US embassy cable - 05COLOMBO1867

C O N F I D E N T I A L SECTION 01 OF 05 COLOMBO 001867 
 
SIPDIS 
 
DEPT FOR SA/INS: MGOWER AND CSIM; 
DEPT PASS USTR 
MCC FOR DNASSIRY AND EBURKE; 
TREASURY FOR SCHUN 
 
E.O. 12958: DECL: 11/17/2015 
TAGS: EAGR, ECON, ETRD, PGOV, PREL, CE, Elections 
SUBJECT: PRESIDENTIAL PLATFORMS HIGHLIGHT STARK ECONOMIC 
CHOICES FOR SRI LANKAN VOTERS 
 
REF: COLOMBO 1853 
 
Classified By: AMBASSADOR JEFFREY J. LUNSTEAD, REASONS 1.4 B, 
D AND E 
 
1.  (C) Summary: The Sri Lanka presidential candidates have 
released their election "manifestos" (platforms). Both have 
clearly learned the lessons of the April 2004 parliamentary 
elections, in which the rural vote proved decisive, and have 
included significant benefit increases for the rural sector. 
The manifestos offer a clear choice for Sri Lankan voters 
between the private sector-led economic policies of the 
opposition leader, United National Party (UNP) leader Ranil 
Wickremesinghe and the state-led approach of the current 
Prime Minister, Sri Lanka Freedom Party (SLFP) candidate 
Mahinda Rajapakse. While both sides promise significant 
benefits, many observers point out that the cost of these 
promises makes their ultimate implementation unlikely. 
The US would find it easier to work with a Wickremesinghe 
administration's economic team, given their private sector 
focus and sound approach to macroeconomic policy, but we 
have worked well with the SLFP-led current government and 
would continue to pursue every opportunity to influence a 
Rajapakse government to adopt sound economic policies.  A 
range of instruments, including the Millennium Challenge 
Account, our Trade and Investment Framework Agreement, and 
other cooperative endeavors give us continued leverage 
regardless of who wins on November 17. End Summary 
 
2.  (U) Sri Lankan Opposition Leader Ranil Wickremesinghe 
and Prime Minister Mahinda Rajapakse, the United National 
Party and Sri Lanka Freedom Party presidential candidates 
respectively, have issued their presidential "manifestos" 
(platforms).  The documents, and the surrounding "spin" 
efforts by the candidates' spokespersons, provide insight 
into the type of policies each candidate will undertake 
if elected, even after the "pie in the sky" rhetoric is 
stripped away.  Political aspects of the manifestos 
reported reftel. 
 
Lessons Learned from 2004 
------------------------- 
 
3. (C) Both candidates' manifestos incorporate lessons 
learned from the April 2004 general elections.  In these 
elections, Wickremesinghe's UNP party was soundly defeated 
largely as a result of a backlash of voters outside the 
country's main business center, the Western Province, which 
houses the capital city Colombo.  While Wickremesinghe's 
government had initially taken bold steps to jumpstart the 
economy and reduce the size and scope of the state's 
involvement in people's lives and businesses, he trampled 
too hard on two fundamental perceptions.  First, his 
negotiations with the Liberation Tigers of Tamil Eelam 
(LTTE) terrorist group, which included the possible 
devolution of greater powers and autonomy to regional 
governments, challenged some Sri Lankans' views of their 
country as a unitary, multi-ethnic democracy. Second, he 
challenged many of the core statist traditions in Sri Lanka, 
suggesting that the country needed to adopt a more western- 
oriented, capitalist approach to its economy.  While his 
policies led to growth in the Western Province, they did 
not translate into higher incomes and higher standards of 
living for rural and small-town Sri Lankans (Note: partly 
as a result of his tenure being cut short by President 
Kumaratunga's dissolution of parliament and call for new 
elections. End Note). Wickremesinghe's handlers recognize 
this mistake and are trying to create a more populist image, 
and are counseling the candidate to temper his market-friendly 
rhetoric.  He may also take a more measured approach to reform, 
if elected.  Rajapakse, on the other hand, has a strong statist 
bent and is painting himself as the candidate most in touch 
with the needs of the Sri Lankan commonweal. 
 
Real Choices for Voters 
----------------------- 
 
4.  (C) On the economic policy front, the documents make clear 
that Sri Lankans are faced with a distinct choice, between a 
reform-minded, market-oriented Ranil Wickremesinghe who favors 
private sector solutions and a more statist-oriented, slightly 
protectionist Mahinda Rajapakse, who sees the private sector 
as something in need of government assistance and coddling. 
 
5.  (U) Sri Lankan voters have the advantage of having seen 
both economic policy teams in action over the past two years. 
During Wickremesinghe's tenure as Prime Minister (from 2001- 
to mid-2004), inflation dropped to less than 5 percent, 
unemployment began to fall, export-led growth picked up 
considerably and fiscal policy began to moderate.  Under 
the past 18 months of the SLFP-led government, negative 
externalities such as the tsunami and increasing oil prices 
have contributed to rapidly rising inflation.  The rising 
inflation also stemmed from the Government's refusal to 
moderate petroleum subsidies, freeze the size of the 
government bureaucracy and sufficiently raise interest 
rates. Inflation has only just begun to taper off at about 
13 percent. While growth has continued to be strong (forecast 
at 5.2 percent for 2005), it has come at the expense of fiscal 
responsibility and through continued Government interventions 
- particularly through subsidies and easy credit to state-owned 
enterprises. 
 
6.  (SBU) Neither candidate has proposed a significant 
dismantling of the bloated government bureaucracy. 
Nonetheless, the documents make clear that Wickremesinghe 
would pursue smaller government and private-sector led 
employment programs, while Rajapakse's manifesto contains 
numerous promises of new government programs, subsidies and 
welfare benefits. 
 
7.  (C) Rajapakse's hands are somewhat tied (as the current 
government's have been) since he forged an alliance with 
the Marxist-Nationalist Janatha Vimukthi Peramuna (JVP) and 
is surrouned by an economic team that includes a strong 
statist-oriented economist, a well known market-oriented 
consultant, a JVP representative and the leader of the 
Buddhist monk party.  While some advisors have suggested 
that once in office Rajapakse would be able to ignore the 
demands of the JVP and other "partners," they have 
nonetheless had a strong influence over the manifesto. 
 
Economic Growth 
--------------- 
 
8.  (U) Wickremesinghe pledges to achieve 10 percent economic 
growth per year or ten years, doubling economic prosperity 
and incomes over the next decade (Note: we assume the UNP has 
decided to simplify this equation for the voters, as 10 
percent growth would require just over 7 years to double GDP. 
End Note). Rajapakse pledges 8 percent growth over 6 years. 
Most economists suggest that Rajapakse's goal is more 
realistic, but that the increase in spending his plan portends 
will crowd out private investment and could prove even more 
inflationary than the current situation. 
 
9.  (SBU) Wickremesinghe's manifesto is reminiscent of his 
previous government's poverty reduction and growth facility 
plan entitled "Regaining Sri Lanka."  It includes a focus on 
infrastructure development, private sector-driven growth, 
sound macroeconomic policies, including deficit reduction, 
and a strong orientation toward liberalized trade. 
 
Structural Adjustments 
---------------------- 
 
10.  (C) Wickremesinghe does not dwell on structural changes, 
but his party's stance on state-owned enterprises and their 
drag on fiscal policy is clear.  A Wickremesinghe Government 
would probably champion privatization of certain entities, in 
line with his previous initiatives as Prime Minister. Given 
the political sensitivity of privatization, however, we would 
expect a gradual approach. 
 
11.  (C) Rajapakse clearly states throughout the manifesto 
that he is opposed to privatization of key enterprises, and 
specifically promises not to privatize the electric utility 
company and the Ceylon Petroleum Corporation. Privately, 
however, his key economic advisor recently suggested to 
Econchief that he would favor minority equity holders being 
empowered with management authority. 
 
Employment 
---------- 
 
12.  (U) On the question of employment, while Rajapakse 
offers a specific number of Government jobs to be filled 
the first year, Wickremesinghe's document merely pledges 
a program to assist unemployed graduates in finding jobs 
in either the public or private sector.  Wickremesinghe 
promises the creation of 200,000 jobs per year, but does not 
specify in which sector and clearly views the private sector 
as the primary engine of employment and economic growth. 
 
13.  (U) Rajapakse, on the other hand, specifically promises 
not to "prune the public sector" during his tenure - given that 
it is the preferred employment option for many Sri Lankans. 
He promises significant public sector-driven employment 
initially, including additional government jobs for 10,000 
university graduates and the expedited hiring of 33,000 
additional public servants to fill vacancies.  He promises 
permanent appointments for all government employees on 
temporary contracts (to solidify the support of the 35,000 
plus university graduates hired by the GSL over the past 18 
months).  He also promises 50,000 jobs for youth in 2006 and 
100,000 in 2007. 
 
Welfare Benefits 
---------------- 
 
14.  (SBU) Both sides promise extensive welfare benefits. 
Wickremesinghe's plan is far less specific, but more 
progressive and market oriented, with promises to increase 
food stamp value; institute welfare reform to target 
assistance and establish limits on how long people can 
draw on the system; develop the equivalent of a blue ribbon 
school program; increase the role of communities in 
education development; establish a private bank-driven 
home loan scheme; and provide a village based development 
fund, among other pledges.  In what may turn out to be a 
poor marketing ploy, however, Wickremesinghe is trying to 
recast the name of the welfare program (currently "Samurdhi" 
in Sinhala) to Siya Saviya (roughly translated as "Personal 
Ability"). The SLFP is taking advantage of this switch to 
claim that Wickremesinghe's failure to mention "Samurdhi" 
shows he intends to make massive cuts in the food stamp 
program. 
 
15.  (U) Rajapakse's plan includes a 50 percent increase 
in welfare payments, the doubling of Government payments 
to families in the event of the death of a family member 
(USD 50 to USD 100) and the doubling of the Government's 
allowance for the birth of a child (USD 25 to USD 50). He 
also outlines numerous housing programs for different 
sectors. 
 
Agricultural Sector 
------------------- 
 
16.  (SBU) Both manifestos reflect lessons learned in the 
April 2004 general election, when it was clear that economic 
growth that did not translate into improved rural standards 
of living cost the UNP the election. Wickremesinghe's 
manifesto, while market oriented, pro-globalization and 
far more sound in its macroeconomic approach, nonetheless 
contains promises that are specifically aimed at the rural 
poor and middle class, including fertilizer subsidies 
(though far smaller than Rajapakse's) and guaranteed prices 
to farmers for rice and dairy production. 
 
17.  (U) Rajapakse's plan for agriculture includes a focus 
on irrigation improvements and the provision of land to 
tenant farmers, fertilizer and seed subsidies, forgiveness 
of cultivation loans, guaranteed commodity prices, import 
substitution policies, marketing efforts to increase rice 
consumption, protection of domestic crops through import 
restrictions, guaranteed minimum prices for farmers and 
assistance for storage of local crops in regional centers. 
18.  (U) Under Rajapakse's plan, every village in the 
country would be guaranteed electricity, telecommunications 
infrastructure, clean drinking water, irrigation water, 
access roads, schools, health center, market center with 
agricultural cooperative, rice and fertilizer storage 
facilities, a factory, a pre-school, a playground, a village 
forest and a cemetery. In short, the Prime Minister is 
promising government largesse from cradle to grave. 
 
19.  (C) Dinesh Weerakoody, an advisor to Wickremesinghe and 
former member of the Economic Policy Council under the last 
UNP government, told Econchief recently that the rural sector 
needs to be appeased, and that the UNP would pledge the minimum 
it needed to win, but would exercise prudence once in office. 
 Rajapakse's chief economic advisor, on the other hand, told 
Econchief that the PM's approach would be one that focuses 
explicitly on rural development and that would require 
significant government intervention. 
 
Furthermore, Rajapakse needs to appease his JVP partners at 
this stage of the campaign, he said. 
 
Comment 
------- 
 
20. (SBU) While Rajapakse's team is obviously gunning for 
the rural vote, Wickremesinghe is clearly counting on current 
dissatisfaction over the rising cost of living and 
unemployment to drive a backlash against Rajapakse and his 
association with the current government. 
 
21.  (C) Through analysis of the manifestos, we can foresee 
some implications for US policy, though ultimately neither 
manifesto is binding, and, as many observers are pointing out, 
the state does not have the money to pay for either platform. 
Should Rajapakse win, there is no question that we will 
continue to see an unabashed focus on the rural sector.  We 
can expect the current emphasis of the Millennium Challenge 
Account compact proposal to remain on rural irrigation and 
mall and medium enterprise development and a continued 
growth in government size and scope.  Rajapakse's comfort 
with protectionist policies will hurt small segments of US 
exports to Sri Lanka (consumer goods, agricultural products), 
though investment goods, which comprise the bulk of US sales 
to Sri Lanka, will likely remain duty-free, as both Governments 
would likely want to support investment in the continued 
development of the export sector.  Sri Lanka will continue 
to harbor hopes for a free trade agreement with the US, but 
keep its topic approach to an FTA as merely a means of 
promoting duty-free access for garments to the US. 
 
22.  (C) Should Wickremesinghe win, we would expect a 
sharp upturn in requests for advisors and assistance. By 
contrast, Rajapakse's key advisors have criticized the use 
of foreign advisors in government ministries.  We would 
expect requests to expand our Treasury Advisor program to 
include an additional budget advisor, to see our debt 
management program accelerate and could receive 
additional requests for a Treasury Advisor on tax 
administration. While the MCA compact proposal may maintain 
its rural focus, it would likely be amended to include 
numerous new policy shifts, such as private sector 
agricultural extension services, enhanced communication 
infrastructure and improved information and market mechanisms 
to provide farmers with greater access to price information 
and reduce their reliance on middle men.  We would expect 
to see more prominent Sri Lankan support in the WTO for US 
positions, partly with a view toward extracting duty 
concessions for Sri Lankan apparel entering the US. 
 
23.  (C) The US would find it easier to work with a 
Wickremesinghe government since they have an economic 
policy that more closely aligns with US policy and is more 
likely to support US goals in Sri Lanka.  That said, we 
have worked effectively with the SLFP-led Government for 
the past 18 months; it simply requires more patience and 
creative thinking.  There are areas where we share common 
goals with the SLFP, but have different approaches to 
attaining those goals.  These goals include continuation 
of the peace process in order to improve prospects for 
prosperity; development of the rural sector, including 
increased incomes for rural families; and, an environment 
conducive to the growth and development of small and medium 
enterprises, which form the backbone of economic activity, 
and targeted investment and fiscal responsibility. Despite 
divergent paths on how to reach these goals, we nonetheless 
have a number of options, including carrots and sticks in 
the form of MCA programs, MCA eligibility, our Trade an 
d Investment Framework Agreement dialogue, Megaports and 
Container Security Initiative programs, and USAID Economic 
Growth programs, from which we can draw in pursuing our 
interests regardless of who wins the election.  End Comment 
LUNSTEAD