Sri Lanka Newspapers Sunday 22/04/2012

* Recent policy measures could contain problem: Risks still there, reserve buffer low, says IMF staff report

The Central Bank which had severely criticised those warning of a balance of payments crisis, denying repeatedly that there was such a problem, and sold down reserves to defend the exchange rate while keeping interest rates stable, an impossible task in practice, has told the International Monetary Fund (IMF) the opposite, indicating that it had known about problem.

Central Bank Governor Ajith Nivard Cabraal recently told journalists that several issues discussed with the IMF are not shared with the public. "What we tell the IMF we do not tell the public," he said at a press briefing soon after the launch of the Central Bank Annual Report 2011 earlier this month.

In an IMF staff report released recently, the Central Bank and Ministry of Finance and Planning’s Letter of Intent dated March 15, 2012, says pressure on the balance of payments became evident during the third quarter of last year.

"Though economic fundamentals were healthy, there were emerging signs in the third quarter that the balance of payments was coming under pressure. A stronger-than-expected rebound in the growth of credit and domestic demand, as well as higher-than-expected oil prices, led to a significant increase in imports, and despite healthy growth in exports and remittances, the current account deficit widened sharply to 7½ percent of GDP. As a result, although the end-December target for net domestic financing of the budget was met, the floor on net international reserves was missed by a large margin. Moreover, higher international petroleum prices and lower hydroelectricity production due to low rainfall resulted in the Ceylon Petroleum Corporation and the Ceylon Electricity Board continuing to incur significant losses," the Letter of Intent said.

"Recognizing the downside risks of these emerging trends against the backdrop of

global uncertainties, the Sri Lankan authorities introduced several corrective measures:

"Following a 3-percent depreciation of the rupee in November 2011, the trading band on the exchange rate was discontinued in early February 2012 to allow greater exchange rate flexibility and reduce intervention in the foreign exchange market.

"Policy rates were raised and directions were given to banks to limit their credit growth, which will result in limiting the expansion of credit to below 20 percent and significantly decelerating monetary expansion in 2012.

"In keeping with global price developments, domestic petroleum and electricity prices were increased by an average of 32 percent and 20 percent, respectively. This revision offset increased costs and reduced the losses of the state energy corporations.

"An increase in petroleum taxes also served to fund measures to cushion the impact of the price increases on the most vulnerable, non-electrified household consumers, the fisheries sector and small service operators, and ensure the achievement of the fiscal deficit target of 6¼ percent of GDP for 2012.

"As a result of these policy changes, the rupee depreciated by around 5 percent to Rs. 120/$ immediately after the trading band was removed and is now trading freely at around Rs. 124/$. Since early February, we have limited Central Bank sales of foreign exchange to supporting the oil bill on a declining scale. This has sharply reduced the level of intervention in recent weeks and the corresponding decline in reserves. More immediately, we expect to start rebuilding our net international reserves and aim, at least, to reverse the recent decline in net international reserves completely by end-2012. We are confident that the package of measures taken will reduce the external current account deficit towards a sustainable level by the end of 2012.We are firmly committed to a flexible monetary and exchange rate policy under which we will take whatever necessary steps that are needed to achieve these objectives.

"Beyond these changes, our policy agenda remains in line with the Sri Lanka - Emerging Wonder of Asia: Mahinda Chintana – Vision for the Future: The Development Policy Framework of the Government of Sri Lanka, which has been described in the program’s Memorandum of Economic and Financial Policies and subsequent Letters of Intent. We will continue the restructuring of the state-owned Electricity Board and Petroleum Corporation to place them on a financially sound footing. We have already restructured overdue obligations between these two enterprises. Cabinet approval for the amendments to the Petroleum Act to strengthen the regulatory framework is on track and is expected to be received in the second quarter. The Cabinet has also approved amendments to the Banking Act to reform the banking regulatory and supervisory framework, and we look forward to the forthcoming FSAP update, which will help strengthening our banking supervision framework further," the Central Bank and Ministry of Finance and Planning said.

The IMF staff report, which recommended the release of the latest tranche under the US$ 2.6 billion standby facility, was optimistic these measures bare fruit but cautioned against risks.

"(IMF) Staff expect that recent steps taken by the (Sri Lankan) authorities will reduce the external current account deficit to a more sustainable level. A continued pick up in long term capital flows, including foreign direct investment, and a turnaround in short term capital flows should help bring the balance of payments for the year into broad balance. However, this outlook is subject to a number of risks. Higher oil prices and any weakening of external demand for Sri Lanka’s exports would put pressures on the balance of payments, as would any slippages in the authorities’ efforts to rein in credit growth and maintain two-way flexibility of the exchange rate.

"Recent developments suggest that the pace of intervention, and associated loss of reserves, has moderated significantly, and that the authorities are on track to stabilize net international reserves by the end of the second quarter. Nevertheless, given that the current account will only respond with a lag, in the short-term, much will depend on how investor sentiment responds to the package of measures announced by the authorities in February. The authorities will need to continue to manage the exchange rate flexibly and maintain a tight monetary stance over the coming months to achieve the program’s external reserve objectives. Even then, Sri Lanka’s reserve buffers will remain relatively low at around 2.7 months of imports and 75 percent of short term debt," the IMF staff report said.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=49983

Quate;

'Central Bank Governor Ajith Nivard Cabraal recently told journalists that several issues discussed with the IMF are not shared with the public. "What we tell the IMF we do not tell the public," he said at a press briefing soon after the launch of the Central Bank Annual Report 2011 earlier this month.'

Friends, I am not agreeable with this statement. Are you agreeable with his coment?. People in a democratic country have all rights to know what policy makers and heads of the govt. institutions are doing. And also ppl have rights to know conditions agreed with IMF or ADB for a loan facility.

Profit taking swallows up some price band removal gains

Profit-taking on the Colombo’s Stock Exchange last Friday overshadowed the previous day’s rally following the removal of the price band, Acuity Stockbrokers said in a market report.

Noting that the market commenced last week after the New Year holidays on a lackluster note with average turnover levels at Rs.0.3 billion by mid-week, the SEC’s removal of the 10% price band imposed to curb price volatility revived markets on Thursday, the report said.

However, the 111 point rally of the All Share Price Index on Thursday following invigorated retail investor confidence was swallowed up by profit taking on Friday that pushed the ASPI down 61 points with the day’s turnover of Rs.0.6 million being the highest for the week.

"We expect market activity in the week ahead to show moderate improvement given the end of the recent spate of holidays," Acuity said.

"Markets are also likely to respond positively to the upgrades in the trading system expected this week."

Acuity also reported that the rupee depreciated 1.4% against the dollar amidst significant importer dollar demand as the currency market braces itself for the possibility of the Central Bank stopping its supply of dollars to meet oil import bills.

Last week saw market indices closing higher against the previous holiday-shortened week with the ASPI up 14.27 points (0.29%).

Acuity said that JKH led turnover value contributing Rs.457.9 million or 24.37% of total market turnover.

NDB with Commercial Bank too made significant contributions of 7.67% and 4.19% respectively.

Total weekly turnover at Rs.1.88 billion averaged Rs.375.88 million a day against the previous week’s daily average of Rs.163.21 million – a gain of over 100%.

Market capitalization too recorded a week-on-week gain of over 0.58% to close the week at Rs.2,029.61 billion, Acuity said.

Foreign participation posted net inflow of Rs.142.83 million, averaging Rs.28.57 a day against the previous week’s net buying position of Rs.9.11million.

The Acuity report said that average foreign daily purchases amounted to Rs.150.05 million against the previous week’s average of Rs.27.75 million while the daily average foreign sales amounted to Rs.121.49 million with Dialog and Swarnamahal Finance leading foreign sales in value terms.

Ceylon Tobacco and Commercial Bank led foreign purchase transactions during the week.

John Keells Stockbrokers said in its weekly report that the market had rebounded during the week on the back of gains on large caps including Ceylon Tobacco, Commercial Bank and HNB.

"The week’s activity was mainly driven by institutional and foreign participation on diversified and banking counters," the report said.
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Announcing its results for the year ended Mar. 31, 2012, Cairn India had this to say about its current oil exploration in Sri Lanka.

* Completed Phase 1 of the exploration programme in the frontier Mannar Basin; resulted in two successive gas discoveries and the establishment of a working hydrocarbon system

* Entered second phase of exploration; additional acquisition of 3D seismic data completed, tendering in process for contracting a drill ship and services.
Cairn on oil prospecting in Sri Lanka

Announcing its results for the year ended Mar. 31, 2012, Cairn India had this to say about its current oil exploration in Sri Lanka.

* Completed Phase 1 of the exploration programme in the frontier Mannar Basin; resulted in two successive gas discoveries and the establishment of a working hydrocarbon system

* Entered second phase of exploration; additional acquisition of 3D seismic data completed, tendering in process for contracting a drill ship and services.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=50116

People’s Merchant PLC has called an extraordinary general meeting on April 25 to consider a special resolution to adopt a new set of articles for the company in place of the existing articles and a second resolution to change the company’s name from People’s Merchant PLC to People’s Merchant Finance PLC.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=50117

Directors fees at Dialog during the year 2011 had doubled from Rs.14.8 million to Rs.30.5 million according to information published in the company’s annual report.

The report indicted that the company’s remuneration policy "endeavours to attract, retain and motivate directors of the quality and experience commensurate with the stature and operational complexity of the Dialog group."

The remuneration policy of the directors is proposed, evaluated and reviewed by Nominating and Remuneration Committee (NRC) of the company comprising the Chairman, Datuk Azzat Kamaludin, Mr. M.R. Prelis and Mr. Mohamed Mushin, in keeping with criteria of responsibility, the report said.

Non-executive directors are paid a monthly fixed allowance and meeting allowances depending on the number of meetings attended, the report said without specifying amounts paid.

"During 2011, the remuneration of the Non-Executive Directors was reviewed by the NRC and revised to reflect the increasing level of responsibility, commensurate with the growth in volume and diversity of business of the group, and to bring remuneration in line with that paid to Non-Executive Directors of comparable companies," the report said.

The company’s only Executive Director, Dr. Hans Wijayasuriya, in his capacity as an employee, receives a package comprising a salary, bonuses, share options and other commensurate benefits as appropriate, the report said.

It indicated that salary reviews take into account market rates and the performance of the individual and the company.

Further, the performance-related element of remuneration has been designed to align the interest of the Executive Director with those of shareholders and link rewards to corporate and individual performance.

"Thus the variable component of the Executive Director’s remuneration is based on the achievement of two dimensions – company performance against company targets and individual performance against a pre-determined set of Key Performance Indicators (KPI)," the report said.
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Sri Lankan shipbuilder Colombo Dockyard has laid the keel for the first of a pair of passenger vessels for the government of India to be deployed to connect its Lakshadweep islands with the mainland.

The vessel, with a capacity to carry 400 passengers and 250 tonnes of cargo, would be bigger than a pair built for India a year ago and be the largest yet to be built by the yard, a statement said.

The two vessels are for the Administration of Union Territory of Lakshadweep, India, and will cater to increased traffic from Cochin port to the UTL islands, as well as in the inter island routes.

"The addition of these vessels will ease the movement of passengers especially during peak season," it said.

The vessel will have a crew of 69. Colombo Dockyard earlier built two passenger vessels for India, MV Arabian Sea and MV Lakshadweep Sea.– LBO
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Stockmarket Review
By Elton Ebert
The market continued its placid run after the holidays except for some mild turbulence when a million shares in JKH were transacted on Tuesday and Thursday when the All Share Index shot up by 111 points subsequent to the lifting of the 10% price band.

There was much enthusiasm on Friday during the earlier part of the day but to the dismay of many it went in reverse gear with the ASI ending below the 5500 mark. However turnover was Rs. 622 million mainly due to a million shares in NDB Bank being transacted as well as dealings in over 10 million Amana Takaful, three million Overseas Realty and two million Panasian Power. Ceylon Tobacco which reached Rs. 720 on Thursday tapered down to Rs.650, while Nestle Lanka which was at Rs. 1,050 earlier closed lower at Rs.1,000 also on Friday. Among the recent IPOs, Access Engineering was down to Rs 23.90, while Textured Jersey gained to close at Rs. 7.20. Last week the minimum brokerage fee of Rs 10 and the CDS fee of Rs.5 were removed.

It appears that a feeble attempt is being made to increase activity in the share market by drawing back the retail segment which was estimated to be around 60% of market activity. It is believed that currently only about 10% of the retail players are interested in the share market for reasons well known. The prevailing dull and depressing market conditions are a cause for concern for many. Broking firms, margin providers and the state are the main victims. A director of a large brokerage said he is very disturbed and uncomfortable with the current conditions.

He says that the company recruited highly qualified staff with very attractive packages especially for research and expanded the office, but now it's very difficult to make ends meet. He agrees that rules to weed out crooks and unscrupulous speculators are good but these rules and regulations should have been thought of bearing in mind the development of the market and not the destruction of the market.

Punishment should have been given to the offenders, but not to all and sundry. He believes those with a good knowledge of the share market should have been involved in the framing of the rules. Some of the investors have told him that the brokers were ruthless when it came to forced selling, even if some small investors delayed payment by just a day or two, and now these investment advisors are going back to the very same players requesting them to come back to the market. It is now clear that foreign funds turn to Colombo once in a way when there are a few good bargains, but it is the retailers who were glued to the market earlier.

Taprobane Holdings Ltd got approval for the listing through an introduction on the Diri Savi Board 732,949,140 voting shares. Meanwhile there are a few more companies who will be getting a listing through an introduction. It is very creditable of the Commercial Bank to state that its billion rupee debenture did not attract a single applicant and they closed it on 18th April 2012, without resorting to any fake applications as is usually done.

Changes in directorates: The Finance Co. PLC - Ms Cherille Rosa was appointed an independent Non-Executive Director on 16th April 2012. Turnover for the week was much improved at Rs.1.8 billion when compared with Rs 400,000 for the three days last week. Both indices were marginally better, the ASI gaining 1% of 58.11 points to end at 5483.11while the Milanka was just 16 points or 0.1% higher to close at 4924.99.
http://sundaytimes.lk/120422/BusinessTimes/bt31.html

The World Bank recently donated US$50,000 to the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) to improve financial infrastructure in this profession. At the event to launch this project, both the CA Sri Lanka President and a World Bank official emphasized the need for transparency, accountability and oversight and said this project was aimed at strengthening some of these areas in the accountancy field.

Haven’t we heard these words before ad nauseam? And isn’t there often more words than deeds being said about this in progressing towards a corrupt-free Sri Lanka in both the public and private sectors?
For example how often do we hear of conflicts of interests in the accounting profession of companies handling audits and also being head-hunters for the same firm? How often do we hear of instances where accusations (with often strong evidence) against corrupt accountants are swept under the carpet? How often are there cases of corrupt accountants being struck off the list?

How often do we hear of auditors in cahoots with companies and dis-regarding the pleas of minority shareholders for more accountability? Ask K.C. Vignarajah, a top investor and the biggest promoter of governance and transparency, who has loads of issues on governance and the way listed companies are run.

Though discussing these issues in many previous editorials, we are compelled to return to the topic given the continuing and increasing levels of corruption and conflicts of interest in the corporate sector.
In today’s business environment, nothing can be done without money changing hands.

When the Sri Lanka Tourism recently issued a statement praising its ‘One-stop Shop” concept where officials of key ministries and state institutions come under one roof to fast-track proposals for hotels and leisure-related activities (in the absence of an effective Board of Investment), one hotelier noted that, ‘nothing moves if you don’t have political patronage’.

Citing an example, he said in a certain hotel project the sponsors ‘swear’ by the rules and go by the book in seeking approvals from local authorities. This has led to long delays and cost escalation.
However in a nearby site an influential businessman is speeding ahead with his hotel project disregarding all rules (including permits from local authorities) because he has access to the powers-that-be. His strategy: Complete the project and then fast-track the approval through these high-level contacts. “How can you do business like this and at the same time claim the process is transparent and accountable,” the first hotelier asked.

Sri Lanka’s top-end corporate sector professes a Corporate Social Responsibility (CSR) culture in the way they do business. Such a culture means being honest, transparent, sticking to the book of rules and governance and running a business devoid of seeking special favours and giving bribes to get things done.

Recently a powerful government official, when told about the emphasis paid by the private sector in CSR and their constant grouse about corruption in the public sector, had this to say:

“These corporate bosses are corrupt themselves. Whenever I speak at a public event, they’ll surround me after the event and seek favours, make special requests. Is this the transparency and governance they practice in their companies?”

One of the few conglomerates to put honesty, governance and accountability ahead of profit is Hayleys, until the exit of Rajan Yatawara and ‘Tanky’ Wickremaratne at the helm. The company suffered immensely, not able to win tenders owing to the flawed, corruption-controlled process.

In a July 10, 2011editorial, the Business Times said that both Yatawara and Wickremaratne, as former chairmen, did not bow to the dictates of politics in the game of tenders and found the company being distanced from some of the big contracts.

“Hayleys, a staid company following age-old values a lot ingrained during the late, much-respected D.S. Jayasundera’s tenure as chairperson in the early 1980s, has come a long way from those heady days of governance, values and disciplined management but its culture has changed dramatically after the entry of new, powerful directors with a different business culture,” the report said, reflecting on the change of command, power and influence at this conglomerate.

Being honest doesn’t work in Sri Lanka anymore and many companies, big or small, are forced to ‘pay’ to get contracts. “If we don’t do it, someone else will, and we don’t get the business. How can you survive by being honest?” asked one small entrepreneur. Bribery and corruption grew with the advent of the open economic policies of the governing party in the late 1970s. If it was then a slow and steady rise, despite the creation of the Bribery Commission (very ineffective and going after individuals like constables or Grama Sevakas accepting small bribes of Rs 50 or Rs 1000 while the sharks go scot free or resorting to politically motivated arrests), corruption now is galloping; such is the pace of growth of the ‘most vibrant’ sector in recent times.

Is Sri Lanka capable of developing and attracting foreign investors with this kind of you-scratch-my-back-I-scratch-yours policy”? Furthermore what lessons are we providing to the younger generation though this kind of corrupt, devil-may-care culture?
http://sundaytimes.lk/120422/BusinessTimes/bt07.html

The Executive Board of the International Monetary Fund (IMF) has initiated formal discussions on the review of the quota formula, which provides the basis for allocations on various credit facilities to member countries, including Sri Lanka.

Three years ago the IMF approved a US$2.6 billion Stand-By Arrangement (SBA) to Sri Lanka which was 400% of the country’s quota, higher than the entitled 300 % quota. In a recent statement, the fund said that as part of an agreement on quota and governance reform, the Board of Governors in December 2010 called for a comprehensive review of the quota formula, to be concluded by January 2013. The review would be followed by discussions of the 15th General Review of Quotas, to be concluded by January 2014.

The quota formula has served in the past as a guide to quota adjustments. The current quota formula, which replaced the previous five formulas in 2008, consists of four variables. Gross domestic product (GDP) has the largest weight (50 %), consisting of a blend of GDP converted at market exchange rates (30 %) and PPP-based GDP (20 %).

The other variables in the additive quota formula are openness, which measures the sum of current payments and receipts (30 % weight); variability of current receipts and net capital flows (15 % weight); and official foreign exchange reserves (5 % weight).

A compression factor (of 0.95) is applied to the weighted sum of these variables. An IMF staff paper took stock of the role of the quota formula and discusses the key principles underlying the formula and its main properties.

Building on previous guidance by the Board of Governors and Executive Directors for further work, the paper analyzes, among others, the scope for measuring openness on a value added rather than a gross basis, the appropriate treatment of intra-currency union flows, options for capturing financial openness, and issues related to the measurement of variability and its ability to capture members’ potential need for Fund resources.

The scope for capturing members’ different financial contributions to the Fund was also explored.
Executive Directors welcomed the opportunity to initiate discussions on the quota formula review, which is to be concluded by January 2013. They recalled that the agreement to conduct a comprehensive review of the formula was an integral part of the quota and governance reform agreed in 2010.
IMF Directors have said the formula should be simple and transparent, consistent with the multiple roles of quotas, produce results that are broadly acceptable to the membership, and be feasible to implement statistically based on timely, high quality, and widely available data.

Directors also highlighted the need to ensure adequate voice and representation for the poorest members. “Directors generally concurred that GDP is the most comprehensive measure of economic size and should continue to have the largest weight in the quota formula,” the statement said.
Many Directors noted that openness is a measure of members’ integration into the world economy and should remain an important variable in the quota formula, with a few favouring an increase in its weight.
Most Directors considered that reserves remain an important indicator of a member’s financial strength and ability to contribute to the Fund’s finances, with some calling for an increase in its weight.
http://sundaytimes.lk/120422/BusinessTimes/bt08.html

Development of capital markets; PPPs and private investment targeted for Sri Lanka
By Sunimalee Dias

The Asian Development Bank (ADB) believes Sri Lanka’s growth would reduce to 7% due to global setbacks and highlighted income inequality as one of the key challenges. The Bank’s Senior Country Economist Tadteru Hayashi told the media in Colombo last Tuesday that they expected the country’s growth to be at 7%, inflation at 8% and the current account balance to remain a deficit at 6.4% this year.

In view of the changing global conditions expected in 2013, the ADB opined a return to previous high figures of growth at 8% with inflation at 7% and the current account balance at -6% of the GDP.
He noted that growth was “moderate” but strong due to global demand and tighter demand management policies.

Inflation in Sri Lanka was impacted due to pressure exerted from currency depreciation and an energy price hike in February this year, he said. Exports are likely to be affected due to slow demand from Europe; Mr. Hayashi said adding that the trade gap however, is expected to“stabilize.”

The ADB is looking towards encouraging public private partnerships in financially viable projects and in assisting the development of capital markets. The Bank also seeks to catalyze private investment through the use of ADB’s credit enhancement products. ADB’s Country Director Rita O’Sullivan addressing the media said they would assist in critical areas of skills development and teacher training in a bid to build up on the required efficient human resources capacity in the country.

She noted that the rise in inequality in Asia was evident here as well adding that regionally this was linked to capacity favoured over labour; skilled over unskilled; and cities over rural areas.
Ms. O’Sullivan spoke of the ongoing country programme that would include the above areas of inclusiveness, capital markets development and more private investment that would ensure higher growth.

The report highlights challenges for policy makers, including tackling income inequality and reducing pressure on natural resources, both of which threaten the sustainability of future growth and poverty reduction. This will require stepped up investment in rural areas and more comprehensive social security safety nets, as well as stronger management of water and other natural resources, and improving energy efficiency.

Currently the ADB is involved in infrastructure development, a key component in the government’s development policy, she said. It was also pointed out there was a need to engage in increased investments in the lagging regions to reduce disparities that would ensure a reduction in poverty levels and in inequality of incomes.

At present, the Bank has invested in projects related to transport, energy, water supply and sanitation, and urban development sectors. The ADB’s report on the region stated that the income divisions were rising with the richest 1% of households accounting for 6% - 8% of total income. In this respect, 20% of the total income went to the wealthiest 5% in most countries.
http://sundaytimes.lk/120422/BusinessTimes/bt17.html

By Prasad Sachintha Mapatunage
Tea, coconut and rubber are the major agricultural exports of Sri Lanka. The local and international demands for these exports increase daily, necessitating the need for a strategic review in order to assure the sustainable growth of these exports. Among all three products, tea is the highest demanding product in the international market. The cost of tea production is increasing whilst the market demands for more and more lower prices. When the modern technology engaged in tea production is concerned, the cost of production is very high in comparison with other agricultural products.

Sri Lanka tea is consumed by many tea lovers all over the world, especially in Europe, Asia, Middle East, etc. However for the product to remain competitive among the global tea exporters we must focus on new strategies. In addition to the quality standards maintained in conventional tea industry, the percentage of value addition to the product should be gradually increased, to give a differentiated product to the market. It helps to create a high competition among core competitors. The value addition should be executed in a manner to fulfill strong consumer requirements and environmental protection. Using an eco-green system in production to combat global warming, maintaining bio diversity in plantations, offering social responsibility to the workers, convenience and sensory satisfaction are some of them.

Value addition to tea
Value addition can be done initially by primary production procedures. Production methods of organic and bio dynamic add value to the tea, as a bulk production. The best value addition that could be done is the convention of tea production to organic tea which is about 100% against 2.5% for conventional tea. Demand for organic products is rapidly growing mainly due to health concerns of consumers in the developed importing countries. The important thing is changing market pattern and strategies towards other sectors such as Europe, North America, Canada and Japan which result in minimizing the high risk of market domination by CIS and Middle East and enjoying higher revenue from tea exports to secure western markets mainly in value added form.

Packing tea into bags in many forms has become very popular because of convenience and it can be considered as an effective form of value addition. The use of environmental friendly packaging materials which are bio-degradable, recyclable and reusable is a favourable factor in tea marketing. Great care must be taken to select materials with non-predictable barrier properties to moisture and flavour which maintain quality standards and the freshness of tea for desirable shop shelf and consumption period.
Flavouring of tea using natural mixture of spices, herbs and extracts in liquid or granulate form has become very popular in most of the market segments of specially teas. Strong artificial flavours are also used widely to flavour tea. Conventional tea is without any significant health risk since the percentage of artificial flavour used is very small.

Quality requirements
Actually, assurance of quality is a form of value addition to tea, which guarantees production quality and the safety standards to customers. Quality monitoring play a major role in monitoring such procedures in tea production when forced to adhere to food hygiene and other quality parameters which provide assurance of food safety to customers in developed countries.

EU consumers are looking for reliable suppliers who can supply them on a regular basis, at a good price with consistency in quality. Developing country exporters must therefore be able to supply at a consistent level of quality and according to agreed specifications.

Another factor is traceability of origin that makes it possible to track and trace product throughout the production chain. This entails heavy registration monitoring and controlled process. When producing quality to products we are obliged to fulfill our responsibility towards customers by maintaining the quality standard levels from the very first step of the production process. Another significant factor is quality certification such as ISO 9000, ISO 12000, etc. Having the certification will improve the confidence of customers in the particular product. Supply chain management is very important, because the availability of the product in the market is paramount. The product will go through several value addition levels before it reaches the end consumer. But the product should always be available no matter whether a local market or an international market, because availability assures good quality.
Having such characteristics will create high demand and will also provide a competitive edge in the world market.

A strong foundation should be laid by Sri Lanka Tea Board to support and guide local producers to reach the needy quality requirements, by introducing Ceylon quality certificate for the long term sustainability of our tea industry. Installing new technological is now more essential than ever before, to introduce new types of tea for the special niche markets. There is a great demand for such tea. Consumers select alternative tea such as Rooibos, Heneybos and other herbal teas that do not have the presence of caffeine. Consumers are becoming more and more health conscious. Price is no barrier for exclusive and innovative teas in the global tea market.

Value addition along with satisfying future quality requirements have become good future investments for tea accessing the ever growing special and higher segment for the rich tea consuming world.

Competitive global tea market

It is time that Sri Lanka should be concerned about the present and the future of the local tea production. Tea business is indeed maintaining a fit between green and sustainable growth of the product. Since the increase in exporting tea volumes means an increase in GDP (gross domestic production) level, a higher market competition should be maintained internationally while surviving high profit levels.

(The writer is studying international transportation and logistics management. He could be reached at rasadsachintha@rocketmail.com)
http://sundaytimes.lk/120422/BusinessTimes/bt36.html

By Lloyd F Yapa
The whole country is agog with the passing of a resolution against alleged human rights violations in Sri Lanka (SL) in March this year. Some say the LLRC report should be implemented not only to avoid such a second resolution containing sanctions but also to resolve the ethnic problem and improve governance. In other words the implication is that this is one of the highest priority challenges facing the country. Actually it is not, although the solution may include implementing the LLRC recommendations. Why should one come to this conclusion?

Poverty and Malnutrition
It is about three years since the LTTE was vanquished and peace restored after a 30-year war. The country should have by now started the economic development war. The question that should be asked is whether we have done so. The most important problem to be tackled in economic development is poverty alleviation. There are claims that the level of poverty has declined to 9% on the basis of the Official Poverty Line which was Rs 3028 per person per month (2009/2010).

The rationale behind this line of poverty is that it enables a person to obtain 2030 kilo calories which is considered to be the level of nutrition that a person needs from food. While it is questionable that this level of nutrition can be obtained with this income, another question that arises is what about expenditure on clothing, shelter, medical needs, education of children, transport etc. during the month.
The US$ 2 a day per person per day poverty line gives an indication of the minimum income per month needed by a family of four to meet all these needs; currently it is about Rs 30,000 a month (1US $= Rs 125). On this basis about 42% of the population of more than 20 million is considered poor. The 30% level of malnutrition reported among children of less than five years of age and expectant mothers may not be surprising given the US$ 2 per person per month cut off line.

Thirty percent is the average level of malnutrition; how much could it be in the poorest districts of Nuwara Eliya, Moneragala, Rathnapura and Badulla? In the war-ravaged areas of the North and the East it is higher- for example in Batticaloa it is reported to be 53% and in Vavuniya it is 51%; this is an indication of the level of rural poverty, which can be attributed mainly to the prevalence of subsistence agriculture in ‘stamp’ sized allotments of land, the farmers of which are unable to invest to increase their incomes (unless ownership is given and the size of holding is increased). If the poverty and malnutrition levels are so high in the country, what effect would they have on the future level of health and productivity of the nation for instance? Malnutrition or anemia is known to affect the physical and mental growth of the persons concerned in general and in particular lead to stunting and vulnerability to diseases. No doubt the level of poverty in SL is one of the gravest problems facing the country and the authorities.

Investment the way out
I believe the major solution to this problem is one of increasing the level of investment (particularly in the poorer areas of the country) from the present level of 28% of GDP to about 35% or more of GDP to create employment opportunities. A part of this level may have to come from foreign direct investments (FDI) as local investors find it difficult to secure the necessary capital, technologies, management skills and global market access to expand earnings from exports (foreign demand), which undoubtedly is the way out to speed up the rate of income growth.

Investment climate
A small country like SL should have a positive investment climate unlike in the case of countries like China and India where the main FDI attracting force is a large market (though with political, social and economic stability). Have we had a positive investment climate at least after the defeat of the LTTE ignoring the 30-year war period? SL had attracted US$ 581(net) and 516 million in 2009 and 2010 respectively (official figures). Whereas similar small countries like Singapore had an inflow of FDI of US$16.8 and 37.4 billion, Hong Kong US$ 48.4 and 62.6 billion, Thailand US$ 5.9 and 6.8 billion and Malaysia US 1.4 and 7.0 billion in 2009 and 2010 respectively; these countries have attracted FDI to the tune of billions of dollars and not a trickle of millions as in the case of SL. What this proves is that in these countries the investment climate has been far better or positive and has been a veritable magnet for investments unlike in Sri Lanka.

Global competitiveness
Our level of international competitiveness is low. According to the Global Competitiveness Index (GCI) 2011 and 2012, SL’s competitiveness ranking, out of 142 countries, in respect of public institutions is 50, (from 73 in 2010/11), infrastructure is 60 (64 in 2010/11), macro economic stability is 116 (128 in 2010/11), higher education is 66 (64 in 2010/11), labour market efficiency is 117, goods market efficiency is 41 (45 in 2010/11), technological readiness is 85 (85 in 2010/11) and innovation is 42 (44 in 2010/11). The figures within brackets indicate that SL has made progress in certain areas and in a few areas like higher education our competitiveness has deteriorated. In the case of Singapore it must be stated that the country’s ranking is within the first 10 in respect of all these competitiveness measures.

Public institutions
The trouble with our public institutions including the judiciary and the police is that they are not politically neutral, are inefficient and mostly corrupt due to politicization of recruitments and promotions particularly in the absence of the independent commissions under the 17th Amendment to the Constitution; a serious question that can be raised is how can good governance with democratic rights as well as the rule of law (with security of persons and property sought after by investors) apply to all irrespective of race or religion if there are no such checks and balances on centralized power? It is mainly the existence of these qualities with macro economic (fiscal and monetary) stability and quality physical infrastructure along with high educational attainments that attract investments especially to a small country. Mere extension of incentives such as tax holidays to compensate the absence of these will attract only ‘footloose’ FDI who will decamp after utilizing the incentives.

Infrastructure and Education
Among infrastructure facilities, power supplies are not only expensive (US Cents 7.00-7.50 per unit vs. 1.52-3.90 in Indonesia) but also the quality thereof even in Colombo is poor that most firms use oil-fired generators for emergencies. The authorities have certainly taken pains to improve roads, but still the connectivity or the time taken to transit between Colombo and the towns in the rural periphery has not been shortened significantly, except in the case of the Southern Expressway, to improve productivity and entice investors to these undeveloped areas. The system of tertiary education does not produce the technical and management skills required by investors to compete with the rest of the world; according to latest GCI data it has in fact worsened in 2011/12 in ranking.

Macro-economic stability
Macro-economic (fiscal and monetary) stability has been poor and therefore the costs incurred by firms have been high, although the authorities to their credit have tried to bring it under control particularly with the recent introduction of some increases in taxes and a flexible exchange rate to reduce (inflationary) budget deficits and to improve the balance of payments.

Labour market efficiency
Our labour laws have been most complex and have not been liberalized in line with competition in the rest of the world so much so that firms have been compelled to engage special staff to negotiate through the maze.

Ease of doing business
According to the World Bank ‘s Ease of Doing Business Index 2012 SL is ranked 89 out of 183 countries (98 in 2011); in respect of other parameters the ranking has stagnated or got worse.

Corruption
Investors and the public have also to contend with widespread corruption, SL’s score which according to the Transparency International’s Corruption Perception Index 2010 was 3.2 , (0.0 being most corrupt).

External threats
These being some of the internal weaknesses, what are the external threats? Prospective investors have been given wrong signals as they may have to examine the possibility of nationalization of assets with a new law to expropriate under-performing and unutilized assets of a number of firms last year. SL has in addition not been consistent or predictable with its policies having done away with tax holidays in one government budget and reintroducing them in a later budget and in implementation. Our relations with the rest of the world especially with the developed West which form the major markets for our exports and from which most of the FDI flows have been deteriorating, reaching a low point with the Geneva resolution on alleged violations of human rights.

Wonder of Asia
My contention is that if we had kept our priorities like poverty alleviation in mind we could have done better, in fact if we had differentiated ourselves against countries competing for FDI and produced a world class or even superior investment climate, (the most notable qualities of which have been stated above under public institutions), without getting distracted by issues like national sovereignty which is of dubious importance in the context of global competition for trade and investment, we could have avoided the devastating Geneva Resolution for the simple reason that there would not have been anything seriously wrong with our governance set up to find fault with. One would think that this is exactly what ‘Wonder/ Miracle of Asia’ means. For this purpose we have no doubt to overcome the above mentioned weaknesses and threats and build on strengths and opportunities like the superior location of the island in the Indian Ocean close to the booming markets of India, Indonesia and China, while maintaining contact with the rich markets of the West until they recover from the recession.

Back to Basics
We can start the process of building a differentiated and dynamic investment climate right now by concentrating on the most serious of our priorities, namely overcoming poverty and malnutrition. The authorities have shown that if they make up their minds, they can attempt any task successfully; the only stipulation is we stick to the most basic of priorities, which if realized will give an additional bonus to the authorities- continue to make them popular because the implementation of this process will benefit a majority of people.

(The writer is an economist)
http://sundaytimes.lk/120422/BusinessTimes/bt35.html

China’s Sinohydro Corp. has won a 252 million US dollar contract to build a dam providing water and hydropower in north-central Sri Lanka.

A statement said the decision to award the contract to build the headworks of Moragahakanda Reservoir to the Chinese state-owned hydropower engineering and construction company was made by the Cabinet of ministers this week.

The project will meet the long term demand for domestic and industrial water needs in the North Central, Northern and Eastern Provinces, it said.

The project will also generate 20 mega watts of power and provide water for around 68,000 hectares of cultivable land including 3,000 hectares of new lands.

– LBO
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=50122

In perhaps a new shift to transparency Sri Lanka has released an International Monetary Fund staff report prepared to support the 7th review under its program, after suppressing them for years.

Under the current administration, quarterly staff reports of the program and even annual reports and selected issues documents prepared as part of annual ‘Article IV’ consultations have been suppressed from the public and markets for several years.

In the mid 1990s Sri Lanka became one of the few countries to release all IMF documents to the public, but the policy was later reversed in 2008.

In 2009 one report was released, after a long delay.

IMF has said that approval from the host country is needed to release report. Countries like Pakistan and Maldives are more transparent.

Economist Harsha de Silva, who is a lawmaker for the opposition has said that Sri Lanka’s authorities painted a rosy picture of the economy by suppressing alternative analysis such as from the IMF and ended up in a balance of payments crisis.

Sri Lanka ended up in a balance of payments crisis by trying to defend an exchange rate without tightening monetary policy, which is not possible in practice. – LBO
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=50123

Thanks CSE.SAS.

K.Haputantri wrote:Thanks CSE.SAS.

Just a polite advice read this link.
http://forum.srilankaequity.com/t17421-thanking-culture?highlight=thanking

Some of our genius guys do not like encouraging others by the way of thanking.
What a shame?

Anilana Hotels and properties invests Rs 4.2 billion
Anilana Hotels and Properties Ltd plans to add 1000 rooms to the hospitality sector by 2015.

The group controlled by entrepreneur and frontline asset manager, Asanga Seneviratna and his family have invested Rs 4.2b and is very bullish about the sector. Seneviratna said that they have started work on four properties situated in Nilaveli, Passikudah, Pannichchankani and Dambulla.

Work on the two hotels in Nilaveli and Passikudah is nearing completion and are scheduled to open by July while work on the other two hotels will be completed next year.

The group has already received BOI approval while it has applied for a listing on the Colombo Stock Exchange and the issue is expected to open by the end of this month.

Facilities at the five star resort at Nilaveli include 70 rooms with state of the art technology, a deck with outdoor dinning,two Swimming pools with shallow ends, a Pool side bar, two restaurants, an indoor Bar, coffee shop, Shops as well as Spa Anilana.The five star resort at Passikudah include 60 rooms as single, double and duplex chalets with state of the art technology, lounge and swimming pools,restaurant and bars an open restaurant on the deck as well the Spa Anilana.
– SG
http://www.sundayobserver.lk/2012/04/22/fin02.asp

By Dr. Arujuna Sivananthan
A bubble in economics refers to a period in which a product or asset is traded in high volumes at prices that are at significant variance with its intrinsic value. History is replete with examples including the Dutch Tulip Mania from 1634 to 1637, the French Mississippi Bubble in 1719-20 and the South Sea Bubble in the Great Britain in 1720.

In an article in the Journal of Monetary Economics, Ricardo J. Caballero and Arvind Krishnamurthy suggest that emerging market economies provide ideal conditions for financial bubbles and that they come at a cost.

Undeveloped and weakly regulated financial markets can lead to investors undervaluing risk premia for protracted periods causing bubbles. Bursting bubbles expose economies to capital flow reversals, prolonged periods of asset price deflation and other welfare reducing outcomes. Caballero and Krishnamurthy also suggest a set of policies to mitigate bubble risk including prudential banking regulation and the undertaking of structural reforms to develop public debt markets and property rights.

In its December 2011 Macro-Prudential Risk Monitor, rating agency Fitch moved Sri Lanka’s banking system to the high-risk ‘3’ category “due to strong real credit and asset price growth stemming in part from the strong growth of imports” asserting that “Historical experience suggests financial systems in this category are at risk of instability”. Moody’s in rating the proposed Bank of Ceylon’s foreign currency obligation makes the following observation of the sector i.e. “deposit growth has not been able to keep pace with its credit growth”. Sri Lanka’s state owned banks in particular have bloated their balance sheets using money markets rather than deposits and have set aside less capital against these new assets than in previous years; most of which were generated by lending to the government and loss making state owned enterprises.

Sri Lanka’s zealous adherence to a soft-peg of the rupee with sterilised interventions since mid 2010 also fuelled excess credit growth. The Central Bank continues to print rupees to keep interest rates low and alleviate the drying up of liquidity in money markets caused by import demand for foreign exchange.

Unfortunately, excessive credit growth plays a critical role in fomenting asset price bubbles. Former president of the European Central Bank Jean-Claude Trichet in a lecture at the Monetary Authority of Singapore observes that “deviations of the credit-to-income ratio in excess of the 4 percentage point threshold alone as a warning signal would have even predicted 79% of financial crises”. In Sri Lanka’s case, credit-to-income growth, despite remedial steps by its policy makers, remains well in excess of 4 percent.

Evidence of Sri Lanka’s bursting asset price bubble is apparent in all markets. The benchmark Milanka stock index is down approximately 30 percent from its highs in 2011. However, its performance measured in US dollars over the same period is worse –it is almost 43 percent lower. Sri Lanka’s economy grew by an impressive 8 plus percent last year. However in dollars terms it has contracted. In April 2012, Sri Lanka’s economy is 10 percent smaller than it was in January 2011. Foreign investors and expatriates lured by Sri Lanka’s high yielding rupee bonds and deposit accounts have suffered too. A depreciating rupee has not only eroded any interest income earned but resulted in them suffering capital losses. Also, anecdotal evidence is suggestive of Colombo’s property market remaining depressed.

Caballero and Krishnamurthy also demonstrate that secure property rights are crucial to sustaining long-term foreign direct investment. However, in Sri Lanka’s case, the Asian Development bank in its 2012 Asian Development Outlook publication states that “Investor confidence is a key factor in attracting investment and this requires a predictable policy environment as articulated and reinforced through the legal, regulatory, and institutional framework. Thus the lack of such an environment for the private sector is a major obstacle to private sector development”.

Sri Lanka’s policy makers have taken some tentative steps to alleviate the financial stresses it confronts. However, whether they shall be adequate to deal with prevailing headwinds not just on the domestic front but in a global economy mired by uncertainty and a volatile geopolitical environment remain yet to be seen.

The question at the heart of Sri Lanka’s economy is whether its citizens are richer or poorer than they were eighteen months ago. And, it only requires simple arithmetic to arrive at the answer.
http://www.thesundayleader.lk/2012/04/22/the-bursting-bubble/