VZCZCXRO6612
RR RUEHLMC
DE RUEHLM #1056/01 2120803
ZNR UUUUU ZZH
R 310803Z JUL 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 6533
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RUEHNE/AMEMBASSY NEW DELHI 1236
RUEHKA/AMEMBASSY DHAKA 0320
RUEHIL/AMEMBASSY ISLAMABAD 7303
RUEHKT/AMEMBASSY KATHMANDU 5417
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RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 02 COLOMBO 001056 
 
SIPDIS 
 
SENSITIVE, SIPDIS 
 
STATE FOR SCA/INS AND EEB/IFD/ODF 
STATE PASS USTR FOR ADINA ADLER 
COMMERCE FOR JONATHAN STONE 
MCC FOR S. GROFF, D. TETER, D. NASSIRY AND E. BURKE 
TREASURY FOR LESLIE HULL 
 
E.O 12958: N/A 
TAGS: ECON EINV CE
SUBJECT: SRI LANKA: CENTRAL BANK GOVERNOR SAYS ECONOMY IS BETTER 
THAN EVERYONE THINKS 
 
 
¶1.  (SBU) SUMMARY: In a recent presentation trumpeting the health of 
the Sri Lankan economy, Central Bank governor Cabraal told heads of 
missions and donor agencies that return to civil war was not ruining 
growth or busting the government's budget.  The governor predicted 
that GDP growth would exceed last year's strong 7.4% showing, and 
that inflation would come down to single digits by the end of the 
year.  The governor ran through a series of "perceptions/claims" and 
realities -- the former, he said, perpetuated by terrorists, 
political opponents, and an overly critical media and the latter 
justified by actual statistics. 
 
¶2.  (SBU) COMMENT: While the nearly two-hour presentation was 
generally accurate, its tone sounded more like marketing spin than 
Central Bank commentary.  Its forecasts assumed fundamentals would 
continue to resemble the relatively healthy 2002-2006 statistics 
produced by the ceasefire years.  First quarter 2007 numbers don't 
support these projections, and current negative business sentiment 
suggests that this year and next could prove far weaker than the 
government expects.  It is this negative business sentiment that the 
governor would like to turn around, but the business people are 
reacting to government policies and market trends that are hurting 
them, not to the governor's slide shows.  While the governor is 
correct that the economy is not on the verge of a crash, he should 
listen more to his business community than to last year's 
statistics.  End summary and comment. 
 
CENTRAL BANK TELLS DIPLOMATS AND PRESS 
THE ECONOMY IS STRONGER THAN IT LOOKS 
-------------------------------------- 
 
¶3. (SBU) Sri Lankan Central Bank Governor Nivard Cabraal invited 
ambassadors and donor agency heads to a July 23 presentation 
entitled "The Sri Lankan Economy: Perceptions/Claims vs. Realities." 
 The governor, his two deputies, one assistant governor, and Finance 
Secretary PB Jayasundera each presented slides covering fiscal and 
 
SIPDIS 
monetary policy, debt management, banking and finance, 
infrastructure investment, and donor assistance.  The Central Bank 
organized a similar presentation for the media later in the week. 
 
¶4. (SBU) The one hour forty-five minute presentation was designed to 
dispel impressions that the economy was suffering badly as a result 
of renewed fighting against the ethnic separatist Liberation Tigers 
of Tamil Eelam.  After his colleagues described the full range of 
economic fundamentals in considerable detail, Governor Cabraal 
presented a wrap-up, which set "perceptions" and "claims" against 
"realities."  He attributed the negative perceptions and claims to 
four factors: "Lack of awareness; deliberate misinformation and 
negative publicity campaigns conducted by interested parties, 
including terrorist groups and sympathizers; promotion of various 
economic and political agendas; and organized efforts to cripple Sri 
Lanka's economy and weaken the State's capacity and ability to take 
counterterrorist measures." 
 
CLAIMS AND REALITIES: TRUTH SOMEWHERE IN BETWEEN 
--------------------------------------------- --- 
 
¶5. (SBU) The governor's overarching message was that Sri Lanka's 
economic growth was resilient and sustainable, and that the economy 
had in fact performed well in the face of a series of economic 
shocks, including the 2004 tsunami, the worsening security 
situation, high oil prices, and unfavorable weather.  The following 
are a sampling of the perceptions and realities the governor 
outlined, with Embassy comments on each. 
 
- Critics' claim: "The worsening security situation will erode 
investor confidence and cripple the economy." 
- Governor's reality: "Investor sentiment remains strong." 
- Governor's evidence: Colombo Stock Exchange rose from 1400 to 2400 
between 2004 and 2006; foreign direct investment increased from $181 
million in 2002 to $480 million in 2006. 
(Comment:  The stock exchange was doing very well, but has fallen 
16% since peaking at 3000 in February 2007.  FDI figures are for 
commitments only, some of which are likely to evaporate as a result 
of the resumed fighting.  A local business journal's monthly survey 
of business confidence dipped to the lowest it has been since 
 
COLOMBO 00001056  002 OF 002 
 
 
October 2004, with four-fifths of business people surveyed saying 
they expect the economy to get worse in the coming twelve months.) 
 
- Critics' claim: "Rising cost of living will hamper growth and 
stability." 
- Governor's reality: "GDP growth has been very strong despite 
rising cost of living." 
- Governor's evidence: GDP growth was 7.4% in 2006 and will reach 
7.5% in 2007. 
(Comment: GDP growth slowed to 6.1% in the first quarter of 2007 and 
is unlikely to exceed that rate for the year.) 
 
- Critics' claim: "Government debt is out of control and an 
overwhelming portion of the deficit is being financed by the Central 
Bank." 
- Governor's reality: "Debt has declined significantly - 13 
percentage points of GDP in three years." 
- Governor's evidence: Public debt as a share of GDP declined from 
around 106% in 2003 to 93% in 2006. 
(Comment: 93% is far higher than the comparable figures for the 
Philippines, about 60%, or Colombia, about 45%.  A growing portion 
of Sri Lanka's debt is at commercial rather than concessionary rates 
and in foreign currencies, against which the rupee is declining, so 
servicing the debt is actually getting more expensive.) 
 
- Critics' claim: "Violence will lead to the economy collapsing and 
defense expenses soaring." 
- Governor's reality: "Security situation has not deteriorated 
materially." 
- Governor's evidence: A comparison chart showing 2006 military 
spending as a percent of GDP for thirteen countries, showing Saudi 
Arabia at 10%, Pakistan at 4.4%, Sri Lanka at 3.8%, and Indonesia at 
3.0%. 
(Comment: The Governor's chart cited the CIA World Factbook as its 
source.  But the Central Bank's own figure for 2006 military 
spending as a percent of GDP is actually 4.0%, and the 2007 budget 
figure is 4.3%.  The actual figure for 2007 is likely to be even 
higher, after supplemental budgets are included.) 
MOORE