Sri Lanka - Country assistance strategy public information notice (CPIN)

Report No. PIN7 CAS Public Information Notice Sri Lanka Country Assistance Strategy Progress Report On January 19, 1999, The World Bank's Board of Executive Directors discussed the Bank Group's Country Assistance Strategy (CAS) Progress Report for Sri Lanka. Country Context Sri Lanka's economic and social development has been impeded by civil conflict for over 15 years. The current government was elected on a peace platform in 1994 but like its predecessors found itself embroiled in the war with secessionist rebels. While the conflict is confined to the Northeastern part of the country, it drains human, financial, and physical resources. At the time the most recent full CAS was reviewed by the Board in mid-1996, the government faced a soaring budget deficit and loss of confidence in its economic policies. Shortly thereafter, it embarked on a program of fiscal and structural reforms. As a result, the deficit and inflation declined, private investment increased, and economic growth rebounded to over 5 percent in 1997. Throughout 1997 and most of 1998 Sri Lanka was relatively insulated from the East Asian financial crisis-largely because of a manageable debt profile, effective exchange rate management, and partial capital controls. But the pace of reforms has slowed over the last year as the government has become preoccupied with politics. There have also been signs of adverse external impact and slower growth. Beyond these short-term concerns, major structural reforms are needed to complete the transition to a market economy. And Sri Lanka's renowned human resource achievements are threatened by declining quality, financial constraints, and changing needs. Bank Strategy The government and the Bank agree that the CAS strategy of promoting private sector-led growth in a manner consistent with the country's traditional concern for social welfare and equity continues to be appropriate. The strategy features human resource development and liberalization of the economy to generate jobs, improve living conditions, and promote equity and social harmony. The Bank's analysis, technical assistance, and IDA credits will support macroeconomic and sector reforms as a framework for effective donor assistance and private investment. Bank support will be directed to those sectors and institutions which evidence willingness to change. To improve the likelihood of reform, the Bank seeks to engage stakeholders- including elected officials, journalists, business and labor leaders, NGOs, and environmentalists-in the policy-making process. Recognizing that peace is a prerequisite for sustained economic growth and poverty alleviation, the Bank is exploring ways to address the underlying causes of the conflict and create conditions for lasting peace once the way is ended. Priorities for Bank Assistance Sri Lanka has been a member of the World Bank since 1954. As of January 31, 1999, the outstanding balance of the Bank's portfolio was US$1.9 billion.  Since Sri Lanka has not been considered creditworthy for IBRD lending in recent years, it has received only IDA credits. During FY96-98 IDA approved nine operations for Sri Lanka totaling US$341 million. Depending on country performance, a comparable program is envisaged for the next three years. The strategy features support for: Fiscal discipline-structural reforms, especially relating to civil service salaries and pensions, as well as transfer payments, to put expenditures on a sustainable basis. Policy environment for private investment-reforms in the policy and regulatory framework especially in infrastructure; continued support for privatization; financial sector reforms; liberalization of agriculture with attention to the needs of the rural poor and environmental protection. Social development and poverty alleviation-health reforms to adapt to the needs of an aging population and rising costs; education reforms to improve efficiency and adapt the curriculum to the needs of a modernizing economy and multi-ethnic society; design of a poverty strategy to provide opportunity to all and a safety net for the poorest. Good governance-legal reforms to improve the transparency and administration of commercial law; public administration reform to make the civil service more accountable and responsive to the needs of a liberalized economy. Partnerships Within the World Bank Group, IDA, IFC, and MIGA are all active in Sri Lanka. The Bank collaborates with other multilateral and bilateral donors, the largest of which are Japan and the Asian Development Bank. Cooperation with the International Monetary Fund is especially close. The Bank and the government often engage local NGOs and researchers to help prepare, execute, and evaluate projects. UN agencies and the International Committee for the Red Cross serve as a channel for delivery of assistance to the war-affected areas. Every 18 months, the Bank chairs a Development Forum for Sri Lanka during which donors and government representatives review progress on reforms and aid implementation. This is supplemented by frequent donor coordination meetings with the government in Colombo. L\ll\cas98\progress\CPIN 2/25/99 -2-