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Foreign aid - a guide for the bemused

Foreign aid - a guide for the bemused

The new government, like the old, will likely depend on it; some donors are considering

whether to cut it. Elizabeth Moorthy looks at foreign aid and what it means

for Cambodia.

"EXTERNAL aid makes up forty percent of the Royal Government of Cambodia's annual

budget." Recent media reports of possible and actual aid suspensions have frequently

cited this statistic, but it is rarely if ever explained. While some foreign aid

does consist of direct or indirect budgetary support to the government, a considerable

amount of aid is not scheduled in the RGC budget at all. Thus, although the forty

percent figure is not inaccurate, it does not reflect the complete picture.

According to a June 1997 World Bank progress report on Cambodia, RGC 1997 budget

expenditures will total roughly 1,500 billion riels. Government revenues will cover

only about 900 billion riels, leaving approximately 600 billion riels, or 40% of

government expenditures, to be financed by foreign aid. This amounts to about US$230


However, 1997 pledges at the July Consultative Group (CG) donor meeting in Paris

amounted to US $450 million. Therefore, the $230 million in deficit financing accounts

for only about half of all Cambodia's external assistance. As one economic analyst

explains, "Aid pledges do not really mean people are just writing checks."

The other half of the $450 million is channeled directly into donor-implemented projects,

without passing through the government system. This includes projects run directly

by bilateral and multilateral donors and also many of those run by NGOs, according

to analysts.

Keeping track of foreign aid, of all types, is the job of the Council for the Development

of Cambodia (CDC). Formed in 1994, the CDC is the governmental body in charge of

coordination and management of external aid. It is chaired by the two Prime Ministers,

and the Vice-Chair is Keat Chhon, Minister of Finance. Before each annual CG meeting,

the CDC puts out a "Development Cooperation Report" (DCR), the official

tally and breakdown of the types and amounts of external aid given to Cambodia.

According to the 1997 DCR, Cambodia received a total of about US $518 million in

1996. Japan was the most generous donor, providing $111 million. The European Union

was the largest multilateral donor, providing $57.6 million. The United States and

Germany, who are the only funders to have announced aid freezes, donated $28.7 million

and $9.6 million respectively in 1996.

The 1997 DCR divides aid disbursements into six categories:

  1. Free-Standing Technical Cooperation, consisting of resources provided for skills

    transfer and capacity building unrelated to any specific project (comprising 29.7%

    of aid 1992-96);

  2. Investment-Related Technical Cooperation, consisting of capacity building for

    a specific project (6%);

  3. Investment Project Assistance, consisting of financing a specific capital investment

    project in cash or kind (28.4%);

  4. Budgetary Aid/Balance of Payment Support, consisting of aid provided in a broad
  5. development context, which may make foreign exchange available (14.7%);
  6. Food Aid, consisting of direct food provision or grants or loans for food purchases

    (4%); and

  7. Emergency and Relief Assistance, consisting of resources for the immediate relief

    of distress and disaster (17%).

These categories cover all aid, grants and loans, whether or not channeled through

the government. Assistance to Cambodia is provided mainly in the form of grants,

with food aid and emergency assistance being entirely grant-funded. Only fifteen

percent of 1996 aid came in the form of loans, mostly from the World Bank and the

Asian Development Bank (ADB). These institutions provide cash budget support and

also finance social and infrastructure projects. Such concessionary bank loans, available

only to poor countries like Cambodia, are very lenient: forty-year terms with ten-year

grace periods and only an 0.5% annual service charge, for example. One World Bank

economist noted that the terms are so favorable that the majority of a "loan"

effectively ends up being a grant.

However, grants and loans are often subject to strict conditions. The ADB and World

Bank provide program loans, which are linked to RGC structural reforms and policy

changes. One Western economist labels these types of loans as "a bit of a bribe."

For example, the ADB has tied a recent program loan to agricultural policy reform.

According to Someth Suos, Resident Representative of the ADB, "We want to change

government policy to improve the agicultural situation." The conditions include

improvements in land reform and management of government fertilizer factories. Suos

admitted that the implementation of these reforms is not progressing as quickly as

the ADB had stipulated, partly because of the three-month-late National Assembly

opening, delaying the latest loan disbursement. "But," he said, "we

know reform takes time, and we are monitoring the situation."

The International Monetary Fund, whose loans are also conditional, is the only funder

to provide balance-of-payment support to the National Bank. Such support is meant

to bolster foreign currency reserves and eliminate the need to print extra money

in a shortfall. In 1995, the IMF agreed to provide $40 million per year for three

years. However, only half of the money has been disbursed. Last November the IMF

suspended payment amidst concerns about insufficient government efforts to collect

revenue, according to analysts and government officials. "This has some small

effect on the economy," admitted one official, "and we should work to revise

our discussions with the IMF. But the most important donors are Japan, the ADB and

the World Bank."

Japan does not give its assistance as direct cash aid, but prefers to channel its

donations through projects and commodities. According to Keiji Yamamoto, Minister

of the Japanese Embassy, the Japanese government funds various projects both directly

and through NGOs. In addition, it provides commodities, such as iron bars or petroleum,

and allows the government to use them or sell them. If they are sold, Japan stipulates

that the money raised can only be used for social development projects. Such commodity

aid is classified as budget support, and Japan is the largest funder of Cambodia's

budget. Japan has disbursed US $66 million in budget support since 1991.

Yamamoto also clarified Japan's current position on aid to Cambodia. Contrary to

some press reports, he said, "we did not stop our aid as policy. It came to

a de facto standstill, because the recent events and security problems hindered the

continuation of our projects." He emphasized that technical assistance is ongoing,

and that new projects will in all likelihood continue. "We explained to the

Cambodian government that we will continue aid so long as the government respects

the Paris Agreements, the Constitution, human rights and freedoms, and holds elections

as planned." Japan has pledged eight billion yen, or about US$80 million, for

1997. Although this amount is less than in 1996, Yamamoto said that the actual amount

disbursed could end up being more or less, depending on the situation in Cambodia.

Thus, the reduced amount does not represent an aid cut.

Conversely, the United States has continued its aid freeze past the initial 30-day

period. A State Department spokesman announced on August 8 that the suspension would

be extended "indefinitely ... until progress on free and fair elections has

been made." Although he said that the precise amount of suspended aid was difficult

to clarify due to the fact that several fiscal years were involved, "our estimate

is roughly two-thirds of the assistance that had been programmed or planned will

be suspended." A US Embassy spokeswoman said that $35 million had been scheduled

for disbursement through USAID here, with an additional $6.8 million scheduled for

military assistance. The State Department spokesman noted that about $20 million

in humanitarian aid, which does not directly or indirectly support the government,

is unaffected.

One Cambodian economist with close connections to government expressed concern about

the US position. "We are sad to see that a major power took action quite so

drastically. We want to have good relations with all countries, including the US."

However, the economist did not feel the aid freeze would have a significant effect

on the government, instead citing concerns about lack of revenue and the RGC's recently-announced

budget cuts.

Revenue collection has long been a crucial issue for donors. Analysts and representatives

of donor organizations agree that the RGC is not doing all it can to increase revenues.

The June World Bank report notes, "The budgetary coverage of non-tax revenues

remains incomplete, with some line ministries and other government entities continuing

to collect revenues without control and supervision by the Ministry of Economy and

Finance. Extrabudgetary revenues need to be brought under budgetary control."

The United Nations Development Program issued a statement after the July 1997 CG

meeting echoing this concern: "It is neither realistic nor reasonable to expect

the international community to substitute with its taxes for revenue which should

be collected within Cambodia itself."

On August 4, Finance Minister Chhon announced that income in the first six months

of 1997 - even before the fighting of July 5-6 and resulting political and economic

turmoil - was lower than expected, and that budget cuts would be necessary. One Western

consultant to a government ministry noted that the ministries "are down to the

minimum already. They can't even buy paper for their photocopiers." The consultant

expressed serious concern about future revenue prospects. "You can make assumptions

about tourism, aid, investment - they're not hard to make - and extrapolate to the

tax situation. It's doubtful whether the disruption of aid has had much of an impact,

but with all the expats leaving, sales tax and import tax will go down."

The June World Bank report noted that even if there were an increase in private investment,

Cambodia would still require $455 million in external aid per year to achieve significant

poverty reduction and economic improvement in 1997-99. Now, with investor exodus

and aid suspensions added to the low first-half revenues, the financial outlook for

1997 looks bleak indeed. It is hard to see when, if ever, Cambodia will be able to

finally reduce its extensive dependence on foreign aid.


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