The Sri Lankan country context has evolved considerably since the previous Country Assistance Strategy was prepared. The 26-year conflict ended in May 2009, and resettlement of internally displaced people and demining are now largely complete. Sri Lanka is transitioning to middle-income country status. The macroeconomic situation has improved. Sri Lanka can now focus on long-term strategic and structural development challenges.
The Country Partnership Strategy (CPS) for FY13-16 is designed to help the government of Sri Lanka address long-term strategic and structural challenges, including those related to the transition to being a middle-income country. The World Bank Group’s relationship with the government has strengthened with increased dialogue and access to IBRD financing as of FY12, allowing for significantly increased financial support during the coming years.
The CPS supports the national development plan as laid out in the “Mahinda Chintana, Vision for the Future.” The CPS focuses on three areas: (i) facilitating sustained private and public investment; (ii) supporting the structural shifts in the economy; and (iii) improving living standards and social inclusion.
Country Context
Sri Lanka is on track to meet most of the Millennium Development Goals. UNDP has identified Sri Lanka as an early achiever on 10 of the 21 indicators, including those related to universal primary education and gender equality. However, Sri Lanka is doing less well on malnutrition and the environment.
Sri Lanka’s changing demographics – the aging and urbanization of the population – is having dramatic impacts on education and health as well as the economy. By 2036, more than 22 percent of the population will be over 60 and there will be 61 dependents per 100 adults.
Unemployment rates and poverty rates have declined in recent years. As of second quarter of 2011, unemployment was only 4.2 percent, though higher among youth, women and the more educated. Poverty rates fell from 15 percent of the population in 2006/7 to 9 percent in 2009/10. Remaining concentrations of poverty are not limited to a single part of the country.
The Sri Lankan economy grew at a vigorous 8.3 percent during 2011, largely due to the post-conflict rebound. The public debt and deficit have been gradually brought down. Sri Lanka has been experiencing an increase in the trade deficit, estimated to be about 17 percent of GDP in 2011, financed largely by remittances and tourism receipts.
Over the CPS period, both exports and imports are expected to grow rapidly. As imports will start from a higher base, the merchandise trade deficit is expected to widen. Sri Lanka’s fiscal balance and debt situation are expected to continue to improve, assuming continued efforts to enhance revenues, reign in expenditures and strengthen debt management. Inflation is expected to remain moderate.
Country Vision, Achievements and Challenges
The first goal of the Mahinda Chintana – to increase per capita income to $4,000 by 2016 – will require sustained high economic growth (8 percent per year), driven by a high investment rate. Of the targeted investment rate (33-35 percent of GDP per year), 6-7 percent of GDP per year is expected to come from public investment with the remainder coming from the private sector. While public sector investment targets were achieved in 2010 and 2011, it will be difficult to sustain these levels in the absence of increased fiscal space. On the private sector investment side, the level reached 22 percent and 23 percent in 2010 and 2011 falling short of the targets. Reversing this trend will require concerted efforts to improve the investment climate.
The second goal is shifting towards a more knowledge-based, globally integrated and competitive, environmentally friendly, internally integrated and increasingly urban economy. Sri Lanka has a solid base for achieving this goal, with a well-educated population and a wealth of environmental assets. Challenges going forward include providing systems and incentives to build an appropriately skilled labor force, establishing economic policies that encourage competitiveness, stronger efforts on environmental sustainability and adaptation to climate change, and modernizing infrastructure systems to integrate the disparate parts of the country and meet the needs of the increasingly urban population.
The third goal is ensuring improvement in living standards and social inclusion. With its long history of attention to access to basic services, Sri Lanka excels for its income level on most social indicators, with the exception of malnutrition. As Sri Lanka becomes a middle income country, new challenges are emerging (e.g. a rapidly aging population) and improving the quality of services will be a major issue. While increasing the quality of services, an important challenge will be to ensure that benefits are equitably shared across all segments of the population and to prioritize social inclusion and ethnic reconciliation. Successful achievement of this goal will require continuation of Government efforts to resettle Internally Displaced Persons, to invest in the conflict-affected areas of the North and East, and to engage with the political opposition.
World Bank Group Partnership Strategy
In the area of sustained private and public investment, the World Bank Group will support the government effort to improve the investment climate, strengthen governance and reduce the inefficiencies of the public sector. The IFC plans to catalyze private investment through directly investing in important projects in key sectors. The World Bank will also support the Government’s efforts to maintain a high level of public investment and improved efficiency of public expenditures and financial management and procurement practices in line with international standards.
In supporting a structural shift in the economy, the World Bank Group will deepen its assistance to the knowledge based economy with investments in skills, research and innovation. In addition, support to the development of infrastructure needed for sustainable urban development and better linkages within Sri Lanka will be enhanced.
Finally, the World Bank Group will continue to support improvements in living standards and social inclusion in order to ensure the benefits of rapid growth and higher quality services are broadly shared. Activities in this area already include three ongoing livelihood projects in the conflict-affected North and East regions. During the CPS period, the program will further include support to the national health sector program; efforts to address malnutrition; integration of women, youth and the disabled; and IFC support for inclusive growth.
Risks and Risk Management
This CPS includes a careful assessment of key risks in the program, and steps to manage such risks. The first set of risks is related to the implementation environment and is reflective of Sri Lanka’s specific development challenges. These include: (i) external shocks emanating from Euro Area crisis; (ii) macroeconomic and fiscal risks; and (iii) natural disasters. The second set of risks is related to the design of the program itself. These include portfolio risks related to governance, procurement and financial management and risks related to government capacity to manage the increased volume of lending. The CPS presents ways to mitigate these challenges. Moreover, the flexible approach of this CPS will allow adjustment in the program in line with evolving government priorities and country needs, within the broad direction for engagement outlined in this CPS.
