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RR RUEHLMC
DE RUEHLM #1993/01 3330650
ZNR UUUUU ZZH
R 290650Z NOV 06
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 4836
INFO RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 0294
RUEHKA/AMEMBASSY DHAKA 9657
RUEHIL/AMEMBASSY ISLAMABAD 6587
RUEHKT/AMEMBASSY KATHMANDU 4644
RUEHSM/AMEMBASSY STOCKHOLM 0474
RUEHKP/AMCONSUL KARACHI 2062
RUEHCG/AMCONSUL CHENNAI 7128
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 02 COLOMBO 001993 
 
SIPDIS 
 
SENSITIVE, SIPDIS 
 
STATE FOR SA/INS 
 
MCC FOR D NASSIRY AND E BURKE 
 
E.O 12958: N/A 
TAGS: ECON EFIN EINV EAID PGOV PTER CE
 
SUBJECT:  SRI LANKA:  LACK OF DESIRE FOR PEACE MAY IMPEDE ECONOMIC 
GROWTH 
 
 
¶1.  (SBU) Summary:  The Ambassador met with a group of key financial 
sector institution heads on November 27.  The meeting provided for a 
frank discussion on pressing issues faced by the sector and the 
country.  While peace is essential for their business and for the 
economy, the group expressed grave concern over increasing support 
for war.  They highlighted other key issues such as increasing and 
inconsistent taxation, and corruption.  The group agreed to the 
Ambassador's suggestion that American Chamber of Commerce collect 
their thoughts into a paper presenting "The Business Case for Peace" 
that the Ambassador would share with senior Government of Sri Lanka 
leaders at the press. End Summary 
 
¶2.  (U) The Ambassador met with heads of key financial sector 
institutions on November 27.  The meeting organized by the American 
Chamber of Commerce of Sri Lanka provided for a frank discussion on 
pressing issues faced by the sector and the country.  The group 
included representatives of local and foreign banks, an insurance 
company, a BPO providing high end corporate research, an accounting 
company and a business consultancy firm. 
 
--------------------- 
Peace is the key to greater economic growth; desire for peace is the 
obstacle 
--------------------- 
 
¶3.  (SBU) Participants identified the need for peace as the most 
important key to improving the investment climate, and expressed 
concern over rising support for war in the south as well as the 
north.  Large sections on both sides of the country, from the 
political leaders to villagers expect to win the war.  The villagers 
also favor war as it has provided lucrative employment to unemployed 
youth and fathers.  Further, the 7 percent economic growth in 
2006-2007 has also made them complacent about war.  As a result, the 
negative consequences of war, including the economic ones, seem to 
have eluded the minds of some politicians and a part of the public. 
The financial leaders stressed the importance of educating the 
politicians and public at large on the "money case," i.e. 
monetary/economic benefits that could accrue from peace, including 
defense savings, foreign direct investment, and the possibility of 
attracting Sri Lankan expatriates abroad for the development of the 
country.   The Ambassador volunteered to take the message to the 
political leadership, and requested the group to provide a paper 
outlining quantifiable benefits of peace under the title "The 
Business Case for Peace." 
 
---------------- 
Increase taxes for the few who comply with the tax laws 
---------------- 
 
¶4.  (U) In addition to peace, the group raised several issues faced 
by the sector.  Key among them was increasing and inconsistent 
taxation.  For example, banking sector taxation exceeds 60% of 
profits, one of the highest rates in Asia.  Insurance also faces 
high taxes.  Insurance also faces high taxes.   The tax liability 
for these sectors was raised again in the recently-passed 2007 
Budget.  In addition, taxation tends to be retroactive, subjecting 
businesses to liability for business decisions made in the past, 
making appropriately-developed business plans unsustainable. 
According to one financial leader, in the absence of other avenues 
of taxation and huge budget deficits, the government has resorted to 
regularly raising tax on four key "profitable" service industries: 
banking, insurance, telecom and shipping.  Further, Sri Lanka's tax 
base has been eroded due to various tax incentives granted to 
investors.  With the absence of political will to reform taxation 
and the tax administration, profitable sectors have become an easy 
prey. 
 
----------- 
Other impediments to greater economic growth 
----------- 
 
¶5.  (U) The group also referred to the absence of a corporate bond 
market.  Sri Lanka does not have pension funds that could invest in 
corporate bonds.  Sri Lanka's main pension funds (which collect 
contributions from private sector workers and employers) are huge 
and controlled by the government which invests these funds into 
government securities.  The government has no appetite for 
liberalization of these funds as they have become captive sources 
 
COLOMBO 00001993  002 OF 002 
 
 
for deficit financing at negative after-inflation rates. 
 
¶6.  (U) Other impediments to development were: 
- The monopoly extended to state owned banks over government 
business. 
- Single borrower limits on lending to conglomerates/groups 
- The need for deepening the capital market 
- Corruption in government 
 
¶7.  (SBU) COMMENT:  While the American Chamber of Commerce sector 
teas provide the Embassy with insights into the views of various 
business sectors, they also provide an opportunity for these sectors 
to discuss issues amongst themselves.  One of the most alarming 
viewpoints that came out of this meeting was that the people from 
Sri Lanka's south (including the President's main constituency) 
think they stand to primarily benefit from continued conflict and, 
along with the fact that true peace has not visited this country for 
decades, business leaders doubt that there is any true desire to 
achieve peace.  Meanwhile, the economy will continue to grow at a 
moderate pace because of continued strong remittances from abroad, 
good rains that assure a good agricultural year for the President's 
base of support, and good export performances. People will consider 
the status quo to be mildly acceptable. 
 
BLAKE