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.

Justifying the SAARC Summit

Many ask what Sri Lanka received from hosting the 15th SAARC Summit in Colombo. Nawaz Rajabdeen, Vice President of the SAARC Chamber of Commerce and President of the Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL) said the benefits were many. "As an international observer, I have come across many people who used to ask ‘what have we received from the SAARC Summit?’ I often used to respond that it was the intangible benefits which cannot be quantified and not the tangible benefits which can be quantified. "The fact of the matter is, I believe with deep conviction, that the relations and friendship as well as the trust the host would establish with the so called ‘guests’ i.e. global investors, could not be quantified but could be used in many ways," he said. He said that in the medium to long term the benefits would be manifest when investments, FDIs, FIIs, international joint ventures, mergers and partnerships and promotion of trade come in to the country as a result for having played the gracious host. "The total cost of the SAARC Summit is estimated to have been in the vicinity of USD 30 million. It is important to note that 86 percent of the total budget of the SAARC was expended for capital expenditure," Rajabdeen said, quoting Foreign Ministry officials. He noted that because of the Colombo SAARC Summit selected roads and highways had been restored and rehabilitated along with a few institutions such as the BMICH and the Ministry of Foreign Affairs. Economic benefits The Agreement on South Asian Regional Standards Organization was signed at the 15th SAARC Summit. "The intrinsic benefits of this initiative would be that the standards of the goods and services would be consonant with each of the countries, thus increasing bilateral and multilateral trade. Also, the standardization would reduce the cost of production as well," Rajabdeen said. The Summit addressed and mapped out the operational aspects and other related issues of the South Asian Free Trade Agreement (SAFTA). "The region is less integrated than many other regions in the world. Total intra-regional trade is still a mere 5.3 percent where as other similar regional blocs have intra-regional trade ranging from 25 to 65 percent," he said. "Despite the fact that the SAARC region is home to 24 percent of the world’s people, the share of the global GDP is a mere 2.8 percent." Rajabdeen said that the opportunities and economic vistas open to the region, as well as to Sri Lanka, as a result of integration should be exploited. "The Iran-Pakistan-India trilateral gas pipeline and hydropower projects, which are in the planning stages, would be beneficial to Sri Lanka once they become operational. "The newest member of SAARC, Afghanistan, would offer unprecedented opportunities for development of the country and Sri Lanka could leverage these opportunities and offer employment to Sri Lankans to be engaged in the construction sector in Afghanistan. Rajabdeen said that tourist arrivals had improved because the SAARC Summit showed that the country was safe to visitors. "The best and most efficacious course of action to counter, so called, travel advisories issued by certain countries would be to globally demonstrate the stability and safety of the country than to counter them with responses and rejoinders," he said, adding that the Colombo Summit did just that. Again quoting Foreign Ministry officials, he said that over 20 bilateral meetings between the leadership of Sri Lanka and, member states of SAARC and observer states took place on the margins of the Summit while other countries too engaged in about 30 bilateral with each other. "It is needless to state that such meetings on the side lines of the SAARC Summit in Colombo would convincingly reflect the stability, peace, safety and capacity of the city of Colombo and the country. Rajabdeen said that as the Chair of SAARC, Sri Lanka had the privilege to articulate and accentuate positions and issues, on behalf of the SAARC, with other regional blocs and groupings such as the EU, NAFTA, ASEAN, GCC, Mercusor, OIC, G-8, G-15, Commonwealth, IOR-ARC and APEC among others.

SAARC opportunities and challenges highlighted

The first South Asia Economic Summit will be held in Colombo today, through Saturday, and representatives of the private sector in the region (eminent academics, economists and corporate heads) will meet government representatives and officials of the official regional organization SAARC. Managing the food prices crisis, oil price hike, transport issues and integration, bolstering the South Asia Free Trade Agreement (SAFTA), trading in services, improving trade facilitation in the region and liberalizing investments, energy issues and how integration can help and strengthening the SAARC process will be the key issues that will be deliberated on. Promoting tourism, bilateral trade agreements, the ICT sector, issues of weaker economies in the region and labour migration will be tackled in parallel sessions which will be held throughout the three day summit. Dr. Saman Kelegama, Executive Director of the Institute of Policy Studies, spoke to the Island Financial Review about the significance of this summit. "It has always been said of the South Asian region that the second track, comprising academia, economists, private sector, have always been a step ahead of the official process, which is SAARC, in terms of strengthening regional integration. "Interaction of the private sector, between the business chambers, economists and researches of the member countries have been quite intense because they would like to see an integrated region, which is the largest in the world in terms of population," Dr. Kelegama said. He said the region’s human resources development was at satisfactory levels. "But the region is not harnessing its full potential," he said. Dr. Kelegama said that the main objective of the Summit would be to have a strong dialogue, where academics, economists and the private sector of the region can address government officials of the region. "This can be an opportunity to feed the officials with the thinking of the private sector on the need to deepen and strengthen regional integration." The summit will also discuss contemporary hot topics such as escalating food prices, the oil price hike and connectivity, which includes integration in transportation, IT and energy. Strengthening the South Asia Free Trade Agreement (SAFTA), integrating trade in services, investment liberalisation and the need for better trade facilitation mechanisms will also be focused on. "The importance of promoting people to people connectivity is also essential and this can be done through tourism, which will be looked at during the summit. The idea to hold a regional economic summit, on the lines of the World Economic Forum in Davos, was mooted in 2000 by the South Asia Centre for Policy Studies (SACEPS) based in Nepal. "This was debated on and the idea was floating around all these years. The Institute of Policy Studies (IPS) took the initiative to oraganise the first economic summit for the region to and demonstrate that it can be done," Dr. Kelegama said. IPS is joined by Research and Information System for Developing Countries (RIS) of India, South Asia Watch on Trade, Economics and Environment (SAWTEE) and SACEPS, both of Nepal, the UNDP, ADM, the World Bank and the Commonwealth Secretariat in bringing the technical and financial assistance for the summit. The Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL) is partnering IPS in organising the summit. The 8th SAARC Trade Fair will kick off today as well at the BMICH and will feature over 600 exhibitors from the region. This fair is organised by the FCCISL. Dr. Kelegama said that RIS of India were inspired by Sri Lanka’s initiative and have agreed to host the 2nd South Asia Economic Summit in India next year.

Vasu demands implementing LMS judgement

The lawyers of Vasudeva Nanayakkara have served notice on the AG, IGP, Deputy IGP, Chairman of the Commission to Investigate Allegations of Bribery and Corruption and the Director General of the Securities and Exchange Commission for failing to take appropriate action according to the law after the Supreme Court ruled against the Privatisation of Lanka Marine Services Ltd (LMS).  The Supreme Court (SC) last week gave JKH time till 10 September to hand over its operations to the Sri Lanka Ports Authority. However, public officials named by court are yet to be brought to book and Nanayakkara’s lawyers have asked the AG, IGP, Deputy IGP, Chairman of the Commission to Investigate Allegations of Bribery and Corruption and the Director General of the SEC requesting them to take necessary action irrespective of the personalities involved.  His lawyers said that the SC ruling warranted immediate action in terms of Offences Against Public Property Act No. 12 of 1982 where ‘mischief to public property, theft and robbery of public property, misappropriation or criminal breach of trust of public property, Cheating, forgery or falsification in relation to public property and attempting to commit any of these offences’ are punishable offences. They said that the SC judgment issued in July stated that all parties to the proceedings had to take necessary action on the basis of the court’s findings. The SC ruled that Dr. P. B. Jayasundera, Secretary to the Treasury and JKH had worked in collusion to give illegal advantages to JKH against the public interest and that he had acted arbitrarily and exceeded his authority. The lawyers said that if the above officials continued to be indifferent to the findings of the SC and its Judgment and failed to take action, they would, on behalf of Nanayakkara, initiate contempt proceedings in the SC. Director General of the SEC, Channa de Silva told the Island Financial Review, that the SEC had sought advice of the Attorney General as to how the SEC should proceed.  Chitta Ranjan De Silva P.C., the Attorney General, said that the Bribery Commission was still investigating the LMS privatisation deal.  Ameer Ismail, Chairman of the Commission to Investigate Allegations of Bribery and Corruption said that investigations to the LMS deal began after the parliamentary Committee on Public Enterprises (COPE), headed by Wijeyadasa Rajapakse, released its first report in 2007, even before the matter was taken before the SC by Nanayakkara. He told the Island Financial Review that the investigation was ongoing.  The SC also ruled that JKH had received unlawful tax concessions. Last week JKH released a statement where it said a tax liability amounting to Rs. 750 million based on a normal tax rate was calculated by the Department of Inland Revenue.  "Based on opinions from independent legal counsel and tax consultants, it is LMS’ view that the supply of bunkers to foreign vessels is an export and therefore income is liable for tax at 15 per cent as provided in the Inland Revenue Act. At the 15 per cent rate, the additional tax liability is Rs. 384 million against the IRD intimation. A further Rs. 137 million of income tax at 15 per cent falls due for the year 2007/08," it said.        Additional customs duty, asset impairment (if LMS does not continue in business) and other costs associated with the vacating of the premises is estimated at Rs. 187 million. JKH said that the impact on the consolidated income statement and / or reserves of the group as a result of the additional tax liability, additional customs duty, asset impairment (if LMS does not continue in business) and other costs associated with the vacating of the premises is estimated at Rs. 704 million (consolidated at 99.44 per cent). "If LMS’ export status is not immediately accepted, then a further Rs. 606 million will have to be treated as a contingent liability till the matter is finally resolved in terms of the Inland Revenue Act." Meanwhile, the government said last week that eight companies will be able to conduct bunkering operations where LMS held a virtual monopoly.

SLAASMB confirms disclosure requirement to Hunters

The Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) said that Hunter and Company Limited (HCL) is required to disclose the provision of a company owned bungalow to key management personal in its financial report. In a letter to HCL (dated 20 August 2008) SLAASMB said that disclosures should be made under short term employee benefits reflecting the fair values of such benefits. SLAASMB said that disclosure on the nature of the related party relationship was also required "…as information about the transactions necessary for an understanding of the potential effect of the relationship on the financial statements." Last month in a circular to shareholders, Ernst and Young, said that they would resign as auditors of HCL as requested by its board of directors at a extraordinary general meeting after a dispute over the disclosure provisions of the company owned bungalow being used by key management personnel. The auditors said that the board of directors HCL was unhappy about the disclosure in the company’s audited accounts for the year ended 31 March, 2007. The auditors were told that the disclosure was incorrect and misleading and that a similar disclosure should not be made in the consolidated accounts for 2008. However the auditors did not agree to this and told shareholders that they would resign as per the board’s wishes. Hunter and Company PLC in a letter to the Island Financial Review said its auditors had not been asked to resign but had done so on their own. They sent us a copy of a letter from SLAASMB (dated 20 June, 2008) which stated the disputed disclosure was not necessary. However the SLAASMB letter was addressed to Heath and Company (Ceylon) Ltd, a subsidiary of HCL. SLAASMB in its recent letter to HLC had this to say. "This is the first clarification the Sri Lanka Accounting and Auditing Standards Monitoring Board is issuing to Hunter and Co. Ltd, regarding disclosure of a bungalow benefit provided to key management personnel of the group. "Prior to your request for the above clarification, we had issued a clarification on related party disclosure dated 20 June 2008 to Heath and Co (Ceylon) Ltd," it said. Heath and Co. owns two bungalows, on land approximately equivalent in extent, in Colombo 3. SLAASMB noted that these properties had been valued by a professional valuer in 2004 for a total value of Rs. 215 million. The bungalow facility provided is valued at Rs. 15,000 per month (Rs. 180,000 per annum for income tax purposes). SLAASMB drew its conclusions from the following accounting standards; SLAS 3 – Presentation of Financial Statements, SLAS 30 – Related Party Disclosure, IFRS 2 – Share-based payment and IAS 24 BC- Basis of Conclusions on IAS 24 Related Party Disclosures. (Note- SLAS- Sri Lanka Accounting Standards, IFRS- International Financial Reporting Standards, IAS- International Accounting Standards).

CEPA will just not work in context of India’s restrictive practices - Rajabdeen Indian visa requirement an irritant

Perhaps the staunchest supporter of the Indo-Lanka Comprehensive Economic Partnership Agreement (ILCEPA), Nawaz Rajabdeen, President of the Federation of Chambers of Commerce and Industry, says that India’s treatment of Sri Lankan travellers and investors is unfair and is a reason why ILCEPA is looked at with resentment. "Indians get their visas on arrival into Sri Lanka whereas we have now to apply 14 days before our departure to India. This kind of bureaucratic red tape must be dispensed with if any trade partnership is to be meaningful," Rajabdeen, who is also the Vice Chairman of the SAARC Chamber of Commerce, told the Island Financial Review. He said that this was just one of the many bottle necks delaying ILCEPA that India would have to address. "ILCEPA will open up the goods and services sectors of both countries but the people of both countries should be able to benefit from this, agreement not just the traders and professionals," Rajabdeen said. "There is no point in wanting to pursue a partnership agreement with us if ordinary citizens cannot enter India as easily as we allow them to enter Sri Lanka. Many of our people visit India on pilgrimage, for studies or on medical grounds and it is difficult for them to get visas." Rajabdeen said that if the Indians were concerned about screening Sri Lankans because of the LTTE threat, it did not hold because India too has its fair share of terrorist problems. "Applying for a visa to India is as difficult as applying for one to the US. Why should this be the case when India is our neighbour, especially when we have opened our doors to India?" Issuing visas on arrival to Indians is only limited to tourists and is issued for 30 days. Rajabdeen charges that there is nothing to prevent Indian businessmen from posing as tourists and have their passports stamped for about seven days which is ample time to conclude a business deal. A representative of an Indian real estate company was in Sri Lanka earlier this week promoting real estate in Mysore. He told the press that he was impressed with the visa on arrival and the services of the BOI. Research Officer of the Institute of Policy Studies, Deshal De Mel, told the Island Financial Review that Sri Lanka lacked the capacity to monitor the movements of Indians in Sri Lanka. "Using the 30 day tourist visa to conduct business in technically illegal, but we lack the technical capacity to monitor our visitors," he said. Rajabdeen also blamed India’s bureaucracy for causing problems to many Sri Lankan entrepreneurs who tried entering Indian markets through the FTA. "The Indians used, and continue to exploit the BOI to establish themselves here, but Sri Lanka is given no such assistance in India." He said the unfair treatment agitated many against ILCEPA. "India must not take undue advantage by restricting our people from visiting India and businesses from investing while enjoying benefits offered by Sri Lanka." "The foreign ministers of the SAARC countries should seriously address this issue because no regional integration can be fruitful if ordinary people cannot enjoy the benefits of such an arrangement while only the influential do," Rajabdeen said.