Public Information Notice No. 06/39

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

April 10, 2006

On February 24, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Suriname.¹

Background

Suriname is benefiting from the global boom in commodity prices and from increased mining output. Real GDP increased by 8 percent in 2004 and by around 5 percent in 2005, boosted by the opening of a new gold mine and investment in the alumina and bauxite sector. Inflation moderated to 9 percent in 2004, partly reflecting the effects of exchange rate stability, but is estimated to have risen to about 17 percent in 2005, largely as a result of a doubling of domestic fuel prices in September 2005.

The strong growth has been supported by a cautious macroeconomic policy stance. The central government overall deficit declined from around 3 percent of GDP in 2004 to an estimated 1 percent of GDP in 2005. This improvement resulted from a substantial increase in revenue from the oil sector, which more than offset higher capital expenditure during the pre-election period, and revenue losses from delays in adjusting domestic fuel prices. Reflecting the lower financing needs of the government, fiscal financing by the central bank declined from about 1 percent of GDP in 2004 to ½ percent in 2005. Although reserve requirements have been lowered on domestic currency deposits since mid-2004, private sector credit growth has moderated as liquidity has been sterilized by a larger issuance of Treasury bills.

The external current account deficit has remained large. A surge in capital goods imports for the mining sector increased the current account deficit to 16 percent of GDP in 2005 from around 5 percent of GDP in 2004. These were largely matched by a continued large inflow of foreign direct investment, and foreign exchange reserves were maintained at around 1½ months of imports.

The near-term outlook remains favorable, owing to the strength of global commodity prices and the impact of recent and ongoing investment in the extractive industries. The economy is projected to grow by almost 5 percent, and inflation would ease to about 8 percent. The current account deficit is projected to decline from around 16 percent of GDP in 2005 to 12 percent, reflecting the effects of continued growth in alumina production and buoyant gold prices on exports, and the impact of the completion of the major investment projects in the mining industry on capital goods imports.

Executive Board Assessment

Executive Directors commended the Suriname authorities for their successful macroeconomic management over the past years. Fiscal discipline, supported by a cautious monetary policy and a favorable external environment, has helped reduce inflation expectations and stabilize the exchange rate, while underpinning buoyant economic growth.

Directors agreed that the near-term outlook for Suriname appears favorable, especially in view of the strength of global prices for the country's commodity exports. Nonetheless, maintaining macroeconomic stability in the past has proven difficult, especially in the face of external shocks. Directors underscored the importance of containing pressures on domestic prices and competitiveness by resisting second-round effects from the recent increases in fuel prices. They cautioned, in particular, against granting compensatory salary increases or subsidies that would exacerbate cost-push pressures. Over the medium term, Suriname would benefit from establishing firmer anchors for fiscal and monetary policies, reducing the size of the public sector, and bolstering the competitiveness of the non-mining sectors.

Directors commended the important steps that have already been taken to strengthen the fiscal framework, including the new Fiscal Responsibility Law. They welcomed the recent modification of the domestic fuel tax and pricing system, which will reduce the vulnerability of fiscal revenue to fluctuations in world oil prices. Directors noted that historically volatile prices for Suriname's bauxite, gold, and oil exports—on which the budget relies for a large part of its revenues—have complicated budgetary management. To cushion the impact of export price changes on the budget, Directors supported building up a stabilization fund, by investing the increased royalty and tax revenues expected from future large-scale investments in extractive activities in an internationally diversified portfolio. The stabilization fund would also help mitigate exchange rate pressures, and facilitate the equitable intergenerational sharing of revenues from finite resources. On the expenditure side, Directors underscored the importance of the envisaged civil service reform to reduce the size and improve the efficiency of the public sector. They urged the authorities to set the annual budget discussions in a medium-term policy framework.

Directors recommended a strengthening of the monetary and exchange rate policy framework. In particular, they suggested that, once sufficient institutional capacity is in place, establishing a defined and pre-announced target for a monetary aggregate would help anchor policies and send an important signal of the authorities' commitment to price stability. At the same time, they encouraged the authorities to reduce their reliance on reserve requirements as their principal policy instrument, and to instead strengthen the role of indirect instruments such as open market operations. Directors welcomed the convergence of the official and bank/cambio exchange rates and the willingness to permit greater exchange rate flexibility. They urged the authorities to take advantage of the present favorable environment to adopt the market-determined commercial rate as the official exchange rate, thereby unifying the regime.

Directors noted that the financial sector is generally sound, and welcomed the improvement in bank capital adequacy ratios. At the same time, they recommended that efforts be strengthened to bolster bank risk assessment capabilities with a view to reducing the level of nonperforming loans. There is room to improve bank supervision and prudential regulation, including the assessment of potential balance sheet risks related to the high degree of dollarization of the banking system. Directors called for the implementation of more effective anti-money laundering controls. They supported the authorities' request for technical assistance from the Fund to strengthen financial sector supervision and to develop the Treasury bill market, and encouraged them to consider participation in the Financial Sector Assessment Program.

Directors stressed the importance of normalizing relations with external creditors and eliminating payment arrears, noting that Suriname's long-standing arrears to bilateral creditors undermine the country's creditworthiness and impede its access to export credit coverage.

Directors considered that structural reforms will be key to enabling the non-mining private sector to provide sustainable employment and income growth. Efforts should be enhanced to simplify licensing procedures, promote a more stable and rule-based climate for investment, and limit and clarify tax exemptions. The efficiency of a large number of state-owned enterprises needs to be raised, and consideration given to their corporatization or privatization. Directors welcomed efforts to privatize the banana, rice, and sawmill companies, and to deal with the small insolvent state-owned banks.

Directors encouraged the authorities to improve the provision and accuracy of statistics, in particular with respect to national accounts and trade data.

¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.