US embassy cable - 05COLOMBO424

UNCLAS SECTION 01 OF 02 COLOMBO 000424 
 
SIPDIS 
 
TREASURY FOR C. CARNES, DEPT FOR SA/INS J. BRENNIG, MANILA 
PLEASE PASS USADB 
 
E.O. 12958:  N/A 
TAGS: EAID, EFIN, ECON, CE, ECONOMICS, External Relations, Tsunami 
SUBJECT:  SRI LANKAN REQUEST FOR POST TSUNAMI DEBT RELIEF 
 
1.  On February 24, Post received a letter from Finance 
Minister Sarath Amunagama addressed to US Treasurer Anna 
Escobedo Cabral (unclear why Cabral was addressee).  The 
original is to be sent directly to Treasury by the Sri 
Lankan Embassy in Washington.  The letter (text below) 
repeats Amunugama's February 17 letter to the Paris Club 
almost verbatim.  It outlines damage to Sri Lanka as a 
result of the tsunami, expounds on Sri Lanka's relief and 
reconstruction needs and requests a debt deferment of 3-5 
years. 
 
2.  Post has, in response to other queries, already 
discussed debt relief with the GSL and explained that since 
Sri Lanka does not have an active IMF program, a one year 
deferral, followed by a four year restructuring would likely 
be the best we could offer. 
 
3.  Begin Text of Finance Minister's Letter: 
 
Ms. Anna Escobedo Cabral 
US Treasurer 
1500 Pennsylvania Ave 
NW Washington DC 20220 
USA 
 
Dear Madam, 
 
REQUEST FOR DEBT RELIEF AS BUDGETARY AND BALANCE OF PAYMENTS 
SUPPORT FOR POST-TSUNAMI RELIEF, REHABILITATION AND 
RECONSTRUCTION (RRR) 
 
The Tsunami disaster on 26th of December took away the lives 
of over 30,000 in Sri Lanka, made nearly one million persons 
homeless and caused extensive damage to private and public 
property and infrastructure in the affected areas in the 
coastal belt.  The asset loss alone is estimated at least 
around US$ 900 million (slightly over 4% of GDP).  Our 
latest assessment suggests that the total reconstruction 
expenditure is around USD 1.5 billion particularly in view 
of the fact that the reconstruction process should avoid 
vulnerabilities to natural hazards in the future.  The 
underlying strategy has been a multi-hazard risk approach 
during the recovery phase to ensure that communities and 
assets are less vulnerable to impact of future disasters. 
The bulk of this expenditure is on housing and townships, 
transportation infrastructure, including roads, railways, 
and ports (USD 400 million), the fisheries sector 
infrastructure requirements such as harbours, anchorages and 
related facilities (USD 200 million), water supply and 
sanitation projects (USD 150 million) and schools and 
hospitals building (USD 120 million).  In our reconstruction 
and recovery program which will take around 2-3 years, 
provisions will also be made to the coast conservation and 
natural resources affections as well.  Substantial work has 
to be done in these areas. 
 
To meet the urgent needs of those affected, the response of 
the government has been swift and comprehensive, supported 
by the assistance of donors and relief agencies.  While 
immediate efforts have focused on the humanitarian needs of 
the survivors, we also aim to undertake as much as 40 
percent of the required rehabilitation and reconstruction in 
2005 with particular emphasis on settlements and livelihood 
support.  With the generous support of international donors, 
we aim to undertake this work without jeopardizing 
macroeconomic stability. 
 
The government's immediate policy response includes several 
initiatives to meet the humanitarian needs of the people 
while also safeguarding key macroeconomic objectives.  These 
include: (i) immediate humanitarian support to affected 
individuals amounting to an estimated 0.2 percent of GDP 
this year;(ii) a concessional refinancing scheme to ensure 
that funding is available for small and medium enterprises, 
initially set at Rs 5 billion; and (iii) measures to ensure 
availability of liquidity and smooth functioning of payments 
and settlements system. 
 
The overall negative impact on GDP growth will be limited by 
the initiation of rehabilitation and reconstruction. 
However, this will lead to significant additional government 
expenditure in 2005. We estimate that the total fiscal cost 
in 2005 to be about 2 percent of GDP, with most of this 
reflected in development expenditure.  While there could be 
some minor revenue shortfalls in some areas, we expect these 
to be limited to about 1/4 percent of GDP. This will push 
the fiscal deficit this year to about 9 3/4 percent of GDP 
compared to the 7 1/2 percent envisaged in the 2005 budget. 
The government expects to meet the additional expenditure on 
account of post Tsunami relief, rehabilitation and 
reconstruction programme out of donor assistance. 
Additionally, external debt relief would help the government 
to provide fiscal space to accommodate reconstruction 
expenditure while containing domestic financing, making more 
resources available to the private sector. 
The country's resources have also been under severe strain 
due to other external shocks namely the higher oil prices 
and a severe drought in early 200.  Heavy foreign debt 
service payments amounting to USD 550 million also exerted 
pressure on the limited foreign reserves.  The 2004 has 
ended up with a balance of payments deficit of USD 212 
million and gross official reserves have depleted by USD 322 
to USD 1,718 million at end 2004.  The official foreign 
loans amortization alone, excluding the debt service 
payments to IMF, for which we have got some relief, in 2005- 
2008 amounting to USD 2,241 is a heavy burden on the budget 
and the balance of payments.  The balance of payments 
pressures due to high oil prices too is likely to continue. 
Given this resource constraint it is only with the assurance 
of enhanced generous budgetary and balance of payments 
support from the donor community at highly concessional 
terms, including debt relief that the urgent and massive 
task of RRR (note:  relief, rehabilitation and 
reconstruction.  Endnote) can be effectively undertaken 
without undermining the development work of the rest of the 
country. 
 
In this background, the announcement of debt relief by your 
Government would provide us a great encouragement. 
Therefore, we shall be grateful if you could differ (sic - 
should read defer) the debt service payments for a period of 
3-5 years during which time we expect to complete the 
reconstruction work of the affected region.  Such relief 
will enable us to finance the required counterpart expenses 
of donor funded project and will provide us the much needed 
fiscal and balance of payments space to manage the 
challenges ahead. 
 
We greatly appreciate your assistance and cooperation in 
this regard. 
 
Yours sincerely 
 
Sarath L B Amunagama 
Minister of Finance & Planning 
 
End text. 
 
LUNSTEAD