21st January 2001
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Big threat for small industries

By Chanakya Dissanayake
Sri Lanka's small and medium-scale (SMI) industrial sector is in the throes of a crisis, being squeezed out by a combination of factors like rising manufacturing costs triggered by wages pressures, interest rates, fuel costs and cheaper imports from India and other mass-growing countries, industrial officials said.

The growing number of SMI failures during the past few years has resulted in the industry appealing to the government for relief against these setbacks which has seen a substantial rise in the number of industries crashing or turning sick.

According to some unofficial studies, at least 22 small factories or companies are shutting down on a daily basis while 75 others are "falling sick daily". A recent study by the Federation of Chambers of Commerce and Industry (FCCISL) shows that 346 firms have foreclosed under parate executions during a six-month period between February 1 to July 31, 2000.

The industrial sector is now calling for a grievance redress system that includes a Banking Ombudsman, to prevent industries that are affected from external macro economic shocks from driven to closure.

Lal de Mel, a spokesman for the industry who last week stepped down as FCCISL president told The Sunday Times Business that SMIs were facing a massive threat due to factors beyond their control. Industries are crippled by the cost inflation, which has reduced their profit margins substantially while on the other hand working capital requirements have gone up resulting in higher borrowings. 

De Mel, commenting about the high interest rates and lack of alternatives to raise capital, said "most SMI's are already highly debt capitalised. This is primarily due to the lack of possibilities to raise equity capital for SMI's. Currently due to the rising interest rates, the interest burden has become more than their profits for many industries."

He said that many of the SMIs going through financial difficulties are bound to be foreclosed by the banks. "SMIs need a banking ombudsman to present their case, before the banks resort to the parate execution. At the time of financial difficulties the bank manager-customer relationship usually deteriorates and the industry needs an independent third party to act on their grievances," he added. FCCISL is calling for a banking ombudsman to be appointed by the Central Bank.

Sri Lankan SMIs are also struggling to survive in the new competitive environment created after the Free Trade Agreement with India that came into force last year.

"Our production costs are higher than India. But we cannot increase our prices according to our costs, because of the competition offered by the cheaper imports. If this situation is not rectified, bank foreclosures will increase by ten fold!" said Granville Perera, industrialist and former president of the FCCISL. 

The industry claims that it was not properly consulted prior to the enactment of the FTA with India.

Where have all the coins gone?

Ever wondered why there is a shortage of Sri Lankan coins in the market?

Walk into any tea kiosk, shop or trading organisation and invariably you come out with a few coins less.

Central Bank authorities say the shortage of coins is due to money not getting back to the system. "There is a sufficient number of coins that have been released to the market but the coins are being retained by various parties and groups for unavoidable reasons and not getting back to the system," an official explained.

Some of the biggest "keepers" of these coins are places of religious worship where worshippers traditionally slip coins into huge tills or "kattas" particularly at the top Buddhist temples in the country. 

The Central Bank in a recent appeal urged these organisations to return these coins in lieu of currency notes to enable authorities to release it once again into the market.

At one temple outside Colombo, Central Bank authorities were able to exchange currency notes for more than three million rupees in coins collected over the years in temple tills and not banked or used. 

Officials said another reason for the shortage was that commercial banks were slow in returning coins to the Central Bank mainly because of tight security measures near the bank's vault in Fort.

"There are fewer trips to the central bank to deposit coins as it is cumbersome for banks to go through the security measures in place," one official said. Banks are also indirectly responsible for storing coins by promoting the savings concept through tills.

It takes a long time to complete filling a till resulting in those coins moving out of circulation for a while. In recent months, parents of grade one and two students in many schools were confronted with a major problem - finding one cent, two cent, five cent and 10 cents coins among other denominations. 

Students were asked to bring these coins - of which the one to five cent coins are completely out of circulation - for school projects. 

Central Bank authorities have now launched a new drive to bring these coins back into circulation relying on the support of temples, churches, mosques and other religious places in addition to banks.

CSE to ride on Govt. securities

The Colombo Stock Exchange's (CSE) move to trade in government treasury bills and bonds - possibly in second half this year -is expected to boost bourse turnover to a daily average of Rs. 100 million rupees by end 2001 from current low daily levels of around Rs 5 million, officials said.

Millennium Information Technologies Ltd (MIT), which has been entrusted with providing the software systems for this purpose, is expected to commission the securities trading system by March 2001, an MIT official explained.

Hiran Mendis, CSE Director-General, said this would enable fluid transition of funds between equity and debt. " Currently there is more demand for debt than equity because of the high interest rates. The CSE is catering to this demand, by creating a common market for government gilts," Mendis added. According to market analysts, outstanding Government treasury bills and bonds now stand at around Rs 200 billion of which at least 10% is expected to be attracted to the new trading system. 

The Primary Dealers Association has signed a MOU with the CSE which specifies that the CSE will only play the role of the service provider together with the IT system implementor. The new trading system will cater only to the secondary market, between primary traders and investors for government securities. Maninda Wickremasinghe, assistant director at First Capital, a primary dealer, told the Sunday Times Business that the new trading system would enable price transparency and two way pricing, which will enhance the securities market.

"However the government should also strive to maintain stable interest rates without large variations to achieve the liquidity aspect," he noted.

The stock brokering community responded positively to the new developments. Jardine Fleming's head of Research, Amal Sanderatne said, " this will make government securities easily accessible to high net worth individuals. Earlier the process of investing in Government securities was tedious for the individuals."

However, stock brokers will not be allowed to trade directly in government securities which according to the brokers would create difficulties to their clientele who will have to approach a separate primary dealer to invest in securities. 

The primary dealers responded to these claims by pointing out that the stock brokers formed themselves into a club and prevented primary dealers from entering the CSE earlier. " Stock brokers did not want us to be admitted to the CSE and trade government securities. We could have used an extension to the existing Central Depository System. But now they want to share the pie," a primary dealer argued.

The fundamental differences in capitalising between primary dealers and the stock brokers was also cited by the primary dealers. "We are 150 million-rupee companies while stock brokers are 15-million rupee companies. The primary dealers carry inventories of government securities while the stock brokers are not allowed to do so," one dealer said.

Herbal toothpastes eat into multinational markets

By Akhry Ameer 
Sri Lanka's traditional toothpaste markets dominated by multinational brands like Signal and SR are rapidly being threatened by a range of local herbal brands by big and small indigenous producers. 

Industry analysts said that this was probably one of the few case scenarios where local producers are holding their own against giant conglomerates and going to the extent of even grabbing market share. "It is a tremendous achievement on the part of local producers in this field particularly in the context of globalisation and international marketing," one analyst noted. 

The toothpaste market, earlier driven by whiter teeth and cavity protection values, is now facing a situation where such values and beliefs are losing ground to ayurvedic and herbal oral care. 

The Sunday Times Business spoke to some of the main players of the ayurveda and herbal toothpaste manufacturers. L. G. Godakande, Director of Vendol (Lanka) Company (Pvt) Ltd. acknowledged the rise in market share attributing it to the fluoride content in the other international brands which do not agree with consumers living in areas with hard water resources. Its brand Vendol has advanced its market share to 7 % in 2000 from 3% in 1998 and Mr. Godakande said he expected a market share of 15% by end 2001.

Siddhalepa, one of the biggest names in ayurvedic products in Sri Lanka, was the first to introduce a non-white toothpaste based on an ayurvedic formula. Siddhalepa's Supirivicky brand since its launch in 1994 commands an 18 to 19% market share. Company managing director Asoka Hettigoda feels that there are many reasons for the rise in ayurveda and herbal toothpaste demand. 

"There are many reasons. People hear of the side effects of chemicals. They hear of products being removed from the market due to side effects. Asians have a likeness to natural and traditional things," said Hettigoda.

Asked about toothpast contents, Hettigoda said "the fluoride content in water is a valid argument. But it is an old concept. Fluoride essentially prevents cavities whereas there are many other benefits from ayurveda toothpaste." The company product is a patented and proven formulation recognised by the Department of Ayurveda. 

Siddhalepa, which recently also received an award from the Sri Lanka Institute of Marketing (SLIM) as one of the two brands to be recognized outside Sri Lanka based on its performance of Supirivicky, has also introduced yet another brand.

Sumudu, a toothpaste made with ayurvedic oils since its launch two months ago has already gained a 7% market share. 

Hettigoda said that Sumudu was introduced to the market to attract upper class consumers who do not feel comfortable with the color of Supirivicky. Sumudu with its lighter color and lami-tube packaging is having "tremendous" sales in most of the supermarkets in Colombo, according to Hettigoda.

Mr. Gihantha Jayasinghe, brand manager for Signal and SR toothpaste of multinational Unilever Ceylon Ltd. declined to divulge figures of their market share but acknowledged the growth in ayurvedic toothpastes. 

Clogard, an international product marketed by Hemas, has not been affected by local herbal and ayurvedic toothpastes, according to its brand manager, Mr. Yohan Rebert. He said their islandwide market share of 33% remains intact because the product is seen as close to herbal and ayurvedic toothpastes due to the presence of the clove oil ingredient.

The prices of all these products too are within the range of the international brands. However local manufacturers feel that they have a competitive edge because of their low overheads as opposed to multinationals. Mr. Hettigoda, referring to advertising, said they would be able to maintain a low advertising budget and depend on word of mouth advertising while that was not a viable solution for multinationals. 

Mind your business

A green hike
There is a lot of agitation for wage hikes these days, what with the cost of living soaring sky high. The greens were somewhat upstaged by the reds in this respect, so the former is now trying to do something to regain lost ground. 

They have sent feelers to 'friendly" companies in the private sector.

The idea is for the greens to negotiate wage hikes for workers from these companies.

However, though some employers agree that something could be done, they don't want to be identified with the greens and fall foul with the blues...

Hotel story
The country's oldest five-star passed on to safe hands recently, but the transition was not without its anxious moments. There were several hotel chains, which expressed interest and a competition of sorts ensued, with one bidder seeking state intervention to secure the deal.

Fortunately though, the powers that be declined and the transition went ahead without a snag...

Three is a crowd
Now that all the major cellular networks have calling cards, there is a different type of competition between them.

With the entry of the latest card into the market, the 'other' networks are now reviewing their own operations, because they feel the latest card could usurp their market share.

So, they too are likely to revise their cellular card tariffs shortly and three's a crowd now in this very competitive business!

The currency depreciation: Is it the solution?

The Sri Lankan rupee continues to de preciate significantly especially in terms of the US Dollar. During the course of last year it depreciated by about 15 per cent. It has continued to slide further in the first few weeks of this year with a devaluation of 2 per cent announced last week. The US Dollar was Rs. 72 at the end of 1999,the rupee depreciated to Rs 82 at the end of 2000 and is currently around 85 rupees to the dollar. Everyone is aware of the hardships the depreciation entails on the consumer through the direct and indirect impacts of higher import prices. It is not only imported items which rise in price, but also locally produced goods owing to an import content in them and higher transports costs, in particular. 

The pertinent question to ask is whether the depreciation of the currency would correct the imbalance in the balance of payments. Neo-classical economists would argue that it would, provided the depreciation of the currency is of the right proportions. This can be theoretically justified. Yet the practical realities in the economic context in Sri Lanka makes one sceptical. The depreciation of the currency or a devaluation is expected to improve Sri Lanka's balance of payments position in two main ways. The increase in the price of imports is expected to reduce imports. It is expected to increase export earnings by increasing export volumes by making our exports more competitive. 

The depreciation of the rupee decreases our export prices in terms of foreign currencies. Consequently, the dollar prices of our exports, in comparison to those of other countries would be competitive. Therefore our exports would be more competitive in international markets. Export earnings are thereby expected rise. The higher rupee earnings on exports are expected to give an impetus to increasing production and exports. These gains are expected in both the short and long run. Whether these expectations would materialise depends to a great extent on the structure of a country's imports and exports. The relevant issues are whether the higher prices for imports would reduce the foreign exchange value of our imports? Will the reduced prices for our exports in foreign currencies increase the demand for our exports adequately to compensate for the reduced prices?

Since the depreciation of the currency is likely to reduce the price of our exports (which gives us the competitive edge) there must be an increase in export volumes sufficient to compensate for the reduced prices. If the reduced export prices in dollar terms leads to a more than commensurate increase in export volumes, then our export earnings would increase and have a favourable impact on our balance of payments. 

There is another condition too to be satisfied. That is whether we are in a position to increase the supply of the goods demanded abroad adequately to make up for the reduced prices. In the case of our manufactured exports it is likely that we can increase our export volumes. This would not be so with respect to our agricultural exports. 

The analysis of our main imports does not give much hope for an adjustment of the balance of payments through a reduction in imports. It is difficult to identify any large imports, which would be curtailed to any significant extent owing to a price increases. 

For instance it is unlikely that rice, wheat flour or sugar imports would be drastically curtailed owing to price increases due to their being essential consumer items and the lack of substitutes. These are essentials, which most consumers would continue to purchase despite price rises of even 20 percent. It is unlikely that imported milk consumers would curtail their milk consumption either to a significant extent. 

Further the adjustment in the balance of payments is hardly likely through consumer import curtailment as these imports do not constitute a high import expenditure. Total food imports constitute a little over 10 to 12 percent of our import bill. All consumer imports amount to only about 20 percent of our imports. 

The bulk of our imports are intermediate goods, which account for over one half of our imports. Most significant among these are the crude oil imports, inputs for our manufactures and imports of textiles for the garment industry. In 1999 when crude oil prices were relatively low, petroleum imports absorbed about 7 per cent of our import bill, while textile imports constituted 21 per cent of total imports. Last year the oil import bill increased sharply owing to the quantum of oil imports increasing as well as a doubling of crude oil prices. 

Imports of crude oil alone are likely have absorbed more than 15 per cent of our import bill last year. This year too there is likely to be a high import bill on crude oil, though less than last year if prices do not shoot up again. Crude oil imports are also likely to be less than last year if rainfall in the catchment areas are heavy. The plain fact however is that the depreciation of the currency is not likely to lead to a severe curtailment of crude oil imports. 

It is neither possible nor desirable to cut the other important items in the category of intermediate or raw material imports. Many of the imports in this category too fall into the same mould of not being able to be curtailed as they are vital for our manufactures and agriculture. Therefore the depreciation of the currency is not likely to reduce intermediate imports. 

When we look at the export side of the equation, the prospects of increased earnings are better. This is so with respect to our manufactured exports. Last year's export recovery in manufactured exports was supported by the depreciation of the currency leading to lower prices of some of our exports. This year too this may help improve our competitiveness in export markets.

Yet these gains can be limited as most of our industrial exports have a high import content. Therefore the devaluation will affect the costs of production too to a substantial extent through higher input costs. Consequently export prices of many imports can be reduced only by a small extent. Where exports have a larger domestic value addition they could become more competitive. But these exports are relatively few. The impact of the depreciation could be more beneficial to the economy in the long run by improving the competitiveness of some of the higher value added imports. 

The gains in our agricultural export earnings are likely to be very limited. Our main agricultural export tea has an inelastic demand. By reducing prices we cannot increase export volumes appreciably. In fact there is a school of thought that the depreciation of the currency leads to a reduction in dollar prices of tea and therefore reduces foreign exchange earnings,though rupee earnings are enhanced. Rubber production fell last year when international prices improved reminding us that production is dependent on other factors besides price. 

The positive impact of the depreciation is an increase in export earnings in Rupee terms and therefore enhanced incomes. This could be beneficial to export agriculture in the long run, but not likely to improve foreign exchange earnings this year. 

An important determinant of our balance of payments is the expenditure on armaments. If these imports are to be at the same high level as last year,it would indeed be a serious strain on the balance of payments. However, this is an item of import expenditure independent of the devaluation of the currency. Armaments imports will not be reduced owing to the depreciation of the currency. 

The bottom line of this analysis is that it is unlikely that we could correct our balance of payments problem by a large increase in exports or the curtailment of imports through devaluation. We are not suggesting that no import items would be curtailed. Certainly there would be some drop in consumption in many imports . Yet the magnitude of the curtailment would be insignificant to correct the balance of payments difficulties we are facing. 

The large items of imports, wheat, sugar, petroleum, armaments will continue to be imported despite the current devaluation. Therefore the main objective of the devaluation is unlikely to be fulfilled. The danger is that the depreciation of the currency could set off a spiralling inflation which itself could wipe out any advantages that the depreciation may have in the short run.


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