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U.N., World Bank Take Steps to Stem

U.N., World Bank Take Steps to Stem

Analysts say measures to stem hyperinflation may be too late The United Nations Transitional

Authority in Cambodia (UNTAC) announced last month it would seize direct control

of the State of Cambodia's central bank to stabilize a rapidly deteriorating economy,

which has contributed to political instability and an alarming rise in popular discontent

in recent weeks.

Economic analysts here agree that, if current trends continue, hyperinflation could

occur as early as the end of the year, paralyzing the already fragile governmental

structures and severely undermining the ability of UNTAC to implement the U.S. $1.7

billion peace agreement.

But any intervention by UNTAC to stabilize the economy could precipitate a political

crisis. On Sept. 22 the Khmer Rouge reiterated their opposition to any form of budgetary

support for the Phnom Penh administration-charging that it gives unfair advantage

to one of the factions competing in next May's elections.

Diplomats, World Bank officials, and U.N. economists based in Phnom Penh agree that

substantive steps must be taken as soon as possible to thwart an inevitable collapse.

"Without the rapid intervention [of the international community], economic stabil-ization-not

to mention meaning- ful rehabilitation-may be beyond the reach of the country,"

stated a confidential draft of a memo by a team of World Bank analysts who visited

Phnom Penh last month.

The World Bank memo outlines a U.S. $82.7 million package of fiscal and monetary

measures to check the deteriorating fiscal situation, restore confidence in the currency,

and set the foundation for longer term reconstruction efforts.

The World Bank program would provide critical goods and materials to key sectors

of the economy-such as agriculture, transport, public utilities, health, and education-to

enable them to continue operating.

The borrower of the proposed credit would be Cambodia, as represented by the Supreme

National Council-the body grouping all four factions, including the Khmer Rouge.

U.S. $75 million would be provided in credit, which would cover foreign expenditures

for goods imported for the World Bank program. If grant funds are available, a U.S.

$2.2 million technical assistance component will also be included in the package.

The project is expected to generate about U.S. $35 million in funds. To steer clear

of complaints of favoring or subsidizing the SOC's Central Bank during the election

period, the World Bank and UNTAC will keep these increased state revenues in escrow

accounts until a new government is formed.

The World Bank recommend-ations must go to the bank's board for approval in January,

which means in the best case scenario, assistance would not begin until early next


In the meantime, UNTAC officials say they are evaluating short-term ways to increase

revenues before international lending institutions can start providing assistance.

"UNTAC is looking closely at means of revenue enhancement, alternatives to the

issuance of currency, particularly at taxes on luxury goods such as alcohol and cigarettes-things

that would be directed at the more well-to-do, such as foreign visitors," said

an UNTAC official, who asked not to be named.

UNTAC is also evaluating customs procedures and regulations governing the sale and

transfer of public assets as a way to stem corruption, which they say is rampant

and depleting the coffers of the state.

UNTAC has already forced the resignation of the head of Cambodia's deep water port

at Sihanoukville (Kompong Som) and a provincial governor because of corrupt practices.

Planeloads of Riel

Another key step in addressing Cambodia's rampant inflation, economists say, is to

control the growth of the money supply.

"Something has to be done. I think the political consequences are serious,"

said Someth Suos, senior project economist for the Asian Development Bank. "We

are looking at hyperinflation certainly before the elections-as soon as the [political]

parties start spending on the election campaign."

UNTAC's chief financial advisor, Roger Lawrence, acknowledges the source of the problem,

but diplomats here say that UNTAC is balking at taking control of the money supply

for fear of being accused of supporting the economy of the State of Cambodia.

"This inflation is almost entirely the result of money creation-the Phnom Penh

administration has no means to finance a deficit except by issuing money," Lawrence


The other primary means of covering the deficit is falling behind in salary payments

to soldiers and civil servants. Recently the government started paying salaries more

regularly again, causing the full burden of the deficit to fall on money creation.

"The problem at this stage is so difficult, the seriousness of the situation

at this point is so great, we are just trying to stop it from collapsing," a

senior UNTAC official told the Phnom Penh Post.

"We are not in a position to make this a healthy economy, we are in a position

to keep it hanging on until the World Bank infuses money. We are only talking about

maintaining an operational country."

New money printed in the Soviet Union and flown into Cambodia in recent months has

been curtailed, say sources here. The Phnom Penh Post has learned that a plane-load

of newly issued 2,000 riel notes was flown into Phnom Penh in recent weeks from Moscow,

but has been prevented from entering circulation.

Any economic stabilization program sufficient to address the current crisis-while

helping to decrease widespread popular anger now directed at SOC-would draw the ire

of the Khmer Rouge at a sensitive junction when UNTAC is trying to bring the group

back into the peace process.

"We could not and will not accept any arrangement of budgetary support for one

party. Such relations will be beneficial to the central bank of Cambodia, which is

in fact the Phnom Penh party," said Khmer Rouge spokesman Mak Ben on Sept. 23.

"On the issue of normalization of relations between world institutions and Cambodia

represented by the SNC," he added, "we have opposed all along the appeal

for budgetary support of the Phnom Penh party."
Spiraling Inflation

Current inflation rates are expected to be over 200 percent by the end of the year,

according to the September World Bank draft report.

Prices of basic commodities have spiralled in recent months, with gasoline and pork

more than doubling since July, and rice increasing by 50 percent during the same


The official exchange rate has gone from 1,270 riel to the dollar at the end of June

to a high of 2,280 in September.

For the first half of 1992, cash in circulation of Cambodian currency grew by more

than 163 percent, according to the World Bank.

Consumer prices in Phnom Penh rose by more than 130 percent in the first seven months

of 1992, with food items rising 158 percent during the same period, according to

UNTAC figures. In July alone, the total index increased by 23 percent and food index

by 25 percent. The figures for August and September are expected to be of an even

greater magnitude.

State of Cambodia civil servants and other government employees such as soldiers

receive monthly pay ranging from 10,000 to 35,000 riels (approximately U.S. $5-17)-which

contributes little to the cost of feeding their families.

"The civil service structure is melting away, as state employees are simply

not showing up, seeking employment elsewhere because they can't feed their families

on their salaries," said one diplomat here.

"Before UNTAC came, we had a better life, but now it is worse, and I think it

will be worse in the future," said Sok Sotha, 32, who worked at a government-owned

foundry before it was sold to foreign investors and shut down earlier this year.

"In the city and the countryside, people don't have enough to eat. We can only

eat meat once or twice a month. It is the same as under the Khmer Rouge, but then

there was not so much difference between rich and poor. Our leaders didn't have expensive

cars like now.

"Now the people blame the Hun Sen government," Sok said. "We see by

our own eyes what they do now. They are corrupt and do not take care of the people,

only themselves. But we are afraid, we cannot show our anger at the government. Last

year a lot of demonstrators were killed."

Widespread anger at corruption erupted last December as workers, students, and civil

servants took to the streets to protest officials selling off state assets and pocketing

the money.

Some of the more blatant selling off of state property has been curtailed in recent

months, but senior officials from many of the SOC ministries continue to request

under-the-table payments for normal state services.

"These are not ministries," said one diplomat here. "They are buildings

crooks use to operate out of."

The ports and customs officials are particularly rife with corruption, diverting

revenues that otherwise would end up in state coffers.

Services such as telephones, electricity, and permits to operate business are frequently

unobtainable without paying large bribes-as much as U.S. $2,000 for obtaining a phone

line, for example.

A dramatic upsurge in crime in recent weeks has resulted in a de facto curfew in

Phnom Penh, with shops closing down early and the streets empty at night as bandits

roam the city shooting people and stealing their motorcycles and other valuables.

Diplomats here say that the upsurge in crime, worsening government services, and

rising popular anger with the SOC regime are directly linked with the deteriorating


Senior UNTAC officials-while aware of the political implications of budgetary support

for SOC financial institutions-say that they hope World Bank stabilization package

will be implemented.

But with World Bank support not in hand before January at the soonest, many are pessimistic

that even the best efforts of the international lending institutions will not be

able to stave off crippling inflation rates in time.


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