Sri Lanka: The political importance of

C O N F I D E N T I A L SECTION 01 OF 02 COLOMBO 001827

SIPDIS

DEPARTMENT FOR SA, SA/INS, E, EB, DRL, USAID FOR B.
BUNDY - ANE/SA
NSC FOR E. MILLARD
TREASURY FOR J. ADKINS
DOL FOR S. HALEY
DEPARTMENT PLS PASS TO USTR FOR AUSTR A. WILLS
DEPARTMENT ALSO PASS TOPEC

E.O. 12958: DECL: 10-21-13
TAGS: PREL ETRD ECON EAID EFIN KIPR PGOV CE
SUBJECT: Sri Lanka: The political importance of
signing an FTA for the GSL and the peace process

Refs: (A) Colombo 1808 (D) Colombo 1686
- (B) Colombo 1702 (E) Colombo 1673
- (C) Colombo 1689

(U) Classified by Ambassador Jeffrey J. Lunstead.
Reasons 1.5 (b,d).


1. (C) SUMMARY: Mission has reviewed the key economic
issues involved in possibly signing a Free Trade
Agreement with Sri Lanka in Reftels. In this message,
Mission sketches out the domestic political context. In
a nutshell, the GSL, deeply worried about maintaining
support for the peace process in the south, is selling
peace as vital for jobs and economic growth, and an FTA
as an important factor in providing such benefits.
Conversely, however, the GSL is worried that not signing
an FTA could undermine public confidence that the peace
process will bring real prosperity. The GSL concerns
have a real foundation: with the expiration of the
Multi-Fiber Agreement (MFA) in 2005, thousands of jobs
are projected to disappear, and an FTA could play a role
in preventing that from occurring. We think the GSL's
argument that an FTA can play a role in realizing
economic gains and thus help the peace process -- the
success of which is the USG's number one goal in Sri
Lanka -- is one that has considerable merit. END
SUMMARY.


2. (C) In Reftels, Mission has reviewed in detail the
key economic issues involved in possibly signing a Free
Trade Agreement with the Sri Lankan government. In this
message, Mission sketches out the domestic political
context.


3. (C) In a nutshell, the GSL, deeply worried about
maintaining public support for the peace process in the
south, is emphasizing that peace will lead to increased
economic growth and jobs. In making this point, the GSL
sees a possible FTA as important in ensuring such
benefits. Regarding the situation in the south, the
Prime Minister and his ministers underscore to Mission
staff all the time the point that the peace process
cannot work unless the Sinhalese Buddhist majority
remains on board. Thus far, based on polling and what
we hear anecdotally, the peace process has proven
extremely popular among all of Sri Lanka's ethnic
communities, including the Sinhalese Buddhists. The
GSL, however, is worried that the many bumps in the way
of getting to a possible final settlement, which mostly
involve dealing with the difficult Tamil Tigers and a
tense cohabitation situation, could eventually unhinge
public opinion in the south.


4. (C) In light of this deep concern, the government --
in a concerted effort to maintain public support in the
south -- is relentlessly hammering home the point that
the peace process means increased jobs and economic
growth for Sri Lanka. Prime Minister Ranil
Wickremesinghe, and G.L. Peiris and Milinda Moragoda,
two highly sophisticated ministers, as well as more
grassroots politicians in the PM's party, directly
emphasize in nearly every speech they make that peace
and prosperity are inextricably linked. As part of this
argument, the point is often made that an FTA with the
U.S. would enhance the peace dividend. Given the
economic importance attached to reaching an FTA by the
government, the proposal has become of interest to the
public, which, we believe, sees the fact that the idea
is even being taken seriously by the U.S. as a natural
benefit flowing from peace.

5. (C) Conversely, however, the government is worried
that the ramifications of not attaining an FTA would be
severe for the economy and thus for its peace process
policies. In essence, the government fears that jobs
will be lost without an FTA, and, due to this, the
public will become disgruntled about the economic
situation and take its anger out on the peace process.
It will also be seen, they fear, as disproving the PM's
thesis that the international community, and especially
the U.S., will support Sri Lanka's peace process with
deeds as well as words. The ultimate concern is that a
serious letdown on the economic front could lead to
protests against the peace process and instability
across the south. This is not an idle concern: many
previous efforts to attain peace in Sri Lanka have been
wrecked or severely undercut by protests in the south.


6. (C) We think the broad outlines of the GSL's
argument described above have a solid foundation. The
expiration of the MFA in January 2005 is correctly seen
as a hugely important economic event in Sri Lanka, with
five percent of the workforce potentially negatively
affected. While there have been commendable efforts
towards vertical integration of the garment sector, and
a move toward consolidation into the high-end garment
area, the GSL still views an FTA as a must for
preserving market access to the U.S., which buys over 60
percent of the country's garment exports. Most senior
GSL officials recognize that an FTA is not a panacea,
and recognize that rule-of-origin constraints,
particularly with regard to textiles, will be a key
challenge. Nonetheless, the increased opportunities for
market access provided by an FTA, particularly as Sri
Lanka consolidates the garment industry and works to
diversify its export base, is seen to be an offset to
the potential loss of jobs projected as a result of the
MFA expiration. Essentially, if an FTA is signed, at
the end of the day the GSL can argue that it was due to
international confidence in the peace process that jobs
were saved.


7. (C) COMMENT: In addition to the domestic political
angle and as reviewed in Reftels, the GSL's pursuit of
an FTA with the U.S. has a core substantive policy
aspect involving its support for trade liberalization
designed to enhance Sri Lanka's reputation as a regional
trading hub. The GSL supported U.S. positions in
Cancun, continues to be a voice of reason in
multilateral trade fora, and has embraced the view that
global trade liberalization is necessary for its future
economic well-being. All that said, the government's
political concerns described above are imperatives that
are playing a key role in its strongly pro-FTA position.
In Mission's estimation, the GSL's argument that an FTA
can play a role in realizing economic gains and thus
help the peace process -- the success of which is the
USG's number one goal in Sri Lanka -- is one that has
considerable merit. END COMMENT.


8. (U) Minimize considered.

LUNSTEAD