Financial Times

Peace deadlock delays aid
The impasse over the resumption of peace talks between the Tamil Tiger terrorists and the government has begun to directly affect much-needed foreign loans and grants with the World Bank saying deliveries of aid this year would be much lower than anticipated.

Sri Lanka received about a billion dollars worth of aid last year in line with the pledges made at the Tokyo conference of all the major bilateral and multilateral donors to the island.

"We had expected this to increase in 2004 but that's not going to happen," declared World Bank country director Peter Harrold. "Disbursements in 2004 will be from half to two-thirds of what we had hoped for under the Tokyo commitments. We were looking for $1.3 billion in 2004," he told The Sunday Times FT in an interview.

The donors had wanted to increase their lending depending on the progress of the peace process but have not yet done so because they are waiting for the peace process to re-start. "There is a strong link between the peace process and assistance," Harrold said.

The peace process was disrupted in April 2003 when the Tigers pulled out of talks, political analysts said. The resumption of talks is now stalled because of the LTTE's intransigence and its insistence that negotiations resume only on the basis of the controversial Interim Self-Governing Authority proposal, seen as a blue print for Eelam, despite the terrorist group's claims that it has not imposed any conditions.

Foreign aid donors have urged both sides to resume talks without further delay saying the longer the negotiations remain stalled the bigger the damage to the economy. Inflows of foreign aid are seen as important for foreign investor confidence in the island and to shore up foreign exchange reserves which have begun to fall owing to much higher spending on petroleum imports and Central Bank sales of dollars to prop up the rupee, which has depreciated sharply this year, analysts said.

In 2003 some $650-700 million was delivered as project aid and about $350 million as budget and balance of payments assistance. A significant amount of money in the Tokyo pledges, and very important in terms of deliveries, was for budgetary support and balance of payments support - so-called programme lending - from the IMF, World Bank and other sources such as the ADB and JBIC.

"Much of this is held up at the present time," Harrold said. "That will certainly be reflected in the overall disbursement figures this year. Secondly, quite a lot of aid was explicitly committed for the North-East Reconstruction Fund and because the peace process has not re-started, the NERF has not been re-launched. That's another reason for lower deliveries." Project aid disbursements are continuing although without any significant increase. Harrold said donors were displaying "considerable patience".

But, he warned, especially for some of the big bilateral donors, demands from other parts of the world get bigger all the time. "If you have a good economic programme and the peace process re-starts, the international community will be very supportive," he said. "The issue is not will they still support you when you come up with a good economic programme and the peace process resumes. The issue is that in the meantime things are not happening - in the meantime people are not getting better off, there are no social improvement opportunities, the rates of return of IDPs (internally displaced persons) is low.

"It is not really whether you're going to lose the Tokyo pledges but right now things are not getting better for people as rapidly as they have the potential to do."

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