International effects of the euro

By Robert Solomon

Questions regarding the international ef fects of the EMU are not difficult to formulate, but some of the answers are problematical.

What will be the effects on trade with the rest of the world? Will the exchange rate of the euro appreciate, depreciate, or remain stable in terms of the dollar, the yen, and other currencies?

Will the euro become an important reserve currency, challenging the international role of the dollar? Will the euro be widely used internationally by the private sector as a unit of account, a means of payment, and a store of value — the three traditional functions of money?

Arelated question pertains to the potential importance of financial markets in euroland for international flows of capital. Finally, how will euroland, without a finance minister, relate to the United States, Japan, other countries, international financial institutions such as the International Monetary Fund (IMF), and international fora such as the Group of Seven and the newly formed Group of 22?

Effects on trade

Euroland has a population somewhat larger than that of the United States and a gross domestic product somewhat below the GDP of the United States. Its total merchandise trade with the rest of the world (excluding intra-EMU trade) exceeds that of the United States by a small margin. Thus the two regions are of comparable size economically, but the United States has a much larger geographical area and therefore a much smaller population density.

With the euro in existence, trade among the 11 countries will not require the purchase or sale of foreign exchange, nor will contracts for transactions among the countries be subject to uncertainties regarding future exchange rates. Furthermore, with prices quoted in the same currency (the euro) in all 11 countries, firms in euroland are more likely to trade with one another and consumers are more likely to purchase products made in other euroland countries.

In those circumstances, trade among the 11 countries will probably increase in relation to their trade with the rest of the world. Both imports from and exports to non-EMU countries would increase less rapidly than in the past.

Euro's exchange rate

Euroland will be a much more closed economy than its pre-EMU members, since their mutual trade will become internal. It follows that policymakers will be less concerned about fluctuations in the foreign exchange value of the euro than officials in the individual countries were about their pre-EMU exchange rates. In other words, the attitude toward the exchange rates of the euro will be more like that of American officials.

The euro will float in relation to the dollar, the yen, and other currencies not pegged to it. The suggestion by Germany's finance minister Oskar Lafontaine that target zones be adopted has been rejected by other European leaders, including the president of the ECB, Wim Duisenberg.

Whether the euro will tend to appreciate or depreciate in relation to the dollar in the early stages is quite unpredictable. The short-term interest rate that is likely to exist at the ECB in January is 3%, the basic rate in France and Germany toward which other central banks have been reducing their rates in anticipation of the Union. In the United States, the basic short-term rate — the Federal funds rate — was about 4.75% as of mid-December. That alone would point to some appreciation of the dollar in relation to the euro.

On the other hand, the euro area has a surplus in the current account of its balance of payments (estimated at more than US$100 billion in 1998), while the United States has a growing deficit (estimated at well over US$200 billion in 1998). Apart from other influences, that would tend to lead to some depreciation of the dollar. But there are other influences: the growing current-account deficit of the United States has not depressed the dollar in the past year, given the high mobility of private capital that easily financed the deficit.

It is fairly safe to predict that the dollar-euro exchange rate will not move by a large amount in early 1999 unless, as is discussed below, large shifts occur in the dollar balances of official and private holders around the world. The yen could move in relation to both the euro and the dollar, as it has in the past year.

Euro as reserve currency?

The dollar has for many years been the dominant reserve currency, the currency in which countries around the world hold their foreign exchange reserves. At the end of 1997, 57% of official foreign exchange reserves worldwide were held in dollars. The deutsche mark accounted for 12.8% and the French franc for 1.2%, while the yen accounted for 4.9 percent of foreign exchange reserves.

Are countries likely to shift their official reserves out of dollars into euros? Those countries that link their exchange rates to European currencies — by a currency board, a fixed or crawling peg, or a managed float — probably already hold deutsche marks or other European currencies in their reserves.

That applies mainly to countries in Eastern Europe, most of which link their currencies to the deutsche mark since much of their trade is with Germany. They will very likely hold their reserves mainly in euros.

How rapidly, if at all, will other countries switch their reserves to the euro? Of those that peg their exchange rates, most do so to the dollar or to a basket of currencies in which the dollar is dominant. They are unlikely to switch on a large scale. Furthermore, most Latin American and Asian countries have closer trade relations with the United States than with Europe.

They are likely to stick to the dollar, but they could gradually diversify their reserve holdings. What can be said with some assurance is that if switches of reserves from dollars to euros do occur, the process will be gradual. Central banks around the world would certainly avoid large sales of dollars and purchases of euros, since that would tend to lower the value of their remaining dollar holdings.

Is the euro likely to be acquired by countries with growing reserves? It is worth noting that a currency can take on an increasing role as a reserve currency only if its issuer incurs an overall balance of payments deficit. In other words, if holdings of a reserve currency are to increase, there must be a supply as well as a demand for it.

The United States has demonstrated that principle over the years either by running a current-account deficit, as in recent times, or by having an excess of capital outflows over its current-account surplus, as in the 1950s and 1960s. At present, euroland has a sizable current-account surplus. The question is, will it become a substantial exporter of capital?

Another condition for reserve currency status is the existence of financial markets in which monetary authorities are willing to invest their foreign exchange reserves. As noted below, that is also important for private holdings of a currency outside the borders of the country that issues it.

Does it matter?

In the 1960s, Charles de Gaulle, president of the French Republic, characterized the reserve currency role of the dollar as an "exorbitant privilege" for the United States. In that period, current-account deficits and surpluses were financed to a much larger degree than at present by movements of official reserves.

In particular, when France had a current-account deficit, it had to use its scarce reserves of gold and foreign exchange to finance it. On the other hand, when the United States incurred a balance of payments deficit, it simply paid out dollars, most of which were added to the reserves of other countries.

Today, payments imbalances — especially of major industrial countries — are more easily financed by flows of private capital.

To what extent is reserve currency status important to the United States? It is significant that the United States pays interest on the dollar assets of foreign monetary authorities that are held in the form of bank deposits or securities. That means that financing a deficit by an increase in liabilities to official holders of dollars is not very different from explicit borrowing in the form of security issues. The main advantage is that American medium- to long-term interest rates are probably somewhat lower than they would be if the dollar were not a reserve currency. But that difference has to be rather small.

The major financial benefit the United States derives from the distinctive international status of its currency is seignorage: the accumulation of paper dollar currency abroad, since no interest is paid on such holdings. It is estimated that such dollar holdings in other countries amounted to between US$200 billion and US$250 billion at the end of 1995. With medium-term interest rates at, say, 5%, that represents an annual saving of US$10billion to US$12.5 billion, or a little more than one-tenth of 1% of America's gross domestic product.

Euro in private external balances?

Private holdings of international assets are of much larger size than official balances. For the world as a whole, the private portfolio amounted to about $7.5 trillion in 1995. Of that total, a bit more than half was denominated in dollars, twice the amount held in the currencies of all 15 EU countries (when intra-EU holdings are deducted).

How important will the euro be internationally as a private unit of account, means of payment, and store of value? According to data collected by the Bank for International Settlements, the dollar is involved in more than 80% of all foreign exchange transactions. Almost half of world trade is priced in dollars.

That provides an incentive for corporations engaged in international trade to maintain working balances in dollars. But the existence of a single currency for much of Europe is likely to lead to a gradual increase in the extent to which Europe's trade with other countries is denominated in euros.

That in turn would induce traders abroad to hold euro balances. But such balances are a small fraction of private international holdings of foreign currencies. Cross-border investment and lending are of major importance.

That is where the difference in financial structure between Europe and the United States becomes relevant. Although total financial assets are of about the same magnitude in euroland and in the United States, bank assets make up well over half of the total in Europe but less than half in the United States. In other words, securities markets are much more developed in the United States, whereas banking is more prominent in Europe.

It is true that the amount of government bonds outstanding in the 11 euroland countries is about equal to U.S. Treasury bonds outstanding. But only one-fourth of corporate finance in continental Europe comes from capital markets. In the United States, the figure is about three-fourths.

The advent of the euro could lead to the enlargement of securities markets in euroland. The stock exchanges of Frankfurt, London, and Paris, and probably others, are planning to create a unified trading system for equities. If the single currency encourages the development of deeper and more active markets for other securities of various maturities — ranging from commercial paper to bonds — that will in turn tend to attract more funds from abroad.

But those developments would also attract more borrowers from abroad. Thus one cannot predict whether greater securitization in euroland will tend to strengthen or weaken the foreign exchange value of the euro.

In any event, this evolution toward greater securitization in euroland will not happen overnight. According to the "Economist" (November 21, 1998, p. 72), progress toward a "single, homogeneous capital market" is likely to be "grindingly slow" since it depends in part on a harmonization of taxes, regulation, supervision, listing requirements, accounting, and trading rules.

International Cooperation

The member states of the EMU will continue to be members of the International Monetary Fund. Even though they will have given up their exchange rates and balance of payments policies, they will retain their sovereignty, including fiscal policy and other domestic policies. Thus the IMF will continue to conduct consultations with the member governments, as it does with Luxembourg, which, as part of the Belgium-Luxembourg Economic Union, does not have a separate exchange rate or balance of payments. But when it comes to monetary policy, the IMF will have to consult with the ECB. On exchange rates, the relations with the IMF will be more complicated.

Representation in other fora such as the OECD [Organization for Economic Cooperation and Development], Group of Seven, Group of Ten, and similar councils will also be complicated. When finance ministers and central bank governors meet, presumably there will be only one central bank governor from euroland, the president of the ECB.

Finance ministry representation remains to be determined; the EU has proposed that, at Group of Seven meetings, the EMU be represented not only by its permanent members (France, Germany, and Italy) but also by the rotating president of the ministerial council along with a representative of the European Commission in a subordinate role "to provide assistance."

The general question that is raised by this diffusion of authority has been expressed as follows: Whom does the U.S. secretary of the treasury call on the telephone when a foreign exchange crisis arises? The current unsatisfactory answer to the question seems to be that the treasury secretary would call three people in Europe: the current president of the Council of Ministers, a representative of the European Commission, and the ECB.

A similar question would arise if and when it becomes desirable to coordinate economic policies among groups of countries, as has occurred from time to time among the Group of Seven nations.

It is reasonable to assume that these problems will be ironed out over time. Meanwhile, there is no reason why the United States should not welcome the establishment of the EMU and the creation of the euro.

Courtesy USIA

Y2K bug playing havoc already

By Paul Malamud USIA Staff Writer

Washington — A survey of international Internet sites shows that the Y2K (year 2000) computer problem is beginning to manifest itself in many nations around the world — and is causing concern, and a burst of activity.

A year before they are supposed to begin in earnest, date-related computer problems are already interfering with such disparate activities as harbour traffic direction in Hong Kong and taxi fare collection in Sweden.

The Y2K problem — otherwise known as the Year 2000 Problem — is a glitch in the world's computer programs that could well cause difficulties in daily life as the world approaches the year 2000. Many computers that people throughout the world rely on were not programmed to recognize dates beyond December 31, 1999. When the year 2000 comes along, this problem could cause some computers to be confused and shut down or malfunction.

In some instances, Y2K is already affecting computer operations, due to the need to plan things such as billing cycles and project schedules in advance.

Thirty years ago, the problem would have been less serious. But nowadays, computers fly airplanes, handle air traffic control systems, monitor bank deposits and investments, and make the Internet and modern telephone service possible; they even enable merchants to restock their shelves with fresh goods.

In addition, computers and their cousins (the "embedded chips" in many industrial processes and consumer appliances) run medical equipment in hospitals, control and supervise manufacturing processes, and perform crucial functions in international commerce, such as directing cargo operations, unloading cranes, and racking inventories. Computers now watch over the operations of everything from space satellites to air conditioning systems to water, electric and nuclear power plants.

Given the fact that computers have become so pervasive in modern life, and given that due to the date problem there may be unpredictable malfunctions from now on, cresting on or about January 1, 2000, the lives of ordinary citizens could be affected. Basic infrastructure that people need to get along — bank deposits, payrolls, cash machines, traffic lights, bus schedules, even electric power — might not work right. Some tests of chip function in nuclear power plants to date have been less than reassuring. Some believe the potential legal liability — in all economic sectors — may be stupendous.

The scope of the problem in the United States and the high priority the U.S. government has placed in solving it are well known. A brief survey of international Web sites and databases, however, reveals that the problem is beginning to be recognized in many other nations — and that governments, regional authorities, trade associations, and businesses are often working together — and sometimes are hard pressed— to respond.

As 1998 became 1999, according to an Associated Press report, some taxi meters in Stockholm failed to work properly, and some gas stations throughout that country were unable to accept their customers' credit cards due to date-related "computer glitches."

"The problem has been patched and now we'll get to the root of the problem,'" said Taxi Stockholm managing director Anders Malmqvist. Likewise, the "South China Morning Post" reports that "in the first minutes of the current new year, there has already been a taste of the tidal wave of disaster that might soon hit Hong Kong videos, mobile phones and other appliances"; the Marine Department's "vital information system, which tracks vessels in and out of Hong Kong, crashed on December 31.

"It was restored to normal operation later on the same morning. Significantly, however, the word is that the virtual cyberspace iceberg which the shipping computer systems ran into was an early incarnation of the Y2K bug."

Other Y2K concerns surfacing around the world include: — A report that some officials have begun to worry about the way the millennium bug might affect weaponry and nuclear power stations in the former Soviet countries and the developing world.

— A report that only about three-quarters of the computer systems critical to New Zealand's Defense Forces are year 2000 compliant because the right person could not be found to oversee the effort.

— A dispatch saying the Tokyo stock exchange has asked its listed companies to disclose measures taken to deal with the Y2K bug since such problems could impact their business performance, and affect their value.

The nature of the challenge is leading to increasing activity — either to reprogram computers in advance or, if that is not possible, to develop workable contingency plans in event of major system or infrastructure failures. In some nations, businesses are taking the lead; in others, the government is heavily involved.

The "New Straits Times" of Malaysia reports, "The (Malaysian) National Year 2000 (Y2K) project team hopes to receive comprehensive feedback on the compliancy status of organizations in critical sectors of the economy" shortly. A government official adds that companies must be fully Y2K compliant by June.

The "Jerusalem Post" adds that the Knesset Science and Technology Committee has demanded the appointment of a single minister to be responsible for ensuring the Israeli government is ready for Y2K. There is a wide range of preparedness in many nations.

The "Daily Star" (Lebanese) quotes Salah Rustum, secretary-general of EAN Lebanon, as saying the Lebanese public and private sectors "don't realize the gravity of the problem, which should be considered as a national issue requiring concerted effort at all levels." It quotes systems engineer Imad Naily: "As we enter Jan. 1, 2000, much of the equipment we take for granted in our daily life could fail or start to malfunction, including timer-equipped washing machines, elevators, cars, and fax and Xerox machines."

A "Financial Times" of London article points to uneven results worldwide, asserting that Mexico "is ahead of other Latin American countries because its government has taken the initiative."

Reporting from South Africa, the "National Post" writes: "The millennium bug, the computer glitch expected to emerge on Jan. 1, 2000, means authorities 'almost have to go at the end of the next year into a warlike situation'" according to "Mohamed Madhi, director of South Africa's national Year 2000 Decision Support Center."

"Madhi's concern is directed at systems like water delivery, where computer-controlled dispensing and billing systems are in the hands of under financed and inefficient local governments."

Finally, in a paper titled "A Global View (Partial) of the Year 2000 Crisis," Howard A. Rubin, chair, Department of Computer Science, Hunter College of the City University of New York, lists estimated Y2K total repair costs as a percentage of 1996 GDP (gross domestic product) for a number of nations, including the United States (2.5 percent), Korea (4.7 percent), Italy (2.8 percent), Portugal (4.9 percent), India (1.2 percent), Mexico (5.7 percent), Argentina (2.8 percent) and Russia (7.3 percent).

For those who have not even begun to consider the scope of the problem, it is not necessarily too late to do anything. Contingency planning is the first step.

According to experts, "contingency planning" for Y2K at this point means: 1. If you're in an executive or leadership position, you need to make sure your organization can continue to function if its computerized systems fail as a result of the Y2K problem.

2. You also need to make sure you and your family will not suffer if some community services are temporarily interrupted as a result of Y2K.

Authorities agree that while some governments and large organizations have made progress toward fixing the problem, many have not. Thus, contingency planning for inevitable computer system failures is now becoming a central concept in Y2K remediation. While it is always best to consult an expert personally, the Internet contains a treasure trove of literature introducing this concept and explaining what is at stake.

Economic slump forces shutdown of Taiwan paper

TAIPEI, - Taiwan's slowing economy has taken its toll on a local newspaper, which announced its indefinite suspension on Thursday.

The Independence Morning Post was supposed to celebrate its 11th anniversary on Thursday, but instead it published the surprise news in a front-page announcement.

"Because of the changes in external economic conditions and long-term internal losses, the Independence newspaper group painfully announces indefinite suspension of the 11-year-old Independence Morning Post starting immediately," it said.

The paper said fierce competition in Taiwan's media market and an economic slowdown forced the group to suspend the money-losing newspaper. It has more than 200 employees, including reporters and editors.

Taiwan is suffering one of its worst economic slumps in decades. Analysts expect the island's economic growth to slow to five percent or less for 1998 and 1999 — still strong compared to most recession-hit Asian neighbours but poor for Taiwan.

Taiwan's gross domestic product grew a more characteristic 6.77 percent in 1997.

The Independence newspaper group said it would focus on running the flagship Independence Evening Post and expects to see significant turnaround in the near term.

The Independence Morning Post was founded on January 21, 1988 after Taiwan lifted press restrictions that for almost 40 years limited the number of newspapers and the number of pages each could print.

REUTERS

Flower Power

• Child labour or child work?

By Dilrukshi Handunnetti

As the van took a steep bend on the picturesque road, they came rushing down the stony stairs, with a flowery greeting and tiny faces wreathed in smiles. Welcome to the salubrious climes of Nuwara Eliya and its young business community- the flower kids.

Nothing new about a kid selling flowers there, is it? But no, these flowers are different. Of course they are like any other flowers but when in Nuwara Eliya, the connotation differs, for these flowers are a decisive economic factor in the hilly area.

We are talking of the flower power- that sustains the family economy of over 1,000 families here selling flowers to foreign and local tourists so that they may buy their books, uniforms or even their next meal!.

These children like others do go to school assist their parents in their vegetable plots and paddy fields which are less in number. But Nuwara Eliya has no recognized cottage industries, and to supplement their fluctuating fortunes, these children play a responsible and contributory role.

What is also significant is that instead of crying fowl and lambasting authorities for their economic plight, here are people, young ones at that sustaining a certain life style by supplementing their family income in this manner.

The small vegetable cultivator hasn't got acres, but tiny plots are heavy with cabbages, carrots, beetroots and the like. In addition, they know the immense monetary value of flowers.

Each inch is put to good use, and come school holidays, the youngsters divide time between play and business. After school, while the older children attend to studies/ classes the young ones haunt the roads- scampering up the Ramboda climb's famous hairpin bends, a fervent appeal to buy the flowers and give them a future.

On our ascent, we soon discovered that these kids with their uncanny business sense, have no time to wait. If you are not interested in their flowers, they have no interest in you. And despite their young age, they have no time to dabble in small talk explaining the how and why of selling flowers on precarious bends.

There is no stopping them as they run up and down the moss covered stone steps to catch tourist buses, in a mad frenzy to sell flowers before they fade. Gray skies we hate, G.M. Nissanka (12) explained.

"Then we don't earn much. We just give the flowers and go home. Sometimes we wait for our collection to swell so that we may buy books, take some bread or what mother wants us to purchase on our way home," he said, a pensive smile creasing the expressive young face.

The sense of urgency becomes visual as groups of young boys chase bus after bus, with a girl occasionally joining in - to raise the normal Rs. 200 a day.

In Nissanka's case, his brother and sister also involved in flower collecting- but he only sells.And there emerges the Nuwara Eliya marketing strategies. Only the young are considered attractive to possible purchasers. So once you reach teens, you are out of business and a younger one in the family fills the vacancy.

Most of them are children of cultivators. The youngsters grow flowers wherever they find an inch. And Nissanka cannot imagine going to school sans the flower economy, as the Nuwara Eliya's vegetable economy has hit rock bottom.

"There was a time when our parents were relatively better off. My four sisters are schooling, and if I stop selling flowers , where's the additional money to buy books and tool boxes?" queried little Sujeewa(11), yet another flower boy.

Sujeewa whose father is a labourer has no stable income, and the singular steady flow of cash is ensured by the youngster who cries himself hoarse trying to sell flowers to disinterested parties.

Sanjaya Ratnayaka is just nine years old, but shoulders enormous responsibility of supplementing the family income. With four schooling brothers and two sisters, it was only the nine-year-old who was considered eligible to sell flowers.

The children, young as they are, fill a certain void in the system, and in their family economies. While the theoreticians claim that children so young should not be made 'young businessmen', the crux is that without this very necessary source of income, they would probably starve on certain days. No school, no cash, no future.

And then their plea becomes valid, ' There are many sad and weary in this pleasant land of ours, Won't you buy my pretty flowers"?

Child labour or child work?

At the risk of inciting the wrath of child rights activists, our story today highlights the bare truth of the

extent to which children are compelled to supplement their families' income.

Take the Nuwara Eliya scenario.

What does a family of 10 do when its sole breadwinner, the labourer father, failed to find work today? Do you starve or send your child with a bunch of flowers to scamper up the Ramboda Hills like mountain goats to flash an appealing smile and proffer a bunch of glorious blooms in the face of a warm hearted foreigner?

Tough decision? No. It's just a matter of course. A way of life.

If the child earns Rs. 100/- for a bunch, the family could have an evening meal of bread and curry and worry about tomorrow on a full stomach.

A child supplementing the family income is nothing new to Sri Lanka. Indeed to South Asia and even Southeast Asia.

As more families live below the official poverty line, the phenomenon of children working for a wage becomes a common sight.

But is this labour or work? Are children being misused or do poor parents have a right to get their children to work for a wage? Is it better to starve them or send them to work in order to feed them?

There is serious discussion now in various international lobbies about child labour vs. child work. When does child labour become child work? And vice versa.

While international and local lobbies fight the rights of the child, Nissanka, Sanjaya, Sujeewa, Tharindi and countless others like them have to eat, make uniforms, buy shoes and books. They have to LIVE.

So if their poor father cannot help them out they will help themselves, child labour or child work notwithstanding. That is the stark fact of poverty.

Standing on a hairpin bend at Labookelle was pretty Tharindi Daya, a bowl of capsicum in hand and gotukola laid out on plastic cloth. Soot- eyes marred her pretty face, sad despite the flashing smile couched with the appeal to purchase her goods.

And Tharindi made a better businesswoman (girl). While less innovative boys stuck to selling flowers from Ramboda upwards, this 12 year old girl chose to sell the perennially found gotukola and capsicum which obviously had better demand among local tourists.

"The veggies come from our little plot of cultivated land. Occasionally I sell flowers too. But there are so many doing that, and I am a bit shy to run behind 'suddas' (foreigners) to sell them. I can always sell vegetables better," Tharindi said.

An year six student of the Palagolla Maha Vidyalaya, Tharindi's curfew begins at 5 pm (before the boys) which makes her hurry to sell her goods - and go home to play with her infant brother.

Accountancy firms get clean bill despite flouting Asian standards

Auditors from the Big Five accountancy firms have been giving a clean bill of health to big Asian companies and banks despite their flouting of international accounting standards, according to a UN study to be published next month.

The study calls on international development agencies to act as "catalysts" for reform by linking their loans to a requirement that countries follow and enforce international standards of auditing and accounting. "All that is lacking is a signal from the World Bank and the IMF," the report says.

It concludes that while corporations and banks are at the root of the financial crisis in Asia, fund managers, analysts, and credit rating agencies "need to be equally blamed for allowing huge sums of money to be poured into the potentially financially weak enterprises of the region".

The report reinforces criticism of the Big Five by the World Bank. Last week it publicly called on the firms to withhold their prestigious global brand names from accounts in case they inspired false investor confidence in financial statements which might hide large undisclosed liabilities.

"Many of the East Asian corporations and banks that received a clean bill of health from their auditors proved to be 'not a going concern' within a few months from the completion of the audit," says the report, to be published by the United Nations Conference on Trade and Development.

"We all recognise the issue," said Mary Keegan of PwC, the world's largest auditor: "Everybody is taking urgent steps, not least to emphasise in accounts which standards are being used - international standards themselves or national standards which may be imperfectly based on them."

The report commissioned by ISAR, the group of intergovernmental experts on accounting, found that most of the 73 big companies and banks analysed in South Korea, Thailand, Indonesia, Malaysia, the Philippines and Japan were audited by the Big Five and "could have adhered" to international standards.

Bank turns to overseas consultant

Japan's central bank, besieged by criticism at home, has broken with tradition and appointed a foreign management consultant to help it improve efficiency. The decision to bring in McKinsey of the US to shake up the Bank of Japan's bureaucracy overturns the institution's reputation as one of the world's least accessible central banks.

Analysts think the timing the announcement was deliberate. The Bank is trying to bully the private-sector banks it supervises to improve their credibility with foreign investors by restructuring. But the Bank is also scrambling to defend its own independence, against a rising tide of criticism. The Japanese media has recently alleged that the Bank has granted excessive fringe benefits to its employees.

The Japanese tax office has also probed the Bank for the first time in three decades. And though the Bank vehemently denies any wrongdoing, some officials suspect that these attacks reflect a growing political tussle over economic policy.

Some politicians are pressing the Bank to increase its purchases of Japanese government bonds. The Ministry of Finance has asked the Bank to provide large loans to fund banking reform.

However, the Bank has refused both requests, on the grounds that agreeing to them would undermine its credibility as an independent institution.

The Ministry of Finance is also concerned that a big increase in the issuance of Japanese government bonds - required to fund a stimulus package - could force up long-term interest rates. This, in turn, could hold back economic growth.

The McKinsey report is unlikely to deal with controversial areas such as monetary policy. Instead, Takeshi Nakashima, chief manager of the Bank's budget and management office, said that the consultants would "focus mainly on the operations department, currency department, administration department and information systems department".

Celltel predicts rapid growth

Sri Lanka's cellular communications industry is poised for rapid growth and exciting new developments this year, the country's leading cellular operator said last week.

Celltel Lanka Limited, the pioneer cellular operator in Sri Lanka and the market leader, told the company's dealers that new tariff structures introduced in December would spur growth of the cellular market, enabling the company to face the anticipated challenges to the industry.

Addressing a gala dealer convention cum awards presentation, Celltel's Chief Executive Officer Serge Guevel said his company had played a catalytic role in opening up the market to the masses by introducing revolutionary tariffs.

While this would result in the subscriber base growing substantially in the months ahead, Celltel would continue to enhance coverage, value-added services and customer care and build on its long-term relationships with dealers islandwide to ensure the company remains market leader in the new millennium, Mr Guevel said.

Celltel's Commercial Director Steve Torode pointed out that worldwide sales of cellular phones had overtaken personal computers, and by the year 2000, the number of cellular phones in use is projected to top 1 billion.

"Sri Lanka is one of the older cellular markets and we anticipate that the industry will really forge ahead. It is an exciting time, and we are 100 per cent committed to stay ahead of the competition and lead the growth of the market," Mr Torode said.

The highlight of the convention was the presentation of six awards to the company's top dealers for their contribution to the growth of Celltel's subscriber base in 1998.

SLIC opens business centre in FTZ

Sri Lanka Insurance Corporation (SLIC) has set up a Business Development Centre to facilitate the industries situated at Katunayake Free Trade Zone.

This Unit was opened by Minister of Plan Implementation and Parliamentary Affairs, Jeyaraj Fernandopulle, in December last year. In his address he said that Insurance Corporation which is rendering a great service to develop the economy of Sri Lanka has initiated a further step by coming closer to its clients, specially, in the Free Trade Zone to provide a superior service.

This step would definitely assist the industries located in the Free Trade Zone and also it would enable to save foreign exchange by obtaining the insurance requirements from Sri Lanka itself.

Prof. J.W. Wickremasinghe, Chairman SLIC, said that the corporation has been able to maintain its leadership mainly due to the superior service rendered to its clients .

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