IMPENDING CHANGE IN GOVERNOR HOLDS PROSPECT FOR

C O N F I D E N T I A L SECTION 01 OF 02 COLOMBO 001032 SIPDIS SIPDIS DEPT FOR SA/INS; MCC FOR D.NASSIRY AND E.BURKE; TREASURY FOR S.CHUN; COMMERCE FOR E.YESIN E.O. 12958: DECL: 06/19/2021 TAGS: ECON EFIN PGOV CE SUBJECT: IMPENDING CHANGE IN GOVERNOR HOLDS PROSPECT FOR GREATER CENTRAL BANK INDEPENDENCE Classified By: EconChief Dean R. Thompson, reasons 1.4 b, d and e ¶1. (C) Summary: The unexpected resignation of Central Bank Governor Sunil Mendis, and the still unofficial announcement that he will be replaced by Senior Presidential Economic Advisor Nivard Cabraal, marks an opportunity for a weakened Central Bank to reassert its independence from Treasury Secretary PB Jayasundera. However, Cabraal's close SIPDIS relationship with the President, his desire to retain certain other responsibilities (including as senior Government of Sri Lanka (GSL) point of contact for the Millennium Challenge Corporation (MCC)) and his interest in "bolstering" certain offices in the Bank to play a more active role on development issues, raise concerns about whether or not the Bank will indeed strengthen its independence, or simply serve as another backstop to the President's economic plan "Mahinda Chintana (literally "Mahinda's Thoughts")," of which Cabraal is a principal author. End Summary ¶2. (C) On June 2, Central Bank Governor Sunil Mendis announced his resignation, effective June 30, for personal reasons. Mendis had been appointed in 2004 by then-President Chandrika Kumaratunga, following a rather inelegant ouster of then-Central Bank Governor A.S. Jayawardena following his hospitalization for a brief illness. Mendis, who had retired as the Managing Director of Hayley's Private Limited, one of Sri Lanka's largest conglomerates, the day before his appointment, was expected to bring greater management skills to the bank. Jayawardena, who had a reputation as an independently minded, tough Central Banker, was seen as a one-man show, who took almost all decisons of consequence and delegated little to bank staff. From the outset, Mendis proved to be a pleasant face for the bank, but was clearly dominated by Finance Secretary P.B. Jayasundera, who also sits on the Monetary Policy Board. In Post's experience, Mendis tended to refer all major decisions to Jayasundera and would seldom make a move without his clearance. Jayasundera, who began his career in the Central Bank, is widely seen as the most powerful player in Sri Lankan economic policy circles. ¶3. (C) That may have begun to change, however, first with Cabraal's appointment as Senior Economic Advisor, following the President's election in November 2005, and then his subsequent, parallel appointment as Secretary to the Ministry of Plans and Implementation, which siphoned off a number of Finance Ministry offices and staff. Cabraal's ascent to the Central Bank Governorship (Note: Cabraal has told us directly that he is to be named. The Presidential Secretariat has confirmed he is the President's choice, but an official appointment will reportedly not happen until Mendis' resignation takes effect on June 30. End Note) was a surprise, as his focus on his new Ministry and its implementation of the President's economic agenda has marked him as one of the most political economic players on the national scene. Cabraal has a close, personal friendship with President Rajapaksa, extending back to their school days and several family connections. While Cabraal and Jayasundera appear to work fairly well together, there are persistent rumors that both are vying for ultimate authority over GSL economicy policy. ¶4. (C) Cabraal told Econoff during a June 14 meeting that he believes he can expand the role of the Central Bank Governor, and carry several of his objectives from the Ministry of Plans and Implementation to the Central Bank. This would include his role as senior GSL point of contact for the Millennium Challenge Corporation. Cabraal says he intends to bolster the Bank's development office with an expanded rural development section and will seek ways to provide additional financing for rural businesses and farmers. When asked about the importance of showing independence from the Government, Cabraal said people will have to get used to a "new model" for the Central Bank Governor to follow, as his close relationship with the President and his role in shaping GSL economic policy is a reality that will have to be understood. ¶5. (C) To date the banking sector has been fairly mute on Cabraal's impending appointment. Some bankers, responding to allegations in a local newspaper that Cabraal has ties to a questionable business venture that has been buying stakes in COLOMBO 00001032 002 OF 002 local banks (a charge Cabraal denies),have been critical of the appointment in private. Most major banks, however, are adopting a "wait and see" approach, acknowledging Cabraal as a highly capable businessman, who may prove highly effective. While there are concerns about the notion that he might continue to explore overtly political agenda items, such as rural credit and the MCC, many hope that he will act indpendently of Jayasundera, and bring a measure of institutional independence back to the Central Bank. ¶6. (C) Comment: At this point, Cabraal is slated to be officially named on June 30 or July 1. Cabraal is a smart, capable businessman, and has been a good embassy contact. While his relationship with the President, and clear desire to expand the role of the Central Bank Governor are causes for some concern, if Cabraal is able to exert stronger influence over the bank and Sri Lankan economic policy, it could dilute Jayasundera's somewhat ethnocentric and heavy handed approach to running GSL economic policy. If Cabraal does not act independently however, and continues to rely on PB for guidance and final monetary policy decisions, it will speak volumes about PB's ultimate influence over the President and his economic policies. End Comment LUNSTEAD