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Viewing cable 06PHNOMPENH2228, CAMBODIA'S BILATERAL DEBT AND JAPANESE CONCERNS

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Reference ID Created Released Classification Origin
06PHNOMPENH2228 2006-12-27 09:18 2011-07-11 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Phnom Penh
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 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
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