FINANCE SECRETARY OUTLINES GSL DEVELOPMENT PLANS

C O N F I D E N T I A L SECTION 01 OF 02 COLOMBO 000981

SIPDIS

E.O. 12958: DECL: 10/22/2010
TAGS: CE ECON ETRD PGOV
SUBJECT: FINANCE SECRETARY OUTLINES GSL DEVELOPMENT PLANS

Classified By: Ambassador Butenis for Reasons 1.4 (B, D)



1. (SBU) Summary. Influential powerbroker P.B.
Jayasundera has returned to the government as the Finance
Secretary, following a year-long exile due to corruption
issues. In an introductory call with Ambassador Butenis,
Jayasundera described government plans to reconstruct the
North and East that include a role for foreign investors.
Jayasundera commented that the global financial crisis had
had a moderate impact on Sri Lanka. Sri Lanka plans a major
reform of its tax structure, which is also required to
fulfill an IMF target. Finally, Jayasundera opined that the
recent arrest in the United States of Raj Rajaratnam for
insider trading will have not have a great impact on the Sri
Lankan economy. End Summary.

Background on Finance Secretary Jayasundera


2. (C) Jayasundera is a key economic advisor to President
Rajapaksa, and Rajapaksa pushed to bring Jayasundera back
after a corruption scandal. President Rajapaksa serves as
his own Finance Minister, but Secretary Jayasundera is the
power behind the throne. Jayasundera has real influence with
President Rajapaksa and serves as the President,s chief
troubleshooter on financial matters. His exile from public
service followed his actions during the privatization of
Lankan Marine Services, when Jayasundera was alleged to have
used his influence to lower the price paid by the local
conglomerate John Keells Holdings for the public monopoly
Lanka Marine Services. In October 2008, Jayasundera was
fined 500,000 rupees (approximately $4,400 USD),and forced
to filed a motion before the Sri Lankan Supreme Court
agreeing to never serve in public office again. After the
resignation of the prior Supreme Court Justice, Jayasundera
filed a motion to withdraw his promise never to serve in
public office. The Supreme Court eventually ruled that
Jayasundera could withdraw from his promise, and President
Rajapaksa immediately reappointed Jayasundera to be his
Finance Secretary.

Reconstruction Plans for the Conflict Areas


3. (SBU) Jayasundera stated that President Rajapaksa had
outlined his 10 year development plan during his 2005
election campaign. Jayasundera said that the GSL plans to
continue its 30 year policy of welcoming the private sector,
and the GSL would pursue the same policies for foreign
investors to encourage trade. The GSL plan placed a high
priority on rebuilding the North and East, and the GSL looked
to donors such as the World Bank, Asian Development Bank and
others to fund infrastructure to spur reconstruction. In
particular, Jayasundera emphasized the importance of
developing Sri Lanka,s ports (as regional transportation
hubs) and power generation. Ambassador Butenis raised the
issue of how bilateral political tensions could impact
donations for reconstruction. The Ambassador cited the
issues of human rights during the final phase of the war and
the GSL holding internally displaced persons in closed camps.
Jayasundera said that the GSL was engaging with the European
Union on the issue of IDP camps.

Global Financial Crisis had a Moderate Impact on Sri Lanka


4. (SBU) Jayasundera asserted that the global financial
crisis had inflicted a limited impact on Sri Lanka.
Jayasundera acknowledged that government revenue and exports
of garments and rubber had declined significantly in the
first half of 2009. Sri Lanka,s treasury had controlled
expenses, he claimed, so the lost foreign revenue had less
impact. Moreover, the trade losses were partially
compensated by lower fuel costs. Sri Lanka imports all of
its fuel, and the world wide reduction in oil prices lowered
Sri Lanka,s cost of oil imports. Jayasundera also said that
the IMF package helped contain investor worries about the Sri
Lankan economy. (Note: Jayasundera breezed over how the GSL
was forced to negotiate for an IMF package last spring and
summer as their foreign exchange reserves reached dangerously
low levels. End Note.) Jayasundera thought that the world
economy was improving, particularly in Asia, which should
lift the Sri Lankan economy.

Fiscal Reform Plans

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5. (SBU) The GSL is determined to simplify its tax
structure and increase its tax collections. The GSL has
appointed a Presidential Commission comprised of bankers, the
private sector and public officials. The Commission is
working on reforming the tax code, not only to make it more
transparent with fewer taxes, but also to significantly
increase tax collections. Jayasundera wants to focus on
income and corporate taxes, customs duties, value added tax,
and excise taxes. The GSL also plans to reduce the number of
tax holidays for foreign investors if these benefits do not
prove necessary to attract foreign direct investment. (Note.
Under the IMF agreement, the GSL has a target to increase
tax collections by 2% of GDP by 2011, an ambitious goal. End
Note.)

Billionaire Arrest Will Not Undermine Sri Lankan Economy


6. (SBU) Sri Lanka has been buzzing about the arrest in
the United States of Raj Rajaratnam for insider trading.
Rajaratnam is a Sri Lankan native who founded the Galleon
hedge fund, became a billionaire and pledged money to help
rebuild Sri Lanka. Ambassador Butenis clarified that our
information indicated that Rajaratnam was arrested for
insider trading, not for activities related to LTTE funding
or any Sri Lankan issue. Jayasundera thought that the market
was overreacting to the arrest, and argued that the market
fundamentals were still strong. Jayasundera did think that
the regulatory authorities needed to review investment flows
to review Rajaratnam,s Sri Lankan investments. (Note. The
Colombo Stock Exchange fell by over 3% on October 20 after
the arrest and the European Union recommendation to revoke
GSP plus trade benefits. According to press reports,
Rajaratnam held up to 9% of the stock of a leading local
conglomerate John Keells Holdings, and in general he
reportedly held 1.3% of the market capitalization of all Sri
Lankan equities. End Note.)


7. (C) Comment. Jayasundera is intelligent and well
educated, with a doctorate in Economics from Boston
University. Post had heard reports that Jayasundera was
nationalist and could be difficult for foreign investors.
However, Jayasundera knew his audience and came off as
reasonable, and he specifically described a role for foreign
investment in Sri Lanka,s reconstruction. The GSL has
increasing turned to new friends such as China and Iran, and
there has been much public criticism of the United States and
the West in government newspapers. Post will send septel an
analysis of how the GSL makes economic policy. End Com
BUTENIS