Cablegate: Sri Lanka Meets Imf Targets in September; Concern

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PP RUEHBI RUEHCI
DE RUEHLM #1053/01 3270239
ZNR UUUUU ZZH
P 230239Z NOV 09 ZDK
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC PRIORITY 0803
INFO RUEHKA/AMEMBASSY DHAKA PRIORITY 2073
RUEHIL/AMEMBASSY ISLAMABAD PRIORITY 9101
RUEHKT/AMEMBASSY KATHMANDU PRIORITY 7343
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 3498
RUEHCG/AMCONSUL CHENNAI PRIORITY 9664
RUEHKP/AMCONSUL KARACHI PRIORITY 2582
RUEHCI/AMCONSUL KOLKATA PRIORITY 0459
RUEHBI/AMCONSUL MUMBAI PRIORITY 6958
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 COLOMBO 001053

SENSITIVE
SIPDIS

DEPARTMENT FOR EEB JENNIFER PETERSON AND TANYA SPENCER
DEPARTMENT OF TREASURY FOR MALACHY NUGENT AND ATTICUS WELLER
USTR FOR MICHAEL DELANEY AND VICTORIA KADER

E.O. 12958: N/A
TAGS: CE ECON EFIN PGOV
SUBJECT: SRI LANKA MEETS IMF TARGETS IN SEPTEMBER; CONCERN
OVER BUDGET DELAY

REF: A. A) COLOMBO 1000
B. B) COLOMBO 977

COLOMBO 00001053 001.6 OF 002

1. (SBU) Summary. An IMF team has found that Sri Lanka
is meeting its foreign reserve and government deficit targets
for September, although the Government of Sri Lanka (GSL)
will need to restrain expenditures to meet the December
deficit targets. The GSL has submitted a Vote on Account in
place of a budget (similar to a continuing resolution), and
they will not submit their budget until May. The delay in
submitting the budget makes it difficult for the IMF to
determine if the GSL is implementing the long term structural
changes required for a sustainable macroeconomic policy. The
IMF believes that the GSL is serious in its efforts to raise
government revenue and to move the operations of state owned
enterprises to a commercial basis. Although the IMF team
believed that Sri Lanka was meeting its targets, the IMF team
lead seemed more cautious than in the prior review. End
Summary.

IMF Mission Background

2. (SBU) Sri Lanka reached an agreement with the IMF in
July to disburse $2.6 billion in eight separate tranches,
with the provision that the IMF would conduct quarterly
reviews of Sri Lanka's progress to IMF goals. The IMF
conducted the second such review in November, and the results
are likely to be presented to the IMF board in January. The
IMF has also established an office in the Central Bank to
help monitor compliance. Econoff met privately with Brian
Aitken, head of the IMF team, to discuss the team's findings.

Sri Lanka is Meeting the IMF Targets

3. (SBU) Sri Lanka is on track to meet its IMF targets
for September. There have been large inflows of foreign
exchange into Sri Lanka (see reftel A), so Sri Lanka will
easily meet its goals for foreign exchange reserves and net
reserves. According to Aitken, Sri Lanka is also on track to
meet its government deficit goal of 7% of GDP from January to
September 2009. Sri Lanka had run a government deficit of
10-11% of GDP from January to June, primarily due to falling
government revenue, so meeting the September goal is an
accomplishment. According to press reports, government
revenue collection is projected to decline by 13% for the
year. Aitken expects it to be harder to meet the December
deficit goals, and commented that the GSL must restrain
spending for the rest of the year.

4. (SBU) Sri Lanka must make structural reforms to meet
the IMF 2010 target to reduce its budget deficit to 6% of
GDP. The GSL has two possible changes: projected declines in
defense spending; and increasing government revenue. Aitken
was told that Sri Lanka will hold its defense expenditure
flat in rupee terms next year, but considering GDP growth,
military spending will decline from 3.8% of GDP in 2009 to
3.2% in 2010. Aitken expected that the GSL could reduce
spending on arms procurement with the end of the war. (Note.
The Embassy calculates that with the 2009 defense
supplemental bill that defense spending will total 4.3% of
GDP in 2009 (see reftel B). End Note.) Aitken also
believes that the GSL is serious about raising revenue.
Under the IMF Letter of Intent, Sri Lanka agreed to raise its
revenue by 2% of GDP by 2011. The Presidential Taxation
Commission appears to be doing serious work, and it is
examining ways to simplify the tax structure and broaden the
base, rather than raise tax rates. According to Aitken, the
GSL understands that its current tax policy discourages
economic growth. The Commission is not expected to release
an interim report until after the elections, possibly in May.

5. (SBU) Finally, Aitken was optimistic that the GSL was
also moving two key state-owned enterprises to a commercial

COLOMBO 00001053 002 OF 002

footing. Under the IMF letter of intent, the Ceylon
Electrical Board (CEB) and the Ceylon Petroleum Company (CPC)
should become break-even enterprises by 2011. The CEB and
CPC have large past due debts that they are struggling to
overcome. The CEB and CPC have not made structural changes,
but again, Aitken thought that they had many good ideas and
were serious about reforms. Aitken thought that the CEB had
agreed to pay very high prices for electricity to independent
power producers, but they may be able to cut costs or
renegotiate their contracts. Sri Lanka also has a
hydroelectric plant and several coal plants coming on line,
which should reduce costs, so he thought that they could be
on better financial footing within several years. (Note.
Post is in contact with an American independent power
producer which has chronic late payments from the CEB, which
we understand is a problem across the board. End Note.)

6. (SBU) Comment. Although the IMF assessment team
concluded that the GSL was meeting its targets, Econoff noted
that the IMF team seemed more cautious than in the September
review. The IMF team acknowledged that it is difficult to
determine if the GSL is on track without a budget, and the
GSL budget is not expected until May. Post is more skeptical
than the IMF: we anticipate that there will be great
pressure to increase spending in the upcoming election
season. We will also wait until we see real reforms of CEB
and CPC and actual plans to increase tax revenue before we
conclude that the GSL will meet its final IMF targets. End
Comment.
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