Let me now deal with how the budget has linked the key policy areas within a well-coordinated Macro Policy Framework 2007 budget very explicitly articulates a well-coordinated medium term macro policy framework, which includes fiscal policy, monetary policy, reserve management and investment policy. Through fiscal policy measures, it is intended to: •  promote economic growth beyond 8% and provide impetus to ensure sustainability of growth over the long term  •  enhance productivity through value addition with particular focus on industrial and agroprocessing ventures. •  Where there is a high content of value addition in local businesses, BOI approval will be granted on the basis that duty free imports of related material will be limited for raw material which are not available locally. Such BOI projects will also be granted a VAT deferment facility for the purchase of material from local industries. •  permit local input supplying companies to open foreign currency accounts to enable them to receive payments in foreign currency from BOI enterprises. In summary, the 2007 budget through fiscal measures proposes to reduce expenditure, increase revenue, provide incentives for savings and investments, pay attention to potential growth sectors such as SMEs, entreport trade in selected industries and promote effective delivery of public service. Calls for effective monetary policy and prudent lending by financial institutions The budget recognizes the impacts of inflation generated through excess liquidity and credit expansion and highlights the need for using monetary policy measures efficiently to contain inflation.

To the extent that asset prices are over-inflated, so too are the recorded profits of the banks. During the downswing, fair value principles are rolled back. Potential losses are then hidden from view. Today, some of the uncertainty around global bank valuations stems from the difficulty in gauging these losses, obscured by provisioning practices in banking books. Regulators and investors alike fear the fog created by such forbearance. In sum, accounting rules in general, and fair value principles in particular, appear to have played a role in both over-egging the financial upswing and elongating the financial downswing. They have tended to over-emphasise return in the boom and under-emphasise risk in the bust. That is not a prudent approach. Indeed, it is a pro-cyclical one. We need accounting rules for banks which are crisis-neutral, valuation conventions for all seasons. What accounting regime might best deliver this robustness? A reasonable starting point would be to recognise the clear differences between bank and non-bank balance sheets, in  3  2  Bernanke and Lown (1991). BIS central bankers’ speeches  particular valuation uncertainty associated with assets and maturity mismatch associated with liabilities. Bank assets and valuation uncertainty Banks’ asset portfolios are not just larger and more complex than for non-financial companies. The business of banking is predicated on banks’ capacity to screen and monitor these assets more accurately than capital markets. Banks serve as a “delegated monitor” for investors.4 This means the risks and uncertainties around the valuation of bank assets are fundamentally different than for non-financial firms.