AMBASSADOR'S COURTESY CALL ON CENTRAL BANK

C O N F I D E N T I A L SECTION 01 OF 02 COLOMBO 002023

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DEPT PLEASE PASS TO SA/INS, SA/RA, USAID FOR BERNADETTE
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E.O. 12958: DECL: 11/24/13
TAGS: ECON EFIN EAID PREL CE ECONOMICS
SUBJECT: AMBASSADOR'S COURTESY CALL ON CENTRAL BANK
GOVERNOR JAYAWARDENA


1. (U) Classified by Ambassador Jeffrey J. Lunstead.
Reasons 1.5 d and e.


2. (SBU) Summary: During his initial courtesy call with
Central Bank Governor Jayawardena on November 20, the
Ambassador discussed the current political situation,
regional economies, US Treasury Department assistance and
the recent GSL budget. Jayawardena was optimistic on the
outcome of the ongoing political dialogue. He saw Sri
Lanka's role as a regional economic hub as potentially
viable and was enthusiastic about upcoming US Treasury
Advisor assistance. He saw the recent GSL budget
submission as a step in the right direction, but cautioned
that continued deficit reduction was key. End Summary

Politics: "Getting this Boy and Girl Together"
-------------- -

3. (C) Ambassador paid an initial courtesy call on Central
Bank Governor A.S. Jayawardena on November 20. The
Governor immediately brought up the current political
climate, offering an assessment of the PM as pragmatic and
flexible and the President as someone who acts on instinct
- thus unpredictable. Getting "this boy and this girl
together" was the main challenge facing Sri Lanka. He
faulted the proportional representation electoral system as
designed to thwart any party gaining a decent majority. On
the economic front, he thought both sides could agree on
the basics of economic policy, which might provide common
ground to build on.

Regional Economies
--------------

4. (SBU) Jayawardena expressed satisfaction with India's
emerging economic prowess, noting it was no longer
"fortress India." He thought the SAARC Finance group
provided a useful working-level forum to build
relationships and deal with ongoing problems.


5. (SBU) Economically, the region's psychology needed to
change. Sri Lanka was the first to do so in 1977, when it
introduced free-market reforms. At that time, Indian PM
Rajiv Gandhi questioned Sri Lanka's wisdom and predicted it
would be bankrupt in five years. India later was forced to
adopt similar measures "to keep from going bankrupt." On
Pakistan Jayawardena expressed concern about his perception
that only fear of India holds Pakistan together.

US Treasury Advisor Programs
--------------

6. (U) The Ambassador thanked Jayawardena for his support
of the US Treasury Advisor program and noted that the Debt
Management TA and a Treasury Anti-Money Laundering team
would arrive in early 2004. Jayawardena was appreciative
of the US assistance. On the debt management front, he
reiterated his view that the Public Debt Management Office
needed to be truly independent and not beholden to the
Central Bank or the Treasury.


7. (C) On money laundering, Jayawardena acknowledged it was
a key area for improvement if Sri Lanka hoped to become a
regional financial hub. Sri Lanka lacked an appropriate
legal framework however, and necessary new legislation was
awaiting clearance at the Justice Ministry. The Ambassador
offered to weigh in with the Justice Minister if necessary
to get the anti-money laundering legislation moving.
Jayawardena said banks were using the "know your customer"
rule in the interim. He urged all bankers to carefully
analyze their accounts and understand the origins of
deposits. Jayawardena then listed several fraud cases the
GSL has dealt with in the recent past. He was considering
some public outreach to educate people about scams such as
the "Nigerian Oil letter" and pyramid schemes.

GSL Budget Submission
--------------

8. (SBU) The Governor said the recent budget proposal by
the GSL was sound. In order to build confidence, the GSL
needed to keep chipping away at the deficit. Sri Lanka
hopes to seek a sovereign credit rating in the next year.
He intends to pursue this as long as the GSL understands
the need to act responsibly and realizes the consequences
of "speaking out of turn." He saw one area of concern with
regard to the sovereign rating - how to manage significant
short-term capital inflows and control capital flight. He
has urged the Board of Investment to target investment that
could be absorbed quickly and that would be long-term in
nature. The Ambassador noted the need to maintain
political stability and move forward on the peace process
in order to give investors confidence in the country and
where it was going.
LUNSTEAD