HIGH INFLATION SPARKS CALLS FOR LARGE PROTEST, GARMENT

UNCLAS SECTION 01 OF 02 PHNOM PENH 000307 SIPDIS SENSITIVE SIPDIS STATE FOR F, EAP/MLS, EAP/RSP, EEB/TPP/ABT, EEB/IFD/OMA STATE PLEASE PASS TO USTR FOR DAVID BISBEE BANGKOK FOR FAS--MEYER HANOI FOR FAS--WADE AND RALPH AGRICULTURE FOR FAS/OCRA--RIKER TREASURY FOR CHUN E.O. 12958: N/A TAGS: ECON SOCI PHUM PGOV ELAB EAGR KTEX CB SUBJECT: HIGH INFLATION SPARKS CALLS FOR LARGE PROTEST, GARMENT WAGE INCREASE ¶1. (U) Summary: Dramatic increases in inflation have led the opposition Sam Rainsy Party to call for a large anti-inflation march to be held April 6 and have netted garment sector workers a 12 percent inflation bonus. While the government reports that annual inflation reached nearly 19 percent in January, a local think tank reports that in March the prices of staples such as rice, fish, chicken, and pork had increased by 30 to 60 percent compared with a year earlier. The Cambodian government is largely unable to halt the rising tide of prices caused by external factors, but is doing the little that it can to increase domestic supply and lower prices. As usual, the working poor--who spent up to 70 percent of their incomes on food before the inflation--bear the largest burden from these increases. End Summary. ¶2. (U) Inflation in Cambodia has increased dramatically in recent months and has reached worrisome levels. The official rate for 2007 was 10.9 percent, the highest rate in almost a decade. Since the beginning of 2008, though, inflation has accelerated, with the government reporting that January's prices were nearly 19 percent above those a year earlier. The food, beverage, and tobacco category outpaced the general inflation index with an increase of 24 percent for the January to January period, following a general global rise in food prices for the same period. More disturbingly, more recent statistics from the Economic Institute of Cambodia, an independent economic think tank, show between March 2007 and March 2008, the price of rice increased by 53 percent, fish increased by 35 percent, pork increased by 62 percent, and chicken increased by 41 percent, significantly outstripping the category averages. These figures become all the more stark when compared to the 4.9 percent inflation reported in 2006 and the 5.8 percent reported for 2005. Global and Local Factors Pushing Prices Up -------------- ¶3. (U) Both global and local factors are contributing to inflation. Huot Chea, economist at the World Bank, said that inflation is on the rise not only in Cambodia but throughout the world due to the rising price of oil and increasing global demand for commodities. He also cited the depreciating dollar, the de facto currency for Cambodian business, versus other currencies as a significant inflationary factor because most goods in Cambodia are imported from other countries. Price speculation could also be playing a role as some farmers and traders are hoarding supplies as they wait for prices to increase. ¶4. (U) Beyond the rising price of oil, depreciation of the dollar, and increasing global demand, specific products may have specific reasons for disproportionate increases in price. As reported septel, rice increased because of export bans by other rice-producing countries and poor harvests. Pork, for example, increased at a higher rate because the government banned imports following problems of diseased swine in neighboring countries. Fish increased because of a poor harvest. Cooking gas increased because of export restrictions by Thailand. Working Poor Suffer the Most -------------- ¶5. (U) The rising prices do not hurt net producers, who may be farmers. However net consumers will suffer, and the working poor will suffer the most. According to 2004 statistics from the World Bank, the poor spend approximately 70 percent of their income on food. Given high inflation levels--particularly for food--the working poor are likely spending even more of their incomes on food today. Hout Chea said that rises in food prices will particularly hurt poor Cambodians, one-third of whom earn less than one dollar a day. Government Efforts to Curb Inflation and Relieve Consumers -------------- -------------- ¶6. (U) The increase in prices is largely due to factors the RGC cannot control, and relief will not be quick. However, the government has taken some steps to ease pressures. According to Hout Chea, the price of rice is the most important for the Cambodian government to counteract because virtually all Cambodians regularly consume rice as a staple in their diet. As Cambodia is a net producer of rice, last week the government banned exports for two months and decided to release reserves at a below-market price. Sok Hach, Director of the Economic Institute of Cambodia, said that this measure may prove effective in stabilizing PHNOM PENH 00000307 002 OF 002 the price of rice in the short-term, and as the harvesting season is underway, may prove effective in slowing the rise of domestic rice prices as long as the ban is enforced. However, hoarding and cross-border smuggling by farmers and traders trying to game the market may limit the effectiveness of this effort. To decrease the price of pork, the government removed a ban on imports of pigs, put in place to prevent diseases brought into the country from imported pigs. The government also has said that it is subsidizing the price of gasoline. However, prices are significantly higher than in neighboring countries largely due to government taxation. ¶7. (U) In addition, today the Labor Advisory Council rubber stamped a deal reached between unions and garment factories to temporarily increase wages by USD 6 per month. This inflation bonus will be given to all garment factory workers, and is scheduled to last until December 2010, when the current monthly minimum wage of USD 50 per month is due for renegotiation. International Labor Organization official John Ritchotte lamented that the decision was largely a political one driven by the ruling Cambodian People's Party, rather than a fact-based economic decision tied to commitments to increase productivity in Cambodia's factories. Opposition Plans Large Anti-Inflation March -------------- ¶8. (U) The opposition Sam Rainsy Party has seized on the inflation issue over the last six months, and has joined unions in calling for reductions in gasoline taxes and increases in civil servant salaries. Over the last few days, however, the SRP has shifted their efforts into high gear, planning a 5,000 person march through central Phnom Penh to be held on Sunday, April 6 to call for effective government action against inflation. The proposed event, which would be the largest march since the funeral procession for assassinated union leader Chea Vichea in January 2004, has clearly worried government officials, several of whom have called for the party to cancel their efforts, warned of potential arrests, and compared this march to anti-inflation rallies in the 1970s that turned violent. Septel will report on decisions taken by the Emergency Action Committee today regarding security precautions for the march. ¶9. (SBU) COMMENT: With Cambodia's national election just months away, it is impossible to separate Cambodia's new inflation troubles from the political fortunes of its leaders. Opposition leader Sam Rainsy, who portrays himself as the champion of the poor, has a golden opportunity to criticize the government's economic policies. Observers worry about the possibility of stagflation as the economy slows and inflation accelerates, negating gains from economic growth. Economic growth is forecast at 7.5 percent for 2008 by the World Bank, and with inflation picking up, gains made in developing and emerging middle class may be set back, as higher prices eat into those economic gains. While these are legitimate concerns, Rainsy will have to be careful in pressing the issue to engender a positive reaction rather than the crackdown that some in Cambodia are fearing. END COMMENT. MUSSOMELI