cambodia laos report 1st quarter 2000 the economist intelligence unit 15 regent st, london sw1y 4lr...

COUNTRY REPORT

1st quarter 2000

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

Cambodia

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EIU Country Report 1st quarter 2000 © The Economist Intelligence Unit Limited 2000

Contents

3 Summary

Cambodia

6 Political structure

7 Economic structure

7 Annual indicators

8 Quarterly indicators

9 Outlook for 2000-01

11 The political scene

17 Economic policy

19 The domestic economy

19 Economic trends

20 Agriculture

21 Industry

21 Infrastructure and services

23 Foreign trade and payments

Laos

25 Political structure

26 Economic structure

26 Annual indicators

27 Quarterly indicators

28 Outlook for 2000-01

30 The political scene

32 Economic policy

34 The domestic economy

34 Economic trends

36 Agriculture

37 Industry

38 Infrastructure and services

39 Foreign trade and payments

40 Trade data

List of tables

17 Cambodia: government defence expenditure budget

18 Cambodia: public investment programme, 2000-02

19 Cambodia: consumer prices, 1999

2


19 Cambodia: money supply

35 Laos: consumer prices, 1999

35 Laos: money supply

37 Laos: rice harvest by crop type and region, 1999

40 Laos: trade balance, 1999

41 Cambodia: direction of trade

41 Laos: direction of trade

List of figures

11 Cambodia: gross domestic product

11 Cambodia: riel real exchange rates

19 Cambodia: consumer prices

20 Cambodia: foreign reserves

23 Cambodia: tourist arrivals

30 Laos: gross domestic product

30 Laos: Kip real exchange rates

35 Laos: money supply and inflation

36 Laos: exchange rates

3


Summary

1st quarter 2000

Cambodia

Political stability will be maintained in 2000-01, owing to the dominance ofthe Cambodia People’s Party (CPP) and Prince Norodom Ranariddh’s currentreluctance to rock the boat. However, there could be some tension in the run-up to the commune elections later in the forecast period. Meanwhile, HunSen’s position, within his party, in Cambodia and internationally, continues tostrengthen. Agreement between the government and the UN on the format ofa Khmer Rouge tribunal is looking less likely. Economic growth will recover to5.5-6% in 2000-01, and will be supported by a stronger regional and domesticenvironment, sustained aid flows and higher public spending. Garments, con-struction and tourism will be the main growth areas. Inflationary pressures willbe minimal and the currency will remain stable. Private investment is likely torecover, as will both exports and imports. Financing a higher current-accountdeficit will present few problems during the forecast period.

Disagreement on the terms of the planned Khmer Rouge tribunal has souredrelations between the government and the UN. The current draft law givesCambodia ultimate control, but it is still unclear who will be tried. Hun Senhas ordered released prisoners back to jail, prompting an outcry from humanrights groups. The opposition Sam Rainsy Party continues to challenge govern-ment policy but presents no threat to the coalition. There are concerns thatPrince Ranariddh’s alleged desire to become king is undermining his ability tolead FUNCINPEC. The Japanese prime minister and the Indonesian presidenthave visited Cambodia. China has extended military aid.

The 2000 budget has been passed, showing higher overall expenditure,although there are still long-term aims to cut defence spending. A $1.1bnpublic investment programme has been unveiled, as have plans to sell off 70%of telecoms. The World Bank has finally agreed to resume structural adjust-ment lending. The foreign investment approvals process is to be improved.

• Growth is expected to come in at 4% for 1999 despite flooding.Inflationary pressure is on a downward trend although the money supply hasexpanded. The riel has stabilised and foreign reserves have reached a recordhigh.

• The 1999/2000 rice crop survived the floods in November but the rubbercrop was badly damaged. Japan is to help market Cambodian riceinternationally.

• Investment fell dramatically in 1999 except from China. Investors are nowgrowing and processing cotton to save importing it for the garment sector.

March 3rd 2000

The political scene

Outlook for 2000-01

Economic policy

The domestic economy

4 Cambodia


• Roads and transport will benefit from new investment initiatives. A newmobile phone network has been launched. Regional airlines can now fly directto Siem Reap, which will further bolster the tourism industry. Many new hotelsare being built as a result. The advertising industry is gearing up for growth.

Trade through Phnom Penh has faltered but the overall trend is of increasedexternal trade. The US has raised its quota restrictions on garment exports butnot by as much as hoped. It has also imposed an import ban on smuggledCambodian artefacts. Cambodia has reiterated its desire to join the WorldTrade Organisation.

Laos

Laos will remain politically stable in 2000-01, the 1999 protest not-withstanding. Significant personnel changes are expected at the Seventh PartyCongress in 2001. The pace of reform is unlikely to quicken, and public andprivate investment will recover only slowly. However, economic growth of 5%is realistic in 2000-01 against a backdrop of a more stable macroeconomy.Exports will be boosted by the regional pick-up, but imports will continue theirsurge.

The vice-president, Oudom Khatthigna, has died, focusing attention on likelychanges to the Politburo line-up at the Seventh Party Congress in 2001. Therehave been no further anti-government protests, and a senior party leader hasexpressed satisfaction with the level of political stability in Laos. The Vientianeparty secretary has been re-elected. An anti-drug smuggling agreement hasbeen signed with Cambodia, and the Myanmar army chief of staff has heldtalks with the Lao defence minister. Both the Japanese prime minister and thenew Indonesian president have paid visits.

The government has made some progress on stabilising the economy but salesof bonds, issued in 1999 to soak up liquidity, have been slow. The IMF hascalled for more progress on structural reforms, and Japan is to dispatch aneconomic advisory team. However, Japan is not yet prepared to extend yenloans. A Lao-Thai-Vietnamese agreement to develop a shared highway has beensigned. Trade ties with China’s Yunnan province are flourishing.

• Inflation is still high but easing, the kip has strengthened slightly againstthe dollar and money supply growth has subsided. Reserves have takenanother knock but foreign investment approvals grew in 1999.

• Rice output rose by 28% in 1999, almost reaching government targets.Efforts are being made to increase dry season cultivation. Coffee output is up.

• A Japanese-sponsored feasibility study has been completed on Nam Nghiep 1but the future of Laos’s hydroelectric power sector is uncertain. Construction ofa second cement plant is about to begin.

Foreign trade andpayments

Outlook for 2000-01

The political scene

Economic policy


5


• Laos’s second Mekong bridge is nearly complete. Lao Aviation has plans forexpansion. This will enhance tourism, which is already showing signs ofpromise. The newly restructured banking sector still has underlying problems.

Unconfirmed data suggest the trade deficit may have ballooned in 1999.Imports from Vietnam rose sharply. Fertiliser imports have been authorised tosupport the dry season rice harvest.

Editor: Jennifer Miles DavisAll queries: Tel: (44.20) 7830 1007 Fax: (44.20) 7830 1023

Next report: Our next Country Report will be published in June

Foreign trade andpayments

6 Cambodia


Cambodia

Political structure

Cambodia

Constitutional monarchy

The cabinet is constitutionally responsible to the National Assembly

King Norodom Sihanouk. The king is selected by the Throne Council and holds officefor life

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

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

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

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

Prime minister Hun Sen (CPP)Deputy prime ministers Tol Lah (FUNCINPEC)

Sar Kheng (CPP)

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)

Chea Chanto (CPP)

Official name

Head of state

National legislature

National elections

National government

Main political organisationsand groups

Main members of thegovernment

Key ministers

Form of government

The executive

Central bank governor

Cambodia 7


Economic structure

Annual indicatorsa

1995 1996 1997 1998 1999

GDP at current prices (CR bn) 7,200 8,251 9,100 10,750 11,806b

Real GDP growth (%) 7.6 7.0 1.0 1.0 4.0b

Consumer price inflation (av; %) 1.0 10.1 3.2 14.7 5.6c

Population (m) 9.7 9.9 10.2 11.4 11.7b

Exports fob ($ m) 855.2 643.6 736 705.4 n/a

Imports fob ($ m) 1,186.8 1,071.8 1,064.0 1,096.8 n/a

Current-account balance ($ m) –185.7 –184.9 –209.9 –223.9 n/a

Reserves excl gold ($ m) 192.0 265.8 298.5 324.3 393.2

Total external debt ($ 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:$) 2,450.8 2,624.1 2,946.3 3,744.4 5,200.5

February 25th 2000 CR3,791:$1

Origins of gross domestic product 1998 % of total Expenditure of gross domestic product 1997 % of total

Agriculture 43.0 Private consumption 86.4

Industry (incl construction) 20.1 Public consumption 8.8

Services 36.9 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 1998d $ m Principal imports 1998e $ 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 1997c % of total Main origins of imports 1997d % 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 Based on first three quarters. d Including re-exports. e Excludingnon-retained imports.

8 Cambodia


Quarterly indicators

1998 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

PricesConsumer prices (1995=100) 123.2 127.7 134.3 136.2 133.7 135.8 136.8 n/a % change, year on year 15.9 17.0 13.9 12.7 8.5 6.3 1.9 n/a

Financial indicatorsExchange rate CR:$ (av) 3,579 3,787 3,796 3,816 3,778 3,794 3,844 3,815 CR:$ (end-period) 3,580 3,995 3,800 3,770 3,790 3,800 3,895 3,770Interest rates (av; %) Deposit 7.9 7.9 7.9 7.5 7.7 7.2 7.1 7.3 Lending 18.5 18.5 18.6 17.7 17.7 17.8 17.5 17.3M1 (end-period; CR bn) 414.6 428.5 474.6 543.3 527.3 499.7 501.3 n/a % change, year on year 24.5 29.6 36.1 41.2 27.2 16.6 5.6 n/a

Sectoral trendsRice production (annual totals; ’000 tonnes) ( 3,515 ) ( 3,515a )Rubber exports, net (’000 tonnes) 5.5 4.5 10.5 12.5 5.5 5.5 12.0 n/a

Foreign trade & payments ($ m)Goods exports fob 143.9 165.0 192.1 204.4 n/a n/a n/a n/aGoods imports fob 263.2 277.3 254.2 302.1 n/a n/a n/a n/aMerchandise trade balance –119.3 –112.3 –62.1 –97.7 n/a n/a n/a n/aServices balance –17.8 –20.7 –20.3 –20.8 n/a n/a n/a n/aIncome balance –3.3 –13.9 –21.4 –11.7 n/a n/a n/a n/aCurrent-account balance –66.0 –72.5 –29.4 –56.0 n/a n/a n/a n/aReserves excl gold (end-period; $ m) 298.5 299.8 284.9 291.7 324.3 357.5 363.1 393.2

a Estimate.

Cambodia 9


Outlook for 2000-01

Cambodia continues to enjoy a period of relative political stability. This in partreflects the dominance of the Cambodian People’s Party (CPP) within thecoalition, which also includes the National United Front for an Independent,Neutral, Peaceful and Co-operative Cambodia (FUNCINPEC). The country isalso experiencing a period of relative political calm because with the generalelection still some three years away, the pattern of manoeuvring, vote-buyingand intimidation associated with elections in Cambodia is currently on hold.Another consideration is that the chairman of FUNCINPEC, Prince NorodomRanariddh, appears to have moved away from the policy of confrontation withthe CPP, which characterised the 1993-97 coalition. This has meant that he hasnot contested developments that in the past he might have been expected to(such as the appointment of Chea Sophara, an ally of the prime minister, HunSen, as governor of Phnom Penh). There have been suggestions that PrinceRanariddh’s less confrontational stance is designed to make himself moreacceptable as a potential heir to his father, King Norodom Sihanouk. Hun Senis expected to be able to control five out of the nine votes on the ThroneCouncil, which will choose the next king when King Sihanouk dies. This is notimminent although the king is becoming frailer, and his health is not good.

Despite the present calm, there are a number of areas of uncertainty on thehorizon. One is the planned commune elections. These have been repeatedlydelayed, and a date has still not been set. However, they are likely to take placewithin the forecast period. Since making inroads at the local government level,is important for both FUNCINPEC and the opposition Sam Rainsy Party (SRP)if they are to build up a support base from which to eventually challenge theCPP nationally, the commune elections are likely to be the focus for a greaterlevel of political confrontation. The SRP is threatening to boycott the com-mune elections unless the National Election Committee responsible forsupervising the polls is restructured to remove what the SRP and others believeis its CPP bias. The CPP can be expected to fight hard to maintain its pre-eminent position at the local level, and is well placed to do this.

Hun Sen’s position within the CPP has come under scrutiny in recent monthsalthough it is not under threat. The allegations that his wife, Bun Rany,ordered the murder of the Cambodian actress, Piseth Pelika, in July 1999 havecaused unease, and are being monitored to see whether they are likely to turnvoters away from the party. In addition, Hun Sen’s promotion of a number ofhis allies in the military prompted muted criticism both in 1999 and in early2000. Nevertheless, although there are factions within the CPP, no one expectsthe party to split in the foreseeable future. Furthermore, Hun Sen’s position isunlikely to be challenged during 2000-01.

Talks on the holding of a Khmer Rouge tribunal have continued to drag on. InJanuary the government approved draft legislation on the tribunal althoughthis has yet to come before the National Assembly (parliament) or the Senate.As far as the UN is concerned, the law falls well short of what is required if it is

Political stability will bemaintained in 2000-01

The run-up to thecommune elections will

lead to increased tension

Hun Sen will not bechallenged from within

his party

Agreement with the UN onthe Khmer Rouge tribunal

looks less likely

10 Cambodia


to back the holding of the tribunal on Cambodian soil. Talks between thegovernment and the UN are continuing, but the likelihood of agreement islooking increasingly slim. Hun Sen has said he wants to hold the tribunal inMarch, although this date could easily slip. Whatever happens, the tribunal islikely to be a limited affair, possibly with just four or five Khmer Rouge broughtbefore the court.

In 1999 GDP growth is estimated at 4%. The government’s target is to raise thisto 6% in 2000-01, although this could prove optimistic. In 2000 the EIU isforecasting GDP growth of 5.5%, rising to 6% in 2001. This is premised on con-tinued political stability, a stronger regional economy that will supportstronger export growth and sustained inflows of foreign aid. The World Bank isto unlock a new structural adjustment credit facility this year, and funds fromthe IMF, the Asian Development Bank (ADB) and the Japanese government arealso expected. Economic growth is also likely to receive a boost from greaterpublic expenditure. In anticipation of increased revenue from taxes as theeconomy recovers, and greater external finance, the government plans tospend 56% more in the 2000 budget. In addition, the government has recentlyunveiled a three-year public investment programme (see Economic policy).

Growth in industry and services is likely to strengthen during 2000-01. Thegarment sector will remain the mainstay of industry, although we could wellsee the emergence of new sectors, notably agro-processing; for example,cotton-processing factories to supply the garment industry have beenestablished in recent months. Services growth will be driven by tourism, whichhit record highs in 1999, and is forecast by the government to grow by 35% in2000. Higher growth in construction will follow as a result. Agriculture, whichcontributes over 40% to GDP, is the least predictable component of our growthforecast given the sector’s vulnerability to bad weather and pests. The govern-ment is forecasting 3.5% growth in agriculture in 2000, compared with anestimated 3.8% in 1999. This is realistic given the prospect of lower growth inforestry as a result of the government’s logging policy.

Cambodia is currently experiencing minimal inflationary pressures. In 1999the inflation rate averaged 5.6% in the first three quarters, reflecting still-weakdemand following the 1997-98 economic downturn. As economic growthclimbs in 2000-01, inflation is also likely to rise slightly, although it will remainin single digits. The good 1999-2000 harvest will keep food prices down thisyear. In 1999 the riel was largely stable, ending the year fractionally strongerthan at the beginning. During 2000-01, there is no reason to expect this tochange. As economic growth accelerates and inflows of capital increase, the rielmay even appreciate.

Private domestic and foreign investment fell by 44.8% year on year in 1999,reflecting both the aftermath of the Asian financial crisis and a degree ofcaution as to whether political stability was likely to be maintained. As bothfactors improve, private investment is likely to strengthen during 2000-01.Although Cambodia has its share of red tape, corruption and hidden costs, thebureaucracy is generally felt to be less of a problem than in neighbouring

Economic growth willrecover to 5.5-6%—

—driven by garments,construction and tourism—

—against a backdrop ofmacroeconomic stability

Private investment is likelyto recover

Cambodia 11


Vietnam or Laos. The government’s recent attitude to privatisation, includingin telecoms and banking, is certainly far more liberal than in either of thesecountries. The lack of a land law and the recent rise in land grabbing have beencited by business as a constraint on its willingness to invest, and some progressin this area is likely later in the forecast period.

Since the last quarter of 1998 there have been signs of a recovery in theexternal sector, notably of exports. During 2000-01 the external sector will con-tinue to recover on the back of stronger regional demand. Forestry exports willremain below historical levels as the government steps up its regulation oflogging. Garment exports will continue to expand and will remain the mainexport earner—ongoing market access issues with the US notwithstanding—and access to EU markets without quota restrictions is guaranteed until 2002.As economic growth rises so too will merchandise imports by volume andvalue, and this points to the likelihood of larger trade and current-accountdeficits in 2000-01. However, financing will not present a serious problem asaid flows, higher levels of foreign investment and improved foreign-exchangeearnings from tourism will be forthcoming.

The political scene

The government and the UN have yet to reach agreement on the terms underwhich the UN would be prepared to support a Khmer Rouge tribunal onCambodian soil. The principal issue at stake remains the degree of control tobe exercised over the process by the two parties. The Cambodian governmenthas strongly defended its right “as a matter of sovereignty” to hold the tribunalon its terms. The UN, however, is not prepared to support the trial process if itfeels it will be little more than a whitewash or a token effort. Against this back-drop, the dispute has focused on whether the judges, along with theprosecutor, should be Cambodian or UN-nominated. A US initiative in October

Financing higher current-account deficits will not be

a problem

Relations with the UN sourover the Khmer Rouge

tribunal—

12 Cambodia


1999, which suggested decisions could be made by a “super majority” of fourout of five judges, was warmly welcomed by the prime minister, Hun Sen (4thquarter 1999, pages 10-11).

However, it soon became clear that the US proposal failed to deal with a rangeof issues to the satisfaction of the UN. In December the government sent adraft of the law to the UN offices in New York setting out how the tribunalwould be held. However, Hun Sen said that the cabinet would debate the lawon December 24th and would not wait for the UN’s approval. To some extent,this was posturing. On January 6th the cabinet approved the law but saidchanges could still be made. Since this date, no substantive progress has beenmade on narrowing the differences between the government and the UN. Bothsides have said they are willing to continue talking, although shortly after thelaw was approved Hun Sen said that a UN technical team should come toPhnom Penh and that he was not prepared to send a delegation to New York.On February 12th the UN was reportedly preparing to send a delegation toCambodia.

The law on the holding of a Khmer Rouge tribunal was drafted in conjunctionwith legal experts from France, India and Russia. It envisages a five-memberpanel of judges (three Cambodian and two foreign) along with a seven-member Special Court of Appeals (four Cambodian and three foreign) and anine-member Supreme Court (five Cambodian and four foreign). In all threecourts, the “super-majority” formula put forward by the US would operate.However, the government is insisting that it approve all the judges, includingthe UN-nominated co-prosecutor. Moreover, according to the law, theCambodian prosecutor has the power of veto over indictments and otherdecisions. On January 11th, following a meeting with the visiting Japaneseprime minister, Keizo Obuchi (see below), Hun Sen said the UN could beallocated the position of joint investigating judge. As it stands, the lawcurrently envisages there being just one investigating judge.

Hun Sen has said he wants the tribunal to begin in March 2000, although oneof his advisors, Om Yintieng, said in December 1999 that he believed “a littlemore time” would be needed. The plan appears to be to try just four or fivepeople. The two most likely to be brought before the tribunal are the formerKhmer Rouge military chief, Ta Mok, and the interrogation centre head, KangKek Ieu (known as Duch)—the only two Khmer Rouge currently in custody.Other leaders who could be summoned include Nuon Chea, Khieu Samphanand Keo Pauk. Another potential candidate is Ieng Sary, but he has a closerelationship with Hun Sen, who may not want to jeopardise this.

At the end of 1999 the office of the UN secretary-general’s specialrepresentative in Cambodia, headed by Lakhan Mehrotra, closed. This was atthe request of Hun Sen, who said that other countries do not have such anoffice, and that Cambodia’s relations with the UN can be handled by its repre-sentative in New York. However, the closure is widely seen as a casualty of theprotracted struggle between the government and the UN over the KhmerRouge tribunal. The office was established in late 1993 after the UN

—and the law gives theCambodian government

ultimate control—

—but it is still not clearwho will be tried

The UN secretary-general’srepresentative office

is closed

Cambodia 13


Transitional Authority in Cambodia (UNTAC), which supervised the 1993general election, completed its mission. All other UN offices in Cambodia willremain open, including the office of the controversial UN High Commissionerfor Human Rights (UNHCHR), which is scheduled to run at least for anothertwo years.

On December 3rd 1999 Hun Sen issued an order calling for the re-arrest ofpeople recently released from custody in what were described as suspiciouscircumstances. These included people held in connection with crimes such asrobbery, kidnapping and drug smuggling, where the charges were suddenlydropped or those already sentenced were released from prison before they hadserved their jail terms. The order followed claims by the governor of PhnomPenh, Chea Sophara, who is aligned with Hun Sen, that he had evidence thatjudges and other court officials were taking bribes to secure prisoners’ release.Following his allegations, two senior Phnom Penh court officials were arrested.Just a week after Hun Sen issued his order, some 50 people were re-arrested.

Hun Sen has been criticised by human rights groups, who argue that his actionrepresents unacceptable interference by the executive in the judiciary, and thatit is unconstitutional. The UN secretary-general’s special representative forhuman rights in Cambodia, Thomas Hammarberg, has said that it is theresponsibility of the Supreme Council of Magistracy to take action againstjudges who violate the law. However, Hun Sen’s tough stance on crime notonly asserts his position in Phnom Penh—this time by reining in city judges—but also plays to popular sentiment, which is strongly in favour of a hardlineposition on crime. However, there are fears that executive interference in thejudiciary could have more negative repercussions in the future.

In January the government arrested Chhouk Rin, who is suspected of involve-ment in the murder of three Western tourists in 1994. A second man, Sam Bith,has also received a summons to appear before a court in connection with thesame case but he has so far failed to attend.

Other actions by Hun Sen have recently caused unease among members of hisparty. This is partly in evidence in relation to the allegations that his wife, BunRany, ordered the murder of the Cambodian actress, Piseth Pelika, in July 1999(4th quarter 1999, page 12). It is hard to predict what the impact of the episodewill be, although the event has received wide coverage in Cambodia,prompting a national outpouring of grief at Piseth’s funeral. This may turnvoters away from Hun Sen and the Cambodian People’s Party (CPP), which isundoubtedly the intention of those who have pushed the allegations. All thesame, it seems highly unlikely that Hun Sen will be ousted or that the CPP willsplit in the short term.

The promotion of a number of Hun Sen’s followers to senior positions in thearmed forces has also been met with muted criticism. In January Hun Sen pro-moted Mol Roeup, the head of the defence ministry’s intelligence department,a trusted ally of Hun Sen and the former head of Hun Sen’s bodyguard unit, tothe rank of three-star general, where he will advise the prime minister on

Hun Sen orders releasedprisoners back to jail—

—prompting an outcryfrom human rights groups

Some of Hun Sen’s actionsare making his

colleagues uneasy

14 Cambodia


military matters. In 1999 Hun Sen appointed another close confidant, KunKim, to head the armed forces.

In late November 1999 the coalition government, which groups the CPP andthe National United Front for an Independent, Neutral, Peaceful and Co-operative Cambodia (FUNCINPEC) was one year old. Although politics inCambodia has been inherently violent and corrupt, the last year has at leastbrought a modicum of stability. This principally reflects the dominance of theCPP and the relative weakness of FUNCINPEC. However, the CPP is wary of thefrailty of the coalition; speaking at a gathering to mark the coalition’sanniversary on November 23rd, the CPP president and Senate chairman, CheaSim, said that there were still politicians looking for ways to destroy relationsbetween the two parties. He did not specify whom he had in mind but he mayhave been thinking of the opposition Sam Rainsy Party (SRP), or of factionswithin the CPP itself.

Relations between the SRP and the government, especially the CPP, continue tobe difficult, and the SRP is critical of the government on nearly all issues. Onthe Khmer Rouge tribunal it has said that there should be a referendum onwhether the trial should be Cambodian or internationally organised, and hasmade no secret of the fact that it has no confidence in the judiciary. Thissentiment is shared by a 17-strong coalition of local human rights groups,which issued a statement in January arguing that the tribunal legislation wasinadequate. The SRP is also threatening to boycott the commune elections (forwhich a date still has not be set) unless the National Election Committee (NEC)responsible for supervising the polls is restructured. The SRP thinks the NEC isbiased towards the CPP, a view also shared by local organisations. In January2000 the SRP leader, Sam Rainsy, said in a characteristically provocativestatement that the ruling coalition was composed of “criminals, crooks andclowns”. He has also been critical of the monarchy, saying that in practicethere is just a “thin veneer of monarchy”, which is little more than “a facade oflegality and democracy for an illegal and dictatorial regime”.

Despite its combative stance, the SRP remains weak. This in large part reflectsthe fact that it has just 15 seats in the National Assembly (parliament), makingit impossible for it to block legislation on its own. For example, when the SRPwalked out of the National Assembly during the budget debate (see Economicpolicy) it did not prevent the budget being passed. It is also not immune fromfactionalism, and in December 1999 five activists from Kompong Cham leftthe party saying that its leadership was dictatorial. Other SRP members haveprivately expressed the view that Sam Rainsy’s publicity-seeking style ofoperating does not always advance the party’s international standing.

In December 1999 the government filed an extradition request with the Thaigovernment for the return of an SRP member, Sok Yoeun, who is serving a six-month sentence there for illegal entry into the country. Sok Yoeun fled toThailand in October 1999, seemingly to escape arrest following an accusationby the government that he was involved in a rocket attack on Hun Sen’svehicle convoy in September 1998. The SRP denies the allegations, saying they

Chea Sim warns of threatsto the coalition—

—and the Sam Rainsy Partycontinues to challenge the

government—

The government calls forthe extradition of an SRP

member in Thailand

—but presents noreal threat

Cambodia 15


are part of the CPP’s efforts to discredit it. Although Thailand and Cambodiahave an extradition treaty, the government of Thailand is not expected torespond to Cambodia’s request until Sok Yoeun has served his prison term.

There have recently been hints of dissatisfaction within FUNCINPEC at PrinceNorodom Ranariddh’s leadership. In November 1999 Prince Ranariddh causeddisquiet amongst some FUNCINPEC members when he backed the appoint-ment of the pro-CPP Chea Sophara as governor of Phnom Penh. On November15th FUNCINPEC’s information office issued a statement rejecting thesecriticisms and expressing complete support for Prince Ranariddh. Nevertheless,if Prince Ranariddh’s desire to become king (see below) interferes with hisability to provide effective leadership of FUNCINPEC—and in particular itseventual goal of defeating the CPP at the polls—this could ultimately lead topressure for him to step down.

The increasing frailty of King Norodom Sihanouk has spurred speculation as towho might succeed him. There are estimated to be as many as 20 peopleeligible, but the focus of attention has lately been on his son, PrinceRanariddh. Although Prince Ranariddh’s poor relations with Hun Sen in thepast might appear to preclude it, they have recently improved. Indeed, part ofthe reason for this may be because Prince Ranariddh does not wish tojeopardise his chances of becoming king. According to the constitution, theThrone Council will choose King Sihanouk’ successor within seven days of hisdeath. The Throne Council has nine members, one of whom is the primeminister, Hun Sen. Hun Sen is also believed to command the support of fourother members, giving him effective control over the Council. However, inJanuary 2000 Hun Sen urged an end to speculation about who might succeedthe king, on the grounds that it would be tempting fate.

The government has long faced pressure from international donors and non-governmental organisations to clamp down on illegal logging and institute asustainable forestry policy (4th quarter 1999, pages 14-15). At a forestry con-ference in January 2000, Sar Kheng, a deputy prime minister, drew attention tothe illegal felling of trees in Mondolkiri province, saying that it involved theco-operation of the province’s high-ranking officials. On January 25th Hun Sensaid that he had authorised action to be taken against the governor ofMondolkiri province, Chhaom Bun Khan. The governor has since been sus-pended from duty, as have 20 other local officials including military and policepersonnel.

On January 11th-12th 2000 Japan’s prime minister, Keizo Obuchi, visitedCambodia as part of a larger South-east Asia tour incorporating Thailand andLaos. It was the first time a Japanese prime minister has visited Cambodia since1957. Japan is Cambodia’s largest aid donor, and during the visit Mr Obuchiannounced fresh aid commitments to Cambodia of ¥2.5bn ($24m). Of this,¥2.2bn is in the form of grant aid to support the country’s structural reforms,with the remaining ¥300m going towards the disposal of land mines and theimprovement of medical facilities for mine victims. In addition, the Japanesegovernment is also providing ¥849m in grant aid to improve National

The government suspendsofficials accused of

illegal logging

Mr Obuchi makes the firstvisit by a Japanese premier

for 43 years

Prince Ranariddh’sleadership of FUNCINPEC

comes under scrutiny—

—amid rumours that hehas his eye on the throne

16 Cambodia


Highway 6 in Siem Reap province, and to build new facilities at a nationaltuberculosis centre.

Mr Obuchi’s visit came as the government and the UN continued their stand-off over the Khmer Rouge tribunal. Japan has not taken a strong stand on theissue, but in talks with Hun Sen Mr Obuchi urged that dialogue with the UN bekept open. Mr Obuchi’s visit was also in part to brief the Cambodian govern-ment and seek its views on the forthcoming G8 meeting scheduled to be heldon Okinawa in July 2000.

In early November 1999 Indonesia’s president, Abdurrahman Wahid, visitedPhnom Penh as part of a wider tour of fellow Association of South-East AsianNations (ASEAN) member states. This follows the visit to Indonesia of Hun Senin March 1999 (2nd quarter 1999, page 15). Political relations between the twocountries are good; Indonesia played an important part in brokering an end towar in Cambodia in the 1980s, and later backed Cambodia’s entry into ASEANeven when others wanted to delay its application. Abdurrahman Wahidreportedly encouraged Cambodia to support the entry of East Timor intoASEAN, but Hun Sen responded that he had not yet considered the issue. Asyet, economic relations are not well developed, although there is some trade,and Indonesia has provided technical assistance in a number of areas.

In November 1999 a defence ministry spokesman, General Neang Phat, saidthat China had agreed a $1.5m aid package to be spent on the demobilisation,training and the construction of military facilities. This was followed inDecember by a ceremony to hand over Chinese military aid, including jeeps,ambulances, parachutes and construction material. The extension of militaryaid is indicative of the close ties between the two countries, which havestrengthened both politically and economically under Hun Sen’s leadership inrecent years (1st quarter 1999, page 17; see also Industry).

In the context of ASEAN, Cambodia’s close relationship with China ispotentially sensitive, particularly as far as military aid is concerned. An articlein a Cambodian newspaper, Sereipheap Thmei, on November 26th said that HunSen had turned down offers of weapons from China for fear of “falling intoChina’s political grip”. However, an unnamed military official was quoted assaying that Hun Sen would eventually accept the aid, which according to theofficial included 250 tanks, 230 artillery pieces, 100 trucks and 100 tonnes ofassorted automatic rifles. In November a delegation of the Chinese CommunistParty visited Cambodia at the invitation of the CPP.

In December 1999 the US embassy in Phnom Penh temporarily suspended itsvisa operation and tightened security after a report of a possible threat againstit. The report appeared in the English-language newspaper, The Vision, andclaimed that Osama bin Laden, a Saudi Arabian national, who is accused ofbeing behind the bombing of US embassies in Africa in 1998, was planning toestablish a training camp in Cambodia near its border with Laos and Thailand.Despite taking precautions, the US, Thai and Cambodian governments wereunable to find concrete evidence to substantiate the report.

The Indonesianpresident visits

Close ties with Chinaextend to military aid

The US embassytightens security

Cambodia 17


Economic policy

In December 1999 the National Assembly (parliament) approved the 2000budget (which runs on a calendar year basis). As yet, no budget revenue figureshave been released, but expenditure is forecast to be CR2.3trn ($614m), up by56% on estimated expenditure in 1999. This will primarily be the result ofincreased spending on capital projects. Current expenditure is forecast to riseby only 10% on 1999.

Expenditure on health and education in the 2000 budget is forecast to rise by51% and 47% respectively compared with 1999. This follows the same trend aspreviously for health spending, but represents a much larger increase foreducation, which was forecast to rise by just 13%. The increase in spending ispremised on a more buoyant domestic economy in 2000, which is expected tolead to higher customs receipts and increased revenue from the new value-added tax (VAT). The government also plans to rely more on external financeto fund the forecast increase in capital expenditure in 2000. According to KeatChhon, the finance and economy minister, current revenue is forecast toexceed current expenditure by a figure equivalent to 1.3% of GDP. In 1999 thedeficit was forecast to be CR845m.

Of total expenditure, CR212.4m, or 34.6%, has been allocated to defence andsecurity. This represents a small reduction as a proportion of total expenditurecompared with 1999, when it made up 41.8% of the total, according to revisedgovernment figures. However, the government originally budgeted forexpenditure on defence to make up only 31% of total expenditure in 1999.Expenditure on defence and security remains controversial. At the budgetannouncement the opposition Sam Rainsy Party (SRP) staged a walk-out,arguing that defence expenditure should be reduced further, although the SRPwas unable to change the final vote. Keat Chhon defended the planned level ofexpenditure on defence and security by saying that the country still needed todefend the country’s border and pay its soldiers. According to the finance andeconomy ministry, defence and security expenditure as a percentage of totalspending will be reduced each year between now and 2003 (see table). Thereductions in defence expenditure are due to occur as the governmentimplements its stated demobilisation plans. The latest official projections arefor 1,500 troops to be demobilised in 2000 on an experimental basis, followedby 10,000 soldiers a year in 2000 and 2001. The reality, however, is thatdemobilisation itself is not a cost-free process, and it will thus be difficult tomaintain for forecast reductions in defence expenditure.

Cambodia: government defence expenditure budget

1999a 2000 2001 2002 2003

Defence as % of total expenditure 41.8 34.6 31.5 29.4 26.9

a Actual.

Source: Official sources.

—apart from in defence

—showing higherspending—

The 2000 budget has beenapproved—

18 Cambodia


In January 2000 the government approved a three-year $1.1bn public invest-ment programme. The programme, which will run from 2000 to 2002, con-centrates on agriculture, education, health and transport, although other areassuch as telecoms and power generation will also benefit. In total, 277 projectshave been earmarked for funding. Health is to receive the largest amountof funds.

Cambodia: public investment programme, 2000-02($ m)

Health 322

Transport 216

Education 168

Agriculture 165

Total incl others 1,080

Source: Official sources.

In September 1999 the government was planning to sell off a 49% stake in thestate-run telecommunications sector (4th quarter 1999, page 22). However, inDecember the prime minister, Hun Sen, said the government would beprepared to sell a 70% stake and use the revenue raised to finance infrastructuredevelopment. This would in turn enable a reduction in borrowing frominternational lenders such as the Asian Development Bank. According to theminister of post and communications, So Khun, the telecoms network is worthup to $100m. In September 1999 talks were reportedly under way with a localprivate company, AZ Distribution, regarding purchasing a stake in the telecomsnetwork, although the government is also hoping to attract foreign interest.

In January the World Bank and the government reached agreement on a three-year $30m structural adjustment credit facility (SACF). Like the IMF, the WorldBank cancelled its last SACF in 1997 after Hun Sen ousted his coalition partnerin a coup d’état. However, the Bank has been slower to conclude itsnegotiations than the IMF, which resumed lending in October (4th quarter1999, page 15). The World Bank’s board is expected to approve the loan in lateFebruary.

The secretary-general of the Council for the Development of Cambodia (CDC),Sok Chenda, talked in December 1999 of plans to make the CDC a moregenuine “one-stop” service for foreign investors. This would include allrelevant ministries with offices at the CDC. Once in place, investors couldexpect to receive a decision on their applications within 28 days. Despitewarnings in December by Hun Sen that corruption was scaring off foreigninvestors, the fall in foreign investment in 1999 is not believed to be a directresult of corruption (see Industry). In fact, the secretary-general of the ChineseChamber of Commerce in Cambodia, Jimmy Gao, recently cited the lack of aland law as the main problem (4th quarter 1999, page 21), but described theinvestment environment as business-friendly overall. Common complaints onthe part of investors are the red tape and high utility costs.

The government unveils athree-year public

investment programme—

The World Bankresumes lending

A faster approvals processfor investors is promised

—and announces plans tosell off 70% of telecoms

Cambodia 19



Economic trends

The government has yet to issue its estimate for 1999 GDP growth. However,despite flooding in November (see Agriculture), the economy is still expectedto achieve growth of around 4%. In 2000-02 the government is aiming for 6%growth. According to the finance and economy minister, Keat Chhon, agri-culture is expected to grow by 3.5% in 2000, construction by 8% (see Industry)and tourism by 17% (see Infrastructure and services). In general, the economyis expected to benefit in 2000 from the improving regional economic climate,steady inflows of foreign aid and greater domestic political stability.

Complete inflation data for 1999 are not yet available. However, the consumerprice index recorded a 0.3% fall month on month in October before rising byjust 0.1% in November, according to the IMF. Average month-on-monthinflation in January to November was zero, although quarterly inflation hasshown a downward trend since the beginning of 1998. Lower prices in 1999were a consequence of continued weak demand following the Asian crisis andgreater stability in the riel, which has reduced imported inflation. In January2000 there was also downward pressure on rice prices following a bumper1999-2000 harvest (see Agriculture). In Phnom Penh the average price of paddywas CR320,000 ($84.20) a tonne in the week ending January 22nd, CR10,000lower than just a week previously.

Cambodia: consumer prices, 1999

Apr May Jun Jul Aug Sep Oct Nov

Index (1995=100) 134.4 136.1 136.9 137.1 136.4 136.8 136.4 136.5

% change, month on month 0.6 1.3 0.6 0.1 –0.5 0.3 –0.3 0.1

Source: IMF, International Financial Statistics.

Cambodia: money supply(CR bn unless otherwise indicated)

1998 1999 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

M1 428.5 474.58 543.27 527.33 499.69 501.34 % change, year on year 29.6 36.1 41.2 27.2 16.6 5.6

Quasi-moneya 652.76 605.96 686.8 787.77 816.53 904.34 % change, year on year 14.2 9.5 1.3 20 25.1 49.2

M2 1,081.26 1,080.54 1,230.07 1,315.10 1,316.22 1,405.68 % change, year on year 19.9 19.8 15.7 22.8 21.7 30.1

Memorandum itemForeign-currency deposits 639.04 590.72 667.03 765.38 792.61 878.96 % of M2 59.1 54.7 54.2 58.2 60.2 62.5

a Time, savings & foreign–currency deposits.


Growth is forecast to risein 2000

Inflationary pressureremains weak

20 Cambodia


In the third quarter of 1999, M1 growth slowed dramatically to 5.6% year onyear. M2 growth accelerated, however, rising by 30.1% year on year, boosted bya sharp rise in quasi-money of nearly 50% year on year. There was also a rise inthe ratio of foreign-currency deposits as a percentage of M2 in the thirdquarter, suggesting a weakening of confidence in the riel and a subsequentshift into dollars. Although the increase was quite small the ratio is on anupward trend.

At the end of February the riel was trading at CR3,800:$1, representing littlechange from the previous month. The currency ended 1999 more or lessunchanged from the level at the beginning of the year. This contrasts with an11.4% fall in 1998, reflecting greater political stability along with expectationsof an improving domestic economy.

According to the IMF, total reserves (excluding gold) were $393.2m at the endof 1999—the highest level on record. After a slight fall in the third quarter, thereserves are now well up on the level at the beginning of the year (see chart). In1993 the reserves were just $2.5m. Based on 1998 trade figures, the reserves areequivalent to 18.6 weeks of imports.

Agriculture

In November Cambodia suffered serious flooding in a number of provinces.However, damage to the wet season rice crop, which was just about to beharvested, was limited. Harvesting got under way in December and January,and the 1999-2000 crop is still expected to yield 3m tonnes, up from 2.9m in1998-99. The heavy rains may in fact be beneficial for the dry season rice crop,which produces around 600-700 tonnes and is mostly harvested by April.

Two years of good harvests have focused attention on developing Cambodia’spotential as a rice exporter (4th quarter 1999, page 25). The government isforecasting an exportable surplus of 60,000 tonnes of milled rice in 1999-2000,compared with 30,000 the previous crop year. In December 1999 it wasreported that the Japan International Co-operation Agency (JICA) had signedan agreement with the Cambodian government to help focus on improvingthe post-harvest quality of its rice and on rice marketing.

The November flooding proved more disruptive for rubber producers, withreports that the rain had rendered the rubber useless. This aside, the rubberindustry has been in decline since the 1970s, and a major programme ofrestructuring and new investment is needed (2nd quarter 1999, page 19).Rubber production is forecast to be about 35,000 tonnes in 2000, down from38,000 in 1999.

M1 falls while M2 rises

The foreign reserves are ata record high

The 1999-2000 rice cropsurvives flooding

Japan is to help withrice exporting

Rubber producers feel theeffects of rains

Cambodia 21


Industry

In 1999 the Council for the Development of Cambodia (CDC) approved 96domestic and foreign investment projects with total capital of $471.7m. Mostof the approvals were in garments and agro-processing, although there werealso projects in construction, mainly of hotels (see Infrastructure and services).Total approvals by value fell by 44.8% in 1999 compared with 1998. Theaverage size of projects was also lower in 1999, at $4.9m, compared with nearly$6m in 1998. Moreover, actual disbursement is generally substantially lowerthan approvals. According to the government, this was around 40% of totalapprovals in 1999, quite good by international standards and possibly an over-estimate. The drop in investment can in part be attributed to lower investmentin the garment sector following the imposition of US quotas in January 1999.In any case, the high levels of investment in this sector could not have beensustained indefinitely, even without the US restrictions. The low level ofinvestment also reflects ongoing difficulties amongst regional investors in theaftermath of the Asian crisis, and continuing uncertainty about Cambodia’ssafety as an investment destination because of past political troubles.

In contrast, Chinese investment was especially strong in 1999, rising by 40%year on year according to Chinese embassy estimates. According to thesecretary-general of the Chinese Chamber of Commerce, Jimmy Gao, there arearound 300 Chinese firms operating in Cambodia. They are prominent in thegarment and construction sectors. After mainland China, the largest foreigninvestors in Cambodia are South Korea, Taiwan and Hong Kong.

A number of companies are moving to process cotton for the garment industry.In November 1999, for example, a local company, Thai Boon Roong Group,formed a $20m joint venture with a Chinese firm, with the aim of reducing thegarment sector’s current reliance on imports. The Thai Boon Roong Group,which is owned by a leading Cambodian businessman, Teng Bunma, is alsoexpected to become involved in developing domestic cotton growing. InJanuary three companies from Taiwan, Singapore and China—the ManhattanTextile and Garment Corporation, the Medtecs Group, and Qing Dao TextileCompany—announced plans to invest $50m over five years in a cottonplantation and processing factory. So far, $3m has been invested, but the groupis looking to raise the additional finance. The project has taken over a state-owned cotton mill, and is expected to have capacity of 20m yards of cottoncloth a year once fully operational.

Infrastructure and services

In November 1999 the Asian Development Bank (ADB) signed a soft loanagreement worth $68m for the upgrading of 577 km of roads in various partsof the country. The loan has a maturity of 32 years with an interest rate of 1%during the first eight years, rising to 1.5% during amortisation. Roads andtransport will also benefit from government plans to sell off the state-owned

Investment fallsdramatically—

—except from China

The cotton industryreceives an

investment boost

New funds are planned forimprovements to roads

22 Cambodia


telecoms company, and from the recently announced public investment pro-gramme (see Economic policy).

Many of Cambodia’s roads are desperately in need of overhaul. The govern-ment has recently highlighted the rebuilding of the road link betweennorthern Cambodia and Laos and Vietnam, as well as the road between SiemReap and the Thai border. It is particularly hoped that the latter will increasethe flow of tourists to Cambodia (see below). However, some progress has beenmade recently on improving the road network. The journey from Phnom Penhto Kompong Cham, in the east towards the Vietnamese border, has beenreduced to around two hours from four, making it easier for the province’sagricultural produce to reach markets in Phnom Penh. Kompong Cham is alsoset to benefit when Cambodia’s first bridge over the Mekong river is completedas it will make access to markets in Thailand easier. The $56m bridge, fundedby Japanese grant aid, is scheduled for completion in March 2002, althoughthere have already been delays (3rd quarter 1999, page 20).

In December Cambodia Samart Communications (CSC) launched a newGlobal System for Mobile Communications (GSM) mobile telephone network.CSC, a joint venture between Thailand’s Samart Corporation and TelecomMalaysia Berhad, has operated a mobile phone network in Cambodia since1995. It has a 30% share of the mobile phone market. The market leader isCamGSM Company, which covers almost all of the rest of the market.CamGSM is a joint venture between a Luxembourg-based company, MillicomInternational Cellular, a private Cambodian company, Royal Group, and thepost and communications ministry.

In January the government announced that it would not renew TelstraInternational’s contract in Cambodia, which expires this year. Telstra, theAustralian state telecoms company, operates a satellite earth station, an inter-national gateway exchange and one of the domestic exchanges in Cambodia.

In December the government announced that it would permit regional airlinesto fly direct to Siem Reap. The only foreign airline previously granted this rightwas Thailand’s Bangkok Airways. The move, while clearly designed to make iteasier for tourists to visit the temple complex at Angkor Wat, has caused someconcern at the national airline, Royal Air Cambodge (RAC), which will loserevenue as a result. RAC is no stranger to increased competition as it lost itsmonopoly position in 1997 (4th quarter 1999, page 21). It also has plans todiversify into new international routes: in 2000 the airline plans to begin flyingto Shanghai, taking its number of international destinations to eight. It is alsoconsidering opening a route to either Tokyo or Osaka. RAC reported respect-able results in 1999—passenger volumes were estimated to have risen by 15-20%, and a similar increase is forecast for 2000.

In 1999 tourist arrivals rose to 262,907, an increase of 41% year on year,exceeding the government’s target of 250,000. This figure is also above theprevious high of 1996 before the downturn in political stability and the onsetof the Asian financial crisis. A year-end millennium festival at the Angkor Wattemple complex, the country’s main tourism attraction, was partly responsible

—further bolsteringtourism

A new mobile phonenetwork is launched

Regional airlines can nowfly direct to Siem Reap—

Cambodia 23


for the boost in arrivals. Foreign tourists to Cambodia in 1999 were estimatedto have spent a total of $126m, just under $480 per visitor per trip. The largestnumber of visitors came from the US, followed by China and France. In 2000the government is forecasting a 35% rise in arrivals, which makes an optimistic355,000. Rising demand will, however, necessitate an investment boost intourism infrastructure.

To this end, companies are already investing heavily in hotel construction. InSiem Reap there are currently just 2,000 hotel rooms. However, six hotels wereunder construction in early 2000 with completion of all expected by early2001, taking capacity to around 4,000 rooms. In the southern coastal city ofSihanoukville a Cambodian company, Sokimex, is investing $10m in a 14.5-hahotel and beach resort. Sokimex, the country’s main fuel importer and retailer,has also invested in tourism in Siem Reap.

In December 1999 a large Cambodian advertising company, Bates Cambodia,launched two new companies that will focus on promotions and media work.Bates, a subsidiary of Bates Worldwide, has a 20-30% share of the advertisingmarket. The general manager, Pascal Duriez, said the company is anticipating aperiod of growth in advertising, assuming political stability can be maintained.He says his company receives a large number of enquiries from internationalcompanies interested in the Cambodian market. The advertising market inCambodia revolves around four main products: telecoms, petrol, cigarettesand beer.

Foreign trade and payments

The volume of trade through Phnom Penh port fell by 26% in 1999 to 461,865tonnes. This is in contrast to a rise in trade volumes through the country’smain seaport of Sihanoukville, and is also out of step with the recovering trendin external trade (4th quarter 1999, page 24). There appear to be four factors atwork. First, Phnom Penh port has traditionally seen large timber exports, andthese were reduced in 1999 following government restrictions. Second,problems of silt in the Mekong and Tonle Sap rivers are making it increasinglydifficult for large ships to reach the port. (The Asian Development Bank isconsidering a government request to assist with the dredging of the Mekongriver near Phnom Penh.) Third, more agricultural goods are now beingexported by road to Vietnam and Thailand. A fourth explanation ventured bythe port’s deputy director, Eang Veng Sun, is that ships are choosing to dock atSihanoukville in order to avoid the bureaucracy involved in travelling throughsouthern Vietnam. In 1999 the largest single product passing through PhnomPenh port was fuel, which accounted for 79% of the total tonnage. Apart fromtimber, the main exports were rubber and agricultural products.

In December 1999 the US government completed a report on labour con-ditions in Cambodian garment factories, which said that, although there hadbeen improvements, conditions were still below standard in some areas.Improvements in labour condition have been made a condition by the US

Advertising gears up for agrowth spurt

Trade through PhnomPenh falters

The US raises its quotarestrictions on

garment exports—

24 Cambodia


administration for easing quota restrictions imposed on Cambodian mer-chandise exports in January 1999 (4th quarter 1999, page 25). In light of thereport, the US government has decided to raise Cambodia’s quota by 5% in2000 pending the implementation of a project to monitor labour conditions.This falls well short of the 14% increase that had earlier been offered.

Speaking about the decision, Cambodia’s commerce minister, Cham Prasidh,admitted that the conditions in some factories are still below par. However, thegovernment is clearly rankled by the US decision. In a meeting with garmentmanufacturers, Cham Prasidh suggested that the government could at anytime reject the linkage between labour conditions and quotas if it felt“exploited or deceived”. In practice, however, this is easier said than donegiven the importance of the garment sector to Cambodia’s economy; garmentsare Cambodia’s biggest export earner, and the sector employs an estimated100,000 people, mainly women, in around 200 factories. In 1999 dollarearnings were up 60% year on year to $606m.

In response to a request from the Cambodian government, the US has imposedan import ban on Cambodian stone artefacts dating from the 6th to the 16thcentury. Illegal trade in such artefacts is very common.

In November 1999 the finance and economy minister, Keat Chhon, said thatCambodia was hoping for early entry into the World Trade Organisation(WTO). However, he expressed concern that Cambodia might become a“dustbin for cheap, second-hand goods”. Cambodia has already signed abilateral trade accord with the US, which should make accession to the WTOeasier, although its application is still at an early stage.

—but not by enough

The government looks toWTO membership

Laos 25


Laos

Political structure

Lao People’s Democratic Republic

One-party rule

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 councilare appointed by the chairman of the Council of Ministers (the prime minister)

The president, General Khamtay Siphandone. The post of vice-president, created in April1996, is currently vacant following the death of Oudom Khatthigna

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

December 1997; next election due in December 2002

The Lao People’s Revolutionary Party (LPRP) dominates the government andbureaucracy

Lao Front for National Reconstruction (LFNR), an umbrella organisation whose maincomponent is the LPRP

Prime minister General Sisavat Keobounphanh

Deputy prime ministers Bounyang VorachitChoummali SayasoneSomsavat Lengsavad

Agriculture & forestry Siene SapangthongCommerce Phoumy ThipphavoneCommunications, transport, posts & construction Phao BounnapholDefence Choummali SayasoneEducation Phimmasone LeuangkhammaFinance Bounyang VorachitForeign affairs Somsavat LengsavadPublic health Ponemek DaraloyIndustry & handicrafts Soulivong DaravongInformation & culture Sileua BounkhamInterior Asang LaolyJustice Kham Ouane BouphaLabour & social welfare Somphanh PhengkhammyState planning Bouathong Vonglokham

Soukhanh Maharath

Official name

Form of state

The executive

Head of state

National legislature

National elections

National government

Main political organisations

Main members of Councilof Ministers

Key ministers

Central bank governor

26 Laos


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 91.0 144.6d

Population (m) 4.9 5.0 5.2 5.3b 5.5b

Exports fob ($ m) 310.9 322.8 318.3 342.1 300.0e

Imports fob ($ m) 626.8 643.7 601.3 506.8 700.0e

Current-account balance ($ m) –346.2 –346.8 –305.5 –150.1 n/a

Reserves excl gold ($ m) 92.11 165.00 112.18 116.82 104.47f

Total external debt ($ 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:$) 804.69 921.02 1,259.98 3,298.33 7,059.10g

February 21st 2000 K7,555:$1

Origins of gross domestic product 1997 % of total

Agriculture & forestry 51.5

Industry (incl construction) 21.1

Services 25.5

GDP 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

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 Based on first three quarters only.e Official Vietnamese estimate. f End-October. g Derived from weekly data published by Banque pour le commerce exterieur Lao(BCEL).

Laos 27


Quarterly indicators

1997 1998 1999 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

PricesConsumer prices (1995=100) 157.2 180.6 244.0 314.3 362.0 463.1 597.1 730.9 % change, year on year 35.9 42.2 77.1 103.6 130.2 156.4 144.7 132.5

Financial indicatorsExchange rate K:$ (av) 1,794 2,428 2,846 3,709 4,211 4,487 7,271 8,909 K:$ (end-period) 2,635 3,230 4,538 3,941 4,274 5,365 9,430 6,550Interest rates (%) Bank (end-period) 35.00 35.00 35.00 35.00 35.00 34.57 35.00 35.00 Deposit (av) 16.23 16.15 17.00 19.00 19.00 17.67 12.00 12.00 Lending (av) 26.00 26.11 29.00 30.00 32.00 32.00 32.00 32.00 Treasury bill (av) 20.38 19.30 23.33 24.00 28.00 30.00 30.00 30.00M1 (end-period; K m) 79,935 87,883 96,812 113,192 168,982 205,522 183,252 191,703 % change, year on year 5.8 24.9 25.9 54.0 111.4 133.9 89.3 69.4

Sectoral trendsRice production (annual totals; ‘000 tonnes) 1,660 ( 1,675 ) ( 2,064a )

Foreign trade ($ m)Exports fob 93.0 81.7 87.9 130.7 69.2 51.8 66.3 n/aImports cif 163.0 138.7 150.0 156.9 107.2 105.5 114.3 n/aTrade balance –70.0 –57.0 –62.1 –26.2 –38.0 –53.7 –48.0 n/a

Foreign payments ($ m)Merchandise trade balance –58.0 –45.3 –49.8 –39.9 –29.7 n/a n/a n/aServices balance 2.6 14.6 13.7 11.7 9.5 n/a n/a n/aIncome balance –5.2 –8.5 –8.5 –8.3 –9.6 n/a n/a n/aCurrent-account balance –61.8 –39.2 –44.6 –36.5 –29.8 n/a n/a n/aForeign exchange (end-period) 112.18 100.85 92.72 115.89 116.82 112.29 109.99 112.28

28 Laos


Outlook for 2000-01

Protests such as those of October 1999 are rare in Laos, and there is little tosuggest that this will change in the near future. Although the risk of politicalinstability is currently greater on account of the current economic hardshipscaused by high inflation and the collapse in the kip, the EIU’s forecast for thenext two years is for modest economic recovery, lower inflation and greatercurrency stability, suggesting that this risk is likely to diminish. Social andpolitical fall-out from significant economic instability has not been great, high-lighting the fact that much of the population in Laos remains relativelyinsulated from the effects of the regional and domestic economic crisis. This isparticularly the case for the majority of the rural population, who are still notintegrated into the cash economy. Even public-sector workers in Vientianeoften have second or third jobs, tapping into the aid or expatriate-fedeconomy. Here, earnings are frequently in hard currency, which means thatworkers do not have to survive purely on their kip salary paid by the state. Thede facto collapse of the banking system has also had few consequences forprivate depositors since only a fraction of the population have bank accounts.

In 2001 the ruling Lao People’s Revolutionary Party (LPRP) will convene for itsSeventh Congress. Preparations for this are already under way with the holdingof local party congresses. (Vientiane municipal party committee held its con-gress in December 1999.) The Seventh Congress is likely to see quite asignificant change to the Politburo line-up. At the most radical, the president,General Khamtay Siphandone, could retire, although some sources believe hemight try to keep his party post and just drop the presidency. The most likelysuccessor to him is the prime minister, General Sisavat Keobounphanh. Despitehis chequered career and association with corruption, General Sisavat is relatedto General Khamtay by marriage, and the two are close allies. Another Politburoheavyweight expected to retire at the Congress is the National Assembly(parliament) president, Saman Vignaket, while the vice-presidency slot is alsovacant following the death in December 1999 of Oudom Khattigna, who rankedfourth on the Politburo. New blood is most likely to come from the ranks of thecountry’s provincial governors. The quality is mixed, although some are knownto have been working hard to try to embrace the challenges posed byintegration with the international economy. The recently re-elected partysecretary in Vientiane, Bounheuang Duangphachanh, is a strong candidate forpromotion in the future, although not necessarily at the Seventh Congress.

The run-up to congresses is customarily a time when political tensions rise asrival clans manoeuvre for position, and next year is unlikely to be any different.Overall, however, political stability will be maintained. The sackings of thefinance minister and governor of the Bank of the Lao People’s DemocraticRepublic in August 1999 appear not to have caused a lasting legacy ofdiscontent. The former central bank governor, Cheuang Sombounkhanh, isexpected to get another job while the former finance minister, KhamphouiKeoboualapha, has retired to his farm to grow coffee, having willinglyleft politics.

The political scene is likelyto remain stable in 2000-01

Significant personnelchanges are likely at the

Seventh Congress in 2001

Laos 29


The feeling among multilateral and bilateral donors is that reform has lostmomentum. The Japanese government, which is not usually very vocal onsuch matters, has said that it wants to see further progress on reform before itwill consider extending yen loans (see Economic policy). The IMF is alsocalling on the government to implement reforms, notably in the bankingsector and in fiscal policy. Only then will it think about extending additionalloans as part of a Poverty Reduction and Growth Facility arrangement. The EIUdoes not expect much quickening of the pace of reform during 2000-01, orbefore the Seventh Congress. In the short term, the focus is likely to be onrestoring macroeconomic stability. Since Laos is a member of the Association ofSouth-East Asian Nations (ASEAN), it is, however, committed to annual tariffcuts.

Public expenditure growth is likely to be modest in 2000 and may even fall as aproportion of GDP, reflecting the government’s need to rein in the fiscaldeficit. However, expenditure is likely to pick up in 2001 as faster growthboosts revenue. Domestic public and private investment are likely to remainsubdued in the early part of the forecast period and probably into 2002 as well,reflecting the fragility of the banking sector. Foreign investment in Laos hasalready begun to recover at least in terms of approvals, but actual disburse-ments will pick up only gradually during 2000-01 as Thailand’s economyrecovers. There will also be higher levels of investment from Vietnam. Privateconsumption is currently subdued, but could recover in 2000 if there is a goodwet season harvest.

In 2000-01 GDP growth is likely to be in the region of 5-5.5%, compared withan estimated 4% in 1999. Laos will continue to benefit from a recovery inregional demand, which will boost exports. Signs that inflation is comingdown and greater stability in the kip (see The domestic economy: Economictrends) point to a more stable macroeconomic climate, essential if morebuoyant growth is to be restored. The outlook is for an above-average dryseason rice harvest in 2000, since ponds and reservoirs are full following theheavy rains in November 1999. Progress has been made in improving irrigationsystems, enabling an expansion of dry season cultivation. Diversification intocash crops, notably coffee, also bodes well for the agricultural sector. Industryand services are expected to pick up in the forecast period; the garment sectorwill continue to be the most dynamic sector followed closely by construction,notably cement production. The development of tourism will underpin anacceleration of services growth, but financial services will remain subduedfollowing recent restructuring.

During 2000-01, merchandise export volumes are likely to recover on the backof strengthening regional demand and access to the US and EU markets, thestrongest gains coming from textiles and coffee. Textiles and garment exportersin particular will benefit from preferential access to the US market from 2001after the award of normal trade relations (NTR), which is expected later in2000. Access to the EU for textiles and garments will remain free of quotarestrictions during 2000-01 following previous commitments to this effect bythe EU. Earnings from electricity exports will, however, record slower growth,

The pace of reform isunlikely to quicken in the

short term

Economic growth of 5% isrealistic in 2000-01—

Public and privateinvestment will recover

only slowly

—aided by a recoveryin exports

30 Laos


owing to lower demand from Thailand. Volumes of merchandise imports willcontinue to exceed exports during both years of the forecast period, and if theycontinue to grow at anything approaching the rate recorded in 1999 (seeForeign trade and payments), the government may be forced to considerapplying administrative controls. However, such measures would be difficult toenforce and could prompt increased smuggling. Laos’s current-account deficitis likely to widen in 2000-01, driven by the larger trade deficit, but will remainmanageable as long as foreign aid continues to be forthcoming.

The political scene

The vice-president, Oudom Khatthigna, died on December 10th 1999 at theage of 69 following illness. He had been vice-president only since February1998 and ranked fourth on the Politburo. In announcing his death the partydeclared a three-day period of national mourning. Condolences or wreathswere sent by Thailand, Vietnam, China and North Korea. Underlining the stillclose nature of ties with Hanoi, Vietnam also sent the chairman of the VietnamFatherland Front (an umbrella group controlled by Vietnam’s CommunistParty) and a Politburo member, Pham The Duyet, to Oudom’s funeral.Oudom’s death is not expected to have much impact on the overall balance ofpower in the Politburo, although it does leave a gap in the Politburo line-up,which is expected to be filled at the Seventh Party Congress in 2001.

Oudom Khatthigna: the passing of a revolutionary

Born in 1930 in Xieng Khuang province, Oudom joined the ruling Lao People’sRevolutionary Party (LPRP) in 1960, although he is officially described as having beenpolitically active since his late teens. After serving as party secretary in his home provincein 1976-77, he was sent to Vietnam to study political ideology in 1979 and was electedto the Central Committee in 1982. In 1989 he was made chairman of the LPRP’sOrganisation Board before being first elected to the Politburo in 1991. From 1991 to1993 he was party secretary of Vientiane municipality. Before becoming vice-president,Oudom was the president of the Lao Front for National Construction.

The vice-president dies

Laos 31


There has been no repetition of the events of October 1999, which saw a smallanti-government protest on the streets of Vientiane (4th quarter 1999, page 31).The government continues to deny officially that a protest occurred, althoughoff the record officials have been more candid. According to diplomats inVientiane, around eight or nine people are still being detained, although this isdifficult to confirm. At a conference organised by the Lao People’s RevolutionaryParty (LPRP) on propaganda and training in January, the chief of the party’sPropaganda and Training Board and a Politburo member, OsakanhThammatheva, was quoted in the government-owned newspaper, the VientianeTimes, as saying he was satisfied with the “basic social order andstability … despite the problems”. He cited the problems as being the fall-outfrom the Asian financial crisis, which he said had worsened the alreadydifficult lives of public-sector employees, the security forces and the populationat large.

In December 1999 the Vientiane municipal party committee held its ThirdCongress. This represents preparation for next year’s Seventh Congress and islikely to be followed by the holding of provincial party congresses. Apart fromreviewing developments since its last congress and setting goals for the nextfive years, a new 27-member executive party committee was elected at themeeting. The existing party secretary, Bounheuang Duangphachanh, was re-elected, and there was a change to the number two position, with the electionof Thongmy Phomvisay as vice-secretary. Holding a senior position in theVientiane municipal party committee is regarded as a common stepping stoneto higher, national office. Bounheuang is a member of the Central Committeeand is a strong candidate for an eventual Politburo seat. His re-election suggestshe has not in any way been blamed for the October protest or the way inwhich it was handled.

On December 13th-17th Laos’s foreign affairs minister, Somsavat Lengsavad,visited Cambodia where he attended the fourth meeting of the Cambodian-LaoJoint Commission. Discussion focused on ways to strengthen co-operationalong the shared 535-km border, particularly between their respective interiorministries and those manning border checkpoints. In 1999 Cambodianprotesters accused the Lao government of alleged border infringements. Thisprompted a statement by the Lao embassy in Phnom Penh that Laos had nointention of violating Cambodian sovereignty and that it was willing to worktowards solving border problems by the end of 2000. One concrete develop-ment to come out of the Joint Commission meeting was the signing of anagreement to assist with clamping down on drug smuggling across the border.The agreement allows for information on drug smuggling to be shared and forco-operation in the arrest of smugglers. Northern Laos forms part of the so-called Golden Triangle opium-growing region, and heroin is often smuggled onto international markets through Cambodia.

In December 1999 a high-level military delegation from Myanmar led by thearmy chief of staff, Lieutenant-General Tin U, visited Laos. This was followedin January by a visit to Myanmar by the minister at the president’s office,Souban Salitthilat. Neither visit produced any announcements of great

No repeats of anti-government protests have

been reported

Bounheuang is re-electedVientiane party secretary

A pact to counter drugsmuggling is signed with

Cambodia—

—while relations withMyanmar remain cordial

32 Laos


substance. However, they are part of the regular process of exchange that hasdeveloped in recent years. Political relations between Laos and Myanmar aregood. In 1994 the two sides signed the Treaty on the Demarcation ofBoundaries, which dealt with outstanding differences on their shared border.Since then there have been no major incidents on the border. Economicrelations are undeveloped, although there is some crossborder trade.

On January 12th-13th Japan’s prime minister, Keizo Obuchi, visited Laos aspart of a wider South-east Asia visit that included Thailand and Cambodia. Thevisit marked the first time that a Japanese prime minister had visited Laos in 33years. Japan is Laos’s principal bilateral aid donor, and further commitmentswere made during the visit (see Economic policy). The visit was also theoccasion for discussions between the two sides on the forthcoming G8meeting, which Japan is hosting in July. Laos’s prime minister, General SisavatKeobounphanh, was quoted as saying he would like the importance ofeducation and meeting basic human needs emphasised at the G8 meeting.

In November 1999 Indonesia’s president, Abdurrahman Wahid, visited Laos.This was his first visit since becoming president and formed part of a widerSouth-east Asian tour. Abdurrahman Wahid held talks with his Lao counter-part, Khamtay Siphandon. Political ties with Indonesia are strong althougheconomic relations remain undeveloped. The last time the Indonesianpresident visited was in February 1997 when Abdurrahman Wahid’spredecessor, Suharto, visited shortly before Laos joined the Association ofSouth-East Asian Nations (ASEAN). A former Lao president, NouhakPhomsavan, who is now a party adviser, visited Jakarta in 1994.

Economic policy

Following its pledge to tighten fiscal and monetary policy in a bid to rein ininflation and stabilise the kip (4th quarter 1999, pages 33-34), the governmenthas continued to issue bonds with the aim of soaking up liquidity. However,the rate of sale has been slow and just K5bn ($660,000) worth of bonds weresold between April 1998 and November 1999, according to the Bank of the LaoPeople’s Democratic Republic (the central bank). In contrast, the central bankhad a target of mobilising K75bn on three-month certificates of deposit withan annual interest rate of 60%, an initiative launched in October 1999. Thereare so far no details of how sales of these are proceeding.

After running very large budget deficits in fiscal years 1997/98 and 1998/99(October-September), the government is expected to implement a policy offiscal tightening when it announces the 1999/2000 budget later in 2000.However, maintaining a tighter fiscal and monetary stance is not easy. A keyfactor behind the surge in inflation in 1998-99 was the government’s failure tosustain a sufficiently tight policy stance. Nevertheless, both inflation andmoney supply growth have slowed since the third quarter of 1999 (see Thedomestic economy: Economic trends). However, it is uncertain how much ofthis can be attributed to government policy.

Japan’s prime ministervisits Laos ahead of the

G8 meeting—

—and Indonesia’s newpresident visits

The government tries tostabilise the economy—

Laos 33


In November 1999 the IMF completed an Article 4 Consultation with the Laogovernment following a visit of a Fund delegation earlier in the year. An Article4 Consultation involves preparing a report on the economy on the basis ofstatistical data and discussions with officials, which is then presented to thegovernment. In its report, the IMF urged the government to maintain tightfiscal and monetary policies, and to implement structural reforms, notablyinvolving the banking system (see Infrastructure and services). The Fund alsosaid that it hoped discussions could soon begin on a programme that could besupported by a Poverty Reduction and Growth Facility arrangement, althoughmore progress on restoring macroeconomic stability and reviving key structuralreforms would be necessary first.

During the visit to Laos of Japan’s prime minister, Keizo Obuchi (see Thepolitical scene), Japan announced plans to send a specialist team to Laos beforethe end of March 2000 to assist the government in drawing up a macro-economic strategy to cope with current difficulties. The team is to be led byYonosuke Hara, a professor at the University of Tokyo specialising in develop-ment economics. In response, the Lao government has set up its owncommittee, headed by the president of the State Planning Committee,Bouathong Vonglaoham, to work with the Japanese team.

The Japanese government also announced a further ¥836m ($7.77m) in grantaid during Mr Obuchi’s visit. The funds are to be split between three projects: astudent exchange programme, building new facilities at the National Universityof Laos and the purchase of food. The new grant aid brings the total amount sofar extended in 1999/2000 to ¥7.57bn. In talks with Mr Obuchi, Laos’s foreignminister, Somsavat Lengsavad, urged Japan to resume overseas developmentaid. Despite the already large amounts of grant aid Japan is targeting at Laos, itsgovernment has said it is unwilling to extend yen loans until Laos makesfurther progress on reforms (4th quarter 1999, page 34). In this respect the visitof the specialist Japanese economic advisory team could lay the foundations forthe eventual resumption of yen loans. However, the Japanese government saidin 1999 that it believed such a step was two years away.

The seventh roundtable meeting between the government and aid agencies,which was originally scheduled for June 1999, took place in January 2000. Themeeting formed part of the government’s preparations for drawing up a newPublic Investment Programme (PIP) covering 2000/01 to 2002/03. The PIP inturn will feed into the government’s Socio-Economic Plan for 2001-05.

In January a conference was held in Vientiane to explore ways in which thegovernment might overcome or indeed reap benefits from the disadvantages ofbeing landlocked. The conference, which was supported by the CanadianInternational Development Agency, was attended by the Lao minister ofcommunications, transport, posts and construction, Phao Bounnaphol, andresearchers who specialise in landlocked countries. Laos’s landlocked statusrepresents a major constraint to economic development since the difficulties ofaccessing international markets push up costs, making Lao goods lesscompetitive. Thailand remains the obvious outlet, and the Mittraphab bridge

—but the IMF wants moreprogress on reforms

Japan dispatches a team toadvise on the

macroeconomy—

—and offers more grantaid, but no yen loans yet

Preparations for the PublicInvestment Programme

continue

The problems of beinglandlocked are discussed—

34 Laos


over the Mekong river near Vientiane, which links Laos with Thailand, haseased problems of access, although transporting goods over the bridge is stillnot trouble-free. Plans to build two more bridges linking Laos with Thailand atdifferent points are proceeding, and this should also facilitate access tointernational markets (see The domestic economy: Infrastructure and services).

Work is also under way to improve road links with Vietnam via the so-calledEast-West highway, or Routes 8, 9 and 12 (1st quarter 1999, page 33). InDecember 1999 seven provincial leaders from Laos, Thailand and Vietnamsigned a memorandum of understanding (MoU) on economic co-operationalong Route 8. The MoU allows for the holding of an annual trade fair to behosted on a rotational basis. The first event was scheduled to be held inFebruary in Khammouane province in Laos.

On November 28th-31st a delegation from China’s Yunnan province, led bythe party committee’s deputy secretary, Wang Tianxi, visited Laos. Relationsbetween Laos and the adjoining Chinese province are close. At the root is aburgeoning economic relationship involving both trade and investment. LaoAviation, the state airline, flies regularly to Kunming in the province, and isplanning to extend the number of flights on this route later in 2000. InDecember 1999 the Lao-Chinese Co-operation Committee and Yunnanprovince, represented by its deputy governor, Shao Qiwei, signed an MoU. Ithighlighted a series of investment projects, in areas such as sugar-processing,steel and salt production, where the two sides intend to co-operate. TheYunnan International Economic-Technical Co-operation Company (YIETCC) isalready active in Laos’s cement sector (see The domestic economy: Industry).Following the signing of the MoU, the two sides pledged to continue talks onestablishing a mechanism to facilitate trade between Yunnan and the three Laoprovinces immediately adjacent to it (Oudomsay, Phongsaly and LouangNamtha).


Economic trends

GDP growth is estimated to have reached 4% in 1999, as a result of a recoveryin regional demand, especially in Thailand, on which Laos depends for tradeand investment. The agriculture sector produced two good harvests in a row,and diversification into cash crops, notably coffee, has reaped modest rewards.No precise data are available, but it is estimated that garments, cement andconstruction made a positive contribution to growth in 1999.

Although still high, inflation has begun to fall. In the third quarter of 1999consumer prices rose by 132.5% year on year, according to the IMF’sInternational Financial Statistics, down from 144.7% in the second quarter.Moreover, the month-on-month rate of increase has fallen since August. It con-tracted by 0.3% in September before rising slightly in October and contracting

Inflation starts to fall—

Trade and investment tieswith Yunnan flourish

GDP reached an estimated4% in 1999

—and provincial leadersfrom three countries agree

to co-operate on Route 8

Laos 35


again in November by 4.2%. According to the government, year-on-yearinflation was in double digits by December. Falling inflation follows thegovernment’s tightening of fiscal and monetary policy (see Economic policy),but is more likely a consequence of downward pressure on food prices follo-wing a series of good harvests (see Agriculture), and a more stable currency.

Laos: consumer prices, 1999

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Index (1995=100) 412.5 464.7 512.0 63.7 587.1 640.4 708.6 743.4 740.8 743.8 712.3 % change 7.7 12.7 10.2 10.1 4.2 9.1 10.6 4.9 –0.3 0.4 –4.2


As a reflection of slowing inflation, money supply growth has also easedslightly, although it remains rapid. According to the IMF, M2 growthdecelerated, rising by 95.4% year on year in the third quarter of 1999 com-pared with a huge 211.4% rise in the second quarter. As a percentage of M2,quasi money (time, savings and foreign-currency deposits) was 86.4% in thethird quarter, a small fall from the previous quarter, reflecting a slight increasein confidence in the kip.

Laos: money supply(K m unless otherwise indicated)

1998 1999 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

M1 96,812 113,192 168,982 205,522 183,252 191,703 % change, year on year 25.9 54.0 111.4 133.9 89.3 69.4

Quasi-moneya 512,380 608,480 696,950 905,711 1,713,880 1,218,649 % change, year on year 151.4 151.8 113.7 133.9 234.5 100.3

M2 609,192 721,672 865,932 1,111,233 1,897,1321,410,352 % change, year on year 117.0 129.0 113.3 133.9 211.4 95.4

Quasi-money (% of M2) 84.1 84.3 80.5 81.5 90.3 86.4

a Time, savings and foreign currency deposits.


After falling steeply against both the dollar and the Thai baht in the first half of1999, the kip rebounded in September and has since stabilised. During thefourth quarter of 1999 and early 2000 the kip appreciated slightly against thedollar. In early March it was trading at K7,565:$1, representing a 1.8%appreciation since mid-November, according to figures from the Banque pourle commerce exterieur Lao (BCEL). By contrast, the kip weakened against thebaht by 2.2% in the same period, to K201:Bt1.

—as money supplygrowth slows—

—and the kip strengthensagainst the dollar

36 Laos


At the end of October 1999 foreign reserves (excluding gold) were $104.5maccording to the IMF. This represents a fall from the previous month when thereserves were $112.3m. At this level, the reserves are equivalent to nearly 11weeks of imports—quite healthy, although not as strong as before the Asianfinancial crisis when they were equivalent to nearly 15 weeks of imports. A fallin reserves is sometimes an indication that the central bank has intervened tooffset currency weakness. While this would be a feasible explanation for therecent currency stability, the resulting reduction in domestic currency—whichwould occur as a result—is not in evidence.

According to government data, approved foreign investment rose by 25.4% in1999 to $1.7m. This was divided among 156 projects, up from 150 in 1999. Nofigures have been issued for the actual number of projects implemented, butanecdotal evidence suggests that a number of companies have put theiroperations on hold, or wound them up altogether, pending a pick-up ineconomic growth and a return to macroeconomic stability. In December SGS(Laos) announced its decision to wind up the company, which is a jointventure with a department of the Ministry of Trade and Tourism. However, thegovernment is forecasting that foreign investment approvals will continue togrow in 2000.

Agriculture

The government’s target for the wet season rice harvest in 1999 was 1.6mtonnes of paddy. In the event, 1.5m tonnes was produced; the slight shortfallcan be attributed to flooding in September, which caused crop damage.Overall, total rice output in 1999 was 2.1m tonnes, representing a 28% increaseover 1998. The rise is probably a result of improved irrigation (2nd quarter1999, page 30) and an expansion of dry season cultivation. In 1999 the dryseason crop came in at 354,000 tonnes planted on 87,000 ha of land. Thegovernment’s target for 2000 is to put 110,000 ha over to dry season ricecultivation, and some companies now have permission to import chemicalfertilisers to help achieve this (see Foreign trade and payments). Savannakhet,

Reserves fall again

Rice output rises by 28%

Approved foreigninvestment rises

Laos 37


Champassak and Vientiane municipality are usually the largest producers ofdry season rice.

Laos: rice harvest by crop type and region, 1999

Tonnes (‘000) Area of land (ha)

By crop typeWet season 1,547 7,000Dry season 354 87,000Highlands 246 153,000

By regionNorth 452 194,000Central 1,100 354,000South 509 169,000

Totala 2,100 717,000

a Figures do not add in source.

Source: Van–Athith, quoted in the Vientiane Times.

Coffee is an emerging business in Laos, and output rose steadily throughoutthe 1990s. In 1999, 19,000 tonnes of coffee were harvested, representing a 15%rise on 1998, which followed a 32% increase in 1997. The majority of thecoffee crop is exported. Up to date figures for export earnings from coffee arenot available, but according to EIU estimates they may now be in excess of$25m annually. The main coffee-producing provinces are Champassak andSaravane.

Industry

In December the Japan International Co-operation Agency (JICA) presentedpreliminary findings of a feasibility study conducted for the Nam Nghiep 1hydroelectric power station. In order to minimise the environmental and socialimpact of the project, the study recommended the medium-sized option forthe project—a 320-metre dam as opposed to a 360-metre version. Furtherdiscussions on the project are due to be held with the Lao government inMarch 2000. The Nam Theun 2 project, which has been mired in controversyon economic, environmental and social grounds, has still not been given thego-ahead (2nd quarter 1999, pages 31-32).

Even if Nam Nghiep 1 is given the go-ahead, it still has to secure financing.Following a fall in demand for electricity—especially from Thailand, the maincustomer—after the Asian financial crisis, this could prove difficult. Since theeconomic downturn, the Electricity Generating Authority of Thailand (EGAT)has reduced the amount of electricity it plans to buy from Laos to 3,200 mw by2008. It has also offered a reduced price for the power, which threatens to eatinto developers’ profit margins. EGAT only ever signed non-binding memo-randums of understanding, and thus is in a strong position to renegotiate theprice (3rd quarter 1999, page 37).

Coffee productioncontinues to expand

A feasibility study iscompleted on a new

hydroelectric plant—

—but securing financingis difficult

38 Laos


Construction of Laos’s second cement factory, in Vang Vieng district inVientiane municipality, is expected to begin in March 2000. The $35m projectis a joint venture between a Lao state firm, the Agricultural and ForestryDevelopment and Services Company, and China’s Yunnan InternationalEconomic-Technical Co-operation Company (YIETCC), which has a 60% sharein the project. Construction is scheduled to be completed in 2001, but it maywell be later because the project has already faced delays (1st quarter 1999,pages 32-33). The cement plant will have annual capacity of 200,000 tonnes,taking the total nationwide capacity to 280,000 tonnes. However, this is stillwell short of total domestic demand, which is forecast to be 700,000 tonnes by2001, meaning that Laos will remain dependent on cement imports.

YIETCC is also investing in another project with its Lao partner to producesacks and bags, which will be used to package the cement. In December aninauguration ceremony was held for the $2.13m project. Investment byYIETCC is part of a wider co-operation between Yunnan province and Laos (seeEconomic policy).

Infrastructure and services

Construction work on the second bridge across the Mekong river, linking Paksein the southern province of Champassak to Thailand’s Phongthong district, isproceeding well. In January the final section of the bridge was lifted into place.The bridge is due to be finished in October, although this could now happenahead of schedule. The bridge, which is 1,380 metres long and 11.8 metreswide, is being funded by a ¥5.4bn ($50m) grant from the Japanese govern-ment. A third bridge across the Mekong, linking Savannakhet to easternThailand, is also planned, following the signing of an agreement in August1999 (3rd quarter 1999, page 38).

In December 1999 Lao Aviation began flying between Bangkok and LuangPrabang, a world heritage site and popular tourist destination in the north.This represents a key component of efforts to boost tourism during “Visit LaoYear 1999/2000”. According to the general manager of Lao Aviation, PothongNgonpachanh, the airline also has plans to start flying to Hong Kong andSingapore. This will necessitate hiring a Boeing or Airbus class aircraft at a costof $500,000 per month, which Lao Aviation is planning to do using foreigninvestment. Mr Pothong also announced plans to expand existing routes toHanoi in Vietnam, Chiang Mai in Thailand and Kunming in China by April2000. The airline will also add a morning flight to Bangkok to its existing after-noon one following government approval of the purchase or lease of an ATR-72/42 aircraft. Lao Aviation’s expansion plans come against a backdrop offinancial difficulties, concerns about safety and an atmosphere of caution onthe part of the company with regard to expansion (4th quarter 1999, page 39).Responding to critics, Mr Pothong said Lao Aviation has made great strides inthe past year despite the bad press it has received. The number of passengersflying on Lao Aviation are estimated to have doubled in 1999 compared withthe level in 1998.

Construction of a secondcement plant gets

under way

The second bridge over theMekong approaches

completion

Lao Aviation has ambitiousexpansion plans

Laos 39


The “Visit Laos Year 1999/2000” promotion, launched in November 1998,appears to be working. Complete figures for tourist arrivals in 1999 have notbeen issued but Laos’s National Tourism Authority (NTA) has issued revisedfigures for the first half of the year. Arrivals rose by 40.8% compared with thesame period in 1998, to 306,410. The largest number of visitors came fromThailand, Vietnam, China, the US and France. If this performance was repeatedduring the second half of 1999 then the government’s target of 700,000 wouldalmost be met. Top hotels in Vientiane and Luang Prabang have reported highlevels of occupancy, although to some extent this reflects inadequate supplyrather than a surge in business, especially in Luang Prabang, a popular touristdestination. There is also some concern over weaknesses in infrastructure suchas transport and roads, and in the quality of tourist guides. In December 1999Phaythalong Duangsavanh of the NTA said that Laos has 279 tourist guides,but that it needs around 500 to meet the anticipated demands of the tourismindustry.

In January 2000 the Fourth National Conference on Banking was held inVientiane. The meeting was attended by both the governor of the Bank of theLao People’s Democratic Republic (the central bank), Soukhanh Maharath, andthe finance minister, Bounyang Vorachit, who ranks seventh in the Politburo.Bounyang is also chairman of the Administrative Council of the central bank.The conference was held to review banking activity during 1999 and plan forthe future. Already heavily indebted, commercial banks were hit hard by theAsian financial crisis and forced further into crisis, precipitating a majorrestructuring of the sector. The three state-owned commercial banks in thenorth, Setthathirath Bank, Lanexang Bank and Alounmay Bank, were merged,taking the name of Lanexang Bank, while the three state commercial banks inthe south were also merged, becoming Lao May Bank. The state-owed Banquepour le Commerce Exterieur Lao remains an independent entity.

Few data have been made public to enable outside observers to gauge the stateof the new banks’ balance sheets. However, in the absence of any form ofrecapitalisation programme, debts held by the banks, which existed before themergers, will simply have been carried over to the new merged entities.Lanexang Bank reported a large increase in earnings in fiscal 1998/99, but thismay simply reflect the fact that it is for the first time drawing on the activitiesof Setthathirath and Alounmay Banks. The IMF, although not critical of thebank mergers themselves, said in November that they left “most of theurgently needed banking reforms to future efforts”. Its comments formed partof its Article 4 Consultation on the Lao economy (see Economic policy).

Foreign trade and payments

Unconfirmed data for Laos’s external trade in 1999 suggest a sharp increase inthe size of the trade deficit compared with 1998. The data, which are derivedfrom official Vietnamese estimates, show export revenue contracting by 12.3%in 1999 to $300m. The cost of imports, meanwhile, expanded by a hefty 38.1%

The banking sector isrestructured—

The trade deficit may haveballooned in 1999—

The tourism sectorshows promise

—but underlying problemsremain to be addressed

40 Laos


year on year to $700m, resulting in a trade deficit of $400m. If confirmed, thiswould represent a 142.9% increase in the trade deficit compared with 1998. Itwould also go a long way to explaining the high inflation and weakness of thekip in 1999 (see Economic trends).

Laos: trade balance, 1999

% change,$ m year on year

Exports 300 –12.3

Imports –700 38.1 of which: from Vietnam 175 139.7

Balance –400 142.9

Source: Official Vietnamese estimates.

Recent data on trade with Vietnam suggest that a large portion of the surge inimports may be derived here, and this is backed up by anecdotal evidence from1999 (4th quarter 1999, page 40). According to Vietnamese figures, imports toLaos from Vietnam rose by 139.7% year on year in 1999 to $175m. Accordingto an article in the Vietnam Investment Review in January 2000, this isequivalent to 25% of Laos’s total import bill in 1999. The principal importsfrom Vietnam are agricultural products (fruit, peanuts and pepper), garments,footwear and arts and handicrafts. Around 85% of the imports were paid forunder barter arrangements, mainly involving the export of completelyknocked down (CKD) motorbike kits to Vietnam. A total of 150,000 such kitswere exported to Vietnam in 1999.

Imports from Vietnam have historically been quite low, particularly comparedwith Thailand. However, two-way trade has been increasing in recent years.Promotion of trade was a key theme in the visit to Laos of Vietnam’s president,Tran Duc Luong, in June (3rd quarter 1999, pages 28 and 39). In January 2000a meeting of the Lao-Vietnamese Economic, Social, Scientific and TechnicalCo-operation Commission in Vientiane signed a memorandum of under-standing (MoU) on crossborder trade. The MoU is designed to facilitate tradebetween the two countries by removing the requirement that goods beinspected so long as the appropriate documentation is produced. TheVietnamese government has said it sees no reason why exports to Laos shouldnot rise soon to $450m annually.

To support dry season rice production, the government has given permissionto a number of companies to import chemical fertiliser. A total of 14,000tonnes is scheduled to be imported in early 2000, of which a large portion isbeing funded by the Japanese government. Most of the remainder is beingimported by companies under the Ministry of Agriculture and Forestry.Fertiliser imports form a relatively small part of Laos’s overall import bill,which in the past has tended to be dominated by construction materials,including cement and inputs for the garment industry.

—partly because of aninflux of imports from

Vietnam—

—which looks setto continue

Fertiliser imports areauthorised

Trade data 41


Trade data

Cambodia: direction of trade($ m)

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-DecImports cif 1995a 1996a 1997 Exports fob 1995a 1996a 1997

Thailand 367 399 198 Vietnam 20 23 157Switzerland 2 1 133 Thailand 146 43 132Singapore 550 567 115 US 5 4 86Vietnam 105 122 108 Singapore 38 43 74Japan 84 62 84 China 5 6 46Total incl others 352 301 624 Total incl others 1,562 1,644 1,114

a DOTs estimates.

Source: IMF, Direction of Trade Statistics, yearbook.

Laos: direction of trade($ m)

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-DecImports cif 1995 1996 1997 Exports fob 1995 1996 1997

Thailand 287.8 310.0 336.6 Vietnam 87.7 157.6 135.2Vietnam 23.9 25.8 25.1 Thailand 83.3 96.7 70.1Japan 48.8 52.5 10.4 France 11.1 8.2 20.0Hong Kong 7.5 8.1 9.5 Belgium 1.3 2.0 17.9China 21.5 23.2 4.9 Germany 12.7 4.8 16.2Taiwan 4.9 5.3 4.3 UK 0.9 6.6 14.9Total incl others 588.8 689.6 647.9 Total incl others 312.8 320.7 316.9

Source: IMF, Lao PDR: Recent Economic Developments.

cambodia laos report 1st quarter 2000 the economist intelligence unit 15 regent st, london sw1y 4lr...

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