• BoC to kick off PwC changes
• Good corporate results fail to move bourse
• Deposit insurance to be compulsory
• Mind your business
• Oil price shock a warning for the future
• A recipe towards a fully resuscitated share market
• Tourism looms up in the rock city
• Markets
• News
• Shipping and Aviation
• Lankan farmers cry out for help

BoC to kick off PwC changes

By Chamath Ariyadasa 

International consultants PricewaterhouseCoopers hired to recommend a restructuring, have submitted their report and proposals will be implemented from the 15th of this month.

A major recommendation in the hundred page report is to increase emphasis on customers and reduce its geographical focus. 

In trimming the 291 branches some can be made corporate banking branches and brought under the DGM corporate. Other branches can be called retail-banking branches their report says.

To check quality of loans given, credit analysis should be strengthened at corporate branches and credit scoring models introduced at retail branches to improve assessment.

The setting up of a specialised recovery organisation at the centre to handle non-performing advances has also been proposed together with formulating a loan recovery strategy. 

Other proposals are to have a cost control policy and setting up a responsibility centre for cost management. Reducing the number of provincial offices and abolishing area managers comes under this. 

The bank hopes to implement these recommendations through a "Reorganisation Cell" that will be established at the centre. A pilot project will be carried out in the Western province and another selected province and thereafter rolled out to cover all the provinces. 

The appointment of a CFO has already been accepted by the bank and according to chairman Mrs. Dayani de Silva it's a "major restructuring initiative" to meet competition faced by the bank. 

Bank of Ceylon for the 6 months to June 2000 faced up to its competitors maintaining market share even though profit after tax dropped by 10% from Rs 857 million to Rs.764 million mainly due to lower margins and drop in other income. 

Turnover increased by 2.5% while gross loans and advances increased by 23% from Rs.78 billion to Rs 96 billion. But net loans and advances increased by only 1.7% due to a 45% drop in bills of exchange carried from Rs 27 billion to Rs 14.9 billion. This was despite international trade picking up this year. 

The bank has also increased liabilities with securities sold under repurchase agreements increasing by Rs 15 billion. On the asset side investments in tradable bonds have increased by Rs 18 billion. 

Last year income from nine subsidiaries and five associates nose-dived bringing in only Rs 28 million in income compared to Rs 195 million the previous year. The bank has an investment of Rs 2.7 billion in these companies. 

The bank however managed to reduce its holding of government restructuring bonds paying up Rs 1 billion. Over Rs 17 billion worth of bonds still remain bringing over Rs 2 billion in interest into interest income from the treasury. 

But shareholder funds increased due to a good bottom line last year helped by lower provisioning. 

This also helped capital adequacy, which is at 12.06% get within Central Bank safe limits. 

The bank has about 9700 employees in 291 domestic branches. 

The consultants for the PricewaterhouseCoopers are one of the largest professional service organisations with 160,000 people in 160 countries. 

            Performance (Rs. Mn)

                 1H 2000   1999   1998 

Turnover     9,711   20,516   19,426
Provisions      586     2,017      4080
PAT              764     2,054       118

Good corporate results fail to move bourse

By Feizal Samath

The buoyant corporate sector and favourable results this year have failed to generate any excitement in the country's stockmarket, which has been the recipient of bad news for a long time though renewed efforts last week by Norwegian peace negotiators could improve sentiment in the markets.

Last week the a Norwegian peace delegation met Tamil Tiger leader Velupillai Prabhakaran in the rebel leader's first-ever meeting in five years with a foreigner. "The talks were frank, open and very useful. We believe the Liberation Tigers of Tamil Eelam (LTTE) are serious about solving the problem through negotiations," Erik Solheim, a special envoy from Norway, told reporters.

Political analysts welcomed the visit and economists who said it came as a much-needed break of fresh air in a bad-news environment. Most analysts say that corporate profits were substantially up this year helped by good tea and rubber prices and positive growth in the banking sector, which has seen less provisioning being made this year for bad debts, unlike last year. 

The Colombo bourse as usual is not reflecting the good news of the corporate sector, particularly of the conglomerates, with turnovers sharply down on some days to a mere Rs. four million per day. 

The bourse index on Thursday stood at 492.90, down from the psychological 500 points and over reached in June this year. Tea and rubber prices have improved tremendously this year. So has the banking sector as exports are doing well and as interest rates go up due to high government borrowings, analysts said. 

"The third and fourth quarter for corporates are extremely encouraging, "said one analyst, adding that companies were improving from a slump last year. Fuel prices have deterred growth but not substantially. "Companies have passed on part of the fuel hike to consumers and cushioned themselves from any major fallout. Of course, the profits margin would have been higher if not for the high cost of fuel," the analyst noted.

Fuel prices have risen by a total of 40% this year and seen inflation averaging by over nine percent in the past four months. The fuel price hike has triggered costs in other consumer goods and reduced consumer spending in recent months. There are fears of another fuel price hike in view of rising world fuel prices but government officials have said it maybe limited to industrial users only. 

Corporate profits, as per companies in the stockmarket, in the first quarter of the year rose by 47 percent against the first quarter of 1999 while rising by 71 percent in the second quarter 2000, according to one broking house. 

Analysts said corporate earnings this year were expected to rise to between 30 to 50 per cent from 1999. Among the sectors that have under-performed are tourism where profits, up by nine percent in the first quarter, showed losses in the second quarter largely due to an escalation of the war.

Tourist arrivals also fell during the period September-October due to election unrest after some countries issued travel advisories urging their nationals to avoid visiting Colombo or potential trouble spots in the country during the election period. 

Deposit insurance to be compulsory

By Chanakya Dissanayake

The main motive of the new scheme is to improve public confidence in the banking system and to create a capital base to bail out deposit holders, when banks crash. 

The Central Bank is also assisted by the USAID in its formulating process of the scheme.

In 1986 Central Bank introduced a voluntary deposit insurance scheme to the banking sector. 

This was largely ineffective due to the fact that, the two state banks did not join the scheme. Bank of Ceylon and the People's Bank held more than 65% of total public deposits in 1986. 

"The premium charged was Rs. 1 per every Rs. 10,000 of deposits. If the two state banks joined the scheme they would have paid a premium of Rs 50 million each depending on their deposits. Bank of Ceylon and the People's Bank opted out of the scheme, considering the premium to be an unnecessary high expenditure. 

Also they held the view that the government guarantees State banks' deposits, which is not true.

The Government owns the two state banks, but its liability is limited. Government is not liable for any debts of the state banks except for any agreed capital contributions to Government guaranteed debts," said an senior Central Bank official.

Since its inception, only Sampath Bank and the HSBC has joined the voluntary deposit insurance scheme. According to analysts, one of the main shortcomings was that it only covered the interest of the small depositors since it only insured deposits of less than Rs 100,000.

According to monetary experts any type of a voluntary insurance scheme is plagued with two main weaknesses: the moral hazard and the adverse selection problem. 

The moral hazard can arise if the bank managers misuse the insurance scheme and adopt haphazard lending practices, which will eventually distort the insurance scheme. 

Also since the option is voluntary, reputed banks with good lending practices might feel insurance is unnecessary, while the swindlers can join to take undue advantage.

The new scheme will attempt to mitigate the adverse selection by making the scheme compulsory to all banks. The premium will also be decided on a case by case basis. Highly reputed banks with a low non- performing loan ratio will be paying a low premium while the banks with a history of high defaults will have to bear a higher premium.

It is also evident that the funds collected from premiums alone are not sufficient to create a strong capital base that can withstand a major banking crisis. 

According to Central Bank sources, Government is also expected to capitalise the proposed insurance scheme.

"A deposit insurance scheme is recognised as a public good that should be provided by the government, since the risk and the capital requirement is too large for the private sector to bear", said a senior economist.

Mind your business

More reshuffling

New heads are likely to take over two of the major state banks while the present bosses will be given promotions of sorts, they say. The former top cop who heads the other big state bank however is likely to retain his job- at least for the time being- while the boss of the biggest of all banks will also get an extension...

Here comes the bad news

One major blue chip in the hospitality industry was about to give the green-light to an ambitious expansion plan to its chain of hotels but now the idea has been put on hold.

To start with, some of these hotels are located in what may be termed 'vulnerable' regions and anyway riots of the '83 type haven't been ruled out yet, company executives say...

Another price hike

The arithmetic was done but alas that was not feasible, the powerful and energetic pundits say. So, a fuel price hike it will be... 

Oil price shock a warning for the future 

The petrol price rise is inevitable owing to the steep price increases in crude oil. Crude oil prices have increased from less than 12 US Dollars per barrel to 35 US Dollars per barrel. The current tense situation in the Middle East is likely to raise prices rather than reduce them. 

Already the trade gap has widened owing to the increased imports of oil, the balance of payments deficit is increasing and foreign exchange reserves are declining. Since this situation is beyond our control, the only way in which we can reduce the burden is by reducing consumption. 

The increased prices would have the effect of decreasing consumption for some time. Yet this impact may not be significant if other policy measures are not taken. This is so owing to the consumption pattern of diesel and petrol. 

A price rise in diesel and petrol will have a limited impact if the bulk of consumers are not sensitive to the price rise. This happens particularly when the users of fuel do not have to bear the costs themselves. Such situations prevail in both the public and private sectors. 

The public sector is a substantial user of fuel. It is therefore important for the government to put in place restrictions on the expenditure on fuel. Otherwise the consumption of diesel and petrol will continue at current levels in spite of the price increases.

This is so in the private sector too.When petrol costs are borne by the firm and is a deductible expense, directly or indirectly, there is no inducement for a curtailment of travel. The woeful inadequacy of public transport is an important reason for increased fuel consumption. 

Hence even with increased prices, consumption would tend to be at similar levels as before. While the focus of the public would be on the price increases, the repercussions on the economy is serious. Petrol price increases do not merely raise living costs, but have an important bearing on the trade balance and the balance of payments.

The rising cost of fuel has been an important factor in increasing the trade deficit to a huge 855 million US Dollars or Rs. 63 billion in the first eight months of this year. This is clearly seen in the increased expenditure on intermediate goods imports for the first eight months.

During the first eight months the intermediate goods import value rose to 2466 million US Dollars. The crude oil price increase would also assert a significant pressure on the balance of payments. Together with the substantial increase in defence imports, the increased crude oil imports would result in a widening trade gap and a deterioration in the balance of payments. 

The foreign reserves had come down to 2272 million US Dollars at the end of August, a 12 per cent decline from what it was at the end of last year. 

Fortunately two factors are preventing a crisis. Exports are growing at about 36 per cent to offset to some extent the increase in imports. Remittances from Sri Lankans living abroad are also increasing to lend support to the balance of payments.Without these favourable factors the country's balance of payments would have been in dire straits. 

What is important to realise is that the crude oil price hike may continue for quite some time. It is also likely that oil prices would not drop to the levels that prevailed 12 to 15 months ago.

Therefore it is vital that an oil dependent economy such as ours should find ways and means of containing consumption of crude oil based products. 

For far too long the country has consumed these products as if we had enough resources to import oil. Had the export performance been like last year's, the oil price hike would no doubt have created a crisis of immense proportions. 

It is important that we develop a set of policies which would make the economy less dependent on oil and thereby reduce the vulnerability of the economy to oil price shocks in the future.

A recipe towards a fully resuscitated share market

Dr.Wimal Hettiarachchi

Whatever the underlying cause or the causes may be, the setbacks in the share market were not without serious economic implications. It contributed in no uncertain terms to undermine the country's ability to mobilize savings: - both domestic and foreign - for its development effort. This in turn, inhibited the country from raising the level of investment and achieving its full development potential, thus postponing the day when it could hope to achieve much longed for "economic breakthrough".

It is not altogether incorrect to say that the Sri Lankan economy has progressed rather lethargically over the last decade, the GDP growth averaging approximately five percent - a rate much lower than that prevailed in developing countries in Asia. With an investment rate of around 25 precent of GDP, it is perhaps futile to expect better growth performance. It has been pointed out time and again that if the economy is to perform robustly and move onto a higher growth plane of 7-8 percent, the country's investment rate has necessarily to rise to around 35 percent of GDP. An important vehicle for mobilizing savings - both domestic and foreign - to raise the country's investment rate, is its share market. Needless to say that a depressed share market has little to offer in this regard.

It has been stressed but not much recognized that one major factor which has contributed to the dismal performance of the Colombo share market is its narrow domestic investor base. At the initial stages and following the opening of the market to foreign.investors, the market was driven heavily by foreign investors. In 1993 when the Colombo market became one of the best performing markets in the region, foreign investors accounted for around 45 percent of the value of shares deposited in the Central Depository System (CDS). 

In the same year, foreign investor purchases accounted for 51 percent of the turnover while foreign investor sales were 33 percent of turnover. Similarly, during the period January-February 1994 (when the Colombo market recorded the highest price levels) foreign investor purchases accounted for 45 percent of turnover, while foreign investor sales were 28 percent of turnover. These figures testify to the fact that the Colombo share market at the initial stages was built heavily on the backs of foreign investors, raising the prices of shares far beyond their underlying values. Needless to say that a share market built on such fragile foundations exposes itself to vagaries of changes in foreign investor sentiment caused by either domestic or external factors.

Since December 1997 there has been virtually a continuous outflow of capital from the Colombo market - Rs.1,560 million in 1998, Rs.950 million in 1999 and Rs.3,000 million during the first nine months of 2000. It is natural that a small market with a relatively large foreign investor share cannot escape the pressures of such continuous outflows of funds without such outflows being reflected in the price levels. This is particularly so in a situation where local investor base is narrow and not equipped to fill the vacuum created by foreign investors. A broad-based domestic investor base would not only support the market against short-term fluctuations but would also contribute to mitigate the adverse effects of outflows of foreign funds. Hence, a cardinal pre-requisite to build a healthy share market in the country is to expand the domestic investor base.

It is no exaggeration to say that the share market is quite an alien place to an average Sri Lankan. This is despite organized share trading having been started over a 100 years ago. No doubt share trading in Sri Lanka has gone through many phases, some which are neither positive nor encouraging. However, share trading on a more formal and organized basis commenced some 16 years ago with the establishment of the Colombo Stock Exchange (CSE) in 1984. Even so, the popularity of the share market as an avenue of investment has been slow to grow in terms the numbers participating in it as a percentage of the total population. As late as 1996, there were only 136,000 Sri Lanka individuals registered at the CDS of the CSE. This number rose to 154,000 by 1997, 1998 however witnessed quite a substantial increase in the number of individuals participating in the CDS when around 86,000 new accounts were opened, raising the overall number of 232,000.

However. this unusual rise in the number of participants in the CDS in 1998 was largely due to the listing of five plantation companies and the distribution of shares in these companies among the employees. Following the listing of a few more plantation companies, the number of local individual investors registered at the CDS rose to 241,000 by the end of 1999. The large bulk of the new registrants dropped out of active trading once their allotted share were disposed of. Therefore, the participation of domestic individual investors in share trading at the CSE is far smaller than that indicated by the above numbers.
In this connection, it is perhaps pertinent to quote from a report recently commissioned by the Securities and Exchange Commission of Sri Lanka (SEC) entitled "Capital Market Development in Sri Lanka: Responding to the Crisis". The report has stated: "Domestic customers too have voted with their feet and the preponderant bulk of central depository system (CDS) accounts show zero balances. According to information from the SEC, 75.7 % of accounts have nothing in them. Nearly 19% have only one share, largely from the recent schemes under which employees got shares. As serious and small investors, having at least two shares or shares in at least two companies, with double counting etc., we still have only in the region of 15,000 customers or a little over 5%." The Report has proceeded to comment that "one can hardly take seriously a market based on such a small number of customers in relation to the potential base. It is very unfortunate considering the large infrastructure and public relations mounted on this slither of a market."

The above quotes put quite succinctly the pathetic state of individual investor participation in the Colombo share market. We have a situation in which only around 15,000 individuals out of a total population of 19 million are actively participating in share trading in Sri Lanka, which works out to only 1 in each 1,260 of the population. This is a very negligible number indeed, particularly considering the long history of share trading in the country and the large volume of financial savings in the hands of the public. Needless to say that this situation has to change and change drastically if the Colombo share market is to be resurrected to play its due role in pushing a monotonously slow moving economy to a dynamic faster growing one.

In advanced countries there is considerable indirect popular participation of people in share trading through mutual and pension funds. This unfortunately is not the case in Sri Lanka as the large social security funds such as the Employees' Provident Fund (EPF), the Employees' Trust Fund and private provident funds, and the large mobilizes of funds such as the National Savings Bank (NSB) and the Insurance Companies have kept away from the share market playing a negligible role. Some have even reduced their mundane involvement. The managers and trustees of these funds have taken the easier path of investing the funds in their custody in government paper, virtually becoming surrogates in providing funds to the exchequer. This has not done any good to the fledging share market in the wake of progressive withdrawal of foreign funds.

It may also be mentioned that the percentage of shares held in the CDS at the end of 1998 in terms of value was only 41 percent of market capitalization, which meant that 59 percent of the share holdings in terms of value were not in trading. While the large bulk of the latter is held by large individual and corporate shareholders who wish to retain control over the affairs of their enterprises, it is possible that a fair number of smaller share holders also have tended to remain out of the CDS of various reasons. 
However, an estimate of this number is not available. While these dorman shareholders are an important group economically, in that they have provided much needed capital to the enterprises concerned, in terms of contributing to active market development they do not play any significant role. One could surmise that it is sheer lack of knowledge of the workings of equity markets, which shut them off from active trading.

The upshot of the low level of participation by Sri Lankans in share trading has been the pervasive role played by foreign investors in influencing the price trends in the Colombo share market. As at the end of 1997 foreign clients accounted for 44 percent of the value of securities held in the CDS totalling Rs.57.4 billion. Share markets driven by foreign investors are usually subject to vagaries of changes in foreign investor sentiment, which in most instances are beyond the control of the national authorities. The overly excessive dependence on foreign investors has been cited as a major contributory factor for the continued depressed conditions in the Colombo bourse when the other markets in the region have shown resilience in the midst of adverse local and international conditions. Thus, a strong case exists for expanding the domestic investor base if the country is to forge ahead and develop a vibrant share market - a share market which can take the economy to a dynamic development path.

In general, capital markets are unfamiliar places for most people in the developing countries. They had been so in the developed countries as well until about two decades ago. For instance, it has been revealed that as recently as in 1980 the number of Americans who owned equities either directly or indirectly through mutual and pension funds was 1 out of 18 in the population. In 1998 - some 18 years later - that number was 1 out of 3. According to a more recent studies, approximately 50 percent of the households in the United States hold some kind of stock, either directly or indirectly.

Consequent to this change, today Americans have more money invested in capital markets than they do in real estate. This phenomenal growth in investment in equities has provided a tremendous boost to the American economy through the wealth effect (of the ownership in equity) which had been strengthening over the years, making average American feel wealthier. In fact, during the last 4-5 years under the impact of this wealth effect the American economy has been the principal engine of world growth in an otherwise troubled global economic outlook. This growth in the breath of markets is not confined to the United States alone, for there had been parallel developments in other markets around the world, both developed and emerging.

What facilitated this great change in equity ownership in USA? It has been achieved, inter alia, through intensive programs of investor education launched, in particular, by the United State Securities and Exchange Commission. Similar programs have been launched in other jurisdictions such as Canada, Poland and South Africa. Such programs have helped bringing larger and larger numbers of investors into the share market thereby converting them to share-owing democracies. Such broad basing has contributed not only to stabilize those markets in times of reversals but also to their steady growth over time.

Investor education makes capital markets more transparent and more familiar places for investors. Educated investors foster the development of healthy and vibrant capital markets by taking more informed investment decisions. If educated, they are far more likely to entrust their capital to trustworthy and dynamic companies to manage. Educated investors contribute to deepen capital markets and facilitate the emergence of liquid markets that extend the benefits across all strands and sectors of the ecomomy. On the other hand, if investors do not know the basics of investing, they risk harming both themselves and the markets in general. Alternatively, they are likely to eschew equity markets altogether with heavy costs to themselves and to the economy in general.

Lack of knowledge of capital markets makes people ignorant of how to maximize their savings and investment objectives. In general, many people do not know how to choose investments which will eventually maximize their net-worth. For instance, an investment in a gilt-edge security will not necessarily guarantee a positive return if the capital value represented in it gets eroded through inflation. An informed investor, on the other hand, will go for an investment in which the capital value is preserved even though the immediate return is low. Financial security starts when individuals can take steps today that will enable them to construct their future provided the steps are sound, based on informed judgment.
Another advantage of investor education is that it would help dampen the possible adverse impact of negative investor sentiment in the event of a market decline. Investors who understand the nature of markets are much better able to withstand the impact of a temporary decline and would even contribute to a revival. They are unlikely to react violently and push panic buttons at the first sign of weakness in the market place. This explains why the advanced markets are able to withstand occasional bear runs and bounce back within relatively short periods, as has been amply demonstrated on a number of occasions over the last two decades..

An informed and knowledgeable investor is good for business and is a malleable person for market intermediaries to deal with. Brokers and investment advisors have fewer problems when their clients are familiar with financial projections and markets gain greater depth and liquidity as investors enter and stay in the market. Greater awareness on the part of investors will enable abusive practices on the part of market participants to be minimized. It would also lessen incidence of unintended market misbehavior and potential for crime. In developing countries the average investor is subject to serious handicaps due to a lack of information and knowledge of the intricacies of capital markets, more particularly the equity market. The paucity of knowledge inhibits him from taking informed investment decisions which are unlikely to turn terribly sour should market sentiment change drastically. For the same reason, he is unlikely to get the best possible investment advice from the market intermediaries, as the required expertise is also slow to develop. The upshot of course is the slow build up of equity markets, which acts as a serious barrier on capital formation and growth - a situation not quite tenable in a present day economy longing for faster economic and social advancement.

Notwithstanding the disabilities and constraints faced, we have seen a number of developing countries forging ahead with rapid equity market development in the recent past. These countries which are commonly known as emerging market economies, have been significant mobilizes of capital, both locally and internationally, to support their development effort. The success of emerging market economies demonstrates the potential available to developing countries to resources through capital markets, provided correct policies are pursued and appropriate initiatives are in place.

A number of factors can be attributed to the lukewarm attitude of the Sri Lankan public to the share market. Amongst these may be the continued depressed conditions in the share market (which in turn can be attributed to the narrow domestic investor base), the abundance of investment opportunities in fixed income securities, money illusion, i.e. failure to take the inflationary factor into reckoning when investing in fixed income securities, heavy urban bias in the availability of infra-structural facilities and, the last but not the least, the paucity of knowledge of the functioning of the share market.

It is this last mentioned aspect with which we are concerned in this paper, which we believe to be the single largest constraining factor that needs to be addressed as a matter of high priority if we are to move out of the current abase and see the birth of a strong equity market.

Why do Sri Lankans feel shy of the share market despite the abundance of savings in their possessions as reflected in the clientele of the National Savings Bank, the commercial banks and the finance companies and their heavy presence in the Government debt securities market. The answer should be the paucity of knowledge of the workings and the opportunities available in the share market. The average Sri Lankan today does not know how to choose an investment which would maximize his returns over time. He also does not know how to select an investment professional or where to turn for help. It is in this context that we see an urgent need to educating the potential investor so that he becomes a beneficial participant in the market thereby contributing to the creation of a wider domestic investor base.

The promotional and awareness programs so far carried out by such organizations as the Securities and Exchange Commission (SEC) and the Colombo Stock Exchange (CSE) have failed to reach the potential investor. Among the programs launched by the SEC are the educational program directed at the Advanced Level and University students, market awareness programs for professional organizations, seminars for media personnel and police personnel, seminars for market intermediaries, do-you-know contests, radio programs (talk shows), and workshops on regulatory and development issues. The CSE on its part has conducted seminars for investors and BOI companies, workshops on debt securities, essay competitions for Advanced Level students and, at times, live broadcasts of share market transactions. However, the programs so far implemented seem to contain relatively little in terms of educating the potential investor per-se. Consequently, notwithstanding the infrastructure facilities provided and the publicity accorded, the Colombo share market remains very narrowly based. The average Sri Lankan still seems to remain dismally ignorant of the intricacies of the workings of the share market and the opportunities available in it. 

The result has been the rather lukewarm attitude of the Sri Lankans towards the share market and the eschewing it altogether as a viable avenue of investment. It is here that Sri Lanka would be facing one of its biggest challenges as the country starts off on the new millennium, i.e. how to make the Sri Lankan citizen an informed and active participant in the share market so that he makes his due contribution to the country's development process. Towards this, a sustained investor education program seems to be a vital necessity.

A concerted investor education program is also vital in cutting through the prejudices and the reluctance of the part of institutional investors, more particularly the social security funds, coming into the equity market. The managers of social security funds, duly supported by political interests, have treated equities as high-risk investments, which should be eschewed in the interests of the members of those funds. On the other hand, they had been heavily driven to fixed income securities on the erroneous belief that such investments safeguard the members' interests. This is a total fallacy based on misguided and misconceived beliefs. The fact of the matter is that fixed income securities earn little or no income when allowance is made for inflation. Sri Lanka's annual inflation over the last two decades has averaged around 10 percent while the dividends distributed by the social security funds were also of the same order of magnitude, which meant that there was little or no real return accruing to the members. If the members are made fully aware of this delusion, then they are unlikely to oppose the fund managers going for alternative forms of investment, away from fixed income securities. Such action on the part of fund managers would not only help expanding the domestic investor base but also would contribute to bringing resilience to the sagging share market. Experience in other countries has shown that it is the investments by social security funds in equity and not in debt, which brings higher rewards to their members.

In this background, a concerted investor education program aimed at potential investors and the social security funds is a vital necessity if the domestic investor base is to be expanded. Increasing a breath of the market is of paramount importance to ensure that the market bounced back and remain strong. Failure to resuscitate the share market will result in Sri Lanka having to compromise on the developmental goal and postpone the day when it could hope for an "economic break-through".

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