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Annual Report 2001

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Sri Lanka

Economic performance

After achieving 6.0% growth in GDP in 2000, Sri Lanka faced negative economic growth of 1.3% in 2001. The decline was largely due to three factors: the global economic slowdown, which reduced demand for manufacturing exports; the ethnic conflict resulting in an attack on Sri Lanka’s international airport that adversely affected tourism and shipping; and poor weather, reducing agriculture yields. The fiscal deficit was around 10.0% of GDP for the last 2 years. The national debt rose, reaching more than 100% of GDP in 2001. Consumer prices increased by 11.0% in 2001 from 1.2% in 2000 despite the drop in world oil prices at the end of the year. Inflation increased due to a rise in key administered prices (particularly diesel and electricity) and the 11.0% rupee depreciation, with poor weather also generating high domestic food prices. Money growth of 11.4%—mainly due to rising domestic deficit—might have triggered inflationary pressures, given the declines in real output. The dollar value of merchandise exports fell by 12.8%, but was offset by the 18.4% decline in merchandise imports, thereby improving the merchandise trade balance position. Following the rupee float, supported by an IMF Standby Arrangement, the level of official reserves improved to about 2.7 months of imports. The new Government’s challenge is to restore macroeconomic stability to provide an environment conducive to long-term development.

ADB operations

Operational strategy: ADB’s operational strategy was formulated in 1999. It was further refined, reflecting the Government’s framework for poverty reduction and ADB’s poverty analysis, to incorporate poverty reduction into ADB operations. The strategy is aimed at achieving sustainable poverty reduction through broad-based, pro-poor growth to generate employment and increase rural income; social development focusing on improving education and increasing nutrition awareness; promoting community-based natural resource management; good governance for greater accountability and responsiveness to the needs of the poor; and reduced conflict-related poverty.

Policy dialogue: Policy dialogue with the Government focused on reducing poverty, improving public sector governance and efficiency, and promoting private sector growth. ADB continued the policy dialogue on poverty reduction through ADB’s poverty analysis, high-level forum, and the Government’s preparation for its poverty reduction strategy. ADB worked with the Government for policy and institutional reforms in the sectors where ADB operations are focused, such as road, power, port, environment and natural resource management, and rural finance. ADB also provided a program for small and medium enterprise (SME) sector development for enhancing the business environment, strengthening business capabilities, and improving private sector access to finance, particularly SMEs. The program will have an integrated strategy that will include policy reforms and capacity building.

Loans and technical assistance: ADB approved six loans for four projects totaling $146 million in 2001 for Colombo Port’s increased efficiency and expansion, North East community restoration and development, Southern Province rural economic advancement, and development of an SME sector program (which includes a program loan for SME development and two investment loans for a business services support facility and a credit line). ADB also approved nine technical assistance grants totaling $4.1 million. Two were to prepare projects on aquatic resource development and quality improvement and on rural finance sector development. Seven advisory technical assistance grants were for integrating cleaner production into industrial development, a study of the pricing policy in the petroleum subsector, road maintenance budgeting and expenditure control, transport sector support, resettlement capacity building, and SME development. ADB approved a $500,000 grant, funded by the Government of The Netherlands, to restore and develop the North East community. The Protected Area Management and Wildlife Conservation Project also received grants from the Global Environment Facility ($9 million) and the Government of The Netherlands ($4 million).

In 2001, ADB approved an equity investment of up to $360,000 in Sri Lanka’s first private sector housing bank, which will provide loans to low- and medium-income borrowers.

Project implementation: Since joining ADB in 1966, Sri Lanka has received 105 loans, of which 32 were active at the end of 2001. Contract awards totaled $103.5 million, bringing the cumulative figure to $1.9 billion. The contract award ratio was 15.1%, higher than the ADB-wide average of 14.8%. Disbursements during the year totaled $103.5 million, bringing cumulative disbursements to $1.8 billion. The disbursement ratio was 15.1%, lower than the ADB-wide average of 20.5%.

In January 2001, ADB conducted a country project implementation and administration seminar for government officials and executing agency personnel with focus on improving project and portfolio performance. The country portfolio review in October 2001 identified ways to enhance portfolio performance and project administration, with an emphasis on procurement procedures, project quality at entry, and project readiness. Recent improvements in project monitoring were discussed with various executing agencies and project directors.

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