The main economic problem facing PNG is high inflation.

a)
The main economic problem facing PNG is high inflation.
Justification: The annual inflation rate is 11.5%, which is significantly high. This is further supported by the 18% commercial bank lending growth (described as "very high"), indicating an excessive money supply and aggregate demand contributing to inflationary pressures.

$$\boxed{\text{High inflation (11.5\%)}}$$

b)
BPNG should implement a contractionary monetary policy (also known as tight monetary policy).
Explanation: This policy is appropriate because the economy is experiencing high inflation and rapid credit growth. Contractionary monetary policy aims to reduce the money supply and aggregate demand in the economy, which will help to curb inflation.

$$\boxed{\text{Contractionary monetary policy}}$$

c)
Here are two specific monetary policy actions BPNG should take and their transmission mechanisms:

1. Increase the Kina Facility Rate (KFR).

   • Transmission Mechanism: An increase in the KFR (the policy interest rate) makes it more expensive for commercial banks to borrow funds from the central bank. This, in turn, prompts commercial banks to increase their own lending rates to customers. Higher lending rates discourage borrowing by businesses for investment and by consumers for consumption. This reduction in investment and consumption leads to a decrease in overall aggregate demand in the economy, which then helps to reduce the high inflation rate.

2. Increase the Current LGS ratio (Legal/Liquid Asset Requirement).

   • Transmission Mechanism: By increasing the LGS ratio, BPNG requires commercial banks to hold a larger percentage of their deposits as reserves, either with the central bank or in liquid assets. This reduces the amount of funds that commercial banks have available to lend out to the public. A decrease in the available loanable funds restricts the money supply and makes credit scarcer and more expensive. This reduction in credit availability and higher borrowing costs leads to lower investment and consumption, thereby decreasing aggregate demand and ultimately helping to bring down inflation.

$$\boxed{\text{1. Increase KFR, 2. Increase LGS ratio}}$$