Public Information Notice No. 01/54

Public Information Notice: IMF Concludes Article IV Consultation with Suriname

May 24, 2001

On May 9, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Suriname.¹

Background

After experiencing steadily declining but positive rates of growth in the period 1996-98, the Surinamese economy contracted in 1999 and 2000. The performance of the economy in these two years was marked by falling activity levels and high inflation. In particular, real GDP excluding the informal sector is estimated to have fallen 8 percent in 2000. Large declines took place in the agricultural, construction, manufacturing and financial services sectors, while mining output increased only modestly. An increase in informal sector activity, mainly gold mining, limited the decline in real GDP including the informal sector to 6 percent.

The stance of fiscal and monetary policies remained loose in the first seven months of 2000. In the run up to the May 2000 elections, the authorities granted large pay increases to civil servants, and central bank resources provided most of the financing for the fiscal deficit. After losing the elections, the outgoing government utilized the transition period to pay off large election-related expenses.

Almost immediately after taking office in August, the new administration took action to address the economy's severe imbalances. In October they devalued the official exchange rate by 89 percent, terminated central government borrowing from the Central Bank (CBS), eliminated the subsidies on petroleum products and raised substantially electricity and water tariffs. The efforts of the new administration kept the overall deficit to an estimated 13 percent of GDP in 2000, up from 10 percent in 1999, and was financed almost entirely by the CBS.

Twelve-month inflation declined to 82 percent in December 2000 from 113 percent in December 1999. Monthly inflation, which had risen to 9 percent in September 2000, jumped to 13 percent in October and November, in response to the adjustments of the exchange rate in September. However inflation fell to zero in December 2000 and averaged around 0.7 percent for the period January-March 2001.

The unsettled political and economic environment of early 2000 together with falling real incomes contributed to a large fall in the real value of private sector credit outstanding. Weak domestic demand contributed to the narrowing of the deficit on the external current account to 17 percent of GDP in 2000 from 20 percent of GDP in 1999. Notwithstanding the narrowing of the current account deficit, and a marginal improvement in the capital and financial account, liquid foreign exchange reserves of the CBS fell to around US$1 million at end 2000, or about one week of imports of goods.

Real GDP is projected to grow by 2 percent in 2001 on the strength of an expansion in the mining sector and some recovery in manufacturing and agriculture. A disciplined fiscal stance and limited recourse by the budget to bank borrowing are projected to result in a fall in the 12-month inflation rate to 16 percent at end-2001. These projections incorporate the additional actions taken by the authorities in January 2001, when they took further corrective measures and increased excise taxes on cigarettes, alcohol and soft drinks. The 2001 budget has not yet been submitted to the National Assembly and the authorities are seeking ways to bring expenditure within the limits of available revenue and grants. They aim to limit the overall fiscal deficit to around 3 percent of GDP, recognizing that a critical ingredient in attaining this goal will be wage restraint within the public service.

Preliminary estimates indicate that even with this restrained fiscal stance, there will be insufficient resources to cover US$49 million in external debt repayments falling due in 2001. To cover this financing gap, the authorities have approached the Netherlands to utilize a facility created under the 1975 independence treaty, which allows Suriname to borrow abroad with the unconditional guarantee of the government of the Netherlands. The potential borrowing guaranteed under the facility is about US$165 million and the negotiations are continuing. Some of the resources will also be devoted to strengthening the reserve position of the CBS.

Executive Board Assessment

Directors regretted the unfortunate effects of lax policies in previous years, but welcomed the recent measures taken by the new coalition government to stabilize the economy, especially the efforts to restore fiscal discipline. Directors considered the key macroeconomic policies for 2001 must be identifying and implementing a comprehensive set of measures to regain control over the budget, to be supported by appropriate monetary and exchange rate policies. In addition, a clearly articulated and firm public sector wage policy would be essential to anchor the fiscal program, serve to moderate private sector wage demands, as well as help preserve exchange rate stability.

Considering the importance of bringing inflation under control, Directors welcomed the authorities' decision to end central bank credit to the government. They noted that continuation of this policy would help restore financial confidence and lead to a recovery of lending to the private sector, provided that the government's borrowing requirement remains limited so as to not crowd out the private sector.

Directors welcomed the authorities' intention to move toward a uniform reserve requirement system and to abolish the current system of credit ceilings to enhance the efficiency of financial intermediation and monetary control. They urged the government to complete the passage of a new Central Bank Act that would incorporate a reform of the regulatory and supervisory framework for banks, in line with the Basle Core Principles for Effective Banking Supervision.

Directors welcomed the removal of exchange rate bands and the virtual convergence of the official and parallel markets toward a fully market-determined exchange rate. They encouraged the authorities to remove remaining exchange restrictions. Directors also considered that settlement of arrears to multilateral agencies and other lenders would be important to restore credibility and establish a good working relationship with the international community. It was suggested that Suriname consider a staff-monitored program with the Fund.

In the area of structural reform, Directors stressed that the early design and implementation of a medium-term public sector reform program would be critical to consolidating and maintaining the gains of financial stabilization over the medium term. They welcomed the renewed dialogue with the World Bank and urged them to work quickly to compile a correct tally of public sector enterprises and agencies and a survey of the infrastructure needs of the social sectors. Directors underscored the importance of these preconditions for public sector reform, including the rationalization of the civil service, privatization, and a well-designed Public Sector Investment Program. They also stressed the need to promote agricultural development and exports, and endorsed the role of the Inter-American Development Bank (IDB) in this regard. The provision of technical and financial assistance in these areas would be essential.

Directors expressed concern about the extensive weaknesses of the statistical database of Suriname and its inadequacy for surveillance purposes. They welcomed the introduction of the new CPI, and acknowledged the revision of the accounts of the central bank. Directors encouraged the authorities to step up efforts to secure technical assistance from the IDB and the Fund to modernize and expand the coverage of statistics, especially in the areas of national accounts, public sector accounts, the balance of payments, and the external public debt.