Sri Lanka - opportunities and challenges

WORLD BANK REPORT ON SRI LANKA 2003


DEVELOPMENT PROGRESS

Sri Lanka was one of the first developing nations to understand the
importance of investing in human resources and promoting gender
equality. As a result, it has achieved health and education outcomes
more consistent with those of high-income countries. It also
liberalized its economy in the late 1970s ahead of other developing
nations and maintained healthy economic growth despite a devastating
20-year civil conflict.

Yet the social and economic toll of the conflict has kept the
country's development far below potential. In February 2002, the
Government of Sri Lanka agreed to a ceasefire with the Liberation
Tamil Tigers of Elam (LTTE), and the parties have subsequently held
six successful rounds of peace talks, facilitated by Norway. The
government has pledged far-reaching economic reforms to accompany
peace efforts in order to help the country realize the full benefits
which lasting stability should afford.

Between 1970 and 2001, Sri Lanka reduced the infant mortality rate
from 48 to 17 deaths per 1,000 live births, and average life
expectancy at birth climbed from 67 to 73 years. From 1980 to 1996,
the maternal mortality rate dropped from 90 to 60 deaths per 100,000
live births, while fertility rates declined from 3.5 births per woman
to a near replacement level of 2.1 births. Educational achievements
include primary education completion rates of around 100 percent. Sri
Lanka's literacy rates, both adult and child, are on par with the more
developed countries of the world.

On the economic front, in 1977 Sri Lanka began the transformation from
an inward-looking socialist system towards a market economy based on
liberalized trade, foreign exchange, and investment arrangements.
Since then, gross domestic product has grown at a moderate rate of 4
to 6 percent a year, with the exception of 2001, during which Sri
Lanka experienced negative growth for the first time since
independence. This was prompted by the effects of the global economic
downturn, as well as by domestic factors including a drought,
political turmoil, stalled economic reforms, and an attack on Sri
Lanka's main airport. A gradual recovery has begun, and the economy is
currently growing at an annual rate of more than 5 percent.

CURRENT CHALLENGES

A number of challenges remain as Sri Lanka strives for peace and
prosperity. Social exclusion, driven by ethnicity, language, religion,
and conflict, has been deeply engrained for decades, resulting in
reduced opportunities and extreme tensions among different groups.
More than 64,000 lives were lost, and an estimated 800,000 persons
were displaced in the conflict. Reducing social and economic
disparities will be critical to rebuilding trust. At the same time,
new economic benefits, equitably distributed throughout the country,
will be essential for maintaining the level of social and political
stability needed for lasting peace.

While Sri Lanka's per capita yearly income ($880) is higher than that
of most of its South Asian neighbors, it lags far behind countries
such as Singapore, Korea, and Malaysia, with which its per capita
income was on par in the 1960s. Besides the toll of the civil
conflict, Sri Lanka's shortfall can in part be explained by a gradual
weakening of public institutions and governance since the early 1970s
and the country's heavy dependence on the public sector in the
creation of jobs and transfer of resources across groups.

Despite Sri Lanka's relatively healthy economic growth, 25 percent of
Sri Lanka's population still lives below the poverty line, and human
deprivation in conflict-affected areas is particularly high. Large
government-sponsored poverty alleviation programs face design and
implementation challenges while complex regulations, large and
ineffective government institutions, and poor physical infrastructure
constrain private sector activity which could boost economic growth
and employment.

While there is relatively wide provision of health and education
services, quality remains inadequate in many parts of the country. The
school repetition rate is high while availability of teachers and
modern learning materials in remote areas is low. Health services will
need to adapt to meet new challenges posed by a large aging population
and emerging threats such as HIV/AIDS.

Ninety percent of Sri Lanka's poor live in rural areas, where access
to basic services is limited. Among the poorest households, only 38
percent have electricity, 55 percent sanitation, and 61 percent access
to safe drinking water. These conditions discourage economic growth in
poorer areas and exacerbate inequality within the country.

The government has articulated an economic program and poverty
reduction strategy: Regaining Sri Lanka, Vision and Strategy for
Accelerated Development, which focuses on restoring peace and economic
growth in the country. Its main pillars are building a supportive
macroeconomic environment, reducing conflict-related poverty, creating
opportunities for the poor to participate in economic growth,
investing in people, empowering the poor and strengthening governance,
and implementing an effective monitoring and evaluation system.


THE WORLD BANK IN SRI LANKA

The World Bank's assistance is aimed at helping the government reach
its stated goals and provides financing and technical assistance for
both economic and human development.

In April 2003, the World Bank produced a new Country Assistance
Strategy for Sri Lanka, outlining a program that includes US$800
million of assistance, to be provided in the form of grants and
interest-free loans (known as credits) from the World Bank's
International Development Association (IDA), over a four-year period.

The strategy is built around three central themes: Peace, Growth, and
Equity. In the area of peace, the strategy builds upon work the Bank
is already doing to support resettlement and revival of livelihoods in
the conflict-affected North and East of the country, through
restoration of health services, irrigation, and water supply, and
payments to displaced people who are returning home. To support
increased short-term assistance by international donors for Sri
Lanka's reconstruction and rehabilitation, the Bank is acting as
administrator of the North East Reconstruction Fund (NERF).

Lessons from the World Bank-supported North East Irrigated Agriculture
Project, which is working to revitalize conflict-affected communities
(see box), are providing a basis for support to rehabilitation and
reconstruction efforts.

The government has deemed it essential that the peace in the country
be accompanied by an equally determined economic reform process to
unleash the potential of the economy. In support of this, the World
Bank is assisting with efforts to create an environment conducive to
healthy private sector growth, which includes improvements in the
financial sector, utilities, infrastructure, and regulatory capacity.

The Bank is also supporting Sri Lanka's efforts to improve access to
and quality of public services in education, health—including
HIV/AIDS prevention and treatment—electricity, water supply, and
sanitation, with a focus on empowering communities to address their
own development needs. It places great importance on balanced
development of the island, with interventions also explicitly
targeting poor areas in the South. These efforts will help Sri Lanka
make progress towards meeting its own development objectives and the
Millennium Development Goals (MDGs), a set of internationally-agreed
goals endorsed by nearly 150 Heads of states at the United Nations'
Millennium Summit in September 2000.

CURRENT LENDING

As of July 2003, the World Bank's portfolio of active projects
consisted of 14 IDA credits and two Global Environment Facility grants
in total value equal to $545.1 million. The largest areas of
assistance are in rural development and the areas of health and
education which together make up over 50 percent of active lending to
Sri Lanka (see chart).

Since joining the World Bank in 1950, Sri Lanka has received 98 loans,
credits, and grants totaling more than $2.87 billion in support of
development efforts as of July 2003. Most assistance has been provided
in the form of interest-free credits through the International
Development Association (IDA), the World Bank's concessionary lending
arm.