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14th February 1999
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Year and half of GDP lost on war 

By Feizal Samath 
Sri Lanka's protracted conflict has cost the economy the equivalent of the total value of 18 months of the country's gross domestic product (the value of goods and services produced by the island nation), a new study has found.

"The approximate cost of the war amounts to 160 percent of the gross domestic product (GDP) at 1996 levels. That means we have lost one whole year and a half of the gross domestic product," said Dr Saman Kelegama, executive director of the Institute of Policy Studies (IPS), quoting from a new IPS study to be released in the next few months. He was giving out details, for the first time, of the think-tank institute's unpublished study on the economic cost of the war, at a Colombo seminar organised by the Sri Lanka Association of Economists last week.

According to Central Bank figures, the value of GDP in 1996 was Rs 768.9 billion. If the GDP value of another six months is added to this figure, the total loss to the economy, according to the IPS survey, would be in the region of Rs.1,153 billion. In January last year, the private Marga Institute presented a similar research study on the economic losses of the war from 1983 to 1996 and in that the loss in terms of economic growth was put at Rs.2,260 billion.

"The human cost cannot be priced," Marga said, while noting that had the money been invested in more productive use, the economy would have been stronger and there would be less poor people around. The Marga study took into account costs of government and rebel expenditures, helping displaced people, output losses, falling tourism levels, easing foreign investment, damage to infrastructure, among other issues. Economic growth would have risen by seven percent instead of 4.3 percent; average household incomes would have gone up by 40 percent; about 50 percent of people living below the poverty line would have had better incomes and unemployment would have fallen to three or four percent from a current 12 percent of the workforce, Marga said.

In last week's presentation, Kelegama noted that one of the reasons for the government, over the years, to refrain from resorting to "large-scale" devaluation of the rupee is because the first casualty would be defence costs. "If devaluation took place, defence spending would rise because most of our procurements are imported. That would reflect in a higher budget deficit and result in interest rates rising," he said.

The IPS chief, speaking on the economic cost of the war during a discussion on this issue, said that the IPS study was prepared by a top team of researchers. He recalled how Singapore Prime Minister Lee Kuan Yew, on the final day of a 1979 visit to Sri Lanka, was asked for his views on the future growth of this country. "The Singapore prime minister, after reviewing the progress of Sri Lanka's economy at that time, said that at the current rate of growth Sri Lanka should - by the year 1990 - achieve Singapore's per capita income level which was 4,000 US dollars in 1979," Kelegama said. Instead, Sri Lanka's per capita has risen from 400 US dollars in 1979 to just 760 US dollars in 1996. "That in essence shows how much we have fallen short," the IPS economist noted.

He said that defence expenditure, which averages 50 billion rupees a year now, has created large budget deficits and curbed foreign investment. The size of Sri Lanka's armed forces has risen by leaps and bounds over the years, and in 1996 was higher than the military strength of countries like Malaysia, the Philippines and Australia.

Kelegama said that had defence spending not increased, this money could have been invested in more productive investment and consumption, noting that the same principle should be applied to the military expenditure of the Liberation Tigers of Tamil Eelam., "What about damaged infrastructure and the cost of maintaining about 750,000 refugees," he asked. In terms of lost income and missed opportunities, Kelegama said that Kenya, the Maldives and Mauritius, which had lower tourist arrivals than Sri Lanka in 1982 have gone way past the Sri Lankan level now. Kenya, which attracted a similar number of 500,000 tourists like Sri Lanka in 1982 (just before the 1983 riots), now draws more than a million foreigners; the Maldives gets about 400,000 a year compared to less than 200,000 in the same period while 600,000 tourists visit Mauritius each year.

"It was a case of lost earnings and missed opportunities," noted the IPS economist, adding that there were other hidden losses like the flight of capital and the brain drain. While the thrust of the discussions was on the negative aspects of high defence expenditure and its impact on the economy, a lecturer at the military's Kotelawala Defence Academy presented a case of defence spending as a productive economic exercise.

"Defence becomes paramount when there is a threat, internally or externally. When defence plays such a vital role in society, the social contract has to be adjusted," said M.M. Jayawardene from the academy. He said that among positive aspects of defence spending was the employment of large numbers of rural youth, who in turn spent their income in rural areas. "Forty percent of the defence bill goes for salaries and wages and one can argue that, with the bulk of recruitment coming from rural areas, these areas get large inflows of funds," he said. Jayawardene said there were other benefits like education and training that filtered into the village, and "when one takes this positive aspect of defence spending, the cost or the burden on the exchequer would be moderated." But he noted that on the negative side, defence spending led to large budget deficits and cuts in social welfare measures. "In the short term, defence spending has a sound positive impact while on the long term there is a negative impact on economic growth," Jayawardene said.

Commercial Law to be revamped 

By Mel Gunasekera 
Commercial Laws of Sri Lanka are to be revamped with World Bank assistance, a Senior World Bank official said.

The project would concentrate on changing the Commercial Laws, automating the Company Registrars office, drafting a new mediation procedure to settle commercial disputes, upgrading the syllabi of institutions teaching commercial law, and to improve the efficiency and quality of judicial services. 

The lack of modern laws concerning commercial matters is one of the problems that is impending faster economic growth in Sri Lanka. In response, the Legal and Judicial Reform Project has commenced work on a scheme to identify the gaps and recommend changes.

The project would cost around US$ 20 mn to 25 mn and would be spread over a four year period, he said. 

We are trying to make the legal system more user friendly to the commercial sector, Legal and Judicial Reform Project Consultant, Thusitha Pilapitiya said.

She said, a modern legal system with simple clearly defined regulations pertaining to the conduct of commerce and business is essential to foster investor confidence leading to economic growth.

A commercial law committee consisting of representatives from the chambers of commerce, experts from the private and state bar, and relevant government ministries have been appointed to study current commercial law; identify areas that require amendment as well as gaps in the law where new legislation is required and work with private and government agencies until new laws are presented in parliament.

Short and long term training would be provided for state counsel, to manage the upgraded legal system relating to commerce. Areas of interest include investment law, trade matter including shipping, banking law, and general international law.

Library facilities including on-line service regarding laws, regulations and judgements would be made available at a central location to lawyers, private sector and the public.

Automating the Company Registrar's Office would enable essential tasks such as registering a new company to be simplified and expedited. Through the setting up of a web page, clients in and out of Sri Lanka will be able to electronically access the services and information stored at the Registrar's Office.

Delays in the settlement of disputes are a major source of concern to investors. The Chambers of Commerce in Sri Lanka will become the implementing agencies for increasing the use of alternate dispute resolutions in the settlement of commercial problems. 

While the concept of commercial mediation, will be actively promoted, a new mediation procedure will be drafted and a mediation centre established where trained mediators will resolve commercial disputes.

Working closely with the faculties teaching commercial law, the project will upgrade the syllabi in Commercial Law related subjects, develop syllabi for introduction of new subjects in commercial law, provide training to the faculty in the new subjects and in modern teaching methods, and provide library holdings including case references for the new syllabi. The faculty will work with international teachers of law with a background in Sri Lanka to implement this activity. The institutions will also be provided with computer facilities. 

In order to enhance the quality and efficiency of the Judiciary, a Judicial Training Institute would be constructed with facilities provided for in-house training, for newly recruited judges, as well as their more senior counterparts. The Institute will be fully staffed and equipped to function as a modern training centre for Judges of Sri Lanka and the SAARC region. A training programme focussing on all aspects of dispensing justice would be developed, with special focus on the knowledge of commercial law. The construction of a fully automated commercial high courts complex would include three courthouses for adjudication of commercial matters, lawyers lounges, visitors lounges and a service bureau where computer and other services will be available.

All courts and the Judicial Services Commission would be computerised.

Telecom vs WLL row escalates

Sri Lanka Telecom escalated a row with their rival phone operators and warned of taking the regulator to courts if its monopoly on international calls was taken away. SLT said the private telephone operator Suntel was "misrepresenting facts" in their bitter interconnection battle.

The telecom watchdog's ruling last year has failed to end the ongoing row between the dominant carrier SLT, and the private operators Suntel and Lanka Bell.

The Telecommunications Regulatory Commission (TRC) unveiled a new interconnection agreement, where SLT had to share revenue from both incoming and outgoing international calls with the two private operators.

Though all three operators expressed their dismay over the interconnection ruling, they said they were bound by it and had no recourse but to appeal to the regulator about the decision.

SLT says that as part of government's privatisation policy, they were given the monopoly of international voice calls till the year 2002.

SLT's Head of Customer Services Christie Alwis said the revenue generated from the lucrative international calls is being used to develop telecommunications services to the unprofitable rural areas. Under the privatisation agreement, SLT was permitted to raise its tariffs by 25% each for the first two years, 20% for the third year, 15% for the fourth and 15% till the year 2002. A cutback in international calls would force SLT to raise its rates on domestic calls.

In August 1997, Nippon Telegraph and Telephone Corp (NTT) of Japan bought a 35 per cent stake in the government owned SLT for US$ 225 mn. 

The government is planning to sell a further 10.5 per cent of SLT this year. While there is speculation that the 10.5 per cent stake would be listed on the exchange, analysts say the on going feud between SLT and the three operators would drive down the price of SLT stocks.

Cyprus agency downgrades two local banks

A Cyprus based rating agency Capital Intelligence has downgraded the long and short-term ratings of two of Sri Lanka's leading commercial banks as part of the general downgrades in the region. 

Capital Intelligence (CI) announced last week it had downgraded Bank of Ceylon's long and short-term ratings and the long-term rating of HNB.

The state owned Bank of Ceylon (BOC) received a long term rating of BBB (-) down from BBB, and a short term rating of A-3 down from A-2.

HNB long-term ratings were downgraded from BB (+) to BB.

However, the overall outlook for both banks remain stable, the report states.

The report adds that the Sri Lankan banking sector has been affected by the slowdown in external trade and lower profits from capital market related activities. 

Moreover, delayed payments from Russian tea importers also led to some asset quality concerns. Consequently, BOC creditworthiness has been impacted by the country's weaker long-term prospects. 

"However, its ratings are still the highest assigned to a bank in Sri Lanka and reflect its strong ownership, capable management and good financial overalls. Though asset quality remains weak by international standards, the portfolio is adequately provided for," the report states. 

BOC reports that its operating profits have risen in 1998 on the back of a 10 per cent growth in both deposits and advances. The provision charges will be higher than in 1997, as the bank intends to clear all the qualifications in its accounts. The bank's pre-tax profit for 1998 will be between Rs. 2.5bn to 3 bn as against Rs. 3.8 bn in 1997, the report states.

"This does not indicate that the local banking sector was facing any sort of crisis. Weaker global demand and depressed conditions in the Far 

East are expected to have adverse impact on the Sri Lankan economy." 

The country's GDP growth rate has slowed to an estimated 5% in 1998 from a more robust 6.4% in the previous year. Investment inflows will also be substantially reduced. 

Signs of poor economic performance

The level of external assets and its trend is a good indicator of economic performance. This is especially so in a trade dependent economy like Sri Lanka.

It is for this reason that a further indicator, the number of months of imports the reserves are adequate to finance, is often used.The external assets position in a sense summarises the country's economic performance in several sectors.It is a composite picture of how exports have performed, investor confidence,the impact of foreign exchange rate management,and the overall performance of the external sector.

It is in fact more than that. It reflects how agriculture and industry have performed as the trade balance is a reflection of the country's production capacity,productivity and international competitiveness.When viewed in this light,there are reasons to be concerned about the declining trend in the external assets of the country,though they are adequate to finance about five months of imports. 

In 1995 the country's external assets were U $ 2571 million. It declined somewhat to 2441 million US dollars at the end of 1996. There was a further improvement in 1997. External Assets rose to 2822 million US dollars at the end of 1997.What is significant is that since then external assets have declined continuously to reach 2740 million US dollars at the end of November 1998. The estimated reserves at the end 1998 position is US$ 2675 million.

We can be quite complacent and say that this is not too bad a position.We could say that the external assets are adequate to finance about five months of imports. So why worry.

Such an approach will not carry us very far.We must examine and analyse the reasons for the decline and take remedial action to arrest the trend. 

No doubt one of the reasons for the lesser performance was the adverse global conditions.The devaluation of Asian currencies,the slow down in economic growth around the world, the collapse of the Russian market for tea,investor pullouts from emerging markets,inter alia, were responsible for making our external performance difficult.

But complaining about these external conditions would not help us .We must respond with appropriate policies, enhance our efficiencies,adapt ourselves to the changing conditions,and remain competitive in world markets. 

It is also significant to note that official reserves have declined by about 8 per cent since the end of 1997.Why ?

Since the external assets position is a good indicator of our overall economic performance it is important to review the factors responsible for the decline in assets, especially as there were some favourable factors as well in our trade such as lowerprices for many imports, such as crude oil.We must also stress that the responsibility for such a review and remedial action does not lie entirely in the hands of the government,it is also a responsibilty for private business as well.

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