SRI LANKA: LTTE AIR ATTACKS HITTING THE ECONOMY

UNCLAS SECTION 01 OF 02 COLOMBO 000637 SIPDIS SENSITIVE, SIPDIS STATE FOR SCA/INS AND SCA/RA MCC FOR F REID, D NASSIRY AND E BURKE TREASURY FOR LESLIE HULL E.O 12958: N/A TAGS: ECON EINV ETRD EAIR PREL PTER CE SUBJECT: SRI LANKA: LTTE AIR ATTACKS HITTING THE ECONOMY REF: A) COLOMBO 630 B) COLOMBO 491 C) 2006 COLOMBO 2104 ¶1. (SBU) Summary: The Liberation Tigers of Tamil Eelam (LTTE) attack early Sunday morning on oil storage facilities outside Colombo (septel) was the terrorist organization's first aerial strike aimed at an economic target. Whether by directly hitting economic infrastructure or by indirectly raising fears that Sri Lanka's skies are not safe, a continued LTTE air campaign is likely to hurt Sri Lanka's ability to attract investment, tourists, and trade contracts. This is probably the LTTE's goal -- to make the government feel economic pain that equals or exceeds the military pain that the LTTE can inflict. End summary. AIR ATTACK ON OIL STORAGE FACILITIES IS FIRST ON ECONOMIC TARGET -------------- ¶2. (SBU) The April 29 air attack on oil storage tank facilities outside of Colombo marked the first time the ethnic separatist Liberation Tigers of Tamil Eelam (LTTE) have used their newly deployed aerial bombing capacity against an economic target. The facilities are primarily owned by the government, but the attack also hit structures owned by private firms Shell and Indian Oil Company. With impressively accurate bomb placement, the LTTE nearly imposed major damage to the country's largest cluster of oil and fuel storage facilities. AIR ATTACKS DISRUPTING CIVIL AVIATION -------------- ¶3. (SBU) The LTTE air attacks against military and economic targets are also disrupting civil aviation. Sunday's attack caused Sri Lankan authorities to briefly close Colombo's international airport, reroute inbound flights and delay outbound flights. The airport was also closed briefly April 26 when the military began firing antiaircraft guns from Katunayake Air Force Base, adjacent to Colombo's Bandaranaike International Airport, in response to a possible air attack (ref A). ¶4. (SBU) Following the latest attack, two international airlines announced they were suspending flights to Sri Lanka. One, Cathay Pacific, had only just resumed flights on April 22, after having cancelled them following the initial LTTE air attack March 26 (ref B). The other, Emirates, is one of the largest carriers to and from Sri Lanka. In an April 30 briefing for the diplomatic community regarding the weekend air attacks, Sri Lankan Minister of Foreign Affairs Bogollagama said the government had started discussions with Emirates to convince the airline to resume flying to Sri Lanka using daytime flights. (Note: the Emirates cancellation is a particularly sharp blow to the government, because Emirates operates and owns 43 percent of the national carrier Sri Lankan Airlines.) TOURISM, ALREADY WAY DOWN, SURE TO DECLINE FURTHER -------------- -------------- ¶5. (SBU) The air attacks are putting further strain on Sri Lanka's already sagging tourism industry (ref C). Tourism, Sri Lanka's fourth largest foreign exchange earner, is already down by 15 percent for the first three months of 2007, compared to the same period in 2006. The air attacks are causing authorities to take steps, aside from the diverted flights, that are likely to further deter tourists. When reacting to nighttime air raids around Colombo, the government now shuts off the city's electricity to improve air defense visibility and reduce the LTTE's ability to identify targets on the ground. The Defense Ministry has instructed hotels not to use their backup generators during these power cuts. Local and international media reporting have described fearful tourists at the international airport being instructed by airport security to take cover as the military fired antiaircraft weapons COLOMBO 00000637 002 OF 002 nearby. BBC online coverage of the attack should images of tracer fire arcing above the capital. INTERNATIONAL CREDIT RATER FITCH SAYS CONFLICT KEEPS SRI LANKA'S SOVEREIGN RATING OUTLOOK NEGATIVE -------------- -------------- ¶6. (SBU) On April 23, international credit rating agency Fitch Ratings announced it was maintaining its BB- rating for Sri Lanka. The rating translates to "speculative," or sub-investment grade, with a negative outlook. Fitch first imposed the negative outlook a year ago as the conflict heated up. Sri Lankan Central Bank and Treasury officials had hoped to convince Fitch that the Sri Lankan economy's resilience to the conflict justified removal of the negative outlook or even an upgrade in the rating. Fitch stated in its ratings release that "the domestic security situation continues to pose risks to economic stability and growth." COMMENT: LTTE ATTACKS ON ECONOMIC TARGETS RAISE THE COST OF WAR FOR THE GOVERNMENT -------------- -- ¶7. (SBU) While many of Sri Lanka's critical private and public infrastructure facilities are well guarded against attack by land or sea, they are more vulnerable to the new air attack threat. The LTTE, in directing its latest air attack at an economic target, is surely aware that it can impose both a direct and an indirect economic cost on the government. Actually taking out a major infrastructure installation would of course impose major costs. But even without scoring such a blow, the LTTE inflicts damage on the Sri Lankan economy by deterring tourists, scaring potential investors, increasing insurance rates, and raising the cost of borrowing for the government. If the LTTE is unable to push back against the Sri Lankan armed forces on the battlefield, it is likely to resort increasingly to attacks on economic targets to raise the cost of the war for the government. MOORE