SRI LANKA: 2006 GDP GREW 7.4 PERCENT; 2007 GROWTH LIKELY TO

UNCLAS SECTION 01 OF 02 COLOMBO 000536 SIPDIS SENSITIVE SIPDIS STATE FOR SCA/INS DOL/ILAB FOR TINA MCCARTER MCC FOR S GROFF, D NASSIRY AND E BURKE TREASURY FOR LESLIE HULL E.O 12958: N/A TAGS: EAID ECON EINV ETRD PREL CE SUBJECT: SRI LANKA: 2006 GDP GREW 7.4 PERCENT; 2007 GROWTH LIKELY TO BE SLOWER REF: COLOMBO 0024 ¶1. (SBU) Summary and comment: Sri Lanka's Gross Domestic Product (GDP) grew by 7.4 percent in 2006, its highest annual growth rate since 1978. The Central Bank Governor announced that he expects 2007 growth to come in between and 7.5 and 8 percent. The Asian Development Bank (ADB) forecasts only 6.1 percent GDP growth for Sri Lanka in 2007. Embassy thinks the ADB assessment is more realistic, as resurgence of Sri Lanka's ethnic conflict and the Central Bank's efforts to control double digit inflation will both dampen growth. End summary and comment. CENTRAL BANK EXPECTS STRONG GDP GROWTH TO CONTINUE... -------------- -------------- ¶2. (U) Sri Lankan Central Bank Governor Nivard Cabraal, in a March 30 press event, reported that Sri Lanka's 2006 Gross Domestic Product (GDP) grew by 7.4 percent. Delivering the Bank's 2006 annual report to President Rajapaksa, Cabraal noted that this was Sri Lanka's highest GDP growth since 1978. He further announced that he expects 2007 GDP growth to be even stronger -- between 7.5 and 8 percent. The President declared that his government's ten year plan targets 8 percent annual growth for the next five years as essential "to raise the living standards of our people to match those of the developed world even to some extent." ¶3. (U) In the years 2002 through 2005, Sri Lanka's GDP growth ranged from 4 to 6 percent. The healthy 2006 growth came on the strength of services and industry. Services, which account for about two thirds of GDP, grew by 8.3 percent. Industry accounts for just over a quarter of GDP and grew by 7.2 percent. Agriculture makes up just over a tenth of GDP, and grew by 4.7 percent. According to the Asian Development Bank, the growth in agriculture was unexpectedly above its recent trend of only 1 percent annual growth, primarily as a result of good rains. ... BUT ADB SAYS GROWTH LIKELY TO SLOW IN 2007 -------------- - ¶4. (U) The Asian Development Bank, in its recently published Asian Development Outlook, predicted that Sri Lanka's GPD growth in 2007 would cool to 6.1 percent. (http://www.adb.org/Documents/Books/ADO/2007/ SRI.pdf) The ADB expects the resurgence of the conflict and tighter fiscal and monetary policies to be the major factors inhibiting growth. The ADB noted that the Central Bank was making a concerted effort to control inflation, which was running at about 20 percent year-on-year in January 2007 (reftel). The Bank's tighter monetary policy would reduce credit both to the private sector and to government, forcing both to restrain spending. The ADB's prediction appears to be supported by the Central Bank's own assessment that fourth quarter 2006 GDP grew by 6.2 percent, signaling the beginning of a cooling trend. COMMENT: SRI LANKA LAGGING WITHIN SOUTH ASIA -------------- ¶5. (SBU) The government is understandably pleased with the 7.4 percent growth figure. Considered on a regional basis, however, that growth rate was only mediocre. According to the ADB, South Asia as a whole grew by 8.7 percent in 2006. So, while Sri Lanka outperformed Bangladesh and Pakistan (respectively 6.7 and 6.6 percent 2006 GDP growth, per the ADB),it lagged behind India, Afghanistan, Bhutan, and Maldives. The ADB estimates that Sri Lanka's 2007 growth will trail Bangladesh's and Pakistan's, exceeding only that of Nepal. This is consistent with the widespread consensus that the conflict in Sri Lanka is costing the country about 2 percent of additional growth potential per year -- exactly the amount that could yield the 8 percent growth rate that President Rajapaksa says the country needs to develop. COLOMBO 00000536 002 OF 002 BLAKE