US embassy cable - 05COLOMBO934

UNCLAS SECTION 01 OF 06 COLOMBO 000934 
 
SIPDIS 
 
DEPT FOR EB A/S ANTHONY WAYNE; SA/INS FOR J. BRENNIG, N. 
DEAN; PLEASE PASS TO TSUNAMI RECONSTRUCTION TASK FORCE; 
TREASURY FOR C. CARNES; MANILA FOR US ADB EXEC.DIR. 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EAID, ECON, EFIN, CE, External Relations, Tsunami, LTTE - Peace Process 
SUBJECT: SRI LANKAN DEVELOPMENT FORUM EXCEEDS 
EXPECTATIONS BUT FOLLOW-UP CRITICAL 
 
Ref: A) Colombo 813 
 
1.  (SBU) Summary: Representatives from the Government of 
Sri Lanka and the donor community met in Kandy May 16-17 
to discuss Sri Lanka's post-tsunami situation, the 
country's development goals and the peace process. 
Hosted by the Ministry of Finance and organized in 
collaboration with the World Bank, the forum exceeded 
most expectations, which were lowered due to the 
Government's failure to distribute pre-conference 
discussion papers.  The meeting provided a useful forum 
for the GSL and its development partners to discuss Sri 
Lanka's reconstruction, development and peace agendas. 
End Summary 
 
2. (U) The Government of Sri Lanka hosted, in 
coordination with the World Bank, the Sri Lanka 
Development Forum in Kandy (in the Central Province) from 
May 16-17.  There was good attendance from the donor 
community and, as a result of hosting the conference in 
Sri Lanka for the first time, outstanding representation 
from Government of Sri Lanka (GSL) officials. 
 
3. (U) The Conference was opened by President 
Kumaratunga, who pledged, in an emotional, unscripted 
speech (reported septel), to pursue a joint mechanism for 
the delivery of tsunami assistance in Sri Lanka's north 
and east, despite her perception of threats to her 
personal safety and to her governing coalition. 
 
4. (U) The conference progressed in four sessions over 
two days - two sessions on the post-tsunami recovery 
process, a session on economic policies and development 
challenges and a closing session on the peace process. 
 
I. The Post-Tsunami Recovery Process 
------------------------------------ 
 
5. (U) The first two sessions on the post-tsunami 
recovery process featured briefings by key players in the 
tsunami relief and reconstruction process, including 
 
SIPDIS 
Center for National Operations (CNO) Coordinator Tara de 
Mel; Task Force for Relief Chairman Tilak Ranaviraja; 
Relief, Rehabilitation and Reconciliation Ministry 
Director General Hairim Pieris and Consortium of 
Humanitarian Agencies (CHA) Director Jevan Thiagarajah 
(on behalf of the NGO community).  While the opening 
presentations gave a positive overall assessment of the 
Government's initial post-tsunami response, presentations 
by the Government Agents from (LTTE-controlled) 
Mullaitivu in the north, Trincomalee in the East and 
Matara in the south, provided useful perspectives of on- 
the-ground realities, including some fairly frank 
assessments of challenges that had to be met during the 
relief phase and transition to the reconstruction period. 
 
GSL Perspectives 
---------------- 
 
6. (U) The presentations by de Mel, Ranaviraja and Pieris 
gave broad overviews of their particular agencies' 
responsibilities and were largely self-congratulatory. 
They correctly noted that temporary shelter construction 
was on track to meet GSL goals of 30,000 units by June 30 
and that immediate relief efforts had stemmed a feared 
outbreak of disease and hunger in the relief camps. 
However, none of the presentations dealt with the land 
allocation problems, the coordination bottlenecks, the 
over-centralization of relief decision-making. 
 
NGO Representative 
------------------ 
7. (U) CHA Rep Thiagarajah noted that the post-tsunami 
period was unique, with INGOs controlling enormous 
resources (USD 720 million committed thus far).  He 
called on INGOs to work closely with local partners, to 
better understand local cultural and economic context, 
and to be guided by international standards, including 
accountability and transparency best practices.  He urged 
international partners to make local-level capacity 
building a high priority. 
 
Asian Development Bank and UN Assessments 
----------------------------------------- 
 
8. (U) ADB South Asia Department Director General Kunio 
Senga noted that three things would drive successful 
recovery and reconstruction, "implementation, 
implementation and, implementation."  Miguel Bermeo, UNDP 
Resident Representative noted that Sri Lanka was in a 
critical stage of the transition and as relief operations 
decrease, the emphasis should shift to "build back 
better" which meant not just better houses than before, 
but communities better prepared to deal with 
vulnerabilities. 
 
9. (U) Both Senga and Bermeo noted the inclusive 
consultative nature of the second phase of the damage 
assessments, being undertaken by the Government of Sri 
Lanka in conjunction with the UN, ADB, Japan Bank for 
International Cooperation (JBIC) and the World Bank. 
Senga focused on the transparency aspect of 
reconstruction, expressing pleasure with the adoption of 
an implementation matrix/database in cooperation with the 
World Bank and UNDP.  Bermeo suggested that four key 
areas needed to be addressed in moving forward with 
reconstruction: equity issues between tsunami and non- 
tsunami areas; land allocation issues and the challenges 
 
SIPDIS 
posed by the implementation of the 100m/200m setback 
zone; coordination issues among the Government, donors 
and NGOs, particularly information flow; and, the need 
for capacity development, particularly at the local 
level. 
 
Donor Community Interventions on Tsunami Response 
--------------------------------------------- ---- 
 
10. (U) Donors responded with a mix of support, 
constructive criticism and empathy.  The Ambassador noted 
the importance of critical analysis, to identify what 
went wrong, why, and to determine how the process could 
be improved in the event of another disaster.  He also 
suggested that experiences be compiled for use in the 
development of an emergency management agency or body 
within the Government.  He urged better overall 
coordination and the development of a tracking mechanism, 
noting that there have been instances of different 
countries negotiating with the GSL for the reconstruction 
of the same site (Note: we recently learned that the 
Germans have also been discussing a plan to rebuild 
vocational schools with the GSL - the same schools for 
which we have a signed MOU to rebuild. We are moving 
ahead as planned. End Note). 
 
11. (U) When the Ambassador raised the 100m/200m buffer 
zone, and the challenges that decision posed, the TAFREN 
Chairman and the Science and Technology Minister each 
provided their assessments of how the decision had been 
made post-tsunami.  The TAFREN Chair said that 
flexibility needed to be shown in those areas where 
additional land cannot be allocated nearby.  The Science 
Minister, however, said that the zone was a "temporary 
measure" meant to bide time until a more comprehensive 
coastal survey could be completed.  The Ambassador asked 
how something could be labeled temporary once 50,000 
families had been moved to new permanent housing outside 
the area.  No reply was forthcoming. 
 
12. (U) The Dutch Ambassador, speaking in her role as EU 
President, said the EU was ready to support long-term 
mechanisms for tsunami reconstruction, including the 
joint mechanism for the north and east.  She noted 
serious implementation problems with the buffer zone and 
urged the Government to adhere to the guiding principles 
developed by the needs assessment teams.  She urged an 
equitable approach to conflict affected areas and 
suggested the need for closer coordination of local and 
INGO activities.  Several donors associated themselves 
with the EU statement. 
 
13. (U) Japan focused its remarks on the President's 
speech, noting that it fully supported the creation of a 
joint mechanism and the need for equitable development 
island-wide.  Japan also announced that it was developing 
a yen loan package that would support small and medium 
sized enterprises in the north and east as well. 
 
14. (U) India and China also made interventions, India 
focusing on its role as both a donor country and aid 
recipient country, and the vast expertise it had built up 
over the years.  China largely focused on a laundry list 
of rebuilding activities it intended to undertake 
(reftel). 
 
II. Economic Development Goals 
------------------------------ 
 
15. (U) Day two of the conference focused on Sri Lanka's 
current economic state and its development agenda.  The 
Government handed out a document entitled "The New 
Development Strategy" on May 15 and referred to it as a 
discussion paper not as a draft poverty reduction 
strategy paper (PRSP).  Finance Secretary P.B. 
Jayasundera said he intended to take the document around 
the country for discussion and input. 
 
16. (U) Following a rather bland regurgitation of 
recently released economic analysis for 2004 by the 
Central Bank Governor, Jayasundera outlined what he 
termed "A Framework for Economic Growth and Poverty 
Reduction - Medium Term Perspectives."  According to 
Jayasundera, the framework came out of the Government's 
political mandate from its April 2004 election and was 
based largely on the 2005 budget and the Government's 
Economic Policy Framework. 
 
17. (U) The framework is premised on the notion that five 
percent growth (Sri Lanka's historical average, including 
the recent civil war period) was insufficient to lift 
large portions of the population out of poverty.  Given 
the failure of moderate to high growth rates to reduce 
overall poverty, the document posited that previous 
policies of liberalization, deregulation and 
privatization have produced "mixed or sub-optimal" 
results.  Jayasundera outlined public reticence towards 
conventional reform initiatives and the particularly 
troublesome problem of slow infrastructure development, 
including a severely challenged procurement system, that 
has led to reduced levels of public and private 
investment. 
 
18. (U) The goals set by the framework are similar to the 
Government's original development plan - six to eight 
percent growth, widespread development to reduce regional 
disparities, improved international competitiveness, 
increased investment and a strengthening of external 
assets.  The framework also outlines the constraints to 
development, including infrastructure limitations, 
erosion in government revenue, high cost of finance, 
market imperfections, inadequate regulatory mechanisms 
and increased vulnerabilities to external shocks. 
 
19. (U) Jayasundera then outlined reform initiatives 
including institutional capacity building, public private 
partnerships, efforts to improve governance and 
efficiency, and financial sector reforms.  Among the 
major undertakings Jayasundera described as "pro-poor 
growth initiatives" were rural infrastructure and 
marketing projects, a project to augment water basins and 
the rural irrigation network, rural road restoration, 
small and medium enterprise (SME) development and the 
creation of rural industrial centers. 
20. (U) In the course of Jayasundera's presentation, 
which was widely acclaimed as a direct, honest assessment 
of the challenges facing Sri Lanka, he lamented that with 
the donor community advocating economic reform and Sri 
Lanka's mixed experience with such reforms, he sometimes 
wondered if "we are talking the same?"  On several 
occasions he suggested the need for analysis based around 
the question, "what went wrong?"  Jayasundera clearly 
sees a strong role for the Government in economic 
decision-making and guidance, and lamented what he termed 
the "running down" of the public sector, so that its 
competence had reached a low ebb. 
The IMF Responds 
---------------- 
21. (U) IMF Resident Representative Luis Valdivieso 
followed Jayasundera's presentation with a discussion of 
key policy challenges and policy options.  According to 
Valdivieso, the most immediate economic need is to regain 
and maintain price stability, while proceeding 
"expeditiously" with post-tsunami reconstruction.  He 
warned that fiscal targets set by the GSL would be 
difficult to achieve without additional measures, but 
that ensuring that fiscal targets are met is crucial to 
maintain the credibility of the Government's fiscal 
efforts.  Fiscal consolidation is needed to reduce the 
high-level of public debt.  In addition to enhanced 
revenue measures (which Valdivieso deemed "the highest 
priority"), elimination of most subsidies, improved 
administration and targeting of welfare benefits and 
better debt management would all be required. 
 
22. (U) With regard to monetary policy, Valdivieso urged 
a further tightening, including increased open market 
operations to reduce excess liquidity and a rise in 
interest rates, in order to signal the Government's 
commitment to reduced money supply growth.  On external 
issues, Valdivieso reminded Sri Lanka that its flexible 
exchange rate has served it well and that it should 
resist protectionist trade policies or reversing liberal 
exchange policies to temporarily reduce exchange rate 
pressure. 
 
23. (U) In addition to the structural reforms and fiscal 
consolidations outlined, Valdivieso noted that continued 
efforts towards a just and lasting peace would be the 
most important economic growth stimulus.  The IMF pledged 
its support to Sri Lanka in its efforts to achieve and 
sustain macroeconomic stability.  The GSL indicated that 
it would prefer to resume discussions on a PRGF/EFF- 
supported program following its efforts to implement 
sound macroeconomic measures.  An IMF technical team will 
return in September to review progress. 
 
Donor Responses to Economic Development Objectives 
--------------------------------------------- ----- 
24. (U) The Ambassador (who was asked by the Finance 
Minister to give the initial response from the donor 
community) noted that we agreed that persistent poverty 
despite medium-high growth rates was a genuine problem 
that needed to be addressed.  The Government's discussion 
paper was a good starting point, but it still raised many 
questions.  While it outlined GSL goals, little was 
spelled out in terms of strategies for achieving those 
goals.  The Ambassador noted that the Government's plan 
should be judged against four important themes: the need 
for broad based, private sector-led growth, the need for 
sound macroeconomic policies, including a recognition 
that interference with economic signals, especially 
prices, can create unwanted anomalies in the marketplace, 
the need for an enhanced role and support for the 
business community and efforts to encourage 
entrepreneurship. 
 
25. (U) Several countries associated themselves with the 
US intervention, including the Germans, the Swiss, and 
the Dutch, speaking on behalf of the EU.  The Japanese 
noted the importance of strong leadership in embarking on 
reform, noting that Prime Minister Koizumi repeats a 
mantra at all public events, "no growth without reform." 
The Japanese representative also suggested the GSL needed 
to find appropriate "entry points" for development 
partners in the framework and to spell out exactly the 
roles they expected donors to play.  With regard to 
restructuring of public sector companies and other 
institutions, a restructuring of key players' mindsets 
would also be important.  Consultative processes would be 
critical to getting needed public "buy in" to the 
process.  He concluded noting that Japan was concerned 
about the status of peace negotiations and reminded 
participants that without peace there would be "no 
sustainable development, and that without development, 
peace is not sustainable." 
 
27. (U) The World Bank rep noted that he shared three 
broad areas of agreement with the GSL and their 
framework. First, the importance of creating fiscal space 
to allow greater public investment was critical.  Second, 
it was important to get public buy-in to any reform 
measures - identifying what should be done is the easy 
part, putting plans into action is difficult.  Finally, 
he noted that the most important idea floated was that 
the framework, in the form of a discussion paper, would 
be taken "on the road" and shared more widely, seeking 
input and developing a consensus around the proposals. 
 
III. Peace Process 
------------------ 
 
28. (U) The final session of the conference covered the 
peace process and was opened by Sri Lankan Peace 
Secretariat General Secretary (and Sri Lankan candidate 
 
SIPDIS 
for UNSYG) Jayantha Dhanapala.  Dhanapala outlined the 
current status of the peace process, the peace 
negotiations (which are separate concepts) and the joint 
mechanism for the delivery of tsunami relief in the north 
and east.  He also noted that the Government saw the 
peace process as fundamental to the country's economic 
development and that the peace process needed to be 
understood within a broad continuum of actors and ideas. 
The process was fluid, drawing as it progresses on ideas 
and processes that have come before. 
 
29. (U) Dhanapala outlined the recent history of the 
peace process, the Government's role in negotiations and 
focused on the disparity between LTTE and GSL ceasefire 
violations (2847 LTTE violations verified by the Sri 
Lanka Monitoring Mission (SLMM), compared to 129 fairly 
low-level violations by GSL forces against LTTE cadre. 
 
30. (U) With regard to the Joint Mechanism, Dhanapala 
outlined its origin and basic structure.  He noted that 
it remains a controversial issue and the basis of 
sensitive political consultations.  Overall, according to 
recent polls, 65 percent of the population supports a 
joint mechanism (51 percent of Sinhalese, 93 percent of 
Tamils and 73 percent of Muslims).  As a result, the 
President believes she has a large groundswell of 
support.  Dhanapala closed by noting that frustration 
existed within the donor community regarding the stalled 
peace efforts.  He indicated that Sri Lanka could not 
afford to get frustrated, however, and cited the old 
saying "the more you sweat in peace, the less you bleed 
in war." 
 
31. (U) Japanese Special Envoy Akashi followed 
Dhanapala's remarks and noted that he had found the 
President's opening speech to the forum "remarkable."  He 
felt it indicated that she was looking at the peace 
process and development with a fresh perspective.  While 
the scope of the joint mechanism might be limited, it 
carries important symbolic and political importance. 
Akashi noted that 70 percent of Sri Lankans are in favor 
of the peace process. 
 
Comment 
------- 
32. (SBU) Several participants commented on the utility 
of holding the meeting in Sri Lanka for the first time, 
allowing better representation from the GSL.  The overall 
tone of the conference was frank, open and constructive, 
although donor representatives were handicapped by the 
fact that the GSL did not distribute its position papers 
until the night before the forum.  The next steps are 
likely to be the most telling - will the GSL truly go out 
and consult it development strategy and take on board 
issues raised in post-tsunami consultations?  The 
Ambassador suggested the need for follow-up in the next 
few weeks, in order to build on the momentum and good 
will coming out of the forum.  We will push this idea 
with the World Bank and other donors as well.  End 
Comment. 
 
33. (SBU) The GSL trumpeted the conference in its public 
statements as a great success, alleging that USD 3 
million in reconstruction aid was pledged at the meeting. 
In truth, the meeting was not a pledging session, 
although some countries use their interventions to sum up 
their previous pledges and/or announce additional 
assistance.  The figures announced by the GSL were simply 
a summing up of these numbers, most of which did not 
represent any additional assistance. 
 
LUNSTEAD