• Income up but pre-tax profit shrinks
  Lower taxes help Seylan to hold bottom line
• Demand for coir growing, says Financial Times
• Pre-GST stock-up by animal feed dealers
• Dramatic profit growth at Kelani Cables
• CGE posts strong mid-year result
• Still no statement from CGE
• Rising unemployment in Asia

• Coconut growers interact with CRI & Cultivation Board
• Economic Commentary
  Lanka price system hopelessly distorted
• Computerization picks up steam
  HNB claims "best presence'' in north and east
• MLL's capital restructuring: CSE/SEC "may or may not'' approve
• Low grown teas doing nicely

Despite a 9.5% income growth last year, the Seylan Bank saw its pre-tax profits shrink to Rs. 201.2 million, down 20.6% from a year earlier, the bank's just published annual report and accounts for the year ended Dec. 31, 1997, indicates.

Seylan, however, recovered most of the lost ground thanks to a sharp reduction in its tax obligations. Taxes for the year under review at just Rs. 1.2 million, down from Rs. 48 million the previous year, refurbished the bottom line to almost 1996 levels. The net profit for the year of Rs. 200 million was down only slightly from Rs. 205.3 million earned a year earlier.

The bank's directors have however decided to halve the previous year's dividend payment and have recommended a 5% dividend for 1997which will absorb Rs. 21.8 million. Retained profits of Rs. 482 million are being carried forward in the books.

Seylan's business had grown last year with deposits rising 9.6% to Rs. 27 billion and loans and advances climbing 6.8% to Rs. 19.3 billion. The bank's total assets were up 14% to Rs. 35.8 billion.

Although earnings per share had declined to Rs. 4.59 from the previous year's Rs. 4.71, the net assets per share had grown 12.6% to Rs. 33.58 from Rs. 29.83 a year earlier.

Looking at how Sri Lanka's banking sector had adjusted to a "low'' interest regime, Seylan Chairman Lalith Kotelawela said that after the interest rates were reduced by the Central Bank, it was difficult particularly for the newer commercial banks to maintain their liquidity positions profitably. This was because the bank's costs of deposits was higher than the Treasury Bill yield.

"The average weighted deposit rate of 10% at the end of Dec. 1997 would mean a cost of 12% when adjusted for the statutory reserve ratio while the 12-month Treasury Bill (TB) yield was 10.21%,'' Kotelawela said.

As TBs accounted for a significant portion of liquid assets of the newer commercial banks, he said this had prevented lending rates coming down below current levels. The banks had tried to mitigate the losses incurred in maintaining the liquidity ratio via other assets - namely loans and advances.

"However, with the banking industry becoming increasingly competitive, the current trend of contracting interest spread call for innovative banking as probably be the only way to remaining as profitable as in the past,'' Kotelawela said.

To the extent that the banks must maintain a spread, Seylan played a leading role in bringing down deposit rates, he said pointing out that they had significantly lowered deposit rates in August last year paving the way for a further reduction in lending rates.

Seylan which aggressively expanded the number of its branches in its early years has kept this number at 90 last year. However it plans to have a fully automated banking network by the year 2000 with More than 100 branches on-line, according to Radley Silva, the banks general manager/CEO.

Silva said that during the latter half of this year, they will be moving to their own head office building at Kollupitiya. "This plush 17-storey building with another twin block comprising 14 luxury apartments is situated in a prominent location facing Galle Road, Colombo-3. This move will no doubt considerably enhance the bank's image,'' he said.

Seylan's directors are Messrs. Lalith Kotelawela (chairman and managing director), D.R. Senanayake (deputy chairman) R. Renganathan (executive director), Mrs. S.P.C. Kotelawela, A.D. Jegasothy, S.K.M. Perera, Ms. M. Sabaratnam, Dr. P.R. Anthonis, Dr. Gamini Corea, S.C.O. de Livera, J.E.P.A. de Silva, and A.I. Macan Markar.

From Sujeeva Nivunhella in London
Sri Lanka is likely to earn more foreign exchange from its coir products as the demand grows all over the world for natural biodegradable material.

According to an article published in the Financial Times, the market for coir products in Europe and the US is growing after a long period of time.

A big producer of coconut in the world, Sri Lanka at present mainly exports de-husked fibre and coir yarn. But to get the maximum benefit from the current demand for coir products in the west, Sri Lanka will have to start making more coir geotextiles sooner rather than later.

Some companies, notably the Hayleys group are already into geotextile production from coir fibre as well as conversion of coir fibre pith (Kohubath) for soil enriching and as a growing medium.

India, the world's largest producer and exporter of coir products, increased their export from 6.55 per cent in the year ended March 31 1998 earning $ 53.4 million. They are the only coconut growing country who maximise the by-product earnings. There are about 500,000 people making coconut fibre and coir products in India, the Financial Times report said.

The other two major coconut producing countries in the world, Philippines and Indonesia, lack facilities for extracting fibre from coconut husks and making coir products.

Animal feed dealers have stocked up before the imposition of GST from April 1, according to trade figures coming from Ceylon Grain Elevators Ltd. (CGE), the country's premier feed miller.

The company has recorded a 16% fall in feed sales volumes during the second quarter of this year. This followed increased stocking in March by dealers ahead of the introduction of GST and a resulting drop in sales volume.

An analysis on CGE by Asia Securities said that chicken feed was not subject to any tax in the past (only processed meat was taxed earlier). The government decided to impose a flat 12.5% rate on chicken feed for the purpose of more effective tax collection.

"However, with a view to temporarily avoid paying GST, we understand that the company's dealers had bought feed stock quite aggressively during March itself. In fact, this enabled CGE to report an impressive 51% year-on-year growth in volumes in the first quarter of this year,'' Asia reported.

Consequent to the over-stocking by feed dealers, CGE reported lower feed volume sales in the second quarter. This had combined with a lower demand for day-old chicks due to seasonal reasons. This had led to a 20% year-on-year drop in sales revenue during the period, Asia Securities said.

Kelani Cables Ltd. has substantially improved profitability in the year ended June 30, 1998, with a trading profit of Rs. 35.6 million, up from the previous year's Rs. 2.5 million, according to provisional unaudited figures released to shareholders.

Turnover for the year under review net of discounts was up to Rs. 533.6 million from the previous year's Rs. 404 million. Other income at Rs. 14.9 million was the same as a year earlier.

The company's pre-tax profit of Rs. 50.5 million compared with Rs. 17.3 million a year earlier. With taxation doubled at Rs. 17.8 million, up from Rs. 8.6 million, a bottom line of Rs. 32.7 million was posted, up from Rs. 8.7 million a year earlier.

With unappropriated profits of Rs. 44.5 million brought forward, the company was carrying a profit of Rs. 77.2 million available for appropriation in its books as at June 30, 1998.

Kelani Cables has an issued share capital of Rs. 54.5 million, a capital reserve of Rs. 193.5 million and a revenue reserve of Rs. 88.4 million. Its fixed assets as at June 30, 1998, was stated at Rs. 244.6 million.

Ceylon Grain Elevators Ltd. , in trouble with a whopping customs fine imposed for alleged wrongful dealing in duty free maize has reported a buoyant first half for the current financial year with both group turnover and profits rising substantially.

Turnover was up 18% to Rs. 1.8 billion and group profits, after tax and minority interest, up 12% to Rs. 135.9 million, an announcement to shareholders and the stock exchange.

The announcement was made just before the first news of the company’s problems with the customs was published and trading in its shares suspend by the CSE.

According to the CGE directors, the introduction of the new goods and services tax (GST) which replaced BTT on April 1 has an ‘adverse impact’ on the animal feed sector but the poultry and livestock industry ‘remains vibrant.’ The company expressed confidence that most industry players and farm operators would adjust over the longer term.

The interim statement noted that the rupee’s slide against the USD in the second quarter was 4% compared to only 1.3% in the first quarter and said that "the aggressive stance by the Central Bank to subject the rupee to a competitive devaluation continues into the third quarter."

It said that the net asset value of the company’s share at mid-year was Rs. 30.93, up 12% from the comparative figure a year earlier.

"The company is finalising its funding plans with its bankers and shareholders will receive a communication soon with regard to this. Prospects for the second half of this year looks good and we expect the results for the second half to be satisfactory barring any unforeseen circumstances," the announcement said.

But analysts noted that all this was before the news of the customs fine broke. In an upbeat analysis of the company, Asia Securities said that CGE’s first half results were in line and maintained their "buy" recommendation.

"As we write this, the stock as been suspended from trading pending an announcement from the company. Market rumour is that CGE has been slapped with a huge fine by the customs department on the sale of intermediary animal feed. Pending an announcement from the company on the case, we maintain our recommendation as buy," Asia Securities said.

Ceylon Grain Elevators Ltd. (CGE) has not yet issued a statement on the Rs. 1.2 billion customs fined imposed on the company for alleged diversion of maize imported duty free into the open market, Mr. Hiran Mendis, Director General of the Colombo Stock Exchange, said on Friday.

The CSE suspended dealings in the CGE share on July 23 soon after the first news on the customs fine was broadcast and it continues todate. A lifting of the suspension will depend on what the company has to say.

"They have told us that they in consultation with their lawyers,'' Mendis said.

An increasing number of coconut growers are taking an interest in the affairs of the Coconut Growers Association of Sri Lanka whose membership had increased by almost 80%, the association's president told its recent annual general meeting.

The AGM and get-together that followed was attended by senior officials of the Coconut Research Institute (CRI)and the Coconut Cultivation Board (CCB).

The president, Mr. Elmo Abeysundera said that their association had established good rapport with the Ministry of Plantations and conveyed growers' concerns and interest on import duty, import of fresh coconuts, GST on coconut products and wages.

"The point of view put forward by us was well received and appropriate action taken on many matters,'' Abeysundera said.

The meeting provided an opportunity for discussion and exchange of information between members and officials present. Discussions ranged from subjects like theft, weeds, low interest loans to growers, fertilizers, an economic farmgate price for coconuts, coconut oil and cholesterol, an association news release said.

The growers stressed the importance of effective and efficient support system to improve productivity and make coconut growing a more viable and economic enterprise.

"Fair prices, countering the cholesterol canard, new enforceable laws to reduce theft and fraud, pro-active extension services and steps to be taken to overcome the dearth of coconut pluckers were some of the matters stressed,'' the news release said.

Officials present including the heads of the CRI and CCB answered questions on fertilizers, weed control, monthly plucking, employment of agricultural diploma holders as farm managers and cheap bank loans which the CCB had arranged for growers.

CRI Chairman, Dr. U.P. de S. Vaidyanatha stressed the need to find employment for diploma holders to help reduce unemployment among technically qualified youth. He said their knowledge would help growers to introduce much needed essential agricultural practices on their land.

By Kanes
Asian currencies may have been largely stabilized in recent weeks, but the Asian economic crisis has not yet ended. The currency crisis was only the prelude to a real economic crisis in Asia where economic growth is declining, thousands of firms and factories are being closed down and millions of jobs are being lost. Some analysts believed at first that the Asian crisis was a mere hiccup and would not prevent Asia from resuming its rapid economic growth. With the deepening of the crisis, however, some analysts believe now that Asia would suffer from this crisis for about five years before it resumes healthy growth. In fact, several analysts believe that the current crisis would result in a second round of Asian currency depreciation if the IMF packages of reform fail to revive the Asian economies. As discussed in the previous article, there is little evidence of such a recovery this year or even the next. In fact, many fear, as mentioned earlier, that apart from the contraction of the economies of Thailand, South Korea and Indonesia, the economies of Malaysia, Singapore and even Hong Kong may have zero or negative growth this year. All in all, 1998 looks like being the most difficult year for Asia since the recession created by the oil price hike in 1974.

Slack Stock Markets
The stock market indices in the table below show clearly that all the countries in Asia are not yet out of the woods by a long way. Except for Taiwan, stock indices for all the other countries — Hong Kong, Singapore, Malaysia, Philippines, Thailand, Indonesia and South Korea — were 40 to 60 per cent below their level one year ago. In South Korea, stock index is 58 per cent lower than a year ago and in Malaysia 57 per cent; indices are about 40 per cent less in Hong Kong. Singapore, Thailand, Indonesia and Philippines. The currency stabilizing that there was, has failed to revive the stock market because of the economic depression caused by deflationary policies and sluggish export growth and the uncertainty regarding the future in the region. Foreign investors have shunned Asian stock markets for some time as they lack confidence in their future.

Slow Export Performance
The prospects of a quick Asian recovery appear to be bleak for several reasons. First, the much talked of export boom consequent to currency devaluation has apparently failed to materialize. Generally, depreciation of a currency provides a stimulus for exports but even a sharp depreciation of 40-70 per cent has not succeeded in stimulating Asian exports. Exports in fact have declined in the first quarter of 1998 in most countries. Indonesia's and South Korea's exports have fallen by 30 per cent, and Malaysia, Singapore and Hong Kong are having sluggish growth of their exports. The major reason for this is that a substantial part of exports of these countries go to the region but as the whole region is experiencing an economic depression trade volume has shrunk. Thus, 40 per cent of Malaysian exports are formally absorbed by the region, 30 per cent of Singapore's and 50 per cent of South Korea's.

Further substantial part of the developing Asian exports have a high import content e.g. electronics, telecommunication equipment, electricals and motor vehicles, and the increase in prices of imported inputs resulting from devaluation has cancelled out much of the positive effect of devaluation on exports. Further, South Korea, Thailand, Hong Kong and Singapore are crude oil importers and depreciation has raised the cost of fuel and of manufacturing. Rising import prices have also contributed to overall inflationary conditions and rise in all prices. In Indonesia, inflation has risen from 6-8 per cent in 1997 to 30.0 in 1998, in Thailand from 5.9 per cent to 9.9 per cent and Malaysia from 3.3 per cent to 7.9 per cent. Increase in exports is also handicapped by inadequate liquidity. Apart from higher interest rates imposed by monetary authorities, the banks which are saddled with 10 to 20 per cent of bad debts tend to adopt a more cautious approach in their lending operations. This restriction of credit and higher interest have discouraged domestic investment while the inability to repay their loans or borrow afresh have caused bankruptcy of many firms. This is compounded by the fact that foreign banks are distrustful of local banks and are reluctant to open letters of credit to finance their exports. Lack of liquidity is made worse by the lack of adequate shipping facilities for exports. As imports have ben drastically reduced in crisis-stricken economies, there are few shipping containers available to carry exports; containers find it unprofitable to come with only 40 to 60 per cent of their capacity utilized to bring exports. Shipping companies in Indonesia for example, are bringing empty containers from Singapore and Hong Kong to carry their exports like marble, but that costs up to $500 per container.

Export industries are also not being injected with new capital investment. Although the crisis-stricken countries were made to understand by the IMF that the implementation of IMF inspired packages of reforms would result in fresh inflows of capital, there have been only a few foreign investors coming in to save the day as the countries hoped. Some foreign investors have put on hold their expansion programmes in these countries. Toyota Motors for instance, has announced the suspension of local production of vehicles in Thailand. The Americans fear to putting money in South Korea as they fear that chaebols would remain unreformed. As the countries have not yet cleared their internal mess, it is inevitable that foreign investors would keep away until they have sufficient confidence in their economic recovery.

Another major factor is decline in world demand for some of the main exports of East Asia and a decline in prices. The global electronics market, particularly personal computers and components in the doldrums. Singapore which is the world's largest producer of computer disc drives suffered a fall in exports and was forced to retrench; some 45 per cent of the workers laid off in the first quarter were in the electronics industry. The Philippines, where electronics account for half of the exports, had the lowest export growth for nearly two years in April. Malaysia and Thailand whose electronics exports are significant have also been adversely affected. Taiwan which makes more than half the world's computer monitors and 60 per cent of motherboards, experienced a decline of 6.9 per cent in exports in the first five months of 1998. In the meantime, a global oversupply of semi-conductors has depressed prices and Korean manufacturers have stopped production temporarily to restrict supplies.

Hong Kong and Singapore are also adversely affected by a slump of the tourist industry. In the first quarter of 1998, 25 per cent fewer people had visited Hong Kong and in Singapore arrivals in the same period were 20 per cent less than in the corresponding period in 1997. With fewer tourist arrivals and shrinkage of resident spending, retail price index dropped by 18 per cent in Singapore and 12.2 per cent in Hong Kong in March 1998. Besides, prices of Singapore's oil exports and Malaysia's exports of electronics, oil, gas and palm, oil have turned unfavourable.

All the East Asian economies are adversely affected by the recession and the depreciating yen in Japan, but it will be discussed in a separate article next week.

Rising Unemployment
Unemployment was never a problem in East and South-East Asia when the economies expanded rapidly to create employment continuously. In the early nineties, recorded unemployment was around 2 per cent but the economic depression with bank failures, corporate bankruptcies, closure of firms and retrenchment have more than trebled this figure. In developed countries unemployed are protected by social safety nets like unemployment insurance, but in East and South-East Asian countries there is no such social safety nets and unemployment means loss of income, poverty and hunger which create explosive social unrest.

In Indonesia, unemployment is expected to rise to 20 million or 22 per cent of the workforse by the end of the year. In June 1997 unemployment was only 5 per cent and it is about 15 million now. Those who live below the poverty line Indonesia have risen from 11 per cent of the population in 1996 to 40 per cent or 80 million in June 1998. Those who cannot afford minimum food security have increased to 58 million because of shrinking purchasing power with the Rupiah falling by 80 per cent in value since July 1997. In Thailand unemployment is around 2 million and is expected to increase to 3 million before the end of the year. In South Korea, where unemployment was only 550,000 has risen to 1,490,000 in May 1998 and the unemployment rate has risen from 2.3 per cent in October 1997 to 6.7 per cent in March 1998 and is expected to rise further to 10 per cent by the end of the year. South Korea deported 300,000 overseas workers in the second half of 1997 and expects to deport another 100,000 before the end of this year.

In Hong Kong, unemployment rate is 4.2 per cent in May 1998 — the highest in 15 years — and is expected to increase further. In Singapore unemployment is low at 2.2 per cent. In Malaysia the economic crisis has resulted in restriction on employment to foreigners, and already a number of foreigners, mainly Indonesians have been repatriated. It expelled 10,000 foreign workers in 1997 and another 200,000 are targeted for this year. Malaysia has about 2.0 million foreigners employed mainly in low skilled jobs. Unemployment is expected to rise further in all these countries, not only because of structural reforms and austerity measures recommended by the IMF but also because of reorganization of firms and shedding their excessive labour force. Some of the unemployed may return to the villages to be under-employed but the majorities likely to seek work in the unorganized or underground economy which account for as large as 20 to 50 per cent of GDP in some of these countries. Nevertheless, a sizeable number will be left with no alternative employment and no social safety net.

China's official unemployment rate is 6.5 highest since 1949, although some estimate it at 10 per cent. The figure of 6.5 per cent may exclude 12-15 million who enter the job market each year, the millions of State workers who have been marginalised at reduced salaries and the "floating population" exceeding 100 million peasants who have left their villages to seek jobs in cities. The reform of China's State enterprises is expected to create millions of unemployed over the next few years, but an annual economic growth rate of 8 per cent is likely to create new employment opportunities for the bulk of them. If, however, the growth rate declines to low levels, China may be forced to reconsider the exchange value of the renminbi. China's growth according to some estimates will be 7 per cent this year as compared to 8.8 per cent in 1997. Exports fell in May — for the first time in two years, and as to be discussed in the next article, China is adversely affected by the depreciating yen.

Unemployment has raised much discontent and resentment among workers who have expressed their opposition in protests and violent demonstrations. Unemployment and fear of unemployment were major factors for the change of government in Thailand and the ouster of President Suharto after 32 years of rule in Indonesia. In South Korea, labour unions agreed to cooperate with the new President by approving a pack in March 1998 which permits lay-offs in ailing firms with 60 days of notice, but the rapidly rising unemployment has forced the Korean Confederation of Labour to demand a renegotiation of this agreement. Workers also rioted in Seoul on May day and threatened to wreak havoc in the streets if unemployment is not checked. Unemployment is so widespread that while it has resulted in an increase in prostitution and human trafficking in Thailand, it has made the unemployed resort to suicide in frustration in Korea. The number of suicides a day has increased by a third in the first three months of 1998 over the corresponding period last year, to 25.

by Analyst
Economists are now generally agreed that prices are critical for a better allocation of resources. Prices must reflect costs which reflect relative scarcity and the resources that have gone into the production of the good in question.

Market prices are signals which decide how resources are utilised. They decide what is produced and consumed in the economy.

Policy makers have been concentrating only on macro-economics. But economic growth theory has pointed out the importance of micro economics which is concerned with relative prices. The focus should be on the supply side — on efficiency, on allocating existing resources properly.

Our price system is still hopelessly distorted. Consider the increasingly popular conversion of petrol driven vehicles to liquified petroleum or LP gas. Earlier the trend was to import diesel vehicles because the relative cost of diesel vis a vis petrol was unusually cheap as a result of the government policy of cross subsidizing diesel.

Then the government raised tariffs on diesel driven cars and introduced the diesel tax on vehicles using diesel. The government is anxious to keep the price of diesel low because the transport of goods is by diesel driven lorries. Passenger transport also utilises diesel. So to keep prices of goods low and bus fares cheap, diesel was not taxed to the same degree as petrol.

But petrol and diesel are produced as joint products and the proportion in which they are refined is more or less fixed. So any unusually large use of diesel means diesel as a refined product will have to be imported.

The government by its differential taxes have arbitrarily distorted the prices of petrol and diesel the trend towards conversion of petrol driven vehicles to diesel was dampened with the special taxation of vehicles using diesel. But now the trend is for the conversion of petrol driven vehicles to LP gas.

The government has distorted the economics of petrol, diesel and LP gas through its tax policy. The Petroleum Corporation should disclose the landed cost of petrol, diesel and LP gas.

LP gas is now the monopoly of the Shell Company the governments taxation policy favours LP gas which is used by consumers for cooking. In earlier times there was a specific duty on petroleum, being a fixed rate per gallon instead of an ad valorem tax. A specific tax does not distort the relative prices of the different petroleum products.

The Central Bank Annual Report for 1997 points out that the expenditure on imports of Liquified Petroleum Gas (LPG) rose due to both a higher volume of imports and increased international prices. Shell company will no doubt be happy about the increase in imports. But is this increase in consumption of LP gas economically justified?.

Unfortunately statistics are not available about the c & f costs of LP gas to compare with petrol. What is required is for the government to review its policy on the taxation of the several petroleum products.

A reader of a daily newspaper, Mr. S. W. Perera, has raised the relevant questions. What is the cost differential of petrol versus LPG? In what proportion are the petroleum products produced in the refinery? What is the loss to government revenue as a result of the conversion of petrol driven cars to LP gas?

By over-taxing petrol relative to other petroleum products, the government will be left with a surplus of petrol but a shortage of diesel and LP gas which have to be imported as refined products.

Bureaucrats can't see beyond their noses. In the past governments were seen as the solution to most economic and social problems. But no more. They are part of the problem rather than of the solution. So governments on assuming power proclaim "administrative reforms". Alas none of them have produced results.

Bureaucrats fail to see the possibilities for substituting one good for another in response to a change in price caused by differential taxes. Bureaucrats don't understand the role that prices have to play as signals for the rational allocation of resources. So they apply price controls and subsidies — so the cost of living is to be kept under control by direct controls on prices.

So prices are kept artificially low to check inflation or prices are arbitrarily jacked up here and there to raise revenue for the government. But beyond a point higher price of a good could lead to a lower consumption and lower tax revenue.

In the case of subsidies, be they economic subsidies such as in cross subsidies or straight financial subsidies, the result is the creation of excess demand. The demand for petroleum products now accounts for about 10% of our import bill and it is growing each year by over 5%.

Meanwhile traffic congestion has increased and the costs of such congestion are quite a substantial drag on the economy. Instead of raising productivity in the economy we are becoming less productive. Both bureaucrats and the public have got used to the idea of a fixed price. But individual prices cannot be fixed when there is inflation in the economy.

Economic populism is a characteristic feature of all our governments. Since independence governments have failed to control inflation. To cover up their failure in macro-economics they interfere with micro economics — keep some prices low by price controls, differential taxes on allied products and joint products and give subsidies on others.

Economic populism has failed to accept orthodox micro-economics. In the process, governments have created havoc. As Geffrey Sachs has pointed out, economic populism is mainly to help the urban populations rather than the rural population.

Town dwellers are keen on subsidised food. They are also disproportionately heavy consumers of imported goods. Our governments have had an urban bias because the urban middle class is vociferous in the press and governments are prone to listen to those who shout loudest.

Remove Rent Restriction
A Communist Minister passed the drastic Rent Restriction Act in the 1970s'. Rent control is a false solution to a problem. Inflation has made the controlled rents look ridiculous. Tenants occupy the houses for free in real terms. But the landlord is required to pay rates and taxes.

The UNP government exempted new buildings from the application of the Act and thus mitigated its adverse economic effects. For with rent control, nobody will build except to occupy himself.

Crumbling houses are typical of buildings subject to rent control. No landlord will find it worth his while to maintain such houses. So because rents were depressed by law, landlords were discouraged from developing or improving their property.

The only way they could increase revenues was to allow the land to be over-run by squatters and then send thugs to collect rents. Squatters tapped water and electricity illegally. The authorities have failed to check such illegal connections. Insanitary conditions have undermined the health of the tenants and made the spread of disease easy.

It is not only residential premises that have been subject to rent controls. Even business premises are subject to such controls. Afterall the business tenants are much richer than their landlords and so the poor subsidise the rich or the better off. Why should this be so?

In Bombay where there was a similar proliferation of slums, the state government of Maharashtra did away with building regulations which stipulated that only so many square feet could be built on so many square feet of land. Landowners even of premises under rent control were allowed to build more and increase the density of buildings per area.

In Mumbai's Pada district, a one-storey tin roofed slum has been converted into a decent seven storey block with gardens and basic amenities. The landlord gets more rent and a sellable property, even though existing tenants have to be rehoused by the landlord. This new approach of the Mumbai government has earned praise.

A committee was appointed by the present government to review the Rent Restriction Law. Apparently the committee has like Rip Van Winkle Woken from slumber and called for representations from the public.

The present government has been sensible enough to adopt market based economic policies. Unfortunately it’s a coalition which includes leftists who do not accept orthodox economics.

The government is strapped for cash and can do little to undertake investment in housing. On the other hand there is a backlog of demand for houses. Housing construction can give a boost to the economy which is flagging.

Price distortions
The distortions caused by differential tax concessions was brought out recently when Prima group which had been given special tax concessions by the previous government was detected allegedly diverting duty free maize intended for animal feed to the manufacture of Triposha, a special food for pregnant mothers and children.

The lesson to be drawn by the authorities is to abstain from granting special tax concessions to any party lest they exploit such concessions in ways not visualised or contemplated by the authorities.

In this instance apart from the violation of the law, there is the fact that a tender has been distorted causing a further loss of government revenue. There must be a level playing field if there is to be fair competition.

The single most important critical element for developing dynamic and, efficient private enterprises is the creation of a "business environment" that encourages efficiency and competition in productive activities. Lack of competition is a characteristic feature of our economy. Large enterprises steeped in inefficiency and losing money are propped up by banks for fear that they will be exposed if they foreclose or take steps to recover outstanding loans.

For many years the two state owned banks allowed large business enterprises to default on their loans and they took no action to recover them. Many of such loans show bad judgment on the part of bank managers. It is not enough to blame the politicians. Bankers are expected to use their judgment. Those who made all those bad loans have not been penalised and are still in office.

Michael Porter the famous management theorist has pointed out that countries enjoy competitive advantage through domestic rivalry and competition. Inspite of the trait of the Japanese to be collectivist rather than individualistic and to decide by consensus, they compete vigorously in the domestic market, reserving co-operation among domestic firms only to the international arena.

Productivity
Productivity increases are perhaps the greatest need for our economy. We are hopelessly uncompetitive in international markets. Our products are too expensive in the SAARC region. Nor are our products competitive globally particularly after the devaluations of the currencies of East Asia and South East Asia.

There is much hype about increasing productivity. Japanese methods of improving productivity are being expounded in seminars and talks. But micro measures to improve productivity can't make a real contribution unless the macro environment is conducive.

Local firms should be free to make changes in the workplace to adjust their production and improve efficiency. So it is necessary to look at the regulatory framework for entry and exit of enterprises. There should be no legal barriers to entry. No industry or sector should be reserved for any enterprise, not even multi-national enterprises who promise to make large investments as a quid pro quo for granting them monopolistic or exclusive franchises.

Such monopolistic priveleges have been given by both the present and the previous governments. It is essential to ensure that such promises are honoured by the enterprises receiving such priveleges. The recent detection of the leak of duty free maize points out to the urgency of the need for monitoring. Does any government authority do so?

Productivity consciousness
The Minister of Industries has tried to make the private sector aware of the need for productivity. But why a five year plan for improving productivity? Isn't productivity the most urgent priority? But is the government aware of the urgent need for productivity? Obviously not, judging from the manner in which decisions are taken.

What is the cost of holding the SAARC conference? Apart from the direct costs of providing hospitality to the state guests what about the costs of dislocation to the economy — the costs of closing for business banks and commercial, industrial establishments, the costs of delay in supplying customers, the delay in clearing cargo from the port.

The government must realise that the city of Colombo with its barricades and armed troops deployed in the streets is a city more or less under siege. Security checks and security barriers already impose an enormous cost of the movement of goods. Why add to the misery to the citizens?

Isn't it apparent that SAARC will take many more years to produce any worth while results. Why then impose unnecessary costs on ourselves for some hoped for benefit in the distant future. Such exercises in image boosting of the holders of power are unlikely to yield any political benefit either. The Non-Aligned Conference was held in 1976 with much fanfare but the ruling party was roundly defeated.

The government must reform the bureaucracy in earnestness. Recently the government announced that public servants will not be granted their increments as a matter of course. Instead their work will be evaluated and only those who have served worked well will be granted an increment.

This is no doubt a laudable measure. Over the years public servants have been given their increments automatically. Should public servants against whom there are complains by the public be given increments? There are public servants who regularly come late to office. There are others who go early. There are those who take bribes.

In theory it's easy to decide that such public servants should not be given their increments. But whether a public servant is remiss in his work or attendance or conduct must be first detected by a superior officer. But there is absolutely no supervision of subordinate staff by executives or staff officers.

So one has to begin by docking the increments of staff officers who do not exercise their responsibility to supervise. To determine whether the lower level staff officers are supervising or not is the task and responsibility of the higher level staff grades like Assistant Directors, Deputy Directors and Directors. The directors in turn have to be supervised by the Director-Generals.

There is a hierarchy and a pecking order. At the top of the pyramid sits the minister. So the President can improve her administration by first checking the efficiency of her ministers. MPs have been appointed as ministers not because of their administrative or organising ability or capacity for policy making, but only because they have been too long in the party. The result is square pegs in round holes; ministers who have neither the intellectual capacity or the administrative ability to run even a small organisation competently.

They are unable to give correct orders or see that their decisions are implemented. Their own private offices are disorganised. They have no idea how to manage a large organisation. They have no knowledge of the principles of administration.

Shouldn't they be given a training in administration. It may be desirable even to send them to School of Public Administration in such countries like U.S.A. or U.K. There is for example the Kennedy School of Public Affairs. It is even desirable to set up a similar school in Sri Lanka since we have such a large number of politicians in Pradesiya Sabhas, Provincial Councils, Municipal Councils etc. who need to be equipped with knowledge of public administration.

The development of the country as well as the future of democracy in Sri Lanka will depend on the competence of our ministers, at the national and provincial level.

The Hatton National Bank has begun extending its branch automation to the north and the east where it is better represented with more branches than any other private commercial bank, a news release said.

"Among private commercial banks, we have the most number of branches in the north and east,'' an HNB spokesman said. "We are represented in Jaffna, Vavuniya and Mannar in the north and have six branches in the eastern province at Amparai, Batticaloa, Kalmunai, Akkaraipattu, Kantalai and Trincomalee.''

Branch computerization in these "difficult'' areas began in the east and then gradually moved north, the release said.

"We started with Trincomalee with the branch there being computerized. That was the initial phase. Since then we've extended this facility to our branches in Amparai and Kalmunai and our new branch at Kantalai. Akkaraipattu and Batticaloa are due to be computerized in the next phase.

"In the north, Vavuniya has been computerized and we have plans for the other northern branches too for the future.''

HNB claims that their "bold step'' is part of their policy of providing an efficient and caring service to their customers. Automatic teller machines (ATMs) will soon be available at Trincomalee and Vavuniya.

"We are closely looking at providing ATMs and tele-banking in the eastern province to provide a 24-hour service and further enhance what we do for our customers,'' the spokesman said.

Will the capital restructuring proposals of Mercantile Leasing Ltd. (MLL) approved on June 30 by the company's directors get the approval of the Colombo Stock Exchange (CSE) and the Securities and Exchange Commission (SEC)?

According to the CSE's Stock Market Daily, it may or may not happen for reasons that have been placed on record by the CSE.

The restructuring plan of MLL will eventually raise the company's present issued capital of 8.3 million shares to 23 million shares subject to CSE/SEC approval. The plan envisages a 1 for 2 rights issue to existing shareholders at an issue price of Rs. 30 per ten- rupee share - that is at a twenty-rupee premium. That would create a little over 4.1 million new shares.

But the CSE is on record saying that the CSE/SEC "may or may not approve the rights issue for the reason that it is at a price higher than the current market price of the MLL share.

The company also plans to issued the NDB convertible debentures at Rs. 35 a share, convertible within two years at the bank's option. The CSE says that private placements such as this have been approved in the past up to a maximum of 12% of the existing issued capital.

"This placement is in excess of 12%. Therefore this may or may not be approved by the CSE/SEC,'' the CSE has said.

MLL also plans to issue shares to the International Finance Corporation (IFC), the World Bank's soft loan window, on a convertible loan of USD 1.8 million with a conversion price of Rs. 35 per share convertible at IFC's option within two years. This would amount to 3 million shares.

CSE has said: "This private placement is also in excess of the 12% of existing issued capital which is the maximum limit for which approvals have been granted in the past by CSE/SEC. Therefore this may or may not be approved by CSE/SEC.''

MLL plans to create 2.5 million shares by converting the second and third tranches of bonus debentures in equal installments in June 1999 and June 2000. The CSE has no comment on this.

But it did have a comment on MLL's plans to create 2 million new shares by was of an Employees' Share Owning Trust (ESOT).

"We have had discussions with the company and its advisors on the nature of this ESOT. This may or may not be approved by CSE/SEC,'' the CSE said.

Low grown teas are having a good ride at the Colombo tea auctions according to brokers' reports which say that this year's cumulative low grown average, at Rs. 140.38 per kilo is Rs. 30.49 above the comparative figure last year.

Somerville and Co. Ltd. also said in a report that to date this year, 149.1 million kg. have been auctioned in Colombo, a gain of 11.5 million kg. from last year.

What is most significant is that the entirety of this increase has come from the low grown teas,'' the report said.

Brokers are not too sure that this year's Uva season will produce the famous quality on account of unusually heavy rain experienced in the district.

"The rain expereinced in the Uva district is feared to affect the quality of teas that will be on offer during the middle of August,'' Somerville's said.