Suriname: 2013 Article IV Consultation: Preliminary Conclusions
July 2, 2013
Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.
The mission is grateful for the high quality and openness of the discussions, and for the cooperation and hospitality received from the Surinamese authorities and private sector. We expect the strong growth of recent years to continue in 2013, but decelerate somewhat in 2014. However, there are risks to the outlook, particularly related to gold prices and fiscal pressures. Sufficient fiscal consolidation is needed to offset recent slippages, build up buffers to manage risks, and entrench sustainability. We commend the efforts of the authorities to upgrade the fiscal framework and encourage their continuation through the adoption of a clear fiscal anchor consistent with sustainability. If fiscal adjustment proves insufficient, monetary tightening would also be called for to help contain demand pressures and ensure the alignment of the overall macro policy stance with the continued stability of the exchange rate. Efforts to further strengthen the monetary and financial sector regulatory framework are welcome. Structural competitiveness should be reinforced.
I. Developments, Outlook, and Risks
1. Macroeconomic performance strengthened markedly in recent years, but there are challenges ahead. Since 2000, stronger policies and buoyant commodity prices, supported also by political stability, have improved growth performance and led to several recent upgrades from major ratings agencies in recognition of the authorities’ strong track record. Commendably, public debt declined substantially, supported by increased fiscal prudence. At this juncture, however, with gold prices declining significantly following a long upswing, the main challenges are to strengthen policy-making institutions and adjust policies to avoid the onset of a boom-bust cycle.
2. Growth remains robust, while inflation has declined considerably. We estimate that GDP grew 4¾ percent in 2012, broadly similar to 2011 and among the highest in the region, supported by buoyant commodity prices, particularly gold. Available data indicates that wholesale and retail trade, construction, transport and communications, and financial services all expanded significantly. However, while gold export volumes grew strongly, oil export volumes were flat while that of aluminum contracted substantially. For oil, the weakness reflected limited reserves and temporary equipment failure. The aluminum export decline was largely due to low international prices. Meanwhile, inflation has dropped to low single-digit levels in 2013.
3. Bank credit is growing strongly, stimulating demand. Credit growth to the private sector has risen to 16¼ percent (y/y) in April 2013, led by trade and housing construction. Deposit and credit dollarization remain broadly stable, contained by recent measures such as increased reserve requirements on foreign currency deposits and a requirement that all government transactions be carried out in SRDs. The banking system is profitable and liquid. Non-performing loan (NPL) ratios are somewhat high, but declined from about 8 percent in 2011 to 6.2 percent in 2012. Bank capital adequacy ratio at 12½ percent is above the regulatory 8 percent minimum, but below the regional average.
4. However, the fiscal position has weakened substantially amid spending pressures. The fiscal balance fell by 5 percentage points to a deficit of 4 percent of GDP in 2012, largely reflecting a sharp jump in spending. Fiscal pressures intensified further in the first quarter of 2013 as a result of wage hikes granted in December 2012 and a significant pickup in capital project-related spending. While measures have been taken since March to contain spending, the overall deficit for 2013 is likely to be around 3 percent of GDP. Nonetheless, public debt remains among the lowest in the region.
5. And the external current account balance has also declined. The collapse of the customs IT system in late 2012 hampers the estimation of the balance of payments for 2012, but indications are that the current account balance declined by about 1½ percent of GDP in 2012, primarily because of strong imports. In early 2013, the weakening of the current account intensified, as the usual seasonal decline in receipts was accompanied by an acceleration of import growth and a moderation of exports due to declining commodity prices. Alongside, international reserves dipped modestly. While price competitiveness is adequate, much of the improvement from the devaluation was eroded by the subsequent high inflation in 2011.
6. The near term outlook depends heavily on commodity prices. Suriname is highly exposed to commodity price fluctuations, particularly gold which accounts for 67 percent of exports and 13 percent of fiscal revenues. Fiscal exposure to oil is also high, as it accounts for 29 percent of revenues. In line with the latest WEO projections and recent gold price movements, our baseline projection assumes moderate declines in gold and oil prices over 2013–14. At the same time, however, the substantial fiscal impulse and robust credit stimulated activity in the first half of 2013. Thus, on balance, GDP growth in 2013 is expected to be similar to that of 2012, but will ease to about 4 percent in 2014. Without additional measures the fiscal deficit is likely to widen in 2014 as commodity prices decline and activity eases. Given current trends the current account balance is expected to deteriorate. Inflation is likely to remain low given the high import content of demand and exchange rate stability.
7. Over the longer run, growth is expected to increase moderately if commodity prices hold up. Two large gold mining projects are expected to start operations over 2015–17, boosting production. Plans for infrastructure investment, if well implemented, will also support growth. On this basis, GDP growth is expected to rise to about 4¾ percent over the medium term. Higher gold output and the new oil refinery should also help improve the fiscal position and current account balance. This favorable outlook assumes that commodity prices stay somewhat buoyant over the medium term, and that macroeconomic stability will be maintained by appropriate fiscal and monetary policies. At the same time, a substantially higher growth path for the non-mineral part of the economy is unlikely without a continuation of the authorities’ efforts to upgrade the business environment.
8. However, there are clear risks to the outlook.
- Downside risks to gold prices are elevated given substantial recent declines and a souring investor appetite. A sustained decline would have a major adverse impact on the macroeconomic outlook.
- Also, plans to issue a sovereign bond to finance minority participation in the two new gold mining ventures will increase central government debt by over 8 percent of GDP in 2013, reducing fiscal space. While the participation could increase future fiscal revenues, it significantly increases fiscal exposure to gold price fluctuations.
- Fiscal buffers appear limited, as accumulated savings from mineral revenues during the commodity upswing were small, the Sovereign Wealth Fund (SWF) not yet operational, and the country remains at risk from shocks emanating from commodity price fluctuations. Thus, pro-cyclical fiscal tightening is likely if key commodity prices decline, intensifying the associated downturn.
- Upside risks, on the other hand, could originate from unexpectedly strong global growth which could raise commodity prices, or the discovery of large oil or mining reserves.
II. Policy Recommendations
9. Given the downside risks and weakening external position, policy tightening is needed to strengthen macroeconomic stability. As the large fiscal slippage appears to be the main driver of demand pressures, the adjustment should ideally be borne by the fiscal sector, with monetary tightening if the fiscal tightening proves insufficient to safeguard the external position. Furthermore, efforts to improve fiscal and financial policy frameworks and structural competitiveness should be intensified to secure stability and robust growth.
A. Ensuring Long-Run Fiscal Sustainability
10. Fiscal consolidation is warranted. With commodity prices far above historical averages, fiscal surpluses would be appropriate to increase buffers and entrench sustainability. Planned initiatives to increase revenues and the recent tightening of spending controls are welcome, but will need to be complemented by additional spending restraint to substantially improve the overall fiscal balance. In this context, public wage moderation would strengthen consolidation efforts and help restrain private sector wage growth. Moreover, the targeting of subsidies should be improved: for example, electricity subsidies are estimated at 2 percent of GDP, largely benefiting the higher-income urban population, and should be phased out. We welcome the authorities’ ongoing efforts to contain spending on goods and services and their plans to prioritize capital projects, and encourage increased efforts in this area. Also, clarity is needed about a provision in one of the gold agreements which seems to guarantee government provision of electricity at a fixed below-market price, potentially creating a large unbounded subsidy. We encourage the authorities to make subsidies explicit in the fiscal accounts.
11. We urge the authorities to intensify efforts to establish an appropriate fiscal framework in light of the considerable sensitivity to mineral sector developments. Elements of such a framework should include the following:
- Fiscal anchor. A clear fiscal anchor is needed to entrench sustainability and guide the consumption of mineral revenues. The mission advocates one based on a target for the non-mineral balance, which has the advantages of transparency and relative robustness to political pressures. Our preliminary estimates, based on a conservative valuation of mineral wealth, indicate that over the medium term a non-mineral deficit target in the range of 5-7 percent of GDP would be consistent with sustainability. This would have corresponded to an overall surplus of 2-4 percent of GDP in 2012. We emphasize that significantly weaker budget targets will lead to larger and disruptive fiscal adjustments when commodity prices decline. The fiscal target would need to be periodically reviewed and adjusted as estimates of mineral wealth are updated, consistent with the achievement of long run sustainability.
- Medium term expenditure ceilings. We encourage the authorities to develop medium term expenditure ceilings consistent with the fiscal anchor, to complement efforts to contain expenditure pressures, aid fiscal planning, and strengthen the top-down aspect of the budgeting process. In this context, we welcome ongoing work to upgrade public financial management, including the newly established financial programming framework, the new ICT system being put in place, and the draft public finance management law. These efforts will provide an essential underpinning for the successful implementation of expenditure ceilings and controls.
- The sovereign wealth fund (SWF). The SWF, as the repository for windfall savings out of mineral revenues, would help to dampen the impact of commodity price fluctuations on fiscal policy and build up fiscal buffers. We welcome the authorities’ efforts to establish an SWF along these lines. Unfortunately, the draft SWF law before parliament has faced some resistance and triggered amendments diverting some mineral revenues into a separate investment fund. We caution that this amendment limits scope for needed savings and may also fragment the planning and oversight of capital spending.
- Revenue diversification. A diversified revenue base would enhance the resilience of the budget to commodity price shocks. In this context, the mission urges the authorities to move expeditiously to implement the introduction of the VAT and the reform of the direct tax regime. The IMF stands ready to help with the provision of any technical assistance needed for the successful launch of the VAT. Ongoing efforts to strengthen revenue from customs and improve tax administration are welcome.
12. Commendable plans to set up a nation-wide social safety net for health care and pensions should be implemented in a fiscally sustainable fashion. The authorities have committed to set up a national social security scheme by early 2014, which will help improve health outcomes, labor mobility, and old age security. These are laudable social objectives, but could add significantly to fiscal spending pressures. Thus, we stress that the scheme should be affordable over the near and long run, and any additional expenditure implications for the budget should be offset by measures elsewhere to safeguard fiscal health. Possible measures include the rationalization of electricity subsidies and a revenue-increasing VAT.
13. Urgent reforms are needed to put the main public electricity and water companies on a sound financial footing. The current state of affairs with a complex and nontransparent web of subsidization, large arrears, and untargeted below-cost tariffs has led to perennial loss-making in the two companies, sapped morale, and hampered investment in these critical sectors. With substantial new investments needed in these sectors, the mission believes that this would be an opportune time to modernize their regulatory frameworks and tariff structures to ensure the efficient allocation of resources.
B. Safeguarding the External Position and Strengthening the Financial Sector
14. Moderating credit growth, together with fiscal tightening, will help contain demand, thus safeguarding the external position. The authorities should consider the use of available monetary policy instruments, including reserve requirements, moral suasion, sales of treasury bills, and intervention in the foreign exchange market to achieve this objective if fiscal policy adjustment proves inadequate to contain demand pressures.
15. We encourage the authorities to press ahead with plans to establish indirect instruments of monetary policy. Supported by IMF technical assistance, the authorities are planning to commence regular Treasury bill auctions in early 2014 as the main vehicle for the development of an interbank money market and a government securities market. This should be complemented by the other elements needed for open market operations (OMO), including a liquidity monitoring/management framework and standing facilities. These additional tools would improve the effectiveness of the monetary authorities in maintaining macroeconomic stability.
16. Suriname maintains multiple currency practices (MCPs). These arise from (i) the existing spread of more than 2 percent between the buying and the selling rates in the official market for the government’s foreign exchange transactions; and (ii) the potential spread of more than 2 percent between the official rates for government transactions and those in the commercial markets. We encourage the authorities to phase out the MCPs, bringing the exchange rate regime in line with international norms. Options in this regard could include (i) reducing the spread between the official buying and selling rate to 2 percent or less, or (ii) using the midpoint of the commercial buying and selling rates for official transactions.
17. Welcome progress is being made on a substantial agenda to upgrade financial sector resilience. A new banking law was passed in 2011, followed by increased staffing and training in the central bank’s banking supervision department. New banking regulations, including stronger capital, loan classification, and provisioning standards, are being finalized. On-site banking supervision has also been strengthened. An insurance law is being developed. The AML/CFT regime has been improved, though some gaps remain. A credit bureau and a deposit insurance scheme are also being contemplated. The authorities are also considering options to restructure five state owned banks.
18. Efforts to contain dollarization should continue. We suggest that measures, such as higher provisioning or risk-weighting on foreign currency lending and limits on net open positions in foreign currency, should be deployed to resume a downward trend on dollarization.
C. Enhancing Structural Competitiveness
19. A more supportive business environment would enhance growth prospects. While Suriname scores well on some indicators such as airport capacity and import costs, the latest World Bank Doing Business Indicators show that it is below regional norms in several areas such as starting a business, enforcing contracts, protecting investors, and registering property. The authorities have already made important steps in easing the impediments to starting a business, and we encourage them to continue in this direction. Also, labor market flexibility could be improved by some relaxation of employment protection regulations, and plans for a minimum wage should not compromise job creation for lower skilled persons.
20. We encourage the authorities to continue to strengthen data quality, coverage, and timeliness. While there has been much improvement in macroeconomic data there are still significant gaps, sometimes complicating diagnosis. Plans to upgrade the statistics law, and strengthen reporting requirements, are welcome.
21. The mission recommends that the next Article IV consultation be conducted on the standard 12-month cycle. In the interim, it would be useful if a small team would visit Suriname in about six months to continue the policy dialogue.