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DE RUEHLM #1063/01 3310751
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RUEHBI/AMCONSUL MUMBAI 6193

UNCLAS SECTION 01 OF 04 COLOMBO 001063 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR SCA/INS AND SCA/RA TOM COLEMAN 
STATE PASS USTR FOR MICHAEL DELANEY AND ADINA ADLER 
DOL/ILAB FOR TINA MCCARTER 
COMMERCE FOR EROL YESIN 
 
E.O 12958: N/A 
TAGS: ECON EFIN ETRD EINV PGOV CE
SUBJECT:  AUSTR DELANEY'S VISIT TO SRI LANKA 
 
¶1. (U) Summary:  Assistant U.S. Trade Representative for South Asia 
Michael Delaney visited Sri Lanka November 11-14 to engage with key 
government and business leaders, to discuss issues related to U.S.- 
Sri Lanka Trade and Investment Framework Agreement talks, and to 
review labor issues raised in the 2007 AFL-CIO petition to remove 
Sri Lanka from the list of developing countries eligible for 
Generalized System of Preferences (GSP) (reported septel). 
Discussing the global economic downturn, the GSL officials remained 
optimistic about Sri Lanka's overall macroeconomic outlook, but 
reservedly acknowledged that it must deal with its dwindling foreign 
reserve, the possible loss of GSP+ (EU preference program) benefits, 
and a growing deficit in its budget.  U.S. companies warned that an 
increasing government bias in favor of local businesses is harming 
the local investment climate.  In a visit to the formerly war-torn 
East, officials highlighted government efforts to attract investors, 
while local businesses underscored the still considerable security 
risk and the difficulty in obtaining financing.  We agreed to look 
for ways (particularly through our bilateral TIFA) to foster 
economic reconstruction in the eastern part of the country. 
 
Local Economic Challenges Amid 
the Global Economic Downturn 
------------------------------ 
 
¶2. (U) In a series of meetings on November 12-14, AUSTR Delaney and 
Ambassador Robert O. Blake met with the Minister of Export 
Development and International Trade G. L. Peiris, Minister of 
Enterprise and Development and Investment Promotion Sarath 
Amunugama, Member of Parliament and Presidential Advisor (and 
Presidential sibling) Basil Rajapaksa, various officials from the 
Ministry of Foreign Affairs (MFA) and the Department of Commerce 
(DOC), and resident American companies.  The Sri Lankan government 
welcomed AUSTR Delaney, expressed their appreciation of embassy's 
(via USAID) development assistance programs in the east, and 
congratulated the U.S. on President-elect Barack Obama.  Throughout 
his meetings, AUSTR Delaney provided an overview of the current U.S. 
economic downturn, highlighting in particular how it might affect 
both exports from, and imports to, the U.S.  He also stressed the 
U.S. commitment to achieving a successful outcome at Doha and the 
G20 meeting.  AUSTR Delaney assured that the U.S. remains committed 
to its bilateral trade agreements with Sri Lanka during the upcoming 
change in the U.S. administration. 
 
¶3. (SBU) Peiris and Amunugama were optimistic that Sri Lanka's 
economy will remain resilient despite global woes, projecting a 
continued growth rate of over six percent.  They touted the success 
of their garment industry and its high labor standards, and promoted 
the government's recent campaigns to strengthen the agricultural 
export industry.  Only when questioned did the ministers acknowledge 
that the government is facing several economic challenges including 
a depleting foreign exchange reserve, a deficit in its balance of 
payments, a depreciation of the rupee, and the risk of losing access 
to the European Commission's Generalized System of Preferences-Plus 
(GSP+) program.  The Ambassador also asked Peiris about the recent 
media reports on GSL's defaulting on foreign contracts; Peiris 
stated that contract obligation is a strength of GSL, and the 
government does not plan to hedge any of its current contracts. 
 
¶4. (SBU) Ministers Amunugama and Peiris acknowledged that the global 
economic downturn will exacerbate an already ailing economy, 
especially with the Sri Lankan rupee under pressure against the 
dollar, cash reserves dropping, and key export sectors forecasting 
downturns.  When queried by the Ambassador, the two Ministers 
conceded that Sri Lanka's foreign exchange reserve was down to two 
months of imports.  Amunugama said that while garments, remittances, 
tea, and taxes on fuel continued to prop the economy, the dwindling 
reserve "will be a big problem" as the GSL relies on these funds to 
finance necessary infrastructure projects.  Peiris acknowleged that 
the GSL may   lose EC GSP+ concessions next year, causing additional 
balance of payment concerns when businesses look to buy from cheaper 
suppliers in other countries.  He argued, however, that Sri Lanka is 
not at the point to seek assistance from the International Monetary 
Fund (IMF); the government plans instead to work with donor 
countries Japan, China, and Iran to ensure that the construction of 
their projects remains on track, perhaps through the provision of 
additional loans to Sri Lanka by these countries.  To illustrate, 
 
COLOMBO 00001063  002 OF 004 
 
 
Amunugama said he is confident that the Iranians would continue its 
projects in Sri Lanka as they were relatively small and cheap. 
 
¶5. (U) In light of the government's 2009 budget proposal, presented 
in early November, the Ambassador queried Ministers Amunugama and 
Peiris on the government's plans to raise current and add new taxes 
on imports.  In response, both ministers defended the government's 
import substitution strategy as a way to encourage local production 
in order to bolster the Sri Lankan rupee.  Peiris acknowledged that 
some proposed taxes in the budget, such as the new National Building 
Tax, still need to be legislated by Parliament.  He noted that the 
tariff and export clusters of the National Economic Development 
Council will meet to discuss the budget's taxation plans and settle 
any discrepancies since the "multiplicity of levies was a problem 
that the government needed to address." 
 
TIFA Follow-Up 
-------------- 
 
¶6. (U) AUSTR Delaney, through various meeting with GSL 
TIFA-counterpart Minister Peiris, noted a strong U.S. commitment to 
ensuring robust and meaningful TIFA talks with Sri Lanka.  Placing a 
special emphasis on agricultural issues (Note:  The GSL did not send 
an AG representative to the May 2008 TIFA talks in Washington), 
AUSTR Delaney and the Ambassador highlighted Ambassador Blake's most 
recent October 27 letter requesting the Minister's assistance to 
reduce overall charges on agricultural imports from the U.S., as 
they are currently not in line with the GSL's WTO commitments. 
Peiris noted that he and his colleagues have reviewed the 
information provided by the U.S. and promised to follow up with the 
Ministry of Finance to argue that the GSL needs to abide by its 
World Trade Organization (WTO) obligations.  In discussing WTO 
negotiations, Peiris highlighted the GSL's concerns on the 
preference erosion in the Non-Agricultural Market Access (NAMA) 
text, and its 2007 proposal requesting early implementation of 
tariff cuts in the U.S. market.  AUSTR Delaney explained the U.S. 
position on the NAMA text, but noted that the issue was still under 
discussion. 
 
¶7. (U) Responding to other TIFA Agriculture issues raised by the 
U.S. delegation, Peiris said that Sri Lanka's ban on poultry imports 
due to low pathogenic avian influenza (LPAI) was "almost resolved" 
with the ban restricted to only two states.  He also stated that Sri 
Lanka is now allowing imports of American seed potatoes.  (Note: 
Although technically correct, USDA continues to work with the GSL to 
stop unnecessary additional requirements the GSL has placed on the 
importation of seed potatoes.) 
 
¶8. (U) On November 14, AUSTR Delaney met with representatives from 
the Ministry of Environment (MOE) to discuss the government's 
genetically modified (GM) food regulations.  The representatives 
reconfirmed that Sri Lanka has adopted GM labeling requirements and 
imposed controls on the importation of GM foods.  Prior to 
importation, relevant authorities must approve all applications to 
import GM foods.  Nevertheless, due to a lack of capacity at the 
regulator level, officials admitted that implementation of the 
controls is not uniform and it has caused uncertainty among 
importers.  Officials noted the GSL needs to also work to create 
more public awareness about the benefits of GM food.  MOE asked 
AUSTR Delaney for U.S. assistance to establish the laboratories and 
other facilities needed to test GM.  AUSTR Delaney suggested 
bringing regional or international speakers to Colombo to highlight 
positive developments that can be achieved through the use of GM 
products. 
 
¶9. (SBU) (Comment:  GM regulations and policy is split between three 
agencies:  the Ministries of Health, Agriculture, and Environment. 
Interagency cooperation between these agencies is very poor, leading 
to miscommunication and misunderstanding on GM issues.  Post, in 
discussions with USDA, is looking at ways to reach out and promote 
increased understanding of, and support for, GM products among these 
three key ministries as well as within the general population.) 
 
Businesses Face Increased Taxes 
------------------------------- 
 
 
COLOMBO 00001063  003 OF 004 
 
 
¶10. (SBU) On November 14, AUSTR Delaney met with American Chamber of 
Commerce members representing Chevron, CitiBank, MAS Holdings (local 
apparel company), Virtusa, and Microsoft.  The representatives told 
AUSTR Delaney the general business environment in Colombo is "okay," 
in light of the global economic downturn and the local security 
situation.  They are fairly optimistic that Sri Lanka will ride out 
the international turbulence.  However, they highlighted that one of 
the biggest challenges in operating in Sri Lanka is the increase in 
government policies favoring local businesses.  Though many 
multinational companies perform better than the local private 
sector, international MNCs and SMEs feel the government is blatantly 
biased towards local companies.  In the 2009 budget draft, 
profitable sectors are heavily taxed, while the government adopted 
import substitution and introduced new non-tariff barriers to 
protect local industries.  Companies claim the government is 
actively creating a misperception that multinationals "have an easy 
life" and contribute little for the country.  Sri Lanka is becoming 
a highly nationalistic environment where the government blames the 
foreigner for its economic and social ills.  This is happening at 
all levels of government and is a serious concern.  As an example, 
the Citibank representative observed that a once prudent regulator 
is transforming into a more political one. 
 
¶11. (SBU) The private sector representatives asked AUSTR Delaney to 
assist the government in creating a legislative and regulatory 
framework that was equitable to local and foreign investors.  They 
also encouraged USTR to assist the government in providing 
enforcement training to protect the country's intellectual property 
rights (IPR).  According to the Microsoft representative, the 
country needs more information technology (IT) enablers at the 
policy level who are responsible for articulating the value of IPR 
protection to the local industry and the rest of the government. 
Although new government procurements contain IPR requirements and 
that the new budget draft has a provision to protect the IPR of 
local singers and artists, the fact that illegal software is 
pervasive within the government sector underscores that IPR 
protection is not a priority. 
 
Visit to the East -- 
The Pros and Cons 
------------------- 
 
¶12. (U) On November 13, AUSTR Delaney travelled to Trincomalee, an 
eastern seaboard town that serves as the capital of the Eastern 
Province (EP), to assess business challenges and opportunities in 
the East.  (The GSL liberated the East in July 2007 from the 
Liberation Tigers of Tamil Eelam (LTTE), a USG-designated foreign 
terrorist organization.)  Challenges are significant and include a 
lack of adequate infrastructure, including dilapidated roads and 
water works, questions about adequate supply of electricity, high 
transport costs to the commercial port in Colombo, and security 
concerns.  On the latter, private companies lack confidence in the 
security situation and worry about the safety of their investment 
and people.  Eastern officials demonstrated only minimal care for 
business concerns, stating that although large security gaps remain, 
the East remains a "conflict emerging society" and, as such, 
businesses should not expect a completely trouble-free environment. 
Local businesses, as highlighted to AUSTR Delaney by the Trincomalee 
Chamber of Commerce and Industry, underscored their difficulty in 
maintaining their companies, and/or expanding, due to a lack of 
financing.  Entrepreneurs have had little access to financing as 
banks are reluctant to lend money for investments that could fail if 
the security situation again declines.  In addition, most people do 
not have the collateral required to borrow as they have defaulted in 
the past due to the conflict and displacement.  The Chamber noted 
that there are no development finance institutions which can give 
loans at a low interest rate to those needing a fresh start. 
 
13.(U)  Promoting the opportunities to investment in the East, the 
Governor of the Eastern Province Rear Admiral Mohan Wijewickrema, 
Trincomalee Government Authority (GA) Major General TT RD Silva, and 
officials of the Trincomalee Ports Authority, highlighted GSL's 697 
square kilometer Trincomalee special economic zone (SEZ), which was 
established to attract foreign investors to set-up a mix of light 
and heavy manufacturing, port-related activities, a power plant, 
agriculture and fish processing industries, and tourism attractions. 
 
COLOMBO 00001063  004 OF 004 
 
 
 To date, only one factory is under construction in the SEZ.  The 
government also hopes to establish a 1,200 acre Export Processing 
Zone (EPZ) within the SEZ; however, it does not have the funding to 
undertake the building of basic, needed infrastructure.  The 
Ministry of Industries has also been allocated 50 acres of land for 
the development of an industrial processing zone (IPZ) for local 
industries; to date three projects (rubber processing plant, ice 
plant, and cement block making plant) have been approved for the 
IPZ; construction has yet to begin.  The government is offering 
generous tax holidays to attract investors to the east.  Peiris 
specifically identified agriculture processing, rice mills, animal 
feed mills, dairy farms, milk processing centers, fisheries, fish 
processing and packaging for exports, sugar, and tourism as 
industries the government hopes to attract to the East. 
 
¶14. (U) The Trincomalee interlocutors agreed that one of the key 
lynchpins to developing the east is to get public and private 
sectors working together.  In this vein, chamber officials commended 
the USAID programs, notably the establishment of a business college. 
 Trincomalee interlocutors, as well as Peiris discussed how land 
fragmentation of crops hindered development of the agricultural 
industry and that the government was planning ventures, such as the 
establishment of agri-export zones, to consolidate land and bring 
SME's together to ultimately protect local manufacturers of imported 
products and 
channel income into the development of rural areas. 
 
Rajapaksa Meeting 
------------------ 
 
¶15. (U) On November 14, AUSTR Delaney and Ambassador Blake met MP 
and Presidential Advisor, Basil Rajapaksa.  AUSTR Delaney thanked 
Rajapaksa for his assistance in arranging the visit to the East, 
stating he recognized the huge economic potential in the area but 
also the considerable security risks at present to business.  He 
affirmed that the USG, including USTR, would like to help Sri 
Lanka's efforts to develop the East and that he will discuss with 
Ambassador Blake and the GSL about the possibility of using the TIFA 
to bring the private sector, USAID, IFIs and other stake holders 
together to help the East.  Rajapaksa thanked the U.S. delegation 
for its assistance in the East so far and agreed that without 
economic development, stability cannot be sustainable.  He lamented 
that the GSL has not been able to reach its economic targets in the 
area, citing the difficulty in encouraging the private sector to 
establish operations. 
 
¶16.  (U) AUSTR Delaney has cleared this cable. 
 
BLAKE