Clear signals on monetary policy

Be careful, Central Bank tells depositors
The Central Bank last week warned the public to beware of unlicensed deposit taking outfits offering high rates of return. "Our message to the public is: don't be tempted by offers of super interest rates and super profits," Central Bank governor A.S. Jayawardena said. "There are many small-time money lenders but it is impossible to chase after all these people, do sting operations, and take them to court," he said. "So we told the public to be wary of extraordinary offers." The bank last week advertised a list of approved financial institutions and said the media had been advised not to publish ads from those that were not registered. Jayawardena said the public had burnt its fingers once from the type of 'double your money in two years' offers from some finance companies which later collapsed. "The higher the return, the higher the risk," he said. "So our message is: 'caveat emptor' - be careful, let the buyer beware." He said it was "humanly impossible to completely protect the public from these tricksters. It is like expecting the police to completely eliminate murders. "When we hear that there are people who are openly soliciting deposits from the public without authority we bring to their notice that they are flouting the law," he added. "We have cautioned them and even taken some to courts after repeated warnings."

The Central Bank will shortly publish statements on monetary policy and financial stability as part of ongoing reforms designed to modernise the organisation, and make it more transparent and accountable to the public. "Very soon we'll be publishing our monetary policy statement," Central Bank governor A.S. Jayawardena said in an interview.

"It will give a clear picture of our monetary policy and an idea of where inflation and interest rates are going to be. In other countries it is even tabled in parliament."

Likewise, the bank will put out a "financial stability report" that would outline the measures taken by the organisation to stabilise the financial system, he said. "Then we'll be more accountable to the public."

These were part of the reform process that will see the bank focus on its core responsibilities and shed those that are not central to its main functions.

The Central Bank's main focus would be to ensure economic and price stability, achieved through the conduct of monetary policy that will aim to keep price increases as low as possible, and ensure system stability by regulating and supervising banks and other financial institutions to create stability of the financial system, Jayawardena said. "We are modernising the bank to meet the demands and challenges of the new international financial system," he said. "Till now we have been looking at mainly the domestic financial scene."

Now there would be more emphasis placed on the strength of the system and its ability to meet the kind of shocks generated by large scale capital flows that created the East Asian economic crisis, he said. "So we need to strengthen the domestic banking system and must start with the Central Bank," he said. The Central Bank was strengthening its supervision of commercial banks and ensuring quicker detection of any weaknesses through online monitoring, he said.

"Earlier we used to leisurely do bank by bank supervision - taking a year or two," he added. "Now we can no longer afford that luxury." However, he warned, "the public must realise that despite Central Bank supervision it cannot guarantee that everything is fine."

The bank was also considering the virtue of making its bank deposit guarantee system compulsory, Jayawardena said. The bank now has a voluntary system but it is not used by commercial banks apparently because of the need to pay a premium that would raise costs. Under new measures to make government spending more responsible, the proposed Fiscal Responsibility Act would restrict the size of the budget deficit and reduce its borrowings from the Central Bank that helps to indirectly fuel inflation.

"The Central Bank does not create money unless it finances the government budget or finances credit expansion by commercial banks," Jayawardena explained. "Credit expansion by commercial banks is kept under check by the Central Bank. If they expand too much we rein them in. "But the chief manner in which money is created by the Central Bank is by lending to the government or by buying government debt," he added. "So if we're to restrain the Central Bank issuing money, the government must reduce its borrowings.

"When the government runs a deficit it can be financed by borrowing abroad or by borrowing locally from the people," he said. "If there is a shortfall it borrows from the Central Bank- the government will issue government bonds, commercial banks will borrow from us and subscribe to these government bonds. "So if you want to curtail the Central Bank's ability to create money the government must curtail its borrowing and stop deficit budgeting."

ICC tourney boost to economy
While rock music, traditional drummers and dozens of dancers launched Sri Lanka's biggest cricket "party" - the ICC Champions trophy - last Thursday, the country's tourism and trade sectors also had much to rejoice for.

'The tournament is a massive boost to tourism while bringing other immense benefits to the economy," noted Hemaka Amarasuriya, chairman of the Sri Lanka Cricket Board Interim Committee.

He said some 5,000 spectators had arrived, mainly from South Asia, to watch the action resulting in heavy bookings at city hotels. This is in addition to the 220 players and officials which make up the 11 teams excluding Sri Lanka "who are bound to spend money on, for instance, shopping in the country," he said.

Last year tourists to Sri Lanka spent $ 63.1 per head inclusive of hotel accommodation, according to Sri Lanka Tourist Board figures.

The 12-nation tournament costs the ICC some $5.5 million, officials said.

Amarasuriya said the sponsorship row also gave a lot of publicity for Sri Lanka. "Good news or bad news … the publicity was good."

Sex scandal in biz sector
The current turmoil in the corporate sector, marked by the shock resignations of John Keells deputy chairman Jagath Fernando and Union Assurance CEO Sarath Wikramanayake, has taken a new turn, this time with a sexual flavour, with allegations that the boss of a high-profile travel firm was sexually abusing male staffers.

The Commercial High Court has issued an interim order restraining the travel boss from functioning as the chairman and a director of the well-known firm after a petition filed by a co-director alleged that he was trying to sexually harass male members of staff of the travel department.

The court also asked the travel boss to show cause why he should not be removed as chairman and director of the company.

The man in the centre of this controversy could not be reached for comment last week. He is believed to be planning to go to court on Monday to try to quash the decision, his associates said.

The Commercial High Court order was in response to a petition submitted by a co-director and shareholder owning 12.5 percent of the firm, who sought an order against the chairman.

The petitioner has alleged that the travel boss was trying to intimidate and coerce male members of staff to perform sexual favours and those who refused were verbally abused and victimised. He had refused a request from the firm's Board of Directors to resign from his position, the petition said.

Seylan to sell EAP property to recover loan
Seylan Bank plans to auction a property owned by E.A.P. Technologies (Pvt) Ltd, a unit of the E.A.P. group which operates ETV and is owned by the Edirisinghe family.

The bank advertised recently saying that an E.A.P. property at Sea Street in Kochchikade North is to be sold by public auction to recover more than Rs. 30 million owed to the bank.

The action is being taken under the Recovery of Loans by Banks (Special Provisions) Act since the E.A.P. firm had defaulted on the repayment of the loan. The company's chairperson Soma Edirisinghe was not available for comment.

Karu certain of striking oil
Sri Lanka plans to resume oil exploration off the country's coastal belt shortly, once cabinet approval is granted, by inviting bids from oil multinationals through a road show.

Power and Energy Minister Karu Jayasuriya, in an interview with The Sunday Times last week oozed confidence over the prospects of Sri Lanka striking oil.

Officials said after cabinet approval for the project is given, treasury approval must be sought for the fiscal terms and conditions of exploration followed by an invitation to oil exploration firms.

"If we are lucky, striking oil or gas would change the destiny of this country in a new direction," Jayasuriya said adding that there are positive signs of the existence of petroleum or gas deposits.

"I am confident we would strike oil," said the minister who was able to fulfil a promise of ending prolonged power cuts earlier this year.

The last time oil exploration was done was in the early 1980s without any success.

Jayasuriya, discussing issues ranging from the power situation, oil exploration to petroleum, said the next challenge of the government is to ensure the country won't have to face another power cut.

He said while demand for power was rising by an average eight percent, it is likely to be around 10-12 percent next year with the peace process getting into gear.

"Our present peak hour demand is 1,350 MW. We will end up with 1,750 MW (supply) by the end of the year with the commissioning of new projects and the emergency purchases we have made," he said adding that negotiations are underway to end some of these expensive contracts.

The government is also considering a downward adjustment of power tariffs next year.

Among major power projects underway or to be undertaken are the Kukule Ganga hydropower project being commissioned in October 2003; preliminary work to start on the Upper Kotmale project in the next eight weeks and proposals to be called for a thermal plant of 350 MW capacity at Kerawalapitiya (near Wattala) and a 350 MW coal power plant in Trincomalee.

Jayasuriya also said the Ceylon Petroleum Corporation (CPC) won't be scrapped under the plan to un-bundle the corporation's various activities. "The CPC will compete with the private sector."

While the Indian Oil Corporation (IOC) is close to refurbishing and running 100 fuel stations from the CPC after both sides signed an agreement earlier this month, Jayasuriya said they were looking for a third player in the fuel import and distribution sector.

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