Does aid matter?

Reports that US Secretary of State John Kerry has proposed a 20% cut in American aid to Colombo provoked a knee-jerk response from the Government Information Department, which sent a cryptic text message quoting a “senior government official” as saying that the move “would have no effect”. But is that really the case?

The reports also described the cut as the highest drop for any South Asian country in Kerry’s budgetary proposals, which were sent to the Congress last week for its approval. In actual terms, Kerry has proposed US$ 11 million in aid to Sri Lanka, which, according to a senior State Department official, is a “drop of 20%” from the actual spending in the 2012 fiscal year.

While the actual US development assistance to Sri Lanka in 2012 was US$ 8 million, Kerry has proposed about US$ 6 million for 2014. Officials quoted in the reports believe that some of the projects undertaken by the money were not conducted effectively as they were “taken over” by the Sri Lankan Government and military. This could refer to some programs that were conducted in the north and east as part of the post-war reconciliation process. Others believe that the economic situation in both Sri Lanka and the US prompted the reduction. For the record, since 1956, the US Government has invested over $ 2 billion to benefit all the people of Sri Lanka.

Analysts would also frame the move as reflecting the unease in America’s ties over issues related to human rights, reconstruction and political integration in Sri Lanka. This would hold more credibility in the aftermath of two US-sponsored resolutions being adopted by the United Nations Human Rights Council (UNHRC) in 2012 and 2013.

Washington’s lukewarm links with Colombo are also seen by Kerry’s proposal to keep development assistance to Bangladesh almost unchanged from US$ 81.6 million in 2012 to US$ 80.9 million in 2014. Meanwhile, Kerry has proposed a substantial increase in US aid to the Maldives – Sri Lanka’s neighbour. Majority of the US fund would go into key projects related to judicial reform and increasing Maldives counter-terrorism efforts. Such a move can also be seen as aligning interests with India, which has a strong stake in Maldives.

So what does this really mean for Sri Lanka? Government officials will no doubt argue that US aid is not necessary and such a small amount will not be missed. More moderate minds will perhaps see a depreciation of Sri Lanka’s international standing in terms of its relations with Washington. Even though Sri Lanka as a middle income country needs to move away from aid, the funding is necessary as aid focuses on public services such as upgrading healthcare and education and improving livelihoods and reconciliation.

Thus, even though the Government can easily bridge such a gap through commercial borrowing, and has eagerly done so, it needs to be cognisant of the fact that Sri Lanka already has very high rates of debt. According to the Central Bank, in US dollar terms, total outstanding external debt, which consists of medium and long term debt and short term debt, increased by 13.8% to US$ 28.4 billion in 2012 from US$ 25 billion in the previous year. This is nearly half of Sri Lanka’s total US$ 60 billion economy.

In a situation where exports are dropping and economic growth was only recorded at 6.4%, this is a worrying trend. So if the Government is concerned about people who are helped by aid, then it needs to boost its sovereign rating profiles and funnel the resultant money into projects that will boost exports and reduce poverty.