IMF Executive Board Concludes 2011 Article IV Consultation with Suriname

On May 2, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Suriname.¹

Background

In 2010, economic growth is estimated to have picked up to 4.4 percent, from 3 percent in 2009, owing to buoyant activity in the mineral sector. Inflation rose from 1.3 percent at end-2009 to 10.3 percent at end-2010, following large wage increases in the civil service and higher food and fuel prices. In January 2011, the authorities devalued the Surinamese dollar by 20 percent in the official market, bringing it broadly in line with the rate in the parallel market. At the same time, they raised fuel taxes by about 40 percent and introduced additional measures of fiscal consolidation. In the wake of these adjustments, 12-month inflation rose to 18.6 percent in February 2011. The external current account balance is estimated to have improved from a deficit of 1 percent of GDP in 2009 to a surplus of about 1 percent of GDP in 2010, in the context of strong mineral exports. Gross international reserves rose by US$22 million in 2010, to US$785 million at year-end (4.4 months of imports).

The overall fiscal deficit shifted from a surplus of 2.2 percent of GDP during 2007-08 to a deficit of 3.3 percent of GDP during 2009-10. Lower tax revenues were only offset in part by higher nontax revenue from the state-owned oil company and grant disbursements. However, both current and capital expenditures rose significantly, reflecting elevated spending prior to the elections, including on goods and services and in connection with the civil service wage reforms. In 2009 and the first half of 2010, the deficit was financed in part by a build-up of domestic payment arrears (estimated at about 1 percent of GDP at end-2010). Public debt rose from 18 percent of GDP in 2008 to 21.6 percent in 2010.

Growth of broad money (M2), which had surged in late-2009 and early-2010, declined in the second half of 2010. Year-on-year private sector credit growth also eased, to around 10 percent, at end-2010, continuing a trend started in mid-2008. Dollarization ratios in the banking sector have continued to decline. The banking sector as a whole appears to be generally well capitalized, but compliance with regulatory norms varies across the sector. In 2010, CLICO-Suriname was acquired by a local insurance company.

Executive Board Assessment

Executive Directors noted Suriname’s favorable economic outlook, supported by buoyant commodity prices and strong private and public investments in the mineral and energy sectors and infrastructure. These investments should help raise the growth potential, strengthen government revenue, and improve the external position. Directors considered that the main challenge in the near term is to contain rising inflationary pressures, while further efforts should be pursued to ensure fiscal sustainability over the medium term.

Directors welcomed the authorities’ commitment to tighten fiscal policy and improve public finances. They stressed the need to rein in current expenditure and avoid the development of a wage-price inflation spiral, and strengthen social support programs to target the most vulnerable households affected by the rise in inflation.

Directors noted that, with the expected substantial decline in foreign grants in coming years, it is important to strengthen government revenue to ensure fiscal sustainability. In this regard, they welcomed the recent revenue-enhancing measures and encouraged the authorities to press forward with the introduction of a VAT system and other measures under consideration. Directors concurred that a credible medium-term fiscal framework and an improved capacity for managing public finances will be crucial to ensuring fiscal sustainability over the medium term. They also urged the authorities to take decisive actions to reform and strengthen the financial positions of public utility companies.

Directors encouraged the authorities to remain vigilant toward inflationary pressures and stand ready to tighten monetary policy as needed. They noted the staff’s assessment that the new official exchange rate is broadly in line with fundamentals, and supported the authorities’ plans to review the exchange rate arrangement and consider greater exchange rate flexibility over time. Directors also welcomed Fund technical assistance to develop indirect monetary instruments and strengthen the central bank’s capacity to conduct open market operations.

Directors supported the authorities’ efforts to strengthen supervision of the banking and insurance sectors. They considered that an early FSAP exercise would be useful to assess the strengths and weaknesses in the banking sector. They also welcomed the authorities’ commitment to promote a gradual dedollarization of the banking system.

Directors encouraged further progress in improving the business environment to facilitate the development of a dynamic private sector and help diversify the economy. In this context, they noted the authorities’ intention to increase the public share in the exploitation of natural resources and encouraged a national dialogue to help foster consensus on such investments and the management of the expected rise in mineral revenues.

Directors commended the authorities for their efforts to improve the quality and dissemination of economic data, including in the balance of payments.

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. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.