Budget 2006

1. Mr. Speaker, it is my privilege to present to this House the Second Budget of this Government, under the leadership of Her Excellency the President.

2. Mr. Speaker, as you, this House and the nation know, President Chandrika Bandaranaike Kumaratunga will end her second consecutive term in office soon, having provided us with over a decade of continued leadership as the elected Head of our country.

Mr. Speaker, I would like with your permission, on behalf of us all, to thank her for her contribution as both President and as Minister of Finance and Planning for 7 years, for taking our economy forward during critical times. Thank you, Madam President.

3. I want, in all sincerity, to say that her record of stewardship of our economy deserves the highest praise. I am happy to report that the country's economic achievements of 2005 are indeed considerable and are a fitting tribute to her enduring legacy.

4. I must highlight here the President's deep commitment to ensuring peace and prosperity in the country. It is the belief of the People's Alliance, to which she has given leadership that we must see an end to this wasteful and futile ethnic conflict through a negotiated political settlement, based on devolution of power.

Successive Finance Ministers have unanimously made it very clear that a political settlement of the ethnic question is a basic requisite for the economic development of Sri Lanka.

5. Mr. Speaker, I initiated a wide consultative process for the preparation of the annual Budget last year. This process has now become fully integrated into the budget preparation process. 23 Clusters that have been organized by the National Council for Economic Development (NCED) have become a conduit to transmit ideas from over 1,000 experienced people of various disciplines.

My ministry's call to the public has also attracted over 500 specific proposals. The consultation process with our development partners has also led to improved co-ordination. The Ministers and key officials of line Ministries participated in budget discussions held in our Ministry to formulate their medium-term strategies and guide us in prioritizing developmental needs. I want to thank all these stakeholders who were associated with the preparation of this Budget.

6. Mr. Speaker, I want to digress for a moment to remind you of how bleak things were in January, this year. The nation is fully aware, that the year commenced having just experienced the unfortunate and unprecedented disaster of the Tsunami - that cost the lives of nearly 40,000 people and directly affected more than 800,000 people. It impacted unfavourably on the tourism sector, fisheries sector, the SME economy and public services in our coastal areas and adversely affected the livelihood of nearly one million people.

May I take this opportunity to thank all our friends who rallied round us in our hour of need. I would specially like to place on record our Government's sincere appreciation to the Managing Director of the International Monetary Fund for providing us US$300 million, with no conditions attached to assist to mitigate the effects of the Tsunami.

The Government of India, our long-standing friend, extended us a 3-year debt moratorium, in addition to responding immediately with rescue and relief assistance. The Governments of the People's Republic of China and Italy agreed to write-off part of our debt, which was a very welcome relief. The Paris Club members including our major development partners namely Japan, Germany, France and the US also responded to my request for a debt moratorium by extending one year of debt relief without any conditions, in addition to providing quick relief assistance.

The British Government, to which we did not have any debt obligation, took over 10 percent of our debt repayments to the World Bank, a welcome gesture. Bilateral and multilateral agencies such as the ADB, the World Bank and UN Agencies as well as national and international NGOs joined our community in extending excellent cooperation for Post-tsunami recovery and the reconstruction strategy of the Government. We owe all of them a special debt of gratitude.

7. Just as we were coming to grips with the worst natural disaster the country has ever witnessed, soaring global oil prices dealt us another blow. This rapid price escalation of oil broke all records. The global oil price reached US$80/barrel.

This affected our foreign exchange position and also the cost-of-living. We know that no Government in the world could have planned for such an oil price hike. What was projected as a future price for oil in August 2004 was very much less than the real market price in 2005. This year we have spent US$500 million more on the import of oil, as against last year.

8. Mr. Speaker, despite facing the daunting task of surmounting these unexpected hurdles, the pro-poor, pro-growth, economic re-engineering process that our Government championed and institutionalized, made our economy resilient enough to rebound with vigour. I am happy to go on record that we can be proud that the year 2005 will go down in history as the best year of Economic Risk Management, Growth and Achievement, for Sri Lanka.

9. Mr. Speaker, it is my duty as the Minister of Finance and Planning, to tell our nation whether the economic policies we have implemented in the past have succeeded in achieving their intended objectives. We have to frankly assess these strategies and even admit failures, if there were such instances. Most importantly, I owe this house and the nation a detailed explanation of how we have performed as managers of the economy up to the present date.

Key achievements of 2005

10. The per capita GDP in 2004 broke the US$1,000 barrier, bringing our nation to a middle-income status. We are no longer cast as an underdeveloped country. We managed to do this because of this nation's collective will to overcome adversity and foster local industries and entrepreneurship. We exceeded all expectations of economic growth, registering a 5.4 percent growth in 2004 and have piloted the national economy towards a near 6 percent growth this year. The per capita income this year is expected to be around US$ 1,200 which is a remarkable achievement.

11. I want to also inform this House that consequent to the prudent economic management strategies adopted by our UPFA Government, in getting the interest rates down to a single digit and the creation of ample liquidity for private sector credit and maintaining the landmark cease-fire agreement which was coupled with development work in the North and East, we witnessed spurred domestic investments in the past 18 months.

Private sector credit expansion is around 20 percent. Import of investment goods recorded a 23 percent growth in US$ terms, reflecting investments into industries and services sector capacity expansion. Investment into our economy, which is the real barometer of "economic confidence", rose to 25 percent of GDP in 2004 from 22 percent in 2003 and is expected to rise to around 27 percent in 2005.

12. Mr. Speaker, having revived economic growth and absorbed the high price of fuel, the Government was confronted with inflationary pressures stemming largely from cost-push considerations.

This necessitated a tightening of monetary policy in order to encourage savings and rebalance demand pressures in the economy. The Central Bank raised its policy rate on several occasions.

Consequently, the one-year Treasury Bill rate has increased to 9.82 percent from 7.50 percent one year ago. Average weighted deposit rate has increased to 7.50 percent from 6 percent and credit growth in the public sector declined from 16 percent in 2004 to 14 percent in 2005. These initiatives have reduced year-on-year inflation from 16 percent in January this year to 10 percent in October, which is a salutary achievement. We propose to keep inflation below 8 percent next year.

13. Mr. Speaker, our biggest concern since we assumed office in April 2004 is improving the revenue performance of the Government. In addition to taking a series of measures for the improvement of the Inland Revenue Service, the department has issued a Code of Ethics and Conduct for officials and a Tax Payer's Charter.

An independent Tax Ombudsman has been appointed to look into taxpayer grievances. Tax amnesty laws were repealed and several loopholes and exemptions closed. For the first time in recent history, the Finance Ministry was able to complete all tax legislation and obtain approval from Parliament within the first quarter of the year giving a clear legal base for tax administration.

The Taxation Cluster of the NCED has provided a forum for officials, private sector stakeholders and professionals to interact regularly on taxation issues. These reforms together with new tax measures enabled the Government to increase tax / GDP ratio from 13.9 percent in 2004 to 14.7 percent in 2005.

Tax to GDP ratio was on a continuous decline up to 2003 i.e. to 13.2 percent, the lowest ratio in the past 25 years. As at September 2005, revenue from income tax has grown by 31 percent, VAT by 19 percent, import duty by 14 percent and excise duty by 12 percent, contributing to a 21 percent overall growth in tax revenue. The tax paying community and the entire tax administration deserve credit for this salutary development.

14. Mr. Speaker, we also succeeded in reducing the revenue deficit from 3.9 percent of GDP in 2004 to 2.8 percent in 2005 by primarily controlling operational expenditure, despite implementing a substantial salary increase to all public servants and pensioners, providing higher fertilizer and fuel subsidies and also providing permanent employment for 42,000 graduates and further employment in other essential services in the public sector.

Recurrent expenditure also accommodated Tsunami related expenditure of Rs. 13,262 million. Decisive action taken to increase bus and railway fares, water charges and adjustments to reduce fuel subsidies helped us to reduce fiscal pressures. Public investments grew to 5.5 percent of GDP as compared to 4.8 percent previously. Therefore, the overall budget deficit at 8.2 percent of GDP exceeded only by 0.7 percent over the targeted deficit of 7.5 percent. This no doubt is a commendable performance, given the challenges we were confronted with, during the year.

15. Mr. Speaker, our debt management strategies enabled us to reduce the total Government debt, which the UNP Government increased to 106 percent of GDP in 2003 to 104 percent of GDP in 2005. Our Government is confident of bringing it down to 98 percent in the next few years, so that our external debt servicing will be kept at a manageable level.

As the bulk of foreign debt comprises of concessionary long-term loans at very low interest rates averaging 1.7 percent, with maturity periods extending beyond 30 years, we are well placed to service our debt obligations.

Our public investments including those in conflict affected districts and Tsunami affected areas will be funded through a large quantum of concessionary loans as well as grants, for the next 3 to 5 years.

This means Mr. Speaker, that our nation can afford to embark on large-scale development programms and add new earning capacity to our economy. The debt-service rate remained at around 11-12 percent of our export earnings and is expected to decline over the medium-term with higher growth of exports as well as other foreign earnings, which grew by 15 percent this year. Remittances from overseas employment alone have increased from US$736 million in 1995 to US$ 1,500 million this year.

The key need is to maintain the real economic growth rate above 6 percent so as to exceed the projected real interest rates on domestic and foreign debt.

16. Mr. Speaker, I am also happy to report that the official foreign reserves of the country have gone up go US$3.7 billion as of September 2005. This is a significant recovery, considering the high cost of oil imports, which has cost us an extra US$ 500 million - much higher than the amount saved from debt relief. Exports have increased by 13 percent in US$ terms.

Private remittances from Overseas have gone up this year against last year, by 21 per cent from January to October. It is commendable that our Central Bank was able to counter opportunistic currency speculators by successfully managing our exchange rate regime. We have succeeded in stabilising the rupee to the dollar exchange rate at around Rs. 101, thereby protecting consumers as well as producers.

17.Mr. Speaker, for the first time in the history of Sri Lanka, in 2005 our Government sought a credit rating for the country by international rating agencies, to establish our international credentials.

This will help us to access a wider range of financial instruments in the debt markets at competitive rates. We have for the first time created for Sri Lanka opportunities in the low-cost international bond markets, which will help our nation to retire high cost debt.

It will also help our private sector to raise capital from competitive sources. The rating arrangement, will provide comprehensive information to the market about our economy and improve transparency.

18.Mr. Speaker, when this Government assumed office last year, we categorically stated that certain strategic State Owned Enterprises (SOEs) would not be privatised. Instead of merely stating that we will not privatise 12 identified Strategic State Enterprises, we set up the Strategic Enterprises Management Agency (SEMA) to infuse more professional management into such enterprises to make them efficient and commercially sound.

After all, taxes need not be the only source of income to a Government. SOEs should also bring in dividend income. At the least, they should not be a burden to the Treasury. They must perform at maximum output capability and deliver services to the nation in an efficient manner.

19.I am happy to state Mr. Speaker, that in the short space of 12 months, SEMA has managed to deliver results. The two State banks significantly improved following restructuring and better management.

So much so that profit before tax of the People's Bank and Bank of Ceylon increased by 19 per cent and 10 per cent respectively during the first half of 2005. Bank of Ceylon linked several of its branches online. It obtained an AA rating while the National Savings Bank (NSB) got an AAA rating by the Fitch Rating Agency. The non-performing loan portfolio has been removed in all these banks.

The operating profits of Sri Lanka Port Authority have increased by 17 per cent, and the Airport and Aviation Authority recorded a 144 per cent increase. Business development plans have been put in place with regard to the State Mortgage and Investment Bank, Sri Lanka Railways and Sri Lanka Transport Board.

Ceylon Petroleum Corporation has improved its performance with a least volume of debt exposure. A viable restructuring plan for the Ceylon Electricity Board will be implemented with the cooperation of its staff. We expect all these enterprises to obtain international ratings over the next 2 years. It is praiseworthy that the Housing Development Finance Cooperation (HDFC), a fully Government owned enterprised was able to successfully conclude an IPO recently.

20.Mr. Speaker, one of the most significant achievements of the Alliance Government under the leadership of President Chandrika Bandaranaike Kumaratunga is securing the Free Trade Agreement (FTA) with India in 1998, which was implemented from 2000. This year, we clearly see the benefits of this FTA, where the opening of the Indian market for the first time in the last two years has enabled Sri Lanka to expand its overall export growth by a further 12 per cent.

This year we concluded a similar agreement with Pakistan. We are also committed to implement a Comprehensive Economic Partnership Agreement (CEPA) with India by December this year. These Agreements enable our entrepreneurs to look at non-traditional products that get duty free market access, to achieve a healthy diversification of our country's export base and also provide ample opportunities for our local entrepreneurs and enterprises to tie up with South Asian partners.

21.Despite the doomsday predictions about the abolition of the Multi Fiber Agreement (MFA) relating to quotas in 2005 and its negative impact to our garment industry, we supported the industry stakeholder representatives to persuade the European Union to give us preferential access, under what is known as 'GSP Plus'.

This preferential access is not confined to garments, but available for 7,000 other products, starting from this year. Mr. Speaker, as I will explain later in my Speech, the 7,000 product export opportunity and the FTAs with India and Pakistan will be the key catalyst for our Export Entrepreneur Economy that our Government will champion in the future.

For purposes of record, the garment sector grew by 7 per cent up to October 2005, and we expect it to grow to reach 9 per cent next year, contributing strongly to our export earnings, together with Tea and Tourism. What is significant is that our Apparel industry entrepreneurs have achieved a world-class reputation in the global garment industry, and our highly skilled labour has earned the reputation to draw premium products, which like our tea, will grantee us market access by being able to compete with the best in the world.

22.We also succeeded in attaining a healthy growth in the services sector, which grew by 7.6 per cent, as reflected by the growth of domestic and retail trade, hotels and restaurants, transport and communications, banking, real estate, business services and other professional services.

The total cargo handled by ports has increased by 10 per cent and the use of cellular and fixed lines has increased by 600,000 during January to August this year. Despite the tsunami setback, tourism has grown over 12 per cent and we expect that tourism will be in 'fullswing' soon. This industry has also improved considerably to position Sri Lanka as the "Best Value for Money Destination" among the top-20 destinations. Our aim is to make Sri Lanka a 2 million tourist destination and raise its contribution to 5 per cent of GDP, from the present level of 2 per cent.

23.Mr. Speaker, the telecom sector is the other sector that had an outstanding performance in 2005, with the introduction of the new CDMA technology and the aggressive market penetration of cellular telephones. The telephone installation and usage density has increased by leaps and bounds and I am proud to say that it is the PA Government that had the vision to transform telecommunications and create the information technology revolution is this country.

This is why it is great achievement for us to see phone companies broadening the market capitalization in the stock exchange this year. I understand that there are several technology focused telecom companies in Sri Lanka that are now developing next-generation telecommunications infrastructure and hopefully we will have a home-grown telecom sector company which will pioneer next-generation communications technology.

24.The property sector and the construction industry have experienced the biggest economic boom so far. Colombo and its suburban skyline, as well as the skyline of many provincial towns such as Kandy have all changed with modern high-rise buildings, urban infrastructure facilities and housing settlements and other facilities. Investments by our private sector in modern hospitals, hotels, new townships and housing apartments are truly encouraging.

The banking and financial institutions are aggressively marketing housing loans, enabling more and more people to won their homes, as well as invest in property development. These are all positive signs denoting economic confidence. Our last year's budget proposal to help public servants to borrow from the banking system at a concessionary rate of interest of 4 per cent for house construction has so far assisted near 5,000 public servants and the numbers are growing.

25.Mr. Speaker, we witnessed Colombo Stock Exchange becoming the best performing market in the region. The stock market doubled its market capitalization to Rs. 700 billion in one year, increasing the value of all our listed companies with both indices reaching all-time high.

In relation to GDP, the market capitalization is now around 30 per cent as compared to 17 per cent a year ago, an achievement no other Government can claim. Not even our friends across the aisle with their so-called private sector friendly economic strategy, managed to do this during their period of office. If is encouraging that companies are increasingly relying on funding from the capital market.

For the first time, investors are following economic fundamentals, instead of speculative playing, further strengthening the integrity of the market. The stock market exceeded the highest ever-monthly turnover of Rs. 600 million, largely on domestic liquidity levels, and the quarter-after-quarter rise in share prices has increased the net worth of thousands of equity holders. The All Share Price Index has gone up from 1,423 a year ago, to 2,346 at present.

26.Mr. Speaker, cost-of-living is no doubt a major concern. We were mindful that inflation reached 16 per cent on a year-on-year basis, in January this year. We have reduced this to near 10 per cent through monetary policy actions and various other measures. Nevertheless inflation is not purely a monetary problem as some 'Pundits' in our country think. In this context, we remove VAT on diesel, gas and some other consumable and raised salaries, pensions and even helped in increasing private sector wages to combat high cost-of-living. We have encouraged food production by providing low interest credit, fertilizer subsidies and remunerative prices to our producers.

The surest way to overcome the high cost-of-living is to increase our own production of rice, milk, sugar, vegetables, fruits, fish and other needs and reduce the cost of electricity, which is now one of the highest in the world.

If we can reduce power cost, we will be able to reduce the high cost of production in services such as water, transport etc. As we know, rice and vegetable prices have come down in response to a good supply this year. We must do the same for other crops. In the meantime we should shift to coal fired and more hydro based electricity generation without interminably debating on the subject.

Economic Transformation Process

27.Mr. Speaker, at present Sri Lanka is growing at near 6 per cent. It is necessary to set a sustainable growth path, which will be realistic in the next 3-4 years to ensure a per capita growth in excess of 5 per cent. Therefore, the Government has set a growth target of 6-8 per cent for the medium-term.

Attaining such a growth regime with equity would require the development of modern infrastructure - highways, electricity, transport, ports and water supplies to create access to a wider range of gainful opportunities in the economy.

It further requires the promotion of production sectors with SME development, improvement of agricultural productivity and the creation of marketable skills. We must encourage the private sector, the co-operative sector, people's sector and the non-Governmental sector to become equity holders in economic transformation. Our aim is to increase the income of the poor and the regions at a far more rapid peace than in the last several years. This requires us to raise our investment level to an average of 30-35 per cent.

28.Successive Governments in Sri Lanka have spent colossal sums of money to subsidize wheat floor at the cost of our rice farmers. We removed the wheat flour subsidy altogether and have imposed a 15 percent duty on imports, giving our domestic rice and grain farmers the benefit of having a level playing field on price.

Over Rs. 2 billion was released by the Treasury to guarantee producer price for paddy. We encouraged the private sector by giving loans at a very low interest rate of 7 percent, also with a longer repayment time. All these helped us to maintain higher prices for paddy in the range of Rs. 15.50 - 16.50/kg and achieve the highest ever paddy production this year.

We hope to raise the producer price of paddy to a range of Rs. 16.50 - 17.50/kg. for the forthcoming 'Maha' harvest so that our farmers can plan their crops with confidence. Forward purchase contracts can also be signed at the cultivation stage itself so as to secure high prices, through the Central Bank Scheme now available.

In order to encourage local farmers and provide the price support, we imposed higher import duties on potatoes, onions, chilies and other farm products, which are easily cultivated here. We focused on international accepted tariff controls to provide a proper balance for our locally grown produce, as well as to keep the price levels acceptable to the consumer.

29. Government undertook to restructure debt of rice millers and accordingly a sum of Rs. 456 million in loans was rescheduled for 565 millers. We assisted them to modernise their milling capacity and storage facilities. As of mid this year 194 mills have been revived. We successfully negotiated with the World Food Program (WFP) to purchase their 20,000 mt. requirement from our local farmers, instead of buying overseas.

This will make our millers to maintain quality standards that are required to enter export markets. Mr. Speaker, we are now exporting organic rice to USA, UK, Australia and Europe. In fact many of the paddy fields that have restarted cultivation under our 'Dahasak Maha Wev' programme are all perfectly suited for organic rice production. Hopefully, our food industry will move beyond rice milling.

With grain processing, other associated technologies and advanced packaging methods now available, our manufacturers should make processed food products out of rice floor, giving our consumers healthy alternatives. We will be offering incentives to them in this Budget to invest in modern technology for food processing industries.

30. In the same spirit, Mr. Speaker, we have implemented a medium-term programme to attain self-sufficiency in our dairy needs, by encouraging local milk consumption instead of using imported milk powder. As we all are aware, our country produces about 180 mn. litres of liquid milk and import 600 mn. litres equivalent milk powder per annum, thus relying heavily on imports for our needs.

This again costs us a colossal sum of foreign exchange each year amounting to Rs. 12 billion. Therefore, we gave our dairy farmers an increased producer price from Rs. 15/litre to Rs. 18/litre and have begun distributing higher milk yielding cows to enable the nation to have a greater quantity of fresh milk and a greater income to dairy farmers. We will continue to increase producer price of fresh milk towards Rs. 30/litre within the next one to two years, in three staggered stages.

I am glad to note that local milk production has increased by 8 percent in 2005. This program will enable our rural farmers, particularly in the Eastern, Southern, Central, North-Central and North-Western provinces to own high milk yielding cows and thus permitting each farmer to earn at least Rs. 20,000 per month.

Mr. Speaker, as an island nation our country is well poised to exploit marine resources as well as our maritime industry, to raise our GDP. In this context it is necessary to increase the usage of multi-day fishing vessels to enhance marine harvesting to be able to meet growing demands, both locally and abroad. Priority will be given to equip our fishing vessel fleet with multi-day trawlers and to introduce modern technology, including harvesting equipment. Incentives will be provided for the development of onshore storage facilities and modern packaging and processing plants.

The large unutilised internal lakes can be utilised to develop farms for inland fisheries. The prawn farming industry, which can be promoted as a large export earning industry is being developed. Sri Lanka also needs to graduate from building small fishing crafts to large multi-day trawlers. We should also undertake ship repairing and other services, to exploit full potentials of the maritime sector.

32. Mr. Speaker, our focus in 2005 was not only on the farm economy. We recognised the important contributions that can be made to our economy from other emerging sectors like information technology. It was the UPFA Government that provided the right incentive structure to get our fledgling software industry the support to position itself for export markets.

Sri Lankan software industry has uniquely evolved by developing their-own products and applications, which can eventually be sold to global markets as our own branded software. We felt it appropriate to encourage our local companies to design and develop software applications, and offered to build a local market for them. Therefore we declared in the 2005 Budget that it is mandatory for government enterprises to purchase software through local firms, and that at least 50 percent value-addition must be done by local firms.

I am encouraged to note that our software industry is reaching the US$ 100 million mark this year. It is growing rapidly and hopefully in another seven years from now is able to reach the billion US dollar export industry. On a similar line of thinking, the printing and packaging industry has become an important integrated service to fast growing industries such as apparel, food processing, marketing and professional services.

33. We successfully attracted local producers to supply school material for the armed forces and for school uniforms, thus providing the initial support required to revive the local textile industry. Textile processing, printing and finishing have become important industries in creating value addition. The textile sector debt restructuring has made several sick industries bounce back with new business.

This re-engineering strategy also recognises the revival of SMEs. Keeping our commitment, the SME bank was set up and entrepreneur development is now being undertaken. I am happy to say that the donor community has recognised the wisdom of our SME policy and have made available over Rs. 30 billion in funds for local entrepreneurs.

This is now available through several commercial banks, which are helping small and medium entrepreneurs to grow. The SME bank will tie up with other banks to develop mortgage-free lending instruments such as credit guarantee schemes, refinance facilities and venture capital funding, to support SMEs.

In 2006, we target a solid 500 SMEs to be in businesses in areas such as rice milling, printing, packaging, gem and jewellery, fruits and vegetables, handlooms, designer garments, software development, furniture manufacturing, professional services etc. to build strong value-added enterprises and support them with export credit to enter external markets.

34. We propose to increase value addition in the apparel industry by providing all needs required to do textile processing, packaging and branding locally to the best possible extent and make it a US$ 5 billion industry over the medium-term. In my 2005 budget, we provided a series of measures for financial assistance for technology improvement, a simplified VAT refund mechanism and incentives for product designing to consolidate market positions. Our Government with the effective mediation of our missions abroad, managed to secure duty-free access to Europe markets.

The apparel industry is now exploiting the benefits of such measures. This year's exports have so far recorded a 12 percent growth in US$ terms, despite low price margins. We will explore other markets as well and initiate measures to promote backward linkages to increase value addition and improve the commercial viability of the apparel industry.

35. Mr. Speaker, the provision of infrastructure is vital to attract investments and place our economy on a high growth path. In this regard, we made 2005 a turning point, as we were able to finalize the funding of several key infrastructure projects, particularly the Hambantota Port, the Puttalam Coal Power Plant, the Katunayaka Expressway, the Katunayake-Colombo railway link and the Performing Arts Theatre in Colombo.

We re-established the CTB and augmented its fleet with 2000 new buses. Negotiations are now in progress with the Government of India to modernize the Colombo-Matara railway line. We have sought donor assistance to fully modernize our railway system.

I would like to tell this house that the Southern Expressway and the Upper Kotmale power projects are currently under construction and the Outer Circular Road-Phase I, is scheduled to begin soon to establish a link between Katunayake Expressway and the Southern Expressway. The Colombo-Kandy Expressway project details are being formulated to commence construction early.

The US$ 300 million highway expansion along the tsunami affected coastal belt, is ready to commence. We have just concluded with the World Bank and the ADB, a massive road-building program with commitments of US$ 100 million and US$ 150, respectively. While we have completed the Airport Terminal Project, discussions have begun to develop a second airport runway and the south harbour facility in the Colombo Port.

These flagship projects will facilitate the achieving of the economic growth target of 8 percent over the medium-term.

36. Development of infrastructure at rural level is equally vital to create equitable distribution of income and development. In the field of irrigation, the launching of "Dahasak Maha Wev" program towards developing our water resources and protecting economic values of our rural economy has seen the successful completion of 970 such small and medium irrigation projects.

I am proud to say that this was not only a Government effort. Many of our private sector organisations also undertook the rehabilitation of irrigation projects. We propose to complete 2,000 such projects in 2006 together with the early completion of Deduru Oya and Kirindi Oya schemes. Promoting access to rural areas, "Maga Neguma' completed 2,000 km of rural roads during this year and a further 3,000 km of rural roads and estate sector roads are expected to be completed in 2006. 'Pubudamu Wellassa' and 'Rajarata Navodaya' have now completed the first year of a 3-year program.

Under the 'Dayata Sevena' housing program, 57,000 houses have been built to provide housing to low-income groups, particularly in rural areas. Community water supply schemes have become a powerful community owned initiative in the rural areas. Several such schemes have been completed primarily in Hambantota, Ratnapura, Anuradhapura, Matara and Badulla. We propose to complete a further 330 such schemes in 2006.

37. Mr. Speaker, the 'Samurdhi' program was reformulated towards providing community based infrastructure. The micro enterprise development programs under 'Jana Pubuduwa' and 'Gami Pubuduwa' - are ideas of Her Excellency the President and in this year 57,000 programs have been targeted under 'Gami Pubuduwa' and 50,000 under 'Jana Pubuduwa', providing greater opportunities for 'Samurdhi' beneficiaries to raise their income levels.

Through the expansion of these programs at each divisional secretariat level, a further 100,000 such projects are targeted each year. Participating in such projects should help the beneficiaries to increase their monthly income level to well over Rs. 5,000. The World Bank assisted 'Gami Diriya' has extended its community empowerment program to Ratnapura, Badulla and Hambantota districts.

38. The setting up of the National Council for Economic Development (NCED) to get private sector stakeholder inputs for policy formulation and implementation, the National Council for Administration (NCA) to formulate a national wage policy and administrative reforms and the Strategic Enterprise Management Agency (SEMA) to strengthen key public enterprises has helped to improve overall public expenditure management and promote overall growth strategies.

The National Procurement Agency (NPA) which was set up to streamline procurements in the government sector has developed guidelines for emergency procurements, new procurement manuals and a website providing procurement information. Formulation of standard functional specifications for regular procurement and setting up of a Procurement Appeal Board to consider appeals on procurement related complaints, are expected to reduce corruption and improve procurement efficiency.

39. The Legal and judicial reforms that had slowed down since 2001, were reactivated. New Court complexes in Trincomalee, Jaffna and Kandy have been completed and around 30 other courthouses scattered over the island have been renovated and refurbishes under this program.

Introduction of information technology to courthouses to facilitate speedy action and minimize laws delays is also a part of this reform program. Members of the Judiciary, officials of the Attorney General's Department and the Legal Draughtsman's Department were placed on international training programs to update their knowledge and professional skills.

A 'LawNet' is being setup to provide web-based access to legal information including laws, regulations and important judgements, for the benefit of investors and the general public. A commercial mediation centre has been set up with the Ceylon Chamber of Commerce, to promote alternate dispute resolution.

It is proposed to take these initiatives further next year with focus on human resource development, court complex development, enhancement of usage of information technology, creation of a business-friendly legal and regulatory environment and further legislative reforms towards reducing transaction costs and thereby promoting and facilitating business development in the country.

40. In addition, Mr. Speaker transparency in government finance has been strengthened by adhering with the reporting requirements of the Fiscal Management (Responsibilities) Act and through the regular release of fiscal information to the general public (FMRA). The Corruption Perception Index - 2005 has placed our country in the best position among SAARC countries.

The perception ranking reflected in this index needs to be further changed rapidly to the better, in order to improve the investment climate of our country. Automation of Inland Revenue and Customs, the appointment of a tax ombudsman, and the adoption of a Code of Conduct and Ethics for the Inland Revenue Service are expected to contribute towards this end.

The allocation of an increased volume of funds for anti-corruption efforts together with greater transparency in the revenue administration and government spending agencies, are given highest priority in this budget.

41. Mr. Speaker, in a nutshell, our economic transformation process include pro-poor growth strategies, a regional focus with special emphasis on recovery in the conflict-affected districts, in the tsunami-hit coastal belt and other disadvantaged districts in the rest of the country, as well as a comprehensive infrastructure development programme.

This involves policy reforms towards strengthening government revenue, improving the quality of government spending, promoting exports, trade and investment cooperation, skills development and productivity improvements, reforms in the financial sector and strategic enterprises, capacity building in legal and regulatory spheres and further private sector development with a SME focus.

Development Decade

42. Mr. Speaker, this year we begin a 10-year journey towards achieving the Millennium Development Goals (MDG) declared by the United Nations. The Millennium Development Goals include eradication of extreme hunger and poverty, achieving universal primary education, empowering women, eliminating gender disparities in primary and secondary schooling, reducing child mortality, improving maternal health, combating HIV/AIDS, Malaria and other diseases, ensuring environmental stability and establishing global partnerships for development.

43. Mr. Speaker, while our country has already witnessed great success in attaining universal primary school enrolment, gender equality in school enrolment and reducing the infant mortality rate, we face challenges in ensuring quality in primary education and reducing child malnutrition and poverty, particularly in disadvantaged regions.

Therefore, in addition to sustaining higher economic growth nationally as elaborated earlier, it is also essential that economic growth opportunities and infrastructure investments are targeted towards the needy and disadvantaged districts that have seen little progress in development.

44. In this background our Government has already launched the Sri Lanka Millennium Development Goal strategy with clear milestones to realise these goals well in time. The Department of Census and Statistics has developed measurable indicators at national level as well as at provincial and local levels and on a gender basis, for policy planning and monitoring of MDGs.

I therefore propose that the 10-year period commencing from this year, be declared as Sri Lanka's Development Decade, dedicating all our efforts to achieve the Millennium Development Goal. Let me refer to four specific areas that would be given priority.

A. National Action Plan for Children

Mr. Speaker, on the bold initiative of Her Excellency the President and with the collaboration of the UNICEF, our Government implemented a 5-year development strategy commencing in 2005, focusing on children to ensure universal access to services they require.

The broader objective of education planning is to expand early childcare and education to the 35 per cent in the pre-school age group. Towards this, funds have been provided for the setting up of 500 early childhood centres, refurbishment of 100 model pre-schools each year and the implementation of education programmes for children with special needs including disadvantaged children, street children and non-enrolled children.

With the overall objective of reducing morbidity and mortality among pregnant mothers, newborns, infants and pre-school children, we have provided paediatric, maternal and child health clinics at provincial levels.

46. It has been reported that 80 per cent of children in the country are subject to diarrhoea disease annually. We have initiated action to provide safe drinking water and sanitation to disadvantaged schools in the districts of Anuradhapura, Hambantota, Rathnapura, Budulla, Matale, Matara, Kurunegala, Gampaha, Nuwara Eliya and Colombo in 2006.

It will be extended to other districts in 2007. Although the use of child labour is not a major problem in our country, it exists in hidden forms in the informal economy. Conducting awareness programmes regarding child labour at district level throughout the country is therefore essential.

In 2005, our Government invested Rs. 8,821 million on children and this amount has been raised to Rs. 13,300 million in the 2006 Budget. I am proud that our society also contributes to this programme through the Social Responsibility Levy, which I introduced in my last Budget, to generate Rs. 450 million. I also want to place on record our appreciation of the contribution made by UNICEF in supporting this programme.

B. Development of the Plantation Community

47. Mr. Speaker, another area of priority in terms of MDGs is the socio economic status of the plantation community. Despite this community being employed predominantly in the privatised plantation sector, 30 per cent of the population is identified as poor, which is higher than the national average of 23 per cent.

Our Government, reflecting its commitment to achieve MDGs has now undertaken to formulate a 10-year plan in three phases, targeting 1.5 million people in 61 divisional secretariat divisions of 10 highland and surrounding districts, to address problems in such areas.

The underlying development indicators in this sector include reduction of infant mortality, increasing the literacy and access to safe drinking water. The resource requirement of this 10-year multi prong development plan is estimated to be around Rs. 40 billion.

The major thrust of this programme would be housing, as there are about 200,000 estate houses requiring re-development or rehabilitation. Estate roads of about 10,000 km have deteriorated due to lack of proper maintenance. The Government will give priority in addressing immediate needs of education, health, water supply and redevelopment of about 3,000 km of roads and 50,000 houses, over the next 3 years.

C. Development in the Conflict Affected Areas - North and East and the Border Districts

48. Mr. Speaker, the Government has mobilised nearly US $ 650 million for development in the North and East. The Government itself provides nearly Rs. 5 billion from its annual budget to improve living conditions of people in these areas.

The RRR strategy in the North and East consists of four major components namely health, education, livelihood support and infrastructure. In respect of health, priority is accorded to meeting manpower shortages in the delivery of health services and to rebuild hospitals, clinics and other physical infrastructure.

In education, the focus has been placed on filling teacher vacancies and teacher training, building new schools and improving classroom facilities, the expansion of non-formal education to children who have missed education due to the ethnic conflict and the expansion of the school-feeding programme. Infrastructure priorities include housing for resettlers, reconstruction of the road network, restoration of electricity, transportation and other infrastructure facilities.

49. The rehabilitation of major irrigation schemes such as Yoda Weva, Irranamadu, Allai and 240 other local village tank development programmes are being implemented under NEIAP II project, funded by the World Bank.

Similarly the NEHRP Project, funded by the World Bank to build 46,000 houses has seen the completion of about 10,000 already. Under the ADB funded rehabilitation programme - CAARP, five ayurvedic dispensaries in Kilinochchi, Vavuniya, Batticaloa and Ampara have been reconstructed and the reconstruction work of the Jaffna Ayurvedic Teaching Hospital is to commence shortly. The construction of 10 'Gramodaya' health centres, 120 school buildings and the provision of furniture to 232 schools are also to be completed.

50. The North East Community Restoration project (NECORD) assisted by a consortium of donors led by the ADB, has completed the construction of a 3-storeyed ward complex in Mannar, an OPD and a clinic complex in Vavuniya, a 4-storeyed out-patients complex and a dental unit in Batticaloa. Work of water supply and sanitation schemes are to commence shortly in Batticaloa, Mutur and Ampara coastal areas to provide water and sanitation to over 300,000 people.

The new highway bridge at Manampitiya, connecting the Eastern Province with North-Central Province and the new Vavuniya/Killinochchi transmission line funded by the Government of Japan are now under construction.

51. Although, significant progress has been achieved with the participatory approach in the implementation of livelihood support programmes, the progress of infrastructure development is not satisfactory.

The Government will focus on removing various implementation bottlenecks associated with the process to ensure early completion of reconstruction work in the affected areas.

D. Tsunami The Development Strategy

52. As mentioned earlier, the tsunami was a major additional challenge for the Government. Its aftermath had to be managed while implementing the development programmes announced in the 2005 budget.

The Government however evolved an overall strategy to implement post-tsunami reconstruction work. This not only contributed towards mobilising nearly US $ 3 billion including debt relief, but also enabled us to launch a medium-term development programme for the affected coastal belt. Let me summarise the key features of this programme and its achievements.

53. Apart from spending Rs. 8,630 million on health and funeral expenses, the provision of kitchen utensils and cooked meals, provision of immediate basic facilities and continued assistance by way of dry rations and a Rs. 5,000 Supplementary Family Allowance, the Government is now in the process of transforming relief measures into income support schemes.

54. A major component of the rehabilitation process is to replace the housing stock affected by the disaster. Towards this end, cash grants of Rs. 100,000 to Rs. 250,000 for housing are being disbursed through the People's Bank and Bank of Ceylon with funding assistance from a donor consortium led by the World Bank. This programme has reached 50,253 homeowners fully or partially affected by the tsunami.

The number of houses that will be build under this scheme by individual homeowners is expected to increase by a further 15,000 with the recent modifications made to the scheme pertaining to setback-zones. As such, about 65,000 houses are expected to be completed before the end of this year. The entire programme upon completion is expected to cost around Rs. 13 billion (US$ 130 million).

The number of houses that have been completed by NGOs, civil organizations, private individuals and organizations is around 5,000. A further 10,000 are expected to be built under various settlement schemes identified by the donors.

55. Transitional accommodation has been provided at 488 sites of which the majority is in Galle, Ampara, Batticaloa and Trincomalee districts. Basic infrastructure including electricity, supply of drinking water, access roads and waste disposal are being upgraded. In addition to donor funds, monies from the Consolidated Fund have also been provided to government agencies for their relief requirements.

56. The revival of livelihood activities in fishing, tourism, trade, commerce, transport, business and self-employment is crucial although time-consuming. The Micro Enterprise Credit Scheme implemented through NDTF and Small and Medium Enterprises Credit Scheme sponsored by the Central Bank have disbursed Rs. 3,762 million through commercial banks at 6% interest with a one year grace period and a 7-year repayment period to 8,197 affected SMEs.

These schemes also provided credit facilities up to Rs. 60 million on concessionary terms for the rehabilitation of tourist hotels. The recent modifications made to these schemes relating to setback-zones will enable financial institutions to expand their assistance further, to support business development in the affected regions.

57. The fisheries sector suffered the greatest damage losing virtually its entire capacity ranging from small fishing boats and nets to large fisheries harbours. Consequently the monthly fish production of around 25,000mt. prior to tsunami declined to around 900mt. in January.

However, there has been a recovery in recent months with production levels now recording approximately 12,000mt. The Coast Conservation Department has undertaken to restore essential infrastructure facilities such as landing and service sites, repair workshops, ice plants and boatyards. A large number of small boats, fishing nets and gear have been provided by many donors.

Manufacturing of single-day and multi-day boats for deep-sea fishing which is vital to revive this industry has been started by local boat manufacturing companies. 100 such boats are now being manufactured and they will be offered to boat owners who have lost their boats, on concessionary terms.

A fuel subsidy for multi-day fishing is also being provided to ease the cash flow burden on affected families. The reconstruction of fisheries harbours at Mirrissa, Puranawella, Beruwela, Kudawella, Galle, Tangalle, Panadura, Hikkaduwa, Kirinda and Kalpitiya and several anchorages are undertaken by donor Governments. they will be commissioned next year. Two new fisheries harbours at Hambantota and Ambalantota will also be constructed.

58. The construction of the main road connecting Kalutara, Galle, Matara, Hambantota, Batticaloa and Jaffna together with several bridges and feeder roads costing US$ 350 million, which is funded by a consortium of multi-lateral and bilateral donors, is expected to commence shortly. This is connected with several township development programmes in Trincomalee, Hambantota and several other locations. 127 water supply schemes in tsunami affected areas have been identified by the Water Supply and Drainage Board to be restored to provide safe drinking water.

59. The Entire 182 affected schools, 4 universities, 3 technical colleges and 13 vocational institutions and hospital facilities including the Mahamodara Hospital in Galle, are under reconstruction through donor assistance. The rehabilitation of temples, churches, mosques, kovils and such other places of religious or cultural importance are assisted through the Consolidated Fund.

Restoration and provision of basic facilities to administrative establishments at divisional and district levels have also been undertaken through the Consolidated Fund. UNDP assistance has been sought for capacity building at district level administration to strengthen tsunami related tasks. However, we encounter problems due to delays in land acquisition, cost escalation of materials, labour shortages, environmental considerations and quality assurance requirements relating to such work.

Future Direction A Knowledge Economy

60. With our human resources advancement over several decades due to traditionally high investment in education, health and skills development, we must position our country as knowledge economy. In fact we should project this country as a high quality skills provider as opposed to low cost cheap labour. It involves using knowledge to increase the value of existing assets as well as entirely new products, services and technologies.

Our country being located in the closest proximity to all emerging Asian and Middle Eastern growth centres, we have to become quality professional service providers both within and outside our country.

The skilled categories of about 150,000 people currently leaving for overseas employment should be diversified and enhanced.

In this background our education system should be further directed towards high quality learning, use of the latest technologies, imparting international languages and a close working partnership between educators, researchers and the business community.

Therefore continued investment in intellectual capital will be the key to success for the future. We propose to launch a national vocational classification for all skills so that both private sector as well as the public sector can plan their human resource and skills development in a systematic manner.

Re-engineering the Government

61. The main objective is to strengthen the complementary role of the Government as facilitator of business development and to make the public service more efficient, transparent, and accountable and people friendly.

Therefore, special attention will be paid, to simplifying government rules, procedures and documentation systems in order to reduce transaction costs, eliminate waste, abuse, inefficiency and corruption in the public service. In the department of Inland Revenue, we have commenced reorganization with emphasis on IT use, HR management and public relations.

We propose every government agency to be subjected to public scrutiny and rating by professional agencies, to ensure a good performance standard. However, we cannot afford to be Colombo centred exclusively in the context of regional disparities prevalent in our country. The highest priority is given in the 2006 Budget to establish a sound district administrative system centred on district Secretaries who are better placed to be responsive to the aspirations of the people.

Capacity building programmes earmarking Grama Niladaries, Divisional Secretaries and District Secretaries have being incorporated into the Budget, in order to improve the delivery mechanism at district level. Assistance from UNDP has been secured to begin this process with the tsunami affected districts.

Law and Order and Public Safety

62. It is important to create a secure environment for sustainable development by maintaining law and order, public safety and legal rights. Focus will be placed in reducing the crime rate, enhancing public access to the judiciary, and prevention of terrorism.

It is encouraging to note that recent measures taken by the Sri Lanka Police have helped to reduce the crime rate considerably. Violent crime has reduced by 11 percent over the last year. Illicit liquor and drug trafficking has also been curtailed. The input of modern technology into the investigation process is necessary to consolidate the present trend.

Private Sector Development

63. Mr. Speaker, the private sector is as important as the public sector in the development strategy that our Government has consistently adopted since 2004. In this context the understanding of various facets of private sector operations is very crucial.

While the private sector functions differently in a business environment, a broad common policy environment can be engineered based on market fundamentals supported by regulatory checks and balances. An important facilitation role is cast upon the Government, generally to assist all sectors of the economy.

Our Government recognizes the importance of complementary participation as well as competition among all sectors of the economy, to achieve best economic efficiency and welfare.

In this context, since we assumed office in April 2004, we have tirelessly worked with the private sector to get the enabling legislation in place. For instance the new Tourism Act provides an enhanced role for the private sector in the tourism industry.

The new Companies Act, which is being submitted to the Parliament to simplify and modernize company law in Sri Lanka, promote SMEs and afford greater protection to minority shareholders, the Financial Transactions Reporting Act and the Prevention of Money Laundering Act to protect the financial system stability are further examples.

While enabling policy environment is conducive for the corporate private sector in terms of capital and financial markets, exchange and trade policy regime, further reforms are required to promote the SME sector as well as the co-operative sector.

Private-Public partnership, particularly in rural sector development, can be promoted for greater economic good. Towards this, apart from the formation of an SME Authority and the re-positioning of the SME Bank, the Central Bank has undertaken a capacity development programme for micro financing agencies in order to strengthen the peoples' sector development in the country.

64. Private sector development, while requiring peace and stability, a consistent policy regime, stable financial conditions and law and order, also needs an efficient functioning of the government machinery. Despite many constraints, there is a great interest in large investments in Sri lanka.

However, due to compartmentalized operations by ministries, departments and agencies, outdated systems and procedures, rigid laws and the lack of a coordinated approach, such investments are delayed or denied.

Having recognized these problems, the Government recently set up a Cabinet Sub-committee on Investor Facilitation. While we have resolved many problems relating to private sector investments, we have also observed that the amount of investment that has been denied is substantial. Delays are unjustifiable and are usually accompanied by widespread corruption.

As I stated in my previous Budget, one clear message I want to send again today, is that our country cannot afford to tolerate corruption and mismanagement. The cost is enormous, as much as the war and finally it is the poor who suffers. Therefore, we have decided that these issues need to be addressed as a matter of urgency. We will present legislation to this house in early January next year to expedite the investment decisions making process and thereby improving the investment climate in the country.

The 2006 Expenditure Priorities

65. Mr. Speaker, as I explained in my previous Budget Speech, the Budget for 2005 was formulated within the overall policy vision articulated in the Economic Policy Framework of the Government - "Creating our future; Building our nation".

In line with this structure, the "New Development Strategy Framework for Economic Growth and Poverty Reduction" was presented at the Development Forum in Kandy in May this year, to promote further discussions and consultations on economic growth and poverty reduction policy strategies in a medium-term context, with special emphasis on MDGs. The strategy of the 2006 Budget is to further consolidate that medium-term policy framework and adopt allocation guidelines on the basis of a sectoral grouping of ministries, in order to direct government spending to achieve higher economic growth based on pro-poor growth strategies and policy based fund use.

Regional Development The Pro-poor Budgetary Framework

66. As revealed in the Consumer Finance and Socioeconomic Survey of 2003/04, the estate sector, Northern and Eastern provinces and several districts in other provinces lag behind the urban sector led development witnessed in this country.

Mr. Speaker, the main focus inn our Pro-Poor growth framework is therefore to enhance the standard of living of low-income and vulnerable groups in these areas through the development of provincial and community level infrastructure facilities. In this context, the mobilization of the poor and ensuring their effective involvement in the community development process is essential.

67. According to the Department of Census and Statistics, nearly 50 percent of the total population has shown a higher poverty ratio than the national average, in 12 administrative districts.

They are Matale, Galle, Matara, Hambantota, Kurunegala, Puttalam, Anuradhapura, Pollonaruwa, Badulla, Moneragala, Ratnapura and Kegalle and in the Northern and Eastern districts. In this background, the 2006 Budget, which has been designed on pro-regional basis, provides Rs. 89,576 million - the highest allocation made for regional development.

This includes Rs. 4,434 million for 'Maga Naguma' the provincial road improvement and development programme, Rs 2,770 million for specific regional development programmes such as 'Rajarata Navodaya', 'Pubudamu Wellesse' and Central Province and southern infrastructure development, Rs. 12,390 million for North and East rehabilitation and reconstruction, Rs. 750 million for 'Dahasak Maha Wav' irrigation programme including Deduru Oya and Kirindi Oya projects and Rs. 672 million for the estate infrastructure development programme.

The pro-regional expenditure also include Rs. 3,200 million for rural electrification, Rs.672 million for 'Gami Pubuduwa', Rs. 1,155 million for 'Gami Diriya', Rs. 550 million for the 1,000 Industrial Villages programme and Rs. 31,923 million for the Tsunami affected regions.

Human Resources Development

68. Public expenditure on education is directed towards increasing access and quality improvement of education at primary, secondary and tertiary levels. Priority in higher education is given to expanding demand-driven degree programmes while also introducing new programmes designed to cater to demands in the emerging local and global markets.

Technical education and skills development programmes are targeted to develop a multi-skilled and a more productive workforce, which will be globally competitive. We have to adapt to rapid technological developments taking place in the global environment during the medium-term 2006 to 2008. With these considerations in mind, Rs. 26,290 million has been allocated for education in 2006.

The 'Navodya' school development programme and secondary education modernization programme are provided with Rs. 2,234 million while rural area school development programme is given Rs. 867 million. Skills development programmes are supported with Rs. 2,563 million.

69. Ensuring equity in health care, easy access to quality and modern health care services will be the main focus of the health sector in the medium-term 2006 to 2008, with emphasis on lower income groups and the most vulnerable in the society.

The present emphasis on curative healthcare should shift towards preventive healthcare by increasing investment on preventive health-care programmes targeted at reducing both communicable and non-communicable diseases, coupled with cost-effective nutrition intervention programmes.

Equal emphasis will be given to reduce the human resource shortage prevalent in the health sector. Total capital funding made available for health sector in 2006 is Rs. 11,112 million. The construction of new hospital facilities including those in Nuwara Eliya and Thelippali will be provided Rs. 4,960 million while community healthcare services are provided with Rs. 640 million.

Infrastructure Development

70. A nationwide, modern, quality and efficient infrastructure network has to be built to establish the vital link between resources, markets and employment. Therefore, a rapid improvement in the capacity and quality of the service of electricity, transport, roads, urban amenities, ports and airports is required to increase accessibility and mobility to ensure bridging regional disparities.

As most of these infrastructure investments are responsibilities of the Government, the Budget provides Rs 63,453 million for these sectors of which funds earmarked for the construction of roads and bridges is Rs. 26,043 million.

For further improvements of the bus and railway services, Rs. 10 billion has been provided. Similarly for power generation and distribution Rs. 302 million is available. A large allocation of Rs. 16,902 million is provided for water supply projects, which include, Kandy, Nawalapitiya, Ampara, Nuwara Eliya, Kurunagela and North Colombo. I have already mentioned the flagship public investment projects that are being undertaken to address the much needed infrastructure requirements.

I am optimistic that these infrastructure development projects will create a massive construction boom over the next 2 to 3 years and encourage long-term private investment as well.

The 2006 Budget

71. Mr. Speaker, the budget process is in transition since our Government has attempted to formulate annual budgets in a medium-term framework based on sectoral policies, which are reflected in the planning process and consistent with macroeconomic priorities.

In formulating the 2006 Budget we have clustered line ministries and agencies into 10 sectors to maintain sectoral consistencies and minimize duplication of public expenditure under different spending heads. We have observed that maintenance of existing assets tend to be neglected when new assets are added through the Budget. A large number of new projects have been identified without making a serious evaluation of the implementation and maintenance capacity.

The total development expenditure provided in the budget estimate is about 8 percent of GDP. Although foreign funds are also identified for such projects, the time lag in terms of the procurement process, mobilization of contractors and related preparatory work has not been reflected in these figures.

In my view, the realistic level of expenditure is 6.5 percent of GDP. Therefore, we have frozen such excess provisions until such time the relevant line ministries prove their ability to use the provisions within the budgetary year. They will remain as standby provisions.

73. Mr. Speaker, The 2006 and our medium-term budget will also underscore a few important policy directions. The first relates to general subsidies. As I have articulate earlier, our policy is to transform consumption subsidies into production incentives.

For instance, it may appear justifiable to eliminate the wheat flour subsidy and provide a fertilizer subsidy. We did this last year.

On a similar principle we will protect expenditure in respect of seed and planting material, credit and fertilizer application. The prevailing oil subsidy will be directed towards service providers such as three-wheeler and omnibus operators, fishing boat owners, and consumers relying on kerosene due to non-availability of electricity. Such a re-direction of resources will also have the advantage of being pro-poor.

72. Second, our budgetary priorities take into consideration the importance of protecting provisions for 'Samurdhi', displaced persons, disabled soldiers, pensioners, widows and orphans, children, women and other vulnerable groups.

In respect of 'Samurdhi', community empowerment through further development expenditure at divisional secretariat level will be promoted to enhance earning potentials of the poor. Micro credit facilities will also be directed towards women entrepreneurs of 'Samurdhi' families.

In respect of Pensioners, improvements, will be made by providing various services including payment of the monthly pension in a timely manner. We propose to open a bank account for each pensioner into which the monthly pension will be credited automatically. This will reduce unnecessary overheads and delays.

74. Third, the Budget will protect important recurrent expenditure including personal emoluments and other cost of deliveries of the public service including those provided at district and divisional administration levels, to improve the public service delivery mechanism.

75. Mr. Speaker, if our fiscal policy options are guided purely on the basis of matching expenditure to available revenue and foreign aid, we will not be able to effectively serve our people since our revenue is still below its potential.

Having embarked on ambitious development programmes in line with the Millennium Development Goals strategy, it is necessary that we concentrate on increasing revenue to a significantly high level.

When we compare ourselves with levels of development achieved by comparable countries, or with our own past experiences, we cannot be complacent with our tax effort. Our country enjoyed over 20 percent revenue in relation to GDP when our per capita income was below US$400.

Mr. Speaker our per capita income will exceed US$ 1,200 this year. We have made a turn-around by raising the tax GDP ratio from the record low level of 13 per cent in 2003 to about 15 per cent now, but this is still far below our capacity.

We consider it is essential that we raise tax revenue at least by 1 per cent of GDP each year. Non-tax revenue is equally important. Therefore, our fiscal policy demands quality improvements in the Department of Inland Revenue and Customs as well as in all other public enterprises, to raise their revenue effort considerably to contribute toward national development.

76. Mr. Speaker, I do not intend explaining detail statistical accounts of fiscal operations. I am placing all such details as annexures to my Speech. Further, I place before this house underlying medium macro economic framework, medium-term macro fiscal policy framework and other background information pertaining to this Budget.

I will disclose all this information to the general public and to the media through the website of the Ministry of Finance and Planning. I will present fiscal details and other proposals after the tea-break. I was explaining to this house how our Government has taken the economy forward since we assumed office last year.

I also referred to the re-engineering process that we have undertaken to address a wide range of imbalances that have grown due to the adverse impact of globalisation on smaller economies on the one hand and emerging income and regional disparities as well as imbalances in fiscal management on the other.

Further I went onto explain the enormous challenges that we as a nation had to face with the Tsunami - the worst ever-natural disaster and the world oil crisis.

As a Government committed to a negotiated political settlement, and devolution of power we have also to accelerate development work in the North East and promote national integration. Besides all these the country has to be positioned to maximize its potential and integrate it with the world in a manner that will safeguard our interests. I earlier proposed that we commit ourselves to a development decade.

This is a decade that the United Nations and our development partners have dedicated to achieving the Millennium Development Goals particularly through a global effort to mobilize resources for development. Therefore, we as a nation should not only commit ourselves to rapid development and eradication of poverty but also to ensure that we will not miss this opportunity, as we have missed on previous occasions leaving us lagging behind many other countries.

I have prepared this budget under difficult conditions. The budget process coincided with an unexpected election cycle. The preliminary Budget call was issued in July this year. The consultation process started thereafter and the Appropriation Bill was placed before Parliament one month ago.

We have also entered into an international rating process for which regular fiscal policy conduct is critical. The private sector, investor community and public services need continuity in their work. The tsunami related work needs to be managed satisfactorily before its anniversary in December, when the eyes of the world will be turning towards us again.

All candidates for the forthcoming Presidential election have placed their manifestos before the public reflecting their political ideologies and policy strategies. Nevertheless, the common objective of all of these visions is to accelerate economic growth, create employment and reduce poverty. Our own interaction with the public and different organizations have reflected similar concerns. Therefore, my task is to address all these concerns in a viable economic and financial framework as well as within our overall pro-poor policy framework that our government announced last year. It is in that context that I am presenting my Budget proposals for the approval of this House.

A large number of children have lost their parents and family protection due to the Tsunami and the conflict in the North East. A large number of children living in these areas have become disabled. It is the responsibility of the government to look after these children and assist in their growth. Hence I propose to open a bank account for each of such children and contribute a monthly payment of Rs.1,500 until they reach the age of 18 years. The accumulated sum of saving in this account will be doubled if the child enters into a vocational training institute and will be tripled if the child enters a University.

To start this scheme I propose an allocation of Rs. 200 million. The Peoples' Bank will manage this account in view of their extensive branch network. I invite professionals in health and educational services to design special child care programmes for children who will be eligible for "Senehasa" accounts in collaboration with the People's Bank.

Concession for Homes for Children, Disabled and Elderly. At present interest income held by any individual or institution in excess of the annual threshold is liable to a tax of 10 percent. As a result charitable organizations dedicated to important social services such as managing elders homes, Children's homes, homes for disabled etc. also have become liable to this tax.

I propose such organizations be exempted from this tax. Mr. speaker since these organizations are doing a very useful service at least cost to society, I proposed to allocate Rs. 75 million to assist all these homes to be refurbished during next year.

Mothers and Children

Last year our government initiated a nutritional food supplement programme for school children as a pilot project. Considering the nutritional deficiencies among schoolchildren and inability to have a meal at the correct time, of those living in backward areas, I propose to expand this project to implement a school meal programme to ensure nutritionally balanced meal is given for school children.

The budget also provides about Rs. 1,000 million for a number of Mother and Child nutrition programmes to address micro nutrition deficiencies.

I propose to allocate a further Rs. 500 million to expand the coverage of all these programmes particularly, high malnutrition districts consisting of estate areas, dry zone and coastal lowlands.

Livelihood Development though Samurdhi

As part of the government's commitment to reduce poverty and increase rural production and income, Samurdhi has initiated community infrastructure development work as well as self employment programmes under Gami Pubuduwa, Jana Pubuduwa and Gami Diriya programmes.

Under these programmes several new livelihood generation activities such as dairy, outgrower arrangements for fruits and vegetable cultivation, sub-contracting arrangements for industrial work and micro credit scheme for self-employment have been identified to augment the income of less advantaged people.

Therefore on the basis of Rs. 10 million per Divisional Secretary area, I propose to allocate Rs. 3,000 million from January 2006 to provide supplementary income for Samurdhi beneficiaries by engaging them in dairy development programmes, self-employment and Community based infrastructure projects at divisional secretaries level with manpower provided by Samurdhi beneficiaries.

Further, since Samurdhi monthly allowance of Rs. 500 has not been increased since 1995. I propose to increase it to Rs. 750 with effect from next year. Corresponding adjustments for other categories will be made. An allocation of Rs.3,000 million is provided for this purpose.

Estate Infrastructure Development and Community Welfare

As I explained earlier consistent with the MDG strategies the government has prepared a 10 year development plan for the estate sector.

Accordingly, the Plantation Development Trust will concentrate on water supply, pre-schools, child development and sports. A new programme called "Praja Shakthi" focusing on micro enterprises which was launched this year will be expanded. A vocational training college will be set up in Nuwara Eliya next year. The feasibility of setting up a separate university is also being explored.

All estate sector hospitals and schools development will be undertaken through Provincial Councils. Estate sector targeted expenditure of around Rs. 1,641 million is separately itemized in the annual Budget estimates, I propose to allocate a further Rs. 2,000 million in order to give priority for the rehabilitation of estate roads and development of 50,000 housing in phase I of the 10 years development plan.

Dedicated Agricultural Product Zone

Sri Lanka's tropical fruits are concentrated in specific districts with unique environmental surroundings. The Ministry of Agriculture proposes to create crop zones for the development of identified crops such as Mangosteen, Orange, Delum. Durian, Papaw, Rambutan, Pineapple, Grapes and Peanuts to provide required technical and extension facilities and improve marketability of products in the export market. It is proposed to allocate Rs. 160 million for this project.

Agricultural Inputs

Our pro-poor, pro farm policies are designed to promote the rural agricultural economy. Availability of inputs such as credit, fertilizer , quality seeds and planting materials at affordable prices is essential given the high risks in agriculture.

Since our government came into office, we have fixed fertilizer prices at Rs. 550 per 50kg bag. This subsidy needs to be directed primarily for the paddy and vegetable sector to provide fertilizer at affordable prices for small farmers. Additional incentives will be offered for organic fertilizer users. In respect of chemical use, it is necessary to improve testing facilities and quality controls to prevent the import of substandard chemicals.

In order to further improve the availability of quality seeds Rs. 40 million will be allocated for the development of seeds and planting materials at Horana, Seetha Eliya, Girandurukotte and Labuduwa seed farms to meet specific geographical and climatic conditions. I also propose to allocate Rs. 190 million to develop the Maha-Illuppallama Field Crop Research Institute to promote dry zone agriculture.

The credit channelled by our banks to rural agriculture is grossly inadequate.

Despite banks increasing savings deposits from the rural economy, the share of agricultural credit has declined from 6.3 percent in 1995 to 4.7 percent in 2004.

Therefore, I propose to amend banking regulations to make it mandatory that credit extended to agriculture including processing be increased to 10 percent during the next three years. Prevailing credit schemes will be designed to offer credit at the low interest of 7 percent for cultivation and paddy purchases.

Rs. 2,000 million now in possession of Government Agents will be converted to a revolving capital to set up an institution dedicated to paddy purchases.

All government storage facilities scattered around the country will be assigned to this institution. Paddy purchase in the forthcoming Maha harvest will be made on this new arrangement at guaranteed price of Rs. 16.50 - 17.50/kg. A new incentive package consisting of credit, seed and fertilizer at affordable prices will be implemented in support of paddy agriculture. I propose to allocate a further Rs. 1,600 million for this programme to enhance budget provisions.

Quality Improvement in Agriculture

Sri Lanka is one of the top 25 bio diversity spots in the world. We now enjoy a good reputation in the international market as a reliable supplier of organic products. This image needs to be protected and promoted. However exporters face problems with regard to the high costs of certification which act as an entry barrier into organic agriculture. I therefore propose to initiate a National Organic Standards and certification programme to enhance organic agriculture.

Gamma Irradiation plants are now widely used for the sterilization of medical products and food preservation. The availability of such a facility for agriculture would help in the reduction of post harvest losses through removal of harmful bacteria and improving methods of packaging and transporting agricultural produce. Therefore, I propose the establishment of an Irradiation Plant for the benefit of agricultural producers at an estimated cost of Rs. 415 million.

Plantation Industry Long Term Development Plan

Plantation agriculture in Sri Lanka comprises mainly of tea, rubber, coconut and sugarcane. They continue to play a major role in the national economy. The Government has adopted a ten year development plan with nursery development, factory modernization, re-planting and new planting programmes together with crop diversification and soil conservation. Therefore, I propose to establish a revolving fund for the development of tea, rubber and coconut by transferring the Rs. 1,600 million currently lying with the Stabilization Fund.

Excess urban land and property owned by the Plantation Ministry will be developed commercially to increase the value of this fund to Rs. 10 billion.

Planting and replanting subsidies will be increased for smallholder plantations. Meanwhile to encourage coconut cultivation in Mahaweli areas, Galle, Matara, Hambantota and in the traditional coconut triangle districts as well as 20,000 hectares of rubber in Monaragala district, an allocation of Rs.600 million will be provided. Economic Service Charge (ESC) on tea processing factories will be reduced from 1 percent to 0.25 percent to encourage tea factory modernization.

Development of Cashew Industry

The global demand for cashew kernel is increasing at a rate of 7 percent per annum and there is a high demand for Sri Lankan cashew in the export market.

I propose to encourage this industry through the establishment of high yielding seed clone gardens in Maha-oya, Anuradhapura and Moneragala areas. We will establish a guaranteed market by promoting raw cashew auctions in Puttalam and Vavuniya. I propose to allocate Rs.100 million for this programme.

Livestock Development 16. This activity has shown a remarkable revival last year due to our policies. At grass roots level the "Kiri Gammana" programme has gathered momentum. At national level large investments have been made.

A new milk plant with a capacity to produce 50,000 lt a day at Kilinochchi is to be commissioned early next year. This investment has been made by expatriates Sri Lankans. The local private sector has started an expansion plan for milk collection and milk processing plant with investment of around Rs. 1,000 million.

To promote this industry I propose to exempt milk processing machinery from import duty and VAT. I also propose to increase producer price of milk to Rs. 25-30/Lt. range next year and gradually remove the prevailing duty waiver on milk powder to promote the local milk industry.

The Mahaweli Economy

Despite substantial public investment in the Mahaweli scheme which has largely boon recovered through hydro power schemes and almost 1/4 of country's rice production and other field crops, the overall annual contribution from the Mahaweli area is around 1.3 per cent of GDP. Second generation employment creation in this important sub-economy is also below its potential.

The government now proposes to remodel a Mahaweli Economy which will aim at raising its contribution to 3 percent GDP and reducing second generation unemployment to 5 percent. This new strategy is designed to promote commercial ventures in high value added activities such as diary, inland fisheries, community tourism and new urban development scheme to create an urban service hub.

A special SME credit scheme dedicated to 500 SMEs will be implemented to create high tech export oriented agro-processing industries including high quality rice. The creation of a Mahaweli Economy requires a seed capital of Rs. 700 - 1,000 million over next 3 years.

I propose to allocate Rs. 200 million to commence the initial work in 2006. This new economy is linked to the greater Dambulla township programme to promote Dambulla as a central hub city.

Promotion of Deep Sea Fishing

Prior to the Tsunami the country's annual fish production of 300,000 mt was harvested by about 30,000 fishing vessels which varied from traditional crafts to multi-day boats. However nearly 2/3 of this fish productions was harvested by about 1,600 multi-day boats. As coastal sea resources are over exploited there is a need to tap deep sea resources to increase country's fish production. Therefore, there is a need to develop multi-day boat manufacturing industry.

Further easy payment scheme for fishermen to purchase such boats and training for fishing for export markets needs to be arranged. Therefore, I propose to establish a Fishing Promotion Fund, to embark on this new venture, I propose to allocate Rs. 700 million.

In the fisheries sector there is also great potential to promote self-employment and high value added export through ornamental fish projects. In order to promote and popularise this activity I propose to set up an ornamental fish exchange. An allocation of Rs. 50 million is recommended for this project.

Prawn Farming

In 2005 budget, I proposed various programmes for the development of the Prawn Farming sector. Accordingly the setting up of illegal farms and unauthorized farming practices are now regulated. Two Brood Stock banks have been established to control the spread of red spot disease.

The Dutch Canal rehabilitation project will increase its farming tolerance level up to 60 percent and encourage shrimp farmers to recommence their farms. I propose to expand this industry in the Hambantota and Batticaloa districts, in addition to further improving infrastructure in the Puttalam districts which is fairing well. I propose to allocate Rs. 100 million for shrimp farm projects in 2006.

Textile Processing Industry

In 1998, the Government introduced a debt restructuring programme for the textile industry consequent to the removal of high protective import duties. Consequently, few state of the art textile processing factories have been established providing locally processed fabric to the apparel industry. Local supply of fabrics to the apparel industry has increased from virtually zero level to around 30%.

Additionally we have been able to procure uniform material for school children and armed forces from local manufactures. Government is committed to completing this process by releasing those industrialists from debt.

It is expected that on a risk sharing basis between the banks this programme can be completed with a cost of approximately Rs. 350 million in 2006.

Textile processing zone

Sri Lanka is a net importer of textiles to a value of over US$ 1.5 billion a year. We know that if textile processing is further promoted locally, it will, increase overall value addition in the apparel industry. Sri Lanka's eligibility under the EU/GSP+ Scheme has provided preferential access to over 7000 items to the European market. This facility is available for products originating in Sri Lanka.

Textile mills require a ready supply of water, stable power and efficient effluent treatment plants. Therefore, I propose to develop Thulhiriya complex as a dedicated textile zone in addition to the Horana Textile Processing Zone and encourage the establishment of more textile processing factories. All BOI incentives currently available will be extended to these two zones.

College of Textiles and Clothing

The next phase of the Textile and Apparel industry in Sri Lanka needs professional managers, technically qualified service providers and skilled workers to improve productivity and making of quality product. The establishment of a multifaceted training centre can ensure a good supply of trained cadre for the apparel industry in order to transform itself from a contract manufacturer to a full service value added solution provider.

The absence of such an institute in the SAARC region provides a good opportunity for us to exploit training markets for this industry in the entire region. Therefore, I propose to establish a "College of Textiles and Clothing", which would link up with international institutes to offer globally recognized degrees and diplomas.

It will be located at Thulhiriya. The estimated cost of this project is US$ 7.5 million over a 3 year period. I propose to allocate Rs. 250 million in 2006 to commence the initial work.

A Regional Apparel Hub

Sri Lanka's locational advantage coupled with the strengths of the apparel industry provides an excellent opportunity for developing a viable apparel hub for the region. Furthermore, large investments in the new mega shopping malls which are coming up can be encouraged by creating a positive environment for the apparel market.

In the context of the declared government policy in promoting domestic industry to reach higher echelons, I propose that the domestic apparel market be expanded subject to the maintenance of minimum export quantum and be liable to VAT.

Handloom Industry

Hand woven and fabric products are fast becoming popular among up-market consumers. A national strategy focusing on training, product designing, market promotion and organizing buyer-seller markets for the handloom industry has been designed to make it a Rs.1 billion industry and provide over 20,000 employment opportunities. Clusters of small and medium handloom manufactures scattered around Colombo, Ampara, Kurunegala , Kegalle and Kandy will be linked with well established manufactures to train weavers and designers and to harness local raw material.

I purpose to allocate Rs. 15 million to initiate this strategy. Required machinery and technology will be provided duty and VAT free under the advanced technology package. I also propose to exempt yarn and dyes from VAT in order to support the handloom industry.

Giftware Industry Craft Villages

SMEs manufacturing giftware items in the provinces who have traditional skills continue to face problems through inability to produce modern marketable designs, quality production, and adopt appropriate pricing methods.

I propose to develop a unique Sri Lankan giftware collection chain through the promotion of a core group of 250 small and medium scale enterprises manufacturing high quality giftware based on the wood, clay and metal based industries, rush and reed, bamboo and basket ware and link them with the tourist industry. I propose to allocate Rs. 50 million for this venture.

Up-market Tourism

27. In the quest for up-market tourism our country will require high end niche products that will attract travellers. Natural tourism such as bird watching, trekking, agro tourism, exploring wild life resources and whale watching could be added into the eco tourism product list.

The establishment of elephant observation facilities in the Trincomalee, Habarana, Polonnaruwa areas can be operated in tandem with whale watching facilities at Trincomalee. The greater Dambulla Development and New Mahaweli Economy will move hand in hand with this project. I propose to allocate Rs. 100 million from the cess collection to promote this venture.

Printing and Packaging Industry 28. The Sri Lankan printing and packaging industry requires about 400,000 mts of paper per annum which is met by imports.

The cost of imported paper constitutes around 70% of the cost of printed material. This high cost is mainly due to higher tariffs imposed on paper and paper boards. Therefore, I propose to remove the prevailing 15% duty on all categories of paper to encourage local printing and packaging industry, which can be established as a promising backward linkage industry.

29. The local packaging industry is facing severe constraints due to the high costs of packing materials, non availability of testing facilities and inadequate package design. I therefore propose to establish a packaging development center that will be equipped with a testing laboratory to enhance value addition.

The prevailing anomalies of import duties will be removed by reducing the duty on raw material to a low rate band to reduce packaging costs. In order to meet the quality packaging requirements, I propose to reduce the duty of imported cans to 6 percent to enable local manufactures to be price competitive.

Private Bus Operators

There is an urgent need to assist local private bus operators while consolidating the CTB, to augment their bus fleet which is fast aging. I am informed that over 40 percent of bus fleet daily entering to Colombo city are over 25 years old.

Therefore, I propose to implement a concessional credit scheme to assist private bus operators to replace their old buses with new buses. This re-fleeting arrangement will also improve service quality and reduce maintenance cost. A sum of Rs. 75 million will be allocated to subsidize the cost of interest of this new scheme.

Local Infrastructure Services

Most of the local infrastructure such as water supply schemes, feeder roads, drainage and sewerage system and waste management, community facilities such as cemeteries, play grounds, children parks etc. have been badly neglected by local authorities due to lack of funds.

The Finance Ministry has estimated funding requirements for such facilities island wide to be around Rs. 6 billion over the next 5 years. I propose to augments funding for such projects through local loans and development fund to meet these requirements.

While seeking external concessional assistance for this purpose, local authorities will be required to build up capacity with the active participation of the community. I propose to allocate Rs. 1,000 million to begin this programme from next year.

Renewable Energy for Rural Electrification

Today there is a vibrant renewable energy sector with more than 20 developers of renewable power projects; 11 are registered for solar energy and 22 for hydropower. This has resulted in 74 MW of grid connected renewable power generation,. 75,000 households obtain electricity from solar systems.

The government will accelerate these programmes by providing necessary assistance to developers of mini-hydro, solar power and wind power with a view to providing electricity to at least to an additional 300,000 households within the next three years. Towards this the government will provide Rs. 10,000 subsidy in respect of each new renewable energy connection provided to rural households.

We have allocated Rs. 500 million for this purpose. Further, I propose a "Renewable Energy Support Bond" for Rs. 2 billion in 2006 through a development financing institution to provide financing to support rural electrification through these energy sources.

Modernization of the Construction Industry

The revival of the construction industry was one of the major policy initiatives in my previous budget. In order to increase the capital of the construction industry guaranteed fund, the government contributed Rs. 250 million to a reserve account to increase the guarantee value to Rs. 3,200 million.

A cess was also implemented to build up this fund over a period of time. I now find that the construction industry should be equipped with modern machinery and equipment. Therefore, I propose to establish a credit guarantee scheme for construction companies to import modern machinery and equipment on concessionary financing terms.

I propose to allocate Rs. 200 million to subsidise the interest cost. Such large construction machinery and equipment imported including those imported for crushing during the next two years will be made duty and VAT free.

Innovation Facilitation and Research and Development Network

The government believes that innovation, generating new ideas and turning them into commercial products is key to the nation's development . On a special request by Her Excellency the President, to link Sri Lankan inventors and innovations to assist in the economic growth of the country, I propose to set up an Innovation Facilitation Network which would be linked to the Inventors Commission and the University of Moratuwa.

I also propose an allocation of Rs.300 million to the National Research Council to promote scientific research and network with other research Institutes.

Institution for International Relations and Strategic Studies 35. There is new emphasize on the economic dimension of our foreign relations in a rapidly globalising world of technology and the knowledge economy. Joint work undertaken by the Ministries of Finance and Planning, Trade and Investment Promotion, Tourism and Foreign Affairs needs to be taken forward.

In this regard, capacity building and policy research are of high priority. Sri Lanka must use its economic and foreign relations to foster our own niche markets. For this purpose, a new institution is being created to focus on international relations and strategic economic issues. I propose to allocate Rs. 75 million for this initiative.

Academy of Labour Relations 36. The promotion of harmonious labour relations in the work place is essential in order to promote productivity and industrial peace. In this context a tripartite partnership needs to be established to motivate all stakeholders in development.

Therefore, I propose to establish an academy to carry out studies and conduct seminars and workshops on labour related issues. This academy will work closely with the National Productivity Secretariat, Trade Unions and Trade Chambers through a consultative process. I propose to allocate Rs. 50 million.

Art and Culture

Having taken into consideration, the richness & diversity of the Sri Lankan cultural milieu, the Tower Hall Theatre Foundation functions as the custodians of the tradition of performing arts.

Therefore, I propose to exempt the Tower- Hall Foundation from all income taxes including withholding tax on interest income, and VAT on services provided by the Foundation. I also respond to the request of my friends - the leading artists - to set up a Kala Nikethanaya in the hill country for all artists to engage in creative efforts in an co-friendly environment.

They can spend time on research and other academic work if necessary. For this purposes I propose to allocate Rs. 50 million from the 2006 Budget.

The National Film Academy which I proposed last year to mobilize funds will be constructed in 2006 with assistance from UNESCO. A modern performing art theatre to be set up in Colombo with the assistance from the government of China is expected to be completed in early 2007.

Tax Exemption for "Under 19 World Cup 2006"

Sri Lanka has been chosen from among many cricketing nations as the venue for this event in which 16 countries including Sri Lanka will participate. It will be held in Sri Lanka from 31st January to 21st February 2006 and is expected to draw a large gathering of fans. I propose to grant "tax exemption" for all ICC international events.

Income Tax Corporate - Income Tax 39. Mr Speaker, in view of our emphasis on rural and agricultural sector development as well as on small and medium enterprise development, I propose to make our corporate tax structure attuned to such an objective.

Therefore I propose to reduce the corporate tax rate on co-operative societies from 20 percent to 5 percent. At present SMEs of which taxable income does not exceed Rs. 5 million are liable to an income tax rate of 20 percent.

Since there is considerable growth of this sector and considering the need to leave more profits in the hands of such companies for the use of advanced technology, I propose to reduce the income tax rate on SME companies to 15 percent.

In order to make the tax system simple, I propose to unify the corporate income tax rate at 33 1/3 percent in respect of quoted public companies of which taxable income exceeds Rs. 5 million and to 35 per cent in respect of non quoted companies by incorporating direct tax contribution to Human Resources Endowment Fund into the Corporate tax rate, I expect to raise Rs.2,000 million from this revision.

Social Responsibility Levy (SRL) 40. I imposed 0.25 percent cess under Finance Act on all taxes other than VAT, PAL, Debit Tax and withholding tax on interest and dividends to be earmarked for the national action plan for children to reflect our collective responsibility and partnership towards building a better world for our children.

Since we have now inaugurated the national action plan for children, I propose to raise this cess to 1 percent. I expect Rs. 1,000 million form this tax.

Income Tax Exemption for Agriculture & Processed Agricultural Products 41. As our government was committed to encourage more investment in agriculture last year, I exempted agriculture from income tax , for a period of five years.

Having seen a new interest in this sector and recognizing the importance of processing of agricultural produce, I consider that income tax exemption should be extended to cover profits from processing primary produce as well. This would encourage the local private sector to engage not only on commercial cultivation activities of fruits and vegetables but also processing of such produce and thereby increase value addition.

Pro-farm Exports Incentives

In order to assist the non-plantation farming communities to graduate to exporting agricultural produces such as fruits, vegetable, rice and organic agricultural produces, I propose to remove the present 15 percent tax on such export income. Mr. Speaker as the Prime Minster of India Manmohan Singh recently said "we cannot subsidise exports like developed countries but at least let us not tax them" Development of Less Developed Provinces

Wealth creating economic activities are, at present concentrated mostly in the Colombo and Gampaha districts. This has resulted in urban transport problems, high cost of expansion of existing businesses , urban pollution and unsustainable regional imbalances.

With the new opportunities now available from free trade agreements with India and Pakistan and market access to European Union for over 7,000 products.

I propose to grant the following incentives for any company setting up a new industry in districts outside Colombo and Gampaha with capital not less than Rs.30 Mn. invested within 2 years from April 2006 in plant machinery and buildings and also provides direct employment to not less than 200 persons ; i. exemption from income tax for a period of 10 years ii. relief from income tax on the sum so invested iii. exemption of interest income derived by any lending institution from any credit facility granted to companies for such investments.

iv. duty and VAT exemption in respect of any new plant and machinery imported for the use in such undertaking.

Any undertaking operating at present in Colombo or Gampaha districts, will be in addition to these incentives, permitted to claim the cost of relocation as a deduction for tax purposes if it is relocated in any other districts. Divisional Secretaries will be assigned to provide land for these industries for speedy implementation.

Incentives for Advanced Technology Based Industries 44. Mr. speaker there are certain industries such as health care, printing gem cutting and polishing , packaging and rice milling that require to keep pace with the rapidly changing technological advances.

Therefore in respect of these industries I propose to increase the depreciation allowance to 33 percent on their plant and machinery. As a further boost to these industries I also propose to exempt import duty on such machinery under the supervision of the relevant Ministries and Agencies.

In 2005 budget, I introduced incentives for Small and Medium Enterprises to acquire advanced technologies to improve the quality of their products to be competitive in international markets. I propose that this scheme which is now operative from June 1, 2005 to May 31st 2006 be extended until December 2007.

I also propose to reduce investment limits to Rs.2 million from Rs. 5 million to assist a larger number of SMEs.

Exemption of Annuities Tax for Senior Citizens 46. All statutory retirement funding plans currently available to private sector employees make lump sum payments at retirement of those employees with no provision for a lifetime income. Most individuals do not have the expertise to convert such lump sum receipts at retirement into secure incomes for life. Mr.Speaker, well designed Annuity plans will provide alternative packages to individuals. Under the current tax rules, the totality of an annuity is liable to tax.

With the growing proportion of the senior citizens in our society, there is a parallel obligation on us to provide for their financial independence. Pension products, would encourage savings for old age and promotes the desired financial independence for a rapidly aging population. I therefore propose to exempt from income tax, the actually computed interest-component of any purchased annuity in order to promote earning plans.

Incentives for Professionals

The existing policy is that foreign currency earnings of individuals and partnerships from professional activities, carried on outside Sri Lanka are exempted from income tax while such income within Sri Lanka are subject to tax at 10 percent provided that the foreign currency earned is brought to Sri Lanka through the banking system.

As our professionals are fast emerging as global professional service providers, I propose that all professional services extended by Sri Lanka professionals outside or inside Sri Lanka for foreign currency be exempted from income tax. Companies offering such services inside Sri Lanka for foreign currency which are currently liable at standard rate will be liable to 15 percent tax in line with tax on export earnings while income earned outside Sri Lanka will continue to enjoy tax exemption.

In order to attract Sri Lankans living overseas to invest on medium term government bonds, I propose to issue Treasury bonds denominated in foreign currency with a maturity period of 3-5 years.

Professionals and Sri Lankans living overseas who will bring foreign currency into the country and invest in such Treasury bonds will be eligible for the importation of a vehicle of his choice subject to a maximum value of 1/5 of the bond value at a concessionary all inclusive duty and tax rate of 25 percent no sooner the primary investment is made.

This facility will be available to individuals who earn foreign exchange and are now proposed to be exempted from income tax provided they also invest their earnings in such treasury bonds. A scheme will be developed to help the professionals in the public service to engage in overseas short term assignments with a view to providing more benefits both to the country and themselves.

Shipping Agent

Non-resident shipping companies are already exempt from income tax in respect of their profits from transshipment activities. But the shipping agent in Sri Lanka is taxable at the standard rate, in respect of the profits from their role in transshipment activity.

Accordingly, shipping agents approved by the Director of Merchant of Shipping, will be taxed at 15 percent - the rate applicable to exports - in respect of the profits attributable to transshipment agency fees, received in foreign currency.

At present there is no incentive for ships to be registered under the Sri Lanka flag as VAT is imposed treating the registration as importation. It is standard international practice to exempt ships from all levies to encourage international transportation. I propose to exempt ships registered under the Sri Lanka flag from VAT in order to remove this disincentive.

Transfer Pricing

Transfer pricing is a mechanism adopted in relation to transactions between two related entities, so as to minimize the overall tax liability of the group of companies of which the two entities are members.

The existing provisions of the Inland Revenue Act are inadequate to apply the "arm length" principle, that neutralizes the adverse effect of transfer pricing. It is therefore, proposed to incorporate in our tax statute, a legal basis to enforce the "arms length" principle. I expect an additional revenue of Rs. 300 million by removing this loophole in our tax laws.

Thin Capitalization

Thin Capitalization is another method adopted by groups of companies to minimize the overall tax burden of the group.

The modus-operandi is to form a company with a minimum issued capital to carry out an activity with a high potential for profits, and to operate the company on funds borrowed from a tax exempt, or loss making member of the group or from a member liable to tax at a lower rate; the interest paid being deductible from the taxable profits of the first mentioned company and on which the second mentioned company pays either no tax or a reduced tax. It is proposed to discourage this practice through an adjustment to the interest paid.

The proposed adjustment will apply only with respect to the interest payments between members of a group of companies. I propose that the debt equity ratio be 2:1 in case of manufacturing companies and 3:1 in case of others. The expected additional revenue would be Rs. 250 Million.

Taxation of Interest from Banks and Financial Institutions

There have been many complaints from the financial sector that the requirements imposed on them by the existing statutory provisions are too complicated.

Therefore, to help financial institutions and at the same time to improve compliance, I propose to modify the system as follows:

(a) Deductions of tax will not be made only if the depositor makes a declaration that his total income from interest does not exceed Rs. 9,000/= per month, or Rs. 108,000/= per annum or the total interest from the bank branch does not exceed Rs. 1,000/= per month, or Rs. 12,000/= per annum (b) Interest from which deduction has been made at 10 percent tax rate, does not form part of the assessable income of individuals and the tax will be considered as final tax Corporate

Debt Securities

While interest derived from banks and financial institutions are taxed at a flat rate of 10% the interest from corporate debt securities are taxed at the standard marginal tax rates ranging from 5% to 30%. I propose that the interest from corporate debt securities be treated in the same way as in the case of interest earnings from banks.

Introduction of Stamp Duty

Stamp duty when abolished in 2002, was generating over Rs. 8,500 million. Stamp duty as a source of revenue has a number of attractive features. The imposition of duty compels the parties to execute a document or instrument to formalize the underlying transaction, thereby making the transaction verifiable in an audit. The duty is self-policing and the revenue yield is immediate.

Therefore, I propose to re-introduce Stamp Duty in respect of instruments and documents other than those which are subject to Debit Tax and letters of credit which are subject to the Port and Airport Development Levy. This measure is estimated to generate Rs. 3,700 million.

The Economic Service Charge (ESC)

The ESC introduced last year has performed extremely well. The revenue collected during the 8 months of 2004 was Rs. 4,000 million and this year up to September, it is Rs.6,000 Million.

However, I propose to make the following changes to make it simple and also to provide relief for some industries which find it difficult to comply in its present form.

New regulations will be gazetted reflecting a reduction in the liable turnover in order to provide relief to address the concerns of different categories such as distributors, cutting and polishing of diamonds, small tea-factory owners etc. whose tax burden will be reduced substantially.

I also propose the following changes to rationalize ESC; (i) The ceiling of Rs. 50 million that had been placed on the total ESC payable by any entity will be raised to Rs. 60 million and the threshold for liable turnover will be brought down to Rs. 40 million.

(ii) Under the present law, the base of the ESC for any year, is the liable turnover for the previous year. The base will be changed to the liable turnover of the current year.

(iii) ESC paid can now be set-off against the income tax attributable to profits from the liable turnover. The set-off in future will be permitted against any income tax.

(iv) to exempt institutions referred to in Section 8(b) of the Inland Revenue Act.

Mr. Speaker, the expected revenue through this revision is Rs. 1,000 million.

Betting and Gaming Levy

In keeping with government's commitment to make law enforcement more effective, I introduced sweeping changes to over 80 relevant statutes in my last Budget. This has not only helped enforcement, but has also generated over Rs. 500 million from those who committed such offences.

Most of the Betting and Gaming institutions still evade payments due to a variety of loopholes in the tax and regulatory framework. New Betting and Gaming centres are proliferating with no tax benefits to the government. Therefore, I will raise levys as follows; live telecast centres to pay Rs. 100,000 each while non live telecast centres will pay Rs. 50,000 each. Additional in revenue of Rs. 300 million is expected from this measure.

VAT Refunds

The existing provisions of the VAT Act entitles exporters to receive their refunds within a period of 30 days. I propose to reduce this period to 15 days, in relation to those who back their refund claims either with a bank guarantee or an insurance bond, to cover the full amount of the refund.

This period in relation to others will be extended to 45 days in view of the risks involved in processing of claims. In order to facilitate the refund mechanism, I propose to maintain a dedicated account with the Central Bank to which 10 percent of the VAT collected on imports will be regularly credited, to ensure the smooth flow of funds for refunds by the Department.

VAT on Financial Services

I propose to increase VAT rate on financial services from 15 percent to 20 percent. Estimated revenue is Rs. 2,700 million. Since VAT on financial services is computed on the basis of net profit this will not impose any burden on the people.

VAT Refund System at the Airport

Currently in Sri Lanka, VAT is included in the price of most goods and services. I propose to establish a VAT refund system at the Bandaranaike International Airport, complying with international practices. Such refunds will be made if the claim is in excess of US$100.

VAT Rate Changes

VAT rate on medicated soft drinks such as Ginger beer and Peyawa, will be reduced from 20 percent to 15 percent to promote the use of local agricultural produce. Computers and accessories will be exempted from VAT to popularize computer usage. The importation of unprocessed timber logs will be exempted from VAT to help local saw mill operators, the construction industry, furniture manufacturers and to protect our natural forests.

Reflecting a realistic trading margin, the markup on the CIF for charging VAT at customs will be revised to 7 percent. Expected revenue from this change is Rs. 2,000 million. In order to minimize the cascading effect on essential food items classified in the 5 percent rate band, such items will be liable for VAT only at the point of customs and not at subsequent sales. This should reduce the prices of sugar , dhal, potatoes, dried fish, chillies and onions.

Advancing the Date of Payment of VAT

It is an obligation of the person who has registered for VAT to collect VAT on behalf of the Government. Further a registered person is entitled to deduct the VAT paid by such a person from the gross VAT collected on supplies.

The actual payment due from the registered person is the net tax payable after setting off of the VAT paid by him. However, only those persons who have taxable supplies exceeding Rs. 30 million per year are required to pay VAT on a monthly basis.

On the other hand the Government has to borrow money to pay back monthly refunds whereas the money due to the Government is kept by a certain category of tax payers, for over 3 months. Even in such cases refunds are made without the Department having received tax.

Therefore, I propose to require all registered persons to pay VAT on a monthly basis subject to final adjustment being made with the return at the end of the relevant taxable period. This is expected to improve VAT collection by Rs.1,500 million and improve Treasury operations.

VAT Exemption for Agro Based Industries

An incentive package was introduced to develop the agricultural sector in the last Budget. We now note the importance of promoting backward integration in agro based industries where the procurement of raw materials is from local primary producers. At present most of the grain products are imported, whereas certain food products manufactured in Sri Lanka is struggling with VAT.

Therefore, it is proposed to exempt VAT on high protein, high energy agro foods manufactured in Sri Lanka out of grain cultivated in Sri Lanka, if procurement of such grain through backward integration from out growers is undertaken.

TAX ADMINISTRATION

 (a) Delegation of Authority

In terms of the rationalization of the Departments of Inland Revenue and Customs, increased cadre has been provided for senior officials to strengthen the management level supervision and decision making. Therefore I propose to amend both Customs and Inland Revenue laws to limit the delegation of authority to senior cadre officials of these two departments.

The provisions in the VAT Act relating to official secrecy are far more rigorous than, those in the Inland Revenue Act. I therefore propose to amend those provisions to bring them in line with those in the Inland Revenue Act.

(b) Time-Bar on Income Tax 65. Time-Bar provision in our tax statute was fixed virtually 3 decades ago at a time when use of modern technology was not available. Therefore I propose to reduce the time-bar given to file returns to 6 months and time bar permitted to tax authorities to 18 months from the end of the tax year. In respect of other cases time bar will be reduced to 3 years.

(c) Tax Compliance 66. Sri Lanka opted for the self assessment scheme of taxation in 1972; The most significant aspect of this self-compliance, where every tax liable person computes his tax liability, pays it to a nominated bank and furnishes the tax-returns, without the intervention of the tax department.

It is distressing that Sri Lanka has not made much headway in self-compliance. Last year I made a number of proposals aimed at improving compliance by strengthening the tax administration as well as awarding recognitions to the best tax payers. This time I propose further incentives to legitimate tax payers to encourage compliance.

(d) Acceptance of Return 67. Where any individual, in relation to the year 2005/06 or any subsequent year of assessment furnishes a return that will be accepted and no further assessment will be made by the Department provided that; he/she has complied with the return and payment requirements for the 3 preceding years.

Pays as tax any sum not less than 120% of the tax or declares an assessable income of not less than 125% of that for the immediately preceding year and furnishes the return accordingly and makes an affidavit that there is no fraud or wilful default committed in relation to the tax payable for that year;

(e) Incentives for good Tax Payers

Delayed tax payments are now subject to penalties ranging from 10% to 50% of the amount unpaid, depending on the period of the delay. I consider, it is fair to concede a discount to those who pay the full tax in time. I therefore propose that where the full amount of the tax due from an individual for any year of assessment is paid one month before the due date a discount of 10% of the tax due for that year be allowed.

(f) Compliant Taxpayers

Where an individual for any year of assessment has paid income tax not less than Rs.250,000 and has maintained this position over a period of 5 years commencing from 2003, that person will be a given duty concession of 25 percent of all duties and taxes payable to import a vehicle of his choice provided that the engine capacity of the vehicle does not exceed 1,500 cc if it is a car. No engine limit will apply on vehicles such as vans, trucks and motorbicycle and utility vehicles.

Acknowledgement of Appeals

The current law requires that an appeal against any assessment, be finalized at the level of the Department, within a period of two years, commencing from the date the Assessor acknowledged the appeal. However, there is considerable delay in the issue of the letter of acknowledgement.

I propose to introduce legislation to curb such inefficient practices by providing that where the letter of acknowledgement is not issued, within 30 days of making the appeal then the appeal will be deemed to have been acknowledged.

This will apply to both income tax and value added tax and a ruling is required to be issued within 12 months by an officer in the rank of a Commissioner or above and counter signed by Commissioner General himself.

(h) A New Inland Revenue Act

The Inland Revenue Act brought out in 2000 has now become complicated on account of subsequent amendments introduced to the law. It is proposed to bring out a new Act discarding all those provisions which have no relevance after April 2006, and incorporating the proposals now being made.

I propose to present this new law to the Parliament before 31st march 2006. From all these administrative measures together with the on going reforms, additional revenue of Rs. 1,750 million is estimated from Income Tax, VAT, tax on interest and customs duties.

Tax Academy

It is the general perception among tax payers and the tax practitioners that the depth and quality of the knowledge of taxation has eroded considerably in recent years. In order to arrest this trend and to create an enlightened tax culture, I propose to establish a Tax Academy, which will function independently. I allocate Rs. 50 million for this.

Creation of a Domestically Sourced Export Industry

The recognition and encouragement of local producers of input and intermediate goods required for the creation of domestically sourced export oriented industry was commenced in our last Budget by suspending output VAT on supplies made to apparel manufacturers.

It is now possible to bring in other export oriented industries also into this system. Accordingly, I propose that input and intermediate goods manufacturers supplying to non traditional export oriented companies including apparel manufacturers registered with the Textile Quota Board / EDB be brought under the suspended VAT scheme with a facility to import raw material as well as capital goods on a deferred VAT basis.

Capital goods received by exporters will also be subject to the deferment of VAT at the point of import. This arrangement will relieve such manufacturers from a cash flow burden.

With the removal of global textile and apparel quotas the preference of buyers is to place orders with companies who are able to provide them total solutions including design, product development and service packages. Due to high cost of investment, most of the small and medium scale factories are not in a position to transform themselves as total solution providers.

Therefore, I propose that income of a registered apparel manufacturer arising from subcontracting arrangement entailing sewing and assembly of garments and or the provision of services, resulting in improvement either of quality or character or the value of the garments to be exported, be treated as exports provided such income is received in convertible foreign currency from the company which is exporting the final product.

Custom Tariff

As suggested by the Trade and Tariff cluster of the NCED our government is committed to keep duty on basic raw material at the lowest tariff band to facilitate industrial development. Having examined several such anomalies, currently prevailing in our tariff structure the Trade and Tariff cluster has identified several intermediate and basic raw material to be classified under the lower rate band. On that basis customs duty on items such as packaging and printing material, have been reduced or removed to facilitate rapid expansion of such industries.

In respect of certain items such as palm oil, fans and parts which are liable for considerable valuation complexities have also been liable to specific duties.

The new revenue protection order (RPO) giving effect to these changes has been already gazetted and will come into immediate effect. The prevailing 10 percent surcharge will continue. In order to facilitate musical education, import duty on musical instruments will be reduced from 28 per cent to 15 per cent. As a measure of relief to nearly 200,000 three-wheeler operators, import duty on tyres used for three wheelers will also be reduced from 28 per cent to 15 per cent.

To promote export oriented enterprises, the cess rates applicable to certain commodities have been revised and the relevant gazette pertaining these items is also gazetted. I expect to generate a net revenue of Rs.3,500 million from customs duty and cess.

Port and Airport Development levy

In the 2005 Budget, I proposed to reduce the PAL to a level of 0.25 percent as an incentive to exports. I now propose to remove this levy as a further incentive to our export economy. However, the current levy of 1.5 percent on items other than exports will be raised to 2.5 percent from January next year. I expect Rs.2,500 million from this measure.

Excise Taxes

As requested by the Presidential Task Force on alcohol and tobacco and illicit drugs, taxation on alcohol and tobacco should be increased regularly. I therefore, have already increased excise duty on hard liquor by Rs.15 / proof Ltr and Rs. 5/Ltr. for soft liquor. Further the excise special provision duty on cigarettes has been increased by cents 50/ cigarette. I expect a total revenue of Rs. 2,550 million. The prevailing 10 percent excise duty on mobile phones has encouraged smuggling of poor quality mobile phones hurting quality supply.

Therefore, I have removed this duty. Special excise duty for motor-bicycles has been removed to correct prevailing anomalies in the present duty structure. This will also reduce the price of motorbicycles. Locally assembled new motor vehicles which will qualify under FTA arrangements will be exempted from Excise special duty.

Salaries of Public Servants

In my last budget, I proposed a 40 percent increase in basic salaries subject to a minimum of Rs. 3,250 per month and maximum of Rs. 9,000 per month and granted only Rs. 2,500 or 50 percent of the increase whichever is high. As I explained in that speech, my expectation is that a greatly motivated public sector could bring benefits far in excess of the cost that will be reflected in the Budget.

In line with this thinking the National Council for Administration (NCA) has formulated, a new salary structure incorporating interim allowances and placing the minimum salary of the employees in the public service at Rs.11,630 per month.

This new structure corrects the prevailing anomalies and provides more than the salary increase recommended in the last budget. Further in order to arrest the creeping of anomalies in to the new structure, NCA has recommended a Cost of Living Allowance (COLA) of Rs. 1,000 adjusted on the basis of Cost of Living Index (COLI) at end June and end December each year.

However, since this transformation needs to be carried out in a financially viable manner and provide reasonable increase to all employees in the public service and armed forces, I propose to grant Rs. 1,000 COLA and a 50 percent of the difference of present salary and new salary recommended by NCA in 2006 and balance 50 percent in 2007 subject to a minimum pay increase of Rs. 1,300 per month inclusive of COLA in 2006.

As budget estimates have already provided for the balance increased proposed last year, I need to provide further Rs. 9,600 million for this proposal. Public Sector Occupational Classification will be formulated by NCA to move towards a streamlined wage structure and a scheme of career development in the public sector.

Public officers are now entitled to draw 21 days of casual leave and 24 days of vacation leave, totalling 45 days per annum. I propose to allow public servants to en-cash a maximum of 30 days of un-availed leave each year, based on the salary drawn as at 31st December of that year.

However, all employees will be required to take leave for 7 continuous days every year. As recommended by NCA, I also propose to introduce a Risk Insurance Scheme for specific categories of employees in identified sectors such as Health, Forest Conservation, Wild Life Conservation, Railways etc., to minimize their risk.

The Ministry of Public Administration in consultation with the National Council for Administration (NCA) and the Treasury will identify the sectors and occupational categories that will be entitled to this benefit.

Pension associations have brought to my notice that the rectification of Pension anomalies by extending the benefits provided through P.A.Circular 06/2004 to those pensioners who have retired before 01.01.1997 providing them the opportunity to enjoy the salary increase granted by P.A. Circular No. 2/97. I propose to implement this with effect from 01.01.2006 without the payment of arrears for the period prior to this date and grant 50 percent of the increase in January 2006 and the balance from January 2007.

I also propose to grant the Cost of Living Allowance (COLA) to Pensioners, with the base value being fixed at Rs.500 per month . The Interim Allowances being paid to the pensioners will also be consolidated and they will be granted a 10 percent increase on their unreduced pension with effect from 01.01.2006 subject to a minimum of Rs 500 and a maximum of Rs 1,250 per month.

Employees retiring between 01.12.2004 and 31. 12. 2005 including the two days will not be entitled to this increase.

Therefore, pensioners will get a minimum increase of Rs. 1,000 from these changes. An additional allocation of Rs. 4,500 million is provided. The relevant amendments to the W & OP Act will be placed before Parliament shortly to give effect to my proposal last year that widows who wish to remarry to be made eligible to receive their W & OP allowance.

Last year we re-implemented the Agrahara Insurance Scheme to provide medical benefits to public services. It is proposed to set up dedicated wards for public servants in government hospitals and provide these benefits to pensioners as well.

In my last budget, I extended housing loans to public servants through the banking system which is working satisfactorily. This facility will be extended to armed forces as well from 2006. Similarly I propose to transfer public servants vehicle loans scheme also to the banking system so that this scheme can be efficiently managed. A new scheme to enable public servants to purchase vehicles at concessionary duty will be introduced next year once NCA and Treasury finalize the eligibility criteria and operational details.

Quality Health System for the Less Privileged in the Country

The Health cluster of the NCED has made a series of recommendations to streamline a high quality health system aimed at improving free and fair access at all levels to the less privileged people in the country. Towards this the cluster has identified a series of legislation relating to mental health, blood transfusion, national drugs, medical research etc. The cluster has also recommended the formulation of a school health policy and recruitment of public health midwives.

Seventeen hospitals at Kuliyapitiya, Puttalam, Dambulla, Diyatalawa, Mahiyangana, Mannar, Kantale, Kalmunai, Point Pedro, Thellipalai, Avissawella, Homagama, Wathupitiwela, Horana, Panadura, IDH, Balapitiya and Embilipitiya are to be upgraded as functional district base hospitals. In order to attract specialized doctors into the hospitals, vehicle and residential facilities will be provided. I propose to allocate the recommended Rs. 300 million for this programme.

Crime Prevention

As I mentioned earlier during the past 18 months substantial progress has been made in reducing violent crime. Intensified police surveillance in combating illicit liquor in the western province has also contributed towards improving government revenue.

The aim of the government crime prevention programme is to make our cities , streets and neighbourhoods safer places for us to live. This will also improve the investment climate as well. Under this programme community policing is promoted with the newly recruited graduates being assigned to this responsibility.

New police stations with sophisticated communication equipment and mobile facilities will also be built near commercial centres. We will install an electronic surveillance system in Colombo and a sea surveillance mechanism to reduce drug trafficking along the Puttalam Colombo coastal belt. It is also proposed to install an automated finger printing system to address commercial cyber crime. I propose to make a special allocation of Rs. 900 million for these projects to the Police Department in 2006.

Integrated Disaster Risk Management Programme

In the context of the recent experience with Tsunami an integrated disaster management strategy has become essential. The Parliamentary Select Committee has also emphasised the need for such a programme. Therefore, Rs.250 million will be allocated to the National Council of Disaster Management to organize an integrated disaster management programme with the assistance of other relevant agencies.

As substantial funding will be required for this project, donor assistance have been requested through the UNDP. In Sri Lanka weather related natural disasters such as floods, droughts, landslides and lightning strikes are on the increase. At present no meteorological surveillance radar systems are available. I therefore propose to provide Rs. 600 million for this purpose.

A summary of the budgetary implication of my proposals are given in Annex I and II.

Budget outlook

The proposals that I have outlined in my speech will increase government expenditure by Rs. 33,495 million of which Rs. 19,100 million is on account of proposed increases in respect of salaries , pensions and Samurdhi allowances and on welfare services particularly focusing on children the disabled and other disadvantaged groups.

The budget estimates already tabled include Rs. 10,000 million for the balance salary commitment from the 2005 Budget. I have also introduced new revenue proposals to raise Rs. 25,050 million over and above what is reflected in the printed budget estimates. Consequently Mr. Speaker, total Government revenue in 2006 will be Rs. 477.1 billion - 17.5 percent of GDP compared to 16.4 percent projected for this year. In view of the recent trend we have established in Government revenue performance I consider this projection is realistic.

As regard expenditure, the current expenditure will be Rs. 503.1 billion - 18.5 percent of GDP. Therefore the revenue deficit is estimated at 1 percent of GDP in 2006 - a substantial reduction over 2.2 percent of GDP in 2005. Speaker, recurrent expenditure remains vulnerable to rising oil cost if we do not remove our fuel subsidy. As you know we provide considerable subsidies for diesel and kerosene.

We have to target these subsidies to three wheeler operators, public transport services, the fisheries sector and kerosene subsidy for rural people without electricity.

Therefore, fuel subsidy will be limited to Rs. 3,000 million in the Budget and fuel prices will be adjusted in line with formula prices next year.

Public investment excluding investment in the Tsunami affected coastal belt is estimated at Rs.171.8 billion which is 6.3 percent of GDP, an increase of 1.3 percent of GDP over 2005. This is after making provision for a freeze of certain capital expenditure in view of capacity constraints in implementation.

The estimated under expenditure on these considerations is Rs. 15,295 million or 8 percent of total provision for public investments. The overall non Tsunami related budget deficit therefore is targeted at 7.1 percent of GDP as shown in Annexure III.

In addition a further capital expenditure of Rs.47 billion is earmarked for Post-tsunami reconstruction work of which Rs. 32 billion is expected by way of outright foreign grants while Rs.15.6 billion is expected as concessionary foreign aid. The total net foreign aid including Post-Tsunami related aid reflected in the Budget is Rs. 117.3 billion which is 4.4 per cent GDP.

Details of expected gross foreign aid are provided in Annexure IV. The net domestic financing requirement has been kept at Rs.124 billion which is 4.6 per cent of GDP.

I mentioned last year that I was proud of that Budget because it was a product of a wide consultative process which attracted input from all stakeholders. It was a reflection of homegrown thinking for a variety of our development challenges. I am proud to claim that this consultative process has now become fully institutionalized and embedded into the Budget making process of our country.

My Ministry in addition to regularly reporting the progress of their work in terms of the Budget framework and keeping within both the law and spirit of the Fiscal Responsibility Act also invited the public to submit their proposals for the Budget.

I must also acknowledge that we devoted a considerable time and effort in working with the donor community towards rebuilding the Tsunami affected region. My Ministry had to coordinate aid mobilization as well as sectoral meetings with the donors/NGOs and private sector to facilitate the implementation of the post-tsunami reconstruction strategy.

Regular meetings by my Secretary with Secretaries and Government Agents have improved coordination in Budget implementation. I personally had to travel to many international meetings and meet a number of my counterparts and heads of international financial agencies to seek their cooperation for Sri Lanka's post-tsunami recovery process.

I am proud to say that fully committed foreign aid, not merely pledges, now stands at US$ 6.5 billion as shown in the Annexure IV to my speech. I am optimistic Mr. Speaker with our deep commitment to MDGs, we will be able to mobilize our future resource requirement in the new development decade. On behalf of the government and the people of Sri Lanka I take this opportunity to express my deepest gratitude to all those who support our efforts.

President Franklin Roosevelt once said "The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have little".

This is in line with our pro-poor programme strategies articulated in my first budget. I am now taking it a further step forward. If one looks at the overall economic scenario in the country, I am quite confident that the policy environment is quite conducive for taking our economy towards a 6-8 percent growth path with significant reduction in poverty over the next 3-5 years. Mr. Speaker, there is a clear silver lining for the future.

Data now confirms that our ocean belt from Mannar to Hambantota contains valuable petroleum deposits. We have made the preparatory arrangements to undertake oil exploration through the establishment of a government owned National Oil Exploration company and a separate Ministry of Petroleum resources to manage this process.

In a nutshell, the proposals I have placed before this House provides an opportunity to make a leap forward in exports all the way from ornamental fish and software to professional services. Our infrastructure strategy not only links us to global markets, but also establishes strong connections and among ourselves within all provinces the surest way of creating equitable opportunities to all our people.

Our economic reforms will consolidate fiscal position and provide a stable economic environment. A crime free, secured living environment as well as our commitment to protect our natural environment should position ourselves in a strong footing in the region. We must be a country which looks confidently into the future and not one which is constantly looking back and only giving voice to grievances.

In closing I would like to reiterate that the essence of our economic policy as set forth in our policy statement "Creating our future - Building our nation" is to promote a proper, pro-growth, Export Entrepreneur-Friendly Economy.

This will help us to place our economy on a growth path of 6-8 percent that will help us to attain Millennium Development Goals within the next 10 years. That is the period that I have recommended to this Honourable House to be declared as Sri Lanka's Development Decade.