Documentof The World Bank

FOR OFFICIAL USEONLY

ReportNo. 43466-LK

S R I LANKA

SECOND POVERTY REDUCTION STRATEGY PAPER

AND

JOINT IDA-IMF STAFFADVISORY NOTE

May 9,2008

Poverty Reduction and Economic Management,Finance and Private Sector Development UnitSouthAsia Region

This document has a restricted distribution and may be used by recipients only in theperformance o f their official duties. Its contents may not otherwise be disclosed without WorldBank authorization. FOR OFFICIAL USEONLY

INTERNATIONAL, MONETARY FUND AND INTERNATIONALDEVELOPMENT ASSOCIATION

SRI LANKA

Joint Staff Advisory Note on the Second Poverty Reduction Strategy Paper

Preparedby the Staffs ofthe InternationalMonetary Fund andthe International DevelopmentAssociation

Approved by KalpanaKochhar andMarkPlant (IMF) and PrahlPatel(IDA)

May 9,2008

I. OverviewandConsultativeProcess

1. The Government of Sri Lanka (GoSL) releasedthe "Mahinda Chintana: Vision for a New Sri Lanka-A TenYear HorizonDevelopmentFramework 2006-2016" inNovember 2006. In March 2008, GoSL formally submitted the Mahinda Chintana (referred to as M C henceforth), together with the "Fiscal Management Report-2008,'' the "Road Map: Monetary and Financial Sector Policies for 2008 and Beyond," and an updated macroeconomic framework, as the main documents to serve as the Poverty Reduction Strategy paper (PRSP) for Sri Lanka- replacing the previous Government's PRSP "Regaining Sri Lanka: Vision and Strategy for Accelerating Development", for which a JSA was completed inMarch 2003.

2. MC's broad aim is to accelerate growth in Sri Lanka from its historical average of about 5 percent to over 8 percent by 2010, which is expected to cut the poverty rate in half from the 2002 level (of 23 percent) to 12 percent by 2015. The 10 Year Vision places particular emphasis on achievement o f equitable growth, recognizing that there has been a "perpetuation o f income disparities, both among income earners and geographic regions". To achieve this, the M C focuses on three strategic areas: (i) accelerate growth through increased investment in infrastructure; (ii) achieve a more equitable development through accelerated rural development, and (iii) strengtheningpublic service delivery.

3. M C was drawn up mainly based on within-government consultation and benefited only to a limited extent from a broad consultative process. It was presented to the international community at the Development Forumheld in Galle in January 2007. M C was built on the current President's election manifesto o f the same name and was the subject o f much public debate and discussion leading up to the election. Since it was prepared with extensive consultations with government departments and provincial councils, M C has a high degree o f ownership within the Government, although broader public consultations were more limited.

4. This JSAN is being prepared at a challengingtime for Sri Lankawhen violenceand armed confrontationshave intensified and the macroeconomicsituationis under stress. The Rajapakse Government has argued for the need o f military operations to "eradicate terrorism", while emphasizing its commitment to a political solution to the conflict. By July 2007,

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not be otherwise disclosed without World Bank authorization.Government forces claimed control o f the LTTE-held temtories in the Eastern Province. OnJanuary 16, 2008, the Government unilaterally abrogated the Ceasefire Agreement that had beeninplace since 2002. Inamove to restorenormalcy inthe East, local government elections for thepredominantly Tamil Batticaloa District were held on March 10, 2008, and Provincial Councilelections for the Eastern Province have been scheduled for May 2008. In parallel, while theeconomy has been buoyant the past two years, macroeconomic imbalances have been emerging,including a sharp acceleration ininflation.

II. PovertyDiagnostics

5. Recent data indicatea relatively broad-baseddecline inpoverty. The government hasjust reportedthat the national poverty headcount rate, as measuredby the HouseholdIncome andExpenditure Survey (HIES 2006-07) i s 15.2 percent - a sharp decline from the 22.7 percentheadcount reported in 2002. This positive development is enhanced by the fact that most o f thedecline has occurred inprovinces other than Westem Province (WP), thus reducing the large gapseen in2002 between WP andthe rest o f the country. For example, Southern Province has halvedpoverty from 28 percent in 2002 to 14 percent. Interpersonal inequality has also remained stableduringthis period. One area o f concern remains the estate sector, where poverty has increasedmarginally since 2002. The provinces o f Uva and Sabaragamuwa that were the poorest in 2002continue to be so by a wide margm, with poverty rates around 10 percentage points higher thanthe national average.

6. The change from 2002 to 2006-07 is in sharp contrast to the poverty trends for thedecade of 1990-91 to 2002, when overall poverty rate fell by only 3 percentagepoints, from26.1 to 22.7 percent. This was primarily due to rising inequality - the Gini coefficient o f percapita consumption increased from 0.32 in 1990-91 to 0.40 in 2002, considerably faster thanother countries in South Asia. The Bank's most recent poverty assessment found that gapsbetween regions had widened and poverty in estates had increased sharply during this period.Projections based on the national trends had suggested that poverty headcount in 2015 would fallshort o f the Millennium Development Goal (MDG) o f halving poverty from 1990-91 levels. Butgiven the reduction between 2002 and 2006-07, the country can now be reasonably expected toreach its MDGs o f halving poverty well before 2015 if the trend from the last five years i ssustained.

7. Staffs encourage the government to updatethe spatial distribution of poverty usingthe HIES 2006-07 data and conduct core diagnostic work, based on which the strategiesoutlined inthe M C can be refined more to address the remaining challenges for lagging areas andgroups. The information available inthe 2006-07 HIES on Eastern Province can also improve theunderstanding o f development outcomes in the conflict areas - HIES data up to 2002 could notinclude the Northand East due to security concerns, while the 2006-07 survey covers two out o fthe three districts in Eastern Province only. There is also a need for better understanding o f thenon-income dimensions o f poverty, particularly in areas o f education, health, nutrition, and labormarket trends including employment and real wages.

8. While diagnostic work with the latest HIES is awaited, some of the concerns onpoverty and inequality highlighted from previous survey rounds continue to be valid. In2006-07 even after broad-based improvements, poverty incidence in estates and the provinces o fUva and Sabaragamuwa was high and much above the national average, and interpersonalinequality, although stable since 2002, was still high compared to other South Asian countries.Given these disparities, MC's emphasis on equitable growth with particular focus on laggingregions continues to be relevant.

- L - III. Macroeconomic Framework and Financial Management

9. The MC envisages an ambitious increase in growth, a rapid reduction in inflation,and a sustained decline in the government's debt burden. According to the government'supdated macroeconomic framework (MF), real GDP growth is projectedto rise from its historicallong-term average o f around 5 percent a year to 8-8% percent from 2010 onwards, while inflationis projected to fall sharply from over 20 percent in the first quarter o f 2008 to the single-digtrange from 2009 onwards.' Private domestic investment would rise steadily from around 18percent of GDP in2007 to 24% percent o f GDP by 2011, while public investment would rise to 8-8% percent o f GDP during 2008-11, before reverting to its earlier level o f 7 percent o f GDP by2012. The overall fiscal deficit i s targeted to narrow from 7.7 percent o f GDP in2007 to around 5percent o f GDP in 2010-11. This fiscal adjustment, together with sustained rapid GDP growth, isprojectedto help reduce the stock of government debt from around 86 percent o f GDP in 2007 to77 percent o f GDP in2010.

10. In the staffs' view, the MC's growth and other macroeconomic targets are unlikelyto be achieved on current policy trends, calling for a substantial change in the direction offiscal, monetary, and external sector policies. The MC and accompanying governmentdocuments would have benefited from an elaboration on how the needed policy adjustments areto be made. A cornerstone o f the MC's growth strategy is a sustained surge in privateinvestment, which hinges on the implementation o f more prudent macroeconomic policies to reinininflation, along with structural reforms to create an investor-fiiendly market environment. Onthe financing side, the pickup in private investment presupposes a sustained increase in privatesavings, coupledwith fiscal consolidation and enhanced government access to internationalcreditmarkets to ensure that credit to the private sector can be crowded in.The MC could have includedsome discussion o f the challenges that will need to be overcome to achieve these objectives.These challenges are likely to have been heightened by the adverse recent developments on theinflation front (year-on-year inflation reached 25 percent in April 2008), a fiscal performanceduring2007 that didnot live up to the expectations inthe Fiscal Management Report-2008, anda deterioration in the external outlook based on developments during the first four months of2008.

11. To ensure that the MC's targets are feasible, the authorities would need to adopt acoherent macroeconomic policy package aimed at curbing inflation and protecting externalsustainability. As is recognized inthe Fiscal Management Report-2008, inflation has risen dueto the combined effects o f demand pressures triggered by expansionary monetary and fiscalpolicies, together with rising world fuel and commodity prices and surging food prices. TheCentral Bank's latest monetary program presented in its Road Map: Monetary and FinancialSector Policiesfor 2008 and Beyond aims to contain inflation to 10-11percent by end 2008 byrestraining reserve money growth to 15 percent. Staffs agree with the Road M a p that thecontainment o f bank credit to government would be critical for the achievement o f the monetaryprogram's objectives. However, it i s the view o f staffs that lower money growth will not sufficeto meet this ambitious disinflation objective unless supported by measures to shore up SriLanka's fiscal and external positions. The RoadMap notes that, as a part o f the strategy to reducethe public sector's need to borrow from the domestic banking system, the government i s talungsteps to increase recourse to external commercial borrowing. These have included so far Sri

' Inthe MC, which was developed in late 2006, GDP growth was projected to reach 8 percent in 2008,while inflationwas to remain inthe single digits from 2007 onwards, i.e. 2 years earlier than inthe updatedMF.The latest version of the MFis contained inthe Central Bank's recently-publishedAnnual Report for2007, andhas beensubmitted to the Bank and Fundas an addendum to the documentation for this JSAN.

- 3 -Lanka's maiden US$500 million international bond issue, the gradual opening o f the domesticbond market for foreign investors, a US$300 million syndicated loan, and the tapping o f aUS$700 million short-term suppliers' credit for oil imports. However, the increase in externalcommercial borrowing entails risks, which could have been usefully identified and furtheranalyzed inthe government documents.

12. The MC would have also benefited from an elaboration of the measuresthat are tobring about much-needed fiscal consolidation. Staffs agree that a large increase in therevenue-to-GDP ratio would be critical for the Government's fiscal consolidation effort.However, contrary to the projections included in the Fiscal Management Report-2008, therevenue outturn in 2007 (15.8 percent o f GDP) was disappointingly low, owing in part toreductions in customs tariffs and VAT on certain food and energy-related items. Additionalmeasures taken recently to cushion the impact o f rising oil prices (e.g., reduced VAT rate onpetrol) have undermined further the coherence and efficiency o f a VAT system that is already indire need o f refom, and raise questions about the feasibility o f the MF's revenue target of 18percent o f GDP for 2008. The public sector payroll and pension overruns in 2007, together withgrowing pressures for cost-of-living adjustments and oil and food subsidies, along with still highinterest rates on domestic debt, raise further questions as to the feasibility o f the MF'sexpenditure target for 2008. In these circumstances, the MF's objective o f reducing thegovernment deficit to 7 percent o f GDP in 2008 could be in jeopardy, unless the governmentsignificantly scales back the ambitious public investment plans that are at the core o f the MC'sgrowth strategy. While an easing o f the deficit target to mitigate the short-term impact o f the oiland food price shocks might be warranted in countries that have the requisite fiscal space, SriLanka's weak underlying fiscal and external positions and still strong excess demand pressuresunfortunately leave little room for such accommodation. These considerations point to the needfor urgent measures to curb expenditure growth and broaden the tax base, including by reviewingexisting tax incentives, concessions, and exemptions.

13. The RoadMap's principalassumptions on the external environment would appearto be sanguine. For example, limiting the current account deficit to around 4-4 ?hpercent o fGDP as envisaged in the MF may not be feasible if international oil prices remain at currentlevels. Equally importantly, the assumptions that the U S economy will grow at the same rate as in2007 and that Sri Lanka's exports would benefit from the buoyancy in advanced economiesappear to have been overtaken by recent events. The worsening security situation, and the recentdowngrading o f Sri Lanka by international credit rating agencies, would also seem to poseadditional risks for tourismreceipts, FDIand government access to international capital markets.As a result, it no longer seems warranted to expect that the balance o f payments will record ahealthy surplus in 2008. While reserves have been boosted during the past six months by thealready-mentioned increase in external commercial borrowing, continuation o f the recent pace o fnonconcessional inflows would make Sri Lanka even more vulnerable to changes in marketsentiment and would be unlikely to be sustainable over the medium term.

14. Sri Lanka's rising external vulnerability heightens the need to carefully monitortrends in external competitiveness and export performance. The MC and Road Mapappropriately reiterate Sri Lanka's commitment to a floating exchange rate regime. However, awidening inflation differential between Sri Lanka and its tradingpartners, together with the recentstrengthening o f the rupee vis-&vis the currencies o f key trading partners, has according to datafrom the Central Bank o f Sri Lanka resulted in the REER appreciating by more than 20 percentsince 2004. With the apparel industry, which i s one o f the country's main foreign exchangeearners, facing stiffening competition in the U.S. market in the context o f the post-quotaenvironment, and with the EU about to review Sri Lanka's GSP+ preferences, every effort needs

- 4 -to be made to protect the profitability and competitiveness of export-oriented activities. To theextent that capital inflows are dominated by one-off or short term external borrowing, which i sunlikely to be sustainable over the medium term, it would seem prudent to add such inflows toofficial reserves while allowing the exchange rate to clear the market for foreign exchange forcurrent international transactions. This could also enhance the contribution o f exports to SriLanka's growth-which, unlike in other high-growth countries in South-East Asia, has been ledprimarily by domestic demand inrecent years.

15. The MC and the Fiscal Management Report-2008 note the government's ongoingefforts to strengthen public financial management. However, a concrete action plan is neededto establish a cost-effective public expenditure management system, with public expendituresbeing programmedwithin a medium-term and structural budget framework to improve efficiencyand productivity. In this context, there is a need to clarify what trade-offs the Governmentintends to make in terms o f its major infrastructure projects should the external financingavailable for these projects fall short o f expectations. Inany case, even ifthese projects are to beklly-funded from foreign sources, their costs need to be properly reflected inthe reported fiscaldeficit, and factored in into the MF and debt sustainability analysis, as they would add to thestock o f foreign debt. Similarly, to facilitate an assessment o f the guarantees and contractualobligations related to public private partnerships (PPPs), staffs recommend that relevant detailsshould be included as part o f the budget documentation and made fully public, and an appropriateframework established to manage the associated fiscal risks.

Iv. TheStrategic Pillars of Mahinda Chintana

A. Accelerate growth through increasedinvestment ininfrastructure16. Staffs concur with the importance attached to increasing investment ininfrastructure for achieving the high growth envisaged in MC. Analyses o f the spatialdistribution o f growth and poverty have suggested that infrastructure improvements, includinglinkages to markets and access to electricity, are critical for enhancing growth opportunities inthelaggingregions and sectors o f the country. Within infrastructure, MC's focus on transport, roads,power and irrigation i s consistent with the needs o f lagging regions and sectors.

17. The overall strategy identifiedfor the transport sector is generally sound but maybe overly optimistic in terms of availability of resources for investment in all the areasidentified. Going forward, the implementation o f the strategy would benefit from bettercoordination among individual strategies for road, bus, rail and ports sectors. Severalopportunities for the involvement o f the private sector have been identified, but progress in thisdirection since the strategy was put inplace has been limited.

18. Staffs concur with the focus on the road sector, given that diagnostic work hasidentified inadequate linkages to markets to be a key constraint in lagging regions. Theoverall road sector strategy is coherent and relevant. The strategy for national roads has beenfurther refined through the Road Sector Master Plan (RSMPbprepared with support from theAsian Development Bank-which defines the most efficient core roadnetwork, and identifies themedium-term needs for road sector investments, which include construction o f new roads, andimprovements rehabilitation and maintenance o f existing roads. The RSMP i s expected to beapproved by the Cabinet o f Ministers shortly. Moving forward, implementation o f the strategywill benefit from achieving: (a) greater clarity on the agencies responsible for resource planningin provincial and rural roads; (b) greater clarity on the use and legal framework of the roadmaintenance trust fund; and (c) better alignment of amendments undertaken to statutes to the

- 5 -overall strategy. While the strategy adequately identifies some o f the operational challenges,these would need to be integratedbetter inthe investment plan going forward.

19. MC includes a well-articulated power and energy strategy, which recognizes theneed for better access to electricity, tariff rationalization, energy security, energy efficiency,reforms and regulatory developments, and long term generation expansion plan inidentifying investments. Ingoing forward with the strategy, a number o f key issues would needto be clarified: (a) the quantum, timing and prioritization o f the investments required; (b) how theidentifiedreform o f the power sector will improve efficiency o f the Ceylon Electricity Board; (c)timely implementation o f power generation projects and the environmental sustainability o f coalbased generation; (d) role o f the regulator inthe reformed market structure; (e) future o f off-gridsubsidies; and (f) properjustification for the projected average cost o fpower.

20. Staffs agree with MC's vision to embody the principles of environmentallysustainable development in responding to development challenges. To this end, Sri Lankaalready has a reasonably good policy and legislative framework for environmental management,but actual steps taken to implement policies have been traditionally weak. Improvements inenvironmental management have been inadequate in the past due to the lack of: (i) institutionalclarity with a multitude o f agencies with overlapping mandates; (ii) political will, incentives andcommitment to deal with complex issues; and (iii)public accountability. Environmentalsustainability i s often not integrated into the decision-making process for large scaleinfrastructure projects. Inthis context, the focus o f MC on infrastructure development can implysignificant environmental risks for the power, road, transport and irrigation sectors.

21. Some encouraging steps in environmental governance have been taken by theMinistry of Environment and Natural Resources since last year. A few highprofile projectsthat were initiated prior to approval o f Environmental Impact Assessments have been stoppeduntil these are completed and approvals granted by the Central Environmental Authority. Anumber o f steps taken by the Government suggest a serious attempt to address environmentalissues in the urban and industrial sectors. However, the attention paid to management o f naturalresources and conservation o f biodiversity i s still weak, with little budgetary support - the 2005Environmental Sustainability Index for Sri Lanka shows the needto strengthen these areas.

B. Equitable development through accelerated rural development22. Staffs welcome the government's emphasis on grassroots driven rural developmentthrough a national community based program (Gama Neguma). This program i s envisionedto bring together all poverty alleviation programs at the village level, aligning investments -primarily in infrastructure and livelihood development - with community needs and coordinatingacross programs administered by different line ministries. The community-based model reflectslessons learned from the World Bank-supported Gemi Diriya project in a number o f villages andenvisions extending this model in a phased manner, incorporating inter-village coordination andplanning to improve prioritization across projects and generate benefits from externalities acrossvillages.

23. Staffs consider the program's focus on people's participation in planning andprioritization of projects to be appropriate for reducing inefficiencies. While the programdesign and institutional arrangement are still evolving, the progress achieved since thepreparation o f MC can be seen as positive steps. For example, from 2008, prioritization acrossvillages and projects will occur through formally constituted people's organizations. However,there are significant challenges to the implementation o f Gama Neguma, especially given itsaccelerated timeline for implementation. In this context, the government's recent plans to

- 6 -undertake pilot initiatives to test out the implementation mechanism o f the program areencouraging.

24. MC rightly emphasizes the role of agriculture in acceleratingrural growth. Staffsagree with the strategic priorities identified for the sector -namely achieving food security andraising incomes o f small farmers -to be achieved through increased competitiveness by applyingmodem technology, improving practices and shiftingincreasingly to commercial agriculture. Theemphasis on diversification to higher value products ( h i t s , vegetables, livestock, fisheries) forthe domestic and export markets i s welcome, and their labor intensive nature o f production willaid employment generation inrural areas.

25. The strong role of the public sector in implementing the strategy includes someareas where the private sector could potentially be more efficient. Examples are: (1)production o f certified seed, where the role o f the public sector could be limited to creating anappropriate certification system and reforming the seed policy that currently serves as a barrier tothe entry o f improved varieties; (ii)achieving optimal land use by crops through market forces,rather than set targets for areas to be planted by specific crops by 2016; (iii) reducing thedominant role o f the public sector in determining land use. Given the reintroduction o fsignificantpublic sector interventions inthe paddy sector and the role envisaged for the Sri LankaAgncultural Products Marketing Authority, careful attention i s merited to ensure that these do notresult insignificant price and market distortions and fiscal costs.

26. To induce sustainable increase in productivity and incomes, MC suggests measuresto improve farmers' links to markets. While staffs concur with these supply-focused policies,more attention to the demand side would be merited, for example expansion o f programs that aimat rural livelihoods development to foster village institutions and farmers organizations that cangenerate the required scale to reduce transaction costs, facilitate better access to markets andinteraction with private players. Improving the effectiveness o f agricultural research andextension will require institutional reforms to strengthen incentives, in addition to the additionalfunds envisagedinMC.

27. M C establishes a broad set of objectivesfor the sustainable use of land, but morespecificityis needed on actions. Staffs concur with the broad objectives -strengthening o f landtenure, more efficient land use and allocation, reducing inequality and promoting social equity inland ownership. MC's call for establishing and strengthening a land titling system can promotemore efficient land allocation and use. The establishment o f a Land Information System toimprove the information base on public lands i s a positive step towards transparency and acoherent land development program. To strengthen land tenure, more specific actions would beneeded- particularly for Land Development Ordinance (LDO) land where restrictions ontransactions constrain the efficient use o f land.

28. MC rightly recognizes irrigation as a key contributor to agricultural growth andfocuses on supporting modern irrigation techniques and improving water resourcemanagement. The attention to joint public sector and farmer management o f major irrigationschemes and funding o f operations and maintenance (O&M) i s well-justified. The strategy wouldhowever benefit from better integration with the National Water Policy that is intendedto providethe framework for sustainable water resource management. There i s also inadequate focus onsome critical sectoral policy issues, and the proposals appear to be overly ambitious in terms o fresource availability and capacity challenges. While the challenges posed by the multiplicity o finstitutions are achowledged, more specific steps would be needed on how to coordinate betteror implement initiatives likejoint funding o f O&M by the public sector and farmers.

- 7 -C. Strengthening public service delivery, particularly in health and education29. Staffs find the heath sector strategy to be an accurate representation of theachievements and challenges in the health sector. These include extremely highoccupancy o fsome o f the large hospitals juxtaposed against low occupancy at more peripheral districthospitals; (ii)the absence o f a results-based managerial approach; (iii)the unfinisheddecentralization agenda; and (iv) the lack o f a strategy to enhance standards of private providersand develop the stewardship role for the government. In going forward, there is a need forgreater prioritization and strategic focus. The final list o f "strategies by time horizon" readsmore like a plan for development o f the public delivery system rather than the reforms necessaryto address the problems outlined. The strategy would benefit from further work to develop amore concrete reform strategy that prioritizes the areas for reform, provides a framework forredefining the role o f public and private sectors in health care provision and developsmechanisms for effective regulation.

30. With regard to the education sector, the policy framework in MC appears toadequately represent the challenges facing the country, particularly in enhancing thequality of education. The strategy for basic and secondary education closely follows theEducation Sector Development Framework and Program (ESDFP) o f the Ministry o f Education(MOE). Trachng the progress o f implementation would be better-served by aligning theindicators for progress to the goals o f the strategy. The acknowledgement o f the need for privatesector participation in higher education i s a positive first step. However, the higher educationsection lacks specificity on areas such as research and development, staff training andrecruitment, and the governance o f higher education, including the roles and responsibilities o fthe Ministry o f Higher Education and the University Grants Commission (UGC). Staffs areencouragedby the efforts o f the Ministry o f Higher Education to address these weaknesses inthelong-term higher education strategy currently being developed and look forward to its completionand implementation.

31. Staffs welcome MC's vision of creating a productive, efficient, transparent andaccountable public service to improve the quality of provision of services. This involvesrecognizing the role o f the state as one o f providing a facilitating environment for private sectorgrowth and investments -by setting national policies to provide overall direction and theregulatory framework, improving access to public infrastructure and minimizing disparities ineconomic opportunities. The central administration i s envisaged to shift its current exclusivefocus on providing public services to one focused more on setting national policies and priorities-a direction the staffs concur with.

32. However, MC does not spell out which measures and in which sequence theGovernment intends to apply to achieve these objectives. A strong civil service has stood thecountry in good stead for much o f the post independence period. But there are signs o fdeterioration inquality and efficiency o fthe civil service, partly as a result o f continued growth inthe public service, and possibly also as a result o f increased politicization o f hiring o f publicservants. Going forward, serious efforts would be needed to contain growth inthe public payroll.In addition, the current low compression ratio of public wages is likely hampering theGovernment's ability to retain the most qualified staff. Finally, resolving the impasse regardingthe constitutional council established under the 17th amendment o f the Constitution to empowerinter alia the Public Service Commission would also be important for the long-term strengtheningo f the public sector.

- 8 -33. Inaddition to the sectors related to the strategic pillars discussed above, staffs considertwo o f the areas that MC focuses on to be critically important to realize its vision o f significantlyhigher and more equitable growth. These are: (i) improving investment climate and efficiency o fstate owned enterprises (SOEs), which are essential for accelerating growth; and (ii) developmentin conflict-affected areas -necessary for reducing poverty and regional disparity and requiringspecial attention due to the unique nature o f challenges they present.

D. Improvinginvestmentclimateand efficiencyof SOEsto supportacceleratedgrowth34. Achieving the ambitious investment and growth targets specified in M C wouldrequire an investment climate that attracts private investment, raises productivity andimproves internationalcompetitiveness. MC intends to provide an enabling environment forthe private sector, for example by improving infrastructure facilities, enhancing slulls andtechnology development, providing better financial instruments, encouraging public-privatepartnerships and creating a better regulatory framework. Priority areas include export promotion,attracting foreign direct investments and promoting SMEs and microenterprises. Staffs concurwith the recognition in MC that government should play a facilitator's role in industrialdevelopment rather than being directly involved in investments. However, a number o f issuesimportant for improving investment climate, including potential areas for structural reform likelabor and land markets have received inadequate attention in MC. Going forward, staffs alsorecommend prioritization among a large number o f proposed activities and identification ofagencies responsible for specific actions, which would be critical for implementation.

35. Staffs find that MC couldhave beenmore explicit about the government's plans forfinancial sector improvements. Important legislative and regulatory reforms have taken placein recent years, banking and insurance supervision and central banlung operations have beenstrengthened, and market infrastructure has improved. However, reforms of the pension andprovident hnds have not been addressed, and only limited progress has been achieved in therestructuring o f the two state commercial banks. In spite o f some improvement following thegovernment's restructuring efforts, high cost-income ratios, dnven by staff and pension costs,continue to affect their performance. Addressing the capital deficiency in state banks should be akey policy priority.

36. MC recognizesthe need to undertake strategic reforms in state owned enterprises(SOEs) to make them more efficient and commercially viable. Staffs concur with the keyelements of SOE reforms espoused in MC: (a) pricing reforms geared towards cost recovery; (b)regulatory reforms with the onus on independent regulatory mechanisms; and (c) structuralreforms for unbundling the monopolies into separate units. However, many o f the reformmeasures pertaining to key institutions lack sufficient detail necessary for them to be translatedinto action.

37. The two years since MC have seen some progress on the SOE reform agenda, butmuch remains to be done. Inspite o f political difficulties, the government has moved aheadwith pricing reforms hoping to gradually phase out budgetary transfers to SOEs. Inthe last 15months, tariff adjustments have been undertaken in key public utilities like transport andelectricity. Independent regulatory oversight over public enterprises has been strengthened, suchas the Public Utilities Commission o f Sri Lanka over CEB and the National TransportCommission over bus fares. Notwithstanding the progress, more substantive reform measureswould be needed to improve the financial viability and efficiency o f SOEs. The Government hasexplicitly ruled out privatization o f SOEs (including state-owned banks). Staffs are o f the viewthat irrespective o f the stance on privatization, SOE reforms would need to focus on difficult

- 9 -issues like excess staff, low productivity and duplications in service delivery inorder to achieve asignificant impact on public expenditures. Staffs also note that the recent creation o f a publicsector budget airline and an import agency to hold down consumer prices of "essential" goodsseem to go against MC's stated intention o f limiting the government's direct engagement incommercial activities.

E. Development inconflict affected areas38. MC provides an informative overview of the pre-conflict economic situation in theNorth and East and the impact of the conflict in terms of displacement, human losses andpoverty. Staffs find that MC appropriately focuses on both short and long term priorities inconflict-affected areas, with objectives that include: (i) rehabilitation and reintegration o f thosedisplaced or affected by the conflict; (ii)resuming service delivery, including throughinvestments in physical infrastructure; and (iii)establishing sound governance and servicedelivery arrangements. The strategy also rightly calls for targeting vulnerable groups, includingthe disabled, elderly, traumatized victims, and the economically deprived.

39. Staffs find the development objectives to be consistent with the known needs. But toachieve the stated goals, the programs would need to be aligned better to objectives. Forexample, capacity building for governance i s not a clear element o f any program even though"establishment o f sound governance administration" i s an explicit objective. While separate plansfor the North and the East (as it i s in MC) have their advantages, they have the disadvantage o fmissing certain needs relevant to both regions, such as youth unemployment in the North. MCalso appears to inadequately address some o f the issues that lie at the core o f poverty andisolation in the North and East. These include the underlying economic factors (land and labormarkets, investment climate) and the need to improve physical and social connectivity with therest o f the country for which roads and production chains are likely to be important. Finally,given that the conflict i s ongoing, staffs encourage the government to plan for a longer transitionperiod for realizingthe development objectives envisaged inMC for the North and East.

K Targets,Indicators andMonitoring

40. Being a strategy document, MC does not include a framework for monitoringprogress on outcome and output indicators. The staffs however recognize that the governmento f Sri Lanka has accorded high priority to monitoring, particularly in tracking progress towardsthe Millennium Development Goals (MDGs). Sri Lanka compares well with most developingcountries inthis area, with the Department o f Census and Statistics (DCS) compiling most o f theincome and non-income indicators o f welfare relevant for Sri Lanka from a variety o f sources -including regular household surveys, censuses and a special survey on MDGs. These indicatorsare also available inthe public website maintainedby DCS.

41. Staffs welcome the recent efforts made by DCS to significantly improve povertymonitoring instruments and techniques. For example, a national poverty line was establishedin2004, which allowed consistent measurement of the trend and pattern o f poverty. A recentlycompleted poverty map yelds estimates o f poverty rates for administrative units smaller thandistricts, which i s useful to identify poor areas and spatial factors associated with poverty. Theseimprovements have led to better links between poverty monitoring and policy, as evident fromthe government's reliance on poverty maps to identify areas to target the Gama Neguma programand initiate targeting reforms inthe national safety net program.

42. Staffs also note the improvementson the internal consistency and reliability of manyof the non-income MDGs indicators. DCS conducted a special survey for indicators that were

- 10 -previously constructed from databases o f other government agencies, whose statistical accuracyand reliability were suspect. Combining this with other household surveys, DCS was able toconstruct a comprehensive and reliable MDG database for 2006-07. DCS has also recentlypiloted a decentralized data entry system in some districts to improve the quality and timelinesso f HIES data, which would likely be extended to other districts and surveys. This along with anumber o f other initiatives to improve data quality and timeliness is planned in the near futureunder a World Bank supported statistical capacity buildingproject.

43. A critical challengethat remains is improving the geographic coverage of householdsurveys in conflict-affected areas. After nearly two decades when the security situation in theNorth and East prevented the HIES from covering these areas, the latest HIES was successful incovering two (out o f three) districts in the Eastern Province. Statistics from the NorthernProvince remain unavailable. The coverage o f MDG indicators from a single multipurposehousehold survey i s also limited, which makes it difficult to examine interlinkages between MDGindicators. The use o f a special survey to measure non-income MDG indicators raises thequestion o f sustainability o f such efforts, given the needto track indicatorsover time.

44. Staffs recommend that the institutional arrangements for linking policy to themonitoring of programs and outcomes be strengthened. While DCS has the responsibility formonitoring outcome indicators, the Ministry o f Plan Implementation (MoPI) appears to have themandate o f monitoring some o f the MC programs like Gama Neguma. However, there i s a lacko f clarity on the institutional arrangements for providing feedback to policymakers from themonitoring o f programs and outcomes linked to the investments planned in MC. Furthermore,program monitoring i s relatively weak due to limited capacity within MoPI, and inadequatecoordinationbetween MoPI and line ministriesthat appear to monitor their own programs inmostcases. Going forward, improving the links between outcome monitoring by DCS andpolicymakers is an important goal o f the aforementioned statistical capacity buildingproject - aData Committee instituted by the DCS, with its members drawn from various ministries, i sexpected to improve such links. In addition, staffs are of the view that the institutionalarrangements for monitoring can be strengthened by: (i)identifying monitorable indicators andtargets in line with the priority public actions identified in MC; (ii)clearly assigning theinstitutional responsibility to coordinate monitoring of MC programs and outcomes to adepartment like MoPI, supported by requisite capacity and budget; and (iii) creating mechanismsthrough which feedback from monitoring flows to line ministries.

W. Conclusionand issuesfor discussion

45. MC provides a vision for development in Sri Lanka through broad-based growthinclusive of lagging regions and sectors. Staffs endorse the recognition in M C that the role ofthe state i s to provide a facilitating environment for private sector led growth and investment.Against this background staffs recommend that the Government carefully review whether theprivate sector would be a more efficient provider of some o f services that the MC envisages to beprovided by the public sector. In implementing the strategy, staffs recommend more specificityin policy actions aligned to the broad and comprehensive objectives laid out for sectors. Itappears that such specificity i s currently laclung especially for many areas where policy reformsrather than additional resources are likely needed to achieve the desired results. Furthermore,staffs recommend more prioritization among the wide-ranging programs listed in MC, given thelimited resources and implementation capacity within the government. Implementation will alsodepend on the government's ability to raise the resources needed to support the ambitious publicinvestment program, particularly ininfrastructure development.

- 11-46. The primary source of risk affecting the implementation of the strategy is theconflict. There are three main risks associated with the conflict. Firstly, continuing conflictwould make it extremely difficult to implement the development program for the North inparticular, and instead lead to further worsening o f poverty and deprivation in a part o f thecountry with already highvulnerability. Secondly, the fiscal impact o f continuation or escalationo f the conflict could reduce the availability o f resources to implement the investment programlaid out in MC. Thrdly, worsening security situation is likely to affect tourism, the businessclimate, confidence, and FDIflows, which would make it harder to achieve the private sector ledgrowthrates envisioned inMC.

47. Macroeconomic imbalances constitute the second significant source of risk. Themain macroeconomic imbalance is the persistently high fiscal deficit, which not only i s acontinued source o f macroeconomic instability but also crowds out private investments. Inaddition, ifthe rate o f inflation i s not soon reduced there i s a real risk of entrenchment o f inflationexpectations, which would make future redresses even more challenging and could seriouslyjeopardize Sri Lankan competitiveness.

48. A third source of risk comes from potential external shocks. Recent increases ininternational oil prices and food prices, the slowdown in the U S economy and the challengesfaced by Sri Lanka garment exports in both U S and European markets all contribute to the risksto Sri Lanka's balance o f payments. The security situation due to the conflict and the recentdowngrading o f Sri La& by international credit rating agencies add to the risks; andnonconcessionary external borrowing, ifit were to continue, would create additional vulnerabilityto market sentiments.

49. D o the Executive Directors agree with: (a) the broad directions o f Sri Lanka's PRS andstaffs' recommendations for implementation, which include addressing macroeconomicimbalances, developing more specific policy actions to match the broad objectives andprioritizing among programs given limited capacity and resources; (b) staffs' assessment o f risksinimplementation?

- 12 - F

IMAHINDA CHINTANA : VISION FOR A NEW SRI LANKA

Development Framework 2006 - 2016 A Ten Year Horizon

Discussion Paper

Departmentof National Planning Ministryof Financeand PlanningPrinted at the StatePrintingCorporation Panaluwa, Padukka. Contents

Page

ExecutiveSummary 1. TransformingAgricultureforProsperity ... ... 01 2. Development StrategyforIrrigation... ... ... 39 3. IndustrialDevelopment :Towardsdiversifiedhigh value addedIndustrybase ... ... 50 4. EconomicInfhtructure - Power&Energy ... ... 63 - Telecommunication ... ... 79 - Water Supply&Sanitation ... .I. 82 - Roads ... ... 87 - Transport ServicesSustainableMobility ... ... 92 - Port&Aviation ... ... 100 - Postal Sector ... ... 104 5. Tourism ... ... 107 6. UrbanDevelopment andHumanSettlements ... ... 114 7. LivelihoodDevelopment andSocialProtection ... e.. 124 8. Education ... ... 142 9. Health ... ... 155 10. Sports andCulture ... ... 169 11. Towards aFlexibleandGlobally EmployableWorkforce ... 175 12. Science&Technology ... ... 188 13. Environment ... ... 197 14. PublicAdministration Reforms ... ... 212 15. The Development intheConflictAffectedDistricts... ... 218 16. MacroEconomicFramework ... ... 225

... 111 MAHINDA CHINTANA:VISION FORANEWSRI LANU DIscussION PAPER-ON E ~ NFRAMEWORK D T 2006-2016

EXECUTIVESUMMARY "Mahinda Chintana" - VisionTowards aNew SriLankaaimedatraisingthe GDPgrowthrateinexcesso f 8per cent.Thenewapproachintegratesthepositiveattributes o f marketeconomic policieswiththedomestic aspirationsbyprovidingnecessarysupporttodomestic enterprisesandencouragingforeigninvestments. Theeconomic policiesduringthepasttwo andahalfdecadeshascontributed to a averageannualGDPgrowthrate o f around 5 per cent. However, the benefits o fgrowth hadnot filtered to manysegmentsofthepopulationandsufficient domestic entrepreneurship development didnottakeplace.Thenewdevelopment strategybuilds onthepositiveaspectso fthepastpolicieswhiletryingto addresstheir limitations, weaknesses andlapsestoimprovegrowthprospectswithequitable development inthecountry, withspecialemphasisontheneedso flaggingregions. Basedonthis strategy, alongtime developmentprogramme covering2006 to 2016hasbeenpreparedwithinthebroadpolicyframework o fMahindaChintana. Theformulationo ftheprogrammehasundergone anintensive consultativeprocessinvolvingsectoralMinistries andother relevant agen-cies. Theprogrammeunderlies atenyearmacro-economic framework withan8per centGDPgrowthtarget for next six years andahighertarget o f9-10per centthereafter. Withinthe macro economicparameterstheprogramme includesten-year policy frameworks for various sectors o fthe economycoveringsectorvisions, issueschallenges, and strategies. Duringthenexttenyears, SriLanka's populationisexpectedtoincreasefromthepresent(2005)levelo f 19.7millionto about 22million. Thelabourforcewillreachalevelo fabout 10.9million. Theunemployment ratehasalreadydeclinedto around 7percent present.There couldbesometighteningo fthelabourmarketconditions withthepossibleincreaseddemandfor labourwiththe ongoingexpan-sion o fthe world economy, agingpopulationinmanycountries includingSriLanka, andexpectedexpansiono fdomestic economy. However, we needto ensurethat gainmadeinemployment issus-tainedandthenewentrants tothe labour force, projectedtobearound2.8 millionduringthenext 10year, arewellpreparedto begainfully employedandtheir productivitylevelsraised. Another majorchallengeswillbeto eradicatingpoverty, affectingabout23 percento f the country's population SriLanka's economic growthinthepastthree decadeshadbeenmoderate andlaggedbehindthegrowthratesachievedbythe dynamic emergingeconomies inEastAsiaInaddition, therehasbeenaperpetuationo fincomedisparities,bothamongincomeearnersandgeographicregions. Itisclearthatinthe pastthe economic growthhas largely bypassedthe ruralareasandconcentratedinthe WesternProvince, which now contributes a 51percent to the national GDP (2004). Inthe case o fincomegroups, the disparity appearsto beevenwider. Therefore, SriLankaneeds aconsiderable catch-up ingrowthratenotonlyto secureits placeinthe regions asanewlyemergingeconomy, butalsoto ensurethatthe c0untry7seconomy iscapableo fprovidingbetterlivelihoodfor allcitizens, includingthosewhoareinabject poverty. Itisencouragingthatthe countryhasdisplayedconsiderableresilienceparticularlyafter theTsunamishockandtheeconomy hasenteredontoahighergrowthpath, registeringaGDPgrowthrateo f6.2 percent in2005. Thehighgrowthmomentum hascontinuedfurther in2006withanimpressiveachievement duringthe firsthalfo f2006. Theprogress madeneedsto be further consolidated. An

Vaccelerationofthegrowthasenvisagedintheten-year developmentprogramwillraise SriLanka's percapitaGNPtoRs.485,OOO (US $3,960) by2016 andelevate SriLanka's positionas aMiddleIncomecountry. As the inflationdifferences betweenSriLankaandresto fthe worldis expectedto narrowdownthe purchasingpowerparityincome also expected toreachabout U S $13,000 by2016. Suchasubstantialleapforwardwouldnotonlyrequirecarefulplanningandimplementationbutalso favourable external conditions. Theplanningwe nowrefer toi sto make aneconomy which islargely private sector driven, more dynamic and regionallyintegrated. The challenge causedbytherecentmassiveriseinworldoilpriceshashadadverseimpactonthe economy andthe countryneedstopreparefor anyfurther shocksinthis area. SriLankahas facedtherecent challengesreasonably wellmakingthenecessaryadjustmentsinpetroleumproductprices, facingtherealitiesintheworldmarketconditions. Thecounty alsohasmadeconsiderable progress inthepost-tsunami recoveryandrecon-structioneffortswhile the speedo frecovery o fsomepartsinthe countryhasbeenconstrainedbytheongoingconflict. Thegovernment's endeavourstoprovidethepossiblefastestrecoveryandcompletereconstructionarecontinuing. Withthe government's reaffirmedcommitmentto findinganegotiatedsettlement to the conflict, aprogress inthis effortwillbe awelcome developmentfor thebenefit o fconflict andtsunami affectedpeopleintheNorthandEastinadditiontothepositiveimpactitwillhaveontheoverallgrowthprocess. Currentgrowthmomentumo ftheworldeconomy hasbeenapositivefactor. The dynamisminthe EastAsiancountries wouldprovide newopportunities aswell as achal-lengeto strengthenour effortsto accelerateeconomic growth. Accelerating economic growthneedsasignificant upscaling o finvestmentandimprovingoverallproductivity level.Accordingly, InvestmendGDPRatioi sexpectedto increase to alevelo f32 to 38percentduringthe nextten years. TheNational Savings which are currently at a level o fabout 25percento fGDPisalsoexpectedto improveinparallelwithgrowingincomes. However, there willbeacontinuingInvestment-Savingsgaptobefinanced f!rom externalsources, inthe formofbothofficialandprivateforeigncapitalinflows. Reflectingtheincreasedutilizationo fforeignresourcesfor majorinfi-a-structureprojects, the current account deficit willbeinthe regiono f3.5 to 4.5 percento fGDPduringthenextthree years. Thisratioispredictedto declinethereafterto around3pero fGDP. Withthegrowthinexport earnings andhigher economic growththe externaldebt indicators are expected toimproveoverthe medium-term. Allthreemajorsectors-Agriculture, IndustryandServices areexpectedtogrow atratesfasterthanthose observedduringthelastfive-year period. Thetargetedaveragegrowthrateduring2006-2016 is4-5 percentinAgriculture, ForestryandFishing. IndustryinwhichincludeMining,Quanymg,Manufacturing, Construction, Electricity, GasandWater growthrateo f8-9 percentisexpectedwhiletheServicessector is projected to grow by 9-10 percent. Inallsectors,newgrowthareasareemerging. Intheagriculture,thenon-traditionalproductssuchash i t sandvegetables, poultry livestock, fisheries etc. areexpectedtomakeagreater contributiono foutput andincomegeneration. The supporttothis sectorwill continue. Inthis endeavour, newinstru-mentsforruralcommunity empowerment suchas"Bim Saviya", anacceleratedprogramto ensurelandownership willbemosteffective ingrowthpromotion, povertyreductionandsocialupliftment. Manufacturingandservicesindustries are also expectedto show greater dynamism. Themoredynamicindustries withinthesemajor sectorswillbeElectricity, Portservices, Transport, Telecommu-nicationservices, small andmediumscalebusinessesincludingpersonalservicesandmanynewmanu-facturingactivities, cateringtobothexternalanddomestic markets. The sectoralplanfor agnculture givesparticularemphasisonachievingfoodsecurity andraisingincomeso fsmallfarmers. The strategiesadoptedinclude, increasingcompetitiveness throughapplica-tiono fmodemtechnology, improvedculturalpractices andshiftingto commercial agriculture. Therole

vio fthe Government includes agriculturalresearchandextension, facilitatingthe supplyo fqualityseedandplantingmaterial,assistancetomarketingandcreditandprovidingproductionincentives intheformo fsubsidiesandtransfers. Randora- hf?astmcture Investment plan, envisageschannellingalargershareo finvestmenttodeveloping thebasicinfrastructureandother servicesintheruralareas-electricity supply,telecommu-nicationservices, supplyo fdrinkingandirrigationwater, accessroads, agriculturalstorage,healthandeducationfacilities. Thesectoralplanfor electricity aims atasubstantial expansionanddiversificationo fgenerationcapacitybyimplementingthe longdelayedcoalpowerandhydroprojects aswell as newfuelLNGbasedprojects, development o frenewableenergy sources, rationalisingthetariffstructure andincreas-ingaccesstoelectricitybyallconsumersparticularlycoveringtheremoteareas. Thenational,provincialandruralroadsimprovementprogramisalreadyunderway. RoadsintheremoteandruralareasaretobedevelopedunderMagaNegurna,various regionaldevelopmentprojectsandprovincialprogrammes.Problemsrelatedtoinadequateandunreliablesupplyo fwater for drinkingandindustrialpurposesandthe emerging environmentalproblemsrelatedto waste disposal, andwater andairpollutionare ac-cordedpriority. While thepublic sector playthe keyroleinthe development o fwater andsanitationsector, the communityparticipationinthe sectorisencouraged. Internationalcompetitivenesso fSriLanka's industryneedstobeimproved. The sectoralplanforindustrialdevelopmentisguidedbythevisiono fcreatingavibrantandinternationallycompetitiveindus-trial sector capable o fcreating alargenumbero femployment opportunities and supporting arapidexpansioninexportsearnings.Industrialpolicywillplaceemphasisonassistingthe smallandmediumindustrysector, microenterprisesandself-employment venturesasaparto fthesharedgrowthstrategy.Governmentinterventionswillfocusoncreatingasoundincentivestructure, includingincentives fornewinvestment,facilitatingtheaccesstotechnology andcredit, developing skills andentrepreneurship,main-tainingstandardsandperformingregulatory functionsamongothers.Amongthesupportivepoliciesare(a) further improvingthemacroeconomic environment, (b) upgradingthepublic servicedeliveryinclud-ingimprovingtheefficiency o fstateownedstrategic enterprises, (c) promotingtechnology and(d)facilitationofprivate investmentinnewindustrialzones. Tourism beinga sector whichhas avast potential for contribution to employment andforeignexchange earnings isexpectedto makemajor strides undertheplan.Thetarget for tourist arrivals in2015 is set at2million. Planshavebeenpreparedto caterto alargevolumeo fhighspendingtouristsincludingfiomtheemergingAsianmarkets.Therewillalsobegreateremphasisondeveloping domestictourism aswellas aM e rstrengtheningo ftheroleo fthe Government insettingstandards,providinginvestment incentivesandregulations inthis sector. Intheareaofsocialdevelopmenttheplancoversmanyareassuchaseducation,health, livelihooddevelopment andsocial protection, disaster management, water supply, anddevelopmentinlaggingregions bytheprioritiesindicatedintheMahindaChintana.Hereagain, the existenceo flargeregionaldifferences insocialindicatorshasnecessitatedthepreparationofanumber o fregion-specific strategiesincludingthose for theNorthandEast andthe Plantationworkers. This approach will give a furtherimpetusto SriLanka's satisfactoryperformancesofar inmovingtowardstheMillenniumDevelopmentGoals (MDG). Asignificant enhancemento ffuturegrowthpotentialinSriLankaalsodependsonthesuccessfulharassing ofthebenefitsfiomglobalintegration. Ourendeavoursinthisregard, includingthroughtheStrengthening o four bilateralandregionaltrade andinvestment relationships, willbecontinued. SriLanka's foreignmissionsabroadwillplayamoreeffectiveroleinthepromotiono ftravel andinvestmentrelationships inco-ordinationwiththerelevantministries andagencies.

vii The subsequentsections o fthis documentpresentthepolicyframeworks forthedevelopment o fvarious sectors, andgeographical regions. The lastsectionpresentsthebroadmacroeconomic frame-work andperspectives for the nexttenyears. The detailedprojections underlyingthe broadmacroeconomic indictorspresentedthere inarebasedontheviewthat SriLankawillsteadily strengthenitsposition as anewly emergingeconomythroughthe acceleration ofbroadbasedgrowthcovering allregionsandsegmentsofthe society, exploitationo fnewareaso fgrowthinAgriculture, Industry, Con-struction andServiceswithincreaseddomesticvalue addition, andprovidingnecessaryincentives andsupportwithinaconsistentpolicyframeworktopromotelocalentrepreneurial skillsand initiatives. Theimplementation o fthe developmentprogramasindicatedinthevarious sectorchaptersinthisdocument isexpectedto improvethe structureo fthe SriLankaeconomy, ensuring sustainablebroadbasedgrowthintheprovinces andanimprovement o fthelivingstandardsinlinewiththe "MahindaChintana" Goals.(MCGs)

viii GROWTHRATESOFGDPBYINDUSTRIALORIGINAT CONSTANT(1998)PRODUCERS'PRICES Percentage 2005 2006 2007 2008 2009 2010 2016Major DivisionAgriculture, Livestock, Forestry 1.2 7.7 4.5 4.8 4.9 5.0 5.0 and FishingI.Agriculture,LivestockandForestry 6.5 4.8 4.2 4.8 4.9 4.9 4.9 1.1. Tea 2.2 2.1 2.2 2.1 2.0 1.8 1.1 1.2. Rubber 10.2 8.0 4.5 4.5 4.4 4.4 4.0 1.3. Coconut 0.9 10.2 3.0 2.9 2.7 2.7 2.2 1.4. Minor Agricultural export crops 16.3 4.0 4.2 4.3 4.5 4.5 5.2 1.5. Paddy 23.4 2.5 3.2 3.6 3.8 3.8 4.4 1.6. Livestock 2.3 7.0 7.0 7.5 7.5 7.6 9.5 1.7. Other food crops 4.7 5.6 5.7 6.8 6.9 6.7 6.0 1.7.1. Highland crops 5.2 7.0 7.0 7.5 7.5 7.4 7.1 1.7.2. Vegetables 4.4 4.8 5.0 6.5 6.5 6.2 5.3 1.7.3. Fruits 3.9 4.5 5.0 5.5 6.5 7.0 7.8 1.8. Tobacco 40.1 1.1 1.1 1.o 1.o 0.8 0.5 1.9. Plantationdevelopment -0.3 4.0 4.1 4.4 4.5 4.6 4.8 1.10. Other Agricultural products 3.4 3.7 4.2 4.7 4.8 5.1 5.5 1.11. Forestry 7.0 1.9 2.2 2.8 3.2 3.8 2.52. Fishing 40.7 55.9 7.2 5.1 5.7 6.4 6.0 2.1. InlandFishing -1.0 5.0 5.3 5.5 5.7 5.7 6.0 2.2. MarineFishing 45.2 68.7 7.5 5.0 5.7 6.5 6.0Industry 7.9 7.5 7.9 8.4 8.6 8.6 10.53. Mining and Quarrying 17.8 12.3 9.9 10.1 10.4 10.8 14.0 3.1. Precious stones and mining 36.3 16.3 7.7 7.8 6.2 6.2 6.3 3.2. Other Minerals 11.9 10.7 10.8 11.0 12.0 12.5 15.84. Manufacturing 6.1 5.9 6.4 6.9 6.9 6.9 8.5 4.1. Processingof plantationandagriculture 0.8 6.1 6.5 7.3 7.1 7.1 7.5 4.2. Factory industry 6.4 6.0 6.5 6.9 6.9 6.9 8.6 4.2.1. Food Beverages & Tobacco 13.5 6.2 6.3 6.7 6.7 6.7 8.0 4.2.2. Textile,Wearingappral& leather 1.7 5.5 5.5 5.7 5.7 5.7 6.8 4.2.3. Chemicals,Petroleum,Coal, Rubber& Plastic 3.9 8.1 10.0 10.0 10.1 10.2 12.5 4.2.4. Non-Metalic Mineral product! exceptproductsof Petroleum & Coal 0.8 7.7 8.4 9.2 9.3 9.3 12.0 4.2.5. FabricatedMetal Machinery8 equipment -1.4 3.6 5.5 5.6 5.7 5.7 8.5 4.2.6. Other Industries ,13.5 3.7 5.0 6.5 6.5 6.0 6.5 4.3. Small Industries 5.8 4.0 5.0 6.7 6.7 6.0 7.85. Electricity, gas and water 13.9 9.8 10.1 11.7 11.9 10.7 13.6 5.1. Electricity 15.7 10.3 10.5 12.2 12.3 11.0 14.0 5.2. Water 4.3 4.4 5.2 5.4 5.8 6.0 8.0 5.3. Gas -0.1 7.0 7.5 8.0 9.0 8.0 10.06. Construction 9.0 9.8 10.5 10.5 11.0 11.3 12.1 6.1. Housing 8.8 10.0 10.8 11.2 11.4 11.8 12.8 6.2. Other Buildings 9.6 10.0 10.5 11.0 11.0 11.5 12.5 6.3. Roads and Bridges 9.4 9.8 10.5 9.9 10.8 11.3 11.7 6.4. Water supply,drainage and Irrigation 8.3 9.5 9.8 9.7 10.6 10.0 10.9 6.5. Other Construction 9.0 9.0 10.2 9.0 10.5 10.1 10.6Services 6.7 7.3 8.0 8.5 9.0 9.2 11.57. Wholesale and retail trade 6.5 7.5 8.5 8.8 8.9 9.2 9.9 7.1. Importtrade 4.2 7.7 9.3 9.3 9.4 9.5 10.5 7.2. Export trade 6.8 7.6 9.0 9.0 9.2 9.5 10.4 7.3. Domestictrade 8.3 7.4 7.5 8.4 8.4 8.8 9.08. Hotels and restaurants -0.1 7.1 9.5 10.0 11.0 11.0 13.59. Transport and communication 9.7 7.6 7.8 8.0 8.5 8.8 11.6 9.1. Transport 6.6 7.0 7.0 7.0 7.0 7.2 7.6 9.1.I. Railway- Passenger & Good -3.8 4.5 6.0 7.5 7.5 7.6 8.0 9.1.3. Other passenger & Goods 6.7 7.0 7.0 7.0 7.0 7.2 7.6 9.2. Cargo Storage & Warehousing 25.2 9.7 11.2 11.5 12.0 12.0 14.5 9.3. Post and telecommunication 73.5 14.0 15.0 16.0 20.0 20.0 25.0I O . Banking, insurance and real estate 8.7 8.3 9.4 10.6 11.6 11.6 13.4 10.1. Banking, insurance and real 7.0 7.5 8.5 9.5 10.4 10.2 12.0 estateexcludingInformationTechnology 10.2. Information Technolgy (+BPO) 27.0 20.0 22.0 24.0 25.0 25.0 20.011.Ownership of dwellings 1.5 2.0 2.1 2.2 2.2 2.2 4.012.Government services 5.4 5.5 5.8 6.0 6.5 6.5 7.013.Private services 4.3 12.2 12.6 13.2 15.0 16.3 23.0Gross Domestic Product 6.2 7.4 7.5 8.0 8.3 8.5 10.6Source : Census and Statistics Department

ix 1.TransformingAgriculturefor EconomicProsperityandPovertyReduction1.1Introduction Asinmanyothercountries,thedevelopment o ftheindustrialandservice sectorsinSriLankahasbeenaccompaniedbyareductioninthecontributiono fagriculture to GrossDomesticProduct(GDP).Thecontributionofthe agriculturesectorto GDP fiom 1995to 2005 was around 18.6percent, whichindicates a 15percent decline overtheperiod1985to 1995; infactthere hasbeenacontinuous declineinthelate 1970s.ThecontributionfiomagriculturesectortoGDPatpresent standsat 17.2percent.The contribution fromthe agriculture sectorto employment hasalso decreasedfiom 36.8 percentin1995to 30.7 percentin2005.

Eventhoughthecontributionfkom agriculture sectorto GDPhashalvedinthelasttwo decades,agriculturestillplaysavitalroleinSriLanka's economic development.This sectorwasthethirdhighestcontributor duringthe lastdecadeandthesecondhighest contributor to employment, andwas at30.7percentin2005.Itisthemainsourceo flivelihoodo ftheruralpopulation, whichaccountsfor 70percentofthetotalpopulation. Therefore, theagriculture sectorwillremainasthe largestinabsoluteterms, andmustbestrengthenedto attainhighergrowthratesandtoplayadynamicroleinthe overall economicdevelopment o fthe country.

The averagegrowthofthe agriculture sectorduringthe lastfouryearswas 1.2percent comparedwith5percentinindustryand7percentinservices.Eventhoughitsrelativepositioninthe economyhasbeendecliningwiththe growtho findustries andservices, becauseo fits strong linkageswith othersectors, agriculture continuoustobethemainelemento fSriLanka's economy.Therefore,theagriculturesectorisasignificant determinant ofnational andprovincialGDP.

The ten-yeardevelopment programme envisagesthatthe agriculture sectorwillto grow atafasterrateo f4-5 percentwithahighercontributioncomingfiomthenon-plantation sector, suchasother foodcrops (non paddy), h i t sandvegetables,fisheries andlivestock.Commercialorientation o fthe smallandmediumscaleoperationsinthesesectorsisexpectedtoimprovewithcontinuedsupportandfacilitiestothis sector, includingimproved accessto bankcredit.

The agriculturesectorwill grow inabsoluteterms generatingincome intherural sectortherebypartlycontributingtoruralpovertyreduction. Concomitantlyemployment opportunities inthenon-agriculture sectorsnamelyindustryandserviceswillgrow fasterthanthe agriculture sector, whichwillresultinthe fallingo fthe shareo fagricultureemployment to about 20percent fiomthecurrent 30percent o fthe labourforce. Thegrowthopportunitiesinthenon-agriculture sector, which couldabsorbsomeofthefieedfarmlabour, willcontribute toruralpovertyreduction. Theagriculturesectorwillbemademoreefficient to increasethereturnto labour,whichwill alsocontribute toreducingruralpoverty.Thepro-poor andpro-growthincomeimprovement andredistributionpolicieswithcomplementaryparticipation o fasocially responsibleprivatesector and strongpublic sector arethe focuses o ftheeconomicdevelopmentprocess.Theinvestmentplanfortheagriculturesectorwillincludetheseobjectives.

Paddydominatesnon-plantation agriculture. Itcoversaround938,000 hectaresorapproximately47percentofthetotalareaunderagriculture. Itemploys abouthalfo fthetotal agriculture labourforce.The domesticricerequirement, whichisnowbeingmetfiom localproduction, hasbeenincreasedto 98percentin2005 fiom 89percent in2004.

1 Tea, rubberandcoconutarethemajorplantationcrops andthis sector accountsfor 4.9 percento fGDP, 15.7percent o fexportearnings, andemploys 18percent o fthe labour force andcontributes27percenttoagriculturalGDP.Teacovers 190,177 hectares, withsmallholdersaccountingfor about49 percento fthetotal areaand65 percento fthenationalproduction. Rubbercovers 116,47 1hectaresand43percentofthisisownedbysmallholders. TheRubberindustryhasrecordedatotalproductiono f104,352 mtin2005 withproductivity o f 1171kgha. Over2000personsareemployedintherubberindustryandover30,000 areemployedintherubber-basedindustries. About 70percento fthetotalrubberproductionislocally consumedbythevalue addingindustries. Coconutcovers around 390,000hectareso fwhich80percentisholdingso flessthan8hectareseach.

Pepper, cinnamon, cardamom, clovesand nutmegand mace, essential oils andbeveragecrops suchas coffeeandcocoaalsomakeasignificant contributionto exports. Over50percent oftheproductionofthese crops i s exported. These crops play animportant roleinaneconomy inearningforeign exchange. Thetotal landareaunder these export crops hasbeengrowing fast andby2009wouldreach90,332 ha.

The fisheries sector i s an important component o fthe economy and employs over 150,000fishmen, withafurther 100,000 engagedinfishery relatedactivities suchasfishprocessing,marketing,boatbuilding,netmanufacturing etc. Itsestimatedcontribution to GDPi saround 3 percent, upfromaround2percentin1988.About 65-70percento fthe animalproteinintake consumedbythepopulationis supplied byfishproducts.

Thelivestocksectoraccountsfor about 1.2percentofthetotal GDPand5.6 percento fagricultureshareinGDP.The roleo flivestock inthe agriculture sector inSriLankaismultifaceted. In2005,20percent o fthetotalmilkrequirement o fthe countrywas suppliedbythe locallivestock industry.Ithasbeenplannedto increasethis contributionto 30percent in2010andto 50percent in2015.

The forestry sector plays animportant role incontributingto various other sectors suchas theagriculture, industries, energy, tourism, andhouseholdsectors. Ithelpsto conserve soil andwaterresources for agriculture, to supplybio energy, andto enhancehydropower generation capacities byconservingcatchmentsareas.This sectoralsogeneratestimber andwoodproducts for bothindustriesandhouseholds, andprovidesplacesfor outdoorrecreationwithaestheticvalue, fortourism.

Government's strategy inagriculture isbasedonthe needto be competitive inproductionandmarketingbyincreasingproductivity, loweringproductioncostsandaddingvalue to rawmaterials.Raisingtherateo fgrowthinagriculture(including crops, livestock, fisheries andforestry) canmakeanimportantcontributiontoruralpovertyreduction.

Governmentis committedto developingamarket-oriented pricingandincentiveenvironment forthe agriculturesector. Directinvolvement inthe commodity marketwillbegraduallyreduced, andby2009, agriculture tradepolicywillbecomemorestableandtransparentforthemainfoodcommodities.Thehighrateso fspecific dutiesusedtoprotect strategicagriculturalcommodities willbereplacedbyaduty o fabout 60percentforthemainstrategic foodstuffs. Tariffswillremainattheselevelsfor sometime toprovidegreatercertaintyto farmers, processorsandtrades.Fertilizer subsidieswillbestreamlinedandeffortsmadetoimprovethetargeting ofthesesubsidies.

Frequentreorganizationsandalackoffocusw i btheagriculturalresearchandextensionservicesappeartohavesubstantially compromisedthenation's capacity to includetechnologicalinnovationinagriculture. Government will substantiallyincreasethe supplyo fimprovedtechnology suitablefor small

2farmersthroughamorediverseandintensiveprogrammeo fadaptiveresearchbasedlargelyonborrowedtechnology.

1.2 Vision for the AgricultureSector TheTenYearDevelopmentPlanforagriculturesectorseekstoachievethefollowingvisionconsistentwiththeMahindaChintanaya.

An agriculturesector contributingto regionally equitableeconomicgrowth, rural livelihood improvement, andfood security through efficient production of commoditiesfor consumption,for agro-based industries andfor exporting competitively to the world market

1.3 Policy Framework Thepolicythrustistotransform the subsistenceagricultureto acommerciallyorientedandhighlyproductivesectorbridginggaps.

1.3.1 OverallPolicy Withintheliberaleconomicenvironment, agriculturepolicywillbedirectedtowardstransformingtraditional subsistenceagriculture(including livestock andfisheries)toonewhichmaximizesproductivity.Increasingtheproductivityo ftreecrop/export agriculturetobecomemorecompetitiveintheinternationalmarkethasbeenidentifiedasanimportantstrategyinthepolicy. Bydoingthis itisexpectedto createanexportablesurplus or importsubstitutionproducts andthereby strengthen thebalanceo fpaymentssituationinthe country,whileprovidinghigherincomestothosewho are engagedsuchcultivation. Thegovernmenthasalsogivenpriorityto improvingprocessing,marketinganddownstreamingactivitiestoincreasevalueadditiontoagriculturalproducts,providingmoreemploymentopportunities inruralareas,andtherebyreducingurbanmigration.Thegoalso fthe agriculturepolicyareto achievesustainableearnings, foodsecurity andhigherincomes forthosedependentonthis sector, reducethecost oflivingo fthe populationas awhole, andprovide anadequate diet at anaffordable pricefor the poor. TheGovernmentplaceshighpriorityonachievingabroadbased-shiftfiomlow- valuetohigh-value agriculture,accompaniedbysustainedimprovementsinproductivityandcompetitiveness, whichwilllaunchtheagriculture sectorintoasignificantlyhighergrowthtrajectory.

Sri Lanka's non-plantation sector also referredto as a domestic food production sector hasrecovereditsmomentumo fgrowthduringthepastfewyears.Riceaccountsfor approximately !A o ftheconsumer goods basket, about 113 o fthetotal grainconsumptionandnearly 50percento fthe calorieintakeinthe country. TheGovernmentpolicytopromotericeproductionconsiststhree keyelements,i.e., aguaranteedpricescheme, fertilizer subsidy, andconcessionary bankcredits. Inaddition, theGovernment hascontinuedfacilitatingthepaddy-purchasing programmebymeanso faspecialcreditarrangementmadethroughtheDivisionalSecretaries.

Apartfiomdirectproductionandpricesupports,thepaddysectorhascontinuedtobethebeneficiaryo fstatesponsoredresearchandextensionservicesandfiee irrigationfacilities. Withtheaimo festablishingsustainableandreasonablemarketingandsellingnetworktoprotectproducers aswell as consumers,the SriLankaAgriculturalProductsMarketingAuthoritywas set upbythe Government. ThisAuthority isexpectedto ensureincentivesfor the farmingcommunityas setoutinthepolicydocument,whilemaintainingabufferstockto llfillthe government needsandto meetconsumptionneedduringunexpecteddisastersituations.ThisAuthority willeventually minimizethegovernment interventionandfinancial commitment ontheannualpaddy-purchasing programme.Aspecific dutyo fRs.20perkgwasimposedonriceimportsto helpandprotectlocalproducers.

3 Withthe emphasisonthepromotiono fthedomestic foodproduction, mostofthesubsidiaryfood cropshavealsobenefited fiom governmentinvestment onirrigation schemes, subsidizedinputs,concessionarybankcreditsandtariffprotectiodimport restrictionsaimedatmaintainingdomesticmarketprices above competitive worldprices. The impositiono fRs.20perkg, Rs.30per kg, andRs.20perkgononion, chillie, andpotatohasresultedinapriceadvantageforthelocalfarmers. Therefore, whilemaintainingthetarifffor foodcrops atthehighestband,itisnecessaryto support competitiveness o fthese cropsthroughimprovedseeds extensionandresearchcreditandagriculturalinfkastructure.

Acomprehensive seedandplantingmaterialproductionprogrammewillbeimplementedoverthenextfiveyearsfor seedpaddy, seedpotatoes,andvegetable seedsproducedbothbytheDepartmentOfAgricultureandtheprivatesector.Inthe seedpaddy sectoritisexpectedto increasethe availabilityo fcertifiedseedpaddy fiom around5 percento ftherequirementatpresent, to 25 percent bytheyear2009.

Withaviewtoefficientmanagementofpublicsectorplantations, governmentsetup23RegionalPlantationCompanies in1992to undertakethemanagement o fthe tea and rubber estates, whichcomeunderthe government ownedJanathaEstateDevelopmentBoardandSriLankaStatePlantationCorporation,marketingthebeginningo faneweraintheplantationindustry.Theobjective o frestructuringtheplantationsectorwasto inducelocalandforeignprivatesectorparticipation. Initiallymanagement,alongwithlongtermleaseholdrights, weredivestedtotheprivatesector. Thereafter themajoritystakesofeachRegionalPlantationCompanywere divestedinordertorealizetheirfullpotential. Mostofthesecompaniesnowhavebeenlistedonthe Colombo StockExchange. Theneedto obtainHazardAnalysisandCriticalControlPoint(HACCP) certificationtoensuremaintenanceofgoodhygienicandprocessingstandardsateverylevelinthemanufacturingprocessenablingteaexportstotheEUcountries hasbeenrecognized.

Thepracticeo fstateinterventioninthedetermination oflabourwageswasreplacedbyaCollectiveAgreement negotiated betweenemployees andemployers. This was aforwardstep inthe direction o ffacilitatingthe process o fcreating ahealthy andproductiveenvironmentfor developinga sharedresponsibilitybetweentheworkers andthemanagementinthe estatesector.

The importanceo fthetree crop sector inthenationaleconomyanditsfuture prospects dependonour competitivenessinthe internationalmarket. Itistherefore necessaryto improvetheproductivityo ftheplantation sector throughresearch andreducethe cost o fproduction. Inorder to do this, it i snecessarytoundertake replantingprogrammes muallytoreplace at least2 to 3percento fthe extentunder eachcrop. Plantationcompanies are expectedto moveaway fiomtheir preoccupationwiththecommodity marketandfocus onthe consumermarket.

The governmentpolicy inthe livestock sector i s to encourage theprivatesector to engage incommerciallivestockoperations.Publicsectorinvestmentwillgraduallybedirectedtoregulatory activitiesandtotheareaswherereturnsoninvestment arenotattractive totheprivatesectorbutareessentialtothedevelopmento ftheindustrye.g. research, extension, preventive programmesthroughdiseasesurveillance,diseasemonitoring, vaccination, diseaseinvestigation andanimalquarantine.

The dairysubsectorwhichislaggingbehindthe other subsectorssuchaspoultryandswinewillreceiveincreasedemphasisinthepublicinvestmentprogramme. Facilitatingprivatesectoractivities fordairy development, similarto those observed inpoultry andswine sectors, willbe anelement inthegovernment strategyfor d a qdevelopment.

4andhealthandpromoteself-employment.Atpresentdomesticmilkproductionmeetsonly20percent Thegoalofthe livestocksectori stobecomemoreself-reliantinmilk,improveanimalnutrition

o fthe consumer demandinthe country. Iti sexpectedto increasethis levelto 25 percentattheendo fthisperiod. Toachievethistargetthefeasibleoptioninthe short-runisto increasetheproductivity o fthedomestic cattle andbuffaloherdsandexpandtheopportunity for milkmarketingintheruralareas. Thenumbero fmilkinganimalsinagiventimeisalsoanimportantdeterminant inincreasingdomestic milkproduction. The livestock-breedingprojectimplementedwith assistance fromthe NationalDairyDevelopmentBoardinIndiawilltherefore focus onimprovingthe supply o fqualitycattle andbuffalosemenforArtificialInsemination(AI)servicesinthe country.

Thelivestocksectorofferssiflcant opportunities forincreasingincomegenerationinruralareas.The development oftheskillsandcapabilities o flivestockfarmers andotherpersonnel for the livestockindustryisalsogivenstrongemphasisinthegovernment's fbture development programme. Solvingcurrentindustryproblemsuchasenvironmentalimpactso flivestockproduction, accreditation o fprivatelaboratoriesfor diseaseinvestigationsaswell as certification o flivestock produce, leasingo festateinfkastructureforprivateinvestmentinanimaldiseasediagnosisandvaccine productionaresomeo ftheothermeasuresthatwillbeundertakenbygovernment inthefuturefor facilitatingthe livestocksectordevelopment.

The fisheries development policy is aimedat exploitingthe country's aquatic resources inasustainable manner,whileconserving the coastalenvironment. The diversification o fproductionandexploitationo foffshoredeep-seafisheries throughthe introductiono fmodemtechnology andefficientfishingmethodswillbegivenpriority.Itisalsoplannedtoreducepressureoncoastalresourcesthroughthe implementationo fafisheries managementprogramme.Governmentinvestmentwill alsoprovideappropriate infrastructuresuchasharbour, shorefacilities, andmarketingfacilities.

Inthesugarsector,themainpolicyissuehasbeentheneedtoensureareasonablepriceforlocallyproducedsugar.Thedemand for higherprices for canesugarfrom farmers, relatively lowyields, lowsugarrecoveryrate, andanabsenceo ffactory expansionhaveresultedinahighercost o fproductionerodingthe financial viability o fthe industry,andcompulsionongovernment to interveneinorder tomaintainsocio economic stabilityinthearea.

Withtheintentionofinjectingmuch-neededworkingcapital,theGovernmentwillincludepoultry,aquaculture, andsugar sectorsinthepresentNon-Comprehensive RuralCredit Scheme (NCRCS)implementedbythe CentralBanko fSriLanka.

priceso fcashewnutsandthevalue addedo fitsby-products. Thetotalextentundercashewcultivation Cashew hasbecomea cash cropthat growers are interestedto cultivate due to the highsales

at presentinSriLankaisabout 32,870 ha, producingatotalo faround 8600mto fnuts.The averageannualkemelproductionisabout 1200mt.o fwhichover 1000mt.arelocallyconsumed, leavingonlyasmall quantityo fabout 150mt. for exports. Themajorbuyerso fSriLanka's Cashew are the MiddleEast countries. Besides, Sri Lanka cashew has a growing demand from Canada, USA, Germany,France, UnitedKingdom, Israel, andJapan.

Inordertorevitalizetheindustryasawhole, itisplannedtoincreasethepresentextentundercashewandthe cropproductivity onasustainablebasis.Productdiversificationandvalue addition arealsotwoimportantaspectsthathavebeenpaidattentioninpromotingthe industry.

Cashew is acropthat hasthepotentialto sustainprofitablelivelihoods andincomeearning andtoprovidemeaningfblemployment to alargesectiono fthefarmingcommunity, especially inthepoorer,

5DryZoneareasofthecountry. However, cashew'spotentialisstilltobefullyexploitedbyourf m e r sto getthemaximumsocio-economic andcommercialbenefits.

There is apressingneedto improvethewelfare o fthe farmingcommunity inthe country, andtoprovideemployment andgreater opportunities for incomegeneration. Increasingtheyieldfromthepresent averageof350kgperhato 650 kgperhaby2009 for the cashew industry are ofparamountimportance inl l l yutilizingthecashewindustryto contributetolocalgrowth, povertyreductionandthenationaldevelopmenteffort.

Palmyrahhasbeenidentifiedas a livelihoodsupport andpovertyreduction source havinganextent o f60,650 haequivalent with 11millionpalmswhile sustainingthePalmyrahresources anditsenvironment. Amongthe strategiesproposed, organkingcommunitybasedawarenessprogrammes toreducethefellingofPalmyrahtreesisvital.Further, developingprivatenurseriesandallowingreplantingornewplantingthroughcommunity participationhasbeenidentifiedasaproductionenhancementpolicy.Palmyrahbasedproducts such as fruit, fibre, leaf, timber, andtuberneedto bepopularizedthroughpromotionalmechanisms.

Withthegreatimpetuscreatedbythepositivepoliciesandthenewconfidence, theprivatesectorisnowgearedtoreachthe goalo fself-sufficiency infruits andvegetablesby2010. TheprivatesectorwillbeencouragedtoestablishSriLanka's mostmodemcoldchainnetworktohandlefreshh i t sandvegetablestominimize postharvest lossesfrom40percentto 5percentandalsotoupgradethe qualitybyintroducingnewtechniques, newvarietieso fseed, andeducatethefarmerswiththe latesttrends.Theindustryexpectsfurther topromoteexporto ff i t andvegetables,flowers, cutflowers, foliagelivefish,poultryproductstomostpartsoftheworldincludingIndiain2006/07. Thespecialfeature inthissectoristhe fact that 80percentoftherevenueearnedwillreachthedmassesinthe leastdevelopedprovin