l wilson kamit : central bank initiatives - liberalisation of foreign exchange control address by mr l wilson kamit, cbe, governor of the bank of papua new guinea, at the annual papua new guinea mining conference, sydney, 6 - 7 december 2004. * * * honorable ministers bart philemon, sam akoitai, puka temu and sir moi avei, government and industry representatives, distinguished participants, ladies and gentlemen ; i want to thank the organizers for inviting me to address this conference. the subject of my presentation under the topic of central bank initiatives is, “ liberalization of foreign exchange control ”. it is now more than eighteen months that we at the bank of png have been deliberating on the subject. it took me until mid november to decide what we should do. i am sure that many of you are asking ; why did it take so long? in the last ten years the central bank has had two traumatic experiences : in september and early october 1994, papua new guinea was facing a classical balance of payments crisis. the level of foreign exchange reserves at that time was at minus us $ 164 million, and was declining at a fast pace. as you all know a country may default on its domestic debt, but it can become bankrupt on its foreign debt, and at that time png was faced with this situation. in october 1994, three options were presented to the government to deal with the crisis : 1. a further devaluation of 25. 0 to 30. 0 percent, after the devaluation of 12. 0 percent on the 12th of september 1994, and retaining the fixed exchange rate regime. the experience in other countries showed that such measures did not solve the problem. 2. using exchange controls to ban foreign currency transactions and rationing of foreign currency by the central bank. 3. the floating of the kina against the other currencies. on the 10th of october 1994, the then prime minister, sir julius chan who was also the acting minister for finance decided to choose the best of three very tough options, and that was to float the kina. the sandline saga, the el nino drought, the asian financial crisis and the loss of confidence by the public on the management of the economy, brought us to the verge of a second balance of payments crisis towards the end of 1998 and early 1999. in both cases the bank of png used the exchange control regulations to assist in cushioning these shocks, and building up the depleted

line with economic growth as the driver of growth in the economy switches from household spending to non - resource exports. however, recent momentum in prices in toronto and vancouver may increase the likelihood of a correction in house prices, which could affect vulnerable households. unsurprisingly, house prices are correcting in oilproducing regions. as in the past, we have illustrated how certain triggers could turn these vulnerabilities into full - blown risks to the canadian financial system. risks assessed in this fsr are ( 1 ) a severe recession that would reduce households ’ ability to service their mortgages and cause a broad correction in house prices ; ( 2 ) an unexpectedly sharp rise in global risk premiums that could spill over to the cost of domestic financing ; ( 3 ) economic or financial stress emanating from china and other emerging markets ; and ( 4 ) more downside risk in resource pricing. these risks are not meant to be exhaustive but rather are used to illustrate the potential consequences of the vulnerabilities we have identified. other possible triggers might include a large - scale credit event in the global resource sector or a sovereign credit event, for example. the governing council acknowledges that certain vulnerabilities are still edging higher, but the overall level of risk they pose to the canadian financial system has remained roughly unchanged since our june report. in this regard, recent changes by canadian authorities to the rules for mortgage financing will help to mitigate these risks as we move into 2016. finally, i ’ d note that the fsr features reports that take a close look at aspects of the canadian and global financial systems. with this issue, there ’ s a report that analyzes the microdata related to household debt, as well as a review of mortgage securitization in canada. these are very important and useful reports, and i hope you ’ ll take the time to read them. with that, carolyn and i will be happy to respond to your questions. bis central bankers ’ speeches