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4th June 2000

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The balance of payments crisis

The congruence of several factors are likely to result in a serious balance of payments crisis. First, the enormous additional expenditures on imports of armaments, of around one third of our foreign reserves, are likely to make a large dent in our reserves. Second, the increasing crude oil prices means that our oil bill will rise sharply. Third, the drought conditions we have experienced will increase crude oil imports, as we are presently depending mostly on thermal power generation. This third factor, combined with the second, implies a very large drain of our foreign exchange earnings on the import of oil. The increase in tea prices are not of a magnitude that can off-set the increased costs of oil imports.

Unfortunately other factors are also not conducive to an improvement in the balance of payments. There is an outflow of funds from the stock market and one cannot expect even planned foreign investments to materialize in the present situation. Tourism is also not expected to bring in higher earnings for the same reason. These likely shortfalls are not that significant, except that they accentuate the problem. The prospect of bringing in about US$ 400 million by the sale of Sri Lanka Telecom also seems unlikely in the present context.

The trade deficit has widened in the first three months of the year. Compared to a trade deficit of US$ 254 million in the first quarter of last year, it has shot up to US$ 439 million, about a 73 per cent increase. This substantial increase in the trade deficit, despite improved export earnings is mainly a reflection of the rise in crude oil prices by around 133 per cent. The other factors that are likely to affect us during the rest of the year have not impacted on these figures. However other significant imports of ours such as wheat and rice, have also shown moderate increases in prices. A favourable development in the economy is also likely to impact adversely on our balance of payments initially. These are the increased imports of raw materials and machinery for industry. The industrial recovery, we are probably witnessing, will also have an adverse impact in the first instance, before contributing to higher export earnings later.

The nature and magnitude of the balance of payments problem is such that some quick, drastic and possibly temporary measures are needed. Placing the country on a war footing implies extraordinary measures on the economic front as well. In as far as the external finances of the country are concerned it may be necessary to curtail foreign expenditures on non-essentials. There are three approaches possible. The first is to raise domestic prices of non essential imported items through tariffs and taxes, which would curtail consumption. Second is to ban for a time items not essential to the economy, items of conspicuous consumption, in particular and third is to appeal to people to reduce their consumption of imported items and use domestically produced goods in this hour of need. The third measure will probably have the least effect, but it must be tried at least as a complement to the other policies. Effective communication methods must be utilised to make such a strategy work.

The most serious deficiency in the current situation is that the severity of the situation with respect to our finances is hardly known by the people. One can hardly expect people to respond when they are not even aware of the problem. A delayed response by the government would mean that the situation would have deteriorated. It would then be more difficult to extricate us from the dire consequences of the deteriorating balance of payments and the erosion of our external reserves. Economically we may be playing into the hands of the enemy.


SEC chief on revitalising the capital market in 2000

By the Business Desk

STB: If a listed company is under investigations and their shares are suspended, do the individual shareholders have a right to know what the status of investigations are in their company?

DCJ: As far as the SEC is concerned, the moment the shares are suspended we always give a reason from that point we would disclose whatever we could disclose. The policy is that as much as we are trying to protect our investors we also need to protect the people who are being allegedly accused. Considering the fact that some of the people we are investigating are high profile people one has to be cautious. What we would generally tell the CSE is that the company is being investigated, we would sometimes go to the extent of saying this company is being investigated for insider dealing or any other area. But generally the policy is to say that a company is being investigated. If and when the suspension is lifted we inform the CSE as to what decisions we take, otherwise the market is in a limbo.

We are going to streamline the procedure because sometimes when the suspension is lifted we issue a statement but there is no coverage in the press.

STB: The amendments to the SEC Act have been on the backburner for the past few years, what is the present status of it?

DCJ: It's at the Legal Draftsmen's department. Currently they are working on the Sinhala and Tamil translations so we hope to see the final version out soon.

There was a general delay in putting it out. It was not a situation particular to the amendments. We are expecting them out within the next few months.

Some of the amendments strengthens our power in the investigation department - we have been hampered in our activities without the adequate legal authority. I am hoping it will be tabled in parliament within the coming months.

Of course in preparing this Act, we have gone through a consultative process where certain parties have been consulted time and time again, we have had discussion also from other concerned entities.

We have had four drafts so far. So it has been updated over the years, its not that we are still working on our earlier draft. There was also a slight delay when we got IOSCO membership and some of our rules had to be altered slightly.

STB: What areas will the amendments cover?

DCJ: A wide spectrum of activities. For instance, margin trading will be covered. However, the amendments will not deal with the extent of regulating merchant banks that will be where the Central Bank will also have to get involved. Apart from strengthening our investigative powers, there are a whole host of market instruments that would be regulated like underwriting, credit rating agency investment and portfolio management so long as they manage listed portfolio and the depository system. If there is any depository system that will do clearing and settlement it will be regulated. The amendments will have to go through another consultative process so its still tentative.

STB: Could you elaborate as to what you mean by portfolio management?

DCJ: There are people who manage unit trusts. Apart from unit trusts, we don't regulate any other fund management companies, which are operating at present. What is envisaged by the amendments is that if there is a person managing somebody's money, and that money is being utilised in listed securities to that extent that fund manager will be regulated.

STB: For instance, if a quoted company fails to honour the interest payments on their debenture, what are your powers?

DCJ: We are talking hypothetically in this instance. The debenture holder can make a complaint to us. We would initially investigate the veracity of that complaint. Then depending if the debentures are quoted or not we can draw the attention of shareholders/guarantors and as an issuer if they have misrepresented the facts we can look at those areas.

The thing is that in countries like USA, Australia etc there is no distinction as to whether a company is quoted or not, all companies are regulated by the SEC. But in Sri Lanka the legislation has been very specific and limited to quoted companies.

STB: What is the status of the SEC Rules?

DCJ: Some rules are being amended particularly the ones relating to the take over and mergers code. This is the major overhaul in the rules so far as we are concerned as there have been a number of take overs and mergers within the last few years.

There are also some minor changes to the unit trust code which are still in the discussion stage. There are also some practical areas that have come about within the present rules like the CDS etc which are going to become redundant.

In addition to these rules, we are also trying to take a broader look at all the laws and regulations that are in force now identifying those pertaining to the financial sector and come up with some recommendations as to how the laws can be changed to accommodate economic growth. For instance under the Mortgage Act, there are provisions that permit scripless transactions.

Then we also have this money lending. It is unlawful for a money lender to go to your house and give a loan to your wife unless your husband has given written consent. Also look at laws pertaining to provincial councils, cooperative societies they have restrictions on how they can raise funds. Before we appoint a committee, we need to do a thorough search of the statutes and we are exploring the possibility of getting research funds for it.

Because we have about 1500 laws currently in operation which are the principle statutes apart from the regulation and you find odd provisions with regard to financial issues scattered around.

A few months back, the Central Bank issued seven volumes of the banking laws but for instance the cooperative society or thrift society there have restrictions with regard to their investments, which have not been included in these laws. So the entire modernisation process has to be looked at.

We have just finalised the project proposal and its going to cost around Rs. 1 billion as we need permanent research people for at least two years.

STB: With regards to the take overs and mergers code, there is a perception that the present 30% rule for a mandatory offer is being violated and companies are putting up front companies to avoid making a mandatory offer.

DCJ: The committee that is looking into the take overs and mergers code is taking a fresh look at it.

STB: How do you plan to curb the problem of front companies buying into a listed company?

DCJ: Its difficult. The entire issue of governance has to be looked into. The CSE, the SEC, the shareholders have to play a role even the company itself has to be transparent. One way we could get around this is by focusing on the target company. At present, if a person buys more than 30% he triggers the code, and you make a mandatory offer. To get around this some people get front companies to buy the shares. In developed countries wherever the ownership changes one could look at making a mandatory offer that is one way in which this could be remedied and we are looking into it. But monitoring such situations is not easy.

STB: The unit trust industry is going through a crisis, despite several incentives being offered by the government, what are your views to try to revive the industry?

DCJ: A crisis has to be viewed in a proper perspective. There is a positive way at looking at a problem and then trying to see where they go wrong. It's from a crisis that you find innovative ways being formulated.

STB: The budget proposals gave the equity funds concession to permit non-nationals to invest, how far has the industry progressed in this direction?

DCJ: We have been having discussions with the industry as to what the industry plans to do with it, their action plans, marketing plans etc. Individual companies have been asked to subject their proposals and we are expecting them shortly.

In time to come, we will focus on market development which will be critical to Sri Lanka. Very soon we will come up with a set of proposals which will come up with possible solutions.

Then we will have a symposium at which these proposals will be considered and set up a think tank to further develop some of these proposals. It will take place within the next two to three months.

In the past, our market development activities were limited to a three day workshop. And concerns have been expressed that nothing much has happened. The market development division is conducting training programmes at present for teachers, as the securities aspect has been included in the commerce subjects at the A/Ls.

STB: Will the new market development plan replace your corporate plan?

DCJ: It won't it will merely strengthen our activities. It's a case of shifting our priorities.

We are also trying to expand the SEC staff and we have been advertising lately. Our investigation unit is perhaps the smallest in the world we just have one senior manager and one police officer who is on deputation. Australia for instance has 1,200 staff at the SEC.

We also started a training programme for the judiciary beginning from the magistrate courts upwards.

Unlike some countries, we don't have a separate judiciary to deal with commercial cases.

STB: With the market performing so low, there is also some concern that companies are shy to list?

DCJ: This has been our concern as well. We are going to have some discussion with the Institute of Directors. Of course, one has to take into account the culture with which companies operate here. The public has also got to be taught that there are various options for them to invest in.

Biz Broadsides by Rajpal A.

The SLT "monopoly'' or the art of losing business fast

Sri Lanka Telecom is an organization which knows sure ways to lose business. With a moniker such as Sri Lanka Telecom, and with the affiliation with Nippon Telegraph & Telephone Corporation (NTT) which owns 35.0% shares, Sri Lanka Telecom, it would have been guessed, was utterly business savvy.

And, after all, SLT's corporate literature has it that SLT's vision is to "become the telecommunications hub of Asia.'' ( ... come back to that in a minute.)

But, Sri Lanka telecomm has Public Relations men made of anaconda hide. And, don't just take my word for it. Take the number of letters to the Editor that appear for instance, in the daily newspapers, about Sri Lanka Telecom's behavior towards the subscribers.

I can think of a few at random, such as the one which exposed the SLT scam of providing a telephone directory only when all dues are paid up.'' The subscriber who wrote was merely voicing the disgust of most subscribers of the SLT 'S I almost said LTTE's terror tactics of getting rid of the usual directory delivery service to which all customers have been used to, since the time of Alexander Bell more or less.

Not only did the SLT mandarins change all that, they added the final coup de grace of the insult by not having the directories ready, when customers called at the SLT, even after having paid up.

Another letter talked of the SLT's monumental ability to get the bills all skewed. This customer, who wrote I think to the Sunday Times, said that his bill had been charged for a international call that he never made.

The SLT counter clerks had admitted the error, but, nevertheless, the poor man's connection was severed, as he had not "settled the dues.'' What dues?'', asked the customer, but the SLT operation is unfazed. One more day of business as usual at the Sri Lanka Telecom offices.

Now, Sri Lanka Telecom is "rationalizing'' tariffs, and the rationalizing there is euphemism if ever there was. Basically, SLT is charging more for a service that for all intents and purposes, is ''getting lousier''.

The SLT's customer unfriendliness, and bad business acumen was apparent in the recent fiasco of disconnecting customer connections, without so much as a courtesy warning. Disconnections were done, irrespective of the amount of arrears outstanding.

The writer is a SLT customer who had his service stopped under these strong arm terms, something for which there was absolutely no excuse. Of course, there were thousands more who were summarily disconnected.

The SLT issued a statement saying "it has become difficult to run the establishment without recovering all dues.'' That's another way of saying that the SLT knows how to lose business.

The fact is that the SLT disconnected lines, for arrears as low as 4000, without a warning even if the customer had a previous record of settling all arrears after a courtesy notice had been sent.

These sort of tactics, which are not just strong arm, but smack of boorish business, do not work in a competitive environment, when other private telephone providers are offering a customer service that is relatively more courteous, efficient, and probably much less expensive. This customer for one, promptly switched to a private provider, which has been offering a superb service, which is also more customer-friendly.

The SLT has more advertising hype and are large on the (imagined) vision-thing, but short on delivery of a real, efficient services that doesn't dish up hassles for the customer. The SLT announces for instance, touting its much ballyhooed concept of "Teleshops'' that "our Teleshops have revolutionized telecommunications marketing. We opened four Teleshops in 1998 and another 26 so far. Another 07 Teleshops are already planned for next year. These Teleshops are one stop centres and perform a variety of functions. Customers may pay their bills, lodge a complaint, register for a new telephone or invest in a range of new equipment, in a customer friendly environment. We are committed to enhancing customer satisfaction at all levels. ''

That's great advertising copy, but in fact the private communication providers offer a service of the type the customer appreciates, sans the frills and the unctuous language. For example, private telecom operators enable your bills to be settled at the touch of a phone button - via phone banking. It's a facility still denied to SLT customers despite all the hype and the advertising copy about being customer friendly and efficient. The SLT simply doesn't allow settling of bills via phone banking, but have the audacity to disconnect lines without a warning when customers delay in paying up (..sometimes due to difficulties in facilitating payment.)

The SLT story is that its acting like a hot-headed monopoly when its monopoly is over. It's a good thing the SLT's monopoly is over, even though foreign interests maybe making money.... ( Something this column has always opposed, but in the case of SLT, one cannot help but suspect even a nexus between these customer scare - tactics, and the existence of a telecom oligopoly. That's another story.)

For the moment, what's galling from a customers point of view is the SLT's rank customer unfriendly and boorish behaviour ( and the litany piles up such as invoices that never get adjusted for past payment, suspect bills etc., ) My simple advise is never subscribe, if you intend getting a new phone, to Lanka Telecom. If you have one already, switch soon. And you guys at SLT I'm not being paid to say this.


Senanayake's injunction rejected

An interim injunction by a director of Blue Diamonds Jewellery world wide Ltd (BDJW) was rejected in the Colombo District Court recently. The injunction sought to prevent voting or sales of 4.8mn shares of BDJW which were held by Gold Lada Ltd but mortgaged to Seylan Bank.

The crisis arose when BDJW moved a resolution to remove Senanayake from his post of managing director using the voting rights of Gold Ladas shares in BDJW to tilt the balance of power.

However Gold Lada had obtained a loan from Seylan Bank and empowered the bank to use the voting rights of the BDJW shares mortgaged.

While the resolution to remove Senanayake was passed by a 63.7 per cent majority Seylan Bank subsequently sold the mortgaged shares to recover its dues.


Tea gets hot, rubber bounces back

By Feizal Samath

Plantation stocks, helped by good tea prices and expected record output, is driving retail investment at the Colombo Stock Exchange and is seen boosting corporate earnings this year though war and higher power costs could slightly dent prospects, analysts said.

"The war is bound to affect big companies but a buoyant tea market plus an improved economic environment in the first half of the year is likely to offset any major fallout," one analyst said.

Treasury Secretary Dr. P.B. Jayasundera told the Sunday Times earlier this month the economy had done well in the first quarter 2000 with exports and manufacturing recording sharp increases. Revenue collections in this period from the Goods & Services Tax (GST) also rose by 21 percent, from the last quarter of 1999.

"Exports were also up in April and the first week of May," he added.

Last week, the Central Bank said exports for the first quarter of the year grew by 24 percent to 91 billion rupees due to a substantial improvement in industrial exports.

Industrial exports represent food, beverages and tobacco, textiles & garments, petroleum products, leather and rubber. Officials said exports fell last year due to depressed world markets, poor tea prices due to a financial crisis in Russia, a major tea importer, and increased competition from East Asian countries.

The Colombo bourse's benchmark all-share index - which sank to 430.6 on May 8 and a nine-year low of 454.6 before that on May 4, earlier last month when Tamil rebels were closing on the northern town of Jaffna - recovered last week to close at April levels.

The index stood at 478.5 on Wednesday, slightly up from 476.5 on April 28, as confidence returned to a market after government troops launched their first major counter offensive in Jaffna last Monday amidst reports that the rebel offensive was waning. "I think the worst is off. Retail investors are less jittery," said one analyst.

"Though the rise last week was very marginal, the market seems to be picking up from dismal levels in the first two weeks. We still are at very low levels but looking at the overall May picture, the week's trading this week looks good."

Foreign buying however was disappointing but not usual. It has been a case of net foreign outflows since January this year and had little do to with the government's tough emergency measures, including a censorship, on May 3 aimed at containg the rebel threat. The government also raised cigarettes and liquor taxes and increased a defence levy to meet escalating military spending.

Media Minister Mangala Samaraweera told reporters last week that the censorship was likely to be eased in a month's time as government troops consolidated in the north.

Analysts said while corporate earnings during the first half of 2000 was expected to be positive, the situation was uncertain in the second half due to a prolonged war situation, a power crisis and impending general elections.

Plantations would also be affected by the power crisis and a higher wage bill. Power and Energy Ministry warned of surcharges, power cuts and bans due to a shortage of rain to feed the country's hydropower plants.

Trade unions and plantation managements are negotiating a wage rise demanded by workers in a dispute that has gone on for many weeks. The unions had called a protest last Monday in the form of a "prayer" meeting in Colombo to back their demands.

In the past five to six weeks, plantations have risen - percentage-wise much higher than any other sector - at the Colombo bourse with mostly retail investors picking up the stock. Ajit Gunawardene, chairman of the Colombo Stock Exchange and senior director at John Keells, said plantations were attractive as they were trading at IPO levels - when the state-owned estates first became listed on the exchange and sold to private investors.

Foreign investors have shied away from these and other stocks since January this year.

Chrisantha Perera, chairman of tea broker Forbes & Walker Ltd, said tea prices had improved this year with prices averaging 130 rupees per kg during the January to May period this year compared to 105 rupees per kg in the same 1999 period.

"Prices are expected to maintain these levels till the end of the year," he said, adding that production was set to peak at an all-time record of 285 or 290 million kg against 283 million kg last year. "Things are looking up this year," he said.

So it is for groups like John Keells Holdings, Hayleys, and Aitken Spence all of which are expected to show improved growth in the first quarter of 2000. The three have a sizable stake in plantations.

Hayleys has reported a 12 percent rise in net profit to 397 million rupees for the year ending March 2000 with company chairman Sunil Mendis saying the firm bounced back from a 15 percent dip in profit in the earlier financial year. John Keells and Aitken Spence's year-end to March 2000 results are expected sometime this week.

While plantations are expected to boost profits of blue chips firms, corporate earnings across the board have been favourable so far, analysts said. Commercial banks, except for the National Development Bank (NDB), have recorded targeted growth rates. Net profit at the Hatton National Bank (HNB), for the January-March 2000 period grew by 7 percent to 160.7 million rupees.

Other banks like the Commercial Bank have also reported good profits. The NDB, saw its year-end to March 2000 profits eroded by provisioning for loss-making investments in the stock market.


Ceylinco in Malaysia

The Ceylinco Consolidated Group expanded its reach to Malaysia when they recently launched eCeylinco.com - an e-trading hub for businesses.

eCeylinco.com is a maiden venture of Ceylinco Consolidated (M) Sdn Bhd of Malaysia.

eCeylinco.com brings together a virtual community of buyers, manufacturers and suppliers with a hugely diverse range of interests from all over the world.

The virtual trading system - which provides seamless integrated B2B (business to business) matching of demand with supply while facilitating transaction and logistics - is designed to enhance the business of small- and medium-sized industries who lack the infrastructure for global trading.

To access eCeylinco.com, parties need to sign up as members. There is an annual registration fee of US$ 100 and a monthly service fee of US$ 15.

The global network of Ceylinco offices will be electronically linked to the headoffice in Cyberjaya, where the mainframe is located and maintained by Cybersign Sdn Bhd.

eCeylinco.com has a human interface through the Ceylinco global network to provide customer service to its members. There are currently 15 offices globally and a further five offices will be opened by the end of the year.

"We have taken the concept of B2B trading into its next dimension. The key factor being the power of the net is supported with the all-important human touch with a customer service dimension," Ceylinco Consolidated (M) Sdn Bhd Director, Sanker Wijesinghe was quoted by the wire services.

"A complete service of sourcing, procurement, payment and logistics management will be handled via the Internet at eCeylinco.com."

He said a total of US$ 4 bn in transactions are traded via the Internet with business-to-consumer (B2C) leading in this arena.

"However (analysts) have predicted that B2B trading will be five times larger than B2C by the year 2001," Wijesinghe said, adding that B2B trading is expected to exceed US$ 1 trillion in 2003.

The company hopes that the product, its concept and the endless opportunities it presents will encourage Malaysian businesses to become a pioneering member of eCeylinco.co, Wijesinghe said. Ceylinco.com expected to be operational in September.Cyberjaya is a new Malaysian city, conceived to house digital multi-media companies. It offers a concentration of cutting-edge computer talent and has world-class telecommunications infrastructure.


"Skywards" the SriLankan way

SriLankan Airlines and Emirates last week launched 'Skywards' - a frequent flyer programme aimed at rewarding their loyal customers.

Frequent travellers with SriLankan and Emirates can earn miles when they fly with either carrier and exchange these for free travel, seat upgrades, priority boarding, waitlist priority over non-members and a host of other exciting benefits.

Skyward comprises three tier levels: Skywards, Skywards Silver and Skywards Gold. Since it is one programme for both airlines, miles flown on either SriLankan or Emirates will count towards the tier level - offering passengers a wider choice to earn and redeem miles, Head of Commercial, G T Jeyaseelan told the media.

In addition, miles can also be earned on partner airlines who are British Airways, Continental Airlines, South African Airways and United Airlines.

Other partners in the programme who extend the same privileges include 20 hotels, Arabian Adventures, Budget Rent-A-Car and the Skywards Citibank co-branded credit card.

Five service centres have been set up worldwide in Colombo, Dubai, Manchester, Melbourne and New York City to service members.

Membership status is based on tier miles accrued or sectors completed over a calendar year. As tier miles are accumulated, members can be upgraded to the next tier.

On enrolment, members are admitted to Skywards tier, with new members earning bonus miles for the first flight on either carrier within six months of joining.

"Its more than just a miles-for-miles programme," SriLankan CEO, Peter Hill said.

It's a world class business and travel club for our most loyal customers, that extends benefits beyond the times a member flies, he said.

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