Sri Lanka has changed dramatically since the end of the armed conflict in 2009. The Sri Lankan economy grew approximately 8% in 2011. Resettlement of internally displaced people is largely complete. Sri Lanka is now a middle-income country at peace. Read More »
The country context has changed dramatically in recent years. A 26-year conflict ended in May 2009, and resettlement of internally displaced persons is largely complete. The macroeconomic situation is much improved. Sri Lanka has become a middle-income country, and its credit-worthiness has opened its access to International Bank for Reconstruction and Development (IBRD), allowing for significantly increased financial support from the World Bank during the coming years.
A look back at growth performances of other comparable economies, post-Global Financial Crisis (GFC), shows Sri Lanka maintaining relatively stronger growth of over 8% in both 2010 and 2011, largely spurred by private-sector demand. Sri Lanka posted the fastest growth in South Asia in 2011 and is expected to achieve the same in 2012. Growth remained strong in the first half of 2012 at 7.2%, but for the year as a whole it is expected to decline to around 6.5% – largely owing to the weakening external demand and tighter credit conditions domestically.
Sri Lanka was able to maintain relatively strong growth (about 5% per year) even during the war, though growth dropped to 3.5% in 2009 during the final military campaign, which coincided with the GFC. The post-conflict rebound helped all sectors both on the supply side and the demand side: Agricultural land in conflict-affected areas could once again be cultivated; double shifts in manufacturing became possible as workers no longer had to worry about security restrictions; domestic consumers’ and investors’ confidence revived; and services related to tourism picked up as tourist arrivals surged after the end of the war.
As Sri Lanka’s economy grew, unemployment and poverty rates fell. As of the second quarter of 2011, unemployment was only 4.2%, though higher among youth, women, and the more educated. Poverty rates have also fallen, from 15% of the population in 2006-07 to 9% in 2009-10. The most dramatic declines have been in the estate sector (from 32% to 11%) following a major wage increase at the beginning of 2010. Poverty rates in Colombo District are under 4%, though there are pockets of poverty in all other parts of the country
Sri Lanka is on track to meeting most of the Millennium Development Goals. UNDP has identified Sri Lanka as an early achiever on 10 of the 21 indicators, including those related to the goals of universal primary education and gender equality. Sri Lanka is also expected to meet the goals of maternal health and HIV/AIDS. However, Sri Lanka is making slower progress on the goals related to malnutrition and child mortality. Indicators are mixed on the environment goal: While Sri Lanka is an early achiever on indicators of protected area, ozone-depleting substance consumption, safe drinking water, and basic sanitation, it has stagnated or is slipping backward on forest cover and CO2 emissions.
As with all prolonged conflicts, social inclusion has been slow to be established. A long-lasting solution to the ethnic problem and putting in place effective means of addressing grievances of minority communities is vital for sustained peace. The Lessons Learnt and Reconciliation Commission (appointed by President Rajapaksa to investigate the final phase of the war), presented its final report to Parliament in December 2011.
Sri Lanka’s demographic transition is having dramatic impacts on education and health as well as the economy. By 2036, more than 22% of the population will be over 60 and there will be 61 dependents per 100 adults. Unless labor force and employment rates increase, a very small number of employed persons will need to provide for a very large number of non-working people – straining the budgets of families and the government. As the population becomes older and has a higher income, the types of public services required will change. The education system will need to increase emphasis on computer, English, and higher-level cognitive skills. The health system will need to deal (both preventively and curatively) with the growing burden of non-communicable diseases, including injuries and mental health problems, and provide rehabilitation and long-term care, especially for the elderly. Social protection for the elderly will need to be enhanced. Increasing urbanization will require investments in mass transit; expanded water and sewage networks; improved road safety; better control of air pollution, noise pollution, and other environmental hazards; and better town planning to allow for elderly-friendly design aspects.
The government strategic vision is laid out in the Mahinda Chintana document of 2010. The strategy describes three clear goals: doubling per capita income through sustained high investment; shifting the structure of the economy; and ensuring inclusive growth, improvement in living standards, and social inclusion.
Doubling of per capita income to $4,000 by 2016. This goal is to be achieved through sustained high economic growth (8% per year), which is in turn to be achieved through high investment rate. Of the targeted investment rate (33%-35% of GDP per year), 6%-7% of GDP per year is expected to come from public investment, with the remainder coming from the private sector. The public sector investment target was nearly achieved in 2010 and 2011 but will be a challenge to sustain unless fiscal space increases. Private-sector investment fell far short of the target: Efforts to improve the investment climate will need to be expanded.
Shifting the structure of the economy. The second goal is shifting the structure of the economy to be more knowledge-based, globally integrated and competitive, environmentally friendly, internally integrated, and increasingly urban. Sri Lanka has a solid base for achieving this goal, with a well-educated population and a wealth of environmental assets. Challenges include providing systems and incentives to give the labor force the types of skills needed for a knowledge economy, establishment of economic policies that encourage competitiveness, stronger efforts on environmental sustainability and adaptation to climate change, and modernizing infrastructure systems to integrate the disparate parts of the country and meet the needs of an increasingly urban population.
Ensuring improvement in living standards and social inclusion. Thanks to a long history of attention to access to basic services, Sri Lanka excels for its income level on most social indicators. Malnutrition, however, is an exception. As Sri Lanka becomes a middle-income country, new challenges are emerging (e.g., a rapidly aging population) and improving the quality of services will be a major issue. The health system needs to be modernized befitting a middle-income country, in line with international standards, so that it can handle the new health challenges facing the country in terms of non-communicable diseases, while maintaining the past achievements with regard to maternal and child health and communicable diseases. While increasing the quality of services, the Mahinda Chintana aims to ensure that benefits are equitably shared across all segments of the population and that social inclusion is a priority.
The World Bank’s forthcoming Country Partnership Strategy is focused on strengthening Sri Lanka’s position as a middle-income country. The World Bank will support the government’s efforts to address the challenges and constraints for achieving its vision, specifically by:
Facilitating sustained private and public investment through improving the investment climate and increasing fiscal space and public spending efficiency;
Supporting structural shifts in the economy through assistance for a knowledge-based economy, and increased internal and international integration and competitiveness; and
Promoting improved living standards and social inclusion through support for increasing quality of services, reducing the prevalence of malnutrition and promoting social inclusion and equitable access.
Since the World Bank Group’s first development credit to Sri Lanka for the Aberdeen-Laksapana Power Project in 1954, the institution has become one of Sri Lanka’s largest development partners. It has worked closely to support the country’s progress in infrastructure, education, health, and resettlement and reconstruction in conflict-affected areas. It is currently supporting the implementation of 13 projects totaling $1.068 billion in assistance aimed at maximizing impact and results.
Sri Lanka has made great strides in increasing school enrollment and literacy rates. School survival rates through grade 9 increased from 78% in 2005 to 91% in 2011, and the proportion of primary school students attaining competence in mathematics increased from 67% to 82% during the same period. The Education Sector Development Project, which was completed in 2011, promoted bilingual education in the school curriculum and included civics as a subject. Multi-ethnic and multicultural curriculum review committees are overseeing the design and delivery in the areas of civics, history, and English. Multi-ethnic teacher training programs were conducted by 78 Teacher Centers, and co-curricular activities among children of different ethnic communities were also conducted by 629 schools. About 2,800 school facilities and 880 toilets were constructed, and 1,220 classroom blocks were built. Approximately 110,500 teachers, 113,800 in-service advisors and 140 education officials were trained. Cognitive achievement scores in first language (Sinhala and Tamil) grade 4 increased from 60% in 2003 to 82% in 2009. Cognitive achievement scores in mathematics in grade 4 rose from 67% in 2003 to 82% in 2009. Cognitive achievement scores in English in grade 4 rose from 32% in 2003 to 58% in 2009. The increase in participation and improvement in learning outcomes was observed in all nine provinces of the country.
The Bank has been supporting the improvement of quality education and employability of graduates at tertiary education since 2003. The Improving Relevance and Quality of Undergraduate Education Project contributed to the improvement of IT and English programs in all universities, and as a result, the IT achievement scores of undergraduates rose from 49% in 2005 to 56% in 2008 and English score from 59% to 69% during the same period. The Higher Education for Twenty-First Century (FY2010) Project has made progress in the development of a national qualifications framework, and legislation has been approved to enable registration, quality assurance, and accreditation of state and non-state higher education institutions in line with the Higher Education Development Strategy of the government.
The significant progress that Sri Lanka has made in health translates into a high level of life expectancy (75 years) that compares well with indicators from higher middle-income countries. The higher life expectancy and lower fertility rates has meant that Sri Lanka is experiencing a rapid demographic transition (mainly characterized by an aging population). A recent study by the World Bank examined the consequences of demographic transition in Sri Lanka. The transition is contributing now to a rich national dialogue on its implications for development in all sectors of the economy.
Sri Lanka has one of the leading health care systems among developing countries, in terms of access and outreach. Preventive and curative health services are available free of charge from the tax-financed public sector system and the country’s health outcomes are among the best in South Asia.
Since mid-1980s, the World Bank has been supporting the Sri Lankan health system. Most recently, the Bank-financed Health Sector Development Project has helped improve health services in rural areas by increasing the proportion of lower-level (primary and secondary level) health facilities that provide emergency health services; the proportion of hospitals meeting quality standards; and building capacity, especially at the district and provincial levels.
Information and Communication Technologies (ICT)
The Bank‘s e-Sri Lanka Development Project has established more than 650 tele-centers throughout the country, linking over 72,000 users monthly, half of whom are women. The project has trained over 35,000 private-sector participants who have now incorporated ICT into their businesses. The project has also supported the Strengthening of business and SME competitiveness through the provision of around 3,000 partial grant facilities to build capacity, create business linkages and generate product and service innovations. A further 200 innovation grants have been provided to promote grassroots innovation and local content development targeting the lower-income groups and remote rural areas. This has enabled them to access to markets and information essential to their livelihoods. The other major focus of the project has been to improve government efficiency and transparency by introducing ICT in government agencies. This has resulted in:
Over 99% of government agencies being integrated into the new ICT career track, with functioning IT officers and active ongoing training;
Establishment of the Sri Lanka government online portal, now used by nearly 7 million people so far and rising with an average of more than 90,000 users per month, and
A total of 130 e-services being offered to date for the citizenry of the country. Apart from this several key laws have been adopted, creating a much-needed ICT legal framework. This has resulted in reducing transaction costs and regulatory burden for businesses and citizens.
Support to SME Development
Approximately 19,000 firms operate in the country, of which about 85% can be categorized as small and medium enterprises (i.e. with between five and 25 employees. These SMEs employ 16% of the labor force in the manufacturing sector and represent 8% of value added. Recently carried out Enterprise Survey data reveals that more than half of SMEs are either fully or partially credit constrained. Over 70% of the SMEs had to provide collateral to obtain a loan from a bank. The US$57.4 million Small and Medium Enterprise Development Facility Project supports the Sri Lanka government’s efforts to improve access to finance for SMEs, as a means to create more productive activities, which in turn will generate jobs and support economic development. The project combines the provision of appropriate financing instruments to banks (line of credit and risk sharing facility) with commitments from participating banks to strengthen their SME lending capability over time. Results to date include access for 350 SMEs across the country to bank commitment for financing under the project. The most represented sectors among SME beneficiaries are tourism, manufacturing, agro-processing and agriculture. In addition, over 2,500 SMEs have been trained by participating financial institutions under the project on customer care, marketing, leadership, record keep and financial management. More than 3,000 bank officers have completed training in customer and marketing services, project appraisals and cash flow lending to support SME banking.
The quality of the national road network has improved with a reduction in the International Roughness Index and a decline in the network vehicle operating costs. Bank support has come through the Road Sector Assistance Project. Under the project, 618 km of national roads have been upgraded and the roughness index is far below the national average. A component on rural roads has contributed 154 km of repaired roads, with a 60% reduction in travel time.
Power and Energy
The World Bank Group contributed both to a greater availability of electricity in rural areas and to an increase in energy supply from renewable sources. Access to electricity in rural areas has expanded with the support of the Renewable Energy for Rural Economic Development Project (RERED): 139,241 new rural households have access to electricity.
Availability of drinking water in rural areas has expanded. The share of rural households with access to an improved water source reached 74% in 2011 up from 71% as of 2008. The Bank contributed partially to the increased availability of water through the recently completed Second Community Water Project and provided around 384,100 people in rural areas with access to improved water sources and about 92,000 new piped household water connections as of the end of 2010.
Resettlement and Reconstruction
An ambitious resettlement of displaced persons advanced rapidly after the conflict ended. Resettlement became a priority as the government wanted refugees to return to their place of origin and become economically active as soon as the conflict ended. Resettlement was undertaken rapidly with the Bank’s support. As of October 2011, 187,533 internally displaced persons (IDPs) had returned, exceeding the target of 100,000. By the same date, employment equivalent to 1,653,000 person-days had been generated, above the target of 1,070,000.
There is improved access to infrastructure services in conflict-affected areas. The share of rural population with access to basic infrastructure facilities in North and East reached 15% as of 2011 from 9% as of 2008. The Community Livelihoods in Conflict-Affected Areas Project, locally known as the Re-awakening Project, received additional financing in 2009 to scale up support for village development and irrigation and to support the resettlement process as the conflict ended. In addition, the North East Local Services Improvement Project is working on construction and rehabilitation of rural roads, construction of drainage systems, and construction and rehabilitation of drainage points.
The Bank has been contributing to the reconstruction of housing destroyed during the conflict as a basis for improving livelihoods of people living in the North and Eastern regions. The support has come through two projects: Puttalam Housing and North East Housing Reconstruction Program. This support has led to the reconstruction of 52,193 houses as of November 2011, and 532 villages are receiving basic infrastructure improvements.
Sri Lanka possesses an extended irrigation system, part of which is one of the oldest in the world and is in dire need of repair to raise agricultural productivity and reduce risks from floods. Since 1999, the World Bank has supported irrigation projects to help communities in the North and East that were devastated by war. Between 2004 and 2009, more than 35,000 hectares of irrigated land were brought back to cultivation and seven major irrigation schemes were rehabilitated, benefiting more than 55,000 farm households. The Dam Safety and Water Resources Planning Project focuses on establishing long-term sustainable arrangements for operation and maintenance of large dams and on improving water resources planning.