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10COLOMBO84 2010-02-03 04:49:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Colombo
Cable title:  

Northern Development Plan Has Not Promoted Reconciliation

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1. (SBU) Summary. Econoff attended a business development
conference in Jaffna, the heart of northern Sri Lanka. Thirty years
ago Jaffna was an economic and educational center, but the legacy of
war is a basic economy now devoid of significant industry. The
Government of Sri Lanka (GSL) is promoting economic growth through
business investment, banking, infrastructure spending, tourism, and
industrial development. However, these plans have not yet had time
to take hold, leaving widespread unemployment. The GSL has done
little to address local resentment, and some of the GSL policies
could unwittingly encourage ethnic issues. End Summary.

Jaffna - Then and Now

2. (U) Thirty years ago Jaffna was the second or third largest
industrial center in Sri Lanka, and it was also renowned for its
educational system, led by the University of Jaffna. The war years
were not kind. The population declined from 900,000 to 600,000
people, and many of the most talented people fled. The economy
progressively deteriorated. For example, in 1982 just before the
war, there were 688 industrial units with more than five employees;
now there are 243. Moreover, now there are only eleven
establishments with more than 25 employees, and these eleven
companies employ just 408 people (see reftel A for more details).
Econoff visited two local factories, one established with German
funding and the other built by the United Nations Development
Program. One of these companies produced the beverage toddy, but
the operation was so basic that the company filled each toddy bottle
individually. The other plant, producing fruit jam, was slightly
more advanced, but neither was active when Econoff visited. Local
newspaper and Chamber of Commerce representatives reported that
massive unemployment is rising as internally displaced persons
(IDPs) are released from the camps and move to host families and
transit sites in Jaffna.

Jaffna Business Conference

3. (SBU) The Business for Peace Alliance, a private chamber of
commerce that receives some USAID funding, held the first postwar
conference in Jaffna, looking at the economic situation in the North
and encouraging investment. Turnout was much higher than conference
organizers expected, with 60 attendees from Jaffna, 100 from
Colombo, and 20 from the rest of Sri Lanka. Several attendees
seemed interested in investing in tourism and infrastructure
proposals. Government representation was mixed. The Jaffna mayor
and representatives from the Sri Lanka Board of Investment (BOI)
attended the conference; in contrast, the government agent, who is
the most important district level civilian official who answers to
the national government, did not attend or send a representative,
while the Governor, appointed by the President, just sent a
representative. Presidential campaign organizers attempted the day
before the conference to move the event, trying to commandeer the
conference hall for a campaign rally until organizers appealed to
Colombo connections. Moreover, approximately 50 police officers and
army soldiers strolled in during lunch and helped themselves to the
conference buffet, and conference organizers chose not to try to
stop them.

GSL Strategy to Rebuild the North

4. (SBU) The GSL is following the same script in rebuilding the
North as they have followed in the last two years in the East (see
reftels A and B). The GSL initially focused on increasing
agricultural and fishery production by ending the wartime fishing
restrictions and encouraging paddy rice production. The GSL is also
improving the road infrastructure, including with funds from
international donors. The next step is increasing economic
development, particularly through financial institutions. The GSL
plans a Northern regional development bank; the Central Bank
approved 45 bank branches and 51 bank extension offices for the
North; and the Central Bank slashed interest rates in the North from
12% to 9%. The Central Bank also facilitated a 3 billion Rs ($26
million) loan plan for small and medium sized enterprises:
according to official statistics, 264 million Rs ($2.3 million) has
been disbursed to 1,875 borrowers, including 50% for agriculture,

COLOMBO 00000084 002 OF 003

25% for trade and services, and 25% for fisheries and small and
micro industries. The BOI has a special investment package for
investors in the North and East, with a tax holiday of 15 years if
certain minimum investment and employment criteria are met. The BOI
also provides a 10 year tax holiday for the revival of existing
industries. The GSL encourages tourism, and plans to auction land
for tourist development. The GSL is also building a cement factory,
with 51% government ownership; there will be a private tender for
the remaining 49%. The GSL plans to build an industrial park near
Jaffna, and MAS industries, one of the two largest apparel
manufacturers in Sri Lanka, plans to build an apparel factory in the
North with heavy government subsidies.

5. (SBU) Although it is still early, the GSL strategy has had a
limited effect on the ground. Fishing production has risen and
agricultural production appears to be rising as well. The
reintegration of the North into the economy of Sri Lanka helped
reduce food prices. The price for most food items has decreased,
since they can be shipped in from Colombo, while the price of fish
(caught in Jaffna) has increased, since fish is now sent to Colombo
for sale. Local business leaders complain that they cannot obtain
loans for a variety of reasons: they may have defaulted during the
difficult war years; they do not have sufficient collateral; the
requirements are too stringent; and/or they are not prepared to file
a formal loan application. Business leaders also expressed concern
that the banks have only come to scoop up savings, but would not
reinvest in the North. Local businesses tend to be very small, so
they do not qualify for BOI loans, which go to Colombo investors.
There are also continuing problems linked with a lack of cold
storage facilities, with up to 60% of the perishables produced in
the North spoiled during transit for sale in Colombo.

Challenges Ahead

6. (SBU) Land ownership is one of the most intractable and
potentially polarizing problems, exacerbated by unclear land
records. During the war, many people fled Jaffna, others moved in,
and later sold the land and houses to third parties. The land
records office in Jaffna burned, so the GSL plans to rely on land
records in Colombo, which are likely to be 30 years out of date.
Several participants in the business conference came to Jaffna to
scout out their long lost homes, and told Econoff that they plan to
reclaim their property even though they may have been gone for 20-40

7. (SBU) The GSL reconstruction strategy has paid little attention
to the critical element of reconciliation. According to conference
organizers the first step to rebuild the North is not infrastructure
or loans, but to rebuild trust, develop local buy-in, and develop
local institutions. The local Tamil newspaper editor claimed that
there had been no economic development (likely an exaggeration), and
he and others were worried that the Sinhalese majority would
colonize the North. Locals said that the Tamil Diaspora has not yet
invested in Jaffna. Dr Anura Ekanayake, chairman of the national
Ceylon Chamber of Commerce, eloquently described the risk of
exploitation because the Jaffna businesses were cut off for thirty
years and thus were not ready to compete. The Colombo
conglomerates, for example, plan to build large international
tourist hotels, while the local business people are looking at small
guest houses. A possible solution is to require large Colombo
businesses to have a local partner.

Outside Jaffna

8. (SBU) Econoff originally planned to go to Jaffna by bus through
the North, but at the last moment the GSL decided that the road was
too 'unsafe' for foreigners, so Econoff flew to Jaffna. Sri Lankan
participants went by road, and they reported that when they passed
Kilinochchi it was a ghost town, devoid of anyone except for Sri
Lankan military. One participant had seen Kilinochchi during the
2004 cease fire period, and then it was a bustling town.

9. (SBU) As with the East, rebuilding the North will prove
challenging for the GSL. Local businesses do not have the capacity

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to expand rapidly and provide the required employment, but use of
large outside companies may stoke local resentment. Although the
GSL development strategy makes some sense in strictly economic
terms, it ignores the history of the conflict and does little to
address reconciliation. The January 26 Presidential election
provided a good example of Northern alienation. The turnout in
Jaffna was 26%, far below the island wide average of 74% (see reftel
C). President Rajapaksa won 58% of the votes in Sri Lanka overall,
but 24% in Jaffna. President Rajapaksa obtained a large national
majority, though he polled less than his opponent in both the North
and East. The president's sweeping win makes it likely that the GSL
will continue on the same course, implementing a development
strategy that has brought basic development, but has not healed
ethnic divisions.