Testimony
of Scot Marciel
Deputy
Assistant Secretary of State
Bureau of
East Asian and Pacific Affairs
U.S. Department of State
Before the
Subcommittee
on Asia, the Pacific, and the Global
Environment
House
Foreign Affairs Committee
February 14, 2008
“The United States and Cambodia: Bilateral Relations
and
Bilateral Debt"
Mr.
Chairman, Ranking Member Manzullo, and Members of the Subcommittee, thank you
for inviting me here today to testify about the growing U.S.- Cambodia
bilateral relationship and, in particular, Cambodia’s
outstanding bilateral debt to the United States.
The
bilateral relationship between the United States
and Cambodia
has been steadily improving, especially over the course of the past two years. Although Cambodia
continues to undergo a difficult transition to democratic governance, we have
seen positive developments in several key areas, including the strengthening of
civil society and democratic processes, rapid economic growth, improvements in the
fight against trafficking, support for democratic reforms in Burma, and increasing religious
tolerance. While longstanding problems
in the electoral process persist, which we are working to address through our
democracy assistance programs, Cambodia’s
April 2007 commune-level elections were peaceful and generally positive. National elections are scheduled for July
2008.
U.S. - Cambodia
cooperation in a number of areas is growing and moving our bilateral
relationship forward. In 2007, Cambodia
hosted two U.S. Navy ships – the first to visit in over 30 years – and
inaugurated a Peace Corps program. With U.S. encouragement and support, Cambodia has taken increasingly responsible
positions on the world stage, including sending de-miners to participate in a
UN peacekeeping mission to the Sudan
and instituting a parliamentary caucus on Burma. We share good cooperation with the Cambodian
military on counterterrorism and POW/MIA accounting.
Despite
this progress, weak rule of law, rampant corruption, and weak institutions remain
major challenges to Cambodia’s
democratic development and sustained economic growth. While the political opposition plays a role
in the country’s political affairs, the ruling party dominates all branches of
the government. Cambodia’s leaders continue to
occasionally use its weak and easily-influenced judiciary to pursue legal cases
against critics and the political opposition.
Land disputes and forced evictions, often accompanied by violence,
continue to be a high-profile problem. Cambodia’s
health and education system were largely decimated during the reign of the
Khmer Rouge (1975 – 1979), and this legacy continues to hamper the country’s
social and economic development.
In Cambodia’s efforts to deal with the legacy of
the Khmer Rouge, the U.S.
strongly supports bringing to justice senior leaders responsible for the
atrocities committed under that regime. We
applaud the progress made by the Extraordinary Chambers in the Courts of Cambodia
(ECCC), a Cambodian government and UN hybrid tribunal created in 2004 to try
those individuals most responsible for the crimes committed under the Khmer
Rouge regime in which nearly two million Cambodians were killed. The investigative phase of the tribunal is
now underway and five former Khmer Rouge senior officials have been charged
with war crimes and/or crimes against humanity. The U.S. has not in the past provided direct
funding to the ECCC, due to congressional and Administration concerns about the
tribunal’s quality, and in particular that the tribunal is not capable of
meeting “international standards of justice.”
However, in light of the Court’s progress during the past year, the Department
is currently reviewing the tribunal and its operations, including whether or
not it is capable of meeting international standards of justice, in order to
make a decision regarding future funding.
Economy and Trade
Cambodia has
taken a number of important policy measures recently to improve its business
climate and promote economic growth. Cambodia
joined the World Trade Organization in 2004 committing to implement global
trading rules and opening its economy to foreign investment and trade. Implementation of these WTO commitments and
other economic reforms have resulted in annual GDP growth rates in the 8 – 10
percent range over the past two years. Despite these impressive results, Cambodia
remains a poor country: per capita income is only $590 per year; education
levels are lower than in most neighboring countries; and infrastructure remains
inadequate. Economic opportunity and
competitiveness continue to be retarded by corruption and lack of legal
protections for investors, and there are significant questions regarding the
sustainability of recent high economic growth rates.
Cambodia’s
largest trading partner is the United
States.
Garments dominate Cambodia’s
exports, especially to the U.S.,
and accounted for over $2.6 billion in 2007.
The garment industry employs roughly 350,000 workers, mostly women. Cambodia
has developed a good labor record in the garment sector, built through close
cooperation with the International Labor Organization and the U.S. Government,
which has attracted socially conscious buyers in the United States. Since the end of the WTO’s Multi-Fiber
Agreement in 2004, Cambodia
has defied expectations that its garment industry would shrink
significantly. In fact, exports have
grown by nearly 20 percent, due in part to safeguards placed on imports of
apparel from China. The U.S. safeguards on Chinese textiles
will expire at the end of 2008, and under WTO rules cannot be renewed. The U.S.
will continue to help accelerate economic opportunity and competitiveness in Cambodia
by encouraging policy reform, implementing measures to reduce and eliminate
corruption, and strengthening the legal framework for investors.
In July
2006, the U.S. and Cambodia signed a bilateral Trade and Investment
Framework Agreement (TIFA), and the first round of discussions took place in Cambodia
in February 2007. The on-going bilateral
TIFA dialogue is focused on creating a cooperative mechanism to deepen and
expand bilateral trade and investment ties, and supporting Cambodia’s efforts to implement its
WTO commitments and other domestic economic reforms. Our engagement with Cambodia under this dialogue has
been highly successful. In November 2007, Ambassador Susan Schwab led the
bilateral dialogue, becoming the first U.S. Trade Representative to visit Cambodia.
U.S.
Assistance to Cambodia
Cambodia is the
third-largest recipient of U.S.
foreign assistance in the East Asia and
Pacific region. In 2007, Cambodia
received $62 million to cover a broad array of important issues, including
HIV/AIDS and maternal health, demining and professionalizing the military,
strengthening good governance and human rights, and promoting economic
development (see Appendix 1). U.S.
assistance also supports programs to reverse the current culture of impunity,
while strengthening civil society's ability to address legal and judicial
reform, land tenure, rights of workers and children, and prevention of
trafficking in persons. The U.S.
also encourages expanded political participation by youth and women in
elections and political processes. The
USG provides assistance to improve the quality of and access to education,
teacher training, assisting school directors to measure performance, and
strengthening the leadership of the education system. We hope to increase the number of Cambodians
studying in the United
States under Fulbright and Humphrey
Fellowship programs beyond the current twenty. U.S.
assistance also helps preserve Cambodia’s
rich natural resources, by building increased transparency in natural resources
management.
From
1997 to 2007, legislative restrictions limited direct funding to the central
government of Cambodia. Current assistance programs started since the
restrictions were removed are carefully targeted to ensure funds are being used
effectively to promote reform.
U.S. Policy
on Restructuring Official Foreign Debts
Debt relief can be an important means of achieving U.S.
goals of promoting economic growth, well-functioning financial markets, and economic
reform abroad. Longstanding U.S.
policy is to coordinate sovereign debt restructuring internationally, primarily
through the Paris Club group of official creditors. This multilateral approach is a good value
for the U.S. taxpayer
because it increases recoveries from countries that are not paying their debts
to the U.S.,
while maximizing benefits of debt relief for heavily-indebted, low-income
countries that are unable to meet their payment obligations.
The United States
provides debt cancellation only under limited circumstances, for example, as a
Paris Club creditor in the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative. This approach provides budgetary resources to
pay for the cost of debt relief for debtor countries that are in debt distress.
These debtor counties commit to implement economic reforms aimed to reduce poverty
and help avoid a new build-up of unsustainable debt before having debt relief. In evaluating requests for debt cancellation,
the U.S.
and other major official creditor countries rely heavily on International
Monetary Fund (IMF) and World Bank assessments of a debtor country’s financial
need for debt relief and willingness to undertake reforms. Congress has reinforced this need-based
approach to debt relief by enacting statutes such as the Special Debt for the
Poorest authorization (enacted this year as Section 662 of the Department of
State, Foreign Operations and Related Program Appropriations Act, Division J of
P.L. No. 110-161) and the Enhanced Heavily Indebted Poor Countries Initiative
(Title V of Appendix E of H.R. 3425, as enacted into law by Section 1000(a)(5)
of P.L. No. 106-113). These statutes
authorize the Executive Branch, under specific circumstances, to reduce or
otherwise restructure sovereign debts, which are considered U.S. Government assets.
Cambodia’s External Debt
Cambodia’s
public debt is almost entirely external, of which roughly one-third is owed to
the United States and Russia. At the end of 2006, Cambodia’s debt was 31 percent of its
GDP. According to the World Bank and
the IMF, Cambodia’s debt is on a sustainable path and the risk of debt distress
is judged “moderate,” an improvement from the 2006 assessment that Cambodia’s
risk was “high,” thanks to higher-than-expected GDP growth and additional
large-scale concessional financing from creditors such as China and South
Korea. IMF and World Bank data indicate
that, in 2007, Cambodia’s
debt-to-exports ratio was 32 percent and its debt-to-government revenues ratio
was 188 percent (net present value terms).
In comparison, the threshold levels of indebtedness needed to qualify
for debt relief under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative
are 150 percent (debt-to-exports) and 250 percent (debt-to-revenues). Simply put, Cambodia does
not qualify for debt relief under Enhanced HIPC applying the usual criteria,
which were designed to identify the most heavily debt burdened poor
countries. Based on the
Multilateral Debt Relief Initiative’s different eligibility criteria, Cambodia
benefited from $82 million in IMF debt relief in January 2006.
Cambodia’s Debt to the United
States
Cambodia’s
bilateral debt to the U.S. Government stems from shipments of U.S. agricultural commodities, such as cotton,
rice, and wheat flour, financed with low interest-rate loans by the U.S. Department
of Agriculture (USDA) under Title I of the Agricultural Trade Development and
Assistance Act of 1954 (P.L. 480). The U.S. and Cambodia
signed three “P.L. 480 agreements” in 1972, 1973, and 1974, during the Vietnam
War and Cambodia’s
turbulent Lon Nol era. The United States
accepted significant payments in local currency under a “Currency Use Payment”
provision commonly included in such agreements; the remainder of the debt was
to be paid in dollars. The Lon Nol
regime never consolidated its hold on the country and ultimately Cambodia
fell to the Khmer Rouge in 1975, which ceased servicing this debt. Arrears and late interest accumulated over
the next three decades.
In
1995, the Paris Club group of creditor nations and Cambodia
reached an agreement to restructure Cambodia’s
debt on “Naples”
terms – then the most generous treatment in the Paris Club’s “toolkit.” At the time, the U.S.
was by far Cambodia’s
largest Paris Club creditor. Cambodia
benefited from a 67 percent reduction of certain non-concessional debts, and a
long-term rescheduling of certain concessional debts. Since all of Cambodia’s debt to the U.S. was
contracted on concessional terms, at below-market interest rates, the Paris
Club agreement called on the U.S. to consolidate arrears and future payments
scheduled between January 1, 1995 and June 30, 1997 into a new loan payable
over 40 years following a 16-year grace period.
Debt service falling due on or after July 1, 1997 was to be paid
according to the original schedule. Cambodia eventually signed debt agreements with France, Germany,
Italy, and Japan to implement the 1995 Paris
Club debt treatment, and began paying those countries normally. The United
States and Cambodia never concluded a
bilateral implementing agreement, in part because the Cambodian government
refused to accept responsibility for debts incurred by the Lon Nol regime and, in
part, because of a disagreement at the time over the amount of debt owed.
After several years of
deadlock, negotiations resumed over the 2001-2005 period, with the active
involvement of the State Department, the U.S. Treasury Department, USDA, and
U.S. Embassy Phnom Penh. After carefully
examining the available legal authorities, the U.S.
negotiating team's offer to the Cambodian government showed significant flexibility
on the amount of debt owed. In December
2005, the Treasury Department affirmed that, for legal and policy reasons, this
was the final, best offer the U.S.
could make.
In February
2006, the Cambodian Finance Minister indicated that Cambodia
agreed with the U.S.,
in principle, with the amount of principal it owed. Based on this understanding, the United States
drafted a bilateral agreement that retroactively implemented the 1995 Paris
Club agreement, including USDA’s concessions, and presented it to the Cambodian
government in the summer of 2006. If the
agreement is implemented in 2008, Cambodia’s
total debt to the U.S.
totals approximately $339 million using data calculated as of December 31, 2007. About $154 million of that amount, arrears
that have accumulated because regular debt service payments were to have
resumed in 1997, would be due immediately. The United
States has repeatedly communicated to Cambodia that, should Cambodia
agree to the proposed bilateral agreement, the U.S. stands ready to support a new
debt treatment in the Paris Club to reschedule these arrears.
To date, the Cambodian government has been
unwilling to sign the draft bilateral agreement and now seeks additional
concessions, such as a lower interest rate.
Longstanding U.S.
debt policy, in keeping with Paris Club principles and U.S. budget rules, is to retain the
same interest rate of the original loans in any rescheduling of those
loans. The proposed U.S.-Cambodia
bilateral debt agreement would reschedule the consolidated P.L. 480 debt at the
original interest rate of 3 percent – a highly-concessional interest rate given
the interest rate environment of the early 1970s. Offering a lower interest rate would be an
unauthorized form of debt reduction. Cambodian
officials have also indicated that domestic political obstacles still make the
government reluctant to accept responsibility for debts incurred by the Lon Nol
regime. Although Cambodian observers may
consider this debt illegitimate, the U.S. has on its side the
international law principle that governments are generally responsible for the
obligations of their predecessors. The
government of Iraq
accepted the debts incurred by Saddam Hussein.
The civilian government of Nigeria accepted responsibility for
debts accumulated by military governments that ruled the country in the 1980s
and 1990s. Similarly, Afghanistan accepted the heavy debt
burden left by decades of foreign occupation and civil war. There are many other examples.
Senior U.S. government officials have repeatedly
encouraged Cambodia to live
up to the 1995 Paris Club agreement it signed with the United States and other creditors,
and urged it to sign the pending U.S.-Cambodia bilateral agreement without
further delay. However, Cambodia may be reluctant to accept the current
proposal to settle the bilateral debt issue if it believes there are good
prospects of converting a significant amount of the debt service it would
otherwise pay to the United States
into a form of increased U.S.
assistance.
We understand Cambodia has expressed
an interest in a debt-swap program similar to debt-for-assistance measures that
were enacted for Vietnam
in 2000. Observers often compare Vietnam and Cambodia
for geographic and historical reasons, but several distinctions about the
treatment of the debts these countries contracted with the United States are worth
highlighting. In 1993, Paris Club
creditors provided Vietnam a
debt rescheduling on terms similar to Cambodia’s 1995 Paris Club debt
agreement. Vietnam
signed a bilateral implementing agreement with the U.S.
in 1997, resumed making scheduled payments, and was in good financial standing
when Congress created the Vietnam Education Foundation, which will refund to
the Foundation’s programs about 40 percent of Vietnam’s total debt payments to
USAID and USDA. The same cannot be said
of our current situation with regard to Cambodia debt.
The
Administration’s position is that Cambodia’s
economic and financial situation does not merit debt reduction, because the
country is neither heavily indebted nor experiencing an external balance of
payments crisis. The Administration is concerned
that creating a special debt reduction program for a country that is unwilling,
rather than unable, to pay its debts, sets a poor precedent for other counties
in similar circumstances and sends the wrong message about prudent debt
management. Cambodia
has accumulated arrears to the U.S.,
while paying other creditors on time, and in at least one case, early. Every year, both within and outside of the
Paris Club context, the U.S Government reviews and declines similar requests for
debt-for-assistance swap arrangements from debtor countries that are both current
on their debt service and may owe billions of dollars of debt.
Congress has also expressed its view on the
importance of maintaining orderly creditor-debtor relations in a number of
statutes, including Section 620(q) of the Foreign Assistance Act of 1961 and
the Brooke Amendment (enacted this year as Section 612 of the Department of
State, Foreign Operations and related Programs Appropriations Act, Division J
of P.L. No. 110-161). These statutes provide
for an automatic cutoff of U.S.
economic assistance to a country that is in default on certain loans for
certain periods of time. Although Cambodia’s USDA debts are not subject to these default
sanctions, these statutes reflect Congress's expectation that countries repay
their debts to the United
States in a timely manner.
Another
concern about funding foreign assistance programs through the principal and
interest payments of debtor counties is that it circumvents normal budget
rules. Congress passed the Federal
Credit Reform Act of 1990 requiring U.S. creditor agencies to make
realistic estimates about recoveries when calculating the true cost of lending
programs. This approach saves U.S.
taxpayers money by creating transparent incentives for agencies to manage
credit programs efficiently and effectively.
Accordingly, the Administration requests and Congress annually appropriates,
funds to be used to pay the U.S.
budget cost of cancelling a country’s debt obligation or providing a debt swap. The Cambodian proposal circumvents this congressional
budget oversight mechanism.
In sum,
Cambodia’s prompt agreement to resolve U.S. debt claims would eliminate this
long-standing dispute in a scenario of otherwise improving bilateral relations;
it would also enhance Cambodia’s creditworthiness and Cambodia’s ability to
access international capital markets. Other
countries following this path have benefited enormously.
Mr. Chairman, I appreciate this opportunity to appear
before you and welcome any questions you may have. Thank you.
Appendix
1
($ in thousands)
|
FY 2007
Actual
|
TOTAL
|
62,020
|
Child
Survival and Health
|
32,989
|
Development
Assistance
|
7,710
|
Economic
Support Fund
|
14,850
|
Foreign
Military Financing
|
990
|
Global
HIV/AIDS Initiative
|
1,600
|
International
Military Education and Training
|
101
|
Nonproliferation,
Antiterrorism, Demining and Related Programs
|
3,780
|