## 1.7 percent in 2017 after two consecutive years of contraction, supported by higher gold ## Source details **Canonical URL:** [1.7 percent in 2017 after two consecutive years of contraction, supported by higher gold](https://www.imf.org/-/media/files/publications/cr/2018/cr18376.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18376.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18376.pdf.json) --- ### Recent developments - Real GDP growth: 1.7 percent in 2017 after two consecutive years of contraction. - Growth drivers: - Gold production increased by over 40 percent in 2017; Merian gold mine launched late 2016. - Refined petroleum production increased by 28 percent in 2017 due to refinery upgrades. - The overall monthly economic activity index (MEAI) grew 3.7 percent in the 12-month period to March 2018, driven by mining, manufacturing, construction, agriculture, and forestry. - Labor market: - Unemployment peaked at 9¾ percent during 2015-16; fell to 8 percent in 2017. - Inflation and interest rates: - Inflation declined from a peak of close to 80 percent in 2016 to single digits since late-2017. - Low inflation resulted in firmly positive (ex-ante) real interbank and lending rates. - External position: - Current account deficit fell from 16½ percent of GDP in 2015 to about zero in 2017. - H1 2018 current account deficit driven by a one-off transaction and large repatriated profits by foreign gold companies; staff projects annual 2018 current account deficit at 2.4 percent of GDP. - Gross international reserves rose to about 3.1 months of imports (after Staatsolie borrowed an equivalent of 18¼ percent of GDP in a syndicated loan, part of which repaid a government loan). - Reserve coverage represented 55 percent of the Assessment of Reserve Adequacy (ARA) metric at end-2017; expected to end 2018 at around 72 percent of the ARA metric. - External debt, as a percent of GDP, has been above 90 percent of GDP since late-2016. - Public finances: - Public (central government) debt reached 77 percent of GDP by end-2017. - Primary deficit evolution: 7.9 percent of GDP in 2015 → 6.2 percent of GDP in 2016 → 5.0 percent of GDP in 2017. - Non-resource primary balance (NRPB) widened by 2.4 percent of GDP to nearly 12 percent of GDP in 2017. - Contributors to NRPB widening: higher fuel prices increasing subsidies to the state-owned electricity company (EBS), higher public investment, and public wage increases (teachers effectively 35 percent in 2017; a 25 percent wage increase for other civil servants announced in September 2018 to be applied retroactively starting January 2017). ### Outlook and projections - Real GDP growth projections: - 2 percent in 2018 (staff projection). - Gradual acceleration to 3 percent over the medium term. - External assessment: - The external position is judged moderately weaker than implied by medium-term fundamentals and desirable policies (based on 2017 data). - Staff estimates suggested a current account norm of a surplus of 1.2 percent of GDP for 2017 and a moderate exchange rate overvaluation of around 2.7 percent. - Risks: - Slow pace of reforms and a step-up in current public expenditures could worsen the fiscal situation in 2019-2020. - Continued heavy dependence on the mineral sector. ### Financial sector and monetary developments - Banking sector soundness and indicators: - Average capital ratio rose from 5.5 percent of risk-weighted assets in 2016 to 9.1 percent in June 2018. - Nonperforming loans (NPLs) were 12 percent of gross loans in June 2018. - Average return on assets (ROA) was 0.5 percent (annualized). - Monetary framework and liquidity: - The monetary framework lacks standard instruments and needs modernization. - CBvS switched its nominal anchor from the exchange rate to the monetary base in 2016 and stopped monetary financing of the budget. - Reserve requirements: 50 percent on foreign currency and 35 percent on the domestic currency base since November 2015; effective rate lower due to concessions permitting on-lending for private residential construction. - Recent stability in the exchange rate contributed to lower inflation. - Recommendation to absorb excess liquidity in the banking system quickly and to develop open market operations and standing facilities. - Staff supports adopting reserve money targeting and strengthening institutional and financial settings of the Central Bank. - Maintaining a flexible exchange rate is advised to support adjustment to external shocks. - Banking oversight and resolution: - CBvS should ensure proper classification and provisioning of NPLs, conduct an asset quality review, remove remaining forbearance, require banks to build capital, and upgrade contingency planning and bank resolution frameworks. - Urgent priorities: coordination between MoF and CBvS on financial stability; rules-based framework for emergency liquidity support; regularly test contingency plans; introduce a new bank resolution system. ### Fiscal assessment and priorities - Fiscal position: - Fiscal deficits are large and public debt is expected to rise unless strong fiscal consolidation is implemented. - The non-resource primary deficit was nearly 12 percent of GDP in 2017. - Key recommended measures to restore sustainability: - Implement the value-added tax (VAT). - Curtail electricity subsidies. - Contain the public wage bill. - Continue to improve tax and customs administration. - Strengthen revenue administration, improve public financial management, and strengthen the public investment system. - Consider a fiscal framework focusing on the non-resource primary balance to safeguard long-term fiscal sustainability. - Strengthen the social safety net to protect vulnerable groups. - Staff fiscal package and magnitude: - Measures of about 6¼ percent of GDP by 2023 would be required to put debt-GDP on a downward path. - Such an effort would reduce the non-resource primary deficit by half (to about 6½ percent of GDP). - Authorities’ fiscal adjustment measures of about 3¼ percent of GDP (as reflected in staff’s baseline; mostly achieved through the VAT implementation) are steps in the right direction, but an additional fiscal effort of close to 3 percent of GDP in the next 5 years (relative to staff’s baseline) will be required. - Staff’s recommended main measures (exact descriptions preserved): - Introducing a VAT at 10 percent in 2019, with a subsequent rate increase to 15 percent in 2021. The VAT should be single-rate and broad based with minimal exemptions. - Reducing energy subsidies through raising average electricity tariffs each year by 15 percent during 2019–20 and 20 percent during 2021-23 to bring Suriname’s electricity tariffs closer to regional averages. - The tariff structure should avoid imposing an undue burden on low-income users (e.g., by not changing tariffs for the lowest consumption bracket). - Additional measures to improve efficiency should increase cost recovery from the current 30 percent to an average of 90 percent. - Moderating wage increases and largely preserving the reduction in the wage bill achieved in 2016, including by reducing public employment, primarily through tackling fraud and continuing with limits on hiring to return the number of central government employees to the pre-2015 levels. - Raising infrastructure spending by an additional 1¼ percent of GDP (compared to staff’s baseline) by 2023, bringing infrastructure spending from an annual average of 3 percent of GDP during 2015–17 to 4.5 percent of GDP. - Strengthening the social safety nets to lower the impact of fiscal adjustment on vulnerable groups. - Impact on growth: - Staff’s fiscal consolidation package would have a modest real GDP cost; simulations suggest only a modest drag on growth relative to a strategy that relies more heavily on cuts to infrastructure spending. ### Structural reforms and policy recommendations - Short- to medium-term priorities: - Significantly reduce the fiscal deficit through revenue and expenditure measures (VAT, subsidy reductions, wage bill containment). - Strengthen the monetary policy framework and modernize monetary instruments consistent with a reserve money targeting regime. - Allow the exchange rate to operate flexibly as a shock absorber. - Use regulatory and supervisory tools to ensure banks meet minimum capital requirements; upgrade contingency planning and bank resolution frameworks. - Implement supply-side reforms to improve productivity and diversify the economy by promoting non-mineral engines of growth. - Improve the business climate, invest in education, increase labor market flexibility while providing a meaningful safety net, and strengthen governance to support investor confidence. ### Risks and stress-test findings - Short-term and medium-term downside risks: - Tighter global financial conditions, pockets of vulnerability in the banking sector, rising public debt with a high share of foreign exchange debt, low international reserves, delays in strengthening the AML/CFT regime, and lack of a non-mineral engine of growth. - Political economy risk: government may increase debt-financed spending in the run-up to the 2020 elections, raising near-term growth but increasing public debt and slowing reserve accumulation. - Upside risks: - Potential new gold or oil discoveries and faster implementation of fiscal or energy sector reforms. - Debt-sensitivity stress-test outcomes (selected exact figures preserved): - A 30 percent depreciation of the real exchange rate could drive external debt to 145 percent of GDP initially; external debt would then fall to 126 percent of GDP in the medium term. - A non-interest current account shock would result in debt of around 104 percent of GDP at the horizon. - Combined macro-fiscal shock illustrated as 98 (percent of GDP) in figures; baseline external debt shown as 81 (percent of GDP) in scenario comparisons. ### Key statistics (as reported) - Real GDP growth: -5.6 (2016), 1.7 (2017), 2.0 (2018 projection). - Nominal GDP (percent changes): 20.6 (2016), 16.5 (2017), 11.6 (2018). - Consumer prices (period average): 55.5 (2016), 22.0 (2017), 7.5 (2018). - Reserve coverage (ARA): 55 percent (end-2017), expected ~72 percent (end-2018). - Gross international reserves (USD millions): 381 (2016), 424 (2017), 552 (2018 projection). - Gross international reserves in months of imports: 2.5 (2016), 2.3 (2017), 3.1 (2018 projection). - Public (central government) debt: 78.5 (2016), 77.2 (2017), 69.8 (2018 projection). - Overall balance (net lending/borrowing, percent of GDP): -8.1 (2016), -8.0 (2017), -7.5 (2018 projection). - Primary balance (percent of GDP): -6.2 (2016), -5.0 (2017), -4.1 (2018 projection). - Non-resource primary balance (percent of GDP): -9.4 (2016), -11.8 (2017), -12.3 (2018 projection). - Current account balance (percent of GDP): -5.3 (2016), -0.1 (2017), -2.4 (2018 projection). - Gold price (USD per troy ounce): 1,248 (2016), 1,257 (2017), 1,261 (2018 projection). - Oil price (USD per barrel): 42.85 (2016), 52.86 (2017), 69.46 (2018 projection). - Staatsolie syndicated loan: equivalent of 18¼ percent of GDP (2018). *Source: STAFF REPORT FOR THE 2018 ARTICLE IV CONSULTATION (Suriname), International Monetary Fund.* ### 1.7 percent in 2017 after two consecutive years of contraction, supported by higher gold ### cr18376 - 1.7 percent in 2017 after two consecutive years of contraction, supported by higher gold ### Recent developments - Real GDP growth: 1.7 percent in 2017 after two consecutive years of contraction. - Growth drivers: - Gold production increased by over 40 percent in 2017; Merian gold mine launched late 2016. - Refined petroleum production increased by 28 percent in 2017 due to refinery upgrades. - The overall monthly economic activity index (MEAI) grew 3.7 percent in the 12-month period to March 2018, driven by mining, manufacturing, construction, agriculture, and forestry. - Labor market: - Unemployment peaked at 9¾ percent during 2015-16; fell to 8 percent in 2017. - Inflation and interest rates: - Inflation declined from a peak of close to 80 percent in 2016 to single digits since late-2017. - Low inflation resulted in firmly positive (ex-ante) real interbank and lending rates. - External position: - Current account deficit fell from 16½ percent of GDP in 2015 to about zero in 2017. - In H1 2018 there was a current account deficit driven by a one-off transaction and large repatriated profits by foreign gold companies; staff projects annual 2018 current account deficit at 2.4 percent of GDP. - Gross international reserves rose to about 3.1 months of imports (after Staatsolie borrowed an equivalent of 18¼ percent of GDP in a syndicated loan, part of which repaid a government loan). - Reserve coverage represented 55 percent of the Assessment of Reserve Adequacy (ARA) metric at end-2017; expected to end 2018 at around 72 percent of the ARA metric. - External debt, as a percent of GDP, has been above 90 percent of GDP since late-2016. - Public finances: - Public (central government) debt reached 77 percent of GDP by end-2017. - Primary deficit evolution: 7.9 percent of GDP in 2015 → 6.2 percent of GDP in 2016 → 5.0 percent of GDP in 2017. - Non-resource primary balance (NRPB) widened by 2.4 percent of GDP to nearly 12 percent of GDP in 2017. - Contributors to NRPB widening: higher fuel prices increasing subsidies to the state-owned electricity company (EBS), higher public investment, and public wage increases (teachers effectively 35 percent in 2017; a 25 percent wage increase for other civil servants announced in September 2018 to be applied retroactively starting January 2017). ### Outlook and projections - Real GDP growth projections: - 2 percent in 2018 (staff projection). - Gradual acceleration to 3 percent over the medium term. - External assessment: - The external position is judged moderately weaker than implied by medium-term fundamentals and desirable policies (based on 2017 data). - Staff estimates suggested a current account norm of a surplus of 1.2 percent of GDP for 2017 and a moderate exchange rate overvaluation of around 2.7 percent. - Risks: - Slow pace of reforms and a step-up in current public expenditures could worsen the fiscal situation in 2019-2020. - Continued heavy dependence on the mineral sector. ### Financial sector and monetary developments - Banking sector: - Financial soundness indicators point to an improvement since 2016, but important vulnerabilities remain. - External debt composition and elevated external debt ratios pose risks to financial stability. - Monetary framework: - The monetary framework lacks standard instruments and needs modernization. - Recent stability in the exchange rate contributed to lower inflation. - Recommendation to absorb excess liquidity in the banking system quickly and to develop open market operations and standing facilities. - Staff supports adopting reserve money targeting and strengthening institutional and financial settings of the Central Bank. - Maintaining a flexible exchange rate is advised to support adjustment to external shocks. ### Fiscal assessment and priorities - Fiscal position: - Fiscal deficits are large and public debt is expected to rise unless strong fiscal consolidation is implemented. - The non-resource primary deficit was nearly 12 percent of GDP in 2017. - Key measures recommended to restore sustainability: - Implement the value-added tax (VAT). - Curtail electricity subsidies. - Contain the public wage bill. - Continue to improve tax and customs administration. - Strengthen revenue administration, improve public financial management, and strengthen the public investment system. - Consider a fiscal framework focusing on the non-resource primary balance to safeguard long-term fiscal sustainability. - Strengthen the social safety net to protect vulnerable groups. ### Structural reforms and policy recommendations - Short- to medium-term priorities: - Significantly reduce the fiscal deficit through revenue and expenditure measures (VAT, subsidy reductions, wage bill containment). - Strengthen the monetary policy framework and modernize monetary instruments consistent with a reserve money targeting regime. - Allow the exchange rate to operate flexibly as a shock absorber. - Use regulatory and supervisory tools to ensure banks meet minimum capital requirements; upgrade contingency planning and bank resolution frameworks. - Implement supply-side reforms to improve productivity and diversify the economy by promoting non-mineral engines of growth. - Improve the business climate, invest in education, increase labor market flexibility while providing a meaningful safety net, and strengthen governance to support investor confidence. ### Key statistics (as reported) - Real GDP growth: -5.6 (2016), 1.7 (2017), 2.0 (2018 projection). - Nominal GDP (percent changes): 20.6 (2016), 16.5 (2017), 11.6 (2018). - Consumer prices (period average): 55.5 (2016), 22.0 (2017), 7.5 (2018). - Reserve coverage (ARA): 55 percent (end-2017), expected ~72 percent (end-2018). - Gross international reserves (USD millions): 381 (2016), 424 (2017), 552 (2018 projection). - Gross international reserves in months of imports: 2.5 (2016), 2.3 (2017), 3.1 (2018 projection). - Public (central government) debt: 78.5 (2016), 77.2 (2017), 69.8 (2018 projection) — note: ratios based on IMF’s 2014 Government Financial Statistics Manual. - Overall balance (net lending/borrowing, percent of GDP): -8.1 (2016), -8.0 (2017), -7.5 (2018 projection). - Primary balance (percent of GDP): -6.2 (2016), -5.0 (2017), -4.1 (2018 projection). - Non-resource primary balance (percent of GDP): -9.4 (2016), -11.8 (2017), -12.3 (2018 projection). - Current account balance (percent of GDP): -5.3 (2016), -0.1 (2017), -2.4 (2018 projection). - Gold price (USD per troy ounce): 1,248 (2016), 1,257 (2017), 1,261 (2018 projection). - Oil price (USD per barrel): 42.85 (2016), 52.86 (2017), 69.46 (2018 projection). - Staatsolie syndicated loan: equivalent of 18¼ percent of GDP (2018). *Source: STAFF REPORT FOR THE 2018 ARTICLE IV CONSULTATION (Suriname), International Monetary Fund.* ### 8. The soundness of the banking system is improving but important vulnerabilities ### 8. The soundness of the banking system is improving but important vulnerabilities remain ### Banking sector soundness: recent progress and remaining vulnerabilities - Following the near-crisis of 2015-16, banks have been actively cleaning up their balance sheets. - Financial stability indicators have improved since 2016, but there is wide variability across banks; the published financial statements of some suggest they do not meet the minimum regulatory requirements. - Key indicators (exact values preserved): - Average capital ratio rose from 5.5 percent of risk-weighted assets in 2016 to 9.1 percent in June 2018. - Nonperforming loans (NPLs) were 12 percent of gross loans in June 2018. - Average return on assets (ROA) was 0.5 percent (annualized, reported as relatively low). ### Outlook and macro-financial projections (staff baseline assumptions) - Baseline fiscal and policy assumptions: - Staff’s baseline assumes modest fiscal measures will be undertaken in 2019 but that the introduction of the VAT is deferred until 2021. - Staff’s baseline assumes implementation of the VAT in 2021. - Staff’s baseline assumes the introduction of a 15 percent VAT to replace the current sales tax in 2021. - 2019 budget and fiscal stance: - The authorities submitted the 2019 budget in September; the budget envisages a significant increase in spending that, if implemented, would result in a double-digit deficit as a percent of GDP. - Staff’s baseline assumes the deficit will rise to around 9.2 percent of GDP in 2019. - Adjustment measures included in staff’s baseline for 2019 include a vehicle tax recently approved by the National Assembly. - Medium-term macro projections (under staff baseline): - Real GDP growth is expected to slowly rise to 3 percent over the medium term as the non-mining economy picks up. - Inflation is expected to subside to 7½ percent (period average) in 2018 and decline further thereafter. - The fiscal deficit is expected to fall to about 6 percent of GDP over the medium term, mostly due to the VAT introduction (in 2021). - Public debt is forecast to fall below 70 percent of GDP by end-2018, largely due to early repayment of some debt using part of the proceeds from the repayment of a 2016 loan by Staatsolie to the government. - From 2019 onwards public debt as a percent of GDP is expected to resume its upward trajectory, reaching 82 percent of GDP by 2023 (Annex II). - The current account deficit is expected to fall from about 2.4 percent of GDP in 2018 to 0.7 percent of GDP in 2023, as the terms of trade improve and the fiscal deficit falls. - International reserves are projected to be at about 3 months of imports by end-2018 or 72 percent of the ARA metric, with a modest increase in reserve coverage over the medium term as the balance of payments improves. - Sectoral and structural notes: - In 2020, electricity subsidies are projected to decline due to the expected transfer of the hydro powerplant to government ownership in late 2019, which will lower input costs for the EBS. - The hydro powerplant is owned and operated by the private aluminum producer Suralco; the power purchase agreement links the price of electricity to the price of hydrocarbons. - The VAT policy change is expected to: - generate an additional 2 percent of GDP in revenues, - have an inflation impact of 5 percentage points at the year of impact (2021), - have a cumulative two-year fiscal multiplier of 0.4. ### Risks to the baseline - Short-term and medium-term downside risks: - Tighter global financial conditions could make debt service more burdensome and a shortfall in external financing could weaken growth and the external position. - Pockets of vulnerability in the banking sector pose risks, especially in the absence of a deposit insurance system and deficiencies in crisis preparedness and resolution frameworks. - Rising public debt, including a high share of foreign exchange debt, increases vulnerability to exchange rate shocks and is a longer-term risk alongside relatively low international reserves. - Lack of a non-mineral engine of growth could erode potential growth. - Delays in strengthening the AML/CFT regime pose risks, including further withdrawal of correspondent banking relationships (CBRs) and freezing of cash shipments by foreign governments. - Political economy risk: the government may decide to increase debt-financed spending in the run-up to the 2020 elections—resulting in higher near-term growth at the cost of higher public debt and a slower path of reserves accumulation. - Upside risks: - Potential new gold or oil discoveries could boost fiscal revenues and GDP growth. - The authorities’ program for strengthening the fiscal framework and an initiative for energy sector reform—complemented by an ongoing social dialogue—also constitute upside risks for the fiscal position and growth in the medium term. ### Authorities’ views on baseline and risks - The authorities considered staff’s baseline too pessimistic and emphasized: - Their intended spending envelope is much lower than what they proposed in the 2019 budget. - Intentions to continue limiting spending on goods and services. - Approval of the new vehicle tax and widespread administrative fee increases to be implemented in 2019. - Intention to introduce the VAT once preparations are completed. - The authorities saw risks to growth and the fiscal position as more balanced and highlighted likely future new discoveries of oil and planned gold mining and non-traditional investment activities as potential offsets to downside risks. ### Policy discussions — A. Putting fiscal policy on a sustainable path - Institutional and policy reforms under way: - The National Assembly approved legislation for a Saving and Stabilization Fund (SSF) in 2017, with the objective to operationalize it in 2019. - The authorities have embarked on a program to strengthen the framework for implementing fiscal policy, supported by a $40 million loan from the Inter-American Development Bank, featuring three major components: - Strengthening revenue administration: - Developing taxpayer services. - Strengthening internal revenue operations (including introducing new tax identification numbers for all taxpayers). - Improving customs operations (including adopting new procedures for eventual VAT implementation). - Reviewing and updating the legal framework for tax and customs administration. - Long-term transformation of the tax department into a modern, semi-autonomous revenue agency using a risk-based approach. - Improving public financial management: - Introducing a new public financial management law to the National Assembly. - Introducing a new procurement law harmonized with CARICOM to improve competition and transparency in public contracting. - Improving the Ministry of Finance’s business model for budget planning, bolstering the medium-term fiscal framework, strengthening treasury operations, and improving internal controls. - Strengthening the public investment system: - Prioritizing investment projects by establishing a public investment and PPP unit and introducing an operational plan for planning, pre-investment and feasibility studies in public infrastructure and PPPs. - Need for a credible medium-term fiscal anchor: - Current anchor: Debt Act public debt ceiling of 60 percent of GDP, with a 2017 amendment introducing an escape clause allowing an annual fiscal deficit of 6.5 percent of GDP in 2017 and 5 percent of GDP in 2018-2021. - Staff recommends a medium-term anchor based on the non-resource primary balance (NRPB) as a share of GDP to smooth commodity revenue swings and support intergenerational equity. - Fiscal sustainability frameworks and illustrative benchmarks (exact figures preserved): - Permanent income framework (PIF): - Under the assumption of no new mineral discoveries, a NRPB of -1¼ percent of GDP would be needed (implying an adjustment of about 10½ percent of GDP relative to the 2017 NRPB). - Modified permanent income (MPIF) framework: - Frontloaded spending of an additional 2 percent of GDP on capital expenditures in the initial period would have to be compensated by achieving a modest NRPB surplus (of up to 1 percent of GDP percent of GDP) in the adjustment period. - Fiscal sustainability framework (FSF): - Adding an extra 2 percent of GDP to capital expenditures in the frontloaded investment period would permanently increase non-resource revenues requiring the NRPB to be reduced to a small (½ percent of GDP) deficit in the adjustment period. - In all three frameworks, substantial fiscal adjustment is needed to start accumulating financial savings to preserve natural resource wealth for future generations. - Magnitude of required measures to put debt-GDP on a downward path: - Measures of about 6¼ percent of GDP by 2023 would be required. - Such an effort would reduce the non-resource primary deficit by half (to about 6½ percent of GDP). - The authorities’ fiscal adjustment measures of about 3¼ percent of GDP (as reflected in staff’s baseline; mostly achieved through the VAT implementation) are steps in the right direction, but an additional fiscal effort of close to 3 percent of GDP in the next 5 years (relative to staff’s baseline) will be required. - Staff’s recommended main measures (exact descriptions and numbers preserved): - Introducing a VAT at 10 percent in 2019, with a subsequent rate increase to 15 percent in 2021. The VAT should be single-rate and broad based with minimal exemptions. - Reducing energy subsidies through raising average electricity tariffs each year by 15 percent during 2019–20 and 20 percent during 2021-23 to bring Suriname’s electricity tariffs closer to regional averages. - The tariff structure should avoid imposing an undue burden on low-income users (e.g., by not changing tariffs for the lowest consumption bracket). - Additional measures to improve efficiency should increase cost recovery from the current 30 percent to an average of 90 percent. - Moderating wage increases and largely preserving the reduction in the wage bill achieved in 2016, including by reducing public employment, primarily through tackling fraud and continuing with limits on hiring to return the number of central government employees to the pre-2015 levels. - Greater differentiation in public salaries could help attract and retain a more skilled public workforce. - Raising infrastructure spending by an additional 1¼ percent of GDP (compared to staff’s baseline) by 2023, bringing infrastructure spending from an annual average of 3 percent of GDP during 2015–17 to 4.5 percent of GDP. - This amount would include implementation of investment projects financed by the IFIs and would help boost potential growth and support domestic demand. - Strengthening the social safety nets to lower the impact of fiscal adjustment on vulnerable groups. - Impact on growth: - Staff’s fiscal consolidation package would have a modest real GDP cost; simulations suggest only a modest drag on growth relative to a strategy that relies more heavily on cuts to infrastructure spending. ### Authorities’ views on fiscal policy reforms - The authorities considered staff’s adjustment scenario projections close to their own baseline scenario and disagreed that Suriname lacks a credible fiscal anchor, though they agreed the anchor could be improved. - They noted recent institutional and legal changes: - Agreement to eliminate monetary financing. - Establishment of the revenue-stabilizing SSF. - The authorities underscored commitment to: - Strengthening the fiscal position and reducing public debt. - Reorganizing the electricity sector to underpin reductions in electricity subsidies and believed subsidies could be phased out faster than projected in staff’s adjustment scenario. - Introducing the VAT. *Source: IMF staff report chapter "8. The soundness of the banking system is improving but important vulnerabilities remain."* ### 18. The central bank (CBvS) switched its nominal anchor from the exchange rate to the ### 18. The central bank (CBvS) switched its nominal anchor from the exchange rate to the ### Monetary framework and tools - In 2016 the CBvS switched its nominal anchor from the exchange rate to the monetary base. - The CBvS stopped monetary financing of the budget and introduced processes to monitor and forecast liquidity to manage the growth of reserve money. - The CBvS lacks standard tools to undertake open market operations and does not have standing facilities common to most central banks. - Instead, the CBvS relies on ad hoc instruments (such as foreign exchange swaps and occasional loans to banks) to manage liquidity. - The CBvS’s main tool is the reserve requirement, which has remained 50 percent on foreign currency and 35 percent on the domestic currency base since November 2015; the effective rate is lower due to concessions (banks are permitted to on-lend a certain part of required reserves for private residential construction). ### Strengthening the monetary framework (recommendations) - Make clear that reserve money is the nominal anchor by: - Setting explicit quarterly targets for reserve money. - Achieving targets through open market operations and (infrequent) changes in reserve requirements. - Introducing standing facilities to meet short-term overnight liquidity needs (lending facilities). - Introducing standing facilities to absorb banks’ excess liquidity (deposit facilities). ### Monetary policy conditions and liquidity - Current stance: Mostly appropriate, with ex-ante real interest rates increased and turned positive as inflation decreased to single digits and credit to the private sector contracted. - Recent development: A pickup in excess liquidity driven by fiscal operations and reduced lending may put pressure on the exchange rate and inflation. - Recommendation: Absorb the excess liquidity. ### Institutional strengthening of the CBvS (findings and recommendations) - First safeguards assessment (June 2016) found significant risks in governance, central bank legislation, financial reporting, and external audit. - Legislation should be submitted quickly to recapitalize the CBvS and align institutional structure with international best practices. - Improve transparency by finalizing and publishing audited financial statements for 2015–2017 and committing to timely publication going forward. - The CBvS should be recapitalized and its charter updated to improve governance and financial reporting. ### Exchange rate regime and reserves - Since early 2017 the bilateral US dollar exchange rate has been remarkably stable, implying a de facto stabilized arrangement; stability reflects moral suasion by the CBvS and coordination among key market participants. - The CBvS continues to provide foreign exchange directly to the private sector for fuel and other specific imports. - Recommendation: Allow the exchange rate to move flexibly (avoid perception that the exchange rate is the nominal anchor) and target a steady accumulation of international reserves. - A more liquid foreign exchange market with meaningful price discovery would create incentives for market participants to gather information, form views, correctly price foreign exchange, and manage exchange rate risks. - Authorities’ view: Consider monetary policy stance appropriate; ready to sterilize excess liquidity if needed through unwinding foreign exchange swaps or offering term deposits; commitment to a flexible exchange rate and development of the interbank market. ### Banking system oversight, resolution, and AML/CFT - Supervision and NPLs: - CBvS should closely monitor the banking sector and take firm supervisory actions where needed. - Ensure proper classification and provisioning of banks’ nonperforming loans (NPLs), including through an asset quality review. - Develop timebound plans for removal of remaining forbearance. - Require banks to develop ambitious action plans to resolve NPLs (restructuring, write offs, collateral or loan sales) and to build capital where necessary by attracting investors, precluding dividends, and cutting operational costs. - Resolution and contingency planning: - CBvS is working on a new bank resolution law and strengthening bank supervision. - Urgent priorities include: (i) establishing coordination between the Ministry of Finance and CBvS on financial stability; (ii) developing a rules-based framework for emergency liquidity support; (iii) regularly testing and updating contingency plans (including requiring banks to provide liquidity contingency plans); (iv) introducing a new bank resolution system consistent with international best practices. - Work on this is urgent and should be expedited. - AML/CFT: - Authorities should continue to strengthen Suriname’s AML/CFT regime in line with the revised (2012) FATF standards. - Steps taken include bringing cambios (foreign exchange houses) under CBvS Banking Supervision Department in 2018. - Further actions needed: effective implementation to mitigate identified ML/TF risks, effective communication of government efforts to foreign correspondent banks, conducting a National Risk Assessment for AML/CFT in 2019 to prepare for the CFATF Mutual Evaluation in 2020. - Authorities’ view: Committed to monitoring the financial system, improving soundness and resilience, strengthening legal frameworks, and submitting draft laws (deposit insurance, Bank Resolution Law, Bank Act, amendment to 2011 Bank Supervision Law) by end-2018; using directives (Aanwijzing) to enforce improvements. ### Structural reforms and growth foundations - Key constraints: - Heavy dependence on the mineral sector creates vulnerability to external shocks and stifles potential growth. - Low scores on ease of doing business indicators including starting a business, enforcing contracts, and getting credit. - Reforms and measures already taken: - Reform of the Companies Act to simplify starting a business; Business and Professions Licensing Law to simplify licensing; National Trade Facilitation Committee established; Electronic Transactions Law passed; development plan for 2017–21 passed; new investment law underway. - Law on Financial Statements (2017) mandates use of IFRS in annual reports starting from 2020. - Priority supply-side reforms: - Improve environment for private investment: strengthen investors’ legal protections and update the investment law to promote FDI and investment in infrastructure and non-mining sectors such as agriculture. - Invest in education: expand access, revise curriculum, enhance teacher training and coaching, renovate schools and teacher training centers. - Increase labor market flexibility while introducing unemployment insurance: address stringent employment protection (conversion of contract workers after 6 months, restrictions on hours) and pair reductions in protections with a well-designed unemployment insurance and active labor market policies (employment services, vocational training). - Strengthen governance: fiscal governance, investors’ legal protections, and ease of doing business. ### Staff appraisal — macro outlook and priorities - Recent stabilization: - Economy returned to growth in 2017 aided by greater gold production and a pickup in commodity prices. - Inflation subsided to single digits and the exchange rate stabilized. - External position: - Improved due to higher gold exports but remains vulnerable; international reserves remain well below 100 percent of the Fund’s (ARA) reserve adequacy metric. - External debt is more than 90 percent of GDP. - Risks: - Short-term risks are balanced; medium-term risks skewed to the downside, including rising public debt and debt service, high share of foreign-currency denominated debt, lack of financing for fiscal deficits, banking sector vulnerabilities, low international reserves, delays in strengthening AML/CFT, and lack of a non-mineral engine of growth. - Upside risks include new discoveries of gold or oil and faster implementation of fiscal or energy sector reforms. - Fiscal priorities: - Strengthening the fiscal position and reducing public debt should be the government’s priority. - Total fiscal measures of about 6¼ percent of GDP over the next 5 years—consistent with reducing the non-resource primary deficit to 6½ percent of GDP—are needed to put public debt on a downward path. - Focus areas: reduce electricity subsidies, contain the wage bill, bring forward VAT introduction, and continue improving tax and customs administration. - If implemented, these measures should provide space for additional capital expenditure and strengthening of social safety nets. - Monetary priorities: - Sterilize excess liquidity and strengthen monetary policy settings by setting reserve money targets, developing open market operations and standing facilities to absorb excess liquidity. - Recapitalize the CBvS, update the central bank charter, and allow the exchange rate to move flexibly to act as a shock absorber. - Banking system priorities: - Maintain strong oversight, require banks to hold capital buffers at least equal to the regulatory minimum, adopt robust contingency planning and an effective banking resolution regime, and bring AML/CFT framework in line with 2012 FATF standards while closely monitoring withdrawal of CBRs. - Structural reform priorities: - Diversify away from natural resources, reduce costs of doing business, reform the investment framework, invest in education, implement labor market reforms that increase flexibility while providing a meaningful safety net, and strengthen governance to promote investor confidence and growth. *Sources: Dagblad Suriname; Central Bank of Suriname; and IMF staff calculations.* ### 41. Staff recommends that the next Article IV consultation with Suriname be held on the ### 41. Staff recommends that the next Article IV consultation with Suriname be held on the standard 12-month cycle. ### Key recommendation - Staff recommendation: next Article IV consultation with Suriname to be held on the standard 12-month cycle. ### Real economy and inflation - Real GDP (period average percentage change): 2016 -5.6; 2017 1.7; 2018 2.0; 2019 2.2; 2020 2.5; 2021 2.1; 2022 2.5; 2023 3.0. - Nominal GDP (period average percentage change): 2016 20.6; 2017 16.5; 2018 11.6; 2019 9.0; 2020 8.7; 2021 12.0; 2022 7.2; 2023 7.0. - GDP deflator (growth): 2016 27.7; 2017 14.6; 2018 9.4; 2019 6.6; 2020 6.1; 2021 9.7; 2022 4.6; 2023 3.9. - Consumer prices (period average): 2016 55.5; 2017 22.0; 2018 7.5; 2019 6.5; 2020 5.7; 2021 9.4; 2022 4.0; 2023 3.4. - Consumer prices (end of period): 2016 52.4; 2017 9.3; 2018 7.2; 2019 6.7; 2020 5.7; 2021 9.4; 2022 3.6; 2023 3.4. - Source statement: "Suriname's GDP was one of the hardest hit by the commodity-driven shock of 2014-2016." ### Fiscal developments and public debt - Central government revenues (percent of GDP): 2016 17.6; 2017 23.0; 2018 22.7; 2019 22.7; 2020 22.9; 2021 25.0; 2022 25.2; 2023 25.3. - Central government expenditures (percent of GDP): 2016 23.9; 2017 29.7; 2018 30.2; 2019 31.9; 2020 32.0; 2021 31.8; 2022 31.7; 2023 31.4. - Overall balance (net lending/borrowing, percent of GDP): 2016 -8.1; 2017 -8.0; 2018 -7.5; 2019 -9.2; 2020 -9.0; 2021 -6.8; 2022 -6.5; 2023 -6.1. - Primary balance (percent of GDP): 2016 -6.2; 2017 -5.0; 2018 -4.1; 2019 -5.2; 2020 -4.8; 2021 -2.3; 2022 -1.8; 2023 -1.5. - Non-resource primary balance (percent of GDP): 2016 -9.4; 2017 -11.8; 2018 -12.3; 2019 -12.9; 2020 -12.5; 2021 -10.1; 2022 -9.6; 2023 -9.3. - Public (central government) debt (percent of GDP): 2016 78.5; 2017 77.2; 2018 69.8; 2019 72.7; 2020 77.3; 2021 78.0; 2022 80.1; 2023 81.8. - Public debt composition (percent of GDP): Domestic 2016 21.1; 2017 23.0; 2018 21.8; External 2016 57.4; 2017 54.2; 2018 48.0. - Table data (central government operations, millions of SRD): Revenues 2016 3,469; 2017 5,276; 2018 5,824; 2019 6,350; 2020 6,964; 2021 8,505; 2022 9,203; 2023 9,868. Expenditures 2016 4,720; 2017 6,821; 2018 7,737; 2019 8,913; 2020 9,711; 2021 10,814; 2022 11,566; 2023 12,266. - Fiscal drivers noted: "Total revenues are recovering driven by the mineral revenues... especially from the gold and oil sectors." and "Fiscal deficits remain elevated." ### External sector and reserves - Current account balance (Millions of USD): 2016 -169; 2017 -2; 2018 -82; 2019 -124; 2020 -96; 2021 -66; 2022 -52; 2023 -31. - Current account balance (percent of GDP): 2016 -5.3; 2017 -0.1; 2018 -2.4; 2019 -3.4; 2020 -2.5; 2021 -1.6; 2022 -1.2; 2023 -0.7. - Trade balance, goods (Millions of USD): 2016 187; 2017 672; 2018 530; 2019 414; 2020 460; 2021 531; 2022 577; 2023 612. - Exports, f.o.b. (Millions of USD): 2016 1,439; 2017 2,034; 2018 2,199; 2019 2,104; 2020 2,207; 2021 2,332; 2022 2,437; 2023 2,541. - Of which: alumina, gold, and petroleum (Millions of USD): 2016 1,194; 2017 1,788; 2018 1,848; 2019 1,793; 2020 1,871; 2021 1,961; 2022 2,043; 2023 2,104. - Imports, f.o.b. (Millions of USD): 2016 -1,252; 2017 -1,363; 2018 -1,669; 2019 -1,690; 2020 -1,746; 2021 -1,801; 2022 -1,860; 2023 -1,929. - Gross international reserves (Millions of USD): 2016 381; 2017 424; 2018 552; 2019 555; 2020 606; 2021 700; 2022 764; 2023 835. - Reserve adequacy (risk-weighted measure, USD millions): 2016 669; 2017 733; 2018 771; 2019 791; 2020 813; 2021 842; 2022 868; 2023 899. - Source observations: "The current account balance improved in 2017 due to a sharp increase in gold exports..." and "Reserves were bolstered by a smaller current account deficit and one-off inflows." ### Monetary, credit, and financial sector - Broad money (constant exchange rate, end of period percentage change): 2016 5.9; 2017 8.6; 2018 8.5; 2019 7.6; 2020 8.2; 2021 9.7; 2022 8.3; 2023 8.5. - Reserve money (constant exchange rate, end of period percentage change): 2016 8.1; 2017 22.2; 2018 24.7; 2019 12.7; 2020 10.8; 2021 14.1; 2022 10.5; 2023 10.5. - Reserve money (percent of GDP): 2016 15.2; 2017 16.0; 2018 17.9; 2019 18.5; 2020 18.9; 2021 19.3; 2022 19.9; 2023 20.6. - Private sector credit (constant exchange rate, end of period percentage change): 2016 -5.7; 2017 0.9; 2018 -3.9; 2019 2.9; 2020 5.0; 2021 7.6; 2022 7.9; 2023 8.1. - Private sector credit (percent of GDP): 2016 38.1; 2017 33.1; 2018 28.6; 2019 27.4; 2020 26.8; 2021 26.2; 2022 26.5; 2023 27.0. - Dollarization indicators: deposit and credit dollarization spiked in 2016 then stabilized thereafter (figure caption). - Financial soundness indicators (selected, percent): Regulatory capital to risk-weighted assets: 2016 5.5; 2017 9.3; 2018Q2 9.1. NPL to gross loans: 2016 10.8; 2017 13.0; 2018Q2 12.0. Return on assets (annualized): 2016 -0.7; 2017 0.9; 2018Q2 0.5. - Source observations: "Credit to private sector is contracting in both nominal and real terms... with substantial differentials across sectors." and "After a reduction in 2016 H2, reserve money growth has increased and remained volatile." ### Projections and medium-term outlook (selected figures preserved exactly as reported) - Real GDP projections: 2018 2.0; 2019 2.2; 2020 2.5; 2021 2.1; 2022 2.5; 2023 3.0. - Public debt projections (percent of GDP): 2018 69.8; 2019 72.7; 2020 77.3; 2021 78.0; 2022 80.1; 2023 81.8. - Current account (percent of GDP) projections: 2018 -2.4; 2019 -3.4; 2020 -2.5; 2021 -1.6; 2022 -1.2; 2023 -0.7. - Gross international reserves projections (Millions of USD): 2018 552; 2019 555; 2020 606; 2021 700; 2022 764; 2023 835. ### Notable sectoral and policy observations from figures and tables - Commodity and exchange rate shocks: "…driven by strong depreciation of the nominal exchange rate." and "REER depreciated significantly following the change in the monetary regime in 2016 but has recently stabilized." - External debt and financing: "External debt increased slightly in 2017 after a sharp increase in 2015-2016 driven by real depreciation." - Fiscal composition: "Total revenues are recovering driven by the mineral revenues... especially from the gold and oil sectors." and "Subsidies to the electricity sector increasing due to very low tariffs and rising costs of generation." - Expenditures: "Expenditures are lower than the median in commodity exporters, but comparable to the Caribbean median... The wage bill is slightly higher than the median of commodity exporters but in line with the Caribbean median. Interest payments have risen above the Caribbean median and remain much higher than in commodity exporters." - External flows: 2016Q4 volatility noted: "The government issued a large bond and repaid debt." and "The recent spike in reserves is due to repayment of a loan and purchase of shares in NEWMONT gold mine by Staatsolie." *International Monetary Fund staff report (cr18376).* ### Annex I. Implementation of Past Fund Advice ### Annex I. Implementation of Past Fund Advice ### Monetary and exchange rate policies - Avoid monetary financing (2016 Article IV). - Implemented. The MoU between CBvS and MoF regarding prohibition of monetary financing ruled out financing of the deficit by CBvS. - Develop indirect instruments of monetary policy (2011-16 Article IV). - Limited progress. The CBvS has taken steps towards establishing these instruments in 2016, but they remain unfinished. - Increase short-term interest rates to positive levels in (ex-ante) inflation-adjusted terms (2016 Article IV). - Implemented. The decline in inflation led to an increase in interest rates in real terms. - Move to a market-determined exchange rate regime (2012 Article IV). Preserve exchange rate flexibility. Phase out the central bank's role as a distributor of foreign exchange to importers of fuel and other essential imports (2016 Article IV). - Implemented in 2016, with some backtracking afterwards. The exchange rate was floated in May 2016. After a period of flexibility in 2016, the exchange rate has been tightly managed. The CBvS continues providing foreign exchange for selected importers. - Implement institutional reforms to prevent fiscal dominance. Amend the Central Bank Act and prepare a strategic plan for addressing the CBvS's weakening financial position (2016 Article IV). - Not implemented. - Eliminate remaining multiple currency practices (2012 Article IV). - Implemented. ### Financial sector policies - Strengthen prudential regulation (2012 Article IV). Enhance financial sector stability by strengthening bank capital and the regulatory and supervisory framework in line with 2014 FSAP recommendations (2014 Article IV). - Implemented. The authorities introduced new regulations on capital adequacy, asset classification and provisioning, corporate governance, internal audit, FX risk, liquidity risk, interest rate risk, large exposures, and net FX positions. The Suriname National Payment System was operationalized in August 2015. The Financial Stability Department was established in 2014 and the first Financial Stability Report published in March 2016. - Develop a robust contingency planning framework (2014, 2016 Article IV): - Strengthen coordination mechanism between MoF and CBvS on financial stability issues, establish the Financial Stability Committee. - Strengthen the framework for emergency liquidity support. - Not implemented. - Modernize the bank resolution framework. Develop legal instruments for bank intervention and resolution. (2014, 2016 Article IV) - In progress. The CBvS is working on revisions to the relevant legislation. - Improve AML/CFT regime (2012 Article IV). Continue the reform process to align the AML/CFT regime with international standards in order to ensure Suriname's exit from CFATF review process. Enhance surveillance of foreign exchange bureaus to prevent AML/CFT abuses (2016 Article IV). - Substantial progress. In May 2017, CFATF announced that it had removed Suriname from its review process, as Suriname had made significant progress in addressing the deficiencies identified in its 2009 Mutual Evaluation Report. Sustained efforts to implement the revised (2012) FATF standard and ensure the effectiveness of the regime in mitigating ML/TF risks are required. ### Fiscal policies - Introduce VAT (2011-16 Article IV). - Not implemented. Substantial preparatory steps have been taken, but the implementation has been postponed to 2021. - Increase fuel taxes (2016 Article IV). - Partially implemented. The authorities increased the “government take” (a sum of fuel import duty, consumer tax and a number of other taxes) for diesel to SRD 0.7 per liter and unleaded gasoline to 1.3 SRD per liter in March 2017. The revenue collected from fuel consumer tax (a sub-component of total government take) remains significantly lower than the 2006-2015 average. - Improve the management of key public utility companies. Set the operations of the public utilities on a commercial basis, including by adjusting their tariffs and making them more progressive (2011 Article IV). Provide more light on the complex system of cross-subsidization and arrears accumulation within the public sector, especially with respect to production and distribution of electricity and water. (2012 Article IV). Phase out electricity subsidies by end-2017 (2016 Article IV). - Not implemented. The government nearly doubled electricity tariffs in late 2015 and implemented another increase in 2016, but electricity prices remain fixed in SRD terms, currently at about one-third of cost-recovery. - Launch a broad-based reform of the civil service (2016 Article IV). - Not implemented. - Strengthen the social safety net (Article IV 2016). Implement social support programs targeted at low-income households (Article IV 2011, 2012). - In progress. In 2015, the authorities launched a new health system. - Establish a sound fiscal framework considering the sensitivity of revenues to mineral sector developments (2013 Article IV). Develop a fiscal anchor rooted in the non-mineral balance, define an appropriate MT target for non-mineral balance (2016 Article IV). - Not implemented. - Establish a Sovereign Wealth Fund. (Article IV 2016). Develop a framework for sound management of future mining revenues and building of policy buffers (2012 Article IV). - Substantial progress. The Law has been passed, the SWF is expected to be operational in 2019. - Implement PFM reforms, including by adopting a new PFM Law (2016 Article IV). - In progress. The new law is to be discussed by the National Assembly. - Improve government procurement practices (Article IV 2016) - In progress. ### Structural policies - Implement supply-side reforms to improve business environment, including legal reforms to start a company, promoting competition, protecting investors, registering property and expanding access to finance (2016 Article IV) - In progress. - Revise the Law on Investment (2016 Article IV) - In progress. - Take steps to increase labor market flexibility, supported by a well-targeted social safety net (2016 Article IV). - Not implemented. *Source: cr18376 - Annex I. Implementation of Past Fund Advice.* ### 12. The external debt is sensitive to shocks to the real exchange rate and to the non- ### 12. The external debt is sensitive to shocks to the real exchange rate and to the non-interest current account ### Key stress-test findings and scenario outcomes - A 30 percent depreciation of the real exchange rate: - Could drive external debt to 145 percent of GDP initially. - External debt would then fall to 126 percent of GDP in the medium term. - A non-interest current account shock: - Would reverse the projected decline and result in debt of around 104 percent of GDP at the horizon. - Combined and alternative scenarios (selected values shown in the document): - Baseline external debt shown as 81 (percent of GDP) in figures presenting scenario comparisons. - Historical scenario example: 113 (percent of GDP) shown in the historical scenario box. - Combined shock (permanent 1/4 standard deviation shocks to real interest rate, growth rate, and current account) illustrated as 98 (percent of GDP). - The analysis notes: "Given the risks around fiscal expansion in response to the political cycle, this possibility is one with high likelihood." ### Public sector DSA baseline projections and debt dynamics (selected indicators) - Baseline projections (selected values and rates reported in figures and tables): - Nominal gross public debt: series shown across 2016–2023 (table and chart). - Sovereign spread example shown as 656 (basis points) in figures. - Public gross financing needs: example values include 5, 16.5, 9.8, 14.5, 19.3, 21.1, 20.2, 22.3, 23.2, 3.2 (percent of GDP shown across periods in the DSA figure). - Real GDP growth (in percent): selected series includes 2.9, -5.6, 1.7, 2.0, 2.2, 2.5, 2.1, 2.5, 3.0 (values displayed in Baseline Scenario figure). - Inflation (GDP deflator, in percent): selected series includes 6.7, 27.7, 14.6, 9.4, 6.6, 6.1, 9.7, 4.6, 3.9 (values displayed in Baseline Scenario figure). - Debt-creating flows and automatic dynamics: - Identified debt-creating flows, automatic debt dynamics, and contributions from primary deficit, real interest rate, and real GDP growth are presented in the DSA tables and charts (explicit formulae for automatic dynamics are provided). ### Composition of public debt and alternative scenarios - Composition series shown by maturity and currency over 2016–2023: - Charts present shares of medium and long-term vs. short-term debt, and local currency-denominated vs. foreign currency-denominated debt. - Alternative scenario assumptions (examples presented): - Constant Primary Balance Scenario: Primary Balance assumed at -4.1 across projection years. - Constant Non-mineral Primary Balance Scenario: Primary Balance series shown as -4.1, -3.9, -4.1, -4.0, -4.1, -4.3 across 2018–2023. - Effective interest rate and inflation series for each scenario are reported in the DSA tables. ### Stress tests and additional shocks (selected stress-test assumptions) - Stress tests presented include: - Primary Balance Shock. - Real GDP Growth Shock. - Real Interest Rate Shock. - Real Exchange Rate Shock (including the one-time real depreciation of 30 percent occurring in 2019). - Combined Macro-Fiscal Shock. - Contingent Liability Shock. - For each stress test, underlying assumptions for real GDP growth, inflation, primary balance, and effective interest rate are reported year-by-year in DSA figures. - Gross nominal public debt under stress tests is shown up to 2023 in percent of GDP and in percent of revenue (charts). ### External sector assessment — current account, reserves, and policy guidance - Current account (CA) and external position: - The CA deficit adjusted from about 16.5 percent of GDP in 2015 to near balance in 2017. - The rebound in gold exports and launch of a new gold mine in 2016 led to an improvement on the order of 23 percent of GDP in the trade balance. - The higher gold exports drove a commensurate rise in reinvested earnings, attenuating the adjustment of overall CA balance to about 14 percent of GDP. - The government’s fiscal balance has improved somewhat but continues to contribute negatively to the current account balance. - International reserves: - Reserves reached USD 0.4 billion (about 2.3 months of imports) in 2017. - Reserves further increased to USD 0.5 billion (about 3 months of imports) in September 2018. - Reserves had dropped during 2012–2015, reflecting a worsening CA balance and capital outflows; they grew in 2016–17 because of CA improvement and increased government external borrowing. - The 2018 increase was attributed to inflows from borrowing transactions of Staatsolie that allowed an early repayment of a large liability to the government. - Intervention to provide foreign exchange for fuel and other essential imports continues to be a drag on reserves. - Policy recommendations from staff: - Fiscal consolidation. - Higher exchange rate flexibility. - Structural measures to increase competitiveness. - These measures are recommended to alleviate pressure on reserves and help restore external balance. *Source: IMF staff (figures, tables, and text as provided in the Suriname country DSA and Annex III: External Sector Assessment).* ### 3. The real effective exchange rate (REER) has returned to its 10-year average. The ### 3. The real effective exchange rate (REER) has returned to its 10-year average. The ### Exchange rate developments - Cumulative REER depreciation of about 16½ percent in 2016-17 offset its appreciation in 2014-15. - In 2017, the REER was broadly in line with its 10-year average. - In 2018, the REER has appreciated marginally due to the inflation differential and some strengthening of the nominal effective exchange rate (NEER). - EBA-lite REER model estimate (noted by staff): REER estimated to be overvalued by 22 percent, with a 7 percent policy gap driven by the shortfall in reserves (model caveat noted). ### External position and net international investment position (IIP) - Net IIP deteriorated significantly: reached -98.7 percent of GDP in 2017 from 4 percent of GDP in 2011. - Sharpest IIP decline occurred in 2016, driven largely by external borrowing and strong real exchange rate depreciation. - IMF External Sustainability (ES) model findings: - Stabilizing the net IIP at its 2017 level of -98.7 percent of GDP would require a current account (CA) balance of -6.1 percent of GDP. - Targeting a positive net IIP of 7 percent of GDP (reflecting resource exhaustibility and the need to pay down public external debt and accumulate financial assets) implies: - Returning the net IIP to 7.0 percent of GDP in the very long term would require zero CA balance. - Achieving the 7.0 percent of GDP net IIP target by 2035 will require a CA surplus of 3.2 percent of GDP. - Staff assessment: Suriname’s 2017 external position is moderately weaker than the level consistent with medium-term fundamentals and desirable policies; staff assesses the CA gap to be -1 to -2 percent of GDP and the REER overvalued by 2-5 percent. ### Current account (CA) model results (2017) - CA norm: 1.2 percent of GDP. - Actual CA: -0.1 percent of GDP. - CA gap: -1.3 percent of GDP. - Policy gap: -4.9 percent of GDP (mostly from inadequate reserves accumulation: -3.8 percent of GDP). - REER gap (from CA model): 2.7 percent. - Cyclical contributions (from model): 0.3%. - Cyclically adjusted CA: -0.4%. - CA-fitted: 3.7%. - Residual: 3.6%. - Elasticity: -0.49. ### Financial account, reserves, and flows - Financial account balance deteriorated to 5.8 percent of GDP in 2017, but net inflows remained positive. - Foreign direct investment (FDI) averaged about 6 percent of GDP over the last 4 years and declined to about 5 percent of GDP in 2017 upon completion of Merian gold mine investments; reinvested earnings from the mine constitute an inflow of FDI. - Other investments (primarily currency and deposits on the asset side and loans on the liabilities side) stood at 1.5 percent of GDP in 2017 and have been volatile due to external borrowing. - A large external syndicated loan (of about 18¼ percent of GDP) to Staatsolie raised liabilities in 2018H1. - Errors and omissions (EO) in the balance of payments averaged 7 percent of GDP over the past 5 years and were consistently negative; 2017 EO declined to -4.3 percent of GDP, suggesting the risk that the current account deficit could be underestimated. ### Reserves adequacy - Reserves stood at USD 0.5 billion (about 3 months of imports) in September 2018. - Desired reserves suggested by IMF’s reserve adequacy framework: 0.8 billion USD billion (5.0 months of imports). - Staff: reserve buffers remain short of desired levels; addressing external imbalances would help alleviate downward pressure on reserves. ### Policy implications and recommended actions - Lead with fiscal consolidation to close the primary deficit in the medium term. - Allow for full exchange rate flexibility to act as a shock absorber. - Adopt a monetary policy stance consistent with positive real interest rates and continued reduction in inflation. - Implement strong structural measures to increase competitiveness. - Build up reserve buffers and reduce reliance on external borrowing. ### Risk considerations (selected highlights from Risk Assessment Matrix) - Reversal of fiscal consolidation: Likelihood High; Impact High. Policy advice: consistently implement measures to improve the fiscal position, strengthen public management framework, build reserves. - Financial sector risks materialize: Likelihood Medium; Impact High. Policy advice: central bank to monitor financial sector closely, strengthen contingency framework, formalize emergency liquidity assistance, set up a Financial Stability Committee. - Sharp tightening of global financial conditions: Likelihood High; Impact Medium. Policy advice: increase exchange rate flexibility, implement appropriate monetary policy, undertake fiscal consolidation. - Weaker-than-expected global growth: Likelihood Medium; Impact Medium. Policy advice: strengthen competitiveness, diversify the economy, strengthen monetary policy framework, use exchange rate as shock absorber. - Sizeable deviations in energy/commodity prices: Likelihood Medium; Impact High. Policy advice: diversify away from extractives, build reserves, undertake countercyclical fiscal policies, continue fiscal consolidation. - Loss of correspondent banking relationships (CBRs): Likelihood High; Impact High. Policy advice: address AML/CFT shortcomings per CFATF recommendations, prepare contingency plans, maintain strict supervision and compliance. ### Banking supervision and AML/CFT developments (selected) - November 2011: new Banking Supervision Act came into force; CBvS reviewed and issued new regulations. - July 2014: Group 1 regulations amended to increase minimum capital adequacy ratio (CAR) to 10 percent and to raise loan provisioning requirements. - April 2015: CBvS introduced Group 2 and 3 regulations covering corporate governance, internal audit, AML/CFT, and market risk management (elements of Basel II and III). - 2016: first draft of the Bank Resolution Law prepared; CBvS aiming to present draft to Ministry of Finance by end of 2018. - Deposit Guarantee System Law being finalized; expected to be considered after Bank Resolution Law approval. - Since 2014: on-site inspections intensified; CAMELS ratings used; banks rated 3 or lower must present remediation plans. - CBvS staff capacity upgraded; resident advisor support (2011–2015); ongoing trainings and technical assistance (including agreement with Central Bank of the Netherlands). - AML/CFT: authorities pursuing a national risk assessment (NRA) with IDB technical assistance and a three-year AML program supported by OAS DTOC. - Suriname and CFATF: member since 1998; evaluated in 2001 and 2009; next evaluation due in 2020. Suriname was removed from the CFATF review process in 2017 after “significant progress” addressing key deficiencies. _Italic: IMF staff calculations and Central Bank of Suriname data as presented in the source content._ ### 14. Since 1996, Suriname has made efforts to improve its AML/CFT regime: ### 14. Since 1996, Suriname has made efforts to improve its AML/CFT regime ### Timeline of legislative and regulatory reforms - 1996: The CBvS issued guidelines on money laundering based on a gentleman's agreement with the banks to protect the integrity of the banking and credit system in Suriname. - 2002: Suriname tightened the statutory framework with eight laws, including: - Money Laundering Penalty Act (SB 2002 No. 64) - Act on the Reporting of Unusual Transactions (SB 2002 No. 65) - Act on the Identification Requirements for Service Providers (SB 2002 No. 66) - July 2013: A new State Decree on Indicators of Unusual Transactions entered into force (SB 2013 No. 148). - 2014: International Sanctions Act came into effect (S.B. 2014 No. 54). - 2016: Amendments and further legislative changes: - Act on the Reporting of Unusual Transactions last amended by SB 2016 No. 33 - Act on the Identification Requirements for Service Providers last amended by SB 2016 No 32 - International Sanctions Act amended (S.B. 2016 No. 31) - CBvS directives adapted most recently in October 2016 - 2018: President inaugurated the International Sanctions Council to supervise all service providers for compliance with the International Sanctions Act. ### Institutional arrangements and governance - 2008: Establishment of the National Anti-Money Laundering Commission (NAMLC). The NAMLC is chaired by the Attorney General of the Republic of Suriname, who is also the CFATF Prime contact for Suriname. - 2011: Establishment of the Anti-Money Laundering Steering Council Suriname, consisting of: - the Ministers of Finance and of Justice and Police - the President of the CBvS - Aim: creating strong management of processes at the policy level to strengthen the AML/CFT enforcement and supervisory regime. ### Supervisory, inspection, and compliance actions - 2011: Banking and Credit System Supervision Act (SB 2011 No. 155) came into effect; CBvS issued the AML/CFT Regulation in April 2012. - 2012: CBvS drafted and issued regulations on compliance with AML/CFT legislation; these were revised twice in 2016 based on feedback from CFATF. - Mid-2017: On-site AML/CFT compliance inspections were expanded and intensified; inspection focus broadened from only technical compliance to include: - transaction monitoring - effectiveness - A risk rating matrix and separate rating for compliance with AML/CFT-related requirements were developed. - Various legislative changes have led to amendment of guidelines and the broadening of the scope of inspections of supervised institutions. ### National Risk Assessment (NRA) and capacity building - NAMLC role for upcoming (2020) Mutual Evaluation (ME): - Act as the sounding board for preparation and implementation of the NRA, the conduct of the ME, and the monitoring of the National Action Plan. - 2018: NAMLC organized an NRA Workshop with the DTOC and the Suriname-Netherlands Legal Cooperation Foundation. - 2018: NAMLC followed the workshop with an Anti-Money Laundering Stakeholder Conference and NRA kick-off in February 2018. - Planned start of NRA work: in the 4th quarter of 2018. ### Key actions and objectives summarized - Strengthen statutory framework with multiple laws (2002 and subsequent amendments in 2012 and 2016). - Institutionalize coordination and oversight through NAMLC, the Anti-Money Laundering Steering Council, and the International Sanctions Council. - Enhance supervisory effectiveness by: - expanding scope of on-site inspections (mid-2017) - introducing transaction monitoring and effectiveness assessments - developing a risk rating matrix and separate AML/CFT compliance rating - Prepare for Mutual Evaluation (2020) and conduct a National Risk Assessment (NRA) beginning in Q4 2018. *Source: cr18376 - 14. Since 1996, Suriname has made efforts to improve its AML/CFT regime:* ### 7.8 percent of GDP in 2019. ### cr18376 - 7.8 percent of GDP in 2019. ### Mining revenues and fiscal impact - Mining revenues, including from the State Oil Company (Staatsolie), is bound to increase in the near future. - Surgold (subsidiary of US mining company Newmont) is nearing the completion of its accelerated depreciation and will start to generate profits with significant fiscal revenue impact. - Iamgold will soon commence mining in Saramacca; besides regular tax, the government will get dividends from its 30 percent stake in this new operation. - The significant windfalls from new gold operations alone, in which the government has substantial participation, is expected to increase revenues in 2019 by 0.5 percent of GDP. ### Subsidies and electricity reform - The administration is aware that phasing out the more than SRD 1 billion electricity subsidy (approximately 4 percent of GDP) will create significant fiscal space, improving the allocation of public resources and the overall efficiency in the economy. - Based on the recommendations of an international auditing firm that assessed the electricity company’s cost structure, appropriate policies are being implemented and ultimately will bring tariffs to market-determined and cost-recovering levels. - The authorities understand that phasing out electricity subsidies in a gradual way is important to avoid new inflationary pressures and social disruption. ### Wages, inflation, and social agreements - The terms of trade shock, accompanied by significant depreciation of the exchange rate and high inflation, diminished real disposable incomes throughout the entire economy. - The government offered civil servants a partial recuperation of purchasing power by adjusting wages—which had substantially lagged inflation in the past two years—by approximately 25 percent in September 2018, with a promised back pay. - The authorities have an understanding with unions that the retroactive element will be effective only if not jeopardizing macroeconomic stability. ### Fiscal framework, SSF, and debt sustainability - Authorities are committed to keep medium-term debt levels on a sustainable path and refrain from any measures that might undermine this objective. - The Saving and Stabilization Fund (SSF), approved in 2017 and expected to become operational in 2019, will function as an instrument to prevent pro-cyclical spending in the future, and will operate as an additional fiscal anchor, second to the Debt Act. - Establishing an expenditure-specific rule is something the authorities are committed to, and they welcome the Fund’s expertise to support this initiative. - The SSF Law sets strict conditions to the amount of mining revenue that can be allocated to the budget from a windfall. - Windfalls will be syphoned off to stabilize future revenue and expenditure volatility, and to create a buffer for future generations. ### Transparency, governance, and public financial management - The Law on Financial Statements approved in 2017 obliges, amongst others, state-owned companies and subsidy-receiving entities to produce and publish audited financial statements starting in 2019. - The newly drafted Public Financial Management Law has already passed a first round of discussions in parliament. - Authorities are preparing, submitting and implementing laws and regulations that will improve transparency, governance and financial accountability. ### Debt management and financing stance - The Surinamese authorities are quite aware of the difficulty to obtain new financing and will continue to use their indebtedness capacity judiciously. - The agreement between the Ministry of Finance (MoF) and the Central Bank of Suriname (CBvS) to stop monetary financing has been maintained, while none of the available financing space under the agreement has been used. - The MoF made early repayments in 2018 to unwind its most expensive debt. - The government is committed to enhance capital investment that will enable further development of non-mineral domestic sectors, contributing to the improvement of the non-resource fiscal balance. - Combined with ongoing economic growth, these initiatives will further increase the sustainability and debt repayment capacity in the medium term. ### Monetary policy and exchange rate policy - Monetary policy continues to target domestic price stability and the CBvS is strengthening its capacity to deliver on this commitment. - The CBvS has introduced several facilities for banks such as an overnight, a deposit and a lending facility. - A liquidity monitoring and forecasting framework has been put in place. - A strong communication platform initiated by the CBvS and comprising of commercial banks and other market participants resulted in a tighter liquidity stance. - The unwinding of foreign currency swaps with domestic commercial banks has also reduced the system’s liquidity. - The Central Bank’s payment system is now ready for open market operations. - Given the very low levels of international reserves in early 2016, the CBvS deemed it necessary to adopt a flexible exchange rate to facilitate the adjustment and realign relative prices. - The CBvS initiated the establishment of a more functional foreign exchange market, with commercial banks regaining the position of forex intermediaries for trade, while Money Transaction Offices (Cambios) remained focused on the retail market. - These measures were instrumental for stabilizing the exchange rate in the last two years. ### External position and reserves - Suriname’s external position has strengthened recently on the back of favorable commodity prices and strong macroeconomic policies. - The current account deficit improved sharply from 16.5 percent of GDP in 2015 to near balance in 2017—the deterioration in 2018 is temporary and due to a one-off transaction as underscored by staff. - The Surinamese authorities agree that raising international reserves is needed to enhance resilience to external shocks and help sustain the exchange rate regime. - Reserves are expected to increase by 30 percent in 2018, to around USD 552 million or 4.1 months of non-mining sectors imports. - International reserves accumulation has benefitted from a gradual phasing-out of import financing of strategic goods. ### Financial sector policy and supervision - Supported by improving macroeconomic conditions, regulatory and legislative actions, the financial system, especially the banking sector, has continuously enhanced its resilience under the supervision of the CBvS. - The Central Bank has issued or renewed several regulations and the Code of Corporate Governance to sustain the stability of the banking sector, mainly by strengthening the financial buffers and improving risk management. - Since 2016, banks must report daily their liquidity and net open currency position. - CBvS is committed to support the banking sector in strengthening their corporate governance, risk management and internal controls. - Timely tightening of the regulations and subsequent follow up by the CBvS’s Supervision Directorate have placed banks in a better position to withstand shocks. - Integrity supervision is a main point of attention for the CBvS; more needs to be done to strengthen the banks’ AML/CFT framework to mitigate risks regarding the withdrawal of correspondent banking relationships. - During the last 12 months integrity on-site inspections took place at almost all banks. - A special rating system for compliance to AML/CFT has been developed and is used to monitor banks’ progress. - CBvS is in the final stage of drafting the Bank Resolution Act; some adjustments will be made in the Supervision of the Banking and Credit System Act of 2011. - The revamped framework will strengthen the position of CBvS’ banking supervision; subsequently, the Deposit Guarantee System Act will be proposed to Parliament. - As part of the new Strategic Plan of CBvS, the prudential and integrity supervision of Cambios has been transferred to the Supervision Directorate; the CBvS expects this transfer will strengthen and rationalize supervision of this branch of the financial sector. ### Medium-term growth prospects and diversification - Policies aimed at strengthening the real economy and its foreign exchange earning capacity have been geared towards favoring investment. - Authorities are implementing several measures to improve the business climate, especially for the non-resource sectors. - International investors’ enhanced confidence in Suriname is illustrated by better access to international financial markets (sovereign and corporate) and increasing FDI, including in areas other than oil and gold extraction. - Any offshore oil findings would dramatically alter the growth outlook. - Additional investment by mining companies could substantially increase output and employment, when accounting for upstream and downstream effects. - Large-scale investment in infrastructure and construction, as well as technical and financial assistance from multilateral financial institutions and multinational corporations, will boost economic activity and employment. - Ongoing projects will enhance infrastructure and give access to new areas with large production potential. - Several construction projects will lessen the significant housing deficit. - Recent cooperation agreements with enterprises from Asia, Middle-East, and Europe will increase Suriname’s agribusiness potential. - Together with the private sector, many opportunities that arise due to upcoming oil exploration in neighboring Guyana are being studied; many Surinamese companies have already established branches in Guyana that support local content and absorptive capacity in both countries. - Those efforts will be key to create jobs and foster inclusive growth in Suriname. *IMF content unit: cr18376 - 7.8 percent of GDP in 2019.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18376.pdf_