US embassy cable - 04COLOMBO490

C O N F I D E N T I A L SECTION 01 OF 05 COLOMBO 000490 
 
SIPDIS 
 
DEPARTMENT FOR SA, SA/INS; INR/NESA 
DEPARTMENT PLEASE PASS TO USTR JROSENBAUM 
DOC PLEASE PASS TO ABENAISSA 
TREASURY PLEASE PASS TO RADKINS 
 
E.O. 12958:  DECL:  03-19-14 
TAGS: ECON, PGOV, CE, Elections, ECONOMICS 
SUBJECT:  PROMISES, PROMISES:  ECONOMIC RHETORIC FROM 
THE SIR LANKAN CAMPAIGN TRAIL 
 
Refs:  03 COLOMBO 2027 
 
(U) Classified by James F. Entwistle, Deputy Chief of 
Mission.  Reasons 1.5 D and E. 
 
1.  (C) Summary: As the march toward the April 2 
parliamentary elections continues, much of the campaign 
rhetoric has focused on the economy.  At the same time, 
the continued political instability caused by the 
dissolution of parliament and the ensuing campaign is 
casting a pall over the economy.  PM Wickremesinghe's 
United National Party (UNP) is trying to position itself 
as the country's economic savior, claiming significant 
results after only two years in office.  President 
Kumaratunga's United People's Freedom Alliance (UPFA), 
meanwhile, accuses the UNP of corruption, mismanagement 
and policies that favor the wealthy and hurt the working 
class, the rural poor and recent graduates.  (Note: The 
President's Sri Lanka Freedom Party (SLFP) is contesting 
the elections with the Marxist JVP in the new UPFA). 
In a just released UPFA election manifesto (largely an 
SLFP creation) several unabashedly protectionist 
policies are advocated.  Finally, the JVP is trying to 
reassure a concerned investor community about its role 
in a potential government.  Its positions give the 
impression, however, that the JVP does not understand 
the "market" policies it claims it will pursue. 
 
2.  (C) While the rhetoric will continue through the 
election period, it is likely that the old James 
Carville adage "it's the economy stupid" will play out 
here, at least in part.  Whether the electorate will 
feel that the PM has delivered, and they are better off 
today than two years ago, or that they have been shafted 
and it is time for a return to more socialist-oriented 
economic policies, will not be known until April 3.  End 
summary. 
 
3.  (U) As the April 2 election approaches, campaign 
rhetoric continues to heat up with the economy a 
frequent topic of debate.  Meanwhile, a recent Finance 
Ministry report notes that Sri Lanka faces lower 
revenues and increased expenditures as a result of 
continued political instability. 
 
Finance Ministry Report: Elections Nothing but Bad News 
--------------------------------------------- ---------- 
 
4.  (U) A recent report by the Finance Ministry (mandated 
by the constitution following the dissolution of 
parliament) notes the GSL made solid strides in the past 
two years in deficit reduction through decreased 
expenditures (revenues did not increased with equal 
success), lower taxes, lower interest rates and lower 
inflation.  There had also been a new round of 
privatization and a focus on improving bilateral and 
multilateral trade ties. 
 
5.  (U) In light of the dissolution of parliament 
however, economic momentum has been lost.  According to 
the report, the budget deficit is likely to increase, as 
expenditures are projected to rise by approximately US$ 
67 million this year, while revenues will likely fall by 
US$ 120 million.  Interest rates have remained steady, 
but the rupee has depreciated against the dollar and 
inflation seems poised to push back up. 
 
6.  (U) The report further outlined other negative 
effects of the recent political instability, including: 
 
--delays in economic reform programs, including 
privatization and introduction of a new revenue 
authority, 
 
--slips in IFI-related funding for reform programs (IMF 
delayed a USD 90 million loan tranche for example), and 
 
--reduced investment, as would-be-investors wait out the 
election to see what happens. 
 
UNP Campaign: PM Deserves Credit for Economic 
Performance 
--------------------------------------------- ----------- 
 
7.  (SBU) The economy is a major focus of each party's 
campaign.  The PM is trying to paint a rosy "its morning 
in Sri Lanka again" picture, taking credit for 
establishing the now two-year old cease-fire with the 
LTTE that has allowed renewed growth and positive 
economic trends to return. 
 
8.  (SBU) Nonetheless, the UNP seems well aware that the 
electorate's mood is "what have you done for me lately?" 
(Just released polls indicate a significant level of 
public disssatisfaction with the UNP economic reform 
efforts.)  The PM's campaign promises to renew its 
efforts, stay the course on privatization and implement 
the national budget it championed prior to the 
dissolution of parliament.  The budget included 
significant public sector wage increases, additional 
agricultural subsidies and increased infrastructure 
investment (see reftel). 
 
9.  (SBU) The PM's campaign has exhibited a more 
sophisticated understanding of the direction the economy 
needs to move: less government intervention, a smaller 
public sector and value-added, rather than subsidized, 
production processes.  There has been some pandering to 
the electorate, however.  For example, despite looming 
power shortages and an electric utility that is 
hemorrhaging money, the GSL has elected not to raise 
electricity prices by one rupee per unit, as had 
previously been planned.  As the election gets nearer, 
more belt-tightening measures could be put off at least 
until after April 2. 
 
Alliance Campaign: People "not ready" for free market 
--------------------------------------------- -------- 
 
10.  (SBU) President Kumaratunga has been campaigning 
hard for the United People's Freedom Alliance (UPFA), 
the alliance of her SLFP Party with the Marxist JVP 
party (whose economic policies are outlined below). 
(Note:  Kumaratunga is not actually standing for election 
to parliament, but sees this election as a chance for 
her party to retake the parliament and forge a new 
coalition government. End Note.)  A common theme 
throughout her campaign has been the UNP's "anti-people" 
policies.  In the "Manifesto of the United People's 
Freedom Alliance (UPFA)," (largely drafted by the SLFP) 
the President criticizes the current government for 
reducing subsidies, cutting the public sector and 
pursuing pro-business initiatives at the expense of 
education and rural healthcare. 
 
11.  (C) A key Presidential advisor, Mano Tittewala, the 
main architect of the alliance manifesto, told the DCM 
recently there was "nothing to worry about in it."  He 
said the JVP would not have a meaningful impact on 
alliance economic policy.  On differences between the 
PM's and the President's economic policy, Tittewala said 
the only substantive difference was on "strategic public 
enterprises" such as water, gas, railroads, etc.  While 
the current Government is intent on privatizing portions 
of these sectors, the alliance Government would keep 
them, take them out from under the ministries and run 
them on a "bottom line basis." 
 
12.  (C) A close reading of the alliance manifesto gives 
a different perspective.  For example, the manifesto 
promises to immediately grant 25,000 unemployed 
university graduates public-sector jobs.  (Note: in 
speeches the number ranges from 25,000 to 60,000 
depending on the alliance candidate.  End note.)  The 
IMF Rep was recently quoted as saying this kind of 
initiative would prompt a review of the IMF program; 
World Bank and ADB contacts have also voiced some 
concern.  (Note: Sri Lanka has a public sector workforce 
that approaches one million, while the island's 
population is 19 million; per-capita, the public sector 
in Sri Lanka is reportedly larger than in India.  End 
note.) 
 
13.  (U) With regard to the private sector, during a 
February meeting of SLFP-JVP Alliance leaders and the 
business community, Presidential advisor and former 
Foreign Minister Lakshman Kadirgamar indicated the 
private sector would have an important role in the 
economy.  He said the alliance would focus its efforts 
on modernizing agriculture, transportation, local 
resource-based industries, housing and infrastructure 
development, human resource development, export 
diversification, assistance to small and medium 
enterprises to bridge the technology gap and protection 
for vulnerable sectors.  During the same meeting, with 
regard to foreign investment, an alliance spokesman Dr. 
Sarath Amunugama said the alliance would pursue foreign 
investment, based on need and "through proper 
monitoring." 
 
14.  (SBU) The election manifesto itself calls for 
several reversals of current economic policies.  These 
include: 
 
--a promise to revise laws like the Termination of 
Employment Act to provide relief to workers (Note: the 
current, recently revised, version provides for up to 60 
months severance and was part of a reform effort coupled 
with the introduction of a social safety net, in order 
to grant employers more flexibility.  It is hardly 
unfriendly to workers. End note.); 
 
--steps to protect domestic industry from foreign 
industrialists; 
 
--expanded state intervention in the garment industry, 
including extensive transport, energy, technological and 
communications facilities. (Note: the Sri Lankan garment 
industry is one of Sri Lanka's success stories and 
hardly in need of additional Government intervention. 
This particular policy would have the effect of 
bolstering the weakest manufacturers, who have not taken 
steps to prepare for the expiration of the Multi-Fiber 
Agreement in 2005. End note.); 
 
--no privatization of railways, bus companies, 
petroleum, electricity, ports, airport, water or state 
banks (several privatization initiatives in some of 
these areas, particular the port and airport, have 
proven very popular and highly successful). 
 
15.  (SBU) It also includes nebulous statements that do 
not provide much comfort to the private sector.  For 
example: "A foundation should be laid for a new 
economic order...to keep in the hands of the Government 
the structures and activities essential to fulfill 
requirements of the people to maintain daily and long 
term good life standards and in areas where it is not 
feasible for the public sector to involve in competition 
with the private sector." 
 
16.  (SBU) On March 15, ADB's senior economist told 
Econchief that during a March 12 briefing by the 
President to the business community, Kumaratunga further 
distanced the alliance from the current government's 
economic policies and sound market principles. 
Kumaratunga said the PM had "imposed" a market economy 
on the country, "without making the people ready.  The 
US and UK had 400 years to prepare." 
 
Campaign:  JVP for a Market Economy...Whatever That Is 
--------------------------------------------- --------- 
 
17.  (U) While the Sinhalese Chauvinist/Marxist Janatha 
Vimukthi Peramuna  (JVP) party is officially tied to the 
SLFP in this election, it has separately voiced many 
economic policy ideas that are still further left of the 
Alliance manifesto.  Nonetheless, it has tried to 
reassure a worried investor class that is fearful of a 
return to the JVP's statist policies and violent 
practices of the past.  In a recent interview, JVP 
Parliamentary Leader Wimal Weerawansa suggested that JVP 
economic policy aspires to "build a strong and honest 
public sector and a private sector that is responsible 
to the people.a private sector that is.socially 
responsible and respects law and order would have 
nothing to fear" with respect to the JVP's proposed 
economic policies. 
 
18.  (U) Weerawansa's overall commentary, however, 
suggested a firm belief in a command-style economy. 
According to Weerawansa, "many of the local industries 
have fallen and are in urgent need of revival, for which 
we would focus our immediate attention...the government 
is certainly in a position to pump capital to help 
revive local industries." 
 
19.  (U) With regard to trade barriers, Weerawansa 
unabashedly promised import restrictions on food and 
manufactured products that could be locally produced 
(these notions made it into the alliance manifesto). 
The JVP intends to "give local entrepreneurs every 
possible encouragement to develop agriculture and local 
industries."   While claiming not to advocate a ban on 
wheat flour, for instance, he said the country "needs to 
create a right market for rice flour based products to 
take precedence in our daily diet." 
 
20.  (U) Regarding imports, Weerawansa quoted an unnamed 
Indian Minister as once saying: "micro chips, yes; 
potato chips, no."  He then went on to explain that by 
reducing imports of food, the country would protect its 
foreign reserves and this was preferable to sending 
young women abroad.  (Note: over one million Sri Lankans 
currently work abroad as laborers in different fields, 
remitting over US$ One billion annually. End note.) 
 
21.  (U) When asked about a free trade agreement with the 
US, Weerawansa deflected the question saying the 
agreements would be based on "fair and beneficial" 
terms. 
 
JVP-SLFP Alliance:  Tail Wagging the Dog? 
---------------------------------------- 
 
22.  (SBU) The SLFP and JVP are not cut from the same 
cloth with regard to economic policy.  Which party would 
exert greater influence over alliance policies in a 
potential government is hard to predict.  Nonetheless, 
it would appear the SLFP is moderating its traditional 
positions more than the JVP. 
 
23.  (C) While Mano Tittewala dismissed the idea that the 
JVP would have any effect on alliance economic policies, 
it has not escaped notice that Tittewala, the former 
Chairman of the GSL's privatization agency, is now 
defending state industries and suggesting the government 
can run them more efficiently.  The SLFP, though 
historically more left-leaning than the UNP, did 
champion some privatization efforts during its tenure, 
including the partial privatization of Sri Lanka 
Telecom, Sri Lankan Airlines and the Colombo Gas 
Company. 
 
The Business Community and the Elections 
---------------------------------------- 
 
24.  (U) The Sri Lankan business community has performed 
a useful role this electoral period, for example, 
hosting the previously described meeting to hear the 
SLFP/JVP alliance's economic policies.  The Joint 
Business Forum (JBIZ) sent a detailed questionnaire to 
both the PM and the President, seeking their positions 
on several key macro-, micro-economic and political 
issues.  It has also offered commentary about the 
parties' platforms.  For example, at the unveiling of 
the UPFA manifesto on March 12, JBIZ Chairman Mahendra 
Amarasuriya noted the alliance plan specified a mixed, 
rather than fully liberalized, economy, sending "mixed 
signals to the business community." 
 
25.  (U) Various Chambers of Commerce in the past have 
published policy positions.  In November, the Ceylon 
Chamber of Commerce outlined its views on budget 
priorities for 2004.  In the run up to the dissolution 
of parliament, JBIZ hosted meetings to discuss the 
political crisis and debate responses.  JBIZ has also 
called on the new government to limit cabinet ministers 
to 25 (the number has ranged recently between 70 and 
90). 
 
Comment 
------- 
 
26.  (C) Embassy Colombo has publicly referred to the 
current Government as the most pro-business government 
in Sri Lanka's history.  That description holds as we go 
to elections.  The UNP appears to have a solid handle on 
market forces and how to get the economy moving again. 
The UPFA alliance clearly wants to "talk the talk" -- 
saying the private sector is critical.  It is not clear 
it can "walk-the-walk" -- shown by its calls for the 
revival of failing state-owned enterprises and more 
protectionist policies.  (Interestingly, however, a 
World Bank official recently told us he saw little 
difference in ability between the PM and Presidential 
economic teams.)  As indicated from the positions 
outlined above, the electorate would seem to have a 
fairly stark choice when it comes to the economy. 
Whether the PM's claims -- that his job was interrupted, 
but that he had made progress and just needs more time - 
- or the President's claims -- that the UNP's corruption 
and pro-business policies have hurt the common man -- 
resonate, however, will only become clear on election 
day.  End comment. 
 
LUNSTEAD