VZCZCXRO6412
RR RUEHLMC
DE RUEHLM #1602/01 2751139
ZNR UUUUU ZZH
R 021139Z OCT 06
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 4368
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHNE/AMEMBASSY NEW DELHI 9995
RUEHKA/AMEMBASSY DHAKA 9455
RUEHIL/AMEMBASSY ISLAMABAD 6355
RUEHKT/AMEMBASSY KATHMANDU 4400
RUEHKP/AMCONSUL KARACHI 2031
RUEHCG/AMCONSUL CHENNAI 6912
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 02 COLOMBO 001602 
 
SIPDIS 
 
SENSITIVE, SIPDIS 
 
STATE FOR SCA/INS AND EB/IFD/OMA; STATE PASS TO USTR FOR HIRSH AND 
ANAND; COMMERCE FOR E YESIN AND B LOPP;  TREASURY FOR S CHUN; MCC 
FOR D NASSIRY AND E BURKE 
 
E.O 12958: N/A 
TAGS: ECON EINV ETRD PREL CE
SUBJECT: SRI LANKA: CENTRAL BANK GOVERNOR DESCRIBES ECONOMY'S 
STRENGTH TO AMBASSADOR BLAKE 
 
 
¶1. (SBU) Summary and comment:  Central Bank Governor Nivard Cabraal 
told Ambassador Blake during their introductory meeting that Sri 
Lanka's economy was healthy and its business climate good.  Cabraal 
was making a personal effort to tell multilateral development banks, 
credit rating agencies, and international bankers the positive facts 
about the economy, because reports that reached them often focused 
on the negative.  He also assured the Ambassador that the Rajapaksa 
government was no less business-friendly than its predecessors. 
Cabraal is a more visible and activist central banker than most, but 
should take care to ensure that his boosterism does not harm his 
credibility.  End summary and comment. 
 
Selling Sri Lanka to Donors and Lenders 
--------------------------------------- 
 
¶2. (SBU) Ambassador Blake began his introductory call on Central 
Bank Governor Nivard Cabraal September 25 by asking about the 
governor's recent meetings with IMF and World Bank officials in 
Singapore.  Cabraal said his objective had been to make senior IMF 
officials more aware of the favorable economic climate in Sri Lanka. 
 Cabraal reported that his audience had been "pleasantly surprised" 
to learn that Sri Lanka's growth was strong and that foreign direct 
investment, exports, and the balance of payments surplus were all up 
this year.  He attributed their surprise to the tendency for bad 
news to be reported in the press while good news was ignored. 
 
¶3. (SBU) Cabraal added that he and his team had met with credit 
rating agencies and bankers in Singapore and had made the case for 
Sri Lanka's credit rating to be upgraded from its current 
sub-investment grade.  Cabraal had particularly disagreed with the 
rating agencies' Spring 2006 shift of their outlook on Sri Lanka 
from "positive" to "negative."  The raters had been too hasty, 
Cabraal thought.  There had been military skirmishes, but there were 
no riots and investors had not fled.  In fact, Cabraal said, 
investors had ignored the rating swing and had continued investing. 
 
Prospects for U.S. Exports and Investment 
----------------------------------------- 
 
¶4. (SBU) The Ambassador told Cabraal that the United States and Sri 
Lanka had good economic relations, but that U.S. exports to Sri 
Lanka were too small, particularly when compared with SL's exports 
to the U.S.  With so much business interest in India now, there were 
prospects to increase U.S. trade and investment in Sri Lanka as 
well.  For example, the Indo-Lanka Free Trade Agreement offered ways 
to export to India's still high-tariff market by sourcing products 
from Sri Lanka.  Also, Sri Lanka could capitalize on its workers' 
strong English and accounting skills to attract some back office 
operations and information technology investment that might 
otherwise go to India. 
 
¶5. (SBU) Ambassador Blake cautioned, though, that instances of 
apparent failure to honor contracts - as in the government's refusal 
to pay American energy company AES for some power it had produced - 
had caused U.S. companies some concern about the investment climate 
in Sri Lanka.  Similarly, newly imposed taxes had given the 
impression that the Rajapaksa government was less business-friendly 
than its predecessor.  Cabraal dismissed this perception, saying 
that he frequently heard businesses claim it was hard to do business 
in Sri Lanka and then soon after report publicly that profits were 
up.  On taxes, there had been policy "shifts," he said, but "nothing 
that should make businesses uncomfortable or hit their bottom line." 
 In fact, Cabraal noted, he and a few others with economic 
portfolios in the Rajapaksa government had formerly been members of 
the opposition United National Party and were known for their 
pro-business approach. 
 
¶6. (SBU) Cabraal nevertheless agreed that it was important to "get 
thorny issues out of the way so that we can move on with the rest." 
He explained that the government had set up an Investment 
Facilitation Committee, chaired by the President, which was charged 
with "unlocking problems."  "Take AES there," Cabraal advised, 
saying it would be a sympathetic forum. 
 
Oil Exploration Prospects 
------------------------- 
 
¶7. (SBU) The Ambassador raised the prospect of oil exploration in 
Sri Lankan waters, saying he hoped U.S. companies would be 
 
COLOMBO 00001602  002 OF 002 
 
 
interested and that the Embassy had arranged for the U.S. Trade and 
Development Agency to provide technical assistance.  Cabraal replied 
that the Central Bank had convened a core group to ensure that oil 
exploration would be handled correctly and that Sri Lankans would 
gain expertise in the process. 
 
Financial Intelligence Unit 
--------------------------- 
 
¶8. (SBU) Governor Cabraal concluded the meeting by stating that 
strengthening Sri Lanka's new Financial Intelligence Unit was 
another priority.  The FIU was studying the transactions associated 
with the recent FBI arrests of LTTE operatives in the United States. 
 The Ambassador replied that the State Department was convening a 
Contact Group meeting to explore how to help Sri Lanka stop money 
and arms from flowing to the LTTE.  The Ambassador appreciated the 
input the FIU had provided in a briefing at the Ministry of Foreign 
Affairs the previous week. 
 
Comment 
------- 
 
¶9. (SBU) Central Bank Governor Cabraal seems intent on making the 
best possible case for the Sri Lankan economy.  He is right that 
someone should be doing this, but it is risky for that person to be 
the Central Bank Governor.  While the economy has performed very 
well this year, recent inflation and interest rate statistics 
(septel) suggest that the Central Bank has not been tough enough on 
inflation.  Moreover, the current 8% growth rate of the Sri Lankan 
economy should not hide the fact that the GOSL must do much more to 
create a favorable business climate for new U.S. investors. 
 
BLAKE