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

in payment and settlement related activities who will attend to the preliminary work, such as stocktaking and identification of gaps in the national payment systems. there should be task forces on ( a ) policy and operational matters ; ( b ) legal and regulatory aspects ; ( c ) technical and institutional infrastructure ; and ( d ) communication and exchange of information. the task forces should make their recommendations to the spc, which will take considered decisions. in nominating members to the task forces, where possible, countries should select officers from their respective npcs, as such councils are expected to have representatives of all stakeholders with the necessary skills and expertise to handle work relating to the above areas. sri lanka has already established an npc with a clear mandate to take forward payment reforms across the nation. the npc has prepared a well - focused action plan after detailed deliberations with all stakeholders and is the apex body for payment system development policies and operations. i understand that india and some other countries too have npcs. it may also be important to set up a secretariat in one of the countries to lead the regional payment initiative. the spc, as well as the task forces, should establish close links with international organizations such as the wb, imf, bis and also with other regional payment groups and developed country central banks for guidance and technical assistance. as i mentioned before, the acu is the only regional clearing mechanism that exists today among saarc member countries. it needs a clear reform agenda to mitigate risks involved in that system and ensure safe payment flows among the member countries. already, a technical committee has been appointed under the chairmanship of sri lanka to look into some elements of modernizing the acu. the whole of yesterday we debated on some of the short - term measures that need to be introduced to the acu clearing arrangements in order to avoid any disruptions to cross border flows. that committee too could report its recommendations to the spc. there may be many other modifications, modernizations and reforms that need to be introduced at national and regional levels which will shape the annual work program of the saarc regional payment initiative. it is in that con text the topic “ working towards a saarc regional payments group ” was chosen as the theme for this conference. 8. conclusion we need not wait till the saarc region ’ s trade and investment flows rise significantly to modernize our payment systems. the saarc member central banks need to decide early to establish a regional payments