VZCZCXRO6297
RR RUEHLMC
DE RUEHLM #0193/01 0561124
ZNR UUUUU ZZH
R 251124Z FEB 08
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 7729
INFO RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 1855
RUEHKA/AMEMBASSY DHAKA 0745
RUEHIL/AMEMBASSY ISLAMABAD 7733
RUEHKT/AMEMBASSY KATHMANDU 5919
RUEHKP/AMCONSUL KARACHI 2328
RUEHCG/AMCONSUL CHENNAI 8344
RUEHGV/USMISSION GENEVA 2626
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 03 COLOMBO 000193 
 
SIPDIS 
 
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: EXPORTS TO U.S. DECLINE BUT STILL NINE TIMES 
IMPORTS FROM U.S. 
 
REF: A. 07 COLOMBO 375  B. COLOMBO 166 
 
¶1. (U) Summary:  The United States merchandise trade deficit with 
Sri Lanka in 2007 was $1.84 billion.  Sri Lanka's exports to the 
United States were $2.1 billion, while U.S. exports to Sri Lanka 
were $227 million -- a ratio of about nine-to-one.  The EU replaced 
the United States as Sri Lanka's largest export market.  A 
noteworthy development was the entry of U.S. wheat to Sri Lanka in 
2007 after a lapse of several years.  Sri Lanka's overall external 
sector performance was solid in 2007.  Imports grew by 10% as the 
oil bill swelled for the third consecutive year.  However, growth in 
exports, remittances, and government foreign borrowing helped Sri 
Lanka post a $500 million balance of payments surplus.  End 
Summary. 
 
U.S. $1.8 BILLION TRADE DEFICIT WITH SRI LANKA 
--------------------------------------------- -- 
 
¶2. (U) According to U.S. Department of Commerce Census Bureau 
statistics, U.S. exports to Sri Lanka in 2007 were $227 million. 
Against $2.06 billion in imports from Sri Lanka, the bilateral trade 
deficit was $1.84 billion.  The nine-to-one flow of goods in Sri 
Lanka's favor was consistent with the level of recent years.  Major 
U.S. exports in 2007 were electrical machinery, appliances, 
computers and parts ($48 million); wheat ($39 million); yarn and 
fabric ($21 million); medical equipment and measuring instruments 
($15 million); plastic raw material ($13 million); paper ($7 
million); and chocolate and cocoa preparations ($6 million). 
 
¶3. (U) (Note: Embassy has requested Commerce Department assistance 
in examining the 2006 figure for U.S. exports, which was $237 
million.  Post believes the correct figure for 2006 may have been 
around $162 million.  Post came to this conclusion during 2007 
(subsequent to ref A) after noticing that 2006 data included an 
unusually large jump in U.S. machinery exports.  Further inquiry 
indicated that the 2006 U.S. export figure included a $75 million 
oil drilling platform; post has confirmed that no oil platform was 
imported into Sri Lanka.  If our analysis is correct, then, U.S. 
exports actually jumped 40% in 2007 -- from $162 million to $227 
million.  This discrepancy also means that the U.S. trade deficit 
with Sri Lanka in 2006 was larger than the $1.91 billion we 
reported.  End note.) 
 
SRI LANKA'S EXPORTS TO THE U.S. DECLINE 
--------------------------------------- 
 
¶4. (U) Sri Lanka's exports to the United States in 2007 decreased by 
4% to $2.06 billion or about a quarter of total exports.  The U.S. 
share of Sri Lankan exports has gradually declined in recent years 
from over a third of total exports in 2005.  The United States is 
now the second largest market for Sri Lanka's exports, after the 
European Union (EU).  Apparel continued to dominate U.S.-bound 
exports, but decreased by about 6% to $1.6 billion.  Other key 
exports from Sri Lanka to the United States were, in order, rubber, 
gems, machinery parts, tea, spices, plastic containers, and fish. 
 
EXPORTS TO THE EU SURGE AGAIN; 
EU BECOMES LARGEST MARKET 
------------------------------- 
 
¶5. (U) Since 2006, the EU has been Sri Lanka's largest export 
market.  In 2006, Sri Lanka's exports to the EU grew by 18%.  In 
2007, exports to the EU are likely (based on 11-month data) to have 
grown by an additional 20% or more, 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: Human 
rights violations and other governance problems could cause Sri 
Lanka to lose eligibility for GSP+ when the EU reviews the program 
at the end of 2008.  Ref B.) 
 
EXPORTS OF APPAREL, TEA, AND 
EMERGING SECTORS STRONG 
--------------------------------------- 
 
COLOMBO 00000193  002 OF 003 
 
 
 
¶6. (U) Sri Lanka's total exports in 2007 were $7.7 billion, 12.5% 
above the 2006 level.  Apparel, Sri Lanka's largest export, 
increased 8.5% in 2007 to $3.34 billion, and accounted for 43% of 
all Sri Lanka's exports.  The United States ($1.6 billion) and EU 
(about $1.4 billion) remain the key markets for Sri Lankan garments. 
 Despite having had a good year, garment exporters are worried, 
fearing dramatic sales declines as a result of expiration of U.S. 
safeguards against Chinese apparel and the possible non-renewal of 
EU GSP+ status after 2008. 
 
¶7. (U) Tea, Sri Lanka's second largest export after apparel, also 
had good results in 2007.  Tea export earnings increased by 16%, 
surpassing $1 billion for the first time.  Although the quantity of 
tea exported declined due to weather and other factors, record high 
tea prices produced the unprecedented export figure.  Total 
agricultural exports were $1.5 billion (19% of total exports). 
Aside from garments and tea, there were positive signs of 
diversification of Sri Lanka's export base.  Other exports 
(including food, rubber, spices, gems and various manufactured 
products) grew by 16% to $3.37 billion. 
 
IMPORTS RISE RAPIDLY AS OIL BILL SWELLS AGAIN 
--------------------------------------------- 
 
¶8. (U) Sri Lanka's 2007 imports grew by 10% to $11.3 billion.  The 
petroleum import bill swelled for the third consecutive year.  Total 
cost of petroleum imports increased by 21% to almost $2.5 billion 
and accounted for a fifth of all imports.  Food import costs 
increased by 11% to $1.06 billion.  Sri Lanka imports staples like 
wheat flour, other cereals, sugar, milk products, onions, and dried 
fish.  A small quantity of rice was also imported to meet a 
shortfall in 2007.  Perhaps responding to hefty taxes, non-food 
consumer goods imports decreased by 8%.  Sri Lanka has increased 
taxes on these imports (including motor vehicles) both to generate 
revenue and to protect local industries.  Imports of investment 
goods such as building material, machinery, and transport equipment 
rose by 20% to $2.7 billion in 2007.  Imports of intermediate goods 
(excluding oil), such as textiles and other industrial inputs and 
fertilizer increased by 3%, to a total of $4 billion. 
 
TRADE DEFICIT EXPANDS BUT THANKS TO REMITTANCES 
AND LOANS BOP REMAINS IN SURPLUS 
--------------------------------------------- -- 
 
¶9. (U) Sri Lanka's trade deficit grew at a slower rate of 6% to $3.6 
billion in 2007 after expanding by 34% in 2006.  The trade deficit 
was partly offset by higher worker remittances, which increased by 
about 15% to $2.5 billion.  Foreign direct investment was around 
$600 million in 2007 compared with $480 million in 2006.  Government 
foreign borrowing, including the $500 million first sovereign bond 
issue, also helped bring in cash.  Consequently, the balance of 
payments recorded a surplus of around $530 million in 2007 compared 
with a surplus of $190 million in 2006.  Total external reserves 
increased by 22% to $4.5 billion, sufficient to finance a healthy 
4.8 months of imports.  The Sri Lankan rupee ended 2007 with a 
marginal 1% depreciation against the U.S. dollar but depreciated 
much more heavily against the Euro. 
 
COMMENT: 2008 COULD BE TOUGHER; NON-GARMENT 
EXPORTS WILL HAVE TO PICK UP THE SLACK 
------------------------------------------- 
 
¶10. (SBU) Sri Lanka ended 2007 with healthy reserves on the strength 
of its again high remittances, strong export performance, and 
increased international borrowing.  A number of factors could drive 
each of these revenue sources down in 2008.  A global economic 
slowdown would likely hit both remittances and exports, as workers 
abroad would earn less and consumers would buy less.  A slowdown 
would also create tighter financial markets less inclined to lend 
money to emerging market countries like Sri Lanka.  2009 will almost 
certainly bring another challenge for Sri Lanka, with garment sales 
likely to be hit hard by the expiration of U.S. China safeguards and 
possibly by removal of the EU's GSP+ benefits.  One positive 2007 
development will cushion these impending blows:  the fact that 
non-garment, non-tea exports exceeded the value of garment exports 
 
COLOMBO 00000193  003 OF 003 
 
 
for the first time in recent years.  This indicates healthy 
diversification of Sri Lanka's exports, after many years of relying 
heavily on garments alone.  USAID's Competitiveness Program deserves 
significant credit for this, after working with the tea, gem, 
rubber, ceramics, and spices sectors, among others, to improve their 
export performance.  However the program wrapped up in 2007, so 
these sectors will have the opportunity to prove on their own that 
they can continue to generate export growth for Sri Lanka. 
BLAKE