service oriented industries and commerce ( wholesale and retail ) sectors will benefit directly or indirectly in the short run through the provision of inputs during the construction phase. then in the operational phase, sectors such as manufacturing will face considerable competition from imports and will be harmed by the appreciation of the real exchange rate. traditional agriculture ( food, fruits and vegetable ) sub - sector will fare well under increased aggregate income and demand. the export agriculture sector ( coffee, cocoa, palm oil, copra, forestry ) will be harmed by the real appreciation ( dutch disease ). our exports will be less competitive and so there will be a decline in the export of these commodities. this adverse effect can be more pronounced under the aggressive government spending scenario because excessive government spending will add to the real exchange rate appreciation through increased liquidity and high inflation. this adverse effect can be mitigated or minimised through the conservative government expenditure approach. apart from a strategic careful and prioritized spending, the government can also mitigate the “ dutch disease ” effect on the tradeable agriculture sector by maintaining and reconstructing the existing road network as well as all the social sector infrastructure of health and education and law and order. this will aid the producers get their produces to buying points and sustain production and export. in other words, the resource curse scenario can be addressed through better and improved infrastructure network. what can the bank of png do to minimize or mitigate the “ dutch disease ” effect to assist the agriculture / forestry / fisheries sector? on its part, the bank of png can mitigate or minimize the “ dutch disease ” effect through its management of the kina exchange rate. while the exchange rate regime is a floating one, it can use the build - up in international reserves to support the kina at an exchange rate that is favourable for agricultural export growth while not completely going against the market trend, under a real exchange rate appreciation scenario. but this will be done in joint consideration of the objective of monetary policy, which is price stability. the desired outcome of having competitive prices for our agricultural exports through the central bank supporting the kina at a desired exchange rate will be best achieved with the conservative fiscal expenditure approach described above, under a close coordination of monetary policy and fiscal policies. apart from the direct influence of exchange rate on the agriculture sector, the bank considers macroeconomic stability as an important foundation for microeconomic development and improvement. when there is price stability – entailing stable inflation, stable exchange and stable interest

was earned from domestic market operations due to higher level of government securities held by the bank and high interest rates on treasury bills ; interest expenditures were lower compared to 2002, due to limited involvement by the bank in the secondary market for treasury bills ; and generally expenditures were well controlled although significant costs were incurred in the areas of : – it management of systems ; – building maintenance ; – currency replenishment ; and – staffing costs - salaries and wages, and training. the way ahead honourable minister, the bank ’ s 2004 financial results would likely be affected by the current low interest rate environment and high liquidity situation that we confront since the beginning of the year. whilst we have rebuild our foreign exchange reserves, our interest earnings on them would be also affected by the low interest rates overseas and the appreciation of the kina exchange rate. it is therefore important that this dividend payment should not allow us to rest on our laurels and pat ourselves on the back. whilst we should take time to celebrate achieving such a result, we must also be mindful of our on - going duty to the government and the nation. there are still on - going work within the central bank to improve the design of our policies and their implementation. we are constantly striving to improve our operations to enhance efficiency in achieving our core objectives and functions by using the latest technology, follow international best practices, and continue to build our internal capacity. and indeed the brief but very significant visit by the deputy managing director of the imf, mr. agustins carstens, not only provided a strong sign of confidence on the government ’ s economic management, but also gave us the opportunity to discuss further technical assistance in various areas of the bank ’ s operations. let me mention some of the major tasks currently undertaken by the bank : • building up our capacity to supervise the financial system including life insurance and superannuation fund industries with external assistance ; • undertaking research work on the central bank ’ s operations and policies ; • implement an electronic registry system to help with our domestic trading of government securities ; • review of the exchange control regulations ; • drafting of the anti - money laundering legislations with government agencies ; and • involvement in the implementation of the png - adb microfinance project. these changes and the on - going work will ensure the central bank not only fulfills its mandate to the government and people of papua new guinea, but also allows us to be responsive to the everchanging vagaries of the world