YOUR VISIT TO SRI LANKA NOVEMBER 7-8

C O N F I D E N T I A L SECTION 01 OF 06 COLOMBO 001764

SIPDIS

FROM THE AMBASSADOR TO THE DEPUTY SECRETARY

E.O. 12958: DECL: 10/23/2014
TAGS: PREL PGOV PTER PHUM EAID ECON CE LTTE ECONOMICS
SUBJECT: YOUR VISIT TO SRI LANKA NOVEMBER 7-8

Classified By: AMB. JEFFREY J. LUNSTEAD. REASON: 1.4 (B,D).

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SUMMARY
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1. (C) After 18 months with no movement toward resumed talks
between the Government of Sri Lanka and the Liberation Tigers
of Tamil Eelam (LTTE),the peace process is beginning to look
less like a process and more like a protracted stalemate.
This perception, which is gaining ground among the Sinhalese
majority in the rural south, erodes popular support for the
peace process, provides a potential platform for more
radical, anti-peace elements on both sides and could spell
political disaster for President Chandrika Kumaratunga's
precarious coalition government. While much of the blame for
the prolonged impasse lies with the LTTE, domestic
politics--and Kumaratunga's preoccupation with her own
political future--play a significant role as well. Your
visit will offer an opportunity to highlight U.S. support for
the peace process, including Norway's contribution as
facilitator; to reinforce our message to the LTTE to respect
the ceasefire and demonstrate flexibility on resuming
negotiations; to press for continued economic reforms; and to
urge greater cooperation among mainstream political forces,
including the opposition United National Party. End summary.

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FROM PROCESS TO DEADLOCK
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2. (C) With no demonstrable progress toward resuming
negotiations between the Government of Sri Lanka (GSL) and
the Liberation Tigers of Tamil Eelam (LTTE) since the Tigers
walked out of talks in April 2003, peace negotiations seem to
have reached an impasse with no jump-start mechanism in
sight. Although the Ceasefire Agreement is largely holding
with no major military engagements reported since December
2001, the lack of movement toward dialogue is creating a
public perception (stoked by extremist anti-peace elements on
both sides) that the peace process is foundering. While much
of the blame for the impasse lies with the Tigers, mainstream
political forces, including President Chandrika Kumaratunga
herself, share some of the responsibility as well.

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TIGER INTRACTABILTY,
CONTINUED TERRORISM
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3. (C) The Tigers, who broke off negotiations a year and a
half ago, continue to show little eagerness to resume talks
anytime soon. The greatest obstacle remains the Tigers'
public demand that their controversial proposal for an
interim administration for the North and East (the Interim
Self-Governing Authority or "ISGA") constitute the sole basis
for resumed negotiations. Staunch nationalistic opposition
to the ISGA, playing to Sinhalese chauvinism and fears of a
GSL "sell-out" to the LTTE, make accepting the LTTE's
ultimatum politically untenable for Kumaratunga, who depends
on one of the ISGA's most virulent opponents, the Janatha
Vimukti Peramuna (JVP),to maintain her coalition. Even
though the LTTE has indicated that it will consider GSL
counter-proposals as well during the course of negotiations,
the Tigers' refusal to modify their public stance leaves the
President little space to maneuver.


4. (C) Besides inflexibility on the negotiating front, the
LTTE continues to demonstrate ruthless disregard for the
terms of the Ceasefire Agreement (CFA). Repeated acts of LTTE
violence, including in Colombo, contribute to a popular
perception that the CFA is unraveling--and that Norwegian
facilitators and Nordic CFA monitors are doing little to
constrain the Tigers. Although most of the more than 2,400
Tiger ceasefire violations are comparatively minor,
non-violent infractions, the Tigers have killed 123 civilians
since the ceasefire began--with more than half of those
murders (64) occurring over the past four months. Tiger
efforts to reassert control in the East following the
defection of Eastern military commander Karuna in March
account for much of the recent uptick in violence. (Another
likely factor: improved LTTE intelligence, gained through
the greater freedom of movement allowed under the CFA, has
helped the Tigers eliminate a number of Army informants as
well.) LTTE suspicion (which seems to us well founded) of
Government colllusion in Karuna's defection, moreover, has
deepened the Tigers' distrust of GSL motives and furnished
them yet another pretext for stalling negotiations. Although
the Tigers have stopped raising the Karuna incident as an
obstacle to resuming talks, it seems unlikely that they will
return to the table until they believe they have eliminated
all resistance and re-established control in the East.

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WHAT CAN WE DO?
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5. (C) How to influence Tiger behavior remains our greatest
challenge. Your visit, which follows closely upon a
top-level Tiger delegation's visit to Europe and precedes
Prabhakaran's much-anticipated annual "Heroes' Day" policy
statement on November 26, will provide a prime opportunity to
do so. The international community is now speaking with
greater clarity and in greater unison to condemn Tiger
terror. We understand that the Tiger delegation to Europe
heard unprecedentedly tough talk from their hosts about the
LTTE's continued violence and inflexible negotiating stance.
Your public statements should highlight those themes,
underscoring that the U.S. position toward the LTTE will not
change as long as LTTE behavior remains unchanged--but also
that a genuine change in Tiger behavior can bring a change in
our attitude toward them. In addition, you should underscore
U.S. support for the Norwegian role as facilitators, which
has come under recent attack in the media and from
pro-nationalist political sources.


6. (C) Our lack of contact with the LTTE in many ways
constrains our ability to try to influence Tiger behavior,
although those who do have contact with the Tigers have not
been able to influence them either. (Moreover, some of our
European colleagues have told us that our refusal to deal
with the LTTE--a position which clearly perturbs the LTTE
leadership--gives us special leverage over the Tigers.)
Other potential avenues include increased
military-to-military cooperation--which the LTTE clearly
regards as a threat--and a clampdown on the Tigers' foreign
funding sources, including the Tamil diaspora in Europe,
Canada and the U.S. In your discussions with GSL
interlocutors, you may wish to seek their suggestions on how
best we might help press the LTTE to modify both its public
positions and its behavior.


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MAINSTREAM POLITICS:
HIJACKED BY RADICAL NATIONALISTS
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7. (C) While the Tigers bear most of the blame for stalling
negotiations, mainstream political parties are partially
responsible as well. President Kumaratunga's ability to
maneuver her way out of the no ISGA/no negotiations box
imposed by the Tigers is severely limited by the opposition
United National Party (UNP) on one hand and her largest
coalition partner, the radical ex-revolutionary JVP, on the
other. Although the UNP and Kumaratunga's Sri Lanka Freedom
Party (SLFP),as the two largest parties in the country, are
closer ideologically and command far broader popular appeal
than radical chauvinist movements like the JVP or the
pro-Buddhist Jathika Hela Urumaya (JHU),the deep-seated
personal enmity between Kumaratunga and UNP leader Ranil
Wickremesinghe impedes bipartisan cooperation, including on
such critical matters of national interest as the peace
process. As a result, comparatively small parties like the
JVP and JHU are hijacking the national agenda, dominating the
debate over the peace process with hard-line stances against
the ISGA and undermining support for resumed negotiations.
JVP and JHU appeals to Sinhalese majority fears of a GSL
"sell-out" make it increasingly difficult for the President
to find a politically feasible position from which to
recommence talks. Unfortunately, however, the longer the
hiatus becomes the more it looks like the GSL has lost
command of the situation--and the greater the opportunity for
the JVP and JHU to fill up the vacuum by mobilizing
opposition to the peace process. Moreover, the President's
inability or unwillingness to rein in the JVP, upon which she
depends to maintain her razor-thin majority and increasingly
shaky coalition government, feeds UNP accusations that she is
more preoccupied with her personal political fortunes than
with preserving the peace process begun by the previous UNP
government.


8. (C) Some of the UNP criticism is accurate. Since the
elections in April, Kumaratunga has done little until
recently to bolster popular support for the peace process.
Her establishment of a multipartisan National Advisory
Council, which met for the first time on October 4, was a
promising initial step. UNP leader Wickremesinghe's decision
to boycott this inaugural session--a decision that aligned it
with fringe elements like the pro-LTTE Tamil National
Alliance and the chauvinist JHU--was regarded by many in the
party as a political miscalculation. Future sessions of the
Council, which we understand will take place at the
politically more palatable working level, could give the UNP
a face-saving opportunity to participate at a more junior
level, although the UNP leadership still tells us it has no
intention of attending. We want to encourage the President
to continue such efforts to consolidate support for the peace
process while urging the UNP not to squander the good work
toward peace begun under its administration by refusing to
cooperate now that its rival is in power.


9. (C) In your conversations with the President and UNP
leader Wickremesinghe, you should re-emphasize the need to
demonstrate greater bipartisan support for the peace process.
You should urge the Government to mobilize greater public
support for the peace process or risk ceding the initiative
to radical elements like the JVP and JHU. With
Wickremesinghe you should stress the importance of ensuring
that his historical role in initiating the peace process not
be diminished by failing to support his successor's continued
efforts--and that his obstinacy is costing him political
support.


10. (C) On the brighter side, it is important to remember
that the peace process continues, even though negotiations
remain stalled. Ongoing demining programs, small-scale
reconstruction efforts and conflict mitigation activities at
the local level are all key parts of this process. As the
hiatus between rounds of dialogue lengthens, these activities
become more important than ever as a way of giving Sri
Lankans of all communities a stake in the outcome of the
peace process.

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ECONOMIC REFORM
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11. (SBU) In your meetings with the Prime Minister and
President, you will want to stress the importance of clear
policies showing this government's commitment to economic
reform in generating economic growth, creating jobs,
restoring investor and donor confidence, and promoting
stability and peace. Uncertainty depressed the investment
climate and slowed economic growth slightly after the
elections in April, and indicators now show around 5.5
percent GDP growth for 2004. The service sector continues to
drive growth, while the industrial sector holds steady and
agriculture struggles. Interest rates have risen, as
inflation continues to increase. The rupee has depreciated
almost 6 percent since the beginning of the year. Though the
depreciation has been good for exports, the corresponding
increase in import prices, accompanied by the rise in oil
prices has increased the overall trade deficit.


12. (SBU) In general, Kumaratunga's dependence upon the
left-wing JVP for her own political survival has slowed
progress on economic reform. Her government views the rural,
agriculture-dependent poor as a strong base of support and is
looking at ways to appease this influential constituency.
Thus, although the government pledged to move ahead on
economic reform, it has refused to consider privatization
opportunities, has increased hiring in the public sector and
has maintained subsidies (though oil prices have forced
partial price increases at the gas pumps). That said, the
GSL has created three new bodies to oversee economic
reform--none of which have been operating long enough to
determine their effectiveness. The Strategic Enterprise
Management Agency (SEMA) is charged with returning 12 key
state-owned enterprises, including the electricity board, the
petroleum corporation and state banking institutions, to
profitability. The National Council on Economic Development
includes public and private sector representatives working to
identify key needs in their industries and recommendations
for making them more competitive and sustainable. We are
told that the first round of policy recommendations will be
highlighted in the government's budget presentation in
November. Finally, a new Government Procurement Agency is
charged with overseeing and streamlining large scale
Government procurement processes.

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Millennium Challenge Account
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13. (SBU) Sri Lanka has been slow off the blocks in the
race for MCC funds. Despite some early indications that the
GSL understood MCC's charge, the Government is only now ready
to submit a concept paper, the precursor to a compact
proposal. There is also little indication that ideas have
been subject to wide consultations, a fundamental requirement
of the MCA process. Delays on the MCA front are due to
several factors. First, the GSL has rejected the former
government's Poverty Reduction Growth Facility (PRGF) program
and has held few discussions with the World Bank and IMF
about developing a new plan. Second, the new government
feels pressure to develop its own budget (to be submitted to
Parliament November 18) to differentiate its policies from
those of the former government, particularly with regard to
assistance to the agricultural sector. Finally, the new
Finance Secretary has dismissed 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 instead.
The GSL must begin soon to engage the opposition parties,
donor community, business community and domestic and
international NGOs to build support for its initiatives or
risk being the last out of the MCA gate.

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U.S.-Sri Lanka Trade
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14. (U) The US is Sri Lanka's dominant trading partner,
absorbing roughly 38 percent of Sri Lanka's exports (and 60
percent of its garments) and accounting for USD 1.8 billion
per year in sales. US exports to Sri Lanka have declined in
recent years, amounting to USD154 million in 2003. These
numbers do not, however, reflect US exports of services, and
goods transported through third countries, which we believe
to be significant. Sri Lanka has been pushing for a Free
Trade Agreement with the US. Current prospects are dim,
however, given the electoral season in the US and the lack of
progress on economic reforms in Sri Lanka. We continue to
look for ways to increase US exports, including the possible
use of the Indo-Lanka Free Trade Agreement to import
components from the US, add the requisite value in Sri Lanka
and then re-export final products, in many cases duty free,
to India. Trade and Investment Framework Agreement (TIFA)
talks were held in Washington the week of October 25.

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MEDIA RELATIONS
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15. (U) Sri Lanka has a dominant government-owned media
sector, as well as a growing--and increasingly
influential--independent media. The majority of Sri Lankans
get their news from government-owned television or radio
broadcasts, which are relayed in English, Sinhala and Tamil,
and can be received throughout the island save for parts of
the north. The government media are horrendous in their
obeisance to the rulers, and, across the board,
unprofessional reporting can be a problem. The peace process
remains the focus of the media. You should expect questions
to revolve around the U.S.' listing of the LTTE as a Foreign
Terrorist Organization and around prospects for increased
military and development assistance. Given the timing of
your visit, you might also receive queries on how the outcome
of the U.S. elections may affect U.S. foreign policy, both
worldwide and specifically relating to Sri Lanka. You may
also expect questions about U.S. involvement in South Asia
and our bilateral relations with India.

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USAID PROGRAMS
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16. (U) For FY 2005 the administration has proposed USD 18.8
million in funding for USAID programs supporting Democracy
and Governance (USD 5 million); Economic Development (USD 9.7
million); Humanitarian Assistance (USD 1.4 million); and,
through the Office of Transition Initiatives (OTI),USD 2.7
million for activities supporting the peace process. OTI
projects aim to demonstrate the tangible benefits of peace;
increase the exchange of balanced, accurate information on
peace issues; and to promote community-level conflict
management and peaceful co-existence. OTI-funded programs
are currently operating in the North, the South and the
ethnically diverse East. Democracy and Governance program
activities targeted at supporting the peace process include
creation of a multipartisan dialogue, facilitated by foreign
experts with direct experience in other peace processes,
between politicians in the predominantly Sinhalese south and
pro-LTTE Tamil parliamentarians; political party
strengthening at the local and provincial levels; and
community-level alternative dispute resolution.

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MILITARY-TO-MILITARY RELATIONSHIP
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17. (C) Sri Lanka,s roughly 150,000-man military is
attempting to develop enough combat power to defeat the LTTE
if the cease-fire fails--a capability the military now lacks.
In March 2002, all three services of the Sri Lankan military
approached the US Embassy with significant requests for
military sales. The findings of three separate Department of
Defense Assessment teams in 2002 revealed systemic and
operational weaknesses, especially shortcomings in doctrine,
mid-level leadership and training, as well as severe
equipment shortfalls in four areas ( maritime surveillance
and interdiction; battlefield intelligence and surveillance;
military communications and mobility; and basic soldier
items). The DoD teams, recommendations have helped focus
our military engagement and assistance, and continue to serve
as guideposts for engagement. The military faces additional
burdens--poor recruitment and retention, lack of training and
operational resources, as well as a continuously decreasing
budget. Sri Lanka began receiving FMF in FY2004 and
receives, in an expanding program, funding for International
Military Education and Training (IMET). Sri Lanka is
eligible to receive Excess Defense Articles (EDA) and
recently took ownership of the ex-US Coast Guard Cutter
"Courageous," scheduled to arrive in Sri Lanka in early 2005.
The Sri Lanka Air Force continues to seek four C-130
aircraft under the EDA program. However, no aircraft are
available for the foreseeable future.


18. (C) Engagement with the Sri Lankan military has
offered unlimited access to the experiences (positive and
negative) and lessons learned by all three services during
nearly twenty years of fighting the world,s most prolific
users of suicide technology and IEDs. Recent exchanges and
exercises held in Sri Lanka have resulted in information that
will directly improve the survivability of US forces serving
in harm,s way. Our military-to-military relationship,
moreover, sends a direct message to the Tigers that they
should not go back to war--and that if they do, they will
face a more capable Sri Lankan military.

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SECURITY SITUATION
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19. (SBU) In your conversations with the Prime Minister
and President, you may wish to express appreciation for the
GSL's consistent responsiveness to our periodic requests for
increased security. In spite of the ceasefire, the LTTE
remains a deadly terrorist organization, continuing a
campaign of assassinations against scores of political rivals
and informants. Most of the LTTE's violence is directed
against Tamil or Muslim opponents, and there is no recent
reliable information of Americans being specifically targeted
by the LTTE. That said, the Tigers' terror techniques,
including their mastery of the most sophisticated suicide
bombing technology in the world, continue to pose a
significant threat. In July the LTTE sent a suicide bomber
to assassinate a Tamil political rival just one block from
the embassy. Although the assassination attempt was
unsuccessful, the bomber detonated herself in a nearby police
station, killing herself and four police officers. In
October, Post received uncorroborated information that the
LTTE might attempt to identify/target suspected American
intelligence officers in Sri Lanka for assassination. This
information continues to be investigated.



LUNSTEAD