Introduction
At the outset I am proud to say that we have made substantial progress on these fronts which have been reinforced in no small measure by the strong support of our people as well as the international community.

What we have embarked upon, some four years ago, is the great task of national revival; involving a radical departure from the tentative, partial and incomplete policies of the period before. It required great political courage to break away from the shackles of our past, to meet the challenges of the enormous problems, which we inherited, and to embark on creating a new economic and social climate in the country. I am sure, that even our most vociferous critics will agree that no government of independent Sri Lanka has undertaken such sweeping reforms for the betterment of the country as what we have done during a short period of about 4 years. Our Government is determined to pursue these reforms resolutely in the future. We are aware that the tasks ahead are formidable but we are determined and we have the courage to face them and find solutions which will propel Sri Lanka to the ranks of the rapidly growing economies, while maintaining our cherished commitment to protect the vulnerable and deprived groups and to maintain our democratic traditions and to respect human rights inviolate.

My presentation is structured in two parts. In Part I, I will review our economic policy and performance. The emerging trends in the national economy, revised budget out-turn for 1998 and salient features of the 1999 Budget estimates will also be included in this section. In Part II, I will place before the House how the Government proposes to consolidate the fiscal position to sustain a stable macro economic environment in 1999. A separate document on the state of the economy 1998 is placed before the House for the benefits of Honourable Members.

Economic Policy and Vision
Four years ago, the people of our country made a historic and courageous decision. By an overwhelming majority, they voted for our vision for peace, freedom and prosperity. After four years of government and the exercise of fulfilling the sacred trust that was bestowed on us, we can justifiably hold our heads high. Given the most daunting obstacles, our vision has proved to be correct. Its practical realisation is well on its way. It has been accepted by all, as the only path for salvation and progress for our country.

Although our noble objective of ushering peace to our land has not yet been completed, owing to the senseless intransigence of the terrorist leadership, our soldiers have laid down their lives to liberate large areas of land and move them three fourth of the people of the North. The terrorists are now confined to the jungles. After being reviled for callousness and indifference in the past, we have now won the sympathy and support of the entire world, for the justness of our cause - our determination to preserve nationa1 unity and bring peace to our nation. Our people in the rest of the country, live no more in fear.

We started the process of economic development with a clear economic vision. First and foremost, the major priority was to strengthen our economic fundamentals. The process of creating stable conditions to sustain economic development had to be started by us all over again. Primarily, we reversed the prevailing policy of massive, recklessly amassed budget deficits, which averaged over 13 per cent of GDP over long period of time, imposing intolerable burdens on the people. We managed our monetary and exchange rate policies prudently and flexibly and succeeded in keeping interest rates low and the exchange rates competitive without pushing domestic inflation. A series of reforms of the financial sector has improved efficiency and kept costs low helping to contain interest rates. Inflation, the scourge of the last regime was tamed, despite the high cost of an unproductive war. In four successive budgets, we tackled economic mess that we inherited and laid the foundation for a sound and sturdy economy.

Second, a fresh breeze of openness and fairness in economic management was introduced; gone are the rampant favouritism, cronyism and corruption that plagued our economy. Adopting a fundamenta1 departure from the past practice of making isolated and ad-hoc attempts to formulate and implement economic policies and programmes, our Government regularised and consolidated market friendly policy strategies in a well-thought out medium term policy framework. We revived national planning, project implementation and monitoring at central and peripheral levels, so that public finances were spent on projects and programmes based on people's and the country's developmental needs and not quwandered on grandiose, unproductive and corrupt ventures as in the past. Annual budgetary formulation is linked to six-year development plans of line ministries and agencies. We are beginning to involve local government's authorities also to function within this overall development framework. All in all, we achieved a stable transition to match the economic realities, while keeping in line with market fundamentals and good governance.

Third, we developed an incentive structure conducive to create a dynamic private sector. We lowered taxes to encourage savings and investment. We lowered customs tariff to improve efficiency and productivity, of our industries. We developed several industrial parks to promote regional industrialization and offered a wide range of fiscal and financial incentives to diversify our industrial production. Within the last four years, we have seen the expansion in investments and diversification of industrial production in electronics, steel, cement, software and other industries. It is a pleasure to see our youth taking up to computers and information technology. We embarked on a privatisation of commercial enterprises such as Air Lanka, Telecom, Steel, Gas and Plantations to attract capital, technology and managerial skills and encouraged private sector participation to develop our economy. The expansion in these areas has proved to be successful. It is significant that our plantation sector reforms of privatising management, while the government retains land ownership has infused a new lease of life to this sector, which suffered a serious setback during the last 20 years. Today, this sector is leading a revival of the agriculture sector. Also we restructured the ventures which were badly privatised with massive corrupt deals and reprivatised them at much expense to the Government. In short, the implementation of our economic vision is transforming a backward economy to a modern one to face the next millennium.

Fourth, there was an urgent need to develop modern infrastructure for any form of economic development. In this area, public investment had declined and social infrastructure such as education and health proved to be completely unsuitable for present day needs. Vital infrastructure services such as public transport, power and energy, telecommunication, ports were badly neglected for several years. There were over 200,000 people waiting for telephone connections. There had been a major crisis in the supply of electricity in the presence of constant demand for such services. We gave highest priority to rebuild the antiquated infrastructure; telecommunication, electricity, roads and the like. In telecommunication, people who were kept waiting for 5-15 years for a telephone in the past are now able to get a phone in 5-10 days. electricity supply has been vastly improved and reliance on unstable hydro electricity has been reduced. Power cuts are no more. Vast investment in the Colombo Port has transformed it to the best port of South Asia. We have expanded rural electrification, roads, 900 odd minor irrigation schemes, industrial estates, school buildings and health facilities to take the development process to the regions.

We have spent much effort and done a great deal of planning to improve the economic infrastructure. Some of the large infrastructure projects we have formulated will come into effect at the beginning of next year. Work on the Colombo-Katunayake expressway, Southern highway and Colombo and Galle Ports will begin next year. Colombo-Kandy highway should start in the year 2000. Yet we will not neglect the maintenance of our existing roads, irrigation and other facilities as done by the previous government. The education reforms project, which began in a model district this year, will take off next year, through the length and breadth of the island to create a new generation of youth, equipped with necessary character, skills and attitudes, to effectively function in a highly competitive and globalised world. The vision of our health reforms is to bring in a system of health-care delivery through structural and organisational changes, geared to meet the community health needs in a modern, equitable and humane manner. The health sector reforms will commence at the beginning of year 2000.Fifth, poverty alleviation is an integral part of our economic vision. We recognise that the fruits of economic development will take time to reach poor and vulnerable sections of our society. The variety of ad-hoc welfare schemes, often captured by the undeserving, have been amalgamated, improved and targeted to all the poor. This has helped to protect the weak at a crucial stage of transition of our economy. Hopefully, it has helped to build social cohesion. The Samurdhi Programme, which has reached nearly 2 million families, has been strengthened through rural development projects, self-employment programmes and community development activities. It also encourages savings among the poor. We pursue the task of tackling the problem of poverty through our two- track strategy of accelerating growth, investment and employment on one-track while strengthening poverty alleviation programmes on the other.

The economy is responding magnificently to our vision and policies. Incomes rose substantially, on average at 5 per cent per year and we are now approaching the levels of middle income countries of the world. Incomes have come to be distributed more equitably than in the past. Unemployment declined steadily.

The resilience exhibited by our economy during the recent global economic crisis is largely due to our prudent economic management. Thus, we did not become vulnerable to vicissitudes of world money and capital markets, as many others have. In this fifth budget, we intend to further consolidate our gains and move resolutely towards sustainable economic growth despite the increasingly difficult world conditions. 'Our relative stability in an ocean of turbulence has attracted the admiration the world over.'

Economic Performance

Our economy continues to be well managed. During the past four years, Sri Lanka has made encouraging progress on the economic front, particularly in terms of higher growth, improved fiscal discipline, lower inflation and lower unemployment. In this background, Sri Lanka's economy shows a strong resilience in economic activity despite an unfavourable regional impact of the Asian crisis. Let me present major achievements on the economic front during the last four years.

- In 1997 Sri Lanka economy recorded 6.4 per cent growth and is expected to be over 5.0 per cent growth this year despite an adverse impact of East Asian crisis on investment. All in all, our economy expanded at an annual average rate of 5.3 per cent during the last four years despite a set back in 1996 due to severe drought and higher expenditure on national security. The per capita real income increased by 4 per cent annually.

- The rate of unemployment declined steadily from 13.8 per cent of the labour force in 1993 to 10.4 per cent in 1997 with the share of private sector employment increasing from 75 per cent to 80 per cent. Employment creation during the past four years through private sector activities, self-employment programmes, rural infrastructure development projects, overseas employment etc. exceed 700,000.

- The overall budget deficit which had risen to 10.5 per cent in 1994 was reduced to 7.9 per cent in 1997; containing the inflationary impact of the budget and making more resources available for the private sector, despite a sharp increase in security expenditures.

- Interest rates came down sharply in keeping with the easing of inflation and some relaxation of monetary policy. As a result, the prime-lending rate declined from 18 per cent to 14 per cent and Treasury bills from around 17 per cent to 12 per cent.

- The current account deficit of the balance of payments declined from 5 per cent of GDP in 1993 to 2.5 per cent in 1997 and country's external assets increased from US$ 1,948 million to US$ 2,972 million.

- The size of external and domestic debt in relation to GDP was reduced and debt service ratio declined from 15.5 per cent to 13.2 per cent of export earnings.

- Improved financial policies helped to reduce inflationary pressure in the economy and bring greater stability in the domestic money and exchange markets.

Socio Economic Conditions

Parallel with the development on economic front, socio-economic indicators also reflect an encouraging improvement during this period. Let me highlight few indicators on socio-economic conditions revealed by the latest Consumer Finance Survey conducted by the Central Bank of Sri Lanka.

- The literacy rate increased from 88.6 per cent in 1986/87 to 92.1 per cent in 1996/97. The improvement in the literacy rate is particularly significant in the estate sector.

- The proportion of population who had access to secondary education increased from 42.8 per cent in 1986/87 to 51.4 per cent in 1996/97.

- The incidence of schooI avoidance in the age group of 5-14 years declined from 13.0 per cent in 1986/87 to 7.3 per cent in 1996/97. School avoidance at 7.0 per cent was lowest in the rural sector. The sharpest decline in school avoidance from 30.7 per cent in 1986/87 to 10.4 per cent in 1996/97 was recorded in the estate sector.

- A reduction in housing congestion was observed between the period 1986/87 and 1996/97. Between the period 1986/87 to 1996/97 the average number of persons per room declined from 1.3 to 1.1 while the average floor area per person increased from 11.0 square meters to 14.7 square meters.

- The proportion of households having access to pipe borne water rose from 22.6 per cent in 1986/87 to 30.6 per cent in 1996/97.

- The proportion of households served with electricity increased from 26.5 per cent in 1986/87 to 54.8 per cent in 1996/97.

- A marked improvement in sanitary conditions is indicated. The water seal type latrines in households increased from 44 per cent in 1986/87 to 68 per cent in 1996/97. In the rural sector the respective proportion increased from 39 per cent in 1986/87 to 68 per cent in 1996/97, while in the estate sector this proportion increased from 35 per cent to 53 per cent during this period.

- In 1996/97, 40.2 per cent of the population was in the labour force. The higher participation rates observed is due to an increase in female participation in the labour force, resulting mainly from better education and an expansion in labour market opportunities for females.

- During the period from 1986/87 to 1996/97 the growth in employment outstripped the growth in the labour force, resulting in a decline in the rate of unemployment from 15.5 per cent of the labour force in 1986/87 to 11.5 per cent in 1996/97.

- A high incidence of unemployment is observed among the youth where the rates of unemployment in the age groups 14-18 years and 19-25 years were 39.7 per cent and 32.1 per cent respectively.

- Widespread employment opportunities, narrowing the urban, rural disparity in income, better targeting in government welfare programmes and the trickling down of benefits emerging from economic progress to lower income groups have led to a more equal distribution.

- Reflecting an improvement in income equality, the income share of the richest 20 per cent of income receivers declined from 57 per cent in 1986/87 to 53 per cent in 1996/97. The income share of the poorest 40 per cent increased from 11.3 per cent in 1986/87 to 12.8 per cent in 1996/97.

However, there continue to be some fundamental challenges to long term development in the country. The economy continues to be strained by the war, which has been claimed for substantial increase in defence expenditure. This constitutes over 5 per cent of GDP. Other than the obvious impact on the Government Budget through high defence expenditure, the war also remains a deterrent for investment in the economy particularly for large strategic investments. The other negative effect of current conflict includes the fall in income from tourism, significant slow down in investment and reduction in production and high cost of refugees and rehabilitation. It is not possible to finance such a large expenditure without making sacrifices in terms of growth, employment and cost of living.

Infrastructure needs are on the rise. Concessional foreign funding has to be allocated to develop infrastructure in non-commercial sectors such as small irrigation, health, education, poverty alleviation and rural economy. Investment requirement of power, water, highways, ports, communication etc. demands for alternative and innovative financing arrangements. The participation of the private sector in commercial infrastructure should therefore be encouraged.

The world economy is undergoing a major business cycle and there is a considerable degree of uncertainty in the global financial markets as well as the medium term prospects for world trade. Exchange markets experienced high volatility with large currency depreciation particularly in the Asian Region. Stock prices continued to decline. The drying up of foreign capital, sharp drop in the purchasing power and decline in asset prices have caused contraction in global demand. This would require a concerted effort to consolidate the current macro economic and financial policies and to further strengthen economic fundamentals.

Monetary policy in the past four years focussed on containing inflation, providing adequate liquidity to the economy and maintaining stability in the financial system. The exchange rate continued to be market driven. The decline in monetary expansion and inflationary pressures together with the recovery in the economy towards 1996 permitted some degree of relaxation in the monetary policy stance in the early part of 1997. A liquidity injection of around Rs.8,000 million was made into the system by the reduction of the Statutory Reserve Requirement (SRR) from 15 per cent to 12 per cent. Commercial banks were permitted to extend foreign currency loans to non-BOI exporters. However, due precautions were taken to avoid excessive foreign currency exposure on the part of the banks.

In the latter part of 1997, the financial system was affected by some speculative activity arising from the East Asian financial crisis. However, given that Sri Lanka's exchange rate has been flexibly managed, there was no necessity to engage in any such major depreciation. In addition, large depreciation of currencies in East Asia has been a situation faced by all other countries and a competitive depreciation of currencies would have been disastrous and created more instability. However, in keeping with the movement in market trends, the exchange rate has been permitted to adjust flexibly to prevent any serious misalignment in the exchange rate. In view of the continued uncertainty in East Asian markets and a rise in inflation, Treasury bill and Treasury bond rates have also risen by about 1-2 percentage points. Open market operations have been continued to contain monetary growth to around 13 - 14 per cent. It is evident that the cautious approach to liberalisation of the capital account, the low exposure to short term foreign debt and the continuous depreciation of the rupee under the current exchange rate regime have enabled Sri Lanka to avoid a major destabilisation consequent upon the current turbulence in East Asia.

Financial Sector Developments

The financial sector has deepened and widened considerably in recent past. Deposits have increased from Rs.137 billion in December, 1994 to Rs.241 billion in August, 1997 and total assets of the banking sector have risen from Rs.281 billion to Rs.463 billion. The number of banks in operation has increased to 26, while the number of bank branches has increased to 977. Several new domestic private sector banks have been established, while the number of foreign banks has increased to 18 in 1997. New financial institutions such as money brokers, unit trusts and venture capital companies have been established. Credit allocation has been deregulated and interest rates are market driven. The government issuing bonds to the banks has improved the financial condition of the two state banks, while at the same time granting these banks greater autonomy in their operations. In a similar fashion, the National Savings Bank (NSB) has been empowered to make its operations more market oriented. These developments have all contributed towards making the financial sector one of the most dynamic in the economy. The sector has recorded an average annual growth rate of 10 per cent in the past five years and now contributes 7.5 per cent of GDP, thus displaying the potential to be a major source of future economic growth.

The development in the financial sector cannot be sustained without systemic stability. Consequently, care has been taken to develop the supervisory and regulatory aspects. Capital adequacy standards consistent with international norms have been introduced for commercial banks. Regulations on loan classification, provisioning for bad and doubtful debt and single borrower limits have been enforced. Off site and on site surveillance of banks has been strengthened. A new category of financial institutions, viz. Licensed Specialised Banks (LSBs), has been introduced and these have been brought under the supervision of the Central Bank. Further, auditing and accounting standards have been developed to ensure uniformity in the financial reporting of listed companies. The management responsibility and accountability of the two state banks have been strengthened and banking laws are being reviewed. All these are measures adopted to maintain the stability of the financial system.

Fiscal Consolidation

The previous regime was notable for extra-ordinarily high budget deficits. The deficit of 1980 of 23 per cent of GDP and in 1989 of 16 per cent was unprecedented. For the entire period of 17 years, deficit

averaged at 13 per cent. The conduct of fiscal policy in this manner directly contributed to double digit inflation of around 13-15 per cent, high level of lending rates of 30 per cent, excessive money growth of over 20 per cent, rise in public debt almost to 100 per cent of GDP and the denial of valuable national savings for investment. On top of this fiscal profligacy we inherited an extraordinary commitment on defence which pre-empts over 5 per cent of GDP with an intolerable burden on our development.

It is this legacy that made us to start all over again the process of creating stable conditions to sustain economic growth. We accorded highest priority to correct these distortions over the last four years. Progress was made towards making a buoyant tax system over the medium term. Goods and Services Tax was implemented to strengthen government revenue flows over the medium term. Excise taxes as well as National Security Levy were raised to maintain the yield of such taxes. Non-priority expenditure was curtailed and expenditure control and management were improved. Politically motivated public expenditure programme was terminated and measures were adopted to save public resources. The Government procurement procedures were streamlined and made them cost effective. Administered prices on wheat flour, petroleum products, public transport, electricity and numerous government services were adjusted in order to prevent the emergence of large budgetary imbalances. Supplementary budget estimates were limited to those required for national priorities. These measures have resulted in a permanent improvement in the structure of the budget. Despite many constraints and large defence expenditure, we have reduced budget deficit below 8 per cent of GDP from the level of around 10.5 per cent prevailing prior to 1995. If not for the large defence expenditure, our achievement in the fiscal front has been substantial. Despite these difficulties, we will contain this year's deficit also below 8 per cent of GDP. Improved fiscal performance enabled us to reduce monetary growth to a range of 13-14 per cent from over 20 per cent, interest rates to a ranges of 12-16 per cent inflation to about 10 per cent and protect our external assets sufficient for over 5 months of imports, providing stability in our economy. We have to undertake this difficult reform process at a time when the world economic outlook has become difficult. Nevertheless, these policies have contributed to insulate our economy from the adverse impact of the recent financial crisis in Asia.

Taxation Reform

Tax reform of our Government aims at achieving a simple, broad based and transparent tax structure in the country in order to create an environment conducive for rapid economic development. In this background, the Government initiated reforms in all major areas of taxation. Surcharge on income tax was removed, the maximum rate of corporate tax maintained at 35 per cent, income taxes on priority sectors and exports kept at 15 per cent, investment tax allowance introduced and tax slabs widened with a view to reducing effective tax rates. Excise taxation has been limited to a range of standard excise commodities to minimise the burden of such taxes and also to improve efficiency of tax administration. National Security Levy on investment goods was reduced to minimise up front cost of investment. Moving to a value added basis and also to eliminate burden on investment and exports, turnover tax was replaced with Goods and Services Tax (GST) with a single rate. Taxation, of the financial sector has also been rationalised. The turnover tax rate on financial services has been gradually reduced and a uniform rate of 1 per cent was introduced for bank and non-bank financial institutions. The with-holding tax on interest income from Government Securities has been eliminated and reduced in the case of interest from other sources the stamp duty on financial instruments has been reduced to a nominal level. Several tax concessions have been provided to develop the capital market. Among these are the elimination of tax on capital gains arising from the sale of shares of listed companies and the removal of stamp duty on the sale of shares of listed companies.

The Government initiated a Public Enterprise Reform Programme in 1995 with a view to improving the performance in the national economy. The reform programme covered enterprises engaged in industry, services and agriculture. This programme, during the past four years attracted foreign inflow of about US$ 400 million, in addition to generating about Rs. 35 billion to the Government revenue. The divestiture of several enterprises also improved budgetary conditions by eliminating subsidies to such enterprises. It attracted private sector investments into important enterprises such as gas, steel, telecommunication, plantation and Air Lanka. In the context of the changing economic condition, this programme has laid a foundation for future restructuring enabling the Government to move away from commercial activities.

Public Service Reforms

The Government accords high priority to restructure public services to cope with emerging challenges and to remove structural deficiencies in public service. A new salary, structure was implemented during the past two years, taking into account its essential interrelationship and levels of operations and responsibility to eliminate distortions and consequent anomalies. The additional cost of new salaries effected by the Government since 1995 has cost Rs. 15.5 billion. The emphasis has been placed to improve productivity and to ensure cost effective services. The major component of public service reform be the rational grouping of functions under ministries and departments with due regard to maintaining their operational efficiency. Action has been initiated to review and revise cadres, recruitment and promotion to conform to restructuring needs as well as to remove prevailing deficiencies. A scheme of performance appraisal designed to enhance efficiency and productivity along with new salary structure has been introduced. The modifications of prevailing systems and procedures to fulfil specific missions of organisations have been undertaken.

Infrastructure Development

The Government, in addition to public investment encouraged private sector participation in the development of infrastructure facilities and achieved a satisfactory progress in addressing infrastructure constraints in key sectors in the economy during the past 4 years. The power supply in the national grid was expanded by adding three thermal power plants namely the Kelanitissa Gas Turbine Project, the Sapugaskanda Power Station and a private sector BOO project. Thus, total installed capacity of electricity generation was raised from 1409 MW in 1994 to 1607 MW in 1997 and reliance on hydropower was reduced to 70 per cent. As a result of incentives offered to the private sector to import generators, a total of 248 BOI and non-BOI companies installed additional power generation capacity of 108 MVA. In addition, several power projects have been formulated to augment the generation capacity by 500 MW and are expected to come on stream between 1998 - 2001. The public investment on generation, transmission and distribution projects continued to remain high and will increase to Rs. 9,100 million in 1999.

The telecommunication sector expanded rapidly during the past 2 years. The total private investment made in 1997 was Rs. 6,816 million as compared to Rs. 3,248 million in 1996. The telephone density improved from 72 person per telephone in 1996 to 58 in 1997. It is expected to achieve 20 per cent density by 2001. The National Budget will also contribute Rs. 3,369 million in 1999 to expand telecommunication facilities. The National Shipping Policy envisages the emergence of Sri Lanka as a premier shipping centre in South Asia with Colombo operating as a hub port. In response to growing demand, the development of the North Pier at the Colombo Port to handle 100,000 TEUs per annum was initiated with the assistance of OECF at a cost of US$ 15 million. Work is also in progress to add 3 container cranes and 6 transfer cranes to the Jaya Terminal at a cost of US$ 40 million. Arrangements have also been finalised for the development of the Queen Elizabeth Quay (QEQ) on a BOT basis. This would enhance the container handling capacity to 1 million TEU per annum at an investment of about US$ 240 million. The construction of a new breakwater at an estimated cost of US$ 350 million and the New South Port at an estimated cost of US$ 400 million have been planned to increase the container throughput at the Colombo Port over the medium term. Action has been initiated to develop the Galle Port on a public sector/BOT basis to handle domestic and transshipment containerised cargo as well as conventional cargo. A feasibility study is being carried out to develop a new Port at Oluvil and development of a new Port for oil and dry cargo handling in the Hambantota area is under consideration.

On the development of major highways, the Asian Development Bank has commenced the feasibility study for the development of Colombo - Matara highway. Action has been initiated to develop Colombo - Katunayake highway as well as outer circular road connecting major highways in Colombo. Pre- feasibility study has been undertaken to develop Colombo - Kandy highway. The road rehabilitation programme continued with foreign assistance. The World Bank funded road project; designed to rehabilitate 397 kms of roads and reconstruct l9 bridges in the Southern, Western and North Western Province is in progress. The construction of 15 bridges in Gampaha, Matara and Hambantota is nearing completion. The ADB funded rehabilitation programme covering 103 kms of Katunayake - Puttalam Road, OECF funded Baseline Road reconstruction programme, the construction work on Ratnapura - Beragala - Badulla Road are also in progress. Capital expenditure on road rehabilitation programme is, maintained at around Rs. 7,500 million per annum.

Tariff Concessions

In moving towards a rational trade regime to encourage competitive industries, the government simplified customs tariff within a three-band structure in 1995. In terms of this change import duties on textiles, fabrics and apparel, printing paper. packaging material, refrigerators., tyres and tubes, parts and accessories of motor vehicles, major food items were reduced from 45 per cent to 35 per cent. Import duty on components for local assembly of buses and lorries, agricultural machinery, implements were also brought down from 20 to 10 per cent. In 1996 budget, further concessions to raise productivity were extended to agriculture, fisheries and to protect the environment. Import duty on agricultural implements was reduced from 35 per cent to l0 per cent. In protecting environment and conserving the forest cover and encourage industries and housing construction, import duty on all varieties of timber was eliminated. Import duty on raw film,' movie cameras, projectors and other equipment required by the film industry was eliminated to give impetus to local film industry.

In 1998 budget, concessions were granted to assist priority sectors such as agriculture, fisheries, industry, telecommunications and computer software manufacturing. ln the agriculture sector, items needed for modernisation of agriculture such as green houses and polytunnel machinery such as seed cleaning, sorting grading and packing machines and seed testing equipment have been exempted from customs duty. Tea bagging machinery and colour separators were also made duty free to assist tea industry. In addition to granting duty exemptions for import of agricultural tractors, lorries, prime movers and refrigerated trucks, fertiliser ingredients for manufacture of agro chemicals have also been made duty free. Navigation equipment and spares for fishery trawlers, raw material required to assist the local c cane industry, equipment required for medical service, computers for software industry and related equipment, telecommunication equipment have also been exempted from customs duty. Under refurbishment scheme tourist hotels have been allowed to import material for the purpose of renovating hotels and rebuilding the vehicle fleet. Under these concessions, goods valued at Rs. 950 million have been imported. Fiscal incentive package under which industries have been permitted to import capital goods free of duty has assisted 251 new and existing industries to introduce advanced technology. Investment. under this scheme has totalled Rs. 7 billion with employment creation of about 20,000.

The Government continued to strengthen the private sector led export oriented industrialisation strategy. The main objectives of this policy were the expansion, diversification and upgrading of the industrial base, efficient management of resources, creation of new employment and promotion of industrialisation at regional level. Certain industries such as electronics, ceramics and glassware, rubber based industries, light and heavy engineering, cutting and polishing of gems, diamonds and manufacture of jewellery have been identified as thrust industries to attract investment. Such industries have been offered BOI incentives. Tax and exchange control amnesty has been granted to those who invest undisclosed income in such industries.

The Government abolished the duties on textiles and other related intermediate and capital goods to encourage apparel industry. With a view to restructuring local textiles industry, an incentive package including debt restructuring was implemented. A Domestic Textile Allocation Committee was set up to procure material requirement for school uniforms, uniforms for service personnel and other textile materials for health sector from local textiles manufacturers. The availability of funds at relatively low interest rates to the private sector increased. The two major development banks and commercial banks expanded financial facilities to the industrial sector in the form of direct loans and equity participation. The two development banks alone approved a total credit outlay of Rs. 15,575 million in 1997 as against Rs. 10,844 million in 1996.

Having identified the need to decentralise industries, 50 garment factory programmes, regional industrial parks and Industrial Township programmes have been implemented. In 1996/97 after a lapse of nearly 10 years, the government has stepped in and set up infrastructure facilities within close proximity to Colombo. In addition to the already established FTZs of Katunayake, Biyagama, Koggala and Kandy, the Mirigama Export Processing Zone was opened with an industrial area of 155 acres. Malwatte Export Processing Zone, is almost fully occupied with industries. The 133 acre Wathupitiwala Industrial Township Development project will have 67 acres for industrial units where 15 - 20 factories are to be set up. The balance will be utilised for a housing scheme where at least 20 per cent of the houses will be for lower income groups. Seethawaka Industrial Park covers a total area of 407 acres while the industrial area is 189 acres. The park, which costs Rs. 3,600 million funded with OECF assistance, will be equipped to international standards in terms of facilities and is expected to introduce a new image of industrialisation in order to attract foreign and local investors.

In addition to the above, an Industrial Estate Development Programme (IEDP) has been undertaken by the Ministry of Industrial Development also with the objective of dispersing industries into the rural areas. A chain of industrial estates of around 50 acres in extent has been initiated. The total cost of the programme is around Rs. 250 million. Estates have been planned in Western, Southern, North Western, Central, North Central, Sabaragamuwa and Eastern Provinces. Twenty Eight sites have been identified while development work has already commenced on 12 sites, which are at different stages of progress. While the infrastructure in some sites is nearly 90 per cent complete, some are still in the land clearing stage. Certain estates already have units in commercial production. When completed the programme is expected to provide 90,000 employment opportunities.

A study on industrial townships in the environs of the export processing zone of Katunayake and Biyagama has identified a priority action programme to develop the region in the vicinity. This programme which commenced in the second half of 1997, is being implemented at a total cost of Rs. 400 million. Improvement of access roads, street lighting, construction of bridges, improvement of minor roads and land acquisition etc. fall within this programme. Rs. 1,500 million has also been allocated under BOI to expand industrial infrastructure during l999.

Promotion of Agriculture

The Government's agricultural policy strategy aims at increasing productivity and agricultural incomes while reducing costs to the consumer. In this context, several measures have been taken to provide extension support, agricultural seed and planting material, credit, basic infrastructure , storage, marketing facilities and agricultural lands.

Priority has been accorded to promote seed paddy production in Amparai, Anuradhapura, Hambantota, Kurunegala and Polonnaruwa districts. The Department of Agriculture was provided with a grant of Rs. 100 million to encourage production and supply of quality seed and increase average yield through intensive land use. Importation of seed and planting material has been made duty free to make superior quality seed material available for the local producers. A programme to encourage farmers to diversify low country paddy lands to other crops has been implemented. In order to encourage agricultural marketing refrigerated trucks have been permitted to import duty free. Tax holidays and investment tax allowance have also been provided to encourage both large and medium scale agricultural activities. Minimum producer price scheme for products such as chillies, onion, potato, maize, green gram, cowpea, Thur dhal and ground nuts and a new credit guarantee scheme have been implemented to encourage domestic food production.

As announced in the 1998 budget a grant cum loan scheme has been implemented to carry out an intensive production drive in export agriculture crops such as pepper, coffee, cocoa, cardamom in the districts of Matale, Kandy, Kegalle and Badulla. This scheme covers activities such as cultivation, post harvest development, supply of planting material, plant production, farmer training, soil conservation, export award programmes etc. Concessional credit has been extended for small and medium scale planting, establishment and development of commercial planting nurseries as well as processing plants, modernisation of existing crop processing, facilities and marketing export agricultural crops.

In order to encourage large-scale non-plantation agricultural activities, state lands are being alienated on long-term leases to private sector for cultivation of fruits and vegetables. Accordingly, 14,221 acres of lands belonging to SLSPC, JEDB and LRC have been identified. Prospective investors are expected to set up BOI ventures in the areas of cultivation of fruits, vegetables and non-plantation agricultural crops. Selected agricultural farms have been transferred to the private sector to undertake seed production at commercial scale.

The national irrigation and rehabilitation project has completed 612 minor irrigation schemes. A further 223 will be completed by the end of 1998. Operation and maintenance work of 152 major and medium irrigation schemes covering 64,000 hectares have been undertaken under participatory management programme. Farmer companies in operation have emerged as an appropriate mechanism to address the major problems of the farmer in the procurement of inputs, obtaining technology, value addition to their products and marketing. The Ministry of Agriculture and Lands has undertaken to facilitate forming and strengthening of farmer companies in all districts. Pilot projects are being implemented in Chandrikawewa and Redibendi Ella to establish commercially viable farmer companies in order to commercialise activities in respect of small farm agriculture land and water management.

In the plantation sector, the Government has increased the replanting subsidy to small holders to cover cost of replanting. At the same time, development loans on concessionary terms with ADB assistance are provided for both small holders as well as plantation companies.

Reforestation programmes have been implemented to minimise the negative impact of deforestation on the environment in order to protect environmentally sensitive areas. In this regard, with ADB assistance, nearly 33,000 hectares of land has been reforested by the end of 1997.

Fisheries

The promotion of new technology in fish catching/harvesting and looking after the welfare of the fishing community is being considered areas for Government intervention. Subsidy schemes have been implemented to promote offshore/deep sea fisheries activities. Development of fishery harbours in Galle, Puranawella, Beruwala, Tangalle and Kirinda are in progress and navigation and communication facilities for deep sea fishing are being improved. The Inland Fishery sector that was badly neglected in the past has been revived. As a result, inland fish production has increased to 21,500 MT in 1997 from 12,000 MT in 1994. Fourteen new housing projects to assist fisheries families in 7 districts have been implemented.

Livestock and Dairy Development

Livestock and dairy development offers significant potential for creating employment opportunities in the rural areas of Sri Lanka and meeting the growing demands of local consumers. In the previous budget, the Government offered duty concessions for animal feed ingredients and animals imported for breeding. The private sector have shown encouraging responses for these fiscal incentives, and investments in the feed milling industry, poultry breeding and hatchery management poultry meat processing and milk processing have resulted in improvements in productivity of different livestock species and also in the introduction of new products for the local consumers.

In the dairy sub-sector, the Government's aim is to make available liquid milk, so as to benefit both the consumers as well as the dairy producers. The Government entered into a joint-venture project with the National Dairy Development Board of India and launched a project over ten years for livestock breeding in the country. The Government is actively promoting farmer managed dairy producers organisations at village level to engage in collective marketing of their produce and receive higher farm returns.

The active participation of the private sector industrialists in the sector will help to make the livestock industry more competitive, and increase its export potential. The Government will therefore promote strategies for increasing private sector participation in the sector and bring down the cost of production of livestock produce locally. The divestiture of some of the farms belonging to the National Livestock Development Board will be a major initiative. Private sector participation with the NLDB is expected to bring the much-needed finances for optimising the farm operations, to introduce advanced technologies, and improve the management standards of these farms.

Education

The major policy emphasis at present has been placed on quality improvement of education, extending educational opportunities for non-school going children, improvement of management of the education system and enhancement of university education to labour market requirements. The strategy to be adopted in respect of quality improvement of education is large scale teacher training through establishment of new 86 Teachers' Centres, curriculum revision and enhanced provision of quality inputs. Mew integrated activity based curriculum to Year 1 and revised curriculum and new text books for Year 6 to 9 will be introduced from 1999 islandwide. Preliminary arrangements have been made to re-organise and restructure schools on a two tier basis. Development of an effective system of school based management is in progress and a programme for appraisal of teacher performance will be implemented in 1999. Government has enacted the Compulsory Education Act and existing school facilities will therefore be expanded to accommodate non-school going children. In the university sector a proper scheme of training of academic staff and assessment of performance of lectures will be implemented. University study courses will be revised in order to meet labour market requirements. Rs. 800 million has been allocated in 1999 budget for education reform project.

Capital expenditure on education and higher education is expected to increase from Rs. 4,212 million in 1997 to Rs. 6,724 million in 1999. School infrastructure facilities including buildings, equipment and furniture have been provided to underdeveloped schools under the major projects implemented with the assistance of the World Bank, Asian Development Bank and Swedish International Development Agency. The National Authority of Teacher Education was established in 1998 as the apex body of teacher education and training. An expansion programme by way of establishing new universities was implemented. Under this programme, three new universities were established. As a result intake into universities has increased from about 7,500 in 1994 to 10,000 in 1997. The two faculties of Dental Sciences and Agriculture at the University of Peradeniya and the Faculty of Medicine at the University of Sri Jayawardenapura were upgraded through provision of modern laboratory and teaching equipment and buildings under Japanese Grant Aid during last three years.

Under the Vocational Training Authority the number of training centres increased from 118 in 1996 to 150 in 1997. The total enrolment has increased from 8,503 to 10,512 indicating a 17 per cent increase. National Apprenticeship and Industrial Training Authority had trained 19,973 trainees in 1996 and 22,576 in 1997.

In the health sector, priorities at present are the reduction of inter and infra provincial disparities in the distribution of health resources, quality improvement of health services, expansion of health services to deal with newly emerging health problems and strengthening training and research activities. Emphasis has been given to reduce regional inequalities by rehabilitating health infrastructure facilities, developing at least one fully-fledged hospital in each district, providing adequate trained manpower, medical equipment and drugs etc. Health Preventive Services will be promoted through further expansion of current immunization programs, strengthening environmental and sanitation programs and enhancing health education programs.

In an attempt to eradicate polio myelitis island-wide campaigns were launched to immunise children under 5 years of age. During the last 3 years nearly 100 per cent coverage was achieved. Japanese Encephalitis vaccines were administered to children of 1 - 10 years of age in high risk areas of Anuradhapura, Polonnaruwa, Kalutara and Gampaha in 1994 and this programme has been expanded to cover other high risk areas over the last few years. In a bid to meet health manpower shortages medical and paramedical personnel and other staff have been recruited on a large scale during the last 3 year period.

World Bank funded Health services project (1998-2002) with a cost of US$ 22 million will strengthen government ability to address major health problems, such as malaria, STD/AIDS, malnutrition, non communicable diseases. Health education programme and health management information system will be strengthened under this project. Lady Ridgeway Hospital will be developed with JICA assistance.

In the indigenous sector Ayurvedic Hospital at Borella was upgraded in 1996 as a teaching hospital. The Ayurvedic medical service had been declared as an islandwide service. In the Ayurvedic system, priority will be given to develop health education programme especially among the school children as well as the estate sector population. Action has been taken to develop existing facilities in most of the Ayurvedic hospitals.

Prevention of Child Abuse

Legislation to establish a Child Protection Authority (CPA) was enacted in Parliament this year. Action has been initiated to streamline of existing legal procedures for more effective implementation of laws dealing with prevention of child abuse and protection of victims of such abuse. Measures are being taken to set up multi-disciplinary teams in every province to decentralise the functions of the CPA. A separate unit on child protection has also been established in the Attorney General's office to handle matters related to child abuse.

Women and Development

Women's contribution to the economy is often not valued. Those on the plantations and in the Free Trade Zones together contributed 53 per cent of our exports last year. The inclusion of women's contribution to other agricultural and manufacturing activities would raise this percentage even higher. Women working abroad also reduce our current account balance of payments deficit through their remittances home; private transfers, about 75 per cent from women, financed around 15 per cent of our imports in 1997.

While very little of the government budget is targeted specifically to women, there is equality of access and usage in the main service sectors of education and health. In the production sectors, such as agriculture and industry, the support women receive is very low and there is evidently a need to devise delivery systems and gender-disaggregated impact assessments that will lead to equalising opportunities for men and women. Resource flows into technology transfer, organisational strengthening, training, extension services and communication system will be increased so as to improve the participation of women. Inequalities in public sector employment also need to be addressed to allow women better access to managerial levels. Government will endeavour to mitigate the impact of policy-related gender imbalance in future policy formulation.

Housing

The housing policy strategy of the Government aims at promoting state assisted low and middle income housing programme as well as private sector led medium and large scale housing settlements. In this context, financial assistance for housing for low and middle income housing constructions have been arranged through public sector financial institutions. Housing loans that were granted during last four years under this programme is Rs. 14,025 million. The National Housing Development Authority continues to expand housing programmes for specific community groups. Under these programmes, construction of 122,477 housing units has commenced since 1995. The Board of Investment has formulated 19 large housing projects for low and middle income families in the urban sector.

Public Transport

Several strategies have been adopted since 1994 to increase the quality of transport services to meet the increasing demand. These include the provision of fiscal incentives, increased public investment as well as payment of increased subsidies for operating buses on uneconomic rural routes. The bus transport that was virtually paralyzed consequent to the peoplisation programme has been rehabilitated since 1994. Most important measure has been the formation of the 11 regional cluster companies in place of the highly fragmented bus depots. This structural change has already resulted in some companies becoming operationally viable. During the period 1994 to 1998, 2,500 new buses have been systematically introduced into the fleet. Steps have been taken to augment the bus fleet by further 1,500 buses by regional bus companies. At the same time, the Government has encouraged private sector to increase its operational fleet. Already under the Indian Line of Credit 450 buses have been provided and further 500 buses arranged. A further 1,751 buses have been imported by the private sector following the duty concessions granted in 1998 budget.

High priority has been given to improve the operating capacity of the railways by rehabilitating the existing assets and adding new rolling stock and infrastructure facilities. Already fourteen locomotives have been rehabilitated and eight locomotives have been purchased since 1995. The main workshop at Ratmalana has been modernised with OECF assistance. The rehabilitation of railway track and signaling system and the extension of rail track, which are long felt needs for efficient train services are in progress. With OECF assistance, 293 km. of track from Kandy to Colombo, Colombo to Galle and Ragama to Negombo are being rehabilitated. The semaphore signaling system from Wadduwa to Hikkaduwa is being replaced with Centralised Train Control System at a cost of Rs.1,247 million with the assistance from the Government of Netherlands. The work will be completed during 1999. Further, the extension of double line between Polgahawela to Rambukkana will be completed during the course of this year. Action has been taken to extend the double line between Panadura to Aluthgarna and Ragama to Negombo.

Poverty Alleviation and Self Employment Programmes

The emphasis of the Government Poverty Alleviation Programme is to move away from conventional welfare orientation to human capital and infrastructure development. In addition to the provision of welfare payments to about two million households at an annual cost of Rs.8,000 million, the Government has launched several schemes to assist low income families. The rural infrastructure development projects initiated under the Samurdhi Programme financed 12,000 projects during 1997 and; 10,155 projects in 1998. The total cost of the programme is estimated at Rs.400 million. Under the Small Irrigation Rehabilitation and Development Programme, about 700 small irrigation schemes in the dry zone districts are to be rehabilitated, using unskilled labour. The programmes provide an opportunity for farmers and labourers to find casual work during the dry season.

As a measure to develop a capital fund during the operation of the welfare programme, Samurdhi baneficiaries are expected to save Rs.100,200 per month. The total funds collected under the Compulsory Savings scheme up to end May 1998 amounted to Rs.3,500 million. A Passbook to reflect the amount of saving and the interest accrued to capital have been issued to about one million beneficiary households.

Under the SASANA credit scheme small loans at a 10 per cent interest were granted to about 75,000 families to undertake microenterprise development activities. The total loan volume under this scheme amounted to Rs.500 million. Micro enterprise credit schemes and entrepreneur development programmes for self employment activities for youths have also been implemented. Under Surathura Programme Rs.500 million has been disbursed for self-employment projects.

The International Environment

Since the eruption of the East Asian Crisis in July 1997, the international economic environment has become hostile to many countries. Exchange markets, particularly in the Asian region, experienced high volatility with large scale currency depreciation, while stock prices continued to decline leading to a redirection of financial flows towards mature markets. With the global demand being depressed since the latter part of 1997, the world economy is expected to grow only by 3.1 per cent in 1998, substantially lower than the original estimated growth of 4.3 per cent. The slowdown is expected to stem mainly from a contraction in growth in developing countries. The Asian region, which remained the mainstay in world output growth for the past two decades is expected to register a sharp slowdown in economic growth, from 6.7 per cent in 1997 to 4.4 per cent in 1998. After a strong pick up in economic growth in the previous year to 5 per cent, the Western Hemisphere is projected to register a moderate growth of 3.4 per cent. Meanwhile, despite a stimulus to growth in the major countries in the European Union, the advanced economies are expected to reflect a moderation in output growth from 3.0 per cent to 2.4 per cent due to a slowdown in growth in the United States, the United Kingdom and Canada and the continued recession in Japan. The African region, which is somewhat isolated from the Asian region in terms of international trade and finance, is expected to perform well and register a growth of 4.6 per cent against 3.2 per cent in the previous year.

Reflecting the negative impact of the adverse developments in the exchange and financial markets and the continued global economic uncertainties, world trade is expected to moderate in 1998 to 6.4 per cent from a high level of 9.4 per cent in the previous year. Since the speculative attack on the Thai baht in July 1997, stock prices in many emerging and mature markets have continued to slump with adverse repercussions on the external positions of those countries. Sri Lanka would by no means be completely shielded from these adverse developments in the international political and economic environment. The challenges ahead of emerging market economies, including Sri Lanka, in facing the potential implications of adverse external sector developments would require concerted efforts with timely and decisive actions to strengthen their economic fundamentals.

Economic Performance

In 1998, the Gross Domestic Product (GDP) in real terms is projected to grow by 5.0 per cent. The GDP in 1997 grew by 6.4 per cent. During the first half of 1998, the real GDP grew by 5.1 per cent on account of the growth of all major sectors.

The agriculture sector including forestry and fishing, is projected to grow by 2.3 per cent in 1998. The major contribution to the growth in agriculture is from the paddy sub-sector, which recorded a growth of 15.6 per cent in production for 1998 over 1997. In plantation agriculture, tea production for 1998 is estimated to be 285 million kgs. surpassing last year's peak production of 277 million kgs. Meanwhile, the fisheries subsector is also projected to expand by 5.0 per cent in 1998 owing to the increase in fishing crafts and the recovery in aquaculture shrimp farming.

The value-added in the factory industry sub sector is estimated to grow by 8.1 per cent during the first half of 1998 when compared with the corresponding period of the previous year. Within this sub sector, the industries in food, beverages and tobacco products and textiles, wearing apparel and leather products grew by 4.6 per cent and 11.1 per cent respectively, during the first half of 1998. The textile and wearing apparel sub sector, which plays a significant role in employment generation as well as export earnings of the economy, is currently facing severe competition from other regional producers who have gained a competitive advantage through the depreciation of their currencies.

The construction sector is estimated to grow by 7.5 per cent in 1998. The higher growth rate compared to 5.4 per cent in 1997, is mainly due to the increase in investments in economic infrastructure development and rehabilitation projects in telecommunication, irrigation works and the manufacturing industry, and the rise in construction of housing and commercial buildings.

The electricity, gas and water sector is projected to grow by 10 per cent in 1998, compared to 8 per cent in 1997. The transport, storage and communication sector is expected to grow at a rate of 6.5 per cent in 1998 indicating a slight slowdown compared to the performance observed in 1997. Port services, which had grown steadily until 1997, indicated a slowing down in 1998. The transport sub-sector, grew by 4.1 per cent in the first half of 1998, when compared to 5 per cent in the corresponding period of 1997.

The wholesale and retail trade sector is projected to grow at a slower rate of 4.7 per cent in 1998, when compared to the 6.5 per cent growth in 1997 mainly due to the slowing down of the export and import trade. The banking, insurance and real estate sector is projected to grow by 9 per cent in 1998, compared to the growth of 9.8 per cent in 1997. The deceleration in external trade affected the profitability of the commercial banking sub-sector, which represents around 60 per cent of the overall value added in the sector. Further, the depressed stock market conditions also led to erosion of profits in stock brokering activities. The insurance sub sector is expected to make a positive contribution to financial services.

Tourist arrivals during the first six months of 1998 declined marginally by 0.6 per cent to 173,145. The earnings from tourism stood at US$ 99 million, the same as in the first half of 1997. Arrivals from Western Europe increased, while arrivals from East Asia and South Asian countries showed significant declines.

The CCPI inflation rate has been higher than the 8 per cent envisaged at the beginning of the year, mainly due to higher food prices. The index for October showed an annual average inflation rate of 10.3 per cent. The average inflation rate in 1998 would be around 10 per cent.

The balance of payments during the first half of 1998 reflected mixed fortunes. Attractive tea prices, a moderate growth in industrial exports and continued growth of private transfers reduced the current account deficit. However, a slowing down of net capital inflows, including the build up of NRFC deposits, led to an overall deficit of US$ 83 million. Against this background, the current account deficit is estimated to remain around 3 per cent of GDP in 1998, which is at the same level as in 1997. Both exports and imports are projected to grow by around 7 per cent each in US$ terms during 1998. The trade deficit would be around 8 per cent of GDP in 1998 as in 1997. The expected higher capital inflows and private remittances during the balance part of the year are likely to generate an overall surplus of about US$ 80 million in the balance of payments by the end of the year. While the debt service ratio is expected to decline to 10.5 per cent of total current receipts, external debt would remain around the same level of 62 per cent of GDP as in 1997.

Revised Budget Estimates 1998

The approved budget for 1998 showed an overall deficit (accounting format) of Rs. 113,089 million. However, in line with the first nine months developments, the budget deficit for the current year has been revised at Rs. 128,822 million. On the expenditure side, defence expenditure in 1998 will increase to Rs. 56,932 million from the estimated amount of Rs. 44,723 million. The supplementary expenditures totalling Rs. 3,944 million have been provided for fertiliser subsidy, transport, water supply, sanitation and education projects have also been provided. The actual performance indicates that under expenditure would be about Rs. 11,402 million of which Rs. 9,524 million is from capital expenditure programmes.

On the revenue side, collections from stamp duties and national security levy are consistent with budget estimates. However, revenue from income taxes, customs duties, excise tax on liquor and cigarettes are likely to be below original targets. Due to the transition from Turnover Tax to Goods and Services Tax, the revenue collections from this source also reflect a slow growth in Government revenue. In respect of non-tax revenue, no significant differences are observed except the additional revenue of Rs. l,000 million from Sri Lanka Ports Authority and Rs. 600 million from interest income. Total revenue therefore is expected to decline by Rs. 6,984 million from the original estimate of Rs. 197,660 million. Receipts from Public Enterprises Reforms are expected to be around Rs. 5,000 million as against the original expectation of 8,000 million.

The Budget out-turn emerging from above developments for year is summarised below:

Table I
Revised Budget Out-turn (Rs. Million)

The financing of revised deficit will be made through foreign borrowings of Rs. 36,630 million and domestic borrowings of Rs. 92,192 million. The increased deficit financing necessitate to increase the borrowing limit for the year.

In terms of economic analysis, the above budget out-turn generates an overall deficit of Rs. 79,334 million (excluding grants and privatisation proceeds) (7.8 per cent of GDP) as against Rs. 66,647 million (6.5 per cent of GDP) targeted for the year. The increase in current expenditure largely due to high defence expenditure and decline in revenue from the original targets will result in a current account deficit of Rs. 16,758 million (1.7 per cent of GDP) in contrast to a surplus of Rs. 1,346 million (0.1 per cent of GDP) expected in the original budget formulation. Public investment is expected to decline to 6.5 per cent of GDP from the targeted level of 6.9 per cent.

1999 Budget Estimates

The draft estimates for the financial year 1999, which has been presented in Parliament, provide for a total recurrent expenditure of Rs. 200,843 million and total capital payments inclusive of debt repayments of Rs. 138,391 million. With a provision of Rs. 500 million for net out-payments on advance account operations, total expenditure for the year 1999 is estimated at Rs. 339,734 million.

Recurrent Expenditure

Reflecting a higher debt burden, interest payments on public debt estimated at Rs. 59,780 million accounts for 30 per cent of total recurrent expenditure in 1999. Expenditure on personal emoluments and pension payments, which is, estimated at Rs. 73,613 million accounts for 37 per cent of total recurrent outlays, while the non-wage operational expenditure and transfers to public corporations and institutions are estimated at Rs. 46,353 million. A total sum of Rs. 19,609 million has been provided for welfare programmes and subsidies.

Capital Expenditure

The draft estimates for 1999 include Rs. 36,949 million for public debt repayments and Rs. 8,307 million for defence. It also includes Rs. 7,135 million to be channelled to the Development Financial Institutions. In terms of public investment programme, a total sum of Rs. 86,501 million has been provided for various capital expenditure projects under ministries and departments.

The priority in public investment programme will be the development of economic infrastructure. The investment in the North Pier development and other on-going development work of the Colombo Port will be Rs. 2,862 million. A sum of Rs. 3,369 million has been earmarked for the improvement and expansion of telecommunication network. Public Investment on power and energy is estimated at Rs. 9,109 million in 1999 as compared to Rs. 8,061 million in 1988. The capital expenditure in this area includes system expansion, development of Kukule Hydro-Power Project, combine cycle power plant and transmission and substation development work. Rs. l,5OO million has been earmarked for rural electrification programme.

Capital investment on the transport sector is estimated at Rs. 14,479 million. Rs. 1,566 million has been allocated for the purchase of buses and engine kits for regional transport companies. A total provision of Rs. 5,034 million has been earmarked for the rehabilitation of rail tracks, purchase of diesel multiple units and improvement of capital assets. A sum of Rs. 7,688 million has been provided for the rehabilitation, constructions improvement and maintenance of highways and bridges.

The 1999 budget provides an enhanced volume of resources for infrastructure for human resource development. Total capital expenditure earmarked for education is Rs. 6,724 million as compared to Rs. 5,200 million in 1998 while that for health will be Rs. 4,854 million as compared to Rs. 4 ,351 million. Public investment on water supply and sanitation has increased from Rs. 2,919 million in 1998 to Rs. 4,125 million in 1999 while that on environment development is raised from Rs. 372 million to Rs. 517 million.

The capital expenditure on industrial infrastructure development is estimated at Rs. 2,383 million. Budgetary allocations in 1999 for irrigation, Mahaweli development, agriculture, fisheries, livestock, rural industries, provincial infrastructure, Samurdhi community development and North East rehabilitation total Rs. 17,163 million.

Revenue

Government revenue and grants are estimated at Rs. 232,362 million. Revenue from Goods and Services Tax and Turnover tax is projected to yield Rs. 58,111 million and Customs duties to generate Rs. 30,927 million. Excise tax on liquor, cigarettes, petrol, diesel and selected consumer durable is estimated at Rs.3 2,744 million while National Security Levy is expected to generate Rs. 23,500 million. Revenue from income tax is estimated at Rs. 23,478 million. Total nontax revenue inclusive of profit, dividend, interest income, loan recoveries and administrative fees and charges is estimated at Rs. 36,152 million. Proceeds from public enterprises reform are projected at Rs. 8,000 million.

Emerging Budget Deficit

The budget deficit in terms of Government accounting format would amount to Rs. 107,372 million as shown below:

Table II
Budget Out-turn (Rs. Million)

In terms of economic analysis this out-turn results in a current account surplus of Rs.6,715 million (0.6 per cent of GDP) and an overall budget deficit (excluding grants and divestiture proceeds) of Rs. 79,288 million (7.0 per cent of GDP). We should aim at reducing this deficit further to consolidate our economic fundamentals and create stable conditions to promote our development objectives. It is in this spirit that the Government has formulated its fiscal proposals for 1999, which I will explain after the tea break.