SRI LANKA - Institute of Policy Studies · 3.5.2 Pakistan-Sri Lanka Free Trade Agreement 35 3.5.3 South Asia Free Trade Agreement 36 3.5.4 Asia-Pacific Trade Agreement 37 3.5.5 Bay

SRI LANKA

State of the Economy

2007

INSTITUTE OF POLICY STUDIES 99, St. Michael’s Road, Colombo 3, Sri Lanka

SRI LANKAState of the Economy

2007

INSTITUTE OF POLICY STUDIES99, St. Michael’s Road, Colombo 3, Sri Lanka

Copyright C September 2007Institute of Policy Studies, Sri Lanka

ISBN 978-955-8708-52-1

National Library of Sri Lanka-Cataloguing-In-Publication Data

Sri Lanka State of the Economy 2007 / Institute of

Policy Studies .- Colombo: Institute of Policy Studies, 2007.

189; 17 cm.

ISBN 978-955-8708-52-1 Price:

i. 330.95493 DDC 22 ii. Title

1. Economy - Sri Lanka

Please address orders to:Institute of Policy Studies99 St Michael’s Road, Colombo 3, Sri LankaTel: +94 11 2431 368, 2431 378 Fax: +94 11 2431 395Email: [email protected]

Website: www.ips.lk

This report was prepared by a team led by Dushni Weerakoon under the overall guidance of the Executive

Director of the Institute of Policy Studies - Saman Kelegama. The research team consisted of Nisha Arunatilake,

G.D Dayaratne, Deshal de Mel, Jagath Dissanayake, Ayodya Galappattige, Asha Gunawardena, PriyankaJayawardena, Tilani Jayawardhana, Malathy Knight-John, Sunimalee Madurawela, Dilhani Marawila, Ramali

Perera, Parakrama Samarathunga, Athula Senaratne, Manoj Thibbotuwawa, Ganga Tilakaratne, Kanchana

Wickremasinghe, Janaka Wijayasiri and Yatila Wijemanne. We thank Wimal Hettiarachchi, Sisira Jayasuriya,S.A Karunaratne and Shelton Wanasinghe for useful comments. Data support from Indika Siriwardena,

editorial support from Manu Tissera-Gunesekara and D.D.M Waidyasekera, and formatting support from

Asuntha Paul is gratefully acknowledged. The views expressed in this publication are those of the researchteam and do not necessarily reflect those of the Institute of Policy Studies.

Contents

Policy Perspectives and Performance

1. Policy Perspectives 1

2. Economic Performance 82.1 Introduction 82.2 Output 9

2.2.1 Sectoral Performance 92.2.2 Trends in Employment 112.2.3 Savings and Investment 12

2.3 Fiscal Policy Management 132.4 Monetary Policy Developments 152.5 External Sector Performance 18

2.5.1 Developments on External Debt 202.5.2 Exchange Rate 21

2.6 Conclusion 22

3. International Economic Environment 243.1 Introduction 243.2 Trends in the Global Economy 24

3.2.1 Advanced and Emerging Economies 243.2.2 World Trade and Commodity Prices 253.2.3 Capital and Aid Flows 263.2.4 Global Outlook 27

3.3 Implications for Sri Lanka’s External Trade Performance 273.3.1 Garment Exports in a Quota Free Environment 30

3.4 WTO Doha Round Negotiations: An Update 323.5 Preferential Trade Arrangements 34

3.5.1 India-Sri Lanka Free Trade Agreement 343.5.2 Pakistan-Sri Lanka Free Trade Agreement 353.5.3 South Asia Free Trade Agreement 363.5.4 Asia-Pacific Trade Agreement 373.5.5 Bay of Bengal Initiative for Multi-Sectoral Technical

and Economic Cooperation 373.5.6 Generalized System of Preferences (GSP) Schemes 383.5.7 Preferential Market Access: Way Forward 39

3.6 Conclusion 39

Empowerment of the Poor

4. Empowerment of the Poor 414.1 Introduction: Poverty and Empowerment 414.2 Empowerment: Key Elements, Forces and Principles 42

4.2.1 Elements of Empowerment 424.2.2 Major Forces Influencing Empowerment 434.2.3 Empowerment Principles 43

4.3 Initiatives on Empowerment in Sri Lanka 444.4 Land and Empowerment 47

4.4.1 Improving Access to Productive Resources and BasicServices 47

4.4.2 Role of National Government 484.4.3 Role of Local Government 494.4.4 Access to Justice and Legal Aid 504.4.5 Local Community Participation 50

4.5 Empowerment of the Poor through Microfinance 514.5.1 Nexus of Microfinance, Poverty and Empowerment 514.5.2 Improving Access to Financial and Non-financial

Services through Microfinance 554.5.3 Role of National and Local Governments 564.5.4 Local Community Participation 57

4.6 Summary and Conclusion 58

Leading Issues in the Development Process

5. Making Technical Education and Vocational Training More Effective 605.1 Introduction 605.2 Administration and Governance of the TEVT Sector 61

5.2.1 Issues Relating to the TEVT Sector 615.2.2 Structure of the TEVT Sector 615.2.3 Accreditation and Certification Used by TEVT Sector 63

5.3 Improving Access to the TEVT Sector 645.3.1 Information and Data for Monitoring Access to TEVT 665.3.2 Improving Access to TEVT 675.3.3 Giving a Second Chance 67

5.4 Making TEVT More Competitive and Demand Driven 685.5 Developing Skills Needed for the Modern Work Place 695.6 Efficiency Enhancing Mechanisms 695.7 Conclusions and Policy Implications 69

6. Access to Health Care 716.1 Introduction 716.2 Challenges in Access to Health Care 716.3 Access to Primary Health Care 746.4 Improving Access to Medicine 786.5 Access to Mental Health 806.6 Conclusion 83

7. Service Delivery at the Regional Level: Development Policy Challenges 847.1 Introduction 847.2 Service Delivery at the Provincial Level: An Inter-play of Incentives,

Accountability and Outcomes 847.3 Fiscal Constraints to Effective Service Delivery at the Regional Level 877.4 Human Resource Constraints to Effective Service Delivery

at the Regional Level 907.5 Realities of Electoral Dynamics at the Regional Level 907.6 Service Delivery at the Regional Level: Issues for Policy

Action and Debate 91

8. Poverty and the Environment: Conditions, Trends and Implications 938.1 Introduction 938.2 Poverty-Environment Nexus: A General Overview 93

8.2.1 Poverty, Affluence and Environmental Degradation 94

8.3 Poverty and Environment in Sri Lanka 958.3.1 Rural Poverty and the Environment: Land Resources 988.3.2 Rural Poverty and the Environment: Water Resources 1008.3.3 Rural Poverty and the Environment: Forest Resources 1018.3.4 Rural Poverty and the Environment: Inland Fisheries 1038.3.5 Urban Poverty and the Environment: Outdoor Air Pollution 1048.3.6 Urban Poverty and the Environment: Indoor Air Pollution 106

8.4 Conclusions 107

Policy Insights

9. Pro-Poor Agri-Business Models: Revitalizing Small Holder SpiceCultivation 1099.1 Introduction 1099.2 Small Farmer Susceptibility 1109.3 Can Small Farmers Survive in a Globalized World? 1119.4 Private Sector Pro-Poor Business Model: A Possible Alternative 1129.5 Conclusion and Policy Recommendations 114

10. Reform of the Donor-Recipient Nexus in Aid Delivery 11610.1 Introduction 11610.2 Aid Conditionality and Options 116

10.2.1 Political Conditionality 11610.2.2 Alternative Sources of Finance 117

10.3 Reforms to the Aid Architecture 11810.3.1 Recipient Voice in Aid 11810.3.2 Impact on Domestic Capacity 12010.3.3 The Paris Declaration 12110.3.4 Transparency 12210.3.5 Decentralization of Aid Management 122

10.4 Conclusion 123

11. Natural Disasters and Socio-Economic Security 12411.1 Introduction 12411.2 Reducing Physical Vulnerability through Disaster Management 12411.3 Provision of Socio-Economic Security for Vulnerable Groups 127

11.3.1 Disaster Relief Activities by the State 12711.3.2 Civil Society and Community Initiatives 128

11.4 Market-based Interventions for Social Security 12811.4.1 Crop Insurance Schemes 12911.4.2 Insurance for Wild Elephant Attacks 12911.4.3 Old-age Insurance Schemes for Informal Sector Workers 130

11.5 Conclusion and Policy Suggestions 130

12. Unemployment Insurance 13212.1 Introduction 13212.2 What is Unemployment Insurance? 13212.3 Why an Unemployment Insurance Scheme Would

be Useful for Sri Lanka 13312.3.1 Issues Concerning the Introduction of an Unemployment

Insurance Scheme in Sri Lanka 13412.4 Conclusions 136

13. SAARC Development Goals 13713.1 Introduction 13713.2 Description of the SDGs 13713.3 Current Status of SDGs in Sri Lanka 13813.4 Challenges and Implications for Sri Lanka 13913.5 Conclusion 140

Prospects14. Prospects 142

Appendices

Appendix A: Macroeconomic Indicators i

Appendix B: Capital Market (Statistical Base) xxvi

LIST OF FIGURESFigure 2.1 : Composition and Rate of Growth in Industrial Output 10Figure 2.2 : Composition and Rate of Growth of Services Sector Output 10Figure 2.3 : Regional Distribution of Industrial Enterprises 11Figure 2.4 : Trends in Unemployment 12Figure 2.5 : Interest Rate Response to Rising Inflation 15Figure 2.6 : Movements in Interest Rates and Inflation 16Figure 2.7 : Trends in Select Monetary Variables 17Figure 2.8 : Sectoral Distribution of Loans of LCBs 18Figure 2.9 : Inflation Trends 19Figure 2.10 : Average Oil Prices and Import Bill 20Figure 2.11 : Debt Service Payments and Export Earnings 21Figure 2.12 : Real and Nominal Exchange Rate Trends 22Figure 5.1 : Percent of Population Getting any Training, by Level of

Education 65Figure 5.2 : Percent of Population Getting any Training, by Province 65Figure 5.3 : Training by Level of English Literacy 66Figure 6.1 : Distribution of Pharmacists and Dispensers in Government

Hospitals 79Figure 6.2 : Needs Assessment of Large Mental Hospitals in Western Province 82Figure 8.1 : Poverty-Environment Nexus 95Figure 8.2 : Income Share of Agriculture and Poverty by District 97Figure 8.3 : Landlessness and Poverty by District 98Figure 8.4 : Poverty and Non-irrigated (Rain-fed) Area in Dry Zone by District 100Figure 8.5 : Poverty and Access to Safe Water by District 101Figure 8.6 : Deforestation and Poverty 102Figure 8.7 : Income and Fuel Choice of Households 106Figure 9.1 : Schematic Presentations of a Traditional and a Modern

Supply Chain 111Figure 11.1 : Disaster Management Strategies 125Figure 11.2 : Percentage Area of Paddy Extent Covered by Crop

Insurance Schemes 130

LIST OF TABLESTable 2.1 : GDP Growth 8Table 2.2 : Production Trends in Principal Agricultural Crops 9Table 2.3 : Employment Elasticity of Output and Sectoral Distribution of

Employment 12Table 2.4 : Trends in Savings and Investment 13Table 2.5 : Fiscal Operations 14Table 2.6 : Government Debt Indicators 14Table 2.7 : Trends in Consumer Price Inflation Rates 15Table 2.8 : External Sector Developments 19Table 3.1 : Overview of the World Economic Outlook 28Table 3.2 : Export Growth of Garments 31Table 4.1 : Household Level Impact of Microfinance: Perceptions of

the Members of MFIs 53

Table 5.1 : Training Offered for Job Seekers 62Table 5.2 : Institutions Registered with TVEC, by District, Ownership

and Category 64Table 6.1 : Utilization of Out-patient Care as a Percentage by Income Group 72Table 6.2 : Coverage of Health Care Delivery by Selected Districts 73Table 6.3 : Out-patient /MO and Percentage of Population below Poverty Line 75Table 6.4 : Distribution of Health Personnel by Districts 77Table 6.5 : Number of Beds for Psychiatry and Psychiatrist Availability

by District 81Table 7.1 : Distribution of Growth: A Spatial View 85Table 7.2 : Performance Indicators for Selected Services:

Inter-Provincial Variance 86Table 7.3 : Fiscal Overview: Provincial Councils 88Table 8.1 : Broad Categories of Environmental Resource and their Use

in Rural Areas in Sri Lanka 98Table 8.2 : Comparison of Socio-economic Conditions of Inland

Fishermen and Seasonal Tank Farmers 104Table 8.3 : Emission Inventory of Pollutants from Thermal Electricity

Generation 105Table 13.1 : SAARC Development Goals 137

LIST OF BOXESBox 2.1 : Stock Market Behaviour 17Box 2.2 : The New Companies Act of Sri Lanka: Companies Act No. 7 of 2007 23Box 3.1 : Oil Price Hedging 30Box 3.2 : Proliferation of Regional Trade Arrangements 33Box 4.1 : Microfinance and Empowerment: Contrasting Paradigms 52Box 8.1 : Climate Change and Possible Impacts 96Box 9.1 : Private Sector Business Models 113Box 10.1 : The Changing Role of the Multilateral Financial Institutions 119Box 11.1 : Rain Related Congestions/Disasters 126Box 13.1 : SAARC Development Goals 138

1

1. Policy Perspectives

Sri Lanka seems set to face formidablechallenges on both the political andeconomic fronts in 2007. Yet, it is preciselyhow fissures - in the economy and society -are handled that will dictate the outlook forthe country's broader development objectivesin the medium to longer term. The primaryconcern on the political front, of course, isthe evolving process towards a 'negotiatedsettlement' of the long-standing conflict. Thevicissitudes of that process can only be merespeculation at this point. In the interim,however, the most immediate impact on theoutlook for Sri Lanka's economicperformance will likely depend on how thepace and intensity of the conflict is managedin the coming months. In addition to impactson the economy of the conflict relateduncertainty, stability of the macroeconomicenvironment and progress on medium termeconomic reforms are two other areas ofconcern. With 2006 recording the highestever rate of GDP growth achieved since 1978- and the third strongest growth rate onrecord - Sri Lanka's short-term economicoutlook can seem bright. However, a closerlook at the details of economic performanceshows the depth and complexity of theproblems the country faces.

On the face of it, the figures are compelling.Sri Lanka's real GDP grew by 7.4 per cent in2006 on the back of 6 per cent growth in2005. Over the past two years, the economyhas registered an average annual pace ofmore than 6.5 per cent growth, comparedwith around 5 per cent in the previous threeyears. The country's rate of unemploymentis at its lowest, estimated at 6.5 per cent in2006. However, concerns over the underlyinghealth of the macroeconomic environmentsupporting this acceleration in growth and

reduction in overall unemployment havemuted confidence in the ability to sustainthis momentum over the medium term.

Sri Lanka's economy displays a number ofsigns that demand is rapidly outpacingsupply. Annual consumer price inflation hadrisen to almost 17.5 per cent by mid-2007,well above developing Asia's average rateof around 4 per cent. There are many othersigns of excess: the current account deficitin the balance of payments (BOP) widenedsharply to 4.9 per cent of GDP in 2006; totalbank lending to the private sector has grownby 24 per cent - well above the pace ofnominal GDP growth; the stock market hasbeen 'bullish' with investors searching forriskier but higher yields amidst negativereturns on fixed income assets. Amidst suchsigns of a weakening in the macroeconomicenvironment, the predominant policyconcern remains the risk that inflation mayfail to moderate sufficiently.

The problems stem from the fact that SriLanka's recent economic expansion has beendriven partly by relatively relaxed fiscal andmonetary policies. Though the overall fiscaldeficit in 2006 was curtailed to 8.4 per centof GDP by cutting back sharply on allottedcapital expenditure, the borrowingrequirement remained high. With thedomestic financing burden rising to 5.8 percent of GDP in the face of a progressive risein inflationary pressures experienced sincemid-2004, significant pressure was placedon the conduct of monetary policy.

Against this background, the interest ratepolicy response was moderate. Policy makersare understandably reluctant to choke offgrowth by raising interest rates too much at

State of the Economy 2007

2

a time when Sri Lanka needs rapid growthto create jobs and reduce poverty.Nonetheless, an over modest response in theface of a progressive build-up of inflationarypressures carries its own risks. The mostpervasive risk perhaps is that, in anenvironment of heightening inflationaryexpectations, monetary policy may need tobe tightened more than in an environmentof low inflationary expectations. As statedin the IPS State of the Economy 2005 report"if interest rates remain unchanged for themost part, allowing real rates to fall, thiswill cushion the initial impact on output,but at a possible risk of higher inflation later,and hence eventually a sharper slowdown"(p.2).

As the annual rate of inflation gathered pacefrom May 2004, the first policy rateadjustment came in November 2004.Though policy rate adjustments were madesubsequently, inflationary pressures werelargely unabated, and continued to riserapidly from mid-2006 to reach a high of17.4 per cent by April 2007. Thus, despiteseveral upward adjustments to interest rates,real interest rates were often negative duringthe last two years. Too low interest ratesencourage undue risk-taking in financialmarkets. When prices have lost touch withfundamentals, other signs of excess result -such as rapid credit growth, a surge in stockmarkets, etc. These are symptoms that havebeen evident in the economy over the lasttwo years.

The economy has witnessed a significantcredit boom in recent years. Bank lendingto the private sector (firms and households)expanded by 24 per cent over the past year.In addition, net credit to the governmentalso increased sharply to meet the fiscalfinancing requirements of the government,fuelling a rapid expansion in money supplygrowth. The growth of monetary variableshas undoubtedly been a key driver of

inflationary pressures in the Sri Lankaneconomy, with excess liquidity spilling overinto inflation. Cost-push price effectsresulting from the pass-through in fuel priceshas also added to rising inflation. But thefact that Sri Lanka's inflation rate remainswell above the average for the South Asianregion and other Asian developing countriesindicates that domestic policy, rather thanexternal factors such as oil price increasesare largely responsible for Sri Lanka's currenthigh inflationary rates.

A much tighter monetary policy stanceadopted by the government since thebeginning of 2007 has already had an impacton inflation. There was a sharp drop in point-to-point inflation from a high of 20.5 percent in January 2007 to 13 per cent by endof June 2007. The monetary authorities haveset firm targets to curtail the expansion ofmonetary variables hoping to gradually lowerinflation to a target range of 8.5-12 per centby end 2007. Whether or not monetaryauthorities will be able to ensure thatmonetary targets are met will dependcritically on the conduct of fiscal policy, viz.,the overall borrowing requirements of thegovernment.

The government has signalled that it intendsto rely increasingly on foreign loans to bridgeits fiscal deficit. Foreign loans are projectedto increase from 1.5 per cent of GDP in 2006to 3.6 per cent of GDP in 2007 for deficitfinancing purposes. Opting for foreignfinancing in the current climate of highdomestic interest rates, and the absence of adeep and liquid capital market capable ofhandling domestic debt instruments withoutplacing further stresses on interest rates,might seem an attractive option. In 2006,for example, the government raised US$ 680million (by issuing 2-3 year maturity dollarbonds and raising a syndicated loan). Similarborrowings have been announced in 2007too. In June 2007, the government called

Policy Perspectives

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for proposals to raise US$ 500 millionthrough bond issue to serve as a buffer fundfor infrastructure development.

However, foreign borrowings carry additionalrisks. Large amounts of external public debt,especially short-term un-hedged foreigndenominated debt, can lead to greaterfinancial risk exposure. While the revisionon the outlook for Sri Lanka’s sovereign creditrating by Standard and Poor’s from negativeto stable in August 2007 is a positivedevelopment, ratings can impactsignificantly on access to capital markets andon the terms of borrowing. Adverse ratingscan have negative consequences for debtsustainability. As the ratio of short-term debtto GDP increases or the debt servicingobligations increase, there will be morequestions about the viability of rolling overexisting external debt. While such risks aregreater under fixed or pegged exchange rateregimes, governments operating underfloating exchange rate regimes are also notimmune to these risks: a loss in marketconfidence can trigger capital flight and anexchange rate depreciation. Whatever thebalance between domestic and foreignborrowing is opted for, the room formanoeuvre is limited. Sri Lanka's total debtto GDP ratio remains high - the recently seenreduction is largely a reflection of highnominal GDP growth in the economy thandue to any improvement in Sri Lanka'soverall debt dynamics.

The financing constraints on the governmentare stringent. The challenge for thegovernment is to ensure that the economicexpansion of 2005-06 is not simply togenerate a short term boom on the back ofrelaxed fiscal and monetary policies, but tolay the basis for a sustainable medium termgrowth platform. This requires raising SriLanka's investment in critical areas. Thegovernment has articulated a clear set ofpriorities: investing in infrastructure, health

and education, and in improving agriculturalproductivity. These are clearly the rightobjectives; the problem is how they are tobe achieved.

Accelerated investment in infrastructure is anecessity if the economy is not to run upagainst supply side constraints. Efforts toaccelerate growth without addressing suchconstraints will be stymied in the mediumto long-run as inflationary pressure ignites.The government has ambitious plans toincrease total investment spending to 35 percent of GDP over the next three years. Re-development needs of the newly liberatedEastern Province are likely to add to theinvestment drive of the government as itattempts to restore physical and socialinfrastructure with a view to rebuilding thesocial welfare and economic developmentcapacity of the province. In this regard,reconstruction plans for the province is alsolikely to place a high priority on othersources of assistance such as donor funding,and in particular on private-sector leddevelopment.

The government will hope that some of thecountry’s investment needs will be financedby public-private partnerships, but involvingprivate investors in infrastructure investmenthas proven to be difficult in the past, notleast because investors are uncertain whetherthey can earn a reasonable return on theirinvestments. Thus, in practice, any majorinfrastructure investment drive will involvesome increase in government spending. Theextent to which the government cansuccessfully take the lead on infrastructurespending will also depend on its approachto implementing broader reforms in theeconomy because public-private partnershipsrequire regulatory reforms to protect theinterests of both investors and consumers.

Thus, the policy options are clear. In theabsence of progress on reforms on a broad


4

front, the government will be compelled tolook for substantial extra borrowing forinvestment purposes. Of course it isappropriate for a government to borrow inorder to 'invest in the future'. Public spendingon areas that clearly represent investment inthe future benefits the economy in severalways. It can encourage further privateinvestment, provide a short run stimulus tothe economy and increase its long run growthpotential. Productive investments cangenerate increased future tax revenues to payoff the borrowings. Of course all this alsorequire that attention is paid to the cost-effectiveness of government spending - forexample, by ensuring that public investmentin infrastructure is responsive to the mostcritical needs.

However, there are risks in adopting anapproach that allows too much flexibilityin public finance, particularly in the contextof Sri Lanka's present fiscal situation. Alarger fiscal deficit, unless carefully targetedto address critical investment needs, mayexacerbate existing macroeconomicimbalances. An infrastructure investmentprogramme based on heavy governmentborrowing can keep the economy afloat inthe medium term, in anticipation thatproductivity gains in the longer term willallow the government to restructure its fiscalmanagement. The risk in the interim is thatthe macroeconomic environment is likely tobe tightly constrained and volatile - withrising debt service obligations furtherconstraining room for manoeuvre - leavingthe government with limited policy optionsin the face of any shock - domestic or external- and with very little tolerance margin forany policy errors.

The alternative to a potentially volatilemacroeconomic environment - and a 'stop-go' policy environment - is to boost supplyby speeding up reforms on a broad front.Even as the government takes the necessary

steps to cool demand with a much tightermonetary policy stance, the main focus ofthe government's attention should be onsupply, so as to dismantle the many barriersto increasing domestic output. Two pressingareas for action can be identified: (i)improving the quality of fiscal consolidationby re-orienting expenditures to priority andgrowth enhancing areas; and (ii) payingrenewed attention to improving the country's'investment climate' - the policies,regulations and institutions that canencourage active private sector participation.

Even high growth and well intentionedpolicy can be ineffective in meeting thefundamental objectives of sustainablegrowth, equity and poverty alleviation if thereis a failure to reform public sector services.The rise of coalition governments withsmaller parties that advance the vestedinterests of narrow constituencies canconstrain economic reform programmes.This can be a factor that can make a reformprogramme falter in Sri Lanka. Hence, thepace and scope of economic reforms mayhave to be tailored to the need to findconsensus between the proponents of rapidreform and their opponents. This may callfor an incremental process of reforms, withflexibility for governments to fashion astrategy that suits its political and socialobjectives.

It is much harder and more painful to carryout reforms at a time where fiscal constraintslimit the capacity to compensate theinevitable losers from any reform process.This means that it is important to pace andsequence reforms so as to ensure the politicalviability and long term sustainability of thereform programme. But it is essential thatreforms are not postponed until the onset ofa crisis. It is far better to carry out reformswhen there is some room for flexibility. Andmost importantly, governments shouldeffectively articulate and convey the message

Policy Perspectives

5

that prudent economic reforms are in thelong term interests of the poor. Withoutgrowth, poverty alleviation can never besustainable. Thus, it is imperative that theoverall policy programme should be basedon the recognition of the overriding needfor substantive reforms if sustained economicdevelopment were to be achieved.

The central theme of the State of theEconomy 2007 report is that betterinfrastructure and improved public servicesare needed not only to increase growth, butalso to ensure that the benefits of that growthare spread more widely. Improved access tobetter quality infrastructure, education,health, etc., are essential to make the ruralpoor more mobile and enhance theiropportunities for improving standards ofliving. It recognizes that widespread povertyand inequity are themselves a drag on growthas the poor cannot take a full part in theeconomy.

The need to check growing inequalitybetween regions has been rightly identifiedas a priority in the government's developmentgoals. Despite all Sri Lanka's achievementson social indicators, poverty remainsentrenched, particularly in rural Sri Lanka,where inefficiencies and inequalities alliedto the allocation and distribution of landand credit in particular have perpetuatedpoverty. Lack of opportunities to participatein economic decision making, economicactivities, and markets has been the rootcause of poverty. This implies that'empowering' the poor - increasing authorityand control over resources and decisions thataffect their lives - is necessary to give theman opportunity to actively participate in theeconomy and reap the benefits of economicgrowth.

Land is the most basic productive resourceand the key asset that facilitates wealthaccumulation and transfer in rural areas.

Nonetheless, Sri Lanka's present land policyis characterized by pervasive governmentownership - with control of about 80 percent of all lands - rigidity in transactions,low market activity and poor conflictresolution. While a complete freeing up ofthe land market may not be politicallyrealistic - nor even economically desirable -incremental reforms can and should beconsidered. Establishing or improving rentalmarkets can reduce the extreme rigidity ofthe existing legislation. Policy reforms toenable local governments and communityorganizations to resolve land relatedproblems and conflicts can substantiallyreduce transaction costs.

Similarly, access to financial resources iscentral for income generation and assetbuilding among the poor. Microfinanceservices have emerged as a significant sourceof credit to the poor given the failure of boththe formal financial sector and informalsources (such as money lenders) to meet therequirements of the poor. But whilemicrofinance has expanded substantially inSri Lanka with a wide range of providers anda large number of points of service,penetration of services to remote rural areasstill remains limited. The quality of thefinancial services needs to be improved bydiversifying the product base and designingmore demand-driven products - providingtraining in business development, improvingmarketing facilities, etc. Improving theregulatory framework for the microfinancesector in Sri Lanka - particularly to facilitateprivate sector participation - is another arearequiring government policy attention.

The supply-side constraints in infrastructure,skilled labour and public services in Sri Lankacan seem formidable. However, what needsto be done comes back to the core issue:improve the capacity of the public sector todeliver basic services. An increasing numberof countries have begun to transfer


6

responsibility for the delivery of basicservices to lower tiers of government. Whilethe reasons for this shift vary - fiscal/administrative/political - a commonmotivation is the assumption thatdecentralization would improve servicedelivery. This assumption hinges on thepossibility of a tighter accountabilityrelationship between service providers andusers of these services at lower tiers ofgovernment. However, the principle ofsubsidiarity is critical to such a relationship.It is important to assess the manner in whichdecentralization has been carried out in SriLanka, bearing in mind the need for incentivestructures that ensure an appropriate line ofaccountability between agents. Successfuldecentralization requires reform on manyfronts; instituting incentive structures toreverse the over-centralized nature of servicedelivery, and creating competition in servicedelivery by bringing in other stakeholderssuch as the private sector into the picture.

Private participation in the delivery ofservices in Sri Lanka has been increasing overtime. However, this could undermine publicpressure for improved public sector servicedelivery as greater numbers of the politicallyarticulate better-off community groups accessprivately provided services. This in turn couldhinder efforts to improve the quality andefficiency of public services in areas such ashealth and education, thereby adverselyaffecting the most disadvantaged groups.

Consider the case of health services. Thesignificant success in improving Sri Lanka'saggregate health indicators does notnecessarily indicate fairness or pro-equity inaccess. There is overwhelming evidence tosuggest that socio-economic inequalities inhealth exist in many areas and that the poor,in particular, are disadvantaged in terms ofhealth status, mortality, non-communicablediseases, etc. Difference in the way healthcare providers and institutions respond to

vulnerable populations in rural areas has alsoled to variation in the quality of medicalcare they receive. If unchecked, inequitiesin access to health care services can aggravateexisting vulnerabilities. The lower healthstatus of the poor suggests that unsatisfactorysocio-economic conditions - inadequateincomes, poor housing, lack of educationopportunities, etc. - is the overriding factorbehind the barriers to access, and resultanthealth inequalities within the country.

The problems are similar in education.Ensuring equity in access to quality educationhas been a pervasive problem in Sri Lanka.Despite reforms to the education system overtime, youth unemployment, particularlyamongst the educated youth, has persistedover the years. According to Labour ForceSurvey data, in 2000-04, the averageunemployment rates for males between 15-19 and 20-24 years were 26 per cent and 21per cent, respectively. For females, thecorresponding figures were 33 per cent forboth age groups. Many of them have highlevels of general education, as well asvocational and technical level training.However, poor quality of training, lack ofrelevance, and lack of human and physicalresources at the training institutions remainmajor supply side constraints. On thedemand side, inability to meet costs oftraining, the high opportunity cost of training,and low returns have constrained many,particularly the poor, from accessingvocational and technical related skilldevelopment opportunities. The need forreforms - to improve access, the relevanceof training, etc.,- to enhance theemployability and productivity of youth,particularly those in marginalized populationgroups, is critical if Sri Lanka is to avoidheightening social inequities.

Sri Lanka's policy priorities emphasize theneed for simultaneously increasing growthand reducing poverty. The long term viability

Policy Perspectives

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of these objectives depends on thepreservation of the natural environment.Economic growth must be managed carefully,or it can leave a degraded naturalenvironment for the future. The latter in turnwill impact disproportionately on the poor.Whilst it is recognized that poverty is neitherthe sole cause nor the only effect ofenvironmental degradation, the poor aretypically more directly dependent onenvironmental resources. They are also mostlikely to be those unable to access manyenvironmental benefits such as cleanneighbourhoods, safe water, etc., and morevulnerable to environmental hazards. Suchhazards lead to lost livelihoods, health risks,and property damage which furtheraccelerates the process of impoverishment.No poverty alleviation, rural development,or social protection programmes would besustained unless appropriate measures toconserve the natural resource base, andmechanisms towards ensuring long termequitable access for such resources, are inplace.

Thus, this report highlights the related issuesof sustaining macroeconomic stability,enhancing investment, growth and povertyalleviation, and the need for sustainable andequitable utilization of the naturalenvironment. All these require acommitment to major policy reforms.

The rest of the report will discuss these andother issues in more detail. Chapter 2examines the performance of Sri Lanka'smacroeconomic environment in 2006/07.

Chapter 3 deals with developments in theglobal economy in 2006/07 and theimplications for Sri Lanka. Chapter 4 looksin detail at the concept of empowermentand its application in the Sri Lankan contextto alleviate poverty in two key resource areas- land and microfinance. Chapter 5 attemptsto assess what reforms are needed intechnical and vocational education sectorto be a more effective means of addressingconcerns of high youth unemployment inSri Lanka. Chapter 6 examines equity inaccess to health care in Sri Lanka in relationto primary health care, medicines, andmental health. Chapter 7 looks at thedevelopment policy challenges for improvingservice delivery at the local level. Chapter 8explores the interrelationship betweenpoverty and environment in Sri Lanka.

Five detailed policy briefs supplement thediscussion to provide insights on variousissues as follows: assessing the changingnature of the international aid architectureand implications for Sri Lanka's access todevelopment assistance; discussing issuesrelated to socio-economic security in SriLanka in the context of natural disasters; thepotential for developing private sector agri-business models and related supply chainsto assist small farmers; analyzing issuesrelated to introduction of an unemploymentinsurance scheme in Sri Lanka to facilitatelabour market flexibility; and the relevanceand potential for Sri Lanka to meet socio-economic targets such as those set out inthe SAARC Development Goals.

2. Economic Performance

2.1 Introduction

The most promising note on Sri Lanka's eco-nomic performance in 2005/06 was a steadyacceleration in output that saw the countryachieving a GDP growth rate of 7.4 per centin 2006 - its fastest rate for 28 years and thethird strongest on record. Improvements toGDP growth has also been accompanied byan accelerated decline in the rate of overallunemployment in the country, falling from8.3 per cent in 2004 to 6.5 per cent in 2006.These are certainly impressive figures. How-ever, the medium term outlook for theeconomy continues to be affected by uncer-tainties related to developments on the con-flict-front, concerns relating to the stabilityof the macroeconomic environment, andperceived slow progress on the implementa-tion of institutional and regulatory reformsto support a sustainable growth momentum.

If, contrary to current expectations, a height-ened conflict situation emerges, it will obvi-ously take a toll on the economy. This im-pact will come primarily from additional fis-cal pressures and the erosion of investor con-fidence on the long-term outlook for thecountry rather than from a squeeze on thecontribution of the Northern and EasternProvinces to overall GDP (their combinedshare in GDP is only slightly over 7 per cent).

Developments on the conflict-front at thisjuncture look promising, but there are someconcerns about the health of the underlyingmacroeconomic environment and in particu-lar, about its ability to absorb either domes-tic or external shocks and still sustain thehigher growth momentum over the medium-term. The recent economic expansion is partlyattributable to the expansionary impact ofrelatively relaxed fiscal and monetary poli-cies. The Sri Lankan economy is at a criticalpoint where that process of adjustment isstill being played out, and such policies haveto be carefully managed to avoid a 'hard land-ing'.

The government's primary policy thrust aimsto ensure that growth is more evenly sharedacross the country. This is obviously a soundobjective in view of fast widening gaps linkedto unemployment, regional disparities andenduring rural poverty across the country. Inmeeting this overall development objective,the challenges for the government are many,but maintaining macroeconomic stability isabsolutely critical. This chapter examines theperformance of Sri Lanka's macroeconomicenvironment in 2006/07 by analysing thebehaviour of a series of key macroeconomicindicators.

8

Table 2.1GDP Growth

2002 2003 2004 2005 2006 2007a

World 3.1 4.0 5.3 4.9 5.4 4.9Emerging market & developing countries 5.0 6.7 7.7 7.5 7.9 7.5Developing Asia 7.0 8.4 8.7 9.2 9.4 8.8Sri Lanka 4.0 6.0 5.4 6.0 7.4 7.0Notes: a: forecast.

Source: IMF, World Economic Outlook, April 2007; CBSL, Annual Report 2006.

Economic Performance

9

2.2 OutputThe Sri Lankan economy has seen a steadyacceleration in output growth during 2005-06, both in historical and comparative terms(Table 2.1). Average GDP growth per annumduring 2005-06 increased sharply to 6.7 percent relative to an average of 5 per centachieved in 2002-04.

2.2.1 Sectoral Performance

The resurgence in growth was felt across allsectors. Helped by favourable weather con-ditions, the agriculture sector grew by ahealthy 4.7 per cent, as against an averagegrowth rate of 1.4 per cent per annum in thepreceding four years. A substantial recoveryin the fisheries sector following the post-tsu-nami turn around and improved productionin rubber, coconut and paddy sectors haveassisted to push up agriculture growth in2006. In fact, paddy output in 2006 was anall time high.

Overall growth of the industrial sector in2006 remained fairly healthy at 7.2 per cent.But this was lower than the 8.3 per centachieved in 2005 following the progressiverecovery in industrial output after the sharpcollapse in 2001. Growth was concentratedprimarily in the categories of textile, appareland leather products (4.3 per cent); food,beverages and tobacco products (6 per cent);

and chemical, rubber, plastic and petroleumproducts (8.3 per cent).

As in the recent past, the services sector re-mained the driving force behind Sri Lanka'seconomic expansion in 2006, growing by 8.3per cent and accounting for nearly 63 percent of GDP. The continuation of the growthmomentum in this sector has mainly been aresponse to increasing consumer demand forservices and the fact that the services sectoris functioning as a facilitator to the goodsproduction sectors of the economy. The tele-communications sub-sector has driven growthin the services sector during the past fewyears. Although the telecom sector contin-ued to record the fastest growth in 2006, therehas been a gradual deceleration in its growthrate from 31 per cent in 2004 to 24 per centin 2005 and then to 22 per cent in 2006.

Table 2.2Production Trends in Principal Agricultural Crops

2002 2003 2004 2005 2006

Tea Kg mn 310.6 304.8 309.4 317.2 310.8

Rubber Kg mn 90.5 92.0 94.7 104.4 109.2

Coconut Nuts mn 2392 2562 2591 2551 2684

Paddy Mt '000 2859 3071 2628 3246 3342

Source: CBSL, Annual Report, various issues.

Despite the healthy overall GDP growth rateachieved in 2006, the economy appeared tobe slowing down during the year. There wasa gradual decline in quarterly GDP growthsince the first quarter of 2006. The strongexpansion in agricultural output is unlikelyto be maintained in 2007. Paddy output islikely to contract due to unfavourable weatherconditions. More importantly, concerns re-garding productivity of the agriculture sectorpersist. Research and development activities


10

encouraging industrial activity to be concen-

trated in the Western Province with better

infrastructure services (Figure 2.3). Other

major impediments include inadequate in-

frastructure connectivity, increasing labour

costs and raw material prices. Some of these

infrastructure inadequacies also hamper the

development of the services sector. In gen-

eral, the overall business environment needs

Figure 2.1Composition and Rate of Growth in Industrial Output


Figure 2.2Composition and Rate of Growth of Services Sector Output


have been lagging behind, and there has been

inadequate application of modern technol-

ogy. As a result, costs of production of all

major crops have been continuously rising.

Sri Lanka's industrial sector also faces its own

challenges, not least the high cost and unre-

liable supply of energy. Such supply con-

straints are most severe in the rural sector,

0%

20%

40%

60%

80%

100%

2002 2003 2004 2005 2006

0%

2%

4%

6%

8%

10%

OtherChemical, petroleum, rubber and plastic productsTextiles, wearing apparel and leather productsFood, beverages and tobacco productsIndustry growth

Per

cent

age

shar

e

Gro

wth

rat

e

0%

20%

40%

60%

80%

100%

2002 2003 2004 2005 2006

0%

2%

4%

6%

8%

10%

Other services

Financial services, real estate and business servicesTransport, sto rage and communication

Wholesale and retail trade, hotels and restaurantsServices growth

Gro

wth

rat

e

Per

cent

age

rat

e

Gro

wth

rat

e


11

improvement. Whilst the introduction of the

new Companies Act in 20071 is a positive

step in improving the business environment,

the recently compiled "Ease of Doing Busi-

ness Index" of the World Bank ranks Sri Lanka

below some of its competitors such as Ma-

laysia, Thailand and Mauritius.

Whilst GDP growth for 2007 has been fore-

cast to remain at around 7 per cent, it is

likely that the economy will experience a

reduction in growth to around 6 per cent by

year's end. Already, first quarter GDP growth

for 2007 has indicated a fairly sharp down-

turn; according to data compiled by the De-

partment of Census and Statistics first quar-

ter growth has slowed to 6.1 per cent as com-

pared to a growth rate of 7.9 per cent in the

same quarter of 2006. The ability to sustain

the growth momentum - and ultimately en-

suring that the government is able to meet

its longer-term development objectives - will

depend critically on appropriate policy re-

sponses. The challenge is to manage the

macroeconomic environment while imple-

Figure 2.3Regional Distribution of Industrial Enterprises (2006)

Note: The total number of enterprises per province includes industries registered under the Ministryof Industrial Development and the BOI.

Source: CBSL, Annual Report 2006.

menting reforms to free supply side rigidi-

ties, particularly in key areas of infrastruc-

ture.

2.2.2 Trends in Employment

Sri Lanka's rate of unemployment has been

declining steadily and recorded the lowest

rate yet in 2006 at 6.5 per cent. Labour Force

Survey data suggests that the unemployment

rate has fallen further to 6.2 per cent in the

first quarter of 2007 as against a rate of 6.8

per cent in the same period in 2006. None-

theless, unemployment amongst educated

youth continues to be a cause of concern -

for instance, the rate of unemployment among

those with GCE/AL and above is estimated

to be well above the national average at 12.3

per cent. It should be noted that changes in

definition and coverage of surveys makes his-

torical comparisons of employment data dif-

ficult. For example, whilst the rate of unem-

ployment shows a decline from the recorded

7.7 per cent in 2005, the 2005 data are based

on a one-off national survey whilst 2006 data

are based on four quarterly surveys that ex-

1 See Box 2.2.

3389

246 228 208 92 44 38 21 60

500

1000

1500

2000

2500

3000

3500

4000

Wes

tern

Sou

th

Cen

tral

NW

S'ga

mu

wa

NC

Uva

East

ern

No

rth

ern

No

. o

f en

terp

rise

s

Wes

tern

Sou

th

Cen

tral

NW

S’g

amuw

a

NC

Uva

Eas

tern

No

rth

ern


12

cluded the Northern and Eastern provinces.

Given that the Eastern Province, for example,

records one of the highest rates of unemploy-

ment, overall figures are likely to be signifi-

cantly affected by the reduced coverage of

the survey.

The sectoral distribution of employment

shows a marginal increase in share of em-

ployment in agriculture and industry sectors

in 2006 compared to 2005. The elasticity of

employment with respect to growth of out-

put has been rather low and, more worryingly

has been even declining slightly over the last

few decades. However, there is considerable

Figure 2.4Trends in Unemployment

Notes: QLFS was conducted as a one-off survey in August 2005.


variation across sectors, with the industries

and services sectors, in general, performing

better than the agriculture sector (Table 2.3).

Table 2.3Employment Elasticity of Output and Sectoral Distribution of Employment

Employment Elasticities Sectoral Share 1990s 2000-04 1990-04 (2006)

Agriculture 0.03 2.56** 0.26 32.2

Industry 0.60*** 0.71*** 0.70*** 26.6

Services 0.73*** -0.09 0.62** 41.2

Total 0.46*** 0.42** 0.52*** 100.0

Notes: * denotes 99% significance, ** denotes 95% significance and *** denotes 90% significance.Source: Tilakaratna, G., P. Jayawardena and T. Kumara (2006), 'Economic Growth, Employment and

Poverty Reduction in Sri Lanka', a paper prepared for the ILO and UNDP.

2.2.3 Savings and Investment

Sri Lanka is grappling with a fundamental

difficulty: how to raise the level of invest-

ment. The country needs to increase its in-

vestment to around 35 per cent of GDP, if

the government's ambitious target of 7-8 per

cent average annual growth is to be achieved

and sustained over time. There is only lim-

ited potential for tapping domestic resources

to substantially push up the investment rate.

45%

46%

47%

48%

49%

50%

51%

52%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2004 2005 2006

0%

2%

4%

6%

8%

10%

Labour fo rce participation rate Unemployment rate

Lab

our

forc

e pa

rtic

ipat

ion

rate

Une

mpl

oym

ent

rate


13

Table 2.4Trends in Savings and Investment (2002-06)

As a percentage of GDP 2002 2003 2004 2005 2006

Domestic savings 14.4 15.9 15.9 17.3 17.1National savings 19.5 21.6 21.6 23.4 23.4

Total investment 21.2 22.1 25.0 26.5 28.7Private 16.7 16.8 19.8 19.7 22.6Government 2.0 2.3 2.2 4.2 3.8Public corporations 2.6 3.0 2.9 2.7 2.2


2.3 Fiscal Policy Management

The structural weaknesses in Sri Lanka's pub-lic expenditure management are well known.Current spending on wages and salaries ofpublic employees, interest payments on gov-ernment borrowing, and transfers and subsi-dies together exceed the total revenue avail-able to the government. There are fairly rigidexpenditure patterns and only a slow increasein fiscal revenues. The government has madesome progress in raising revenue throughadministrative measures - including effortsto streamline the work of the Departmentsof Inland Revenue, Customs and Excise - inaddition to which faster growth in nominalGDP has also helped to lift the tax take ofthe Treasury.

Sri Lanka managed to ensure a reduction inthe overall fiscal deficit to 8.4 per cent ofGDP in 2006, but at the cost of a sharp cut-back in budgeted capital expenditures. Evenwith a reduced deficit, the financing require-ments remained high, with the government'sdomestic borrowing requirement rising from5.2 per cent of GDP in 2005 to 5.8 per centin 2006.

There is scope for keeping the fiscal deficitto around 8.5 per cent of GDP even in 2007by transferring funds from intended capitalspending to meet other expenditure overruns.This is because past experience suggests that

Domestic savings has recovered since theeconomic contraction of 2001, but remainfairly low. There was a marginal decline in2006, probably the result of low real inter-est rates that encouraged consumption anddiscouraged savings. Overall national savings,boosted by higher inflows of remittancesfrom Sri Lankans working abroad, has shownan increase in recent years. The increase inremittances may have been partly due to tsu-nami related altruism, but may have alsobeen related to higher earnings of migrantworkers due to high global oil prices.

Total investment has crept up, helped byhigher government expenditure on post-tsu-nami related reconstruction activities. Theratio of private investment to GDP has alsobeen increasing, reflecting the impact of thecheap credit regime on investment. Much ofthe heavy investments required in the futurerelates to infrastructure. Involving privateinvestors in infrastructure investment throughpublic-private partnerships has proven to bedifficult, not least due to investor uncertaintyabout earning a reasonable return on suchinvestments. In the circumstances, it is likelythat any substantial increase in overall capi-tal infrastructure investment will necessitatea significant increase in government spend-ing. The challenge will be to finance suchhigher spending without further weakeningpublic finances.


14

Table 2.5

Fiscal Operations

2004 2005 2006 2007

As a percentage of GDP Forecast Actual Forecast

Total revenue 15.4 16.1 17.8 17.0 18.5 Tax revenue 13.9 14.2 16.0 15.3 16.7Total expenditure 23.5 24.7 26.9 25.4 27.7 Current 19.2 18.7 18.7 19.5 18.4 Capital 4.3 6.0 8.2 5.9 9.3Deficit -8.2 -8.7 -9.1 -8.4 -9.2FinancingForeign 2.2 3.4 4.6 2.6 4.4 Loans 1.8 2.0 3.0 1.5 3.6Domestic 5.8 5.2 4.5 5.8 4.8


Table 2.6Government Debt Indicators

2004 2005 2006 2007a

Government debt/GDP 105.5 93.9 93.0 88.0 Domestic debt/GDP 56.4 53.5 52.7 50.6 Foreign debt/ GDP 49.1 40.4 40.4 37.4Total debt service/govt. revenue 96.5 91.0 93.1 84.3 Domestic debt service/govt. revenue 81.4 83.3 79.9 70.7Domestic interest/government current expenditure 27.2 25.5 24.1 24.5

Notes: a: Estimates.

Source: Central Bank of Sri Lanka, Annual Report 2006.

Sri Lanka's total debt to GDP ratio has beenover 90 per cent until 2006, but is projectedto fall to 88 per cent in 2007. But this de-cline in the ratio is largely attributable to theimpact of high nominal GDP growth. In thecurrent environment of high interest rates,and additional pressures for domestic bor-rowing it will become increasingly difficultto reduce interest rates. The quality of fiscalconsolidation needs to be improved urgentlyby raising revenues and re-orienting expen-ditures to priority and growth enhancing ar-eas if a supportive macroeconomic environ-ment for sustained high growth is to beestablished.

the capital expenditure target of 9.3 per centof GDP in 2007 is unlikely to be met. Nev-ertheless, the government's borrowing re-quirement is likely to remain high. The re-development needs of the Eastern Provinceare likely to be a critical area requiring addi-tional expenditures. The government has sig-nalled its intention to meet its financingneeds by higher foreign borrowing; the shareof foreign loans is budgeted to increase to3.6 per cent of GDP in 2007 from the real-ized target 1.5 per cent of GDP in 2006. Infact, initial steps to raise US$ 500 millionas buffer funds for infrastructure develop-ment was announced in July 2007. Resort-ing to foreign loans in the face of high do-mestic interest rates might appear an attrac-tive option in the short term, but increasing

exposure to foreign currency denominated debtcarries longer term risks.


15

Table 2.7Trends in Consumer Price Inflation Rates

2002 2003 2004 2005 2006 2007a

Emerging market & developing countries 5.8 5.8 5.6 5.4 5.3 5.4Developing Asia 2.0 2.5 4.1 3.6 4.0 3.9South Asia 4.2 3.9 4.3 5.0 6.4 6.4ASEAN-4 5.8 4.0 4.6 7.3 8.2 4.3Sri Lanka 9.6 6.3 7.6 11.6 13.7 8.7

Notes: a: Estimates.Source: IMF, World Economic Outlook, various issues; CBSL, Annual Report 2006.

2.4 Monetary Policy DevelopmentsInflationary pressures caused by fiscal defi-cits have spilled over into monetary policy.Cost push inflationary pressures in the SriLankan economy have been aggravated by theexternal supply side shock from high globaloil prices, but it is clear that Sri Lanka's in-flation rates remain well above comparativeglobal and competitor country rates. This isprima facie evidence that domestic policybears the greater responsibility for highinflation.

Monetary policy has to constantly deal withuncertainty, being forced to work with im-perfect information about underlying trendsin the economy. This makes it difficult to

Figure 2.5Interest Rate Response to Rising Inflation (2001 and 2006)

2001

-5-4-3-2-10123

Q1 Q2 Q3 Q4

2001

4681012141618202224

GDP Rerepo CCPI

2006

4

5

6

7

8

9

Q1 Q2 Q3 Q4

2006

4

6

810

12

14

16

GDP Rerepo CCPI

Source: Data obtained from CBSL, Annual Report, various issues.

fully anticipate the full effects of any par-ticular policy. There are understandable con-cerns that a significant hike in interest ratesmay slow down the growth momentum. Infact, the monetary policy response to con-trol rising inflationary pressures in 2001 - inthe face of some evidence that suggested theeconomy was contracting sharply - arguablyinflicted a significant cost in terms of lostoutput. Nonetheless, an overly relaxed mon-etary policy stance in the face of rapidly ris-ing inflationary pressures also carries substan-tial risks. It may cushion an initial negativeimpact on output but runs the risk of higherinflation; in turn such higher inflation couldforce a stronger tightening of monetary policyproducing a sharper economic slowdown.


16

Thus, despite repeated upward adjustmentsto interest rates, faster inflation has causedreal interest rates to be generally low and, attimes, negative (Figure 2.6). While strictlyspeaking, these indicate ex-post real interestrates, it is reasonable to assume that thesewould have produced low or negative ex-pected real interest rates. These sorts of de-velopments lead to other signs of excess, suchas rapid credit growth, a surging stock mar-ket, etc. - symptoms that have been visiblein the Sri Lankan economy in recent times(see Box 2.1). If the public starts to expecthigher inflation, prices will begin spirallingupward and the stability of the macroeco-nomic environment will come under threat.

Negative real rates of interest also encouragecredit expansion. This is evident in the SriLankan economy. As shown in Figure 2.7,credit growth has been expanding rapidly,particularly to the private sector. In turn, theseaffect other monetary variables and impacton inflation. In addition, persistent gapsbetween the rate of inflation and interest rateslead to misallocation in resources by encour-aging a dangerous shift to riskier assets.

During 2005-06 there has been a significantexpansion of Licensed Commercial Banks(LCBs) lending, particularly to the private sec-

Figure 2.6Movements in Interest Rates and Inflation

0%2%4%6%8%

10%12%14%16%18%20%

2004 2005 2006 2007

12 months TB rate Annual average inflation

tor, for consumption and real estate(Figure 2.8). The share of these two sectorsin total loans granted by LCBs rose from 31per cent in 2005 to 36 per cent in 2006. Ifthere is a rapid increase in interest rates - ashas happened recently - non-performing loanscan increase sharply, posing risks for thehealth and stability of the financial system.

Inflationary pressure in the economy has beenbuilding up since mid-2004 (Figure 2.9). Theannual average rate of inflation (as measuredby the Colombo Consumers’ Price Index)peaked at 12.8 per cent in August 2005 be-fore experiencing a steady decline to 9.2 percent in April 2006. Thereafter, inflationarypressures built up rapidly again and the point-to-point rate of inflation peaked at 20.5 inJanuary 2007; the annual rate of inflationpeaked (with the expected lag) at 17.4 percent in April 2007. Inflation appears to havecrested, at least for the time being, with thepoint-to-point rate dipping quite sharply threemonths in a row to drop to 13 per cent byJune 2007. Nonetheless, largely as a resultof upward adjustments to administeredprices, inflation picked up again in July 2007with the point-to-point rate rising sharply to17.6 per cent while the annual rate ofinflation increased marginally to 17.2 percent.


17

Box 2.1Stock Market Behaviour

In 2006, the Colombo Stock Exchange (CSE) performed relatively well, with the broad All SharePrice Index (ASPI) inching up 42 per cent to 2722.4, while the liquid Milanka Price Index (MPI)added 51 per cent to 3711.8 at the end of the year compared to 2005. Declining real interestrates for savings, high economic growth and a high-profile share offering were some of the keycontributory factors. With a decline in real interest rates - and negative real rates at times -investors are tempted to invest in more risky stocks that may offer higher returns on investmentas compared to fixed income savings instruments.

Movements of ASPI and MPI

0

1000

2000

3000

4000

5000

6000

2004 2005 2006 2007

ASPI M PI

Source: Central Bank of Sri Lanka, Annual Report and Monthly Economic Indicators, various issues.

The stock market performance has been buoyant despite investor confidence being affectedby intermittent terrorist activity - the dips in CSE activity after terrorist incidents have tended tobounce back towards an overall upward trend. This probably reflects the increasing domi-nance of local investors - estimated to account for nearly two-thirds of the total turnover of the

CSE - who are likely to have already 'factored in' conflict related uncertainties on the economy.

Figure 2.7Trends in Select Monetary Variables

0

200000

400000

600000

800000

1000000

1200000

1400000

2004 2005 2006

Net credit to govt. Net credit to pvt. sector M oney supply (M 2b)



18

Figure 2.8Sectoral Distribution of Loans of LCBs (2005–06)


213

11395

55 6334 43

2810

240

160134

80 7251 43 32

12

-306090

120150180210240270

Com

mer

cial

Con

sum

ptio

n

Hou

sing

Oth

er

Indu

stri

al

Fina

ncia

l

Serv

ices

Agr

icul

ture

Tour

ism

Rs.

bn

2005 2006

The moderation in inflation reflects the im-pact of the sharp tightening of monetarypolicy since the beginning of 2007. The Cen-tral Bank has set targets to progressively re-duce reserve money growth to 11.6 per centby end 2007 and broad money growth to 13.2per cent. The end year target rate of inflationset at 8.5 per cent has been revised to a rangeof 8.5-12 per cent. If this tighter monetarypolicy is maintained, a moderation in the rateof inflation can be expected by the end of2007 as credit growth to the private sectorand consumption expenditure slow down. Butinflationary pressures can be expected to re-main fairly high - in the range of 14-15 percent - in the absence of an easing-off of gov-ernment borrowing requirements.

2.5 External Sector Performance

A significant feature of Sri Lanka's externalsector performance has been a sharp deterio-ration in the trade balance over the last threeyears (Table 2.8). This is certainly in part aresponse to high global oil prices. But, some-what worryingly, earnings growth from ex-ports has continued to decline since 2004.Despite a recovery in garments exports after

the uncertainties related to the quota expiryin 2005, exports grew only at 8.4 per centin 2006. A corresponding sharp deteriora-tion in the external current account has beenpartially averted because of a higher inflowof worker remittances. Nevertheless, SriLanka's current account deficit on the bal-ance of payments (BOP) increased sharplyto 4.9 per cent in 2006 from a deficit of 2.8per cent in the previous year.

Whilst a current account deficit is commonlyexpressed as the difference between thevalue of exports and imports of goods andservices, it is also a measure of the differ-ence between national savings and invest-ment. A sharply worsening current accountimplies that demand is rapidly outpacingsupply in the economy. In fact, in the con-text of the Sri Lankan economy, the deterio-ration of the current account understates theworsening of the gap between domestic de-mand and actual domestic supply becauseremittances are in some ways more like aform of exogenously determined capital in-flow.


19

Some moderation in the trade deficit can beanticipated in 2007 because though high glo-bal oil prices are likely to continue, expendi-ture on other imports may ease with the an-ticipated slowdown of the Sri Lankaneconomy. There is some evidence of this al-ready: in the first half of 2007, exports in-creased by 12.9 per cent but imports increased

Figure 2.9Inflation Trends

0%

5%

10%

15%

20%

25%

Jan

Mar

May Ju

l

Sep

Nov Jan

Mar

May Ju

l

Sep

Nov Jan

Mar

May Ju

l

Sep

Nov Jan

Mar

May

2004 2005 2006 2007

Point to point inflation Annual average inflation

Source: CBSL, Monthly Economic Indicators, various issues.

by 3.9 per cent only. Nevertheless, the ex-ternal current account deficit is unlikely tofall dramatically in 2007.

A deficit may not be a cause for major con-cern so long as foreign financing - FDI, for-eign grants and loans, etc. - is available tofinance the gap. But Sri Lanka's financing

Table 2.8External Sector Developments

2002 2003 2004 2005 2006

Export growth % -2.4 9.2 12.2 10.2 8.4

Garments % -4.7 6.3 9.1 3.1 6.4

Import growth % 2.3 9.3 19.9 10.8 15.7

Petroleum 7.9 6.2 40.2 36.9 33.0

Trade balance % of GDP -8.5 -8.4 -11.2 -10.7 -12.5

Terms of trade 1997=100 102.5 110.4 104.4 100.0 96.6

Private transfers % of GDP 6.6 6.6 6.7 7.4 7.7

Current a/c balance % of GDP -1.4 -0.4 -3.2 -2.8 -4.9

FDI US$ mn. 181 171 217 234 451

Gross official reserves US$ bn. 1.7 2.3 2.2 2.7 2.8



20

options are rather limited. Foreign directinvestment (FDI) inflows increased in 2006from an average of about US$ 200 millionto US$ 450 million (or from 1 per cent ofGDP during 2002-05 to 1.7 per cent in 2006)largely as a result of re-investment ofearnings, particularly in the telecom sector.As the tsunami related capital inflows tailedoff, the surplus on the BOP dropped fromUS$ 500 million in 2005 to US$ 200million in 2006. On the assumption thatadequate sources of financing will beavailable, the government projects tomaintain a BOP surplus of US$ 200million by end 2007, with official reservesat about US$ 2.6 billion, sufficient for about3 months of import coverage. As of endJune 2007, the BOP position was estimatedat a surplus of US$ 190 million with officialreserves at US$ 2.8 billion.

2.5.1 Developments on External DebtHow the current account deficit is financedhas a critical bearing on Sri Lanka's externaldebt position. Realistically, options for rais-ing foreign financing remain limited. Withthe graduation of the country to a lowermiddle income status, access to developmentaid is being squeezed. Programme lending

Figure 2.10Average Oil Prices and Import Bill

0

10

20

30

40

50

60

70

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

0

500

1000

1500

2000

2500

Average price of crude oil (US$/barrel) Value of petroleum imports (US$.mn)

Source: Energy Information Administration (EIA); CBSL, Annual Report, various issues.

by multilateral international financial insti-tutions are often subject to conditionalitiesthat can make them unattractive as sourcesof finance. The government has increasinglyresorted to bilateral negotiations - aid, softloans, credit lines, etc. - exploring optionswith newly emerging donors such as Chinaand India. But bilateral options can be some-times much more costly than is immediatelyapparent because of conditions such as therequirement that funds are used to sourceimports from the donor country, which isoften not the cheapest source.

The government has supplemented recourseto bilateral negotiations with increasing reli-ance on foreign currency denominated bor-rowing on commercial terms. In 2006, forexample, the government raised US$ 680million - US$ 580 as Sri Lanka DevelopmentBonds and a further US$100 as a syndicatedloan. Similar borrowings have been an-nounced in 2007 too. It must be borne inmind that there are significant downside risksto external borrowing on commercial terms.Such debt - especially short term un-hedgedforeign currency denominated debt - exposesthe country to greater financial risk as it be-comes more vulnerable to global fluctuations.As the ratio of short-term foreign commer-


21

cial debt to GDP increases or the amountsfalling due increase, there will be more ques-tions about the viability of rolling over exist-ing external debt. Thus, higher foreign com-mercial borrowings impact on sovereign creditratings, which then influence access to, andterms of, future borrowing. Worsening rat-ings can have adverse consequences for debtsustainability.

2.5.2 Exchange RateThe above discussion indicates that SriLanka's overall external position will con-tinue to remain tight in 2007. The situationwill be different to that in 2005-06, whenSri Lanka had the luxury of additional tsu-nami-related capital inflows to act as a bufferagainst deteriorating terms of trade. In thiscontext, the external sector pressures can beexpected to exert further downward pressureon the rupee in 2007.

The dollar/rupee parity held steady for muchof 2005 and 2006 with the BOP support pro-vided by the tsunami-related capital inflows.As pressure on the rupee began to mount inthe second half of 2006, there were indica-tions that the monetary authorities were in-tervening to support the currency. Gross

Figure 2.11Debt Service Payments and Export Earnings

0100020003000400050006000700080009000

2002

2003

2004

2005

2006

0

2

4

6

8

10

12

14

Export earnings Debt service ratio

Notes: Debt service ratio defined as interest payments as a percentage of merchandise exports andservices.


official reserves dipped sharply from US$ 2.6billion in August 2006 to US$ 2.4 billion inSeptember 2006. However, leaning againstmarket pressures proved unsustainable; therupee appreciation from Rs. 103.78 inAugust to Rs. 102.49 in September was re-versed, and it depreciated to Rs. 107.74 byNovember 2006. The rupee had depreciatedfurther against the dollar to Rs. 111.4 by endJune 2007.

The relatively stable nominal exchange rate,coupled with significantly higher domesticinflation vis-à-vis Sri Lanka's main tradingpartners, produced a rapid real appreciationof the rupee in 2005-06. A real appreciationof 12.3 per cent in 2005 was moderated in2006; the significant nominal depreciationmeant that the real appreciation was low-ered to 4.2 per cent. Reflecting the build upof pressures on the external current account,there has been a much sharper depreciationof the rupee since the beginning of 2007.While the extent to which further deprecia-tion will take place will depend on thegovernment's ability to raise foreign fundingto bridge the current account deficit, it mustbe noted that continuing real appreciationof the currency is a cause of concern, given


22

Figure 2.12Real and Nominal Exchange Rate Trends

60

75

90

105

120

Jan

Mar

May Ju

l

Sep

Nov Jan

Mar

May Ju

l

Sep

Nov Jan

Mar

May Ju

l

Sep

Nov Jan

Mar

2004 2005 2006 2007

$/Rs. nominal exchange rate index REER 2006=100


its negative implications for the competitive-ness of Sri Lanka's export sector.

2.6 ConclusionThe continuation of the good growth perfor-mance will depend critically on the abilityto maintain macroeconomic stability whilesignificantly increasing the level of invest-ment. This creates major challenges for fis-cal policy. On the one hand, the economy isalready subject to substantial inflationarypressures, posing the need for measures tocool demand pressures. On the other hand,given the volume of resources required forinfrastructure investment purposes, it appearsalmost inevitable that additional governmentinvestment spending will need to be forth-

coming. In the absence of significant restruc-turing of fiscal management, such spendingis likely to require additional borrowing bythe government.

This would mean that the macroeconomicenvironment on both the domestic and ex-ternal fronts will be subject to significantlytighter constraints. There will be little roomto absorb policy errors or to have safeguardsagainst possible shocks from domestic and/or external sources. In this situation, the needto re-orient government expenditures to pri-ority and growth enhancing areas, and to ur-gently implement necessary reforms to boostthe economy's supply capacity cannot beover-emphasized.


23

Box 2.2The New Companies Act of Sri Lanka: Companies Act No. 7 of 2007

In the present global context, company and commercial law are vital forces in promotinginternational trade and commerce requiring countries to reform and develop their companylaw. The necessity arises from the need to promote local entrepreneurship, and secondly, toenhance the competitiveness of a country in attracting foreign business. In the Sri Lankancontext, the implementation of the Companies Act, No. 7 of 2007 (CA 2007) was a majornecessity. This is because the predecessor to the CA 2007, the Companies Act, No. 17 of 1982(CA 1982) was based on the UK Companies Act 1948. Although, the CA 2007 was a welcomemeasure, a number of lawyers, academics and scholars have voiced numerous opinions andobservations concerning certain major aspects within the CA 2007.

The CA 2007 has enhanced the ease of doing business in Sri Lanka. For instance, the possibilityof creating 'limited liability one man companies', regardless of being a new entrant to Sri Lanka,has been witnessed in many developed countries such as the UK. Furthermore, it has removedthe mandatory requirement for a company to have a Memorandum of Association as a meansof abolishing the ultra vires rule so far as third parties are concerned. This has raised questionsas to whether it would be difficult to keep track of the actual business of a company. However,it should be noted that the ultra vires rule has generated substantial controversy within companylaw not only in Sri Lanka, but in countries such as the UK. Therefore, the non-mandatory natureof the clause would be an advantage in remedying such problems in the future.

In regard to the duties of directors, the Common Law principles would remain intact. Theseinclude, the duty to act in good faith, duty to comply with the legislation, required standard ofcare and use of information and advice. Moreover, statutory duties which were in the previouslegislation and further duties have been inserted to the CA 2007. This is in order to enhance thelevel of governance within corporations in Sri Lanka. An important insertion is seen throughSections 219 and 220 CA 2007. The former deals with the duty of directors on insolvency,whilst the latter concerns the duty of directors on serious loss of capital. These two provisionsare important in determining the health of a company. If the health of a company is low, themanagement would be under an obligation to make it right and greater protection would beafforded through such measures to creditors. However, a question which might emerge at thisjuncture is whether companies would be transparent in disclosing the health of the company.Therefore, proper mechanisms should be employed to determine the level of transparency andaccountability within companies.

The 'Solvency Test' is also a new application. It provides a mechanism by which the "capitalonce raised is not unwittingly eroded away by distributions that may be made by a company" toits shareholders. The introduction of the solvency test is essential in protecting the rights ofcreditors. In relation to the rights of minority shareholders, greater protection has been offered.Some examples include the possibility for minority buy outs, and in amalgamations. Further-more, the CA 2007 abolishes the requirement for an authorized capital and "no share in acompany shall have a nominal or par value". The concepts of authorized capital and nominalor par value remained as a 'capital cushion' for creditors. However, local and internationalexperience shows that the above concepts did not actually provide this so-called 'capital cush-ion'. Therefore, much protection could be afforded via the introduction of the notion named'stated capital' in the CA 2007.

Other important features include the establishment of a Company's Disputes Board to settledisputes through mediation, as opposed to resorting to courts and statutory registration to

derivative actions.

24

3. International Economic Environment

3.1 Introduction

The world economy continued to expand in

2006 for the fourth consecutive year despite

volatility in financial markets and high com-

modity prices - particularly continuing high

oil prices - during the year. Global trade vol-

umes strengthened in 2006 driven by strong

demand. The world economy is set for an-

other good year of performance in 2007 -

albeit at a slower pace of expansion - with

some downside risks to this outlook. The

world currently displays a number of large

economic and financial imbalances, with the

possible risk of a slide in the dollar precipi-

tated by these economic imbalances.

Progress under the Doha Round of negotia-

tions of the World Trade Organization (WTO)

has also been disappointing despite the re-

sumption of trade negotiations in early 2007.

The lack of progress on the multilateral front

is likely to further encourage countries to

adopt an alternative in the form of regional

arrangements. Already, all but one WTO

member - Mongolia - is now involved in

some sort of preferential trade deal.

Developments on the global economic front

have significant implications for Sri Lanka.

As a small open economy, not only is the

country dependent on major markets for its

export earnings but it is also a significant

importer of intermediate and capital goods.

The country continues to be vulnerable to

adverse external developments, especially

escalating oil prices, but on the export front

it was able to take advantage of higher growth

in its major markets and record a relatively

robust export growth, which is likely to con-

tinue into the next year provided global

growth keeps on track.

This Chapter will deal with developments

in the global economy in 2006. Section 3.2

will examine the economic performance of

advanced and emerging economies and the

developments in international trade and com-

modity markets as well as capital and aid

flows to developing countries. Section 3.3

would look at global implications for the Sri

Lanka economy in terms of their effects on

the country's export and import performances.

Section 3.4 will provide an update of bilat-

eral and regional initiatives undertaken by

Sri Lanka and progress made at the multilat-

eral trade negotiations. Section 3.5 con-

cludes.

3.2 Trends in the Global Economy3.2.1 Advanced and EmergingEconomies

The global economy expanded in 2006 to

record an overall growth of 5.4 per cent, up

from 4.9 per cent recorded in 2005. The US

economy continued to grow despite a sharp

downturn in the housing market and soften-

ing of business investments towards the end

of the year. Consumption in the US was sus-

tained by continued growth in employment

and subsequent fall in oil prices during the

latter part of the year. The US recorded a

solid growth of 3.1 per cent for the year as a

whole but there were emerging signs of a

slowdown in the second half of the year.

In the Euro Area, growth accelerated to 2.6

per cent in 2006 with Germany leading the

way. The region as a whole recorded the fast-

est growth witnessed in recent years due to

high domestic demand, which was boosted

by increasing business and consumer confi-

dence and improving labour market condi-

24

International Economic Environment

25

tions, amongst other positive developments.

Strong export growth was recorded despite

the strengthening of the euro and this also

helped to shore up the growth rate of the

region.

GDP growth in Japan stood at 2.2 per cent

in 2006 though activity slowed down in the

middle of the year. Strong exports and ex-

port driven business investments are under-

pinning Japan's growth while private con-

sumption remains visibly weak due to labour

market conditions. In the rest of Asia, rapid

growth in emerging markets and developing

countries was led once again by China and

India. China continued its rapid expansion -

growing by10.7 per cent in 2006 - with growth

driven by investment and export growth. The

Indian economy recorded a growth rate of

9.2 per cent on account of strong industrial

growth and buoyant services sector growth

and export earnings. Other emerging mar-

kets and developing countries saw robust

growth rates supported by high commodity

prices and favourable financial conditions.

Strong growth and rising oil prices in the first

half of 2006 raised concerns about inflation

but the pressure was dampened by tighten-

ing of monetary policy in most countries and

a turn around in oil markets in the second

half of the year. Easing of oil prices from

August 2006 reflected improvements in the

security situation in the Middle East and

improved market conditions in the second

half of 2006. Inflation in advanced coun-

tries dropped sharply as fuel costs fell in the

latter half of the year. Inflation in the US

eased moderately and interest rates were kept

on hold to balance out risks from a slowing

economy and continuing concerns regarding

inflation. In Japan, inflation remained close

to zero and interest rates were raised only

gradually (by quarter of a point) after exiting

from a zero interest policy in July 2006. It

was raised again in the first half of 2007 but

it is expected that rates would remain below

one per cent for most of the year. In light of

economic buoyancy in Europe, central banks

in Europe have gradually withdrawn from an

accommodative monetary policy to curb in-

flationary pressures. Some emerging markets

- i.e., China and India for example - have

tightened monetary conditions in face of

concerns surrounding rapid growth and over

heating of economies.

3.2.2 World Trade and CommodityPrices

World trade expanded rapidly in 2006 (ex-

port volume growth went up from 7.7 per

cent in 2005 to 9.9 per cent) due to improved

demand conditions in major advanced coun-

tries together with strengthening of consumer

spending in Japan and the Euro Area. Robust

export performance in Asia also contributed

to growth in world trade, with China play-

ing an important role in this regard. With

economic performance expected to be less

buoyant in 2007, world trade is likely to

moderate to about 7.5 per cent in 2007. Ja-

pan and the Euro Area are expected to take

up some of the slack in demand in the US

with the moderation of the US economy but

private consumption in these economies

remains weak and of some concern.

Oil prices averaged US$ 65.4 a barrel and

peaked at US$ 80 a barrel in early August

2006 before falling in the latter part of the

year, with softening of demand and rise in

inventories. Oil prices are expected to aver-

age about US$ 57 a barrel in 2007 but risks

of further increases are on the upside. Non-

oil commodity prices showed strong gains

during 2006, largely driven by a surge in

prices of metals and minerals caused by ris-

ing demand and supply side difficulties. Ag-

riculture commodity prices also increased

with some commodities enjoying strong

gains on account of supply shortages, falling

stocks and surging demand. Non-oil prices

are expected to stabilize in 2007 after a sharp

rise during the previous year with a slower


26

growth outlook and easing of demand con-

ditions and supply constraints.

In foreign exchange markets, slower growth

in the US and robust expansion in Europe

have contributed to the weakening of the US

dollar against the euro and the sterling pound.

In 2006 as a whole, the US dollar depreci-

ated by 4 per cent, while the euro and ster-

ling pound appreciated by around 7 per cent.

The yen also continued to weaken in 2006

and depreciated against the dollar despite

Japan's rising current account surplus, largely

due to capital outflows from the economy.

3.2.3 Capital and Aid Flows

Expectations of continued economic growth

and subsiding inflation concerns have con-

tributed to positive global financial market

conditions since mid-2006 despite some

volatility in the markets. Advanced country

equity markets remained close to an all time

high while those in emerging markets are at

peak levels after rebounding from concerns

relating to tightening of monetary policy in

the US, which gave way in the middle of the

year. Capital flows remained high in 2006

with global foreign direct investment (FDI)

flows growing by 34 per cent for the third

year in a row to reach US$ 1.2 trillion ac-

cording to UNCTAD. The continued rise in

FDI has been due to strong performance in

both developed and developing countries,

together with increased corporate profits, and

continued liberalization of investment poli-

cies and trade regimes. FDI flows to devel-

oped countries rose significantly with the US

continuing to be the single largest recipient

country for FDI in the world, while the EU

continued to be the largest recipient region.

FDI flows to developing countries and emerg-

ing economies rose as well to reach record

levels. Within developing countries, Asia

continued to be the largest recipients of FDI,

reaching a new high of US$ 187 billion -

with China, Hong Kong and Singapore se-

curing most of the inflows to the region, while

India surpassed South Korea to become the

fourth largest recipient in Asia. Outward FDI

from the region has also surged with China

securing its position as an important source

of FDI, while India is fast catching up by

doubling FDI outflows and challenging Asia's

newly industrialized economies as the main

sources of FDI in the developing world.

Development aid from the world's major

donors fell by 5.1 per cent in 2006 to US$

103.9 billion, but this figure includes US$

19.2 billion of debt relief, notably extended

to Iraq and Nigeria. Excluding debt relief,

other forms of aid fell by 1.8 per cent. This

was to be expected as overseas development

assistance (ODA) was exceptionally high in

2005 due to large Paris Club debt relief op-

erations which boosted ODA to its highest

level ever at US$ 106.8 billion. In 2006, net

debt relief grants still represented a substan-

tial share of ODA. Of the 22 major donor

countries, 16 of them managed to meet the

2006 targets for ODA set at the 2002

Monterrey Conference on Financing for De-

velopment. However, ODA is expected to

fall back slightly again in 2007 as debt relief

for Nigeria and Iraq tapers off. It is expected

that other types of aid would increase as

donors fulfill their more recent pledges.

Despite the higher flows of ODA, remit-

tances nevertheless remain the largest source

of external financing in many developing

countries. Recorded remittance flows have

more than doubled over the past five years -

largely due to increased scrutiny over flows,

reduction in remittance costs and expanding

networks in remittance industry, deprecia-

tion of the US dollar and growth in migrant

stock and incomes. Worldwide flows of re-

mittances, including those to developed

countries, were estimated to have increased

by 3 per cent to US$ 268 billion in 2006 -

with most of it going to developing coun-

tries. But these figures reflect only transfers

through official channels and as such the


27

actual amount could be as much as 50 per

cent more of recorded flows. Including these

unrecorded flows, the actual size of remit-

tances could be larger than foreign invest-

ment flows and as much as twice the size of

official development assistance received by

developing countries.

3.2.4 Global Outlook

The global economy is expected to continue

to grow in 2007-08 but at a moderate pace

compared to 2006. According to IMF esti-

mates, global growth would moderate to 4.9

per cent in 2007. Among the advanced econo-

mies, the slowdown would be most pro-

nounced in the US with a growth rate pro-

jected at 2.2 per cent for 2007, which is ex-

pected to gain momentum over the year and

return to its full potential by mid-2008.

Growth is also projected to ease in the Euro

Area. The expansion in the Japanese economy

is expected to continue at about the same

pace on the grounds of a gradual strengthen-

ing of domestic demand with expansion of

exports underpinning this growth. Emerging

markets and developing countries are

expected to continue to grow strongly,

drawing on favourable financial market con-

ditions and commodity prices, but at a slower

pace than in 2006. China's growth is expected

to moderate gradually in 2007-08 from its

high rate in 2006 while the pace of expan-

sion is also expected to slow down in India

with tightening of policy to control overheat-

ing of the economy.

Global trade is expected to expand with oil

and other commodity prices expected to come

down in 2007 and 2008. Downward risks to

the outlook has subsided with the fall in oil

prices and favourable global financial con-

ditions, but remain due to the following rea-

sons: potential for a sharper slowdown in

the US (if the housing market continues to

deteriorate), selling off of risky assets (if fi-

nancial markets continue to be volatile), in-

flation picking up with another hike in oil

prices, and disorderly adjustment of global

imbalances (the possibility of this happen-

ing is low but the cost of it still remains

high). According to the IMF, there is one in

five chance of global growth falling below 4

per cent in 2008.

3.3 Implications for Sri Lanka'sExternal Trade PerformanceSri Lanka is highly dependent on international

trade with trade in goods and services ac-

counting for over 70 per cent of the country's

GDP, indicating a relatively high openness

(and vulnerability) of the economy to exter-

nal developments. In light of sustained glo-

bal growth, Sri Lanka's export earnings grew

by 8.4 per cent to US$ 6,883 million in 2006.

Despite the relatively healthy performance,

there was a decline from the 10.2 per cent

growth recorded in 2005.

Much of the growth in export earnings was

underpinned by strong growth of industrial

exports which continued to dominate with a

share of 78 per cent of total exports, followed

by agricultural (18 per cent) and mineral ex-

ports (2 per cent). Industrial exports grew by

8.8 per cent, with good performances recorded

mainly by textiles and garments (see Section

3.3.1).

Agricultural exports also saw a healthy

growth of 12 per cent in 2006, led by good

performances by tea and rubber exports dur-

ing the year; tea and rubber make up about

three-fourths of agricultural exports. Tea ben-

efited from supply shortages in the interna-

tional markets due a drought in Kenya and

greater demand from Middle Eastern and CIS

countries. Rubber exports also benefited from

record high international rubber prices due

to escalating oil prices during the year. Due

to natural constraints in the further expan-

sion of output of traditional agricultural com-

modities, value addition and branding are

necessary not only to achieve sustainable

growth in exports of these commodities but


28

also to compete effectively in the interna-

tional markets, not only in terms of price

but also quality. One important step in this

regard would be improving standard testing

capacity in the country as well as ensuring

that local standards are recognized interna-

tionally.

In terms of export destinations, the US con-

tinued to be Sri Lanka's largest trading part-

ner but its share fell marginally (from 31 per

cent in 2005 to 29 per cent in 2006) while

the UK maintained its position as the sec-

ond largest export market. India has remained

the third largest export market since 2003

Table 3.1Overview of the World Economic Outlook

ProjectionsAnnual growth 2005 2006 2007 2008World output 4.9 5.4 4.9 4.9Advanced economies 2.5 3.1 2.5 2.7

United States 3.2 3.3 2.2 2.8Euro Area 1.4 2.6 2.3 2.3

Germany 0.9 2.7 1.8 1.9France 1.2 2.0 2.0 2.4

Japan 1.9 2.2 2.3 1.9 United Kingdom 1.9 2.7 2.9 2.7

Other advanced economies 3.9 4.3 3.8 3.8Newly industrialized Asian economies 4.7 5.3 4.6 4.6

Other emerging market and developing countries 7.5 7.9 7.5 7.1Africa 5.6 5.5 6.2 5.8

Sub-Sahara 6.0 5.7 6.8 6.1Central and Eastern Europe 5.5 6.0 5.5 5.3Commonwealth of Independent States 6.6 7.7 7.0 6.4

Russia 6.4 6.7 6.4 5.9Developing Asia 9.2 9.4 8.8 8.4

China 10.4 10.7 10 9.5India 9.2 9.2 8.4 7.8ASEAN-4 5.2 5.4 5.5 5.8

Middle East 5.4 5.7 5.5 5.5Western Hemisphere 4.6 5.5 4.9 4.2

World trade volume (goods and services) 7.4 9.2 7.0 7.4Imports Advanced economies 6.1 7.4 4.7 5.7 Other emerging market and developing countries 12.1 15 12.5 12.2ExportsAdvanced economies 5.6 8.4 5.5 5.8Other emerging market and developing countries 11.2 10.6 10.4 9.9

Commodity prices (US$)Oil 41.3 20.5 -5.5 6.6Non fuel (av. based on world commodity export weights) 10.3 28.4 4.2 -8.8

Consumer pricesAdvanced economies 2.3 2.3 1.8 2.1Other emerging market and developing countries 5.4 5.3 5.4 4.9

London inter-bank offered rate (%)On US dollar deposits 3.8 5.3 5.3 5.1On euro deposits 2.2 3.1 3.8 3.7On Japanese yen deposits 0.1 0.4 0.9 1.2

Source: IMF, World Economic Outlook, April 2007.


29

but its share fell to 7 per cent in 2006 (from

9 per cent in the previous year) due to lower

exports of vanaspathi from Sri Lanka as a re-

sult of a trade dispute between the two coun-

tries under the terms of the India-Sri Lanka

Free Trade Agreement (see Section 3.5.1).

Overall, Sri Lanka's exports continued to be

highly concentrated in terms of both prod-

ucts and markets.

So far, trade in services has not received much

attention but increased exports through this

sector could benefit the country not only in

terms of higher export earnings but also

through diversification of exports towards

more service oriented exports. Sri Lanka con-

tinues to rely on traditional service exports

such as transport and tourism which make

up more than two-thirds of services exports.

Earnings from both sectors rose in 2006 on

account of higher transshipment cargo han-

dling which grew by 37 per cent reflecting

India's expansion in international trade and

gradual recovery of the tourist industry from

the tsunami in 2004. Despite the travel ad-

visories issued by the major markets in the

latter part of 2006, total tourist arrivals and

earnings increased in 2006. With the inten-

sification of conflict related disturbances and

the closure of the only international airport

at night following air raids, tourist arrivals

to the country has dropped sharply, especially

from key markets such as Germany and In-

dia. The industry has already lowered its fore-

cast for tourism arrivals by 20 per cent to

543,877 for 2007 and has engaged in cam-

paigns to promote Sri Lanka as a safe desti-

nation, as well as initiating efforts to target

the domestic tourist market to weather the

downturn.

While earnings from transshipment are likely

to continue to increase with expansion of

trade from India channelled through Co-

lombo, Sri Lanka's position as South Asia's

hub is likely to be challenged in the long-

run with the on-going expansion and cuts in

charges at Indian ports, as indicated by the

increasing number of shipping vessels mak-

ing direct calls to India and by-passing Co-

lombo. As a result, Sri Lankan exporters are

not only facing rising freight charges but also

inadequate space on ships calling at Co-

lombo, adversely affecting the competitive-

ness of exports from the country. Therefore,

there is an urgent need to fast track the ex-

pansion of the Colombo port not only to

maintain its hub status but also to facilitate

the export sector in the country.

While earnings from transportation services

and tourism are important sources of foreign

exchange, it is encouraging to note that com-

puter and information services which include

Business Process Outsourcing (BPO) is an

expanding sector. This sector has grown con-

secutively over the last three years to record

earnings of US$ 98 million with a growth

rate of 19 per cent in 2006 alone. While Sri

Lanka might possess a comparative advan-

tage in promoting such exports - given the

high literacy rates in the country, required

professionals, and relatively good infrastruc-

ture with a sound legal framework - the coun-

try needs to build its telecommunications

infrastructure and improve the English lan-

guage education and training in order to ex-

pand the scope of the BPO sector in the coun-

try.

Reflecting rising demand (from industrial

expansion and higher demand for consumer

items) and escalating oil prices, imports grew

by 15.7 per cent in 2006 - at a much faster

rate than the 10.8 per cent recorded in 2005

- to US$ 10,253 million. Intermediate goods

(petroleum, fertilizer, chemicals, textiles,

etc.,) which account for 58 per cent of total

imports grew by 12.1 per cent in 2006. In-

termediate goods are dominated by petro-

leum imports, accounting for about 20 per

cent of total expenditure on imports, and

grew by 25 per cent with escalation of oil

prices during 2006, but slowed down in the


30

latter part of the year as oil prices fell. Sri

Lanka spent US$ 2070 million on its oil

import bill in 2006. In order to mitigate the

adverse impact of rising oil prices, the Ceylon

Petroleum Corporation (CPC) entered into a

hedging arrangement (see Box 3.1).

Imports of other intermediate goods increased

in 2006 due to expansion of the industrial

sector. Investment goods and consumer goods

which account for the remainder of total

imports (roughly one-fifth each) grew signifi-

cantly during the year. Growth in imports of

investment goods was driven by investment

projects undertaken by both the public and

private sector, and this component of im-

ports is likely to grow in the future given the

government's plan to substantially raise in-

vestments, particularly in infrastructure. Con-

sumer goods imports increased with higher

import prices of major food and beverage

items. Asia continued to be the major source

of imports to the country, with India having

a share of 21 per cent, followed by Singapore

and China.

3.3.1 Garments Exports in a Quota FreeEnvironment

The garments sector is a vital industry for the

Sri Lankan economy in terms of not only its

capacity to earn much needed foreign ex-

change (the second largest foreign exchange

earner in the country), but also as an impor-

tant source of employment generation, pro-

viding direct employment to 300,000 people

and affecting the lives of a million people. It

Box 3.1Oil Price Hedging

In order to cushion the volatility of international oil prices, the Ceylon Petroleum Corporation

(CPC), which controls two-thirds of the petroleum market in the country, entered into an oil

hedging facility in February 2007 handled by the Standard Chartered Bank (SCB). CPC entered

into a 'zero cost collar' hedging option. With the zero cost collar, the CPC is limiting the upside

price movements. The hedge puts the floor price at US$ 67.50, the cap at US$ 72 and a strike

price of US$ 70. Accordingly, for any price increase over US$ 70, the CPC will get a US$ 2

advantage. For any price fluctuation between US$ 67.50 and US$ 70, the CPC has to buy oil at

the market price. If the price falls below the floor price (US$ 67.50), the CPC still has to purchase

oil at US$ 67.50.

Initially, the CPC hedged for 150,000 barrels of imported diesel and as a result the SCB paid US$

300,000 to the CPC in the month of April 2007. The subsequent hedge was done for another

300,000 barrels for a period of three months from March 2007 and it has also resulted in a

favourable receipt of US$ 600,000 to the CPC. However, the volume of oil the CPC currently has

hedged represents less than one per cent of the annual total petroleum imports of the country.

The policy of hedging oil prices is not a total solution to meet increasing oil prices, but rather a

measure to merely cushion the shock of short-term oil price fluctuations in the world market. In

fact, currently the CPC has put on hold the decision to go for another fuel hedging facility due to

skyrocketing fuel prices. Even if the CPC resumes hedging in the future, they would have to adjust

the hedging arrangement in line with the oil price trend in the world market. Therefore, the

impact of long-term increases in oil prices cannot be avoided by a hedging mechanism alone,

and as such, the country has to look into other means of dealing with escalating world oil prices.

These could include, for example, measures to improve the public transportation system in the

country, and promoting alternative sources of power generation given that both transportation

and power sectors are the largest oil consumers in the country.


31

provides 33 per cent of employment in the

manufacturing sector and makes up about 5

per cent of the labour force (the figure could

be much higher if one takes into account

direct and indirect employment creation). The

prospects for the industry - which account

for 45 per cent of total exports (and 57 per

cent of industrial exports) - was of some con-

cern in the aftermath of a quota free environ-

ment introduced in January 2005 with the

full implementation of the WTO Agreement

on Textiles and Clothing (ATC). A slowdown

in earnings from garments exports in 2005

heightened concerns regarding the ability of

Sri Lanka's garments producers to compete

in the new international trading environment.

However, export earnings growth picked up

from 3.1 per cent in 2005 to 6.4 per cent in

2006 and reached US$ 3 billion owing to

higher prices and volume, thereby easing

some of the concerns regarding the ability of

the sector to meet intense international com-

petition (Table 3.2).

While the US continued to be the largest

buyer, exports to the EU have increased pro-

gressively with the GSP-plus scheme in place

since mid-2005. The EU now accounts for

40 per cent of textile and garment exports

from Sri Lanka (from 36 per cent in 2005),

while the share of the US market fell to 56

per cent in 2006 (from 59 per cent recorded

in 2005). While the sector appears to be suc-

cessfully placed to face the quota free trad-

ing environment, competition is expected to

intensify with the accession of Vietnam to

Table 3.2Export Growth of Garments

2003 2004 2005 2006Textiles and garments (US$ mn.) 2576.0 2809.0 2895.0 3080.4

% change 6.3 9.0 3.1 6.4

% of total exports 50.2 48.8 45.6 44.8

% of industrial exports 64.8 62.3 58.5 57.2

Export markets

US 61.3 58.0 59.4 56.0

EU 32.4 37.1 35.8 39.6


the WTO in November 2006 and the removal

of quotas imposed by the US on textiles and

garments exports from Vietnam.

Sri Lanka currently competes with Vietnam,

which is the sixth largest apparel exporter to

the US. Textile and garment exports from

Vietnam have continued to grow - even faster

than China - despite the imposition of quo-

tas by the US. The situation is likely to get

tougher for the industry with the removal of

restrictions by the EU and US on Chinese

exports of articles of textiles and apparel in

2008. These restrictions have so far acted as

a buffer against the full impact of the phase

out of quotas and China's ability to domi-

nate as a result. Sri Lanka's share of the US

market of textile and clothing has remained

at around 2.35 per cent over the recent past.

Towards meeting the challenges of the quota

free environment, Sri Lanka's apparel indus-

try has already undertaken a number of ini-

tiatives, including setting up fabric mills and

manufacturing accessories required for the

industry to improve backward linkages in the

country, and embarking on a branding cam-

paign under the slogan of 'Garments with-

out Guilt' to create a competitive edge over

other garment manufacturing countries by

emphasizing the relative good labour condi-

tions and record in the country. The govern-

ment has also extended various fiscal incen-

tives as a means of helping the industry to

withstand the intense competition in the in-

ternational market.


32

3.4 WTO Doha Round Negotiations:An UpdateProgress on the WTO Doha Round negotia-

tions has been less than encouraging. Fol-

lowing the suspension of talks in July 2006,

trade negotiations were resumed across-the-

board in February 2007, but has so far not

led to any breakthrough in bringing the Round

to a successful conclusion despite a number

of meetings by the G-4 involving the US,

EU, India and Brazil. Much of the real nego-

tiations have been taking place outside the

WTO and outside Geneva in bilateral dis-

cussions among the G-4 members.

The positions of the four members are still

far apart on all the major issues, including

domestic support and market access in agri-

culture. The main stumbling block remains

the refusal on the part of the US to make an

improved offer on agricultural domestic sup-

port. The failure of the US to provide a lower

figure is widely accepted as the main factor

causing the suspension of the Doha Round

negotiations in July 2006. In October 2005,

the US made an offer to lower agricultural

domestic support to US$ 22.7 billion; this

was, however, not regarded as credible since

the actual level of support in 2005 was esti-

mated at US$ 19.7 billion. Developing coun-

tries are pushing for a much lower figure,

possibly in the range of US$ 12-15 billion.

Without making the commensurate conces-

sions, the US has been requesting that others

make substantive concessions, especially in

agriculture and non-agricultural market ac-

cess (NAMA) negotiations.

There are also large differences in positions

on NAMA negotiations as well. The US and

the EU are sticking to their demands that

developing countries commit to a co-efficient

of 15 under the Swiss formula to reduce tar-

iffs, while developed countries adopt a coef-

ficient of 10. This has been rejected by Bra-

zil and India (and other developing coun-

tries) who are arguing that it would lead to

deindustrialization in their economies, with

tariffs being cut by as much as 70 per cent

while developed countries would only sub-

ject themselves to a cut of about 28 per cent.

Instead, developing countries are demand-

ing that there should be at least a 25 point

gap between the coefficients of developed

and developing countries, as well as enhanced

flexibilities for developing countries. These

measures are intended to take into account

the principle of 'less than full reciprocity' in

reduction commitments, requiring that de-

veloped countries do more than developing

countries.

Negotiations were brought back to the WTO

and the multilateral process in April 2007

given that the G-4 had failed to deliver any

results. In another important development

that holds implications for the multilateral

process, the deadline for the US President to

inform Congress of intentions to sign trade

agreements under the present fast track au-

thority - granted under the Trade Promotion

Authority (TPA) - expired in April 2007, with-

out putting forward any intentions regarding

the Doha Round negotiations. Thus, a major

deadline of the WTO passed, marking a sig-

nificant blow to any hopes of concluding

the Doha work programme.

This was yet another missed deadline in the

troubled Doha Round of talks launched in

November 2001, with an initial deadline for

the conclusion of negotiations by January

2005. With the expiration of the TPA on 30

June 2007, it is unlikely that the US Con-

gress, which is dominated by the Democrats,

would extend the fast track authority of the

President to get a new TPA for the rest of the

current term of office. This would mean that

negotiations that are underway would have

to take it on trust that the US Congress will

somehow endorse whatever is finally agreed

upon by members of the WTO.


33

Box 3.2Proliferation of Regional Trade Arrangements

Regional trade arrangements (RTAs) have become a significant feature of the world trading

system in recent times. Almost all countries in the world are now members of at least one or more

RTAs while some are party to 20 or more. According to the WTO, the number of such arrange-

ments has surged since the early 1990s and there are some 386 RTAs notified as of end Decem-

ber 2006 with still more in the pipeline. By 2010, it is estimated that close to 400 RTAs will be in

existence. The growth in the number of RTAs and their increasing importance is reflected by the

steady rise in the share of preferential trade - trade between members of RTAs account for about

one-third of total global trade at present. While RTAs have sprung up across the world, the Asia-

Pacific and Latin American regions have witnessed the largest proliferation of arrangements in

recent times. This has resulted in an increasingly complex global trading system with different

countries having access to a given market under different rules, a situation resembling a 'spa-

ghetti bowl', which could potentially hamper efforts to reach an agreement at the multilateral

level.

The proliferation of RTAs has been due to a number of developments dating back to the early

1990s, namely the uncertainty surrounding the fate of the Uruguay Round, which prompted

countries to seek trade deals with their most important trading partners rather than wait for a

multilateral trade agreement to be in place. The sluggish progress under the current Doha Round

launched in 2001, which was expected to have been concluded in 2005 is likely to fuel a further

surge in RTAs as already witnessed, as countries scramble to partner up with more countries. In

fact, a number of countries announced their intention of signing up RTAs with their major

trading partners following the suspension of the Doha Round in July 2006.

While smaller countries have seen RTAs as a defensive response to emergence of regional

trading arrangements elsewhere in the world, even larger countries are increasingly turning to

RTAs to avoid being left out. For example, Japan which has historically been less inclined to sign

up for RTAs has recently concluded agreements with Mexico and Thailand, and is negotiating

further deals with eight other economies. While it remains far behind the US and Europe, Japan's

new found urgency for FTAs has been prompted in part by impending trade agreements be-

tween the US and South Korea and ongoing negotiations between the EU and South Korea. The

US has been actively seeking RTAs and has negotiated 26 bilateral deals since 2001, while the

EU rejoined the bandwagon recently and is seeking trade arrangements with a number of

countries in Asia, including South Korea, India, and ASEAN. Asian countries are also moving to

sign trade agreements, and some 150 bilateral FTAs were signed or were under negotiation in

2005 alone. ASEAN is negotiating agreements with China, Japan and South Korea while India

concluded a deal recently with Singapore and is talking with other Southeast Asian countries

amongst others.

Having missed the deadline of wrapping up

a deal before the expiry of the TPA, negotia-

tions are now under way to attempt to final-

ize a deal before the end of 2007. The

timeline reflects the urgency of concluding

the Doha Round before end 2007 as the US

will be engaged in Presidential elections

thereafter, and it will have limited inclina-

tions to engage in the WTO negotiations.

Given the end-2007 deadline, substantive

issues in agriculture and NAMA have to be

concluded by the end of July 2007 so that

there will be time for other outstanding is-

sues to be resolved.

The near failure of the Doha Round has raised

fears that it will lead to a greater focus on


34

regionalism - more interlocking and overlap-

ping trade deals - among countries. Regional

and bilateral trade deals have mushroomed

to the extent that with the exception of

Mongolia, all WTO members are now in-

volved in some sort of preferential trade deal

(see Box 3.2).

3.5 Preferential Trade ArrangementsWhilst continuing to participate at multilat-

eral trade negotiations, Sri Lanka too has been

pursuing preferential access to markets

through bilateral and regional trade arrange-

ments - more recently, strengthening some

of the existing agreement as well as deepen-

ing others.

3.5.1 India-Sri Lanka Free TradeAgreement

Under the India-Sri Lanka Free Trade Agree-

ment (ISFTA), Sri Lanka implemented the

second stage of tariff reductions in Septem-

ber 2006 (after a delay of six months) and

brought down tariff rates by 70 per cent on

2700 odd items. While this would benefit

consumers of the country - i.e., affording

them cheap motorcycles from India, for ex-

ample - it could also prove to be detrimental

to some domestic industries that have to

compete with cheaper Indian imports, such

as in the jewellery sector. According to the

ISFTA signed in 1998, India will have duty

free access to the Sri Lankan market other

than those items on the negative list by 2008.

Sri Lanka already has duty free access to the

Indian market since 2003 except for some

400 items on India's negative list.

Exports to India from Sri Lanka declined for

the first time since the ISFTA came into op-

eration in 2000, with a dip of 11 per cent

recorded in 2006. This was largely on ac-

count of the drop in key exports of vanaspathi

oil, copper articles and aluminum articles,

which account for more than half of Sri

Lanka's exports to India. Vanaspathi became

a bone of contention in the bilateral trade

relations in 2006, with India canalizing

vanaspathi exports from Sri Lanka in light of

a surge in imports to the Indian market - top-

ping Rs. 12 billion in 2005. India has also

expressed concern over exports of pepper,

copper, and dessicated coconut from Sri

Lanka. Whilst some other products recorded

significant increases during 2006 (i.e., rub-

ber and rubber products, marble, wooden

furniture, woven fabrics of cotton, ceramic

products and leather products), the value of

these products were insufficient to make up

for the overall fall in exports to India.

Imports from India continued to grow with

India being the largest source of imports to

Sri Lanka, accounting for about 21 per cent

of total imports in 2006. However, it ap-

pears that most of the products imported fall

outside the ISFTA - i.e., they have duty free

access to Sri Lanka regardless of the agree-

ment due to the liberal trading regime of the

country - while some important items,

namely agricultural products are in Sri Lanka's

negative list of items and as such do not get

any preferential access. Recently, India agreed

to remove port restrictions on imports of tea

from Sri Lanka, which was limited to Kolkota

and Cochin. India also agreed to allow Sri

Lanka to export three million pieces of gar-

ments (out of the quota of eight million

pieces given under the ISFTA) made from

fabrics sourced from other countries; previ-

ously this was limited to 2 million pieces.

Trade disputes arising from the ISFTA have

also adversely affected plans of deepening

economic cooperation between Sri Lanka and

India under a Comprehensive Economic Part-

nership Agreement (CEPA). Following the

vanaspathi related controversy in 2006, CEPA

negotiations resumed in 2007. So far, Sri

Lanka and India have held a number of tech-

nical rounds of trade talks under CEPA with

the intention of further liberalizing trade in

goods and extending preferential treatment


35

to include services and investments. The

CEPA talks have been ongoing for three years

now and it is expected that negotiations can

be wrapped up by the end of 2007.

The CEPA is expected to address a number

of issues and update existing treaties on bi-

lateral investment promotion and protection,

avoidance of double taxation, and preven-

tion of fiscal evasion. In the area of goods,

the CEPA will seek to further prune down

the negative lists under the ISFTA and con-

sider relaxation of existing rules of origin cri-

teria. Sri Lanka has identified 57 items that

it can remove from its negative list, while

India has agreed to consider 118 tariff lines.

However, there are some issues that need to

be ironed out before negotiations can be

brought to a successful completion. For in-

stance, in the services negotiations there re-

mains the fundamental issue of the inclu-

sion of Mode 4 (movement of natural per-

sons) liberalization. Sri Lanka feels that do-

mestic regulatory capacity is not developed

sufficiently to handle extensive liberalization

of Mode 4 at this stage, particularly in pro-

fessional services. Therefore, the position

remains that Mode 4 should be linked to

Mode 3 (commercial presence) until such

time that the domestic regulatory framework

is in a position to effectively deal with the

consequences of further liberalization. In this

context, it is essential that Sri Lanka's pro-

fessional bodies ensure that regulatory stan-

dards are built up to an international level.

Besides Mode 4, other issues that are yet to

be resolved include the rules of origin in ser-

vices negotiations (denial of benefits clause)

and the inclusion of a safeguards clause in

the services text.

Sri Lanka has a great deal to benefit from the

liberalization of services with India, espe-

cially in sectors such as tourism, maritime

transport, air transport and Business Process

Outsourcing (BPO). In the case of BPO for

example, there is tremendous potential to

tap into the BPO industry in India through

subcontracting. At the same time, there have

been concerns among domestic stakeholders

who fear a flooding of the Sri Lankan market

by Indian professionals and firms. However,

it should be noted that the liberalization of

services under CEPA takes place under a posi-

tive list approach, where only selected ser-

vices are liberalized, and even then they are

opened up only to the extent that domestic

stakeholders are comfortable with. For in-

stance, the Sri Lankan government can specify

the maximum level of ownership that can

be enjoyed by an Indian firm, and can specify

limits to the number of professionals from

India who can work in each firm. There is a

great deal of control over the extent of liber-

alization that takes place in the CEPA ser-

vices agreement. The fact that Sri Lanka stands

to benefit from Indian investment and ser-

vice provision in the country should not be

ignored either. Transfer of technology and

knowledge in areas of Indian expertise such

as the BPO sector would certainly be of value

to both Sri Lankan consumers and enterprises.

There are also shortages in Sri Lanka in cer-

tain specialties such as in the medical sector

(i.e., neurosurgeons, thoracic surgeons and

plastic surgeons, etc.) where Sri Lankans

spend large amounts to travel abroad seek-

ing treatment. If such treatment facilities are

available in the country it would be of great

benefit to consumers.

3.5.2 Pakistan-Sri Lanka Free TradeAgreement

Under the Pakistan-Sri Lanka Free Trade Agree-

ment (PSFTA) implemented since June 2005,

Sri Lanka implemented the second duty re-

duction of 30 per cent. Pakistan will phase

out duties except those on the negative list

by March 2008 while Sri Lanka will phase

out duties on 4478 items by June 2010. Ex-

ports to Pakistan have grown by 39 per cent

- from Rs. 4.4 billion in 2005 to Rs. 6.1

billion by 2006 - but this growth has come

from the same products which were being


36

threatening to unilaterally withdraw tariff

concessions given to Pakistan. On the other

hand, Pakistan accused India of maintaining

a large number of para-tariffs and non-tariff

barriers, thereby denying access to the In-

dian market. At the 14th SAARC Summit

held in April 2007, both countries together

with the other members of SAARC signed

the Declaration which emphasized that

SAFTA would be implemented in 'letter and

spirit' with countries agreeing to provide ef-

fective market access through the implemen-

tation of the trade liberalization programme.

The Declaration also went further to state

that SAFTA should integrate trade in services

but it remains to be seen whether the coun-

tries in South Asia can at least implement

what they have agreed to. While the oppor-

tunities from free trade in South Asia are

considered to have some potential, Sri Lanka

already has access to the two largest markets

in South Asia - India and Pakistan - through

bilateral agreements. The bilateral FTAs are

much more comprehensive in terms of prod-

uct coverage, less restrictive in terms of rules

of origin and offer better concessions com-

pared to SAFTA. Moreover, the tariff liberal-

ization under SAFTA is comparatively a

drawn out process - i.e., offering Sri Lanka

duty-free access to India and Pakistan by 2013

which would make it irrelevant to Sri Lanka

since the ISFTA and PSFTA would be fully

operational by then. SAFTA may be useful

to Sri Lanka in accessing other South Asian

markets but the potential for trade expan-

sion seems limited given current bilateral

trade patterns with these countries. In order

to make the agreement of any benefit at all,

it would be worthwhile considering trimming

the negative lists, selecting a few key areas

where trade facilitation can be worked on

(such as transit facilitation, customs and stan-

dards harmonization), promoting cooperation

on trade related infrastructure development,

and most importantly on addressing non-tar-

iff barriers as part of the agreement.

granted to automobile parts under the PSFTA

to base production in Sri Lanka with a view

to exporting to Pakistan. Although Sri Lanka

is not a major exporter of automobile com-

ponents (other than rubber based automo-

bile components), there is thought to be

strong potential for such exports with the

support of foreign participation. Therefore,

Sri Lanka should examine this issue properly

before withdrawing the concessions allowed

under the PSFTA. In turn, Pakistan has agreed

to raise tariff concessions on betel leaves and

remove the quota of 1200 tonnes imposed

under the agreement, as well as provide tar-

iff concessions for herbal cosmetics manu-

factured in Sri Lanka. Both countries have

expressed an interest in exploring furthering

economic relations by looking into liberal-

ization of services and investments and work-

ing out a CEPA in the near future

3.5.3 South Asia Free Trade Agreement

Although the South Asian Free Trade Agree-

ment (SAFTA) came into operation in July

2006 after some delay, the process ran into

trouble early on with India accusing Paki-

stan of not complying with the agreement

by maintaining a positive list of items and

exported to Pakistan before the agreement

became operational. These include products

such as natural rubber, copra, dessicated co-

conut, black tea, betel leaves, cotton yarn,

coconut ekels, nutmeg and mace, which ac-

count for about 80 per cent of total exports

to Pakistan.

Imports from Pakistan too have recorded an

increase of 31 per cent from Rs. 11.6 billion

in 2005 to Rs. 15.2 billion in 2006 but here

again the main products imported have been

much the same, with cotton imports alone

accounting for 60 per cent of total imports,

and which is imported on an MFN basis. At

the first bilateral consultation held, Pakistan

expressed concerns over the possibility of

Indian investors making use of concessions


37

3.5.4 Asia-Pacific Trade Agreement

The third round of tariff concessions under

the Asia Pacific Trade Agreement (APTA) -

which was formerly known as the Bangkok

Agreement - came into force in September

2006 after a delay. At the negotiations, mem-

ber countries which include Bangladesh,

China, India, South Korea and Sri Lanka ex-

changed concessions on 4270 products in

addition to 587 products extended to LDC

members of the grouping. This was seen as a

significant improvement from the previous

round, which covered 1721 products and 112

products for LDCs. The average margin of

preference (MOP) was raised to 26.8 per cent

compared with 21.6 per cent at the second

round while the MOP offered to LDCs al-

most doubled to 58.8 per cent. China of-

fered the largest number of concessions fol-

lowed by South Korea, which offered the

highest average MOP on products from non-

LDCs. China offered the highest MOP to

products from LDCs.

In terms of product coverage under APTA,

all countries saw an increase in imports re-

ceiving concessions as a result of the third

round, with China recording the highest rate

of 63 per cent. Sri Lanka's product coverage

rose to 11 per cent (from 9 per cent). Intra-

APTA trade has been steadily increasing in

products under concession over the years

(from 5.5 per cent in 1999 to 8.4 per cent by

2003) and it is now expected that intra-APTA

trade will further expand with the implemen-

tation of the third round. In the case of Sri

Lanka, however, the utilization rate of con-

cessions under APTA is low, accounting for

about one per cent. The fourth round of ne-

gotiations under APTA is expected to be ini-

tiated by the end of 2007 to deepen eco-

nomic cooperation within the region as well

as widen the membership with Thailand, the

Philippines, Papua New Guinea and some

Central Asian countries having expressed an

interest in joining the grouping. Pakistan has

also applied for membership as far back as

1998 but the request is still pending.

3.5.5 Bay of Bengal Initiative for Multi-sectoral Technical and EconomicCooperation

Sri Lanka is also a member of BIMSTEC

which has been negotiating to move to a free

trade agreement since 2004. A framework

agreement covering trade in goods, services

and investment between the seven South

Asian and Southeast Asian countries signed

in February 2004 was supposed to have fi-

nalized outstanding issues by the end of 2005

for implementation in July 2006. But so far

the Trade Negotiation Committee (TNC)

which was established to undertake this task

has not managed to do so due to some con-

tentious issues, specifically those related to

rules of origin (ROO) and negative lists even

after 14 TNC meetings to date.

With regard to ROO, member countries are

yet to agree on a figure for domestic value

addition. Thailand favours a 30 per cent value

addition in addition to the Change of Tariff

Heading (CTH) at 4 digit level for all the

member countries, while others including Sri

Lanka, have suggested to extend 30 per cent

value addition for LDCs and 35 per cent for

non-LDCs in conjunction with CTH. Mem-

ber countries have also expressed the need

to provide derogations from this general

ROO by applying specific rules for some

1200 products. Despite the agreement to

limit the negative list to 20 per cent of total

tariff lines (at six digit level), Thailand has

expressed its desire to bring down the nega-

tive lists to 10 per cent. Sri Lanka has circu-

lated its negative list, which is more or less

based on the SAFTA agreement but with a

reduced number of items totalling 1050 tar-

iff lines. Thailand has also proposed the prin-

ciple of reciprocity in the determination of

the negative lists, but this does not seem to

have gone down well with the rest of the

member countries.


38

Liberalization of goods will be done under

two approaches: 'fast track' between 2006

and 2010 and 'normal track' between 2007

and 2017, depending on the level of devel-

opment of member countries. Under the fast

track, members have agreed to offer 10 per

cent of total tariff lines at HS 6 digit level.

Sri Lanka has offered 514 items under the

fast track. Tariff reduction/elimination un-

der the normal track will be made over a

period of 11 years from the date of imple-

mentation. The list of products to be liberal-

ized under the normal track would account

for 70 per cent of total tariff lines. However,

the percentage for tariff reduction and tariff

elimination are still to be discussed.

Most of the TNC meetings have focused on

the Agreement on Trade in Goods and dis-

cussions on services and investments are still

at the very initial stages. Since the July 2006

deadline for concluding the agreement was

missed, members expressed a desire for the

agreement to be concluded before the

second BIMSTEC summit in February 2007

but this event was subsequently put off due

to the inability of Bangladesh to participate

and fresh dates for the summit meeting are

still under exploration. Meanwhile, at the

last TNC meeting held in Bhutan in June

2007, Sri Lanka was appointed as the

permanent chair of the TNC in order to bring

the deliberations to a successful conclusion.

The next TNC meeting is scheduled to be

held in September 2007.

3.5.6 Generalized System ofPreferences (GSP) Schemes

Sri Lanka managed to capitalize on the EUs

GSP-plus scheme - of which the country be-

came a beneficiary in July 2005 - as reflected

by higher growth of exports of textiles and

apparel to the EU in 2006, recording an in-

crease of 17.3 per cent over the previous year.

Under the EU GSP-plus scheme, Sri Lanka

has duty and quota free access for some 7000

odd items to the EU market up to December

2008 when it would be up for revision. How-

ever, Sri Lanka has not been able to make the

most of the arrangement so far due to strict

rules of origin as indicated by the low utili-

zation rates.

In order to qualify for GSP plus concessions,

beneficiaries must meet the rules of origin

criteria under the EU GSP scheme. The EU

has been considering revising rules of origin

of its preferential trade arrangements such as

the GSP scheme since 2003 by moving to-

wards a single criterion (value addition) from

the multitude of criteria currently being used

- i.e., processing criteria, change of tariff head-

ing, and value addition. This is likely to ben-

efit Sri Lanka - namely, its exports of apparel

(the largest export to the EU) but certain sec-

tors such as agricultural, fisheries, and tex-

tile products might be still subjected to an-

other approach other than value addition. Sri

Lanka has also backed the idea of super cu-

mulation between regional groupings in meet-

ing the rules of origin criteria - i.e., taking

ASEAN and SAARC as a single group so that

Sri Lanka can source inputs from East Asian

countries and still be eligible for preferential

access to the EU under the GSP scheme.

Sri Lanka is also a beneficiary of the US GSP

scheme, which expired at the end of 2006.

Unlike other years, there was considerable

debate regarding renewal of the scheme this

time around largely due to the current im-

passe in the multilateral trade talks and con-

cerns regarding the inclusion of certain ad-

vanced developing countries, such as India

and Brazil, in the scheme. The US is cur-

rently reviewing whether to limit, suspend

or withdraw the eligibility of 13 countries

which exported more than US$ 100 million

worth of goods to the US under the scheme

in 2005, or accounted for more than 0.25 of

world exports. These include Argentina, Bra-

zil, Croatia, India, Indonesia, Kazakhstan,

the Philippines, Romania, Russia, South Af-

rica, Thailand, Turkey, and Venezuela. The


39

removal of these countries from the GSP

scheme would be beneficial for other ben-

eficiaries such as Sri Lanka, which compete

with these countries in the US market.

The US is also considering the removal of

concessions on imports which exceeded the

value of US$ 120 million in 2005 or ex-

ceeded more than 50 per cent of total im-

ports into the US. Under this rule, imports

of brooms and brushes from Sri Lanka, which

accounted for more than 50 per cent of total

imports of the product to the US can be re-

moved from the scheme. Sri Lanka has made

representations not to withdraw the conces-

sion extended to the product.

3.5.7 Preferential Market Access: WayForward?

While there is an obvious need to strengthen

and deepen existing agreements, Sri Lanka

also needs to be selective in negotiating new

regional trade arrangements given that the

process of negotiating and signing of RTAs

has become increasingly complex. These

agreements have become deeper and broader

in scope. A single agreement absorbs a great

deal of resources, both physical and human,

over the years to complete it. Given this con-

sideration, it is essential that the pursuit of

new RTAs is limited only to where proven

long-term economic benefits are abundantly

clear. When considering new agreements in

the medium term, it is also important to take

into account a number of other factors.

Transaction costs between two trading part-

ners are a major hindrance to the success of

a trade agreement. Countries with a record

of high non-tariff barriers, weak trade related

infrastructure, high transport costs and strin-

gent bureaucratic regulations are unlikely to

result in great benefits since tariff liberaliza-

tion alone will not be sufficient to generate

trade. When signing new agreements it is

also important to learn from the experiences

of past agreements. For instance, benefits ac-

cruing from the ISFTA have been more lim-

ited due to non-tariff barriers, and the extent

of investment that was expected following

the agreement has not materialized. Much

of the investment has been in low value

added industries with little technology trans-

fer and gainful employment creation (i.e.,

vanaspathi and copper).

Obtaining market access alone is not suffi-

cient to ensure that the country is able to

export under the agreement if there are do-

mestic supply constraints in the economy.

Inability to make use of preferences extended

to Sri Lanka also indicates the need to build

domestic supply side capacities to trade, an

issue which has gained increasing recogni-

tion and attention in policy circles. For ex-

ample, Sri Lanka has not been able to make

the most out of the trade arrangements and

meet rules of origin criteria due to lack of

backward linkages in the economy. There-

fore, it is important that improved market

access through strengthening and deepening

of existing trade arrangements are accompa-

nied by domestic measures undertaken in the

country to facilitate the expansion of trade.

3.6 ConclusionProspects for the international economy re-

main broadly favourable with the world

economy expected to continue to grow

strongly in 2007. Nevertheless, growth in

major industrial countries is set to slow, pri-

marily in the US - Sri Lanka's main export

market. The growth momentum in Europe is

expected to moderate a little in 2007, while

Japan is expected to continue to grow at the

same pace as in 2006. Continued impres-

sive growth in emerging markets and devel-

oping countries is expected to be led as in

recent years by China and India. Global trade

is expected to expand less quickly than last

year, but still at a fairly robust rate.

Sri Lanka as a small open economy is largely

likely to benefit from developments in the


40

global economy. Nevertheless, there are still

some downside risks to such projections,

namely, further pressures emanating from an

escalation of oil prices being the primary con-

cern. While Sri Lanka has secured market ac-

cess abroad to some of its major export des-

tinations through preferential trade arrange-

ments, these need to be better utilized by

strengthening and deepening them in order

to raise overall export earnings and thereby

narrow the widening deficit in the country's

external trade balance. However, preferen-

tial agreements should not be viewed as the

sole means of improving export performance.

Sri Lanka should be mindful about entering

into new arrangements with other countries

without properly examining potential ben-

efits (and costs), and pay due attention to

addressing domestic supply side constraints

to trade.

4. Empowerment of the Poor

4.1 Introduction: Poverty and Empowerment

There is no universally accepted definitionof poverty. As identified by the ADB, 'pov-erty is deprivation of essential assets andopportunities, to which the human beingsare entitled. Everyone should have access tobasic education and primary health services.Poor households have the right to sustainthemselves by their labour and be reason-ably rewarded, as well as having some pro-tection from external shocks. Beyond incomeand basic services, individuals and societiesare also poor - and tend to remain so - if theyare not empowered to participate in makingthe decisions that shape their lives.'1 More-over, as described in the World DevelopmentReport 2000/2001, the poor 'often lack ad-equate food and shelter, education andhealth, deprivations that keep them fromleading the kind of life that everyone values.They also face extreme vulnerability to illhealth, economic dislocation, and naturaldisasters. They are often exposed to ill treat-ment by institutions of the state and societyand are powerless to influence key decisionsaffecting their lives. These are all dimensionsof poverty.'2

The above definitions of poverty portray itsmulti-dimensional nature. Poverty encom-passes not only the material deprivation thatis measured by income or consumption lev-els, but also other dimensions such as lowachievement in basic education and healthand poor quality of shelter and sanitation.Furthermore, the definition of poverty hasbeen broadened in recent years to includethe dimensions of vulnerability (exposure to

risks), voicelessness and feeling of power-lessness (which includes social exclusion andlack of freedom to participate). As such,empowerment of the poor has beenrecognised as an essential part of any pov-erty alleviation strategy in recent years.

Empowerment, in the broadest sense, is theexpansion of freedom of choice and action.This is tantamount to increasing one's au-thority and control over the resources anddecisions that affect one's life. Once a per-son exercises real choices, he/she gains in-creased control over his/her life. Poor peoplein this sense have extremely limited choices,because they lack assets, and powerlessnessinhibits their negotiating capacity for betterterms for themselves with a range of institu-tions, both formal and informal. In this re-spect, empowerment is the expansion of as-sets and capabilities of poor people to par-ticipate in, negotiate with, influence, con-trol, and hold accountable institutions thataffect their lives.3

Thus, empowerment is the process of increas-ing the capacity of individuals or groups tomake choices and to transform those choicesinto desired actions and outcomes. Centralto this process are actions which build bothindividual and collective assets, and improvethe efficiency and fairness of the organiza-tional and institutional context which gov-ern the use of these assets. Empowerment isalso defined as a process of conceding todisadvantaged communities the right to ques-tion and communicate alternative options.

41

1 ADB (2006), Poverty Handbook Analysis and Processes to Support ADB Operations: A Working Document.2 World Bank (2000), World Development Report 2000/2001: Attacking Poverty.3 World Bank (2002), Empowerment and Poverty Reduction: A Sourcebook.


42

Empowerment of the poor is important atthe individual level as well as at the collec-tive level, and it is multi-faceted; social,economic, political and legal.

Essentially, lack of opportunities to partici-pate in economic decision making, economicactivities and markets have led the way topoverty. Empowering the poor requires pro-viding the poor with the opportunity to ac-tively participate in economy-wide activitiesby removing economic and social obstaclesto such opportunities. Moreover, afavourable social economic and politicalenvironment has to be provided to facilitatethe participation of the poor and utilizationof such opportunities. Furthermore, all ef-forts and endeavours should ensuresustainability and enhance security, whilereducing risk and vulnerability for the poorto enjoy the full fledged benefits of empow-erment efforts.

This Chapter will look in detail at the con-cept of empowerment and its application inthe Sri Lankan context to alleviate poverty intwo key resource areas - land andmicrofinance. Section 4.2 will examine thekey elements and principles and forces in-fluencing empowerment. Section 4.3 willdiscuss various initiatives taken by Sri Lankaduring the last couple of decades to empowerthe poor. Section 4.4 looks at the specificarea of land and empowerment in Sri Lanka.Section 4.5 looks at the case study of therole of microfinance in empowerment. Sec-tion 4.6 will provide some concluding re-marks and policy recommendations.

4.2 Empowerment: Key Elements,Forces and PrinciplesThere is no single model for empowermentin the literature. Hence, a more practical andsuccessful empowerment framework should

basically encompass the major elements orpractices of empowerment, forces which fa-cilitate the empowerment process, and theprinciples or empowering approaches as dis-cussed below.

4.2.1 Elements of Empowerment

There are four key elements of empowermentwhich are closely intertwined and act in syn-ergy as set out:4

• Access to information: Lack of access totimely, accurate and full information islikely to deprive the poor from realizingthe full benefits of the opportunities ofany macro reforms. Well informed indi-viduals are able to take effective actions,exercise their rights, bargain and negoti-ate effectively.

• Inclusion and participation: Poor and so-cially excluded groups normally lack theopportunity of participating and decisionmaking resulting in unfavourable solu-tions. Participation directly or indirectlyat local and national levels with the au-thority and control over decisions and re-sources is important to the disadvantagedgroups for effective participation in inputand goods markets and getting access toresources.

• Accountability: Assurance of accountabil-ity in political, administrative, public orsocial mechanisms plays a crucial role inempowering the poor since they normallylack direct access to officials and services,resulting in fewer options.

• Local organizational capacity: In the pro-cess of empowerment of the poor, theimportance of organization of localcommunities is often highlighted as itimproves their ability to demand for andinfluence decision making, collectivebargaining power, and most of all increating a voice of their own.

4 World Bank (2002), Empowerment and Poverty Reduction: A Sourcebook.

43


4.2.2. Major Forces InfluencingEmpowerment

Any effort of empowering the poor of a par-ticular locality is greatly affected by the re-sponse of other citizens or the nature of pub-lic action, both at local and broad economywide levels. This may include activities oflocal organizations, institutional mechanismsor national level policies based on the goodsor services provided at the local level.

As such, patterns of social exclusion andconflict also have an impact on benefits re-ceived by the poor from the empowermentprogrammes. In general, societies are strati-fied and some groups control the entry andexit of the other groups into the social sys-tem - based on caste, race, religion, ethnicity,education, economic status or gender - lead-ing to conflicts. Hence, prior to any inter-ventions with regard to empowering the poor,the patterns and culture of social exclusionshave to be studied. Additionally, to enablethese groups to secure the benefits of suchprogrammes, discriminatory barriers have tobe removed by changing the existing laws,rules and regulations.

Empowerment efforts are also likely to beaffected by the extent of decentralization ofgovernance. It is believed that decentralizedgovernments address local problems moreeffectively compared to the centralized sys-tem, enabling members of the communitiesto participate in decision making and re-source allocation to best reflect their priori-ties.

Strong civil society institutions and local lead-ership are also important actors in the do-main of public action. In marginalizedgroups, strengthening of civil society bychanging rules and regulations is a neces-sity, and an important intervention in em-powerment.

Empowerment strategies will be productiveonly if there is sufficient political freedomof information, public debate, formation ofunions and access to justice. Hence, suffi-cient political freedom should be ensuredthrough establishing transparency, free flowof information, and freedom in decisionmaking.

4.2.3. Empowerment Principles

A key requirement for empowerment of thepoor is access to productive resources, basi-cally land, water, credit, farm inputs, mar-keting opportunities and technology. All overthe world, poverty has shown a positive cor-relation with lack of access to resources, es-pecially to natural resources like land andwater. With respect to getting access to natu-ral resources and management of commonproperty resources, the role of civil societyorganizations is crucial. Also, when wellorganized, they can effectively participate ininput and credit markets. Similarly, the statehas to play a vital role in facilitating accessof poor to resources by establishing a secure,durable, administrative and regulatory envi-ronment. Further, implementation offavourable financial and fiscal polices is aprerequisite to the success of any initiativein this respect.

National government can play a crucial rolein empowering the poor by strengtheninglocal government through decentralizationand devolution of power, adopting partici-patory processes in the development of na-tional poverty reduction strategies, issuingguidelines for reforms and setting standardsof performance, and ensuring internal andpublic accountability of local governmentsto citizens. Moreover, the state can facilitaterevenue generation through infrastructuredevelopment, provision of resources and ba-sic social services. The state also has a keyresponsibility in developing local institutions,assuring justice and public safety, and creat-ing an environment to promote broad based


44

growth through favourable macroeconomicpolicies.

Local government in general establish closelinks with the people at the grass root level,and is, therefore, a crucial institution inempowerment of the poor. Improved localgovernance can contribute to communitydevelopment by providing public services,mobilizing community resources, increasingcitizens' access to information, stimulatingprivate investment, expanding rural-urbanlinkages, investing in local infrastructure,adapting national development policies tolocal conditions, enabling inclusion and par-ticipation of the local populace in decisionmaking, and increasing accountability ofnational governments to the citizens. Basi-cally, local governments can be the sourceof opportunities and provider of the physicaland financial resources to the local popu-lace to realize the benefits of their initiatives.However, in most cases local governmentsare inefficient and unable to deliver a goodservice as expected due to strong central con-trol and being at the bottom of the hierarchyof the administrative system. Efforts towardsdevolution of power to place more responsi-bility to local governments have failed dueto the influence of local economic, politicaland social elites. Hence, decentralization ofpower to local governments should neces-sarily be accompanied by effective supervi-sion and provision of financial and materialresources to realize the full potential.

Access to justice is a necessary condition forthe empowerment of the poor. Therefore,creating a legal environment for accountablegovernance has become a prerequisite inempowerment programmes. Hence, it isobligatory to bring about suitable legal andjudicial reforms that are publicly known,enforceable, transparent and equally appliedto all citizens. Organizations funding em-powerment projects have identified the needto include legal and judicial reforms. The

focus is on different aspects; improving ad-ministrative justice (making decisions ac-countable and affordable to all citizens), pro-moting judicial independence and account-ability, improving legal education, improv-ing poor people's access to justice and pub-lic outreach. Several countries have intro-duced judicial and legal reforms throughparticipatory approaches combining percep-tions of civil society groups and relevant of-ficials while adopting mechanisms to ensurethe inclusion and participation of the poor.These include training judges and other courtpersonnel in local languages, decentralizedcourt services, travelling judges and publicdefenders, low cost service provision byNGOs, use of alternative dispute resolutionmechanisms, etc.

Empowerment requires the participation oflocal communities in formulation, imple-mentation and evaluation of decisions andactions determining the functioning and well-being of society. Benefits of community par-ticipation in development projects includeincreased mobilization of financial and non-financial resources by communities, greatereffectiveness in planning and implementa-tion of development initiatives by adaptingthem to local circumstances, improved main-tenance of assets and infrastructure throughlocal resource contribution and management,contribution to local experience in provid-ing local services, stimulating developmentof other forms of local institutions, and en-hanced accountability and equitable distri-bution of benefits. Civil society organizationsare the key to inclusion of the poor in thedevelopment process - provided they arescaled up to benefit the poor and excludedgroups - in a sustainable and efficient man-ner through proper mechanisms.

4.3 Initiatives on Empowerment inSri LankaAlong with the evolution of the concept ofpoverty over the past couple of decades, a

45


number of important changes were observedin poverty alleviation strategies adopted inSri Lanka and elsewhere. Until the 1980s,programmes explicitly focusing on povertyalleviation were not implemented in SriLanka. Instead, the main focus was on uni-versal provision of basic needs and servicessuch as free education and health services,food subsidies, irrigation, land settlementand subsidized agro-inputs. While such wel-fare policies did have a beneficial impact onthe poor, the need to separate out the poorfrom the rest of the population and to imple-ment targeted policies directly aimed at thepoor was recognized in the 1980s. Accord-ingly, there was a shift in the focus from'universalism' to more of a 'targeted' ap-proach. In addition, there was a change inemphasis from welfare provision to 'workfare'type approaches, and adoption of participa-tory methodologies and bottom-up develop-ment approaches aimed at empowering thepoor. The focus of this approach is to raisethe income capacity of the poor by raisingtheir productivity and to facilitate their par-ticipation in the economic growth processwhich in turn helps their empowerment.

During the last two decades, there have beena number of initiatives by government andnon-governmental/private sector focusing onempowering the poor through implementa-tion of various projects. Empowerment hasbeen recognized as an important step towardsalleviating poverty and has been incorporatedas an integral part of many poverty reductionand development strategies/programmesimplemented by the government, interna-tional agencies and non-governmental insti-tutions in recent years.

The Janasaviya programme (JSP) implementedby the government in 1989 was the first tar-geted poverty alleviation programme in SriLanka that aimed at empowering the poor.The JSP had dual objectives of short-term

income supplementation and long-term em-ployment creation among the poor. It hadseveral components: provision of credit tolow income households, supplementation ofnutrition, infrastructure development andsmall-enterprise development (for which gov-ernment-NGO partnerships were formed).

Under the JSP, an allowance of Rs. 2500 permonth was provided to selected householdsfor a period of two years, where half of thisamount was to be used for consumption andthe rest for investment in a self-employmentventure.5 At the end of the two years, theincome-supplement component was to bewithdrawn but households were expected tobe able to start-up some self-employmentactivity to enhance household income. Thisin turn was expected to help the poor house-holds to achieve economic empowermentand move out of poverty. However, the evi-dence shows that the programme was un-able to create sustained self-employment formany participating households due to vari-ous reasons such as low entrepreneurial skillsand marketing difficulties. Furthermore, dueto large costs and lack of off-farm activities,this programme was implemented only inselected locations. The JSP was virtually with-drawn in 1994 with the election of a newgovernment, and a new programme namedSamurdhi was implemented island-wide in1995.

The Samurdhi programme has been the singlelargest welfare programme since its incep-tion, covering nearly 2 million householdsin the country. The Samurdhi programmecomprises of three main components: (i) anincome transfer component, which includesconsumption and social insurance support;(ii) community development through invest-ment in economic and social infrastructure,agriculture, nutrition, etc.; and (iii) a sav-ings-credit (microfinance) scheme aimed atproviding financial services to the poor

5 The amount for investment was saved in a bank account in the name of the recipient and could be withdrawn at the end of the two years.


46

through a series of Samurdhi Banks that havebeen set up in almost all districts in thecountry.

The Samurdhi microfinance programme iscurrently one of the largest microfinanceprogrammes in the country with the largestspatial outreach. The 'Janapubuduwa' and'Gamipubuduwa' are some otherprogrammes implemented under the um-brella of Samurdhi by the Samurdhi Author-ity. These programmes aim at empoweringrural communities, providing basic infrastruc-ture facilities to remote villages and helpingto construct houses for poor families. Theobjective of the Janapubuduwa programmeis to develop personal capabilities of lowincome earners through the provision of in-vestment loans for income generating activi-ties. The Gamipubuduwa programme, on theother hand, was initiated with the objectiveof improving rural infrastructure facilities inorder to create a favourable environment forincome generation.

Despite its huge coverage and multiplicityof sub-programmes, the Samurdhiprogramme overall suffers from a number ofproblems such as poor targeting, corruption,political polarization of the selection pro-cess, etc.

The Gemi Diriya project of the governmentwhich is being implemented by the supportof the World Bank is a novel approach whichadopts a different strategy. At present, it coversnearly 1000 villages from seven districts inthe country. Unlike other livelihoodprogrammes, Gemi Diriya aims not only toimprove livelihoods but also its sustenance.It is designed to raise income and improvewellbeing of rural communities by buildingand sustaining village level institutions andtransferring resources and decision makingresponsibilities to village communities. Thisnew intervention of rural poverty reductionby the government aims to build account-

able and self-governing local institutions, andto manage sustainable investments by: (i)devolving decision-making power and re-sources to community organizations; (ii)strengthening selected local governmentswhich demonstrate responsiveness and ac-countability to rural communities; and (iii)working with federations of village organi-zations, the private sector and NGOs on eco-nomic empowerment to increase the size anddiversity of livelihood options. The projectdesign is based on the need for innovativesolutions to alleviate rural poverty in SriLanka. This project is in line with thegovernment's approach of CommunityDriven Development (CDD), which leads toeconomic and political empowerment of thepoor.

The Ten Year Development Framework of thegovernment (Mahinda Chinthana: Vision fora New Sri Lanka) has also recognized the im-portance of empowering the poor and disad-vantaged groups, and has identified a num-ber of strategies and programmes to createopportunities for the poor and the vulner-able groups to participate in the economicgrowth process in a productive manner. TheGama Neguma (village upliftment)programme is the major rural developmentprogramme, bringing together a number ofmore specific programmes focused on liveli-hood development and poverty reduction atthe village level. The main objective of thisprogramme is to develop villages as micro-centres of growth on modern lines. It in-volves a number of priority areas includingmobilizing all rural development efforts toone development programme, bringing in-formation and communication technology(ICT) to the village, facilitating constructionand improvement of houses in the village,and developing small and cottage industries.

In addition, a number of area-based devel-opment programmes have been identified topromote infrastructure facilities and improve

47


livelihoods among the people in some lag-ging regions to reduce regional disparities.

The preceding discussion reviewed the con-cepts of poverty alleviation, and empower-ment of the poor in their general contexts.Examining how and to what extent theseobjectives are fulfilled in the case of spe-cific interventions is another important facet.To this end, the rest of this Chapter inquiresinto two specific development interventions,land policy and microfinance initiatives, toassess their effectiveness in empowering thepoor of Sri Lanka.

4.4 Land and EmpowermentLack of access to land for agricultural as wellas non-agricultural purposes is highly corre-lated with poverty throughout South Asia,and Sri Lanka is no exception. Owing to theinefficiencies and inequalities allied with theallocation and distribution of land, it is com-monly believed that poverty has been per-petuated in rural Sri Lanka. Land plays a keyrole as a means of income generation, in-vestment and accumulation and transferringof wealth in the agrarian societies. In spiteof the numerous economic opportunitiesavailable today, land still plays a key role asthe major means of livelihood and wealthaccumulation for the rural poor of Sri Lanka.However, diminishing incentives from agri-culture observed during recent years togetherwith the scarcity of land for farming havecreated serious problems in the agriculturalsector as the current rate of expansion of othersectors is not adequate to absorb the popu-lation moving out of agriculture.

In Sri Lanka, the majority of the poor sufferfrom lack of access to land as well as lack ofownership; landlessness is acute with over27 per cent of peasants estimated to be land-less. Laws, rules and regulations related toland are outdated. Inequity in distributionand inefficient land use observed in the ru-ral sector in Sri Lanka are primarily attrib-

uted to lack of a coherent and consistent landpolicy and land use policy. Further, imper-fections prevailing in the land market andsupporting markets seem to have adverseimpacts on allocative efficiency and equi-table distribution of land, leading to distresssales and heavy demands on non-farm sectoremployment in rural areas. Encroachment ofstate lands, low productivity, non-viablesmallholdings, non-optimal land transactionsand disputes related to land are other com-monly observed problems in the land sector.It is argued that in Sri Lanka, in particular inthe rural sector, poverty is mostly land centredand solving it could largely contribute to-wards empowering the poor. The present landpolicy environment is not in favour of thepoor. They are disadvantaged and more vul-nerable to the problems in the land sectorcompared to the rich, due to lack of bargain-ing power and resources. Apart from the prob-lems directly related to limited access anduser rights to land, lack of other resources(capital, labour) and inputs, technical knowl-edge, managerial capability and access toland related services are likely to be prevent-ing the poor from exploiting the potentialbenefits within the current system.

In Sri Lanka, the poorest households comeunder the landless category that cultivate onencroached lands, sharecrop on others' landsor serve as casual labourers. Even though lackof access to land is identified as a key issue,gaining access to land alone will be of noavail unless the environment to generate anincome out of it is provided. Hence, criteriafor empowerment of the poor in Sri Lankacan be summarized under the empowermentprinciples as set out below.

4.4.1 Improving Access to ProductiveResources and Basic Services

In Sri Lanka, poor availability and productiv-ity of land has been closely linked with pov-erty. Thus, improving access to land by re-moving the obstacles and facilitating produc-


48

Mul

ativ

ue

tion are needed for the empowerment ofthe rural poor. Access to land will not onlyprovide a means of livelihood, but will alsohelp build up the resource base, increaseaccess to credit and other resources, improvebargaining power and decision making abil-ity, while providing a sense of security. Fur-ther, it reduces the risk of being exploited,saves resources while increasing social rec-ognition.

In the present context, access to land by thepoor can be made by redistributing landsheld under the control of the state. Releas-ing restrictions on sub-division, inheritanceand rental transfers on alienated state landswill induce transfer of lands to the best us-ers while helping the inefficient producersmove out of agriculture to other ventures.Nevertheless, full scale liberalization of theland market is implausible economically,socially or even politically owing to thepossible adverse impacts on the poor. Con-ferring full ownership rights is likely to per-manently deprive the disadvantaged andvulnerable groups unless they are protectedwith adequate safeguard mechanisms. More-over, there is no empirical evidence to sup-port a positive cause and effect relationshipbetween the ownership rights and land pro-ductivity or wealth.6 Hence, facilitatingthe mobilization of land by liberalizing theland rental market seems the most practicalmeans of ensuring effective use of land.Moreover, large extents of lands in the coun-try are unutilized due to disputes on own-ership and boundaries, and these lands canbe made available for production by resolv-ing the conflicts through local governmentand community based institutions. Boththese are imposing constraints on the mo-bility of land, and their elimination willdefinitely lead to a better allocation of landresources.

Improving the human resource base and build-ing its capacity to make productive use of landsand strengthening their decision making abil-ity are crucial for helping the poor to comeout of the poverty trap. Providing technicalknow-how through improved research, exten-sion services and training programmes on ag-ricultural activities as well as on non-agricul-tural activities is important in this regard. Onthe other hand, without access to informa-tion the poor cannot effectively participate inland markets and are often left withunfavourable terms of contracts, ultimatelyresulting in unprofitable or inefficient opera-tions. Hence, creating awareness on the rulesand procedures related to land managementas well the penalties for violating them is ofgreat importance.

Getting access to land will have no meaningunless a favourable environment for economicenterprises is provided through developmentof infrastructure (irrigation, road networks andcommunication) and facilitation of the func-tioning of other markets - where national andlocal governments have to play a crucial rolein providing them.

4.4.2 Role of National Government

The state has a key stake in reducing povertyand empowering the poor by helping themgain access to land and make the maximumuse of it by providing the necessary environ-ment and guidance. This has to be done with-out leaving the poor - who are always notcompetent in using the land resource effi-ciently - behind. Foremost, policies have tobe revised and amended to meet present dayrequirements. Even though the government hasinitiated the groundwork for formulating a newland policy and land use policy, due to lackof a political will of successive governments,completion of the task has been delayed. It istimely for the government to remove the rules

6 Samaratunga P. A., T. D. Marawila (2006), “Rural Land Sector in Sri Lanka: Major Characteristics, Determinants and Implications for LandPolicy”, Agricultural Economic Policy Series, IPS.

49


and regulations that unnecessarily inhibit theproductive use of the land while imposingstrict rules and penalties on encroachments,improper use and illegal transactions on land,which have deleterious implications. For ex-ample, removing restrictions on rental trans-fers on alienated state lands will lead to anumber of benefits to the poor, such as in-creased land transactions and participationof the poor, possibility of long-term tenurecontracts, secure user rights, and preventionof exploiting the poor.

Moreover, management of land which nowcomes under different institutions should bebrought under one umbrella body, rational-ized and strengthened to provide transparentand efficient service to the public while en-suring a fair service to the marginalizedgroups. The present incentive schemes forofficials should also be revised and possibleloopholes in the system be amended to pre-vent corruption and malpractices.

The importance of clear property rights - ei-ther ownership or user rights - in the case oftenants is often highlighted as important formaking economic use of land. Providing cleartitles to lands distributed by the state hasbeen subject to much debate. However, aproposal has been put forward to confer titlesto highlands under village expansion schemeswhich cover the largest proportion of the dis-tributed lands. Moreover, securing user rightsby facilitating land rental market operationsby releasing legal barriers will enable land-less poor to get access to land.

The state will have to develop regional plansunder a more rigorous national plan to fullyutilize resources and create more off-farmemployment opportunities that are capableof attracting a growing population and thepeople willing to move out of agriculture,reducing pressure on lands. It is obvious thatexisting cultivable lands cannot provide em-ployment for the rapidly increasing popula-

tion and there should be substantial oppor-tunities to absorb the excess without creat-ing unemployment. Furthermore, engagingin off-farm employment will provide asupplementary income for farmers, offsettinga greater part of their risk and vulnerability.

4.4.3 Role of Local Government

The poor interact closely with local govern-ments, and hence they can effectively inter-vene and assist the poor in their problems.One of the major problems with the poorseems to be the lack of management skillsand technical knowledge to make the maxi-mum out of the resources they have in hand.Most of the poor farmers are subsistence farm-ers deriving marginal incomes and, conse-quently, they have to be lifted to the statusof commercial producers. Local governmentscan play a vital role in providing improvedmarketing facilities, credit facilities, inputsupply and water management, enabling thepoor to make effective use of their land. Theycan initiate public-private partnerships andencourage private sector investments to im-prove the marketing structure and credit in-stitutions which are mostly lacking in therural areas of the country today. Local gov-ernments also bear the responsibility of ini-tiation and proper implementation of projectsand programmes, and securing the participa-tion of community based organizations suchthat long term benefits are brought to thecommunity and the poor in particular.

Lack of accessibility, high transactions costand inadequate awareness of the poor on landrights, rules and procedures have preventedthem from receiving efficient services fromland related institutions. Similarly, bound-ary and other disputes eat up a great deal ofresources in terms of time and money of theoperators. Hence, local governments canregularly inform and advise the poor on suchmatters, handle land related problems, andprovide speedy solutions to them.


50

With the devolution of governance in 1987and transfer of responsibilities among differ-ent agencies related to land, the system ofmanagement has become quite complex. Asa result, some issues related to land lie be-yond the mandate of local governments, thusleading to conflicts in governance. On theother hand, misallocation of land resourcesand malpractices are quite evident due tocorrupt officials, with the poor disadvantagedmostly. This indicates the necessity of ratio-nalizing land management - both at nationaland local levels - to provide a reasonableand effective service and to ensure thesustainability of land resource.

4.4.4 Access to Justice and Legal Aid

Even though existing laws and regulationson issues related to land are quite compre-hensive, they are not easily enforceable andpenalties for their violations are outdated.Moreover, high costs involved in judicialprocedures in terms of time and money havemade obtaining such services extremely dif-ficult for the poor who lack affordability andawareness. The rich and influential peopletake advantages of loopholes in the existinglegal system, mostly at the expense of thepoor. For example, even though regulariza-tion of encroachments in protected areas hasbeen prohibited by the state, illegal encroach-ments as well as regularizations are widelytaking place all over the country. Hence, fairaccess of the poor to judicial services has tobe made by localizing legal services andbuilding up awareness. Minor problems canbe effectively and efficiently handled by lo-cal government institutions and communitybased organizations.

4.4.5 Local Community Participation

Building up social assets is critical in em-powerment of the poor. Hence, initiatingcivil society based institutions, farmer orga-nizations, irrigation committees, and com-mon land management committees, and

thereby increasing participation of the poorand marginalized groups in resource man-agement and decision making is important.The strength and cohesion possessed by acommunity enhance bargaining power canenable the poor to gain access to resourceswithout being exploited. It increases infor-mation flow to marginalized groups, en-hances their participation in local decisionmaking while reducing vulnerability and risk.Further, it helps them to build up a rapportwith policy makers and other formal institu-tions, and develops a voice of their own.

Organizing collective actions by the poor arean important means of getting access to re-sources and inputs of the production pro-cesses. The poor can organize themselves ingaining access to credit as social collateralsin the absence of physical collaterals whichis already quite popular in some villages.Similarly, marketing as groups increases thebargaining power of the poor while enablingthem to gain reasonable prices for their pro-duce without being exploited. Collectiveaction in cultivation practices, especially inpaddy farming, derives a lot of benefits in-cluding increased production and reducedcosts to all participants. Likewise, increasedparticipation of the local community in con-flict resolution, common resource manage-ment (irrigation tanks and water ways, graz-ing lands) and infrastructure development arelikely to benefit the community as a wholewith spillover benefits to all participants.

Community participation enhances account-ability and, in a way, ensures the egalitariandistribution of the benefits of common re-sources. For example, participation of ruralcommunity people in the distribution andmanagement of water in local irrigation sys-tems is likely to result in greater efficiencyand equity. Moreover, it improves the main-tenance of the irrigation resources and makeseffective use of local knowledge and experi-ence in development.

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4.5 Empowerment of the Poor throughMicrofinanceLack of access to financial services, particu-larly credit and savings facilities has been amajor constraint faced by many poor in meet-ing their consumption and investment needs.The formal financial institutions such asbanks, have failed to serve the poor becauseof high default rates on loan repayments andhigh transaction costs involved in lending tothe poor. Moreover, stringent collateral re-quirements of these institutions often ruleout a large segment of the poor from accessto credit. Subsidized credit programmes thatwere widely in operation in many countriesduring the 1970s and 1980s also experiencedmany problems: much of the credit of theseprogrammes was diverted to non-poor ruralelite or politically powerful persons and awayfrom poor households. In addition, high loandefaults reduced the resource base for fur-ther lending and increased the costs of sub-sidized credit, which adversely affected theviability of these programmes.

In the above context, the alternative left forthe poor was to meet their credit require-ments from informal sources, which are oftwo types: namely (i) non-commercialsources such as friends, relatives andneighbours; and (ii) commercial sources likeprofessional money-lenders, traders and land-lords. The Consumer Finance and Socio-Eco-nomic Survey (CFS) 2003/04 of the CentralBank revealed that informal sources accountfor about 39 per cent of the total amount(value) of loans that had been granted tohouseholds (friends and relatives account for29 per cent) in Sri Lanka. There are however,a number of limitations and disadvantagesassociated with informal credit, particularlyfrom commercial sources: the interest ratescharged are very high (as high as 20-30 percent per month) and the loans are restrictedto small amounts that are insufficient forinvestment in micro-enterprises or long-term

assets. It was against the above background -namely, failure of formal financial institu-tions, lack of viability of subsidized creditprogrammes, and limitations of informal fi-nancial sources - that 'microfinance'emerged as an innovative mechanism to pro-vide financial services to the poor.

Microfinance covers not only credit but alsosavings and other financial services such asinsurance. It can be defined as 'the provi-sion of a broad range of financial servicessuch as deposits, loans, payment services,money transfers, and insurance to poor andlow income households and their microenterprises.7 What is new in microfinanceis its innovative methods, such as the usageof social collateral (e.g., group guarantee) in-stead of physical collateral, progressive lend-ing approach, mobilization of savings fromthe poor and linking credit provision to sav-ings and social intermediation (social mobi-lization) process that involves awarenessbuilding, group formation and skill develop-ment among the poor.

4.5.1 Nexus of Microfinance, Poverty,and EmpowermentAs previously discussed, poverty is a multi-dimensional phenomenon, which needs tobe addressed in all its many dimensions.Microfinance has been recognized as an ef-fective instrument for poverty alleviation allaround the world. It is argued thatmicrofinance through the provision of a largearray of financial and non-financial serviceshas the potential to impact directly or indi-rectly on many of the dimensions of pov-erty. It is claimed that microfinance, by pro-viding financial services to poor individualsand households, promotes income and em-ployment generation opportunities, helps toaccumulate assets (expand the asset base) andstrengthens the capacity to deal with variousrisks and vulnerabilities.

7 ADB definition of microfinance (see http://www.adb.org/microfinance/).


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Box 4.1Microfinance and Empowerment: Contrasting Paradigms

Much of the literature on the role of microfinance on empowerment is confined to empowermentof women, who are largely the members/clients of many microfinance programmes in theworld. Three key paradigms related to empowerment of the poor (or poor women) have beenidentified in the microfinance literature. These are: (i) poverty alleviation paradigm; (ii) financialself-sufficiency paradigm; and (iii) feminist empowerment paradigm.

The poverty alleviation paradigm considers reduction of poverty among the poorest, increasedwell-being and community development. Here, microfinance is considered a part of theintegrated programme for alleviating poverty and vulnerability, and increasing well-being ofthe poor. Hence, the focus of this paradigm is on the provision of small loans and savings forconsumption and production, group formation, etc. This paradigm justifies some level ofsubsidy for programmes working with particular client groups or in particular contexts. Someprogrammes have developed effective methodologies for poverty targeting and/or operatingin remote areas. The underlying assumption of this paradigm is that increased well-being andgroup formation will automatically lead to empowerment of poor (women).

The financial self-sustainability paradigm mainly considers the provision of financially self-sustainable micro-finance services to a large number of poor and micro-entrepreneurs. Toachieve the financial sustainability, the prime factor is setting the interest rate ‘right’ to at leastcover costs. Further, it adopts practices of separating the accounting for microfinance fromother interventions, expanding the functions so as to reach economies of scale, and usinggroups to reduce cost of delivery. It is assumed in this paradigm that increasing access tomicrofinance services will automatically lead to economic, social as well as politicalempowerment of the poor.

The feminist empowerment paradigm defines ‘empowerment’ as ‘transformation of the powerrelations throughout society’. Here microfinance is treated as an entry point for women’seconomic, social and political empowerment. It assumes that women’s empowerment requiresfundamental changes in the macro-level development agendas as well as explicit support forwomen to challenge gender subordination at micro-level.

Source: L. Mayoux (2000), “Microfinance and the Empowerment of Women: A Review of Key Issues”,ILO.

Microfinance programmes are also said tohelp the poor, particularly poor women (whoare largely members of many microfinanceprogrammes) to gain economic and socialempowerment. Through the provision of fi-nancial services to improve income, assetsand employment opportunities, microfinanceprogrammes help the poor to gain economicempowerment. In addition, the social inter-mediation process, which often accompaniesfinancial services, contributes to build socialassets such as social networks, group/societymembership, mutual trust and help. Partici-

pation in microfinance programmes alsohelps to improve self-reliance, social recog-nition and social status of the poor. Theseare all elements of (social) empowermentwhich can be gained through participationin microfinance programmes.

The rest of this section provides some em-pirical evidence from Sri Lanka on the roleof microfinance in empowering the poor -i.e., the extent to which microfinance hashelped their clients to improve income, em-ployment and assets, as well as social assets

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like (networking) and social status/recogni-tion.

In analysing the impact of microfinance onempowerment, it is important first to lookbriefly at the landscape of the microfinancesector in the country and its outreach. Themicrofinance sector in Sri Lanka consists ofa wide range of providers including both for-mal and semi-formal financial institutions.Formal institutions include state-owned andprivate commercial banks, and developmentbanks such as Regional Development Banks(RDBs). Semi-formal institutions include co-operatives like Thrift and Credit Co-opera-tive Societies (TCCSs) and Co-operative Ru-ral Banks (CRBs), various NGOs, CBOs andgovernment programmes like Samurdhi bank-ing societies.

A number of studies carried out in recentyears have portrayed a considerable cover-age/outreach of microfinance institutions

Table 4.1Household Level Impact of Microfinance: Perceptions of the Members of MFIs

What Extent (%)Area Decreased No Change IncreasedHousehold income 2.2 53.6 44.2

Asset base 0.4 86.3 13.3

Savings 2.2 48.7 49.1

Housing condition 0.5 61.2 38.3

Business knowledge 0.0 78.7 21.3

Coping with risk 0.5 59.6 39.9

Social recognition 0.3 45.0 54.7

Integration with villagers 0.4 28.4 71.2

Standard of living 1.5 56.2 42.3

Source: Tilakaratna et al., (2005).

(MFIs) in Sri Lanka. Currently, there are about14,000 points of service all over the coun-try,8 with one for every 1,300 inhabitantson average.9 In addition, it is found that thereis at least one financial institution in everyGrama Niladari division (GN division) withan average of four per division, with 80 percent of the divisions having access to at leastthree institutions.10 The findings, however,reveal considerable disparities in spatial out-reach of MFIs, with the Samurdhi programmeoperating in almost all divisions, followedby TCCSs and CRBs while many NGOs andprivate banks have only limited outreach.Furthermore, while microfinanceprogrammes have been able to reach the poorand the poorest groups, there is still a con-siderable proportion of microfinance clientswho are from not-so-poor or vulnerable non-poor groups.

8 Point of service could be defined as a bank or cooperative branch or a society where clients can deposit savings and/or obtain loans. 9 Duflos, E., et al.(2006), ‘Country-level Effectiveness and Accountability Review: Sri Lanka’, CGAP.10 Tilakaratna, G., et al. (2005), ‘Microfinance in Sri Lanka: A Household Level Analysis of Outreach and Impact on Poverty’, Poverty and

Social Welfare Series No. 7, IPS.


54

The empirical evidence shows some posi-tive impacts of microfinance on the economicand social empowerment of the poor in thecountry. There is evidence to suggest thatnearly 40-50 per cent of clientshave experienced improvements intheir income, savings and housing conditions.For example, about 44 per cent ofmicrofinance clients have been able to in-crease their income levels with a significantlyhigher percentage among the richer groups(quintile) compared to the poorer groups(Table 4.1). About 38 per cent of clients havealso been able to improve their housing con-ditions, and this is particularly significantamong the better-off groups.

Savings also plays an important role in help-ing the poor to build their asset base,smoothen consumption at times of incomefailure or vulnerability and invest in produc-tive activities such as micro-enterprises orincome-generation activities (IGA). Empiri-cal evidence shows that microfinanceprogrammes have played a crucial role ininculcating savings habits among their mem-bers/clients - nearly one half of the clientshave seen an improvement in their savingswith over 45 per cent even in the poorestgroup. Moreover, an interesting finding isthat the relative importance of average sav-ings in relation to their average income ishigher among poorer groups compared toricher groups.

Another vital aspect of economic empower-ment is the creation of employment oppor-tunities. The evidence suggests that more thanone-third of the member households havestarted new business ventures with the assis-tance of microfinance. However, many busi-nesses that have started are small scale self-employment activities involving little or noskills and technology. Only a few have re-ceived any training on these businesses.Moreover, many lack marketing facilities for

their products. These are some key obstaclesfaced by the poor in sustaining their enter-prises supported by MFIs.

In addition to the impact on income, em-ployment etc., many microfinanceprogrammes have helped the poor to developboth individually and socially, acquire so-cial and organizational skills and therebyachieve social empowerment. Empirical evi-dence shows that microfinance programmeshave helped over 70 per cent of their clientsto better integrate with the community/ im-prove social connectedness, which helpsthem to build social assets. Moreover, over50 per cent of the clients have gained socialrecognition due to their involvement inmicrofinance programmes. In addition, thereis also some evidence that a significant pro-portion of women members have been ableto enhance their status within the family dueto their contribution to household income.11

The empirical evidence discussed in the ear-lier section implies a somewhat high out-reach of microfinance programmes/MFIs anda positive impact on the empowerment oftheir clients. Nevertheless, there are manyremote rural areas with limited access to fi-nancial institutions and certain poor groupswho are yet to be reached by MFIs. Severalmeasures need to be taken to extendmicrofinance services to those under-servedregions/groups and to improve the effective-ness of the services provided by MFIs to havea sustainable impact on income generationactivities, assets, etc. Furthermore, variousefforts are needed in a number of aspectsrelated to MFIs and the microfinance sectoras a whole (e.g., capacity building, regula-tion of MFIs) to ensure sustainable deliveryof microfinance services to the poor.

The following discussion looks at howmicrofinance programmes can function ef-fectively to ensure improved outreach and

11 See Tilakaratna, G., et al. (2005) for details.

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sustainable delivery of quality services to bringabout economic and social empowermentof the poor, using a framework based on theprinciples of empowerment discussed in Sec-tion 4.2.

4.5.2 Improving Access to Financial andNon-financial Services throughMicrofinance

Improving access to financial services is vi-tal as a means of creating employment op-portunities and building assets among thepoor and enabling them to empower them-selves. However, mere access to financialservices would not be sufficient to ensurethat the maximum benefits of these servicesare reaped by the poor. While extending theoutreach to a larger clientele, particularlythose belonging to disadvantaged groups/re-gions, it is important to ensure improvementin quality of the financial services providedby these programmes. Provision of financialproducts that are more demand-driven andare able to fulfil the diverse needs of the pooris important in this regard. MFIs should beable to offer a wide range of financial ser-vices, which include not only credit but alsoother services like savings and insurance.Moreover, in designing financial products,MFIs should take into account the heteroge-neity of the poor and their diverse needs thatlargely depend on the type of income gener-ating activity (IGA)/livelihood pursued, theircash flows and socio-economic background.In addition, adequacy (e.g., in terms of theamount), timeliness and the costs involvedare some of the other issues that need to betaken into account in improving the qualityof services.

Nevertheless, provision of financial servicesalone is also not sufficient to create sustain-able IGAs/micro-enterprises among the poor.The poor often lack necessary skills/training,

technology and marketing facilities requiredto expand and sustain their enterprises. Thus,it is important that MFIs become directlyinvolved in or facilitate the provision of so-called 'credit plus' services or non-financialservices that include business developmentservices (BDSs). This largely includes train-ing/skill development (e.g., training on self-employment, financial management and ac-counts keeping) marketing facilities and tech-nical assistance (e.g., agricultural extensionservices).

A survey carried out by the IPS in 2006 cov-ering a sample of about 20 majormicrofinance providers in the country foundthat there are considerable gaps with regardto supply and demand for BDSs provided byMFIs in the country. Only 68 per cent of theMFIs covered under the survey were directlyinvolved or facilitated the provision of someform of BDS to their clients.12 Nevertheless,had the smaller MFIs operating at divisionalor village levels also been included in thesurvey, this figure would have been muchlower. The survey results also showed thattraining - i.e., vocational/self-employmentrelated and finance/accounts keeping - wasthe most common form of BDS that was pro-vided by nearly two-thirds of these MFIs.However, of various BDSs, the demand fromclients was highest for marketing facilities,followed by training in business management.The study further revealed that nearly one-half of the clients who have not received anyBDS are even willing to pay to receive theseBDS services.13

Many MFIs are faced with a number of con-straints in directly providing BDSs to theirclients - high costs, limitations in staff, space,skills/technical capacity and resource persons.However, there are a number of ways thatMFIs can get involved in providing their cli-

12 The survey included a sample of 20 MFIs, the majority of which are operating at national or provincial level, including commercial anddevelopment banks, co-operatives, NGOs and the Samurdhi programme.

13 See Tilakaratna G., et al. (2006), ‘Promoting Empowerment through Microfinance in Sri Lanka’ (http://www.saceps.org).


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ents with necessary services without mucheffort/costs. There exist many institutions atnational and regional levels, especially thegovernment institutions that provide train-ing and other BDS services free of charge orat an affordable price. In addition, there areprivate institutions, companies and individu-als who are involved in providing variousBDSs. Provision of information on such in-stitutions or individuals could bring aboutlarge benefits to MFI clients. Furthermore,MFIs could act as an intermediary linkingclients and service providers in the area. Itis vital that MFIs explore such alternativemechanisms of providing these services totheir clients and effectively utilize them tohelp them to improve and sustain their IGAs/micro-enterprises.

4.5.3 Role of National and LocalGovernments

National and local governments can play animportant role in the microfinance sector bycreating an enabling environment to ensureincreased outreach and sustainable deliveryof financial services to the poor that wouldhelp them to create sustainable IGAs and togain economic and social empowerment. Inaddition to the direct involvement in the pro-vision of microfinance services, there are anumber of areas where government involve-ment is required, particularly in facilitatingprivate sector participation in microfinance,institutional strengthening, facilitating pro-vision of BDSs, donor coordination andstrengthening the regulatory framework formicrofinance.

The government can play an important roleby creating a conducive environment for theprivate sector to participate in themicrofinance sector, and especially to extendtheir outreach to remote rural areas. In thisscenario, the role of government should bemainly on infrastructure development - i.e.,roads, transportation, telecommunication,electricity and markets - which would help

private sector players to reduce their transac-tion costs/ unit costs of operating, andthereby extend services to the poor in remoterural areas.

The government can also play a facilitatorrole with regard to provision of the BDSs tothe poor/micro-entrepreneurs. The importanceof the role of local governments can also behighlighted here. Establishing marketing link-ages, training and information (timely andadequate) and improved access to such fa-cilities are vital for expanding and sustain-ing micro-enterprises/IGAs among the poor.The government and local level governmentinstitutions can play a key role by encourag-ing MFIs to establish linkages with locallyavailable institutions that provide these ser-vices. Moreover, capacity building among thestaff of MFIs is crucial to equip them forefficient delivery of financial and non-finan-cial services to their clients. The governmentcan play an important role by facilitating anddeveloping required capacity building/train-ing programmes for the MFI staff.

Facilitating donor coordination at nationallevel is another important area where gov-ernment involvement is needed. This wouldhelp to minimize any negative effects aris-ing from an influx of donor funds to themicrofinance sector (like in the aftermath ofthe tsunami) and avoid 'bad practices' or ad-hoc measures adopted by some MFIs (e.g.,mixing of grants and loans, loan write-offs).

The role of the government in creating a soundregulatory framework is vital in ensuringsustainability of MFIs, and the sustainableand efficient delivery of services to the poor.The current regulatory framework of themicrofinance sector in Sri Lanka is rather frag-mented with diverse laws/institutions/bod-ies involved in regulating MFIs of differenttypes. Banks such as commercial banks (bothstate-owned and private), RDBs and SanasaDevelopment Bank are regulated by the Cen-

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tral Bank of Sri Lanka. The Co-operative so-cieties like TCCSs are registered under theCo-operative Societies Law, No 5 of 1972and regulated by the Department of Co-op-erative Development. Moreover, many non-bank MFIs are registered under different Actssuch as the Companies Act No 17 of 1982and Societies Ordinance, No 55 of 1949.

The weaknesses in the current regulatory sys-tem have resulted in a large number of un-sustainable MFIs leading to inefficiency inthe microfinance sector. Moreover, under thecurrent regulatory framework, some MFIs(e.g., NGOs) are not allowed to mobilizesavings from their members. Nevertheless,savings is an important part of microfinance,which is often referred to in the literature asthe missing half of microfinance. Proper regu-lation of these MFIs could authenticate mo-bilization of savings; it benefits the institu-tion, for savings forms an important sourceof funds for the institute and it benefits cli-ents by enhancing security for the servicesobtained by the poor (security for the savingsdeposited at MFIs). Furthermore, regulationof an MFI also can help to build the confi-dence of donors, funders, members and thedepositor and ensure financial soundness ofthe institutions. It is important to attract ex-ternal/donor support which is important forsustainable operation of the institute.

The new Microfinance Institutions Act whichprovides licensing and capital requirementsfor MFIs (with the exception of banks, financecompanies and co-operatives) is expected tobring about solutions to current weaknessesin the regulatory framework discussedabove.14 Under this Act, only the institu-tions licensed by the Central Bank will bepermitted to carry out microfinance business.

Nevertheless, excessive government interfer-ence, particularly as a provider of

microfinance services, can bring about ad-verse implications on the sector as a whole.For instance, provision of concessionaryloans, interest subsidies and writing-off ofloans often affect the 'credit culture' and canhave distortionary effects on the microfinancesector. Moreover, politicization of manystate-run microfinance programmes or insti-tutions is another issue that needs to beaddressed.

4.5.4 Local Community Participation

Participation in microfinance programmes isexpected to improve income and employ-ment opportunities among the poor, buildtheir financial, physical and social assets andraise self-reliance, social recognition andsocial status of the poor. It further helps tobuild networks and integrate the poor withthe rest of the community. The effects of allthese lead to the empowerment of the poor,not only economically, but also socially andpolitically.

The social intermediation process which of-ten accompanies financial intermediation inmany MFIs plays an important role in bring-ing the poor together and raising awarenessand developing necessary skills among thepoor. It is a process of developing both hu-man resources and institutional capital, withthe aim of increasing the self-reliance of poorhouseholds and preparing them to engage informal financial intermediation. Social in-termediation involves awareness building,leading to the formation of self-help or soli-darity groups through which the poor canrelate to each other as well as others insociety, and through which members can de-velop a substitute for physical collateral theylack (i.e., use of group guarantee as collat-eral). This process also helps to build socialcapital - sense of solidarity, trust, and reli-ance on groups in times of distress, sharingof valuable information and social interac-

14 The Act has been approved by the Cabinet and will be presented to the Parliament shortly.


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tion. Often it is also accompanied by at-tempts to provide certain basic skills, suchas literacy and record-keeping skills requiredfor accessing formal financial services.Formation of such groups, development ofsocial capital/networks, and skills gainedthrough the social mobilization process ofMFIs can also be used for other developmentefforts that require local communityparticipation.

4.6 Summary and ConclusionEmpowerment of the poor has emerged as avital ingredient in the efforts of alleviatingpoverty. Poverty is a multi-dimensionalphenomenon in accordance with any of itsdefinitions, and consequently alleviating itentails multi-pronged efforts. Empowermentof the poor, defined as 'the expansion offreedom of choice and action' means increas-ing one's authority and control over theresources and decisions that affects one's life.This consists of both individual and groupactions that lead to the build-up of assetsand improvement of efficiency and fairnessof organizational and institutional contextwhich governs the use of those assets. It isimperative to mention, therefore, thatempowerment of the poor is of fundamentalimportance in developing countries such asSri Lanka where the roots of economic andsocial development are embedded in the poorsector of the society.

Amongst the development or povertyreduction efforts in Sri Lanka, land policyand microfinance stand out as two majorcomponents. Land being the most basicproductive resource and an asset thatfacilitates wealth accumulation and transferin rural areas is at the centre of economicdevelopment. Nevertheless, it has beenobserved that government policy thatregulates ownership and control of about 80per cent of all lands is acting as animpediment to rural and agriculturaldevelopment. Formal and traditional

financial services on the other hand has oftenbeen pointed out as inadequate andunfriendly in meeting the needs of develop-ing rural communities, whereby microfinanceis been increasingly resorted to. Therefore,examining the characteristics of the existingland policy and emerging microfinancesector and their interactions with the ruralempowerment initiatives are timely. As thereis no single model for empowerment, its ap-plications were evaluated in terms of its suc-cess along four essential components of anyeffective empowerment programme: namely,access to resource and information, inclu-sion and participation, accountability andaccess to justice, and local organizationalcapacity.

Sri Lanka's present land policy is character-ized by government ownership, rigidity intransactions, low market activity and poorconflict resolution. Since land is the centralproductive resource in rural areas a clear needprevails for correcting this situation. Clearland ownership and tenure rights are a basicrequirement that ensures the maximum effi-ciency of land use and allocation, which inturn empower the rural community economi-cally and socially. Further, transfer of tech-nology through improved information flowand the provision of an environment condu-cive for commercial agricultural productionthrough adequate input delivery and productmarketing are complementary factors.

According to the existing status quo, empow-erment of the rural community through im-proved access to land resources remains aresponsibility of the central government.Complete liberalization of the land marketdoes not appear to be a political reality.Nevertheless, granting rights for a rental mar-ket can reduce the extreme rigidity of theexisting legislation. Moreover, policy reformsto enable local governments and communityorganizations to resolve land related prob-lems and conflicts can reduce the transac-

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tion costs substantially. This can furtherenhance public-private partnerships andprivate investments in land, augmentingother productivity enhancing activities.Although such reforms in land policy aimedat empowering the rural poor by ensuringtheir right to use land productively are anecessity, they are by no means sufficient.Such empowerment efforts will be fruitfulonly when they are undertaken as part of apackage of other services such as inputdelivery, product marketing and ruralinfrastructure, etc.

Financial services are an essential compo-nent of this package, particularly for incomegeneration and asset building among thepoor. Nevertheless, both the formal finan-cial sector and the informal sources such asmoney lenders have failed to meet the fi-nancial requirements of the poor and hence,microfinance has emerged as an innovativemechanism to provide a broad range of fi-nancial and non-financial services to thepoor. Currently, microfinance has shown aconsiderably high outreach in Sri Lanka witha wide range of providers and a large

number of points of service. However, theseservices need to be further improved to servethose in remote rural areas. Furthermore, mereaccess to financial services is not sufficientto create sustainable IGAs that help towardseconomic empowerment of the poor. In ad-dition to the financial services, MFIs have arole in facilitating or directly involving inthe provision of BDSs such as training andmarketing facilities that are in high demandby the poor. Improving the quality of thefinancial services - by diversifying the prod-uct base and designing more demand-drivenproducts is also important.

The role of the government in creating anenabling environment to ensure increasedoutreach and sustainable delivery ofmicrofinance services is also essential for theempowerment of the poor. Government in-volvement is particularly important in facili-tating private sector participation inmicrofinance and provision of BDSs, insti-tutional strengthening, donor coordinationand strengthening the regulatory frameworkfor the microfinance sector in Sri Lanka.

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5. Making Technical Education and Vocational Training More Effective

5.1 Introduction

Social unrest amongst youth and high levelsof youth unemployment has persuaded gov-ernments since the early 1970s to promotevocational and technical training as an im-portant means of improving employabilityof youth and fostering social harmony. Forthis purpose, successive governments haveestablished a wide network of public sectortraining facilities covering most geographi-cal areas in the country over the years. Theseinitiatives were continued in the post-1977period, when the expansion and diversifica-tion of the economy and greater global link-ages increased the demand for technical andvocational training in a variety of fields. Sinceof late, rapid technological advancementshave increased the demand for a new set ofbasic requirements - such as that of IT lit-eracy. However, the public sector trainingproviders were not adequately equipped tosupply the growing demand for training inthe post-1977 period. In recognition of this,the government actively promoted the roleof non-public actors in the provision of tech-nical education and vocational training(TEVT). At present, although the governmentdominates the supply of TEVT, a growingnumber of private and non-government or-ganizations are involved in the sector.

Despite these attempts by the government,youth unemployment has persisted over theyears, particularly amongst the educatedyouth. For example, according to LabourForce Survey data by the Department of Cen-sus and Statistics, in the five years from 2000to 2004, the average unemployment rates formales between 15-19 and 20-24 years were

26 per cent and 21 per cent, respectively.For females, the corresponding figures were33 per cent for both age groups. The major-ity of these individuals have high levels ofgeneral education, as well as vocational andtechnical level training. Analysis of a sampleof 11,550 job seekers who registered withJobsnet during the first six months of 2005shows that 70 per cent of job seekers havepassed GCE A/Levels and a further 22 percent have passed GCE O/Levels. The major-ity of these individuals also have other typesof diplomas or certificates received from avariety of vocational training institutions.

In the past several years, many studies andpolicy documents have examined the reasonsfor this low level of success of the TEVT sec-tor to meet the objective of reducing youthunemployment.1 These highlight both de-mand and supply side problems relating tothe TEVT sector, including on the supply side,poor quality of training, lack of relevance,and lack of human and physical resources atthe training institutions; and on the demandside, socio-economic problems, inability tomeet costs of training, high opportunity costof training, and low returns are key reasons.

Given this backdrop, this Chapter attemptsto assess what reforms are needed in this sec-tor to be a more effective means of address-ing concerns of high youth unemployment.As a starting point, it summarizes the policyrecommendations made by recent studies andpolicy documents and the policy initiativestaken by the government to reform the TEVTsector. It then, highlights areas needing fur-

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1 World Bank (2005), “Treasures of the Education System in Sri Lanka” ; and Hong Tan and S. Chandrasiri (2004) “Training and LabourMarket Outcomes in Sri Lanka”, Working Paper, World Bank Institute.

Making Technical Education and Vocational Training More Effective

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ther reforms for improving the outcomes ofthe TEVT sector. Specifically, the Chapterhighlights the need to improve access toTEVT to all, the need to create competitionin the TEVT sector and give students a choicein the TEVT programmes and institutions,the need to make TEVT more relevant, andthe need to improve efficiency and effective-ness of resource utilization in the TEVT sec-tor.

5.2 Administration and Governance ofthe TEVT SectorTechnical and vocational training is providedby a variety of public, private and non-gov-ernmental organizations in the country. TheTertiary and Vocational Education Commis-sion (TVEC) is the apex statutory body invocational education and training in SriLanka. Its main responsibilities are planning,co-ordination and development of tertiaryand vocational education "towards maintain-ing a conducive policy and planning envi-ronment for the development of a market-responsive TVET system in Sri Lanka" underthe overall guidance of the Ministry of SkillsDevelopment, Vocational and TechnicalEducation. According to the Tertiary andVocational Education Act of 1990, all insti-tutions providing technical and vocationaltraining are required to register with theTVEC. At present, there are over 1000 pub-lic, private and NGO sector training institu-tions registered with TVEC. Despite legisla-tive requirements, a large number of TEVTinstitutions also function without prior reg-istration. The public sector remains the mainprovider of TEVT in the country.

5.2.1 Issues Relating to the TEVTSector

In recent years, a large number of policy pa-pers have highlighted the main issues relat-ing to the TEVT sector institutions and theneed for reform. According to these, the maindrawbacks of the TEVT sector include:

(i) low quality of training courses that donot meet the demands of the market; (ii) in-adequacy of resources; (iii) high levels of ex-ternal inefficiencies (i.e., high drop-out rates,poor transition to the world of work); (iv)poor linkages with general and universityeducation institutions; and (v) poor linkageswith industry.

Recognizing these critical issues relating tothe public sector provision of TEVT, severalrecommendations were made in these reportsaimed at reforming the sector. Some of theserecommendations are already being imple-mented. These include, most importantly,consolidation of courses offered by differentpublic sector training institutions in the samegeographic area, development of action plansfor implementing accreditation of compe-tency based training and skills laddering, andcost recovery through fee based course offer-ings in high demand training areas, and bet-ter collaboration between public sector TEVTinstitutions.

5.2.2 Structure of the TEVT Sector

The structure of the TEVT sector is primarilythose under the public and those under theprivate sectors. The public sector traininginstitutions in the country are handled by amultitude of organizations. The main publicsector training providers include: the Depart-ment of Technical Education and Training(DTET), the National Apprenticeship andIndustrial Training Authority (NAITA), theSri Lanka Institute of Advanced TechnicalEducation (SLIATE), the Vocational TrainingAuthority (VTA), and the National YouthServices Council (NYSC). Of these, all ex-cept NYSC come under the purview of theMinistry of Tertiary Education and VocationalTraining (MTEVT). The NYSC comes underthe purview of the Ministry of Youth Affairsand Sports. In addition to these, training isalso provided by a number of governmentdepartments and statutory bodies comingunder various other ministries.


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Table 5.1Training Offered for Job Seekers

Training Authority/ Institute Number (% of total)a

GovernmentVocational Training Authority (VTA) 222 (7.73)National Youth Services Council (NYSC) 152 (5.29)National Apprentice and Industrial Training Authority (NAITA) 36 (1.25)National Institute of Business Management (NIBM) 18 (0.63)Open University 18 (0.63)Sub Universities 15 (0.52)University of Colombo 13 (0.45)Department of Technical Education and Training (DTET) 8 (0.28)International Universities 6 (0.21)University of Kelaniya 6 (0.21)University of Ruhuna 6 (0.21)University of Sabaragamuwa 6 (0.21)Sri Lanka Institute of Information Technology (SLIIT) 5 (0.17)University of Sri Jayawardenapura 5 (0.17)University of Peradeniya 5 (0.17)University of Moratuwa 4 (0.14)Private (selected)Nondescript private company or Institution 1515 (52.76)Association of Accounting Technicians of Sri Lanka (AAT) 147 (5.12)IDM Computer Studies (Pvt) Ltd. (IDM) 110 (3.83)TEC Sri Lanka 80 (2.79)Others 494 (17.21)Total 2871(100.00)Notes: a: Total = 100 per cent.Source: IPS calculations, Jobsnet data (sample: job seekers, who registered with Jobsnet in the first six

months of 2005).

The information available on these institu-tions mainly relate to student enrolments,completions and drop-outs. These show thatclose to 20 per cent of individuals who en-rol with the public sector TEVT providers dropout, which is largely reflective of the inter-nal inefficiencies of these institutions. Thereis very little systematic information on thelabour market outcomes - such as job place-ments and earnings - of the graduates of thesetraining institutions that can be useful to judgethe quality of training. A set of recent tracerstudies done for DTET, NAITS and VTA doesnot show promising results. According tothe findings of these studies, more than aquarter of graduates in each trainingprogramme (30 per cent of DTET, 12 per cent

of NAITA and 26 per cent of VTA) did notfeel that the training was relevant for findingjobs. Further, a large per cent of the gradu-ates (34 per cent of DTET, 28 per cent ofNAITA and 63 per cent of VTA) were unem-ployed after the training.2

The number of private training institutionshas increased in the post-1977 period. Al-though private training institutions are legis-lated to register with TVEC, many do notregister. Even the institutions that do regis-ter provide limited information. As such,there is very little information on the pri-vately supplied TEVT in the country. Theavailable information shows a considerableexpansion in the output of trainees at the

2 See World Bank (2005), “Treasures of the Education System in Sri Lanka”. The results are not comparable across training institutions as theycovered samples in different geographic regions.


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3 For example, a category “A” training institution is one that has a full time officer as head with a staff of 10 teachers and at least 200 studentenrolments and provides training in four full time courses of six months duration. The institution is also required to have a library withrelevant books and at least one workshop or laboratory with adequate tools and equipment, and at least five classrooms with a minimumfloor area of 1000 sq. ft.

basic and intermediate skill levels, althoughthe same is not true at the advanced skilllevel. Most training institutions providetraining in elementary level general skills,mainly English or computer skills. Availableinformation is not sufficient to judge whattypes of skills the market can expect fromthe graduates of most of these training courses.Table 5.1 tabulates the institutes from whichjob seekers received their highest level of train-ing, of the job seekers who registered withJobsnet in the first six months of 2005. Asseen, the majority (53 per cent) have trainedfrom nondescript private institutions, whosecertifications have limited value in the jobmarket.

There are a number of private sector trainingproviders who prepare students to qualify forinternational level professional qualifications(e.g., CIMA, CIM). There is a growing de-mand for these courses, especially in theWestern Province and anecdotal evidencesuggests that there is high demand for gradu-ates of these courses at very competitive sal-ary scales, both locally and internationally.However, these courses and exam fees tendto be expensive. They also require high lev-els of general education skills such as lan-guage and IT skills. As such, most of thesecourses are not accessible to individuals out-side the Western Province with low educa-tion attainments and low economic status.

5.2.3 Accreditation and CertificationUsed by TEVT SectorThe recently introduced TEVT sector reformshave offered solutions to some of the prob-lems of the private TEVT providers who donot prepare students for international levelqualifications. The newly introduced Na-tional Vocational Qualification (NVQ) sys-tem standardizes the qualifications by dif-

ferent TEVT providers. The TVEC arrives atNVQ standards after examining industry re-quirements. It also informs training provid-ers what types of skills are in demand in themarket. Students from different trainingprogrammes are given certificates to indicatetheir competencies in different TEVTprogrammes. A NVQ also provides valida-tion of non-formal learning experiencesthrough workplace assessments. At present,a NVQ has been developed for 45 occupa-tions.

As highlighted earlier, the TVEC has alreadystarted accreditation of training institutionsbased on teaching of competencies and skillsladdering. Although this is a step in the rightdirection, the methods used by the TVEC toevaluate institutions are highly process ori-ented and provide little information on thequality of the institution. Evaluations aremainly based on physical and resource in-puts. At present, the TVEC does not publi-cize a list of accredited institutions. The TVECwebsite does post a list of institutions thatare registered with the TVEC and their own-ership. These institutions are categorized -from "A" to "D" - based on the availabilityof a manager, number of teachers, numberof student enrolments for a year, number ofcourses offered and their duration and theavailability of other physical resources. Noinformation on the quality of the inputs areavailable, nor the quality of the training pro-vided and the labour market outcomes of thetrainees.3 According to even these inputbased assessments, most available TEVT in-stitutions do not score well. For example,there are only two "A" grade institutions, andclose to 80 per cent of the TEVT institutionsfall under categories "C" or "D" grade (seeTable 5.2). The majority of the institutionsare based in the Western Province.


64

A listing of registered institutions and thecourses offered by these institutions at thetime of registration are provided on aninternet based website (www.tvec.gov.lk).However, important information that wouldenable students to chose training courses thatprovide data on the labour market outcomesof the graduates of these training institutionsare not available. Given this, the usefulnessof this information to the different stakehold-ers is questionable. What is needed is toevaluate these institutions based on their

outputs. The critical questions that need tobe answered are the following: (i) how suc-cessful have the TEVT graduates been in find-ing jobs or qualifying for further training; and(ii) what are the starting salaries received bythese graduates?

5.3 Improving Access to the TEVTSectorAs highlighted in the introductory section,the main objectives behind the developmentof the TEVT sector are to improve employ-

Table 5.2Institutions Registered with TVEC, by District, Ownership and Category

Ownership Category1

Government Statutory Private NGO Other A B C D

Ampara 3 14 2 0 0Anuradhapura 3 8 5 1 1 0 3 12 3Badulla 1 8 1 1 0 0 2 7 2Batticaloa 1 2 1 2 0 0 4 2 0Colombo 12 24 103 4 0 2 34 63 44Galle 2 17 11 0 0 0 3 17 10Gampaha 3 10 43 2 1 0 11 19 29Hambantota 3 5 0 4 3 0 3 8 4Kalutara 2 8 12 3 1 0 5 12 9Kandy 7 13 6 2 0 0 7 18 3Nuwara Eliya 2 1 1 1 0 0 1 3 1Kegalle 1 5 7 1 0 0 5 3 6Kurunegala 3 10 17 1 1 0 4 18 10Matale 2 5 3 1 0 0 3 6 2Matara 1 9 5 5 1 0 4 10 7Mannar 1 0 0 1 0 0 0 2 0Moneragala 2 4 1 2 0 0 3 5 1Polonnaruwa 0 2 1 0 1 0 1 3 0Puttalam 1 4 1 2 0 0 2 5 1Ratnapura 2 8 6 2 0 0 2 10 6Mullaitivu N/A N/A N/A N/A N/A N/A N/A N/A N/AVavuniya 1 2 1 1 0 0 1 1 3Jaffna 1 2 1 0 0 0 1 0 3Trincomalee 2 0 0 0 0 0 2 0 0Total 56 161 228 36 9 2 101 224 144% of Total 11.4 32.9 46.5 7.3 1.8 0.4 21.4 47.6 30.6

Note: 1. These categories are defined by the TVEC based on the following criteria: a) time involvement of thehead of the institute; b) the number of full time/ part time teachers; c) number of courses offered andtheir duration; d) student enrolment per year; and e) availability of a library, laboratory and classrooms. A = Best.

Source: IPS calculations based on data from http://www.tvec.gov.lk.


65

ability of individuals and to alleviate socialunrest. In order to plan the TEVT sector tocater to these goals, it is critical to under-stand whether TEVT is reaching out to thepopulation groups that need training most.As shown in the World Bank 2005 report on

Figure 5.1Percent of Population Getting any Training, by Level of Education

0

10

20

30

40

50

60

70

Noschooling

Primary Lowersecondary

Uppersecondary

GCEO/Level

GCEA/Level

Graduate Post-graduate

%

Male 1992 Male 2004 Female 1992 Female 2004

Treasures of the Education System in SriLanka, the incidence of training is highestamongst the Western Province, among malesand among individuals with higher formaleducation. This study also shows that TEVTcomplements formal education, rather than

Note: Any training can be formal or informal training.

Source: IPS calculations using Department of Census and Statistics LFS data.

Figure 5.2Percent of Population Getting any Training, by Province

0

5

10

15

20

25

Wes

tern

Cen

tral

Sout

hern

Nor

ther

n

East

ern

Nor

th-W

est

Nor

th-C

entr

al

Uva

Saba

raga

muw

a

%

Male 1992 Male 2004 Female 1992 Female 2004

Note: Any training can be formal or informal training.

Source: IPS calculations using Department of Census and Statistics LFS data.


66

5.3.1 Information and Data forMonitoring Access to TEVTIn order to develop policies to improve ac-cess to TEVT, a better understanding of thereasons for non-participation is needed. Un-like with formal education, participation inTEVT is difficult to define. A TEVT refers toany learning experience relevant for the worldof work. The learning can take place eitherin a training institution or in the work placeunder different learning contexts. The train-ing can terminate with the individual enter-ing the labour force, or it can terminate withentry into a more advanced level of training.A TEVT includes initial training by youth aswell as continuing training by adults. Thisheterogeneity creates problems in categoriz-ing TEVT learning and coming up with theusual indicators to measure access, such asenrolment rates and completion rates ofTEVT. However, in 1997 UNESCO devel-oped an International Standard ClassificationEducation (ISCED) to categorize education.This can be used as a guide for developingtools to collect systematic information onTEVT.

being a substitute for formal education.There is only limited information indicatingwhy individuals do not participate in TEVT.Moreover, the access to TEVT has not changedmuch from 1992 to 2004 (see Figures 5.1.and 5.2).

Information on TEVT drop-outs reveal thatsocio-economic reasons, expected low re-turns, financial problems and high opportu-nity cost of training as the main reasons fordropping out. The data also suggests that lowcompetencies in general education levels re-strict training. For example, analysis ofJobsnet data shows that individuals withhigher levels of formal education were morelikely to obtain vocational training aimed atbetter paying jobs and that individuals withbetter English knowledge were more likelyto obtain skills required for jobs in the higherend of the occupation ladder (see Figure 5.3).In order to meet the objectives of improvingemployability of individuals, ways to encour-age all individuals to participate in TEVTneed to be found.

Figure 5.3Training by Level of English Literacy

0

20

40

60

Type of training

GoodFairPoor

Source: IPS calculations using Jobsnet data.


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inces. Most training institutions - both gov-ernment and private - are located in theWestern Province, while the prevalence ofTVET facilities in less developed provincesare low. More effort should be made to im-prove availability of training facilities in lo-cations outside the Western Province. Pri-vate sector TVET programmes often involvefees. The fees for better training programmes,with international recognition and better jobmarket outcomes, are usually more expen-sive. A system should be developed to fi-nancially support individuals to obtain train-ing through a combination of loans or grants.Further, training programmes should be mademore flexible, so that individuals from allbackgrounds can participate in thoseprogrammes in combination with other ac-tivities and responsibilities. For example,training programmes can be offered at nighttime or on week-ends, so that those who needto work to supplement family incomes, canstill obtain TEVT.

5.3.3 Giving a Second Chance

As highlighted earlier, most individuals whoobtain TEVT are those already having highlevels of formal education qualifications.This is partly due to the fact that basic edu-cation skills are necessary for successfulcompletion of TEVT. Unless attention is givento improve the quality of primary and sec-ondary education, not all will be able tobenefit from expansion of TEVT. As such, asan important requirement for TEVT, atten-tion should be given to upgrading basic edu-cation. At the same time, alternate educa-tion programmes should be provided for in-dividuals who missed out on education ini-tially due to various reasons. In most devel-oped countries, individuals who drop outfrom school can undergo equivalencyprogrammes that help them to obtain a di-ploma equivalent to the high school diplomawhile an adult. There are also literacy andnumeracy programmes for adults aimed atreducing adult illiteracy. The non-formal

Information on enrolments and completionrates in TEVT can only be obtained from gen-eral household level surveys. At present, theonly annual source of information on theTEVT sector in Sri Lanka is the Labour ForceSurvey (LFS) conducted by the Departmentof Census and Statistics. As pointed out bymany recent studies on the TEVT sector, theavailable LFS information on the TEVT sec-tor is very limited. Importantly, the LFS doesnot provide information on when the train-ing was received, the quality of the trainingand whether the training was helpful in im-proving labour market outcomes (e.g., inobtaining employment, obtaining a highersalary, etc.). Some information that is avail-able is also of limited use, as they are notcomparable across individuals. For example,the LFS categorizes training that provides cer-tificates as formal, and those that do not asinformal. Since a certificate can be given byany training provider, obtaining of a certifi-cate is not indicative of the complexity/qual-ity of training. In the recent revision of theLFS schedule, more detailed information isprovided. But, this information is only avail-able for unemployed individuals. The devel-opment of the TEVT sector requires informa-tion on access to training for all individualsand their labour market outcomes. Such analy-sis can only be done if the vocational train-ing information for all surveyed individualsis known. Different indicators, similar tothose used to track the performance of theformal education sector, should be developedto monitor and track progress in the TEVTsector. One such structural indicator usedby the European Union (EU) is the percent-age of population aged between 25 and 64in education and training.

5.3.2 Improving Access to TEVT

One reason why individuals are unable toparticipate in TEVT is the direct and indirectcosts of training, including travel costs,programme costs and time costs. The TEVTinstitutions are spread unevenly across prov-


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education unit of the Ministry of Educationhas introduced a non-formal education ini-tiative to reduce illiteracy amongst adults(www.moe.gov.lk/modules/non_formal).However, the success of this programme inimproving literacy has been limited.

5.4 Making TEVT More Competitiveand Demand DrivenThe public sector training programmes in SriLanka are highly supply driven. Training in-stitutions choose training programmes andprovide certifications. Individuals have littleinformation on the labour market outcomesof the different training programmes, and themeans to compare the quality of the traininginstitutions. Most public training institu-tions are not accountable to any one. Theyare mainly concerned with student enrolmentsand programme completion rates rather thantheir success in producing graduates who areemployable in good jobs.

The newly introduced NVQ system is a so-lution to some of these problems in the TEVTsector. It is intended to identify skill needsof the market and standardize skill certifica-tion. The skill requirements of the marketare developed with the participation of busi-nesses, so that they reflect the needs of themarket. The TVEC conducts examinations ordoes work place assessments to certify indi-viduals on their competence in differentskills. The TVEC also accredit training coursesthat meet the standards set for training indi-viduals to obtain different NVQs. This is auseful first step towards standardizing certi-fication of competencies and making voca-tional training more relevant. However, moreneeds to be done to create competitionamongst training providers.

First, LFS data should collect specific infor-mation on the different NVQs of individu-als so that the employability and earnings ofindividuals with different NVQs can be com-pared and publicized. Individuals can choose

to train for different NVQs based on thelabour market outcomes of different NVQs.Second, the NVQ system has provided abenchmark for comparing training providedby various institutions (both private and pub-lic). Analyzing and publicizing informationon the success of different training institu-tions in training individuals for different NVQqualifications, in addition to the human andphysical facility availability at different in-stitutions will help to create competitionbetween training providers and make train-ing more demand driven.

This is the business model used by interna-tional certification bodies such as the Char-tered Institute of Management Accountants(CIMA). The training for CIMA is providedby a multitude of training institutions oper-ating around the world. The CIMA is mainlyinvolved with developing curriculum andtraining material to different training institu-tions and students. It also provides informa-tion on the labour market outcomes of CIMAgraduates. The competency of the CIMA stu-dents is judged by an international level ex-amination which is recognized around theworld. The CIMA graduates belong to a net-work, which share important information onthe labour market outcomes of CIMA gradu-ates. The support services provided by CIMAfor its members include: career support, sup-port for further learning and personal devel-opment, information on products and ser-vices to assist members in their everyday andprofessional lives (www.cimaglobal.com).This business model is highly demand driven.Based on the information provided by CIMA,on the success of its graduates, individualschoose to obtain CIMA certification. Themain objective of CIMA training institutionsis to provide their students with the skillsneeded to obtain CIMA certification. TheCIMA training providers compete amongstthemselves based on the number of success-ful graduates and facilities, and the qualityof lecturers to attract students.


69

5.5 Developing Skills Needed for theModern Work PlaceAs described above, the newly introducedNVQ system is a positive first step in stan-dardizing TEVT given by various institutions.However, the NVQ mainly assesses the com-petencies in technical skills. For example, toqualify as a level 2 "Computer ApplicationsAssistance" a person should be able to: (i)use the computer and manage files withinstandard operating systems; (ii) perform wordprocessing; (iii) prepare spreadsheets; and (iv)perform internet and electronic mail opera-tions. However, in order to be successful inthe work place, individuals need a variety ofother inter-personal and life skills such asproblem solving skills, team working skills,behavioural skills and communication skills.The TEVT sector curricula should ensure thatthese skills are also taught alongside techni-cal skills.

5.6 Efficiency Enhancing MechanismsQualified and motivated teachers are essen-tial for ensuring quality of teaching. As theskill needs of the market are continuouslychanging, the teachers should undergo con-tinuous training themselves to upgrade theirskills. In addition to knowledge of the sub-ject, teachers should be trained in effectiveteaching methods. At present, the TEVT sec-tor in the country has a severe shortage ofqualified trainers. A part of the problem isthat there is no systematic means of trainingtrainers for the TEVT sector. When designingcareer paths for TEVT graduates, the need forfuture trainers should be taken into accountsuch that a percentage of the best TEVT gradu-ates are trained to be trainers.

As mentioned earlier, many public sectortraining institutions monitor themselvesthrough the number of enrolments andcompletions, rather than through labour mar-ket outcomes. The TEVT is more expensiveto provide than formal education. The suc-

cessful provision of TEVT requires invest-ments in costly laboratories and equipment.Training institutions should be made account-able to the quality of training provided toindividuals, so that resources spent on TEVTare efficiently and effectively used. One wayof doing this is by improving competition,both for different training programmes andfor training institutions. Also, training insti-tutions can be made to compete for fundsbased on performance.

The TEVT sector should also have close linksto industry and the tertiary education sectorso that new skill requirements of the marketare identified and incorporated into the cur-riculum of the TEVT sector.

5.7 Conclusions and PolicyImplicationsSuccessive governments in the last severaldecades have invested in the TEVT sector withthe objectives of improving youth employ-ability and social harmony. However, thesuccess of the TEVT sector in improving em-ployability and productivity of individualsin the country has been limited. Recent re-forms have identified the need to standard-ize certification of TEVT and the need toconsolidate and better coordinate the publicprovision of TEVT. The Chapter highlightedthe need for further reforms to improve ac-cess of TEVT and enhance the employabilityand earnings of TEVT graduates. The policyrecommendations arising from the above dis-cussion can be summarized into four areas.Namely, the need for improving access toTEVT, the need for better information on theTEVT sector, the need for incorporating newbasic skills to cater to changing market de-mands, and the need for teacher training andbetter management of resources.

The limited data on TEVT participation showsthat participation is limited to the more edu-cated males in the Western Province. A vari-


70

ety of reasons relating to both demand andsupply side factors affect low participationin TEVT. There is a need to provide financialaid to marginalized population groups to en-courage participation in TEVT and the needfor making TEVT training more flexible toallow individuals with other commitmentsto engage in TEVT. Further, TEVTprogrammes should be developed keeping inmind the demand for skills by the local mar-kets, and the attractiveness of the programmesto target populations.

There is an urgent need for better informa-tion on the TEVT sector for the purposes ofplanning, monitoring the success of TEVT,and creating competition between TEVT pro-viders. Information is needed at two differ-ent levels. First, at the structural level, house-hold surveys should include questions onTEVT that will allow the analysis of accessto TEVT, and the labour market outcomes ofTEVT of different NVQ. Second, more infor-

mation relating to the labour market out-comes of the graduates of different TEVT pro-viders should be made available to the pub-lic so that they can make informed decisionson obtaining TEVT.

The basic skill needs of the market are con-stantly changing. There is a need to be awareof these changes through linkages to indus-try and universities, and to incorporate theseskills in the training programmes. Further,teachers should be continuously trained inthese new training needs. Skill requirementsshould also take into account non-technicalskill needs that are necessary in a workingenvironment.

Lastly, the training institutions should bemade accountable. They should be moni-tored based on the success of labour marketoutcomes of their graduates, and the effi-ciency and effectiveness in the resource uti-lization of different institutions.

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6. Access to Health Care

6.1 Introduction

In medical ethics, several principles supportthe right to and equal access to health care.Lack of health care access increases risk ex-posure; failure to meet health needs as theyoccur can expose individuals to even greaterrisk of illness or injury later on. Access tohealth care is also affected by the presenceor absence of barriers, such as physical, eco-nomic, cultural barriers, etc. The existenceof socio-economic inequalities in a range ofhealth outcomes -- such as premature mor-tality, and non-communicable diseases suchas diabetes and cardiovascular diseases haveencouraged the potential link between lackof access and poor health to be explored. Ifunchecked, it can exacerbate existing vulner-abilities from a potential further decline inhealth, lost income due to medical expenses,and lost opportunities at work or school. Theworst case scenarios would be severe dis-ability, heightened individual and familyinsecurity and vulnerability. When individu-als lack access to means of reducing or miti-gating risk, they become insecure; vulner-ability and insecurity in turn can diminishthe well-being of the affected population.

An equitable health system provides accessfor protection for all individuals, especiallyfor the poor and marginalized or disadvan-taged, against the monetary burden associ-ated with health risks. While the Constitu-tion of Sri Lanka does not recognize accessto health as a right, successive governmentshave offered universal coverage, offering ac-cess to health care for the entire populationas a means of improving health conditions.Although there has been significant successin improving Sri Lanka's aggregate health in-

dicators, it does not necessarily indicate fair-ness or pro-equity in access to health. Thereis overwhelming evidence to suggest thatsocio-economic inequalities in health existin many areas and that the poor, in particu-lar, are disadvantaged in terms of health sta-tus, mortality, and non-communicablediseases. Differences in the way health careproviders and institutions respond to vulner-able populations in rural areas has also ledto variation in the quality of medical carethey receive. Less time is spent on diagnos-ing and prescribing - although this tends tobe prominent in all hospitals irrespective ofwhether they are urban or rural -while lessmedical advice and health information arealso offered. Given evidence that the healthsystem in Sri Lanka is subject to a mal-distri-bution of services biased against the poorerand marginalized population to be foundmostly in rural areas, this Chapter attemptsto assess access to primary health care, medi-cines, and mental health as three key areasof concern.

6.2 Challenges in Access to Health CareAccess to health care is affected by the pres-ence or absence of barriers. These includephysical barriers that relate to the generalsupply or availability of health care, the dis-parity between the quality of services inurban and rural areas, and the distance tohealth services. Economic or financial barri-ers can relate to the cost of seeking and ob-taining health care in relation to a patient'sor a household's income. An increase in theprice of drugs or treatment may reduce ac-cess to health care for individuals in thathousehold. Financial barriers also include


72

indirect costs such as transport, time awayfrom work, and childcare costs. Governmentpolicies on health financing also influencethe impact of financial barriers. Finally, cul-tural barriers may also exist, related to socialor community perceptions of health services;for example, perceived or actual discrimina-tion on the part of health care providers, andlanguage barriers -- in addition to a lack ofquality care by hospitals due to dearth ofhealth care professionals, and facilities.

Health care facilities in Sri Lanka are providedby both the government and private sectorwith an equal share of investment by both.While the country has succeeded in improv-ing overall access to health care, it has comeamidst years of under-investment, critical staffshortages and inflexible and unresponsiveservices, increasing in waiting time, etc. Nev-ertheless, with the expansion of private hos-pital care services and due to ineffective re-ferral system in government hospitals, patientsnow have more choice of hospitals with re-sources to go to according to preferences.

Table 6.1 confirms the consensus that SriLanka's health system is generally equitableby international, and certainly regional stan-dards. The utilization of health care servicesis almost uniformly distributed across incomequintiles, with the poorest and richestquintiles consuming 17 per cent and 22 percent, respectively, of total outpatient care.The data, however, conceal several inequali-

ties that may be present in Sri Lanka's healthsystem. For instance, it does not highlightthe discrepancies in the quality of health careavailable for those in different quintiles. Alsoit does not give an indication about the scaleof under and over-utilization of healthservices. Anecdotal evidence suggests thaton average, the incidence of morbidity ishigher amongst the poor, which means thatin theory the frequency of health care utili-zation should also be greater for them.Therefore, although the poorest quintile wasresponsible for 17 per cent of total outpa-tient visits, it is highly likely that some poorpatients (most likely to be the rural poor)did not receive any or adequate medicalattention.

Under these circumstances, the leadingcauses for lack of access or exclusion expe-rienced in health care are related to the fol-lowing: (i) external to the health system orbased on disparities or barriers to access suchas poverty level, percentage of family unitthat is not in an income earning category,employment related, geographical location,ethnic or cultural factors, or related to thelack of public infrastructure for the deliveryof basic services; and (ii) internal or integralto the health system itself, either linked tothe process of health care, infrastructure ofthe health system network, resources as-signed to the health system, or the effective-ness of the coverage. As an example, in SriLanka, the process of health care delivery is

Table 6.1Utilization of Out-patient Care as a Percentage by Income Group (2001)

Income Groups (quintile) Public Care Private Care TotalPoorest 20% 11.0 5.9 16.9Second 13.0 6.3 19.3Third 13.0 6.7 19.7Fourth 11.0 11.0 22.0Richest 20% 08.0 14.1 22.1Total 56.0 44.0 100.0

Source: IPS/Health Policy Programme database.

73

Access to Health Care

determined by availability of medical per-sonnel, paramedics and medicine in publichospitals. Table 6.2 provides a synoptic viewof the coverage in a few selected districts in2002.

While average mortality rates in the countryhave decreased in recent years, cross-countryevaluation by districts demonstrate thaturgent action is needed in areas that sufferfrom higher levels of poverty coupled withlack of access to basic health care. Althougha low quality level of health service provi-sion exists in primary care facilities in gen-eral, the issues are more acute in some ar-eas. Persistent issues of poor quality servicesuch as limited staff or under-staff facilities,poor staff retention, non-compliance withevidence based treatment, drug shortages, lackof proper infrastructure are common in manyremote locations. Additionally, geographicbarriers prevent these people from seekingtreatment and care due to distance, meansand affordability of transportation, (out-of-pocket transportation costs), food, accom-modation, family care, medication, and lossof work days.

Table 6.2Coverage of Health Care Delivery by Selected Districts (2002)

District Specialists MOs and Out-patients per In-patients per MOInterns MO

Colombo 195 2523 1983 266Kandy 87 1180 2758 278Galle 69 536 3899 432Kurunegala 31 400 9098 874Anuradhapura 19 367 6527 545Ratnapura 25 305 7756 658Badulla 27 262 8200 718Polonnaruwa 6 179 5243 534Nuwara Eliya 5 113 9758 490Hambantota 6 109 12902 801Ampara 2 96 18342 939Moneragala 5 90 15169 986Notes: MO refers to Medical Officer.

Source: Ministry of Health, Annual Health Bulletin 2003.

The incidence of poverty in rural areas ismuch higher and it is intertwined with otherfactors such as lack of access to availablesocial services and health care. This leads toa disproportionately higher rate of maternaland infant mortalities, malnutrition and in-fectious diseases among affected populationwhen measured against national level healthindicators. This situation is mostly visible inthe estate sector and in some districts suchas Moneragala, Hambantota, andAnuradhapura.

Scaling up towards full access to health carein deprived areas will require a comprehen-sive health sector response to identify issuesand challenges constraining access of patientsto treatment, care and support services. Inmany remote places, access to health care isdifficult and there are not enough healthworkers, or support services which draw at-tention towards the need to identify alterna-tive approaches outside the clinic and hos-pital setting in order to make care morewidely available.

In Sri Lanka, health care is being transformed,and due to the heavy burden in health carefinancing, the government will be facing


74

many challenges in areas such as:• devolved functions in health and private

sector involvement, health system gover-nance and financing;

• technological advances that are creatingnew opportunities for health care;

• socio-economic changes bringing addi-tional pressures, in particular stressescaused by increased water borne and vec-tor borne diseases, and emerging diseasessuch as HIV/AIDS, etc.

• The Avian influenza pandemic threat, andthe recent rise in non-communicablediseases; and

• rising health care costs and higher publicexpectations, making increased demandon resources. Government health expen-diture accounted for 43 per cent of totalhealth expenditure in 2002 and duringthe last five years, the public expenditureshare has dropped from 50 per cent to 43per cent, while in-patients and out-pa-tients treated in government hospitals in-creased by 5 per cent and 6.5 per cent,respectively, during the same period.

Over time, these challenges are likely to drivethe wedge further between the access andquality of health care services available forthe rich and poor. Therefore, these emerg-ing challenges should be taken into consid-eration during the formulation of futurepolicy reforms.

At the same time as facing such challenges,the removal of barriers in access to treat-ment and care is another issue to face up toin order to reduce excess mortality, morbid-ity, and disability risks for the poor andmarginalized populations. In addition, theover-arching goals to promote healthy lifestyles and reduce risk factors to human healththat arise from environmental, economic andsocial behavioural causes will also need tobe considered. Therefore, the government hasa dual responsibility to strengthen accessi-

bility and appropriate services for people fromlower socio-economic groups, and tostrengthen accessibility and appropriate ser-vices for marginalized areas.

6.3 Access to Primary Health CarePrimary health care is a vital means throughwhich not only preventive, diagnostic, treat-ment, rehabilitation and support services areprovided for individuals, but also an impor-tant means through which many public healthservices and interventions are provided forlocal communities. In this context, quality isa direct outcome of health care principles ofequity, accessibility, cost-effectiveness,sustainability and partnership with the com-munity.

It is recognized that behavioural patterns, so-cial circumstances and environmental expo-sure, coupled with availability of necessaryinfrastructure - namely, communication andtransport - is vitally linked to the population'saccessibility to basic services. It is also im-portant to perhaps recognize that participa-tion in meaningful work is important to theeconomic and psychological well-being ofmarginalized populations. Unfortunately,household own- account workers, farmers,and fisher folk are differently exposed to eco-nomic marginalization and are subject to in-stitutional discrimination and disparities dueto their socio-economic status. These socialand behavioural factors will indirectly blockaccess to health care, affecting the distribu-tion of disease, disability and death. This situ-ation is compounded by lack of access to live-lihoods by poverty stricken populations.

Institutional discrimination by the health caresector predominantly manifests itself in ar-eas such as human resource allocation, cov-erage and the direction of capital. This is ex-emplified by the relative neglect of under-privileged communities by the medical pro-fession (see Table 6.3). The correlation coef-ficient between the 'Poverty headcount per-

75


centage' and the 'Number of out-patients/Medical Officer' for 11 districts was calcu-lated to be 0.7. Marginalized areas in SriLanka are associated with a greater numberof people living below the poverty line.Therefore, the strong positive correlation be-tween the two variables indicates that thereis less medical coverage in marginalizedareas.

Sri Lanka's health system consists of a wellestablished network of health institutionsproviding primary, secondary and tertiaryhealth care services. The enormous variationof facilities in terms of infrastructure, equip-ment, human resources, etc., make the levelof care vary, attracting patients towards ter-tiary facilities at the expense of under-utili-zation of primary care services. Further, thegeographical disparity in health facilitiescause patients to by-pass the nearest healthinstitution and seek care at more popularinstitutions.

At the primary level, the majority of thepopulation has an inadequately equivalentand deficient access to health care serviceswhile a small privileged class finds ways to

Table 6.3Out-patient /MO and Percentage of Population below Poverty Line (2002)

District Out-patient/MO Poverty Headcount %Colombo 266 6Kandy 249 25Galle 401 26Kurunegala 325 25Anuradhapura 545 20Ratnapura 631 34Badulla 621 37Polonnaruwa 435 24Nuwara Eliya 556 23Hambantota 515 32Moneragala 868 37

Source: Data from Department of Census and Statistics and Ministry of Health, Medical

Statistics Unit.

obtain the care they need. As an example, inmany government hospitals while somewhatadequate treatment is provided for commu-nicable diseases, patients have to seek treat-ment for non-communicable diseases fromhospitals such as district or provincial hos-pitals located outside. Access to these hos-pitals becomes difficult due to geographicalbarriers and the cost involved. Lack of accessto health system information and/or poorknowledge on diseases, prevents many fromtimely intervention. In many cases, healthprofessionals who are often responsible forthe initial diagnosis do not systematicallyprovide their patients with information aboutaccessing local services.

On the other hand, Sri Lanka enjoys a widelyspread system of preventive care facilitiesdelivered at the grass root level and adminis-tered by the Medical Officers of Health. Withchanging demographic and epidemiologicalpressures, accessibility of the service has beenhampered due to the lack of user friendli-ness. It reflects the lack of coordination inhealth information providers across geographi-cal boundaries from the centre to province,districts, or from peripheral units to the rural


76

hospitals, etc. Patients and their families needtimely help to access the most appropriateroute for treatment and care without gettingabandoned at the point of diagnosis ordelivery.

In this instance, strategies of targetingdeprived population are not useful but themain effort should be focused on scaling upoverall extension and strengthening thehealth system. This has to be coupled withscaling up of activities to ensure a level ofcoverage for prevention, and care and treat-ment service that will have a real impact onpreventing certain types of diseases, decreas-ing mortality, and improving the quality oflife of the affected population group.

In order to minimize the burden of barriersto access, it is necessary to start with im-proving access to nursing care and midwiferyservices at primary level as an integral partof service accessibility. Unfortunately, thesituation in backward areas of rural Sri Lankais being undermined by various issues suchas a shortage of nursing and midwifery per-sonnel, poor working conditions and mal-distribution of services. In terms of strate-gies that authorities can use to deal with theshortage of nurses, short-term solutionsinclude the use of temporary staff to fill upimmediate vacancies. Longer-term responsesfor creating more sustained growth in thenursing workforce include providing finan-cial support for nursing education and chang-ing nurses' work environment.

The Ministry of Health (MOH) which is pri-marily responsible for staffing of health in-stitutions, has pursued longer-term strategiesto address the nurse shortage, including in-vesting in nursing education and improvingworking conditions. However, a lack of nurs-ing school capacity remains an importantbarrier to meeting long-term nursing needs.Although recent attempts to fill all nursingvacancies suggests a potential easing of hos-pital nurse shortages, nurse staffing will likely

to remain an important issue for health careproviders, blocking access to care mainly atprimary level in the coming years. At present,the country has an average of 76 nurses per1000 population; Colombo and Kandy dis-tricts do better with 157 and 118, respec-tively, while Moneragala at 44 andHambantota at 38 do relatively poorly (Table6.4). According to the MOH, absenteeismis a major bottleneck experienced at primarylevel hospitals. Understaffing at primary levelhospitals pave the way for constraints inaccess, which in turn leads to under-use, overuse, or misuse of available services.

An example of an under-use of a serviceavailable is the failure to immunize childrenand adolescents against preventable diseasesin some areas, especially in the estate sec-tor. According to the Family Health Bureau,approximately 83 per cent of reported infantdeaths have occurred during the neo-natalperiod (1-28 days) while 61.5 per cent oc-curred during the early natal period (1-7 days).Due to deficiencies in anti-natal delivery care,mothers lack access to nutrition education,particularly among the working poor, andremote communities. Under-use due to lackof access to facilities is more visible in theestate sector as infant mortality rates indi-cate that nearly one in every 20 infants diedin the first year of life. Mortality levels arehighest among children born to women be-low 20 years of age, especially infant mor-tality where 21.5 out of every 1000 birthsoccur.

Inadequate accessibility is very much evidentat maternal health programmes - aimed atimproving the well-being of the mother andbaby - at primary level. In the past, Sri Lanka'smaternity mortality ratio had seen a signifi-cant decline. In spite of this achievement,issues related to quality of service delivery,management and attitude practices withinhospitals and quality of care given to patientscontinue to remain a major challenge to ac-

77


Table 6.4Distribution of Health Personnel by Districts (2003)

Medical Nurses Public Health Public HealthOfficers of Nursing Sisters Midwives Health

No Rate No Rate No RateColombo 23 3,899 172.1 44 1.9 285 12.6Gampaha 26 1,125 54.2 43 2.1 402 19.4Kalutara 23 589 55.5 44 4.1 370 34.9Kandy 35 1,955 151.8 8 0.6 388 30.1Matale 17 296 66.1 9 2.0 143 31.9Nuwara Eliya 8 201 28.1 7 1.0 125 17.7Galle 23 1,094 109.4 17 1.7 283 28.3Matara 23 528 68.6 8 1.0 265 34.4Hambantota 13 235 44.4 na na 209 39.5Jaffna 2 323 60.7 na na 66 12.4Kilinochchi 2 26 8.2 na na 17 5.3Mannar 1 37 37.8 na na 17 17.3Vavuniya 2 72 49.3 na na 22 15.1Batticaloa 7 344 65.9 4 0.8 131 naAmpara 13 204 34.2 1 0.2 100 16.8Trincomalee 5 139 38.8 na na 81 22.6Kurunegala 32 1,191 81.5 39 2.7 438 30.0Puttalam 11 321 45.0 7 1.0 169 23.7Anuradhapura 26 968 128.4 9 1.2 283 37.5Polonnaruwa 10 200 55.1 5 1.4 104 28.7Badulla 27 634 80.6 10 1.3 223 28.3Moneragala 17 192 47.9 6 1.5 153 38.2Ratnapura 25 694 68.0 15 1.5 297 29.1Kegalle 17 523 66.7 14 1.8 248 31.6Central government 0 727 3.8 16 1.0 na naTotal 388 61,517 86.9 310 1.6 4,819 25.4

Notes: Rates per 100,000 population.

Source: Ministry of Health, National Health Bulletin 2003.

cessibility of maternal health services. Thishas resulted in significant differences betweensocio-economic groups, as well as betweengeographical areas. As a result, the quality ofanti-natal service has been affected althoughthe coverage is high (90 per cent). It is seenthat maternal weight gain during pregnancyis not adequate, and anaemia is a commonproblem among pregnant mothers. Maternalunder-nutrition together with a high incidenceof anaemia has resulted in the high preva-lence of low birth babies, most commonly inthe estate sector and vulnerable socio-eco-nomic groups.

Over-use is when patients receive care that isnot medically indicated. Using antibiotics for

all ills due to non-availability of essentialmedicines is an example. Care that is pro-vided erroneously or poorly - described asmisuse of care - is more prominent in ruralareas than in urban.

Government health authorities have primaryand prior obligations to deal with healthinequalities that are experienced in rural aswell as in under-privileged communities.The first obligation is to assume primaryresponsibility for creating conditions to ful-fill an individual's capability to access ser-vices to be healthy. In this instance, the gov-ernment and MOH are in a position to re-duce the gap between potential and actual


78

health. This includes efforts to deal with thesocial, economic and political determinantsof health. Secondly, the state assumes theprimary responsibility for creating an insti-tutional framework for equitable and afford-able health care and public health. This in-cludes allowing equal access to qualityhealth-related goods and services, includingnutritiously safe food and drinking water,basic sanitation, adequate living conditions,health care, public health surveillance andhealth literacy to affected rural andmarginalized populations.

6.4 Improving Access to MedicinePharmaceuticals, equipment and otherconsumables are among the important in-puts that ensure the proper functioning ofthe health service. Drugs are often the mostimportant cost driver in hospitals and ambu-latory care service. Expenditure on medicinesaccounts for a major proportion of healthcost. This means that access to treatment isheavily dependent on the availability of af-fordable medicines. It is estimated that nearlyone-third of the people are unable to receiveor purchase essential medicines on a regularbasis in Sri Lanka.

In Sri Lanka, public expenditure for medi-cine for out-patients is around Rs.500 mil-lion. According to annual allocation, around60 per cent is allocated among national hos-pitals (1), teaching hospitals (10), provincialhospitals (6), base hospitals (6), district hos-pitals (159) and 16 other specialized hospi-tals. The balance 40 per cent is distributedthrough 98 peripheral units, 183 rural hospi-tals and 400 central dispensaries. Rural hos-pitals and peripheral units cover nearly one-third of the population, and these institu-tions are frequently experiencing regular short-ages of essential medicines, pharmacists andother health care personnel.

The price of medicines is the most likely toaffect access in order to raise affordability of

medicines. In general, patients who are seek-ing medicine have one of four possibilitiesin terms of accessibility: (i) quality brandeddrugs at cost; (ii) assured quality, low costgeneric drugs; (iii) local traditional medicinesof variable effectiveness; and (iv) no treat-ment at all.

Improving access to medicines focuses at-tention on the macroeconomic context anddemand side needs, based upon disease cat-egories and purchasing power in low incomeand middle-income categories in the coun-try. Patients that have access to adequate drugsat the time of need are more likely to behappy with the treatment they receive. Theavailability of affordable and effective drugsis the most visible indicator of the quality ofthe health service. Many of the health ser-vices used by the poor still lack an adequatesupply of basic medicine. Drug shortages andquality problems continue to undermine thepro-poor free health system throughout thecountry, although 400 Central Dispensaries(CDs) under the government are in opera-tion, in addition to various other hospitals.This situation has forced the under-privilegedto seek local traditional medicine or not toseek treatment at all. Achieving some accessto modern diagnosis and treatment for thesegroups would appear more likely to yield anoverall improvement in health outcomes.

Many factors influence the ability of low in-come groups to obtain drugs from govern-ment hospitals. Affordability, quality andconfidence are among the key factors. Mostof the patients such as those from areas likeSiyambalanduwa in the Moneragala districtor Giribawe in the Kurunegala district haveto trek miles to visit the most convenienthospital that provides only a part of the drugrequirement. Effective pharmaceutical deliv-ery to patients seeking treatment from gov-ernment hospitals is being hampered by non-availability of adequate stocks and absentee-ism of qualified pharmacists, uneven distri-

79


bution of pharmacists and dispensers in dis-pensaries across marginalized areas. Figure6.1 provides the details of such disparity indistribution of pharmacists and dispensersin government health institutions in 2003.

Figure 6.1 indicates that Colombo, Kandy,Kurunegala and Gampaha districts are wellahead of all other districts in terms of theavailability of pharmacists and dispensers ingovernment hospitals. Also, due to the con-centration of teaching and private hospitalsin Colombo, Galle and Kandy, it is con-ceivable that these districts are enjoying bet-ter quality services relative to the rest of thecountry. The present system of governmentdoctors working in private hospitals has en-couraged pharmacists and laboratory techni-cians to also fall in line to work in thesedistricts, enabling them to engage in lucra-

tive private practice, depriving access of theirservices to marginalized populations. In turn,rural hospitals provide only partial treatmentor poor quality care to the patients seekingtreatment. Although essential medicines aresupposed to be available at all times withassured quality, they are instead forced tochange their usual access to seek treatmentfrom other hospitals away from the districtsor from private facilities at a cost.

The main vulnerable groups affected by thisdeprivation are rural communities, peopleliving in poverty, the elderly, the mentallyaffected, and the disabled. It is of criticalimportance to create awareness amongstpolicy makers of the need to identify vulner-able groups that need special attention, toensure access and overcome underlying hid-den discrimination.

Figure 6.1Distribution of Pharmacists and Dispensers in Government Hospitals 2002

Source: Ministry of Health, National Health Bulletin 2003.

0 50 100 150 200 250

Colombo

Gampaha

Kalutara

Kandy

M atale

Nuwara Eliya

Galle

M atara

Hambantota

Jaffna

Killinochchi

M annar

Vavuniya

Batt icaloa

Ampara

Trincomalee

Kurunegala

Put talam

Anuradhapura

Polonnaruwa

Badulla

M oneragala

Ratnapura

Kegalle

Dispensers

Pharmacist

Dispensers

Pharmacists


80

Another area of concern with regard to thepoor who cannot access private pharmacies,relate to issues of pricing and procurementof affordable drugs and availability of quali-fied pharmacists. It is estimated that over3000 private pharmacies are in operation il-legally creating a potentially dangerous situ-ation. Unregulated markets are often suppliedwith stolen and diverted drugs from govern-ment hospitals. When families are confrontedwith non-communicable diseases such ascardiovascular, diabetes, cancer, etc., whichneeds expensive treatment from hospitals farway from the area of dwelling, they mightbe forced to avoid regular long distance trav-elling due to economic reasons and create adeficit in drug usage by continuing out-datedprescriptions to purchase medicine from thenearest unregulated pharmacy.

Another area that relates to drug prescriptionto patients is inadequate laboratory servicesfor diagnostic tests and investigation for pa-tients. It is observed that poor supervisionand supply of inadequate human, financial,and logistics resources to hospitals haveresulted in a deterioration in the quality ofmost hospital laboratories. The situation isfurther aggravated by the non-availability ofconsultants for routine supervision. Most ofthe consultants do not have confidence inthe reliability of laboratory investigation re-ports, and as such, tend to order a secondinvestigation to be performed by a privatesector laboratory. It is also observed that mostof the private sector laboratories do not havequalified staff as well as specialized equip-ment. Providing quality laboratory servicesand ensuring efficiency in government hos-pitals will contribute immensely in thisregard.

6.5 Access to Mental HealthThe demand for special medical needs in SriLanka - for example, trauma, ageing, mentalhealth, etc. - is on the increase. In this con-text, mental health issues remain a key area

of concern. Although Sri Lanka's health sys-tem has been widely commended for its tech-nical efficiency, mental illness still remainsan area that has received the least attention.With an increase in the number of reportedcases of psychiatric disorders, and still manybeing unreported due to fear of stigmatiza-tion, it is vital that adequate provision ofaccess to mental health services is addressedin the future. Also, the incidence of mentalillness appears to be prevalent in rural andisolated communities due to socio-economicfactors such as high unemployment rates,lower incomes and a closer association withthe civil conflict. Therefore, lack of aware-ness and consideration given to mental healthissues could further lead to the deteriorationof the health status of the poor and an inten-sification of the inequalities in health be-tween the wealthy and the vulnerable.

It has been reported that there are around360,000 people or nearly 2 per cent of thepopulation suffering from serious mental ill-nesses. Of psychiatric services available,there are only 19 psychiatrists in the coun-try, with a total of 2,691 psychiatry bedsavailable, of which 90 per cent are in Co-lombo, Kandy and Galle. The total numberof beds available in Colombo is 1,900 whichis 70 per cent of the total psychiatry bedstrength of the country. Sri Lanka acknowl-edges that the country has one of the highestsuicide rates of any country in the world,rising substance use and psychological prob-lems. In the world, over the next 15 years,mental illness is expected to be the numberone cause of morbidity.

Mental illnesses are a hidden burden in so-ciety, irrespective of rural, urban, or capac-ity of income. This burden is associated withthe stigma of shame, or disapproval whichresults in patients being shunned or rejectedby others. Hiding symptoms of mental ill-ness from society due to fear of personalembarrassment too contribute to lost oppor-

81


tunities for timely intervention. Many casesremain concealed and unreported. The situ-ation gets further compounded when a per-son also has physical disability. People withthese disorders are often subjected to socialisolation, poor quality of life and increasedmortality. Barriers to effective treatment ofmental illness includes lack of access to in-formation, lack of delivery of facilities, non-recognition of the seriousness of mental ill-ness, and lack of understanding about thebenefits of services.

According to available estimates of theMOH, about two-thirds of adult and a thirdof children needing mental health care donot get it. The rate may be higher and thequality of care poorer for rural and lower in-come groups. Thus, despite a range of effec-tive treatment being available - such as psy-chotherapy regimens and prescription medi-cation - many Sri Lankans often do not haveadequate access to mental health services.Many health plans that have been introducedin the past, including the recent ‘Health

Master Plan’ of 2007 score lower on qualitymeasures for mental health than measuresfor other health services. Consequences oflack of recognition of this hidden burden hascaused premature deaths by suicide; accidentsby people who are psychologically disturbed;direct and indirect financial costs for fami-lies caring for the mentally-ill person; un-employment, alienation, and crime in youngpeople whose childhood problems (e.g., de-pression) and behaviour disorder were notsufficiently well addressed for them to ben-efit fully from the education available; emo-tional burden and diminished quality of lifefor family members.

The drawbacks of addressing mental illnessesare largely felt due to the following:

• lack of accessibility to information;

• lack of facilities to provide mental healthservices at primary, secondary, and ter-tiary level;

• limited in-patient facilities available atnational and sub-national level; and

Table 6.5Number of Beds for Psychiatry and Psychiatrist Availability

by District (2002)

Number of Beds No. of PsychiatristsColombo 2564 naGampaha 527 3Kandy 176 4Matale 12 naGalle 79 6Matara 1Jaffna 74 1Batticaloa 22 1Ampara 1Kurunegala 40 1Anuradhapura 48 1Badulla 1Ratnapura 29 1Kegalle 20 na

Source: Ministry of Health, Annual Health Bulletin 2003.


82

• lack of provider services that could beorganized at community level with com-munity participation. Lack of access toavailable community based services inurban areas has affected the optimizingof mental health for those finding itunaffordable in rural areas.

According to a 'needs based' assessmentstudy undertaken by the Ministry of Healthin 2002, a serious disparity of bed strengthand the psychiatrists distribution is revealed(Table 6.5).

Table 6.5 shows how mental care facilitiesare concentrated in major districts and therecognition given for mental illness. Themajority of the mental health resources areconcentrated in the Western Province and afew major urban cities. Most people have totravel a long distance to obtain basic ser-vices. To avoid embarrassment, families ofmental patients are also likely to seek accessfor treatment from distant hospitals. Access

to facilities from remote localities has cre-ated burdens on the families of the patients.Lack of delivery of facilities, non-recognitionof the seriousness of mental illness coupledwith social stigma forces them to abandonseeking treatment, increasing the risks of iso-lating patients and possible premature death.

Only the Western Province has some signifi-cant care accommodation, including staffedand un-staffed homes and sheltered nursinghomes in addition to the major in-patientgovernment hospitals located in Angoda,Mulleriyawa and Hendala. Lack of properregular needs assessment of long-term careand rehabilitative care has made these hos-pitals over-crowded, and deprived access tomany patients who need urgent psychiatristtreatment. According to the WHO, in SriLanka, nearly 1,700 patients have had theirneeds assessed at these hospitals and nearlyall can move into a variety of accommoda-tion in the community, providing muchneeded access to the needy cases (Figure 6.2).

Figure 6.2Needs Assessment of Large Mental Hospitals in Western Province

Source: WHO/MOH, Needs Assessment Survey 2002.

987

267

173

15

236

0

200

400

600

800

1000

1200

Could live Independently.Need further rehabilitationNeed major supportVery sheltered nursing homes for the elderlyNeed continued care

No.

pat

ient

s

83


Over 60 per cent of long stay patients justneed a place to live with minimum support.Lack of such community facilities has de-prived the much needed care for those inurgent need of treatment.

The most crucial issues related to this situa-tion are that once these long-stay inmatesare released to the community, there are noestablished systems in place to connect themwith jobs, housing, or recovery, with negli-gible private coverage for mental health, lackof screening at primary care level, or emer-gency room to determine further interven-tion.

Although there are 276 MOH areas in SriLanka manned by a Medical Officer of Healthin each area, they are not equipped with com-munity support centres that provide infor-mation on access to day care activities, andclinics for out-patients. The situation is ag-gravated due to lack of essential staff such aspsychologists, occupational therapists, psy-chiatric nurses, and support workers.

6.6 ConclusionMany people in society cannot exploit thedeterminants of health in their everyday livesmainly due to lack of access because of pov-erty, homelessness, distance, or related rea-sons. They may be denied access because ofbackwardness or discrimination. This hascreated health inequities, leaving those whoare left out not as well equipped to achievetheir full health as those better off.

The relationship between the social factorsthat lead to health or chronic diseases hasbeen well identified in Sri Lanka's health caredelivery system. It has led to the establish-ment of a network of 954 government healthinstitutions in 276 MOH areas with a healthworkforce of nearly 50,000, widely spreadthroughout the country and providing freehealth care. There is no doubt that the im-pressive gains achieved in average life ex-pectancy can be attributed to improved medi-cal care over time. The changes in life ex-pectancy, however, have not been achievedequally within the country. Some areas haveseen a reversal in life expectancy, especiallyin the estate sector and in marginalized ar-eas in the dry zone. The rural andmarginalized areas are swelling with peoplefacing limited prospects to earn incomes andsecure employment, and face poor housing,education opportunities, etc. These negativesocio-economic conditions, together withgeographical barriers have accumulated toproduce negative health outcomes. The cur-rent concerns on health equity emphasizesthat health is influenced by a wide range ofsocial circumstances and public policies, andnot merely in terms of access to health careand traditional health sector policies. In SriLanka, poverty - coupled with social inequali-ties - is the overriding factor behind the bar-riers to access and resultant health inequali-ties within the country.


84

7. Service Delivery at the Regional Level: Development Policy Challenges

7.1 Introduction

In the last two decades, an increasing num-ber of countries have begun to transfer re-sponsibility for the delivery of basic servicessuch as education, health, water, sanitation,roads, rural electrification, etc., to lower tiersof government. While the reasons for thisshift vary from fiscal to administrative topolitical - depending on the particular coun-try context - a common factor is the assump-tion that decentralization would improveservice delivery. This assumption hinges onthe possibility of a tighter accountability re-lationship between service providers and us-ers of these services at lower tiers of govern-ment in comparison to central provision.However, empirical evidence indicates thatthe results of decentralized service deliveryhave been mixed, based on the interplay ofincentives and principal-agent dynamics thatgovern accountability along the deliverychain.1

In Sri Lanka - as in several other developingnations - access to and affordability of basicservices is seen as key to the mitigation ofregional disparities in poverty levels and toimproved levels of growth. According to avail-able data by the Central Bank for instance,the regions bordering the country's WesternProvince (North Western, Southern,Sabaragamuwa and Central) - which has rela-tively high levels of service delivery and in-frastructure - grew faster in 2006 in compari-son to the provinces (Eastern, Uva, NorthCentral and Northern) located further away.This spatial pattern of growth is highlightedacross the country (see Table 7.1).

This Chapter looks at the ground realities sur-rounding service delivery at the provinciallevel as set out in the 13th Amendment tothe Sri Lankan Constitution enacted in 1987,using analytical tools drawn from new insti-tutionalism (focusing mainly on the incen-tives and accountability mechanisms facingkey actors along the delivery chain). Section7.2 provides a brief overview of the concep-tual framework used to examine the natureof and challenges facing provincial level ser-vice delivery in Sri Lanka. Sections 7.3, 7.4and 7.5 identify key administrative, fiscal andgovernance bottlenecks, respectively, that arehindering improved service delivery at theprovincial level. The concluding section setsout policy actions aimed at enhancing re-gional service delivery, drawing also fromrelevant international experience, and raisessome crucial issues for policy debate.

7.2 Service Delivery at the ProvincialLevel: An Inter-play of Incentives,Accountability and OutcomesAs expounded in the literature, the new in-stitutionalism that takes on the roles and re-sponsibilities of lower tiers of government iscentred primarily on government (as opposedto market) failures in achieving desired out-comes. Within this framework, governments(agents) are put in place to serve the interestsof citizens (principals) and the guiding prin-ciple for any institutional design is to ensurethat these agents meet public interest obli-gations (e.g., such as access to andaffordability of basic services) while at thesame time minimizing any transaction costs

1 Ahmad J., et al. (2005), “Decentralization and Service Delivery”, World Bank Policy Research Working Paper 3603, World Bank.

Service Delivery at the Regional Level: Development Policy Challenges

85

to the principals (e.g., such as the waitingtime to obtain basic health care services).The constraint, however, is that these princi-pals - or users of basic services in this case -have limited knowledge on the nature andsphere of services compared to the agents.Given this problem of informational asym-metry, the public policy challenge is to de-sign institutional structures that would cre-ate the right incentives; incentives that pro-vide for accountability in service deliveryconsistent with citizen preferences.

In the Sri Lankan context, the agents at theprovincial level - Provincial Councils (PCs)in this instance - are mandated to provideservices such as roads, passenger transport,rural electrification, housing, education,health, etc., under the 13th Amendment tothe Constitution. In addition, the Town andCountry Planning (Amendment) Act No.49of 2000 gives these PCs the authority to pre-pare ‘Regional Physical Plans’ for their re-spective jurisdictions. The key policy issuesthat this Chapter is concerned with are: towhat extent do these provincial service de-livery mechanisms actually meet the needsof users in these regions (in terms of avail-ability, cost, and quality for instance); and,

Table 7.1Distribution of Growth: A Spatial Viewa

GDP Growth Contribution to GDP Share Growth

2005 2006 2005 2006 2005 2006Western 15.1 16.8 47.1 46.2 50.8 50.1North Western 21.9 24.4 11.3 11.8 8.9 9.3Southern 17.0 23.0 9.2 11.1 8.9 9.3Sabaragamuwa 16.4 14.9 6.3 5.1 6.4 6.2Central 7.3 22.7 4.0 10.4 8.5 8.8Uva 24.0 20.8 6.2 5.1 4.5 4.6Eastern 13.6 18.1 4.0 4.6 4.7 4.7North Central 38.5 12.8 8.5 3.0 4.3 4.1Northern 19.0 15.3 3.4 2.5 3.0 2.9National 16.5 18.4 100.0 100.0 100.0 100.0Notes: a: At current factor cost prices.Source: CBSL.

what policy measures are required to addressgaps in service delivery on a sustainable ba-sis.

The findings of recent provincial level work-shops on service delivery conducted by theIPS,2 and extensive research carried out inthis area in the Sri Lankan context3 indicatethat there are significant inter-provincial dis-parities in access to, and quality of basic ser-vices, and that gaps in fiscal and administra-tive capacity play a significant role in shap-ing outcomes. Regional disparities in theperformance of selected basic services arehighlighted in Table 7.2.

Identifying workable strategies to address theservice delivery gaps highlighted in Table 7.2requires an in-depth understanding of theincentives and principal agent dynamics thatshape outcomes along the delivery chain. Thisincludes an understanding of a set of com-plex issues such as the following: (i) the na-ture of the relationship and balance of powerbetween principals and agents - for instance,do service providers and users operate on aformal, contractual basis or do they interactmore informally on the basis of trust, loyaltyon the one hand and influence, political con-

2 See details of these workshops at http://www.ips.lk3 See for instance, Wanasinghe, S. (2006), “Devolution Revisited: Towards a More Effective Devolutionary Policy”, IPS; and Waidyasekera,

D.D.M. (2005), “Decentralization and Provincial Finance in Sri Lanka: An Update”, IPS.


86

nections etc., on the other; (ii) the mecha-nisms by which principals are able to holdagents accountable - for instance, how effec-tively can the current provincial governancestructure 'penalize' service providers that failto meet pre-specified performance targets (isthere a credible threat for non-compliance);and, (iii) what incentives do the agents haveunder the existing provincial governancemechanisms to meet the expectations of us-ers - for instance, how significant is the linkbetween the performance of basic serviceindicators (perceived efficiency of the agents)and the probability of re-election, are therewell-organized user groups at the regionallevel.

Wes

tern

Cen

tral

Sout

hern

Nor

ther

n (a

)

East

ern

N.

Wes

tern

N. C

entr

al

Uva

Saba

raga

muw

a

All

Isla

nd

The extent to which the setting up of provin-cial governance structures under the 13thAmendment of 1987 represents real decen-tralization is a much debated topic in SriLanka's policy circles. While it is acknowl-edged that the culture of service delivery inSri Lanka changed with the formation of PCs- and the creation of another layer of agents(service providers) in the delivery chain --case law has also established that these lowertier structures are obliged to devise policiesin conformity with national (central govern-ment) policy.4 This debate is extended inWanasinghe (2006), which sets out that whilethe 13th Amendment lists central, provin-

4 For example, referring to education policy, Justice Fernando in the Kamalawathie case ruled that: "While powers in respect of education havebeen devolved to Provincial Councils, those powers must be exercised in conformity with national policy. Once national policy has been dulyformulated in respect of any subject, there cannot be any conflicting provincial policy on that same subject". (Kamalawathie and Others v TheProvincial Public Services Commission, North-Western Province and Others, [2001] 1 Sri L.R. (S.C).

Table 7.2Performance Indicators for Selected Services: Inter-Provincial Variance

No. of individuals/ 4.27 4.35 4.49 4.74 4.61 4.08 4.10 4.35 4.22 4.31household

% of pop. aged 5 96.1 88.9 92.3 92.4 86.2 93.3 92.4 88.1 91.0 92.1& above

Availability of 92.4 72.7 78.4 63.6 65.6 68.5 62.0 56.7 64.7 74.9electricity (% ofhouseholds)

Pipe-borne water 51.7 29.8 34.1 3.1 17.4 15.5 15.2 21.3 25.1 30.8to house (% ofhouseholds)

Separate water seal 84.6 69.6 86.4 42.8 42.6 83.2 71.7 72.7 79.3 76.5toilet (% ofhouseholds)

Average distance to 5 5 16 NA NA 6 7 11 18 6nearest market (Km)

Poverty headcount 11 25 28 NA NA 27 21 37 34 23(2002)Notes: a: Excludes Kilinochchi, Mannar & Mullaitivu Districts.

NA = Not Available.

Source: Compiled from Sri Lanka Investment Climate Survey 2004 (Asian Development Bank and WorldBank), Consumer Finance and Socio-Economic Survey Report 2003-2004 (CBSL).


87

cial and concurrent governance functions, the"outcome has been a severe degree of confu-sion in regard to the management of the spe-cific functions - with each level of gover-nance seeking either to grab management rolesfor itself or to evade such roles where politi-cally and bureaucratically convenient."5

Referring back to the analytical framework,the ambiguity with respect to the roles andresponsibilities of the agents (both the cen-tral and the provincial governments) wouldundermine the performance of service deliv-ery for several reasons - all of which will beexpanded on in the context of fiscal decen-tralization, human resource capacity and thecurrent electoral system later on in this Chap-ter. First, given the lack of clarity in terms ofgovernance and constant shifts of powerbetween the centre and the regions, the rela-tionship between service providers and usersis likely to be informal and political, wherethose with better political connections wouldalso have access to better services as opposedto a formal service contract which sets outthe obligations of providers or an informalpact based on trust. Second, in the absenceof clarity and structured service agreementssetting out the terms of service provider ob-ligations and user expectations (and giventhe existing electoral system), principals lacka mechanism by which agents can be heldaccountable for non-compliance. Third, thecurrent PC structure does not contain built-in incentives to ensure that the agents meetthe needs of the citizens.

As argued in the literature, the absence ofclarity with respect to the roles and respon-sibilities and accountability mechanismsconcerning the PC system stems from therather ad hoc origins of this decentralizationexercise; the fact that the 13th Amendmentwas conceived as a solution to the inter-eth-nic strife ravaging the nation rather than as

an instrument honed to effectively devolvegovernance powers to the regions. The restof the Chapter looks at principal-agent dy-namics, incentive structures and outcomesin three specific areas - fiscal decentraliza-tion, human resource capacity and the cur-rent electoral system - in an attempt to get abetter understanding of the ground realitiessurrounding basic service delivery at the re-gional level.

7.3 Fiscal Constraints to EffectiveService Delivery at the Regional LevelThe international literature typically identi-fies four key components in the fiscal de-centralization process as follows: (i) alloca-tion of expenditure responsibilities betweencentral and lower tier governments; (ii) as-signment of tax revenue to these tiers; (iii)design of inter-governmental grant systems;and, (iv) budgeting and monitoring of fiscalflows between the different layers of govern-ment. Although the allocation of expendi-ture and tax responsibilities should ideallybe based on objective criteria such as econo-mies of scale (in some Latin American coun-tries for example, the decentralization ofwater and sanitation services to small localgovernments resulted in losses of economiesof scale in service delivery), the cost of taxadministration, etc., political realities oftenplay a more significant role in determiningthese choices - as seen in both the Sri Lankancase as well as in the case of Indonesia where'big bang' decentralization attempts in 1999resulted in flawed expenditure laws whichhad to be subsequently revised.

As indicated in Table 7.3, provincial expen-diture amounts to between 7-10 per cent oftotal central government expenditure in SriLanka. Although the pattern of central gov-ernment dominance in total expenditure iscommon in most developing countries, thetroubling feature in the Sri Lankan context is

5 Wanasinghe, S. (2006), “Devolution Revisited: Towards a More Effective Devolutionary Policy”, IPS, p.6.


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the breakdown of provincial expenditure -with around 80 per cent on average beingspent on recurrent items such as personalemoluments and administration, leaving littleexpenditure space for improving infrastruc-ture and basic service delivery (see Table 7.3).Another worrisome observation in terms ofbalanced regional growth highlighted inWaidyasekera (2005), is that larger shares ofcapital expenditure are incurred by the moredeveloped Western, Central and SouthernPCs, while the Uva, North Central andSabaragamuwa PCs record the lowest shares.

The sources of revenue devolved to the prov-inces are specified in List 1 of the NinthSchedule to the 13th Amendment. As indi-cated in Table 7.3, tax revenues account foraround 85 per cent of the funds generated bythe provinces; however, provincial tax rev-enues amount to less than 5 per cent of total

government tax revenues, with a similar pat-tern being observed in the case of provincialrevenues as a percentage of total central gov-ernment revenues. The devolving of a rela-tively insignificant proportion of revenue tothe regions compared to the expenditure re-sponsibilities of the provinces has a negativeimpact on the fiscal space of the PCs, and inturn on the service delivery capacities of thesesub-national units.

The fiscal constraints faced by the PCs arefurther compounded by large inter-provincialdisparities in the ability to raise revenuethrough taxes. Clearly, the space to raise taxesand adjust tax rates on the part of lower-tiergovernments would increase their account-ability to local clients or users of the ser-vices subject to tax. India for instance, hasconsidered a dual centre-state value-added-tax structure, with states being given the

Table 7.3Fiscal Overview: Provincial Councils

2003 2004 2005 2006Total central government revenue (Rs. mn.)a 300,761 332,435 396,004 496,869Total provincial revenue (Rs. mn.)b 11,625 13,522 16,133 19,481Provincial revenue as % of central government 3.86 4.06 4.07 3.92revenueProvincial tax revenue as % of total provincial 85.74 85.37 85.65 85.13revenueProvincial tax revenue as % of total central 4.30 4.10 4.10 3.87government tax revenueTotal central government expenditure (Rs. mn.)c 661,346 684,398 830,774 1,035,975Total provincial expenditure (Rs. mn.)b 49,224 56,964 73,010 94,470Provincial expenditure as % of central 7.44 8.32 8.78 9.11government expenditureProvincial current expenditure as % of total 80.85 81.29 80.99 80.90provincial expenditureCentral government transfers (Rs. mn.)b 37,832 45,848 59,695 79,029Central government transfers as % of total 76.85 80.48 81.76 83.65provincial expenditureBlock grants as % of central government 80.51 78.28 78.91 78.88transfersCriteria based grants as % of central 1.60 1.75 1.36 0.99government transfersMatching grants as % of central government 0.65 0.67 0.45 0.27transfersNotes: a: Table 96; b: Table 116; c: Table 97.

Source: Compiled from CBSL, Annual Report 2006.


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power to set rates in order to broaden the taxbase. A lop-sided picture emerges in the SriLankan context, however, as set out inWaidyasekera (2005) with the Western PCaccounting for around a half of the country'sGDP, collecting almost 70 per cent of thetotal devolved revenue.

Limitations to self-financing - given regionalvariations in resources and economic oppor-tunities - give rise to the need for fiscal trans-fers from central to sub-national governments.As illustrated in Table 7.3, these transfersaccount for over 75 per cent of total provin-cial revenue - an indication of the high levelof dependency on the centre for funds. Fis-cal accountability hinges on three key fac-tors: (i) are grants allocated on a conditionalor an unconditional basis; (ii) is the grantssystem based on needs or efficiency promo-tion criteria; and, (iii) how predictable arethese fiscal flows. When fiscal transfers aregiven on a conditional basis, the line of ac-countability is between sub-national andcentral governments, as opposed to uncon-ditional or discretionary grants where lowertier governments are accountable to their con-stituencies. In addition, the predictability offiscal flows enhances the effectiveness andplanning capacity of regional governmentswith respect to service delivery.

As pointed out in Table 7.3, block grantsmake up the bulk of fiscal transfers to theregions, with criteria based grants and match-ing grants accounting for less than two percent and one per cent, respectively, of totalcentral government allocations to the prov-inces. As set out in Waidyasekera (2005),the existing system undermines accountabil-ity and does not create the right incentivesfor PCs to generate their own sources of rev-enue. Although block grants are subject to

some level of assessment (conditionality) bythe central government through the FinanceCommission,6 these transfers are needs-ori-ented and used largely for recurrent expendi-ture. Matching grants, which were introducedin 1995 as an incentive for PCs to generateown-source revenues, only account for aminuscule proportion of total transfers andare allocated mainly to the Western and Cen-tral Provinces. While criteria-based grants -where allocations are based on a formula thattakes into consideration inter-regional dis-parities in population, per capita income,socio-economic opportunities, etc. - are seenas a more predictable source of revenue, theseflows amount to less than two per cent ofinter-governmental fiscal transfers. On a prac-tical level moreover, the formula is based onthe 'Salgado' study7 on fiscal devolution car-ried out nearly two decades ago and doesnot take into consideration dynamic changesin the socio-economic status of the regions.Also, as in the case of matching grants, prov-inces such as the North Central, Uva andSabaragamuwa receive minuscule amountsof criteria-based grants.

Fiscal accountability on the part of the PCsis undermined by the institutional frameworkcreated to manage and monitor inter-govern-mental transfers. As per the Constitution, theline of accountability between the provin-cial and central governments is weakened bythe fact that key actors in the central govern-ment space, such as the Ministry of Financeand Planning, and the Ministry of ProvincialCouncils, do not have the legislative author-ity to request expenditure data from the re-gions. Although the Finance Commission hasthe mandate to request such information, inpractice, this body functions as a recommen-datory entity rather than as one whose deci-sions are considered to be binding. Fiscal

6 This is an autonomous body established under Section 154R(3) of the Constitution and consisting of five members: the Governor of theCentral Bank, the Secretary to the Treasury and three other members representing the three major communities, each of whom hasdistinguished themselves or held high office in the fields of finance, law, administration, business or learning.

7 Salgado, M.R.P. (1989), “Report on Fiscal Aspects of the Public Restructuring Project: Financial Devolution in the Provinces”.


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accountability between service providers andusers is also eroded by the structure of theFinance Commission - with PCs not beingrepresented in the composition of this en-tity. As set out in Ahmad et al., (2005), thedominant role played by the centre inresource distribution across the regions meansthat the political incentives of the centralgovernment also play a significant role ininter-governmental fiscal transfers. Given thepolitical party dynamics that define SriLanka's governance space, the allocation ofa relatively high level of resources to theWestern Province is possibly the result ofsuch political capture at the centre.

7.4 Human Resource Constraints toEffective Service Delivery at the Re-gional LevelA key bottleneck confronting sub-nationalgovernments, particularly in developing na-tions, is access to human and staff resourcesfor effective service delivery. In an ideal sys-tem, the responsibility for human resourcemanagement - including hiring, firing, ca-reer development, etc. - should be alignedwith the tier of government that uses theseemployees. Misalignments in administrativedecentralization weaken accountability andblurs incentive structures. A case in point isthe example of Pakistan where incompleteadministrative decentralization has resultedin local staff still being a part of a higher tierof government and continuing to respond toincentives at the top, leading to conflicts ofinterest in service delivery.

A similar situation prevails in Sri Lanka withPC cadres being recruited through the All-Island Service that is controlled by the cen-tral government. According to Wanasinghe(2006), "the Provincial Councils are, at best,temporary users of such staff that are pro-vided to them on loan. They hardly have asay in the assignment of staff for their use.They have no influence on the career path ofsuch staff or in their capacity development

to suit the specific needs of each ProvincialCouncil" (p.11). This situation has an ad-verse impact on the level of commitmentthat these agents have towards the citizenryin the respective provinces, with the incen-tive structure that is currently in place plac-ing greater priority on the policy directionsof the central government. For instance, theexperience to date indicates that the appoint-ment of the Chief Ministers of the PCs bythe President has resulted in these cadresbeing influenced by the policies of the cen-tre rather than catering to the specific needsof their regional constituencies.

The dominant influence of the centre withrespect to human resource deployment hasalso resulted in a relatively inefficient sys-tem of positional bargaining, where cadreswith influential connections are deployed tothe more prosperous regions. This phenom-enon is marked in the case of teacher de-ployment, where the transfer of teachers fromsurplus schools to those with deficits is ob-structed by political interference, leading toa significant problem of understaffing inpoorer schools. Evidence from the educationsector also indicates that the weak link be-tween sub-national governments and theirconstituencies has resulted in a mis-matchin the demand and supply of teacher skills -for instance, a teacher qualified in social stud-ies is recruited to teach mathematics in aschool that has a short supply of mathemat-ics teachers. The underlying lesson from theseexamples is that administrative decentrali-zation in Sri Lanka, in its current form, is notconducive to improved service delivery at theregional level.

7.5 Realities of Electoral Dynamics atthe Regional LevelThe benefits of decentralizing service deliv-ery to lower tiers of governments hinge onthe fact that a narrower jurisdiction and aconfined scope of activities would make iteasier for principals (users) to hold agents


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accountable. As argued in the literature,however, policy makers in developing coun-tries that rely largely on political support fromthe poor often fail to provide basic servicesto these stakeholders due to imperfectionsin political markets such as asymmetric in-formation on the performance of politicians.For instance, voters rarely possess the knowl-edge to assign responsibility for a breakdownin service delivery (or on a more positive note,improvements in service delivery) to a spe-cific political actor; as such, these agentshave little incentive to make and adhere tocredible commitments.

The problem of accountability is com-pounded in the Sri Lankan case given thatthe existing electoral system is one wherethe different layers of government claim le-gitimacy from the same electoral base. Asargued in Wanasinghe (2006), the current pro-portional representation (PR) based electoralsystem has resulted in a hierarchical gover-nance culture with the 'first rung' of politi-cal cadres in each geographical area beingnominated to Parliament and the 'secondrung' to either the PCs or to other local gov-ernance institutions, with members of thePCs being viewed as subservient to agents atthe centre. Once again, the dominant posi-tion accorded to the centre weakens the linkbetween lower tier governments and theirconstituencies; creates a conflict of interestin the minds of sub-national agents betweenthe priorities of the centre and of the regions;and, undermines service delivery performanceat lower levels of government.

7.6 Service Delivery at the RegionalLevel: Issues for Policy Action andDebateThe policy question explored in this Chapteris: to what extent has decentralization en-hanced the performance of service delivery

at the regional level? As highlighted in thediscussion above, there are significant gapsin regional service delivery due to shortcom-ings in both fiscal and administrative decen-tralization and due to the existing electoralsystem. Decisions with respect to budgetaryallocations and human resource deploymenthave tended to be driven from the top; and,there has been little focus on an efficient,equitable and effective management of bothfinances and cadre. The electoral system,which has resulted in an imprecise alloca-tion of responsibilities, has further compli-cated the process of monitoring and evaluat-ing service delivery.

Although devolution of power to the regionsbecame a reality, at least on paper, with theenactment of the 13th Amendment to theConstitution in 1987, ground realities indi-cate that there is a significant imbalance ofpower - with the power base still largely be-ing consolidated at the centre.8 As mentionedearlier, historical legacies and political re-alities relating to the origins of the 13thAmendment as an instrument to deal withthe North-East conflict rather than as a well-thought out exercise in governance are stillevident in the ad hoc functioning of the PCsystem.

The manner in which decentralization hasbeen carried out in Sri Lanka - ignoring theprinciple of subsidiarity - has resulted in in-centive structures that undermine the line ofaccountability between agents (regional ser-vice providers in this instance) and princi-pals (users of basic services in the regions).This section looks at some key areas for policyaction and debate in this regard, drawingwhere relevant from international experience.First, it is important to recognize the factthat decentralization is a process as opposedto a one-off exercise; and, that any process

8 A possible option that could be explored by policy makers to enhance revenue-raising by PCs is to devolve some of the functions currentlyunder the Concurrent List in List III of the Ninth Schedule of the 13th Amendment.


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of change involves difficult challenges suchas sequencing and managing the winners andlosers of reform.

As argued in Ahmad et al., (2005), in an idealworld fiscal decentralization should go withthe following sequence: setting out the func-tions of sub-national governments, assigningexpenditure responsibilities in accordancewith these functions, and aligning revenueinstruments to meet these expenditures. Inorder to manage fiscal decentralization effi-ciently, administrative decentralization needsto be implemented in parallel. As evidentfrom international experience, however, de-centralization rarely proceeds in this text-bookstyle fashion, with most episodes stemmingfrom political windows of opportunity forreform. In South Africa for instance, the endof the apartheid era provided the impetus forthe drafting of a new constitution and thereforming of the nation's inter-governmentalinstitutional framework. Clearly, any reformprocess that is a reaction to a particular po-litical event rather than a well-thought outscheme is bound to have shortcomings - In-dia and Bangladesh for instance have politi-cal decentralization (elections at the locallevel) without fiscal authority; in Eastern Eu-rope devolution of expenditure responsibili-ties has outstripped fiscal decentralization.

As discussed above, these shortcomings arealso evident in Sri Lanka's experiment withdecentralization. What is relevant from apolicy perspective is whether and how thesemis-matches can be catalyzed into strategictools for change. Ahmad et al., (2005) arguefor instance that the proliferation of centrallysponsored development schemes in India --with contradictory and overlapping objectives-- is creating a constituency for reform. Acrucial issue for policy debate in the SriLankan context is: what incentive structuresneed to be institutionalized, given the

current political economy climate, to reversethe over-centralized nature of servicedelivery and to tighten the accountability re-lationship between principals and agents atthe regional level. One possible means ofcatalyzing change and tightening account-ability is by creating community-based or-ganizations (CBOs) made up of users andservice providers. While CBOs have aninherent advantage, at least in relative terms,in overcoming informational asymmetriesbetween principals and agents, thepossibility of penalizing agents that fail todeliver is rather remote in the Sri Lankancontext given the culture of political patron-age that prevails in the public sector.

This takes us to another dimension in thispolicy debate - creating competition inservice delivery by bringing in other stake-holders such as the private sector into thepicture. Competition, if managed properlywith an enabling regulatory framework, canimprove the performance of service delivery(telecommunications services in Sri Lankabeing an excellent example) with mutuallybeneficial impacts on service providers andusers. In instances where the benefits ofreform are substantial, the politics of reformalso become that much easier; for instance,if the decentralization of a particular servicehas a positive impact on a large proportionof the population it becomes easier to pla-cate or compensate those stakeholders whoresist change. Two crucial and indispensableingredients in this mix, however, arepolitical will and the active participation ofthe citizenry in creating awareness on thebenefits of reform. Reviving and reignitingthese two facets poses a significant challengeto all stakeholders in the public policy space;however, the alternative would be disinte-gration not merely of service delivery mecha-nisms, but of governance in general.

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Poverty and the Environment: Conditions, Trends and Implications

8. Poverty and the Environment: Conditions, Trends and Implications

8.1 Introduction

Poverty is a complex phenomenon and so isthe environment. While poverty is deemedundesirable, what is unwelcome in the caseof environment is degradation which canoccur in various forms. While poverty is notthe sole reason for environmental degrada-tion - nor the sole outcome of it - the inter-face between the two remains compellingenough to occupy a central position in thedebate on sustainable development.

Despite the important poverty-environmentnexus, there is limited empirical work toexamine the actual nature of the relation-ship in the Sri Lankan context. Key ques-tions regarding the interrelationship betweenthe poor and the environment, the outcomesof this relationship on the environment,what impact the environmental outcome hashad on the poor, and what lessons can belearnt from these experiences to simulta-neously achieve the objectives of povertyalleviation and sustainable management ofenvironmental resources, remain to be an-swered. The discussion is made more diffi-cult by the scarcity, asymmetry and mis-match of existing data on the link betweenthe two phenomena.

This Chapter attempts to explore the interre-lationship between poverty and environmentin Sri Lanka. Section 8.2 will review someessential concepts to illustrate the nature ofthe poverty-environment nexus at the con-ceptual level. Section 8.3 will discuss pov-erty and environment linkages in Sri Lankaunder two broad themes of rural and urbanpoverty. Section 8.4 concludes with policyrecommendations.

8.2 Poverty-Environment Nexus: AGeneral Overview

There are three major features that charac-terize the involvement of the poor with theenvironment. They are: (i) direct dependenceon low-valued economic uses of environ-mental resources; (ii) denial of access tocertain benefits from the environment; and(iii) high vulnerability to negative impactsof environmental degradation.

Direct dependence of the poor on environ-mental resources is the most fundamentalrelationship between poverty and the envi-ronment. In the complex structure of mod-ern economy, these supply channels havebeen organized as value chains. Poor peopleusually occupy initial primary links in suchchains where low level of value additiontakes place. Their involvement is largely re-stricted to primary production (i.e., farm-ing) or extractive activities, which are basedon land, water, forest, fisheries or mineralresources, either as small producers or aslow-paid workers. Restriction of the poorinto the low-end of value chains is mainlycaused by limited ownership of assets thatprevents them from engaging in the upper-end involvements with high value addition.Usually, assets owned by the poor are lim-ited to own labour and a few productivephysical resources that can hardly generatean income above the subsistence level.

Poor peoples' dependence on primary re-sources could sometimes lead to degrada-tion or over-exploitation of resources. In suchoccasions, involvement of a large numberof users rather than the intensity of activi-ties of individual users is mainly responsible


94

for impacts on the environment. Cumula-tive effects of small-scale activities couldbe substantial in certain occasions, therebyleading to significant overall losses. Themore serious issue here is that the asset-lesspoor are incapable of investing on rehabili-tation of resources, which are degraded bytheir own activities.

Deprivation or denial of access to certainbenefits from the environment represents anentitlement failure. The market system tendsto raise prices of benefits of the environmentthat are highly demanded by the poor. Thepoor are thus deprived of those benefits. Forinstance, increased pollution has made cleanneighbourhoods a scarce, high-priced re-source, forcing the poor to live in unhealthy,polluted environments. Similarly, access tosafe water has become an expensive choicedue to numerous sources of contaminationand usually the poor are the worst sufferersfrom the hazards of contaminated water.

Traditionally, communal systems of resourcemanagement under shared ownership arrange-ments have helped to enhance entitlementsof the poor for livelihood security and lifesupport services of the environment. In manydeveloping countries, such common poolresource (CPR) systems still play an impor-tant role as a buffer against shocks on liveli-hoods of marginalized sections of rural com-munities. Such systems have come underincreasing threats with the spread of com-mercial economic activities with privateownership patterns, depriving poor peopleof their traditional entitlements.

High vulnerability of the poor to environ-ment related hazards is another critical as-pect of the poverty-environment nexus.Usually, vulnerability is a joint outcome ofdirect dependence on environmental re-sources, deprivation caused by lack of as-sets, and limited accessibility to reliable cop-ing strategies and social protection measures.

The poor are vulnerable not only to environ-mental degradation caused by their own actsbut also to damages caused by the affluentas well as by natural factors. Broadly, poorpeoples' vulnerability to environmental haz-ards could lead to losses of livelihoods,health risks and damages from natural disas-ters, which further accelerates the processof impoverishment.

Figure 8.1 presents a schematic presentationof the interrelationships between poverty andthe environment as described above. In ad-dition to common features highlighted here,there are context-specific factors that dependon socio-economic background, ecologicalconditions, cultural aspects and state poli-cies, as well.

8.2.1 Poverty, Affluence and Environ-mental Degradation

With regard to the issue of who is more re-sponsible for environmental degradation -the poor or the affluent - a popular answeris provided by the Environmental Kuznets'Curve which emphasizes that environmen-tal damage is a dynamic phenomenon thatevolves continuously over the path of eco-nomic development of a given country.Accordingly, environmental degradation canaccelerate in the early phases of develop-ment until reaching higher income levelsand, thereafter, begins to decline. This propo-sition, intuitively appealing though, doesnot seem to capture the real situation ad-equately.

The impact on the environment is not easilycomparable between developed and devel-oping economies. It seems that losses dueto extractive uses such as deforestation andrural land degradation are more prevalent indeveloping countries. However, such im-pacts usually have local effects than globaleffects. On the contrary, developed coun-tries are more responsible for over-using glo-bal commons such as atmosphere and oceans

95


for disposal of industrial wastes and emis-sions in large quantities. These effects havemore global impacts causing damages notonly to source countries but to developingcountries as well. Hence, poor nations arevulnerable not only for environmental deg-radation taking place in their own countriesbut also for damages to the environmentcaused by developed countries. The pend-ing threat of global climate change providesa fine example of this. Climate change islargely a result of emissions accumulatingin the atmosphere due to industrial activi-ties of developed countries. In spite of that,many climate change projections forecastdire consequences for poor developing coun-tries. This leaves developing nations withthe immense challenge of adapting to pend-ing changes of climate, which can place ahuge burden on their economies.

Figure 8.1Poverty-Environment Nexus

8.3 Poverty and Environment inSri Lanka

The population of Sri Lanka can be broadlydivided into rural (80.1 per cent), urban (14.6per cent) and estate (5.3 per cent) sectors.People belonging to all three sectors are af-fected by poverty, yet on different scales.According to recent poverty assessments, thehighest incidence of poverty was reportedin the estate sector (30 per cent) followedby rural (24.7 per cent) and urban (7.9 percent) sectors, respectively.

Livelihood patterns of these three sectors varywidely. The urban population dependslargely on services and manufacturing sectoremployment, whereas rural as well as theestate sector populations live mainly on ag-riculture. Categories of poor within eachsector could be broadly identified as follows:(i) the urban poor comprise the lowest paid

disasters

(-) Denial of access to benefits

Deprivation

Dependency (-) Degradation (+) Livelihood support

Environment Poverty

Vulnerability

All (-) Livelihood losses Natural Disasters

Health risks d


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Box 8.1Climate Change and Possible Impacts

Many scientists now believe that human induced climate change is actually taking place. AsMichel Jarraud, Secretary General of the World Meteorological Organization summed up inthe recent release of the 4th Assessment Report of the Intergovernmental Panel on ClimateChange (IPCC), it is (now) a question of when and how much and not if. The main causes ofclimate change have been well comprehended; the accumulation of carbon dioxide emissionsfrom fossil fuel burning is the main contributing factor for global warming and resultant changesin climate. In addition, Methane and Nitrous Oxides from agriculture, Chloro-Fluoro-Carbon(CFC) from industry and deforestation also have been found to contribute, albeit to a lesserextent.

Global studies predict that the developing South would have to bear the greater burden ofcosts, while within developing countries, the poorer will be more vulnerable. The South housesnearly a quarter of the global population. As significant masses of the ‘poorest of poor’ in allcountries of South Asia are dependent directly on weather-reliant livelihoods such as agriculture,fisheries and forestry, any adverse change in already volatile weather patterns are likely tocreate major chaos. Despite their close geographical location and commonly shared burdenof widespread poverty, countries in South Asia represent a highly diverse group with large sub-continental mainland nations with significant coast lines (India, Pakistan and Bangladesh),island nations (Sri Lanka), archipelagos (Maldives) and land-locked mountainous countries(Nepal and Bhutan). Climatic diversity found in the area ranges from arid tropical deserts to mildtemperate mountain climates. Predictably, island nations are more susceptible to sea level rise.So are the low-lying coastal plains of mainland nations. The mainland sub-continent is dependenton glacial mountain flows for the main source of water supply and, therefore, is vulnerable tofuture water shortages as well as to floods. Generally, the region is located in a drier area oftropics and future increases of atmospheric temperature are likely to generate problems ofdesertification and habitat losses, adverse impacts on major crops and outbreaks of vectorborne diseases. Weather patterns in the region already involve frequent disaster prone weatherextremes such as droughts, floods and cyclones and global studies predict that such events arelikely to increase in their intensity and frequency.

No systematic effort has so far been made to understand the specific impacts of climate changeover the economy and livelihoods of Sri Lanka. It is natural to expect that a sea level rise,increased scarcity of water in dry regions, and rising number of extreme weather events wouldcause significant impacts. All major export crops – tea, rubber and coconut – are highlysensitive to heat stress and drought. Therefore, significant economic losses could be anticipatedwith gradual progress of climate change in the future. A country like Sri Lanka with a negligiblecontribution to global emissions can do little to mitigate the threat other than conservingforests. What is more important is taking necessary adaptive measures to mitigate or minimizethe damages. Given the nature of impacts involved, it is necessary to take suitable precautionswith foresight.

sections of working class population, andslum dwellers who live on various informaloccupations; (ii) the rural poor compriselandless agricultural workers, subsistencefarmers with low ownership of assets, farm-

ers in areas with low access to resources,people who live on extractive activities, andpeople living in disaster prone areas; and(iii) the estate poor comprise of low paidestate workers1 who live on the margins of

1 It has been observed that high alcoholism among estate workers is another problem that contributes to the poverty in the estate sector.

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poverty with no ownership of productiveassets with the poorest of them living in ar-eas with the lowest access to socialfacilities and employment opportunities.

Compositions of the poor under each cat-egory shed some light on the nature of thelinks between poverty and environment un-der rural and urban contexts in Sri Lanka.Accordingly, rural and estate poverty is char-acterized by direct dependence on environ-ment-based livelihoods, subject to depriva-tion caused by poor ownership of assets andvulnerability to environmental related haz-ards. Urban poverty is characterized by vul-nerability to urban pollution due to high levelof exposure and limited access to means ofovercoming it. In spite of this broad di-chotomy in rural and urban poverty catego-ries, a somewhat complex situation couldbe observed in the coastal belt of thecountry, where the poor living on fishing(marine fisheries) - a category of ruralpoverty - is increasingly being subjected to

the harmful effects of various types of envi-ronmental pollution caused by industrialinterventions in coastal areas such astourism development.

Despite recent attempts on diversificationand industrialization of the economy, a sig-nificant proportion of the country's ruralpopulation still depends on livelihoodswhich are directly reliant on environmentalresources. Agriculture remains the majorlivelihood in rural areas providing employ-ment for 30.7 per cent of the labour force.Figure 8.2 presents the nature of the rela-tionship between household dependence onagriculture and incidence of poverty amongdistricts. In addition to small-scale farmersand landless agricultural workers who de-pend on agriculture-based livelihoods inrural areas, there are also significant num-bers who are occupied in fisheries, forestryand mineral-based industries that have di-rect dependence on environmental resources.

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Figure 8.2Income Share of Agriculture and Poverty by District

Source: Compiled from data obtained from the Department of Census and Statistics.


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8.3.1 Rural Poverty and theEnvironment: Land ResourcesEnvironmental degradation in rural areas canbroadly be divided into a few major catego-ries.

In this Chapter, rural poverty is discussed inthe context of its relationship to four majorenvironmental resources, land, water, for-ests, and inland fisheries. The first link withenvironment begins with land resources, withland being the most important asset for amajority of the rural population. Therefore,

Table 8.1Broad Categories of Environmental Resource and their Use in Rural Areas in Sri Lanka

Resource Use Component Resources Types/Sources of Degradation EffectsLand use Land, forests, water bodies Land degradation (e.g., soil erosion,

fragmentation) deforestation, siltation ofwater bodies

Water Surface water, ground water Water pollution, salinization, over-exploitation of fisheries, over-exploitationof ground water

Air and climate Air quality, climate patterns Air pollution, extreme weather events,variability in climate patterns

Biodiversity Natural vegetation, agricultural Loss of habitats and species, loss ofcrops diversity of eco-systems, loss of

natural resources

lack of ownership of land inevitably leadsto poverty unless such households are sup-ported by other alternative sources of income(i.e., off-farm employment). In the absenceof productive off-farm employment, land-less people are compelled to make their liv-ing as agricultural workers for meagre farmwages. Hence, extremely poor people arefound to be landless, near-landless or agri-cultural labourers. Figure 8.3 shows the re-lationship between proportion of landlessfarmers and level of poverty in major agri-cultural districts.

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Figure 8.3Landlessness and Poverty by District


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Landlessness among farmers in Sri Lanka hasa long history, with the acquisition of amajority of lands - used by local farmersunder customary and traditional systems ofrights - by colonial rulers and subsequentlytransferred to plantation agriculture. Thiscreated an intense pressure on practising oftraditional agriculture based livelihoods,especially in upcountry wet zone areas wherelocal villages were surrounded by large scaleplantations of tea, rubber and coconut. Thispressure of landlessness continued to growuntil the government from the mid-1930stook steps to 'ease' the pressure by settlinglandless peasantry from the upcountry andmid-country in irrigated colonizationschemes in the sparsely populated low coun-try dry zone. Therefore, the problems of land-lessness in the low country dry zone and upcountry wet zone are historically intercon-nected with each other.

Despite the temporary easing of landless-ness, the problem has continued to evolveboth in the wet zone and dry zone with re-curring fragmentation of land holdings as aresult of increasing population. Accordingto the Census of Population and Housing2001 carried out by the Department of Cen-sus and Statistics (DCS), the average land-holding size declined from 1.3 ha to 0.47ha over the past 56 years. This has been fur-ther aggravated by the informal accommo-dation of family members, tenants and oth-ers leading to ownership and user rights frag-mentation, irrespective of the fact that landsgiven by the state under permits or grantshave rules against subdivision. The dimin-ishing land holding size of cultivated landstends to prevent farmers from achieving ad-equate returns and productivity levels.

It seems that both landlessness and land frag-mentation act as catalysts for land degrada-tion in the wet zone as well as dry zoneareas. Younger generations are likely to en-croach on state lands - such as natural for-ests, reservation areas, common public

places such as cemeteries and school grounds- for their living. Encroachers of natural for-ests clear the forest and practise chena culti-vation which leads to deforestation and landdegradation. Encroachment in reservationareas also results in soil erosion. Some en-croachers live in highly unproductive landsand work as agricultural labourers. There hasbeen no systematic attempt to solve thisproblem other than for the state regularizingencroachments from time to time.

In the wet zone, where many lands are lo-cated in sloping terrain with intensive rain-fall, encroachment and clearing of vegeta-tion has led to heavy soil erosion. Soil ero-sion leads not only to on-farm effects ofdeclining of fertility/productivity but also tonumerous off-farm effects too. Among them,siltation of down stream irrigation and hy-dro-electric reservoirs, unfavourable changesin seasonal water availability, increasinghazards of floods and landslides have cre-ated a severe impact over the livelihood ofthe poor as well as the environment.

The problem of landlessness in rural areascould affect poverty in urban areas also.Recently, significant migration has beenwitnessed from rural areas to urban areas.Rural landlessness can be identified as adefinitive push factor behind this process.In urban areas, most of the landless peoplelive in slums and are prone to numeroushealth hazards. This has resulted in poorhealth and sanitation conditions for the in-habitants of these areas, thereby making themsusceptible to various water borne and vec-tor borne /diseases. In addition, in the eventof a natural disaster they are more prone tobe affected adversely. On the other hand,their living in such places causes severalenvironmental problems such as blocking ofdrainage systems, urban flooding, accumu-lation of garbage, pollution of water sourcesand decline of economic value of urbanassets.


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8.3.2 Rural Poverty and the Environ-ment: Water ResourcesWater becomes the next most critical envi-ronmental factor after land that affects ruralpoverty involving agricultural livelihoods.Even though the main plantation crops areconcentrated in the wet zone, the dry zoneplays a key role in producing major foodcrops that support livelihoods of the ruralagrarian population. The dry zone also isthe region which is affected by scarcity ofwater that acts as a major limiting factoragainst development of rural agriculture. SriLanka's long history of establishing a net-work of irrigation tanks in response has beenextended further by a series of large-scalehydroelectric and irrigation reservoirs morerecently. Due to this huge network of irriga-tion reservoirs, Sri Lanka is considered as acountry with the highest density of inlandwater bodies per unit of land area having2.3 ha /sq.km.2

Paddy based farming systems being the back-bone of rural livelihoods for many areas,availability of water from irrigation, to a largeextent, determines the level of income and

welfare of farmers. Therefore, development,rehabilitation and maintenance of irrigationstructures have continuously occupied animportant place in the government budget-ary allocations and donor funded invest-ments. Broadly, farming systems in thecountry are divided into three major catego-ries according to the availability of water,namely major irrigation, minor irrigation,and rain-fed areas. Around 48 per cent ofpaddy lands in the country come under themajor schemes and are the most productivepaddy areas in the country. It has been esti-mated that 24 per cent of total paddy farm-ing area comes under minor irrigation struc-tures while around 28 per cent of paddy landscome under rain-fed areas.

Rain-fed areas are marginal areas with lim-ited livelihood options thereby causing highlevel of poverty among people living in suchareas. Figure 8.4 shows the rain-fed areaunder agricultural districts and poverty lev-els in respective districts. Accordingly, a clearrelationship could be observed between theextent of rain-fed agriculture and levels ofpoverty.

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Figure 8.4Poverty and Non-irrigated (Rain-fed) Area in Dry Zone by District


2 De Silva, S.S. (1989), “Reservoirs of Sri Lanka and their Fisheries”, FAO Fisheries Technical Paper 298, FAO, Rome.

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Water as a resource is an economic asset aswell as an essential life support system.Access to safe water sources is a critical is-sue and is dependent on protection of watersources from contamination and pollution.Shallow dug wells which used to be themajor source of domestic water for drinkingcannot be considered as entirely safe withincreased population and high levels of wa-ter pollution taking place in many areas ofthe country. In densely populated urban ar-eas, contamination from improper seweragedisposal, haphazard disposal of garbage andeffluents from industrial/commercial estab-lishments are mainly responsible for pollu-tion of surface and ground water sources. Inrural areas, pollution caused by high usageof fertilizer and pesticides and improper sani-tation facilities are the major factors thataffect the quality of water for human con-sumption. Further, research has indicatedthat natural causes such as high fluoridecontent and deficiency of iodine could alsocreate harmful effects on human health.3

Safety of water is a function of both the qual-ity of environment as well as users' capabil-ity of accessing uncontaminated sources.Access to safe water has become a relativelyexpensive choice with the poor having todepend on unsafe sources unless subsidizedmeans are available from governmentschemes or through civil society initiatives.Figure 8.5 indicates a negative relationshipbetween the level of poverty and access tosafe water as a general observation madeamong districts. Therefore, ensuring thepoor's access to safe water should be a fo-cus of policies on environmental manage-ment as well as poverty alleviation.

8.3.3 Rural Poverty and the Environ-ment: Forest Resources

Deforestation has been linked closely withthe development of land policy in Sri Lanka.Forest degradation became a particularly sig-nificant issue with the clearing of lands forcultivation of export crops such as tea, co-

3 Dissanayake, C.B.(1991), “The Fluoride Problem of Groundwater in Sri Lanka: Environmental Management and Health”, InternationalJournal of Environment Studies, 19: 195-203.

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Figure 8.5Poverty and Access to Safe Water by District

Source: Compiled from data obtained from the Department of Census and Statistics andMinistry of Health.


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conut and rubber. Evidence further indicatesthat valuable species of timber, especiallyin dry zone areas, had been systematicallyexploited from the colonial era to the earlypost-independence period. From around themid-1930s up to the late 1980s, large scaleirrigated colonization schemes also contrib-uted to rapid deforestation. At present, themajor causes of deforestation include shift-ing cultivation, encroachment for agriculture/living and illegal extraction for timber andother forest products.

The nexus between deforestation and pov-erty is argued to be bi-directional in manyoccasions; deforestation can lead to highpoverty levels and/or activities of the poorresults in decline in the forest cover. Therelationship between poverty and deforesta-tion at the national level in post-indepen-dent Sri Lanka is not as evident as the coun-try experienced a higher rate of deforesta-tion while poverty levels declined owing tovarious poverty alleviation and social pro-tection measures. Besides, large scale defor-estation took place in certain areas due to

major development projects too like theMahaweli Scheme. In spite of such overrid-ing effects, an apparent positive relationshipcould be observed between poverty and de-forestation in certain dry zone districts (Fig-ure 8.6). The situation in the wet zone maybe somewhat different since the causes thatled to deforestation are not similar in thetwo zones.

Presently, in dry zone areas, deforestation islargely linked with encroachment, shiftingcultivation and other agriculture relatedcauses rather than over-exploitation of for-est products. Therefore, it is reasonable toassert that deforestation caused by the ruralpoor is largely a result of their demand forland rather than demand for forest products.In many occasions, subsistent demand onvarious forest products could be met withinsustainable limits when no commercial pres-sure is involved. However, with a rapidlyincreasing population, there is significantpotential for even small scale subsistent ac-tivities by rural communities becoming un-sustainable in the future.

Figure 8.6Deforestation and Poverty (1983-1991)

Source: Compiled from data obtained from the Department of Census and Statistics and ForestDepartment.

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The effects of the forest degradation havemultiple impacts on the poor. Consequencessuch as loss of vegetation cover, soil ero-sion, siltation of water bodies lead to natu-ral disasters such as floods, earth slips wherethe poor mostly get affected. Loss of naturalhabitats for wild animals due to deforesta-tion has resulted in increased human-ani-mal conflicts in villages around forests. Thishas grown into a major threat to lives andproperty of peripheral communities and leadto further impoverishment.

8.3.4 Rural Poverty and the Environ-ment: Inland Fisheries

The other important environmental resourcethat involves livelihood of the rural poor inSri Lanka is fisheries. While marine fisher-ies is the major supply source of fish, in-land fisheries also represents another impor-tant source linked to the network of irriga-tion reservoirs. While the contribution ofinland waters accounts for only about 10per cent of total fish production in Sri Lanka,inland fisheries and aquaculture has a largepotential to cater to the food security needsof the country. High density inland aquaticresources provide a total annual productionin the range of 25,000-30,000 mt. In addi-tion to resource potential, the bio-economicthresholds of marine fisheries that prohibitthe sustainable increase of harvest beyondcertain limits, provide a strong justificationfor the development of inland fisheries andaquaculture as a priority sector. Given thefact that the productive resource base is con-centrated in rural areas, these opportunities,if used wisely, have the potential to gener-ate large benefits to the rural poor.

According to the availability of water, thesereservoirs can broadly be categorized as pe-rennial water bodies and seasonal waterbodies. Perennial reservoirs are water bod-ies with year round supply of water and arecapable of supporting naturally recruited,continuous fish populations. Over 500 such

reservoirs have been identified and all ma-jor irrigation and hydroelectric reservoirs arecovered under this category. In contrast, sea-sonal tanks are water bodies that run dryduring a part of the year - not able to sup-port a continuous, naturally recruited fishpopulation - and thus identified as suitablefor community-based aquaculture by artifi-cial stocking of fish to be grown out duringthe rainy season and to be harvested whentanks run dry.

This difference in fisheries potential in pe-rennial and seasonal tanks gives rise to animportant distinction between communitieswho live on the two types of fisheries re-sources. Perennial reservoirs can support regu-lar fishing communities of fulltime, profes-sional fishermen that rely on them - atpresent supplying over 95 per cent of inlandfreshwater fish. This community consistsmainly of migrant fishers and their descen-dants. Those engaged in seasonal tank aquac-ulture are basically paddy farmers from sur-rounding agrarian communities. The seasonalnature of fish production does not supportpermanently settled fishing communitiesand, therefore, despite the high resourcepotential, the contribution from seasonaltank aquaculture remains at a very low level.

Significantly, inland fisheries make a sub-stantial contribution to the nutrition of lo-cal communities in rural areas with highdensity of irrigation reservoirs. Despite this,inland fisheries and aquaculture has so farprovided very limited support to improvethe livelihoods of rural communities wholive on them. Table 8.2 provides a compari-son between the economic well-being of thetwo communities.

Low daily output of fish and relatively lowprice received by fishermen at the landingsite (compared with marine fish) providemeagre income support for inland fishermen,and is further subject to seasonal fluctua-


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Table 8.2Comparison of Socio-economic Conditions of Inland Fishermen

and Seasonal Tank FarmersIndicator Inland Fishermen Seasonal Tank FarmersAsset ownershipLand owners (%) 68.7 93.9Avg. land size (ac) 0.8 2.7House (% owned) 72.6 93.8Permanent houses (%) 55.2 72.3IncomeMonthly average (Rs.) 7,192 10,481CompositionFish (%) 64.3 2.9Other (%) 35.7 97.1Facilities (% households)Drinking water 79.1 90.8Electricity 40.3 50.0Sanitation 66.7 86.1

Source: Calculations based on data from the Ministry of Fisheries and Aquatic Resources.

tions dependent on rainfall. As a result, theyremain a relatively poor group compared withthe neighbouring agrarian community whohave a better asset profile and can supple-ment income from fish with income fromcrops as well. The major benefit thatseasonal tank farmers obtain from villagetanks - water for cultivation of crops andincome from fish - is only a fraction of theirtotal income. Therefore, inland fishermenare the more vulnerable of the two commu-nities as far as incidence of poverty isconcerned. Inland fishing as a soleoccupation can support a meagre standardof living and, therefore, it is engaged by themarginalized with access to a limitedportfolio of productive assets.

At the present level of development, it seemsthat the poverty-environmental linkage ininland fisheries is more of a relationship ofunder-utilization of potential resources ratherthan of over-exploitation. As a result, thegovernment is currently undertaking a ma-jor inland fisheries and aquaculture devel-opment programme in rural areas with thesupport of the donor community. However,this should be undertaken with proper caregiven that the delicate ecological balance insmall reservoir fisheries can easily be sub-

jected to over-exploitation. It has been ob-served that poverty, low employment oppor-tunities as well as improper political patron-age have sometimes led to over-exploitationof local fisheries in the past. Managementfailures have led to decline of catch rates incertain tanks after the government withdrewthe state patronage temporarily for inlandfisheries during the period of 1990-1994.Some attribute such failures to wrongly des-ignated, 'open access conditions' that wereclaimed to prevail in local fisheries. How-ever, open access conditions are a relativephenomenon that is caused by the collapseof management rather than being an inher-ent practical reality like in deep sea fisher-ies. Many local inland fisheries are de factocommon property resources that can be man-aged through adoption of proper co-manage-ment systems.

8.3.5 Urban Poverty and the Environ-ment: Outdoor Air Pollution

Urban poverty and the environment can bediscussed in relation to air pollution, high-lighting the vulnerability of urban poor topollution. Air pollution can broadly be cat-egorized into two main types, namely out-door and indoor air pollution. Outdoor airpollution refers to pollution taking place due

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to various emissions from industrial andtransport sectors, and is particularly observedin the cities of Colombo and Kandy and theirsuburbs. Table 8.3 presents a profile ofinformation on major pollutants and theiroccurrence in different areas of the country.

It has been estimated that 60 per cent of thetotal vehicle fleet in Sri Lanka operates inand around the Colombo city. Air pollutiondue to vehicular emissions can be directlylinked to a wide range of factors such ascomposition and increase in number of ve-hicles, price structure of fuel, poor trafficmanagement, use of low-quality fuel, ab-sence of alternative fuels, poor maintenanceof the vehicles as well as poor conditions ofroads. According to the emission inventoryin 1997, vehicular emissions contributed to48 per cent of sulphur dioxide (SO2), 47per cent of nitrogen oxide (NO2) and 60 percent of carbon dioxide (CO2).4 The rapidchange of fleet mix in favour of three wheel-ers, motorcycles and small diesel vehiclescan be observed due to increase of fuelprices, pricing policy of fuel and vehicleimportation policies. Compared to emissionsfrom petrol vehicles, emissions from dieselvehicles contain much higher concentrationof particulate matter. However, changingprice policy against diesel as a measure toreduce pollution is not an easy decision since

Table 8.3Emission Inventory of Pollutants from Thermal Electricity Generation (‘000 tons)

Area Particulate Sulphur Dioxide Nitrogen Dioxide2002 2003 % Increase 2002 2003 % Increase 2002 2003 % Increase

Western 853.6 913.1 7.0 27.1 29.5 8.5 51.0 54.4 6.8provinceColombo 425.8 527.6 23.9 11.3 14.2 25.4 32.1 32.1 23.8districtOther 100.3 87.4 -12.9 2.6 2.4 -8.9 5.3 5.3 -13.3provincesSource: Manthrinayake, M. and R.P. Samarakkody, 2004, “Electricity and Air Emission”, paper presented

at the First National Symposium on Air Resource Management in Sri Lanka, December 2004, SriLanka.

vehicles used for public transportation andtransportation of goods are mostly poweredby diesel. Therefore, increasing the price ofdiesel affects the poor people in the countrydrastically.

Power generation has been the second ma-jor air polluter in Sri Lanka. The energy mixof the country has been changing from hy-dro-power to thermal energy generation,which has a high potential to increase airpollution. With the increase in oil prices,the country is now shifting towards coalpowered electricity generation on a largescale that could further aggravate the prob-lem of pollution.

Few studies have highlighted the effect ofair pollution on health in Sri Lanka. Thepollutants cause respiratory problems suchas asthma, increased toxicity and mortality.Asthma has been identified as the secondhighest respiratory illness for hospital ad-missions in Sri Lanka. In Colombo, observedlead (Pb), sulphur dioxide (SO2), total sus-pended particulates (TSP) and ozone (O3)levels are higher than WHO recommendedlevels. One study has estimated that thevalue of health damage due to particulateemissions in Colombo alone was in therange of Rs. 67-160 million per year.5

4 ADB (2006), “Country Synthesis Report on Urban Air Quality Management”, Discussion Draft, Asian Development Bank and Clean AirInitiative for Asian Cities (CAI- Asia) Centre.

5 Chandrasiri, S. and S. Jayasinghe (1998), "Health Effects of Vehicular Emissions in Colombo", UC-ISS Project, Working Paper Series, 9805.


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It is not difficult to infer that the poor peoplein urban areas get more exposure to open airin their livelihoods, transport, households,etc., and, therefore, are more vulnerable torelated health damages. Their high suscepti-bility to adverse health impacts is furtherincreased due to poor nutrition, poor livingconditions and poor access to quality medi-cal services. Further, due to lack of aware-ness and ignorance they do not take suitableprecautions to minimize their exposure orto get the help of even available medicalcare services before the conditions worsen.Their informal means of income do not per-mit spending more time in obtaining healthcare facilities due to loss of daily-based earn-ings, and as a result they can suffer morelosses in number of working days due toworsened illness conditions.

8.3.6 Urban Poverty and the Environ-ment: Indoor Air Pollution

Indoor air pollution is the persistent expo-sure to smoke from bio-mass fuel used inhouseholds, which causes adverse health

impacts on those who are subject to it. In-door air pollution seems to have continuedfrom the past without much attention beingpaid to it. Nevertheless, the risks are signifi-cant; it has been estimated that smoke gen-erated from biomass combustion is respon-sible for killing over 1.6 million peopleannually around the world.6 The main healthproblems are acute lower respiratory infec-tions such as pneumonia (one of the mainkillers of children under the age of five),chronic obstructive pulmonary disease, lungcancer and pulmonary tuberculosis. Furtherevidence indicates increased infant mortal-ity, low birth weight of infants and cataract.

The exposure to smoke due to bio-mass com-bustion is linked to the choices of fuel use,cooking habits, stove and kitchen design,ventilation arrangements, etc. The majorityof the rural and estate sector households inSri Lanka use firewood for cooking due tolow purchasing power and high availabilityand easy access to bio-mass energy. About14.5 per cent of households, which are

Figure 8.7Income and Fuel Choice of Households

Notes: Income quintiles are arranged in such a way that 1 represents lowest income level and 5represents the highest.

Source: Calculations based on Sri Lanka Integrated Survey, 2000.

6 WHO (2002), “World Health Report: Reducing Risks, Promoting Healthy Life.”

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mainly urban, are estimated to use LPG. Fig-ure 8.7 shows the type of energy used byhouseholds in relation to their level of in-come.

As the choice of fuel basically depends onthe income of the household and other fac-tors such as food and cooking habits, it isnot practical to change the choice of fuelthrough short-run measures and so reducethe vulnerability. The promising strategiesto reduce indoor air pollution for a develop-ing country like Sri Lanka may include theuse of improved cooking stoves, improvedkitchen designs and promotion of changesin cooking habits through awarenessprogrammes such as reduction of time spentfor cooking by adopting efficient practices,keeping away small children from thekitchen while cooking, etc.

8.4 Conclusions

The relationship between poverty and theenvironment in Sri Lanka assumes twodistinctive forms under rural and urban pov-erty contexts. There are three important factsthat characterize rural poverty in Sri Lanka,namely: (i) close interdependence betweenland, water, forestry and fisheries resourcesfor providing livelihood for the poor; (ii) com-mon livelihood related factors that lead todegradation of environmental resources; and(iii) high vulnerability to natural disasters.On the other hand, the link betweenpoverty and the environment in urban areasis mainly a relationship of vulnerability as aresult of high exposure of the poor topollution.

Rural poverty and its consequences on theenvironment have been strongly influencedby the post-independence development strat-egy, which gave high priority towards agri-culture under irrigated schemes. The coun-try at present is certainly richer in terms ofproduction capacity enhanced by invest-ments in irrigation infrastructure and asso-

ciated expansion of arable land. However,these gains have come at a significant costwhich is yet to be estimated precisely.

In the first instance, despite various at-tempts, the problems of landlessness andland fragmentation have evolved rather thangetting solved. Second and third generationlandlessness in dry zone settlements and con-tinuous land fragmentation throughout thecountry have given rise to a rapid process ofland degradation that takes place at unevenintensity in different localities. Land beingstill the major productive asset for the ruralpoor, this represents another source of im-poverishment. Coupled with scarcity of off-farm economic opportunities and high levelof unemployment in rural areas, a viciouscycle of impoverishment is in place that canact as a strong push factor towards urbanmigration.

Secondly, the entire rural development pro-cess has been quite insensitive to importantnatural assets such as forests, fertile soils,bio-diversity, watersheds and wild life habi-tats giving rise to immense external coststhat are highly damaging in the long run.Significant deforestation took place in statesponsored developments in the dry zone aswell as rapid soil erosion occurring as a re-sult of expansion of commercial agriculturein wet zone areas. This degradation processwhich takes diverse forms under differentnatural assets has strong connections withimpoverishment originating from landless-ness and land fragmentation. The main linkin this connection is overlapping vulnerabil-ity. In other words, the poor are the mostvulnerable to impacts of environmental deg-radation taking place in rural areas in termsof livelihood losses, health hazards and natu-ral disasters.

The link between urban poverty and theenvironment, though a relatively recent phe-nomenon, has the potential to become a


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larger problem with the expansion of indus-trial activities, increasing number of vehiclesand growing urban migration. Rural poverty,enhanced by environmental degradation,could act as a catalyst for this processthrough urban migration. Even though thecountry seems to be more environmentallyconscious than before, there have been littletangible efforts to arrest the problem of ur-ban environmental degradation so far.

Some broad lessons that should be taken inan integrated framework of sustainabledevelopment include the following:

• Impoverishment and environmental deg-radation go hand in hand with each otherand can be considered as two sides ofthe same coin. Therefore, no poverty al-leviation without proper environmentalmanagement or vice versa could be ex-pected.

• No poverty alleviation, rural develop-ment, or social protection programmeswould be sustained unless appropriate

measures to conserve the natural resourcebase - that supports such programmes -and mechanisms towards long-term eq-uitable access for such resources are inplace. Continuation of widespread landdegradation despite huge investmentsmade to arrest poverty through irrigatedcolonization schemes provides a goodexample of this.

• Environmental sustainability cannot beachieved through an isolationist approachwithout mainstreaming into the devel-opment process. For instance, the ForestDepartment or the Wildlife Departmentcould not arrest the large scale state spon-sored deforestation that took place as aresult of various irrigation developmentschemes.

• Problems concerning the poverty-envi-ronment nexus, be it of rural or urbanorigin, could be addressed only throughan integrated approach where economic,social/institutional and environmentalaspects are taken as in-built componentsof a holistic process.

Pro Poor Agri-Business Models: Revitalizing Small Holder Spice Cultivation

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9. Pro-Poor Agri-Business Models: Revitalizing Small Holder Spice Cultivation

9.1 IntroductionHistorically, the spice sector consistingmainly of cinnamon, pepper, cloves, carda-moms, nutmeg and mace has played a keyrole in the Sri Lankan economy. At present,over 80,000 ha of land (6 per cent of landunder perennial crops) is under spice culti-vation. Annual production of spices has ex-panded from 27,000 mt. to 37,000 mt. overthe last decade. Sri Lanka is the largest pro-ducer of cinnamon in the world and contrib-utes to over 80 per cent of total global pro-duction. In the case of pepper, around 3 percent of the world demand for pepper is sup-plied by Sri Lanka. In terms of earnings fromexports, the value of spice exports is typi-cally equivalent to 1.5 per cent of total ex-ports and 8 per cent of agricultural exportswith a sectoral contribution of around 0.8per cent to GDP.

The spice sector has a small farm orientation- with over 200,000 small scale growers in-volved in spice cultivation - where 70 percent of production comes from small holderfarm units of less than 1 ha of land. Over thelast couple of decades, spices have becomethe main cash earning enterprise of manyfarmers in the major spice growing areas.1

Around 50,000 spice cultivators depend onspices as their main family income. Giventhe nature of small farming in this sector, ithas significant implications in terms of pro-viding a source of livelihood and in address-ing poverty in rural farming communities.The sector nonetheless faces considerablechallenges.

Both domestic and export agri-food systemsare undergoing rapid and continuous trans-formation. Changes are being observed allover the world, and in all segments of valuechains. These can be attributed to increasedquality due to the development of high qualityretail markets, bulk procurement by domes-tic manufacturing firms, and increase in qual-ity awareness of both domestic and worldmarkets. This phenomenon has been influ-enced further by urbanization, rising income,increased migration of citizens, the rise inthe participation of women in the labourforce, etc. In turn, these developments havecreated new demand patterns, shifting thefocus towards continuous supply of highquality, value added products with improvedprocessing, packaging and labelling require-ments.

The impact of modern and restructured mar-kets has a number of repercussions on smallscale producers who are unable to competein the emerging marketing environment. Thishas necessitated a need to enable thetransformation and competitiveness of smallfarmers and ensure their participation in theemerging agri-business systems. Thefollowing discussion attempts to identify newinnovative practices of the private sector agro-industries in improving the farmers' abilityto face restructured market conditions, andderive policy lessons for public and privatesector actors in supporting greater participa-tion in agro- industry markets. The mainfocus of the discussion will be confined to

1 More specifically, cinnamon is found around the low country wet zone, while cardamoms are found in the up country wet zone and midand up country intermediate zones, and pepper, cloves and nutmeg are found in the mid country wet zone.


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private sector agri-business models and re-lated supply chains of the spices sector in SriLanka.

9.2 Small Farmer SusceptibilityThere are a number of interrelated issues andchallenges in the Sri Lankan spice sector re-lated to cultivation practices, technology andmarketing. Small scale cultivation, high costof labour, inferior quality, sanitary and phyto-sanitary measures, lack of research and tech-nology and unorganized markets have beenthe most important issues of concern.

Since spice cultivation has been tradition-ally characterized by small scale operations,lacking adequate knowledge of managementpractices, it inherits various problems relatedto non-commercial agriculture. Subsistenceoriented attitudes of growers have movedthem away from quality consciousness andmarket-focused production. Further, farmerslack credit worthiness needed by commer-cial banks, while government and other in-stitutional intervention policies have had lim-ited impact. Below optimal management -ignoring recommended improved practicesdue to inadequate knowledge - practice ofmixed cropping and lack of financial resourceshave led to serious constraints on productiv-ity and the sustainability of the sector.

Minimal input use and lack of constant re-placement of soil nutrients together withleaching due to heavy rains have been themain contributory factors for the low soilfertility. Plant density is below the recom-mended level with farmers not paying suffi-cient attention to replanting and gap filling.Adoption of productivity improvementprogrammes such as land and soil conserva-tion, shade management and agronomic prac-tices have been hindered by the lack ofknowledge and awareness on the part of farm-ers. These have a considerable negative im-

pact on regularity of supply of spices in thecountry.

Inferior quality of farm gate spice productshas been a serious issue in the context ofhigh demand for product quality. A largeproportion of the spices that leave the farmgate are of poor quality that is far below ex-pected levels at the high end of the supplychain. High moisture retention, contamina-tion by micro-organisms such as moulds andthe presence of extraneous matter are com-mon problems affecting the quality of spices.They are mainly attributed to poor weatherconditions, low cost processing technology,poor storage facilities and early harvestinghabits and small scale nature of the produc-tion. Poor quality leads to a direct loss ofpotential exports and foreign exchange earn-ings. Many producers do not have properprocessing facilities and are also not awareof the quality parameters. Since farm gatequality does not match with any accreditedstandard quality, a considerable amount ofcleaning and processing is carried out through-out the marketing channel adding to costs.

The most important constraint in the spicesector from the side of small holder farmersis the poor market link between farmers andexporters. The market structure of the minorexport crops sector of Sri Lanka is character-ized by its traditionality at the domestic leveland rather high degree of sophistication atthe exporter's level. The traditional supplychain of spices in Sri Lanka is characterizedby decentralized purchasing, low qualityproduct trade and the presence of a largenumber of intermediaries without essentialfunctions (Figure 9.1). Those intermediaries(or commonly known as middlemen) takeadvantage of this situation by buying thefarmers' products at lower prices and sellingthem at higher prices creating a large gapbetween the price received by the farmersand the auction /FOB price.2 The traditional

2 The middlemen constitutes mainly of travelling collector, village trader, wholesale buyer, commission agent and the auction broker.


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perception on the role of the middlemen isnegative since they are seen as unnecessaryagents in the supply chain, increasing mar-keting costs and capturing parts of the rentsaccruable to farmers. Thus, the involvementof a large number of non-essential interme-diaries has ultimately resulted in high wast-age, low farm prices and high consumerprices. Even where the farmers produce abetter quality product, there are no attractiveand differentiated farm gate prices for suchbetter quality products. These result in lowvalue added in the chain, low incentives tothe farmers and sluggish growth of the sec-tor.

9.3 Can Small Farmers Survive in aGlobalized World?Small holder producers play a vital role inrural development as improvements in pro-ductivity and income tends to spread thebenefits throughout poor rural communities.With the liberalization of agricultural sec-tors and the withdrawal of the state from

Figure 9.1Schematic Presentations of a Traditional and a Modern Supply Chain

many essential functions - including in theprovision of marketing services - small holderfarmers' access to markets and ancillary ser-vices decreased. Small farmers becomemarginalized due to supply-side andinfrastructural constraints and the structuralweaknesses mentioned previously.

The market potential for Sri Lankan spiceexports mainly depends on the tariff struc-ture and sanitary and phyto-sanitary require-ments demanded by world markets. The mostintractable issue arising from world trade isquality since quality standards like ISO 9000certification and Hazard Analysis and Criti-cal Control Point (HACCP) have become es-sential parameters in the food industry. Inaddition, international trade agreements suchas the WTO Agreements on Agriculture(AoA), Sanitary and Phyto-sanitary Measures(SPS), and Technical Barriers to Trade (TBT)show evidence of some inhibitive effects onSri Lankan spice trade. For example, the TBTagreement creates the basis for various con-

Traditional

Brokers

Exporter

Village trader

Traveling collector

Town traders Regional wholesaler

Distillery/confectionary owners

Commission agents/ Colombo wholesalers

Outstation wholesalers

Retailer

Local consumer

Small/medium scale producers Large scale

producers

Auction

Farmers/ producers

Procurement centre

Factory (Wholesaler/ Assembler/ Processor)

Super- markets

Manufacturing companies

Satellite farmers

Hotels/restaurants/ catering services

Domestic consumers

Export

Modern

Travelling

Distillery/confectionery


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straints in generating value added productsin spices and organic spice products. Pro-duction constraints, strict quality, certifica-tion and accreditation issues, national andregional standards and importing procedures,organic labelling, and stiff competition fromother producers are the main obstacles im-posed by these agreements. Consequently,suppliers are faced with strict contractualrequirements and increasing cost of compli-ance.

The absence of adequate infrastructure in-cluding transportation and storage has be-come a major obstacle in rural areas, increas-ing transaction cost and introducing unnec-essary risks. Exorbitant transaction cost has asignificant impact on income and competi-tiveness while poor storage has become amajor source of inefficiency. The growth ofthe modern supply chains which is largelybased on supermarkets, coupled with theabove weaknesses tends to concentrate powerin a relatively small group of large purchas-ers making the survival of the small holdersuncertain. Nonetheless, the potential for ex-panding this sector is high if government,private sector and other related institutionspay more attention to these issues. Increas-ing competitiveness and/or strengthening theirlinkages with agri-business firms which ulti-mately improve the capacity for participat-ing in modern supply mechanisms will beuseful in creating a conducive productionenvironment for small farmers.

9.4 Private Sector Pro-Poor BusinessModel: A Possible AlternativeAn innovation which is basically a 'businessmodel' change with limited 'collective ac-tion strategies by farmers' that enables ful-filling consumer demands while effectivelyintegrating the farmers in the supply chainhas been attempted in a few cases (see Box9.1). This innovation introduces a packageof activities and strategies that can generatechanges in technological, managerial, orga-

nizational and financial aspects of the sup-ply chain. First, the company has to shift itsfocus from a decentralized procurement sys-tem to a centralized procurement system. Thiscentralization process increases the efficiencyof procurement through the reduction of thecoordination cost and number of officers re-quired for the procurement. The procurementsystem is centralized on the basis of regionalcollection centre/s which is further respon-sible for the backward integration of thecompany's activities in the supply chain andfor delivering the social responsibilities tothe region as well (Figure 9.1). It is respon-sible for providing extension services to thefarmers with regard to training and technicalassistance in production, record keeping andpost-harvest practices, organic certification,supply of high quality planting material andintermediation of commercial credit frombanks. It assures continuous supply of rawmaterial at the right time in right quantityand quality and eliminates non-essential in-termediaries from their supply chain. It caneventually result in improved informationflow among the supply chain segments whilereducing the marketing risk faced by boththe company and farmers.

The company set, own private standards fa-cilitates the standardization of the productsprocured from different suppliers and differ-entiates the company's products from com-petitors. Further, they offer a considerableadjustment period to bring the produce upto the standards, and premium prices to farm-ers who meet those standards. Moving to-wards logistic improvements in the supplychain is focused on by introducing new op-erations not in existence earlier, in the areasof grading, processing, packaging, labelling,trade marking, etc. Such practices make thebusiness entities more competitive in thelocal and international markets, enabling thecompany products to satisfy newly emergingtrends in consumer preferences. Adoption oforganizational innovations comprises a shift


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Box 9.1Private Sector Business Models3

MAS Foods

MAS Tropical Food Processing (Pvt.) Limited, established in 1987, is a family owned spiceprocessing enterprise based in the Matale District. The business has advanced over timebeyond the status of a manufacturing unit and built up a corporate image as a leading processorof spices and spice based products including spices, seasonings, sauces, chutneys, picklesand ready-to-eat foods. MAS Foods possesses an exclusive marketing programme to cater totheir different markets. It basically operates on three markets covering a wide variety of consumergroups both locally and internationally, namely national food manufacturing companies/restaurants like Nestle, Unilever & Sri Lankan Airlines, supermarket chains like Cargills andKeels and the export market. MAS Foods is an internationally certified company of SQF 2000and HACCP quality standards and supplying and processing of organic spices. Procurementhas been centralized by Regional Agri-business and Perennial Initiative and Development(RAPID) which is responsible for the backward integration of the company’s activities in thesupply chain and for delivering the social responsibilities to the operating region as well.Further, it is responsible for providing extension services to the farmers with regard to trainingand technical assistance in production, record keeping and post-harvest practices, organiccertification, supply of high quality planting material and intermediation of commercial creditfrom banks while ensuring full traceability on to farm level. It assures continuous supply of rawmaterial at the right time in right quantity and quality and eliminates non-essential intermediariesfrom their supply chain. It has resulted in improved information flow among the supply chainsegments while reducing the marketing risk faced by both the company and farmers.

Hayleys Agro

The Hayleys Group of Companies is one of the oldest and longstanding private sectorconglomerates to be in operation in Sri Lanka at present. The company is Sri Lanka's soleexporter of gherkins to the international market today while employing thousands of peoplethrough its out-grower and subcontractor network. It offers a wide array of agricultural inputscombining business with the large agricultural establishments and farmers spread across thecountry. The diverse nature of the businesses it holds has enabled Hayleys Limited to set uphundreds of production centres in many parts of the country, most of them in rural areas. As aresult, the company has been able to form an important link between Sri Lanka's rural hinterlandand its global customer base, and has been able to penetrate and make use of the valuableresources that are available in the country's rural areas. The company's factories and productioncentres set up in underdeveloped areas have made two important contributions towards theSri Lankan economy, namely by increasing the income generation capacity of people living indifferent parts of the country (creating employment opportunities for thousands of rural workers)and by enhancing the local value addition of manufactured goods due to the use of domesticraw materials and other inputs. Further, the use of local inputs can also have a positive effect onthe economy by saving foreign exchange. Moreover, it has been involved in a number ofinfrastructure projects as a result of the relationship it has built up with its employees in ruralareas.

3 MAS is a private sector business model in the spice sector while Hayleys Agro is mainly involved in the gherkin sector.


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from reliance on traditional wholesale mar-kets and brokers toward use of specializedwholesalers, namely satellite farmers. Thesesatellite farmers are specialized in supplyingspices in bulk quantities and dedicated totheir main clients.

Several measures can also be adopted to en-sure that locally and internationally estab-lished basic process standards - such as GoodManufacturing Practices (GMP), SQF 2000and HACCP quality - along the value chainare met in order to prevent the risk of prod-ucts supplied to the restructured market notcomplying with legal and ethical norms andconsumer demand. These are supported byfully equipped, modern, in-house laborato-ries which enable the physical inspection,organic certification and chemical and mi-crobiological analysis in order to maintainthe established standards. Tracking and trace-ability is assured through a well documentedand computerized procedure. Activities ful-filling corporate social responsibility on theworkers (free meal, lodging, training, etc.)the local society (providing employment forthe youth and handicapped) and the envi-ronment (waste management system to dis-pose both liquid and solid wastes) in factbecome an investment to the company. Itimproves labour productivity, worker atti-tudes and the image of the company amongtheir clients as well as society at large.

Consequences of such innovation are clearlyevident in improvements in corporate in-come, volume of trade, assets, farm income,employment creation and non-monetary ben-efits while ensuring greater degree of inclu-sion of small farmers to the new supply chain.The supplier base can been further strength-ened by attracting organic farmers who getthe organic certification with the full coop-eration of the company. With the inclusionof the supply chain of the company, farmersreceive several benefits viz., achieving a pre-mium price for better quality products, ac-

quiring a stable price regardless of the pricefluctuations in the market, spread of incomethroughout the year, services received (suchas extension), credit facilities and marketingrisk minimization.

9.5 Conclusion and Policy Recommen-dationsThe processes outlined above have not yetreached their potential capacity because onlya very small number of companies are oper-ating in Sri Lanka, while a large number ofpotential small farmers are left untouched.Thus, there are ample opportunities for otherentities as well to follow this type of modelnot only for the same product but also fordifferent product types taking on board theirspecific characteristics. This business modellargely depends on market linkage develop-ment where contractual agreements andmutual understanding plays a major role, sothat the model works well even with morethan one buyer. It is well recognized thatlack of technology, suitable infrastructure andinformation flow associated with rural pooract as major constraints to market linkagedevelopment.

Thus, at a macro level, governments can playa regulatory and facilitative role to ensurelong-term sustainability of the agri-businesssystem. They can improve efficiency andcompetitiveness by providing necessaryinfrastructural services such as roads, and asuitable policy and legal environment espe-cially in the areas of trade, land and labour.In seeking to do this, developing a facilita-tive policy and legal framework to reducethe transaction cost and time involved thatcan enable the private sector to function in acompetitive way has to be given priority,including through incentives, flexible landand labour regulations, promotion of exportsviz., trade agreements. Research and devel-opment policies and related programmeswhich are focused on agro-industries, mar-ket demand and economic feasibility of ag-


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ricultural products are required in order togenerate appropriate demand driventechnology.

One of the specific SPS related problems facedby Sri Lankan exporters and producers is thatthey do not have adequate and timely infor-mation about the standards, and health andsanitary regulations applicable to these prod-ucts in the target markets. Sri Lanka does notat present have an adequate number of na-tional enquiry points (NEPs) from which in-formation could be obtained. Facilities forobtaining certificates of positive assurancefrom a recognized institution that the prod-uct is in conformity with the standards arestill not conveniently available and the costof the process is also not competitively af-fordable. Thus, other areas in which govern-ments can contribute to providing an effec-tive enabling environment include improved

mechanisms for information flow such asManagement Information Systems (MIS),regulations relating to pesticide use, food stan-dards, seed quality and provision of arrange-ments to certify quality and Good Agricul-tural Practices (GAP).

In general, the government has extremely lim-ited resources and there are several compet-ing demands on those resources. Given thisreality, the best avenue is to utilize fundsallocated for agricultural development to im-prove technology, rural infrastructure andbuilding market linkages rather than usingthem for economically insignificant subsi-dies which have no long-term developmentimpact. These can be accompanied by sup-portive policies at the macro level in areassuch as trade, land, and labour policies asthe second step towards capitalizing on theimprovements achieved.


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10. Reform of the Donor-Recipient Nexus in Aid Delivery

10.1 IntroductionForeign aid can help to reduce poverty byboosting recipient countries' growth rates.While more aid does not mean more growth- studies that have failed to find a link be-tween aid and faster economic growth, none-theless have found evidence to suggest thatcountries with sound policies and good in-stitutions tend to benefit more - aid, if usedeffectively can have significant direct ben-efits to lifting people out of poverty. Foreignaid has also played a significant role in theSri Lankan economy since independence. Atpresent, it is estimated to make up 4.5 percent of GDP, 17 per cent of government ex-penditure and 54 per cent of public invest-ment. Aid to Sri Lanka has been dominatedby Japan, the Asian Development Bank(ADB) and the World Bank (WB), in totalcontributing nearly 80 per cent of aid to SriLanka.

Whilst Sri Lanka's borrowing from such do-nors has not reduced, this may change inthe future since the country's access to con-cessionary finance is on the decline as percapita income increases. At the same time,Sri Lanka is set to embark on a major infra-structure development drive - focusing onroads, the power sector and ports - that wouldrequire a significant level of capital invest-ment. The present status of government fi-nances makes it challenging to continue tofund these projects in the context of declin-ing concessional finance. As a result, thegovernment has looked to alternative sourcesof foreign finance such as emerging donorsincluding China and India whilst furtherexploring the avenue of commercial borrow-

ing. Sri Lanka's relationship with foreigndonors is at an interesting juncture, and itwould be prudent to explore this relation-ship further and consider options for reformon the part of donors and the government.

10.2 Aid Conditionality and Options10.2.1 Political Conditionality

It has long been recognized that strategicconsiderations on the part of donors can of-ten outweigh developmental ones. In thesame vein, donors have frequently made loansconditional on policy reform, be it economicor political. In the case of Sri Lanka, whilstthe decline in availability of concessionalfunding is a key reason driving the search foralternative sources of finance, the governmenthas also made reference to the need for in-creased 'policy space' in aid relationships.There has been a significant increase in thetie up of aid to political conditions. For in-stance, at the Donor Forum held in January2007, donors emphasized the need to pur-sue a peaceful solution to the conflict in theNorth and East of the island. The WB repre-sentative1 was quoted as saying that "thereis no way to politely skirt this issue, as amajor development partner to Sri Lanka, theWorld Bank would be failing if we did notplace the conflict front and centre in our de-liberations."

In addition, aid has also been cut back insome instances. The Minister for OverseasDevelopment of Germany announced inDecember 2006 that tsunami aid to Sri Lankawould be halted until there is a resumptionof peace efforts. More recently, the UK froze

1 Praful Patel, South Asia Vice President, World Bank.

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half of the US$ 5.9 million debt relief thatwas pledged to Sri Lanka given its concernson issues of human rights. As an aid recipi-ent, Sri Lanka's stance is that aid should bede-linked from domestic political processesgiven that domestic security concerns is apriority for any government. It is true thatdonors, especially bilateral donors, have avalid foreign policy concern regarding con-flict and human rights in recipient countries.However, whether such concerns can be dealtwith in the forum of development assistancerelationships remains questionable. Mostoften, if the nature of a conflict is complex -likely to have evolved over decades, if notlonger - the 'solutions' are unlikely to be ar-rived at over a short period of time. Externalpressures can also prove counter-productive.Attaching political conditions to aid canstrengthen the arm of governments that aretrying to push through 'donor-friendly' mea-sures but remain otherwise unpopular. Con-ditional-driven reforms rarely succeed unlessa government considers the reformprogramme essential, and its own.

It could well be argued that if aid is beingused to influence donor country foreignpolicy concerns, it should not be called 'aid'or 'development' assistance. This could becompared to the linking of labour and envi-ronmental issues to trade matters in theWorld Trade Organization (WTO). The bot-tom line is that effectiveness of linking aidbeyond 'development' assistance throughconditions can be questioned, when it isoften those most in need of humanitarianassistance that suffer as a consequence.

10.2.2 Alternative Sources of Finance

Attempts at aid 'conditionalities' has led SriLanka to increasingly consider other emerg-ing options such as bilateral aid from newdonors like India and China. However, suchan approach raises additional concerns. Forinstance, while there may be no politicalconditionality, a condition of aid could be

that work is conducted using labour,consultancy, machinery or raw materialsfrom the lending country. As a result, theremight be a lack of competitive bidding ortender processes, unlike with multilaterallending agencies, resulting in a more expen-sive procurement process. Most aid fromChina to Sri Lanka is of this nature. In fact,the government of China can specify the ex-act contractor or consultant to be used. Withregard to aid from South Korea, the govern-ment can require that the contractor is ofKorean origin but there will be competitionbetween Korean producers to supply the ser-vice. Indian aid is often in the form of In-dian lines of credit, where Sri Lanka can buyIndian imports under the support measure.In the long run, it could well turn out to bethat bilateral aid is more expensive than bor-rowing on the commercial market.

There are also possible detrimental effects tocommercial borrowing. Sri Lanka obtainedinternational credit ratings in late 2005 fromStandard and Poor (B+) and Fitch (BB-) rat-ings, and went on to borrow US$ 680 mil-lion commercially in 2006. It could be ar-gued that a move towards commercial bor-rowing may increase discipline in the usageof funds, and due to repayment requirements,there will be incentives to invest in com-mercially viable projects. However, at thesame time, it is important to understand thedangers of this route. Commercial borrow-ing may create a bias towards projects withquick short-term benefits and may make gov-ernments more reluctant to invest in the larger,more long-term projects with social ratherthan commercial benefits. In the event thatthere is any downgrading of the country'ssovereign rating, it would make it even moreexpensive to borrow commercially. Thiswould be detrimental to long-term economicprospects since it would increase the debtburden in the future. As it stands, Sri Lankahas a public debt of around 95 per cent ofGDP, but much of the international compo-


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nent of this is loans obtained onconcessional terms. If this changes, it islikely that debt service payments would in-crease exponentially.

10.3 Reforms to the Aid Architecture10.3.1 Recipient Voice in Aid

Whilst political conditionality has been aconcern, economic conditionality has beenless of a concern for Sri Lanka in the recentpast. Since the fold up of the Poverty Re-duction Growth Facility (PRGF) process, SriLanka's borrowing from donors has beendominated by project based loans rather thanprogramme loans. This shift should in theoryaddress one of the major concerns in theliterature regarding aid relationships; that ofthe level of recipient voice in aid. Lendingpractices by the WB and the InternationalMonetary Fund (IMF) in the 1980s and 1990swere criticized for the imposition of the de-velopment agenda upon the recipient, withlittle or no say on the part of the recipient.Today, Sri Lanka has in theory an organizedsystem of generating locally driven projectssupported by foreign funding. A line minis-try will submit a project proposal to the De-partment of National Planning (NPD) whowill then determine that the proposal is nota duplication of existing projects. If foreignfunds are required, the project will be sentto the Department of External Resources(ERD) who will choose an appropriate do-nor. However, the reality is often different.The extent of actual domestic ownership ofdonor funded policies depends a great dealon the capacity of the relevant line minis-try. What often happens is that the donorwould approach the ministry with a back-ground proposal, explaining the gaps in thesystem that have been identified, and pro-posals of how these can be remedied andthe type of support they are willing to pro-vide. The issue is then studied by the lineministry and their inputs are submitted. Theline ministry's inputs and suggestions would

be within a framework provided by the do-nor, such as limitations on the types of assis-tance that can be given.

The capabilities of the ministry in questionare the key here. If the ministry has experi-enced officers well versed in the country re-quirements, they will be able to effectivelymould the donor suggestions into the type ofaction plan required by the country. If, how-ever, the ministry lacks such capacity, therecould well be a situation where the ministryaccepts (in fact, proposes to the NPD) aproject which is not in the country's interest.The project implementation is carried out bythe government, and it is at this stage thatthe donor influences the project the most.The donors have strong expertise and experi-ence in the relevant area, with the requisiteknowledge to influence the design of the plan.While plans produced are not necessarilyopposed to the country's interest, their de-sign is often tailored towards the expectationsand requirements of the donor. This again isinevitable given disparities between donorand recipient expertise. However, the con-cern is the possibility of misuse of this ad-vantage in expertise.

One way to overcome the donor-recipientcapacity gap is to involve a broader group ofstakeholders in meaningful discussions withdonors and the government. As it stands, thedonor-recipient dialogue is confined to do-nor representatives and government represen-tatives. If experts in the field from outsidethe government could also be involved in dis-cussions at a meaningful level (at present,there are some stakeholder discussions butthese occur at a superficial level) it wouldimprove the weight of experience and author-ity on the recipient's side of the negotiatingtable. An example of this was the E-Sri Lankaproject initiated in 2003 which had its ori-gins in the private sector in collaboration withwith USAID. The WB supported the projectas it was integrated into the Regaining Sri


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Box 10.1The Changing Role of the Multilateral Financial Institutions

The major Multilateral Financial Institutions (MFIs) - the WB, IMF and the regional development banks suchas the ADB - have in the last decade or so reached a watershed in their history. As economies continue toprogress and global financial markets evolve, the demand for the services supplied by these institutions havebeen changing. The WB was created in 1944 to provide access to credit for the reconstruction of countriesravaged by the Second World War. Since then, it has evolved to provide developmental assistance todeveloping nations which have limited access to international credit markets. The regional developmentbanks were created as regional supplements to the services provided by the WB. The IMF was created in1944 in order to prevent a repetition of the detrimental economic policies - import restriction and exchangerate devaluations - conducted by major countries during the inter-war years that culminated in the GreatDepression. The IMF was charged with overseeing the stability of international monetary systems throughensuring exchange rate stability and elimination of exchange restrictions. However, since 1999 the IMF hasalso lent money to its poorest members under the poverty reduction growth facility (PRGF) with the aim ofachieving poverty reduction through economic growth.

Today, these roles are changing. With the strong emergence of major economies like China, India, andBrazil, there is less demand for the development assistance that the WB and ADB provide. To be sure,between 1999 and 2005, 75 per cent of WB lending was to 12 countries - Turkey, Brazil, China, Argentina,India, Mexico, Indonesia, Cambodia, Russia, Romania, Korea and Thailand. As these countries continue todevelop, demand for WB funding will continue to decline. The ADB is in a similar position. China, its largestborrower, is now its third largest lender and is in effect borrowing from itself and also competing with theADB in lending to other developing nations. Emerging economies have unprecedented access to interna-tional capital markets, so much so that WB funds account for less than 1 per cent of private financial flowsinto these economies. Capital markets now offer longer repayment periods and do not come with condition-alities associated with the MFIs making them more attractive sources of capital. The IMF has seen its lendingportfolio that totalled US$ 100 billion in 2003 fall to US$ 13 billion.2 The IMF's income stream continuesto dry up as fewer countries take on large borrowing and more countries are completing repayment of oldloans. In this context it was recommended, by a committee appointed to evaluate the Fund's financialposition, that the IMF sells 1/8th of the Fund's holdings in gold (initially deposited as quota contributions bymembers) and invest the proceeds. That the IMF is considering the sale of its major cushion against systemicrisk is indicative of the serious nature of its financial problems. In fact, in February 2007 as a part of itsrestructuring efforts, the IMF closed its Resident Mission in Sri Lanka since there was no longer a countryprogramme. However, the IMF continues to have Article IV consultations with the country.

Capital markets are not the only source of finance for developing countries today. Emerging global powerslike China and India have been keen on providing capital to smaller developing countries in the form of aidand FDI. Furthermore, regional financial cooperation mechanisms such as the Chiang Mai initiative in Asiaand Banco Del Sur in Latin America are pooling resources to support members in times of economic shock.

It is clear that the role of the MFIs must evolve and keep pace with the changes in the global economicparadigm. The MFIs should not overlook the fact that poverty remains widespread, but needs to alter the wayit approaches the problem. In many parts of Asia for instance, poverty is more due to mismanagement ofexisting resources rather than a lack of resources per se. This implies the need for a shift of resources tocountries with less access to capital markets. Lending criteria such as the WB's CPIA (Country Policy andInstitutional Assessment) and other performance based lending schemes will need to be reformed to reflectthis need. The IMF's efficacy in crisis management can be called into doubt given its limited resources incomparison to the scale of financial flows associated with a crisis in the modern global economy. Theimproved capabilities of the modern central banker and economic leaders in developing countries have alsomade the IMF's role as economic policeman in the developing world largely redundant. It seems evident thatthe IMF's comparative advantage will be in surveillance of risks to the open economy and providing timelyinformation to forestall systemic crises. However, doing without MFIs also means that governments muststand or fall purely on their own reputations for financial soundness.

2 Wall Street Journal Online, “What’s Left for the IMF”, April 13 2007.


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domestic institutions has long been seen asa priority in the international aid literature.Whilst some efforts in donor technical assis-tance have been successful in contributingto this, donor actions at times inadvertentlyundermine domestic capacity. The donorscan, for instance, reduce the burden placedon domestic implementing institutionsthrough extensive bureaucratic requirementsof handling aid and the numerous missionsthat characterize lending practices (multilat-eral donors in particular) taking up a lot oftime of government officers. For instance,implementing units in the government haveto report back to the donor at multiple stages,providing details of progress and other infor-mation. Whilst some degree of project moni-toring is important, donors need to rational-ize the level of management.

Furthermore, aid institutions tend to capturesome of the best human resources from thegovernment and civil society by employingthem at far better salaries than available

locally. This creates an internal brain drainof sorts, undermining country capacity. Here,the donors need to consider streamlining theirrole in the aid partnership; the greater thenumber of people involved in donor agen-cies, the greater the bureaucracy, the greaterwill be the transaction costs of the transferof resources from lender to borrower. Thebulk of the planning, implementation, anddesign of work needs to be from therecipient's end. Whilst present capacityleaves much to be desired, part of the rea-son for this has been the lack of opportuni-ties given for institutions to build their owncapacity as donor agencies have historicallydominated the intellectual input in the aidrelationship.

Whilst project based lending is not charac-terized by general macroeconomic condi-tions, the loan agreements are managedthrough loan covenants and safeguardsagreements.3 A loan covenant is an agree-ment signed between the donor and the re-cipient government detailing agreed actionsand reforms to be carried out along with theproject. These are not conditions, in thatfunding will continue even if the covenantsare not adhered to. The problem with cov-enants is the extent of paperwork and bu-reaucratic processes involved in tacklingthem. As a result, large amounts of time andenergy are spent simply understanding theagreements in question. This contributes todelays in project implementation, and oftenbefore the project is completed, the repay-ment of the loan has commenced.

Whilst these broad objectives are often im-portant and required, it could be argued thatthe state is in the best position to decidewhat is required for its own people in thelong-run. A government has the democrati-cally elected mandate to look after the con-cerns of the population and, therefore, thedevelopment agencies do not always need

Lanka programme. The key element in thisproject design was the incorporation of amulti-stakeholder approach (including theInformation and Communications Technol-ogy Agency team, representatives of thedifferent sectors and stakeholders appointedto focus groups set up to guide the prepara-tion of the programmes and major projects,and the WB) to ensure broad ownership andsustainability. The problem with involvingmultiple stakeholders is the difficulty in reach-ing a compromise. These could result infurther unwanted delays in project implemen-tation. However, a smoothly functioningstakeholder forum, with an appropriatenumber of experts will certainly improve thequality of projects implemented using donorfunding.

10.3.2 Impact on Domestic Capacity

The need for improvement in capacity of

3 Safeguards usually refer to environmental safeguards and resettlement and compensation of individuals disrupted by the project.


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to ensure safeguards for a population overwhich they have no mandate. A governmentis accountable to the people if their conductin development projects incurs any damage;however, the development agencies are notaccountable to anyone for the delays andcosts inherent in the implementation of safe-guards. Since a government is obtaining arepayable loan, it should have the freedomto decide how best to allocate expenditure,taking into account the short-term and long-term costs and benefits to the people con-cerned. Some of the suggested safeguards maynot be in the long term interest of develop-ing countries which have different preferencesets compared to developed nations. Unfor-tunately, governments may be rushed intoagreeing to loan agreements given urgenciesof projects, without fully taking into accountthe implications of safeguards and covenants.

10.3.3 The Paris Declaration

The Paris Declaration is an internationalagreement signed in March 2005 betweenrepresentatives of recipient governments anddonors, detailing commitments to improveaid management with a set of targets andactions. This agreement addresses most ofSri Lanka's concerns with regard to aid rela-tionships including pledges by donors toalign aid with country development plans,increased accountability (donors and recipi-ents) to citizens and the need for increasedauthority for donors’ field staff (as opposedto boardrooms in Washington or Manila).

To quote a few examples from the Paris Dec-laration, "Donors agree to;

• Base their overall support - country strat-egies, policy dialogues and developmentco-operation programmes - on partners'national development strategies.

• Avoid activities that undermine nationalinstitution building, such as bypassing na-tional budget processes or setting highsalaries for local staff.

• Strengthen capacity by avoiding parallelimplementation structures - avoid, to themaximum extent possible, creating dedi-cated structures for day-to-day manage-ment and implementation of aid-financedprojects and programmes."

Unfortunately, there is very limited usage ofthe Paris Declaration as a negotiating toolby the government in aid negotiations. It isimportant that officers involved in aid nego-tiations, particularly at the External ResourcesDepartment (ERD) and key line ministries,have increased awareness of the Paris Decla-ration and its efficacy in strengthening thenegotiating position of the aid recipient.Whilst many of the Paris Declaration com-mitments have been implemented unilater-ally by the major donors in Sri Lanka, thereremain concerns about harmonization of aid,duplication and inefficient use of funds withregard to the smaller donors. Many of thebilateral aid partners channel aid throughinternational and local NGOs, and whilstthere is a system by which they report theseactivities to the government, it is often thecase that reporting is incomplete or delayed,undermining attempts of aid coordination.According to the Paris Declaration, the do-nors in question would need to ensure thatall steps are taken to support the ERD in"eliminating duplication of efforts andrationalising donor activities…"

Alignment of donor activities to nationaldevelopment strategies is emphasized in theliterature and is reflected in the Paris Decla-ration as well. However, in Sri Lanka therehave been three separate development frame-works in the last four years (Regaining SriLanka, Rata Perata and MahindaChinthanaya). It is not plausible to expectdonor alignment when there is a change inthe national development plan with eachchange in government. In this context, it isimportant that country development plansattempt to capture a greater degree of


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political consensus and reach a compromisethat will result in general continuation ofthe programme despite changes in govern-ment. The present development plan wasframed primarily by the Department of Na-tional Planning with inputs from relevant lineministries. Enhancing greater stakeholder in-puts from academia, civil society and politi-cal parties may be one means by which na-tional ownership can be better reflected. Itis encouraging to note that the present draftof the ‘Mahinda Chinthanaya’ is at presentundergoing revision along these lines. Thedevelopment framework can provide theclearest possible indications to donors ofwhere they can make a contribution to thecountry's development.

10.3.4 Transparency

The need for improved transparency at alllevels of donor activity is a theme that recursfrequently in the aid literature, and it is nodifferent in Sri Lanka. The greatest need fortransparency is in its role in reducing trans-action costs and wastage in aid relationships.A concern with major donors, INGOs, andthe UN system is the bureaucracy that char-acterizes their activities. "Phantom Aid" isdefined by Action Aid as "aid that nevermaterializes to poor countries but is insteaddiverted for other purposes within the aidsystem" - i.e., tied to goods from donor coun-tries, over-priced technical assistance, admin-istration costs and transaction costs.

In Sri Lanka, the administration costs makeup the greatest segment of "Phantom Aid".Large salaries are paid to international con-sultants who do not necessarily add anequivalent amount of value to the develop-ment process. Costly per diems, vehicles,excess staff and projects with weak cost-ben-efit ratios remain prevalent in the aid bu-reaucracy in the country. Transparency is thekey here. Institutions need to be audited;projects should clearly specify the details ofoperational costs incurred, salaries paid to

consultants need to be publicized and justi-fication should be provided for the need tohire foreign consultants. Transparency is im-portant on the part of the government as wellas donors. This is particularly true of bilat-eral aid projects where there are inherentlyless transparent bidding practices. These needto be publicized so as to minimize loss ofpublic funds through wastage or corruption.Systems such as PETS (Public ExpenditureTracking Systems) have been used in SriLanka; however, it would be advisable tohave this kind of information for publicknowledge rather than just information be-tween donors and the implementing agency.

10.3.5 Decentralization of AidManagement

A major debate in aid reform is on the ne-cessity of change in governance structures ofthe major multilateral donors such as theBretton Woods Institutions and the regionaldevelopment banks. Focusing too much onleadership of the relevant institutions masksa more pertinent concern. Aid must be pro-vided based on a country's specific require-ments and not determined at the governingboard room in Washington or Manila. There-fore, the weight of decision making shouldshift towards country offices, and it is in theseoffices that increased recipient voice isneeded, particularly in leadership. Whilstlocal staff is recruited into the local units ofthe donors, the major decision making posi-tions are occupied by foreign nationals. Evenlocal staff who are hired are often entrenchedin donor systems and toe the line of donorpolicy. As a result, locally generated knowl-edge and debate is often excluded from de-cision making processes within donors evenat the country level. To include a greater de-gree of local debate and input into the de-sign of country assistance strategies, theircreation should involve a broader range ofdomestic voices, beyond representatives ofthe government and locals in the employ ofdonors.


123

Along with decentralization of decision mak-ing on the part of donors, it is important thatthe government too considers the possibilityof some degree of decentralization in aidmanagement. For instance, donor coordina-tion at the provincial level would in an idealworld be handled by provincial governments.Whilst the major projects such as highways,power plants and public infrastructureprojects should be handled at the centre, thesmaller micro level assistance provided byINGOs and smaller bilateral donors couldin theory be better handled by provincialgovernments. Provincial governments arebetter placed to understand the needs of thecommunity and should be better able tohandle donor coordination within a smallergeographic area. Furthermore, it would pro-vide a closer linkage between donor, govern-ment and recipient, allowing for greater feed-back from recipients of aid. As it stands, ca-pacity may be a problem in implementationof such a decentralization of aid manage-ment; however, it would be a worthwhileendeavour to work towards.

10.4 ConclusionsThe priorities for reform on the part of do-nors would be to reconsider the usage of aidas a political lever in fulfilling foreign policyagendas; these are ineffective at best and det-rimental to the poor in reality. Donors needto streamline project management practicesso as to avoid extensive micromanagementwhich further stretches already constrained

domestic capacity. The usage of safeguardsand covenants needs to be designed so as toavoid putting pressure on governments to ac-cept agreements that are not priorities in de-velopment. Furthermore, the bureaucratic pro-cesses inherent in these agreements must bestreamlined as envisaged in the Paris Decla-ration.

Donors channelling funds through NGOsshould ensure that these implementing bod-ies provide timely and accurate reporting ofproposed activities to the government so asto prevent duplication and facilitate harmo-nization. Increased transparency in opera-tional processes and incorporating legitimatelocal voices into the design of country assis-tance strategies and project planning are veryimportant as well.

The government's major priority is to ensuresensitization of aid negotiators to the ParisDeclaration and to fulfil its potential as akey negotiating tool. In order to improve ne-gotiating strength it is important to make useof available local capacity in the form of ex-perts in the relevant field who work outsidethe government. The government has a rolein ensuring increased transparency for pub-lic knowledge and debate of foreign fundedprojects and their implementation. Finally,steps should be taken to decentralize themanagement and coordination of some aidto the sub-national government.


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11. Natural Disasters and Socio-Economic Security

11.1 Introduction

Sri Lanka has experienced regular incidence

of natural disasters such as droughts, floods

and earth slips during the recent past. The

December 2004 tsunami devastated coastal

areas claiming nearly 40,000 lives and de-

stroyed economic assets worth billions of

rupees. Among the major impacts of natural

disasters on the Sri Lankan economy are de-

celerations to the rate of economic growth,

negative impacts on livelihoods and com-

munities, and destruction of assets and in-

frastructure. The poor, who by definition have

less assets and limited opportunities to cope

with risks, inevitably are more vulnerable to

natural disasters. Particularly, informal sec-

tor workers such as farmers, fishermen, un-

skilled manual workers and low paid self

employees are more susceptible to such ca-

tastrophes due to the insecure nature of their

livelihoods and employments.

As revealed by recent scientific reports on

climate change, the impact of natural disas-

ters on the economy and livelihoods of the

poor could increase at an alarming rate in

the future. It seems that the word 'natural' is

misleading to explain droughts, floods and

landslides since recent increase in such di-

sasters are now being recognized by scien-

tists as outcomes of unsustainable human

activities, such as large scale emissions of

green house gases (GHG), deforestation, un-

planned land use patterns, etc. Sri Lanka as a

tropical island, is more vulnerable to climate

change impacts such as sea level rise, pro-

longed dry periods, changes in rainfall pat-

tern, alterations in bio-diversity distributions,

and increase in extreme weather events such

as tropical cyclones. A rise in sea levels may

pose adverse impacts on communities living

along the coast. In practical terms, predicted

impacts are likely to boost the incidence of

'natural' hazards overall by an alarming pro-

portion. Meeting such a threatening increase

in hazards could be costly for developing

countries like Sri Lanka. Therefore, essential

steps need to be taken to adapt to the

challenge of global climate change before it

becomes too late. The following discussion

examines issues of socio-economic security

in Sri Lanka in the context of natural

disasters.

11.2 Reducing Physical Vulnerabilitythrough Disaster ManagementSri Lanka has seen an increase in the frequency

of natural disasters in recent years, with sig-

nificant implication given the numbers of

households that tend to be affected. Owing

to the substantial losses to human lives as

well as to the economy, it is necessary to

take appropriate measures to minimize the

effects of natural disasters.

Broadly, measures to minimize effects of

natural disasters take two forms: (i) measures

taken to reduce the physical vulnerability to

disasters; and (ii) measures to provide socio-

economic protection for vulnerable groups

to cope with risks associated with natural

disasters (Figure 11.1). The latter can be con-

sidered also as part of broader poverty alle-

viation strategies adopted to reduce impov-

erishment resulting from the negative shocks

of such disasters.

Reducing physical vulnerability has a major

role to play in minimizing losses caused by

natural disasters. Such initiatives consist of

preventive measures, taking appropriate miti-

Natural Disasters and Socio-Economic Security

125

gation measures and ensuring that people are

prepared for disasters. In the Sri Lankan con-

text, disaster management gained much pub-

lic attention only after the 2004 tsunami.

However, it is important to pay attention to

other disasters too, which are more frequent

in occurrence. The Road Map for DisasterRisk Management in Sri Lanka prepared by

the Disaster Management Centre (DMC)

highlights the need for a disaster policy, in-

stitutional development, risk assessment,

planning, disaster mitigation, community

involvement, training and education and

public awareness programmes.

Currently, a number of government organi-

zations are working on disaster management

activities of the country. Duplication of roles

and responsibilities of such agencies can be

observed as a major drawback. The major

official responsibility for disaster manage-

ment as specified by the Disaster Manage-

ment Act, No. 13 of 2005 lies with the Di-

saster Management Centre (DMC) of the

Ministry of Resettlement and Disaster Relief

Figure 11.1Disaster Management Strategies

Services. The National Disaster Management

Council, chaired by the President serves as

the umbrella organization responsible for

providing substantive direction to implement

disaster management activities in the coun-

try. However, agencies such as the Natural

Disaster Management Centre (NDMC), Re-

habilitation and Development Agency

(RADA) and Department of Social Services

also play overlapping roles. In addition, or-

ganizations such as the National Building

Research Organization (NBRO), Land Rec-

lamation and Development Corporation

(LRDC) and Meteorological Department have

specific technical roles to play in research,

planning, infrastructure development and

maintenance which are of great importance

in proper management of natural disasters.

Not only the central government but the lo-

cal authorities also have to play a vital role

in disaster incidents, since local governments

are the most knowledgeable of the strengths

and capacities of communities in coping with

disaster risks as well as their needs after a

Disaster management strategies

Strategies to reduce physical vulnerability

Provision of socio-economic security

Government interventions

Market-based interventions

Civil society interventions


126

disaster. Lack of coordination between cen-

tral and local governments still remains as a

barrier for proper implementation of disaster

management activities. Despite the fact that

local governments have a fundamental role

to play in disaster situations, their capacities

and skills in doing so, still tends to subsist

below the required levels. Efficient manage-

ment of disasters essentially implies strong

coordination among agencies not only within

the government, but also amongst private,

Box 11.1Rain Related Congestions/Disasters

The Colombo city experienced torrential rains on 3 May 2007, creating flooded conditions in

many urban localities. The situation caused enormous difficulties to the public and the business

community in the city. The flooded roads and streets in Colombo restricted the mobility of

vehicles and people, resulting in traffic congestion that undoubtedly led to significant

productivity losses. The incident was not restricted to Colombo alone. The situation resulted

in a total of 17 fatalities with more than 40,000 families affected in the Western Province and

Galle district.

This was not the first incidence of this kind that the Colombo city has experienced. In 1992,

the city was affected by floods with more or less the same level of intensity. In addition, the city

experiences near flood situations during heavy occasional rains from time to time. Repeated

occurrence of such kind in the capital of the country indicates a major failure in preparedness

to face the challenge of natural hazards.

The reasons for such disasters can be accrued to multiple factors. In the first instance, reduced

detention capacity of flood water in the adjoining marshy lands due to unplanned developments

has led to a significant increase in the volume of rain water accumulating on the roads. Poor

implementation of waste disposal activities by the Colombo Municipal Council (CMC) has

caused blocking of drainage canals during the rainy season. Additionally, poor maintenance,

lack of public awareness and lack of investments on improvement of drainage have caused

these problems to be exacerbated. The fact that expected results have not been generated by

the Greater Colombo Flood Control and Environment project (Phase I & II) should be of great

concern.

The situation calls for urgent action to rehabilitate the road side drainage canal system;

enhancement of flood detention capacity provided by marshy, swampy and low lying lands;

assessment of flood retention capacities in lands released under conditional development

approvals; and implementation of cost-effective measures to ensure quick drainage of rain

water out of the city. Additionally, the CMC has to carry out its roles, particularly in speedy and

proper disposal of waste from the city, preventing the blocking of the drainage system to avoid

this kind of consequences in the future.

non-governmental, and community actors as

well. However, the current level of coordi-

nation among even government agencies

seems very low and this invariably leads to

various inefficiencies. It is vital to be alert

on emerging catastrophes that may result

through so called inefficiencies in respon-

sible agencies. The experience of recent floods

in the Colombo city provides some evidence

of the absence of an extensive disaster miti-

gation network in place (see Box 11.1).


127

The necessity of having an efficient early

warning system has increasingly been high-

lighted. Currently, Sri Lanka possesses a ba-

sic early warning system in place, but it needs

to be further improved in order to effectively

disseminate warnings of an imminent disas-

ter. At present, the system is capable of dis-

seminating signals up to district level, but

communication to subsequent levels (DS,

GN) have still not been well developed. This

should be treated as a priority in the country's

ongoing disaster management activities.

In terms of disaster preparedness, progress

remains limited. For example, a survey car-

ried out by the IPS in July 2006 of 620 house-

holds affected by the December 2004 tsu-

nami indicated that only 14 per cent of the

households have a good knowledge in re-

sponding to a future tsunami.1 According to

the survey results, the level of disaster pre-

paredness is still is not substantial; as a per-

centages of households who have identified

safe places, practised tsunami drills and pur-

chased insurance are 51, 6 and 4 per cent,

respectively.

11.3 Provision of Socio-EconomicSecurity for Vulnerable GroupsSocio-economic security can be delivered in

many ways to reduce the impact of external

shocks. Such measures may include a range

of activities starting from providing immedi-

ate relief to disaster victims in the short-term

to long-term assistance for livelihood recov-

ery. The key actors include the government,

private sector, non-governmental organiza-

tions (NGOs) and community-based organi-

zations (CBOs). Informal sources of security

provided by communities and individuals

also play an important role. The socio-eco-

nomic measures in managing disasters nor-

mally take three forms, including preventa-

tive, mitigation and coping strategies. Pre-

ventive and mitigation strategies are taken

before a disaster occurs and they are useful,

respectively, in reducing the risks of disas-

ters and potential impacts of disasters once

they have occurred. The overall objective to

coping strategies is to minimize the prob-

ability of falling into poverty or deepening

existing poverty condition of a particular

household or a community.

11.3.1 Disaster Relief Activities by theState

The government has been the main provider

of socio-economic security such as disaster

relief and social assistance programmes in

reducing the vulnerability from natural di-

sasters. Short term programmes are launched

by the National Disaster Management Cen-

tre (NDMC) to provide immediate relief for

disaster victims throughout the country. The

provisions are available for widespread di-

sasters such as floods, droughts, cyclones,

landslides, inundation by sea as well as for

casual disasters such as damages to crops by

wild elephants, minor damages to property

and fire. In widespread disaster conditions,

affected needy people are provided with

cooked meals or dry rations determined on

the basis of family size. Other than urgent

measures such as temporary accommodation

and meals for displaced victims, relief is usu-

ally provided on a selective basis determined

on an eligibility criterion based on income.

Among the expenses covered under such re-

lief are funeral expenses, medical treatment,

compensation for damaged houses, recovery

payments for small scale self-employment

enterprises, compensation for crop damages

and provision of kitchen utensils, etc. The

NDMC has been allocated with a signifi-

cant budget for assisting affected households

in different areas of the country during the

recent past. The amounts allocated for floods

1 Based on the households survey conducted by IPS in tsunami affected Ampara, Batticaloa, Galle, Hambantota, Matara and Trincomaleedistricts (see www.ips.lk for details).


128

in 2003 and drought in 2004 were Rs. 49

million and Rs. 477 million, respectively.

However, there is a perception among com-

munities that distribution of relief in some

areas is not well-coordinated and targeting

problems exist. In certain occasions needy

people are not given relief, while non-eli-

gible persons are benefited.

11.3.2 Civil Society and CommunityInitiatives

Both local and international NGOs and

CBOs provide social and economic assis-

tance to help disaster victims. Some NGOs

have come forward to initiate disaster miti-

gation activities, disaster preparedness

programmes, rehabilitation projects, etc., in

some areas of the country. On certain occa-

sions NGOs have provided microfinance for

the poor to assist in the recovery process of

disaster victims. In addition, communities

and households themselves act as effective

socio-economic security providers in disas-

ter situations to meet immediate require-

ments of the affected families. Therefore, a

high degree of social cohesion can be con-

sidered as a strength in fighting against di-

sasters. Sri Lankan social cohesiveness in

helping disaster victims was commended by

the United Nations Tsunami Recovery En-

voy where it was noted that Sri Lanka's tsu-

nami victims were able to recover faster than

those who were affected by the hurricane

'Katrina' in the US due to extensive informal

security mechanism of that nature.

Both civil society organizations and commu-

nity initiatives have to play an important role

in providing social security for disaster vic-

tims. Their strength lies in the ability to reach

and address issues that are difficult for the

government or other formal organizations.

Most importantly, the community efforts

might be helpful in assisting the victims to

at least cover their basic needs, until formal

institutions come forward to provide support.

Such CBOs are knowledgeable about vulner-

able groups and their locations, and are bet-

ter placed to help victims than those from

outside institutions. Thus, enhancing the ef-

fectiveness of such interventions has to be

prioritized. It has been identified that the

effectiveness of civil and community initia-

tives can also be improved by increasing the

coordination with other parties working in

such activities (i.e., the government and the

private sector). For instance, in the tsunami

rehabilitation effort, it has been reported that

communities in certain areas have benefited

from relief and economic support (e.g., boats

for fishermen) from a number of NGOs while

in other areas people have not received any

kind of support. The situation is more or less

the same in terms of disaster preparedness

initiatives. For instance, tsunami mock drills

have been conducted by several agencies in

the same area, whilst some other areas have

not received any kind of training to save them-

selves from future disasters. Further, there is

a great potential for making use of such so-

cial networks to reduce the physical vulner-

ability to disasters by preparing households

for disasters, increasing public awareness, and

implementing early warning systems in an

effective manner.

11.4 Market-based Interventions forSocial SecurityEvidence suggests that people tend to obtain

micro credit from informal lenders to recover

after disasters, rather than going to formal

sources. The inability of formal lenders to

provide assistance has been one of the major

drawbacks preventing market-based instru-

ments being effectively utilized in social se-

curity measures in developing countries. This

is mainly because the present system has not

recognized the actual needs of the vulner-

able groups, and more specifically, such

measures are not demand-driven. Further,

formal lenders face high transaction costs in

assessing credit worthiness compared to in-

formal lenders, and taking loans from the

formal sector can involve strict procedures


129

that is time consuming. Therefore, quite

often, the state has had to intervene in

providing such assistance. However, recent

improvements in micro credit and social

insurance strategies provide some hope in

this connection.

Insurance is the foremost market based in-

strument for the management of risks. It can

be used to provide economic security for the

vulnerable groups against external shocks

including natural disasters. However, disas-

ter insurance is recognized as being distinct

from other types of disasters owing to sev-

eral factors. Disasters could affect the risk

pool at the same time and can cause mul-

tiple losses, and it is not easy to estimate the

disaster risks. Thus, problems of moral haz-

ard and self selection are often associated

with disaster insurance. In Sri Lanka, both

the government and private sector play the

role of insurance providers. Crop and live-

stock insurance, insurance for wild elephant

attacks and old age insurance for informal

sector workers provide some examples for

this.

11.4.1 Crop Insurance Schemes

The Agriculture and Agrarian Insurance Board

(AAIB) was the first institution to initiate a

programme to provide insurance against crop

damages in Sri Lanka. Separate policies have

been introduced to provide coverage for

paddy, chilli, sugar cane, big onion, tobacco,

betel, fruits, cashew, coconut, potatoes, or-

namental plants, etc. Protection is provided

against losses caused by drought, shortage of

water, excess water, floods, pest attacks, dis-

ease outbreaks, and wild animal attacks.

Coverage is based on the type of the crop,

mode of irrigation (rain-fed, large irrigation

schemes, small irrigation schemes) and the

degree of risk to a particular natural disaster.

The insured has to pay a certain percentage

as the premium to the Board, per season and

the percentage is dependent on the magni-

tude of the risk concerned. Current rates are

5, 6 and 8 per cent for low risk, medium risk

and high risk areas, respectively. Schemes are

driven in association with the agricultural

credit obtained by farmers from various state

and private banks.

Initially, the AAIB was the only provider of

crop insurance. Later on, the private sector

also entered the picture by introducing a

similar kind of insurance programme, where

having the crops insured is taken as manda-

tory to apply for a loan. So far, only one

company has entered the market. In the case

of private schemes, no groundwork is being

done to encourage the farmers to enrol in

the scheme.

Despite the fact that the AAIB promoted the

scheme through field work, so far both the

government and private sector provides cov-

erage for only around 5 per cent of the total

paddy area cultivated annually on average.

Low enrolment ratio can be a result of a num-

ber of reasons such as poor awareness, as

well as inability and reluctance of farmers to

pay premiums, etc. Due to the difficulties

resulting from the low rate of enrolment, the

AAIB does not offer insurance for certain

crops cultivated under rain-fed systems and

for those which are highly susceptible to pest

and disease attacks. To overcome this situa-

tion AAIB and private sector actors have to

adopt innovative methods. Successful and

innovative market based approaches have

been introduced in other developing coun-

tries (e.g., SEWA in India, Grameen in

Bangladesh) in a number of situations. Thus,

priority should be given to reform the present

schemes, moving out from traditional lines

to adopt effective and client-friendly ap-

proaches which can be implemented with

community support.

11.4.2 Insurance for Wild ElephantAttacks

Very recently, Sri Lanka introduced an insur-

ance policy to provide coverage against losses


130

caused by the 'human-elephant conflict',

which has been a serious problem in certain

parts of the country. Offered by a private in-

surance company, the policy aims at help-

ing communities that are at risk from wild

elephant attacks, as well as conserving el-

ephants and safeguarding their natural habi-

tats. The scheme provides benefits in the case

of death or permanent disablement of the

insured, death or permanent disablement of

the spouse, damages to crops insured and

damages to insured homes. Twenty per cent

of profits of the scheme are intended for el-

ephant conservation activities.

11.4.3 Old-Age Insurance Schemes forInformal Sector Workers

Contributory old-age insurance schemes for

the informal sector workers such as farmers,

fishermen and self-employed workers have

also been introduced in Sri Lanka to provide

economic security in their old age. This can

be considered as another type of social pro-

tection measure designed to help vulnerable

sections of the society against livelihood risks.

The schemes include death gratuities for the

insured, disablement benefits and widow/

widower pension schemes. In 2002, an esti-

mated 39 per cent of agriculture operators

reported in the Census of Agriculture were

covered by the scheme. Similarly, according

to Ministry of Fisheries estimates, 30 per cent

of total fishermen were said to be covered as

well. However, the level of outreach of such

schemes is constrained by unavailability of

regular income to pay monthly contributions

to the schemes and lack of knowledge among

the target group about their benefits.

Besides, financial viability has been an issue

for the scheme due to the high rate of de-

fault.

11.5 Conclusion and Policy Suggestions

Gathering momentum from recent develop-

ments in the international arena, the natural

disaster management system in Sri Lanka is

struggling to evolve gradually from its former

role of a relief distribution mechanism to a

scientific hazard management system. De-

spite recent improvements, the system is still

Figure 11.2Percentage Area of Paddy Extent Covered by Crop Insurance Schemes

Source: The AAIB and private sector.

3.12.8

1.9

1.01 .3

1.9 2.11.8

0.30.6

1.7

1.81 .4

4.0

2.5

2.0

0

1

2

3

4

5

6

7

1998 1 999 2000 200 1 200 2 20 03 2004 2 005

Year

% E

xten

t

P rivat e sect or

AAIB

% E

xten

t

Year


131

largely biased towards distribution of relief

for victims rather than taking appropriate

measures to minimize damage and vulner-

ability through measures for prevention, miti-

gation and planning. The recent instance of

the tsunami has brought the system under

close public attention. Developments on glo-

bal climate change has necessitated that coun-

tries be on alert on all types of natural haz-

ards, assigning a significant role towards di-

saster management policy in the future.

In this backdrop, there are a few mandatory

steps that are essential to transform the sys-

tem into a more effective one. Foremost

among them is strengthening the coordina-

tion between organizations that are involved

in disaster management activities in the coun-

try. Even the coordination that exists between

different government organizations can be

considered as minimal, whereas effective di-

saster management demands coordination

among all stakeholders, including the gov-

ernment, private sector and civil society or-

ganizations. Thus, establishing a proper

mechanism for efficient coordination among

disaster management organizations is an es-

sential pre-requisite to strengthen the system.

Secondly, more emphasis should be directed

at scientific aspects of disaster management

that deals with reducing the physical vulner-

ability to disasters rather than distribution of

relief. Particularly, research and technical

development and planning aspects should be

given high priority due to the complex na-

ture of disaster issues that can be expected

in the future. For instance, adaptation to

pending threats of climate change could cre-

ate difficulties unless properly planned. Given

the scale and nature of pending hazards, un-

planned, reactive approach would be a costly

choice.

Thirdly, although prevention is the cheapest

option for managing disasters, the role of

socio-economic security also cannot be taken

lightly at the time of, and after disaster inci-

dents. Disaster relief, insurance and micro-

credit facilities have a significant role to play

in the recovery of victimized groups in the

short, medium and long-term horizons.

Thus, a need has arisen for strengthening the

present system of socio-economic security

by extending the coverage of present schemes

and programmes, promoting respective

schemes among target groups effectively, and

making the systems financially more viable.

CBOs and self-help groups can play an ac-

tive role in bringing such programmes to the

door-step of vulnerable groups to increase

their involvement.

Finally, increasing the awareness of the pub-

lic regarding all types of disaster manage-

ment measures is necessary to improve the

effectiveness of the system. Currently, the

public is mostly unaware of even the exist-

ing system. Successful disaster management

is essentially an exercise of strong public par-

ticipation. Therefore, an effective programme

should be carried out to inform and train the

public to face disaster situations using all

possible channels. Experiences in disaster

prone countries show that the preparedness

of the public to disasters is more effective in

reducing damage to human lives and prop-

erty than anything else.


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12. Unemployment Insurance

12.1 Introduction

Sri Lanka's severance pay system, based onthe Termination of Employment of WorkmenAct of 1971, has long being criticized for itsindistinctness, cost and lack of uniformity.Although reforms introduced in 2003 (andlater amended in 2005) were aimed at im-proving uniformity of severance pay levels,the costs remained high and terminatingworkers still require the approval of the Com-missioner of Labour. Studies for other coun-tries show that high firing costs reduce em-ployment generation in the formal sector,push workers into the informal sector andreduce the efficient allocation of workersacross the economy. Literature for Sri Lankahas also argued that the present severancepay system is at least partly responsible forthe high share of informal sector employ-ment in the country - estimated at anythingbetween 40-60 per cent of total employment- and the low levels of job creation and jobmobility.

Reforming the present severance pay systemrequires the introduction of an alternativesystem to protect workers against the incomevariability associated with job-loss. Onesuch alternative suggested is the introduc-tion of an unemployment insurance (UI)scheme. At present, according to Interna-tional Labour Organization (ILO) statistics,just over 50 countries have UI schemes withmost being developed countries. Many ofthese countries have adopted a combinationof active and passive policies to provide com-pensation to the unemployed and to helpthem get re-employed. The usual active labourmarket policies include job search assistance,training prorgammes and specific employ-ment programmes targeting the unemployed.

The passive labour market policies includeUI schemes and early retirement plans.

Introducing an unemployment insurancescheme in a developing country setting iscomplicated for several reasons. Most UIschemes are designed for countries with alarge share of their workers in the formal sec-tor. As UI schemes can create adverse em-ployment effects, many countries closelymonitor the behaviour of UI beneficiaries.Such sophisticated UI schemes can be costlyto administer and finance. Nevertheless, sev-eral policy documents in the recent past haverecommended the introduction of a UIscheme in Sri Lanka. The coverage, terms andconditions of eligibility and benefits, financ-ing mechanisms and administration of a UIscheme needs to be designed giving due con-sideration to the specific labour market con-ditions of a country. The following discus-sion attempts to shed light on some issuesconcerning the introduction of an unemploy-ment insurance scheme in Sri Lanka and pro-vides recommendations on addressing theseissues.

12.2 What is UnemploymentInsurance?Unemployment insurance is a type of socialinsurance. It aims to protect workers fromincome loss associated with unemployment.Such schemes allow governments to smoothconsumption through provision of incomeprotection to workers. Although private in-surance schemes can also serve the samepurpose, they may not be as effective giventhat a higher proportion of workers who aremore likely to lose jobs for various reasonsmay enrol in these programmes (i.e., adverse

Unemployment Insurance

133

selection). Rigid dismissal rules and highlevels of severance pay - compensation givento workers during dismissals - can also in asense, protect workers from income loss. Butthese types of regulations protect incomethrough protecting jobs and may be less effi-cient as they are shown to restrict job mo-bility, impede industrial restructuring, andreduce investments.

Despite these positive aspects, UI schemescan adversely affect labour markets by dis-torting individual and firm level decisionmaking. The literature has pointed to severalways in which UI can lead to problems ofmoral hazard. First, workers who receiveunemployment benefits may wait longer tore-enter the labour market, and they may notexert as much effort in looking for a newjob. As a result, unemployment levels mayincrease, which in turn will reduce economicgrowth on one hand, and increase demandfor social benefits on the other. Second,workers may also have higher reservationwages as a result of UI benefits, and mayincrease demand for wages. In fact, cross-country studies for OECD economies indi-cate that the rise in unemployment in Eu-rope from the 1960s to mid 1990s is partlydue to changes in labour market institutions,such as UI schemes.

Given such problems associated with imple-menting UI schemes and the high cost ofproviding UI benefits, the main challengefor many countries has been to design UIschemes that balance the objectives of workerwelfare and economic growth. In an attemptto improve job search during unemploymentbenefit periods, some countries have intro-duced measures to monitor job searchbehaviour and penalize individuals - usuallyby reducing payment amounts or stoppingpayments -- who do not satisfy job searchstandards. In other instances, some countriespay higher unemployment benefits at the startof the unemployment spell, or provide bo-

nuses for individuals who find employmentsooner. Although these types of incentivesand punitive measures have improved jobsearch efforts during unemployment spells,they can be costly to administer and requiressophisticated administrative capacity.

In addition to the general problems discussedabove, there are specific problems relatingto implementing UI schemes in developingcountries. First, UI schemes are designedkeeping formal sector workers in mind. Usu-ally, only workers who have a prior employ-ment history and those who have becomeunemployed due to involuntary reasonsqualify to receive unemployment benefits.Workers are usually given a percentage of thewages they were receiving prior to unemploy-ment. Unlike for formal sector workers,establishing employment behaviour andamounts of wages received will be difficultfor informal sector workers. For this reason,most UI schemes only cover formal sectorworkers. In developing countries where amajority of workers are in the informalsector, UI schemes covering formal sectorworkers will be less effective in smoothingconsumption.

Second, as discussed earlier, due to sub-op-timal behaviour of individuals subjected toUI schemes, effective implementation of UIschemes require close monitoring of indi-vidual behaviour and reliable information onemployment and earning history of individu-als. The management capacity of develop-ing countries may not be equipped to handlesuch demanding administrative functions.Further, having high administrative costscould reduce the amount of benefits avail-able for distribution to the unemployed.

12.3 Why an UnemploymentInsurance Scheme would be Useful forSri LankaThe main argument for introducing an un-employment insurance scheme in Sri Lanka


134

is the high costs and time consuming proce-dures associated with firing workers. TheWorld Bank's 2007 report on DoingBusiness groups Sri Lanka in the ten coun-tries with the highest cost of firing workers.Literature for Sri Lanka as well as other coun-tries shows that rigid labour markets reduceinvestments and impede growth. One propo-sition put forward to improve flexibility ofthe labour market and reduce delays of busi-ness restructuring is the introduction of anunemployment insurance scheme. This couldreduce job protection - which distorts theallocation of workers and reduces the size ofthe formal labour market - while insuringworkers against income loss associated withjob loss. However, as highlighted earlier, thenature of the labour market and the com-plexities and costs associated with adminis-tering, makes the introduction of a UI schemea challenging exercise for countries such asSri Lanka.

12.3.1 Issues Concerning the Introduc-tion of an Unemployment InsuranceScheme in Sri Lanka

The key issues related to the introduction ofan unemployment insurance scheme in SriLanka concern financing, benefits, adminis-tration, and coverage.

The EU countries spend the most amount offunds on unemployment programmes. Onaverage, around 1 per cent and 2 per cent ofGDP is spent by EU countries on active andpassive labour market policies, respectively.An important consideration in the design ofan unemployment insurance scheme is themeans of financing the scheme. Key concernshere are whether it should be financed fromworkers' pay, employers' payroll taxes, orgeneral taxes. Most unemployment assistanceprogrammes for other countries are financedthrough contributions from employees andemployers. Even among developed countries,very few cover the entire cost of unemploy-ment assistance programmes through public

funding - two exceptions to this rule areAustralia and New Zealand. In some coun-tries, the cost of administering the programmeis covered by the government, while in oth-ers the government provides temporary as-sistance or makes deficit payments.

Unemployment insurance extends usually toworkers who have lost formal jobs. Further,the literature suggests that it is the more privi-leged and the non-poor who are able to se-cure jobs in the formal sector. According tothe 2006 4th Quarter Labour Force Surveyconducted by the Department of Census andStatistics (DCS), 61 per cent of workers inthe Sri Lankan labour market are in the infor-mal sector. Given this, it is not welfare im-proving to fund an unemployment insurancescheme in Sri Lanka using public funds. Anyproposed UI scheme should be entirelyfunded through a contributory system.

The level and duration of the unemploymentbenefits has also to be determined. The lit-erature highlights the need to choose thelevel and duration of unemployment ben-efits with care, as long duration paymentsand high levels of benefits can dissuade ben-eficiaries from re-employment. The challengeis to reach a compromise between providingan adequate level of benefits to allow ben-eficiaries to maintain their lifestyles, but tokeep the levels of benefits sufficiently low,so that they have an incentive to find alter-native employment quickly. Usually, unem-ployment benefits are a percentage of theaverage earnings during a specified period.These rarely exceed 75 per cent of earnings.Some countries vary the amount of benefitgiven over time, to induce individuals to seekemployment faster. Others impose waitingperiods before the receipt of unemploymentbenefits to reduce unnecessary movementsinto unemployment and to reduce the ad-ministrative burdens of handling large num-bers of small benefit amounts. The paymentperiods are less than 26 weeks for mostcountries.

Unemployment Insurance

135

The means by which an unemployment in-surance scheme is to be administered in SriLanka also requires some attention. Admin-istering an unemployment insurance schemeinvolves collecting UI contributions, check-ing the eligibility criteria for potential ben-eficiaries, and making payments. The amountof administrative effort needed for an unem-ployment insurance scheme depends on thecomplexity of the scheme. For most coun-tries, the levels of contributions are a simplepercentage of the earnings of the employee,or the pay roll of the employer. As such, theseare easy to administer. However, some coun-tries - such as the United Kingdom - havedifferent contribution levels for different typesof employees. This will require more admin-istrative effort as the UI scheme administra-tor will need to collect information to estab-lish the type of worker.

To qualify for unemployment insurance, mostcountries require that workers are capableand willing to work, and that they registerwith an employment office. These conditionsare relatively easy to establish. However, inaddition to these basic requirements, somecountries also require that beneficiaries showthat they are actively looking for work. Somecountries combine unemployment benefitschemes with retraining programmes to fa-cilitate re-employment. Still other countrieshave complex benefit systems, which pro-vide incentives for workers to find alterna-tive jobs quickly.

Incorporating these sophisticated conditionscould be administratively more difficult, asthis requires tracing beneficiaries over theduration of their unemployment period.Further, when a higher share of the UI con-tributions are spent on administering thescheme, less is available for the beneficia-ries. Given this, for countries such as Sri

Lanka, where monitoring job searchbehaviour and labour market activity wouldbe relatively costly, the different functionsof the UI scheme should be kept simple.Some simple means of calculating and de-livering benefits suggested include the fol-lowing:1

(i) the elimination of personalized moni-toring of job-search behaviour and thelabour market status, which, in turn,enables

(ii) making direct deposits of benefits tothe savings account of the unemployed,as well as

(iii) the simplification of benefit paymentsby using existing institutions andsimple benefit payment rules.

Who should be covered by the UI scheme isanother key issue. In most countries, eligi-bility for unemployment insurance requiresthat an individual has made a specific num-ber of contributions towards the UI schemeor has been in employment covered by theUI scheme for a specific period. Usually,only workers who have become unemployedinvoluntarily are eligible for benefits. Theserequirements imply the need for prior em-ployment under formal employment con-tracts. As such, mainly workers in the for-mal sector are covered by the scheme.

According to DCS Labour Force Survey data,close to 90 per cent of the unemployed inSri Lanka are first time job seekers. As un-employment schemes are intended for thosewho have lost jobs due to economic fluc-tuations, these types of workers will not ben-efit from UI schemes. However, they maymisunderstand the objectives of the unem-ployment insurance scheme, and may de-mand benefits. This could lead to social andpolitical unrest in the country. Thus, signifi-cant attention will need to be paid to intro-

1 Vodopivec, M. (2003), “Introducing Unemployment Benefits to Sri Lanka”, The World Bank, HDNSP.


136

ducing an unemployment insurance schemeto raise public awareness, to avoid such mis-understandings.

12.4 ConclusionsMany research studies in the past several yearshave highlighted the need to relax regulationon retrenching workers in Sri Lanka. Thepresent legislation in Sri Lanka protects work-ers against income variability through em-ployment protection. International evidenceshows that high levels of employment pro-tection limits economic growth by reducingjob creation and job mobility. One solutionto this problem is the introduction of anunemployment insurance scheme which canprotect workers from income loss, while al-lowing job mobility. However, UI schemes

can be costly and difficult to administer andusually only covers workers in the formalsector. They can also have adverse employ-ment effects such as increasing the period ofunemployment and increasing the demandfor a higher wage. An unemployment insur-ance scheme for Sri Lanka needs be take intoconsideration these issues in its design. Thispolicy brief argues that given only formalsector workers - who are mostly non-poor -will primarily benefit from an unemploy-ment insurance scheme for Sri Lanka, itshould be financed through a contributoryscheme by the workers and the employers.Further, the policy brief argues that the un-employment payments should be kept simplein order to keep the costs of administeringthe UI scheme low.

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13. SAARC Development Goals

13.1 Introduction

Accommodating almost one fourth of theworld's population, South Asia is home to47 per cent of the world's poor living on lessthan US$ 1 a day. In absolute terms, SouthAsia has the highest number of poor people- even more than Sub-Saharan Africa - and asa region South Asia is not even on track toachieving any of the human developmentgoals, although of course performance mayvary across countries. It would seem that evenafter more than 50 years of independencefrom colonial rulers there has not been acorresponding freedom and prosperity for thevast majority of the population of the region.Even in terms of political freedom, thereseems to be a gap in more than one SouthAsian country.

This phenomenon has led to considerabledebate over the past few years on what shouldbe done to eliminate poverty and relatedproblems in South Asia. This was reflectedat the 12th SAARC Summit held in Pakistanin 2004, where the Heads of State directedthe Independent South Asian Commissionfor Poverty Alleviation (ISACPA) to set out acomprehensive and realistic blueprint, set-ting out SAARC Development Goals (SDGs)for the following 5 years in the areas of pov-erty alleviation, education, health and envi-ronment. At the 13th SAARC Summit heldin 2005, the Heads of State decided to de-clare 2006-2015 as the SAARC Decade ofPoverty Alleviation and endorsed the SDGswhich are to be achieved by 2010. With thisdeadline only three years away, it is prudent

to ask what the progress, if any, has been inachieving these goals.

Although as a region, South Asia is not ontrack to meet many of these goals, Sri Lanka'sprogress has been better than most, but itmay also not be able to meet the goals by2010. It raises the question of whether the2010 deadline is unrealistic. The latest re-port published in March 2007 by the ISACPAon Taking SDGs Forward would seem to in-directly suggest this to be so, whereby al-most all references to the deadline of 2010have been shifted to 2012. What is neededto be determined at this stage is whether theregion is spending time and resources in cre-ating different sets of goals and targets (whichare not achievable and are then subsequentlyrescheduled) rather than actually getting onwith the task at hand - i.e., to achieve theultimate objective of improving the standardof living in the South Asia region by target-ing the key areas of poverty, education, healthand environment.

13.2 Description of the SDGsIn order to assess the suitability/necessity forsetting SDGs, a closer examination of thegoals and how they are measured is required.The SDG report on An Engagement with Hopefinalized in 2004 identified a set of 22 goalsof which 8 are related to livelihood, 4 tohealth, 4 to education and 6 to the environ-ment. The report published in March 2007recommends the adoption of 67 indicatorsto be used in monitoring these goals.1

1 There was also an additional 23rd SDG suggested by the Sri Lankan implementing authority on environmental disaster management aimedat reducing the impact of natural disasters, as well as industrial and other disasters. This could be seen as a response or an attempt tocontextualise the goals following the 2004 tsunami. However, this has not been included.


138

As can be seen when looking at the goals,they are in line with the existing MillenniumDevelopment Goals (MDGs) but are moredetailed and also more ambitious (see Box13.1). This is somewhat surprising consider-ing that many of the countries in the regionare not even on track to meet the MDGs(made up of 8 major goals, 18 targets and48 indicators) leave alone the SDGs. One ofthe objectives of formulating the SDGs wasto contextualize the MDGs to South Asia,and whilst this makes sense it is question-able whether the correct solution is to create

Box 13.1SAARC Development Goals (2005-2010)a

Livelihood SDGsGoal 1 Eradication of hunger and povertyGoal 2 Halve proportion of people in poverty by 2010

(i.e., within the period 2005-2010)Goal 3 Ensure adequate nutrition and dietary improvement for the poorGoal 4 Ensure a robust pro-poor growth processGoal 5 Strengthen connectivity of poorer regions and of poor as social groupsGoal 6 Reduce social and institutional vulnerabilities of the poor, women, and childrenGoal 7 Ensure access to affordable justiceGoal 8 Ensure effective participation of poor and of women in anti-poverty policies and

programmes

Health SDGsGoal 9 Maternal healthGoal 10 Child healthGoal 11 Affordable health-careGoal 12 Improved hygiene and public health

Education SDGsGoal 13 Access to primary/communal school for all children, boys and girlsGoal 14 Completion of primary education cycleGoal 15 Universal functional literacyGoal 16 Quality education at primary, secondary and vocational levels

Environment SDGsGoal 17 Acceptable level of forest coverGoal 18 Acceptable level of water and soil qualityGoal 19 Acceptable level of air qualityGoal 20 Conservation of bio-diversityGoal 21 Wetland conservationGoal 22 Ban on dumping of hazardous waste, including radio-active waste

Notes: a: In the new report Taking SDGs Forward the time frame is 2007-2012.

Source: ISACPA, 2004, An Engagement with Hope-SAARC Development Goals 2005-2010.

additional goals which may not be achiev-able under the current institutional frame-work.

13.3 Current Status of SDGs inSri Lanka

The set of 67 indicators suggested in the 2007report Taking SDGs Forward are easily appli-cable to all the South Asian countries andcan be measured nationally and comparedregionally. However, given the vast quantityof information required for this purpose, thetask of monitoring remains yet to be imple-


139

mented. At present, the monitoring andimplementing authority is the Samurdhi Di-vision which falls under the purview of theMinistry of Nation Building and Estate Infra-structure Development. Even though someof the projects initiated under the MDG Plan(Jana Pubudu, Gam Pubuduwa, Gemidiriya,etc.) are implemented by this division, it isnot directly involved in implementing theMDGs and is solely responsible for the SDGsin Sri Lanka.

As the indicators were only finalized in Janu-ary 2007 progress is yet to be assessed. How-ever, a country report on the SDGs in SriLanka together with a regional poverty pro-file is due to be completed by the end of2007. This will be used in the evaluationprocess. In the case of the MDGs, Sri Lankais either on track or has already achievedsome of the targets in relation to poverty(halving the proportion of people living be-low US$ 1 a day); education (on track toachieve MDG 2 of universal primary educa-tion and some of the targets under MDG 4in relation to gender equality in education)and health (on track to achieve MDG 4 and5 in relation to child mortality and maternalhealth).

As there is an overlap in information in somecases, this can be used to ascertain to someextent how far Sri Lanka is on track to achiev-ing the SDGs. However, this has to be doneat the level of indicators because when look-ing at individual goals a greater number ofindicators and targets have been suggestedfor the SDGs. For example, SDG 9 on mater-nal health is the same as the MDG 5 to im-prove maternal health. However, in the caseof the MDG, the indicators used are mater-nal mortality ratio per 1000 live births andproportion of births attended by skilled healthpersonnel, whereas in the case of the SDGin addition to these two, life expectancy ofwomen as a ratio of life expectancy of menand age specific fertility rate of 15-24 years

of girls has also to be used. Whether the lat-ter is relevant here is questionable as it doesnot refer only to mothers but to the entirefemale population. Sometimes, collecting toomuch information can actually be less help-ful and act to confuse, rather than providesome form of clarity. Though data collec-tion for the calculation of indicators has notcommenced yet, it is expected that theSamurdhi Division will work with its super-vising ministry and other relevant ministriesin order to obtain the information.

The original report on An Engagement withHope talks about costing and how it signalscommitment. All of which is undoubtedlytrue. However, at present there is no sepa-rate budget for the implementation of theSDGs. The Samurdhi Division is expectedto balance these within its original budgetallocation. Perhaps in terms of necessary ac-tions and projects to achieve the goals, thisis sensible. However, for monitoring andevaluation purposes - both of which bear acost - it is necessary to allocate sufficientresources, both financial and otherwise.

13.4 Challenges and Implications forSri LankaThere are a number of key challenges to befaced in implementing the SDG goals. A fewof the main issues that were noted at formu-lation stage and mentioned in the originalSDG document on An Engagement withHope are:

• Incorporation of the SDGs into nationaldevelopment plans/poverty reductionstrategy papers (PRSPs) and prioritizationof the SDGs in light of national concernsand the limited time frame;

• Developing an effective implementationplan;

• Resource allocation, management ofpublic expenditure, resource mobiliza-tion, exploring external resources andbuilding multi-stakeholder partnerships;


140

• Establishment of credible database atboth national and regional levels;

• Tracking progress and putting in place aproper monitoring mechanism; and

• Ensuring regional cooperation whereverfeasible and necessary.

The first of these is a very valid one and alsoone very relevant to Sri Lanka where thereare a number of different goals in existence.National development plans have to someextent incorporated the MDGs. Thegovernment's Ten Year Plan has made a num-ber of references to the MDGs, and in addi-tion, a number of key projects have been ini-tiated under each of the 8 goals. What re-mains now is to combine and synergize theSDGs with the existing plans so that an ac-tion plan can be formulated to achieve anytargets not accounted for in the existing plans.

Any action plan that is developed should beclear and effective. There should be clearaccountability so that progress can be prop-erly tracked and monitored. It is so often thecase that responsibilities are not clearly allo-cated so that there is often confusion andinefficiency which will ultimately result infailure to achieve these goals.

Resources should be allocated in an adequateand sensible manner. As mentioned in theoriginal SDG report "costing signals the seri-ousness of purpose". Therefore, public ex-penditure and national budgets should re-flect a commitment to achieving these goals.Establishment of a credible database at anational and regional level is important formonitoring purposes. There already exists adatabase for monitoring the MDGs at thenational level created by the Department ofCensus and Statistics (though this only moni-tors 23 of the 48 indicators) and another setof progress cards by those implementing thegoals. These only need to be expanded totake into account the 67 indicators under theSDGs. Of course, for an investment in such

a database to serve any purpose it needs tobe complemented by an efficient and effec-tive monitoring mechanism. Given the shorttime frame, progress needs to be monitoredfrequently and implementing officials shouldbe accountable and reasons given in the eventof failure to achieve certain goals.

Ensuring regional cooperation wherever fea-sible and necessary, is seen as a challenge inthe original SDG report of the ISACPA. Intoday's context where at the best of timesthere is a certain level of discord betweencountries over borders, defence policy andtrade matters this could be seen as a chal-lenge of sorts. But such a level of co-opera-tion is generally beneficial to all parties. Thisis even so in terms of resource mobilization.For example, the SAARC Development Fundcreated in 1996 (originally known as theSouth Asia Development Fund) is for projectsin the region which are of significant eco-nomic interest in two or more countries. ThisFund is made up of three windows: social,economic, and infrastructure of which the'social window' is for poverty alleviation andsocial development projects, and thus cov-ers the achievement of the SDGs. This win-dow could be used more effectively for thepurpose of achieving the SDGs if countriesco-operate with each other.

13.5 ConclusionThe key objective when formulating the SDGswas to bring to the forefront the internationalimperative of achieving the MDGs and go-ing beyond and further than these targets. Italso aimed to contextualize these goals forthe South Asian region in order to achievethese goals and allow for a poverty free SouthAsia. However, putting theory into practiceis no easy task - especially when dealing withsuch ambitious and all encompassing goals.At least in the Sri Lankan context where thereis already a monitoring mission for theMDGs, and where there also exists a sepa-rate authority to achieve the national Ten Year


141

Plan, it might appear that the SDGs repre-sent an additional burden. Furthermore, asthere is no separate budget for the SDGswithin the Samurdhi Division, its implemen-tation could compete with other concernsthat do not directly fall under the SDGs. Inthe context of the ongoing conflict in thecountry, the number of displaced people andcommunities, perhaps resources will needto be channelled to otherwise more urgentneeds.

In order to make best use of these goals andminimize duplication, it is important thatthe monitoring be done together with themonitoring of the MDGs. As these two arecomplementary, it is not sensible to treatthem as mutually exclusive and independent.Also, as the Samurdhi Division is respon-sible for implementation it would make sensefor the monitoring to be carried out by a sepa-rate independent authority. The Departmentof Census and Statistics would seem to begeared for this task as they are alreadyinvolved in the monitoring of the MDGs and,therefore, would appear to be the ideal can-didate to play the role of monitoringauthority.

The Sri Lankan strategy for achieving theMDGs is led and administered by the Min-istry of Finance and Planning together withthe support of the United Nations Develop-ment Programme (UNDP) which providesdirect implementation assistance. The Na-tional Council for Economic Development

(NCED) is also involved and brings togetherstakeholders from the private and public sec-tor in order to develop appropriate economicpolicies and plans. Yet for some unspecifiedreason, implementation of the SDGs fallsunder the Ministry of Nation Building andEstate Infrastructure Development. Given thatboth sets of goals are meant to complementeach other, it would be sensible to have themfall under one umbrella. In this manner, ef-forts can be combined and duplication ofefforts avoided. Given that information col-lection for the SDGs is done with the assis-tance of other ministries it would be easierif the tasks for both the MDGs and SDGs areconsolidated to some degree, thereby easingthe burden on those involved in supplyingdata and working for each of these line min-istries. Given the need for prioritization ofthe SDGs, it would seem that it is necessaryto educate the public sector on their exist-ence as many ministry employees are notaware of the SDGs.

Overall, any action plan in this regard hasbeen delayed. With deadlines being pushedto 2012, it brings into question whether theset goals can be achieved. While the SDGsappear additional to the requirements - andcould possibly serve to confuse - in view ofexisting MDGs, as they have already beenset and targets decided upon, it would besensible at this stage to combine MDG andSDG efforts and set a clear agenda of bothsets specifying what is to be achieved andwhen.


142

14. Prospects

Sri Lanka's economic performance in 2006

judged on the basis of expansion in output

has been a significant improvement, both in

terms of historical rates of growth achieved

in the past as well as in comparative terms

in relation to the performance of competitor

countries across the Asian region. Nonethe-

less, the improvement in GDP growth has

been accompanied by a rapid build up of

inflationary pressure that has prompted con-

cerns over the health of the macroeconomic

environment underlying that acceleration. In

effect, the concerns centre on the medium-

term prospects for maintaining the growth

momentum in a sustainable fashion.

Already, there is evidence that economic

growth in 2007 will slow down relative to

that achieved a year earlier. This is to be ex-

pected in the current policy environment

where the main focus will be to cool down

demand; the high interest rate regime can be

expected to choke off some amount of pri-

vate investment as well as having a dampen-

ing effect on consumption expenditure. But

the challenges to economic management are

unlikely to dissipate; if anything, they may

become more demanding.

On the domestic front, the borrowing re-

quirements of the government to bridge the

deficit financing needs are not likely to ease,

and could even increase if there is added pres-

sure on defence spending. While monetary

authorities have adopted a tougher anti-in-

flationary stance since the beginning of 2007

-- with some signs of it already paying off in

terms of lowering inflationary pressures -- the

outlook for inflation to moderate as expected

remains subject to some uncertainty. The

absence of economic reforms to consolidate

public spending that would reinforce mon-

etary policy in controlling inflation, fuels the

disquiet. Even if the annual rate of inflation

declines over the coming months - with some

expected upward spikes as price adjustments

filter through - it is likely to remain fairly

high, possibly in the region of 14-15 per cent

by year end.

On the external front, the challenges for

policy making are also likely to become more

complicated in 2007. The increase in inter-

national oil prices has the hallmarks of a

permanent supply-side shock to the economy.

The long term prognosis is that even if oil

prices were to moderate and stabilize, it

would do so at a much higher price than

was prevalent prior to 2004. Sri Lanka has

experienced a much weaker balance of trade

over the last three years, offset significantly

by the better than anticipated increase in pri-

vate remittance inflows. Even so, the exter-

nal current account deficit deteriorated

sharply in 2006 to nearly 5 per cent of GDP

and appears set to remain fairly high in 2007.

A sharply deteriorating current account defi-

cit - which can be interpreted as the gap be-

tween national savings and income - is one

indication that demand is rapidly outpacing

supply in the economy. In fact, in the case

of Sri Lanka it is perhaps an understatement

of the gap given that worker remittance in-

flows do not truly reflect domestic demand

and supply conditions.

An external current account deficit need not

be a cause for concern if foreign financing -

in the form of foreign aid, loans, grants, pri-

vate capital, etc. - is available to the coun-

try. On the assumption that such financing

is available, the government expects to have

a BOP surplus of US$ 200 million by end

2007 with official reserves of US$ 2.6 bil-

Prospects

143

lion. While the downward pressure on the

exchange rate to depreciate can be expected

to gather some momentum, the risks will be

mitigated to the extent that such external

funding is available for BOP support.

Increasingly, the policy thrust appears to be

to explore options of raising foreign financ-

ing by way of bilateral loans and some amount

of commercial borrowing. Resorting to in-

creased borrowing - whether domestic or for-

eign - in the absence of reforms to boost sup-

ply capacity in the economy will tighten the

constraints and room for manoeuvre in the

event that the economy faces any heightened

shocks from either the domestic or external

fronts.

While GDP growth is expected to slow down

in 2007, it can still be held at a moderate

level in the medium-term under such a policy

scenario, but without the prospects of main-

taining the growth momentum at a sustain-

able pace of 7-8 per cent over time. In addi-

tion, the overall macroeconomic environ-

ment will likely be more volatile, with the

government having to introduce policies of

a 'stop-go' nature to correct for any emerg-

ing imbalances.

As discussed in the report, a more prudent

policy alternative is to implement economic

reforms to boost supply capacity. This will

partly resolve the fundamental difficulty that

Sri Lanka is grappling with at present: how

to raise investment rates. The real problem

is that Sri Lanka's weak fiscal position con-

strains its future growth by leaving no room

for more public spending on infrastructure,

education and health. Regulatory and insti-

tutional reforms are necessary if private in-

vestors are to be induced to come in as part-

ners to raise investment in key areas of infra-

structure, taking some of the burden off gov-

ernment coffers. Economic reforms are

needed to sustain growth at high levels and

to extend its benefits - to make the public

sector better at delivering basic services - to

more people. The poorer regions are grow-

ing poorer. These are, in relative terms, be-

coming poorer, not because their growth is

declining, but because they have failed to

match the acceleration achieved by the richer

regions.

The supply-side constraints of infrastructure,

skilled labour and public services seem daunt-

ing. The prospects for radical change in the

near future look slim, and may not always

be the most appropriate. For the foreseeable

future, governments are likely to be unwieldy

coalitions requiring efforts to build wide-

spread support for reforms amongst key stake-

holders. It may call for a measured, incre-

mental process of reforms, but the urgency

is very real. Economic policy in 2007 is likely

to remain focused on efforts at reconciling

the twin objectives of facilitating economic

growth and containing inflation. Growth as

a result is likely to slow down in 2007 as

already evident from first quarter 2007 GDP

figures. In the absence of economic reforms

on a broad front to tackle supply-side rigidi-

ties, the threat of Sri Lanka's recent economic

expansion remaining merely a cyclical boom

will keep growing.

i

Appendix A: Macroeconomic Indicators (Statistical Base)


Table A1: Socio-Economic Indicators

1. Basic indicators Unit

Area Sq. km. 65,610Mid year population (2006) ('000) 19,886Population growth rate (2006) % 1.1Life expectancy at birth (2004) Years 74.3Infant mortality rate (2004) Per 1000 live births 12.0Gross school enrolment ratio (2003)(a) % 63.0Adult literacy rate (2004) % 90.7Human development index (HDI) (2004) Value 0.75Human poverty index (HPI) (2004) Value 17.7

2. Output, labour force and employment

GNP at current market prices Rs. bn.GDP at current market prices Rs. bn.GDP at current factor cost prices Rs. bn.GDP per capita at current market prices US$Labour force(b) mn.Labour force participation (b) %Unemployment (b) %

3. Real output growth

GDP %Agriculture, forestry, and fishing %Mining and quarrying %Manufacturing %Construction %Services %

4. Prices and wages

CCPI (annual average) % changeSLCPI (annual average) % changeWPI (annual average) % changeImplicit GNP deflator % changeReal wage ratesWorkers in wages boards trades % changeGovernment employees % change

5. Consumption, investment, and savings

Consumption % of GDPGross domestic capital formation % of GDPGross domestic savings % of GDPGross national savings % of GDPForeign savings % of GDP

6. Government finance

Revenue % of GDPExpenditure and net lending % of GDPCurrent expenditure % of GDPCapital expenditure & net lending % of GDPCurrent a/c balance % of GDPBudget deficitPrimary deficit % of GDPOverall deficit (before grants) % of GDPPublic debtExternal % of GDPDomestic % of GDP

Contd..../-

2002 2003 2004 2005 2006(e)

1,560.0 1,742.0 2,016.0 2,354.0 2,790.01,582.0 1,761.0 2,029.0 2,366.0 2,802.01,403.0 1,562.0 1,800.7 2,098.0 2,484.2

870.0 948.0 1,030.0 1,197.0 1,355.07.0 7.6 8.1 8.1 7.1(c)

50.0 48.9 48.6 48.3 51.2(c)9.0 8.4 8.3 7.7 6.5(c)

4.0 6.0 5.4 6.0 7.42.5 1.6 -0.3 1.9 4.7-1.1 5.7 7.9 14.1 8.02.1 4.2 5.1 6.0 5.3-0.8 5.5 6.6 8.9 8.06.1 7.9 7.6 6.2 8.3

9.6 6.3 7.6 11.6 13.710.2 2.6 7.9 10.6 9.510.7 3.1 12.5 11.5 11.78.4 5.0 9.3 9.9 10.3

-2.0 0.7 -4.8 -3.5 -9.96.4 -6.0 2.9 -7.0 -11.8

85.5 84.1 84.1 82.7 82.921.3 22.1 25.0 26.5 28.714.5 15.9 15.9 17.3 17.119.5 21.6 21.6 23.4 23.46.9 6.2 9.1 9.3 11.5

16.5 15.7 15.4 16.1 17.025.4 23.7 23.5 24.7 25.420.9 19.0 19.2 18.7 19.54.6 5.0 4.8 6.3 6.3-4.4 -3.3 -3.9 -2.7 -2.5

-1.6 -0.9 -2.2 -3.6 -3.0-8.9 -8.0 -8.2 -8.7 -8.4

45.6 47.9 49.1 40.4 40.459.8 57.9 56.4 53.5 52.6

ii


Unit

7. External trade

Terms of trade % changeImport price index % changeExport price index % changeImport volume index % changeExport volume index % change

8. External finance

Trade balance % of GDPCurrent account balance % of GDPCapital & financial account balance % of GDP

Foreign direct investment % of GDPForeign portfolio investment % of GDP

Import capacity months of imports (d)External debt % of GDPDebt-service ratio % of exports

9. Exchange rates (year end)

U.S.A. Rs./US$U.K. Rs./UK PoundJapan Rs./YenEuropean Union Rs./EuroIndia Rs./Rs. IndianSDR Rs./SDR

10. Money supply

Narrow money supply (M1) % changeBroad money supply (M2) % changeDomestic credit % changeExternal banking assets % change

11. Interest rates

Treasury bills 3 month % per annum12 month % per annum

Call money rate % per annumAverage prime lending rate % per annumCommercial banks saving % per annumNSB saving % per annumCommercial banks fixed deposits % per annumNSB fixed deposits % per annum

12. Share market indicatorsAnnual turnover Rs. bn.Companies listed No.Market capitalization Rs. bn.Net purchases by non-nationals Rs. mn.Share price indices

CSE share (Index, 1985=100)CSE sensitive (f) (Index, 1985=100)

Notes: (a): Combined first, second, and third level gross enrolment ratio.(b): Excluding Northern and Eastern Provinces.(c): Average of four quarters.(d): Months of same year imports.(e): Provisional.(f): The Milanka Price Index (MPI) was introduced in January 1999, (1998 December=1000) to replace the Sensitive Price Index.

Sources: IPS database.Central Bank of Sri Lanka, Annual Report, various issues.Colombo Stock Exchange, Annual Report, various issues.UNDP, Human Development Report, various issues.Dept. of Census and Statistics, Quarterly Report of the Sri Lanka Labour Force Survey, various issues.

2002 2003 2004 2005 2006(e)

4.6 7.4 -5.2 -4.2 -3.5-8.3 -1.8 9.7 7.8 8.0-4.1 5.5 4.0 3.3 4.2

11.4 11.2 9.0 2.7 7.12.2 3.5 7.8 6.6 4.1

-8.5 -8.4 -11.2 -10.7 -12.5-1.4 -0.4 -3.2 -2.8 -4.92.7 3.9 3.1 2.8 6.71.4 1.1 1.1 1.0 1.70.2 0.01 0.05 0.03 0.194.9 5.8 5.2 5.7 4.7

62.4 64.6 63.7 55.3 52.813.2 11.6 11.6 7.9 12.7

96.73 96.74 104.61 102.1 107.7155.12 172.19 201.37 175.9 211.3

0.82 0.90 1.02 0.9 0.9101.38 121.6 142.32 121.0 107.7

2.02 2.12 2.4 2.3 2.4130.99 143.75 161.6 145.9 162.0

14.0 16.0 16.6 22.4 12.613.4 15.3 19.6 19.1 17.86.7 7.6 25.0 18.7 25.9

49.3 51.0 1.9 20.3 -15.0

9.9 7.3 7.2 10.1 12.89.9 7.2 7.6 10.4 12.9

11.4 8.5 9.0 10.3 11.512.2 9.3 10.2 12.2 15.29.2 7.2 7.7 10.2 10.56.9 5.0 5.0 5.0 5.0

13.2 7.7 9.8 11.5 14.010.9 7.0 8.0 9.0 11.0

30.2 73.6 59.0 114.6 105.1238 244 242 239.0 237.0

162.6 263.0 382.1 584.0 835.02,442.0 209.3 1109 6,143.0 5,377.0

815.1 1,062.1 1506.9 1,922.2 2,722.41,374.1 1,897.8 2073.7 2,451.1 3,711.8

iii


Table A2: Gross Domestic Product (GDP), Mid-year Population (POP), Per Capita GDP(PGDP), and their Growth Rates, 1986-2006

1996 Prices Growth Rates GDP PGDP POP(b) GDP PGDP POP

Rs. mn. Rs.mn. (‘000)

1986 456,316.2 28,312.7 16,117 4.3 2.5 1.8

1987 462,949.6 28,295.9 16,361 1.5 -0.1 1.5

1988 475,441.7 28,665.2 16,586 2.7 1.3 1.41989 486,140.6 28,926.6 16,806 2.3 0.9 1.3

1990 516,152.7 30,335.2 17,015 6.2 4.9 1.2

1991 539,954.8 31,270.9 17,267 4.6 3.1 1.5

1992 563,061.9 32,311.6 17,426 4.3 3.3 0.91993 602,171.5 34,125.1 17,646 6.9 5.6 1.3

1994 636,061.5 35,571.9 17,891 5.6 4.2 1.3

1995 670,742.2 36,984.0 18,136 5.5 4.0 1.4

1996 695,934.0 37,954.5 18,336 3.8 2.6 1.11997 739,763.0 39,875.1 18,552 6.3 5.1 1.2

1998 774,796.0 41,225.7 18,794 4.7 3.4 1.3

1999 808,340.0 42,448.1 19,043 4.3 3.0 1.3

2000 857,035.0 44,270.6 19,359 6.0 4.3 1.72001 843,794.0 45,045.6 18,732 -1.5 1.8 1.4

2002 877,284.0 46,155.8 19,007 4.0 2.5 1.5

2003 930,057.0 48,309.6 19,252 6.0 4.6 1.3

2004 980,720.0 50,391.5 19,462 5.2 4.2 1.12005 1,039,763.0 52,865.7 19,668 5.7 4.7 1.0

2006(a) 1,116,215.0 56,130.7 19,886 6.8 5.8 1.1

Notes: (a): Provisional.(b): From 2001 figures are based on Department of Census and Statistics, Population and Housing.

Source: Central Bank of Sri Lanka, Annual Report, various issues.

iv


Tab

le A

3: S

truct

ure

and G

row

th o

f O

utp

ut,

1997-2

006

Unit

1997

1998

1999

2000

2001

2002

2003

1. S

truct

ure

of o

utp

ut

Agr

icul

ture

, for

estry

, and

fish

ing

% o

f tot

al o

utpu

t21

.721

.321

.320

.420

.120

.519

.0A

gric

ultu

re%

of t

otal

out

put

17.0

16.6

16.6

15.9

16.0

16.6

14.7

Tea

% o

f agr

icul

ture

8.8

8.7

8.5

8.9

9.0

7.2

8.6

Rubb

er%

of a

gric

ultu

re3.

02.

72.

62.

32.

41.

22.

4C

ocon

ut%

of a

gric

ultu

re10

.510

.010

.411

.110

.08.

48.

8Pa

ddy

% o

f agr

icul

ture

17.5

20.4

20.8

20.4

20.1

18.0

21.6

Min

ing

and

quar

ryin

g%

of t

otal

out

put

2.0

1.8

1.8

1.7

-1.8

1.8

1.7

Man

ufac

turin

g%

of t

otal

out

put

16.6

16.9

16.8

17.4

-16.

915

.816

.4Ex

port

proc

essin

g%

of m

anuf

actu

ring

13.6

12.7

12.6

12.0

11.7

11.3

11.1

Fact

ory

indu

stry

% o

f man

ufac

turin

g78

.779

.779

.780

.680

.877

.281

.3Sm

all i

ndus

try%

of m

anuf

actu

ring

7.6

7.6

7.7

7.4

7.5

7.6

7.6

Con

struc

tion

% o

f tot

al o

utpu

t6.

87.

67.

67.

37.

67.

27.

2Se

rvic

es%

of t

otal

out

put

52.8

51.4

52.0

53.3

53.9

54.9

54.7

Unit

1997

1998

1999

2000

2001

2002

2003

2. R

eal o

utp

ut g

row

th

Agr

icul

ture

, for

estry

, and

fish

ing

% g

row

th3.

02.

54.

51.

8-3

.52.

51.

5A

gric

ultu

re%

gro

wth

2.9

1.8

4.4

1.7

-4.3

1.9

3.0

Tea

% g

row

th7.

11.

11.

37.

8-3

.55.

1-2

.2Ru

bber

% g

row

th-5

.4-9

.01.

0-9

.7-1

.55.

01.

7C

ocon

ut%

gro

wth

3.3

-3.2

9.1

8.0

-13.

5-1

3.6

7.1

Padd

y%

gro

wth

11.2

18.3

6.6

-0.3

-5.7

5.1

7.4

Min

ing

and

quar

ryin

g%

gro

wth

3.8

-5.4

4.1

4.8

0.7

-1.1

3.6

Man

ufac

turin

g%

gro

wth

9.1

6.3

4.4

9.2

-4.2

2.1

4.4

Expo

rt pr

oces

sing

% g

row

th3.

5-1

.23.

84.

2-6

.7-0

.92.

2Fa

ctor

y in

dustr

y%

gro

wth

10.3

7.6

4.5

10.4

-3.9

2.5

4.6

Smal

l ind

ustry

% g

row

th7.

06.

54.

85.

5-3

.52.

16.

1C

onstr

uctio

n%

gro

wth

5.4

7.1

4.8

4.8

2.5

-0.8

5.5

Serv

ices

% g

row

th6.

93.

79.

82.

3-0

.56.

17.

7G

DP

% g

row

th3.

86.

34.

36.

0-1

.54.

05.

9

Not

es:

(a):

Pro

visio

nal.

(b):

Ave

rage

ann

ual g

row

th ra

te.

Sour

ce: C

entra

l Ban

k of

Sri

Lank

a, A

nnua

l Rep

ort,

vario

us is

sues

.

1997-2

006(b

)

19.6

15.5 8.0

2.5

9.1

18.4 1.5

13.1

13.4

78.6 7.5

7.4

54.0

1997-2

006(b

)

1.9

2.0

1.9

-0.2 0.3

4.7

4.2

4.7

0.8

5.3

4.3

5.2

5.8

4.9

2004

2005

2006(a

)

17.8

17.2

16.8

14.3

14.3

13.4

8.1

7.1

6.9

2.5

2.6

3.5

7.4

7.8

6.8

17.5

17.4

14.9

1.9

1.9

1.9

15.3

16.3

16.0

15.2

15.2

15.2

77.8

77.2

76.2

6.9

7.6

8.2

7.9

7.5

7.5

55.4

55.7

56.2

2004

2005

2006(a

)

-0.3

1.9

4.7

-0.9

8.6

0.5

1.5

2.4

-2.0

3.1

9.8

4.0

0.1

-2.2

7.1

-17.

819

.62.

17.

414

.18.

04.

96.

05.

31.

32.

71.

15.

75.

75.

50.

08.

95.

16.

28.

98.

07.

06.

28.

35.

26.

07.

4

v


T

able

A4

: V

alu

e A

dd

ed in

In

du

stry

an

d I

nd

ust

rial

Pro

du

ctio

n, 1

99

4-2

00

6

1994

1995

1996

1997

1998

1999

2000

2001

2002

1.

Val

ue

added

, curr

ent p

rice

s (R

s. m

n.)

Food

, bev

erag

es a

nd to

bacc

o24

,373

29,5

0732

,891

35,5

8540

,452

44,5

0349

,031

54,2

8261

,550

Text

ile, w

earin

g ap

pare

l and

leat

her p

rodu

cts

19,9

1624

,895

31,1

4840

,581

47,4

8255

,263

69,4

5171

,263

77,0

28W

ood

and

woo

d pr

oduc

ts (i

nclu

ding

furn

iture

)1,

081

1,17

71,

250

1,25

81,

313

1,39

01,

554

1,63

91,

736

Pape

r and

pap

er p

rodu

cts

2,30

12,

458

2,58

02,

633

2,57

82,

664

2,80

83,

103

3,12

4

Che

mic

als,

petro

leum

, coa

l, ru

bber

and

pla

stic

prod

ucts

5,75

86,

898

8,95

710

,745

14,2

7413

,832

17,7

7119

,245

22,6

53

Non

met

allic

min

eral

pro

duct

s (ex

cept

pet

role

um a

nd c

oal)

9,27

29,

726

10,5

3711

,600

12,4

6313

,817

14,2

4016

,010

17,2

73Ba

sic m

etal

pro

duct

s35

634

745

059

871

077

795

91,

131

1,30

6

Fabr

icat

ed m

etal

pro

duct

s, m

achi

nery

and

tran

spor

t equ

ipm

ent

4,34

44,

547

4,80

95,

924

6,77

97,

367

7,71

48,

731

9,69

8

Man

ufac

ture

d pr

oduc

ts n.

e.s.

1,83

82,

319

2,76

33,

157

3,42

63,

799

3,96

54,

154

4,69

5

Tota

l69

,239

81,3

6895

,385

112,

011

129,

477

143,

412

167,

493

179,

559

199,

063

2.

Com

posi

tion o

f indust

rial

pro

duct

ion, %

Food

, bev

erag

es a

nd to

bacc

o35

.235

.634

.531

.731

.231

.029

.330

.230

.9

Text

ile, w

earin

g ap

pare

l and

leat

her p

rodu

cts

28.8

30.6

32.7

36.2

36.7

38.5

41.5

39.7

38.7

Woo

d an

d w

ood

prod

ucts

(inc

ludi

ng fu

rnitu

re)

1.6

1.4

1.3

1.1

1.0

1.0

1.0

0.9

0.9

Pape

r and

pap

er p

rodu

cts

3.3

3.0

2.7

2.4

2.0

2.0

1.7

1.7

1.6

Che

mic

als,

petro

leum

, coa

l, ru

bber

and

pla

stic

prod

ucts

8.3

8.5

9.4

9.6

11.0

9.6

10.6

10.7

11.4

Non

met

allic

min

eral

pro

duct

s (ex

cept

pet

role

um a

nd c

oal)

13.4

12.0

11.0

10.4

9.6

9.6

8.5

8.9

8.7

Basic

met

al p

rodu

cts

0.5

0.4

0.5

0.5

0.5

0.5

0.6

0.6

0.7

Fabr

icat

ed m

etal

pro

duct

s, m

achi

nery

and

tran

spor

t equ

ipm

ent

6.3

5.6

5.0

5.3

5.2

5.1

4.6

4.9

4.9

Man

ufac

ture

d pr

oduc

ts n.

e.s.

2.7

2.9

2.9

2.8

2.6

2.6

2.4

2.3

2.4

Tota

l10

0.0

100.

010

0.0

100.

010

0.0

100.

010

0.0

100.

010

0.0

Not

es:

(a) P

rovi

siona

l.

Sour

ce:

Cen

tral B

ank

of S

ri La

nka,

Ann

ual R

epor

t, va

rious

issu

es.

2003

2004

2005

69,7

0877

,850

88,3

80

84,6

2397

,216

101,

300

1,92

82,

467

2,79

0

3,33

43,

947

4,53

0

25,0

2832

,131

39,8

00

18,4

7721

,450

25,5

001,

463

1,61

51,

895

11,1

9813

,987

15,8

70

5,25

75,

909

6,70

0

221,

016

256,

572

286,

765

31.5

30.3

30.8

38.3

37.9

35.3

0.9

0.9

0.9

1.5

1.5

1.6

11.3

12.5

13.9

8.3

8.4

8.9

0.7

0.6

0.7

5.1

5.5

5.5

2.4

2.3

2.3

100.

010

0.0

100.

0

2006(a

)

99,9

94

107,

978

3,08

95,

194

48,0

43

31,4

55

2,26

217

,868

7,67

7

323,

560

30.9

33.4 1.0

1.6

14.8 9.7

0.7

5.5

2.4

100.

0

vi


Tab

le A

5: M

ajor

Agr

icult

ura

l Cro

ps,

Pro

duct

ion a

nd P

rice

s, 1

985-2

006

Tea

R

ubber

Coco

nut

Pad

dy

Pro

duct

ion

Pri

cePro

duct

ion

P

rice

Pro

duct

ion

P

rice

(a)

Pro

duct

ion

Pri

ce(b

) M

n. k

g.C

olo

mbo (n

et)

Export

(f.o

.b.)

M

n. k

g.C

olo

mbo (R

SS 1

)Ex

port

(f.o

.b.)

M

n.n

ut

Rs.

/nut

000 M

t R

s./b

ush

el(c

) R

s/kg

. R

s/kg

.

R

s/kg

.

R

s/kg

.

1985

214.

035

.460

.613

7.5

15.9

021

.32,

958

2.6

2,66

1.0

70.0

1986

211.

030

.344

.513

7.8

16.6

023

.83,

039

1.5

2,58

8.0

70.0

1987

213.

038

.153

.012

1.8

19.9

027

.62,

291

2.6

2,12

8.0

70.0

1988

227.

041

.656

.012

2.4

24.4

037

.31,

936

4.0

2,47

7.0

80.0

1989

207.

052

.266

.911

0.7

22.6

036

.22,

484

3.4

2,06

3.0

80.0

1990

233.

065

.791

.811

3.1

22.9

035

.52,

532

3.6

2,53

8.0

110.

019

9124

1.0

57.1

84.1

103.

923

.60

34.6

2,18

44.

82,

389.

013

6.0

1992

179.

060

.582

.010

6.1

29.3

037

.72,

296

6.5

2,34

0.0

136.

019

9323

1.9

68.9

91.2

104.

235

.50

44.3

2,16

46.

32,

570.

015

5.0

1994

242.

265

.191

.310

5.3

50.4

051

.82,

622

5.7

2,68

4.0

155.

019

9524

5.9

72.2

102.

310

5.7

72.0

083

.72,

755

6.1

2,81

0.0

155.

019

9625

8.4

103.

913

9.6

112.

567

.90

79.8

2,56

19.

42,

061.

015

5.0

1997

276.

911

9.4

158.

410

5.8

56.7

075

.42,

631

9.6

2,23

9.0

155.

019

9828

0.1

134.

318

4.9

95.7

49.7

067

.72,

552

8.3

2,69

2.0

155.

019

9928

3.7

115.

316

2.4

96.6

45.3

054

.02,

828

10.0

2,85

7.0

155.

020

0030

5.8

135.

518

4.4

87.6

55.0

066

.93,

096

7.4

2,86

0.0

155.

020

0129

5.1

143.

920

8.9

86.2

55.0

066

.42,

796

7.1

2,69

5.0

-20

0231

0.0

149.

3021

6.30

90.5

68.8

0069

.50

2,39

212

.10

2,85

9.0

-20

0330

3.2

149.

0522

1.01

92.0

102.

5010

5.25

2,56

29.

983,

071.

0-

2004

309.

518

0.74

248.

9294

.712

7.20

128.

512,

591

9.83

2,62

8.0

-20

05(d

)31

7.2

185.

8426

3.31

104.

414

7.41

147.

732,

515

12.4

63,

246.

0-

2006

(e)

310.

819

8.87

279.

9710

9.2

187.

9720

4.70

2,68

414

.39

3,34

2.0

-

Not

es:

(a):

Ave

rage

exp

ort p

rice

of th

e th

ree

maj

or c

ocon

ut p

rodu

cts o

nly.

(b):

Gua

rant

eed

pric

e.(c

): 20

.9 k

g. o

f pad

dy =

1 b

ushe

l of p

addy

.(d

): Rev

ised.

(e):

Prov

ision

al.

Sour

ce:

Cen

tral B

ank

of S

ri La

nka,

Ann

ual R

epor

t, va

rious

issu

es.

vii


Table A6: Labour Force Participation of the Household Population All Island, 1997-2006

Household Labour Labour Labour forcepopulation force force Employed Unemployed(10 yrs. & over) participationNo. mn. No. mn. rate (%) No. mn. % No. mn. %

1997q1 12.9 6.2 48.5 5.6 89.3 0.7 10.7q2 12.9 6.2 48.4 5.6 89.8 0.6 10.2q3 12.9 6.2 48.3 5.6 89.6 0.6 10.4q4 12.9 6.2 48.5 5.6 89.6 0.6 10.3

1998q1 12.9 6.6 51.6 5.9 89.5 0.7 10.5q2 12.9 6.6 51.0 6.0 90.5 0.6 9.5q3 12.9 6.7 51.9 6.1 90.9 0.6 9.1q4 12.9 6.6 51.4 6.0 91.2 0.6 8.8

1999q1 12.9 6.7 52.3 6.2 91.4 0.6 8.6q2 13.1 6.5 49.5 5.9 91.5 0.6 8.5q3 13.2 6.7 50.8 6.1 90.9 0.6 9.1q4 13.5 6.8 50.2 6.1 90.8 0.6 9.2

2000q1 13.5 6.9 50.8 6.3 92.0 0.5 8.0q2 13.5 7.0 52.0 6.5 93.0 0.5 7.0q3 13.5 6.7 49.4 6.2 92.0 0.5 8.0q4 13.6 6.7 49.2 6.2 92.6 0.5 7.4

2001q1 13.7 6.7 49.2 6.2 92.3 0.5 7.7q2 14.0 6.9 49.0 6.3 91.7 0.6 8.3q3 13.9 6.7 48.3 6.2 92.2 0.5 7.8q4 14.1 6.8 48.9 6.2 91.7 0.5 8.3

2002q1 14.1 7.2 51.7 6.7 91.3 0.6 8.7q2 14.2 7.0 49.5 6.3 90.2 0.7 9.8q3 14.2 7.1 49.4 6.4 90.9 0.6 9.1q4 14.3 7.2 50.6 6.7 92.5 0.5 7.5

2003q1 15.6 7.6 49.1 6.9 90.8 0.7 9.2q2 15.6 7.5 48.3 6.9 91.9 0.6 8.0q3 15.7 7.6 48.6 7.0 91.6 0.6 8.4q4 15.8 7.8 49.6 7.2 92.1 0.6 7.9

2004(a)q1 16.3 7.9 49.0 7.3 91.9 0.6 8.1q2 16.5 8.0 48.6 7.3 91.0 0.7 9.0q3 16.7 8.0 47.8 7.3 91.5 0.7 8.5q4 16.7 8.1 47.8 7.4 91.8 0.7 8.2

2005(b) 16.9 8.1 48.3 7.5 92.3 0.6 7.72006

q1 14.8 7.6 51.7 7.1 92.8 0.5 7.2q2 14.8 7.6 51.1 7.1 93.7 0.5 6.3q3 15.0 7.6 50.7 7.1 93.5 0.5 6.5q4 15.0 7.6 51.0 7.1 93.7 0.5 6.3

Notes: (a) Up to 4th quarter 2002, data excludes both Northern and Eastern Provinces. Commencing from 1st quarter 2003, EasternProvince is included and only the Northern Province is excluded from the survey.

(b) Quarterly labour force survey was conducted as a one off survey in August 2005.

Source: Department of Census and Statistics, Quarterly Report of the Sri Lanka Labour Force.

viii


Table A7: Gross Domestic Fixed Capital Formation, 1985-2006 Private(a) Public(b) Private(a) Public(b) Private(a) Public(b) Private(a) Public(b)

(Rs. mn., current market prices) (As % of GDP) (at 1996 prices(c)) (Growth in real terms)

1985 30,690 7,767 18.9 4.8 90,542.8 22,914.5 -6.4 8.8

1986 32,692 9,634 18.2 5.4 91,122.2 26,852.8 0.6 17.2

1987 34,536 11,216 17.6 5.7 89,958.6 29,215.2 -1.3 8.8

1988 37,156 12,805 16.7 5.8 86,801.6 29,914.3 -3.5 2.4

1989 39,943 14,306 15.9 5.7 85,114.8 30,484.7 -1.9 1.9

1990 57,910 12,507 18.0 3.9 102,852.2 22,213.3 20.8 -27.1

1991 68,368 15,838 18.4 4.3 109,412.4 25,346.3 6.4 14.1

1992 86,407 13,632 20.3 3.2 125,717.4 19,833.8 13.0 -27.8

1993 105,305 20,570 21.1 4.1 139,953.2 27,338.1 10.2 27.4

1994 136,649 17,611 23.6 3.0 166,094.3 21,405.8 15.7 -27.7

1995 147,280 23,595 22.1 3.5 165,105.2 26,450.7 -0.6 19.1

1996 160,181 23,328 20.9 3.0 160,181.0 23,328.0 -3.1 -13.4

1997 186,950 29,923 21.0 3.4 172,145.0 27,553.4 6.9 15.3

1998 221,754 33,960 21.9 3.3 188,246.2 28,828.5 9.4 4.6

1999 266,518 35,210 24.1 3.2 216,505.3 28,602.7 15.0 -2.6

2000 311,460 41,132 24.8 3.3 237,212.5 31,326.7 9.6 9.5

2001 267,298 42,346 19.0 3.0 181,058.0 28,683.6 -23.7 -8.4

2002 298,731 31,812 19.1 2.0 188,863.2 19,913.6 4.1 -44.1

2003 345,915 40,706 22.1 2.6 205,901.8 24,229.8 8.3 17.8

2004 461,474 45,201 25.7 2.5 251,347.5 24,619.3 18.2 9.9

2005 527,953 99,246 25.1 4.7 261,621.9 49,180.4 3.9 49.9

2006(d) 695,335 107,335 27.9 4.3 312,369.7 48,371.1 16.2 -1.7

Notes: (a): Private sector and public corporations.(b): Government and public enterprises.(c): Current series deflated by GDP deflator.(d): Provisional.


ix


Tab

le A

8: S

avin

g an

d Inve

stm

ent,

1993-2

006

(As %

of G

DP)

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Gro

ss d

omes

tic c

apita

l for

mat

ion

25.5

27.0

25.7

24.2

24.4

25.1

27.3

28.0

22.0

21.3

Gro

ss d

omes

tic sa

ving

s16

.015

.215

.215

.317

.319

.119

.517

.415

.814

.5

Net

impo

rts o

f goo

ds a

nd n

on-fa

ctor

serv

ices

(b)

9.5

11.8

10.4

8.9

7.1

6.0

7.8

10.6

6.2

6.8

Net

fact

or in

com

e fro

m a

broa

d-1

.2-1

.4-1

.0-1

.5-1

.1-1

.1-1

.6-2

.1-1

.7-1

.6

Net

priv

ate

trans

fers

5.4

5.4

5.2

5.1

5.2

5.4

5.6

5.9

6.2

6.6

Gro

ss n

atio

nal s

avin

gs20

.219

.119

.519

.021

.523

.423

.521

.520

.319

.5

Fore

ign

savi

ngs

5.3

7.9

6.2

5.2

5.2

1.7

3.8

6.5

1.7

1.8

Not

es:

(a):

Prov

ision

al.

(b):

Also

refe

rred

to a

s ext

erna

l inf

low

or t

he re

sour

ces g

ap.

Sour

ces:

IPS

data

base

; Cen

tral B

ank

of S

ri La

nka,

Ann

ual R

epor

t, v

ario

us is

sues

.

2003

2004

2005

22.0

24.9

26.5

15.9

15.9

17.2

6.1

9.0

9.3

-0.9

-1.0

-1.3

6.6

6.7

7.4

21.6

21.6

23.4

0.4

3.3

3.1

2006(a

)

28.7

17.1

11.6

-1.4 7.7

23.4 5.3

x


Tab

le A

9: S

um

mar

y of G

ove

rnm

ent Fi

scal

Oper

atio

ns,

1995-2

006

(As

% o

f GD

P)1995

1996

1997

1998

1999

2000

2001

2002

Reve

nue

20.4

19.0

18.5

17.3

17.7

16.8

16.7

16.5

Gra

nts

1.4

1.0

0.8

0.7

0.6

0.4

0.4

0.4

Expe

nditu

reC

urre

nt e

xpen

ditu

re23

.122

.820

.819

.618

.720

.221

.620

.8C

apita

l & n

et le

ndin

g7.

45.

75.

76.

76.

56.

55.

94.

5C

urre

nt a

ccou

nt b

alan

ce-2

.7-3

.8-2

.2-2

.4-1

.0-3

.4-4

.9-4

.4Pr

imar

y de

ficit

-4.3

-3.1

-1.7

-3.8

-1.9

-4.2

-4.1

-1.6

Ove

rall

defic

it (b

efor

e gr

ants)

-10.

1-9

.4-7

.9-9

.2-7

.5-9

.9-1

0.8

-8.9

Fina

ncin

g bu

dget

def

icit

Fore

ign

finan

cing

4.5

2.3

1.9

1.7

0.7

0.4

1.4

0.6

Net

bor

row

ings

3.2

1.3

1.1

1.0

0.1

01.

00.

1G

rant

s1.

41.

00.

80.

70.

60.

40.

40.

4D

omes

tic fi

nanc

ing

5.1

6.5

3.4

7.1

6.8

9.4

8.8

8.0

Mar

ket b

orro

win

gs5.

05.

14.

57.

16.

89.

28.

78.

0Ba

nk1.

11.

7-0

.21.

92.

54.

53.

5-0

.3N

on-b

ank

3.9

3.4

4.7

5.2

4.4

4.7

5.3

8.3

Oth

er b

orro

win

gs0.

11.

3-1

.1-0

.1-0

.10.

30.

1-0

.1 P

rivat

izat

ion

proc

eeds

(a)

0.4

0.6

2.5

0.4

__

0.6

0.4

Not

es:

(a):

Sinc

e 19

94, p

rivat

izat

ion

proc

eeds

hav

e be

en sh

ifted

from

the

capi

tal e

xpen

ditu

re a

nd n

et le

ndin

g ca

tego

ry to

the

finan

cing

sect

ion.

(b):

Prov

ision

al.

Sour

ce:

Cen

tral B

ank

of S

ri La

nka,

Ann

ual R

epor

t, va

rious

issu

es.

2006(b

)

17.0 1.2

19.5 5.9

-2.5

-3.0

-8.4 2.6

1.5

1.1

5.8

5.8

2.9

3.0 - -

2003

2004

2005

15.7

15.4

16.1

0.5

0.4

1.5

19.0

19.2

18.7

4.7

4.3

6.0

-3.3

-3.9

-2.7

-0.9

-2.2

-3.6

-8.0

-8.2

-8.7

2.9

8.2

3.4

2.4

1.8

2.0

0.5

0.4

1.4

4.5

5.8

5.2

4.5

5.5

5.0

-1.2

2.1

1.1

5.7

3.4

3.9

-0.

20.

20.

60.

1-

xi


T

able

A10: M

oney

Supply

and U

nder

lyin

g Fa

ctors

, 1987-2

006

1995

11.3

34.2 6.7

19.2

66,5

32.0 3.2

223,

798.

328

.835

,214

.025

.118

8,35

2.0

29.3

-61,

794.

032

.6

1996

10.2

33.0 4.0

10.8

61,8

61.0

-7.0

252,

317.

012

.748

,537

.037

.820

3,78

0.0

8.2

-60,

978.

0-1

.3

Unit

1987

1988

1989

1990

1991

1992

1993

1994

1.Fi

nan

cial

dep

thN

arro

w m

oney

supp

lyM

1/G

DP

12.8

14.6

14.0

12.3

12.5

11.8

11.9

12.2

Broa

d m

oney

supp

lyM

2/G

DP

29.7

30.6

30.3

28.1

29.7

30.5

32.1

33.1

2.M

onet

ary

expan

sion/c

ontr

action

Nar

row

mon

ey su

pply

% g

row

th18

.429

.19.

112

.117

.77.

418

.618

.7Br

oad

mon

ey su

pply

% g

row

th14

.716

.512

.518

.522

.117

.423

.419

.73.

Cau

sal f

acto

rs3.

1Ex

tern

al b

anki

ng as

sets

Rs. m

n.9,

291.

27,

058.

54,

732.

03,

419.

012

,258

.020

,940

.048

,119

.064

,467

.0%

gro

wth

1.2

-24.

0-3

3.0

-27.

725

8.5

70.8

129.

834

.03.

2D

omes

tic cr

edit

Rs. m

n.75

,565

.596

,867

.010

2,32

1.2

115,

964.

312

7,75

1.2

144,

003.

015

0,69

6.9

173,

795.

6%

gro

wth

17.9

28.2

5.6

13.3

10.2

12.7

4.6

15.3

3.2.

1 G

over

nmen

tRs

. mn.

27,0

47.9

36,0

64.5

36,1

18.0

35,3

58.0

35,3

92.0

33,0

65.0

26,9

93.0

28,1

48.0

% g

row

th20

.033

.30.

1-2

.10.

1-6

.6-1

8.4

4.3

3.2.

2 Pr

ivat

e se

ctor

Rs. m

n.48

,517

.660

,802

.566

,203

.280

,606

.392

,359

.211

0,93

8.0

123,

703.

914

5,64

7.6

% g

row

th16

.725

.38.

921

.814

.620

.111

.517

.73.

3O

ther

liabi

litie

sRs

. mn.

-26,

521.

9-3

5,97

9.6

-30,

619.

8-2

8,83

8.0

-29,

435.

0-3

5,15

0.0

-38,

679.

0-4

6,59

0.0

% g

row

th18

.335

.7-1

4.9

-5.8

2.1

19.4

10.0

20.5

Con

td…

Unit

1997

1998

1999

2000

2001

2002

1.Fi

nan

cial

dep

th

Nar

row

mon

ey su

pply

M1/

GD

P10

.710

.510

.910

.59.

88.

8Br

oad

mon

ey su

pply

M2/

GD

P35

.934

.636

.036

.036

.032

.22.

Monet

ary

expan

sion/c

ontr

action

Nar

row

mon

ey su

pply

% g

row

th9.

812

.112

.89.

13.

214

.0Br

oad

mon

ey su

pply

% g

row

th13

.89.

713

.313

.011

.413

.23.

Cau

sal f

acto

rs 3

.1Ex

tern

al b

anki

ng as

sets

Rs. m

n.89

,292

.093

,724

.083

,892

.059

,448

.082

,966

.010

1,71

7.0

% g

row

th-4

4.3

5.0

-10.

5-2

9.1

39.6

22.6

3.2

Dom

estic

cred

itRs

. mn.

272,

733.

031

1,62

6.0

374,

120.

046

9,08

4.0

513,

457.

054

8,57

8.0

% g

row

th8.

114

.320

.125

.49.

56.

83.

2.1

Gov

ernm

ent

Rs. m

n.46

,365

.058

,591

.085

,881

.013

4,48

4.0

161,

735.

015

3,17

1.0

% g

row

th-4

.526

.446

.656

.620

.3-5

.33.

2.2

Priv

ate

sect

orRs

. mn.

226,

368.

025

3,03

5.0

288,

239.

033

4,59

9.0

351,

722.

039

5,40

7.0

% g

row

th11

.113

.916

.15.

112

.416

.23.

3O

ther

liabi

litie

sRs

. mn.

-73,

768.

0-8

9,17

6.0

-99,

936.

0-1

23,8

63.0

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,696

.0-1

39,8

99.0

% g

row

th21

.020

.912

.123

.917

.64.

0

Not

es:

Dat

a ha

ve b

een

recl

assif

ied

starti

ng fr

om 1

990.

For

mor

e in

form

atio

n, se

e C

entra

l Ban

k of

Sri

Lank

a, 1

995,

Ann

ual R

epor

t.

Sour

ce:

Cen

tral B

ank

of S

ri La

nka,

Ann

ual R

epor

t, va

rious

issu

es.

2003

2004

2005

10.3

10.5

11.0

37.2

38.3

39.2

16.0

16.6

22.4

15.3

19.6

19.1

129,

487.

012

9,15

2.0

167,

147.

027

.3-0

.322

.760

2,89

8.0

734,

605.

086

4,39

2.0

9.9

21.8

11.6

143,

444.

018

1,11

1.0

249,

565.

0-6

.326

.311

.643

0,57

5.0

526,

236.

068

0,69

3.0

16.2

22.2

22.7

-151

,638

.0-1

75,7

93.0

-208

,608

.08.

515

.915

.7

2006

10.4

40.0

11.2

20.7

185,

005.

09.

61,

138,

805.

024

.135

7,28

9.0

30.1

856,

842.

020

.0-3

30,5

45.0

36.8

xii


Tab

le A

11

: In

tere

st R

ates

, 1

99

3-2

00

6

(%, e

nd o

f per

iod)

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Bank

rate

17.0

17.0

17.0

17.0

17.0

17.0

16.0

25.0

18.0

18.0

15.0

15.0

15.0

15.0

Trea

sury

bill

s, yi

eld

rate

s 3

mon

th18

.118

.719

.317

.510

.012

.012

.117

.812

.99.

97.

37.

210

.112

.812

mon

th19

.419

.419

.017

.410

.212

.612

.818

.213

.79.

97.

27.

610

.413

.0Re

purc

hase

rate

16.5

20.0

16.5

12.8

11.0

11.3

9.3

17.0

12.0

9.9

7.0

7.5

8.8

10.0

Cal

l mon

ey ra

te M

axim

um28

.028

.010

2.0

31.0

20.0

16.5

14.3

32.0

13.0

10.9

8.2

10.6

11.1

15.4

Min

imum

16.5

14.0

16.0

13.0

9.0

11.3

9.8

20.3

12.5

10.2

7.4

9.5

10.5

12.7

Wei

ghte

d av

erag

e pr

ime

lend

ing

rate

20.4

17.8

20.0

18.4

14.2

15.1

15.2

21.5

14.2

12.2

8.9

10.2

12.1

14.7

Com

mer

cial

ban

k sa

ving

Max

imum

14.0

13.0

13.0

13.0

11.0

10.0

10.0

10.0

12.0

11.0

7.2

7.7

10.3

10.5

Min

imum

5.5

5.5

5.0

4.5

3.0

2.0

2.0

2.0

4.0

3.5

2.1

3.0

3.0

3.0

NSB

savi

ng14

.014

.012

.012

.010

.810

.59.

28.

48.

46.

05.

05.

05.

05.

0C

omm

erci

al b

ank

fixed

dep

osit

(one

yea

r)M

axim

um17

.017

.017

.017

.815

.313

.012

.515

.014

.511

.07.

79.

811

.514

.0M

inim

um13

.510

.010

.012

.08.

59.

09.

09.

09.

57.

55.

05.

05.

55.

5N

SB fi

xed

depo

sit (o

ne y

ear,

paid

on

mat

urity

)16

.014

.016

.015

.011

.011

.511

.515

.013

.010

.07.

08.

09.

010

.5

Sour

ces:

Cen

tral B

ank

of S

ri La

nka,

Ann

ual R

epor

t, va

rious

issu

es.

xiii


Table A12: Basic Indicators of the General Price Level, 1987-2006

CCPI GCCPI WPI GDPD(1952=100) % change (1989=100) % change (1974=100) % change (1996=100) % change

( Jan-June)

1987 652.8 7.7 - - 414.9 13.4 38.4 7.0

1988 744.1 14.0 - - 488.7 17.8 42.8 11.5

1989 830.2 11.6 103.8 - 532.9 9.0 46.9 9.6

1990 1,008.6 21.5 124.6 20.0 651.1 22.2 56.3 20.0

1991 1,131.5 12.2 138.9 11.5 710.8 9.2 62.5 11.0

1992 1,260.4 11.4 152.0 9.4 773.0 8.8 68.7 10.0

1993 1,408.4 11.7 164.8 8.4 831.8 7.6 75.2 9.5

1994 1,527.4 8.4 172.6 4.7 873.4 5.0 82.3 9.3

1995 1,644.6 7.7 179.3 3.9 950.7 8.9 89.2 8.4

1996 1,906.7 15.9 202.5 12.9 1,145.1 20.4 100.0 12.1

1997 2,089.1 9.6 220.1 8.7 1,224.3 6.9 108.6 8.6

1998 2,284.9 9.4 235.2 6.9 1,298.7 6.1 117.8 8.4

1999 2,392.1 4.7 244.1 3.8 1,295.3 -0.3 123.1 4.4

2000 2,539.8 6.2 252.0 3.2 1,317.2 1.7 131.3 6.7

2001 2,899.4 14.2 279.6 11.0 1,471.2 11.7 147.6 12.3

2002 3,176.4 9.6 309.3 10.6 1,629.0 10.7 159.9 8.4

2003 3,377.0 6.3 319.0 3.1 1,679.1 3.1 168.0 5.0

2004 3,632.8 7.6 - - 1,889.0 12.5 183.5 9.2

2005 4,055.5 11.6 - - 2,105.9 11.5 201.8 9.9

2006 4,610.8(a) 13.7 - - 2,351.6(a) 11.7 222.6 10.3

Notes: CCPI : Colombo Consumers’ Price Index.GCCPI : Greater Colombo Consumers' Price Index.WPI : Wholesale Price Index.GDPD : GDP deflator.(a) : Provisional.

Sources: Department of Census and Statistics.Central Bank of Sri Lanka, Annual Report, various issues.

xiv


Table A13: Wage Rate Indices, 1987-2006 (December 1978=100)

Workers in wages boards trades(a) Government employees(b)

Nominal Real Nominal Real

1987 277.7 101.8 297.4 109.1

1988 335.8 107.9 390.9 125.4

1989 338.1 112.0 421.8 121.9

1990 453.5 107.6 476.8 113.2

1991 518.8 109.7 534.6 113.2

1992 590.0 112.0 557.6 106.0

1993 685.8 116.6 675.5 114.8

1994 712.4 111.7 735.5 115.4

1995 740.3 107.8 792.5 115.4

1996 801.7 100.7 818.2 103.5

1997 849.1 97.3 906.5 104.0

1998 953.3 99.9 1,001.4 104.9

1999 977.6 97.8 1,001.4 100.2

2000 1,000.4 94.3 1,084.7 102.1

2001 1,049.3 86.6 1,310.8 108.1

2002 1,126.5 84.9 1,525.3 115.02003 1,205.2 85.4 1,525.0 108.1

2004 1,233.0 81.3 1,872.1 123.3

2005 1,329.7 78.5 2,417.5 142.7

2006(c) 1,358.2 70.5 3,155.6 164.2

Notes: The wage rates used in the calculation of index numbers are minimum wages.(a): Combined index for workers in agriculture, industry and commerce, and services.(b): Combined index for non-executive officers and minor employees.(c): Provisional.


xv


Table A 14: Sri Lanka's Direction of Foreign Trade, 1989-2006

Unit 1989 1990 1991 1992 1993 1994 1995 1996 1997

1. Exports to selected countries and groupings

U.S.A US$ mn. 400.0 492.5 559.0 837.6 1,006.8U.K. US$ mn. 88.4 115.1 126.2 170.2 203.5Germany US$ mn. 95.4 126.7 148.8 211.8 227.5Japan US$ mn. 89.0 102.4 101.6 128.0 148.0

EU % of total exports 25.4 25.0 27.0 32.8 31.2Germany % of exports to EU 24.1 25.5 27.0 26.3 25.5UK % of exports to EU 22.3 23.2 22.9 21.1 22.8

ASEAN % of total exports 3.9 3.9 5.5 2.4 2.9 Singapore % of exports to ASEAN 59.6 63.7 59.8 56.5 58.6 Malaysia % of exports to ASEAN 2.3 3.3 23.6 7.7 4.0

SAARC % of total exports 5.5 3.6 3.0 2.3 2.5 India % of exports to SAARC 11.5 29.1 20.8 20.3 27.6

NAFTA % of total exports 28.4 27.2 30 36.4 37.1USA % of exports to NAFTA 90.3 91.3 91.4 93.5 94.9Canada % of exports to NAFTA 5.8 5.4 5.2 4.3 3.4

APEC % of total exports 41.2 39.5 43.7 47.6 48.7USA % of exports to APEC 62.4 62.8 62.7 71.5 72.3Japan % of exports to APEC 13.9 13.1 11.4 10.9 10.6Singapore % of exports to APEC 0.6 0.5 0.4 0.3 0.2

2. Imports from selected countries and groupings

Japan US$ mn. 295.4 325.4 358.4 415.6 452.6India US$ mn. 64.2 118.1 220.1 301.9 342.9Hong Kong US$ mn. 109.9 120.4 212.5 241.0 312.4U.S.A US$ mn. 137.0 207.7 174.5 159.4 131.3U.K. US$ mn. 125.2 137.0 166.3 172.8 184.8Taiwan US$ mn. 116.1 1555.8 207.4 214.0 225.7

EU % of total imports 16.0 14.4 15.2 14.7 15.8Germany % of imports from EU 20.0 21.7 22.0 24.7 21.9UK % of imports from EU 35.2 35.5 36.0 33.5 29.2

ASEAN % of total imports 12.7 12.8 13.8 15.1 14.5Singapore % of imports from ASEAN 33.4 29.7 32.3 44.8 35.8Malaysia % of imports from ASEAN 21.5 33.2 33.4 24.1 29.5

SAARC % of total imports 5.5 6.9 10.3 11.8 10.7India % of imports from SAARC 52.1 64.1 70.3 72.7 80.1

NAFTA % of total imports 6.8 8.5 6.3 5.2 3.7USA % of imports from NAFTA 90.1 91.4 91.3 87.0 89.4Canada % of imports from NAFTA 9.7 8.3 8.3 11.6 10.1

APEC % of total imports 52.9 55.7 58.5 57.1 55.7USA % of imports from APEC 11.6 13.9 9.8 8.0 5.9Japan % of imports from APEC 11.7 12.1 11.8 11.9 11.3Singapore % of imports from APEC 8.0 6.9 7.6 11.9 9.3

1,115.3 1,353.5 1,395.8285.4 345.3 388.6222.5 254.3 239.3165.3 200.4 256.4

31.3 31.0 29.422.2 21.6 19.828.4 29.3 32.2

3.9 3.7 2.860.6 52.3 52.04.6 15.7 23.5

2.7 2.7 2.627.2 31.3 39.6

36.8 37.3 35.694.4 95.4 95.64.3 3.5 3.1

49.6 50.1 48.770.1 71 69.810.4 10.5 12.80.2 0.1 0.1

526.6 498.6 497.3404.4 469.2 561.9316.6 357.4 354.1284.7 172.7 198.3247.6 242.6 251.7250.2 286.4 287.8

16.3 15.3 15.421.8 20.5 18.431.8 29.8 30.1

13.2 12.8 12.637.2 36.6 37.728.8 31.1 26.7

10.3 10.2 11.982.7 86.1 86.9

6.3 3.6 4.395.0 91.3 84.64.6 7.9 10.0

55.4 50.2 50.410.8 6.5 7.311.0 9.4 9.28.8 9.3 9.5

1,666.4525.4230.0234.2

35.017.139.0

3.443.716.6

3.137.0

45.595.33.2

59.872.410.20.1

479.3559.8411.3186.6282.4

372.1

17.620.531.6

14.738.322.3

13.183.9

5.764.719.0

61.95.99.49.1

xvi


Cont../Unit 1998 1999 2000 2001 2002 2003 2004 2005 2006(a)

1. Exports to selected countries and groupings

U.S.A US$ mn. 1,890.2 1,791.8 2,192.5 1,925.9 1,764.0U.K. US$ mn. 530.4 604.2 736.7 576.4 590.3Germany US$ mn. 231.9 215.7 230.2 198.5 199.3Japan US$ mn. 196.1 159.1 229.7 185.8 140.3

EU % of total exports 33.6 35.3 33.4 32.3 35.2 Germany % of exports to EU 17.9 16.2 15.2 15.8 14.4 UK % of exports to EU 41.0 45.0 48.5 45.8 42.8

ASEAN % of total exports 3.0 3.1 3.5 2.9 2.6 Singapore % of exports to ASEAN 38.1 37.9 38.7 51.4 63.6 Malaysia % of exports to ASEAN 10.1 6.0 5.0 5.9 8.4

SAARC % of total exports 3.0 3.8 4.2 4.1 6.5 India % of exports to SAARC 33.2 33.7 30.6 45.6 66.5

NAFTA % of total exports 51.5 49.8 50.5 52.0 47.6 USA % of exports to NAFTA 95.4 95.1 95.4 95.1 94.6 Canada % of exports to NAFTA 3.1 3.1 3.1 3.4 3.3

APEC % of total exports 56.3 57.8 59.5 54.6 52.2 USA % of exports to APEC 83.4 84.1 83.5 83.1 82.5 Japan % of exports to APEC 8.6 7.5 8.7 8.0 6.6 Singapore % of exports to APEC 1.9 2.1 2.3 2.5 3.1

2. Imports from selected countries and groupings

Japan US$ mn. 555.9 560.9 646.0 336.9 355.3India US$ mn. 539.4 511.6 600.1 709.3 852.9Hong Kong US$ mn. 411.0 459.1 515.9 500.3 491.0U.S.A US$ mn. 229.5 216.2 254.9 265.6 218.7U.K. US$ mn. 304.8 251.1 311.4 220.6 262.9Taiwan US$ mn. 378.7 347.1 390.1 322.8 288.0

EU % of total imports 23.3 19.4 18.8 18.0 18.0 Germany % of imports from EU 20.2 15.8 16.5 16.3 13.5 UK % of imports from EU 30.3 29.1 32.8 26.0 29.3

ASEAN % of total imports 19.6 21.1 21.0 19.4 19.1 Singapore % of imports from ASEAN 36.8 48.2 46.7 44.8 46.0 Malaysia % of imports from ASEAN 22.8 18.0 20.5 22.7 21.7

SAARC % of total Imports 15.1 14.2 14.0 15.1 19.1 India % of Imports from SAARC 83.3 81.4 84.8 84.4 89.4

NAFTA % of total imports 7.1 5.5 6.0 6.2 4.7 USA % of imports from NAFTA 75.0 89.0 84.1 91.5 93.8 Canada % of imports from NAFTA 13.6 9.3 15.6 8.2 5.8

APEC % of total imports 45.9 53.4 54.9 55.6 52.1 USA % of imports from APEC 11.6 9.1 9.2 10.1 8.5 Japan % of imports from APEC 28.1 23.6 23.2 12.8 13.8 Singapore % of imports from APEC 15.7 19.0 17.8 15.6 16.8

Note: (a): Provisional.

Sources: International Monetary Fund, Direction of Trade Statistics, various issues; Central Bank of Sri Lanka, Annual Report, various issues.

1,777.4 1,869.3 1,988.1640.4 779.2 777.3232.4 274.1 271.8165.4 157.6 144.6

35.9 38.3 37.215.3 14.9 13.942.2 42.3 39.9

2.5 2.6 2.961.8 67.9 52.211.7 7.1 9.5

8.3 10.5 12.570.0 77.3 86.7

44.5 41.2 40.494.5 94.5 94.13.4 3.6 3.7

52.2 47.8 46.280.6 81.4 82.37.4 6.9 5.93.0 3.8 3.3

448.1 411.7 379.71,073.2 1,439.1 1,835.4

559.5 619.4 648.2188.3 240.1 204.5272.9 312.1 276.2276.1 290.8 278.7

18.8 18.2 16.713.4 15.7 14.325.5 25.2 22.2

19.8 20.0 20.546.2 51.2 48.225.6 24.1 25.7

19.9 23.1 26.691.5 91.4 92.6

4.1 4.1 3.985.4 84.4 71.214.2 15.3 28.0

49.2 46.4 44.07.1 7.6 6.2

16.0 13.0 11.618.7 20.5 22.4

2005.5880.1328.8163.6

40.714.538.7

3.439.012.9

10.781.6

38.194.23.6

44.081.56.63.0

449.62,172.9

659.1200.6303.4274.8

15.916.222.1

21.752.923.7

27.292.4

4.848.051.4

43.85.3

11.926.2

xvii


T

able

A1

5: St

ruct

ure

of

Co

mm

od

ity

Imp

ort

s, 1

98

7-2

00

6

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1.C

onsu

mer

goods

Val

ue (U

S$ m

n.)

469.

154

8.2

581.

570

9.4

782.

173

4.6

774.

593

0.6

Gro

wth

7.2

16.9

6.1

22.0

10.3

-6.1

5.4

20.1

% o

f tot

al im

ports

22.8

24.6

26.1

26.4

25.5

21.0

19.3

19.5

1.1

Foo

d

Val

ue (U

S$ m

n.)

253.

432

1.1

364.

439

0.0

404.

941

9.7

415.

948

3.9

Gro

wth

5.2

26.7

13.5

7.0

3.8

3.7

-0.9

16.4

% o

f tot

al im

ports

12.3

14.4

16.4

14.5

13.2

12.0

10.4

10.2

1.2

Oth

er

Val

ue (U

S$ m

n.)

215.

722

7.1

217.

131

9.4

377.

231

4.9

358.

744

6.6

Gro

wth

9.7

5.3

-4.4

47.1

18.1

-16.

513

.924

.5

% o

f tot

al im

ports

10.5

10.2

9.8

11.9

12.3

9.0

8.9

9.4

2.In

term

edia

te g

oods

Val

ue (U

S$ m

n.)

1,17

5.7

1,26

7.8

1,25

5.4

1,39

1.7

1,55

3.3

1,88

4.4

2,15

4.4

2,42

5.0

Gro

wth

15.1

7.8

-1.0

10.9

11.6

21.3

14.3

12.6

% o

f tot

al im

ports

57.2

56.8

56.4

51.8

50.7

53.8

53.7

50.9

2.1

Petro

leum

Val

ue (U

S$ m

n.)

296.

024

6.5

232.

435

8.7

311.

531

8.0

309.

229

6.3

Gro

wth

31.8

-16.

7-5

.754

.4-1

3.2

2.1

-2.8

-4.2

% o

f tot

al im

ports

14.4

11.0

10.4

13.3

10.2

9.1

7.7

6.2

2.2

Text

iles

Val

ue (U

S$ m

n.)

274.

627

6.5

276.

933

5.8

498.

276

5.5

865.

11,

038.

1

Gro

wth

21.1

0.7

0.1

21.3

48.3

53.7

13.0

20.0

% o

f tot

al im

ports

13.4

12.4

12.4

12.5

16.3

21.9

21.6

21.8

3.In

vest

men

t goods

Val

ue (U

S$ m

n.)

384.

937

9.8

333.

458

4.4

720.

185

0.9

1,04

6.8

1,36

6.5

Gro

wth

2.2

-1.3

-12.

275

.323

.218

.223

.030

.5

% o

f tot

al im

ports

18.7

17.0

15.0

21.7

23.5

24.3

26.1

28.7

4.Tota

l im

port

s

Val

ue (U

S$ m

n.)

2,05

5.6

2,23

3.2

2,22

5.6

2,68

9.0

3,06

1.1

3,50

3.4

4,01

1.3

4,76

7.3

Gro

wth

5.6

8.6

-0.3

20.8

13.8

14.5

14.5

18.8

982.

0

5.6

18.5

522.

0

7.8

9.8

461.

03.

1

8.7

2,90

0.0

19.6

54.6

386.

9

30.6 7.3

1,15

8.5

11.6

21.8

1,18

9.0

-13.

022

.4

5,31

1.1

11.4

1,03

0.0

5.2

19.0

597.

0

14.3

11.0

433.

0-5

.8 8.0

2,97

1.0

2.6

54.6

479.

9

24.1 8.8

1,16

8.8

0.9

21.5

1,20

3.0

1.5

22.1

5,43

9.0

2.6

xviii


Con

td…

./

1

997

1998

1999

2000

2001

2002

1.C

onsu

mer

goods

Val

ue (U

S$ m

n.)

1,08

4.0

1,12

8.0

1,13

1.0

1,26

1.0

1,12

6.0

1,18

9.0

G

row

th4.

94.

00.

311

.5-1

0.7

5.6

%

of t

otal

impo

rts18

.519

.218

.917

.318

.919

.51.

1 F

ood

Val

ue (U

S$ m

n.)

642.

059

6.0

551.

056

6.0

545.

056

6.0

Gro

wth

7.5

-7.2

-7.6

2.7

-3.7

3.8

%

of t

otal

impo

rts11

.010

.19.

27.

89.

19.

31.

2 O

ther

V

alue

(US$

mn.

)44

2.0

532.

058

1.0

696.

058

1.0

623.

0

G

row

th20

.69.

219

.8-1

6.5

7.2

25.2

%

of t

otal

impo

rts7.

59.

09.

79.

59.

710

.22.

Inte

rmed

iate

goods

Val

ue (U

S$ m

n.)

3,23

5.7

3,10

8.0

3,16

8.0

3,91

6.0

3,43

0.0

3,62

2.0

Gro

wth

8.9

-3.9

1.9

23.6

-12.

4-5

.6%

of t

otal

impo

rts55

.252

.853

.053

.557

.459

.32.

1 P

etro

leum

Val

ue (U

S$ m

n.)

539.

534

5.0

500.

090

1.0

731.

078

9.0

Gro

wth

12.4

-36.

144

.980

.2-1

8.9

7.9

%

of t

otal

Impo

rts9.

25.

98.

412

.312

.212

.92.

2 Te

xtile

s

Val

ue (U

S$ m

n.)

1,38

6.9

1,39

7.0

1,32

0.0

1,47

1.0

1,32

0.0

1,32

1.0

G

row

th18

.70.

6-5

.511

.4-1

0.3

0.1

%

of t

otal

impo

rts23

.723

.722

.120

.122

.121

.63.

Inve

stm

ent g

oods

Val

ue (U

S$ m

n.)

1,32

4.0

1,47

7.0

1,56

5.0

1,73

7.0

1,08

1.0

1,16

9.0

G

row

th10

.011

.35.

911

.0-3

7.8

8.1

%

of t

otal

impo

rts22

.625

.126

.223

.618

.119

.24.

Tota

l im

port

s

Val

ue (U

S$ m

n.)

5,86

4.0

5,88

9.0

5,97

9.0

7,32

0.0

5,97

4.0

6,10

5.0

Gro

wth

7.7

0.4

1.5

22.4

-18.

42.

2

Not

es:(a

): P

rovi

siona

l.

Sour

ces:

Cen

tral B

ank

of S

ri La

nka,

Ann

ual R

epor

t, va

rious

issu

es; I

PS d

atab

ase.

2003

2004

2005

1,34

4.0

1,44

0.0

1,50

3.0

11.5

7.1

4.4

20.1

18.0

16.9

564.

059

6.0

611.

0-0

.45.

72.

58.

57.

56.

9

780.

084

4.0

891.

025

.28.

25.

711

.710

.610

.1

3,94

8.0

4,82

8.0

5,45

8.0

9.0

22.3

13.0

59.2

60.4

61.6

838.

01,

209.

01,

655.

06.

244

.336

.913

.715

.118

.7

1,37

2.0

1,51

4.0

1,53

1.0

3.8

10.3

1.1

20.6

18.9

17.3

1,32

0.0

1,67

0.0

1,86

9.0

12.9

26.5

11.9

19.8

20.8

21.1

6,67

2.0

8,00

0.0

8,86

3.0

9.3

19.9

10.8

2006(a

)

1,78

2.0

18.6

17.4

757.

023

.913

.5

1,02

4.0

14.9

10.0

6,16

4.0

12.9

60.1

2,07

0.0

25.1

20.2

1,54

6.0

1.0

15.1

2,24

6.0

20.2

21.9

10,2

60.0

15.7

xix


1987 1988 1989 1990 1991 1992

1. Agricultural exports

Value (US$ mn.) 592.2 632.1 611.7 721.0 641.4 604.7

Growth 5.2 6.7 -3.2 17.9 -11.0 -5.7

% of total exports 42.4 42.8 39.3 36.3 32.3 24.6

1.1 Plantation crops

Value (US$ mn.) 509.6 531.3 518.7 617.7 538.5 468.1

Growth 5.9 4.3 -2.4 19.1 -12.8 -13.1

% of total exports 36.5 36.0 33.3 31.1 27.1 19.0

1.1.1 Tea

Value (US$ mn.) 361.8 386.7 379.1 494.8 431.9 339.8

Growth 9.6 6.9 -2.0 30.5 -12.7 -21.3

% of total exports 25.9 26.2 24.3 24.9 21.7 13.8

1.1.2 Rubber

Value (US$ mn.) 99.5 116.5 86.3 76.9 63.8 67.5

Growth 6.3 17.1 -25.9 -10.9 -17.0 5.8

% of total exports 7.1 7.9 5.5 3.9 3.2 2.7

1.1.3 Coconut kernel products

Value (US$ mn.) 48.3 28.2 53.3 46.0 42.8 60.8

Growth -15.9 -41.7 89.2 -13.7 -7.0 42.2

% of total exports 3.5 1.9 3.4 2.3 2.2 2.5

1.2. Minor agricultural crops

Value (US$ mn.) 58.2 80.5 66.8 79.9 82.4 113.1

Growth 8.8 38.3 -17.0 19.5 3.2 37.3

% of total exports 4.2 5.5 4.3 4.0 4.1 4.6

2. Mineral exports

Value (US$ mn.) 61.3 82.2 74.7 87.0 61.9 62.7

Growth 45.3 34.1 -9.1 16.4 -28.8 1.3

% of total exports 4.4 5.6 4.8 4.4 3.1 2.5

3. Industrial exports

Value (US$ mn.) 679.4 712.9 789.8 1,036.1 1,237.3 1,763.2

Growth 19.9 4.9 10.8 31.2 19.4 42.5

% of total exports 48.6 48.3 50.7 52.2 62.3 71.7

3.1 Textile & garments

Value (US$ mn.) 438.0 448.3 489.1 628.1 803.9 1,214.0

Growth 27.4 2.4 9.1 28.4 28.0 51.0

% of total exports 31.4 30.4 31.4 31.7 40.5 49.3

3.2 Petroleum products

Value (US$ mn.) 88.0 71.2 62.2 99.2 79.5 63.2

Growth 4.6 -19.1 -12.7 59.5 -19.9 -20.5

% of total exports 6.3 4.8 4.0 5.0 4.0 2.6

4. Total commodity exports inc. petroleum

Value (US$ mn.) 1,396.9 1,475.4 1,558.4 1,983.9 1,987.5 2,460.8

Growth 14.9 5.6 5.6 27.3 0.2 23.8

5. Total commodity exports excl. petroleum

Value (US$ mn.) 1,308.9 1,404.2 1,496.2 1,884.7 1,908.0 2,397.5

Growth 15.6 7.3 6.6 26.0 1.2 25.7

Table A16: Structure of Commodity Exports, 1987-2006

1993 1994 1995

655.3 702.1 829.0

8.4 7.1 18.1

22.9 21.9 21.8

514.9 546.8 660.9

10.0 6.2 20.9

18.0 17.0 17.4

412.7 424.2 481.0

21.4 2.8 13.3

14.4 13.2 12.6

64.0 72.5 111.0

-5.3 13.3 53.8

2.2 2.3 2.9

38.3 50.1 69.0

-37.0 30.9 37.1

1.3 1.6 1.8

120.7 129.2 134.0

6.7 7.0 3.5

4.2 4.0 3.5

75.7 86.9 87.0

20.7 14.7 -0.1

2.6 2.7 2.3

2,102.3 2,398.9 2,870.0

19.2 14.1 19.6

73.4 74.8 75.4

1,412.4 1,551.9 1,853.0

16.3 9.9 19.4

49.3 48.4 48.7

78.8 80.1 85.0

24.6 1.7 5.9

2.8 2.5 2.2

2,863.7 3,208.6 3,806.6

16.4 12.0 18.6

2,784.9 3,128.5 3,721.7

16.2 12.3 19.0

1996

961.0

16.1

23.5

801.3

21.2

19.5

615.0

28.2

15.0

104.0

-6.6

2.5

81.0

17.7

2.0

132.0

-1.4

3.2

96.0

10.3

2.3

3,006.0

5.0

73.4

1,902.0

2.9

46.4

104.0

22.4

2.5

4,199.0

10.3

3,991.0

7.2

xx


Contd../1997 1998 1999 2000 2001 2002

1. Agricultural exports

Value (US$ mn.) 1060.0 1088.0 947.0 1005.0 932.0 938.0

Growth 10.3 2.6 -13.0 6.1 -7.3 0.6

% of total exports 22.9 22.9 20.6 18.2 19.3 20.0

1.1 Plantation crops

Value (US$ mn.) 882.1 878.1 738.0 806.0 755.0 728.0

Growth 10.1 -0.4 4.6 9.2 -6.3 -3.6

% of total exports 19.0 18.5 16.0 14.6 15.7 15.5

1.1.1 Tea

Value (US$ mn.) 719.0 780.0 621.0 700.0 690.0 660.0

Growth 17.0 8.5 -20.4 12.7 -1.4 -4.4

% of total exports 15.5 16.4 13.5 12.7 14.3 14.1

1.1.2 Rubber

Value (US$ mn.) 79.0 44.0 33.0 29.0 24.0 27.0

Growth -24.4 -44.3 -25.0 -12.1 -17.2 12.5

% of total exports 1.7 0.9 0.7 0.5 0.5 0.6

1.1.3 Coconut kernel products

Value (US$ mn.) 81.0 56.0 84.0 77.0 41.0 41.0

Growth 2.0 -31.8 50.0 -8.3 -46.8 0.0

% of total exports 2.0 1.2 1.8 1.4 0.9 0.9

1.2. Minor agricultural crops

Value (US$ mn.) 145.0 170.0 165.0 155.0 136.0 168.0

Growth 9.9 17.7 -2.9 -6.1 -12.3 23.5

% of total exports 3.1 3.6 3.6 2.8 2.8 3.5

2. Mineral exports

Value (US$ mn.) 90.0 60.0 64.0 97.0 86.0 90.0

Growth -6.7 -33.1 6.7 51.6 -11.3 4.6

% of total exports 1.9 1.3 1.4 1.8 1.8 1.9

3. Industrial exports

Value (US$ mn.) 3,436.0 3,607.0 3,551.0 4,283.0 3,710.0 3,631.0

Growth 14.3 3.2 -1.8 20.6 -13.4 -2.1

% of total exports 74.1 74.9 77.0 77.6 77.0 77.3

3.1 Textile & garments

Value (US$ mn.) 2,274.0 2,460.0 2,425.0 2,982.0 2,543.0 2,424.0

Growth 19.6 8.2 -1.4 23.0 -14.7 -4.7

% of total exports 49.0 52.0 52.7 54.0 52.8 51.6

3.2 Petroleum products

Value (US$ mn.) 97.0 73.0 74.0 98.0 68.0 73.0

Growth -6.3 -25.9 1.4 32.4 -30.6 7.3

% of total exports 2.1 1.5 1.6 1.8 1.4 1.5

4. Total commodity exports inc. petroleum

Value (US$ mn.) 4,736.0 4,871.0 4,684.0 5,620.0 4,885.0 4,772.0

Growth 12.8 2.9 -3.8 20.0 -13.1 -2.3

5. Total commodity exports excl. petroleum

Value (US$ mn.) 4,542.0 4,725.0 4,536.0 5,424.0 4,749.0 4,626.0

Growth 13.8 4.0 -4.0 19.6 -12.4 -2.6

Note: (a): Revised.(b): Provisional.

Sources: Central Bank of Sri Lanka, Annual Report, various issues; IPS database.

2003 2004 2005(a)

965.0 1065.2 1,153.8

2.9 10.4 8.3

18.8 18.5 18.2

770.0 849.0 905.9

5.8 10.3 6.7

15.0 14.7 14.3

683.0 739.0 810.2

3.5 8.2 9.6

13.3 12.8 12.8

39.0 51.0 46.9

44.4 30.8 -8.0

0.8 0.9 0.7

48.0 59.0 48.8

17.0 22.9 -17.3

0.9 1.0 0.8

150.0 162.0 183.4

-10.7 8.0 13.2

2.9 2.8 2.9

84.0 120.0 143.3

-6.6 42.9 19.4

1.6 2.0 2.3

3,977.0 4,506.0 4,948.4

9.5 13.3 9.8

77.5 78.3 78.0

2,575.0 2,809.0 2,894.6

6.2 9.1 3.0

50.2 48.8 45.6

65.0 100.0 130.9

-10.9 53.8 30.9

1.3 1.7 2.1

5,198.0 5,856.7 6,477.6

8.9 12.7 10.6

5,068.0 5,657.6 6,215.8

9.5 11.6 9.9

2006(b)

1,292.7

12.0

18.8

1,027.1

13.3

14.9

881.2

9.3

12.8

93.1

98.5

1.4

52.8

8.2

0.8

194.6

6.1

2.8

136.2

-5.0

1.9

5,383.4

8.8

78.3

3,080.3

6.4

44.8

187.2

43.0

2.7

7,140.3

10.2

6,882.7

8.4

xxi


T

able

A1

7:

To

uri

sm,

19

87

-20

06

Unit

1987

1988

1989

1990

1991

1992

1993

Tour

ist a

rriv

als

No.

182,

620

182,

662

184,

732

297,

888

317,

703

393,

669

392,

250

Excu

rsio

nist

arr

ival

sN

o.2,

417

6,10

84,

064

3,95

42,

665

5,65

16,

093

Tour

ist n

ight

s00

02,

414

2,30

51,

970

3,22

53,

633

4,05

54,

148

Earn

ings

Rs.

mn.

2,41

5.2

2,43

8.3

2,73

9.7

5,30

3.3

6,48

5.8

8,82

5.6

10,0

36.8

US$

mn.

82.0

76.6

76.0

132.

015

6.8

201.

420

8.0

Rec

eipt

s pe

r tou

rist

per

day

US$

34.0

33.3

38.6

41.1

42.8

49.7

50.1

Ave

rage

dur

atio

nN

ight

s13

.212

.610

.710

.811

.410

.310

.6A

ccom

mod

atio

nRoo

ms

No.

9,92

19,

977

9,45

99,

556

9,67

910

,214

10,3

65B

eds

No.

19,3

2219

,432

18,4

6418

,669

18,9

4719

,907

20,2

42O

ccup

ancy

rate

, gra

ded

%31

.532

.131

.047

.248

.455

.357

.0Sr

i Lan

ka n

atio

nals

Arr

ival

sN

o.21

7,12

724

5,06

525

8,95

030

6,36

723

7,42

433

9,10

937

5,74

0D

epar

ture

sN

o.25

7,76

029

8,58

328

5,51

029

6,88

431

0,37

342

0,74

941

6,24

6Em

ploy

men

tD

irect

No.

20,3

3819

,960

21,9

5824

,964

26,8

7828

,790

30,7

10In

dire

ctN

o.28

,473

27,9

4430

,741

34,9

5037

,629

40,3

0642

,994

Con

td…

/

Unit

1997

1998

1999

2000

2001

2002

Tour

ist a

rriv

als

No.

366,

165

381,

063

436,

440

400,

414

336,

794

393,

174

Excu

rsio

nist

arr

ival

sN

o.18

,265

27,6

2928

,335

44,5

1860

,008

63,5

60To

uris

t nig

hts

000

3,68

03,

944

4,47

94,

056

3,43

53,

989

Earn

ings

Rs.

mn.

12,9

80.0

14,8

68.0

19,2

97.3

19,1

62.2

18,8

63.3

24,2

02.0

US$

mn.

216.

723

1.5

274.

925

2.8

211.

125

3.0

Rec

eipt

s pe

r tou

rist

per

day

US$

58.6

59.5

61.4

62.3

63.1

63.4

Ave

rage

dur

atio

nN

ight

s10

.110

.410

.310

.19.

910

.1A

ccom

mod

atio

nR

oom

sN

o.12

,370

12,7

7212

,918

13,3

1113

,626

13,8

18B

eds

No.

22,9

4423

,373

24,2

1624

,953

25,5

9525

,956

Occ

upan

cy ra

te, g

rade

d%

49.1

52.8

57.6

52.3

42.1

43.1

Sri L

anka

nat

iona

lsA

rriv

als

No.

482,

850

481,

793

521,

073

514,

448

487,

356

493,

947

Dep

artu

res

No.

530,

712

518,

050

496,

963

524,

212

505,

341

533,

565

Empl

oym

ent

Dire

ctN

o.34

,006

34,7

8036

,560

37,9

4333

,710

38,8

21In

dire

ctN

o.47

,608

48,6

9251

,184

53,1

2047

,194

54,3

49

Not

es:

(a):

Rev

ised

.(b

):Pr

ovis

iona

l.

Sour

ce:

Cey

lon

Tour

ist B

oard

, Ann

ual S

tatis

tical

Rep

ort,

var

ious

issu

es.

1994

1995

407,

511

403,

101

8,41

310

,556

4,25

14,

024

11,4

01.6

11,5

51.6

230.

722

5.4

54.2

56.1

10.4

10.0

10,7

4211

,255

20,9

2921

,680

56.6

52.6

422,

367

459,

441

448,

437

504,

420

33,9

5635

,068

47,5

3849

,095

1996

302,

265

12,8

632,

947

9,55

9.1

173.

057

.9 9.8

11,6

0022

,040

40.3

488,

055

494,

258

31,9

6344

,748

2003

2004

2005(a

)

500,

642

566,

202

549,

308

82,0

6611

0,00

011

9,61

85,

093

5,74

24,

754

32,8

10.0

42,6

66.3

36,3

7734

0.0

416.

836

266

.872

.274

.610

.210

.18.

7

14,1

3714

,322

13,1

6226

,511

26,8

5424

,740

53.2

59.3

43.6

560,

602

646,

990

683,

169

561,

126

680,

248

727,

301

46,7

6153

,766

52,0

8565

,465

75,2

7272

,919

2006(b

)55

9,60

312

8,71

95,

793

42,5

86 409

83.4

10.3

14,2

1827

,117

39.8

734,

421

756,

735

55,6

4977

,909

xxii


1

99

8

19

99

No.

Gro

wth

No.

Gro

wth

37,2

2414

.044

,379

19.2

35,2

830.

841

,526

17.7

32,2

56-5

.441

,022

27.2

25,5

78-4

.934

,443

34.7

20,3

94-9

.025

,212

23.6

22,4

10-3

.226

,184

16.8

29,5

29-4

.333

,288

12.7

31,4

46-1

.839

,081

24.3

31,6

536.

233

,915

7.1

31,7

6712

.235

,112

10.5

38,4

2120

.141

,952

9.2

45,1

0215

.940

,326

-10.

638

1,06

34.

143

6,44

014

.5

20

00

No.

Gro

wth

43,3

11-2

.443

,287

4.2

40,1

10-2

.233

,642

-2.3

23,4

04-7

.221

,825

-16.

633

,267

-0.1

34,4

22-1

1.9

31,0

35-8

.526

,658

-24.

132

,469

-22.

636

,984

-8.3

400,

414

-8.3

T

able

A1

8:

Mo

nth

ly T

ou

rist

Arr

ival

s, 1

99

5-2

00

6

1995

1996

1997

No.

Gro

wth

No.

Gro

wth

No.

Gro

wth

Janu

ary

45,9

871.

330

,957

-32.

732

,652

5.5

Febr

uary

42,5

913.

729

,550

-30.

635

,010

18.5

Mar

ch40

,074

-2.9

26,4

42-3

4.0

34,0

9829

.0A

pril

33,7

5620

.220

,376

-39.

626

,907

32.1

May

24,6

7213

.317

,655

-28.

422

,407

26.9

June

22,4

164.

819

,668

-12.

323

,160

17.8

July

35,9

941.

825

,380

-29.

530

,867

21.6

Aug

ust

35,8

149.

124

,765

-30.

932

,034

29.4

Sept

embe

r30

,828

-0.8

23,2

11-2

4.7

29,7

9328

.4O

ctob

er30

,603

-7.9

23,5

11-2

3.2

28,3

1420

.4N

ovem

ber

28,3

65-1

4.8

24,9

21-1

2.1

31,9

9528

.4D

ecem

ber

32,0

01-2

5.1

35,8

2912

.038

,928

8.6

Tota

l40

3,10

1-1

.130

2,26

5-2

5.0

366,

165

21.1

Con

t../

2001

2002

No.

Gro

wth

No.

Gro

wth

Janu

ary

44,1

872.

128

,296

-36.

0Fe

brua

ry46

,575

7.6

31,6

83-3

2.0

Mar

ch44

,290

10.4

33,0

84-2

5.3

Apr

il36

,906

9.7

27,0

57-2

6.7

May

26,9

24-1

5.0

26,6

61-1

.0Ju

ne28

,323

29.8

26,3

55-6

.9Ju

ly28

,566

-14.

135

,742

25.1

Aug

ust

15,7

17-5

4.3

35,4

7512

5.7

Sept

embe

r11

,758

-62.

132

,982

180.

5O

ctob

er12

,904

-51.

636

,258

181.

0N

ovem

ber

17,3

44-4

6.6

37,3

9511

5.6

Dec

embe

r23

,300

-36.

942

,183

81.0

Tota

l33

6,79

4-1

5.9

393,

171

16.7

Not

e:M

onth

ly g

row

th fi

gure

s ref

lect

per

cent

age

chan

ges c

ompa

red

to th

e sa

me

mon

th in

the

prev

ious

yea

r.(a

): P

rovi

siona

l.

Sour

ce:

Cey

lon

Tour

ist B

oard

, Ann

ual S

tatis

tical

Rep

ort,

vario

us is

sues

.

2

00

3

20

04

20

05

No.

Gro

wth

No.

Gro

wth

No.

Gro

wth

40,6

4743

.649

,950

22.9

38,1

87-2

3.5

39,0

8123

.443

,584

11.5

36,6

45-1

5.9

40,8

1823

.438

,418

-5.9

50,4

1831

.233

,714

24.6

30,6

72-9

.042

,261

37.8

30,0

4812

.730

,162

0.4

40,8

7835

.531

,836

20.8

32,1

190.

845

,699

42.3

43,7

4322

.450

,525

15.5

56,7

4512

.342

,111

18.7

48,6

7515

.651

,216

5.2

36,0

549.

351

,525

42.9

43,5

36-1

5.5

49,9

2237

.759

,442

19.1

44,0

95-2

5.8

54,9

4646

.964

,971

18.2

48,4

57-2

5.4

57,7

2236

.866

,159

14.6

51,1

71-2

2.7

500,

642

27.3

566,

202

13.1

549,

308

-2.9

20

06

(a)

No.

Gro

wth

52,1

0336

.452

,687

43.8

54,7

468.

649

,776

17.8

43,8

257.

244

,066

-3.6

55,3

54-2

.552

,931

3.3

38,4

85-1

1.6

38,8

15-1

2.0

37,5

91-2

2.4

39,2

24-2

3.3

559,

603

1.9

xxiii


Table A19: Tourist Arrivals by Country of Residence, 1995-2006

1995 1996 1997

No. Growth No. Growth No. Growth

North America 14,565 -7 12,462 -14 15,951 28

Canada 5,469 11 4,689 -14 6,477 38

U.S.A. 9,096 -15 7,773 -15 9,474 22

Western Europe 250,152 -2 167,343 -33 212,052 27

Germany 79,698 -15 45,075 -43 59,814 33

United Kingdom 63,582 33 52,095 -18 62,997 21

France 30,996 2 21,480 -31 25,392 18

Italy 18,378 2 11,988 -35 14,424 20

Netherlands 14,274 17 10,995 -23 15,957 45

Asia 118,323 2 102,558 -13 113,565 11

Japan 18,180 -7 11,724 -36 13,374 14

India 47,448 8 42,822 -10 47,010 10

Pakistan 11,325 11 11,748 4 11,439 -3

Australasia 10,254 -15 8,763 -15 11,712 34

Australia 9,066 -6 7,626 -16 10,392 36

Other(a) 9,807 2 11,139 14 12,912 16

Total 403,101 -1 302,265 -25 366,165 21

Contd…/

2001 2002

No. Growth No. Growth

North America 15,983 -8 19,866 24

Canada 7,609 1 8,301 9

U.S.A. 8,374 -15 11,565 38

Western Europe 203,984 -22 200,295 -2

Germany 60,405 -14 55,170 -9

United Kingdom 67,830 -20 67,533 0

France 20,949 -19 19,984 -5

Italy 12,074 -28 12,177 1

Netherlands 12,569 -44 11,748 -7

Asia 89,732 -2 143,064 59

Japan 9,237 -10 13,602 47

India 33,924 7 69,960 106

Pakistan 8,562 -14 6,756 -21

Australasia 13,105 -28 13,209 1

Australia 11,457 -30 11,217 -2

Other(a) 13,990 12 16,737 20

Total 336,794 -16 393,171 17

Notes: (a): Latin America & the Caribbean, East Europe, Africa, and Middle East.(b): Revised.(c): Provisional.

Source: Ceylon Tourist Board, Annual Statistical Report, various issues.

1998 1999

No.Growth No.Growth

17,529 10 18,477 5

7,542 16 7,905 5

9,987 5 10,572 6

238,959 13 275,796 15

74,058 24 77,259 4

66,432 5 80,919 22

26,874 6 34,458 28

15,867 10 19,815 25

22,977 44 29,670 29

99,702 -12 114,375 15

13,785 3 16,332 19

37,356 -21 42,315 13

10,782 -6 11,421 6

12,159 4 15,159 25

10,329 -1 13,218 28

13,092 1 12,633 -4

381,063 4 436,440 15

2003 2004 2005(b)

No. Growth No. Growth No. Growth

25,110 26 29,759 19 46,457 56

11,164 34 14,633 31 21,185 45

13,946 21 15,126 8 25,272 67

255,169 27 284,440 11 227,191 -20

58,908 7 58,258 -1 46,350 -20

93,278 38 106,645 14 92,629 -13

28,585 28 29,996 5 26,653 -11

15,654 29 18,862 20 10,192 -46

18,197 55 21,455 18 15,156 -29

177,351 24 198,068 12 223,351 13

17,115 26 19,641 15 17,148 -13

90,603 30 105,151 16 113,323 8

9,704 44 9,638 -1 11,029 14

22,965 74 26,540 16 29,738 12

19,958 78 23,247 16 25,986 12

20,047 20 27,395 37 22,571 -18

500,642 27 566,202 13 549,308 -3

2000

No.Growth

17,319 -6

7,503 -5

9,816 -7

260,824 -5

70,584 -9

84,693 5

25,992 -25

16,833 -15

22,618 -24

91,521 -20

10,226 -37

31,860 -25

10,005 -12

18,228 20

16,443 24

12,522 -1

400,414 -8

2006(c)

No.Growth

35,323 -24

14,623 -31

20,700 -18

228,447 1

47,402 2

88,306 -5

22,693 -15

12,424 22

19,360 28

242,132 8

16,189 -6

128,370 13

11,145 1

25,127 -16

21,849 -16

28,576 27

559,603 2

xxiv


Tab

le A

20: B

alan

ce o

f P

aym

ents

, 1995-2

006

U

nit

1995

1996

1997

1998

1999

2000

2001

2002

1.Tr

ade

bala

nce

US$

mn.

-1,5

04.5

-1,3

43.8

-1,2

25.0

-1,0

92.0

-1,3

69.0

-1,7

98.0

-1,1

57.0

-1,4

06.0

% o

f GD

P-1

1.5

-9.7

-8.1

-6.9

-8.7

-10.

8-7

.4-9

.5

2.Se

rvic

es b

alan

ceU

S$ m

n.15

2.1

105.

015

9.1

145.

014

7.0

38.0

175.

029

5.0

% o

f GD

P1.

20.

81.

10.

90.

90.

21.

32.

0

3.In

com

e, n

etU

S$ m

n.-1

70.0

-197

.0-1

60.0

-180

.0-2

54.0

-305

.0-2

67.0

-253

.0

% o

f GD

P-1

.1-1

.5-1

.1-1

.1-1

.6-1

.8-1

.9-1

.7

4. N

et p

rivat

e tra

nsfe

rsU

S$ m

n.67

5.0

709.

878

8.1

849.

088

7.0

974.

098

4.0

1,09

7.0

% o

f GD

P5.

25.

15.

25.

45.

65.

97.

07.

5

5.N

et o

ffici

al tr

ansfe

rsU

S$ m

n.60

.849

.044

.552

.026

.024

.022

.031

.0

% o

f GD

P0.

50.

40.

30.

30.

20.

10.

20.

2

6.C

urre

nt a

ccou

nt b

alan

ceU

S$ m

n.-7

53.9

-677

.0-3

93.0

-226

.0-5

63.0

-1,0

66.0

-244

.0-2

37.0

% o

f GD

P-5

.8-4

.9-2

.6-1

.4-3

.6-6

.4-1

.7-1

.6

7.C

apita

l and

fina

ncia

l a/c

US$

mn.

699.

045

9.0

602.

041

3.0

373.

044

3.0

562.

044

4.0

% o

f GD

P5.

74.

24.

22.

62.

42.

74.

03.

0

Cap

ital a

ccou

ntU

S$ m

n.11

7.2

95.6

87.1

80.0

80.0

50.0

198.

065

.0

Fina

ncia

l acc

ount

US$

mn.

581.

036

3.0

515.

033

4.0

293.

039

3.0

364.

037

9.0

8.Lo

ng-te

rmU

S$ m

n.50

2.0

381.

071

6.0

398.

043

5.0

304.

016

4.0

326.

0

Fore

ign

dire

ct in

vestm

ent

US$

mn.

19.7

86.0

128.

613

7.0

177.

017

6.0

172.

018

5.0

Priv

ate

long

-term

(net

)U

S$ m

n.91

.02.

047

.02.

019

6.0

82.0

-257

.0-2

1.0

Gov

ernm

ent l

ong-

term

US$

mn.

358.

025

9.0

239.

020

3.0

62.0

47.0

249.

016

2.0

9.Sh

ort-t

erm

US$

mn.

79.0

-18.

0-2

01.0

-64.

0-1

42.0

88.0

201.

053

.0

For

eign

por

tfolio

inve

stmen

tU

S$ m

n.-1

.76.

413

.0-2

4.0

-13.

0-4

5.0

-11.

025

.0

10O

ther

(b)

US$

mn.

157.

498

.127

.3-1

16.1

-101

.017

4.0

71.0

-145

.0

11.O

vera

ll ba

lanc

eU

S$ m

n.52

.0-6

8.0

163.

037

.0-2

63.0

-522

.022

0.0

338.

0

% o

f GD

P0.

4-0

.51.

81.

4-1

.7-3

.11.

62.

3

Not

es:

(a):

Prov

ision

al.

(b):

Val

uatio

n ad

justm

ents,

erro

rs, a

nd o

miss

ions

.So

urce

:C

entra

l Ban

k of

Sri

Lank

a, A

nnua

l Rep

ort,

vario

us is

sues

.

2003

2004

2005

-1,5

39.0

-2,2

43.0

-2,5

16.0

-9.5

-12.

6-1

2.1

399.

041

9.0

338.

0

2.4

2.4

1.6

-172

.0-2

04.0

-299

.0

-1.2

-1.1

-1.4

1,20

5.0

1,35

0.0

1,73

6.0

7.4

7.6

8.3

36.0

30.0

93.0

0.2

0.2

0.4

-71.

0-6

48.0

-650

.0

-0.6

-3.6

-3.1

722.

063

1.0

1,22

4.0

4.3

3.5

5.9

74.0

64.0

250.

0

648.

056

7.0

974.

0

722.

068

0.0

798.

0

171.

021

7.0

234.

0

-33.

014

.011

.0

554.

043

9.0

553.

0

-75.

0-1

12.0

176.

0

2.0

11.0

60.0

-2.0

202.

032

3.0

502.

0-2

05.0

501.

0

3.1

-1.1

52.

4

2006(a

)

-3,3

70.0

-33.

7

256.

0

2.6

-388

.0

-1.6

2,06

9.0

8.6

101.

0

0.4

-1,3

34.0

-5.6

1,80

7.0

7.5

291.

0

1517

.0

709.

0

451.

0

-35.

0

491.

0

610.

0

51.0

293.

0

204.

0

0.8

xxv


Tab

le A

21

: Ex

chan

ge R

ates

Beh

avio

ur,

19

94

-20

06

(

End

of

per

iod

val

ues

)C

urre

ncy

Unit

1994

1995

1996

1997

1998

1999

2000

2001

2002

Nom

inal

exc

hang

e ra

tes

U.S

.A.

S.L.

Rs.

per U

S$49

.98

54.0

556

.71

61.2

967

.78

72.1

280

.06

93.1

696

.72

Jap

anS.

L. R

s. pe

r Yen

0.50

0.53

0.49

0.47

0.59

0.71

0.70

0.71

0.82

U. K

.S.

L. R

s. pe

r Pou

nd78

.05

84.2

595

.86

101.

6011

2.62

116.

7211

9.37

135.

0615

5.12

Eur

opea

n U

nion

S.L.

Rs.

per E

uro

--

--

-72

.53

74.3

282

.27

101.

38

Indi

aS.

L. R

s. pe

r Ind

. Rs.

1.59

1.54

1.58

1.56

1.59

1.66

1.71

1.93

2.02

Real

exc

hang

e ra

tes

U.S

.A.

Inde

x, 2

000=

100

84.9

688

.38

81.8

280

.71

79.5

481

.56

90.2

498

.32

86.1

0

Japa

nIn

dex,

200

0=10

010

4.31

100.

9379

.65

70.5

879

.72

89.4

282

.47

73.7

288

.50

U. K

.In

dex,

200

0=10

077

.45

80.7

981

.35

79.3

980

.92

81.0

479

.98

79.4

980

.40

Eur

opea

n U

nion

Inde

x, 2

000=

100

--

--

-98

.39

100.

0099

.05

111.

32

Indi

aIn

dex,

200

0=10

071

.10

70.0

164

.70

60.9

259

.77

61.8

763

.95

66.2

865

.90

Sour

ces:

Cen

tral B

ank

of S

ri La

nka,

Ann

ual R

epor

t, va

rious

issu

es; I

nter

natio

nal M

onet

ary

Fund

, Int

erna

tiona

l Fin

anci

al S

tatis

tics Y

earb

ook,

var

ious

yea

rs.

2003

2004

2005

96.7

410

4.60

102.

12

0.90

1.02

0.87

172.

1920

1.37

175.

94

121.

6014

2.32

120.

96

2.12

2.40

2.27

94.5

010

0.88

94.6

9

91.7

797

.86

76.0

3

109.

8712

2.28

98.4

3

127.

5214

1.61

112.

21

106.

2311

8.68

105.

74

2006

107.

71

0.90

211.

29

141.

58

2.44

91.9

4

71.2

8

106.

59

121.

46

104.

71

xxvi


Appendix B: Capital Market

Table B1: Sri Lanka's Capital Market Structure, 2002-2006

2002 2003 2004 2005

1. Equity market:

Market capitalization 162,600 262,800 382,100 584,000

of which central depository 85,943 136,059 195,032 259,780

2. Debt market: 943,286 1,035,394 1,165,491 1,266,802

(i) Private 43,110 45,751 48,000 29,060

(ii) Public 900,176 989,643 1,117,491 1,237,742

(a) Short-term(TBs) 210,995 219,295 243,886 234,174

(b) Medium & long-term 689,181 770,384 873,605 1,003,568

3. Total debt and equity (Rs. mn) 1,105,886 1,298,194 1,547,591 1,850,802

as a percentage of GDP(%) 78.80 83.07 86.07 88.20

of which actually traded 92,118 147,159 209,532 270,680

through the central depository

as a share of total (%) 8.3 11.7 13.5 14.6

4. Foreign participation in the central 12 14 14 14

depository as a per cent

of market capitalization (%)

Note: (a): Provisional.* Debentures listed is no longer available. (Source: CSE Fact Book 2005 and 2006).

Sources: Colombo Stock Exchange, Annual Report; Central Bank of Sri Lanka, Annual Report, various issues.

2006(a)

834,800

370,076

1,460,644*

42,260*

1,418,384

257,732

1,160,652

2,295,444

92.40

393,576

17.1

14

*

*

*

xxvii

Appendix B: Capital Market (Statistical Base)

Note: 1000 Million = 1 Billion.

Source: Colombo Stock Exchange, Annual Report, various issues.

Table B2: Recent Developments in the Share Market, 1998-2006

1998 1999 2000 2001 2002 2003 2004

1. Number of companies listed 240 237 239 238 238 244 242

New listings 6 4 5 2 9 8 5

De-listings 5 7 3 3 9 2 7

2. Number of companies traded 224 226 228 225 231 236 241

3. Market capitalization Rs. bn. 117 112.8 89 124 162 263 382

US$ bn. 1.7 1.6 1.2 1.4 1.7 2.7 3.8

4. Price -earnings ratio times, year end 9.0 6.6 5.2 7.5 12.1 11.1 10.8

5. Number of shares traded (mn.) 634 486 449 747 1,220 2,255 2,752

Domestic (mn.) 425 357 350 607 1,035 1,932 2,479

Foreign (mn.) 208 129 99 140 185 323 273

6. Trades (‘000) 329.0 205.7 160.0 159.7 283.2 481.3 645.1

Domestic (‘000) 312.0 193.6 150.0 152.8 273.2 460.9 611.6

Foreign (‘000) 17.0 12.1 10.0 6.8 10.0 22.8 33.4

7. Turnover Rs.bn. 18.2 14.8 11 14.1 30.5 73.8 59.0

US$ bn. 0.3 0.2 0.1 0.2 0.3 0.7 0.6

Domestic Rs. bn. 11.8 9.3 7.9 11.4 24.3 59.9 47.9

Foreign Rs. bn. 6.4 5.5 3.1 2.6 6.2 13.8 11.1

8. Liquidity- turnover / market

Capitalization ratio (%) 15.5 13.1 12.4 11.3 18.7 28.1 15.4

9. No. of new issues 6 4 4 _ 5 4 _

10. Total no. of shares issued (mn.) 24 29.2 80 _ 244 _ _

11. Value of shares issued (Rs. bn.) 0.3 0.4 0.1 _ 3.6 _ _

12. Central depository:

Domestic (Rs. bn.) 29.8 33.9 30.9 50.9 66.5 98.2 140.4

Foreign (Rs. bn.) 17.2 9.5 12.2 19.5 37.8 54.6 Total

(Rs. bn.) 48.4 51.1 40.4 63.1 86.0 136.0 195.0

Percentage of market cap. (%) 41 45 45 51 53 52 51

13. Non-national activity

Net purchases (Rs. mn.) -1,560.0 -950.8 -3,364.6 -1,024.8 2,441.5 209.3 1,105.0

Purchases (Rs. mn.) 5,645.0 5,050.1 1,445.0 2,111.9 7,477.7 13,943.9 11,278.0

Sales (Rs. mn.) 7,205.0 6,000.9 4,809.9 3,136.7 5,036.2 13,734.6 10,172.0

14. Price indices

All Share 1985=100 597.3 572.5 447.6 621.0 815.1 1,062.0 1,506.9

Growth % change -14.9 -4.2 -21.8 38.7 31.2 30.2 41.9

Sensitive 1985=100 923.0 937.5 698.5 1,031.0 1,374.6 1,898.0 2,073.7

Growth % change -13.6 -6.2 -25.4 47.6 33.3 38.1 9.3

2005 2006

239 237

6 2

9 4

242 232

584 835

5.8 8.0

12.4 14.0

5,128 3,912

4,313 3,178

815 734

1,100.4 9,523.8

1,038.5 9,082.2

61.9 44.2

114.6 105.1

1.1 1.0

89.9 70.7

24.6 34.5

19.6 12.6

_ _

_ _

_ _

179.8 248.7

79.9 121.4

259.8 370.1

44 44

6,144.5 5,377.0

27,712.4 37,167.0

21,567.9 31,790.0

1,922.2 2,722.4

27.6 41.6

2,451.1 3,711.8

18.2 51.4

xxviii


Table B3: Market Concentration(% of total market capitalization)

Dialog

JKH

SLT

Commercial Bank

Lanka IOC

Carsons

DFCC

National Development Bank

Ceylon Tobacco

Hatton National Bank

Total

Note: As at year 2006 the top ten of the 234 listed company accounts for 56% of totalmarket capitalization.

Source: Colombo Stock Exchange , Annual Report, various issues.

2006(%)

23.50

10.75

5.99

3.25

3.04

1.97

1.86

1.82

1.77

1.76

55.71

xxix


Contd...../-

3.

Company No. of shares Issue price No. of shares No. of shares Date listedoffered Rs. subscribed devolved to

by public underwriters

1. New listings-2004

2.

Gestetner of Ceylon Ltd. 1,012,500 20.00 1,012,500 – 11-Feb-05The Fortress Resorts Ltd. 20,737,250 10.00 20,737,250 – 29-Mar-05Hotel Reefcomber Ltd. 3,932,663 10.00 3,932,663 – 22-Mar-05Lankem Developments Ltd. 1,800,000 15.00 1,800,000 – 21-Mar-05Laxapana Battries Ltd. 5,700,000 10.00 3,300,000 – 4-Apr-05The Ceylon Guardian Investment Trust Ltd. 3,550,896 80.00 3,550,896 – 5-Apr-05The Ceylon Investment Company Ltd. 4,527,338 50.00 4,527,338 – 5-Apr-05Tess Agro Ltd. 53,200,000 1.50 30,636,364 – 10-Jun-05Seylan Merchant Bank Ltd. 11,125,780 11.00 11,125,780 – 22-Jun-05Nawaloka Hospitals Ltd. 120,000,000 4.00 104,752,798 – 14-Jul-05Muller & Phipps (Ceylon) Ltd. 54,000,000 2.00 48,000,000 – 15-Jul-05E-Channeling Ltd. 6,978,938 10.00 6,978,938 – 21-Sep-05Kelsey Development Ltd. 2,582,115 25.00 2,582,115 – 3-Oct-05Merchant Bank of Sri Lanka 30,000,000 15.00 30,000,000 – 18-Oct-05Pegasus Hotels of Ceylon Ltd. 15,670,637 18.00 15,670,637 – 6-Dec-05Equity One Ltd. 34,118,387 30.00 34,118,387 – 9-Nov-05Equity Two Ltd. 24,800,000 14.00 24,800,000 – 9-Nov-05Samson International Limited 549,711 46.00 549,711 – 21-Nov-05 Value (Rs) 3,783,189,065 Issues (No.) 18

Right issues - 2004 by sector No.of issues No. of shares Value(Rs.)

Banks, Finance & Insurance 2 41,125,780 572,383,580Chemicals & Pharmaceuticals 1 3,300,000 33,000,000Construction & Engineering 1 1,800,000 27,000,000Healthcare 1 104,752,798 419,011,192Hotels & Travels 3 40,340,550 528,770,596Investment Trusts 2 8,078,234 510,438,580Information Technology 1 6,978,938 69,789,380Land & Property 3 61,500,502 1,435,304,485Manufacturing 1 549,711 25,286,706Stores & Supplies 2 49,012,500 116,250,000Trading 1 30,636,364 45,954,546Total 18 348,075,377 3,783,189,065

New listing-2005 No. of shares Issue price No. of shares No. of shares Date listedoffered Rs. subscribed devolved to


Blue Diamonds Jewellery Worldwide Ltd. 65,589,385 2.50 30,057,291 – 6-Jan-06Cargo Boat Development Co. Ltd 3,400,012 15.00 3,400,012 – 4-Jan-06Commercial Leasing Co. Ltd 2,016,667 60.00 2,016,667 – 30-Jan-06Regnis (Lanka) Ltd 1,207,271 50.00 1,207,271 – 20-Jan-06Chemical Industries (Colombo) Ltd 8,100,000 62.00 8,100,000 – 29-Mar-06Chemical Industries (Colombo) Ltd 2,430,000 35.00 2,430,000 – 29-Mar-06Dankotuwa Porcelain Ltd 18,094,296 10.00 12,791,509 5,302,787 25-Apr-06Seylan Merchant Leasing Ltd 5,047,475 18.00 5,047,475 – 20-Apr-06The Fortrees Resorts Ltd 38,882,344 10.00 38,882,344 – 23-May-06Seylan Bank Ltd 83,560,000 12.50 83,560,000 – 2-May-06Vidullanka Ltd 2,981,250 20.00 2,981,250 – 3-May-06Overseas Reality (Ceylon) Ltd 69,057,200 15.00 10,133,921 58,923,279 23-Aug-06

Table B4: New Equity Listings - 2005 & 2006

xxx


No. of shares Issue price No. of shares No. of shares Date listedoffered Rs. subscribed devolved to


Pan Asia Banking Corporation Ltd 55,571,883 10.00 55,068,524 – 26-Oct-06Seylan Merchant Leasing Ltd 3,028,485 20.00 3,028,485 – 30-Oct-06Diesel & Motor Engineering Co. Ltd 1,100,000 50.00 1,100,000 – 20-Nov-06People's Merchant Bank Ltd 12,500,000 20.00 12,500,000 – 14-Nov-06 Value (Rs) 4,705,479,692 Issues (No.) 15

Right issues - 2005 By Sector No.of issues No. of shares Value(Rs.)

Banks, Finance & Insurance 6 161,724,510 2,122,643,100Chemicals & Pharmaceuticals 1 10,530,000 587,250,000Hotels & Travels 1 38,882,344 388,823,440Land & Property 2 72,457,212 1,086,858,180Motors 1 1,100,000 55,000,000Manufacturing 3 84,890,952 405,279,972Power & Energy 1 2,981,250 59,625,000Total 15 372,566,268 4,705,479,692

4.

Source: Colombo Stock Exchange, Annual Report, various issues.

xxxi


Note: (a): Provisional.** All corporate denbentures listed on the Colombo Stock Exchange were transferred to the DEX with effect from August2005.* Therefore, debentures listed is no longer available. (Source: CSE Fact Book 2005 and 2006).


Table B5: Structure of Debt Market, 2002-2006(Rs.bn) 2002 2003 2004 2005

1. Private Debt:

(a) Commercial paper(year end) 5.60 11.10 14.50 10.90

(b) Certificates of deposit 28.71 24.98 21.03 18.16

(I) Commercial banks 27.21 23.64 19.79 17.06

(ii) Finance companies 1.50 1.34 1.23 1.10

(c) Debentures (listed) 10.30 9.67 12.47 **

Total private debt 44.61 45.75 48.00 29.06*

2. Public debt:

(a) Short terms

(i) Treasury bills 210.99 219.29 243.88 234.17

(ii) Central Bank securities _ _ _ _

(b) Medium & long term

(i) Treasury bonds 347.13 483.11 643.35 751.57

(ii) Rupee securities 287.70 248.41 164.76 140.56

(iii) Certificates of deposit _ _ _ _

Total public debt 845.82 955.20 1052.00 1126.30

3. Total debt 890.43 1000.95 1100.00 1155.36*

2006(a)

23.50

18.76

17.70

1.06

**

42.26

257.73

_

885.97

116.71

_

1,260.41

1,302.67*

xxxii


Table B6: Listed Debentures, 2004-2006

Issuer Issued Par value Interest No.of debt Date listed(No.) (Issue price Rs.) (p.a.) subscribed

1. Listings 2004 Merchant Bank of Sri Lanka Ltd. 1,000 (with an 100 10.38% 83,000 08.04.04

option of issusing 100 10.12% 7,280 08.04.04

a further 1,000) 100 10.00% 33,320 08.04.04

100 Floating 7,110 08.04.04100 Floating 50 08.04.04

100 Floating 32,590 08.04.04

Sampath Bank Ltd. 10,000 (with an 100 10.00% 226,840 29.06.04

option of issusing 100 9.75% 45,150 29.06.04a further 5,000) 100 Floating 1,228,010 29.06.04

2. Listings 2005

Seylan Merchant Leasing Ltd. 100 10.25% 63,000 18.07.051,000,000 100 11.00% 399,050 18.07.05

100 11.50% 111,850 18.07.05

100 12.00% 90,000 18.07.05

100 11.75% 23,000 18.07.05100 12.50% 313,100 18.07.05

Senkadagala Finance Company Ltd. 2,500,000 100 14.00% 2,242,200 10.10.05

100 Floating 257,800 10.10.05

3. Listings 2006

Seylan Merchant Leasing Ltd. 10,000,000 with an 100 13.00% 7,646,400 25.07.06

option to issue up to 100 13.50% 4,620,800 25.07.06

a further 5,000,000 100 Floating 305,950 25.07.06 DFCC Bank if oversubscribed 1,000 13.75% 200,000 17.11.06

Floating 170,000 17.11.06

Unsecured subordinated Floating 40,000 17.11.06

redeemable debenture 14.00% 590,000 17.11.06

Source: Colombo Stock Exchange.

Documents

SRI LANKA - Institute of Policy Studies · 3.5.2 Pakistan-Sri Lanka Free Trade Agreement 35 3.5.3 South Asia Free Trade Agreement 36 3.5.4 Asia-Pacific Trade Agreement 37 3.5.5 Bay