US-SRI LANKA TIFA DISCUSSIONS AN OPPORTUNITY TO

C O N F I D E N T I A L SECTION 01 OF 06 COLOMBO 001727

SIPDIS

DEPARTMENT FOR SA/INS BRENNIG; PLEASE PASS TO USTR: A.WILLS
AND J.ROSENBAUM; COMMERCE FOR A. STERN; MCC: S.GROFF

DEPARTMENT PASS USTR

DEPARTMENT PASS USDA

E.O. 12958: DECL: 10/18/2014
TAGS: ETRD ECON CE ECONOMICS
SUBJECT: US-SRI LANKA TIFA DISCUSSIONS AN OPPORTUNITY TO
MOLD GSL PRIORITIES, FRAME GSL EXPECTATIONS

REF: A. COLOMBO 1702


B. COLOMBO 1717

C. 03 COLOMBO 1673

Classified By: Ambassador Jeffrey J. Lunstead. Reasons 1.4 B, D and E


1. (C) Summary: The GSL delegation for TIFA, headed by
Commerce Minister Fernandopulle, is looking forward to
discussions with USTR during the next round of talks on
October 26. The delegation will seek to convince the USG of
the GSL's continued commitment to economic reforms (while
true for most members of the GSL delegation as individuals,
the jury is still out on the Government as a whole). They
will likely cite recently released economic data showing
growth continuing above 5% and the Finance Ministry's
assertion that the budget deficit will remain at 8% of GDP
this year, dropping to 5% within two-three years.


2. (C) Summary cont'd: The delegation will be eager to hear
from USTR the status of the GSL's request for an FTA.
Despite constant efforts by Post to tamp down expectations,
the GSL remains keenly interested in an FTA, partly under
pressure from the garment sector and partly in search of a
"good housekeeping seal of approval" for its economic plan.
US issues to raise include IPR, the Millennium Challenge
Account, investment climate/commercial issues, and support
for US positions in the WTO. End Summary.


3. (SBU) As the USG prepares for the upcoming round of Trade
and Investment Framework Agreement talks, it should take note
that it faces a new GSL, with a less disciplined approach and
a short-term economic outlook, a situation which is
compounded by the impending expiration of the Multi-Fiber
Agreement in January. There is likely to be a bit of
disappointment on the GSL side regarding the agenda, which
they had hoped would be more inclusive and substantive on the
issue of bilateral trade (despite numerous Embassy efforts to
tamp down expectations in light of political uncertainties in
Sri Lanka and the upcoming US elections).

GSL Players
--------------


4. (C) Commerce Minister Jeyaraj Fernandopulle will lead the
delegation and will likely be accompanied by Tourism and
Industries Minister Anura Bandaranaike (President
Kumaratunga's brother) and Board of Investment Chairman
Saliya Wickramasuriya. Fernandopulle has slowly increased
his comfort level on international trade matters but is still
heavily reliant on his Director General, former GSL Rep to
the WTO, Ambassador K.J. Weerasinghe, who will also
accompany. Weerasinghe is a thoughtful, focused public
servant who would serve as a good sideline interlocutor,
along with GSL Ambassador Devinda Subasinghe, for the US
side. Bandaranaike has been generally positive on the notion
of increased trade with the US, but not particularly engaged
or helpful on commercial matters. BOI Chairman
Wickramasuriya, a recruit from the international private
sector, is smart, non-political and engaging. He has been
focused primarily on reorganization of the BOI and its
internal management, however, and actually soliciting
investment has been a secondary focus so far.

Economic Situation
--------------


5. (SBU) Economic activity and outlook has been mixed since
the President's decision to take over three ministries last
November and the ensuing period of political jockeying,
including the April elections and the breakaway of
LTTE-renegade leader Karuna. A recent poll of businesses
showed business confidence at its lowest point in the last
two years (the lowest since the LTTE attack on the
international airport in 2001). Nonetheless, the industrial
and services sectors continue to peform well, as Western
Province (i.e. Colombo) growth continues. The stock market
has also shown strong returns, buoyed by tourism-related
stocks - whose index values have doubled since December. It
is currently ranked as the best performing stock market in
Asia.


6. (U) On the macroeconomic front, growth for the first half
of 2004 was 5.7%, down from the same period last year.
Inflation is on the rise with oil price hikes a leading
factor. Monetary policy remains a bit loose (according to
members of the Central Bank (CB) monetary board, the CB is
allowing money supply to grow in the hopes that the GSL will
cut price subsidies, thus sopping up excess liquidity) and
the increased balance of payments deficit (caused by a
suspension of World Bank and IMF budgetary support) is
forcing continued depreciation of the rupee. First half
economic conditions are reported thoroughly in Ref A.

GSL Issues at TIFA
--------------


7. (SBU) The GSL delegation is coming to Washington with one
issue on their mind, a US-SL FTA. They will try to steer the
meeting to a discussion of all the steps they have taken
since the last TIFA round in October 2003, in response to US
suggestions. These included signing the WTO Information
Technology Agreement (which is still outstanding - Finance
Ministry and Cabinet must approve the duty concessions) and
sponsoring a visit by Sri Lankan apparel manufacturers to the
Carolinas (which took place last month). While the Embassy
has made strong efforts to keep expectations in check and
tamp down any notion that an FTA could be pursued this year,
the impending MFA expiration and pressure, particularly from
garment manufacturers, keeps the issue at the forefront of
US-Sri Lanka economic relations. They will also likely raise
domestic concerns, focusing primarily on the needs of the
agriculture and small and medium enterprise (SME) sectors -
citing the recent change in government as evidence of a need
to balance reform, liberalization and globalization trends
with the needs of the rural poor. While we should
acknowledge the importance of addressing the needs of all
levels of society and seeking broad-based growth, it is
important that the USG remind Sri Lanka of its position as a
trade-based nation with strong international ties. The GSL
should not let the need to address domestic concerns
overwhelm their policies in the international trade arena and
thus cause the engine of growth to sputter.

Suggested Points:

--We appreciate Sri Lankan Government efforts to take on
board many of our suggestions from last year's TIFA round and
would be interested to hear about your experience and the
outcomes of these pursuits.

--While we note the enhanced focus of your Government on the
needs of the rural and SME sectors, we think it is important
that Sri Lanka recognize its strong position as a trading
nation and the broad success the country has realized through
economic reform and trade liberalization.

--AM sure you realize that in the long-term, reducing poverty
in Sri Lanka will not come from subsidies and increased
government employment, but from creating an environment to
spur private sector growth.

--There are many options around the world for investors. Sri
Lanka needs to make the right decisions and show the right
investment climate in order to foster additional FDI and
economic growth.

USG Issues at TIFA
--------------


8. (U) Post understands the TIFA agenda currently includes
the following issues: Sri Lankan Economic and Investment
Policies; the Millennium Challenge Account; IPR; and
Bilateral Trade Relations (including FTA).

Sri Lankan Economic and Investment Policies
--------------


9. (SBU) Commercial Disputes and Investment Climate: While
this topic is discussed comprehensively in Ref B, the TIFA
discussion gives an excellent opportunity to reinforce our
views that US companies operating within BOI zones and in the
growing services sector are having great success and taking
advantage of the growing Sri Lankan market and access to
India. The overall investment climate remains mired in
uncertainty, however, as the Government continues to send
mixed signals on its economic policies and fails to employ
prompt, clear decisionmaking in the investment approval
process. US businesses recognize potential in Sri Lanka,
particularly in the infrastructure development and services
sectors, and could offer significant assistance in the
agricultural sector. The onerous process of working with the
Government, however, is crowding out potential investors and
expertise.


10. (C) Economic Reform: Economic reform remains largely on
hold with the GSL. Privatization continues to be demonized.
The most recent casualty stems from a decision to halt
selection of a party to take over a one-third interest from
the state-owned oil company in the petroleum retailing
sector. Twelve state-owned strategic enterprises have been
lumped under a new entity run out of the President's office,
the Strategic Enterprise Management Agency (SEMA),headed by
Senior Presidential Advisor Mano Tittawella. SEMA's role is
to provide a protective "buffer" around these strategic
enterprises, insulating them from political influence and
allowing the boards to hire professional managers and operate
more as a private-sector entity, with focus on the
bottom-line, productivity and profit, while still maintaining
Government control of essential services. In theory, this is
a fine idea, but whether Tittawella has the political heft to
provide this insulation is unknown. He has been helpful in
resolving commercial disputes in some sectors in the recent
past.


11. (SBU) The previous Government reduced the size and scope
of the government bureaucracy. Following its election in
April, however, the current GSL decided to hire 27,000
unemployed college graduates to reduce unemployment rolls.
Further, there have been promises of up to 70% salary
increases and enhanced benefits (though during a recent
conversation with the Ambassador, the Finance Minister
assured that in reality, the raises would be much lower).

Suggested Points:

--We would be interested to hear an update on the economic
reform process.

--In particular, since privatization has largely been
abandoned, we would like to know the status of the Strategic
Enterprise Management Agency and its efforts to streamline
and modernize state institutions.

--We would also appreciate knowing the status of efforts by
the National Committee for Economic Development and the new
Government Procurement Agency.

--All three organizations seem to have critical roles to play
in helping push the economy forward.

IPR
---


12. (SBU) After passage of the new IPR Law in November 2003,
the government of Sri Lanka, the Embassy, and the Embassy-led
private sector Working Group have worked together to begin
enforcement. Numerous training sessions were organized by
the Embassy for Police and Customs with the participation of
US Customs from New Delhi, the International Federation of
the Phonograhic Industry (IFPI),and BSA Microsoft. These
supplemented sessions for Police, Customs and the business
community that were led by the GSL Intellectual Property
Office Director. With Embassy assistance, IFPI gave the
Police a manual on how to investigate IPR violation cases,
and gave Customs handy reference brochures to help identify
counterfeit goods.


13. (SBU) The Embassy also sent four lawyers and a Commercial
High Court Judge to the US on a special International
Visitors Program on IPR protection. The GSL has incorporated
IPR Law into the curriculum at the Police Academy, and has
created special IP task forces within the AG, Police and
Customs. The government has begun enforcement efforts, with
a crackdown on counterfeit local music products. A recent
raid also uncovered a CD and DVC printing plant, with
numerous counterfeit CDs, many of which were US music, movie
and software titles. The raid reflected solid police work,
but US company representatives worry that the government may
not be able to make a strong enough case against the
defendants.

Points:

--Piracy remains a major concern.

--The recent raid shows that there is domestic production of
counterfeit goods as well as imports.

--We are encouraged that the Police have conducted some
raids, and hope that the GSL follows these cases with
diligence through the legal proceedings.

--We hope the GSL ensures that the Police and Customs are
given the support they need to make seizures and give
testimony with confidence.

--The Embassy and the IPR Working Group have offered their
continued assistance with training sessions, information on
legitimate product identification and other support as
requested by the GSL.

--Many will be watching to see how Sri Lanka handles these
new cases.

--We hope to see more raids, leading to prosecutions, and a
reduction of counterfeit products in the marketplace.

--We look to Sri Lanka to be the leader in South Asia in IPR
protection, with a concurrent rise in confidence by
prospective investors.

Millennium Challenge Account
--------------


14. (C) The GSL has been slow to take up the MCA challenge
(Note: recently the MCC indicated it had already received
concept papers or compact proposals from 13 of the 16
eligible countries. Post only last week received a partial
draft of the GSL's initial concept paper. End note). While
claiming to be thoroughly consulting with NGOs and private
sector chambers around the country, there is little evidence
of any significant outreach. The GSL has submitted a partial
draft concept paper to the Embassy, but we continue to await
their final draft for submission to MCC. Slow going on the
MCA front is due to several factors:

--GSL rejection of the former Government's Poverty Reduction
Growth Facility (PRGF) program (Regaining Sri Lanka) and few
discussions with the World Bank and IMF about developing a
new plan.

--Pressure to develop its own budget (the current GSL has
adopted the previous Government's budget through November,
when the new budget submission to parliament is due). There
is significant pressure on the GSL to differentiate itself
from the former Government's policies, particularly with
regard to assistance to the agricultural sector, accompanied
by the inconvenient reality that the Government coffers are
virtually empty.

--The new Finance Secretary has released virtually all
members of the senior Ministry staff with relevant experience
(either as a result of personal or policy differences) and is
relying on the highly bureaucratized national planning office
to take up the mantle.


15. (SBU) While it is not too late to take advantage of the
MCA opportunity, the GSL risks being the last one out of the
gate unless significant high-level pressure is applied to
this initiative soon. In particular, the GSL needs to engage
the opposition parties, donor community, business community
and domestic and international NGOs to build support for its
initiatives (MCC made very clear that one of the first
responses to a proposed compact would be to vet it with civil
society).

Suggested Points:
--MCA program poised to become a key model of delivering
assistance, can be used as a framework for looking at a
country's complete assistance portfolio.

--We are concerned that Sri Lanka still has not completed its
concept paper and that little publicity has been given to the
consultative process.

--We would appreciate knowing what your timeframe is for
submission of a compact proposal, how the consultative
process has gone and what additional efforts are underway to
build broad-based support for the initiative.

Bilateral Trade Relations
--------------


16. (U) Trade between the US and Sri Lanka continues to be a
one-way street, three-quarters of which involves the export
of Sri Lankan-made garments to the US. In 2003, Sri Lankan
exports to the US were US$ 1.8 billion (US$ 1.5 billion of
which was garments). US exports to Sri Lanka have been in
decline for several years and in 2003 were US$ 154 million
(Note: Post continues to look into this figure, as we believe
it does not fully capture the strengths of US "exports"
including services, education, and items re-exported from
other countries in the region. End note).


17. (U) Post has recently received funding from the
Department to pursue a study on how to use the Indo-Lanka
Free Trade Agreement to create opportunities for US companies
to export to the Indian market via Sri Lanka. American goods
are popular in Sri Lanka and potential for increased exports
exists.


18. (SBU) Perhaps the single largest impediment to US exports
is the Government procurement process. In the past year,
several opportunities have been squandered due to
non-transparent tender processes, or interminable delays due
to bureaucratic inertia. US companies lost out on
opportunities for upgrading the radar at the international
airport (despite having technically superior products and
pointing out that the Italian firm that won could not perform
the work at the price bid),opportunities to be part of the
"third-player" in the petroleum sector (due to GSL reneging
on earlier privatization contract obligations),opportunities
to bunker fuel for ships in Colombo port (due to restrictions
placed on outside bunkering facilities after the
privatization process had been initiated). Two US power
companies continue to have payment problems and have been
forced to suspend operations in this power-starved country
(in one case the non-payment has taken place following a GSL
request for Embassy intervention with the company to restart
operations after a plant accident. The company acceded to
the request.).


19. (SBU) The GSL has touted a newly formed Government
Procurement Agency as a solution to this problem. To date,
however, this entity has not made the same headway as its new
sister agencies the Strategic Enterprise Management Agency
and the National Council for Economic Development.

Suggested Points:

--We are concerned about the declining trend in US exports to
Sri Lanka, particularly as Sri Lanka continues to improve its
access to US markets.

--We appreciate the efforts of the Sri Lankan garment sector
to visit North Carolina and look for sourcing opportunities
in the US. We encourage continued efforts on that front.

--US companies currently have a very difficult time operating
in Sri Lanka, due to political intrusion into the market and
poor Government procurement practices.

--We would appreciate an update on how the Government of Sri
Lanka intends to rectify its government procurement practices.

--In particular, we would like to stress the need for
resolution of payment disputes with US companies in the power
sector and the need to expedite approvals for US companies
seeking to invest in Sri Lanka.
WTO
---


20. (SBU) Sri Lanka has continued to play a supportive role
in the WTO and in moving the Doha agenda forward. During our
discussions, they continue to acknowledge that their
long-term views are more in line with US policy and that they
intend to be supportive of progress on the multilateral
front. During a recent meeting with Econoffs and business
sector representatives, however, Commerce DG Weerasinghe
noted that support on the multilateral front would also be
driven by progress on the bilateral front - laying down a
clear marker that Sri Lanka believes they should get more
(i.e. an FTA) for their cooperation.


21. (SBU) It should be noted, however, that the GSL does face
some local criticism for its support for progress in the WTO
(which is labeled as pandering to the US position) rather
than showing solidarity with its developing country brethren.
The GSL has looked closely at its interests, however, and
appears ready to continue to play the helpful role it has
adopted. It is important that the USG continue to reinforce
that we understand Sri Lanka's position alongside us in the
WTO stems from a sophisticated consideration of Sri Lankan
interests in global trade talks, rather than some sort of
"gimmick" to garner US support or concessions on other
fronts.

Points:
--USTR and State points on US policy toward the WTO and US-SL
FTA as appropriate.
LUNSTEAD