Executive Summary

1. The tsunami of December 26 2004 left Sri Lanka with over 30,000 people dead, several hundred thousand displaced, and massive damage to infrastructure and capital assets (estimated at around US$ 1 billion (4.5 per cent of GDP)) particularly in tourism and fisheries sectors. The medium-term financing needs were estimated to be around US$ 1.5-1.6 billion (7.5 per cent of GDP). It is expected to reduce 2005 GDP by around 0.5 - 1.0%.

2. With no previous history of such disasters Sri Lanka was quite unprepared for the tsunami. But with a massive community response followed by government and international action, it was able to implement an initial relief effort that, in the circumstances can be termed a success

3. Promised external assistance - a total of US$ 2.2 billion over the next 2-3 years - appeared to be more than adequate to cover reconstruction costs in full. But problems have emerged with relief payments, providing credit facilities, distribution of funds, coordination of reconstruction activities, and mismanagement of funds. Clearly the reconstruction phase poses complex and difficult challenges.

4. Housing is the households’ main concern. Reconstruction and repairs have been hampered by the ‘no-build’ coastal buffer zone, cuts to relief payments and cost increases. Progress has been slow, uneven, and concentrated in the south and southeast, though the worst affected areas are in the east and northeast.

5. Reconstruction spending produces a particular type of Dutch Disease’ reflected in construction cost increases which have escalated rapidly (by 40-60% in some instances). Overall inflation, caused primarily by policy and exogenous factors, is rising, and may accelerate with election cycle spending, high oil prices and recently promised increases in government expenditures. This implies a major increase in funds required to fully meet construction targets in the private housing sector and in public infrastructure, implying a major funding gap. The government has limited options to address the funding short fall. Poorer households and public infrastructure reconstruction will be severely affected.

6. The report raise issues in the following areas and presents several related policy recommendations: livelihood related cash payments to households; assistance for rebuilding houses; titles to new houses; buffer zone rules; early warning and disaster management systems; coordination of donor assisted activities and macroeconomic policy issues.

7. A Rs 5,000 ($50) monthly grant – a modest sum that falls short of poverty line incomes for a household – was expected to be provided for about six months to all affected households. But this has been scaled back to four months, its scope reduced by tightening eligibility rules. This is inequitable and counterproductive. The grant should be paid to all affected households for six months using donor funds earmarked for livelihood assistance.

8. The cash grants for house rebuilding and repairs are manifestly inadequate given cost escalations. We recommend an upward revision of the grant, at least for the poorer households, using designated donor funds.

9. Eligibility for new houses should be determined on clear criteria in a transparent manner. Freehold title should be granted jointly to the husband and wife unless it is a single parent family, changing existing legislation as necessary. Any time restrictions on sales to non-family members should be limited to minimise market inefficiencies and illegal transactions.

10. A buffer zone to achieve coastal environmental protection and minimize impact of future natural hazards in future has intrinsic merit, and the basic concept should be retained. However, limits should be set through a transparent and consultative process, clarifying the underlying scientific and economic rationale for zone limits, and regulations must be combined with incentive-based systems drawing on international experience.

11. The tsunami experience, the recent Pakistan-Indian earthquake, climate change, and scientific opinions highlight the need for greater preparedness to cope with natural disasters. Building on the Sri Lanka Disaster Management Act (presented to Parliament in February, 2005), a scientifically sound and financially feasible disaster management system geared to coping with the multiple hazards must be formulated. Sri Lanka cannot afford a multiplicity of specialised warning systems based on low probability events. Options to meet financing issues arising from catastrophic risks, including purchase of insurance and setting aside reserves to meet unexpected disasters should be explored.

12. Poor coordination among domestic and external agencies have emerged as serious problems, together with the sensitive issue of balancing political considerations and humanitarian assistance to the needy. Some international NGOs’ reluctance to cooperate with government institutions, and competitive behaviour towards other agencies have hampered coordination and implementation. The modalities of aid spending, including procedures and mechanisms should be reviewed to improve quick and effective responses. .

13. Problems with aid utilisation and accountability highlighted by the Auditor General’s Department must be urgently addressed. But, despite these weaknesses and inefficiencies, the strengths and positive contributions of government institutions must also be recognised.. Attempts to bypass government institutions by relying primarily on NGOS can be counterproductive, complicating coordination of reconstruction efforts. A balanced approach must be adopted to improve coordination among donor, government and community groups.

14. Overall macroeconomic management circumstances and policies are critical to the success of reconstruction. The tsunami hit at a time of serious macroeconomic imbalances, and paradoxically helped to mask them for a time. But they are reemerging now, fuelling inflation, lowering the real value of aid funds, constraining government’s fiscal capacity, and adversely affecting reconstruction. Pressure on the currency generates temptations to prop up the currency using tsunami aid related foreign reserves by delaying reconstruction activities. This would achieve short-term stability at the expense of reconstruction, growth and equity, while aggravating macro imbalances in the longer term. Wider macroeconomic imbalances should be addressed directly targeting their sources; tsunami aid funds should be utilised for reconstruction purposes.

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Comment(s)

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1. Dushi Weerakoon, one of the co-authors
   (posted 31 March 2006 / 11:43:50 AM)
   
   In response to the comment below:
   
   Besides funeral expenses, etc. a cash grant of $50 per month and $3.75 cash and food ration were given to all affected households (for approximately 4 months). For residents outside the buffer zone, if a house is more than 40% damaged, a grant of $2,500 is given in 4 instalments, based on progress. If a house is less than 40% damaged, then a grant of $1,000 is provided, disbursed in 2 stages. For residents within the buffer zone, the government planned to assist not only landowners, but all residents (including encroachers) with some form of housing. This was estimated to require around 50,000 permanent houses. Further quite considerable details on government handouts are contained in the report itself.
   
2. ken bacon
   (posted 18 December 2005 / 06:57:36 PM)
   
   This chapter notes that the government immediately paid money for funeral expenses, livelihood and cooking utensils. What additional government compensation has been provided? I am particularly interested in how the relatively generous post earthquake compensation program in Pakistan compares to government compensation for loss following the tsunami.