Announcement of Loan to Ceylon for the Aberdeen-Laksapana Hydroelectric Project on June 18, 1954

INTERNATIONAL BANK FOR RECONSTRU1TION AND DEVELOPMENI' • FOR THE PRESS PRESS R~LEASE NO. 36$ FOR RFUASE 11:00 A.M. JWle 18, The International Bank for Reconstruction and Development has appr,;oved its 19S4 first loan to Ceylon. The loan will be niade in various currencies equ;L valent to $19,1101 000. The funds will help to carry forward the Aberdeen-LB.l<:sapana hydroelectric scheme for supplying additional power to southwestern Ceylon, the most productive and populous part of this island country. The hydroelectric power potential of Ceylon is largely undeveloped and there is a heavy dependence on thermal pa..rer which is generated entirely with imported fuel. Particular importance., therefore, is attached to the development of hydroelectric power because it will both produce additional electricity at lower cost and effect foreign exchange saVings. The Aberdeen-Laksapana scheme is intended to develop the power potential • of the Kehelgamu and Maskeliya rivers at a point about 50 miles east of Colombo., the capital. Eventually the total generating capacity of this development will be 150.,000 kilowatts. The scheme is being carried out in stages., of ,;ftlich the first was completed in 1951. It consisted of the construction of a 25.,000 kilowatt plant in the Laksapana Vall~J., a diversion dam and tunnel to conduct water from the Kehelgamu to t,he plant., and a transmission line to Colombo. The next stage 0£ this development is being financed with the help of the Bank's loan. It consists of the constr~ction of a second dam to store additional water from the Kehelgamu and to regulate its flow to the power station., the addition of 25,000 kilowatts to the generating capacity of the existing power plant., am the construction of transmission lines and distribl.ition facilities. The total cost of this sta.ge is estimated at about 150 million rupees • (equivalent of $31.5 million). requirements; The Bank's loan will finance the foreign exchange tne rupee costs will be met by the Government,,. that the proj eet will be completed in ~pproxiJnq. tely four years, It is expected  ~ 2 - Tea., rubber and coconut products constitute 9'JI; of Ceylon's exports. Almost all the factories processing these products are situated in the area to be served by the Aberdeen-Laksapana project. 7nese, industries now rely for power to a great extent on small thermal units. Increased supplies of low-cost power from the project will improve efficiency of production in the f'actorj.es. The power will also be used in light industries producing consumer goods of kinds now imported. The area served also includes Colombo., which is Ceylon• s largest city a.nd most important port. A program to enlarge and modernize the port, now nearly finished, will enable it to handle more traffic and will increase the demands, for power for cargo-handling facil~ties. Because Col.i.,mbo is the center of Ceylon's foreign trade and has a large labor force., it is likely that future industrial growth., with consequently increased dernand !or power 1 will take place in this • vicinity • The power system. which is being built up in. the area served by the Aberdeen- Laksapana project is run by the Electrical Undertakings Department of the Ceylon Government. The major part of the construction will be done by foreign contractors under the supervision of Briti~h consulting engineers and the Department. The loan is for a term or 25 years and bears interest of 4-3/4% per annum., including the statutory 1% commission charged by the Bank. Amortization will begin January lS, 19$9. The Executive Directors of the Bank approved the loan at a meeting on June 17, l954, and the loan doc'4fflents ,will be signed shortly. f. I,  -3- • Supplemental Statemen~ on Loan to Ceylon Ceylon is an island of 2$ 1 000 square miles, an area about half the size of New York State. It lies in the Indian Ocean off the southeast coast of India. Of the total land area., only about 21.$% is now under cultivation. The population has been increasing at the rate of 2.8% over the last 10 years, and in 1953 wa~ nearly 8.5 million. Ceylon's economy has been built ap on three industries - those concerned with the produ.ction and distribution of tea., rubber and coconut products. A hundred years ago only coconuts were produced on the island; tea a.nd rubber were later introduced mostly by British planters with British capital. Today over half the working population is employed in the production and distribution of these three commodities, which account for about 90% oi Ceylon's foreign exchange earnings. • On the other hand, nearly two-thirds of Ceylon's i'ood requirements and almost all its requirements of fuel and consumer goods have to be imported. The tremendous inc1·ea.se in the rate of population growth gi. ves special urgency to the need f'or increazcad domestic production or consumer goods. Bef'ore World War II population growth was more than matched by the increase in output; but a dramatic change in this picture was caused by the virtual elimination of malaria during and since the war., so that today the population is gro't-u"'ing at a rate wh;_ch is one of the highest in the world. Unless output can be increased to keep pace with this growth., the staP,1dard ct living of the people JT!USt fall. The production or tea., rubber and coconuts must continue to play a prominent part in the econ~~ but the scope for increasing output of these three commodities is limited and could not be at a pace adequate to Ceylon's needs. Consequently., while the development plans of the Governn1ent have not neglected these key industries., much attentiotl is being given to en_couraging output of food gra.ins and consumer goods which are at present imported. ~ince an  Lt 1·· - 4- essei'1tial prerequi~ite of industrial gro,.,,th is the availability of basic s~vices, or which power is perhaps the most necessary, n1uch iJT4)ortance is attached to the Aberdeen-Laksapana hydroelectric scheme. Financially., c,~ylon anerged from the war in a strong position. Her foreign exchange reser·ves stood about Rs. 1,26o millions ($265 million) at the end of 191t5, higher than ever before ¥1 her history. Some decline followed as depleted stocks were replenished and impprt controls were relaxed; b,1t the Korean boom brought a sharp rise in the prices of the threA PX:p~!'t c~mmcdities, an(i by the end of 1951 once again raised the level of forei~ exchange reserves above Rs. 1,200 million. In addition, the boom h~d substantially increased Government revenues. However., Government expenditures had increased even more., due in some part to greater developmer.1.t expenditures but in greater part to enormously increased food subsidies. When the collapse of the boom in 1952 caused a much • sharper drop in the prices of Ceylon's main e~q,orts than of its imports, and when no reduction was made in the food subsidies or other expenditures., a large budget deficit resulted. This was financed largely by :uiflationary means; and, consequently, Ceylon's foreign reserves began to fal~ at an alarming rate. The Government, made some, attempt to ranedy the situation in 1952, but by ,. early 1953 it became apparent that really drastic measures to eliminate inflationary financing would be nece~sary. In July a cut was made in the food eubsidies which nearly trebled the cost of imported rice to the consUll'le1.., and this was followed by other measures of retrenchment. Il'l particular, work on lllri.ny Government industrial projects was suspel'ld.ed. By· the end of the year these mea$ures began to Mve their effect. Ceylon ha~ had a trade ~urplus since Januar.1 1954 and a surplus in its balance of paYJnents • since December 19.53. The decline ip. foreign reserves has been halted, and the budget deficit in the current fiscal year will probably be of mam~geabie  • -s- • proportions • The--rieed for the greate·st care in the use of resources\for deve1opment I:> has led the Govenunent to establish a Pla.nning Secretariat which will detenrdne priorities for the use of such resources as are an:t.lable; and instead of setting up a program of projects to be completed within a fixed period of time., the Government has decided to embark on high-priority projects only as resources are seen to be available. To increa$e these resources the Government has recently floated a i.5 million loan in London, and has now negotiated its first loan from the Bank. Ii' present development and fiscal policies are continued, Ceylon's prospects are good • • • ':