US embassy cable - 03COLOMBO1957

C O N F I D E N T I A L SECTION 01 OF 03 COLOMBO 001957 
 
SIPDIS 
 
DEPT PLEASE PASS TO E, EB, SA/INS, SA/RA, USAID FOR 
BERNADETTE BUNDY - ANE/SA, USTR FOR AUSTR WILLS; TREASURY 
FOR ROY ADKINS; NSC FOR ELIZABETH MILLARD; COMMERCE FOR 
ARIADNE BENAISSA 
 
E.O. 12958: DECL: 11/12/13 
TAGS: ECON, PGOV, PREL CE, ECONOMICS 
SUBJECT: Economic Consequences of the Sri Lankan Political 
Crisis and Post Recommendations on Assistance Programs 
 
REF: A)Colombo 1902 B) Colombo 1916 C) Colombo 1917 D) 
Colombo 1918 E) Colombo 1926 F) Colombo 1927 G) Colombo 
1930 
 
1. (U) Classified by Ambassador Jeffrey J. Lunstead, 
Reasons 1.5 b, d and e. 
 
2. (C) Summary: The ongoing political spat has negatively 
affected the Sri Lankan economy, though the long-term 
repercussions, especially the loss of potential investment, 
are unknowable at this juncture.  The Colombo Stock 
exchange has been volatile and GSL representatives claim 
investors and tourists are staying away.  Post recommends a 
"business as usual" approach, particularly in the financial 
and economic aid realms, to avoid potentially further 
upsetting the economic recovery, to not create an overly 
negative impression on the peace process and to keep from 
taking sides in this domestic dispute.  End summary 
 
3. (U) Post has reported extensively on President 
Kumaratunga's recent political moves in Refs A - G.  While 
initial international news coverage of the events featured 
footage of Sri Lanka's quiescent civil war and prior 
terrorist attacks, the mood on the ground was one of calm 
confusion.  There was little evidence of a problem, aside 
from extra police at certain intersections and a small 
cadre of military guards at two government locations. 
 
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Economic Indicators 
------------------- 
4. (SBU) The Colombo Stock Exchange (CSE) reacted to the 
President's moves and subsequent events in a fairly 
predictable manner.  For the first two days of the crisis, 
while the PM was still in Washington, the market suffered 
its two single worst daily performances ever(dropping 6 
percent and 13 percent respectively).  On the day of the 
PM's return (marked by a vocal throng of party loyalists at 
the airport and thousands of supporters lining the streets 
of his motorcade route into Colombo), the market was up 
considerably, posting its largest ever single day gain 
(13.3 percent).  While daily turnover of shares was high 
for the first two days of the situation, recent turnover 
has been down considerably.  We expect the volatility to 
continue as the PM and the President continue their spat 
and until some arrangement brings a sense of calm to the 
political dynamics. 
 
5. (U) While the CSE has been turbulent and the GSL has 
posited concerns about FDI (see below), it is interesting 
to note that on the two most volatile days of the stock 
market so far, foreign purchases outpaced foreign sales 
almost 6 to 1.  International bargain hunters appear to 
have taken advantage of the situation to buy well known Sri 
Lankan blue chips. 
 
6. (U) The Central Bank released its latest monetary policy 
review on November 11, noting mostly positive trends in the 
economy.  The review did not predict the impact of the 
current political crisis, though the Governor of the 
Central Bank expressed hope the country would "get back to 
normalcy soon" in a statement to the press. 
 
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IFI Positions 
------------- 
7. (U) The IMF has announced that the conclusion of Article 
IV consultations and the next tranche of the Poverty 
Reduction and Growth Facility (PRGF) disbursement will be 
delayed, as the suspension of parliament has delayed the 
presentation of the budget.  Both the World Bank and IMF 
reps in Colombo have called on the various parties to 
resolve their differences and work together for sake of the 
peace process and the economy. 
 
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Foreign Investment 
------------------ 
8. (U) Board of Investment Chairman Arjuna Mahendran has 
publicly called for the PM and the President to reconcile 
their differences, noting that the President's actions had 
a negative effect on foreign investment.  He claims a few 
companies have delayed exploratory visits.  He has yet to 
give concrete evidence of investment leaving the country. 
 
9. (SBU) According to Roshanthi Dias in the BOI Promotions 
Office, there was an initial drop in inquiries following 
the President's initial actions, but new investors have 
started to come in.  Four new agreements have been signed 
in the past week, though all are with domestic investors. 
We do not know of specific pending investment decisions 
which had the potential to come to Sri Lanka, but have been 
scrapped due to the uncertainty in the political situation. 
 
-------------- 
Tourism Sector 
-------------- 
10. (U) GSL officials have consistently cited 2000 tourist 
cancellations as the impact so far on the tourism sector. 
According to representatives in the travel industry, most 
cancellations are coming from East Asia.  All European tour 
groups have come as planned since the crisis began. 
Cancellations are mainly by individual travelers or 
families.  A contact at Jetwing Travels, one of Sri Lanka's 
largest travel/tour groups, told us that a survey of six of 
the largest tour companies has revealed approximately 1200 
cancellations. 
 
11. (U) Most tour promoters are concerned about the length 
of the crisis, as it has the potential to severely affect 
the busy winter tourist season.  Most have contacted their 
overseas booking offices to reinforce the message that this 
is a political issue and that the situation is under 
control.  One silver lining: overbooked hotels have been 
able to use the cancellations to manage their guest flow. 
A good test will come in two weeks when Britain's cricket 
team and its swarms of fans are scheduled to descend on Sri 
Lanka for a long-anticipated cricket tournament. 
 
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Comment 
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12. (C) The situation on the ground remains calm, with most 
business (outside of the political realm) proceeding as 
normal.  US military training with GSL forces continues, 
and the Sri Lankan military is acting in a professional 
manner.  USAID continues to move forward with its programs 
and the GSL continues to plan for the release of its new 
budget (once parliament reconvenes, probably on November 
19).  We continue to focus on visits and issues related to 
ongoing economic reform programs. 
 
13. (C) The effects of the President's actions on the peace 
process should also be considered in an economic context. 
The international community has been vocal in support of 
the peace process throughout this ordeal.  Continued 
progress on economic development is imperative to avoid 
sending the wrong signals.  The peace process is at an 
important juncture made more fragile by the ongoing 
political feud.  As the US moves forward with economic aid 
and financial cooperation decisions, post recommends 
proceeding with a "business as usual" approach.  A negative 
reaction by the USG to ongoing programs could be seen as a 
lack of confidence in the government's ability to weather 
this tempest and continue with the peace process.  This 
could potentially foster negative reactions by others, 
including US businesses and donors, in Sri Lanka.  End 
Comment 
LUNSTEAD