Identifier
Created
Classification
Origin
06PHNOMPENH2228
2006-12-27 09:18:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Phnom Penh
Cable title:  

CAMBODIA'S BILATERAL DEBT AND JAPANESE CONCERNS

Tags:  EFIN PREL ECON CB 
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VZCZCXRO4356
OO RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHPF #2228/01 3610918
ZNR UUUUU ZZH
O 270918Z DEC 06
FM AMEMBASSY PHNOM PENH
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7750
INFO RUCNASE/ASEAN MEMBER COLLECTIVE PRIORITY
RUEHKO/AMEMBASSY TOKYO PRIORITY 3113
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY 0625
UNCLAS SECTION 01 OF 02 PHNOM PENH 002228 

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STATE FOR EAP/MLS AND EB

E.O. 12958: N/A
TAGS: EFIN PREL ECON CB
SUBJECT: CAMBODIA'S BILATERAL DEBT AND JAPANESE CONCERNS


UNCLAS SECTION 01 OF 02 PHNOM PENH 002228

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SENSITIVE
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STATE FOR EAP/MLS AND EB

E.O. 12958: N/A
TAGS: EFIN PREL ECON CB
SUBJECT: CAMBODIA'S BILATERAL DEBT AND JAPANESE CONCERNS



1. (SBU) Summary. Meetings with the RGC Ministry of
Economics and Finance (MEF),the Japanese Embassy, and the
IMF suggest that questions surrounding the relevant cut-off
date for Cambodia's bilateral debt is creating
misunderstandings and possibly preventing the Cambodian
government from finalizing the draft bilateral debt agreement
submitted to the RGC. MEF has said that the GOJ has objected
to Cambodia signing the agreement due to concerns about the
cut-off date; the Japanese Embassy says that as long as the
cut-off date remains 1985, the GOJ has no objections. The IMF
claims that there is roughly USD 4 million in pre-1985 GOJ
loans to Cambodia that will be affected and the GOJ has
indicated this is problematic for them. The IMF noted that
USG intentions as to what cut-off date will apply in recent
Paris Club discussions were not clear. Post would appreciate
Washington clarification regarding the cut-off date, if
appropriate to specify at this time, so that we can engage
Cambodian officials. Washington may wish to consider a
separate discussion with the GOJ. End Summary.

RGC Update on Bilateral Debt
--------------


2. (SBU) On December 19, MEF Deputy Secretary General
Vongsey Vissoth met with Pol/Econ Chief under instructions to
respond to Embassy inquiries as to the status of an RGC
response to the USG proposed agreement on the bilateral debt.
Vongsey Vissoth noted that the RGC had run into problems
with the Japanese Government on this matter, as the Japanese
had objected due to concerns over Japanese loan repayments
that would be affected by Paris Club terms and comparability
of treatment. The Japanese are reportedly unhappy that the
cut-off date for Cambodia's debt to the USG will affect
Japanese loan repayments. Vissoth said it would take 3-4
months to work out this problem with the GOJ, and asked for
more time. Pol/Econ Chief raised the issue of ongoing RGC
discussions regarding Russian debt, and asked it the RGC saw
any linkage between the two. The MEF official responded in
the negative, underscoring that for the USG bilateral debt,
the only outstanding problem had been determining the amount
of the debt. The RGC agrees with the USG position; however,

Japan is Cambodia's key lender and the RGC cannot afford to
alienate the GOJ. Already, said Vissoth, the GOJ has
withdrawn funding on a joint Japanese-ADB infrastructure
project in Sihanoukville because of the USG debt issue. With
the Russian debt, the outstanding difference is the interest
rate proposed by the Russians. Five percent is too high,
argued Vissoth, who said that Cambodia wants a more
concessional rate.


3. (SBU) Pol/Econ Chief met on December 20 with Murata
Tetsumi, the Economic Counselor at the Japanese Embassy, to
verify the GOJ position. Tetsumi said that the GOJ is not
worried about the Cambodian discussions with the USG
concerning resolution of the two countries' bilateral debt,
as long as the cut-off date is 1985 - as had originally been
agreed in the 1994-95 Paris Club discussions. Japan's loans
to Cambodia post-date 1985, and therefore would not be
affected. Tetsumi said that his Embassy's discussions with
the MEF, however, indicate that the RGC is still unhappy over
the terms of the proposed USG agreement, and noted that
senior MEF officials would prefer to see the agreement
include recycling of debt repayments to in-country assistance
programs. Pol/Econ Chief explained that the USG has
repeatedly told the RGC that such special consideration is
not realistic, and the RGC's best deal is on the table.
Tetsumi reiterated that his government is not precluding the
RGC from signing the agreement.


4. (SBU) Also on December 20, Pol/Econ Chief called on John
Nelmes, IMF Resident Representative, to seek his views on the
issue. Nelmes, in contrast to Tetsumi's remarks, said that
his understanding is the GOJ has USD 4 million in pre-1985
cut-off loans to Cambodia, and that the GOJ is unhappy that
comparable treatment and subsequent rescheduling would
negatively affect Japan. The IMF rep did give credence to
MEF concerns, adding that if the USG wants to push the issue,
clarification of the cut-off date and engaging the GOJ should
move forward sooner rather than later. Nelmes also pointed
out that he believes the USG was not clear in recent Paris
Club discussions as to what cut-off date would apply to the
USG-RGC bilateral debt agreement. The IMF is working from
the assumption that 1985 will remain the cut-off date, as
originally discussed in the mid-1990s when the issue of the
bilateral debt was under negotiation. But without
clarification from the USG, the GOJ may be concerned that a
new cut-off date may be applied that could negatively impact
its loan portfolio with Cambodia. Nelmes was uncertain why

PHNOM PENH 00002228 002 OF 002


the RGC had asked for 3-4 months in which to resolve this
matter with the Japanese.


5. (SBU) On the subject of the IMF's tabled Poverty
Reduction and Growth Facility (PRGF) program for Cambodia,
Nelmes noted that the RGC appears to be losing interest and
he worries that the government may believe that it can do
without an IMF program. The RGC's interest in acquiring a
commercial rating in 2007 by Moody's and Standard and Poor's
is ostensibly centered on providing commercial businesses
with a basis for getting a rating; i.e., it is difficult for
businesses to be rated when the country in which they operate
lacks a rating. However, Nelmes worries that the RGC may be
contemplating taking out loans at commercial rates in the
future and bypassing the IFIs. With China and some others
willing to provide loans at concessional rates and commercial
loans possible in the future, perhaps the RGC will disengage
with the IFIs, he opined. The IMF rep emphasized that he has
no/no proof of RGC intentions along those lines, but the
future oil/gas revenues may prove irresistible to borrow
against. Nelmes noted that Cambodia is too poor a country to
borrow at commercial rates -- the government needs to borrow
at concessional rates -- but the RGC also resents the
conditionality imposed by some donors providing those
concessional rates.

Comment
--------------


6. (SBU) While it remains unclear if the issue of the
cut-off date to be applied to the Cambodian debt is a real
stumbling block to the RGC reaching agreement with the USG,
it would be useful for post to have Washington clarification
on this subject so that we can respond to the MEF. We also
suggest that Washington consider the utility of engaging with
the Japanese, as they have an interest in the matter. During
a recent Embassy lunch with Japanese counterparts, the
Japanese Ambassador complained about the USG trying to
collect on a Lon Nol-period debt accrued under wartime
circumstances, and he also mentioned that his government was
rethinking co-sponsorship with the ADB of the Sihanoukville
project as a result. But he did not indicate that the GOJ
was a key factor in the RGC's unwillingness to move forward
on this issue. End Comment.




MUSSOMELI