SRI LANKA INVESTMENT CLIMATE STATEMENT APPENDIX,

UNCLAS SECTION 01 OF 03 COLOMBO 001342

SIPDIS

E.O. 12958: N/A
TAGS: EINV EFIN ELAB KTDB PGOV CE ECONOMICS
SUBJECT: SRI LANKA INVESTMENT CLIMATE STATEMENT APPENDIX,
2004

REF: (A) STATE 141379 (B) 03 COLOMBO 001389

Sri Lanka - July 2004 Appendix to 2003 Investment Climate
Statement


1. This appendix serves as an update to the 2003
Investment Climate Statement for Sri Lanka. It has been
provided to assist investors in the interim period
resulting from the U.S. Government's decision to begin
publishing the Country Commercial Guide (of which the
Investment Climate Statement is a chapter) on a calendar
year basis, in January instead of August.


2. The United States Government has reviewed the 2003
Investment Climate Statement for Sri Lanka, and has noted
the following changes that have occurred since its
publication. In most circumstances, if a portion of the
2003 Investment Climate Statement has not been modified in
this appendix, it is because the U.S. Government is
satisfied that it continues to accurately reflect the
state of affairs in Sri Lanka as of July 2004.


3. The following are keyed to upates requested in Ref A:

Openness to Foreign Investment: Since the last Investment
Climate Report, there was a change of government in Sri
Lanka. In early February 2004, President Chandrika
Kumaratunga dissolved the Parliament, following the
failure of the two major political parties to come to an
agreement on how to break an impasse over control of
ministries and steps to move the peace process forward.
Consequently, Parliamentary elections were held on April 2
and the United People's Freedom Alliance (UPFA),a left
leaning coalition comprising the Sri Lanka Freedom Party
(SLFP) and Marxist Janatha Vimukthi Peramuna (JVP),formed
a government. However, it failed to gain a majority in
Parliament.

A Norwegian brokered ceasefire, between the LTTE and the
Government, in effect since February 23, 2002, continues
to hold despite LTTE withdrawal from peace talks in April

2003. LTTE presented its proposals for an interim
administration in October 2003. Efforts to restart peace
talks have floundered.

The UPFA contested the election on a platform of pro-poor
growth policies. The Government's Economic Policy
Framework "Creating Our Future, Building Our Nation"
http://www.treasury.gov.lk focuses on development of the
small and medium enterprise sector (SME),agriculture,
infrastructure, with a much heavier reliance on
Government. The Government also hopes to facilitate
private investment through market friendly, export
oriented strategies supported by a strong regulatory and
legal framework. The Government has abandoned plans to
privatize strategic state enterprises. Instead, the
Government will retain ownership and management of these
enterprises ranging from large state-owned banks to
electrical utilities. The Government hopes to insulate
them from political interference and make them profitable.
The Government has created three new agencies to improve
state owned enterprises, economic development, and
procurement.

The Government has rejected the former Government's
poverty reduction strategy paper titled "Regaining Sri
Lanka" citing its failure to benefit the poor and rural
areas. However, it has indicated a strong desire to
continue with various reforms begun by the former
government.

The Government acknowledges the vital role played by both
foreign and local private investors in the economy. The
Government has promised to encourage both foreign and
local private investment through the removal of
impediments and an introduction of an investor friendly
administration. However, there have been efforts to
introduce prohibitive new taxes on the acquisition of land
by foreigners and other bureaucratically inspired
impediments to foreign investments. The Government
encourages adoption of best practices in the corporate
sector, and hopes to rely on a healthy corporate sector to
facilitate investment. The Government welcomes
environmentally friendly, socially responsible
investments.

Pending clarity on economic and fiscal policies, the IMF
has withheld disbursements under a Poverty Reduction
Growth Facility (PRGF) and Enhanced Fund Facility (EFF)
extended to Sri Lanka in April 2003.

The Sri Lankan Rupee has depreciated by about 5 percent
during the first seven months of 2004, due to political
uncertainty. There has been a slowdown in aid and
investment inflows. In addition, Sri Lanka's trade
deficit has also expanded due to a heavy oil import bill.
Gross official receipts have slipped 13% in the first five
months. Total reserves at $3.1 billion, provides 5.3
months of import cover. The currency is likely to
depreciate further in the next few months.

Conversion and Transfer Policies: No significant changes
since 2003.
Expropriation and Compensation: No significant changes
since 2003.

Dispute Settlement: There continue to be trade and
investment disputes, particularly surrounding Government
procurement. The procurement process in Sri Lanka is slow
and non-transparent. US companies continue to face
problems with payment on valid contracts, implementation
on agreements with the Government and inexplicable failure
to secure contracts, despite high value and low bids.

Performance requirements and investments: No significant
changes since 2003.

Right to private ownership and establishment: The
Government is considering changing land ownership
regulations and there are calls for the imposition of a
substantial tax on land sales to foreigners. Under
previous versions of this tax foreign companies registered
in Sri Lanka were considered local companies and were not
liable. In its current form, however, any company with
25% foreign ownership would be considered "foreign" for
the purposes of the tax.

Protection of Property Rights: No significant changes
since 2003.

Transparency of the regulatory System: No significant
changes since 2003.

Efficient Capital Markets and Portfolio Investment: No
significant changes since 2003.

Political Violence: There has been an uptick in violence,
mostly in the Eastern part of the country, related to
infighting between the Liberation Tigers of Tamil Eelam
(LTTE) terrorist organization, and a faction that split
from the LTTE earlier this year. In July, there was a
suicide bombing in a Colombo police station. Five people
(including the bomber) were killed. The bombing bore the
hallmarks of an LTTE attack. Despite these incidents, the
ceasefire largely holds and both sides have publicly
committed to its maintenance.

Corruption: No significant changes since 2003.

Bilateral Investment Agreements: The US-Sri Lanka Income
Tax Treaty went into effect on June 12, 2004.

OPIC and Other Investment Insurance Programs: No
significant changes since 2003.

Labor: The Government continues to take steps to improve
enforcement of labor regulations inside export processing
zones (EPZs). The Board of Investment (BOI) has recently
issued revised instructions to BOI companies to facilitate
union activity within their factories. In addition,
employers were requested to allow trade union access to
EPZ factories. Previously, in October 2002, the BOI
instructed BOI companies to recognize trade unions and the
right to collective bargaining. ILO has confirmed that
non-union employee councils and trade unions can coexist.

Labor Management Relations: There is a new thrust on
corporate social responsibility. Sri Lanka is trying to
focus international attention to high social compliance in
the corporate sector in the wake of the MFA-phase out.

Foreign Trade Zones/Free Ports: No significant changes
since 2003.

Foreign Direct Investment Statistics: Statistics will be
updated in the next full revision of the Investment Climate
Statement, which will be published in January 2005.
ENTWISTLE