The Asian Development Bank (ADB) will grant US$ 630 million in loans to the public sector as part of a three year country partnership strategy (CPS) for Sri Lanka.

"Economic growth in the first half of 2008 has remained strong at around 6.6%. However, the external risks have increased, compounded by further signs that the global slowdown is more profound than many had expected, and this could have a significant negative impact on Sri Lanka’s economy," Richard Vokes, ADB Country Director for Sri Lanka, said.

In a statement issued yesterday the multilateral bank said the aim of the CPS is to unlock the country’s growth potential as equitably as possible, improve the investment climate and clear bottlenecks in infrastructure development.

"Sri Lanka has posted an average economic growth of 5 percent per year over the past 30 years, putting it on the point of becoming a middle-income country.

"However, it has failed to reach its full potential because of civil conflict, weak infrastructure, and high public debt. Recent high global oil and food prices, a surge in inflation, and worsening prospects for the global economy also pose a threat to future growth and poverty reduction efforts," the ADB said.

The partnership will focus on improving fiscal management in order to improve the country’s macroeconomic environment beset by poor infrastructure, high taxes, policy uncertainty, civil conflict, and high financing costs.

High inflation and high interest rates have begun to ease with inflation recording 24.3 percent point-to-point change in September after peaking at 28.2 percent in June and overnight interbank lending rates have also reduced significantly after the Central Bank relaxed restriction on the reverse repo window and the statutory reserve ratio.

However, the exporters are unhappy about the propped-up rupee and observers warn that the depletion on dollar reserves could get out of hand if this continues.

The ADB hopes to enhance its support for infrastructure development particularly in the areas of power and transport so that the macroeconomic environment could further improve.

The bank will also facilitate public-private partnerships to reach the goals set out in the CPS.

ADB will said it will also target better delivery of power, water, transport and other essential services in poorer provinces to make sure the fruits of development reach those most in need.

The CPS will focus on provinces outside the relatively wealthy western province, targeting electrification of rural areas, linking provincial roads to rural roads and villages, upgrading water supply in lagging regions, and supporting urban development in selected secondary towns." said Johanna Boestel, country economist for ADB’s Resident Mission in Sri Lanka, and team leader for the strategy.

As part of the CPS, the ABD said it will increase the capacity of provincial councils and local authorities to improve public service delivery and by strengthening rural infrastructure, the bank hopes its support will also help boost agricultural efficiency which has become increasingly important with the spike in global food prices.

According to the Prosperity Index introduced by the Central Bank last month, the overall Prosperity Index for Sri Lanka in 2007 is measured at 52.7 percent (out of 100 percent).

The Western Province is above this average with 66.1 percent along with Central Province (52.9) percent.

The Northern Province and Eastern Province scored the least with 43.6 percent and 44.2 percent respectively.

Sri Lanka’s average is just above 50 percent—neither here nor there, but with various rural development projects, initiated by the government and other stakeholders such as the private sector, at different stages of implementation and with many more promised, we still have a long way to go.

The conflict…

The ADB said because of uncertainties sparked by renewed fighting since 2006 in the more-than-two-decade conflict between the Government of Sri Lanka and the Liberation Tigers of Tamil Eelam — and to provide greater operational flexibility — it has reduced the term of the CPS from the usual five years to three years.

"The issue of the conflict and how best ADB can contribute to its resolution have been central to the work of the CPS team. To this end, ADB will strive to provide a balance of support throughout the country while continuing implementation of ongoing projects and initiating new projects in areas that have been affected by the conflict, wherever possible.

"ADB will also ensure that its interventions are conflict sensitive, with strong emphasis on transparency and full and active consultation among all stakeholders," it said.