IMF Executive Board Concludes 2007 Article IV Consultation with Suriname

Public Information Notice (PIN) No. 07/56
May 21, 2007

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2007 Article IV Consultation with Suriname is also available.

On March 21, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Suriname.1

Background

Aided by favorable external conditions and an improvement in macroeconomic management, Suriname's economic performance has improved in recent years. Since 2002, the central government deficit has declined sharply, leading to a substantial decrease in public debt as a share of GDP. Monetary policy has focused on reducing inflation, while the central bank has become more independent. Backed by these policies, the exchange rate has remained stable since early 2004. As a result, real economic growth has averaged about 5 percent a year, while inflation has declined.

In 2006 macroeconomic performance was better than anticipated, benefiting from a continued favorable external environment. Real GDP is estimated to have grown by almost 6 percent, led by strong growth in exports and private investment. End-year inflation declined to below 5 percent from 16 percent in 2005, aided by tight credit policy by the central bank and a stable exchange rate. The external current account recorded a surplus of 5 percent of GDP, reflecting high international prices for alumina, gold, and oil. Net international reserves rose sharply, reaching two months imports of goods and services.

The central government recorded a small overall surplus in 2006, supported by strong growth in mineral-related revenues. The non-mineral deficit (the total deficit net of mineral-related revenues) declined by 2 percentage points to 7½ percent of GDP, reflecting both higher revenues and lower expenditure. Revenue collections were boosted by the liberalization of domestic fuel prices in late 2005, increases in selected excise taxes and a one-time dividend paid by the central bank. The lower expenditure resulted from a decline in capital spending in relation to GDP. Public debt declined to 30 percent of GDP by end-2006.

In the financial sector, deposits and credit to the private sector grew rapidly in 2006, while banking system soundness indicators (capital adequacy, nonperforming loans, and profitability) improved. However, nonperforming loans remained relatively high at 12 percent of total loans, reflecting mainly difficulties in state-owned banks. Financial dollarization remains high, with the share of deposits and loans in foreign currency exceeding 50 percent. The spread between lending and deposits rates remained significant at about 8 percentage points both for domestic and foreign currency transactions, owing partly to high reserve requirements. The central bank has been reducing the reserve requirement on domestic currency deposits to encourage intermediation in local currency.

The outlook for 2007 looks broadly positive. Real GDP is projected to expand by 5¼ percent, driven mainly by the non-mining sector, while inflation is expected to fall slightly to 4½ percent. The surplus in the external current account would decline to about 2½ percent of GDP owing to lower world commodity prices, but international reserves would still rise, helped by tight credit conditions by the central bank. The central government's overall balance would deteriorate somewhat compared to 2006, reflecting strong growth in the wage bill. However, public debt would continue to decline.

Executive Board Assessment

Executive Directors commended the authorities for the improvement in economic policies in recent years, which—combined with the rise in export prices—contributed to stronger economic performance in 2006. Directors particularly welcomed the authorities' commitment to keep strong policies in place.

Directors supported the authorities' policy stance and underscored that the key challenge in the period ahead is to enhance policy credibility by strengthening Suriname's medium-term policy framework. In particular, an explicit assessment of fiscal sustainability at the time the budget is considered would help manage spending pressures, especially in the face of volatile mineral-related revenues. In this context, Directors considered that a revenue stabilization fund would be a useful supplement, provided it is well-integrated into the budget and managed in an efficient and transparent fashion. Directors recommended distinguishing between mineral revenues and the non-mineral deficit in annual budgets to help assess fiscal sustainability. They also cautioned against crowding out capital spending and called for improved targeting of subsidies. Directors welcomed the continued decline in public debt and in this context most directors encouraged the authorities to reduce the ceiling on total public debt, while maintaining the ceiling on domestic debt unchanged to strengthen credibility in the medium-term fiscal policy framework.

Directors welcomed the improvement in banking soundness indicators. However, stronger prudential regulations would help manage the risks from the high financial dollarization and Directors suggested taking steps to deal with the high level of non-performing loans, including by improving management of state-owned banks. Directors also called on the authorities to strengthen the enforcement of legal provisions on anti-money laundering, and encouraged them to participate in the Financial Sector Assessment Program.

Directors encouraged the authorities to continue steps to unify the exchange rate. They emphasized that over time inflation expectations could be anchored by credible demand management, and recommended improving the monetary policy framework and increasing exchange rate flexibility in coming years.

Directors underscored the need to diversify the economy to sustain growth and mitigate its vulnerability to shocks. In this context, they welcomed the introduction of a new investment law and encouraged authorities to advance on the long-overdue civil service reform, with emphasis on reducing the size and improving the efficiency of the public sector.

Directors also urged the authorities to normalize relations with external creditors by settling existing arrears, which would improve Suriname's creditworthiness.


Suriname: Selected Economic Indicators

        Est. Proj.
2003 2004 2005 2006 2007

(Annual percentage change, unless otherwise indicated)
           

Real economy

         

GDP at 1990 prices 1/

6.0 8.1 5.5 5.8 5.3

GDP current market prices 1/

30.5 23.4 19.0 19.5 6.0

Consumer prices (end of period)

13.1 9.1 15.8 4.7 4.5
           
(In percent of GDP)
           

National accounts

         

Gross domestic investment

31.6 32.5 31.8 32.0 30.9

Gross national savings

20.8 28.4 20.9 36.9 33.4

Foreign savings

10.8 4.1 10.8 -5.0 -2.4
           

Central government

         

Revenue and grants

27.8 26.3 27.8 28.7 29.1

Total expenditure

27.9 28.5 30.1 28.6 29.7

Overall balance

-0.1 -2.3 -2.2 0.1 -0.6
           
(Annual percentage change)
           

Money and credit

         

Banking system net domestic assets

6.7 29.0 18.2 6.4 15.5

Of which:

         

Public sector credit

-20.7 14.6 -0.5 -56.2 -4.8

Private sector credit

40.5 32.9 25.1 27.6 12.6

Money and quasi-money (M2) 2/

15.9 28.5 11.7 21.1 12.3
           
(In percent of GDP, unless otherwise indicated)
           

External sector 3/

         

Current account

-10.8 -4.1 -10.8 5.0 2.4

Merchandise exports, f.o.b.

50.2 58.5 52.3 65.8 59.7

Merchandise imports, f.o.b.

-52.6 -47.1 -58.8 -61.4 -59.4

Capital and financial account

-4.8 -2.1 0.8 -4.1 -3.7

Of which: central government net borrowing

-1.5 -0.8 -0.4 -1.0 -0.4
         

Change in reserves (-=increase)

0.0 -2.1 -1.6 -4.9 -1.6
           

Gross official reserves (in months of imports)

1.41 1.66 1.38 1.98 2.20
           

Total public debt

41.1 38.8 37.0 30.4 29.4

Of which: External 4/

30.3 25.4 21.6 18.5 17.2

Sources: National authorities; and IMF staff estimates and projections.

1/ GDP numbers include estimates of the informal sector.

2/ Includes foreign currency deposits held by residents.

3/ Based on amounts expressed in U.S. dollars.

4/ Includes public external payments arrears.


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.



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