Aid could strengthen peace moves
Future foreign aid tied to reforms

Foreign aid to revive Sri Lanka's war-ravaged economy would strengthen popular support for government efforts to achieve a durable peace by holding talks with Tamil Tiger rebels, Finance Minister K.N. Choksy said last week.

Prime Minister Ranil Wickremesinghe addressing representatives of donor agencies.

Foreign aid donors had accepted government proposals to accelerate economic growth, reduce poverty and rehabilitate conflict-ridden areas, he said after the two-day Sri Lanka Development Forum meeting with lending agencies and bilateral donors.

"We emphasised to the donor community that if people in the conflict affected areas could see and feel the benefits of peace - make it a part of their lives - then the government's hand in a final peace settlement would get strengthened," Choksy told reporters.

He said if people feel the "peace dividend straight away", the government would have more public support for its peace effort while there would be "psychological pressure" on Tamil rebels to arrive at a settlement.

The ceasefire alone was not enough and a permanent peace is needed, he said.
Foreign donors had agreed to start rehabilitation work in conflict areas immediately using $150 million already available from the Asian Development Bank, Japan and the International Monetary Fund (IMF), he said.

The most pressing needs were schools, hospitals, water supply, roads and community centres, he said.

The aim of the donor meeting was not to discuss aid pledges but for donors to examine the government's economic policy and development programmes, he said.

Donors had endorsed the government's Growth and Poverty Reduction Strategy (GPRS) and the Relief, Rehabilitation and Reconciliation (RRR) framework needed to accelerate development of the north and east.

Choksy stressed that rehabilitation efforts would not be focused only in the conflict-affected areas of the north and east but would extend to other parts of the country as well.

Firm pledges of future aid would be made at a meeting with donors in Paris in December and that this would depend on how well the government carries out financial sector reforms and reduces spending on social welfare, Choksy said.

Spending on Samurdhi would be reduced by Rs. 1.5 billion to Rs. 10 billion in the first year and the programme revamped to ensure that funds go only to the needy and that those no longer eligible exit from the scheme, he said.

In his address to the Development Forum on Wednesday, Choksy said that donor agencies had put "great emphasis" on good governance, de-regulating the economy and the need to improve the use of foreign aid.

"The freeing of the economy and business from excessive bureaucratic control was also actively advocated by our donor partners," Choksy said. "The government recognises the necessity for this."

The tax and customs administration was being simplified and co-ordinated for the benefit of the financial, industrial and trading sectors, a unified revenue authority for tax, excise and customs was being established by law with expert guidance from the IMF and the ADB, and labour laws were being steadily made less rigorous, to enable employers to secure greater productivity while assuring employee welfare.

Land laws were being liberalised to make land more commercially transactable, Choksy added.

The gross under-use of available donor funds was another factor pointed out by donor partners, he told the meeting.

The government had already achieved some success in making better use of foreign aid, he said.

Aid utilisation which was only 14.5 percent last year had been increased to around 18 percent, based on the first quarter disbursements.

Choksy said the government, in its first six months in office, had implemented a series of measures suggested by donor agencies, that were in line with the government's own economic thinking, despite their being "perhaps politically unpopular".

These were the increase in electricity and water prices, postage rates, and fuel prices.

"We have thus, to some measure, redeemed lapses of the past," Choksy said.
"The present government does not believe that poverty can be reduced by ad-hoc financial hand-outs and continuous government subsidies of essential consumer items," Choksy said. "This only perpetuates poverty and the degradation that goes with it."

Donors were also critical of the lack of communication between the government and the public on its economic policies and programmes and had even wanted the government to pass laws to compel the disclosure of information.

"I said there was no need for that and that the government has nothing to hide," Choksy. "Government decisions will be disclosed to the people. We will disclose all the facts and figures about tenders and contracts."

Pockets of poverty need attention - Chandrika
Pockets of poverty in areas outside the north and east require the urgent attention of the government and foreign aid donors, President Chandrika Kumaratunga told last week's Development Forum.

In addition to the government's 'Triple R' and RPSP programmes, which target the North-East problem in particular and poverty in general, donors required to focus urgent attention on the "poverty-ridden pockets in the provinces other than the North and East," Kumaratunga said.

These were the distant rural areas of the country, she added.

"We need to look at new programmes of action to economically empower the communities living in numerous pockets of these regions," she said.

Kumaratunga also said that the resilience of the island's economy built up over the years prevented a collapse despite last year's severe shocks to the system.

The island faced a series of "unprecedented setbacks" in 2001 with the increase in oil prices, global recession, the September 11 terror attacks in the United States, the LTTE attack on the Katunayake airport, severe drought and emergency war expenditure necessitated by the intensification of hostilities, she said.

"Yet, the resilience of the economy we built up was amply demonstrated by the fact that our economy avoided a collapse as happened elsewhere," she said in her inaugural address at the meeting.

Kumaratunga said that sustained economic growth will not be possible without restoring peace and political stability.

"We believe that this would be achieved only when every Sri Lankan citizen, irrespective of race, religion or political creed could live in dignity and enjoy equal opportunities," she said.

IMF urges govt. to implement VAT
The International Monetary Fund has urged the government to implement the value-added tax as planned, resist pressure to grant further tax breaks and ensure that the Inland Revenue Department implements revenue-raising measures, Jeremy Carter, of the IMF's Asia and Pacific Department told the Development Forum.

It has also asked the government to maintain the prudent wage policy set out in the 2002 budget, remove open-ended subsidies and transfers to public institutions and curb defence spending, improve the targeting of the Samurdhi programme and ensure that health and education spending is maintained at the budget levels, he said. Recent developments on the economic front have been encouraging, Carter said in a statement.

The macroeconomic situation is stable and inflation appears to be on the decline, he said, adding that the prospects for the rest of the year are brighter.

"The external position continues to strengthen, and the rupee, which is freely floating, has remained broadly stable in recent months," Carter said.

The Central Bank continues to maintain a broadly prudent monetary stance, he said. Nominal interest rates are expected to fall as inflation and fiscal pressures abate during the second half of 2002.

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