SRI LANKA LIKELY TO REQUEST IMF ASSISTANCE

C O N F I D E N T I A L COLOMBO 000244


DEPT FOR EEB/IFD/OMA, EEB/IFD/ODF, SCA/INS, AND SCA/RA
STATE PLS PASS TO

E.O. 12958: DECL: 03/04/2019
TAGS: ECON EFIN PGOV CE
SUBJECT: SRI LANKA LIKELY TO REQUEST IMF ASSISTANCE

REF: A. COLOMBO 215

B. COLOMBO 61

C. COLOMBO 22

D. 08 COLOMBO 943

E. 08 COLOMBO 821


Classified By: Ambassador Robert O. Blake, Reasons 1.4 (d)


1. (C) SUMMARY: The GSL appears ready to request IMF
assistance to help cope with its otherwise looming economic
crisis. IMF officials report that a formal invitation to
begin negotiations could come from the government "within a
couple of weeks." END SUMMARY

It's bad...
--------------


2. (C) Sri Lanka's overall macroeconomic outlook continues
its downward spiral. Exports and remittances are declining
due to the global financial crisis. Attempts to raise
foreign exchange through the sale of T-bills and T-bonds to
the Diaspora and currency swaps with other governments have
not produced the desired results. China and Iran, which the
government privately assumed would provide all financial
assistance needed, have not -- to our knowledge -- provided
any new loans or other funds in recent months. The
government is unlikely to raise money through international
borrowing due to declining ratings and an overall lack of
confidence by investors. Official reserves continue to
dwindle, and currently total -- according to sources --
around USD 1.3 billion. (Note: The government requires
approximately 800-900 million for loan service payments in
2009.) The trade deficit is rising and the likely
forthcoming BOP crisis cannot be ignored.

...and we finally admit it.
--------------


3. (C) IMF's Brian J. Aitken, Deputy Division Chief, Asia and
Pacific Department and his team arrived in Colombo in late
February to undertake technical discussions with the GSL.
Aitken reported to the Ambassador and Econ Chief on March 3
that, unlike in previous discussions with the GSL in August
(ref e) and October, the government is "no longer officially
in denial." He speculated that the government has privately
conceded that there are no other alternatives. Central Bank
Governor Nivard Cabraal publicly set the stage for a retreat
from the GSL's vocal anti-IMF stance, telling Reuters on
March 2 that quote if there is an option that the IMF is
saying is on the table, that's something...we would look at.
end quote. Discussions between the GSL and the IMF team have
been very "warm and gracious," Aitken said, adding that the
GSL's collegial attitude is a significant departure from the
past.


4. (C) Although the IMF has yet to formulate what an
assistance package and its conditions will entail, Aitken and
IMF Senior Economist for the Asia and Pacific Department
Ebrima Faal said they would like to ideally look to help the
government rebuild reserves while addressing its underlying
fiscal problems, including its departure from its own
requirement under the 2003 "Fiscal Management
(Responsibility) Act" that its budget deficit not exceed 5%
of GDP. Aitken and the Ambassador agreed that significant
cuts in military spending will be required, but Aitken said
the IMF would not specifically tell the government to do so
due to the sensitivity of this issue. Faal noted that the
government will need to look closely at the overvaluation of
the rupee, its state-owned enterprises, and its financial and
banking sectors, especially in light of an increase in
non-performing loans and low confidence in these sectors.

Tread Cautiously
--------------


5. (C) Ambassador advised Aitken and Faal that, although the
GSL excels at making promises, it has proven less effective
at fulfilling them. Very few senior government leaders and
advisors have any true grasp of economics; as such, they do
not understand the importance of making prudent yet
politically difficult decisions in the near term. Ambassador
advised the IMF team to work closely with former Treasury
Secretary PB Jayasundra, Minister for Export Development and
International Trade GL Peiris, Senior Political Advisor Basil
Rajapaksa, and Tourism Minister Milinda Moragoda to ensure
the President hears and understands the severity of the
situation. Aitken reported that the team is already working
closely with Moragoda and Jayasundra, and is reaching out to
others.


6. (C) The Ambassador also cautioned against getting out
ahead of discussions in the press. Because of statements to
date by the President and senior Cabinet members, the
government will need to walk slowly back from its recent
anti-IMF statements. He also cautioned that the timing of
possible general elections sometime this year further
complicates matters for the President. Aitken noted that the
IMF will continue to keep the details of any possible deal
private until the government is prepared to go public. He
acknowledged that, due to local political conditions, it will
be very hard for the government politically to acknowledge
its needs for an IMF bailout. Aitken said IMF would be happy
to let the government "sell" the deal domestically however it
needs to do so. For example, IMF would be comfortable if the
government chose to publicly state that it, as many
countries, is benefiting by IMF programs that are helping
those countries affected disproportionally by the global
financial crisis.

Comment
--------------


7. (C) The government needs help. It is a positive
development that it a) finally recognizes it and b) will
almost certainly turn to the IMF to receive it.
Nevertheless, the government continues to maintain an
unlikely 4-5% GDP growth estimate for 2009 and a hope that
exports and remittances will perform better than is
realistic. (Note: Fitch forecasts 3% GDP growth, and the
Economist Intelligence Unit (EIU) 3.2%; Faal reports that IMF
believes it will be closer to 2%. End note.) This calls
into question whether he government is ready to make the
deep sacrifics that will be necessary to facilitate IMF
assisance. Economics aside, no matter how well the
government sells the deal, it will suffer some political
damage for returning to the IMF, and even more as it moves
forth with implementation of difficult decisions. Post hopes
the government is truly ready to move foward, but only time
will tell.

BLAKE