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Countries and Regions Country Partnership Strategies Document
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Country Strategy and Program 2004-2008: Sri Lanka
Executive SummarySri Lanka is emerging from two decades of civil conflict. Over this period, and aside from the enormous human cost, the conflict has had an acutely debilitating effect on the economy. It has reduced the level of resources available for economic and social development, damaged the domestic climate for investment (especially foreign investment), and suppressed tourism. As a result, it has reduced gross domestic product (GDP) growth by about two percentage points a year, curbed expansion in productive employment, and contributed greatly to poverty and fiscal pressure. With the chances of peace now significantly enhanced, and a radically changed government strategy published, the country’s development context is fundamentally different. The Government is now moving positively toward introducing a comprehensive reform agenda that, as it continues to develop, promises a major socioeconomic peace dividend. It is in this context of the Government’s reform proposals on the one hand, and the peace process on the other, that this country strategy and program (CSP) is framed. Despite relatively good GDP growth over many years and an average GDP per head of some $870, poverty—and rural poverty in particular—remains extensive. It is the link between GDP growth and poverty reduction that has been weak, and it is this that has now to be strengthened. In addition, job creation has lagged behind labor supply, causing high unemployment and growing overseas employment. Making matters especially complex is the burden of Sri Lanka’s public debt, with its level by the end of 2002 standing at over 105% of GDP (up from 87% in 1997). The Government’s reform program is found in Regaining Sri Lanka and it proposes radical initiatives that represent a marked change in the strategy for achieving GDP growth and poverty reduction from the earlier emphasis on state control, redistributive transfers, and welfare payments. The Government’s strategy now involves raising economic growth by removing the barriers to increased productivity and by instituting a basic change in the relationship between the public and private sectors, with a central role for the private sector as the engine of growth. Given the chronically large fiscal deficits, the capital contributions to development projects from domestic government revenue are very limited. In reality, virtually the entire public investment for development projects is financed by external assistance, which renders the role of external funding of paramount importance to Sri Lankan development. This is seen not only in the financing of physical projects but in the support provided for institutional and policy reform, and this will continue as an integral aspect of the financing of the rehabilitation of the North and East, and of the Government’s development program more generally. The principal development challenge of the Asian Development Bank (ADB) is to support the Government’s efforts for reconstruction and development of Sri Lanka particularly through implementing the Government’s reform program to reduce poverty. These entail targeting support at pro-poor economic growth, with emphasis placed wherever possible on backward regions or on those facing particular hardship: by improving infrastructure, raising the quality and relevance of education, increasing access of the poor to social services, rebuilding the conflict areas and reintegrating them into the national economy, removing legislative and regulatory barriers to private investment, and promoting enhanced rural livelihoods and commercialization. As part of this, ADB will support the Government in improving the effectiveness and efficiency of public services, public policy management, and a service delivery system that ensures services are equitable, accessible, efficient, and sustainable. The Government‘s far-reaching reform agenda, which focuses on promoting private sector development and balanced regional development, will be supported by ADB. Comprehensive structural reforms are critical to achieve strong and sustained economic growth, which is necessary to reduce poverty. In supporting poverty reduction through broad-based growth, sectors of intervention have been chosen on the basis of their potential impact on these reform measures and on the basis of ADB’s operational experience, and because they offer the best prospects for addressing the specific development challenges noted above. The chosen sectors of intervention are agriculture and rural development; transport (roads and ports); energy (including rural electricity); financial sector and small and medium enterprises (SMEs); education (especially skills and vocational training); and water supply and sanitation. In terms of its thematic interventions, ADB’s ongoing assistance in environment and natural resources management is focused on promoting rural development and enhancing rural incomes in a range of subsectors. Future intervention will depend on the consolidation of policy reforms and institutional capacity building supported under the ongoing portfolio. In governance, ADB will support the Government’s ongoing agenda to raise the effectiveness of public sector management, the quality and efficiency of public service delivery, and the impact of external assistance and government programs. Gender concerns will be addressed by projects in education and in water and sanitation, and by projects directly addressing the poor in backward regions, including the North and East. Of importance will be efforts to improve access to technical and vocational education and information technology for women and, thereby, to raise the position of women in the labor market. Private sector development, a central tenet of the Government’s strategy, will also continue to be supported in policy dialogue and as a part of sector interventions. It is proposed to increase the overall lending level to Sri Lanka to $700 million in 2004–2006 from $600 million in the last planning cycle (2003–2005), of which Asian Development Fund lending is to be $400 million and that from ordinary capital resources increased to $300 million. The proposal to increase the overall lending level is a response to the increased degree of economic activity arising from the peace process thus far, the needs of reconstruction and development as peace evolves, and the publication of the new government strategy outlining major reforms and a more intensive effort to reduce poverty. But it is contingent upon the continuation of peace and upon progress in project performance, without either of which the lending level scenario will be reviewed accordingly. Both the lending level and the pipeline program will be monitored and evaluated in consultation with the Government and other stakeholders as part of the annual process of CSP updating. The nonlending program amounts to $12.8 million for 2004–2006, with $2.8 million cofinancing envisaged. A worrisome feature of the portfolio performance, as of the Government’s aid utilization more generally, is the delay in the implementation of many projects. To combat project implementation deficiencies more broadly, there will be greater use of sector and sector development program loans. They provide more flexibility to the process of project execution, and allow greater attention to be paid to potential policy and institutional obstacles prior to, or alongside, the physical investments. ADB will facilitate up-front project activities—such as environmental clearances, land acquisition, and resettlement—by providing, for relevant sectors, technical assistance loans to prepare projects, followed by investment loans to improve and strengthen linkages between project planning and implementation. More importantly, the Government has put high priority on improving project performance and strengthening its own management. The Government is taking steps to reorganize its project planning and monitoring activities through establishment of a new development agency with private sector representation.
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