07 jun - 07 mar - 07 dec - 06 jun - 06 sep - 06 mar - 06 dec - 05 - 4 source : national statistics office, bank of png staff calculations, world bank. other factors affecting inflation in png while food prices contributed to 60 percent of png ’ s inflation between march 2008 and june 2009, over the last year, they have only contributed about 35 percent. therefore, increasingly, additional pressures are contributing to inflation. after years of strong revenues, government spending has increased dramatically, contributing to strong domestic demand. additionally, png ’ s macroeconomic stability of recent years has led to increased business activity and foreign investment, most notably the png liquefied natural gas project which is currently under construction. moreover, due to the length of this boom in business activity, domestic demand pressures have consistently exceeded the ability of domestic supply to increase, and inflation expectations have increasingly become a factor in price setting and wage negotiations. with data collected from our business liaison surveys, we can see that wage expectations increased with the food and fuel price surge in 2008. but starting at the end of 2009 – even before the current food price surge began – we have seen wage expectations increase to their highest sustained levels since our survey began. when expectations of higher inflation are built into business costs, higher inflation can become entrenched, and monetary policy must then also decrease these expectations to reduce inflation. expected average employee wage change over the next year ( percent ) trimmed mean ( 50 % ) survey response q4 2010 q2 2010 q4 2009 q2 2009 q4 2008 q2 2008 q4 2007 q2 2007 q4 2006 q2 2006 q4 2005 q2 2005 q4 2004 q2 2004 q4 2003 source : bank of png staff calculations. bis central bankers ’ speeches thus, since 2007, inflation in png has been affected mainly by these factors : 1 ) external food and fuel prices ; 2 ) increased domestic demand due to high government spending, business activity, and lng project construction ; and, increasingly, 3 ) inflation expectations. role of monetary policy the bank of png has some tools to affect these inflation developments, but when it comes to externally driven factors such as food prices, png is a price taker, and the main challenge is for the bank to limit these prices passing on to other prices. moreover, with much of the current business boom driven by the lng project, the bank of png can only have a limited effect on demand

on the government ’ s expenditure plans, it has maintained expenditure on key priority areas of education, health, law and order, and infrastructure. the government ’ s focus on free education and primary health care are commendable as it strive to address the poor social indicators in the country. redirecting the focus of government resources to agriculture, tourism and small to medium enterprises ( smes ) will broaden the economic base of the country, reduce reliance on imported food and create employment opportunities for the majority of the population. serious investment in these sectors will assist in reducing the economy ’ s dependence on the mineral sector and increasing its resilience to adverse shocks, such as falling mineral prices or unexpected adverse weather conditions. let me turn to the area of financial system development. the central bank undertook two major financial sector reforms. the first was in 2000 as part of the structural reforms undertaken by the png government to address serious shortcomings in the financial system. this was followed by reforms towards the end of 2000 to broaden the financial sector, increase competition and improve accessibility to financial services, and to create a sound and stable financial system. the reforms in 2000 involved the following : banking sector – strengthening governance of banks with prudent management standards and guidelines superannuation funds – introduce voluntary superannuation and increase wider participation by the workforce ( reduce employees to 10 from 15 ) life insurance – introduced good governance and management practice standards and guidelines savings and loan societies – enhance market - oriented institutions and improved management ( reduced from 100 to 21 ) major legislations enacted were : a. central banking act 2000 making the central bank independent ; b. banks and financial act 2000, superannuation act, life and insurance act c. life insurance act 2000 bis central bankers ’ speeches d. superannuation ( general provisions ) act 2000 there were other financial sector reforms : • exchange control liberalisation for ease of doing business with exchange contracts broaden to allow residents to remit more abroad ( 1992 ), restrictions on ( kina ) lending to non - resident companies from domestic banks liberalised in 2004, current account transactions liberalised in 2005 and capital account transactions in 2007. there are now only a few controls in place. • financial inclusion towards the end of 2000s, there were further reforms striving towards financial inclusion and interconnectivity. these included : o establishment of centre of excellence for financial inclusion ( cefi ) to promote growth of microfinance o reach out to the large non -