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PP RUEHBI RUEHCI
DE RUEHLM #0967/01 2940625
ZNR UUUUU ZZH
P 210625Z OCT 09 ZDK
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC PRIORITY 0646
INFO RUEHKA/AMEMBASSY DHAKA PRIORITY 1956
RUEHIL/AMEMBASSY ISLAMABAD PRIORITY 8992
RUEHKT/AMEMBASSY KATHMANDU PRIORITY 7230
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 3375
RUEHCG/AMCONSUL CHENNAI PRIORITY 9553
RUEHKP/AMCONSUL KARACHI PRIORITY 2543
RUEHCI/AMCONSUL KOLKATA PRIORITY 0433
RUEHBI/AMCONSUL MUMBAI PRIORITY 6853
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 COLOMBO 000967 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT PASS TO EEB JENNIFER PETERSON 
DEPARTMENT PASS TO TREASURY FOR MALACHY NUGENT/ATTICUS 
WELLER AND MARY BRENNAN 
DEPARTMENT PASS TO USTR FOR MICHAEL DELANEY AND VICTORIA 
KADER 
 
E.O. 12958: N/A 
TAGS: CE ECON EFIN ETRD KTEX PGOV
SUBJECT: CENTRAL BANK GOVERNOR CONFIDENT ON ECONOMIC GROWTH 
AND RECONSTRUCTION; DEFENSE BUDGET IS SRI LANKA'S BUSINESS 
 
REF: COLOMBO 944 
 
COLOMBO 00000967  001.3 OF 002 
 
 
¶1.     (SBU)  Summary.  In his introductory meeting with 
Ambassador Butenis, Sri Lankan Central Bank Governor Ajith 
Nivard Cabraal described the Sri Lankan economy as strong. 
Cabraal expects Sri Lanka to make large strides in the 
reconstruction of the conflict areas in the North and East. 
Cabraal parried questions about the economic impact of Sri 
Lanka's strained political relationship with the West by 
returning to his theme about the strength of the Sri Lankan 
economy.  Cabraal expressed confidence  that Sri Lanka would 
generally meet the IMF targets to reduce GSL budget deficits, 
although he allowed that the IMF realizes that the GSL may go 
over the targets for reconstruction spending.  Cabraal denied 
any connection between the IMF and defense spending, 
maintaining that the IMF only sought to reduce government 
deficits, and it was up to the GSL how to spend the money. 
Finally, the GSL is prepared with an assistance package for 
the private sector if the European Union withdraws GSP Plus 
trade preference benefits.  End Summary. 
 
A Strong Economy Allows Sri Lanka to Meet IMF Targets 
 
¶2.    (U)  The Sri Lankan economy has weathered the global 
downturn well, according to the Central Bank Governor. 
Cabraal thought that Sri Lankans had regained their economic 
confidence, highlighted by a booming stock market (see 
reftel).  He rattled off the familiar positive economic 
statistics: the Central Bank has raised its growth estimates 
from 2.4 percent to 3.5 percent for 2009 and expects 6 
percent growth in 2010; inflation has fallen from 26 percent 
to 1 percent; interest rates have dropped from 23 percent to 
9 percent; and foreign exchange reserves have grown from 2 to 
5 months of import cover. 
 
¶3.    (SBU)  Cabraal asserted that Sri Lanka is on line to 
meet its IMF targets.  He noted that the IMF program lends 
confidence to the Sri Lankan economy, and it is still 
important for the GSL to stick to the IMF program to maintain 
investor confidence.  Cabraal stated that the GSL has greatly 
benefited from falling interest rates, which have 
substantially reduced the GSL's debt payments.  (Note.  Sri 
Lanka's debt service constituted 21 percent of its government 
budget in 2008, so interest rate savings are substantial. 
End Note.)   The IMF budget targets will not constrain GSL 
spending for reconstruction of the North and East, he 
maintained.  The IMF recognized that national reconstruction 
costs are a priority and that the deficit targets could be 
adjusted.   New IMF representative Koshy Mathai essentially 
confirmed this view. The IMF recognizes that Sri Lanka is at 
an historic moment, and as long as the reconstruction 
spending is reasonable the IMF could make some allowances on 
its deficit targets. 
 
Reconstruction of the North and East 
 
¶4.    (SBU)  According to Cabraal, there has been great 
progress rebuilding the Eastern part of the country liberated 
from the LTTE several years ago, and the GSL will apply the 
same model to the North.  The GSL has emphasized road 
construction, and the government is looking for donor 
assistance to help rehabilitate more roads.  The East, 
traditionally a breadbasket of Sri Lanka, has begun 
cultivation of crops.  The GSL also has a microcredit lending 
program that has made 1,900 loans to families.  The next step 
is to rebuild more police stations, schools, and hospitals. 
Cabraal believes that the North has great potential to 
contribute to overall growth.  For example, in 1982, before 
the conflict began, the North exported 50,000 metric tons of 
fish, but in 2007 Northern fishermen exported a mere 7,000 
metric tons of fish. 
 
GSL Will Decide Its Defense Budget; Not the IMF 
 
¶5.     (SBU)  Ambassador Butenis questioned why the GSL had 
 
COLOMBO 00000967  002.5 OF 002 
 
 
increased its defense spending by 15 percent in a 
supplementary budget request and asked if this would be an 
issue with the IMF.  Cabraal argued that it was up to the GSL 
to determine its own internal spending targets, and the IMF 
was only concerned with the overall government deficit 
numbers.  Therefore, if the government spends more on the 
military, as long as the GSL cuts spending elsewhere or 
raises revenue sufficiently to reduce the overall budget 
deficit, the IMF should be satisfied.  IMF Representative 
Mathai would not put the issue quite so baldly, since the IMF 
does pay attention to the composition of the budget. 
However, Mathai stressed that the IMF would respect a 
sovereign government's spending priorities.  Mathai thought 
that Sri Lanka would need to show some defense savings in the 
2010 budget to meet the IMF government budget deficit target 
of 6 percent of GDP, but Mathai noted that the GSL military 
is performing many non-military roles in the North, including 
reconstruction and police work. 
 
Impact of Political Tensions on the Economy 
 
¶6.    (SBU)  On several occasions Ambassador Butenis noted 
that political tension over the end of the war and the closed 
IDP camps could impact the economy.  Cabraal sidestepped 
these concerns by returning to his overall picture of a 
strong Sri Lankan economy, and he never directly addressed 
the potential for economic costs due to political tensions. 
 
GSL Plan to Cope with the Possible Loss of GSP  Benefits 
 
¶7.    (SBU)  After the Cabraal meeting, the European 
Commission recommended to the European Union revoke Sri 
Lanka,s GSP Plus benefits on human rights grounds, which 
would result in an estimated USD150 million trade loss for 
Sri Lanka.  The EU process is lengthy, and even if the EU 
finally decides to revoke GSP Plus benefits, this will not 
occur until mid 2010.   Cabraal anticipated this issue, and 
claimed that the GSL was ready with a 'Plan B' if Sri Lanka 
lost GSP Plus.  The GSL would provide subsidies to exporters 
for up to one year, and Cabraal also expected that the 
exporters would benefit from interest rate reductions and 
lower electricity prices (because several coal plants are due 
to come on line).  In the end, he believed that the exporters 
could adjust to the loss of GSP Plus. 
 
¶8.    (SBU)  Comment.  Governor Cabraal is an excellent 
salesman who skillfully made the case that Sri Lanka's 
economy is in good shape and does not need further 
assistance.   Although the GSL likes to portray itself as 
fine without GSP Plus and maintains that Sri Lanka can ride 
out any donor ire about its military spending, we continue to 
emphasize that the political tensions have economic 
consequences, hope that this message  is getting through to 
GSL leadership.  The GSL has been very concerned about the 
potential loss of GSP Plus benefits, and it must know that it 
needs substantial donor assistance to rebuild the North and 
East.  End Comment. 
BUTENIS