Public Information Notice No. 03/135

Public Information Notice: IMF Concludes 2003 Article IV Consultation with Suriname

November 19, 2003

On October 17, 2003 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Suriname.¹

Background

This year, the authorities have taken strong steps to stabilize macroeconomic conditions following a sharp depreciation of the currency and a rise in inflation in 2002. Real GDP growth slowed from 4.5 percent in 2001 to 3 percent last year. In 2003, the authorities raised the sales tax by 3 percentage points, introduced a casino tax and a temporary, one-year 10-percentage point "bridging" tax on corporate incomes and the highest personal incomes, and adjusted gasoline prices. In addition they maintained a tight rein on spending, including resisting any increases in civil service salaries.

Despite lower than envisaged yields from the tax measures, the fiscal balance shifted to a surplus of 1 percent of period GDP for the first eight months of 2003, compared with a deficit of 7½ percent for the same period in 2002. The improved fiscal performance was complemented by a tightening of monetary policy. The 12-month growth rate of reserve money declined from 32 percent in December 2002 to negative 2 percent in August 2003.

As a result of these measures, the 12-month inflation rate in June 2003 was 28.4 percent, unchanged from December 2002, while quarterly inflation decelerated sharply from 6.2 percent in the first quarter of 2003 to 3.1 percent in the second quarter. The illegal parallel market exchange rate appreciated by 5 percent since the beginning of the year, virtually eliminating the spread with the commercial bank exchange rate by July.

During the past year, the authorities embarked on a number of structural reforms designed to address vulnerabilities and improve economic efficiency. To improve fiscal governance, budget processes, and tax administration, the authorities launched a three-year institutional strengthening program with technical assistance from the government of the Netherlands. To strengthen the financial system, a new banking supervision law was passed and the central bank introduced new prudential regulations, in line with Basel Core Principles. An anti-money laundering law was passed in August last year. In trade policy, Suriname implemented the final phase of the CARICOM common external tariff and approved the CARICOM Single Market and Economy Treaty. However, progress on public sector reform has been limited.

Executive Board Assessment

Directors commended the Surinamese authorities for their efforts in 2003 to stabilize the economy, noting that fiscal and monetary policies have been tightened and that the authorities have embarked on a number of structural reforms to address external vulnerabilities. As a result, the fiscal balance has improved in 2003, and exchange market and inflation pressures have abated. Directors stressed that macroeconomic stabilization and sustained economic growth over the medium term will require continued fiscal consolidation, rapid progress toward exchange rate unification, economic diversification, structural reforms, and improvements in governance.

Directors urged that macroeconomic stabilization remain a priority in the face of spending pressures that could arise in 2004 from wage demands and the general election campaign. They congratulated the authorities for having kept a tight rein on government spending and urged that fiscal policy should continue to emphasize wage restraint. At the same time, improving tax administration and moving ahead with public sector reform will be key for macroeconomic stability and fiscal sustainability in the medium term. Directors also noted that raising government saving will be necessary to help finance much needed infrastructure investment.

Directors highlighted the need to substantially improve tax administration in order to increase collections and improve the equity of the tax system. They noted that widespread tax evasion and an uneven tax collection effort, partly related to governance problems, have resulted in volatile tax revenue over many years. They encouraged the authorities to take advantage of technical assistance provided by donors to strengthen the institutional capacity of the tax department and to improve administrative efficiency and governance.

Directors emphasized the importance of public sector reform for raising overall economic efficiency as well as for fiscal sustainability. They noted that a reform of the civil service is urgently needed to reduce its size, better match personnel with needed occupations, and improve public service delivery. In addition, a restructuring of the public enterprise sector, including rationalizing its size through closures and privatization, would be key to improving its productivity and profitability. Directors encouraged the authorities to move ahead with plans to formulate a comprehensive public sector reform strategy, while paying due attention to the possible impact on unemployment and poverty.

Directors recognized the key role played this year by the tightening of monetary conditions in reducing volatility in the foreign exchange market and subduing inflation expectations. They noted that the high and volatile rate of inflation observed in Suriname in the last eight years was mainly the result of subordinating monetary policy to fiscal financing needs. They therefore supported plans to amend the Central Bank Act so as to strengthen the ability of the central bank to enforce the limit on advances to the government and to manage liquidity conditions in order to achieve price stability. In this context, it would be important to make the limits and conditions for central bank financing of the government more explicit and transparent, and to develop indirect instruments of monetary control to supplement reserve requirements.

Directors urged the authorities to return quickly to a unified, market-determined exchange rate system. They were encouraged by the authorities' plans to phase out the temporary ceiling on the commercial bank exchange rate as soon as conditions allow. They considered this reform to be important for building credibility in the new currency that is to be introduced next year.

Directors noted that the overall banking system appears to be relatively healthy, but urged the authorities to take action to resolve problems in three small insolvent state-owned banks. In this context, they commended the authorities on the introduction of new bank regulations aimed at upgrading the supervisory and regulatory framework in line with the Basel Core Principles and encouraged them to press ahead with their full implementation. Directors encouraged the authorities to take steps to strengthen the supervision and regulation of foreign exchange bureaus. They welcomed the introduction of an anti-money-laundering law in August last year.

Directors supported the introduction of reserve requirements on foreign currency deposits, but saw the need for additional prudential safeguards to deal with the potential risks from the relatively high rate of dollarization. Directors also encouraged the authorities to unify the reserve requirements on foreign currency deposits and those on domestic currency deposits, in order to discourage dollarization of deposits.

Directors noted that the development of the nonmining private sector is key for generating employment growth, especially as the authorities contemplate a rationalization of the civil service and given the capital intensive nature of the mining sector. Directors emphasized that advances in trade liberalization, in particular through the adoption of CARICOM protocols, would help increase competitiveness, as would ongoing efforts to improve infrastructure. In this context, they encouraged the authorities to move ahead expeditiously with removing a host of obstacles to investment, as recommended by a recent International Finance Corp. report, and with their plans to privatize their banana, rice, and forestry companies.

Directors observed that significant progress has been made in all areas in improving the quality and timeliness of economic statistics, and encouraged further progress to make surveillance more effective. In this connection, they welcomed the authorities' decision to subscribe to the General Data Dissemination System, and encouraged them to continue to take full advantage of the technical assistance being provided by the Fund and the Inter-American Development Bank.