ADB support to Sri Lanka less effective in policy reform

14106-sri-lanka-ied-finalThe Asian Development Bank (ADB) has released an independent evaluation report that assesses its $5.5 billion program for Sri Lanka in the 10 years to the end of 2015.

The program made a substantial contribution to expanding infrastructure services in the country especially in lagging regions and former conflict-affected areas.

ADB’s support for former conflict-affected communities underpinned the program’s overall success. ADB responded positively to Sri Lanka’s post-conflict reconstruction needs by stepping up financing for infrastructure, especially for the severely neglected Northern Province. Small scale, community based infrastructure development during the conflict years also proved highly effective, especially in supporting women and traumatized communities to rebuild their lives. Now that the program is over, ADB needs a country-wide strategy for inclusive growth that builds on these strengths.

ADB however, was less effective in policy reform. A decade of technical assistance for the Ministry of Finance did not slow an alarming decline in state revenues and a deteriorating fiscal position. Fixing Sri Lanka’s taxation system is now part of an International Monetary Fund-backed Extended Fund Facility approved in June earlier this year.

“Sri Lanka’s medium-term growth outlook still remains positive but there are significant downside risks, particularly from the deteriorating fiscal position,” says Marvin Taylor-Dormond, director general of Independent Evaluation at ADB. “These risks need to be decisively addressed to ensure that growth is strong, sustainable and benefits all regions of the country.”

However, the sustainability of ADB’s project portfolio and government development programs—particularly in transport and energy—is being undermined by the lack of progress on policy and institutional reform, with ADB’s engagement in these areas declining over the evaluation period.

“Sri Lanka’s revenue crisis is by far the biggest policy challenge,” says Joanne Asquith, the study’s main author. “Low revenue is driving up the cost of government borrowing and weakening the ability to expand needed public services that can promote inclusive growth.”

The country’s level of government revenue in relation to gross domestic product—an important indicator of a country’s health—is one of world’s lowest, at just 12.1% in 2015 compared to 24.2% in 1978. Because of weak revenue collection, the government’s plans to double education spend to 6% of GDP for example won’t be possible without increasing domestic tax resources.

The study makes clear that further structural reforms are needed to strengthen the Sri Lankan economy, which has been slow to attract private investment and is encumbered by burdensome business regulations. ADB’s support for private sector development was judged less than successful over the period but conditions for future support look more favorable.

ADB approved a $250 million loan in October this year to support capital market development, and is planning to scale up support for public–private partnerships.

The report recommends that ADB intensify its support for policy reform in Sri Lanka’s infrastructure sectors—for example, independent tariff setting by the Public Utilities Commission, which ADB helped establish, to assist the government in improving the financial performance of state-owned enterprises, and to strengthen the private sector by improving the investment climate.

It also recommends that ADB build on the success of its decentralized, community-based project approaches for infrastructure, social services and livelihood assistance to promote inclusive growth for economic and social development nationwide. ADB should continue to support skills development, and help the government to protect the natural environment.

“Sri Lanka needs to attract private sector investment to sustain growth” says Taylor-Dormond. “Supporting the environment for business development should be a key part of ADB’s next country strategy”.