Cambodia, US duel over Vietnam War debt
Washington's demand that Phnom Penh repay a four-decade-old US$500 million loan will likely push the post-conflict country even closer to China
Since US President Donald Trump’s inauguration in January, Cambodian Prime Minister Hun Sen has repeatedly called on the new American leader – often personally – to cancel a US$500 million debt owed dating back to the Vietnam War. Hun Sen has made the request to previous US presidents, to no avail. He has referred to the money owed as “blood-stained” and “dirty.”
Between 1972 and 1974, the US Department of Agriculture gave the then ruling pro-US Lon Nol regime US$274 million, officially for food supplies, but most believe it was really used for military purposes. Lon Nol came to power in a US-backed military coup in 1970, only to fall to the Maoist radical Khmer Rouge regime five years later.
The United States has forgiven other past debts when politically expedient. It cancelled almost US$4 billion worth of Iraqi debt incurred during the Saddam Hussein regime, once it was overthrown and replaced by a US invasion. Most debt negotiations are solved by the Paris Club, an informal group of official creditors founded in 1956.
Cambodia serviced debts with France, Germany, Italy and Japan in 1995, the same year Cambodia rejected a US offer made via the Paris Club to waive 58% of the debt in return for payment of the rest. Cambodia’s debt to the US has now doubled due to interest and arrears, representing almost 3% of Cambodia’s current gross domestic product (GDP).
Hun Sen has noted that around the same time the debt was incurred the US dropped more than 2.7 million tons of ordnance on Cambodia, making the country one of the most heavily bombed per capita in the history of warfare. “It is difficult for us to tell Cambodians to accept debt to buy bombs and bullets to kill Cambodian people,” Hun Sen said recently.
US Ambassador to Cambodia William Heidt acknowledges that tragic history, but nonetheless told local media last month that it is “in Cambodia’s interest not to look at the past, but to look at how to solve this because it’s important to Cambodia’s future.” Cambodia is among only four nations, the others being Sudan, Somalia and Zimbabwe, which are in arrears to the US, Heidt noted.
During the 1990s, when Heidt was an economic officer at the US embassy in Phnom Penh, a US offer was tabled for Cambodia to pay back the debt over a 40-year period, he said. At the time, the debt was considerably less than the US$500 million owed today. It is not in “Cambodia’s best interest to keep letting that grow forever,” Heidt said last month, referring to interest accruing on the principal.
The US government has also firmly maintained that if Cambodia wants to be treated by the US and international community like a stable and prosperous country – as Hun Sen has demanded – these are the terms of engagement it should expect.
“The [US] 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,” Scot Marciel, then deputy assistant secretary for East Asian and Pacific Affairs, told a congressional foreign affairs committee in 2008.
The Cambodian economy has enjoyed rapid economic growth since, fueled by a booming export sector, driven largely by garment exports, and ever rising levels of foreign investment.
“To me, Cambodia does not look like a country that should be in arrears. Buildings coming up all over the city; foreign investment coming in; government revenue is rising rapidly,” Heidt said last month.
Heidt also chided recent bilateral developments, saying he was “disappointed” by Hun Sen’s decision to cancel joint military exercises scheduled for January, in a move widely viewed as a snub to Washington and a nod to Beijing. He said the government’s passage last month of a new political party law that makes it easy to dissolve opposition parties was not “what the Cambodian people want.”
After some bilateral gains, including a 2009 revision that lifted a long-time US ban on Cambodian imports to the US as a Marxist-Leninist country, Washington’s sway over Cambodia has weakened in recent years as China’s has surged through generous aid and large-scale investments.
With democracy and human rights again in retreat in Cambodia, an agreement by the US to renegotiate the debt might provide it with financial leverage to regain some of its lost political influence.
Indeed, the US$500 million repayment issue comes at a trying time for Cambodia’s finances, with national debt standing at around one-third of GDP. The Cambodian economy, which has expanded around 7% per annum over the last decade, could be poised for structurally slower growth due to its fast rising debt obligations, including to China.
Because of Phnom Penh’s persistent refusal to pay, Washington has in kind pressured the International Monetary Fund to restrict its engagement with Cambodia, including the provision of potentially vital loans if new foreign investments start to wane.
“To me, Cambodia does not look like a country that should be in arrears. Buildings coming up all over the city; foreign investment coming in; government revenue is rising rapidly.” – US Ambassador to Cambodia William Heidt
Stratfor, a US-based private intelligence outfit, noted in a report that the debt issue is largely a “symbolic matter”, but that the issue does give the US “more leverage” over Phnom Penh. But if Washington’s aim is to win more influence, including vis-à-vis China, by replacing carrots with sticks, a tough stance on the debt issue could have the opposite effect.
Cambodia plays a pivotal role in Southeast Asia’s politics through what many view as a patron-client relationship with China. In June 2016, Cambodia’s opposition to a strongly-worded statement against China’s ambitions in the South China Sea forced the Association of Southeast Asian Nations to retract the communique, irking regional partners – and no doubt the US – which supported a tough collective stance.
Shortly afterwards, Beijing extended Cambodia more than $600 million in loans and aid.
“Nothing could be better guaranteed to lock Cambodia in behind China on issues like the South China Sea than to destroy any possibility for flexibility towards Cambodia on that issue than this demand for money,” said Tony Kevin, former Australian ambassador to Cambodia, recently told Australian media. “It’s just dumb.”