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Countries and Regions Country Partnership Strategies Document
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Country Strategy and Program Update 2005-2006: Sri Lanka
I. Current Development Trends and Issues1. Since the present Country Strategy and Program (CSP) was endorsed by the Board of the Asian Development Bank (ADB) in September 2003, Sri Lanka's political environment has changed substantially. In November 2003, President Kumaratunga assumed control of three key ministries-defence, interior, and media-that had previously been controlled by the United National Front (UNF) government led by Prime Minister Ranil Wickremasinghe. The President, who leads the party that formed the opposition to the UNF government, had been in an uneasy coalition with the UNF government since it came to power in late 2001. The President's action set in train a series of events that culminated in a parliamentary election on 2 April 2004, 4 years ahead of schedule. The result was victory for an alliance formed between the President's party and the Janatha Vimukthi Peremuna. However, the alliance does not have a majority in parliament and the first months after the elections were marked by building intra-alliance consensus, and seeking support from minority parties to gain sufficient parliamentary seats for the alliance to be able to govern. The resulting uncertainty might soon have an impact on the economy, and also on the peace process, the latter already strained after the revolt against the Liberation Tigers of Tamil Eelam's (LTTE's) leadership by its eastern military commander. Despite these developments, the Government and the LTTE have stated that they remain committed to the peace process, and will maintain the ceasefire that has been in place since April 2002. There is as yet, however, no agreement on when peace talks, suspended since April 2003, will restart. 2. Since the present CSP was finalized, new poverty surveys have been published. In a recalculation of the national poverty line, released in July 2004 and based on three household income and expenditure surveys, the percentage of households living in poverty peaked in 1995/96 at 24.3% (up from 21.8% in 1990/91) to fall to 19.2% in 2002. The surveys suggest that regional income inequality grew in the 5-year interval since the 1995/96 survey. Possible reasons are increasing wages linked to a rapidly expanding private sector in Colombo and the surrounding western province, especially in services and an erosion of real incomes by inflation, which tends to hit the poorest relying on wage incomes the hardest. B. Economic Assessment and Outlook3. Future economic performance depends crucially on progress in the peace talks, the Government's fiscal stance, and on global economic growth and oil prices. The unexpected sustained global increase in oil prices might lead to a widening trade deficit and is also a drain on the budget as petroleum prices remain subsidized. Government price increases, for petroleum and other basic commodities that are similarly subsidized, are likely before the end of the year to reduce the pressure on the budget. Revenue-enhancing measures will also be required, for there to be a noticeable impact on the budget deficit. Although the Government has made a strong commitment to bring the deficit to below the 2003 level of 8% of gross domestic product (GDP) by year-end, it is not clear how it will be able to increase revenue, or decrease expenditure, in such a short time frame to achieve this. Indications are that the deficit is likely to increase, rather than decrease. For economic growth to be at least 5%, as the Government intends, the restructuring of the economy in all major sectors would have to be continued and fiscal consolidation plans, a stated priority of the Government, be implemented. 4. The Government’s Economic Policy Framework, a good first step to define overall policy direction, was published in July 2004. It included major infrastructure projects in energy, roads and ports. At the same time, small and medium enterprises (SMEs) and more equitable regional growth will be the focus of the new strategy. Tourism, and the rural sector will also be promoted. Large-scale manufacturing will be supported, and the Government plans to strengthen trade ties with important trading partners. The Government set up three major agencies in May 2004. These are the National Council for Economic Development to oversee and steer economic development policy, the Strategic Enterprises Management Agency to restructure 12 strategically important state-owned enterprises (SOEs) to improve profitability while retaining them in state ownership, and a National Procurement Agency to improve efficiency in the procurement process. The remaining less important SOEs will be overseen by the existing Public Enterprise Reform Commission. C. Implications for Country Strategy and Program5. Under its Economic Policy Framework, the Government will continue economic restructuring and reform to put the economy on a more efficient footing. The reform focus will be on commercializing SOEs, creating a balance between private sector and public interests, and improving the institutional framework to reap larger benefits from technology transfers and trade. Provided that this plan is further concretized and put into action, the impact of the change of Government on ADB's program will be relatively small and ADB will assist the Government in its renewed and stronger focus on SMEs and in promoting growth in remoter and poorer regions. As a short-term measure, the Government has agreed to present an interim poverty reduction strategy paper as a working document. It will then start work on its own strategy, due later this year, which is expected to include more details on the north and east and its new economic policies. ADB will carefully monitor progress in economic reforms and is prepared to adjust its program in line with progress made. 6. As discussed earlier, regional inequality has increased, and in some provinces poverty levels actually increased (despite overall improvements in living conditions).1 A conclusion that can be drawn is that ADB’s assistance to Sri Lanka should address not only poverty in general, but also improve the manner in which its assistance is distributed throughout the country. In addition, to support the Government's new policy of reducing regional inequality, ADB's programs and projects should increasingly focus beyond the western province and Colombo where most, if not all, economic development takes place. The gradual shift towards greater inclusion of the neglected conflict-affected areas, started in 2001, will also contribute toward greater income equality and equal access of opportunities across Sri Lanka's provinces. At the same time, ADB's programs need to continue to cover the poorest regions in south and central districts where most of the present core poverty interventions such as water supply and sanitation, road, and livelihood projects take place.
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