VZCZCXYZ0000
RR RUEHWEB

DE RUEHLM #0626/01 1700815
ZNR UUUUU ZZH
R 190815Z JUN 09
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 0132
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHNE/AMEMBASSY NEW DELHI 3133
RUEHKA/AMEMBASSY DHAKA 1748
RUEHIL/AMEMBASSY ISLAMABAD 8760
RUEHKT/AMEMBASSY KATHMANDU 6998
RUEHCG/AMCONSUL CHENNAI 9375

UNCLAS COLOMBO 000626 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR SCA/INSB AND EEB/IFD/OMA 
STATE PASS USTR FOR ADINA ADLER AND VICKY KADER 
TREASURY FOR SUSAN CHUN 
COMMERCE FOR ITA EROL YESIN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD PGOV CE
SUBJECT:  SRI LANKA:  Economic update June 2009 
 
REF:  A) COLOMBO 540 B) COLOMBO 395 
 
¶1. (SBU) Summary:  Sri Lanka's GDP grew by 1.5% in the first quarter 
of 2009.  Key macroeconomic indicators have also improved. 
Inflation has slowed to 3.3% in May 2009 from a peak of 28% in June 
¶2008.  The trade deficit narrowed as imports continued to fall at a 
faster pace than exports.  Top foreign exchange earners, apparel and 
remittances are holding steady despite the global crisis.  The 
Colombo Stock Exchange is up 56% in 2009.  While foreign exchange 
reserves are still low, the Central Bank reports it has managed to 
increase reserves.  Nevertheless, the government's fiscal 
performance, and its ability to keep expenditures under control, 
remain a serious concern.  End Summary. 
 
FIRST QUARTER GDP GROWTH: 1.5% 
------------------------------ 
 
¶2. (U) According to the Department of Census and Statistics, Sri 
Lanka's economy expanded by 1.5% in the first quarter of 2009, 
against 6.2% in the first quarter of 2008.  Agriculture grew by 3% 
compared with 5.9% growth in 2008.  Tea, the key agricultural 
export, recorded a sharp decline due to a drought in February. 
Excluding tea, agriculture grew by a strong 7%.  Rice production 
increased by 10% and was the main contributor to agriculture growth. 
 Good rains, higher prices, increased production in the eastern 
province, as well as the government's ongoing subsidized fertilizer 
program, helped the rice sector.  Industry and services growth 
slowed significantly to 1.9% and 1%, respectively, from over 6% in 
the first quarter of 2008.  Import trade, hotels, ports and the 
aviation sector contracted sharply by over 10% each, reflecting the 
direct impact of the global recession.  The construction industry 
recorded 3% growth. 
 
¶3. (U) Despite the 1.5% growth figure, the Central Bank (CB) is now 
upbeat about economic performance in the second half of 2009 due to 
the conclusion of the war.  In media interviews, the Central Bank 
Governor indicated plans to revise upwards its current growth 
forecast of 2.5% for 2009.  The governor said that when the CB made 
earlier forecasts it did not quite know "where the economy was 
going."  However, the CB now believes that reconstruction, 
agriculture and fisheries in the north and east are likely to be key 
drivers of expected additional growth in the post-war economy.  To 
help boost growth, the government is starting to undertake various 
programs.  For example, the government recently relaxed restrictions 
on fisheries in the north and east which it hopes will immediately 
improve the sctor in these regions.  The government plans to embrk 
on a worldwide advertising campaign to promot tourism, aiming to 
increase arrivals by 20% annally in coming years.  (Note: Post 
believes that tourism is unlikely to experience a large peace 
dividend immediately,  given the global recession.)  Tourist 
arrivals decreased sharply to 438,000 in 2008. 
 
TRADE DEFICIT NARROWS 
--------------------- 
 
¶4. (U) In the first quarter, Sri Lanka's trade deficit contracted 
sharply to $645 million from $1,400 million in 2008.  Exports 
contracted by 12.6%, while imports contracted sharply by 30%.  All 
categories of imports contracted.  The oil import bill halved to 
$362 million from $732 million in 2008. 
 
¶5. (U) On the export side, garment exports recorded a healthy 
increase of 6%.  All other key exports declined.  Garment exports to 
the United States, Sri Lanka's second-largest market, recorded a 4% 
decline.  Exports to the EU, which enter duty free under the EU's 
GSP-Plus program, increased 21%.  Tea, Sri Lanka's second largest 
export, recorded a sharp downturn in the first quarter.  Production 
fell by 42%.  Prices also fell quite sharply during this period. 
While production continues to be low due to erratic weather, tea 
prices rebounded by June from the slump experienced since October 
¶2008.  The rise in prices is attributed to a shortfall in world tea 
crops.  Consequently, tea prices are expected to remain strong 
through 2009.  One industry leader told EconOff that although 
production was down 30% in early months of the year, prices are now 
up 20%.  As a result, the industry is hopeful that is will still be 
able to reach USD one billion in export sales in 2009, as it did in 
2007 and 2008. 
REMITTANCES 
----------- 
 
¶6. (U) Despite the global crises, remittances, Sri Lanka's second 
largest source of foreign exchange after garment exports, dropped 
only marginally by 1.7% in the first quarter of 2009 compared to the 
first quarter of 2008.  Total private remittance inflows were $2.9 
billion in 2008. 
 
INFLATION AT 3.3% 
------------------- 
 
¶7. (U) Inflation, as measured by the Colombo Consumer Price Index 
(CCPI), rose to 3.3% (year-on-year) in May after having fallen for 
seven straight months to a low of 2.9% in April.  Annual average 
inflation, however, continued to decline to 14.7% by the end of May, 
down from 16.7% in April.  The Central Bank forecasts inflation will 
remain at single-digit levels in 2009 and 2010.  The relaxation of 
monetary policy by the Central Bank will affect inflationary 
expectations.  Furthermore, the expected recovery of the economy and 
relatively higher commodity prices will begin to affect price levels 
in the second half of the year. 
 
¶8. (U) On June 15, the Central Bank eased interest rates for the 
third time in 2009.  The bank said in a press release "The 
prevailing benign inflation environment has enabled the Central Bank 
to pursue a policy path that is more supportive of economic activity 
during 2009."  The Central Bank lowered its benchmark repurchase 
rate by 50 basis points to 8.5%.  The reverse repurchase rate (at 
which it lends to banks) was also lowered by 50 basis points to 11%. 
 The bank hopes lower rates will spur economic activity and support 
reconstruction and development work in the newly-liberated areas. 
The government's earlier moves to reduce interest rates have not 
been successful, as private sector credit contracted in the past few 
months. 
 
¶9. (SBU) Government fiscal performance will remain a key concern in 
¶2009.  According to Finance Ministry sources, state revenue is now 
estimated to fall sharply by over 1.3% of GDP in 2009 due to a fall 
in imports and slowdown in economic activity.  Consequently, the 
government is running a high overdraft from state banks.  Meanwhile, 
government expenditures have increased.  The Finance Ministry is 
planning to request additional funds from the parliament through 
supplementary estimates in coming weeks to meet additional 
expenditure. The government's original budget forecast anticipated a 
deficit of 6.5% of GDP; however, analysts agree that such a forecast 
was unrealistic in the current global economy. 
 
RUPEE IS STEADY ADMIST HOPES OF IMF FUNDS 
----------------------------------------- 
 
¶10. (U) The Sri Lankan Rupee depreciated against the U.S. dollar in 
early May to about Rs 120/$1, after the Central Bank stopped 
intervening in the market.  It has appreciated by about 4% since 
then to about Rs 114.90/$1.  According to banking sources, the 
appreciation would have been higher if not for state banks buying at 
the above rate.  The rupee has strengthened on the hope that a loan 
from the IMF will soon be approved.  The demand for foreign exchange 
is low at present.  The government in response has relaxed foreign 
exchange controls imposed in the wake of low reserves in 2008.  It 
has removed deposit requirements on imports as well. 
 
¶11. (U) The Central Bank reported an increase in foreign reserves in 
June due to an inflow of foreign funds to government bond markets 
after the end of the war.  Reserves have increased by about $300 
million in the past few weeks.  According to latest published data, 
gross official reserves were $1.2 billion, equivalent to 1.2 months 
of imports, by end of March.  Total foreign reserves were reported 
at $2.7 billion, sufficient to finance 2.5 months of imports. 
 
STOCK MARKET IS UP 52% IN 2009 
------------------------------ 
 
¶12. (U) The Colombo Stock Exchange (CSE) has partially recovered 
from the slump experienced in 2007/2008.  It is up 23% since the 
conclusion of the war in mid-May, taking its total gains in 2009 to 
56%.  As of June 17, CSE's All Share Price Index (ASPI) stood at 
2342 points.  Nonetheless, it has yet to fully recover the losses 
recorded in 2007-2008 due to the escalation of violence in Sri 
Lanka.  ASPI recorded its highest level at 3016 points in February 
2007, before the LTTE air attacks in Colombo. 
 
¶13.  (SBU) COMMENT:  The fall in state revenue, and the increase in 
expenditures, leads post to believe the GSL -- despite private and 
public rhetoric that it has and will meet all IMF conditions -- 
continues to be unable to adequately manage its accounts.  The 
government must identify and quickly implement concrete measures to 
increase revenue collection and decrease overall spending, or risk 
greater financial difficulties later in the year. 
 
MOORE