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Cablegate: Economic Reforms

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 COLOMBO 001448

SIPDIS

SENSITIVE

TREASURY FOR AKIFYAT
DOC FOR JFERNANDEZ, ASTERN

E.O. 12958: 08/06/12
TAGS: ECON PREL ETRD CE ECONOMICS
SUBJECT: ECONOMIC REFORMS

Ref: Colombo 561

1. (U) Summary: In its eight months in power, Sri Lanka's
UNF government has made measurable progress on one of its
main goals, economic reform, with efforts starting to show
real results over a broad range of promised actions. The
true tests will be action on pending economic legislation
and implementation of difficult measures. End summary.

---------
THE MEANS
---------
2. (U) To spark growth and rein in the deficit, the UNF's
March 2002 budget incorporated tax reforms, realignment of
investment incentives, privatization, removal of subsidies,
deregulation, and pension and labor reforms (reftel). New
laws are required for many proposed measures, and economic-
related drafts comprise the majority of the thirty-six new
bills on the docket for an extended August/September
parliamentary session. Parliament will consider laws or
amendments on fiscal responsibility, revenue authority, bank
rescue, IPR, financial sector revamping, the monetary law,
the electricity act, and pension supervision, among others.

3. (U) To carry out economic reform measures, the
government is using a variety of tactics. Leading the
effort is the Policy Development and Implementation
Ministry, a small group headed by the Prime Minister, that
operates largely behind the scenes with personnel brought in
from UNF's previous administrations and foreign (including
US) advisors. Also, experienced Sri Lankans have been lured
back from abroad to take key governmental positions. After
conferences on two major issues, deregulation and financial
sector reform, public/private sector working groups were
established to advise on implementation. In some cases,
consultations are held with involved parties, e.g., the
Minister of Employment and Labor met regularly with
employers, unions and government officials before drafting
wide reaching reform legislation. The government has also
contracted world class marketing firms for a public
information campaign to sell its most controversial (e.g.,
privatization and tax) measures.

-------------
TO THESE ENDS
-------------
4. (U) The GSL has already implemented promised changes in
many areas. It has made upward adjustments of utility,
transport, wheat flour and fuel prices, eliminating
subsidies. One hundred percent foreign ownership is now
allowed in sectors formerly restricted, including banking,
insurance, finance, and supply of water, mass transport,
telecom and professional services. Long term debt
instruments have been added, increasing the maximum term
treasury bonds from 6 years to 12 years. Incentives offered
to investors under the Board of Investment were restructured
and reduced. Civil service recruitment is frozen.
Licensing controls on rice, potatoes and onions were
removed, leaving these food items with only a duty.

5. (U) Privatization: Real progress has been made in
privatization of state-owned enterprises. The government is
moving to reach its goal of Rps. 21 billion (approx. $219
million) in privatization proceeds by year's end. The
largest privatization this year was the sale of Lanka Marine
Services, the bunkering arm of Ceylon Petroleum Corporation,
for Rs. 1.2 billion (approx. $12.5 million). The government
has sold the residual stakes of two regional plantation
companies through the Colombo Stock Exchange. Two sugar
mills were sold to local investors, and a Cabinet decision
is pending on a third. The results of a tender to privatize
50 percent of the bus transport system are expected in early
September. The GSL has announced the sale of two insurance
companies, including Sri Lanka Insurance Company, the
largest player in the market. There are plans to sell an
additional 15 percent of Sri Lanka Telecom (out of the 65
percent still government-held) in October. The GSL's 49
percent equity in Shell Gas Lanka will also be sold later
this year.

6. (U) Tax reforms: Major tax reform was implemented with
the introduction of a Value Added Tax (VAT) on August 1.
The VAT replaces the GST of 12.5 percent and the National
Security Levy of 6.5 percent, and is expected to simplify
the tax system and improve tax administration. Local
wholesale and retail activities, and exports are exempt from
VAT. The VAT has reduced the number of exemptions under the
former system, expanding its regime, but a significant
portion of private consumption is still protected. In
addition to VAT, the GSL introduced a 0.1 percent tax on
bank debits, and a 10 percent tax on interest. The import
duty surcharge was reduced from 40 to 20 percent, a 25
percent customs fee was lifted, and the one percent stamp
duty was eliminated. The cost to the government of VAT
exemptions was recently estimated at Rps. 800 million ($8.33
million). The revenue from the tax on interest payments,
however is expected to net Rs. 5.7 billion ($59.4 million)
more than forecast.

7. (U) International Financing Institutions' support for the
government's reforms efforts is strong. The ADB and World
Bank have programs in Central Bank restructuring, legal and
judicial reforms, economic reforms technical assistance, and
public sector resources management. USAID-funded
consultants are providing assistance in the public
information campaign, and in economic and productivity
policy development. Support is also seen from local firms,
who are beginning to upgrade and expand, after a period of
subdued activity preceding and following the December
elections.

8. (SBU) Comment: The way forward for the GSL is clear, but
will not be smooth. The government has already felt
compelled to respond to public complaints about the rising
cost of living associated with the removal of subsidies, by
lifting a cost-recovery charge on fuel. The hinted-at
restructuring of a state-owned bank has provoked protests
from unions, as have some privatization plans. If the GSL
does follow through on these plans, and the proposed labor
reforms, a stronger social safety net to help those
displaced by these measures must be in place.

9. (SBU) Comment continued: Political will to carry through
reforms seems firm at the top, and is the key reason for
results achieved so far. US support for continued strong
leadership on economic reforms could strengthen the GSL's
resolve. Lack of technical expertise, a bloated and
inefficient public sector and the entrenched culture of
delays, opacity and personal agendas hinder the efforts in
implementation. More importantly, a derailment of the peace
process or political disruption caused by infighting in the
government could stop the momentum. End comment.

Wills

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