VZCZCXRO3063
PP RUEHIK
DE RUEHLM #0003/01 0041148
ZNR UUUUU ZZH
P 041148Z JAN 10
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC PRIORITY 1069
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHKA/AMEMBASSY DHAKA 2228
RUEHIL/AMEMBASSY ISLAMABAD 9250
RUEHKT/AMEMBASSY KATHMANDU 7505
RUEHNE/AMEMBASSY NEW DELHI 3660
RUEHPF/AMEMBASSY PHNOM PENH 0100
RUEHCG/AMCONSUL CHENNAI 9812
RUEHKP/AMCONSUL KARACHI 2634
RUEHCI/AMCONSUL KOLKATA 0494
RUEHLH/AMCONSUL LAHORE 0120
RUEHBI/AMCONSUL MUMBAI 7101
RUEHPW/AMCONSUL PESHAWAR 0396
RUEHBS/USEU BRUSSELS
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
UNCLAS SECTION 01 OF 02 COLOMBO 000003
SIPDIS
E.O. 12958: N/A
TAGS: ECON ETRD PGOV EINV KTEX CE
SUBJECT: ECONOMIC DIFFICULTIES IN SRI LANKA'S CENTRAL
PROVINCE
REF: COLOMBO 02
COLOMBO 00000003 001.6 OF 002
1. SUMMARY: Sri Lanka's mountainous Central Province includes
the country's second largest city, the majority of the
tea-planting region, and a sizeable nubmer of foreign
investment and export-oriented industries. Unfortunately the
province's economy is struggling under the weight of the
global economic downturn, the high cost of borrowing money, a
reduction in foreign investment, and the government's
development focus on the war-torn North and East. Business
people and Chamber of Commerce contacts emphasized their
hopes that the economy will be the prime focus in the
upcoming Presidential election (reftel) and that an economic
"peace dividend" will eventually benefitthe region. END
SUMMARY.
2. Kandy, Sri Lanka's historic capital, is the country's
second largest city and is the capital of the Central
Province, a region which takes in much of the hill country
(rising to 6000 feet) with its verdant tea plantations,
vegetable farms, and country villages. The Central Province
(CP) covers nearly 2200 square miles and has a population of
2.6 million people. Its 2008 GDP was $4.0 billion and its
per capita income was $1535/year -- slightly below the
national average of $2014/year. The CP produces shoes, baked
goods, furniture, and vegetables for local consumption; and
tea and some textiles for foreign markets. Tourism is also
an important driver of economic activity.
3. Unfortunately, the economic situation in the region has
slowly deteriorated over the past five years. After a spurt
of central government interest and directed investment which
began 15 years ago, the government's focus slowly shifted
first toward winning the war against the Tamil Tigers and
more recently on rebuilding the affected northern and eastern
regions of the country. In the past year, the global
financial crisis has also taken its toll, particularly on the
export-oriented textile industries located in the province.
According to one textile producer, nearly 50 percent of the
CP's moderate number of textile companies closed their doors
in the past year, and others dramatically reduced their
number of employees (also likely to be compounded should the
EU's GSP-Plus tariff-reduction benefit for textiles end this
summer). And while tea prices are fetching record prices,
the value of those sales is registered in the Western
Province where Colombo's tea auctions occur and therefore is
not reflected as part of the CP's economic activities. The
actual plantations, on the other hand, suffer with some of
the country's highest levels of poverty, further dragging
down the Province's per capita income.
4. The biggest complaint heard, however, was the lack of
monetary circulation and difficulty in obtaining a bank loan
for a reasonable interest rate. (NOTE: This is an
island-wide complaint. END NOTE.) Loan rates are often as
high as 20 percent and even state-run banks (which were
recently forced to lower rates below market) employ various
means to deny those lower rates to your average small
business owner. Mr. Anuruddha Warnakula, President of the
Central Province Chamber of Commerce, also noted a decided
lack of confidence in the central government's economic
policy. He noted how new taxes have hindered growth and
lamented the fact that the government ended its support in
2006 for the successful business incubator located outside
Kandy. The Board of Investment's targeted tax exemption for
the region (begun in 1994) was ended under the Rajapaksa
administration in 2004, leading to further stagnation.
Warnakula also described the central government's Export
Development Board field office in Kandy as "useless" and
lamented the decided lack of entrepreneurship in the region.
5. COMMENT: While both candidates for January's presidential
election are talking about economic issues, neither candidate
has developed a clear and believable economic platform to
improve the CP's situation. While the prospects of rapid
peace-time development in the CP remain unclear --
COLOMBO 00000003 002.18 OF 002
particularly if the North and East continue to receive the
bulk of national and international investment and development
assistance -- the fundamentals for the province remain good.
Labor costs are low, transportation times to the port are
quick, and tourism growth continues. As the global recession
ends, the CP's economy should once again expand as a peaceful
Sri Lanka finally focuses on issues other than the war. END
COMMENT.
BUTENIS