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
reforms.
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
percent.
Post: How would you rate your degree of influence over the economy
here?
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
Washington.
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
approval.
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
government?
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
instrument.
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
does?
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
Assembly.
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
doing?
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
see?
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
1997.
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
base.
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
Cambodia?
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
effectively.
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
forced.
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
dismissed?
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
way?
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
efficiency.
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.
