2008 while expenditure was within budget but higher than the revenue, which resulted in a larger budget deficit compared to a projected budget surplus. while the bank acknowledges that its reaction in adjusting monetary policy in 2008 to market conditions was a little late it has to be pointed out that ( i ) the link between monetary aggregates ( money supply ) and inflation is weak and not as strong as in other economies, and that ( ii ) the most influential variables / factors of inflation are the exchange rate and imported ( foreign ) inflation of png ’ s major trading partners. with these in mind, while monetary expansion in the form of credit growth contributed to an extent to aggregate demand and therefore to inflation, the most influential factors on inflation in 2008 were the increased food and fuel prices in 2007 and the first half of 2008 and their lag effect, and strong domestic demand. with respect to the high credit growth, the bank continued to closely monitor the quality of loans and as evident, there was no increase in non - performing loans by banks. it is also important to appreciate that the bank viewed the credit growth necessary to stimulate economic growth after low growth rates of real gdp were recorded prior to 2007. indeed, the bank stood ready to tighten monetary policy in the event evidence of inflationary pressures emerged in the economy. relying on the release of actual inflation data had a part in the slow response of the bank. within domestic demand, monetary policy was picked on by the survey as being responsible but increased government spending and public consumption from the export earnings, both important factors contributing to strong domestic demand, were not clearly emphasized. also, very importantly, the kina appreciated against the us and australian dollars and the prices of fuel and food declined in the second half of 2008. these would have some positive flow on effects to domestic prices, but we have not seen business houses passed on the benefits of reduced import costs to consumers. this is something that the survey missed. bpng hopes that there is still a lag effect of the appreciation, that is, goods bought under the appreciated rates will be sold at lower price. firms must be fair and pass on the benefits to consumers. however, the latest ( 2009 ) depreciation of the kina against the key currenciesus and australian dollars may give them an excuse not to reduce prices of goods and services or delay further any downward adjustment to domestic prices. coinciding with the declining commodity prices in 2008 was an increase in total government spending in excess of total revenue.

experience of the 1990s show that when there is excessive government spending there can be downward pressure on the exchange rate and high inflation. and monetary policy is burdened with the task of restoring macroeconomic stability. that is, monetary policy could become preoccupied with the government ’ s debt management. we have to avoid this. we may be going through this cycle again. in this respect, the survey then makes some comparison of the revenue windfall and its management in the 1990s with that of the 2000s. in the 1991 to 1994 period the main growth area in expenditure were salaries and benefits and current transfers or simply – recurrent expenditure which were financed by substantial amounts of domestic debt. in the 2000 ’ s, there was restraint on public sector salaries and current transfers, especially in 2003, although revenue had already increased substantially. also starting in 2003, the reduction in public debt took place. by 2007, the public debt / gdp ratio had been reduced to around 33 percent from 63 percent in 2003. this decline reflected the increase in nominal gdp and also a deliberate and prudent debt management policy to prepay expensive overseas loans using the windfall revenue. but then recurrent expenditure started increasing and by 2007, salaries and benefits increased by 40 % from 2002. this is unproductive expenditure and i agree with the survey that it would be difficult to reduce it under a situation where budget revenue is declining, unless drastic reforms in the public service to achieve efficiency are undertaken. we hope to avoid the experience of the 1990s where monetary policy became burdened with government ’ s debt management. the difference now is that the central banking act 2000 safeguards monetary policy from any political interference and influence. but to achieve macroeconomic stability and growth, it requires close coordination between fiscal and monetary policies. overall, the survey pointed out that the government managed the revenue windfalls of the 2000s better than in the 1990s. but we have to be mindful that some of the windfall revenue are kept in trust accounts with commercial banks and bank of png. whether these funds will be effectively spent for the intended purposes remains to be seen. more time will lapse before we know. good management of the windfall revenue and effective spending for improvement in the delivery of goods and services also requires good governance and micro reforms. while the government should be acknowledged in the survey for putting aside in trust accounts some of the windfall revenue, and also coming up with long term development plans ( national strategic plan 2010 - 2050 ), which should be supported