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Annual Report 2002 : South Asia

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Sri Lanka

Economic Performance

The ceasefire agreement, reopening of A-9 highway to Jaffna, and successful rounds of peace talks all helped foster stability and promote economic recovery in Sri Lanka in 2002, but continued weakness among its global trading partners hindered a rapid turnaround. For more on Sri Lanka and postconflict rehabilitation, see the Special Theme chapter. Real GDP grew by 3.0% in 2002, in contrast to a 1.4% decline in output in 2001. Agriculture, industry, and services all showed gains compared with 2001,
with tourism and shipping recovering from the downturn that followed the attack on the country’s international airport. Inflation fell to 10.2% in 2002, from 12.1% the previous year.

The Government took steps to bring the fiscal deficit under control. The budget deficit, excluding grants and privatization proceeds, declined from 10.9% of GDP in 2001 to 9.0% in 2002. The national debt continued to be an issue, with the level exceeding 100% of GDP. The central bank maintained a prudent monetary policy with money supply increasing by 13.4%, of which a larger share was channeled to private sector credit in 2002 than in 2001. The dollar value of merchandise exports dropped for a second year, by 2.4%. Imports grew by 2.2%, thereby widening the trade gap. The level of foreign exchange reserves improved from 2.2 months to 2.3 months of import cover, supported partly by the successful completion of the IMF Standby Arrangement.

ADB Operations

Operational strategy: ADB’s strategy is being revised. It is expected that the new strategy will continue to reduce poverty through regionally balanced development, and pro-poor growth to generate employment and increase rural incomes; social development to enhance the marketable skills of the labor force; and good governance for greater public sector accountability.

Policy dialogue: ADB has been an active participant in the Government’s planning committee for postconflict rehabilitation. ADB supported the Government’s rehabilitation efforts through the North East Community Restoration and Development Project by using loan savings redirected from closing projects. Dialogue with the Government focused on institutional reforms in the infrastructure sector, such as unbundling the vertically integrated state-owned electricity company. The reforms are expected to instill greater commercial focus on the new power sector companies, provide improved service at lower prices, and ensure continued expansion of the grid’s coverage. In the roads subsector, the dialogue focused on public-funded maintenance contracts.

Loans, technical assistance and grants: Seven loans totaling $236.5 million for four projects were approved in 2002. The projects are aimed at improving aquatic resources and plantations, and developing the power and roads subsectors. Nine technical assistance totaling $4.8 million and a grant of $900,000 were approved (see tables 1, 6, 24, 25, and 35 in the Statistical Annex).

Project implementation: Since joining ADB in 1966, Sri Lanka has received 112 loans totaling $2,980 million, of which 38 were active at the end of 2002. Contract awards totaled $157.4 million, bringing the cumulative figure to $2,011.2 million. The contract awards ratio for 2002 was 18.9%—lower than ADB’s average of 22.6%. Disbursements during the year totaled $171.2 million, bringing cumulative disbursements to $1,956.7 million. The disbursement ratio was 17.6%—lower than the ADB-wide average of 22.2% (see tables 14–23 in the Statistical Annex).

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