The income-sharing arrangement between Hong Kong's fiscal reserves and the Exchange Fund will be revised to increase its investment income and stability.

Financial Secretary Henry Tang said in his Budget Speech today that from 1 April, the return on the fiscal reserves will be calculated on the basis of the average rate of return of the Exchange Fund's investment portfolio over the past six years. The rate of return on the fiscal reserves for 2007 will be 7%.

The minimum return is also guaranteed so as to ensure the annual investment return in any year will not be lower than the average yield of three-year Exchange Fund Notes for the previous year.

The investment income of the fiscal reserves is extremely volatile, fluctuating between 0.5% and 18% of government revenue over the past decade, yet there are public calls for higher returns from the reserves.

Mr Tang said the carefully considered move will not compromise the Exchange Fund's ability to defend Hong Kong's currency and stabilise its monetary and financial systems.

On March 31, Hong Kong's fiscal reserves are expected to be about $365.8 billion. He expects the reserves to vary between $390 billion and $580 billion over the next five years.