IMF Executive Board Concludes 2008 Article IV Consultation with SurinamePublic Information Notice (PIN) No. 08/110
August 26, 2008
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 2008 Article IV Consultation with Suriname is also available.
On June 2, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Suriname.1
Aided by strong commodity prices and improvements in policies, macroeconomic performance has strengthened markedly in recent years. The terms of trade have improved by about 30 percent in 2005-07, implying an increase in real income of over 10 percent. Supported by this favorable environment, improved policies—strengthening of the non-mineral balance, bolstering central bank independence, and reduction of foreign exchange market fragmentation—have contributed to higher growth, lower inflation, large accumulation of international reserve, and a sharp decline in public debt as a ratio to GDP.
Macroeconomic performance was strong in 2007, but inflation has risen to double digits. GDP grew by an estimated 5½ percent, with strong performance in both the mineral and non-mineral sectors. The external account surplus was about 3 percent of GDP, and international reserves rose by over 60 percent. Twelve-month inflation more than trebled to 13.8 percent in March 2008, driven mainly by large increases in food and fuels prices. However, non-tradables goods inflation has also picked up significantly since November. Tradable goods inflation excluding food and fuel has also been rising rapidly, as the nominal effective exchange rate has depreciated.
Fiscal performance strengthened in 2007, reflecting mainly a lower non-mineral deficit, with the central government posting an overall surplus of 3 percent of GDP. Driven mainly by higher excise taxes and improvements in income tax administration, revenue increased sharply, while expenditure growth was kept under control. Public debt declined to 21 percent of GDP, aided also by a large pre-payment to the Netherlands. The authorities also made progress on the clearance of external arrears.
In the financial sector, bank credit grew by 35 percent over the last year. This large liquidity increase resulted from incomplete sterilization of international reserve accumulation and a reduction in reserve requirements adopted in early 2007. Nominal lending rates declined by 2½ percentage points in the last year. Financial soundness indicators have generally strengthened, although nonperforming loans remain high, especially at state-owned banks. Financial dollarization is also high, with over half of deposits in foreign currency.
GDP growth is projected to accelerate to about 7 percent in 2008, led by rapid expansion of domestic demand. This is expected to contribute to higher inflation, which is projected to close the year at 10 percent. Stronger commodity prices would result in an increase in the current account surplus to about 3¾ percent of GDP. The central government balance is projected to weaken compared to 2007, mainly reflecting large increases in capital spending. Public debt would continue to decline, but only marginally.
Executive Board Assessment
Executive Directors welcomed the improvement in economic policies in recent years which, supported by a favorable external environment, has contributed to higher economic growth and lower inflation, a sizeable buildup of international reserves, a decline in public debt, and improved bank supervision.
Directors stressed, however, that inflation has become a growing challenge. While substantial increases in world food and fuel prices have clearly contributed to inflation, domestic demand growth has also played a role, spurred by the substantial improvement in Suriname's terms of trade and an expansionary macroeconomic policy stance. In particular, given the de facto exchange rate peg, external inflows are fuelling rapid money and credit growth, and the envisaged fiscal loosening in 2008 will add further stimulus.
Against this background, Directors called on the authorities to tighten macroeconomic policies. They recommended the issuance of treasury or central bank bills, or raising reserve requirements, to bring credit growth to more sustainable levels. A significantly tighter fiscal stance is needed in 2008 to help rein in domestic demand growth.
Many Directors saw exchange rate stability as advantageous for Suriname at this stage, and favored keeping the de facto peg, both to anchor expectations and to safeguard the competitiveness of the non-mineral sector. A few Directors noted that the exchange rate is somewhat undervalued. Looking ahead, Directors broadly agreed that, as policies strengthen and institutions develop over time, greater exchange rate flexibility would be appropriate, and would enable the economy to better weather adverse shocks. Directors called on the authorities to unify the current dual exchange rate system, which gives rise to a multiple currency practice.
Directors emphasized that a sound medium-term fiscal framework will be central to Suriname's economic prospects. Setting a more prudent debt ceiling and an appropriate target for the non-mineral fiscal balance would help ensure that fiscal policy avoids procyclicality and remains sustainable over the long run. Directors recommended strengthening the monitoring of public enterprise operations to lower fiscal risks, and broadening the coverage of public debt statistics to include debt that is not contracted or guaranteed by the central government. They welcomed the continued progress being made in reducing external arrears, and encouraged the authorities to follow through with efforts to fully normalize relations with all creditors.
Directors welcomed ongoing reform efforts in customs administration and income tax and investment legislation. They emphasized the need for income tax reform to be revenue-neutral.
Directors encouraged the authorities to further strengthen the financial system. Very rapid credit growth risks increasing the nonperforming loan rate. Directors recommended continuing efforts to reduce financial dollarization, and encouraged the authorities to lower the associated risks by adopting prudential regulations to limit banks' foreign exchange net open positions and deal with potential currency mismatches.