Cablegate: Initial First Quarter Gdp Stats May Be Misleading

VZCZCXRO0473
RR RUEHLMC
DE RUEHLM #1052 1771216
ZNR UUUUU ZZH
R 261216Z JUN 06
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 3741
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHNE/AMEMBASSY NEW DELHI 9757
RUEHKA/AMEMBASSY DHAKA 9286
RUEHIL/AMEMBASSY ISLAMABAD 6180
RUEHKT/AMEMBASSY KATHMANDU 4215
RUEHCG/AMCONSUL CHENNAI 6730
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS COLOMBO 001052

SIPDIS

STATE FOR SA/INS; MCC FOR D NASSIRY AND E BURKE

SIPDIS

SENSITIVE

E.O 12958: N/A
TAGS: ECON CE
SUBJECT: INITIAL FIRST QUARTER GDP STATS MAY BE MISLEADING

1. (U) SUMMARY: The Department of Census and Statistics
(DCS), an agency coming within the Ministry of Finance and
Planning, has released quarterly Gross Domestic Product
(GDP) data for the first quarter of 2006. According to
these statistics, GDP in the first quarter of 2006 was 7
percent more than the first quarter 2005 GDP. The growth
reflects a recovery from the tsunami-affected first quarter
of 2005 when GDP (as measured by the DCS) grew by 5 percent
over the first quarter 2004 figure. This cable outlines
some of the causes of the GDP growth. END SUMMARY.

2. (SBU) Robust growth rates in the three major sectors
helped growth: agriculture grew by 11 percent, industry by
6.6 percent and services by 6.2 percent over the
corresponding period in 2005. Encouraged by these figures,
senior government officials have declared that the Sri
Lankan economy is resilient and would be seeing similar
growth rates in the next three quarters. Dr Dushny
Weerakoon, Deputy Director of the Institute of Policy
Studies, an economic think tank in Colombo, also confirmed
that they do not dispute the overall trend of strong growth
in the economy where growth has exceeded 6 percent in every
quarter beginning from the second quarter of 2005. If there
is no breakout of full-scale war, IPS expects to see growth
over 6 percent for the year 2006. According to Weerakoon,
there has been a clear turnaround in agriculture, with good
weather and government policies helping rice and other
crops. Other sectors, especially services, are also
continuing their growth from last year. Construction in
particular is robust due to tsunami reconstruction activity.

3. (U) However, these numbers should be viewed with care
for several reasons. They reflect economic activity in
January to March 2006 before violence increased in April
2006. The growth also reflects a recovery from the tsunami
destruction. In particular, growth in agriculture is
partially attributed to a spectacular recovery in fisheries
(250 percent) from a decline of 77 percent in the
corresponding period in 2005. The construction sector is
also doing particularly well due to tsunami reconstruction
activities. Inflation was significantly lower in the first
quarter of 2006 when compared to 2005. According to present
trends a much higher rate of inflation during the rest of
the year is likely, which could affect growth. Currently,
inflation as measured by the Colombo Consumer Price Index is
running over 13 percent. Furthermore, quarterly GDP numbers
reported in Sri Lanka are not/not seasonally adjusted and
annualized and therefore would not indicate annual trends.

4. (U) Meanwhile, the high world oil prices, subsidies, and
the absence of usual budgetary and balance of payment
support from the ADB, World Bank and the IMF (due to the
government's inability to move ahead with reforms) could
cause a strain on the finances of the country. Besides, the
government has been forced to postpone its plans to raise up
to USD 1 billion in a 7 to 10 year sovereign bond issue, due
to lack of interest in the investment community, at least in
part due to the current security situation. The financial
situation could worsen further if the government seeks to
increase defense expenditure. These developments could
result in significant pressure on the rupee and increase
inflation rates, which would slow economic growth.

5. (SBU) Comment: The Central Bank, Sri Lanka's
traditional source of GDP data, has not yet published its
statistics for the first quarter. Generally, the level of
professionalism within the Central Bank, and relative
insulation from national politics, lend greater authority to
its reports than is enjoyed by the DCS. The Central Bank
data are to be released on June 30. The Embassy will report
more on this matter in early July if the Central Bank data
are significantly different from that of the DCS.

Lunstead

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