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Draft rule ready and voluntary compliance requested
Directors and CEOs must declare personal share dealings

The Colombo Stock Exchange (CSE) has drafted a rule requiring directors, chief executives and other connected parties of listed companies to disclose share transactions by them in their companies.

Although it is not yet formally in place, the CSE has requested that these persons make such disclosures on a voluntary basis during the interim period. The first such disclosures that have been made have been published in the Stock Market Daily of May 21 issued by the CSE.

There have been two such disclosures on the transaction of Vanik shares and those of W.M. Mendis and Co. Ltd., the distillers. Titled ``Dealings by directors, chief executive officers and connected parties from 10.5.99 to 19.5.99,’’ it has been stated that 100,000 Vanik shares had been transacted at Rs. 4.50 and 163,688 W.M. Mendis shares at Rs. 12.

But there is no indication of whether the declarants have bought or sold and who they were.

Stock Exchange sources said that the rule was ready in draft and voluntary compliance was requested prior to it being incorporated in the trading rules. A spokesman for the Securities and Exchange Commission (SEC) said that they have received the draft rule from the CSE and had approved it in principle.

Quoted companies currently publish directors (and their spouses) interest in shares in their annual reports at balance sheet date along with the comparative figures a year earlier. Such publication enabled the news to break recently that Mr. Daya Senanayake, who until recently was deputy chairman of a large number of companies of the Ceylinco - Seylan group, had divested substantial shareholdings in both the Seylan Bank and Ceylinco Insurance.

While some companies indicate directors shareholdings through connected parties - like holding companies - others do not and merely report individual holdings.

20% advantage for illegitimate imports
Film smuggling continues despite duty abolition

The smuggling of certain brands of films continues, though at a lower level, despite the abolition of Customs duty on imported photographic films announced in the last budget, a leader in the business has said.

Mr. Sunil Mendis, Chairman of Hayleys Photoprint Limited, has said in the company’s annual report that the government responded positively to representations made by his company and three other importers of photographic materials about the rampant smuggling of photographic films.

He thanked the government for the action it has taken as it had created a more even platform on which legitimate film and photographic material importers can operate. But smuggling of some brands continued as doing so save GST and the National Security Levy which absorbed 20% of invoiced cost.

Hayleys Photoprint is a member of the Hayleys group of companies dealing in imaging, information, paper and healthcare material.

The company closed the financial year ending March 31, 1999 on what its chairman called "satisfactory’’ note with turnover growing 3% to Rs.349 million and profits declining 13% to Rs.10.8 million from the previous year’s Rs.12.4 million as a result of a Rs.1.5 million provision being made in the accounts to cover the fall in value of the company’s investments in unit trusts.

Mendis said that the company was able to achieve these results under difficult conditions. The printers requisites and consumer marketing departments had performed strongly. The contribution made by the photo materials department towards profitability was described as "specially noteworthy.’’

Mendis announced that the company will intensify its involvement in the supply of healthcare products and services and considerable growth is expected from this activity.

Hayleys Photoprint established its own state-of-the-art photofinishing operation in Colombo last year. Mendis said that they were satisfied with the results achieved up to now and will consider other similar outlets where there is a need and potential for quality photofinishing. He said that the company has achieved and maintains market leadership positions in many areas in which it is involved.

The company are the agents and distributors in Sri Lanka for Fujifilm and Mendis said that they deeply valued the relationship with their principals, Fuji Photofilm Company of Japan, and appreciated their interest in assisting Hayleys Photoprint to develop the Fujifilm business in Sri Lanka. Fuji had extended substantial support to their company, he said.

The company had seen sales of Fujicolour negative films growing substantially during the year in an environment of intense competition among established brands.

The directors have recommended a final dividend of 12.5% on top of the interim 10% paid in February to give shareholders a 22.5% return for the year. With tax credit for advance corporation tax available to individual shareholders, this distribution represents an effective dividend of 34.3% or Rs.3.43 a share, Mendis said.

The directors of the company are: Messrs. Sunil Mendis (Chairman), M.J.C. Amarasuriya (Deputy Chairman), R.A. Ebell, E.F. Edirisinghe, G.S. Dewaraja, T.K. Bandaranayake, A.C.F. Abeyesundere and J. Thiagarajah.

Outlook excellent despite 15% decline
Textiles, gherkins & plantations impact on Hayleys profits

A flood of highly competitively priced imported textiles from South East Asia for the local garments industry has hurt the bottom line of Hayleys Ltd., one of the country’s most diversified conglomerates according to well informed business sources.

Hayley’s knitted textile factory had been a high contributor to profits in the previous financial year, the group’s chairman, Mr. Sunil Mendis said. But following the Asian economic crisis and the sharp devaluation of several South East Asian currencies, this factory could not compete with imported fabrics. This depressed earnings.

According to a memorandum to shareholders dated May 20, Hayleys announced its audited results for the year ended March 31, 1999, posting a profit of Rs. 354.6 million attributable to shareholders, down 15.3% from Rs. 418.9 million earned a year earlier.

Mendis said that in addition to reduced profit from textiles, plantation earnings too were down and also earnings from their semi-processed gherkin exports. But corrective steps were being taken both in textiles and gherkins.

In textiles, the company has invested in specialised machinery that would enable it to provide upmarket fabrics to the garments industry and make good losses in qualities more competitively produced in South East Asia with currency advantages.

They also did not intend reducing their acreage of gherkins which were being exported semi-processed in barrels. their Japanese partner has invested substantially in their canning factory to enable stepped-up exports of the relish in glass jars. The finished product will be less affected by fluctuating prices than the raw gherkins, Mendis explained.

The Hayleys directors have recommended a final dividend of 15% for fiscal 1998/99 on top of a 15% interim paid on May 4. This would give shareholders the same 30% return they enjoyed the previous year.

Hayleys has announced that its annual report will be with shareholders in the first week of June and the annual general meeting has been scheduled for June 30. Investors will keenly watch whether the company will be able to maintain its track record of making a bonus share issue on these results.

Hayleys has an issued share capital of Rs. 308 million, up from Rs. 264 million the previous year following a 1 for 6 bonus share issue. The company’s capital reserve is Rs. 2.1 billion and its revenue reserve Rs. 1.5 billion. A sum of Rs. 504 million is held in an Employees Share Trust under which the company loaned interest free the cash needed fro the trust to acquire a stake in Hayleys.

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Grain Elevators "informally’’ settle with Customs?

Ceylon Grain Elevators Ltd. has "informally settled’’ its dispute with the Customs Department leading to the slapping of a billion rupee fine over the duty free sale of imported maize according to a leading stock broker.

Asia Securities said in its May 24 Sri Lanka Focus report that they "understood’’ that the dispute has been informally settled with no liability to be incurred by the company.

Grain Elevators filed court action over the Customs forfeiture. But there has been no judgement yet on the case although one is expected shortly.

Asia Securities said that the "final closure’’ of this issue is expected in the third quarter of this year.

"Nevertheless, we believe that until the case is officially resolved, it will continue to weigh down on the share price performance.’’

Asia maintains its "hold’’ recommendation for the Grain Elevators share despite a 7.2% decline in the net profit, down to Rs.84.7 million in the first quarter of this year.

The brokers said that the company’s exceptionally strong result a year earlier was largely due to increased buying ahead of the introduction of GST in April 1998. This was reflected in the 34.8% downturn in revenue in the first quarter of this year.

The Asia analysis said that the lower revenue has been compensated by significantly higher operating margins that have jumped up from 8% to 10.8% for the first quarter of this year on the back of lower raw material costs. Also, enhanced contributions from the subsidiary, Three Acre Farms, and enhanced interest income had helped to boost the company’s net profit margin from 7.6% to 10.8%.

CTC netts Rs 494 mn. capital gain from Eagle sale

The Ceylon Tobacco Company Limited (CTC) saw a net cash infusion of Rs.558 million from last week’s sale of its 63.8% stake in CTC Eagle Insurance Company Limited at Rs.44.25 per share.

An Asia Securities analysis said CTC’s effective cost in Eagle worked out to Rs.5 per share following a series of scrip issues. Thus CTC netted a capital gain of Rs.494 million on the sale which would be treated as an extraordinary item.

CTC declared an interim dividend of 33% to its shareholders following this sale. While Asia Securities said that they expected the whole of the capital gain to be paid out to shareholders, and this would work out to additional dividends of approximately Rs.3.70 per share, CTC’s interim dividend payment immediately after the Eagle sale amounted to Rs.3.30 per share.

Company sources said that some of the cash raised from the Eagle sale will be retained in upgrading the core tobacco business and also continuing the early retirement incentive offered to employees to run a leaner and tighter operation.

The CTC share price hit Rs.55 after the Eagle sale but has since come down to Rs.47 on Wednesday when the shares were transacted ex-dividend.

Central Securities post Rs. 18 m. loss for 1998/99

Central Securities Limited, the Central Finance subsidiary owning and dealing in a quoted share portfolio, has reported a trading loss of Rs.9.1 million during the year ended March 31, 1999, down from a profit of Rs.2.5 million a year earlier.

The company has also made provision in Rs.9.8 million for the fall in market value of its investments during this year. In the previous year, there was a reversal of provisions of Rs.2.3 million made in this respect.

The result was a bottom line loss of Rs.18.1 million, down from a profit of Rs.6.5 million in the previous financial year.

Retained profits of Rs.13 million brought forward in the books were inadequate to absorb this loss. A loss of Rs.5.1 million is therefore being carried forward in the books. Given this result, a dividend seems unlikely according to analysts. The company paid a 10% dividend absorbing Rs.4.9 million during the last financial year.

Central Securities said that its quoted share portfolio as at March 31, 199 carried a cost of Rs.74.2 million against a market value of Rs.41 million reflecting a fall in value of Rs.33.2 million.

Provisions of Rs.9.8 million had been made in the accounts for the last financial year in compliance with the relevant Sri Lanka accounting standards.

Haycarb profits from bhat devaluation

Haycarb Limited, the Hayleys activated carbon manufacturing subsidiary, had closed the financial year ended March 31, 1999 with a pre-tax profit of Rs.205.2 million, up from Rs.187 million a year earlier on a turnover that had grown marginally to Rs.1.33 billion from Rs.1.3 billion the previous year.

Profit attributable to Haycarb after taxation and minority interest was Rs.142.4 million, down from Rs.157 million the previous year.

Company sources said that minority interest had grown to Rs.26.8 million from Rs.6.4 million the previous year as their joint venture in Thailand, in which the Thai partner holds a half share, had performed very well and contributed substnatially to profit as a result of advantages accruing to the unit from the devaluation of the Thai bhat.

The Haycarb directors have decided to recommend the payment of a final dividend of 15% for the year on top of an interim of 15% paid in March to give shareholders a 30% return for the year, shareholders have been told.

Haycarb which has an issued share capital of Rs.226.4 million made a bonus share issue in the last financial year increasing its issued capital from Rs.194 million.

The company’s capital reserve stood at Rs.47.3 million at the close of the financial year while its revenue reserves were Rs.689.8 million.

The current year’s dividend pay out is absorbing Rs.34 million, up from Rs.29.1 million the previous year.

First post-privatisation dividend from Hunas Falls

Hunas Falls Hotels Limited has announced its first post privatisation dividend - albeit a modest 2% - for the year ended March 31, 1999, on a pre-tax profit of Rs.2 million, up from Rs.0.3 million a year earlier even though cumulative losses have not been made good.

The company was listed in the Colombo Stock Exchange in October 1993 following the government divesting its majority shares which were taken up by Carbotels Limited (46.89%), a Haycarb subsidiary, and the Jetwing group of companies among other investors.

Turnover during the year under review increased 12% to Rs.33.6 million while occupancy too was up marginally to 60% from the previous year’s 59%.

Hunas Falls Chairman Sunil Mendis said that improved yields, vigilant cost control and lower interest cost enabled the profit and the dividend which absorbed Rs. 1.1 million from the years profit leaving Rs. 0.9 million avialable for set-off against accumulated losses of Rs. 4.8 million. The commpany is now carrying forward accumulated losses of Rs. 3.9 million, down from rs. 4.8 million a year earlier.

Mendis reported "focussed attention’’ to increase the hotel’s marketing momentum year around. Traditional Lankan clientele had also continued to patronise Hunas Falls.

He said that the European winter season from November 1998 to April 1999 saw an increased performance by foreign tour operators as compared with the previous year and expected this trend to continue during the forthcoming winter season as well.

Reporting that tourist arrivals during the summer months, specially from May to August had declined from the previous year, he said that this changed from September right up to the end of the financial year with a 20% growth in some months on a month to month comparison.

Mendis also said that eco-friendly tourism is now assuming greater importance in the global tourism industry. Considering the location of their hotel and its surroundings, they were well placed to capitalise on this. They were already carrying on eco-friendly activities such as developing a hotel farm to cultivate land close to the property and using its produce in the hotel. They have introduced heart healthy menus and promoted jogging and trekking.

``It is envisaged that this dimension of development will further assist in marketing the hotel to provide our clientele good value for money,’’ he said.

Mendis also drew attention to the advantages accruing from the government recognising tourism as a thrust industry and reducing the corporate tax rate applicable to hotels to 15% on operational income from April 1, 1998. Since Hunas Falls was a quoted public company, it was entitled to a further 5% tax credit which brought down the effective corporate tax rate to 10% on operational income.

While thanking the government for this relief, he drew attention to GST becoming applicable on accommodation income of hotels after March 2000 although exempted earlier. Unless this exemption is extended or tourism is classified as an export industry, the impact of GST from April 2000 could seriously erode margins, he said.

Discussing future prospects, Mendis said that the year under review had been relatively stable from a security point of view. If this continues during the current year, the industry is very optimistic of improved tourist arrivals to Sri Lanka during the coming year which could be a very good one for tourism.

He said that the various marketing activities spearheaded by the Tourist Board along with their own marketing and the very high reputation the hotel has earned for its quality of service to contribute significantly to performance in the current financial year.

The directors of the company are: Messrs. Sunil Mendis (Chairman), N.G.H. Cooray, R. Yatawara (Managing Director), N.J.H.M. Cooray and V.K. Wickremasinghe.

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Is the WTO being undermined?

By Kanes
The World Trade Organization (WTO) appears to have operated fairly successfully in the four years since its establishment in 1995. It has certainly enforced world trade low much more vigorously than its predecessor - GATT. Its dispute - settlement mechanism is meant to be effective and its rulings cannot be blocked by the guilty party even if it happens to be a powerful country like the USA. Thus, even the weaker developing countries are assured of justice even if they have a dispute with powerful developed countries. The guilty or losing party in a dispute have the right to appeal once, and if they lose again, they have 15 months in which to conform to the world trade law: and if they fail to comply, the plaintiff can demand compensation or impose retaliatory measures. This system worked well until recently.

The WTO dealt with 163 disputes in the last four years mainly involving the USA and the European Union. The USA brought the largest number of disputes - 53 - followed by the European Union - 43; in addition the USA is the defendants in 29 cases and the European Union in 26. The developing countries too have used the system against one another and against the developed countries. Most of the disputes have been settled without arbitration and in cases where there was arbitration, no governments have defied the WTO rulings. The USA for example, amended its petrol standards when the WTO ruled that they discriminated against Venezuelan products and it removed restrictions on Costa Rican underwear on a WTO’s directive. Japan is reforming its alcohol taxes after losing a case brought by the US, EU and Canada.

The success of the WTO gave rise to fears that it was becoming too strong. It was feared that it was encouraging developed countries to use WTO’s enforcement powers to pursue their own objectives which were not the WTO’s. The USA for instance, tried to use the WTO to force Japan to enforce its anti-trust rules. The EU complained to the WTO regarding the US’s Helms-Burton Act which penalized companies investing in Cuba, but reached a bilateral agreement later. Then the US wanted the WTO to impose tough labour and environmental standards on developing countries; this was, however, strongly resisted by the developing countries.

Trade Disputes Settlement Mechanism

Recent developments, however, seem to indicate that the WTO is becoming weaker rather than stronger. Questions are being asked whether the WTO is capable of enforcing compliance to its rules particularly after the experience of the banana war. The WTO ruled twice that the European Union’s banana regime is illegal but it has failed to make the EU reform, as its rules of compliance are rather ambiguous and provide scope for losing parties to delay obeying a WTO ruling. The US made its complaint against the EU’s banana regime to the WTO in September 1995, Two years later, the WTO ruled for the second time that the EU’s banana regime was contrary to the international trade laws, and gave it 15 months to comply. In January 1999, the EU made some minor changes in its banana regime but the US, Latin American countries and independent observers considered that those changes were of no significance. The EU, however, argued that the plaintiffs were not justified in dismissing its changes until the WTO gives a ruling on them. The WTO has now ruled against the EU for the third time, but the EU has said it might appeal: the matter will not end there, for the EU can make some more minor changes in its banana regime and request the WTO to give a ruling for the fourth time. The process can be repeated and the EU might never have to comply fully. It is very clear the EU is exploiting the loophole in the WTO’s rules of compliance to the full. The US is also guilty of stretching WTO rules for its has imposed a 100 per cent tariff with immediate effect on 14 European goods without waiting for WTO’s final ruling: it has however, promised not to collect the penal duties until the WTO makes a full assessment of the damage to the Us by EU’s banana regime. The WTO has now reduced the amount of retaliation that the US is allowed to impose on European luxury goods from $520 million worth to $191 million.

The banana war appears to be the precursor of several more disputes between the US" legislation. The US also resents that the EU is doing little to expand its imports to revive the crisis hit emerging economies thereby transferring the entire burden on the US’s shoulders.

In some of the above disputes the WTO has given its rulings, but they do not appear to have been implemented. The EU has indicated that it will not lift the ban on hormone-treated American beef, as the WTO requires, by May 13th. Canada is also refusing to implement WTO’s ruling that it removes restrictions on foreign (mainly American) magazines. As the EU and Canada have virtually refused to accept WTO rulings against them, the US - the injured party in both cases - is unlikely to accept the WTO judgement against its ban on shrimp from countries that use nets which trap turtles. If countries feel that the WTO is ineffective, they will be tempted to bypass or ignore it; powerful countries like the US will act unilaterally and smaller countries may deal directly with them without using the WTO. A rule-based system which ensures fairness and predictability will be replaced by an arbitrary one which will lead to more trade conflicts.

One suggestion to solve the problem is that the WTO should clearly stipulate what countries must do to comply with its rulings, but the US and EU are opposed to the WTO playing a prescriptive role. Another suggestion is to appoint an independent arbitrator to rule swiftly whether and when or losing party has complied. Yet another proposal is to clarify the rules on compliance to remove or reduce ambiguity. This may, however, receive little support from the US and EU who would like ambiguity in the rules to continue so that they could discipline other countries without binding their hands too tightly. Clarifying and tightening of rules under such circumstances would merely result in them being flouted more regularly. The crux of the problem is both the US and EU are reluctant to give priority to WTO’s rulings over domestic political considerations, for example, powerful banana lobby in the US and disquiet at the intrusion of WTO into sensitive domestic matters in EU like food. The effectiveness of the WTO in the final analysis can be strengthened only if all members act in good faith. If governments are unwilling to abide by the rules, clarification of the rules will not help because it might make breaches of the rules more likely. As ignoring adverse rulings will undermine the WTO big powers have an obligation to respect its judgement and set an example to all the countries.

Anti-Dumping Levies

The other major problem is the WTO’s inability to arrest the growing protectionism in developed countries in the guise of anti-dumping duties. The developed countries are not averse to using WTO rules to secure access for their exports in developing countries and at the same time to obstruct access for imports from developing countries to their markets in order to protect their domestic industries. Although tariffs have been substantially reduced, there are disguised trade barriers in developed countries in the forms of anti-dumping, anti-subsidy, countervailing and safeguard duties, and they are being increasingly used to keep out unwanted imports from developing countries. It seem unfair for developed countries with advantages of advanced technology, superior infrastructure and economies of scale to seek protection from cheaper imports from developing countries and deny them the opportunities for growth.

Developed countries instituted 136 anti-dumping cases in 1997 alone. It should be realized that anti-dumping duties are invariably high and of five years duration: fighting anti-dumping cases is difficult and very costly for developing countries. Recently, the outgoing Director-General of WTO - Renato Ruggeiro - urged the leading developed countries to check their arbitrary use of antidumping measures. The European Union for instance, has launched 45 anti-dumping actions, of which 29 are aimed at Asian nations. When the European Union planned to impose anti-dumping levies on Asian unbleached cotton fabric in 1998, the stiff opposition from European importers - retail stores, mail order houses and cotton finishing industry - forced it to drop the plan. The Asian nations had a trade surplus of $35 million with EU in 1998 and expect to overcome their economic crisis through expansion of exports, which is not to the liking of the KU. European importer groups will intervene in cases of direct interest to their members like unbleached cotton textiles, but they will not intervene in cheap imports of other goods like garments, steel and chemicals. In fact, anti-dumping duties by EU have resulted in $7 million worth of Indian garments being held up in various European ports since December 1998.

Another trade war is likely in steel embracing the US, Canada, Brazil, Russia, Ukraine, Japan, China, South Korea, Taiwan, South Africa and India. The US steel industry employs 260,000 people but it has a powerful lobby which carries on a campaign against steel imports which allegedly led to a loss of 10,000 jobs and low profits for steel firms. The actual situation is that only 3,000 jobs have been lost (when the economy created 2.5 million new jobs last year) and 11 of the 13 steel companies made profits in 1998. While Japan’s share in the world market dropped from 13.1 per cent in 1997 to 12.1 per cent in 1998, and Russia’s share fell from 6.1 per cent to 5.5 per cent, US share rose from 12.3 per cent to 12.6 per cent. The powerful lobbying, however, resulted in the US Congress passing a bill imposing quotas on all foreign steel producers - although it was in violation of world trade rules. The US administration has vetoed the bill as it will breach the world trade law but it has placated the steel lobby by adopting the following measures: (a) imposition of prohibitive anti-dumping tariffs of 25 to 71 per cent on steel imports from Japan and Brazil: (b) agreement with Russia to restrict imports by quota; (c) offer of a subsidy package that includes $300 million of tax breaks to steel makers; (d) offer of more cash to workers who lose their jobs. President Clinton pledged in his State-of-the Union message to retaliate "when imports unlawfully flood our nation". The US administration, by its statements and trade restrictive measures, is encouraging protectionism in the US and this will certainly undermine the authority of the WTO. The WTO appears to be helpless in checking this protectionist tide.

The WTO has also failed to check the growing practice in developed countries of patenting indigenous plants/products of developing countries such as Basmati rice, margosa, turmeric and pepper which have been grown in India and Pakistan for centuries. In the case of Basmati rice for instance, the US administration has granted a patent for "Basmati Rice Lines" in 1997 to Rice Tec Inc. a Texan firm despite opposition from India and Pakistan. Both countries are attempting to solve the issue bilaterally with the US before taking it up with the WTO. As per WTO norms, such disputes could be brought before the WTO only after efforts to solve them bilaterally fail. The patent was given to Rice Tec as per existing laws and as per trade related intellectual property rights, WTO member countries are free to have their own patent laws. Beside the Basmati rice patent, India is also preparing to fight the patent given by the US to piperine, an extract from the pepper fruit.

The deterioration in public finance

By Analyst
The deterioration in the public finances is a significant feature of the economy in 1998. The Minister of Finance announced in his Budget speech that he would bring down the over-all deficit to 6.5% of G.D.P. But the deficit, excluding privatisation proceeds, turned out to be 9.2% of the G.D.P. indicating a ‘’substantial slippage’’ according to the Central Bank report.

What is even worse, the current account which is always budgeted for a surplus, turned out to be a deficit of 2.4% of G.D.P. even higher than the realised deficit of the previous year. The golden rule in budgeting is to ensure a surplus or at least a balance in the current or revenue account. The higher over-all deficit ‘’thwarted the objective of easing the high interest rates to promote investment and employment’’.

Interest rates rose during the year as government borrowing increased to a much higher level than in the previous year. The government’s borrowing requirement more than doubled to Rs. 81 billion or 8% of G.D.P. The only reducing feature in the state of the public finances is the increase in public investment which was largely financed from foreign aid and the rate of utilisation of foreign aid improved to 82% from 79% previously.

Capital expenditure went into key infrastructure areas like energy, transport, telecommunications, port, water supply and drainage. The increase in public investment was particularly welcome since private investment had slowed down due to depressed market conditions for export products.

The main reason for the deterioration in public finances is the increased defence expenditure by 13% and the increase in salaries and allowances of public servants by 21%. Current transfers and subsidies increased by 3%. Transfer payments which are transfers to households for welfare, continued at the previous level. Nearly 1.9 million families received Samurdhi benefits. Are there such a large number of poor people in the country or is it a dispensing of vote catching political largesse, the curse of populist politics?

Wealth or Welfare?

There is no hope whatsoever that there will be a permanent improvement in the finances of the state given the high war expenditure and equally large welfare expenditure on free health, free education subsidies and Samurdhi benefits.

The aim of economic reforms urged on the government by the lending institutions is to stave off such bankruptcy and to create a dynamic economy. Have they succeeded? Obviously not. The economy is not more efficient after the four years of reform by the present government. The loosening of regulations has made the private sector freer and perhaps a little more dynamic. But the government still dominates the economy. The public sector is demoralised and any good manager or administrator leaves for the private sector. Those who remain hibernate in limbo.

The public sector is also short of cash, even to do the most elementary things, as the Treasury imposes austerity in a vain attempt to cap the budget deficit. Only politicians and administrators with the greatest clout manage to circumvent the austerity but that is often not for the most needy or urgent requirements either.

We pride ourselves on our high rank in the Human Development Index. We have such high indicators as 90% literacy, high life expectancy, low mortality rates etc: comparable to the level in developed countries. These high quality of life indices have not led to any sustained economic development. These high social indicators have instead produced inefficiency among workers.

Years of socialist dogma preached by our politicians to a highly literate population, has produced only militant trade unionism. It has led to high indiscipline in the work place, high absenteeism and poor work ethics. Any private entrepreneur who took the trouble and ventured to invest his money in creating wealth, was castigated as a capitalist and a robber.

A maze of government regulations were passed by socialist oriented governments to reduce their spirit of entrepreneurship and innovation. Socialism or the state ownership of the means of production was considered the praiseworthy thing. While workers in other developing countries like South Korea, Taiwan, Thailand and Malaysia worked hard and long hours to raise their production, our workers, demanded more and more leisure. We have the highest number of holidays in the world. South Korea and Taiwan workers worked over 55 hours per week but our Labour laws passed in the 1950’s by a socialist Minister restricted the working week to 48 hours.

The average size of landholding is small and is not suitable for commercialised agriculture. Restrictive laws prevent a free market in agricultural land which would enable consolidation of farm lands. Proper water management in irrigation schemes requires sufficient social discipline among the farmers, a social discipline which in our ancient irrigation society was strictly enforced by the ruler.

The quality of our roads, bridge and communications needs to be improved. The ever-expanding numbers of cars, buses, vans make the roads congested while road blocks imposed by the security forces for the better protection of VIP’s reduces the speed and increases the cost of transport for both goods and people. Meanwhile the railways and water transport systems are neglected and the government gives duty free concessions for the import of more and more vehicles, increasing the cost of transport and reducing the speed of transport for everyone, hastening the deterioration of roads which are badly maintained in any case.

How irresponsible of the government which also keeps the diesel price below its economic cost.

We pride ourselves on our system of free education, the so called pearl of great price. But the education we impart in our schools and universities is an apology for modern education. It is neither true to the traditions of our ancient culture nor in accordance with the trends in modern education. The attempt to impart modern scientific knowledge in swabasha has produced half educated men and women who are not fit for a modern society. Nor have we succeeded in imparting any moral or religious values.

Education imparted through government owned schools has been a social and moral disaster. Inspite of the preaching of sermons at every street junction and daily broadcasts over the radio and television, the people are becoming beastly. Crime is abundant and vicious crime at that.

The workers need little provocation to exercise their right not to work but the employer has no right to refuse payment or to terminate his services without obtaining approval from the bureaucrats in the labour department. Go-slows work to rule and other restrictive work practices abound. The government is still captive to the socialist dogma although the communists themselves never allowed any strike, go slow or any form of trade union action in state enterprises, in the former Soviet Union or Eastern Europe. Nor does China or Cuba allow any organisation of independent trade unions or trade union action of any sort.

State enterprises cannot be run if independent trade unions and strikes are permitted. The government must awaken to this circumstance. If it was a question of trade-off of economic efficiency for social equity the strikes by workers can be looked upon with sympathy. But the workers involved in such go slows are those who form the aristocracy of the working class.

When workers strike in democratic countries they appeal to the public to stay away from patronage of the employer’s business. Here they harass the public while seated comfortably at their desks and enjoying the salary and perks.

Not only is the over-all level of unemployment much too high being close to 10% of the labour force, its burden is carried disproportionately by the educated unemployed. Is it accepted to sacrifice the job opportunities of the worst off to help those who are already at work drawing handsome wages and enjoying perks? What sort of social justice is that?

The unemployed are more numerous and many of them are unorganised or poorly organised. The educated unemployed who have been cheated by an ‘’ersatz’’ (false) education have revolted twice in the last three decades. The politicians ignore them at the peril of society.

Finding Money

How to find the money to build the economy since over 75% of government revenue goes to run the public service, the welfare services and to fight the civil war, a war with no end in sight given the stubborn refusel of both sides to compromise?

Hitherto the finances for investment have been found mainly through foreign aid. But foreign aid is drying up and with our present status as a middle income country in the international scale, we are not entitled to concessional aid. Nor is the country able to utilise the foreign aid with maximum speed due to corruption and inefficiency in political executive.

Administrative corruption cannot be separated from political corruption and they feed on each other as pointed out by Gerald E. Calden with regard to the American environment. When political masters the ministers, indulge in wrong-doing and plunder and the public are passive if not indulgent, public employees might as well get a share of the pickings.

They know scandals do not stir up any action and if for appearance sake, something had to be done, much white-washing could be expected. If anyone is made a scapegoat he is sure to be eventually restored to grace and even recompensed for any inconvenience suffered.

All that the honest public employee can do is to leak information about the wrong-doing or sacrifice his career by publicly blowing the whistle. Unless such public employees are supported by the public whistle-blowing will not make any impression on public life. Often they make headline news in the media for a day or two and then everybody forgets it.

It is surprising that we still receive foreign aid given the various corruption scandals and scams linked to Ministers and their political advisors. The institution set up to investigate bribery and corruption—The Permanent Commission has been practically annihilated. A select committee of Parliament was set up to inquire into the allegations against the commissioners but the public have not heard anything thereafter. What a way to implement the promise in the Manifesto to eradicate corruption or ‘’dushanaya’’ the favourite word of the President!

Foreign capital

Nor are we likely to receive much foreign capital inspite of the hype and the lavish tax concession given by the BOI. At last the Central Bank itself has come out openly against these tax concessions. They merely undermine government revenue and provide ‘harum scarum’, fly by night investors to come in to utilise the tax concession and make a fast buck.

Political and economic stability are the more important factors that attract direct foreign investment. We are in danger of losing our attraction as a low labour cost center for labour intensive manufacturing. We are likely to be by-passed the globalisation process under which manufacturing industry moves from developed countries seeking low labour cost centres to produce goods for the world market.

The Japanese moved in the way to Thailand and Malaysea and so did the Koreans. As these countries themselves develop, their labour costs increase and manufacturers in these newly developed countries like Malaysia themselves move out seeking out lower labour costs. The way our labour costs increase with no improvements in productivity but merely to compensate for domestic inflation, we will soon price ourselves out of world markets let alone being an attraction for direct foreign investors.

Economic Efficiency

Economists stress two principles that should govern economic activity. The first is the principle of efficiency, which says that society should squeeze as much as it can from scarce resources at its disposal and not waste resources by under-utilising them or missing them. The other is the principle of equity which says that an equal distribution of income is preferable to an unequal one.

The trouble is that these two principles clash policies aimed at promoting efficiency like say cutting the top income tax rate can cause greater inequality. So is the taxation of goods used more by the poor than the rich in relation to their income.

But policies aimed at promoting equality for example undermine the incentives that spur efficiency. Thus Samurdhi hand-outs and subsidies in general like free education or free health create a dependency culture and lead to waste of resources since there is over-demand for that which is supplied free of charge.

So students who cannot make the grade and who are better off learning a craft or trade, continue to hog the schools and villagers who visit the town, take the opportunity to call at the local hospital even if they don’t have any serious malady but only aches and pains.

What weight should be attached to each of these principle since some combination is necessary? There are policies that promote both efficiency and equity and there are other policies that are bad for both like the excessive perks and priveleges given to politicians and the tax exemptions given to the better off who are investing in certain sectors which the government thinks are desirable.

The whole scheme of Provincial Councils have become a white elephant and an unnecessary burden on the economy. The Tamil demand for autonomy has to be accommodated without increasing costs for the rest of society. Nor should any political reforms lead to increases in the costs of governing. This should be one of the principle to be taken into account when the state finances are already in a parlous condition.

The whole structure of wages and salaries in the public sector requires to be overhauled. Wages are best left to be determined by the market. But this is not possible when the public sector has a monopoly of a particular economic activity or service. But this doesn’t mean doctors, nurses engineers should be allowed to get away with much higher salaries than the state finances permit.

In the case of service oriented activities in the public sector wages should be determined by an impartial National Pay Commission upsetting relative wages as the B.C. Perera Commission did, is disastrous. In UK they determine a percentage rise in all which is a guide. Nor should the government permit restrictive work practices like work to rule or go-slows. The duty of the government is to the people not to sectarian interests.

Religious convention draws the traffic
April arrivals all time high for the month

The Borah Religious Convention held in Colombo in April which attracted a large number of visitors from the South Asian region had boosted April tourist arrivals to an all-time high (for the month) of 34,431, provisional data from the Ceylon Tourist Board reve-als.

Cumulative arriv-als for the first four months of this year have grown a strong 23.8% to 161,358, these figures indicated.

According to the detailed break-up available up to February, East Asian arrivals that accounted for 11% of the visitor total last year, had increased sharply by 43% year-on-year in 1999. South Asian arrivals which accounted for 15% of the total last year were also up 10% year-on-year.

This is in sharp contrast to the dismal performance in 1998 when East Asian traffic was hard hit by the regional economic turmoil and South Asian arrivals were affected by US sanctions on India and Pakistan after their nuclear tests last May.

"With the Asian economic climate fast improving, we expect tourist arrivals from Asia - who are mainly business oriented visitors - to continue to grow strong in 1999,’’ an Asia Securities research report said.

Western European traffic which is the mainstay of the Sri Lankan tourist industry and accounted for 63% of arrivals last year had also grown 17% in January/February this year. As this market segment is primarily holiday makers, traffic from this area is expected to ease during the off-peak second quarter season. Also, Asia says that the World Cup in England may possibly affect British arrivals. The UK is Sri Lanka’s second biggest tourist market.

However, even the off-peak season is expected to show strong year-on-year growth in the second quarter of this year as arrivals from Western Europe were affected by security concerns in early 1998.

Asia Securities projected tourist arrivals to grow 15% this year and said that most city 5-Star hotels are likely to perform better during the current financial year with increasing business arrivals pushing up occupancy.

The beach resorts were also expected to benefit from improved Western European arrivals which will contribute to boost their overall performance during the current financial year, Asia ‘s Sri Lanka Focus report said.

LOLC sets up insurance broking subsidiary

Lanka Orix Leasing Company Limited (LOLC), who pioneered the leasing industry here 19 years ago has floated a wholly owned subsidiary, Lanka Orix Insurance Brokers Limited (LOIB) launched in Colombo on May 20.

Earlier, LOLC pioneered factoring in Sri Lanka with its subsidiary, Lanka Orix Factors Limited (LOFAC) which has been operating since 1992.

A company spokesman said that LOLC considered entering into the insurance brokers business strategically advantageous to diversify into related areas like insurance particularly where its existing base would provide virtually automatic business.

"It was believed future customers would prefer to deal through a single window which offers a range of quality financial services, offered with speed. LOLC being the leading leasing company having a good customer base, together with a widely spread branch network, will have the opportunity of cross marketing related financial services to its customers,’’ the spokesman said.

LOIB was incorporated in February and has since obtained statutory and government clearances from the Controller of Insurance. The company has recruited Mr. Sanjeev Keerthiratne, formerly of CTC Eagle as the General Manager while Mr. Nihal Silva, the former Managing Director of Aitken Spence Insurance and General Manager of Lloyd’s Agency as the Specified Officer/Consultant.

The spokesman said that the company will be supported by a full cadre of 10 widely experienced insurance personnel and its board of directors would comprise Messrs. C.P. de Silva (Chairman), S.S. Jayawickrama and E.C.S.R. Muttupulle.

The venture is risk free with a fee-based income derived from the commission earnings on the insurance placed with each of the eight Insurance companies in Sri Lanka, namely, Sri Lanka Insurance Corporation. Ltd., National Insurance Corporation Ltd., Union Assurance Ltd., CTC Eagle Insurance Co. Ltd., Ceylinco Insurance Co. Ltd., Janashkthi General Insurance Co. Ltd., Janashakthi Life Insurance Co. Ltd., Co-operative Insurance Co. Ltd.

``LOLC’s existing and future clientele could now place their insurance with the underwriters of their choice, while being served by a team of experienced personnel who would provide a professional broking service,’’ the company said.

Insurance brokers are specialists who advise clients on how best their insurance should be placed and from what companies the most favourable or competitive rates may be obtained. The principal function of the broker will be to act as skilled intermediary between the client and the insurance company. Hence, there is a greater accountability to customers.

Mr. C.P. de Silva, Chairman stated in his opening address that he would require the new company to always follow this maxim and maintain the highest standards of professionalism and ethics.

Previously LOLC served as an agent for the Insurance Corporation to service their leasing to customers. The company is confident that it can successfully increase commission income with the varied products of all insurance companies as well as marketing life assurance.

Eventually the company hopes to recruit and develop agents to be "Super Sales People’’ to canvas more business for all the insurance companies.

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