CAMBODIA is heading toward a collision with international bankers over, among other

things, present and future demands to sack 135,000 or more soldiers, police and civil

servants.

The International Monetary Fund (IMF) is continuing to withhold a $20 million loan

installment for "budgetary support" which is already five months overdue.

The installment was originally frozen because timber revenues were not being paid

into the State budget.

Now, the IMF is testing whether Phnom Penh has the political will to reduce its number

of State servants.

Donors and sources within the Royal Government say that political will does not exist.

For both Prime Ministers, culling loyal party members from the army, police and civil

service would mean an erosion of influence and power, which a floundering Funcinpec

particularly cannot afford just 18 months out from an election. Cambodian sources

also say that Hun Sen views IMF and World Bank conditions as examples of "Western

meddling."

"[Ministerial advisers] care about [what the IMF and World Bank want], but they

can't do anything about it," said one senior Cambodian official.

The IMF recently discovered that the number of Cambodian civil servants was even

higher than the 138,000 that the Government said it had - and this after nearly 7,000

"ghost" workers had been chased away in an internal audit. The figure has

now ballooned out to more than 163,000, following further Funcinpec and BLDP appointments

within various ministries. NGOs report that this has been noticeable both in Phnom

Penh and in the provinces.

One of the IMF/World Bank "rules" of good financial governance calls for

the number of civil servants to be pegged at between 0.5 per cent to 0.75 per cent

of the total population. That means the pressure is on the Government to shed 50,000

to 70,000 jobs.

Though Council of Ministers chief Sok An is working with the UNDP and the World Bank

on this, sources say that Ranariddh and Hun Sen have scrapped a promise to cut one

in ten public service jobs this year, and the same again in 1997.

"[The Prime Ministers] are not prepared to lose any of these jobs. There are

elections coming up and these jobs are party properties. This is one of the problems

with factional politics," said one analyst.

The IMF had already let Cambodia "off the hook" for the time being on reducing

its military - this too being Sok An's responsibility - "but instead said they

would talk about it later," one source said.

This demobilization will eventually see another 50,000 people or more laid off. Relevant

NGOs are pleased at the delay, saying they would have been expected to deal with

the social implications of so many redundant soldiers, and only then as an afterthought.

One NGO chief complained that neither the IMF nor the World Bank bother themselves

with the social problems of such mass layoffs, while the Royal Government cannot

afford to help those affected.

The IMF and World Bank have also insisted that police numbers be cut, from 70,000

to around 55,000. "This is also politically unacceptable," said one Cambodian

official, adding that the Prime Ministers are neither willing nor able to agree on

such a measure.

The official also noted that there were now about 10,000 military police, effectively

another private force under commander Kieng Savuth and aligned to the CPP. "This

was supposed to have been built up from surplus police and army personnel,"

he said. "In reality, it has been staffed with entirely new people."

Ministry of Finance State Secretary Sun Chanthol said the delay in the IMF payment

was a minor one, a matter of "filling in numbers to do with civil servants that

[the Government] did not have.

Chanthol said the Government and an IMF auditing team that recently visited had reached

agreement "on everything except for these few numbers".

He said when the statistics were ready they would be sent to Washington D.C. and

the IMF board there would likely approve the disputed payment. "It is nothing

like the IMF pulling out of Cambodia, as some newspapers have reported."

Chanthol said that to his knowledge the IMF was not now worried about logging. "As

long as we are to fulfill [promises of transparency and accountability of logging

revenues], there is no problem."

However, the Ministry of Finance is now striking the 1997 budget and the estimate

of logging revenues is again providing a big headache. "We know there are millions

of dollars worth of logging going on, but the projected income [for 1996] was only

about six billion riel ($2.4 million) - and we haven't even seen much of that,"

said one ministry official.

The IMF has also insisted that the CDC, Cambodia's investment agency, must pass internal

regulations to manage the Investment Law.

One source said: "There are many criteria that Cambodia has to look at with

investments - how technical the investment is, how many people a company will employ,

how much tax it should pay, how it will affect exports. Without internal rules and

regulations, the CDC can approve what they want and give tax emptions to whom they

please.

"Even with an Investment Law, CDC could be open to charges of approving investment

deals on political, financial or family favors. On one hand, the IMF tells the Government

to lower State spending and increase domestic revenue, on the other hand there is

a government agency [the CDC] giving away tax exemptions on a whim," he said.

Chanthol said however that CDC's new internal regulations were now with the Council

of Ministers awaiting approval.

"This is mainly to make sure the granting of [tax and other] incentives is more

transparent," he said.

Investments would in future be "ranked" on a number of criteria, for instance

on how many local people would be hired, so that the highly-ranked investors would

be given priority for approval and for tax and other incentives, he said.

"There won't be anything like 'Oh he's a nice guy, we'll give him an eight-year

tax holiday'," Chanthol said. He said it had taken a long time for the CDC "to

really see the potential issues and problems... facing us now."

The IMF team left Phnom Penh last month "having reached a broad agreement on

a policy package," team leader Michael Kuhn said. "The key is having it

all implemented and we'll see over the next few months whether the Government follows

through with its intentions."

Cambodia only has about ten to twelve weeks worth of foreign currency left in the

Central Bank to pay for its imports. One international banker said that although

it was a long way before Cambodia could be said to be in crisis, the situation was

"dangerous", especially because of the message the IMF was sending to other

financiers and donors.

Presently, Japanese budgetary support money was shoring up Cambodia's foreign reserves.

That would not last, sources said, because Japan - like the World Bank - is going

to peg its aid toward individual development projects from next year.

Sources added that the IMF is a sister organization to the World Bank. "If the

IMF continues having these sorts of problems, the World Bank will have to look toward

its program as well. If the IMF were ever to pull out, the World Bank would have

to go as well."

Highly placed sources within the World Bank say that there has been an historical

tendency for the Bank and the IMF to place too many conditions on borrowing governments.

In a situation like Cambodia's, the IMF is in danger of "painting itself into

a corner", eventually having to realize that it cannot insist on 135,000 jobs

being cut as fast as it wants.

"[The Cambodians] can look you straight in the eye and say 'yes, we'll cut those

jobs'. It just won't be on the same timetable as what the IMF thinks," said

one Bank official.

It was unlikely that the IMF or the Bank would pull out of Cambodia, especially as

aid donors have said they will not walk away from the one of the poorest populations

in the world, he said.

"There is a lot of articulate argument coming from Asian countries now that

they will follow their own brand of development, which is different from that of

the West and that has been proved to work."