great majority of the population, living in the rural areas. for the bank's part, we realize that with the first lng project and the likelihood of more lng projects, the economy will enter a new era of economic growth. in its formulation and conduct of monetary policy the bank will carefully assess and evaluate the trade - off between higher economic growth and inflation so as not to discourage domestic economic activity and ensure inflation does not spiral out of control. it is very encouraging that the national executive council ( nec ) decided to set up a joint working group of very senior staff from the department treasury and the bank of papua new guinea to asses and evaluate the applicability of the sovereign wealth fund model, to prepare the country toward the times that the lng project will move into the operation stage of production and export. all the expectations are that when the lng project will move to the operation stage, the country will benefit from very large taxation, dividend, and royalty incomes. it is of outmost importance that the mistakes of the late 1980's and 1990's are not repeated. 6 / 7 bis - central bankers'speeches the working group is consulting with all the stake holders and get the best available advice, from domestic and international experts, to come up with the best structures known at the present to deal with large foreign exchange inflows. the last thing we should do is not to preempt the working group's deliberations and recommendations. the whole nation has a very strong interest and a lot at stake and we want to ensure that they come up with the best possible solutions to the two subjects they deal with ; the stabilization of the fiscal operations of the government and the savings for future generations, from a project of immense size and importance to the future wellbeing of all our nation. the government in close cooperation and consultation with all economic sectors and civil society, has the time to carefully formulate, and design the implementation tools and mechanisms of its development strategies and plans, to ensure that we commence an era of high economic activity and growth for the nation's future generations. thank you. 7 / 7 bis - central bankers'speeches

the same mistakes. it decided to use some of the excess revenue to repay domestic and off shore debt. this is equivalent to a future generation fund. reducing debt today reduces the burden on future generations when the debt becomes due. it also decided to place some of the excess revenue in trust accounts to be used as a stabilization fund. this decision has had some flaws, the first is that the use of the funds were not tightly controlled and regulated by law. the second is that the funds were deposited with the commercial banks at a very low interest rate, and the bank of papua new guinea has had to defuse them to ensure that the excess liquidity will not result in very high inflation, by using central bank bills ( cbb's ), at a much higher interest rate cost to the benefit of the commercial banks. just to give some indication of the magnitude of the cost to the government and the people, the interest rate paid on the trust accounts by the commercial banks were bellow 1 %, while the cbb's were placed at 5 % and higher, and only this year it has come down to 4 %. the amounts were very large, at the peak the trust accounts reached close to k4. 6 billion and the cbb's issued were k4 billion. every one of us can see how costly this was to the government and the people of papua new guinea. the third problem was that most of the trust accounts were aimed to be spent on development projects and there was and still is very limited implementation capacity, that result in non - efficient use of the funds and in some cases some of the funds were misused. the fourth and last issue i want to point out is the trust accounts offered a stabilization potential. they could be drawn down when the revenues decline. when it came to the test in the sharp decline of the commodity prices in 2008, it did not work. the government incurred a relatively large deficit of k 479 million, which as expected has had an inflationary impact that resulted in a two digit level inflation of 11. 2 %. the generally accepted paradigm by the government and the bank of papua new guinea is that, a very responsible fiscal management, which aims at a balanced budget, or at the worst case at a very low deficit, and a complementary monetary management with the main objective of price stability, defined as low inflation levels, which is a necessary condition for a long term, sustainable economic growth. if properly done, this can benefit the