but a requirement that a proportion ( initially 30 per cent but later reduced to 10 per cent ) of incoming portfolio investment be deposited with the central bank at zero interest for a period of one year. the intention of this measure was to discourage short - term capital inflow while creating no barriers to other forms of capital movement. whether such a measure would work in the relatively sophisticated financial markets which we now have in new zealand is at this stage an open question. indeed, there is intense debate internationally whether the policy has even had a beneficial effect in chile itself, and chile has recently reduced the proportion of incoming portfolio investment which must be deposited with the central bank to zero. as i noted in my speech on the balance of payments deficit last year, there would clearly be some real risks in introducing such a policy in new zealand, not least the longer - term costs of undermining investor confidence in new zealand ’ s commitment to free and open markets. a fourth idea for avoiding strong exchange rate appreciations has recently been gaining some media play, namely the idea that new zealand should irrevocably peg to some larger currency, or even form a currency union with some larger country or group of countries. the new zealand dollar is simply too small and insignificant to float alone in the turbulent ocean of world financial markets, it is argued, and would be better securely linked to a bigger vessel. many countries contemplating this possibility see a link to the united states dollar as having huge appeal, while in the past the german mark has also had a number of adherents. no doubt in the future the euro will also attract its strong adherents. in the new zealand situation, it is not surprising that most of those who advocate new zealand becoming a part of a larger currency area argue for a currency union with australia ( although in reality, given the relative size of our two economies, a currency union between new zealand and australia would be more akin to new zealand pegging to australia than a genuine currency union in the european sense ). australia is our largest trading partner, and there is essentially free mobility of labour and capital between the two countries. this means that two of the key criteria for an optimal currency area would be at least partly met in the case of an australian / new zealand currency union. but while australia may well be the most logical country for new zealand to form a currency union with, and this idea may well be worth further exploration for a whole raft of economic and political reasons, it is quite misleading to imply that

##s. as the countries of the region move into the caribbean single market and economy, public understanding of the financial and economic issues which govern the arrangement will be imperative. during the year, the bank restructured its operations, in an effort to improve its effectiveness and efficiency. a significant part of the restructuring effort was the establishment of a statistics department. this signals the increased importance being placed by the bank on assisting member countries to gather relevant statistics in order to improve decision - making for economic development and improvement in the standard of living. the eccb's financial objective for 2005 / 2006 was expenditure reduction, in an attempt to keep expenditure in line with income earned on foreign reserve assets. i am pleased to say that this objective was achieved notwithstanding the unfavourable performance of the us bond market in an increasing interest rate environment, which had an adverse effect on the bank's portfolio of foreign reserves. operating income of $ 64 million exceeded the budgeted amount by more than $ 11 million. on the expenditure side, total expenditure of $ 51 million was less than budgeted by just over $ 1 million. the conservative expectation for income, coupled with strict expenditure management controls, contributed to a higher than anticipated operating profit of just under $ 13 million. at 31 march 2006, the bank's total assets stood at just over $ 1. 8 billion, a decline of 2. 3 per cent when compared to the position last year. this decline, reflected in a contraction in the foreign reserves, was due primarily to foreign payments made by the bank on behalf of member governments and commercial banks in the eccu. all in all, however, i am pleased to report that 2005 / 2006 was a successful and profitable year for the bank. the current financial year 2006 / 2007 will bring new challenges for the bank and its member countries. we must persist in our joint efforts in the years ahead as we work to strengthen our own economic union. this is necessary if the bank is to continue to fulfil its mission to maintain the stability of the ec dollar and to ensure the safety and soundness of the banking system, for the benefit of the people of the eastern caribbean currency union.