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Countries and Regions Country Partnership Strategies Document
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Country Strategy and Program Update 2005-2006: Sri Lanka
IV. Country Performance and Assistance LevelsA. Proposed Lending Level23. Lending levels for the 2 years 2005-2006 for ADF are unlikely to exceed $90 million per year. This is a considerable reduction in ADF levels for Sri Lanka, which recently have been about $150 million, partly to support the country's reconstruction and rehabilitation efforts.14 This reduced allocation is in line with the performance-based allocation exercise conducted in November 2003. This identified the base case and therefore planned a level of approximately $90 million ADF allocation for 2004. For reference, the 2004 assistance pipeline for lending products and nonlending products and services is provided in Table A4.1 and Table A4.2, respectively. 24. Sri Lanka has been classified as a B1 country since December 1998 and is a blend ADF/OCR country in terms of accessing ADB financial resources. Assuming continued economic growth and economic reforms, the program plans a gradual move toward increased OCR lending for power and major road projects, and retains ADF for education, remote provincial and rural roads, other sectors identified on a case-by-case basis, and urgent reconstruction and rehabilitation work in the north and east. Sri Lanka will also be eligible for a 10-15% grant element in its ADF allocation starting in 2005.15 However, for OCR funding, the size of the allocation will have to fit into the framework of the Government's debt strategy and will be reviewed regularly. In this context, ADB is helping the Government set up a public debt office to improve public debt management including more efficiently trading government bonds.16 An earlier borrowing capacity assessment concluded that OCR levels of $150 million to $200 million per year are possible, provided that growth remains in the region of 6% per year, and the fiscal deficit is gradually reduced to 6% by 2006. Given the unexpectedly large deficit last year, this deficit target is not likely to be achieved. Yet reducing the level of OCR might have implications on interest rates and private sector growth if the Government steps up domestic borrowing to make up for the OCR shortfall. There will also be an impact on long-term economic growth if large public investment projects, in particular infrastructure-related, do not proceed. 25. The Tokyo Declaration agreed to during the June 2003 Sri Lanka Reconstruction and Development Conference linked funding agency assistance to progress in the peace process. Although negotiations have not resumed since they were suspended by the LTTE in April 2003, both the Government and the LTTE remain committed to the peace process. The role of the Government of Norway as facilitator has been confirmed. To strengthen the peace process on the ground, projects and programs for poverty reduction and reconstruction will continue and be expanded. This is considered essential: while the absence of war has led to a dramatic return of internally displaced persons to their original homes, the social and economic basis has to be restored to enable people to resume their normal lives. B. Nonlending Program26. The non-lending program prioritized the project preparatory TA for projects in the pipeline. The 2004 allocation has been reduced to $1.8 million, while the allocation for 2005 and 2006 is somewhat larger, subject to change, however. As in the past, priority will be given to project preparatory TAs. C. Summary of Changes to Lending and Nonlending Program27. The Colombo-Katunayake expressway, with a loan amount of $50 million from OCR, is an addition to the 2005 program, although it is subject to further discussion with the Government about viability and financing modality. Two other new operations, a technical education development project and the Jaffna water supply project, have been included as firm in 2006. The total loan amount for the national highway sector development project has increased from $60 million to $100 million, all from OCR. The human resource investment project for $20 million has been moved to 2006. The total effect of these changes for 2005-2006 is a $50 million increase in OCR and a $30 million increase in ADF funding for firm projects. The project preparatory TA for commercialization of agriculture has been moved from 2004 to 2005. As a result of the prioritization process, three projects were removed from the 2005 nonlending plan. The total effect on the nonlending program for 2005 is an increase of $1 million. One new project, education sector development, has been included in the 2006 nonlending program. ____________________
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