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UNCLAS SECTION 01 OF 03 COLOMBO 000084 
 
SIPDIS 
 
SENSITIVE 
 
PASS TO USAID FOR AMY PARO AND STEVE SILCOX 
PASS TO USTR FOR MICHAEL DELANEY AND MICHAEL FELDMAN 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV SOCI PGOV CE
RETELS: A) 2009 COLOMBO 1126; B) COLOMBO 10 C) COLOMBO 65 
 
SUBJECT:  Northern Development Plan Has Not Promoted Reconciliation 
 
¶1. (SBU) Summary.  Econoff attended a business development 
conference in Jaffna, the heart of northern Sri Lanka.  Thirty years 
ago Jaffna was an economic and educational center, but the legacy of 
war is a basic economy now devoid of significant industry.  The 
Government of Sri Lanka (GSL) is promoting economic growth through 
business investment, banking, infrastructure spending, tourism, and 
industrial development.  However, these plans have not yet had time 
to take hold, leaving widespread unemployment.  The GSL has done 
little to address local resentment, and some of the GSL policies 
could unwittingly encourage ethnic issues.  End Summary. 
 
Jaffna - Then and Now 
 
¶2. (U) Thirty years ago Jaffna was the second or third largest 
industrial center in Sri Lanka, and it was also renowned for its 
educational system, led by the University of Jaffna.  The war years 
were not kind.  The population declined from 900,000 to 600,000 
people, and many of the most talented people fled.  The economy 
progressively deteriorated.  For example, in 1982 just before the 
war, there were 688 industrial units with more than five employees; 
now there are 243.  Moreover, now there are only eleven 
establishments with more than 25 employees, and these eleven 
companies employ just 408 people (see reftel A for more details). 
Econoff visited two local factories, one established with German 
funding and the other built by the United Nations Development 
Program.  One of these companies produced the beverage toddy, but 
the operation was so basic that the company filled each toddy bottle 
individually.  The other plant, producing fruit jam, was slightly 
more advanced, but neither was active when Econoff visited.  Local 
newspaper and Chamber of Commerce representatives reported that 
massive unemployment is rising as internally displaced persons 
(IDPs) are released from the camps and move to host families and 
transit sites in Jaffna. 
 
Jaffna Business Conference 
 
¶3. (SBU) The Business for Peace Alliance, a private chamber of 
commerce that receives some USAID funding, held the first postwar 
conference in Jaffna, looking at the economic situation in the North 
and encouraging investment.  Turnout was much higher than conference 
organizers expected, with 60 attendees from Jaffna, 100 from 
Colombo, and 20 from the rest of Sri Lanka.  Several attendees 
seemed interested in investing in tourism and infrastructure 
proposals.  Government representation was mixed.  The Jaffna mayor 
and representatives from the Sri Lanka Board of Investment (BOI) 
attended the conference; in contrast, the government agent, who is 
the most important district level civilian official who answers to 
the national government, did not attend or send a representative, 
while the Governor, appointed by the President,  just sent a 
representative.  Presidential campaign organizers attempted the day 
before the conference to move the event, trying to commandeer the 
conference hall for a campaign rally until organizers appealed to 
Colombo connections.  Moreover, approximately 50 police officers and 
army soldiers strolled in during lunch and helped themselves to the 
conference buffet, and conference organizers chose not to try to 
stop them. 
 
GSL Strategy to Rebuild the North 
 
¶4. (SBU) The GSL is following the same script in rebuilding the 
North as they have followed in the last two years in the East (see 
reftels A and B).  The GSL initially focused on increasing 
agricultural and fishery production by ending the wartime fishing 
restrictions and encouraging paddy rice production.  The GSL is also 
improving the road infrastructure, including with funds from 
international donors.  The next step is increasing economic 
development, particularly through financial institutions.  The GSL 
plans a Northern regional development bank; the Central Bank 
approved 45 bank branches and 51 bank extension offices for the 
North; and the Central Bank slashed interest rates in the North from 
12% to 9%.  The Central Bank also facilitated a 3 billion Rs ($26 
million) loan plan for small and medium sized enterprises: 
according to official statistics, 264 million Rs ($2.3 million) has 
been disbursed to 1,875 borrowers, including 50% for agriculture, 
 
COLOMBO 00000084  002 OF 003 
 
 
25% for trade and services, and 25% for fisheries and small and 
micro industries.   The BOI has a special investment package for 
investors in the North and East, with a tax holiday of 15 years if 
certain minimum investment and employment criteria are met.  The BOI 
also provides a 10 year tax holiday for the revival of existing 
industries.  The GSL encourages tourism, and plans to auction land 
for tourist development.  The GSL is also building a cement factory, 
with 51% government ownership; there will be a private tender for 
the remaining 49%.  The GSL plans to build an industrial park near 
Jaffna, and MAS industries, one of the two largest apparel 
manufacturers in Sri Lanka, plans to build an apparel factory in the 
North with heavy government subsidies. 
 
¶5. (SBU) Although it is still early, the GSL strategy has had a 
limited effect on the ground.  Fishing production has risen and 
agricultural production appears to be rising as well.  The 
reintegration of the North into the economy of Sri Lanka helped 
reduce food prices.  The price for most food items has decreased, 
since they can be shipped in from Colombo, while the price of fish 
(caught in Jaffna) has increased, since fish is now sent to Colombo 
for sale.  Local business leaders complain that they cannot obtain 
loans for a variety of reasons:  they may have defaulted during the 
difficult war years; they do not have sufficient collateral; the 
requirements are too stringent; and/or they are not prepared to file 
a formal loan application.  Business leaders also expressed concern 
that the banks have only come to scoop up savings, but would not 
reinvest in the North.  Local businesses tend to be very small, so 
they do not qualify for BOI loans, which go to Colombo investors. 
There are also continuing problems linked with a lack of cold 
storage facilities, with up to 60% of the perishables produced in 
the North spoiled during transit for sale in Colombo. 
 
Challenges Ahead 
 
¶6. (SBU) Land ownership is one of the most intractable and 
potentially polarizing problems, exacerbated by unclear land 
records.  During the war, many people fled Jaffna, others moved in, 
and later sold the land and houses to third parties.  The land 
records office in Jaffna burned, so the GSL plans to rely on land 
records in Colombo, which are likely to be 30 years out of date. 
Several participants in the business conference came to Jaffna to 
scout out their long lost homes, and told Econoff that they plan to 
reclaim their property even though they may have been gone for 20-40 
years. 
 
¶7. (SBU) The GSL reconstruction strategy has paid little attention 
to the critical element of reconciliation.  According to conference 
organizers the first step to rebuild the North is not infrastructure 
or loans, but to rebuild trust, develop local buy-in, and develop 
local institutions.  The local Tamil newspaper editor claimed that 
there had been no economic development (likely an exaggeration), and 
he and others were worried that the Sinhalese majority would 
colonize the North.  Locals said that the Tamil Diaspora has not yet 
invested in Jaffna.  Dr Anura Ekanayake, chairman of the national 
Ceylon Chamber of Commerce, eloquently described the risk of 
exploitation because the Jaffna businesses were cut off for thirty 
years and thus were not ready to compete.  The Colombo 
conglomerates, for example, plan to build large international 
tourist hotels, while the local business people are looking at small 
guest houses.  A possible solution is to require large Colombo 
businesses to have a local partner. 
 
Outside Jaffna 
 
¶8. (SBU) Econoff originally planned to go to Jaffna by bus through 
the North, but at the last moment the GSL decided that the road was 
too 'unsafe' for foreigners, so Econoff flew to Jaffna.  Sri Lankan 
participants went by road, and they reported that when they passed 
Kilinochchi it was a ghost town, devoid of anyone except for Sri 
Lankan military.  One participant had seen Kilinochchi during the 
2004 cease fire period, and then it was a bustling town. 
 
 
¶9. (SBU) As with the East, rebuilding the North will prove 
challenging for the GSL.  Local businesses do not have the capacity 
 
COLOMBO 00000084  003 OF 003 
 
 
to expand rapidly and provide the required employment, but use of 
large outside companies may stoke local resentment.  Although the 
GSL development strategy makes some sense in strictly economic 
terms, it ignores the history of the conflict and does little to 
address reconciliation.  The January 26 Presidential election 
provided a good example of Northern alienation.  The turnout in 
Jaffna was 26%, far below the island wide average of 74% (see reftel 
C).  President Rajapaksa won 58% of the votes in Sri Lanka overall, 
but 24% in Jaffna.  President Rajapaksa obtained a large national 
majority, though he polled less than his opponent in both the North 
and East.  The president's sweeping win makes it likely that the GSL 
will continue on the same course, implementing a development 
strategy that has brought basic development, but has not healed 
ethnic divisions. 
 
BUTENIS