Documentof TheWorld Bank ReportNo. 34054-LK INTERNATIONAL DEVELOPMENT ASSOCIATION AND INTERNATIONAL FINANCE CORPORATION COUNTRYASSISTANCE STRATEGY PROGRESSREPORT FOR THE DEMOCRATICSOCIALISTREPUBLICOFSRI LANKA January6,2006 Sri Lanka CountryManagementUnit South Asia Region The last CountryAssistance Strategyfor Sri Lanka (Report No. 25413-CE) was discussed by the Board on April 1, 2003. Currency andEquivalents Currency Unit= Sri Lankan Rupee (Rs.) US$1 =Rs. 101.87 (as of November 21,2005) FiscalYear January 1- December 31 AbbreviationsandAcronyms AAA Analytical andAdvisory Activities JBIC Japan Bankfor InternationalCooperation ADB AsianDevelopmentBank JHU JathikaHele Urumaya AG Auditor General JVP JanathaVimukti Peramuna[People's LiberationFront] BOP BalanceofPayments LDO LandDevelopmentOrdinance CIA Current Account LTTE LiberationTigers ofTamil Eelam CAS CountryAssistance Strategy MDG(s) MillenniumDevelopmentGoal(s) CBSL CentralBank of Sri Lanka MDTF Multi-Donor Trust Fund CCPI ColomboConsumerPriceIndex MFA Multi-Fibre Agreement CDD Community-DrivenDevelopment MIGA Multilateral InvestmentGuaranteeAgency CEB CeylonElectricity Board MOF Ministry ofFinance CFA Cease-FireAgreement MOU MemorandumofUnderstanding CFAA CountryFinancialAccountability Assessment MTBF MediumTermBudgetFramework COPA CommitteeonPublic Accounts NEERP North East EmergencyReconstructionProgram COPE Committeeon PublicEnterprises NEHRP North East HousingReconstructionProgram CPA Center for Policy Alternatives NEIAP I1 SecondNorthEastIrrigatedAgriculture Project CPAR CountryProcurementAssessment Review NGO(s) Non-GovernmentalOrganization(s) CPIA(s) CountryPolicy andInstitutionalAssessment(s) NPA NationalProcurementAgency CWSSP I1 CommunityWater Supplyand SanitationProjectI1 ODA Official DevelopmentAssistance DCS Departmentof CensusandStatistics PA People's Alliance DPR DevelopmentPolicyReview PB People's Bank DSA Debt SustainabilityAnalysis PRGF PovertyReductionandGrowth Facility EFF ExtendedFundFacility PRS PovertyReductionStrategy ERTA EconomicReformTechnicalAssistance PRSC PovertyReductionSupport Credit ETF Employers'Trust Fund P-TOMS Post-TsunamiOperationalManagementStructure FMRA FiscalManagementResponsibilityAct PUCSL PublicUtilities Commissionof Sri Lanka FMTAAS FundingMechanismfor TechnicalAssistanceand ROSC Reportsonthe Observanceof Standards andCodes Advisory Services RSL RegainingSri Lanka FY FiscalYear RTA Registrationof Title Act GDP Gross DomesticProduct SCOPP Secretariat for Coordinatingthe PeaceProcess GNFS Goods andNon-FactorServices SEDF SouthAsia EnterpriseDevelopmentFacility GNI GrossNationalIncome SEMA Strategic EnterpriseManagementAgency GOVCAP GovernanceandCapacity Building SME(s) Small andMediumEnterprise(s) HIES HouseholdIncomeandExpenditureSurvey SOE(s) StateOwnedEnterprise(s) ICR ImplementationCompletionReport STATCAP Statistics CapacityBuildingProject IDA InternationalDevelopment Association SWAP SectorWide Approach IDF InstitutionalDevelopmentFund TA TechnicalAssistance IDP InstitutionalDevelopmentPlan TAFREN Task Forceto Rebuild the Nation IFAC InternationalFederationofAccountants TB Tuberculosis IFC InternationalFinanceCorporation TERP Tsunami EmergencyReconstructionProgram IFRC InternationalFederationofRedCross TEWA TerminationofEmploymentofWorkman's Act IMF InternationalMonetaryFund W D P ) UnitedNations(DevelopmentProgram) IPSAS InternationalPublicSectorAccountingStandards UNF UnitedNational Front IRQUE ImprovingRelevanceandQuality of Undergraduate UPFA UnitedPeople's FreedomAlliance Education USTDA United States Trade andDevelopmentAgency ISGA InterimSelfGoverningAuthority WBI World BankInstitute UC)T Information(and Communications) Technology IDA IFC Vice President: PrafulC. Patel, SARVP Assaad Jabre, CIOVP Country Director: Peter C. Harrold, SACSL IyadMalas, CSADR Task TeamLeader DeborahA. Bateman, SACNA Neil Gregory, CSASC SRI LANKA CountryAssistance StrategyProgressReport TABLE OF CONTENTS I INTRODUCTION . .......................................................................................................................... 1 I1 . PROGRESSTOWARDSIMPLEMENTINGTHE CAS ........................................................... 2 A. Introduction................................................................................................................................ 2 B. Outcomes................................................................................................................................... 2 C IDAProgram............................................................................................................................. 4 . Lending...................................................................................................................................... 4 Non-Lending.............................................................................................................................. CapacityBuilding...................................................................................................................... 6 7 D. IFCandMIGAPrograms.......................................................................................................... Portfolio Management ............................................................................................................... 7 8 I11 . THE WAY FORWARD ................................................................................................................. 8 A. Introduction................................................................................................................................ 8 B. The ProposedSupport Program................................................................................................. C. Risks........................................................................................................................................ 9 12 BOXES Box 1 Monitoringand Evaluation.............................................................................................................. .4 Box 2 The DevelopmentPartnersCoordination and Support Fund........................................................... 6 Box 3 WBIActivities ................................................................................................................................. 7 Box 4 RisksAssociated with CAS Implementation................................................................................. 12 TABLES Table 1LendingActivities, FY03-FY05 ...................................................................................................... 5 Table 2 Non-Lending Activities, FY03-FY05 .............................................................................................. 6 Table 3 Indicative AAA, FY06-FY08........................................................................................................... 9 Table 4 Indicative LendingProgram, FY06-FY08 ..................................................................................... 10 FIGURES Fig. 1 Progresstowards Achieving CAS Outcomes................................................................................... 3 Fig.2 Plannedand Actual Lending: FY03-FY05....................................................................................... 5 APPENDICES Appendix I Sri Lanka: The Country Context Appendix 11 Country Outcome Performance Matrix Appendix 111 Evaluation of the CAS Triggers Appendix IV Lending, Non-Lending, Capacity Building,IFC and MIGA Appendix V The RisksAssociated with Implementationo fthe CAS Appendix VI Country FinancingParameters ANNEXES Annex A1 KeyEconomic andProgramIndicators-Change fromLast CAS Annex A2 At A Glance Annex B2 SelectedIndicatorsof BankPortfolio Performance and Management Annex B3 Bank Group ProgramSummary Annex B4 Summary o fNon-Lending Services Annex B5 Poverty and Social Indicators Annex B6 Key Economic Indicators Annex B7 KeyExposure Indicators Annex B8 Status o fBank Group Operations Map (IBRD 30684) S R I LANKA CountryAssistanceStrategy ProgressReport I. Introduction 1. The last Country Assistance Strategy (CAS) for Sri Lanka-the first `results-based' CAS discussed at the Board on April 1,2003-was presentedat a time o f great optimism.' On the peace front, a Memorandum o f Understanding (MOU) had been signed between the Government and the Liberation Tigers o f Tamil Eelam (LTTE), a permanent cease-fire was in effect and six rounds o f peace discussions had been held. On the political front, a private sector-oriented Government was in power and moving forward decisively in implementing a comprehensive reform program. Finally, on the economic front, the country was experiencing a gradual recovery and the economy was growing at more than 5 percent. Indeed, Sri Lanka was facing a rare window o f opportunity. 2. Since that time, much has happened in Sri Lanka-most notably, the devastating tsunami that struck on the morning o f December 26, 2004, leaving behind widespread destruction and killing over 35,000 people.* Inaddition: Shortly after the CAS was discussed at the Board, the peace talks stalled. Although for the most part the cease-fire has continued to hold, since the end o f 2004 there has been a rising tide o f political violence-especially in the East after the split o f the Karuna faction from the LTTE-and the situation has become extremely fragile. There had been hopes that the horrific tragedy o f the tsunami might be the `silver lining' to unite all Sri Lankans inre-building the devastated country. However, the agreement on how the parties to the conflict would work together in good faith to deliver post- tsunami support to the coastal communities inthe North and East-which was hoped would create an environment for the renewal o f the peace process-has not yet become effective. The peace front i s extremely tenuous. The political `co-habitation'-i.e., a President from one party and a Prime Minister from the opposition4id not work. Within the increasingly unstable political environment-that has included elections at all levels, and the formation and failure o f unexpected coalitions-the Poverty Reduction Strategy (PRS) was discarded, and the pace and depth o f the reform efforts were severely curtailed. With backing from the far left JVP and the Buddhist JHU, on November 17, 2005, Mr. Mahinda Rajapakse was elected Executive President o f Sri Lanka. While average growth has remained at about 5 percent, this has not been adequate for significantly reducing poverty beyond urban areas. There are vast differences among regions and sectors, and between the rich and the poor-inequality has risen sharply. Macroeconomic performance weakened in2004 and the fiscal situation remains under severe stress. Needed reforms have proved elusive in the face o f the political instability and the challenge o f recovering from the tsunami. Economic performance continues below the potential and the reform agenda remains on the back burner. 1 Report No. 25413-CE, March 4,2003. 2 The CAS Progress Report had been planned for FY05, but plans changed when the team mobilized in fill to orchestrate the Bank's impressive response to the tsunami (see Box 3 in Appendix I). such, a As decision was made to delay the CAS Progress Report untilthe present time. 3. In short, the political constraints and uncertainties have affected the peace process, policy implementation and the environment for pro-poor, broad-based economic As such, there are great challenges facing Sri Lankatoday. 4. Given this significantly changed operating environment, it i s an opportune time to review the Bank's strategy for Sri Lanka. Given the expectation that it will take some time before the situation becomes considerably clearer-especially on the political front-the decision was made to go aheadwith a CAS Progress Report at this point in time and present a new CAS in 12 to 15 months' time when the situation is expected to have stabilized. While this Progress Report does not propose to change the core strategy, it does propose a significant shift inthe structure o f the Bank's activities. With the prospect of continued uncertainty over both the reform and peace processes, the indicative program would not place Poverty Reduction Support Credits (PRSCs) at the center as proposed inthe CAS. Rather it proposes a core programo f investment and analyticalactivitiesthat would support the outcomesinthe three thematic areas, while providing the option o f adding policy-based lending in a higher case in the event o f an improved framework. The remainder of this document evaluates the implementation of the Bank's programsince the April 2003 CAS and proposesa strategy for going forward inthe near term. 11. Progresstowards Implementing the CAS A. Introduction 5. The Bank's strategy was designed to support implementation o f the country's PRS and was organized around three central themes: Peace, Growth and Equity. Inselecting the peace pillar, it was felt that a return to peace and restoration of domestic security were critical to create a framework for sustainable poverty reduction and growth, and make sure that the fiscal burden remained tolerable. In addition, peace was important to ensure that the most vulnerable poor groups-i.e., the displaced and the conflict-affected-were reached. Secondly, itwas felt that economic growth was the main instrument for achieving prosperity and creating more resources for distribution. Finally, ensuring a balance/equity within the society was essential, especially with deeppockets ofpoverty existing inthe North, South and East. B. Outcomes 6. The CAS was developed around key outcomes defined for each o f the three pillars. Intotal, the strategy provided support towards achieving thirty-three outcomes, of which: (i) six were inthe peace pillar; (ii) fourteen were in growth; and (iii) thirteen were in equity. As the team worked towards developing a system to monitor and evaluate these outcomes, it was quickly realizedthat the number was excessive. As such, the outcomes were reviewed and prioritized, and the number currently being periodically monitoredhas more than been cut inhalf to sixteen, of which: (i) two are inthe peace pillar; (ii) ingrowth;(iii) areinequity;and(iv)twoarerelatedtothets~nami.~ seven five 3 For more detailed background information on the events in Sri Lanka since the last CAS-including the social, political, peace and economic contexts-see Appendix I. 4 Itwas decidedto treat `tsunami' as a fourth pillar, given the overlaps with eachofthe other three pillars. In addition, given its importance inthe Bank's program-that had not been envisioned at the time the CAS was formulated-it was deemed appropriate to add these new outcomes inthe tsunami pillar. With regard to the prioritization o f the original CAS outcomes, those that were felt to be less important andor could not be reported easily were dropped. 7. An evaluation of the CAS outcomes-including FY06 milestones, indicators, baseline data (end-2002) and data for subsequent years (Le., end-2003 and end-2004)-is contained inAppendix 11. As summarized in Figure 1, overall, there has been some modest success towards achieving the CAS outcomes, with 43 percent showing positive progress and/or improvements.' The highest concentration of these outcomes-three out of seven-are in the growthpillar, however, when loolung atthe growth pillar as a whole, positive progress and/or improvements have also been achieved in only 43 percent o f the outcomes. The next largest cluster-which covers about 38 percent of the CAS outcomes+an not 1Fig. 1: ProgressTowards AchievingCASOutcomes I be evaluated; specifically, there i s only one data point-i.e., a benchmark-and hence, it i s impossible at this point intime to evaluate whether or not there has been progress. Not surprisingly, the majority o f these outcomes are in the equity pillar, and in fact, three years into the CAS, it i s possible to evaluate progress towards achieving only one of the five outcomes defined within this particular pillar. This i s also not surprising as it generally does takes longer to observe changes in Positive I*patwe Mixed Car'tEvA I human development indicators and as data collection is expensive, these indicators are generally not measured annually. Three CAS outcomes-all inthe growth pillar and accounting for 19 percent of total outcomes-are classified as having negative progress and/or deteriorating, and mixed progress. It i s not a coincidence that all of these are inthe growth pillar-i.e., the one inwhich there has been the biggest disconnect between the envisioned CAS program and actual program, due to disruptions and uncertainties causedby the political events that unfoldedduringthe period. 8. Looking at the outcomes overall, it i s not unexpected to see that results were below intended results in those key areas in which the views o f the UPFA (United People's Freedom Alliance) administration differed significantly from those of the prior administration, while success was achievedin areas inwhich there was more continuity. Thus, the benefits from the cease-fire, especially interms of economic growth and agricultural production in the North and East, and outcomes associated with less controversial systemic reforms-such as results-based budgetingand reform of the Central Bank-have largely been realized. However, other public sector reforms that were designed to lay the foundation for future economic growth by reducing the role of the state-notably SOE reform and reduction o f public employment-were reversed and remain an issue for long term results. Some outcomes related to equity concerns cannot yet be evaluated due to data limitations, butthe early indications are that they are making better progress than anticipated and are likely to be achieved. Finally, the tsunami-related indicators that were added with respect to housing and livelihoods are yelding positive results. Overall, this means while short term indicators continue to be reasonably positive, it will be important for IDA to continue to support programs of reform and investment that will bring about poverty reduction over the medium to longterm, and the outcomes to date leave something to be desired inthis regard. 9. Monitoring and Evaluation. As was recognized in the CAS, an effective monitoring and evaluation system is critical for tracking implementation of poverty and human development outcomes. A number o f efforts have been initiated-aided by a strong collaboration between the Bank and the Department of Census and Statistics (DCS)-during the CAS period to enhance institutional and technical capacity for monitoring such outcomes (see Box 1). The partnership that has been developed 5 Success towards achieving each o f the CAS outcomes has been evaluated according to four categories: (i) positive progress or improving; (ii) progress or deteriorating; (iii) negative mixedprogress-i.e., a situation with more than one indicator showing different directions o f progress; and (iv) can't evaluate-i.e., a situationwhere there i s only baseline information. Sri Lanka: Country Assistance StratemProgress RePort Pape 4 of 12 will continue to , b e strengthened through Box 1: Monitoring and Evaluation `STATCAP'-type6 support in Giventhe geographically unevenpoverty reduction, and the recent policy the proposed follow-up focus on lagging areas and improving targeting o f welfare programs, there technical assistance (TA) is a critical need to monitor poverty at and below the district level. TA operation (see paragraph 22). from the Bank (including through ERTA) has helped DCS develop The efforts to continue to capacity in this area-e.g., a recently finalized poverty map yields improve the quality and estimates o f poverty rates at the division level or even below for the country (with the exception o f some areas of the North and East). This is availability of statistics in Sri valuable in terms o f being able to identify poor areas and spatial factors Lanka will help to strengthen associated with poverty-e.g., in conjunction with a map of road the evidence base for improved networks, the poverty maps are able to relate concentration o f poverty policy-making, as well as with remoteness and lack o f adequate access to markets. These efforts monitoring and implementing have reinforced the need for the current Household Income and development programs. An Expenditure Survey (HIES) to include more information on human enhanced capacity will allow development indicators, which will enable systematic monitoring at the D C S to undertake the broad district level. A plan to expand HIES-including enhancing DCS range of monitoring activities institutional capacity to conduct household surveys-is currently being in a sustainable manner, discussed and a pilot will be conducted next year in conjunction with the next round o f the standard HIES. It i s important for this and other future including monitoring poverty surveys to include a representative sample o f the North and East to bridge and social indicators at district the existing data gap for that region. However, to what extent this is level or below through regular possible will depend on the situation on the ground. household surveys and updatingofpoverty maps. C. IDA Program Lending 10. Since the presentation o f the CAS, Sri Lanka has received the lending levels associated with the `base case' scenario that envisioned a programaveraging US$200 million inresources annually from the International Development Association (IDA). Ineach year, base case lending was to be anchored in a PRSCprovidingprogrammatic support to the implementation of the PRS. This wouldbe complemented bytwo to four investmenthectoraloperations per year to support key programs inthe focus areas. For Sri Lanka to remain in the base case, continued progress was anticipated in implementing the peace process and a positive evaluation towards meeting triggers covering: (i) macroeconomic performance, with special emphasis on fiscal issues; (ii) successful implementation of the economic reform program as contained inthe PRS; (iii) progress inaddressing equity concerns; and (iv) portfolio management.7 11. So far during the CAS period (FY03-FY05), eleven projects have been approved for a total of US$610.4million, of which US$192.4million(32 percent) has been inIDA grants, all which have been directed towards the equity pillar and tsunami recovery. On top of this, there were two portfolio restructurings-in November 2002 to provide US$36 million for emergency reconstruction in the North and East, and in February 2005 to provide US$75 million in emergency support for tsunami reconstruction. 6 `STATCAP' stands for Statistical Capacity Building Project. Currently, a multi-year Statistical Master Plan is being developed that will help identify the constraints and specific steps, including financing needs, requiredto operationalize the plan. 7 For an evaluation o f these triggers, see Appendix 111. 12. When Fig. 2: PlannedandActualLending:FY03-FY05 compared to the (Values inUS$ Millions) lending volume A. ByPillar B.ByFiscalYear* during- the period Wace Growth Quity Tsunani FY03 FY04 FY05 has been pGZZiG? /.Ranned.Actualj SUTrisinglY close- * Differentshadingfor FY05 "actuals" is tsunami-related lending. Table 1: LendingActivities,FY03-FY05 Credit/ Approval Amount Pillar GrantNo.' Name Date (US$ M) Peace (R) NorthEast Emergency ReconstructionProgram(NEERP) 11/12/02 36.0 3935 Second NorthEast Irrigated Agriculture Project (NEIAP 11) 6/22/04 64.7 4014 NorthEastHousing ReconstructionProgram(NEHRP) 12114/04 75.0 Sub-totalPeace* 139.7 Growth 3722 Economic ReformTechnical Assistance (ERTA) 12/10102 15.0 3781 Improving Relevance andQuality o fUndergraduate Ed. (IRQUE) 6110103 40.3 3780 First Poverty Reduction Support Credit (PRSC I) 6117/03 125.0 3986 e-Sri Lanka Development 9121/04 53.0 Sub-total Growth 233.3 Equity H013 National HIVIAIDS Prevention 12117/02 12.6 H035 Second CommunityWater Supply and Sanitation (CWSSP 11) 5/6/03 39.8 H078 CommunityDevelopment andLivellhood Improvement GemiDiriya 3/30/04 50.0 H095 HealthSector Development 6/15/04 60.0 Sub-totalEquity 162.4 Tsunami (R) Tsunami EmergencyRecovery Program (TERP), PhaseI 2111/05 75.0 4039/H147 Tsunami Emergency Recovery Program (TERP), PhaseI1 2/24/05 75.0 Sub-total Tsunami' 75.0 Notes: (1) Items beginning with `H' are IDA grants; others are IDA credits; (R) signifies portfolio restructuring. (2) As it is not considerednew lending, the sub-totals do not include the portfolio restructurings. Sri Lanka: Countn,Assistance StratemPromess Report Page 6 of 12 Non-Lending Box 2: The Development Partners Coordination and Support Fund This find, managed by the Bank, was established in November 13. As envisioned in the 2004 to finance analytical activities that: (i)support the donor CAS, the ambitious program of coordination process; and (ii) are related to the harmonization o f donor Analytical and Advisory policies and practices in Sri Lanka. So far, there three contributors-the Activities (AAA) was Netherlands, the UK Department for International Development (DflD) developed around three broad and Swedish International Development Cooperation Agency (Sida)- categories of activities: (i) areas have committed US$1.95 millionto t h ~ sfund. in which there were major The' find i s currently financing two analytical studies: (i) knowledge gaps to be filled; Strategic Conflict Assessment that evaluates the past four years o f (ii) areas o f analysis international donor involvement in Sri Lanka and recommends how the specifically requested by the development partners can best engage with and help strengthen domestic Government; and (iii)AAA peace building efforts; and (ii) Monitoring Factors Affecting Peace needed as a basis for future Process in which periodically over the coming years trends inthe peace process will be analyzed and reports will be prepared. This monitoring lending, especially for sectoral system will help to measure compliance with the cease-fire agreement programs. So far during the (CFA) and analyze social indicators. CAS period, most of the completed activities have helpedto fillknowledge gaps. Looking at the distributiono f the AAA bypillar, nine pieces-r nearly 70 percent of the total'-support achieving the objectives o f the growth pillar, with another three (23 percent) supporting the equityobjectives. This is not very different from what was envisioned in the CAS, reinforcing the team's recognition that significant analytical work would be requiredto buildconsensuson the proposed growth agenda. Despite the slowdown inthe reformefforts, this analyticalwork hasbeentremendously valuable. Inthe coming year, a concerted effort willbe made to disseminate the results more widely as part o f our role as an `Information Bank' to help education civil society and generatepublic debate on these critical issues. AAA carried out duringthe period to date are summarized in Table 2 and presented in more detail in Appendix N. In addition, the Bank has been worlung closely with other donors on analytical activities to support the peace process and donor harmonization(see Box 2). Table 2: Non-Lending Activities, FY03-FY05 Pillar Purpose Name Completion Date Growth A Public Expenditure Analysis May 2004 A DevelopmentPolicy Review (DPR) June 2004 A Improving the Rural andUrbanInvestment Climate January 2005 A I s Sri Lanka Ready for Removal o f Textile and Clothing Export Quotas? May 2005 A Country Procurement Assessment Review (CPAR) June 2003 A ROSCAccounting and Auditing Assessment May 2004 C Roads Policy Note November 2003 C Governance Policy Note November 2003 Equity A Attainingthe MillenniumDevelopment Goals inSri Lanka March2005 A Poverty Mapping Policy Note June 2005 C Treasures o fthe Education SysteminSri Lanka: Restoring Performance, May 2004 Expanding Opportunities and EnhancingProspects Tsunami B Preliminary Damage and Needs Assessment February 2005 Multi A Development Forum: The Economy, Tsunami and Poverty Reduction May 2005 Note: The purposes are: (A) areas inwhich there are major knowledge gaps to be filled; (B) areas of analysis requested bythe Government; and(C) AAA needed as abasis for future lending, 8 Includes the piece identified as multi-pillar inTable 2. Capacity Building Box 3: WBI Activities Primarily supporting achieving the outcomes in 14. To be able to achieve the CAS and PRS the growth and equity pillars, the focus o f the outcomes, and more fundamentally to be able to WBIprograminSri Lanka has been infour areas: monitor and evaluate progress towards achieving PRS Implementation to strengthen capacity to these outcomes, the CAS placed special emphasis on implement growth-oriented, pro-poor budgets; capacity building. To realize the capacity building Governance to ensure that public resource objectives, numerous sectoral and TA operations, as allocation i s consistent with constituent well as key pieces of the non-lending program- demands and development objectives; carried out jointly with local counterparts-were Media to increase transparency o f the public included in the program. With regard to the decision-making process and improve public achievements, all the investment operations approved sector accountability; and so far during the CAS periodg contain institutional Social Accountability to gain a better strengthening or capacity building components and understanding o f models of social accountability inpractice. approximately 20 percent o f the total funding approved has been allocated towards these activities. This includes: (i) I ERTA, the sole objective c which i s to strengthen public sector capacity to implement the economic reform program; (ii) projects where development of specialized institutional capacity i s a primary focus--e.g., LRQUE and e-Sri Lanka; and (iii)sectoral operations where weak institutional capacity was recognized as a critical constraint---e.g., Health, CWSSP I1and HIV/AIDS. With regard to non-lending activities there are also many examples where capacity building has been a focus, including the close working relationship between the Bank and DCS on the poverty-related work, and the collaboration with DCS and ACNielsen Lanka (Pvt.) Ltd. in carrying out the investment climate analysis. These activities have been fully coordinated withandreinforced by the World BankInstitute (WBI), for which Sri Lanka hasbeen a focus country (see Box 3 andAppendix IV for more details). Portfolio Management 15. As of October 31, 2005, the IDA portfolio in Sri Lanka consists of eighteen creditdgrants, with total commitments o f around US$SS3 million and an undisbursed balance of about US$452 million (5 1 percent). As mentioned, the portfolio also contains two "restructurings'-NEERP and TERP Phase I- that have allowed the Bank to respond quickly to reconstruction needs inthe conflict-affected North and East, andtsunami-affected areas. 16. Despite the uncertainties duringthe period-i.e., changes inGovernment, breakdown o f the peace talks and the tsunami-vera11 portfolio performance has been improving. Problems relating to procurement, financial management and disbursements have diminished, mainly as a result o f focused guidance and training provided both by the Bank and the National Procurement Agency (NPA). Commitments-at-risk have reduced from US$207 million (end-FY03) to US$5 million (end-FYO5). While the disbursement ratio has fluctuated at around 26 percent, total annual disbursements (from investment projects) have increasedfrom US$66 million inFY03 to US$112 million inFY05. 17. The staff of the Colombo office have played a pro-active role in helping to expedite project- related implementation and decision-making through: (i) providing real-time support to project staff, complementing regular supervision missions; (ii) undertaking continuous halogue between the Country Director and higher level officials on critical policy issues to help resolve impendingsetbacks; and (iii) regular monitoring of overall portfolio performance. A Project Directors' Forum-comprising the Directors of all IDA-financed projects and staff from the key supporting agencies-was convened inJuly 2003 to act as a focal point for addressing and resolving generic issues, sharing best practices, and 9 l k s includes the two `operations' created through the portfolio restructurings. streamlining monitoring and reporting. The Forum, that meets quarterly, has helpedto draw attention to issues beyond the control of Project Directors, but its synergic influence on portfolio performance i s yet to be fully realized. The procurement reform program-spearheaded by the NPA-is proceeding well, covering capacity building,document standardization and development of procurement-specific curricula with local institutions. Environmental and safeguard issues, as well as financial management and other fiduciary obligations, continue to receive priority attention during project identification, preparation and implementation to ensure effective compliance. Given the results-based focus o f the CAS, outcome- basedmonitoring is an integral focal area duringthe entire project cycle. D. IFC andMIGA Programs 18. The International Finance Corporation (IFC) has supported the growth pillar through investments that foster private sector participation. IFC has sought investments that: (i) develop financial markets and add value to the on-going consolidation of financial services; (ii)expand private provision of infrastructure services+.g., power, ports and telecommunications; (iii) support the growth o f export- oriented manufacturing and service companies; (iv) encourage the expansion of Sri Lankan companies' operations into the region; and (v) support the growth of small and medium enterprises (SMEs) in conjunction with multilateral and bilateral partners. As of September 30, 2005, the held portfolio of IFC consisted of investments innine companies, with a total committed exposure o fUS$96.6 million, all from IFC's own account that is comprised of US$64.5 million in loans, US$24.2 million in equity, US$5.9 million in guarantees and US$2 million in risk management. The portfolio i s spread over financial institutions, power, health care, manufacturing, ports and telecommunications. The activities o f the Multilateral Investment Guarantee Agency (MIGA) are directed towards supporting foreign direct investments in the country and improving the investment climate. MIGA's current exposure stands at a gross exposure o f US1.69 million, well below the country limit (US$420 million net), providing sufficient room for additional guarantees. MIGA has issued guarantees to a Japanese investor for an infrastructure project that i s aimed to helpalleviate the power shortage. 111. The Way Forward A. Introduction 19. While clearly presenting the risks and challenges that were widely present, the CAS scenarios were defined as `black or white'-i.e., peace or war and reform or no reform. Although clarity, stability and predictability had been envisioned, the situation that soon started to unfold was increasingly unclear, unstableand unpredictable. Therefore, it has beennecessaryto adapt the scenarios, and hence, the CAS performance indicatorsto make themmore realistic inlight of the events o frecent years. 20. Giventhe on-going uncertainties, but takmg account of the continued opportunities inSri Lanka, three scenarios have been developed for Bank support going forward." Each o f these three scenarios would be associatedwith different Country Policy and Institutional Assessments (CPIAs), and therefore, 10 As mentionedpreviously, it is envisionedthat a new CAS would be presented to the Boardinthe spring of 2007, or approximately four years after the current CAS--covering FY03-FYObwas discussed. Therefore, this Progress Report and its three scenarios-although including indicative lending and AAA programs for FY07 and FY08-are only intended to guide the Bank's programuntilthe time the next CAS i s presented. While it is conceivable that an FY07 operation could be ready before the new CAS, the current timetables do not suggest that this will happen. Therefore, it is very likely that only the FY06 operations listed inTable 4 will bepresentedbefore the next full CAS. Sri Lanka: CountrvAssistance Stratem Profless ReDort Pane 9 of 12 different maximum (though not necessarily actual) levels of IDA support." The CAS had assumed a strong commitment to the peace process and the economic reform program set out inthe PRS. As such, the CAS had placed PRSCs at the very heart o f the strategy, accompanied by a wide range o f supportive investment operations and AAA. The uncertainties that have developed mean that it is no longer possible to presume that a framework will be inplace to support policy-based lending. Thus, going forward, the proposed revisedprogramwould: 0 Provide for the possibility of PRSCs, ifthe policy framework develops inan appropriate way; 0 Identify a range of activities that would generate bi-partisan support, be justifiable in terms o f the long term impacts and further the desired outcomes associatedwith the three CAS themes; and 0 Permit the overall program to be adjusted in either direction in the light o f the developments on the peace, political and economic/policy fronts. B. The ProposedSupport Program 21. The core scenari+"Muddling Through"-would see a continuation o f the current framework that is inplace today inSri Lanka. Specifically, there is a 'no peace, no war' situation inwhich the cease- fire agreement (CFA) continues tohold in its key respects and there i s an adequate poverty reduction strategy framework. This means that FY06 Area while there are no significant reforms, a Local Service Delivery C framework is maintained that i s enough to: (i) Access to Finance AJC generate economic growth o f 4-5 percent Social ProtectionNote AJC annually, with a public expenditure pattern that Poverty Assessment A continues to give priority to social sector YouthTransitions A expenditures to maintain the strong human Tea and RubberEstatesStudy AJC development record; and (ii)maintain FY07 Study onAgeing A development expenditures which favor poorer GrowthDevelopment Options for the NE AJC regions and provide for the necessary social and AgricultureMarketing and Trade A economic infrastructure. While the YouthEmployment A macroeconomic framework would have TradeStudy A deficiencies, the fiscal deficit (excluding FYO8 tsunami-related expenditures) would be Urbanization B contained to around 8 percent o f GDP and Accounting for the Environment A inflation under 20 percent, levels that appear to Country Economic Memorandum A be not inconsistent with this level of growth. Education Sector Update C As part of this scenario, continued good progress in the implementation o f the tsunami recovery program would be expected. Energy issues are currently exerting significant pressures on spending and distorting the distribution pattern of subsidies, as well as threatening the stability o f the state banking system. As such, under this scenario it would be expected that the power sector reforms would gradually be implemented, especially inthe area o ftariffs.I2 11 Itis important to notethat IDAallocations depend not only onthe CPIA, butalso onportfolioperformance and governance. Taken together, these determine country performance on which the IDA allocation is based. l2 The power sector reform plan adopted by Cabinet in August 2005 envisages actions in three areas: (i) realistic pricing based on import equivalents; (ii) investment in low-cost base load generation capacity to Sri Lanka: Countrv Assistance Stratem Prowess Revort PanelOof12 22. An indicative program of-activities- both AAA and Lending-is presented in Table 4: IndicativeLendingProgram,FY06-FYOS (values inUS$ millions) Tables 3 and 4. The level o f IDA support in FY06 190 this scenario would be somewhat below the Governance and Capacity Building TA 30 (G) current IDA allocation for Sri Lanka, Education Sector Operation 60 (G) anticipating a slightly declining CPIA in Road Sector Assistance 100 2005.13 There i s a strong bias towards NorthEast Housing Reconstruction 15 (S) lendingfor operations that: (i) support human FY07 150 development--e.g., education, estates/ Gemi Diriya I1(Estates) community-dnven development (CDD), Water Management social protection; (ii) recovery in the further Local Service Delivery conflict-affected areas+.g., LandTitling housing, 90 (S) promoting growth; and (iii) PRSC I1 assist roads and FYOS 150 irrigation, as the core infrastructure neededto Promoting Growth inthe North and East 70 support pro-poor growth via reduced transport Social Protection 50 (GI costs and sustained access to water for Agriculture Research and Extension 30 agnculture. This scenario includes a Private Sector Develop./Access to Finance 50 (R) Governance Capacity Building Technical PRSC I11 90 (sj Assistance ("GOVCAP") that would cover (G): Grant; (S): Stand-by; (R):Reserve strengtnening key as the Auditor Annual sub-totals do not include stand-bys or reserves. I Sri Lanka: Countrv Assistance StratemProwess ReDort Paae f 1 of 12 0 Steady progress towards tsunami reconstruction, using housing completions as the measure o f progress; and 0 Progress inenergy sector reform, as measuredby a reduction inthe fiscal losses of CEB.'' 24. Under this scenario, investment opportunities for IFC are likely to be limited during the remainder of the CAS period. Therefore, IFC would focus on supporting SMEs, while continuingto look for opportunities in manufacturing, including providing support to companies embarlung on regional expansion programs. 25. A second scenario-"Moving Forward" to Peace and Poverty Reduction-is characterized by a return to the bright framework envisaged under the CAS. This optimistic scenario would see a rapid return to peace negotiations and monitorable movement towards a sustainable framework for peace. The needed economic reforms-identified inthe DevelopmentPolicy Review (DPR) completed last year- would be accelerated, especially with regardto the five areas considered essential for pro-poor growth: (i) public expenditure planning linked to the PRS framework; (ii) improved revenue leading to declining fiscal deficits and public debt; (iii) improved incentives for agriculture and rural development; (iv) reorientation o f the Samurdhi program away from welfare towards empowerment; and (v) an improved framework for economic infrastructure, especially in roads and power. Under this scenario, the core program could be supplementedby additional lending inthe form o f PRSCs as well as support for land titling and private sector development, with volumes of IDA support rising above the current IDA-14 lending allocations, as country performance andhence, the CPIA would likely improve. The performance indicators associatedwith this scenariowouldbe: 0 Better prospects for peace, as measuredbythe peacemonitoring index; 0 Revenuesrisingtowards 19percent o f GDP andthe primary deficit falling towards zero; 0 Land ownership and freedom of landuse for poor farmers16; 0 Reform of the Samurdhi program, includingpoverty targetingandempowerment/CDD programs; and 0 Significant progress in the power reform program supported by the Asian Development Bank (ADB) and the JapanBank for InternationalCooperation (JBIC). 26. For IFC, this scenario should present new investment opportunities across a wide range of sectors, especially public-private partnerships in infrastructure. In addition, IFC would continue to support SMEs island-widethrough the SouthAsia Enterprise DevelopmentFacility (SEDF). 27. The third and final scenario-''DriJi'ing Back"-is an undesirable one inwhich there would be a slow drift back towards conflict and regressive economic policies. In this scenario, the peace process would break down and low-level conflict would gradually emerge. On the economic front, there would be a retreat from the open, relatively progressive economic framework that has prevailed in Sri Lanka duringthe lasttwo decades, with an increasinglynationalistic agendaandprotectionistapproaches. There would be increasing hostility to foreign participation in the economy, including especially the non- governmental organizations (NGOs) that are playingsuch a vital role inthe tsunami recovery efforts. The public sector would be increasingly dominant in the economy and severe macroeconomic strains would l5 A well-functioning, sustainable road maintenance financing system is a condition for the proposed Road Sector Assistance Project being presented at the same time as this CAS Progress Report. Itis not necessary to have a separate trigger for the roads sector, as failure to maintain such a mechanism would cause the suspension o fthe operation. l6 Most farmers who have permission to use state land rather than having title are required under these permissions to grow rice. As an example of how strictly this policy is enforced, in2004 one poor farmer .was actually finedUS250 for diversifying his crops. Sri Lanka: Countw Assistance Stratem Propress ReDort Pane 12of 12 appear. Under this scenario, the Bank would have to reconsider its strategy, would likely be very restrained inlending", and the portfolio would be closely examined as to the prospects for achieving the development objectives of current operations. For IFC, the focus would primarily be on technical assistanceopportunities, particularly through SEDF. 28. The administrative budget resources released from lending and supervision would partly be allocated to other countries in the region, but under this scenario it i s also envisaged that the AAA program would be augmented by carrying out all the activities in Table 3. An intensive dialogue would be attempted and the necessary analytical framework prepared both to provide alternatives to be considered, as well as preparing for the inevitable shift back to more appropriate policies, as Sri Lanka has always done inthe past. C. Risks Box 4: Risks Associatedwith CAS Implementation Peace: During the last 18 months tensions have escalated and today the 29. While the five different CFA is under strain. The delay o f the Supreme Court decision on the P- types of risks associated with the TOMS has caused additional disenchantment on the part o f the LTTE. The Bank will continue to provide resources for reconstruction-both strategy remain the same as those tsunami-related and conflict-related-in the North and East. In the event described in the CAS, in each that hostilities resume, the strategy described inthe CAS remains valid. case the emphasis has changed Politics: There are two political risks: (i)new government could be a somewhat during the last few formed on a platform that would result in the undesirable "drifting back" years. In addition, a new risk- scenario. This would be harmful to the short and medium term prospects associatedwith the tsunami-has and detrimental to achieving the CAS outcomes; and (ii) a continuation o f further complicated the picture. the political stalematesand instability that have dogged Sri Lanka over the However, one thing remains last two years, leading to the inability to move on the peace or reform clear-without a doubt, the risks fronts and leaving the country stuck inthe "muddling through" scenario. associatedwith peace and politics Tsunami: The risks include: (i)high expectations associated with tsunami-related reconstructionthat mustbe managed carefully recognizing have risen considerably since the that this will take time; (ii)many poor communities in the North and East preparation of the CAS (see Box have not been affected by the tsunami, but are still awaiting post-conflict 4 and Appendix V). reconstruction support; and (iii) there are needy areas with deep pockets o f poverty inthe South. The Bank will continue to be extremely sensitive to 30. This remains a these risks, contributing to a balanced development o fthe country. significant set of risks, and as Implementation: Prior to the tsunami, absorptive capacity was stretched, before, it i s important to enter but tsunami-related reconstruction will certainly overextend into a program with Sri Lanka in implementation capacity. To help mitigate this risk, there will be the full knowledge that some of continued focus onproviding support for institutional and implementation the identified risks may emerge. capacity building. External: With the sharp increase inoil prices, the primary external risk It will be recalled that the CAS has beenrealized and the importbillwill be significantly higher incoming had identified the breakdown o f years, threatening the balance o f payments. Other external risks include: the cohabitation between the (i) garment sectorlosingmarketshare; (ii) potentialimpacton the the President and the Government as tourism earnings if conflict re-emerges; and (iii) the unknown related to a major risk, which indeed was remittances. realized. In light of the disappointments of the last two years in achieving progress, this CAS Progress Report proposes a program of a different nature than inthe CAS, although designed to achieve the same outcomes. Nevertheless, staff consider that the risks remainjustifiable. As long as Sri Lanka retains the potential for movingtowards peace andachieving its elusive but still attainable economic potential, Bank support will continue to bejustified inthe indicatedorder of magnitude. And the hope can be maintained that the optimistic scenariomay infact emerge inthe end. " Indeed, in such circumstances, the proposed sector wide approach ("SWAp") disbursement mechanism in the education sector would have to be reviewed andpossibly replacedby a more traditional approach. APPENDICES Appendix I Sri Lanka:The Country Context A. Social Context 1. As noted many times, Sri Lanka i s unique among developing countries with regard to its achievements related to human development. With a per capita gross national income (GNI) of only US$1,010 (2004), Sri Lanka has achieved human development outcomes comparable to those o f high income countries and surpassed some of the MillenniumDevelopment Goals (MDGs) at an early stage of its development process (see Table 1). Table 1:Progress towards Achieving.the MillenniumDeveloDmentGoals CMDGsI D Sri Lanka's Current Position Prospects and Issues Nationalpovertyheadcountratio declined 4t this rateit will bedifficult to attainthe MDG. The 2015, theproportionof from26.1% (1990/91)to 22.7% (2002), nodestdecline reflectssharp disparitiesacross sectors people living inextreme despite sustainedper capitaannualGDP mdprovincesresultingfromsluggishgrowthin poverty. growthofover 3% over the last two agriculture andunevenregionaldevelopment with a decades. heavyurbanbias. The net primaryenrolmentratecurrently Learningresultsrevealweaknesses inthe quality of educationby 2015. stands at 96%, with net enrolment ingrade education-e.g., cognitiveachievementscores of 1at closeto 100%andnet primary primarystudents show unsatisfactorymastery of completionat 95%. There is little regional languageandmathematicsskills. The percentagesof variationinthese indicators. primary-agedchildrenwho do not attendschooland who donot completeschoolhavenot changedsince themid-1990s, suggestinganeedfor special and non- formal educationprograms. Makeprogresstowards Gender equalityhasbeen achievedat the Unemploymentratesamongwomen aged 19-29, gender equity and primary, secondaryandeventertiary especiallythose inthe senior secondaryanduniversity empoweringwomenby levels. qualifiedgroupsare high (30-40%), comparedto those eliminatinggenderdisparity for men(21-27%). Despite the achievements in inprimaqdsecondary gender equityineducation, there is evidenceof intra- educationby 2005. householddiscriminationagainstgirls inthe allocation of nutritional inputsandhealthservices. Betweenthe late-1970sand2000, the The MDGrate of6 deaths per 1000live birthsi s mortality ratesby two-thirds infantmortality rate fell from 36 to 13 expectedto be attainedby 2015 andmay fall even between 1990and2015. infantdeaths per 1000live births and more. Despitethe impressiveperformance, disparities under-fivemortality fell from 48 to 17. existacrossprovincesandwithin districts, as well as Yet, child malnutritionremainshigh, as gender or birth order due to variationsinliving one inthree childrenaged3-59months is standards, healthinfrastructure andhousehold underweight and chronic/acute characteristics. Socio-culturalfactors, particularly malnutrition affects morethan one inten child-feedingpractices, explainhighchild childreninthe same agegroup. malnutritionrates. Reducematernalmortality Maternalmortality rate(23 per 100,000 Over 30%ofpregnantandlactatingmothers suffer rateby three-quarters live births in 1996) is onpar with middle- fromanemia. between 1990and2015. income countries. Havehaltedby 2015 and HIV/AIDS epidemicremains at alow Progresstowardsreducingthe riskofHIV-associated beginto reversespreadof levelwith 179AIDS and614 HIV cases tuberculosis includesanincreaseinthe treatment HIV/AIDS, incidenceof reported(end-2004). Prevalenceamong success ratefrom 70% in2002to 81% in2004 with a malariaandother major high-risk sub-populations(0.2% for long-termnationaltarget of 85%. Overall diseases. female sex workers and0.08%for patients contraceptiveprevalencerateincreasedfrom 62% with sexuallytransmittedinfections) is (1987) to 71% (2000). An HIV/AIDS treatment low. Reportedcasesoftuberculosisrose programwas successfullylaunchedon 12/1/04(World from about 6,500 (1997) to 8,400 (2000). AIDS Day). The responseto the programhasbeen P Malaria-relateddeaths decreasedfrom 115 positive, with over 100patientsregisteredand 32 on (1998) to 30 (2002). anti-retroviraltreatment. Integratethe principlesof Since 1994, two successivenational Without strongprograms, the MDGwill not bemet sustainabledevelo ment into environmentalactionplanshavebeen becauseof: (i) persistent institutional weaknesses- Appendix I Sri Lanka: The Countw Context Pape 2 of I 3 Sri Lanka's Current Position Prospectsand Issues developedandare presently under i.e., local inspection, enforcement andmonitoring, and programs, andreversethe implementation. However, the programs lackof clear, monitorabletargets; (ii)adverse loss of environmental needto be scaled upand strengthenedin environmentalandnaturalresourceimpactscreatedby resources. earnest to reversedegradation. post-tsunamireconstruction;and(iii) escalatingurban r degradationdue to poor or non-existentsolidwaste management. Developaglobalpartnership Exports(as %of GDP) rosefrom 13% Mediumtermdevelopment will require amore for development. (1972) to 36% (2004) reflectingamore conducivepublic investmentprogram, and liberal trade regime. Per capitaoficial encouragingdomesticandforeign investment to developmentassistance(ODA) has fallen diversify the exportbase, realizethe growthpotential from US42.9 (1990) to US14.3 (2000). of non-plantationagriculture, strengthen Externaldebt stands at 54%ofGDP infrastructure,revampeducationandcontainthe fiscal (2004). Over 40% ofunemployedare deficit. Another challenge is the effectiveand youngadults. Tele-density increasedfrom efficient utilizationof ODA, especiallyinthe wake of less than 1%per 100persons(1990) to the unprecedentedlevel ofresourcesmobilized for 9.6% (2002). IT exportshavegrown tsunamireconstructionandrecovery. steadilvinthe uastdecade. Note: Socialindicator surveys co 1notbe camed out inthe Northand East inrecen `ears due to the conflict; hence, the data exclude these areas of the country. However, withthe material deprivation, human suffering and destruction of social infrastructureresultingfrom the conflict, performanct of manyhumandevelopment indicators for the North and East is likely tobeweaker than for most ofthe other provinces. World Bank sources: Attaining the Millennium Development Goals in Sri Lanka, June 2005; Treasuresof the Education System in Sri Lanka, June 2005; Aide Memoire: NationalHIVIAIDS PreventionProjectImplementationSupport Mission, May 2005;Sri Lanka: Development Policy Review, 1December 2004; ProjectAppraisal Document: NationalHIVIAIDS Prevention, Novemba2002; Other sources: Sub-National Analysis of MillenniumDevelopment Indicatorsfor Sri Lanka, 1990-2000mimeo, Sri LankaBusinessDevelopmentCentre, March2004. only 3 percentage points-from Fig.1: Poverty Headcount(YO)inSectors Flg.1: Poverty Heidcount (Yo)for Pmdarri in 26.1 percent to 22.7 percent- although real per capita gross M domestic product (GDP) increased M by almost 50 percent.' The decade 10 I O has also seen widening gaps- 5 p between urban and other areas (see 0- I f f 0 9 1 ZWZ + z +g;g 5 C `-I g; U ,55 3: EB ~~ Figure l), between the Western OUlban6iRuralBEElale Province and the rest of the Source: HIES (1990-91 and 2002), using official poverty line for relevant years. country, andbetweentherichand Note: These estimates exclude the North and East due to non-availability o f representative consumptiondata for the region. 1 As noted elsewhere, includinginBox 1,these figures do not include the NorthandEast. 2 To better understand the constraints to reducing estate poverty, quantitative and qualitative surveys are currently beingundertakenas part ofthe Bank's forth-coming Poverty Assessment. Appendix I Sri Lanka: The Countw Context Page 3 of 13 3. While growth in the laggmg Box 1: Poverty inthe Northand East regions i s essential to raise incomes A lack ofreliable householddata continues to affect the ability to and reduce poverty, there is also a conduct a meaningful assessment o f the poverty situation in the need for social welfare programs to North and East. Although incomplete and unable to cover the protect the poor, particularly in view region inits entirety (including Kilinochchi, Mullaitiw and some of rising inequality and the areas in other districts), recent surveys by DCS and the Central concentration o f poverty in certain Bank yield some information. A partially completed Household areas. Sri Lanka has had a long Income Expenditure Survey (HIES) in 2002/03 showed history of such programs, o f which in substantially lower (compared to the national average) average recent years Samurdhi has been the monthly household consumption expenditures in the North and most significant interms ofbudgetary East-i.e., similar to that o f the poorer provinces in the South. Unemployment rates in the North (13 percent) and East (15.9 allocation. However, Samurdhi's percent)-significantly higher than the national average o f 8.8 impact has been well below potential percent in 2002-are in fact the highest among all provinces. due to inefficient targeting, excluding Using empirical data and qualitative information from a variety more than 30 percent o f the poorest o f existing sources, the on-going Poverty Assessment will 10 percent of the population, while examine further the primary challenges the North and East faces spending more than 40 percent of its in terms of social outcomes and in improving income budget onthe non-poor. The Bank has opportunities. been supporting the intentions of successiveadministrations to convert the Samurdhi program from a welfare programto an empowerment programand this remains a core element ofthe strategy. B. Political Context, including the Peace Process 4. The Parliamentary elections held in December 2001 resulted in a unique `cohabitation': a President, M r s . Chandnka Bandaranaike Kumaratunga, from one party--the People's Alliance (PA>- and aPnmeMinister, Mr.Rani1Wickramasinghe, from the opposition UnitedNationalFront (UNF). The absence of consensual decision-making servedto heightentensions between the President and her cabinet, especially after the break down inthe peace negotiations inApril 2003. 5. In late-October 2003, the LTTE unveiled its blueprint for an interim self governing authority (ISGA) for the North and East. The proposal outlined what could be termed a `confederal' vision for the island with the proposed ISGA controlling much o f the day-to-day administration of the North and East, except for monetary policy, defense, foreign affairs and communications. The proposal heightened fears inthe Souththat the LTTEhadnot dropped its demand for a separatestate andtensions rose. Usingher constitutional prerogative, the President took over the Ministries o f Defense, Finance andMediawhile the Prime Minister was out o f the country. Subsequenttalks betweenthe President and the Prime Minister to resolve the political stalemateprovedinconclusive. 6. InJanuary 2004, the PA and the Marxist nationalist Janatha VimuktiPeramuna (JVP) forged a new political alliancethe United People's Freedom Alliance (UPFA). Shortly thereafter, in February, the President dissolvedParliament, calling for elections inApril. The UPFA obtained 105 seats and was able to form a coalition administrationwith support of certain opposition legislators and after five months was able to control a majority in Parliament, with the President affirming her commitment to the peace process and economic liberalization. While the cease-fire continued to hold for the most part, tensions continued to build between the South and North East. Nearing the end o f 2004, the situation looked 3 Ths work will helpto: (i) the targeting of Samurdhi; and (ii) its focus beyondhandouts to improve broaden include livelihood generation through community development and micro-finance. Yielding encouraging results, for the first time ever S a m u r h cash transfers are also being introduced in the North (Jafha district) using a proxy means testing method for targeting. Appendix I Sri Lanka: The Countrv Context Page 4 of 13 extremely tenuous, with many speculating that the cease-fire was on the verge of collapse. Then came the events o f December 2 6 b y far, the most devastating natural disaster in the history of Sri Lanka. The tsunami affected a 1,000 km stretch of the coast, including a large proportion of the North and East, and a large section o f the country's population, including nearly equal shares from the three major ethnic communities. 7. With an unprecedented local and international outpouring of assistance, not only did Sri Lanka face the daunting task of rebuilding the coastal areas, but the need also arose for the Government and LTTE to cooperate in this effort in the hard-hitNorth and East. The President took the bold step of negotiating a Post-Tsunami Operational Management Structure (P-TOMS) with the LTTE to oversee reconstructionefforts in the North and East, including allocation of reso~rces.~The clear hope was that this agreement would create a conducive environment for the full resumptionof the peace process. The President remained firm to the controversial agreement despite strenuous opposition from the JVP and concerns from the Muslimcommunity that opposed the deal on the grounds that they were not included as a signatory. With tensions growing, inprotest o f the impending agreementthe JVP quit the Government on June 16,2005, throwing the country into a minority Government situation. Nevertheless, on June 24, the P-TOMS was signed. This resulted in an immediate challenge of the P-TOMS by the JVP in the Supreme Court and an interimstay order was issued on July 15 pending ajudicial review. On September 12 the interim stay order was extended, with a hearing scheduled for November 21. On this more recent date, it was decidedthat the hearingwould be postponed for the present and that the interimorder would continue ineffect. 8. Inone last political wrinkle, for much of 2005, there hadbeen some ambiguity surroundingthe timing of the next Presidential elections that cannot be contestedby Mrs. Kumaratungaunder the current Constitutional limit^.^ This was resolved by the Supreme Court on the advice o f the Elections Commissioner and Presidential elections were held on November 17, pitting Mr.Mahinda Rajapakse- the Prime Minister before the election-against the opposition leader, Mr. Rani1Wiclcramasinghe. This attests to the robust nature o f the democratic process in Sri Lanka which has a 70 year continuous history of an active Parliamentary system. Mr. Rajapakse entered into agreements with the JVP and the party o f the Buddhist Monks (the JHU) under which he would abandon the P-TOMS, renegotiate the cease-fire agreement (CFA), move away from "liberal, open economic policies", reverse and halt privatization, and preserve the unitary state o f Sri Lanka. Mr. Wickramasinghe stuck with his earlier approach of negotiations with the LTTE, upholding the P-TOMS and the CFA, and a pro-business-oriented economic framework. He was endorsed by the Sri Lanka Muslim Congress and the Ceylon Workers Congress. Thls election marked a very significant crossroads for the country, as the people o f Sri Lanka were faced with a stark choice for once-a leftist economic policy and Sinhala-majority politics versus an open economic policy andappeasement with the LTTE. By an extremely narrow margin-50.3 percent to 48.4 percent or approximately 180,000 votes-Mr. Rajapakse was elected as Sri Lanka's fifth Executive President. Inadditionto a relatively low voter turnout inthe South (about 75 percent), the majority o f the Tamil populationinthe Northand East didnot vote. 4 Related to the allocation of resources, the Bank had been asked to administer a multi-donor trust fund (MDTF) to help implement the agreement. While internal processing requirements are well advanced, further processing o f the MDTF was put on hold pending the outcome of the Presidential elections (see the next paragraph). 5 The President's first six-year term commenced in December 1994. Elections were called for December 1999, one year before the first term ended. The President won a second six-year term and argued that her term inoffice ended inDecember 2006 since elections had beenheld one year earlier than scheduled. This interpretation was challenged in the Supreme Court, which ruled that the second six-year term ends in December 2005. Appendix I Sri Lanka: The Countw Context Pape5ofl3 9. On the peace front, the cease-fire has been fragile and the record has been mixed. Human rights groups report that the LTTE continues to harass civilians, abduct opponents, recruit children and assassinate military personnel.6 The military continues to occupy the "high security zones" with restrictions on agnculture and fishing. However, there have also been considerable improvements inthe lives of the people in the North and East, and while there i s evidence that the entire country has marginally benefited from the cease-fire, the benefits in the North and East have been quite remarkable (see Box 2). The road to Jaffna was reopened in2002 after 1997-2001 2002-2003 a gap o f 12 years, rail service to (`Pre-CFA') (`Post-CFA') Batticaloa was resumed in 2003 and Northern 3.4% 12.6% Eastern 4.6% 10.1% considerable reconstruction activity has NorthCentral -0.2% 8.2% occurred. 84,000 internally displaced Western 6.0% 6.2% families have returnedto their homes and Overall Sri Lanka 3.9% 5.0% villages, and there has been a restoration o fpublic services, including public healthandeducation inthe region. 10. Shortly after the CAS was discussed at the Board, on April 21, 2003 the LTTE suspended its participation in the peace talks on the grounds that the Government had unilaterally reached out to the internationalcommunity to rebuild the nation bypassing the LTTE.7 Itallegedthat the militaryhad failed to vacate civilian premises in the North and East, and that the country'^ Poverty Reduction Strategy (PRS)-Regaining Sri L a n k a 4 i d not address the reconstruction needs o f the regon. InJune 2003, the LTTE also boycottedthe Tokyo Conference for the Reconstruction and Development o f Sri Lanka.8 As mentioned, the LTTEsubmitted its proposal for an ISGA on October 31, 2004, eliciting a strongreaction inthe Southwithmanyexpressing concernsthat thiswas afirst steptowards outright secession. 11. InMarch2004, fractures arosewithinthe LTTE,with"Colonel" Karuna-the LTTEcommander of the Batticaloa and Amparai districts in the East-breaking away alleging that the northern leadership had marginalizedthe eastern cadre. The LTTElaunched an all out military assault on the Karuna faction inApril andre-established some semblance of control on the ground. However, the Karuna faction has continued to stage hit andrun attacks on LTTEpersonnel. Tensions have escalated and the split in the LTTEhas ledto an increaseinthe spate o fassassinationsand counter-assassinationsindirect violation of 6 For amore complete account of the current challenges inthe conflict inSri Lankatoday see `Aid, Conflict andPeacbuildinginSri Lanka 2000-2005' by J. Goodhandet. al, The Asia Foundation, Sri Lanka, 2005. 7 Among other things, the LTTE cited their exclusion from a gathering of the internationalcommunity to discuss the reconstructionof Sri LankaheldinWashington, DC onApril 14,2003. 8 At this event, donor nations pledged US$4.5 billion to Sri Lanka over a four year period (2003-2006) to finance reconstructionof the North and East, and implementationof the PRS. Inthe final communiquk- the so called"Tokyo Declaration"-the participantsstressed that `assistance by the donor community must be closely linked to substantial andparallelprogressinthe peaceprocesstowards the objectivesagreedby the parties to the conflict'. Appendix I Sri Lanka: The Country Context Pane 4 of I 3 the CFA. OnAugust 13,2005, the Minister of ForeignAffairs-Mr. Lakshman Kadirgamar, a prominent legslator-was assassinated, withthe Government accusing the LTTEofbeingresponsible and the LTTE denying involvement. As such, currently the cease-fire is under considerable strain and efforts toward resumingthe Norwegian-brokeredpeace talks were put on holduntilafter the Presidential elections. C. The Tsunami 12. As is widely known, on December 26,2004, a `megathrust' earthquakeoff the islandof Sumatra sent 6.5 meter hightidal waves through the Indian Ocean instantaneously bringingdeath and destruction to a number o f counties in the region. Sri Lanka-ae o f the worst affected counties-reported over 35,000 tsunami-related deaths and initial displacement of about one million.' The North and East were especially hard hit, registering about 55 percent of the deaths, 65 percent of the initial displacements and about 60 percent of the damage. Approximately Box 3: The Bank's Response to the Tsunami 28 percent o f Sri Lanka's IDA'Sresponseto the tsunami was comprehensive and swift. Following making population lives within resources available from existing projects within days o f the event, in less than one kilometer o f the sea, two months following December 26, IDA: making the coastal Carried out a joint damage and needs assessment together with the Asian population vulnerable to Development Bank (ADB) and the JapanBank for International Cooperation tidal and tropical storm (JBIC) [IDNSec M2005-0040, dated February 7,20051; activity. The tsunami Undertook a portfolio restructuring (ie., "Tsunami Emergency Recovery directly affected one Program (TEWFPhase I")through which ten operations were amended to make available US$75 million [IDA/R2005-0012, dated February 2, 20051; million persons out of the and total population o f about Processed an Emergency CreditIGrant (Le., "Phase II") w h c h through 19 million. It resulted in US$75 million was made available for tsunami recovery/reconstruction the destruction or damage efforts [Report No. P7650, dated February 14,20051. of approximately 89,000 While the IDA resources can be used to address any o f the needs described houses, o f which about in the damage and needs assessment, notionally the funds were allocated half are within the towards: (i) housing; (ii) water supply and other infrastructure; (iii) roads, proposed buffer zones. It livelihood support; and (iv) support for implementation capacity. InAugust the also significantly following allocation of the US$150 million was agreed: (i) housing: US$60 impacted all types o f million (40%); (ii) livelihoods: US$35 million (23%); (iii) US$33 million roads: coastal infrastructure, (22%); (iv) capacity building: US$10 million (7%); (v) health: US$8 million (5%); and (vi) contingency: US$4 million (3%). Of the total amount, as o f end- including roads, railway, October about US$63 million (42 percent) has been disbursed. power, The IFC response included (i) providing US$195,000 in matching grants telecommunications, (financed by FMTAAS) to selected partner companies to remove infrastructure water supply and fishing and distribution bottlenecks for relief operations; (ii) establishing a special loan ports. The estimated total facility to support the recovery o f tourism; (iii) providing US$150,000 from reconstruction cost- IFC's corporate contingency to support the Fisherman's Relief Trust Fund to presented to the May repair or replace fishing boats and equipment; and (iv) implementing a USTDA 2005 Sri Lanka program to provide water purification and disinfection systems. Develoument Forum-is US$2. ibillion. The Bank's response to this catastrophe was impressive, with the International Development Association (IDA) providing over US$150 million in emergency assistance within two months o f the event (see Box 3). 9 Data as o f end-October 2005. Appendix I Sri Lanka: The Countn, Context Paae 7 of 13 13. Progress to Date." The international community has pledged US$2.2 billion in support-the entire amount needed to reconstruct Sri Lanka's tsunami-affected areas." As o f mid-November, US$1.6 billion has been committed to specific projects under way. Immediate relief efforts were largely successful, although longer term reconstruction efforts were slower to commence. However, despite severe challenges and some shortcomings, significant progress i s now being achieved. IDA-financed livelihood support cash grants (Rs. 5,000 per month for four months) were initiated in March to approximately 200,000 families, and numerous cashfor work programs have beenmounted. Government has provided reconstruction credits via the banking system and micro-finance i s being provided in large volumes, as are ~~ ~ significant numbers o f Box 4: The GuidingPrinciplesfor TsunamiRecoveryandReconstruction fishing vessels. Drawing from international experience inprevious disasters and bearing inmind However, viable schemes the special political circumstances o f Sri La&, the key stakeholders-including to restart small and Government, the affected communities, public and private donor organizations, medium enterprises civil society organizations, the LTTE and others-have agreed on and formally (SMEs) have beenharder adopted the following set o f `guiding principles' for the recovery and reconstructionprocess: to launch. Overall, 0 The allocation o f resources-both domestic and international-will be strictly housing was the most guidedby the identifiedneedsand local priorities, without discrimination on significantly affected the basis o fpolitical, religious, ethnic or gender considerations. physical asset. Some The principle o f subsidiarity will be applied-Le., each reconstruction activity 50,100 temporary houses will be designed andimplemented at the lowest competent tier o fgovernment. were erected to .The focus will be on the medium and long term needs o f the victims accommodate the themselves; hence the need for enhanced and solid consultation with local displaced and now there affected communitiesand stakeholders,and local communities participating are only a handful of fully inreconstructionactivities. families still in tented .There needs to be better communication and transparency in decision- camps. Replacement of making and implementation. permanent housing has Reconstructionprocesses will reducefuture vulnerabilities to naturalhazards, taken longer to start, but including floods, cyclones and landslides. has recently accelerated. There is a need to be sensitive to equity and other considerations, such as governance, gender, environment, resettlementlland issues and human rights Over 60,000 houses are concerns. now being built or 0 A coordinated approach-especially between Government and development repaired with the first partners-needs to be operationalized to prevent duplication or overlap. new houses already completed and occupied. 7 :re i s confidence that the reconstruction of housing canbe completedby tl end o f 2006. There has also been significant progress in the reconstructiono f schools and clinics, with major reconstruction pertainingto roads and main water supplies to start in early 2006. While enormous challenges remain, as described below, there i s now a clear momentum inthe recovery, and lessons have beenlearned, not least o f which inthe application of the "Guiding Principles" (see Box4). 14. Challenges. In responding to this monumental event, there have been numerous challenges. Initially there were capacity constraints in coordinating reconstruction efforts and the international 10 Related to the tsunami, the Government and development partners are working together towards the medium term objective of laying the foundations for a joint monitoringhmpact assessment and the more immediate objective o fpreparinga comprehensive report on where the recovery effort stands, both interms o f accomplishments and challenges. Led by a steering committee made up o f the Ministry o f Finance (MOF), TAFREN, ADB, UN and IFRC, and including sectoral teams headed by the lead sectoral ministries, a fust draft o fthe fust anniversary monitoringreport will be finalized inmid-November. 11 While it appears that there is no finding gap, in reality gaps may develop because of: (i) issues-e.g., capacity building-not included inthe original scope o f the needs assessment; (ii) inflation dnving up the costs ofmaterials, etc.; and (iii) the fact that commitments include the costs o finstitutional overheads. Appendix I Sri Lanka: The Countn, Context Paae 8 of 13 organizations involved. The Task Force to Rebuild the Nation (TAFREN) was established to steer reconstruction efforts and there had been criticism that the Colombo-centric decision-making lacked consultation. The initial disconnect between TAFREN and the distict administrations i s on its way to beingremedied, as the services of first class international consultants were sought to repositionTAFREN withthe necessarystructure andmanagerial skills. 15. Both overall and at the sectoral level, for the most part there has been good donor coordination inColombo. Working groups-with representatives from the Government, the bilateral and multilateral donor community, civil society and the private sector-n housing, health, education, livelihood and infrastructure meet every two to four weeks, providing a useful forum to resolve operational bottlenecks. These are overseen by a coordinating committee bringing these five partners together. The Bank has worked hand in hand with the United Nations (UN), ADB and JBIC in guiding the process, and a firm partnership has been formed between these four key agencies. The challenge, however, is to ensure similar coordination of efforts at the local level, whichi s constrained by weak local capacity and a lack o f empowerment o f local officials. Steps are under way to build local level governance structures with better project management skills and ensure that reconstruction efforts runto time and budget, and fit in with allthe other demandsonthe limitedhumanresources. 16. As has been mentioned, the conflict-affected North and East suffered considerable damage from the tsunami, exacerbating the earlier conflict-induced devastation. Giventhe sizeable influence and presence o f the LTTE in the area, there is a need to coordinate reconstructionefforts with them. While the proposed establishment o f P-TOMS was a considerable step inthis regard, the hard-line opposition in the South and the Supreme Court's interim stay orders have delayed the pace o f post-tsunami reconstruction progress inthe conflict-affecteddistricts. 17. Initially, setback zones-of 100 meters inthe South and West, and 200 meters inthe North and East-were established to protect coastal populations from future disasters. However, there was virtually no consultation inthe formulation o f this policy that disproportionately impacted the fishing community and certain ethnic groups. Furthermore, delays in the provision of suitable land to relocate affected families continues to cause uncertainties in the lives of many. The initial setback zone policy was reviewed and it was decided to implement the earlier coastal management plan conceptualized by the Department of Coast Conservation inwhich setback zones are determined by local conditions+.g., the presence of sand dunes, mangroves and the indentation of the coast. This change inpolicy, together with credible early warning systems, i s less intrusive to coastalpopulations, butwill take time to implement. 18. Finally, the challenge in managing the reconstruction process will be to overcome the other capacity constraints that could slow the process or impact the environment. Construction activity i s risingto unprecedentedlevels-housing alone i s requiring more than ten times the number o f housesbuilt ina typical year-and there are pressures on materials prices, skills shortages and limits on the capital equipment capacity o f construction companies. Together with the difficulties o f managing fiscal expenditures inthis period, the challenge i s to containinflation within reasonable levels consistent with as rapid a construction process as possible. D. RecentMacroeconomic Performance and Prospects 19. Recent Macroeconomic Performance. Sri Lanka's recent history attests to the economy's resilience to adverse shocks. The economy has been growing at around 5 percent for over two decades even during the conflict years (see Table 2). Much o f this resilience has to do with the country's relatively well-developed human capital and the continuation of market-friendly reforms since the late- 1970s. However, as mentioned above, the relative peace enjoyed since the cease-fire has not translated into substantially higher growth rates for the country and has not been adequate to significantly reduce Appendix I Sri Lanka: The Countrv Context Page 9 of I 3 poverty beyond urban areas. To achieve faster growth and poverty reduction, Sri Lanka will need to address remaining structural constraints, including weaknesses in the macroeconomic environment, and step up investments ineconomic infkastructure. Table 2: Key Macroeconomic Indicators, 1990-2004 1990 1995 2000 2001 2002 2003 2004 Annual GDP Growth ("3 change) 6.4 5.5 6.0 -1.5 4.0 6.0 5.4 Atlas GNP per Capita (US$) 470 700 890 840 850 930 1,010 Inflation(CCPI Average) 21.5 7.7 6.2 14.2 9.6 6.3 7.6 InvestmendGDP 22.2 25.7 28.0 22.0 21.2 22.1 25.0 Domestic SavingdGDP 14.3 15.3 17.4 15.8 14.4 15.9 15.9 C/A Balance (excl. official transfers) (%o f GDP) -5.4 -6.5 -6.4 -1.4 -1.4 -0.4 -3.2 Overall BOP SurplusDeficit (inUS$ million) 119 52 522 220 338 502 -205 Gross Official Reserves (months o f GNFS imports) 1.7 4.1 1.5 2.3 2.9 3.6 2.9 External Debt Service ("A o f GNFS) 17.8 16.5 14.7 13.2 13.2 11.6 11.5 Government Revenue (% o f GDP) 21.1 20.4 16.8 16.7 16.5 15.7 15.3 Government Current Expenditure ("A o fGDP) 22.3 23.5 20.2 21.6 20.9 19.0 19.2 Interest Payments ("! of GDP) 6.4 6.2 5.7 6.7 7.4 7.1 5.9 Government Capital Expenditure ("3 o f GDP) 8.2 7.9 6.4 5.9 4.6 5.0 4.3 Budget Deficit ("Aof GDP)" -9.9 -10.1 -9.9 -10.8 -8.9 -8.3 -8.2 Primary Deficit ("! o f GDP) -3.5 -3.9 -4.2 -4.1 -1.6 -1.2 -2.2 Public Debt ("ho f GDP) 96.5 95.2 96.9 103.2 105.4 105.8 105.5 o fwhichdomestic debt (% o f GDP) 41.6 43.3 53.8 58.0 59.8 57.9 56.4 Government Employmen?' (thousand persons) 649 738 857 864 790 786 842 NominalAverage Exchange Rate (&./US$) 40.1 51.3 75.8 89.4 95.7 96.5 101.2 "Excludinggrantsandprivatizationproceeds. Includes only Government institutions. Sources: Central Bank of Sri Lanka andDCS 20. Sri Lanka has recovered from the 2001 economic slump when a series o f adverse shocks-i.e., a prolonged drought, the LTTE attack on the airport and falling export demand in the aftermath o f September 11-led to a contraction inreal GDP for the first time since Independence. Economic growth resumed modestly at 4 percent in 2002, peaked in 2003 at 6 percent and fell slightly to 5.4 percent in 2004. Services and industry registered healthy growth rates during the period, while agriculture continued to stagnate. In 2005, the economy i s set to grow by 5.3 percent. The tsunami will have a minimal impact on growth as the sectors directly affected-fishing, hotels andrestaurants-comprise less than 3 percent of GDP. Growth i s expected to be fbeled by continued healthy performance in telecommunications, strong textile and garment exports despite the removal o f textile andclothing export quotas, and increased construction activitiesrelatedto post-tsunami reconstruction. 21. The end of the Multi-Fibre Agreement (MFA) based textile and apparel export quota regime on December 31, 2004 has not yet had any negative impacts in Sri Lanka. Exports o f textile and apparel increasedby around 8 percent duringthe first halfo f 2005 to US$1.3 billion. Garment factory owners are optimistic that they will continue to be competitive in the near term as larger firms have been able to move up to highervalue segments of the market and their exports now qualify for GSP Plus concessions to the European Union (EU). However, to ensure the industry's longer term competitiveness, Sri Lanka still needs to address `behmd the border' constraints, such as poor power and road infrastructure, and restrictive and costly laborretrenchment laws. 22. As Sri Lanka continues to be predominantly rural-with about 80 percent o f the population residinginrural areas-jump-starting growth inrural areas i s essential for poverty reduction. The rural Appendix I Sri Lanka: The Countw Context Page I O of 13 sector has stagnated during the last three years, growing at an average annual rate o f 1.1 percent. The poor performance reflects the highconcentration on a few crops-paddy, tea, rubber and coconut-and a high vulnerability to weather conditions. On top of this: (i)infrastructure bottlenecks hamper the distribution of apculture produce; (ii) unpredictable tariff adjustments create uncertainty and discourage long-term investments in the sector; (iii) restrictions on the transfer and use of lands have led to the fragmentation of land into non-economical holdings; (iv) poor maintenance of irrigation infrastructure and the provision of free water seriously affect the efficient use of water; and (v) lack o f access to credit and market information hinder smallbusiness formation. 23. A sustainable fiscal stance is a prerequisite for any viable growth strategy." Since 2002, there have been some strides towards fiscal consolidation with the enactment of the Fiscal Management Responsibility Act (FMRA), however, the fiscal situation remains under considerable strain. The fiscal deficit (around 8 percent of GDP) and public debt (around 105 percent o f GDP) remain high, especially compared to the 2006 FMRA targets (5 and 85 percent, re~pectively).'~Government revenues remain inadequate and the deterioration of the tax to GDP ratio (from 19 to 14percent) from the 1990sneeds to be reversed significantly. Government employment and generous salary increments to civil servantsneed to be contained. Rising fuel and power subsidies from inadequate adjustments in administered prices need to be limited. The monthly pricing formula-meant to peg domestic fuel prices to world crude costs-has beenabandoned. The 2005 budgetary allocation for fuel subsidies hasbeenreviseddrastically from the budgetedRs. 1billion to Rs. 13 billion. 24. Macroeconomic Prospects. Loolung ahead, Sri Lanka has the potential to reach its envisioned higher growth path (6-8 percent) and significantly reduce poverty commensurate with its human and naturalresources. However, there are a number of downside risks that the country has to contendwithin the short term, including: (i) potential further escalations in international oil prices; (ii) continuation o f political instability; (iii) further glitches in resuming the peace process; and (iv) delays in the implementationo fpost-tsunami reconstructionactivities. 25. While positive steps have been taken towards boosting growth and protecting those affected by the tsunami, slow progress in key structural reforms and lack o f progress in improving the investment climate, including inadequate investments in economic infrastructure+.g., roads and power-continue to restrict Sri Lanka from reaching its full growth potential and poverty reduction goals. Inthe longer run, addressingstructural weaknesses willrequireimprovingmacroeconomicmanagement, containingthe burgeoning fiscal deficits, addressing behind the border barriers and revamping the rural economy. Policy reversals should also be avoided so that gains from past reform efforts canbe sustained. E. Progressin Reform Implementation and an Assessment of the Draji PRS Update 26. Soon after coming to power inApril 2004, the UPFAGovernment vocally rejected Regaining Sri 12 f i s i s one area in which the Bank and International Monetary Fund (IMF) have been working together closely. With regard to the IMFprograminSri Lanka, inApril 2003 the IMF Board approved a three-year Poverty Reduction and Growth Facility (PRGF) and Extended Fund Facility (EFF). Only the f r s t disbursement-upon approval-has taken place so far. The reviews of the program were initially delayed due to lack o f progress with key structural reforms; however, during 2004 macroeconomic policies also deteriorated. InJanuary 2005, the IMF Board approved the extension o f repayment expectations arising in the remainder o f 2005 and in March 2005 approved Sri Lanka's request for a purchase under the IMF's Emergency Policy for NaturalDisasters. 13 The IMF and Bank are planning to conduct a more detailed @e., loan by loan) debt sustainability analysis (DSA) before the end o fthe year. Appendix I Sri Lanka: The Countrv Context Pane 11of 13 Lanka (RSL), the PRS formulated under the previous UNF admini~tration.'~After delays causedby the political transition and the tsunami, a draft PRS-Sri Lanka: New Development S t r a t e p w a s presented at the May 2005 Development Forum. This document outlines broad policy directions, with a welcome focus on macroeconomic stability, enterprise restructuring and infrastructure development. The document also contains a strong emphasis on reducing regional inequalities and creating income generating activities to assist the poor. However, it i s less clear on critical reforms pertaining to agriculture policies, labor and the future of cashtransfers. Going forward, there i s a need to articulate time-bound actionplans for the priority areas and to engage ina process of consultation with all relevant stakeholders. However, thisprocesshasbeenpostponeduntilafter the Presidential election^.'^ 27. The current draft policy framework departs from the previous one incertain areas such as the role of the state. Notably, the current strategy for enterprise restructuring favors the retention of state- ownership and rejects privatization as an option. Consequently, earlier plans to privatize the largest commercial bank-People's Bank (PB)-have been abandoned. To oversee the restructuring o f twelve strategic enterprises (in the transport, energy and banking sectors), a Strategc Enterprise Management Agency (SEMA) has been established. Furthermore, a new state-owned SMEbankhas beencreated. 28. Given the unstable political climate o f the past few years, progress inreformimplementation has been mixed. Inthe financial sector there has been some progress. Restructuring o f the state-owned banks-PB and Bank of Ceylon-has continued and non-performing loans in these banks have been brought down from 17.8 percent (end-2002) to 12.6 percent (end-March 2005). The Central Bank o f Sri Lanka (CBSL) has continuedto strengthen its bank supervision capacity and has adopted a more market- oriented monetary policy regime. Following amendments to the Banking Act, CBSL has tightened prudential norms, capital standards, loan classification, exposure limits, public disclosure and market discipline. Anti-money laundering legislation-the Financial Transactions Bill-was passed this year. Finally, CBSL has commenced its public disclosure policy with the publication o f the financial sector stabilityreport inJune 2005, to be continued onabi-annualbasis. 29. Inthe area of land titling and administration,Cabinet has approved amendments to the Land Development Ordinance (LDO), which provides for the conversion o f farmers' land grants into freehold title, beginning with village expansion schemes. The amendments also make provisions to facilitate women's ownership and access to land. Amendments to the 1998 Registration of Title Act (RTA) have also been approved. However, little progress has been made in establishingthe institutional framework requiredto implement the provisions ofthe amendedLDO andRTA. 30. With regard to labor legislation,the Ministry of Labor has upheld the principle o f applying a uniform formula to determine severance payments as stipulated in the 2003 amendments to the Termination of Employment of Workmen's Act (TEWA). Severancepayments under the formula, revised in March 2005 due to trade union pressure, remain high by international standards-i.e., the second l4 In private, it was suggested that they would continue to support many of the policies and programs contained inRSL. However, inthat RSL was closely associated with the UNF administration, the name was primarily being rejected. It was also felt that RSL was too urban-oriented at the expense o f neglecting rural development, and views o fthe new administration incertain key areas-such as the role o f the state- differed substantially &om that containedinRSL. PRSC Iwas approved inJune 2003 supporting RSL, but given its subsequent rejection and a slowdown in reform implementation, PRSC I1has been indefinitely delayed. 15 Obviously, it would be preferable to have a `finalized' PRS before going to the Board with this CAS Progress Report. However, as mentioned previously, this Progress Report is already delayed, coming substantially past the mid-point o f the FY03-FY06CAS period. Therefore, it was decided not to postpone further untilthe PRS is finalized, butto basethe strategy going forward onthe PRSas currently drafted. Appendix I Sri Lanka: The Countrv Context Pane 12 of 13 highest in the world-and applications are still subject to the approval o f the Labor Commissioner. Notwithstanding these limitations, the formula has made the system more transparent and predictable. The severancepackage will be complemented by an unemployment benefits scheme to be funded through the Employers' Trust Fund(ETF). 31. Reforms in the power sector have been difficult. For fear that it would lead to privatization, unionshave opposed the unbundlinginto separate companies of the state-owned Ceylon Electricity Board (CEB). Instead, strategic business units will be formed-prior to incorporating them into separate companies-with CEB remaining as the holding company. However, this may require amending the 2002 Electricity Reform Act under which CEB was to be abolished. Regulation o f the sector by the Public Utilities Commission o f Sri Lanka (PUCSL) also can not start until separate companies have been created. Inthe meantime, because tariffs have not been adjusted inthe last two years, CEB has incurred substantial losses--estimated at over US$300 million or 1.5 percent o f GDP by mid-2005. Furthermore, tariff increasesto take effect from October-but postponed due to the Presidential election-will not even be sufficient to cover costs. While current reforms aim to improve the financial viability o f CEB, additional measures will be needed to address capacity generation constraints, such as commissioning newgenerationplants. 32. Relatedto public expendituremanagement,there has been some progress towards developing a medium term budget framework (MTBF). Further to the introductiono f budget ceilings and a three-year planning horizon, the Ministry of Finance (MOF) is institutingthe use o f sectoral clusters for budget preparation in an effort to improve the link between resource allocation and public sector priorities. However, past initiatives to downsize the public service-through a hiring freeze and voluntary retirement schemes-have been reversed and the implementation o f recently announced public sector wage increaseswill further compressthe public service wage structure. 33. Following the recommendations o f the Country Procurement Assessment Review (CPAR), the National Procurement Agency (NPA) was established in May 2004 to regulate and monitor all public procurement. MA-assisted bya grant from the InstitutionalDevelopmentFund(IDF)-has embarked on a reform agenda to strengthen public procurement through regulations, standardization and capacity development, with an action plan covering: (i)revision of existing procurement guidelines; (ii) preparation o f standardbidding/proposal documents; (iii) introduction o f procurement specific curricula; and (iv) development o f information technology (IT) based monitoring and e-procurement. These important initiatives are being fully supported by all donors and there will be several joint missions to assess implementationo f the reform agenda. Inaddition to improvements inthe operations o f the Auditor General (AG; see Box 5), there has been progress inother aspects o f public financial management (see Appendix IV). Of particular note is the preparation o f public sector financial statements in accordance with the International Public Sector Accounting Standards (IPSAS). The tsunami-related operations increased demands for enhanced financial accountability and transparency, resulting in strengthened accounting, reporting and auditing. 34. On welfare reform, there are plans to shift the focus o f welfare programs fkom cash hand-outs towards facilitating the creation of income-generating opportunities for the poor. To this end, micro- finance services through the Samurdhi Bank will be expanded and social mobilization programs at the community level will be promoted. Meanwhile, a new formula-based targeting methodology i s being adopted for the first time in the North and East to identify beneficiaries for Samurdhi cash transfers. However, the expansion o f the new targeting methodology to the rest of the country will depend on the extentto which income generating activities canbe made available to those exitingthe program. Appendix Z Sri Lanka: The Country Context PugeI3ofI3 35. In summary, although some progress has Box 5: The Auditor General is ShowingIncreased Results taken place in Progressive improvements in the capacity o f the AG to support implementing reforms over transparent expenditure management and reporting have been demonstrated at the last two years, the the center by audited consolidated annual financial statements prepared in uncertain political climate accordance with international accounting standards. In addition, at the and short election cycles program level there has been a valuable public report on the implementation o f have affected the pace and the tsunami relief effort within a relatively few months o f the event and the consequent international relief. This report has shown the willingness and depth of the efforts. Under capacity o f the AG to address substantial issues ina positive manner through these circumstances, it valuable recommendations to ensure the proper use o f relief funds and the would be important for the effective support o f the people affected, while continuing to address apparent country to unite behind a mis-direction o f some funds. common core reform A new National Audit Act will be enacted that among other thmgs agenda that can withstand provides for more administrative autonomy for the AG and a high level changes in political Parliamentary committee to safeguard the independence and accountability o f leadership and ensure the AG. The institutional development program includes: (i) usage o f up-to- sustainability. The next date audit methods for certification, investigative and performance audit; (ii) few months will b e critical upgrading the organization structure andhumanresource skills; (iii) o f creation inthisregard. a consolidated institute for training public sector accountants and auditors to international standards; and (iv) implementation o f IT to support an improved audit and reporting effort. These actions will create a sustainable basis for increasing professionalism o f public sector auditing staff through local institutions that are supported for the longer term by the oversight o f an international leader inthe field. The Bank has been working closely with the AG's office inthe designandimplementationo fthese efforts andwill continue to do so. ? : : xa: W 3 - m e 2 =I d " s m * . e . s $: a a a a a a 0 a I I *. . I I I. h-I I 3 lil 0 . 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Y x 4"a Appendix IV Lending,Non-Lending, CapacityBuilding,IFC andMIGA This appendix provides more details on the various lending, non-lending and World Bank Institute, (WBI) capacity building activities carried out during the FY03-FY05 period. It also provides more details on the programs of the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA). A. Lending Activities The following bullets briefly describe the lending activities that have been approved since the beginningof the CASperiodinFY03: The North East Emergency Reconstruction Program (NEERP)-approved by the Board on November 12, 2002-was formed through a portfolio restructuring in which three credits were amended to allow the Bank to provide a rapid response to emergency reconstructionneeds inthe North and East. US$36 million was made available under this operation to provide funding for critical activities in health, water and sanitation, livelihood support and institutional capacity building. The Economic Reform Technical Assistance Project (ERTA, Cr. 3722-LK)-approved in December 2002 for U S 1 5 million-is designed to strengthen public sector capacity to implement the economic reform agenda. The project finances priority technical assistance (TA) for capacity building and strategic communications, as well as reforms ininfrastructure, financial sector and economic regulations. To be able to respond flexibly to reform opportunities, a large share of the funding flows through a "Challenge Fund"-i.e., a pool o f assistance which reform- minded sectoral ministries can apply for on a'first-come, first-served basis to fund specific well- definedreforminitiatives. The objective o f the NationalHIV/AIDS Prevention Project (HO13-LK) i s to limit the spread of HIV infection in Sri La& among the highly vulnerable sub-populations and the population at large, without stigmatizing those who are engaging in high risk behaviors. It also supports revitalization and expansion of the tuberculosis (TB) control program. This US$12.6 million grant was approved inDecember 2002. The Second Community Water Supply and Sanitation Project (CWSSP 11, H035-LK)-a grant for US39.8 million approved inMay 2003-supports implementation o f Sri Lanka's rural water supply and sanitation program, focusing on the North, East, North West and Central provinces. The objectives o f the project are to increase service coverage, and achieve effective and sustaineduse of water and sanitation services inrural communities. Insupport ofthe long-term tertiary education reformprogram, the ImprovingRelevance and Quality of Undergraduate Education Project (IRQUE, Cr. 3781-LK) provides support to enhance institutional capacities to achieve greater relevance and quality in undergraduate programs. The support provided by the program i s designed to address: (i) highunemployment among graduates; (ii)insufficient quality and relevance of undergraduate education; (iii) insufficient attention to cultural diversity; and (iv) weak administration and lack o f quality assurance mechanisms. This credit for US$40.3 million was approved inJune 2003. Appendix ZV Lending, Non-Lendina, Camcity Building. IFC and MIGA Paae 2 of 7 0 The First Poverty Reduction Support Credit (PRSC I, 3780-LK)--approved Cr. inJune 2003 for US$125 million-provided support to implementation of the broad PRS agenda, with particular focus on factor market @e., land, labor and finance) reform. The project was structured around two principal components: (i) accelerating economic growth and supportingprivate sector . development; and (ii) strengtheninggovernance andpublic resourcemanagement, and improving the welfare system. As measuredby the PRS medium term development outcomes and program implementation benchmarks, progress was made towards meeting the program's core objectives. The program was successfully implementedwiththe credit closing inDecember 2003. For more details on programimplementation, see the ImplementationCompletion Report (ICR).' 0 The long term objective ofthe Community Development and LivelihoodImprovement "Gemi Diriya" Project (H078-LK) is to support Sri Lanka's strategy of reducing rural poverty and promoting sustainable and equitable rural development through: (i) better access o f the poor to basic social and economic infrastructure, and services and support for productive activities; and (ii) developmentofpolicies, rules, systems,proceduresandinstitutionalarrangementsthat the would allow the public sector to transfer funds directly to communities and provide them with technical and other support on a demand-driven basis. Working in the poorest provinces in the South, this grant for US$50 millionwas approved inMarch 2004. 0 The Health Sector Development Project-H095-LK, a grant for US$60 million approved in June 2004-is supporting the Sri Lankan health system to adapt to the challenges resulting fi-om the double burden of disease by improving equity, quality and efficiency. Specific objectives include support to the public sector to: (i) better balance policy, strategies and allocation o f resources to more effectively address both the continuing health problems, and the new and emergingissues through strengtheningpreventive activities; and (ii) inequalities inaccess reduce to public resources for health and health outcomes by strengthening basic health services, and increasing resources allocated to district and peripheral services, especially those with highrates ofpoverty and vulnerability. 0 Following a successful first project, the Second North East Irrigated Agriculture Project (NEW11, Cr. 3935-LK) helps conflict-affected communities inthe North, East and adjoining areas to restore livelihoods, enhance agricultural and other production and incomes, and build capacity for sustainable social and economic reintegration. The development objectives o f this US$64.7 millionproject approved inJune 2004 will be achieved through: (i) restoring or creating, improving essential village-level social and economic infrastructure and facilities; (ii)improving productivity, sustainability and competitiveness of agriculture; (iii)building skills and capacity, and decentralizing powers for decision-making, control of resources and implementation of programs to the community level; and (iv) implementing targeted livelihoodsupport programs for the most vulnerable (e.g., land mine victims, people with war-induced deficient abilities, widows, women-headedhouseholds, etc.). 0 The e-Sri LankaDevelopmentProject (Cr. 3986-LKFapproved inSeptember 2004 for US$53 million-aims to promote: (i) o f Information and Communication Technologies (ICT) to use enhance growth, employment and equity through affordable access to means o f information and communications; (ii) to and use o f public information and services on-line by citizens and access businesses; and (iii) private sector competitiveness, particularly o f knowledge industries and SMEs. The first integrated ICTproject approvedby the Bank, e-Sri Lankasupports six programs, 1 ReportNo. 29337, datedJune 16,2004. Appendix I V Lending. Non-Lendinc, Capacitv Buildina. IFC and MIGA Paae 3 of 7 providing financial assistance to modernize public sector services and improve access to information infrastructure and services. 0 The NorthEastHousingReconstructionProgram(NEHRP, Cr. 4014-LK) will help to provide the poorest conflict-affected families (that meet accepted vulnerability criteria) in the North and East with improved and affordable housing. This US$75 million credit approved in December 2004 supports cash grants (paid in installments) to vulnerable families to help reconstruct their homes. In facilitating the reconstruction of 46,000 homes, NEHRP supports the return of displaced populations in the North and East, and the regularization o f land titles to targeted beneficiaries, as well as contributing to the training o f skilled construction workers, consequently allowing the resumption of economic activity in the war devastated region through increased construction activity. The TsunamiEmergency RecoveryProgram, Phase I(TERP I)-approved on February 11, 2005 for US$75 million-was formed through a portfolio restructuring in which seven credits and three grants were amendedto finance emergency tsunami-related reconstruction efforts. This was followed by the TsunamiEmergency RecoveryProgram, Phase II--Cr.4039-CE/H147- CE, a US$75 million credib`grant approved on February 24,2005-to provide support to address the immediate post-tsunami needs and start the recoveryprocess. The IDA financing-notionally allocated to housing, livelihood support, infrastructure, and implementation support to TAFREN-is flexible and would be available to address any o f the needs described inthe needs assessment. B. Non-Lending Activities The following non-lending activities have been undertaken during the CAS period, beginning with those intendedto fill knowledgegaps: 0 The Public Expenditure Analysis (May 2004)-carried out over a number ofyears-was more of a `process' activity then a traditional report, and was designed to assist the public sector in institutionalizing a more strategic, policy-focused and performance-based budget formulation process. The work consisted of: (i) initiating a dialogue and reaching agreement with high level MOF officials on possible changes in the budget process; and (ii) completing background analytical work-including sectoral policynotes-that served as inputsto the budget preparation. 0 The Development Policy Review (DPR, June 2004) provides an integrated view o f Sri Lanka's development challenges for sustainable growth and poverty reduction, and is designed to contributeto the national debate onthese issues. 0 Drawing heavily from other reports (e.g., the DPR and the Needs Assessment mentioned below), the Sri Lanka Development Forum: The Economy, the Tsunami and Poverty Reduction (May 2005) was the Bank's background paper for the participants o f the May 2005 Development Forumand was the only document circulatedprior to the event.2 The investment climate analysis (1CA)-Improving the RuralandUrbanInvestment Climate (January 2005)--was unique in that it was the first such report to include an analysis o f entrepreneurship inrural areas, allowing a more comprehensive look at the business environment. 2 Inaddition, following the eventa "Report ofthe Proceedingsofthe DevelopmentForum" waspreparedby the Bank andissuedto the Board [Report No. CG2005-0012, August 18,20051. Appendix I V Lendinp. Non-Lendina. Capacitv Buildinp, IFC and MIGA Paae 4 of 7 Itaims to identify andunderstandthose factors that have madeit difficult for firms to do business inSriLankaandanalyzehowthese obstacleshaveaffected their productivity. 0 To provide background information on how Sri Lanka i s confronting the end o f the Multi-Fibre Agreement (MFA), the policy note I s Sri Lanka Ready for the Removal of Textile and Clothing Export Quotas? (May 2005) i s a stocktaking exercise about the: (i) structure and relative importance of the garment sector in Sri Lanka; and (ii) state of readiness o f the sector for the post-export quotaperiod. 0 Attaining the MillenniumDevelopment Goals in Sri Lanka (March 2005) attempts to answer the question "how likely and what will it take to reduce poverty, childmortality and malnutrition, and to increase school enrolment and c~mpletion?~.Concluding that some o f the MDGs have already beenmet, the report points to andtries to explain two areas-poverty reduction and child nutrition-where considerable challengesremain. Employing poverty mapping i s a useful method to uncover spatial heterogeneity in poverty incidence that i s prominent in Sri Lanka. The Poverty Mapping Policy Note (June 2005) providesmaps ofpoverty estimates at sub-national levels andlinksthem with maps o fremoteness and drought. The poverty maps have hadimpact even as they were being developed, including to get a roughidea ofthe mis-targeting o fthe Samurdhi program. 0 Responding to the recognized weaknesses in public accountability systems, the Country Procurement Assessment Review (CPAR, June 2003) provides analysis and recommendations on the topic of public procurement. 0 Together with providing a wide range o f policy recommendations, the ROSC (Reports on the Observance o f Standards and Codes) Accounting and Auditing Assessment-carried out together with the IMF in May 2004-provides an appraisal of accounting and auditing practices in the broader context of the institutional framework and the capacity needed to ensure high quality corporate financial reporting. Among other findings, the review highlighted the weakness of the Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB), which i s empowered with monitoring of and compliance with Specific Business Enterprise (SBE) accounting and auditing standards. As far as analysis specificallyrequestedbythe Government: 0 The Preliminary Damage and Needs Assessment for the Post-Tsunami Recovery Program (February 2005) was preparedtogether with the ADB and JIBC. This document-released thirty- eight days following the devastating event-serves as the basis for the on-going recovery and reconstruction efforts. Among the work setting abasis for future lendingare: 0 The Governance Policy Note (November 2003) that identifies the challenges for restoring the efficiency and effectiveness o fthe Sri Lankan civil service inthe short andmediumterm. Designed as a note to provide the basis for a sector reform dialogue, the Roads Policy Note (November 2003) providesthe basis for discussion and agreement for a Bank lending operation in the sector (Le., the proposed Road Sector Assistance Project). Appendix'IV Lendinn, Non-Lendina. Capacity Building. IFC and MIGA Paae 5 of 7 0 Last, but certainly not least, setting the stage for future reform in the educational system, the Treasures of the Education System in Sri Lanka: Restoring Performance, Expanding Opportunities and Enhancing Prospects (May 2004) analyzes the country's lost education achievements and the challenges currently facing the system, along with providingoptions for the htureto allow Sri Lanka to regainits once celebratededucation system. Another non-lending activity has been related to follow up to the Country Financial Accountability Assessment (CFAA) carried out by the Government and the Bank in 2003. Among the key findings of the CFAA were: (i) weak public audit function; and (ii)ineffective parliamentary control of the public purse. There are two fronts to address these concerns, specifically: (i) new legislation and rules to address institutional issues; and (ii)capacity building, including training for improving organizational efficiency and effectiveness. While progress on CFAA recommendations to date has been slow, there have been noteworthy achievements in certain areas, which provide opportunities for continuedimprovement inpublic financial accountability. The status of various activities is: 0 ParliamentaryCommittees: The TA proposal for buildingresearch capacity inthe secretariat for the Committee on Public Enterprises (COPE) and the Committee on Public Accounts (COPA) was finalized after extensive discussion, but, there has not yet been progress in the more crucial institutional reform measuresnecessaryfor allowing greater public access to committee hearings. This i s being coordinated with the parliamentary capacity building program (carried out by UNDPand the Inter-Parliamentary Union) that will among other things review the parliamentary committee system and services. 0 Public Financial Accountability Framework: The enactment of the Public Finance Bill-to update the Public Finance Act of 1971and modernize the public accountability framework-has not progressed much. However, there has been substantial progress related to the timeliness of financial reporting of Ministries, departments and SOEs, with a majority now rendering their accounts and having them audited withn the stipulated six-month period. While efforts are underway to move towards full accrual accounting as a means for improving quality o f financial information, this initiative lacks wide institutionalandpolitical support. 0 Public Sector ProfessionalAccountancy Institute: A CharteredInstitute of Public Finance and Accountancy of Sri Lanka will be established to specialize in the education and training of accountants and auditors for the public sector, and to ensure continuing professional development. The new Institute will receive technical and educational advice and support by the Chartered Institute of Public Finance and Accountancy (CIPFA), based inthe UK. 0 Public Audit: The recommendations to improve public audit functions include: (i) a enacting dedicated Public Audit Act; and (ii) preparing an Institution Development Plan (IDP) for the AG's office. The draft Public Audit Act has been prepared, as has the IDP. The later-to be implemented with continuing Bank support-identified areas o f improvement to transform the AG's office into a modem supreme audit institution, including: (i) implementing legslation to create adequate financial and operating independence; (ii)introducing international audit standards; (iii)introducingprofessionally qualified and adequately remuneratedmanagedstaff. C. WBICapacityBuildingActivities Primarily supporting achievement o f the outcomes in the growth and equity pillars, the focus of the WBI programinSri Lanka has beeninfour areas: (i) implementation o f the PRS; (ii) governance; (iii) media; and (iv) social accountability. More specifically: Appendix IV Lending. Non-Lending. Capacini Buildinn. IFC and MIGA Page 4 of 7 PRS Implementation. To strengthencapacity to implement growth-oriented, pro-poor budgets, a series of workshops-bringing together policy-makers from the center and provinces, leading academics and think tanks-has taken place at the central and provincial levels to: (i) support an on-going process of consultation on the DPR (ii) help develop linkages and mechanisms between PRS objectives and budget resource planning; and (iii) capacity to design and implement build citizens' scorecards to increase public sector accountability. The two workshops to date were broadcast through mobile radio stations in local languages, reaching an estimated 80 percent o f the populationinthe three poorestprovinces. 0 Governance. To ensure that public resource allocation is consistent with constituent demands and development objectives, programs have been designed to strengthen the public accounts and parliamentary committees, focusing on the role o f Parliament in the budget and PRS process. Among others, the training program for Parliamentarians focuses on topics such as parliamentary procedure and aspects of debate, legislation, the role o f the opposition, women in parliament, record keeping and the media, and the role of members and parliamentary staff. The program uses distance learning technologies to connect Sri Lankan parliamentarians with their counterparts and colleagues from other commonwealthcountries. Media. To increase transparency o f the public decision-makmg process and improve public sector accountability, a workshop on Freedomof InformationandMassMedia was carried out in May together with the Center for Policy Alternatives (CPA). The workshop provided an overview o f key issues in the information environment in Sri Lanka, and enabled participants to identify key constraints andpriorities towards the development of a longer term program. Going forward, priorities include: (i)access to information and its impact on governance and development outcomes; and (ii) the legislative framework for freedom of information. A media training program-to be carried out in partnership with academic institutions and the Press Institute o f Sri Lanka-is under development. Further, under the Gemi Diriya project a pilot community radio program is being developed to overcome constraints in the enabling environment for community andpublic interest broadcasting. 0 Social Accountability. Inpartnership with the Public Affairs Foundation (PAF) o f Bangalore, a social accountability program has been launched to gain a better understanding o f models o f social accountability in practice. In conjunction with the National HIV/AIDS project and in partnership with the Sri Lanka Center for Development Facilitation, an orientation workshop was heldinJune 2005. The workshop objectives were to: (i) introduce social accountability concepts, relevance, tools and mechanisms; (ii) explore how to apply these tools in HIV/AIDS prevention and care, and allow implementing agencies to decide on how to advance these tools; and (iii) train a core group o fNGOsto train others on the concepts and application o f these tools. An outcome of the workshop has been the incorporation o f some o f the tools into the monitoring and evaluation framework o f the project, holding implementing NGOs and the National Coordinator o f the National HIV/AIDS Prevention Project (NSACP) accountable for program performance and outcomes. The program will be expanded to other projects-i.e., Gemi Diriya and Health Sector Development-in the Sri Lankaportfolio. D. International Finance Corporation The IFC has been supporting the growth pillar through investments that foster private sector participation in Sri Lanka. IFC has sought investments that: (i) develop financial markets and add value to the on-going consolidation o f financial services; (ii) expand the private provision o f infrastructure services, especially power, ports and telecommunications; (iii) support the growth o f export-oriented AppendinI V Lendinn. Non-Lending. Capacity Building,IFC and MIGA Pane 7 of 7 manufacturing and service companies; (iv) encouragethe expansion of Sri Lankan companies' operations into the South Asian region; and (v) support the growth of SMEs in conjunction with multilateral and bilateral partners. As of September 30, 2005, the held portfolio of IFC in Sri Lanka consisted o f investments innine companies, with a total committed exposure of US$96.6 million, all from IFC's own account. IFC's own account i s comprised o f US$64.5 million in loans, US$24.2 million in equity, US$5.9 million in guarantees and US$2 million in risk management. The portfolio i s spread over financial institutions, power, healthcare, manufacturing, ports and telecommunications. Duringthe CAS period, IFG's investment opportunities have been limited due to: (i) increased political uncertainty, together with the change in the public sectors' stance towards privatization and private sector participation; (ii) indecisioninpolicy-making; and (iii) increase inliquidity o f domestic an financial institutions, particularly post-tsunami. Inparticular, few infrastructure andmanufacturing sector investment opportunities o f sufficient scale have emerged. In FY03, IFC committed one new investment-a US$9.9 million in equity in the Commercial Bank of Ceylon-while in FY04, two investments were committed-a US2.89 million rights issue in the Commercial Bank o f Ceylon and a loan o f US$50 million to Dialog to support the expansion and upgrade o f the leading mobile telecommunications network. The SouthAsia Enterprise DevelopmentFacility (SEDF) was expanded in 2005 to cover Sri Lanka, with the programproviding TA for SME development. The program focuses on financial services, the enabling environment for business, and specific sectors (e.g., tourism, construction and agnbusiness), and will expand to support the growth of SMEs inthe North and East if the conditions remain favorable. E. Multilateral Investment GuaranteeAgency The activities of MIGA in Sri Lanka are directed toward supporting foreign direct investments in the country and improving the investment ~limate.~ MIGA's current exposure in Sri Lanka stands at a gross exposure o f US$1.69 million, well below the country limit (US$420 million net), providing sufficient room for additional guarantees. MIGA has issued guarantees to a Japanese investor for an infrastructure project that i s aimedto help alleviate Sri Lanka's power shortage. In May 2005, MIGA was asked to help Sri Lanka develop and implement an economic development initiative focusing on the North, East and tsunami-affected areas. These efforts to attract investment into conflict and tsunami-affected areas would complement the peace process. Specifically, the idea i s to establish an investment guarantee facility which would offer insurance for foreign investment (including Diaspora) into conflict-affected areas. Ways are also being explored to extend the guarantee facility to cover local investments into these areas. Interms o f TA, MIGA has: (i) undertaken an institutionalneeds assessment of the Board o f Investments (BOI); and (ii) made recommendations for a capacity buildingprogram for the BO1to support developing its capabilities inthe areas o f investment promotionandinvestor facilitation. 3 As elsewhere, these goals are achieved by providing: (i) non-commercial guarantees to foreign investors interested in opportunities; and (ii)technical assistance-i.e., analyacal and diagnostic tools-to country institutions responsible for investment promotion. Appendix V TheRisks Associatedwith Implementationof the CAS Ina bit more detail, the major risks associated with implementation of the strategy are the following: 0 Peace: While bothparties to the conflict continue to express their commitment to peace, during the last 18 months tensions have escalatedand today the cease-fire i s under considerable strain. On top o f this, the delaying of the Supreme Court decision on the P-TOMS until after the Presidential elections may cause the LTTE to become completely disenchanted, giving up all together on the politics inthe South. To mitigate this risk, the Bank will continue to ensure that resources are available for reconstruction-both tsunami-related and conflict-related-in the North and East. As pointed out in the main text (see paragraph 12), the volume of resources directed towards projects inthe North and East has been triple that envisioned inthe CAS. This was due not only to the tremendous needs of the region, but also to the excellent implementation record that has been established.' Inthe event that hostilities resumed, the strategy described in the CAS remains valid.' 0 Politics: Inaddition to the risk of a return to conflict, there are two politicalrisks that were cited in the main document and Appendix I.The primary risk is that a new government could be formed on a platform that would move the Bank to the undesirable "dnfting back" scenario. Under such a scenario, the risk of the conflict re-emerging would be quite high as would be the advent o f unsustainable policies. Such a scenario would likely lead to the emergence o f unsustainable poverty reduction. Inthe staffs' view, this would be very harmful to Sri Lanka's short and mediumterm prospects, and very detrimental to achieving the outcomes the Bankhas selected as crucial for the development of the country. The second major risk i s that o f a continuation of the political stalemates and instability that have dogged Sri Lanka over the last two years, leading to the inability to move on the peace or reform fronts. This would leave Sri Lanka stuck in the "muddling through" scenario, unable to move forward to a framework that would significantly improve the prospects for the poor. 0 Tsunami: The tsunami has introduced a number o f additional risks and complications. First of all, there are high expectations associated with tsunami-related reconstruction. These must be managed carefully recognizing that given the absorptive capacity reconstruction efforts will take three to five years. Secondly, many poor communities in the North and East have not been affected by the tsunami, but are still awaiting post-conflict reconstruction support. Inaddition, there are needy areas with deep pockets of poverty in the South. Especially in light of the civil conflict and the past youth insurrections, there i s a need to ensure equity between regions and ethnic groups. The Bank has been and will continue to be extremely sensitive to these risks, ensuringto contribute to abalanced development ofthe country. 1 Of the eighteen active operations inthe portfolio, three-or about 17 percent-are devoted entirely to the North and East-i.e., NEERP, NEIAP I1and NEHRP. Inrecent years, NEIAP I-that closed in June 2005-had also been operating exclusively in the North and East. Together these `North and East only' projects accounted for about 30 percent of total disbursements (from investment projects) in the period FY03-FY06,demonstrating the relatively strong implementation record inthe region. 2 See paragraph 77 ofReport NO.25413-CE7dated March 4,2003. Appendix V The Risks Associated with Implementation of the CAS Page 2 of 2 0 Implementation: Prior to the tsunami, Sri Lanka's absorptive capacity was stretched and without a doubt the magnitude o f tsunami-related reconstruction will certainly overextend implementation capacity, involving among other things skills shortages and limits on equipment capacity o f construction companies. This will likely have spill-over effects onthe implementation of regular development projects. In addition, the strategc shift suggested in this Progress Report-i.e., moving back towards greater reliance on project-based support-will be more taxing than the programmatic-based support proposed under the original CAS. To helpmitigate these risks, a focal area o f the Bank's tsunami-related assistance will be support for implementation capacity and building institutional capacity will remain a crucial cross-cutting theme within all Bank activities. 0 External: With the recent sharp escalation of oil prices, the primary external risk has already been realized. This risk will continue and will be best mitigated by sensible domestic pricing to reduce demand. Nevertheless, the import bill will be significantly higher in coming years, threatening the balance of payments (BOP). Interms o f export earnings, the garment sector has performed very well since the abolition of MFA, but there i s a danger of losing market share to China and India in the coming years. The industry has put in place programs to maintain competitiveness, butthese will require monitoring. A thirdrisk i s the potentialimpact on tourism earnings-already reeling under the effects o f the tsunami-if conflict were to re-emerge. Finally, there is the constant unknown with regard to remittances. With some one million Sri Lankans working inthe Middle East, this has been a stable bedrock o f the balance o f payments. For now, this appears to be likely to continue stable, but it could change, as did Iraq, which had been one o f the major markets. Appendix VI CountryFinancingParameters: Summary Table Date: September 22,2004 The country financing parametersfor S n Lanka set out below have been approvedbythe Regonal Vice President for SouthAsia andarebeingposted on the Bank's internal website. Item Parameter RemarkdExplanation Costsharing. Limitonthe proportionof upto Clounterpartfundingby the national individual project costs that the Bank may 100% Zovernment and other entities will finance. :ontinue to be encouraged. For :ommunity-driven development (CDD) I ?rejects, the Bankwill require :ontributions incashand inkind from user groups or beneficiary communities inlinewiththe currentpractice. An increasingproportion o f Bank financing is expectedto be for sector wide operations (SWAPS)inwhich typically the Bank finances a relatively lower percentageo fproject costs thanregular investmentprojects. No While no country-level limits on that would apply to the overall amount o f country- recurrent costs are currently being set, recurrent expenditures that the Bankmay level limit the fiscal situation and its implications finance. for Bankfinancing o frecurrent costs will continue to be closely monitored. Local costfinancing. Are the Yes The two requirements are met. At the requirements for Bank financing of local project level, the Bank expects to expenditures met, namely that: (i) finance local costs as requiredbythe financing requirements for the country's project's development objectives. development programwould exceedthe public sector's ownresources (e.g., from taxation and other revenues) and expected domestic borrowing; and (ii) the financing of foreign expenditures alone would not enable the Bank to assist inthe financing of individual projects. Taxesand duties. Are there any taxes None The Bankmay finance the costs o f taxes and duties that the Bank would not and duties as longas they are finance? reasonable andnon-discriminatory. As o f June 2004, no taxes are identified as unreasonable or discriminatorv. ANNEXES v) 0 2 Annex A2 Page 1 of2 At A Glance 11/1/05 Lower- POVERTYand SOCIAL Sri South middle- Lanka Asia income Developmentdiamond' 2004 Population,mid-year (millions) 19.4 1,448 2,430 GNI percapita (Atlas method, US$) 1,010 590 1,580 Lifeexpectancy GNI (Atlasmethod, US$bil/ions) 19.5 860 3,847 Averageannual growth, 1998.04 Population1%) 1.3 1.7 1.o Laborforce (%) 2.1 2.1 0.7 GNI Gross per primary Most recentestimate (latest year available, 1998-04) capita enrollment Poverty(% ofpopulationbelownationalpovemline) 23 Urbanpopulation(% of tofalpopu/ation) 21 28 49 Lifeexpectancyat birth (years) 74 63 70 i Infantmortality(per 1,000live birfhs) 13 66 33 Childmalnutrition(% of childfen under5) 48 11 Access to improvedwater source Accessto an improvedwater source(% ofpopulation) 78 84 81 Illiteracy(% ofpopulationage 15+1 93 59 90 Gross pnmaryenrollment (% ofschool-agepopulation) 112 97 114 -Sri Lanka Male 113 105 115 Lower-middle-incornegroup Female 112 92 113 KEY ECONOMIC RATIOS and LONG-TERM TRENDS I984 1994 2003 2004 Economicratios' GDP (US$billions) 6.0 11.7 18.2 20.1 GrossdomesticinvestmentlGDP 25.8 27.0 22.1 25.0 Exportsof goodsand servicedGDP 28.9 33.8 35.9 36.4 Trade Grossdomestic savingslGDP 19.9 15.2 15.9 15.9 Gross nationalsavingdGDP 25.6 19.6 223 19.5 T Currentaccount balance/GDP -38 -7.4 -0.4 -3.2 InterestpaymentdGDP 25 1.3 1.o 1.1 Total debtlGDP 49 5 67.9 56.1 54.3 Totaldebt service/exports 130 8.6 7.4 8.5 Presentvalue of debffGDP 46.0 I Presentvalueof debffexports .. 103.4 Indebtedness 1984-94 1994-04 2003 2004 2004.08 (averageannualgrowth) GDP 41 4.2 6 0 5.4 5.9 -Sri Lanka ' GDPper capita 3 0 2 8 4.8 4.2 4.8 Lowermiddle-incomegroup Exportsof goodsandservices 7 3 5 5 5.4 7.8 5.3 STRUCTUREof the ECONOMY 1 (% of GDP) 2003 2004 Growth of investmentand GDP (%) Agriculture 28.7 23.8 19.0 17.8 20 Industry 26.3 26.2 26.4 26.8 40 Manufacturing 14.9 15.4 15.6 15.3 0 Services 45.0 50.1 54.6 55.4 1 ~ -10 I Privateconsumption 72.3 75.1 76.2 76.0 -201 V I Generalgovernmentconsumption 7.8 9.7 7.9 8.1 Importsof goodsandservices 34.5 45.6 42.1 45.5 -GDI *GDP 1984-94 2003 2004 (averageannualgrowth) Growth of exports and imports(%) Agriculture 1.8 1.2 1.6 4.7 2o Industry 5.8 4.5 5.5 5.2 IO Manufacturing 7.2 4.8 4.2 5.1 Services 4.4 5.2 7.9 7.6 Privateconsumption 3.2 4.8 5.2 5.1 -10 Generalgovernmentconsumption 5.5 7.0 12.7 4.9 -20 Grossdomesticinvestment 1.6 4.6 16.0 11.6 ---Exports -Imports Importsof goodsandservices 4.4 6.9 10.2 9.3 Annex A2 Page 2 of 2 PRICES and GOVERNMENTFINANCE I 1984 1994 2003 2004 1 Domesticprices Inflation I (% change) 15 Consumer prices 8.4 6.3 7.6 10 ImplicitGDP deflator 20.3 9.8 5.1 8.7 5 Government finance (% of GDP,includes current grants) 0- Current revenue 22.2 20.4 16.0 15.3 99 W 01 02 03 Current budgetbalance 6.1 -1.5 -3.0 -3.9 -GDP deflator -CPI Overallsurplusldeftcit -6.8 -9.1 -8.3 -8.2 I TRADE 1984 1994 2003 2004 (US$millions) Export and import levels (US$ mill.) Total exports (fob) 1,468 3,209 5,133 5,757 Tea 620 424 683 740 losooo T Other agriculturalgoods 130 299 390 392 Manufactures 208 1,552 2,575 2,809 Total imports(cia 1,869 4,767 6,672 8,000 Food 602 564 596 Fueland energy 296 838 1,209 Capitalgoods 1,366 1,320 1,670 88 99 W 01 02 03 04 Export priceindex (1995=100) 57 120 131 Import priceindex (1995=100) 60 110 127 Exports Imports Terms of trade (1995=100) 95 109 103 BALANCEof PAYMENTS 1904 1994 2003 2004 (US$millions) Current account balance to GDP (%) Exportsof goods and services 1,739 3,955 6,544 7,284 Imports of goods and services 2,312 5,333 7,684 9,108 Resource balance -573 -1-378 -1,140 -1,824 Net income -134 -169 -171 -203 Netcurrent transfers 479 680 1,241 1,380 Current account balance -228 -867 -70 -647 Financingitems (net) 539 1,107 572 442 Changes in net reserves -311 -240 -502 205 Memo: Reserves includinggold (US$millions) 2,022 2,196 2,211 Conversion rate (DEC, /ocalNS$) 25.4 49.4 96.5 101.2 EXTERNALDEBTand RESOURCE FLOWS 1984 1994 2003 2004 (US$ mi//ions) Composition of 2004 debt (US$mill.) Total debt outstanding and disbursed 2,993 7,960 10,238 10,887 IBRD 50 54 3 1 471 1 IDA 311 1,339 2,051 2,167 Total debt service 274 416 0 766 IBRD 6 13 2 2 IDA 4 16 49 55 Composition of net resourceflows Officialgrants 180 160 136 Officialcreditors 260 272 485 288 Privatecreditors 82 -14 21 44 Foreigndirect investment 33 166 229 Portfolio equity 0 0 -14 World Bank program Commitments 41 0 180 118 A IBRD E Bilateral Disbursements 94 78 202 68 B IDA D Other multilateral - F Private Principal repayments 3 15 38 40 C IMF --- G Short-term --- Netflows 90 63 164 28 Interest payments 6 15 14 17 Nettransfers 84 48 151 11 Development Economics 11/1/05 Annex B2 Page 1of 1 Selected Indicators* of Bank Portfolio Performance and Management As of 10/31/2005 Indicator 2003 2004 2005 2006 Portfolio Assessment Numberof projects under implementationa 17 18 19 19 Average implementationperiod(years) ' 3.1 3.2 3.6 4.0 Percentof problemprojects by number 17.6 11.1 5.3 5.3 Percentof problemprojects by amounta, 21.3 4.4 0.6 0.6 Percentof projectsat risk by numbera, 23.5 11.1 5.3 5.3 Percentof projectsat risk byamount a, 32.0 4.4 0.6 0.6 Disbursementratio (%) e 27.3 25.6 27.4 9.4 Portfolio Management CPPR during the year (yeslno) Supervision resources (totalUS$ thousands) 1,361 1,460 1,935 1,800 Average supervisioncost(US$ thousands/project) 80 81 97 80 Memorandum Item Since FY80 Last Five FYs Projectsevaluatedby OED by number 70 5 Projectsevaluatedby OED by amount (US$ millions) 1,942.5 176.9 % of OED Projectsrated U or HU by number 25.4 0.0 % of OED Projectsrated U or HU by amount 29.5 0.0 a. As shown in the Annual Reporton PortfolioPerformance(exceptfor current FY). IncludesGEF. b. Average age of projects in the Bank's country portfolio. c. Percentof projectsrated unsatisfactory(U) or highly unsatisfactory(HU) on development objectives(DO)andlor implementationprogress(IP). d. As defined underthe PortfolioImprovementProgram. e. Ratioof disbursements during the year to the undisbursedbalanceof the Bank's portfolioat the beginningof the year; Investmentprojectsonly. f. Directcosts (source: BusinessWarehouseTable 5.2 except2006 data). g. Actuals as of 9/23/2005. All indicatorsare for projectsactive in the portfolio,with the exceptionof the disbursementratio, which includesall active projectsas well as projectswhich exited duringthe fiscal year. Annex B3 Page 1of 2 Bank Group Program Summary Indicative IDA Lending Program a Strategic Rewards Implementation Year Project Name US$ Milions (H/M/L) Risks (H/M/L) 2006 Governanceand Capacity Building TechnicalAssistance 30.0 H M EducationSectorOperation 60.0 M M Road SectorAssistance 100.0 H M North East Housing Reconstruction (S) 15.0 H M Sub-total 190.0 2007 Gemi Diriya II(Estates) 50.0 Water Management 50.0 Local Service Delivery 50.0 PRSC II (S) 90.0 Land Tiitling (R) 30.0 Sub-total 150.0 2008 PromotingGrowth in the North and East 70.0 Social Protection 50.0 Agriculture Research and Extension 30.0 PRSC 111 (S) 90.0 PrivateSector DevelopmentlAccessto Finance (R) 50.0 Sub-total 150.0 Total FYO6-FY08 490.0 Notes: a. This table presentsan indicativelending program for the next three years. b. For each project,the strategic rewards and implementationrisksare rated as High (H), Moderate(M), or Low (L). c. Sub-totals and total do not include Stand-bys (S) or Reserves(R) Annex B3 Page 2 of 2 IFC andMIGA Programs: FY 2003-2006 As of 10/21/2005 2003 2004 2005 2006 IFC Approvals (US$ Millions) 75.00 2.89 Sector (YO) Finance and Insurance ' 33 100 Information 67 Total 100 100 0 0 InvestmentInstrument(YO) Loans 72 Equity 15 100 Quasi-Equity 13 Other Total 100 100 0 0 MIGAGuarantees(US$ Millions) 1.69 1.69 1.69 Annex B4 Page 1o f 1 Summary of Non-LendingServices Completion Actual/Planned Product FY Cost (US$OOO) Audiencea Objective Recent Completions Country FinancialAccountabilityAssessment CFAA) 2003 100.0 GIB KGlPS Country ProcurementAssessment Review (CPAR) 2003 40.0 GIB KGlPS CountryAssistance Strategy(CAS) 2003 90.0 GIDIBIPD KGIPS Joint StaffAppraisal of the PRS 2003 167.0 GIDIB PDlPS DevelopmentPolicy Review (DPR) 2004 260.0 GIDIBIPD KG/PD/PS EducationSector 2004 160.0 GIDIBIPD KGlPDlPS PublicExpenditureAnalysis 2003104 330.0 GIDIB KGIPS Governance Policy Note 2003104 70.0 GIB KGIPS Roads Policy Note 2004 24.0 GlDlB KGlPS ROSCAccounting andAuditingAssessment 2004 40.0 GIB KGIPS TechnicalAssistanceon PublicSector Reform 2004 65.0 GIB KGIPS Urban & Rural InvestmentClimateSurvey 2005 230.0 GIDIBIPD KGlPDlPS MDGAssessment 2005 130.0 GIDIBIPD KGIPS On-goinglplanned Access to Finance 2006 100.0 GIDIB KGIPS Social ProtectionNote 2006 100.0 GIDIBIPD KGIPD Povertyand Social ImpactAssessment(PSIAs) 2006 300.0 GIDIBIPD KGlPD Improving Service Deliveryin a DecentralizedFrameworl 2006 310.0 GIDIBIPD KGlPDlPS Tea and RubberEstatesStudy 2006 150.0 GIDIBIPD KGIPDIPS PovertyAssessment 2006 200.0 GIDIBIPD KGIPS Youth Transitions 2006 150.0 GIDIBIPD KGIPDIPS Study on Ageing 2007 100.0 GIDIBIPD KGIPDIPS Growth Optionsfor the Northand East 2007 150.0 GIDIBIPD KGIPDIPS AgricultureMarketingandTrade 2007 100.0 GIDIBIPD KGlPDlPS Youth Employment 2007 75.0 GIDIBIPD KGIPDIPS Trade Study 2007 100.0 GlDlBlPD KGIPDIPS Urbanization 2008 125.0 GIDIBIPD KGIPDIPS Accounting for the Environment 2008 150.0 GIDIBIPD KGlPDlPS Country EconomyMemorandum 2008 100.0 GIDIBIPD KGIPDIPS Education Sector Update 2008 75.0 GIDIBIPD KGIPDIPS Technical AssistancelOther Development Forum 2005 35.0 GIDIB KGIPD Tsunami NeedsAssessment 2005 100.0 GIDIB PS CAS ProgressUpdate 2006 45.0 GIDIBIPD KGIPS Joint StaffAppraisalof the PRS 2006 50.0 GIDIBIPD PDIPS a. Government(G),Donor (D), Bank(B),PublicDissemination(PD). b. KnowledgeGeneration(KG),PublicDebate(PD),ProblemSolving(PS). Annex B5 Page 1of 1 Poverty and Social Indicators Latestsingleyear Same regionlincomegroup Lower- South middle- 1975-80 1985-90 1998-2004 Asia income POPULATION Total population, mid-year (millions) 14.6 16.3 19.4 1,447.7 2,430.3 Growth rate (% annualaveragefor period) 1.6 1.o 1.3 1.7 1.o Urban population(% of population) 21.6 21.3 21.I 28.3 48.6 Total fertility rate (birthsperwoman) 3.8 2.5 2.0 3.0 2.1 POVERTY (% of population) National headcount index 26.1 22.7 Urban headcount index 16.3 7.9 Ruralheadcount index 29.4 24.7 INCOME GNI per capita (US$) 280 490 1,010 590 1,580 Consumer priceindex(1995=100) 19 61 221 Food price index (1995=100) 19 62 215 INCOMEEONSUMPTIONDISTRIBUTION Gini index 33.2 Lowest quintile(% of incomeor consumption) 8.3 Highest quintile(% of incomeor consumption) 42.2 SOCIAL INDICATORS Publicexpenditure Health(% of GDP) 1.8 1.3 2.5 Education (%of GDP) 2.7 3.1 3.1 3.5 Net primaryschool enrollmentrate (% of age group) Total 90 96 87 Male 92 89 Female 88 85 Access to an improvedwater source (% ofpopulation) Total 68 78 84 81 Urban 91 99 93 93 Rural 62 72 80 70 Immunizationrate (% of childrenages 12-23months) Measles 80 99 67 86 DPT 46 86 99 71 88 Child malnutrition(% under 5 years) 54 37 48 11 Lifeexpectancy at birth (years) Total 67 70 74 63 70 Male 65 68 72 62 68 Female 69 73 76 64 72 Mortality Infant (per 1,000 livebirths) 36 26 13 66 33 Under5 (per 1,000 live births) 48 32 15 92 42 Adult (15-59) Male (per 1,000 population) 200 182 244 249 192 Female (per 1,000 population) 152 122 124 199 123 Maternal (per 100,000live births) 23 Birthsattended by skilled health staff (%) 87 97 36 86 Note: 0 or 0.0 meanszero or lessthan half the unit shown. Net enrollmentrate: break in series between 1997 and 1998 due to changefrom ISCED76to ISCED97. Immunization: refersto children ages 12-23 monthswho receivedvaccinationsbeforeone year of age. World DevelopmentIndicatorsdatabase, World Bank - 08/29/05 Annex B6 Page 1of 2 Key EconomicIndicators Actual Estimate Projected Indicator 2002 2003 2004 2005 2006 2007 2008 2009 Gross domestic product' 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Agriculture 20.5 19.0 17.8 16.8 16.4 16.0 15.5 15.1 Industry 26.3 26.4 26.8 26.1 26.5 26.7 27.0 27.3 Services 53.2 54.6 55.4 57.1 57.1 57.3 57.5 57.6 Total consumption 85.6 84.1 84.1 85.3 83.4 81.7 80.1 79.2 Gross domestic fixed investment 20.9 22.1 25.0 26.4 27.6 28.2 28.1 27.5 Government investment 2.0 2.3 2.2 5.3 5.9 5.8 5.5 5.4 Privateinvestment 18.9 19.6 22.8 21.1 21.7 22.5 22.5 22.1 EXPO~~S (GNFS)~ 36.1 35.9 36.4 34.2 33.8 32.4 31.5 30.7 Imports (GNFS) 42.8 42.1 45.5 45.9 44.8 42.4 39.8 37.4 Gross domestic savings 14.4 15.9 15.9 14.7 16.6 18.3 19.9 20.8 Gross national savings' 19.8 22.3 19.5 27.9 28.6 29.3 29.8 30.4 Gross domestic product 16,536 18,246 20,055 22,530 24,399 26,512 28,811 31,321 (US$ million at current prices) GNIpercapita (US$,Atlas method) 850 930 1,010 1,110 1,180 1,290 1,380 1,490 Realannualgrowth rates(YO,calculatedfrom 1982 prices) Gross domestic product at marketprices 4.0 6.0 5.4 5.3 6.0 6.0 6.0 6.0 Gross domestic income 5.3 8.5 3.8 2.8 6.6 6.1 6.4 6.2 Realannualper capita growth rates (%, calculatedfrom 1982prices) Gross domesticproduct at marketprices 2.5 4.7 4.8 4.3 5.0 5.0 5.0 5.0 Total consumption 5.0 4.9 4.4 3.4 3.2 2.7 2.7 3.5 Privateconsumption 6.3 3.9 4.6 5.3 3.0 2.4 3.0 4.0 Balanceof payments (US$millions) ~xp01-t~(GNFS)~ 5,967 6,544 7,284 7,707 8,252 8,602 9,085 9,609 Merchandise (FOB) 4,699 5,133 5,757 6,098 6,386 6,587 6,908 7,258 imports (GNFS)~ 7,080 7,684 9,108 10,338 10,923 11,245 11,454 11,719 Merchandise (CIF) 6,106 6,672 8,000 9,171 9,694 9,948 10,070 10,240 Resource balance -1,113 -1,140 -1,824 -2,631 -2,671 -2,643 -2,369 -2,110 Net current transfers 1,128 1,241 1,380 1,603 1,643 1,660 1,676 1,862 Current accountbalance -238 -70 -647 -1,252 -1,399 -1,395 -1,181 -810 Net privateforeign direct investment 185 171 217 276 227 237 370 370 Long-term loans (net) 326 520 457 1,197 566 871 467 217 Official 232 485 288 565 620 377 186 99 Private 94 35 169 632 -54 494 281 118 Other capital(net, incl. errors & ommissions) 65 -119 -232 194 712 468 444 364 Change inreservesd -338 -502 205 -415 -107 -181 -101 -141 Resource balance(% of GDP) -6.7 -6.2 -9.1 -11.7 -10.9 -10.0 -8.2 -6.7 Real annualgrowth rates (1982 prices) Merchandise exports (FOB) 2.2 3.5 7.8 7.5 5.4 4.5 4.3 4.5 Mechandise imports (CIF) 11.4 11.2 9.0 9.2 5.3 3.3 1.1 1.1 Annex B6 Page2 of 2 ' Key Economic Indicators (Continued) Actual Estimate Projected Indicator 2002 2003 2004 2005 2006 2007 2008 2009 Publicfinance (as % of GDPat marketprices)e Current revenues 16.6 16.0 15.3 15.7 16.4 16.9 17.3 17.8 Current expenditures 20.9 19.0 19.2 18.6 18.3 17.9 17.6 17.1 Current account surplus (+) or deficit (-) -4.4 -3.0 -3.9 -2.9 -1.9 -1.0 -0.3 0.7 Capital expenditure 4.6 5.0 4.3 5.3 5.9 5.8 5.5 5.4 Foreign financing 1.4 2.9 2.2 3.4 3.9 3.5 2.9 2.3 Monetaryindicators M2/GDP 39.4 40.8 42.3 42.1 43.0 43.3 43.4 43.7 Growth of M2 (%) 13.4 15.3 19.6 15.0 17.6 13.6 11.6 11.4 Private sector credit growth/ 87.5 130.4 89.5 65.0 86.5 79.9 83.4 90.4 Total credit growth (%) Price indices(1982 400) Merchandise export price index 141.2 150.2 161.1 158.7 157.7 155.7 156.5 157.4 Merchandise import price index 137.7 136.3 154.1 161.9 162.5 161.4 161.6 162.6 Merchandise terms of trade index 102.6 110.2 104.5 98.1 97.1 96.5 96.8 96.8 Real exchange rate (US$/LCU)' 121.7 115.7 109.9 GDP deflator (% change) 8.1 5.1 8.7 9.7 8.5 6.5 5.0 4.5 a. GDP at factor cost. b. "GNFS" denotes "goods and non-factor services." c. Includes net unrequitedtransfers excluding official capital grants. d. Includes use of IMFresources. e. Consolidated central government. f. "LCU" denotes "local currency units."An increaseinUS$/LCUdenotes appreciation. Page 1 ofB1l Annex Key Exposure Indicators Actual Estimate Projected Indicator 2002 2003 2004 2005 2006 2007 2008 2009 Totaldebt outstandinganddisbursed(TDO) (US$m)a 9,546 10,238 10,887 12,114 13,171 14,393 15,187 15,608 Net disbursements (US$m) a 184 507 1,425 1,288 1,306 1,474 1,043 670 Totaldebt service (TDS) oJS$m) a 718 605 166 909 912 896 1,263 1,402 Debtanddebt service indicators("h) TDO/XGS 130.2 126.0 120.9 128.2 131.5 138.5 139.3 136.3 TDOIGDP 57.7 56.1 54.3 53.8 54.0 54.3 52.7 49.8 TDS/XGS 9.8 7.4 8.5 9.6 9.1 8.6 11.6 12.2 ConcessionaliTDO 76.4 80.4 80.9 BRDexposureindicators("h) lBRDDS/publicDS 0.8 0.4 0.3 0.1 0.0 0.0 0.0 0.0 PreferredcreditorDS/public 26.5 27.5 36.4 36.0 28.9 26.8 30.9 38.1 DS(%) lBRD DS/XGS 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 IBRD TDO (uS$m) 4 3 1 0 0 0 0 0 Share of IBRDportfolio("h) 0 0 0 0 0 0 0 0 IDA TDO (us$m) 1,734 2,051 2,167 2,170 2,285 2,391 2,490 2,585 FC (US$m)e 0.0 75.0 2.9 0.0 Loans 54.0 Equityandquasi-equity 21.0 2.9 MIGA MIGA marantees(Us$rn) 1.7 1.7 a. Includespublic andpubliclyguaranteeddebt, privatenonguaranteed, use of IMFcreditsandnet short-termcapital. b. "XGS denotes exportsofgoods andservices, includingworkers'remittances. c. Preferredcreditorsare definedas BRD,IDA, the regionalmultilateraldevelopmentbanks, the MF, and the Bank for International Settlements. d. Includespresentvalue of guarantees. e. Fiscalyear approach. 3ooocDoooo c?999-?9999 0 0 0 0 ~ 0 0 ~ 0 0 8 0 8 m 9 7 0 8 -C0% 0 a, m 0