l wilson kamit : policy and regulatory environment for business address by mr l wilson kamit, cbe, governor of the bank of papua new guinea, to the 21st australia papua new guinea business forum, cairns, australia, 1 - 3 may 2005. * * * introduction honourable ministers from the governments of papua new guinea and australia, mr. alan walter, president of the australia - papua new guinea business council, mrs. winifred kamit, president of the business council of papua new guinea, members of both councils, distinguished guests, ladies and gentlemen. i am honoured and pleased with your invitation to address this forum again. the macroeconomic stability seen in papua new guinea during the last three years, for me as the governor of the central bank, is like breathing of fresh unpolluted air. steady continuous high foreign exchange inflows ; fiscal discipline ; balance of payments and fiscal surpluses ; enabled the bank of papua new guinea to pursue a stable exchange rate ; which has led to low inflation and allowed for a reduction in domestic interest rates. the recent reports of a net profit of k85 million by the bank south pacific and k120 million by the posf from their 2004 operations, a k58 million net profit by nasfund for the first quarter of 2005, announcements of expansion in business operations, and a pick - up in construction activity, are good indicators of improvements in economic activity. a large number of companies, including banks declaring dividends and paying them to both their domestic and overseas shareholders, are a further indication of an increase in economic activity and that there is renewed confidence and optimism in the business community. i hope that we will continue to receive this type of news from the many other firms and industries in papua new guinea in the coming months. the stable macroeconomic climate experienced in papua new guinea over the last three years is expected to continue in 2005. whilst this is obviously positive news, those of us tasked with ensuring a conducive environment for economic growth and management of the nation ’ s economic affairs, are constantly challenged towards ensuring its sustainability. the contribution of the central bank was, providing a stable interest rate and exchange rate regime through a conducive monetary policy as well as developing the necessary infrastructure for a sound financial system. this was implemented through the legislative changes introduced in 2000 and 2001. we constantly ask ourselves as to how else we can promote business activities in papua new guinea. in this same forum last year i alluded to the bank

, morobe province, which the bank of papua new guinea licensed in 2004, is showing strong signs of growth by expanding its micro - finance operations into the city of lae after one year of commencement. these initiatives are not in direct competition with the existing financial institutions, but are seen as complementary to the financial system. foreign exchange control liberalisation let me touch on the bank ’ s decision to remove the remaining controls on foreign exchange. the first question many may ask is the obvious one : why liberalise the exchange controls? the rationale as i have stated is to allow for a smoother flow of capital into and out of the country. under a floating exchange rate regime, exchange controls are not required because the market can adjust itself to meet the supply and demand of foreign currency and the exchange rate acts as an adjustor to adverse impacts from domestic or external shocks. prior attempts and intentions to liberalise exchange controls did not eventuate. in 1994, after the kina was floated, the controls were retained to allow the severely depleted reserves to be rebuilt to comfortable levels. again in 1997 and 1998, the timing was inappropriate with adverse economic shocks resulting from the el nino drought, sandline crisis and low confidence levels. one of the deciding factors not to pursue liberalisation was that, the central bank did not have the independence to rein in a monetary expansion, as a result of any expansionary fiscal policy, and to stop the pressure on the kina emanating from it. in 2000, whilst the enactment of the central banking act gave the central bank greater independence, the controls were kept to give the bank time to develop appropriate monetary instruments and prudential standards to achieve the objective of price stability. the stable macroeconomic environment that emerged in 2003 and improved outlook for the country has enabled the bank to revisit the liberalisation of the exchange controls. if ever there was a time to liberalise, this is it. the next question many of you may have is : what form would this liberalisation process take? as explained in my address to the annual mining conference in december 2004, the liberalisation involves imposing exemptions on the exchange control regulations, without actually doing away with the legislation on foreign exchange and gold regulation itself. we are in a sense shelving the legislation with the possibility of re - introducing it as and when the need arises, the most probable being in the event of a severe balance of payments crisis. another question on the minds of many present here is : when will