52004 IDA At Work Sri Lanka: Supporting the Dual Transition to a Middle Income Country in Lasting Peace S ri Lanka faces a historic opportunity to evolve from a lower- income country mired in conflict, to a middle-income country in lasting peace. The International Development Association (IDA), the World Bank's fund for the world's poorest countries, is ready to work with the gov- ernment and all stakeholders to support Sri Lanka's dual transition towards peace and prosperity. Until now, Sri Lanka's growth had been constrained by three decades of conflict despite the country's highly educated popula- tion. The ending of the armed conflict with the separatist Liberation Tigers of Tamil Eelam (LTTE) in 2009 provides an opportunity for the country to embark on reforms and work with the private sector to establish a more dynamic and vibrant economy. 1990­99 2000­07 2008 or Country Indicators (Average) (Average) latest GDP growth (%) 5.2 5 6 (2008) GDP per capita (US$) 899 (2000) 1,634 (2007) 2,014 (2008) Fiscal deficit (as % of GDP) 9.1 8.7 7.7 (2008) Inflation (GDP Deflator%) 10.2 9.6 16.3 (2008) Poverty rate 28.8 (1995/96) 22.7 (2002) 15.2 (2006/7) Literacy rates (%) 91.8 (1996/97) 92.5 (2003/04) 90.8 (2006) Access to safe drinking water 72 (1994) 84.7 (2006/07) 84.7 (2006/07) (% of population) Population (millions) 19.1 (2000) 20 (2007) 19.9 (2008) Source: Central Bank of Sri Lanka, Department of Census & Statistics. COUNTRY ACHIEVEMENTS Sri Lanka is on track to achieve most Millen- nium Development Goals by 2015, but will Sri Lanka's development has reached a need to focus on achieving quality, relevance critical juncture. Thanks to relatively rapid and sustainability in key public services. economic growth that pushed per capita income over the US$1,000 mark in 2004, and IDA CONTRIBUTIONS traditionally high levels of human develop- ment, Sri Lanka is on the verge of becoming a For over five and a half decades IDA has pro- fully-fledged middle-income country. vided both financing and technical assistance to support Sri Lanka's economic development. Since embracing an open market economy IDA assistance has helped in developing the in the late 1970s, the country has witnessed island's energy, transport, and telecommu- robust economic growth despite several nications infrastructure, expanded health, adverse shocks, including a tsunami, oil and education, water and sanitation services, food price increases, and increased competi- enhanced agricultural productivity, and tion for its apparel exports following the end financed nascent private enterprise. In the of the Multi-Fiber Arrangement (MFA). Growth wake of the tsunami, IDA was able to modify averaged around 5 percent in the 1980s and its 2003 Country Assistance Strategy to 1990s, and has been above 6.5 percent since address urgent needs. the 2004 Tsunami. However progress has been hampered from At the same time, however, Sri Lanka's growth time to time by escalating conflict. For exam- has been highly uneven with most of it con- ple, a housing reconstruction project in the centrated in the Western Province. In the rest North and the East was forced to scale back of the country, GDP growth has remained at to safer areas due to supervision constraints around half of that of the Western Province, and material shortages. while poverty rates have also remained rela- tively high. A more conflict-sensitive approach supports reconciliation. The long-standing armed conflict, which acted as a major impediment to rapid The World Bank Group's current Country development, ended in mid 2009. Assistance Strategy for Sri Lanka, covering the period from July 2008 to June 2012, With the end of conflict, vast areas in the was launched against this background. The North and East of the country, neglected for CAS aligns its support with the government's nearly a quarter-century, stand to receive a 10-year Development Framework, by focus- considerable positive stimulus. Peace is widely ing on inclusive and equitable development, expected to inject new life into the tourism improving the investment climate and sector, which until now could not reap its full strengthening service delivery, with an annual potential. The country also stands to attract lending envelope of around US$ 200 million. more Foreign Direct Investment especially in the burgeoning business process outsourc- This CAS, formulated amidst the intensifica- ing sector (BPO) which holds considerable tion of the armed conflict, marked a departure promise. from past practices in its recognition of aid's 2 potential to address not only consequences will be utilized. The project would provide of the conflict but also its causes, wherever services to the internally displaced persons opportunities arise. The strategy seeks to (IDPs) currently in camps through mobile clin- avoid inadvertently fueling the conflict on the ics and subsequently, to re-establish health ground, and commits IDA to allocate sufficient facilities when they are resettled in their resources from the IDA resource envelope to original places, based on the needs assess- the conflict-affected areas and populations. ment. Second, the Additional Financing will enable the provincial level health authorities In practice, this has meant designing new to employ health workers with sufficient lan- operations that meet the Bank's new Conflict guage proficiencies, in order to cater services Filter (see box). to all linguistic groups. Third, the Additional Financing will strengthen grievance mecha- For example, the design of the Additional nisms by reactivating hospital committees Financing for Health Sector Development with an inclusive membership. Project (US$24 million), the first operation under IDA15, was shaped by the Conflict Filter IDA has also increasingly been supporting in several ways. devolution through empowerment of provin- cial councils, with a special emphasis on the First and foremost, half of project resources Eastern provincial council. This process not will be allocated to the conflict-affected only helps IDA design more robust projects, North and East to address needs emerging and thereby reduce reputational risks to IDA, from the current situation. A special health but it also helps IDA design better projects so needs assessment is being carried out in these that within a limited scope IDA can support provinces to determine how project funds reconciliation and peaceful co-existence in Sri Lanka. IDA's Conflict Sensitive Engagement The current Country Assistance Strategy introduced an instrument called the "Conflict Filter" against which lending operations are reviewed. The rationale for this is the need to minimize the risk that IDA activities may inadvertently fuel ethnic tensions and further strain Sri Lanka's social fabric, and manage reputational risks to IDA that could come from being perceived as a partial or biased actor on the development scene. All projects are now routinely reviewed to ensure that: (i) sufficiently broad stakeholder consultations have been held; (ii) an adequate grievance mechanism has been established; (iii) beneficiary selection processes have not been distorted; (iv) conflict-generated needs are being adequately identified; and (v) opportunities to strengthen reconciliation and inter-ethnic trust have been identified. Adjusting to the Conflict Filter is an ongoing process, and the Sri Lanka Country Team and its counterparts are continuously learning. IDA's conflict sensitive approach in Sri Lanka is recognized as a good practice on the ground. Donors including the European Commission and the Australian Government's Oversees Aid Program (AusAid) have been working with IDA with co-financing operations in the North and East and through trust funds. IDA has hired a specialist focusing on its implementation, with funds provided by interested donors. 3 IDA support has helped Sri Lankans in IDA support followed a sector wide approach, a number of sectors. backing the country's Education Sector Development Framework and Program for Rural development. Since 1999, IDA has 2006-2010. To support Sri Lankan policy supported irrigation projects to help commu- makers, the IDA-financed project targeted nities in the North and East that were devas- schools that are located in poor rural, estate tated by war. The conflict damaged essential and semi-urban areas. In 2008, IDA provided irrigation schemes and transport of goods to additional financing to support activities that market came to a virtual halt. The challenge can promote social cohesion between dif- was to bring normalcy back to the lives of ferent communities--such as English classes, conflict-affected communities and restore multi-ethnic co-curricular activities, and the their livelihoods. In 2007, those efforts were review of history and civics curricula. restructured to allow communities to plan, design and implement small-scale infrastruc- Health. Sri Lanka has one of the leading ture and livelihood activities of their choos- healthcare systems among developing coun- ing. This community-development approach tries. Preventive and curative health services proved more resilient in conflict situations, are available free of charge and the country's where a degree of flexibility is required. health outcomes are among the best in South Asia (see box). Between 2004 and 2009, more than 35,000 hectares of irrigated land were brought However the country still has an unfinished back to cultivation and seven major irriga- health agenda with a need to address mal- tion schemes were rehabilitated, benefiting nutrition, non-communicable diseases (NCD), more than 55,000 farm households. Over 500 long-standing and emerging communicable villages have been organized into community- diseases, and issues related to an ageing based institutions and are benefiting from population. community and productive infrastructure. In addition, the introduction of sustainable Since 2004, IDA support has helped improve agricultural practices and rice intensification health services in rural areas by increasing in all project districts has doubled the yields the proportion of lower level (primary and and lowered input requirements in demon- secondary level) health facilities that provide stration plots. emergency health services and the proportion of hospitals meeting high quality standards. Education. Sri Lanka has made great strides in increasing school enrollment and literacy A Healthy Country rates. In 2005, over 95 percent of students completed grade 5, but only 80 percent Sri Lanka's health indicators are impressive: completed the basic education cycle (grade · Infant Mortality Rate: 11 per 1,000 live births 1 through 9). Four years later, the completion (compared to 62 per 1,000, on average, in South rate through basic education (grades 1­9) has Asia) increased to over 90 percent, meaning more · Long life expectancy: 75 years at birth than 300,000 additional students are cur- · Full coverage of child immunization: 97 percent rently completing the basic education cycle, · Institutional childbirth: 98 percent. with gender parity. 4 The Health Sector Development project A World Bank study in Sri Lanka found that helped double the number of women over each additional minute separating a village the age of 35 screened for non-commu- from a main road raises unemployment nicable diseases between 2004 and 2009. by 3 percent. Improving the road network The project also helped establish Sri Lanka's was therefore a way to create employment Human Influenza Surveillance System. The opportunities, expand village economies and World Health Organization (WHO), Japan reduce poverty. International Cooperation Agency (JICA) and IDA collaborated to provide technical assis- The IDA-supported Road Sector Assistance tance for this project. project rehabilitated 468 km of national roads between 2006 and 2009, reducing aver- With the recent ending of the conflict in the age vehicle operating costs for the National North and East, addressing the health needs Highways from LKR.23.9/km (US$ 0.2/km) to of vulnerable populations is now of utmost LKR 15.37/km (US$0.13/km). urgency. Part of the project's additional funding is expected to target North and East The project reflected the close donor coor- provinces for post-conflict rehabilitation. dination between the Asia Development Bank (ADB), JICA and IDA in the road sector. Energy. Sri Lanka has been working to While IDA focused on road rehabilitation and increase energy coverage across the country maintenance through this project, ADB was while trying to decrease its dependency on responsible for the re-engineering of the costly imported petroleum projects. One Road Development Authority and JICA funded project, supported by IDA and the Global capacity building in the private sector. Environment Facility, has helped Sri Lanka develop a vibrant private renewable energy Empowering communities through industry. The Renewable Energy for Rural community driven approaches. Economic Development (RERED) project helped provide off-grid electricity to over Multi-sectoral projects based on a community- 100,000 households between 2004 and 2009. driven approach have proven to be a major About 4,700 households use electricity gener- success in Sri Lanka. A 12-year community ated by village hydro and biomass projects. development and livelihoods program, known Rural small and medium enterprises have also been connected. This project enhanced Connecting People the capacity of private sector developers. As a result, several Sri Lankan developers have Virtual connections are almost as vital as roads been able to undertake renewable energy in today's knowledge economy. The E-Sri Lanka initiative, which became effective in January 2005 projects and provide technical assistance in is one of several pioneering ICT for Development other countries. projects supported by IDA. This ambitious e-development project aims to bring connectivity Roads. Public consultations and studies to rural populations, improve the way government stressed the importance of rehabilitating operates and raise awareness of the benefits of road networks to better connect communi- ICT for remote rural populations as well as support the development of a vibrant private ICT sector. ties to schools, markets and health services. 5 in the country as "Gemi Diriya" was approved ADB. The three donors, together, provide in March 2004 to help rural communities the country about US$700 million annually, improve their quality of life. or about 60 percent of all donor assistance. Recently, several new donors have emerged To date, almost 1,000,000 people from about in Sri Lanka--including China, which, in 180,000 households in the poorest districts terms of financial assistance, became the of the country have benefited from commu- largest donor in 2007. Iran too, in late 2007, nity infrastructure and productive invest- offered Sri Lanka a credit line facility for the ments (such as drinking water, access roads Petroleum Corporation and financing for a and bridges, ICT centers, access to credit, much-needed upgrade to an oil refinery. The markets, skills, and income generation). The UN-family, together with a number of inter- project households have been weaned away national NGOs, is mostly active in providing from dependency on subsistence agriculture humanitarian related to the conflict and and wage labor. As the project intentionally associated displacements. targets both young and old, households now benefit from a diversified stream of income, IDA has assisted the government in mak- both from on-farm and off-farm livelihood ing institutional and policy changes, and in opportunities. The participatory nature of introducing best practices other donors can the decision making process has led to better employ. Examples of donor coordination targeting of the poor and improved gover- spurred by IDA include the provision of recon- nance, transparency and accountability at struction assistance to the conflict-affected the village level. areas, where IDA's owner-driven housing scheme and community-driven development PARTNERSHIPS programs attracted co-financing from other donors. Through these interventions, IDA IDA has traditionally been one of the big wishes to help establish good practices in three donors in Sri Lanka, next to Japan and conflict-sensitive development. Helping Villagers Help Themselves · Before the community-development project was launched in 2004, about 70 percent of households in the project villages had no access to credit and marketing facilities. As of 2009, almost 20,000 self-organized savings and production groups have been set up and are actively mobilizing savings. About 147,000 households have benefited from the savings and credit fund. Savings groups have used their cumulative savings of US$2.25million to leverage credit equal to about ten times that amount, and have invested US$17.6 million in more than 125 types of income-generating activities. They have also attracted funding and technical assistance from 15 major private sector agencies. · Skills development training and off-farm employment, poor women and unemployed youth are contributing substantially to the welfare of the household. About 22,000 people have benefited from skills development activities. Their services, as Community Professionals, are being demanded by other village communities and programs, and have led to setting up of 4 district and one national Community Professional Learning and Training Centers, that are self-sustaining. IDA's approach has led the government of Sri Lanka to revise its own policies, shifting from a welfare-oriented to an empowerment-oriented approach to poverty reduction. 6 CHALLENGES AHEAD and improving the overall macro framework which would enable the country to weather The government of Sri Lanka is faced with the global downturn and move ahead with the formidable task of reconstruction and post conflict development. resettlement at a time when the economic environment is far from conducive to postwar Creating lasting peace is a formidable recovery. challenge. In addition, Sri Lanka needs to take on long-awaited reforms to become a The economy in the first quarter of 2009 middle-income country. The current Country grew just 1.5 percent from a year earlier, its Assistance Strategy leaves IDA well positioned slowest pace in 8 years and slower than the to respond to the needs and challenges 4.3 percent growth in the fourth quarter of emerging from recent events in Sri Lanka in a 2008. The onset of the global economic crisis conflict-sensitive manner. IDA is working with exacerbated already existing macroeconomic all stakeholders, including the government, imbalances, in particular, due to persistently the international community, NGOs, and the high fiscal deficits. With considerable macro private sector, to support Sri Lanka through fiscal challenges ahead, the country entered these dual transitions. into a 20-month Stand-By-Agreement (SBA) with the IMF in July 2009 aimed at consolidat- July 2009. ing its fiscal position, rebuilding international reserves, strengthening the financial system http://www.worldbank.org/ida 7