the budget, i caution that the government should consider slowing the pace of increase in expenditure, which grew by 33. 8 percent in the march quarter of 2006, from the levels in the corresponding period in 2005. the government should direct funds to priority development areas identified in the medium term development strategies ( mtds ). in this respect, i have stated that the government should consider using windfall revenue from mineral taxes for early retirement of some of its foreign debts. the major risk to the current macroeconomic stability remains the fiscal operations of the government in 2006 and 2007. i would point out that the fast pace of growth in lending and high level of liquidity in the banking system introduces further vulnerability to the economy. they also provide new challenges to the bank of papua new guinea in closer surveillance of the financial system and management of monetary policy. in this regard any major fiscal slippages by the government, or fall in commodity prices could lead to loss of macroeconomic stability. i stress that the government ’ s adherence to the parameters of the mtds, that is consistent with the mtds, is vital for sustained macroeconomic stability and promotion of economic growth. reforms to remove impediments to conducting businesses in png saw the removal of the majority of the exchange control regulations. it is one year since we introduce the liberalization and we have not notice any stress on the foreign exchange system. financial sector reforms undertaken at the beginning of this decade ( in 2002 ) are bearing great returns. the banking sector asset quality has improved, likewise finance companies. the other financial institutions under the central bank supervision also are performing very well. the superannuation industry continues to report improvement and good results. likewise work to improve the life insurance industry is continuing. the savings & loan society movement the savings and loan societies movement, which is currently comprised of 21 active societies, has grown in terms of their asset base and membership. over the past six ( 6 ) years, the total assets in the movement have grown from k126 million to over k332 million. the total membership has significantly grown from 120, 775 in december 1999 to 152, 438 members by the end of 2005. the movement, more particularly provincial based societies such as the east new britain s & l society, is an ideal vehicle to reach and promote savings into the rural population. the movement plays an important role in the financial system in promoting thrift to its members and more importantly in extending the monetization of the png

economy into the rural sector, so that the rural population participates meaningfully in economic development. savings and loan societies complement other financial service providers such as banks and financial institutions in providing basic savings and loans products to members. the difference between the movement and other financial institutions is that savings and loan societies operate on the principle of mutuality. that is the members are the owners of the societies, where each member has an equal say on the election of directors to the boards of the societies. they also have a direct say in the distribution of profits. challenges the movement has faced many challenges in its evolution over the years. the bank in its supervisory role has observed serious weaknesses in areas of governance and management. we have seen and dealt with directors and managers who have conflict of interest when making decisions that were not in the best interest of members. we have also dealt with infightings between directors and managements and also between supervisory committees and boards members. in its supervisory role, the bank has increased its enforcement efforts to ensure that the societies are constantly in compliance with directives and regulations so that the bad experiences of the past do not repeat themselves. in many cases where such instances have occurred, the bank has not hesitated in suspending or removing board members, managers and / or supervisory committee members from those societies. other challenges which we have seen societies faced over the years were concerning operational difficulties in ensuring accurate and timely reporting of financial statements, lack of effective management of asset quality such as nonperforming loans, weaknesses in controls and risk management systems and more seriously fraud. directors, management and committeemen of the societies have a duty to continue the effort in educating members to save for the future and to borrow within the required limits. members must be educated to repay the loans that they borrow. legislative framework the growth experienced by many societies over the years has also resulted in most societies moving away from the traditional savings and loans business. many have now invested their surplus savings in other products such as in equities and government securities. in view of these developments and the challenges which i have just mentioned, i have established a working team within the bank which has started looking at reviewing the existing legislative framework with the view to reform the entire savings and loan societies industry and microfinance / microbanking businesses. the work of the working team is progressing and at this stage the bank is looking at securing funding for technical assistance to carry out the substantial work in improving the legislative framework. east new britain savings & loan society on