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Thus have we seen in visions of the wise !."
Tamil Poem in Purananuru, circa 500 B.C 

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Home > Tamils - a Nation without a State > Struggle for Tamil Eelam > Foreign Aid & Tamil Eelam - Sri Lanka Conflict > USAID Development Assistance Fund Request, 1996 

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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.


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