprising owing to difficulties in the textile and garment sector, where exports fell in 1999, and weak commodity prices. However, it may be that the growth was to be found in the re-export trade in which Cambodia has excelled in recent years. The current-account deficit fell 57% compared with the previous year to US$96.2m. This is mainly accounted for by the smaller trade deficit. Equivalent data for the first three quarters of 2000 are not yet available. However, based on port statistics which detail the volume of goods passing through Sihanoukville and Phnom Penh, it is likely that both the trade and current-account deficits will be larger in 2000.

Foreign exchange reserves According to the IMF, total reserves (excluding gold) were US$491.77 at the are healthy end of August 2000, representing a slight fall on the previous month. The reserves are now equivalent to 23.5 weeks of imports.

EIU Country Report November 2000 © The Economist Intelligence Unit Limited 2000 20 Laos

Laos

Political structure

Official name Lao People’s Democratic Republic

Form of state One-party rule

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

Head of state The president, General Khamtay Siphandone; the post of vice-president, created in April 1996, is currently vacant following the death of 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 Keobounphanh of Ministers Deputy prime ministers Bounyang Vorachit Choummali Sayasone Somsavat Lengsavad

Key ministers Agriculture & forestry Siene Sapangthong Commerce Phoumy Thipphavone Communications, transport, posts & construction Phao Bounnaphol Defence Choummali Sayasone Education Phimmasone Leuangkhamma Finance Bounyang Vorachit Foreign affairs Somsavat Lengsavad Public health Ponemek Daraloy Industry & handicrafts Soulivong Daravong Information & culture Sileua Bounkham Interior Asang Laoly Justice Kham Ouane Boupha Labour & social welfare Somphanh Phengkhammy State planning Bouathong Vonglokham

Central bank governor Soukhanh Maharath

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Economic structure

Annual indicatorsa

1995 1996 1997 1998 1999 GDP at current prices (K bn) 1,419 1,710 2,200 4,260 10,837b Real GDP growth (%) 7.1 6.9 6.9 3.9 4.0c Consumer price inflation (av; %) 19.6 13.0 27.5 91.0 128.5 Population (m) 4.9 5.0 5.2 5.3b 5.5b Exports fob (US$ m) 310.9 322.8 318.3 342.1 310.8d Imports fob (US$ m) 626.8 643.7 601.3 506.8 n/a Current-account balance (US$ m) –346.2 –346.8 –305.5 –150.1 n/a Reserves excl gold (US$ m) 92.11 165.00 112.18 116.82 101.19 Total external debt (US$ m) 2,165 2,263 2,320 n/a n/a Debt-service ratio, paid (%) 6.3 6.7 6.5 n/a n/a Exchange rate (av; K:US$) 804.69 921.02 1,259.98 3,298.33 7,102.03

October 27th 2000 K7,600:US$1

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

Principal exports 1997 US$ m Principal imports 1997 US$ m Garments 90.5 Construction & electrical equipment 82.8 Timber & wood products 89.7 Materials for garment industry 73.7 Gold re-exports 41.5 Gold & silver 50.4 Hydroelectric power 20.8 Motorcycle parts 24.9 Coffee 19.2 Total incl others 647.9 Total incl others 316.9

Main destinations of exports 1997 % of total Main origins of imports 1997 % of total Vietnam 42.7 Thailand 51.9 Thailand 22.1 Vietnam 3.9 France 6.3 Japan 1.6 Belgium 5.6 Hong Kong 1.5 Germany 5.1 China 0.8 a IMF, International Financial Statistics unless otherwise stated. b EIU estimate. c Official estimate. d Customs basis data.

EIU Country Report November 2000 © The Economist Intelligence Unit Limited 2000 22 Laos

Quarterly indicators

1998 1999 2000 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Prices Consumer prices (1995=100) 314.3 362.0 463.1 597.1 730.9 686.7 732.0 769.2 % change, year on year 103.6 130.2 156.4 144.7 132.5 89.7 58.1 28.8 Financial indicators Exchange rate K:US$ (av) 3,709 4,211 4,487 7,271 8,909 7,741 7,550 7,664 K:US$ (end-period) 3,941 4,274 5,365 9,430 6,550 7,600 7,560 7,815 Interest rates (%) Bank (end-period) 35.00 35.00 35.00 34.57 35.00 35.00 35.00 35.33 Deposit (av) 19.00 19.00 17.67 12.00 12.00 12.00 12.00 12.00 Lending (av) 30.00 32.00 32.00 32.00 32.00 32.00 32.00 32.00 Treasury bill (av) 24.00 28.00 30.00 30.00 30.00 30.00 30.00 30.00 M1 (end-period; K m) 113,192 168,982 205,522 183,252 191,703 235,497 251,744 293,988 % change, year on year 54.0 111.4 133.9 89.3 69.4 39.4 22.5 60.4 M2 (end-period; K bn) 721.67 865.93 1,114.23 1,897.13 1,410.35 1,561.02 1,778.34 2,088.63 % change, year on year 129.0 113.3 134.5 211.4 95.4 80.3 59.6 10.1 Sectoral trends Rice production (annual totals; ’000 tonnes) ( 1,675 ) ( 2,103a ) ( n / a ) Foreign trade (US$ m) Exports fob 130.7 69.2 57.3 88.3 78.5 81.4 82.7 n/a Imports cif –156.9 –107.2 –111.9 –146.0 –163.2 103.7 –112.3 n/a Trade balance –26.2 –38.0 –54.6 –57.7 –84.7 –22.3 –29.6 n/a Foreign payments (US$ m) Merchandise trade balance –39.9 –29.7 –54.6 –57.6 –56.9 –20.4 n/a n/a Services balance 11.7 9.5 18.1 20.0 23.2 16.9 n/a n/a Income balance –8.3 –9.6 –10.2 –10.1 –9.6 –9.5 n/a n/a Current-account balance –36.5 –29.8 –38.7 –44.5 –33.6 –4.3 n/a n/a Foreign exchange (end-period) 115.89 116.82 112.29 109.99 112.28 101.19 99.37 112.44 Sources: FAO; IMF, International Financial Statistics.

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Outlook for 2001-02

Political forecast

Domestic politics In recent months the ruling Lao People’s Revolutionary Party (LPRP) has looked its most vulnerable since it came to power in 1975. Since 1975 the LPRP has in general experienced very little overt opposition. However, it has faced in the last year a small pro-democracy protest in Vientiane, a series of unexplained bomb blasts and a crossborder raid by anti-government rebels operating out of Thailand. There is also the possibility that a government minister has defected. None of these acts, either individually or collectively, threaten the survival of the ruling party in the short term, but they have cast doubt about the regime’s inviolability.

However, during the forecast period (2001-02) the ruling LPRP will continue to hold exclusive power. It is also likely to preside over a relatively stable polity. Further bomb explosions of the type recently seen cannot be ruled out nor can further small-scale protests. However, none of this will be of a degree sufficient to jeopardise the operations of international business in Laos. Large-scale popular protests are highly unlikely. On the whole, political opposition against the ruling party remains undeveloped, poorly organised and divided among itself. It is striking in this respect how groups have surfaced recently that are both for and against the return of the Lao monarchy. There is also a gulf between the politics of the often quite radical overseas Lao and their more moderate counterparts inside the country. While there are differences within in the ruling elite, recent media coverage has tended to exaggerate the extent of the divisions. Any differences that do exist are unlikely to result in the use of violence by rival members of the political elite during 2001-02.

The two main political events scheduled in the forecast period are the Seventh Party Congress in 2001 and the National Assembly elections in 2002. Both are likely to see leadership changes: of the Politburo and Central Committee in 2001 and of the cabinet in 2002. Predicting precisely what these changes will be is notoriously difficult. At its most radical, next year’s party congress could see the president, General Khamtay Siphandone, relinquish both his party and government posts. If this happens, the politician most commonly tipped to succeed him is his close ally the prime minister, General Sisavat Keobounphanh. However, it is not inconceivable that General Khamtay will stay on. Indeed, recent political instability may lead the party towards continuity at the top, making changes lower down on the Politburo rankings.

Economic policy outlook

Policy trends Whatever the changes in leadership during 2001-02, the EIU is not forecasting any major changes in policy. Politically, the ruling party will continue to reject any shift to multiparty politics, placing the emphasis instead on making the one-party system more democratic along the lines of neighbouring China and Vietnam. Economically, the party will continue to move in a broadly reformist direction although progress will often be painfully slow. Again like its

Communist neighbours, this will include reforms in the key areas of foreign trade, banking, public administration and state industry. As a member of the Association of South-East Asian Nations (ASEAN), Laos has committed itself to lowering tariff barriers as part of the regional groupings plan to create an ASEAN Free Trade Area (AFTA). In Laos’s case tariffs are to be lowered on a wide range of products to below 5% by 2008. In light of the economic difficulties since the Asian financial crisis, ASEAN countries, including Laos, may lower tariffs more slowly than originally anticipated. However, tariff cuts will continue to occur annually. Further liberalisation measures are envisaged once the bilateral trade accord signed with the US is implemented but this may not happen in 2001-02 owing to worsening relations with Washington. By the end of the forecast period many protectionist measures will remain in place hindering the participation of both local and foreign private companies in the economy. The fact that Laos is landlocked and has a small population with low average incomes also limits its attractiveness to international business.

Economic forecast

Economic growth In fiscal year 2000/01 (October-September) the government’s target is for 6- 6.5% GDP growth, compared with 5.9% in 1999/2000. While the expectation of continued economic recovery is realistic, the government’s figures would appear to exaggerate the likely extent of growth. We forecast GDP growth of 5- 5.5% in 2001-02, compared with our forecast of 4.5% growth in 2000. In September severe floods hit the agricultural sector, and this will result in lower rural consumption, the affects of which will continue to be felt in 2001. Assuming a good dry season harvest and a better wet season harvest in late 2001, economic growth can be expected to pick up in 2002, possibly even slightly exceeding our 5.5% growth forecast.

The 2000/01 budget anticipates strong growth in public expenditure which if realised will lead to higher growth in 2001-02. To some extent, this is dependent on improved revenue collection although the larger share of public expenditure will continue to be financed by foreign aid. This will continue to be forthcoming during the forecast period despite some sign of donor exasperation with the slow pace of reform. The government is currently not receiving any financial support from the IMF, although talks are ongoing about the possibility of a poverty reduction and growth facility arrangement. It is not out of the question that these will be successfully concluded later in the forecast period although progress in the talks has not been fast to date. Private investment growth is likely to recover in 2001-02, albeit gradually, and this can be expected to translate into faster growth in industry and services in the forecast period. The country will lose out on some foreign investment in light of the recent political instability. The slow pace of reform, red tape and the lack of transparency in the investment environment can also be expected to deter investors.

Furthermore, we are not optimistic that the current political difficulties with the US will be resolved in time to allow the granting of normal trade relations (NTR) status before 2002. In the absence of NTR, access to the US market will remain limited, and this will also suppress investment growth. The US market

aside, the economy should benefit from solid regional and global trade growth during the forecast period. Although the recent political troubles are unlikely to lead to a collapse in the tourism sector, growth in the sector will certainly be more subdued in 2001-02 than in the previous two years.

Inflation After hitting triple-digit levels, inflation has been falling since the first quarter of 1999. In the second quarter of 2000 prices rose 28.8% compared with 58.1% in the previous quarter. During 2001-02 consumer price inflation is likely to remain in double digits at around 15-20%. The recent flooding can be expected to lead to higher food prices in late 2000, continuing into 2001. Other areas of concern are fiscal and monetary policies that are too loose, and further exchange-rate volatility. The government’s record in terms of maintaining fiscal discipline is not good, nor are the policy instruments at its disposal well developed. However, we do not anticipate a return to triple-digit inflation in the forecast period. This was linked to exceptional circumstances triggered by the Asian financial crisis, which are unlikely to be repeated.

Exchange rates As with inflation, we do not anticipate a repeat of the exchange-rate volatility that characterised the aftermath of the Asian crisis in 1997-98. Nevertheless, the kip could display periodic weakness during 2001-02 as a result of a widening of the trade deficit and low levels of foreign investment. The foreign- exchange reserves are also small which gives the government little room to manoeuvre in terms of defending the currency. The kip has been rather unaffected by the recent political instability and given our forecast of relative stability this is likely to remain the case during the forecast period.

External sector Laos’s main exports are textiles and garments, timber and wood products, electricity and coffee. World trade growth is expected to peak in 2000. Nevertheless, it will remain solid, including in Asia, which will be of benefit to Lao exporters. In terms of market access, the absence of NTR will suppress export growth, although the government has negotiated favourable market access arrangements with the EU until 2002, which will continue to offer scope for expansion, notably of textiles and garments. Access to non-quota markets such as Japan will also be maintained. Commodity prices are forecast to firm during 2001-02 which will lead to higher earnings from Laos’s primary products exports, especially coffee. The expansion of the hydroelectric power sector has been set back by the Asian financial crisis which has led to lower demand for electricity in Thailand and to some extent undermined the confidence of potential power project financiers. This points to the prospect of slower growth in electricity exports during 2001-02. The import bill has been boosted this year by higher oil prices. However, this will not last since oil prices are expected to fall in 2001 before stabilising thereafter. Nevertheless, import growth is likely to pick up as the economy strengthens, notably from neighbouring Vietnam where it has been rapid since 1999. This points to the prospects of widening of the trade and current-account deficits in the forecast period. Financing the current-account deficit will not be a problem as long as foreign aid donors remain engaged in Laos.

The political scene

The government plays Laos’s reputation for political stability has been undermined in recent months down the bomb blasts by a series of bomb blasts. The latest explosion occurred on August 10th in front of the Asian Pavilion Hotel in Vientiane. As with the previous attacks, it is unclear who is responsible or indeed what the precise motive was although there has been much speculation (August 2000, pages 29-30). The deputy prime minister and foreign minister, Somsavat Lengsavad, has been quoted as saying that the attacks may have been the result of a domestic or business dispute. However, it seems inconceivable that there is not a political motive even if it is not a clearly articulated one. Speaking after the Pavilion Hotel attack, the Vientiane municipal police described it as an “act of terrorism” designed to “obstruct development in the country”.

A bomb had previously been defused in late July outside a Vietnamese social club opposite the Vietnamese embassy in Vientiane, suggesting an anti- Vietnamese rationale to the bomb attacks. Relations with Vietnam are close, which is a source of resentment among those opposed to communist rule in Laos. Vietnam has sought to downplay the discovery of the bomb near its embassy. A spokesperson for the Ministry of Foreign Affairs in Vietnam, Phan Thuy Thanh, said that they were following events in Laos closely and they believed that recent developments did not reflect the overall situation in the country.

Preparations begin for next In September the ruling Lao People’s Revolutionary Party (LPRP) Central year’s party Congress Committee convened for its 12th plenum session. The meeting, which was chaired by the president and senior Politburo member, Khamtay Siphandone, saw the continuation of preparations for next year’s Seventh Party Congress. In July and August Khamtay and the prime minister, Sisavat Keobounphanh, separately visited a number of provinces for the presentation of their five-year socioeconomic reports. The visits also form part of the preparation for next year’s congress. Provinces visited were Savanakhet, Sekong, Attopeu, Xieng Khouang, Bolikhamsay and Khammouane. Details of the reports have not been

forthcoming although the two leaders called for security to be stepped up and emphasis to be placed on agriculture. Khamtay described development of the agricultural sector as a party priority in the period to 2020.

The prime minister On September 29th-October 4th the National Assembly convened for the sixth addresses the legislature session of the fourth legislature. (The current term of the National Assembly expires in December 2002.) Reports were heard on the economic development plan and budget plan for 1999/2000 as well as on the forthcoming economic plan and budget covering 2000/01 (see The domestic economy: Economic trends). Addressing the National Assembly Sisavat Keobounphanh said that the country had faced “many difficulties” this year but that under the leadership of the party and government and the support of the international community, problems could be overcome. The Far Eastern Economic Review has suggested that the former president and party chief, Nouhak Phoumsavanh, was so concerned about recent political developments that he convened a series of emergency meetings in July and August with members of the leadership, calling for party unity. This follows an article by the magazine in July linking the bomb attacks with differences within the party. Many foreign analysts on Laos have since dismissed the article as not being based on firm evidence.

Khamsay Souphanouvong There has recently been media interest in the whereabouts of Khamsay may have defected Souphanouvong, a government minister and second son of the late Prince Souphanouvong, known as the “Red Prince”, who served as Laos’s first president. News agency reports have referred to his alleged disappearance after he left Laos, reportedly with government approval on April 10th for a medical check-up. The reports have also suggested that his departure from the country may be connected to the recent political troubles in Laos. Some US groups clearly believe that Khamsay has defected. The Centre for Public Policy Analysis (CPPA), for example, has invited him to a Congressional forum on Laos which is also expected to feature leading Lao dissidents.

Although there is confusion as to Khamsay’s whereabouts, there is as yet no firm evidence that he has actually absconded. Thai immigration has said that Khamsay has been in and out of Thailand some ten times since he first entered the country in April. According to their records, he re-entered the country on August 15th on his way back from Germany. They have no record of him subsequently leaving Thailand. However, a Lao diplomat said in September that Khamsay was in Europe visiting friends and relatives and engaging in various business discussions. Since his father’s death in 1995, Khamsay, who was never especially influential, has lost ground politically. He lost his Central Committee seat at the Sixth Party Congress in 1996 after serving just one term while his current ministerial portfolio—minister in the prime minister’s office in charge of economic affairs—is considered a sideline position. There has been no formal request from the Lao government for the Thai government to make enquiries as to Khamsay’s whereabouts.

Pressure mounts in the US In September the appointment of the new ambassador to Laos, Douglas for a tougher line on Laos Hartwick, was blocked in the US Senate. The action, led by a Republican senator, Rob Smith, is aimed at prompting a review of US policy to Laos. The

executive director of the CPPA, Philip Smith, also favours such a review. He believes that the Clinton administration is failing to provide sufficient support to the political opposition in Laos, and argues that opposition leaders should have been invited to meet with organisations such as the National Democratic Institute and the International Republican Institute, which work to promote democracy in other countries. The CPPA has invited Lao dissidents to give evidence to a congressional forum on Laos.

Relations between the US and Laos have been strained for some months now, notably since the disappearance of two naturalised US citizens on the Thai-Lao border (June 2000, page 25). The existence of a large overseas Lao population in the US has prompted speculation of a possible link between opposition activity in Laos and US-based groups. However, the US secretary of state, Madeleine Albright, reportedly told the Thai prime minister, Chuan Leekpai, that the US has had no part in supporting the use of violence in Laos.

Lao soldiers occupy three In August there were reports that Lao soldiers had occupied three disputed islands islets on the Mekong river border with Thailand. The 400 rai (6,400 sq metres) islands, Koh Mano 1, Koh Mano 2 and Koh Pha Kham, have been farmed by Thai families for generations although whether the islands are Thai or Lao territory is unclear. According to Thai reports, the families were told by Lao officials to harvest their crops and leave by September 15th. While the Lao and Thai governments are in the process of demarcating their land border (August 2000, page 31), work on their river border has yet to begin. Lao government accounts as to why their soldiers have occupied the islands have been confused. At first it was reported that the soldiers were searching for anti- government rebels. However, later it was suggested that they were not soldiers at all but rather land officials and they simply wanted the land in order to allocate it to Lao families who had been brought down from the highlands. Since the episode, the Lao government has asserted its sovereignty over the islands referring back to the Siam-Franco Treaty of 1926.

The Thai government, while calling for the matter to be resolved at the local level, has said that the Lao troops should withdraw pending negotiations on the river border. Against this backdrop, the Lao occupation of the islands may simply be a pre-emptive move designed to strengthen its claim to the islands ahead of formal negotiations. In September talks were held at both the district and provincial level in an attempt to resolve the matter. (The relevant provinces are Chiang Rai on the Thai side and Bokeo on the Lao side.) This was followed by a meeting between Thailand’s director-general of East Asian Affairs, Surapong Jayanama, and the Lao ambassador in Thailand, Hiem Phommachanh, in Bangkok. As yet, however, the dispute remains unresolved.

Rebels’ relatives face Thai police have said five family members of Lao rebels who carried out a raid extradition on an immigration and customs post in Champassak province in July (August 2000, pages 30-31) are to be extradited to Laos. The wife of one of the detained rebels, Udom Rinthang, who is herself a Thai citizen, said the five are concerned that they will be arrested if they are sent back to Laos. The five have all reportedly been living (some illegally) in Thailand’s Udon Ratchathani province since 1975. The Lao government is calling for the extradition of all 28

rebels. However, the Thai government has said that the men must first be tried in Thailand on weapons and immigration violations. There is no extradition treaty between the two countries.

Government strengthens Although Laos has traditionally been close to Vietnam, this has not prevented defence ties with China the development of relations with China now that Sino-Vietnamese relations are less troubled. Sino-Lao relations have developed on a broad range of fronts. Laos is now the recipient of a growing amount of Chinese aid while economic relations are flourishing, notably on province-to-province basis (1st quarter 2000, page 43). Defence contacts are also increasing. In August the deputy prime minister and defence minister, Choummali Sayasone, visited China, holding talks with the vice-chairman of the Central Military Commission, Chi Haotian, in Kunming. This is Choummali’s second visit to China in a little over a year, having last visited in June 1999.

A co-operation agreement In September the government signed a co-operation agreement with Libya. The is signed with Libya agreement, which covers economic, scientific and cultural relations, was signed during the visit to Libya by Somsavat Lengsavad, the deputy prime minister and foreign minister. Although commercial links between the two countries are limited, political relations are friendly. During his visit, Somsavat praised what he referred to as the “gigantic achievements” of the Libyan revolution.

In late August Somsavat also attended the fifth meeting of the Myanmar-Lao Joint Commission for Bilateral Co-operation, of which he is chairman for the Lao side.

Economic policy

Budget increases are The National Assembly has approved the 2000/01 budget. Revenue is targeted for 2000/01 calculated at K2.23trn, which is up 33% on 1999/2000. Expenditure is also budgeted to increase by the same rate, reaching K3.58trn. The budget deficit is therefore forecast to be K1.34trn, which is equivalent to 8% of GDP. In 1999/2000 the budget deficit of K1.03trn was 7.4% of GDP. This is slightly higher than the government’s target, which was for a deficit equivalent to around 7% of GDP.

Government finances (K bn) 1999/2000 2000/01a % change Revenue 1,680 2,234 33.0 Expenditure 2,705 3,578 32.3 Balance –1,025 –1,344 31.1

a Budget

Source: Official reports.

The central bank receives In August an agreement was signed between the German Agency for Technical technical assistance Cooperation (GTZ), the State Bank of Vietnam and the Bank of the Laotian

People’s Democratic Republic (the central bank) under which GTZ and the State Bank of Vietnam will assist the central bank. The project is focused on strengthening monetary policy at the central bank and developing a modern supervisory and internal control system. The duration of the project is initially for one year but it can be extended. GTZ is already working with the State Bank of Vietnam and it is hoped that some of the lessons leant in Vietnam will be relevant to the Lao central bank. In terms of monetary policy, the central bank has tended to be reliant on blunt instruments while indirect levers have been applied only sporadically. Supervision of the commercial banks is poor. The Lao banking system was hit very hard by the Asian financial crisis, resulting in six state-owned commercial banks being merged into two. However, bad debt levels remain high (1st quarter 2000, page 39). The state Banque pour le Commerce Extérieur Lao (BCEL) has opened three new branches this year in Luang Prabang, Luang Namtha and Oudomsay province.

The government is hoping In September Japan announced its willingness to extend ¥55.42m to receive debt relief (US$510,000) in debt relief to Laos. The relief is sufficient to cover the principal and interest on yen loans extended by Japan before March 31st 1988, which have repayment deadlines in the first quarter of the current Japanese fiscal year. The government appears to have accepted the relief although it had previously expressed concern that so doing could jeopardise its ability to borrow from commercial sources in the future (August 2000, pages 34-35).

The domestic economy

Economic trends

The government forecasts In fiscal year 1999/2000 (October-September), GDP growth was 5.9% compared faster growth with a target of 5%, according to the government. Total GDP for the year was calculated at K13.8trn (US$1.8bn). Agricultural growth was 4.4% while industry and services growth was 7.3% and 6.4% respectively. Agriculture continues to contribute the largest share of national output at 51.3% followed by services (26.1%) and industry (22.3%). In 2000/01 the government has set a GDP growth target of 6-6.5%. However, this was set prior to the flooding which affected the agricultural sector in September and which is likely to depress overall growth. Total GDP is expected to reach K16.8trn.

Faster growth in Vientiane According to figures published in Van Athith newspaper, GDP growth in than elsewhere Vientiane municipality was considerably faster than nationwide growth in 1999/2000, rising 10% year on year. This was the result of rapid growth in services which rose 19.6% on the previous year. Both agriculture and industry expanded at below the national rate. The structure of output in Vientiane is different compared with the country as a whole. Unsurprisingly, the contribution of services to total output in Vientane is much higher at 42.4% of GDP while agriculture is much lower at 22.5% of GDP. Industry contributed 26.4% to the city’s GDP in 1999/2000.

Consumer price inflation has been falling since the first quarter of 1999 when Inflation is still high but it peaked at 156.4% year on year. In the second quarter of 2000, prices rose falling 28.8% compared with 58.1% in the previous quarter, according the IMF’s International Financial Statistics. Month-on-month inflation rose by 1.16% in August and 0.78% in July. The last very large monthly increase was in January when prices rose 17.9% on the previous month. The government is anticipating further falls in inflation although it is still expecting it to remain in double digits. In 2000/01 the official inflation target has been set at 10-15%. Given recent flooding and the knock-on effect on prices, it is probably unrealistic to expect inflation to fall any lower over the next year.

Growth in broad money According to the IMF’s International Financial Statistics, growth in narrow slows money (M1) accelerated in the second quarter of 2000 to 60.4% year on year, compared with growth of 22.5% year on year in the first quarter. By contrast, broad money (M2) growth slowed in the second quarter to 10.1% compared with 60% in the previous quarter. Foreign-currency deposits were equivalent to 85.9% as a percentage of M2 in the second quarter of 2000, representing little change from the previous quarter.

The kip maintains its value The kip continues to remain broadly stable. According to Banque pour le Commerce Extérieur Lao (BCEL), it was trading at K8,120:US$1 on October 5th. Against the Thai baht, the kip was trading at K198:Bt1 on the same date. Both figures represent a small depreciation compared with two months earlier. In 1999 the kip fell 44% against the US dollar.

Agriculture

Flooding hits the harvest Flooding, which has affected neighbouring Vietnam and Cambodia, also devastated central and southern parts of Laos in September. The worst-affected provinces were Bolikhamsay, Khammuan, Savannakhet, Saravan, Attopeu and Champassak. The Ministry of Agriculture and Forestry has described the floods as the worst to have hit the country since 1978. Some 450,000 people have

been affected, many of whom have been made homeless. Fifteen people have died. The government estimates that just under 49,000 ha of crops have been destroyed. Compared with the total cultivated area of around 667,000 ha this is quite small (7.3%). However, the floods are likely to lead to slower growth in agriculture and risk pushing up food prices (see The domestic economy: Economic trends). Prior to the flooding, the government was forecasting a 1.64m-tonne rice harvest compared with 1.5m tonnes last year. The main wet- season harvest usually occurs in November.

Industry

Foreign investment In the period from December 7th 1988 to March 29th 2000, the government remains small-scale approved US$7.07bn in foreign investment. During this period, the leading investor was Thailand with 41.5% of the total, followed by the US with 21.1%. South Korea, Malaysia and China are also significant investors. The power generation sector attracted 63.6% of approved capital, spread between just seven projects. Transport and telecommunications attracted the next largest share of investment, followed by hotels and tourism and industry. Based on this data, the average capitalisation of investment projects is about US$88,000, or US$3,200 if power generation projects are excluded. Foreign investment, both in terms of approvals and actual inflows, fell sharply following the Asian financial crisis, and as yet there is no data to suggest it has recovered.

The textiles and garment In October Japanese-financed courses were held in Vientiane aimed at sector seeks to raise quality improving the quality of textiles and garments products made in Laos. According to the vice-president of the National Chamber of Commerce, who is also the president of the Textile and Garment Association, Onsy Boutsivongsack, Lao companies are still struggling to meet demand for textiles and garments, which comes principally from Europe, North America and Japan. There are currently 78 textile and garment factories operating in the country, employing some 19,000 workers. Textiles and garments are Laos’s largest export earner. In 1999 the sector exported 32m items earning US$104m

in revenue. According to Onsy, the main problems faced by the sector apart from ensuring product quality, are shortages of investment, transportation problems and labour shortages.

Lao cotton is expensive Garment factories are tending to buy imported cotton because locally made cotton is too expensive. The director of the state-owned Lao Cotton Company, Souvanpheng Bouppanounong, has said that its main market is not the domestic textile and garment sector but direct sales to foreign customers and hotels. According to Souvanpheng, the cost of locally made cotton is commensurate with the quality of the product, which is made by hand at every stage of the production process.

Lao Beer expands One of Laos’s largest companies in terms of turnover is the Lao Brewery production Company. It is also a significant contributor to government revenue, paying K80bn (US$10m) in taxes last year. Since 1988 production has risen from 2.8m litres of beer to 34m litres in 1999. Moreover, its share of the domestic market has risen from 50% to 90%. In 2000 the company is planning to raise production further to 50m litres. The Lao Brewery Company currently produces largely for the domestic market, although last year around 340,000 litres were exported.

Mining

Finance is sought for a An Australian company, Oxiana Resources NL, announced in September plans mining project to mine for copper and gold in Savannakhet province. The company is still at the stage of completing a feasibility study on financing the project, which is expected to cost US$150m-175m. Oxiana is talking to the World Bank affiliate, the International Finance Corporation (IFC), as well as a number of private banks, about financing the project. The first stage of the project would involve building a US$50m-60m gold mine. If the project goes ahead, the hope is that the mine can produce around 125,000 ounces a year beginning in mid-2002. The copper mine, which would be built as the second stage of the project, would be expected to come on stream in mid-2003. The copper would be sold to buyers in Thailand where demand is around 150,000-180,000 tonnes a year. In July a Thai company, Padaeng, received a licence to mine for zinc at a location north of Vientiane. It also has permission to prospect for zinc in a 12 sq km tract. The mining sector in Laos has been open to foreign investors since the early 1990s. However, with difficult terrain, poor infrastructure and an unclear regulatory framework, investment has been limited.

Services

Japan hands over the new In August the Japanese government formally handed control of a newly Mekong bridge completed bridge across the Mekong river, linking Pakse in the southern province of Champassak to Thailand’s Phongthong district. The bridge, which was financed by a ¥4bn (US$50m) grant from the Japanese government, will be known as the Lao-Nippon Bridge. It is only the second such bridge across the Mekong river. The first, the Australian-funded Mittaphab (Friendship) bridge,

was completed in 1995 linking the Thai town of Nong Khai to the outskirts of Vientiane. The Japanese government is also financing a third bridge across the Mekong linking Savannakhet to Thailand’s Mukdahan province. This is designed to facilitate transit of goods in a corridor between Thailand and the Vietnamese coast. In July the Lao communications, transport, posts and construction minister, Phao Bounnaphol, held talks with his Vietnamese counterpart, Le Ngoc Hoan, in Hanoi on strengthening land transport links between the two countries. The result was an agreement on adjusting a number of provisions in two previously signed accords, the Land Transport Agreement and the Land Transport Protocol. With the support of foreign aid donors, the two sides are working on projects to renovate Highways 14 and 18B, which will give Laos access to the ports on Vietnam’s central coast.

Tourism targets are In the first half of 2000 just under 600,000 tourists visited Laos, according to reviewed government figures. This is nearly as many as the total number of visitors in 1999 (614,278). It also represents a sharp increase on the 306,410 tourists who visited in the first half of 1999, suggesting significant success in the “Visit Laos Year 1999/2000” promotion. However, there are doubts whether the increase will be sustained in the second half of the year in light of the recent political instability (see The political scene). In August the Lao ambassador in Thailand, Hiem Phommachanh, said that the government had initially thought that it could attract 1m visitors in 2000, but since the bomb attacks this was doubtful.

Joint tourism with In September the Tourism Authority of Thailand and the National Tourism Thailand is discussed Authority of Laos discussed plans whereby tourists taking trips on the Mekong river from Thailand could also visit Laos. The potential sticking point is Lao immigration requirements, although a feasibility study is being carried out which is expected to look at this.

Foreign trade and payments

The government forecasts a In September the IMF published data on Laos’s external accounts for 1999. smaller trade deficit Exports contracted by 1.1% to US$338.2m in 1999 compared with a 7.5% increase in the previous year. Imports rose 4.1% to US$527.7m, following a fall of 15.7% in 1998. The combination of a fall in exports and continued import growth resulted in a 15.1% increase in the trade deficit to US$189.5m. The current-account deficit fell to US$121.1m, down by 19.3% compared with the previous year, owing to positive increases in the income and services balances. According to government data the trade deficit was US$217m, equivalent to 1.6% of GDP, in fiscal year 1999/2000 (October-September). Export earnings were calculated at US$323m and imports at US$540m. In 2000/01 the government has said it anticipates a smaller trade deficit in GDP terms. Trade with Vietnam The rise in imports last year has been linked to strong growth in imports from continues to rise Vietnam, the majority of which were paid for in barter arrangements (1st quarter 2000, pages 39-40). Two-way trade between Laos and Vietnam is estimated to be worth some US$350m annually. In August the director of Ho

Chi Minh City’s Trade Department, Pham Thi Kim Hong, held talks with the Lao consul-general in the city, Khampasong Douangsithi, on plans for Vietnamese companies to exhibit products at trade fairs in Vientiane.

The foreign reserves are At the end of the first half of 2000 foreign-exchange reserves (excluding gold) small totalled US$112.44m, up slightly from US$111.28m at the end of the first quarter, according to the latest data from the IMF’s International Financial Statistics. Although this is the highest level since early 1999, the reserves have fluctuated substantially in 2000, reflecting the widening trade deficit and the low level of foreign investment. The reserves are currently equivalent to just 11 weeks of imports.