US embassy cable - 04COLOMBO1727

C O N F I D E N T I A L SECTION 01 OF 06 COLOMBO 001727 
 
SIPDIS 
 
DEPARTMENT FOR SA/INS BRENNIG; PLEASE PASS TO USTR: A.WILLS 
AND J.ROSENBAUM; COMMERCE FOR A. STERN; MCC: S.GROFF 
 
DEPARTMENT PASS USTR 
 
DEPARTMENT PASS USDA 
 
E.O. 12958: DECL: 10/18/2014 
TAGS: ETRD, ECON, CE, ECONOMICS 
SUBJECT: US-SRI LANKA TIFA DISCUSSIONS AN OPPORTUNITY TO 
MOLD GSL PRIORITIES, FRAME GSL EXPECTATIONS 
 
REF: A. COLOMBO 1702 
 
     B. COLOMBO 1717 
     C. 03 COLOMBO 1673 
 
Classified By: Ambassador Jeffrey J. Lunstead. Reasons 1.4 B, D and E 
 
1. (C) Summary: The GSL delegation for TIFA, headed by 
Commerce Minister Fernandopulle, is looking forward to 
discussions with USTR during the next round of talks on 
October 26.  The delegation will seek to convince the USG of 
the GSL's continued commitment to economic reforms (while 
true for most members of the GSL delegation as individuals, 
the jury is still out on the Government as a whole).  They 
will likely cite recently released economic data showing 
growth continuing above 5% and the Finance Ministry's 
assertion that the budget deficit will remain at 8% of GDP 
this year, dropping to 5% within two-three years. 
 
2. (C) Summary cont'd: The delegation will be eager to hear 
from USTR the status of the GSL's request for an FTA. 
Despite constant efforts by Post to tamp down expectations, 
the GSL remains keenly interested in an FTA, partly under 
pressure from the garment sector and partly in search of a 
"good housekeeping seal of approval" for its economic plan. 
US issues to raise include IPR, the Millennium Challenge 
Account, investment climate/commercial issues, and support 
for US positions in the WTO.  End Summary. 
 
3.  (SBU) As the USG prepares for the upcoming round of Trade 
and Investment Framework Agreement talks, it should take note 
that it faces a new GSL, with a less disciplined approach and 
a short-term economic outlook, a situation which is 
compounded by the impending expiration of the Multi-Fiber 
Agreement in January.  There is likely to be a bit of 
disappointment on the GSL side regarding the agenda, which 
they had hoped would be more inclusive and substantive on the 
issue of bilateral trade (despite numerous Embassy efforts to 
tamp down expectations in light of political uncertainties in 
Sri Lanka and the upcoming US elections). 
 
GSL Players 
----------- 
 
4. (C) Commerce Minister Jeyaraj Fernandopulle will lead the 
delegation and will likely be accompanied by Tourism and 
Industries Minister Anura Bandaranaike (President 
Kumaratunga's brother) and Board of Investment Chairman 
Saliya Wickramasuriya.  Fernandopulle has slowly increased 
his comfort level on international trade matters but is still 
heavily reliant on his Director General, former GSL Rep to 
the WTO, Ambassador K.J. Weerasinghe, who will also 
accompany.  Weerasinghe is a thoughtful, focused public 
servant who would serve as a good sideline interlocutor, 
along with GSL Ambassador Devinda Subasinghe, for the US 
side.  Bandaranaike has been generally positive on the notion 
of increased trade with the US, but not particularly engaged 
or helpful on commercial matters.  BOI Chairman 
Wickramasuriya, a recruit from the international private 
sector, is smart, non-political and engaging.  He has been 
focused primarily on reorganization of the BOI and its 
internal management, however, and actually soliciting 
investment has been a secondary focus so far. 
 
Economic Situation 
------------------ 
 
5. (SBU) Economic activity and outlook has been mixed since 
the President's decision to take over three ministries last 
November and the ensuing period of political jockeying, 
including the April elections and the breakaway of 
LTTE-renegade leader Karuna.  A recent poll of businesses 
showed business confidence at its lowest point in the last 
two years (the lowest since the LTTE attack on the 
international airport in 2001).  Nonetheless, the industrial 
and services sectors continue to peform well, as Western 
Province (i.e. Colombo) growth continues.  The stock market 
has also shown strong returns, buoyed by tourism-related 
stocks - whose index values have doubled since December.  It 
is currently ranked as the best performing stock market in 
Asia. 
 
6. (U) On the macroeconomic front, growth for the first half 
of 2004 was 5.7%, down from the same period last year. 
Inflation is on the rise with oil price hikes a leading 
factor.  Monetary policy remains a bit loose (according to 
members of the Central Bank (CB) monetary board, the CB is 
allowing money supply to grow in the hopes that the GSL will 
cut price subsidies, thus sopping up excess liquidity) and 
the increased balance of payments deficit (caused by a 
suspension of World Bank and IMF budgetary support) is 
forcing continued depreciation of the rupee.  First half 
economic conditions are reported thoroughly in Ref A. 
 
GSL Issues at TIFA 
------------------ 
 
7. (SBU) The GSL delegation is coming to Washington with one 
issue on their mind, a US-SL FTA.  They will try to steer the 
meeting to a discussion of all the steps they have taken 
since the last TIFA round in October 2003, in response to US 
suggestions.  These included signing the WTO Information 
Technology Agreement (which is still outstanding - Finance 
Ministry and Cabinet must approve the duty concessions) and 
sponsoring a visit by Sri Lankan apparel manufacturers to the 
Carolinas (which took place last month). While the Embassy 
has made strong efforts to keep expectations in check and 
tamp down any notion that an FTA could be pursued this year, 
the impending MFA expiration and pressure, particularly from 
garment manufacturers, keeps the issue at the forefront of 
US-Sri Lanka economic relations.  They will also likely raise 
domestic concerns, focusing primarily on the needs of the 
agriculture and small and medium enterprise (SME) sectors - 
citing the recent change in government as evidence of a need 
to balance reform, liberalization and globalization trends 
with the needs of the rural poor.  While we should 
acknowledge the importance of addressing the needs of all 
levels of society and seeking broad-based growth, it is 
important that the USG remind Sri Lanka of its position as a 
trade-based nation with strong international ties.  The GSL 
should not let the need to address domestic concerns 
overwhelm their policies in the international trade arena and 
thus cause the engine of growth to sputter. 
 
Suggested Points: 
 
--We appreciate Sri Lankan Government efforts to take on 
board many of our suggestions from last year's TIFA round and 
would be interested to hear about your experience and the 
outcomes of these pursuits. 
 
--While we note the enhanced focus of your Government on the 
needs of the rural and SME sectors, we think it is important 
that Sri Lanka recognize its strong position as a trading 
nation and the broad success the country has realized through 
economic reform and trade liberalization. 
 
--AM sure you realize that in the long-term, reducing poverty 
in Sri Lanka will not come from subsidies and increased 
government employment, but from creating an environment to 
spur private sector growth. 
 
--There are many options around the world for investors.  Sri 
Lanka needs to make the right decisions and show the right 
investment climate in order to foster additional FDI and 
economic growth. 
 
USG Issues at TIFA 
------------------ 
 
8. (U) Post understands the TIFA agenda currently includes 
the following issues: Sri Lankan Economic and Investment 
Policies; the Millennium Challenge Account; IPR; and 
Bilateral Trade Relations (including FTA). 
 
Sri Lankan Economic and Investment Policies 
------------------------------------------- 
 
9. (SBU) Commercial Disputes and Investment Climate:  While 
this topic is discussed comprehensively in Ref B, the TIFA 
discussion gives an excellent opportunity to reinforce our 
views that US companies operating within BOI zones and in the 
growing services sector are having great success and taking 
advantage of the growing Sri Lankan market and access to 
India.  The overall investment climate remains mired in 
uncertainty, however, as the Government continues to send 
mixed signals on its economic policies and fails to employ 
prompt, clear decisionmaking in the investment approval 
process.  US businesses recognize potential in Sri Lanka, 
particularly in the infrastructure development and services 
sectors, and could offer significant assistance in the 
agricultural sector.  The onerous process of working with the 
Government, however, is crowding out potential investors and 
expertise. 
 
10. (C) Economic Reform: Economic reform remains largely on 
hold with the GSL.  Privatization continues to be demonized. 
The most recent casualty stems from a decision to halt 
selection of a party to take over a one-third interest from 
the state-owned oil company in the petroleum retailing 
sector.  Twelve state-owned strategic enterprises have been 
lumped under a new entity run out of the President's office, 
the Strategic Enterprise Management Agency (SEMA), headed by 
Senior Presidential Advisor Mano Tittawella.  SEMA's role is 
to provide a protective "buffer" around these strategic 
enterprises, insulating them from political influence and 
allowing the boards to hire professional managers and operate 
more as a private-sector entity, with focus on the 
bottom-line, productivity and profit, while still maintaining 
Government control of essential services.  In theory, this is 
a fine idea, but whether Tittawella has the political heft to 
provide this insulation is unknown.  He has been helpful in 
resolving commercial disputes in some sectors in the recent 
past. 
 
11.  (SBU) The previous Government reduced the size and scope 
of the government bureaucracy.  Following its election in 
April, however, the current GSL decided to hire 27,000 
unemployed college graduates to reduce unemployment rolls. 
Further, there have been promises of up to 70% salary 
increases and enhanced benefits (though during a recent 
conversation with the Ambassador, the Finance Minister 
assured that in reality, the raises would be much lower). 
 
Suggested Points: 
 
--We would be interested to hear an update on the economic 
reform process. 
 
--In particular, since privatization has largely been 
abandoned, we would like to know the status of the Strategic 
Enterprise Management Agency and its efforts to streamline 
and modernize state institutions. 
 
--We would also appreciate knowing the status of efforts by 
the National Committee for Economic Development and the new 
Government Procurement Agency. 
 
--All three organizations seem to have critical roles to play 
in helping push the economy forward. 
 
IPR 
--- 
 
12. (SBU) After passage of the new IPR Law in November 2003, 
the government of Sri Lanka, the Embassy, and the Embassy-led 
private sector Working Group have worked together to begin 
enforcement.  Numerous training sessions were organized by 
the Embassy for Police and Customs with the participation of 
US Customs from New Delhi, the International Federation of 
the Phonograhic Industry (IFPI), and BSA Microsoft. These 
supplemented sessions for Police, Customs and the business 
community that were led by the GSL Intellectual Property 
Office Director.  With Embassy assistance,  IFPI gave the 
Police a manual on how to investigate IPR violation cases, 
and gave Customs handy reference brochures to help identify 
counterfeit goods. 
 
13. (SBU) The Embassy also sent four lawyers and a Commercial 
High Court Judge to the US on a special International 
Visitors Program on IPR protection.  The GSL has incorporated 
IPR Law into the curriculum at the Police Academy, and has 
created special IP task forces within the AG, Police and 
Customs.  The government has begun enforcement efforts, with 
a crackdown on counterfeit local music products.  A recent 
raid also uncovered a CD and DVC printing plant, with 
numerous counterfeit CDs, many of which were US music, movie 
and software titles.  The raid reflected solid police work, 
but US company representatives worry that the government may 
not be able to make a strong enough case against the 
defendants. 
 
Points: 
 
--Piracy remains a major concern. 
 
--The recent raid shows that there is domestic production of 
counterfeit goods as well as imports. 
 
--We are encouraged that the Police have conducted some 
raids, and hope that the GSL follows these cases with 
diligence through the legal proceedings. 
 
--We hope the GSL ensures that the Police and Customs are 
given the support they need to make seizures and give 
testimony with confidence. 
 
--The Embassy and the IPR Working Group have offered their 
continued assistance with training sessions, information on 
legitimate product identification and other support as 
requested by the GSL. 
 
--Many will be watching to see how Sri Lanka handles these 
new cases. 
 
--We hope to see more raids, leading to prosecutions, and a 
reduction of  counterfeit products in the marketplace. 
 
--We look to Sri Lanka to be the leader in South Asia in IPR 
protection, with a concurrent rise in confidence by 
prospective investors. 
 
Millennium Challenge Account 
---------------------------- 
 
14. (C) The GSL has been slow to take up the MCA challenge 
(Note: recently the MCC indicated it had already received 
concept papers or compact proposals from 13 of the 16 
eligible countries.  Post only last week received a partial 
draft of the GSL's initial concept paper. End note).  While 
claiming to be thoroughly consulting with NGOs and private 
sector chambers around the country, there is little evidence 
of any significant outreach.  The GSL has submitted a partial 
draft concept paper to the Embassy, but we continue to await 
their final draft for submission to MCC.  Slow going on the 
MCA front is due to several factors: 
 
--GSL rejection of the former Government's Poverty Reduction 
Growth Facility (PRGF) program (Regaining Sri Lanka) and few 
discussions with the World Bank and IMF about developing a 
new plan. 
 
--Pressure to develop its own budget (the current GSL has 
adopted the previous Government's budget through November, 
when the new budget submission to parliament is due).  There 
is significant pressure on the GSL to differentiate itself 
from the former Government's policies, particularly with 
regard to assistance to the agricultural sector, accompanied 
by the inconvenient reality that the Government coffers are 
virtually empty. 
 
--The new Finance Secretary has released virtually all 
members of the senior Ministry staff with relevant experience 
(either as a result of personal or policy differences) and is 
relying on the highly bureaucratized national planning office 
to take up the mantle. 
 
15. (SBU) While it is not too late to take advantage of the 
MCA opportunity, the GSL risks being the last one out of the 
gate unless significant high-level pressure is applied to 
this initiative soon.  In particular, the GSL needs to engage 
the opposition parties, donor community, business community 
and domestic and international NGOs to build support for its 
initiatives (MCC made very clear that one of the first 
responses to a proposed compact would be to vet it with civil 
society). 
 
Suggested Points: 
--MCA program poised to become a key model of delivering 
assistance, can be used as a framework for looking at a 
country's complete assistance portfolio. 
 
--We are concerned that Sri Lanka still has not completed its 
concept paper and that little publicity has been given to the 
consultative process. 
 
--We would appreciate knowing what your timeframe is for 
submission of a compact proposal, how the consultative 
process has gone and what additional efforts are underway to 
build broad-based support for the initiative. 
 
Bilateral Trade Relations 
------------------------- 
 
16. (U) Trade between the US and Sri Lanka continues to be a 
one-way street, three-quarters of which involves the export 
of Sri Lankan-made garments to the US.  In 2003, Sri Lankan 
exports to the US were US$ 1.8 billion (US$ 1.5 billion of 
which was garments).  US exports to Sri Lanka have been in 
decline for several years and in 2003 were US$ 154 million 
(Note: Post continues to look into this figure, as we believe 
it does not fully capture the strengths of US "exports" 
including services, education, and items re-exported from 
other countries in the region. End note). 
 
17. (U) Post has recently received funding from the 
Department to pursue a study on how to use the Indo-Lanka 
Free Trade Agreement to create opportunities for US companies 
to export to the Indian market via Sri Lanka.  American goods 
are popular in Sri Lanka and potential for increased exports 
exists. 
 
18. (SBU) Perhaps the single largest impediment to US exports 
is the Government procurement process.  In the past year, 
several opportunities have been squandered due to 
non-transparent tender processes, or interminable delays due 
to bureaucratic inertia.  US companies lost out on 
opportunities for upgrading the radar at the international 
airport (despite having technically superior products and 
pointing out that the Italian firm that won could not perform 
the work at the price bid), opportunities to be part of the 
"third-player" in the petroleum sector (due to GSL reneging 
on earlier privatization contract obligations), opportunities 
to bunker fuel for ships in Colombo port (due to restrictions 
placed on outside bunkering facilities after the 
privatization process had been initiated).  Two US power 
companies continue to have payment problems and have been 
forced to suspend operations in this power-starved country 
(in one case the non-payment has taken place following a GSL 
request for Embassy intervention with the company to restart 
operations after a plant accident.  The company acceded to 
the request.). 
 
19. (SBU) The GSL has touted a newly formed Government 
Procurement Agency as a solution to this problem.  To date, 
however, this entity has not made the same headway as its new 
sister agencies the Strategic Enterprise Management Agency 
and the National Council for Economic Development. 
 
Suggested Points: 
 
--We are concerned about the declining trend in US exports to 
Sri Lanka, particularly as Sri Lanka continues to improve its 
access to US markets. 
 
--We appreciate the efforts of the Sri Lankan garment sector 
to visit North Carolina and look for sourcing opportunities 
in the US.  We encourage continued efforts on that front. 
 
--US companies currently have a very difficult time operating 
in Sri Lanka, due to political intrusion into the market and 
poor Government procurement practices. 
 
--We would appreciate an update on how the Government of Sri 
Lanka intends to rectify its government procurement practices. 
 
--In particular, we would like to stress the need for 
resolution of payment disputes with US companies in the power 
sector and the need to expedite approvals for US companies 
seeking to invest in Sri Lanka. 
WTO 
--- 
 
20. (SBU) Sri Lanka has continued to play a supportive role 
in the WTO and in moving the Doha agenda forward.  During our 
discussions, they continue to acknowledge that their 
long-term views are more in line with US policy and that they 
intend to be supportive of progress on the multilateral 
front.  During a recent meeting with Econoffs and business 
sector representatives, however, Commerce DG Weerasinghe 
noted that support on the multilateral front would also be 
driven by progress on the bilateral front - laying down a 
clear marker that Sri Lanka believes they should get more 
(i.e. an FTA) for their cooperation. 
 
21. (SBU) It should be noted, however, that the GSL does face 
some local criticism for its support for progress in the WTO 
(which is labeled as pandering to the US position) rather 
than showing solidarity with its developing country brethren. 
 The GSL has looked closely at its interests, however, and 
appears ready to continue to play the helpful role it has 
adopted.  It is important that the USG continue to reinforce 
that we understand Sri Lanka's position alongside us in the 
WTO stems from a sophisticated consideration of Sri Lankan 
interests in global trade talks, rather than some sort of 
"gimmick" to garner US support or concessions on other 
fronts. 
 
Points: 
--USTR and State points on US policy toward the WTO and US-SL 
FTA as appropriate. 
LUNSTEAD