Identifier
Created
Classification
Origin
09COLOMBO540
2009-05-18 12:07:00
CONFIDENTIAL
Embassy Colombo
Cable title:  

SRI LANKA: CB GOVERNOR RESPONDS TO U.S. IMF

Tags:  ECON EFIN PGOV CE 
pdf how-to read a cable
VZCZCXRO6860
PP RUEHBI
DE RUEHLM #0540/01 1381207
ZNY CCCCC ZZH
P 181207Z MAY 09
FM AMEMBASSY COLOMBO
TO RUEHKA/AMEMBASSY DHAKA PRIORITY 1678
RUEHIL/AMEMBASSY ISLAMABAD PRIORITY 8686
RUEHKT/AMEMBASSY KATHMANDU PRIORITY 6920
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 3051
RUEHCG/AMCONSUL CHENNAI PRIORITY 9309
RUEHBI/AMCONSUL MUMBAI PRIORITY 6615
RUEHC/SECSTATE WASHDC PRIORITY 9999
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 04 COLOMBO 000540 

SENSITIVE
SIPDIS

STATE FOR EEB/IFD/OMA BRIANA SAUNDERS AND SCA/INSB
TREASURY FOR SUSAN CHUN

E.O. 12958: DECL: 05/18/2019
TAGS: ECON EFIN PGOV CE
SUBJECT: SRI LANKA: CB GOVERNOR RESPONDS TO U.S. IMF
CONCERNS

REF: A. COLOMBO 523

B. COLOMBO 508

C. OWEN-MOORE EMAIL 05/06/09

D. COLOMBO 488

E. SECSTATE 41959

F. COLOMBO 449

G. COLOMBO 431

H. COLOMBO 385

I. COLMOBO 285

J. COLOMBO 244

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

C O N F I D E N T I A L SECTION 01 OF 04 COLOMBO 000540

SENSITIVE
SIPDIS

STATE FOR EEB/IFD/OMA BRIANA SAUNDERS AND SCA/INSB
TREASURY FOR SUSAN CHUN

E.O. 12958: DECL: 05/18/2019
TAGS: ECON EFIN PGOV CE
SUBJECT: SRI LANKA: CB GOVERNOR RESPONDS TO U.S. IMF
CONCERNS

REF: A. COLOMBO 523

B. COLOMBO 508

C. OWEN-MOORE EMAIL 05/06/09

D. COLOMBO 488

E. SECSTATE 41959

F. COLOMBO 449

G. COLOMBO 431

H. COLOMBO 385

I. COLMOBO 285

J. COLOMBO 244

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


1. (SBU) Summary: Central Bank Governor Nivard Cabraal, in a
written response to DCM, classified U.S. attempts to "block"
the GSL's IMF Stand-by Arrangement (SBA) as "misplaced" and
"puzzling," noting that such an action could set a precedent
for future IMF loan requests. Cabraal highlighted the GSL's
excellent debt servicing record, its compliance with all IMF
requests, and the country's ability to continue with its
economic, social, and financial programs despite the
conflict. He also lamented that the misinformation campaign
against the GSL is painting an unfair picture of a government
that deeply cares about the well-being of all of its people.
Cabraal stated on May 18 that, despite efforts to look
elsewhere for funds, the GSL remains keen to obtain an IMF
SBA as it will lead to a positive impact on the economy and
encourage post-conflict investment. End Summary.


2. (SBU) In a written response (see para 6) to post's
delivery of ref c points, on May 15 Central Bank Governor
Nivard Cabraal called into question U.S. efforts to block or
delay IMF facilities on political or non-economic factors,
underscoring that the IMF's code of governance does not
provide for the Executive Board to consider extraneous issues
in its decision making. He warned that such actions may set
a precedent for future IMF facilities. Cabraal highlighted
that both the GSL's excellent debt service record and its
ability to maintain economic, social and financial programs
"in a satisfactory manner" throughout the conflict should
lead the U.S. and others to the "logical conclusion" that
ground conditions will ease following the end of the
conflict, spurring Sri Lanka's economic and social
development and the country's financial capabilities.



3. (SBU) Cabraal also noted the GSL's strong commitment to
develop the north quickly in order to improve the living
conditions of its citizens, rather than to "impress" the
international community. He wrote with dismay about the
negative propaganda that have led others to believe that the
GSL's humanitarian practices have deteriorated.


4. (SBU) Perhaps in an effort to address U.S. concerns,
Cabraal noted that as a result of the forthcoming defeat of
terrorism, there is "now the real possibility of developing a
time table and a definite set of strategies for the revival
and reconstruction effort."


5. (C) Speaking with DCM and Econ Chief on May 18, Cabraal
noted that the government was successful at increasing
reserves in April, and will do so again in May. While
positive that the government is slowly edging further away
from a balance of payments crisis, he outlined that the
government is still very keen to obtain an IMF SBA because of
the positive effect it will have on the economy. However, in
the meanwhile, he confirmed that the government is in talks
with several other countries (Libya (USD 500mn),India (USD
600mn),China (amount TBD)) for loans. To date none of these
loans have been finalized. Some may not be; Tourism Minister
Milinda Moragoda told DCM on May 15 that the much-discussed
Libya loan is in doubt.


6. (SBU) Substantive Language of the Letter:

Begin Quoted text:

Issues raised as per your note:

With regard to your request for an IMF stand-by arrangement,
we are concerned about your ability and commitment to carry
out an effective program in the current conflict

COLOMBO 00000540 002 OF 004


circumstances.

Separately, your conduct in the final stages of this ear, and
the way humanitarian issues are handled, will greatly
influence your ability to reconcile and reconstruct your
country after the conflict, and will also greatly influence
the willingness of the international community to support you
in your reconstruction efforts.

Until the humanitarian situation in the north is clarified,
it will be difficult to assess the actual costs of meeting
the immediate and longer term needs of the people,
reconstruction, and further security expenditures. We urge
you to improve your humanitarian practices with an eye
towards gaining wide donor support for your near-term
reconstruction needs.

The following are our broad reactions in relations to your
concerns which views we shared with you at our meeting as
well:

The conflict situation in Sri Lanka is not a current
phenomenon or development. This conflict has been on-going
in our country for over 25 years. During such period, while
facing one of the most brutal terrorist groups in the world,
our country has been able to continue with its economic,
social and financial programs in a satisfactory manner. At
the same time, it has also been able to maintain an
impeccable debt servicing record without a single default.
Further, during this period of prolonged conflict, the IMF
has disbursed loans to Sri Lanka on eighteen occasions under
nine facilities. In each such program, Sri Lanka has
honoured its commitments and ensured that repayment is done
without a single delay or default.

It is now common knowledge that Sri Lanka's terrorist
conflict is reaching its final stages. Therefore, it would
be logical to expect that the ground conditions would greatly
ease after the conflict, so as to spur the country's economic
and social development. In that scenario, it is likely that
the financial capability of the country also correspondingly
improve further. Thus, we would be able to fulfill the
conditions of the proposed IMF program with even greater
confidence. As far as Sri Lanka's commitment towards debt
servicing is concerned, the country has shown its deep
commitment in no uncertain terms with an impeccable record of
debt servicing. In fact, even on the day that the LTTE
suicide bomb truck exploded its deadly cargo at the Central
Bank headquarters in a fashion similar to the 9/11 Al-Qaeda
attack at the World Trade Center in New York, the Central
Bank staff, many of whom were gravely wounded, were at the
disaster management site in a matter of hours after the
blast, making the repayments that were due on that fateful
day!

It must also be noted that the currently proposed facility of
USD 1.9 billion is designed to be disbursed in several
tranches over a 24 month period. Such periodic disbursements
would be based on the effective fulfillment of the several
program targets. If, therefore, the Sri Lankan authorities
fail to implement any components of the agreed program, the
next tranche could be held back by the IMF. Further, with
regard to the disbursement of the first tranche, the
Government and the Central Bank have already implemented all
prior actions as agreed with IMF. Therefore, any concerns
regarding the ability or the commitment on the part of the
Sri Lankan authorities to adhere to an effective program,
would be essentially misplaced.

For purposes of record, may we also state that the Sri Lankan
authorities have already finalized each component of the
Letter of Intent with the IMF staff and reached complete
agreement on all key macro-economic targets and policies to
be implemented under the program. Unfortunately however, we
have been thereafter informally informed that the current
delay in submitting the proposal to the Executive Board at
the IMF is only due to the fact the US has indicated to the
IMF Management that they want Sri Lanka's request for the
stand-by facility delayed, which is obviously for reasons
extraneous to economic factors.


COLOMBO 00000540 003 OF 004


The second observation set out in your note is also puzzling
to us. It is well known that the IMF's code of governance
does not provide for the Executive Board to consider
extraneous issues other that economic issues in relation to
its decision making. In fact, were informed by reliable IMF
sources that, in its long history, the IMF has never
experienced any instances where member countries and/or
Executive Board members have sought to "block" or delay
facilities that have been finalized at the staff level, on
political or non-economic issues. Your observation
unfortunately encompasses a new dimension whereby extraneous
matters which clearly stretch beyond the current mandate of
the IMF are being brought into the IMF's decision-making
process.

In recent past, the IMF has made many public pronouncements
that the Fund is keen and willing to help member countries
that have been adversely affected by the global financial
crises. Further, in response to the current situation,
several wealthy member countries have already pledged to
augment the resources of the IMF by offering enhanced
financing to meet funding for needy countries. In that
light, it is naturally disappointing that the Sri Lankan
stand-by arrangement is being delayed in a manner that is
clearly contrary to the IMF objectives, governance
structures, values, rules and conventions. Needles to say,
such a "block" may also give rise to an unfortunate
precedence which may be cited by others too, when IMF
facilities are to be submitted for approval in the future.

In your note, we also observed that you have raised certain
doubts regarding the commitment and ability of the Sri Lankan
government to provide relief to internally displaced people
and reconstruct the affected areas. In that regard, it
should perhaps be noted that the Government has already
demonstrated its ability and commitment by virtue of its
handling of the Eastern Province in the post-conflict period,
in a very successful manner. In the East, not only has a
substantial amount of investment already been made, but
democratically elected local and provincial councils too have
been established and are functioning in accordance with the
law. Further, you may also particularly note that His
Excellency President Mahinda Rajapaksa has recently appointed
a high-level 19 member Task Force to deal with Resettlement,
Development and Security in the North. All these actions,
(not mere words),clearly confirm the Government's ability
and commitment.

It has also been acknowledged by many, including those of the
international community, that conditions in the Eastern
Province have already returned tot near normalcy in a very
short period after a prolonged period of conflict. In fact,
such an outcome has been achieved much earlier that the world
community would have ever imagined. Elections have been
held; economic activities have been revitalized and expanded;
harmony within different ethnic groups has been established;
infrastructure has been developed at a rapid pace; and most
importantly, people of all races continue with their normal
lives without fear or violence. Therefore, any misgivings
and concerns about the Sri Lankan Government's ability to
reconstruct the North in a very quick time would be clearly
misplaced, in the light of the Government's exemplary track
record.

In our own way, we at the Central Bank have been preparing
ourselves to expand the banking system in the newly liberated
areas by quickly facilitating the opening of many banking
outlets by commercial banks. By doing so, we believe we
would be in a position to implement new livelihood
development programs impacting the people in the North.
Needless to say, our focus and commitment to reconstruct
these newly liberated areas, stems from our own intense
desire to develop these areas expeditiously and thereby
improve the living conditions of our people, and not so much
to "impress" the international community. At the same time,
as already indicated by His Excellency President Rajapaksa,
we would certainly welcome the efforts of all nations towards
this reconstruction effort and, in that context, we hope that
the United States too would contribute actively to this
endeavor, as indeed it has done in the past.


COLOMBO 00000540 004 OF 004


It is now a well know fact that most of the criticisms and
accusations leveled against the Sri Lankan Government have
been cleverly organized and disseminated by pro-terrorist
mis-information groups. In fact, the international medial
has been regularly embarrassed by the subsequent revelations
made by the Sri Lankan authorities which have given lie to
the many outrageous claims made by the mis-information
groups. Nevertheless, those groups have been able to mislead
many foreign governments, NGOs, etc, by their sustained
campaigns. In particular, during the recent past, these
false propaganda with even greater vigour in the face of
massive defeats suffered by the terrorists at the ground
level, and the reason for the build up of the perception that
Sri Lanka's humanitarian practices have deteriorated, is
essentially as a result of such major mis-information
campaigns, and not because of the actions of the Government.

For the record, may we state that the Sri Lankan Government
has always been deeply conscious of the well-being of all its
people, while embarking on a tough battle to rid the country
of the scourge of terrorism so as to liberate the people from
the clutches of the LTTE. We must also understand that the
war on terror is not an easy one. Terrorists resort to
various ruses and practices to discredit those who oppose and
fight terrorism. Terrorists have no sympathy for civilians
and often subject them to violence in order to achieve their
own objectives. The US has also experienced this situation
and would therefore understand the challenge of dealing with
terrorists who use innocent people as human shields. Today,
Sri Lanka is engaged in the largest ever hostage rescue
operation in the history of the world, where thousands of our
own citizens held hostage by the world's most ruthless
terrorist group, are being systematically rescued. So far,
the Sri Lankan forces have been able to rescue over 170,000
such hostages and more are being rescued daily. Further, as
you may be aware, the LTTE terrorists are now confined to a
small tract of land where our forces are bravely attempting
to rescue the remaining trapped civilians held hostage. Even
in these very trying and dangerous conditions, the Government
has taken humanitarian approach where every precaution is
being taken to ensure the safety of the civilian population.
As a result of such actions, the capacity of the terrorist
group is weakening rapidly and it is almost certain that,
very soon, the entire country would be freed from the
clutches of terrorism.

We also believe that the impeding defeat of terrorism, there
is now greater clarity in the humanitarian situation in the
North. As a result, there is now the real possibility of
developing a "time table" and a definite set of strategies
for the revival and reconstruction effort. In fact, the
present ground situation offers greater clarity than on 2nd
March 2009, when Sri Lanka's request was first made to the
IMF for the stand-by arrangement. According, we believe this
new situation should provide the US Government with greater
confidence in providing support for the near-term
reconstruction needs, than in the recent past.

Finally, may we state that we are deeply appreciative of the
frankness and candour with which we were able to discuss this
issue with you. It is perhaps a reflection of the fact Sri
Lanka and the United States have been countries with a
history of excellent relations. We also believe that the
USA, as the leading super power of the world, both militarily
and economically, would not, in any way, want a large segment
of Sri Lankan people who are emerging out of untold suffering
at the hands of a terrible terrorist group, to suffer further
as a result of a financing delay by the IMF and it s
resultant consequences. Accordingly, we do hope that his
unfortunate issue could be quickly put to rest, and for Sri
Lanka to receive the support of the US Executive Director on
the Board of the IMF to approve our IMF facility. In that
respect, we earnestly look forward to your Government's
positive response. End quoted text.
BLAKE