• The economy must sustain the war - Comment
• The ball is in our court! - Trade
• IMF and the Michel Camdessus years
• Nerws
• Shipping

The economy must sustain the war

There is no need to recount in detail the manner in which the war has affected the economy adversely. Some weeks back we reported the study done by the Institute of Policy Studies, which estimated the cost to be horrendous. We are all aware of the huge cost and its impact on the fiscal situation, including the large domestic debt and the inability of the government to expend resources on vital sectors for development owing to these expenditures created by the war. It has also siphoned away resources, which would have otherwise been available to the private sector. Foreign investors have been reluctant to invest heavily owing to the weakened economic fundamentals, as well as the risks inherent in the security situation. Many sectors of the economy could not perform to their full potential; fisheries and agriculture in the north and east and tourism are clear examples. If all these sectors were to perform to their fullest productive capacity, then the Sri Lankan economy would be a very different indeed. We can only hope that out of this crisis would emerge a solution which would enable the economy to function normally once again.

Meanwhile, and immediately,it is essential to recognize the importance of not neglecting the economy.The fact that the country is on a war footing should not lead us to think that the economy could be neglected.In fact a weakened economy would vitiate our capacities to fight the war effectively.One of the most direct ways in which a poor economic performance would affect us is through our exports.If we can sustain our exports,indeed enhance our export earnings ,then our capacities to import military hardware would be strengthened.Even after the war is ended the continuing burdens would be easier to bear if our export earnings were on an up-trend. Just as the war was a burden to the economy,a weak economy would be a constraint to the war effort.

While emergency measures have to be taken to enhance the financial resources of the government for the war effort,these should not hamper the productive capacity of the economy. It is important for the government not to overreact to the war situation and take drastic measures which could hamper the economy.Economic advisers should ensure this.

At times of crises such as these, people are willing to undergo enormous sacrifices provided the monies are effectively utilized and results are evident. The resources should come from sacrifices in consumption, rather than measures, which would dampen production. It is a time when workers must give of their best to increase production and productivity. We must not let the war effort reduce the momentum of the economy. In fact it is a time to accelerate than slow down.

Vital to achieving this is a public awareness of the link between economic performance and the war effort. Not everyone can fight on the warfronts, but everyone can contribute to the war by sacrifices in consumption and increases in productivity. We must mobilize public support for the war on the economic front if we are to sustain our war expenditures and ensure the sustainability of the war to its bitter end.

The ball is in our court!

By Granwille Perera

India's large hearted concessions especially in scaling down their negative list and granting Sri Lanka eight years of zero duty while India limited the time to three years and listed one thousand items, is to be appreciated . 

Now the ball is in our court. The private sector here should now gear up to export the five thousand odd items for which India has granted concessions, and removed non tariff barriers. 

The question is do we have a sufficiently large industrial base to produce and supply the quantity required by the vast Indian market? 

There are many reasons for this. The main reason is that up to now, our SMI's especially were set up to feed the small local market. 

The larger local and foreign manufacturing units of the BOI already export to world markets at better terms. 

These businesses have already identified their buyers requirements, and signed forward sales contracts. Unless they have excess capacity which is idle, they will not be willing to sell to India at lesser value.

Therefore, it will now be necessary to organise the local industrialist to expand their existing factories, or to set up new factories to supply the Indian market by taking advantage of the duty concessions granted by India. 

To do this, firstly the local businesmen need to identify the items which can qualify for concessions based on the 35% value addition requirement i.e., there should be 35% local value in the cost of the product. 

Secondly the item should be saleable in India, and there should be a definite advantage to the Indian Consumer in quality and price. 

If these conditions are satisfactory, then the Sri Lankan industry could consider the additional investment required to increase installed capacity or the setting up of a new factory. 

Here it will be necessary to prepare a feasibility report extending up to at least sixty months, to see if the investment and loan interest could be recovered through the new Indian sales.

Both investors and lending institutions will require a financial feasibility report for the five year period. Under normal conditions a market sales report could be prepared for this purpose. 

However, there is a clause in the agreement that states that either contracting party could cancel the FTA agreement with six months notice. 

This creates a dilemma for the Sri Lankan investor, who will not be able to have a watertight feasibility approval with such a condition hanging over his head. 

Probably this condition may never be applied, but it being, in the agreement is a disincentive to investment. For the Indian party it will make no difference, as the capacity of most Indian factories are suited to supply the Indian market, and the loss of sales to Sri Lanka would be as small as losing the market in an Indian town. 

S.M.E's are especially susceptible as the existing labour laws and the provisions in the Banking Act would create havoc, should they need to close up for no fault of their own. 

How could we overcome this situation? Perhaps the government of Sri Lanka could arrange a bale out package for industries which invest on expansion of their present production capacity, or for new ventures set up to supply the Indian market, or the investors should calculate their profitability based on the normal Customs Duty in India, perhaps taking into consideration the duty reduction in the future. 

A word of advice is due herein that in India over and above the basic Customs Duty there are other levies based on the Basic Duty. These levies are: (1). S.B.D. i.e., Surcharge on Basic Duty from 0% to 3.5%; (2). A.D.D. Additional Duty from 0% to 16%; (3). S.A.D.D. Special Additional Duty usually 4%. Under the FTA with the lowering of the Basic Duty, these levies will automatically reduce.

The ideal would be to seek joint venture participation with Indian business, who could invest the additional funds required to increase capacity. 

In fact this would be ideal as the same party could handle the sales in India as well. What Sri Lanka industry lacks is good management staff. 

The Indian partner could also provide the management skill needed for this purpose. Visas extending up to five years renewable annually should be allowed to such Indian employees. 

We may also require technical staff especially in production and R and D from India. 

It is a known fact that the Indian Universities and Technical Colleges have produced efficient and dedicated Technical and Managerial graduates who are in demand in Europe and USA. 

A third possibility would be to encourage foreign direct investment through BOI projects to supply the Indian market especially in High Tech. items.

One of the services required urgently in Sri Lanka is advertising and marketing services for Sri Lankan products in India. 

The government could encourage Indian advertising and marketing companies to establish liaison offices in Sri Lanka. 

There is a lot of work the Chambers of Commerce & Industry in both countries could do to make the FTA a suceess. 

In this respect the Sri Lanka India Joint Business Council of the Federations of Chambers of Commerce of Sri Lanka and India have aggressive programmes for the future.

The writer is the Chairman, Sri Lanka-India Joint Business Council, Past President, Federation of Chambers of Commerce & Industry of Sri Lanka.

IMF and the Michel Camdessus years

The word "globalization" itself gained increasing currency during the Camdessus years, reflecting the accelerating international integration of markets to which it refers. Globalization has been driven by technological change and financial liberalization and sustained by an appreciation among policymakers that an open, liberal and rules-based international trading and financial system is essential to global economic progress. But globalization brings disruption and risks as well as benefits. One form of disruption is the unemployment and human dislocation that can be associated with structural change in economies. Another is financial crises associated with volatile capital flows: in particular, currencies have proved vulnerable to speculative attack when international investors have sensed policy weakness, as the crises of the 1990s - in the European Monetary System, Mexico, Asia, Russia, and Brazil - all demonstrated. Surges of private international capital played a significantly smaller role in the crises of the earlier part of the IMFs history, such as the collapse of the Bretton Woods exchange rate system in 1971-73, the oil shocks of 1973-74 and 1978-79, and the debt crisis of the early 1980s. 

The work of the IMF during the Camdessus period is perhaps best understood as a progressive process of equipping the institution and its members to harness the benefits of globalization while minimizing its pitfalls. First, the IMF has been working to help all countries enjoy the benefits of globalization. This has been helped by the globalization of the IMF itself - its transformation into a virtually universal institution. 

The IMF has worked to be relevant to the entire membership, by appropriately adjusting its lending facilities and other operations, including introducing its confessional facilities - the Structural Adjustment Facility (SAF) and the Enhanced Structural Adjustment Facility (ESAF), which is now the Poverty Reduction and Growth Facility (PRGF) - for the poorest countries. The IMF has also encouraged its members to take advantage of globalization by removing current account payments restrictions and accepting the obligations of Article VIII; by moving toward, and establishing the conditions for, orderly capital account liberalization; and by increasing the flexibility of markets in the domestic economy. 

At the same time, the IMF has made no secret of the disruptions and risks associated with globalization. The reference to "high levels of employment" among the purposes of the IMF has pointed directly to the responsibility of the IMF to advise on macro- economic and structural policies that can help to reduce unemployment, its duration, and its human cost. And, as often as it has advocated financial and capital account liberalization, the institution has cautioned against over-hasty, ill-conceived opening measures. As Managing Director, Camdessus was eloquent in warning both that globalization was a constant good for rectitude in economic policy making - for policies that would keep at bay financial contagion, as well as direct speculative attack - and that globalization called for policies that promoted equity as well as efficiency. 

The impact of globalization on the poor and vulnerable - for bad as well as good - has, in fact, been a constant preoccupation. During Camdessus's tenure, social safety nets became a much more prominent part of the armory of policies that are recommended by the IMF. And Camdessus frequently called for action to rectify the slow progress in reducing poverty around the world. He repeatedly called for governments to reverse the decline in aid budgets and asked policy makers to reflect on the need to place the human being at the centre of economic policies. The need to humanize globalization was a central consideration for the Managing Director. This has stemmed from Camdessus's vision of human development, rooted in his human and spiritual values, and from his firm conviction that human development is dependent on the quality of economic and social policy. This vision and conviction, in turn, formed the basis of his profound sense of the importance of public service and of the gravity of the IMFs responsibilities. 

It is not easy to single out the influence of an individual on an institution that is run by an Executive Board representing the governments of almost all countries and that favours a collegial and consensual approach to decision making. Perhaps it is clear only to close observers and participants that, on many occasions the path trodden by the IMF in the past 13 years was one that Camdessus had first to coax the membership to follow; that his boundless energy, firm convictions, and securely grounded optimism were a constant source of inspiration to the IMF, especially its staff, and to many leaders and policy makers in its member countries around the world; that he repeatedly demonstrated the courage needed, when that advice of others had been heard and evaluated, to undertake the most lonely task of leadership - to decide and to act; and also, that if the IMF in the 1990s was in the thick of the process of globalization that was characteristic of the decades as its promoter, its crisis manager, and as an agent for its humanization - this was in no small part due to the vision and leadership of Michel Camdessus. 

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