Document of The World Bank For Official Use Only Report No. 25413-CE MEMORANDUM OF THEPRESIDENT OF THE INTERNATIONALDEVELOPMENT ASSOCIATION AND THE INTERNATIONALFINANCE CORPORATION TO THE EXECUTIVEDIRECTORS ON A COUNTRY ASSISTANCESTRATEGY OF THE WORLD BANK GROUP FOR THE DEMOCRATICSOCIALISTREPUBLIC OF SRI LANKA April 23,2003 This document has a restricted distribution and may be used by recipients only in the performance of their official duties.Its contents may not otherwise be disclosed without World Bank authorization. The last Country Assistance Strategy for SriLanka (ReportNo. 15633-CE)was discussedby the Board on June 13, 1996and a ProgressReport (ReportNo. IDA/R98-190) was discussed on January 19, 1999. Currencyand Equivalents US$1=Rs. 96.855 (asof February28,2003) CurrencyUnit = Sri Lankan Rupee (Rs.) Fiscal Year January 1 -December 31 Abbreviationsand Acronyms AAA Analytical and Advisory Activities LIL Learning and Innovation Loan ADB Asian Development Bank L'ITE Liberation Tigers of Tamil Eelam BOC Bank of Ceylon MDGW Millennium Development Goal(s) BOT Build, Operate,Transfer MFA Multi-Fibre Arrangement CAN Country Assistance Note MIGA Multilateral Investment GuaranteeAgency CAS Country Assistance Strategy MOF Ministry of Finance CBO(s) Community Based Organization(s) MOU Memorandum of Understanding CBSL Central Bank of Sri Lanka MTBF Medium-Term Budget Framework CDC Commonwealth Development Corporation NBFI(s) Non-Bank Financial Intermediaries CDD Community Driven Development NE North East CEB Ceylon Electricity Board NEIAP North East Inigated Agriculture Project CFAA Country Financial Accountability Assessment NERF North East Reconstruction Fund CFSS Consumer Finance & Socioeconomic Survey NGO(s) Non-Governmental Organization(s) COPA Committee on Public Accounts NSL National Security Levy COPE Committee on Public Enterprises OED Operations Evaluation Department CPAR Country Procurement Assessment Review PA People's Alliance CPC Ceylon Petroleum Corporation PB People's Bank DDR Disarmament, Demobilization and Reintegration PER Public Expenditure Review DEC Development Economics Vice Presidency PHRD Policy and Human Resource Development DO DevelopmentObjective PRGF Poverty Reduction and Growth Facility DPR Development Policy Review PRS(P)/(C) Poverty Reduction Strategy (Paper)/(Credit) EPF Employee Provident Fund PSIDC Private Sector Investment DevelopmentCorporation ERP Emergency Reconstruction Program PSP Private Sector Participation ESW Economic and Sector Work PSR Project Supervision Report EU European Union QAG Quality Assurance Group FDI Foreign Direct Investment RRR RERED Renewable Energy for Rural Economic Development FSAP Financial Sector Assessment Program Relief, Rehabilitation and Reconciliation FY Fiscal Year RSL Regaining Sri Lanka: Vision & Strategy for Accelerated GDP Gross Domestic Product Development GEF Global Environmental Facility SBA Stand-By Arrangement GEP GNFS General Education Project SIRHN Sub-Committee on Immediate Relief & Humanitarian Needs Goodsand Non-Factor Services SLIC Sri Lanka Insurance Company GNP Gross National Product SLT Sri Lanka Telecom HIES GST Goods and Services Tax SME(S) Small and Medium Enterprise(s) Household Income and Expenditure Survey SOE(s) State-OwnedEnterprise@) IBRD International Bank for Reconstruction & Devlp TA Technical Assistance ICR Implementation Completion Report TETD Teacher Education and Teacher Deployment IDA International Development Association TEWA Termination of Employment of Workmen Act IDF Institutional Development Fund UK United Kingdom IDPS Internally Displaced Persons UN United Nations IFC International Finance Corporation UNDP United Nations Development Program ILO International Labor Organization UNESCO UN Educational, Scientificand Cultural Organization IMF International Monetary Fund United National Front IRQUE Improving Relevance & Quality of UNF UNFPA UN Population Fund Undergraduate Education UNHCR UN High Commissioner for Refugees IT Information Technology UNICEF UN Children's Fund IP Implementation Progress VAT Value Added Tax JBIC Japan Bank for International Cooperation WBI World Bank Institute JSA Joint Staff Assessment WHO World Health Organization JSDF Japan Social Development Fund WTO World Trade Organization IDA IFC Vice President: Mieko Nishimizu, SARVP Assaad Jabre, CIOVP CountryDirector: Peter C. Harrold,SACSL DimitrisTsitsiragos,CSADR Task Team Leader Deborah A. Bateman, SACNA Neil Gregory,CSASC SRI LANKA: CountryAssistanceStrategy TABLE OF CONTENTS Executive Summary....................................................................................................................................... i INTRODUCTION ...................................................................................................................................... 1 I. SOCIAL.POLITICALAND ECONOMIC CONTEXT ........................................................... 1 C MacroeconomicPerformance.................................................................................................... B. Political Developments.............................................................................................................. A SocialContext ........................................................................................................................... . 31 D Medium-TermMacroeconomicProspects................................................................................. .. 4 6 I1. REGAININGSRI LANKA AND CONNECTINGTO GROWTH: SRI LANKA'S POVERTY REDUCTIONSTRATEGY ........................................................... 7 B Building a SupportiveMacroeconomic Environment................................................................ A. Background ............................................................................................................................... 77 C. Reducing Conflict-Related Poverty ........................................................................................... . 9 10 E. Investing in People................................................................................................................... D Creating Opportunitiesfor Pro-Poor Growth.......................................................................... . F Empowering the Poor and StrengtheningGovernance............................................................. . 10 10 G. Assessment ofthe PRS............................................................................................................ 10 I11 . THEBANK GROUP COUNTRYASSISTANCE STRATEGY ............................................. 11 A The Bank Group's Country Assistance Strategyfor FY03-FY06........................................... . 11 Growth.............................................................................................................................. Peace................................................................................................................................. 13 Equity ............................................................................................................................... 14 Gender .............................................................................................................................. 17 19 19 B. BankCapacity Summaryof Outcomes..................................................................................................... Safeguards........................................................................................................................ Group Scenarios............................................................................................................. 20 20 IDA Non-LendingProgram.............................................................................................. Building............................................................................................................. 20 IDA Lending Scenarios.................................................................................................... 22 21 MIGA Program................................................................................................................. IFCProgram..................................................................................................................... 24 Progress under the Last CAS and LessonsLearned ......................................................... 25 25 26 IFCPortfolio..................................................................................................................... IDA PortfolioManagement.............................................................................................. C IDA Eligibilityand IBRD Creditworthiness............................................................................ . 27 28 IV. IMPLEMENTINGTHE CAS .................................................................................................... 28 A. Partnerships.............................................................................................................................. 28 B. Monitoring of Outcomes.......................................................................................................... C. Risks......................................................................................................................................... 30 30 BOXES Box 1 The HumanitarianEffects of the Conflict.......................................................................... Sri Lanka and the MillenniumDevelopmentGoals........................................................... 2 Box 2 3 Box 3 Constraintsin the Land and Labor Markets ....................................................................... 8 Box 4 Lessons of the CountryAssistanceNote .......................................................................... The Bank's Activities in the North East............................................................................. 9 Box 5 25 Box 6 CAS Risks ........................................................................................................................ Improving Accountability in Project Implementation...................................................... 27 Box 7 31 TABLES Table 1 4 PRS Core Areas and Priority CAS Outcomes.................................................................. Medium-Term MacroeconomicProjections: 2002-2006 ................................................... Key MacroeconomicIndicators: 1990-2001...................................................................... Table 2 6 Table 3 12 Table4 22 Table 5 23 24 Partnershipsin Implementingthe Poverty Reduction Strategy........................................ IDA PortfolioTrends and Performance:FY00-FY03...................................................... Triggers for Different Lending Scenarios......................................................................... IDA Base Case Lending Program, FY03-FY06............................................................... Key AAA,FY03-FY06.................................................................................................... Table 6 Table 7 26 Table 8 29 ANNEXES Annex A2 At A Glance Annex B2 SelectedIndicators of Bank Portfolio Performance and Management Annex B3 Bank GroupProgramSummary Annex B4 Summary of Non-Lending Services Annex B5 Social Indicators Annex B6 Key Economic Indicators Annex B7 Key ExposureIndicators Annex B8 Status of Bank GroupOperations Annex B9 Summary of DevelopmentPriorities Annex B10 Policy Matrix for the Poverty Reduction StrategyReform Agenda and World Bank/ Partner Programs of Support Annex B11 ThematicMatrices APPENDICES Appendix I The Root Causes of the Ethnic Conflict in Sri Lanka Appendix I1 Fund Relations Note Appendix I11 CAS Completion Report Summaryof CAS Consultations AppendixV Appendix IV The Main Findingsof two Key Fiduciary Assessments: CFAA and CPAR Appendix VI The MillenniumDevelopment Goals and Related Indicators Appendix VI1 World Bank Institute (WBI) Activities SRI LANKA Country AssistanceStrategy ExecutiveSummary i. The last Country Assistance Strategy (CAS) for Sri Lanka-discussed at the Board on June 13, 1996-was prepared at a time of great uncertainty with regard to the prospects for peace, political stability and economic reform. For a number of years the uncertainties continued: Sri Lanka went through frequent elections that slowed the momentum for structural reform and the domestic security situation-most notably, an escalation of the nearly two decade-longcivil conflict waged between the Sri Lankan army and the Liberation Tigers of Tamil Eelam (LTTE)-took a tremendous toll on development of this unique island nation. ii. Since late-2001, however, the situation in Sri Lanka has shown noticeable improvements. On the peace front,'a Memorandum of Understanding signed between the Government and LTTE in February 2002 has resulted in a permanent cease-fire. Five successful rounds of peace discussions-facilitated by Norway-have taken place and with significant advances being made, there is great optimism that the long-standing conflict can be resolved. On the political front, in December 2001, a private sector-oriented Government-headed by Prime Minister Mr. Rani1 Wickremasinghe-assumed control and has moved forward decisively in starting to implement a comprehensive reform program. Finally, on the economic front, Sri Lanka has begun to experience a gradual recovery and the economy is currently growing at an annual rate of more than 5 percent. With these developments, today Sri Lanka faces a rare window of opportunity. iii. The Executive Directors may wish to discuss: The planned significant increase in IDA activity in response to the peace process and poverty reduction strategy (PRS); The balance between the lending and non-lending programs; The choiceof instruments to deliver the lending program; and The appropriateness of the CAS outcomesgiven the PRS. iv. The Government has articulated an economic program and poverty reduction strategy: Regaining Sri Lanka: Vision and Strategy for Accelerated Development (RSL). This is an ambitious proposal to eliminate factors which inhibit the restraints on private sector activity and to change the role of the state, while addressing the key elements of poverty. The principal objectives of RSL include: (i) building a supportive macroeconomic environment;(ii) reducing conflict-related poverty; (iii) creating opportunities for pro-poor growth; (iv) investing in people; (v) empowering the poor and strengtheninggovernance;and (vi) implementing an effective monitoring and evaluation system. V. The CAS program supportsthe Poverty Reduction Strategy and is organized around three central themes: Peace, Growth and Equity. First, a return to peace and restoration of domestic security are critical to create a framework for sustainable poverty reduction and growth and ensure that the fiscal burden remains tolerable. It is also important towards ensuring that the most vulnerable poor groups- i.e., the displaced and those in conflict-affected areas-are reached. Secondly, economic growth is the main instrument for achieving prosperity and creating more resources for distribution. Finally, ensuring a balance/equity within the society is essential, especially with deep pockets of poverty existing in the South and North East. Sri Lanka's ability to attain the MillenniumDevelopment Goals (MDGs) will be influenced by equitable progress towards improving social and human development indicators. The assistance strategy is a comprehensive one in which the International Development Association (IDA), the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA) all play significant roles. Capacity building is an integral element of the strategy and the World Bank Institute (WBI)plays a centralrole in implementingthis cross-cuttingtheme. vi. The CAS is "results-focused," In the thematic area of peace, key outcomes that the CAS is designed to support include: (i) restored infrastructure in health, education and irrigation; and (ii) technical capacity built to implement the reconstruction and poverty reduction efforts. In the area of growth, key CAS outcomes include: (i) legal frameworks established to increase flexibility in the labor and land markets; (ii) regulatory environment conducive to private sector participation established; (iii) the time and formal cost of business start-up reduced; and (iv) agricultural producers receiving more consistent price signals and clearer land title. Finally, in equity, key CAS outcomes include: (i) improved access to and quality of public services in education, health and water supply;and (ii) expanded degree of empowermentof communitiesto address their own developmentneeds. vii. The base case lending program consists of an average of four operations per year for a total of US$SOO million of IDA resources during FY03-FY06. In each year, the lending program would be anchored in a Poverty Reduction Support Credit (PRSC) providing program support to the implementationof the PRS. This would be complemented by two to four investmentlsectoral operations per year to support key programs in the focus areas. Given the intensity of the conflict, Sri Lanka qualifies for a limited amount of IDA grants during FY03 and FY04. Key operations in the equity theme-i.e., in rural water, health and rural poverty-would be financed by IDA grants. Lending activities would be accompanied by a strong non-lending program, with a particular focus on public expenditure and poverty issues. In the base case, it is assumed that progress would continue towards achieving a lasting peace. To remain in the base case, specific triggers must be met including: (i) maintaining satisfactory macroeconomic performance; (ii) successful implementation of the economic reformprogram; (iii) progress in addressing equity concerns; and (iv) satisfactory portfolio management. viii. The high case scenario would have a lending volume approximately 25 percent above the base case. In addition to maintaining performance as envisioned under the base case, additionalimprovements would be expected in the areas of fiscal management,private participation in infrastructure,public sector management and decentralization. The strategy also describes two types of low case scenarios: (i) a situation triggered by a breakdown of the peace process and the resumption of hostilities or the serious lagging behind of structural reforms; and (ii) a deeper low case scenario-i.e., an exit strategy-if the peace process were to break down entirely and hostilities were to break out on a national scale. ix. A CAS Completion Report--evaluating performance under the previous CAS-has been prepared and the lessons learned have been subsequently incorporated. Furthermore, the CAS contains a comprehensive country program results frameworkthat links together the different levels of results-Le., the country's longer-term development agenda (based on the PRS/RSL) and the shorter-termgoals to be achieved during the CAS period and supported by the Bank's interventions. During initial implementation of the CAS, special focus will be placed on refining the results framework by establishing: (i) baseline information and benchmarks for the various indicators to be monitored during implementation;and (ii) a solid monitoring and evaluation capacity. X. Because of the historic moment at which Sri Lanka finds itself, the strategy is inherently risky. The Government and indeed the LTTE are themselves being very bold and taking enormous risks with respect to their own political futures for the sake of a better future for the people of Sri Lanka. The Bank should be prepared to accept the risks of this strategy so long as the two parties remain committed to achievingpeace and laying the foundation for a renewed attack on poverty. Therefore, while the strategy has very high risks, it has potentially very high rewards in a country that for too long has been performing below its potential. The Bank is adopting appropriate strategiesto mitigatethe risks. -111 ... - xi. Sri Lanka now has the opportunity to break out of the conflict and follow a path of sustained development and progress for all its people. This CAS presents a coherent strategy for how the World Bank Group should supportSri Lanka to help this opportunity be realized. SRI LANKA COUNTRY ASSISTANCESTRATEGY INTRODUCTION 1. The last Country Assistance Strategy (CAS) for Sri Lanka was considered by the Board on June 13, 1996and a Progress Report was discussed on January 19, 1999. Since that time, Sri Lanka has been through numerous elections that slowed the momentum for structural reform. At the same time, the domestic security situation worsened as a result of the intensification of the nearly two decade-long civil conflict between the Sri Lankan army and the Liberation Tigers of Tamil Eelam (LTTE). This period of uncertaintyhas been costly to the developmentof this unique island nation. 2. In the last year, however, the country has experienced encouraging developments in many respects. First and foremost,there has been progress towards peace and improved domestic security. The Government and LTTE signed a Memorandum of Understanding (MOU) on February 23, 2002 that resulted in a permanent cease-fire. Both sides have demonstrated their commitment to finding a lasting solution to the conflict and five successful rounds of negotiations-facilitated by Norway-have taken place. Second, a more optimistic political environment has emerged. The private sector-oriented Government-headed by Prime Minister Mr. Rani1 Wickremasinghe-which took office in December 2001 has taken earnest and decisive steps in implementing a far-reaching economic reform program. Finally, an economy recovery is underway with growth currently at an annual rate of more than 5 percent. Today, Sri Lanka is poised to capitalizeon these promising developments. 3. This CAS has been drawn up on the basis of the post-conflict situation in which Sri Lanka finds itself. As such, the lessons from other post-conflict situations have been incorporated, but it has been decided not to apply the IDA post-conflict framework to this case. Although many features of post- conflict countries apply to Sri Lanka, the state did not break down during this conflict, even within the conflict-affected areas of the country. Therefore, a number of the challenges that other post-conflict countrieshave faced are not present. I. SOCIAL,POLITICALAND ECONOMIC CONTEXT A. Social Context 4. Sri Lanka-long an outlier among developing nations-holds a unique position in South Asia. It was one of the first developing countriesto provide universal health and education coverage and promote gender equality and social mobilization. As a result, Sri Lanka achieved human development outcomes comparableto those of high income countries and surpassed some of the MillenniumDevelopment Goals (MDGs)at an early stage of its development process (see Box 1and AppendixVI). Sri Lanka has largely eradicated destitutionand its long-standing commitment to human development has ensured that even the poor have relatively good health and education. For the most part, economicgrowth has been reasonable, and despite the acceleration of the conflict in the 1990s, the country's per capita income (US$830) remains the second highest in South Asia (behindMaldives). SRI LANKA CountryAssistance Strategy Page 2 of 31 Box 1: Sri ankaand the MillenniumDevelopmentGoals Millennium Sri Lanka's Dosition DevelopmentGoals(MDGs) with respectto the MDGs Reduce the proportion of people Poverty incidence declined from 31 living in extreme poverty by half percent to 25 percent between the exist. between 1990and 2015. mid-1980s and mid-1990s. Enroll all children in primary school Net primary enrollment rates Quality, relevance and contribution by 2015. exceeded 97 percent by the late- of education to social inclusion in 1990s. question. Make progress towards gender Gender equality achieved in primary, Gender disparities exist in access to equality and empowering women by J secondary and even tertiary levels. employment opportunities (e.g., eliminating gender disparities in women mostly in low-skill, low-paid primary and secondary school by jobs in agriculture and industry). 2005. Reduce infant and child mortality Between the mid-1970s and late- High child malnutrition (33 percent rates by two-thirds between 1990and 1990s, infant mortality fell from 44 to of children under age 5) and low birth 2015. 15per 1,000live births; under-five weight (25 percent of infants). mortalit fell from 100to 18. Reduce matemal mortality rates by Maternal mortality rate is 60 per High prevalence of anemia among three-quarters between 1990 and 100,000live births, on par with pregnant women. 2015. middle income countries. Provide access for all who need Contraceptive prevalence rate is high Demographic transition with an reproductive health services by 2015. at 66 percent; poorest country in the unprecedented aging of the world to have achieved below population. Proportion of population replacement fertility; 95 percent of over 60 projected to increase from 9 births attended by health staff. percent to 20 percent by 2025. Implement national strategies for Since 1994, two successive national Implementation slow in many areas sustainable development by 2005 to environmental action plans have been due to institutional weaknesses and reverse the loss of environmental developed and are presently under lack of clear, monitorable targets. resources by 2005. implementation. Note: The statistics do not include I;NorthEastwherethestateofwvertyisreportedlyhigh. 2003 and staff estimates. 4 I A poverty assessment-Cri Lanku: Poverty Assessment'-was and other analysis, it is estimated that 25 percent of Sri Lankans remain below the national poverty line; finalized in FY02. Based on is there are large disparitiesin poverty incidence among regions; and the rural population remains especially vulnerable to income fluctuations2. Whereas the Western province--containing the capital city and most of the country's manufacturing and services-has a relatively low incidence of poverty, the North, East and other areas affected by the conflict have high levels of material deprivation and human suffering. While it has not been possible to carry out surveys in the North and East in recent years due to the conflict, it is likely that the poverty conditions in these regions are far more severe than in other parts of the country and compounded by massive destruction of economic and social infrastructure. 6. Over 90 percent of Sri Lanka's identified poor live in rural areas of the South and on tedrubber estates in the Central region where the depth and severity of poverty are almost twice as high as in urban areas. Small-scale subsistence agriculture-especially paddy farming-and wage labor (in farms or plantations) are the main sources of income for most of the poor. Incidence of poverty varies only poor and are mostly Indian Tamils) are among the poorest, often deprived of basic infrastructure and slightly across ethnic groups, although plantation estate workers (who represent about 4 percent of the ' Report No. 22535-CE, June 2002. * This is based on a Household Income and Expenditure Survey (HIES) carried out in 1995196and does not include the North East. A new survey will be completed in mid-2003 and together with an FY03 Social Assessment of the Conflict- Affected Areas will allow for a more complete up-to-date picture of poverty in Sri Lanka. SRI LANKA Country Assistance Strategy Page 3 of 31 other public services, and face severe difficulty integrating into the economy and society due to the remote location of estates,languagebarriers,and for some, lack of citizenshipcards. 7. The poor in Sri Lanka are relatively well-protecteddue to free and universal access to health and education services, large income transfer programs-such as Samurdhi-and substantial subsidy schemes. The early successes in human development outcomes undoubtedly result from these long- standing policies. But there are weaknesses. While access to health and education services is well- distributed, quality--especially in poor areas-remains inadequate. Poor households also face shortfalls in access to other basic services+.g., among the poorest households, only 38 percent have electricity, 55 percent safe sanitation and 61 percent safe drinking water. Access to English language and technical education-both in great demand-is also low in poor regions. Moreover, social protection programs have become highly politicized and Samurdhi is presently available to 60 percent of the population. B. Political Developments 8. Sri Lanka has had numerous elections since the last CAS-including Provincial Councils (April 1999), Presidential (December 1999), Parliamentary (October 2000 and December 2001) and local (March 2002). The United National Front (UNF)-traditionally supportive of economic liberalization- won a near majority in the 225-member legislature in the December 2001 parliamentary elections. With the support of allied parties, the UNF formed a Government with a two seat majority, returning to power after seven years in the opposition. Mr. Rani1 Wickremasinghe-Prime Minister from 1993-1994and a cabinet minister from 1977-1993-was sworn in as Prime Minister on December 9, 2001. Following this, in the March 2002 local electionsthe UNF won a sizeable majority of the seats, strengtheningits mandate to pursue a peace and economicreform agenda. 9. Mrs. Chandrika Kumaratunge, leader of the People's Alliance (PA), first became President in 1994. After being re-elected in 1999, her term expires in December 2005. Under the constitution, the President is Chief Executive, while Parliament retains financial and legislative control. The party that controls the legislature nominates the Cabinet of Ministers. Except for a brief interlude in 1994,this is the first time in Sri Lankan history there is a President from one party and a legislature controlled by another. Both sides are pursuing a strategy of "cohabitation", with the Prime Minister making key policy recommendationsto Cabinet, which is chaired by the President. However, the President retainsthe power to dismiss the Governmentafter one year in office. 10. A top priority of the new administration is to end the nearly two decade-old civil conflictthat Box 2: The HumanitarianEffects of the Conflict has placed severe stress on Sri Lanka (see Box 2)3. The conflict in Sri Lanka has led to loss of life, the displacement of persons belonging to all ethnic groups and Early on in his administration,the Prime Minister the destruction of infrastructure, health care facilities and revived internationally-supported initiatives to schools. Approximately 2.5 million persons lived in areas undertake peace talks with the LTTE. The of direct military activity-65,000 people have been killed, Government and the LTTE announced a cessation 800,000 are intemally displaced, including 172,000 living in refugee camps and another 700,000 left the country. There of hostilities in December 2001 and signed a are 30,000 war widows and an estimated 300,000 displaced permanent cease-fire in February 2002 under a children in the North East where the school drop out rate is Norwegian-brokered Memorandum of double the national average. The infant mortality rate in the Understanding(MOU). To date, this is the longest North East is twice the national average, the matemal cease-fire to hold. The Government has removed mortality rate is thrice the national average and 92% of malaria deaths are reported from the region. There are an the economic embargo imposed on rebel-held estimated 1.8 million landmines in the North-a per capita areas, lifted restrictions on the movement of incidence comparable to Angola. civilians, rescinded restrictions on fishing and 3 For a brief analysis of the root causes of the conflict, see Appendix I. SRI LANK4 Country Assistance Strategy Page 4 of 31 accelerated its de-mining program. The military has vacated schools and public buildings in the North East and most paramilitary groups have been disarmed. The LTTE has re-opened roads in areas under its control for vehicular traffic after a gap of 12 years. It has also opened political offices in military- controlled areas in an effort to participate in the political process and has expressed willingness to give up its demand for a separate state under certain conditions. An international team monitors the truce and approximately 260,000 internally displaced persons (IDPs) have spontaneously returned to their original homes since the cease-fire,with more returning daily. 11. The Government de-proscribed the LTTE in September 2002 and Norwegian-facilitated peace discussions commenced in Thailand on September 16, 2002. Further discussions were held in October 2002, December 2002, January 2003 and February 2003. Both sides have agreed to set up mechanismsto oversee humanitarian and reconstruction activities in the North East-lead by the Sub-committee on Immediate Relief and Humanitarian Needs (SIRHN)-and on the broad outlines of a future federal structure of governance for Sri Lanka. Following the January 2003 discussions, the Bank was invited to act as administrator for the North East Reconstruction Fund (NEW)through which humanitarian and rehabilitation programs will be implemented(see paragraph 40) in the conflict-affectedareas. C. MacroeconomicPerformance 12. Despite the prolonged civil conflict and several external shocks, Sri Lanka has sustained reasonable economic growth of around 5 percent from 1996-2000 (see Table 1). Inflation generally declined over this period and through 1998the current account deficit declined significantly in line with strong growth in exports and remittances. This, combined with labor migration (mainly to the Middle East and accounting for over 12percent of the labor force by 2000) reduced unemploymentto 7.6 percent fromrates exceeding 14percent in the early-1990s. Table1:Key Macroeconomic Indicators:1990-2001 1990 1993 1995 1996 1997 1998 1999 ZOO0 2001 Annual GDP Growth (8change) 6.4 6.9 5.5 3.8 6.3 4.7 4.3 6.0 -1.4 Atlas GNP Per Capita (US$) 470 600 700 750 800 810 820 850 830 Annual Change in (Colombo)Consumer Price Index 21.5 11.7 7.7 15.9 9.6 9.4 4.7 6.2 14.2 InvestmenVGDPRatio 22.2 25.6 25.7 24.2 24.4 25.1 27.3 28.0 22.0 Domestic SavingsGDP Ratio 14.3 16.0 15.3 15.3 17.3 19.1 19.5 17.2 14.6 U A Balance (excludingofficial transfers) (% of GDP) -5.4 -5.3 -6.5 -4.9 -2.6 -1.4 -3.7 -6.6 -1.9 Overall BOP SurpludDeficit (in US$ million) 119 661 52 -68 163 37 -259 -522 220 Gross Official Reserves (in months of imports of GNFS) 1.7 4.5 4.1 3.8 3.5 3.3 2.2 1.5 2.0 External Debt ServiceRatio (46 of GNFS) 17.8 12.9 16.5 15.3 13.3 13.3 15.2 14.7 13.3 Government Revenue (8of GDP) 21.1 19.7 20.4 19.0 18.5 17.2 17.7 16.8 16.5 Government Current Expenditure (8of GDP) 22.3 20.5 23.5 22.8 20.8 19.6 18.7 20.2 21.4 Interest Payments (% of GDP) 6.4 6.0 6.2 6.4 6.2 5.4 5.6 5.7 6.7 Government Capital Expenditures (% of GDP) 6.1 6.7 5.9 4.9 4.9 5.3 5.5 5.4 4.8 Budget Deficit (8of GDP)" -9.9 -8.7 -10.1 -9.4 -7.9 -9.2 -7.5 -9.9 -10.9 Primary Deficit (% of GDP) -3.5 -2.7 -3.9 -3.0 -1.7 -3.8 -1.9 -4.2 -4.1 Government Debt (% of GDP) 96.5 96.9 95.2 93.1 85.9 90.8 95.1 96.8 103.6 Of which Domestic Debt (8of GDP) 41.6 42.8 43.3 46.4 43.6 45.5 49.1 53.8 58.3 Government Employment (thousandpersons) 649 - 738 752 762 790 822 857 864 Nominal Average Exchange Rate (RsJUS$) 40.1 48.3 51.3 55.3 59.0 64.6 70.4 77.0 89.4 I /Excluding grants and privatization proceeds. Sources: Central Bank of Sri Lanka and Department of Census and Statistics. SRI LANKA Country Assistance Strategy Page 5 of 31 13. Sri Lanka has many strengths, including leading developing countries in recognizing the importance of education, health and gender equality for development. These, together with one of the most open trade and foreign direct investment (FDI) regimes in South Asia, have fostered healthy manufacturing production and export performance, especially in tea and textiles. With the successful privatization of the plantation sector, Sri Lanka has recaptured its position as the world's largest tea exporter. Benefiting from the liberalization of banking and telecommunications and, until 2001, the expansion of tourism and container traffic, the service sector has grown steadily. Nevertheless, slow progress in key structural areas-including civil service reform, restructuring state-owned enterprises (SOEs), and financial, land and labor market reform-have undermined potential growth and slowed progress towards reducing poverty. grants) remaining between 7-11 percent of GDP and revenue performance weakening by about 4 14. The fiscal situation was an increasing concern throughout the 1990s, with the deficit (before percentage points of GDP since 1995. The escalation of the conflict in the late-1990s and the continuing expansion of public sector employment compromised expenditure adjustments. Heavy reliance on domestic deficit financing-averaging 75 percent of financing needs since 1996-have made interest payments one of the largest budget expenditure items, amounting to 6.7 percent of GDP and over 40 percent of tax revenue in 2001. Hence, important expenditure categories-such as physical and social infrastructure-have been crowded out and public debt climbed to over 100percent of GDP in 2001. 15. Sri Lanka suffered significanteconomicsetbacks in 2001. The change to a floatingexchangerate regime on January 23 was an important step to stem the loss of externalreserves that had started in 2000. However, given import demand pressures and high oil prices, by March 31 gross official reserves fell to under 2 months of import financing needs. To improve fiscal balances, stabilize the exchange rate and reverse reserve losses, the Government entered into a Stand-By Arrangement (SBA) with the developments in the second half of 2001-including International Monetary Fund (IMF) on April 204. However, adverse political and economic the July 24'hattack by the LTTE on the Colombo international airport, sluggish external demand, the prolonged drought and the general political uncertainty-contributed to derailing the program5. With these shocks,output declined by 1.4percent in 2001-the first contraction since independence in 1948. In addition, defense spending over-runs and fiscal laxity intensified in the run up to the December 2001 elections. 16. In 2002, Sri Lanka began to experience a gradual recovery. The Government presented a strong budget in March demonstrating their commitment to growth, fiscal consolidation and structural reform. To this end, the goods and services tax (GST) and national security levy (NSL) were transformed into a value added tax (VAT), selective expenditure cuts were introduced (including a credible public sector hiring freeze), restrictions on FDI were further relaxed and the deficit target was set at 8.5 percent of GDP6. The measures have fostered investor confidence, boosted the stock market and doubled capital inflows on a cumulative basis. With the return of normal rains and the cessation of hostilities, GDP growth turned positive in the first quarter of 2002 and is estimated at about 3 percent for the year, largely reflecting a pick-up in domestic-oriented activity since global demand remains sluggish. The 2003 budget presented on November6, 2002 maintains continuity of the earlier initiatives. 4 For more information on the IMF program in Sri Lanka, see the "Fund Relations Note" in Appendix 11. 5 The program was subsequently brought back on track and the IMF released the last tranche under the SBA in September 2002. 6 exemptions intended to contain upward pressures on the cost of living. The estimated 2002 budget deficit of 9 percent is primarily due to less than expected GDP growth and VAT SRI LANKA Country Assistance Strategy Page 6 of 31 D. Medium-Term Macroeconomic Prospects 17. Looking ahead, Sri Lanka has a good opportunityto restore macroeconomic stability and achieve economic performance commensurate with its human and natural resources. Its medium-term prospects for increased GDP growth and sustained fiscal and external sustainability have recently improved due to: (i) the positive developments in the peace process; and (ii) the continued implementation of a credible program of macroeconomic stabilization and structural reforms. A growth-focused program is being implemented to liberalize factor markets, increase agriculture productivity, restructure SOEs, strengthen the commercial legal foundations, implement a stable import tariff regime and increase private sector participation in infrastructure. Furthermore, steps are being taken to strengthen tax administration and fiscal discipline,as well as to refocus the Central Bank of Sri Lanka (CBSL) to its primary task of price stability. A healthy economic revival should result from these developments, along with improving investor sentiments, expected reconstruction activities in the North East, improvements in the power supply and recovery in agricultureand services. 18. If peace holds and the stabilizatiodstructural reform program stays on track, Sri Lanka can achieve 5-7percent GDP growth with single-digitinflationin the medium-term (seeTable 2)'. Regarding the fiscal outlook, sustained implementation of the reform program, together with higher GDP growth, should lead to gradual reduction of the budget deficit and public debt. This would also create increasingly more fiscal space for high priority poverty programs. In an environment of price and political stability, business and household formal savings would be encouraged;hence, leading to an increasein the national savingsrate. Table2: Medium-TermMacroeconomic Projections:2002-2006 (In percent of GDP or as noted) 2002p' 2003 2004 2005 2006 Annual GDP Growth (% change) 3.3 5.5 6.5 6.8 7.0 Average Inflation (% change) 9.6 8.9 7.0 6.0 5.O Gross InvestmentIGDPRatio 22.3 24.2 26.3 27.9 29.0 National SavingdGDPRatio 20.3 20.8 22.1 23.7 25.3 U A Balance (includingofficialtransfers) -1.8 -3.3 -4.1 -4.1 -3.6 Overall BOP SurpludDeficit 1.5 0.1 0.4 0.5 0.9 Gross Official Reserves (in months of imports of GNFS) 2.4 2.7 3.1 3.4 3.6 Total External Debt 59.6 58.7 58.2 57.7 55.6 Govemment Revenue 16.5 16.9 17.9 18.7 19.1 Govemment Current Expenditure 20.8 19.2 17.9 16.8 16.2 Interest Payments 7.4 7.3 6.6 5.9 5.5 GovernmentCapital Expenditures 4.6 5.2 6.2 6.9 1.2 Budget Deficit" -8.9 -7.5 -6.3 -5.1 -4.3 Primary Deficit -1.4 -0.2 0.3 0.8 1.2 Net External Financing 0.1 2.0 3.0 3.2 2.7 Grants 0.4 0.4 0.6 0.6 0.6 Government Debt (% of GDP) 103.8 99.6 94.5 89.1 83.8 Of which Domestic Debt (% of GDP) 60.0 56.8 52.2 47.2 42.8 'Provisional. " Excluding grants and privatizationproceeds. Source: Ministry of Finance, Central Bank of Sn Lanka and staffestimates. 1 The growth projections are consistent with the PRS discussed below. They also take into account the likely adverse impacts of the elimination of MFA quotas by end-2004. SRl LANKA Country Assistance Strategy Page 7of 31 11. REGAININGSRI LANKA AND CONNECTINGTO GROWTH: SRI LANKA'SPOVERTYREDUCTIONSTRATEGY A. Background 19. During the past four years, the administration has engaged in broad stakeholder consultations to reach consensus on a medium- to long-term strategy for faster and sustained economic development and poverty reduction. The incidence and depth of poverty were widely discussed, along with the country's approach to the problem. The island-wide consultative process also mobilized views of key stakeholders on how to work together on relief and rehabilitation in the conflict-affected areas through the Framework for RelieJ Rehabilitation, and Reconciliation (RRR). The results of these consensus-building consultations together with background assessments resulted in a well-developed draft of Sri Lanka's Poverty Reduction Strategy (PRS), which development partners strongly endorsed at the June 2002 Development Forum. 20. After its election, the new Government set about the task of defining its own economic and poverty reduction program-Regaining Sri Lanka: Vision and Strategy for Accelerated Development (RSL)-more precisely'. This is an aggressive proposal to eliminate factors which inhibit the restraints on private sector activity and change the role of the state, while addressing the key elements of poverty. The main objective of the PRS is to "regain Sri Lanka" by accelerating growth and eliminating poverty through private sector-led development. This marks a fundamental departure from the previous unsustainable policies of "redistribution and transfer'' to alleviate poverty. To meet its objectives, the PRS outlines six core areas: Buildinga supportivemacroeconomicenvironment; Reducingconflict-relatedpoverty; Creatingopportunitiesfor pro-poor growth; Investingin people; Empoweringthe poor and strengtheninggovernance; and 0 Implementing an effective monitoring and evaluation system. 21. The PRS identifies halving the number of poor by 2015 as its key target. Other targets include: (i) raising GDP growth to around 7 percent within three to four years and to 10 percent in the second half of the decade; and (ii) creating a minimum of two million new jobs during the next few years. For each of the key PRS elements, recently implemented actionsheforms are identified and specific actions to be implemented over the medium-termare outlined and prioritized (see Annex B10). B. Building a Supportive Macroeconomic Environment 22. Creating the conditions for accelerating economic growth with macroeconomic stability is a top priority of the PRS. Sri Lanka has not been able to achieve economic growth consistent with its human and natural resource endowments. In part, this below potential performance has been due to the conflict, however, there is also a need to remove distortions in the economy and reform the enabling environment to foster private sector development. The PRS identifieshighly inflexiblelabor laws, constraints on land transfers and sizes, inadequate infrastructure, a largehnefficient SOE sector, bureaucracy and a serious bottleneck in tertiary education as key factors contributing to a high cost of doing business. Further, it proposes to address a variety of legal, institutional and regulatory impediments which hamper private sectoractivity. 8 RSL was officially released in January 2003 and may be obtainedat www.regainingsrilanka.org. SRl LANIol Country Assistance Strategy Page 8 of31 23. Recognizing that macroeconomic stability is a sine qua non for sustained high economic growth, strong emphasis has also been placed on fiscal sustainability and strengthening the macroeconomic framework. Significant reductions in the budget deficit and public debt are planned to restore fiscal sustainability and strengthen macroeconomic stability. Currently, interest payments, the salary/wagebill, defense spending and subsidies/transfers account for most of the budgetary expenditures, leaving small amounts for capital expenditures-less than 5 percent of GDP-and negligible amounts for non-wage repairshnaintenance. The medium-term objective is to reduce the budget deficit to 5 percent of GDP by 2005 and public debt to below 90 percent of GDP. Aside from the fiscal measures,some of the structural reforms initiated under the program-Le., those pertaining to SOEs and administered prices-will contribute to the fiscal consolidationand deficivdebt reduction effort. To ensure that fiscal discipline is maintained and fiscal consolidation continues, the Government recently enacted the Fiscal Management Responsibility Act, which requires regular reporting on the budget and also mandates a "Pre-election Budgetary Position'' report to discourage pre-election hand-outs. The Act also sets strict limits on borrowing from the Central Bank and fixes the 2006 budget deficit target at below 5 percent of GDP. 24. In the PRS, domestic economic liberalization and Box 3: Constraints in the Labor and Land Markets strengthening the enabling Well-functioning labor and land markets are pre-requisites for environment are seen as key to economic growth, but currently in Sri Lanka there are constraints in both fostering private sector-led growth. which inhibit development. In labor, formal workers are protected by laws such as the Emphasis has been placed on Termination of Employment of Workmen Act (TEWA, 1971) and the reforming factor markets; most Industrial Disputes Act (1950). Under TEWA (applying to private sector notably, labor, land and financial (see firms with 15 or more employees), the termination of any worker is only Box 3). Recently amendments were possible with the prior written consent of the Commissioner of Labor or the employee concerned. The Commissioner has the discretion to accept or passed to increase flexibility in the reject a firm's application and has the prerogative to determine the exact labor market, thereby enhancing labor compensation to be paid. As such, smaller firms have no incentive to mobility, productivity and graduate and larger firms are reluctant to hire additional workers. employment generation'. For a more The majority of land in Sri Lanka is state-owned and controlled, efficiently functioning land market, but farmed by private farmers under varying tenure arrangements most of which permit private use and inheritance, but restrict lease and sale. The preparations are underway to clarify Land Reform Act (1970) nationalized private land holdings in excess of 50 property rights and modernize the acres and redistributed them to small-holder tenants in perpetuity, placing a institutional framework. Efforts are ceiling on tenant farms of five acres. Furthermore, the deeds registration being made to establish a legal system places cumbersome burdens on private land owners in the rural sector and private lands are also affected by land use restrictions*.g., the framework to remove restrictions Paddy Lands Act does not allow paddy land to be used for non-paddy related to the sale, leasing, transfer cultivation without Govemment permission. All these factors together and mortgaging of rural lands impede the efficient use of land. previously distributed to farmers. It is &o likel; that state-owned urban land will be divested to raise resources and promote more efficient use of urban land. 25. The PRS aims to improve financial intermediation by restructuring the state-owned banks-the Bank of Ceylon (BOC) and People's Bank (PB) account for over 50 percent of banking sector assets- increasing private sector participation in the insurance and pension fund industry and strengtheningthe regulatory and supervisory framework in financial markets. To improve the enabling environment for private activity, steps will be taken to: (i) move towards a uniform/lower and transparent corporate tax 9 These amendments-not yet effective-require the Labor Commissioner to apply a new compensation formula for job termination cases and expedite redundancyflabor dispute-related hearings and determinations according to a time- bound labor dispute settlement rule. SRILANK4 Country Assistance Strategy Page 9 of 31 structure; (ii) modernize the legalhegulatory environment for market entry and exit; (iii) establish a modem, unified tax administration;and (iv)reduce and rationalize tariff protection. 26. Sri Lanka has a significant number of large SOEs involved in commercial activities, including utilities, transport, banking, petroleum and the wholesale of basic commodities. The PRS concludes that these SOEs have been a drag on the economy and burden on the budget", and have failed to deliver reliable and affordablegoods and services. Consequently,the PRS proposes to continue the privatization program in most commercial activities, while undertaking restructuring of some of the large SOEs and encouraging private sector participation in infrastructure. For example, in petroleum some of the Ceylon Petroleum Corporation's(CPC) assets are being divested and steps are being taken to open importation, distribution and retail activities to the private sector. In power, legislation is proposed to: (i) unbundle generation, transmission and distribution; (ii) break-up Ceylon Electricity Board (CEB); and (iii)establish an independent regulatory body with responsibility for implementing economically sound tariff policy, regulating the sector and issuinglicenses. 27. About 80 percent of Sri Lanka's population and 90 percent of the country's poor live in rural areas. Despite its declining contribution to GDP (20 percent in 2000), the agricultural sector (including livestock and fisheries)remains vital for employmentand income generation. Thus, fosteringrapid rural development-particularly raising productivity and competitiveness in agricultureand the non-farm rural sector-is critical for achieving faster overall economic growth and poverty reduction. As such, the PRS gives high priority to rural development and measures are being taken to remove policy/institutional constraints, including the on-going reforms in labor and land administration and policy. Other key elements of the rural development strategy include: (i) rationalizing the trade regime for agricultural outputs, inputs and technology; (ii) gradually reducing state involvement in agricultural marketing; and (iii) supporting improvements in rural infrastructure-Le., roads, electricity, communications and water and sanitation-to facilitateconnectivity and integration. C. Reducing Conflict-RelutedPoverty Box 4: The Bank's Activities in the North East Since 1999, the Bank has been a leader in assisting development of 28. As indicated, Sri Lanka's protracted to the North East (NE). The NE Irrigated Agriculture Project conflict has resulted in a significant (NEIAP; 1999) has been active in conflict-affected areas supporting humanitarian problem. Establishing lasting community-driven efforts to rebuild economic activity and the 2001 peace is viewed as the key to reducing Land Mine Action Project (a US$1 million Post Conflict Fund Grant administered by UNDP) has been supporting de-mining conflict-related poverty and as such, a activities. In mid-2002, the Bank developed a three-phase strategy critical element of Sri Lanka's PRS. To this for comprehensive reconstruction support to the NE. In the first end, the Government is pursuing a three- phase, we are redirecting, expediting, and scaling-up activities in pronged approach consisting of: (i) the NE in those projects which focus on the entire country, but Approximately US$15 million was identified through four projects. activities could not be carried out in the NE because of the conflict. negotiating a political settlement; (ii) enacting constitutional reforms to fulfill the In the second phase, certain projects-with significant savings aspirations of all citizens; and (iii) and/or where project components will not meet development objectives by closing-have been restructured to provide additional affected areas (see Box 4). The RRR expediting development in the conflict- urgently needed support to the reconstruction efforts. US$31 million was identified in three operations and a restructuring Framework will help to address the basic package was approved by the Board on November 14, 2002. In the needs of the people affected by the conflict, third phase, a longer-term program to meet the development needs improve conditions for the resumption of of the NE is being addressed in the context of this CAS. In economic activities and facilitate ethnic addition, the Bank will administer the North East Reconstruction Fund (NERF)-the main vehicle for implementing humanitarian reconciliation. The Government has been and rehabilitation programs in the NE. actively engaged with donors to mobilize 10 SOE losses equaled 1.5 percent of GDP in 2000 and budgetary (recurrent and capital) transfers to SOEs amounted to 3 percent of GDP in 2001. SRI LANKA Country Assistance Strategy Page 10of 31 financial support for immediate humanitarian and rehabilitation needs in the North East. A donor conference was held in Oslo on November 25, 2002 and will be followed by an international donor meeting in Tokyoon June 9-10,2003. D. Creating Opportunitiesfor Pro-Poor Growth 29. Another priority of the PRS is to effectively connect poor regions to rapidly growing domestic and international markets. The strategy focuses on six main pro-poor transport and communications initiatives, specifically: (i) upgrading the port network; (ii) building a national highway system and integrated road network; (iii) enhancingperformanceof the bus system; (iv) modernizing the railways;(v) improving access to telecommunications facilities; and (vi) bringing internet into the countryside. The strategy in this area is to introduce public-private partnerships to expand the scope for investment and provide a wider range of services-especially in areas such as energy, ports, water supply and transport- to the public. E. Investing in People 30. Improving access to quality education and basic health services is central to the PRS and the strategy promotes a growing private sector role in their provision. In education, the focus will be on: (i) addressing regional inequities in the provision of quality basic education; (ii) improving the curricula in secondary education; and (iii) enhancing the relevance of tertiary education in line with market needs, including increasing capacity by opening up to the private sector. In healthhutrition, the goals are to: (i) improve the nutritional status of infants, children and pregnant women; (ii) maintain a low incidence of non-communicable diseases; (iii) reduce the burden of vector-borne diseases, including malaria; and (iv) fight AIDS. The overall objective is to improve the equity, efficiency and effectiveness of health expendituresand the main focus will be on preventive health care programs and encouraging the private sector to develop secondaryand tertiary care private hospitals. Capitalizingon Sri Lanka's long-standing strengths in social mobilization, there will be reliance on community-based organizations (CBOs) to expand the provision of safe drinking water and sanitation services in rural areas under a sustainable system of tariff setting and maintenance. In urban areas, the private sector will be encouragedto play an increasing role in these activities. F. Empowering the Poor and Strengthening Governance 31. Another thrust of the PRS is to change the role of the state from being a "provider"of goods and services to being a "facilitator" of private sector activity. As such, there is commitmentto reducing state involvement in commercial activities and focus on primary activities and responsibilities in providing public gooddservices and using public resources more effectively for poverty reduction. To this end, there is a need to: (i) reform public administration;(ii) improve transparency and accountability;and (iii) continue decentralization. As mentioned, public expenditure management needs to be strengthened, including expenditure planninghudgeting, execution, monitoringhontrol and oversight. At the same time, to empower the poor, the intention is to shift the focus of authority from the central to local Governments. Efforts will be placed on strengthening the management capacities of local Governments to ensure that they play a more effective role in meeting locally-defined initiatives and discharging devolved responsibilities. G. Assessment of the PRS 32. As indicated in the B a n W Joint Staff Assessment (JSA), Sri Lanka's Poverty Reduction Strategy is broadly appropriate for addressing the country's current economic development and poverty reduction challengesand provides a sound foundation for the Bank's assistance. The PRS candidly lists SRI LANKA Country Assistance Strategy Page I1 of 31 the causes of poverty. Aside from the civil conflict, it correctly identifies the highly restrictive controls/regulations that have inhibited the functioningof the domestic factor markets and rural economy as principal causes of Sri Lanka's below potential performance. It acknowledges that the heavy involvement of the state in commercial activities has constrained private sector development and economic growth. Particularly important is the recognition that the policy of redistributiodtransfers pursued so far to reduce poverty has been ineffective. As mentioned, the PRS envisions a role for the state as that of: (i) facilitator of an enabling environment for private sector-led growth; and (ii) creating opportunitiesfor the poor to participate in the growth process. The latter is to be achieved through greater public expenditure devoted to human resource development and infrastructure. The PRS also calls for smaller and better targeted safety net programs. Given the large public debt and the tight fiscal situation, the PRS correctly indicatesthat the pace at which the reform agenda can be implemented depends on the fiscal space that can be created by economic growth, the restoration of peace, macroeconomic stability and concessional assistance. 33. This said, the JSA points out a number of areas in which the PRS could be strengthened; specifically: 0 There is nothing with regard to institutionalizinga public sector tracking system; 0 Although there is a comprehensive picture of the patterns and determinants of poverty, further work is warranted to monitor and assess the impact of current and future fiscal policies on the poor; The poverty diagnosticsfor the North East is inadequateand needs to be improved;and 0 There is a need to enhance institutional arrangements to coordinate monitoring and evaluation and promote incentives for its use in policy and budgetary decision-making. 34. These all underscore the tremendous capacity building needs in the country, especially as they relate to measuring, analyzing, monitoring and evaluating poverty reduction outcomes. It is recommended that the first annual progress report of the PRS include: (i) an update of the macroeconomic framework and prioritization of policies aligned to a detailed costing of the PRS agenda; (ii) addressing critical issues in the governance agenda, especially in civil service reform, transparency and decentralization; (iii) a selection of indicators and baselines to monitor PRS implementation and setting up an expendituretracking system; (iv) a preliminary assessment of the impact of policies on the poor and disadvantaged groups; and (v) completingthe poverty assessment and reconstruction needs of the North and East. 111. THE BANK GROUP'SCOUNTRYASSISTANCESTRATEGY A. The Bank Group's CountryAssistance Strategyfor FY03-FY06 35. The CAS program is built on the Poverty Reduction Strategy contained in Regaining Sri Lunku: Visionand Strategyfor Accelerated Development. Within this, the Bank will focus on three core themes: Peace, Growthand Equity. Without peace, there is no prospect for development. This derives not only from the difficulty of creating a framework for sustainable poverty reduction and growth in such a situation, but also that the fiscal burden would likely become increasingly intolerable, and the most vulnerable of the poor in today's society-the conflict-affected and displaced populations-would not be reached. Growth is the key to prosperity and to creating more resources for distribution. The Regaining Sri Lanka strategy is the Government'sresponse to the poor recent growth performance, and answers one of the Bank's key concerns over the earlier drafts of the PRS. Equity concerns will remain high in Sri Lanka, not only to permit the expected attainment of the MDGs, but more to ensure balance within the society. Education and health have made great strides, but access varies sharply across the country and SRI LANK4 CountryAssistance Strategy Page 12 of 31 quality is a major concern. Furthermore, the South faces many natural disadvantages and growth has lagged behind other parts of the country. The explicit links between the PRS core areas and the CAS priority outcomes by theme arecontained in Table 3. PEACE GROWTH EQUITY Reducing conflict-relatedpoverty Rural access to safe water and sanitation expanded Investing in people Investment in education increased, especially in poor areas Performance-based funding mechanism established at tertiary level Effectiveness in use of health sector resources improved Overall coverage rate of measles immunizationincreased Empowering the poor and strengtheninggovernance Number of empowered communities implementing sub-projects contained in their development plans expanded 36. In designing the CAS program, wide consultationshave been undertaken both within and outside the Bank (see Appendix IV). The CAS is explicitly drawn on the fact that Sri Lanka is a post-conflict country,and thus incorporatesthree key conclusionsfrom the experience of such countries: SRI LANKA Country Assistance Strategy Page 13of 31 There is a strong case for increased assistance in the period following the end of hostilities, although the maximum impact is likely to be felt two to four years after such a cessation; There are good prospects for addressing key economic and social reforms in such a situation, even those that have proven difficultin the past; and The highest returns may be found in social aspectsof development. 37. The CAS has been drawn up as a Bank Group strategywith the full participationof IFC. As will be seen below, there could be substantial synergies between the different arms of the Bank Group. In addition, an important cross-cuttingtheme of the CAS is capacity building. First of all, for the conflict- affected areas to "catch up" with the rest of the country, strengthening capacity in the region is as important as the physical reconstruction efforts. Furthermore, given the finalization of the PRS and results-orientation of the CAS, there is a critical need to focus on building capacity both for successful program implementation, as well as for effective monitoring and evaluation. While the World Bank Institute (WBI) will play a leading role in these efforts, strengthening institutional capacity is an importantelement in many IDA lending and non-lendingactivities. Peace 38. As mentioned, peace is the very basis for the future of the Sri Lankan economy and for balanced poverty reduction. The key outcomes that the CAS is designed to support (see Table 3) include: (i) restored infrastructure in health, education and irrigation; and (ii) technical capacity built to implement the reconstruction and poverty reduction efforts. 39. There is a huge need for reconstruction and capacity building and to address the fiscal support needs generated by the peace process. It is important that the population begins to see the gains from peace at an early stage and that resources are in place to permit resettlement to occur. The Bank has already begun this process with the restructuring of the portfolio, which was approved by the Board on November 14, 2002. This restructuring affected seven on-going projects and mobilized US$46 million in extra resources for the North and East, some 17 percent of our undisbursed portfolio. In total approximately US$62 million-or over 25 percent of the existing undisbursed portfolio-will be available for this region of the country. The restructuring provides resources for health, water supply, capacity building, connectivity, and payments to returning IDPs, in what is referred to as the North East Emergency Reconstruction Program. This supplements the on-going work in community development and irrigated agriculture (through NEIAP), education, the legal system and environment. Furthermore, the Bank will contribute to the reconciliation effort in particular through the on-going education projects by assisting the Government in its strategy to: (i) develop English as a way to eliminate language-based segregation, while encouraging Sinhalese and Tamil as "second" languages-Le., native Sinhalese speakers to learn Tamil and native Tamil speakers to learn Sinhalese; and (ii) formulate curricula, textbooks and pedagogic approaches that fosterpluralism,tolerance and social cohesion. 40. In addition, the North and East have been starved of investment for the past 20 years. Poverty levels are unknown, but appear to be among the highest in the country. After the immediate reconstruction, there is 20 years of deferred maintenance and postponed investment that will need to be Bank will work with these partners, both on the planned needs assessment in FY03",and also in the addressed. It is likely that many development partners will be willing to participate in these efforts. The design and implementation of further support programs for infrastructure and for capacity building. Many donors are willing to increase their assistance to Sri Lanka in the short-term to support ~~ I 1 The Bank is leading the efforts in preparing the housing needs assessment and is working closely with UNICEF on June 2003 Tokyo Financing Conference for Sri Lanka. education, as well as co-financing the team leader with UNDP. The needs assessments will provide background for the SRI LANKA Country Assistance Strategy Page 14 of 31 reconstruction and rehabilitation. For this purpose, the North East Reconstruction Fund (NERF) has been created and the Bank will act as its administrator. In the Bank's lending program, a Credit for Znfrastructure Rehabilitation and Capacity Building in the NE is proposed for early-FYO5, but its size and timing would be determined to a significantdegree by absorptive capacity issues and by the level and timing of commitmentsfrom other developmentpartners. This operation would be flexible, and thus able to respond to a variety of needs in infrastructure, capacity and perhaps in land management, with the Bank acting as the "lender of last resort". A key feature would be to utilize such an operation to encourage the local private sector,especially in the area of contracting. 41. An issue that has not yet been addressed is that of disarmament, demobilization and reintegration (DDR) of combatants. The two sidesare not yet ready to discussdemobilization,and thus it is difficult to assess whether it will be necessary for the Bank to consider a role in this regard. Initial discussions in partnership with the International Labor Organization (LO) have taken place and this will be kept under close review. Growth 42. At the core of RSLJPRS is the desire to raise the rate of growth and to rejuvenate the private sector by removing the policy constraints that are inhibiting the achievement of these objectives. The CAS strongly supportsthe Government'sview that it is imperative that the peace process be accompanied by an equally determined economic reform process to unleash the strong potential of the economy. As such, the key CAS outcomes (see Table 3) to be achieved include: (i) legal frameworks established to increase flexibility in the labor and land markets; (ii)a regulatory environmentconducive to private sector participation established; (iii) the time and formal cost of business start-up reduced; and (iv) agricultural producers receiving more consistentprice signals and clearer land title. 43. A key component of any poverty reduction and growth scenario for Sri Lanka must be a sound macroeconomicenvironment. As mentioned,the conflict has resulted in high fiscal deficits, leading to an accumulation of over 100 percent of GDP in public debt and domestic debt of 58 percent of GDP. Restoration of fiscal stability is at the center of the macroeconomic program to be supported by the IMF Poverty Reduction and Growth Facility (PRGF)-an important basis for the Bank-supported program. 44. In FY03, the Bank's initial support to this process will come through the Economic Reform Technical Assistance Project which was presented to the Board on December 10, 2002. This will provide the technical support that is needed to implement the ambitious program. It is designed to be flexible,in order to be able to respond to reform opportunities as they emerge. An initial group of reform areas-including financial sector, utilities and regulatory capacity building-have been identified,but the allocation of the majority of funds will be determined over the next three to four years and will likely include assistance to prepare a public sector reform program. As mentioned below (see paragraph 65), this project will also support capacity building efforts to strengthen the country's poverty monitoring and evaluation ability. This project accompanies the on-going Legal and Judicial Reform which is supporting the modernization of the legal system, especiallyas it impacts on the private sector,and with a special emphasis on improving the quality of judicial services. A particular focus is access to justice for women and for the citizens of the North East through a Japan SocialDevelopmentFund (JSDF)grant. 45. The completed PRS provides the basis to proceed with Poverty Reduction Support Credits (PRSCs) in Sri Lanka. Annual PRSCs would provide budgetary support to assist in the implementation of the PRS, not least to permit government to provide public services in previously unserved areas. At the heart of the PRS is a program to release the private sector from its constraints, and to reorient public expenditureaway from a welfare and control mentality towards an empowerment and service provision approach. While the PRSCs would review the overall progress in the implementation of the PRS SRI LANKA Country Assistance Strategy Page 15 of 31 program, there would also be an annual focus on particular areas of the strategy where deeper progress would be targeted. In the first of these-planned for FY03-the focus would be on factors of production: finance,labor, land and utilities; the elements of the PRS described in paragraphs 24-26 above". 46. The financial sector has received a lot of past Bank attention, with an on-going operation to support the strengthening of the Central Bank and a recently-completed Financial Sector Assessment Program (FSAP). Following up on vulnerabilities revealed in the FSAP with regard to anti-money laundering and counter-terrorism financing, in the coming years the Bank will provide technical Nevertheless, the primary obstacle to the healthy development of the financial sector remains the assistance for capacity building and formulatiodimplementation of an appropriate legal framework. dominance of the state banking system, whose reform would be central to this program. Labor markets have long been identified as a major constraint to investment, and the program would focus on improving certainty for employers in such areas as the costs and timing of redundancy, while improving the functioning of the market itself through better information centers. Land markets are to be improved through converting restricted land grants to freehold so that farmers can more readily sell, lease or use their land as collateral. The reform of the power and telecommunications sectors calls for greater regulatory capacity and a change in the role of the state, and this too would form a part of the early program to be supported. Last and by no means least, the first year of implementation of the PRS would see a strong emphasis of monitoring and evaluation mechanisms for the PRS itself through various capacity building efforts. In this regard, lack of a medium-term expenditure framework (MTEF) has made the costing of PRS initiatives difficult. The development of a MTEF-aided by public expenditure analysis-which the Governmentplans to have in place by mid-2003, is key to a more in-depthcosting of the PRS, thereby helping to undertake pro-poor budget allocations over time, and the Bank will provide any necessary support for this effort. 47. The second PRSC would be in FY04 and might focus on two key areas for the poverty agenda- the reform ofthe welfare system into one which is much more tightly focused on those in need, and reform of the rural economy, in particular to raise the productivity of farmers, who remain the poorest sector of the economy. The greatest challenge in this regard is to de-politicizeand improve the targeting of Samurdhi-largely a cash transfer program-based on the recently enacted Welfare Reform Act that sets objectivecriteriafor selectionof beneficiaries through means-testing and tracking. These reforms are expected to engender better targeting with lower exclusion of deserving beneficiaries. In the third PRSC-in FYOS-attention would turn to the public sector itself, with a focus on the reform of public sector employment systems and structures,and the related structure of public expenditure, including the issues of decentralization of decision-makingand revenue-sharing. It is likely that the implementation of thispublic sector reform would need to be accompaniedby a Technical Assistance Credit to support the complex technical work associated with public sector restructuring (including retraining re-deployed staff) and developing a comprehensive program for strengthening public sector capacity. If this reform program is ready sooner it could be incorporated into the second PRSC. The specific theme of the fourth PRSC in FY06 would be determined on the basis of the outcome of the Development Policy Review (DPR), but could well focuson the managementand efficiencyof public expenditure. 48. To accompany this work, a continuous program of Public Expenditure Review (PER) work is planned, again with annual themes. Rather than producing a large report, this work would result in 12 Obviously, the reforms receiving "focus" in each of the PRSCs will not be completed in a single year, but will take time for complete implementation-e.g., the land and labor reforms highlighted in the first PRSC. When a reform is a "focus" area in one PRSC, it is likely that additional milestones to "cement" the reform will be featured in subsequent PRSCs-Le., economy, and therefore, follow up actions in these areas will likely figure prominently in the second PRSC. as discussed in paragraph 47, labor and land issues also figure prominently in reforming the rural SUI LANKA Country Assistance Strategy Page 16of31 smaller outputs that can be incorporated into the living PRS as implementation proceed^'^. This would complementand build on the work of the Country FinancicrlAccountability Assessment (CFAA)and the Country Procurement Assessment Review (OAR)-both to be completed in FY0314-and would form the basis for a future program of technical support to reform the fiduciary framework. These would be summarized in a Safeguards Assessment Paper that would also incorporate the current state of knowledge on Sri Lanka's management of environmental and social safeguards, and would accompany the first PRSC to the Board. 49. While addressing the policy issues through budgetary and technical support can remove many of the constraints inhibiting the private sector, it is also important to contemplate the sources of growth. This will be addressed in part by two proposed non-lending pieces. The first of these would be an assessment of the Investment Climate carried out during 2003 and 2004 in cooperation with the Asian Development Bank (ADB) and the United Nations Development Program (UNDP). In addition to the standard work on the climate for "urban" investment, given the importance of encouraging off-farm employment opportunities in rural areas, this would incorporate a "rural investment climate" component. In addition, after the initial reformprocess has had a chance to eliminatethe most obvious constraints, the Bank would conduct a Development Polzky Review, with a particular focus on future sources of growth. It is clear that the economy will be going through major changes in the corning years, both because of the potential for new areas of growth and the likely decline of the garment industry after the end of the current Multi-Fibre Arrangement (MFA) in 2005. The PRS makes a start in this direction by outlining detailed action plans for raising productivity in priority sectors-i.e., agriculture, fisheries, tourism, apparel and the tea industry. However, the PRS does not analyze the links between these sectors and poverty-related outcomes, which is critical for prioritizing policies that promote pro-poor growth. It is also important to increase the availability of financing to support the growth of the private sector. IFC will take the lead role here, making direct investmentsin medium and large-scalecompanies and building the capacity of the financial sector to finance private enterprises-especially for small and medium enterprises (SMEs)-through investments and technical assistance. 50. One area that is consideredby many to have significant potential for fostering growth both on its own and by raising productivity in other sectors is the Znformation Communications Technology (ICT) sector. This is an important focus of the Government'sdevelopment policy and the Bank would provide support to this effort in FYO4-through E-Lanka-emphasizing the policy and regulatory environment, the development of e-government, rural connectivity and societal applications. There seems to be great potential for Sri Lanka to follow India as a major player in this market and this operation would be designed to help "jump start" this activity. A related operation would be the proposed Improving Relevance and Quality of Undergraduate Education Project (ZRQUE), which would both increase the supply of in-demand skills-such as those in Information Technology (IT)-while also equipping recent graduates with basic employment requirements,including English language skills. IFC will also consider investmentsin ICT companies. 51. Another issue that impacts on growth and also on the durability of the peace process and the achievementof equalityof opportunity is Land Administration and Policy. It will be important to absorb the lessons of the Laming and Innovation Loan (La) currently under implementation and decide whether the experiencejustifies a "scaling up" into a major operation, that might include key aspects of 13 88 below). Specifically, given the already high levels of debt servicing, in the near future this work will focus on throughprogramsupport and Sri Lanka'spotentialnear-termgraduation from IDA concessional lending (see paragraph One particularly pressing issue to be covered by the PER work relates to the increasedIDA lending volumes provided helping Sri Lanka start to prepare-i.e., with regard to formulatinga sustainabledebt strategy-for the phasing out of large volumes of concessional financing. 14 See Appendix V for a summary of the findings of these reports. SRI LANKA Country Assistance Strategy Page I7 of 31 land policy, not the least of which is the massive holdings of land by the Government in both urban and rural areas. This analysis would be done in FY05, and if a positive evaluation of the learning experience emerges, it could be followed by a scaled up project in FY06. 52. Without rural growth, the prospects for sustained poverty reduction are unclear. However, while land policy is a clear case, it is less clear how the Government proposes to address more general issues related to agricultureand rural development. For instance,while the PRS advocates private sector-driven productivity improvements, the action plan appears to advocate continued state interventions. The strategy would also benefit from refinements to address important systemic issues such as improving linkages between federal and provincial-level agencies and making lead institutions-such as the Department of Agriculture-more responsive to sector demands. Policy issues would be addressed through the PRSC framework,and the on-going Mahaweli project will continue to implement important pilot programs in areas such as bulk water and river basin management. The Government has asked that the Bank support the agricultural sector through lending. Based on recently completed work-Sri Lanka: Promoting Agricultural and Rural Non-Farm Sector Growth, Report No. 25387-CE, February 2003-and work contemplated for the future, should a reasonable proposal emerge, the program would be adjusted accordingly. Nevertheless, while there is a land management problem in the wet zone, there is a water management problem in the dry zone. If the pilots progress well and the on-goingirrigationmanagement reforms are completed, this could be followed by lending support later in the CAS period. 53. In the base case, IDA would not finance infrastructure. The two largest external providers of financing-the Japan Bank for International Cooperation (JBIC) and ADB-are willing to continue to finance the key programs in roads, energy and water supply. In the spirit of selectivity, IDA will participate only with respect to supporting key reforms and potentially private participation in infrastructure. If the Government does proceed with advanced reforms in areas such as urban water, railways, roads financing and ports, and succeeds in attracting private participation, in a high case scenario-in which these reforms are explicit triggers-IDA would consider participating through lending and/or guarantees. While generally limited to supporting cases where private financing would be attracted, one possible exception would be the highways sub-sector. Should the Government develop a viable Road Fund, the Bank would investigate participating through a sector-wide operation. Support for private infrastructure will be a top priority for IFC and is a primary area of potential synergy between IDA, IFC and MIGA, with scope for a creative combination of the instruments available to the three institutions if the policy environment is right. In the meantime, IFC will continue to look for investment opportunities in this area, beyond its existing investments in power, ports and mobile telecommunications. Equity 54. While Sri Lanka has made remarkable strides in the area of human development over the last decades, seriousequity issues remain-Le., equality of opportunity and access to services. Access to and the quality of services in Sri Lanka differ greatly from one area to another. As such, equity issues are very important in a country where the resource base is not evenly distributedand where groups of citizens have been mired in poverty for a long time. Key CAS outcomes (see Table 3) focus on: (i) improved access to and quality of public services in education,health and water supply; and (ii) increased degree of empowermentof communitiesto address their own development needs. 55. As noted, a new household income and expenditure survey (HIES) is under way, which will include the North and East where many citizens suffer from conflict-related poverty. Once this new information is available, the Bank will work with the authorities to draw up a poverty map of Sri Lanka and collaboratively produce an Updated Poverty Assessment. This would start in FY04 and be finalized in FY05. While many policy reforms have been outlined in the PRS, a mechanism to monitor and assess SRI LANKA CountryAssistance Strategy Page 18 of 31 their impact is largely lacking. It is difficult to judge a priori whether these reforms will reduce poverty or have their intended impact. In this context, using the new national household data and other sources to analyze the poverty and social impact of reforms, as well as building similar capacity within Sri Lanka, remains a critical exercise for the future. This would be a focus of the Bank's contribution to the joint poverty work. Other early sector work would stress the MDGs and what is needed to attain these-and beyond-in Sri Lanka. 56. While the North and East suffer from conflict-related poverty, the South-notably Uva and Southern Province-suffers from structural poverty. The resource endowment of these areas is limited, water is scarce, distances are great and the human resource endowment is the lowest of those that are known. Under the on-going Mahaweli project, the Government has carried out community-driven development (CDD) pilots that have worked very well. NEIAP operates very successfullyunder similar principles and there are numerous other examples of this type of approach in Sri Lanka. Thus, the Ministry of Rural Economy has proposed that IDA undertakea Rural Poverty ReductionInitiative, under which poor communities in the South would be mobilized to analyze their key constraints-Le., rural roads, water supply, income-generating activities, etc.-and resources provided directly to these communities to address those constraints. This process is one that would be scaled up gradually and would need support over a long period of time. An Adaptable Program Lending approach will be utilized,under which IDA would commit support in phases for 10-12years, and the scope of the coverage would be gradually expanded from the South to include all the poorest parts of the country, including the estate/plantation sector. The results of the rural investmentclimate study will be useful for this operation. Nevertheless, one important service many rural communitiesplace great emphasis on is water supply and a Second Community Water project has recently been neg~tiated'~.It is envisaged that this operation will make a transition into a CDD approach over its lifetime, developing the locally-based expertise to support village level managed investments. 57. One of the key questions facing Sri Lanka with respect to access to services is the growth of urbanization and the related issue of Servicesfor the UrbanPoor. It is one of the key issues within the more general issue of decentralization, but with a set of rather specific features of its own. The Governmenthas begun working to address urban policy issues and obviously the eventual outcome of the peace process-which will define more accurately the concept of "asymmetrical devolution"-will shape future policy in this regard in key ways. In preparation for a possible lending operation in FY06, a strategic options study, including fiscal decentralization issues, would be conducted in FY04. It is possible that CDD approaches would be adapted to the urban frameworkfor an operation in this area. 58. In the sub-sectorsrelated to equity concerns, it is very important that investment interventionsbe based on sound analytical frameworks. A Health Sector Strategy and program formulation exercise is under way, using a Policy and Human Resource Development (PHRD) grant. This would lead to the first proposed sector-wideoperation for Sri Lanka in the Health Sector in FY04. This would supplement the National HIV/AIDs Prevention operation that was approved on December 17, 2002 and aims to build awareness of the risks of the pandemic, while improving capacity to address its most frequent manifestation in Sri Lanka, in tuberculosis'6. The comprehensiveness of this sector-wide approach is expected to deepen over time, and one key area that is not being addressed with the current health sector 15 Given the severity of the poverty in the South and the CDD approach to be used, as well as the emphasis placed on water supply by rural communities, the Rural Poverty Reduction Initiative and the Second Community Water Project will be entirely financed by IDA grants. 16 Although mention of HIV/AIDs is made with regard to the health context, it is well-recognized that this issue is more appropriately an overall development issue. As such, an important aspect of the recently approved operation is to strengthen multi-sectoral involvement-i.e., the Ministries of Health, Defense, Labor, Education, Child Protection and Interior-and capacity on the fundamentals of HIV prevention. SRI LANKA CountryAssistance Strategy Page I9 of 31 work is that of Nutrition. Joint analytical work would be carried out, for later incorporation to the health sector program. Furthermore, IFC has already invested in a private hospital in Colombo and would continueto look for opportunities to support the private provision of health services. 59. Similarly, it has been agreed with the Ministry of Education that there would be a Strategic Framework Exercisefor the Education Sector launched in 2004 and followed by a possible Education Sector Operation in FY05. Under this and the health sector operation,the Bank would provide financial support to the overall sector programs-essentially on a budgetary support basis-while ensuring appropriate expenditureframeworks to address key sectoral issues and constraints, with procurement and financial management arrangementsthat reassure all financiers-including most importantly the state-of sound resource use. In both sectors, it is especially importantto use this opportunityto create capacity in the Ministries so that they can more strategicallydirect recourses in the future, as well as more effectively monitor human resource development progress. Close work with the authorities would be undertaken to develop concrete action plans in areas such as decentralizing school management, promoting public- private partnerships and seeking private investment in training and technical education. Effective delivery of education services will also require defining the role of the provinces and devolved institutions in school administration and teacher deployment,in the context of the overall decentralization program. The previously mentioned IRQUE will focus on raising access to quality education at the tertiary level and making it more accessibleto deserving students,thus supportingboth growth and equity concerns. Gender 60. While there is no freestanding program for gender activities proposed in this CAS, some operations do include a specific gender focus, such as the JSDF-supported program to encourage and expand women's rural financial institutions and networks. Rather, the approach is to ensure that in everything done by the Bank, the potential contribution of women is maximized in this country where women's roles are often discounted. For example, within CDD operations, efforts will be made to mobilize women's rural development societies-an approach that is already transforming villages in the North. In the HIV/AIDS program, women's groups will be empowered and sex workers-both women and boys-will be targeted for support. In the health sector, women's health issues and knowledge will be a major target of the program, not least in the area of nutrition. Finally, in terms of the program for the North East, there are many war widows who will receive particular support during the reconstruction and reconciliation process. In summary, the CAS does not propose a gender program; but instead proposes a program that will ensure that women's contributions to development are realized, since it is clear in Sri Lanka that whenever this happens the overall impact is significantly greater. Safeguards 61. Similarly, in implementing the CAS, ensuring the Bank's safeguard policies will be crucial. Major work has recently been undertaken to review financial and procurementissues, with the completion of the CFAA and the CPAR (see Appendix V). Overall, financial management in Sri Lanka is quite good, but a major effort is needed with regard to the oversight aspects. Thus, the CFAA calls for particular attention to internal and external audit and to the role of Parliamentary Committees. In procurement, the issue is not adequatecontrols, but rather overlappingcontrol systems that end up with a diffusion of responsibilities and with major delays to the procurement process. The CPAR calls for a simplificationof the regulatory framework for procurement, possibly through a new procurement law. 62. A successful six-year program of support to environmental capacity-building is drawing to a close. Capability in the sector is quite high and awareness exceptionally so. Continued strengthening is needed--especially in the area of natural resources management-and will be primarily supported by a SRI LANKA Country Assistance Strategy Page 20 of 31 new ADB-financed program. The high degree of collaboration between the Bank and ADB will continue in implementing this program, with the Bank serving on the project steering committee and Bank staff participating in ADB implementationefforts. 63. Finally, social development issues have come to the forefront, with significant resettlement of IDPs with Bank support and a major reconciliation program. As part of the IDP process, the resettlement regulations have been revised to a standard that meets the Bank's guidelines. Furthermore, the Bank plans to post a Post-Conflict Adviser for the South Asia Region in Colombo and a social development adviser is also being recruited. As mentioned, a note summarizing safeguard issues and assessing capacity will be submitted to the Board along with the first PRSC in FY03. Summaryof Outcomes 64. country program results framework that links together the different levels of results-Le., In preparing the CAS, the Bank's country team for Sri Lanka has developed a comprehensive the country's longer-term development agenda based on the PRSRSL and the shorter-term goals to be achieveddurin the CAS period and which are supported by the Bank`s interventions (in partnershipwith other donors)18 . The key priority base case "CAS Outcomes''have been summarizedin Table 3 above. 65. Both the Government and the Bank realize that an effective monitoring and evaluation system is critical for tracking implementationof the PRS and hence, the CAS outcomes. There is much work ahead in data collection, analysis and its linkages with policy and the monitoring of inputs, outputs and outcomes. Particularly weak are the current institutional arrangements in Sri Lanka to coordinate the monitoring and evaluation efforts. An immediate challenge is to enhance the capacity of the Department of Census and Statisticsto be able to conduct the key surveys-Le., the HlES and the Consumer Finance and Socioeconomic Survey (CFSS)-required to deepen poverty diagnostics and monitoring at appropriate intervals. An integral part of poverty monitoring and impact is also the participatory component to assess access and consumer satisfaction with servicedelivery. During the initial phases of CAS implementation,the Bank will place specificemphasis on addressing these capacity constraints. As one example of how this will be done, the capacity of the Department of Census and Statistics will be enhanced in the context of the on-going Economic Reform Technical Assistance Project. Furthermore, the program of the WBI (see paragraphs 66-69 below) will also help to build monitoring and evaluation capacity. These and other efforts will clearly facilitatethe monitoring of the CAS outcomes. At the time of the CAS Progress Report-Le., two years from now-this particular aspect will receive special attention. It may be the case that CAS outcomes will need to be adapted in the light of experiences. B. Bank Group Scenarios CapacityBuilding 66. As mentioned, an important cross-cuttingtheme of the CAS is capacity building. To be able to achievethe CAS and PRSP outcomes and, more fundamental,to be able to monitor and evaluateprogress toward achieving these outcomes, there is an urgent need to build capacity in Sri Lanka. Throughout the IDA lending program, there are numerous sectoral operations (e.g., health and education) and technical assistance operations (e.g., economic and public sector reform) which provide support in this regard. In addition, key pieces of the non-lending program-e.g., public expenditure, poverty and reviewing implementation of social policies/programs-will be carried out jointly with local counterparts, both public and private/academic, to strengthen in-country capacity for this essential analytical work. These 17 See the Thematic Matrices in Annex B11 for a complete elaboration of the results framework. SRI LANKA Country Assistance Strategy Page 21 of 31 activities will be fully coordinated with and reinforcedby the World Bank Institute (WB1)-for which Sri Lanka is a focus country-which will also play a leadingrole in the capacity building efforts. 67. WBI will support the CAS peace, growth and equity themes through a variety of face-to-face and distance learning programs (see Appendix VII). With the formal launching of the Sri Lanka Distance Learning Center in February 2003, WBI will be increasinglymaking use of this facility to reach clients in Sri Lanka. The WBI program will be continuouslyassessed and adapted to ensure that it is responsive to key institutional capacity weaknesses and bottlenecks in the country. The main priorities for capacity enhancement are in the areas of PRS implementation, governance and the media. In addition, other priorities are in health, nutrition and population, educationand rural development. 68. Related to cementing and strengthening the PRS process, WBI will develop programs to: (i) support the establishment of an on-going process of consultation in Sri Lanka; (ii) help Government develop firm linkages and appropriate mechanisms between PRS objectives and budgetinghesource planning, including inter-governmental public finances at both the central and decentralized levels, and (iii) build capacity in designing and implementing a "citizen's scorecard." In the area of governance, to assist in the implementation of CFAA recommendations, WBI will engage in programs to strengthen the public accounts and parliamentary committees,focusing on the role of Parliament in the budget and PRS process. Finally, related to the media, programs to enhancethe reporting skillsof journalists-in English, Sinhaleseand Tamil-will be developed and implemented. 69. The PRS learningprogram is expected to support the achievement of the CAS growth and equity outcomes by strengtheningcapacity to implement growth-oriented and pro-poor budgets. Strengthening of Parliament under the governanceprogram also contributes to the achievementof the growth and equity outcomes. The development of parliamentary capacity would ensure that: (i) public resource allocation is consistent with constituentdemands, as well as with the country's development objectives; (ii) funds are not misappropriated; (iii) fiscal transparency is maintained; and (iv) PRS expenditures result in improved service delivery. The media program is cross-cutting in nature and is expected to contribute to the achievement of outcomes in all three thematic areas. Generally, it will help to increase transparency of the public decision-making process, which in turn will improve accountability. This process will eventually increase the overall governance and efficiency of development activities. The media will receive training on covering the development needs of a diverse, multi-ethnic society--crucial to the country's efforts to sustain the peace process. Finally, programs to support other CAS objectives will contribute to achieving the equity outcomesthrough improving public sector servicedelivery capability in health (HIV/AIDs communications), education (developing and implementing national education assessments)and rural development (integratedwater resources planning). IDA Non-Lending Program Activities (AAA; see Table 4). Given the strong analytical capabilitiesexisting in Sri Lanka, AAA will 70. The IDA program is founded on a significantly augmented program of Analytical and Advisory all be carried out in conjunction with Sri Lankan agencies, both within Government and the network of research institutions and universities. The AAA programfalls into three broad types of activity: First, there are major knowledge gaps that need to be filled. These include areas such as poverty mapping and poverty in the North East, the investment climate, sources of growth and progress towards achieving the MDGs. SRI LANKA Country Assistance Strategy Page 22 of 31 Second, there are areas of analysis specifically requested by Table 4: Key AAA, FY03-FY06 the Government. These include FY03 Area' topics such as urbanization and the Social Assessment of the Conflict-Affected Areas A role of local government and the Public Expenditure Analysis A Country Procurement Assessment Review (CPAR) A reform of the welfare system, It is Country Financial Accountability Assessment (CFAA) A anticipated that further requests of Promoting Agricultural 8t Rural Non-Farm Growth A this type-both through Bank staff Safeguards Assessment Paper A and technical assistance (TA)-will Health Sector Strategy C FY04 be forthcoming and as such, the Report on Millennium Development Goals (MDGs) A ability of the Bank to respond to Investment Climate Survey (Urban and Rural) A such requests will be retained. Public Expenditure Analysis A Development Policy Review (DPR) emphasizing growth A Third, there is AAA that is AAA on General Education C Financing of Municipal Services B necessary as the basis for future F Y O S lending, especially for sectoral Public Expenditure Analysis A programs. Work in health, Poverty Update A education and land are specific Nutrition and Environmental Health C Land Policies: Lessons from the LIL C examples of this, to help define the FY06 priorities for future public Public Expenditure Analysis A expenditureand reform. Country Economic Update A/B Update on Rural Development Issues A/B 71. One of the early programs Review of Implementation of Social Programs proposed for support-the e-Lanka 'Areas correspond to those described in paragraph 70 an( re as C - - - follows: (A) knowledge gaps; (B) analysis requested by the program-is itself about the generation Government; and (C) necessary as a basis for future lending. and management of knowledge for At the time of the CAS Progress Report, the AAA timetables development. In terms of allocation of will be revisited. the administrative budget, the AAA program will receive an allocation similar to that of the lending program. All core diagnostic economic and sector work will have been completed by the end of FY03, with the exception of the DPWCEM that will be carried out in FYM1*. IDA Lending Scenarios 72. The FY03-FY06 base case lending program consists of about four projects per year for a total of US$SOO million of IDA resources (see Table 5). While this lending amount is significantlyhigher than the amount approved during the last CAS period, such an increase is based on a dramatic change both in the peace prospects and the economic policy framework and is merely a restoration of a "normal" lending program for Sri Lanka in line with its IDA allocations. 73. As mentioned, in each year the lending program would be anchored in a PRSC providing program supportto the implementation of the PRS. It is envisaged that the four PRSCs might account for close to half of the total four-year lending program. This would be complemented by two to four investmenthectoraloperations per year to support key programs in the focus areas. Given the intensity of the conflict, Sri Lanka qualifies for IDA grants for a limited period of time-Le., FY03 and FY04. In FY03, the IDA grant amount-ver and above that approved in December 2002 for the National 18 In summary: (i) the CPAR and CFAA are on-going and will be finalized in FY03; (ii) a Poverty Assessment was finalized in FYOl and will be updated in FY05; (iii) a Public Expenditure Review was completed in FY97 and continuous public expenditure analysis is a key part of the CAS program; and (iv) the last CEM was canied out in FYOO and the DPWCEM emphasizing growth will be undertaken in FY04. SRI LANKA CountlyAssistance Strategy Page 23 of 31 HIV/AIDs Prevention Project-will be US$% million and used to finance the: (i) Table5: IDA Base Case LendingProgram,FY03-FY06 Second Community Water Project (US$40 (values in US$ millions) million); and (ii) PRSC (US$15 million), FY03 205.0 primarily to support establishment of the PRSC I: Factors of Production 110.0 Economic Reform Technical Assistance 15.0 monitoring and evaluation mechanisms of Second Community Water 40.0 the PRS. Assuming that the IDA grant National HIVlAIDs Prevention 10.0 allocation in FY04 is of a similarmagnitude, Improving Relevance & Quality of Undergraduate 30.0 it would most likely be used to finance the: Education (i) Rural Poverty Reduction Initiative FYo4 230.0 PRSC 11: Welfare Reform & Rural Development 90.0 (US$40 million); and (ii) Health Sector e-Lanka 50.0 Operation (US$15 million). Rural Poverty Reduction Initiative 40.0 Health Sector Operation 50.0 74. An assumption for Sri Lanka to FY05 195.0 90.0 remain in the base case is continued PRSC 111: Public Sector Reform NE Infrastructure RehablCapacity Building 40.0 progress in implementing the peace process. Public Sector Reform Technical Assistance 15.0 In addition,Sri Lanka must meet the triggers Education Sector Operation 50.0 shown in Table 6 that cover: (i) maintaining FY06 170.0 macroeconomic performance, with special PRSC IV (To be determined) 90.0 Land and Water Administration 40.0 emphasis on fiscal issues; (ii) successful Services for the Urban Poor 40.0 implementation of the economic reform program as contained in the PRS; (iii) progress in addressing equity concerns; and (iv) portfolio management. These are broad policy and performance indicators. The "intermediate indicators" in column four of the "Thematic Matrices" in Annex Bll will be used to measure the status of these indicators. Thus, for example, improvements in the quality of education would be measured inter alia by the national learning assessments; factor market deepening by the extent of commercialization of the People's Bank and labor market legislation and fiscal reform by the size of the public sector domestic borrowing requirement. There are thus a series of specific measures and indicators that will be used to assess performance against these broader categories. 75. The high case would have a lending volume approximately 25 percent above the level of the base case. In addition to maintainingperformance as envisioned under the base case, the expectation would be for high performance in the following areas: 0 Accelerated structuralreform, especially in financialsector and public expendituremanagement; 0 Progress in private participation in infrastructure;and 0 Deepening of public sector management reforms in the areas of staffing and decentralization beyond that currently envisaged. 76. For the first case, it is proposed that the high case would be reflected in larger PRSCs. In the second, this would trigger specific operations to support those reforms, notably possible investments supporting private participation in water, railway concessioning, landlord port arrangements or IDA guarantees for private power generation investments or toll roads. For the third case, this would trigger additional resources for the public sector management technical assistance programs to cover the costs of re-deployment. Given the triggers, it is unlikely that a high case scenario would be reached for about a year. SRI LANK4 Country Assistance Strategy Page 24 of31 Table 6: Triggers for Different Lc Jing Scenarios Area Base Case Macroeconomic Progress in macro performance in Table 2) Strong progress in macro performance (asdefined High Case' Management PRGF program on track, including reduced net public sector borrowing requirement Strong fiscal management, particularly in terms of resource mobilization and quality of pro-poor public spending via a poverty tracking system in a results-based MTEF Economic Satisfactory implementation of the economic Accelerated implementation of the economic Reforms reforms contained in the PRS, specifically: reform program, especially with regards to: Improved functioning of factor markets, Securing private participation in infrastructure notably market orientation of financial sector Deepening public sector management reforms transaction times and greater labor flexibility as measured by rationalizedstreamlined and reductions in as measured by number of departments Improved targeting of welfare programs as overstaffing measured by the share of welfare benefits going to the poor Deepening the decentralization process as measured by the share of Government Improved rural economic incentives as revenues transferred to the local level measured by number of cleared titles issued to farmers Design and gazette a Voluntary Retirement Scheme (VRS) for the public sector Equity Improvements in education quality, especially achievements in poor areas as measured by learning Undertake analysis of the location & sources of poverty, including in the NE Portfolio Satisfactory portfolio performance with less Higher portfolio performance with less than Management than 15% problem projects 5% problem projects and disbursement ratio ' For over 20% the high case scenario, all base case triggers must be met, as well ahose in this column. 77. The CAS envisions two types of low case scenarios. The first would see lending fall to levels similar to those of the last five years-on the order of US$250 million over the four year period-with the elimination of the PRSCs, the e-Lanka Project and the technical assistance operations for economic and public sector reform. This low case would be triggered by either: (i) the breakdown of the peace process and the resumption of hostilities, but essentially limited to the North East; or (ii) the lagging behind of PRGF program. The deeper low case scenario would be an exit strategy. If the peace process were to structuralreforms and a failure to maintain satisfactory macroeconomic performanceas evaluated by IMF break down entirely and hostilities were to break out on a national scale, there would be no new lending and in all probability, it would be necessary to suspend all operations. Nevertheless, it should be emphasized that such a scenario has never been seen in Sri Lanka during the 20 years of conflict and is thus considered highly unlikely. IFCProgram 78. As discussed above, the International Finance Corporation (IFC) will support the growth agenda through investments that contribute to the CAS outcomes related to establishing and fostering private sector participation. IFC will focus on investmentswhich: Develop financial markets, increase the availability of financing for SMEs, expand housing finance, add value to the on-going consolidation of financial services, or support the growth of privately-managedcontractual savings institutions; Expand the private provision of infrastructure services, especially in power, ports, water and telecommunications; SRI LANKA Country Assistance Strategy Page 25 of 31 Support the growth of export-oriented manufacturing and service companies, including IT companies; and Supportprivatization. In addition,IFC will explore new opportunitiesto support the growth of SMEs in conjunctionwith multi- lateral and bi-lateral partners. MIGA Program 79. During the CAS period, the Multilateral Investment Guarantee Agency (MIGA) will explore the possibility of working with Sri Lanka's investment promotion intermediaries to improve their investor outreach capabilities through the use of the FDZ Xchange. This e-mail based technology developed by MIGA allows promotion agencies to send customized information to international investors that matches their specified interest in a region, country or sector. With funding provided by the Gateway Foundation, MIGA is prepared to offer hands-on supportto appropriatecontentpartners in Sri Lanka who would make use of the FDZ Xchange. As foreign investor interest in Sri Lanka grows in a post-conflictenvironment, MIGA would also be ready to help reduce non-commercial risks for foreign direct investors through the provision of guarantees to qualified investments against currency inconvertibility and transfer restrictions, war and civil disturbance,expropriation and breach of contract. Progress under the Last CAS and Lessons Learned 80. When the previous CAS was presented to the Board, due to the prevailing uncertainties- including the conflict-the low case was considered the most likely scenario. By the time of the Progress Report, Sri Lanka had moved to the mid-base case following the initiation of policy reforms in early- 1997. However, the country slipped back into the low case in mid-1999 as the Government became preoccupied with elections, the conflict escalated and reform efforts weakened. As a result, lending to Sri Lanka was relatively modest, withjust twelve IDA credits for a total of approximately US$370 million- or an average of two creditsper year for an annual amount of US$62 million-approved during the period FY97-FY02. 81. As part of the CAS process, a CAS Completion Report for the 1996CAS has been Box 5: Lessonsof the Country AssistanceNote (CAN) The main lessons from the December 1998OED CAN were: prepared (see Appendix 111). This analysis The physical components of projects-while implemented identifies the major factors-Le., political well-were subject to increasing implementation delays, instability and the lack of ownership, which due primarily to procurement problems; often resulted in complex projects that Policy changes and institutional reforms were difficult to suffered from weak implementation-that achieve; therefore, the Bank's assistance should have been more sensitive to the political cycle and substantial contributed to a lack of significant progress preparation and consultation with stakeholders; towards implementing the CAS program. The Bank did not give adequate attention to the possible Similar lessons were highlighted in the divisive impact of its programs-e.g., several large Country Assistance Note (CAN) carried out education projects could have had greater value if they had by the Operations Evaluation Department fostered the role of education in promoting social inclusion in a more prominent manner; and (OED) in December 1998(see Box 5). These Although the Bank's analysis and advice were sound and its lessons are being taken forward in the design strategic objectives were well-aligned with Government's, of this CAS in a number of ways, including: only limited institutional framework changes were made. Adopting a more realistic approach to the issues of political instability and ownership, specifically by focusing more on: (i) AAA and policy dialogue before jumping prematurely into project preparation; (ii) supporting specific, opportunistic reforms put forward by serious championswith demonstrated implementation ability;and (iii) capacity building; SRI U N k A Country Assistance Strategy Page 26 of 31 * Placing greater emphasis on project implementation. In the past, project preparation has often taken more than three years and consumed a substantial share of the administrative budget, thereby leaving limited resources for implementation efforts. In the future, project preparation will be shortenedand greater resources will be allocated for implementation; Developing simpler, yet larger projects supporting either CDD approaches or comprehensive sectoraUmulti-sectoralefforts;and Being more selective and focused in areas of engagement, in addition to shifting towards more use of programmatic/adjustmentlending instruments. IDA PortfolioManagement 82. After a steady decline during the 199Os, since FYOO the IDA portfolio for Sri Lanka has shown a slight increase in the number of projects, annual lending levels and overall disbursements (see Table 7). Currently, the portfolio consists of thirteen IDA projects and one Global Environmental Facility (GEF) balance of about US$250milli~n'~. operation with total commitmentsof about US$470 million, net of cancellationsand an undisbursed IDA Table7: IDA PortfolioTrends andPerformance: FY00-FY03 (As of January 31,2003) FYOO FYOl FY02 FY03 Number of projects under implementation" 13 13 13 14 Average implementation period (years)" 2.8 3.2 3.8 3.2 New IDA Commitments (US$ million)31 45.2 37.3 75.0 27.6 Disbursements (US$ milli~n)~' 45.9 47.4 69.1 44.2 Disbursement ratio (percent) 13.6 15.3 26.3 10.4 Number (percent) actual problem rojects5/ Number (percent) projects at risk6p 2 (15.4) 2 (15.4) 2 (15.4) 2 (14.3) 2 (15.4) 2(15.4) 2 (15.4) 3 (21.4) Proactivity index 100 100 100 100 Realism index 100 100 100 100 "As shown in the Annual Report on Portfolio Performance, including GEF. Commitments approved in FY. Average age of projects in the portfolio as of the end of each FY. 41 "Projects rated U or HU on Development Objective (DO) or Implementation Progress (IP). Gross disbursements. Niimher of actual and nntential nrnhlem nrniertc 83. Although the portfolio has experienced some deterioration since the last CAS, since FY02 there have been improvements as a result of the pro-active measures (discussed below) taken by both the Government and IDA2'. The most important systemic issues affecting portfolio implementation include: (i) lack of accountability and commitment; (ii) lack of continuity in carrying out reform initiatives; (iii) 19 Recently approved projects not yet effective-Le., Economic Reform Technical Assistance and National HIV/AIDs Prevention-are included in these totals. The portfolio restructuring-in which US$31 million was reallocated to provide support to the North East Emergency Reconstruction Program-is not counted as a stand-alone project. 20 projects-at-risk). By mid-FY03-through Going into FY02, four projects were identified as "projects-at-risk" and four were on the "watch list" (Le., potential restructurings and/or cancellations-there were only two projects-at-risk and one on the watch list. SRI LANKA CountryAssistance Strategy Page 27 of 31 poor governance, including weak fiduciary controls; (iv) irregular flow of counterpart funds; and (v) overly ambitious project design. level and establishing measures to assign Box 6: Improving Accountabilityin ProjectImplementation direct ownership and accountability to the In September 2002, the Ministry of Finance issued a circular respective line ministries (see Box 6). In outlining amendments to procedures to deal with issues that "inhibit expeditious project implementation." Each line ministry Secretary addition, monthly reviews of all donor- i was made fully responsible for coordinating and ensuring timely funded assistance are conducted by the implementation of projects under hisher purview. As such, Ministry of Policy Development and financial authority limits have been increased and Secretaries are Implementation and chaired by the Prime required to delegate authority to Project Directors to make them more accountable. Furthermore, rigorous procedures for the Minister's portfolio advisor, and monthly selection and performance monitoring of Project Directors have meetings are held-chaired by the been established. Department of External Resources with the In procurement-in which there have been serious delays in State Accounts Division and line the past-a Cabinet Sub-committee on Budget and Tenders has been established to oversee all tender decisions and monitor ministries-to ensure adequate allocation and timely flow of counterpart funds. a key advisor in procurement has also been established. procurement plans. The role of the Procurement Support Bureau as Specifically related to the IDA portfolio, financial and decision-making authority to Project Directors and Furthermore, revised procurement guidelines-delegating more other on-going activities include: (i) establishment of a Project Directors' Secretaries of line ministries-have been issued. Forum-consisting of project directors of all IDA- funded projects-that meets quarterly to address and resolve common issues, share best practices and streamlinemonitoring and reporting; and (ii) bi-annual portfolioreview meetings between IDA, the Ministry of Finance,line ministries and other stakeholders to discuss implementation issues. 85. IDA'S portfolio management plan focuses on enhancing quality, with special attention paid to sociaYenvironmenta1safeguards and fiduciary controls. For example, quality enhancement reviews are being taken to achieve high quality at entry and emphasis is being placed on establishing procurement planshystems before project effectiveness. Compliance with social and environmental safeguards will be strengthened through systematic sector reviews, particularly for the energy, infrastructure and irrigation sectors and by building local ownership and capacity to address social and environmental concerns. Greater emphasis will be placed on CDD activities and multi-sectoral approaches,both in rural and urban settings. 86. To ensure more effectiveportfolio implementation, specific supervision strategiesfor each sector are being developed. Regional sector specialists will provide quality oversight, while staff in the Colombo Office-supported by the New Delhi procurement hub-will interact with project staff and other stakeholderson day-today implementation issues. The underlying principle will be on pre-emptive action to resolve issues before they become full-fledged problems. In addition, more interaction will be undertaken with the media, as this is an essential part of promoting understanding and awareness of the portfolioobjectivesand for engagingcivil society in an open and transparentmanner. IFC Portfolio 87. As of January 31, 2003, IFC had outstanding committed investments in 14 companies in Sri Lanka with a total exposure of US$74 million, consisting of US$68 million from its own account (net exposure) and US$6 million from participating banks. This includes projects in the financial sector, infrastructure, general manufacturing, health care and tourism. In the infrastructure sector, IFC SRI LANK4 CountryAssistance Strategy Page 28 of 31 participated in the South Asia Gateway Terminal project together with ADB, Commonwealth Development Corporation (CDC) and the Private Sector Investment Development Corporation (PSIDC) to develop a quay of the Colombo port as a private container terminal on a 30-year build, operate and transfer (BOT) basis. It also invested in Asia Power-Sri Lanka's first private power generation project-and Suntel-one of Sri Lanka's two mobile operators. In the financial sector, IFC activities have included investments in venture capital funds, housing finance companies, commercial banks, the country's first credit rating agency and support of capital markets through credit lines to leasing companies and other non-bank financial institutions. Portfolio performance is excellent, with no loan arrears. C. IDA Eligibile and IBRD Creditworthiness the country is currently not considered creditworthy for IBRD lending because of political risks and its 88. While Sri Lanka's per capita income level is approachingthe IDA operational cut-off (US$875), precarious fiscal position. Previous reviews have concluded that Sri Lanka's creditworthiness was not strong enough to justify access to IBRD resources because of: (i) the civil conflict; (ii) high total public debt and inadequatefiscal performance;and (iii) vulnerabilityto external shocks. 89. Nevertheless, given the policy performance envisioned in the base case scenario and the strong prospects for peace, it is possible that Sri Lanka might be deemed eligible for IBRD lending by the time of the next CAS, or even before-Le., possibly in a high case scenario. With regard to potential IBRD lending in the coming years, the following possibilities exist: In a base case scenario, Sri Lanka would remain an IDA-only country during the entire CAS period (Le., FY03-FY06). A creditworthiness analysis would be carried out in mid-FY06-i.e., to coincide with the preparation of the next CAS-to determine Sri Lanka's readiness for transitioning to an a IDNIBRD blend-country during the next CAS period; and If the triggers for the high case scenario are met and economic performance is in line with the medium-term economic framework set out in Table 2, a review of IBRD creditworthiness could be carried out earlier-Le., early-FY0621.If under this review, Sri Lanka is deemed creditworthy, then the high case scenario could include a limited amount of IBRD lending-primarily for private participation in infrastructure projects. Otherwise,the high case would be an IDA-only scenario. IV. IMPLEMENTINGTHE CAS A. Partnerships 90. There are three types of partnership that are important for this CAS. First, there are official partnerships. Of these, the most important are with JBIC and ADB, the two largest providers of finance to Sri Lanka. The two institutionsare currently preparing their assistancestrategiesand clear efforts have been made to ensure congruence. In February 2003, the Bank and JBIC co-hosted a workshop of the three institutionsin Tokyoto discusstheir respective strategiesand fine-tunecoordination. The workshop was extremely successful and permitted the agencies to ensure complementarity between their strategies, ~ 21 for the country to develop a track record in a number of areas, including solidifying the peace process and macro In moving towards a scenario in which Sri Lanka is considered IBRD creditworthy, first and foremost, there is a need stability, most importantly in regaining strong growth and fiscal paths. Such a track record could only be established based on the observation of economic and financial performance indicators through 2005, including public debt and fiscal debt levels reached by end-2005. The economic targets as set out in Table 2 thereby provide useful benchmarks against which to assess economic performance and progress. SRl LANKA Country Assistance Strategy Page 29 of 31 especially in terms of support to the North East, support to implementation of the PRS, financing of infrastructure and balancing lending. There is a very reassuring degree of complementarity between the strategies-Le., the Bank is addressing macro constraints on business, while the ADB is focusingon PSD institutions and JBIC is providing support to financial institutions. ADB's focus on sector policy in roads and power has facilitated JBIC financing in these sectors. In education, the Bank is focusing on primary and tertiary education, while ADB interventions are focused on secondary and vocational skills. The Bank is also working closely with the Japanese authorities to ensure the success of the Tokyo Financing Conferencefor Sri Lanka, scheduled for June 9-10,2003. 91. and the Bank have been working especially closely together with respect to assessing the needs of the The relationship with the UN system is also strong, and ADB, LO,UNDP, UNHCR, UNICEF Bank's PRSC is being prepared in parallel with the IMF PRGF and the two institutions are working North and East. In addition, coordination with the IMFhas been consistently excellent. Currently, the closely to ensure that the programs are consistent and reinforce each other. As another example of the close coordination,the assessment of the PRS was carried out by ajoint Bank/IMFteam. 92. An important part of the coordination efforts revolves around selectivity in implementing the PRS-Le., development partners are working together to ensure that duplication is minimized, while at the same time, all essential components of the PRS are receiving adequate support. The multi-lateral and bi-lateral partnerships for implementingthe PRS are summarizedin Table 8. Reform governance and empower the Growth, Equity ADB, UN agencies Australia, France, Japan, poor Netherlands, Norway, Sweden Gender development Throughout UN agencies Canada Expand opportunities for micro- Growth ADB Canada, Japan enterprise development SRI LANKA CountryAssistance Strategy Page 30 of31 93. This being said, nevertheless,Government leadershipof the coordination of development partners leaves much to be desired. This is an area that the Bank is working with ADB in trying to improve, especially to ensure continuity between meetings of the DevelopmentForum. 94. The second type of partnership is with the private sector--especially, the Chambers of Commerce. These are exceptionally well-organized in Sri Lanka and routinely prepare inputs to policy formulation, such as comments on the draft PRS and suggestions for the budget. The Ceylon Chamber of Commerce-one the oldest in the world-is collaborating with the Bank to prepare the Development Gateway for Sri Lanka and will be an important partner in carrying out the investment climate work and other initiativesaffecting the private sector. 95. Partnership with civil society is mixed. On the development implementation front, it is going well in such projects as the NEIAP, in which Non-Governmental Organizations (NGOs) are performing strongly in their role as social mobilizers. NGOs are also playing a significant part in the North East Emergency Reconstruction Program. However, there is not a very well-organized framework for policy consultation, and no structured framework exists for exchange of views between the Govemment, the Bank and civil society. Thus, there are those who felt fully consulted on the PRS and others who never saw it. This will receive increased attention during this CAS period, especially through the efforts of WBI. Priority will also be placed on building better partnerships with the media and improving the Bank'sexternalcommunicationseffortswith regard to both lendingand non-lending activities. B. Monitoring of Outcomes 96. As mentioned above (see paragraph 65), effective monitoring and evaluation is critical for tracking implementation of the PRS, and hence, the CAS outcomes. The Thematic Matrices4ontained in Annex B1I-identify clear, specific indicators that will be used to measure progress toward achieving the CAS outcomes. In the coming months, as emphasis is placed on monitoring and evaluation systems, for each of the indicators, annual targets for the CAS period will be established and agreed with the Government. Preliminary indications are that sufficient information is availableto carry out this exercise as envisioned. However, there is still the need to determine whether or not valid and verifiable data exist-including baseline information-to measure real progress towards achieving all of the CAS outcomes. C. Risks 97. There are five types of risk associated with this CAS. In Box 7 these risks are listed in order of importance, with the first two-peace and politics-being the most critical. This is therefore a relatively risky strategy. It is intentionally so, because of the historic moment at which Sri Lanka finds itself. The Governmentand indeed the LTTE are themselves being very bold and taking enormousrisks with respect to their own political futures, for the sake of a better future for the people of Sri Lanka. It seems only reasonable that the Bank should also be prepared to accept the risks of this strategy so long as the two parties remain committed to achieving peace and laying the foundation for a renewed attack on poverty. It is therefore a strategy that has high risks, but potentially very high rewards in a country that for too long has been performing below its full potential. Sri Lanka now has the opportunity finally to break out of the conflict and follow a path of sustainedprogress for all its people. The World Bank Group can make a substantialcontribution to this process. SRI LANKA Country Assistance Strategy Page 31 of 31 98. To handle these risks, several mitigation strategies are being adopted. First, with Bank Box 7:CAS Risks support, a major communicationsprogram is being Peace: the biggest uncertainty is whether peace will indeed developed to present and explain the reform be achieved this time. It has been noted that the process is program to the population. This should reduce going remarkably well and that both sides appear determined. But after 20 years and several failed attempts, resistance to the reforms. In addition, a major claiming certainty would be foolish. The Bank is ensuring program of technical assistance for the reform resources are available for reconstruction and has a strategy process has been approved-Le., the Economic in the event hostilities were to resume. Reform Technical Assistance Project-which Politics: Sri Lanka is going through "cohabitation"-i.e., a should boost implementation capacity. Both the President from one party and a Government from another- for the first time. The President has the constitutional power IMF and the Bank will also provide support to to dismiss the Government and call elections. Suchan event strengthen the monitoring and evaluation capacity would obviously disrupt both the peace process and building effort. economic reform. The President has stated that she will not call elections as long the GovernmentBut, continues to command the confidence of Parliament. a political 99. The political risks are harder to mitigate, crisis remains a risk for this strategy. but should be tractable so long as the Government Economic reform:the Government is committed to reform, retains the confidence of Parliament. The but could face serious opposition to some of its policies, successful implementation of the reform program reform were to threaten the peace process Government such as in the financial sector. In addition, if economic and successfulnegotiation of the peace process are might slow down. Thus, the level of support is linked to the best guarantees of this. With regard to the both the pace and quality of reform. peace process, there is every indication of strong External: Sri Lanka remains a country with heavy external commitment from both sides and the best prospect dependence. If the situation in the Middle East were to to supporting this is an early demonstration of the decline significantly just as the Sri Lankan economy is deteriorate, intemational tourism and remittances might benefits of peace. Thus, the Bank-along with recovering. other development partners-will provide early Implementation: the CAS proposes a major increase in support for reconstruction efforts as part of the lending at a time when Sri Lanka's own resources are strategy. Finally, the external shocks require that heavily stretched, raising the question of absorptive foreign reserves be built up as quickly as possible. capacity. Significant resources will be transferred in the form of program assistance. This is easily absorbed and in This would require appealing for this type of for and of itself makes it easier for project assistance to be external assistance during the forthcoming absorbed. Financing Conference for Sri Lanka planned for June in Tokyo. 100. Sri Lanka now has the opportunity to break out of the conflict and follow a path of sustained development and progress for all its people. This CAS presents a coherent strategy for how the World Bank Group should support Sri Lanka to help this opportunitybe realized. James D. Wolfensohn President By: ShengmanZhang Peter L. Woicke Annex A2 Page 1 of 2 At A Glance 2/20/03 Lower- POVERTY and SOCIAL Sri South mlddle- Lanka Asia income Developmentdiamond' 2001 Population,mid-year (millions) 19.6 1,380 2,164 Life expectancy GNI per capita (Atlas methd, US$) 830 450 1,240 GNI (Atlas method, US$billions) 16.3 616 2,677 - Average annual growth, 1995-01 Laborforce p') Population ("h) 1.3 1.9 1.o 2.2 2.4 1.2 Gross ;:I +primary Most recent estimate(latest year available,1995-01) capita enrollment Poverty (% ofpopulationbelownationalpoverty line) 25 Urban population ("hof totalpopulation) 23 28 46 I Life expectancyat birth (years) 73 62 69 I Infantmortality (per 1,000live births) 15 73 33 Child malnutrition (% of children under5) 33 49 11 Access to imtxoved water source Access to an improvedwater source (% of populafion) 83 87 80 Illiteracy (% ofpopulation age 754 8 44 15 Gross primary enrollment ("9 of school-agepopulation) 111 101 107 - Sri Lanka Male 112 109 107 Lower-middle-incomegroup ~ Female 110 93 107 KEY ECONOMIC RATIOSand LONG-TERMTRENDS 1981 1991 2000 2001 GDP (US$billions) Economlcratios' 4.4 9.0 16.3 15.7 Grossdomestic investmenVGDP 27.8 22.9 28.1 22.0 Exportsof goods and servicedGDP 30.5 28.2 39.7 37.0 Trade Gross domestic savingdGDP 11.7 13.9 17.2 15.3 Gross national savingdGDP 17.8 17.1 21.4 19.5 T Currentaccount balance/GDP -10.0 -5.8 -6.5 -1.7 InterestpaymentdGDP 1.1 1.4 1.3 1.3 Domestic Investment Total debVGDP 50.6 73.1 55.3 54.4 savings Total debt service/exports 13.7 10.0 9.7 Presentvalue of debt/GDP 42.8 1 Presentvalue of debVexports 89.6 Indebtedness 1981-91 1991-01 2000 2001 2001-05 (average annualgrowth) - GDP 3.9 4.9 6.0 -1.4 5.6 Sri Lanka GDP per capita 2.4 3.6 4.3 -2.9 4.4 __Lower-middle-incomegroup Exportsof goods and services 4.9 6.9 18.0 -6.5 2.4 I STRUCTURE of the ECONOMY 1981 1991 2000 2001 Growth of Investment and GDP (%) (% of GDP) Agriculture 27.7 26.8 19.5 19.5 Industry 28.0 25.6 27.5 26.7 Manufacturing 16.2 14.8 16.9 15.8 Services 44.3 47.7 53.0 53.8 .lo .20 ':- Privateconsumption 80.9 76.3 72.4 74.6 Generalgovernment consumption 7.4 9.8 10.4 10.1 - Importsof goods and services 46.5 37.2 50.5 43.7 I GDI -GDP I 1981-91 1991-01 1 (average annualgrowth) 2ooo 2o01 Growth of exports and Imports(%) I Agriculture 2.0 1.7 1.7 -2.9 20 Industry 4.9 6.5 7.5 -2.0 10 Manufacturing 6.5 7.4 9.2 -4.0 Services 4.4 5.6 6.8 -0.3 0 Privateconsumption 3.5 .IO _. 4.1 4.4 18.6 Generalgovernmentconsumption 6 6 81 Gross domestic investment 0 7 55 100 -171 Exports -Imports Importsof goods and services 3 4 7 8 149 -101 Note: 2001 data are preliminaryestimates Debt Data is from the World Bank Global DevelopmentFinance Database The diamonds show four key indicators in the country (in bold) compared with its income-groupaverage. If data are missing, the diamond will be incomplete Annex A2 Page 2 of 2 Sri Lanka PRICES and GOVERNMENT FINANCE 1981 1991 2000 2001 Domesticprices Inflation (YO) (% change) 20T Consumerprices 12.2 6.2 14.2 Implicit GDP deflatoi 20 9 10.6 6.2 13.2 Governmentfinance ("A of GDP, includes current grants) i Current revenue 22.6 17.2 16.9 96 97 98 99 00 01 Current budget balance 0.1 -3.0 -4.5 Overall surpluddeficit (including grants) -12 4 -9.5 -9.5 -10.5 -GDP deflator -CPI I TRADE 1981 1991 2000 2001 (US$ millions) Export and import levels (US$ mlll.) Totalexports (fob) 1,987 5,522 4,817 Tea 432 700 690 8.000I 7,000 m I Other agriculturalgoods 261 442 330 6.0004 Manufactures 804 2,982 2,543 4,000 5,000 Total imports (cia 1,694 2,894 7,320 5,974 Food 485 693 654 3,000 Fuel and energy 234 901 731 2,000 1,000 Capitalgoods 720 1,737 1,081 0 I Exportprice index (1995=100) 151 140 95 96 97 98 99 00 O1 I Import price index (1995=100) 132 125 IIExqorts Imports Terms of trade (1995=100) 115 112 BALANCEof PAYMENTS 1981 1991 2000 2001 (US$ miiiions) Current account balanceto GDP (%) I Exportsof goods and services 2,534 6,475 6,183 Imports of goods and services 2,054 3,345 8,235 7,135 Resourcebalance -811 -1,760 -952 Net income -96 -180 -305 -280 Net currenttransfers 363 469 998 960 Current account balance -442 -521 -1,066 -272 Financing items (net) 404 942 447 542 Changes in net reserves 38 -421 619 -270 Memo: Reserves includinggold (US$ millions) 704 915 1,187 Conversionrate (DEC,iocai/US$) 19 2 41.4 77.0 89.4 EXTERNAL DEBT and RESOURCE FLOWS 1981 1991 2000 2001 (US$ millions) Compositionof 2001 debt (US$ mill.) Total debt outstanding and disbursed 2,235 6,580 9,019 8,529 IBRD 29 76 13 8 A: 8 IDA 126 1,058 1,610 1,570 G.A53 Totaldebt service 212 416 777 716 IBRD 4 15 7 5 IDA 1 11 31 39 Compositionof net resourceflows Officialgrants 178 173 109 94 Officialcreditors 163 563 154 184 Privatecreditors 182 36 133 71 Foreigndirect investment 49 63 176 172 Portfolioequity 0 32 -45 -11 World Bank program Commitments 159 242 18 37 A IBRD - E. Bilateral .- ~~ Disbursements 28 187 47 39 B - IDA D - Other multilateral F Private Principalrepayments 2 12 24 31 C .IMF G Short-term Net flows 26 174 23 8 Interest payments 3 14 14 13 Net transfers 23 161 10 -5 Development Economics 2/20/03 Page 1 of 1 Annex B2 Selected Indicators*of Bank Portfolio Performance and Management As of 1/31/2003 Indicator 2000 2001 2002 2003* PortfolioAssessment Number of Projects Under Implementationa Average ImplementationPeriod(years) 26.0 14.3 3.2 14 25.9 15.4 3.8 13 32.3 15.4 3.2 13 22.5 15.4 2.8 13 Percentof ProblemProjectsby Number Percentof ProblemProjectsby Amount a, Percentof Projectsat Risk by Number a, Percentof Projectsat Risk byAmount a, 22.5 15.4 32.3 15.4 25.9 15.4 21.4 DisbursementRatio (%) e 41.2 PortfolioManagement 13.6 15.3 26.3 10.4 CPPR duringthe year (yeslno) Yes No Yes Yes SupervisionResources(totalUS$thousands)I Average Supervision(US$thousands/project) 817 68 588 39 1,098 84 - 1,049 75 MemorandumItem Since FY 80 Last FiveFYs Proj Eva1by OED by Number Proj Eva1by OED by Amount (US$millions) 1,649.2 63 207.7 8 % of OED ProjectsRatedU or HU by Number % of OED ProjectsRatedU or HU byAmount 27.7 25.0 51.2 37.5 a. As showninthe Annual Reporton PortfolioPerformance(except for current FY). IncludesGEF. b. Averageage of projects in the Bank'scountry portfolio. c. Percentof projectsrated U or HU on development objectives (DO)andor implementationprogress (IP). d. As definedunderthe PortfolioImprovement Program. e. Ratioof disbursementsduringthe year to the undisbursedbalanceof the Bank's portfolioat the beginningof the year: Investment projectsonly. f . g. Actualsas of 1/3112003. Directcosts (source: BusinessWarehouseTable 5.2except 2003data) ' AllindicatorsareforprojectsactiveinthePortfolio,withtheexceptionofDisbursementRatio, which includesall active projectsas well as projectswhich exitedduringthe fiscal year. Page 1of 1 Annex B3 Bank Group Program Summary As of 1/31/2003 IDA Base Case LendingProgram Strategic Rewards Implementation Year Project Name US$Milions (WWL) Risks (WWL) 2003 SecondCommunityWater 40.0 M L Economic ReformTechnicalAssistance 15.0 H M NationalHIVIAIDSPrevention 10.0 H M Improving Relevance& Qualityof Undergraduate Education 30.0 H H PRSC I: Factorsof Production 110.0 H H Subtotal 205.0 2004 e-Lanka 50.0 H M Rural Poverty Reduction Initiative 40.0 H M HealthSector Operation 50.0 H M PRSC II:Welfare Reformand Rural Development 90.0 H H Subtotal 230.0 2005 NE InfrastructureRehabilitation/CapacityBuilding 40.0 M M PulblicSector ReformTechnicalAssistance 15.0 H H Education Sector Operation 50.0 M M PRSC111: PublicSector Reform 90.0 H H Subtotal 195.0 2006 Landand Water Administration 40.0 M M Services for the Urban Poor 40.0 M M PRSCIV: (To be determined) 90.0 H H Subtotal 170.0 Total WO3-FY06 800.0 a. This table presentsthe basecase programfor the next four years. b. For each project, the strategicrewards and implementationrisksare ratedas High (H), Moderate(M),or Low (L). Page 1 of 1 Annex B4 Summary of Non-LendingServices As of 113112003 Completion ActuaVPlanned Product FY Cost (US$OOO) Audiencea Objective RecentCompletions PovertyAssessment GIDIBIPD KGIPDIPS Agricultural Policy Review 2001 250.0 GIB KGIPS PetroleumProducts 2002 80.0 G KGIPS Policy Dialoguein CDD 2002 2002 45.0 30.0 GIDIB KGIPS FinancialSector Assessment 2002 300.0 GIB KGIPS On-going/Planned Country FinancialAccountabilityAssessment GIB KGIPS CountryProcurementAssessment 2003 2003 100.0 G/B KGIPS PromotingAgricultural & Rural Non-FarmGrowth 140.0 50.0 GIDIBIPD KGIPD SocialAssessment of the Conflict-AffectedAreas 2003104 2003 BIGIDIPD PDIPS Urban & Rural InvestmentClimate Survey 150.0 75.0 BIGIDIPD KGIPD SafeguardsAssessment Paper 2003104 GIB KGIPS Public ExpeditureAnalysis 2003/04/05/06 2003 1OO.O/year 20.0 G/D/B/PD KGIPS HealthSector Strategy GIDIBIPD KGIPS Report on MDGs 2003 150.0 75.0 50.0 GIDIB KGIPS Development PolicyReview EmphasizingGrowth 2004 GIDIBIPD KGIPDIPS AAA on General Education 2004 GIDIB KGIPS Financingof MunicipalServices 200.0 100.0 75.0 KG/PS 2005 2004 2004 G/D/B PovertyUpdate GIDIBIPD KGIPS Nutritionand EnvironmentalHealth G/D/B/PD KGIPS Land Policies: Lessonsfrom the LIL 2005 75.0 GIDIBIPD KGIPS Country EconomicUpdate 2005 100.0 150.0 75.0 GIDIBIPD KGIPD Update on Rural DevelopmentIssues 2006 2006 GIDIBIPD KG/PD Review of Implementationof Social Programs 2006 100.0 GIDIBIPD KGIPD Technical AssistancdOther Joint Staff Appraisal of the PRS GIDIBIPD PDIPS CountryAssistance Strategy 100.0 150.0 2003 2003 2003 GIDIBIPD KGIPS CleanAir and Fuels GIDIB KGIPS TransportllnfrastructureDialogue 125.0 75.0 G PS TechnicalAssistance on ICT Strategy 2003 G KGIPS Wildlife Conservation 2003 2003 150.0 30.0 GIDIB KGIPS a. Government(G), Donor (D), Bank (B), Public Dissemination(PD). b. KnowledgeGeneration(KG), Public Debate (PD), ProblemSolving (PS). Page 1 of 1 Annex B5 Social Indicators As of 1I31/2003 Latestsingle year Same reglodincome group Lower- South mlddle- 1970-75 iga0-85 1994-00 Asia Income POPULATION Total population,mid-year (millions) Growth rate (% annual average for period) 13.5 15.8 19.4 1,355.1 2,047.6 Urbanpopulation(% of population) 22.0 1.5 21.1 1.4 23.6 1.3 28.4 1.9 42.0 1.1 Total fertility rate (birthsper woman) 3.9 2.9 2.1 3.3 2.1 POVERTY ("hofpopulation) National headcountindex Urban headcountindex 25.0 Rural headcountindex INCOME GNI per capita (US$) Consumer price index (1995=100) 310 380 850 440 1,130 Foodprice index (1995400) 12 34 34 154 159 142 146 INCOME/CONSUMPTION DISTRIBUTION Gini index Lowest quintile (% of income or consumption) 34.4 Highest quintile (% of income or consumption) 42.8 8.0 SOCIAL INDICATORS Public expenditure Health (% of GDP) Education(% of GDP) 3.4 1.7 0.9 2.3 4.6 Social securityand welfare (% of GDP) 2.7 2.6 3.0 2.9 3.0 Net primary schoolenrollment rate 6.1 (% of age group) Total 91 Male 102 Female 103 101 91 91 Access to an improved water source (% of population) Total 87 80 Urban 83 69 95 Rural 80 91 85 92 Immunization rate (% under 12 months) Measles 89 DPT 20 95 53 89 Child malnutrition("3. 1 1 Ufeexpectancyat blrth under5years) 70 99 33 57 49 (years) Total 67 69 Male 65 66 67 69 71 73 62 62 Female 68 71 76 63 72 Mortality Under 5 (per 1,000live births) Infant (per 1,000live births) 100 44 25 15 73 33 Adult (15-59) 48 18 96 41 Male (per 1,000 population) 214 200 161 227 1 92 Matemal (per 100,000live births) Female (per 1,000population) 196 152 92 212 125 Births attended by skilled health staff (%) 65 85 95 60 between the estimatesof school-agepopulationand reportedenrollmentdata. Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollmentratios exceeding 100indicate discrepancies 2002World DevelopmentIndicatorsCD-ROM, World Bank Annex B6 Page 1 of 2 Key EconomicIndicators As of 1/31/2003 Actual Estimate Projected Indicator 1998 1999 2000 2001 2002 2003 2004 2005 2006 Nationalaccounts(as% of GDP) Gross domestic product' 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Agriculture 21.1 20.7 19.5 19.5 19.3 18.7 18.0 17.2 16.5 Industry 27.5 27.3 27.5 26.7 27.0 26.8 26.8 26.8 26.8 Services 51.4 52.1 53.0 53.8 56.0 54.5 55.2 55.5 0.0 Total consumption 80.9 80.5 82.8 84.7 84.7 84.0 82.0 80.3 78.3 Gross domestic fixed investment 25.1 27.3 28.0 22.0 22.3 24.2 26.3 27.9 29.0 Government investment 3.3 3.2 3.3 3.0 3.5 4.7 5.7 6.3 6.6 Privateinvestment 21.8 24.1 24.7 19.0 18.9 19.2 20.6 21.7 22.6 Exports (GNFS)b 36.2 35.5 39.7 37.0 35.9 36.8 38.1 38.2 39.1 Imports (GNFS) 42.2 43.3 50.5 43.7 43.0 44.7 46.4 46.5 46.6 Gross domestic savings 19.1 19.5 17.2 15.3 15.3 16.0 18.0 19.7 21.7 Gross nationalsavings' 23.4 23.5 21.4 19.5 27.2 27.6 28.9 30.1 31.4 Memorandumitems Gross domestic product 15795 15657 16305 15669 16301 17527 19111 20871 22849 (US$ millionat current prices) GNI per capita (US$, Atlas method) 810 820 850 830 820 860 920 1000 1080 Real annual growth rates (%,calculatedfrom 1982prices) Gross domestic product at market prices 4.7 4.3 6.0 -1.4 3.3 5.5 6.5 6.8 7.0 Gross domestic income 9.6 3.6 3.6 -0.3 12.9 5.9 8.5 8.4 8.1 Realannual Der caoitagrowth rates (%, calculatedfrom 1982Drices) Gross domestic predict at market'prices 3.5 2.8 4.3 -2.9 1.6 4.3 5.4 5.9 6.1 Total consumption 5.7 3.8 3.3 -1.1 3.4 3.6 5.0 5.6 4.4 Privateconsumption 5.7 3.8 2.7 16.9 3.1 3.9 5.7 6.0 4.3 Balanceof Payments(US$ millions) Exports (GNFS)b 5712 5578 6475 6183 5856 6449 7280 7972 8939 MerchandiseFOB 4798 4610 5522 4817 4793 5310 6052 6633 7483 Imports (GNFS)~ 6659 6800 8235 7135 7011 7826 8860 9695 10654 MerchandiseFOB 5889 7320 5974 6097 6834 8450 9280 Resourcebalance -947 -5980 1222 -1760 -952 -1155 -1377 -7736 1580 -1723 -1715 Net current transfers 900 912 998 960 1008 1052 1098 1137 1172 Current account balance -227 -564 -1066 -272 -399 -590 -793 -905 -872 Net privateforeigndirect investment 193 177 176 172 233 380 312 351 354 Long-termloans (net) 398 397 297 354 358 599 765 816 767 Official 376 155 154 184 407 490 307 178 91 Private 22 242 143 170 -49 110 457 638 676 Other capital(net, incl.errors& ommissions) -135 -351 -26 16 42 104 105 117 111 Change in reservesd -229 340 619 -270 -234 -493 -389 -380 -360 Memorandumitems Resourcebalance(% of GDP) -6.0 -7.8 -10.8 -6.1 -7.1 -7.9 -8.3 -8.3 -7.5 Real annualgrowthrates (YR82prices) Merchandiseexports (FOB) 13.2 4.5 9.8 2.4 -3.0 3.9 8.4 4.2 10.6 Merchandiseimports (CIF) 9.9 3.7 13.7 1.3 3.6 8.1 13.9 9.7 9.4 Page2 of 2 Annex B6 Key Economic Indicators (Continued) Actual Estimate Projected Indicator 1998 1999 2000 2001 2002 2003 2004 2005 2006 Publicfinance(as % of GDP at market prices)'17.2 Current revenues 17.7 16.8 16.5 16.5 16.9 17.9 18.7 19.1 Current expenditures 19.6 18.7 20.2 21.4 20.8 19.3 17.9 16.8 16.2 Current account surplus (+) or deficit (-) -2.4 -1.0 -3.4 -4.9 -4.3 -2.4 0.0 1.9 2.9 Capitalexpenditure 5.3 5.5 5.4 5.9 4.6 5.2 6.2 6.9 7.2 Foreignfinancing 1.7 0.7 0.7 1.6 0.1 2.0 3.0 3.2 2.7 Monetary indicators MYGDP 37.1 38.7 38.5 39.2 40.1 40.1 40.1 40.1 40.1 Growthof M2 (%) 13.2 13.4 12.8 13.6 15.0 13.5 14.0 13.2 12.4 Price indices(YR82 -100) Merchandiseexport price index 91.4 91.7 78.1 80.1 85.3 89.7 94.3 96.2 Merchandiseimport price index 94.7 84.0 97.0 108.2 87.1 76.5 79.3 78.9 78.5 78.9 Merchandiseterms of trade index 96.4 86.6 84.7 89.6 104.7 107.6 113.8 120.1 122.0 Realexchangerate (USWLCU)' 126.2 117.4 124.7 122.2 119.5 Consumerprice index (%change) 9.4 4.7 6.2 14.2 9.6 8.9 7.0 6.0 5.0 GDP deflator (%change) 9.2 4.2 6.2 13.2 9.3 8.9 7.0 6.0 5.0 a. GDP at factor cost. c. Includes net unrequitedtransfers excludingofficialcapitalgrants. b. "GNFS"denotes "goods and nonfactor services." d. Includesuse of IMFresources. f.e. "LCU"denotes "localcurrency units."An increasein US$/LCUdenotes appreciation. Consolidatedcentral government. Page 1of 1 Annex E7 Key ExposureIndicators As of 1/31/2003 Indicator c Actual Estimate Projected Totaldebt outstanding& disbursed(TOO) (US$millions)a 9732 9019 8529 8961 9599 10392 11263 11994 Netdisbursements(US$millions) a -714 -490 432 638 793 871 731 Totaldebt service (TDS) (US$millions)a 738 777 716 674 850 737 772 901 Debtanddebtserviceindicators (%) TDOMGS 43.1 115.8 115.2 125.9 123.0 119.0 118.6 14.0 TDOIGDP 62.2 55.3 54.4 59.6 58.7 58.2 57.7 55.6 TDSMGS 10.8 10.0 9.7 9.5 10.9 8.4 8.1 8.6 IBRDexposureindicators (%) IBRD DWpublic DS 1.3 1.o 0.9 0.9 0.3 0.3 0.2 0.0 Preferredcreditor DS/public 27.1 24.2 28.3 27.9 23.1 30.8 29.3 29.6 DS (%) IBRD DS/XGS 0.1 0.1 0.1 0.1 0.0 0.0 IBRDTDO (US$millions) 0.0 0.0 19.7 13.3 8.3 4.0 2.0 1.o 0.0 0.0 Shareof IBRDportfolio (%) 0.0 0.0 0.0 0.0 0.0 0.0 IDATDO (US$millions) 0.0 0.0 1652 1610 1570 1597 1705 1807 1908 2007 IFC (US$millions) Loans 50 Equityand quasi-equitye 18 MlGA Gross outstandingguarantees(US$millions) ' 4.7 3.4 3.2 1.7 ... 1.7 ... Note: Debtdataare from the WorldBank Global DevelopmentFinanceDatabaseandmaydifferfrom TextTables 1and2 that are basedon IMFsources. a. Includespublicandpublicly guaranteeddebt, privatenonguaranteed,useof IMFcredits andnetshort-termcapital. b. "XGS"denotes exports of goods andservices, includingworkers' remittances. c. Preferredcreditorsaredefinedas IBRD, IDA, the regionalmultilateraldevelopmentbanks, the IMF, andthe Bankfor InternationalSettlements. d. Includespresentvalue of guarantees. f. 2003 is as of endsecondquarter FY03. e. Includesequity and quasi-equitytypes of both loan and equity instruments. 3 8 i i i5 3 v)v) v) v)3 v) v)v) v) v) v ) O X X 'P n H I P n2 .- H Page 2 of 2 Annex B8 Statementof IFC's Heldand DisbursedPortfolio As of 1I31I2003 (In US$ Millions) Held Disbursed FY Approval Company Loan Equity All Loan Equity All 1981 LankaHotels 0.0 0.6 0.0 0.0 0.6 0.0 1988195 UnionAssurance 0.0 1.o 0.0 0.0 1.o 0.0 1996 Lanka Orix Lease 0.4 0.0 0.0 0.4 0.0 0.0 1996197 Asia Power 7.9 2.3 6.0 7.9 2.3 6.0 1997 LOFAC 1.o 0.3 0.0 1.o 0.2 0.0 1997 PackagesLanka 0.0 1.1 0.0 0.0 1.1 0.0 1998 Apollo Lanka 0.0 1.1 0.0 0.0 1.1 0.0 1998 MLL 0.5 0.0 0.0 0.5 0.0 0.0 1999 Aitken Spence 0.0 0.0 0.0 0.0 0.0 0.0 1999 Fitch Srilanka 0.0 0.1 0.0 0.0 0.1 0.0 1999 NationsTrust 0.0 1.1 0.0 0.0 1.1 0.0 1999 SAGT 35.0 7.3 0.0 15.0 3.6 0.0 2000 NDB HousingCorp 0.0 1.1 0.0 0.0 1.1 0.0 2000 Suntel 0.0 7.5 0.0 0.0 7.5 0.0 Total Portfolio: 44.7 23.5 6.0 24.7 19.6 6.0 Approvals PendingCommitment Loan Equity Quasi Partic 2003 CBCeylon 14.0 11.0 0.0 0.0 Total PendingCommitment: 14.0 11.0 0.0 0.0 P 0 c g! f '1'1'I'1 L L L L LLLLLLLL -52e 5 L E o n 2 % 5uL iE (E ic i i1 E i L ? ii L 5c B 3 6 ~ i3 EL x * L I t I IH I N (1 2 'i r ! o Z 3 I I s8 m c) n 9 1 b M . I L I k 0 2 h x ri: x I Appendix I Page 1of 6 Appendix I The Root Causesof the Ethnic Conflictin Sri Lanka' Background The ethnic conflict in Sri Lanka has many root causes and consequences that are closely inter- linked. However, given its complexities, it should not be assumed that these causes are part of linear historical processes where one event led to another. Often many of the issues that may be regarded as root causes arose within a single but extended context and equally as often, simultaneously. It is primarily within the context of ethnic politics that language and education policy can be located. However, for discussion purposes it is necessary to separate these issues as clearly identifiable themes that would emerge in any analysis of the Sri Lankan conflict. In general, these themes can be broadly identified as: Ethnic politics and the interpretation of the past; Politicsof language; Politics of education;and Other factors, including employment and land. DemographicPatterns Sri Lankan societ is an ethno-religious mosaic2and within the ethnic groups, there are clear religious divisions as well To a certain extent, ethnicity and religion also have a regional basis, which Y. is a significant reason why the Tamil militancy has a strong geographical dimension, which extended to the demand of a separate independent state. Of the ethnic and religious groups, Tamil Hindus predominate in the Northern Province and maintain a significant presence in the Eastern Province. The Eastern Province is an ethnicallymixed area where Tamils, Muslims and Sinhaleseare found in sizeable numbers even though Tamils have a slightly higher statistical edge. Indian Tamils-the descendants of laborers brought from Southern India by the British in the 19" century to work on tea and coffee estates-are concentrated in parts of the Central, Uwa and Sabaragamuwa Provinces. Sinhalese Buddhists predominate in all parts of the country except the Northern and Eastern Provinces. Muslims have a significant concentration in the Eastern Province, but generally are scattered throughout the country. Christians maintain a significant presence in the coastal areas as a result of over 500 years of constant European colonial presence and the consequent Christianization of significant numbers of the population in these areas. However, Christians are found in all parts of the country in small numbers. Malays are mostly concentrated in and around the city of Colombo and the Western Province. By the time Sri Lanka achieved independence in 1948from the UK, there were expectationsthat the country would become a model democracy. Universal adult franchise had been introduced in the 1 This draws heavily from "The Ethnic Conflict in Sri Lanka: A Historical and Sociopolitical Outline", by Dr. Sasanka Perera, of the Department of Sociology, the University of Colombo, December 1999. At the time this paper was written, Dr. Perera was a full-time staff member of the World Bank. The views and opinions expressed here are those of the CAS team and do not necessarily represent those of the World Bank or the Government of Sri Lanka. 2 Based on 1981 statistics, the population is as follows: Sinhalese: 74.0%;Sri Lankan Tamils: 12.7%;Indian Tamils: 5.5%; Muslims: 7.1%; Burghers: 0.3%; Malays (followers of Islam): 0.3%; and numerous other small groups: 0.2%. 3 Buddhists make up 69.3% of the population; Hindus, account for 15.5%; Muslims-who constitute the only ethnic group who have a single term to denote ethnicity and religion-along with Malays (also Muslims) account for 7.6%. Christians account for 7.4%. Appendix I Page 2 of 6 1931, democratic institutions and traditions had been in place and political violence was not an issue. Moreover, by the 1950s literacy in Sri Lanka was on the rise and there were no serious indicators of economic or social catastrophesof the years to come. However, even before independence, there were clear indications of ethnic politics that were to emerge later. The Emergenceof Ethnic Politics Relations between Tamils and Sinhalesehave not always or consistentlybeen antagonistic. This happened only in times of external threats from South India after the formulation of clear Sinhaleseand Tamil ethnic or cultural identitiesin the 9* (or 12*) century. These wars were wars of dominance fought between regional rulers and were not `race' wars as defined later. Historical chronicles compiled by Sinhalese Buddhist monks defined these wars as campaigns undertaken to protect Buddhism and the Sinhalese nation. Mainly reinforced by formal education, many Sinhalese accept these problematic interpretations as fact today. In the eyes of many Sri Lankans, these interpretations seem to suggest a long and bloody tradition in which hope for reconciliation is minimal. Significantly, these interpretations-with their potent and emotional contents-have also found their way into school textbooks, which is an important aspect of social and political socialization in contemporary Sri Lanka. Forces of Sinhalese nationalism perpetuating notions of eternal conflict with Tamils had been gathering strength since before independence. Many of them were Sinhalese-educated rural people whose nationalist aspirations for cultural transformation, power and status did not automatically materialize with independence. Soon after independence it was clear that a conflict was emerging between Sinhalese-educatedrural elite and the English-educatedurban ruling elite. Meanwhile, one million Indian Tamils were disenfranchised in 1948 under the Ceylon Citizenship Act. Of this, approximately 350,000 were repatriated to India under the Indo-Ceylon Agreement of 1964. Over the years, subsequent governments conferred citizenship rights to the rest. The Ceylon CitizenshipAct served to reinforce ethnic politics and reduced the electoral leverage of the Indian Tamils who remain an impoverishedcommunity today. Ethnic Conflictand Language In addition to the barriers imposed by the continued use of the English language as the official language after independence, the emerging nationalist forces perceived that Sri Lankan Tamils had access to a disproportionateshare of power as a consequence of educational opportunitiesin the colonial period and were also disproportionately represented in the civil administration.Moreover, considerable mercantile interests were also controlled by non-Sinhalese groups. These fears and concerns were a basis for the politics of language that was to emerge. As early as 1944, politicians proposed resolutions in Parliament to declare Sinhalesethe official language, while other amendments proposed both Sinhalese and Tamil as official languages4. A 1944 resolution specified that Sinhalese and Tamil would become the languages of instruction in schools, examinations for public services and legislative proceedings. The resolution was approved by 27 to 2 in the Sinhalese-dominated legislature. Committees were establishedto advise on how these changes were to be implemented, however, there was little progress in implementing the policy. In 1956, S.W.R.D Bandaranaike was elected Prime Minister with a main election promise of establishing Sinhaleseas the official language of the country, replacingEnglish. The new governmentfulfilledthis promise-through 4 In the colonial period, both Tamil and Sinhalese politicians espoused the idea of swabasha, which, literally translates into `native languages'. By this, they meant that in the post independent period primacy of place should be given to local languages, namely Sinhalese and Tamil. Appendix I Page 3 of 4 the passage of the so-called "Sinhalese Only Bill" (OfficialLanguage Act, No. 33 of 1956)-soon after the election giving no status of parity to the Tamil language. The language issue in many ways brought the Sinhalese-Tamilconflict into the forefront of Sri Lankan politics. In terms of the dominant strands of Sinhalesenationalism,the Sinhaleselanguage along with the Buddhist religion necessarily had to occupy the pre-eminent position in society. This was perceived to be the only way the glory of ancient Sinhalese civilization could be revitalized. Even though Tamil has been decreed an official language along with Sinhalese in terms of the 13* Amendment to the Constitution (in 1987), the damage caused by the politics of language generally remain unaddressed. Moreover, the vast gap between the official recognition of Tamil as an official language and the practical implementation of the provisions and conditions it entails, is yet to be bridged. Ethnic Conflictand Education Since the 1970s, access to education-particularly access to higher education-has been ethnicized. In addition, many other aspects of education-including the structural organization of schools and universities, contents of textbooks and training of teachers-have impacted directly on ethnic conflict. Compared to other ethnic and religious groups in the country, Tamils have had strong cultural norms which valued education. Many Tamils attended English Ianguage schools which were the passport to higher education and better employment in the colonial period. As a consequence of well- funded American missionary activities, the Tamil-dominated Northern Province had comparatively better facilitiesfor English languageand pre-universityeducation. There was also a limit beyond which Tamils could not be absorbed within the traditional land- based occupations in the arid areas where they predominated. This further encouraged many to seek employment through education. The net result was the relative over-representation of Tamils in higher education,professions and the administration in comparison to their status in the general population'. In this context, post independence Sinhalese nationalism sought to curb the Tamil presence in education and thus also in the professions and civil administration. While the passing of the "Sinhalese Only Bill" was one attempt in this process, more direct hurdles were placed on the path of Tamils' realization of educational goals since the 1970s. The constitutional provisions in the 1972Constitution favoring the Sinhalese language and Buddhist religion, along with their educational policies, convinced many Tamils that they had been perceived as a marginal community. From 1971 onwards, a new "standardization" policy was adopted, which ensured that the number of students who sat for university entrance examination in that language . In real terms this number of students qualifying for university entrance from each language was Froportionate to the meant that Tamil speaking students had to score much higher than Sinhalese speaking students to gain admission to universities. This also meant that for the first time, the integrity of university admissions policy was tampered with by using ethnicity as a basis. In 1972,a district quota system was introduced 5 By independence, Tamils accounted for over 30% of govemment services admissions, a share larger than their proportion in the general population-i.e., Sri Lankan and Indian Tamils have never totaled more than 25%. By 1956, it is estimated that Tamils constituted 50% of the clerical personnel of the railway, postal and customs services, 60% of all doctors, engineers and lawyers, and 40%of other labor forces. 6 Prior to this, individuals entered universities on the basis of national competitive examinations marked on a uniform basis. Those who scored highest, gained access to different faculties in universities irrespective of their ethnicity or districts from which they came. While there was no inherent bias, Tamils from Jaffna and Colombo did particularly well-e.g., in the 1969-1970 intake to science and engineering courses, Tamils constituted 35% and over 45% of the intake in medical faculties. Appendix 1 Page 4 of6 in order to benefit those not having adequate access to educationalfacilitieswithin each language. These changeshad a serious impact on the demographicpatterns of university entry'. In general, these policies seriously impacted upon not only the chances of Tamils to gain access to higher education, but also on the overall process of ethnic relations as well. In 1977, the language- based admission policy was abolished and since that time various adjustmentshave been introduced on the basis of merit, district quotas, disadvantaged area quotas, etc. While the obvious ethno-linguistic discrimination of the 1971policy has long been dismantled, many Tamil youth still feel that they are discriminated against in accessto higher education. Furthermore, the ethnic divisions in Sri Lanka tend to manifest within the education structure in a number of other ways-Le., the organizational structure of educational institutions, the training of teachers and the content of textbooks and syllabi-which are much more long lasting and far more insidious than the more visibleethno-linguistic policies of the 1970s. Related to the organizational structure of educational institutions,it is clear that language-based segregation takes place. This does not apply to privately-owned institutions in which instruction is in English, but applies to institutions with more than one language of instruction(such as some universities, mixed media schools and technical institutes)where a system of internal segregationtakes place. In real terms Sinhalese students are segregated into Sinhalese-languageschools and Tamil and Tamil-speaking Muslim students are segregated into Tamil-language schools. If they enter universities or technical institutes, this segregation is likely to continue unless they o t to, and have the money to receive, a non- segregatedfurthereducation in English in private institutions t. The training of teachers poses similar problems, as most teachers in the system today are products of the segregated education system they are teaching in. Moreover, they are also trained in institutions that are internally segregated except in the training of teachers specializing in subjects such as English. Few teacher training institutions in operation today, have seriously taken into account the need to train teachers who can teach in a context keeping in mind the challenges of a multicultural society. There is a clear disjuncture between current statepolicy towards ethnicrelations and the manner in which teachersare trained. Since the early-l98Os, many have stressed the role school texts play in shaping ethnic relations in the country. Ideally, school texts (e.g., texts used for teaching religion, language, social studies, etc.) should portray the multi-cultural reality of Sri Lankan society and address issues that are important in this context while approachingthe prescribed subject matter. Schooltexts have been written, supervised, produced and distributed by agencies of the state, meaning that their contents reflect state policy or thinking. Furthermore, ethnic politics have also been played out in the process of text production. In recent times some of the more problematic contents in these texts have been removed in the process of revision and re-writing'. Ironically however, sometimes this has gone to the opposite extreme--e.g., in some texts all references to ethnicity and related issues have been removed. 7 Tamil representation in the science-based disciplines fell from 35% in 1970 to 19% in 1975, while Sinhalese representation in all disciplines increased quite dramatically. 8 Some state institutions (e.g., university departments where instruction is given in all three languages such as the Department of Law at the University of Colombo) are exceptions to this as students can opt for the medium of instruction of their choice. But given the legacy of segregated school education and the general poor state of English language education, very few have the required background or make the choice to educate themselves in a non- segregated environment even when given the choice. 9 Support for development of new textbooks, along with teacher training is being provided under two on-going IDA projects: Second General Education (Cr. 3014-CE) and Teacher Education and Teacher Deployment (Cr. 2881-CE). Appendix I Page 5 of 6 Ethnic Conflictand Employment As mentioned above, both language and education policies have placed barriers on employment, especially in the administrative and professional ranks in which Tamils were at one point "over- represented." In the private sector-which for the most part continued to work in English-employment opportunities for Tamils and other minorities remained relatively open. As a result, today some of the leading business ventures in the country are Tamil-owned. However, as a result of the discrimination that has occurred in state sectoremploymentpractices over time, there is a tendency among many Tamils to perceive of themselves as generally discriminatedagainst in employment. According to the census of public sector and corporate sector employment in 1990,Sri Lankan Tamils accounted for 5.9% of those employed in the state services. This represents a significantdrop from earlieryears. Ethnic Conflictand the Issue of Land The issue of ownership over and access to land has also been a consistent area in which ethnic politics in Sri Lanka have manifested, and have sustained themselves over the years. As noted, one of the peculiarities in the demographic patterns in Sri Lanka is the relative concentration of certain ethnic groups in certain geographical regions. The clearest site of politics of land and ethnicity has been in the sparsely populated areas of the dry zone in the North Central Provinceand the Eastern Province". When post independence governments decided to settle poor Sinhalese farmersfrom the densely populated wet zone areas of the country, many Sinhalese politicians and people in general viewed the process as a "reclamation and recreation in the present of the glorious Sinhalese Buddhist past." The so-called "colonization schemes''became an integral aspect of SinhaleseBuddhist `nation-building.' Not surprisingly,the Tamils had a completely different perception of the colonization of the dry zone. The notion of the `traditional Tamil homeland' became a potent component of popular Tamil political imagination. Since Sinhaleseirrigation settlements in the North Central and Eastern Provinces occurred under direct state sponsorship, it appeared to many Tamils as a deliberate attempt of the Sinhalese-dominated state to marginalize them further by decreasing their numbers in the area. The colonization schemes did alter the demographic patterns, particularly in the Eastern Province in a significant way". A decision was made in the late-1970s to acceleratethe development of the dry zone through the "Accelerated Mahaweli Program," that provided for the opening up of dry zone areas further for agricultureand resettlement of people. Only in 1986,as a result of continuing Tamil agitations, did the government agree to allocate the remaining land under the Mahaweli Program on the basis of the ethnic distributionof each ethnicgroup in the total population. Meanwhile, the Muslim community tended to reject the countervailing notion of a traditional Tamil homeland in the North East region. Growing cooperation between the security forces and Muslim home guards led to LTTE attacks on Muslim villages in the East, armed counter attacks on Tamil communities in the South East and to the eviction of 55,000 Muslims from the North in 1990 most of whom remain displacedtoday. 10 The dry zone areas of the North Central Province had special socio-cultural significance for Sinhalese in term of their popular imagination of the past-Le., it was area where a number of ancient Sinhalese capitals were located in a time considered as the "golden era of Sinhalese civilization." It was also where many of the ruins of these ancient cities and citadels continued to be a source of pride to many Sinhalese. I I According to census data, the Sinhalese population-which constituted 3% of the population in the Trincomalee District in the east in 1921-was 30% in 1981. Similarly, Amparai District which used to be a largely Tamil and Muslim-majority area is now a Sinhalese-majority area. Appendix I Page 6 of 6 Loss of Confidencein Non-violentand DemocraticPolitics Ethnic politics and fears of discrimination led Tamil politicians in the Federal direction from a very early stage of recent Sri Lankan politics. Since the 1930s,and much more clearly since the 1950s, Tamil political parties have been asking for greater political autonomy for the areas in which they predominate. Such a devolution of power has been recognized at different times as a means to diffuse tensions between the two groups. A number of pacts had been formulated to define the modalities for devolution of power, including the Bandaranaike-Chelvanayagam Pact in July 1957 that offered a framework for regional devolution. But due to various political pressures, the provisions of the pact were never implemented. In 1965, the Dudley-ChelvanayagamPact was formulated and agreed upon. But, yet again the provisions of this pact-quite similar to the earlierone-were annulled. The failure to implement these proposals led to Tamil demands for separation, instead of Federalismthat they had been mostly seeking up to that point. On the part of many Tamils-particularly Tamil youth from the north-the failure of these pacts also marked a disintegration of confidence in parliamentary politics in general. In 1977, the Tamil United Liberation Front won an overwhelming electoral victory on a highly charged political platform of separatism. In 1980,the District Development Council Act was passed in Parliament and elections to the councils were held in July 1981. But given the lack of government commitment to decentralization of power, this attempt also proved to be a failure. After this point, there were clear indications that the politics of Tamil society were shiftingfrom the commitment to parliamentary democracy (held by its conservative leaders) to a commitment to armed struggle (held by considerable sections of Tamil youth). In 1979, the government enacted the draconian Prevention of TerrorismAct as a an interim measure, but in 1982it was amended to be part of the permanent law. The Emergenceof Armed Conflict Until the early-l980s, ethnic conflict was primarily limited to the political arena where destruction to property and life was minimal. However, violence had occurred on number of occasions, such as in the passing of the "Sinhalese Only Bill" in 1956. Similar ethnic riots involving Tamils and Sinhalese occurred in 1958, 1977 and 1981, with the most violent and destructive taking place in July 1983. Many observers see the violence of July 1983as a turning point in the conflict. After the early-1980s, such sporadic cases of violence gradually gave way to institutionalized political violence which became a main feature of the conflict. At this stage, organized or institutionalized political violence was widely utilized by both the political parties in power and Tamil youth who organized themselves into armed guerrilla outfits. This development marked the militarization and the steady brutalization of the Sri Lankan ethnic conflict. The failure of parliamentary politics and the entrenchment of ethnic politics which led to frustration among Tamil youth, eventually made some of these youth organize themselves into armed groups for the ostensiblepurpose of seekingindependence from Sinhalesedomination. The first of these groups was the Tamil Tigers which later came to be known as the Liberation Tigers of Tamil Elam or LTTE. In 1978,the Tamil Tigers carried out a series of bank robberies and also assassinated a number of police officers, many of whom were Tamil. Bank robberies and selected assassination of individuals within the Tamil community (who were considered traitors) later led to massacres of Sinhalese and Muslim civilians in the border villages and contestedareas. By the 1980s,this phase in the evolution of political violence expanded to include indiscriminate bomb attacks in the Sinhalese-dominated south, particularly in Colombo. Subsequently, the conflict reached civil war proportions and Indian peace- keeping forces were sent to Sri Lanka in 1987. The Indian forces left in 1990 and the civil conflict between the Government and LTTE resumed three months later. The conflict escalated in the late-1990s with conventionalbattles being fought to captureterritory. Appendix I1 Page I of 4 Appendix I1 Fund Relations Note Public InformationNotice (PIN) No. 02/100 InternationalMonetary Fund September 11,2002 700 19" Street, N W Washington,D. C. 2043, USA Sri Lanka: Public InformationNotice Article IV consultation with Sri Lanka'. On September3, 2002, the Executive Board of the International Monetary Fund (IMF)concluded the Background Sri Lanka's economy grew steadily during the last two decades, despite the civil conflict, which has been going on for over 9 years. During this period, financial markets were liberalized, the outward orientation of the economy was significantly increased, and a more diversified export base established. However, large fiscal imbalances (which averaged more than 9 percent of GDP during this period) led to prolonged periods of public dissaving. Slow progress in key structural areas, including civil service reform, restructuring of state-owned enterprises, financial and labor market reforms, underminedthe economy's growthpotential. Faced with low reserves, large import bills, and an exchange rate level and regime (a crawling band) that was no longer credible, the authoritiesinitiateda program of economic stabilization.The Central Bank of Sri Lanka (CBSL) floated the exchange rate on January 23, 2001 and committed to an ambitious stabilizationprogram, supported by a Stand-By Arrangement, which was approved by the Board on April 20, 2001. As envisaged, the current account deficit narrowed, and the CBSL succeededin building up net internationalreserves with a broadly stable exchange rate. At end-June 2001, the program had met all its key objectives. However, political developments complicated economic policymaking during the second half of 2001. During this time, the government was not able to take correctivepolicies to keep the program on track in the face of worseningcircumstances. GDP contractedby about 1%percent in 2001-the first contraction since independencein 1948.The global recession led to stagnant demand overseas for garments and textiles-which account for half of exports. Due to the drought, agricultural output declined more than 3 percent and low water reservoir levels led to widespread power cuts. The attack on Colombo airport and the events of September 11 also exacerbated the slowdown. While underlying inflation was close to the program target of 8 percent (end-yearbasis) for 2001, drought-affectedfood prices drove up the headline rate. The official Colombo Consumer Price Index (food items account for 65 percent of the CCPI basket) increased 10%percent in the 12months to December 2001. I Under Article IV of the IMFs Articles of Agreement, the IMF holds bilateral discussions with members, usually every country's economic developments and policies. On retum to headquarters, the staff prepares a report, which forms the year. A staff team visits the country, collects economic and financial information, and discusses with officials the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman authorities. The PIN summarizes the views of the Executive Board as expressed during the September 3d Executive of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's Board discussion on the staff report. Appendix II Page 2 of 4 Although, the external reserve losses of 2000 were partly reversed, balance of payments developments in 2001 were weaker than programmed due to the external and domestic shocks and delays in external financing. Private capital flows (including privatization receipts) fell below expectations as structural reforms were delayed and investor confidence was undermined. After a good start, the envisioned fiscal stabilization in 2001 did not materialize. In the second half of the year, the slowing economy and a lack of resolve weakened the budget performance considerably. Instead of declining as planned, the fiscal deficit rose in 2001 by 1 percentage point to almost 11 percent of GDP. Revenue suffered from slower growth, election-related tax cuts, and a lack of progress on tax administration reform. On the expenditure side, despite tight controls on nonwage recurrent spending, the authorities failed to tackle the politically sensitive spending on Samurdhi and subsidies. Fiscal laxity intensified in the run-up to the December 2001 elections, with the granting of large wage and pension increases. There was also an overrun in defense spending. The program target on borrowing by public corporations was exceeded due to large losses by the Ceylon Electricity Board (CEB). Monetary policy was constrained by the fiscal situation, requiring high real interest rates to counter exchange rate and inflationary pressures during most of 2000 and the early part of 2001. However, the CBSL progressively reduced rates during the last three quarters of 2001 because of the weak economy. By end-2001, the reverse rep0 rate was 900 basis points lower than its rate in January 2001. Despite the weak economy and the concomitant compression of credit to the private sector, broad money growth slightly exceeded the 2001 target (13% percent) reflecting the increased public sector borrowing requirement. Following victory in the December elections, the United National Front (UNF) government committed to deal with the major economic challenges it faced and move ahead with the program. The new government presented a strong budget in March 2002, which demonstrated their commitment to fiscal consolidation and structural reforms to lay the foundations for private sector led growth in the medium-term. Substantial progress was made on the macroeconomic stabilization front during the first half of 2002. Inflation showed a trend decline-headline inflation was in the range 8-9 percent for the 12months to August, consistent with the year end target. GDP growth bottomed out in the first quarter GDP. The external position has stabilized and the rupee remained broadly stable, The CBSL continued to maintain a broadly prudent monetary stance. Fiscal consolidation has began which is a key program objective. The financial position of the public corporations also stabilized over January-June 2002. In addition, major initiatives have been taken to resolve the civil conflict-a permanent ceasefire is in operation and peace talks are expected to commence in Thailand in September. EconomicProspects2 Modest growth of 3%-4 percent is expected in 2002, reflecting in part the gradual pace of recovery in external demand. With improved rainfall, early indications are that agricultural output will rebound during the second half of 2002. Although some recovery is expected in both the garment and tea sectors, which should boost manufacturing activity, significant turnaround in exports is not expected 2 more updated outlook provided in the main text. It should be noted that this Appendix is as of September 3, 2002 and as such, the economic outlook deviates from the Appendix II Page 3 of 4 until the latter part of 2002. Headline inflation through August indicates that the annual inflation target of 7-8 percent is achievable. The CBSL continued to maintain a prudent monetary stance and fiscal data through June suggest that the 8%percent deficit target is achievable. Nominal interest rates are expected to decline during the second half of 2002 as inflation comes down and fiscal consolidation takes hold and confidence begins to strengthen. The rupee, which is freely floating, has remained stable in recent months. The trade deficit narrowed significantly during the first four months of 2002 before increasing in May, and official reserves continued to rise steadily through August. Preliminary data suggest that recent progress on the peace front has improved the outlook for both portfolio and FDI flows. Thus, the external position is expected to strengthen, and gross official reserves are projected to rise to $1% billion, about 2%months of imports of goods and services. Executive Board Assessment Executive Directors noted that Sri Lanka is at a critical juncture-despite recent improvements, the macroeconomic situation remains fragile, and achieving sustainable high growth requires major adjustments. Directors also noted that resolution of the civil conflict and the scope for generating growth opportunities are closely intertwined. Directors welcomed the fact that the cease-fire is already providing an economic boost to the country through lower security spending and renewed economic activity in the country's conflict-affected North and East. Sustained peace would allow budgetary resources to be reallocated to social programs and building or rehabilitating infrastructure, especially in the war-tom parts of the country. Directors welcomed that the government's key macroeconomic objectives under the Stand-By Arrangement had been achieved, with reserves being rebuilt and fiscal consolidation and several structural reforms initiated, especially in the public sector. Nevertheless, Directors observed that the government's adjustment program has significant downside risks. In particular, there remain risks of drought, and the long-term electricity shortages are still a major concern. Directors were also concerned that any resumption of political uncertainties could slow down the peace momentum, and undermine the fiscal position. Directors welcomed the authorities' intention to press ahead with fiscal consolidation, which is essential to ensuring fiscal and external sustainability over the medium term. They welcomed the introduction of the new VAT, but stressed that the government should press on with other measures to reform the tax system and administration. To contain current spending, the government should also stand firm on its disciplined approach to wage and recruitment policies and defense spending. In that connection, Directors welcomed the newly formed Defense Spending Monitoring Committee. In addition, they urged the authorities to avoid having subsidies and transfers exceed the budget provisions, and they should resist any further broad cost-of-living relief measures, including tax cuts and administered price adjustments, that would undermine the financial viability of the budget or the public corporations. If needed, the authorities should stand ready to take additional measures to ensure that the broad fiscal goals are achieved. Directors stressed that the 2003 budget will need to continue the path of fiscal consolidation, with the focus on controlling current expenditures. They urged the authorities to extend the VAT to the retail level and remove exemptions. The proposed unified revenue authority would likely soon contribute to enhancing tax administration. Appendix I1 Page 4 of 4 Directors considered that firm fiscal consolidation would enable the CBSL to maintain a prudent monetary stance, while balancing the need to provide sufficient and affordable bank credit to the private sector. While welcoming the gradual declinein policy interest rates this year, in line with the path of inflation, Directors urged the CBSL to avoid further significant easing until it is clear that fiscal consolidationhas taken hold. Directors endorsed the authorities'current exchange rate policy and their commitment to improve the functioning of the interbank foreign exchange market by implementing the Financial System Stability Assessment (FSSA) recommendations. They agreed that CBSL's intervention should continue to aim primarily at realizing the net foreign asset path of the monetary program, with only limited smoothingof short-termexchangerate volatility. Directors emphasized the need to strengthen the banking system, which, together with a stable macroeconomic environment, would provide a stronger basis for a gradual and sequenced form of capital account liberalization. They called for further strengthening of the CBSL's supervisory function. They welcomed the authorities' decision to tackle the problems of Peoples Bank and to improve the performance of the Bank of Ceylon, with the help of technical assistance from the Fund and the World Bank. The authorities were encouraged to finalize the draft law on anti-money laundering, in the light of the Financial Sector Assessment Program (FSAP) mission's recommendations. Looking ahead, Directors noted that a major challenge for the authorities is to press ahead with deeper structural refom measures to promote growth and reduce poverty. They endorsed the authorities'structural reform agenda, and were encouragedby the initial steps taken on the structural front. The measures to restructure the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB), and to invite private participation in those companies under an appropriate regulatory framework, were welcomed. More ambitious privatization was recommended, which could provide resources for governmentdebt reduction, and contribute to long-termeconomic growth and private sector development.Over the medium term, further reform of public expenditure and the financial sector, restructuring of public sector institutions, strengthening the tax collection agencies, and labor market reforms would serve to improve public sector effectiveness and promote private sectorgrowth. Directors noted that data quality and timeliness are satisfactoryfor surveillance.They looked forward to Sri Lanka soon subscribing to the SpecialData DisseminationStandard (SDDS). For questions,please contact Mr. Jahangir Aziz (Mission Chief on Sri Lanka, 202-623-7693)or Mr. Lamin Leigh (Desk Economist, 202-623-6518)'Division 9, Asia and Pacific Department,IMF. Appendix III Page 1of 15 Appendix I11 CAS CompletionReport Country: SriLanka Date of CAS: May 21, 1996 Date of Progress Report: December 23, 1998 Period covered by the CAS CompletionReport: July 1996-December2002 CAS CompletionReport completed by: Deborah Bateman,Country Coordinatorfor Sri Lanka Date: December 6, 2002 A. CountryDevelopment Results At the time the Country Assistance Strategy (CAS) was written in 1996, the most important country development results which the CAS were aligned with included: (i) reducing poverty, especially in rural areas;(ii) improvingthe quality of education and health services;(iii) obtaining higher and steady growth rates; and (iv) reducing unemployment (see Table 1). Although the Millennium Development Goals (MDGs)are a much more recent concept, a number of the development results with which the CAS was aligned-specifically, reducing poverty, improving the quality of education and health services and reducing unemployment-are directly related to the MDGs. However, it is important to note that at the time the CAS was written, Sri Lanka's impressive social achievements-i.e., low infant mortality; virtually universal primary school enrollment,with enrollment rates for girls comparable to those for boys throughout the system; and gender disparitiesin wage levels among the lowest in the world-set it apart from most low and middle incomeeconomies. While it appearsthat some progress has been made in achieving the country developmentresults, in many areas it is difficult to measure progress given a lack of data and clear indicators. Initially growth rates improved slightly, but due to the sharp downturn in 2001-in which negative GDP growth was recorded for the first time since Independence-Sri Lanka is far from achieving the higher, steadygrowth rate that it desires. Furthermore, while unemployment has also declined during the period, it still remains high and identifyingnew sources of employment remains a chief concern. B. CAS Outcomesthe Bank Expected to Influencethrough its Interventions The specific CAS outcomes focused on key areas required to help Sri Lanka realize its dream of economic growth and poverty reduction comparableto that of its more prosperous East Asian neighbors. CAS benchmarks were established in the areas of: (i) improving fiscal discipline/ensuring sustainable macroeconomic balances; (ii) developing/promotingthe private sector; (iii) enhancing social protection/ building human capital; and (v) improving portfolio performance. There are a number of direct links between these and the country development results+.g., improving/promoting the private sector is directlyrelated to obtaining higher and steady growth rates and reducing unemployment. However, many of the linkages are more indirect--e.g., improving fiscal discipline and enhancing social protection are indirectly linked with improvingthe quality of education and health. There has been considerable progress on meeting many of the CAS outcomes (see Table l), although much of the progress has been quite recent and as a result, the remaining agenda is substantial. Specifically: Appendix 111 Page 2 of 15 Improving fiscal discipline/ensuring sustainable macroeconomic balancenthere have been periods of weak fiscal discipline during the period-in part associated with the almost annual pre-election "hand-outs." Nevertheless, the previous administration did make some notable progress-including entering into a Stand-by Arrangement (SBA) with the IMF in April 2001-and the current administration(elected in December 2001)is continuingwith serious steps towards fiscal consolidation. With regard to specific targets, initially the overall budget deficit declined, but starting in 2000, weakening revenue performance and increasing expenditures (many related to the security situation and the large debt burden) have resulted in relatively high deficits. The current commitment to ensuring macroeconomic stability and institutionalizing fiscal discipline is strong, but in a peace scenario with large reconstruction needs, there is a possibility that high deficits could remain in the coming years. On the issue of subsidies, there has been good progress-even prior to 2002-with many large subsidies removed and the few that remain are more limited and closely monitored. With regard to the tax system, there have been impressive gains with the introduction of a goods and services tax (GST), which more recently (August 2002) has been replaced by a VAT. DeveIoping/promoting the private sector-there has been significant progress over the period on number of fronts. With regard to privatization, there was progress early on with the successful privatization of the plantations (1996) and the national telecommunicationscompany (SLT). Following this, there was little action for a number of years, due in part to frequent elections that slowed the momentum for structural reforms. Nevertheless, 2002 has seen a burst of activity, including the privatization of two sugar companies and Lanka Marine, along with progress toward unbundling the electricity company (CEB) and plans to place additionalsharesof SLT on the stock exchange. With regard to People's Bank, the Government is exploring a number of options (developed with lMFA3ank assistance) and will announce its plans in mid- 2003. Furthermore,early in the period there were some reductionsin Government interference in the domestic agriculturalmarket-including closing the Paddy Marketing Board. More recently, there has been an acceleration of implementation of the pilot land titling program, but, as identified in a recent Bank Report ("Sri Lanka: Promoting Agricultural and Rural Non-farm Sector Growth"), improvements in agricultural productivity growth are still restricted by extensiveGovernment interventions in agricultural commodity and factor markets. Enhancing social protectionhuilding human capital-Progress was fairly limited during the initial years of the CAS period, with a lot of talk about reforming Samurdhi,but little action, with the exception of annual real reductions in budget allocations to Samurdhi since 2001. In recent months, the Government has passed a new Welfare Benefits Act that provides a legal framework for all welfare relief benefits financed by the Treasury. This act sets out transparent processes and guidelinesdictating how all social transfer programs will be carried out, along with giving the Ministry of Finance a key role in the implementation of all schemes. Hence, targeting, efficiency and effectivenessof such programs will likely improve. Over the last two years, there have been positive outcomes in the area of teacher re-deployment with evidence now that all provinces are continuing to make steady progress on deploying teachers to difficult areas. Nevertheless, it is difficult to assess whether or not there has been real progress in building human capital. Project implementation-while the disbursement ratio declined for the most part during the period, it improved slightly in FYOl and substantially (to 25%) in FY02. In part, this is due to the strong commitment that the new Government has shown to improving project implementation, including the establishment of a cabinet subcommittee to focus on this area. Appendix III Page 3 of 15 Nevertheless, a number of important generic issues-including weak project management, slow procurementdecisions and frequent changes in project personnel-persist and need to be tackled. As mentioned above and shown in Table 1, many of the CAS outcomes can be quantified and provided a general basis for measuringprogress. However, it has been difficultto measure whether or not there has been progress with regard to the human capital developmentefforts. A number of factors-including the prolonged internal ethnic crisis, continuing political instability and the external environment (e.g., the repercussions of September 1l*)-have contributed to the limited achievement of the CAS outcomes. Specifically, all these factorshad considerableimpactson economic growth, both directly through declines in important activities such as tourism and exports, and indirectly on development of the private sector due to uncertainty and lack of demand. Furthermore, despite some successes in structural reforms, on more than one occasion during the period, increases in political instability were directly linked with slowdowns/stalls in the pace of reform implementation,as Governmentbecame preoccupied with politics and ownership of reform efforts weakened. There have not been any unintended negative impacts-such as unintended social costs or environmental damage,etc.-as a result of the implementationof the CAS. C. MeasuringBank Performance' Throughout the period, the assessment of quality at entry has been impressive with ratings of 100% being maintained (see Table 1). The quality of supervision has been rated as relatively high, although declined slightly in recent years. The assessment of quality of ESW has been very limited with two of the three pieces-the Urban Transport Strategy Note and the Poverty and Social Development work-evaluated as marginal'. Similarly, evaluations of achievement of development objectives and sustainability of results have been fairly poor and not improving through the period. With regard to program delivery, under the CAS base case scenarioit was anticipatedthat lending volumes would be in the range of US$70-140 milliodyear. Alternatively, the low case scenari- envisioned in the event of a failure to stem the current fiscal deterioration or if the structural reforms entirely stalled or reversed--carried with it a lending program of about one or two operations a year, for an average annual total of about US$50 million. During the period FY97-FY02, twelve IDA credits were approved for a total of approximately US370 million (see Table 2-r an annual average of two projects per year for US$62 million. As such, while performance supported a base case lending program for a short sub-period (Le., in 1997and 1998following the initiationof policy reforms),for the remainder of the period-as the Government became preoccupied with the elections, the conflict escalated and reform efforts weakened-performance was judged to be less than that required to operate under the base case scenario. This was appropriatelyborne out in the Bank's lending volumes. Nevertheless,throughout I A serious lack of availability of reliable data for the purposes of the evaluations in this section should be noted. As many of the Bank's systems-including SAP and Business Warehouse-were only being developed during the CAS implementation period, consistent historical data series are lacking for most variables. Furthermore, routine tracking of quality and performance-by QAG and OED-were only being developed during the period and the small samples for these indicators may be very misleading. While this discussion is based on the best available data, the scope for inaccuracy and drawing of wrong conclusions should be noted. 2 dialogue and dissemination. It should be noted that this was always intended to be a small piece of work (Le., less than In the case of the Urban Transport Strategy Note, the major faults cited included a lack of clarity of the task and limited Poverty and Social Development work, again the clarity of the task objectives were questioned, as were its cost and US$50,000) and for an internal Bank audience-both of which the QAG team did not accept. In the case of the audience. Appendix III Page 4 of 1.5 the period, a strong AAA (Analyticaland Advisory Activities) program was carried out, with an average of 4-5 activities per year (see Table 3). Key reports included Annual Economic Updates, a Poverty Assessment, assistance in carrying out the "RRR Framework3, an Agricultural Policy Review and a Financial SectorAssessmentProgram (FSAP). With regard to portfolio performance, the number of (IDA) projects declined steadily from 19 in FY96 to 10 in FY99, before increasing to 12 in FYOO where it has since remained. This decline was accompaniedby a decline in the average implementationperiod-from 4.4 years in FY96 to 2.4 years in FY99-and at the same time, a decline in the disbursement ratio-from 24% in FY96 to 15% in FYOO. Since then, there has been a substantial increase in the disbursement ratio-to 25% in FY02-as the portfolio matured. Prior to the CAS, portfolio performance experienced a sharp turn around in FY95, following a major restructuring effort after successive years of decline. Throughout the period, both the percent of projects at risk by number and the percent of problem projects by number stayed below 20%, with the exception of FY99 when it increased to 30%. The two current problem projects-Mahaweli and PSIDC-are experiencing many of the generic issues previously identified, including weak regulatory/policy environment, lack of ownership and political will to implement reform measures and weak project management. Nevertheless, in November 2002, a portfolio restructuring-primarily of these two projects-was undertaken to provide urgently needed support to the conflict-affected North East. D. Consultationand Coordination During the period, aid coordination has been an important component of the Bank's strategy and effortshave been quite successful. Until assumed by the Governmentin June 2002, the Bank had chaired the aid coordination meetings-Le., Development Forums-held approximately every 18 months. At the same time, an activedonorcoordination forum in Colombohas been developed and meets regularly under the leadership of a chairman that has rotated between the Bank, ADB and UNDP. As Japan (JBIC), the ADB and IDA account for about 90 percent of concessional assistance, the Bank has also made effortsto coordinate at the country strategy and sector level with these large donors. While this has resulted in some successes-such as thejoint CAS consultations carried out in FYOl and the more recent rapid needs assessments in the North East-there is still considerable room for progress, especially with convergence on the need to link lending decisions to outcomes and implementation of programdresults. This is a process that will need to be further strengthened and the efforts towards reconstruction in the North East pose a tremendous opportunity for further improvements and solidifying a "best practice" donor coordination model. Furthermore, Government leadership of the coordination of development partners leaves much to be desired. The Bank, along with the ADB, is working on trying to improvethis. PHRD and GEF have been the major sourcesof trust fundgrant resources mobilized in support of the CAS implementation. Disbursements from these sources ranged between US$2 million and US$4 million during the period FY99 to FY02 with a shift taking place from Bank to country execution. GEF funding for two projects-Energy Services Delivery and Medicinal PlantsAominate these disbursements, complemented by PHRD grants for project preparation and an IDF grant to support improvementsin urban air and fuel quality. When the CAS was developed in 1996,there were broad consultations with various stakeholders, including the Government. However, compared to today's standards, the consultations were relatively 3 The Relief, Rehabilitation, and Reconciliation (RRR) Framework was an important consultative process that brought together Govemment, civil society, individuals and communities to identify ways to work together to improve relief, rehabilitation and reconciliation efforts in the context of the civil conflict. The Bank assisted the Government in launching this process and provided strong support until the Government completely took over in early-2002. Appendix Ill Page 5 of 15 limited. In FYO1, a substantial CAS consultation process was carried out4-by the Bank and joined by ADB and JBIC-to gain a better understanding of the development challenges and priorities facing Sri Lanka. The team consulted with a wide range of civil society groups, including teachers, students, religious leaders, trade unions, political party leaders, members of the international donor community, journalists, professionals, young entrepreneurs, non-governmental organizations (NGOs), national and provincial chambers of commerce, fishermen, villagers, plantation workers, and national and local Government officials. Although the views of stakeholdergroups diverged, there was strong consensuson several key priorities. The cross-cutting concerns raised during the consultations include: (i) the deterioration of governance in the country; (ii) the effects of the civil conflict; (iii) the absence of empowermentand opportunities for the poor; (iv)the need for reforms in education,notably the provision of education in English; and (iv) the role of donors. Prior to this, the Bank had assisted andor participated in other important consultation processes carried out by the Government for the development of the RRR Framework and the Poverty Reduction Strategy(PRS). E. LessonsLearnedfor SubsequentCAS Design While the country development results supported by the Bank during the CAS period were quite broad and generic, they were likely the correct ones. In that the CAS was undertaken before MDGs when many of the Bank's clients had yet to define clear and specific development results, the lack of clarity/specificity in the country development results have made evaluation of the country and the CAS performance somewhat more difficult. Nevertheless, as previously mentioned Sri Lanka is in a fairly unique position, having achieved human development outcomes as great as those of high-income countriesand surpassingalmost all of the MDGs at an early stage of its development process. Overall, the CAS outcomes achieved during the period are sustainable. While in many cases progress was relatively modest and prolonged in being achieved, there appears to be a clear and irreversible reform process set in motion. For example, the need for fiscal consolidation is clearly accepted today and an important part of the country's strategy. Furthermore, there is well-recognized need to remove the distortions hindering private sector development and reform the enabling business environment. Prior to the CAS, recognition of the need for these types of reforms-at least across the political spectrum-were not so widespread. Nevertheless, considerable public awarenesddissemination is still required to education the general populationon thejustification and benefits of such reforms. An important factor that contributed towards achievement of the CAS program was strengthening of the Colombo office, including moving the Country Director to Colombo in 1997 and building a local capacity to support the economic/policy dialogues and project implementation. In addition, the strong presence in Colombo allowed the Bank to: (i) work successfullyin fosteringlfacilitatingthe early conflict- related activities-Le., the RRR framework; (ii) gain experience in implementing community-driven demand (CDD) approaches in both conflict-affected and other areas through the North East Irrigated Agriculture Project (NEIAP) and the Village Self Help Initiative; and (iii) react quickly-through portfolio restructuring to support an emergency program for the North East-when the conditions for peace turned favorable. Bank support to the Central Bank (through the Central Bank Strengthening Credit) also worked well by demonstrating that quick reaction to a reform-minded champion can foster reform effortsand begin to chip away at governance issues. Major factors contributingto a lack of real progress toward implementing the CAS program were political instability and lack of ownership, which often resulted in complex projects that suffered from 4 It was intended that a CAS for Sri Lanka be presented to the Board in late-FYOl/early-FY02. Due to heightened political instability at that time, along with a severe worsening in the domestic security situation, it was assessed that it was an inappropriate time to present a new CAS. Appendix Ill Page 6 of 15 weak implementation. These are being taken forward in the design of the next CAS in a number of ways, including: adopting a more realistic approach to the issues of political instability and ownership, specifically by focusing more on: (i) AAA and policy dialogue before jumping prematurely into project preparation; (ii) supporting specific, opportunistic reforms put forward by serious champions with demonstratedimplementationability; and (iii)capacity building; placing greater emphasis on project implementation. In the past, project preparation has often taken more than three years and consumed a substantial share of the administrativebudget, thereby leaving limited resources for implementation efforts. In the future, project preparation will be shortened,and greaterresources will be allocatedfor implementation efforts; developing simpler, yet larger projects supporting either CDD approachesor comprehensive sectoral/multi-sectoralefforts;and being more selective and focused on areas in which we choose to engage, in addition to shifting towards greateruse of programmatic/adjustmentlending. There are a number of analytical gaps which need to be addressed in the next CAS, specifically: given the current continuing fragile fiscal situation-including the effects of the large public debt burden-public expenditure analysis will need to become a permanent core activity and work has already been initiated in this regard; as governance remains a fundamental challenge, completing the Country Procurement Assessment Report (CPAR) and Country Financial Accountability Assessment (CFAA) will be essential for setting a strong foundation for the shift toward a more programmatic lending approach and uncoveringother important issues for potential futureAAA; given the "opening-up" of the North East-in which currently all (including the Government) have a substantial knowledge void-key pieces of ESW are needed, comprising a Poverty Assessment (including updating the situation for the entire country) and a Social Assessment of Conflict-AffectedAreas; to better understand the reform challenges, it will be important to carry out a Development Policy Review (DPR), with a particular focus on future sourcesof growth; 0 given that the private sector will need to play an enhanced role in generating future economic growth, an Investment Climate Survey-for both urban and rural areas-will need to be undertaken; 0 given the urgent need to show real improvements in the quality of human development, it will be important to analyze carefully the issues in both the health and education sectors and assist the Government in developingappropriatestrategies; and 0 an effective monitoring and evaluation system is critical for tracking implementation of the country development results and CAS outcomes. Given the current institutional weaknesses in this area, there is much to be done with regard to strengtheningdata collection, analysis and its linkages with policy and the monitoring of inputs, outputs and outcomes. In recent years, between specific consultationscarried out by the Bank-including for the CAS- and consultations carried out by the Government with Bank involvement-such as for the RRR Framework and the PRS-there is a bit of "consultation fatigue" within Sri Lanka. Therefore, it will be Appendix Ill Page 7 of 15 important to be more selective in carrying out further consultations and Bank efforts in this area need to take a backseat to Government efforts. Nevertheless, in developing more projects that use community- driven demand approaches, strong emphasis will be placed on consultations during project preparation and implementation. With regard to a related issue-i.e., a relatively poor image of the Bank within Sri Lanka-we will be more proactive in our external relations efforts, including focusing on disseminating information about the Bank's activities in all native languages and supporting the Government in its public awareness campaigns surrounding the reform efforts. It is envisioned that important lessons will be learned from these activitiesto fine-tune the CAS during the implementationperiod. Similar lessons were highlighted in the Country Assistance Note (CAN) carried out by the OperationsEvaluation Department (OED) in December 1998;specifically: 0 The physical components of projects-while implemented well-were subject to increasing implementationdelays,due primarily to procurementproblems; Policy changes and institutional reforms were difficult to achieve; therefore, the Bank's assistance should have been more sensitive to the political cycle and substantialpreparation and consultation with stakeholders; 0 The Bank did not give adequate attention to the possible divisive impact of its programs- e.g., several large education projects could have had greater value if they had fostered the role of education in promoting social inclusion in a more prominent manner; and 0 Although the Bank's analysis and advice were sound and its strategic objectives were well- aligned with Government's,only limited institutionalframework changes were made. E s E E r c i d Appendix 111 Page I3 of 15 Table 2. PlannedLendingProgramand Actual Deliveries: FY97-FY02 CAS PLANS(a13/1996) Base Case ACCOMPLISHMENTS FV I IDA 1997 Health Services Development 25.0 Actual 18.8 EnvironmentalAction 25.0 Actual 14.8 Energy Services Delivery 25.0 Actual 24.2 Subtotal 75.c Subtotal 57.8 1998 MahaweliRestructuring 60.0 Actual 57.0 General EducationII 70.0 Actual 70.3 Subtotal 730.0 Subtotal 127.3 1999 Clean Settlementsa/ 60.0 Forwardedto FY2000 0.0 Legal & RegulatoryReformTA b' 20.0 Forwardedto FY2000 Southern Irrigation 60.0 Dropped 0.0 Subtotal 0.0 140.0 Subtotal Subtotal 1997-1999 345.0 Subtotal 1997-1999 0.0 PROGRESSREPORT PLANS(1/19/1999) ACCOMPLISHMENTS(10/20/2002) - 1999 EmergencyY2K Assistance 29.0 Actual 29.0 Clean Settlementsa/ 60.0 Forwardedto FY2000/Dropped 0.0 Subtotal 89.0 Subtotal 29.0 2000 Legal & Regulatory ReformTA b' 25.0 Actual 18.2 North-East IrrigationRehabilitation 40.0 Actual 27.0 CommunityWater II 30.0 Forwardedto FY2003 0.0 PostalServices Reform 723.C 28.0 Dropped 0.0 Subtotal Subtotal 45.2 AdditionalActuaI Projects: LandTitling (2001)` 5.0 Central Bank Strengthening (2001) 30.3 Distance Learning (2001) 2.0 Renew. Energyfor Rural Econ. Dev. (2002) 75.0 Subtotal 72.3 Subtotal 7999-2002d/ 212.0 Subtotal 1999-2002 86.5 Total FY 1997-2002d/ 417.0 Total FY 1997-2002 71.6 a/ Name of the project was changedto Urban Settlements Improvement. b/ Nameof the project was changedto Legaland Judicial Reforms. c/ Projectwas in Progress Report High Case scenario. d/ (Sub)Totalfor FY 1999-2000in ProgressReport. Appendix 111 Page 14 of 15 Table 3. PlannedNon-LendingServices: FY97-FY02 CAS PLANS(a13/1996) Base Case ACCOMPLISHMENTS FY Product Status 997Transport Sector Study Actual Policy Dialogue/MacroMonitoring (IMF) Actual DevelopmentForum Actual TA for Tax and Tariff Reform LeadTaken by IMF Irrigation Sector Study Dropped Agriculture Policy Review Incorporatedin other work AdditionalActual Activities: Public InvestmentReview PetroleumSector Study Power RestructuringStudy a/ 998 Policy Dialogue/MacroMonitoring (IMF) Actual FinancialSector Report Actual Special Policy Notes b' Actual DevelopmentForum Actual 999 Education Finance Study Dropped EmploymentSector Roundtables ' Actual PolicyFramework Paper Actual PROGRESSREPORTPLANS(1/19/1999) ACCOMPLISHMENTS(10/20/2002) 999 Policy Dialogue/MacroMonitoring(IMF) Actual Public Sector ManagementStudy Actual Anti-Corruption Initiative Actual AdditionalActual Activities: Rural DevelopmentBackgroundStudies 000 Rural DevelopmentAssessment Actual Annual Economic Updated/ Actual Telecommunications ReformAssessment Dropped HealthSector Strategy Actual Poverty& Social Development Actual PrivateSector Update Actual TA for RegulatoryReform Actual Policy Dialogue/MacroMonitoring (IMF) Actual DevelopmentForum Forwardedto FY2001/Actual AdditionalActual Activities: UrbanTransport StrategyNote (2001) Policy Dialogueon RRR/Peace (2000-2001) InfrastructureSector Dialogue (2000-2001) PovertyAssessment (2001) Public Expenditure Note (2001) PrivatizationTA (2001) Agricultural PolicyReview (2002) FinancialSector Assessment Program (2002) a/ Activity was in high case scenario. b/ Nameof the activity was changedto "SocialSector Report"and "Civil Service ReformsStudy". Appendix IV Page 1of 4 Appendix IV Summary of CAS Consultations I ConsultationProcess The Bank carried out extensive consultations for the Country Assistance Strategy (CAS) during June-November, 2000 in order to benefit from various stakeholder groups' knowledge and ideas, as well as gain a better understanding of the development challenges and priorities facing the people of Sri Lanka'. Given the strong presence of the Asian Development Bank (ADB) and the Japanese Bank for International Cooperation (JBIC) in Sri Lanka, these two organizations'were invited to participate in the consultation process. The Bank/ADB/JBIC team consulted with a wide range of civil society groups, including teachers, students, religious leaders, trade unions, political party leaders, members of the international donor community, journalists, professionals, young entrepreneurs, non-governmental organizations (NGOs), chambers of commerce at both the national and provincial levels, fishermen, villagers, plantation workers, and government officials at both the national and local levels. Detailed summaries of individual consultation meetings were prepared and sent to the participants for their comments and subsequent endorsement for wider distribution. Two documents containing these summaries of the meetings ("Summaries of the First Round Consultations for the Country Assistance Strategy (CAS) of the World Bank, Colombo Sri Lanka June-July 2000" and "Summaries of the Second Round Consultations for the CAS of the World Bank, Sri Lanka November 2000") were prepared and widely disseminated within the country and the Bank. More recently, small meetings have been held with various stakeholder groups-primarily in Government, the international donor community, professionals, chambers of commerce and with various groups in the North East-to validate the observations of the previous consultations. For the most part the earlier observations remain valid, however, given the current prospects for peace and the poor economic performance during 2001, in the more recent consultations substantially more emphasis has been placed on the need for finding a lasting solution to the conflict and improving opportunities for the population, especially for the poor Main Messages The insights provided by the consultations have been valuable in formulating the Bank's future role and assistance strategy for Sri Lanka. While there were often diverging views among and between stakeholder groups, there was also strong consensus on several key priorities issues. The cross-cutting priority concerns raised during the consultations include the: (i) deterioration of governance in the country; (ii) impacts of the civil conflict; (iii) lack of empowerment and opportunities for the poor; (iv) need for reforms in education, most notably provision of education in English; and (iv) role of donors. Some illustrative quotations and highlights from the consultations are presented below. It should be stressed that the views and comments expressed in this Annex are not those of the World Bank, but have been expressed by various stakeholders during the consultation process. * Deteriorationin governance "We always talk to the World Bank, JBIC, ADB, and others and keep repeating the same things, but donors are not in a position to help with the biggest problem in Sri Lanka-the absence of good governance. The rule of law and due process must prevail. '' I It was intended that a CAS for Sri Lanka be presented to the Board in late-FYOl/early-FY02. Due to heightened political instability at that time, along with a worsening in the domestic security situation, it was decided that it was inappropriate to present a new CAS at that time. AppendixIV Page 2 of 4 L6Governanceis the biggest issue. There is no participatory democracy in Sri Lanka. Politicians are not answerable topeople after they are elected." "National development has to be government-owned and an inclusive process. It may not be the best, but is better than other strategies since it is government-driven. An example is the Poverty Framework prepared by the Government of Sri Lanka." The deterioration of governance in Sri Lanka was overwhelmingly identified in the consultations as one of the highest concerns. In general, there is the feeling that policy and political debates center not around poverty reduction or the problems facing the poor, but on vested interests. Stakeholders expressed the view that Government decision-making has been driven by short-term political considerations, and there is little evidence of long term planning. Furthermore, it is felt that there is a lack of accountability in the public sector. For instance, the Public Accounts Commission of the Western Provincial Council is still reviewing the financial statements and audit queries for 1995. Statements for subsequent years have not yet been prepared, and no one has been held accountable for this lapse. There is the view that while high standards were maintained in the civil service in the 1960s, there has been a gradual erosion over time. The abolishment of the Public Service Commission in 1972 was identified by many as the beginning of pervasive politicization of government recruitment and the deterioration in governance. It was felt that an independent Public Service Commission, Police Commission and Election Commission, if established with proper guidelines and incentives, would help improve accountability in the public sector. * Poverty, conflict and social divisions "lfa small fraction of what is being spent on the war would have been spent on the development of Sri Lanka, we would have seen a much greater reduction of poverty." "Despite several constraints, the country has managed to continue a reform process. I f not for the war, the benefits of the reform process would be great." "Developmentshould not only be in Colombo!" There is consensus that the quality of life in Sri Lanka is higher than in other South Asian developing countries. Nevertheless, the war has prevented the country from fully capitalizing on its high social indicators, and generous levels of foreign assistance. The detrimental effects of the conflict are far more widespread than just the North East. For example, the livelihood of fishermen is constrained by curfews imposed due to security concerns; foreign investment has been restrained by the pervasive uncertainty and insecurity; and inflation has been rising with the government having to increase administrative prices and taxes to finance military expenditures. People see the end to the civil conflict as a political solution. A commonly shared opinion is that the conflict has become a business in Sri Lanka with widespread allegations of corruption in the "war business." As one child in the consultations put it, successive governments have utilized the war to their advantage as a kind of "wound on a beggar's leg" tojustify soliciting foreign aid-Le., many felt that the war has been used as an excuse for poor governance in the country. The view was also expressed that the conflict is a convenient justification to delay reforms and development. Many attribute the origins of the conflict to divisive policies/politics. The country has been divided along ethnicity, religion, politics and geography. Disparities among these divided groups have caused frustration. For instance, the division of the country between Colombo and the rest of the island in terms of level of public expenditures, employment and economic growth with industries concentrated in the Western Province (because of good Appetzdrx IV Page 3 of4 infrastructure) was mentioned repeatedly as a concern by government officials and the segments of civil society consulted outside Colombo. * Lack of empowermentand opportunitiesfor the poor "Givethem (thepoor)opportunities.... not handouts." "Weare not a poor country, but there are many poor people." The view that development needs to be "people-centered" was often voiced. It was felt that people must be empowered in making decisions that affect their lives. Often the beneficiaries were not even consulted as to what they need and what they feel is needed to improve their lives. However, many did comment on the successes in public programs/policies based on inclusion and consultations (e.g., privatization of plantations) and the fact that voter turnout during elections is high. There was a sense of frustration regarding inadequate social debate on important issues in Sri Lanka, despite the country's long legacy of literacy. Another commonly expressed sentiment was that the country's development is leaving the poor behind. A number of important facets were noted; specifically that: (i) the poor need access to markets and information; (ii) there is a lack of good roads and the transport networks restrict the mobility and access of people from remote villages. This in turn results in middle men exploiting poorer farmers and depressing producer prices, which keep families in these remote villages in poverty; (iii) young women from remote villages are at times left with no other option but to work in estates outside their villages or as domestic workers in the Middle East, because there are no jobs available in their own localities; (iv) there are few, if any, training opportunities for the poor; and (v) Sri Lankans have a lot of potential, but there are often very limited avenues available to utilize their capacities. A view was expressed that the poorest of the poor are often difficult to target. For instance, when midwives visit a community, the poor are generally not present since they are often away trying to make ends meet. Furthermore, it was felt that: (i) children of poor families are unlikely to be immunized since they frequently do not have birth certificates; (ii) social security programs are usually so complex that the poor are unable to participate in them; (iii) very few services are provided to abused and institutionalized children (including orphans and abandoned children) with psychologistlpsychiatrists in short supply in the country; and (iv) mainstreaming these children into society is a major issue when they leave institutions at age 18 without adequate life skills. * Reforming education "SriLanka created human capital, but a stifling environment.'' "Thereis literacy, but there is very little education." "There is a mismatch between education and market needs. The education system has failed to improve despite ad hoc changes. Education is insulatedfrom the market.'' The need for education reforms was another cross-cutting challenge identified. The key themes included: (i) the lack of English and computer science education in most rural areas which handicap the poor; (ii) a disconnect between the education system and the needs of the economy; (iii) English and computer skills-while vital for the job market-are often not effectively taught in schools; and (iv) over 90 percent of the population is said to be literate, but much of this is either in Sinhalese or Tamil. Appendix 1V Page 4of 4 Many expressed the view that the medium of instruction in schools should be English, as proficiency in English will widen the economic opportunities for young graduates and can also be used as a link language to promote social harmony in the country. For example, all students in one meeting in Galle unanimously raised their hands when asked who wanted to learn in English. The students clearly understood that they were at a disadvantage if they are not conversant in English. The education system is currently segregated by medium of instruction (Sinhalese or Tamil), which makes it difficult to foster social harmony. * Donors share part of the blame,but they can also be part of the solution "Onehas to ask ifgovemment has made the best use offundsfrom donors." "They(Government)know donor money will continue to come in,so they don't need to change." "Therehad never been consultations with NGOs (non-governmental organizations)for the CASprocess before." Foreign donors have played an important role in Sri Lanka in the past, but it is felt that foreign agencies may have also compounded Sri Lanka's problems by continuing to provide assistance without questioning the adequacy of policies and rationale for projects. Some groups expressed concerns about the fungibility of aid to a country in conflict. It was also felt that monitoring and evaluation of donor programs must improve to maximize the developmental impact of aid and that many donor projects need to do better to reach the grassroots level. Some of the advice offered by the stakeholders on how the Bank can improve the effectiveness of aid to Sri Lanka included: (i) the need for better public dissemination of information regarding Bank projects and activities in the country; (ii) inclusion of people at the grassroots level in monitoring and evaluating Bank-funded projects; and (iii) the need for the Bank to continue policy dialogue with the government and make an effort to influence the government to end the war. Appendix V Page 1 of 10 Appendix V The Main Findingsof Two Key Fiduciary Assessments: The Country FinancialAccountabilityAssessment(CFAA) and the Country ProcurementAssessmentReview (CPAR) A. The Country FinancialAccountabilityAssessment' Context The framework for public financial accountability in Sri Lanka is founded in the principles of governanceassociated with the Westminster model inherited from the British. This framework is widely accepted as appropriate for the country. The primary accountability institutions and organizations for financial management, control, audit and legislative scrutiny have, however, not evolved in line with the changes in the more advanced democracies of a similar background. This lapse has reduced the effectivenessof the system of public financial accountability in Sri Lanka, resulting in less than adequate assurance that public funds are used for the purposes intended with due consideration to economy and efficiency. Financial accountability at the sub-national level is less well-developed than at the center. The reasons for this are similar to those concerning the central government, but more acute and pronounced. For example,control over funds is subject to less public scrutinyand financial reporting is less regular. In addition, provincial and local governments' dependency on the central government for funds and confusion over the role of the center vis-his that of the provinces, result in excessive duplication of effort and resources. As regards public corporations,there are over 180 state-owned enterprises (SOEs) which combine commercial and regulatory activities in Sri Lanka. The majority of these are characterized by excessive staff; weak management; inefficiencies; heavy losses; dependency on budget transfers; and delayed publication of audited accounts, thus, further eroding public financial accountability. Key Findings The will to reform is evident at both the political and bureaucratic levels. Confirming the willingness to move ahead with much needed reforms are several recent initiatives jointly taken by the government, legislators, and the Auditor General (AG) for improving accountability of key SOEs, including: (i) strengthening the reporting requirements of government agencies; (ii) drafting of new legislations, setting up organizational arrangements for improved oversight by the Treasury of state owned enterprises;and (iii) the `e-Srilanka' initiative for implementingthe e-governanceconcept. Discussions with stakeholders on reforms centered around the urgent need to arrest further deterioration in public financial accountability. Five priority areas of concern were identified: Parliamentary control of the public purse has become ineffective and does not currently meet the expectationsset in the Constitution. This can be restored by strengtheningthe oversight function provided by the public accounts and public enterprises committees (COPA and COPE) and I The CFAA was undertaken from February to October 2002 by a team comprised of Bank staff, govemment counterparts and consultants. The work was carried out through a combination of field studies in specific areas, reviews of existing studies and self-assessments. In addition, there was extensive discussioddialogue with concemed stakeholders in the govemment, private sector, legislature, media, civil society and donors. Appendix V Page 2 of IO establishing a standing committee to focus on the annual budget. The recent initiative taken by the COPE to probe into the performance of the Ceylon Electricity Board (CEB) is noteworthy in this regard. The accountability of the executive at present is too focused on `spendingto budget', rather than on `managing for results'. This shift in focus, widely considered to be important, can be accomplished by introducing,on a progressive basis, a performance-based culture with incentives that reward achievement of outputs and outcomes, and holding the secretaries of government to account for meeting departmental objectives and performance standards. In this context, recent efforts taken to base the year 2003 budget on a Medium Term Budget Framework (MTBF) is notable. It will be equally important to reduce the emphasis on concern with administrative processes and mere compliance with detailed rules and regulations. The government's move towards establishing a separate revenue agency is a good example of re-thinking on these lines. At the same time, it will be necessary to clarify the accountability relationshipof the secretary of each department to hisher minister. The government has received advice on the issue of ministerial accountability from the Netherlands Court of Audit. The public audit function does not currently meet the standards implied in Article 153 of the Constitution and those expected of the auditing profession, and consequently, its impact on financial accountability is below its potential. This can be strengthened by making the Auditor General more independent of the executive and by building capacity to provide more relevant audit information to parliament. A preliminary study carried out by the Netherlands Court of Audit has endorsed the need for strengthening this institution. Recent initiatives of the Auditor General to improve the timeliness of audit reports is a significantstep in this direction. The culture of governance that derives from colonial times is not appropriate to the present needs and the government has expressed its intention to move towards a more open, participative form of governance and decision-making. This can be accomplished by removing obstacles, such as the Official SecretsAct, and re-visiting the Establishment Codes to bring government in line with evolving good practices in other parts of the world. The lack of clarity over the accountability relationships of the central, provincial and local governments and financial reporting arrangements not being well-aligned to the needs of a more devolved system of governance, weaken accountability at the sub-national levels. The efforts underway to address this issue should include greater specificity on financial accounting, reporting, auditing, and public scrutiny arrangements and capacity building at the sub-national levels. To address the above concerns,the government intends to move forward on two broad fronts: (i) enacting new legislation and rules to address institutional issues; and (ii) carry out capacity buildindtraining, for improving organizational efficiency and effectiveness. Specifically: Institutional Reforms Amend the standing orders and the Parliamentary Powers and Privileges Act, which govern the rules of procedures of parliament, to allow for greater public access to the hearings of the COPA and COPE and for opportunities for these committees to further explore ways to enhance government productivity,over and above scrutiny based on audit information. Enact the proposed Public Finance draft legislation after due consultation with stakeholders and review of recent similar legislations enacted in other countries, for financial management of the government of Sri Lanka, the establishment and maintenance of the accounts of the State, and the control of public sector enterprises. Such legislation would have greater authority than the Appendix V Page 3 of 10 existing financial regulations promulgated by the government, and consequently provide a firmer basis for more effective enforcement. At the same time, this should clarify the financial accountability of the minister as distinct from the secretary of the ministry. Enact dedicated audit legislation that specifies the duties, powers and responsibilities of the AG and provides safeguards for his financial and administrative independence from the executive. The Act should also provide for unrestricted access by the AG to information, property and personnel associated with management of all significant public resources. Pass the proposed Freedom of Informationbill, after due consultation with stakeholders,to allow for greater public access to information in line with the principles of more accountable and open system of governance. Develop the form and content of the financial accounts of the various levels of government,and common reportingstandardsconsistent with internationalpublic sector accounting standards. CapacityBuilding Build awareness,information sharing, and research capacity of the two oversight committeesand the proposed new standingcommittee on the budget in the legislature. 0 Strengthen the management control practices associated with revenue, expenditure, assets and liabilitiesof the government. This work would complement initiativescurrently being covered by the Public Expenditure Management Systems Project (funded by ADB) would include simplification of Financial Regulations (FRs), modernization of accounting and financial reporting in conformity with international public sector professional standards, and performance reporting in line with the evolution in more advanced democracies. 0 Formulate an Institutional Development Plan for strengthening the AG's Department. This would entail changes to the audit work program, methodology and the organizational structure, and, most importantly, a human resources strategy, including recruitment policy, compensation packages, training,and career developmentopportunities. 0 Implement the proposed legislation on Freedom of Information through the development of policies, procedures, and training of personnel involved with the provision of timely and appropriate information to the public. 0 Set accounting and financial reporting standards in line with international public sector accounting standards,and developpolicies and practices for the preparation and dissemination of financial information, including by means of information technology under the e-governance initiative. The assessment concluded that there are substantial opportunities for introducing institutional reforms for strengtheningpublic financial accountability in Sri Lanka. There is every indication that the political will for reforms will be sustained. The government seeks a time-bound action plan for moving forward on each of the areas of reform and capacity building as outlined above. The Bank, in partnership with other development agencies, will support initiatives aimed at developing the action plan and provide technical assistancefor implementingthe recommendationsof this assessment. Appendix V Page 4 of 10 B. The CountryProcurementAssessmentReview2 Context Per capita employment in the public sector in Sri Lanka is the largest in Asia and provides employment for more than 850,000 people. In addition to ministries and departments, Sri Lanka has over 150Statutory Boards, Public Corporations and Public Enterprises, which combine commercial and regulatory activities. Public sector contribution to GDP is 12.3%;the fiscal situation is dominated by defense and interest payments (56%) and public debt is 97.1% of GDP (2000). Furthermore, public accountability systems, processes and institutions are weak, outdated and not sufficiently independent. The volume of public procurement in Sri Lanka is about Rs.70 billion, with about 65 billion in US$. The Sri Lankan legal system is well-established and based on British Common Law, with some influenceof Roman Dutch Law and customary practices. Key Findings The following are the key findings: Legal and Regulatory Framework (a), the President may assign any subjectlfunction to a MinisterMinistry. As such, the President has The Constitution has no specific provisions regarding award of contracts. Under Article 44 (1) and Amendments,etc." Chapter XI11 laid down the rules to be followed for procurement of works, goods assigned to the Minister of Finance the subject of the "Government Financial regulations, Interpretation and services. In addition,there is no central law or provincial law regulating public procurement and the basic contract law has no specificprovisions having direct bearing on public procurement. In order to keep the procurement process fully transparent, "timely" and to obtain the financially most advantageous and qualitatively best services/supplies, on September 30, 1996 the Ministry of Finance (MOF) issued "Guidelines on Government Tender Procedure." The introduction of the Guidelines was an epoch-making step and ushered in procurement reform. Revised Guidelines- containing procedures both for projects financed from Consolidated Fund and Foreign Financing Agencies-were issued on September25, 1997to be implemented with effect from November 1, 1997by all Government institutions-including Ministries, Departments, Public Corporations, Public Statutory Bodies, fully-owned Government Companies,Provincial Councils (PC)s and Local Authorities including Pradeshika Sabhas (PSs-for the procurement of works, services and supplies and disposal of governmentassets. The Guidelines are approved only by the MOF/Cabinet and not by Parliament3. To enhance public confidence in the system, rules of this nature which govern the use of large amounts of public funds-although having the force of law- should be: (i) difficult to change; and (ii) 2 In association with the govemment, the Bank carried out a comprehensive assessment of the public procurement system during the period April to November 2002. Twelve public sector organizations participated in the CPAR and other contributors included ADB, JBIC and National Construction Contractors Association of Sri Lanka (NCCASL). 3 Most countries have public procurement laws enacted by Parliament dealing with the public procurement of goods, works and services by governmental entities at all levels. Very few countries still follow the approach-as used in Sri Lanka-using Financial Regulations and Guidelines. Appendix V Page 5 of IO changed only in a public and transparent manner. Therefore, it is suggested that a Public Procurement Law be enacted4. The law should be complemented by detailed Guidelines for implementation. Entity to Oversight Policy Responsibilityfor Procurement Functions There is no independent entity to provide oversight to the policy-related responsibilitiesof public procurement functions, including policy formulation. In practice, the MOF has been taking this responsibility through the Procurement Support Bureau (PSB). PSB was created in 1999 to provide procurement implementation support, including advice on evaluation of tenders and assessment of tender proposals. It has also tender monitoring functions. Presently the policy-making responsibility-Le., functions of a regulatory nature that should be carried out by an independent organization-are also being carried out by PSB. As such, there is a need to create a small high-powered, professionally-staffed, independent Procurement Regulatory Agency (PRA) to develop the procurement legal framework. The functions of this agency should be confined to policy-making, documentation,development of rules, etc. PSB. and not include line clearance functions for awarding and execution of contracts as presently done by Frameworkfor Audit, Anti-Bribery and Anti-Corruption Measures The Constitution provides for the appointment of the AG-who shall audit the accounts of all public expenditure-and details the duties and functions of the office. The AG reports the findings on unauthorized expenditures, waste of public funds, and abuse of procedures resulting in loss to the Treasury. In general, the institution is seen as a watchdog and feared; however, procurement audits, technical audits and performance audits are not conducted. The Bribery Act (1954) and the Commission to Investigate Allegations of Bribery or Corruption Act (1994) provide a legal framework for anti-bribery and anti-corruption measures. The bribery provisions are adequate, but reportedly implementation is poor and few have been punished. As such, there is a need to strengthen the Bribery Commission and make it more pro-active in seeking support of non-governmental agencies such as Transparency International (TI) in making the public aware of the seriousnessof the problem and prompt them to fight against bribery and corruption5. Procurement Procedures and Practices The Guidelines on government tender procedures-which are broadly based on donor procurement guidelines-have provided a much needed procedural framework.However, the Guidelines have some provisions, which are not conducive for transparency and fairness. The important ones are discussed briefly below, as well as some of the provisions which need to be clarified, supplemented, enlarged and strengthened. 4 The law should be based on United Nations Commission on Intemational Trade Law (UNCITRAL) model on Procurement of Works, Goods and Services with established Intemational practices, an appeakhallenge mechanism, debriefing to unsuccessful tenderers, dispute resolution mechanism, suspension and blacklisting of firms and publication of awards. 5 In its latest report, TI has given Sri Lanka a "Corruption Index" of 3.7. This can be compared to 3.5 for China; 2.7 for India; 2.6for Pakistan; and 1.2for Bangladesh. Appendix V Page 6 of 10 a. Standard tender documentsfor goods, works, and services Except for procurement of works, there are no standard tender documents for goods, design, supply and erect contracts,or consultingservices. The quality of the tender documents-which includes contract format and conditions4ecide the level of competition, the transparency of the process, the risks imposed on the tenderer and consequently the price. As such, the tender documents need to be standardized and mandated for use by all procuring entities. b. Registration ofjrms and contractors registration and grading by the Institute for Construction Training and Development (ICTAD) for this Since pre-qualificatiodpost-qualificationis required for works of more than Rs.5 M, the need for category of contracts,appears not relevant and servesno purpose. For works of value less than Rs.5 M- which may be large in number-going through the process of verification to meet the specified qualificationcriteria in each case may turn out to be cumbersomeand lead to delays. Hence, determining the eligibilityon the basis of simplified method of registration would be preferable. Also, membership in the National ConstructionContractors Association of India (NCCASL)should not be compulsory. c. Evaluation of tenders, evaluatiodpurchase committee,preparation of evaluation reports, approval for award of Contractsand contract award The procedures for the constitution of Tender Boards (TBs) and Tender Evaluation Committees (TECs) need to be streamlined to reduce the time periods. If need be, the number of standing TBs and TECs may be increased. The "multi-layered review approval process"-particularly for large value contracts-needs to be simplified to expedite the process and minimize opportunities for mal-practices and corruption. TBs need to be empowered to take award decisions on the recommendations of TECs. While a TB may seek clarification from the TEC or reject the recommendations giving its reasons for the TEC to reevaluate, it should not itself re-evaluate the tenders. The tenders need to be awarded within the initial validity period. d. Negotiations To improve outcome and benefits (includingcost reduction and reduce uncertainties,presumably with all tenderers), the provisions in the Guidelines are ambiguous and permit-in fact encourage- negotiations before selection of the successful tenderer. Negotiations should not be held merely to push down the competitively quoted price of the lowest (selected) tenderer. Negotiations should be permissible only in very exceptional circumstances (single, substantially high tender, evident/obvious collusion,etc.) with prior government approval and that too by a high level committee. e. Standardfinctional specijcations for goods To bring consistency and increase transparency, there is a need to develop standard functional specifications,particularly for goods that are usually procured by various implementingagencies. Placing of these specifications on the PSB website inviting comments from manufacturers, suppliers and users will lead to refinement of specifications. J `TenderCapacity'as a criteriafor award ofcontracts "Tender Capacity" should be made a mandatory criteria for award of contracts. Specific requirements in this respect should be pre-disclosed in the tender documents. The contracts on hand need to be assessed to determine the available capacity net of current commitments and ability of the tenderer Appendix V Page 7of 10 to perform the new contract satisfactorily, if awarded. In addition, where the tenderer is lowest in more than one tender or slice of a package, the qualificationrequirements to be satisfied by the lowest tenderer need to be the aggregateof the individual tenders or slices of a package. g. Electronic tendering One of the major steps towards e-governance is e-tendering. Systems are available to introduce electronic tendering in public agencies. This will substantially increase transparency, efficiency and reduce scope for mal-practice and corruption. The Procurement Law should also cover e-tendering aspects. h. Areasfor improvement in the guidelines Some of the other procurement aspectdareas covered in the Guidelines which need to be clarified,supplemented,enlarged or strengthenedare: e Provisions for incorporating minimum functional specifications in accordance with national/ international standards for goods; ICTAD detailed specificationsor other Sri Lankan standards for works; e Specify the various methods of procurement including their applicability for contracts financed by the Government's consolidated fund at a single place for easy usage by all executiveagencies; e Wide gap between the thresholds for optional and mandatorypre-qualificationrequirements; e Adequate guidance to the implementing agencies on the incorporation of the price adjustment provision; e Unusual provisions empowering the Secretary to waive liquidated damages for special reasons, if provided for in the tender documents; e Restrictive provisions for sale of tender documents to only those who are registered contractors and members of NCCSAL; e Stipulations on the date of start and close of issue (sale)of tender documents; e Different tendering periods for tenders financed by internal and external sources; e Different procedures for correction of errors and establishing the tender price for donor and ConsolidatedFund financed tenders; e Price and/or purchase preferences provision, and exemptions for submission of tender security deposit to a group of organizations(such as approved societiesand parastatals); e With regard to types of insurances to be taken out and coverage,removal of the stipulation that all insurance should be from government-ownedinsurance companies; e Cumbersome procedures for evaluation of unbalanced tenders and different procedures for tenders financed from donor agencies and consolidated fund; and Procedures for hiring of consultants,methods of selection and types of contracts. Though a commendable effort has gone into the drafting of the Guidelines, they need revision to include provisions as discussed above and exclude those provisions which should be covered by the StandardTender Documents. Appendix V Page 8 of IO Organization and Resources Procurement functions are mostly decentralized. The concerned Ministries and Provincial Councils are responsible for procurement within their organizations and the Guidelines govern public procurement in all organizations. The Guidelines are available for sale and all the procurement entities are aware of the Guidelinesand the thresholdsprescribed therein. However, the delegation of contracting authority is inadequate. Since tenders beyond a certain value have to be referred to the Cabinet for decision,the possibility of political interferencein decision-makingis a distinct possibility. Furthermore, there is no separate procurement cadre or procurement core group in the country and most of staff carrying out procurement functions are from general engineering or accounting backgrounds and are inexperienced and are not specially trained in procurement. Furthermore, contract administration is weak, resulting in cost and time over-runs. PSB was established to improve public procurement performance in Sri Lanka and improve the efficiency of procurement processes to expedite the economic and social development of the country for the betterment of the Sri Lankan people. However, the PSB has a lot of independent responsibilities- e.g., it also acts as a support office for MOF for preparation of briefs for the Cabinet Appointed Tender Board (CATB) sub-committee, as well as CATB and Cabinet; it is involved in the appointment of members for TB and TECs. Therefore, PSB needs to be strengthened and manned by competent officers and technical experts, and should deal with planning, settingof standards and monitoring of outcomes and capacity building, including training. PSB should also be entrusted with the responsibility for implementation of the CPAR Action Plan. Procurement Capacity Building System and Institutions PSB contains a training unit. Due to the large number of officers requiring training in public procurement procedures, a "Train the Trainer" type approach has been adopted by PSB with selected senior officers in the key sector agencies being trained and supported to conduct training within their respective agencies. A training master plan has been prepared and PSB's Training Unit has been conducting some programs. Nevertheless, the training effort is inadequate and has to be increased substantially to cover all staff involved in procurement functions. Courses should be developed for various levels and types of staff on a number of topics, including public procurement policies; rules; good practices; standard tender documents; evaluation of tenders; contract management, etc. The training master plan needs to be reviewed, updated and effectively implemented. Further, efforts are required to be made to include public procurement and contract administration' courses in the curricula of engineering, commerce,law and business managementcoursesat the Graduateand Post Graduatelevels. Public Sector Management Pe~ormance Contract administration and monitoring is neglected, reflecting poor implementation capabilityin general. Clear contract provisions and "right-sizing" of contracts play a vital role in efficient implementation. Similarly,clear and complete specificationsand well-defined performance standardscan reduce disputes and ensure satisfactory works contract performance. With respect to goods contracts, contract administration is also weak, particularly with respect to inspection and taking over. Even for consultancy contracts, the monitoring of the completion of all the stipulated tasks as per the "description of services''and the timing and contentsof the reports to be submitted,is rather poor. Appendix V Page 9 of IO Performance on WorldBank and ADB-financed Projects The most serious shortfalls in contract awards are due to: (i) delays in contract awards resulting from delays in carrying out procurement actions according to Guidelines, lack of authority given by executing agenciesto project directors,delays in approval procedure of TEC and CATB and unfamiliarity with ADB Procurement Guidelines; (ii) delays in establishing project units and appointing project staff; (iii) time consuming procedures for land acquisition and resettlement; and (iv) delays in preparation of documents and TOR finalization;and (v) inadequatecounterpartfunds and budget allocations. GeneralRisk Assessment Donor agencies finance a substantial portion of public sector procurement in Sri Lanka. The government follows the procurement procedures as stipulated by the donor agencies in the Loadcredit Agreements. Also, the government has issued the "Guidelinesfor Government Tender Procedure" which establish the procedures and are generally being followed for contracts financed from Government's own Consolidated Fund. Implementation of contracts lacks efficiency and needs improving. However, there are inadequacies in the Guidelines and Standard Bidding Documents (SBDs). Public procurement would improve vastly if the recommendations made in this report are fully implemented. This may take some time, but with the introduction of SBDs, marginal improvementsin the Guidelines,better implementation monitoring by PSB and intensified capacity building effort, Sri Lanka's risk rating for procurement purposes could improve substantially. Competitivenessand Participation of Private Sector in Public Procurement: The private sector needs to be equally more efficient, competent, healthy, honest and vigilant if public procurement is to function effectively. The construction industry is in an infant stage in Sri Lanka and until recently, all big contracts have been awarded to foreign contractors. To develop the construction industry, ICTAD has been conducting training courses. With this, domestic contractors are participating in the tenders and also winning them. The consultant services profession has not developed in Sri Lanka and consultants are usually from outside the country. However, local consultingfirms andor individuals are becoming associated with foreign firms in the form of sub-consultants or individual experts. Performance on Public Procurement Contracts: Quality, Timeliness,Disputes Public procurement performance is not encouraging. Since technical auditing mechanisms are not in place, the quality of construction-particularly for small value contracts supervised by the employer-has scope for improvement. Contractsare generally not completed in time, thereby causing cost and time over-runs. Disputes may arise, but they are generally settled amicably without going to litigation. Mediation and arbitration are not very common. With a small manufacturing industry in the country, most of the finished goods and supplies are from outside the country and their quality is reported to be satisfactory. Summary of Recommendations In summary,the principal recommendations are the needs to: Enact a Public Procurement Law; Revise the Guidelines; e Create an entity to provideoversight to public procurementpolicy; Appendix V Page I O of 10 Strengthen PSB; Develop and mandate standardtender and contract documents; Develop standard functional specificationsfor goods; Dispense with registration requirementsfor contracts of value more than Rs.5 million; Introduce `tendercapacity' as a criteria for award of contracts; Introduceelectronictenderingprogressively; Restrict negotiations; Simplify and streamline review and approval processes to ensure award of the contracts within the initial validity period of tenders; Review,finalize and implement a procurementtraining master plan; Strengthen the institution of the Bribery Commission;and Prescribea `codeof conduct' for procurementprofessionals. Appendix VI Page 1of 2 Appendix VI The MillenniumDevelopment Goals (MDGs)and Related Indicators Sri Lanka Country Profile 1990 1995 1999 2000 1Eradicateextreme poverty and hunger 2015 target =halve 1990$1 a daypovettyandmalnutritionrates Population below $1 a day (%) 6.6 Poverty gap at $1 a day (%) 1.0 Percentageshare of incomeor consumptionheld by poorest20% 8.0 Prevalenceof child malnutrition(% of children under 5) 32.9 Populationbelow minimumlevelof dietary energyconsumption (YO) 29.0 23.0 2 Achieve universal primary education 2015 target =netenrollment to 100 Net primaryenrollment ratio (%of relevantage group) 97.0 Percentageof cohort reaching grade 5 (%) 94.4 83.3 Youth literacy rate (%ages 15-24) 95.1 96.0 96.7 96.8 3 Promote gender equality 2005 target =educationratioto 100 Ratioof girls to boys in primaryand secondaryeducation (%) 98.7 99.0 99.0 Ratioof young literatefemales to males (% ages 15-24) 98.3 99.0 99.5 99.6 Share of women employedinthe nonagricultural sector (%) 30.7 31.1 Proportionof seats held by women in national parliament (YO) 4.9 4 Reducechild mortality 2015 target =reduce 1990under5 mortalitybytwo-thirds Under 5 mortalityrate (per 1,000) 23.0 19.0 17.9 Infant mortalityrate (per 1,000 live births) 18.5 16.5 15.9 15.0 Immunization, measles(% of children under 12months) 80.0 87.0 95.0 5 Improve maternal health 2015 target =reduce 1990maternalmortalityby three-fourths Maternal mortalityratio (modeledestimate, per 100,000 live births) 60.0 Births attended by skilled healthstaff (% of total) 85.0 95.0 6 Combat HIV/AIDS, malaria and other diseases 2015 target =halt, andbeginto reverse, AIDS, etc. Prevalenceof HIV, female (% ages 15-24) 0.1 Contraceptiveprevalencerate (% of women ages 15-49) Number of childrenorphaned by HIWAIDS 600.0 Incidenceof tuberculosis (per 100,000 people) 59.0 Tuberculosis cases detected under DOTS (%) 76.0 7 Ensure environmental sustainability 2015 target = various (see notes) Forest area (%of total land area) 35.4 30.0 Nationally protectedareas (%of total land area) 13.3 13.5 GDP per unit of energy use (PPP$ per kgoil equivalent) 6.3 8.5 8.1 C02 emissions (metrictons per capita) 0.2 0.3 0.4 Access to an improvedwater source (% of population) 66.0 83.0 Access to improvedsanitation(% of population) 82.0 83.0 Access to secure tenure ("70of population) 8 Developa Global Partnership for Development 2015 target = various (see notes) Appendix VI Page 2 of 2 Youth unemployment rate(%of total laborforce ages 15-24) 33.3 24.7 28.2 Fixedlineand mobiletelephones (per 1,000 people) 7.2 14.1 49.8 63.2 Personalcomputers (per 1,000 people) 0.2 1.1 5.6 7.1 General Indicators Population million 17.0 million 18.1 million 19.0 million 19.4 Gross nationalincome($) billion GNIper capita ($) 7.9470.0 12.7billion 15.7billion 16.4billion 700.0 820.0 850.0 Adult literacyrate (YOof peopleages 15and over) 88.7 90.2 91.4 91.6 Totalfertility rate (births per woman) 2.5 2.3 2.1 Lifeexpectancyat birth(years) 70.2 71.4 73.1 Aid (YOof GNI) 9.3 4.3 1.7 1.7 Externaldebt (YOof GNI) 74.5 64.9 63.6 56.7 Investment (% of GDP) 22.6 25.7 27.3 28.0 Trade (%of GDP) 67.2 81.4 78.8 90.2 Source: World Deve.-Ipment -.ic.Lators data-sse, .pi1 2002 . Note: Insome casesthe dataarafor earlier or later years thanthose stated. Goal 1targets: Halve, between1990and2015, the proportionof peoplewhose IncomeIslessthan one dollar a day. Halve, between1990and 2015, the proportion of peoplewho suffer from hunger. Goal 2 target: Ensurethat, by 2015, childreneverywhere, boysand girls alike,will beable to completea full courseof primaryschooling. educationno laterthan 2015. Goal 3 target: Eliminategender disparity Inprimaryand secondary educationpreferablyby 2005 andto all levelsof Goal 4 target: Reduceby two-thirds, between 1990and2015, the under-fivemortality rate. Goal 5 target: Reduceby threequarters, between1990and2015, the maternalmortality ratio. Goal 6 targets: Havehaltedby 2015, and begunto reverse, the spreadof HIWAIDS. Havehalted by 2015, and begunto reverse,the Incidenceof malariaand other majordiseases. Goal 7 targets: Integratethe principles of sustainabledevelopment into country policies and programsand reversethe loss of environmentalresources.Halve, by2015, the proportionof peoplewithout sustainableaccessto safedrinking water. By 2020, to haveachieveda significant ImprovementInthe lives of at least 100mlllion slum dwellers. Goal 8 targets: Developfurther an open, rule-based, predictable,non-discrlmlnatorytrading andfinancialsystem. Addressthe SpecialNeedsof the Least DevelopedCountries.Address the SpecialNeedsof landlockedcountries andSmall Islanddeveloplngstates. Dealcomprehensivelywith the debt problemsof developingcountries through nationaland internationalmeasuresIn order to make debt sustainableInthe longterm. Incooperationwith developingcountries, developand Implementstrategiesfor decentand productivework for youth. Incooperationwith pharmaceutical companies, provideaccessto affordable, essentlaldrugs Indeveloplngcountries. Incooperation with the privatesector, makeavailablethe benefitsof newtechnologies, especiallyinformationand communlcations. Source: MDG Country Profile as provided on the World Bank MDG website (http://sima.worldbank.org/mdg). d I 5 8 k II2