its share in preventing the disaster. i move now to this morning ’ s breakfast presentation on the first mps for 2010. while you can read what ’ s in the mps in today ’ s newspapers, my presentation will deal with two main subjects : 1. what is defined as price stability by the bank of papua new guinea ; and 2. what effect might the liquefied natural gas ( lng ) project have on the economy in general and on monetary developments in particular? the bank of papua new guinea defines price stability as a non volatile single digit or low level of inflation supported by stable levels of interest and exchange rates. the term “ non volatile ” is a very important part of the definition. the objective is, to create a conducive environment for investment and growth in economic activity by the private sector. for the private sector to plan ahead, it must have some certainty of what will be the price of inputs during the period of investment and the selling price of the outputs. an entrepreneur knows that there is risk involved in future flows from any investment. what central banks are trying to achieve is a stable macro - economic environment that will reduce the risk of price volatility. the risk of producing a salable product that has a market, at a competitive price rests with the entrepreneur. based on this paradigm it is clear that we do not want a negative inflation. expectation of negative inflation will reduce investment, entrepreneurs will delay activity to benefit from the lower future costs. reduction in investment and activity and its multiplier effects will result in a decline in economic activity and negative growth. the most important decision the governor has to take is what level of inflation will define price stability. as you already understand it will depend on the level of expected economic activity and growth. it is clear that there is a trade off between the two, i. e. inflation and economic growth. i want to clearly express to you my definition of price stability. at the level of average real economic growth of 5. 25 % realized in the four years 2006 – 2009, the acceptable level of inflation as defined by the central bank and even in government budget documents is 5. 0 % to 6. 0 %. the actual average inflation outcome for the same period was 5. 265 %. this is within the range that i clearly define as a period of price stability. looking at each year you will see that the range of annual inflation rates varied from 2. 4 % in 2006 to 11. 2 % in 2008

projects. i went back to study what can be deduced about the impact they have had on economic growth, inflation, foreign exchange flows and employment. in the decade 1981 to 1991 five major projects were constructed, ok tedi, misima, hides gas, porgera and kutubu, all at a total cost of us $ 6. 0 billion. they commenced production in the years 1984 to 1992. the information about their impact was distorted by the second oil crisis in the early 80 ’ s, and the bougainville uprising in 1989. in spite of those events the lesson we can draw is that economic activity as measured by gdp increased from around 4 % to 5 % before reaching 11 % to 12 % during the period of construction of the mining projects, and to 17 % when the kutubu petroleum project was constructed. the construction of these projects has had a very moderate impact on inflation, if at all. it increased to 11. 7 % in 1980 mainly as a result of the second oil crisis. for the period of construction of these projects, inflation rate averaged 5. 5 % with some outliers in 1982 and 1983 at 6. 9 % and 8. 5 % and in early 1990 ’ s by around 7. 0 %, respectively. most of the projects in the 80 ’ s and 90 ’ s were in remote areas in the star mountains, misima island, southern highlands, and enga and these areas are not measured in the urban based cpi we are using. the lessons learnt are limited. the lng project is two and a half times larger at around us $ 15 billion to be spent in four years. but what is expected is that png will experience a period of heightened economic activity with gdp growth increasing, combined with inflation rate moving up to a new level. this is expected to occur during the construction phase of the lng project. the mps makes mention of some of these impact based on a study we carried out jointly with the monash university. the project is important but we have to be careful not to exaggerate its benefits. the gdp may increase significantly ( expected to be around 50 % ) but what matters most are the expenditures on domestic factors of production for the construction and set - up phase. upon the production phase, the main means through which to spread the benefits of the project throughout png over time is the government ’ s fiscal policy. the best fiscal strategy is to save some of the windfall revenue gain in