VZCZCXRO5337
PP RUEHBI RUEHCI
DE RUEHLM #1053/01 3270239
ZNR UUUUU ZZH
P 230239Z NOV 09 ZDK
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC PRIORITY 0803
INFO RUEHKA/AMEMBASSY DHAKA PRIORITY 2073
RUEHIL/AMEMBASSY ISLAMABAD PRIORITY 9101
RUEHKT/AMEMBASSY KATHMANDU PRIORITY 7343
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 3498
RUEHCG/AMCONSUL CHENNAI PRIORITY 9664
RUEHKP/AMCONSUL KARACHI PRIORITY 2582
RUEHCI/AMCONSUL KOLKATA PRIORITY 0459
RUEHBI/AMCONSUL MUMBAI PRIORITY 6958
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 COLOMBO 001053 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EEB JENNIFER PETERSON AND TANYA SPENCER 
DEPARTMENT OF TREASURY FOR MALACHY NUGENT AND ATTICUS WELLER 
USTR FOR MICHAEL DELANEY AND VICTORIA KADER 
 
E.O. 12958: N/A 
TAGS: CE ECON EFIN PGOV
SUBJECT: SRI LANKA MEETS IMF TARGETS IN SEPTEMBER; CONCERN 
OVER BUDGET DELAY 
 
REF: A. A) COLOMBO 1000 
     ¶B. B) COLOMBO 977 
 
COLOMBO 00001053  001.6 OF 002 
 
 
 
¶1.     (SBU)  Summary.  An IMF team has found that Sri Lanka 
is meeting its foreign reserve and government deficit targets 
for September, although the Government of Sri Lanka (GSL) 
will need to restrain expenditures to meet the December 
deficit targets.  The GSL has submitted a Vote on Account in 
place of a budget (similar to a continuing resolution), and 
they will not submit their budget until May.  The delay in 
submitting the budget makes it difficult for the IMF to 
determine if the GSL is implementing the long term structural 
changes required for a sustainable macroeconomic policy.  The 
IMF believes that the GSL is serious in its efforts to raise 
government revenue and to move the operations of state owned 
enterprises to a commercial basis.  Although the IMF team 
believed that Sri Lanka was meeting its targets, the IMF team 
lead seemed more cautious than in the prior review.   End 
Summary. 
 
IMF Mission Background 
 
¶2.    (SBU)  Sri Lanka reached an agreement with the IMF in 
July to disburse $2.6 billion in eight separate tranches, 
with the provision that the IMF would conduct quarterly 
reviews of Sri Lanka's progress to IMF goals.  The IMF 
conducted the second such review in November, and the results 
are likely to be presented to the IMF board in January.  The 
IMF has also established an office in the Central Bank to 
help monitor compliance.  Econoff met privately with Brian 
Aitken, head of the IMF team, to discuss the team's findings. 
 
 
Sri Lanka is Meeting the IMF Targets 
 
 
¶3.     (SBU)  Sri Lanka is on track to meet its IMF targets 
for September.  There have been large inflows of foreign 
exchange into Sri Lanka (see reftel A), so Sri Lanka will 
easily meet its goals for foreign exchange reserves and net 
reserves.  According to Aitken, Sri Lanka is also on track to 
meet its government deficit goal of 7% of GDP from January to 
September 2009.  Sri Lanka had run a government deficit of 
10-11% of GDP from January to June, primarily due to falling 
government revenue, so meeting the September goal is an 
accomplishment.  According to press reports, government 
revenue collection is projected to decline by 13% for the 
year.  Aitken expects it to be harder to meet the December 
deficit goals, and commented that the GSL must restrain 
spending for the rest of the year. 
 
¶4.    (SBU)  Sri Lanka must make structural reforms to meet 
the IMF 2010 target to reduce its budget deficit to 6% of 
GDP.  The GSL has two possible changes: projected declines in 
defense spending; and increasing government revenue.  Aitken 
was told that Sri Lanka will hold its defense expenditure 
flat in rupee terms next year, but considering GDP growth, 
military spending will decline from 3.8% of GDP in 2009 to 
3.2% in 2010.  Aitken expected that the GSL could reduce 
spending on arms procurement with the end of the war.  (Note. 
 The Embassy calculates that with the 2009 defense 
supplemental bill that defense spending will total 4.3% of 
GDP in 2009 (see reftel B).  End Note.)   Aitken also 
believes that the GSL is serious about raising revenue. 
Under the IMF Letter of Intent, Sri Lanka agreed to raise its 
revenue by 2% of GDP by 2011.  The Presidential Taxation 
Commission appears to be doing serious work, and it is 
examining ways to simplify the tax structure and broaden the 
base, rather than raise tax rates.  According to Aitken, the 
GSL understands that its current tax policy discourages 
economic growth.  The Commission is not expected to release 
an interim report until after the elections, possibly in May. 
 
 
¶5.    (SBU)  Finally, Aitken was optimistic that the GSL was 
also moving two key state-owned enterprises to a commercial 
 
COLOMBO 00001053  002 OF 002 
 
 
footing.  Under the IMF letter of intent, the Ceylon 
Electrical Board (CEB) and the Ceylon Petroleum Company (CPC) 
should become break-even enterprises by 2011.  The CEB and 
CPC have large past due debts that they are struggling to 
overcome.  The CEB and CPC have not made structural changes, 
but again, Aitken thought that they had many good ideas and 
were serious about reforms.  Aitken thought that the CEB had 
agreed to pay very high prices for electricity to independent 
power producers, but they may be able to cut costs or 
renegotiate their contracts.  Sri Lanka also has a 
hydroelectric plant and several coal plants coming on line, 
which should reduce costs, so he thought that they could be 
on better financial footing within several years.  (Note. 
Post is in contact with an American independent power 
producer which has chronic late payments from the CEB, which 
we understand is a problem across the board.  End Note.) 
 
¶6.     (SBU)  Comment.  Although the IMF assessment team 
concluded that the GSL was meeting its targets, Econoff noted 
that the IMF team seemed more cautious than in the September 
review.  The IMF team acknowledged that it is difficult to 
determine if the GSL is on track without a budget, and the 
GSL budget is not expected until May.  Post is more skeptical 
than the IMF:   we anticipate that there will be great 
pressure to increase spending in the upcoming election 
season.  We will also wait until we see real reforms of CEB 
and CPC and actual plans to increase tax revenue before we 
conclude that the GSL will meet its final IMF targets.  End 
Comment. 
FOWLER