Countries and Regions

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p. 3 of 7 BACK | NEXT Executive Summary I. Current Development Trends and Issues II. The Government's Development Strategy III. ADB’s Development Experience IV. ADB's Strategy V. ADB's Assistance Program VI.Risks and Performance Monitoring and Evaluation

Country Strategy and Program 2004-2008: Sri Lanka

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II. The Government's Development Strategy

A. Development Goals and Strategy

1. Economic Reform

29. Regaining Sri Lanka presents a wide range of analyses, policy and institutional reform initiatives, and action plans covering the whole economy (by sector or issue). It is the distillation of 4 years’ work by the present and previous governments, and is based on very wide discussion within government and with stakeholders, including external agencies and civil society. The reforms proposed for achieving the Government’s goals are radical, and they constitute a refreshingly innovative approach that form the basis for this CSP.

30. The Government’s core strategy involves accelerating economic growth by removing the barriers to increased productivity. It envisages annual GDP growth rates rising to 7% over the medium term and to 8–10% after that; a fundamental change in the relationship between the public and private sectors; and a central role for the private sector as the engine of growth. Essentially, the strategy entails what are regarded as three key elements of reform: (i) accelerating the process of privatizing commercial activities; (ii) reforming the legal and regulatory foundation of the economy; and (iii) increasing the efficiency of critical government functions.

31. The Government sees its present crisis as having a number of dimensions all of which have to be addressed concurrently, and as presenting four challenges which must be overcome: (i) increasing employment by creating over 2 million jobs in the next several years; (ii) reducing public debt by raising revenues and modifying expenditure patterns; (iii) investing in reconstruction throughout the entire country in order to create lasting peace; and (iv) increasing income levels through raising productivity and increasing investment.

32. As an integral part of its core strategy, six main pillars—each with a detailed action plan—constitute the strategic foundation of the Government’s poverty reduction policies: (i) building a supportive macroeconomic environment; (ii) reducing conflict-related poverty; (iii) creating opportunities for the poor to participate in economic growth; (iv) investing in people; (v) empowering the poor and strengthening governance; and (vi) implementing an effective monitoring and evaluation system.

2. Rehabilitating the North and East

33. The immense conflict-related needs of these areas have been assessed, by sector, jointly by ADB, World Bank, and United Nations, with the full participation of the Government and the LTTE.¹¹ Needs have been divided into immediate needs (the next 18–24 months) and medium-term needs (those for completion within 6 years, varying according to the inherent nature of the needs themselves). Total financing requirements following a baseline case covering principal conflict-affected areas are tentatively estimated to be in the region of nearly $1.5 billion, with about one third required for immediate needs and two thirds for medium-term needs (Table 2). A higher scenario, which includes other conflict-affected areas, suggests total requirements of $1.9 billion. Longer-term needs could be up to a further $1.5 billion (approximately) but are not included here.

34. The assessment has factored into its estimates and sector needs such crosscutting issues as gender concerns, conflict-sensitivity, human rights, environment, private sector, and community development. To rebuild a war-ravaged region, the assessment identifies a holistic approach that goes beyond the repair and reconstruction of facilities and the reestablishment of the means for making a living, important though these are. It seeks to capture some of the interrelationships that contribute to peace building and that go to make up a secure and productive economic and social life, however imprecise these might often be. As such, it is recognized that in the assessment that, while progress has to be made across all sectors and issues, the pace of progress in them cannot always be the same. But in order that progress is made, creating a local administrative capacity will be essential.

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B. Resource Mobilization and Investment

35. Aside from requiring wide political acceptance, the Government’s development strategy needs underpinning by additional fiscal resources and more efficient public spending, as well as by faster progress in institutional development (especially in financial intermediation and fiscal management). With continuing peace, although there will be more opportunity for substituting various military outlays for higher reconstruction and development activity, the traditional levels of domestic savings of 16–19% of GDP and domestic investment of 24–27% of GDP still need to be raised if they are to sustainably support a virtual doubling of GDP growth rates. With annual service payments on domestic debt so high, the Government is committed to mobilizing added domestic resources, managing them more efficiently, utilizing them more productively, and creating a business climate that motivates higher private savings and investment. The private sector is the key to realizing the country’s development potential, and for this the reform of finance, land law, and labor markets will be critical.

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C. Role of External Assistance

36. In the period 1998–2002, Sri Lanka received slightly over $3 billion in external assistance commitments from the donor and creditor community, the largest sources being Japan, ADB, and the World Bank. Given the chronically large fiscal deficits, the capital contributions to development projects from domestic government revenue are severely limited and consist of certain very small projects under the aegis of the various ministries. In reality, therefore, 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, and makes the relatively slow pace of project execution a worrisome feature of public administration. The importance of external assistance is seen not only in the financing of physical projects but in the support provided for policy and institutional reform, and it is likely that this will continue in the future as an integral and essential aspect of the financing of the rehabilitation needs of the North and East as well as of the Government’s development program more generally. Without external assistance, therefore, there would be few development projects of any size.

37. The Government has estimated that, based on the priorities identified in Regaining Sri Lanka and the additional needs of all conflict-related districts, external assistance requirements for 2003–2006 are targeted at $6.52 billion (of which $2.87 billion is for 2003–2004).¹² Of the $6.52 billion, $570 million has been committed by IMF. In addition, $800 million is expected from external agencies as budgetary program support, $4.8 billion as project financing (through grants and concessional loans), and $400 million as direct private sector support. In terms of official balance-of-payments projections, and known loan and other commitments, this leaves a financing gap of $730 million.

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D. ADB’s Assessment of the Government’s Development Strategy

38. The proposed structural reform program that lies at the heart of the Government’s new development strategy constitutes 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. Notwithstanding misgivings about certain implicit assumptions of the strategy, it has been welcomed by the country’s development partners as representing an admirable break with the past. However, the success of the strategy is highly contingent on the continuation of peace because, without it, it is unlikely that the Government will be in a position to implement reforms in full; it is unlikely that business and tourist confidence will maintain recent advances; and it is unlikely that the required reorientation of budgetary expenditure to civilian uses will be possible.

39. Assuming the continuation of peace, however, the strategy correctly places emphasis on the revitalization of the private sector as the spearhead of growth, and it proposes to liberalize the domestic economy, strengthen the finance and credit systems, revamp the legislative and institutional structures, reform land and labor laws, modernize infrastructure, and reinforce the position of SMEs, as ways of providing a more enabling environment for private investment. ADB supports these proposals, as they are very much in line with the directions and substance of the policy dialogue in which it has been closely engaged in recent years. It also supports the Government’s intentions to continue tackling the inefficiency of state-owned enterprises, as this mirrors the kind of assistance specifically provided by ADB to the energy (petroleum and power), transport, estate, SMEs, and port sectors, as well as in its general policy dialogue.

40. Proposed sector reforms are equally radical. Given that the overwhelming proportion of the poor live in rural areas, the strategy correctly addresses the rural economy as being crucial to its poverty reduction initiatives. In agriculture, the Government aims to raise productivity by increasing the role of the private sector (although state intervention stills appears to remain significant); removing state control over land; introducing a new land titling program; reducing protection; eliminating tariff irregularities; and encouraging higher-value output (including in such areas as horticulture, livestock, and fisheries). The Government also aims to provide the rural population with the skills to migrate to urban areas, although it is not clear that current urban reform measures can accommodate a large-scale migration in the time frame suggested without adding to slums and the urban jobless.¹³ Complementing these reforms will be major efforts to ensure that the poor are themselves able to benefit from the anticipated growth process (“connectivity”), by narrowing the transport and information divide that separates the poor from dynamic markets; mainstreaming such objectives as job creation and poverty reduction (although gender does not seem to be included explicitly) in all sector strategies; promoting SMEs; and incorporating community participation in assistance for poor regions.

41. In social services, its proposals are similarly far-reaching, involving “investing in people”. In education, in line with its pro-poor focus, the Government aims to raise quality, to improve the relevance of the curricula, and to redress disparities in access, in an attempt to reduce dropout rates (especially among the poor) and to increase the returns accorded to basic education in the labor market. This will require major refurbishment and refurnishing of school premises, and increases in the supply of trained teachers, especially in rural areas. In health and nutrition, there will be a concentration on the needs of the poor and other disadvantaged groups, and a rationalization of health care funding (with the public sector concentrating support on the poor and the private sector being expected to expand its role for certain other health groups). This again will require an expansion in rural facilities and significant increases in the supply of nurses and trained medical personnel. In social protection, a welcome proposal is the decision to improve the impact of its income transfer schemes for the poor (e.g., Samurdhi).

42. Collectively, these initiatives represent an ambitious agenda, especially as they have to be executed at a time of fiscal consolidation. Whether the Government has the capacity to carry out so much will ultimately depend on its own managerial effectiveness, and this will depend on governance reform and improved aid utilization. Although the strategy recognizes the pressing need for better governance and makes proposals to this end, there are few details on civil service reform, on rationalizing its structure, on clarifying the responsibilities of the different tiers of government, and on establishing some kind of focal point to track delivery at each level of government.

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