US embassy cable - 03COLOMBO1983

C O N F I D E N T I A L SECTION 01 OF 02 COLOMBO 001983 
 
SIPDIS 
 
DEPT PLEASE PASS TO E, EB, SA/INS, SA/RA, USAID FOR 
BERNADETTE BUNDY - ANE/SA, USTR FOR AUSTR WILLS; TREASURY 
FOR SRI LANKA DESK, NSC FOR ELIZABETH MILLARD; COMMERCE FOR 
ARIADNE BENAISSA 
 
E.O. 12958: DECL: 11/17/13 
TAGS: ECON, PGOV, PREL, CE, ECONOMICS 
SUBJECT: ECONOMIC IMPACT DEEPENS AS POLITICAL UNCERTAINTY 
CONTINUES 
 
REF: A) Colombo 1957 B)Colombo 1902 C) Colombo 1916 D) 
Colombo 1917 E)Colombo 1918 F) Colombo 1926 G) Colombo 1927 
H) Colombo 1930 
 
1. (U) Classified by Ambassador Jeffrey J. Lunstead, 
Reasons 1.5 b, d and e. 
 
2. (C) Summary and Introduction: Though businesses are 
operating on peaceful streets, and both parties to the 
current dispute have stated the peace process will 
continue, uncertainty is taking an increasing toll on the 
Sri Lankan economy.  Planned investment, imminent 
purchases, stock market growth, IFI disbursements and 
business relationships have all suffered delays in this 
unpredictable environment.  The longer the uncertainty 
continues, the harder it will be to recover lost economic 
ground.  End Summary and Introduction. 
 
Investment 
---------- 
3. (C) On November 14, Chairman of the Board of Investment, 
Arjunna Mahendran, told visiting Commerce DAS Williamson 
that $150 million in five infrastructure investment 
projects are now on hold as a result of current events. 
Investors have not cancelled these projects, he noted, but 
want to wait and see what will happen.  Mahendran was 
quoted in the press saying that investment depends on the 
peace process and the President has raised concerns in 
investors' minds.  Mahendran himself took an extreme 
position during the interview, referring to the 
"probability of the resumption of war", a view we do not 
believe is shared by the majority of Sri Lankans. 
 
Sales 
----- 
4.  (SBU) Though it is too soon for statistical information 
on sales, imports or exports, Post has received anecdotal 
evidence that business transactions have been negatively 
affected.  Garment buyers from Lands' End, who had just 
arrived in Colombo to discuss increased purchases, were 
called back to the US by the main office, based on 
sensationalized reports in the media.  Reportedly, Wal-Mart 
representatives were not allowed by their management to 
leave the US for a planned trip to Sri Lanka due to the 
perception of instability and violence.  A US supplier of 
wind turbines told a local importer it could no longer 
accept orders from Sri Lanka.  Seven officials from the 
Ceylon Chamber of Commerce, the premier business group in 
the country, said in a meeting that each of them had at 
least one or two deals held up because of the current 
situation. 
 
Stock Market 
------------ 
5.  The Colombo Stock Exchange continues its volatility. 
After rising on the Prime Minister's return from Washington 
on November 7, it fell on the November 14 news that the 
Norwegian mediators were putting mediation efforts on hold 
until a decision was made on whether the Prime Minister or 
the President would lead the peace process.  Overall, the 
market fell just over 10%, week on week.  Interestingly, 
there was a net foreign inflow, and foreign participation 
increased to 28%. 
 
Business groups 
--------------- 
6.  Members of the business community seem unanimous in 
their desire for a quick resolution, without elections. 
Business groups have requested meetings with the President 
and Prime Minister and hope to deliver four key messages. 
The messages are: this dispute is damaging to specific 
business relationships as well as to the country's 
international reputation; it has the potential to undo all 
the progress that has been accomplished in the past 20 
months; the parties should work it out without resorting to 
elections; and, unpredictability is the enemy of 
investment.  At the Ceylon Chamber of Commerce, officials 
also noted that next year's budget, which has been delayed 
by Parliament's suspension, contained measures reflecting a 
peace dividend, made possible by the government's fiscal 
discipline of the past two years. 
 
International Financial Institutions 
------------------------------------ 
7. In addition to IMF delays (ref A), the ADB reportedly 
considered delaying a $50 million loan tranche due for 
release on November 20.  It appears that tranche will move 
forward as planned, so long as Parliament is reopened on 
November 19. 
Comment 
------- 
8. (C) Our consistent message to the President and the PM 
is that capital is a coward and the economy will suffer as 
long as uncertainty prevails.  It seems clear the President 
and her advisors had no intention of rocking the economic 
boat with their actions, hence the numerous "clarifications" 
and denials in the last few days.  Hopefully, they now 
realize the longer it takes to resolve the current impasse, 
the more economic damage is done.  End comment. 
LUNSTEAD