VZCZCXRO6857
RR RUEHLMC
DE RUEHLM #0375/01 0651222
ZNR UUUUU ZZH
R 061222Z MAR 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 5589
INFO RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 0714
RUEHKA/AMEMBASSY DHAKA 9940
RUEHIL/AMEMBASSY ISLAMABAD 6906
RUEHKT/AMEMBASSY KATHMANDU 4978
RUEHKP/AMCONSUL KARACHI 2153
RUEHCG/AMCONSUL CHENNAI 7478
RUEHGV/USMISSION GENEVA 1865
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 02 COLOMBO 000375 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR SCA/INS AND EB/TPP 
 
STATE AND GENEVA PLEASE PASS TO USTR 
 
MCC FOR S GROFF, D NASSIRY AND E BURKE 
 
E.O 12958: N/A 
TAGS: ECON ETRD EFIN EAID CE
SUBJECT:  SRI LANKA: 2006 U.S. EXPORTS UP, BUT BARELY DENT USD 1.9B 
BILATERAL TRADE DEFICIT 
 
REF: COLOMBO 370 
 
¶1. (U) Summary:  The United States-Sri Lanka goods trade balance 
narrowed to nine-to-one in Sri Lanka's favor in 2006, from over 
ten-to-one in recent years.  The improvement came from 20 percent 
growth in U.S. exports to Sri Lanka, while U.S. imports from Sri 
Lanka rose by only 3 percent.  Nevertheless, the U.S.-Sri Lanka 
trade deficit for 2006 remained around $1.9 billion, unchanged from 
¶2005.  Sri Lanka is likely to continue to run a heavy trade surplus 
with the United States as it maintains high tariffs and para-tariffs 
on imports (reftel), while steadily producing U.S.-bound garments. 
For Sri Lanka overall, export growth of 8.4 percent was overshadowed 
by a 16 percent jump in imports and a decline in its balance of 
payments surplus.  End Summary. 
 
U.S. EXPORTS UP, BUT TRADE DEFICIT STEADY AT $1.9B 
--------------------------------------------- ----- 
 
¶2. (U) According to U.S. Department of Commerce statistics, the 
United States ran a $1.9 billion trade deficit with Sri Lanka in 
2006, unchanged from 2005.  U.S. exports to Sri Lanka increased by 
20 percent in 2006 to $237 million.  Major U.S. exports in 2006 were 
machinery ($94 million), electrical machinery and parts ($32 
million), yarn and fabric ($22 million), medical equipment ($10 
million), paper ($7 million), and computers and related equipment 
($6 million). 
 
¶3. (U) Sri Lanka's exports to the United States, its largest market, 
increased by 3 percent to $2.1 billion, or nearly a third of total 
exports.  Apparel continued to dominate U.S.-bound exports, but grew 
by only 2 percent to $1.7 billion.  Other key exports from Sri Lanka 
to the United States were, in order, rubber, gems, tea, and spices. 
 
 
SRI LANKA'S EXPORTS TO THE EU SURGED 
----------------------------------- 
 
¶4. (SBU) Exports to the European Union (EU), Sri Lanka's second 
largest apparel market, grew by 26 percent to $1.3 billion in the 
first eleven months of 2006.  Exports to the EU were boosted by duty 
free access under the EU's Generalised System of Preferences Plus 
(GSP+) scheme.  Under GSP+, the EU grants duty free access to Sri 
Lankan exports, including garments, in recognition of Sri Lanka's 
meeting international standards in human and labor rights, 
environmental protection, counter-drugs policy, and good governance. 
 (Note: According to the EU mission in Colombo, the EU has begun to 
evaluate whether human rights violations and other governance 
problems could cause Sri Lanka to lose eligibility for GSP+ when the 
EU reviews the program in 2008.) 
 
SRI LANKA'S EXPORT GROWTH SLOWS OVERALL, EXCEPT FOR 
GARMENTS AND EMERGING SECTORS 
--------------------------------------------- ------ 
 
¶5. (U) Sri Lanka's total exports were $6.9 billion in 2006.  Export 
growth slowed to 8.4 percent in 2006 from 10.2 percent in 2005. 
Growth in apparel, Sri Lanka's key export, accelerated to 6.4 
percent in 2006 from 3.1 percent in 2005.  Apparel, at $3.1 billion, 
accounted for 45 percent of all Sri Lanka's exports.  Despite having 
had a good year, garment exporters are worried, fearing that the 
2008 expiration of U.S. safeguards against Chinese apparel will cut 
their sales dramatically. 
 
¶6. (U) Aside from garments, there were positive signs of 
diversification of Sri Lanka's industrial export base.  Food and 
rubber product exports grew by 10 percent to $2.1 billion, 
accounting for 30 percent of exports.  Agricultural exports, led by 
tea (which had record high exports), increased by 12 percent to $1.3 
billion, or 19 percent of Sri Lanka's exports. 
 
IMPORT GROWTH EXCEEDS EXPORT GROWTH 
----------------------------------- 
 
¶7. (U) Sri Lanka's island economy is importing more and more, both 
 
COLOMBO 00000375  002 OF 002 
 
 
for consumption and investment.  Imports grew by 16 percent to $10.2 
billion.  The petroleum import bill rose by 25 percent to $2.1 
billion, both on higher price and higher volume.  Petroleum products 
accounted for 20.2 percent of total imports.  Consumer goods 
imports, mostly food staples like sugar and milk products, grew by 
23 percent.  Imports of investment goods such as building material, 
machinery, and transport equipment, rose by 24 percent to $2.2 
billion in 2006.  Imports of intermediate goods (excluding oil), 
such as textiles and other industrial inputs, increased by 8 
percent, to a total of $4.1 billion. 
 
¶8. (U) The Indo-Lanka Free Trade Agreement (ILFTA) was a significant 
factor in the jump in imports.  The 2000 agreement has produced a 
four fold increase in total bilateral trade between the two 
countries, with Sri Lanka's exports rising eight-fold.  However, in 
2006, Sri Lanka's exports to India actually dropped by 14 percent to 
$483 million as India imposed quotas on palm oil and pepper 
following complaints by Indian producers.  These joined existing 
Indian quotas, tariffs and restrictions on ports of entry on 
garments and tea, demonstrating how far from "free trade" the two 
neighbors remain despite the ILFTA.  Although Sri Lanka likewise 
maintains a 1,100 item negative list, protecting major production 
sectors including numerous agricultural products, its imports from 
India grew on the order of 25 percent in 2006. 
 
TRADE DEFICIT INCREASES 34 PERCENT, BUT BOP REMAINS IN SURPLUS; SRI 
LANKAN RUPEE DEPRECIATES 
--------------------------------------------- ---------- 
 
¶9. (U) With these patterns, Sri Lanka's trade deficit rose 34 
percent to $3.4 billion in 2006.  The deficit was partly offset by 
higher worker remittances, which increased by 21 percent to $2.3 
billion.  Government borrowing in international markets also 
increased, to $1.1 billion from 120 million in 2005.  The balance of 
payments recorded a surplus of around $190 million in 2006 compared 
with a surplus of $500 million in 2005.  Total external reserves 
fell by 6 percent to $3.6 billion, sufficient to finance 4.2 months 
of imports.  Despite Central Bank efforts to prop up the Sri Lankan 
Rupee, the currency depreciated by 5.2 percent against the U.S. 
Dollar and about 17 percent against the Euro. 
 
COMMENT: BILATERAL TRADE LIKELY TO REMAIN STAGNANT 
--------------------------------------------- ----- 
 
¶10. (U) The 20 percent increase in U.S. goods exports to Sri Lanka 
in 2006 was good news, but was not due to any liberalization by Sri 
Lanka, which has increased tariffs and para-tariffs (which UNCTAD 
defines as "measures that increase the cost of imports in a manner 
similar to tariff measures") in the last few years.  Instead the 
jump in U.S. exports was probably driven by Sri Lanka's unusually 
high 7 percent GDP growth rate in 2006 and by the stimulative effect 
of negative real interest rates for the past three years.  With the 
Central Bank raising interest rates to control inflation, growth in 
2007 may slow down. 
 
¶11. (U) For Sri Lanka overall, the mixed performance in 2006, with 
exports growing but imports rising even more, was mitigated by the 
huge growth in remittances.  A slowdown in the global economy could 
thus hit Sri Lanka's balance of payments doubly hard, as both 
exports and remittances would likely fall.  With external debt 
growing as the government finances domestic budget shortfalls, this 
could be problematic.