Public Information Notice No. 05/54

Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with Suriname

April 20, 2005

The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Suriname.¹

Background

Tighter fiscal and monetary policies helped stabilize the exchange rate and moderate inflation pressures in 2003 and 2004. The fiscal deficit narrowed from 6.5 percent of GDP in 2002 to near balance in 2003, while a tighter monetary policy helped to reduce inflation from 28 percent in 2002 to 13 percent in 2003 and 9 percent in 2004. Concurrently, investment and employment strengthened, and real GDP growth accelerated to about 5 percent in both 2003 and 2004. The more stable macroeconomic framework also laid the foundation for the successful launch of the Suriname dollar (SRD) which replaced the Suriname guilder in January 2004.

The policy stance became somewhat more expansionary in 2004. The central government's overall deficit widened to about 1.75 percent of GDP in 2004, owing to a substantial increase in capital expenditure and a drop in domestic fuel taxes. Monetary policy also became somewhat more accommodative, as the Central Bank of Suriname (CBvS) lowered reserve requirements on domestic currency deposits and allowed commercial banks to invest part of their required reserves in low-interest housing loans.

The financial system has become increasingly dollarized in recent years, reflecting the lingering effects on confidence of earlier episodes of price instability, as well as regulatory changes favoring foreign currency intermediation. The share of foreign currency deposits rose from 47 percent to 56 percent of the total deposit base during 2002-04, while the share of private sector credit denominated in foreign currency increased from 42 percent to 54 percent.

The external current account deficit has remained wide, as imports surged in response to large investments in the mining sector during 2003-04 and an increase in consumer demand. While mineral exports have increased rapidly in recent years, exports from non-mining sectors have been stagnant, affected in part by the relatively high level of the real effective exchange rate. The large current account deficit has been more than financed by continued large inflows of foreign direct investment, and international reserves rose by almost 3 percent of GDP in 2004. Weak, albeit improving, debt management and significant arrears on bilateral loans since 1999 have contributed to Suriname's poor international credit rating.

Executive Board Assessment

Directors commended the authorities for their successful macroeconomic management in recent years, and observed that prudent fiscal policies, combined with a cautious monetary policy stance, had helped stabilize the exchange rate and lower inflation, and fostered a solid growth performance in 2004.

Directors stressed that macroeconomic stability should remain a policy priority to strengthen growth and tackle poverty supported by reforms to diversify the economy and improve the business climate. They encouraged the authorities to resist pressures to relax the fiscal stance in light of the upcoming general elections. Over the medium term, Directors underscored the importance of establishing an institutional framework to help avoid procyclical monetary and fiscal responses to terms-of-trade shocks that in the past had led to destabilizing cycles of inflation and currency depreciation, and emphasized the need to reduce expenditure inefficiencies.

In this connection, Directors welcomed the recent strengthening of the fiscal framework. Looking forward, Directors suggested the development and adoption of a medium-term fiscal framework to help cope with the volatility of revenue from mining operations and to broaden the domestic revenue base in order to reduce reliance on mining. They also recommended that steps be taken to amend the fuel pricing mechanism to reduce the vulnerability of tax revenues to world energy prices. They noted that civil service reform and downsizing would be critical for improving the efficiency of the public sector, which was large by international standards, and they urged the authorities to accelerate the Inter American Development Bank-supported project in this area. More broadly, Directors welcomed the statutory limits that had been established for public debt, but cautioned that these limits appeared high given the sensitivity of Suriname's fiscal position to exogenous shocks.

With regard to monetary policy, Directors stressed the importance of maintaining firm control over credit growth, noting that the strong growth of broad money in 2004 could threaten the gains achieved in lowering inflation over the past two years. They encouraged the authorities to follow through with plans to amend the Central Bank Act in order to define more clearly the central bank's scope and responsibility in the provision of credit to the government. Directors also observed that policy implementation would benefit from being anchored more firmly, possibly on a pre-announced monetary target, and by expanding the range of monetary policy instruments.

Directors, pointing to the recent increase in dollarization, urged the authorities to take further steps to protect the banking system from balance sheet risks. They welcomed the central bank's recent moves to reduce the difference between the reserve requirements on foreign and domestic currency deposits, which had favored foreign currency-denominated financial intermediation in Suriname, and encouraged the authorities to tighten prudential regulations and improve banking supervision, with a view to limiting potential currency mismatch risks in the system. Directors viewed that an increase in resources for banking supervision and staff training would be

worthwhile, in light of the recent increase in nonperforming loans and continuing problems at the small state-owned banks. They also welcomed the authorities' interest in participating in a Financial Sector Assessment Program.

Directors commended the successful launch of the Suriname dollar in 2004 and welcomed the steps taken by the central bank that had led to the convergence of exchange rates. They urged authorities to seize the present opportunity to move to a unified and floating exchange rate regime.

Directors stressed the importance of the authorities clarifying relations with external creditors and eliminating payment arrears without delay. Noting that Suriname's erratic payment record in the past had undermined the country's creditworthiness and increased borrowing costs, they welcomed the recent regularization of bilateral arrears with Germany.

Directors underscored Suriname's continued vulnerability to external shocks and encouraged the authorities to implement policies that would support a reduction in reliance on the mining sector. They advised the authorities to simplify licensing procedures and promote a more stable and rule-based climate for investment. They also suggested that the authorities begin designing a comprehensive plan to improve the efficiency of state-owned companies and to foster nonmining private sector activity, including through the privatization of the banana, rice, and forestry companies.

Directors welcomed Suriname's recent accession to the General Data Dissemination System (GDDS). They urged the authorities to address the remaining serious data reporting problems, particularly in the areas of real sector and trade statistics.