US embassy cable - 03COLOMBO1601

UNCLAS SECTION 01 OF 04 COLOMBO 001601 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON, EAID, PTER, PGOV, CE, LTTE - Peace Process, ECONOMICS 
SUBJECT: LANDMINES AND TIGERS AND "BEARS" OH MY! ECONOMIC INTEGRATION 
PERSPECTIVES FROM SRI LANKA'S NORTH AND EAST 
 
REF: Colombo 01222 
 
1.Summary: The mood on the northern Jaffna peninsula is 
largely positive, with increasing economic activity and 
potential.  Nonetheless, post-conflict problems abound, 
including a lack of infrastructure, little available local 
credit, a shallow labor pool, a fair amount of underemployment 
for recent university graduates, and an underutilization of 
arable land due to SL Army High Security Zones.  In the LTTE 
controlled territory (the Vanni), LTTE presence mirrors in many 
observable ways the GSL.  In the Trincomalee town area, there 
is little evidence that LTTE influence is the same as in Jaffna 
or other areas in the north/east.  Addressing these challenges 
and ending the overlapping interests of the GSL and LTTE will 
be keys to successful economic integration in the north/east. 
End Summary 
 
2.Econchief, Econ Summer Intern and EconFSN traveled to 
Jaffna and Trincomalee (in the north and east respectively) by 
road on August 24, 25, and 26.  During meetings with 
businesses, academics, NGOs and government representatives, a 
fairly consistent picture was presented of hope in the peace 
process, poor or rudimentary financial and economic 
development, and frustration with the policies and tactics of 
both the GSL and the LTTE. 
 
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Jaffna: Watch for land mines on your way to the grocery store 
--------------------------------------------- ---------------- 
 
3.In Jaffna, a sense of normalcy seems to be returning, 
despite the evidence of the recent fighting.  In the main 
intersection of town, a new "Food City" (known locally as 
"Anainaga Food City" not affiliated with the reputable Food 
City chain in Colombo) has opened with fully stocked shelves 
and a fairly solid pace of customers on the same block as 
numerous bombed out buildings.  Store management said they had 
come from Colombo.  We later learned the shop is suspected to 
be LTTE-owned.  En route to dinner at a local restaurant, it 
appeared several shops and small eateries were still open and 
the restaurant itself was completely full of families and young 
couples by 8:00 p.m. 
 
4.Everyone we talked to, from shop owners to the fellows 
selling vegetables in the market, were willing to discuss the 
LTTE and openly explained the taxes and tributes they are asked 
to pay.  Some of our interlocutors were willing to challenge 
e 
LTTE policies and ideas, even while dining at a public 
restaurant, though it is clear fear of the LTTE remains.  One 
contact, who claimed recently to have discussed issues with the 
LTTE, relayed that at the conclusion of his meeting the LTTE 
representative had said to our contact's wife "you don't need 
to be afraid of us anymore."  The woman reportedly replied, 
"until you are ready to accept that people may disagree with 
you.the fear will remain."  Whether this was bravado or not we 
cannot say.  It was, however, relayed in a fairly open setting. 
 
5.There was little in the way of complaint about LTTE taxes 
(though no one particularly liked paying them or felt they 
received much in the way of services in return) but a clear 
sense of resignation, that there was no choice in the matter. 
Attitudes were perhaps mitigated by the fact that the 
government does not collect taxes in Jaffna (consumers are, in 
a sense, taxed twice, as goods purchased in Colombo for resale 
in Jaffna are assessed VAT at purchase and then taxed again at 
LTTE "customs."). 
 
6.The team stopped in Chavakachcheri on the Jaffna peninsula 
and interviewed shopkeepers in a municipal government-built 
open-air structure that had replaced shops destroyed by 
fighting. The shopkeepers enthusiastically reported increased 
sales volume since the cease-fire and have expectations that it 
will hold.  All reported paying "import" taxes to the LTTE, as 
did our contacts in Jaffna town, but many of the shopkeepers 
also have to register with the LTTE and pay additional monies 
in the form of monthly tributes based on shop size and 
earnings. One new shop owner reported that he had been told by 
the LTTE to register at their local office but had not yet been 
asked for money.  He expected to be hit up once his shop was 
more established.  It is unclear what would happen to the 
shopkeepers if they refused to register or to pay, though 
clearly the cost of non-compliance is considered higher than 
simply paying.  In general, the shopkeepers seemed guardedly 
optimistic but uncertain about near-term interactions with the 
LTTE. 
 
7.Over the course of casual conversations with shop-owners, 
university contacts and UN personnel, several themes were 
repeated: 
 
--The LTTE is fairly well organized but either random or 
selective in its enforcement of rules and revenue collection 
(the random nature of taxes, particularly on personal items, is 
the main criticism in Jaffna about LTTE taxation mechanisms). 
--Infrastructure remains a problem - roads, transport, cold 
storage (fishermen are reliant on transport middlemen and 
unable to negotiate their own prices at market in Colombo). 
 
--High Security Zones cover 25-35 % of the peninsula (UNDP 
figure) and are located on the most productive agriculture and 
fishing land; mostly in the north of the peninsula, but also on 
the islands to the west in places that inhibit movement. These 
zones have been shrinking but, according to UNHCR, thousands of 
people are waiting in refugee camps across the region to 
return. 
 
--Farming has been dramatically affected: 65,000 farming 
families pre-conflict; 30,000 now (UNDP figures).  6,000 
cultivated hectares pre-conflict, 4,500 cultivated hectares now 
(UNDP figures). 
 
--Lack of access to credit (interest rates are high and 
unmanageable for small and medium-sized businesses; government 
assistance has been spotty).  HNB Bank (a well known private 
bank in Sri Lanka) has operated in Jaffna for a number of years 
and has some micro-loan schemes for poorer people, but the 
interest rates discussed were high (in the 18 percent range). 
Capital is probably available from the Tamil diaspora, but much 
of it is on hold, while people wait to see what happens with 
the peace process.  The economy in the north is heavily 
dependent on money coming from abroad, much of which is 
probably filtered in some way through the LTTE. 
 
--There are no tax incentives to bring businesses to 
economically disadvantaged areas. 
 
--Underemployment may be a bigger problem than unemployment - 
very little idle labor was evident. 
 
--While there were complaints of poor coordination of 
Government and NGO efforts (particularly from the Chamber of 
Commerce and the University), USAID reports that the Government 
Agent in Jaffna has set up a coordination unit for gathering 
project information and data collection and is making a strong 
attempt to coordinate development efforts). 
 
--There is no heavy industry/light industry/manufacturing to 
speak of (mostly farmers and fishermen with little or no access 
to credit). 
 
--Huge swathes of clearly developable or arable land remain 
unusable as a result of landmines (though landmine removal 
efforts are obvious). 
 
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LTTE-land: Down the barrel of a (radar) gun 
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8.During the drive to Trincomalee, the team passed through 
LTTE-controlled territory (known as the Vanni) from Kilinochchi 
to Omanthai.  The LTTE is the governing authority in this area 
and all aspects of government responsibility one would find in 
GSL territory are mirrored (at least along the main highway, 
the A9) including: police stations, courthouses, an LTTE-run 
bank, "customs," and (why should our lives be any different in 
the Vanni than home?) traffic police armed with radar guns. 
Checkpoints between GSL-controlled territory and LTTE- 
controlled areas are set apart by approximately 100 meters of 
"no-man's land," monitored by the ICRC. 
 
9.ICRC representatives at the checkpoint outside Omanthai 
indicated that the crossings were largely well-run and that 
there had been no recent incidents on either side.  People are 
able to travel by public bus as far as the SL Army checkpoint, 
disembark, check out of GSL territory, walk across the 
monitored area to the LTTE check point where they again 
register and pay an entrance fee (recently the LTTE has gone 
from charging private buses Rs 350 (approximately USD 3.50) per 
head to a flat fee of Rs 3,500 (USD 35)).  They can then catch 
an LTTE-affiliated bus to their next destination (unless they 
are going on to Jaffna, where they have to repeat the process 
in Kilinochchi).  The ICRC is on duty from about 6 a.m. to 6 
p.m., but the checkpoints have been staying open as late as 
8:00 p.m. without incident. 
 
10.The LTTE-controlled bank appeared to have a brisk business, 
though the team was unable to determine if it was computerized 
from our Landcruiser-based view.  LTTE customs appeared quite 
well run and efficient.  Trucks would pull into an unloading 
area, cargo was inventoried and a tax was assessed.  Some 
Jaffna businesses indicated they have been able to get away 
from itemizing large shipments by paying a set fee. 
 
11.LTTE taxes seem to mirror GSL VAT structures, roughly, with 
approximately 20 percent for "luxury" items and 10 percent for 
essentials (there are gradations within these and food is 
reportedly taxed at a very low rate, with some as low as zero). 
. 
These may be averages - previously we have reported a tax range 
of 5-25 percent with some essentials exempt. 
 
12.Receipts are reportedly issued in order to avoid double 
taxation if the LTTE comes to audit a store or stand once its 
goods have arrived in Jaffna.   USAID personnel reported a 
discussion with a family they encountered on the road to 
Jaffna.  They displayed a very sophisticated receipt for the 
taxes paid at the "border" to the LTTE.  The total was about Rs 
25,000 (USD 250) for the goods alone (i.e. their personal 
belongings, furniture, etc). They had paid a separate tax for 
the vehicle. 
 
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Trincomalee: Beware of Tigers 
----------------------------- 
 
13.While on the map Trincomalee looks like a major center and 
large urban setting, in reality it is a small town with a 
largely unused port, a couple of major industrial centers 
located on the harbor, and poor road and rail access to the 
rest of the country.  LTTE influence in the town appears 
s 
subdued but nonetheless present.  In some outlying areas there 
is no GSL presence, only LTTE, again with parallel systems of 
government.  There is no LTTE taxation on goods imported from 
elsewhere and the LTTE does not control the major roads 
connecting Trinco (as it is known locally) to the rest of the 
country.  However, LTTE cadre are employed by businesses 
throughout the area, as it is very difficult to determine 
political affiliation, and cadre members continue to ask for, 
and receive, "donations" during special times of the year. LTTE 
members also sell a self-published magazine whose purchase is 
semi-compulsory. 
 
14.There have been reports of grenade attacks against some 
shops that have not paid the requested tribute.  These are 
usually aimed at Muslim-owned and a few Sinhalese shops as 
these two ethnic groups do not pay LTTE taxes regularly (unlike 
a majority of Tamil-owned businesses).  Several people referred 
to recent "LTTE" violence as a "Muslim problem" (referring 
specifically to Mutur East and West (Mutur itself is south of 
Trinco), East being LTTE controlled and most of the businesses 
in the East owned by Muslims). 
 
15.The large industrial centers around the port reported 
trouble recruiting good management talent given Trincomalee's 
remote location and lack of good educational opportunities. 
There are also reports that many qualified candidates from 
Colombo won't come to Trinco for fear of kidnapping, although 
kidnapping has tapered off since the beginning of the 
ceasefire. 
 
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Comment 
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16.This trip adds to our growing collection of observations 
and experiences in the north and east.  The potential for 
economic restoration exists - as one staffer from a Norwegian 
NGO commented - "once the ceasefire was announced, and every 
day that it holds, market activities increase."  However, under 
a continuing cease-fire, or in the wake of a peace agreement, 
improving the labor pool, increasing administrative 
e 
transparency, establishing a viable and affordable capital 
market and a returning land to productive use (i.e. no longer 
under high security zone status or pocked with landmines) will 
be important stepping stones to successful economic 
integration.  Until a final peace arrangement is established, 
however, the overlapping and competing interests of the GSL and 
LTTE will continue to be an economic drag.  End comment. 
 
LUNSTEAD