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by SUREKHA GALAGODA

If financial reforms are to succeed, they should be implemented as a partnership between the government and the private sector, Minister of Economic Reforms Milinda Moragoda said last week.

Addressing the first Conference on Financial Reforms held at the Trans Asia Hotel, he said the private sector has been passive with politicians over the years because it needs the help of politicians. "Therefore, we need to ensure that we will not fail again as before," he said.

Minister Moragoda requested the participants to bring an actionable list. "Do not revisit old solutions, but bring some changes that are good for the people and assure them that reforms are good," he added.

Over 200 delegates including ministers, government officials, bankers, fund managers, stockbrokers, members of the private sector and heads of donor agencies took part in the conference.

The Minister said that practical ideas are needed to wipe out the old culture. "The road to reforms is difficult and hard, but we will have to go through it as it needs to be done," he added.

Resident Representative of the International Monetary Fund (IMF) Dr Nadeem Ul Haque, a strong proposer of reforms, spoke on the need for financial reforms. He said that the industry should take the lead in bringing the financial reforms with innovative and fresh ideas as politicians can only run governments and not take risks.

Dr Ul Haque said that markets are the engine of growth contrary to the popular belief that the private sector is the engine of growth.

He said that though the industry is under-developed, it should not be over-regulated. He sees the referee model as the best model for a regulator. "Regulators should be heard and not seen. They introduce rules to ensure fair play and intervene when the game is threatened and is about to get out of control."

Dr Ul Haque said that markets cannot be developed by governments. Instead, they should introduce the legal framework and minimise government intervention and allow for innovation to take place. This, he said, will ensure the immediate development of markets.

Board of Investment Chairman Arjuna Mahendran, addressing the gathering on 'Critique of the present financial system', said that the economy is facing a crisis due to the poor macro-economic situation and the weaknesses in the banking system.

The two State banks account for over 50 per cent of deposits at present due to the State patronage they receive and not due to their efficiency or competitiveness, he said. He suggested some methods to improve the economy and the efficiency of the banking system. As an initial step, he said that bad debt should be restructured immediately while one State bank should be closed and converted to a Debt Recovery and Collection Agency (RACA).

Among the other recommendations were transferring all bad debt to RACA, rescheduling public debt into long-term debt with a maturity period of 5-10 years, implementing a debt trading system in the Central Bank, abolishing fixed commissions in the Colombo Stock Exchange, which is said to be the highest in the world, negotiating cross-listings of Sri Lankan blue chips in Singapore and Mumbai, making US dollars legal tender in Sri Lanka, commencing the issue of treasury bonds to the public in US dollars, making the Employees Trust Fund (ETF) a public-private sector partnership and contracting of Employees Provident Fund (EPF) funds, forcing consolidation in the banking sector by raising the minimum capital requirement to five billion rupees per bank by 2005, reducing non-performing loans to below three per cent of the asset base via RACA and strictly enforcing adjustment plans to achieve a capital adequacy ratio of 12 per cent by 2005.

Financial Consultant of USA-based Broadmark Asset Management Sanjay Kulatunga said the lack of a proper dividend policy and proper advice deters small investor participation.

Introducing different instruments and investment options, bringing down transaction costs, establishing an independent Securities and Exchange Commission (SEC) and rationalising of State financial institutions are some of the methods suggested by Mr Kulatunga to build the confidence of small investors.

Fund Manager of Ayojana Nirosh de Silva said an efficient capital market is a pre-requisite for proper allocation of resources in the economy and for sustainable development. The Government needs to liberalise the collection and management of long-term savings. Funds collected through the EPF, ETF and National Savings Bank should be given to private sector fund managers, he said.

Mr De Silva said if the Rs 400 billion under State management was handed over to private sector fund managers, the country could have a fund management industry that nets a fee income of over Rs 2-4 billion. The industry could post a profit of Rs 1-2 billion.

In return, the country can get a more efficient allocation of resources, a transparent capital market which relies less on foreign investors and better returns for all stake holders.

Secretary to the Ministry of Enterprise Development, Investment Promotion, Industrial Policy and Constitutional Affairs and former CEO of National Development Bank Ranjith Fernando said: "We should pay more attention to the process of reform rather than the content of reform."

He was of the view that ownership rules and the Mergers and Acquisitions Code should change to suit modern day needs.

CEO Hatton National Bank Rienzie Wijetilleke, speaking on 'The present state of banking', said that commercial banking links all other industries. Therefore, a pressing need is to withdraw State patronage while consolidation should be considered as a solution. He said that it should not be at the expense of healthy competition. He also spoke of the impediments to the growth in the sector.

Deputy CEO Standard Chartered Grindlays Mangala Boyagoda said prudential regulation and supervision are vital to developing a vibrant financial market.

Director General SEC Dr Dayanath Jayasuriya said 1500 laws are in operation with 60 of them having a significant impact. The requirement of far too many approvals, overlapping areas, unregulated financial services, unregulated products, unregulated institutions, uneconomical requirements, arbitration proceedings, grey areas, discriminatory laws and restriction of foreign investors were some of the problem areas identified by him.

CEO Citi Bank Kapila Jayawardena, addressing the gathering on debt markets, recommended the appointment of a debt market committee, deregulation of captive funds, legal and tax reforms and effective training for market participants.

CEO of Union Assurance Sarath Wickramanayake, presenting the insurance industry view point, called for a supportive tax and legal structure and greater freedom to sell a full range of forex products and also make overseas investments to safeguard the interest of life funds.

Managing Director JB Securities Murtaza Jafferjee, presenting the view point of stock and commercial debt brokers, recommended the formulation of a shared, committed and unified strategy for capital markets, hastening the listing of large State-controlled or semi-privatised businesses by the government, hastening the enactment of legislation to bring the revised Companies Act, a more active and effective role in the market to be played by regulators and lobbying for inclusion of Sri Lanka in the Morgan Stanley Global Equity Index.

Director Ceylinco Consolidated (Pvt) Ltd and Deputy Chairman Ceylinco International Investments Mano Tittawella, speaking on the role of the government in the financial sector and government as owner and financier, said that major macro-imbalances need to be rectified. "There are no magic solutions," he warned.

The starting point of any reform agenda in the financial sector must be at the level of tackling the budget deficit, while encouraging foreign and domestic investments into the much needed infrastructure projects in the country.

Minister of Enterprise Development, Investment Promotion, Industrial Policy and Constitutional Affairs Prof. G.L. Peiris, addressing the gathering at the end, assured the participants that the Government will do everything possible to ensure rapid and effective implementation of the proposed financial reforms. He said the UNF Government is fully committed to the implementation of recommendations.

The conference was organised by the Development and Review Committee on Financial Reforms, Advisory Council for Industry, Ministry of Enterprise Development, Industrial Policy, Investment Promotion and Constitutional Affairs and the IMF. The conference was coordinated by the Sri Lanka Association of Investment Analysts.

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