Logo of Phnom Penh Post newspaper Phnom Penh Post - Budget blowout looms

Budget blowout looms

Budget blowout looms

C AMBODIA's economy faces a "very real" prospect of disaster, pressed by

a serious budgetary shortfall and a massive downturn in foreign aid and investment,

according to diplomats and economic analysts.

The economic crisis - sparked by Second Prime Minister Hun Sen's July putsch against

First Prime Minister Prince Norodom Ranariddh - has provoked fears of further political

and social instability, as government officials desperately seek to shore up the

nation's ailing finances.

Topping the list of grim economic figures now confronting the government is a budgetary

shortfall of up to $58 million, according to analysts.

"This is the gains we won't have because we made war. It's the consequence of

the July events," said one financial analyst.

With limited options for dealing with the budgetary crisis, the Ministry of Finance

has already slashed government expenditures by 20%.

The cuts are not being distributed evenly, according to financial sources. Priority

areas of spending - including defense, public sector salaries, and debt servicing-

will not be reduced. Education and health have had their budgets trimmed by 10%,

while other ministries are being asked to curb expenditures by up to 35%.

Nevertheless, the cuts may not be enough to stave off a financial crisis, in which

case the government would be forced to borrow from the National Bank's foreign reserves.

"There is no option - to stop the country or borrow from the bank. We have no

money, what can we do?" said one financial source.

The likelihood of the government turning to the National Bank to finance a budget

deficit is now "more probable than possible", said one economist. "I

don't think we can get to December without doing this."

Borrowing from reserves would accelerate the country's galloping inflation which

the Ministry of Finance now puts at between 10-12%, double the May figure.

Alternatively, the government could seek financing or borrow materials on credit

from the private sector, a move economists describe as "very dangerous".

Not only would the government incur debts that it would find difficult to service,

they say, but business activity would suffer as a result.

"We are facing a real economic meltdown which is already causing tensions within

the ruling Cambodian People's Party [CPP]," a western diplomat said. "Many

people within the CPP are appalled by the economic repercussions of what happened

here and are desperate in terms of finding a solution."

Added to concerns over the political fallout of the money crisis are fears that social

strife will result from an unpaid military and civil service.

"This will lead to an increase in crime as soldiers turn to extortion to make

ends meet," said one observer.

"Most troops have some sort of business going on. Illegal logging will resume

to make up the shortfall [in pay]," he said.

While delays in payment are nothing new for both civil servants and soldiers, the

problem has intensified since July. Many soldiers have not been paid for two months,

according to the observer, who added that the problem was "definitely"

a result of the budget strife.

Economists attribute the budgetary woes largely to the government's inability or

unwillingness to collect revenue.

"[For] the few taxes we have there are plenty of exemptions both legal and illegal.

Investors are exempted from some taxes but there are other taxes they don't pay,"

said one economist.

"The first option is to stop exemptions. But do you think tax collectors dare

to ask big businessmen, such as Teng Boonma, for taxes? The options are to apply

the laws they have. Ministers stop laws by verbal decisions," he said.

The government's poor record on revenue collection prompted the International Monetary

Fund (IMF) last month to suspend indefinitely a balance of payments loan program.

"The Cambodian government has lost close to $100 million in the past year because

of its inability to collect logging revenue and the ad hoc granting of tax breaks

in return for kickbacks to politicians and political parties," said an IMF official.

The IMF decision, coupled with the World Bank's failure to renew a budget support

program, will cost Cambodia tens of millions of dollars.

But the loss of IMF and World Bank soft loans are only part of a grim picture of

diminishing foreign aid and investment facing the government.

According to financial analysts, the amount of donor aid actually given in grants

and loans, as opposed to pledges, was hoped to reach $320 million. That figure is

now expected to drop by 20%.

Minister of Finance Keat Chhon said the government, which relies on aid for more

than 40% of its revenue, had lost more than $100 million this fiscal year through

suspended aid.

Investor confidence has also faltered in the wake of the July fighting, with estimates

of Foreign Direct Investment (FDI) - originally pegged at up to $300 million this

year - slashed by one third.

"Now we think if it reaches $200 million, it will be very good," said an


Foreign reserves, a crucial measure of the economy's health and its ability to survive

in tough times, will also take a hammering, with analysts forecasting a drop of 20-50%.

In June, the National Bank held $278 million in foreign reserves, according to the

Finance Ministry. That sum may fall to as low as $150 million, said one economist.

However National Bank General Director Chea Sok dismissed fears over the bank's reserve

holdings, saying that the figure has held steady despite the country's economic woes.

The economic figures are grim, but the good news is that they could be worse. Soon

after July 5-6, Finance Ministry officials calculated that the overall economic growth

this year would be negative.

"Now we are a little more optimistic. We think two to three percent [growth]

this year and for 1998 four percent, which is low but after the events it would be

nice," said one analyst.

Cambodia has experienced steadily increasing growth rates since 1993 but this trend

has now been reversed and the downturn could last several years, warned analysts.

"We have lost at least two years. If everything is okay politically we will

begin to move again at the end of 1998. Not until 1999 will we see the high level

of growth that we had from 1993 to 1996," said one observer.

Tourism, a major contributor to the country's growth, is one of the worst hit sectors

of the economy.

Civil Aviation Authority figures indicate close to 10,000 tourists arrived at Pochentong

in August, compared to over 16,000 for the same month last year, but tourism industry

operators report lower numbers.

"Before the events of early July, we had an occupancy rate of between 60 and

70 percent. In August it was just 25 percent and for September we are expecting around

28 percent," said Jean Pierre Kaspra, manager of the Cambodiana Hotel.

Craig Martin, managing director of International Management and Investment Consultants

said: "The hotel sector is suffering very low occupancy rates and tourist and

travel agencies are finding the going pretty tough. Some of that is due to seasonal

factors and the sector will be looking to activity in the traditionally busy time

around December before they can properly assess the impact."

Diethelm Travel, a Phnom Penh-based travel agency, reported an average drop of 75%

in clientele since July compared to last year.

"Those figures would not allow a company like this to survive... Thinking positively,

we assume the future will be okay - we don't know when it will be okay," said

a company representative.

The slump in the tourism industry will cut into government earnings as well as making

a drastic impact on local business.

"Last year tourism brought in around $100 million in government revenue through

taxes, but we are expecting a loss of up to 25 percent this year. We don't know yet

what the flow-on effect is likely to be," said Minister of Finance Keat Chhon.


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