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IMF to press over logs

A ROYAL government decision to allow their military to control lucrative logging concessions and keep the money threatens crucial aid from international donors and lending institutions.

But most international economic analysts say it is merely expected political resistance to a remarkable - and succesful - restructuring of financial institutions and laws since UN elections last year eased out the policies of the former communist government.

The decree awarding the Ministry of Defence the right to sign logging contracts and keep the money - bypassing a carefully crafted national budget - is in direct contravention of new budget and financial structure laws signed earlier this year.

More importantly, it violates a policy framework paper signed by the IMF and government in February promising the centralization of revenue disbursement which was key to opening the door for international assistance to reconstruct the war ravaged nation.

If the government does not agree to rescind the new logging decrees by September, according to government and other sources, the IMF will likely react by threatening to revoke it's stamp of approval.

"If the government doesn't reverse the decision, the IMF will move out, the World Bank will move out, and the donor countries will move out," said one senior Cambodian government official, "It is a break of the most fundamental, minimal rules of our new financial policies."

Such a move would be catastrophic for Cambodia - which has been pledged more than $1.5 billion in assistance since June 1992 - of which only a third has been received.

For Cambodia the logging revenues are not small potatoes. These revenues should amount to between $40-50 million per year, according to the Cambodian Ministry of Finance. Timber exported prior to the government ban which went into effect on March 31 amounted to $23 million for the first three months of 1994. This is compared to $8,331,000 for the whole of 1993.

Out of the $350 million budget passed in January, only $180 million is from internally generated revenue. The rest - nearly half - is foreign assistance. The logging rights would amount to more than a quarter of internally generated revenue taken out of the central coffer.

This extra revenue for the Defence Ministry is in addition to the 28 percent of the current budget already allocated to the military and security services.

But despite this serious breach of aid agreements, most analysts say that Cambodia's economic planners have made remarkable progress in stabilizing the economy and implementing structural changes since the new government assumed power last year.

They give much of the credit to a new team of technocrats - many of whom are European educated Cambodians - who have returned since the UN peace plan to work with the new government.

Optimistic foreign and governmental analysts point to the July 2 aborted coup attempt as a sign that Cambodia's economy remains healthy despite the government's political growing pains.

They say the aborted putsch barely sent a ripple through the economy. The exchange rate, which fluctuated wildly in recent years responding to even rumors of political instability, was unaffected by the attempted coup, and has remained fairly stable since the beginning of the year.

" The market shrugged it off as political lunatics at play," said one foreign economic planner attached to the government.

"Economically speaking, the situation remains sound," Finance Minister Sam Rainsy told the Post on July 26. He added: "The market is confident things remain under control on the economic front, confident in the economic and financial policy, in the state of the economy."

While inflation reached 13.7 percent for the first five months of 1994 - higher than hoped for - analysts say it is remarkably stable compared to triple digit figures in the last several years.

Of the total of $1.5 billion pledged so far since the first International Conference on Reconstruction of Cambodia in Tokyo in June 1992, only $500 million has been received. A further $880 million was pledged in June 1992, $120 million in September 1993 and $500 million in March this year.

But analysts say that the "absorbtion capacity" of Cambodia is limited, causing some of the delay in the release of the funds. The lack of human resources to assess needs, identify priorities, and monitor implementation has slowed the process. Much of the money is earmarked for rural development and institution building schemes.

One of the primary purposes of centralizing revenue collection and disbursement was to increase the ability to assess and implement national priorities. Prior to the Financial Structure Laws, many ministries and provinces kept their own data and there was no centralized system of compiling nationwide data on everything from education to healthcare to the state of rural infrastructure. This made it difficult to come up with a national plan for targeting international donor assistance by sector or local needs.

"The advantages of this new classification will be the ease with which we will be able to prepare the budget, conduct increasingly better economic and financial analysis, and monitor in detail the budget's implementation," the Ministry of Finance said during the passage of the Financial Structure Laws earlier this year.

But it also limited the ability of the military to define at will how much money they could use to wage war against the Khmer Rouge.

After months of globe trotting in which government officials have unsuccessfully sought renewed foreign military support, the new administration was pressured into accepting the logging concessions by an increasingly frustrated military given the mandate to wage war against the Khmer Rouge with limited resources.

All unsawn timber exports were officially halted on March 31. But on June 18, the Council of Ministers - headed by the two co-prime ministers - signed a special decree.

It stated that "in view of the present military and security situation" there was an "immediate need of building and strengthening the Royal Cambodian Armed Force. The decree therefore "annul[ed] existing procedures and regulations on the export of timber."

The decree took away the right of the central government to control logging revenues and resumed exports of timber with all revenue collected and spent by the Ministry of Defence.

Also on June 18, the Ministry of Defence reaffirmed two licenses to Thai logging firms for the immediate sale of nearly 200,000 cubic meters of logs worth nearly $4 million. The two Thai logging companies - the Chaophraya-Irrwaddy Co. LTD and BLP Import Export - have had long dealings with Cambodian timber exports.

A June 18 letter to the Thai Ambassador in Phnom Penh signed by the two Co-Ministers of Defence Tea Banh and Tea Chanrith said, "... previous approvals for timber and processed wood exports issued by various Ministries are no longer valid.

"However the adoption of a new procedure has been assigned for the Ministry of National Defence to deal directly with the matter of timber export .... the Ministry of National Defence anticipates that Your Excellency would kindly take this into account and inform your government that the process will be running smoothly."

The military has unsuccesfully sought foreign assistance in providing free or cheap military aid and was forced to seek supplies on the open market without sufficient support from the national budget. Hence the logging decree allowed new access to revenues.

The Post has learned that the Ministry of National Defence has requested that they be extended credit for additional state funding for the military budget significantly beyond what has been allocated in the current budget.

Financial analysts say that the request, if approved, would go way beyond the acceptable percentage of government military spending approved by the IMF as a sound budget that could receive the IMF stamp of approval.

While representatives of multi-lateral lending institutions in Phnom Penh - who have been watching closely the political will of the new government to implement the new financial policies - term the new timber decree "a big leap backward against the basic commitments to the IMF and world community" they are confident that the move is an unfortunate hiccup that will be reversed.

The reason is simple. All parties in Cambodia, including the military, are in agreement that the confidence of the donor countries and international lending institutions is unbreachable.

At the end of the day, the IMF and others, because of Cambodia's huge reliance on international assistance, are in a position to virtually dictate economic policy.

"Eventually the government will give up because they need international support," said one foreign economic analyst attached to the government.

Analysts expect that a visit in early August by a high level delegation from the IMF will end with a government agreement to revoke the new decree.

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