Cablegate: Sri Lanka: Central Bank Governor Describes Economy's

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UNCLAS SECTION 01 OF 02 COLOMBO 001602

SIPDIS

SENSITIVE, SIPDIS

STATE FOR SCA/INS AND EB/IFD/OMA; STATE PASS TO USTR FOR HIRSH AND
ANAND; COMMERCE FOR E YESIN AND B LOPP; TREASURY FOR S CHUN; MCC
FOR D NASSIRY AND E BURKE

E.O 12958: N/A
TAGS: ECON EINV ETRD PREL CE
SUBJECT: SRI LANKA: CENTRAL BANK GOVERNOR DESCRIBES ECONOMY'S
STRENGTH TO AMBASSADOR BLAKE

1. (SBU) Summary and comment: Central Bank Governor Nivard Cabraal
told Ambassador Blake during their introductory meeting that Sri
Lanka's economy was healthy and its business climate good. Cabraal
was making a personal effort to tell multilateral development banks,
credit rating agencies, and international bankers the positive facts
about the economy, because reports that reached them often focused
on the negative. He also assured the Ambassador that the Rajapaksa
government was no less business-friendly than its predecessors.
Cabraal is a more visible and activist central banker than most, but
should take care to ensure that his boosterism does not harm his
credibility. End summary and comment.

Selling Sri Lanka to Donors and Lenders
---------------------------------------

2. (SBU) Ambassador Blake began his introductory call on Central
Bank Governor Nivard Cabraal September 25 by asking about the
governor's recent meetings with IMF and World Bank officials in
Singapore. Cabraal said his objective had been to make senior IMF
officials more aware of the favorable economic climate in Sri Lanka.
Cabraal reported that his audience had been "pleasantly surprised"
to learn that Sri Lanka's growth was strong and that foreign direct
investment, exports, and the balance of payments surplus were all up
this year. He attributed their surprise to the tendency for bad
news to be reported in the press while good news was ignored.

3. (SBU) Cabraal added that he and his team had met with credit
rating agencies and bankers in Singapore and had made the case for
Sri Lanka's credit rating to be upgraded from its current
sub-investment grade. Cabraal had particularly disagreed with the
rating agencies' Spring 2006 shift of their outlook on Sri Lanka
from "positive" to "negative." The raters had been too hasty,
Cabraal thought. There had been military skirmishes, but there were
no riots and investors had not fled. In fact, Cabraal said,
investors had ignored the rating swing and had continued investing.

Prospects for U.S. Exports and Investment
-----------------------------------------

4. (SBU) The Ambassador told Cabraal that the United States and Sri
Lanka had good economic relations, but that U.S. exports to Sri
Lanka were too small, particularly when compared with SL's exports
to the U.S. With so much business interest in India now, there were
prospects to increase U.S. trade and investment in Sri Lanka as
well. For example, the Indo-Lanka Free Trade Agreement offered ways
to export to India's still high-tariff market by sourcing products
from Sri Lanka. Also, Sri Lanka could capitalize on its workers'
strong English and accounting skills to attract some back office
operations and information technology investment that might
otherwise go to India.

5. (SBU) Ambassador Blake cautioned, though, that instances of
apparent failure to honor contracts - as in the government's refusal
to pay American energy company AES for some power it had produced -
had caused U.S. companies some concern about the investment climate
in Sri Lanka. Similarly, newly imposed taxes had given the
impression that the Rajapaksa government was less business-friendly
than its predecessor. Cabraal dismissed this perception, saying
that he frequently heard businesses claim it was hard to do business
in Sri Lanka and then soon after report publicly that profits were
up. On taxes, there had been policy "shifts," he said, but "nothing
that should make businesses uncomfortable or hit their bottom line."
In fact, Cabraal noted, he and a few others with economic
portfolios in the Rajapaksa government had formerly been members of
the opposition United National Party and were known for their
pro-business approach.

6. (SBU) Cabraal nevertheless agreed that it was important to "get
thorny issues out of the way so that we can move on with the rest."
He explained that the government had set up an Investment
Facilitation Committee, chaired by the President, which was charged
with "unlocking problems." "Take AES there," Cabraal advised,
saying it would be a sympathetic forum.

Oil Exploration Prospects
-------------------------

7. (SBU) The Ambassador raised the prospect of oil exploration in
Sri Lankan waters, saying he hoped U.S. companies would be

COLOMBO 00001602 002 OF 002

interested and that the Embassy had arranged for the U.S. Trade and
Development Agency to provide technical assistance. Cabraal replied
that the Central Bank had convened a core group to ensure that oil
exploration would be handled correctly and that Sri Lankans would
gain expertise in the process.

Financial Intelligence Unit
---------------------------

8. (SBU) Governor Cabraal concluded the meeting by stating that
strengthening Sri Lanka's new Financial Intelligence Unit was
another priority. The FIU was studying the transactions associated
with the recent FBI arrests of LTTE operatives in the United States.
The Ambassador replied that the State Department was convening a
Contact Group meeting to explore how to help Sri Lanka stop money
and arms from flowing to the LTTE. The Ambassador appreciated the
input the FIU had provided in a briefing at the Ministry of Foreign
Affairs the previous week.

Comment
-------

9. (SBU) Central Bank Governor Cabraal seems intent on making the
best possible case for the Sri Lankan economy. He is right that
someone should be doing this, but it is risky for that person to be
the Central Bank Governor. While the economy has performed very
well this year, recent inflation and interest rate statistics
(septel) suggest that the Central Bank has not been tough enough on
inflation. Moreover, the current 8% growth rate of the Sri Lankan
economy should not hide the fact that the GOSL must do much more to
create a favorable business climate for new U.S. investors.

BLAKE

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