.

Over-subscription likely this week through big investments
Namunukula share offer draws tepid response

Efforts by the Public Enterprise Reform Commission (PERC) to get a five-rupee premium on the shares of Namunukula Plantations Ltd. (NPL) have left investors who scrambled wildly for previously offered plantation shares at par mostly unmoved.

A spokesman for the Colombo Stock Exchange said that there had been "very few applications'' for this share offer which opened on Jan. 7 and it remains wide open. It will be open for one month unless earlier subscribed.

The managers to the issue said that up to Friday about 4,500 applications covering half the 4 million shares on offer had been received. He confirmed that in terms of applications, there was no rush of 30,000 to 40,000 as seen in some of the previous issues.

"But we reckon that the issue will be subscribed early next week (that is week beginning today) because some large applications of investors taking the long term view are in the pipeline. I would think that we would finish up with 6,000-7,000 applications covering the full quantity on offer,'' he said.

Since the offer is fully underwritten, the completion of the sale is assured.

Most of the previous plantation share offers were snapped up even before the opening day with investors who feared being crowded out sending in their cheques early. Most such issues were over-subscribed on day one itself with many investors applying in the names of friends and relatives too to get a bigger share of a cake with certain profit on the secondary market.

" The response to the Namunukula issue is reminiscent of the very early plantation share offers when there were very few takers. But those early birds who subscribed did very well with their investments with some shares going as high as Rs. 70 on the secondary market a few months down the road,'' one analyst said.

NPL was floated in June 1992 and the company was managed by BC Plantation Services (Pvt) Ltd., a member of the Bartleets Group.

The first tranche of 51% of the issued capital of the company amounting to 10.2 million ordinary shares were purchased on the CSE at a bid price of Rs. 40 per share by Keells Plantation Management Services (Pvt) Ltd. This company is controlled by John Keells Holdings which owns 51% with the Commonwealth Development Corporation (24.5%), Tea Plantation Investment Trust Plc (19.5%) and Ceylon Partners Fund (5%) holding the balance shares.

Under the management agreement, Keells Plantation Management Services received a management fee comprising 3.5% of gross turnover, 2% on supplies, 50 cts. per kg. on tea and rubber crop and 5% of profit.

NPL has 20 estates with a total land area of 12,444 ha. of which 3,442 ha is planted in tea, 4,184 in rubber and 1,101 in other crops. The remaining 3,717 ha includes uncultivated land.

The company estates in the Namunukula area consists of Uva, high and mid-grown tea giving approx. 38% of production while low growns produced in estates in Galle, Matugama and Matara give the balance crop. Bought leaf gives the company 55% of the total crop manufactured in its factories.

The issued and fully paid up share capital of NPL comprises 20 mn. ordinary ten-rupee shares and a single golden share. The company also has debentures valued at Rs. 270 million on June 30, 1998. Rs. 150 million of such debentures purchased by Keells Plantation Managements are convertible. The conversion of these debentures due next June 16 would give Keells Plantation Management 3.75 million more share and raise their stake in NPL to 58.7%.

The balance Rs. 120 mn. worth of debentures is redeemable, commencing Sept. 1998 to Dec. 1999. The Insurance Corporation of Sri Lanka, EPF and ETF have jointly taken up these debentures at a coupon rate of 15%.

John Keells Stock Broker said in a recent research report that NPL is expected to spend Rs. 140 mn. in FY99 and approx. Rs. 100 mn. per year over the next 3-4 years in field development, factories, equipment and vehicles. Funding this investment will be a mix of an Asian Development Bank credit of USD 10 million over five years and internal funds. The ADB credit will be at a special interest rate with a discount on the average weighted prime rate. A five year grace period on the repayment of this loan will ease pressure on NPL's cash flows, the research report said.

It placed NPL's net profit for FY96 at Rs. 62 mn., FY98 (covering a 15 month period) Rs. 142 mn. and projected a small Rs. 5 mn. loss in FY 99.

Incentives don't attract companies to get quoted
CSE and SEC disappointed at paucity of listings

The directors of the Colombo Stock Exchange (CSE) and the Securities and Exchange Commission (SEC) met last week at the request of the CSE to discuss listing procedures and other matters of common interest, CSE and SEC sources confirmed.

There is disappointment in business circles and within the securities industry itself that despite various incentives offered by government, including a reduced rate of taxation to companies quoted on the CSE, there is very little interest by unlisted companies to get themselves quoted.

"Other than the plantation companies where the state divested itself of its shares, there was only one company that obtained a listing last year,'' the SEC's director-general, Kumar Paul confirmed.

But as the CSE's CEO, Hiran Mendis said, several debt securities had been listed on the stock exchange in 1998. Mendis agreed that as far as equity listings were concerned, the results were disappointing.

Participants at the meeting said that the discussions were informal and there was agreement that the two agencies that run the stock exchange and regulate it should meet at least every six months to discuss matters of mutual concern.

There have been complaints in business circles that there was a duplication of listing procedures at the CSE and SEC and a demand that procedures required of companies seeking quotations should be made easier. But the regulatory agencies have found the quality of documentation including prospectuses that must be approved before any company invites public subscription to its equity wanting.

"It's not that there is any deliberate attempt to misrepresent. Certain genuine errors have been made and the regulators have to point them out. When we do the response is `my goodness, yes. That's a mistake.' When there are such mistakes, we have to go through the papers with a fine-tooth comb,'' Paul said.

Mendis said that it was necessary to better publicise the advantages of listing so that unquoted companies will be properly informed of the advantages of getting themselves quoted.

Paul agreed. "There must be marketing,'' he said. "That's an area for the industry itself.''

In the past governments have played a role in persuading multinationals in business here to offer a stake in their business to local investors. One businessman cited the example of Bata Ceylon saying: "When Mr. Cyril Mathew was Industries Minister and Bata wanted exemption from the then penal tax that applied to share transfers so that it could move its shares from one holding company to another, the government agreed to approve the deal on the condition that Bata offered 20% of the equity of the local company to investors here via a stock exchange listing.''

Among the recent incentives offered to listed companies is a limited period offer of investment relief on new shares issued by such companies. Thus investors in Royal Palms Beach Hotels Ltd., the only company that got itself quoted on the CSE last year, won a tax shelter on their investment.

Some new shares issued by Aitken Spence and some of the older listed companies with employees share ownership plans (ESOPs) also benefitted. But the incentive did not encourage new listings bar one on the CSE.

There are 243 companies listed on the Colombo Stock Exchange at present.

Why do companies shy away from listings? According to businessmen, some closely held company owners do not want the hassle of outside shareholders. Others feel that the access to zero cost capital and the other advantages of being quoted was not worth the price of conforming to the various requirements imposed by the regulators.

"Also there is a cost involved,'' said one businessman. "You have to publish expensive annual reports and send interim financial statements to all your shareholders. Many of them expect to be at least treated to a good tea at the AGM even if they are disappointed with the dividend!''

"Companies who want to compete in the best Annual Report contest may spend Rs. 300 on a glossy report,'' said the SEC's Kumar Paul. "But we also see cyclostyled reports that contain all the required information.''

It was agreed by all that companies with thousands of shareholders, and there are some of these quoted on the CSE, do have to incur considerable expense of that account. But many of them find this worthwhile.

Fall in investment value drives Equill to the red

Equity Invest-ments Lanka Limited (Equill), the Com-mercial Bank's venture capital associate, has recorded a net loss of Rs.18.4 million during the year ended March 31, 1998, up from a net loss of Rs.2.3 million in the previous year.

The loss was on account of providing for the fall in value of investments amounting to Rs.19.1 million.

The company's Chairman, Mr. M. J. C. Amarasuriya, who is also the chairman of the Commercial Bank, said that the Equill directors were of the view that it would be prudent to make the following provisions in respect of the investments in these companies: Castalloys Ltd (Rs.3.3 million), A.M.J. Industries & Services Ltd. (Rs.1.0 million), Ceramex Ltd. (Rs.2.6 million), Biotech Corporation Lanka (Pvt) Ltd. (Rs.2.0 million), SAG Renewable Energy Briquettes Ltd. (Rs.1.8 million) and Italpolo Footwear (Pvt) Ltd. (Rs.8.4 million).

The main source of income during the year under review continued to be interest earned on short term funds pending portfolio investment.

Amarasuriya said that the funds at the disposal of the company for new investments have been reducing year on year on account of optimum use of funds in previous years.

During the year under review only one new investment had been made in Auto Gas Limited where an initial investment of Rs.0.4 million was made.

The chairman said that the country's business climate continued to be at a low ebb during the year with the emphasis being on the war front and limitations placed on infrastructural improvement.

Although all the blue chips had recorded excellent financial performances, the Colombo Stock Exchange had a bad year and other venture capital companies too have had an experience similar to theirs with few avenues for exit from investments already made presenting themselves.

This was on account of the Colombo Stock Exchange not being ready for new listings. All new issues which came on the market during the year under review were those of privatised plantation companies under PERC auspices. The only exception was a share issue by the National Development Bank which succeeded in placing new shares both overseas and at home at a high premium just before the stock market plunge last year.

Amarasuriya said that his directors had on a conservative basis valued Equill investments in portfolio companies at Rs.212.4 million as at March 31, 1998, up from an acquisition cost of Rs.190 million.

The year under review had seen Mr. N. Wadugodapitiya, who had been with Equill since the inception of the company and had been appointed Managing Director last January resigning tyis position in May. The chairman placed on record the company's appreciation of his servicces to Equill.

The major stakeholders of the company were: Commercial Bank of Ceylon Ltd. (22.92%), Sri Lanka Insurance Corp-oration Ltd. (15.68%), Antah Overseas Holdings SDN.BHD (12.6%), Singer (Sri Lanka) Ltd. (9.28%), Distilleries Company of Sri Lanka Ltd. (6.27%), Paints & General Industries Ltd. (5.16%) and Acme Aluminium Company Ltd. (5.16%).

The directors of the company are: Messrs. M.J.C. Amarasuriya (chairman), R.I. Fernando (managing director), H.D.S. Amarasuriya, P.P.J. Perera, Sri T. Nagendra, Sohli E. Captain, YAM Tunku Tan Sri Imran Ibni Tuanku Ja'afar, E.A.D. Perera (alternate to YAM Tunku Tan Sri Imran Ibni Tuanku Ja'afar), N.C. Peries (alternate to H.D.S. Amarasuriya), A.L. Gooneratne and N. Wadugodapitiya (resigned w.e.f. 31.5.98).

Kelani Tyres takes hard blow from 9-month factory closure

Kelani Tyres Limited, whose factory lay idle for 9 months of the last financial year, has recorded a massive loss of Rs.308.1 million for the year ended March 31, 1998, up from a loss of Rs.107.3 million a year earlier.

The company is now carrying forward unappropriated losses of Rs.344.7 million in its books.

During the year under review, the company was able to achieve a net turnover of Rs.393.9 million on the sale of imported tyres which constituted the bulk of its sales as its own production was at a standstill for most of the year. The non-production at the factory was attributed to an industrial dispute that dragged on for 9 months.

The company incurred an operating loss of Rs.89.3 million during the year under review, down from a profit of Rs.15.7 million a year earlier. Interest and similar charges (Rs.95.8 million) and an extraordinary expense of Rs.130 million comprising Rs.100 million in an ex gratia payment to past employees and Rs.30 million provided for obsolescence of stocks due to he prolonged closure added to the company's losses.

Shareholders have been told in a circular accompanying the provisional financial statement for the year that no taxation had been provided due to the loss that had been made during the year.

They have also been told that on the recommendation of the company's auditors, additional provision had been made in the accounts for doubtful debts (Rs.1.7 million), provision for technical assistance/royalty (Rs.15.2 million) and a reversal of a journal entry on account of purchases erroneously taken into the accounts of financial year 1998/99 (Rs.1.5 million) and other journal entry corrections (Rs.0.3 million).

The directors said that since the company was not operational for 9 months, no provision was made for technical assistance/royalty in the unaudited accounts. The auditors have however advised that full provision be made.

Kelani Tyres which has an issued capital of Rs.402 million had a capital reserve of Rs.350.6 million and a negative revenue reserve of Rs.344.7 million on account of carry forward losses.

Its long term liabilities include a NDB loan of Rs.254.6 million, almost twice the Rs.132.5 million owing to the same bank a year earlier.

The company which had tangible fixed assets worth Rs.809.8 million was carrying net current liabilities of Rs.136.5 million as at March 31, 1998 according to the provisional financial statement.

Rohan T. Fernando, managing director of the company, has told shareholders that the audit report together with the detailed accounts will be circularised in. due course.

Lal Nanayakkara elected Vice-President of SAFA

Mr. Lal Nanayakkara, President of the Institute of Chartered Accountants of Sri Lanka, was elected as the Vice President of the South Asian Federation of Accountants (SAFA) at its recent assembly held in Calcutta in December 1998, the local institute announced.

SAFA, a forerunner to SAARC, consists of the Institutes of Chartered Accountants & Cost & Works Accountants of India, Pakistan, Bangladesh, Sri Lanka and Nepal. These constituent Institutes collectively have a membership of approximately 150,000 professionally qualified accountants.

The broad objective of the Federation is to foster the development of a co-ordinated accountancy profession in the region. To achieve this objective the following steps have been identified:

* co-ordinate and guide efforts to evolve technical, ethical and educational guidelines within the region;

* work towards international recognition of qualifications of accountancy bodies of the region;

* provide opportunities for consultation such as the holding of conferences of accountants within the region to enable members of the accountancy profession to discuss and interchange ideas and to inform themselves of developments in accounting and related matters.

Mr. Nanayakkara assumed office of Vice President of SAFA on January 1.

Janashakthi General Insurance Co. Ltd. will sponsor the activities of the Ceylon National Chamber of Industries during 1999. The company has continued its association with the Chamber for the second consecutive year, and sponsored their Annual General Meeting held recently.

The picture shows Mr. C.T.A. Schaffter, Managing Director, Janashakthi General Insurance Company Ltd. handing over the sponsorship package to Mr. Nimal Samarakkody, President, Ceylon National Chamber of Industries. Also in the picture are Mr. Gihan Silva, Marketing Services Manager, Janashakthi General Insurance Company Ltd., Mr. Nihal Abeysekera, Past President and Mr. Asoka Tennakoon, Secretary General of the Ceylon National Chamber of Industries.

APEC and ASEAN in disarray

by Kanes
The recent summit meetings of APEC and ASEAN have clearly indicated that the East Asian crisis has created doubts among East Asian countries on the alleged benefits of such groupings and dampened their enthusiasm for trade liberalization and globalization. This is not surprising as the crisis has demonstrated the helplessness of the groupings in the face of regional turmoil. If the groupings were useful while the going was good they proved virtually useless when things turned bad and exposed their inherent weakness in coping with disasters of regional dimensions. Disillusionment set in when the groupings failed miserably to come up with a regional response to the crisis. Both groupings consequently are in disarray as they watch helplessly the devastation of their economies by the unprecedented maelstrom which has transformed almost overnight erstwhile prosperous countries into basket cases with negative growth, deflation and unemployment.

APEC
The APEC summit in Kuala Lumpur in November 1998 proved beyond doubt that the APEC has ceased to be relevant to the Asian-Pacific developing countries. Apart from the indiscreet remarks by the U.S. Vice-President which annoyed Malaysia and some others and created a tense atmosphere in the meeting, the summit failed to address the main issue of the region - the Asian crisis. The issue of a vague statement that the APEC members would work together to overcome the crisis, confirmed the views of many Asians that the APEC was nothing more than a "talking shop". The meeting was conspicuous by the absence of a collective APEC approach to tackle the crisis, avoid the global recession, formulate concrete measures to resurrect the Asian economies and agree on a programme of work for the future.

The APEC, it will be recalled, came into existence in the late 1980s when Japan proposed a regional consultative group that would provide technical cooperation in trade and investment like the OECD. In early 1990s, Australia fearing economic isolation, took the initiative with the support of U.S. to pull the group away from Japan's idea of a loose consultative body towards a formal free trade area, and this was embodied in the 1994 Bogor summit declaration which pledged to reach free trade and investment in the Asia-Pacific by 2010 for the developed countries and 2020 for the developing countries. In the Osaka Summit of 1995, however, Japan influenced other the Asian countries to water down the Bogor declaration by declaring that any trade liberalization would be voluntary, flexible and non-binding. This made the grouping weak and less effective; in fact, when the Vancouver Declaration in 1997 urged members to voluntarily liberalize 15 priority sectors early, no government had any intention of taking it seriously.

There were other factors, which eroded the cohesion of the grouping. Its membership of 21 members makes it too large and unwieldy; the presence of developed and developing countries with different trade and development interests and of countries with different ideologies tend to create dissension. The Asian crisis has even widened these differences; while the U.S. is of the view that the crisis was caused by wrong policies the developing countries are unanimous that it was caused by speculative short-term capital movements; while the U.S. (and the IMF) advocate further liberalization, free trade and openness, some Asian members support restrictions, state intervention and international regulation of speculative capital movements. Even among the developing countries while some prefer to follow the IMF's prescriptions, others are acting independently.

Although the APEC Business Advisory Council recommended further liberalization of regional trade, the meeting was in no mood to go along with it. In fact, when the U.S. demanded liberalization of imports of fish and forestry products Japan flatly rejected it. The Vancouver summit had agreed to target nine sectors on a free trade fast track to potentially liberalize some $6.5 trillion in commerce; these included environmental goods and services, fish, forest products, toys, medical equipment, chemicals, energy equipment, gems and telecommunication equipment. Cutting back tariffs on them - voluntarily of course - was expected to commence in January 1999. The Kuala Lumpur summit, however, failed to make progress on this proposed liberalization and agreed to refer it to the WTO where it will be delayed for some time. It was clear that there was no political will to take action to reach the targets of free trade and investment by 2020. Besides, there was no focus on the financial crisis and there was no agreement on Malaysian Premier Mahathir Mohamed's proposal for international measures to check capital movements. There was no evidence of any new thinking indicating that the member countres preferred the APEC to drift.

Professor Walden Bello, Professor of Public Administration and Sociology of the University of the Philippines strongly believes that the APEC serves no useful purpose and should be phased out of existence.

"Of course, as a social club, APEC is a great success, providing a good excuse for bureaucrats to spend taxpayers' dollars to subsidize tourist junkets that mask as exercise in economic diplomacy. Let's face it, none of these events - from the meetings of environmental bureaucrats to "clean up the Pacific" to conference on how to support small and medium sized businesses, to the recent meeting in Manila to "advance gender equity" in APEC - has produced anything beyond nice sounding declarations. No other regional association, not even the Association of South East Asian Nations, has generated so much heat yet yielded so little."

His answer to the question why members have not left APEC instead of wasting time and money is as follows:

"However, no one dares leave the grouping for fear that in their absence, some other faction might gain the advantage and ram through its vision for Asia trade relations". (Far Eastern economic Review,. November 12, 1 998)."

ASEAN
The ASEAN Summit in Hanoi in December 1998 too was overshadowed by the Asian economic crisis. The negative growth of all the member countries except Brunei on account of the economic devastation caused by currency turmoil has raised doubts whether ASEAN can regain its vitality and vibrancy in the near future. The self-confidence of members has clearly been eroded. The cohesiveness of ASEAN has been undermined both by the economic crisis and discord among the membership. The summit showed not unity in the grouping's approach to several issues, but divisiveness that underscored a weakening of the bonds that linked them together. ASEAN was hitherto dominated by the towering personality of Suharto who virtually determined its place of liberalization and degree of economic cooperation. The lacuna created by his departure has not been filled and Indonesia, the largest in the membership, has lost its clout in the grouping. To add to the problems, Malaysia and Singapore - the largest intra-traders in ASEAN - are on bad terms particularly after the publication of Lee Kuan Yew's memoirs, and Mahathir Mohamed has further drawn flak from some of the region's leaders when he imprisoned his deputy Anwar Ibrahim.

There was first disagreement over the membership of Cambodia, Singapore, Philippines and Thailand opposing it on the grounds it had not yet set up a Senate and amended the Constitution and others supporting it. Second, the group was divided on the reactions to the Asian crisis, Malaysia condemning the IMF's prescriptions of deflation and liberalization while Thailand was faithfully implementing them. Third, the Summit failed, like the APEC, to come up with a regional response to the Asian crisis, a united stand on globalization and a common vision on their future.

The meeting, however, issued a "statement of bold measures" to accelerate trade liberalization and offer incentives to foreign investors in order to overcome the crisis. The original six members agreed to cut tariffs to 0-5 per cent by 2002 instead of 2003 as originally envisaged and permit new members to do so later, Vietnam by 2006 and Laos and Myanmar by 2008. In addition to trade liberalization, short-term incentives are to be extended to foreign investors: three-year corporate tax exemption, 100 per cent foreign equity ownership and domestic market access. The meeting further agreed to study the possibility of an ASEAN currency, cooperation in infrastructure, promotion of bond markets and according national treatment to ASEAN investors in order to create an ASEAN Investment Area.

The less developed countries were not satisfied with these targets; Vietnam, Laos and Myanmar considered the pace of trade liberalization too fast and to satisfy them the meeting agreed to introduce a new clause allowing "flexibility". These three countries were also not happy in advancing the target date for launching of ASEAN Investment Area to 2003 which was seven years ahead of the original plan; the target date - mainly to accord national treatment to other ASEAN investors - was therefore changed to 2010. Many observers, however, have pointed out these target dates are meaningless as ASEAN countries which are in the grip of serious crisis will not recover for some time and regain strength to liberalize trade and investment. Further, they expect the conflict of interests between more developed and less developed countries to become more acute in the years to come.

What holds ASEAN together is the substantial share of intra-regional trade or mutual trade between the members - 25 per cent of total exports in 1997 - unlike SAARC where international exports are only 34 per cent of total exports. The intra-regional exports of Malaysia and Singapore are close to 30 per cent whereas those of Philippines form 15 per cent.

The sizable volume of intra-trade makes the ASEAN countries more interdependent and need one another's market much more than SAARC. Thus, whatever the problems and internal discussions, the ASEAN will need to cooperate among themselves so as to protect and consolidate their markets.

While the compulsions of trade call for mutual cooperation, there are several areas in ASEAN where cooperation or coordination is necessary but absent. For example, although Indonesia and Malaysia are the world's top two producers of palm oil and rubber, there is little cooperation between them to increase economies of scale or share market information. The same applies to tin mining and plywood. Indonesia has rebuffed Malaysian investors proposing to invest in palm oil plantations in Indonesia despite their being ASEAN members and in addition Muslim countries. The Philippines has rejected Malaysian investments in its hotel sector. Malaysia is working to boost its financial sector to compete with Singapore; further, it prefers to invest in South America and elsewhere beyond the immediate region. Indonesia under Suharto changed its policies haphazardly and took unilateral action frequently to undermine the collective approach of the ASEAN. Further, despite having provisions in the ASEAN for dispute settlement through regional processes, some ASEAN members have referred territorial disputes to the world courts as those ASEAN countries sitting in judgement too have territorial disputes with the disputants. Thus, in 1994, Singapore and Malaysia took their dispute over a tiny island - Pedra Branea - to the World Court and Indonesia and Malaysia agreed in 1996 to take their dispute over two islands - Sipadan and Ligitan - to the World Court. Whether there will be closer cooperation in all these matters among ASEAN countries once they recover from the crisis remains to be seen.

The free trade agreement with India

by Analyst
The government has signed a bilateral free trade pact with India, outside the framework of S.A.A.R.C. India will remove tariffs on about one thousand Sri Lankan products within 3 years. Sri Lanka will eliminate tariffs on 900 Indian products within eight years from March 1st 1999.

The list of products have not been named. They are to be named within 60 days. In addition to the duty free list there seems to be concessionary tariff imposed by India on Sri Lankan exports of textiles and garments. Many textile items however will be placed by India on the negative list.

The Indian negative list covers 400 products. They are said to be garments, petro-chemicals alcoholic spirits, coconut and coconut oil. Sri Lanka it is reported will allow duty free access to 300 items comprising of industrial raw materials which presently carry a low duty of 5%. The duty on a further 600 items will be phased out over the next three years.

Rules of origin which are very important, have been defined to allow goods with 35% value addition in Sri Lanka. Where the raw materials are sourced from India the value addition will be 25% for purposes of duty free or preferential access in India. The local business circles have viewed the agreement with scepticism. Some even regard it as one sided and beneficial to India. But there seems to be adequate safeguard which provide a transition period of eight years.

It is not clear whether India would permit the import of tea from Sri Lanka. One has to peruse the Indian negative list and see if it is included there-in. If not, it would be a big advantage for Sri Lanka since the domestic consumption of tea in India is huge.

Advantages of Free trade
The classical case for free trade argued that free trade is good for a country even if other countries do not return the favour. Adam Smith had stated a lot about gains from trade. He saw it, among other things as a way of promoting efficiency, because it fostered competition and because it provided opportunities to specialise and gain economies of scale.

Specialisation is not a matter of absolute advantage as often misunderstood by non-economists. Absolute advantage of course is a clear case for trade since it allows countries to produce what they are best at and buy the rest. But what if one country is bad at making everything? Does this mean that trade will drive all its producers out of business?

Ricardo answered this question with the principle of comparative advantage. Even if country A is better at producing both cheese and chalk cheaper than country B it is still in the interest of country A to use its rsources in the production of the commodity where it has a greater comparative advantage and import from country B the other commodity.

The two country, two goods model of trade used by Ricardo has been refined and extended by later economists to paint a more realistic picture. Many countries both import and export a wide range of goods they do not always specialise. But both Ricardo's conclusions hold good even in these refined models.

If trade is unimpeded by tariffs, quotas etc; it will be driven by comparative advantage and free trade makes countries better off. These findings do not require reciprocity. Nor do they depend on the question of fair trade.

Some countries export at prices below their costs of production in order to obtain market share. This practice has been called dumping and is considered unfair trading and the countries who consider themselves victims of such unfair practices impose counter-vailing duties to counter such dumping.

There is plenty of evidence that countries almost always benefit from free trade even if they open their markets unilaterally. The law of comparative cost advantage is inadequately understood. Paul Krugman, one of the critics of the classical free trade theory refers to a faulty observation in the Wall Street Journal that 'many small countries have no comparative advantage in anything.''

A tariff will increase a country's production of the protected goods and raise the price obtained as producers, but the producer's gain is the consumer's loss. Consumers buy less of the goods than before and have to pay more for them, so they lose.

Our experience with import substitution policies in the 1960's and 1970's show how protectionsm affected our growth rate, adversely affecting even the rate of growth of exports. Economists allowed an exception to free trade-the infant industries required protection for a period to develop and establish themselves. Otherwise short sighted bankers will not lend money for an enterprise which will lose money at the outset, although it would make money after a time.

Modern economists like Paul Krugman have argued for a strategic trade theory. But even he has argued for the lowering of trade barriers by countries like Japan for U.S. products. He has also doubled the competence of governments to carry out the delicate interventions required by their theory, which could provoke retaliation by foreign governments.

It used to be argued that the classical case for free trade was based on perfect competition where individual producers are so small that they cannot move prices by their actions. What happens when perfect competition does not hold? Studies have shown that imperfect competition far from weakening the case for free trade, actually strengthens it. (Empirical Research on trade liberalisation with imperfect competition: a survey O.E.C.D. Economic studies No. 12).

Trade and specialisation
The point of trade is to allow the economy to specialise. If a country is better at making ships than sealing wax, it makes sense to put more resources into ship building and export ships to pay for imports of sealing wax. This is true even if it's the world's best maker of sealing wax.

So we will have to think seriously whether we should go on growing potatoes when potatoes can be produced very much cheaper in India. Land is capable of alternative uses and it would be best to cultivate some other crops than potatoes. Our farmers will have to learn to cater to the market.

The trouble over the years has been our failure to expose our economy to outside competition. We introduced the open economy only in 1977. Even then we have not allowed prices to be determined by market forces. Prices have been distorted by various subsidies particularly subsidies on various inputs like fertilisers. We have also subsidised farmers through the guaranteed prices for various agricultural products.

Guaranteed prices protect farmers from market forces. Soon these guaranteed prices depart widely from the prices that would prevail under the free play of market forces. Free trade works best when prices are determined in free markets. This is one of the underlying assumptions-that the markets are free to set the prices and producers, whether farmers or industrialists, buy and sell in response to price signals; and that prices broadly reflect costs.

This excludes prices being fixed by bureaucrats. The government must shed the practice of fixing prices for goods and services. What the farmers need is information - information about market prices, about quantities bought and sold etc. On the basis of such market intelligence the farmers should be able to form a view on the forward market price of a product that they decide to cultivate.

There is undoubtedly the risk that their anticipations of future prices may be wrong. This is the risk that any entrepreneeur has to take and farmers are no different from other entrepreneurs.

Economists always stress that every advantage granted by a government to one part of the economy, puts the rest at a disadvantage. The government offers tax concessions, price supports etc. as though it costs nothing. So we find various industries asking for tax benefits or farmers asking for price supports. But all these have costs and reduce over-all human welfare.

It's interesting to quote Adam Smith. He said ''by means of glasses, hotbeds and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be bought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines merely to encourage the making of claret and burgundy in Sctoland?''

A similar argument can be applied to potatoes grown by us or perhaps apples. Free trade also is the best way to force producers that might otherwise be near monopolies to compete.

Growth through trade
What sort of trade policy gives us the best chance of rapid economic growth? The World Bank in their World Development Report some years back showed that free trading policies usually work better than the protectionism which was preferred by most developing countries including us.

In the 1960s and 1970s; we tried import substitution policies - in other words by encouraging our producers to make goods for domestic consumption rather than for export. The idea was to industrialise without being confined to the production of primary products when world demand was not growing enough to fetch good prices. The aim of the policy was to build an industrial base as quickly as possible.

But by giving protection for too long, the domestic producers were sheltered from foreign competition. The producers soon became inefficient producing third rate products and selling them at the highest possible prices.

This policy had and unfortunate effect. By raising the price of imports, it also made the production of those goods more lucrative than producing for exports. In short production for export was discouraged.

Government revenue increased as imports became more expensive and domestic producers switched resources from exports to domestic market. This set of policies came to be called as inward oriented trade policies. The opposite policy is one where government does not discriminate between production for export and production for the domestic market and it is called outward oriented policies.

World Bank studies which classified countries into strongly outward oriented, moderately outward oriented, moderately inward oriented and strongly inward oriented, came out with the conclusion that outward oriented countries grew faster than inward oriented countries. It was also noted that there was a correlation between outward looking trade policy and productive investment.

Foreign Investment
One of our biggest drawbacks to economic growth is the lack of adequate savings. Our savings ratio is too low compared to countries like India and China. So we have depended on foreign aid and foreign investment to propel the economy.

Foreign aid is now drying up and will probably be seriously curtailed when we achieve middle income status. Will the free Trade Agreement encourage foreign investors to come in given the possibility of exporting to India?

Sri Lanka of course has much higher costs of production than India. Our level of wages is much higher than India. Costs of fuel and power are also much higher. So if India liberalises foreign investment, it would be better for foreign investors to set up plants directly in India to market their products.

But India has a strong tradition against foreign invstors. She is unlikely to liberalise foreign investment as Sri Lanka has done. So there is some hope that multi-nationals and other foreign investors who have an eye on the Indian market may take a chance and invest here. There is also possibility, given the more liked trading atmosphere in Sri Lanka for Indian entrepreneurs to move some of their production here or enter into joint ventures to supply both India and Sri Lanka.

A free trade area will benefit both India and Sri Lanka if the amount of trade it creates exceeds the amount it diverts. Duty free or low tariffs on Indian goods may encourage local buyers to import from India in preference to importing from other countries.

This is trade diversion. This is not necessarily good. Why? because before the Free Trade Pact, two foreign exporters faced the same tariff and we as importers would choose the supplier on the basis of price and quality only. With the Free Trade pact in place, our importer might switch to the less efficient supplier from India merely because he is cheaper owing to the duty concession.

On the other hand if India buys from Sri Lanka goods that it would have previously made for itself, there would be an increase of trade - trade creation as a result of the Free Trade Pact. That is why international authorities prefer a Customs Union where the two countries would have a common external tariff while granting each other's products duty free status.

It is also necessary to go beyond free trade in goods and extend it to services. Perhaps we could even go further and allow free movement of capital between the two countries.

The Free trade agreement signed by India shows a dramatic change of attitude by India. Perhaps after the nuclear explosion, India has gathered enough self confidence to give a lead to creating a trade block around itself and perhaps thought it best to start with the small countries in the sub continent.

India must give regional leadership and build a strong regional trading block. India may be fearing that the world is moving away from free trade to economic regionalism. The European Union has come to stay inspite of many obstacles.

Trade including freer trade between India and Sri Lanka is good. The question is how to make sure there is more of it? It's not enough to sign an agreement. It must be made to work. The local value added criterion of 35% to be considered for origin in Sri Lanka could be an opportunity. The value addition comes down to 25% if raw material inputs from India are utilised. These opportunities should be exploited by our entrepreneurs.

Ties that bind
If there is to be success then we have to follow more closely Indian economic policies - for otherwise we will risk losing our competitiveness. We cannot allow our rates of inflaton to exceed those of India. In fact, since our rate of inflation has in the past exceeded India's by a wide margin, we need to strive for extremely low inflation to regain our competitiveness.

One way to do so is to tie the Sri Lankan rupee more closely to the Indian rupee. We may not be able to go the whole hog. But the Indian rupee should carry weight in the basket of currencies that our rupee is said to be tied to.

Another aspect that requires attention is trade facilitation. The Indian bureaucracy is a cantankarous lot. Agreements should be reached on such trade facilitation issues as customs harmonisation and simplification, product classification and standardisation and mututal recognition agreements for product testing and certification. Our bureaucracy will have to change attitudes towards Indian products and work hard to make free trade a success.

Commercial Bank deposit rates to come down?

The Central Bank's overnight repo rates hit a 1-year low in December following a reduction of the overnight T-Bill repurchase rate by 25 basic points to 11.25% in the middle of December. Analyst predict a cut in commercial bank deposit rates in an excessively liquid market.

The Central Bank cut short term interest rates by 50 basic points in December. Analysts see this as partly due to the recent easing of the domestic inflationary pressures and the relative stability in foreign exchange markets during the past two months.

They said that excessive liquid money market conditions saw over Rs.7 billion being transacted in the Central Bank's repo window on December 21.

Asia Securities said in a market report that the USD 65 million that the DFCC bank raised via its recent international floating rate notes (FRN) has also now entered the market and the demand for credit remained subdued.

It was not surprising that an average of Rs.6.7 billion was deposited with the Central Bank's repo window on the subsequent 3 days despite the 25 basic point rate cut'', Asia said.

The securities firm believes that further downside on the Central Bank's overnight repo rate "remains a distinct possibility in the short term''.

Asia said that they expect T-Bill yields to ease further during the first quarter of this year as demand for credit both from corporates and the government is expected to remain relatively weak.

Noting that the 2-year T-Bond yields has also fallen 31 basic points to 13.5% during the past five weeks, Asia expected yields to decline further in the short term.

In this climate, they questioned the wisdom of all the listed commercial banks aggressively competing to mobilise fixed deposits in already limited money market conditions.

"Although bank FDs should ideally command a premium to risk free T-Bills, there was little compelling necessity for such aggressive deposit mobilisation efforts and the banks look to have over-estimated the extent of the traditional fourth quarter rise in interest rates'', Asia said.

The Asia analysis expected the banks feeling the pressure of falling interest yields to swiftly reduce their deposit rates.

"(But) the damage looks to have already been done in the short term. With the banks' lucrative external trade financing activities also likely to have suffered due to the slow down in import/export trade, profit growth in the commercial banking sector is likely to decelerate in the fourth quarter of 1998'', the analysis said.

Janashakthi turnover grows for third year running

Janashakthi General Insurance Co. Ltd. has achieved a turnover of Rs.358 million in 1998, up 32% over the previous year, the company announced.

Claiming this "creditable performance'' as another milestone "in an already impressive record'', Janashakthi said that they were proud of this achievement in their third year of operations.

In 1996, Janashakthi posted a Rs.200 million turnover which itself was the highest any insurance company here had achieved in its first year. In 1997, this was boosted 32% to Rs.264 million and the company posted a profit in its second year in business.

Mr.C.T.A. Schaffter, Managing Director, Janashakthi said: "The company can look back with pride and satisfaction at the progress it has made. We express our thanks to our valued policyholders, brokers and the public for the confidence placed in the company. That trust has enabled Janashakthi to forge ahead on the road to progress and excellence.

"Our achievements demonstrate the strength and quality of our performance. To record a growth rate of over 30% for the second successive year in the fiercely competitive local insurance market is a remarkable achievement''.

Janashakthi said in a news release that it has developed excellent relationships with some of the world's best re-insurers. Their primary re-insurer was Employers Re. of USA who are among the world's top five in reinsurance.

The others on the panel of reinsurers of the company are: Tokyo Fire & Marine Insurance Co. Ltd. - Japan, Chiyoda of Japan, GIO - Australia, China Re and Zurich Re. "The cumulative credentials of this galaxy of reinsurers is unmatched in the Sri Lankan insurance industry, and is a guarantee of the company's strength and stability,'' Janashakthi said.

The company which employs several professionally qualified staff says that it is willing to consider any kind of insurance cover regardless of the perceived risks. In addition to the common areas like fire, motor, marine, burglary etc. they also offer insurance cover against title risks, bombs, demands against libel and slander, agricultural insurance, livestock insurance, special contingency risks etc.

The company said that this kind of insurance is not freely available in the country. That, together with their encouragement of motor business, "sets us apart from competitors as an insurer with the new approach'', the company said.

The directors of the company are: Messrs. Nissanka Wijewardena (chairman), C.T.A. Schaffter (managing director), Prakash A. Schaffter, Tryphon R. Mirando, N. Pararajasingam, W.T. Ellawala and L.C.R. de C. Wijetunge.

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