UNCLAS SECTION 01 OF 02 COLOMBO 000424

SIPDIS

TREASURY FOR C. CARNES, DEPT FOR SA/INS J. BRENNIG, MANILA
PLEASE PASS USADB

E.O. 12958: N/A
TAGS: EAID EFIN ECON CE ECONOMICS
SUBJECT: SRI LANKAN REQUEST FOR POST TSUNAMI DEBT RELIEF


1. On February 24, Post received a letter from Finance
Minister Sarath Amunagama addressed to US Treasurer Anna
Escobedo Cabral (unclear why Cabral was addressee). The
original is to be sent directly to Treasury by the Sri
Lankan Embassy in Washington. The letter (text below)
repeats Amunugama's February 17 letter to the Paris Club
almost verbatim. It outlines damage to Sri Lanka as a
result of the tsunami, expounds on Sri Lanka's relief and
reconstruction needs and requests a debt deferment of 3-5
years.


2. Post has, in response to other queries, already
discussed debt relief with the GSL and explained that since
Sri Lanka does not have an active IMF program, a one year
deferral, followed by a four year restructuring would likely
be the best we could offer.


3. Begin Text of Finance Minister's Letter:

Ms. Anna Escobedo Cabral
US Treasurer
1500 Pennsylvania Ave
NW Washington DC 20220
USA

Dear Madam,

REQUEST FOR DEBT RELIEF AS BUDGETARY AND BALANCE OF PAYMENTS
SUPPORT FOR POST-TSUNAMI RELIEF, REHABILITATION AND
RECONSTRUCTION (RRR)

The Tsunami disaster on 26th of December took away the lives
of over 30,000 in Sri Lanka, made nearly one million persons
homeless and caused extensive damage to private and public
property and infrastructure in the affected areas in the
coastal belt. The asset loss alone is estimated at least
around US$ 900 million (slightly over 4% of GDP). Our
latest assessment suggests that the total reconstruction
expenditure is around USD 1.5 billion particularly in view
of the fact that the reconstruction process should avoid
vulnerabilities to natural hazards in the future. The
underlying strategy has been a multi-hazard risk approach
during the recovery phase to ensure that communities and
assets are less vulnerable to impact of future disasters.
The bulk of this expenditure is on housing and townships,
transportation infrastructure, including roads, railways,
and ports (USD 400 million), the fisheries sector
infrastructure requirements such as harbours, anchorages and
related facilities (USD 200 million), water supply and
sanitation projects (USD 150 million)

and schools and
hospitals building (USD 120 million). In our reconstruction
and recovery program which will take around 2-3 years,
provisions will also be made to the coast conservation and
natural resources affections as well. Substantial work has
to be done in these areas.

To meet the urgent needs of those affected, the response of
the government has been swift and comprehensive, supported
by the assistance of donors and relief agencies. While
immediate efforts have focused on the humanitarian needs of
the survivors, we also aim to undertake as much as 40
percent of the required rehabilitation and reconstruction in
2005 with particular emphasis on settlements and livelihood
support. With the generous support of international donors,
we aim to undertake this work without jeopardizing
macroeconomic stability.

The government's immediate policy response includes several
initiatives to meet the humanitarian needs of the people
while also safeguarding key macroeconomic objectives. These
include: (i) immediate humanitarian support to affected
individuals amounting to an estimated 0.2 percent of GDP
this year;(ii) a concessional refinancing scheme to ensure
that funding is available for small and medium enterprises,
initially set at Rs 5 billion; and (iii) measures to ensure
availability of liquidity and smooth functioning of payments
and settlements system.

The overall negative impact on GDP growth will be limited by
the initiation of rehabilitation and reconstruction.
However, this will lead to significant additional government
expenditure in 2005. We estimate that the total fiscal cost
in 2005 to be about 2 percent of GDP, with most of this
reflected in development expenditure. While there could be
some minor revenue shortfalls in some areas, we expect these
to be limited to about 1/4 percent of GDP. This will push
the fiscal deficit this year to about 9 3/4 percent of GDP
compared to the 7 1/2 percent envisaged in the 2005 budget.
The government expects to meet the additional expenditure on
account of post Tsunami relief, rehabilitation and
reconstruction programme out of donor assistance.
Additionally, external debt relief would help the government
to provide fiscal space to accommodate reconstruction
expenditure while containing domestic financing, making more
resources available to the private sector.
The country's resources have also been under severe strain
due to other external shocks namely the higher oil prices
and a severe drought in early 200. Heavy foreign debt
service payments amounting to USD 550 million also exerted
pressure on the limited foreign reserves. The 2004 has
ended up with a balance of payments deficit of USD 212
million and gross official reserves have depleted by USD 322
to USD 1,718 million at end 2004. The official foreign
loans amortization alone, excluding the debt service
payments to IMF, for which we have got some relief, in 2005-
2008 amounting to USD 2,241 is a heavy burden on the budget
and the balance of payments. The balance of payments
pressures due to high oil prices too is likely to continue.
Given this resource constraint it is only with the assurance
of enhanced generous budgetary and balance of payments
support from the donor community at highly concessional
terms, including debt relief that the urgent and massive
task of RRR (note: relief, rehabilitation and
reconstruction. Endnote) can be effectively undertaken
without undermining the development work of the rest of the
country.

In this background, the announcement of debt relief by your
Government would provide us a great encouragement.
Therefore, we shall be grateful if you could differ (sic -
should read defer) the debt service payments for a period of
3-5 years during which time we expect to complete the
reconstruction work of the affected region. Such relief
will enable us to finance the required counterpart expenses
of donor funded project and will provide us the much needed
fiscal and balance of payments space to manage the
challenges ahead.

We greatly appreciate your assistance and cooperation in
this regard.

Yours sincerely

Sarath L B Amunagama
Minister of Finance & Planning

End text.

LUNSTEAD