Cairn India Limited who won the bid to explore for oil in the Mannar Basin will sign the Petroleum Resource Agreement on 7 July at Temple Trees, the official residence of President Mahinda Rajapakse. "They were expected to sign the agreement today (30 June) but they will be here on 07 July instead and the signing ceremony will be held at Temple Trees," Minister of Petroleum and Petroleum Development Resources A. H. M. Fouzi told the Island Financial Review. He said that details will be made public soon after the signing takes place. Cairn India is expected to incorporate a company in Sri Lanka in order to commence operations in Sri Lanka. According to analysts Malaysia’s success had been attributed to the country’s policies of making sure that although foreign entities developed their oil reserves that adequate technical and knowledge transfers took place so that the country could fully own its petroleum resources, refineries and operational facilities. Today, Petronas, wholly owned by the Malaysian government, is a leading fully integrated oil and gas company listed in the Global 500’s largest corporations in the world with a presence in over 30 countries. Oil producing Latin American countries such as Mexico and Venezuela could not reap the desired benefits because oil exploration and extraction was in private hands. It was only recently that Venezuelans took control of their oil fields and progress is slow in terms of distribution of benefits to its people. Nigeria extracts oil but because of political instability, corruption, bad management and the ever present threat from armed guerrillas, the country has no capacity in place to refine its own oil as the foreign companies controlling the operations there naturally thought against investing. The country’s crude oil is exported, refined and imported back, so when oil prices surged riots broke out in the country as many people could not afford the fuel hike. Cairn India won the bid to explore for oil in Block SL2007-01-001 where water depths range from 15 to 1,500 metres on the 3,400 sq km block for which two other companies submitted their bids. "Everything had been thought of. We studied contracts between other governments and oil exploration companies and have selected the best profit sharing concept," Dr Neil De Silva, Director General, Petroleum Resources Development Secretariat (PRDS) told the Island Financial Review last month. He said that the bidders had to bid for a minimum exploration work programme, the amounts offered as signature bonus, production bonus, the percentage share of profit based on an investment multiple and the extent of participation of the National Oil Company. According to Dr De Silva the share of profit, smaller at the initial stages, should increase significantly as time progresses. "A life time of an oil field is about 20 years. Towards the latter stages Sri Lanka could end up with a major share of the profit," he said. Once oil is found and commercial extraction commences, the oil company is allowed up to 70 percent of the revenue to cover its investment. The government expects a 10 percent royalty, the profit share based on the investment multiple, taxes (currently at 15 percent) and the revenue of the participating National Oil Company. The Exploration licence is valid for eight years and divided into three stages of three, two, and three years. To progress from one stage to another the oil exploration company would have to complete whatever it laid down in the work programme, for which the government would charge a 25 percent guarantee. The second and third stages should result in at least one well in each stage while 30 percent of the territory must be relinquished back to the state after eight years. An extension is possible after the fourth stage if a potential discovery is made. The entire territory is to be handed over to the government, except the areas where oil is discovered. Cairn India Ltd is expected to invest over US $ 10 million on off shore exploration for gas and oil deposits in the Basin where water depths range from 15 to 1,500 metres on the 3,400 sq km block for which it bid. According to available estimates, however, a single exploration well in shallow waters will cost about US$ 10 million and US$ 30 million in deep waters, therefore Cairn India’s investment is more likely to exceed US$ 10 million several times over. |
Monday, June 30, 2008
Can Sri Lanka satisfy conditions for GSP+ extension?
The country’s diplomatic corps is engaging their counterparts in an effort to convince them that Sri Lanka will be able to meet the conditions that are required for an extension of the GSP+ facility, Dr. Palitha Kohona, Secretary, Ministry of Foreign Affairs, said.
Delivering a public lecture on The Role of International Agreements and Diplomacy in Promoting Sri Lankan Business he said that it was vitally important that the country continued to enjoy the benefits of GSP+ with bilateral trade with the EU exceeding US $ 3 billion affecting 100,000 jobs directly.
"At present we are making a concerted effort through our diplomatic missions to convince our partners that Sri Lanka will be able to meet the conditions required," he said.
He said that while the struggle against a brutal terrorist outfit continued the government had taken several steps to ensure that international human rights standards are met.
One particular convention on human rights, the International Covenant on Civil and Political Rights (ICCPR) drew attention recently when a court ruling said that the country’s legislature did not make the convention effective. But the Supreme Court laid this matter to rest.
"The Supreme Court has held that the ICCPR had been given adequate legal effect under the law of Sri Lanka."
"The Tilakaratna Commission was appointed to look into disappearances. An independent commission of inquiry was launched to investigate a number of high profile incidents which commenced hearings in March," Dr Kohona said.
The latter commission was observed by an International Independent Group of Eminent Persons who withdrew in May saying the government had put stumbling blocks preventing them from carrying out their functions as well as they would have liked to. And they left after stirring a hornet’s nest.
"Its true they decided to conclude their work and had also made certain comments. The commission and the attorney general’s office have responded to these comments."
Dr Kohona said that the military have been extensively trained by the ICRC.
"We continuously interact with high level UN officials responsible for different aspects of human rights and have not hesitated in inviting them to the country," he said.
Dr Kohona said that the scrutiny that Sri Lanka was being subject to suggested that the harshest standards were being applied.
"It is important that they realise that while Sri Lanka fights a brutal terrorist organisation, the country is making a genuine effort to protect human rights standards."
Despite adverse publicity the country’s diplomatic corps had done well to maintain good relationships and was able to acquire development assistance from several countries and Dr Kohona went on to list a few.
Japan US $ 618 million, China over US $ 1 billion, Iran US $ 1.9 billion, India over US $ 500 million, the Republic of Korea US $ 117 million, the EU US $ 129 million.
The Asian Development Bank, World Bank and countries such as the US, Germany, France, Spain, Australia, the Czech Republic, Austria and Hungary also assist Sri Lanka achieve its development objectives.
"At a time when global development assistance levels have dropped, Sri Lanka seeking to provide a better economic future for its people, has succeeded in increasing assistance. These development projects create opportunities for business and increased prosperity for the people," he said.
A visiting delegation of European Commission (EC) officials said that the government needed to help the EC by finding a way to address their concerns.
"If GSP+ is wanted Sri Lanka will first have to help us," they said.
They pointed out that the lack of follow up on the abductions and the calls of both the International Group of Eminent Persons and the UN on the government to deliver concrete results were serious concerns for the EC.
"The government should take their recommendations seriously by taking cases to court and ensure effective and independent human rights monitoring," the EC delegation said, adding that the government should publicise the positive steps it took so that people could be aware of what the government was doing to address the human rights issues.
Thursday, June 26, 2008
CFO’s should develop HR values - Ronnie Peiris
"It is puzzling that many CFOs have a disinterest in human capital where their involvement has been purely of a control nature. Companies spend a great deal on employees, yet few finance executives understand any detail how this investment creates value to the organisation," Peiris said addressing the 3rd LBR-LBO Chief Financial Officer Forum recently.
Peiris pointed out to a recent study conducted in the US showed that while companies spent more than 36 percent of their revenues on human capital expenses only 16 percent of the CFOs understood the nature of the returns these investments were making.
"JKH spends about 70 percent of its revenue on human capital in the services sector while the manufacturing sector spends about 12 percent of its revenue. As a group, JKH spends about 20 percent of revenue on average. While companies continue to spend so much on human capital it is puzzling how CFOs can be disinterested in this area."
The traditional role of the CFO had always been that of the caretaker of an organisation’s "purse". A CFO is absorbed in the company’s accounts, controlling finances that effect performance through a plethora of targets, budgets, incentives and measures.
Peiris said that this setting created a bureaucratic organisation, one that stifles creativity of employees and results in uninspired leaders and frustrated managers who are not trusted to make decisions. Because of the CFO’s narrow minded focus on bottom-line results, short term measures are often adopted which result in higher costs and wrong behaviour.
"Very often CFO’s paid a lot of attention when purchasing a machine which comes with a limited capacity, but are often stingy when investing in employees. The human mind is limitless in capacity and CFOs underestimate or do not know the potential of people," Peiris said.
He said that CFOs need to change the old-world mindset, steeped in traditional accounting based on historically assessing physical assets, to the new-world mindset that focuses on eking sustainable value from physical assets, and most importantly intangible assets such as human capital to improve organisational performance.
The dynamism of business is changing fast and survival, success and failure will depend on people within organisations. This would mean that CFOs will have to venture into areas hitherto dominated by psychologists, behavioural experts.
Peiris strongly advocated performance based remunerations with fair assessment mechanisms in place as it will not only link executive pay to bottom-line results, easing tensions of shareholders, but encourage employees to perform better.
"Not every employee is interested in money. To some it is personal pride that motivates them, while for others it may be job satisfaction or a personal desire to contribute," Peiris said, stressing the fact that higher pay alone will not guarantee results.
The concept of performance based remuneration is "hard and unemotional," Peiris pointed out but said the system could work if organisations could minimise, if not eradicate, the causes of employee disengagement to achieve optimum productivity.
Employee disengagement is where employees do the minimum that is required of them in order to collect their pay check.
This is caused by a conflict of interest between individual goals with that of the organisation further aggravated by the lack of training, development, mentoring and unclear lines of communicating with the hierarchy.
Non empowerment of employees leads to frustrations which also result in disengagement because a bureaucratic setup may require rigmarole of approvals and procedures for even mundane of transactions.
Disengagement is also caused by poor working conditions.
"Poor working conditions will include an inadequate system of recognition and reward, inappropriate tools and insufficient resources and an unsuitable work environment," Peiris said.
He said that when JKH adopted a performance based remuneration scheme it had its trauma.
"But as mindsets began to change things began to improve."
While past relationships between HR and Finance functions had been on an adverse footing, Peiris said that CFO’s will have to engage in closer collaboration with HR, simplify processes, get involved in recruitment, development and training processes of the organisation and learn to understand Human capital in all its complexities, ambiguities and paradoxes.
"CFOs need to ally themselves with the entire organisation. The first step in creating a high performance based organisation will be the step taken by the CFO in changing our own attitudes," the CFO of John Keells Holdings concluded.
Wednesday, June 18, 2008
IOC entry a miserable failure .....
Allowing the Indian Oil Company (IOC) to enter the local market as a competitor to Ceylon Petroleum Corporation (CEYPETCO), so that consumers would benefit, has failed miserably, the Association of Container Transporters (ACT) said.
It said that transport rates will be increased by 45 percent as a result of increased fuel prices, as the impact on heavy vehicles, with their higher litre capacities, is much more than for normal ‘light’ vehicles.
The ACT came down on the inefficiency of the public sector and said that it was the consumer that had to bear the resulting costs.
"The delay in the port which amounts to seven to eight hours per vehicle results in excess use of fuel and escalates the cost of container operators and requires the urgent attention of the authorities. The number of man hours lost is clearly visible for anybody who witnesses the long queues at the port access road at Ingurukade junction."
The costly delays at the port are due to inefficiencies of the Sri Lanka Customs (SLC) and Sri Lanka Ports Authority (SLPA).
"Both organisations operate at the same place and each point the finger at the other for causing the delays but the truth is they are both causing the delays," Sunil Fernando, President, ACT told the Island Financial Review.
"We had brought this issue, and many others, to the notice of the authorities for the past two decades and have not got a response," he said.
The ACT said that the industry was the bridge between shipper, consignee and the port (and the consumer as well).
"It is the only conduit for exporters and importers. However, this industry has been neglected by all governments."
The increase in diesel prices to Rs 110 a litre announced by CEYPETCO and OIC last month, had a ripple effect on the transport industry.
"It is proved that whenever there is an increase in the price of fuel, within no time the prices of all commodities increase in par. Hence when considering a price revision due to a fuel (price) increase we cannot ignore these indirect price increases which impact our industry," the ACT said.
According to the association, engine oil, transmission oil, brake oil had all increased four fold during the recent past.
Tyres have increased in price as well and are beyond the purchasing power of the container transport industry with containers running on 16 heavy duty tyres.
Batteries have sky rocketed in price while servicing costs, spare parts, wages and electricity costs have increased as well.
The container transport industry has employed thousands and has provided a pool of heavy vehicle drivers for employment overseas. Fernando estimates that the livelihoods of about 10,000 depend on the industry.
For an economy which depends more on imports to feed its people and provide other consumer items, the end result of the fuel price increase is yet to be felt.
"The indirect impact of the fuel price increase on consumer items, especially on food, will be felt in a few months, as it usually takes time. But many unscrupulous traders have already increased prices haphazardly not at all in proportion to the fuel price increase. It is an inherent weakness of the system," an official of the Censes and Statistics Department said.
Saturday, June 14, 2008
Janashakthi gearing for total day one IPO purchase
Janashakthi Insurance Company Limited is going for its Initial Public Offering, June 16, and is confident that all 33 shares on offer will be grabbed on day one itself.
"We have a great brand built over a short period of time and the fact that there has been no IPO in the country in two years tells us that now is the right time to make an IPO. We are optimistic that the IPO will close on the very first day," Ravi Liyanage, General Manager Sales and Marketing, Janashakthi Insurance Company Limited (JICL) told the Island Financial Review.
A special feature of the IPO is that JICL has set internal targets for its personnel to attract applications for the IPO in Batticaloa, Badulla, Hambantota, Monaragala, Anuradhapura, Polonnaruwa, Puttalam, Matale, Nawalapitiya and Nuwara Eliya.
This is perhaps an indication of the company’s confidence that the Janashakthi brand is established in these areas noted for their high poverty levels, and is committed to take the benefits of insurance to the rural populace.
The company hopes to raise close to Rs 400 million through the IPO which will be channelled into upgrading its computer systems and networks to be on par with the developed world, improve its brand value, take its training and development of staff to international standards, turn each of the 115 branches into profit centres and expand into the Middle East market.
"JICL is the third largest general insurer with only a decade gone by since the company was formed. We have the highest profit margin in the industry of Rs 525 million in 2007. Our branch network is the second largest and we are the most awarded service brand by the Sri Lanka Institute of Marketing. We are also the fastest insurer to reach the Rs 5 billion revenue milestone," Liyanage said highlighting some of the company’s notable achievements.
He also said that Janashakthi was the first to venture into the South Asian region when it offered its insurance products to the Maldives.
When JICL acquired the National Insurance Corporation in 2001, it became the only private insurance company to acquire a state-owned insurance company.
The Gross Written Premium for general insurance grew by 17 percent, or Rs 3.678 billion in 2007, while for life insurance the corresponding figure was Rs 1.206 billion, a 18 percent growth.
"We have already commissioned the rating of our financial strength and expect the results soon. The Janashakthi Brand is being valued concurrently as well," Liyanage said.
"Applications for the IPO can be made at any one of our 115 branches and at 300 Bank of Ceylon branches while our 3,000 strong insurance sales personnel have been deployed to take the IPO to the masses as well."
The issue price of a share will be Rs 12.
Janashakthi through the years...
1992
Janashakthi Life Insurance Co. Ltd was incorporated in Sri Lanka as a public company with limited liability in 29th October 1992.
1994
Janashakthi began operations on 15th September 1994, as Sri Lanka’s first specialised life insurer.
1995
Janashakthi General Insurance Co. Ltd. was established on 20th September 1995 as Sri Lanka’s first specialised general insurer.
1996
Janashakthi took the concept of insurance to people’s doorsteps and embarked on a rapid regionalisation programme and established one of the widest branch networks in the industry.
1997
Janashakthi Life made Profits and the company was able to declare their first bonus to policyholders.
The company moved to an aggressive advertising and marketing strategy in 1997 with the sponsorship of the Sri Lanka vs. India Test match.
1998-1999
The company began exercising social responsibilities as a corporate entity by becoming involved in several social projects. A massive programme for the safety of people on the highway, in Colombo, was undertaken at Pedestrian Crossings, Guard Rails and Belisha Beacons.
2000
Janashakthi Life and Janashakthi General merged and formed one strong entity called Janashakthi Insurance Co. Ltd.
2001
Janashakthi Insurance acquired a controlling interest in National Insurance Corporation Ltd.
In the same year the Life Operations Department received ISO 9002 International Service Quality Accreditation and in the process became the first insurer in Sri Lanka to obtaine this certification.
The premium income in the year 2001 exceeded Rs. 1 Billion.
The company undertook 2 major Test Cricket sponsorships- the SL vs. West Indies and SL vs. Zimbabwe Test Series.
2002
Janashakthi became the first private insurer in Sri Lanka to open a representative office overseas, establishing a branch office in Maldives.
In the same year, branches were established in Jaffna and Batticaloa in the Northern and Eastern Provinces.
2003
The Janashakthi Group diversified into banking, financing, development banking, porcelainware, property development and Agriculture by investing in strategic stakes of various companies.
2004
The company’s 10th year of operation registered a record turnover of Rs. 3.1 billion premium income, thus becoming the only insurer in Srilanka to surpass the Rs. 3 billion mark within the first 10 years of operations in Sri Lanka. The company also relaunched its comprehensive motor insurance policy as Janaratha Full Option with a package of benefits that included onsite claim settlement with a dedicated 24 hr Call Centre.
2005
Janashakthi becomes the 3rd largest insurer in Sri Lanka by the end of 1st Quarter 2005, in terms of the overall Gross Written Premium (GWP).
2006
Janashakthi Insurance struck Gold as the No.1 Service Brand of the year having competed against market leaders in insurance, leading banks, finance companies and large conglomerates. Organized by the Sri Lanka Institute of Marketing, this year’s Brand Excellence Awards also crowned Janashakthi Full Option as the Best Innovative Service Brand of the Year, and Janashakthi Corporate, as the Best Local Service Providing Brand of the Year.
Thursday, June 12, 2008
Excessive use could make cooking expensive if national policies ignored Conversion to auto gas, environmentally friendly, less costly - Laugfs
Laugfs Gas had a press conference Tuesday and to the surprise of many who attended, the press briefing was not called to announce a price hike.
In the face of escalating petroleum prices Laugfs Auto Gas announced that it was the right time for vehicle owners to convert their vehicles’ engines to run on auto gas.
The difference in petrol and auto gas prices is almost double and keeps widening each month, the company said in a statement.
"Within a year Sri Lanka had seen petrol prices increase from Rs 106 to Rs 157 per litre while gas prices have increased from Rs 62 to Rs 80 per litre; a 29 percent increase as against a 48 percent increase in petrol prices."
The company said that if 200 litres of petrol was consumed a month, at Rs 157 a litre, it would cost Rs 31,400—Rs 376,800 a year. The cost of running on auto gas would amount to Rs 16,000 a month (200 litres at Rs 80)—amounting to Rs 192,000 a year. Thus running on auto gas would result in a saving of Rs 184,800.
However wonderful the proposition may seem, beating negative perceptions harboured by vehicles owners that auto gas conversion would ruin their vehicle engines is a tough hurdle Laugfs Auto Gas would have to overcome if it is to cash in on these hard times.
There are false myths with regard to auto gas conversion which came about when the company launched its auto gas business in 1990 and resulted in "other mushroom organisations cashing in on the opportunity and had offered low quality cut priced conversion systems that seriously hampered the growth of the market," the company said, denying emphatically that auto gas ruined vehicle engines.
With right technology, the company said that the benefit of converting to auto gas, apart from the 49.0445 percent saving, is that it was less harmful on the environment.
The major drive to convert vehicle engines to run on auto gas is an improvement in terms of low emissions of pollutants, said Senior Lecturer and former Head of the Mechanical Engineering Department, University of Moratuwa, Dr. A. G. T. Sugathapala.
"The technology is there to conduct the conversions however I would not advise owners of new vehicles to make the change," he said.
Dr Sugathapala pointed out that engines are specifically made to run on certain fuels and although the technology for a conversion may exist, the temperature point and lubrication properties of auto gas may have an effect on new vehicles.
Not personal but a national issue
Dr Sugathapala however draws attention to critical factor that needs to be analysed by Laugfs Auto Gas if it hopes to convert vehicles at a large scale.
"Auto gas, or LPG, is mainly used for cooking purposes and is therefore taxed less by government. But should vehicles begin to convert to auto gas in a large scale, government may decide to increase taxes on LPG as revenue from petroleum products," he told the Island Financial Review.
This is a policy issue that people will have to be mindful of, he warned.
"Although the environmental benefits exist, the cost benefits are distorted. Converting three-wheelers and vehicles used for public transport may be a good idea, however we must be careful that people don’t get penalised in order to benefit those who own vehicles," Dr Sugathapala said.
"It should not be an issue about personal benefits, but rather, the benefits to the entire nation should be considered."
Saturday, June 7, 2008
Can SLIM go international? Taking Sri Lanka’s home grown marketing qualification to the region
The post graduate marketing diploma developed by the Sri Lanka Institute of Marketing (SLIM) could soon emerge as an international marketing qualification, in the same vein as CIM perhaps.
"Certain institutions and interested parties in India and Bangladesh wanted to linkup with us and offer our post graduate marketing diploma to their students and we tried to go online but because they did not have the necessary infrastructure in place the idea had been shelved for the time being. Currently, however, several Maldivians are following the course," said Nimal Wirasekara, Executive Director, SLIM.
The SLIM post graduate diploma is developed and updated by an elite panel of marketing professionals headed by Dr. K U Kamalgoda, the first Sri Lankan to earn a doctorate in marketing.
Dr. Kamalgoda currently chairs the Asia-Pacific Marketing Federation (AMF) of which Sri Lanka is a full member and its post graduate diploma is approved by the AMF and recognised among the member countries.
Wirasekara said that whilst there were many marketing qualifications on offer, they were more theoretical. SLIM was more practical in its orientation, with many assignments, dissertations and hands-on-experience thrown in with the theoretical aspects of marketing.
Sarath C. Fernando, Immediate Past President, SLIM, said that by 2020 the institute plans to establish its own university in marketing and the post graduate marketing diploma will be further developed as an international qualification through foreign partnerships.
"We discovered that there are markets abroad where large number of students complete their primary and secondary education and do not have the opportunity to acquire a qualification that was specific to marketing. We met with a few people abroad and laid down the ground work to link these foreign students to our qualification," he said.
Fernando believes that there is a big opportunity to expand into the region. Several interested parties in those countries in Asia have showed a keen interest in SLIM’ post graduate marketing diploma.
Fernando observes that there are new trends taking place in local and foreign markets to acquire knowledge specific to career paths that are being selected by the prospective students. For example many students are now following specialised study courses after GCE (OL) without moving along with the traditional pathway of doing the GCE (AL).
Some attend advanced level classes whilst following other specialised courses. The number of students following these specialised courses after advanced level had been increasing over the years. They collect necessary qualifications to meet their dream of becoming global citizens and like to get ready for employment in the global market.
But the signs that SLIM’s post graduate diploma could go places emerged when Buckinghamshire New University (or Bucks for short, established in 1893, so its not New) recognised the SLIM qualification for exemptions to the first semester of its MBA programme.
The 18 month MBA programme is divided into three semesters of six months each. The UK based Chartered Institute of Marketing (CIM) post graduate diploma also receives the same exemptions and this augurs well for Sri Lanka’s ‘home grown’ marketing qualification. The Bucks MBA programme can be followed here in Sri Lanka with SLIM conducting the lectures.
"SLIM having identified these trends linked up with Bucks University to help Sri Lankan youth meet their educational aspirations. SLIM has also initiated discussions with some other universities in developed countries. The existing SLIM business English and personality development course will support students to move in this direction," Fernando said.
"We need to identify and create avenues to help our youth. Acquiring knowledge and skills will provide more job opportunities for our youth in the global market, and our country will benefit on the long run when they begin to remit their earnings back to Sri Lanka. Currently, the worker remittances from abroad have become one of the largest foreign exchange earners for the country."
Elaborating on the Sri Lanka University Grants Commission approved Bucks MBA programme, Wirasekara said that the course had two competitive advantages over other MBA programmes.
"The course can be completed in just 18 months and is structured in such a way to cater to professionals who don’t have adequate time to set aside for studies. The second benefit is that the investment is less than Rs.700,000," he said. Payments can be made in three instalments.
Thursday, June 5, 2008
Is our economy in trouble? Central Bank Governor responds
Central Bank Ajith Nivard Cabraal said that inflation is too high and that the Central Bank is highly concerned about it, but said that the present economic situation was a challenging one that can be faced if right steps are taken."We are pursuing a very tight monetary policy to rein in the inflation and inflation expectation. If the Central Bank fails to tighten monetary policy by imposing tough limits on reserve money and thereby allowing the interest rate to rise, not only the industrial sector but also the whole country will face more difficulties than currently being experienced," Cabraal said.
He said that in the present context if wages were to increase it could lead to spiralling cost-push inflation as it would add up to costs of goods and services and may not result in a net-gain.
Cabraal pointed out that out of the 33 million barrels of oil imported annually, 35 percent of it was used to generate electricity and about 50 percent of it was used on transport. If the country could somehow conserve at least 3 million barrels it would amount to a savings of US $ 300 million, he said.
A full report of the interview the Central Bank Governor follows.
Q: The surge in world oil prices affects all countries and is not a problem unique to Sri Lanka. However, what will be the impact on the economy?
As you rightly mentioned the rising oil and commodity prices are affecting all countries across the globe. But the magnitude of the impact may vary from country to country depending on the domestic economic structure and the endowment of economic resources. For instance, rising oil prices will increase the income of oil exporting countries by transferring income from oil importing countries through higher import expenditure on oil imports. The international crude oil prices, which were in the range of US dollars 60-65 per barrel during May 2007 has more than doubled to US dollars 135 per barrel in May 2008. In this context, Sri Lanka as a 100 per cent oil importing country has to pay in foreign currency the double the amount spent on oil imports in 2007. However, the impact of rising import expenditure on the exchange rate is largely mitigated by the increased foreign exchange earnings from exports of goods and services, higher remittances from migrant Sri Lankans, higher capital flows to the government and concessional supplier’s credit extended by the Government of Iran. Therefore, the impact of rising oil prices on exchange rate and BOP has been mitigated to a certain extent. However, as an oil importing nation we must strive to save valuable foreign exchange by economizing the use of petroleum products and energy consumption. Currently, we import around 33 million barrels equivalent of crude and refined petroleum products annually, of which around 35 per cent is used for power generation, 50 per cent for transportations and the rest for the industrial and other purposes. If we could conserve say at least 3 million barrels per annum we could easily save a minimum of US dollars 300 million, which will help the external sector in a great way.
The government has rightly passed on the increased international prices to consumers who actually consume the petroleum products rather than giving subsidies through taxing all citizens, irrespective of who consume those products. This measure avoids the inflationary government borrowings and hence helps to rein in the future inflation and inflation expectation and avoids those who do not consume petroleum products from subsidizing petroleum users. This of course invariably lead to higher transportation cost, higher input cost and overall price increase in the economy causing higher inflation. As a result, the cost of production may increase posing a challenge to exports, which may lead to an improvement of productivity.
I must admit that the rising international oil and commodity prices have posed numerous challenges to both the Government and the Central Bank and we had to take tough decisions to deal with the emerging situation. But that has been done in order to mitigate the adverse impact that the rising oil prices would have on the economy in the medium to long term.
Q: Most people ask these days: is our economy in trouble? How would you answer as the Governor of the Central Bank?
I would say we are facing one of the toughest challenges today. But as to whether we are in trouble, I would say it is a challenge that we can face, if we take the right steps. If you carefully look at the performance of various economic fundamentals during the first few months of 2008 you will realize that there is no truth in what some politically motivated pessimists cry about the economy. However, I must admit that the current inflation is too high and that we are highly concerned about it. I am sure, you are aware that we are pursuing a very tight monetary policy to rein in the inflation and the inflationary expectation. During the first quarter, agriculture sector, industrial sector and services sector have performed well and we expect this trend to continue during the remainder of the year. For instance, during the first quarter, the export earnings increased by around 10 per cent, tea production increased by around 30 per cent, worker remittances increased by 23 per cent, both fixed line and cellular phone connections grew by around 44 per cent, total cargo handling increased by 9 per cent, the balance of payment registered a surplus of around US dollars 450 million and the gross official reserves increased to US dollars 3.5 billion. Both exchange rate and interest rates have been more stable in 2008 than in 2007. According to the 2006/2007 Household Income and Expenditure Survey conducted by the Census and Statistics Department, Sri Lanka’s poverty level has declined to 15.2 per cent compared with 26.1 per cent recorded in 1990/1991 survey. This is the true picture. So, even in a challenging environment both domestically and internationally we have been able to achieve these developments.
Q: How will industries be affected? As it is, high interest rates, tax rates are affecting them, especially the SME sector.
The Central Bank of Sri Lanka (CBSL) is fully aware of the impact of current high interest rates on the industrial sector, particularly to Small and Medium Enterprises (SMEs). However, by law we are expected to maintain economic and price stability as the first core objective of the CBSL. What it means is CBSL has a responsibility to secure low inflation in the country. Due to rapidly increasing petroleum and other essential commodity prices, and other shocks, headline inflation has been increasing beyond our expectations. Therefore, to arrest the trend of increasing inflation by avoiding the second round impacts of high headline inflation, CBSL is adopting a tight monetary policy. If the CBSL fails to tighten the monetary policy by imposing tough limits on reserve money growth and thereby allowing the interest rate to rise, not only the industrial sector but also the whole country will face more difficulties than currently being experienced. At the same time, it must also be noted that based on the industrial production survey, the cost of interest as a percentage of total cost of production is less than 5 per cent. Further, industrialists are aware that the government has granted several tax holidays and incentives and has special programs for industrial development and investment promotion. With the concerns of the development of industrial sector including SMEs, government has also taken several initiatives to mitigate the tax and interest rate issues by providing special incentives on tax and interest rates through the Board of Investment (BOI), Sri Lanka Export Development Board, Lankaputhra Development Bank and through special industrialisation programs such as "Nipayum Sri Lanka" 300 factory industry program, Gamata Karumantha regional industrialisation program and Negenahira Navodaya . Duty free concessions to import high tech machinery and equipment to enhance the production capacity of local enterprises, concessionary loans subject to a maximum of Rs.15 million at an interest rate of 10 per cent for small and medium scale garment factories situated outside the Colombo district to enable modernization, financial assistance at concessionary rates for SMEs including diary, fishery, livestock and textile industries from the National Co-operative Fund were among the Buidget-2009 proposals intended to steer SME sector.
Q: Some exporters say that our currency is over-valued and affect the value addition as inputs are imported? What are your comments?
As you know since 2001 the country adopted a floating exchange rate regime, allowing market forces greater flexibility in determining the exchange rate. Unlike previous fixed exchange rate regime, the CB has no major role in terms of exchange rate determination other than monitoring the movements of the rate. The current system is often called self-correcting, as any differences in supply and demand will automatically be adjusted by changing the existing rate. In recent months under the floating exchange regime, the Sri Lanka rupee no longer depreciates at a steady pace against major currencies but appreciates responding to market forces of supply and demand in determining the exchange rate with limited intervention by the Central Bank to mitigate excessive volatility in the market. It is usually payments required for imports of goods and services and for capital payments that constitute demand for a currency while supply of a currency is determined by the exports of goods and services, worker remittances and capital inflows. It is true that the current level of currency may appear overvalued to exporters, compared to the levels in September 2007. But this is purely due to market factors that drove the exchange rate to current level. The Central Bank is also concerned about any sharp appreciation of rupee against major currencies and therefore sometimes intervenes in the market to prevent too rapid an appreciation. If not for the Central Bank’s interventions, the exchange rate may have even been appreciated more.
Q: Inflation, high interest rates, an overvalued rupee. How is the Central Bank taking care of these issues?
This is a good question. Managing all these macroeconomic variables simultaneously is not a simple job. Not only inflation, interest rates and exchange rate, the Central Bank should also be conscious of economic stability while balancing growth. Dealing with high inflation certainly is a priority and that requires high interest rates. If not, it will further expand money supply with higher demand for goods and services leading to even higher inflation in the future. But, at the same time, we can’t squeeze the economy too much. If we do so, growth will be affected severely, while poverty may increase and unemployment may rise. If interest rates are too high, it may also conflict with our second objective, financial system stability. Therefore, we have to balance the interest rate movement, while primarily targeting inflation. You have used the term overvalued rupee. The Sri Lankan rupee has appreciated only by 0.76 per cent during this year. This is partially reflecting the depreciation of US dollar against other major international currencies. It is also due to capital flows to the country. Some people are happy with this movement, while other groups, particularly exporters, may complain that the rupee is not depreciating sufficiently. The sharp depreciation of the Sri Lankan rupee could fuel the already high inflation which could affect more adversely on interest rates, wages and cost of production. At the same time, you have to note that the prices of export commodities have increased in US dollar terms, which partly compensates rising cost of production.
Q: What can industries and the people of the country expect, apart from increasing prices, in the near future and in the long run?
As you mentioned, price increase may occur in the near future, due to external factors. But, fortunately, the situation would not remain so forever. International prices may not come down soon, but yet they would not increase at the same rate continuously. Therefore, inflation, change in prices, will diminish gradually when the impact of the current acute external shock phases out. We can now notice the impact of our past monetary policy. We are therefore now able to achieve our tight reserve money targets comfortably. Broad money growth has now decelerated to 13.7 per cent from the high levels of over 20 per cent. The same trend can be seen in growth in private sector credit. These are signs of reduced demand pressures. Core inflation is only 9.4 per cent, even though the headline inflation is much higher. Technically, headline inflation has to stabilize at the level of core inflation when the supply side impact is over. When this happens industries and people of the country can expect low interest rates. But, they have to bear with the high interest rates until the inflation trend turns the other way. Let me reiterate that the long-term prospects for the country are favourable and then we will be able to maintain a high growth, reduce unemployment, reduce poverty and reduce regional disparities further.
Q: The demand for wage increases is inevitable? How will this affect the economy?
Wage pressures are certainly a challenge for our efforts to bring inflation down. Inflation is a result of a macroeconomic imbalance. The adjustment process of this imbalance is painful. The more we avoid the pain, the less the speed of adjustment. In other words, if there are too much wage increases, it could lead to spiralling cost-push inflation. Even though, the wage earners can be happy for few months, finally it will add up to costs of goods and services and there may not be any net gain. So, everyone has to make some sacrifice, if we have to come out of this trap.
Q: Corruption and inefficiency of the state, public institutions. What kind of effect does it have on our economy?
If we first look at the second issue, that is the inefficiency, many agree that the state of some public institutions or even many of our private institutions is not at a level conducive for efficient delivery of public services. Hence, there is no doubt that the efficiency of institutions has to be improved. To do that, the identification of the causes for these inefficiencies is very important. Then only the appropriate measures could be introduced to strengthen the efficiency. If we look at the reasons, we would find that a series of factors including deficiencies in deployment of employees, issues related to managerial capabilities, problems related to attitudes, lack of willingness and ability to change, and inadequate systems, are responsible for these inefficiencies. I believe that the government and the private sector already know this situation and are in the process of implementing various programmes to improve the efficiency of public and private institutions. Separate institutions, such as Strategic Enterprises Management Agency (SEMA), have also been established for the very purpose of improving efficiency of the strategically important public institutions.
On the issue of corruption, no one will deny the fact that there may be such instances. From the time I can remember, the allegations of corruption in the public sector has been prevalent. At the same time, we should not forget the fact that we are now in the process of implementing a huge development initiative, which is essential for Sri Lanka’s growth in the future and is important facet of the development of the country. Hence, a large amount of funds associated with these projects have to be handled by the government. If that is the case, the chances of certain leakages from the process may arise and these would have to be dealt with. At the same time, I don’t think that there is any country in the world that is entirely free from corruption and if we stop all development work because there are allegations of corruptions may also have adverse repercussions in the long term.
What is important in this context is the level of corruption and the confirmation of its prevalence. We have seen that more often, various interest groups make a huge noise about the widespread corruption practices in public institutions in general and in the entire political system in particular. However, available evidence indicates that many of these allegations have not been proved to be true in all the times. Fortunately, we have relatively strong institutional mechanisms, including the judiciary, police, and Bribery and Corruption Commission, to deal with the potential corrupt practices. The Parliament is also concerned about the corruption in general. In addition, various civil groups maintain their vigilance on this issue. If all these efforts also continue strongly, we would be able to deal with corruption to a satisfactory extent.
Sri Lanka’s application for extension of GSP+ presented lucidly
When The European Union talks of human rights, analysts wonder whether the European block had ever considered the repercussions to a country like Sri Lanka should the extension of GSP+ be denied.
For a country where the trade deficit keeps widening, evermore now thanks to escalating world food and oil prices, export earnings and foreign remittances go along way to sustain an import dependent economy. The apparel sector is US$ 3 billion export industry, the biggest earner as far as exports go.
350,000 people making a living in the apparel industry, are directly employed. Add their dependents, a generous estimate would mean that a little less than a million people depend on the apparel industry.
When Sri Lanka’s new ambassador to the European Union presented his credentials to the President of the European Commission (EC), Jose Manuel Barroso, he wasted no time in doing what he was meant to do—He engaged the EC President on Sri Lanka’s application for an extension of GSP+ facilities and the unbalanced statements and mixed reactions of the European Union that had caused the country much concern, the Sri Lankan Embassy in Brussels said.
Responding to concerns raised by Barroso on developments in Sri Lanka, Sri Lanka’s Ambassador to the European Union, Ravinatha Aryasinha said that while Sri Lanka valued constructive suggestions on what could be improved, the positive developments taking place despite trying circumstances, also needed to be acknowledged.
"Unbalanced statements that disregard the context and tended to exaggerate the problems were not helpful," he told Barroso.
Taking the current debate on the extension of GSP+ facility to Sri Lanka as an example, Aryasinha said this facility kept over 350,000 in direct employment, had significantly contributed to poverty reduction, empowered women and uplifted the rural economy.
He expressed the country’s regret in what was seen as a tendency in recent statements and actions by the EU to disregard the significant achievements of Sri Lanka in relation to the environment, labour and good governance, and to singularly focus on human rights, in the context of the GSP+ review.
"Many positive aspects on human rights were glossed over, including the recent Supreme Court ruling that gave legislative backing to the International Covenant on Civil and Political Rights (ICCPR), the marked decline of violations over the past year, the prosecution of those, including security forces personnel, responsible for violations, the effort through the Presidential Commission of Inquiry to identify the perpetrators of alleged human rights abuses and the vast strides made in restoring the rights of the people of the Eastern Province through the revival of the economy and the holding of Provincial Council elections after a lapse of 20 years," Aryasinha told the EC President.
The EC President agreed on the need for providing a fair & balanced reaction on the part of the EU, and encouraged the Government of Sri Lanka to debate issues that Sri Lanka feels are under-represented or misrepresented.
"Sri Lanka must not misunderstand the expression of concerns with regard to human rights, as it was not peculiar to Sri Lanka, but was one done in good faith with all of the EU’s partners. The elections to the Eastern Provincial Council were a development in the right direction," Barroso said.
Barroso had expressed hope that the forthcoming Sri Lanka- EC Joint Commission scheduled to be held in Colombo from 9-11 June 2008 would provide a forum for a meaningful dialogue.
