BUSINESS

Pre-election report highlights cost of instability

Secretary, Finance Ministry, Charitha Ratwatte released the Pre-Election Budgetary Report last Friday, in terms of Section 16 of the Fiscal Management (Responsibility) Act.

According to the report, the increased expenditure and the reduction in revenue are likely to result in an increase in the proposed budget deficit for 2004 from 6.8% to 7.3% of Gross Domestic Production (GDP).

The report states that in terms of expenditure, the relief package approved by the government in January this year for households in drought stricken areas will cost around Rs. 900 million, while rectification of salary anomalies in the health sector and the adjustment to pensions is likely to cost Rs. 1.7 billion.

Subsidies granted on LP gas and wheat flour to domestic consumers, amounts to Rs. 1.5 billion and the delay in the restructuring process caused by litigation in the bus transportation sector and in the adjustment to postal rates has resulted in an additional cost of Rs. 1.8 billion.

The cost of the general elections, for which no provision has been made in the budget, would add a sum of Rs. 800 million to recurrent expenditure. The political instability and the delays in foreign funding are likely to reduce capital expenditure by around Rs. 7 billion and this position would partly offset the increased recurrent expenditure. The report states that the expected revenue from the Value Added Tax (VAT) and that of income tax in the budget 2004 would require adjustment.

In addition, revenue estimates were made on the basis that the economy will, following the trend shown in 2003, continue to grow at a higher rate of 6% in the current year. The legislation to establish the Revenue Authority has had to be postponed due to the dissolution of parliament. Introduction of an economic service charge and amendments to the Inland Revenue Act have had to be deferred and will come into effect only in the second half of the year with the retrospective effect from January 1 or April 1, this year, as applicable.

The relief package introduced to reduce the cost of living including the reduction of Customs duty on several essential food items is estimated to result in a revenue loss of Rs. 250 million per month. Consequent to these factors, the revenue estimate for 2004 has been revised downwards by Rs. 12 billion to Rs. 319 billion.

Further, some of the donor funding that was expected in the budget is likely to be delayed. As a result net borrowings from the domestic market are estimated to be about Rs. 87 billion in the current year, which is within the estimated availability of domestic resources.

According to the Fiscal Management (Responsibility) Act, the secretary to the Finance Ministry is required to present to the public, within three weeks of the proclamation requiring the holding of a general election, a Pre-Election Budgetary Position Report containing information on the fiscal position of the country.

Imports, exports record growth

Both imports and exports recorded a growth in 2003. Exports, in US dollar terms, increased by 9% in 2003 in contrast to a decline of 2% in 2002.

Industrial exports, dominated by garment exports, made a significant contribution of 80% to this improvement. Agricultural exports also contributed to this growth, due to favourable tea and rubber prices.

The export earnings of US$ 495 million recorded in December 2003 were the highest monthly earnings recorded during the year. Of these earnings, 79% were from industrial exports and 19% from agricultural exports. The cumulative export earnings during the year 2003 were US$ 5,133 million, compared with US$ 4,699 million in 2002.

The trade deficit in 2003 increased to US$ 1,539 million, which was US$ 133 million higher than in 2002. Nevertheless, increased foreign exchange inflows due to the growth in tourism, port services, private transfers and capital account inflows increased foreign exchange liquidity and reduced the pressure on the exchange rate.

Cumulative imports too increased by 9% in 2003 with increases in all three major categories.

Demand for intermediate goods increased due to the recovery in exports and domestic industrial activities, while demand for investment and non-food consumer goods increased responding to enhanced domestic economic activities, particularly in construction and transport services.

Food imports increased only marginally due to lower imports of rice, wheat and sugar, which offset the increases in other food items.

Expenditure on imports (US$ 755 million) increased by 20% in December 2003, over imports in December 2002 (US$ 627 million). The expenditure on imports during the year 2003 was US$ 6,672 million, reflecting an increase of 9% over the imports of US$ 6,105 million during 2002.

All major categories of imports showed significant increases in December 2003 over December 2002. This was partly a reflection of importers' anticipation of upward revisions of tariffs and Value Added Tax (VAT) in this year's budget.

Food imports increased by 40% due to high imports of sugar, wheat, milk products and other consumer products.

Devaluation of rupee raises concern

By Shehan Moses

The continuing devaluation of the rupee against the US dollar is causing concern among the business community.

The selling rate of the US dollar on the day before the dissolution of parliament (February 6) was Rs. 97.88. However on Friday, February 27, the rate of the dollar was Rs. 99.22.

Finance Minister K.N. Choksy speaking to The Sunday Leader said that the government cannot control or intervene in the money market to control the value of the rupee since the rupee is in the floating exchange rate system. He said the government cannot have any policies regarding the control of the value of the rupee since it is determined by market dynamics.

Minister Choksy says the main reason for the rupee to devalue is the political uncertainty that was created last November and the economic situation in the country. According to him, the devaluation of the rupee will have a direct impact on the economy and the cost of all essential and non-essential items would increase.

He says when the rupee devalues against the dollar the prices of all imported items would increase, which includes all food products creating an added burden to the public. He added that investor confidence would also decrease and foreign investment to the country will fall and may cause serious problems to the current economic situation.

Business confidence nosedives

The LMD-ACNielsen Business Confidence Index (BCI) has nosedived by an alarming 40 basis points since President Chandrika Kumaratunga first dissolved parliament on November 4. So observes the latest edition of the index, published in the March edition of LMD, out tomorrow.

The March BCI's free fall below the psychological barrier of 152 (the 11-month low in July last year), to 138, reflects the sombre mood of the nation's business community, LMD observes.

The survey was completed three days after Kumaratunga called a snap general election on February 7.

Last month, the business magazine noted, "The writing is on the wall, for the shorter term at least. The unceremonious events of last November and the political wrangling that has followed will take many months to recover from - if and when our politicians start acting in the national interest."

LMD further comments that as far as business sentiments go, the April 2 poll is being viewed as a waste of time and money - and the prospect of yet another hung parliament does not augur well for business confidence in the near term. The BCI, therefore, is destined to slump even further, LMD predicts.

The 'investment climate in the country' is now being viewed with even more pessimism, with only 52% of those polled stating that our prospects are either "good" or "fair." Almost 90% said so in November, whilst two-thirds were positive about the same issue in January. Those who feel that the climate is "poor" now account for as much as 43% percent of ACNielsen's sample.

The medium-term economic outlook, too, is being viewed with caution, LMD claims. Only 21% of those surveyed expect "the economy, in general, to improve in the coming 12 months." This is down from 44% in the previous month and almost 60% last November.

The only good news is that a clear majority of businesspeople (60%) continue to acknowledge that their "company's business" (or sales volumes) increased from 12 months ago, and almost half of those who participated in the opinion poll expect business "to get better in the next year."

People's Bank records highest operating profit

The People's Bank issued its financial performance report for the year 2003 last week. According to the accounts, the bank has recorded the highest operating profit in its history of Rs. 1.555 billion - a growth of 54.7% over the last year's profit level. Treasury income grew by 58% due to the successful treasury operations. The bank's total assets increased from Rs. 181.7 million to Rs. 200.7 million over the last year.

Speaking to the media, Chairman, People's Bank, Lal Nanayakkara said the bank was able to achieve its goals for the year 2003 due to staff motivation and he also said he is happy to produce the annual report faster than the previous year. He added that low income deposits are on the rise, which is a strength to the bank. The bank has been able to reduce the bad debts from last year's 25% to 21% this year.

Major initiative to protect marine resources

The 'Our Nation and the Sea' Initiative (ONS), a joint venture between the public and private sector has been organised with a view to widen awareness of the sea, its resources and potential to contribute to Sri Lanka's development. The objectives of the ONS include creating awareness among professionals with regard to the Law of the Sea, harnessing resources, undertaking capacity building and formulating policies and strategies for implementation to be submitted to the government.

The National Aquatic Resources, Research and Development Agency (NARA), the principal national agency responsible for marine resources in Sri Lanka, and its regional counterpart, the Indian Ocean Marine Affairs Cooperation (IOMAC) have come together to convene the ONS, the inauguration of which will be held on March 3 at the BMICH and will be followed by a series of workshops.

The panel of speakers on the inaugural day will include the Chief Justice Sarath N. Silva, Attorney General K.C. Kamalasabayson, former Registrar, Law of the Sea Tribunal, Kumar Chitty, Secretary General, IOMAC, Dr. Hiran Jayewardene, the sixth Chairman, NARA, Razik Zarook and Additional Solicitor General, P.A. Ratnayake, P.C. Details regarding participation could be obtained from the Conference Bureau at the Ocean Centre IOMAC Secretariat Suite BMICH (e-mail iomac@sltnet.lk).

Development linked to peace

By Dinesh Weerakkody

The pressing question which every voter has to mull over at this moment of time - is development possible without durable peace? What now of development? The economists have advocated the 'trickle down' approach, with the government mobilising all the savings and capital which can be borrowed and letting the group of entrepreneurs invest them in infrastructure, industry and commerce productively to churn out goods and services that people in the country and in other countries will want and pay for.

This increase in capital and value to companies leading to competitive advantage has to necessarily leave the working classes to make sacrifices and be happy with the pittance coming their way, until the wealth that is accumulating trickles down to them. This approach certainly has lost its supporters.

Another set of development economists advocate the alleviation of poverty, total human development and equity as the government's primary goal with decentralisation of government, privatisation of public enterprise, quality education and training of people, technological upgrading, and 'private sector as the engine of growth' as its principal strategies.

This approach also encourages the participation of the private sector, voluntary organisations and other key institutions in implementing the government's policies and programmes.

Infrastructure

 What the government has achieved during this interim period of 25 months - 64 key projects - needs to be looked at in perspective. Some of them are:

 Major repair and rehabilitation of the existing road and highway network, including rural and provincial roads.

 The Southern Highway under construction

 Colombo-Katunayake Expressway: being negotiated

 Colombo-Kandy Expressway: in the preparation stage

 Colombo South harbour: preparations for tender underway

 Hambantota seaport development, including coal fired power plant agreements being developed and work expected to commence this year

 Bandaranaike International Airport: first phase upgrading will be getting underway

 New airport in Wellawaya: tenders being prepared and bids have been invited

 Biyagama II: new industrial zone: land allocated and will be opened in 2004

 Western Region 'Megapolis' major urban development plan almost completed

 Tourism development programs - Bentota II, Maskeliya, Puttalam and Kalpitya

 Anuradhapura Mahamevuna Park: work to preserve this sacred area is underway.

These infrastructure developments have two direct benefits - they create jobs and more important, they create the vital linkage between the cities / regional hubs and the villages. This in turn improves the access to 'enabling technologies' for the people in villages.

The 'disabling' question is whether all this is possible with an aberrant economy, under the constant threat of exploding bombs (human or otherwise) and sporadic attacks on civilian communities ? However if the ceasefire holds, one can hope to see most of these mega projects nearing completion. They certainly will bring the ray of hope to our younger generation who have not seen much of any form of development, since the beginning of the 20 year conflict.

There is some thing else which irks the common man - the unbalanced spending on non food imports, for example the imports of non essentials which had increased by 34% and motor vehicles by 134 %, at a time when we are still struggling to put in place our infrastructure. We need to make sacrifices. However, sacrifices which we have to make in order to create the future of our younger generation will be wasted in the aftermath of scattered peace initiative and resumption of hostilities. A most forbidding scenario for us to think of.

Productivity is another issue which is more on our collective lips than in reality. We lag far behind even our regional neighbours in terms of productivity indices.

Can you imagine what a nation that had not thought of inculcating productivity and work ethics even in better times will find itself in when confronted with the growing uncertainty of life and property ? We must be bold enough to challenge ourselves in meeting higher goals and add greater value. The private sector as much as the public sector has a stake in this dilemma confronting all of us.

The improvement in process methodology, research and development and worker training, while conserving energy and economising on luxuries, so that capitol accumulation is rapid will help us vindicate ourselves in the eyes of our future generations. We need to create more jobs, be conscientious about our work ethic and ultimately be able to buy more goods for our salaries. Certainly all this is not possible with the peace process in disarray .

Low and middle-income groups have been the most adversely hit when one considers urban and non-urban housing.

 The government by lowering interest rates to single digit has facilitated the movement of funds to support housing construction.

 In the Western Province, three joint venture pilot housing projects are being introduced as pilot programmes where the UDA provides the land and private sector partners provide financial capital. Additional land will be released to the private sector through an open tender process for housing construction.

 In Galle a project with Malaysian support is getting underway to develop housing for public servants.

Destabilising conditions can only serve to push these investments further back, with the ultimate result of deferring the relief available for these income groups, who will never be able to realise their dreams of owning their own homes - be it a flat or house within their lifetimes. This is destroying the dreams of people. Do you have the conscience to usher in an era, sans hope?

The answer to this question is now with the people of Sri Lanka. Helping strengthen an administration which will deliver on their promise is the only way to ensure that our hopes stay alive!

Changes at LB Finance

LB Finance (LBF) Ltd. has undergone a structural change with ownership and the controlling interest being passed on to entrepreneur Dammika Perera with the divestiture of the interest of Vanik Incorporation Ltd. and its management by it. At present Perera holds 73% of the issued capital of LBF.

The new board of directors and senior management were introduced at a media briefing held in Colombo last week. "Certain structural changes have taken place within the company and we want the public to be informed of such changes of the board and management," said Chairman of the reconstituted board, LBF, B.M. Amarasekera, setting out the purpose of the briefing.

"Our emphasis is on good corporate governance and we are committed to abide by and adopt the Code of Best Corporate Practices published by the Institute of Chartered Accountants of Sri Lanka (ICASL)," said Amarasekera addressing the media.

LBF has consolidated its position as number three amongst financial companies in terms of its deposit base, which amounts to Rs. 2 billion.

Sathosa VRS to continue

Following a protest by around 50 persons last Wednesday in front of the Presidential Secretariat, President Chandrika Kumaratunga made an order to stop the Voluntary Retirement Scheme (VRS) offered to the employees of Sathosa. The petition submitted by the protestors charged that employees were being forcibly made to retire and requested the President to take necessary action.

"Around 60-65 days ago the employees of Sathosa themselves made a request to provide them with a retiring scheme. Acting on this request we took necessary steps to formulate a retiring scheme and obtained cabinet approval for it," stated Commerce Minister Ravi Karunanayake, stressing that no employee is being made to retire by force and that they have done so of their own free will. The VRS scheme had already received cabinet approval and the President herself as the head of the cabinet has given her approval to it.

In spite of the President's order, 10 employees who had requested for the VRS received their monies last Thursday at the Commerce Ministry from Chairman, Sathosa Wholesale, Lal Wickrematunge. According to Wickrematunge, around 2,000 employees have requested for the VRS so far. However, they were to make submissions for it before February 27.

"In short what we wish to bring to the notice of the public is that Sathosa has indeed come a long way from where it was two years ago to where it is now. Through the restructuring of loans outstanding exceeding Rs. 13,000 million and bringing about other necessary structural changes we have been able to turn the situation around," stated Wickrematunge.

Karunanayake added, "We refute the charges made by certain persons that Sathosa is bankrupt and had not paid the employees their monthly salaries. I challenge Ministers Kingsley T. Wickremeratne and Reggie Ranatunga to meet me at an open forum to prove the various accusatory statements made by them about Sathosa and its operations."