Financial Times

Too many Lankans remain poor, World Bank says
Sri Lanka needs to restore a sound macroeconomic framework as it grapples with the problems of recovering from the tsunami disaster while continuing efforts to reduce persistently high levels of poverty, the World Bank has said.

"There is a need to ensure that fiscal and monetary policies underpinning the recovery effort are consistent with the restoration of a sound macroeconomic framework," the bank said in a new report prepared for the forthcoming Sri Lanka Development Forum.

"Despite strong growth in the wake of adverse shocks, too many Sri Lankans remain poor," said the report, meant for discussion in the May 16-17 Kandy meeting. "The tsunami is a painful reminder of this as a lot of the victims are poor (which is why the impact on GDP is mild)."

The report expressed surprise that the relative peace enjoyed since the ceasefire in February 2002 has not translated into higher growth. The past growth performance has not been adequate for significantly reducing poverty beyond urban areas.

"To achieve faster growth, Sri Lanka needs to address remaining structural constraints, including weaknesses in the macroeconomic environment." The hike in world oil prices combined with expansionist monetary policies have led to rising inflation and widening macro-economic imbalances, the World Bank said.

Much of Sri Lanka's skewed growth record and ensuing income inequality is a reflection of the unfinished reform agenda, it said. It said that "important strides" have been made in trade liberalization and private sector development, which explains the country's resilience to adverse shocks, including the ethnic conflict.

But significant challenges remain including containing the fiscal deficit and public debt to sustainable levels, increasing export diversification against the backdrop of the abolition of the Multi-Fibre Arrangement, and reviving non-plantation agriculture and the rural economy.

It said that peace remains critical for both growth acceleration and poverty reduction and that it is essential that policy reversals be avoided so that gains form past reforms can be further strengthened.

The national poverty headcount ratio fell by only three percentage points to 22.7 percent between 1990 and 2002, despite a 3.5 percent annual growth in per-capita income over the period, excluding the north and east.

"This modest decline underlies sharply unequal poverty trends across sectors and regions," the report said. "Poverty incidence in urban areas was halved (to 7.9 percent) while rural poverty declined by less than five percentage points (to 24.7 percent) and poverty in the estate sector actually increased (to 30 percent)."

Despite some efforts at fiscal consolidation, the past two years have seen a slippage from the Fiscal Management Responsibility Act (FMRA) targets. Although the fiscal deficit reduced between 2001 and 2003, it was still short of the original targets and was achieved by reducing defence and capital spending while tax revenues continued to fall until 2004.

"The rapid credit expansion reflects increased financing of the government budget and higher private demand for credit in the context of declining real interest rates."

The acceleration in money supply growth fuelled inflationary pressures. The report also said that around 13 percent of the labour force is employed in the public sector, which results in Sri Lanka having one of the largest bureaucracies in the developing world (3.9 civil servants per 100 people compared to an average of 2.6 in Asia).

Most state-owned enterprises are overstaffed, incur operating losses and are burdened with large debts. The report also criticised the Samurdhi social welfare programme which it said remains poorly targeted with "minimal" cash amounts being transferred to almost half of the population and still significantly missing a large proportion of the poor.

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