leonard wilson kamit : sustaining macroeconomic stability presentation by mr leonard wilson kamit, governor of the bank of papua new guinea, to the rural industries council, port moresby, 22 february 2006. * * * introduction thank you chairman mr brown bai for the invitation to this meeting of the rural industries council ( ric ). i want to share my thoughts on financial sector reforms, which commenced in 2000, and how this development changed economic management of the country. i am convinced that sustained macroeconomic stability will lay the necessary foundation for growth in the medium to long run. i present a snap shot of necessary institutional reforms that create an enabling environment to promote sustained macroeconomic stability and growth. financial sector reforms i am of the view that most significant reform process in papua new guinea was the financial sector in 2000. 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 insurance acts. under the central banking act 2000, the central bank has three important objectives and functions, which are the responsibility for monetary policy formulation and implementation, financial system supervision and oversight of the payments system. the act also made significant changes to the relationship between the central bank and government, eliminating political influence, introducing price stability as the objective of monetary policy, and provided greater independence to the central bank in the management and conduct of it ’ s affairs. the central banking act 2000 made price stability as the main objective of monetary policy. consistent with the act, the monetary policy statement ( mps ) is released semi - annually in january and july. in order to respond quickly to monetary shocks, the kina facility rate ( kfr ) is announced on the first monday of each month, which provides a clear direction or signal to the market on the bank ’ s monetary policy stance. the announcement is strengthened through operational instruments, which are market orientated and used commonly by many central banks around the world. these instruments include treasury bills, short term inscribed stocks, repurchase agreements, and central bank bills. a sound and healthy financial and efficient payments system is a necessary conduit for monetary policy implementation for facilitating business activity. the bank has also introduced stringent supervision of banks, finance companies and other financial institutions such as savings and loan societies, superannuation funds and life insurance companies. this is to ensure prudent management of depositor ’ s funds, members ’ contributions, and premiums on life insurance policies held

and improved asset quality of the financial institutions ; and • confidence in the government ’ s management of the economy by the public. consistent with the macroeconomic stability, the bank of png progressively eased monetary policy, reducing the kina facility rate ( kfr ) from around 16. 0 percent in 2002 to 6. 0 percent in february 2006. as a result of the lower interest rate environment private sector credit grew significant in 2005 by over 20 percent. unlike in the past, where private sector borrowing stagnated because of continued increased funding of the fiscal deficit of the national government, the increase in private sector borrowing is also the result of improved fiscal management and new loan products offered by the commercial banks. i released the semi - annual monetary policy statement ( mps ) on 31 january 2006. the mps sets the broad parameters for monetary policy for the six months of 2006 and the medium term. the monetary policy for 2006 and the medium term were framed against a background of sound macroeconomic fundamentals, which we expect will be sustained into the medium term. going forward going forward, much still needs to be done. the financial sector reforms have not only led to the development of a sound and healthy financial system but also created a stable macroeconomic environment. however, papua new guinea should not be complacent with these outcomes but continue to work towards building a more efficient and competitive financial system that accommodates domestic and global challenges. the reforms of the financial sector is still on - going and the following reforms are currently being undertaken by the bank : • a taskforce has reviewed the superannuation and life insurance industries to determine areas where parts of these new legislations could be more stakeholder / member friendly. the report has been finalized and is waiting to be formally presented to the treasurer and myself ; • undertaking a review on the legal framework for micro - finance institutions and a review to the savings & loan societies act 1995 with the view of separating registry functions from prudential supervision. • in june 2006 the bank will undertake a review of the liberalization with the aim of fully liberalizing the remaining exchange controls. i intend to immediately allow holders of onshore foreign currency accounts to settle obligations in foreign currency. this arrangement is intended to minimize foreign exchange transaction costs. • the bank decided to licence financial institutions as authorised foreign exchange dealers under the banks and financial institutions act to promote competition. • the bank has commenced a major review of the payments system in papua new guinea. review of the payments system is necessary for