SRI LANKA

	FY 1998 Actual	FY 1999 Estimate	FY 2000 Request
Development Assistance	$4,300,000	$3,000,000	$3,000,000
Child Survival and Disease	$ 400,000	---	---

Introduction

The U. S. program in Sri Lanka supports the following U.S. foreign policy and strategic goals: broad-based economic growth and agricultural development, democracy and good governance, and humanitarian assistance. Within South Asia, Sri Lanka provides a unique environment for advancing these interests. With the Government of Sri Lanka (GSL) focusing on ending the ongoing ethnic conflict, and with clear potential for achieving sustainable economic growth, USAID is helping the country move through an important political and economic transition.

The Development Challenge

Sri Lanka has a fifty year tradition of vigorous democracy with competing political parties, a free press and an independent judiciary. Although it has achieved high levels of literacy, low birthrate, low infant mortality rates and broad gender equality and has made progress on economic reforms, it remains at the bottom of the list of middle-income developing countries. The prolonged 15-year ethnic conflict raging in the North and East Provinces continues to threaten its progress.

The Sri Lanka economy remained resilient in 1998 despite adverse external conditions in the region and increases in defense expenditures. A growth rate of 5% is expected for 1998, which is below the initial target of 6%. Growth in the economy remained highly dependent on export earnings from the garment sector and from plantation crops. Although Sri Lanka has made progress in macro-economic reforms, progress on financial and structural reforms that would stimulate productive investment, diversify the economy and raise incomes remained slow.

USAID's programs are aimed at improving the trade and investment environment. Building on previously developed strong relationships with a wide range of companies, USAID's programs strengthen business associations that promote key reforms related to agriculture, manufacture and trade liberalization, and that improve business strategies for global competitiveness. In 1998, the success of this approach was demonstrated by the Government's 1999 budget proposals, which included most of the reforms requested by these advocacy groups to promote the import of agro-technology and processing materials.

An open and transparent financial market, which shifts from being dominated by banking to strong capital markets, is essential for Sri Lanka to improve its competitiveness. USAID has had considerable success in establishing a modern and efficient stock exchange in Sri Lanka, but the stock market remains small in capitalization. USAID programs support expansion of the investor base and contribute to improving regulation and increasing transparency of the capital market. USAID programs also support establishment of new financial instruments, including development of corporate bonds to facilitate financing of industry and infrastructure development.

In 1998 the ethnic conflict in the North and East Provinces of the country placed heavy demands on the country's resources. The GSL continued to pursue a three-pronged strategy of intensive military confrontation, reestablishment of normalcy in the Jaffna peninsula, and a negotiated political settlement. Resettlement of the displaced population to the Jaffna peninsula was slowed by security problems in the area, and a large number of persons remain displaced. Efforts to reach a negotiated political settlement were stalled by the lack of cooperation between the major political parties and lack of interest on the part of the insurgents. Reports of torture, primarily related to the conflict, continued to surface in 1998, but the GSL made significant progress in reducing the number of disappearances and extrajudicial killings. USAID's programs support efforts of the GSL and the non-government organizations (NGO) community to improve protection of human rights, improve the ability of the judiciary to resolve complaints efficiently and effectively, and provide relief to those most affected by the conflict.

Other Donors

In 1997, total donor disbursements to Sri Lanka were about $448 million. The United States, with about 3% of total disbursements, was the fourth largest bilateral donor, and the sixth largest overall. The leading donors were Japan, the Asian Development Bank, the International Development Association, Netherlands, Norway, and the United States. In 1997, total donor assistance provided to improve the policy environment and strengthen capital markets was approximately $24.0 million. USAID is the lead donor working with the Securities & Exchange Commission, the Colombo Stock Exchange and developing a policy reform program through the private sector.

FY 2000 Program

USAID's programs will continue to support Agency goals for increasing broad-based economic growth and agricultural development, strengthening democracy, and providing humanitarian assistance. In the private sector, programs will support business associations and chambers to improve the dialogue with government on competitiveness issues facing Sri Lanka, and to improve business strategies on a sector-wide basis. Technical assistance will be provided for improvements in financial market and trade/investment systems, policies and practices necessary to attract the level of investment required for sustained growth and competitiveness. Democracy programs will provide further support to both NGO initiatives and GSL programs to improve the human rights climate in Sri Lanka. To restore confidence in the judiciary, programs that support improvements in the efficiency and effectiveness of the District Courts will be expanded, as well as judicial training. USAID will extend its programs of humanitarian assistance through NGOs to reach children and families most affected by the conflict and related violence in Sri Lanka in order to help them return to a normal life.

SRI LANKA

FY 2000 PROGRAM SUMMARY
(in thousands of dollars)

USAID Mission Director, Lisa Chiles

USAID Strategic & Special Objectives	Economic Growth & Agriculture	Population & Health	Environment	Democracy	Human Capacity Developmnt	Humanitarian Assistance	TOTALS
S.O 1. Improved framework for trade and investment. - DA	3,000	---	---	---	---	---	3,000
Totals: - DA - ESF	3,000 ---	--- ---	--- ---	--- ---	--- ---	--- ---	3,000 ---

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ACTIVITY DATA SHEET

PROGRAM: SRI LANKA
TITLE AND NUMBER: Improved Framework for Trade and Investment, 383-0120
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCES: FY 2000: $3,000,000 DA
INITIAL OBLIGATION: FY 1998 ESTIMATED COMPLETION DATE: FY 2000

Summary: In 1998, when USAID began to work on this objective, the Government of Sri Lanka (GSL) had made many of the improvements needed in the macro-economic framework, but remained weak in terms of its competitiveness. This raised the concern that Sri Lanka would not be able to diversify its economy further and create the kind of jobs needed for educated but unemployed youth. The purpose of this SO is adoption of at least nine significant policy and regulatory reforms needed to improve Sri Lanka’s competitiveness by 2000. To ensure progress towards this target a minimum of three reforms in both financial markets and trade and investment are expected to reach the evaluation/dialogue stage annually. The direct beneficiaries of this SO will be approximately 30 private sector associations and their members throughout Sri Lanka, new entrants into the private sector and both men and women in the labor force.

Key Results: Two key intermediate results were concluded to be necessary to achieve this objective: 1) three policies or improved practices of financial markets in progress per year; and 2) three policies or improved practices in trade and investment in progress per year (progress of the policy agenda is tracked according to the following stages: agenda, awareness, evaluation/analysis, dialogue and adoption).

Performance and Prospects: Performance in 1998 has been on track despite the continued conflict and events in the region. Important policy changes made by the GSL in 1998 with USAID assistance include incentives for development of the debt market, liberalization of seed imports, and progress on revising the intellectual property rights law to incorporate information technology needs.

To strengthen the financial sector, USAID programs are educating public and institutional investors on secondary market trading in debt securities, and providing assistance for the development of a code of conduct for primary dealers and for tax and other issues related to the bond market. A clearing and settlement fund for the Securities and Exchange Commission and the Colombo Stock Exchange was established in early 1998, a year ahead of schedule, as was the establishment of a core policy group for capital/financial market development. Banking supervision is being improved through development of a computer program for off-site monitoring.

A USAID exercise on competitiveness conducted in 1998 captured the attention of key stakeholders in Sri Lanka. More than 600 Sri Lankan business and government officials participated. Since the exercise began, many local initiatives have begun. Leading private sector associations formed a joint group and charged the government with developing a bipartisan approach to resolving the conflict and promoting economic growth. The Ceylon Chamber of Commerce announced the formation of an intelligence unit and expressed interest in supporting competitiveness at the industry cluster level. The tourism sector has accelerated its effort to privatize functions formerly held by the government, including external marketing of the sector. Industry cluster groups were formed in agricultural associations for marketing their products overseas.

USAID support encourages local initiatives to address competitiveness issues and promote effective public/private dialogue. Activities focus on promoting business associations and development of competitiveness clusters through training, seminars, workshops, study tours, demonstrations, technology assessments, market research and promotion. The areas covered are association-specific and range broadly from quality, standards, and certification development to productivity promotion and environmental management. Technical assistance and training will continue for policy reform efforts of the Government of Sri Lanka (GSL), focusing on those changes needed to improve the competitive environment, including infrastructure policies.

Possible Adjustments to plans: National elections are scheduled for 2000, which may delay the policy reform process and national attention to a competitiveness strategy for Sri Lanka. However, given the high level of interest and response to the issue of competitiveness by the private sector, USAID’s program of support for strengthening capacity of the private sector to address such issues should continue to be effective.

Other Donor Programs: Programs of the World Bank and Asian Development Bank emphasize continued progress on macro-economic reform and improvement in infrastructure. USAID programs on banking supervision are coordinated with advice of the International Monetary Fund and Swedish technical assistance. Other bilateral donors providing support for private enterprise development include Germany, Norway and Japan. The International Labor Organization provides assistance on management/labor issues. USAID's contribution constituted almost 27% of the total donor assistance of $24 million for sectoral policy reform.

Principal Contractors, Grantees or Agencies: Grantees and contractors include International Executives Service Corps; Oregon State University/Development Alternatives Inc.; International Science and Technology Institute and contractors through the USAID Global Bureau.

Selected Performance Measures:

	Baseline (1997)	Target (2000)
Improved policies or practices of financial markets in progress per year	0	3*
Improved policies or practices in trade and investment in progress per year	0	3*
*To insure progress towards project target, a minimum of three reforms are expected to reach the evaluation/dialogue stage annually.

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