CAMBODIA'S DETERIORATING ECONOMY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP78T02095R000800070010-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 12
• Document Creation Date: December 20, 2016
• Document Release Date: August 9, 2006
• Sequence Number: 10
• Publication Date: April 15, 1964
• Content Type: IM

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SECRET
Economic Intelligence Memorandum
CAMBODIA'S DETERIORATING ECONOMY
CIA/RR EM 64-11
April 1964
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
State Dept. review completed
USAID review completed
128
SECRET
GROUP 1
Excluded from autcnatic
downgrading and
declassification
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SECRET
Economic Intelligence Memorandum
CAMBODIA'S DETERIORATING ECONOMY
CIA/RR EM 64-11
WARNING
This material contains information affecting
the National Defense of the United States
within the meaning of the espionage laws,
Title 18, USC, Sees. 793 and 794, the trans-
mission or revelation of which in any manner
to an unauthorized person is prohibited by law.
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
SECRET
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CONTENTS
Summary and Conclusions . . . . . . . . . . . .
I. Nationalization of Foreign Trade . . . . . . .
II. Nationalization of Commercial Banking
III. Decline in Economic Activities . . . . . . . . .
IV. Aid and Trade from Communist Countries . . . . . . . .
V. French Assistance . . . . . . . . . . . . . . . . . . .
Page
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S-E-C-R-E-T
CAMBODIA'S DETERIORATING ECONOMY*
Summary and Conclusions
The economic reforms announced in November 1963 by Prince Sihanouk,
the Cambodian Chief of State, were designed to achieve a more effective
control of Cambodian resources and to provide the financial capital for
development of a viable socialist economy. Reforms announced during
the period of his renunciation of US economic assistance provide for
nationalization of the import-export trade by 1 March 1964 and for
nationalization of commercial banking by mid-1964. In addition to the
objective of reducing corruption, these measures were expected to
transfer the capital and energy of resident Chinese and European busi-
nessmen from trade and finance to the development of industry and
expansion of agriculture. A large part of the profits, which formerly
accrued to foreign interests, hopefully would then be available to the
state for use in financing needed social and economic infrastructure.
These new policies, rather than promoting economic gains, have dis-
rupted internal distribution and export of rice, increased unemployment,
all but eliminated short-term credit, further raised the cost of living,
and widened dissatisfaction among both foreign and Cambodian entrepre-
neurs as well as high government officials. Although affecting a broad
segment of Cambodia's population, none of these economic dislocations
appears serious enough to be an immediate 'threat to the control exercised
by Prince Sihanouk.
* The estimates and conclusions in this memorandum represent the best
judgment of this Office as of 15 April 1964.
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I. Nationalization of Foreign Trade
Nationalization of Cambodian foreign trade was to have been effected
on 1 January 1964, and to this end the National Export-Import Company
(SONEXIM) was established in December 1963. When it became obvious,
however, that the vital export of rice, which usually provides about
one-third of Cambodia's total exports, could not be carried out by the
newly organized SONEXIM, the effective date of complete nationalization
of trade was delayed until 1 March 1964. SONEXIM, with a Chinese Com-
munist adviser as a permanent staff member, is an autonomous company,
funded jointly by the government (60 percent) and by private Cambodian
capital. It is subject to the control of the Ministry of Commerce in
policy matters and allocations of foreign exchange. According to Prince
Sihanouk, SONEXIM will buy domestic commodities and products solely for
export, domestic distribution remaining in the hands of private traders.
Similarly, SONEXIM will act as an importer and wholesaler, and as in the
past the retailing of imported goods will be left to private traders.
Foreign exchange is to be made available to SONEXIM according to a
schedule made up by the Ministry of Commerce. SONEXIM purchases import
commodities with allocated foreign exchange according to orders sub-
mitted by the end-users. This organizational structure places the par-
ticipating government and private officials in a position to profit from
increased business in domestic trade through private firms in which
they have an active interest.
The first problem faced by SONEXIM was the export of the important
current rice crop. Cambodia's rice crop in 1963/64 turned out to be
the largest crop ever, the estimated 2,065,000 tons* exceeding the
1962/63 record crop by about 22 percent. 1/** If harvesting was com-
pleted satisfactorily, the rice crop would provide 600,000 tons for ex-
port compared with 200,000 to 400,000 tons in former years. To harvest
the rice, however, the Cambodian farmer needed to borrow money to pair
his field laborers. The laborers were financed in the past through
the advance sale of paddy to millers and exporters who received loans
from commercial banks. The total requirement for short-term credits to
cover the rice harvest had been 200 million to 300 million riels.***
Such credit has not been available this year because of restrictive
banking legislation imposed in November 1963 and the uncertain prospects
for businessmen engaged in foreign trade and commercial banking. The
government, in an attempt to fill the credit gap, established a re-
discount fund to finance credits to eligible clients instrumental in
the rice harvest. 2/ To administer this fund, the government bought
* Tonnages are given in metric tons throughout this memorandum.
*** Riel values in this memorandum are given in current riels and may
be converted to US dollars at the rate of 35 riels to US $1.
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the private commercial Cambodian Bank (now the Cambodian Commercial
Bank) and passed legislation permitting the Cambodian National.-Bank to
enter the commercial banking field. The bureaucratic process for ap-
proval of loans to millers and exporters, however, proved too slow to
satisfy the needs of the export markets. As a result, by early March
SONEXIM had contracted for the purchase of only about 70,000 tons,
whereas under normal marketing conditions the entire export rice. crop
would have been contracted for during January.
Further aggravation of the credit problems affecting the rice har-
vest developed when additional credit was needed in February to finance
the harvest of tobacco and other field. crops. Moreover, the shortage
of jute bags, formerly imported under the USAID program, limited the
capacity of farmers and millers to store and transport the export rice.
Although a final report on the rice harvest has not been received, it
has been reported that half of the export rice crop in. Battambang
Province has been lost in the fields. 3/ Although Battambang Province
is the leader in total output and in export rice, the output of export
rice is fairly widespread throughout Cambodia's rice growing provinces.
The failure, therefore, of a large number of rice farmers throughout
the country to sell export rice as a cash crop will restrict consider-
ably the business usually generated by them in other sectors of the
economy. The final impact of the problems of the rice harvest prob-
ably has not been felt. Distrust by the farmers and millers in the..
ability of the government, and particularly of SONEXIM, to handle ex-
port marketing and local financing also may lead to a reduced planting
during the next season. Such a reaction occurred in 1962-63, when the
failure of the government subsidy program for cotton resulted :Ln,a
drop in output of cotton from 30,000 to 4,000 tons.
II. Nationalization of Commercial Banking
The projected nationalization of all Cambodian banking in mid-1964
has dried up almost all commercial credit. Cambodia had eight com-
mercial banks, three of which were backed by Cambodian nationa:Ls, three
by French interests, and two by the British. In December the Cambodian
Bank of Phnom Penh closed when its director, Songsakd Kitchpanich, fled
the country, taking with him a large portion of the bank's assets, in-
cluding some government funds. This was a significant blow to private
banking and implicated many high government officials who had received
the bank's favors in the form of low-interest loans. As previously
stated, private commercial banking was faced with competition by the
government in December as a result of the nationalization of the Cam-
bodian Bank and the authorization to the National Bank to conduct com-
mercial transactions. The fate of French and British commercial banks
now operating in Phnom Penh is not yet known, but their banking activi-
ties have been curtailed, and apparently they will be compelled to
close unless a change in legislation is made before July 1964. At any
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rate, the absence of commercial credit has touched off a general decline
in business and construction. Moreover, with the cutoff of US economic
assistance, new developments in agriculture and industry, electric
power, and transport will depend on economic assistance made available
largely by France and by the Communist countries. In an effort to
forestall additional disorganization of the private business sector,
guarantees against nationalization have been authorized for manufactur-
ing industries and agricultural enterprises. 4/ Recent nationalization
moves, however, have poisoned the private foreign investment climate,
and little has been forthcoming even with these formalized guarantees.
III. Decline in Economic Activities
Although the effects of the new economic policies on exports of
rice and the rice harvest have been the most dramatic, the new market-
ing and banking policies have had other adverse effects on the Cambodian
economy. There has been a general decline in business activity. Un-
employment has increased in the urban areas and is expected to reach
30,000 (17 to 20 percent of the urban labor force). The unemployed
include a large number of students completing their studies and seeking
white-collar employment and those service personnel formerly employed
by foreign businesses and residents. In addition, the three operating
state-owned factories built with Chinese Communist aid have reduced
their total work force by one-third, adding more than 800 to the un-
employed. A compulsory work law has been passed, giving the government
the authority to employ workers where they are needed, but the small
number of jobs available in remote areas are primarily physical labor,
not particularly suited to the city-bred worker. 5/ Public and private
construction has been curtailed by a drop in imports of construction
materials, a lack of financing, and restrictions on issuing new build-
ing permits. Although imports of petroleum products (formerly supplied
under the USAID commodity import program) are being continued by for-
eign oil companies with guaranteed payments by the Cambodian government
and although local distribution reportedly is not to be nationalized,
the availability of petroleum is limited. Civilian use of gasoline
has been discouraged by doubling the price. This increase in price
has particularly affected truckers and bus companies, who have not been
granted commensurate increases in freight and passenger rates. 61
Trucking is to be nationalized gradually beginning in 1964, a move
that probably will result in a general decline in the efficiency of
transport services. 7/
Recent status of gold and foreign exchange reserves has not been
reported. At the end of October 1963 these reserves stood at about
$96 million, having been built up to this relatively high level with
the help of the US commodity import program. 8/ It is known that in
December at least $3 million of foreign exchange reserves were drawn
to pay for imports of petroleum, annual imports of which have been
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about $7 million. The total adverse balance of trade during L963 may
have reached $25 million, calling for a further reduction of reserves.
Unrealistic projections for trade during 1964 estimated an export sur-
plus. The reduced exports of rice, along with the lower output of corn,
beans, and other export crops and the low price of rubber, will make a
significant increase in exports unlikely. Imports will be lower than
in 1963 because of strict government restrictions and the dislocation
of normal import activities. Thus trade during 1964 may be balanced
but probably will not yield a significant surplus.
The proposed government budget for 1964 indicates a defic=_t of
about $50 million, some 28 percent of the total budget. Of this
amount, $23 million is to be advanced by the National Bank. Antici-
pated, but indefinite, foreign borrowings from France, the USSR, Yugo-
slavia, and Czechoslovakia are to account for the remainder. 99/ Bor-
rowings from Communist countries are under existing long-term credits,
and increases in French assistance are under negotiation. A planned
reduction of imports, however desirable from the point of view of the
balance of payments, will have an adverse effect on government receipts,
for customs duties make up about 25 percent of total government revenues.
Currency in circulation increased to 4 billion riels by November
1963, an estimated increase of 27 percent above 1962. An additional
printing of currency of 500 million riels was reported to have been
ordered in January 1964 to provide funds to pay the armed forces. 10
These additional money issues will further raise consumer prices, which
had increased markedly during 1963. The cost-of-living index and the
food price index for the working class in Phnom Penh in 1963 both rose
about 12 percent above 1962 and have continued to rise during 1964. 11/
Turnover taxes on rice and meat, which were rescinded in early 1963,-
were reestablished in January 1964. It was reported that the pay of
Foreign Ministry officials had been delayed for January and that em-
ployees of the Ministry of Public Works were not paid for 6 weeks. A
recent report indicates that treasury funds for payment of government
salaries are adequate to cover only about 2 months at the current rate
of spending. 12/
IV. Aid and Trade from Communist Countries
Since the renunciation of US aid, Prince Sihanouk has looked for
additional economic assistance from both Communist countries and coun-
tries of the Free World. The only new economic aid proposed by a Com-
munist country has been that offered by East Germany. Military assist-
ance has been provided by the USSR and Communist China and is forth-
coming from Czechoslovakia and Yugoslavia. Soviet military assistance,
consisting of 24 antiaircraft guns with auxiliary equipment and 4 MIG
aircraft given in late 1963, will be augmented by additional military
aircraft, artillery, and small arms. Soviet technicians are training
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Cambodians in the use of this equipment, and Cambodian pilots have been
trained in the USSR. 13/ Communist China's military aid, first received
early in 1964, has thus far consisted of 100 vehicles and small arms
to equip 3 battalions. A mission headed by Cambodian Minister of
Defense Lon Nol was in Peking during March 1964 and probably succeeded
in obtaining further military aid. This mission has been to the USSR
probably for the same purpose. 14/
Economic assistance from Communist countries during 1964 will be
provided under existing grants and credits. Soviet assistance will
include final drawings on the grant for a technological institute, and
drawings under a $12.2 million credit for the Kamchay Dam hydroelectric
facility. Yugoslav credits totaling $6 million also will provide work
on hydroelectric power facilities and possibly other projects still
under consideration. Under Czechoslovakia's credit of $4.5 million, a
sugar refinery, a tractor assembly plant, a tire factory, and a muni-
tions plant are in early stages of construction. In addition, under
the Czech credit, an 18,000-kilowatt thermal electric generating plant
may get underway during 1964. Chinese grants should provide for com-
pletion of the cement plant at Chakrey Ting and, if agreement can be
reached, may finance additional industrial plants. Cambodia seeks eco-
nomic assistance for the construction of an oil refinery and an auto-
mobile assembly plant and for the expansion of port facilities at
Sihanoukville. Another pressing need is for financing to complete the
Phnom Penh - Sihanoukville Railroad.
Other recent Communist activity.in Cambodia's economy has included
sending.a number of Chinese technical advisers to assist in planning
for the progressive nationalization of the economy. In December 1963
a civil air agreement was concluded with China to permit weekly flights
between Phnom Penh and Peking via Vientiane,. Hanoi, and Canton. Imple-
mentation of this agreement was postponed, however, because of the
inability to get overflight rights from Laos. An East German delega-
tion visited Cambodia early in 1964 and has offered economic assistance
for construction of irrigation works, for mechanization of saw mills,
for construction of pottery and china factories, and for improvement
of facilities at Sihanoukville. 15/
Trade with the Communist countries increased during 1963. During
the first 9 months,15 percent of Cambodia's total exports went to Com-
munist countries (valued at $63 million) compared with 11 percent for
the same period in 1962. Similarly the Communist countries supplied
19 percent of Cambodia's total imports (valued at $82 million for the
9-month period) as opposed to 16 percent in 1962. Increases in Soviet
Bloc* trade were accounted for primarily by larger purchases of Cam-
bodian rice, which in 1963 accounted for about 30 percent of all
* Excluding Albania.
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Cambodian exports of rice and rice flour. 161 East Germany initiated.
trade with Cambodia during 1963, but the total volume was only about
$300,000 during the first 9 months of the year. A trade agreement was
signed with North Korea calling for an exchange of about $1.4 million.
of goods each way.
V. French Assistance
Although economic aid comes from several countries of the Free
World, French presence in Cambodia continues to be strong and repre-
sents the major Western influence in the country. French financial
interests are considerable and include ownership and operation of most
of the rubber plantations,* partial ownership of a number of small in-
dustrial installations, the operation of three commercial banks, and
an interest (40 percent) in the Royal Cambodian Airlines. The French
military training mission consists of about 250 instructors; the cul-
tural mission includes 70 university teachers and about 256 teachers
in lower schools; and the technical aid mission provides 40 experts
in the fields of health and public works. 17 A French mission headed
by French Army Minister Pierre Messmer, in early January 1964 estab-
lished the basis for further grants of military and economic assist-
ance. About 100 military vehicles, 18 training and transport aircraft,
and 18 tanks with auxiliary equipment for an armored battalion of the
Cambodian Army are being provided by the French. Other aid offered
by the French included construction of a teacher-training school in
Phnom Penh and assistance in establishing a national agricultural
college. The estimated value of the new French military and technical
assistance is about $7.5 million. The established cultural, technical,
and military missions represent an annual grant of about $3 million.
Although no commitment has been obtained from France, financial. guaran-
tees or long-term credits have been sought by Cambodia to underwrite
the completion of the Phnom Penh - Sihanoukville Railroad and the ex-
pansion of the port facilities at Sihanoukville. Negotiations on
French assistance have been stalemated for the past 2 years by Cam-
bodian refusal to recognize the French currency devaluation of 1958.
* Rubber is Cambodia's second important export crop, accounting for
roughly one-third of total exports by value.
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