5th March 2000

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"I will not bail any bank out,"
Central Bank Governor, Amarananda
Somasiri Jayawardena tells
HNB Securities chief, Rienzie Wijetillake
over some refreshments at the
company's opening. "There is an
erroneous belief in this country, that
if anybody deposits some money in any
bank, it is guaranteed by the
Central Bank. That is not true.
There is no guarantee even for
commercial banks, though we supervise
them." he said. HNB Securities Ltd is
one of the seven dedicated primary
dealers who opened for business on March 1.
Commercial banks were opposed to the
formation of separate entities with
Rs. 150 mn capital fearing it was not viable.
The banks relented later, when
Central Bank officials managed to
convince them there was money in
dealing government securities.
Pix Athula Devapriya

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Deposit insurance to be revived

By Mel Gunesekera

Central Bank has expressed interest in reviving the deposit insurance scheme for licenced commercial banks and licenced specialised banks, a top Central Bank official said last week.

A deposit insurance scheme promotes safety and soundness of insured depository institutions and the local financial system by identifying, monitoring and addressing risks to the deposit insurance funds; minimises disruptive effects from the failure of banks and savings companies and ensures fairness in the sale of financial products and provisions of financial services.

In developed markets, the Central Bank or the Financial Service Authority monitors such schemes. The US has a Federal Deposit Insurance Corporation, while the UK has a Deposit Protection Scheme. The participating banks pay a premium towards an insurance fund. In developed markets, premiums are sometimes based on a bank's credit rating; high rating low premium, low rating high premium.

The present Monetary Law Act 32A to 32C of 1974, makes provisions for such a scheme. The scheme was in operation for many years. Since it was not made mandatory, most banks did not join in, and the others opted out of the scheme a few years later.

With the government moving towards further liberalising the financial markets such schemes are essential to ensure soundness in the banking system.

"There has been no great difficulty (in the banking system), but an interest has been shown and we will think about it," Central Bank Governor, Amarananda Somasiri Jayawardena said.

He said that they were constantly collaring the banks, because they are concerned about the country's financial stability.

"There is an erroneous belief in this country, that if anybody deposits some money in any bank it is guaranteed by the Central Bank. That is not true. There is no guarantee even for commercial banks. True they come under our supervision," he said addressing the opening of HNB Securities Ltd.

Speaking on the government securities market, Governor Jayawardena said that the industry was large with over Rs. 200 bn circulating at any given time.

With the debt market still at infancy, the Central Bank felt dedicated primary dealers were essential to broadbase government securities, develop the secondary market and provide the public with information about prevailing interest rates to enable them to choose their investments.

"Dedicated primary dealers, will be expected to quote two ways. It is also important that in any market, people must know what one should pay for the 3 month lending, 6 month lending etc. In the US you get 35 year old treasury bonds. A good market must give the different interest rates," he said.

Creating a vibrant efficient market, makes it easy to create a proper market driven yield curve. A yield curve is extremely important for a financial market as it helps to develop fiscal and monetary policies. Superintendent of Public Debt, T S N Fernando said that launching dedicated primary dealers is another milestone towards developing the debt market.

"On March 1, 1997 we issued the first two year bond with a 14% coupon but there were no bids and we had to sell it to EPF. Less than three years later on February 24, 2000 EPF was under bid by other dealers in the primary market. The market got all and EPF got nothing. Now we are in a situation where the market is ready for longer term maturities, but due to limitations we are limited to six year bonds," he said.

HNB Securities chief, Rienzie Wijetillake said that the bank was initially reluctant to invest Rs. 150 mn in a separate entity as they felt the returns would be poor. But they have been since convinced that they could compete and make adequate returns on their investment.

New regulation to go to Treasury

The Central Bank is planning to regulate all deposit taking financial institutions that presently do not fall under the purview of the Bank, Central Bank sources said.

A draft of the necessary legal documents will be put forward to the Treasury shortly for approval. The proposed regulations would require such institutions to register with the Central Bank. Financial institutions will be also be required to submit their financial statements to the Central Bank's, Banking Supervision Department.

The proposed regulations would net in merchant bank under Central Bank's banking supervision department.

The market has been lobbying for merchant banks to be regulated since financial irregularities were uncovered in a certain merchant bank a few years ago. With another merchant bank too presently undergoing a crisis, such legislation would fulfil a long felt market need.

The nine merchant banks include, Amana Investments, Asia Capital, Citi National Investment Bank, Merchant Bank of Sri Lanka, Mercantile Merchant Bank, People's Merchant Bank, Seylan Merchant Bank, Vanik Incorporation and Waldock Mackenzie.

CEB advisor to be selected in May

The advisor to restructure the Ceylon Electricity Board (CEB) will be selected in May.

CEB's monopoly will crumble into three under a proposed restructuring programme.

Presently, officials from the CEB are working closely with the donor agencies in selecting an an advisor.

Under the restructuring process at least two companies would be set up for power generation, one company for transmission and an estimated five companies for distribution. There would also be a regulator for the power sector, Assistant General Manager incharge of Transmission, D.C. Wijeyeratne said.

Once the details of the restructuring programme is worked out, the necessary legislation will be presented in parliament by mid 2001.

All such ventures will be registered under the Companies Act as government owned companies and will operate independently of each other.

Restructuring of the CEB has become inevitable if the Board is to meet forecasted demand. To achieve forecasted targets, the CEB needs to be more efficient and expand. CEB forecasts an annual demand increase of 8 per cent or a 100 to 150 MV increase.

ICASL to give verdict on whether accountants could advertise

By Dinali Goonewardene

The Institute of Chartered Accountants of Sri Lanka (ICASL) will appoint a committee to study the possibility of Chartered Accountants advertising their services. Individual Chartered Accountants and audit firms are presently barred from advertising their services by the ICASL's code of ethics. However the International Federation of Accountants of which the ICASL is a member body, permits institutional advertising of its members in a generic way, President, ICASL, Ranel Wijesinha told The Sunday Times Business. This was incorporated in to our code six years ago, he said. In developed countries like the UK, US, Australia and New Zealand accountants are permitted to advertise their services subject to ethical standards and guidelines. While the ICASL believes it is desirable to advertise, the ethics committee of the Institute should ensure advertisements, publicity and promotions of member firms are within guidelines and parameters, Wijesinha said. However some of the smaller audit firms are apprehensive of the move to deregulate. "I feel there should not be advertising, we do not have large resources to advertise," Senior Partner, Puvimanasinghe & Co, F H Puvimanasinghe said. "Large firms will swallow the market and there will be no level playing field. Advertising is well regulated in developed countries but developing countries such as India and Pakistan do not permit advertising," he said. Puvimanasinghe said 200 - 300 chartered accountants pass out in Sri Lanka and in this environment regulation for advertising was still to come. "In my capacity as president, regardless of which firm I represent, I have a responsibility to individual chartered accountants and member firms regardless of size or affiliation," said Wijesinha, who is a Partner of PriceWaterhouse Coopers." Individual firms without international representation would find relaxing rules on advertising and publicity a progressive step. It would reduce the advantage international firms have since their brands are marketed globally anyway," he said. Individual firms overseas advertise on CNN, BBC, the Business Week, Fortune and even the internet. Sri Lankan audiences are exposed to these media which promote international brands such as KPMG, Ernst and Young and Price Waterhouse. "Adequate information should be available to the public about who is providing a service and what the service is," Partner, Gajma and Co., N R Gajendran said. "The present ethical requirement is heavily restrictive and denies information which should be available to the public. But commercial advertising is not conducive because of the dignity with which the public looks upon professionals. As a first step the ICASL could inform the public of services provided which will ensure fair treatment to all," he said. "The restriction against advertising stems from a Victorian ethic," Partner, KPMG Ford Rhodes Thornton & Co., Reyaz Mihular said. However advertising should be within ethical guidelines, perhaps we could adapt the rules in developed countries, he said. Meanwhile corporates including development banks and merchant banks steal an edge by advertising their services which are the same as some services offered by chartered accountants. These include management consultancy, corporate finance and company secretarial services.

MBFSL gets closer to the customer

MB Financial Services is to launch an on line customised trading system to trade fixed income securities.

Customers can click on view, their portfolio and trade from any part of the world, Assistant Director Finance and Operations, Nirantha Wickremasekera said.

"We give value-added services to our clients and strive to make the market accessible to all, he said".

MB Financial Services Ltd (MBFSL) is the first dedicated primary dealer set up in 1993. Their main line of business is trading in government securities.

"When dedicated primary dealers were formed last week, we have had seven years of experience to the extent, that we are almost like a benchmark in government debt," MBFSL CEO, Ajith Devasurendra said.

We also congratulate Central Bank for taking a bold initiative to form dedicated primary dealers, he said.

Since teaming up with Singer Sri Lanka (their major shareholder) MBFSL has embarked on a unique marketing concept by exploiting Singer's extensive branch network to set up regional offices. At present, MBFSL has a branch in Kandy situated within the Singer Mega outlet, other branches are scheduled for Matara and Anuradhapura later this year.

The prime objective of the branch network is to make long term instruments accessible to retail investors. Most retail investors are unaware of interest rate fluctuations in the market. To rectify this anomaly, MBFSL is working closely with the Central Bank to conduct customer awareness programmes to educate investors, to get positive returns.

"Right now, retail investors find it difficult to access long term instruments. At any given time we will standby, by way of quoting two way process and make the long end of the government bond market as liquid as possible," Devasurendra said.

Assistant Director Fixed Income Securities, Maninda Wickremasinghe said that in Sri Lanka people have an investment strategy such as buy and hold. "We are in the process of educating and allowing customers to get maximum benefit of interest rate fluctuations in the market. We came in to give customers the cutting edge."

We have a computerised back office and trained staff, equipped to handle inhouse research which goes to all our clients, Devasurendra said.

MBFSL's shareholding is First Capital 65%, ETF 15%.

The company also has a strong board comprising eminent people like Mrs. Rohini Nanayakkara (General Manager Seylan Bank) as their chairperson, Mr. Hemaka Amarasuriya (Chairman Singer), Mr. M T L Fernando (partner Ernest & Young), Mr. Vijaya Malalasekera (Executive Director Ceylon Tobacco Co.), Mr. G Jinadasa (Chairman ETF) and Mr. Ajith Devasurendra (Managing Director/CEO).

No great expectations nor fears from the FT agreement

The Indo Sri Lanka Free Trade Agree ment is now a fait accompli. Most of the provisions are available, though the negative lists do not appear to have been either finalised or released. Most of the hopes and fears of the last number of months may be also rested. The gains from the qualified freeing of trade between the two countries cannot be expected to be spectacular.

Fears of disadvantages to Sri Lanka are also not very convincing.

What are the likely gains? A fair amount of raw materials and industrial goods would be either free of duty or enjoy preferential duties. In terms of export gains the advantage of this is likely to be mostly to India. India would enjoy a further competitive edge over other countries in the export of raw materials and machinery to Sri Lanka. However this concession does confer long term benefits on the Sri Lankan economy as Sri Lankan producers would gain from lower costs of production owing to reduced costs of inputs for manufactures.

Consumers too would benefit from lower prices of Indian goods.The immediate disadvantages are a loss of some revenue to government by way of import duties and increased imports from India, which would tilt the adverse trade balance further in India's favour.

The real lack of advantage to Sri Lanka arises from the restrictions placed by India on the import of a number of industrial products from Sri Lanka. The revised list however permits some limited exports of garments for instance, which we hope would lead to a more interdependent relationship between the two countries in their industrial exports.

The most serious constraint could be the provision to limit exports of only commodities which have at least 35 percent of domestic inputs.While it is very reasonable and rational to ensure that this agreement is not abused by exporters of either country to re-export the goods of a third country, the requirements of 65 per cent of value addition could create difficulties owing to two reasons. First our industrial development is based largely on imported raw materials.

This has to be so owing to the narrow raw material base in a small country like Sri Lanka.

Even a product like tyres for which local rubber is an important input, imported inputs are not insignificant. The other danger lies in the interpretations and haggling that can go on about the raw material content. If disagreements on this prevents trade that could be an especially serious set back to our trade in industrial produce.

The two countries should aim at clearing certain industries for free trade irrespective of calculations of the import content. This is no doubt envisaged in the agreement and should be implemented. A serious fear in Sri Lanka was that cheaper agricultural imports from India would destroy our agriculture. It is well known that agricultural produce is much cheaper in India.

If free imports were allowed these would have wiped out our farmers. It appears that most agricultural produce would be on the negative list and therefore this fear is now unjustified.

The fact that the last budget gave a 35 per cent protection is further evidence of the government's intention to protect our agriculture. A similar fear was expressed by some tea trading interests regarding the import of Sri Lankan tea to India.

In fact the government had negotiated for a freeing of Sri Lankan tea and rubber imports to India as this would have been advantageous to us. Only limited quantities of these imports would be allowed. Such exports would strengthen the international market for these commodities and confer a direct benefit to Sri Lanka. Overall, only an optimist would hail this agreement as a landmark for Sri Lankan trade.

Only a pessimist would be struck by fears. It is only a very limited freeing of trade between the countries. It is however a useful first step in the correct direction.We hope it will over the years mature into a fuller and more mutually beneficial trading relationship

Farmers fight competition through APNR

By Feizal Samath

In September last year, Ratna Gamage and six other Sri Lankan tea factory owners walked into the World Bank office building in Washington and threatened to launch a hunger strike against unfair trading practices.

"We had to do something since the Sri Lankan government was not listening to us," recalled Gamage, a 33-year old economist who owns a state-of-the art tea factory in southern Sri Lanka.

An embarassed President Chandrika Kumaratunga, Deputy Finance Minister Prof. G.L.Peiris and Central Bank Governor A.S.Jayawardena - in the US for discussions with the multinational bank - met the group in the lobby and persuaded them to call off the protest, promising to consider their demands back in Colombo.

The US-qualified Sri Lankan economist is giving an intellectual twist to the local debate over globalisation, in leading a campaign on behalf of farmers struggling against cheap imports by transnational corporations.

"Our dream is to prevent poverty-stricken Sri Lankan farmers from

committing suicide," says Gamage, also chairman of the newly formed Association for the Protection of Natural Resources (APNR).

Thousands of farmers across Sri Lanka are eternally in debt - with some committing suicide in desperation - while the government occasionally allows the import of cheaper food commodities. The victims include private tea factory owners like Gamage.

"There were times I was so desperate I didn't know what to do," said Gamage, recalling how repayments on loans for his factory had to be rescheduled due to losses.

Farmers over the years have been protesting against cheap imports saying they were being thrown out of business. Protests and demonstrations first came from potato farmers, followed by chilli and onion producers. Last year chicken farmers joined the campaign after cheap eggs and meat flooded the market.

"We are hit by the high costs of inputs, imports and taxes," said a chicken farmer who like many others in the business have buckled under imports and high feed costs.

The APNR was formed in May 1998, exactly a year after Gamage formed the CTC Tea Factories Association to seek justice for CTC producers who went into the business with government support and encouragement but were now facing a crisis due to imports.

"Farmers - representing different fields of activity - were drawn to our campaign and wanted to join up in a common front against cheap imports," Gamage said adding that poultry farmers - who are yet to join the APNR - have also promised support.

Residents from the north central town of Eppawela, who are opposing plans by the government to hand over graphite mines to a US firm, have also joined the campaign.

Earlier this month, the APNR brought 400 farmers from across the country to Colombo for a seminar in Colombo on the national crisis facing farmers. Speakers included the Colombo representative of the International Monetary Fund (IMF) and some ministers.

Most of the rice, potato, chillie and onion cultivators had never visited Colombo before - let alone gone beyond their village. Herath Banda, 55-year old president of the Dambulla Onion Producers Association, was taken by Gamage to meet the IMF representative in Colombo.

"That was the first time Banda had ever met any high-ranking government official or foreign official," said Gamage. At the seminar, compensation was also given to the next of kin of four farmers and a boy who committed suicide due to farm-related problems.

One of the recipients was the mother of 11-year old Upul Kumara from Nikaweratiya in Sri Lanka's north central region. Kumara, whose father is a rice farmer, hung himself in 1998 after being depressed over the lack of proper food, clothes and school books.

APNR officials say, according to unofficial figures, about 500 farmers took their lives last year unable to pay mounting debts from banks and private moneylenders after mortgaging their houses and farming land.

Over the years, Sri Lankan farmers have been caught up in rising debts due owing to uneconomical farming, low prices demanded by buyers or middlemen and globalisation.

Potato, onion and chillie farmers are constantly complaining about the influx of cheaper imports from India and Holland, while eggs from India hit the local poultry industry. Farmers, unable to produce food cheaper than their foreign counterparts due to the high cost of imported inputs, want the government to impose higher tariffs on imports, lower local taxes and reduce the price of imported inputs or provide locally made inputs.

Gamage reckons the India-Sri Lanka fast-track trade liberalization pact (FTA) will further ruin local businessmen. "With FTA and SAPTA (South Asian Preferential Trade Agreement) we are finished," he said.

The FTA, signed in December 1998 and aimed at opening markets from either side, is due to come into operation next month.

"We are not terrorists. We are advocating non-violent ways to fight for our rights. But that does not mean we will sit back and watch our industries and farms crumble and our families destroyed," Gamage said, running his campaign from a small office in Pettah.

Gamage, from a wealthy southern family from the south, schooled at the prestigious Royal College in Colombo before proceeding to the United States for higher studies.

He graduated in economics with a degree at the University of Berkeley, California.

Instead of opting for a high-paid job as an economist there, the young Sri Lankan returned home in the early 1990s to set up a tea factory on family-owned land.

In 1994, the government was encouraging the private sector with various incentives including soft loans to set up CTC factories due to growing demand for these teas from the Middle East and the Commonwealth of Independent States (CIS). CTC - cut, twisted and curled - is an unconventional type of tea made from ordinary green leaf and used in tea bags. Thirty-six CTC factories, under management companies and private owners like Gamage, were set up.

Sri Lanka is the largest exporter of tea. Around 1997, due to a shortage of CTC tea, the government allowed a small quantity of CTC grades to be imported to meet a shortage of these teas for the tea bags export market. Imports of quality teas, also in small quantities were also permitted for blending and re-export purposes.

But Gamage and other producers say poor quality and cheap teas were imported under bogus categories undermining local CTC tea production. This led to local CTC tea prices crashing to Rs. 80 per kg in May 1998 from Rs. 200 per kg in the previous month. With CTC tea prices falling, green leaf producers sold their teas to factories producing other tea types that fetched a higher price.

The crisis has not ended. Private CTC tea factory owners are struggling with many closing their factories or working at less than half capacity.

"The bigger CTC factories run by companies have a section for the

production of normal teas unlike ours which only handle CTC production. They are able to survive because of this, plus having better financial resources," Gamage said, noting that his tea association was formed after the 1998 crisis.

"We burnt our fingers by being swayed by government incentives at that time," Gamage said adding that there was a time when he wanted to quit and return to the US.

"Having discussed this matter with my wife, I decided to stay back and fight for our rights."

Gamage says members of the tea association are not opposed to imports.

"What we want is proper labelling of Sri Lankan tea to make sure that what the foreign buyer gets is properly listed in the pack," he said. The association says that blended tea sold by Sri Lankan packers should be properly labelled "imported tea, blended and packed in Sri Lanka" and list the percentage of Sri Lankan tea and imported tea.

"We know our CTC teas will get a fair price if overseas buyers are aware of the type of tea that goes into tea bags," he said, claiming that inferior teas are inserted as quality grades in the blending process.

Gamage, speaking for the APNR, says that local farmers are aware that they have to compete against imports but need support through the transition period during globalisation. "They are aware of the inevitable but the government must help them through this crisis so that they can withstand international competition."

Some of the demands of the APNR include the formation of an independent committee, with farmer representatives, to handle the issues of government subsidies and an independent committee to formulate a correct label for Sri Lankan tea.

Shippers Council rejects rate hike

By Dinali Goonewardene

Two shipping lines have increased freight rates to Europe while the Shippers' Council is refusing to accept a previous rate increase notified through an advertisement in a newspaper.

Zim Lines and Hyundai Lines have increased freight rates by $150 per 20 foot container from the South East Asian subcontinent to Europe. These two lines have notified the Shippers' Council of the rate increase which will be effective from May- July, President of the Sri Lanka Shippers Council, Rohan Masakorale told The Sunday Times Business. "Freight rates to Europe will be determined by market forces.

We do not believe in price fixing to Europe," he said. Masakorale said he saw no reason for a rate restoration (which was how the rate increase was described by the shipping lines) but said the Shippers' Council had not reacted to the increase as they had just been notified.

Meanwhile an advertisement in the Daily News of February 17, 2000 notified shippers of a rate restoration of US $ 900 per 20 foot container from Sri Lanka to Australia, to be effective from March 1, 2000. "Consultative procedure has not been followed and we are unaware of who has inserted the advertisement and we will not accept the rate increase," Masakorale said.

The advertisement names shipping lines effecting the rate restoration including ANL Container Line Pvt Ltd, APL Co Pte Ltd, Hanjin Shipping Co. Ltd, Hyundai Merchant Marine Co. Ltd, "K" Line, Lloyd Triestino SPA, Maersk Sealand, Malaysia International Shipping Corporation Berhad, Mitsui OSK Lines Ltd, NYK Line, Orient Overseas Container Line and P&O Nedlloyd LTD However NYK Line officials said that although they increased rates two months ago a paper advertisement of this nature was contrary to the procedure they adopt when implementing rate increases.

We are unaware of who placed the advertisement and would like to know who did, they said. However industry sources said the advertisement had been placed by the Malaysia International Shipping Corporation Berhad


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