IMF concludes Article IV Consultation with Sri Lanka

Despite the unfavorable regional impact of the Asian crisis, real economic growth rebounded to 6.4 percent in 1997, from 3.8 percent in 1996. There was a strong recovery in the output of traditional agricultural products (tea and paddy products); higher output and exports of manufacturing products (garments and textiles); and continued good performance in the services sector (electricity, telecommunications, and tourism).

Preliminary figures suggest that the real economy grew by 5.8 percent in the first quarter of 1998, reflecting broad based growth across most sectors of the economy, especially services and manufacturing. Consumer price inflation declined from 17 percent at end-1996 to under 11 percent at end-1997.

The external current account deficit narrowed to 3 percent of GDP in 1997, reflecting strong export growth of textiles, garments, and tea; high growth of port services; and higher transfers arising from compensation payments to victims of the Gulf War. However, since mid-1997, exports of gems, rubber, and coconuts, which represent about 14 percent of total exports, have been affected by a reduction in demand and increased competition from crisis countries in the region.

Capital inflows were augmented by privatization receipts and the overall balance of payments turned around from a deficit in 1996 to a surplus, improving the international reserves position. Sri Lanka has managed to avoid the worst of the Asian crisis as many of the conditions that existed in the crisis countries did not hold in Sri Lanka . The capital account is not fully open; there had been no large inflows of "hot money" in the previous years; portfolio and direct foreign investment flows account for a low proportion of capital flows; the short-term debt stock is small, is mainly trade-related and the exchange rate has been allowed to depreciate gradually.

The overall fiscal deficit narrowed further in 1997, to 8 percent of GDP, in line with the budget target. However, this was achieved only at the expense of lower-than-budgeted development expenditure that more than offset a revenue shortfall, principally from indirect taxes. As a result, the current account deficit was only reduced from 4 percent of GDP in 1996 to 2 l/4 percent of GDP in 1997, compared to the budget target of 11/2 percent of GDP.

The CBSL relaxed its monetary policy stance in the first quarter of 1997 with the aim of supporting economic recovery, following the drought of the previous year. Reserve requirements were lowered to increase liquidity and lower interest rates, and thereby spur the demand for credit. In the event, credit expansion remained slower than expected in the first half of the year as both lenders and borrowers remained cautious.

In the second half of 1997, a surge in capital inflows from privatization receipts, foreign disbursements, and private transfers, led to a new wave of sterilization operations by the CBSL. From the end of 1997 onward, monetary policy was tightened somewhat through increases in the CBSL's repurchase rate and in the spread vis-a-vis the rediscount rate, in an effort to ease exchange rate pressures from events in neighbouring Asian countries.

While the CBSL has continued to manage the exchange rate in a flexible manner, the sharp depreciation of other Asian currencies during 1997, including the Yen, together with higher domestic inflation, led to a real effective appreciation of the rupee during the year. However, about half of the appreciation was reversed in the first half of 1998, following an increase in the pace of rupee depreciation.

On the structural side, the main recent achievements include the introduction of the GST; several successful divestitures; tighter controls on government salaries and employment; and steps to improve the control of the core civil service and the efficiency of non-core institutions. There has been a strengthening of auditing standards as well as reporting and prudential requirements of financial institutions.

Executive Directors commended the authorities for maintaining macroeconomic stability in 1997, despite the continued civil strife and a difficult regional environment, and for making steady progress in addressing structural weaknesses. Directors noted that the principal challenge now facing the authorities is to consolidate recent macroeconomic gains and elaborate a comprehensive structural adjustment reform program.

There were still considerable downside risks stemming from the regional crisis and the civil conflict, but the authorities' efforts to work with parliament to pass needed legislation was commendable. In this regard, Directors underscored the critical importance of the authorities' tightening fiscal and monetary policies and accelerating key structural reforms so as to build the foundations for strong private-sector-led growth.

Directors stressed that action in these areas should pave the way for discussion on an ESAF-supported program. In this connection, it was important to elaborate feasible and credible reforms in the areas of the financial sector, the civil service, and pensions.

Directors emphasized that continuing progress in fiscal consolidation was a key ingredient in maintaining macroeconomic stability. Thus, Directors endorsed the targeted reduction in the overall fiscal deficit for 1998. They welcomed the measures recently announced by the authorities to raise excise duties on tobacco in the framework of the government's mid-year budget review.

However, in view of the uncertainty of the Goods and Services Tax (GST) revenue collection and the potential for expenditure overruns, Directors urged the authorities to take further timely corrective actions. In this regard, they suggested that the authorities broaden the tax base, especially by reducing exemptions to the GST and improving tax collections, to contribute to improving the prospects for achieving their budget target.

They indicated that emphasis on revenue-raising measures should reduce reliance on sharp cuts in essential social spending and needed infrastructure to meet the budget target.

Directors strongly recommended building further on the 1998 fiscal outturn and deepening fiscal consolidation in 1999 in order to release resources necessary for the expansion of the private sector. Directors saw scope for further rationalization of the tax structure and for decisive and comprehensive restructuring of the public sector that would allow the achievement of a current fiscal surplus and a reduction in the overall central government deficit.

Thus, they welcomed the authorities' intention to eliminate unnecessary government functions, and called for the elimination of many tax exemptions, as well as reform of the core civil service and pension systems to control wage and pension outlays.

Drawing lessons from the Asian crisis, Directors noted that financial sector weaknesses, including the relationship between the state and the banking sector, needed to be promptly identified and corrected. Thus, they emphasized the need to move quickly and decisively to address longstanding and fundamental problems that have weakened the banking sector.

While Directors welcomed the performance contracts in the form of memoranda of understanding aimed at improving the commercial viability of state banks, they urged the authorities to separate the commercial and noncommercial activities of the two state banks and to privatize them as soon as possible. Directors also saw equal urgency in further raising the standard of prudential regulations for the financial system as a whole, and making supervision much more effective.

While recognizing the progress that had already been made, Directors urged the authorities to continue on the path of trade liberalization and to establish a more transparent and unified tariff regime by moving directly to a two-band tariff structure and by further reducing the maximum tariff rate. With regard to the capital account, Directors pointed to the benefits of further liberalization of foreign direct investment inflows.

TRC regulates phone equipment

The Telecommunication Regulatory Commission of Sri Lanka (TRCL) has begun regulating the importation of terminal equipment and use of fax machines with cordless telephone attachments.

A press release issued by TRCL said that a complete list of types of terminal equipment approved is now available for inspection by the public at its office at Narahenpita. TRCL also advises the public to familiarise themselves with the approved list before buying such equipment.

The release says that these measures were taken because there are many instances where customs had to confiscate cordless phones brought to the country which are not of the approved type. The instruments outside the permitted ranges can cause interference to telecom services and even endanger vital services.

The TRCL approved type of equipment are for base unit 1606.5-1800 khz &46-49Mhz. For the hand unit it is 49-50MHZ and the range(distance) is less than 500 metres. The TRCL urges the public to purchase cordless phones from the authorised dealers who in return will issue a licence for the cordless telephone. The use of cordless telephones without a proper licence from the commission is an offence punishable under the Sri Lanka Telecommunication Act, says TRCL.

Stock market shakes off Wayamba poll

Braces for the next round

By Feizal Samath

Last week's unsavoury poll in the northwestern province and expectations of further elections that could trigger another bout of violence in the next few months is set to dampen sentiment at Colombo's stockmarkets this year, analysts and economists said.

"External factors like the Brazilian crisis and fears of a round of devaluation by China had already affected stockmarkets in the region, including ours. Now the sad state of affairs in the conduct of the northwestern provincial poll and another possible outbreak of violence will exacerbate the crisis," one analyst, who declined to be named, said.

The People's Alliance swept Monday's poll, winning 30 seats in the 52-member council but the election was marred by attacks on polling stations, intimidation to polling officials and voters, stuffing and tampering of ballot boxes by armed supporters of political parties and illegal removal of ballot boxes. Much of the violence was blamed on the PA by election monitors, and some of it on the UNP.

While the United National Party and election monitors, the People's Action for Free and Fair Elections (PAFFREL) and the Centre for Monitoring Election Violence (CMEV), said the poll was not fair and free and called for a fresh one, the PA stoutly rejected charges that it tampered with the election and accused both monitors of biased reporting.

As the allegations flowed from one side to the other, the one thing that was clear was the level of violence which saw many analysts and economists recoil in horror.

"Everyone was taken aback by the scale and intensity of the violence, irrespective as to who was involved," said Rajiv Casie Chitty, head of research at CT Smith Stockbrokers.

The stockmarkets fell on Tuesday and Wednesday but Casie Chitty said there may have been other reasons too for the fall. "It could have been a combination of political instability here plus worries of a devaluation by Chinese authorities. Already foreigners are pulling out from stocks in most markets," he said.

Casie Chitty said that in view of the violence, most people were raising the question as to the legitimacy of the PA victory. "I hear that the United States embassy has also expressed some concerns. These signals are not favourable when one is seeking foreign investment," he said.

A US embassy spokesman said it was concerned by reports that the election was not fair and free and of allegations of poll tampering. "We know the two election monitors have a good reputation of monitoring elections in the past and we are awaiting their published report," he said.

Asian diplomats also said they were disappointed at the violence that occurred at the northwest poll. "I was disappointed at the intensity of the violence. Of course violence has been part and parcel of Sri Lankan elections in the past but the intensity was much greater this time. This is a disturbing trend, "one Asian diplomat, who has spent more than 20 years during various postings in Sri Lanka, said.

After a bad month in December, the Colombo stockmarket has been flat since January this year and, insofar as Colombo is concerned a further round of elections this year may throw the markets into a spin.

"Well, another round of elections will affect sentiment," noted Nanda Nair, research head at John Keells Stockbrokers.

But he added that 1999 had already been considered a difficult year with economic growth slowing down due to a global downturn, exports falling, a continuing problem in Russia which would affect tea prices and other factors. "We were expecting a bad year this year."

He felt the northwest poll would not have any major negative impact on the stockmarket. "But if we take a situation where the markets have had some reaction from the poll, and that on top of external factors that are already impacting on the market, then there is a problem," he said.

Other analysts said a PA win will ensure continuity of policies but if the UNP won there could have been a period of uncertainty. "If the UNP won, they would have brought pressure on the government by, as tradition in the past has shown, working through trade unions and the working class while the PA may have had to rethink policies and offer expensive handouts to the people to garner support," one analyst said.

Government sources say that President Chandrika Kumaratunga is examining all options in the conduct of polls to other provincial councils. While the decision to hold elections in other five provinces on one day or stagger it at intervals lies solely with the Elections Commissioner Dayananda Dissanayake, government authorities are likely to advise the police to ask for staggered elections due to manpower shortages, which was very evident in the northwest.

Stockmarket analysts said that there was a possibility of fresh vote-catching programmes being implemented ahead of the polls, which could then put budget targets, particularly the budget deficit out of gear.

Also the government calling an early presidential poll, not due until end 2000, is also possible but some analysts said that it was unlikely given the practice in the past when no poll has been called ahead of the scheduled time.

A government economist said he felt the PA win would be a morale booster for the government and help in investor confidence. "The government has shown it has the capability to win an election, and as far as foreign investors are concerned, they are looking for profits, the right policies and a safe place to invest. I don't think many of them are worried about allegations of human right abuses," he said.

MLL to issue Rs. 220 million debentures

By Vasana Wickremasena

The World Bank's commercial credit lending arm, International Finance Corporation (IFC) and National Development Bank (NDB) are jointly guaranteeing a Rs. 220 million debenture issue of Mercantile Leasing Limited (MLL).A senior MLL official said the agreement between the parties, which is part of its major restructuring program which has already led to a doubling of business volume, was signed last Monday." The guaranteed redeemable debentures in Rs. 100 denomination, will be first issued to existing resident shareholders," the official said.

The issue will be open to pubic after that, he said. The debentures with a coupon of 14 per annum payable half yearly will be redeemable in full at the end of five years. The issue to be listed on the Colombo Stock Exchange, is underwritten by the Employees Trust Fund Board. The Board will be paid Rs. 1.65 million as an underwriting commission together with a devolvement fee up to a maximum of Rs. 550,000."The issue will expand the capital base of the company and lessen the dependence on bank borrowings, while expanding resources for projected growth in leasing portfolio," the official said."Another objective is to lessen the risk of interest rate votality and its consequential impact on company earnings by securing fixed interest term finance," he said.

" MLL is poised to become a strong player in Sri Lanka's leasing industry," an IFC official said.Meanwhile, the IFC also extended a loan of US $ 1.8 million (about Rs.117 million) to the MLL. Accordingly, MLL will issue convertible loan stock to IFC. The loan will carry an interest at LIBOR plus 2.7 percent payable half yearly and convertible into ordinary shares at Rs.35 per share. The conversion is optional to IFC which has to take a decision within two years. " The loan facility will directly assist over 100 small and medium enterprises," observes Rashad Kaldany, Director of IFC's South and South East Asia Department.

MLL will also issue convertible debentures to the NDB to raise Rs. 105 million. The debentures will carry an interest of 14 percent payable half yearly and convertible into ordinary shares at Rs.35 per share. The conversion will be optional to NDB, which has to take a decision on it within two years. MLL will raise approximately Rs.450 million through the restructuring programs. MLL was incorporated in 1982 and became Mercantile Lloyd Leasing CompanyLtd. after in 1983, when Lloyds Banks International Ltd. bought 35% stake at the first public offer. Later, the bank withdrew in 1988 keeping with its change in global strategy divesting..

Veyangoda suspended for second time

The Colombo Stock Exchange (CSE) last Tuesday suspended trading of Veyangoda Textiles Mills Ltd (Veytex) shares following the company's request. This was the second time within a few weeks the Veyangoda shares were suspended with shares trading at Rs. 1.00 per share at the close of trading on last Monday.The request was made to the CSE as new Veytex restructuring program is known only to several parties.

The company has said that therefore they feel that it is appropriate to suspend the trading of shares until the outcome of these discussions are known and it can make a disclosure to this effect. Veytex management has submitted its proposals for a major restructuring programme to the Treasury after the Stock Exchange last Tuesday suspended trading.

" Manufacturing at Veytex stalled on December 1 and more than 2000 employees are now without work," a senior Veytex official said. However, the management is denying the situation.

They informed the CSE on December 2, 1998 that they had not taken a decision to close the mill though the operations were gradually coming to a standstill due to lack of raw materials.They also informed the CSE that they had brought to the notice of the relevent authorities the situation and were awaiting assistance to continue the operations.

Meanwhile, the management reportedly accused the Bankers' Association and the Attorney General for failing to implement a draft format of the tripartite agreement regarding the settlement of Veytex debts.

Deutsche Bank's custody head visits Sri Lanka

Richard Ernesti, responsible for Deutsche Bank's Custody Services in Asia Pacific will be visiting Sri Lanka next week to review the bank's operations in Colombo branch.

He will be meeting some of the bank's local clients, market participants and regulators during his stay in Sri Lanka.

Mr. Ernesti is widely respected in the industry for his expertise and knowledge and is frequently consulted by international bodies such as ISSA (international Society for Securities Administration) and SWIFT (Society for Worldwide Interbank Financial Telecommunication) to address issues and market developments on their behalf.

Deutsche Bank AG Colombo Branch offers both commercial and investment banking products and services in Sri Lanka. Advanced telecommunications and technology enable the Bank to offer a complete array of services to its clients. Custody services are a core product of the Deutsche Bank worldwide.

The Colombo branch custody services is actively involved in providing a wide range of trustee, custodian and fund administration services to its local and foreign clients.

Indian tech firms to list on New York stock exchange

BOMBAY — At least two Indian technology firms are likely to list on the New York Stock Exchange or Nasdaq in 1999, stock market officials and bankers said on Wednesday.

Dewang Mehta, the president of the National Association of Software and Service Companies, which represents India's software industry, said he expects five IT firms to list in the United States in 1999.

Several Indian tech firms, encouraged by booming revenue growth from software and services exports, have been planning US listings to tap the tremendous appetite for technology stocks there and raise funds for overseas acquisitions.

"The first two firms could probably list in the first quarter of this year," said Alfred Elbrick, managing director of investment banking for BT Alex Brown International.

Analysts expect Infosys Technologies to list within the next two months, closely followed by HCL Technologies, a part of the HCL group.

James Shapior, NYSE vice president for Asia Pacific, said a number of Indian tech firms were ready for listing, but the number that actually did so in 1999 would depend on US market sentiment.

"A couple of Indian companies could get a lot of attention and that would draw several others to follow suit. It would be a very positive thing for India and for US investors," Shapiro said.

Nasdaq is in close competition with NYSE to attract Indian tech companies, and said it too expects many such companies will eventually be listed on US markets.

"There is no reason why India cannot follow the example of Israel," said Patrick Sutch, the market's Asia Pacific director. Sutch said that Israel had nearly 80 technology stocks listed in the United States, and most of them were doing very well. Reuters

Japan to take US to WTO

Washington -Japan is preparing to take the US to the World Trade Organisation over a lawsuit against three Japanese steel importers. Tokyo's expected action follows rising tensions over steel trade and what Japan sees as US moves to impose sanctions on trading partners.

The dispute involves a suit filed by the US steel company Wheeling Pittsburg against Itochu, Marubeni and Mitsui, three of Japan's top trading companies, under the 1916 US anti-dumping act. The suit alleges that the three companies caused injury to Wheeling Pittsburgh by dumping hot-rolled steel from Japan and Russia in the US market.

Japanese trade officials contend that the suit is in violation of WTO rules, since they say the 1916 act breaches the principle of national treatment and does not conform to WTO rules on anti-dumping. The 1916 act is also the target of a separate dispute between the European Community and the US involving steel imports.

Also, Japanese steelmakers face anti-dumping charges filed with the US International Trade Commission by US producers.

US officials have made it clear they would resort to whatever measures available, including domestic trade laws that allow the US to target and monitor imports from specific sectors and countries, unless steel imports from Japan fall.

Bethlehem Steel yesterday blamed "cheap" Japanese imports for its deteriorating performance when it announced a 57 per cent fall in net profits for 1998.

In Japan, Shinya Okuda, director of the trade ministry's iron and steel division, added his voice to Japanese protests over Washington's action on steel imports.

The near-300 per cent increase in imports last year was the result of market forces and reflected a sharp rise in demand and insufficient capacity of US mills to fill the orders, he said. Japanese steel exports to the US fell 47 per cent in December, the first monthly decline for over a year.

The figures had been keenly anticipated since Charlene Barshefsky, US trade representative, warned that the US administration would initiate trade action against Japan unless the December numbers showed a "substantial" decline.

William Daley, US Commerce Secretary, said the lower imports from Japan were "good news". But he did not rule out future action if steel imports surged again. One month's numbers did not end a crisis, he added.

He noted that the surge in imports of hot-rolled steel from Japan for 1998 still represented a 385 per cent rise over 1997.

The December figures have done little to mollify protectionist pressures in Congress. Several members of the Senate Finance Committee, which has jurisdiction over trade, are threatening to initiate new trade sanctions, something the committee has never done, but has the right to do.

Allan Greenspan says:

Internet mania not all hype in huge market

By Caren Bohan

WASHINGTON (Reuters) - Federal Reserve Chairman Alan Greenspan said "hype" was helping to feed the frenzy over Internet stocks, but some of the run-up made sense because the fast-growing sector shows enormous promise.

Indeed, Greenspan said some loftily priced web companies may well succeed.

"Is there some hype in this? Of course, there's some hype," Greenspan told the Senate Budget Committee in his first detailed comments on the soaring Internet segment.

But he added that the hype would never have caught hold if there were not some sound reasons for buying into the sector.

"The size of that potential market is so huge that you have these pie-in-the-sky type of potentials for a lot of different vehicles," Greenspan said. "Undoubtedly, some of these small companies which have stock prices going through the roof will succeed and they very well may justify even higher prices. The vast majority are almost sure to fail."

The Fed chairman's remarks, made during a hearing to discuss Social Security, encouraged a rally on Wall Street, where traders already were celebrating yet another web merger and strong earnings from America Online Inc. (NYSE:AOL - news)

Investors were pleased the Fed chief refrained from offering a stern stock-market warning akin to his 1996 comment about ''irrational exuberance,'' which sent stocks reeling.

"He is looking at the reality of the situation. Even though valuations are looking a little stretched, industries that are new generally carry some excessive multiples," said Barry Hyman, strategist at Ehrenkrantz, King and Nussbaum.

Attempting to head off a spillover onto the U.S. economy from economic crises in Asia and other countries, the Fed cut short-term interest rates three times last year.

The U.S. economy's sizzling growth since then has weakened the case for further rate cuts, although some analysts have said fear of blowing air into the stock market might lead the Fed to err on the side of keeping interest rates tighter.

Greenspan Thursday gave few hints about the direction of rates, which most analysts believe will stay steady for a while. He said the U.S. economy's resilience in the face of international problems was remarkable, but the picture could change if the global economy did not pick up.

Pierre Ellis of Primark Decision Economics in New York said Greenspan's remarks about Internet stocks showed a reluctance to interfere with the market despite some wariness at the Fed.

"The stock market is about risk-taking," Ellis said. "He can't say a certain sector is overblown."

In the latest example of the cyberspace craze, Internet media company Yahoo! Inc.'s purchase of web company GeoCities sent Geocities' stock rocketing 50 percent.

America Online Inc.'s stock was up 6 percent on strong earnings announcements.

The American Stock Exchange index of Internet stocks climbed 5 percent to another record high. Over the past year, the index has nearly tripled in value.

Many of the darlings of the sector, such as online book seller Amazon have yet to turn a profit and may not for a couple of years. Yet its stock has risen astronomically. Amazon's market capitalization is almost $20 billion — nearly eight times that of Barnes & Noble, a giant of traditional book-seller with four times the revenue.

Players bidding up Amazon envision not only a growing book business but also the prospect that the company will become a ''Walmart'' of the Internet — a full service retailer that offers aggressive prices because of economies of scale.

At the Senate hearing, Greenspan said he saw validity to the comparisons between the stock market and a lottery, especially when it comes to risky areas such as the Internet: the market's bettors are putting down cash against steep odds in the hopes of reaping huge riches. "What lottery managers have known for centuries is that you could get somebody to pay for a one in a million shot," he said.

But he emphasized that such gamblers provided benefits to the economy. "Mainly, that they do endeavour to ferret out better opportunities and put capital into various different types of endeavours prior to earnings actually materializing."

He concluded, "With all of this hype and craziness — that is something that at the end of the day is more plus than minus."

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