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 08 COLOMBO 001131 
 
SIPDIS 
 
DEPARTMENT FOR D, SA, SA/INS 
NSC FOR E. MILLARD 
 
E.O. 12958:  DECL:  07/07/2014 
TAGS: PREL PGOV PTER CE ECONOMICS LTTE
SUBJECT:  AMBASSADOR'S ASSESSMENT:  PEACE AND PROSPERITY 
IN SRI LANKA-WHERE ARE WE AND WHAT CAN WE DO ABOUT IT 
 
 
CLASSIFIED BY AMBASSADOR JEFFREY J. LUNSTEAD.  REASONS 
1.5 B, D. 
 
SUBJECT:  Ambassador's Assessment: Peace and Prosperity 
in Sri Lanka--Where are We And What Can We Do About It 
 
¶1.  (C) SUMMARY:  This is the Ambassador's assessment of 
where things stand in Sri Lanka 90 days after the new 
government took office.  The heady optimism on peace and 
prosperity which prevailed when Ranil Wickremasinghe took 
over in December 2001 has largely disappeared. Though 
Ranil lost the April 2004 election largely on economic 
grounds, the gains by extremist parties also showed a 
deep disillusionment with politics as usual in Sri Lanka. 
President Kumaratunga's desire for peace is not 
questioned, but her ability to run a peace process is. 
Efforts by the Sri Lankan military to use Tiger renegade 
Karuna against the LTTE have eroded already weak trust 
and have the potential to get out of hand. Behind all of 
Kumaratunga's actions is a desire to change the 
Constitution to allow her to continue in politics after 
her Presidential term. The government's economic policy 
is muddled. It says some of the right things about a 
market orientation, but shows no clear understanding of 
how to move forward. Still, the country remains committed 
to peace and there is great economic potential.  We need 
to continue to push both sides to compromise for peace, 
while realizing that our influence on the Tigers is much 
less than on the Government. We also should continue our 
efforts on the peace process, which is much bigger than 
just the peace negotiations. Our interest here centers on 
showing that terrorism can be defeated, and that 
transcends any particular government. Sri Lankans have 
freely and fairly chosen their government. We need to 
work with the new government, just as we did with its 
predecessor. END SUMMARY 
 
¶2.  (C) The United Peoples Freedom Alliance (UPFA) 
government headed by President Chandrika Bandaranike 
Kumaratunga (CBK) -- comprised of the President's own Sri 
Lanka Freedom Party (SLFP), the Marxist and Sinhalese 
chauvinist Janatha Vimukthi Peramuna (JVP), and some 
smaller leftist parties -- has been in office for three 
months. This report is the Ambassador's analysis of where 
things stand at this point on the two key, and 
interlinked, issues for the United States--peace and 
prosperity. 
 
What Happened? 
------------- 
¶3.  (C) When I arrived in Colombo in August 2003, the 
situation seemed clear and relatively optimistic.  Ranil 
Wickremasinghe's United National Party (UNP) had won a 
substantial majority in Parliamentary elections in Dec 
2001 running on a peace platform.  The resultant 
ceasefire with the Tamil Tigers and the peace 
negotiations had made some major breakthroughs, 
particularly the Tiger's acceptance of a united Sri 
Lanka, and the government's acceptance that the Tamil 
issue could only be settled through the establishment of 
a federal system. On the economic side, the UNP was 
committed to quick and drastic economic reform, as they 
attempted to do away with Sri Lanka's legacy of state 
domination of the economy. The economy was booming, with 
growth predicted at over six percent, the stock market 
up, and a palpable air of excitement in the economic 
sphere. CBK remained as President of the country, but 
Ranil seemed firmly in charge of government policy and 
administration. The LTTE had suspended the peace 
negotiations in April 2003, but a resumption was expected 
soon after the Tigers, in October 2003, delivered their 
proposal for an Interim Self Governing Authority (ISGA) 
in the areas they effectively control. 
 
¶4.  (C) This whole edifice came crashing down after CBK 
took over three Ministries (including the Defense 
Ministry) on Nov 3, 2003, beginning a protracted power 
struggle with Ranil which culminated in her alliance's 
electoral victory in April 2004.  USAID-sponsored pre- 
election polls showed that Sri Lankans believed that 
Ranil was better able to handle the peace issue (though 
not by a huge margin), but that they also believed CBK 
could better handle the economy, law and order, and 
corruption. The UNP ran a lackluster campaign, and 
suffered a stunning loss, declining from 109 seats to 82. 
In retrospect, it is clear that voters were not happy 
with the UNP's economic policies. In particular the 
prosperity of Colombo and its surrounding areas hid a 
lack of economic progress in the rural areas where most 
Sri Lankans live (the Western Province, which houses the 
capital city, represents close to 50 percent of all 
economic growth in Sri Lanka.  No other province provides 
more than 10 percent). 
 
¶5.  (C) Even so, the President's victory was not 
overwhelming.  In fact, her UPFA won 105 seats in the 
225-member parliament, leaving her short of a majority. 
And within that number, her SLFP won 66 seats, while her 
junior partner, the Marxist/Nationalist JVP, took a 
stunning 39 places.  The UPFA's election manifesto 
revealed built-in contradictions.  It generally supported 
the peace process while promising to be tougher with the 
LTTE--but with some significant reservations by the JVP-- 
but resorted to outright populist gimmicks on the 
economy, such as promising a 70 percent pay hike to all 
government servants and to solve unemployment by 
immediately hiring into the government 30,000 unemployed 
college graduates. 
 
¶6.  (C) The election revealed, in my view, deep-seated 
unease among many Sri Lankans about where their country 
was heading. Ranil was forcing the country to confront 
two long-cherished assumptions of the Sri Lankan polity: 
that Sri Lanka was a unitary state dominated by Sinhalese 
Buddhists, and that Sri Lankans were essentially 
guaranteed a job for life without regard to economic 
imperatives or market signals.  The election campaign 
also showed the resurgence of a Sri Lankan xenophobic 
tendency, in attacks on foreign "domination" of the 
economy, foreign "sellout" to the Tigers, and foreign 
"attacks" on Buddhism.. The widespread disillusionment 
with the two mainstream parties was shown most clearly in 
the success of the extremist parties: the unprecedented 
showing by a new Buddhist monk political party, the 
Jathika Hela Urumaya (JHU), which won nine seats, the 
twenty-two seats won in the North and East by the Tamil 
National Alliance (TNA), a stalking horse for the Tigers, 
in a campaign marked by LTTE intimidation, and the 39 JVP 
seats. 
 
Problems on Peace 
----------------- 
¶7.  (C) During the November 2003-April 2004 period, 
nothing happened on the peace negotiations, as Ranil 
argued that he could not conduct negotiations while CBK 
was Defense Minister.  The situation was further 
complicated when the LTTE's eastern commander, Karuna, 
broke away from Prabhakaran's leadership in early March 
¶2004.  Since April the situation has deteriorated 
considerably.  The issue is not CBK's desire for peace -- 
no one should doubt that she is personally dedicated to 
that end. But her micromanagement style, her lack of 
consistency, lack of both clear lines of responsibility 
within the government and a unified government position, 
and the JVP's disagreement with CBK's policy, have led to 
confusion and an uncertain future for the peace talks. 
The talks are currently stalled, with the two sides 
unable to agree on the agenda.  The Tigers insist they 
will only discuss an interim administration, using their 
ISGA proposal as the basis for negotiations. CBK wants 
also to discuss final settlement issues, but the Tigers 
say they won't do that until an interim administration 
has been agreed upon and implemented. 
 
¶8.  (C) CBK has taken some good steps.  Her 1994-95 
negotiations with the Tigers were run without any type of 
staff setup.  She has rectified that failing this time, 
proposing the establishment of a political-level National 
Peace Council and a strengthened Peace Secretariat.  Her 
choice of widely respected former diplomat (Sri Lankan 
Ambassador to the US and later UN Under Secretary 
General) Jayantha Dhanapala, a serious thinker and 
respected administrator, was a good one. But she remains 
the only decision-maker on all substantive peace issues, 
and no one seems to have authority besides her.  At the 
same time, various voices in the government issue 
conflicting statements of policy.  Foreign Minister 
Kadirgamar--a hard-liner on the Tigers--is especially 
well-known for this. There is no inter-agency process 
which decides what policy is and enforces it. And in the 
meantime, the JVP trumpets its belief the government is 
too soft with the Tigers, and that the Norwegian 
facilitator role is unwanted. The net result is a lack of 
trust by the Tigers, who proclaim--with some 
justification--that they do not know what the GSL wants. 
In all fairness, the impasse cannot be blamed entirely on 
CBK and her government.  CBK has, in fact, shown a 
willingness to compromise on the interim 
administration/final settlement issue. The Tigers, by 
contrast, have been completely obstinate, showing no 
willingness to compromise. CBK also changes her own mind. 
At one point she told me that she had agreed to the Tiger 
demands to deal only with the interim administration, and 
then shortly afterwards she backtracked. 
 
Complicating Factors - Karuna and the Constitution 
--------------------------------------------- ----- 
¶9.  (C) The Karuna affair has muddled things up even 
more.  Karuna's move was, in substance, a good thing.  It 
was evidence of what we had always anticipated (and 
hoped) the peace process would bring about: a yearning by 
the Tigers and ordinary Tamils for a return to a normal 
life and a resultant breakdown of the Tigers' monolithic 
structure. The substance was great, but the timing was 
terrible. Without demilitarization and normalization, the 
outcome was a military confrontation between Prabhakaran 
and Karuna--which Karuna lost. Karuna fled to Colombo in 
an apparent liaison with the Sri Lankan military. Small 
pro-Karuna elements continue to operate against the 
mainline LTTE in the East, and probably can continue for 
some time. This has alarmed the Tigers and sown even 
greater distrust. The government and the military have 
played this very poorly. Their contradictory--and 
patently untrue--claims about their relationship with 
Karuna have set back the prospect for negotiations while 
gaining them very little. 
 
¶10.  (C) It is not clear who is calling the shots on 
Karuna. It is noteworthy, however, that the President 
believes that a negotiation has a best chance of success 
when one side is clearly stronger than the other. She has 
told this to me personally, and also to the Norwegians. 
If she is trying to operationalize this concept by using 
Karuna to weaken the Tigers, she is playing a very 
dangerous game. The Tigers have made this clear in 
several public statements, warning of a "bloodbath" and a 
possible return to war if the GSL uses Karuna in this 
way. The murder of several LTTE members in the East on 
July 5 followed by that appears to be a retaliatory 
suicide bombing in Colombo as I finish this cable on July 
7 underscore how dangerous and volatile the current 
situation has become. 
 
¶11.  (C) The issue of CBK's future and possible 
Constitutional change is also muddling things up. CBK is 
currently in her second term as President, which will 
expire in either 2005 or 2006. (There is an arcane legal 
argument about the length of her term which I will not 
attempt to describe here.) The crucial point is not the 
length of her term, but that under the present 
Constitution, she is limited to two terms. That means 
that her political career will end at the expiry of her 
current term. Theoretically she could run for Parliament 
and become Prime Minister, but she would not want to hold 
that office under a powerful Executive President.  Her 
UPFA ran for office on a pledge to amend the Constitution 
to abolish the Executive Presidency and make the Prime 
Minister Head of Government.  Amending the Constitution 
requires a two-thirds majority, but she does not even 
have a simple majority.  A simple majority would allow 
her to try the (legally dubious) move of converting 
Parliament into a Constituent Assembly, circumventing the 
need for a two-thirds majority. The point here is not 
whether or how she will amend the Constitution, but that 
her fixation on that determines what she does on other 
issues--like peace and the economy. 
 
¶12.  (C) The opposition--essentially the UNP plus several 
small ethnic parties, has as its chief goals to keep CBK 
from attaining a majority and to block Constitutional 
change.  This has led to attacks on her conduct of the 
Peace Process. The UNP says that it would support her if 
she ran a genuine peace process, but has described her 
actions as a "sham Peace Process," designed only to lure 
support from the Tamil National Alliance (a group of pro- 
LTTE parliamentarians) to give her a majority. 
 
What is the Economic Policy? 
---------------------------- 
¶13.  (C) The situation with regard to economic policy is 
somewhat similar to that of the peace process. The SLFP, 
which had introduced a rigid socialism to Sri Lanka in 
the 1970's, had changed tack and during previous periods 
of rule had introduced free market reforms including 
high-profile privatizations.  The differences on economic 
policy between the UNP and SLFP had seemingly become a 
matter of degree, not of substance.  The SLFP's campaign 
rhetoric, however--pushed along by their JVP partners-- 
took a retrograde note. It promised to halt planned 
privatizations of major State enterprises, to increase 
subsidies on essentials, as well as the budget-busting 
exercises mentioned earlier. It was not clear if the SLFP 
believed what it was saying, or just seeking a political 
advantage.  Since coming into power, the government has 
continued to talk both sides of the fence while doing 
little.  The Government finally delivered its public 
statement of economic policy--required by the 
Constitution as well as a prerequisite for a resumption 
of IMF loans--only on July 1. Trapped by its own 
rhetoric, the government has held domestic petroleum 
prices steady while the international price has soared 
and has begun the process of hiring 27,000 unemployed 
graduates for "management trainee" jobs in the 
Government.  The Government says it will make large State 
enterprises more efficient by instituting a "Strategic 
Enterprises Management Agency" to oversee them -- 
essentially one more layer in an already inefficient 
bureaucracy.  And the end of the Multi-Fiber Agreement 
quota system will almost surely mean significant job 
losses in Sri Lanka's most important export sector - the 
apparel industry. 
 
¶14.  (C) When I meet with Ministers and other high 
officials responsible for economic policy, they are 
always reassuring. They say they are committed to a 
market economy, but that the UNP government's policies 
need some "adjustments."  They say they will not 
privatize large state enterprises, but isolate them from 
political interference and make them run efficiently. 
Privately, they admit they cannot possibly fulfill all of 
their election promises without busting the country's 
budget.  The new government has some valid points in its 
economic policy. It points out that growth has been 
largely concentrated in the Colombo area, and that 
poverty remains unacceptably high in the rural areas. It 
admits that the large budget deficit needs to be 
controlled. In some ways the UPFA government is simply 
acknowledging political reality which cannot be ignored: 
just as in the recent Indian election, a large part of 
the populace felt neglected by earlier policies. To try 
to push policies which the majority of the populace 
rejects will not work. 
 
¶15.  (C) The problem is that the solutions offered are 
either clich? or counter-productive.  The budget deficit 
will be fixed by making revenue collection more 
efficient, they say, and the rural poor will be lifted 
out of poverty by erecting tariff barriers on food 
imports, leading to a strengthened agricultural sector, 
for example.  Unfortunately, identifying the problem is 
not synonymous with offering a solution, something the 
Government's economic framework fails to do. 
¶16.  (C) What is missing in all of this is a sense that 
Sri Lanka not only needs international investment, but 
has to compete for it.  With investors free to choose 
where to put their money, a situation with continued 
hassles for new investors, an uncertain economic policy 
framework and ambivalent (at best) statements on key 
reform issues is not going to attract them.  Our 
continued refrain to all who will listen is that Sri 
Lanka needs to make investment easier than anywhere else. 
Our advice appears to fall largely on deaf ears. 
 
Where's the Boss? Who's in Charge? 
---------------------------------- 
¶17.  (C) In both the peace process and the economy, one of 
the key problems is an almost cavalier approach to 
management. All decisions are concentrated at the top, 
but sometimes the top cannot be found.  In mid-June the 
President, without any public announcement, took off for 
her daughter's medical school graduation in London. She 
spent almost two weeks there, and then abruptly returned, 
again without any notice. Her brother, Industries and 
Investment Minister Anura Bandaranaike, was also in 
London for over two weeks. In his absence, all important 
investment decisions were on hold. 
 
¶18.  (C) The cavalier attitude towards peace is especially 
disturbing, and hard to fathom. It is only two and a half 
years ago that the ceasefire transformed Colombo from a 
fear-wracked city with omnipresent security barricades to 
a relatively carefree environment.  Yet Sri Lankans voted 
out the man who had brought them that peace, and 
installed someone with a history of failed peace 
initiatives leading to renewed war.  And the government's 
dalliance with LTTE rebel Karuna has heightened the 
feeling that they are playing with fire, feeling that 
they are immune to being burned. Sri Lankans have a 
peculiar ability to forget the recent past, it seems, and 
to assume that the current situation will continue. Ranil 
recently said to me that although he did not like to say 
it, he thought the government would only come to its 
senses and negotiate with the LTTE after there was 
another bad incident.  Today's suicide bombing might be 
that very incident. 
 
Where's the Good News? 
---------------------- 
¶19.  (C) As I look back on what I have written, it seems 
unremittingly gloomy, perhaps overly so. It is easy to be 
that way here, especially as the high hopes to two years 
ago seem to be frittered away.  But is this an accurate 
picture?  Not entirely, and there is some good news: 
 
PEACE 
----- 
 
--There is widespread public support for peace and an 
aversion to a return to war as an instrument to solve the 
ethnic conflict. Sri Lankans largely accept that Tamils 
have legitimate grievances which need to be addressed and 
that this can only be done through some type of 
devolution of power, a federal system. 
 
--The President herself is clearly dedicated to peace. 
 
--The LTTE also seems to have no desire to turn to war, 
though the fairly quick dispatch of the renegade Karuna 
faction indicates a continued ability to conduct military 
operations in a lethal manner, and today's suicide 
bombing--which we assume was carried out by the LTTE-- 
shows they are ready and willing to resume violence. 
 
PROSPERITY 
---------- 
 
--The economic strengths of the country remain: a 
literate, trainable workforce; good infrastructure 
(though it could be better); a desire for foreign 
investment; access to the Indian market under the Indo- 
Sri Lanka FTA. 
--The country retains a basic free-market orientation. 
 
--A private sector which is energetic and enterprising. 
 
What this likely means is a long period of just "muddling 
through."  While few expect war to break out, progress in 
the peace negotiations is likely to be minimal.  This 
means that reconstruction of conflict-affected areas will 
also be minimal. It also means that foreign investors' 
enthusiasm will be tempered by the fear of renewed 
conflict. Economic growth will be moderate, but never 
reach the level (8-10% per year) that would allow a 
breakthrough in reducing poverty. 
 
What Can We (And Others) Do? 
---------------------------- 
¶20.  (C) Before we think about what we can, or should, do, 
we need to keep in mind what our interests and goals are 
here. Our chief goal is peace, to see the end of the 
Tamil Tiger terrorist movement. We have two reasons for 
that. The first is to prevent any possible cooperation 
between the Tigers and trans-national terrorist groups. 
The second, and linked goal, is to show to the world that 
a terrorist problem can be resolved through negotiations 
and a political process.  Prosperity is intimately linked 
with this because lack of economic opportunity is one of 
the driving forces behind the Tamil insurgency, and 
because the promise of greater prosperity can be used to 
sell peace to those portions of a Sinhalese populace 
skeptical of Tamil demands. Those interests and goals 
remain whoever is in power in Sri Lanka. 
 
¶21.  (C) We have worked till now, in concert with other 
concerned countries, to put as much pressure as possible 
on both the Government and the LTTE to take meaningful 
concessions for peace.  While I wish I could offer some 
imaginative breakthrough, I have to say that the basis of 
our strategy remains the same.  We just have to keep 
pushing.  Both the Tigers and the Government want the 
support of the international community.  That last phrase 
raises another point. That much tossed-about clich?the 
"international community" really has a meaning here.  The 
concerned countries (a phrase I prefer to "donors," 
because this is not just about money and our influence 
here far outweighs our actual cash outlays) act with 
considerable solidarity here, and that has an impact. It 
is something we want to work assiduously to preserve. We 
need to keep pushing the message--as delivered after the 
Brussels Co-Chairs Meeting--that the attention and 
funding of the international community will not be 
available forever, that unless the two sides make some 
progress, they will lose out. 
 
¶22.  (C) There are two caveats we need to keep in mind, 
however.  The first is that both the GSL and the Tigers 
are fighting for their vital interests and, indeed, for 
their survival.  They value our opinion, they want our 
money--but they won't sell out their own existence to get 
it.  The second is that in pushing the two sides to take 
steps for peace, our power is asymmetrical.  We have 
considerable influence on the GSL, which wants many 
things from us, from trade to aid.  We have much less 
influence on the Tigers.  They seem relatively immune to 
economic inducements and willing to subordinate economic 
issues to political ones. With regard to the Tigers, the 
US is the bad cop, the hammer. We not only (correctly) 
keep them on the FTO list, but we also avoid all 
political level contact.  We have a dual message for the 
Tigers: that they will remain on the terrorism list and 
be treated as terrorists until they change their 
behavior, but that they will come off the list and be 
treated as legitimate political players if they change 
what they do. We have to make sure that they understand 
both parts of this. I am sure they understand the first 
part, but it remains unclear to me whether they 
understand the second part.  I believe we should consider 
whether there would be some value in communicating this 
message in a more direct way. Whether that is feasible or 
not, we have to keep looking for ways to put pressure on 
the LTTE. Our continued support for the Sri Lankan 
military also sends an important message to the Tigers 
that will lessen the temptation to return to war. 
¶23.  (C) On the economic side, we will need to keep 
pushing the government to do the right things, to be 
faithful to their own statement that "the policy 
framework will be based on market friendly, export 
oriented strategies supported by a strong regulatory and 
legal framework." Certainly we have no problem with that. 
The Millenium Challenge Account process offers us a good 
opportunity to do this. And we will need to recognize the 
limitations of their own political space, and just how 
far they can go. 
 
Peace Process More Than Just Negotiations 
----------------------------------------- 
¶24.  (C) We also have to keep in mind that the peace 
process is much bigger than the peace negotiations.  The 
peace process goes on everyday: in demining activities, 
in efforts to build civil society involvement in peace, 
in reconstruction and rehabilitation, and in many other 
ways.   Every day the process continues, every new fact 
that is created on the ground, gives people a bigger 
stake in peace and makes it less likely that the country 
will go back to war.  Our efforts and the efforts of 
other donors are a part of this and need to be 
strengthened. 
 
Can They Get Together? 
---------------------- 
¶25.  (C) The last three times I have seen the President, 
she has said the same thing to me. "Isn't it strange," 
she says, "that the moderate parties in Parliament 
control 75 percent of the seats, and the extremist 
parties control twenty-five percent, and yet the 
extremist parties dictate what we all do.  Shouldn't the 
moderate parties be able to work together"? This is an 
extraordinary statement, because she is saying that the 
UNP and the SLFP (the seventy-five percent) have much in 
common, and that the extremists include her own coalition 
ally, the JVP.  The problem, of course, is that the 
personal agendas of the two leaders, CBK and Ranil, are 
completely at odds. She wants to change the Constitution 
to abolish the Executive Presidency so she can become 
Prime Minister and continue her political career. Ranil 
wants to both become Executive President and see the send 
of CBK's active political life.  Several of my 
predecessors as Ambassador have told me of their 
fruitless attempts to convince Ranil and CBK to "put 
aside political differences and work together for the 
good of the country." None of them succeeded, and neither 
I nor anyone else would be more successful now. The one 
thing which might drive them together is the (not 
unrealistic) fear that the public could become so 
disgusted with the antics of both parties that they would 
turn to the JVP, which would swallow them up. 
 
¶26.  (C) And if I had to guess, I would venture that the 
most likely mid-term political scenario is that the JVP 
will mark its time and then, when it feels the opportune 
moment has come, pull out of the UPFA government.  The 
SLFP and UNP will then have two choices: either to have 
another election with the prospect of strong JVP gains, 
or even a JVP victory, or to work with each other in some 
type of national unity government. That will lead to some 
interesting maneuvering if it ever comes to pass. 
 
Where Do We Go From Here? 
------------------------- 
¶27.  (C) This exercise has come out very like the classic 
three-option action memo. Deciding against both abject 
capitulation or a pre-emptive strike (options one and 
three), we will naturally decide to follow option two-- 
the measured course which has served us so far.  That is, 
indeed, where I end up.  Basically, we just have to keep 
slogging away.  Our actions within the bilateral context 
become even more important in the current political 
climate:  it is easy to support the GSL when things are 
going well, but our continued efforts on all fronts, 
especially the AID/development one, will reinforce to all 
Sri Lankans that the USG remains committed in all the 
little important ways even when no big strides are being 
made. We have to accept the political reality of today's 
Sri Lanka, that the Sri Lankan people have chosen the 
government they want, and that we have to work with that 
government.  The great optimism of the early Ranil days 
is gone, and we will not get it back. But we can help Sri 
Lanka make progress on both peace and prosperity, and it 
is in our interests to do so.  And finally, we have to 
remember that, since Sri Lanka is a genuine democracy, 
the people of Sri Lanka may change their mind again when 
next given the chance. 
 
LUNSTEAD