##s the adjustment of interest costs to rising rates. second, although interest rates on some variable - rate loans will rise quickly, the adjustment for a large number of variable - rate loans could be a good deal slower. for example, many adjustable - rate mortgages start off with a fixed rate for several years, providing households with some protection from rising rates. this relatively upbeat assessment of household credit quality seems to be shared by lenders and by investors in securities backed by consumer debt. according to the federal reserve ’ s survey of senior loan officers, the number of banks tightening their standards on consumer loans has fallen over the past year. moreover, credit spreads on securities backed by auto loans and credit card receivables have narrowed in recent months. these indicators do not point to much concern about household loan performance. thus far, i have focused on the liability side of the household balance sheet. favorable developments have occurred on the asset side as well. equity prices rallied strongly last year and have held their ground this year ; as a result, they have reversed a good portion of the losses sustained over the previous three years. in addition, home prices have appreciated sharply since 1997. all told, the ratio of household net worth to disposable income - a useful summary of the sector ’ s financial position - has climbed in the past couple of years and currently stands at a high level relative to the past decade. financial conditions of businesses businesses are also in good financial shape, having experienced a dramatic improvement in recent years. indeed, starting last year, many firms found themselves in the unusual position of being able to finance a pickup in spending entirely out of rapidly rising cash flow, and those that turned to external markets generally found the financing environment to be quite accommodative. this improvement in financial conditions reflects a number of factors, namely low interest rates, a widespread restructuring of corporate liabilities, and significant cost - cutting and productivity gains that boosted profitability. in my view, even with an expected rise in interest rates and some moderation in profit growth, the financial condition of the business sector should remain strong and able to support continued expansion. i will address each factor in turn. first, firms are continuing to benefit from the accommodative stance of monetary policy. even with the recent increase by the fomc in the target funds rate to 1. 75 percent, short - term borrowing costs remain low. for longer - term debt, the combination of low yields on benchmark treasury

the expenditure will be on imported goods and services, paid from funds held off shore while, some of the goods and services will be purchased on shore, with funds to be brought in from off shore. the size of the project coupled with the very strong impact it will have on domestic economic activity will facilitate activity in the other sectors of the economy such as food production in agriculture, manufacturing, building and construction, and transportation. those who will act for the lng project will be paid by the developer converting foreign exchange into kina, which will have the effect of an appreciated kina. the increase in imports to accommodate increase in economic activity in other sectors will have the effect of a depreciated kina. these opposite effects could balance each other out and result in a stable kina exchange rate. but this will depend on the magnitude of flows from each side. even if the reserves might decline as a result of the imports by other sectors that are not for the project development, it will be marginal. the bank of papua new guinea has sufficient reserves to ensure that it has minimal impact on the exchange rate and through it on inflation. while it is expected that there will be very strong growth in economic activity during the construction phase, high demand for goods and service will have some inflationary effect. to ensure that there is economic growth while inflation is not too high, the government has to follow some clearly designed policies. the developer is constructing a huge infrastructure corridor from the southern highlands to port moresby. they will construct roads, a pipeline, bring in electricity, telecommunication, and meet social - community commitments in the villages where the corridor is passing through. the country's production capacity will be used far beyond its availability. the government is therefore advised not to undertake any major infrastructure development project during the construction years of the project and not increase its general expenditure. it should instead concentrate its efforts on maintaining and improving the existing infrastructure that deteriorated in some areas to an unusable state. the added advantage will be that all the resources of the government can be concentrated on the priority areas of education, health, conservation of the environment and law and order. in these three to four years the government should undertake a full detailed review of its development agenda. all sacred cows should be slaughtered. 4 / 7 bis - central bankers'speeches 1. it should re visit the decentralization of government responsibilities and review the organic law on provincial and local level governments to streamline channels of funding mechanism for rural areas ;