UNCLAS SECTION 01 OF 02 COLOMBO 000086

SIPDIS

DEPARTMENT FOR SA/INS, EB
PASS TO USTR:AWILLS
COMMERCE FOR ITA:ABENAISSA
TREASURY FOR SRI LANKA DESK:RADKINS

E.O. 12958: N/A
TAGS: ECON ETRD CE USTR ECONOMICS
SUBJECT: SRI LANKAN ECONOMY GROWS 5.5% IN THIRD
QUARTER


1. Summary: The Sri Lankan economy expanded by 5.6%
in the third quarter, in line with the projected
growth of 5.5% for 2003. The Central Bank said the
5.5% growth for the full year was still achievable,
despite recent political divisions and uncertainties.
The Central Bank, however, stressed that continued
peace, political stability and speedy implementation
of infrastructure projects will be key to maintain
momentum and achieve the higher 6% growth projected
in 2004. End Summary

Services boost economy
--------------

2. The Sri Lankan economy expanded by 5.6% in the
third quarter of 2003 contributing to an average 5.6%
growth rate in the first three quarters, compared
with 2.9% growth in the same period in 2002.
Significantly, this was the fifth straight quarter in
which growth exceeded 5.5%. The positive results in
the third quarter were mainly driven by strong (8.3%)
growth in the services sector, which contributed 79%
to overall growth. Banking, trading, communications,
port services and tourism posted double digit growth
during this period. In 2003, tourist arrivals
reached 500,000 for the first time, up 27% from
393,000 arrivals in 2002.

Other sectors
--------------

3. Third quarter industrial sector performance was
rather disappointing at 2.8% growth. The sluggish
growth was mainly due to lower value addition in
apparel manufacturing sector, where factories are
trying to streamline their operations to meet the
MultiFiber Arrangement phase out in 2005. The
construction sector grew by 5.9% and agriculture grew
by 2.1%, with the tea, coconut, and rice sectors
recording robust growth rates of over 5%.

External performance through October
--------------

4. On the external front, exports rose by 11% through
October, in contrast to a drop of 6% in 2002.
Imports increased by 9%, against a decrease of 3% in

2002. The trade deficit increased marginally to
$1.14 billion from $1.11 billion in 2002. Foreign
exchange inflows from tourism, ports, private
remittances and capital transfers increased,
contributing to reserves and improving foreign
exchange liquidity. Foreign reserves reached $3.1
billion in October, up 25% from January 2003,
providing 5.7 months of import cover.

Earlier reforms support growth
--------------

5. Strong growth in the first three quarters reflects
the positive response to improved macroeconomic
conditions. The main contributory factors to growth
were peace, improved macro economic management,
greater fiscal discipline (budget deficit is forecast
at 7.8% of GDP in 2003), declining interest rates,
stability of the rupee, falling inflation (inflation
fell to 6.3% in 2003 from 9.6% in 2002), increased
foreign inflows, increased power supply, improved
business confidence and some recovery in the world
economy.


6. The Central Bank said the challenge now is to
achieve the medium term growth target of over 6%.
Without such an expansion it will be difficult to
improve education and employment opportunities,
income generation, living conditions, and quality of
life in a sustainable manner. The higher growth
would require increased investments, which in turn
will require political stability, peace, further
improvements in macro economic management,
acceleration of reforms, reducing economic policy
uncertainties and effective utilization of foreign
assistance to improve infrastructure.


7. Comment: The 10 month momentum of the peace
process and economic reform programs of the
government this year resulted in strong third quarter
performance. The current political disturbance,
begun in early November, has had a negative impact on
the economy, though it may not be severe enough to
affect the 2003 targets significantly. The effect is
expected to be felt more strongly in the early months
of 2004. End comment.
Lunstead