private issuance is one of periodic panic and instability. in times of uncertainty and stress, people don ’ t want to hold privately issued fiat money. this is one reason why today physical banknotes are backed by central banks. it is possible that ways might be found to deal with this financial stability issue – including full collateralisation – but these tend to be expensive. this suggests that if there were to be an electronic form of banknotes that was widely used by the community, it is probably better and more likely for it to be issued by the central bank. if we were to head in this direction, there would be significant design issues to work through. the tokens could be issued in a way that transactions could be made with complete anonymity, just as is the case with physical banknotes. alternatively, they might be issued in a way in which transactions were auditable and traceable by relevant authorities. we would also need to deal with the issue of possible counterfeiting. depending upon the design of any system, we might be very reliant on cryptography and would need to be confident in the ability to resist malicious attacks. this brings me to the second issue here : is there a public policy case for moving in this direction? such a case would need to be built on electronic banknotes offering something that account - toaccount transfers through the banking system do not. we would also need to be confident that there were not material downsides from moving in this direction. our current working hypothesis is that with the npp there is likely to be little additional benefit from electronic banknotes. this, of course, presupposes that the npp provides low - cost efficient payments. one possible benefit of electronic banknotes for some people might be that they could have less of an ‘ electronic fingerprint ’ than account - to - account transfers, although this would depend upon how the system was designed. but having less of an electronic fingerprint hardly seems the basis for building a public policy case to issue an electronic form of the currency. so there would need to be more than this. among the potential downsides, the main one lies in the area of financial stability. if we were to issue electronic banknotes, it is possible that in times of banking system stress, people might seek to exchange their deposits in commercial banks for these banknotes, which are a claim on the central bank. it is likely that the process of switching from commercial bank deposits to digital banknotes

level of foreign exchange reserves. it is important to note that the first crisis was all our own doing. the foreign currency inflows from the mining and petroleum exports were at their peak, at hundreds of millions of united states dollars per annum. the government of the day decided that we could afford a highly expansionary fiscal regime. the planned budget deficit for 1993 was at 5. 0 to 6. 0 percent of gross domestic product ( gdp ). it was obvious that it was far from being sustainable even in the short term, when the tax flows from mining and petroleum exports were expected to be high. in the medium to longer term it was a recipe for disaster. the public reacted as expected, by loosing confidence in the kina. in 1997 and 1998, the government of the day did nothing to mitigate the economic impact of these shocks. to maintain some resemblance of stability, the central bank used the foreign exchange reserves to support the exchange rate. in spite of heavy intervention in the foreign exchange market, the value of the kina declined at a fast rate, from around us $ 0. 70 in 1997 to $ 0. 34 in less than 2 years to 1999. as was the experience in other countries, currency devaluations do not stop the outflow of foreign currency ; on the contrary it accelerates it. the central bank did not have the independence to rein in the monetary expansion, resulting mainly from a high budget deficit and to be able to stop the pressure on the kina. in 1994, it was agreed that a floating exchange rate is inconsistent with foreign exchange controls. the recommendations were to retain the foreign exchange regulations until the reserves are built up to a comfortable level that can withstand any adverse impact of liberalization of foreign exchange control. in 2000, upon the enactment of the new central bank act ( cba ), the subject was revisited. it was concluded that the foreign exchange controls should stay in place as they are, at least until the central bank has developed appropriate monetary instruments to achieve the objective of price stability. the election driven 2002 budget, and the large built in fiscal deficit, were the first time the central bank could test the instruments it developed, mainly the use of interest rates, to counter - act an expansionary fiscal policy and try to maintain price stability. the other question that we needed an answer to was ; will the public believe that the bank of png is going to use its independence to achieve the objective of price stability. the developments in