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The Sunday TimesBusiness

6th April 1997



Air Lanka to expand

The national carrier is to expand its route network adding Seoul and Berlin and resuming flights to Melbourne and Sydney, in the wake of increased capacity utilization.

Melbourne and Sydney are likely to become operational first followed by Seoul and Berlin though no form dates have so far been set, an official said.

AirLanka terminated its flights to Johannesburg and Durban recently in the wake of continued losses.

AirLanka says it has been achieving high cabin factors in recent months with March registering 84 per cent which was the highest for the month since the company started 18 years ago. February had also recorded the highest ever cabin factor for the month.

In 1996 tourist arrivals had dropped sharply by 25 per cent but has since showed improvement. But AirLanka officials do not attribute high capacity usage only to tourist arrivals, though there had been a market increase in arrivals for European destinations such as UK.

"These figures are evidence of high performance system-wide and the airline is seeking to consistently enhance services to maintain these levels," AirLanka said.

Air Lanka is planning to increase capacity to its European destinations by 22 per cent during the summer 1997 season.

"Approval is being sought to further increase capacity to Europe in the coming winter particularly to introduce a fifth weekly frequency to London," the airline said.

In April a second weekly frequency will be introduced to Doha and a second weekly frequency will be added to Riyadh and Dharan later in June.

AirLanka has already enhanced capacity by 21 per cent to its five Indian destinations following bilateral talks with the country.

On March 1 a third weekly frequency had commenced to Trichy.

AirLanka is also organising 10 charter flights to Saudi Arabia for the Haj pilgrimage.

Air Lanka says it will make special arrangements such as special meals, deploying crew of the Muslim faith and start special ground handling arrangements.

Disruptive holidays

Market focus

By Analyst

Consolidation in the price levels was witnessed in the csm, with ASPI trading at 635 levels in the week under review. Foreign participation was moderate with large amount of trading being carried out in Grain Elevators/Commercial Bank and Haycarb.

HNI were mainly seen buying speculative shares such as MBSL/Vanik and Kotagala. The large parcel of Ceylon Foreign Trades transacted in the review period seems to be a re-purchase of the shares by the majority shareholder, as a take-over is not probable. This share could increase in price further as there may be an offer for the rest of these shares going by the trading pattern of the share, the present holding of the majority shareholders being nearly 90%, allows the majority shareholders the right to delist the company at their discretion which also may be the reason why the share increased in price 40% for the year.

With radical monetary policies being undertaken to the economy from the recessionary scenarios prevalent from the time the PA-Administration was elected, it is expected that 1997 would be a better year for the country than the previous two years under this administration. It is expected by conservative estimates that the GDP would increase to 4% if the country is not stifled by violence. This especially applies to Colombo than any other city.

It is expected that the holiday-mood prevalent in April as well as the lack of trading days due to the New Year season could dampen the increase in share-prices in the csm. It is expected that investor momentum would increase only in mid-May.

Recommended: Grain Elevators/UAL/CTC/MBSL/NDB/DFCC/Ceylinco Insurance.


By Business Bug

Picking up

Despite the general downturn in tourism, one city five-star has managed to post impressive profits last year, and that has been the talking point in the trade.

The secret - extensive promotion of the hotel for locals: the restaurants, banquet halls, buffets and even board and lodging, hotel sources.

Other hotels will do well to copy, instead of always complaining about the dwindling tourist traffic...

a sell-out?

A new development bank is planning a private placement of securities to raise a tidy sum of money.

There was some hesitation in the minds of investors earlier, because of the personalities involved in the management and the offer of a placement itself was in doubt.

But now, all that has been cleared and the issue is expected to draw a sell-out response...

Don't fly yet

Domestic airlines have now become a long suffering lot under a ban on internal flights for security reasons.

Recently, their renewed appeal to resume flights was deferred.

And the reason? If the Airforce itself is not safe these days how could private flight operators be secure...

Lending rates must come down

Interest rates are likely to taper down. The recent decision of the Central Bank to bring down the statutory reserve on rupee deposits by 2 percentage points to 12 per cent is a further inducement for commercial banks to bring down their interest rates.

It is now very clear that the government has changed its stance on interest rates and has decided to bring to an end the high interest rate regime we have witnessed over the last few years. Industrialists and businessmen would no doubt welcome this change. However the effect of the Central Bank's change in policy depends very much on the response of the commercial banks, the two state banks in particular, which dominate the banking scene.

The reduction in the statutory reserve should ensure that lending rates come down. Although prime lending rates of commercial banks are at around 15 per cent per annum most borrowers still pay over 20 per cent. It is therefore essential that these rates are reduced. The state banks should give a lead.

There is a tendency for banks to defer reducing their interest rates downwards on the ground that they have contractual obligations to depositors which involve high deposit rates. This argument is not correct as the logic and rationale for reducing interest rates when the statutory reserve is decreased has no relationship to the deposit rates. The release of 2 per cent of cash reserves of banks by the Central Bank means that 2 per cent of the funds deposited with them, which were frozen by the Central Bank without earning interest, is now released for lending.

The quantum of funds available is increased and the cost of funds are thereby reduced. The amount of cash available for lending becomes larger than the cash released as the credit multiplier comes into effect. As the Central Bank has pointed out the 2 percentage point reduction in the statutory reserves released around Rs. 5.6 billion which was earlier not available for lending. Consequently the average cost of lendable funds of commercial banks is reduced irrespective of a change in deposit rates. Therefore there is no reason why commercial banks should not reduce their lending rates immediately. What the precise quantum would be is something the Central Bank itself could determine and it should persuade the banks to reduce their rates accordingly.

There is another important aspect which must not go unnoticed. The reduction in the statutory reserves is not a good ground for reducing deposit rates. In fact deposit rates have come down and the average commercial bank deposit rates are 12.1 per cent. A year ago it was about 12.4 per cent. The National Savings Bank offers an interest rate of 12 per cent per annum for one year deposits. A reduction in the deposit rates below this level would be injurious to the economy. Since inflation is also running at double digit levels depositors virtually get a negative rate of interest. To reduce deposit rates further would be a severe discouragement to savings. In a context when the country's savings rate is low, for the purposes of increasing investment for economic growth, it is imperative that deposit rates do not come down any further.

The increase in the supply of funds and the decreased cost of funds to commercial banks owing to the reduction in the statutory reserve must lead to reduced lending rates. On the other hand the recent policy of reducing the statutory reserves is not a good reason for reducing deposit rates. Deposit rates must be retained at least at the current levels in order to provide an adequate incentive for financial savings.

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