The Sunday TimesBusiness

02nd June 1996




Billions busted in blackouts

By Asantha Sirimanne

While the nation ground to a halt in the aftermath of the CEB strike, the economic costs, though difficult to quantify, were running into billions analysts said.

The CEB itself is losing Rs 40mn a day in turnover based on last year's billed revenue of over Rs 14.4bn, according to one estimate.

The manufacturing sector is likely to suffer the most damage, followed by the services sector to a lesser extent. Agriculture already under pressure due to a strike, is likely to suffer least, analysts said. Manufacturing was also a top contributor to GDP growth last year, and setbacks in this sector would impact on GDP growth this year, which was predicted at around 4 to 4.5 by private analysts earlier.

Most manufacturers were forced to close down as even stand-by generators were unable to supply power on a continuous basis.

"We have fallen from the frying pan to the fire," Chamber Chief Patrick Amerasinghe said.

Even earlier with limited power cuts most industries were undergoing hardship with some exporters unable to meet delivery schedules. In order to meet schedules finished products then had to be airlifted at enormous cost.

Even if large companies had generators, the small and medium sector companies which supplied components to the large manufacturers were unable to keep up supply. This held up work in large companies. "Importers were picking up generators from every nook and corner of the world and dumping them here, and already some of them have packed up," Mr. Amerasinghe said.

Last week the BOI companies, which were previously supplied with power, despite power cuts to the rest of the country, were left high and dry.

Analysts said, the profits of most listed companies would be put under further pressure by the events this week. The accounts now being filed for the first quarter of 1996 did not show much improvement over the last quarter of 1995.

Even banks worked shorter hours, as CEB worker continued to strike ignoring the essential services declaration by the government.

At one CEB office workers who had arrived to work was being prevented from signing in by fellow workers who urged them to return home.

Even the Colombo Stock Exchange was coming to a standstill with only a few trades being concluded. "When people do not have water to drink, how can they think of buying shares," one broker asked.

Employees of some offices had come to work with towels and razors as they did not have water at home.

Some brokers suggested that as activity was low anyway during the last few days the number of trading days should be reduced to two or three days a week.

Authorities however were hoping to keep the exchange running for at least a few hours each day until the last minute.

"If we can do a few trades to produce the index it might help," an official said. "If publications like Wall Street Journal which carries the daily CSE indices have to pull it off saying the CSE is closed due a power sector strike, it won't help anybody," he said.

In addition to the generator importers, battery manufacturers and candle makers,whose products were in demand, some Colombo hotels were also doing a roaring business selling a US $ 50 a day package to the local and expatriate residents, who were wilting in the heat without even water.

Mind Your Business

By Business bug

DPL ties with SA

AirLanka now flies to South Africa and the link may foster several trade opportunities, we hear.

There is talks of textile, tea and rubber-based goods to be exported to that country and tourists from Africaaner-land arriving here.

But there is a hitch too - there is no diplomatic representation of that country in Colombo. And vice-versa, and that may soon be rectified....

3% growth

Government is optimistic of a sustained GDP growth this year too, but not everyone is so optimistic.

The power crisis itself will erode growth and a three percent growth is more likely, an overseas fund manager has told clients.

For the record, government expects a 5 to 6 percent growth.

Power undercut

Power cuts have their pitfalls, even to those who import generators.

One such company found its electricity system gone haywire and its computers wrecked when power supply was restored after a power cut all because of a faulty fuse.

The damage was in millions but at least, most of it was insured....

Central Bank chief defends figures in annual report

Any of the figures appearing in the Central Bank's recent annual report could be backed up with evidence, if called upon to do so, Governor A. S. Jayawardena said.

"Every figure, every single number that we published is open for inspection by the public", Mr. Jayawardena said. "There are international orgnizations which almost audit these figures, and we are in a position to defend these figures".

The Central Bank's growth number for the domestic economy at 5.5 per cent was higher than most private research forecasts, which put the figure at 5 or 5.2 per cent.

"The 5.5 per cent growth rate is not something to crow about but it is a very satisfactory growth rate", he commented.

Mr. Jayawardena was speaking at a forum organised by the Organization of Professional Associations (OPA), last week.

He said it was creditable because it was achieved while the country was in the middle of a military conflict. If not for the war, the GDP growth rate could have been as high as 7.5 per cent, he said.

Chamber Chief Patrick Amerasinghe said, though the industrial sector was supposed to have grown at the rate of 10 per cent last year, the private sector was somewhat wary of these figures.

"When any government agency normally publishes statistics, the private sector has certain doubts and fears about these statistics, because there is a feeling that this is to impress the politicians", he said.

He said in fairness to the annual report it had also highlighted the negative sides of the economy.

Mr. Jayawardena said the government had taken a very important step when it adopted low inflation as a major arm of government policy.

For the first time in the last decade the country had achieved single digit inflation. He said the outside world looked at inflation as an indicator of how well the economy was managed, and a high level of inflation indicated poor economic management.

"Now this is criticised by very learned people in this country, who seem to say that we must have some inflation", he observed.

Bank's Economic Research Director R.A. Jayatissa said the Bank relaxed its restrictive monetary stance late last year as interest rates had risen sharply.

"There was a lot of complaints from the private sector that it was hurting investment, so we relaxed monetary policy and purposely intervened in the market", he said.

Mr. Jayewardena also said that a major problem in the economy was the poor state of infrastructure which was characterised by the power cuts in force now. The government was unable to invest in these areas as it was fighting a Rs. 35 bn a year war. In fact the government had run deficit budgets since independence. The level of domestic savings was insufficient to finance investment and the only way out was to finance investment by foreign private flows. Foreign aid was becoming an increasingly scarce commodity.

Referring to anti-privatization feelings prevailing among some sections of society Mr. Jayawardena said, there was a strong current of opinion in society that the family jewels or the crown jewels should not be sold to the private sector. "Until we get over this we will remain a poor nation", he said.

Concern over economy

There is considerable anxiety about this year's economic performance. But the concerns are not restricted merely to this year's economic performance but developments which may affect the economy's performance over time. The long term concerns relate to a deteriorating climate for investment.

The economy is poised for a much lower rate of growth this year. Some economists place the growth rate to fall to around 4 per cent. This would be the lowest rate of economic growth in recent years. There is little doubt that the drought in the first few months of this year is likely to affect agricultural production adversely. The drop in production in tea, rubber and paddy is already visible. Coconut production too is likely to fall.

This decline together with similar falls in subsidiary food crops again induced by the drought would result in a negative growth of agriculture this year. Given that agricultural production constitutes a diminished,but significant one-fifth of the country's GDP the economy growth rate would be adversely affected

The power cuts have disrupted industrial production to a good extent. It is true that some of the bigger industries have been able to continue their production uninterrupted by the installation of generators. Even these companies are likely to feel the pinch of higher costs. The smaller concerns, which have not been able to find alternate sources of power, are likely to suffer considerably more in lost production. It is also a truism that there are linkages between industries. The inability to keep to production schedules in one industry could affect the production in another. Also, export industries which have been affected can suffer considerably in terms of meeting international schedules for their exports. These adverse developments in industry are likely to affect the marketability of our exports. International buyers of our garments are likely to be wary about giving orders to Sri Lankan firms who may be susceptible to delays owing to power cuts. This could affect particularly some of the ailing garment industries at a time when they can ill afford to take the shock of further cutbacks in their export markets. Apart from the immediate impact on the international market, where a large number of countries are vying for garment manufactures, the power situation would make international buyers as well as international investors prefer other locations. The setback to our markets as well as international investment could take quite some time to redress even after the power situation is resolved in a couple of years.

The decline in tourism is very clear. This is of course related to the security situation. Following on a decline in the last quarter of 1995 the first two months of this year have shown a decline of 32 per cent in tourist arrivals compared to the first two months of last year. Not only are tourist hotels adversely affected by this decrease in tourists, but several other industries which feed the tourist sector are adversely affected. This setback to tourism is likely to affect our economic growth for the year quite adversely.

Currently Sri Lanka seems afflicted by three grave crises affecting her long-term economic growth. The security situation, labour unrest and inadequate power to sustain industrial expansion. The security situation has at last shown some signs of improvement and it is hoped would ease. In fact if the reconstruction of the North could take place it appears to be the best possible source of generating an impetus to growth. Such a growth impetus would of course require considerable foreign assistance, which we are told has already been committed.

There is also the prospect of additional commitments of foreign aid to help the reconstruction. This indeed is the silver lining in an otherwise cloudy sky. But even this impetus could be exploited only if the government gets its acts together and there is adequate resolve to act expeditiously to resolve the country's problems. If the wheels of bureaucratic processes move slowly then the beneficial impact and the reconstruction would indeed be small. What is more, considerable bottlenecks may arise.

The labour situation is indeed one of the constraints which would affect the needed expansion of production to meet the requirements of the resurgence. If the country is to be plagued by strikes, work indiscipline and employer fears of terror, then the needed expansion in industrial production may not be forthcoming. Inadequate power, which is likely to be a factor for at least one more year, would be a serious constraint to industrial production as well as foreign investment. No country can expect to attract foreign investment if the economic infrastructure is weak. Inadequate power is probably the worse infrastructural defect. It has an immediate impact and can hardly be circumvented.

The economy is certainly faced with a very gloomy prospect, with these three factors having a dominant influence on investment. The problem is considerably accentuated by a lack of a pro-active role of the government. The Asian Development Bank has described it as 'a very passive approach to economic policies'. The bureaucracy is very slow, indecisive and unenterprising. Unfortunately the severity of the economic problem and the inefficiency of the bureaucracy does not appear to be appreciated by the government.

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