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Investment Climate Sours

Investment Climate Sours

Investment and business activity in Cambodia slowed markedly in April and early May

as a result of "election related nervousness," a U.N. report released on

June 8 said.

"A large part of the business community appears to have adopted a wait-and-see

attitude and postponed major financial commitments," the monthly review of economic

indicators stated.

The decline in economic activity was also influenced by the impending withdrawal

of the cash-flush 21,000-man U.N. peace operation, continuing worries about inflation

and the slowdown in tourist arrivals, which virtually came to a standstill amid an

upsurge of fighting between rival warring factions, it said.

The U.N.-organized election, which was held from May 23-28, was narrowly won by the

royalist FUNCINPEC Party but the Phnom Penh government has contested the results

and balked at surrendering power. The resulting power vacuum has added to the uncertain

business climate.

The U.N. report noted that business registrations dropped by almost half during the

first quarter of 1993 compared with the average for 1992.

"During this period of uneasy calm, merchants have been involved in a considerable

amount of de-stocking. They and other traders moved into safer holdings of foreign

currency and gold," the report said.

In the case of poorer income earners, the choice has been to acquire stocks of non-perishable

marketable commodities rather than cash holdings of riels, because the riel has been

subject to rapid depreciation.

The volume and value of imports dropped significantly during May "as traders

perceived a situation of temporary market saturation for items such as motor vehicles

and motorcycles," it said.

Moves by third countries to lift curbs on economic dealings with Vietnam also affected

the volume of Cambodia's entrepot trade, which to a considerable extent is regarded

as illicit by Vietnam.

State revenues also declined in the run-up to the election as Phnom Penh authorities

relaxed the collection of taxes, especially on imports.

At the same time, many state ministries redoubled efforts to settle mounting arrears,

particularly unpaid civil service salaries, resulting in a widening of the overall

budget deficit, although the report did not specify by how much.

By the end of April, the report noted some downward adjustment in prices and exchange

rates had occurred from the exceptionally high levels in the aftermath of the turmoil

in the financial market during March, which saw the riel lose almost half its value.

Along with the partial recovery in the exchange rates, prices of most major items

of consumer expenditure either declined or remained unchanged. The consumer price

index for Phnom Penh fell by about 12 percent from the record high level at the end

of March. The decline reflected to a large extent a 20-30 percent reduction from

the exceptionally high levels from the previous month in the price of certain grades

of rice, the main item on the household budget for the great majority of Cambodians.

"Prices and economic stability are likely to return to more normal levels only

when a clearer and more confident political situation emerges and further international

support is forthcoming,'' the report concluded.

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