Debunking Myths about the Debt [The U.S ambassador said Cambodia is unwilling to repay its U.S. debt]

William E. Todd, U.S. Ambassador to the Kingdom of Cambodia 

Thank you for the excellent feedback that you continue to provide on my “Ask the Ambassador” column.  Engaging directly with all of you on issues that you find important and pressing are a highlight of my work in Cambodia.  I hope to continue to hear from you at AskAMBToddPP@state.gov.

Recently, I have received several questions regarding Cambodia’s bilateral debt to the United States since the matter was raised during the East Asia Summit between our two countries.  As I indicated in a previous column, both the United States and Cambodia agree that resolving the debt issue would go a long way toward strengthening our bilateral relationship and would help spur Cambodia’s economic development by improving its creditworthiness and access to international capital markets.  Unfortunately, there still seems to be some misunderstandings about the specifics of the debt and most of the questions demonstrate how much misinformation out there exists.

What is the source of the debt?  The debt arose from shipments of agricultural commodities, such as rice and wheat flour, financed with low-interest loans by the U.S. Department of Agriculture to Cambodia in the early 1970s.  When the Khmer Rouge regime came to power in 1975, it ceased to repay these loans.

In 1995, Paris Club creditors – an informal group of financial officials from some of the world’s largest economies, including the United States – agreed to a debt restructuring package for Cambodia.  Cambodia signed bilateral debt agreements with France, Germany, Italy, and Japan and began paying those countries accordingly.  The Cambodian government indicated, however, that it was unwilling to repay its U.S. debt, in part, because it did not recognize debts incurred during the Lon Nol era.  According to international law, governments are generally responsible for the debts of their predecessor governments.  For example, the Iraqi government agreed to repay the debts of the Saddam Hussein regime, the civilian government of Nigeria accepted the debts of the preceding military regimes, and Afghanistan accepted the financial burden stemming from decades of foreign occupation and war.  In fact, one of the most important decisions of an independent United States in 1783 was to honor debts to Great Britain.

The United States has remained steadfast in resolving this issue.  After several years of deadlock, we offered concessions of nearly $100 million on the amount of principal owed, leading the Cambodian Ministry of Finance to agree on a final principal figure.  Both parties then moved forward with drafting a bilateral agreement – similar to the ones Cambodia had with France, Germany, Italy, and Japan for repaying those debts – that retroactively implemented the 1995 Paris Club agreement, including a highly favorable interest rate concession.

Although the agreement has been with Cambodia since 2006, the Royal Government has been unwilling to move forward with signing it and has since asked for additional concessions, such as an additional interest-rate reduction and a debt swap arrangement.  The challenge with these requests is that under U.S. law the Cambodian government must be current in repaying its debt before these ideas can be considered.  Furthermore, 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 countries in similar circumstances and sends the wrong message about prudent debt management.  The United States regularly reviews and declines similar requests for debt-for-assistance swap arrangements from debtor countries, including countries that are current on their payments.

So how can we resolve the debt issue?  We have urged the Cambodian government to sign the pending bilateral debt agreement and to re-establish a track record of timely repayment.  If it makes scheduled payments for at least one year, the U.S. government would communicate to the International Monetary Fund that efforts are underway to resolve official arrears, which would pave the way for the Paris Club to consider a favorable rescheduling of the remaining debt.  We now await Cambodia’s decision to move forward.

I hope this explanation helps clear up any misunderstandings regarding the longstanding and thorny debt issue, which the United States remains committed to resolving.  Thank you all very much for spending your Sunday reading my column.  I look forward to reading next week’s questions, so please send your questions to me in English or Khmer at AskAMBToddPP@state.gov, and don’t forget to follow my blog at http://blogs.usembassy.gov/todd/.

William E. Todd is U.S. Ambassador to the Kingdom of Cambodia