VZCZCXRO4641
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHPF #0307/01 0980115
ZNR UUUUU ZZH
P 070115Z APR 08
FM AMEMBASSY PHNOM PENH
TO RUEHC/SECSTATE WASHDC PRIORITY 9481
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0745
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

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