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10th August 1997

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IMF boost after this year's budget

Sri Lanka is expected to get the much sought after enhanced structural adjustment facility after the government presents the 1998 budget, 'The Sunday Times' learns.

IMF Representative Thomas Morrison said a decision would be made around the time the budget was presented as the budget was an important milestone in the context of the three year period of adjustment under consideration. He said the facility would anyway apply to the period following the budget.

The IMF's last SDR 280 mn dollar adjustment facility ended in 1995 with the last SDR 56 mn not being disbursed.

Some believe this was suspended as the IMF was not happy with the government's spending habits.

The granting of an ESAF facility itself is generally expected to boost the country's investment image as investors gain more confidence about a country as such facilities compel government's to curb their spending habits.

Mr. Morrison said that government need not resort to ESAF's all the time and the lack of such a facility during the last two years was not necessarily a bad thing.

Earlier this year an IMF team had visited the country as part of the negotiation process to arrange an ESAF.

However others say with the balance of payments going into deficit and the declining foreign reserves during the last two years, the need to have an ESAF in place had grown in importance.

By end 1994 Sri Lanka's foreign reserves jumped to a record SDR 1,792 mn partly helped by the last SDR 56 mn ESAF instalment that the country received.

However by end of 1995 reserves had fallen to SDR 1,729 mn and by the beginning of this year it had fallen further to SDR 1,701 mn or US $ 2,441 mn. By end May this had fallen further to US $ 2,302 mn.

Despite this however the import cover had exceeded the critical 3.5 months.

"We have been lucky that the import growth slowed down during the last two years, resulting in the trade deficit narrowing," one analyst said. "But with the economy picking up we have to expect a surge in imports."

The US $ 225 mn inflow from the privatization of Sri Lanka Telecom would however provide a welcome boost for the country's reserves. A further US $80 mn is also expected from the sale of NDB shares.

Mr. Morrison said the IMF welcomed the decision to retire debt with most of the sale proceeds.

"This type of windfall revenue should be used to reduce debt as it will cut the government's interest burden," he said.

"The IMF team who were in Sri Lanka in May would also view this development positively."

One of the major obstacles to greater fiscal discipline had been the growing defense expenditure in Sri Lanka. Recently Pakistan received a US $ 1.5 bn facility from the IMF. One of the reasons which had weighed in favour of Pakistan had been the containment of defense expenditure which only grew by 4 per cent while inflation was around 13 per cent representing a decline real terms.

Mr. Morrison said the time taken to grant the facility should be regarded as the government's fault as such negotiations involved complex issues which took time to resolve.

Private analysts believe that despite the US $305 mn which the government is getting from Telecom and NDB, the granting of an ESAF could give government planners much needed room to manoeuvre.

In addition to capital imports for investment going up (which may be partly offset by investment flows themselves) consumer imports are also expected to pick up rapidly.

"With interest rates coming down, it is going to be much more economical to stock - pile goods," one analyst pointed out. "With businesses carrying more inventories, consumer imports would also rise."


Telecom share offer only after 3 years

A domestic and international float of Sri Lanka Telecom shares would take place only after three years, Public Enterprise Reform Commission said.

Employees of SLT would be given a 3.5 per cent stake in the company (equivalent to 10 per cent of the stake sold to NTT) shortly, PERC Director General Mano Tittawella said.

NTT will be required to keep open a window six months from the date of issue to purchase employee shares after they are issued.

NTT is the first high profile Japanese investment in the country. Analysts believe the move is likely to re-kindle interest of top Japanese corporations in Sri Lanka. Few big Japanese corporations have so far made major investments here, unlike in the ASEAN region though the Japanese government has been a major aid donor.

The government has also decided to appoint private sector representatives as government nominees to two of the six seats it is entitled to hold on the board. The balance four seats go to NTT.

Former CINTEC Chairman and son of former Minister Ranjan Wijeratne, Rohan has already been nominated Mr. Tittawella said. The next vacancy would be filled this month.

The other directors are Hemasiri Fernando (Chairman), Telecom Managing Director .... Somasiri, Dr. P. B. Jayasundera and present CINTEC Chairman Professor V. K. Samaranayake.

With the management going to NTT (said to be the world's largest telecom firm after the break-up of AT & T), NTT International's President and Chief Executive Hideaki Kamitsuma has taken over as Chief Executive of Colombo operations.

Mr. Somasiri remains the Managing Director as the sale contract requires NTT to hold all present employees in their positions.

The US $ 225 mn valued the company at US $ 642 mn. Mr. Tittawella said the bid was comfortably ahead of the second contender, France Telecom.

Sources put the second bid at around US $ 160 mn.

The government valuer had placed a floor value of US 110 mn for the 35 per cent stake and US $ 140 mn 'open market' of upper limit.

PERC's own financial advisors had place the value between US $ 160 mn and US $ 197 mn.

NTT was required to double its subscribers or clear all waiting lists in three years as part of the agreement.

The monopoly to carry international voice traffic (telephony) which is presently with Sri Lanka Telecom is to end in 2002.

Both bidders have been given the option of the international monopoly being ended in two and a half, five and seven years and both had chosen five year, Mr. Tittawella said.


Exporters honoured

The 5th NCE Export Awards '96 was held last week at the Colombo Hilton. Organised by the National Chamber of Exporters of Sri Lanka (NCE), this year's event had three additional special awards; Most Outstanding Exporter, Best Woman Exporter and Best Sri Lanka Brand Exportes besides the useual bronze, silver and gold awards presented to small, medium and large scale enterprises categorized under the four sectors, Industry, Agriculture, Services and Gems/Jewellery.

The Most Ourtstanding Exporter Awrd was presented to Dankotuwa Porcelain Ltd. The company which is a Japanese collaboration venture, exprots to 33 countries, with 80 percent of its exports going to Japan, Italy and USA.

The best Woman Exporter Gold Award went to Joy & Friends (Pvt) Ltd, while the Best Sri Lanka Brand Expoter Gold Award went to Viveca Rattan Industries (Pvt) Ltd.


Improving Economic Performance

The economic performance this year appears to have been quite satisfactory so far. Nearly all sectors of the economy have performed better than last year. There is evidence of an increased momentum in economic activity.

Agriculture, which constitutes one-fifth of the country's Gross Domestic Product, has performed reasonably well. The paddy crop this year is considerably better than it was in Maha 1996, largely owing to an improvement in the weather. Rubber and coconut production is higher. Tea production which fell in the first few months has not caught up last year's production levels but there are indications of an improvement in the second half of the year. It is likely that there would be a growth in agricultural production this year. Agricultural exports grew by 8 per cent in the first five months of the year.

There is evidence of renewed industrial activity and expansion of industrial production. Industrial exports have increased by around 19 per cent. The garments industry, which faced serious difficulties last year, has by and large revived and only a few garment firms continue to be in difficulties. Garment exports grew by 23 per cent in the first five months of this year. Other industrial exports also grew, notably rubber and leather products which increased by 24 per cent in the first five months.

Total exports grew by 16 per cent and imports by 10 per cent. Exports have grown and import prices have not been adverse to Sri Lanka. This resulted in the trade deficit decreasing by 3 per cent. Nevertheless the external reserves of the country have fallen mainly due to the inflow of official funds being less. The official reserves have declined noticeably.

Tourism which suffered a severe setback last year appears to have re-gained its position of 1995. Although the growth in 1997 is largely a recovery, there is hope that this growth in tourism will continue during the rest of the year and into 1998. Tourist arrivals increased by 21 per cent during the January - May period of this year compared to the same period last year.

The improvement in economic performance is no doubt due to more stable security conditions and the avoidance of power cuts. There has also been support to private enterprise by last year's fiscal measures which reduced the tax burden and gave several incentives to industry. Perhaps even more than the specific policies there appears to be a greater conviction that market friendly policies are in place and that private enterprise is acceptable as the lead player in the economy. The crippling factors are however labour unrest and the overhang of possibilities of a deterioration in security conditions.

One of the factors responsible for improved corporate performance has been the reduced rates of interest. Although the government has taken measures to increase liquidity in the banking system and thereby reduce interest rates, the full impact of these policies has not been felt. For most borrowers the interest rate decrease has been marginal. Prime borrowers have however been able to obtain concessions from banks which are highly liquid.

Other entrepreneurs are awaiting a further decline in interest rates to make their real investments. There are also those who believe that the decrease in interest rates would be temporary. This view is however fading with the government's likelihood of bridging the budget deficit through sizeable funds from the privatisation of plantations, the NDB and Telecommunications. The sustainability of lower interest rates appears to be now fairly certain.

These favourable factors are reflected in the gains in the stock market. Business confidence has grown, foreign investors are bringing in money for portfolio investment and there is a general air of optimism in the share market. It must however be recognised that the share market indicators could change quickly if even a single unfavourable event were to occur and speculation fuels a downward move.

Such developments do not necessarily indicate that the fundamentals of the economy are not sound. But such a reversal in the stock market would erode the confidence of the business community and have a secondary effect on investment. We hope this could be avoided.

As the budget for 1998 is under preparation it will be wise for the government to take note of the favourable developments and capitalise on these by giving a further boost to private enterprise. Nothing helps the government more to get larger revenues than growth in the economy. The timing appears to be ripe to implement further some of the government's policies which encourage private investment.

It must also be remembered that Sri Lanka's growth potential largely rests with export growth and every encouragement must be given for the development of exports.


Market Focus

Indices fluctuate but stability regained

The CSM indicies were erratic with ASPI shedding nearly 30 points over the week, but gradually regaining lost ground to stablise in the 850 ASPI levels.

Foreign and Retail profit taking was evident in all counters. Companies trading in the low beta factor ranges over the period seem to be gaining ground with appreciabe increases being recorded in price levels.

This is mainly due to the fundamentally sound performances recorded for the 2nd quarter 1997.

On the Privatization front: 35% Sri Lanka Telecom has been divested by the government of Sri Lanka to NTT to form a strategic partnership for the development of SLT and the telecommunication industry in general.

On the corporate front: Kelani Tyres employees have demanded a salary increase of 40% over and above the 50% increase in salary that the employees had received within the previous two years. This is a direct violation of the contract agreement between the employer and employees brokered by the Labour Ministry.

The management of the company has decided to retrench the unproductive staff due to the breach of the contractual agreement. It is understood that for the 1000 odd vacancies, 20,000 odd applications have been received.

Vanik offered for every 100 shares of Forbes a sum of Rs 350, plus 4 shares of Vanik (voting) for Rs10, plus 4 transferable redeemable debentures of Rs 100 carrying an interest of 15% and one warrant. This was made possible only after Asia Capital agreed to dispose of its holdings of11% in Forbes Ceylon Ltd., if Vanik makes a general offer to the s/h of FCL.

Accounts of Haytex Ltd., a subsidiary of Hayleys are being probed by the Securities and Exchange Commission due to the allegation of mismanagement made by a large foreign investor, who claims that on liquidation, his due share was not given.

Corporate results: HNB: 2nd quarter ending June results revealed a 30% increase in turnover and a 9% in profit after tax in comparison with 1996.

Trans Asia Hotel: Jump in profits by 96% to Rs 54.51m. for the 1st quarter ended 30th June 1997. The turnover has increased by 25% to Rs 147m. Increase in tourist arrivals coupled with innovative marketing strategy helped to improve the performance.


Mind Your Business

By Business Bug

Not at last

After the Central Bank reduced the capital reserve requirements, state banks announced a reduction in interest rates.

Private bankers however resisted the move, opting to retain high interest rates, hoping to attract more depositors.

Now, however, they are feeling the crunch and one such banak reduced rates last week. Others are expected to follow suit.

Unions consoled

The privatisation of a 35 percent stake of Sri Lanka Telecom has had the unions worried in other state sector monopolies.

Union representatives of one such powerful concern met their Minister after the Telecom announcement and wanted a clarification about their status.

And, the answer was that there would be no privatisation, come what may.

Call war

The State Telecommunication Service joined in the competition among phone networks, announcing discounts to international calls to selected countries.

A cellular network, thinking of ways and means to beat them at their own game has come up with a new idea.

Soon they are likely to offer IDD calls to be charged in six second segments and not in one minute blocks.

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