SRI LANKA: GOVERNMENT UNVEILS ECONOMIC STIMULUS PACKAGE

UNCLAS SECTION 01 OF 02 COLOMBO 000022 SENSITIVE SIPDIS STATE FOR SCA/INS AND EEB/IFD/OMA STATE PASS USTR FOR ADINA ADLER AND VICKY KADER TREASURY FOR ANNE ALIKONIS E.O 12958: N/A TAGS: ECON EFIN PGOV KMCA CE SUBJECT: SRI LANKA: GOVERNMENT UNVEILS ECONOMIC STIMULUS PACKAGE Ref: (a) 08 STATE 134459 (b) 08 COLOMBO 1133 (c) 08 COLOMBO 1123 (d) 08 COLOMBO 922 ¶1. (SBU) Summary: On December 30, the government announced a 16 billion rupee (USD 140 million) economic stimulus package intended to aid various ailing economic sectors and ensure 6% GDP growth in ¶2009. Actual implementation mechanisms for the plan remain unclear, and certain components of the package must still be approved by Parliament. While export industries in particular can use the help, the move is likely timed to bolster support for the government in advance of provincial council elections. End Summary. ¶2. (U) On December 30, President Rajapaksa announced a 16 billion rupee (USD 140 million) stimulus package to help various ailing economic sectors. The package was approved earlier in the week at a special cabinet meeting. Certain proposals, such as changes in tax regulations and subsidies, will require Parliamentary approval. Details of the package remain vague; no formal text of the plan has been released. However, in a memorandum to the Cabinet, the President underscored that the stimulus offers a reduction in fuel prices, soft loans and a moratorium on repayments of existing loans and price support to selected industries hard hit by the global recession, such as tea, rubber and tourism. The package will be funded through spending cuts and new import taxes. According to Sarath Amunugama, former Minister of Enterprise Development and Investment Promotions, and Nivard Cabraal, Central Bank Governor, the main objective of the package is to ensure a six percent growth rate in 2009. Amunugama stated the package is a proactive strategy to guarantee the government's 2009 budget forecasts are achieved. Salient features -------------- ¶3. (U) Key components of the stimulus package: --Fuel prices: Diesel, kerosene and furnace oil reduced by Rs 10 per liter to Rs 70 (USD .61) per liter. Gasoline reduced by Rs 2 per liter to Rs 120 (USD 1.05). Three-wheeler, or auto rickshaw, drivers who install meters in their vehicles will be given gasoline at a lower price. --Electricity: Removal of a 15% surcharge on electricity bills for industries and tourist hotels. --Credit facilities: Reduction of interest rates to companies in specific sectors that maintained employment and export levels in 2008, namely construction, tea and rubber factories, garment and porcelain producers, hotels, and small and medium enterprises. --Tea: Loans amounting to one month's working capital for tea factories with a government guarantee; a moratorium on loan repayments for companies undergoing factory modernization projects; a new state trading institution to buy tea leaves at a floor price of Rs 40 per kg; and a new fertilizer subsidy for tea producers until the price of tea leaves reach Rs 45 per kg. Tea imports will also be restricted. --Rubber: A floor price of Rs 150 per kg for rubber; interest rates will be reduced and repayment periods extended; financial aid will be provided to new manufactures of rubber based products; a tax on rubber exports will be lifted; and new taxes on rubber and rubber product imports will be implemented. --Tourism sector: Concessionary loans and rescheduling of loans to hotels that maintain current employment levels. --A temporary stop of legal action against loan defaulters and cancellation of fines for late payment of loans for a period of one year for various (unspecified) industries. --Lifting of the Economic Service Charge (ESC) - 0.25% - for export manufacturing companies with a to-be-determined level of local value addition. COLOMBO 00000022 002 OF 002 --New trade opportunities to be explored with Russia and Iran (for tea) and India and China (for rubber). --Apparel and leather product exporters that do not lay off workers and maintain export income in 2009 at 2008 levels will receive a 5% subsidy of export income. ¶4. (U) According to a memorandum signed by the President detailing the package and published in a leading Sunday Newspaper, the government expects to finance the package through various measures. These include reducing expenditures of the president, ministers and members of parliament (Rs 2 billion),increased import taxes (Rs 6 billion),improved revenue from loss-making state institutions (Rs 3 billion) and deferrals of capital spending (Rs 3 billion). ¶5. (U) Although fuel prices have already been reduced in accordance with the package, further details and implementation mechanisms are expected to be finalized in the next few weeks, after the Cabinet confirms the minutes of the December 30 cabinet meeting. Meanwhile, there are mixed reactions. Industrialists are skeptical about the success of the package, believing that the problems they face are too severe for the package to make a significant positive difference. For instance, tea smallholders, noting significant difficulties in the last quarter of 2008, say the government intervention is not adequate and has come too late. The price offered by the government is inadequate to meet production costs, including plantation wages. Rubber industrialists also say that the industry needs a better price from the government. Newspapers quoted President of the National Chamber of Exporters Rohan Fernando as saying relief measures are not adequate and alleges that these are populist measures probably done for political gain. Conversely, a leading tourism industry official did state that the package offered to the tourist industry is good and in line with what the industry needs; however, the government has yet to inform the industry officially, and questions as to how and when the package would be implemented remain unanswered. Comment -------------- ¶6. (SBU) Despite months of touting that Sri Lanka is immune to the global economic downtown, the package is the government's first real public acknowledgement that export and other sectors are suffering. Nevertheless, although industries can use all the help they can get, this action -- and the government's lack of ability to provide concrete informatio on its proposal -- is more likely a move to garer support in advance of provincial elections in Fbruary and to draw attention away from criticismof the high cost of retail fuel. Further, the government will face significant difficulty in raising commercial loans in 2009 to help finance its deficit and is therefore is a poor position to spend additional money it does not have. BLAKE