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New IMF "Res Rep" opens the books

New IMF "Res Rep" opens the books

T HE new resident representative of the International Monetary Fund (IMF) is
Joshua D. Charap, an American economist who arrived in Cambodia in

mid-August for a two year posting. Charap was previously working for the IMF on

Moldava, one of the former Soviet republics. As he puts it, his job in Cambodia

will be to "keep both sides informed." That means appraising Washington D.C.

headquarters of what progress is being made in Cambodia on monetary and

economic reforms, and keeping Cambodian officials informed of what's going on in

policy matters.

The IMF has been in Cambodia for two years. The

organization was set up after World War II at the same time as the World Bank,

as a cooperative institution to try to ensure stability in international

monetary relations and exchange rate issues. Today, most countries in the world

belong, with the notable exceptions of Cuba and North Korea, both of which

coincidentally have embassies in Cambodia.

Although the IMF was

established primarily to oversee the monetary systems in countries worldwide,

it's best known in recent years for pumping billions of dollars into the system

during the debt crisis of the 1980s, and guiding economic reform in the

independent republics of the former Soviet Union. In 1994 the Royal Government

reached an agreement with the IMF in which about $130 million would be loaned to

the National Bank, with disbursements tied to progress on economic


In between meetings with government officials and foreign

diplomats last week, Charap agreed to sit down for an interview with the Phnom

Penh Post's Susan Postlewaite.

Phnom Penh Post: What is the

IMF's role in the Cambodian economy?

Joshua Charap: The Fund assists members experiencing balance of

payments difficulties. That is the only rationale for the Fund's involvement in

a country. We help the government work out a strategy which we believe and the

government believes is appropriate for achieving medium-term external viability

- in other words the ability to export enough to pay for their imports. What

that means in practice is looking at monetary policy, exchange rate policy,

budget policy and how that fits together in a coherent framework. About a year

and a half ago the Fund agreed to a three-year program with the government of

Cambodia. Our Enhanced Structural Adjustment Facility consists of loans for ten

years, including a five year grace period, at the interest rate of 0.5


Post: How would you rate your degree of influence over the economy


JC: People take you more seriously if your own money is on the table.

We have a lot of money here, and a lot of other people look to us to say that

the policies the government is pursuing are sound before they want to put their

money in. The World Bank usually does not go ahead in the absence of a Fund

program. A lot of donors look to see that the Fund says the government policies

are appropriate.

Post: What is the status of the IMF loans to Cambodia?

JC: The program agreement is for close to $130 million. The agreed

disbursements consist of three separate one-year arrangements. The first

one-year arrangement - about $40 million - was drawn down, in addition to a $10

million loan, in November 1993. The second one-year arrangement has been

negotiated and should be discussed by our board of directors on September 15 in


Post: How does that loan agreement compare to what's being offered in

other countries with underdeveloped or developing economies?

JC: One of the principals of Fund involvement is equality of

treatment. The Cambodia loans are broadly comparable to Fund activities in

similar countries based on the overall size of the economy. The Fund calculates

a quota for each country based on total GNP and trade volume. For example

Vietnam has a loan arrangement of about $540 million. In Laos the loans are for

about $50 million.

Post: Who negotiated the agreement here?

JC: The IMF mission was here in the spring and in July for a follow-up

mission. The officials agreed to the program with the authorities. That

agreement is on the level of the staff, not the management or the board of

directors. We have to present the program to the Board of Directors for


Post: What is the money supposed to be used for?

JC: Let me speak generally about how a program works. The Fund lends

money to support the national currency. As a monetary institution our focus is

on the balance sheet of the central bank. By lending money to the central bank

we increase the reserve position of the bank.

The normal activity of a

central bank would be to draw down an increase in foreign reserves by increasing

the domestic asset position of the central bank, which means because the central

bank has more dollars sitting in its coffers it can now afford to lend more

money domestically either to the government or to private enterprise in a non-

inflationary way.

Post: How much of the initial $50 million is in reserves, and how much has

been loaned out by the Central Bank? In other words, what are they doing with

the loan?

JC: A lot of the money has remained in the reserves of the National

Bank as these reserves are being built up from a very low level.

Post: So the intent is to keep down interest rates and inflation and get

money flowing into the economy. What are the conditions under which you want to

see the central bank lending money to the commercial banks or the


JC: The monetary program of the National Bank, agreed with the Fund,

sets out a framework for the credit program. It is encouraging that the

government does not wish to borrow from the National Bank as this is the primary

cause of inflation in many economies.

Post: Where's the money held, in the vault at the central bank?

JC: Usually in the central bank's accounts, which might be in the

Federal Reserve Bank in New York or in whatever kind of interest bearing


Post: Although the IMF's primary focus is on a monetary program, your

influence is perceived to be much more pervasive. Why is that?

JC: There is a divergence between our genesis and the broader things

we end up doing in practice. In reality in Cambodia there are a lot of

structural measures which are necessary to achieve medium term viability, such

as reforming the civil service or making sure logging occurs at a sustainable

pace or more generally making sure there's electricity, water. Because otherwise

how can people do business? So we would discuss with the authorities structural

issues we consider important and they consider important to set up the framework

for economic growth.

Other parts of the program include privatization or

corporatization of the electric company, for example. Passing the central bank

law, the budget, generally what you would expect for improving the legal

framework. Some of these things are jointly worked out with the World Bank.

Post: How great a leverage do you have over what the Cambodian government


JC: I wouldn't choose to use the word leverage. I think we help the

authorities formulate policies and we help them implement (those policies). This

is a very complicated environment. It's important to keep things focused. For

example, it's important that the budget move through the National Assembly. Not

leverage, but I think that it's in everybody's interest, not just the Fund's but

also the Ministry of Finance, to see that the budget passes the National


Post: To what extent is the IMF involved in the national budget and

revenue collection to support government spending?

JC: We certainly discuss with the authorities how their revenue

collection is going, but in terms of the Fund, going back to the monetary

program, the very first question is to what extent is there bank financing of a

budget deficit, because in most countries that's really the root cause of

inflation. The government runs a deficit, and finances it from the banking

system and that causes inflation.

I think in Cambodia they have done an

extraordinary job of not borrowing from the central bank, and therefore you're

not seeing inflation here, you're not seeing the exchange rate depreciate

rapidly, and that's point zero.

The next step is how is the government

moving to create a sustainable fiscal picture? What steps do they take to create

a much stronger base for revenue, a much broader base for taxes. Most of the

taxes now come from Customs. First of all it's a very inefficient way of

extracting taxes because it increases inefficiency to tax goods as they cross

the border. In terms of an efficiency argument, a much more efficient tax is on

consumption. But it's much easier to control the border, control the ports and

collect your taxes as the goods cross the border than it is to implement a VAT

(value added tax) or even a sales tax on the street sellers selling bananas and

bowls of soup. So you have an efficiency versus reality argument and you have to

be realistic and collect what taxes you can. The fund is providing jointly with

the UNDP, the World Bank and other donors a lot of technical assistance to help

the Ministry of Finance work on broadening the tax base.

Post: So how many IMF foreign experts are there and what are they


JC: Six in the National Bank. Two in the Ministry of Finance. Two in

Customs. They're working together with IMF and UNDP. One advisor just arrived

from Washington to assist on tax policy, tax collection, tax implementation,

getting money and also some aspects of revenue.

Post: How is Cambodia doing in terms of what you would like to


JC: The general impression is they are holding the fiscal picture

together under extraordinary circumstances. It's very important for the country

that that continue. I think that there is a will here not to resort to the

printing presses to finance the budget; there's a good understanding that

ultimately that is very destructive. It's reasonably well understood here that

printing money to give to people will make them happy for a little while, but

undermines the whole financial system.

Even today we see a great deal of

dollars in circulation. That's a clear indication that people aren't rushing

into the banks with their dollars to buy local currency. There's some aspects of

a wait and see attitude.

In the medium term, I think the government is

trying very hard to implement necessary fiscal forms and revenue measures

because it's important to have a tax base, to have a broadly based personal

income tax, a broadly based corporate income tax. I wouldn't advocate high

levels of taxation, but a broad tax where everybody pays their share, not a high

rate on people who can't avoid it .

With revenue collection, they're

taking steps. Even with the best made plans, the best implemented plans, they

will only have a limited effect in 1996. We'll start to see more in


It's very difficult to judge outcomes with such a long lead time.

You can always grab more money by raising Customs duties. If it's ten percent

and you raise it to 12 percent you've more or less raised Customs duties by 20

percent. That's simple. But in terms of creating a broad base tax, personal or

corporate income, people need to write the laws, understand the laws, both the

payer and the tax collector who can go out and collect it.

Post: How do you assess the extent to which Cambodia is up to the job of

continuing with proper monetary and economic policies you've described?

JC: I think very much so. My sense of the situation is that policy

makers really see what is going on. There's a sense of lost time. You can look

at Thailand and elsewhere in Asia and see that Cambodia has the potential to

catch up. And there's a willingness to persevere with policies that maybe don't

seem to have an immediate payoff. Everything we're talking about here is merely

setting the basic framework for growth - ensuring low inflation so the monetary

system holds together and that domestic money has value. That doesn't ensure

growth, but the absence of it pretty much ensures an absence of growth.

Post: The Ministry of Finance estimates annual growth, or GNP, at five to

seven percent. How real is that figure?

JC: I don't think it's by any means overly optimistic growth. Sure

things here could go badly and the economy won't grow, it might contract. But

things could go very well and it wouldn't take an enormous increase in the

efficiency of agricultural production to lead to a large agricultural output.

That would have an enormous effect on the standard of living, on health, calorie

intake in rural areas. Particularly if you're dealing with 1994 as a base where

the grain harvest was low and you're measuring growth in 1995 relative to that


It's a heavily agriculture economy. A drought one year, you have

good rains the next year. It's misleading to call it economic growth because

basically you're taking the ratio of GDP in 1995 and 1994 and saying it's five

percent higher.

Post: How closely is the IMF watching the economy?

JC: The Fund is assessing the situation closely and missions come to

Cambodia three or four times a year.

Post: Do you have a rating system, for example two-thumbs up for


JC: Yes. When we agree to the program. There are countries where we

don't or where programs fall apart and negotiations drag on and on. By agreeing

on the program, it means policies the government has set out are supported.

Post: What kind of rating do you give Finance Minister Keat Chhon after

nine months in the job?

JC: He's doing an extremely good job, an effective job under extremely

difficult circumstances. I think his whole life is basically turning to

everybody in government and saying "No, there's no money. No, there's no money."

Thirty, fifty, eighty times a day, somebody must be banging on his door, ringing

his phone saying "I have to have money for this. I have to money for that," and

some of these things are really very important and should be supported and he is

the one who has to say "No, there's no money," and he's doing it very


Post: What is your view on dedollarization of the Cambodian economy, which

is a priority of the National Bank leadership?

JC: The Fund's view on that is by no means black and white. Hong Kong

doesn't have its own currency. They have a currency board, which means that

every single HK dollar is backed by bank holdings in foreign exchange to offset

every Hong Kong dollar, which effectively means there's no domestic currency, no

scope for domestic monetary policy.

In terms of increasing use of the

riel, it will come as the credibility track record of the government,

particularly of the central bank, is established, and the central bank should

soon have its autonomy. But I don't think it's an issue that should be


Post: Inasmuch as you work very closely with the National Bank on monetary

policy, will you be looking at the National Bank governor's involvement in

lending money to failed Credit Bank of Cambodia and recommending he stay or be


JC: I certainly don't envision that. We're not here to tell the

government of Cambodia how to run their country, who to appoint to a position.

We're here to see that sound policies are implemented.

Post: Do you think you will have any involvement in this decision?

JC: I hope not.

Post: Do human rights issues fit into the review process in any


JC: No. The IMF is non-political.

Post: Describe your priorities for the IMF over the next couple of years

in Cambodia.

JC: Expand the revenue base. In economic terms the situation here is

still volatile. It's linked to perceived or real security considerations, both

among potential domestic and foreign investors.

Potential investors

still look at Cambodia and they're a little bit nervous. It's a country emerging

from 25 very difficult years with a track record not very long and an investor

going into a country without a long track record is going to be quite nervous.

In that sense it's important not to race to attract the wrong kind of

investment. Investment will come. Certainly the tax laws shouldn't be rigged to

favor foreigners over domestic investors. An investor in a project is an

investor in a project. If anything you might want to encourage Khmers to be

investing, not just foreigners.

Effectively prioritizing government

expenditure - there are legitimate security needs. Recent history says there is

strong justification for strong defense expenditures, and one can't fault the

logic of that. At the same time you have to get the most bang for the buck out

of your expenditures. You want to get what you paid for and do what you intended

to. In all aspects of civil service there's plenty of scope to increase


Post: So if all that happens, does the IMF figure Cambodia will be in a

position to repay its loans in five to ten years time?

JC: I would certainly expect the economic position of Cambodia to have

improved substantially by then.


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