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Cablegate: Sri Lanka's Gdp Grows 5.6% in First Half Of

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 001732

SIPDIS

DEPT PASS TO USTR; COMMERCE FOR ARI BENAISSA; TREASURY
FOR ROY ADKINS

E.O. 12958: N/A
TAGS: ECON ETRD CE USTR
SUBJECT: SRI LANKA'S GDP GROWS 5.6% IN FIRST HALF OF
2003

1. Summary: The Sri Lankan economy recorded 5.6% GDP
growth in the first half of 2003, coming mainly from
industry and services. Other macro economic
fundamentals have also improved, and contributed to
strengthening of the Sri Lanka Rupee recently. The
Central Bank says economic performance is within
expectations and annual GDP growth could be higher
than the original projection of 5.5% in 2003, though
still not at the 8-9 percent range required for
"tiger" status. End Summary.

Growth led by industry and services
-----------------------------------

2. GDP growth in the first half of 2003 was 5.6%
compared with 1.4% growth recorded in the first half
of 2002. The economy expanded strongly by 5.5% in the
second quarter of 2003 despite severe flooding in the
Southern and South Western parts of the country.

3. Industry and services were the main contributors
to growth in 2003. Exports grew by a strong 18% to
$2.4 billion in the first half of the year. Driven by
rising exports, the manufacturing sector grew by 5.4%
compared to a 2.6% decline in the first half of 2002.
Service sector growth was 7.2% compared to 3.1% during
the same period last year. Communications, banking
and insurance, and tourism led services growth. The
construction industry grew by about 5%, while the
agriculture sector declined 0.2% as fish production
dropped sharply and severe floods during May damaged
tea crops. Most other agricultural crops performed
well, with rice reaching record production. According
to the Central Bank, a 25% increase in cultivated area
in the north and east consequent to the ceasefire has
helped rice production.

4. Improved macroeconomic conditions, greater fiscal
control and the continuation of the ceasefire between
the Government and the LTTE have increased overall
economic activity. Interest rates have dropped
significantly. Currently, T-bill rates are around
7.25% compared with 11% a year ago. The commercial
bank prime rate is 9.3% compared with 12.57% a year
ago. Inflation is also trending down and is expected
to fall to 6% from 9.6% in 2002. The economic upturn
boosted the stock market to an all time high in
September. Increased remittances, tourism, investment
and aid/loan flows to the Government have helped boost
total foreign reserves to $2.8 billion (5.2 months of
imports) as of July, up from $2.5 billion in January
2003. This inflow of foreign currencies has led to a
three percent appreciation of the rupee relative to
the dollar.

5.On September 30, the Central Bank's Deputy
Governor, W.A. Wijewardena, told the media that the
bank was encouraged by the continued strong economic
performance, and that annual GDP growth could surpass
the original projection of 5.5% in 2003. Wijewardena
also noted that as the country's macroeconomic
fundamentals improve, the Government would seek a
sovereign rating in early 2004. The Central Banker
warned, however, that growth in the current 5-6% rate
would be insufficient in the medium and long term to
overcome basic economic problems such as poverty,
malnutrition and unemployment. Wijewardena remarked
that higher growth expected from 2004 onwards would
require greater investment. This will depend on peace
as well as speedy implementation of structural
reforms, effective utilization of foreign assistance,
infrastructure development, further improvements in
macro economic management and reducing economic policy
uncertainties. The Central Bank also warned against
inflationary pressure from wage hikes that are not
linked to productivity.

6.Comment: Overall the economic news continues to be
good, with the GSL's economic reform and fiscal
discipline reaping rewards in the form of improved
economic performance. Employment continues to be an
area of concern, however, with the PM and other key
officials urging private sector representatives to
create jobs. While growth still remains below the 8-9
percent level that denotes "tiger" status, continued
progress on economic reforms by the government, and a
continued global economic rebound, could help pull Sri
Lanka up to that vaunted level. End Comment.
ENTWISTLE

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