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Logo of Phnom Penh Post newspaper Phnom Penh Post - Gov't budget woes mount

Gov't budget woes mount

ECONOMIC analysts warn that if the downturn in commercial activity triggered by the

July 5-6 fighting continues, the economy could plunge into recession.

The Ministry of Finance, meanwhile, has slashed growth predictions by more than half.

"We had good growth last year of about six and a half percent, but this year

I don't think we will see more than three percent," Minister of Finance Keat

Chhon (CPP) said Sept 1.

While stressing that it was too early to assess the full economic impact from the

fighting, Chhon noted that "even the most optimistic economic scenario is not

so good".

The Minister said the government, which depends on foreign donors for nearly half

its budget, had effectively lost $100m in aid this financial year because of aid

freezes.

Another key source of revenue, the tourism industry, which earned the government

$100m last calendar year, had suffered a "dramatic" slump, Chhon said.

"We are expecting a fall of revenue from tourism by about 25 percent for this

year - fortunately we have had a very strong first half."

Chhon said he was moving to rein in government spending. "I have told the Royal

government that we have little money. I have told them that we have to make savings

on overseas travel and fuel and power costs."

A survey of five Phnom Penh markets, conducted by the Cambodian Development Research

Institute (CDRI) July 15-17, noted a marked decrease in economic transactions.

"If the current situation continues into the future, it may potentially lead

the Cambodian economy into a recession," the study concludes. A recession is

characterized by three consecutive months of negative growth.

Expatriate businessmen confirmed the fighting had an "enormous" impact

on the economy, resulting in millions of dollars of lost business.

Roy Barram, the Australian managing director of construction and maintenance firm

Roymar Services, said his company had seen cancellations of seven contracts worth

$19.5 million.

"Basically, the inactivity since the fighting has wiped out everything we made

up to July and I expect things to get worse from here," he said, adding that

he had been forced to lay off 450 workers.

The extent of unemployment caused in the wake of the conflict is hard to gauge, according

to independent observers and government officials. One Finance Ministry official

publicly quoted as saying that as many as 40,000 jobs may have been lost said last

week that he had no evidence to support that figure.

Several economic analysts said the full impact from the political crisis would likely

take several months to become apparent, and warned that there could be serious social

fallout.

"People will get by for a little on savings, but then we run the risk of a very

disgruntled population and a surge in problems like violent robbery," said one.

A Western law enforcement official also predicted a rise in crime.

The CDRI survey, Coping With The Current Economic Crisis, offered a snapshot of key

indicators which directly affect the lives of the majority of Phnom Penh residents.

Researchers looked at prices of a basket of necessities: rice, fuel, vegetables,

transportation, meat, soap, sarongs and other daily purchases. Retail prices for

rice, for example, rose from an average of 1,041 riels per kilo in June to 1,172

in mid-July.

But the survey concluded that price peaks in early July had generally fallen since

then, and that there was an abundance of goods in the shops.

The problem, however, was that fewer consumers were buying, either because they were

living from stocks they had hoarded or were simply having to survive with less. "Demand-pull

inflation is unlikely to set in," the researchers concluded.

Most of the 50-odd vendors surveyed complained of sluggish business. Ninety-one percent

reported sales decreases and more than half said that business was down 50% or more.

Some speculated that customers had built up stocks in anticipation of more fighting.

Others noted that sales to provincial retailers had fallen flat, citing concerns

that Phnom Penh was not yet perceived safe for business.

Restaurants either closing or limiting trade to the daylight hours dried up a considerable

source of revenue as did the evacuation of expatriates and the tailspin in tourism,

researchers cited vendors as saying.

Merchants also griped about thinning margins due to higher wholesale prices. They

also said that they were having to pay more often in dollars, rather than riels.

Some clothing traders claimed they were selling at below cost to buy food for their

families.

The survey suggests that traders in some non-food items were hardest hit, offering

eloquent explanations with examples. "Sarongs are a durable consumption good

which can be stored or its purchase postponed," it explained. "Our survey

found that sarong and cloth sellers are apparently among those who were most severely

affected by the sharp reduction of demand."

The survey authors stressed that not only retailers will be hurt if the country is

hit with recession.

"The initial impact will be transmitted to other people's livelihood through

a chain of market transactions," they said. Wholesalers can expect to feel the

pinch and the cycle can compound itself.

"People involved in those input sectors will then lose their income and job

opportunities, which will subsequently reduce their demand for final goods and services,"

they predict. "This will again reduce the sales of retailers in the markets."

The study concludes that the public sector could mitigate the problem by creating

a stable environment for business. "The government urgently needs to ensure

the safety and security of all citizens in Cambodia," it says. "Only then

will the situation normalize and revitalize businesses and economic activities to

prevent a recession from setting in."

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