The Development Challenge

Key U.S. national interests in Sri Lanka include supporting democratic institutions and processes, including curbing terrorism and finding a peaceful solution to the 18-year war. The new government is one of the friendliest to the United States in Sri Lankan history and was very supportive of the United States in the aftermath of the events of September 11, 2001. By helping to resolve Sri Lanka's internal war, the United States is making an important contribution to regional stability and the global war on terrorism. In addition, the U.S. national interest is served by further promoting free markets, transparency, rule of law and respect for workers' rights, in order to integrate fully Sri Lanka into the global economy and provide greater opportunities for U.S. goods, services, and capital.

Sri Lanka weathered a year of internal political and economic stress. The fighting intensified in its 18-year war in the north and east, and included an attack on the international airport by the Liberation Tigers of Tamil Eelam (LTTE). Political instability led to the postponement of its parliament for two months; and two of the most violent parliamentary elections in history occurred over a 14-month period. Exports declined by over 8%; the budget deficit rose to nearly 10% of gross domestic product; exchange reserves dropped from $2.6 billion to $2.1 billion, and gross national product growth plunged from an annual average rate of 5.5% in the 1990's to minus 0.6%. Adding to the country's economic woes, as a result of the previous government's failure to meet budget expenditure terms, the International Monetary Fund postponed further drawdown of its Standby Agreement Facility after Sri Lanka had withdrawn only $131 million of the agreement's $253 million total.

Despite all the negative events over the past year, the December 2001 change in government has injected optimism into the populace that a peaceful solution to the war can be found and that the economy will recover from the recent downturn. In one of its first moves, the new government requested Norway to restart the talks that could lead to a peace agreement with the LTTE. In response, the LTTE unilaterally declared a one-month cease-fire "to give peace a chance" and the government reciprocated.

The new government has a critical mass of highly respected private sector individuals in key cabinet positions. Many of these individuals have been active in USAID's competitiveness activity. They understand the need and have the ability to create an environment that facilitates private sector led growth and employment generation.

Compared with its neighbors, social indicators for Sri Lanka remain high, although they do not include data from the conflict zone. Sri Lanka ranks 81st of 162 countries on the UNDP's Human Development Index. Per capita income is $826. Life expectancy is 69.3 years for men and 75.0 years for women. Infant mortality is 17 per 1,000 live births; the literacy rate is 88.6% for females and 94.3% for males. While respectable, these indicators are at risk of eroding if the social, political, and economic constraints are not effectively addressed.

The USAID Program

USAID plans to spend $5,450,000 in DA funds and $3,000,000 in ESF funds in FY 2002, and is requesting $6,050,000 DA and $4,000,000 ESF in FY 2003. The three USAID objectives focus on increasing Sri Lanka's competitiveness in the global marketplace; creating and enhancing economic and social opportunities for disabled and disadvantaged groups; and promoting peace, good governance, human rights awareness and enforcement, and providing psychological counseling to communities in the northern and eastern conflict zones. FY 2002 funds will be used to implement ongoing activities that assist industry and government to develop and implement strategies and for appropriate policies and programs to address barriers to competitive trade and investment. USAID will support the provision of improved prosthetic and orthotic devices for the disabled; develop capacity of organizations to advocate on behalf of the disabled; and implement social programs for families and children affected by the war. Beginning in FY 2003, a new USAID program will promote peace and good governance and will assist in the promotion of Sri Lankan citizens' rights, as well as providing counseling and other support to victims of torture in the conflict zones in the North and East.

Performance Highlights

• USAID technical assistance to up to 15 business competitiveness "clusters" in areas such as tea production and tourism has facilitated strategic partnerships among the Government of Sri Lanka, business leaders, and associations; these partnerships enhance Sri Lanka's global competitiveness; eight substantive policy and regulatory reforms have been achieved.
• By 1999, 3,830 amputees had been fitted with prosthetic devices; and 14,859 children had received community-based psycho/social counseling and activities to help them heal from the trauma of Sri Lanka's on-going 18-year civil ethnic conflict.
• In FY 1999, the number of human rights violations reported to the 10 field offices of the Sri Lanka Human Rights Commission (assisted by USAID) was almost double the target of 2,500; the number of legal aid cases was 22,848, exceeding a target of 12,000.

Budget Summary Table