. the fiscal strategy should not be one where there is aggressive spending over and above the revenue with the government borrowing against future revenue or one that the government spends all it gets in a year each year over the life span of the lng project. the prudent conservative spending approach will see some savings and accumulation of assets by the government over time while allowing for welfare of the people to improve through improvement of infrastructures of transport, education, health and law and order. real exchange rate let me first define a couple of economic terms that matter for the topic of the forum. real exchange rate refers to movements in the nominal exchange rate adjusted for differences in the rate of inflation in png and the rates of inflation in png ’ s principal trading partners. movements in the real exchange rate facilitate changes in exports and imports. real appreciation decreases the rate of growth of exports and increases the rate of growth of imports. real depreciation has the opposite effect. “ dutch disease ” refers to an economic condition where a mineral boom leads to an appreciation of the real exchange rate, which in turn depresses output in the tradeable sector. the real exchange rate appreciation can occur in two ways. first, a surge in export from the mineral sector leads to an appreciation of the nominal exchange rate, resulting in a rise in the domestic prices of tradeables and a reduction in exports of other tradeables, non - tradeables being unaffected. or second, the increase in income may lead to an increase in demand for domestic non - traded goods and a consequent increase their prices. having given the above definitions, let me now move onto why the concepts matter. in the construction phase of the lng project, real exchange rate appreciation is likely under all three government fiscal scenarios – conservative, aggressive and passive spending. then in the production phase, the study by bpng and monash shows that real exchange rate appreciation will be more pronounced under the aggressive spending ( over spending ) and passive ( spend all as you get it ) scenarios than under a careful conservative spending approach. real exchange rate and inflationary pressures will be significantly lower under the conservative spending approach. so the effects of dutch disease can be mitigated by careful and prioritized government budget expenditure. thus, the importance of the sovereign wealth fund ( swf ). the decision by the government to establish an swf is therefore welcomed. bis central bankers ’ speeches sectoral implications of the lng project construction, manufacturing, transportation,

loi m bakani : the lng project and papua new guinea ’ s economy presentation by mr loi m bakani, governor of the bank of papua new guinea, at the consultative implementation and monitoring council ( cimc ) workshop on “ the lng project and papua new guinea ’ s economy ”, port moresby, 31 march 2011. * * * acknowledgement honourable ano pala, minister for agriculture and livestock honourable mr. warren dutton, chairman of cimc agriculture sectoral committee mr. anthony yauieb, deputy secretary, treasury department mr. paul barker, director, institute of national affairs ms. marjorie andrew, executive officer, cimc ms. laura bailey, world bank country manager ladies and gentlemen i am pleased to have been invited to make a presentation at this forum. the topic of discussion is an important one at this juncture of developments in the country. it is timely to discuss it. i take serious note of the focus on the implications on agriculture sector of the lng project. my paper draws on the findings of a study done in 2010 jointly by the bank of png and the monash university ( melbourne ) on the impact of the png lng project, as well as the latest policy issues that have emerged amongst relevant government bodies and authorities, including issues raised in the bank ’ s monetary policy statement of march 2011 ( about which i made a breakfast presentation this morning, hosted by the pngid, and to be released through the media tomorrow. ) introduction during the construction phase of the png lng project, the sectors of the png economy that supply material inputs and will be involved in activities directly and indirectly with the project will benefit. these sectors include manufacturing, building and construction, transportation and communications, commerce ( wholesale & retail – especially equipments and vehicles ) and service industries such as hoteling. there are other sectors such as the agriculture / forestry / fisheries that will not benefit directly from the project. the project has the potential to significantly raise standards of living in png. however, it will generate structural adjustment pressures. how the rest of the country, including the agriculture / forestry / fisheries sector where majority of our people live, benefit will depend on : ( i ) macroeconomic management of the government, specifically how the government manages the windfall revenue from the project during the production stage ; and ( ii ) monetary policy stance in reaction to movements in liquidity, inflation, exchange rates, and interest rates. there is