30th December 2001

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Interest rates bottom out

The Central Bank's announcement last week that it had reduced its lending rate (Bank Rate) to commercial banks is unlikely to have an impact on interest rates which appear to have bottomed out and could even rise next year, analysts said.

The Central Bank said it had cut the Bank Rate, the rate at which it gives advances to commercial banks to help tide over temporary liquidity problems, to 18 percent from 23 percent. A senior treasury official at a commercial bank described the move as "an academic exercise" that would have no impact on lending rates. "It has no meaning," he said. "The market rates are lower - 13 percent - while the Bank Rate is at 18 percent."

Dushyanth Wijayasingha, head of research at Asia Capital, said most commercial banks "were not really pressed for liquidity so they don't have to resort to borrowing from the Central Bank."

The Bank Rate was raised when the Central Bank increased the Repo and Reverse Repo rates and was not brought down when these rates were lowered. "They have cut it only now," he said.

He said he believes that, overall, interest rates had bottomed out. "I don't see any significant downside from current levels," he said. "The government would have to resort to domestic borrowings to bridge the shortfall in the budget deficit. So interest rates are likely to stay level for the next three or four months." But, he said, if the government decides on a spending package in the next budget to kick-start the economy, interest rates could go up in the second half of next year.

The Central Bank also said it had cut the margin between the Discount and Rediscount rate to make them compatible with the reductions in other interest rates used by the Central Bank for monetary policy purposes and to facilitate the declining trend in the market. Dealers said this would give a fillip to the market for government paper.

Unilever closes tea blending plant

Unilever Ceylon Ltd, a subsidiary of the foods and personal care products multinational, said it is closing its blending and tea packing plant at Mabole from tomorrow owing to poor productivity and loss of markets.

Orders for tea bags and blended teas had fallen sharply over the years as costs went up and the plant became uncompetitive against factories elsewhere, company officials said. Unilever is a big buyer of bulk tea at the Colombo auctions for blending and packing abroad for its brands such as Lipton and Brooke Bond. This will continue.

Labour unions said they opposed the move to close the Mabole plant (near Wattala) by December 31 as 540 people would lose their jobs, and accused the company of wanting to outsource the work on contract as it was cheaper.

Unilever officials denied they were planning to give the work on contract saying that the company had applied to the termination unit of the Labour Department to close the plant. "The main reason to close the factory was that the product had become too costly," an official said.

The Lipton/Brooke Bond factory at Mabole was established in 1991 to amalgamate the operations from the original two sites in Colombo and to produce and export tea bags and packet teas as well as bulk blended Ceylon tea. Some tea for the local market was also produced there, a company statement said.

The main customers were Unilever marketing companies around the world, especially where there was no production source close to their market.

But demand for tea bags and value added teas in Russia and Eastern Europe has fallen steadily after peaking in the late 1990s and the company said it was not viable to maintain the same workforce.

Following the collapse of the Russian market, sales plunged by more than half from 4,000 tonnes achieved in 1998. Demand for blended teas has fallen to a little more than 8,000 tonnes from over 20,000 tonnes. Other Unilever plants in the Middle East and elsewhere were making tea bags cheaper than in Sri Lanka, officials said.

The Ceylon Mercantile Union (CMU), which represents workers at the Mabole plant, said the compensation offer by the management of Rs. 200,000-400,000 under a voluntary retirement scheme was not acceptable to many workers, some of whom have 25 years of service. The CMU had challenged Unilever's application to close the plant and asked for an inquiry, said G. Wickramaarachi, president of the Brooke Bond - Lipton branch of the CMU.

A Unilever statement said that the market for tea bags had become "extremely competitive" and therefore reliability, speed of response and minimum supply costs have become key drivers for marketing companies. "Transport costs, especially for tea bags which are some four times that for teas in its original form, are now an increasingly significant part of the supply-chain," it said.

The unsatisfactory history of supply and quality service levels from the Mabole site has made it impossible (despite improvements this year) to prevent permanent business loss and the forecast production for next year is now less than 200 tonnes of tea bags, it said.

Truce may trim defence costs

The ceasefire by government troops and the LTTE could result in immediate and significant financial savings for the armed forces, because the absence of offensive operations means much less munitions costs and fuel use, but only a durable peace would sharply cut defence spending, military officials and analysts said.

"We do not expect a big reduction in costs except in the case of ammunition expenditure in combat areas, because we have to maintain our formations in Jaffna," said military spokesman Brigadier Sanath Karunaratne. "But the savings could still be a handy sum, especially in foreign exchange since all munitions are imported."

Dr. Saman Kelegama, executive director at the Institute of Policy Studies, said the truce gives a sense of confidence to people who have seen the war drag on for years with no end in sight.

"It gives hope that things are moving in the right direction," he said. "For the first time, the international environment is favourable to the government. Now there's a collective global effort to address terrorism. The ceasefire has come at a time when the world is turning against terrorism because of the events of September 11. So it gives confidence and hope - more than in 1995."

The government has said that the truce could be extended. Godfrey Gunatilleke, governor of the Marga Institute, said the truce by the security forces would result in significant savings in recurrent expenditure such as that on fuel and ammunition.

Military offensives have usually resulted in heavy expenditure on aircraft munitions and artillery and tank ammunition, especially in recent years with the security forces increasingly relying on air and artillery attacks to pave the way for ground troops to advance.

The cost of munitions used by the army gives some idea of potential savings. A 120mm Grad rocket fired from multi-barrelled rocket launchers costs $210 (Rs. 19,530), a 152mm shell for the army's heavy artillery regiment costs $240 (Rs. 22,320) and a shell for its 130mm guns, which have greater range, is $300 (Rs. 27,910). A 105mm tank round for the T-55 battle tanks in the cavalry regiments is $55 (Rs. 5,115).

The Sri Lanka Air Force (SLAF) expects to make some savings in aircraft operating costs and fuel and munitions expenditure but all other operations continue as usual.

"The only cost reduction would be in ground attack missions," said SLAF spokesman Wing Commander Ajith Wijesundera. "We won't be engaging identified ground targets or providing closer air support during army and navy operations. Other than that everything is normal."

Although offensive operations have ceased, normal patrols especially aerial and naval reconnaissance would continue, as will the usual transport flights and convoys. The SLAF ferries about 1,000 troops and 20 tonnes of cargo a day between Palaly and Ratmalana while the navy has regular convoys between Trincomalee and Kankesanturai.

One area where costs might actually go up would be in training with the security forces using the respite to do more training.

Finance Minister K.N. Choksy said last week there could be savings in the defence budget because of the ceasefire.

Defence spending now accounts for as much as 30 percent of government revenue and 5-6 percent of Gross Domestic Product. However, Choksy also said there was a lot of defence spending that had not been properly accounted for and where no record had been kept on how money was spent." There was no proper accounting of defence spending," he told a news conference. Ministry of Enterprise Development, Industrial Policy and Investment Promotion, Professor G.L. Peiris said last week that there was a big outstanding claim from China, for long the biggest supplier of weapons systems and military equipment to the security forces.

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