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Cablegate: Sri Lankan Development Forum Exceeds

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

200551Z May 05

UNCLAS SECTION 01 OF 06 COLOMBO 000934

SIPDIS

DEPT FOR EB A/S ANTHONY WAYNE; SA/INS FOR J. BRENNIG, N.
DEAN; PLEASE PASS TO TSUNAMI RECONSTRUCTION TASK FORCE;
TREASURY FOR C. CARNES; MANILA FOR US ADB EXEC.DIR.

SENSITIVE

E.O. 12958: N/A
TAGS: EAID ECON EFIN CE LTTE
SUBJECT: SRI LANKAN DEVELOPMENT FORUM EXCEEDS
EXPECTATIONS BUT FOLLOW-UP CRITICAL

Ref: A) Colombo 813

1. (SBU) Summary: Representatives from the Government of
Sri Lanka and the donor community met in Kandy May 16-17
to discuss Sri Lanka's post-tsunami situation, the
country's development goals and the peace process.
Hosted by the Ministry of Finance and organized in
collaboration with the World Bank, the forum exceeded
most expectations, which were lowered due to the
Government's failure to distribute pre-conference
discussion papers. The meeting provided a useful forum
for the GSL and its development partners to discuss Sri
Lanka's reconstruction, development and peace agendas.
End Summary

2. (U) The Government of Sri Lanka hosted, in
coordination with the World Bank, the Sri Lanka
Development Forum in Kandy (in the Central Province) from
May 16-17. There was good attendance from the donor
community and, as a result of hosting the conference in
Sri Lanka for the first time, outstanding representation
from Government of Sri Lanka (GSL) officials.

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3. (U) The Conference was opened by President
Kumaratunga, who pledged, in an emotional, unscripted
speech (reported septel), to pursue a joint mechanism for
the delivery of tsunami assistance in Sri Lanka's north
and east, despite her perception of threats to her
personal safety and to her governing coalition.

4. (U) The conference progressed in four sessions over
two days - two sessions on the post-tsunami recovery
process, a session on economic policies and development
challenges and a closing session on the peace process.

I. The Post-Tsunami Recovery Process
------------------------------------

5. (U) The first two sessions on the post-tsunami
recovery process featured briefings by key players in the
tsunami relief and reconstruction process, including

SIPDIS
Center for National Operations (CNO) Coordinator Tara de
Mel; Task Force for Relief Chairman Tilak Ranaviraja;
Relief, Rehabilitation and Reconciliation Ministry
Director General Hairim Pieris and Consortium of
Humanitarian Agencies (CHA) Director Jevan Thiagarajah
(on behalf of the NGO community). While the opening
presentations gave a positive overall assessment of the
Government's initial post-tsunami response, presentations
by the Government Agents from (LTTE-controlled)
Mullaitivu in the north, Trincomalee in the East and
Matara in the south, provided useful perspectives of on-
the-ground realities, including some fairly frank
assessments of challenges that had to be met during the
relief phase and transition to the reconstruction period.

GSL Perspectives
----------------

6. (U) The presentations by de Mel, Ranaviraja and Pieris
gave broad overviews of their particular agencies'
responsibilities and were largely self-congratulatory.
They correctly noted that temporary shelter construction
was on track to meet GSL goals of 30,000 units by June 30
and that immediate relief efforts had stemmed a feared
outbreak of disease and hunger in the relief camps.
However, none of the presentations dealt with the land
allocation problems, the coordination bottlenecks, the
over-centralization of relief decision-making.

NGO Representative
------------------
7. (U) CHA Rep Thiagarajah noted that the post-tsunami
period was unique, with INGOs controlling enormous
resources (USD 720 million committed thus far). He
called on INGOs to work closely with local partners, to
better understand local cultural and economic context,
and to be guided by international standards, including
accountability and transparency best practices. He urged
international partners to make local-level capacity
building a high priority.

Asian Development Bank and UN Assessments
-----------------------------------------

8. (U) ADB South Asia Department Director General Kunio
Senga noted that three things would drive successful
recovery and reconstruction, "implementation,
implementation and, implementation." Miguel Bermeo, UNDP
Resident Representative noted that Sri Lanka was in a
critical stage of the transition and as relief operations
decrease, the emphasis should shift to "build back
better" which meant not just better houses than before,
but communities better prepared to deal with
vulnerabilities.

9. (U) Both Senga and Bermeo noted the inclusive
consultative nature of the second phase of the damage
assessments, being undertaken by the Government of Sri
Lanka in conjunction with the UN, ADB, Japan Bank for
International Cooperation (JBIC) and the World Bank.
Senga focused on the transparency aspect of
reconstruction, expressing pleasure with the adoption of
an implementation matrix/database in cooperation with the
World Bank and UNDP. Bermeo suggested that four key
areas needed to be addressed in moving forward with
reconstruction: equity issues between tsunami and non-
tsunami areas; land allocation issues and the challenges

SIPDIS
posed by the implementation of the 100m/200m setback
zone; coordination issues among the Government, donors
and NGOs, particularly information flow; and, the need
for capacity development, particularly at the local
level.

Donor Community Interventions on Tsunami Response
--------------------------------------------- ----

10. (U) Donors responded with a mix of support,
constructive criticism and empathy. The Ambassador noted
the importance of critical analysis, to identify what
went wrong, why, and to determine how the process could
be improved in the event of another disaster. He also
suggested that experiences be compiled for use in the
development of an emergency management agency or body
within the Government. He urged better overall
coordination and the development of a tracking mechanism,
noting that there have been instances of different
countries negotiating with the GSL for the reconstruction
of the same site (Note: we recently learned that the
Germans have also been discussing a plan to rebuild
vocational schools with the GSL - the same schools for
which we have a signed MOU to rebuild. We are moving
ahead as planned. End Note).

11. (U) When the Ambassador raised the 100m/200m buffer
zone, and the challenges that decision posed, the TAFREN
Chairman and the Science and Technology Minister each
provided their assessments of how the decision had been
made post-tsunami. The TAFREN Chair said that
flexibility needed to be shown in those areas where
additional land cannot be allocated nearby. The Science
Minister, however, said that the zone was a "temporary
measure" meant to bide time until a more comprehensive
coastal survey could be completed. The Ambassador asked
how something could be labeled temporary once 50,000
families had been moved to new permanent housing outside
the area. No reply was forthcoming.

12. (U) The Dutch Ambassador, speaking in her role as EU
President, said the EU was ready to support long-term
mechanisms for tsunami reconstruction, including the
joint mechanism for the north and east. She noted
serious implementation problems with the buffer zone and
urged the Government to adhere to the guiding principles
developed by the needs assessment teams. She urged an
equitable approach to conflict affected areas and
suggested the need for closer coordination of local and
INGO activities. Several donors associated themselves
with the EU statement.

13. (U) Japan focused its remarks on the President's
speech, noting that it fully supported the creation of a
joint mechanism and the need for equitable development
island-wide. Japan also announced that it was developing
a yen loan package that would support small and medium
sized enterprises in the north and east as well.

14. (U) India and China also made interventions, India
focusing on its role as both a donor country and aid
recipient country, and the vast expertise it had built up
over the years. China largely focused on a laundry list
of rebuilding activities it intended to undertake
(reftel).

II. Economic Development Goals
------------------------------

15. (U) Day two of the conference focused on Sri Lanka's
current economic state and its development agenda. The
Government handed out a document entitled "The New
Development Strategy" on May 15 and referred to it as a
discussion paper not as a draft poverty reduction
strategy paper (PRSP). Finance Secretary P.B.
Jayasundera said he intended to take the document around
the country for discussion and input.

16. (U) Following a rather bland regurgitation of
recently released economic analysis for 2004 by the
Central Bank Governor, Jayasundera outlined what he
termed "A Framework for Economic Growth and Poverty
Reduction - Medium Term Perspectives." According to
Jayasundera, the framework came out of the Government's
political mandate from its April 2004 election and was
based largely on the 2005 budget and the Government's
Economic Policy Framework.

17. (U) The framework is premised on the notion that five
percent growth (Sri Lanka's historical average, including
the recent civil war period) was insufficient to lift
large portions of the population out of poverty. Given
the failure of moderate to high growth rates to reduce
overall poverty, the document posited that previous
policies of liberalization, deregulation and
privatization have produced "mixed or sub-optimal"
results. Jayasundera outlined public reticence towards
conventional reform initiatives and the particularly
troublesome problem of slow infrastructure development,
including a severely challenged procurement system, that
has led to reduced levels of public and private
investment.

18. (U) The goals set by the framework are similar to the
Government's original development plan - six to eight
percent growth, widespread development to reduce regional
disparities, improved international competitiveness,
increased investment and a strengthening of external
assets. The framework also outlines the constraints to
development, including infrastructure limitations,
erosion in government revenue, high cost of finance,
market imperfections, inadequate regulatory mechanisms
and increased vulnerabilities to external shocks.

19. (U) Jayasundera then outlined reform initiatives
including institutional capacity building, public private
partnerships, efforts to improve governance and
efficiency, and financial sector reforms. Among the
major undertakings Jayasundera described as "pro-poor
growth initiatives" were rural infrastructure and
marketing projects, a project to augment water basins and
the rural irrigation network, rural road restoration,
small and medium enterprise (SME) development and the
creation of rural industrial centers.
20. (U) In the course of Jayasundera's presentation,
which was widely acclaimed as a direct, honest assessment
of the challenges facing Sri Lanka, he lamented that with
the donor community advocating economic reform and Sri
Lanka's mixed experience with such reforms, he sometimes
wondered if "we are talking the same?" On several
occasions he suggested the need for analysis based around
the question, "what went wrong?" Jayasundera clearly
sees a strong role for the Government in economic
decision-making and guidance, and lamented what he termed
the "running down" of the public sector, so that its
competence had reached a low ebb.
The IMF Responds
----------------
21. (U) IMF Resident Representative Luis Valdivieso
followed Jayasundera's presentation with a discussion of
key policy challenges and policy options. According to
Valdivieso, the most immediate economic need is to regain
and maintain price stability, while proceeding
"expeditiously" with post-tsunami reconstruction. He
warned that fiscal targets set by the GSL would be
difficult to achieve without additional measures, but
that ensuring that fiscal targets are met is crucial to
maintain the credibility of the Government's fiscal
efforts. Fiscal consolidation is needed to reduce the
high-level of public debt. In addition to enhanced
revenue measures (which Valdivieso deemed "the highest
priority"), elimination of most subsidies, improved
administration and targeting of welfare benefits and
better debt management would all be required.

22. (U) With regard to monetary policy, Valdivieso urged
a further tightening, including increased open market
operations to reduce excess liquidity and a rise in
interest rates, in order to signal the Government's
commitment to reduced money supply growth. On external
issues, Valdivieso reminded Sri Lanka that its flexible
exchange rate has served it well and that it should
resist protectionist trade policies or reversing liberal
exchange policies to temporarily reduce exchange rate
pressure.

23. (U) In addition to the structural reforms and fiscal
consolidations outlined, Valdivieso noted that continued
efforts towards a just and lasting peace would be the
most important economic growth stimulus. The IMF pledged
its support to Sri Lanka in its efforts to achieve and
sustain macroeconomic stability. The GSL indicated that
it would prefer to resume discussions on a PRGF/EFF-
supported program following its efforts to implement
sound macroeconomic measures. An IMF technical team will
return in September to review progress.

Donor Responses to Economic Development Objectives
--------------------------------------------- -----
24. (U) The Ambassador (who was asked by the Finance
Minister to give the initial response from the donor
community) noted that we agreed that persistent poverty
despite medium-high growth rates was a genuine problem
that needed to be addressed. The Government's discussion
paper was a good starting point, but it still raised many
questions. While it outlined GSL goals, little was
spelled out in terms of strategies for achieving those
goals. The Ambassador noted that the Government's plan
should be judged against four important themes: the need
for broad based, private sector-led growth, the need for
sound macroeconomic policies, including a recognition
that interference with economic signals, especially
prices, can create unwanted anomalies in the marketplace,
the need for an enhanced role and support for the
business community and efforts to encourage
entrepreneurship.

25. (U) Several countries associated themselves with the
US intervention, including the Germans, the Swiss, and
the Dutch, speaking on behalf of the EU. The Japanese
noted the importance of strong leadership in embarking on
reform, noting that Prime Minister Koizumi repeats a
mantra at all public events, "no growth without reform."
The Japanese representative also suggested the GSL needed
to find appropriate "entry points" for development
partners in the framework and to spell out exactly the
roles they expected donors to play. With regard to
restructuring of public sector companies and other
institutions, a restructuring of key players' mindsets
would also be important. Consultative processes would be
critical to getting needed public "buy in" to the
process. He concluded noting that Japan was concerned
about the status of peace negotiations and reminded
participants that without peace there would be "no
sustainable development, and that without development,
peace is not sustainable."

27. (U) The World Bank rep noted that he shared three
broad areas of agreement with the GSL and their
framework. First, the importance of creating fiscal space
to allow greater public investment was critical. Second,
it was important to get public buy-in to any reform
measures - identifying what should be done is the easy
part, putting plans into action is difficult. Finally,
he noted that the most important idea floated was that
the framework, in the form of a discussion paper, would
be taken "on the road" and shared more widely, seeking
input and developing a consensus around the proposals.

III. Peace Process
------------------

28. (U) The final session of the conference covered the
peace process and was opened by Sri Lankan Peace
Secretariat General Secretary (and Sri Lankan candidate

SIPDIS
for UNSYG) Jayantha Dhanapala. Dhanapala outlined the
current status of the peace process, the peace
negotiations (which are separate concepts) and the joint
mechanism for the delivery of tsunami relief in the north
and east. He also noted that the Government saw the
peace process as fundamental to the country's economic
development and that the peace process needed to be
understood within a broad continuum of actors and ideas.
The process was fluid, drawing as it progresses on ideas
and processes that have come before.

29. (U) Dhanapala outlined the recent history of the
peace process, the Government's role in negotiations and
focused on the disparity between LTTE and GSL ceasefire
violations (2847 LTTE violations verified by the Sri
Lanka Monitoring Mission (SLMM), compared to 129 fairly
low-level violations by GSL forces against LTTE cadre.

30. (U) With regard to the Joint Mechanism, Dhanapala
outlined its origin and basic structure. He noted that
it remains a controversial issue and the basis of
sensitive political consultations. Overall, according to
recent polls, 65 percent of the population supports a
joint mechanism (51 percent of Sinhalese, 93 percent of
Tamils and 73 percent of Muslims). As a result, the
President believes she has a large groundswell of
support. Dhanapala closed by noting that frustration
existed within the donor community regarding the stalled
peace efforts. He indicated that Sri Lanka could not
afford to get frustrated, however, and cited the old
saying "the more you sweat in peace, the less you bleed
in war."

31. (U) Japanese Special Envoy Akashi followed
Dhanapala's remarks and noted that he had found the
President's opening speech to the forum "remarkable." He
felt it indicated that she was looking at the peace
process and development with a fresh perspective. While
the scope of the joint mechanism might be limited, it
carries important symbolic and political importance.
Akashi noted that 70 percent of Sri Lankans are in favor
of the peace process.

Comment
-------
32. (SBU) Several participants commented on the utility
of holding the meeting in Sri Lanka for the first time,
allowing better representation from the GSL. The overall
tone of the conference was frank, open and constructive,
although donor representatives were handicapped by the
fact that the GSL did not distribute its position papers
until the night before the forum. The next steps are
likely to be the most telling - will the GSL truly go out
and consult it development strategy and take on board
issues raised in post-tsunami consultations? The
Ambassador suggested the need for follow-up in the next
few weeks, in order to build on the momentum and good
will coming out of the forum. We will push this idea
with the World Bank and other donors as well. End
Comment.

33. (SBU) The GSL trumpeted the conference in its public
statements as a great success, alleging that USD 3
million in reconstruction aid was pledged at the meeting.
In truth, the meeting was not a pledging session,
although some countries use their interventions to sum up
their previous pledges and/or announce additional
assistance. The figures announced by the GSL were simply
a summing up of these numbers, most of which did not
represent any additional assistance.

LUNSTEAD

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