Identifier
Created
Classification
Origin
04COLOMBO1171
2004-07-14 10:45:00
CONFIDENTIAL
Embassy Colombo
Cable title:  

GSL ECONOMIC PLAN HEAVY ON PROMISES, SHORT ON

Tags:  ECON ETRD EAGR EAID CE ECONOMICS 
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C O N F I D E N T I A L SECTION 01 OF 05 COLOMBO 001171 

SIPDIS

DEPT FOR SA/PAB
DEPT PLEASE PASS TO USTR FOR J. ROSENBAUM AND A. WILLS
COMMERCE FOR A. BENAISSA

E.O. 12958: DECL: 07/13/2014
TAGS: ECON ETRD EAGR EAID CE ECONOMICS
SUBJECT: GSL ECONOMIC PLAN HEAVY ON PROMISES, SHORT ON
DETAILS

Classified By: ECONCHIEF DEAN THOMPSON, REASONS 1.5 D AND E.

C O N F I D E N T I A L SECTION 01 OF 05 COLOMBO 001171

SIPDIS

DEPT FOR SA/PAB
DEPT PLEASE PASS TO USTR FOR J. ROSENBAUM AND A. WILLS
COMMERCE FOR A. BENAISSA

E.O. 12958: DECL: 07/13/2014
TAGS: ECON ETRD EAGR EAID CE ECONOMICS
SUBJECT: GSL ECONOMIC PLAN HEAVY ON PROMISES, SHORT ON
DETAILS

Classified By: ECONCHIEF DEAN THOMPSON, REASONS 1.5 D AND E.


1. (C) Summary: Following the Central Bank's first quarter
review of the Sri Lankan economy, which indicated strong GDP
growth and posited a generally sound economic situation, the
UPFA Government released its "Economic Policy Framework."
The plan clearly notes the GSL,s focus on the agricultural
and Small and Medium Enterprise sectors, but, as one observer
put it, "does not answer how they intend to get where they
want to go." It also appears to strongly favor government
intervention, and promises of heretofore illusory public
sector efficiency, rather than market forces and export-led
growth to lift the nation's economy. In the run-up to the
policy framework's release, there have also been conflicting
statements from GSL officials on issues such as
privatization. It is possible that much of this stemmed from
internal debate and that the release of the framework may
help keep elements of the GSL "on message." The stated link
of the policy framework to the UPFA's election manifesto, its
continual criticism of the former Government's economic plan
and the avoidance of straightforward policy recommendations
lend credence to the notion that this policy framework is
largely a political beast, leaving most of the heavy lifting
to the implementation phase. End Summary.

Central Bank Lauds Continued Economic Growth
--------------


2. (U) The Central Bank,s first quarter (a period under the
economic stewardship of the previous UNP Government) report
on the Sri Lankan economy, issued on June 29, indicated that
GDP grew at an annualized rate of 6.2 percent, marking the
seventh consecutive quarter that Sri Lanka recorded economic
growth in excess of 5.5 percent. The Central Bank credited
this performance to a generally sound macroeconomic
environment and a continuation of the ceasefire between the
GSL and the Liberation Tigers of Tamil Eelam (LTTE) terrorist
organization.



3. (U) Not all economic sectors shared in the expansion,
however. While the services sector continued its strong
growth rate at 9.5 percent (providing 80 percent of the GDP
growth) and the industrial sector grew by 5.5 percent, the
agricultural sector contracted by 1.4 percent (a result of
dry weather conditions affecting domestic agriculture and tea
output) widely felt to have been the harbinger of bad
electoral tidings for the previous government.


4. (U) While the Bank was generally positive about the
direction of the economy, it warned that continued success
relied on increased investment, which would only continue as
a result of increased political stability, a long-term
solution to the civil conflict with the LTTE, further
improvements in macroeconomic management, implementing much
needed structural reforms and more effective aid utilization,
particularly in support of infrastructure (power and roads).

UPFA Plan: Protecting our Sectors, Buying Your Votes
-------------- --------------


5. (SBU) On the heels of this largely positive economic news,
the GSL issued its "Economic Policy Framework" (EPF)
"Creating our Future, Building our Nation." The EPF is
general and heavily focused on Small and Medium Enterprises
(SME) and agriculture, the two sectors from which the UPFA
Government believes it draws its electoral strength.


6. (C) While more specific aspects of the EPF are outlined
below, a principle criticism has been that it is short on
specifics. IMF ResRep Jeremy Carter ((please protect)) told
Econchief that the plan is more akin to an election speech,
noting that it adhers closely to the UPFA's election
manifesto. His primary concern was the lack of financial
figures associated with the plan's goals. Carter suggested
that the GSL,s mid-year fiscal review painted a bleak
picture on the deficit front, driven by the GSL's abysmal
revenue collection performance. In that regard, the EPF's
deficit pledge (8% of GDP) was unrealistic. The deficit will
be the IMF's main concern and IMF approval will be needed
for World Bank budget assistance as well. During a separate
meeting between Econchief and Japanese Economic Counselor
Mitsuo Kawaguchi, Kawaguchi indicated that the GOJ believes
that Sri Lanka's economic fundamentals are basically sound,
but the UPFA's plan "tells a nice story, but doesn't answer
how they intend to get where they want to go". These
sentiments have been echoed in the press by several leading
business figures and organizations.

Macro-Economic Goals
--------------

7. (U) In its EPF, the GSL sets macroeconomic targets of 6-8
percent GDP growth, enhanced revenue collection (20 percent
of GDP),and deficit reduction (8 percent of GDP in 2004,
narrowing to five percent "over the medium term"). The GSL
would maintain a liberal foreign exchange policy, with
Central Bank interventions to smooth fluctuations. Regarding
inflation, the EPF calls for a regular price surveillance
mechanism to ensure competitive prices for essential food
items. The mechanism would include "profit percentage
caps," set by an internal rate of return (IRR) index. This
IRR index would be extended to public transport and other
services as well. The GSL claims priority will be given to
an "island-wide infrastructure development program and
social safety net."

It's the UNP's Fault
--------------

8. (SBU) The EPF is heavy on criticism of the previous
Government, which changed in April 2004. The current UPFA
Government blames the former UNP Government for increasing
the deficit by increasing debt relative to GDP. The plan
blames revenue shortfalls on the prior Government,s tax
amnesty program and corruption. It accuses the former
regime,s poverty reduction program "Regaining Sri Lanka" of
gutting popular rural development programs, education
initiatives and needed government support for industrial
development.

New Layers to the Bureaucracy, or Old Wine in New Wineskins
-------------- --------------

9. (U) The EPF calls for the creation of a National Council
for Economic Development (NCED) a permanent secretariat
charged with improving policy formulation and implementation
in a well-coordinated fashion. Line Ministries would retain
their day-to-day implementation responsibilities. There will
also be a Strategic Enterprise Management Agency (SEMA)
charged with overseeing public enterprises, returning them to
profitability and channeling those profits into Government
coffers. SEMA CEO Mano Tittawella, also a Senior Policy
Advisor to the President, told Econchief that SEMA's focus
will be on reforming poor performers and looking for market
oriented solutions to their problems, but not through
privatization. The EPF also calls for a National Procurement
Agency (NPA),charged with streamlining the unwieldy,
non-transparent government procurement process. Treasury
Secretary P.B. Jayasundera told the Ambassador on July 12

SIPDIS
that the NCED and SEMA would be working closely with the
private sector to "add structure" to the EPF and identify
those policies the GSL will need to pursue to help the EPF
take root.


10. (SBU) The development of the North-East, a key issue for
progress on the peace front, gets relatively short shrift in
the plan. The GSL acknowledges that relief and
rehabilitation efforts in the North East are important to all
stakeholders in the peace process. The Government intends to
implement relief activities primarily through the North-East
Provincial Council and the District Secretariats. The
Ministry of Relief, Rehabilitation and Reconciliation would
be the apex coordinating body, coming directly under the
President.


11. (U) The following are some highlights of the UPFA,s main
goals outlined in the plan:

Agriculture:

The GSL,s key economic objective is to assist the
agricultural sector to become self-sufficient in food
production and food security. The EPF claims Sri Lanka can
achieve self-sufficiency in milk, sugar, vegetables and rice,
but that these segments cannot compete with imports due to
misaligned trade and tariff regimes. Assistance will be
provided through new technology, subsidized inputs, storage
and credit facilities, as well as continued high tariffs on
key agricultural commodities. Cultivation zones will be
established for strategic food crops (potato, onion, other
vegetables). Expert assistance will be provided to farmers
in remote and war-affected areas of the country. Existing
irrigation facilities will be rehabilitated and drought
resistance technologies popularized. Livestock and fisheries
sectors will be targeted for improvements, including
infrastructure development. Duty on agricultural commodities
will be maintained at the "high duty range" of 25-35
percent or "such other appropriate rates to insulate pressure
on domestic agriculture."

Small and Medium Scale Industries:

SMEs are referred to as the &nerve center of economic
development" and the EPF suggests that a primary focus should
be protecting this sector from undue import competition,
while at the same time "balancing the needs of consumers."
The GSL will promote SME entrepreneurs through the
establishment of a "multi-prong support mechanism"
consisting of streamlining bureaucratic procedures related to
taxation, customs, and export procedures; increased training
to SMEs; technical support in the areas of quality
management, productivity improvement, IT access; access to
venture capital equity funds and SME development finance;
programs to foster the emergence and deepening of selected
industrial clusters with comparative advantage; efficient and
cost-competitive infrastructure development. Donor countries
will also be asked to assist in SME development by providing
access to best practice knowledge, upgrading the capacity of
SME associations and committing resources to SME
competitiveness programs.

The Public Service:

Public servants are going to become more responsible and
efficient, with time-based targets and financial incentives
for meeting efficiency goals. The departments of Inland
Revenue, Customs and Excise will be the first agencies to
undergo modernization and improvement. The 27,000 unemployed
graduates the GSL pledged to hire are going to become
"Change Agents" in the public sector, following a
comprehensive management-training program.

Export Sector:

The GSL will promote maximum value-addition to domestic raw
materials for export. The GSL will ban the export of local
minerals in raw form and encourage the establishment of
processing and conversion plants to upgrade the industry
toward value-added finished goods. The GSL will encourage
agricultural producers to move from bulk to packaged exports.

Textile and Apparel Industry:

In its opening chapter, the EPF taunts the garment sector
(indirectly) for not making "distinctive claims about the
local identity based on environment attributes, and socially
responsible corporate and individual citizen behavior
standards." The EPF indicates the GSL will provide
assistance to consolidate the lead role of textile and
apparel manufacturing and export in the economy, enabling it
to perform efficiently in the post-2005, quota-free era. The
GSL will promote global market access, particularly bilateral
arrangements with the EU markets. The GSL will also offer
special assistance to enhance Sri Lanka,s competitiveness,
through the development of design skills, the opening of
promotion offices, trade lobbying and business development in
global markets. The GSL will assist the garment industry to
leverage Sri Lanka as an apparel producer that is the "only
socially responsible business practitioner in Asia..."

Tourism:

The GSL would like to refocus the tourism sector away from
high-volume European charter groups for resort holidays,
toward smaller, "higher-spending" eco-conscious tourists.
The GSL refers to this as a shift from "quantity to
quality." Tourism will be developed in a matter that
safeguards Sri Lanka,s environment, while providing unique,
Asia-oriented holiday experiences. (Note: The plan does not
talk about the need to improve infrastructure to meet the
needs of these up-market tourists. End note.)

Transportation:

Regional bus and rail companies will be redeveloped to become
"efficient transport agencies." The GSL will increase the
operational bus fleet of the regional bus companies and
improve route diversity. Additional law enforcement and
streamlined administration will enhance efficient operation
of the transportation industry. Rail service will be
modernized and passenger usage will be increased through
improved service reliability. A fare structure based on an
agreed IRR will be implemented.

Infrastructure:

The GSL believes the country cannot rely on the private
sector to build infrastructure. The road-network will be
expanded and the country,s power generation plan will be
implemented as the highest national priority. Development of
the Colombo South Port, the Galle Port, the airport terminal
facility and an Air Cargo Village will be immediate
development priorities. The GSL,s infrastructure
development strategy will also include rural water supply
schemes, economic centers, storage facilities and recreation
and leisure facilities.

Other areas of note:

The GSL will introduce legislation to provide an
institutional mechanism to facilitate restructuring of
financially troubled enterprises.

The GSL will take steps to revive the construction industry,
including the development of a Construction Industry
Guarantee Fund and the exploration of opportunities for local
contractors in foreign-funded projects. The GSL will also
encourage the sourcing and manufacture of construction
industry materials based on local raw materials.

The GSL has targeted the building of 300,000 housing units
island-wide.

Corporate best practices will be encouraged and regulatory
frameworks will be further developed.

Regulatory surveillance of the financial sector will be
strengthened.

One Government, Several Voices
--------------


12. (C) The lead up to the release of the Government's EPF
was marked by several conflicting public pronouncements,
ranging from Trade Minister Fernandopulle's recent assurances
in Washington that the GSL will follow the former regime's
economic reform policies, including privatization, to
Treasury Secretary Jayasundera's hard-core adherence to the
UPFA election manifesto insistence that no privatization will
take place. In the middle is Finance Minister Amunugama, who
has flip-flopped on the issue, but lately has been indicating
that if loss making state-owned enterprises are not
privatized, neither should they expect to be subsidized by
the Government. These kinds of conflicting statements
present a lack of discipline within the ranks at best, the
notion that the audience is what determines the message at
worst. It is possible that much of the internal bickering
was being hashed out in the press and, with the release of
the EPF, there may now be a clearer script from which GSL
officials can read.

Comment
--------------


13. (C) Politics is the order of the day with the EPF
(underscored in the minds of the UPFA by the similar recent
electoral change in India),in deference to the rural voters
who carried them to power. The EPF reads like a testimony of
faith in the power of government, rather than markets, to
lift the country out of its economic malaise. This possibly
signals the influence the Marxist/Nationalist Janatha
Vimukthi Peramuna (JVP) party on the UPFA coalition. Much of
the plan, while highlighting a desire for competition or
private-sector led growth, goes on to describe how the
Government wants to engineer that competition or growth.
While the agriculture and SME sectors are clearly in need of
improvement, and were clearly at the root of the UPFA's
electoral victory, the plan says little about key obstacles
to development in these areas, such as land reform, a
relatively shallow financial sector and inappropriate
government interference in business and farming decisions
(e.g. requirements for farmers to petition for permission to
grow crops rather than rice in "designated paddy lands").



14. (C) Comment cont'd: Perhaps the EPF's biggest
question-mark is its failure to address in a systematic way
how the UPFA Government intends to finance new programs while
trying to raise sufficient revenue to cut an already growing
deficit. Based on Secretary Jayasundera's comments to the
Ambassador about the work of the NCED and SEMA, it seems that
the Finance Ministry is still focused on putting structure
underneath the framework cover. In that regard, it will be
necessary to watch the continued development of GSL
discussions with the IFIs and the actions taken by the NCED
and SEMA. (Note: The entire plan is available on the GSL
Finance Ministry's website
http://www.treasury.gov.lk/epsg/ecopolstgov.p df.) End Comment.

LUNSTEAD