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3rd May 1998

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CB targets further drop in budget deficit

By Ruvini Jayasinghe

Spurred by a healthy reduction in the budget deficit from 9.4 per cent of GDP in 1996, to 7.9 per cent of GDP in 1997, the Central Bank has targetted a deficit of 6.5 per cent of GDP for 1998. Its medium term target is an idealistic 4 per cent of GDP by 2000.

Reducing the budget deficit and controlling inflation were the two most significant achievements this year, Central Bank's head of Economic Research, R. A. Jayatissa told The Sunday Times Business at the presentation of its annual report last week.

GDP growth for 1997 recorded a 6.4 per cent as compared to 3.8 in 1996.





The overall budget deficit inclusive of privatisation proceeds has declined further from 8.8 per cent of GDP in 1996 to 5.3 per cent of GDP in 1997. The overall budget deficit after grants has been reduced to 4.5 per cent of GDP which is a 3.3 percentage point reduction compared to 7.8 per cent in 1996.

The deficit has even surpassed targets and is 1.6 per cent lower than the estimated budget deficit for 1997, the report adds.

Privatisation receipts (Rs. 22,535 million) were mainly responsible for containing the deficit but better cash management has also paid off, Deputy Governor S. Easparathasan said.

Despite a 0.5 per cent dip in revenue due to tax exemptions and reductions in 1997, current expenditure is down to 20.7 per cent of GDP in 1997, from 22.8 per cent of GDP in 1996. This is largely due to cuts in subsidies, defence, transfers and interest savings on high cost government debt.

While the government used less domestic resources to finance the deficit in 1997, the proceeds from the US$ 50 million floating rate notes were also available for budgetary operations.

The comparatively high GDP growth of 6.4 per cent (at 1982 factor cost prices) is partly due to the low 3.8 per cent GDP growth last year, Mr. Easparathasan said. But it also reflects the confidence of the business community to improved macro economic fundamentals and a healthy business climate, he added.

An overall growth in all sectors indicates the improved performance of our economy in 1997, he said.

Significant improvements have been recorded in inflation rate, domestic savings and balance of payments (BOP) which recovered from an overall deficit in 1996, to a surplus in 1997.

Inflation has been contained to a single digit of 9 per cent in 1997, down from 12 per cent in 1996. Improvement in domestic supply and a reduction in demand pressure with moderation in money expansion, were chiefly responsible for lower inflation, the report says.

Domestic savings grew to 17.3 per cent of GDP from 15.3 per cent of GDP in 1996, indicating a faster growth in real incomes. This increase indicates an improvement in the marginal propensity to save, despite a reduction in real interest rates, the report said.

But a decline in public investment and only a marginal increase in private investment failed to match the domestic saving rate increase. Investment is up by only 0.2 per cent from 24.2 per cent in 1996 to 24.4 per cent in 1997.

The overall BOP improved from a deficit of US$ 68 million in 1996, to a surplus of US$ 163 million in 1997, mainly due to increased exports (up by 13 per cent) service receipts, private transfers and higher capital inflows.

BOP projection for 1998 is in the region of US$ 100 million, Mr. Jayatissa said.


Bail-out package for Tri Star Group

By Mel Gunasekera

Tri Star's 12 ailing factories have been given a shot in the arm of 87,525 dozens quotas, subject to the factories being disposed of within four months, a Textile Quota Board (TQB) official said.

Under the proposed re-structuring programme, only 25 per cent of the quotas are to be restored immediately. Quotas would be allocated to 10 factories for a four-month period, during which they have to be sold off.

Quotas will be resorted to the factories for the four-month period on condition that no transfer out will be permitted, the official said.

Of the 10 factories, no quota adjustments are necessary for the Welimada and Balapitiya factories as they presently have full quotas for 1998.

The remaining eight under the 200 Garment Factory Programme, at Ambalantota, Yapahuwa, Badulla, Bandarawela, Galgamuwa, Nikaweratiya, Polpithigama and Buttala have been allocated a total of 87,525 dozens quotas.

The two other factories situated in Kamburupitiya and Girandurukotte came under the Provincial Scheme.

The TQB has also allocated a further quotas to Tri Star and Four Star Group (its subsidiary). The Group is also said to manage SLBC Super Lanka, which has been allocated additional quota. The Tri Star Group is also lagging behind in its EPF/ETF payments amounting to Rs. 75 mn. The company has been requested to pay the arrears in six monthly instalments of Rs. 12.5 mn per month.

Tri Star's total turnover per month in 15 factories manufacturing mainly non-quota garments dropped by around Rs. 40 mn becuase of problems with thier main buyer S R Gent .

They have now confirmed a 30 per cent increase in orders to the Tri Star Group The Group has also received non-quota orders from three additional US buyers. Defending his decision to go to rural areas, Tristar chief Kumar Dewapura said, "I could have opened up these 12 factories in the suburbs of Colombo. But I chose to open it in the rural areas to provide employment. There are also indications that some of the factories in the Tri Star Group would be listed on the CSE by end this year as part of their management restructuring programme, apparel industry sources said.


Mind your Business

Who feels the bite

Guess who is hardest hit by the postal strike?

Topping the list would be the cellular networks. Their bills are lying idle at the Mail Exchange and only a few customers have bothered to find out about payments and settle dues.

Now, we hear at least one cellular network is contemplating hand-delivering the bills, in a bid to make ends meet.

Complete ban

For some time now, there has been talk of banning cigarette and liquor advertising in all forms, but that has not really become a reality.

Now, those in the health sector are exerting pressure and the ban will sooner, rather than later, become law, we hear.

And yes, the ban will be a complete ban, encompassing sponsorship of sporting and cultural events as well.


Baghdad visit blocked

High pressure from the United States has once again stopped a top-level ministerial delegation led by Trade Minister Kingsly Wickremaratne leaving for Iraq mid this month, tea industry sources said.

They say they are unable to comprehend why the US government should prevent a Sri Lankan ministerial delegation from visiting Iraq as the visit has the UN's blessings.

Unhappy with recent developments, the Iraqi government has decided against renewing bulk tea orders from Sri Lanka, until a ministerial delegation from Sri Lanka visits Baghdad, the sources added.

The Iraqi government is reported to have imposed a ban on all Sri Lankan tea imports beginning this February. The ban came in the wake of a lack of interest shown by the Sri Lankan authorities to an invitation to visit Iraq by a high powered delegation to negotiate tea exports under a UN oil-for-food deal approved in November 1996, tea brokers said.

Iraq was a major buyer of Sri Lankan tea during the late 1970s. With the outbreak of the Iran-Iraq war and later the Gulf war, Sri Lankan tea imports had been on the decline, the tea industry sources said.

However, under the UN oil-for-food programme, Iraq was permitted to import Sri Lankan tea.

Under this programme, Sri Lanka exported tea to Iraq through an intermediary Jordanian firm, Talfeet Trading Company.

Last year, indirect tea exports from Sri Lanka amounted to 8,500 MT. "This was one of the major factors which helped prices at the Colombo tea auction to remain strong," tea brokers said.

Up to date, Sri Lanka has not received any direct United Nations LCs to ship tea to Iraq, while India is now receiving direct orders from Iraq under UN LCs.

It is more or less certain, that Sri Lanka will not receive direct tea orders to Iraq with UN LCs until a delegation visits Baghdad and strike deals with Iraqi State Company for food stuffs, Tea Board official said. Despite the indirect Iraqi purchases through a Jordan company, only a marginal impact was witnessed at the Sri Lanka tea auction prices.

Tea brokers say the bottom of the market has got stronger where the margins between the below best and the bottom are virtually insignificant. However, the Colombo auction was not in a position to derive the full advantage of Iraq's presence due to the orders being channelled through another nation.


Earnings move market

Improved sales performances in tourism, agriculture and banking sectors have resulted in better earnings growth in the second half of 1997, Jardine Flemming Stock Brokers said.

The JF tracker based on 37 companies' half-year results reports a 46 per cent total earnings growth for the second half of 1997, compared to the same period in 1996.

The 46 per cent earnings growth is an improvement from the first half's growth of 25.26 per cent. Overall earnings growth over 1996 is 33.5 per cent, the securities firm's quarterly earning review says.

Better earning growth is also a key factor for the bull run at the Colombo bourse which picked up 48 points in the previous week and 15 points last week, JF's head of research, Panduka Ambanpola told The Sunday Times Business.






This could actually be a delayed market reaction to an overall 33.5 per cent earnings growth over 1996, he said.

Investors will now look out for earnings growth in 1998 based on the positive 1997 performance of most listed companies, and this could push the market further, he added.

John Keells Stock Brokers' weekly review confirms this view. Anticipation of phenomenal profits in corporates for 1998 and a re-rating of the market to fall in line with 1999 earnings expectations are quoted as two of the main reasons for the current market boom.

The report says the market should remain volatile next week and further profit taking should set in, followed by a rally.

With more corporate results expected to show significant earnings growth flowing in this week, a rise in prices is anticipated, they say.

John Keells earnings model indicates the Colombo bourse trading at 10.5x for the financial year ending 998 and a 8.9x for 1999.

The JF review says the earnings growth reflects a sales growth of 17 per cent over the previous year.

The high growth is a recovery form negative EPS growth in 1995 and 1996, and it is prudent to expect lower earnings growth figures in the next two years, it said. The review forecasts a 27 per cent growth in 1998 and a 21.4 per cent growth in 1999 for its tracker 40.

Based on the brokerages' current earnings per share (EPS) projections, the Colombo bourse's 12 month forward price earnings ratio (PER) is 7.8x, one of the cheapest in Asia, the review says.


Super-highway: costs and benefits

It appears that the government is now fully resolved to go ahead with constructing the Colombo-Katunayake Super-highway. There can be little doubt about the need to have a quick access and exit from the airport.

The question at issue is whether the investment at this point in time of over Rs. 5 billion by the government is a prudent one.

Also whether alternate and cheaper methods of transport to and from the airport have been adequately considered.

Originally the super highway was to be constructed by foreign investors who would make the total investment on the basis of a Build-Own-Operate (BOO) or Build-Operate-Transfer (BOT) project. Such an exercise would have meant that the government would not have had to bear the burden of the expenditure and users would pay for the services and thereby finance the construction of the highway.

Foreign investors have obviously not been willing to undertake the investment despite earlier indications that they would. This may be due to the financial crisis in the Asian countries. The government has therefore decided to build the super highway to make it a toll road so that the government would be able to pay for the investment from the fees collected.

Is this actually possible? Would there be adequate traffic and the charges sufficiently high, but not a disincentive, for the use of the highway?

Despite the inadequacy of the present road to the airport, the time saved would be quite minimal, especially at times when air traffic is at its peak. Readers are familiar with the fact that most flights in and out of Colombo are during the late hours of the night or early in the morning.

Therefore travel to the airport from the Kelaniya bridge does not take more than 35 to 40 minutes. How much of this time could be saved? Would people be willing to pay a fee to save this time? Will the super highway be so designed that all airport travellers would have to use the toll way? If they are give an option will there be adequate users to pay the cost of the highway?

These are questions we hope have been considered adequately in arriving at the decision for the government to invest a large sum of money.

It must also be appreciated that decision making on a development project, particularly an infrastructure one, has to be on a very long term perspective. There has to be a vision of the needs not merely of the year 2000 but for most of the millennium.

Besides this there could also be intangible benefits from visiting investors' perspective of the country having adequate infrastructure for investment opportunities. Investors could form a view of the country's infrastructure based on the super highway from the airport.

In determining whether such a high investment should be made currently, it is also important to consider alternative possibilities of improving access to and from the airport. Most European cities are served by an efficient subway system which brings passengers speedily to the centre of the city and connects them to other points and railway systems in the country.

This is an invaluable convenience. The possibility of such a development must be looked into. The development of a railway system to and from the airport should be viewed as an alternative for the time being as it is likely to be much less costly.

On the other hand, irrespective of whether the highway is developed or not, there would be a need for a convenient mass transport system to and from the airport. This would reduce traffic on the highway, be most convenient to passengers and could boost tourism.

The national investment on transport could also be reduced. Therefore irrespective of whether the highway is constructed or not, the possibility of developing an efficient, frequent and comfortable railway route must be explored. In fact the question is, should such a railway connection precede the construction of the highway?

The development of the country's infrastructure, particularly the road network, is a priority. Given the tight public finances it may have been more beneficial if the country could have relied on foreign investors to build this infrastructure.

Alternately, what are the possibilities of obtaining concessionary credit from multi-lateral organisations to finance this infrastructure? We must also weigh carefully the costs and benefits of each such infrastructure project and be certain that their expenditure would bring in adequate benefits to the country.


Saving food that goes waste

By Feizal Samath

Sri Lanka will take a major step forward on the road to a more secure future in food security when a pilot project funded by the Food and Agriculture Organisation (FAO) gets under way next month.

The three-year project, called the pilot phase of a special program for food security, will assess the country's constraints and weaknesses towards food sufficiency and recommend measures to improve the situation.

"At the end of the pilot phase, the government will formulate a national programme of food security and present it to donor agencies for aid and investment purposes," said Gerard Bernard, FAO representative in Sri Lanka.

Low income

Sri Lanka is among a list of 86 nations that have been defined as low-income, food-deficit countries (LIFDCs). Forty three African, twenty three Asian, nine Latin American and Caribbean, seven Oceania and three European countires are included.

These countries are home to most of the world's 800 million, chronically undernourished people. The food security programme is being implemented in these 86 countries as a sequel to the World Food Summit held in Rome in November 1996.

There, representatives including about 100 heads of state or government, made a commitment to reduce the number of undernourished people in the world by half by the year 2015.

The conference approved a plan of action that included recognition of the need "to pursue, through participatory means, sustainable, intensified and diversified food production, increasing productivity, efficiency, safety gains, pest control and reduce water losses, taking fully into account the need to sustain natural resources."

The pilot phase has already begun in some countries. While self-sufficiency in food was once the buzz-word in most Third World nations, like Sri Lanka where more than 75 percent of its population live in the rural countryside, the food security concept is now in vogue.

Bernard says there is a distinct difference between self-sufficiency in food and food security. "Self sufficiency is an old concept in which every country must produce everything it needs. In food security, one does not need to produce everything.

A country can produce something that its neighbour doesn't have, export it and use the foreign exchange to buy the food it needs. It is like an exchange," he explained.

"You produce some; you buy some." The FAO official said that food security relates to one region, one country or one area. "Everyone here should have sufficient food in quality and quantity."

Bernard said that some of the food problems in Sri Lanka were the high cost of production, the lack of diversification such as the growing of rice only in some parts of the country when other crops too would be grown, and post harvest losses due to poor storage facilities and transport.

"In Sri Lanka there is a 35 percent post-harvest loss. This is a big problem," he added. Some of the reasons for high production costs are costly fertilizer application and costly transporting of produce to the markets.

Food experts say that the loss occurs from the production centre to the market place. Though there is sometimes excess production, in vegetables for instance, the lack of proper storage - at the production site - to keep them for longer periods, means they have to be sold in the markets quickly.

Prices high

As a result, during off-peak crop seasons, vegetable prices are high due to the nonavailability of goods.

"If you can bring down post-harvest losses to about 15 percent from 35 percent, prices will then come down and the consumer benefits, " Bernard said.

Irrigation is the high point of the FAO-assisted food security programme. Sri Lanka's biggest problem towards better production lies in not having enough small irrigation schemes.

"There is a lot of water which is not put to proper use. There is money available for big irrigation schemes but then maintainance becomes a problem.

The answer lies in small schemes in which the farmer or small village level groups can be responsible to look after," the FAO official said.

Under the FAO-assisted pilot phase, FAO experts will ascertain some of the reasons for the country's inability to achieve food security like high production costs or poor irrigation and suggest ways of overcoming these difficulties.

Bernard said that under the three-year programme, some preliminary activity will be undertaken to understand the problems that the country faces in food production. "We will have to prepare big, national level investment projects to boost food security."

He said funding agencies like the World Bank, Asian Development Bank, United Nations Development Programme and Economic Commission would be briefed "all the way like the way it is done in most of our projects" during the tenure of the three-year pilot phase.

Final phase

"By the end of this phase, donors would then have decided - when the national programme is formulated and the government seeks funds to implement it - which part of the food security programme it would be interested in helping," Bernard noted.

The FAO official acknowledged that the war in the north and the east has sharply cut the island's fish production. Prior to 1983, before government troops and Tamil guerrillas started fighting over rebel demands for a separate homeland for their minority Tamil community, the north and the east accounted for a substantial part - some experts say at least 40 percent - of the country's fish requirements.

Since the war, there is less fish produced in these two regions resulting in high fish prices owing to the shortage..

The FAO programme has been successful in countries where it is under implementation. In Bolivia, maize yields in demonstration sites were reported to have more than doubled as compared to local varieties and potato yields were 240 to 425 percent higher than those in surrounding areas not applying improved techniques.

In Tanzania, the pilot phase became operational in July 1995 and in the 1995/96 crop year, yields were found to be approximately double those in surrounding areas using traditional methods. In Nepal, the special programme demonstrated how to expand irrigated acres by 30 to 100 percent simply through good water management.


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