leonard wilson kamit : monetary and financial sector reforms in papua new guinea presentation by mr leonard wilson kamit, governor of the bank of papua new guinea, on economic and policy update by the australian national university, port moresby, 28 april 2006. * * * introduction the director, asia pacific school of economics and government of the australian national university, professor andrew macintyre, distinguished guests, ladies and gentlemen. i am delighted to be invited to today ’ s session to share my thoughts on the evolution of financial sector reforms in papua new guinea, and in particular the benefits from the reforms. monetary policy prior to 2000 prior to 2000, the minister of finance significantly influenced monetary policy of the bank of papua new guinea. monetary policy, then, was submitted to the board of the central bank who recommended it to the minister for finance for approval. this setting had a major set back because of its conflicting nature. the arrangement allowed for automatic financing of the fiscal deficit through temporary advances, which were subsequently converted to treasury bills at the end of the year. fiscal deficit when financed by the central bank result in the following : • increase liquidity levels as new money was injected into the financial system ; • exert pressure on the exchange rate. this leads to inflationary pressure because in papua new guinea changes in inflation rate are closely associated with movements in the exchange rate ; • deplete the international reserves of the country as the bank of papua new guinea intervenes in the foreign exchange market to support the kina. from 1992 - 1994, expansionary fiscal policy accompanied by high fiscal deficits of the government led to complete depletion of the country ’ s international reserves by july 1994 with only half a month of import cover remaining ; and • negatively impacts on investor confidence and in the government ’ s management of the economy. similarly, when the fiscal deficit is financed by the private sector, the increase in holdings of government securities crowd out private sector investments, which is vital for generating employment and growth. commercial banks ’ primary role as financial intermediaries is to accept deposits and lend for investment, which in the process create economic activity. this process becomes less efficient if commercial banks fail to meet private sector demand for credit. financial sector reforms since 2000 the most significant reform process in papua new guinea since 2000 was in the financial sector. it involved the government introducing the new central banking act ( cba ) 2000, the banks and financial institutions act ( bfia ) 2000, and the superannuation and life

the step up to the next level of our framework is too big. that being said, we could in the long run move to a graduated approach that covers all nonsystemic firms. under such a regime the complexity of the framework would grow 2 / 5 bis central bankers'speeches commensurately with the size and complexity of a firm ’ s activities, minimising potentially steep barriers to growth. this is in fact the long - term vision we have outlined in our paper. but doing this will take time and, rather than delaying the roll - out of a simpler framework for everyone, we thought a better approach would be to do this step - by - step. one possible first step is to start with the smallest firms that would benefit the most from a radically simpler regime – but, as with all the trade - offs in our paper, this is something we would welcome views on. we also need to consider the position of foreign banks that operate in the uk. internationally active firms will continue to be in scope of international standards ; likewise, it may be appropriate for subsidiaries of international groups to stick with the international standards. but we have an open mind on this. the second trade - off is the approach to simplification. there are two broad approaches we can follow : the first is what we have called a ‘ streamlined ’ approach, while the second is what we have called a ‘ focused ’ approach – you can tell from this that the pra is not a marketing agency. you can think of the ‘ streamlined ’ approach as retaining most of the chapters of our rulebook, but simplifying the text within them. on the other hand, you can think of the ‘ focused ’ approach as completely removing whole chapters from our rulebook. for example, under a streamlined approach we could perhaps simplify our pillar 2 capital requirements, whereas under a focused approach we might get rid of them altogether. how far we go in either direction will partly depend on how broad the scope of the framework is. this then brings me to what i think is the third key trade - off : the strength of the framework. the more focused an approach we take – that is, the more requirements we completely remove – the more likely it is that the calibration of the remaining requirements may need to be increased to ensure that the overall framework remains strong. this indeed is the approach that has been taken by several other jurisdictions, such as the us and switzerland. by how much calibrations might