 |
| The government of President Rajapaksa is facing increasing charges of mismanaging the economy. He is pictured with his wife and the Sri Lankan Foreign Minister being greeted during a visit to New York that saw him take an entourage of 65, most of whom did not make it to the UN. Photo The Island |
The ADB’s policy supporting loans, conflict assistance and agriculture sector lending have been “less than successful” or “borders unsuccessful” according to an evaluation of 90 loans worth 3.3 billion dollars granted over two decades.
The bank has been giving low interest loans to Sri Lanka since 1968 but 90 percent of the 3.7 billion total lending came after 1986.
“One of the findings was that with program or reform loans perhaps both sides were too ambitious,” says Johanna Boestel a country economist at the ADB Colombo office.
“The ADB missions came and thought that things can be done quickly and the government, in its enthusiasm, also agreed to theses reform loans. Perhaps both sides were too ambitious”.
Partly Successful
Program loans support broad economic reforms while ones targeting an identified project like constructing a school building or a road are called project loans.
For analyzing lending to Sri Lanka, which is one of the top ten borrowers from the ADB, the bank has split the 90 loans in to seven broad areas.
None of the seven areas have got the best possible “highly successful” rating on a four point categorization.
Project loans for education, water supply and road development, have been the most successful in the ADB portfolio to Sri Lanka getting “successful” ratings which is a notch below the best possible rating.
Power and governance related loans have got partly successful ratings which is only one notch above being unsuccessful.
ADB categorizes agriculture and assistance to conflict areas also as “partly successful” but say they are “bordering unsuccessful” which is the worst possible rating.
Despite the posturing ADB is not pouring cold water on future lending to Sri Lanka.
“Sri Lanka has a complex political economy. And this is something we want to keep in mind when preparing our new strategy”, according to Johanna Boestel who is involved in preparing ADB’s new Sri Lankan country strategy.
Overall benefits of ADB lending have been categorized “partly successful” which is only a notch above “unsuccessful” in the 4 point rating scale.
Out of Line
Like many lenders ADB aid is based on a medium term (five year) plan formulated on the government's economic strategy.
The current one spanning 2004 to 2008 was negotiated soon after the country had signed a ceasefire agreement with the Liberation Tigers in 2002.
The conflict itself has pushed the Northern and Eastern regions into deep poverty, and donors have found it difficult to run projects in the area.
The 2004-2008 strategy focused on restructuring loss making state institutions and reducing government subsidies and transfers that had pushed budget deficits to around 10 percent of GDP.
But a left-leaning coalition replaced the fiscally prudent United National Party led administration in 2004 to who’s polices the ADB strategy was aligned.
“…the changing political economy context since April 2004, conflict resurgence and shifting government policies have diminished the relevance of the current strategy,” according to the ADB’s lending evaluation.
The bank's operations evaluation department said the current [2004-2008] country strategy was “satisfactory” when first issued but has been downgraded to “partly satisfactory” because of the changed context.
The current lending strategy has scored 1.33 points, the lowest score awarded to a Sri Lankan country strategy since the evaluation started in the early nineties.
Although the bank continued to write generous 200 million dollar annual aid checks it’s now worried about the Mahinda Rajapaksa administration’s loose fiscal management.
“We do still see a quite a high fiscal deficit and losses at state enterprises that are not shrinking,” Boestel said.
“Part of the government’s budget plan in 2006 was to reduce this. Increasing losses in state enterprise is something that’s difficult to bear.”
New Strategy
ADB’s 200 to 250 million dollars in annual aid have been funding 10 to 15 percent of Sri Lanka’s budget deficit during the last five years.
Together with the government of Japan and the World Bank, Sri Lanka’s top three lenders usually fund over half the government's annual budget deficit.
Letting poor countries fall behind is dangerous because their politicians are corrupt or policies weak, but the world's largest multilateral lender, the World Bank, has punished weak policies and governance in the last two decades.
In 1990, countries with bad policies and institutions got an average of 44 US dollars a person in aid, while those with better policies got 39 dollars according to a World Bank analysis of its lending.
But a decade later, countries with better policies were getting 29 US dollars of aid a person, while aid to countries with weak polices had shrunk to 16 dollars a person.
Unlike World Bank aid, which has fallen to an annual 70 million dollars from a 200 million dollar high a two of years ago, ADB disbursements have been consistent.
“Government has published its working paper,” says Boestel. “The main emphasis is to reduce the infrastructure bottleneck and regional disparities.”
“We are trying to help in infrastructure and in reducing the social or regional disparities”.
Infrastructure lending has been successful in the past according to the ADB’s own reckoning but eliminating regional disparities without opening up economic factor markets like land, labor and capital is likely to be a challenge.
World Bank has repeatedly stressed on the need to let markets freely operate to replicate the success of Sri Lanka's Western Province in reducing poverty in the rest of the country.
Johanna Boestel emphasises “the loans are tied to reforms; we are talking to the government on what type of reforms they will be.”
Lack of reforms that can boost growth makes it difficult to get cheap foreign budgetary support, forcing the government to tap expensive commercial finance.
Economic analysts say Sri Lanka is suffering from manipulated markets which benefit privileged sections of society. High and chronic inflation caused by money printing for more than five decades has also hit assetless classes and wage earners.
Meanwhile regulations have kept businesses from expanding though a wave of liberalization in the late 1970's and mid 1990's has managed to keep the island slightly above the poorest countries in the world.
