VZCZCXRO0473
RR RUEHLMC
DE RUEHLM #1052 1771216
ZNR UUUUU ZZH
R 261216Z JUN 06
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 3741
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHNE/AMEMBASSY NEW DELHI 9757
RUEHKA/AMEMBASSY DHAKA 9286
RUEHIL/AMEMBASSY ISLAMABAD 6180
RUEHKT/AMEMBASSY KATHMANDU 4215
RUEHCG/AMCONSUL CHENNAI 6730
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS COLOMBO 001052 
 
SIPDIS 
 
STATE FOR SA/INS; MCC FOR D NASSIRY AND E BURKE 
 
SIPDIS 
 
SENSITIVE 
 
E.O 12958: N/A 
TAGS: ECON CE
SUBJECT: INITIAL FIRST QUARTER GDP STATS MAY BE MISLEADING 
 
 
¶1.  (U) SUMMARY:  The Department of Census and Statistics 
(DCS), an agency coming within the Ministry of Finance and 
Planning, has released quarterly Gross Domestic Product 
(GDP) data for the first quarter of 2006.  According to 
these statistics, GDP in the first quarter of 2006 was 7 
percent more than the first quarter 2005 GDP.  The growth 
reflects a recovery from the tsunami-affected first quarter 
of 2005 when GDP (as measured by the DCS) grew by 5 percent 
over the first quarter 2004 figure.  This cable outlines 
some of the causes of the GDP growth.  END SUMMARY. 
 
¶2.  (SBU) Robust growth rates in the three major sectors 
helped growth:  agriculture grew by 11 percent, industry by 
6.6 percent and services by 6.2 percent over the 
corresponding period in 2005.   Encouraged by these figures, 
senior government officials have declared that the Sri 
Lankan economy is resilient and would be seeing similar 
growth rates in the next three quarters.  Dr Dushny 
Weerakoon, Deputy Director of the Institute of Policy 
Studies, an economic think tank in Colombo, also confirmed 
that they do not dispute the overall trend of strong growth 
in the economy where growth has exceeded 6 percent in every 
quarter beginning from the second quarter of 2005.  If there 
is no breakout of full-scale war, IPS expects to see growth 
over 6 percent for the year 2006.  According to Weerakoon, 
there has been a clear turnaround in agriculture, with good 
weather and government policies helping rice and other 
crops.  Other sectors, especially services, are also 
continuing their growth from last year.  Construction in 
particular is robust due to tsunami reconstruction activity. 
 
¶3.  (U) However, these numbers should be viewed with care 
for several reasons.  They reflect economic activity in 
January to March 2006 before violence increased in April 
¶2006.   The growth also reflects a recovery from the tsunami 
destruction.  In particular, growth in agriculture is 
partially attributed to a spectacular recovery in fisheries 
(250 percent) from a decline of 77 percent in the 
corresponding period in 2005.  The construction sector is 
also doing particularly well due to tsunami reconstruction 
activities.  Inflation was significantly lower in the first 
quarter of 2006 when compared to 2005.  According to present 
trends a much higher rate of inflation during the rest of 
the year is likely, which could affect growth.  Currently, 
inflation as measured by the Colombo Consumer Price Index is 
running over 13 percent.  Furthermore, quarterly GDP numbers 
reported in Sri Lanka are not/not seasonally adjusted and 
annualized and therefore would not indicate annual trends. 
 
¶4.  (U) Meanwhile, the high world oil prices, subsidies, and 
the absence of usual budgetary and balance of payment 
support from the ADB, World Bank and the IMF (due to the 
government's inability to move ahead with reforms) could 
cause a strain on the finances of the country.  Besides, the 
government has been forced to postpone its plans to raise up 
to USD 1 billion in a 7 to 10 year sovereign bond issue, due 
to lack of interest in the investment community, at least in 
part due to the current security situation.  The financial 
situation could worsen further if the government seeks to 
increase defense expenditure.  These developments could 
result in significant pressure on the rupee and increase 
inflation rates, which would slow economic growth. 
 
¶5.  (SBU) Comment:  The Central Bank, Sri Lanka's 
traditional source of GDP data, has not yet published its 
statistics for the first quarter.  Generally, the level of 
professionalism within the Central Bank, and relative 
insulation from national politics, lend greater authority to 
its reports than is enjoyed by the DCS.  The Central Bank 
data are to be released on June 30.  The Embassy will report 
more on this matter in early July if the Central Bank data 
are significantly different from that of the DCS. 
 
Lunstead