Public Information Notice No. 02/125

Public Information Notice: IMF Concludes 2002 Article IV Consultation with Suriname

November 1, 2002

On October 16, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Suriname.¹

Background

Suriname's economic performance improved markedly in 2001, mainly as a result of stabilization measures introduced by the new administration. Real GDP is estimated to have grown by over 1 percent after two years of negative growth and inflation (end-of-period basis) decelerated sharply from 77 percent to 5 percent. The central government overall balance improved from a deficit of 13 percent of GDP in 2000 to about balance in 2001; the market exchange rate was stable; and gross official reserves rose from around one to almost three months worth of imports by end-2001.

A major relaxation in fiscal policy occurred in March 2002 when the government implemented an agreement with the civil service unions for an average increase of 60 percent in civil service salaries. This increase, together with the 30 percent wage increase granted in June 2001, will result in an increase in the wage bill in 2002 of 80 percent, or 6½ percent of GDP. Central government revenue has been adversely affected by a go-slow in the tax administration department. As a result of these factors, the fiscal deficit for the first half of 2002 was 1.4 percent of GDP, compared with a surplus of 3.4 percent for the corresponding period in 2001. In early October, the long-delayed increase in the sales tax was approved by the legislature. The increase is expected to become effective before the end of October and is projected to yield about 2 percent of GDP on an annual basis.

Investors' concerns about the direction of macroeconomic policy have resulted in pressures on the guilder. The currency depreciated by more than 35 percent during the period of January to August 2002, reaching SF 3500 per U.S. dollar. In an effort to stabilize conditions in the foreign exchange market, the central bank imposed a trading band of SF 2500 to SF 2800 per U.S. dollar in early September. The central bank has not intervened in the foreign exchange market, and gross international reserves at end-September were US$104 million, virtually unchanged from the end-December 2001 level.

The depreciation of the currency has had an almost instantaneous pass through to inflation, which for the 12-month period ended August 2002 was 22 percent, compared with 5 percent in 2001. In order to offset some of the inflationary pressures stemming from the government's increased recourse to banking system credit, the central bank increased the cash reserve ratio from 27.5 percent to 33 percent in August.

Progress on key structural reforms was limited in 2002. Nevertheless, an important step was taken to improve fiscal governance with the enactment in February 2002 of a new law placing a 60 percent ceiling on the ratio of total government debt to GDP. In June 2002, the authorities liberalized the foreign exchange market by eliminating surrender requirements for nonmining sector exports and allowing banks to offer foreign currency deposit accounts to residents. In August 2002, a new anti money laundering law was approved by parliament.

Executive Board Assessment

They commended the authorities for their success in restoring macroeconomic stability in 2001, noting that as a result of strong measures taken by the new government, the large fiscal deficit was eliminated, the exchange rate stabilized, inflation fell sharply, international reserves rose, and investor and donor confidence started to rise.

However, Directors expressed concern at the granting of a large increase in civil service wages in early 2002, which has complicated the authorities' attempts at sound macroeconomic management and has threatened to undo the gains achieved in 2001. While noting that public sector wages were lagging behind private sector wages and inflation, Directors considered that the wage increase could have been staggered to smooth the economic shock over time. Instead, the large wage increase has contributed to a substantial deterioration in the public finances and seems to have initiated a wage-price spiral, which has been at the root of the sharp depreciation of the currency and the resurgence of inflation.

Directors urged the authorities to take quick and decisive actions to restore confidence in macroeconomic management by strengthening their fiscal policy stance. They welcomed the smaller fiscal deficit envisaged in the 2003 budget and the imposition of a statutory limit on the amount of government borrowing. Directors also endorsed the recent increase in the sales tax and the planned increase in the lottery and casino taxes. They stressed that a stronger effort is needed to reduce expenditure, particularly the wage bill—which, as a percent of GDP, is the highest in the region—and transfers to public enterprises. Directors warned that the authorities' ability to keep fiscal policy on track will depend crucially on whether they resist likely pressures by civil servants for additional wage increases.

Directors supported a strict monetary policy stance to help foster price and exchange rate stability. They welcomed the central bank's restraint on lending to the government, and the measures taken earlier this year to liberalize the foreign exchange market. However, Directors expressed disappointment that, instead of integrating the official rate and the market rate, the authorities have recently abandoned the market rate and fixed an official trading band at a substantially appreciated rate. Directors urged the authorities to allow market forces to determine the exchange rate. They also encouraged the authorities to eliminate as soon as possible the multiple currency practice.

Directors encouraged the authorities to move forward forcefully with structural reforms. They hoped that the authorities will follow through vigorously with their recent commitment to carry out a comprehensive public sector reform, stressing that this is crucial for fiscal sustainability as well as for raising overall economic efficiency. Directors noted that the civil service urgently needed reform to reduce its size, redistribute positions across ministries, and raise the quality of its output. Further, public expenditure management should be improved in line with international standards, and the public enterprise sector needs to be rationalized through closure or privatization of enterprises to increase its productivity and profitability.

Directors urged the authorities to press ahead with upgrading the supervisory and regulatory framework of the banking system to bring it into conformity with the Basel Core Principles. They commended the authorities for the recent enactment of legislation to counter money-laundering and the financing of terrorism. Directors noted that, in order to further enhance the central bank's control on monetary management, it is desirable that the authorities grant independence to the central bank, and prepare an adequate regulatory framework for the foreign exchange bureaus.

Directors considered that, to reduce the high unemployment rate, Suriname should diversify its economy away from the capital-intensive mining sector. They noted that agriculture could be an important growth sector with export potential, and welcomed the government's efforts to re-organize the state-controlled banana industry. Noting that diversification will require an increase in investment, Directors encouraged the government to create the conditions for private sector development—in particular by removing impediments to investment flows.

Despite progress in a number of areas, Suriname's economic and financial statistics remain weak, hampering economic analysis and the formulation of economic policy. Directors encouraged the authorities to give priority to removing these weaknesses, and to take full advantage of the technical assistance being provided by the Fund and the IDB.