SRI LANKA: FINANCE SECRETARY EXPECTS GROWTH AND STABILITY

UNCLAS SECTION 01 OF 02 COLOMBO 001569 SIPDIS SENSITIVE, SIPDIS STATE FOR SCA/INS, EB/CBA MCC FOR F REID, D NASSIRY AND E BURKE E.O 12958: N/A TAGS: ECON EINV ETRD PTER CE SUBJECT: SRI LANKA: FINANCE SECRETARY EXPECTS GROWTH AND STABILITY ¶1. (SBU) Summary: Finance Secretary PB Jayasundera, the government's economic mastermind, expects Sri Lanka's GDP to grow by 7 percent this year, fueled by strong performance in the service, construction, and manufacturing sectors, and by healthy export growth. The government is pushing hard to steer foreign and domestic investment toward infrastructure, in order to stimulate further potential growth. Jayasundera told the Ambassador that Sri Lanka experienced a surge in economic activity in Sri Lanka over the last two to three years, and that he believed Sri Lanka's resilience to shocks like the 2004 tsunami and years of conflict would enable it to continue to perform at this level. End summary. Economy is Thriving ... -------------- ¶2. (SBU) Finance Secretary PB Jayasundera, who, along with Central Bank governor Nivard Cabraal, runs the Sri Lankan economy, told Ambassador Blake September 19 that he expected current strong economic performance to continue in coming years. Jayasundera outlined how and why the economy had performed well so far this year: - 7 percent GDP growth driven by a "buoyant" service sector; booming post-tsunami construction; and strong production of tea, gems, leather, ceramics, and wood products. - Export growth of 10-12 percent due in part to free trade agreements with India and Pakistan and preferential trade (GSP+) with the European Union. - Productivity improving. - Government revenue rising to 17 percent of GDP, from 14.5 percent a few years ago, on higher VAT, income, and excise tax collection. - Balance of payments remaining positive partly on the strength of remittances from Sri Lankans working abroad. ... and Outlook is Positive -------------- ¶3. (SBU) Jayasundera added that intensive focus on infrastructure development would remove "structural impediments to growth" and generate private sector enthusiasm for further investment in Sri Lanka. He listed ports, roads, and electricity as the government's three priorities for infrastructure improvements, to be supplemented by investment in water supply, education, and health. The rural south and northeast lagged in economic development, so the government would direct new investment to those areas. Not Worried about Inflation, Oil Prices, or Conflict -------------- -------------- ¶4. (SBU) Ambassador Blake asked how the government could keep inflation in check as it increased government spending to improve infrastructure. "Foreign funding," Jayasundera answered, noting that Sri Lanka had USD 5 billion in the aid pipeline which would be directed towards infrastructure projects. This would enable the government to reduce its annual deficit spending to 5 percent of GDP from over 10 percent now. Jayasundera added that the government planned "monetary restraint to the maximum extent." ¶5. (SBU) Jayasundera recognized that Sri Lanka's dependence on imported oil was a major risk, and noted that the value of oil imports so far this year had increased to USD 1.4 billion from USD 800 million at this point last year. But he said that exports, remittances, and the service sector were keeping the balance of payments in the black. Further, Sri Lanka's resilience to shocks like the 2004 tsunami and years of conflict made these targets realistic even in the face of possible renewed ethnic conflict. TIFA Talks and Trade Mission -------------- ¶6. (SBU) Ambassador Blake noted that Deputy U.S. Trade Representative Kiran Bhatia would potentially lead the U.S. side in Trade and Investment Framework Agreement (TIFA) talks late this year. "We will go as fast as you are ready to go," the Ambassador said, adding, "we need signals that you are ready to remove obstacles that do exist." The Ambassador noted that business people in Washington had told him that they encountered difficulties doing business in Sri Lanka. Cases like the government's refusal to pay power plant operator AES for power it had produced under a special contract could "poison" the investment environment. When small and COLOMBO 00001569 002 OF 002 medium size companies see that a big player like AES could not get its contract honored, the smaller firms get spooked. ¶7. (SBU) The Ambassador added that he expected a major trade mission to India to send a spin-off group to Sri Lanka in December. It was important that Sri Lanka have a good story to tell, and good opportunities to show. The Ambassador urged Sri Lanka to conduct an ongoing dialogue with the private sector, to hear what the government could do to facilitate their business. Terrorism Finance -------------- ¶8. (SBU) The Ambassador raised terrorism finance, saying that the United States was prepared to help Sri Lanka fight terrorism and that the financial side was important. He noted the assistance the United States was providing to help Sri Lanka get its financial intelligence unit (FIU) operational, and asked what more we could do. Secretary Jayasundera said that Sri Lanka appreciated the FIU assistance, as "we have had weakness in that area in the past" and promised to coordinate with the Embassy to identify other areas for cooperation. Comment -------------- ¶9. (SBU) Finance Secretary PB Jayasundera has a firm grip on economic principles and on the prospects and challenges for the Sri Lankan economy. He is right that the economy performed well during the peaceful 2003-2005 period. Economic performance figures for the first six months of 2006 reflect the economic circumstances that prevailed during the ceasefire period. The economy's performance in the second half of this year and into 2007 will indicate whether it is as resilient as Jayasundera hopes. BLAKE