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UNCLAS SECTION 01 OF 03 COLOMBO 000250 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EB/IFD AND SCA/INS 
 
STATE PLEASE PASS USTR 
 
MCC FOR S GROFF, D NASSIRY AND E BURKE 
 
E.O 12958: N/A 
TAGS: EAID EINV PREL CE CH IN IR JA KS MY
SUBJECT: SRI LANKA: GROWING COUT AND APPEAL OF NON-WESTERN 
DONORS 
 
REF A: 06 Colombo 2096, B: 06 Colombo 550 
 
¶1. (SBU) Summary and comment:  Sri Lanka is increasingly 
looking to non-Western partners like China, India, Korea, 
Malaysia, and even Iran to fund major infrastructure 
projects.  These donors are promising aid without 
conditions, while the World Bank, Asian Development Bank, 
European donors and the United States are pressing the 
Government of Sri Lanka to seek peace, improve governance, 
reduce corruption, and distribute aid equitably.  While 
much of the grant and loan money promised by the 
nontraditional donors may never materialize, the prospect 
of such unconditional money is already encouraging the GSL 
to question why it should listen to Western donors' advice. 
Newly appointed Minister of Enterprise Development and 
Investment Amunugama this week told the press ?the pattern 
of development assistance is changing.  We do not have to 
go behind the World Bank or the Asian Development Bank who 
are imposing conditions.  As Sri Lanka taps into new 
sources of assistance, the Tokyo and other Western donors 
are at risk of losing leverage with the Rajapaksa 
government, making it harder for us and others to prod the 
government toward a peaceful solution to Sri Lanka's ethnic 
conflict, and address such concerns on human rights and 
corruption.  End summary and comment. 
 
Government Wants Infrastructure and Development... 
--------------------------------------------- ----- 
 
¶2. (U) Sri Lankan President Mahinda Rajapaksa promised in 
his populist 2005 campaign manifesto "Mahinda Chintana" to 
deliver the benefits of development to the poor.  He and 
his economic team believe that an intensive program of 
infrastructure investment will "unlock" economic potential 
currently dormant outside prosperous Colombo and the 
surrounding Western Province.  However, with government 
revenue insufficient to even cover the cost of Sri Lanka's 
vast civil service and rising defense spending, the country 
is dependent on donors and lenders to finance the 
infrastructure it wants. 
 
... but Doesn't Want Conditionality 
----------------------------------- 
 
¶3. (U) Rajapaksa's populist approach also features a 
nationalistic strain that rejects foreign influence 
(spurred in part by political pressure from the ultra- 
nationalist Janatha Vimukthi Peramuna party).  Donor calls 
for public enterprise reform, cleaning up corruption, and 
restraint in the ethnic conflict are at odds with 
Rajapaksa's preference for big government, patronage, and 
seizing military advantage against the Tamil Tigers.  In 
response, the Rajapaksa government has sought to fund its 
development plans without having to bend to donors' 
preferences.  It has done this in two ways: by cultivating 
bilateral donors and lenders that will not impose 
conditions for their assistance; and by borrowing in 
domestic and international financial markets, rather than 
from the IMF. 
 
Embraces Visitors From the East Bearing Gifts 
--------------------------------------------- 
 
¶4. (U) Most of the new donors and lenders are Asian, with 
China in the forefront.  They typically accompany high- 
level bilateral visits with announcements of financing for 
major infrastructure projects.  Press reports in the last 
year show how lavish the Asian donors' promises are.  China 
 
COLOMBO 00000250  002 OF 003 
 
 
has announced more than $1 billion, India $450 million, 
Malaysia $300 million, and South Korea an estimated $300 
million.  The Asian Development Bank is also offering a 
generous $450 million.  Japan also remains a large donor, 
with over a billion dollars in its pipeline.  By contrast, 
the United States is considering granting around $200 
million (through the Millennium Challenge Account), the 
World Bank plans to lend $160 million, Germany $150 
million, Sweden $76 million, and France $37 million. 
(Note: these dollar figures are very rough, as press 
reports and donor announcements both tend to be imprecise.) 
 
¶5. (U) Like China, Iran is also drawing headlines with big 
promises.  This week, it promised $500 million, including a 
$200 million gas power plant.  In making this announcement, 
Iranian Ambassador Behnam Behrooz explicitly stated that 
the Iranian government would be providing funds to Sri 
Lanka on an unconditional basis. 
 
¶6. (U) The Asian donors' preference for large 
infrastructure projects fits well with Rajapaksa's desire 
to attract infrastructure projects, whereas traditional 
donors' insistence on stringent environmental and social 
impact assessments makes them wary of funding large 
infrastructure.  More principled donors also suspect that 
the new donors are more tolerant of corruption in the 
course of these big-ticket projects. 
 
¶7. (U) Newly-appointed Minister of Enterprise Development 
and Investment Promotion Amunugama this week spoke frankly 
to the press about the changing aid picture: "Our 
development partners in the forefront now are Japan, China, 
India, Eastern European countries such as Hungary, and the 
European Union.  The pattern of development assistance is 
changing.  We do not have to go behind the World Bank or 
the Asian Development Bank who are imposing conditions." 
 
No Conditionality in the Bond Market Either 
------------------------------------------- 
 
¶8. (U) Ref A reported that Sri Lanka has also sought to 
avoid conditionality by borrowing domestically and in 
international capital markets.  This borrowing has amounted 
to over $1.2 billion, or about 4 percent of Sri Lanka's 
outstanding debt.  Sri Lanka began to use this avenue of 
debt finance in 2004 after abandoning its IMF structural 
adjustment program in 2003, which had called for 
politically difficult reform of large and powerful state- 
owned enterprises like the Ceylon Electricity Board.  At 
the end of January 2007, the IMF closed its office in Sri 
Lanka, as it could no longer justify maintaining an office 
in a small country not on a program (Ref B). 
 
Comment 
------- 
 
¶9. (SBU) We are skeptical that the giant packages like 
those promised by China and Iran will fully materialize, 
but they nevertheless have the effect of emboldening Sri 
Lanka to ignore the advice offered or conditions sought by 
traditional donors.  This is a significant shift away from 
the incentives formulated in the 2003 Tokyo Donors 
Conference, which were designed in part to induce the 
government to pursue a peaceful resolution to the ethnic 
conflict.  The new donors' no-strings generosity may be 
convincing President Rajapaksa that he can have both his 
war and his infrastructure, instead of having to choose 
between the two. 
 
COLOMBO 00000250  003 OF 003 
 
 
BLAKE