Export losses of US$ 300 to 500 mn due to economic downturn

The world economic downturn could hit Sri Lankan exports with the loss amounting to anything between US$ 300 to 500 million and the tea sector is already feeling the crunch, Economic Affairs Director of the Government Peace Secretariat, Rohantha Athukorala, said. Athukorala, a professional marketer and former chairman of the Export Development Board, said that the state should provide strategic incentives for industries to exploit existing regional free trade agreements which can bridge the gap caused by declining consumer spending in the EU and US. "The budget can be used to come up with these incentives and the state should take steps to mediate and remove non-tariff barriers that impede trade rather than tinker with exchange rates to adjust to inflationary pressures," he said. According to the Asia Pacific Free Trade Agreement, 12 percent of Sri Lanka’s export lines are eligible for preferential tariff lines to China, but Athokorala says that only 5 percent is being utilized while 15 percent to the whole Asia Pacific region is not touched. "Forget the media hype of doing business in India. The private sector should be ruthless and aggressive and win in the Indian markets," he said. Consumer spending in the US was based on borrowed funds and after the housing bubble burst, consumption dropped. "Consumer spending is estimated to decline by 3 to 5 percent and sector wise volumes can drop by almost 15 percent depending on the product range and the impact on the basket of goods on US households. In September alone, 156 thousand people lost their jobs in the US," he said. The decline in US consumption, and of Europe, where the US led credit crunch spread, could threaten Sri Lankan exports significantly. Exports to the US and EU accounted for 59 percent of total exports amounting to US$ 3.8 billion in the first half of 2008. Athukorala said that 23 percent of total export proceeds came from the US with apparels dominating with 77 percent of total export revenue from the US amounting to US$ 692 million. "Apparel exports have already declined by 11.6 percent as at June 2008 with exports to the US market declining by 8.2 percent," he said, adding that a decline in US consumer spending could lead to a further decline in apparel exports. He said that analysts forecast zero to negative growth in the US economy for the first quarter of 2009 and Sri Lankan apparel exporters are bracing themselves for a tough year. "The private sector should aggressively focus on opportunities available within the region to bridge the gap. Under the free trade agreement with India, 3 million pieces of garments have duty concessions and this is yet to be utilized," Athukorala said. "Decline in consumer spending in the US, and the rest of the world, is sure to hit Sri Lankan exports, which is estimated to be around US$ 300 to 500 in lost revenue," he said. On the positive side, he said that diamonds and frozen fish are less vulnerable to the economic slowdown in the EU while apparel exports to the region grew by 16 percent during the first half of the year compared with the previous year. "However, this needs to be monitored because even with all the rescue packages in place if they are not backed by reforms to their financial markets lending may not happen in the levels that could foster economic growth in those countries," he said. The tea bubble Athokurala said the tea industry is the first to get hit by the global economic downturn. He believes Sri Lankan teas were out priced in the recent past and that the market correction was bound to happen after world commodity prices took a hit due to the credit crisis. He said that tea exporters ought to accept this reality and sell existing stock and absorb the negative impact on profits rather that incur additional stock holding costs. He urged the tea producers to reduce manufacturing costs but maintain high quality and capitalize on the fact that quality has not suffered due to the crisis. "We must develop the value added tea sector with strategic incentives to the Industry and perhaps the next budget could allocate the required moneys to the Sri Lanka Tea Board," Athukorala said. "The Industry must also inform the labour unions on the new reality so that one cannot push for unreasonable wage increases," he said. "Sometimes I feel it’s a blessing in disguise," Athukorala said, " but, the situation needs to be carefully monitored and a bail out package be prepared for the small timers and bought leaf manufacturers in the event the market does not stabilize. "We can use the strong links we have with Iran and China and ask for priority orders on a government to government basis so that we can clear the backlog. Accountable CFOs Athokorala made these observations at the National Conference of the Institute of Chartered Accountants. "What Sri Lanka requires right now is not a rubber stamp accountant who signs anything and everything but a person who is vocal to good governance and protects the company from adverse risks. "If this does not happen, Sri Lanka may also see many a Lehman brothers or Merryl Lynches of the world. The private sector must be aware that the country will not be able to take that kind of shock in the event of a financial crisis," he said.

CBSL regulations shield domestic banks from global credit crunch

Sri Lankan banks are to a great extent spared from the world economic downturn due to the sectors unsophisticated nature and vigilance of the regulator, the Central Bank, said the President of the Sri Lanka Bankers’ Association, Rajendra Theagarajah. "Sri Lankan banks are greatly spared from the financial crisis in the west because the banking industry is less sophisticated in terms of structured finance and investments in structured products and because the regulator is quite vigilant and engages local banks regularly with issues relating to prudential supervision and this has given rise to a certain amount of prudence of local banks," he told the Island Financial Review. The financial crisis began in the US and soon spread to Europe as result of aggressive lending and securitis ation of debt. "Sri Lankan banks have traditionally relied on deposits as a source for financing the commercial bank’s balance sheet with relatively low leveraging. Similarly exposures to complex foreign assets, and structures such as collateralised debt obligations, have been insignificant. "Of course, in good times we have not had a good share of the cherry which foreign investment and commercial banks have enjoyed due to taking higher level of risk but in these bad times we are far more insulated as far as the banking industry is concerned," he said. "We have benefited from regulatory reforms even before some of our neighbours. The kind of foresight the Central Bank has which may sometimes be viewed even as an irritant during good times is what shields us from economic shocks." However, Theagarajah says the global credit crunch is definitely bound to have some impact on the country’s banking sector and its impact is already being felt. "We are beginning to feel the effects of the credit crunch on the supply and demand for dollars; there is no question about it. Sri Lankan banks may find it harder to mobilize foreign bank lines to support growth and this will impact cost of bank financing," he said. Theagarajah believes there is a positive side. "From a capital market point of view, listed banks stand to gain. When all hell breaks loose in developed markets the natural tendency of those investors and fund managers is to look at less riskier markets and better run companies to invest in. "So local listed banks can be attractive and there is strong case for these banks to increase their investor communications and seize the opportunity," he said. He said the listed local banks while being relatively small in size, were better managed and engaged in prudent lending than banks in advanced countries, whose structural weaknesses were exposed as a result of the sub-prime episode. In order to attract foreign investments and bring about long term benefits to the economy Theagarajah cautions that short term policies of over-taxation of the banking sector has to be relooked. About 60 percent of the profits are taxed and after further regulatory requirement of retaining reserves for capital adequacy are created it leaves little to pay out a decent return to shareholders. "The policymakers should not sacrifice long term opportunity for short term necessity. The banking sector can be positioned as a gateway to attract Foreign Investment into Sri Lanka through the capital market. The sector is somewhat the darling of the stock market and represents a better regulated industry, well run and managed. "This is where reconciliation has to take place between seeking short term revenue collection against long term opportunities," Theagarajah said. He expects the global economy to slowdown further in 2009 and 2010 which will impact on opportunities for Sri Lanka’s banking and corporate sectors. "However, we are looking optimistically at the revival of the East and a permanent solution in the North as they will create opportunities for domestic development. We will look to the future optimism and proceed with a degree of caution." Commenting on the Central Bank’s decision to cut the statutory reserve requirement (SRR) last week, he said that it was a welcome move by the regulator. "We already see the impact with the reduction of overnight interbank rates coming down to the 14 to15 percent range from the 19 to 20 percent range. It is hoped this will cascade into a reduction of medium term rates as well. "The reverse repo window can now be accessed ten times a month and this gives banks a bit more breathing space they need. It will reduce volatility in the interbank market and stabilize rates," Theagarajah said. With interest rates expected to decline this could pose a problem for those who applied for housing loans in the recent past because rates are fixed in most cases. High inflation in Sri Lanka has been around but the phenomenon in world commodity prices over the last 12 months have accentuated the problem and the result has been a downside on consumption. "Inflation together with high interest rates puts pressure on corporate margins. The positive sign was the significant reduction in price of oil which has dropped to the $ 70’s level against the $ 140 + levels prevailing during the first half of this year. "This will hopefully reduce the Lankan import bill and have a positive impact on trade deficit," Theagarajah said. He said that loan repayments have been affected and many banks are now focused on consolidating and monitoring their loan books while recovering loans, leaving credit expansion for better days to come.

BoC maiden debenture a certain success - MBSL

The Bank of Ceylon maiden debenture issue is tipped to be a success partly because the bank is 100 percent owned and backed by the state, said the managers of the issue, Merchant Bank of Sri Lanka PLC (MBSL), who are confident it would enjoy the same success as Janashakthi Insurance when they entered the stock exchange earlier this year. The insurance companies initial offering of 16.5 million shares had been oversubscribed four times-over and the second offering, also of 16.5 million shares, had been oversubscribed within the first three and half hours on its opening day. The insurance company had collected around Rs. 900 million. The Chairman of MBSL said obscene corporate governance and the failure of capitalism had led to the breakdown of western financial systems with many banks and financial institutions being taken over by the governments of the EU and US. "Many said that socialism failed but the world economic situation today shows that capitalism has failed too. The trend is for governments to takeover banks and I think this will soon be the case in Asia as well," Head of MBSL Janaka Ratnayake said. He made these comments to the Island Financial Review after state-owned Bank of Ceylon announced it would raise Rs.3 billion Unsecured Subordinated Redeemable Five Year Debentures which will be listed on the main board of the Colombo Stock Exchange. If oversubscribed, the bank has an option to raise another Rs.2 billion and take the total to Rs.5 billion. Apart from the bank’s strong financial position MBSL, manager, sponsor and registrar of the bank’s debut at the capital market, believes the bank’s strength lies in the fact that it is 100 percent state-owned and depositors’ funds are guaranteed. Meanwhile, the Chief Financial Officer of Bank of Ceylon, Saliya Rajakaruna, believes that interests will come down in the future. The Central Bank has already relaxed the reverse repo window allowing the commercial banks to borrow overnight funds from the Central Bank at cheaper rates than the interbank rate 10 times a month from three. The Statutory Reserve Ration has also been lowered to 9.25 percent which, according to the Central Bank, will inject additional liquidity amounting to Rs. 7.5 billion. "The Reserve Bank of India reduced SRR from 10 percent to 9 percent and then brought it down to 6 percent. It is possible that the Central Bank too will follow a similar trajectory. "As a result we can expect interest rates to come down in the future which will make the BOC Debenture a profitable investment," Rajakaruna said. BOC debenture comes in three types. One gives an annual return of 19 percent paid yearly. Another has a floating rate of return which is the weighted average 6 months Treasury bill rate + 0.75 and paid bi-annually. The third option will not pay a return until maturity where Rs.225 is paid for every Rs.100 invested in the debenture. As at 30 June 2006, BOC’s loan portfolio amounted to almost Rs. 185 billion with loans to the government amounting to Rs. 89.7 billion (48.6 percent). For the same period in 2007, loans to government amounted to 46.7 percent (Rs. 137 billion) of Rs. 294 billion. This year, loans to government amounted to 42.3 percent (Rs.126 billion) of Rs. 298 billion. "Government exposure is a concern but it is on the decline," Rajakaruna told journalists. BOC recorded strong deposit growth. In 2003 the deposit base amounted to Rs. 186 billion, in 2007, 306 billion. In 2002, the bank’s non performing loans (NPL) amounted to almost Rs. 17.5 billion, 23.9 percent of total loans. However, NPLs have declined steadily to record less than Rs. 5 billion in 2007 to 5.5 percent of total loans. NPLs peaked at 7.1 percent in March this year but by June had come down to 4.8 percent. Rajakaruna expects NPL’s to consolidate around this range, hovering around the Rs. 5 billion mark. He said the debenture issue is to strengthen BOC’s tier II capital base so as to be able to generate more credit for future expansion projects in the area of infrastructure development. He said, however, that Rs. 2 billion is being earmarked to capitalize its branch in London which will function as a subsidiary of BOC and be regulated by the Financial Systems Authority of the UK. "Being a branch of BOC, the London office did not require separate capital as it had recourse to BOC’s capital. However, the Financial Systems Authority (FSA) will evaluate the branch and will authorize it to expand its business-lines and depending on what they allow us to do the investment will be made accordingly," he said. The London branch does not give loans and it is seeking to begin credit operations and trade services with FSA approval. According to BOC sources, for the past two years or so the FSA had been asking the BOC Branch to build up necessary capital in order to be allowed to expand its operations. MBSL CEO, Gamini Karunathileka, said that BOC had the option to raise the capital through a private placement which would have been less costly with speedy results. "BOC decided to go for a public offering through debentures because it felt that the capital market in Sri Lanka needs more maturity and that ordinary people need to be given the advantage making an investment in the capital market," he said. A debenture is priced at Rs.100 and the minimum investment is Rs.10,000 for 100 debentures. "This clearly reflects that the targeted group is broad based, giving small investors an opportunity," Karunathileka said.

CSE would remain a low risk stable destination

The Director General of the Securities and Exchange Commission says the current crisis faced by capital markets across the world could place Sri Lanka’s stock exchange as a low risk stable destination for foreign investors who bail out from falling exchanges. "Due to its small size the Colombo Stock Exchange (CSE) has performed relatively satisfactorily during the crisis which has seen exchanges in 10 countries in the region record more than 50 percent losses year-to-date as against an 18 percent fall the CSE has experienced," Channa De Silva told the Island Financial Review. De Silva says that the CSE’s relatively better run is attributed to the fact that foreign investments in the exchange are not very significant, resulting in the exchange being less susceptible to losses as a result of mass-scale selling to exit the market. While US exchanges recorded 31 percent losses, exchanges in countries such as China and India who had recorded phenomenal growth last year recorded year-to-date losses of 59 percent and 53 percent respectively. "This is because there is a strong correlation between the US markets and markets in these countries which resulted in bigger losses in response to the downturn in the US capital markets," De Silva says. Exchanges in Russia, Indonesia, Ukraine and Romania had recorded phenomenal growth last year and had to suspend trading last week to prevent market collapse after investors sought to bail out. The CSE’s lackluster performance last year had prevented investors making investments in the exchange riding on the credit bubble of the US and Europe and is thus shielded to a great extent from overselling induced losses. "Investors could now look at the CSE as a low risk, stable exchange to place an investment," De Silva said. Director Research, Lanka Orix Securities (Pvt) Ltd, Vajira Premawardhana, says that the CSE is experiencing a slight downturn because of selling pressure, but it was difficult to gauge at this stage what the full impact of the global financial crisis would have on the CSE. "We do not see a direct impact on the CSE, although a few foreign buyers may want to offload their shares," he said. Premawardhana believes, however, that some local investors were selling off shares in the face of the global crisis to be able to buy more shares when prices are down. "It’s a self fulfilling prophecy really, we see some investors selling shares because of global conditions but with the intension buying back more shares at the depressed prices," he said. He said that the CSE was now attractive place for those who are risk-takers. "They have the nerve to hold on hoping that things will improve and especially that peace will come soon to Sri Lanka," Premawardhana said.

Sri Lanka likely to feel some tremors of global financial crisis – IPS report

"Sri Lanka is bound to start feeling some of the impacts of a slowdown in the global economy—not only through trade flows but also through financial and investment links—while having to continuously grapple with international commodity prices," says a report released by the Institute of Policy Studies (IPS). The fall in US consumption, a result of the credit crunch which saw the US government raise US$ 700 billion in an attempt to bail out its financial system, is not entirely discouraging for Sri Lanka says the report, ‘Sri Lanka: State of the Economy 2008’. It says that asset price falls in the US will effect consumption of durable goods to a greater extent than non-durable goods. "The majority of Sri Lanka’s exports to the US are non-durable goods, particularly apparels (which accounts for 81 percent of Sri Lanka’s exports to the US)," the report says. About 25 percent of Sri Lanka’s exports in 2007 was to the US, and although declining the US remains the biggest market for apparels. The report says that according to the US Bureau of Economic Analysis statistics, consumption of durable goods fell by 1.5 percent between the fourth quarter of 2007 and first quarter of 2008, while consumption of non-durables fell by 0.3 percent. However, expenditure on clothes and shoes increased by 0.2 percent. But the report raised concerns that non-durable consumption growth in the US has slowed down significantly since 2007. When the report was prepared it was too early to predict the economic crisis the EU is in now. In 2007, about 37 percent of Sri Lanka’s exports were to the EU with a third of these to the UK. The slowdown of UK’s economy and its shaky financial system is a major concern for Sri Lanka as the report says that the country’s housing bubble had been larger than that in the US. "The financial sector (in the UK) has been adversely affected, reflected by declining equity prices on major financial institutions. "As the financial sector is the engine of the UK economy a decline will have ripple effects across its economy," the report says. Earlier this year, many multilateral institutions and economists believed that developing countries no longer relied on developed countries as a result of the emergence of China and India as economic powerhouses. However, the IPS report says that some countries, including Sri Lanka, continued to rely on developed countries for export markets. "Financial markets in Sri Lanka are largely unaffected by the sub-prime crisis," the report says. "The major impact of a downturn in advanced economies is likely to be transmitted through the trade channels," the report said. Boosting intraregional trade and enhancing links to ASEAN and China is viewed by many economists and analysts as a way of minimizing the impact of declining exports to the US and EU and to gain lost ground or even more. FDIs However, it says that foreign directed investments (FDI) could be constrained in the short term as access to capital has declined together with the risk appetite of investors tempering in the short run. "However, encouragingly for Sri Lanka, FDI in the recent past has been dominated by developing nations- particularly Malaysia and India," it says. The report goes on to say that the continued dominance of emerging economies and the down-turn in developed markets could shift investments from developed markets towards developing economies in the short term. Foreign commercial borrowings However, the government’s trend to resort to foreign commercial borrowings, in the face of dwindling aid as Sri Lanka is no longer classified a low-income country, has raised concerns that the country’s vulnerability to external shock has been increased. "With domestic rates high foreign borrowing may be cheaper for the government," the report says. It could also mitigate the upward movement of interest rates by not demanding for domestic credit. The report says, however, that the dominance of foreign debts will require that Sri Lanka repays a large sum of money in one payment at a fixed date. With the global financial crisis, raising foreign commercial loans to service these debts is going to be costly. Long term commercial borrowing increased from US$ 56 million in 2004 to US$ 630 million in 2007, the report says. "With further pressure on government finances, the government decided to further expand sources of external finance by allowing foreign purchases of up to 5 percent of the value of outstanding Treasury bonds in 2006," it says. In December 2007 the limit was expanded to 10 percent. "By the end of 2007, investment in Treasury bonds reached US$ 373 million (more than the total multilateral aid received by Sri Lanka in 2007). "The maturity of these bonds was between 2 to 11 years and the average yield was 14 percent," the report says. In 2006, the government raised US$ 680 million through dollar bonds maturing in 2 to 3 years and syndicate loan. The sovereign debt issue of US$ 500 million is to be repaid in 5 years at 8.25 percent. The government has raised about US$ 800 million from foreign sources this year and hopes to raise a further US$ 300 million syndicate loan. "The share of foreign financing of the budget deficit has increased from 2.5 percent of GDP in 2006 to 3.7 percent in 2007, where the bulk of the increase has come by way of loans rather than grants," the report says. The report says the government’s strategy is to push ahead with easing the infrastructure bottlenecks impeding growth while continuing to spend on security, education and agriculture. It says that balancing these expenditures with medium term debt exposure is not without its pitfalls. "The prudent course has to be to restructure spending in other areas in order to minimize Sri Lanka’s recourse to costly borrowing," the report suggests.

*International prices yet volatile, stability required Too early to reduce domestic fuel prices - Fowzie

Petroleum Minister A. H. M. Fowzie says it is too soon to reduce domestic petroleum prices until world market prices moderate to a stable range. "Prices are still volatile and we don’t want to reduce prices yet until we can be sure world prices will remain at the low levels they are today," he told the Island Financial Review. He said, however, that he hoped to revise prices within three weeks time if not the 2009 budget is expected to propose a downward revision when it comes up for debate in parliament in November. "At the moment we are making a profit of about Rs. 6 to a litre and this is not a significant benefit we can pass on to the people. We have to be able to make a significant downward revision if we are to demand reductions in transportation costs and other related prices that are affected by oil prices," Fowzie said. "If we reduce prices now we would lose what little profits we are making at the moment," he said. Chairman of the Ceylon Petroleum Corporation Ashantha De Mel said that prices can only be revised when the 2009 budget is passed. "The government subsidized fuel for the first eight months of the year and we made a Rs. 23 billion loss, so we cannot immediately reduce prices unless the government says so in the budget," de Mel told the Island Financial Review. He said that oil prices are expected to increase in coming months. The Asian Development Bank said last month that oil prices, peaking at US $ 148 a barrel earlier this year, currently below US$ 95, is expected to remain high and volatile. "The recent drop in oil prices will be short lived," the multilateral bank said. When the government decided to cut fuel subsidies Naoko Ishii, Country Manager, World Bank commended the decision to do so. "The decision was extremely difficult but if it was not done it could have lead to a widening of the fiscal deficit which would lead to an increase in public debt and taxation," she said at the Sri Lanka Economic Summit organised by the Ceylon Chamber of Commerce earlier this year. Economists believe that subsidies should be removed as it tended to benefit those who did not need it, while such benefits are better targeted to those who do. The fuel subsidy benefited the rich who could afford vehicles at the expense of the poor.p "The annual consumption of fuel is about 2,500 million litres and out of this public transport and freight accounts for only 800 million litres. The balance is consumed by private vehicles," Prof Kamal S. Kumarage, Chairman, National Transport Commission (NTC), told the Island Financial Review earlier this year. Targeting welfare and subsidies to those who need them is an issue in this country. Consider for example the Samurdhi programme, a welfare programme designed to take people out of poverty. The Central Bank Annual Report 2007 says that previously about 40 percent of the population received Samurdhi relief although the existing poverty level is around 15.2 percent. A new selection process was adopted in 2007, but the Central Bank says that an estimated 38 percent received welfare benefits. The total allocation for the Samurdhi programme in 2007 was about Rs. 9.6 billion. In 2006 it was about Rs. 12.1 billion and averaged around Rs. 10 billion a year since 2002. "Given the high budgetary cost of the programme, it is necessary to link the poor to properly designed safety ropes programmes to enable them to exit poverty. "It is time now to revisit the Samurdhi programme with improving it on the basis of the ultimate goal of eradicating poverty," the Central Bank said. Fertilizer subsidies to farmers are also criticized for not reaching the farmers directly. While the government spends on education, health, subsidies and welfare they are not sufficiently targeted to those who need them the most. Sixty percent of the population received some stipend from the budget allocations in the form of subsidies or welfare, Dr. R. M. K. Ratnayake, Secretary, Ministry of Trade and Marketing Development, Cooperative and Consumer services, said at the annual sessions of the Sri Lanka Economic Association last month. "This is wasteful and the public ought to debate these issues. They seem to be afraid to talk about these things," he said.

Trade success depends on bribing Customs officers?

A family owned company engaged in imports said that it tried to conduct its business activities without having to bribe Customs officials but had to quit as the company made more losses as a result. "For about eight months we tried to carry out our dealings with Customs without having to pay bribes to get our goods cleared. But we could not continue to do so any longer. "It became increasingly difficult for us to clear goods on time and we had to pay arbitrary duties which made our products more expensive than our competitors," a director of the company told the Island Financial Review on the sidelines of a seminar on Building Integrity and Transparency in Business Relationships organised by transparency international. It was done in such a way that it all seemed legal. "They would openly ask for a bribe for about Rs. 15,000 or Rs. 20,000 and when we refuse it they tell us that the consignment has to undergo a full inspection resulting in a delay which goes on for days. "Sometimes when our documents are submitted for clearing the goods along with the bank cashier’s order for the Customs duty, we are told that the calculations are incorrect or that some new rule or the other had been introduced. "If I had to pay Customs Rs. 500,000 they would tell me that it should be Rs. 900,000. But this problem can be taken care of with a bribe," he said. He also happened to be a member of the Sri Lanka Institute of Directors and we asked him what measures the institute was taking. "Giving bribes to Custom officials is nothing new and I have seen many big companies clear their goods without any hassle at the docks and since our company began to tow the line we have had no problems whatsoever. "The institute asked me to participate in this seminar and we need to work together to fight bribery because alone we will be ineffective and our businesses suffer," he said. During the eight months the company tried to go ‘bribe-free’ it saw its competitors release goods into the market before they did and at much cheaper prices. So clearly, the incentive to satisfy one’s conscience is not a luxury that many can afford. Custom Chief’s response Sri Lanka Customs Director General Sarath Jayatilake said that this is a big problem they encounter. "Bu the culprits are probably the wharf clerks and not the customs officials and we have come across incidents where they inform Customs that a consignment is not in order and that it should be held for inspection. "Many confuse the wharf clerks with customs officials. They are free-lance agents who facilitate the port clearance procedures on behalf of the importer. They may be soliciting bribes to speed up the process. But we have not received any complaints," Jayatilake said. Jayatilake said that no complaints had been made and that it was unclear as to what extent bribery was prevalent. "We have come across instances where importers had colluded with some Custom officials to clear goods unlawfully. "There are instances where big multinationals under-invoice their consignments through Royalty payments, dividends and transfer prices. "Some importers open up LC’s with one bank while the payment is made through another bank, and when they clear the goods they present the document with the lesser value so as to minimize the duty. "But we have computerized our processes, we can now track the whole process," he said.

Eastern China - a huge market for Sri Lankan exports

The National Chamber of Commerce of Sri Lanka (NCCSL) recens signed cooperation agreement with four provinces in China. The agreements were signed with the regional offices of the China Council for Promotion of International Trade (CCPIT) in the provinces of Jiangsu, Fujian, Hunan and Anhui in Eastern China, the Foreign Ministry said in a statement. The chamber was successful in negotiating with officials from Fujian to train Sri Lankan experts in producing green tea. A Chinese trade delegation from these provinces is expected to visit Sri Lanka later this year. According to the Foreign Ministry, trade between Sri Lanka and the Jiangsu province amounted to US$ 200 million in 2007 and US$ 47 million for the first quarter of this year. Textiles, chemicals, paper and vegetables are the provinces main exports to the island while Sri Lanka’s exports to the province are mainly fibre, rubber and transformers. The Fujian province has 34 counties that make up special economic development zones. The population of the four provinces combined is about 238 million, a huge market for Sri Lankan exporters to exploit. An official of the Export Development told the Island Financial Review that total exports to China in 2007 amounted to US$ 36 million (0.5 percent of total exports to all countries) and imports amounted to US$ 921 million (8 percent of total imports from all countries). About 23 percent of exports are in Tea. China is expected to consider granting more concessions to Sri Lanka under the Asia Pacific Trade Agreement. During the recently concluded First South Asia Economic Summit, the question was raised as to whether the region was ready to face China after quotas restricting its exports are lifted next year. While the South Asian Free Trade Agreement is virtually non-existent, the Summit realized that integration is the only way the region could survive the swarm of Chinese goods which will hit US and EU markets at cheaper prices. Trade statistics showed that India demonstrated a keenness to establish links with the ASEAN trade-block, which enjoyed closer links with China. The summit discussed that despite the fact that integration could give the region better bargaining powers, the seeming preference of India to grow ties with ASEAN rather than with SAARC, could, however, present an opportunity for other South Asian countries to provide supply chain services to India. In 2006, India’s trade with SAARC amounted to 2.8 percent while trade with East Asia amounted to 24.9 percent. Sri Lanka’s trade with SAARC amounted to 19 percent while trade with East Asia amounted to 22.1 percent in 2006. High tariffs, non-tariff barriers and high transportation costs resulting from political wrangling in the region has prevented the effectiveness of SAFTA and with exception of Nepal (no statistics were presented for Afghanistan and Bhutan) the rest of South Asia had more trade with ASEAN than with SAARC. Nepal, a landlocked country, along with Bhutan and Afghanistan (along with the lagging impoverished provinces of India, Pakistan and Bangladesh), depend on the rest of the region to open up borders through transportation and trade linkages so that their people too could benefit from the East Asian connections (if SAFTA fails).

Inflation down in August Interest and exchange rates cause concern

Inflation dipped further in August to 24.9 percent the Central Bank announced last week. In July the point-to-point change in the Colombo Consumers’ Price Index (CCPI) recorded 26.6 percent. In January 2008 the inflation rate was 20.8 percent and it peaked in May at 28.2 percent when world food prices and oil prices increased sharply. The Central Bank always maintained that these prices would ease after July, and as such a decrease in the inflation rate can be seen. An official of the Census and Statistics Department said that domestic food prices have remained static for the most part while vegetables and rice price increases had declined according to expected seasonal trends with the Yala season and the harvesting of other vegetable crops. The new index, introduced this year, is based on expenditure survey of the Greater Colombo area in 2002. The basket of goods that cost Rs.100 then, costs Rs. 206.3 in August 2008 (Rs. 206.4 in July, Rs. 205.9 in June, Rs.198.5 in May, 2008 and Rs. 183.5 in January 2008). In the new index, food items are given a weight of 46.71 percent, where as in the old index, food items consisted of 68.3 percent of total expenditure based on a survey in 1952 survey. The weights for the selected goods had been recommended by a technical committee appointed by the Treasury which prompted some analysts to call it a ‘cooked-up’ inflation index. While the Central Bank continued with its tight monetary policy to curb the expansion of domestic credit resulting in high interest rates, manufacturers are finding it extremely difficult to maintain their competitiveness as working capital costs are high. While both interest rates and inflation rates erode into margins, the exchange rate does not reflect the trade balance. The two rates have steadily increased over the past months, while the exchange rate has more or less stagnated. The export community has accused the Central Bank of controlling the rupee instead of allowing it to depreciate, like it should, according to the trade balance. Although the trade deficit keeps widening, the Central Bank maintains that other foreign currency inflows (FDIs, grants, worker remittances etc) threaten to appreciate the rupee and that the bank has so far recorded a net-buy of dollars to prevent the extreme appreciation of the rupee. The Central Bank last month began to use its own securities when it depleted it stock Treasury bills which is generally used to mop up excessive liquidity in the market. The bank had issued Rs. 8 billion in Central Bank Securities by mid August depending on the foreign exchange inflows will continue doing so. When foreign currency inflows increase, liquidity of the money market increases correspondingly. The Central Bank then auctions its Treasury bills to mop up the excessive liquidity of the market. But Sri Lanka is heavily dependent on imports, so while on the long run, a depreciated rupee could improve the country’s export sector, create employment and bring development, on the short run it may spike food prices even further and the poor could suffer immense hardships. According to Food and Agriculture Organisation (FAO) a record harvest is expected for grains this year, but the high prices will remain. Quoting the FAO, ADB Country Director Richard Vokes said that the production prospects for cereals was good after rice prices increased by almost 100 percent and wheat by 130 percent between the later stages of 2007 and May 2008. "The FAO predicts a bumper harvest and although cereals and other commodities have started to ease since April, the high prices will remain and we may not see the former price levels again," he said, addressing the session on Managing the Food Prices Crisis at the first South Asia Economic Summit. An estimated 40 percent of the world’s poor is homed South Asia and they are more vulnerable to increases in food prices. "Food constitutes 65 percent of the consumption basket of South Asian households and soaring food prices are pushing many of them into poverty and malnutrition. "An estimated half a million people are severely affected by the crisis. An ADB study shows that a 10 percent increase in food prices will push some 7 million into poverty in Pakistan," Vokes said. He called for the need for countries to invest in their agricultural sectors and formulate projects to increase production, develop technologies and manage climatic and disease related risks. The First South Asia Economic Summit issued a declaration at the end of the sessions and said that food price inflation is a major concern for the region. It said that countries should expand existing social assistance programmes that directly targeted the poor who most vulnerable to food price hikes. "These programmes could be expanded by increasing the amount of cash transfers and the number of people receiving low cost grains while still passing the price increase to other domestic consumers who can better afford it, and this is where targeting becomes crucial," the declaration said. The Summit resolved to monitor and pressurize the SAARC process in implementing strategies to improve regional cooperation, where technology transfers and resources can be shared to increase agrarian productivity, give lagging regions access to markets and where a seed bank could be established for the region, as against a food bank which was proposed in 1988 of which no country gained a grain of salt.

Sri Lanka envisioned as maritime hub for the region

A recent study, one among a galaxy of studies on the South Asian transportation, shows that if inland connectivity in the region is developed, Sri Lanka could play the role of the region’s maritime hub, and all countries stood to gain. This is according to a working paper published by the Research and Information System for Developing Countries (RIS) of India, titled ‘Restoring Afghanistan-Pakistan-India-Bangladesh-Myanmar (APIBM) Corridor: Towards a New Silk Route in Asia. Prabir De, Fellow, RIS, made this observation at the First South Asia Economic Summit in Colombo last week. He said that 74 percent of the SAARC region’s intra-regional trade potential is yet to be realized. "In 2006 intra-regional trade amounted to US$ 10.48 billion whereas the potential is estimated at US$ 40 billion," De said. This is attributed to high trade barriers, tariff and non-tariff, poor transportation links, inadequate trade facilitation links (measure that would reduce or eliminate non-tariff barriers) and the lack of supply capabilities of the least developed countries of the region. "In Asia, transport costs outweigh tariffs in the region. Fuel surcharges on sea freight increased from US$ 455 in January 2007 to US$ 1,130 in July 2008 and it continues to rise, hurting manufacturers in the developing world. "South Asian countries are paying more towards trade transportation costs compared to custom tariffs," he said. Transport Policy Advisor Bangladesh Planning Commission, said that according to the SAARC Regional Multimodal Transport Study (SRMTS), 10 sea ports had been indentified for priority attention, with Colombo identified as the hub port for the region. The First South Asia Summit identified the need to improve custom procedure in the region and reduce administrative barriers in ports and provide land locked countries and lagging regions with easy access to ports. However, developing a regional inland transportation network has to overcome the intelligence concerns of each country, which has led to the non-implementation of proposals in the SRMTS report, commissioned by the New Delhi SAARC Leaders’ Summit in 2004. However, the South Asia Economic Summit passed a declaration that a report will be prepared on the summits progress in terms of influencing policies with their academic findings by its next installment in India next year. Transport connectivity is vital to lift the least developed countries and lagging regions out of poverty. While South Asia is said to be one of the fastest growing regions in the world, the growth is not inclusive and 40 percent of the world’s poor call South Asia their home.

Democracy essential to combat poverty

An eminent economist said that in order for democracy to be sustained and for poverty to be effectively combated in the South Asian region empowerment of the region’s poor was of paramount importance. "We need to give substance to the idea of peoples empowerment and not just use it as a slogan," Rehman Sobhan, Chairman, Centre for Policy Dialogue, Bangladesh said. Sobhan delivered the keynote address ‘A Vision for South Asia’ at the inaugural session of the first South Asia Economic Summit: SAFTA and Beyond last Thursday. "The poor of the region remain disempowered due to their unequal command over economic and political resources. This drives them into relations of subordination and dependency on those who monopolise resources," he said. He suggested several policy measures which, through interventions and institutional reforms, can address these "injustices". Broadening the ownership of assets, enhancing the capacity of the poor to participate more competitively in the market place, democratizing educational opportunities, giving strength to the voice of the poor and enabling them to participate in the process and institutions of governance were the basic but critical measures Sobhan highlighted. Sobhan said that the instability of the region could be addressed through these measures, where the most violent and long standing of the region’s insurgencies have been in the least developed parts of the countries in the region. "The resort to violence originates not just in the poverty of the rural poor, but in their deep sense of disempowerment and alienation caused by their marginalization from the opportunities for development and exclusion from the institutions of governance." He stressed the need of broadening land ownership among the poor, particularly in the agrarian sector. "Small agrarian households can be empowered through collective action to realise the external economies available to bigger farmers. Groups of landless households could be incorporated to own and operate tube wells or farm machinery and market these services to other small farmers. "Crops can be collectively stored and communities can as a whole negotiate better prices, own transportation facilities and use IT facilities to track the market," he said. Citing Bangladesh’s Garmeen Bank as an example, Sobhan suggested that the poor can be given the opportunity to own corporate wealth. "Seven million households own Grameen Bank. This is not only the largest microfinance institution of the world but is also one of the largest commercial banks in Bangladesh. "In 2007, the bank dispersed over US$ 729 million to 7.5 million borrowers with a recovery rate of around 99 percent. Grameen Bank holds a 38 percent equity stake in Bangladesh’s largest corporate entity, Grameen Phone, which has around 20 million subscribers and a market capitalization of US$ 3.5 billion." Sobhan cited several other examples of corporate ownership of the poor which included stock option plans to workers. He said however, that promoting ownership in the corporate sector should not be viewed as charity. "Ownership of equity of the poor can be financed through institutional credit in the same way purchase of shares by the rich is leveraged by bank finance. The Poor of South Asia have already proved their credit worthiness and should be no less entitled to financial support than the rich."

Sound macro economic fundamentals needed to benefit from trade

The Assistant Director of the Department of Commerce said that that trade instruments alone are not enough to bring about economic growth. Saman Udagedara told the Island Financial Review that while trade instruments such as free trade agreements give greater market access to our exporters, an environment conducive enough to enable them to expand their production base was prerequisite for sustainable development of the export sector. "Our exporters are facing difficulties because of weak infrastructure facilities, a harsh investment climate where inflation and interest rates are high and high energy costs. The government is doing all it can to address these issues," he said. Udagedara pointed out that a major obstacle for the success of the Indo-Lanka Comprehensive Economic Partnership Agreement (ILCEPA) was high inflation rate and interest rates in Sri Lanka compared to India, which would make production costs in Sri Lanka high. Former Chairman of the Ceylon National Chamber of Industries, K. C. Vignarajah, said that the issues many industrialists had expressed with regard to ILCEPA were minor compared to the issues brought about by the country’s skewed macro economic fundamentals.  "The added value and export industries and services are faced with tremendous disadvantages. Many factories have closed, and many more will closedown soon, unless the Macro Economic factors are corrected forthwith," he said.  "The Macro Economic factors have to be correct and Good Governance Infrastructure structures in place before ILCEPA can be effective for Sri Lanka. ILCEPA is a great advantage if these are corrected," Vignarajah said.  "ILCEPA is an endeavour to offer advantages to our industrialists and service providers by giving them easy access to an expanded market of 1 billion people, through liberalized tariffs."  "However it is negated by the highly disparate inflation rate, interest rate regime, and the lopsided real exchange rate of the Sri Lankan Rupee which is over valued by about 12 to 13 percent," he said.  "For example, an exporter adding value of US $ 300,000 a month is suffering a setback of about Rs. 4.5 million a month. This is a serious disadvantage," he stressed.   "The forward exchange rate a few months ago per US $ 1 was Rs. 122 while the spot rate was Rs. 114. Now the spot rate is only 107. This amounts to a loss, at Rs. 7 per Dollar (spot), of Rs. 2.1 million, per month or if the natural rate was permitted a loss of Rs. 15/- per Dollar (Rs. 4.5 million per month)."  "The intervention by the Central Bank was to borrow hundreds of millions of U.S. Dollars to boost the currency reserves, to artificially appreciate the Rupee, to make imports cheaper, to facilitate taking out Foreign Exchange, while paying much less to exporters who have to face highest rates of Inflation, Interest rates, Electricity, Transportations and Fuel costs all of which cost much higher than our competing countries," he said.  Vignarajah went on to say that in the EU block, the Bundesburg and the Bank of England monitor the Macro Economic factors very carefully and are very sensitive to any slight changes in them and take immediate corrective action.  "The strength and benefits of the EU are there for all to see. Ireland, the poor relation of Europe at one time is now one of the most prosperous nations with a high growth," he said.  Commenting on the CNCI seminar on ILCEPA, Vignarajah said that the frequent comment of the industrialists were that while the Indians had leaders and officials who were really patriotic, the Sri Lankan counterparts were pathetically deficient, self centered and could not be trusted.  "Too broad a brush has been used. But when you reflect on the larger issues, the lack of wisdom in our so called leaders and lack of civil society activism (admittedly a great society otherwise) to correct these errant, self centered power hungry coterie is evident over the last few decades," he said.  When Sri Lankan exports lose its competitiveness the result is that workers are forced to seek jobs overseas.