Dynamics and trends of foreign aid in Sri Lanka: Exploring space for context-sensitive aid delivery

This report looks at foreign aid in Sri Lanka and whether development assistance could be a more effective tool for consolidating peace in the country.

The post-war political economy of Sri Lanka is defined by the three-decade long conflict. The influence of government remains central to the economy, and is increasingly driven by a new bureaucratic class that encompasses the well connected social, political and economic elite.

The contribution of aid from traditional development partners has decreased since 2009, and a strong government-led development policy has determined their engagement. In contrast, non-traditional donors have significantly increased their presence and support, while international development banks and multilateral agencies have increased their commitments. Although the growing non-traditional presence poses a challenge to the consistency of standards and practices, it provides the government with attractive options for acquiring development finance.

This shifting aid landscape has significant implications for the political economy. The increasing reliance on non-concessionary loans to fund development activity and the resultant increase in the debt burden risk creating a “vicious cycle of debt”. This has the potential to ultimately fuel social and political unrest, as increasingly challenging economic conditions could require the government to tighten its belt and prioritise expensive repayments in the future.

In this context, identifying and improving the effectiveness of traditional and non-traditional development partner-financed projects is a challenge. There is a clear need to improve state–citizen and state–donor consultation to ensure an improved understanding of local needs, local conflict dynamics and emerging risks. This will ensure a greater degree of sustainability of long-term development programmes that address not only economic but also other human development goals.