Search

 

Cablegate: Sri Lanka: 6.2% Gdp Growth in First Half of 2007 Amidst

VZCZCXRO3101
RR RUEHLMC
DE RUEHLM #1305/01 2631036
ZNR UUUUU ZZH
R 201036Z SEP 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 6844
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHNE/AMEMBASSY NEW DELHI 1384
RUEHKA/AMEMBASSY DHAKA 0421
RUEHIL/AMEMBASSY ISLAMABAD 7408
RUEHKT/AMEMBASSY KATHMANDU 5535
RUEHCG/AMCONSUL CHENNAI 8001
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 03 COLOMBO 001305

SIPDIS

SENSITIVE

SIPDIS

STATE FOR SCA/INS AND EEB/IFD/ODF
STATE PASS USTR FOR DARLA BROWN AND ADINA ADLER
DOL/ILAB FOR TINA MCCARTER
MCC FOR S. GROFF, D. TETER, D. NASSIRY AND E. BURKE
TREASURY FOR LESLIE HULL

E.O 12958: N/A
TAGS: ECON EFIN ETRD KMCA CE
SUBJECT: SRI LANKA: 6.2% GDP GROWTH IN FIRST HALF OF 2007 AMIDST
CONTINUED HIGH INFLATION AND DECLINING EXCHANGE RATE

REF: COLOMBO 1056

1. (U) Summary and comment: Sri Lanka's GDP grew at an annual rate
of 6.2% for the first half of 2007. The trade deficit narrowed as
export growth significantly exceeded import growth. Growing
remittances compensated for much of the trade deficit and boosted
foreign exchange reserves to a level sufficient to cover three
months of imports. Average annual inflation returned to the 17%
range after moderating somewhat earlier in the year, as the Central
Bank continued to finance the government's deficit spending and
imported commodity prices rose. The high inflation drove the Sri
Lankan Rupee to historic lows against the dollar, Euro, and Indian
Rupee. The Colombo Stock Exchange recovered somewhat from a large
drop following Tamil Tiger attacks in March and April, but remains
down 5% for the year. Business confidence, as indicated by a
monthly Nielsen survey, is at a three-year low.

2. (SBU) The 6.2% growth rate is respectable for a country in the
midst of a long civil conflict, but it suggests Sri Lanka won't see
the 7.5% growth the government has been predicting for 2007. High
inflation is a more serious liability for the populist Rajapaksa
government, with public concern growing over the rising cost of
living. However, the government has avoided the sacrifices
necessary to reduce inflation. Its projected 2007 budget deficit is
7.8% of GDP, despite recently instructing all ministries to defer
capital spending. The Central Bank likewise is ducking tough
choices -- instead of raising interest rates enough to dampen still
strong consumer demand and investment, it has tried to use
administrative measures and "moral suasion" to discourage banks from
lending. Beyond all this, the one measure that could improve all
the economic trends would be for the government to decisively pursue
a peaceful solution to the conflict. End summary and comment.

6.2% GDP GROWTH IN FIRST HALF OF 2007
-------------------------------------

3. (U) The Sri Lanka Department of Census and Statistics reported
September 13 that second quarter 2007 GDP growth was 6.4%. This
brought GDP growth for January-June 2007 to 6.2% -- below the
government's target of 7.5-8% and below the 7.8% growth registered
in the first half of 2006. Services, the largest sector, grew by
6.5%, boosted by rapidly expanding telecommunications and strong
growth in banking and finance. These outweighed a 19% decline in
the tourism-driven hotel and restaurant category. The manufacturing
sector grew by 7.5% with textiles and apparel expanding strongly by
12.7%. In the agricultural sector, which grew by 3.5%, both tea and
rice production contracted, the latter by 7.6% due to a reduction in
cultivation in the east caused by the conflict.

TRADE DEFICIT NARROWS
---------------------

4. (U) Exports increased strongly by 13% to $3.56 billion and
imports increased by 4% to $5.15 billion in the first half of 2007.
Consequently, Sri Lanka recorded a trade deficit of $1.58 billion
compared with $1.79 billion in 1H2006. Textiles and garments, Sri
Lanka's largest export category, rose 15%. Other manufactured
exports were also strong. Exports to the United States, Sri Lanka's
largest market, recorded a marginal decline however. Exports to the
EU increased sharply, on the growth of duty-free garment sales under
the EU's GSP Plus program. Agriculture products, which account for
about a fifth of total exports, grew by 9%.

5. (U) Sri Lanka's January-June petroleum import bill decreased by
8%, helping to contain the overall increase in imports. This was
not due to reduced consumption, however. Instead, Sri Lanka had
higher than normal petroleum stocks at the beginning of 2007; total
oil import costs are expected to pick up again in the second half of
the year. Consumer and capital goods imports each increased by 9%.
Imports of intermediate goods were flat, mainly due to lower oil and
fertilizer imports. In the capital goods category, building
materials and transport goods increased strongly. Machinery imports
recorded a marginal decline of 1 percent.

REMITTANCES CONTINUE TO INCREASE

COLOMBO 00001305 002 OF 003


--------------------------------

6. (U) Remittances, Sri Lanka's second largest source of foreign
exchange after garment exports, increased by 18.4% to $1.3 billion
in the 1H2007. Net private remittances financed nearly 70% of the
trade deficit in the first half of 2007. According to estimates of
the Sri Lanka Bureau of Foreign Employment, 1.5 million Sri Lankans
were working abroad as of 2006.

INFLATION REMAINS HIGH
----------------------

7. (U) Inflation, as measured by the Colombo Consumer Price Index
(CCPI), was high, with prices in August 17.3% higher than a year
earlier. Since 2006, inflation has been driven by both demand and
supply side pressures. On the demand side, government deficit
spending has been partially financed by the Central Bank and
partially from local and international borrowing. Low real interest
rates have fed continued private sector credit expansion. Growing
remittances have also contributed to strong consumer spending. On
the supply side, prices rose for imported commodities including oil,
fertilizer, wheat, and milk powder. Reduced government subsidies on
petrol, diesel and kerosene caused these prices to rise.
Depreciation of the Sri Lankan Rupee also contributed to the rising
local prices of imported commodities.

EXCHANGE RATE DECLINES DESPITE CENTRAL BANK VIEWS
--------------------------------------------- ----

8. (U) The Sri Lankan Rupee has depreciated 5.7% against the U.S.
dollar so far this year, setting record low rates almost daily in
recent weeks. Currently, the Rupee is trading around 113.5 against
the dollar, down from 107.7 at the beginning of the year. The rupee
has depreciated even more strongly against the Pound, Euro, and
Indian Rupee. Forward rates for the Rupee indicate markets expect
it to decline further: the six month forward rate is currently
around 120 Rupees to the dollar. The depreciation has been driven
by a combination of high inflation, the trade deficit, and high
demand for dollars -- both by speculators and importers hedging
against expected continued declines in the Rupee.

9. (U) Because the depreciated Rupee makes both imports and debt
service more costly, the Central Bank has sought to shore up its
value. In July and August the Bank spent about $150 million in
reserves to buy Rupees, which slowed but did not reverse the slide.
Giving up this approach, the Bank issued a statement on August 30
saying the "undue depreciation of rupee" was "not based upon any
fundamental macroeconomic factors." The Bank's intervention did not
substantially reduce reserves: at the end of August, gross official
reserves were $2.67 billion, providing an import cover of three
months, having risen from $2.52 billion at the beginning of the
year.

STOCK MARKET DOWN 5% SO FAR THIS YEAR
-------------------------------------

10. (U) The Colombo Stock Exchange, which was on a steady downward
trend since the March and April Tamil Tiger air attacks near
Colombo, bottomed out in mid-July and has recovered somewhat since
then. Currently, the All Share Price Index is down 5% since the
beginning of the year and 14% from the all-time high it reached in
February. Stock brokers attribute the upturn to the relatively
stable security environment since April, the government's military
gains in the Eastern Province, and attractive price-to-earnings
levels at the market's ebb. Top listed companies have reported
declining net profits as a result of inflation, high interest costs,
and rising taxes. On a sectoral basis, telecoms, banks, and
conglomerates have done well, as have tourism companies that have
investments in Maldives.

BUSINESS CONFIDENCE INDEX AT A THREE-YEAR LOW
---------------------------------------------

11. (U) The Lanka Monthly Digest-ACNielsen Business Confidence Index
(BCI), which surveys 100 senior top executives in Colombo, has

COLOMBO 00001305 003 OF 003


fallen for five straight months to a 35-month low. In the August
survey, 85% of respondents viewed Sri Lanka's investment prospects
as being poor or very poor and 53% expected sales volumes to get
worse in the coming twelve months.

COMMENT: NO SILVER BULLET, EXCEPT FOR PEACE
-------------------------------------------

12. (SBU) The 6.2% growth rate is certainly respectable for a
country in the midst of a long civil conflict, but it is less than
the government hoped to see after frequent public statements by
ministers and the Central Bank governor that the economy is on track
for 7.5% growth this year (reftel). The high inflation rate is a
more serious liability for the Rajapaksa government, as daily
headlines and opposition criticism reflect real public concern over
the rising cost of living. However, the government has not been
willing to make sufficient sacrifices to bring inflation down. It
has made some easy choices, such as trying to limit its projected
$2.6 billion budget deficit by instructing all ministries to defer
capital spending. The harder choices would be for the government to
cut electricity and kerosene subsidies, and for the Central Bank to
raise interest rates enough to dampen still strong consumer demand
and investment. Perhaps the hardest of all, but the one measure
that could improve all the economic trends, would be for the
government to decisively pursue a peaceful solution to the
conflict.
BLAKE

© Scoop Media

 
 
 
World Headlines

 

New IPCC Report: ‘Unprecedented Changes’ Needed To Limit Global Warming

Limiting global warming to 1.5°C will require “far-reaching and unprecedented changes,” such as ditching coal for electricity to slash carbon emissions, says a special report that finds some of the actions needed are already under way, but the world must move faster… More>>

ALSO:

Jamal Khashoggi: UK, France, Germany Join Calls For Credible Investigation

Germany, the United Kingdom and France share the grave concern expressed by others including HRVP Mogherini and UNSG Guterres, and are treating this incident with the utmost seriousness. More>>

ALSO:

MSF Not Wanted: Nauru Government Shows Continued Callousness

The Nauruan Government’s decision to ask Doctors Without Borders to immediately leave shows continued callousness towards asylum seekers desperately seeking a safe place to call home, Green MP Golriz Ghahraman said today. More>>

ALSO:

Sulawesi Quake, Tsunami: Aid Response Begins

Oxfam and its local partners are standing by to deploy emergency staff and resources to the Indonesian island of Sulawesi, as an estimated 1.5 million people are thought to be affected by the massive earthquake and tsunami that hit on Friday. More>>

ALSO:

Decriminalising Same-Sex Relationships: UN Rights Chief Applauds Indian Decision

“This is a great day for India and for all those who believe in the universality of human rights," Bachelet said. "With this landmark decision, the Indian Supreme Court has taken a big step forward for freedom and equality...” More>>

ALSO:

 
 
 
 
 
 
  • Pacific.Scoop
  • Cafe Pacific
  • PMC