US embassy cable - 03COLOMBO2023

C O N F I D E N T I A L SECTION 01 OF 02 COLOMBO 002023 
 
SIPDIS 
 
DEPT PLEASE PASS TO SA/INS, SA/RA, USAID FOR BERNADETTE 
BUNDY - ANE/SA; TREASURY FOR DEBRA VON KOCH AND ROY ADKINS; 
USTR FOR AUSTR WILLS; COMMERCE FOR ARIADNE BENAISSA 
 
E.O. 12958: DECL: 11/24/13 
TAGS: ECON, EFIN, EAID, PREL, CE, ECONOMICS 
SUBJECT: AMBASSADOR'S COURTESY CALL ON CENTRAL BANK 
GOVERNOR JAYAWARDENA 
 
1. (U) Classified by Ambassador Jeffrey J. Lunstead. 
Reasons 1.5 d and e. 
 
2. (SBU) Summary: During his initial courtesy call with 
Central Bank Governor Jayawardena on November 20, the 
Ambassador discussed the current political situation, 
regional economies, US Treasury Department assistance and 
the recent GSL budget.  Jayawardena was optimistic on the 
outcome of the ongoing political dialogue.  He saw Sri 
Lanka's role as a regional economic hub as potentially 
viable and was enthusiastic about upcoming US Treasury 
Advisor  assistance.  He saw the recent GSL budget 
submission as a step in the right direction, but cautioned 
that continued deficit reduction was key.  End Summary 
 
Politics: "Getting this Boy and Girl Together" 
--------------------------------------------- - 
3. (C) Ambassador paid an initial courtesy call on Central 
Bank Governor A.S. Jayawardena on November 20.  The 
Governor immediately brought up the current political 
climate, offering an assessment of the PM as pragmatic and 
flexible and the President as someone who acts on instinct 
- thus unpredictable.  Getting "this boy and this girl 
together" was the main challenge facing Sri Lanka.  He 
faulted the proportional representation electoral system as 
designed to thwart any party gaining a decent majority.  On 
the economic front, he thought both sides could agree on 
the basics of economic policy, which might provide common 
ground to build on. 
 
Regional Economies 
------------------ 
4. (SBU) Jayawardena expressed satisfaction with India's 
emerging economic prowess, noting it was no longer 
"fortress India."  He thought the SAARC Finance group 
provided a useful working-level forum to build 
relationships and deal with ongoing problems. 
 
5. (SBU) Economically, the region's psychology needed to 
change.  Sri Lanka was the first to do so in 1977, when it 
introduced free-market reforms.  At that time, Indian PM 
Rajiv Gandhi questioned Sri Lanka's wisdom and predicted it 
would be bankrupt in five years.  India later was forced to 
adopt similar measures "to keep from going bankrupt."  On 
Pakistan Jayawardena expressed concern about his perception 
that only fear of India holds Pakistan together. 
 
US Treasury Advisor Programs 
---------------------------- 
6. (U) The Ambassador thanked Jayawardena for his support 
of the US Treasury Advisor program and noted that the Debt 
Management TA and a Treasury Anti-Money Laundering team 
would arrive in early 2004.  Jayawardena was appreciative 
of the US assistance.  On the debt management front, he 
reiterated his view that the Public Debt Management Office 
needed to be truly independent and not beholden to the 
Central Bank or the Treasury. 
 
7. (C) On money laundering, Jayawardena acknowledged it was 
a key area for improvement if Sri Lanka hoped to become a 
regional financial hub.  Sri Lanka lacked an appropriate 
legal framework however, and necessary new legislation was 
awaiting clearance at the Justice Ministry.  The Ambassador 
offered to weigh in with the Justice Minister if necessary 
to get the anti-money laundering legislation moving. 
Jayawardena said banks were using the "know your customer" 
rule in the interim.  He urged all bankers to carefully 
analyze their accounts and understand the origins of 
deposits.  Jayawardena then listed several fraud cases the 
GSL has dealt with in the recent past.  He was considering 
some public outreach to educate people about scams such as 
the "Nigerian Oil letter" and pyramid schemes. 
 
GSL Budget Submission 
--------------------- 
8. (SBU)  The Governor said the recent budget proposal by 
the GSL was sound.  In order to build confidence, the GSL 
needed to keep chipping away at the deficit.  Sri Lanka 
hopes to seek a sovereign credit rating in the next year. 
He intends to pursue this as long as the GSL understands 
the need to act responsibly and realizes the consequences 
of "speaking out of turn."  He saw one area of concern with 
regard to the sovereign rating - how to manage significant 
short-term capital inflows and control capital flight.  He 
has urged the Board of Investment to target investment that 
could be absorbed quickly and that would be long-term in 
nature.  The Ambassador noted the need to maintain 
political stability and move forward on the peace process 
in order to give investors confidence in the country and 
where it was going. 
LUNSTEAD