Financial Times

Aid, peace talks and sovereignty
The World Bank's announcement last week that it had increased its aid pledge to Sri Lanka to a billion dollars over the next four years, from $800 million (or $200 million a year) announced at last month's Tokyo donor conference, is certainly welcome news to a country struggling to raise economic growth and improve the lot of its people.

The fact that the World Bank's announcement of its generosity came on the eve of the government's own announcement of new proposals for an interim power sharing arrangement to be controlled by the LTTE in the north and east in an effort to revive the stalled peace process must surely be a coincidence.

World Bank country director Peter Harrold was at pains to point out that the pledges amounted to a quintupling of previous levels of aid and that a big chunk of the organisation's lending to Sri Lanka is in the form of grants and the balance on what he called "our usual terms" - interest free, with repayments over 40 years, and starting only in 2013. "We are aware," he said, "that many in Sri Lanka are concerned about the possible debt burden of the Tokyo commitments."

The World Bank must also be aware of other concerns such as the conditions attached to the loans, in this case the most notable being that it is explicitly tied to progress being achieved in the peace process, and economic reforms, which usually means reducing social safety nets that protect the poor and removing barriers that prevent exploitation of Third World resources by big business.

There is growing unease over the linkages between the aid that has been pledged to Sri Lanka and peace talks aimed at ending the Eelam war. Donors have often stated that the disbursements of much of this aid will depend on the progress of the talks between the government and the LTTE in arriving at a lasting solution to the ethnic problem.

The concern is whether these conditions mean making compromises that, in effect, erode the country's sovereignty and put a terrorist group in effective control of over one-third of the island. In other words, whether the largesse of the foreign donors is designed to project the peace process in the direction they desire.

Harrold himself described the interim administration as the "key" to the resumption of peace talks and said the donors were "very interested" in it. In a defensive remark that is revealing he also said: "But nobody is exerting unnecessary pressure at present." Does it mean that more pressure might be required, perhaps later?
The LTTE has publicly stated its desire for an interim administration that is outside the Constitution.

The World Bank itself is apparently prepared to be flexible in its own way. As Harrold said the bank is prepared to work with "whatever arrangement is put in place" and that its legal agreements with the government were flexible enough to accommodate changes in the interim administrative set up.

The bank also appears to be ready for the worst. Its Country Assistance Strategy unveiled last week said lending would fall to previous levels - of just $50-60 a year - if the peace process broke down and hostilities resumed in the north-east, and economic reforms were delayed.

It also has an "exit strategy" - a worst-case scenario of what would happen if the war resumed on what it called a "national scale". According to this, there would be no new lending and in all probability, the bank might even suspend all operations, although this last option, it said, was "highly unlikely".

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