IV.  POLITICAL ENVIRONMENT

 Nature of Bilateral Relationship with the United States

 The U.S. and Sri Lanka enjoy a friendly relationship based in
 large measure on shared democratic traditions and respect for
 the rule of law.  The Government of Sri Lanka is currently
 fighting Liberation Tigers of Tamil Eelam (LTTE) insurgents
 seeking to create a separate state from the island's northern
 and eastern provinces.  The U.S. Government supports the
 territorial integrity of Sri Lanka and has called for a peaceful
 resolution of the conflict which takes into account the
 legitimate concerns of all ethnic groups.  Moreover, the U.S.
 Government has unequivocally condemned efforts by the insurgents
 to advance their political agenda through force of arms and
 terrorist tactics.  The U.S. Government has been concerned by
 the human rights violations that have arisen from the
 insurrection, and has welcomed the Government of Sri Lanka's
 constructive dialogue on these human rights issues.


 Major Political Issues Affecting Business Climate

 The most serious issue affecting the investment climate is the
 insurgency in parts of the North and East.  This insurgency,
 which has its roots in longstanding ethnic tensions between the
 majority Sinhalese (70 percent) and minority Tamil (18 percent)
 communities, has brought direct armed conflict to the island's
 northern and eastern provinces and has led to terrorist attacks
 in the south.  Although the non-conflict areas have been
 relatively peaceful, the uncertainty created by sporadic
 terrorist attacks of the insurgents against (mainly
 governmental) targets in the south has affected investment.
 Parliamentary and presidential elections will be held in the
 second half of 1994.  Concern that both the government and
 opposition may "politicize" economic decision-making is another
 cause of a degree of investor unease.


 Political System, Schedule for Elections and Orientation of
 Major Political Parties

 Sri Lanka has been a functioning democracy since gaining
 independence in 1948.  It has a strong executive presidency and
 a unicameral parliament.  Legislative drafting is generally
 handled by the executive.  A system of provincial councils was
 created in 1987 to devolve greater power to the provinces and to
 smaller local government bodies as well.  Power in almost all
 spheres of public life, however, still rests with the center.

 National parliamentary elections have been called for August 16,
 1994.  The previous parliament was dissolved by the President
 under constitutional authority on June 24, 1994, seven months
 short of completion of its six-year term of office. Presidential
 elections are expected in November 1994.

 The ruling United National Party (UNP) has been in power for 17
 years.  It has been a strong advocate during that time of an
 open-market economy.  The UNP has built strong trade relations
 with the West while remaining non-aligned diplomatically.

 The opposition Sri Lanka Freedom Party (SLFP), which alternated
 in power with the UNP prior to 1977, was historically a
 socialist party with a vigorous non-aligned foreign policy.
 Recently, its leadership has articulated greater flexibility on
 economic policy, endorsing open market mechanisms and supporting
 a strong private sector.  It has not yet, however, publicly
 presented details of its economic agenda.