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Rs. 23 mn. compounded settlement between Carsons and Exchange Control

A long standing investigation relating to an overseas investment by the Carsons group has been settled by the payment of a Rs.22.7 million levy, shareholders of the company have been told in an interim report covering the quarter ending June 30, 1999.

"This compounded levy was accepted by the company in order to close a very long outstanding investigation which commenced as far back as the mid 1980s,’’ Carsons have said.

Company sources said that these transactions, including one involving the acquisition of villas in Portugal, had taken place before the present controlling interest acquired their stake.

First quarter turnover of the Carsons group had been flat at Rs.715 million while the consolidated group pre-tax profit declined by about 45% to Rs.111 million this year from Rs.203 million during the first quarter of the previous financial year.

Carsons attributed two main reasons for the profit reduction - a shrinking on earnings in the beer sector which saw profits down by 39% to Rs.55.4 million due to a significant drop in sales volume. This loss in sales was attributed to the increased excise duty on beer which came into effect in November 1998.

The second reason for the dip in Carsons profits was the stabilisation of world market prices for palm oil which had traded at exceptionally high levels the previous year. Carsons have interests in a number of palm oil producing companies with plantations in Malaysia.

The price stabilisation of palm oil was due mainly to increased supply of the commodity and pressure from declining soybean oil prices - palm oil’s closest competitor.

"In consequence, the plantation sector profits for this period have declined by approximately 26% as compared with the exceptionally good performances recorded the previous year,’’ Carsons said.

Also, the first quarter of last year saw a significant accrual of capital gains from the investments sector as the portfolios of the Guardian group were rationalised through divestment of non-strategic holdings.

"As this process has now largely been completed, such exceptional capital gains were not recorded this year, and sector income was mainly limited to dividends,’’ shareholders have been told.

Carsons have also informed their shareholders that their unaudited pre-tax profit of Rs.550.5 million (before provisions and write-offs) for the year ending March 31, 1999, has to be adjusted downward. There are provisions of approximately Rs.110 million to be set off against this figure which were not provided for in the unaudited accounts released in 1999.

Of these provisions, Rs.84 million is on account of the company’s unquoted investment portfolio of Greenfield ventures. A provision of Rs.22.7 million had also to be made because of the Central Bank levy.

Carsons said that the outlook for the rest of the current financial year looks ``uncertain’’ since the group’s key businesses are unlikely to perform sufficiently well in the near future to wipe out the first quarter downturn.

"Taking all factors into account it is probable that the year-end results for 1999/2000 will not show significant improvement over the last year’s performance,’’ Carsons said.

Economy set to recover in second half says Asia Securities

Asia Securities, one of the leading stock brokers on the Colombo Stock Exchange, has projected a second half recovery of the economy this year based largely on the better external trade, stabilisation/improvement in tea prices and continuing steady growth in tourist arrivals.

On a recent market trip to Hong Kong, the brokerage had presented a top-down argument in favour of a recovery in the economy in the second half, Asia has said in a market report.

Asia said that they had previously expected inflation and interest rates to remain relatively subdue at around current levels. But they have now reduced their inflation forecast from 9% to 7% and also expect interest rates to ease further in view of the Central Bank’s reduction in the Statutory Reserve Ratio (SRR).

"Lower inflation and interest rates in particular are thus expected to provide further impetus to the economic recovery in the second half of 1999,’’ Asia said.

But it expected the stock market which gained 12% in July to have little upside in the short term as a result of "generally uninspiring second quarter 1999 corporate results, increased external tensions in the Indian Sub-Continent and profit taking by retailers.’’

However, the brokerage said with the reduction in the SRR, fixed income yields are likely to fall further from their present relatively unattractive levels and this could mean a transfer of marginal funds from fixed income securities into equities in the medium term.

This was particularly so as earnings per share growth is also likely to recover on the back of a strengthening economy in the second half of this year.

Beer prices up as brewers opt for price against volume

The country’s two biggest brewers have abandoned the strategy of absorbing part of the substantial excise duty increases imposed on beer last November themselves in the hope of catching up losses on the price swings on the volume roundabouts. They increased prices last week and the consumer must carry the whole duty increase.

``We’re passing on the full duty increase,’’ a director of the two companies, Ceylon Brewery Ltd. and its subsidiary, Lion Brewery Ltd. said.

This has pushed up the price of a bottle of Lion Lager from Rs. 46 to Rs. 50 while a bottle of Carlsberg will cost five rupees more - up from Rs. 60 to Rs. 65. But stout produced by the Ceylon Brewery will be marketed at the old price.

Will the brewers be better off as a result or will volume losses on account of the price deterrent hurt profitability?

``We think we’ll be slightly better off than where we were,’’ the director said. ``Put it this way. If volumes drop sharply, we’ll be worse off but if they don’t, the position will be slightly better for us.’’

He said it was their experience that a price increase hurts sales initially but they pick up in three or four months. This has also been the experience of the tobacco industry which like arrack has been beaten with the price stick by most budgets for the past several years.

When the beer excise duty increases - 69% for low alcohol beers and 182% for beers with an above 5% alcohol content - were imposed last November, the industry tried to soften the blow on profitability by absorbing part of the increase themselves and not passing it on to the consumer. They hoped that they could protect volumes to some extent that way. That strategy has apparently not paid off and hence the decision to increase the beer price.

The beer industry attracted Rs. 2.6 billion in investment with the Ceylon Brewery collaborating with Carlsberg to build a state-of-the-art brewery under the Lion Brewery Flag and a fourth brewery being built by a new entrant to the industry producing King’s beer.

High demand for beer triggered by the 70% reduction in beer excise duty in November 1995 attracted fresh investment into the industry which was lobbying for easier licensing of distribution outlets when it was hit by the heavy duty increases last year. The disappointed investors are on record saying that they would think twice before investing in a climate of such policy inconsistency.

Both the hard and soft liquor industries have been stridently declaring that the alcohol excise duty policy only helps the untaxed illicit liquor manufacturers with kasippu freely available in every nook and cranny in the country.

Ceylon Tobacco loses volume but cost cutting helps profit

The Ceylon Tobacco Company is feeling the bite of high excise duties on its products with the volume of cigarettes sold in the first half of this year down 11% from the equivalent period in 1998, the company has told its shareholders.

"This was largely due to the excessive excise/price increases in the domestic and export markets,’’ the company said. Cigarette prices in Sri Lanka are among the highest in the world.

Despite volume loss, the company had increased profitability during the half year to Rs.424 million from Rs.314.1 million a year earlier as a result of what it called "the ongoing aggressive cost reduction program.’’ Further, the disposal of the CTC Eagle Insurance Company Limited has boosted other income to Rs.451.2 million from Rs.75 million a year earlier.

CTC sold off its stake in CTC Eagle Insurance to Zurich NDB Finance Lanka (Pvt) Limited (ZNFL) at Rs.44.25 a share on May 20, 1999. ZNFL is an alliance between the NDB and the Zurich Financial Services Group, a leading global company in the finance sector.

CTC which paid a first interim dividend of 33% (Rs.3.30 per share) from its capital gain on the CTC Eagle disposal, has announced a second interim dividend of 16% (Rs.1.60 per share) payable on September 13.

The directors have re-stated their commitment "to ensure a satisfactory return to all its stakeholders in 1999.’’

Gross turnover for the half year under review at Rs.10.5 million was up from Rs.9.4 million a year earlier. But the company said that the figures are not comparable due to the difference in accounting treatment for Goods & Services Tax.

Profit before other income was Rs.424 million, up from Rs.314.1 million a year earlier and after taking credit for other income, the pre-tax profit was Rs.875.2 million, up from Rs.389 million a year earlier.

After providing Rs.86.9 million for taxation (Rs.81.6 million a year earlier) the after-tax profit was Rs.788.3 million, up from Rs.307.4 million a year earlier.

Discounting the cost of the two dividend payments for the year, the company was carrying forward Rs.153.4 million in its profit and loss account as at July 30, 1999.

CTC has an issued share capital of Rs.1.34 billion, capital reserves of Rs.85 million and revenue reserves of Rs.521 million with shareholders funds totaling Rs.1.95 billion. There are no long term liabilities.

The directors of the company are: Messrs. J.E.D. Perera (Chairman), G. Thoma (MD/CEO), G.R. Armstrong, K. Balendra, J.D. Bandaranayake, B.T. Kurian, V.P. Malalasekara, J.S. Mather and J.R. Patrick.

Shaw Wallace amends articles to remove ‘restrictive’ provisions

Shaw Wallace and Hedges Limited, an old established company with extensive real estate assets in Kollupitiya with Galle Road and Duplication Road frontages, is amending the articles of association to remove certain "restrictive’’ provisions imposed on the directors regarding the sale or disposal of land or leasing of the company’s land or property.

Shareholders of the company have been informed that the provisions of the present articles places upon the board of directors "an undue restriction’’.

The existing article prohibits the amalgamation of the company with any other company or individual; the sale or disposal of the business or undertaking or lands of the company; or where the consideration exceeds Rs.100,000 any part of any lands or fixed assets of the company.

These articles also preclude the "lease of any estate, lands or property of the company or any part thereof for a term exceeding 21 years.’’

The directors have said that in keeping with the modern trends and present day requirements, some of these limitations are not acceptable in practice and the board has recommended the amendment of the relevant article to remove the restrictions imposed.

However, restrictions covering the amalgamation of the company with any other company or individual or disposal of the entire business or undertaking will continue and will require a special resolution of the company.

An extraordinary general meeting of Shaw Wallace has been summoned on September 22 to consider a special resolution to amend the articles of association of the company to give effect to the removal of the restrictions.

Shaw Wallace and Hedges Limited is controlled by an Indian parent and the majority of its board of directors comprises Indian nationals.

The directors of the company are: Messrs. M.R. Chhabria, R.K. Jain, M.A. Chandy, P.M. Nene, L.L. Samarasinghe, J.M. Swaminathan and S.P. Choudhary.

Retained losses mount as wet weather hurts Coke too

Coca-Cola Beverages Sri Lanka Limited is heading for a loss making year with operations for the 9 months ending June 30, 199 returning a pre-tax loss of Rs.53.5 million against a profit of Rs.126.8 million a year earlier.

Like Elephant House, its main competitor, Coca-Cola too had been hit with depressed sales during the March/April hot season when considerable wet weather was experienced. Soft drinks manufacturers have traditionally found wet weather in the hot months a sales damper.

According to the company’s provisional financial statement now with shareholders, group turnover for the 9 months under review at Rs.842.6 million was down from Rs.1.08 billion a year earlier. The group returned an operating loss of Rs.14.4 million in these nine months against a profit of Rs.126.6 million for the comparative period the previous year. Other income too was down to Rs.5.9 million from Rs.62.4 million a year earlier.

Despite interest cost dropping to Rs.45 million from Rs.51.3 million a year earlier, the company has posted a pre-tax loss of Rs.53.5 million and an after-tax loss of Rs.55.5 million for the period under review, down from a profit of Rs.126.7 million a year earlier.

With retained losses of Rs.288.9 million brought forward, Coca-Cola was carrying losses of Rs.344.4 million in its books as at June 30, 1999.

The company which has an issued share capital of Rs.756.3 million has capital reserves of Rs.467.6 million and a revenue reserve of Rs.78.6 million.

Associates drag down Richard Pieris in first quarter

Richard Pieris & Company Limited, one of the conglomerates quoted on the Colombo Stock Exchange (CSE), has seen a sharp drop in first quarter profits as a result of profit share from associate companies turning out negatively, provisional figures now with shareholders reveal.

While group turnover remained flat at Rs.550.3 million and the operating profit after interest is also flat at Rs.51 million, the bottom line was sharply eroded by a Rs.11 million loss from associate companies against a Rs.61 million profit a year earlier.

Analysts attributed this to the downturn in the plantation sector in which Richard Pieris has a large interest in association with the Hayleys and John Keells groups of companies. A subsidiary of Richard Pieris Exports also had suffered losses and this had contributed to the negative figures on associate companies’ profit share.

The group’s pre-tax profit for the quarter at Rs.42.2 million was down from Rs.117.2 million a year earlier while the after-tax profit was down to Rs.32.5 million from Rs.104.4 million. After discounting minority interest, the profit attributable to Richard Pieris’ shareholders was Rs.23.5 million against Rs.87.5 million earned a year earlier.

Richard Pieris had an issued share capital of Rs.199.1 million, capital reserves of Rs.746.9 million and revenue reserves of Rs.810.6 million as at June 30, 1999. Its net current assets on the same date was stated as Rs.414.4 million while investments were Rs.932.9 million.

Insecurity and uncertainty – Globalization 4

by Kanes
Globalization or integration of world markets has contributed to the rapid growth and rise in income of developed and a few developing countries but it has at the same time created new threats to human security and generated a sense of uncertainty among people in most developing countries. These threats to human security come from disruptions of the pattern, stability and harmony of daily life by events and developments associated with the globalizing market forces. They are several; loss of employment and income from automation, downsizing, and free trade; human rights violations in factories and workshops; financial market instability created by volatile money ‘lows; criminalization of society by crime syndicates operating illegal traffic in narcotics, weapons, women, children and dirty money; health hazards from growing tourism and migration; invasion of western materialistic culture and affluent (American) lifestyles and the destruction and the degradation of the environment by the consumerist society.

Job and Income In security

While globalization has tended to increase job and income security of the rich it has created job and income insecurity to the poor. Job insecurity is increasing in both developed and developing countries in the wake of corporate restructuring and the dismantling of social protection measures. Technological advance, in particular automation, mergers, acquisition, downsizing and relocation of industries tend to create unemployment and lower wages in some sectors of developed countries. Six countries of the European Union have had continuous unemployment exceeding 10 per cent for several years reflecting jobless growth. As a result of automation and information revolution, large transnational corporations are now in the habit of downsizing - an euphemism for macro corporate firings - and throwing thousands of workers into unemployment. The German auto industry, for example, has cut more than 100,000 jobs since 1991. The largest private oil company the Royal Dutch/Shell Group announced in January 1999 that it would cut 105,000 jobs. The high unemployment rates and the possibility of industrial relocation, further have enabled transnational corporations particularly in Europe, to put pressure on their workers to work longer hours for less pay by threatening to move to low wage economies.

The workers and the farmers in developing countries on the other hand are facing risk of unemployment and/or loss of income as a result of liberalization and the flood of cheap imports which undermine domestic agriculture and industry. Farmers in developing countries, for example, are being threatened by subsidized and cheap imports of wheat, rice, maize, beef, milk, butter and other foods from developed countries on the one hand and reduction or removal of import duties and restrictions on such products under the IMF inspired policies of liberalization on the other. Competition from cheap imports following trade liberalization is also making things difficult for domestic industries. Further, while employment opportunities are available and accessible for the highly skilled and professionals, there are national barriers to prevent movements of unskilled labour. To make matters worse, liberalization has helped transnational corporations to squeeze large domestic firms which compete with them and to swallow them up as shown earlier. They are also supported by the patent laws in developed countries which allow silent theft of indigenous traditional knowledge from developing countries as clearly illustrated by the recent steps taken by US firms to patent Indian traditional food and herbal cures such as Basmati rice, margosa (neem), turmeric and pepper oil and Sri Lankan herbs such as Karawila, Pathola, Kothala-Himbutu, Nutmeg, Cardamom and Venivel. To cap it all, insecurity is increased by the IMF policies of emasculation of the state and reduction of expenditure on social services and human welfare and its policies of adding flexibility to the labour market by encouraging informal employment.

Human Rights Violations

Human rights violations also increase workers’ insecurity. Transnational corporations are accused in several developing countries for payment of low wages, denial of trade union rights and neglect of human welfare, in their factories and in export processing zones. A number of them like Disney, Mattel, Nike and Wal Mart have faced public attacks for the working conditions of their contractors’ factories in Asia and Latin America. Transnational corporations have relocated their labour-intensive industries in developing countries mainly because of low labour costs and consequently they are opposed to raising labour costs by granting higher wages, improving working conditions and expanding welfare services. Their contractors in fact use about 60 million children for "slave-work" to keep their costs low and stay competitive. The ILO and WHO point out that the continuing shift of industrial production to low-cost sites in developing countries where worker protection is lower is likely to increase the global incidence of occupation disease and injury. The WHO chief says: "From the occupational health perspective, trends to globalization of trade pose certain health risks".

Financial Volatilitv

Integration of world’s financial markets which are inherently unstable - by removal of all controls on capital movements - tends to destabilize those very developing countries which benefit from such liberalization by attracting foreign capital. This is well illustrated by the financial turmoil in East Asia which had liberalized its financial sector too soon. The large capital inflows to these countries apart from assisting rapid growth had also contributed to appreciation of real exchange rates, delayed devaluation at a time of increasing current account deficits, thereby reducing competitiveness, and expanded domestic lending to speculation and increased vulnerability to reversals of capital flows. The sudden out flows of capital - the short-term category - in 1997, amounting to 11 per cent of the pre-crisis GDPs of the crisis-hit countries, were too much for the countries to cope with and the result was massive currency depreciation, stock market crash, bank closures, company bankruptcies and loss of jobs for 13 million people. The IMF’s prescriptions of high interest and fiscal austerity made matters worse by deflating the economies and creating an economic recession which through contagion effect spread to distant places like Russia and Brazil. Production losses from the East Asian crisis and its global repercussions are estimated at $2 trillion over the three years 1998-2000. A substantial part of the progress made by these countries in the last 30 years has been wiped out and people are facing a bleak and uncertain future. In Indonesia for example, per capita GNP in 1996 before the crisis was $ 1080 which exceeded Sri Lanka’s $ 740; after the crisis, however, it fell to $ 403 in 1998 even below Sri Lanka’s $805. An additional 40 million people or 20 per cent of the population fell into poverty. Nearly 100,000 children have stopped going to school because of the crisis in Thailand and suicides increased from 620 to 900 a month in mid-1998.

Criminalization of Society

Globalization has provided opportunities for criminal activities on a large scale to create personal insecurity. Advances in communications and information technology, cheaper transport and liberalized financial markets have facilitated the cross-border flows of narcotics, dirty money and arms. Illicit trade in drugs, women, weapons and laundered money is contributing to violence and crime the world over. There are for instance, 200 million drug users in the world threatening neighbourhoods. Traffic in women and girls for sexual exploitation - 500,000 a year to Western Europe alone - is a $7 billion business. The Internet is an easy vehicle for trafficking in drugs, arms, women and children through nearly untraceable networks. Illegal drug trade was estimated at 8 per cent of the world trade in 1995. Money laundering is estimated by the IMF to be 2 per cent to 5 per cent of global GDP. The root of all this is organized crime estimated to gross $1.5 trillion a year rivalling transnational corporations as an economic power. Global crime groups have the power to criminalize politics, business and the police, developing efficient networks extending their reach deep and wide.

Health Hazards

Growing travel and migration stimulated by globalization have helped spread HIV\AIDS to create health insecurity. There were more than 33 million people living with HIV/AIDS in 1998; and there were 6 million new infections in that year alone. With 95 per cent of the 16,000 infected each day living in developing countries, AIDS has become a poor man’s disease, reducing life expectancy. A loss of 17 years in life expectancy is projected for 9 African countries by 2010, back to the life expectancy levels of the 1960s.

Threat to Indigenous Culture

While globalization opens people’s lives to culture, ideas and knowledge from all corners of the world, today’s flow of culture is unbalanced as it is a one-way traffic from the rich countries to the poor. The biggest export of the US to the world is entertainment as Hollywood films earned more than $30 billion from exports. The expansion of global media networks and satellites communications technologies have created a powerful new medium with a global reach, and it has brought Hollywood films to the remotest villages in developing countries. The number of television sets per 1000 people, as pointed out earlier, doubled from 1980 to 1995. Hollywood films are accompanied by other appurtenances of affluent (American) living such as Coca- Cola, McDonald hamburger, blue jeans, pop music and Marlboro cigarettes. Such an invasion of western culture can put cultural diversity at risk and make people fear losing their cultural identity.

The culture of globalization is money-culture of laissez faire capitalism and free markets. Culture has been made an economic good and identified with commodities that can be sold and traded - crafts, tourism, music, books, films - to the neglect of community, custom and traditions, and it is being homogenized. The market or transnational corporations utilize the modern media to stimulate consumption habits and build a consumerist society that enslaves the people to money and material things and trap them in debt. It propagates a culture that glamourizes affluence, avarice and individualism that is calculated to undermine the traditional culture of developing countries like South Asia which ennobles the virtues of moderation, altruism and sacrifice. One of the casualties of market expansion and globalization is care and altruism - care of the children, the elderly and the sick by women - which is threatened by the pressure the competitive global market is putting on time, resources and incentives for caring labour. Care has become a victim of increasing employment of women and cuts in state-provided care services following fiscal austerity. It is not a socialist but one of the world’s leading capitalists - George Soros - who has recently warned of the free market threat to contemporary civil society in these words: "I now fear that the untrammelled intensification of laissez faire capitalism and the spread of market values into all areas of life is endangering our open and democratic society. The main enemy of the open society, I believe, is no longer the communist but the capitalist threat".

Globalization and the Environment

As markets under globalization reach into new countries and areas, and as the consumerist society spreads around the world, increasing consumption tends to cause an environmental squeeze by accelerating environmental degradation and depletion. Markets are no respecters of the environment. The increasing demand caused by higher consumption for food and raw materials stimulates higher production which in turn results in the rapid depletion of non-renewable natural resources like petroleum and other minerals as well as of other land and water resources like fish and forests. Further, the extensive cultivation of agricultural crops to meet the rising demand has led to the widespread use of chemical fertilizers and pesticides which pollute the soil and water; it has also resulted in bringing in marginal land under crops, intensive methods of production and overgrazing of pasture lands that have caused land degradation. The increased consumption of water for human needs, for agriculture, industry and animal husbandry is reducing available supplies including subterranean-water resources.

The largest consumers, of course, are in the developed/industrial countries where the richest people live.

The richest fifth of the world’s population, in fact, consume 45 per cent of all the meat and fish, 84 per cent of all paper, 87 per cent of the world’s motor cars and 75 per cent of the world’s petrol. The disparity in consumption between the rich and the poor countries is illustrated by the fact that the overall consumption of the richest fifth is 16 times that of the poorest fifth. Average annual meat consumption, for example, is 77 kg per head in the industrial countries as compared to 5 kg in South Asia and 10 kg in sub-Saharan Africa; it is 119 kg in the US as compared to 4 kg in Brunei and 3 kg in Bangladesh. Energy consumption measured in kg of oil equivalent per capita in the industrial countries is nearly seven times that of developing countries and nearly 13 times that of South Asia. The number of motor cars per 1000 people in the former is 25 times the number in developing countries and petrol consumption per capita is 12 times more. These high levels of consumption had led to accelerated use of natural resources: burning of fossil fuels has quintupled since 1950; consumption of fresh water has doubled since 1960; marine catch has increased fourfold and wood consumption is 40 per cent higher than 25 years ago.

The environmental consequences of high consumption are rather alarming. First, there is deforestation as a result of the excessive exploitation of tropical forests for timber. The rate of tropical forest loss is 15.4 million hectares or 38.1 million acres a year - or 72 acres a minute. Second there is declining fish stock; about 25 per cent of fish stocks for which data are available are either depleted or in danger of depletion, and another 44 per cent are being fished at their biological limit. Third, there is loss of biodiversity; about 12 per cent of mammal species, 11 per cent of bird species and almost 4 per cent of fish and reptile species are classified as threatened: between 5 per cent and 10 per cent of the world’s coral reefs and half the world’s mangroves have been destroyed; about 34 per cent of the world’s coasts are at high potential risk of degradation and another 17 per cent are at moderate risk. President of the international Botanical Congress - Peter Raven - states: "We are predicting the extinction of about two-thirds of all bird, mammal, butterfly; and plant species by the end of the next century, based on current trends".

Fourth, there is soil depletion: nine million hectares are extremely degraded, with their original biotic functions fully destroyed, and 10 per cent of the earth’s surface is at least moderately degraded. Fifth, there is environmental pollution: about 70,000 chemicals have been introduced to the environment and about 1,000 new ones are being introduced every year and the pollution they cause to soil, water and the air is the root cause of the growing incidence of several diseases; carcinogenic pesticides for instance, is one of the major causes of cancer and the number of cancer deaths is estimated to increase from 6 million a year now to 10 million by 2020; air pollution kills. 3 million people and water pollution 5 to 7 million a year. Six, it is destruction and degradation of the environment which cause acid rain, global warming and ozone depletion with far reaching consequences on people’s lives.

Perhaps the most alarming is the threat to the world’s water supplies from the unchecked march of globalization and the consumerist society. Water scarcity has become the single biggest threat to life, health, food security and eco- systems. About 1.4 billion people or nearly one-fifth of the world population and two-fifths of world’s urban dwellers, do not have access to clean, safe drinking water an about 3 billion people or half the world population, mainly the poor, lack water for proper sanitation. It is estimated that of the 5 to 7 million killed by water related diseases, every year, 4 million are children. Unless development or globalization stays within limits of water supplies and current water shortage is reduced, a good part of the world population will face a serious water shortage in 2025. It is estimated that about 2.3 billion people in 48 countries will face water shortage by that time - 1.3 billion will experience severe water shortages and 1 billion absolute water shortage.

Transnational corporations are accused in several countries for over-exploitation of national resources with no concern for the environment. Nearly all the mining companies have come under fire for ecological devastation and for violent crimes against indigenous people. The American firm - Free Port McMoran - for example, has conducted a vast and hugely destructive mining operation in one of the world‘s richest and least exploited environments in Irian Jaya which has some of the world’s richest gold and copper deposits. The contract was granted to +he firm in 1991 but Indonesian legislators want to review it because of various allegations against it including corruption. The open gold and copper mines operated by Free Port McMoran are destroying the environment by dumping 70 million tonnes of tailings a year into the Ajkwa River and polluting the waterway and blighting the entire forests along the banks. They will leave behind a 230 sq. km. scar in the jungle - visible from space - when the mines close in 30 years.

Do we have a free market economy

By Analyst
Some people think the open economy is synonymous with free markets. It is not so. The openness of the economy refers to its openness to international trade, where goods are imported freely with low tariffs imposed only for revenue collection than for protecting local industrial or agricultural products.

This refers to a free market for imports and exports only. In 1977 the government opened the economy, removing quantitative restrictions like import quotas and lowering tariffs and doing away with exchange restrictions on goods.

The exchange rate which had been rigidly fixed and held constant by the central bank, was allowed to vary within narrow limits. The exchange rate was more market determined, though not entirely since the central bank continued as dominant player in the market.

Economists have long trumpeted the benefits of eliminating restrictions and distortions in markets. They argued for the elimination of interest rate ceilings, trade barriers, subsidies, foreign exchange controls and labour market controls, which slow down economic growth. This is the message preached by the World Bank and the I.M.F. But it fell on deaf ears of politicians.

Economists have also pointed out that the order in which the different markets are deregulated is vital. Programs of economic liberalisation can flop if the sequencing of reforms is wrong. This is what seems to have happened to us. The government tackled the financial markets reforms first, because it was politically easy to undertake. But the first priority is the factor markets, land, labour and capital, particularly labour.

Even the liberalisation of the financial markets was not properly timed. The first priority should have been to get the budget deficit down to about 5% of g.d.p. to enable exchange control to be removed and the high interest rates reduced. But inspite of five years of this government elapsing, the budget deficit is over 9%. So there is pressure on the exchange rate and nobody can send even a birthday gift of a mere $ 50 to a friend or relative abroad.

The only beneficiary of the financial liberalisation is the foreign investor who is able to buy our assets more and more cheaply as the value of the rupee falls. Businessmen have a strong incentive to keep their foreign exchange earnings abroad and bring them in late at a profit since the rupee continues to fall steadily over the years. The fundamental problem ofcourse is the war which is now absorbing too large a proportion of our resources and driving the state towards bankruptcy which is being staved off only by the sale of assets under the privatisation programme.

The war which now costs over Rs. 50-55 billion, has to be financed by taxation. As we are a nation of tax dodgers, the government has to resort to indirect taxes like the general sales tax, turnover tax and tariffs, all of which push up the prices of imported inputs as well as locally produced goods. Our local products have thus become too expensive vis a vis imported products, be they agricultural or industrial products.

Our exports to remain competitive in world markets, have to be compensated by depreciation of the rupee. It is ludicrous for ministers to exhaust our farmers to be more productive since they have to pay higher prices for imported inputs like fertilisers, agro-chemicals, animal feed seeds etc. The All Ceylon Poultry Producers Union have rightly asked the government to level the playing field to compete with imported chicken and eggs by levying g.s.t. on such imports.

Even the guaranteed price scheme for paddy needs to be reviewed more often. The government is no longer able to guarantee farm incomes owning to the volatility of imported inputs. There may even be a case for price volatility in rice provided the benefits of scarcely profits accrues to the farmer and not to traders. The government must encourage the small farmers to get together and market through co-operative societies. If the government wants development it must pay more attention to the producer rather than the consumer.

Labour market

The biggest failure was to continue with the rigidity imposed an the labour market by over-protection labour legislation in previous decades. The termination of employees act makes it impossible and unduly costly to get rid of staff made surplus by a fall in demand. Entrepreneurs are reluctant to employ more workers even when there is work to be done.

The entrepreneur cannot adjust his costs and become more competitive. It is practically impossible to have a restructuring of an unviable loss-making business. There is discrimination against local entrepreneurs in this matter, since labour laws are not applicable or are not enforced in the case of foreign investors in free trade zone projects.

The entrepreneurs need more flexibility in hiring and firing. We still follow the British common law immunity for trade unions. Britain herself has introduced the compulsory strike ballot. Our industrial relations legislation is too advanced for a developing country. Who benefits from these arrangements? The professional trade unionists and this lawyers who represent the employees before labour tribunals and industrial courts.

These parasitic professionals charge fees for every appearance whether the case is heard or postponed. No minister of labour has been able to clear this back log of cases before these tribunals. Unless legal fees are regulated by the state, there will be no improvement in the disposal of cases.

Inflexible wages and the strict regulation of hours of work and conditions of employment mean that the employer has no flexibility for his operations. Since the wage structure is rigid workers are not encouraged to shift out of declining industries to expanding ones.

The Cooray plan has come out with some valuable suggestions to develop in small and medium enterprise sector. The plan is right to recongise the importance of this sector. The small and medium enterprise must be exempted from the labour laws and not forced to pay employees provident fund and employees trust fund contributions. These contributions increase the cost of labour and discourage job creation and discourage SME’s.

Distorting taxation

The government has still not liberalised the market for agricultural land and housing. The rent laws are still enforced even against commercial properties. The tenants are thus being subsidised by the landowners.

On top of all this, there are the tax incentives for housing and for office buildings. These tax incentives divert investment into real estate development which involves uprooting of valuable coconut lands and their diversion to residential purposes.

A significant amount of capital is being artificially diverted to real estate urban development at a cost to the taxpayer since the taxes foregone have to be recovered elsewhere. The occupancy rates of commercial urban space is coming down.

Transition to the market economy

The transition to a market economy has imposed new situations and challenges on citizens lack long accustomed to stable jobs and subsidized prices. Some have accepted the challenge and engage in many remunerative activities after their normal working hours - moonlighting. Some have engaged themselves in many small enterprises and more would do so if the rules and regulations that they have to comply with are relaxed.

The company law drafted by a UN expert to ease conditions for business registration, has still not seen the light of day. Those who remain passive and expect the state to look after them as in the past, are doomed to disappointment.

Since we have not adopted the most important market reforms in the labour, laws and capital sectors our growth is now grinding to a halt. To ease the pain of the poorest, the international institutions have suggested directly targeting them for welfare. But we carry on regardless with our universally free education and health and Samurdhi in spite of the inefficient bureaucracies they depend on in spite of political in fighting and the corruption it involves. There is proof that benefit directed at specific targets are more effective in reaching the poor than such universal schemes, but we carry on nevertheless.

The political parties have also failed to reorient to the new situation. The introduction of proportional representation severed the relationship between the local member of parliament and the constituents. Without such a link to their constituents the politicians have bone berserk.

There was little the MP could do even in the previous system where he lobbied on behalf of his constituents and interfered in the administration. But now there was no need for him to lobby for his constituents. He infact has no constituency. He is free to lobby for himself and his party supporters.

It is the political party that is all powerful. Since the political parties are not organised democratically, the MP has little influence with this party and must instead cultivate the party bosses. Many citizens are losing hope in the political parties, the government and parliament, to look after their every day needs.

We have failed to develop laws, processes and institutions that operate to control the politicians and hold them to account. Instead of the rule of law we have the rule of the M.P. not far removed from the feudal system where the local noble or chieftain ruled the roost. Nor can the people get rid of the MPs who are corrupt and who have abused their office.

The bribery commission was rendered non-functional to prevent investigations into the complaints which included ministers as well. Since the people vote for the party it is difficult to remove the corrupt if they are on a closed list. The MP’s want to get rid of the preference vote and have closed lists making it impossible for the people to determine who will represent them which will vest such power in the political party.

Restructuring markets

If the government believes in a free market economy, it must restructure markets and use them instead of administration mechanisms. Restructuring the market is a form of intervention different from the usual ‘command and control’ type regulation, like the Rent Restriction Law. All legal markets are necessarily structured and regulated by laws and regulations. Only black markets are really ‘free’ in that sense.

There are two large areas of normal expenditure by the people which are outside the scope of markets - education and health care economists enamoured of the benefits of markets have sought to create virtual markets for these services which are presently tax financed (free) by introducing vouchers. The vouchers are used by parents to pay as school fees although education continued to be free. The parents could choose the school.

In this way demand begins to play a role in influencing the behaviour of the suppliers of education. If the education provided in a particular school is not good, it will lose students and may have to close down eventually unless remedial action is taken. Voucher schemes are operated in several states in U.S.A. their advantage is that market forces begin to operate.

Market forces are more effective than command and control techniques of the bureaucracy. When president Truman realised that general Eisenhower would be the president he remarked "he will, sit behind that big desk and say ‘do this’ and ‘do that’. and do you know what will happen - nothing."

Barking orders to the bureaucracy is of no effect. So, the top down educational reforms envisaged by the government will be a flop. What is required is to empower the parents and involve them in the management of schools.

No educational reform will succeed unless the initiative is given to the parents.

There are other market oriented alternatives to most such administrative programs. The argument against "user fees" say for education or "user charges" for health care, is that they discriminate against the poor. This need not be so if the charges are low and affordable.

Only about 20 - 25% of the population is really poor although politicians like to exaggerate the extent of poverty. Much of Samurdhi benefit are obviously going to political party supporters and those who do not need it. This type of political patronage must be stopped or at least scaled down and confined to the genuinely poor.

Markets can work even for the poor if user charges are affordable. The customer must have enough purchasing power to buy the product on service. There must be many suppliers and they must be accessible to buyers. Sophisticated markets like the stock market even have brokers to bring buyers and sellers together.

Restructuring of education and health services must mean moving away from administrative mechanisms to market oriented structures. It must mean decentralisation and empowered of the people. It must mean accountability of the supplier or provider to the customer higher directly or indirectly.

In order to realise a balanced social structure, the government sector and the private business sector must be complemented by a third sector of non-profit organisations. The public must be given the opportunity to set up new grass roots institutions and values. The state must encourage voluntary organisations to take up activities like health care, education, care of the elderly, care of the physically and mentally handicapped.

Of course the government cannot force people to take up these responsibilities - to look after their schools or their neighbourhoods. But it can liberalise its rules regulations and laws so that people can take control if they want to. Everybody may not want to do it but the opportunity should be made available. The government should remove the barriers to community action, encourage organised communities to take control of services, provide seed money, training and technical assistance and move the resources necessary to deal with the problems from the bureaucracy into the hands of community organizations.

Sri Lanka bourse battles nuclear aftershocks with freebies

by Amal Jayasinghe
COLOMBO, (AFP)— When Sri Lanka’s stock exchange was devastated in a massive bomb, the market it did not lose a single day’s trading. But two years later, it is the aftershocks of a nuclear blast the bourse is battling.

The Colombo Stock Exchange (CSE) was reduced to rubble in the 1997 bombing of the World Trade Centre where the trading floor is located and some were unaware of the destruction because the CSE had a back up system elsewhere.

"I don’t think we have sufficiently marketed the fact we did not lose any trading after the bombing," said CSE Director General, Hiran Mendis. "May be it is time for us to use this as a positive thing to show our strength."

The October 1997 bombing blamed on the separatist Liberation Tigers of Tamil Eelam (LTTE), surprisingly did not affect the market. Prices kept on rising.

It was the nuclear blasts carried out by neighbouring India and the tit-for-tat explosions by Pakistan that really hurt the market. Sri Lanka is still suffering the after effects even though the markets in India and Pakistan have recovered.

Only the Sri Lankan market has remained in the doldrums. East Asian markets are out of the woods and others in South Asia are also doing well.

Another director of the CSE, Ranjith Fernando, said the bluest of the blue chips in Sri Lanka were selling at a discount to the book value making Colombo one of the most attractive bargain basements.

"All regional markets are doing well and why is Sri Lanka in this state?", Fernando asked. "There is misinformation about Sri Lanka and if we get the fund managers down here we can show the positive aspects and admit the negatives."

This year there had been a net outflow of foreign money from the Colombo bourse which is now regarded as one of the worst performing emerging markets. Back in 1994 it was considered the world’s best performer.

Sri Lanka blames its misfortune on the May 1998 nuclear tests by India and Pakistan that led to a flight of foreign capital from the entire South Asian region.

Between May and September last year the Colombo market fell 41 percent. More than 2.5 billion rupees (34 million dollars) in foreign capital has left the country in the past year.

Getting foreign investors back is not easy and the CSE says they can no longer remain passive victims of a free fall.

The CSE is throwing a freebie to any foreign fund manager who is willing to buy an airline ticket at a discounted rate from the national carrier to come here and take a first hand look at facilities available.

The CSE is hoping to invite about 350 fund managers for a two-day conference in Colombo with another two days at a beach resort or at a golf club in the mountains early October.

The blue chip companies which pick up the tab for the free stay of the fund managers say the money will be spent because there was an urgent need to get foreign investors interested in the market in order to revive it.

Mendis said foreign participation accounted for about half the trading at the stock exchange, whose market capitalisation is a mere 1.5 billion dollars.

"Better-informed investments by foreign fund managers would help reduce the volatility of the market," Mendis said adding that they hoped at least 50 key foreign fund managers would attend the early October conference.

He said Sri Lanka was streets ahead of neighbouring countries in terms of technology, accounting standards and regulatory framework.

CSE director Fernando who is also the general manager of a top development bank here, said even if only two foreign funds decided to invest 0.5 percent of their money in Colombo it would immediately turn around the market.

He admitted the continuing Tamil separatist war was a damper but said the security risks in Colombo were somewhat similar to other places in the world.

"Even the Bombay stock exchange had been hit by bombs," he said adding that many realised after visiting Sri Lanka that it was not as bad as they imagined it might be.

With little sign of any market moving political news from the Sri Lankan government, brokers say they are pinning hopes of the fund managers meeting to end the gloom and doom sentiment at the Colombo bourse.

B
Tea picture looking up, but will it last?

The tea picture is improving and although exports in the first half of this year were down marginally in volume (0.6%) and sharply in revenue terms (26.6%), a recovery pattern has been seen in the last two months according to John Keells Stock Brokers (Pvt) Limited.

However one analyst cautioned that the uptrend may not continue beyond this year ``as present improvements are supply related rather than demand related.’’ He said that once supply improves, the price gains may well get erased.

John Keells said that tea prices at the Colombo auction had been advancing in June and July particularly for the high growns. Increase in Middle East buying over these two months and a decline in quantity on offer at the Colombo auctions had enabled the monthly net sale average to move up from Rs.102 per kg. in March-June to Rs.113 per kg. by July.

"We expect tea prices in the second half of 1999 to be firmer compared with the first half. The cumulative net sale average at Rs.106 per kg. at the end of June is expected to advance to Rs.112 per kg. by the year end,’’ the report said.

It attributed the shortage in the world tea crop to be the primary thrust behind the projected up-trend in prices.

Tea exports in the first half of this year were marginally down in volume terms to 131.6 million kg. from 132.4 million kg. a year earlier. But export earnings for the same period were dismal - down to USD 295.6 million from USD 403 million. In rupee terms, the loss was lower - Rs.20.6 billion in the first half of this year against Rs.25.5 billion in the comparative period last year indicating a 19.2% decline against the 26.6% decline in dollar terms.

Tea export revenues have been on a downward trend since the Russian crisis in August last year. Also, 1999 revenues were further affected in the first quarter due to a high global supply stemming from record production figures last year.

But prices have been recovering from April this year with monthly revenues going up and winter buying from the CIS and Russia improving.

John Keells said that there was a global shortfall of 97 million kg. of tea at mid-year due to production problems in India helping to push up prices at auction centres worldwide.

"This trend is expected to continue for the next three months as quantities are sought before the winter season,’’ the report said.

Merchant Bank launches Midcap Index covering less pricey shares

Merchant Bank of Sri Lanka Limited (MBSL) last week launched a Midcap Index to measure the aggregate price levels and price movements of medium sized companies on the Colombo Stock Exchange (CSE).

A bank spokesman said that this index is expected to create investor interest and increase the liquidity in second tier companies on the market.

Currently the CSE has two indices - the All Share Price Index measuring the price movements of all stocks listed on the CSE while the Milanka Price Index measures price movements of highcap listed companies.

"There was a need to measure the price movements of mid sized companies and the vacuum is now filled with the launch of the MBSL Midcap Index,’’ MBSL said in a news release.

The companies included in the index are: Central Finance Company, Seylan Bank, Lanka Orix Leasing Company, Union Assurance, Tea Small Holder Factories, Bairaha Farms, Haycarb, Aitken Spence Hotel Holdings, Walkers Tours, Royal Palms Beach Hotels, Ceylon Guardian Investment Trust, CT Land Development, Dipped Products, Tokyo Cement Company (Lanka), Pelwatte Sugar Industries, Lanka Ceramic, Royal Ceramics, Bogala Graphite, United Motors, Balangoda Plantations, Madulsima Plantations, Kegalle Plantations, Asiri Hospitals, Singer and Richard Peiris Exports.

MBSL said that the share prices of these less sensitive, medium size companies, except for two are below Rs.60.

"Hence this index will reflect the aggregate price performance of stocks which are of more interest to local retail investors on the CSE,’’ MBSL said.

"It can be used as the benchmark index for individual and institutional investors who prefer growth, but are prepared to withstand only conservative levels of volatility in their equity investments.’’

The bank is confident that its new index can be used as the benchmark for the introduction of midcap linked index funds in the future.

"The Midcap Index, together with the Milanka Price Index (MPI) can generate valuable signals for portfolio managers for switching between large-cap more sensitive stocks, and the mid-cap less sensitive stocks in response to changing capital market conditions,’’ MBSL said.

The 25 stocks comprising the index had been selected on the basis of size, liquidity and profitability with size measured by market capitalisation at the end of last year. Liquidity was measured in terms of the number of transactions last year, the number of shares traded last year and this number as a percentage of the average issued share capital in 1998.

The 25 companies in the Milanka Price Index and those that made net losses in the previous financial years were excluded from the list in the Midcap Index. The 25 companies in the index represent approximately 10% of the 239 stocks listed on the CSE.

1999 tea production ahead of `98 despite July losses

Despite a 4% shortfall (960,077 kg.) in black tea production in July, production for the first 7 months of the year covering the period January-July is still running ahead of comparative figures a year earlier, the Sri Lanka Tea Board said.

Given the increased production, the country still has a chance of bettering the 1998 record, tea traders said. For the past several consecutive years, record tea crops have been achieved in Sri Lanka.

Meanwhile Forbes and Walker said in their weekly tea market report that the CIS remains the major importer of Sri Lanka tea for the Jan.-July period although year-on-year figures show a 19% reduction in its purchases. The UAE continues to be the second largest importer with a growth rate of about 21% from the same period last year.

While high growns and mid growns have boosted production in July in comparison to a year earlier, there was a 2 million kg. crop loss among the low growns which accounts for the lion’s share of the country’s tea production.

High growns in July were up to 7.2 billion kg. from 6.2 billion kg. a year earlier while mid growns were up to 4.2 million kg. from 3.8 million kg. Low growns however were down to 11.1 million kg. from 13.4 million kg. a year earlier.

The January-July cumulative figures also demonstrated increased production in both the high and mid grown categories with a slight shortfall in low growns.

High growns for this 7-month period were up to 50.6 million kg. from 45.7 million kg; mid growns were up to 32.6 million kg. from 30.6 million kg. while low growns were down to 81.5 million kg. from 82.2 million kg., the Tea Board said.

Production of CTC tea too has increased slightly in 1999 with the January-July production figure placed at 11.7 million kg., up from 10.8 million kg. a year earlier.

PDL declares higher dividend on back of rent and investment gains

Property Development Limited (PDL), the owners of the Bank of Ceylon’s headquarters building, had substantially boosted profitability during the year ending December 31, 1998 due to higher rental income and growth of non-operating income from investments and interest, the company’s just published annual report said.

PDL had a turnover of Rs.281 million during the year under review, up from Rs.200.4 million a year earlier while its operating profit was up to Rs.172.9 million from the previous year’s Rs.132.5 million. A rental income of Rs. 287.2 million had been received by PDL from the Bank of Ceylon under the tenancy agreement between the two parties.

Other income at Rs.62.1 million was up from Rs.41.5 million a year earlier giving the company a pre-tax profit of Rs.234.2 million against the previous year’s Rs.174 million.

Taxation had gone up to Rs.96.7 million from Rs.70.6 million a year earlier and the after-tax profit was Rs.137.5 million against Rs.103.5 million in 1997.

With prior year retained profits of Rs.119.2 million, the company had Rs.256.6 million available for appropriation at the end of 1998.

PDL has declared a 20% dividend to shareholders absorbing Rs.132 million, up from the previous year’s dividend of 15% costing Rs.99 million.

The directors have reported that the reinstatement works of the company’s building in the Colombo Fort closed by bomb explosions in its environs are "progressing satisfactorily.’’

PDL has seen a substantial decline in the value of its portfolio of quoted investments costing Rs.48.6 million and carrying a market value of Rs.38.1 million as at December 31, 1998. A provision of Rs.10.5 million has been made for the fall in value of shares.

PDL has an issued capital of Rs.660 million. Its ten rupee share had traded within a narrow range of Rs.17.50 and Rs.17.75 during the year under review with 96 transactions involving 180,700 shares recorded. Despite a strong downturn on the Colombo Stock Exchange, PDL’s share price had remained stable.

The company’s earnings per share at Rs.2.08 was up from Rs.1.57 a year earlier while its net asset value per share at Rs.13.33 was up from Rs.13.24 the previous year.

The directors of the company are: Ms. D.A. de Silva, B.M. Amarasekera, Dr. M.S. Perera, Ms. M.S. Jayasinghe, Prof. J.W. Wickramasinghe and Ms. A.C.R. Manuelpillai (alternate to Ms. M.S. Jayasinghe).

Profits halved at Tea Smallholder Factories

The downturn in the tea market had depressed first quarter earnings of Tea Smallholder Factories Limited, an associate of John Keells Holdings and Central Finance groups, owning a string of bought leaf factories manufacturing smallholder leaf mainly in the low country.

But analysts noted that unlike tea growing, manufacture is still profitable though at lower levels than during the boom time.

The company’s turnover during the quarter ended June 30, 1999 was down to Rs.188 million from Rs.250 million a year earlier while its pre-tax profit was down to Rs.18.4 million from Rs.38.9 million in the first quarter of the previous year.

With taxation too down to Rs.4.8 million from Rs.8.1 million in the comparative quarter last year, the after-tax profit of Rs.13.6 million was down from Rs.30.8 million in the first quarter of the previous financial year.

The company earned an after-tax profit of Rs.52.4 million on a turnover of Rs.871.5 million in the year ended March 31, 1999 and paid its shareholders a 20% dividend.

Tea Smallholder Factories has an issued share capital of Rs.150 million, a general reserve of Rs.135 million and retained profits of Rs.57.2 million in its books as at June 30, 1999.

Reserve ratio reduction likely to divert funds to govt. securities

The Central Bank’s decision to reduce the Statutory Reserve Ratio (SRR) from August is likely to divert additional liquidity in the system initially towards low risk government securities in the absence of an increased appetite for credit, a research focus on the likely impact of the measure has said.

Central Bank Governor A.S. Jayawardena is on record saying that the reduction of the SRR was not triggered by a cash crisis in the market but was taken to encourage banks to lower lending rates which are among the highest in the world with temporary overdraft rates going as high as 26%.

In 1997, the Central Bank for the first time in five years reduced the SRR first from 15% to 14% and then from 14% to 12% in order to relax monetary policy. This infused approximately Rs.8 billion into the banking system.

"The reductions on the SRR effected in 1997 provided an immediate injection of liquidity of Rs.8 billion with the consequent increase in the money multiplier creating a potential for commercial banks to increase their credit levels by approximately Rs.20-25 billion. The additional liquidity provided to commercial banks was expected to be used to boost credit to the private sector thereby supporting the recovery of the economy,’’ John Keells Stock Brokers said in a research report.

The reduction had the expected effect of effectively reducing the cost of funds of commercial banks enabling them to reduce their lending rates to reflect cheaper fund mobilisation.

But both borrowers and lenders were cautious and the realised credit expansion was lower than expected. The result was that the increased liquidity was pumped into government securities by the commercial banks leading to lower interest yields at Treasury Bill auctions.

Given the last experience, the John Keells report said that they expected the level of caution adopted by both borrowers and lenders "to be the prime determinant for credit expansion.’’

The report said that the degree of caution adopted by borrowers will be influenced by the level of business confidence in the economy "given the probability of policy slippage in view of the forthcoming General and Presidential elections.’’

It report also expected lenders also to be careful in the context of a slowing economy as well as tougher Central Bank guidelines on loan loss provisioning.

The SRR reduction was expected to result in the decline in short-term rates exceeding the decline in long-term rates due to underlying inflationary expectations over the long-term, the report said.

"This results in a tendency by borrowers to substitute long-term borrowings with short-term borrowings. However since the quantum of funds infused is lesser than in the previous reduction (in the SRR) the difference between short and long-term rates is not expected to be significant enough to justify a large scale shift,’’ it said.

Lanka Lubricants now Caltex Lubricants

Lanka Lubricants Limi-ted has with effect from September 1 changed its name to Caltex Lubricants Lanka Limited to highlight Caltex management and control of the company, the company said in a news release.

"This will strengthen the company’s image and reconfirm the alignment and support we receive from the Caltex Corpo-ration giving us a leading edge over our competitors,’’ it said.

Lanka Lubricants whi-ch celebrated the fifth anniversary of Caltex managing the company on July 15 described this as a "major milestone not only for the company but the community at large."

It said that during these five years, the company had won enhanced shareholder value and greater customer and community focus.

With the lubricants market due to be liberalised in the near future, Caltex which currently enjoys a monopoly will see a host of international brands fighting for a market share. The company said that their key objective in the face of such competition would be to maintain market leadership and its commitment to its shareholders, customers, community and employees.

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