US embassy cable - 04COLOMBO927

UNCLAS SECTION 01 OF 02 COLOMBO 000927 
 
SIPDIS 
 
SENSITIVE 
 
DEPARTMENT FOR SA/INS 
DEPARTMENT PASS TO USTR - JROSENBAUM AND AWILLS 
COMMERCE FOR ARI BENAISSA 
MCC FOR RSANKARAN AND SGROFF 
 
E.O. 12958:  N/A 
TAGS: ECON, ETRD, EAID, CE, USTR, ECONOMICS 
SUBJECT:  Still No GSL Economic Policy Framework, but Some 
Structural Reforms Anticipated 
 
Sensitive but Unclassified, please handle accordingly. 
 
1.  (SBU) Summary: Recent visits by the IMF, ADB and 
Millennium Challenge Corporation have inspired a flurry of 
economic policy activity on the part of the Sri Lankan 
Government.  It did not pull an economic plan together 
prior to the visits, although a Senior Advisor to the 
President has indicated that an initial draft plan should 
be out by the week of June 14.  IMF representatives left 
without a clear sense of the direction of the GSL's 
economic policies and now have concerns about structural 
and fiscal benchmarks that had been the core of the most 
recent Poverty Reduction and Growth Facility (PRGF) 
agreement.  Nonetheless, the GSL intends to launch several 
major reform initiatives, including three new bodies that 
will oversee economic reforms and state-owned enterprise 
restructuring.  While these plans indicate a good 
understanding of the kinds of reforms that are needed, 
broad societal support and technical/professional capacity 
for implementation will prove to be the economic Gordian 
knot for the new GSL.  End Summary 
 
2.  (U) IMF and ADB teams visited Sri Lanka the week of May 
24 and a Millennium Challenge Corporation visit the week of 
May 31 provided an opportunity to meet with representatives 
from the IMF, ADB and GSL to discuss the current 
Government's economic policy plans. 
 
3.  (SBU) During a meeting between international financial 
institution (IFI) reps and the MCC, IMF Rep Jeremy Carter 
said it was clear that Sri Lanka did not have a policy yet 
formulated and that the GSL was in an "incredibly tough" 
situation, unable to match election promises and needs of 
coalition partners, particularly the Marxist JVP, with the 
requirements of international donors, who are advocating 
continued fiscal prudence, privatization and sectoral 
reforms. 
 
4.  (SBU) Carter thought that with the GSL's focus on the 
July Provincial Council elections there was little chance 
that any meaningful action will be taken in parliament 
during the next month.  Therefore, economy-related 
legislative initiatives that were dropped when parliament 
was dissolved (such as new banking regulations, the foreign 
exchange management act, a new revenue agency), are not 
likely to be considered in the near term.  Further, the 
unclear UPFA stance on privatization (there have been 
several contradictory statements about privatization by 
high-level GSL officials) has created problems for reform, 
particularly in state-owned banks.  Meanwhile, price 
increases, particularly for oil, wheat flour and rice, are 
causing subsidy payments, or arrears, to balloon, creating 
pressure on the government to let prices increase. 
 
5.  (SBU) Until the GSL is able to articulate an economic 
plan and come to terms with the IMF under Article IV 
consultations, IMF disbursements are on hold.  Carter 
suggested it was unlikely any disbursements could now be 
made before next fall, at the earliest. 
 
6.  (U) Senior Presidential Advisor Mano Tittawella, during 
a meeting with the visiting Millennium Challenge 
Corporation team, however, suggested that the GSL's 
economic plan was in the pipeline, with an initial draft to 
be released the week of June 14 and a final, more 
comprehensive strategic plan at the end of June.  He 
expected the IMF and World Bank teams to return to discuss 
the country's poverty reduction strategy at that time. 
 
7.  (U) Tittawella said the Government's economic plan would 
focus on removing impediments for growth, but not through 
pure privatization mechanisms.  He described three bodies 
that have been created and approved by cabinet to oversee 
economic reform.  The first is the National Council on 
Economic Development, which will feature working groups 
from various industries.  These groups will make 
suggestions to the Government about needed reforms.  In 
particular, they will be asked to submit an initial list, 
within a "short period of time" of actions that should be 
taken before the end of the year, in order to jumpstart the 
reform process.  The idea, Tittawella said, was to convert 
ideas into action as quickly as possible. 
 
8.  (U) The second body will be the Strategic Enterprise 
Management Agency (SEMA), a holding company that will 
oversee the operations of the four state-owned banks, the 
port, airport, petroleum company, electricity board, bus 
companies, and other state-owned enterprises.  SEMA will 
have the authority to place management at each enterprise 
and will be charged with implementing needed reforms to 
transform the companies into profitable ventures, rather 
than financial sinkholes. 
 
9.  (U) The third main body is a new National Procurement 
Agency that would run all large procurement projects.  The 
GSL will ask the IFIs to provide expertise and assistance 
in establishing the agency.  (Note: Poor government 
procurement procedures are the single largest source of 
Embassy advocacy requests.  End note.) 
 
10.  (U) Tittawella also described the continuation of the 
"eSri Lanka" program begun under the last Government.  This 
is an ambitious electronic governance plan, which, 
according to Tittawella, will fall under an inter- 
ministerial body and link up the Government's other 
initiatives.  (Note: This project has been underway through 
Sri Lanka's Information and Communications Technology 
Agency (ICTA), with funding by the World Bank.  Its 
structure and role under this new body remains unclear 
however.  End note.) 
 
11.  (SBU) Tittawella acknowledged that the real challenge 
faced by the new Government was not developing new ideas, 
but getting them implemented.  He suggested that several of 
the proposals, including eSri Lanka, electricity and 
petroleum sector reform, and the restructuring the main 
state bank in particular, were bi-partisan in nature and 
would hopefully be accomplished in fairly short order. 
 
12.  (SBU) Comment:  The contrasting views on the economic 
situation posited by Carter and Tittawella make clear that 
the GSL has a lot on its economic plate at the moment. 
While the IMF is clearly not satisfied with what it sees, 
the focus of high-level GSL officials on continuing 
economic reforms is encouraging.  Further, the willingness 
of the GSL to take a black-eye in the short-term, rather 
than rush out a plan that is not completely vetted, is 
laudable.  Tittawella's admission that implementation, not 
conception, will be the main stumbling block, also 
indicates a solid understanding of the polarization of Sri 
Lankan society, and the poor track record of the GSL, under 
any administration, in actually putting reforms in place. 
End Comment. 
 
LUNSTEAD