28th May 2000

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A silver lining amidst an overhang of dark clouds

The first quarter's economic performance is a silver lining amidst a gathering of stormy dark clouds. What has been gained in the first few months are likely to be more than off-set during the remaining months of the year. We can only hope that these clouds would somehow or the other blow away. Yet, the chances are rather remote as the dark clouds are already with us and the factors bringing these ominous clouds are out of our control.

During the first quarter the economy gained in momentum, with March providing the best evidence. During the first quarter exports grew by 24 per cent. Both industrial exports and agricultural exports contributed to this success. Industrial exports rose by 26 per cent. Nearly all major categories of manufactures registered significant export growth. Our main export, garments, showed an increase of 28 per cent and was the main contributor to the steady export growth during the quarter.

A significant rise in international tea prices by around 5 per cent owing to steadier markets overseas for tea proved a relief to the flagging market of last year. Tea export volumes too increased by around 11 per cent to increase tea earnings by 17 per cent. Some anxiety was felt that the improvement in tea prices might be offset by a fall in tea production . This too has been arrested and the first quarter's tea production is in the range of 77 million kilograms, slightly above the performance of last years' record crop. Rubber prices too have improved slightly to keep the industry afloat.

There is evidence of an improved industrial performance. Industrial production indices show a distinct up-trend. Imports of raw materials and capital imports have grown. These point to increased industrial exports in the coming months.

Where then are the dark clouds?. Most of them have as their underlying reason the fierce fighting that is going on in the North. There are both the direct and indirect impacts, the immediate and the long run effects. The first casualty is perhaps tourism, which recorded the highest arrivals and foreign exchange earnings last year. There are indications that tourist earnings would fall during the year. The tourist industry itself has learnt to live with good and bad years, recoveries and set backs, all of which were brought about by factors beyond their control. In the first quarter itself, tourist arrivals and tourist earnings were around last year's. It is in future months that the full blast of the war would have its toll. If however we could settle the war in a short spell, there is the prospect of the next tourist season commencing in the last quarter reversing this trend.

The most pervasive and damaging impact on the economy would be through its effect on the public finances and the balance of payments. At present the increased expenditure is estimated at around Rs.12 billion.

This increase in expenditure for the war effort would require increased public borrowing or resort to inflationary funding of the war. Either option would have unsatisfactory consequences through excessive taxation, increase in prices and reduced availability of funds for private sector investment or their availability at much higher costs. All these could be disincentives for production.

The havoc in the public finances would not come about merely owing to the increased funding of the war by about an additional Rs.12 billion or 1 per cent of GDP. It will be through the indirect effects of the war. Decreased production and tourist earnings too would reduce government revenue. But the biggest impact would however be through the inability of the government to realise the budgeted proceeds from privatisation , especially of Sri Lanka Telecom. The financing of the budget deficit was highly dependent on obtaining Rupees 30 billion from privatisation proceeds.

It may not be practical or prudent to put the Telecom shares on the international market at this juncture. The current state of our share market with foreign investors quitting it is more than adequate evidence of this.

This large shortfall in revenue will have serious repercussions on the economy in the manner we discussed earlier but by a larger magnitude than by the increased war expenditure alone. This shortfall is as much as 2.5 per cent of GDP. {see table 2)

This shortfall will result in a significant increase in the amount of financing required or the inflationary impact would be large. Already the government has increased taxes on tobacco and alcohol and increased the National Defence Levy. This may be only the first move.

Further taxation measures would be necessary to bridge the gap created by both the increased defence expenditure and the non realisation of the privatisation proceeds. To focus on only the increased war expenditure and ignore the other shortfalls in revenue is not a realistic appraisal of the impact of the war on the public finances and the economy.

If the internal repercussions are unpalatable, the impact on our balance of payments are no less serious, The war expenditure would be costly in terms of foreign exchange as the purchase of sophisticated armaments appears to be the need of the hour. Decreased tourist earnings is another source of diminished foreign exchange.

The privatisation proceeds would have not only strengthened the governments revenue but would have brought in foreign capital of a sizeable extent. Without all these our balance of payments, which has been deteriorating in the last few years, would slump bringing in its wake domestic difficulties. Even if the foreign exchange expenditure increase is only around US$ 800 million, this is about one third of our current foreign exchange reserves. This increased foreign exchange expenditure is in a context of an increasing trade gap in recent months owing to higher import costs.

The price of crude oil has more than doubled compared to what it was a year ago. This will have a serious impact on the balance of payments and foreign exchange reserves. This is especially so due to the increased needs of oil for power generation. The low levels of water in the reservoirs has resulted in most of the electricity generation being thermal.

The enhanced thermal capacity of recent years has saved us from power cuts and shortages. Yet the reliance on thermal power plants rather than hydroelectricity implies much higher foreign expenditures on fuel and its consequent adverse impact on the balance of payments. Oil prices too have been rising. Since current crude oil prices are more than twice what it was an year ago, the additional costs are likely to be heavy and an additional strain on the balance of payments

In a situation where the real production sectors are performing well, it is important to device policies to cope with the expected deterioration in public finances and the balance of payments, in such a manner that the country's production and export competitiveness in international markets are not adversely affected.

There may be also a need to devise conservation measures to reduce consumption of particularly imported products.

Taxation should increase revenue without decreasing production.

This implies taxation on consumption rather than on inputs to production and profits. We still have the good fortune that most of the country's production sectors are not directly affected by the war. The new crisis requires that economic management must ensure that the burdens of the war do not affect our production capacities.

Table 1 Silver Linings: first Quarter 2000 & 1999

Export Earnings 1st Q. 2000 ($ Million) 1st Q. 1999 Percent Increase Total Exports 1253 1007 24 Industrial Exports 968 768 26 Agricultural Exports 242 209 16 Garments 684 533 28 Tea (Rs. Billion) 12 10 20
Table 2 Dark Clouds: Increased budget deficit

Rs billion %of GDP

Original budget deficit 96 8

Increase in Defense costs 12 1


Expected Privatisation 30 2.5


Likely new deficit 132 11.5

Miss universe –the real winners and losers

Last week's Sunday Times had an interesting article by one Sidarth Bhatiya, which in effect was saying that the victories of Indian women in "miss world" and "miss universe" contests should be " kept in perspective." Mr Bhatiya trailed off by saying that " Beauty after all is skin deep."

I was thinking on slightly different lines. Why doesn't a miss Sri Lanka ever get close to winning the miss world or miss universe title? It may be a strange question to ask, and one may as well say, why should a miss Sri Lanka win the accolade anyway? Well not that anyone should, because that way we are blessed- we have enough problems as it is here without having queens to crow about. But methinks, at least just for argument's sake, why doesn't miss Sri Lanka win at least once in a score of years? Former Prime Minister , John Kotelawala, or so said a book written I think by Dhanapala, was photographed next to Maureen Hingert, and made a quip that was quite unbecoming of a Prime Minister.( something about standing between the two best chassis in the country...)

But, no Sri Lankan ever came close to winning the title after her time, and of course, apart from Rosy Senanayake who might have wished that she looked snazzier at least ten years before she won Mrs world, we have not had any " victories"in the beauty department.

This columnist for one couldn't care less. But never a beauty contest that was fixed, says Bhatiya, and this line is what interests me mostly about this beauty-and what Sidarth Bhatiya calls the " cattle contest"-business.

Let's listen to Sidarth Bhatiya's more celebrated countrymen, P Sainath, a journalist who has won many international awards-though not in the beauty department. ( One Columbian Professor of Journalism famously quipped that Sainath does what " journalists in America only dream of doing" His book " everybody loves a drought" , was a memorable swipe at the Indian establishment and particularly the notoriously unwieldy Indian bureaucratic establishment.

Though there is no earthly point pitting one Indian writer against the other, it's perhaps enough to just state that Sainath is the far more authoratitive of the two. And this is what P Sainath has to say about this whole beauty business.

"1995 saw the press absolutely overawed by the stupendous achievements of Indian women winning both the miss world and miss universe titles. No matter where one looked there were the smiling faces of A. Rai and S. Sen. Commercialisation was in.

But then," will a miss Manaco or a miss San Marino ever win a miss universe title? Even if they did, and every woman in San Marino for e.g bought some lipstick, how much lipstick could they sell?

Whereas, even if the tiny fraction of the Indian middle clsss bought lipstick or perfume or whatever, it makes millions for multinationals! ( when asked about the goals in life, apparently one Indian beauty said that she wants to be like mother Theresa. Sainath's comment was" doesn't seem likely unless mother Theresa enters a beauty contest.")

Not much need to belabor the point. Sainath thinks that the successive successes of Miss India contestants at Miss World and Miss Universe is more than coincidence. He cites Monaco and San Marino as long shots for the titles, as these countries have small markets which will make it a disaster for multi- national companies to have Miss World candidates from among them. Which of course brings me back to that little opening statement about Sri Lanka never being able to win one of these beauty contests either.

But, to get to brass tacts, what Sainath says is that these rigged beauty contests are nothing but charades that are sprung upon gullible TV viewers around the globe.

Though it sounds incredible, the coincidence of India beginning to win these beauty pageants soon after ex -premier Narasimha Rao's liberalization of the Indian economy, more or less clinches Sainath's point.

Commenting on this years Miss Universe contest, one expert commentator states, Letty Murray of Mexico prepared very hard for this competition with Miss Universe 91, Lupita Jones, and the fact that she won both the "Best in National Costume Award" and the "Clairol Herbal Essences Style Award" proves that.

With entire segments named after brands, the commercialization of Miss Universe is beyond doubt,. and with this kind of commercialization, the nexus between India's liberalization and its sudden crop of beauty contest winners is too good to be just beautiful.

Sainath in a recent talk points out that in 1996, the Miss Universe contest was held in Bangalore, and it attracted all the attention while earlier this year the debate over the Yanni concert in Agra grabbed al the media attention.

The way the press viewed poverty in India has also changed, says Sainath, connecting the press euphoria about Miss India to other issues. Says he : Though the print media reaches only 12 per cent of the Indian population, it is this segment that controlled most of the economic and policy decision making power in the country. Earlier there were two ways that the press looked upon poverty - -one in reports of destitution famine etc., and the other in the representation of the poor farmer/worker as the malnourished hero or for example the great agricultural success story. However, presently even this token reporting on poverty issues has changed. Now it is more of why care - - writing about the poor man isn't going to increase my advertising revenue anyway, and the people who buy the newspaper aren't poor. As a percentage of correspondents, the 1990s have the most reporters devoted to covering business, displacing political correspondents for long the largest section to second place. Following politics is sports reporting of which cricket takes up the major share. Then comes the Ministry beat, followed by those who cover fashion design and glamour items. Then comes the much coveted eating- out reports. In a country where 1/3rd of the people living without adequate water in the world exist, which has one third of all the leprosy cases in the world, 4/5ths of all TB cases, 1/5the of all people displaced by development projects, — there is no reporter to cover poverty in any single newspaper.

In such a rapaciously invasive and insensitive business culture that is prevalent since the multi- national invasion of India, why is not so hard to believe Sainath when he says there is hardly anything beautiful about Indian girls winning the worlds beauty pageants?

ESCAP calls for regional surveilance

The Economic and Social Commission for Asia and the Pacific (ESCAP) 2000 has called for regional surveillance to complement global surveillance mechanisms such as the International Monetary Fund and rating agencies. "Spillover effects in the region are very insidious and there is a pressing need to engage in regional co- operation," the report says. However action to forestall a crisis has to be undertaken at national level, it cautions.

The countries involved in regional surveillance would be able to monitor financial systems and beware of developing risks. Regional level initiatives are essential because economies in the region have become more interdependent in terms of trade and investment. They are considered as belonging to one region and investors treat the countries as having the same characteristics.

The Asian crisis exposed gaps of varying levels of seriousness in the existing global and national surveillance mechanisms. Major credit rating agencies include Standard and Poor's, Moody's and Fitch IBCA. However in the wake of the Asian Financial Crisis the rating agencies failed to predict the approaching problems in the Asian banking and financial sectors.

Although their misinterpretation may have weakened their credibility their potential influence was increased following a revision of the Basle Capital Adequacy rules.

The idea of a regional surveillance monitoring mechanism was first proposed during the Manila Framework meeting in 1997.

Funds should move to private sector says corporate leader

A top corporate leader urged the government to move funds out of the state controlled pension funds to the private sector.

The Employers Provident Fund (EPF) is worth around Rs. 160 bn, most of which is invested in government securities. The Employers Trust Fund (ETF) has around Rs. 35 bn and very little of this has gone to the private sector, the Sri Lanka Association of Securities and Investment Analyst (SLASIA) Chairman and General Manager National Development Bank (NDB), Ranjith Fernando said.

"We understand that in todays situation the government needs these resources but if the private sector is to play a role, some of these funds should move to the private sector, Fernando said addressing the recent Chartered Financial Analyst (CFA) graduation ceremony.

"Politics is the art of the possible. Although we believe that in a market based economy capital market development is essential for a country to progress, certain conditions in the country prevent the government taking positive steps in that direction," he said.

"But we are also discouraged when it takes steps backwards, he added citing the example of the proposed pension scheme for the private sector which is yet to become a reality. The recent CFA graduation ceremony saw ten people graduating.

This prestigious exam - which is equivalent to a masters degree - is administered by the Association for Investment Management Research (AIMR) of the USA. Sri Lanka has produced 21 graduates during the past seven years. Six past graduates were accorded the honour of being chosen to evaluate performance at this year's exam.

Rupee under pressure


Amidst the prevailing comparatively high overnight interest rates, the rupee came under severe pressure on the back of the excess demand for dollars. The market spot remained above the Central Bank selling rate, moving within Rs. 74.76 and Rs. 74.85 per US dollar. The Central Bank selling rate rose by 24 cents and the spot rate rose by 6 cents. Given the higher imports and the weakened trade balance, the rupee is likely to devalue further, FCL weekly money report said.

Repo market

The lack of liquidity in the market, saw an upsurge in the inter-bank overnight interest rate once again. As at end last week, the inter-bank call money rate prevailed at higher levels. The weekly call money average escalated by around 100 basis points compared to the previous week to close at 13.88%.

The present, cash in circulation is estimated to be in the range of Rs. 68 bn, which was approximately Rs. 3 bn to Rs. 4 bn higher than the normal average. Higher cash in circulation also reduced the liquidity available in the market. This in addition to the weakened trade balance in the balance of payment and the sales of dollars by Central Bank caused a liquidity shortage in the market.

The Central Bank overnight repurchase rate remained at 9.25%, while reverse repo rate increased to 14%. The rise in rates in the primary auctions and the increased pressure in the exchange rate may have pushed Central Bank to raise the rates. The market repo rates followed suit with the inter-bank call money market ranging between 13% and 14%.

TB auction

Rs. 3.56 bn in treasury bills were auctioned during the week. Due to renewed borrowing limits of the government and the prevailing uncertainty in the country, investor sentiment was disturbed. Rising momentum in the short-term interest rates continued. Although the auction was fully subscribed, the Central Bank intervened to inject around Rs. 1.7 bn in order to secure the rates.

However, the rates for all categories ascended, with the 91 days 182 days and 364 days climbing by 16, 18 and 35 basis points respectively. The three month bills attracted 11.76%, six months 11.99% and 12 months 12.43%.

Treasury auction

Rs. 1 bn worth five year bonds were auctioned last week. Bond rates continued to rise, given the affected investor sentiment and the weakened liquidity in the market. But in order to safeguard the rates, Central Bank accepted only Rs. 150 mn worth of bids. However, the Weighted Average for 5 years, rose by 23 basis points to 12.94%.

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