Friday, October 31, 2008

the tea smallhoder is in shits creek due to the credit crisis

I am writing this at Paradise Farm in Kitulgala, which is an organic plantation, that grows the World’s best Green Tea. All the people who live around the farm are Tea Smallholders who grow tea on their little plots and sell their leaf to the local factories. 60% of Sri Lanka’s tea is grown by them, and have seen a significant price and production increase over the past few years owing to the increase in the demand for low grown teas that go to the Russian, Ukrainian, Middle Eastern and Iranian markets, which have seen an increase in their purchasing power.

As I noted in an earlier article written a week earlier, but published on Oct 27th the international buyers of tea have stayed away from the Sri Lankan auctions, due to their inability to obtain bank financing to purchase. The unsold tea has resulted in a substantial reduction in the price of this tea.

These people who I just saw waiting anxiously with their bags of cut tea leaf for the van to pick them up, have seen a drop of over 50% in price. The faces clearly show the fact that the van may not accept their tea if the quality is substandard. When prices were high rejections were low, now factory owners are demanding better quality of leaf, to make better grades of OP teas that still have a market. So the double whammy of price and quantity reduction, have reduced some of them small holders to penury, as the local factory have delayed payment for the leaf by over a month, citing that they have yet to receive payment, with no assurance when payment may arrive.

I know some of these small holders, a few work on the farm and one is a retiree from the farm, who now grows and sells his tea this way. They have never been faced with this kind of sudden price reduction, so sudden and then a refusal to buy tea plucked. They are in a real quandary. It is not like losing a job with some kind of relief albeit in temporarily. Here there is no relief, especially if this is their only source of income. Additionally in agriculture one invests for the long term, as it takes three years for a tea bush to mature to the stage of plucking. So money borrowed to plant and maintain, as well as the very high cost of fertilizer, has left many people with debts they are unable to service and in some cases, of repossessions of motorcycles, tractors, and vans by the leasing companies. One local person had all five of his vans used to pick up leaf and take to factories, repossessed for non payment of his lease, as he did not receive the funds owed to him for tea from the factories who have either defaulted or deferred payment.
It is interesting to note, that the President called a meeting to discuss this issue and no small holder was there to present the subsistence farmer’s plight. He instead made an asinine comment like, if he had known about this problem he would have called his buddy Ahmadinejad(President) of Iran and ask him to increase the purchases of tea, just like he did the other day to ask him to extend credit on Sri Lanka’s oil purchases. He said he will call his friend the largest tea buyers in Sri Lanka(I presume Akbarally) and ask him to increase the amount of tea he buys as a special favor!

This problem is temporary, but for the small guy, all it takes is one missed payment for his small tractor to be repossessed. The factory owner can close the factory and so not buy any more tea, till demand picks up. He can reschedule debt as banks don’t want to own non-producing factories. Those such as brokers who have lent on the strength of the consignment at auction, can recover their money when the Tea Board buys the unsold 1Million KG.

I repeat, the Smallholder bears both the brunt of the lower prices and also the non-payment for tea sold to the factory and also even worse the prospect of his tea remaining unsold, which he can do nothing else with. The direct help for this person was what my earlier article was about, and this is the one area the government has not been able to give relief. The Rs5000/- per bag of Urea is beyond anyone and this lack of sales means there will be little fertilizer being used, so the future crop will also reduce accordingly.

We here at Paradise Farm are trying to give temporary relief for the next two months to buy the tea from those in our village only, namely Ganepalla, Thaligama. We will use this tea to make Green Tea. The problem lies with the procedures and bureaucratic red tape to enable us to do this. Tea leaf purchases are tightly controlled by red tape, so I can’t buy your green leaf which no one else will buy from you! If this clearance takes time, the whole objective of the exercise, to help those in need, will be worthless.

I say don’t waste money getting the Tea Board to buy our teas as bargain hunters will buy it at a lower price. Those who really need help are the Smallholders, and due to their circumstances differing from person to person and the numbers needing help, so large, the government is impotent in not knowing how to help so many. I say give an immediate once only subsidy based on volume to each who can show how much tea was sold by him in August, before the crisis erupted, with a cap on the extent of the total subsidy at say Rs50K.

Monday, October 27, 2008

Urgent action needed in Sri Lanka to avert a crisis

It is very unfortunate to note that Sri Lanka’s foreign reserves have fallen by over US$600M just in the month of September to US$2500M. This is before the world was thrown into turmoil, and so the October figure is expected with trepidation.

In the midst of all this the Governor of the Central Bank, the only person who seems to be able to influence monetary policy in this country, issued smug pronouncements about the state of the country’s finances. First one should never be smug, lest he has egg all over when proved wrong; secondly some degree of caution along with an instant devaluation to prevent any flight of capital would have been the prudent course. In hindsight the a billion dollar flight of capital has taken place, and the country could have saved a fortune if the devaluation took place before. It is not too late.

While confidence is the bedrock of an economy, doing nothing in the midst of a recession is downright irresponsible. Neither the President who is the Minister of Finance or any other member in government understands what all this means, it is solely the responsibility of the Governor to fill the void, as the whole country is most likely to suffer severe setback due to the inaction so far. I have earlier noted why we should take action now, as doing so once confidence in the economy drops will lead to drastic steps like 100% devaluation and 50% inflation, both of which must be avoided.

I am aware of the thinking of the Bank that if we devalue the extra 25% in rupees that the kith and kin of overseas workers spend in the economy will be inflationary. It will also lead to a worse balance of payments deficit by them buying imported goods like TV and refrigerators. I believe the fillip to the exporters reduction in capital flight will more than offset this threat, and confidence that the overvalued rupee has been tamed will help the market.

Please don’t be complacent or think we are immune from international events, and realize the true extent of what is about to happen. Our interest rates do not permit investment, and hence there is zero growth in productive capacity, the high costs of production will not generate job growth. The unexpected rains three weeks early has created a literal quagmire on the battle front that may last till next year, by which time it will be too late for the President who will be toast thanks to the financial advisers who caused it walking away scot-free at the expense of the citizenry. Act today decisively.

The current crisis in the Tea Industry

Yesterday the representatives of the Tea Smallholders (those having tea extents of less than 5 hectares each), the backbone of the tea industry in Sri Lanka, were in crisis talks with the Tea Board over the need to address and resolve the problem, which for them is one of halving the price received by them for their leaf, within a matter of a month, after a prolonged period where they received in the region of Rs50/- per kg for their plucked leaf sold to the factories. Many are losing money at this price.

The reason for this is that there are many consignments of tea at the auction (which is the primary method of bulk tea sales in Sri Lanka), not fetching even the reserve price. This is because overseas buyers have lately been absent from the market, and which has also resulted in most varieties of tea fetching substantially lower prices than in the recent past.

We do not know for how long these buyers will stay away, but looking into why they are absent, it is logical to assume that as many buyers are traders, they have not been able to raise the necessary finance to make these purchases owing to the international credit crisis.

It is very unlikely that the world demand for tea will fall sharply owing to the recession, so it is a timing problem, so that when credit lines are made available, the market will return to normalcy.

The government is in a quandary over what to do. If they provide money to the local buyers such as MJF or Akbar, to purchase this tea, then it is just helping them to stockpile at a lower price to off load when prices rise. Actually these entities are better able to finance stocks anyway, are most likely waiting for prices to drop further so they can snap up bargains, as the prices they will purchase at will be much less than the cost of production.

If they help the factory owners with finance, to buy tea from the Tea Smallholders, to keep the factories operating then they have an unfair advantage, where they will continue to offer lower prices to the Smallholder, while keeping the future profits to themselves, when they eventually sell the tea they manufacture. We then come to the Smallholders who can be loaned money to tide them over, but the government will be unable to collect on these loans, as they will not have any collateral to enforce collection.

One other matter that needs to be mentioned to appreciate one of the practical problems is that due to the demand for tea and the need for factories to run at capacity, to ensure lowest cost of production, there has been a lot of competition to collect as much leaf as possible. Due to this competition, the Smallholder sells the tea to the factory that offers the best terms, not just in price, but also if the factory offers free pickup, and then only deducts a nominal 2% for moisture content of wet leaf, and also being lax on the quality of the leaf itself, as it is likely that with so many smallholders, the strict adherence to leaf standard could be compromised, resulting in a quality reduction.

Factory owners thus complain that some of these factories with low leaf quality have unsold tea at auction, resulting in their closure temporarily, affecting the smallholder who sold to them, now trying to find a buyer. They may have to find a factory further away, that charges a transport fee, and a higher moisture retention as well as a lower price, which in turn reduces the smallholders revenue by a substantial amount in the current trading environment.

How does one resolve the catch 22 situation, as the tea must be plucked. Once plucked the tea has to be manufactured, as one cannot leave leaf for more than a few hours. Once manufactured, tea stock that remains unsold can create a glut and a drag on prices once the demand increases. Tea can be kept in stock for a period if it is well sealed and stored in dry warehouses.

When the free market creates a temporary problem such as this, government intervention must also be very temporary, just for the duration of the problem, but one that will not create either an unfair advantage to the buyer or factory owner both of whom are usually at a much higher income bracket, at the expense of the sector most affected, namely the small tea farmer, who is suffering the most at this stage.

I can only think of one way where there is a Rs10 per kg subsidy given to the Smallholder who sells at a lower price to the factory that is operating and when it works its way through the system is a subsidy to the factory owner that is operating despite the lower orders so he can contemplate holding stock taking an element of risk himself until such time as the prices stabilize and the orders resume. This scheme should be strictly temporary for a stipulated period and the subsidy given a month in arrears once the tea has been sold to the factory from where the data is obtained to pay the subsidy

The essential difference between Obama and McCain

If one were to ask the average US voter what the difference between the two candidates on domestic policy was, other than say one would tax the rich while the other would reduce taxes on large corporations and wealthy, they would not be able to say anymore.

In Obama’s case he is proposing two main platforms that will impact on the voter, which should form the basic premise of his platform. The first is a tax cut for those earning less than $250,000 per annum, and the second is the insistence of employers providing health insurance for their employees, along with tax credits to them for so doing.

Taking the first matter, one must appreciate some of the basics of US taxes. While 40% of workers in the US do not pay federal income tax as they earn very little, one must appreciate that payroll taxes, such as social security is deducted from the first dollar they earn, and amount is also contributed by the employer. These 40% will be entitled to a non-refundable tax credit of a $1000, which is effectively a subsidy from the government.

The effective result of this is to permit a consumption increase as the poor spend all their income on living, equivalent to the tax cuts. In a recession, a consumption led growth is more likely than investment led growth and is likely to counter the fall in consumption seen lately with people losing jobs and tightening their previous extravagances.

Taking the second area, namely that of health insurance, it is cheaper to obtain collective policies, in preferences to individual policies that McCain favors. How many employers who are suffering in the downturn can afford health insurance for their workers is a question that has not been adequately addressed. Unless some tax credits are given to smaller employers to provide health insurance the pool of insured will not rise.

While the cost of health insurance is a tax-deductible expense on a company it is not so to an individual. There are 40million Americans without health insurance, and the number will rise when more people lose their jobs. Today’s insurance cost per insured is higher as a result. So the greater the number who are insured, will reduce the average cost, which is the premise on which the Obama plan rests its case. Lets see the percentage of uninsured at the end of Obama’s first term to comment on its effectiveness.
On McCain’s side he complains that Obama is about to make the tax more progressive, which he deems taxing the rich, and rather foolish Palin calls socialism. In an ideal world, one would not need to tax the rich, but in order to reign in the Bush deficit, some revenue has to be generated and the wealthy will pay a greater percentage of their incomes in taxes under Obama. One must bear in mind that payroll taxes stop, for the employee at about $80K so the rate of taxes that the wealthy pay taking this into account is not that much higher. On a flat tax rate, under McCain they will pay a lower proportion of their income in taxes than those earning at that threshold of $80K.

McCain’s other main plan is to provide a $5000 tax credit to the employee to purchase their health insurance privately to encourage the increase of the pool of the insured. One must however realize that because health care is private and run for profit, purchasing individual policies, rather than collective ones pooling a whole group is much more expensive, which is both a cost to the employee and the government that is subsidizing this policy which will go as profit to the health insurer. Remember that health insurance for a family of 4 if one were to purchase amounts to about $20,000 per annum which is a huge chunk of ones income if one is middle class, and not affordable if one is poor, so this $5000 credit amounts to nothing more than a hill of beans!

It is easier to understand the election in this context on how it affects the average American rather than look at other policies, as I believe there is little practical differences over any of the other policies, domestic or foreign between the two candidates though the rhetoric is there to distinguish them.

While no candidate dare talk about reforming the unwieldy tax code, I believe in mid term, serious thought should go into simplifying this when the economy improves, so as to reduce the amount of inefficiencies in the smooth functioning of the economy, which the current code encourages.

Of course none of all this is important if one does not bring in the intangibles, namely that of hope that a bi-racial President will create history and inspire confidence in a new generation of Americans for whom race matters little, and an international audience watching eagerly to see if the US can re-gain the moral high ground in its dealings with the rest of the world, which has hitherto taken a beating during the Bush Presidency. Sadly the festering sore, that is the blind support for Israel will be a permanent crutch.

The impact of the Global recession on Sri Lanka

I have noted earlier what the Central bank should do immediately to minimize the impact of the recession, and take advantage of it to profit from it. However there does not appear to be anyone who has heeded my advice.

Drastic scenarios now seem to come at breakneck speed and the authority’s smugness itself will create more problems as we are definitely being affected by events beyond our control. Now the flight of capital will continue, as the overseas investor has already discounted a rupee devaluation, which we should have done immediately there was any indication of trouble.

We could face a run on the banks, and finance companies when investors realize that some of the assets the banks have lent money for are worthless, such as exposure to apartment complexes, which are bound to be the first casualties of the drop in Colombo real estate prices. There is already a softening in the used car market, which will translate into the new car market, and with the current rates of interest, businesses are hampered in making a profit and a significant drop in stock values are imminent.

The central bank must give confidence to the banks by at least guaranteeing deposits so that there will be no panic run on the banks due to rumor or just a drop in confidence, which is all that is needed for an unforeseen event.

The extremely silly pronouncements by the Governor of the Bank, saying we are cushioned from the crisis is most irresponsible. We just have to be ahead of the game in our predictions and take steps to cover the eventualities rather than just say we have enough reserves to cover a run on the rupee!

If a 25% devaluation is not done immediately we may have to contemplate a 100% devaluation later when things have got out of control. The main thing is to be in control of the situation and not let external forces overtake ones ability to inspire confidence. The wealthy in Sri Lanka are about to see a halving in their wealth including Colombo property, and traditional havens such as gold are also falling, so like the herd they will try to hold dollars using the black-market and a run on the rupee will ensue with the black market determining what the rupee should be devalued to.

It is not too late to act now and stave off the crisis by putting a lid on the value of the rupee by devaluing.

The Global Economic Summit G20 in Washington DC November 15th 2008

It is a total sham to hold such a meeting in the midst of this economic crisis, which has been created primarily by the US Federal Reserve not regulating the totally irresponsible lending practices of the quasi mortgage lenders like Fannie Mae and Fredddie Mac and Banks under its purview. It is akin to holding a meeting of the foxes in the hen house!

All regulatory bodies must share the blame, as this problem was obvious even to the amateur. It is interesting to note that there has not been any mention of the culpability of the accounting firms, who I believe must share in the blame, but if it is highlighted, they would all be out of business and so they are keeping mum about it lest blame is apportioned to them.

There is no point partaking, as we all agree, in the blame game, and we should go towards reducing the impact of this recession and to the best of our abilities reduce the likelihood of it occurring at this level of severity.

The reaction of the stock market is just a reflection of confidence and not the problem itself, which resulted in lending drying up, businesses unable to borrow, and so on. It is so apparent that confidence is fickle and any Bank can go under if there is a run on the bank. The IMF was set up to help short term confidence issues of countries, and similarly each country must set up a contingency fund for the very same thing happening to their banks, but with a tough regulatory framework within which to operate.

It is easy, as we have seen for these rules to be flouted as incomprehensive mortgage instruments are invented daily, and few understood what they meant, in order to be able to opine on their value and recoverability. More novel ways will be found in the future to do the same thing, and until the authorities are able to get wind of them when they are structured rather than wait for a problem to occur, we will have this crisis again.

The severity of the crisis depends on the confidence of the public, which in turn depends on the way it is handled by the respective governments, and I say it again, that the stock market is just a barometer of this and not the cause. This meeting does not foretell of a combined international effort to combat bad practices of private institutions by ensuring strict adherence. The internationalization of the larger Financial Institutions including Insurance companies means that common rules must cross frontiers, as otherwise some of the problems can flow out of the borders of one into the other. The problem is that exchange rate fluctuations may also have to be managed, as even these result in banks going bust. How does one effectively control the prima donnas in banks that are always taking risks on behalf of the banks and making bets that could bring the bank crashing. There is a limit to the amount of regulation that can prevent rash action that if proved correct can make a huge profit for the bank and hence a huge bonus to the departmental head. Often the person does not lose his job if the bank suffers a loss.

The most important point to note is that with the advent of the internet and cross border banking made easy at the click of a button on a laptop, people are able to move funds daily with very low transactions cost. So a global approach is needed as countries and currencies can be affected just on whims and rumors that are baseless. Greed and profit are part and parcel of the western world, but now even more so in China, India and Brazil, therefore concerted action is required when there are signs of trouble, rather than waiting for the problem to balloon outside anyone’s control.

The level of uncertainty as well as the reward for placing the correct bet is so great that despite the best will in the world small fluctuations in exchange rates can result in massive losses or gains, that may force companies and banks to go bust, and no amount of regulation that kicks in later will help them. So regulation has to be real time, and hourly, with computer programs highlighting the contingent liabilities on an hourly basis. The regulators also need to be aware of this at this speed as well, but as secrecy is also part of the ability to profit, it will be difficult to agree internationally on how such immediate issues can be identified and tackled.

I am not confident that the real issues will be tackled. It will be an attempt at a smokescreen to reduce uncertainty, and bring back the confidence that has disappeared. It may have a short term benefit, but the structural international issues will not be even addressed, unless an institution is set up to oversee and report on this problem with a timeline on recommendations that are binding on countries. Few countries will allow international regulators. So it is unlikely that the real issues will be solved. The free market will be free to carry on in the same vein and then again go for government bailouts when things get difficult and the troublemakers get off scot-free yet again while the innocent will suffer the pain and consequences yet again. It is sadly the way capitalism works, but is a better alternative to socialism, where the government interferes in one’s life on a daily basis akin to a nanny state.

Why has the US$ strengthened against all currencies?

People are surprised that despite the global economic crisis that was precipitated by the collapse of some US Investment Banks that had held on to worthless mortgage debt, the US dollar has continued to rise against all other currencies. If one had forecast this to happen, few of the pundits would have agreed. Furthermore when US treasury securities are yielding 1% one would expect money to flow out to countries offering higher rates and thus make the dollar depreciate more.

Well it is all to do with confidence. The whole world has confidence that whatever happens the US government will not default on its debt and therefore every country would prefer to hold assets in US dollars in preference to any other country’s security. So the Japanese and Chinese have not pulled out any money from the US and the market value of their securities have strengthened both in dollar terms and in the currency of the lending country, reinforcing the decision to hold on to these securities.

With this confidence and the dramatic fall in the prices of commodities, especially crude oil, the US is able to withstand the trade deficit it runs with the rest of the world, counterbalanced by the surplus in invisible earnings. There is no other country or currency or for that matter any asset, not even gold that can match the US treasury bonds and so while the currency remains strong, and there is no run of funds out of the US, I believe the US is the best placed to get out of the recession, faster than other countries due to its flexible labor laws, that permit quick firing in the event of company’s requiring urgent action to stem losses, so it can just as quickly take advantage of an uptick as soon as it occurs where employers are not afraid to hire because they can just as easily fire unlike in most other places.

This flexibility in the economy will hold the country in good shape, for a more speedy recovery than the rest of the world, that depend a lot on international trade. With a fall in orders for Chinese goods, some of their companies are folding, as is the case with Indian companies that depend on overseas orders including those in the computer field.

It is anyone’s guess as to what price the exchange rate will settle at, and it is all the more miserable for Sri Lankan companies that export, unless a substantial depreciation is carried out on a sickeningly overvalued currency the Sri Lankan rupee.
It is therefore important to bring back confidence, for funds to move out to more lucrative areas. A lot depends on the deflation that is taking place, and the level at which it will eventually settle at. This massive drop in international wealth as a result of the valuation in stock markets worldwide as well as the drop in value of homes, which is a greater figure to the average homeowner, has made people very cautious about spending their way out of a recession, which will therefore not happen. The downside of that is that the recession will last longer, until people are willing to invest again.

The unavailability of funds rather than the rate of interest has stopped many a company it its tracks, and this situation will not change much as people and companies have got risk averse and are reluctant to take a gamble, which they would have taken if this crisis had not erupted.

It is also worthy of note that contrary to the doctrine, the Bush administration has been deficit spending to such an extent that it will reduce the ability of a future administration to cut its budget. Keynesian economics teaches one to spend one’s way out of a recession, usually by larger increases in public spending, but I do not believe that it is the way to go, because the perception of fiscal responsibility will erode into areas not earlier considered and a run on the dollar could result. The Friedmanite way of controlling Monetary policy will also not arise due to deflation and printing more money will only mean they search for even more safe haven’s to park their funds instead of spending which will increase the amount on deposit reducing the likelihood of them being able to spend their way out of a recession as it will not work.

Massive public works programs to keep people employed while also improving the infrastructure is what has been bandied about as the only way to show some relief in the country.

While gold used to be a safe haven, it is no longer the case as investors realize its true value will only emerge in jewelery and is neither an inflation beater nor a safe investment. Cash in the form of dollars are held all over the world, cushioning the dollar further, which is still the defacto reserve currency of the world. Therefore in closing, this state of affairs will continue and those forecasters who predicted the demise of the dollar will just have to eat humble pie, now realizing the importance of this currency far further than would have been anticipated earlier.

Monday, October 20, 2008

Letter to the Governor of the Central Bank of Sri Lanka

Dear Sir,

If I would be presumptuous enough to propose urgent action, in light of current world economic conditions, for Sri Lanka to take maximum advantage of the situation. We can show the world we are able to maximize the benefit of the crisis to our advantage. The reason I appeal to you is I still have some faith that you may be able to see the wood from the trees and be bold enough to take action, which could be a recipe for the rest of the world to follow at some stage in the future. There is no downside to you.

I believe Sri Lanka should take maximum advantage of the current conditions instead of being concerned about its effect on the SL economy, thereby taking defensive actions. We must instead go on the offensive.

With the expected free fall in the price of oil, which is poised to drop below $50, I expect you to be able to keep the price at the pumps unchanged and instead tax the difference. This additional US$500 million, which you will have from tax should be set aside to pay off your very high interest loan you negotiated recently as interest rates have dropped to zero in US treasuries. If you still need the cash you can renegotiate this as a new loan at an interest rate of 2% as the country risk rating would improve by repaying a loan early, saving the country untold billions.

Please ensure that the Central Bank watches carefully the prices of our imports as steel and other commodities have dropped by more than 50% and should be reflected in the invoices. If they have not some of the importers may be over-invoicing to stash money overseas and they can easily be brought to task. As you may be aware, the case in Sri Lanka is there are limited number of importers who work in concert, who will not pass the price reduction to the consumer, and together with the wholesaler and retailer keep the shop price the same for all these items while making the profits themselves.

A price drop is actually deflation, which means we must drop to zero inflation immediately as there is no reason for any inflation in a period when prices are falling. This is exactly the situation for you to devalue the rupee to 130 to the dollar without seeing an increase in the import price of products in rupees. A unique situation to find oneself in. This depreciation will help the exporters who are hurting and who are putting the jobs of their workers especially in the garment sector at risk. If you do this I believe we can keep the dollar earnings of exports unchanged as the price of tea will most likely remain unchanged and the fall in garment earning will be more than offset by increasing remittances from the our workers overseas. Again you are in a lucky situation to see your export and invisible earnings rise while at the same time seeing a significant reduction in the import bill giving you a balance of payments surplus in the short term and hence foreign reserves.

Remember in a period of deflation, cash is king so all the foreign currency reserves you hold will help you in the long run to stabilize your currency reduce the country risk therefore be able to borrow at extremely favorable rates should the need arise.

Don’t wait to take reactive steps, take proactive steps and you will be proved right and at worst you can make a name for your self outside these shores which counts more than to be known within as the latter is only for ones failings and not ones achievements.

These simple actions can reduce money supply growth just enough to keep inflation at zero, something you never thought would happen in your lifetime. That is because you are embedded in the past and not in the future to a changed world that happens once in anyone’s lifetime and that is now.

The deficit spending you have resorted so far will not be necessary if proper action is taken to ensure that a few politicians and industrialists don’t benefit from the drop in prices, and instead ensure that the government in the form of taxes or tariffs raise revenue, without affecting inflation much in the way the oil price fall is used only for the government’s benefit.

Identify the best people to help you. 80% who work in the Central Bank are just time servers, who have to be cautioned or reassigned and not just to hog desks and have a subsidized buffet lunch that encourages a siesta. I recommend as a step in restructuring the Bank, you offer a buffet breakfast between 7and 8 am, and make sure they all work till 3.30 with a cup of tea and sandwich served at noon. On their way home when they exit the bank give a small snack to eat on their way home to give them the energy to get home. Trust me the productivity you get from them will double.

Yours truly, A subsistence farmer who spends less than Rs100 a month.

lets face it we have a problem with the assumptions

Just think, and look around you in Sri Lanka. We have the highest concentration of foundation stones being laid for projects, highest concentration of partially built and abandoned projects, highest concentration of government buildings, and largest number of government departments all as per capita in the world. This is a fact.

How can we be a poor country with these, institutions? It is because it is bureaucratic and not efficient. No one is performing to expectation and the importance of maintenance is set aside out of egos too inflated to need their names on foundation stones, over well maintained structures.

Until we realize we should not waste anymore money in construction of new projects; make more efficient the existing arms of the government by making them accountable for their performance; to be judged on how well their budget allocations are spent and evaluated; and energize public servants with performance incentives and drop age based seniority and age based promotions; we cannot proceed effectively.

All this comes down to good management from above where objectives and goals are laid down and everyone works on the same page. Then progress can be made. Our bureaucracy at some levels are made up of zombies, this frustrates the energetic dynamic individuals, as they are not allowed to shine and are constantly put down by their lazy and cushioned elders.

There is political interference when it comes to transfers of government servants, as well as promotions, which demotivate good staff. Each one of the 400+ government departments must have a set of objectives and criteria for performance measurement, so that they are working after their lunch break and not literally sleeping on the job as is commonly encountered. Thanks to President Premadasa, we have Wednesdays as public days where the officials are obliged to be at their seats. The instances, when, even this rule has been violated by government servants, are too numerous to mention.

Lets bring a sense of discipline into the public sector, and make them accountable and efficient, only then will the private sector be able to take up the mantle of performing without hindrance and corruption. They are up to the task if only the government sector is doing their bit. So please re-evaluate the assumptions and energize the personnel to perform.

the good suffer with the bad

After the fall out of the present crisis, where genuine hardworking, profitable businesses are shut out from obtaining working capital as a result of the actions and excesses of others, it is hard to tell them that they have to suffer along with the rest through no fault of their own.

That in a nutshell is what is wrong with the system. These small entrepreneurs are the backbone of the economy. They are the most productive who manage and run small businesses. The excesses of the banks’ poor lending practices are hitting these innocents. They see the government helping the worst offenders, and not them who are just asking for an extension of a line of credit to keep their businesses from going under.

Often these businesses prefer to operate on short term borrowings rather than lock into long term loans, so they become the most vulnerable when credit lines are not extended as the banks are reluctant to lend, because they cant even borrow from each other. The resulting effect is these small businesses have to close or lay off and the economic repercussions multiply.

Bankers reading this please take note that knee jerk reaction to mistakes on your part will affect productive hardworking businesses more than you would realize and in a way the banking system is one that is more than just a business, it is one that should have obligations to give people a chance, when they are not to blame for a tightening of credit, which affects good and bad.

It is important to realize the knock on affect of credit tightening because the small engines to economic growth are also affected by adherence to strict new rules of lending. This issue does not appear to be addressed and needs to be if the downturn is to be minimized and sound businesses permitted to function. Working capital is an essential tool for a small company, as without it they are often not able to meet their day to day obligations, and payroll is the first to fall prey, and then the payables to suppliers.

Governments are quick to apportion blame, but it is no time to blame when honest people are unwittingly caught up in the trap. It is the duty of the state to protect or at least help those, much like in a natural disaster to get back on ones feet, as the problems are often someone else’s creation. It is vital that a proper understanding of the problem be made a quick solution found, so that those businesses that can be salvaged are in fact prevented from folding.

Monday, October 13, 2008

Sri Lanka can ride out the Global Recession with relatively little impact

By whatever criteria it is viewed, the world will be in for a period of economic slowdown. The depth and length is still a matter of conjecture, but it is not a precise science, the severity will depend only on how it is managed. In the case of Sri Lanka it can be managed with minimal impact if the following recommendations are followed.

a) When the oil price falls to $50, just lock in the rate by forward purchase agreements for as long as one can afford, even though the expected drop may be greater. The government should keep the price at the pump unchanged from present levels, by taxing the difference so even IOC can still profit. I expect the government tax per annum on this price locked in to be at least $500M, which effectively negates the need for borrowing this amount from overseas, something they would otherwise be forced into.
b) In light of this drop, one needs to make sure no agreements are made to purchase fertilizer as the government has estimated it to cost Rs66Billion. Due to the price decline in oil it will drop to Rs22Billion, if no one makes decisions on personal profit.
c) A modest devaluation taking the dollar pegged SL rupee to Rs125 to US$1 should be done, and stabilized at that rate as it is essential to help exporters who are desperate for some relief due to their increasing costs and falling revenue
d) Due to the devaluation of the Indian rupee against the dollar, all our food imports and vehicle imports from India that account for 30% of vehicles will not cost more and we can be cushioned to some extent on imported prices. Commodities such as steel have almost halved in value. In short we should not see a depreciation led inflation increase. With the 35% depreciation of the Australian dollar against the US dollar we should not see an increase in Dhal price, and in fact see a decline.
e) We should not see a decline in remittances from the Middle East, and this revenue will at worst hold steady, so I believe our total foreign exchange earnings will remain stable, as even the decline in Rubber prices, will not affect it as we export manufactured rubber in the form of tires, which are unlikely to fall in either demand or value.
f) With the war won, the soldiers should be put to infrastructure work on highways in the north so more output from the North can come to the markets in the South and overseas, increasing National Output. They will therefore be in productive employment.
g) Stock market falls will not affect the economy as the Banks appear to be relatively immune and a correction in the Colombo property market which is overdue will not create a crisis, and instead release labor from construction projects in Colombo, to development projects in recently liberated areas.
h) I am not counting on a large inflow of foreign investment as a result of the peace as the appetite for investments from overseas will dry up and local entrepreneurs will take up any perceived benefit from peace, which is actually a better alternative.

Following these very simple rules and advice, we can in fact grow through this recession, at rates higher than otherwise. We can at the same time reduce inflation, from double back to single digits, and the government will not require large deficit financing to carry out their projects, as I expect our balance of payments to be in surplus (trade and invisibles).

I just hope our leaders have the courage to take the all important step of not passing lower oil prices to the consumer, as transport costs of people and goods is unlikely to come down, and the private sector can increase profitability from reducing commodity prices, despite the modest devaluation recommended to help the export sector from massive layoffs and closure. Dollar price reduction in imported goods is expected.

The inherent point to note is that our import bill will fall substantially, so we can afford a devaluation, and our export and foreign currency earnings will barely fall, giving us a much better balance of payments picture and the government a far better borrowing picture from both domestic and foreign sources.

The one thing that can stop us in this endeavor will be the greed of the government to benefit from this without passing it to the people in the form of less corruption. As I reiterate we are not in an employment crisis, just an efficiency crisis, and anything we do to improve productivity at this stage will be rewarded many fold. More productive and remunerative employment is only a byproduct of the efficiency drive. This is a chance that only comes once in a lifetime, and if we do not take advantage of the situation now we will not get another chance for another 100 years!!! So please wake up to the opportunity and don’t blow it

Will they ever learn? An accident waiting to happen- the 2008 recession

This crisis that is upon us now was predicted, the severity is something that depends on human factors such as confidence, and wise state intervention that cannot be predicted, but the inevitability was as night follows day.

The US economy that is the largest in the world, also grew rapidly, not out of productivity growth, but out of consumption led growth where lending institutions relaxed lending amounts and rates. This made it easier for people who are not financially savvy to rack up huge credit card debt, and release equity from increasing home prices to borrow to finance consumption. Hitherto positive savings rates thus became negative.

China was eagerly supplying the US consumer with cheaper products, thereby increasing consumption of such items like flat screen TVs and electronic items. The dollars the Chinese received went back to purchase US treasury debt. There is a limit to how far one can go, when one is unable to pay one’s debts. The unscrupulous lenders who were remunerated more based on the increase in the amounts lent, devised more schemes, such as secondary loans with teaser interest rates to get people to commit to borrow. Like a ponzi or pyramid scheme, when the rate of increase began to fall as there were no more takers, and the teaser rates ended, people who had signed up unwittingly and foolishly, were unable to pay their loans. The loans had been sold off in the secondary markets with Fannie Mae and Freddie Mac guarantees, and so were off the books of the regulated financial institutions.

The incompetent accountants(the largest firms in the world) failed to realize that any fraudulent information on the loan documents, hold the originator responsible, and the originators were the first to go bust when fraud was discovered, when they were unable to meet their obligations. The banks thought they would have recourse but were left holding worthless paper and insurance companies, who guaranteed these without fully understanding the risk profile, began defaulting.

Not to be outdone, international banks and insurance companies joined the bandwagon not wanting to be left out of this jamboree with tiny banks in Iceland joining the fray through internet banking crossing borders seamlessly, wanting a piece of the pie. Now even they have to be rescued by their governments making it a global phenomenon.

Regulations in the era of Deregulation


The world-wide telecommunications revolution, which has enabled people all over the world to benefit from the use of mobile phones is not even 15years old. Along with the new technologies, band frequencies were deregulated, and competition permitted in countries that only had one phone company, usually owned by the state.

What that did to countries like Sri Lanka and for that matter to most of the world, was more people found it affordable to own a phone. CDMA and GSM technology made it much cheaper, and those who were in the forefront of the revolution, benefited most as they had a head start.

This free for all created an industry that did not exist before, and much like the internet and the growth of the lap top, allowed a lot of players in and now have come to the point that with competition, rates declining the previously high profit margins are also taking a tumble, being reflected in the share prices. For example within a year, where Dialog shares rose to Rs30, they are now Rs6/50 and falling wiping Rs100Billion of this company’s market capitalization in the space of a few months.

In much the same way, the banking industry was also allowed to create new products. Previous restrictions on some of their lending practices were lifted allowing them far more freedom, which was not properly understood by the regulators, creating the current crisis. When big money confronts governments, this is bound to happen. Rules are set aside and restrictions lifted. Money talks! US lawmakers are complicit in not being able to oversee the excesses, I believe in Sri Lanka we are in for a washout of the Telecom companies, as their viability in light of competition is questionable. Cartels are being formed to prevent more entrants that may threaten existing ones.

How much regulation should remain in the era of deregulation? There is no question that deregulation increases growth, but if that permits a cowboy culture with no sheriffs able to see reality due to their incompetence and lack of expertise, then, we have put a crime policemen in charge of traffic, so chaos is the result. It is the understanding of the issues involved that is required before the management of the problem. Only then can steps be taken to ensure that crashes and shocks don’t occur because as always it is human greed. Not just the banks but also the greed of the borrower is to blame for the present crisis that is also affecting legitimate borrowers.

the good suffer with the bad


After the fall out of the present crisis, where genuine hardworking, profitable businesses are shut out from obtaining working capital as a result of the actions and excesses of others, it is hard to tell them that they have to suffer along with the rest through no fault of their own.

That in a nutshell is what is wrong with the system. These small entrepreneurs are the backbone of the economy. They are the most productive who manage and run small businesses. The excesses of the banks’ poor lending practices are hitting these innocents. They see the government helping the worst offenders, and not them who are just asking for an extension of a line of credit to keep their businesses from going under.

Often these businesses prefer to operate on short term borrowings rather than lock into long term loans, so they become the most vulnerable when credit lines are not extended as the banks are reluctant to lend, because they cant even borrow from each other. The resulting effect is these small businesses have to close or lay off and the economic repercussions multiply.

Bankers reading this please take note that knee jerk reaction to mistakes on your part will affect productive hardworking businesses more than you would realize and in a way the banking system is one that is more than just a business, it is one that should have obligations to give people a chance, when they are not to blame for a tightening of credit, which affects good and bad.

It is important to realize the knock on affect of credit tightening because the small engines to economic growth are also affected by adherence to strict new rules of lending. This issue does not appear to be addressed and needs to be if the downturn is to be minimized and sound businesses permitted to function. Working capital is an essential tool for a small company, as without it they are often not able to meet their day to day obligations, and payroll is the first to fall prey, and then the payables to suppliers.

Governments are quick to apportion blame, but it is no time to blame when honest people are unwittingly caught up in the trap. It is the duty of the state to protect or at least help those, much like in a natural disaster to get back on ones feet, as the problems are often someone else’s creation. It is vital that a proper understanding of the problem be made a quick solution found, so that those businesses that can be salvaged are in fact prevented from folding.

Friday, October 3, 2008

the US presidential debates - round one


If I was from outer-space, but with a lot of knowledge of history, geography and topography of Earth I would have been horrified that one of the two candidates in the debate would within months lead the most powerful nation on earth! God help the human race!

That is the problem with politics because it is directed at winning the vote of prejudiced ill informed and in the case of the United States broadly a very dumb TV watching populace who have never set foot outside of their continent.

If one breaks the debate down to Foreign and Domestic issues; In terms of foreign policy you only need to change the strategy to enhance public opinion outside the US so that all the world’s trouble-makers are no longer a threat to the security interests of the US. It is conceptually very simple and with good espionage all decisions should merely be congruent with this strategy. It requires countervailing measures to minimize the threats from the three types of nemesis listed below.

One being the economic threat of counterweights of Russia, China and to a lesser extent the EU. The other being consequences of the US policy of defending the state of Israel, which are the jihadists of Iraq, Iran, Afghanistan being given moral authority due to US intransigence on leaning on Israel. The third are those challenging US energy policy which is still dependent on oil where the strategy should be to immediately change direction to alternative sources, which will automatically lessen the clout of Venezuela and bit players using their oil wealth to cause upheavals.

On the domestic front, the crisis that has been created due to greed was expected so those risk takers should pay for taking the risk, with an underlying floor to ensure that people living in their homes are not turfed out, but where the state holds an equity share for bailing them out of their greed. So the bailout will mean a benefit in the long term for the state in taking a profit when the home is eventually sold as all US homes change hands at least every ten years.

Long term structural adjustments to reduce the likelihood of speculation need also be taken, but that is more difficult to implement until there is a sea change in peoples attitudes to “me versus us” syndrome where for example a collectivist attitude on health care is called for to prevent people from being left to die on the roads because there is no social safety net.

The problem with the US Houses of Congress is no different to the Sri Lankan legislators. Once they get elected they want to remain there forever even though most of them are unable to grasp government or carry out the wishes of the electorate. So no one really does a days work and just bamboozle the electorate to believe simple problems have complicated solutions, even though most problems have fundamentally very simple solutions if only one is able to see it without the tinted glasses they wear.

I can solve all of America’s domestic and foreign policy problems in a short while, but because the jobs of millions are to solve these problems, they will all be out of a job so they will not permit simple solutions as otherwise they cannot justify their existence.

While I was explaining to someone why I gave up accounting. It was simply that people were making it complicated to keep their jobs so no one was interested in doing things very simply as then they would not be able to justify and further increase their pay packets. This same theory hold true to politics and running the country, it is so simple, an idiot can do it but those with an education will not permit simple solutions as they have justify why they have got an education in order to supposedly contribute something.

In summary every problem can be broken down into its fundamentals and solved by consensus between reasonable human beings. However as human beings are just not reasonable, due to human nature being fundamentally greedy, we have these so called problems constantly appearing.

It is sad that in this world where 4 billion people will die in the next 50 years, we are creating problems when none ought to be there. We should make life easier and not more difficult, and if we look to enhance quality of life rather than wealth creation, which are completely different things many of the issues of the day will not arise. It is the fact that these simple principles upheld in Christianity and Buddhism are ignored by even the most rabid Christian and Buddhist, that we have these problems. Misuse of religion has contributed to much of what is wrong in the world today.

We know the problem, we have the solution, but we are not ready to share. We therefore commit the rest of society to live in misery out of that greed.

If Marx lived in Sri Lanka today he would be horrified


Marx and his socialist writings were more apt in Germany during the period he lived and in that context would have seemed a perfectly logical theory. In the context of Sri Lanka today, where the populace have been bred on a different diet of asking for the moon and expecting the government to provide, which has been the way the country has operated, has lead to a basic breakdown of productivity of human capital and not its exploitation.

Marx I believe would have concentrated on areas of the economy that could improve productivity without adversely affecting the living conditions of the people who give rise to the increase, but at the same time improve the overall living conditions of the populace at large, permitting free enterprise, where competition is not stifled. In the present bizarre mix, where the supposedly socialist administration is packed with oligopolists and those representing such, so competition from small enterprises are stifled, while at the same time providing social welfare, in the form of health education and free loading government jobs, none of which the country can afford.

Of course it is in the state sector that the productivity is at its lowest, and where in the absence of unemployment in this economy, the potential for the greatest reforms lie, by retraining the sector to be more productive and re assigning them in state jobs that are now in demand in areas of conservation, recycling, alternative energy, marketable skills, pollution control, and agricultural development. He will realize that there is no place for collective ownership in Sri Lanka, as the nuclear family is the greatest source of conflict in the inability to share.

While I don’t even presume to know or actually want to know what Marx was on about when he wrote his seminal work, all I can surmise is that as a rational human being with average intelligence he would have come up with a theory that would be practical and apt to suit the conditions of the day in Sri Lanka, and there would be few who would dispute it. There are many who would try and prevent its implementation, as it would still go against the self-interest of the governing and ruling classes who still form a minority in a country, which is still essentially a parochial country of sheep being lead to slaughter without their knowledge. In this context it is a precipice that is being faced with the leaders ready to step aside the moment they reach the edge so the flock will just get thrown into their doom!

tthe sakvithi scandal that is inevitable again and again


No matter what the Central Bank or government says, people always try to find a better return on investment for their money. In a country where the annual rate of inflation is hovering around 25%, only dodgy deposits offer returns higher than the rate of inflation, and accordingly rich and poor alike invest in such companies. One just has to cautious and follow a few rules.

Rule no 1 – too much of a good thing cannot last forever, and therefore be cautious how long you can expect high returns by just holding a 6month CD
Rule no 2 – never put all your eggs in one basket as every basket has a chance of a leak whether it is metal, wicker or plastic. Have many baskets.
Rule no 3 – if it too good to be true, it probably is not true, so stay away.
Rule no 4 – don’t risk your money if you are over 50 as the period you have left to earn any loss is less, and therefore your chance of recovery is slim.
Rule no 5 – seeing is believing and don’t count on a return until you actually receive the money as all pieces of paper showing CD amounts are just that.

These scandals are daily occurrences and will continue until you can eliminate greed. Be cautious and follow the rules above, and then the risk can be reduced, not totally avoided. The SL case is the same as the US debt security scandal, but in reverse, where the depositors have been swindled, and are holding worthless paper, where as in the US Institutions are holding worthless paper, as people, the Joe Blow’s of this world are unable to meet their obligations because unsafe lending practices were adopted by lending institutions. The common denominator is greed, and securities due to the rating of the debt carried high rates of interest, just because of the level of risk.

EAP a well-known lender’s certificates of deposit pay 24% as they purchase gold, which has been appreciating in value. Jewelry is made and sold. When pawned, a higher rate of interest is charged on the borrower, using the pawned asset as collateral, giving the depositor some sense of satisfaction that the deposit has some gilt edge! As it is registered under the Central Bank there is some additional tracking, but I am not sure exactly what they require as covenants for this registration. It is therefore not wholly without risk, as this institution could fail with depositors losing their funds, and hence follow the rules set out above and minimize your risk, the only way you can. Of course there are additional factors like the size of the institution one should take into account, but size is no guarantee of security.

credit squeeze explained


Which comes first, the chicken or the egg? This analogy partially explains the current crisis. The increasing home prices, that exceeded the growth in inflation, and incomes, inevitably leads to a time when people are unable to afford to purchase a first home. Homebuilders who took advantage of the rise in prices, paid large amounts for their landbank leading to ever increasing prices for new homes. Homeowners, seeing the increase in the value of their homes, released equity. Firstly by borrowing more by re-mortgaging and then later by taking second mortgages at higher interest rates to fund extravagances like autos and vacations, and such like.

Many of these loans were made at teaser rates for the first couple of years, but when the higher rates kicked in many borrowers found themselves unable to pay their installments. The secondary mortgage could only be called once the first mortgage was paid off, so the non-performing loans that had been sold through investment banks backed by quasi-Federal institutions like Fannie and Freddie, became worthless. Those, holding such loans in their portfolios, went bankrupt or had to be rescued. This immediately affected the confidence of both investor and lender to the financial institutions. It worsened by the nationalization of Freddie and Fannie, and the house of cards began to unravel, as the prices of property on which much of the consumer confidence in their net worth was placed, began dropping.

The government really has no option but to steady the ship by printing and pumping credit to a market that has frozen credit out of the recoil factor of being shell shocked. The quid pro quo for such intervention should be some upside benefit when the markets settle and things gradually get back to normal after a period of recession. This could be short or long depending on how it is managed both by the private sector and government, with safeguards to re-build confidence, which has been lost.

One should not get confused with the stock market and its performance, which in theory should reflect the short and long term prospects of the companies reflected therein. The credit squeeze no doubt has an impact on company performance both financial and non-financial, but is analyzed independently of the credit squeeze itself. To the extent that each individual has a stake in the stock market through pension funds and retirement savings the fall in the latter does have a bearing, but is indirect and hopefully temporary, with upside once markets settle and volatility reduces.

Who is dumber? the Sri Lanka or US voter


Politicians pander to the voter. In Sri Lanka they promise what the voter wants, irrespective of whether it can be kept and the voter delivers by electing those that sound most convincing! In the United States today, all members of the lower house of congress, namely the House of Representatives are seeking re-election in less than 5 weeks, and the voters are bombarding their congressmen asking them not to vote to bail out the troubled institutions, and they responded by opposing it on Monday.

Due to the meltdown effect, the voter does not realize that passing the bailout is a confidence building exercise, necessary no matter what public opinion says. How does one reconcile this dichotomy? Members have to put country first irrespective of whether they will have a job in a few weeks, and for power hungry individuals, doing this is hard.

As usual the media is concentrating on stock market performance, which bears little relation to the debt problem at hand. The real issue is that businesses are and increasingly will find it difficult to borrow, and such costs would rise. The resulting effect is lower margins, and accordingly, more unemployment. The voter with a job should fear that, not saving the backsides of a few wealthy wall streeters.

The bailout will make it easier to borrow, reducing the severity and sharpness of the Sword of Damocles. It will add confidence to the banking sector reducing the likelihood of people withdrawing money from the banks. The banks will therefore reduce the extent of foreclosures on defaulters, giving them an extension on payments, or permitting some form of refinancing to turn non-performing assets into performing ones.

One must realize that a fundamental concept of capitalism is confidence, and when that is lost extreme action is necessary to restore confidence, and that is all that the government is doing as it is their responsibility for the long term security of its citizens. It is the long-term savings, retirement funds and home equity of the average Joe we are talking about as the wealthy are immune whatever happens, bailout or not! This is the responsibility of any government and its duty. I found it interesting that the Irish government backed the deposits of every bank in Ireland irrespective of balance. No Irishman then need pull out their savings fearing a run on a bank. That’s confidence for you!

media manipulation


I have previously noted the power of media, mainly in the areas of editorial and policy to represent certain points of view. It is common that all Sri Lanka government owned media is unabashedly one sided, influencing public opinion in a dangerously partisan, irresponsible and in the long run detrimental to the interests of the populace at large. History is replete with media barons influencing public opinion in a similar way, with similar results.

I want to concentrate here on the manipulation of unsuspecting journalists to a point of view because the person giving the information is a man with some responsibility inn the field, which he is talking about, and the journalist therefore takes it at face value without checking independent facts.

Sri Lanka is full of people in high positions, deliberately feeding misinformation into the media to highlight their position, but not based on anything other than the figment of their own imagination.

The total farce over a Weerawila International Airport which anyone with any common sense would know it was a non starter is one example. The other more recent example is that of the Kalpitiya Resort, which with the best will in the world cannot be justified under any grounds, and is merely an attempt by some people at the top of their posts misusing it to either pad their positions, and hence justify their existence, or being totally irresponsible, to hook people into spending money to defraud them, later.

This is a report for the journalists, to tell them to check their facts before reporting and the facts should always use an element of commonsense by asking the question “is this practical?” In Sri Lanka the manipulation of journalists of both state and private media is a daily occurrence, because the manipulators know that our journalists like the rest of the community don’t use common sense, and are therefore easily manipulable.

Journalists, be a little more critical about everything you hear or see, analyze the practicality of what you are reporting on, and make your own comment as to why you don’t believe what is said, and don’t be afraid to express your point of view as your view and not that of your paper. Later when you are proved correct, you then go with that for your promotion or your next job. “Kalpanakaranna , meka venna bari deyak! Kiyala vedak naha”

fools leading fools into fools' paradise


Related to the media manipulation article, I note that the newspaper reports of tourist numbers, supplied by the Tourism Authority are not questioned, again by the lack of insightful reporting by our journalists.

The arrival of every non-citizen is recorded as a tourist arrival. Needless to say this is grossly erroneous and overstates the tourist numbers, I would guess by at least 100%. In a country where barely 15,000 tourists arrived in September 2008, the figures published will be about twice that, why are we even pretending to have a tourist industry! So much money is collected as a departure tax on everyone to fund the expenses and extravagance of the tourism business, when they cannot even draw this number of tourists, why doesn’t anyone question the moral authority of people in charge.

The individual tour operator or hotel owner in his or her own way performs a better job attracting them, by way of repeat business or their own websites that this money can be far better spent by developing basic infrastructure rather than on promotion. The war is given purely as an excuse, in a country where the war has not accounted for a tourist death let alone an injury.

This clever manipulation, disinformation, and wasteful expense of gathering data that is inherently wrong is discourteous to say the least and fraudulent. Who are we trying to protect? Fraudsters! Newspaper journalists wake up!

The theme of this blog is to think things through, as we still perform tasks and follow traditions like cattle not knowing why we are doing something. It is the duty of those providing information to consider the facts, and in a country where few tell the truth, a national characteristic, we must treat all information fed, especially by official sources with a certain level of skepticism. The colossal waste arising from our mistakes can be avoided.

Use common sense here if you don’t understand what I am telling you. If I was a businessman coming to Sri Lanka, to do business for two days, I still have to obtain a business visa that will cost time and money. If I say I am a tourist, I get visa free access for thirty days, and therefore even a form to state my purpose will not be accurate. We have to use statistical random sampling techniques to get at a truer picture, which whatever route you choose will give you the answer that we don’t have enough tourists rate the industry anywhere near the top 10 foreign exchange earners for Sri Lanka.

a story of life in transition from rural to urban


A boy from Ratmale, left school and reached 18 in May, and followed a few courses in computing in the area. I gave him a PC to enhance his knowledge, and then he pressed me into getting him a job in Colombo to further his skills and get out of the village, where he would otherwise have had either to farm, join the forces or the home guard, or do manual work like brick making or rock quarrying or sand mining, or offer himself as a day laborer.

I managed through friends to place him in a job, repairing and maintaining computers and peripherals, where he has to go to different locations to carry out this work. For the first 6 months when he will receive training his monthly allowance is Rs6,500. I agreed to provide him lodging free, but he has to find his own food and pay for his traveling and clothes.

This is the first time he has left the comfort of his own home, and has now to learn to fend for himself, something he has never done before. He has to find his own food, and now realizes the cost of eating out and expense of clothing as well as traveling. While I agree the allowance is not sufficient for this he has somehow got to learn to manage, if he is to get to the next level and get a training which will make him more marketable and earn a real living. I recall the day when I began working and how difficult the first three years was in order to survive, as I had to pay almost two thirds or my net salary just for the room rent.

I don’t want to see him give up due to these short-term difficulties. He needs resilience to realize that the sacrifice today will pay dividends in the future. Without the close family, he has been used to all his life, except for his mother, who had abandoned the family shortly after his birth, he has to fight his battles on his own and grow up fast. I have done my best to cushion him from the molly coddling at home to the harsh realities of long commutes and city life.

In addition to his struggle, he also has to cope with the petty jealousies of people in the village he comes from, not wanting to see him succeed even though they do not see the hardship he has to undergo just to live from day to day. Sinhala people have a very bad characteristic of not wanting see a neighbor succeed and do all in their power to prevent success. Discouragement is the evil he has to face when he goes home.

Central Bank and failed finance companies


In light of the failures of financial institutions, we must face reality. Sri Lankan borrowers, be it individuals, banks, or finance companies, are inherently unreliable. So a lender or depositor must always be wary.

A credit guarantee for a million rupees per name per institution, must be backed by the Central Bank, and for this backing to be given, stringent oversight powers must be given. This seal will then be the only guarantee an individual has of the safety of his or her investment.

As an ex-auditor with over 11 years of experience internationally, I know how easy it is to hoodwink the most seasoned auditor, if one is to perpetrate a fraud. So the Central Bank, which does not have people with common sense, just overqualified prima donnas, and bureaucrats who are promoted on seniority, is easily misled. The onus is on the bank therefore to improve their audit practices to prevent abuse of the system for which they don’t appear to take any responsibility, and not even a statement from the governor of the regret or lapse on their part has been broadcast to date.

There has been the failure of Mercantile Credit, primarily a lender for auto financing, and then latterly Pramuka Bank and even more recently the pyramid schemes and there appears to be no forewarning until the horse has already bolted. The Central Bank has been caught napping in all these cases.

It is time, people are advised of the risk whatever the statements made by institutions on the security of the deposit. The Central Bank can only realistically do so much due to a skill shortage of people able to understand basic truths and deal with perpetrators of fraud who are extremely cunning.

The strict oversight of the remaining financial institutions, will then strengthen their credibility, and before there is a bubble that bursts on the Colombo property market, steps should be taken to examine critically, all loan portfolios primarily on real estate developments before there is even one bank failure. This could then have a knock on effect on the others. A credit crunch and withdrawal of deposits will stifle investment and growth, both of which we badly need having an adverse impact on the economy.

Governor you are in a make or brake moment, and how you command yourself in this critical juncture determines the future course of this nation.

Central Bank please wake-up


With recent disclosures about the bank being asleep while the unsuspecting depositor was losing money, is no surprise. Go to any floor of the mighty central bank at 9am and you will not find a lazier sleepy bunch of people if you wanted to. Then after their “Rs50 all you can eat buffet” lunch in the canteen, no one is competent enough to do any productive work as it is siesta time.

The hierarchy is aware of the problem, but as they have given up on getting productivity from the lifers who only get promoted on seniority there is little a progressive leader can do. This is called ossified and fossilized bureaucracy. No one takes the blame for a crisis and is the governor even has the gall to say it was they, who alerted and precipitated the crisis.

This is an example, like we have in the police force or the judiciary, where the laws and rules and regulations as well as powers are all in place, but no one wants to rock the boat, and instead hides under a cloak anonymity.

All government servants are the people’s representatives, and are supposed to look after the interests of the public, but no one is diligent in their jobs.

I agree that the Central Bank and its 3,000 overpaid staff have different job descriptions. No one has questioned whether it is necessary that they all occupy expensive offices in the heart of Colombo, or whether the job they do is really necessary. In the meantime the country is suffering due to incompetence and I have not heard one word uttered against this place.

A reform of the Central Bank on a meritocratic basis is sorely needed with an evaluation of what they do and the effectiveness and usefulness of some of their functions. I have forever maintained that even the statistics published of the foreign remittances are grossly understated. No one has been able to measure the shortfall in an objective way.

The malaise of a highly educated but totally impractical workforce is not only common to the Central Bank, but also to many government institutions, however I believe we should concentrate on cleaning this up as it has a detrimental effect to good governance and thereby default a drag on economic growth of the nation. I have a plan that will solve this problem, but we have to get rid of the dead weight in the Bank first.