Cablegate: Austr Delaney's Visit to Sri Lanka

DE RUEHLM #1063/01 3310751
R 260751Z NOV 08





E.O 12958: N/A

1. (U) Summary: Assistant U.S. Trade Representative for South Asia
Michael Delaney visited Sri Lanka November 11-14 to engage with key
government and business leaders, to discuss issues related to U.S.-
Sri Lanka Trade and Investment Framework Agreement talks, and to
review labor issues raised in the 2007 AFL-CIO petition to remove
Sri Lanka from the list of developing countries eligible for
Generalized System of Preferences (GSP) (reported septel).
Discussing the global economic downturn, the GSL officials remained
optimistic about Sri Lanka's overall macroeconomic outlook, but
reservedly acknowledged that it must deal with its dwindling foreign
reserve, the possible loss of GSP+ (EU preference program) benefits,
and a growing deficit in its budget. U.S. companies warned that an
increasing government bias in favor of local businesses is harming
the local investment climate. In a visit to the formerly war-torn
East, officials highlighted government efforts to attract investors,
while local businesses underscored the still considerable security
risk and the difficulty in obtaining financing. We agreed to look
for ways (particularly through our bilateral TIFA) to foster
economic reconstruction in the eastern part of the country.

Local Economic Challenges Amid
the Global Economic Downturn

2. (U) In a series of meetings on November 12-14, AUSTR Delaney and
Ambassador Robert O. Blake met with the Minister of Export
Development and International Trade G. L. Peiris, Minister of
Enterprise and Development and Investment Promotion Sarath
Amunugama, Member of Parliament and Presidential Advisor (and
Presidential sibling) Basil Rajapaksa, various officials from the
Ministry of Foreign Affairs (MFA) and the Department of Commerce
(DOC), and resident American companies. The Sri Lankan government
welcomed AUSTR Delaney, expressed their appreciation of embassy's
(via USAID) development assistance programs in the east, and
congratulated the U.S. on President-elect Barack Obama. Throughout
his meetings, AUSTR Delaney provided an overview of the current U.S.
economic downturn, highlighting in particular how it might affect
both exports from, and imports to, the U.S. He also stressed the
U.S. commitment to achieving a successful outcome at Doha and the
G20 meeting. AUSTR Delaney assured that the U.S. remains committed
to its bilateral trade agreements with Sri Lanka during the upcoming
change in the U.S. administration.

3. (SBU) Peiris and Amunugama were optimistic that Sri Lanka's
economy will remain resilient despite global woes, projecting a
continued growth rate of over six percent. They touted the success
of their garment industry and its high labor standards, and promoted
the government's recent campaigns to strengthen the agricultural
export industry. Only when questioned did the ministers acknowledge
that the government is facing several economic challenges including
a depleting foreign exchange reserve, a deficit in its balance of
payments, a depreciation of the rupee, and the risk of losing access
to the European Commission's Generalized System of Preferences-Plus
(GSP+) program. The Ambassador also asked Peiris about the recent
media reports on GSL's defaulting on foreign contracts; Peiris
stated that contract obligation is a strength of GSL, and the
government does not plan to hedge any of its current contracts.

4. (SBU) Ministers Amunugama and Peiris acknowledged that the global
economic downturn will exacerbate an already ailing economy,
especially with the Sri Lankan rupee under pressure against the
dollar, cash reserves dropping, and key export sectors forecasting
downturns. When queried by the Ambassador, the two Ministers
conceded that Sri Lanka's foreign exchange reserve was down to two
months of imports. Amunugama said that while garments, remittances,
tea, and taxes on fuel continued to prop the economy, the dwindling
reserve "will be a big problem" as the GSL relies on these funds to
finance necessary infrastructure projects. Peiris acknowleged that
the GSL may lose EC GSP+ concessions next year, causing additional
balance of payment concerns when businesses look to buy from cheaper
suppliers in other countries. He argued, however, that Sri Lanka is
not at the point to seek assistance from the International Monetary
Fund (IMF); the government plans instead to work with donor
countries Japan, China, and Iran to ensure that the construction of
their projects remains on track, perhaps through the provision of
additional loans to Sri Lanka by these countries. To illustrate,

COLOMBO 00001063 002 OF 004

Amunugama said he is confident that the Iranians would continue its
projects in Sri Lanka as they were relatively small and cheap.

5. (U) In light of the government's 2009 budget proposal, presented
in early November, the Ambassador queried Ministers Amunugama and
Peiris on the government's plans to raise current and add new taxes
on imports. In response, both ministers defended the government's
import substitution strategy as a way to encourage local production
in order to bolster the Sri Lankan rupee. Peiris acknowledged that
some proposed taxes in the budget, such as the new National Building
Tax, still need to be legislated by Parliament. He noted that the
tariff and export clusters of the National Economic Development
Council will meet to discuss the budget's taxation plans and settle
any discrepancies since the "multiplicity of levies was a problem
that the government needed to address."

TIFA Follow-Up

6. (U) AUSTR Delaney, through various meeting with GSL
TIFA-counterpart Minister Peiris, noted a strong U.S. commitment to
ensuring robust and meaningful TIFA talks with Sri Lanka. Placing a
special emphasis on agricultural issues (Note: The GSL did not send
an AG representative to the May 2008 TIFA talks in Washington),
AUSTR Delaney and the Ambassador highlighted Ambassador Blake's most
recent October 27 letter requesting the Minister's assistance to
reduce overall charges on agricultural imports from the U.S., as
they are currently not in line with the GSL's WTO commitments.
Peiris noted that he and his colleagues have reviewed the
information provided by the U.S. and promised to follow up with the
Ministry of Finance to argue that the GSL needs to abide by its
World Trade Organization (WTO) obligations. In discussing WTO
negotiations, Peiris highlighted the GSL's concerns on the
preference erosion in the Non-Agricultural Market Access (NAMA)
text, and its 2007 proposal requesting early implementation of
tariff cuts in the U.S. market. AUSTR Delaney explained the U.S.
position on the NAMA text, but noted that the issue was still under

7. (U) Responding to other TIFA Agriculture issues raised by the
U.S. delegation, Peiris said that Sri Lanka's ban on poultry imports
due to low pathogenic avian influenza (LPAI) was "almost resolved"
with the ban restricted to only two states. He also stated that Sri
Lanka is now allowing imports of American seed potatoes. (Note:
Although technically correct, USDA continues to work with the GSL to
stop unnecessary additional requirements the GSL has placed on the
importation of seed potatoes.)

8. (U) On November 14, AUSTR Delaney met with representatives from
the Ministry of Environment (MOE) to discuss the government's
genetically modified (GM) food regulations. The representatives
reconfirmed that Sri Lanka has adopted GM labeling requirements and
imposed controls on the importation of GM foods. Prior to
importation, relevant authorities must approve all applications to
import GM foods. Nevertheless, due to a lack of capacity at the
regulator level, officials admitted that implementation of the
controls is not uniform and it has caused uncertainty among
importers. Officials noted the GSL needs to also work to create
more public awareness about the benefits of GM food. MOE asked
AUSTR Delaney for U.S. assistance to establish the laboratories and
other facilities needed to test GM. AUSTR Delaney suggested
bringing regional or international speakers to Colombo to highlight
positive developments that can be achieved through the use of GM

9. (SBU) (Comment: GM regulations and policy is split between three
agencies: the Ministries of Health, Agriculture, and Environment.
Interagency cooperation between these agencies is very poor, leading
to miscommunication and misunderstanding on GM issues. Post, in
discussions with USDA, is looking at ways to reach out and promote
increased understanding of, and support for, GM products among these
three key ministries as well as within the general population.)

Businesses Face Increased Taxes

COLOMBO 00001063 003 OF 004

10. (SBU) On November 14, AUSTR Delaney met with American Chamber of
Commerce members representing Chevron, CitiBank, MAS Holdings (local
apparel company), Virtusa, and Microsoft. The representatives told
AUSTR Delaney the general business environment in Colombo is "okay,"
in light of the global economic downturn and the local security
situation. They are fairly optimistic that Sri Lanka will ride out
the international turbulence. However, they highlighted that one of
the biggest challenges in operating in Sri Lanka is the increase in
government policies favoring local businesses. Though many
multinational companies perform better than the local private
sector, international MNCs and SMEs feel the government is blatantly
biased towards local companies. In the 2009 budget draft,
profitable sectors are heavily taxed, while the government adopted
import substitution and introduced new non-tariff barriers to
protect local industries. Companies claim the government is
actively creating a misperception that multinationals "have an easy
life" and contribute little for the country. Sri Lanka is becoming
a highly nationalistic environment where the government blames the
foreigner for its economic and social ills. This is happening at
all levels of government and is a serious concern. As an example,
the Citibank representative observed that a once prudent regulator
is transforming into a more political one.

11. (SBU) The private sector representatives asked AUSTR Delaney to
assist the government in creating a legislative and regulatory
framework that was equitable to local and foreign investors. They
also encouraged USTR to assist the government in providing
enforcement training to protect the country's intellectual property
rights (IPR). According to the Microsoft representative, the
country needs more information technology (IT) enablers at the
policy level who are responsible for articulating the value of IPR
protection to the local industry and the rest of the government.
Although new government procurements contain IPR requirements and
that the new budget draft has a provision to protect the IPR of
local singers and artists, the fact that illegal software is
pervasive within the government sector underscores that IPR
protection is not a priority.

Visit to the East --
The Pros and Cons

12. (U) On November 13, AUSTR Delaney travelled to Trincomalee, an
eastern seaboard town that serves as the capital of the Eastern
Province (EP), to assess business challenges and opportunities in
the East. (The GSL liberated the East in July 2007 from the
Liberation Tigers of Tamil Eelam (LTTE), a USG-designated foreign
terrorist organization.) Challenges are significant and include a
lack of adequate infrastructure, including dilapidated roads and
water works, questions about adequate supply of electricity, high
transport costs to the commercial port in Colombo, and security
concerns. On the latter, private companies lack confidence in the
security situation and worry about the safety of their investment
and people. Eastern officials demonstrated only minimal care for
business concerns, stating that although large security gaps remain,
the East remains a "conflict emerging society" and, as such,
businesses should not expect a completely trouble-free environment.
Local businesses, as highlighted to AUSTR Delaney by the Trincomalee
Chamber of Commerce and Industry, underscored their difficulty in
maintaining their companies, and/or expanding, due to a lack of
financing. Entrepreneurs have had little access to financing as
banks are reluctant to lend money for investments that could fail if
the security situation again declines. In addition, most people do
not have the collateral required to borrow as they have defaulted in
the past due to the conflict and displacement. The Chamber noted
that there are no development finance institutions which can give
loans at a low interest rate to those needing a fresh start.

13.(U) Promoting the opportunities to investment in the East, the
Governor of the Eastern Province Rear Admiral Mohan Wijewickrema,
Trincomalee Government Authority (GA) Major General TT RD Silva, and
officials of the Trincomalee Ports Authority, highlighted GSL's 697
square kilometer Trincomalee special economic zone (SEZ), which was
established to attract foreign investors to set-up a mix of light
and heavy manufacturing, port-related activities, a power plant,
agriculture and fish processing industries, and tourism attractions.

COLOMBO 00001063 004 OF 004

To date, only one factory is under construction in the SEZ. The
government also hopes to establish a 1,200 acre Export Processing
Zone (EPZ) within the SEZ; however, it does not have the funding to
undertake the building of basic, needed infrastructure. The
Ministry of Industries has also been allocated 50 acres of land for
the development of an industrial processing zone (IPZ) for local
industries; to date three projects (rubber processing plant, ice
plant, and cement block making plant) have been approved for the
IPZ; construction has yet to begin. The government is offering
generous tax holidays to attract investors to the east. Peiris
specifically identified agriculture processing, rice mills, animal
feed mills, dairy farms, milk processing centers, fisheries, fish
processing and packaging for exports, sugar, and tourism as
industries the government hopes to attract to the East.

14. (U) The Trincomalee interlocutors agreed that one of the key
lynchpins to developing the east is to get public and private
sectors working together. In this vein, chamber officials commended
the USAID programs, notably the establishment of a business college.
Trincomalee interlocutors, as well as Peiris discussed how land
fragmentation of crops hindered development of the agricultural
industry and that the government was planning ventures, such as the
establishment of agri-export zones, to consolidate land and bring
SME's together to ultimately protect local manufacturers of imported
products and
channel income into the development of rural areas.

Rajapaksa Meeting

15. (U) On November 14, AUSTR Delaney and Ambassador Blake met MP
and Presidential Advisor, Basil Rajapaksa. AUSTR Delaney thanked
Rajapaksa for his assistance in arranging the visit to the East,
stating he recognized the huge economic potential in the area but
also the considerable security risks at present to business. He
affirmed that the USG, including USTR, would like to help Sri
Lanka's efforts to develop the East and that he will discuss with
Ambassador Blake and the GSL about the possibility of using the TIFA
to bring the private sector, USAID, IFIs and other stake holders
together to help the East. Rajapaksa thanked the U.S. delegation
for its assistance in the East so far and agreed that without
economic development, stability cannot be sustainable. He lamented
that the GSL has not been able to reach its economic targets in the
area, citing the difficulty in encouraging the private sector to
establish operations.

16. (U) AUSTR Delaney has cleared this cable.


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