Balancing reforms, resilience and recovery

Asian Development Bank’s commitment to Sri Lanka

Asian Development Bank 
Country Director for Sri Lanka Takafumi Kadono 

PIC BY NIMALSIRI EDIRISINGHE

As Sri Lanka navigates its journey towards economic recovery and growth, the role of international partnerships has become crucial in maintaining progress. 

One key player in Sri Lanka’s journey toward sustainable recovery is the Asian Development Bank (ADB), whose support was instrumental in helping the country come out of its unprecedented economic crisis in 2022.

Building on its extensive support across various sectors, the multilateral lender remains committed to support Sri Lanka’s continued recovery. With a new government in place, it’s also an ideal time to explore the ADB’s ongoing efforts and future plans for the country. 

In an exclusive interview with Mirror Business, ADB Country Director for Sri Lanka Takafumi Kadono shared his insights on the ADB’s vision for Sri Lanka’s development.

Below are the excerpts from the interview.

Q:Let’s begin with your appointment as the ADB’s primary representative to Sri Lanka in July 2023. What was your outlook for Sri Lanka at that time? 

When I arrived in July, Sri Lanka was just emerging from the impacts of COVID-19 and the economic crisis, following the approval of the International Monetary Fund (IMF) programme in March 2023.

At that time, the ADB was preparing its budget support for Sri Lanka, called the special policy-based loan of US $ 350 million, aligned with the IMF programme. I was involved in Sri Lanka’s reclassification, which shifted it from an upper-middle-income to lower-middle-income status, to enable access to concessional financing.

When I first arrived, the IMF programme was still in its early stages and I was unsure about the government’s commitment, given this was Sri Lanka’s 17th IMF programme. That being said, I had heard so much about Sri Lanka’s strengths, the strong human capital, abundant natural resources, etc.

I was positive as long as the government was committed to stay with the programme. I’d like to emphasise that these reforms were not implemented solely for the IMF. These were reforms Sri Lanka needed anyway.

I was quite delighted to see the government’s leadership and the commitment of various ministries to undertake them, despite their painful nature.

Q:Over time and with experience, your perspective about Sri Lanka must have surely evolved. When you first arrived, you saw things in a certain way. What has made you see them differently now?

Well, before the presidential election, I had built confidence in the government’s commitment through our support for reforms in sectors like finance, power, water and SMEs.

Through these engagements, I had a firsthand experience to understand the government’s dedication to undertake them. So, we were quite content. In the meantime, the first and second reviews of the IMF programme were completed. There was good progress in domestic debt optimisation and external debt restructuring. That gave us more comfort.

As the presidential election approached, we basically sought for continuity because this is a journey that Sri Lanka needs to go through under any leadership. When the new government was formed, we were again happy to see that there is a will to continue with the reforms.

We wanted to make sure that the government remains within the parameters and work towards the same objectives. Currently, we are seeing that and we are happy to continue our support as Sri Lanka works its way out of the economic crisis. 

Q:Given Sri Lanka’s trajectory so far, what are the ADB’s top priorities at the moment and how do they align with the government’s priorities for recovery?

To answer this, I think it’s easier to refer to our five-year Country Partnership Strategy (CPS) for Sri Lanka (2024–2028), which outlines three strategic objectives.

1. Strengthening public financial management and governance
2. Promoting private sector-led green growth
3. Improving climate-smart public services with deeper social inclusion 

Our overarching objective for the next five years is sustained, sustainable recovery to build resilience and revive growth. We also have three cross-cutting themes that apply across all of our lending and non-lending activities. 

1. Climate change, environmental sustainability and disaster resilience
2. Gender equality and social inclusion
3. Capacity building, governance and digitalisation

In aligning with the government’s priorities, we understood that Sri Lanka does not have a medium-term socioeconomic development plan. So, we consulted with the government, private sector, academia and other development partners to identify the areas where we could add value. We believe this strategy still remains valid under the new administration.

The country has achieved quite a lot in terms of both bilateral and commercial debt negotiations and I commend it for coming this far

Q:So, has nothing changed in terms of the ADB’s priorities, post the presidential election?

Nothing has changed yet but we do expect to see some changes. So far, we’re observing positive signs of continuity in the ongoing reforms. Our focus remains on ensuring that the changes made will still lead to the same objective of sustainable recovery, resilience and growth.

Q:Do you anticipate any major changes?

It’s difficult to predict what will happen. But based on what we’ve heard from His Excellency the President’s statements, the government would like to see a fairer burden-sharing process. That is by alleviating the burden of the poor and vulnerable on the one hand and providing support to those in need on the other. There are two sides to this. Revenue is being reduced while the expenditure is increased. But to stay within the framework, something has to be given, right?

But I think the government is trying to find ways to increase revenue through many other means. If that is possible, then the primary balance target of 2.3 percent in 2025, which is an immediate target under the IMF’s Extended Fund Facility, could be met. There may be different ways to get there. However, the room to manoeuvre is limited and I think the government has that understanding.

Q:In 2023, the ADB dispersed over a billion dollars in support to Sri Lanka (US $ 908 million in grants, US $ 5.5 million in technical assistance and an additional US $ 610 million in loans) to support areas such as climate action, sustainability and governance. How do you assess the impact of these projects?

Yes. You’re right. But our support extended beyond these areas. E.g. Our budget support, aligned with the IMF programme, backed by policy reforms, helps the government fill its financing gaps occurring from recurrent costs.
Climate action in our CPS is mainstreamed across all of our operations. We always try to find an angle in climate mitigation and adaptation. As Asia-Pacific’s ‘climate bank’, the ADB aims to finance US $ 100 billion in climate initiatives by 2030.

But it’s not just about financing; it’s about policy dialogue as well. So, apart from supporting projects like helping the SMEs adopt climate mitigation technologies, we’re also focused on helping the government formulate the right policies and regulations to promote climate action.

In Sri Lanka, there are a lot of talks on mitigation and renewable energy. But we must understand that the island’s climate vulnerability is high, while its preparedness for it is low. There are many areas that require significant planning and investment to make Sri Lanka more climate resilient.

Q:Lately, the ADB has been particularly involved in promoting sustainable tourism and supporting women-led SMEs and government reforms. Could you provide an update on these programmes?

The SMEs, representing over half of employment and GDP in Sri Lanka, are a key sector. Our approach is through improving their access to finance through financial intermediary loans, where we lend to the government, which then provides funds to banks that lend to SMEs. This supports sectors like agriculture, manufacturing, export industries and tourism, while promoting climate-friendly businesses.

Women entrepreneurs face unique challenges such as limited access to finance and collateral. To address this, the ADB introduced the Women’s Entrepreneur Finance Initiative (We-Fi). We also encourage the banks to collect gender-disaggregated data and promote financial literacy.

In tourism, we see great potential for GDP, foreign currency and employment. We try to promote sustainable tourism via policy reforms and sustainable practices.

For the SME sector, we approved a US $ 100 million concessional loan in March. This included US $ 50 million for working capital, which is already being dispersed across 13 participating financial institutions. The other US $ 50 million is for the National Credit Guarantee Institution (NCGI), which helps provide partial credit guarantees to the banks to make them more comfortable when lending to SME borrowers who do not have enough collateral. The NCGI is already established but the operationalisation may take more time but we are hoping that the guarantees can be issued in the first quarter of 2025.

For tourism, we have worked on a policy reform component. We just need to make sure that the new administration is in agreement with what is being proposed and we hope it will be approved this year.

Q:One topic of interest among many people is the power sector reforms. You have also previously mentioned that long-term political will is crucial for its success. What is the update on that sector?

It’s still a bit early to tell and I think we will have to wait to understand the new government’s plans more clearly. We do understand that there is a broad appetite to continue with the sector reforms.

I personally feel that the unbundling of the Ceylon Electricity Board will continue. But we are hearing that there may be some changes to its structure after unbundling and that there may be certain amendments to the Electricity Act. At the moment, I cannot say anything beyond that. But I think there is still a strong interest to promote private sector investment into the renewable energy sector.

Q:Digitalisation of the state sector is also a major area of focus with the new government. Can you elaborate on how the ADB is supporting these initiatives?

In our CPS, we see digital technology as a key tool to enhance transparency, strengthen governance and improve public services.

We’ve supported several initiatives, including the e-government procurement system and an integrated treasury management system. We’re also advocating for a port community system to improve transparency and are working with the CIABOC to introduce an electronic asset declaration platform, as recommended by the IMF’s governance assessment.

Additionally, we aim to enhance transparency in renewable energy tendering, human resource development in science and technology and explore opportunities for a National Single Window initiative.

Q:You once mentioned the possibility of the ADB supporting the start-ups in Sri Lanka.

Yes, of course. We’re currently exploring ways to contribute to Sri Lanka’s start-up ecosystem, particularly supporting tech start-ups led by young people with strong digital skills and creative ideas. Through our university partnerships, we’re already promoting connections between academia and industry in both research and entrepreneurship.

Sri Lanka has a high rate of youth unemployment and a significant out-migration. Our vision is to create a thriving start-up ecosystem that encourages young people to stay. We’re engaging with incubators and accelerators to provide mentorship, training and access to finance to encourage start-ups.

The ADB has vehicles like ADB Ventures and ADB Frontier, which invest in start-ups though they aren’t active in Sri Lanka yet.

We are still trying to understand the landscape and hopefully we may be able to support them sometime next year.

Q:What do you think will be Sri Lanka’s biggest challenges going forward?

In the very short term, once the external debt restructuring is completed, the repayments will start, which may put pressure on the foreign reserves. This is towards the end of the IMF programme in 2027. We hope that by that time, the economy will have grown sufficiently to support larger repayment volumes. But Sri Lanka’s debt-to-GDP ratio will still be high, even in 2027. It’s only expected to reach 95 percent of GDP by 2032, which is still a substantial figure. So, the economy must grow and the key question is, how can it grow?

Can it just rely on remittances? or tourism? or are there any new engines of growth that need to be strengthened and pursued? Economic diversification hasn’t happened in Sri Lanka and it has been producing the same products for many decades. Even in exports such as tea, rubber, garment and coconuts, nothing significant has changed. But this model needs to change.

For that, Sri Lanka needs to be more outward looking and also be more strategic in enhancing the quality of its products. Then there will be an opportunity to pursue branding strategies. For example, Sri Lanka’s cinnamon has a good potential for it to be branded and processed and sold for a higher price abroad, rather than just putting it in a bag and selling it.

I believe foreign direct investment is another area of concern. It has been consistently low, averaging at around one percent of GDP. We need to understand why foreign investors are not investing in Sri Lanka. What we do hear a lot is the inconsistency in policies and macroeconomic instability. These areas need to be rectified urgently to give confidence to investors to come with money and then stay for the long term. These investors need to be confident that they can pump their money, build their factories, find their market networks and then start earning. It takes several years for them and these investors have other places to go to.

We need to be very serious about that shift towards tradable production and consistency in policies to maintain macroeconomic stability. Bring in more new technologies to improve productivity, efficiency and the quality of the products to be competitive in the global market. 

There may be different views on free trade agreements but the government should be exploring it with certain trading partner countries and carefully strategise the industries that can grow.

Q:Since we touched upon external debt restructuring, how well do you think Sri Lanka has fared on that?

The external debt landscape has changed significantly over the past few decades. It’s no longer just the traditional Paris Club countries lending but now you also have non-traditional bilateral development partners providing bilateral loans. This has complicated the landscape. Even in Sri Lanka’s case, you have the presence of international sovereign bondholders, not just commercial creditors.

Given this difficult environment, restructuring decisions are much harder to reach compared to other countries that have gone through similar negotiations. That being said, I think Sri Lanka has done quite well in a relatively short period of time. The country has achieved quite a lot in terms of both bilateral and commercial debt negotiations and I commend it for coming this far.

Q:We’ve spoken broadly about the ADB’s extensive assistance to Sri Lanka. Can we expect a similar level of support in the coming years?

Our involvement depends on Sri Lanka’s debt-carrying capacity, as most financing is in the form of loans, which must be repaid. 

The scale of our assistance is closely related to the country’s debt sustainability and the government’s priorities and whether it aligns with our Country Partnership Strategy. Of course, we try to mobilise as much grant funding as possible but those will be still limited with respect to the volumes. We do have a concessional window but that too is finite. 

Under the IMF programme, the ADB is expected to provide around US $ 2 billion in budget support until 2027. This is our baseline and it hinges on the successful implementation of the IMF programme. Also, the continuity of such large-scale programmes depends on maintaining a sustainable debt situation and the government’s ability to make early progress on the necessary reforms. Without those parameters, it will be difficult for us to continue with the budget support.

Q:Do you believe that the best option for Sri Lanka is to stick to the IMF programme?

Certainly, yes. As I mentioned earlier, these reforms were needed anyway but for us to confidently provide budget support, we need to see the continuity of the IMF programme as well as the continuation of reforms in sectors where we’re involved.

For long-term investments, we’ll need to discuss with the government to prioritise sectors. Currently, our three-year programme includes reforms in the financial and power sectors, water supply, tourism, agriculture, public sector management and capital markets. We’re also focused on sustainable financing and continuing support for SMEs.

This may not be about lending but we want to continue supporting the state-owned enterprise reforms as well as promoting public-private partnerships, which is also what the current government’s manifesto refers to as public, private and people partnership.

We hope that the momentum in those areas will continue, as these reforms are not an ideological debate and it’s not about privatising. It’s about making sure that these entities operate profitably and that the taxpayers’ money is not used to sustain them. 

Q:To wrap up, what lessons has the ADB learned from its collaborations in Sri Lanka and how will they shape your approach for future partnerships?

I think, without giving ourselves too much credit, the government sees us as a trusted partner. We have a long history of collaboration with Sri Lanka, as the country has been a founding member since 1966, covering over 58 years of partnership. 

As an institution, we have a very rich institutional knowledge about Sri Lanka and have accumulated a lot of experience working here over the decades. And because we have been leading the assistance in Sri Lanka in various sectors, we are in a very good position to provide policy advice as well. 

We do believe that the government has an appetite to talk about their challenges and opportunities with us and I think it is our duty to bring the experience from other countries in Asia and the Pacific and beyond to help governments make informed decisions, so that it would lead to a strong, sustainable growth. 

We have found that our efforts are most effective when we work coordinately with the other development partners. However, we believe that the government should lead this coordination.

We are hopeful that with the new government formed, we will be able to create platforms for these discussions and move forward with our initiatives.