A controversial attempt to divert vast logging profits to the Defense Ministry, has been dropped under domestic and international pressure.
The co-premiers were forced to scrap a decree they signed in June which would have allowed the defense ministry to sign lucrative logging contracts and pocket the proceeds, according to documents obtained by Reuters on Aug 12.
"They [the two prime ministers] were afraid of the pressure from the IMF [International Monetary Fund] and the international community because they were violating the law," said an informed source familiar with the agreement.
"They [the government] have now accepted that all the revenue from the wood be transferred back to the Ministry of Finance," the source said, demanding anonymity.
According to documents obtained by Reuters three new agreements have been drawn up to resolve a damaging debate over the June decree signed in secret by First and Second Prime Ministers, Prince Norodom Ranariddh and Samdech Hun Sen.
This was in direct contravention of the Budget Law which says all state revenues must be put in the budget, and be controlled by the Finance Ministry.
Government officials said at the time that the decree was worth "millions of dollars" to the defense ministry.
The June decree also contravened the government's own undertakings to international loan bodies such as the IMF, legal experts said.
The IMF's senior representative in Phnom Penh, Reza Vaez-Zadeh, denied the IMF had pressured the government to drop the contentious decree, but expressed disapproval of it.
"We have made our concerns very clear to the government - that [the deal] is obviously an issue related to [financial] sources which is important for the implementation of the budget law," Vaez-Zadeh said.
"We are against any agreement that takes a major (income) source from the budget," he said.
One diplomat said the scrapping of the decree would help restore financial credibility to the government.
A memo obtained by Reuters and signed on Aug 5 on behalf of the two prime ministers, stated that all revenue from timber exports would be paid directly to the Ministry of Finance.
According to Finance Ministry figures Cambodia earns about $40-$50 million dollars per year from timber exports.
King Norodom Sihanouk said earlier this week that recent natural disasters including floods and drought were caused by massive deforestation.
In the 1960s Cambodia had 70 percent forest coverage but now less than 30 percent of forests remain in the whole territory, Sihanouk said.
In his Aug 8 letter sent from Beijing Central Hospital, the monarch warned that "Cambodia could become a country of wilderness like some countries in Africa" within the next 10 or 20 years.