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Countries and Regions Country Assistance Plans Document
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Country Assistance Plans - Sri Lanka
IX. Local Cost Financing101. Throughout the 1990s38 , ADB has approved lending for local currency financing (LCF) amounting to about $352 million or 28 percent of total ADB lending for 27 projects. The LCF level has been determined based on the medium-term economic prospects of the country and the Government’s ability to finance the public investment program required for the country to undergo the economic and social transition to a higher level of development and to reduce the high rate of poverty. 102. In recent years, the Government has recognized that there are severe limits on the extent of public sector financing of the country’s investment program. Accordingly, it has taken a number of important actions to mobilize non-budget investment, including the implementation of an ambitious privatization program in key sectors such as civil aviation, telecommunications and the plantation industry. In 1997 and again in 1998, the Government counter-guaranteed private sector borrowing on the international capital market under the ADB’s guarantee scheme. In addition, the Government has secured substantial private investment in capital intensive industries such as power supply and ports. The Government, with ADB support, has initiated an ambitious private sector development program in 2000, aiming to further privatize and restructure state-owned enterprises and address labor market rigidities to accelerate private sector investments and raise industrial productivity and cost efficiency. The proceeds from the privatization program are expected to be amounting to about 1.5 percent of GDP in 2000, the second largest achievement since the Public Enterprise Reform Commission commenced work in 1995. The largest receipts of privatization proceeds was achieved in 1997, when the public enterprise reform program generated about SLRs23 billion (equivalent to 2.5 percent of GDP), of which SLRs10 billion were used to retire public debt during the year. 103. However, despite these actions, the overall capacity of the Government to self-finance the public investment program in the coming years is expected to remain limited, as debt servicing and the costs related to the ongoing civil conflict continue to absorb about 50 percent of budget outlays. The 1999 budget deficit was 7.5 percent of GDP, an improvement on the 9.2 percent of GDP in 1998, but still remained at a high level. This outcome was largely because of lower than anticipated tax receipts in the initial years of operation of the goods and services tax that was introduced in 1998, and the larger than anticipated outlays on capital investment and defense. While the Government intends to reduce the budget deficit to 5 percent of GDP by 2002, in 2000, it has been projected at 8.0 percent of GDP compared to the original budget of 7.6 resulting from increased defence expendicture. 104. In recent years, most ADB-financed projects have received adequate counterpart funds, although some delays in the release of funds have occurred, which slowed project implementation. However, continued ADB support for LCF is considered to be justified in view of the prevailing difficult country circumstances and the need for a substantial program of rehabilitation, replacement and improvement of the country’s capital stock, for it to successfully undergo a transition to a higher growth path. Over the medium-term the ADB’s lending program will include several environment projects that will produce national as well as global benefits and they may warrant special consideration with respect to local cost financing. ___________________
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