America’s debt diplomacy in Cambodia

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America’s debt diplomacy in Cambodia

Moralizing is all well and good but the Vietnam War era $700 million Phnom Penh owes Washington need not be a sticking point
By DAVID HUTTJULY 1, 2021



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A Cambodian woman holds riel bank notes. Photo: AFP Forumhttps://asiatimes.com/2021/07/americas-debt-diplomacy-in-cambodia/
A Cambodian woman holds a stack of riel bank notes. Photo: AFP Forum

According to Cambodian Prime Minister Hun Sen, it’s “dirty” and bloodstained money. For the United States, it’s simply a debt that Cambodia, a sovereign state, must pay.  

For years, Washington and Phnom Penh have clashed over a $278 million loan that Cambodia took in the early 1970s but which, after four decades of interest and non-payment, has now more than doubled.

In 2010, the US Congress put the figure at $444 million, including interest. In 2017, the US Embassy in Phnom Penh told local media that the debt had risen to $505 million at a concessional 3% interest rate. 

Fresh News, the Cambodian government’s mouthpiece, said recently that it had risen to around $700 million, which cannot be confirmed and appears high considering aforementioned US estimates from previous years. Let us assume it is between $500 million and $700 million, but probably toward the lower end of that scale. 

But it only started out as $278 million in US loans to the Lon Nol government, which in 1970 had ousted the regime of king-turned-autocrat Norodom Sihanouk.

Lon Nol’s five-year failed attempt at a republic collapsed in 1975, after widespread corruption and incompetence, as well as near-unprecedented rates of bombing by the US, when the Khmer Rouge rose to power, unleashing a four-year genocide.

The all-too-common argument is made that the debt should be wiped out on moral grounds, because of the past crimes of America’s secret (and not-so-secret) bombing of Cambodia during the early 1970s.

US President Richard M. Nixon points to a map during a press conference on Vietnam and Cambodia in Washington, D.C. on 30 April 1970. Photo: AFP / National ArchivesUS President Richard M. Nixon points to a map during a press conference on Vietnam and Cambodia in Washington, D.C. on 30 April 1970. Photo: AFP / National Archives

“I consider the US debt Cambodia owed during the rule of Lon Nol to be a ‘dirty’ debt that forced Cambodia to buy American bombs and drop them on the heads of Cambodians, causing many deaths and injuries. Remembering this story every time, I feel pain for all Cambodians,” Hun Sen said in April in a personal appeal to US President Joe Biden.

(Washington, as stated during a hearing of the House of Representatives’ Committee on Foreign Affairs in 2010, still contends that the original loans were for “agricultural commodities,” not munitions.) 

An editorial last month in the Khmer Times, a government-aligned rag, asserted: “The US still demands for debt repayment that Cambodia owed during Lon Nol’s regime, as if the 2 million tons of bombs were not enough.” Or, as Hun Sen put it in 2017 when the debate arose after Donald Trump’s assumption of power: “It is difficult for us to tell Cambodians to accept debt to buy bombs and bullets to kill Cambodian people.”

But let’s get away from the moralizing. Maybe some in Washington genuinely believe canceling Cambodia’s historic debt would set a bad precedent for other states, yet the US has canceled the past debt owed to it by foreign governments.

There is the persuasive argument, however, that if Cambodia wants to sit at the adults’ table then it has to start acting as such, not just crying victimhood about the past. After all, Hun Sen certainly cannot take the moral high ground in Cambodian history.  

Cambodia, indeed, can afford to pay back the debt, as Scot Marciel, then deputy assistant secretary for East Asian and Pacific Affairs, noted in a congressional hearing back in 2008, during which he said Cambodia was “unwilling, rather than unable, to pay its debts.”

Cambodia’s public debt consists entirely of external debt, the World Bank recently noted, and is forecast to grow to around $9.6 billion in 2021. But that’s just 35.2% of GDP, a ratio that would make the likes of Vietnam and Thailand turn green with envy. (If we even accept that the historic debt to the US is now around $700 million, that’s only 7% of Cambodia’s total external debt.)

At the 2010 House hearing, the deputy assistant secretary for East Asian and Pacific Affairs at the time, Joseph Yun, also noted that “Cambodia has  accumulated arrears to the United States while paying other creditors on time.”

Cambodia’s Prime Minister Hun Sen is facing more pressure to reform from the US. Photo: AFP/Tang Chhin Sothy

According to the World Bank’s latest update published in June, Cambodia’s external debt to China now stands at $3.9 billion, about 44% of Cambodia’s total debt stock, most of which was accrued in the 2010s at the same time as it argued it couldn’t pay back the US loan. (Portions of this debt from China have been incurred for less-than-moral reasons, too.)

Moralizing its all well and good, but this is geopolitics, and the Hun Sen government’s actions since 2017 have enmeshed Cambodia dangerously and (seemingly) intractably in the middle of the US-China conflict. 

Debt is diplomacy. For years, we’ve heard incessant claims of China’s “debt trap” diplomacy, claims that tend to be overblown. Also, they assume that only China uses debt as a way of building influence in foreign countries. That’s as old as time, though. 

What it really comes down to is quid pro quo. If Washington were to ease Cambodia’s debt liabilities, what would the US get in return? That may have been a simpler question prior to 2017, the year when US-Cambodia relations really deteriorated, chiefly over Cambodia canceling joint military drills with the US and then dissolving the country’s only viable opposition party, the Cambodia National Rescue Party (CNRP), on the spurious accusation it was plotting a US-backed coup. 

In early June, ahead of a visit to Phnom Penh by US Deputy Secretary of State Wendy Shermam, Hun Sen suggested that Washington could either allow delayed repayments, cut the interest rate on the debt to 1% or turn 70% of the debt into new development assistance for Cambodia, to be used on education and health care.  

Yet if Washington were to wipe out a large chunk of the debt, it would only do so if it believed this gesture was met by good-faith reciprocity from Phnom Penh. 

Frankly, there’s zero reason for such a belief now. A case in point occurred last month, when, after Sherman’s visit to Phnom Penh, the Cambodian government allowed the defense attaché at the US Embassy, Marcus M Ferrara, to tour the Ream Naval Base. (Since 2018, US officials have alleged that Cambodia is in secret agreement to allow Chinese troops access to the base.)

Yet he turned up to find that he was only allowed to visit parts of the site. Phnom Penh was in its rights to limit Ferrara’s visit, yet it did nothing to absolve US fears that Cambodia is hiding something.

As for Hun Sen’s “suggestion” that Washington commute 70% of the debt into new development assistance, under that scenario, the money would simply go to Hun Sen’s government to blow on whatever it likes, with little oversight from the US, and pocket the kickbacks. (Canceling the debt would only benefit the Cambodian people if you believe that Cambodia’s public debt is mostly used for the public’s benefit.) 

A woman working at a money exchange shows 500 Cambodian riel notes to photographer in central Phnom Penh March 12, 2011. The much delayed stock exchange regulator Securities and Exchange Commission of Cambodia (SECC) said that all prices of securities will be quoted in local currency riel. Cambodia is highly dollarized and that many foreign investors want to see US dollars quoted in the upcoming bourse. REUTERS/Samrang Pring (CAMBODIA - Tags: POLITICS) - RTR2JSDUA woman working at a money exchange shows 500 Cambodian riel notes to photographer in central Phnom Penh March 12, 2011. Photo: Agencies

Moreover, after ridding Cambodia’s balance sheets of around 7% of its current external debt, if the US were to cancel it, Hun Sen would likely turn to Beijing for new credit lines, an eventuality completely against America’s foreign-policy objectives. 

Instead, the US could be more creative with the $500 million to $700 million it is owed, a rounding error for American finances. A large proportion of it (say Hun Sen’s proposed 70%) could be forgiven and turned into new infrastructure investment for Cambodia, a way of rivaling China’s infrastructure investment in the country. 

Or Washington could make a gesture to the Cambodian people, not Hun Sen’s government, by commuting 70% of the debt into new development assistance only for Cambodia’s civil society. Better still, it could wipe off this debt if American inspectors deem the 2023 general election in Cambodia to be legitimate and fair.  

Look at it whichever way you wish, the debt gives Washington leverage in a country where its opinion is no longer heeded. If Washington were to get tough and seriously call in the debt, Cambodia’s reputation among international lenders, including the International Monetary Fund, could be jeopardized.

If Phnom Penh wants it wiped out, it must give something in return. If not, the US is happy to let the debt continue to tot up from interest. 

David Hutt is a political journalist based between the Czech Republic and Britain. Between 2014 and 2019, he was based in Cambodia, covering Southeast Asian affairs. He is Southeast Asia columnist for The Diplomat and a regular contributor to Asia Times, including the column Free Thoughts. He reports on European political affairs and Europe-Asian relations. Follow him on Twitter @davidhuttjourno.

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