.

DFCC shops for new CEO to replace Prelis

The DFCC Bank now shopping for a chief executive to succeed Mr. Maxi Prelis who had held the job for 18 years since 1981 is likely to advertise the position in foreign publications like the Economist, well informed banking sources said.

Does that mean that they are open to an expatriate? ``Preferably not,’’ said an inside source. ``There are quite a few Lankans who have had useful and extensive foreign exposure who may be interested in the challenges and the rewards the job offers. Many of them would like to come back home.’’ A locally experienced high flyer is also a possiblility.

These sources said that ``the package is not the problem.’’ The DFCC which needs a high calibre CEO is determined to get one. It is certain that the new appointment will be made from outside the institution.

Prelis, 63, professionally an engineer, came to the DFCC which was then a relatively insignificant player in the domestic banking industry despite being an only development bank from the senior management of the Bank of Ceylon. He had, in fact, represented the bank on the DFCC board for about six months before he applied for the then vacant position of the CEO there which had been previously held post-retirement by senior commercial bankers including C. Loganathan, a former general manager of the bank of Ceylon and Donald Kannangara, who was GM of the People’s Bank.

A succession problem kept Prelis in the saddle beyond the normal retiring age of 60-years and there has been speculation within the DFCC of when he would exit. Now that the bank has already advertised locally for a CEO and will also advertise abroad, it is clear that the long serving CEO who has led the bank through a phenomenally successful growth phase which made the DFCC the largest market capitalised quoted company on the Colombo Stock Exchange in the earlier years of this decade. It has since lost this crown to John Keells Holdings.

DFCC hired Pricewaterhouse Coopers of the USA last year to device a re-engineering plan for itself and it is likely that the titles favoured by the local banking industry like general manager, deputy general manager and assistant general manager will be changed to president, vice-president etc.

``When we’ve gone on international roadshows, out titles like GM, DGM etc. were totally unintelligible to many participants,’’ a DFCC source explained.

With soft loans which the DFCC was able to channel into development finance now drying up, the development of a local debt market to raise relatively cheap funds locally has become more urgent. The DFCC Bank was able to raise floating rate note (FRN) abroad last year, but raising such funds abroad means an exchange risk.

Financial circles who described the recent acquisition of a substatial stake in the Commercial Bank of Ceylon by the DFCC Bank as a ``win-win situation for both,’’ said that the possibilities have not yet been maximised and this too will be a challenge for whoever takes over from Prelis.

The DFCC now has over 10,000 shareholders with over 50% of the shares in local hands. In its early stages the Bank of Ceylon and the People’s Bank were major shareholders. The People’s Bank however sold out last year taking a fat capital gain on shares that had cost it as little as five rupees each after factoring in the various bonuses received over the years.

The Bank of Ceylon remains the biggest shareholder with 15% of the company followed by the German Bank, DEG and some foreign investment funds. But with foreigners selling out in the wake of the Asian crisis, the controlling shares of the DFCC is now in local hands.

Financial circles also expect that the serving Chairman of the DFCC Bank, Mr. C.A. Cooray, a former Secretary to the Treasury and widely respected public servant, who is over 70-y ears of age may bow out at next month’s annual general meeting of the bank. If so, who his successor will be is yet an open question. Prelis has been mentioned as a possibility within the DFCC.

Aitken Spence Hotels to invest USD 4 .5 m. in Maldives

Aitken Spence Hotel Holdings Ltd. (previously Ahungalle Hotels) which has just announced a 1 for 6 bonus share issue is preparing to make a USD 4.5 million investment in a third Maldivian resort, company sources said.

The company which previously made a 1 for 3 bonus share issue in fiscal 1994/95 are the owners of the Aitken Spence hotel properties both in Sri Lanka and the Maldives. With Kandalama now turned around and contributing to profits and the newer Tea Factory virtually out of the woods, the company is determined to maximise the opportunities offered by the tourism revival here and the growing popularity of the Maldives as a holiday destination.

The highly profitable Maldivian operation gave the company the financial resilience to withstand the tourism downturn in Sri Lanka and even pay its shareholders dividends and make a bonus share issue during lean times.

Corporate strategists are confident about the growing potential in Maldivian tourism and the company which has won the management contract for the Golden Sun resort there is planning to be ready with its own third island resort in time for the Summer season next year.

Corporate analysts expect the company to raise the capital for the new development via a rights issue and speculate that it would be in the proportion of 1 for 3 after the bonus for which shareholder approval has to be obtained.

It is likely that these shares will be offered at a premium but at a discount to market price. Aitken Spence Hotels’ share price is likely to decline after the bonus is factored by the market. Analysts expect an underwriting agreement which will assure the inflow of the needed zero cost funding with no additional strain on the balance sheet.

Company sources said that the new resort is already being marketed very successfully and 80% occupancy similar to that achieved at Club Ranhalli with which Aitken Spence Hotels broke ground in the Maldives is assured.

Sri Lanka cricket now big business

Cricket has become a big business with the income of the Board of Control for Cricket in Sri Lanka (BCCSL) leaping from Rs.57.59 million in 1993/94 to Rs.268.95 million last year according to the just published annual report of the BCCSL.

BCCSL income dipped to Rs.34.08 million in 1994 and Rs.32.14 million in 1995 but has been rising since.

1996 income of Rs.81.5 million better than doubled to Rs.191.1 million in 1997 and despite higher expenditure, a surplus of income over expenditure of Rs.24 million had been achieved last year.

BCCSL’s fixed assets have grown from Rs.7.1 million in 1993/94 to Rs.40.6 million last year. The growth between 1997 and 1998 has been spectacular - rising from Rs.19.3 million to Rs.40.6 million.

According to the report Rs.25.2 million is being spent by the Board on international players’ contracts, Rs.16.4 million on infrastructure development, Rs.22.4 million on domestic cricket and technical expenses and Rs.18.9 million on administration.

Singer chief blows whistle on Indo-Lanka FTA

One of Sri Lanka’s top business leaders has focused on the uncertainty created within domestic industry today as companies await the finalisation of the Indo-Lanka Free Trade Agreement (FTA).

Reporting to shareholders of Singer Industries (Ceylon) Limited, the market leader in the domestically assembled television receivers here, Singer Chairman/CEO Hemaka Amarasuriya has sounded a cautionary warning that anti-dumping laws are not in place and expressed the fear that the market will be inundated with spurious brands.

Amarasuriya said: "Our experience of bi-lateral agreements is that while trade between the two participating countries will expand substantially, there is no guarantee that the smaller partner stands to benefit.’’

Asking the rhetorical question "Is our country ready for such far-reaching tariff and trade reforms?,’’ he made the point that anti-dumping laws are not in place.

Amarasuriya forcefully made the point that consumer protection had to be simultaneously strengthened to protect buyers from sub-standard goods.

In its just published annual report for 1998, the Central Bank said that under the Indo-Lanka Free Trade Agreement (FTA) signed last December, Sri Lanka will fully remove tariffs immediately for some products and will grant partial concessions on some other products.

While India will remove tariffs entirely on some goods immediately, partial concessions will be granted to some selected products with the tariffs on those products to be removed gradually over three years.

The report admitted that industrialists and producers here catering to the domestic market may face competition and loss of market share. But those catering to the export market "may realise the benefits of free trade.’’

Although the respective negative lists under the FTA were due to be finalised in March, back pedalling by India on the promised free entry for Sri Lanka tea into the Indian market and other problems have created a yet unresolved deadlock.

Hayleys Exports maintains 40% dividend level

Hayleys Exports has seen a small dip in net profits for the year ended March 31, 1999, despite a gain in turnover according to a company statement issued to shareholders.

The directors have announced a final dividend of 20% for the year under review which together with the 20% interim paid in March gives members a 40% return for the year maintaining its previous year’s dividend level after a scrip issue.

Group turnover at Rs.258.7 million was up from Rs.225.3 million a year earlier while the gross profit of Rs.65.9 million was almost the same as the Rs.65 million earned the previous year.

The pre-tax profit of Rs.54.3 million was down slightly from Rs.57.2 million a year earlier while the net profit after-tax and minority interest at Rs.45 million was down from Rs.48.1 million a year earlier.

With a balance profit of Rs.66.5 million carried forward, the company had Rs.111.5 million available for appropriation as at March 31, 1999. It is maintaining the previous year’s dividend level of 40% although the pay out will cost the company Rs.16 million against the previous year’s Rs. 14 million on account of a bonus issue of 1 for 7 made last year.

The company is carrying forward retained profits of Rs.95.5 million as at March 31, 1999. Its earnings per share for the year under review at Rs.11.24 was down slightly from the previous year’s Rs.12.02.

Hayleys Exports has an issued capital of Rs.40 million and reserves of Rs.131.5 million in its books.

Low growns the only only spark
Tea sale average hits 1999 low in May

The Colombo tea sale hit a 1999 low with an average price of Rs.99.68 per kilo at the auction at the beinning of this month, brokers said.

"Last week’s auction average was only Rs.99.68 and the lowest recorded so far this year,’’ Somerville & Co. Ltd. said in their tea market report covering the May 11/12 tea sale No.18.

Brokers said that going by the crash in prices in the previous week’s ex estate offers, the last auction average "would have certainly been much lower’’ but for the better demands seen for low growns.

What traders called a ``strong and buoyant market for most low growns’’ on offer at this auction saw the low growns average improving to Rs.120.66 a kilo from the previous week’s Rs.116.52 a kilo.

Brokers said that buyers from the Middle East and the CIS have been actively bidding for their requirements and expected the trend for low growns to continue into the coming weeks because more buying orders from the Middle East have been received.

Somerville stressed that all low grown tea producers must pay close attention to all aspects of manufacture in order to benefit from the current market trend where well made "true to grade’’ teas are fetching attractive prices.

Rs. 1.76 bn. investment in plantations
Finlay’s profits plunge in ‘big acquisition’ year

James Finlay & Company (Colombo) Limited has seen its after-tax profit plunging 34% despite a 109% increase in turnover during the year ended December 31, 1998 according to the company’s annual report now with shareholders.

The year under review saw Finlays investing hugely to acquire the Plantation Investment & Management Company Limited (PIMC) owning 51% each of two regional plantation companies, Hapugastenne Plantations Limited (HPL) and Udapussellawa Plantations Limited (UPL).

The acquisition cost Finlays Rs.1,675 million and was funded through a rights issue which raised Rs.1,200 million, a long term loan of Rs.300 million and internally generated cash of Rs.175 million.

The company’s Chairman, Mr. R.L. Juriansz, described this acquisition as a "very significant event’’ resulting in the group becoming a fully integrated tea business involved in the growing and manufacture of black tea.

This complemented Finlays’ other tea related activities such as tea blending and packaging for export, the manufacture and export of green tea and warehousing.

"The acquisition is also of significance, because it doubles the size of the group in financial terms, making us one of the largest tea producers in the country, with a combined production of nearly 17 million kgs. of tea (or 6% of Sri Lanka’s production). This acquisition provides the Finlay Group with an equity interest in Sri Lanka’s plantation industry, where it will be able to impart its considerable skills and knowledge in field practices, factory procedures and marketing,’’ he said.

The year under review had also seen the local company selling its instant tea factory to its UK parent, James Finlay Plc. Juriansz said that this was considered a prudent step because the cash shortage within the group could not meet the needs of additional funds for the instant tea project.

The divestment meant that approximately Rs.230 million spent by the local James Finlay company on the project was recovered and used to reduce the group’s long and short term debts.

The chairman explained that the 1998 performance, which saw the net profit after-tax decline to Rs.67.3 million from the previous year’s Rs.102.5 million, had been affected by two significant factors. Firstly, they had to absorb Rs.67 million interest on the bridging finance raised to fund the PIMC acquisition. Secondly, the currency crisis in Russia had seen a steady fall in tea prices from the middle of last year and the full impact of this had been absorbed by the profit and loss account.

But he said that their move to a new packing facility at Welisara had expanded their export business and their non tea business also performed well with insurance and timber treatment achieving significantly better results.

Finlays which paid a dividend of 20% in 1997 has announced a 10% dividend during the year under review on the increased capital consequent to the rights issue. The 1998 dividend in rupee terms is Rs.5 million higher than in the previous year, the company said.

Juriansz said that his board aims to achieve a progressive increase in the annual rate of dividend at least in line with inflation and twice covered over the medium term. He explained that the reduced profit for the year necessitated the reduction of the dividend per share and lower dividend cover.

Asked how he would justify focusing on tea instead of diversifying the spread of business, the chairman said that their core competence is tea and their parent company, James Finlay Plc. is one of the major players in the global tea industry. They are able to constantly exchange ideas and information with Finlay operations in other parts of the world and they believed that their skills, knowledge, use of the industry’s best practices and access to markets will enable them to achievesatisfactory profits in the long term.

"We can build on these strengths and capitalise on the ample opportunities that exist within Sri Lanka’s tea industry. Our focus therefore will be on tea and tea related activities. However, though not at the heart of this strategy, we will continue to be involved in those non-tea businesses that we have been associated with, as we see opportunities for growth in them as well,’’ he said.

James Finlay Plc. owns 74.9% of the Sri Lanka company whose other major shareholders are the Tea Plantation Investment Trust Plc. (7%), NDB (4.4%) and Ayojana Fund Management (3.5%). In addition to one individual shareholder, D.S. Al Abdul Karim who owns 2.9% of the company, the other large shareholders are the Hongkong & Shanghai Banking Corp. Ltd. ITL Lanka Growth Fund (2.5%), National Equity Fund (2%) and the DFCC Bank (0.46%).

Juriansz said that although they were not directly affected by default from Russian buyers as they sold very little direct to Russia and payment had been secured in advance where sales were made, they undertook a considerable amount of contract packing of tea bags for exporters to CIS countries. As these orders declined, the utilisation of their tea packing machinery was reduced to a single shift from a round-the-clock operation the previous year.

"For Finlays, the biggest impact of the currency crisis was on the plantations as, following the withdrawal of Russian support in the auctions, prices fell from mid-year and the profitability of the plantation companies were badly affected. During the first quarter of 1999, there has been a further fall in prices,’’ he said.

In a review of operations, the company said that despite the uncertain economic environment in many of the major tea importing countries during the year under review, Finlays tea exports were up 17.6% to reach 6.6 million kg. according to the turnover of Rs.1.3 billion against the previous year’s Rs.1 billion. Finlays had been ranked the 5th largest tea bag exporter and the 10th largest packeted tea exporter of the country last year.

The review said that the depreciation of the Japanese yen was making Sri Lanka green tea more expensive for Japanese buyers and sales had plunged to 18,385 kg. from 116,995 kg. the previous year. But some succession had been achieved in finding new markets.

The directors of the company are: Messrs. R.L. Juriansz (Chairman), C.I.K.P. Jayasuriya, E.R. Croos Moraes, N.K.H. Ratwatte, N. Ratnasabapathy, C. Jayaratne, N.D.C. Austin, R.J.K. Muir and P.G. Lockett.

Financial liberalization may create another currency crisis

By Kanes
The excessive liberalization of the financial sector in East Asian countries mainly as a result of the pressure of the IMF and US, and partly in order to become regional financial centres, when the domestic financial markets were relatively undeveloped, was undoubtedly the major cause of the East Asian currency turmoil followed by economic recession. Financial liberalization resulted in a substantial inflow of foreign capital into the East Asian countries in the forms of direct investment, portfolio investment and bank credits. Foreign direct investment was mainly the relocation of export industries to take advantage of cheap labour particularly by Japan, when the yen appreciated to make its exports uncompetitive. The increase in portfolio investment, mainly by hedge funds, was caused by the higher returns to be obtained from the emerging markets than at home. By providing easy access to international financial markets, liberalization, enabled domestic banks, other financial institutions and business firms to borrow at cheaper interest rates from foreign banks which were only too eager to find investment outlets for their surplus funds. Portfolio investments and bank borrowings increased the foreign short-term debts of these countries; they also encouraged greater dependence on foreign funds than was necessary by the domestic investment pattern. Altogether, net private capital inflows to Asia rose from an annual average of $13.1 billion in the period 1984-1989 to $56.0 billion in the period 1990-1996 as shown in the following table and East Asian countries became more dependent on foreign funds.

East Asian Currency Crisis

In 1996, just before the currency turmoil, net private capital inflows to Asia reached $100.2 billion - the peak; direct investment was $60.2 billion, portfolio investment $10.1 billion and other net investment (bank loans, etc.,) $30 billion. These substantial capital inflows exceeded the absorptive capacity of East Asian economies: they were used mainly for investment in non-tradable sectors - property and stocks: such investment was encouraged by the appreciation of the real exchange rate by both substantial capital inflows themselves and the peg to the American dollar which was appreciating against the yen. There resulted a boom in the stocks and real estate markets, which in turn contributed to high domestic demand and rapid economic growth.

Booming investment and consumption led to the enlargement of the current account deficit. Thailand’s deficit rose to 8.3 per cent of GDP in 1995 and 8.1 per cent in 1996 and Malaysia’s to 6.3 per cent of GDP in 1996. Normally it is government deficit financing which causes current account deficits. Here in East Asia, however, it was private profligacy that enlarged current account deficits. Business companies had borrowed so much that the debt equity ratio of companies with foreign loans was 5.6:1 in Indonesia, 4.2:1 in Thailand and 3.5:1 in South Korea. Several companies found the debt service burden too heavy and defaulted as early as February 1996 in Thailand and January 1997 in South Korea.

The increase in short-tem foreign debt by private banks and business firms, their inability to service it, the slowing growth of exports on account of the appreciating exchange and the growing current account deficits led to a loss of foreign investor confidence ond a withdrawal of short-term investments. Foreign banks became more cautious and restricted credit to local banks: foreign investors in the stock exchange sold their stocks and repatriated the proceeds in dollars; residents with foreign debts purchased dollars to hedge their dollar debts; hedge funds began to make speculative assaults on the local currencies knowing that the exchange rate could not be maintained. Authorities attempted to meet the demand for dollars and defend their currencies, but they could not cope with the increasing demand, and were forced to allow their currencies to float and depreciate.

Loss of confidence, flight of short-term capital and currency depreciation triggered a sharp fall in stock and property markets in the second half of 1997. With the disappearance of a good part of their paper wealth business firms were in serious difficulties and defaulted on their loan repayments. Banks’ burden of bad loans was compounded by the burden of higher foreign debt service on account of depreciation, and were forced to restrict lending and this made more companies bankrupt and lay off their workers. When these countries sought the IMF’s help, the remedy offered made the disease worse. For what the IMF offered was a massive dose of deflation - monetary restraint with higher interest, closure of unsound banks and credit restriction and fiscal restraint with cuts in public spending and budget surpluses. This inevitably led to a further fall in output and growth converting the currency crisis into an economic recession with large scale bankruptcies and retrenchment. The crisis wiped out the productive gains of the last seven years. This crisis affected the whole world causing turmoil in Russia, Brazil and slowing economic activity even in the developed countries. In fact, world economic growth is estimated to fall from 3.2 per cent in 1997 to 1.9 per cent in 1998 and 1.8 per cent in 1999.

IMF’s Prescriptions

The IMF’s belief - in fact, dogma- is that the restoration of private capital inflows is the only way to recovery in the crisis-stricken countries, and consequently every possible measure should be taken to win foreign investor confidence. This enabling environment for foreign investors was to be created by sound macro-economic fundamentals guaranteeing monetary and fiscal stability and full liberalization of trade, exchange and investment regimes. However, fiscal and monetary restraint undermined the confidence of domestic investors: higher interest rates may have appealed to foreign investors but it raised the cost of credit to domestic investors who were already suffering from credit restriction; closure of "unsound" banks undermined the confidence of the public in the banking system as a whole and in the economic policies. Public expenditure cuts led to reduction in public investment and consumption. Economic activity came to a standstill, companies went bankrupt, unemployment increased and banks became burdened with more bad loans. Nonperforming loans of Thai domestic banks for instance, rose to 54 per cent of total outstanding credit in the last quarter of 1998. When the IMF realized that its fiscal and monetary prescriptions instead of reviving the countries were driving them into depression, it had second thoughts and permitted them to have budget deficits and relax monetary restraint; Thailand was allowed to have a budget deficit equal to 3 per cent of GDP instead of the original target of a budget surplus of 1 per cent of GDP in 1998 and it was also advised to strengthen its social safety net; South Korea too, was allowed to have a budget deficit of 5 per cent of GDP instead of a budget surplus of 1 per cent of GDP in 1998 and to lower interest rates. These measures, however, were too little and too late and failed to revive the ailing economies. Besides, deficit financing in an open economy leads to increase in imports and enlargement of current account deficits.

Liberalization

IMF’s trump card, however, was liberalization. It believed that even if deficit financing and liberal monetary policy failed to revive the economies, its prescription of liberalization - removal of all restrictions on foreign investment and foreign ownership, privatization of public assets, elimination of government intervention in economic activity and creation of labour flexibility and restructuring of firms and banks - would attract foreign capital and put the crisis-hit economies back on the road to recovery. Thus, Thailand, South Korea and Indonesia were given strict instructions not to follow Malaysia and impose exchange controls but to keep their doors wide open to foreign capital. South Korea and Thailand were made to amend their laws to allow foreign ownership of domestic assets and Thailand has passed new laws on bankruptcy and Kim Dae Jung reached an agreement with Korean labour to effect temporary lay-offs. Further, all the countries were directed to privatize state undertakings and invite foreign investment in both public and private companies. Privatization and sale of local assets to foreigners lacks popular support in Thailand and Korea and consequently there has been little private capital inflows into the country so far. Foreign capital has taken over the First Bangkok City Bank and Bangkok Investment. In South Korea, however, foreign investors seem to have purchased more large domestic companies at bargain prices, e.g. Seoul Bank by the Hong Kong and Shanghai Banking Corporation, Korea Exchange Bank by Commerzbank of Germany and Korea First Bank by a group led by America’s Newbridge Capital: General Motors, Ford and Procter and Gamble have also purchased Korean automobile and other companies. However, thousands of workers demonstrated against the sale of Daewoo Shipyard to Japanese companies.

These measures, however, have failed to restore overall investor confidence in Asia. Table 1 shows that net private capital to Asia which declined from $100.2 billion in 1996 to 21.5 billion in 1997 are expected to fall further and become negative in both 1998 and 1999 - minus $18.3 billion in 1999 and minus 7.3 billion in 2000. Both portfolio investment and private credit - mainly bank credit - will be negative in 1998 and 1999 and foreign direct investment will fall from $60.2 billion in 1997 to $35.0 billion in 1999. The kind of capital flows that sustained speculative bubbles in the 1990s cannot be expected now. The fact is that investor confidence is not country or region specific but relates to all emerging markets. The East Asian crisis as well as the crises of Russia and Brazil have made foreign investorlose confidence in all emerging markets and a single country will not be able to restore that confidence by taking all the appropriate measures to attract them. The loss of confidence is not related to what an individual country has done or does. It is a cyclical downturn in the pattern of capital flows and needs global solutions.

Thus, the East Asian economic recession continues. Indonesia, Malaysia, South Korea, Thailand and Hong Kong will have negative growth in 1999. Since the baht devalued in July 1997, approximately 7 out of 10 companies in Indonesia, Malaysia, Philippines, South Korea and Thailand have experienced a drop in their output. Capacity utilization among factories in these five countries has fallen from about 80 per cent in 1996 to 66 per cent at the end of 1998. For the first half of 1999, between 25 per cent and 41 per cent of companies in each country expect to be idling still more machines and people. Capacity utilization has fallen most in auto parts, electronics and machinery firms. About 15 per cent of the companies are both illiquid and insolvent, 17 per cent are insolvent and 43 per cent are illiquid. Half the companies in the five countries laid off about 15 per cent of their workers or about 1 in 7. Production has fallen because of poor demand and unstable markets - both at home and abroad. Economic recession and unemployment have reduced domestic demand, while slower growth in the Asian region as well as in the developed countries has reduced the demand for their exports.

No Signs of Recovery

East Asian countries have not recovered mainly because their exports have not recovered. Their economic growth is export-led and the stagnation in exports in spite of IMF’s remedies is holding up growth. Devaluation has not helped exports because the countries which buy these exports, in the Asian reign and abroad, too are experiencing low growth. In addition, the IMF’s formula has destroyed the dynamism of the economic system and driven too many companies to bankruptcy: export firms are unable to obtain adequate bank credit as banks are saddled with bad loans and imported inputs have risen in price after devaluation . Both South Korea and Thailand are having current account surpluses and some see this as a sign of recovery, but they are the result not of an increase in exports but severe contraction of imports. Korea for instance, announced a record $41 billion current account surplus in 1998 reversing an $8 billion deficit in 1997; this was brought about by a massive contraction of imports by 37 per cent while exports actually fell by 5 per cent. Average annual export growth of the five crisis-hit countries in 1991-1997 was 13 per cent but the forecasts for 1999 is 6.6 per cent, for 2000, 7.9 per cent and for 2001, 8.2 per cent - nowhere near the high export growths in the first half of the nineties. Their imports, which had risen by 12 per cent in 1991-1997, fell by 18 per cent in 1998 and are expected to increase by only 4.6 per cent in 1999. These current account surpluses of Korea and Thailand have been squeezed out of contracting economies by means of a sharp fall in personal disposable incomes - even greater than the fall in output - and by causing much hardships to the poorer sections of the population. In South Korea, the Confederation of Trade Unions has called for a general strike on May 1 to protest lay-offs as unemployment has reached 1.8 million 8.7 per cent - the highest level in a decade.

In spite of the IMF’s announcements that the East Asian countries are on the road to recovery many others are pessimistic. The World Bank’s director for Thailand - Jayasankar Shivakumar - for instance stated recently that "ten years will pass before the structural reforms take effect and prosperity can be measured for the vast majority of the people". In fact, as all IMF’s prescriptions have failed, the Thai government has launched a $3.5 billion stimulus package consisting of direct funding, slashing value added tax from 10 per cent to 7 per cent, cutting personal income and business taxes and creating 486,000 new jobs, to revive the economy.

The East Asian crisis was caused mainly by excessive liberalization of the financial sector and undue dependence on foreign short-term funds. What the IMF is doing is directing both South Korea and Thailand to liberalize even further to win foreign confidence and attract foreign capital. This will, however, result in a repetition of the current crisis: inflows of capital will create excessive short-term foreign debt, appreciate the real exchange rate, divert investments to stock and property markets, enlarge the current deficit, create a loss of investor confidence and assault on the local currency. The same cycle again! The main culprit of the crisis speculative short-term capital movements - instead of being regulated at the international level - are allowed free rein to cause devastation in emerging markets. Nor can developing countries adopt any effective policy so long as they operate open economies, for any regulation of capital movements - however disruptive they are - are contrary to IMF’s dogma of free markets.

It is the abundant availability of foreign funds that made the East Asian economies adopt an export-led strategy in recent years. They had earlier adopted import substitution to reduce external vulnerability - particularly as their major exports then - commodities - were facing unfavourable and unstable prices, but- this problem disappeared with inflow of foreign funds. The current crisis has, however, demonstrated that the developing countries are still exposed to external vulnerability - not from unfavourable commodity prices but from speculative short term capital movements and lack of demand for their exports. They have now been forced to reassess their policies of export-led growth and open markets and accept, despite IMF’s opposition, selective controls on capital movements and selective import substitution as the only way out of their current crisis.

Trust and sociability needed for development

By Analyst
The extent of spontaneous sociability in a society affects the economic growth of a country. In every society there are individuals who are extroverts who mix easily with others and are sociable. Where there is such sociability people join up with others easily to form associations to promote social goals or collective objectives of the members.

In some countries people are highly individualistic and don’t mix with others and form associations with the same spontaneity. There may be many introverts. In such individualistic introverted societies it is hard to form associations and even when such associations are formed they don’t last long since the members are quarrelsome and they break up.

But spontaneous sociability is critical to economic life because virtually all economic activity is carried out by groups rather than by individuals. Before wealth can be created human beings have to learn to work together. Efficient economic organisation is the key to growth and the development of an efficient economic organisation accounts for economic development.

It is sad to see how workers and management quarrel in companies. The workers have been indoctrinated in the idea of class conflict and don’t see that their prospects for continued employment depends on the success of the business. A new generation of workers who have not been indoctrinated in class conflict, will have to join the work force if there is to be industrial peace and economic growth.

The government must modify it not repeal the trade union legislation. If the workers and to have the right to strike the employer should have the right to terminate their services subject to certain minimum safeguards, a go slow is not an appropriate trade union action. Acts by trade unions in restraint of work and restricture employment practices should be treated as illegal acts liable to dismissal. Trade unions should be sued for losses caused by illegal practices.

Trust

Ours is a society of very low trust. Trust involves the confidence that the other members of the community will act honestly and co-operate. It is based on shared values of what is right and wrong, just and unjust. Members of religious sects like the Quakers trust each other implicitly because they are totally committed to honesty.

Minority trading communities in India like Sindhis, Borahs and Memons also have well developed trust among themselves.

Such trust also encompasses social norms like professional standards. We act on the advice of a doctor because we believe he acts in our interest and will not deliberately cause injury since he has taken the Hippocratic Oath and we expect him to act by that oath. This prevalence of trust in society is an important component and some economists call this "social capital".

According to Fukuyama in "Trust: The social virtures and the creation of prosperity", "social capital differs from other forms of human capital in so far as it is usually created and transmitted through cultural mechanisms, like religion, tradition or historical habit. People may tend to form social groups to promote their common interests and bind themselves together with a constitution or a legal contract document. But it is trust among the members that enables the association to grow and render useful service to its members. But if the members do not share common ethical values like honesty, loyalty, dependability, then the association can’t last. The group must adopt common norms as a whole before trust can become generalised".

Many voluntary associations in our society break up. We rarely hear of a society that has lasted for long. Recently, a society dedicated to promote public morality and civic responsibility split asunder as the members did not share the ethical norms of behaviour like openness, frankness, straight-forwardness. Instead the members are imbued with negative attitudes and resort to intrigue. Negative attitudes and lack of frankness seem to be the hall-mark of many individuals in our society. The western norm of expressing one’s opposition openly and seeking resolution of differences of opinion is not common. Those having different views or who dissent are treated as enemies and those who seek power resort to intrigue.

If people who have to work together in an enterprise, trust one another, because they are all operating according to a common set of norms then doing business costs less. Highly sociable American’s pioneered the development of the modern corporation while the strongly community conscious Japanese developed the net work organisation.

On the other hand widespread distrust in a society imposes a kind of tax on all forms of economic activity. If, for example, many people who eat in restaurants walked out without paying their bills, then a security guard will have to be positioned to check each customer who was leaving. Our libraries post security guard to check books removed by borrowers.

The level of honesty is low and it imposes additional costs on those doing business. There is no culture of paying bills for utilities promptly. The government is the biggest offender in delaying payment for goods and services. Big companies are no less errant. They reduce the flow of money and thereby the volume of economic activity. Firms have to keep excessive working capital unlike in developed countries.

Business firms can’t grow

Ours is a highly individualistic society where there is little capacity for association either in social or economic activities. In low trust societies with a weak sense of community, large economic organisations don’t emerge as a result of the natural play of economic forces. They tend to have mainly family owned businesses and small firms as in Taiwan and Hongkong.

Small firms are associated with labour intensive goods production, such as garments, textiles and plastics. Large firms are required to master complex manufacturing processes which also require large amounts of capital. They are also necessary to undertake marketing services abroad. Extensive and costly advertising is required for branded goods.

It is not an accident that most of the well known brands are for products manufactured in U.S.A., Japan and Germany like Kodak, Sony and Mercedes. In countries like Japan and Germany, the strong community sense has gone hand in hand with a strong state. Discipline and obedience to the state are valued for their own sake.

Social Discipline

On the other hand there are societies with low sociability and community sense which also have a soft state. Our country falls into this category. We have little or no social discipline and the state is weak. In colonial times we had a strong sense of obedience to the state bordering on servility. But with the social revolution of 1956 this social discipline broke down.

A new social discipline based on the dignity of the individual and respect for the law, has yet to be created. President Premadasa tried to impose a form of autocratic discipline, freedom requires discipline although they may look opposed to each other. Freedom cannot thrioe unless the citizen obeys the laws of the state voluntarily. It is freedom under the law. Discipline goes hand in hand with freedom. If there is no discipline, freedom will be only for the mighty and powerful.

Just as a child must be trained from his young age to follow the proper rules of conduct, so should the state train its citizens to obey its laws by enforcing discipline. Some sort of social engineering has to be practised as in Singapore. Ancient habits like spitting on the street or littering the streets have been eliminated in Singapore.

We have had a surfect of laws but they are poorly enforced or not enforced at all. There is little respect for authority inspite of outward deference to politicians and bureaucrats.

The socialism which we practised until 1977 has created many unhealthy habits like excessive dependence on the state with people looking up to the state and politicians to solve their problems, instead of getting together to solve their problems by their collective action.

Peasants, for example face exploitation at the hands of middlemen and traders when they sell their products. In other countries small producers who lack bargaining power get together and sell their produce through co-operative organisations. But co-operative self-help has not been of any significance here.

Public servants became lethargic, easy going and errant since socialism was equated with an absence of discipline from the top. Whenever there was an outbreak of protests or discipline, the bureaucrats were told by politicians like S. W. R. D. Bandaranaike that they must be tactful irrespective of the frivolous nature of the issue. Port workers in the fifties and sixties used to walk out with impunity complaining that the free meal served to them was not good. Meals were sometimes deliberately spoilt to stage a walk-out.

Socialism by inculcating a sense of class conflict, has made it difficult for workers and employers to co-operate voluntarily. Even the lack of co-operation between the two main political parties is due to this Marxist ideology of class conflict and the promotion of entagonism and hatred, against the so-called capitalist party — the U.N.P. which embraced a broad section of the people contrary to the Marxist propaganda.

The Marxists heaped violent abuse on the democratic parties. The S.L.F.P. embraced the slogans of the Leftists and perpetuated the entagonism. It was in the 1970’s when leftists joined the S.L.F.P. that violence against political party opponents was unleashed with vigour. It was with the victory of the United Front Coalition that managers of the state corporations were chased away by the employees organised in Leftist trade unions.

It is this Leftists promotion of antagonism against political opponents that has made it impossible for democratic parties to co-operate in the political field. Although both the main parties are committed to the free market economy and democracy, it has been difficult for the people or their political leaders to learn the social habits of reason and compromise required for the functioning of both the free market economy and democracy.

Those who sought to rectify historic injustices to the Sinhala Buddhist majority, created antagonism against the Tamil ethnic minority which spilled over into violence and civil war. The abolition of constitutional safeguards against racial any religious discrimination, created disaffection with all minorities. The culture of antagonism reached its climax with the JVP terror of 1888-89. There is still no dearth of intellectuals who preach antagonism and stir up people against each other.

Free Rider Problem

There is another reason that societies showing a high degree of communal solidarity and shared moral values are more economically efficient than more individualistic ones. This has to do with the free rider problem.

Economists talk of public goods, where the benefits cannot be restricted to those who contribute to its costs. A neighbourhood group may engage a security guard service to protect their houses. But some in the neighbourhood may refuse to bear the cost of such service although they will also benefit from it. There is no way to restrict the benefit of the security service only to those who contribute to the cost.

Similarly, a trade union may strike for a wage increase which if successful will benefit non-strikers.

As the Economist Mancur Olson has pointed out, all organisations producing public goods of this sort, suffer from the fact that the larger they become, the greater is the tendency to become free riders. A free rider benefits from the public goods, produced by an organisation but fails to contribute his or her individual share to the common effort.

In a small firm of lawyers, one may slacken while others do all the work, but he may be easily detected. But in a large organisation like a government department or corporation, the free riding individuals gets away easily. He can take sickness or take extra long lunch and tea breaks. When the work of the department is so arranged that group members are highly dependent on one another, to complete a job, it is the public who suffer. The subject clerk is absent or not in his seat and the file cannot be traced. This is the story of the public service today — a free riders paradise.

People become free riders only because they put their individual economic interests above that of the group. If they strongly identified themselves with the group’s well-being or if they had a sense of duty to the public they would be much less likely to shirk work or their responsibilities. The British imbued the public service with the concept of "duty" because the noble aims of an organisation enables its members to subordinate their self interest as we see in religioas sects. This is why "ethos" is so important for schools to motivate teachers and children.

If the ethos of duty to the public among public servants has disappeared, it is due to the lack of any such spirit among the ministers who are the effective heads of the public service now, unlike in the past.

Public servants see how their political bosses pillage and plunder the state funds, use state power for their political ends and resort to corruption. With Ministers appointing secretaries in their own image and the letter in turn being motivated by their personal interests rather than by any concept of public interest, the bottom layers of the public service naturally follow their example.

It’s so easy to destroy an institution but it takes years to build an institution with "ethos". Our politicians have effectively destroyed the public service. They will have to restore the independent P.S.C. and abrogate their power to meddle with the public service.

A glaring example of the low trust and confidence in our society is our attitude to third party mediation in the ethnic problem. When two sides to a dispute have no trust in each other it is imperative that there should be a third party acceptable to both, to mediate. But we won’t hear of it although commonsense dictates it.

If the politicians could not trust any western nation the Oslo Agreement would not have been possible. We seem to be incapable of finding an acceptable mediator in the whole wide world. It shows our low trust and negative outlook on the world.

Lanka seeks bigger tea quota to Iraq

Colombo (AFP) - Sri Lanka’s depressed tea industry is seeking a bigger export quota to Iraq in the next month, officials said Wednesday.

Sri Lanka, the biggest supplier of tea to Iraq before the Gulf war, had been allocated a modest 2,000 tonnes out of 19,000 tonnes of tea that was to be imported to Iraq in. the six-month period ending this month, officials said.

They said the tea industry was urging the government to step up diplomatic efforts to match lobbying by rival tea exporters, notably India and Kenya, to secure a bigger export order for Sri Lanka.

"Sri Lanka is noticeably lagging behind other tea producers in the diplomatic front,’’ a tea trade official here said, adding that a higher export order from Baghdad could tremendously help the depressed market here.

Prices have been falling steadily at the weekly tea auctions here, the world’s largest tea sale, while the island’s tea crop is set for a record, compounding the problems of oversupply.

Tea prices have fallen by over 30 percent. Prices of several varieties of tea have fallen below production cost.

Trade officials here said Kenya had an allocation of 2,000 tonnes to supply Iraq for the first time under the UN deal although Sri Lanka managed to get about the same quantity despite being the market leader earlier.

Before the Gulf war, Sri Lanka exported about 30,000 tonnes of tea to Iraq and accounted for nearly two thirds of the market there.

Sri Lanka’s tea promotion board chairman Clifford Ratwatte said an average Iraqi drank 16 cups of tea a day and was the biggest consumer of the beverage.

Officials said the United Nations was expected to register suppliers for the sixth phase of the oil-for-food program next month and Sri Lanka was hopeful of getting a bigger share.

Even though Sri Lanka was allocated 2,000 tonnes under the fifth phase, the country has not received letters of credit for a volume of 200 tonnes, effectively shrinking its slice to 1,800 tonnes.

Sri Lanka had received indirect orders to supply Iraq with another 1,000 tonnes through Jordan (500 tonnes) and Russia (500 tonnes) but the Russian deal appeared to have gone sour.

Radiant Gems breaks even

Radiant Gems International Limited had nearly wiped out trading losses in the year ended March 31, 1999 earning a marginal profit with other income but has been unable to make a dent on the company’s substantial carried forward losses of Rs.19.1 million, shareholders have been told.

In an interim financial statement to shareholders incorporating last year’s results, the company said that turnover had grown to Rs.17 million from the previous year’s Rs.12.4 million and a trading loss of Rs.45,792 incurred against a Rs.0.2 million loss the previous year.

Other income which had doubled to Rs.122,120 from Rs.62,120 the previous year, helped the company to post a marginal profit of Rs.76,328, up from a loss of Rs.0.4 million the previous year. There was no tax liability.

This earning has slightly reduced the carry forward losses. However, an adjustment in respect of the previous year and deferred expenditure had wiped out this advantage and increased the carry forward loss to Rs.19.1 million from Rs. 18.5 million the previous year.

The company has an issued share capital of Rs.24 million, fixed assets of Rs.12.5 million and net current assets of Rs.6 million.

The directors of the company are: Messrs. W. Priath Fernando (Chairman), Sarath Munasinghe (Managing Director), F.M. Marker, Asoka Sirimana, Roland Naftule and Ms. Christine Fernando.

Pricewaterhouse re-engineers DFCC Bank

By Harini Dias Bandaranayake
After much critical evaluation DFCC Bank has selected Pricewaterhouse Coopers (PwC) of USA to provide consultancy services in developing a new corporate strategy in keeping with the bank’s objective of expansion, M. Prelis, General Manager of DFCC said.

He said that in a six month assignment which commenced last August, a team of 17 PwC consultants provided the bank with specialist input at various stages in the current project of expansion. "DFCC Bank staff provided counterpart inputs throughout the assignment", he added at a press briefing on Wednesday.

As the bank has excelled in the local business scene, Mr. Prelis said, the new strategy would focus on entering new markets and transforming itself into a modern market driven financial institution and thereby catalyzing Sri Lanka’s market developments.

He said that the public seemed to have misunderstood DFCC’s initiatives to change the organizational structure together with the expansion project. He explained that steps such as advertising for a Chief Executive Officer which were recently taken by the bank, were a part of the changes intending to "reflect international practices with suitable adaptations to DFCC".

The strategic changes that DFCC hopes to engage itself includes re-focus on market trends and expansion of these trends in production as well as concentration in sector development, Mr. Prelis elaborated. Explaining these moves further, he said that although the bank was initially founded on developmental projects, the new focus would also consider the development of business sectors, markets, debt markets and other businesses. " These changes would especially enable medium sized companies to establish identity in the market and would also assist in their growth", he said.

An official of Pricewaterhouse Coopers present at the press briefing said that the planning process of the strategic changes of the bank would take about 18- 24 months. She said that taking recommendations of the employees also into consideration, DFCC would restructure its vision to coincide with international standards. She also said that information technology and human resource development were two important aspects in the restructuring project.

"DFCC will no longer only subject itself to the function of a development financial institution (DFI) but expand into other areas of business as well", she said. The need to meet international standards was even greater now as DFCC would soon be visited by a rating agency, the PwC official said.

Eight exporters woo $ 1 bn. market
Lanka looks for direct links with Italian jewellery makers

A group of 8 exporters of free sized and calibrated stones from Sri Lanka will leave for Italy next week in a ground breaking bid to get direct access to the Italian market, for Lankan gemstones, an EDB spokeswoman said.

The delegation, arranged by the EDB under its market diversification program was set up with the assistance of the Sri Lankan Embassy in Italy, a news release said. A study carried out by the embassy has recommended the contact promotion program which will be useful for the establishing links.

"Italy is a major manufacturer supplying nearly 62% of the worldwide jewellery demand. Italian jewellery manufacturers are familiar with the wide variety of Sri Lankan stones and use them extensively, but we had no direct contacts with them. They purchase Sri Lankan gems through Thailand and Hong Kong,’’ the spokeswoman said.

The contact promotion program organised by the EDB is to find out our way direct to meet the increasing demand for free sized and calibrated stones in the Italian market which is estimated to be around US $ one billion per annum.

Gem exports from Sri Lanka have been declining during the last few years as a result of the depressed situation in the major markets mainly Japan and Singapore.

The Sri Lankan exporters will have one to one meetings with manufacturers in Naples, Milan and Vicenza, the EDB said. A number of organisations have been associated with the Sri Lankan Embassy in organising these meetings including Business Council, Institute of Foreign Trade in Italy, Chamber of Commerce, Confindustria Association of Small and Medium Industries and Consorzio of Naples.

Trade and Commerce Minister Kingsley T. Wickramaratne has stressed that the future of the Sri Lankan export industry greatly depends on the diversification of markets and said that the country must go all out to enter the new markets.

Vellai Oya tops ex-estate sale

Two invoices from Vellai Oya Estate, Hatton, managed by Watawala Plantations Limited achieved a top price of Rs.174 per kilo at last week’s ex-estate tea sale in Colombo, brokers said.

The tea has been purchased by Van Rees and Akbar Brothers and sold by Bartleet Produce Marketing (Pvt.) Ltd.

Although Vellai Oya Estate is situated in the Hatton region, it is considered a mid-grown on account of its factory being located 4,000 feet above sea level.

Mr. Brian Baptist, Joint Managing Director at Bartleet Produce Marketing said that teas produced at Vellai Oya Estate "possessed good colour, strong and useful quality.’’ For many weeks, produce from this estate has been obtaining top prices at the auctions in its medium category.

"This week Vellai Oya topped the whole sale in the ex-estate catalogue,’’ Baptist said.

The estate is managed by Mr. Mahinda Yatigammana who has worked hard to ensure the quality of the tea coming out of his factory.

SLSI trains consultants on ISO 9000

The Sri Lanka Standards Institute is continuing its Consultants Development Program on ISO 9000 and the sixth in this series began on May 2.

SLSI said that already 150 consultants have in the last two years successfully completed the program initiated to assist the industrial sector to develop quality management systems.

``These programs are geared towards assisting the industrial sector in the development of quality management systems in accordance with ISO 9000 standards,’’ SLSI said.

It explained that it was unable to assist industry directly due to its involvement as a certification body. But by training the consultants there will be long term benefits to itself as the number of institutions seeking certification from SLSI is likely to increase.

According to SLSI, there is a demand for consultants to help achieve ISO 9000 certification at present from the industrial sector due to the lack of competent persons to develop this activity.

The on-going program which will be held over 16 Sundays will cover the practical and theoretical aspects of the implementation of the standards including documentation, internal auditing and management review.

SLSI said that those who successfully complete the program will be registered as consultants and their names will be made available to the industrial sector on request.

Senior Morison’s director retires

Mr. U. Karunatilake, a senior director at J.L. Morison Son & Jones (Ceylon) Ltd has retired, the Colombo Stock Exchange (CSE) announced. The Exchange also announced the following changes of directorates in quoted companies:

Mr. N.J. Wimalananda appointed alternate director to Mr. M. Araki at Horana Plantations Limited effective April 27 and Dr. (Mrs.) Damitha de Zoysa, appointed alternate to Treasury Secretary D. Nilaweera at Hapugastenne Plantations Ltd effective from April 23.

The Exchange also reported the following resignations: Mr. H.D.J.N. Wijeratne from Metal Recyclers Colombo Ltd and Mr. R. Mody from J.L. Morison Son & Jones (Ceylon) Ltd.

New board appointments at JKH leisure companies

The John Keells Holdings Group has appointed several new directors to the boards of directors in quoted companies in the leisure sector of its portfolio according to an announcement made to the Colombo Stock Exchange (CSE). All these appointments are effective from May 1.

Additionally, three new directors have been appointed to John Keells Limited, the original produce and share broking company from which the group diversified into a giant conglomerate. They are: Messrs. J.S. Ratwatte, S.N. Dharmartne and Ms. D.A. Alagaratnam. These appointments too are effective from May 1.

John Keels Ltd. are the owners of the group’s Glennie Street, Colombo, premises where the offices of many JKH Group companies are located.

The leisure sector appointments are: Mr. R. Amerasinghe (Ceylon Holiday Resorts Ltd), Messrs. A.D. Gunewardene, S.C. Ratnayake, G.S.A. Gunasekera, J.S. Ratwatte and Ms.J.C. Ponniah (Habarana Lodge Ltd), Ms. A. Coomaraswamy, Messrs. A.D. Gunewardene, S.C. Ratnayake, B.S.H. Mendis and Ms. J.C. Ponniah (Habarana Walk Inn Ltd), Messrs. G.S.A. Gunasekera, J.S. Ratwatte and Ms. D.A.R.C. Perera and Mr. N.S. Cooray (Kandy Walk Inn Ltd), Ms. A. Coomaraswamy and Ms.S.C. Rajendra (Walkers Tours Ltd).

Mr. S.N. Dharmaratne has resigned his seat on the board of Kandy Walk Inn Ltd while Ms. R.S. Goonewardena and Ms. J.C. Ponniah have resigned from the Walkers Tours board.

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