Cablegate: Still No Gsl Economic Policy Framework, but Some

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 000927

SIPDIS

SENSITIVE

DEPARTMENT FOR SA/INS
DEPARTMENT PASS TO USTR - JROSENBAUM AND AWILLS
COMMERCE FOR ARI BENAISSA
MCC FOR RSANKARAN AND SGROFF

E.O. 12958: N/A
TAGS: ECON ETRD EAID CE USTR ECONOMICS
SUBJECT: Still No GSL Economic Policy Framework, but Some
Structural Reforms Anticipated

Sensitive but Unclassified, please handle accordingly.

1. (SBU) Summary: Recent visits by the IMF, ADB and
Millennium Challenge Corporation have inspired a flurry of
economic policy activity on the part of the Sri Lankan
Government. It did not pull an economic plan together
prior to the visits, although a Senior Advisor to the
President has indicated that an initial draft plan should
be out by the week of June 14. IMF representatives left
without a clear sense of the direction of the GSL's
economic policies and now have concerns about structural
and fiscal benchmarks that had been the core of the most
recent Poverty Reduction and Growth Facility (PRGF)
agreement. Nonetheless, the GSL intends to launch several
major reform initiatives, including three new bodies that
will oversee economic reforms and state-owned enterprise
restructuring. While these plans indicate a good
understanding of the kinds of reforms that are needed,
broad societal support and technical/professional capacity
for implementation will prove to be the economic Gordian
knot for the new GSL. End Summary

2. (U) IMF and ADB teams visited Sri Lanka the week of May
24 and a Millennium Challenge Corporation visit the week of
May 31 provided an opportunity to meet with representatives
from the IMF, ADB and GSL to discuss the current
Government's economic policy plans.

3. (SBU) During a meeting between international financial
institution (IFI) reps and the MCC, IMF Rep Jeremy Carter
said it was clear that Sri Lanka did not have a policy yet
formulated and that the GSL was in an "incredibly tough"
situation, unable to match election promises and needs of
coalition partners, particularly the Marxist JVP, with the
requirements of international donors, who are advocating
continued fiscal prudence, privatization and sectoral
reforms.

4. (SBU) Carter thought that with the GSL's focus on the
July Provincial Council elections there was little chance
that any meaningful action will be taken in parliament
during the next month. Therefore, economy-related
legislative initiatives that were dropped when parliament
was dissolved (such as new banking regulations, the foreign
exchange management act, a new revenue agency), are not
likely to be considered in the near term. Further, the
unclear UPFA stance on privatization (there have been
several contradictory statements about privatization by
high-level GSL officials) has created problems for reform,
particularly in state-owned banks. Meanwhile, price
increases, particularly for oil, wheat flour and rice, are
causing subsidy payments, or arrears, to balloon, creating
pressure on the government to let prices increase.

5. (SBU) Until the GSL is able to articulate an economic
plan and come to terms with the IMF under Article IV
consultations, IMF disbursements are on hold. Carter
suggested it was unlikely any disbursements could now be
made before next fall, at the earliest.

6. (U) Senior Presidential Advisor Mano Tittawella, during
a meeting with the visiting Millennium Challenge
Corporation team, however, suggested that the GSL's
economic plan was in the pipeline, with an initial draft to
be released the week of June 14 and a final, more
comprehensive strategic plan at the end of June. He
expected the IMF and World Bank teams to return to discuss
the country's poverty reduction strategy at that time.

7. (U) Tittawella said the Government's economic plan would
focus on removing impediments for growth, but not through
pure privatization mechanisms. He described three bodies
that have been created and approved by cabinet to oversee
economic reform. The first is the National Council on
Economic Development, which will feature working groups
from various industries. These groups will make
suggestions to the Government about needed reforms. In
particular, they will be asked to submit an initial list,
within a "short period of time" of actions that should be
taken before the end of the year, in order to jumpstart the
reform process. The idea, Tittawella said, was to convert
ideas into action as quickly as possible.

8. (U) The second body will be the Strategic Enterprise
Management Agency (SEMA), a holding company that will
oversee the operations of the four state-owned banks, the
port, airport, petroleum company, electricity board, bus
companies, and other state-owned enterprises. SEMA will
have the authority to place management at each enterprise
and will be charged with implementing needed reforms to
transform the companies into profitable ventures, rather
than financial sinkholes.

9. (U) The third main body is a new National Procurement
Agency that would run all large procurement projects. The
GSL will ask the IFIs to provide expertise and assistance
in establishing the agency. (Note: Poor government
procurement procedures are the single largest source of
Embassy advocacy requests. End note.)

10. (U) Tittawella also described the continuation of the
"eSri Lanka" program begun under the last Government. This
is an ambitious electronic governance plan, which,
according to Tittawella, will fall under an inter-
ministerial body and link up the Government's other
initiatives. (Note: This project has been underway through
Sri Lanka's Information and Communications Technology
Agency (ICTA), with funding by the World Bank. Its
structure and role under this new body remains unclear
however. End note.)

11. (SBU) Tittawella acknowledged that the real challenge
faced by the new Government was not developing new ideas,
but getting them implemented. He suggested that several of
the proposals, including eSri Lanka, electricity and
petroleum sector reform, and the restructuring the main
state bank in particular, were bi-partisan in nature and
would hopefully be accomplished in fairly short order.

12. (SBU) Comment: The contrasting views on the economic
situation posited by Carter and Tittawella make clear that
the GSL has a lot on its economic plate at the moment.
While the IMF is clearly not satisfied with what it sees,
the focus of high-level GSL officials on continuing
economic reforms is encouraging. Further, the willingness
of the GSL to take a black-eye in the short-term, rather
than rush out a plan that is not completely vetted, is
laudable. Tittawella's admission that implementation, not
conception, will be the main stumbling block, also
indicates a solid understanding of the polarization of Sri
Lankan society, and the poor track record of the GSL, under
any administration, in actually putting reforms in place.
End Comment.

LUNSTEAD

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