Country Profile - Sri Lanka
Development Assistance Fund Request
USAID Mission Director: David A. Cohen, 1996
In 1993, total donor assistance to Sri Lanka was about $475 million. The United States, with about 5% of total assistance, is the second largest bilateral donor (behind Japan) and the fifth largest overall. Leading donors are the Asian Development Bank, the World Bank, and the International Monetary Fund. There are 17 bilateral and 6 multilateral donors to Sri Lanka.
Sri Lanka's economy has grown steadily since liberalization began in 1978 with growth reaching an estimated 6.9% in 1993. However, despite economic progress, poverty persists and per capita income is only $540. Economic growth has been concentrated in urban areas, and in the industrial and service sectors, and has not been sufficiently broad-based to absorb under- and unemployed labor throughout the country. Agriculture, although the dominant economic activity in Sri Lanka, continues to stagnate.
Income distribution patterns disfavor the poor, and much of the poverty is concentrated in the rural areas where 80% of the population resides. While democratic traditions are strong, the Government of Sri Lanka (GSL) remains highly centralized, with few authorities and limited resources given to local governments. Years of civil war have strained GSL resources and threatened stability. U.S. assistance to Sri Lanka (5% of total international aid received) supports U.S. interests by promoting democratic governance, an open and free market economy, and preservation of natural resources.
The Development Challenge
Sri Lanka has an ethnically diverse population of 17.6 million persons residing in an area about the size of West Virginia. Population growth is low at 1.2%. The country has made some progress in evolving from a socialist, centralized economy to a more open and market driven economy. The budget deficit was 8.1% of gross domestic product (GDP) in 1993, down from 15.5% in 1988. Most of this reduction came at the expense of public investment, particularly in infrastructure. The annual inflation rate is about 11.7%. Unemployment is officially estimated around 14%, but may be as high as 35%-40% if underemployment is included.
Sri Lanka combines good human and natural resources with comparatively impressive social indicators. Life expectancy is high for a developing country, and about 87% of the population is literate. However, wide disparities exist in socioeconomic status and access to employment opportunities. About 20% - 25% of the population is considered poor, and while much of this poverty is in the rural areas, there is also severe urban poverty. One of the most serious social problems is extremely poor maternal and child nutrition, with stunting and wasting of children being more prevalent in the rural areas. The GSL has placed a high priority on poverty alleviation. The country's natural resource base is rapidly being eroded, endangering health as well as livelihoods in agriculture, industry and tourism.
Since independence in 1948, politics have maintained a democratic character. Local, parliamentary and presidential elections held in 1994 resulted in a smooth transition to power of a new coalition government, the Peoples Alliance, ending 17 years of United National Party domination. The new government has called for a continuation of economic growth strategies which are now gaining momentum. An eleven year-old ethnic war is centered in the Northern and Eastern provinces, which comprise about 30% of the country's land area and about 15% of its total population. This ethnic conflict has imposed a large drain on the Government's financial resources. The 1994 elections brought renewed hopes for peace and economic development in this area.
Sri Lanka is a responsive, sustainable development partner. However, its track record as a high-level performer in development is relatively short, and while progress has been good, it is also fragile. Sustainability will depend significantly on social and political stability, continued policy reform, environmental protection and conservation, and progress in the three strategic areas now targeted by USAID assistance.
Strategic Objectives (SOs)
The goal to which USAID's program contributes is a democratic Sri Lanka, with broad-based sustainable development, and preservation of natural resources. To accomplish this goal, the USAID program has three strategic objectives. USAID is encouraging broad-based economic growth by facilitating micro and small-scale enterprise development (both urban and rural) for a broad range of people, while strengthening related financial markets and increasing access to credit and urban infrastructure. USAID is helping to protect the environment through regulatory reform and local involvement in conserving ecosystems and biodiversity. USAID is also building democracy by enabling greater participation of people in all economic classes to define their own needs and achieve their own solutions, and by encouraging higher quality media and legal systems. In FY 1996, USAID will contribute 61% of its development assistance budget to economic growth, 20% to the environment, and 19% to democracy initiatives. A quarter of USAID program funds will support policies and planning in all three strategic objectives.
SO 1. Increased opportunity for people to participate in, and benefit from, a growing market economy ($13,030,000)
Sri Lanka is a low-income country with high unemployment and a fragile economic base. For generally improved standards of living, all sectors of the economy must continue to grow at a steady pace and have broad-based impact. This includes strengthening the rural and urban economies through enterprise development, policy reforms, new technology and skills, and strengthening of formal market institutions. More and better jobs for the unemployed and underemployed, and more revenue for the GSL are essential to sustain progress in humanitarian areas, and to sustain the viability of democracy. Slow or inequitable growth and poverty will feed potential political instability.
Activities. The USAID program helps to create credit and savings societies to expand credit access and services to the poor. USAID's direct assistance to private enterprises introduces technologies to improve competitiveness and market penetration, and helps to create sustainable small and medium-enterprise activities, in agriculture and industry. Assistance to capital markets helps to mobilize investment funds which create new jobs and make Sri Lanka's private enterprises more competitive. USAID also assists the GSL with its privatization program to transfer government assets to private control and to encourage private investment in urban infrastructure such as solid waste collection. The P.L. 480 Title III program, funded through FY 1994, has addressed the malnutrition problem and helped leverage free-market, agricultural reforms, while making U.S. wheat available for humanitarian resettlement programs and feeding programs for the rural and urban poor.
Indicators. USAID indicators for measuring progress toward achieving this objective are: (1) Increase in the percentage of private sector participation in GDP from 15.8% in 1995 to 17.2% in 2000; (2) stunting and wasting among preschool children will decline from 60% in 1995 to 40% in 2000; (3) $88 million annual increase in Sri Lankan Board of Investment domestic and foreign investment approvals per year, from $880 million of total approvals in 1995 to $1.32 billion of total approvals by 2000.
Feasibility and Cost-effectiveness. Sri Lanka must continue on a path of economic liberalization. Further opening up of the economy and broad-based growth will result in increased employment and income opportunities. Mobilizing productive savings and investment and increasing opportunities and access to private enterprise comprise the foundation for USAID's efforts. Assistance activities are aimed at policy reform and implementation, developing efficient financial markets, and strengthening private enterprises and institutions in the agricultural and manufacturing sectors. This approach is feasible given Sri Lanka's impressive progress in opening its economy. USAID's investment of $7-$8 million per year in economic growth activities is conservatively estimated to have rates of return in the 15%-25% range. This investment is effectively leveraging private sector investment at the micro- enterprise/mini-enterprise level.
Progress in 1993-1994. The dramatic increases in employment and income seen in previous years continued through 1993 and 1994. The availability of technical and support services to microenterprises and small businesses has improved, and has led to measurable effects on productivity, job creation and profitability. Some 12,000 people have increased their incomes through promotion of non-farm micro and small businesses and agribusinesses. Employment opportunities have been enhanced at the grassroots level by setting up microenterprise and income- generation activities through private voluntary organizations (PVOs) which have provided training in microenterprise development, new and more productive farming techniques, and vocational skill training for 27,500 people in urban and rural areas. New enterprise creation and expansion of existing enterprises, made possible by assistance to Sri Lanka's capital market, has created over 8,000 jobs in 1993 and an estimated 10,000 jobs in 1994, bringing the total jobs created to approximately 24,000. In 1994, the capital market was able to raise $167.2 million through initial public offerings and rights issues, compared to just over $20 million three years ago.
Improved farming techniques and diversification into high-value crops have increased income of participating farmers from $578 per year in 1987 to $1,042 per year in 1992-93. Dissemination of new technology has enabled farmers to realize additional income over their traditional crop paddy by using irrigated plots. Through 1993, 500 assisted private firms have purchased over $15 million in goods and services from the United States, producing nearly a fivefold return on USAID's investment. During 1994, a further 100 firms have been assisted and are expected to result in similar returns. With USAID assistance, 40 of 61 companies identified by the GSL have been privatized, and $310 million in assets transferred to private control.
Some 700,000 rural poor people received loans from the strengthening of community-based thrift and cooperative societies. The current USAID Housing Guaranty program, concluded in FY 1994, provided approximately 45,000 below median-income families (less than $95 per month) with long-term credit for housing. In addition, the P.L. 480 Title III resources supported the GSL's feeding programs, benefiting approximately 250,000 poor people, and leveraged a full range of policy reforms.
Donor Coordination. USAID's programs under this strategic objective complement World Bank and Asian Development Bank programs. The Asian Development Bank's financial sector program is developing a secondary market for government debt securities and improving capital market facilities. USAID projects complemented the World Bank and Asian Development Bank's lending programs for industrial development. USAID collaborated closely with Asian Development Bank agriculture sector projects to establish and monitor performance on institutional reforms and policy changes.
P.L. 480 Title III resources supported PVOs which supplemented World Bank, Norwegian, Canadian, and Swedish aid program assistance to improve food security, poverty alleviation and employment creation.
Constraints. Although the new government continues the goal of expanding the free market economy, it has yet to define its development focus and strategy and may not move ahead at the required pace in some development areas. In addition, the business skills found in rural and urban, micro to medium-scale enterprises will need to be improved in order to access and utilize economic opportunities. Overall, Sri Lanka's economic growth performance is fragile and to some extent will be, dependent on resolution of its internal ethnic conflict and its progress in maintaining social and political stability.
SO 2. Improved environmental practices to support sustained development ($2,545,000)
Sri Lanka is an island nation which is rapidly depleting its natural resource base. Its population density is one of the highest in the world. It is therefore imperative that its natural resources be wisely managed to ensure that the sustainable gains from economic growth are not undermined from declining environmental quality or resource degradation. The future sustainability of Sri Lanka's economy is dependent on the preservation of its natural resource base, such as water for irrigation and electricity, and a clean ocean to attract tourists. Capable institutions are required for formulating and implementing policies and programs to ensure full attention to environmental management.
Activities. USAID environmental activities focus primarily on policy reform and regulatory change, with successful pilot demonstration sites in natural resource management. The natural resource environmental policy program, the flagship of this objective, assists the Government of Sri Lanka to implement new regulations on industrial siting, to undertake environmental impact assessments on important development projects, to establish an environmental licensing program, and to implement a pollution prevention and environmental auditing program. Another component of the program helps to organize user groups to take joint responsibility for sustaining the productivity of selected watersheds through participatory management and control of land and water resources.
Indicators. USAID indicators for measuring progress toward achieving this objective are: (1) Number of people benefitting from adoption of environmentally sound practices will increase from 116,030 in 1995 to 173,530 in 2000; (2) percentage of high- polluting industries which are implementing pollution prevention/control measures will increase from 15% in 1995 to 60% in 2000; (3) the number of hectares of land with agricultural conservation practices will increase from 7,960 hectares in 1995 to 37,460 in 2000; and (4) the percentage of municipal solid waste disposed through environmentally sound systems will increase from 20% in 1995 to 70% in 2000.
Feasibility and Cost-effectiveness. USAID's approach emphasizes development of institutional and policy capacity carried out in cooperation with a wide range of Sri Lankan partners, including government agencies, academic institutions, the private sector, and community groups and non-governmental organizations (NGOs). USAID leverages significant funding from other donor programs and the GSL to improve environmental resource conservation. There is a strong receptiveness to policy interventions which achieve high cost-effectiveness through national and regional impacts. USAID achieves lasting results and the permanent adoption of environmentally sound development strategies and practices by focusing on the development of local institutions and participation at the community level. USAID's involvement in this strategic objective will be $2.54 million in FY 1996, a relatively small investment for planning and sound policy returns which will have a large payoff for improved quality of life in the future.
Progress in 1993-1994. USAID has assisted the GSL in a variety of institutional strengthening activities which were almost non- existent four years ago, most significantly, the revision of the national environmental action plan (NEAP) for the next five years. This includes the acceptance of pollution prevention and waste minimization approaches as essential elements of a national industrialization program. The use of environmental impact assessment methodology also was institutionalized, with 200 officials trained. Ninety-five user-groups, involving 1,200 farm families, were formed for shared control of natural resources with their local government in two pilot watersheds. Since 1993, a total of 50,000 low-income people participating in community- based, resource management have benefitted from such interventions as improved sanitation. Training and awareness programs encouraged users to accept and utilize conservation concepts, including conservation farming, soil conservation measures, and tree planting. In summary, USAID has had results in addressing green, brown, and blue issues of environment.
Donor Coordination. USAID collaborated closely on the Natural Resource Environmental Policy program with the World Bank on the development and implementation of the national environmental action plan and the Colombo environment improvement plan for solid waste management, clean settlement and the economic study of waste treatment. USAID also works closely with the World Bank, United Nations Development Program, and the Asian Development Bank on a variety of issues including biodiversity, wildlife conservation, and watershed management.
Constraints. Rapid economic growth is putting pressure on Sri Lanka's natural resources. Even if economic growth slows and does not provide employment and incomes demanded by the population, there will be increased pressure for extractive use of environmental resources and greater difficulty in restraining development of environmentally unsustainable activities. There is also still some resistance among key decision-makers to the premise that environmental considerations should be factored into every aspect of development planning, and the commitment of the GSL to protect the environment will be essential to conservation of critical eco-systems.
SO 3. Greater empowerment of people to participate in development and democracy ($3,262,000)
Ordinary Sri Lankans have relatively limited opportunities to participate in, let alone influence, decision making that affects their political, social, and economic well-being. Although great progress has been achieved by Sri Lanka in some social indicators, unemployment, poverty, social unrest, ethnic conflict, and dependency on government continue to threaten the sustainability of progress made to date. Broader participation, improved public information, and more responsive and capable democratic institutions are essential for Sri Lanka to sustain its current economic momentum and achieve its aspirations of becoming a modern developed society.
Activities. USAID supports PVOs which represent vulnerable groups, such as displaced persons and youth, and their priorities; assistance for organizing farmer groups to better use water and land resources; and institutional strengthening to increase access to justice and an improved media. The newly signed Citizens' Participation Program is the cornerstone of USAID's democracy program. It is strengthening democratic processes, particularly at the village level, enabling ordinary citizens to address fundamental social and economic development needs.
Indicators. USAID indicators for measuring progress toward achieving this objective are: (1) increase in the number of people with access to legal services and information; and (2) increased expenditure by local government units. Targets for these: indicators will be determined by 9/30/95 once the cooperative agreements with two principal U.S. PVOs are established.
Feasibility and Cost-effectiveness. USAID has a strong record of success in working with NGOs on popular participation. Social, political and economic crises have disrupted Sri Lankan society. However, as a testimony to the strength of democracy in Sri Lanka, these crises have not weakened the commitment to democratic processes, but rather reaffirmed the necessity of strengthening these processes and making them more receptive to citizen input. USAID has chosen local government, participatory development, legal systems and the media as areas of activity under this objective. In each area, there are well established groups to work with on specific issues.
USAID will invest almost $3.3 million under this strategic objective in FY 1996. Working with grassroot-level NGOs will involve lower costs while supporting a diverse range of economic activity, with assistance to business associations and their members, to displaced persons in the North and East, and income- generation for farmers, rural women and urban slum dwellers. Assistance to mediation boards in rural areas is a cost-effective way of providing access to legal services. USAID expects the impact per dollar of assistance to be high.
Progress in 1993-1994. USAID's democracy activities focus on strengthening the role of NGOs by increasing their ability to advocate for policies and programs that enhance the quality of life for all citizens, especially vulnerable populations. USAID has worked closely with U.S. PVOs and Sri Lankan NGOs to increase the public's awareness on human rights issues, rule of law and justice through training programs and seminars for 5,400 people, including judicial and legal professionals. USAID also has strengthened institutional capabilities and activities of 230 farmer groups, 23 business chambers, and 33 environment and human rights advocacy groups. During 1993-1994, USAID partner institutions have made significant strides in providing access to democratic processes for ordinary Sri Lankans. Emergency regulations restricting individual freedoms were rescinded, thousands of people redressed their grievances through community- based mediation boards, and nongovernmental organizations advocated greater freedom of information, exposure of human rights abuses, and resolution of environmental issues.
Humanitarian assistance has been provided to 13,296 people affected by ethnic conflict in the northern and eastern provinces. Public awareness of prevention and control of drug abuse, sexually transmitted diseases and human immunodeficiency virus (HIV) and acquired immunodeficiency syndrome (AIDS) has been provided to NGOs, citizen group leaders and Government decision makers, through seminars, workshops and training.
Donor Coordination. USAID works closely with various bilateral donors through the United Nations Development Program-sponsored forum for NGOs. Most of these organizations and donors are involved in community-based participation activities. USAID also has collaborated with the Dutch and Norwegian aid agencies on human rights activities.
Constraints. Uncertainty remains regarding the new government's outlook towards private sector-led growth strategies and the role of NGOs. Implementation of the GSL's stated policy of devolution of power to lower levels of government is mandatory if democracy is to become truly participatory.
