loi m bakani : economic overview and future developments in papua new guinea statement by mr loi m bakani, governor of the bank of papua new guinea, at the 2010 annual meetings of the international monetary fund and the world bank group, washington dc, 8 october 2010. * * * mr. chairman, colleague governors, president of the world bank group, managing director of the international monetary fund, ladies and gentlemen, it is my pleasure to address this 2010 annual board of governors meeting. on behalf of the government of papua new guinea i would like to extend our appreciation to the bank and the fund for the ongoing effort and initiatives to improve our living standards and global financial systems. we look forward to a fruitful round of discussions here in washington dc. governors and colleagues, the prospects for global growth continue to be impacted by the aftermath of the financial crisis. i reiterate the international monetary fund ’ s ( imf ) outlook on the world economy with an anticipated growth of 4½ per cent in 2010. whilst the growth is heading in the right direction we must acknowledge that growth remains sluggish by past standards. at the same time downside risks remain, due to rising concern over sovereign debt and fiscal imbalances that could trigger a repeat of the financial and economic crisis. the downside risks underscore the need for ongoing cooperation and commitments from mutual partners to develop policies and governance mechanisms to address the challenges and secure global prosperity. at the global level, we should support policies that address structural imbalances over the medium term including supportive monetary conditions, accelerating financial sector reform, and rebalancing global demand. papua new guinea, as a small open economy, was able to navigate the negative impact of the global financial crisis and grew by 5½ percent in 2009. in 2010, growth prospects remain positive as the economy enters its fourth year of economic expansion. the combination of a stable exchange rate and moderate interest rates is encouraging businesses expansion. employment is strong, foreign exchange reserve level is high and government debt is at a sustainable level. the solid performance of the papua new guinea economy reflects increased investor and consumer confidence following a period of macroeconomic and political stability. the country has also benefited from a number of important economic and structural reforms the government has undertaken in recent years to complement its macroeconomic policies and management. at the same time, competition has improved the delivery of telecommunication services throughout the country. this is one of our success stories of the past few years. services

making loans to borrowers. almost all the funds raised by our commercial banks are done so through deposit takings domestically. deposits comprise over 80 percent of our commercial banks ’ liabilities, much of it in kina. foreign currency deposits are only a small component of the banks ’ deposit base. as at the end of december 2008, foreign currency deposit was around 9 percent of total deposits. the commercial banks are generally sound with high capital adequacy ratios. in 2008, their capital adequacy ratio was 25 percent, higher than our limit of 12 percent ( see chart 1 ). the banks have no exposure to sophisticated financial products such as mortgage - backed securities that are linked to the demise of the sub - prime mortgage market. the high level of liquidity in the banking system also provided sufficient funds for commercial banks to operate without resorting to borrowing from the international financial system. despite the high level of liquidity, the commercial banks ’ lending is prudent with low levels of non - performing loans. in 2008, non - performing loans totaled k70 million, down from k277 million in 2001 ( see chart 2 ). lending also comprises a small share of the banks ’ assets, about 35 percent. the banks are well managed and closely regulated by the bank of png. in addition, the two subsidiaries of australian banks have in place guarantees from their parent banks ( letters of comfort ) for any lending in excess of prudential exposure limits set by the bank of png, giving confidence to the stability of the financial system. both these banks ’ parents have double “ a ” credit ratings by standard and poor ’ s. however, the financial institutions and companies most likely to be affected by the crisis are the superannuation funds and png dual - listed companies in overseas stock markets. the two major superannuation funds, the nambawan super ltd and nasfund ltd, have some of their assets invested in offshore equities, while the rest are invested in commodity - based stocks that are dual - listed in png and overseas markets. they have reported positive returns in 2008 and remain positive and confident, though with lower returns projected for 2009. indeed, much credit must be given to the financial sector reforms introduced by the government in 2000, which created an independent central bank and introduced improved supervision of the financial system. the reforms saw much needed changes done to strengthening our financial sector after the excesses and mismanagement of the 1990s ( see chart