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.
