• Resigned but raring to go
• Market turns schizophrenic
• IMF unhappy with PCs
• Government debt grows in the hand of retailers
• An uneventful year ends
• The growing need for a public service efficiency charter
• Code for fair advertising
• Should auditors be regulated?
• Core package from Mercator
• Goldstein Award for Grey
• Cathay Pacific awards ceremony
• Celltel awards contract to Alcatel
• Gestetner world accounts exhibition
• Tourism on the up
• Century of change in U.S. financial industry
• No time for breath in Euro banking sector
• SLT gets rating for Rs 1.5b debt

Resigned but raring to go

By Feizal Samath

President Chandrika Kumaratunga's victory at presidential polls last week may not entirely please Sri Lanka's Colombo-based business community but there are lingering hopes that she would now take steps to revive the current economic slump.

What is lacking in the government is state investment in infrastructure, quick policy implementation and business confidence and many analysts hope the president, who scored a narrow victory over her closest rival Ranil Wickremasinghe, would turn her attention to these matters.

Some say her speedy and unexpected resumption of the second term of the presidency with a quick swearing-in ceremony at Temple Trees, as the final election results were being announced, augurs well for a president who is known to be late for most functions.

"Some may argue that she did that because she was going abroad later that night for specialised treatment abroad. But I think people were surprised by the speed by which the president moved in being sworn-in and also re-appointing her entire cabinet," said one analyst, noting that things may improve if this was the way the president would conduct other official matters too.

By and large, the business community, which turned pro-UNP before and during the election campaign, is resigned to another five or six years of Kumaratunga rule unless something drastic happens at forthcoming parliamentary polls or if successful constitutional reforms mean she steps down and functions as a prime minister with less powers.

The margin of victory - 51.1 percent to Kumaratunga against Wickremasinghe's 42.7 percent - last week was not overwhelming like the president's resounding win in 1994 where she secured 62 percent of the poll. Yet analysts say UNP candidate Wickremasinghe had failed to make major inroads into the voter base to clinch victory, maybe because he did not cater to rural aspirations.

The UNP, other candidates and independent election monitoring agencies like PAFFREL and CMEV claimed the election was flawed by widespread irregularities including intimidation of voters and stuffing of ballot boxes. But before the poll Wickremasinghe, while acknowledging there would be election irregularities, said it was unlikely to influence the outcome of the entire poll.

Most stock market analysts, going on the basis of what their clients say and the general mood in the business community, felt Wickremasinghe would win. "Investors see the UNP as being more right-wing and thus more business friendly. They also associate it with the profitable bull runs (of the Colombo bourse) in the first half of 1990s," said stockbroker Jardine Fleming in a recent report, reflecting a widely held view in Colombo.

Other analysts said Wickremasinghe was pro-business and given the UNP success during their 17-year rule from 1977 to 1994 in charting the economy and initiating ground breaking economic reforms, believe he had the right solutions to take the country forward and out of the current economic slowdown.

But what the business community failed to understand was that the ruling People's Alliance's (PA) strength lay in the rural sector and that vote, plus some sympathy for a president wounded by Tamil rebels, probably swung the verdict in her favour.

Transparency, absent during UNP times and the privatisation of giant state enterprises which the former UNP government didn't touch for fear of losing support have also swung in favour of the government. So has its support for small businesses, key to the rural economy.

"We have implemented a lot of policies to support small businesses in the country," says Finance Secretary Dr. P.B. Jayasundera.

He told the Sunday Times Business that the government would take further steps to kick-start the economy and improve on its current performance.

"We are also glad that there is calm after the election and people would get on with their business. This is another good signal for the world community," he noted. Dr. Jayasundera said the economy had been picking up particularly in exports since August and September and tea earnings were also now doing well.

The absence of widespread post-election violence was also a good sign for hotels, which had reported cancellations as fears of election violence grew. Colombo's five-star hotels were preparing huge millennium bashes when elections were unexpectedly announced, causing uncertainty amongst many hoteliers and losses to some extent. Whether the hotels could recover this lost business for millennium night parties is yet to be seen.

Ken Balendra, welcomed Kumaratunga's victory and said he hoped the business community would be able to continue its bipartisan search for a solution to the country's nagging ethnic conflict.

Most business analysts believe the government must try to restore business confidence, which is lacking. "There must be a bigger focus on business and the economy like for instance financial resources being channelled to the economy instead of only the war," said one stockbroker.

"There is a need for the government to invest particularly in infrastructure like roads, transportation and airport development, not to the extent of say the Mahaweli but some investment at least. These are sectors where the return on investment is many, many years away and which local businesses can't afford unless they are big Indian conglomerates like the Birla's, Bajaj's or the Ambani's who can afford such large investment and wait years for a return," he noted.

Analysts also believe that there should be a cabinet that would reflect a more investor-friendly composition - pointing to the eternal battles on the import/export issue between Trade Minister Kingsley Wickremaratne and Agriculture Minister D.M. Jayaratne, as an example of conflicting economic policies.

There is also a view that Kumaratunga should hand over the finance portfolio to a senior minister to ensure the decision-making process is smooth and speedier.

"If she could hand over key sectors like defence, the economy and foreign affairs to separate ministers, whom she has confidence in and then monitor developments from the top, that might be the best thing that would happen to this country," one analyst noted.

"This would give her enough time to step in when there are gaps in implementation or policy, " he added.

But analysts are worried that Kumaratunga's speech, at the swearing-in ceremony on Wednesday, may have been perceived as hardline and pro-war. "She appeared to get tough with the LTTE and what many interpreted, as a strident call to continue the war while implementing a peace solution. If fighting continues and there are huge battles it would be bad for business," one analyst noted.

The business community's response to President Kumaratunga's win is unlikely to been seen for a while since parliamentary polls are also expected anytime now, though they can be held by around August 2000.

But there is also the possibility that the private sector may go ahead with their investment and policy-making plans anticipating a victory for the PA at parliamentary polls too, or in the event the government announces new-investor friendly measures to raise sentiment. What is also clear and encouraging from the policies of recent governments is that when it comes to the economy, there is a kind of national policy - continuation of the free market system with a little tinkering here and there.

"I wish both main political parties would also devise a similar national policy on the ethnic conflict, then half our problems would be solved.

"Maybe the business community's effort in this direction could help," said a private businessman, with rural links.

Market turns schizophrenic

By Dinali Goonewardene

Bomb blasts, election fever and the president's brush with death rocked the Colombo bourse in a traumatic week's trading. A seemingly speedy recovery by the injured president saw a swing in sentiment in her favour. Panic stricken retailers weighed down the index ten points at the start of the weeks trading. But clutching at the last straws of a UNP victory, investors caused the All Share Price Index to rise 0.47 per cent to close at 593.57 on election day.

"The market moved up on election day on the expectation of a UNP win," Director Trading, Asia Securities, Tushan Wickramasinghe said.

In a knee jerk reaction to president Kumaratunga's election victory the Colombo bourse tumbled 16 points at the start of trading on Thursday. It stabilised later in the day and the All Share Price Index closed 7 points lower at 589.4."People don't want to sell expecting a stronger more stable government now. UNP MP's not getting nominations might cross over," Tushan Wickramasinghe said. He said the PA had been restricted to a one seat majority in parliament and this might change.

Investor expectations have not materialised said Head of Research, MMBL Phillip Securities, Nauzab Fareed. "There will be no change in infrastructure projects, foreign investments, privatisation and state investments."he said. "Investors will wait to see tangible action on the economic front, political front and war front," Head of Research, NDBS Stock Brokers, Chanaka Wickramasuriya said. The president did not mince her words at the recent swearing in ceremony. "Let those who condone the paths of violence pursued by the cowards of the LTTE be warned; the days of terror in this land are numbered and the number is small," she said. "We are more likely to have decisive policy as it is her final term in election," Strategist, Jardine Fleming HNB Securities, Amal Sanderatne said.

IMF unhappy with PCs

The International Monetary Fund has said that Provincial Councils lack adequate control, accountability and transparency of their fiscal operations.

The devolution system which saw Provincial Councils (PC's) being introduced, has been marked by ambiguities in responsibilities between the central government and PC's, the absence on the part of PC's of adequate control, accountability and transparency of their fiscal operations; and the failure of the PC's to deliver quality services, the Fund said. The government unveiled new devolution proposals in 1996, which address some of these weaknesses but they have yet to be adopted by parliament.

"However, the proposals do not specify detailed intergovernmental financial relations. Therefore, it remains uncertain whether the proposals will correct long standing problems of weak expenditure management and control, and provide the right incentives for proper financial management," the Fund said in their annual country report.

Provincial councils were given jurisdiction over public order and the provision of certain services like housing, roads, education, health and vested with some specific revenue collection powers.

The major revenue sources of PC's comprise turnover tax on wholesale and retail businesses, licence fees on motor vehicle registration, stamp duties on property transactions and various fees and charges.

The Western PC accounts for two thirds of total PC revenues. In 1998 the Rs. 6 bn (0.5 percent of GDP) in revenues collected by PC's covered less than a quarter of their total expenditures.

The bulk of PC's expenditure is spent on personal emoluments in the provision of social services, principally education (68 percent) and health (19 percent). The Western PC accounts for a quarter of total PCs current expenditure. Capital expenditure by PC's are small and mostly related to line ministry projects funded through medium term investment programmes.

In 1998 total expenditure amounted to Rs. 26.7 bn (2.5 percent of GDP) of which Rs. 25.2 bn (94 percent) was for current expenditure.

The bulk of the combined overall deficit of PC's (95 percent) is financed by block grants from the central government. The remainder is financed through matching criteria based grants.

Government debt grows in the hand of retailers

Government securities which were one time unheard of among retail investors has seen a marked growth in ownership over the last ten years.

Debt market analysts say treasury bill ownership was broad based since the Central Bank appointed primary dealers to trade treasury bills in 1992.

Despite treasury bills paying a higher interest rate than commercial bank fixed deposits, the secondary market has remained underdeveloped.

On the other hand, according to Central Bank statistics, the margin between treasury bills and bank fixed deposits has dropped from three percent to 1.5 percent since 1997. Despite lower margins the gilt-edge nature and liquidity of treasury bills has attracted a growth in private sector holdings.

Debt market analysts say the secondary market has not developed today due to the lack of tradable securities (other than treasury bills) available in the market.

If the debt market is to be developed, corporate debt has to be developed hand in hand with government debt and private investors should be aware of how to pick the right instruments depending on the risk premium.

However, prior to buying corporate debt, investors should be aware of the risk reward structure and should strive to get the best return on their investment.

Analysts feel that people must change their investing mentality as we move towards the millenium. There is also a view that the government can further reduce the borrowing cost by 1% to 1.5% and thereby reduce the gap in the interest burden and indirectly help to reduce the budget deficit.

More individual savings are needed for the country to prosper. For the market to develop, savers need to be motivated that they can make money in the secondary market.

An uneventful year ends

As this is the last Comment for the year that is ending, it is fitting that we ponder over the year that is perhaps best described as an uneventful year.Some have described it as a lost year for the economy.

Whatever description one may choose there is no doubt that it was an year where little was achieved and perhaps much was lost.Those who are obliged to defend the economic performance would no doubt give the excuse that the economy faced the lagged impact of the East Asian Crisis.That is indeed a very pathetic explanation,because we are supposed to be suffering from the after effects of a crisis when the crisis countries which were affected are recovering.

That speaks very badly for our policy makers and whoever is in the driving seat of the economy.Had our economic management been professional, we should have been able to take the measures which would have avoided such a down turn in the economy. Let us first look at the facts.Nineteen Hundred and Ninety Nine will be seen as being unique in the recent economic history of this country.It is about the only year in which we recorded a decline in exports.Even during the black days of the JVP insurgency industrial exports, though affected, continued to increase.

In fact it was this resilience which kept the economy going.In contrast the first nine months of this year recorded an export decline of 7 per cent from that of the corresponding period last year.And we must remind ourselves that last year itself was not such a great year for exports.

Our industrial exports declined by 4.5 per cent and our agricultural exports dropped by 18.5 per cent.Such a decrease in export incomes has a serious impact on domestic incomes,corporate profits,domestic savings and economic growth.

The slowing down of the economy is also reflected in a decrease in imports of all categories.Decreased imports of intermediate imports reflects very clearly the lower exports.

Even more alarming is the 13 per cent decline in investment goods.This decrease is an indicator of a loss in business confidence.

The decreased investment would also have an adverse impact on the economy for several years.

The overall slowing down in international trading and its concomitant slowing down of economic activity would reduce government revenue.

The drop in government revenue as a proportion of GDP observed last year would no doubt be seen in greater measure this year owing to both a drop in international and domestic trade based taxes and the reduced momentum in the economy.

This in turn implies a widening of the fiscal deficit. In a trade dependent economy such as ours,the performance of our exports have a pervasive impact on nearly every sector of the economy.

This in fact is the underlying reason for the deflationary tendency in the economy.In fact one could even sense a mild depression.The preoccupation with electoral politics has no doubt added another dimension to the already depressed state of the economy.

This does not mean that all was lost.Despite the poor performance in the real sectors of the economy focused on exports,domestic agriculture appears to have fared somewhat better,no doubt largely due to good weather conditions.

Private remittances from abroad continued to buttress the economy and tourist earnings rose by about 30 per cent.It is very likely that tourist arrivals this year would exceed the 400,000 mark.All these have helped to save the economy from a situation of decline in the production sectors that really matters.

In fact the decline in our industrial export income raises the question of how vulnerable we are with the given compositional structure of our industries.

The important question as we end the year is whether we can reverse this trend.Can we take meaningful measures which would enhance our competitiveness? Can we once again increase our industrial exports? Can we change the investment climate? Will the government once again focus its attention on the economy?

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