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4th April 1999

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Negative Growth - Sharp decline in prices and profitability

Sri Lanka's exports nosedive

By Lyn Fernando, Chairman, Exporters Association of Sri Lanka

Export performance from January to De- cember 1998 shows a marginal increase of 2% over the previous year but what is more significant is that the second half of 1998 shows a negative growth of 3.2% which is likely to continue and perhaps increase during the current year.

In fact, exporters are of the view that unless there is urgent intervention by government on the several impediments faced by the export sector the current year could show a negative growth in exports between 4%-5% resulting in loss of employment and markets.

The trends can best be appreciated by studying the statistics in table 1 - export performance for the 12 months of 1998 and table 2 - export performance for the second half of 1998 in comparison with the corresponding periods of the pervious year.

These statistics show that the main exports from Sri Lanka consist of garments 51.8% manufactures (other than garments and textiles) of 17.5% and tea 16.4% of total exports.

While tea exports show a growth of 7.8% during 1998, the second half shows a negative growth of 11.8% .

In the case of garments, although the growth for the year is 8.3% the second half shows a growth of only 4% while other manufactured goods which recorded a negative growth of 0.22% in the twelve months of 1998 declined by as much as 4.9% in the second half of the same year.

Export Figures Suspect

Some of these garment export figures are also suspect as one sees major discrepancies between visas obtained by exporters and actual receipt of goods into the US indicating that there has been several phantom shipments to enable firms obtain their performance quotas.

For example, export visas issued in Sri Lanka for quota category 336/636 to the USA was 588, 506 dzn whereas only 452,921 dzn entered the USA - a shortfall of 135,585 dzn or 23%.

This type of short shipments can be seen in many other quota categories where all documentation is completed reflecting in both customs and BOI records that shipments have been effected when it is not so. Consequently the overall export figure could be far worse than what is projected.

Increase in export volume

At the same time the statistics from the Ports Authority indicate that the total amount of export containers increased from 206,824 TEU's in 1997 to 241,128 TEU's in '98 indicating an increase of 16% over the previous year.

This shows that whilst the volume of exports has increased the prices have dropped sharply. The several requests recently to banks by exporters for the rescheduling of loans etc. also confirm the effect on the profitability and future progress of the export sector.

East Asian crisis

In January 1998 at the request of the Deputy Finance Minister the Exporters' Association of Sri Lanka submitted a report to government indicating that all export sectors were either affected or likely to be affected as a result of the East Asian crises.

This was followed with an update in April last year but the government response was that this was a temporary phenomenon and that in the short to medium term inflation in the East Asian countries and increasing cost will bring their prices on par with that of Sri Lanka.

Additionally some of the newspapers highlighted that exporters were only demanding a currency devaluation which was not the correct position.

What did happen, however, was that many East Asian countries cut their cost particularly rentals, wages etc., and given their enormous capacities became super competitive resulting in considerable pressure on the prices of Sri Lanka's exports.

Our export garments although appearing to be buoyant has a large number of small to medium indigenous companies in difficulties and in a few months' time may be compelled to close down.

Many have requested assistance from banks for re-scheduling their loans and unless the banks step in and provide the necessary assistance there will be large scale defaults. Already many have defaulted in their EPF/ETF payments.

The main reason is the pressure on prices as both Indonesia and the Philippines are in a position to supply at very low prices. Additionally as a result of the WTO, in January 1998 some garments which were always non quota for Sri Lanka, for example Cat 239 (infants clothing) but was under restraint in Indonesia and the Philippines had these quota restrictions removed with the result that manufacturers and exporters of infants' garments from Sri Lanka suddenly found that they were asked to give discounts as much as 10-15% which was well below their cost of production.

More recently the Philippines after protracted negotiations with the US succeeded in increasing their export quotas by an estimated US $60 million annually for 1999 to 2002. With the devalued peso the Philippine prices will bring further pressure on the prices of Sri Lankan garment exports.

The second largest export from Sri Lanka, manufactured goods other than garments and textiles has been witnessing a negative growth for the last few years.

Tea, the next important export has to contend with the Russian currency crisis, unpaid export bills and a major impact resulting in excess production, sharply declining prices and many of the tea factory owners unable to pay their bills or wages. In fact, even tea producers are now appealing to government for help.

Although small in Sri Lanka's total share of exports other sectors such as rubber, coconut, floriculture, gems and jewellery, diamonds and wooden products are also adversely affected.

In the ceramics sector, firms have given major discounts to retain markets. In activated carbon the two Sri Lankan firms having production facilities in Thailand and Indonesia find that the profitability in these two countries is very much greater than their operations in Sri Lanka.

Additional threats

In this somewhat dismal scenario there is another threat to Sri Lanka's exports from the shipping lines operating in Sri Lanka. As far as FOB exports are concerned where the local exporter has no right to negotiate freight rates because they are paid for by the ultimate buyer, the shipping lines have introduced a terminal handling charge (THC) for the last few years which has greatly eroded the profitability of FOB exporters.

The Exporters' Association made representations at the highest level, went before the Fair Trading Commission and on March 30, '98 got a ruling that the pay ment of the THC was an anti-competitive practice and should be stopped forthwith.

Unfortunately the Fair Trading Commission does not have any teeth to implement their findings. The shipping lines through their association claim to have filed an appeal which has been pigeon holed with no summons served on either the Fair Trading Commission or the Exporters' Association to-date.

Apart from introducing the Terminal Handling Charge these shipping lines under the umbrella organisation of the TSA - Transpecific Stabilization Agreement - have continued to increase freight rates from Colombo with the result that in some specific export commodities such as fibre and fibre pith the cost of freight is over 100% of the FOB value of the product.

So effectively these items will not be exported from Sri Lanka in future.

Additionally, these lines who are members of the TSA representing about 85% of the shipping lines operating from Colombo to the United States have now decided that with effect from May '99 on a further increase in freight rates by USD 900 per 40ft. container to the US west coast and USD 1,000 per FEU to other US coasts.

They have also decided on the need for a USD 300 per FEU as peak season surcharge saying that it is to "help cover operating contingencies in a severely imbalance trade during the period of heaviest seasonal volumes i.e., June 1 to 30 November".

There is clear evidence of price fixing and is contrary to the basic principle of the WTO. Government should take urgent steps to break this anti-competitive practice.

Change in policy

The Exporters' Association is also concerned about government policy shifting from an export led strategy to one of making Sri Lanka a financial and services centre.

Although the President has at various fora including in the budget proposals very clearly stated that the government is continuing with an export led strategy, many exporters think otherwise.

For example, all assistance schemes to the export sector provided during the last several years have been phased out. This includes the export credit refinance scheme which enabled exporters to obtain credit at lower rates of interest, the Export Development Incentive Support Scheme (EDISS) which reimbursed firms for their expansion, marketing etc., based on the incremental increase in exports.

The several assistance schemes of the EDB have also virtually stopped as a result of their not receiving adequate funds or due to confusion as to the future of the EDB.

At one time it was suggested that the EDB should be merged with the department of commerce, at another time a parallel organization was mooted. The confusion continues.

The key issues

Sri Lanka has given considerable prominence to increasing productivity. But apart from seminars and talk shops nothing tangible has been done to address this vital subject.

In fact, the Exporters' Association also held a few seminars on measures to improve Sri Lanka's export competitiveness and identified several areas requiring the urgent attention of government.

But unless there is a very definite commitment on the part of the government it would be extremely difficult to implement some of the proposals vital for the survival of the export trade.

For example a major issue over the last few years has been labour market reform. We have had confirmation at the highest level that it is the need of the hour.

Successive governments in power acknowledge the need for change but has sacrificed it for political gain. Our labour laws have not kept pace with the changes demanded by a highly competitive market economy.

Even a few changes such as linking wages to productivity, reducing the number of holidays and permitting the employment of temporary labour as in the US and UK cannot be implemented due to fear that the opposition will use it as a political weapon.

What is sad is that there is nothing wrong with the ability or productivity of the Sri Lankans. For example, a Sri Lankan working in the Middle East free of unions and other pressures produces over three times that of the same worker in Sri Lanka.

Second, capital market reform at a meeting last year the President was surprised when we mentioned the current rates of interest on long term loans and this still needs to be rectified urgently.

The third significant requirement is cost of infrastructure and the need to reduce some of these costs. For example whilst appreciating the current security situation the cost of moving containers to the port has increased tremendously due to closure of certain roads and redirecting of traffic - particularly containers.

Port charges have also increased and they are now levied in US dollars resulting in the Ports Authority making substantial profits. Electricity and water charges have increased totally out of proportion. Telephone charges which should have reduced as a result of privatisation has not only increased but indications are that further increases are contemplated.

What is surprising in the privatisation of the port and telecom is that there is hardly any room for competition as the private firms cannot charge less than the rates of the Ports Authority or the Sri Lanka Telecom.

These are areas which need to be addressed by government if we are to succeed in reducing cost and improving Sri Lanka's export competitiveness.

The recently concluded Indo-Sri Lanka free trade agreement has also resulted in Sri Lankan exporters finding that under the guise of a duty withdrawal scheme substantial subsidies are provided to Indian exporters whereas there is no support to the Sri Lankan exporter.

Other countries also have several assistance schemes to promote exports. The very least that government can do is to reintroduce the EDISS - Export Development Incentive Support Scheme as a matter of priority.

Many exporters have continued to service their buyers even supplying at cost or marginally below cost hoping for better times because once a buyer or market is lost there is no easy path to re-gain that buyer.

Unfortunately at present we do not see any indication that there would be a change for the better. It would indeed be a sad tale if one has to wait until the current negative growth on exports has an effect on employment for government to look at the export sector more seriously than hitherto providing the necessary support to reverse the present negative trend.


It's goodbye from man behind today's vibrant stock exchange

By Feizal Samath

At "Seva Mandiraya", the headquarters of Forbes and Walker Ltd, which is behind the Chamber of Commerce building on Navam Mawatha, there are pictures of eight distinguished individuals nicely Imageframed, just above the receptionists' desk.

A new picture will soon be added to this line-up of former chairmen of Forbes - that of Ajit Jayaratne.

Mr. Jayaratne retired as Forbes group chairman on April 1, 1999, exiting from the place as quiet and unobtrusively as he is known to be and talking to The Sunday Times Business with much persuasion, on his past, present and future.

Making a splash about one's retirement or exit to another world seems necessary in the new corporate culture and the world of yuppies. There have been high profile business personalities who have gone into even politics or into other spheres making their exit known with a bang - bold headlines in newspapers and gala parties.

Mr. Jayaratne, however, belongs to a rare breed of people who have stayed away to publicity from the point of being shy. His exit from the active corporate world is something worth recording, particularly for me, whose association with this gentleman, stretches back to the days of the late 1970s when the share-market was a kind of old boy's club and transactions took place in a battered old room.

Two weeks ago, sitting in the office of Forbes director and veteran tea trader Chrisantha Perera, while working on a tea story, I overheard a telephone conversation, Mr. Perera was having with another executive on a party for "his retirement". It occurred to me that they could be talking about Mr.Jayaratne. Mr.Perera confirmed Jayaratne's retirement.

"Oh, I must do it for old times sake," I said and at my request, Mr.Perera called Mr.Jayaratne and said, "an old friend wants to interview you." Mr.Jayaratne apparently appeared reluctant but agreed when persuaded to do so.

Unassuming and mild-mannered, Jayaratne - son of a former civil servant and ambassador to the United States - joined Forbes and Walker on April 1, 1970 as an accountant. Schooled at Royal College in Colombo, the young lad went to Britain for higher studies and obtained an economics degree at the University of Southampton before qualifying in chartered accountancy,

After working for Coopers & Lybrand for a year in London in 1967, Mr. Jayaratne returned to Sri Lanka and worked for Ford Rhodes, Thornton and Co - the senior partner being N.G.P. Panditharatne - for about two years.

Forbes & Walker Ltd was one of the biggest share and produce brokers at that time with other big-time broker/traders being John Keells, Bartleets, Somerville and De Silva, Abeywardene and Co (the only fully-owned Sri Lanka entity).

Mr. Jayaratne joined Forbes at a time when the chairmanship was still in foreign hands. Company chief was John Grigson while the directors comprised two other Europeans and three locals - Siri Wijeyesekera, Ajit Chitty and Bala Sivaratnam.

The company was located at Prince Building in Fort, which was owned by Harrisons & Crosfield and is now a Board of Investment office, in front of the Foreign Ministry.

Mr. Jayaratne recalls how share trading took place in the boardroom of the company. "All brokers use to meet in this room every day and transact stocks," he said.

While the pre-nationalisation of estates saw transactions averaging around 50 to 60 a day, the volume fell sharply to a miserly two or three after Sirima Bandaranaike's United Left Front (ULF) government in the mid-1970s took over private-owned estates.

Stock markets collapsed, plantations were in dire straits and British plantations interests were being quietly sold out to local managers as the going got tough, under the government's inward-looking policies of making the state do everything and anything. Insurance, transport and shipping became targets for state-takeovers.

Import-substitution and "grow more food" were the buzzwords. "It was hard times then and business was minimal," Mr. Jayaratne, specialising in the share trade then, said.

Most broking houses were dependant on tea and rubber but as the business climate changed overnight and a rapid transformation of the economy took place, companies were left wondering whether they should close down loss-making share departments.

"Wisely we kept our share section going on shoestring budgets," the Forbes chairman said, adding that the country's political and economic situation then underwent further drastic changes when Bandaranaike's government was routed and J.R. Jayewardene rode into power.

With radical changes taking place in the global economy, Mr. Jayewardene and his United National Party (UNP) believed the way ahead was in an outward-looking economy. Free enterprise and open trade was encouraged.

In 1972, with the British losing interest in local plantations, Mr. Wijeyesekera became chairman of Forbes becoming the second Sri Lankan to head a former British brokerage after Mallory Wijesinghe, who had taken charge of Bartleets a few years before that. Forbes had by then moved their office to Staples Street, close to the Empire Theatre.

Jayaratne joined the Forbes directorate in 1975. By that time, the stock markets had come alive but clashes between the two Ws - Wijeyesekera and Wijesinghe - stirred unrest in the small broking community.

Mr.Wijeyesekera was one of the country's best-known share experts and his wide knowledge of the subject was sought after by the trade, the government and students. He was also a hotheaded individual who did not see eye-to-eye with Mr. Wijesinghe. Their frequent tiffs, mostly over the affairs of the Colombo Brokers Association that controlled the tiny share market, was often the subject of debate and scorn of the private sector. "The clash of the Titans" ran one newspaper headline, reporting these squabbles, those days.

Then the inevitable happened. Mr. Wijeyesekera threw his weight behind financier N.U. Jayawardena - who was also reportedly not on good terms with Wijesinghe - and they set up their own stock exchange, which is now history.

Dr. Darin Gunasekera, with some stock market experience abroad, was entrusted with running this exchange. "It was a unique situation. Here we, as members of the Brokers Association, were running a rival outfit," Mr. Jayaratne recalled, noting that it was a totally unhappy scenario.

In September 1984, Jayaratne became Forbes chairman when Wijeyesekera died of a heart attack.

Before further damage could be done, the new Forbes chairman launched a fence-mending exercise - sorting to bring both sides together by using the fine art of stockbroking into peace-broking.

"It was ludicrous to have two exchanges in this country," Mr. Jayaratne said, noting how as a "new kid on the block", his neutral views were gradually being accepted by veterans like Mark Bostock, Jayawardene and Wijesinghe.

In a now historical peacemaking role, Mr.Jayaratne brought the warring factions together and under a compromise solution reached, it was decided that Mr. Wijesinghe would be the first chairman of the Colombo Stock Exchange followed by Mr.Jayawardene.

The group applied for a licence to the government to set up the Colombo Stock Exchange, which then ran the country's first trading floor operation. At the same time, economic reforms were taking shape and the private sector was seeing a remarkable transformation of their activities. Investment was growing, both locally and foreign, and industry was taking off.

The stock market boomed during this period, with a host of new companies seeking capital through a rejuvenated stock market. The number of listed companies rose. "Those were really booming times in the stock market," said Mr.Jayaratne, who has served two terms as chairman of the Colombo Stock Exchange.

He continued an unbroken period as director of the exchange board until quitting last month, pending retirement from Forbes.

The former Forbes chairman also recalled how the exchange - now a vibrant facility from a sleepy trading operation - ran into problems, unable to cope with the paperwork and documentation. The Central Depository System, with scrip-less trading, was then installed with financial help from the United States government.

While most broking firms - John Keells in particular - took advantage of the liberalised environment to branch out into a range of activities, Forbes chose to remain with produce and share broking and strengthen these.

"May be we should have diversified more. May be we were traditional brokers and conservative," Mr.Jayaratne said, adding that in hindsight the company should have spread out even more into other areas of business.

The next phase of Forbes or Jayaratne's career appears to be the most unpleasant and the former chairman reluctantly spoke about the period after 1993 when the group was having cash flow problems like most management-owned firms, and needed a fresh infusion of capital.

In 1993, Sri Lankan-born Canadian businessman Christopher Ondaatjie - looking for a stake in Colombo - offered a share swap cum investment deal to take over Forbes. At the same time, Forbes was seriously contemplating going public.

"We had two options - either accept Ondaatjie or go public," Mr. Jayaratne said, adding that the Ondaatjie deal appeared to be a better option. The deal envisaged Ondaatjie swapping shares in his giant corporation with those owned by Forbes directors, plus investing a sum of about US $ 50 million in Forbes.

Government authorities were persuaded to accept the deal, the first of its kind in Sri Lanka as share swaps with foreigners were not allowed under the law. This was done under a special concession offered by the Central Bank as it was seen beneficial to Sri Lanka.

"That deal turned out to be a disappointment," says Jayaratne, with a tinge of sadness. While Jayaratne and other directors continued to run Forbes, Ondaatjie made the investment decisions. The huge cash pile from the Ondaatjie Corporation gathered dust and some interest income while nothing was spent here.

"I just could not understand his way of thinking. All our proposals for investing that money in other avenues were turned down and the money never left the bank," Mr.Jayaratne said, adding that developments worried shareholders of a new company Forbes Ceylon, which was floated after the Ondaatjie-Forbes deal.

Drama set in when Ondaatjie sold controlling interest of his corporation to a US company, Physicians Insurance Corp of Ohio (PICO) who were not interested in either Sri Lanka or Forbes. Buyers were sought, locally and internationally, to take up PICO's stake in Forbes.

"Some of these offers I knew; some I didn't know," Mr. Jayaratne said. Sri Lanka's Vanik Inc came into the picture in late 1997 and in a complex deal of cash, shares, warrants and debentures with PICO, became the new owners of Forbes.

With a heavy heart, Mr. Jayaratne also recalls the other unfortunate history of Forbes when a group of senior Forbes tea executives broke away and formed their own company.

"They were perhaps not happy with the Vanik deal," he said, regretting the crisis Forbes faced at that time. However, he said Forbes is very much back on its feet now.

Mr. Jayaratne retires at the age of 59 after 29 years with the company. He preferred not to stay on till the company retirement age of 60 as "we have been grooming Chrisantha for the job".

He has held many senior positions in the corporate sector including that of chairman of the Ceylon Chamber of Commerce. He was also chairman of the government's Finance Commission, when provincial councils were formed.

Speaking about the future of the private sector, Mr.Jayaratne feels the way ahead is in mergers and acquisitions because small businesses will be unable to compete against giants in a global market place.

"In Sri Lanka we tend to be shy about merging with another company, and want to feather our own nests, even if the company is sinking. This is our culture but this has to change if we are to compete in a global market," he said.

Mergers and acquisitions needn't be hostile; they can be friendly or considered as strategic alliances. More than 30 to 40 mergers and acquisitions take place every day in the world.

"One of the problems here is that we don't have the expertise for this kind of business culture, and we have need to import it, until it takes root in our system," he said.

Mr.Jayaratne will continue as non-executive director on Forbes and Vanik group companies plus others he is currently involved in like Glaxo, Overseas Realty Ltd, E.B. Creasy and the Colombo Fort Lands group. He is also non-executive chairman of Colonial Motors.

To many in the business sector, Mr. Jayaratne's move out of active corporate life is "the end of an era." "He was synonymous with much of the business happenings in the late 1980s and early 1990s and much more in Colombo's stock markets," said a senior corporate executive from another firm.


BP Amoco to overtake Royal Dutch Shell

BP Amoco is about to overtake the Royal Dutch Shell as the second largest oil group in the world. BP will be outranked only by Exxon Mobil after it completes its acquisition of Atlantic Richfield for $26.8bn in shares. The much-rumoured agreement was officially confirmed on Thursday and the enlarged BP Amoco group will have a stock market value of about $190bn.

Against that value the initial benefits look relatively modest. BP said that it will set aside $1bn for restructuring, including 2000 job cuts, and it expects to save $1bn in synergies and rationalisation on top of $500m already identified by Atlantic Richfield in its own right. Dealers see the BP move as a sensible way of capitalising on the company's historically high stock market rating at a time when Atlantic Richfield's value has been depressed by the low price of oil.

After a cautious start, leading shares in London were firmer, with the FTSE 100 trading around 6,350 and very close to its all-time high of 6,365 which was reached on March 12. BP, however, went a shade lower on profit-taking. Other leading European equity markets were a shade lower in very thin pre-Easter trading.

However, Euro-zone government bonds went a little higher and there was also support for UK even though predictions of a further base rate cut from the Bank of England on April 8 were being played down by dealers, after the Chartered Institute of Purchasing and Supply issued a more resilient survey than expected for the UK manufacturing sector in March. The overall rate of decline slowed down again, while exports actually showed a small advance over February.

ICI eased 1 per cent on reports of a delay in its plan to sell some $2.8bn of industrial chemical assets to Huntsman of the US.

Corporate Services Group, whose shares have been hit by profit warnings and boardroom changes in recent weeks, jumped 37 per cent. Carlisle Holdings plans to merge with BHI Corporation and then make a bid for Corporate Services in cash and shares. Michael Ashcroft, the controversial entrepreneur who built up the ADT security group will hold almost half the enlarged share capital of "New Carlisle" after the various transactions. It will be a global services company with sales of £600m a year and share quotes on AIM in London and Nasdaq in the US.

Cable and Wireless fell 2 per cent after its launch of a lawsuit against MCI over the recent purchase of the latter's internet operations for $1.75bn. There were also worries that China Telecom might sell its stake in C&W's key asset, Hong Kong Telecom.

The continuing decline in telecom charges was underlined with price cuts by Mobilcom in Germany and by British Telecom, which has reduced its tariff for calls to mobile phones. The weekend rate to call a Cellnet phone from a BT fixed line is now only 2p a minute.

Acorn soared 10 per cent on hopes of action to unlock the value of its 24 per cent stake in ARM Holdings, the microchip designer. The ARM shares have been transferred to an Acorn subsidiary.

Inchcape continued its re-focusing with a $118m deal to sell its Middle East operations to Cupola Investments, which is based in Dubai.

Skillsgroup has paid £32m for the training division of Cap Gemini UK.

Raphael Zorn Hemsley, the specialist insurance brokers, fell 32 per cent on a profit warning and SEP Industrial Holdings was suspended. Its chairman has resigned and the accounts have been delayed because of possible "accounting irregularities"

Suez Lyonnaise des Eaux shares were steady after reporting satisfactory net operating profits of E760m, an increase of 25 per cent.


Economists attack FTA

By Dinali Goonewardene

Eminent economists attacked the Indo-Lanka Free Trade Agreement (FTA) at a forum last week saying that it undermined Sri Lanka's commitment to the South Asian Free Trade Agreement (SAFTA).

An authority and a "hard hitter" of the FTA, economist, Dr. J. B. Kelegama lashed out at the agreement in his speech citing several instances where the agreement would be unfavourable to Sri Lanka.

While Sri Lanka does carry an adverse trade balance of Rs. 30 billion against India for 1997, we also carry adverse trade balances with 16 other countries including China and Hongkong, he pointed out. Meanwhile our trade balances are favourable with 10 countries including USA, UK and Germany.

"India launched a mission to dismantle trade barriers in 1993. Tariffs which were 30% in 1990 were reduced to 23% in 1993 under the aegis of the World Trade Organisation, World Bank and International Monetary Fund. Trade was progressing favourably and this scenario did not necessitate the hasty signing of the Free Trade Agreement in the aftermath of a SAARC meeting. Goods for zero tariff and preferential tariffs have not even been decided," said Dr. Kelegama, who is the Vice Chancellor, Rajarata University. "It is like the signing of a blank cheque," he said.

Tea which was to be granted duty free access to India under the Agreement has now been subject to quota restrictions and tariffs. "This belies the nature of a free trade agreement and is reminiscent of a bilateral agreement," said Dr Kelegama who believes bilateral agreements went out with the 60's.

He is supportive of the current trend towards multilateral trade and agreements therein.

Pakistan was an important market for tea till 1996, when the FAO predicted Pakistan to be the largest importer of tea. The Sri Lankan government, instead of entering into an agreement with Pakistan to secure this market has signed an agreement with India for non-existent goods," said Dr Kelegama.

He did not believe the agreement would promote Sri Lankan exports to India. India is one of the largest exporters of garments and this rules out imports from this indutry. The future for agricultural products, is unsure as India only imports in the event of domestic shortfalls. India's low cost of production on agricultural commodities, will provide stiff competition to the domestic industry, Dr. Kelegama added.

He said Sri Lanka's largest exports to India at present were iron and paper scrap material.

Dr. Kelegama questioned whether the Indo Lanka Free Trade Agreement was a step backwards for the South Asian Free Trade Agreement, (SAFTA) as it implied a lack of confidence in its ability to shed trade barriers in the region at the required pace. Bilateral agreements between member states are detrimental to the status of SAFTA.

Since India imports only 0.9% of Sri Lankan exports, Dr. Kelagama asked why Sri Lanka does not have bilateral agreements with America, Germany, Singapore or the EU countries which import a greater percentage of Sri Lanka's products.

Head of Trade, Economic Research, Central Bank, Dr. H. N. Thenuwara cited multilateral and bilateral trade as being instruments which are the means to an end and which could not be scoffed at by virtue of being bilateral trade agreements. He countered Dr. Kelegama's contention by questioning whether countries such as USA and Germany sought to enter into bilateral trade agreements with Sri Lanka.

Dr. Kelegama questioned whether Sri Lanka would attract investment from investors who would base operations in Sri Lanka for subsequent export to India.

He said the cost of production in India is lower than in Sri Lanka and would prove a disincentive to investment in Sri Lanka. Pakistan and Bhutan are situated on the borders of India and production in India to sell in these countries was a feasible, cost effective alternative to situating production facilities in Sri Lanka, he said.

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