Sri Lanka Country Commercial Guide, FY 2004

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SUBJECT: Sri Lanka Country Commercial Guide, FY 2004

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1. Below is the Executive Summary of the Sri Lanka
Country Commercial Guide, FY 2004. Per reftel, Post
has sent the entire text of the Guide to Washington
agencies, and will be uploading the guide to CS
intranet soon.

BEGIN TEXT.

Country Commercial Guide

Sri Lanka

Fiscal Year 2004

EXECUTIVE SUMMARY


2. In 2003, Sri Lanka is expected to realize many
political, economic and social rewards won through
the cessation of armed conflict and the government's
continuing peace initiatives. The year 2002 was a
turning point for the country. After almost 20
years of armed conflict, the new government signed a
ceasefire agreement with the Liberation Tigers of
Tamil Eelam (LTTE). The initial agreement developed
into an ongoing peace process supported by the Sri
Lanka people and the international community.
Eighteen months of peace has allowed positive
economic growth and plans for reconstruction of the
war-torn areas. Negotiations with the LTTE
continue, though not always smoothly, into 2003.
The outcome is uncertain, but the relative peace and
stability brought by the cease-fire has created
cautious optimism and increased activity by both the
domestic population and the international business
community.


3. The government has moved to capitalize on the
peace by pushing reform and reconstruction at home
and attracting assistance and investment from
abroad. The commitment of $4.5 billion at a June
2003 donor conference in Tokyo gives the government
substantial resources to carry out its national
objectives of rebuilding physical and social
infrastructure and spurring economic growth. These
objectives are identified in the Prime Minister's
policy framework document, "Regaining Sri Lanka",
which also includes the government's poverty
reduction strategy. A portion of these funds ($1.5
billion) will be spent to rebuild the areas most
affected by the conflict - the north and east.
Numerous projects have been identified for this
financing, a combination of grants and concessional
loans.


4. To implement reforms, and realize the goal of 8
percent annual growth, the government is focusing on
progress in the peace process, and utilization of
the increased flow of donor assistance in a quick
and transparent manner. Earlier efforts to enhance
private sector growth continue, including reforms in
financial markets, labor, land, fiscal policy,
telecom and privatization of state-owned
enterprises. A new Information and Communication
Technology initiative, eSri Lanka, aims to
electronically connect and service the entire
country. The labor force is being enhanced with
education, skills training and a focus on
productivity. Hoping to use trade to spur growth,
Sri Lanka is emphasizing its central position in the
region and key shipping lanes, Free Trade Agreements
with its neighbors and its relatively friendly
business climate to grow into a regional hub for
manufacturing, commerce and transport.


5. The private sector also has responded to the
peaceful environment with increased business
activity and investment. Sri Lanka's economy
expanded by 4 percent in 2002, and further progress
was made on macroeconomic stabilization. Largely
driven by services, GDP growth was 5.5 percent in
the first quarter of 2003, and this pace is expected
to continue through the year. The SARS epidemic did
not spread to Sri Lanka and tourism increased. On
the negative side, in mid-May, southern Sri Lanka
experienced extensive damage from severe flooding,
though the impact on overall growth will be minimal.

6. The government has committed itself to reducing
corruption; however, problems remain. Tender
procedures are opaque, decision making is slow,
enforcement of IPR rights is uneven, and
bureaucracy, caused by a large public sector,
hinders efficiency. Though the Prime Minister's
party is strongly supported for its peace
initiatives, tensions between the political parties
of the Prime Minister and the President threaten
domestic stability. Progress depends on the
continuation of the peace process, policy
adjustments, private sector development and
structural reforms. Though still faced with
substantial economic, social and political
challenges, Sri Lanka accomplished much in 2002, a
fact recognized by the international community.
This external support, coupled with growing internal
confidence creates the foundation for sustained
growth and stability in 2003 and beyond.
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