The Sunday TimesBusiness

11th August 1996




Economic time bomb in our hands

Leading Sri Lankan businessmen have warned of grave consequences if corrective action was not taken soon to arrest the economic crisis facing the country today.

The alarm was sounded when a visiting Malaysian delegation met the local private sector. Among the ideas that received consideration was the establishment of a bail out fund styled after the Entrepreneur Rehabilitation Fund set up by the Malaysian government to help small and medium industries when that country faced a recession in 1984 , The Sunday Times Business learns.

With declining domestic demand and intense competition from imported goods most factories catering to the local market faced closure. "Eight out of 10 factories are in trouble", one local businessman warned.

There were indications that the unemployment rate was rising, already it could be as high as 14 per cent.

"We have a nice little time bomb in our hands", John Keells Chief Ken Balendra warned.

He was speaking when a visiting delegation led by Economic Advisor to the Malaysian government Tun Daim Zainuddin met representatives of the Sri Lankan private sector. Presidential Economic Advisor Dr. Lal Jayawardena, Several top officials were also present.

Ceylon Chamber Chairman Mano Selvanathan said the government by acting consistently had to instill confidence which was badly dented at present.

One businessman said that the government should act with a sense of purpose and urgency to restore confidence. "We are milling around like cattle at the moment", he said.

Malaysian tycoon Yahaya Ahmed said when they were trying to rescue the economy in 1984, the private sector had had deliberations with the government very often. Asked how regular these meeting were, he joked that they had had so many meetings until they had run out of things to say and were repeating themselves.

For example when the ringgit fell from 1 ringgit against 100 yen to 2.5 most business who had large yen loans were in deep trouble.

But the Malaysian government had forced domestic banks to give new loans to settle the Japanese loans. Banks had also been prohibited from auctioning off assets of the large troubled companies that showed a willingness to downsize and implement cost cuts or "those who were willing to help themselves".

Around 50 per cent of the large troubled companies were said to have been saved in this manner.

Meanwhile the Entrepreneur Rehabilitation Fund amounting to Malaysian Ringgit 800m, jointly administered by the Malay Chamber of Commerce and Bank Negara (Central Bank) had also been set up to bail out small and medium industries, who were no longer bankable.

Asked by Dr. Jayewardena how these industries were selected for assistance Tun Daim replied smilingly that they were "just selected".

Observers say Malaysia has a reputation for acting first and talking later and deals are routinely struck by the government without benefit of open bidding processes.

Tun Daim said he had taken over the finance portfolio when the Malaysian economy was in recession and the budget deficit was running at 10 per cent . He had cut spending sharply and put through a package of reforms that instilled confidence in the minds of investors including tax cuts and harsh measures that enabled troubled companies to shed labour.

The Kuala Lumpur stock market has picked up and investment had started to flow in from abroad, even before corporate earning had started to improve.

A Malaysian delegate said while stock indices moved up and went through periods of corrections drastic re-ratings should be heeded by economic planners and government.

"A stock exchange index is a confidence rating. You have to believe that the rating is intelligent", he said. He said governments should not make the mistake of ignoring stock indices.

Top officials of export firms with high domestic value addition complained that the exchange rate was highly overvalued especially compared to that of our South Asian neighbours such as India and cited the now defunct gherkin industry as an example of this.

Dr. Lal Jayawardena expressed surprise and remarked that the exchange rate controversy was a new one.

Hayleys Deputy Chairman Mahendra Amarasuriya swiftly informed Dr. Jayawardena that it was a long-standing issue and offered to supply documentary evidence to back up his stance. "Government is making ad hoc changes to policy and paying lip service to export led growth", he said.

However Dr. Jayawardena said while the effective exchange rates had appreciated from around 1991 a new study by two experts who were now in Australia had found that it was corrected in 1995. He said the choice had to be made between a "gherkin exchange rate" or one that benefitted the country as a whole.

Dr. Jayawardena added that the devaluation was a double edged sword but said it was important to have an exchange of ideas with the private sector to find out what needed to be done.

Others also complained that the low duty regime that was proposed to come into effect would affect them as both raw materials and finished goods would be subject to the same rates. They said due to lack of domestic resources Sri Lankan companies were heavily dependent on imported raw material and if finished goods and raw materials were treated equally economies of scale and low interest rates in other producing countries would finish them off. As a result there was no incentive to invest in such sectors.

However Dr. Jayawardena said the government had signalled its intentions several years ahead and put businesses on notice, with sufficient time to adjust to the new conditions.

Alliance Finance makes profit

By Ruwanthi Ratnayake

Despite the economic uncertainties in the country, Alliance Finance Company Limited has shown a 40 percent growth in the finance sector, with a net profit of Rs.18.35 million which is described as the highest in the 40 year existence of the company.

Incorporated in 1956, with an issued share capital of Rs. 150,000, Alliance Finance has grown slowly, but steadily over the years. The ongoing process of diversification has led the company into many new ventures. Today, the associate and sister companies in the Group include Alliance Finance Company Limited, Alliance Agencies Limited, Alliance Trading and Engineering Services Limited, Arpico Finance Company Limited, etc.

The business of hire purchase and leasing has shown a steady growth with an increase of more than 25 percent in the cost of goods hired or leased during the year and an increase of more than 96 percent in the portfolio of loans.

Venturing into many new businesses has proved to be profitable for the company. For instance in collaboration with Exel Trading (Pvt) Limited, the company has begun importing ceramic wall and floor tiles from R.A.K. Caramica in Dubai which is a Spanish/Italian collaboration. These tiles have gained a large market due to their quality and price and orders are currently underway from large scale BOI approved projects.

In addition, the business of importing motor vehicles such as BMW and Jaguar from Britain is progressing rapidly.

Holding 39.33 percent of the stock of Arpico Finance Company Limited, Alliance Finance is now its associate company. While maintaining separate identities, the two companies team up in joint transactions and share expert know-how.

Alliance Agencies Limited, another sister company in the Group, is the local agent for Heidelberg printing machines.

Ceylinco Venture Capital which is a joint venture between Alliance Group and Ceylinco Group is engaged in promoting self employment projects in the country. Currently 258 youths have launched self employment projects, many of whom are graduates.

In 1990 Alliance Finance together with Arpico Finance set up the Organisation for the upliftment of Siyambalagoda Village, Polgasowita. At present, the village consists of a community centre, pre-school and library. A weekly dole is given to the poor, in the form of provisions.


By P.M.N. Bandara

A 26% decline in profit after tax from Rs. 162 million to Rs. 120 million has been the most significant feature of Orix Leasing Company during financial year 1995/96. This decline is despite an impressive growth of 39% in lease income from Rs. 434 million in 1994/95 to Rs. 602 million in the year under review.

"The reason for this decline in profits is a sharp and unexpected increase in short term interest rates that took place in the last quarter of 1995", says chairman, C.P. de Silva. He adds that call money rates which had averaged 13.9% in the previous year soared to an average of 31.4% and reached the extra ordinary peak of 102% on one occasion. These high interest rates continued into a part of the first quarter of 1996. As the company's lending was mainly long term and borrowings were mainly short term, rising interest rates badly affected the company to create a mismatch in its assets and liabilities.

However, during the year, the company was able to pay a 15% interim dividend. Final proposed dividend payable, this week is 10%.

Labour Dispute

Ceylon Synthetic Textile Mills Limited has reported a drop of turnover followed by net loss for the year ended 31st March, 1996.

According to the provisional financial statements, turnover dropped by 35% from Rs. 266.3 m. to Rs. 173.8 m.

The net loss increased by 315% from Rs 8.9 m. to Rs. 37.0 m. during the year under review. As a result shareholders' funds decreased by 61% from Rs. 60.7m. to Rs. 23.7 m. Due to heavy losses the company has not paid dividents to its shareholders for two consecutive years.

Managing Director A.Y.S. Gnanam says that the losses were mainly due to two reasons.

The factory was forcibly closed by the factory workers for 2 months due to a continuous strike and demand of 50% salary increase. Workers damaged fabrics and machinery.

Cost of production increased due to rise in price of raw materials but it had not been absorbed by the product price due to price competition in the market due to smuggling and garment factory leakages.

Healthy signs

Kelani Valley Plantations Limited - a Company engaged in production and processing of tea and rubber - has shown a satisfactory performance during the year ended 31st December, 1995, according to the audited financial statements just released.

The company's turnover during the year was Rs. 726 m. This is an increase of 18% as against previous year's turnover.

Profit after taxation increased by 501% from Rs. 7.6 m. to 45.7 m. However, the shareholders' funds dropped by 147% from Rs. 625 m. to Rs. 252.9 m. as a result of the brought forward loss of Rs. 141 m. from the previous year.

Commenting on the performance Chairman, S. Mendis, says that the company achieved a notable gain in profit which is attributable mainly to rubber. "Though the overall performance of tea showed improvement the contribution from up-country estates continued to be below expectations. Measures taken to improve quality and reduce cost are however beginning to bear fruit", he added.

The major shareholder of the company is the DPL Plantations which owns 51% of the issued share capital. The treasury holds 29% of the issued capital and one Golden Share.

Going steady at 40

Alliance Finance, which celebrates its 40th anniversary this year has recorded a healthy growth during the year ended March 31, 1996.

According to the audited financial statements, the company's turnover increased by 5.5% from Rs. 230.8m. to Rs 243.5 m. Profit before tax increased by 14% from Rs. 17.21 m. to Rs. 19.67m. However, profit after tax increased only by 6% from Rs. 17.2m. to Rs. 18.3 m. The shareholders' funds increased by 19.7% from Rs. 66.4 m. to Rs. 79.1m.

Commenting on the performance of the company Mr. Prapathkumar de Silva, Chairman of the company says that the overall results of our operations despite the prevailing difficulties and uncertainties in the economic climate of the country has nevertheless shown a net profit of Rs 18.35 million which is the highest in the 40 years of the company's existence.

Dividends declared

The managers of the Comtrust Fund declared a dividend of Rs. 0.60 per unit amounting to, Rs. 33.8 m. for the financial year ended March 31, 1996, according to the news release of the Fund.

The total dividend paid out to unit holders since the funds inception in 1992 now amounts to Rs. 5.05 per unit.

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