ADB to support infrastructure reforms, revenue is key challenge

Nov 21, 2016 (LBO) –  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, a new Asian Development Bank study shows.

The ADB, releasing an independent evaluation report that assesses its 5.5 billion US dollar program for Sri Lanka in the 10 years to the end of 2015, said the program made a substantial contribution to expand infrastructure services in the country especially in lagging regions and former conflict-affected areas.

But the report recommends support for policy reform in Sri Lanka’s infrastructure sectors.

It also recommends that ADB build on the success of its decentralized, community-based project approaches for infrastructure, social services and livelihood assistance to promote inclusive growth for economic and social development nationwide.

“Sri Lanka’s medium-term growth outlook still 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 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, with ADB’s engagement in these areas 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.

ADB’s support for private sector development was judged less than successful over the period but conditions for future support look more favorable.

The Bank approved a 250 million US dollar loan in October this year to support capital market development, and is planning to scale up support for public–private partnerships.

“Sri Lanka needs to attract private sector investment to sustain growth” says Taylor-Dormond.

“Supporting the environment for business development should be a key part of ADB’s next country strategy.”