macroeconomic management requires that the fiscal consolidation process be continued as required in the fiscal ( responsibility ) management act, to enhance public investment, attain a sustainable level of public debt, and reduce inflationary pressures. this has to be accompanied by the continuation of a monetary policy that would maintain price stability and avoid the emergence of inflationary pressures that are highly injurious, particularly to the most vulnerable groups in society. the central bank will continue to focus on this area. in addition, reforms in the financial sector need to be pursued vigorously to ensure a vibrant and stable financial environment that would be able to take advantage of the links to the international markets and support growth. the high international price of fuel is a major concern. competitiveness of the economy has to be improved through productivity and technological improvements, especially in the agriculture sector. the tsunami related relief, rehabilitation and reconstruction have to be accelerated to restore normalcy to economic activities throughout the country. finally, the economy has to be further diversified so that it is better able to withstand internal and external shocks. i have highlighted the main economic challenges that face sri lanka and the broad policy requirements. i hope that today ’ s discussions would shed further light on how to move forward with a coherent policy package that will have the broadest support in sri lanka, as well as from all other stakeholders and well wishers. thank you.

economic progress has been below the desired level for a sustainable reduction in unemployment and poverty in sri lanka. sri lanka ’ s inflation has averaged 11 per cent in the post liberalization era. this has the adverse consequence of eroding the living standards of people, particularly vulnerable groups such as pensioners, other fixed income earners and the poor. supply side factors, including sharp increases in the price of oil imports, have contributed to cost - push inflation. sri lanka ’ s vulnerability to the vagaries of weather, and relatively low agricultural productivity have been causal factors. monetary management has been able to contain demand - pull inflation to a degree. the increase in inflation in 2004 over 2003 was perhaps typical - caused by a prolonged drought in certain areas of the country, a rise in international prices of key commodities, especially fuel, a somewhat higher growth in money supply and an increased budget deficit. investment and savings ratios have been moderate ; not sufficient to raise economic growth to the level necessary to improve the standards of living to the desired degree. investment improved in 2004 to 25 per cent of gdp. however, a level of about 30 – 35 per cent of gdp is required on a sustained basis over the next five to ten years to improve essential infrastructure, to promote a higher and regionally balanced growth. the external sector has been developing rapidly since 1977 with a significant degree of export diversification. external trade expanded considerably in 2004 with an increase in both exports and imports, benefitting from the fastest global economic growth recorded in the past few decades. trade deficits have been mitigated by increased worker remittances, and inflows from services, mainly tourism and port services. the flexibly managed exchange rate regime has helped to maintain sri lanka ’ s external competitiveness. throughout the post liberalization era, fiscal deficits have been high due to heavy public investment in the early eighties and high defence expenditure from the mid eighties until the signing of the ceasefire in 2002. this has led to the public debt rising to over 100 per cent of gdp, a cause for concern. recognising this, the government made a commitment to strengthen the fiscal consolidation process with the enactment of the fiscal management ( responsibility ) act ( fmra ) in 2002, designed to reduce the budget deficit and outstanding debt in the medium term. the economic policy framework of the new government emphasises the need to increase government revenue, in the fiscal consolidation effort, while maintaining an adequate public investment programme to improve the quality of the