• Lanka's rubber industry can withstand competition
  Richard Pieris Exports boss optimistic about prospects
• Hotelier proposes moratorium on hotel projects
• Habarana Walk Inn reflects tourism upturn
• Watawala to introduce its branded teas to local market
• Two more Pages on Ceylon Theatres board
• CTC Eagle sets up new subsidiary
• Globalization and the labour market in Sri Lanka III
• The strengths and weaknesses of the economy

• Chemanex investments now thrice its own capital
• 5.8 per cent growth in GDP in first quarter - 1998
• Mercantile Leasing launches capital restructuring process
• New President of CIMA outlines future plans
• Kegalle Plantations record satisfactory results
• Revlon Cosmetics Come To Sri Lanka
• World's first electronic coin from Pay Phone Company
• Hemas offers special tours to Britain and America

Lanka's rubber industry can withstand competition
Richard Pieris Exports boss optimistic about prospects

Reporting what he called "a story of success and steady growth,'' Richard Pieris Exports Ltd. (RPE) Chairman Ian Pieris has told shareholders that he views the future with optimism despite a perceived threat to Sri Lanka's rubber industry from East and Far East Asian countries.

"The fundamentals on which we have structured our company, our product mix and our emphasis on quality will help surmount most problems of competition in this sector. We intend as an organization with `thrust industry' status to make best use of the concessions and incentives offered by the government to embark on a controlled expansion programme,'' he said.

Pieris also said that they planned "to pursue once again negotiations to form a close alliance'' with the company marketing their products in Europe and the USA. RPE is seeking a more representative foothold for itself in global marketing "to ensure for ourselves long term stability in our markets and also to broaden our activities into new fields not available to us at present.''

In this chairman's review in RPE's annual report, Pieris said that two of their subsidiaries, Richard Pieris Natural Foams and Playcraft Lanka have now moved into profit mode and will contribute significantly to future progress. The former, manufacturing foam rubber, had pushed turnover up 10% to Rs. 215 million during the year under review and posted a marginal Rs. 1.6 million profit.

Playcraft, manufacturing balloons, had boosted turnover 152% to Rs. 43.6 million and earned a profit of Rs. 5.2 million. This company had more than doubled production and Natural Foams too had gained volumes "despite an initial and temporary period of totally unnecessary labour unrest.''

The chairman drew special attention in his review to the completion of their project to manufacture specialized rubber shoe soling for the world market. The building has been completed and plant and equipment installed. Personnel are being trained in Italy and Sri Lanka. Test production is scheduled for this month and commercial production for September.

Pieris said that RPE's two major product lines, rubber mats and sealing rings had seen significant volume growth, up from 3,700 mt to 5,100 mt for mats and from 394 mt to 524 mt for rings. They have also achieved more success than expected in small mouldings with production up from the previous year's 53 mt to 103 mt.

"Stimulated by our success, we intend ordering machinery to expand and update our facilities in the rubber injection moulding process as it now seems clear that we really do have an additional product range to complement our traditional range of products.

"I am proud to say that we are now producing about 7,000 mt of finished rubber products, almost all of which is for world markets. Micro Minerals (Pvt.) Ltd. now manufactures 2,500 mt of high quality fillers which are supplied to industries outside the group as well,'' he said.

Pieris also announced that RPE had enhanced its retirement gratuity scheme in order to provide a more realistic retirement reward particularly to long serving employees. He said that they would seek shareholder approval for an employees' share option plan (ESOP) to give senior executives, including executive directors, share options of upto 5% of the present issued capital of the company.

"The ESOP has been designed to give employees on whom the success of the company depends, a direct interest in its growth and to motivate and encourage employees to enhance group productivity,'' Pieris said.

Richard Pieris and Co. Ltd. now holds 59.35% of RPE. The RPE Group boosted turnover during the year ended March 31, 1998 to Rs. 676.3 million from Rs. 520.1 million a year earlier. The operating profit of Rs. 106.1 million compared with the previous year's Rs. 67.1 million. The after tax profit of Rs. 63.6 million was up from Rs. 29.1 million a year earlier.

The directors have recommended a first and final dividend of 22% on the issued share capital of Rs. 110.5 million.

The directors of the company are Messrs. P.I. Pieris (chairman), Henry. A. Pieris, Klaus Dames Willers, C. Thangarajah, A.S. Jayatillake, N.J. Palihakkara, Goerge Bobbiese (retired with effect from 17.7.97), Nihal Abeysekera (appointed on 20.5.98) and L.N. de S. Wijeyeratne (appointed on 20.5.98)

Hotelier proposes moratorium on hotel projects

The Chairman of Pegasus Hotels of Ceylon Ltd, one of the oldest resort hotels in Sri Lanka, has proposed a moratorium on hotel development projects until the standards of present hotels are raised and there is an improvement in tourist arrivals.

The Chairman, reginald F.Poulier, said in his annual report for the year ended 31st March 1998 " At this juncture, it may be appropriate to introduce a moratorium on further development of hotel projects until existing hotels are brought up to the required star category standards and a significant improvement of inbound tourism is generated."

He said that supply of rooms has outstripped demand over the past few years. Sri Lanka has about 12,500 rooms plus 1.500 rooms under construction which is sufficient to cater to 650,000 tourists as against the projected arrivals of 450,000 for 1998.

"The emergence of cheaper destinations in South East Asia, coupled

with lower standards in most of the local hotels, are adding pressure on the room rates leading to a severe competition with the industry, with most hotels following penetrative strategies to maintain required occupancy levels. Furthermore the recent currency turmoil in Asian destinations such as Thailand, Indonesia and Malaysia being perceived as cheaper destinations for travel".

He added that most of Sri Lanka's key markets are affected by recession and travellers have become more value conscious. Those constraints leave little option to tour operators and hoteliers who are compelled to resort to different strategies viz all-inclusive packages to counteract competition and retain price sensitive shorter segments. This results in lower margins leading ultimately to undermining Sri Lanka's reputation as a value for money destination.

The turnover of the company increased by 13% to Rs.101.9 Mn compared to Rs.90.2 Mn in the preceding year. Improved occupancy coupled with additional income from conference and banquet functions have significantly contributed towards this achievement. additionally, increase in charter groups has helped the upward trend.

Despite increase in overheads, the company was able to achieve a profit of Rs.1.27 Mn as against a loss of Rs.2.79 Mn in the preceding year.

Savings generated from cheaper funding through moneymarket sources also resulted in lowering the interest cost enabling to turnaround the loss situation, the report said.

Habarana Walk Inn reflects tourism upturn

Habarana Walk Inn Ltd., the resort hotel with which the John Keells Holdings (JKH) Group broke new ground 26 years ago, has turned in a good performance with all profit centres ending the year with substantially improved performances over the previous year, the company's chairman, Mr. Ken Balendra, has reported.

"The performance of your company, which comprises the resort hotel, The Village, Habarana, its subsidiary, Whittal Boustead (Travel) Ltd. and its associate company, Walkers Tours Ltd. both inbound travel companies, reflected the improved status of the tourism industry during the year,'' Balendra said.

Group turnover was up 75% from Rs. 75 million to Rs. 131 million, profit before tax from Rs. 2.4 million to Rs. 57.8 million and profit after tax from Rs. 1.3 million to Rs. 42.8 million.

Balendra said that the directors were happy to propose a first and final dividend of 30% taking up Rs. 7.1 million for the year under review and transfer Rs. 6.3 million to the reserve.

"The outlook for tourism for the ensuring year looks very bright, and we are confident of even better results provided the internal strife as well as the global uncertainties that presently exist with our South Asian neighbors undertaking nuclear tests, does not escalate into something more serious,'' he said.

The Village had operated at 54% occupancy year round, a considerable improvement from the previous year when it had to be closed off season with tourist arrivals dismally low due to the security situation. As a result, turnover had better than doubled to Rs. 60.9 million from the previous year's Rs. 26.5 million - an improvement of 130%.

The previous year's loss of Rs. 4.2 million was reversed to a Rs. 6 million profit and after adding Rs. 4.5 million dividend income from the company's investments, a pre-tax profit of Rs. 10.7 million was posted. This compared with the Rs. 0.02 million earned a year earlier.

Balendra said that the hotel, now nearly 25 years old, was being maintained in "a most satisfactory condition.'' But the cost of repairs and maintenance continued to increase. Sufficient funds had therefore to be provided to ensure that accommodation facilities were maintained and even upgraded to meet the challenged of the competition that has built up in the cultural triangle area.

"Overall, client satisfaction continues to be very high,'' the chairman said.

JKH is the dominant shareholder of the company with an equity stake of 85.76%. In addition to a 42.4% stake in Walkers Tours, Habarana Walk Inn owns equity in other quoted and unquoted JKH companies.

The directors of the company are Messrs. K. Balendra, V. Lintotawela, C.J. Fernando and S.N. Thambapillai.

Watawala to introduce its branded teas to local market

Watawala Plantations Ltd. is planning to introduce its value added branded teas to the local market so that local consumers could buy the best tea manufactured by the company at competitive prices.

This, while creating a brand equity for the company's product, would also to some extent insulate the performance of the company from the vagaries of the market, its Chairman, G. Sathasivam told the shareholders.

The Company's total turnover rose to Rs.1,245.17 Mn compared to Rs.894.79 Mn last year an increase of nearly 37%, the Chairman said in his report for the year ended 31st December 1997, now with the shareholders.

He said that over the last two years, importance has been placed for the improvement of agricultural practices in estates and this has begun to show results by way of increased yields.

During the year, the company exported about 210 Mn kgs of tea including 0.75 Mn kgs of its own teas. The company produced about 8.88 Mn

kgs of tea, a 25% increase over the previous year's production of 7.36 Mn kgs. The production of rubber during the year at 1.28 mn kgs was almost at the same level as in the previous year when the production was 1.27 Mn kgs. However, production of palm oil at 2.74 Mn kgs fell by 9.47% during the year compared to 3.03 Mn kgs the last year.

The stagnation in the production of rubber could be partly attributed to the weather condition which were adverse to tapping . The fall in oil palm production was due mainly to lower yields of palm trees and necessary corrective action has already been taken by the company to improve the yield, the Chairman said.

He said that during the current year, there has been an unprecedented increase in labour wages and, in an effort to ensure that it does not significantly erode into the company's profitability, efforts are being made to achieve higher production and enhance quality.

The principal activity of the company during the year was cultivation, manufacture, and sale of tea, rubber and palm oil and trading in tea.

In September l at year, the Secretary to the Treasury, who was holding 49% of the issued share capital of the company, sold to the public through an offer for sale, 4 million shares of the company, equivalent to 20% of the issued share capital, and the response was overwhelming. The shares of the company were listed with the Colombo Stock Exchange from December 1997.

Two more Pages on Ceylon Theatres board

Two more members of the Page family, Mr. J.C. Page and Mr. V.R. Page, have been appointed to the board of directors of Ceylon Theatres Ltd. of which their father, Mr. Albert Page, is chairman and brother, Mr. Anthony Page, is managing director.

The Pages have a substantial holding in Ceylon Theatres.

The Colombo Stock Exchange also announced the following board changes in listed companies: Mr. Sumal. S. Perera, chairman of Sathosa Motors Ltd. and Mr. H. Nagashima, chief operating officer.

Mr. Jeevan Thiagarajah, director of Hayleys Photoprint Ltd.

Mr. M.O.F. Salieh, chief operating officer of retail banking of the NDB as a director of Mercantile Leasing Ltd. Dr. H.S.D. Soysa (deputy managing director) has resigned from this company.

Mr. Mahendra Jayasekera has been appointed a director of Lanka Walltile Ltd. Messrs. T.K. Bandaranayake and G.M.P. de Silva have resigned from the board of this company.

Mr. M.P. Wijesinghe, has been made the non-executive chairman of Metalix Engineering Ltd. with effect from June 26. He resigned his previous position of director/chairman of this company on June 25.

CTC Eagle sets up new subsidiary

CTC Eagle Insurance Co. Ltd. has set up a new subsidiary, Rainbow Trust Management Ltd., "with a view to providing further services to Eagle life policyholders and Eagle NDB Fund Management clients.''

A company news release said "that the subsidiary will operate independently to provide trustee and associated administrative services for clients and exploit emerging market opportunities in fields associated with insurance and fund management.''

by Kanes

Age Profile of the Workforce
Labour participation rate is highest in the age groups 20 to 49 as shown in the following table.

Nearly 70 per cent of age groups 20-49 actively seek employment as compared to about 23 per cent of the age group of over 60 and 1.3 per cent in the youngest age group of 10-14 years.

The Department of Census and Statistics (1991) Labour Force Survey reveals that although unemployment overall was 14.4 per cent, among the young it was higher. Of the total unemployed, over 70 per cent were estimated to be between 20 and 34 years of age. The surveys revealed that the proportion of unemployed was 30 per cent in the age group 15-19 years, 35 per cent in the 20-24 age group and 17 per cent in 25-29 age group. In contrast, less than 5 per cent among those 34 years or older were unemployed. Unemployment thus is a major problem among the youth. Youth unemployment is further higher in the urban (18.5 per cent) than the rural sector (13.6 per cent). These unemployed youth are also educated; about one-third has passed at least the G.C.E. (ordinary level) examination while 14 per cent have passed the G.C.E. (advanced level) or higher.

As new industries need new skills they tend to employ the young who have acquired these skills and thus lowers the age profile of the workforce. For example, most of the female workers in the BOI enterprises in export processing zones, as stated earlier, are between 18 and 25 years of age.

Wages - Nominal and Real
Nominal minimum wages of all workers have increased by five to ten times in the last 18 years - 1978 to 1996. Those in the private sector - wages boards trades - belong to three categories - agricultural workers, industrial and commercial workers and workers in services; and nominal minimum wages of those in agriculture increased by about 10 times, of those in industry and commerce by seven times and of those in services by about five times. In the government sector nominal minimum wages increased by about eight times for all central government employees and school teachers. Real wages, however, appear to have increased, though slightly, for some and declined for others. The real wage rate index of private sector workers in wages boards trades in 1996 for instance was almost the same as in 1978; it had increased until 1993 but declined thereafter as shown in the table. It is significant, however, that the real wage rate index of workers in industry, commerce and services was much lower in 1996 than in 1978; that of workers in industry and commerce had declined from 102.6 in 1978 to 85.9 in 1996 while that of workers in services had fallen even more sharply from 107.8 in 1979 to 61.3 in 1996. The real wage rate index of agricultural workers on the other hand rose from 99.0 in 1978 to 113.9 in 1996; thus, in the private sector it was only agricultural workers mainly plantation labour whose real wages increased in this period.

The real wages rate index of all central government employees appears to have fallen in this period - from 105.2 in 1978 to 103.0 in 1996, but here again, while that of non-executive officers has fallen from 107.8 to 95.2, that of minor employees increased from 105.3 to 110.6. Thus, the real wages of clerks have declined while those of peons, messengers, attendants and other manual workers have risen in recent years. Government school teachers too have suffered a fall in real wages: their real wage rate index declined from 105.3 in 1978 to 95.7 in 1996.

The main cause of the decline in workers' real wages was the increase in cost of living on account of the rising prices. The Colombo Consumers' Price Index for instance, increased over eightfold or by 737 per cent from 227.8 in 1978 to 1906.7 in 1996. The highest increases in price were in fuel and light - 1270 per cent - and food 788 per cent. Thus, the increase in money wages was neutralized by the increase in prices - inflation. Deregulation of the labour market and relaxation of labour laws in the context of unemployment, normally tends to depress real wages. In the export processing zones where the new industries are established the labour market is more flexible and labour laws less strictly applied. Perhaps this factor too could have contributed to a fall in real wages. Of course, this tendency is resisted by trade unions and it rarely operates where there is strong trade unionism. The agricultural workers, mainly plantation workers have succeeded in securing higher real wages in recent years because of the strong countrywide plantation workers' union led by a Cabinet Minister himself. Trade unions of government minor employees too are strong and enjoy political patronage; this explains the increase in their real wages.

The published data, however, relate to the organized sector of the economy. In the case of the unorganized sector where trade unionism is virtually absent, real wages appear to have declined even more sharply in recent years. The proportion of population living below the poverty line had increased during the liberalized years from 18-19 per cent in 1973 to 20-23 per cent in 1978-1979 and to 27-28 per cent in 1986-87. The vast majority of the poor - 92 per cent - in 1996/1997 lived in rural areas and in almost half the poor households, the occupation of the main income earner was related to agriculture.

Globalization has a tendency to keep real wages down in the developing countries. The pressure of international competition and the increase of competition among developing countries to attract foreign direct investment tends to keep real wages down and working conditions stagnant. Import liberalization which accompanies globalization, also tends to keep real wages down in the protected industrial sectors which are now exposed to competition. The workers in such industries are prepared to accept cuts in their real wages rather than lose employment altogether.

Labour Strikes
Relations between employers and employees in Sri Lanka have rarely been cordial; consequently, strikes have become a common feature in industrial relations as shown in the table. Generally, the plantation sector appears to have more labour problems than the nonplantation sector. After a lull in 1974-1975, strikes increased in number and the number of mandays lost peaked in 1978 to 1984; thereafter, things were quieter except for 1990-1992 and 1995-1996. Even as late as 1996 there were 137 strikes involving 50,982 plantation workers resulting in 220,121 man-days lost. In the non-plantation sector, the number of strikes, the number of workers involved and the number of man-days lost were much less than in the plantations in the last 27 years. There were fewer strikes after 1970 until 1994-1996; workers involved were small in number except for 1989 and 1994-1996; and the number of man-days lost were highest in 1984, 1989 (the peak) and 1994-1996. In 1996 for instance there were 87 strikes involving 24,215 non-plantation workers resulting in 168,786 man-days lost. The plantation workers appear to have used the strike weapon more effectively to win their demands and this perhaps explains why the real wage rates rose in this period while those of other workers fell.

The crushing of the government servants' strikes of 1980 using emergency laws and the dismissal of strikers resulted in relative labour peace in the government sector in the eighties and early nineties, but government servants have become more belligerent and less hesitatant to resort to strikes with the change of government in 1995.

by Analyst
The economy grew by 6.4% in 1997, recovering from the depressed conditions in 1996 caused by power shortages and harvest failures. The inflation rate also declined in 1997 from 12% in 1996 to 9%. Unemployment rate declined from 11.1% in 1996 to 10% in 1997 and the balance of payments recorded an over-all surplus of us $ 163 million. Privatisation proceeds from the sale of government assets to foreign investors contributed to the last.

So all in all, 1997 was a prosperous year, although the last quarter saw the contagion effects of the South East Asian crisis on the local stock market. But the government cannot afford to be complacent. There are dangers on the horizon which could lead to an economic downturn this year. Consider the decline in the stock market. It has certainly worsened in May-June 98 and the indices have dropped to rather low levels. How important is the situation in the stock market for the real economy. Not as significant as in developed countries, when the 1929 great depression was set in motion by the collapse of the stock market in U.S.A. But a similar crash in October 1987 did little damage to the real economy, since governments in developed countries have learnt how to protect the real econmy from upsets in financial markets.

But the East Asian and South East Asian countries have so far not succeeded in preventing contractions in output and employment arising from the collapse in the financial markets — the foreign exchange money and stock markets. The crash in financial markets made many companies bankrupt and unable to service their debts. As they retrenched their labour a contraction in demand took place.

Changes in the economy
In the 1960's and 1970's the economy was insular and it was driven by state spending. But now an open economy is in operation with the economy driven by private sector investment and fully open to external disturbances through trade and investment. A comprehensive and coherent macro-economic strategy seem to be in place with the commitment to bringing down the budget deficit and to privatisation. Whether a low budget deficit without restraining current expenditure is sustainable remains to be seen. As for now with privatisation continuing, the budget deficit can be reduced. The exposure to global trade and investment means that any exogenous or externally generated shock such as a large deficit in the balance of payments will affect the internal economy adversely. In 1997 their was an over-all surplus in the balance of payments of US $ 163 million but capital inflows arising from privatisation of Sri Lanka Telecom and sale of shares of the National Development Bank to foreign investors amounted to $ 376 million. So if not for privatisation there would have been no over-all surplus. On the other hand there was an improvement in the current account deficit to US $ 387 from $ 683 million in 1996. Foreign portfolio investment is no longer a significant influence. Short term capital movements were negative. This includes commercial banks holdings of foreign assets which according to the new format of the balance of payments is included under short term capital instead of under monetary movements. Official reserves are still sufficient to finance 4 months imports of goods and services. There has been an mprovement in the debt service burden, as the rate declined from 15.7% in 1997 to 13.7% in 1997. External debt as a ratio of the G.D.P. also improved.

The question is whether these improvements are sustainable in the next ten years as well. Export growth recovered to 13% in 1997 from 8% in 1996. But with the loss of export competitiveness due to the South East Asian currency depreciations export growth will slacken. Apart from a competitive depreciation the other remedy is to improve productivity of capital and labour and restrain wage increases. But no effective action has been taken to reduce the excessive number of holidays or to curb the restrictive practices resorted to by employees and their trade unions. Even the private sector is bedeviled by inefficiency. Management is often weak and afraid to face upto the trade unions. As for the public service its no service at all. Employees in the public sector and the organised private sector have too much job security. They have secure jobs, get high pay for little work and they make extra money from pilferage and embezzlement. We heard how postal employees create overtime for each other and draw more money by way of overtime than their wages. It is impossible for administrators to impose discipline on subordinate staff since the latter have been recruited on political patronage. In the case of the labour grades politicians have recruited under-world characters. The government has decided to give telephones to trade union offices. Should public funds be disbursed in this way to trade union leaders who have shown scant regard for the public. The trade unions are not democratic institutions since the democratic practices and procedures are not followed in their governance. Instead of trying to palaver the trade union mafia the government should ensure democratic governance in these institutions. Trade unions funds are large and there is little or no accountability for the use of such funds by the trade union leaders to their general membership. A cabinet member is the leader of the largest trade union a clear case of conflict of interests. In which other democratic country is a trade union leader allowed to be a Cabinet Minister simultaneously? Democratic practice requires that he should wear one or the other hats but not both at the same time.

Agriculture
The growth in agricultural output by 3.1% in 1997 is from a low base since in 1996 there was a decline of 4.6%. Has the income of peasant farmers improved as a result of the growth in output? There are no statistics of disposable incomes to ascertain whether the economic lot of the peasantry, a large segment of the population, has in fact improved. Economic development is characterised by a substantial increase in the demand for agricultural products and failure to expand food supplies in pace with this increased demand will lead to steep rises in food prices, causing pressure to increase wages in the urban sector. Such increase in wages cause adverse effects on industrial profits, investment and economic growth itself. Agriculture must be made more efficient and it must respond to market forces. Agricultural productivity must be increased. Farmers require better credit facilities and marketing facilities. But they should develop their own solutions to these problems with the assistance of the state. The provision of these services by the state without utilising the organisational skills and savings of the farmers themselves as a base, leads to paternalism. Paternalism fails to mobilise the efforts of the farmers and creates wrong attitudes.

Corporate sector
One of the weaknesses of our corporate sector is that many firms have borrowed too much and are heavily indebted. It was politically advantageous to say that the estates were bought by local firms under the privatisation programme. But none of the local firms had the kind of money required to pay for the estates. So they borrowed from the commercial banks and the development banks. The debt service burden of many companies is high, sometimes as much as 50% of profits before tax. The debt equity ratios are excessive and these companies will find it difficult to maintain dividends. Higher the gearing, a term used to denote debt equity ratios, the greater the risk of failure. Firms often have a lot of assets. Sometimes under-valued assets. But the capital in relation to assets is low. Even some of the banks have a low ratio of capital to assets. And banks are said to be carrying many non-performing loans. The banks are unable to raise equity capital from the public. Owing to the depressed state of the stock market. So they are raising funds by way of debentures. One bank has concluded a debenture issue for 5 years at a comparatively low rate of interest of 13.5 — 14%, while the Central Bank can determine short term interest rates. It is not successful in regulating the long term rate which is affected by the inflationary expectations of savers. Lower short term interest rates are the result of reduction in the statutory reserve ratio of commercial bank funds kept with the Central Bank. The reduction in the ratio not only released a large volume of funds, amounting to Rs. 8000 million (Central Bank Annual Report) but it also decreased the cost of funds since the banks did not earn income on the reserves with the Central Bank. But the banks have not increased their lending to business preferring instead to buy foreign assets or lend to the government by purchase of government securities. Credit expansion was however prominent in the Foreign Currency Banking Units which lend mainly to BOI enterprises. These enterprises are in the fortunate position of not having to face the foreign exchange risk since they carry out their transactions in foreign currency converting only the funds required to pay wages and for local purchases. The foreigners seem to enjoy all the advantages while the local entrepreneurs, particularly the small and medium scale enterprises are starved of credit. No economy in the world has been built only by foreign enterprise. The prosperity to the local economy will arise mainly from the enterprise of the local nationals although foreign enterprises could provide employment. General economic expansion and progress are the most powerful forces for the reduction of poverty. The high interest policy followed by the Central Bank in the past in the name of monetary control of inflation, discouraged private sector investment. The present policy of moderately low interest rates and the grant of loans from the Asian Development Bank to the plantations could lead to faster growth if the tea prices hold. But there are indications that tea prices may not boom for long. In fact any significant down turn in the price of tea may put many of the plantation companies into financial distress.

Unemployment
The 1997 Annual Report of the Central Bank refers to the reduction in unemployment to 11.5% as reckoned from the consumer finances and Socio-Economic Survey for 1996/97. But youth unemployment is quite high almost 30%.

Economic growth alone cannot solve the problem of unemployment among the educated youth. Many of them are unemployable in the jobs they seek. Specific programmes of training and job creation are necessary to cater to youth unemployment. The youth are the victims of wrong educational policies pursued by all governments since 1956. It is politically not palatable to say the truth, that university education is a colossal white elephant. In fact politicians pledge to increase the number of universities comparing the ratio of the university educated to the total population with that prevailing in developed countries. Their needs are different. If we were to produce engineers, computer programmers and computer software specialists, we could support more graduates. But the economy does not need the large number of arts graduates turned out each year. We need to speed up technological and scientific advances and to diffuse them widely among the population. But our universities have never even tried to do so.

WAR
In USA in the 1960s President Johnson tried to combine guns with butter and sought to prevent his "great society" programs from being sacrificed for military spending. The economy could not finance both without an increase in taxes. Deficit financing overheated the U.S. economy and brought on inflation and loss of foreign exchange reserves. Our policy advisers seem to think that they can pull off the trick President Johnson failed to do in the largest economy in the world.

So we argue that our economy is resilient and carry on with the war, stubbornly refusing to explore alternatives. Long winded essays are written debunking the Tamil argument for traditional home lands. Much is written about the rights of the majority. But if there is to be a single state encompassing the Tamil minority surely they must be willing participants. How to secure their willingness and support for a single state is the problem to be tackled. The longer the war drags on, the more hardening of their attitude is to be expected.

How can public services be expanded or even maintained at the current level without allocating more resources? The current expenditure is being frozen year in and year out inspite of regular inflation. How can the quality of service in education, health etc he maintained unless expenditure in real terms is kept going? There is the need for expenditure on infrastructure like power, energy, roads, bridges, railway and bus transport. There is no money for such investment. It is such investment that has been sacrificed with the World Bank insistence on cutting the budget deficit. A distinction has to be drawn between the short term increases in output and income on the one hand and the economy's capacity to grow faster. The latter requires large investments in infra-structure. We have neglected such investments for too long.

Sustainable economic growth rates require additions to the economy's capacity to produce. This depends not only on the combination of labour and capital but also on the productivity of these factors of production. The productivity of our labour is pretty low while our capital cannot be fully utilised owing to the numerous holidays and excessive leave entitlements. We must improve output per hour of work. The government can manipulate aggregate demand. But it cannot increase aggregate supply easily. The introduction of technology, the efficiency of management of human and physical capital are not susceptible to government manipulation. Manpower training and education as well as labour market policies must change to reduce unemployment. The escalation of war spending without compensatory tax increases will disturb macro-economic stability and economic growth.

The war seems to be entering a phase where there is mutual destruction of resources. They used to call it "scorched earth" policies when the invading enemy destroyed the fields and crops. The destruction of transformers will prove extremely costly. Fighting drives peasants from their lands and makes them refugees, consumers instead of being producers. Battle lines keep food andl fish away from markets. So everybody becomes poorer while the arms dealers and corrupt politicians and generals become richer. How long will the war go on? Every deadline announced has passed without outright victory. Wars fought on the emotions of nationalism have rarely ended in victory for the state forces. In several African states such wars have crippled all parties. Only the military have grabbed the fruits of the earth by force of arms. Many African states have had to face famines and epidemics after long drawn out wars. Can we afford to ignore the war and blithely assume continued economic growth and progress.