COLOMBO: The Asian Development Bank (ADB) should intensify support for policy reform in Sri Lanka’s infrastructure sectors, like independent tariff setting by regulators, according to an independent evaluation of its aid program for the island.
The sustainability of ADB’s project portfolio and government development programs—particularly in transport and energy—is being undermined by the lack of progress on policy and institutional reform, the evaluation report said.
The evaluation of its $5.5 billion program for Sri Lanka in the 10 years to the end of 2015 found that, while it made a big contribution to expanding infrastructure services, the ADB was less effective in policy reform.
“A decade of technical assistance for the Ministry of Finance did not show an alarming decline in state revenues and a deteriorating fiscal position,” the report said. Fixing Sri Lanka’s taxation system is now part of an International Monetary Fund-backed Extended Fund Facility approved in June earlier this year.
The report recommends that ADB give more support to assist the government in improving the financial performance of state-owned enterprises, and to strengthen the private sector by improving the investment climate.
“Sri Lanka’s medium-term growth outlook remains positive, but there are significant downside risks, particularly from the deteriorating fiscal position,” says Marvin Taylor-Dormond, director general of Independent Evaluation at ADB.
“These risks need to be decisively addressed to ensure that growth is strong, sustainable and benefits all regions of the country.” The report said the ADB’s engagement in policy and institutional reform has been declining over the evaluation period.
“Sri Lanka’s revenue crisis is by far the biggest policy challenge,” says Joanne Asquith, the study’s main author. “Low revenue is driving up the cost of government borrowing and weakening the ability to expand needed public services that can promote inclusive growth.”
The country’s level of government revenue in relation to gross domestic product—an important indicator of a country’s health—is one of world’s lowest, at just 12.1 percent in 2015 compared to 24.2 percent in 1978.
Because of weak revenue collection, the government’s plans to double education spend to 6 percent of GDP for example won’t be possible without increasing domestic tax resources, the ADB said. The study makes clear that further structural reforms are needed to strengthen the Sri Lankan economy, which has been slow to attract private investment and is encumbered by burdensome business regulations.
ADB’s support for private sector development was judged less than successful over the period but conditions for future support look more favorable.
ADB approved a $250 million loan in October this year to support capital market development, and is planning to scale up support for public–private partnerships.
