Cablegate: Sri Lanka: Finance Secretary Expects Growth and Stability

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UNCLAS SECTION 01 OF 02 COLOMBO 001569

SIPDIS

SENSITIVE, SIPDIS

STATE FOR SCA/INS, EB/CBA

MCC FOR F REID, D NASSIRY AND E BURKE

E.O 12958: N/A
TAGS: ECON EINV ETRD PTER CE
SUBJECT: SRI LANKA: FINANCE SECRETARY EXPECTS GROWTH AND STABILITY

1. (SBU) Summary: Finance Secretary PB Jayasundera, the
government's economic mastermind, expects Sri Lanka's GDP to grow by
7 percent this year, fueled by strong performance in the service,
construction, and manufacturing sectors, and by healthy export
growth. The government is pushing hard to steer foreign and
domestic investment toward infrastructure, in order to stimulate
further potential growth. Jayasundera told the Ambassador that Sri
Lanka experienced a surge in economic activity in Sri Lanka over the
last two to three years, and that he believed Sri Lanka's resilience
to shocks like the 2004 tsunami and years of conflict would enable
it to continue to perform at this level. End summary.

Economy is Thriving ...
-----------------------

2. (SBU) Finance Secretary PB Jayasundera, who, along with Central
Bank governor Nivard Cabraal, runs the Sri Lankan economy, told
Ambassador Blake September 19 that he expected current strong
economic performance to continue in coming years. Jayasundera
outlined how and why the economy had performed well so far this
year:

- 7 percent GDP growth driven by a "buoyant" service sector; booming
post-tsunami construction; and strong production of tea, gems,
leather, ceramics, and wood products.
- Export growth of 10-12 percent due in part to free trade
agreements with India and Pakistan and preferential trade (GSP+)
with the European Union.
- Productivity improving.
- Government revenue rising to 17 percent of GDP, from 14.5 percent
a few years ago, on higher VAT, income, and excise tax collection.
- Balance of payments remaining positive partly on the strength of
remittances from Sri Lankans working abroad.

... and Outlook is Positive
---------------------------

3. (SBU) Jayasundera added that intensive focus on infrastructure
development would remove "structural impediments to growth" and
generate private sector enthusiasm for further investment in Sri
Lanka. He listed ports, roads, and electricity as the government's
three priorities for infrastructure improvements, to be supplemented
by investment in water supply, education, and health. The rural
south and northeast lagged in economic development, so the
government would direct new investment to those areas.

Not Worried about Inflation, Oil Prices, or Conflict
--------------------------------------------- -------

4. (SBU) Ambassador Blake asked how the government could keep
inflation in check as it increased government spending to improve
infrastructure. "Foreign funding," Jayasundera answered, noting
that Sri Lanka had USD 5 billion in the aid pipeline which would be
directed towards infrastructure projects. This would enable the
government to reduce its annual deficit spending to 5 percent of GDP
from over 10 percent now. Jayasundera added that the government
planned "monetary restraint to the maximum extent."

5. (SBU) Jayasundera recognized that Sri Lanka's dependence on
imported oil was a major risk, and noted that the value of oil
imports so far this year had increased to USD 1.4 billion from USD
800 million at this point last year. But he said that exports,
remittances, and the service sector were keeping the balance of
payments in the black. Further, Sri Lanka's resilience to shocks
like the 2004 tsunami and years of conflict made these targets
realistic even in the face of possible renewed ethnic conflict.

TIFA Talks and Trade Mission
----------------------------

6. (SBU) Ambassador Blake noted that Deputy U.S. Trade
Representative Kiran Bhatia would potentially lead the U.S. side in
Trade and Investment Framework Agreement (TIFA) talks late this
year. "We will go as fast as you are ready to go," the Ambassador
said, adding, "we need signals that you are ready to remove
obstacles that do exist." The Ambassador noted that business people
in Washington had told him that they encountered difficulties doing
business in Sri Lanka. Cases like the government's refusal to pay
power plant operator AES for power it had produced under a special
contract could "poison" the investment environment. When small and

COLOMBO 00001569 002 OF 002

medium size companies see that a big player like AES could not get
its contract honored, the smaller firms get spooked.

7. (SBU) The Ambassador added that he expected a major trade mission
to India to send a spin-off group to Sri Lanka in December. It was
important that Sri Lanka have a good story to tell, and good
opportunities to show. The Ambassador urged Sri Lanka to conduct an
ongoing dialogue with the private sector, to hear what the
government could do to facilitate their business.

Terrorism Finance
-----------------

8. (SBU) The Ambassador raised terrorism finance, saying that the
United States was prepared to help Sri Lanka fight terrorism and
that the financial side was important. He noted the assistance the
United States was providing to help Sri Lanka get its financial
intelligence unit (FIU) operational, and asked what more we could
do. Secretary Jayasundera said that Sri Lanka appreciated the FIU
assistance, as "we have had weakness in that area in the past" and
promised to coordinate with the Embassy to identify other areas for
cooperation.

Comment
-------

9. (SBU) Finance Secretary PB Jayasundera has a firm grip on
economic principles and on the prospects and challenges for the Sri
Lankan economy. He is right that the economy performed well during
the peaceful 2003-2005 period. Economic performance figures for the
first six months of 2006 reflect the economic circumstances that
prevailed during the ceasefire period. The economy's performance in
the second half of this year and into 2007 will indicate whether it
is as resilient as Jayasundera hopes.

BLAKE

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