loi m bakani : papua new guinea ’ s economy and comments on the planned sovereign wealth fund address by mr loi m bakani, governor of the bank of papua new guinea, to the 2012 papua new guinea advantage summit, an international investment summit on papua new guinea, port moresby, 9 september 2013. * * * acknowledgments the organizers entitled my presentation as “ economic briefing ” and asked me to touch upon the “ sovereign wealth fund ”. i will do my best in the time allotted to me, to cover both subjects and more. i will commence with the subject of inflation : as you might know, the bank of papua new guinea ’ s ( the bank ) main role and objective, as is the case with many developed countries central banks, is “ price stability ”. only after this objective is achieved, and subjected to it “ to promote macro - economic stability and economic growth in papua new guinea ”. in the last four years 2009 – 2012, the bank of papua new guinea achieved its primary and secondary objectives, far beyond expectations. inflation was on the average 6. 4 % per annum. given the very high economic growth, as measured by the real increase in gross domestic product ( gdp ) of 9. 5 % in the same period, the inflation outcome is at the low end of our projections and expectations. the outcome we are still trying to fully understand is the very low inflation in 2012, of 2. 2 %. this trend continues in 2013 with inflation of 1. 6 % in the march quarter and 0 % in the june quarter, in spite of the devaluation of the kina since the last quarter of 2012. in the past, our analysis showed that the devaluation was one of the main causes of inflation. it may seem that the effect of kina devaluation is offset by low imported inflation because of low inflation in our major trading partner countries and slow down in capital inflow, and could be a measurement issue. at the present the bank ’ s projections show that inflation in 2013 will be around 5. 5 %. the bank ’ s assessment and analysis shows that the projection is on the high side. i state with confidence that, “ price stability ”, will be achieved. the second subject of my presentation is on gdp growth : as stated above, gdp growth in the last four years was 9. 5 %. present projections are for a 5. 2 % growth in 2013. this projection which

by more than 7 percentage points ( relative to gdp ) between 2008 and 2012. in spain the current account has improved even more substantially. also, we have seen reductions in unit labour costs. ireland has seen an 18 percentage point improvement relative to the euro area average. in greece, portugal and spain the improvement has been about 10 percentage points. as i have recently stressed to the euro area heads of state and governments, narrowing the gap between wage and productivity growth is absolutely essential for improving competitiveness in euro area countries. 4 to conclusively address the root causes of the crisis these efforts need to be maintained and, in some countries, stepped up. in the meantime, however, what i referred to earlier as the symptoms of the crisis also need to be tackled. fiscal positions need to be maintained on a sustainable path and balance sheet weaknesses in the banking sector need to be repaired. and let me be clear : undertaking structural reforms, budget consolidation and restoring bank balance sheet health is neither the responsibility nor the mandate of monetary policy. monetary policy can only avert an abrupt deleveraging that would have been conducted in an environment of panic and fire sales. and this is what we have done in order to avoid deflationary downward spirals that would have prevented us from delivering on our mandate of preserving price stability in the euro area. monetary policy can support the reform progress by safeguarding price stability and anchoring inflation expectations. but it cannot substitute for actions that other actors, including the private sector itself, must take. completing the euro area ’ s institutional architecture in addition to the role of misguided or imprudent national policies, the narrative of the crisis that i have just spelled out clearly points to some serious shortcomings in the institutional architecture of the euro area. to begin with, the only policy sphere where some form of supra - national surveillance was in place was fiscal policy. and even in this domain, the mechanisms that were envisaged to prevent and correct unsustainable fiscal performance by member states proved to be lacking. no framework was foreseen for monitoring competitiveness and heterogeneity within the euro area and for enforcing corrective action when needed. what ’ s more, in interconnected financial systems an entirely national perspective on bank regulation and supervision turned out to be insufficient. finally, no crisis management framework had been set up to complement the national shock absorption capacity of euro area countries. the creation of the efsf and more recently the esm