November 11, 2011

WHY THE HUN SEN REGIME RELIES MORE AND MORE HEAVILY ON EXTERNAL BORROWINGS

The economic situation in Cambodia is artificial, fragile and explosive based on the following facts (from F1 to F7):

F1 : A dollarized economy. The country’s money supply is composed of US Dollars for up to 95% and Riels for only 5%. The exchange rate (1 US Dollar = around 4,000 Riels) is totally artificial, being easily manipulated given the respective amounts of Riels and Dollars in circulation. Because it is pegged to the Dollar, the Riel is overvalued compared to the currencies of our neighbouring countries and commercial partners after taking into account the differences in inflation rate in the different countries (caution: official statistics in Cambodia are manipulated for political reasons). The dollarized economy and the overvalued Riel contribute to a loss of competitivity for Cambodia’s economy which in turn contributes to a huge trade deficit and a large unemployment.

F2 : High inflation rate, meaning increasing cost of living. This seems paradoxical given F1 because inflation tends to be low in countries with an overvalued currency. But the high inflation in Cambodia is largely due to compulsory bribes in the production and distribution processes, other forms of financial extortion and commercial monopolies based on government systemic corruption.

Inflation is an insidious form of wealth transfer from the weak and the poor to the powerful and the rich, whereas the ongoing land grabbing is a direct and brutal form of such a transfer.

F3 : High and increasing unemployment rate partly due to the dollarized economy (see F1) but also to demographic factors, inappropriate education system, corruption-related hindrances to foreign direct investment and poor economic governance.

F4 : Deteriorating living conditions because of high inflation and low salaries for workers, employees and civil servants. Farmers’ income also suffers from government corruption and neglect and the absence of any consistent agricultural policy (by comparison see SRP political platform for agriculture). Hidden and disguised unemployment is a major cause of poverty (see F3).

F5 : Huge trade deficit (imports of goods and services larger than exports). The main cause for such a deficit is low productivity and declining competitivity associated with the dollarized economy (see F1).

F6 : Continuous fiscal (or State budget) deficit. Because of government corruption (loss of State revenues, unjustified increase in State expenditures that are always inflated) the fiscal deficit is persistently high and needs to be covered by international assistance, increasingly by borrowings from foreign institutions and countries.

F7 : Increasing borrowings from foreign institutions and countries, such as China over a recent period (see F6). This continuously contributes to the dollarized economy (see F1). External borrowings feed corruption, allow continuous fiscal and monetary irresponsibility on the part of the CPP-led government that is in a position to indulge in vote buying (donations and patronage system). Thanks to the increasing amount of non-transparent external borrowings in foreign currencies, secret amounts of Riels could also be illegally printed by the CPP for corruption and election purposes without notably affecting the exchange rate (see F1). Therefore, external borrowings play a pivotal role in maintaining the CPP in power by preventing a deterioration of the fiscal deficit (see F6) and a worsening of the balance of payments (see F5) that would result in dramatic consequences for the economy and for the CPP political domination (see F2, F3 and F4).

Sam Rainsy

Elected Member of Parliament

Former Finance Minister