The relaxation of monetary policy is unlikely to lead to further inflation as other factors have a greater impact on local inflation, a private economic consultancy has forecast.
One factor is import prices.
Econsult (Pvt.) Ltd. says there is a strong relationship between import expenditure and money stock (broad money).
"If this is the case and a relationship exists between import expenditure and money stock, then one can conclude that it is import prices which in turn influence domestic prices, that drive money stock, "Econsult said.
Econsult has been a consistent critic of government and Central Bank policy in the past two years which has been aimed at containing inflation through monetary means.
This strategy is widely believed to have caused the present economic downturn by strangling credit and investment as well as business confidence.
In 1996, however, the Central Bank relaxed monetary policy and allowed money markets to remain liquid despite rising inflation. The latest relaxation came in the form of a reduction of the statutory reserve ratios of commercial bank deposits.
Econsult points out that such action is a direct contradiction of the Central Bank's earlier policy.
"If inflation is a monetary phenomenon, then relaxing monetary policy when inflation rates are at 16 per cent levels, does not make sense," it said.
According to monetarist thinking such action would lead to even higher inflation.
Critics of monetary thinking have however held that rather than money stock driving inflation, it is increases in prices that drive changes in money stock.
"The essence of the argument is that inflation in Sri Lanka is not a monetary phenomenon and is driven mainly by import prices over which we do not have control," Econsult says.
"Situations such as the drought and war, further worsen supply bottlenecks which in turn, lead to increased cost push pressures."
Starving the economy of liquidity to curtail inflationary pressures would therefore add to inflation via higher interest rates.
"Given the above reasoning, the relaxation of monetary policy is unlikely to cause inflationary pressures in the economy," Econsult says.
"We expect world inflationary pressures and commodity prices to decline in 1997 reducing pressure on import prices."
Econsult suggests that investments may have started to pick up from the second half of 1996. "On an annual basis, investment goods imports, in rupee terms grew by around 5 per cent in November 1996."
However declining industrial output continues to cause concern, which cannot be simply explained away by citing the power cuts.
"The fact that warrants noting is that the trend growth of the manufacturing sector, as shown by manufactured export earnings, had been on the downward path, even before the power crisis and has continued its slide even after the normal power supply was restored," Econsult said.
The image of the World Bank (WB) and the International Monetary Fund (IMF) as distant financial institutions which impose conditions on developing countries was repudiated by the Governor of the Central Bank A.S. Jayawardena at a public lecture last week. Mr. Jayawardena, who had served on the IMF Board as an Alternate Executive Director, was speaking on "The World Bank, IMF and Structural Adjustment."
The Press and some politicians have been known to criticise the IMF and the World Bank as alien organizations bent on dictating terms to developing countries. But there is nothing further from the truth, he said. This is the type of rhetoric that the whole country is indulging in.
Mr. Jayawardena traced the history of the formation of the two Bretton Woods institutions and the part played by Lord Keynes and Dr. Harry White, at the end of the Second World War. He pointed out that there was considerable chaos in world trade, with rich countries dominating the poor and keen competition among developed countries. Trade, he said, should be for the mutual benefit of the trading countries. An objective of the IMF was to promote trade and payments amongst its members who undertook to engage in orderly trading and making payments. The World Bank was intended to engage in the reconstruction and rehabilitation of the war devastated countries.
Although countries promised to allow payments to be made freely, trade imbalances could result in a temporary halt to a free flow. A short term balance of payments crisis could be brought about by a temporary shortfall in export earnings due to low prices in the world market. In such circumstances a temporary loan from the IMF would help alleviate the problem.
But, said Mr. Jayawardena, the problems of a country could be deep seated rather than temporary. In such a case there would need to be structural adjustments in order to induce changes in the economy and this is where the IMF would offer a Structural Adjustment Programme which would involve the extension of financial assistance on a medium or long term basis. The IMF would consider granting a loan under its Structural Adjustment Facility only if the country adopts policies that would promote and sustain growth which would enable the country to pay back the debt, said Mr. Jayawardena. he said that this is the usual lender-borrower relationship where the former tries to ensure that the latter pays him back the money owed to him.
Very often, said Mr. Jayawardena, countries that obtain such loans have politically motivated welfare measures such as subsidies.
He cited the bread subsidy which would have an adverse effect on the farming community, while providing cheap bread to guests at five-star hotels. In any case somebody has to pay for such subsidies. Can we afford to have subsidies, he asked. The IMF may require the abolition of such subsidies. The abolition would come in for criticism on the ground that it has been done at the behest of the IMF. But the only way we can find our own salvation is to adopt sound economic policies. "We are responsible for our own salvation", he said.
The Sri Lanka beer market which of late has experienced a short supply will see two to three new brands of beer, from a new brewery: United Breweries (Pvt) Ltd.
A joint venture between Mauritius Breweries offshore Ltd., of Mauritius, the A.P. Casie Chitty Co., Ltd., and Hilary Co., (Pvt) Ltd., of United Breweries (Pvt) Ltd., hope to enter the market by September.
Mervin Rodrigo, CEO of United Breweries, told the media the reduction of excise duty on beer in the 1996 budget had resulted in an unprecedented increase in demand; the supply sadly had not increased, thus there was a vaccum in the market and United Breweries would fill it.
Contrary to popular belief, the reduction of excise duty on beer has resulted in the increase of Government revenue due to the higher consumption, Mr. Rodrigo said. He said a further duty reduction would make beer as affordable to the masses as illicit liquor was and this in turn would drain the illicit liquor trade which did not contribute to Government revenue.
The initial production capacity is designated to meet the immediate partial shortfall in local consumption requirements at around 120,000 Hecto Litres. The monthly supply at present according to estimates is around 1 million bottles. According to United Breweries the demand is close upon 2 million bottles a month and with the start of production they are hoping for a market share of around 25%.
The building construction for the Brewery to be situated at Mawathagama on the Kurunegala-Kandy road is to begin shortly with an investment of Rs. 550 million with the Brewery to be constructed in two stages. This project is expected to provide employment to around 150.
Mr. Rodrigo said United Breweries was concentrating on brewing a sweeter brand of beer, more acceptable to the Sri Lankan palate.
Commenting on the pricing, Mr. Rodrigo said they did not plan to start a price war. To produce a high quality beer at present is their aim, he said. United Breweries also hope to reach the export market after start of production and are even considering exporting to countries outside the SAARC region, Mr. Rodrigo said.
Cyril Lagesse, Chairman of Mauritius Breweries Ltd., said they would hold a 49% stake of United Breweries (Pvt) Ltd., and would nominate three directors to the board. He said that in Mauritius beer consumption was at 28 litres per person a year while in Sri Lanka it was a mere 1 litre per person per year: thus there is great potential in the Sri Lankan market, he observed, and hoped that many more joint ventures would flourish between Sri Lanka and Mauritius with the initiative offered by these two companies.
Bede Anandappa, Chairman of United Breweries said they would consider a public offer in around three years and assured the public of high quality brands of beer with even a possibility of an international brand being introduced.
Staying pure
A leading beverage maker was in trouble recently because of labour unrest, and supplies of its popular product were in short supply.
The situation was such that even the prestigious local agency was being reviewed.
But the state of affairs is much better now, and though unrest is still simmering, the agency will be retained in its purest form, we hear...
Tied to poll
The Colombo stock market was steadily climbing but suddenly flattened out last week.
Retail profit is the explanation of most, but there are other factors at play.
Most local agents for foreign institutional buyers have advised a "go slow" on buys until the local government polls, they say...
Chase is on
One major American Bank has linked with a local development bank already.
Now another is eyeing Colombo, seeking a mate for a joint venture.
The chase is on and two blue chip banks are already in the fray...
Has privatisation earned a bad name? The recent mismanagement and mistakes in privatisation, the failure of some privatised enterprises, the tendency for the government and opposition to find fault with privatisation done by each other and the opposition of trade unions do not augur well for future exercises in privatisation. Yet privatisation appears essential for enhancing efficiency and increasing the momentum of industrialisation and inducing much needed foreign capital for our growth.
A distinction has to be made between the need for privatisation and the modalities of privatisation. The issue of whether assets have heen undervalued must be looked at dispassionately. Merely because share prices increased after privatisation is no good reason to thank that the assets were undervalued before. The asset value of an enterprise is not necessarily a good basis of valuation for privatisation. The value of an enterprise for privatisation could be lower or higher than the asset value. There are also overall and macroeconomic considerations in selling public enterprises. The impact on the economy as a whole and the investment climate must also be considered. The need to have good strategic partners to take over public enterprises in the national interest complicates the issue even further.
Therefore, the valuation of a public enterprise for privatisation is a complex issue. It is best left in the hands of the experts. What must be prevented is the give away of state assets to political stooges. Selling public property at obviously low values, in order to benefit the decision makers, politicians or bureaucrats must of course be avoided. But prejudiced and uninformed assessments merely to bring discredit to the privatisation process or political opponents are not in the national interest at this stage of development when privatisation is an essential strategy for economic growth. Criticisms of past privatisations could help avoid mistakes but should not be used to prevent future privatisations.
The privatisation process must protect the public interest. This is especially so in the case of public utilities and public monopolies. There must be rules and regulations to govern the enterprise post privatisation. The pricing of a public utility service must be governed by clear guidelines. That is not at all.
Many countries have insisted that privatised public utilities should achieve pre-determined targets, in order to ensure that the country gains from such privatisation. For instance, the expansion and extension of services are stipulated and failure to achieve those targets have in-built penalties in the privatisation agreement. Furthermore there should be statutory bodies to ensure that the public interest is served.
Apart from protecting the public interest in terms of pricing, there is a need to ensure the national interest by the process of privatisation leading to decisive gains in technology transfers and in more efficient management and gains in externalities. Some of these are ensured by the enterprise being profit motivated. But some of the advantages of privatisation could be achieved only if the process of deciding the owners of the new enterprise is done after careful selection keeping in mind the national interest in the long run.
For instance, selling public Corporations to hostile foreign interests could be damaging. Similarly, if a foreign or local buyer does not have the capacity to move the efficiency of the concern to higher levels, one of the main objectives of privatisation will not be achieved.
Trade Unions often oppose privatisation. Though they cry halt in the name of the public good, in most cases such objections are based on narrow interests of particular workers. The vested interest of trade unionists to dominate a public enterprise and to be able to continue inefficiently are reasons for such opposition. Many of those who are used to a lethargic work pace are against privatisation.
The objections raised by the Sri Lanka Telecom Trade Unionists demonstrate that trade union action was not in the national interest, but intended to sustain an inefficient telecommunication system and deny the public a better service. For instance, the telecom trade unionists have insisted that the private companies should not reduce their prices below the level of Sri Lanka Telecom. That is decisively against the public interest. One of the many advantages which a privatised telecommunication system was expected to give was for the public to obtain better services at cheaper prices. The trade unionists are in effect denying the public the lower cost of telephone services.
The approach of many of those who oppose privatisation appears to be that public enterprises have failed, but must continue to be publicly owned. This is indeed an unsatisfactory approach. Public enterprises which are unable to deliver the goods and heap burdens on the state have no right to ask for their continued existence as government owned enterprises. This does not necessarily mean that all public enterprises need to be privatised.
But where the objectives of higher efficiency and the public interest are served by privatisation ideological or political reasons should not prevent the government from going ahead with such privatisation. The decision to privatise must be backed by the proper modalities to ensure that the government obtains the correct value and that the process of transferring the assets confers long term advantages to the economy and the public. Privatisation must go ahead but the process must be professionally formulated and implemented.
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