FY 1996 Development Assistance Fund Request	$18,837,000



Sri Lanka's economy has grown steadily since liberalization began 

in 1978 with growth reaching an estimated 6.9% in 1993.  However, 

despite economic progress, poverty persists and per capita income 

is only $540.  Economic growth has been concentrated in urban 

areas, and in the industrial and service sectors, and has not 

been sufficiently broad-based to absorb under- and unemployed 

labor throughout the country.  Agriculture, although the dominant 

economic activity in Sri Lanka, continues to stagnate.  Income 

distribution patterns disfavor the poor, and much of the poverty 

is concentrated in the rural areas where 80% of the population 

resides.  While democratic traditions are strong, the Government 

of Sri Lanka (GSL) remains highly centralized, with few 

authorities and limited resources given to local governments.  

Years of civil war have strained GSL resources and threatened 

stability.  U.S. assistance to Sri Lanka (5% of total 

international aid received) supports U.S. interests by promoting 

democratic governance, an open and free market economy, and 

preservation of natural resources.



The Development Challenge



Sri Lanka has an ethnically diverse population of 17.6 million 

persons residing in an area about the size of West Virginia.  

Population growth is low at 1.2%.  The country has made some 

progress in evolving from a socialist, centralized economy to a 

more open and market driven economy.  The budget deficit was 8.1% 

of gross domestic product (GDP) in 1993, down from 15.5% in 1988. 

 Most of this reduction came at the expense of public investment, 

particularly in infrastructure.  The annual inflation rate is 

about 11.7%.  Unemployment is officially estimated around 14%, 

but may be as high as 35%-40% if underemployment is included.



Sri Lanka combines good human and natural resources with 

comparatively impressive social indicators.  Life expectancy is 

high for a developing country, and about 87% of the population is 

literate.  However, wide disparities exist in socioeconomic 

status and access to employment opportunities.  About 20% - 25% 

of the population is considered poor, and while much of this 

poverty is in the rural areas, there is also severe urban 

poverty.  One of the most serious social problems is extremely 

poor maternal and child nutrition, with stunting and wasting of 

children being more prevalent in the rural areas.  The GSL has 

placed a high priority on poverty alleviation.  The country's 

natural resource base is rapidly being eroded, endangering health 

as well as livelihoods in agriculture, industry and tourism.



Since independence in 1948, politics have maintained a democratic 

character.  Local, parliamentary and presidential elections held 

in 1994 resulted in a smooth transition to power of a new 

coalition government, the Peoples Alliance, ending 17 years of 

United National Party domination.  The new government has called 

for a continuation of economic growth strategies which are now 

gaining momentum.  An eleven year-old ethnic war is centered in 

the Northern and Eastern provinces, which comprise about 30% of 

the country's land area and about 15% of its total population.  

This ethnic conflict has imposed a large drain on the 

Government's financial resources.  The 1994 elections brought 

renewed hopes for peace and economic development in this area.



Sri Lanka is a responsive, sustainable development partner.  

However, its track record as a high-level performer in 

development is relatively short, and while progress has been 

good, it is also fragile.  Sustainability will depend 

significantly on social and political stability, continued policy 

reform, environmental protection and conservation, and progress 

in the three strategic areas now targeted by USAID assistance.



Strategic Objectives (SOs)



The goal to which USAID's program contributes is a democratic 

Sri Lanka, with broad-based sustainable development, and 

preservation of natural resources.  To accomplish this goal, the 

USAID program has three strategic objectives.  USAID is 

encouraging broad-based economic growth by facilitating micro and 

small-scale enterprise development (both urban and rural) for a 

broad range of people, while strengthening related financial 

markets and increasing access to credit and urban infrastructure. 

 USAID is helping to protect the environment through regulatory 

reform and local involvement in conserving ecosystems and 

biodiversity.  USAID is also building democracy by enabling 

greater participation of people in all economic classes to define 

their own needs and achieve their own solutions, and by 

encouraging higher quality media and legal systems.  In FY 1996, 

USAID will contribute 61% of its development assistance budget to 

economic growth, 20% to the environment, and 19% to democracy 

initiatives.  A quarter of USAID program funds will support 

policies and planning in all three strategic objectives.



ENCOURAGING BROAD-BASED ECONOMIC GROWTH ($13,030,000)



SO 1.  Increased opportunity for people to participate in, and 

benefit from, a growing market economy ($13,030,000)



Sri Lanka is a low-income country with high unemployment and a 

fragile economic base.  For generally improved standards of 

living, all sectors of the economy must continue to grow at a 

steady pace and have broad-based impact.  This includes 

strengthening the rural and urban economies through enterprise 

development, policy reforms, new technology and skills, and 

strengthening of formal market institutions.  More and better 

jobs for the unemployed and underemployed, and more revenue for 

the GSL are essential to sustain progress in humanitarian areas, 

and to sustain the viability of democracy.  Slow or inequitable 

growth and poverty will feed potential political instability. 



Activities.  The USAID program helps to create credit and savings 

societies to expand credit access and services to the poor.  

USAID's direct assistance to private enterprises introduces 

technologies to improve competitiveness and market penetration, 

and helps to create sustainable small and medium-enterprise 

activities, in agriculture and industry.   Assistance to capital 

markets helps to mobilize investment funds which create new jobs 

and make Sri Lanka's private enterprises more competitive.  USAID 

also assists the GSL with its privatization program to transfer 

government assets to private control and to encourage private 

investment in urban infrastructure such as solid waste 

collection.  The P.L. 480 Title III program, funded through 

FY 1994, has addressed the malnutrition problem and helped 

leverage free-market, agricultural reforms, while making U.S. 

wheat available for humanitarian resettlement programs and 

feeding programs for the rural and urban poor.



Indicators.  USAID indicators for measuring progress toward 

achieving this objective are:  (1) Increase in the percentage of 

private sector participation in GDP from 15.8% in 1995 to 17.2% 

in 2000; (2)  stunting and wasting among preschool children will 

decline from 60% in 1995 to 40% in 2000; (3) $88 million annual 

increase in Sri Lankan Board of Investment domestic and foreign 

investment approvals per year, from $880 million of total 

approvals in 1995 to $1.32 billion of total approvals by 2000.



Feasibility and Cost-effectiveness.  Sri Lanka must continue on a 

path of economic liberalization.  Further opening up of the 

economy and broad-based growth will result in increased 

employment and income opportunities.  Mobilizing productive 

savings and investment and increasing opportunities and access to 

private enterprise comprise the foundation for USAID's efforts.  

Assistance activities are aimed at policy reform and 

implementation, developing efficient financial markets, and 

strengthening private enterprises and institutions in the 

agricultural and manufacturing sectors.  This approach is 

feasible given Sri Lanka's impressive progress in opening its 

economy.  USAID's investment of $7-$8 million per year in 

economic growth activities is conservatively estimated to have 

rates of return in the 15%-25% range.  This investment is 

effectively leveraging private sector investment at the micro-

enterprise/mini-enterprise level.



Progress in 1993-1994.  The dramatic increases in employment and 

income seen in previous years continued through 1993 and 1994.  

The availability of technical and support services to 

microenterprises and small businesses has improved, and has led 

to measurable effects on productivity, job creation and 

profitability.  Some 12,000 people have increased their incomes 

through promotion of non-farm micro and small businesses and 

agribusinesses.  Employment opportunities have been enhanced at 

the grassroots level by setting up microenterprise and income-

generation activities through private voluntary organizations 

(PVOs) which have provided training in microenterprise 

development, new and more productive farming techniques, and 

vocational skill training for 27,500 people in urban and rural 

areas.  New enterprise creation and expansion of existing 

enterprises, made possible by assistance to Sri Lanka's capital 

market, has created over 8,000 jobs in 1993 and an estimated 

10,000 jobs in 1994, bringing the total jobs created to 

approximately 24,000.  In 1994, the capital market was able to 

raise $167.2 million through initial public offerings and rights 

issues, compared to just over $20 million three years ago.



Improved farming techniques and diversification into high-value 

crops have increased income of participating farmers from $578 

per year in 1987 to $1,042 per year in 1992-93.  Dissemination of 

new technology has enabled farmers to realize additional income 

over their traditional crop paddy by using irrigated plots.  

Through 1993, 500 assisted private firms have purchased over $15 

million in goods and services from the United States, producing 

nearly a fivefold return on USAID's investment.  During 1994, a 

further 100 firms have been assisted and are expected to result 

in similar returns.  With USAID assistance, 40 of 61 companies 

identified by the GSL have been privatized, and $310 million in 

assets transferred to private control.



Some 700,000 rural poor people received loans from the 

strengthening of community-based thrift and cooperative 

societies.  The current USAID Housing Guaranty program, concluded 

in FY 1994, provided approximately 45,000 below median-income 

families (less than $95 per month) with long-term credit for 

housing.  In addition, the P.L. 480 Title III resources supported 

the GSL's feeding programs, benefiting approximately 250,000 poor 

people, and leveraged a full range of policy reforms.



Donor Coordination.  USAID's programs under this strategic 

objective complement World Bank and Asian Development Bank  

programs.  The Asian Development Bank's financial sector program 

is developing a secondary market for government debt securities 

and improving capital market facilities.  USAID projects 

complemented the World Bank and Asian Development Bank's lending 

programs for industrial development.  USAID collaborated closely 

with Asian Development Bank agriculture sector projects to 

establish and monitor performance on institutional reforms and 

policy changes.



P.L. 480 Title III resources supported PVOs which supplemented 

World Bank, Norwegian, Canadian, and Swedish aid program 

assistance to improve food security, poverty alleviation and 

employment creation.



Constraints.  Although the new government continues the goal of 

expanding the free market economy, it has yet to define its 

development focus and strategy and may not move ahead at the 

required pace in some development areas.  In addition, the 

business skills found in rural and urban, micro to medium-scale 

enterprises will need to be improved in order to access and 

utilize economic opportunities.  Overall, Sri Lanka's economic 

growth performance is fragile and to some extent will be, 

dependent on resolution of its internal ethnic conflict and its 

progress in maintaining social and political stability.



PROTECTING THE ENVIRONMENT ($2,545,000)



SO 2.  Improved environmental practices to support sustained 

development ($2,545,000)



Sri Lanka is an island nation which is rapidly depleting its 

natural resource base.  Its population density is one of the 

highest in the world.  It is therefore imperative that its 

natural resources be wisely managed to ensure that the 

sustainable gains from economic growth are not undermined from 

declining environmental quality or resource degradation.  The 

future sustainability of Sri Lanka's economy is dependent on the 

preservation of its natural resource base, such as water for 

irrigation and electricity, and a clean ocean to attract 

tourists.  Capable institutions are required for formulating and 

implementing policies and programs to ensure full attention to 

environmental management.



Activities.  USAID environmental activities focus primarily on 

policy reform and regulatory change, with successful pilot 

demonstration sites in natural resource management.  The natural 

resource environmental policy program, the flagship of this 

objective, assists the Government of Sri Lanka to implement new 

regulations on industrial siting, to undertake environmental 

impact assessments on important development projects, to 

establish an environmental licensing program, and to implement a 

pollution prevention and environmental auditing program.  Another 

component of the program helps to organize user groups to take 

joint responsibility for sustaining the productivity of selected 

watersheds through participatory management and control of land 

and water resources.  



Indicators.  USAID indicators for measuring progress toward 

achieving this objective are:  (1) Number of people benefitting 

from adoption of environmentally sound practices will increase 

from 116,030 in 1995 to 173,530 in 2000; (2) percentage of high-

polluting industries which are implementing pollution 

prevention/control measures will increase from 15% in 1995 to 60% 

in 2000; (3) the number of hectares of land with agricultural 

conservation practices will increase from 7,960 hectares in 1995 

to 37,460 in 2000; and (4) the percentage of municipal solid 

waste disposed through environmentally sound systems will 

increase from 20% in 1995 to 70% in 2000.



Feasibility and Cost-effectiveness.  USAID's approach emphasizes 

development of institutional and policy capacity carried out in 

cooperation with a wide range of Sri Lankan partners, including 

government agencies, academic institutions, the private sector, 

and community groups and non-governmental organizations (NGOs).  

USAID leverages significant funding from other donor programs and 

the GSL to improve environmental resource conservation.  There is 

a strong receptiveness to policy  interventions which achieve 

high cost-effectiveness through national and regional impacts.  

USAID achieves lasting results and the permanent adoption of 

environmentally sound development strategies and practices by 

focusing on the development of local institutions and 

participation at the community level.  USAID's involvement in 

this strategic objective will be $2.54 million in FY 1996, a 

relatively small investment for planning and sound policy returns 

which will have a large payoff for improved quality of life in 

the future. 



Progress in 1993-1994.  USAID has assisted the GSL in a variety 

of institutional strengthening activities which were almost non-

existent four years ago, most significantly, the revision of the 

national environmental action plan (NEAP) for the next five 

years.  This includes the acceptance of pollution prevention and 

waste minimization approaches as essential elements of a national 

industrialization program.  The use of environmental impact 

assessment methodology also was institutionalized, with 200 

officials trained.  Ninety-five user-groups, involving 1,200 farm 

families, were formed for shared control of natural resources 

with their local government in two pilot watersheds.  Since 1993, 

a total of 50,000 low-income people participating in community-

based, resource management have benefitted from such 

interventions as improved sanitation.  Training and awareness 

programs encouraged users to accept and utilize conservation 

concepts, including conservation farming, soil conservation 

measures, and tree planting.  In summary, USAID has had results 

in addressing green, brown, and blue issues of environment.



Donor Coordination.  USAID collaborated closely on the Natural 

Resource Environmental Policy program with the World Bank on the 

development and implementation of the national environmental 

action plan and the Colombo environment improvement plan for 

solid waste management, clean settlement and the economic study 

of waste treatment.  USAID also works closely with the World 

Bank, United Nations Development Program, and the Asian 

Development Bank on a variety of issues including biodiversity, 

wildlife conservation, and watershed management.



Constraints.  Rapid economic growth is putting pressure on Sri 

Lanka's natural resources.  Even if economic growth slows and 

does not provide employment and incomes demanded by the 

population, there will be increased pressure for extractive use 

of environmental resources and greater difficulty in restraining 

development of environmentally unsustainable activities.  There 

is also still some resistance among key decision-makers to the 

premise that environmental considerations should be factored into 

every aspect of development planning, and the commitment of the 

GSL to protect the environment will be essential to conservation 

of critical eco-systems.



BUILDING DEMOCRACY ($3,262,000)



SO 3.  Greater empowerment of people to participate in 

development and democracy ($3,262,000)



Ordinary Sri Lankans have relatively limited opportunities to 

participate in, let alone influence, decision making that affects 

their political, social, and economic well-being.  Although great 

progress has been achieved by Sri Lanka in some social 

indicators, unemployment, poverty, social unrest, ethnic 

conflict, and dependency on government continue to threaten the 

sustainability of progress made to date.  Broader participation, 

improved public information, and more responsive and capable 

democratic institutions are essential for Sri Lanka to sustain 

its current economic momentum and achieve its aspirations of 

becoming a modern developed society.



Activities.  USAID supports PVOs which represent vulnerable 

groups, such as displaced persons and youth, and their 

priorities; assistance for organizing farmer groups to better use 

water and land resources; and institutional strengthening to 

increase access to justice and an improved media.  The newly 

signed Citizens' Participation Program is the cornerstone of 

USAID's democracy program.  It is strengthening democratic 

processes, particularly at the village level, enabling ordinary 

citizens to address fundamental social and economic development 

needs.



Indicators.  USAID indicators for measuring progress toward 

achieving this objective are:  (1) increase in the number of 

people with access to legal services and information; and (2) 

increased expenditure by local government units.  Targets for 

these:  indicators will be determined by 9/30/95 once the 

cooperative agreements with two principal U.S. PVOs are 

established.



Feasibility and Cost-effectiveness.  USAID has a strong record of 

success in working with NGOs on popular participation.  Social, 

political and economic crises have disrupted Sri Lankan society. 

 However, as a testimony to the strength of democracy in Sri 

Lanka, these crises have not weakened the commitment to 

democratic processes, but rather reaffirmed the necessity of 

strengthening these processes and making them more receptive to 

citizen input.  USAID has chosen local government, participatory 

development, legal systems and the media as areas of activity 

under this objective.  In each area, there are well established 

groups to work with on specific issues.

 

USAID will invest almost $3.3 million under this strategic 

objective in FY 1996.  Working with grassroot-level NGOs will 

involve lower costs while supporting a diverse range of economic 

activity, with assistance to business associations and their 

members, to displaced persons in the North and East, and income-

generation for farmers, rural women and urban slum dwellers.  

Assistance to mediation boards in rural areas is a cost-effective 

way of providing access to legal services.  USAID expects the 

impact per dollar of assistance to be high. 



Progress in 1993-1994.  USAID's democracy activities focus on 

strengthening the role of NGOs by increasing their ability to 

advocate for policies and programs that enhance the quality of 

life for all citizens, especially vulnerable populations.  USAID 

has worked closely with U.S. PVOs and Sri Lankan NGOs to increase 

the public's awareness on human rights issues, rule of law and 

justice through training programs and seminars for 5,400 people, 

including judicial and legal professionals.  USAID also has 

strengthened institutional capabilities and activities of 230 

farmer groups, 23 business chambers, and 33 environment and human 

rights advocacy groups.  During 1993-1994, USAID partner 

institutions have made significant strides in providing access to 

democratic processes for ordinary Sri Lankans.  Emergency 

regulations restricting individual freedoms were rescinded, 

thousands of people redressed their grievances through community-

based mediation boards, and nongovernmental organizations 

advocated greater freedom of information, exposure of human 

rights abuses, and resolution of environmental issues.



Humanitarian assistance has been provided to 13,296 people 

affected by ethnic conflict in the northern and eastern 

provinces.  Public awareness of prevention and control of drug 

abuse, sexually transmitted diseases and human immunodeficiency 

virus (HIV) and acquired immunodeficiency syndrome (AIDS) has 

been provided to NGOs, citizen group leaders and Government 

decision makers, through seminars, workshops and training.



Donor Coordination.  USAID works closely with various bilateral 

donors through the United Nations Development Program-sponsored 

forum for NGOs.  Most of these organizations and donors are 

involved in community-based participation activities.  USAID also 

has collaborated with the Dutch and Norwegian aid agencies on 

human rights activities.



Constraints.  Uncertainty remains regarding the new government's 

outlook towards private sector-led growth strategies and the role 

of NGOs.  Implementation of the GSL's stated policy of devolution 

of power to lower levels of government is mandatory if democracy 

is to become truly participatory.



Other Donor Resource Flows



In 1993, total donor assistance to Sri Lanka was about $475 

million.  The United States, with about 5% of total assistance, 

is the second largest bilateral donor (behind Japan) and the 

fifth largest overall.  Leading donors are the Asian Development 

Bank, the World Bank, and the International Monetary Fund.  There 

are 17 bilateral and 6 multilateral donors to Sri Lanka.





USAID Mission Director:  David A. Cohen