ADB, Japan to support Sri Lanka with fiscal reforms to promote investment

Sri Lanka is getting a $50 million loan from Asian Development Bank (ADB) to continue with public finance management reforms aimed at paving the way for increased investment in underdeveloped areas, including those severely affected by conflict.

The loan for the Fiscal Management Efficiency Project will be used to introduce new tax revenue and treasury management systems which will strengthen public resource management, giving the government the fiscal space to step up spending in lagging and conflict-affected regions.

It will build on the success of ADB's earlier Fiscal Management Reform Program in Sri Lanka and is supported by a technical assistance grant of $2 million from the Government of Japan-financed Japan Special Fund.

'The project will support the efforts of the Government of Sri Lanka to promote sustainable and equitable development in the post-conflict environment by providing greater scope for increasing investments in reconstruction and infrastructure,' said G. Bhatta, Principal Public Sector Management Specialist in ADB's South Asia Department.

It will also help build transparency in, and accountability of, the public financial management system in the country.

Sri Lanka's thirty-year internal armed conflict which ended less than a year ago has placed huge constraints on government spending to improve the lives of people through investments in the social sectors. Public resource management has been caught up in a vicious cycle of low resources, upward pressure on spending, and a lack of modern integrated revenue and expenditure systems.

Service delivery as well as infrastructure and social development, particularly in the conflict-affected regions of Northern Province and Eastern Province, have suffered and the recent global economic downturn has further drained government revenues.

"The cornerstone of the loan will be to finance a project for the introduction of revenue administration management information and integrated treasury management information systems, which together will strengthen compliance, tax collection, and improve efficiencies and decision-making on the allocation and use of resources," said K. Shin, Senior Economist (Financial Sector) of ADB's South Asia Department.

Capacity building opportunities will also be created to develop the skills and knowledge of public finance managers using the new systems. Reforms will be carefully phased and sequenced to complement the policy foundations established by the earlier Fiscal Management Reform Program, and the expenditure management system will support gender-responsive budgeting to ensure equity in policy making and public expenditure.

Addressing the needs of vulnerable groups, especially women, through inclusion of gender-specific needs in the allocation and use of public funds as well as enhanced social safety nets, will be a key benefit of the project.

The technical assistance from Japan Special Fund will be used to help with the establishment of the two IT management information systems, including the preparation of request for proposals to select the international vendor.

ADB's loan from its ordinary capital resources has a 25-year term with a 5-year grace period and interest determined in accordance with its LIBOR-based lending facility.

The Government of Sri Lanka will provide in-kind counterpart funding of $10 million, for a total project cost of $60 million.

The Government of Sri Lanka's Ministry of Finance and Planning is the executing agency for the project which is due for completion around October 2013.