International multilateral and bilateral donors on Tuesday pledged $ 4.5 billion to Sri Lanka for the next three years, but actual commitment and disbursal may be much less if the war does not cease, economic reform does not take place, and the country's ability to absorb foreign aid remains low.
"International donors expressed satisfaction at our economic track record and we have got commitments up to 4.5 billion dollars to pay for projects from 2007 to 2009," gushed the Sri Lankan Minister for Investment Promotion, Sarath Amunugama, at the end of the two-day Sri Lanka Development Forum meeting at Galle.
Sri Lanka had apparently succeeded in blunting the donors' trenchant criticism about the on-going war, the ethnic conflict and the high 20 per cent inflation.
World Bank's Vice President for South Asia, Praful Patel, who had said that the Sri Lankan economy could not bear the burden of war, became conciliatory at the press conference.
"We don't have a relationship with Sri Lanka with any conditions placed on its development," he said.
The Asian Development Bank's Vice President Liqun Jin was sanguine about the prospects in Sri Lanka when he said that the government's development goals were "achievable."
Explaining the mismatch between the statements made by the donors at the inaugural and at the end, Sri Lankan economist Dr Harsha de Silva said that the donors were partly convinced that the war against terrorism was justifiable, and partly felt helpless in the face of a determined government.
"President Rajapaksa may have been persuasive. Also, there is only so much that outsiders can do when confronted by a sovereign government.
The multilateral agencies are particularly handicapped because they do not have the political and military leverage states have," Dr de Silva told Hindustan Times.
The donors might soft pedal the peace issue, but they would insist on economic reform before pledges were translated into commitments and money was disbursed, Dr de Silva, who runs the LIRNE-Asia regional think tank, said.
"Sri Lanka's poor utilisation of foreign aid may also stand in the way of disbursements. Utilisation is 13 per cent," he said.
The war has been a key factor in the under utilisation of aid. Out of the $ 750 million of World Bank aid in the pipeline now, 25 per cent related to projects in the war-affected North-East, but some of these were on hold because of intense fighting, Praful Patel said.
The structural reforms expected by the multilateral agencies may not come through given the populism of the Mahinda Rajapaksa regime.
"Aware of pressures on this issue, the government is already going in for commercial borrowing abroad and is looking to countries like China to fund its projects in preference to easier but conditional loans from the multilateral institutions," Dr de Silva observed.
Foreign funding accounts for 33.5 per cent of the total financing in the Sri Lankan budget for the year 2007.