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DE RUEHLM #0763/01 1310645
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R 110645Z MAY 06
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 3332
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUEHNE/AMEMBASSY NEW DELHI 9605
RUEHKA/AMEMBASSY DHAKA 9168
RUEHIL/AMEMBASSY ISLAMABAD 6058
RUEHKT/AMEMBASSY KATHMANDU 4093
RUEHCG/AMCONSUL CHENNAI 6609
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 02 COLOMBO 000763 
 
SIPDIS 
 
For Administrator Tobias from Ambassador Lunstead 
 
ADM AID Dept please pass to USAID 
 
SENSITIVE, SIPDIS 
 
E.O 12958: N/A 
TAGS: EAID ECON CE
SUBJECT: Your Efforts to Rationalize Foreign Assistance 
 
 
¶1. (SBU) I have read with interest the information we have 
received regarding your efforts to revamp US foreign 
assistance processes.  In that vein, I believe Sri Lanka 
deserves a closer look and poses interesting questions for 
the foreign aid planning community to consider as it moves 
forward with budget and implementation decisions.  I hope to 
discuss these issues with you when I am in Washington next 
week. 
 
¶2. (SBU) With regard to your efforts to coordinate foreign 
aid more centrally in Washington, there are four issues I 
would like to comment on:  1) As I mentioned in the MPP 
"Blue Skies" exercise, the budget process does not match the 
planning process.  Three to five-year budget commitments 
would allow continuity in planning and programming; 2) MCC 
eligibility should not lead to a reduction in USAID funding; 
3) conditions in Sri Lanka warrant that our two agencies 
take a critical look at re-categorizing it as a `Rebuilding 
Country'; and, 4) While there are good reasons for a strong 
guiding hand to ensure budget discipline, thus far the new 
process sounds highly Washington-centric. I urge you to 
include a mechanism that allows for significant input from 
the field perspective, in order to ensure that the budgets 
are consistently implemented and justified. 
 
Strategic Planning and Budgeting 
-------------------------------- 
 
¶3. (SBU) In October 2003, USAID Washington approved a five- 
year strategy, with accompanying budget, for Sri Lanka.  In 
the initial year of implementation, the annual budget to 
USAID/Sri Lanka was in line with this strategy. However, 
beginning in 2004, and each year since, USAID has faced 
annual budget cuts of between $3 and $21 million USD (as 
much as 100 percent of some categories).  Those cuts have 
steadily increased each year, with little explanation and no 
requests for strategy revisions.  This `tug-of-war' approach 
to budget allocation does not make for sound strategic 
thinking and confuses the host government and implementing 
partners. 
 
MCC-Induced USAID Cuts 
---------------------- 
 
¶4. (SBU) Post was informed this year that one of the reasons 
for the budget cuts was Sri Lanka's eligibility for the 
Millennium Challenge Account (MCA), a program that allocates 
budgets on a five-year time horizon.  Over the past three 
years, Sri Lanka has been deemed MCA-eligible.  While it is 
certainly an honor for Sri Lanka to be eligible and 
recognized as having promoted the concepts of good 
governance, investing in people and economic freedom 
(relative to other developing countries), the hard truth is 
that the road to an MCA compact is bumpy and makes for a 
slow ride.  The bottom line is that the only benefits of MCA- 
eligibility so far are lots of hard work and drastically 
reduced ESF and DA levels. 
 
¶5. (SBU) MCA, with its focus on country-driven plans and 
removing barriers to economic growth, concentrates on 
certain areas, including infrastructure.  But other crucial 
needs such as humanitarian assistance, conflict-resolution, 
good governance, etc. are handled by USAID.  Or at least 
they were, up until Sri Lanka became MCA-eligible, and USAID 
funding was cut..and cut..and cut again, forcing us to operate 
on a shoestring, limiting the scope and reach of some of our 
most successful projects and, as an unintended consequence, 
undercutting the potential success of MCA-related projects, 
none of which will focus on these critical areas. 
 
¶6. (SBU) We are at best six months away from an MCA compact, 
and possibly another year away from the disbursement of 
funds. Both we at Post and our contacts in the GSL are 
looking forward to those days arriving.  Meanwhile, US 
influence and impact in the country is declining as our 
USAID programs face cutbacks and program closure. 
 
Sri Lanka: Rebuilding more than Transforming 
-------------------------------------------- 
 
¶7. (SBU) I understand Sri Lanka has been labeled a 
"Transforming Country" based on its scores on particular 
 
COLOMBO 00000763  002 OF 002 
 
 
measures, including the Millennium Challenge Corporation 
(MCC) eligibility scales.  While Sri Lanka's Western 
province, which includes the capital city, could be included 
in a "transforming" category, the north, east and deep south 
remain mired in poverty, post-tsunami rebuilding and 
conflict-related upheaval (the current security situation 
calls into question whether we are "post-conflict" or not). 
Given these issues, Sri Lanka seems to fit partially in both 
the "Transforming" and "Rebuilding" categories.  Peace 
building is the most important US foreign policy objective 
in Sri Lanka.  Economic growth will not be sustained without 
sustained peace.  True, those portions of Sri Lanka under 
the Government's control have a vibrant democracy and 
generally sound (though far from exemplary) macroeconomic 
framework.  Nonetheless, its significant budget and current 
account problems remain, and as possible new security 
requirements loom, any "peace dividend" that has been 
available could disappear. 
 
¶8. (SBU) Therefore, I would urge serious consideration and 
analysis of Sri Lanka's internal situation, as the "numbers 
game" of applying only quantitative measures, can be 
misleading. 
 
Concluding Thoughts 
------------------- 
 
¶9. (SBU) As you look at the challenges before you, and as we 
consider the huge interplay among US goals, including 
peaceful resolution of internal conflicts, enhanced 
democratic institutions, counterterrorism, economic 
development, increased market access for US business and 
support for the successful conclusion of the Doha Round, 
among others, I urge you to consider the following four 
issues: 
 
-- strategic thinking in budgeting as well as planning - a 
commitment to continuity is important; 
 
-- greater interplay among overarching USG policies and 
goals - MCC and USAID are complementary, but only if both 
are functioning at full strength and in a cooperative 
manner; 
 
-- a re-designation of Sri Lanka as a `Rebuilding Country'; 
and, 
 
-- inclusion of a strong, practical voice from the field to 
complement Washington's resource management skills and 
structure. 
 
LUNSTEAD