Srilanka Newspapers Sunday 08/04/2012

Revenue falls short of 2011 budget target
By Bandula Sirimanna
Government revenue targets set by the 2011 budget have fallen short by Rs.33.59 billion from the estimated revenue last year, official sources said. According to the government’s Annual Accounts for 2011, total receipts and grants in the year was Rs. 974.297 billion against estimated revenue of Rs. 1.007 trillion.

Banking and Finance Commission to be set up
A Banking and Financial Commission is to be set up soon to make the necessary changes in the financial sector going beyond the regulatory and conventional aspects, official sources said.

The President in his capacity as Finance Minister has made this proposal to further enhance state revenue because reducing taxes or long term lending alone is not enough for economic development in the country, a top government official said.

“Sri Lanka is now on a journey that will adequately compensate what the country lost over 26 years of terror and banks are the critical institutional set up to drive this economic development process,” he told the Business Times.

The proposed Commission will conduct public hearings, discussions with bankers, share international experience and propose required changes beyond the regulatory and conventional aspects.

It will also look at the prospects of introducing a wider range of new products in credit, equity, insurance, leasing, merchant banking, investment banking and project financing to drive development, he disclosed.

The Inland Revenue (Tax) Department has achieved 99% of the revenue target of Rs. 307 billion set for 2011 while other major revenue collection bodies including the Customs were slightly short of the targets, the sources added.

Customs and the Excise Department considered as main pillars in the local tax system, have been able to contribute Rs. 446 billion and Rs. 55 billion, respectively to the state revenue last year. The Motor Traffic Department has doubled revenue to Rs 8.3 billion last year, according to official figures.
The accounts for the year 2011 were prepared and forwarded to the Auditor General by the Treasury on Tuesday. The government was able to maintain the overall expenditure within the limit approved by the Parliament, official sources revealed.

According to the accounts, the total actual expenditure in terms of government accounts is Rs. 1.961 trillion which consists of Rs. 1.020 trillion recurrent expenditure and Rs. 398.519 billion capital expenditure. The total debt repayment was Rs. 542.337 billion,

The original total estimated expenditure for 2011 including debt repayments was Rs.1.968 trillion.
The Auditor General in his earlier 2010 report noted that a stringent mechanism should be implemented to minimize the loss of revenue to the state due to ‘large scale tax frauds’ of certain importers by presenting under-valued invoices when importing goods,

Special investigations on state revenue management carried out by the Auditor General Department had revealed that the country’s revenue collection system was weak, ineffective, erroneous and inefficient.
http://sundaytimes.lk/120408/BusinessTimes/bt01.html

Finance and leasing companies are considering investing in new ventures, away from traditional lending and leasing to overcome severe pressure from rising interest rates, inflation, and the sudden tax hike on motor vehicles, senior finance company officials said.

They noted that the government’s latest move aimed at tiding over the current account deficit in the balance of payments will increase risks especially in smaller finance companies. Managing Director, Abans Finance and former chairman of the Finance houses Association of Sri Lanka, Kithsiri Wanigasekera told the Business Times that the increase in interest rates on Treasury Bills has resulted in a sharp increase in interest rates on deposits accepted by Commercial Banks and Licensed Finance Companies (LFCs).

In accordance with Central Bank (CB) directives, interest rates on deposits payable upto a period of one year and for a period of more than one year has increased sharply compelling LFCs to increase their lending rates in order to maintain interest margins to operate as viable financial institutions. Deposit rates in banks and LFCs have risen to the level of 16% to 18%, he said, adding that the lending rates also have seen a proportionate increase that will affect borrowers who will now have to pay comparatively high monthly installments on the facilities they obtain.

He said these changes will adversely affect the asset quality of banks and LFCs in the times ahead since the level of non-performing loans is likely to increase in an era where interest rates are high with deteriorating recoveries.

Referring to the recent increase in duty on all types of motor vehicles, he said that it will reduce the buying power of the average vehicle buyer owing to the fact that the new prices on these vehicles will not be within the reach of majority of these buyers. The situation will be worse in the case of buyers of 3-wheelers since the new prices of these vehicles and the quantum of lending facilities on leases, hire purchase facilities and loans will be high to obtain a facility.

3-wheeler owners service their borrowing facilities out of the regular earnings on their hires. What is debatable is as to whether the revenue they could generate on a monthly basis in the future will be adequate to meet the monthly commitment on their facilities after allowing for operating expenses.
The position with regard to new motor cycle owners will also get affected badly since the servicing of monthly installment on new facilities will be high exerting pressure on payments of the majority of customers who are fixed income earners, he said.

Asia Finance Ltd CEO - Sanathana Dalugoda said finance companies could face pressure if they mobilize funds at very high rates because they will have to lend at a higher rate. At present, finance companies are not affected but if this current situation prevails for six to nine months, small finance companies will have to face serious cash problems, he added.

Almost 70 % of the loans were given for vehicle finance by many finance and leasing companies as they are easy to repossess and sell. Such companies will have to curtail this practice and look into new financial instruments, Mr. Dalugoda said.

The sale of private cars, commercial vehicles, 2-wheelers, tractors, agricultural equipment, consumer durables (television sets, washing machines and kitchen appliances) and housing is significantly dependent on borrowed funds. Higher interest rates also raise the cost of construction of the government’s infrastructure investment programme.

Therefore, rising interest rates discourage construction activity as well as the sale of motor vehicles, two-wheeler, tractors, farm equipment, cement, construction, and steel and consumer durables, he said.
http://sundaytimes.lk/120408/BusinessTimes/bt04.html

By Sunimalee Dias
Vehicle importers were in a quandary this week with one section insisting the government needs to remove the age of imported vehicles to one year while others believe there is a necessity to phase out used car imports. But both were against the government recent tax hike on motor vehicles and opined it could result in a 60-70% drop in sales in the future.

Unsold vehicles in showrooms at mixed prices
Importers of new and second-hand imported vehicles, lying in showrooms before the new taxes were imposed, have mixed views on the prices of these vehicles.

CMTA chief Tilak Gunasekara says new vehicle importers would not increase prices on existing stocks and this has been agreed by all its members.

Currently, there are approximately 1000 brand new vehicles at the Colombo port and they would request the government to allow vehicles for which LCs have been opened before March 31 to be released at the previous price.

However VIA President Yoga Perera said there a possibility that the prices of in-stock vehicles would increase in accordance with the duty structure using different mechanisms.

He explained that some dealers would engage in sharing the imposed duty on both the existing stocks and the new imports as well.

In this respect, he pointed out that the existing stocks would increase in price by half of the duty imposed on the respective vehicle and the other half on the new vehicle.

On the other hand, some dealers would also increase their existing stocks by 25-30% and reduce the duty on the new stocks by a similar amount, he explained.

Vehicle Importers’ Association (VIA - reconditioned vehicles) President Yoga Perera said they had requested the government not to impose the one year age of imported vehicles as it would result in closure of businesses for used vehicle importers.With around 2000 reconditioned vehicles stuck at the Colombo port and 6000 ordered, the association wants measures taken to ensure those imported and ordered prior to the imposition of the new duty structure and vehicles already ordered for could be provided at the earlier price.

The VIA submitted their request to President Mahinda Rajapaksa and believes a favourable solution would be forthcoming. Reconditioned vehicles imported in 2010 amounted to 37,000 whereas in 2009 it was at only 3,400.

While some consumers who have already paid advances would find it difficult to pay the difference of the duty recently imposed; others have not opened LCs since the new tax was imposed, they said. The new duty imposed results in a small vehicle increasing by approximately Rs.1.2 million while others had gone up by at least approximately Rs.1.6 million, importers said. Ceylon Motor Traders Association (CMTA) President Tilak Gunasekara told the Business Times that there is a need to phase out used vehicles in this country. In fact, he believes the government would unlikely change the one year age of imported vehicles already imposed. Mr. Gunasekara said they understood the government’s situation but believed the rate of increase was “irrational.”

Taxes were previously hiked to similar levels in 2006/2007and which then dropped in 2009. At the time the imports indicated a drastic drop only in 2009 when it came down to 18,021 compared to 41,542 in 2008. The figure in 2010 reached 61,253 after the government imposed new tax structure wherein the duty on motor vehicles was relaxed considerably.

The recent hike in taxes was significant, Mr. Gunasekara said and explained that taxes on cars below 1500-2000 cc was previously increased only by 20%; but this time the current duty of 120% has been increased by 80%. This has also impacted on cars from 800-2000 cc. He also pointed out that the depreciation of the rupee has also affected the industry.
http://sundaytimes.lk/120408/BusinessTimes/bt05.html

Whether the government likes it or not – the perception and to many, the reality-, the economy is running downhill. The President and his closest financial and economic advisors – Dr P.B. Jayasundera and Ajith Nivard Cabraal - may proclaim on any tree top that the situation is not as bad as it looks, but their pleas are bound to fall on deaf ears.

Talk to any middle class income wage earner and working class workers, as joint polls by the Business Times and research agency, the Research Consultancy Bureau (RCB) have repeatedly shown, the constant plea is for the cost of living to be tackled and reduced.

But how do you do this in a world where fuel prices are rising and Ministers like Bandula Gunawardene assert and go further as to debate claims that a family of three can live, even frugally, on Rs. 7,500 income?

The recent policy measures introduced by both the government and the Central Bank have led to a lot of concern and heartburn. Increased taxes on motor vehicles and the withdrawal of intervention in the foreign exchange markets led to a lot of uncertainty, which the authorities are dismissing as a knee-jerk reaction.

The choice of owing a car is becoming a distant dream to middle and low income wage earners.
The increased taxes are impacting on the fast-growing tourism sector, which the government is itself promoting. This makes today’s policy measures meaningless in terms of promoting sectors like tourism on one side, and on the other hand imposing high taxes that restricts growth.
Another area of concern is the credit squeeze and rising interest rates which is being felt mostly by the small and medium scale sector, responsible for the bulk of economic activity and stimulating local industry.

For, how does one then reconcile tightening credit which curbs small industry growth, with statements by none other than the President and his brother Basil on the need to reduce dependence on imports and be self sufficient, by increasing production and expanding local industry?

While a homespun economy is nice in words, it’s difficult in deed. The cost of production of any local product including tea is always higher than other economies due to dependency on foreign fuel, fertilizer and other inputs and thus uneconomical. Rice farming as a profitable crop has failed.

More than a decade ago, then Trade Minister Kingsley Wickremaratne allowed cheap imports of eggs from India for Christmas due to a shortage, at less than half the price of local eggs. Consumers relished the idea but local producers – a key vote base - objected and imports were stopped. Local producers are struggling against economies like India and China that have a huge advantage in terms of economies of scale.

It’s far more efficient and economically viable to import what Sri Lanka cannot produce cheaply and export high, value products and crops, based on sound, policy initiatives that are not changed in an ad-hoc way (example -the recent expropriation laws).

There must be a balance between looking after the interests of both the producer and the consumer. Ultimately it’s the yield (value) and not quantities that should matter in terms of exports, a lesson the government should learn in trying to target mass market tourists rather than aim for niche market, high-spenders.

This Avurudu is not going to be the best of years for most celebrants as costs rise. Finance companies say rising interest rates will hurt mostly those who have leased 3-wheelers and other vehicles to generate an income.

The plan to reduce the age of used vehicle imports to one year, a promise made last year, would affect the future of a million people employed in this industry. Eventually only new vehicle imports will be permitted.

Higher taxes will reduce revenue, a worry expressed by the Treasury which has reported lower than targeted revenue last year. Further tax increases on other non-essentials are likely in coming months as the government grapples with a yawning trade deficit which was $1 billion in January alone, and $10 billion for the whole of 2011.

The Central Bank says the recent measures would help firm foreign exchange reserves with the reduction in intervention. Separately the Ministry of Industry and Commerce is quoting a businesswoman from China as saying that they plan to invest a gigantic total of $50 billion in a 10-5 year period to set up a trade port in Hambantota. Everything is happening in Chinese-led Hambantota and the Indians must be worried too.

Whether this huge inflow will materialize, almost the size of the country’s GDP and far more than the $500 million to an estimated $2 billion average from foreign investment inflows, is anybody’s guess.
Sri Lanka’s local industry, built on costly power and other, high costs, is struggling against cheap Chinese and Indian goods.

The country’s local industry was ruined under the inward policies of the Sirima Bandaranaike 1970-77 government when people were compelled to depend on local, poor quality goods. Because of the demand and foreign exchange constraints to secure good technology or know-how, the quality of local goods was shoddy.

In 1977 the free-market deleted government opened the floodgates to foreign goods, giving consumers a good deal and ending the shoddy-goods era but in the process killing the local industry. Despite many efforts over many years to lift the local industry, it is far from being the ideal on the lines that government leaders profess can lead to self -sufficiency.

In recent weeks, there has been a lot of loose talk by various government politicians and officials, contradictory statements and a peculiar response from government spokespersons: “They (ministers) are expressing their own views and not that of the government.” Using the same yardstick, is the President and his brother Basil also expressing their “own views and not that of the government”, in pursuing a less-import, dependent economy?

Given the plethora of statements, often contradictory by government ministers and key officials, state policy is increasingly becoming unclear and confusing to the people.
http://sundaytimes.lk/120408/BusinessTimes/bt06.html

Vitriol is dominating our lives. Politicians use strange and aggressive language to express their displeasure at events. Rights activists the world over are loudly proving themselves to be pathological narcissists. Double standards are rife in the application of rules (the rich keep winning while the global middle classes keep struggling and falling behind). A deeply polarising presidential year election campaign in the United States is pitting an incumbent left-wing ideologue against an eclectic mix of Christian fascists.

Ironically amongst this chaos, all the worlds’ people seem to be unified in one theme: education. More bluntly, many agree that whatever system they have in place at the moment is the worst in the world. This is odd in a world where there has been tremendous progress in research and innovation over the last 50 years. Someone somewhere obviously has got something working. Most parents often struggle with what to teach their kids. Should formal school be supplemented with additional tutorials? Should children study music and art, along with sport? If so, does cricket and rugby outweigh the merits of tennis and basketball?

The answers aren’t easy and most activities for many children the world over are a function of their local culture. Does it matter and can it have a bearing on who you can become? I have been interested in this topic as a way of assessing the capabilities of senior managers in the world’s largest corporations. As an investor, the primary fiduciary duty is to protect and grow the capital you have been entrusted. The duty of an analyst is to understand people and the impact they can have positively or negatively on the bottom line of a company. Assessing people’s propensity to produce growth is challenging, especially as some of the useful tools such as DNA testing and neuro-scientific profiling are clearly off limits. That has forced me to look more closely at formal education systems and try to estimate the important subjects that shape individuals.

Here are some suggestions for both parents and investors in order of importance. It’s a non-exhaustive list which I intend to update as I continue to gather global evidence on the subject.

Mathematics - It’s elementary. Knowledge in mathematics tells me you understand a problem. Curriculums around the world are weak (getting alarmingly weaker) and in Sri Lanka it is centred on rote learning. We were and continue to be curious about the atmosphere and the world around us. That has lead to an over emphasis on Geometry and Trigonometry. The challenge of space has been answered. What’s seriously lacking now in a world that is rapidly changing is a strong understanding amongst students and decision-makers of probability and calculus. I have been appalled at the lack of understanding at the highest levels of global corporations of basic distributions.

The mathematics curriculum has been too slow to change dragged by pitiful bureaucrats and unmotivated teachers. Looking at the latest statistics for the GCE O/L’s, fewer students passed mathematics than last year. While teaching is a major factor, malnutrition in the provinces is perhaps a bigger and more worrying explanation. Forget western conspiracies. A nation weak in mathematics is doomed to an eternal cycle of poverty. We need to fix our diets (which is to say we need to fix poverty and wealth distributions) to start altering the equation.

Natural sciences - If knowledge in mathematics tells me you understand a problem, knowledge in natural sciences give me confidence you can gather evidence to develop a solution. Here the evidence points favourably to Chemistry and Physics as cornerstones to help set you well for the future. The recent global trend targeting science and the work of scientists is disturbing. These attacks have been lead by a chorus of Christian fascists who have never gotten over Darwin’s theory of evolution. It’s one thing to believe in creation, but another matter to take the blow torch to the fields that have provided the greatest breakthroughs in human life.

The supremacy of the United States (and the Western world) over the next decade shall not be undermined by crazy extremists living overseas, but by religious fanatics within their own shores. Sri Lanka’s record is nothing to write home either. Scientists are poorly paid, not duly recognised and research is hopelessly under funded. Worse, there is a dearth in the availability of simple lab equipment beyond the top 25 schools in the country (that’s counting both public and semi-public).

Philosophy - Knowledge in philosophy demonstrates you can deduce an answer as much as use data and analytics to induce an answer. They are two different skills and not to be confused. Of all the areas, deductive reasoning sets apart the most successful individuals both from a personal growth and returns to shareholder perspective. Great visionary CEOs who have produced headline growth of 20% per year demonstrate their ability to deduce a solution when faced with tough times. Philosophy shapes an individual’s character. Character is the most significant determinant of success. Parents and the investment community make the same error by being focused too much on short term data (term tests and yearly report cards for the former and quarterly earnings for the latter). Character isn’t formed by achieving superior short term performance. Character is what drives long term value creation.

MBAs, CIMAs and CFAs of the world are great acronyms after a name. But none of these form character. Understanding the Arthashastra (great philosophical work by Chanakya), deciphering the Bhagvat Gita and studying Shakespeare is what forms character. Debating the great religious works of the world helps build character, and makes you stay away from the fringe lunatics in any sect. Buddhism teaches us to deal with an ever changing impermanent world and the virtue of patience. Hinduism leaves you with due regard for cyclicality. Christianity focuses on the work ethic. Islam dwells on the importance of brotherhood.

History - A proper grounding in history means that you understand where you have come from, which helps put the future in the right context. History doesn’t repeat itself but it rhymes, said Mark Twain. A great disservice has been done by not making Sri Lankan and world history a mandatary subject at all levels. There is a dire need for a direct push into the mushrooming array of “international schools”, which are producing a strange class of citizens, who are clueless about the story of the country where they live.

As noted earlier, this in no way is an exhaustive list. These are five knowledge areas that have been consistently demonstrated by successful individuals. The definition of success being quantitative markers I have used, as well as highly individual qualitative markers the respondents to the global survey provided. It’s time we as a society demanded something different from corporate culture as well as our children. It’s time we stopped obsessing about the title of degrees and diplomas. Otherwise we run the risk of creating more unproductive citizens (such as investment bankers, parliamentarians and rights activists) and damaging society as a whole. That would be a real shame.

(Kajanga is an Investment Specialist based in Sydney, Australia. You can write to him at
kajangak@gmail.com).
http://sundaytimes.lk/120408/BusinessTimes/bt07.html

By Sunimalee Dias
Recent government policy measures towards reducing its current account deficit was reason for the International Monetary Fund (IMF) agreeing to approve the US$426.8 million tranche, the body's resident representative Dr. Koshy Mathai told journalists in Colombo.

He noted that the fund final review would take place in the next three months (for the balance $400 million). It was noted that the adjustment measures, of a floating rupee, implemented by the government since February provided the required sustainability and opined that these were likely to change in the future either to further tighten or relax depending on the economic progress.

Commenting on the recent hike in taxes on motor vehicles and alcohol products, he said that they were unaware of this and did not expect it. Dr. Mathai noted that this indicated the government's attempts at addressing the issue of its current account deficit although they were not fans of such moves of any state. On the other hand, the government needs to follow a policy of adopting a tax structure, he said.

Loan terms so far
The IMF said the interest rates for the US$2.6 billion loan are tied to LIBOR and currently at 1.1%. This 1.1% applies for upto US$2 billion.
Total disbursements to date are US$2.1 billion with the latest disbursement being US$426.8 million. Of this approximately US$300 was given at 1.1% and the excess of approximately US$130 million is given at the rate of 3.1% (with the 2% surcharge).
In future, the disbursement would be made at the higher rate (3.1%).

But he was optimistic of the policies passed and that they were "highly consistent" as well.

The IMF also said that while the country's economic growth projection was expected to reduce from the targeted 7.5%, inflation would increase although it would be retained at a single digit. Meanwhile, it was pointed out that Sri Lanka needs to look to its two dominant economies in the region India and China compared to its priority markets, the US and the EU that buys more than 50% of the country's exports.

In this respect, Dr. Mathai said the country has to "reduce and diversify" what it exports. The IMF will in the next 6-12 months continue to focus on the country's balance of payment issues and its reserves. IMF has also approved waivers on the net international reserves and reserve money, which Dr. Mathai explained was found to have missed its targets for last year.

There was concern at the time of the pace of the loss in reserves that dropped from a targeted US$8 billion to US$6 billion last year. Dr. Mathai remained "optimistic of Sri Lanka's prospects in the medium term," and noted the country was not "overheating."

However, he believed that with credit on the rise there was also an increased pressure from the labour market as well. Responding to a question on the possible slowing down of Foreign Direct Investments (FDI) to the country, he said "expectations are too high" and this would take time. "We expect FDIs to pick up in this kind of economy," he said.
http://sundaytimes.lk/120408/BusinessTimes/bt09.html

Despite the depressed economic conditions, there is no protracted recession or major financial crisis in Europe, however if the Eurozone crisis escalates, there could be spillover risks to US economy, according to a regional ratings expert. "Protracted economic slowdown and health of the banking sector could impact growth, risk perception and funding availability, said Managing Director - South East Asia of Standard and Poors Rating Services - Surinder D Kathpalia. He was the keynote speaker at a forum jointly organized by the Institute of Chartered Accountants of Sri Lanka and RAM Ratings Lanka Ltd on 'Rising Global Risks Cloud Asian Outlook' in Colombo last week. In remarks released to the media by the Colombo accountancy institute, he was quoted as saying that abrupt trade/capital controls, protectionism measures, idiosyncratic political risks and risk of asset bubbles would add to potential policy mistakes in tackling the rising risks.

Discussing the Asian outlook, he said that Asia felt the tremors from Europe in the second half of 2011 compounded by sensitivity of the region to capital flows, trade impact more pronounced in open economies, global risk appetite and liquidity matter that even impacted the relatively domestically driven economies, oil sensitively of the region and rising oil price resulted from political instability in the Middle East etc.

He said that in a nutshell, a country's ability and willingness to honour financial obligations impact the sovereign rating and most Asian economies would remain relatively benign in this sphere, owing to economic fiscal and external resilience, but risks have intensified; policy challenges are acute; and the likelihood of the downside scenario has increased. He called for political leadership which is a critical factor in policymaking and dealing with some of the uncertainties.
http://sundaytimes.lk/120408/BusinessTimes/bt31.html

State policy is increasingly becoming unclear and confusing to the people.

Which is 1000 times true.

I like the recent carton uploaded in the entertainment section regarding the economy.(Instead of bank in the cartoon - in Srilanka All the Financial institutions are robbing the poor citizen)
http://forum.srilankaequity.com/t10451p225-entertaiment-spot-all-are-welcome#114239

Good to read.
Thanks.

Vehicle buyers who had paid deposits to importers have been confronted with the problem of the refusal to refund such deposits when they found last week’s tax increases have driven up prices beyond affordable limits.

``I paid Rs. 100,000 as a deposit to a well known dealer to purchase an Indian vehicle for Rs. 2.9 million. The price went up to Rs. 3.9 million which is beyond my reach. But the dealer won’t refund my lakh,’’ one affected person said.

The trade explained that importers incur costs and would-be buyers have signed agreements that they will make good price rises that can occur due to exchange rate fluctuation, taxes and other reasons.

When a letter of credit is opened and the import procedures initiated, costs are incurred, they explained. If the buyer does not complete the deal, the importer may, if he can find another customer, sell the vehicle. If not, he would be saddled with a big loss.

There was no word yesterday if and how this issue will be sorted out.
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=49270

Lankem Ceylon PLC in a Stock Exchange filing last week said that it has transferred its holding of 2.75 million ordinary shares in Sigiriya Village Hotel representing an equity stake of 30.56% to Colombo Fort Hotel Limited for a consideration of Rs.184.25 million.

This followed a Lankem board decision to consolidate all the hotel companies of the group under its subsidiary, Colombo Fort Hotels Limited, making that company the group’s holding company over the hotels sector.
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=49283

The request is often made that the public should think of the country first as Sri Lanka has been passing through a decisive period where political and economic issues, both local and international have to be dealt with extreme care. Whilst expecting the public and the private sector to be patriotic, the behavior of some of the state sector institutions is quite questionable, says Nayana Dehigama, a well-known techno-entrepreneur in the country.

An institution linked to the government dealing with interbank financial transactions is reported to be finalizing awarding a contract to a British firm ignoring standard practices of procurement, governance and ethics in procurement and also the prevailing situation in the country, he asserted in a statement.

"My company which has an impeccable track record of 14 years with 46 national and international awards won during the past four years was not given an opportunity by this entity for another large project knowing well our talents in developing world-class solutions as we had earlier successfully designed, developed and implemented an interbank switching solution for them", he noted.

Despite the new policy initiatives introduced under domestic preferences, state organizations and affiliated institutions are depriving the opportunities available for local firms, Dehigama said.

"We often see in the media how some of these top officials constantly suggest various measures to safeguard the sliding value of the domestic currency amidst various unfavorable factors emanating locally and internationally. However, once the conduct of their own institutions are brought to personal notice the behavior of these officials is quite different and we tend to ask ourselves whether they are practicing what they preach", he added.

Having formulated many favorable strategies and policy initiatives to promote domestic industries, the President has recognized the role of the local entrepreneurs and firms in his Mahinda Chinthanaya. However, it is pathetic to see that while preaching the contents of the mandate, some of those who are empowered to implement them doing the complete opposite. Such acts will erode public confidence on the government, compelling the entrepreneurs to mind their own businesses leaving the government to solve its own problems at decisive moments, Dehigama the immediate past Chairman of COYLE said.
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=49235

by R.M.B Senanayake



Professor Shinji Asasuma of Hitotsubashi University recently spoke about Asia’s growth experiences and its lessons for Sri Lanka. The World Bank analyzed the growth experience of the East Asian NICs in "The East Asian Miracle in 1993. The bank also published the Growth Commission Report of 2008. Malaysia too became a success story among 13 success stories, but not Sri Lanka.

Asasuma referred to the method of analysis through paired comparisons, a method that enables considerable illumination of economic processes. Prof Deepak Lal has compared such pairing exercises to the psychologists comparing the medical histories of twins. Some sort of comparative analysis is indispensable for a greater understanding of economic development. He paired Sri Lanka with Malaysia

The two countries have many similarities. In 1960 our per capita income was US$961 (in IPC/Kravis dollars) and Malaysia’s was US$ 888. Both countries are multi-ethnic and have gone through ethnic conflicts. Both countries are engaged in the production of primary commodities and mineral resources. Both countries were largely agricultural and rice cultivation was an important economic activity. Both countries also have undergone a colonial experience and built up some democratic traditions after Independence.

But consider the following development indicators over time in the table. What are the reasons for the differences? Are they due to the civil conflict? The professor though that is not the full explanation. He referred to the spillover effect in Korea from Japan’s growth. When Japan became protectionist and its costs rose, there was a spillover effect to Korea.

The full explanation for the differences in indicators arises not only from the conflict but also from wrong economic policies and bad economic management in the case of Sri Lanka. He also thought it was due to different economic strategies followed in Malaysia and Sri Lanka. Malaysia considered the issue of what to do with its plantations - rubber and oil palms. Only Rohana Wijeweera even bothered to raise the issue here.

Economists have been referring to the long term decline in the terms of trade between primary producer countries and industrialized countries. But Malaysia continued with its rubber plantations and sought to improve their productivity. She built up a first class research institute to study ways and means of raising productivity. Malaysia also gave up identity politics and ideological struggles while Sri Lanka continued to debate about Socialism and went for State Capitalism rather than free market driven capitalism.

There are defining moments in every country where there has been a shift to economic development strategies from identity politics or ideological politics. The defining moment for Malaysia was the launching of the First Malaysia Plan 1970. In Korea it was the coming into power of the Park Chong Hee government. In Indonesia it was the New Regime of 1970 under President Suharto and his development cabinet. In China it was Deng Chiao Ping’s Reforms to allow market prices and market forces to operate. In Vietnam it was the launching of the "Doi Moi" Policy and in India it was the liberal reforms by Dr Manmohan Singh after the balance of payments crisis of the early 1990s.

Sri Lanka produced President J.R Jayewardene’s open economy of 1977. But identity politics and ideological struggles re-emerged in the 1980s. The momentum petered out and the reforms to expand the market economy and de-regulate lost momentum during the regimes of his successors. They were more committed to State power.

The present regime believes in public sector investment and state driven rather than private sector driven development. But the development we have seen so far in all these countries including China is private sector driven development. The present regime believes in state driven rather than private sector driven development although of late it has tended to shift gear. But even then it is to a form of crony capitalism where businessmen who have the favor and support of the rulers alone are favored. Crony capitalism is unlikely to produce development.

The State driven development has not generated the stimulus for the private sector. The economic opportunities arising from the infrastructure investment has not flowed to the private sector. Chinese contractors do not subcontract and they use largely Chinese labor. The Government has however not pre-empted resources available to the private sector and instead is resorting to foreign borrowing for its investment programs.

But this has exposed the economy to the pressures arising from the world financial and capital movements. The liberalization of trade by the reduction of tariffs and other bureaucratic controls in an environment where there is excess money supply and continuous budget deficit has brought what looks like a balance of payments crisis.

Strategies for growth

There has not been a serious debate on the sort of growth strategies suitable for the country. All political leaders pay lip service to economic growth and they all want it. But they don’t realize that there are trade-offs which are indeed painful. There are always winners and losers in the process of growth. The losers will complain and even protest on the streets. But unpalatable changes and reforms have to be carried through if there is to be faster growth.

Our leaders are inclined to follow short term populist strategies rather than long term reforms. Whenever they introduce reforms they want to protect the losers and this has a cost financially. Our political leaders are not willing to go through with the trade-off. In the process they water down the reforms or counteract it and the anticipated advantages do not take place.

The professor also referred to the need for technocrats and professional managers in government. He compared the governance of a country to the management of a business by a company. The company has shareholders and other stakeholders like the employees and the suppliers. They benefit if the company is managed well. But this doesn’t mean that the shareholders should be the mangers or even select the managers. Imagine what would happen if the managers are appointed by popular vote of the shareholders. A modern state cannot be managed except by technocrats and a system of governance where the politicians decide is a recipe for a failed state.

The professor also stressed the need for realistic targets rather than aspirations. Doubling per capita incomes by 2015 is an aspiration not a realistic target, unless it is based on a strategy where there is a direct relationship between the target and the strategy. There must be a commitment to the strategy and given the scarcity of resources it is foolish to attempt to do too much even of a good thing.

The professor next dealt with the implications of his analysis for Sri Lanka by raising the questions but leaving the answers to the audience. Do our political leaders have a commitment to economic growth or are they still concerned more with identity politics and ideological stances of socialism versus capitalism? Are they for short term populist measures to become popular? .

Do we have a long term economic strategy? Have we studied the natural resource availability in the country? What about the productivity of our agriculture? Should we go for expanding the tea or rubber plantations? Have we completed the applications of the Green Revolution? Have we fully utilized the high yielding seeds? How efficient and productive are our irrigation systems? Should we not economize on the use of water and if so how do we do it and what legal measures have to be taken to penalize those who use too much water? What about our agricultural extension service? Do they provide an efficient service? Should we expand our paddy cultivation when we know that we can’t export our rice? Should we produce rice for export and if so what investments will be necessary to make our rice conform to international standards?

Industrialization

What type of industrialization should we promote? Should it be export driven or intended for import substitution? If we opt for export driven industrialization should we set up special export processing zones? Do our present export promotion zones meet the requirements of the investors already located in these EPZs? Should we promote labor intensive industries such as textiles, electrical and electronic industries where there are limits to expansion in the world markets? Should we move up the value chain and if so what sort of knowledge and skills do we have to promote? What about creating a suitable environment for domestic investors? What about the overly protective Labor Regulations? Can we continue with them if we want business to develop?

What about the diaspora? Should we not create a conducive climate for them to come back or at least invest locally? The Diaspora has capital, skilled professional knowledge and skill. They also have entrepreneurial ability and run successful businesses abroad. Since there are many Tamil expatriates who can invest in the country, have we created the right climate for them? Are we leveraging India’s growth and what use are we making of the Bilateral, Regional (SAARC) Agreements? These are all questions that should be debated and discussed both within the government circles as well as in business.
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=49229

My Island in the Sun
By Dr. Sanjiva Wijesinha

I was very interested to read about the recent one day summit of the BRICS nations (Brazil, Russia, India, China and South Africa) that took place a week ago, on March 29, in New Delhi .

The events that took place at this meeting brought home the fact that the current world order dominated by the BATS nations (Britain, America and The European Union) is certainly facing a challenge.

The acronym BRICS is said to have been coined by Jim O’Neill, an economist working for Goldman-Sachs. In 2001 he published an article "Building Better Global Economic BRICS" – and the acronym is widely used today to indicate those countries towards which in the 21st century, global economic power is expected to shift. Originally the bloc comprised of Brazil, Russia, India and China – with South Africa being the new member of the group. It is postulated that by the year 2027, the economies of the BRICS nations will overtake the economies of the ‘Group of Seven’ (G7 countries - Britain, France, Italy, Germany, Japan, Canada and the US).

The BRICS represent 42% of the world’s population, 25% of its land mass and approximately one fifth of global economic output. And at last week’s meeting the leaders of these five countries gave the impression that they want to make their collective voices heard, criticizing the lax fiscal policies of the western nations which they blamed for the current instability in the world’s financial markets.

During the 20th century, the world’s financial system was effectively controlled by the US, Britain and the European nations. Outlining some modest measures that could be construed as small initial steps aimed at changing this BATS-dominated world, the BRICS leaders agreed in New Delhi that the development banks of the five nations would look into extending credit facilities in their local currencies. This initiative would boost trade among the BRICS countries and in the long term reduce their dependence on the U.S. dollar, which is universally accepted as the world’s reserve currency.

They also envisaged setting up their own development bank – a bank that would be funded entirely by tbe BRICS nations, which would in due course allow the bloc to pursue independent policies that could challenge the pre-eminence of US dominated lending institutions such as the World Bank and the International Monetary Fund (IMF), which for the better part of the last century served as powerful monetary levers for Western interests.

The monetary system which the world uses today goes back to the Bretton Woods conference that was held during the last days of World War II. Consequent to the large scale destruction of Europe and the Soviet Union and the massive expenditure these countries had wasted on fighting each other, most of these nations were nigh on bankruptcy. The US on the other hand had accumulated vast surpluses - and its currency, the dollar (being readily convertible to gold at a fixed rate of $35 an ounce) was the clear choice for the international reserve standard.

Now, seven decades later, these BAT countries have accumulated huge levels of government debt and their currencies have devalued themselves virtually beyond recognition. The BRICS nations in contrast with their low levels of government debt, high levels of investment and savings, robust industries and more pragmatic economic policies, have accumulated vast reserves. As an example, at a time when the US treasury has accumulated debts of 15.4 trillion dollars, the BRICS nations have aggregated reserves of approximately four trillion! Clearly the continued dominance of the BAT countries is no longer justified.

Could the sun which never set on the British Empire be finally setting on the Anglo-American-European dominance of the financial world?

Of course we on this little island in the sun must reconcile ourselves to the fact that, whether it is the BRICS or thr BATS that dominate the world, we small countries will have little say in a world where decisions will continue to be made by larger nations!
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=49220

How far this will affect Auto sector in CSE? Experts opinion please.

Well said R.M.B Senanayake.
Good to read.
Our politicos, if they can read and understand (which I have doubt) these type of articles good for our country.

By Lalin FERNANDOPULLE
The Business Chambers commended the move by the Government to increase the vehicle import tax which will help bridge the widening trade deficit and address environmental pollution due to vehicle congestion in cities.

The National Chamber of Commerce of Sri Lanka (NCCSL) hailed the recent increase in vehicle import taxes as a move that will save foreign exchange and reduce traffic congestion in cities which contributes to environment pollution said NCCSL Secretary Sujeiva Samaraweera.

He said that while the Chamber welcomed the tax increase as a positive step to address the balance of payment issue it has raised concerns on the injustice caused to those who had already imported vehicles. The Chamber has called upon officials to formulate a mechanism to address the grievances of vehicle importers”, Samaraweera said.He said that the Chamber has called upon the authorities to reconsider taxes on motorcycles which are provided to a large number of private sector employees.

There has been a huge influx of vehicles into the country since the reduction of import taxes on hybrid vehicles in mid 2009.

The staggering import tax was slashed to encourage more import of vehicles for an effective transportation in the country. Samaraweera said that many petrol-driven luxury vehicles such as Prados and SUVs which are not fuel efficient were imported under the previous tax structure.

The NCCSL commended the Government for not imposing taxes on the importation of buses and trucks which are vital for long haul transportation and port activities.

Sri Lanka Chamber of Small Industries President Aloy Jayawardena said that the increase in vehicle importation tax is a sound move to curb trade deficit and reduce traffic congestion. He said the tax on vehicles will discourage importation of vehicles which is vital to reduce the vehicle density on roads.

The American Chamber of Commerce President, Vijaya Ratnayake said .

Vehicle importers said that sales volumes will drop drastically as a result of the increase in import taxes. Industry experts said that auto makers exporting to Sri Lanka will pass on the burden of an import duty hike to consumers.

The Government increased the import duty on automobiles to contain the rising fiscal deficit. The import duty on cars increased from 120-291 percent to 200-350 percent on three-wheelers from 51-61 percent to 100 percent and two-wheelers from 61 percent to 100 percent.

However, duty on buses, trucks and tractors remains unchanged. Sri Lanka is a vital export destination for several Indian auto makers such as Bajaj Auto Ltd and Maruti Suzuki India Ltd.

Bajaj Auto, India’s largest exporter of motorcycles and three-wheeler exported 10,7691 units in the fiscal year ending March 2012, which is a 54 percent increase over 2011.

Reconditioned vehicle importers said that they would have to close down their business making one million employees redundant unless the Government rescinds its decision to impose taxes and other restrictions on motor vehicles.

Meanwhile, there had been allegations levelled against the authorities that the vehicle import tax was increased to please the IMF as one of the conditions of the Monetary Fund to address the balance of payment in the country.

Deputy Secretary to the Treasury S. R. Attygalle said the decision to raise the import tax on vehicles was taken for the economic development of the country. The tax revision was made to tosave foreign exchange and minimise expenditure on fuel.
http://www.sundayobserver.lk/2012/04/08/fin01.asp

RCL buys Asia Siyaka
Royal Ceramics Plc (RCL), in a bid to diversify into commodity broking bought Asia Siyaka Commodities Ltd's 51% stake this week, the company said. “The share transfer was done and the deal was completed at 5 pm on Thursday,” deleted Perera, Chairman RCL which is controlled by businessman deleted Perera told the Business Times. He said that five new directors will be appointed by RCL to Asia Siyaka in a few weeks.

Mr. Perera added that RCL will not go into backward integration (diversifying into similar businesses), but will selectively buy into different businesses. He said that RCL is a cash rich company, but strategically sold its 12.3% stake in The Fortress for Rs. 246 million and 0.5% stake in Hayleys for Rs.137 million to Vallibel One Plc, which is a connected party to Mr. deleted Perera's firms to raise money to buy Asia Siyaka. “We did this on Wednesday ahead of Thursday’s sale,” he said, adding that RCL will find synergies between plantations owned by Hayleys Plc and Asia Siyaka.

Meanwhile Hayleys denied a report in last week’s Sunday Times that it was negotiating the purchase of shares of Asia Siyaka. In an announcement to the Colombo Stock Exchange on Wednesday-April 4, Hayleys Chairman Mohan Pandithage, referring to the April 1 news item, said “neither Hayleys nor its subsidiaries were negotiating with Asia Siyaka for purchase of its shares.” The report said the deal was being done through Hayleys director and powerful businessman deleted Perera.