Friday, November 8, 2019

Millennium Challenge Compact

On April 25, 2019, the MCC Board of Directors approved the five-year Sri Lanka Compact. )

Background and Context

Sri Lanka’s performance on MCC’s policy indicators has steadily increased in parallel with the reforms undertaken by the Government since January 2015. In FY 2017, Sri Lanka passed more than half of the indicators, including both democratic rights indicators—political rights and civil liberties—and the control of corruption indicator.

MCC’s Board selected Sri Lanka to develop a compact in December 2016. With MCC’s assistance, the Government completed a constraints-to-growth analysis in November 2016 identifying three binding constraints to economic growth:

(1) policy uncertainty, especially regarding revenue collection and tax policy;

 (2) transport bottlenecks resulting in traffic congestion in the Western Province and the slow movement of people, goods and services between the Western Province and other regions; and

(3) the difficulty of the private sector in accessing state-owned land for commercial purposes.

Sri Lanka has made impressive economic headway over the past few decades, but significant challenges remain. Economic growth declined to 3.2 percent in 2018, down from 3.4 percent in 2017, and 4.5 percent in 2016. Between 2002 and 2016, the country made significant strides to reduce poverty. Excluding the Northern and Eastern Provinces (for which 2002/2003 data was not available), the poverty rate fell from 22.7 percent in 2002/2003 to 6.1 percent in 2014. The national poverty rate, including the Northern and Eastern Provinces, fell further to 4.1 percent in 2016.

Despite this encouraging reduction in poverty, living standards remain modest for most of the country, and pockets of severe poverty persist. Living standards of the near-poor—those above the national poverty line but below the 40th percentile—are similar to those of the poor. Significant pockets of poverty remain in the central region and former conflict areas in the north and east. The current coalition government, elected in 2015 on a platform of political and economic reform, has developed an agenda to accelerate economic growth and continue to reduce poverty in Sri Lanka. The Government’s goal is to increase per capita income to $5,000 per year by 2025, increase foreign direct investment to $5 billion per year from its current $1 billion, and further reduce poverty.

Prior to Board approval of the program, on October 26, 2018, President Maithripala Sirisena dismissed Prime Minister Ranil Wickremesinghe, and replaced him with former president 2 Mahinda Rajapaksa. Questions immediately arose regarding the constitutionality of both actions. On December 13, the Supreme Court ruled that President Sirisena had acted in violation of the Constitution. Rajapaksa subsequently resigned as Prime Minister on December 15 and Wickremesinghe was reinstated a day later. The Supreme Court decision, Rajapaksa’s resignation, and the re-instatement of Prime Minister Wickremesinghe were important developments that brought the immediate constitutional crisis to a close.

 MCC assesses partner country governments’ ongoing commitment to MCC’s eligibility criteria by examining their policy performance, including their commitment to the rule of law. The current democratically constituted government has expressed its continued support for and commitment to the terms of the Compact as negotiated. MCC’s assessment of policy performance in Sri Lanka recognizes that if this or a future government engages in a pattern of actions inconsistent with MCC’s eligibility criteria, there could be consequences for our partnership, in line with MCC’s Policy on Suspending or Terminating Assistance. )

Link to Congressional Notifications

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