• CSE expects company statement
  Stock Exchange suspends trading in Grain Elevator shares
• Jan.-June figures running behind last year's
  Will winter help pick up lost tourism numbers?
• Investors interested, but at what price?
  Aitken Spence chief upbeat about raising new cash
• Asia Capital takes 20 percent of LOLC
• Operational conditions now better
  Mid-year performance down at Three Acre Farms

• Entrepreneurship Development Training Programme
• Tea Auctions advanced
• Top price for CTC tea
• The deepening Asian crisis
• Economic commentary on SAARC
• Bombay and Karachi too hurting
  Colombo not the only victim
• The view from Olhuveli
  New Maldivian hotel offers Aitken Spence rosy prospects

The Colombo Stock Exchange Thursday suspended trading of shares of Ceylon Grain Elevators Ltd. (CGE), a listed company, following the imposition on it of a massive Rs. 1.2 billion customs fine for alleged irregular trading in duty free maize.

The first news of the fine broke on a morning newscast on Thursday morning and the CSE acted quickly to stop trading in the share. The suspension remained in force throughout Friday with a CSE spokesman saying they are awaiting a company statement. This statement was not received up to the close of business on Friday.

No senior officer of the company was available for comment on Friday. They were closeted at meetings. One company official contacted on the phone said that he could not say anything about a statement. He denied any wrong doing and said that they were taking legal action to protect the company's interests.

CGE is the country's biggest feed miller. An associate of Prima Singapore which mills flour for the government at Trincomalee in return for the bran by-product, the group is a producer of day-old-chicks (both layers and broilers) and is into shrimp farming, retailing and other activities connected with the livestock and bakery industries.

It purchased the business of Christombu Farms Ltd. last year, taking over the production and marketing operations.

The group which has one quoted subsidiary, Three Acre Farms Ltd., has other unlisted companies under its umbrella.

The CGE share which went down a couple of years ago following the sale of a large foreign shareholding had since been recovering lost ground and is a counter recommended by many stock analysts. It is a frequently traded share with transactions recorded almost every day.

CGE last traded on Wednesday at a high of Rs. 29.50 and a low of Rs. 29.25. Before the current slump on the stock market, the counter was touching Rs. 40.

Unless there is a pick-up in tourism arrivals during the forthcoming winter season, 1998 may see a slight decline in tourism from last year, industry analysts looking at the latest figures said.

Provisional Tourist Board data indicates that June arrivals were down 3.2% to 22,410 from a year earlier. Although this is an improvement of the May picture which recorded a 9% decline from the comparative month the previous year, and an average 5% drop in March-April, the half-year picture is running behind last year.

"Arrivals in Jan. - June this year at 173,151 is down 0.6% year on year. While part of the reason for this is the terrorist problems we've had, we believe the main reason for the slowdown is most likely increased price competition in the region. Thailand, Malaysia and the Philippines have brought down their room rates sharply following the sharp devaluation of their currencies,'' an Asia securities analysis of the sector said.

"The Indian and Pakistani nuclear tests together with the riots in Indonesia, may also have diverted tourist attention towards alternative destinations outside Asia.''

According to this analysis, the fact that Sri Lanka has traditionally focused on the lower end of the global tourism market, the current give-away room rates in alternative destinations plus heightened security considerations do not bode well for the tourism sector.

"In view of the twin impact of a slowdown in arrivals and a sharp 12% increase in beach resort room supply, we expect to see further downward pressure on the margins of resort hotel companies,'' the Asia analyst said.

But the city five-stars, given their greater exposure to business travellers, are expected to be less affected. With 17% of the room supply lost following the World Trade Centre bomb together with an on-going refurbishment at the Colombo Hilton where some rooms are closed, there is more business for the rooms that are operational.

But some of the non-five star city hotels say that they are not selling as many rooms as they would wish given current conditions although banqueting and other function sales are doing nicely.

Aitken Spence CEO Ratna Sivaratnam flies off tomorrow to present an international roadshow marketing a major slice of slightly over 7 million shares of his company overseas at a yet undetermined price.

He is confident of raising the cash to fund the group's ambitious expansion plans but resigned to the fact that the current depressed state of the Colombo stock market will depress the price at which the new shares can be marketed.

When the company first charted the strategy of an overseas placement of 10 million shares, diluting its present issued capital 19.3 million ten-rupee shares by about 50 percent, a price of over Rs. 150 a share seemed realistic. But now, after the battering the Colombo bourse has taken from the East Asian crisis, the nuclear tests on the subcontinent and weakened yen, it is obvious that they must settle for much less.

But how much less? Sivaratnam was cautious about giving figures. The company, obviously, is keen on getting a price higher than current market. The CEO who is also chairman and managing director of the blue chip conglomerate is quietly confident that he can raise the cash, though somewhat less than originally envisaged when market conditions were better.

Last week shareholders of the company received a circular letter telling them that they have an "opportunity to participate in an open offer of shares.'' What that translates to is that existing shareholders may retain their present percentage in the company by taking up additional shares in proportion to their holding at a still undetermined price.

They've been asked for an "expression of interest'' on whether they would take their entitlements once the deal in packaged and also whether they are interested in additional shares.

Sivaratnam said that the directors of the company and its employees own about 25 percent of its issued capital. They will take up as many shares as they can within the limits of the tax shelter they are entitled to in terms of the last budget proposal granting investment relief on new shares of quoted companies purchased by individuals.

To taxpayers in the top bracket, and that includes the directors of Aitken Spence, that would mean that 35 percent of what they pay for these shares would be money they would otherwise have paid as taxes. But to benefit from the tax shelter, they must hold the shares for three years.

Sivaratnam said that he would also be talking to other high net worth individuals interested in taking this same tax break. Some he had spoken to had been interested, he said.

Analysts regard the share as "going cheap at the price'' to borrow the headline of a research study of the offer by Socgen-Crosby. A big plus on Aitken Spence's expansion plans is a new hotel in the Maldives at a price of around USD 12 million.

The company has been doing very well with its Maldivian hotel properties that have added a lot of shine to its profit and loss account. With 5% of the Maldivian resort beds already under its belt, the operation would be further expanded if a third resort comes under its control by the end of this year.

Socgen-Crosby says that "end December appears to be a realistic target for Spence to take ownership and management control. As the hotel is already in operation, contributions should be seen from day one.''

The Aitken Spence directors got shareholder authority to place a maximum of 10.4 million shares. The 7 million they are offering is only 67.3% of this figure, with the right reserved to issue the rest later.

"They are obviously thinking of a better price later down the road or at least a hedge against a further market downturn. Also, the tax break was granted only for a year and the major part of the issue must be completed by November if the Lankan shareholders including the directors would benefit from the shelter,'' an analyst explained.

Lehman Brothers, who are advising Aitken Spence on the issue, are bullish about the company's earnings prospects with its gearing improved with the new cash infusion. With a new Maldivian hotel and earnings from investments in plantations, the company's earnings per share is projected to rise from Rs. 8.53 this year to Rs. 14.10 next year and 18.70 in 2000, they have said in a research note. It labels Aitken Spence as a "premium blend for earnings growth.''

Asia Capital Ltd, "in pursuance of its objective of acquiring strategic stakes in sound well managed businesses'', increased its holding in Lanka Orix Leasing Company (LOLC) to over 20%. This gives LOLC associate company status and Asia Capital intends to equity account for LOLC's earning in the future, a company news release said.

LOLC is the premier leasing company in the country with a significant market share and has acquired over the years, through its tie up with the Orix Corporation of Japan, skills and expertise of international standard.

Speaking about the increased stake-holding, Mr.Dirk Flamer Caldera, chief executive of Asia Capital Ltd said, "It is our view that leasing/factoring are business areas with high potential for growth under our present status of economic development.

"The long-term objective of Asia Capital is also to be involved in similar types of businesses. The policy of Asia Capital has not been to venture into these areas of business by developing them internally if expertise is already available outside. Therefore, Asia Capital decided to venture into the arena of leasing through a strategic investment in LOLC".

This is the third strategic investment made by Asia Capital within this year after the change in its management. The first two were Asia Siyaka Commodities (Pvt) Ltd, a tea and commodities brokering company and the strategic alliance with Richard Pieris and Company Ltd.

Asia Capital intends to pursue a similar strategy for growth and diversify its business activities in the future and make strategic investments in areas which it feels have high potential for growth and offer above average returns to shareholders, the company said.

Mr.C.P.De Silva, Chairman, LOLC said, "From the viewpoint of LOLC the purchase is very welcome because it does a number of positive things. It shows that a highly successful financial institution with expertise in financial analysis like Asia Capital considers LOLC a very good investment. It brings the two institutions which are not in competition with each other closer together. It results in synergies that would be of value to both institutions.

"LOLC has been an innovative financial institution that has pioneered a number of financial activities and instruments. Asia Capital discerned that LOLC shares were grossly undervalued. With the help of Asia Capital, LOLC expects to considerably reduce its cost of funds and also widen its customer base. Both companies will benefit from the new relationship".

Endorsing this Mr.Dheerendra B Abeyratne, Executive Director, Ceybank Unit Trust (Pvt) Ltd, said, "the acquisition is likely to benefit LOLC significantly by having direct access to the financial expertise of Asia Capital and thereby being able to exploit the opportunities of the growing capital market.

"This will combine the strength of LOLC in meeting the funding needs of the retail business segments widely dispersed in both urban and sub-urban areas with Asia's capability in mobilizing wholesale funding at attractive interest rates. This no doubt is evident in the dis-intermediation process that is already happening in our economy and I believe that will invariably benefit both investors of equity and debt securities of LOLC.

"Further, it is an effective way for Asia Capital to reap the benefit of the lucrative leasing market without development of in-house leasing expertise. This kind of marriage will certainly enable each institution to do what they are best at rather than getting burdened by diversification into activities for which they do not have the resources to get the best results."

Three Acre Farms Ltd., a member of the Ceylon Grain Elevators Group, has reported "difficult trading conditions'' during the second quarter of the current financial year with over-production of layer day-old-chicks and poor egg prices in the open market.

Additionally, heat stress from hot weather conditions dramatically reduced day-old-chick production, shareholders have been told.

The result was that group turnover for the second quarter was Rs. 126.6 million, boosting the half-year figure to June 30 to Rs. 256.9 million, down 6.7% from a year earlier.

Group profits after tax at mid-year was Rs. 11.8 million, down from Rs. 16.2 million a year earlier.

However, the group's net assets per share had improved 5.2% to Rs. 28.68 from the comparative figure at the middle of last year.

But trading conditions at present "appears to have improved from the last quarter,'' a company announcement to the Stock Exchange circulated among shareholders said.

"The improvement in egg prices, better weather conditions and good demand for broiler day-old-chicks should support activities. We cautiously expect the results for the second half of the year to be ahead of the first half, barring any unforeseen circumstances,'' the announcement signed by Mr. Henry Tan Hong Tjioe, the company's executive director said.

Three Acre Farms which has one subsidiary has an issued share capital of Rs. 231 million and a share premium of Rs. 372.6 million. The company had Rs. 59 million available for appropriation as at June 30, 1998.

The Sri Lanka Business Development Centre (SLBDC) is conducting a training programme on Entrepreneurship Development for the second and third generations of farmers of Rajanganaya at Irrigation Management Division (IMD) Project Office in Rajanganaya commencing from July 20-August 6, an SLBDC news release said.

"The Irrigation Management Division (IMD) of the Ministry of Irrigation and Power and the Sri Lanka Business Development Centre have earlier taken action to identify potential entrepreneurs among the farmer community.

"The main objective of this programme is to develop entrepreneurial competencies of the participants to enable them to embark on other income generating activities or self employment initiatives. Consequently these measures are expected to upgrade their standards of living and improve their quality of life.

"The training methodology used to train the participants is called competency based economies through formation of entrepreneurs. It has been developed by the German Agency for Technical Co-operation (GTZ) and successfully implemented in more than 60 developing countries including Sri Lanka", the release said.

The Colombo Tea Auctions this week have been advanced in view of traffic arrangements for the SAARC meetings, a news release from the Ceylon Chamber of Commerce said.

The sales scheduled for Tuesday and Wednesday have been advanced for Monday and Tuesday at the chamber. Monday's sale will begin at 9 a.m. and Tuesday's at 8.30 a.m., the release said.

At the July 14 Colombo tea auction a PF 1 grade of tea produced by New Peacock Group, Pussellawa, fetched the top price of Rs.113/= per kilo as the highest among Sri Lankan PF 1 - CTC teas.

The brokers who sold this line of tea were Forbes & Walkers.

New Peacock Group is an estate of Elpitiya Plantations Ltd., managed by Aitken Spence Plantation Management (Pvt) Ltd.

By Kanes
It would be a grave mistake to underestimate the Asian Currency Crisis and its possible impact on Sri Lanka. What originally began as a currency crisis and then a stock market crisis, a banking crisis and a debt crisis has now been transformed into an overall economic crisis of production and employment. The crisis is all the more disquieting as it has occurred in a region which has had a high sustained growth of 7-8 per cent a year and had not experienced real unemployment for over 30 years. Further, the crisis is of domestic origin and caused by internal factors unlike in the past when crises in developing countries were caused by crises in developed countries like recession or depression. The crisis has become so overwhelming that it cannot be overcome with domestic action or domestic resources. While it is most acute in three or four countries, it has spread to other countries nearby and is threatening even countries beyond.

IMF Bail-out Programmes
The three countries in Asia that are being helped out of their crisis by the IMF with packages of loans exceeding $100 billion combined with unpopular economic reforms are Thailand, South Korea and Indonesia. These countries have managed with IMF assistance to stabilize their currencies to some extent but this has been at the expense of economic growth and employment. Thus, their currency problem has now become a problem of economic stagnation and unemployment.

In Thailand where the baht has fallen in value by 40 per cent since July 1997 and the stock market was at its lowest point in eight years has implemented IMF inspired reforms faithfully in return for a $ 17.2 billion bail-out package. It has closed down 56 insolvent finance companies, nationalized four large banks, allowed foreign ownership of banks, reduced government expenditure, raised taxes, imposed a gasoline tax, appointed a new governor to the central bank, privatized some state enterprises, downsized the bureaucracy, passed new banking regulations, revamped the bankruptcy law and liberalized its foreign investment laws.

These measures have revived international confidence to some extent. Foreign banks have agreed to delay Thailand's repayment of its outstanding short-term debts of $38 billion and a foreign bank — ABN-AMRO has even bought a controlling interest in a Thai bank. The US has extended trade finance and other credits worth $1.7 billion. Thailand has implemented IMF prescribed reforms so faithfully that the IMF has even relaxed some of its conditions as the targeted budget deficit reduction.

The lowest point may have been passed, but the impact of the crisis is still being felt in the loss of liquidity and of the effect of this on business bankruptcies and lay-offs of workers; non-performing loans are expected to reach 30 per cent of total loans. Some are of the view that Thailand has tried to please the IMF too much so that economic recovery has been sacrificed for currency stability and banking probity.

The baht which was as low as $1 = 48 in January had recovered to $ 1 = 42 by June 1998 but economic growth is expected to be minus 6 per cent in 1998 while unemployment — to be discussed later — will be rising. Some analysts estimate Thailand's growth in 1998 to be as low as minus 11 per cent.

In South Korea, in response to IMF's bail-out package of $ 57 billion, the authorities have suspended the operations of half the country's 30 merchant banks, closed 12 insolvent merchant banks, five ailing banks urging them to merge with stronger institutions, shut down two brokerages and allowed foreign banks to set up subsidiaries. In order to force transparency and rationalization of their business on the chaebols, new regulations require them to cut their debts by more than half by the end of 1999; to stop their subsidiaries from subsidizing and guaranteeing each other's loans, and to concentrate on a few core businesses by swapping assets. But whether they can be fully implemented in the teeth of opposition by the chaebols is in doubt.

Restrictions on foreign exchange and on the purchase of Korean stocks, bonds and property by foreigners have been lifted and even hostile takeovers by foreign companies are allowed. There is, however, no coherent plan to reform the Korean banks which are saddled with about $ 70 billion of bad loans.

Foreign banks have agreed to roll over some $ 150 billion of foreign loans amassed by Korean banks and firms, but worries remain regarding the $ 50 billion more of liabilities run up by the overseas subsidiaries of firms and $ 400-600 billion of domestic debt of companies and interest rates at high levels of 25 per cent. The Korean won has recovered from as low as $ 1 = 1695 in January to $ 1 = 1394 in June 1998, but economic growth in 1998 is expected to be minus 2 per cent. In fact, some economists are more pessimistic and expect the growth rate to be minus 11 per cent with increased unemployment. In the first quarter of 1998, GDP contracted by minus 3.8 per cent. As more than 10,000 firms have gone bankrupt since January 1 and 7000 people are losing their jobs each day, the authorities are renegotiating with the IMF to lower interest rates and prevent further bankruptcies and unemployment.

Indonesia which attempted to set up a currency board in defiance of the IMF has now reached a new agreement with the IMF. In addition to the IMF bail-out package of $ 41/2 billion which was kept in abeyance during Suharto's presidency, IMF has agreed to provide a further $ 4-6 billion in loans for balance of payments support in 1998-1999. While the previous agreement had concentrated on economic reform and the dismantling of monopolies, the new deal has a much more basic focus-fighting the deepening hunger and deprivation suffered by the growing ranks of Indonesian poor. Subsidies on food and essential commodities which the IMF wanted to be scrapped in pervious deals will now remain in place until the economy moves. It will be recalled that it was the removal of subsidies on food and fuel which increased petrol prices by 70 per cent, electricity rates by 60 per cent and food prices by more than 50 per cent, which was a major factor behind the unrest which ousted Suharto. The IMF seems to have realized perhaps belatedly, that economic reforms can be introduced only if the people are fed first and essential food made available to them at affordable prices. However, the IMF has pushed Indonesia to sell off 12 state owned companies, close 16 insolvent banks, place 54 banks under supervision, guarantee deposits, restrict bank lending and approve mergers.

Under the agreements between Indonesia and foreign banks, about $ 60 billion of private debt is to be rescheduled. Private borrowers will be required to pay only interest for three years and thereafter they will be given five years to repay the principal with the government agreeing to shield debts from currency risk in the event the Rupiah falls further; commercial banks have benefited from having repayment dates on $ 9.2 billion of debt extended up to four years; and trade finance will be provided at levels prevailing before the crisis of April 30.

The Rupiah had fallen in value by over 70 per cent since July 1997 and it is currently at the low level of $ 1 = 14,200 as compared to $ 1 = 5950 in January 1998, but it is lower than weeks earlier when it exceeded 15,000 to the dollar. The economy is in deep crisis with 70 per cent of non performing loans and most companies insolvent and technically bankrupt. It is expected to have a negative growth of 10 per cent; some even forecast a growth rate of minus 23 per cent with massive unemployment. The economy contracted by 8.5 per cent in the first quarter of the year, and prices have risen by 33 per cent and are still rising.

Negative Growth
There is no evidence of an early recovery in these three countries. In fact, several analysts believe that they will have negative growth for about three years at a stretch. This is in contrast to their average annual economic growth of 7-8 per cent in the recent past. The loss in production cumulatively if there is negative growth for three years is estimated at 20-25 per cent which is close to that of 30 per cent decline in output in the developed countries during the Great Depression of 1929-1933.

The depression in thee countries has affected all the other countries of the region, particularly Malaysia, Singapore and Hong Kong which according to some analysts may experience negative growth this year. In Malaysia, the currency became stronger in March since its decline from July last year but weakened again in June to the same level as in January. Its GDP shrank 1.8 per cent in the first quarter of 1998 — the first negative performance for years and analysts estimate growth to fall by 3 per cent this year. Its prices have increased by 21 per cent since the crisis began and car sales have fallen by 70 per cent. Malaysia has not gone to the IMF for help but instead is carrying out economic reforms by itself such as merging 39 finance companies into eight and restricting bank lending. Its policy of bailing out politically connected companies including that owned by the Prime Minister's son and its criticism of foreigners and charges that foreign speculators have caused the Asian crisis have not won it international confidence. Although Singapore's economy is fundamentally sound, her close trade and financial links with other countries of the region have made it vulnerable to the vagaries of the region. Its internal demand has declined and its sales of luxury cars have fallen by 35 per cent in the first quarter of 1998: Singapore is estimated to grow at 2.0 per cent in 1998 as compared to 7.8 per cent in 1998, but some analysts expect growth to be negative. Property prices are down by as much as 35 per cent from their peak.

The Singapore dollar has become slightly stronger since January 1998. Hong Kong's economic growth too is expected to be negative this year. GDP shrank 2 per cent in the first quarter and is expected to do the same in the second quarter; Hong Kong stocks have lost about 43 per cent of their value. Its exchange rate stability at $ 1 = 7.8 is maintained by high interest rates of 12 per cent for three-month loans — highest in 14 years – which are hurting business and discouraging investment. Hong Kong's property values have dropped by some 40 per cent, its sales have fallen for one and a half years, and its tourist earnings are falling. It is finding it strenuous to maintain its peg to the US dollar, particularly when the yen is rapidly depreciating, but there is little likelihood of a devaluation in the near future. The government has launched a $ 4.1 billion economic rescue package to add liquidity to the market and lower interest rates. Economic growth of the Philippines is estimated to fall from 5.1 per cent in 1997 to 2.5 per cent in 1998. Growth in the first quarter of this year was only 1.7 per cent. Philippines has increased bank capital requirements by 50 per cent over the next two years.

The crisis has not affected China yet although indications are that it cannot remain insulated against the crisis for long. It has maintained a stable currency, and although its economic growth may be a little lower than the previous year, it will still have the fastest rate of growth in the world. China's currency is inconvertible and there are capital account controls to restrict movement of foreign capital. Its short-term bank borrowings are limited and its external borrowings are equal to 17 per cent of GDP is compared with 56 per cent in Indonesia and 30 per cent in South Korea. Taiwan's currency appears to have weakened in June as shown in the table and hit a 11 year low. Its growth in 1998 is estimated at 6.0 per cent or slightly less than in 1997 as it is adversely affected by the depreciating yen. Its exports declined by 6.4 per cent in the first quarter of 1998.

The Asian crisis is expected, according to IMF forecasts in April 1998, to reduce world economic growth from 4 per cent in 1997 to 3 per cent in 1998, but the deterioration of the situation since then has made some analysts to fear that world growth would fall to 2 per cent in 1998.

by Analyst
A daily newspaper has reported that the SAARC Chamber of Commerce and Industry has opposed the recommendation of a group of eminent persons that the SAARC Free Trade Area be postponed from the projected year 2001 to 2008. The Federation of Chambers of Commerce and Industry, a local grouping has echoed this sentiment. They argue that such a postponement would erode the enthusiasm of the private sector businessmen and that it would expose a total lack of commitment and seriousness of the governments of the SAARC countries.

Misgivings
But serious misgivings have been expressed because our cost and price structures are much above the Indian structures. Our macro-economic policies since the 1960s have been inflation oriented. Deficit financing was in vogue during the 1960s. Since the fixed exchange rates were the norm, there was no alignment of our prices and costs with those of the Indian sub-continent. There was also the inward oriented policies which favoured import substitution behind high rates of effective protection, direct controls and import licences with little if anything in the way of offsetting incentives for exporters as was done in South Korea. The Rupee continued to be over-valued. The end result was that the prices and costs got out of line with those countries in the outside world which followed sound macro-economic policies Protection breeds economic inefficiency. Producers are restricted to the domestic market where they achieve considerable market power if not monopolistic power. The small domestic market makes it almost impossible to achieve economies of scale. The consumers are fleeced.

To maintain protection through tariffs and quotas requires a bloated bureaucracy which soon became corrupt.

Our High Costs
Along with protection there was also inflation induced by deficit financing. The rate of inflation in Sri Lanka has been much higher than that of India for the last three decades. So the domestic prices have gone much higher than the prices of similar goods in India. What economists used to call "wage goods", those goods of basic consumption required by urban workers have risen much more in Sri Lanka than in India. Consequently wages have risen to compensate for the higher inflation. There is a marked relationship between wages in the organised sector and the rate of inflation. So as the prices of wage goods rose with inflation caused by domestic and external factors, wages rose.

Today wages in Sri Lanka are much higher than on the Indian sub-continent. The observed economic trend has been for industry to migrate from high cost centres to places where wages are low. We are fortunate to have attracted foreign investment to the apparel industry because of the quota system for each developing country.

Not only the wages but even the interest rates in Sri Lanka and the Indian sub-continent have diverged with the Sri Lankan rates being much higher to compensate for the higher inflation and the lack of savings. The spread between the Indian and Sri Lankan interest rates have not been narrowing either.

SAPTA
Initially the member governments of SAARC sought to introduce trade preferences for member countries. But negotiations on trade preferences was initially on a product by product basis rather than across the board reductions. Lists of goods where trade concessions were sought were exchanged. We have recently obtained tariff reductions for some 60 odd products. But India had and still has many non-tariff barriers which are far more crucial. Transparent, stable and predictable regulations are required for trade to develop. Future planning and investment to promote exports is not possible without such a stable regulatory environment. So the tariff preferences granted so far have had little impact on furthering trade within SAARC.

Experts have suggested the introduction of a payments agreement similar to the European Payments Union which preceded the European Free Trade Area and the European Monetary Agreement. The European countries accepted the need for economic integration and worked diligently towards it. Germany had the lowest rate of inflation and other currencies that sought to curb inflation sought to tie their national currency to the German Mark. Of course the formal mechanism, called the European Exchange Rate mechanism nearly collapsed when Britain was ejected out in September 1992. But it did manage to reduce both inflation and exchange rate volatility among European currencies.

As for the currencies of the SAARC they move independently of each other. They follow the US dollar but there is no co-ordination among the intra-SAARC currencies. Even if rigid arrangements cannot be maintained, shouldn’t there be some loose arrangements where the Sri Lankan rupee follows the Indian rupee, which is still the strongest SAARC currency. It will be difficult if not impossible to move towards economic integration within SAARC if the currencies of its members are free to fluctuate against each other as widely as the dollar or the yen.

To bring prices and costs in SAARC countries into line also requires that the rates of inflation in them are also similar. Any market differences in the rates of inflation among the member countries affects their competitiveness. Countries with higher rates of inflation become less competitive and their currencies, may appreciate or depreciate in real terms.

Adjustments needed
So before we can enter SAFTA we have to make adjustment to our cost/price structures. The adjustment burden is on us because we are uncompetitive with India. The position is made worse by the low productivity of our labour vis a vis Indian labour. It is not possible to cut money wages as the workers will resist it with strikes, go slows etc. Even cuts in real wages is not possible because the urban worker is used to demand increases in money wages to compensate for increases in the cost of living. Nor can we improve productivity given the excessive number of holidays and paid leave entitlements. One other way to restore competitiveness is to depreciate the rupee. But even this is not feasible given the sensitivity of wages to inflation. So the least painful way is to improve the productivity of labour.

Trade unions will have to recognise the right of management to restructure their enterprises to achieve higher labour productivity. This is where the Labour Charter would spell disaster. It is also why trade unions must agree to lower job security by abolition of the Termination of Employees Act. Management must set about downsizing where necessary and there should be no legal impediments to their efforts. Any excessive compensation for retrenched workers should be borne by the government as in the case of unemployment insurance in developed countries. Less job security will make for a more disciplined work-force. Everybody agrees that our workers are a most undisciplined lot.

The President recently stated that foreign investors prefer to employ our women rather than the unemployed men because the latter organise themselves in militant trade unions. It is necessary for the government to ensure that trade union leaders are accountable to their general membership. As it is, the trade union leaders decide on their own to strike. In no democratic country in the world is a strike decision taken without putting it to the vote of the general membership. If trade union leaders want to claim democratic rights they must act like democrats and not like thugs. They have no right to intimidate anyone who is not supportive of their case.

It's time the government passed a law regulating trade unions and strikes. Any damage caused to the employer’s property must be recovered from trade union funds and the leaders must be held liable if they have instigated their members to resort to violent conduct. Sympathy strikes in support of other groups of workers must be banned by law. The President of the Ceylon Workers Congress has recently stated that the workers must remember that in the last resort the government will back the employer. This is a misleading statement. The primary duty of the government is to the community — the people who cannot be made to suffer because to workers and their employers have locked horns in battle.

No government can fail in its duty to maintain the services essential to the community. As for the trade union leader also being a cabinet minister, a clear conflict of interest arises. Public morality requires that nobody should place himself in a situation of conflict of interest and exploit his interests. It's time that both national parties announced a common stand on such issues of public morality.

To get back to the subject of competitiveness, it must be stated that trade within SAARC cannot be increased unless their currencies are stable relative to each other after an initial correction to restore competitiveness.

SAARC needs to think seriously about the way in which future progress is to be made. It must ask seriously where it wants to end up. Does it want eventual economic integration. If so what measures will be required to achieve such a goal and over what span of time.

SAARC members have hitherto moved incrementally without asking where it should end up, hoping that one day it will arrive somewhere which is good. A bit more freedom in trade is always worth having. But such steps are not likely to produce results unless the member governments realise the deeper implications.

Role of India
Europe has achieved a high degree of economic integration without moving towards political integration. SAARC can do the same. Much can be done by economic reform in all the countries of the region. India’s India needs others much less than they need her. Our trade with India shows a massive deficit. We buy much from India but she buys very little from us. Although strict bilateral trade balancing is not necessary yet the deficit is too large.

Our exports have a high import content, amounting to almost 50%. So rules of origin must be liberal. India must give the lead, just as Germany and France did in European integration. Ties of history. language, culture and religion do help people to tie across national frontiers. If a SAARC community is to develop it will have to come out of the decisions of the businessmen in these countries. It is in India’s long-term interests to build SAARC. Indian businessmen can provide capital and even technology to the countries of SAARC. As India develops and accelerates its growth rate the scope for inter-SAARC trade investment, technology and even tourism will expand. India will aspire to regional leadership and such leadership will be least resented if the countries in the region are bound together more closely in their trade and investment. Opening India’s economy to SAARC counties will not constitute a threat to India’s industry or agriculture. Foreign trade doesn’t play any significant role in India’s economy.

The world may be moving away from free trade to economic regionalism. The recent nuclear explosions in India and Pakistan have attracted the threat of economic sanctions by the West. The West is organising themselves into two large regional blocks — European Monetary Union and a large free trade area encompassing USA, Canada and eventually Latin America. Asian countries are in danger of being shut out from these regional blocks greater regional co-operation and integration among SAARC countries will mean that it is more attractive for foreign investment in the whole region. Particularly by Japan the political influence that ASIAN has achieved in its sphere speaks for itself. India can do the same by giving leadership to SAARC capital movements within the region can be liberalised.

The value of co-operation among SAARC members must be promoted by India among government officials, academics, businessmen and opinion leaders. Many more seminars on co-operation will have to be held. The formal decision-making apparatus must be improved. A regular economic report on the performance of the whole SAARC region should be published at least annually. There have been suggestions to set up a regional fund. Perhaps such a fund can finance joint ventures between India and the local businessmen. The new Indian government of the BJP is committed to Swadeshi. But this policy should make room for products made in the SAARC region.

War Expenditure
Sri Lanka now spends over 5% of GDP in financing the war. The hawks want the military action to continue until the defeat of the LTTE. We have been promised an end to the war on numerous occasions. The public have still to realise the enormous cost of the war and its impact on the economy. Some people naively say that the economy is resilient inspite of the war and that we can have economic growth while prosecuting the war. The war has to be financed either through inflation or through taxation. Both methods raise costs and make our products uncompetitive in world markets. Our outward oriented policies mean that whatever products we make will not be able to stand competition from imports. If we reduce tariffs on agricultural products our subsidiary foodstuffs production will suffer from imported Indian agricultural produce. Our potatoes cost 4-5 times the cost of Indian potatoes.

Professor A. V. de S. Indraratne, President of SLAAS recently referred to the fact that "India sells a kilo of potatoes for Rs. 10 whereas in Sri Lanka it is sold at Rs. 40. He said the reason is that we are not producing it scientifically." But is this reason? Isn’t it due to the several decades of higher inflation in our country vis a vis India which has made our costs of production way out of alignment with India. Isn’t our higher costs of production due to higher taxation and depreciation of the Rupee. Can we solve these problems without scaling down considerably our war expenditure or cutting back on our welfare services like free education, free health care and subsidies. We have no doubt reduce the budget defects in recent years. But this is due entirely to the proceeds from privatisation — the partial sale of telecommunications, the sale of shares in the National Development Bank.

What happens when there are no more state enterprises to be sold. Won't the government have to spend more and more on the free education and free health services to cope with the greater demand for such services. Is it realistic to expect a sustainable low budget deficit after the privatisation comes to an end. Haven't we priced ourselves out of the global economy. Can we go back to inward oriented policies which we pursued prior to 1977.

Can we become like those Pacific islanders waiting for the foreigners ships which brought them their goodies — the so-called cargo cult. We have been able to accumulate adequate foreign reserves due to the sweat of our housemaids. But can we depend on this source of income always. What if war breaks out in the Middle East. Nor can we depend entirely on foreign investment. There is a heavy cost attached to such investment. Not only have we to finance the outflow of profits, dividends and capital; we have to grant them tax free and duty free status. The burden of taxation has to fall only on local business enterprises. This means that local businessmen will not be able to compete with foreign businessmen even in our own soil. Local business enterprise will be severely handicapped. The bulk of local businesses are small and medium scale. They cannot compete for credit with large enterprises and foreign enterprises.

Will we not end up as a paradise for foreign business enterprise but a hell for our own native businesses. As long as the war goes on the government cannot reduce taxes. Reducing direct taxes such as income tax or corporate tax alone will not do. Indirect taxes like turnover tax, customs duties and GST must also come down if the local costs of production are to be reduced to become competitive with other countries, be they in SAARC or in the global economy.

If we are serious about joining SAARC to obtain a large market for our goods and a diversified source of capital for our investment needs, we cannot avoid facing upto the problems posed by the war. President Johnson tried to finance the Vietnam war and also the welfare economy in USA. But he failed and USA temporarily lost its economic strength. Can we do what the world’s largest economy failed to do. We cannot have both guns and butter as Economists say.

Punters on the Colombo bourse can take comfort, though cold comfort perhaps, in the knowledge that Indian and Pakistani markets too had experienced negative growth last month, taking the same kind of blows that share prices here have done.

Bombay shed 12% of its value while Karachi lost 15%, the Colombo stock Exchange has reported in its June monthly market report. In East Asia, Kuala Lumpur depreciated 15% and Hongkong dropped 4%, the report said.

Developed stock markets had shown mixed results with Tokyo (Nikkei) and New York (Dow Jones) appreciating 1%. In London, the FTSE reported a 1% drop.

The report said that the all share index in Colombo had lost 101.4 points (14.8%) in June while the sensitive price index lost 182.1 points (17.7%).

June 15 was the worst day with the all share dropping 33.4 points (5.2%), unprecedented since Feb. 13, 1995. This index which peaked for this year at 789.7 on May 4, sank to its lowest ebb of 568.8 on June 25 before edging up to 580.9 on June 30.

"Sectoral performance was in line with the downward trend in the market with only two sectors recording marginal gains. Stores and supplies were up 0.44% and land and property 0.17%. The drop was most significant in plantations (27%), construction and engineering (21%), banks, finance and insurance (18%), diversified holdings (17%) and services (12%),'' the report said.

Foreigners had continued to sell during the month with net sales totaling Rs. 550 million against Rs. 424 million the previous month, the report said. The CSE too has subscribed to the view that the Indian and Pakistani nuclear tests had triggered an exodus of foreign investors from the region including Colombo.

Aitken Spence and Co. Ltd. has reached what is described as an "outline agreement'' to buy the Olhuveli View Hotel from Mitsui at an estimated cost of USD 11 - 12 million, Lehman Brothers, the internationally known brokerage advising the company on its forthcoming new share issue, has reported.

"It will both own and manage the hotel, replacing the existing manager, Asahi View International of Japan......This hotel has been marketed by Jones Lang Wootton from Singapore with the sale particulars requiring 'expressions of interest' by January 1998,'' the Lehman report said.

Drawing on Jones Lang Wootton particulars, Lehman's said that the hotel is renown for its diving with about 30 sites nearby; is an established destination for Japanese tourists who typically account for over 50% of its occupancy.

The report which said that Japanese are among the heaviest holiday spenders appeared to accept premium pricing spending an average of 4-5 days which is well below the average of a European holiday maker.

The hotel is on an unexpired lease that runs until 2011. Aitken Spence will continue in association with Japanese agents to market Olhuveli to Japanese tourists. Also, the Italian tour operators who are heavy patrons of the two Aitken Spence Maldivian properties already in business are upbeat about Olhuveli rated at 4-5 star. They want to include it in their 1999 brochures.

The hotel has 125 rooms - 80 standard, 32 superior and 13 water suites which are quite a rage among visitors to the Maldives who enjoy living in luxury chalets built on stilts in the water.

Room rates range from USD 120 a night for a standard room to $ 160 for a water bungalow. Occupancy at Olhuveli has been rising consistently, reaching 75% in 1996 and budgeted to reach 78% last year.

Lehman's have projected that assuming the $ 12 million investment in the hotel is financed 50-50 on equity and debt (the equity coming from the new share issue and the debt raised offshore in USD), after financing costs at the pre-tax level, the hotel would contribute an estimated USD 2.3 million (Rs. 150 million) to Aitken Spence. After minorities, this would add a fully taxed $ 1.5 million (Rs. 95 million) to net income.