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RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 02 COLOMBO 001569 
 
SIPDIS 
 
SENSITIVE, SIPDIS 
 
STATE FOR SCA/INS, EB/CBA 
 
MCC FOR F REID, D NASSIRY AND E BURKE 
 
 
E.O 12958: N/A 
TAGS: ECON EINV ETRD PTER CE
SUBJECT: SRI LANKA: FINANCE SECRETARY EXPECTS GROWTH AND STABILITY 
 
 
¶1. (SBU) Summary:  Finance Secretary PB Jayasundera, the 
government's economic mastermind, expects Sri Lanka's GDP to grow by 
7 percent this year, fueled by strong performance in the service, 
construction, and manufacturing sectors, and by healthy export 
growth.  The government is pushing hard to steer foreign and 
domestic investment toward infrastructure, in order to stimulate 
further potential growth.  Jayasundera told the Ambassador that Sri 
Lanka experienced a surge in economic activity in Sri Lanka over the 
last two to three years, and that he believed Sri Lanka's resilience 
to shocks like the 2004 tsunami and years of conflict would enable 
it to continue to perform at this level.  End summary. 
 
Economy is Thriving ... 
----------------------- 
 
¶2. (SBU) Finance Secretary PB Jayasundera, who, along with Central 
Bank governor Nivard Cabraal, runs the Sri Lankan economy, told 
Ambassador Blake September 19 that he expected current strong 
economic performance to continue in coming years.  Jayasundera 
outlined how and why the economy had performed well so far this 
year: 
 
- 7 percent GDP growth driven by a "buoyant" service sector; booming 
post-tsunami construction; and strong production of tea, gems, 
leather, ceramics, and wood products. 
- Export growth of 10-12 percent due in part to free trade 
agreements with India and Pakistan and preferential trade (GSP+) 
with the European Union. 
- Productivity improving. 
- Government revenue rising to 17 percent of GDP, from 14.5 percent 
a few years ago, on higher VAT, income, and excise tax collection. 
- Balance of payments remaining positive partly on the strength of 
remittances from Sri Lankans working abroad. 
 
... and Outlook is Positive 
--------------------------- 
 
¶3. (SBU) Jayasundera added that intensive focus on infrastructure 
development would remove "structural impediments to growth" and 
generate private sector enthusiasm for further investment in Sri 
Lanka.  He listed ports, roads, and electricity as the government's 
three priorities for infrastructure improvements, to be supplemented 
by investment in water supply, education, and health.  The rural 
south and northeast lagged in economic development, so the 
government would direct new investment to those areas. 
 
Not Worried about Inflation, Oil Prices, or Conflict 
--------------------------------------------- ------- 
 
¶4. (SBU) Ambassador Blake asked how the government could keep 
inflation in check as it increased government spending to improve 
infrastructure.  "Foreign funding," Jayasundera answered, noting 
that Sri Lanka had USD 5 billion in the aid pipeline which would be 
directed towards infrastructure projects.  This would enable the 
government to reduce its annual deficit spending to 5 percent of GDP 
from over 10 percent now.  Jayasundera added that the government 
planned "monetary restraint to the maximum extent." 
 
¶5. (SBU) Jayasundera recognized that Sri Lanka's dependence on 
imported oil was a major risk, and noted that the value of oil 
imports so far this year had increased to USD 1.4 billion from USD 
800 million at this point last year.  But he said that exports, 
remittances, and the service sector were keeping the balance of 
payments in the black.  Further, Sri Lanka's resilience to shocks 
like the 2004 tsunami and years of conflict made these targets 
realistic even in the face of possible renewed ethnic conflict. 
 
TIFA Talks and Trade Mission 
---------------------------- 
 
¶6. (SBU) Ambassador Blake noted that Deputy U.S. Trade 
Representative Kiran Bhatia would potentially lead the U.S. side in 
Trade and Investment Framework Agreement (TIFA) talks late this 
year.  "We will go as fast as you are ready to go," the Ambassador 
said, adding, "we need signals that you are ready to remove 
obstacles that do exist."  The Ambassador noted that business people 
in Washington had told him that they encountered difficulties doing 
business in Sri Lanka.  Cases like the government's refusal to pay 
power plant operator AES for power it had produced under a special 
contract could "poison" the investment environment.  When small and 
 
COLOMBO 00001569  002 OF 002 
 
 
medium size companies see that a big player like AES could not get 
its contract honored, the smaller firms get spooked. 
 
¶7. (SBU) The Ambassador added that he expected a major trade mission 
to India to send a spin-off group to Sri Lanka in December.  It was 
important that Sri Lanka have a good story to tell, and good 
opportunities to show.  The Ambassador urged Sri Lanka to conduct an 
ongoing dialogue with the private sector, to hear what the 
government could do to facilitate their business. 
 
Terrorism Finance 
----------------- 
 
¶8. (SBU) The Ambassador raised terrorism finance, saying that the 
United States was prepared to help Sri Lanka fight terrorism and 
that the financial side was important.  He noted the assistance the 
United States was providing to help Sri Lanka get its financial 
intelligence unit (FIU) operational, and asked what more we could 
do.  Secretary Jayasundera said that Sri Lanka appreciated the FIU 
assistance, as "we have had weakness in that area in the past" and 
promised to coordinate with the Embassy to identify other areas for 
cooperation. 
 
Comment 
------- 
 
¶9. (SBU) Finance Secretary PB Jayasundera has a firm grip on 
economic principles and on the prospects and challenges for the Sri 
Lankan economy.  He is right that the economy performed well during 
the peaceful 2003-2005 period.  Economic performance figures for the 
first six months of 2006 reflect the economic circumstances that 
prevailed during the ceasefire period.  The economy's performance in 
the second half of this year and into 2007 will indicate whether it 
is as resilient as Jayasundera hopes. 
 
BLAKE