US embassy cable - 04COLOMBO1342

UNCLAS SECTION 01 OF 03 COLOMBO 001342 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EINV, EFIN, ELAB, KTDB, PGOV, CE, ECONOMICS 
SUBJECT:  SRI LANKA INVESTMENT CLIMATE STATEMENT APPENDIX, 
2004 
 
REF: (A) STATE 141379  (B) 03 COLOMBO 001389 
 
Sri Lanka - July 2004 Appendix to 2003 Investment Climate 
Statement 
 
1.  This appendix serves as an update to the 2003 
Investment Climate Statement for Sri Lanka.  It has been 
provided to assist investors in the interim period 
resulting from the U.S. Government's decision to begin 
publishing the Country Commercial Guide (of which the 
Investment Climate Statement is a chapter) on a calendar 
year basis, in January instead of August. 
 
2.  The United States Government has reviewed the 2003 
Investment Climate Statement for Sri Lanka, and has noted 
the following changes that have occurred since its 
publication.  In most circumstances, if a portion of the 
2003 Investment Climate Statement has not been modified in 
this appendix, it is because the U.S. Government is 
satisfied that it continues to accurately reflect the 
state of affairs in Sri Lanka as of July 2004. 
 
3.  The following are keyed to upates requested in Ref A: 
 
Openness to Foreign Investment: Since the last Investment 
Climate Report, there was a change of government in Sri 
Lanka.  In early February 2004, President Chandrika 
Kumaratunga dissolved the Parliament, following the 
failure of the two major political parties to come to an 
agreement on how to break an impasse over control of 
ministries and steps to move the peace process forward. 
Consequently, Parliamentary elections were held on April 2 
and the United People's Freedom Alliance (UPFA), a left 
leaning coalition comprising the Sri Lanka Freedom Party 
(SLFP) and Marxist Janatha Vimukthi Peramuna (JVP), formed 
a government.  However, it failed to gain a majority in 
Parliament. 
 
A Norwegian brokered ceasefire, between the LTTE and the 
Government, in effect since February 23, 2002, continues 
to hold despite LTTE withdrawal from peace talks in April 
2003.  LTTE presented its proposals for an interim 
administration in October 2003.  Efforts to restart peace 
talks have floundered. 
 
The UPFA contested the election on a platform of pro-poor 
growth policies.  The Government's Economic Policy 
Framework "Creating Our Future, Building Our Nation" 
http://www.treasury.gov.lk focuses on development of the 
small and medium enterprise sector (SME), agriculture, 
infrastructure, with a much heavier reliance on 
Government.  The Government also hopes to facilitate 
private investment through market friendly, export 
oriented strategies supported by a strong regulatory and 
legal framework.  The Government has abandoned plans to 
privatize strategic state enterprises.  Instead, the 
Government will retain ownership and management of these 
enterprises ranging from large state-owned banks to 
electrical utilities.  The Government hopes to insulate 
them from political interference and make them profitable. 
The Government has created three new agencies to improve 
state owned enterprises, economic development, and 
procurement. 
 
The Government has rejected the former Government's 
poverty reduction strategy paper titled "Regaining Sri 
Lanka" citing its failure to benefit the poor and rural 
areas.  However, it has indicated a strong desire to 
continue with various reforms begun by the former 
government. 
 
The Government acknowledges the vital role played by both 
foreign and local private investors in the economy.  The 
Government has promised to encourage both foreign and 
local private investment through the removal of 
impediments and an introduction of an investor friendly 
administration.  However, there have been efforts to 
introduce prohibitive new taxes on the acquisition of land 
by foreigners and other bureaucratically inspired 
impediments to foreign investments.  The Government 
encourages adoption of best practices in the corporate 
sector, and hopes to rely on a healthy corporate sector to 
facilitate investment.  The Government welcomes 
environmentally friendly, socially responsible 
investments. 
 
Pending clarity on economic and fiscal policies, the IMF 
has withheld disbursements under a Poverty Reduction 
Growth Facility (PRGF) and Enhanced Fund Facility (EFF) 
extended to Sri Lanka in April 2003. 
 
The Sri Lankan Rupee has depreciated by about 5 percent 
during the first seven months of 2004, due to political 
uncertainty.  There has been a slowdown in aid and 
investment inflows.  In addition, Sri Lanka's trade 
deficit has also expanded due to a heavy oil import bill. 
Gross official receipts have slipped 13% in the first five 
months.  Total reserves at $3.1 billion, provides 5.3 
months of import cover.  The currency is likely to 
depreciate further in the next few months. 
 
Conversion and Transfer Policies:  No significant changes 
since 2003. 
Expropriation and Compensation:  No significant changes 
since 2003. 
 
Dispute Settlement: There continue to be trade and 
investment disputes, particularly surrounding Government 
procurement.  The procurement process in Sri Lanka is slow 
and non-transparent.  US companies continue to face 
problems with payment on valid contracts, implementation 
on agreements with the Government and inexplicable failure 
to secure contracts, despite high value and low bids. 
 
Performance requirements and investments:  No significant 
changes since 2003. 
 
Right to private ownership and establishment: The 
Government is considering changing land ownership 
regulations and there are calls for the imposition of a 
substantial tax on land sales to foreigners.  Under 
previous versions of this tax foreign companies registered 
in Sri Lanka were considered local companies and were not 
liable.  In its current form, however, any company with 
25% foreign ownership would be considered "foreign" for 
the purposes of the tax. 
 
Protection of Property Rights:  No significant changes 
since 2003. 
 
Transparency of the regulatory System:  No significant 
changes since 2003. 
 
Efficient Capital Markets and Portfolio Investment:  No 
significant changes since 2003. 
 
Political Violence: There has been an uptick in violence, 
mostly in the Eastern part of the country, related to 
infighting between the Liberation Tigers of Tamil Eelam 
(LTTE) terrorist organization, and a faction that split 
from the LTTE earlier this year.  In July, there was a 
suicide bombing in a Colombo police station.  Five people 
(including the bomber) were killed.  The bombing bore the 
hallmarks of an LTTE attack.  Despite these incidents, the 
ceasefire largely holds and both sides have publicly 
committed to its maintenance. 
 
Corruption:  No significant changes since 2003. 
 
Bilateral Investment Agreements:  The US-Sri Lanka Income 
Tax Treaty went into effect on June 12, 2004. 
 
OPIC and Other Investment Insurance Programs:  No 
significant changes since 2003. 
 
Labor:  The Government continues to take steps to improve 
enforcement of labor regulations inside export processing 
zones (EPZs).  The Board of Investment (BOI) has recently 
issued revised instructions to BOI companies to facilitate 
union activity within their factories.  In addition, 
employers were requested to allow trade union access to 
EPZ factories.  Previously, in October 2002, the BOI 
instructed BOI companies to recognize trade unions and the 
right to collective bargaining.  ILO has confirmed that 
non-union employee councils and trade unions can coexist. 
 
Labor Management Relations:  There is a new thrust on 
corporate social responsibility.  Sri Lanka is trying to 
focus international attention to high social compliance in 
the corporate sector in the wake of the MFA-phase out. 
 
Foreign Trade Zones/Free Ports: No significant changes 
since 2003. 
 
Foreign Direct Investment Statistics:  Statistics will be 
updated in the next full revision of the Investment Climate 
Statement, which will be published in January 2005. 
ENTWISTLE