BPNG Strategic Plan 2012 - 2015-Finalforwebsite-24thNov11

7/27/2019 BPNG Strategic Plan 2012 - 2015-Finalforwebsite-24thNov11

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Bank of Papua New Guinea Strategic Plan 2012 - 2015

Table of Contents

Foreword 2

Background and Environment 4

Mission, Vision and Values 8

Economic Environment and Challenges 10

Monetary Policy 13

Financial System Stabil ity 16

Payments System 20

Economic Growth 24

Internal Efficiency and Effectiveness 27

Organisational Management Structure 30


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1. FOREWORD

The Banks first four-year strategic plan for 2005 to 2008 outlined strategies required under each

core function of the Bank, as stipulated under the legislation, that were backed up with specific

tasks to be carried out in order to achieve the stated objectives. The strategic plan also de fined the

Banks mission statement and outlined the core values that are to guide and shape the attitudes of

the staff in the discharge of their designated duties towards the realization of the strategy. The Bank

has been successful in implementing many of the initiatives.

This second strategic plan intends to build on those achievements by setting out the Banks strategic

direction for the period 2012 to 2015, under which it will perform its responsibilities by carrying out

ongoing tasks as well as strategic projects and work programs. Considering the evolving economic,

social, political, and physical environment, both internal and external, it sets a path that needs to be

followed in order for the Bank to continue to improve on its performance towards the realization of

the Banks vision and mission. Some of the initiatives are consistent with the National Governments

development intentions as contained in the Vision 2050 document.

The envisaged economic environment, both external and internal, over the next four years poses

some macro-policy challenges, which call for careful and coordinated policy responses.

The development of this Strategic Plan, involved a consultation process, done internally and

externally with some stakeholders. From this process several major key issues stood out and these

will require attention through careful policy management and/or strategic projects. These include:

The importance of continued effective implementation of monetary policy at a cost to the Bank

(note that balance sheet consideration should not be a restraint and constraint to monetary policy

management);

More than ever before, the need for a stronger and better coordination effort between fiscal and

monetary policies in an environment of strong economic growth, increase budget size, rising

liquidity from the already high level, and inflationary pressures;

The need to reform the National Payments System to better serve the economy in an evolving

domestic and global financial system.

Promotion offinancial inclusion of the population in the rural areas, including the non-monetized

parts of the economy, andfinancial literacy for both the rural and urban population, for better

management of money as a mechanism to empower them to contribute to economic growthand increase wealth, consistent with the Governments long term development vision or vision

2050.

Continue to strengthen the Banks internal capacity and improve governance for continued

effective and efficient delivery of services to its stakeholders.

The recent global financial crisis demonstrates that even with all the wisdom and knowledge of how

financial markets and economy work, what we think may happen in the future may not occur. So the

Bank remains alert to the need to revisit this plan and to review its priorities and programs should

the evolving economic environment warrant a change. The strategies outlined in the ensuing pages

provide the direction the Bank should follow in the period 2012 to 2015.


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I am most grateful to all those who contributed to the preparation of this plan, including my fellow

Board members, Dr. Jakob Weiss, Dr. Gae Kauzi, staff of the Bank, the consultants- Mr. Peter

Ferguson and Mr. John Vivian who produced an earlier draft of the plan, and the stakeholders.

Similar participation for the first plan was noteworthy. The ownership and support for the strategies

and initiatives in this second plan will be equally strong. The plan is an important element inensuring we remain forward-looking and prepared to deliver on our core mandate and support

the Governments macroeconomic policies. The implementation of the plan will enable the Bank

to remain true to its vision - a contemporary central bank and regulator excelling in performing

its core functions and making a distinct and valuable contribution to the economic prosperity of

Papua New Guinea.


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2. BACKGROUND AND ENVIRONMENT

Background

The Central Banking Act2000 that superseded the Central Banking Act1973 (amended in 1991 and1993), under which the Bank of Papua New Guinea was established, entails significant changes for

the Central Bank. It establishes the Banks independence, separates debt management from the

conduct of monetary policy, redefines the relationship between the Bank and the Government to

safeguard against excessive financing of budget deficit, and redefines the overall objective of

monetary policy to that of achieving and maintaining price stability. The revisedBanks and

Financial Institutions Act2000, aims at broadening and strengthening the regulation, supervision

and effectiveness of the financial system. The broadening of the supervision scope was further

facilitated by theLife Insurance Act2000 andSuperannuation Act2000 which entrusted the Bank

to also regulate and supervise life insurance companies and superannuation funds.

The enactment of these Acts were important milestones for the financial system in PNG and provide

the foundation for the advancement of the sector. They entail significant changes that give the Bank

the basis to advance in adopting market oriented practices, which are in line with trends around the

world, in the conduct of monetary policy, and in adopting best practices and adapting to changes in

the discharge of its core functions.

Roles and Objectives

The Central Banking Act2000 entrusts the Bank with four core responsibilities, which are to be

carried out for the benefit of the people of Papua New Guinea:

to formulate and implement monetary policy with a view to achieving and maintaining price1.

stability;

to formulate financial regulation and prudential standards to ensure stability of the financial2.

system in Papua New Guinea;

to promote an efficient national and international payments system; and3.

subject to the above, to promote macro-economic stability and growth4.

Governance

The Central Banking Act2000 provides that the primary responsibility of the Governor is to manage

the Bank and direct its affairs. To that end, the Governor has the sole responsibility for the

formulation and implementation of monetary policy, and for regulation of the financial system.

The Board, on the other hand, is responsible for determining policies, other than monetary policy

and financial supervision, of the Central Bank. The Board and the Governor (who is also the

Chairman of the Board) act in partnership to ensure the efficiency and effectiveness of the Banks

operations.

As at 31st December 2010, the Bank has a staff of 300, grouped into eleven Departments. To better

place the Bank to perform its functions in a changing environment (both internal and external) and

meet future challenges, the top management was restructured in 2011 so that there is only oneDeputy Governor and four Assistant Governors responsible for key areas in the Bank.


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A chart showing the organisational management structure, approved in 2011, is provided at the end

of the document.

Stakeholders

In developing this plan and in the discharge of the functions of the Central Bank, the needs of major

stakeholders, the need to enhance and maintain close working relationships with them, and the

provision of quality services to them are all taken as a priority. These stakeholders include the

general public (people), the business community, the financial community, the Government, the

international community and the Banks own staff.

The People

The people of Papua New Guinea are the owners of the Central Bank. A high proportion of the

total population does not have access to banking andfinancial services. It is a joint responsibility of

the Central Bank, the Government and the financial intermediaries to create a policy environmentand a program that will enable financial services to reach these people so that the monetized and

financially inclusive population is greatly increased over time.

Ultimately, there should be a safe, sound, and prudently managedfinancial system for the public to

have confidence in and conduct their activities. To this end, the people need:

notes and coins of the domestic currency in circulation that are authentic, in good condition, and

are in ready supply;

access to banks and other financial institutions and to payments arrangements, which are

effi

cient, well managed and properly supervised;access to efficient and cost effective remittance services;

access to sound and reliable economic statistics and analysis;

stability (no large fluctuations) in the value of their income savings through the implementation

of sound monetary policy, assisted by prudent fiscal policy;

effective communication of the Banks monetary policy stance and other relevant macroeconomic

policies, and the supporting realized and forecast economic data so that they can make informed

decisions;

information on the financial system and confidence that banks and financial institutions are

sound and stable, as well as transparent in their dealings with the public;

assurance that the other policies and operations of the Central Bank are for the benefit of the

people; and

confidence in the Banks integrity and transparency.

The Business community

The business community of the private sector contributes greatly to economic activity and growth

of the economy. The business houses need:

a stable and predictable inflation environment to enable it to plan its income streams and

investments; anda stable and predictable exchange rate to enable it to plan its operations in the domestic and

international markets.


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The Financial community

Commercial banks, finance companies, savings and loan societies, micro banks, general and life

insurance companies, superannuation funds, investment managers, fund administrators, and the

National Development Bank are all intermediaries in; the transmission of monetary policy; playingtheir respective roles of advancing credit, facilitating deposit and withdrawal transactions; facilitating

payments; and making the financial system work.

For the advancement and maintenance of a sound, prudent, efficient and low cost financial system;

monetary policy andfiscal policy must operate in tandem so as not to undermine financial

stability, affect the price of financial instruments, and retard its development and

sustainability;

the ability to fund long-term development borrowing requirements with shorter-term liability

holdings is enhanced;

the prudential framework within which the intermediaries work is evenhanded, can addressand minimize risks and can serve the public interests;

a two-way process of effective supervision by the Central Bank and adherence by the

intermediaries to prudential framework is maintained and enhanced through application of best

practices in line with the evolving financial environment;

the central bank and the intermediaries work together to promote a payment system that is

modern and efficient; and

the intermediaries must have access to accurate and up-to-date financial and economic data and

information and forecasts to assist their business decisions, and also contribute to the provision

of these data and information.

The Government

The Bank is the banker andfinancial agent for the Government. It provides banking services to the

Government, its departments and statutory bodies. It also administers (issues, conducts auctions,

maintains a registry and provides reports for) the Governments debt instruments. The implementation

of the Treasury bills auctions and Inscribed stock tenders are part of liquidity management from the

Banks perspective.

While maintaining operational independence, the Bank will;

work closely with the Government in the coordination and implementation of monetary and

fiscal policies to ensure adherence to annual budgets and effective liquidity management for

macroeconomic stability;

enhance the efficiency with which it serves the Government; and

ensure that its strategies are consistent with the governments own long-term development

vision for the country.

Regional and International Organisations

The Bank has good and cordial working relationships with many overseas central banks and

prudential regulatory authorities, as well as major international financial institutions such as theIMF, World Bank and its subsidiaries, and ADB.


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In its dealings with these stakeholders, the Bank will:

endeavour to be responsive and efficient, and maintain the relationship for the mutual benefit

of both parties; and

participate in programs that will assist the Bank deliver on its core functions.

Bank Staff

Staff are central to the discharge of the Banks functions, the implementation of this strategic plan,

and the success of the organization.

In carrying out their responsibilities, staff:

should abide by and demonstrate the stated values of the Bank;

be engaged in training programs that will enhance their skills and enable them to continue to

improve on their performances; and

be rewarded appropriately so that the Bank can retain quality staff.


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3. MISSION, VISION AND VALUES

The Mission, Vision and Values of the Bank of Papua New Guinea were defined in 2005. The Bank

Board subsequently endorsed these.

In the development of this new plan, the Banks Mission, Vision and Values were revisited to see

whether they properly describe how the Banks role and culture are perceived in the period ahead.

This re-examination has essentially confirmed the relevance of the 2005 statements.

Mission

The Bank of Papua New Guinea is the central bank and prudential regulator (for commercial banks

and specifiedfinancial institutions) in Papua New Guinea.

The mission statement is drawn directly from the Central Banking Act2000.

Mission

to serve the people of Papua New Guinea by conducting effective monetary policy and

maintaining a soundfinancial system. We will act at all times to promote macro-economic

stability, provide a first class payments system and help foster economic growth of our

country

Vision

The Banks vision needs to be aligned with the legislated mission, and also provide a guide forforward planning.

Vision

a contemporary central bank and regulator excelling in performing its core functions and

making a distinct and valuable contribution to the economic prosperity of Papua New

Guinea

Values

The values represent a set of principles that guide the actions and shape the attitudes of staff.

Collectively developed by the managers, they have been adopted by staff and are widely displayed

and communicated internally and externally. They define the Banks culture, provide leadership

and direction and send a clear message to stakeholders of the Banks commitment to the mission of

the Bank. The adoption of these values, and the transfusion of them into daily behavior of staff, is

a critical element in the overall transformation, and development and implementation of this plan.


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Values

Value Generally accepted principle

Integrity With integrity we build good governance and credibility

Transparency With transparency our decisions stand scrutiny

AccountabilityThrough accountability we take responsibility for our decisions and

actions

Efficiency With ef ficiency we produce quality results, on time and on budget

TeamworkThrough teamwork we benefit from sharing skills, knowledge and

experience

Professionalism Through professionalism we strive for best practice

These values guide the way staff:

Carry out work;

Make decisions;

Relate to others internally and externally;

Design structures and procedures; and

Set priorities.


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4. ECONOMIC ENVIRONMENT AND CHALLENGES

The Environment Ahead

The Central Bank operates in a dynamic and evolving environment. Therefore, the Bank willendeavour to employ best practices in line with trends around the world and adapt to changes in the

discharge of its core functions that are specified by statute and/or practice. The strategic planning

framework must be flexible enough to accommodate change.

The period of this strategic plan is likely to be characterised by an environment in which there is:

a slow recovery of the international financial system and major world economies to stability and

growth;

an increased focus on financial regulation and global exchange rate imbalances;

an upsurge in domestic economic activity, generated largely by the development of new resource

projects, and a lengthy period of relative macroeconomic stability;

an increase in the volume of PNGs trade with the rest of the world, an increase in capital flows

(both inflow and outflow), and in foreign exchange earnings;

an increase in liquidity level in the banking system and the economy that will pose a major

challenge for the Central Bank in liquidity management and the associated implications for

aggregate demand, exchange rate, and macroeconomic stability;

a serious need for close working relationship between the Bank and the Treasury and Finance

Departments in the coordination of monetary andfiscal policies for a disciplined management

of the revenue windfall from the development of the resources and effective liquidity management

for sustainable economic growth and macroeconomic stability;

the potential for consolidation of a two-speed domestic economy, with expanding mineral,transport, manufacturing and construction sectors, and slower growing agricultural and

traditional sectors;

continued expansion and product innovation in the developed part of the financial system,

despite concentration and limited competition;

a rapid growth in the use of technology, including mobile phones and the internet;

increased public awareness of the costs offinancial services and consumer protection; and

an increased national impetus and determination to improve financial inclusion for the bulk of

the unbanked PNG population into the financial sector.

Key Challenges

The economic environment in the next four years will create policy challenges for the Bank.

Amongst a range of issues, six key strategic and management challenges have been identified, to

which attention needs to be given.

Monetary Policy Management

Increased investment inflows, trade-related foreign exchange inflows, and Government spending

associated with resource project developments will lead to further increases in liquidity levels in the

banking system and the economy and threaten the monetary policy objective of price stability. Forthe Bank to effectively manage liquidity at a sustainable level that is neither inflationary nor


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hindering economic growth, it will require:

sound monetary policy formulation;i.

appropriate liquidity management strategies using current policy instruments;ii.

development of new instruments where necessary; andiii. a closer coordination between the Governments debt management and spending, and theiv.

Banks conduct of monetary policy.

Unless the windfall taxation and other revenue streams from the development of PNGs major

resource projects are prudently managed, macroeconomic stability will come under severe pressure.

A sound and disciplinedfiscal management regime in this period of more resource development

could entail an arrangement, such as a Sovereign Wealth Fund, whereby part of the windfall revenue

is saved offshore and draw downs are linked to the annual budget process. The Government should

refrain from the use of Trust Accounts to deposit windfall tax revenue.

Developing strategies such as fostering efficient and effective coordination between the Bank andrelevant government departments, would be needed for sound macroeconomic management.

Financial Market and Foreign Reserve Management

Foreign reserve levels are at historical highs and are expected to increase further with more capital

inflows and taxation income from the resource sector. This has and will continue to contribute to

the excessive level of liquidity. Therefore the Bank will need to:

have sound research and analysis of the developments;i.

refi

ne its monetary policy implementation through use of current and new instruments;ii.adopt and adapt best practices in foreign exchange reserve management under evolvingiii.

external and domestic financial market conditions and in settlement banking and payment

services;

lead and/or assist in the development and deepening of the financial markets, including theiv.

foreign exchange and the capital markets in PNG.

Payments System Reform

A large proportion of the population of PNG is unbanked or has limited access to the formal

financial systems and services. Much of the country is still subsistence-based and cash money is

predominantly used as the medium of exchange, following the era of bar ter trade. The Bank will

have to reform the countrys payments system to ensure a safe, efficient, reliable and cost-effective

system for the general public, businesses andfinancial institutions within PNG. This will include

the adoption of modern technology, consistent with advances in payment systems elsewhere.

There is a need to improve financial inclusion of the population, reduce costs of transactions and

improve efficiency with respect to timely clearing of transactions, reduce risks, and adapt the

regulatory framework.


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Supervision of the financial system and its development

The Bank will continue to improve on its manpower and application of appropriate regulatory and

prudential framework for the supervision of the licensed intermediaries. A two-way process of

effective supervision by the Central Bank and adherence by the bank and non-bankfi

nancialinstitutions to the prudential framework is maintained and enhanced through the application of best

practices.

Financial inclusion and financial literacy

The Bank recognises that expanding financial services can encourage the participation of more

Papua New Guineans, especially those in rural areas and urban settlements, in development activities

in both the formal and informal sectors of the economy, and that the benefits of growth and

technology need to be widely shared. Many Papua New Guineans find themselves on the fringes of

the monetary economy with little understanding of, or access to financial services. Improvement in

the proportion of the banked population and the financial literacy of this population will empowerthem to improve outcomes in savings, investment and sharing of the benefits of economic growth.

The Bank, given its various roles and functions, is well placed to assist in this endeavour through

the advancement of micro-finance, internet and mobile phone banking initiatives and other programs.

Achieving this strategy would meet the Governments long-term vision of an educated, and

financially inclusive and literate population.

Upgrading internal capacity

A key challenge for the Bank is to ensure that it has the capability, adaptability and result-focusnecessary to deliver on the mandated and prescribed goals, that it is operationally efficient and

effective, and a high standard of internal governance is demonstrated and maintained.

The Bank will endeavour to build on its internal staff capacity and knowledge, retain qualified staff,

anticipate future needs, and ensure that all the service and support arms of the organisation human

resources, accounting/budgeting, IT, risk management, and corporate affairs - work cohesively to

support the four core objectives. All these present a special challenge for the Bank in the context of

an increasingly competitive labour market, and will require the development of innovative and

workable strategies.


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5. MONETARY POLICY

Formulate and implement monetary policy with a view to achieving and maintaining

price stability

It is now widely accepted that the achievement and maintenance of price stability over a period of

time can lead to macroeconomic stability, increase business confidence and promote economic

growth.

To formulate effective monetary policy, sound analysis that covers updated data and information on

market conditions, understanding of the transmission process, based on research that encompasses

surveys, forecasting models and economic analysis, must be pursued.

To implement monetary policy, effective use of current instruments and development of new

instruments, continued refinement of the operations for the conduct of monetary policy are required.

In addition, policy measures to assist in the deepening of the financial market must be pursued andare necessary to improve the efficiency of the markets, which will improve the effectiveness of

monetary policy. A critical strategy for the effectiveness of monetary policy will be a close working

relationship between the Bank and the Treasury and Finance Departments in the coordination of

monetary andfiscal policies.

To help ensure sustainability of policy, prudent management of the Banks portfolio of domestic and

foreign assets and a tradeoff between the risks and returns involved is required to optimise the

benefits for the Banks owners (the people of PNG). Prudent management of these assets would

make the Bankfinancially independent and provide the impetus for it to operate more effectively in

financial markets.

To ensure a good level of dissemination, understanding and appreciation of the Banks monetary

policy stance, continued improvement and refinement in the ways of communication and commentary

to the stakeholders is required.

From these, five key strategic goals are identified.

Continue to formulate appropriate monetary policy, based on enhanced understanding1.

of the dynamics of the markets and transmission of monetary policy through sound

research and analysis.

Effective use of current policy instruments, review and refinement of the operational2.

framework and process, development of new instruments in line with evolving markets

and trends around the world.

Promote deepening of the financial markets for efficiency and effectiveness of monetary3.

policy.

Foster close working relationship between the Bank and the Treasury and Finance4.

Departments in the coordination of monetary and fiscal policies.

Enhance communication of monetary policy to the general public for better5.understanding and appreciation of the policy.


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PRINCIPAL OBJECTIVE ONE

Formulate and Implement Monetary Policy to Achieve and Maintain Price Stability

STRATEGY ACTION

Continue to formulate1.

monetary policy, based on

enhanced understanding of

the dynamics of markets and

monetary policy transmission

mechanism, through sound

research and analysis.

Continue to develop and enhance research

capacity and analytical input into monetary policy

formulation.

Refine and enhance current forecasting models and

research modules (methods) and processes.

Redefine price stability under evolving economic

and market conditions.

Improve, expand, make better use of data, and re-

assess policy data needs, including strengthening

of monetary data and business surveys, balance ofpayments, national accounts, and price data.

Effective use of the current2.

policy instruments, review

and refine the operational

framework and process, and

develop new instruments in

line with evolving markets

and trends around the world.

Improve liaison and dialogue with the Treasury &

Finance Departments to obtain reliable Government

cashflow for liquidity management.

Enhance understanding of the open market

operation process and market conditions to enable

decision making in liquidity management.

Develop and introduce new policy instruments

and processes where necessary and appropriate asmarkets and economic conditions evolve over time.

Review and revise exchange rate intervention

strategies where appropriate.

Utilise a TAP facility for trade of securities in small

amounts to encourage small investor participation

and enhance the monetary transmission process.

Integrate the securities settlement arrangements into

wider national payments system reforms.

Support the development of the secondary

securities market and enhance liaison with market

stakeholders to ensure wider participation in thefinancial markets.

Promote deepening of3.

the financial market for

efficiency of the market and

effectiveness of monetary

policy.

Periodic assessment of market developments

and economic conditions to determine deepening

measures and changes.

Introduce policy measures where appropriate and

necessary, including in the exchange rate market, to

improve competition.


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Foster close working4.

relationship between the

Bank and the Treasury and

Finance Departments in the

coordination of monetary and

fiscal policies.

Hold consultative meetings regularly and improve

data reliability from both sides to aid policy

decisions.

Hold regular seminars to improve understanding

of staff on the workings and complexities of the

other partys work area and relationship between

monetary andfiscal operations and their impact on

the economy, to aid policy decisions.

The Heads of the three institutions to hold monthly

meetings, between themselves and with the Minister,

to update each other on the measures taken and

implementation of decisions and their implications/

impact.

Contribute to the framing of the National Budget and

MPS through regular exchange of data and forecasts.Make combined presentation/submission

to Government Committees or Cabinet on

macroeconomic issues where necessary.

Enhance communication5.

of monetary policy stance

to the general public for

better understanding and

appreciation of the policy.

Have seminars or public presentations on

Monetary Policy Statement or any monetary policy

announcement after it is released.

Explore ways to improve the public communication

activities on monetary policy stance and changes.

Continue to publish and disseminate policy issues,

research papers and other publications.


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6. FINANCIAL SYSTEM STABILITY

Formulate financial regulation and prudential standards to ensure stability of the

financial system

A stable and efficient financial system is important for the smooth working of the various markets

(goods and services, financial, etc) and the economy. It can: improve the effectiveness of thefinancial

intermediation process, and thereby enhance the transmission process of monetary policy; and

contribute to overall economic growth, wealth and welfare of the population.

With little exposure to the troubled international financial institutions, the PNG financial system

has largely withstood the severe effects of the global financial crisis that beset financial systems in

many advanced, emerging and developing economies, and whose uncertainties still overhang the

worldfinancial system as this plan is being developed. Nevertheless the lessons of that global crisis

cannot be ignored. The domestic financial system needs to be prepared for such occurrences:

contagion can spread quickly across national boundaries, exchange rate relativities can shift rapidly,

risky financial products and non-prudent practices can quickly emerge, and cohesion needs to exist

between overall financial stability and the prudential supervision offinancial institutions. Recent

experiences abroad suggest it is also important to pay close attention to the supervision of systemically

important institutions, of which PNG has several.

The Bank will continue to develop innovative approaches, best market practices and upgrade staff

skills to effectively supervise an expanding financial system, including a growing number of small-

scale local savings and credit institutions.

With this background and a review of all the initiatives set out in the previous strategic plan, thefollowing areas will continue to be given attention.

Development of an internationally acceptable best practice prudential regulatory framework is well

advanced. For the banks, superannuation funds and life insurance firms that the Bank supervises,

appropriate legislative provisions, and directives and standards are in place. Ten prudential standards

for banks and six for superannuation funds are in force. There is further work to be done in

developing and completing new bank standards and to strengthen others. The strategic challenge is

to ensure that all standards continue to conform to best practice by keeping abreast of evolving

international benchmarks, with adaptation to local circumstances where required.

The Bank will develop the requirements and standards for mobile phone banking service and ensure

the service is efficient and low-cost and that the interest of the public is safeguarded.

While tightening the compliance regime, the Bank aims to continue the strategy enunciated in the

previous plan to gradually move the regime towards some reliance on internal risk management, by

requiring the managers and directors of financial service providers to properly perform their

fiduciary responsibilities, while not moving into a regime of self regulation.

The current regulatory framework for small-scale credit and savings institutions will be reviewed,

with a view to having a regulatory framework that will promote linkage between Papua New

Guineans and the widerfinancial system, and which will enhance public confidence and operationalstandards.


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At the macro-level, the Bank will endeavour to improve its analysis of systemically critical

institutions and pay more attention to issues of overall financial system stability. Concentration and

limited competition are issues of interest as well as pressures from resource project development.

Finally, experience for the past few years has confi

rmed that high quality and experienced prudentialsupervisors are essential for effective supervision and maintenance of a soundfinancial system.

Enhancing the skills of supervision staff is essential for the Bank to deliver on its strategic goals in

a rapidly changing financial environment.

Five strategic goals are identified from the above.

1. Consolidate and improve the current staff strength, and enhance staff skills and

supervisory methods and practices of the Bank.

2. A two-way process of effective supervision by the Central Bank and compliance by

the intermediaries to prudential framework is maintained and enhanced through the

application of best market practices.

3. Continue to encourage and require financial institutions to strengthen their risk

management capabilities.

4. Develop an analysis offinancial system stability and resilience of systematically

important institutions, to enable the Bank to monitor developments.

5. Increase focus on the regulation and supervision of small institutions that cater for

Papua New Guineans involvement infi

nancial inclusion.


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PRINCIPAL OBJECTIVE TWO

Formulate Financial Regulations and Prudential Standards to Ensure Stability of the

Financial System

STRATEGY ACTION

Consolidate and improve1.

on the current staff strength,

and enhance staff skills and

supervisory methods and

practices of the Bank for

effective supervision.

Upgrade staff skills and competency level.

Continue to deepen our technical cooperation with

other supervisory agencies.

Refine current supervisory procedures, methods

and practices in line with best market practices.

Ensure that standards remain best practice.

Consolidate the application of current on-site and

off-site supervisory methods on a timely basis.

Continue to maintain and2.

introduce new prudential

standards, where necessary,

and ensure compliance by the

intermediaries to the prudential

framework is maintained.

Maintain on-going review of prudential standards

to assess application to PNG.

Review bank standards against Basle II and

III capital adequacy, leverage and liquidity

requirements.

Complete issue of standards on key risks and

strengthen existing standards.

Complete the issue of life company standards.

Develop regulation and standards on mobile phone

banking.Finalise cross-border understandings with other

regional supervisors and monitor potential cross-

border institutional stresses.

Continue monitoring of the non-supervised fringe

financial sector

Maintain liaison with Financial Intelligence Unit

on money laundering issues.

Expand program of on-site reviews, strengthen

on-site techniques and improve response times to

supervised entities.

Enforce submission and timeliness of returns bysupervised entities.

Enforce adherence to legal superannuation

requirements by non-complying employers.

Ensure new applicants seeking market entry are

competently managed with appropriate business

models.

Implement electronic data transmission and

monitoring from supervised entities as part of an

expanded data warehouse.


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Continue to encourage and3.

require financial institutions

under the Banks supervision

to strengthen their internal risk

management capability, while

not moving into a regime of

self regulation.

Ensure risk protocols exist for all classes of

supervised entities.

Enhance on-site assessment of internal risk and

governance protocols.

Develop an education program to assist risk

management.

Enhance the current program of prudential linkage

with external auditors.

Develop an analysis of4.

financial system stability and

resilience of systematically

important institutions.

Adopt and adapt reporting standards and

approaches to system stability.

Develop system stability guidelines and reporting

framework.

Increase focus on the5.

regulation and supervision of

small institutions that cater

for Papua New Guineans

involvement in financial

inclusion.

Increase resources devoted to development and

encouragement of micro-finance, mobile phone

banking service, and locally based savings and

credit intermediaries.

Adapt prudential standards to the micro

environment.

Consider appropriate supervision arrangements

for unregulated micro-entities.


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7. PAYMENTS SYSTEM

Promote an efficient national and international payments system

Payment system is part of the corefi

nancial infrastructure that underpins afi

nancial system and theeconomy as a whole. Payment systems enable transfers andflows of funds between banks,

institutions, business houses and individuals. An efficient, low-cost and sound payments system can

be a catalyst for effective monetary policy transmission and overall economic management.

The Bank has statutory responsibilities and operational roles in the payments system:

It oversees the nations payments system;

It issues currency notes and coins, and coordinate the distribution of currency throughout the

country;

It conducts Exchange Settlement Accounts which are used to settle obligations between the

Bank of PNG and commercial banks;

It is the banker to the National Government;

It acts as the central clearing house for the daily clearing of cheques and other inter-bank

settlements;

It buys, sells and settles government securities with market participants;

It buys, sells and trades in foreign currencies and settle these electronically with off-shore

institutions; and

It manages the collateral of participants in the system to meet their obligations;

Payments systems globally are undergoing rapid changes as more people have access to electronic

means offinancial transactions. The Internet and mobile telephones are becoming increasinglyimportant means of transactions and they provide a means to take banking services to the unbanked

rural areas. More and more of these services are being provided by institutions other than banks.

PNGs payments system should take advantage of these changes to take financial services to the

unbanked population in the rural areas.

In this area (payments system) of responsibility, the Bank has two strategies in this plan. The first

is to reform the countrys payments system. This is a major project, with series of parts, which will

impact on individuals, businesses andfinancial institutions throughout the country. In the domestic

part of the payments system, PNG is heavily reliant on cash and cheques as a means of payment and

the project aims to support the introduction of new measures of electronic payments and improve

linkages between various parts of the payments system.

The objectives of the project are to:

improve financial inclusion of the population;-

reduce costs of transactions and improve efficiency with respect to timely clearing of-

transactions; and

reduce risks.-

The Bank is ensuring that sufficient resources are devoted to the project over the next four years.


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Developing an appropriate vision and policy strategy, and implementing the required operational

arrangements are essential. To guide the way forward in the reform, the Bank in consultation with

stakeholders developed a Vision and Strategy for the future PNG National Payments System (NPS)

in 2008. The project will be given priority in the time span of this plan.

The second component involves the currency. Notes and coins are still the primary means of

conducting financial transactions for most of the population. PNG is the second country after

Australia to have all its notes in polymer. The security of the Papua New Guinea currency note/font

issue remains very high with no incidence of counterfeit of polymer notes since 1991 when polymer

notes were first introduced. The Bank will continue to ensure there is adequate supply of notes and

coins in circulation to meet public demand, and maintain good quality currency as part of its Clean

Note Policy.

Five strategic goals are identified.

1. Reform the current payments system, with enabling legislation where appropriate, to

improve efficiency with respect to timely clearing of transactions, reduction in costs

and risks, within PNG and with the rest of the world.

2. Reduce the reliance on cash and cheque payments and move towards electronic

payments.

3. Improve the linkages between the various parts of the payments system.

4. Improve and advance the payment system services, including mobile phone banking,

to the rural areas to increasefi

nancial inclusion of the population.

Continue to issue quality bank notes and coins to meet public demand.5.

PRINCIPAL OBJECTIVE THREE


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Promote an efficient national and international payments system

STRATEGY ACTION

Reform the current1.

payments system, with

enabling legislation

where appropriate, to

improve efficiency

with respect to timely

clearing of transactions,

reduction in costs and

risks.

Define clearly the Banks payments system objectives and

its role to reinvigorate the process of reform.

Introduce appropriate legal structure to enable the reform

underpinning the payments, settlement and clearing

systems.

Outline the necessary parts of reform and establish the

steps needed to be undertaken.

Procure and operate a system to process large value and/or

time-critical payments and other interbank payments.

Issue industry standards for cheque security and encourage

greater use of mechanized and electronic payments to

improve the efficiency of cheque clearing process.Establish operational guidelines for new payment and

settlement arrangements.

Facilitate the automation and integration of government

collections and disbursements into the National Payments

System.

Implement and manage securities clearance, settlement and

depository systems which are safe, efficient, and compliant

with international standards and support capital market

development.

Promote efficient international remittances and other cross-

border transactions.

Reduce the reliance2.

on cash and cheque

payments and move

towards electronic

payments.

Promote retail payment systems, including mobile

banking, which are safe, efficient and convenient.

Support the provision of payment instruments and services,

which are widely accessible and affordable.

Encourage establishment of common nationwide networks

to net and clear ATM, EFTPOS and other payment

arrangements.

Reduce risks by moving to real time settlement of inter-

bank transactions.

Improve the linkages3.

between the various

parts of the payments

system.

Under the reform, identify and correct for lack of linkages

in the various parts of payments system.

Work with relevant stake holders to remove barriers for

efficient and low cost payments transactions.


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Improve and advance4.

the payment system

services, including

mobile phone banking,to the rural areas to

increase financial

inclusion of the

population.

Identify and undertake programs that will expand the

payments service to the rural communities.

Promote the expansion of mobile phone banking and micro

finance banking to the rural population.

Identify and/or encourage the participation of a broad

range of payment service providers under the supervision

of the Bank.

Issue standards for licensing and supervision of mobile

banking.

Issue regulations under relevant legislation to supervise

mobile banking.

Continue to issue5.

quality notes and coins

to meet public demand.

Maintain and implement the clean note policy,

Engage in continuous dialogue with all stakeholders.

Carry out analysis of demand and supply to optimiseprocurement and storage.

Conduct and research and develop currency production and

issue strategies

Improve efficiency of note and coin distribution/and

destruction.

Upgrade marketing of commemorative and special issue of

notes and coins.

Expand public communication and education in currency

matters.

Research and develop the decision process on the

substitution between currency and electronic or mobilemoney.

Reduce risks by introducing real time settlement of

currency issuing processes.


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8. ECONOMIC GROWTH

Subject to the three core objectives, promote macro-economic stability and economic

growth in Papua New Guinea

A central bank cannot contribute directly to economic growth but it can influence financial and

economic conditions, through the conduct of monetary policy and the implementation of other

functions of central banking, that can lead to macroeconomic stability, which in turn is conducive

for investment, capital formation and economic growth. Achievement of price stability, financial

system stability, and sound and efficient payments system can lay the foundation for macroeconomic

stability and economic growth. Price stability is a crucial part of macroeconomic stability as it

encompasses stable low inflation, stable interest rates and exchange rates, which can give confidence

to participants in economic activity, for their forward planning and investment.

Macro-economic stability and economic growth objectives can be in conflict as they may not be

attainable at the same time. There is a trade-off between the two objectives. This is especially so in

the current and future environment that confronts Papua New Guinea. While the LNG project and

other resource development projects provide an opportunity for the PNG economy to achieve

significant growth, the increase in economic activity and aggregate domestic demand can be

inflationary. The challenge for the Bank is to carefully assess and evaluate the trade-off between

higher economic growth and inflation so as not to discourage domestic economic activity and ensure

that inflation does not spiral out of control.

The Bank can also do things within the domain of its responsibilities to help Papua New Guineans

to be a part of the development process. In this regard, the Bank can promote the inclusion of more

people in financial services and contribute to theirfinancial literacy. This will in the long run leadto better management of money and capacity which can increase the participation of people in

economic activity and thus in economic growth. Promotion offinancial inclusion is consistent with

Papua New Guinea Vision 2050 plan.

To support the Governments longer-term vision, especially in the area of wealth-creation, specific

assistance in the area offinancial literacy programs will be encouraged to bring more Papua New

Guineans within the orbit of the broader financial system. This focus on improving financial

inclusion andfinancial literacy is consistent with world trends. The Bank intends to continue to

support the growth of savings and loan societies, micro-finance institutions, and mobile phone

banking by ensuring they can flourish within an appropriate legal framework and supervisory

guidelines, assisted by training resources and adequate field support. In this way financial capability

can be promoted. Also, more public awareness is required for people to know various financial

products and services available with financial institutions. Our national payments system strategy

will contribute by facilitating future developments in financial markets.


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Two strategic goals are identified

1. Assess and evaluate the trade-off between higher economic growth and inflation and

ensure appropriate conduct of monetary policy that will not discourage growth in

domestic economic activity while ensuring that infl

ation does not spiral out ofcontrol.

2. Promote the inclusion of more people in financial services and contribute to their

financial literacy and capacity.


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SECONDARY OBJECTIVE

Promote macro-economic stability and economic growth

STRATEGY ACTION

Assess and evaluate the trade-off1.

between higher economic growth and

inflation and steer a course, in the

conduct of monetary policy, so as not

to discourage economic activity and

ensure that inflation does not spiral out

of control.

Maintain a close relationship with all the

agencies entrusted with fiscal operations

and macroeconomic management to ensure

compatibility of macroeconomic policies.

Carry out sound analysis of economic

developments and conditions so that

appropriate decisions are made on the balance

between macroeconomic stability, particularly

price stability, and economic growth.

Promote the inclusion of more people2.

in financial services and contribute

to the development of theirfinancial

literacy, which will then contribute to

the development process.

Encourage widerfinancial sector

understanding and participation under the

Vision 2050.

Work with other agencies andfinancial

institutions to develop effective financial

inclusion and literacy programs in schools.

Develop strategies to improve the rural

penetration offinancial services, including

mobile phone banking.

Ensure national payments system reformssupport financial inclusion.

Continue promoting public awareness to

discourage investment in fast money scams

and borrowing from loan sharks.

Direct banks and otherfinancial institutions

to establish and manage codes of good

practice, standards of service and simply-

explained information on their products.

Ensure banks have appropriate internal

mechanisms to resolve customer complaint

issues.Support the growth of savings and loan

societies, micro-finance institutions, and

mobile phone banking service by ensuring

they can flourish within an appropriate legal

framework and supervisory guidelines,

assisted by training resources and adequate

field support.


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9. INTERNAL EFFICIENCY AND EFFECTIVENESS

Foster an efficient and cost effective organisation with motivated and skilled staff

The Bank recognizes that effi

cient and effective management and application of resources, includingskilled manpower, is important for the successful delivery of the specified core objectives. These

values underpin the legislative responsibility of the Bank to act for the advantage of the people of

Papua New Guinea.

The Bank re-configured decision-making at the senior level through the restructure of its management

and redefining its committees and their charters, sought to inculcate a performance-based culture,

and proposed a series of initiatives to improve efficiency and reduce costs in the day- to-day

administration and processes. It will continue to review the organisational structure at reasonable

intervals to ensure the structure responds to the Banks strategic and operational needs. Project

management skills have been strengthened, as has the identification and management of internal

risks. Consolidation in the use of appropriate information technology systems and introduction of

new ones to enhance efficiency in the functions of the Departments is on-going. The internal budget

process also reflects cost-effectiveness and project implementation.

Five strategic goals are identified for internal efficiency and effectiveness.

Ensure efficient and effective resource management.1.

Apply high standard of good governance.2.

Maintain and retain high level of staff skills in line with changing work3.

environment.

Ensure our information technology systems and other support services4.

meet the Banks business and operational needs.

Ensure the physical environment is appropriate and conducive for an efficient operation.5.


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SECONDARY OBJECTIVE

Foster an efficient and cost effective organisation with motivated and skilled staff

STRATEGY ACTION

Ensure efficient1.

and effective

resource

management.

Extend the budget horizon and improve linkage between work

plans, budget and project implementation.

Improve strategic oversight of balance sheet projections.

Implement guidelines on administrative expenditure growth.

Strengthen project management capacity and implementation.

Continue assessment of cost savings through outsourcing of non-

core functions.

Enhance efficiency in all operations and processes.

Identify and apply strategic performance measures.

Apply high2.

standards of good

governance.

Develop and communicate a statement of corporate

governance, which reflects Bank core values.

Strengthen awareness of internal code of conduct/ethics for

staff.

Enhance and extend the risk management framework

to achieve comprehensive enterprise risk management,

encompassing the ownership and management of all tangible

and intangible risks.

Develop and apply business continuity planning.

Establish clear procedures for dealing with alleged breaches of

the corporate governance statement and ensure all allegationsof substance are dealt with according to these procedures.

Enhance external communication activities website,

publications, press statements.

Build internal legal support capacity.

Maintain high3.

level of staff

skills through a

capability and

succession plan,

in line with

changing work

environment.

Reinforce organisation values and ensure conformity to the

values by staff.

Strengthen implementation of performance management system

and reward structure.

Improve internal communication and an appropriate

communications strategy.

Identify capacity shortfalls throughout the Bank and address

bank-wide training needs and priorities.

Explore remuneration flexibility against appropriate external

benchmarks to improve staff retention and meet staff

expectations.

Develop long term career paths for staff.

Develop and implement succession planning.

Review all policies relating to human resources to ensure they

serve future organisational needs.


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Ensure the4.

information and

communication

technology

systems and

support services

meet the Banks

business and

operational

needs.

Continue to align technology strategy and architecture to

support business operations and all major projects and sub-

systems.

Optimise services and risk management in alignment with

industry best practice.

Support development of an organisation wide intra-net,

management information system, data warehouse and payments

systems.

Instill a high quality service and support culture.

Develop a communication strategy for the Bank Website and

other information technology.

Ensure the5.

physical

environment

is appropriate

and conducive

for an efficient

operation.

Complete the review on the Bank building premises to improve

office space for Departments.

Ensure internal and external security arrangements protect the

bank and its staff.

Seek efficiencies through outsourcing of non-core functions.


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OrganisationalManagement

StructureoftheBank


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Notes;

BPNG Strategic Plan 2012 - 2015-Finalforwebsite-24thNov11

Documents