Countries and Regions

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p. 2 of 4 BACK | NEXT I. Current Development Trends and Issues II. Implementation of the Country Strategy and Program III. Portfolio Management Issues IV. Country Performance and Assistance Levels

Country Strategy and Program Update 2006–2008: Sri Lanka

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Implementation of the Country Strategy and Program

A. Progress in Poverty Reduction

9. Sri Lanka’s social indicators compare favorably with those of countries with similar per capita incomes. However, it is now clear that Sri Lanka is unlikely to meet the first target of the Millennium Development Goals (MDGs), a halving of poverty levels by 2015. Although survey data are not strictly comparable given different methodologies and sampling sizes, the percentage of the population in poverty remains stubbornly at about 22%, and there has been little improvement since 1991. While more work on the causes of poverty needs to be done, relatively low economic growth, persistently low agricultural productivity, and increasing income inequality are certain to play a role. Despite good health indicators, declines in morbidity have been slow and there are relatively high levels of undernutrition among women and children. In terms of the quality of education, women are still underrepresented in vocational and technical courses and lack information technology (IT) skills, which reinforces the gender division in the labor market. While child and maternal mortality rates have fallen by 50% over the last 10 years to very low levels, malnutrition among children remains relatively high.⁷ International agencies and the Government are becoming increasingly concerned that the previous good record in health and education may have led to a degree of complacency, and that these good indicators may erode over time as spending decreases. The Government has set up an MDG cluster in its National Council for Economic Development to monitor progress toward achieving the MDGs.

B. Progress in the Country Strategy and Program Focus Areas

10. The CSP and the programs developed from it, focused on three areas: (i) economic reform, (ii) governance, and (iii) social development. Crosscutting issues such as the environment and gender equity are supported through these programs and projects. For example, social development projects promote technical and vocational training for women; assistance for the conflict-affected north and east includes subprojects on women’s enterprises, targeting war widows; a rural finance project specifies the percentage of loans that should go to households headed by women; and water supply and sanitation projects have involved women in project implementation and maintenance, and also implicitly address environmental issues. ADB’s regional project assistance has not yet included Sri Lanka, primarily for geographical and political reasons, but ADB remains actively engaged in strengthening regional cooperation through its support for the South Asian Association for Regional Cooperation.

1. Economic Reform

10. SEMA and the National Council for Economic Development (NCED) are recently established agencies set up to implement economic reform and formulate economic policies. An SEMA bill is being prepared and is due to be presented in Parliament in 2005. NCED is tasked with formulating and implementing policies in such key areas as SME development, legal issues, tariff and trade policy, finance, and tourism. There are over 25 clusters under NCED, each of them co-chaired by representatives from line ministries or agencies and the private sector. Not all clusters are equally active, and some have met rarely since the establishment of NCED in July 2005. In other sectors (such as finance) the Government is moving decisively to push through with reforms.

11. Power sector restructuring, fiscal management, the restructuring of People’s Bank, and the strengthening of the private sector are focuses of economic reforms supported by ADB. Reforms in the power sector began in 1998 and have led to the passing of the Electricity Reforms Act and the establishment of the Public Utilities Commission (PUC), a multi-utility regulatory body. However, the restructuring of the Ceylon Electricity Board (CEB), which has been at the planning stage since 1997, supported by ADB and the Japan Bank for International Cooperation (JBIC), is making slow progress. This is a concern as weaknesses in CEB’s management need to be identified and addressed, staff performance improved, the level of implicit cross subsidies determined, and more private direct investment in power generation attracted. The Government has asked for, and has been granted, an extension of a program loan⁸ to support power sector reformw which would have expired in June 2005, to give it more time to build consensus among stakeholders, a key component for any successful reform attempt. Fiscal revenue collection increased last year, mostly because of an increase in imports and a subsequent rise in value-added tax (VAT) and excise collection. The Government has established a revenue board that aims to modernize and streamline all three revenue-collecting agencies. The People’s Bank balance sheet improved further in 2004, and the ratio of nonperforming loans fell to 14% from 18% in 2003. The restructuring and recapitalization process is being monitored by SEMA and the reform drive will be actively supported by the NECD’s banking cluster.

2. Governance

12. Governance issues within the power sector, industry, banking, and local government are being addressed through ongoing projects. A 2004 program is helping the Government to improve fiscal management and includes IT support and a human resource strategy.⁹ A farreaching program to pilot improved service delivery mechanisms from the top to the bottom of government—increasingly important for the cash-strapped treasury—could not be implemented in 2004 because of the change in Government. However, discussions to resume this program restarted in 2005 and the Government is very receptive to the program. A recent ADB and World Bank investment climate assessment of Sri Lanka,¹⁰ revealed that corruption, the legal system, and public management are not seen as major obstacles to private sector development. The assessment concluded that ‘Sri Lanka has managed to reduce public sector obstructionism to a minimum’, indicating that ADB’s focus on public management and improving social service delivery is on the right track.¹¹

3. Social Development

13. Improving the quality of education is high on the agenda of the Government, and is fully supported by ongoing and planned ADB projects. These projects support curriculum reform, decentralization of school management, and the introduction of IT in classrooms. Technical education and modernizing of colleges, as well as improving the delivery of rural financial services, are also crucial to improve social indicators, and are supported by ADB projects. Given the past neglect and low public investment in education, a rapid improvement in key indicators cannot be expected. Youth unemployment in 2004 remained high at 21%. In addition, a central bank survey found that all households regardless of income spent more than twice as much on private education in 2003–2004 as they did 5 years ago. This could be a sign that public education has not yet improved sufficiently. Strengthening vocational training, another ADB focus area, is also crucial: about 13,000 unfilled vacancies are reported by JobsNET, a Government e-initiative. A Local Government Infrastructure Improvement Project in 2005 aims to improve the delivery of key social services (such as communal water supply, drainage, municipal clinics, etc.) by local authorities.

C. Highlights in Coordination of External Funding and Partnership Arrangements

14. Cooperation between development partners in Sri Lanka remains very good and has been strengthened by reconstruction efforts since the tsunami. Post-tsunami damage and needs assessment was done together by the three main development partners, ADB, JBIC, and the World Bank, and finalized in January 2005. The chairing of post-tsunami reconstruction steering and coordination committees¹² has been rotated among all key players, and all development partners continue to work closely together. The Ministry of Finance has taken a keen interest in the coordination of external funding, and a recovery and reconstruction strategy has been drafted. The Government also hosted a Development Forum, attended by delegates from over 50 countries, in Kandy in May 2005, further strengthening the collaboration between the Government and its development partners. More players have now entered the road sector, for example, and ADB is taking the lead in donor coordination. The investment by all the development partners will follow the Government’s road sector master plan, prepared with ADB assistance, and projects prepared under an ADB TA loan¹³. ADB projects in postconflict and post-tsunami reconstruction have attracted substantial cofinancing (in the case of the 2005 projects,¹⁴ this was close to $150 million), an acknowledgement that these projects can deliver quickly and efficiently. Support for petroleum exploration and strengthening of the country’s debt market have been cofinanced by the Norwegian Government and the Swedish International Development Cooperation Agency (Sida). JBIC and ADB work very closely on power sector reforms, where loans of both development partners contain the same conditions.

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