Business

2nd December 2001

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Sri Lanka's cost of living has risen in recent years as this graph shows. But there have also been periods where it rose by 26.1 percent in 1980, 21.5 percent in 1990 and 16 percent in 1996.
Contents

Mind your Business 

Hit bull and run
Brokers at the Colombo bourse are bracing themselves for a buying spree next week, subject of course to a green win at the polls.

Word has it that many overseas and institutional players have earmarked funds to cash in, but are awaiting the outcome of the polls to take the plunge.

But most of them believe that such a Bull Run will only be a knee jerk reaction to the elections; for it to be sustained much more needs to be done. Therefore, most of them plan on making a quick buck and beating a hasty retreat.

Golden garbage dump
With the economy in the dumps, even large and diversified blue chips are feeling the pinch. One blue chip has already offered an early retirement plan for workers and now another is planning to cut upto a quarter of its workforce with a generous discontinuation allowance.

But before announcing the offer the latter did an employee survey and the results were not encouraging: and there may be no takers, even if the golden handshake was lucrative enough!

Dreary dairy dealer
A leading dairy products distributor is said to be in trouble with dwindling profits, rising overheads and rivals eating into their market share.

Their appeals to the authorities for tax concessions have fallen on deaf ears and now the only answer, their experts say, is to remain competitive by reducing prices of their products. But the company is also looking at another option - that of scaling down operations in this country.


Crucial poll for Sri Lankan economy

By Feizal Samath
Sri Lankans go to the polls on Wednesday for the second time in a year to elect a fresh government, which has a daunting task ahead of reviving a crisis-hit economy.

Economists say whoever the ruling People's Alliance (PA) or the main opposition United National Party (UNP) wins would be hard-pressed to find quick solutions to key issues like the war, trimming government spending and reducing the cost of living.

"There is no doubt about that. Irrespective of what the two parties say on political platforms on their solutions for the economy, the task is extremely difficult and often too complicated," said a private sector economist.

He said the Janatha Vimukthi Peramuna (JVP), expected to come a distant third in the polls, is seen losing some support after the contradictory statements of its leader Somawansa Amerasinghe, who emerged after 12 years of hiding in the west.

Public statements like the prospects of a third insurrection and an apology by the JVP for their spate of killings in the 1980s, is negative to a party that wants to be viewed as democratic and non-violent with grassroots support, and forget its dubious past record.

The Colombo-based leaders of the JVP and Amerasinghe are even divided on the role of the private sector. Amerasinghe told the Kalutara rally that he had returned to fulfil Rohana Wijeweera's ambition of "finishing off the capitalists" while Wimal Weerawansa, the group's charismatic propaganda secretary, said in a recent magazine interview that the JVP wants to strengthen the state sector while making the private sector the engine of growth.

For most economists, the poll would be fought on a very basic issue which party is more capable of tackling the cost of living. "It virtually boils down to that. Voters will place their faith in the party that is most likely to bring down prices of essential goods," said a government economist, who declined to be named.

The country's business community is banking on a UNP victory as the opposition party is widely seen as a much better economic manager than the PA, a fact that was reinforced by the latter continuing the wide-ranging economic reforms launched by J. R Jayawardene's regime in 1977. The fight is between an urban-favoured UNP versus a rural-favoured PA though public discontent against the government in rural areas is seen rising, giving the UNP an edge at the polls.

Economists say the new government's priority in the first three months or 100 days would be to resume peace talks with the LTTE, trim government spending and re-negotiate the standby arrangement with the IMF which has gone off the rails. The delayed 2002 budget, not announced in November, would have to be presented by at least February or spending done through a vote on account.

"It's tough if the UNP wins as it would immediately get entangled in a high-stakes battle with President Chandrika Kumaratunga, giving the party little time to devote to economic issues or the war," a political analyst said.

Sri Lanka's economy battered by the war and a worsening external environment for the country's exports is heading for near zero growth for the first time in decades. Economists said that any revival next year to a 3-5 percent growth could not be considered an achievement, as it would be growing from a very low base.

Foreign investors say the investment climate is very shaky. "These are very challenging and unpredictable times," said one investor involved in infrastructure development. "What investors need is consistencies in policy, transparency and to allow the free market to operate."

A PA government would continue current economic policies with sharp cuts in government spending after negotiations with the IMF. The UNP, economists say, is likely to undertake large-scale economic restructuring and initiate tripartite negotiations between the BOI, management and unions on wage setting.

It is also likely to reverse privatisation of SriLankan Airlines or keep a tight leash on the airline and the port, and order an inquiry into the privatisation of these two state assets. It is also likely to start divesting the banks.


Tussle over telephone tariffs

Sri Lanka's two private fixed phone operators are battling against eroding profits and an economic downturn that has led to cutbacks on calls by corporate and household clients, and is desperately hoping that Sri Lanka Telecom (SLT) would raise tariffs.

"Technically we can raise rates as we are not controlled by the government regulator but SLT has to make the first move," said Hugo Cenderschiold, managing director at Suntel Ltd.

Joey V. Mendoza, managing director at Lanka Bell, agrees saying there has to be some tariff increase commensurate with increasing costs. "SLT controls 90 percent of the market. We can't raise rates if SLT rates remain unchanged as there is a danger of pricing ourselves out of the market."

Local telephone rates have remained unchanged for 18 months while the operating costs of the two operators and SLT have gone up sharply. The Telecommunications Regulatory Commission (SLT) is apparently not opposed to a revision in the tariffs and SLT is also interested but officials say it is ultimately a government decision.

"We can't change rates without government permission," a SLT official said adding that they were also losing in the region of Rs. 100 million a month due to low rates as revenues on foreign calls have also fallen under an ongoing re-balancing mechanism.

The SLT is gradually reducing international tariffs - which subsidises local rate charges to customers - and bringing it in line with domestic rates, costing the state operator in terms of revenue. Industry analysts say though a revision in the domestic rates is long overdue, the government is unlikely to respond as it would add to high living costs.

The Suntel chief said profits have been severely affected by low call charges. "We are losing revenue while this in turn is affecting investments. We are not sure whether we would end up this year with a bottomline profit or a loss," he said.

Cenderschiold said there has been a drop in telephone calls in the past few months. "Companies are cutting down costs and taking away IDD facilities. Household customers are cutting usage."

Mendoza said given the current economic climate, increasing tariffs also raises other issues like less usage. "This is a dilemma we are facing. We need the increase but will this reduce usage? We have to weigh the pros and cons."

He said for dollar-based companies like Lanka Bell the cost of investments is rising. "While the rupee value against the dollar is fast depreciating our costs are rising if we take into account inflation, increased salaries, power cuts, etc. Every year the costs are increasing."

"We are finding it very tough to earn in rupees and spend in dollars. There is a lot of pressure on revenues," Mendoza said, adding that the company has not increased staff levels despite an increased workload.

He said they have seen a 15 percent fall in outbound calls in the past six to twelve months with the crisis in the hotel sector also adversely affecting the telecommunication industry.


Paltry returns for poultry farmers

Sri Lanka's poultry industry is facing a major crisis of rising costs of production against low selling prices while 3.5 million kg of meat lie in cold storage.

"There is a major crisis and some farms are closing down," lamented Dr. D.D. Wanasinghe, chairman of the All Island Poultry Association (AIPA). Even the festive season Ramazan followed by Christmas hasn't cheered the market with the demand for eggs falling even from traditional cake manufacturers, he said.

Chicken prices have risen sharply to about Rs. 140 per kg from around Rs. 110-115 per kg earlier this year, primarily after the government slapped an import duty on maize.

"Consumer buying has dropped because of high prices and a general economic depreciation," he said, adding that the slump in tourism had further complicated matters for the poultry industry.

Egg prices have fallen to between Rs. 2.50 to Rs. 2.60 per egg while production costs are in the region of Rs. 3.20. Production costs have increased because of the high cost of imported maize, which until February was duty free. Maize accounts for 15 percent of poultry feed and less that 7 percent is produced locally. A 12 percent duty was introduced to encourage local production and that was raised to 14 percent. 

Wanasinghe also blames the current situation on unplanned and overproduction in anticipation of seasonal sales. Broiler farms are continuing to produce in large numbers despite a stagnant market and oversupply, as owners don't want to close their farms. Farmers have also been affected by diseases like gumbora, which kills birds instantly, and salmonella in broiler and egg farms. "Vaccines are expensive, so there is a problem here," he added.

The poultry industry is made up of 60 percent broilers and 40 percent eggs with close to a million people dependent on this sector for a living.


Garments trade stunned by fire, robbery, dismissal

Dramatic developments followed last week's meeting between President Chandrika Kumaratunga and the garment trade with a senior official being dismissed, a factory set on fire and the payroll of another firm being robbed in broad daylight by gunmen.

Kumaratunga's cancellation of the last meeting of the Textiles Quota Board (TQB) also threw into uncertainty garment quotas for 2002, industry sources said.

The sources said Chandralal Athanapola, TQB director-general, was sent home on compulsory leave by the Industries Ministry, on the same day former Industries Minister Prof. G.L. Peiris, now in the opposition, spoke of how he refused an illegal order by the president on quotas.

But Athanapola through his lawyers, Paul Ratnayake Associates, challenged the dismissal and filed a fundamental rights petition in the Supreme Court on Thursday claiming political victimisation.

The TQB director-general refused to accept the dismissal letter and till Thursday stubbornly remained in his office, TQB officials confirmed in a scene reminiscent of the recent saga of the Samurdhi Director General, Dr. Kumari Navaratne.

The industry was also thrown off gear by a fire at a garment factory at Nittambuwa destroying several machines and a large stock of garments on Wednesday. An unidentified group of 15 armed men stormed the factory and set it ablaze after threatening security guards.

The following day, a group of four to five armed men in a van blocked another vehicle inside the high-security Free Trade Zone at Katunayake - carrying the payroll of Star Garments Ltd totalling Rs. 26 million at around 12 noon.

Three of the men got off and grabbed bags containing Rs. 2.6 million and drove off, a factory spokesman said in an incident that shocked the trade as it happened inside one of the most secured places in the country.

"After the Katunayake attacks, security in and around the airport has been tightened and since the FTZ is next to the airport, this place is also highly secure. This is a major security breach," he said. Star Garments is one of the first factories in the FTZ with US investment.

"Despite the crisis which unsettled our employees, we paid all the salaries on Thursday," the spokesman said.

Industry sources said Monday's meeting was disappointing with the president listening to the woes of the industry and promising to look into the matter. She, however, acted on a complaint made by Kumara Devapura of the Tri Star group who referred to insufficient quotas and urged that quotas be given on the basis of the number of machines and the numbers employed.

At a high-level meeting of officials and the trade on Wednesday, it was disclosed that the president had cancelled the decisions taken at the previous TQB meeting and that quotas should also be allocated on the basis of machines and employment.

It was at the last TQB meeting held in the third week of November that the board decided to grant the routine 50 percent quota allocation to garment exporters with the balance allocations to be made after end December.

Quota allocations have historically been made on the basis of performance, a system that has worked perfectly in recent years, but would now undergo changes under the new presidential directive. "The system is perfect when it is performance-driven but could lead to all kinds of problems under the new ruling," a source said.



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