This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 05 COLOMBO 000154 
 
SIPDIS 
 
DEPARTMENT FOR D, SA, SA/INS; NSC FOR E. MILLARD 
 
PLEASE ALSO PASS TOPEC 
 
E.O. 12958:    DECL:  01-27-14 
TAGS: PREL PGOV EAID CE JA NO EU LTTE ECONOMICS
SUBJECT:  February Co-Chairs Meeting:  Where We Go From 
Here 
 
Refs:  Colombo 150, and previous 
 
(U) Classified by Ambassador Jeffrey J. Lunstead. 
Reasons 1.5 (b,d). 
 
¶1.  (C) SUMMARY:  The USG-hosted February 17 Tokyo co- 
chairs meeting in Washington comes at an appropriate 
time.  Cohabitation between the President and the Prime 
Minister remains highly stressful which unfortunately 
means that a possible return to the peace table has been 
pushed down the road.  The delay in talks means that 
assistance, explicitly linked to progress in the peace 
process in the Tokyo Declaration last year, has not 
proceeded apace.  Lost in the shuffle is the fact that 
the peace process (as opposed to the peace talks) is 
progressing.  The incremental but significant progress 
in the process must be encouraged and nourished and not 
allowed to wither because of the cobwebs on the peace 
table.  The co-chairs meeting in Washington can play a 
key role in supporting the ongoing peace process by 
underscoring the need for donors to increase the pace of 
donor assistance on an island-wide basis.  At the same 
time there should be a clear message that the assistance 
spigot will not be turned all the way on until there is 
substantial progress at the peace table. 
 
¶2.  (C) For Department principals involved in the 
February 17 meeting, this message provides an in-depth 
analysis of the political and economic situation in Sri 
Lanka, as well as options in the assistance area. 
Mission has also included a draft statement to be issued 
by the co-chairs after the February 17 meeting, which is 
contained in Para 20 and is for Department's review. 
END SUMMARY. 
 
------------------------------------- 
Co-chairs Meeting Crucial Opportunity 
------------------------------------- 
 
¶3.  (C) The USG-hosted February 17 Tokyo co-chairs 
meeting in Washington comes at an appropriate time. 
Cohabitation between the President and the Prime 
Minister remains tense which unfortunately means that a 
return to the peace table appears distant at this point. 
Moreover, the SLFP-JVP electoral alliance inked on 
January 20 in our view increases the chances of 
nationwide elections (historically bloody, vehement 
affairs in this country).  The outcome of those 
elections could well make it even more difficult for 
peace talks to resume. 
 
¶4.  (C) The delay in the peace talks (nothing has taken 
place since the Tigers walked away in April 2003, 
although they produced their "counterproposal" for an 
interim governing authority in October) means that 
assistance, especially in the North and the East, 
explicitly linked to progress in the peace process in 
the Tokyo Declaration last year, has not proceeded 
apace.  While significant donor activity is taking place 
throughout the country, the LTTE continues to beat the 
drum that assistance is inadequate and that it is unfair 
to punish the North and the East for the South's 
inability to get its political act together (this 
argument conveniently glosses over the fact that the 
Tigers left the table first, not the GSL, and stayed 
away for six months). 
 
¶5.  (C) Lost in the shuffle is the fact that the peace 
process (as opposed to the peace talks) is progressing. 
Each month that the ceasefire continues to hold means 
that peace, not war, becomes the norm and makes it more 
difficult for either side to go back to the battlefield. 
Each month, displaced Tamils return to their homes. 
Houses are being built and communities re-established. 
Local peace committees try to defuse conflicts and 
promote reconciliation.  Humanitarian demining is moving 
forward.  This incremental but significant progress must 
be encouraged and nourished and not allowed to wither 
because of the cobwebs on the peace table. 
 
¶6.  (C) It is imperative, therefore, that the co-chairs 
meeting in Washington hammer out a way to support the 
ongoing peace process.  This includes increasing the 
pace of donor assistance to the North and the East while 
ensuring that sufficient aid will continue to flow to 
the "South" to reinforce the Prime Minister's message 
that the peace process will bring prosperity to the 
entire island, not just to the Tamil areas.  At the same 
time there should be a clear message that the assistance 
spigot will not be turned all the way on until there is 
substantial progress at the peace table. 
 
----------------- 
Political Outlook 
----------------- 
 
¶7.  (C) In the political arena, the situation in the 
South remains very troubling.  Since Sri Lanka's 
cohabitation experiment began in December 2001, the 
relationship between President Kumaratunga and Prime 
Minister Wickremesinghe has been dysfunctional -- and 
relations have only plunged to new depths after the 
President's takeover of three key ministries (Defense, 
Interior, Mass Communications) on November 4.  In 
response, the PM demanded that all three portfolios be 
returned to government control immediately.  From mid- 
November until mid-December, a joint committee composed 
of representatives of both leaders met to try to resolve 
the situation, but it had little success in ending the 
impasse.  Further complicating matters, the PM made an 
unexpected announcement in early January that the 
government could no longer take responsibility for the 
February 2002 ceasefire agreement with the Tamil Tigers 
in light of the President's continuing control of the 
Defense Ministry. 
 
¶8.  (C) The downward spiral of action and reaction has 
continued in recent days.  For example, a dispute has 
arisen as to the exact length of President Kumaratunga's 
term in office.  While it was widely assumed that her 
second term would end in late 2005, the President has 
publicly stated that she believes that she is entitled 
to serve until late 2006.  The PM and his supporters 
have indicated that they will contest this.  In 
addition, as touched on above, the recent signing of an 
alliance between the President's SLFP party with the 
anti-peace process JVP has led to fears that Sri Lanka's 
political class is girding itself for general elections. 
Given current temperatures, such elections could be 
violent beyond all precedent.  Even if parliamentary 
elections are not called, Provincial Council elections 
are slated to take place in April sparking similar fears 
about violence and thuggery.  An overarching issue to 
all the infighting is President Kumaratunga's strongly 
held view that she will not be treated by the PM for the 
next two (or three years) of her term in the same poor 
way she feels she has been treated in the past two 
years, i.e., cut out of the decision-making loop.  In 
the meantime, while the peace process on the ground 
continues and even moves forward in some areas, there 
are gathering signs that the Tamil Tigers are growing 
concerned by the uncertain situation in the South. 
 
¶9.  (C) Amid all the bad vibrations, one piece of good 
news is that the two sides still appear willing to 
discuss their differences.  After a month's hiatus, the 
joint "Mano-Malik" committee is meeting again.  It is 
the case that the President and PM have agreed on 
roughly 80 percent of the issues necessary for a 
compromise, but the two remain hung up on the last 20 
percent.  The basic question is which Defense Ministry 
powers should be given back to the PM, and which kept in 
the President's hands.  As the two sides meet, a factor 
favoring compromise is that both sides appear receptive 
to some extent to the views of the international 
community, especially India and the U.S.  As bad as 
things are, they could well be worse if not for 
Secretary Powell's recent letters to the two principals, 
 
SIPDIS 
or Indian government discussions with Kumaratunga on the 
margins of the recent Islamabad SAARC Summit.  In light 
of this, we believe that the President and PM will 
carefully listen to the message emerging from the 
upcoming Washington co-chairs meeting and factor it into 
their subsequent actions on the political stage. 
 
----------------- 
Economic Forecast 
----------------- 
 
¶10.  (C) Meanwhile, the cohabitation crisis and 
impending drought make the economic forecast tepid at 
best.  There are three economic realities donors need to 
face.  The current (post-November 4) economic situation 
is not going to lift Sri Lanka's overall standard of 
living in any meaningful way.  Delivering aid to the 
north-east and deep south could keep the economic base 
from deteriorating further and give non-combatants in 
the area a taste of a peace dividend, encouraging 
further support of the peace process.  Finally, real, 
sustained economic growth is not possible until 
political stability is realized, a return to peace 
negotiations takes place, and major infrastructure 
projects get underway. 
 
¶11.  (C) The ongoing political impasse has led some 
foreign investment to stay on the sidelines, awaiting a 
resolution.  Further, progress on investment projects 
already in the country has been slowed as GSL decision- 
makers are distracted by current events.  On the macro- 
front, it appears that an ongoing drought will have a 
negative effect on the agriculture and power sectors and 
reduced foreign investment is pushing the rupee down 
against the dollar.  The IMF process is off-track, with 
a likely return to Article IV consultations that 
eliminate an expected USD 80 million loan tranche this 
year.  World Bank (and perhaps also Japanese) budgetary 
assistance will almost certainly be delayed.  There are 
some silver linings though -- tourism continues to boom, 
remittances remain strong and the service sector 
continues to be the engine of growth.  The main garment 
manufacturers are developing a strategic plan for post- 
2005 and intend to double output over the next decade. 
 
¶12.  (C) Moving forward on assistance to the north-east 
will have a positive effect in answering some LTTE 
concerns about the political squabble and help residents 
in the north-east recognize additional economic benefits 
from the peace process.  Further, it will have the 
important psychological effect of showing that donors 
are not letting the political infighting in Colombo 
deter them from the long-term goal of securing a 
peaceful settlement that allows Sri Lanka to prosper 
economically. 
 
¶13.  (C) Real, sustained economic growth, however, will 
be elusive until major infrastructure and reintegration 
programs and projects are brought online.  Clearly such 
an undertaking needs all parties to be back at the 
negotiating table at least.  Therefore, continued 
political bickering in the south that keeps the parties 
away from negotiations continues to doom Sri Lanka to 
the realm of mediocre economic growth potential. 
 
----------------- 
Assistance Issues 
----------------- 
 
¶14.  (C) The best method for ensuring that key 
development funding is not completely hamstrung by the 
lack of progress at the peace table (while not opening 
the floodgates) would be to work in those areas where a 
clear humanitarian need is evident.  The returns for 
these efforts should be high impact, visible, and 
directly attributable to assistance that flows as a 
result of the peace process.  All donors agree that 
despite the continued impasse between the President and 
Prime Minister and the stalled peace talks, the people 
of Sri Lanka need to continue to see the benefits of 
peace -- particularly outside Colombo. 
 
¶15.  (C) Mechanisms exist for the continuation of "peace 
dividend" projects which focus on communities affected 
by the conflict island-wide.  These include World Bank 
and Asian Development Bank programs that fund community 
infrastructure and humanitarian assistance activities 
which provide these benefits.  Some bilateral donors are 
contributing to these projects.  Bilateral donors are 
also providing funding to NGOs and contractors to 
address some of the needs of targeted communities and 
vulnerable groups, including food, humanitarian 
assistance and human security.  These funds, pledged as 
part of the Tokyo aid package, need to keep flowing and 
be accelerated.  Possibilities also exist for funding 
through the North East Reconstruction Fund (NERF) to 
which several donors have already pledged support. 
Negotiations with the LTTE on how the GSL and LTTE can 
jointly review and submit projects for NERF funding 
should continue.  If the NERF itself cannot be 
resuscitated, given its historical baggage, then a 
"NERF-like" mechanism may need to be created to do the 
job.  The project can be used to meet the immediate 
needs of the people in the North and East. 
 
¶16.  (C) There appears to be donor agreement that 
humanitarian assistance, demining and small scale 
community based projects (schools, clinics, roads needed 
for access to services, water, sanitation, housing for 
returnees, resettlement activities) and other activities 
that promote the participation of people in decision 
making on areas that affect their daily lives should 
continue and be accelerated.  Work should be done using 
local structures to the extent possible. 
 
¶17.  (C) Projects which may be held back from the $4.5 
billion dollar pledge for leverage should be those which 
are desired by both parties (information and 
communication technology, for example) or other 
development big ticket items which are not critical to 
meet basic social and humanitarian needs of the people. 
The "stick" should be seen as having leverage equally on 
both parties, not just one.  The "carrot" should be for 
the on-the-ground priorities that affect the well-being 
of people and communities. 
 
¶18.  (C) In the gray area are meta-infrastructure 
projects which should be viewed through the lens of how 
they are facilitative of meeting basic human needs 
including creating greater opportunities to enhance 
livelihoods.  Meta projects should be those vital to 
restore connections such as access to markets, schools, 
health facilities, etc., at the local level.  Donors 
should continue to talk to one another and review big- 
ticket items especially ones involving large new 
construction. 
 
¶19.  (C) This tack allows for a positive trend in 
economic growth to continue while holding the carrot of 
larger-scale, major growth-inducing projects for all to 
see on the horizon. 
 
-------------------------------- 
Suggested Post-Meeting Statement 
-------------------------------- 
 
¶20.  (C) The public optics of the co-chairs meeting will 
be key.  We suggest that the four co-chairs release a 
press statement at the end of the February 17 event 
along the following lines: 
 
Begin text: 
 
(opening pleasantries, etc.) . . . and are pleased to 
note that the ceasefire in Sri Lanka has held for two 
years.  With each passing month of peace, more displaced 
Sri Lankans continue to return to their homes, more 
humanitarian demining occurs, and daily life in 
previously contested areas becomes progressively more 
settled and bearable.  The co-chairs applaud these 
indicators of peace, while at the same time calling for 
the earliest possible resumption of the peace talks 
which have been suspended since April 2003.  Progress at 
the peace table is essential if the encouraging progress 
in the peace process is to be sustained. 
 
In the same vein, the co-chairs note that the political 
"cohabitation crisis" in the South between the President 
and the Prime Minister poses the greatest impediment to 
an early return to the peace table.  The tense situation 
in the south is also harming prospects for economic 
investment and growth.  The co-chairs call on all 
political figures in Sri Lanka to find a method to 
establish clarity of responsibilities, so that the peace 
negotiations -- and the entire process of governance -- 
can resume. 
 
The co-chairs note that in the absence of peace 
negotiations support for the peace process throughout 
the country becomes even more important.  They call on 
all donors to find appropriate mechanisms through which 
adequate amounts of humanitarian relief and assistance 
to improve the quality of life at the community level 
can continue to be delivered to all needy areas of the 
country.  At the same time, the co-chairs wish to draw 
attention to the specific language in the Tokyo accords 
which makes clear that full release of aid funds pledged 
at the Tokyo conference cannot go forward in the absence 
of substantive progress at the peace table. 
 
End text. 
 
¶21.  (U) Minimize considered. 
 
 
LUNSTEAD