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Cablegate: Sri Lanka: 2006 Gdp Grew 7.4 Percent; 2007 Growth Likely To

VZCZCXRO6840
RR RUEHBI RUEHLMC
DE RUEHLM #0536/01 0960615
ZNR UUUUU ZZH
R 060615Z APR 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 5822
INFO RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 0838
RUEHKA/AMEMBASSY DHAKA 0028
RUEHIL/AMEMBASSY ISLAMABAD 7005
RUEHKT/AMEMBASSY KATHMANDU 5086
RUEHKP/AMCONSUL KARACHI 2177
RUEHCG/AMCONSUL CHENNAI 7580
RUEHBI/AMCONSUL MUMBAI 5280
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 02 COLOMBO 000536

SIPDIS

SENSITIVE

SIPDIS

STATE FOR SCA/INS

DOL/ILAB FOR TINA MCCARTER

MCC FOR S GROFF, D NASSIRY AND E BURKE

TREASURY FOR LESLIE HULL

E.O 12958: N/A
TAGS: EAID ECON EINV ETRD PREL CE
SUBJECT: SRI LANKA: 2006 GDP GREW 7.4 PERCENT; 2007 GROWTH LIKELY TO
BE SLOWER

REF: COLOMBO 0024

1. (SBU) Summary and comment: Sri Lanka's Gross Domestic Product
(GDP) grew by 7.4 percent in 2006, its highest annual growth rate
since 1978. The Central Bank Governor announced that he expects
2007 growth to come in between and 7.5 and 8 percent. The Asian
Development Bank (ADB) forecasts only 6.1 percent GDP growth for Sri
Lanka in 2007. Embassy thinks the ADB assessment is more realistic,
as resurgence of Sri Lanka's ethnic conflict and the Central Bank's
efforts to control double digit inflation will both dampen growth.
End summary and comment.

CENTRAL BANK EXPECTS STRONG GDP GROWTH TO CONTINUE...
--------------------------------------------- --------

2. (U) Sri Lankan Central Bank Governor Nivard Cabraal, in a March
30 press event, reported that Sri Lanka's 2006 Gross Domestic
Product (GDP) grew by 7.4 percent. Delivering the Bank's 2006
annual report to President Rajapaksa, Cabraal noted that this was
Sri Lanka's
highest GDP growth since 1978. He further announced that he expects
2007 GDP growth to be even stronger -- between 7.5 and 8 percent.
The President declared that his government's ten year plan targets 8
percent annual growth for the next five years as essential "to raise
the living standards of our people to match those of the developed
world even to some extent."

3. (U) In the years 2002 through 2005, Sri Lanka's GDP growth ranged
from 4 to 6 percent. The healthy 2006 growth came on the strength
of services and industry. Services, which account for about two
thirds of GDP, grew by 8.3 percent. Industry accounts for just over
a quarter of GDP and grew by 7.2 percent. Agriculture makes up just
over a tenth of GDP, and grew by 4.7 percent. According to the
Asian Development Bank, the growth in agriculture was unexpectedly
above its recent trend of only 1 percent annual growth, primarily as
a result of good rains.

... BUT ADB SAYS GROWTH LIKELY TO SLOW IN 2007
--------------------------------------------- -

4. (U) The Asian Development Bank, in its recently published Asian
Development Outlook, predicted that Sri Lanka's GPD growth in 2007
would cool to 6.1 percent.
(http://www.adb.org/Documents/Books/ADO/2007/ SRI.pdf) The ADB
expects the resurgence of the conflict and tighter fiscal and
monetary policies to be the major factors inhibiting growth. The
ADB noted that the Central Bank was making a concerted effort to
control inflation, which was running at about 20 percent
year-on-year in January 2007 (reftel). The Bank's tighter monetary
policy would reduce credit both to the private sector and to
government, forcing both to restrain spending. The ADB's prediction
appears to be supported by the Central Bank's own assessment that
fourth quarter 2006 GDP grew by 6.2 percent, signaling the beginning
of a cooling trend.

COMMENT: SRI LANKA LAGGING WITHIN SOUTH ASIA
--------------------------------------------

5. (SBU) The government is understandably pleased with the 7.4
percent growth figure. Considered on a regional basis, however,
that growth rate was only mediocre. According to the ADB, South
Asia as a whole grew by 8.7 percent in 2006. So, while Sri Lanka
outperformed Bangladesh and Pakistan (respectively 6.7 and 6.6
percent 2006 GDP growth, per the ADB), it lagged behind India,
Afghanistan, Bhutan, and Maldives. The ADB estimates that Sri
Lanka's 2007 growth will trail Bangladesh's and Pakistan's,
exceeding only that of Nepal. This is consistent with the
widespread consensus that the conflict in Sri Lanka is costing the
country about 2 percent of additional growth potential per year --
exactly the amount that could yield the 8 percent growth rate that
President Rajapaksa says the country needs to develop.

COLOMBO 00000536 002 OF 002

BLAKE

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