Sri Lanka's air force bombed a Tamil Tiger rebel air base and a rebel navy base, while separate ground clashes in the country's war-torn north left 20 combatants dead, the military said on Tuesday.

Military spokesman Brig. Udaya Nanayakkara said the rebel sea base was targeted Monday night, while the air base was bombed early Tuesday.

Pilots confirmed that they hit their targets but casualty and damage details were not immediately available, he said.

Meanwhile, infantry fighting across the northern front lines of the island's civil war killed 16 rebels and four soldiers, Nanayakkara said. The fighting took place Monday along the Jaffna, Mannar, Vavuniya and Welioya fronts, he said.

Rebel spokesman Rasiah Ilanthirayan could not be immediately reached for comment.

It was not possible to verify the military's claims because reporters are not allowed into the war zone.

The rebels first deployed their air wing last year to attack military and economic targets. It is made up of a few self-assembled, low-flying aircraft.

Sri Lankan troops on the ground have been trying to push into the northern rebel territory from four fronts, while the air force has supported them with near-daily bombing raids.

The government earlier vowed to crush the insurgents by the end of this year. However, the island's army chief Lt. Gen. Sarath Fonseka told Colombo-based foreign correspondents Monday that while the rebels have been stripped of their conventional fighting capabilities, it may take another year to defeat them.

Tamil Tiger rebels have fought since 1983 to create an independent homeland for ethnic minority Tamils, who have faced marginalization at the hands of successive governments controlled by majority ethnic Sinhalese. More than 70,000 people have been killed in the conflict.

Sri Lankan shares sagged further on Tuesday as investors remained cautious because of deteriorating economic conditions and uncertainty caused by the ethnic war.

The All Share Price Index fell 0.73 percent (17.88 points) to end at 2,439.96 while the more liquid Milanka was down 1.23 percent (36.63 points) to 2,952.15. Turnover was 318 million rupees.

The indices were dragged down by drops in index-heavy stocks.

"The main dips came in the heavyweights," said a broker.

Dialog Telekom fell 25 cents to 14 rupees and Sri Lanka Telecom also dropped 25 cents to 45 rupees. John Keells Holdings lost one rupee to end at 109

"Investors are taking a very cautious approach owing to concerns about the economy and the war. With interest rates being high, they also have an investment alternative."

Nations Trust Bank was the main focus of trading with 4.9 million shares changing hands as a high-net-worth individual sold out, brokers said.

NTB ended up one rupee at 35.

Some 143,000 shares in Hotel Services (Ceylon) were done with the stock closing up a rupee at 143.

Brokers said the market could revive if there was any positive news on either the economic or war front.

Investors are concerned that soaring inflation and high interest rates could erode corporate profitability, and that the war against the Tamil Tigers is dragging on with no end in sight.

A top Sri Lankan industrialist has warned that high inflation from weak monetary and fiscal management is destroying the country's manufacturing base by grinding down the competitiveness of the country's exports.

Sri Lanka's inflation hit a record high of 28.2 percent in June on a new inflation index in which weights were changed after the most widely watched index showed 29.9 percent inflation in April.

In the second half of 2007 Sri Lanka's monetary policy loosened causing rampant inflation and currency depreciation but the rupee rose amidst tight monetary policy and improved government finances from a dollar loan later in the year.

Though the on-off monetary policy managed to reverse exchange rate weakness, it has not managed to check inflation, hurting producers who face rising domestic costs including higher wage demands and threats of labour unrest.

Head of Hayleys, a top exporter that uses a large proportion of domestic raw material, says it understands that the government is fighting a war and is also pushing for infrastructure development.

"But these goals require a sustainable economy with inflation under control," Hayleys chairman N G Wickremeratne told shareholders in the group's annual report.

"It does not make sense to destroy the country's productive base as the present policies are doing.

"That is what we are saying is happening, being the first to notice as we are at the forefront of the economy."

Hayleys estimates that it lost at least a billion rupees in margins due to the inflation, exchange rates and interest rates that are acting against domestic industry.

The group produces and exports tea, rubber and coconut-based goods, textiles and is also involved in international shipping and logistics.

"We are extremely concerned and indeed significantly affected by the management of inflation, interest rates and exchange rates which have serious consequences for all value added goods and services which are required to be competitive in export markets," Wickremeratne said.

"Global markets will not allow manufacturers the privilege of recovering cost increases fuelled by local inflation beyond the levels of inflation in competing countries, and exchange rates must move to accommodate this reality.

"Productivity enhancements though indeed necessary cannot address this problem if these circumstances continue."

Economic analysts say countries like Singapore had steadily appreciated their currencies in a bid to push domestic industries higher up the value chain, but this was achieved with low inflation and in small increments spread over nearly three decades.

Inflation is a monetary phenomenon coming from central banks, when policy rates are used to manipulate interest rates in defiance of market forces, where rising demand for credit - especially from government deficits - require a higher interest rate.

Sri Lanka has an exchange rate pegged to the US dollar but the country runs its own policy rates - a process known as a soft-peg - which can generate high domestic inflation when new money is created.

Before the central bank was created in 1950 with the power to print money and manipulate interest rates, Sri Lanka had a currency board, also known as a 'hard peg', an arrangement similar to that of Hong Kong and close to Singapore's.

International and local economists have called for a return to a currency board or at least to legislated inflation targeting where the parliament takes away the powers now given to the central bank to inflate the economy through the country's monetary laws.

A currency board blocks central bank financing of either budget deficits or commercial bank liquidity shortfalls, creating economic and exchange rate stability and low inflation.

From 1977 to 1994 Sri Lanka has adopted a cycle of money printing and depreciation to keep the economy going.

Before that Sri Lanka slapped exchange controls and import controls in a failed bid to prevent currency depreciation, creating what is referred to in the country as a 'closed economy'.

From 1995 serious attempts were made towards creating a low fiscal deficit, low inflation, strong currency economic framework. The process ended in 2004 with a return to central bank financing of deficits and high inflation.

High domestic inflation requires currency depreciation to prevent export sector bankruptcies.

But Hayleys says they are not calling for constant currency depreciation.

"We know that the problem is inflation and not the exchange rate," Wickremeratne said.

A player in an economy can escape the worst effects of the mis-management of the domestic currency by adopting a foreign currency which is backed by better monetary policy - a process economists call dollarization.

Sri Lanka went for partial dollarization with the creation of foreign currency banking units, and has since allowed domestic industries, especially in exports, to borrow in dollars.

Hayleys says the rupee depreciated against the US dollar in the first half of the last financial year, but appreciated in the second half.

Meanwhile, local interest rates rose towards 20 percent and above, while US dollar interest fell. Hayleys says it "decided to seize the single most critical opportunity" which was the interest rate differential between the US dollar and Sri Lanka rupee.

"The strategy thus formulated was implemented across the group, leading to many beneficial outcomes," the company said.

"The group as a whole underwent a shift to dollars in their funding mix, leading to a reduction of interest costs."

The borrowings were hedged against export earnings. By dollarizing their operations even partially, a company could divorce itself somewhat from being buffeted by a badly managed currency.

Increasing official and de facto dollarization of an economy (including foreign currency hoarding, retention of travellers cheques), dollar deposits or dollar borrowing show a weakening of the confidence in the national currency.

Economic analysts say it also indicates a denial of legitimate seigniorage revenues (profits from note issue) to the government and a tacit admission of the failure of the monetary system itself or the inability to issue 'good money.'

Economists have pointed out in the past that with financial sophistication one can escape the worst effects of a high inflation currency.

But ordinary and poor people who do not even have the knowledge to shift their savings deposits or demand dollar salaries and foolishly trust the domestic currency, get hit harder than even businesses.

Although companies spend heavily on employees, few finance executives understand the value of this investment, a top official of one of Sri Lanka’s largest conglomerates said.

"It is extremely puzzling to see the amount of disinterest that CFO’s have in this area of human capital," said Ronnie Peiris, chief financial officer and group director of John Keells Holdings.

He was speaking to a 300-strong audience of senior corporate executives at the LBR-LBO CFO forum held at the Cinnamon Grand in Colombo recently.

"A research survey in America indicated that only 16 percent of the surveyed CFOs (chief finance officers) had anything more than a moderate understanding of the return on the human capital. It is also very paradoxical as the CFO is the fulcrum on which we allocate resources to various areas of investment."

CFOs of companies play a pivotal role in managing the resources of an organization but are usually not concerned enough about optimizing employee returns, he says.

A CFO develops revenue for the employer while maintaining a balance in revenue and cost by overseeing all company accounting practices, including accounting departments, preparing budgets, financial reports, tax and audit functions.

The official would study, analyze and report on trends, opportunities for expansion and projection of future company growth.

CFOs also direct financial strategy, planning and forecasts; conferring with the president, vice president of sales and department heads.

Peiris says it is a must for CFOs to participate in and help improve people management while tracking the out come of the organisation's investment and work.

"But these are all outcomes. Then, we will compare the actuals mechanically and blindly against these out comes and we stay in our offices snuggly.

"Given the significant value of the investment shouldn’t we be going beyond out comes, beyond control, beyond compliance in helping our teams to build a performance-driven culture?"

Employee pay and benefits make up 20 percent of costs at the diversified John Keells Holdings and de-motivated employees are a low return on human capital investment, he says.

"Employee disengagement is what happens when people continue to work at a company but have effectively quit, when they put in the minimum effort to get their paycheck and not get fired…

"But they do not give their talent, creativity energy or passion to their work. Their bodies are there but not their hearts and minds."

He says there are factors that are beyond money that motivate people to perform.

"They are motivated by factors such as pride, job satisfaction and personal desire to contribute, rather than receive a monetary note."

As a result, organizations are now shifting more attention to developing human capital.

Over the last few years, JKH has developed a comprehensive performance measurement and "pay for performance system," he says.

"Employees must understand what is expected of them. Also, they must see if they can achieve the desired levels of performance and they must also believe if they achieve these, then the organization will recognize and reward them."