US embassy cable - 03COLOMBO1732

UNCLAS SECTION 01 OF 02 COLOMBO 001732 
 
SIPDIS 
 
DEPT PASS TO USTR; COMMERCE FOR ARI BENAISSA; TREASURY 
FOR ROY ADKINS 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, CE, USTR 
SUBJECT:  SRI LANKA'S GDP GROWS 5.6% IN FIRST HALF OF 
2003 
 
1. Summary:  The Sri Lankan economy recorded 5.6% GDP 
growth in the first half of 2003, coming mainly from 
industry and services.  Other macro economic 
fundamentals have also improved, and contributed to 
strengthening of the Sri Lanka Rupee recently.  The 
Central Bank says economic performance is within 
expectations and annual GDP growth could be higher 
than the original projection of 5.5% in 2003, though 
still not at the 8-9 percent range required for 
"tiger" status.  End Summary. 
 
Growth led by industry and services 
----------------------------------- 
 
2.  GDP growth in the first half of 2003 was 5.6% 
compared with 1.4% growth recorded in the first half 
of 2002.  The economy expanded strongly by 5.5% in the 
second quarter of 2003 despite severe flooding in the 
Southern and South Western parts of the country. 
 
3.  Industry and services were the main contributors 
to growth in 2003.  Exports grew by a strong 18% to 
$2.4 billion in the first half of the year.  Driven by 
rising exports, the manufacturing sector grew by 5.4% 
compared to a 2.6% decline in the first half of 2002. 
Service sector growth was 7.2% compared to 3.1% during 
the same period last year.  Communications, banking 
and insurance, and tourism led services growth.  The 
construction industry grew by about 5%, while the 
agriculture sector declined 0.2% as fish production 
dropped sharply and severe floods during May damaged 
tea crops.  Most other agricultural crops performed 
well, with rice reaching record production.  According 
to the Central Bank, a 25% increase in cultivated area 
in the north and east consequent to the ceasefire has 
helped rice production. 
 
4.  Improved macroeconomic conditions, greater fiscal 
control and the continuation of the ceasefire between 
the Government and the LTTE have increased overall 
economic activity.  Interest rates have dropped 
significantly.  Currently, T-bill rates are around 
7.25% compared with 11% a year ago.  The commercial 
bank prime rate is 9.3% compared with 12.57% a year 
ago.  Inflation is also trending down and is expected 
to fall to 6% from 9.6% in 2002.  The economic upturn 
boosted the stock market to an all time high in 
September.  Increased remittances, tourism, investment 
and aid/loan flows to the Government have helped boost 
total foreign reserves to $2.8 billion (5.2 months of 
imports) as of July, up from $2.5 billion in January 
2003.  This inflow of foreign currencies has led to a 
three percent appreciation of the rupee relative to 
the dollar. 
 
5.On September 30, the Central Bank's Deputy 
Governor, W.A. Wijewardena, told the media that the 
bank was encouraged by the continued strong economic 
performance, and that annual GDP growth could surpass 
the original projection of 5.5% in 2003.  Wijewardena 
also noted that as the country's macroeconomic 
fundamentals improve, the Government would seek a 
sovereign rating in early 2004.  The Central Banker 
warned, however, that growth in the current 5-6% rate 
would be insufficient in the medium and long term to 
overcome basic economic problems such as poverty, 
malnutrition and unemployment.  Wijewardena remarked 
that higher growth expected from 2004 onwards would 
require greater investment.  This will depend on peace 
as well as speedy implementation of structural 
reforms, effective utilization of foreign assistance, 
infrastructure development, further improvements in 
macro economic management and reducing economic policy 
uncertainties.  The Central Bank also warned against 
inflationary pressure from wage hikes that are not 
linked to productivity. 
 
6.Comment: Overall the economic news continues to be 
good, with the GSL's economic reform and fiscal 
discipline reaping rewards in the form of improved 
economic performance.  Employment continues to be an 
area of concern, however, with the PM and other key 
officials urging private sector representatives to 
create jobs.  While growth still remains below the 8-9 
percent level that denotes "tiger" status, continued 
progress on economic reforms by the government, and a 
continued global economic rebound, could help pull Sri 
Lanka up to that vaunted level.  End Comment. 
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