VZCZCXRO6857
RR RUEHLMC
DE RUEHLM #0375/01 0651222
ZNR UUUUU ZZH
R 061222Z MAR 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 5589
INFO RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 0714
RUEHKA/AMEMBASSY DHAKA 9940
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RUEHKT/AMEMBASSY KATHMANDU 4978
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RUEHGV/USMISSION GENEVA 1865
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RUEHLMC/MILLENNIUM CHALLENGE CORPORATION
UNCLAS SECTION 01 OF 02 COLOMBO 000375
SIPDIS
SENSITIVE
SIPDIS
STATE FOR SCA/INS AND EB/TPP
STATE AND GENEVA PLEASE PASS TO USTR
MCC FOR S GROFF, D NASSIRY AND E BURKE
E.O 12958: N/A
TAGS: ECON ETRD EFIN EAID CE
SUBJECT: SRI LANKA: 2006 U.S. EXPORTS UP, BUT BARELY DENT USD 1.9B
BILATERAL TRADE DEFICIT
REF: COLOMBO 370
1. (U) Summary: The United States-Sri Lanka goods trade balance
narrowed to nine-to-one in Sri Lanka's favor in 2006, from over
ten-to-one in recent years. The improvement came from 20 percent
growth in U.S. exports to Sri Lanka, while U.S. imports from Sri
Lanka rose by only 3 percent. Nevertheless, the U.S.-Sri Lanka
trade deficit for 2006 remained around $1.9 billion, unchanged from
2005. Sri Lanka is likely to continue to run a heavy trade surplus
with the United States as it maintains high tariffs and para-tariffs
on imports (reftel), while steadily producing U.S.-bound garments.
For Sri Lanka overall, export growth of 8.4 percent was overshadowed
by a 16 percent jump in imports and a decline in its balance of
payments surplus. End Summary.
U.S. EXPORTS UP, BUT TRADE DEFICIT STEADY AT $1.9B
--------------------------------------------- -----
2. (U) According to U.S. Department of Commerce statistics, the
United States ran a $1.9 billion trade deficit with Sri Lanka in
2006, unchanged from 2005. U.S. exports to Sri Lanka increased by
20 percent in 2006 to $237 million. Major U.S. exports in 2006 were
machinery ($94 million), electrical machinery and parts ($32
million), yarn and fabric ($22 million), medical equipment ($10
million), paper ($7 million), and computers and related equipment
($6 million).
3. (U) Sri Lanka's exports to the United States, its largest market,
increased by 3 percent to $2.1 billion, or nearly a third of total
exports. Apparel continued to dominate U.S.-bound exports, but grew
by only 2 percent to $1.7 billion. Other key exports from Sri Lanka
to the United States were, in order, rubber, gems, tea, and spices.
SRI LANKA'S EXPORTS TO THE EU SURGED
-----------------------------------
4. (SBU) Exports to the European Union (EU), Sri Lanka's second
largest apparel market, grew by 26 percent to $1.3 billion in the
first eleven months of 2006. Exports to the EU were boosted by duty
free access under the EU's Generalised System of Preferences Plus
(GSP+) scheme. Under GSP+, the EU grants duty free access to Sri
Lankan exports, including garments, in recognition of Sri Lanka's
meeting international standards in human and labor rights,
environmental protection, counter-drugs policy, and good governance.
(Note: According to the EU mission in Colombo, the EU has begun to
evaluate whether human rights violations and other governance
problems could cause Sri Lanka to lose eligibility for GSP+ when the
EU reviews the program in 2008.)
SRI LANKA'S EXPORT GROWTH SLOWS OVERALL, EXCEPT FOR
GARMENTS AND EMERGING SECTORS
--------------------------------------------- ------
5. (U) Sri Lanka's total exports were $6.9 billion in 2006. Export
growth slowed to 8.4 percent in 2006 from 10.2 percent in 2005.
Growth in apparel, Sri Lanka's key export, accelerated to 6.4
percent in 2006 from 3.1 percent in 2005. Apparel, at $3.1 billion,
accounted for 45 percent of all Sri Lanka's exports. Despite having
had a good year, garment exporters are worried, fearing that the
2008 expiration of U.S. safeguards against Chinese apparel will cut
their sales dramatically.
6. (U) Aside from garments, there were positive signs of
diversification of Sri Lanka's industrial export base. Food and
rubber product exports grew by 10 percent to $2.1 billion,
accounting for 30 percent of exports. Agricultural exports, led by
tea (which had record high exports), increased by 12 percent to $1.3
billion, or 19 percent of Sri Lanka's exports.
IMPORT GROWTH EXCEEDS EXPORT GROWTH
-----------------------------------
7. (U) Sri Lanka's island economy is importing more and more, both
COLOMBO 00000375 002 OF 002
for consumption and investment. Imports grew by 16 percent to $10.2
billion. The petroleum import bill rose by 25 percent to $2.1
billion, both on higher price and higher volume. Petroleum products
accounted for 20.2 percent of total imports. Consumer goods
imports, mostly food staples like sugar and milk products, grew by
23 percent. Imports of investment goods such as building material,
machinery, and transport equipment, rose by 24 percent to $2.2
billion in 2006. Imports of intermediate goods (excluding oil),
such as textiles and other industrial inputs, increased by 8
percent, to a total of $4.1 billion.
8. (U) The Indo-Lanka Free Trade Agreement (ILFTA) was a significant
factor in the jump in imports. The 2000 agreement has produced a
four fold increase in total bilateral trade between the two
countries, with Sri Lanka's exports rising eight-fold. However, in
2006, Sri Lanka's exports to India actually dropped by 14 percent to
$483 million as India imposed quotas on palm oil and pepper
following complaints by Indian producers. These joined existing
Indian quotas, tariffs and restrictions on ports of entry on
garments and tea, demonstrating how far from "free trade" the two
neighbors remain despite the ILFTA. Although Sri Lanka likewise
maintains a 1,100 item negative list, protecting major production
sectors including numerous agricultural products, its imports from
India grew on the order of 25 percent in 2006.
TRADE DEFICIT INCREASES 34 PERCENT, BUT BOP REMAINS IN SURPLUS; SRI
LANKAN RUPEE DEPRECIATES
--------------------------------------------- ----------
9. (U) With these patterns, Sri Lanka's trade deficit rose 34
percent to $3.4 billion in 2006. The deficit was partly offset by
higher worker remittances, which increased by 21 percent to $2.3
billion. Government borrowing in international markets also
increased, to $1.1 billion from 120 million in 2005. The balance of
payments recorded a surplus of around $190 million in 2006 compared
with a surplus of $500 million in 2005. Total external reserves
fell by 6 percent to $3.6 billion, sufficient to finance 4.2 months
of imports. Despite Central Bank efforts to prop up the Sri Lankan
Rupee, the currency depreciated by 5.2 percent against the U.S.
Dollar and about 17 percent against the Euro.
COMMENT: BILATERAL TRADE LIKELY TO REMAIN STAGNANT
--------------------------------------------- -----
10. (U) The 20 percent increase in U.S. goods exports to Sri Lanka
in 2006 was good news, but was not due to any liberalization by Sri
Lanka, which has increased tariffs and para-tariffs (which UNCTAD
defines as "measures that increase the cost of imports in a manner
similar to tariff measures") in the last few years. Instead the
jump in U.S. exports was probably driven by Sri Lanka's unusually
high 7 percent GDP growth rate in 2006 and by the stimulative effect
of negative real interest rates for the past three years. With the
Central Bank raising interest rates to control inflation, growth in
2007 may slow down.
11. (U) For Sri Lanka overall, the mixed performance in 2006, with
exports growing but imports rising even more, was mitigated by the
huge growth in remittances. A slowdown in the global economy could
thus hit Sri Lanka's balance of payments doubly hard, as both
exports and remittances would likely fall. With external debt
growing as the government finances domestic budget shortfalls, this
could be problematic.