to productivity gains. attempts are made to minimize income expenditure gaps and avoid deficit financing from inflationary sources such as bank financing, in particular, borrowing from cbsl. govt. ’ s medium term strategy rests largely on public investments in key sectors and infrastructure that supports growth. it is important that these investments are financed in such way that it would not place excess burden on the budget. in this regard, it is encouraging to note that the govt. has committed to commence operations of infrastructure projects such as the south harbour development, weerawila airport and other highways within the framework of public private partnership, which will provide an opportunity to the private sector to take part in such projects. reducing vulnerability to rising import prices in view of the significant volatility in oil prices in international markets, cpc has taken measures to hedge oil imports so that the price fluctuations do not adversely affect domestic prices. it may be worth exploring the possibility of introducing hedging to other critical imports such as gas, fertilizer to mitigate impacts of adverse price fluctuations in the domestic market. 3. banks and financial institutions banks and financial institutions are expected to provide finances for economic activity. some banks and financial institutions provide credit to government as well as the private sector, while others serve only the private sector. the continuing high growth in private sector credit could cause a threat to price stability as well as the financial system stability. high credit growth could deteriorate the quality of assets of commercial banks and increase the level of non - performing loans. in inflationary situations, lenders should be cautious not to fuel inflation further, but to direct investment towards productive activities. banks and financial institutions continue to enjoy short term profits from lending at high rates to their customers and living on interest income. but the real value of their assets and profits continue to erode in an inflationary environment. for example, the real growth of assets in the banking system in 2006, was 5 % as compared to a nominal growth of 19 %. similarly, the real growth of profits of the banking sector in 2006 was 12 % compared to a nominal growth of 26 %. in essence, the real value of short term profits recorded by the banking sector is only half of the nominal growth. eventually, there will be pressures for higher wages which will, together with rising non - performing loans, erode profits and threaten the stability of the banking system. banks and financial institutions should therefore take a longer term view and be more cautious in expanding their loan portfolios

##holders can retain their product and their coverage. tomorrow, the dutch ministry of finance will provide more details on the bail ‐ in. the second instrument, the sale of business, enables us to sell the shares of an insurance group. or the shares of a troubled entity within the insurance group. or to sell an insurance portfolio, without the shareholders ’ consent. this was already part of dnb ’ s toolkit. however, the bridge institution is an instrument we have never used before. it allows us to transfer an insurer, or an insurance group entity, or part of that entity, to a semi public company. during this time, the insurer is not allowed to compete on the market. the bridge institution is only a temporary solution, and it buys us time for a sale of business. when setting up the bridge institution, we can also benefit from our experience in bank resolution. the last instrument is asset separation. this allows us to transfer assets, rights or liabilities to a semi ‐ publicly owned asset management vehicle. in the banking sector, this vehicle is also known as the “ bad bank ”. the toxic assets or liabilities can be removed from the balance sheet, to limit the risk and make the insurer more attractive to other buyers. this instrument is only allowed in combination with one of the other instruments, because the insurer also has to bear some of the losses. other resolution toolkit features next to the four resolution instruments, the resolution toolkit also provides another crucial feature : the possibility to conduct resolution planning. we will prepare a resolution plan for insurers that pass the public interest test. i ’ ll go into more detail about this test later on. the resolution plan identifies possible impediments to resolution. and the new resolution regime gives us powers to remove these impediments, if necessary. this contributes to a resolvable insurance sector. resolution planning ensures that any failures result in lower costs for society, and reduces the risks for financial stability. finally, it is good to point out some key differences from the bank resolution toolkit. first, the absence of loss ‐ absorbing capacity. in bank resolution, there is a major focus on loss ‐ absorbing capacity. the bank resolution experts among you will be familiar with the european and international standards in this respect ‐ mrel and tlac. however, the dutch finance ministry has decided not to require insurers to have an additional layer of loss ‐ absorbing debt. traditionally, this layer is very