WEEKLY SUMMARY SPECIAL REPORT CEYLON: TROUBLE LOOMS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001500020056-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 14
• Document Creation Date: December 22, 2016
• Document Release Date: May 14, 2010
• Sequence Number: 56
• Publication Date: November 20, 1970
• Content Type: REPORT

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DIRECTORATE OF
INTELLIGENCE
-Seeret-
WEEKLY SUMMARY
Special Report
Ceylon: Trouble Looms
DSB Fr.E COPY \
BETU o~' I~1 I E-6 ,
DOCUMENT SERVICES BRANCH
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N2 654
20 November 1970
No. 0397/70A
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Ceylon: Trouble Looms
Prime Minister Sirimavo Bandaranaike's co-
alition government has reached an important
stage, vital not only for its own success and unity
but possibly also for the continuation of democ-
racy in Ceylon. In its first six months the regime
acted primarily to solidify its socialist image,
largely through leftist-oriented foreign policy ini-
tiatives; the government now must face up to
several difficult domestic problems. The initial
euphoria in the public's acceptance of the coali-
tion, following its sweeping victory last May over
the moderate government of Dudley Senanayake,
has started to wane. Mrs. Bandaranaike has not
been able to roll back the high cost of living nor
to alter the high unemployment rate. Many
Ceylonese, whose unrealistic expectations of
rapid economic progress were fed by the coali-
election, could succumb to the propaganda of a potentially dangerous "new left" revolutionary
element. Pressure from this or other potential sources could prod Mrs, Bandaranaike into risking
ill-advised repressive measures in order to retain control.
A Leftist Turn in Foreign Policy
A strong tide of victory carried Mrs. Banda-
ranaike's United Left Front-composed of her
own nationalist, left-of-center Sri Lanka Freedom
Part; (SLFP), the Trotskyite Lanka Sama Samaja
Party (LSSP), and the Ceylon Communist Party/
Moscow (CCP/M)-to power last May. As the de-
feated United National Party (UNP) and its allies
retreated into temporary obscurity, numerous
glowing press reports proclaimed that the nation's
difficulties would finally be solved.
The new government sustained popular in-
terest during its early days by a series of foreign
policy moves designed to heighten its socialist
image. Full diplomatic recognition was granted to
Special Report - 1 -
East Germany in June, and later to North Korea,
North Vietnam, and finally to the Provisional
Revolutionary Government of South Vietnam.
Ceylon also suspended relations with Israel, gave
notice that the US Peace Corps agreement would
be germinated in October, and asked the Asia
Foundation to leave.
From Mrs. Bandaranaike's point of view,
such measures were ideally suited to launch her
new government. In addition to creating an im-
pression of rapid, decisive action, they apparently
enabled her to fulfill promises made earlier to her
coalition allies in return for their electoral sup-
port. During the pre-election planning stage as
well as throughout most of the campaign, it had
seemed that the contest would be close, with
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20 November 1970
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Senanayake's UNP holding a slight lead. Mrs.
Bandaranaike presumably calculated that she
would need the assistance of the Trotskyites and
the Communists and was willing io pay the price.
At first analysis, ii would appear that the new
prime minister, whose own party won 91 of the
151 elective seats in the HOL,se of Representa-
tives-the largest majority ever enjoyed by a single
party in Ceylon-could have dispensed with her
campaign partners, whose combined 25 seats
might be considered of marginal value.
Mrs. Bandaranaike, however, evidently con-
cluded that her position was not solid enough to
enable her to dismiss her allies. Her own party is
not homogeneous, but a miniature coalition em-
bracing a large body of moderates and a strong
leftist wing. Mrs. Bandararaike's previous govern-
ment had fallen in late 1.964 because of party
defections, when a number of conservative SLFP
representatives bolted the party because of Mrs.
Bandaranaike's effort to take over the country's
largest independent newspaper chain and because
of the growing leftist influence in her govern-
Seats Won in House of Relpresentatives
in 1965 and 1970 Elections
151 Elective Seats
(After elections 6 additional
member are appointed to
represent groups not
otherwise rep esented.)
*** Both Tamil Congress and
Federal Party claim to be
functioning as "independent"
opposition parties
* Federal Party was an ally/
of the UNP until late 1968.
**Sri Lanka Freedom Socialist Party - 5
(By the 1970 elections, this party had
merged into the UNP.)
Tamil Congress -3
Others - R
Special Report
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ment. After the 1970 elections she probably rea-
soned that retention of the SLFP left wing neces-
sitated continued cooperation with the LSSP and
the CCP/M. Three members of the LSSP and the
UNP - United National Party
FP = Federal Party
SLFP= Sri Lanka Freedom Party
LSSP = Lanka Some Samaia Party
CCP/M - Ceylon Communist Party/Moscow
IND - Independent
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secretary general of the CCP/M received cabinet
portfolios in the new government, and the foreign
policy pledges were quickly redeemed.
The prime minister apparently hoped that
Ceylon's chances of obtaining increased aid from
Communist sources would be improved by these
initiative.; and gambled that any adverse reaction
T. B. Ilangaratne
from Western nations would be limited. Her strat-
egy has had some success. Relations with Commu-
nist China warmed, and after a hiatus of over four
years, a new Chinese ambassador to Ceylon was
named in early June. In August, a Chinese techni-
cal team arrived in Colombo to resume assistance
in the construction of the Bandaranaike Memorial
International Conference Hall. This project, a
memorial to Mrs. Bandaranaike's husband, who
was assassinated in 1959, had been agreed on
initially in 1964, but was shelved after the UNP
won in 1965.
More substantial Communist aid followed
the visits of several Ceylonese delegations to
China and North Korea in August and September.
Trade Minister T. B. Ilangaratne, probably the
most prominent leftist among the SLFP cabinet
ministers, obtained an interest-free loan of about
Special Report -3-
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US $8.9 million, repayable over a 10-year period,
to cover the cost of importing 100,000 tons of
rice, in addition to the 200,000 tons of rice
initially ordered from China for 1970. This con-
stituted the first Chinese credit to Ceylon since
1964. Through that year, Ceylon had received
from China a total of about US $48 million,
chiefly for project assistance. In addition to this
new loan, China reportedly offered further assist-
ance for the purchase of subsidiary foodstuffs as
well as project aid for a survey of Ceylon's re-
sources and the development of its fishing in-
dustry. Ilangaratne's delegation then negotiated
various trade agreements and protocols on eco-
nomic cooperation and commod;ty exchange
with North Korea. Ilangaratne, moreover, in late
October, led a delegation to Moscow and East
Germany and signed various trade and economic
agreements.
Meanwhile, Ceylon's traditional Western aid
donors appear to have accented, some of them
reluctantly, the nation's leftward turn. West Ger-
many resented the recognition of Pankow and
emphasized it by refusing to fulfill 1970 aid
pledges and by advising the Ceylonese to work
out with German banks credit arrangements for
commodities already ordered on commercial
terms as a private rather than a government mat-
ter. Canada, England, and Japan, however, have
signed or are negotiating agreements to fu!fill
their aid pledges. Australia is implementing its
pledge, and France, whose 1969 commitment to
Ceylon has not been exhausted, reportedly as-
sured Mrs. Bandaranaike during her September
visit to Paris that French aid would continue at
previous levels. The US in late September signed a
new PL-480 agreement with Ceylon, providing US
$14 million in long-term credit for wheat flour
purchase.
In order to assure US good will, Mrs. Banda-
ranaike took some steps to make her foreign
policy moves less unpalatable. She eschewed the
harshly anti-US phrasings that typically appeared
in Ceylon's foreign policy pronouncements during
her previous term in office. Announcements of
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the recognition of Communist regimes appeared a
week or so after the effective dates and were
published matter-of-factly in the press. Termina-
tion of the Peace Corps and Asia Foundation
programF was handled by the Ceylonese Govern-
ment diplomatically and without rancor.
An unexpected irritant developed in August,
however, when LSSP leader and Finance Minister
N. M. Perera charged publicly that the CIA was
backing a so-called "Che Guevarist" revolutionary
movement on the island, and the trade minister
ates. In early Aur'.ast he reportedly headed a small
delegation that expressed concern to the prime
minister over what they viewed as an excessively
leftist bias in Ceylon's foreign policy. This criti-
cism and possibly subsequent advice from Felix
Bandaranaike-probably the only friend at court
the US has in Ceylon-may have had some im-
pact. At the recent nonaligned conference in
Lusaka, Mrs. Bandaranaike held herself to a rela-
tively moderate role, refraining, for example,
from a move for seating a Sihanouk delegation.
Furthermore, the new Ceylonese ambassador to
the US has made considerable effort to explain
his government's actions as being prompted by
pragmatic political and economic motives and has
hinted that the worst-from Washington's point
of view-is over. If Ceylon's foreign policy does
indeed assume a more even keel, pragmatic con-
siderations of a different order will have been
involved-the Ceylonese Government's recogni-
tion of its pressing need for continued US eco-
nomic aid.
N. M. Perera
followed up with two strong att:ucks on US for-
eign policies. After several protests by US offi-
cials, members of the Ceylonese Government is-
sued new statements apparently intended to re-
tract or at least blunt the allegations. Perera him-
self, possibly at the urging of Mrs. Bandaranaike,
privately expressed regret to the US ambassador,
claiming his charges were caused by his misunder-
standing of the CIA's role within the US Govern-
ment.
In her efforts to avoid alienating the US,
Mrs. Bandaranaike has been backed if not pushed
by Home Minister Felix Bandaranaike, a relative
and an influential leader among cabinet moder-
Special Report -4.
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This continued need for foreign aid reflects
the troubles brewing domestically. For over a
decade the economy has been faltering, with un-
employment high, the cost of living rising, and
foreign exchange reserves dwindling. Mrs. Banda-
ranaike, whose policies during her prior adminis-
tration aggravated. the slump, aroused expecta-
tions during the campaign that her coalition
would be able to put the economy on an upward
curve and provide jobs for all.
Some warnings, however, were voiced early
after the election in order to counter the initial
enthusiasm. In early June, the finance minister
announced that the nation was near bankruptcy,
predictably laying the blame on the previous UNP
government. A "save the nation" drive material-
ized, and for several weeks the press carried a
steady diet of pictures of individuals handing gov-
ernment officials checks representing part of their
earnings or collections taken up to meet the emer-
gency. This campaign, however, served more as a
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temporary morale booster than an effective
means of staving off economic disaster.
1965 and 1970 Elections Other actions helped to divert popular atten-
tion from the harsh financial outlook. Plans are
A Others under way to change the local government sys-
tem. In late July, the House of Representatives
Ceylon Communist passed a resolution empcwering itself to act as a
Party/Moscow constituent assembly to draft a new constitution.
Lanka Same Samaja Pasty Although this implemented another campaign
promise, the widely publicized opening of the
constituent assembly served also as a temporary
diversion while the government searched for a
economic
roblems
way out of the deepenin
p
g
Occasional press stories have divulged alleged
details of the new constitution, possibly for the
purpose of buoying up sagging public interest or
serving as trial balloons for controversial issues,
but complete details are not yet available. The
`Tamil Congress new document will evidently make Ceylon a re-
Freedom Party public and establish a unicameral legislature. Mrs.
Bandaranaike has indicated that there has been no
final decision regarding Ceylon's continued mem-
* horchin in the C
mmnr
l+L. Th
..
wea
ee
o
senLlment among some lert-wing government lead-
ers for leaving, but other strong economic reasons
for remaining.
Ceylon's senate is still dominated by the
opposition UNP because of a staggered senate
election process. It is normally a rubber stamp for
the house, but in August it sounded its own death
knell when it vetoed a poorly written house con-
stitutional amendment designed to save a cousin
of the prime minister from bein
ualified
dis
g
q
*Despite only a slight decline in its popular vote between 1965 and from his seat. Inasmuch as work on the new
1970, the United National Party's strength in the House of Repre? constitution has apparently bogged down, the
sentatives dropped considerably (see other chart) because of an house passed a bill in late October to abolish the
electoral system weighed heavily in favor of the rural areas, which senate, but this will evidently be defeated by the
the Sri Lanka Freedom Party and its allies captured. senate, thereby preventing the bill from becoming
Special Report
law for six months. The new constitution report-
edly will specify a six-year term for the national
assembly, in effect giving the present house as
well as the Bandaranaike government the possibil-
ity of almost seven years in office.
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Ceylon has obtained about 140,000 tons over its
earlier purchases for 1970 fror' Burma, plus
10,000 tons from Pakistan.
To provide for the expanded rice ration, the
government will also have to buy up a consider-
ably larger portion of the domestic crop than it
has been. The government will become the sole
buys. of unmilled rice in March 1971 and, in
preparation, has launched a crash program to in-
crease its milling and storage facilities. Legislation
will reportedly be introduced, whereby private
truck and tractor owners W00 d be compelled to
lend their equipment 30 days each year-for
which they supposedly will be paid a reasonable
compensation-in an effort to lower production
costs for small farmers. A large number of rice
mills will also be taken over by the government to
enable it to enlarge the capacity of its processing
facilities.
Workers loosening soil in rice paddies
The one government measure that initia!ly
was most appealing to the people was the imple-
mentation on 26 September of the coalition's
promise to double the weekly rice ration. Under
the new system each ration card holder (most of
the island's 12.5 million people) will receive one
two-pound "measure" of rice per week free, as
during the Senanayake administration and an ad-
ditional measure for which he must pay about US
$0.12. To operate the new ration program, the
government has had to increase rice imports. In
addition to the extra 100,000 tons from China,
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So far it is uncertain how well the govern-
ment will succeed in filling the double rice ration
over a sustained period of time without adding
seriously to the strains of an already over-
burdened economy. The situation may be al-
leviated somewhat by the world rice surplus,
which could allow Ceylon to arrange favorable
credit terms to ease its balance of payments. A
hint of governmental awareness that even the
present system could be too heavy a financial
drain on the government's budget came in mid-
October when Trade Minister Ilangaratne ap-
pealed to the Ceylonese to surrender their rice
coupons or to refrain from buying their full ra-
tion of four pounds a week "as an act of benev-
olence to future generations." Many Ceylonese
are indeed not buying the second measure, but
not from altruistic motivation. They had ex-
pected a return to the system in effect during
Mrs. Bandaranaike's former administration,
whereby two measures of rice were sold for about
US $0.04 each. The quality of rice supplied under
the present double ration is apparen'.v poor, and
the Ceylonese prefer to buy a better duality at a
higher price on the market. The initial public
enthusiasm for the new ration has lessened.
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The gc ernment will probably be reluctant,
however, to do away with the new rice ration
although it may alter it somehow, because it has
little else to show for nearly half a year in office.
It is unlikely that the average Ceylonese is excited
over the prospects of a new constitution, and
even when it is promulgated and a republic pro-
claimed, Mrs. Bandaranaike can expect only
limited political benefit.
77ie Deepening Economic Crisis
Ceylon has had chronic trade deficits. For
c,ter a decade the prices of Ceylon's principal
exports-tea, rubber, and coconut-have been fall-
ing, while the prices of its imports have been
rising. In 1969, for example, prices on the
London market for tea, the nati. - -- largest ex-
change earner, dropped 10 percent and Ceylon's
trade deficit increased sharply from L'S $61 mil-
lion in 1968 to about US $113 million in 1969.
In an effort to reduce the trade deficit, the
Bandaranaike government has enacted a new
restrictive licensing procedure that has sharply
reduced imports of both consumer goods and
goods needed for industrial production. As a re-
sult, prices of consumer goods on the domestic
market have risen markedly. The government's
Consumers' Price Index has shown a dramatic rise
from 114.8 in 1967 to 130.5 at the end of 1969
and to 138.7 in September (1952=100). The
Bandaranaike government has already put several
items under price controls, and Trade Minister
Ilangaratne recently announced that at the begin-
ning of 1971 all consumer goods would fall under
such controls.
A lack of supplies has caused factories to
reduce production, intensifying Ceylon's high un-
employment problem. Over 12 percent of the
labor force is unemployed. Among them are at
least 10,000 university graduates, unable to find
suitable jobs and prevented from doing physical
labor because of the stratification of Ceylonese
society. Presumably most of the unemployed
Special Report
voted for Mrs. Bandaranaike's coalition last May
and looked to her government to provide jobs.
The government is aware of the magnitude
of its problems, and it appears equally aware of
the growing discontent. Mrs. Bandaranaike has
appealed for patience and time, and other offi-
cials have protested against charges that nothing is
being done, pointing usually to the convening of
the constituent assembly and to the increased rice
ration as proof that the government is moving
forward. That there is little else to point to is not
entirely the fault of the present administration.
Ceylon's economy is fundamentally agricultural.
The prime minister reportedly has told some for-
eign diplomats that she has no intention of na-
tionalizing the large foreign-owned tea estates,
although it is probable that she may try to exert
more government control over this important seg-
ment of the economy. There is more room for
government management in the export trade, but
the import of most essential commodities is al-
ready a state monopoly. Although the coalition
had promised during the campaign to nationalize
the banking system (only a handful of foreign?25X1
owned banks would be affected because most
banks were nationalized in Mrs. Bandaranaike's
former term),
In late October Finance Minister Perera in-25X1
troduced a bill in parliament that would enable
the government to take over any business employ-
ing more than 100 workers. Defending the bill
against sharp reaction from Ceylonese business-
men, government officials have stated that the
bill's powers would be used only in extreme cases
to eliminate uneconomical industrial enterprises
and to help the government deal with businesses
that refuse to comply with government policy.
Whatever the bill's outcome, the private sector's
apprehension over government intentions is likely
to have an adverse effect on industrial produc-
tion. If passed, the bill could be used by Marxist
elements in the government as a means for rapid
nationalization of some industries.
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The nnw budget, announced at the end of
October and billed as a step toward completing
the socialist transformation of the economy, con-
tains some austere measures. A "one-shot" capital
levy on individual wealth above US $33,000 is
called for. Persons with an annual income over US
$1,000 must deposit a portion of their income,
ranging from 2 to 20 percent, with the govern-
ment at 5 percent interest, and companies must
deposit a flat percentage of their income. Al-
though such measures may appeal to the less
Political Problems Within and Without
the Cc, alition
Mrs. Bandaranaike faces more than eco-
nomic problems. The three-party coalition is po?
tentially explosive. The partners are united more
by expediency than by ideology, and strains are
already apparent. One area of friction is the trade
union field where LSSP organizations have at-
tempted to increase their strength, provoking her
own SLFP to take countermeasures. One SLFP
union has campaigned openly against an LSSP
union leader who was appointed chairman of the
Ceylon Transport Board. The CCP/M is also
_J_._ .. ....
not a ;rue Marxist and that the government has
done nothing to ease the economic crisis and
25X1
bring about economic nationalization. Other
Communist leaders have taken up these themes
and have told the party faithful to prepare for a
campaign to take over the ostattas, banks, and the
nation's largest independent newspaper cha n.
Keuneman, apparently miffed when some cabinet
ministers recently opposed his proposal to bring
all housing under rent control, warned Mrs.
Bandaranaike that he would resign unless he were
25X1
Ceylonese trying to exchange old 50 and 100 rupee
notes after announcement of demonitizati:on.
affluent Ceylonese and provide some additional
source of government revenue, they will probably
discourage investment and further slow the econ-
omy. Even people with lower incomes may be hit
by increased excise taxes and by a demonetiza-
tion plan for 50- and 100-rupee notes. By this
plan, individuals who have hoarded such notes-
and most probably avoided paying taxes on
them-may exchange 100 rupees of the old notes
for new ones. The excess is to be deposited for at
least a brief period in banks, enabling the govern-
ment -co tax previously hoarded sums which had
escaped scrutiny.
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8- 20 November 1970
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given a free hand. In late August Mrs. Banda-
ranaike found it necessary to issue a public appeal
for unity. As long as both the LSSP and the
CCP/M continue to need the SLFP more than
Mrs. Bandaranaike's party needs them, however,
the two junior partners will probably take care
not to break up the coalition.
In addition to preserving unity, Mrs. Banda-
ranaike faces the problem of maintaining her own
leadership. In the early days of her administration
she took steps further to strengthen her control.
Supervision of the public service was transferred
from the Ministry of Finance, under the care of
LSSP leader Perera, to the Home Affairs Ministry,
headed by Felix Bandaranaike. Presumably this
would make it morn difficult for the LSSP to
Infiltrate effectivel'? into the government ap-
paratus. Two ot;-, +r LSSP leaders we,a given
posts-those dealing w;th transportation and the
plantation industries-that could bring them into
dii 'ct conflict with some of the powerfu' trade
unions controlled by their Party. With the LSSP
leaders hopefully given enough to keep them
either in hot water or out of mischief and with
the smaller CCP/M probably viewed as less of a
threat, Mrs. Bandaranaike may have believed that
she had effectively forestalled immediate chal-
lenges to her leadership. Although there has been
the usual postelection changeover among police,
military, and public service personnel, there is no
firm evidence that enough members of the far left
have attained positions of sufficient importance
to enable them to exert a disproportionate influ-
ence over policy.
Although there may be no direct challenges
in the near future, Mrs. Bandaranaike eventually
may feel compelled to adopt more radical policies
in order to protect her position. Her continued
failure to alleviate Ceylon's problems could lead
or stimulate the left wing of the SLFP to join
with the LSSP and the Communists in demanding
more radical moves. Mrs. Bapdaranaike is also
aware of a developing "new left" revolutionary
elemunt, composed of r-, number of apparently
disunited organizations whose members are edu-
Special Report _9"
9-
cated unemployed youths and whose leaders are
cated
generally former members of either the pro-Mos-
cow or pro-Peking Communist parties. The gov-
ernment is clearly concerned, and a special police
unit has been assigned to monitor the new left
groups. Several arrests have been made, but
usually the police have been able to prove little.
Unusual care is being taken to guard arms and
munitions of the armed forces and to prevent
weapons being smuggled into the country. At
present the new revolutionary groups do not seem
to constitute a serious threat, but they could
become so, particularly if popular discontent
grows.
Another potential source of agitation is the
island's large (about 22 percent) Tamil minority,
divided almost equally between the "Ceylon
Tamils," whose ancestors have lived on the island
for generations and who have full voting rights,
Indian Tamils Sorting Tea
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1963 Populations
Sinhalese
7,517,750
70.8
Tamil
2,293,160
21.9
latNat) ll
Ceylon
1,170,310
11.0
I
x
Indian
1,122,850
10.9
Moors
168,880
6.5
still
ISLAND
Burghers &
Eurasians
46,050
.4
Malays
24,130
.2
Others
20.090
.2
ISLAM
BUDDHISM
Anurcdhapura u
CHRISTIANITY
COLOMBO?
Q Sinhalese
Ceylon Tamil
Q Indian Tamil
Q Moor/Ccvlon Tamil
ISLAM Religion name
Coconut * Too
Rice 0 Rubber
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0 Kandyo, ~.,
0 HINDUISM
0
1970 Estimate: 12,500.000
Based on 10% tabulation
by the Dept. of Census
and Statistics
0Trlnrnrnalee
Op?
ISLAM'
BUDDHISM
HINDUISM
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and the mostly disenfranchised "Indian Tamils,"
whose forebears were brought over from southern
India in the second half of the 19th century to
work on plantations. The Tamils remember that
the earlier Bandaranaike administrations fanned
existing anti-Ta;:iil sentiment among the majority
Sinhalese, causing occasional violence. The Cey-
lonese Tamils might begin agitating should the
new constitution appear to discriminate against
them, and the Indian Tamils, the work force for
the important plantation industries, could cripple
the economy should they launch a strike.
From whatever direction, there is a clear
possibility of serious trouble for the new govern-
ment. The people appear tired of sl,)gans and
impatient for t;ingible economic progress. There is
a notable, relrcively moderate element within the
government, and Mrs. Bandaranaike herself is
probably not a radical leftist. The possibility of
strong leftist pressure from within or without the
government, however, might prompt her to ad-
vocate more extreme solutions. Increased govern-
ment control could lead eventually to creatie n of
a more authoritarian form of govern-
ment.
Special Report
SECRET
Sanitized Copy Approved for Release 2011/06/04: CIA-RDP85T00875R001500020056-9