13th July, 1997


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Primary dealers face shake-up

By Mel Gunasekera

The primary dealer network for government securities is to be revamped with some dealers being dropped and capital requirements raised five fold to Rs 500 mn The Sunday Times Business learns.

Last year too the Central Bank dropped several primary dealers, due to insufficient secondary trading, reducing membership from 23 to 18.

While non-bank primary dealers tended to actively sell T-Bills to their customers, commercial banks tended to persuade customers to invest in the bank's own fixed deposits instead of the T-Bills.

At least two bank primary dealers are likely to lose their licenses following the shake up, Central Bank sources said.

The newly registered Primary Dealers Association's President R Nadarajah said the increase in capital structure, would reduce the number of Primary Dealers in the market.

"We understand that the capital requirement would be raised so that the losses arising from trading could be absorbed," he said.

However some fear that an increase in the minimum capital requirement, would create an 'exclusive club' for primary dealership.

Government securities market in Sri Lanka has developed over the last three years with several of the constraints that had resulted in an inadequate Treasury Securities market being removed, Mr. Nadarajah said.

The Central Bank has established responsibilities and privileges for Primary Dealers, introduced reporting requirements, removed taxes and legislative constraints, and introduced a two and four year Treasury Bond.

The Association of Primary Dealers would work closely with the Central Bank in developing and modernising the market for Government Securities. They will promote the government securities market in Sri Lanka and review and analyse the issues arising from time to time and formulate guidelines and parameters within which the market should operate within Sri Lanka. They will also sponsor workshops, seminars, training courses and meetings and develop material for the members of the trade and the general public as the case may be, in order to promote awareness and understanding of the Treasury Securities and encourage wider participation in the market.

The Association and the Bank hope to standardise the documentation and market practices on government securities and develop a code of conduct.

The Governing Council consists of President. R Nadarajah (Bank of Ceylon) Vice-President, Ajith Devasurendra (MB Financial Services), Secretary Ajith Fernando (Vanik Corporation Ltd.) Hiran Cabraal (Hong Kong and Shanghai Banking Corporation Ltd.) and Divula Weeratunge (Commercial Bank of Ceylon Ltd.).

Central Bank Governor A S Jayawardena, told Primary Dealers at a reception, that a high standard of integrity was required when dealing with government paper.

In Australia after market was first started in 1982, there was a phenomenal growth in government securities, treasury bonds and treasury bills trading.

"We would like to see a similar competitive market," Mr. Jayawardena said.

"We want to develop the long end of the market of 10-15 year bonds, with competitive interest rates for higher yields,"

Sri Lanka has already seen wide fluctuations in Treasury Bills last year.

"This is something we don't expect to happen in the future," Mr. Nadarajah said.

"We find that there is enough liquidity in the market which is reflected by call money rates. There is no likelihood that they will rise in the near future.

Efforts are being made to reduce interest rates by atleast one percentage point towards the end of this year, he said.

Mr. Nadarajan said people should also get used to trading in bonds.

So far nine Treasury Bonds issues have taken place. Eight of these bond issues were with two-year maturity (7 issues for Rs. 500 mn each and 1 issue for Rs. 1.5 bn) totaling Rs. 5 bn. One issue for a four-year maturity totaling Rs. 500 mn was issued on 15th May 1997.

Treasury Bonds are expected to be as liquid as Treasury Bills due to the convenience of transfer by endorsement Deputy Superintendent of Public Debt, K G D D Dheerasinghe said.

However, the need for physical delivery of the bond certificate will continue to be an impediment to the development of the secondary market until the introduction of scripless securities system, he said.

At present, the authorised limit for Treasury Bills is Rs. 125 bn and the overall gross new borrowing for 1997 stipulated in the Appropriation Act amounts was Rs. 55 bn, Central Bank sources said.

The total Treasury Bills outstanding amounts to Rs. 124.9 bn, which accounts for approximately 38 percent of total domestic debt. This indicates that a sizable proportion of domestic debt is in short term maturities; i.e. 12 months and less. It was important to space out the maturities over a longer periods.

The offering of Treasury Bills much in excess of the desired volumes has provided an easy avenue for commercial banks to invest their excess short term funds in Treasury Bills.

This situation is associated with a lop-sided interest rate structure resulting in a contradictory relationship between the risk and return, Mr. Dheerasinghe said.

Gilt-edged securities provided a higher return than commercial bank deposit rates.

"This could be minimised by a considerable reduction in short term Treasury Bills available in the market," he said.


By Business Bug

Capital reserve comes down

A bank of the people last week announced it was reducing interest rates, in keeping with a Central Bank directive reducing the capital reserve requirements.

The other major state bank is likely to follow suit this week, but not so the private commercial banks.

Most of them are not happy at having their profit margins pruned; so they are likely to try to maintain the status quo as long as possible.....

Battery sales going up

The ownership of a leading battery manufacturer changed hands recently.

The new management found the product in need of a promotional campaign and that is what we see in the media today.

And the initial results are encouraging, company sources say, with sales recording a healthy rise....

Airport site: no change

The Authority that develops the South has proposed an International Airport in that region, and those plans were ratified some time ago.

Now some ruling party politicos feel the city selected for the Airport was too far away from Colombo. They are proposing that the Airport be shifted to somewhere 40 to 50 kilometres South of the Capital.

But the powers that be would have none of it. So Hambantota will be the site, after all.....

Education in crisis

By Asantha Sirimanne

Though Sri Lanka has made enormous gains in education in the 60's the last two decades have seen a major setback with low funding and widespread misallocation of available funds, experts who are studying the system have revealed.

"The education sector in Sri Lanka gets one of the lowest allocations in the whole of Asia," World Bank's Senior Education Planner Dr. Albert Aime told the Sri Lanka Association of Economists. From a high level of 8 per cent of GDP in the 1960's funding for education has now dropped to 2.9 per cent.

Experience in other countries has shown that whenever the sector received less than 3 per cent of GDP the education system would not be sustainable and would run into serious problems.

The devolution process in Sri Lanka has further squeezed resources with provincial governments committing insufficient resources to quality inputs.

"This is a pattern that has occurred in South America, Africa and some Asian countries within few years of devolution," Dr. Aime said.

The central government too had made a major mistake in using the education sector to relieve the unemployment situation in he country.

"Historical records show that any country which had taken the route of putting untrained, unqualified teachers in schools hnd ended up sacrificing children and future generations," Dr. Aime said.

In 1994 the education system was estimated to have been overstaffed by 50,000 though there were wide anomalies in teacher deployment, with severe shortages in rural schools.

Even the available funds were mis-allocated with over 90 per cent going to pay salaries. In 1994 provincial governments were allocating as much as 97 per cent of the education budget to salaries, while much needed quality inputs for students were getting as little as one half of one per cent.

The World Bank was conducting a US $ 70 mn project to upgrade teacher training and better deploy human resources.

Senior Lecture of Colombo University's Economics Department Harsha Athurupana said student enrollment was predicted to go down in the next few years with falling birth rates in the country.

Another major problem is the textbooks which were found to cover only 40 per cent of syllabi and teachers guides were found to be partly incompatible with the textbooks and syllabi.

The World Bank project was currently attempting to better direct resources in addition to providing some of the estimated Rs 18 bn needed for the next five years.

Some city students were getting as much 1000 per cent of resources given to rural students. A more logical resource allocation method based on student numbers was also being developed.

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