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Cablegate: High Inflation Sparks Calls for Large Protest, Garment

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

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