## Suriname—Economic conditions ## Source details **Canonical URL:** [Suriname—Economic conditions](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2009/_dp0902.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2009/_dp0902.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2009/_dp0902.pdf.json) --- ### Introduction: recent trajectory and scope - 1990s: exogenous shocks amplified by inadequate macroeconomic policy responses led to episodes of near-hyperinflation and highly volatile output growth. - Recent years (work reflects the period up to mid-2008): more positive outlook due to a favorable external environment and stability-oriented policies of the Venetiaan administration, boosting investment, domestic activity, and employment. - Economic structure: concentrated in commodity exports—mainly bauxite, oil, and gold; nontraditional agricultural exports face significant developmental and export hurdles. - Objective: draw policy conclusions to support a medium-term, stability- and growth-oriented framework by reducing revenue volatility, facilitating a more proactive monetary policy, and managing risks associated with a dollarized economy. - Timing: authors’ analysis through mid-2008; authors: February 2009. ### Volatility and policy responses: overview and comparative assessment - Suriname underperformed in the 1990s relative to the region: high volatility, low growth, and high inflation. - Main drivers of adverse outcomes: policy responses rather than the magnitude of shocks. - Key factors undermining performance: - High volatility of the real effective exchange rate. - Preponderance of highly negative real interest rates. - Fiscal and quasi-fiscal policy choices that amplified shocks. - Governance: indicators near the international median and compare favorably to the region; governance not identified as the leading cause of lower growth. ### The two near-hyperinflation episodes of the 1990s: causes and mechanics - First episode (early 1990s): - Inflation accelerated, reaching almost 600 percent in 1994. - Main causal factors: - High rates of monetary expansion owing to central bank exchange losses. - Massive liquidity injection connected with the official multiple exchange rate system between late 1992 and mid-1994. - Expansionary fiscal policy. - Fiscal sequence and facts: - Central government deficit: 17 percent of GDP in 1991 (from about 6 percent of GDP in 1990). - Only about 1 percent of GDP of the fiscal deterioration in the early 1990s is attributable to declines in bauxite export revenues. - Central government operations improved to about 9 percent of GDP deficit in 1991–93, while central bank quasi-fiscal losses increased from zero in 1990 to about 14 percent of GDP in 1994. - Combined public sector balance: deficit of about 21 percent of GDP in 1994. - Central government net indebtedness to the banking system reached 96 percent of GDP by end-1991. - Government bonds placed in 1991–92 amounted to about 20 percent of GDP; bonds had a maturity of five years and carried an annual interest rate of 6 percent. - Second episode (1998–99): - Sharp fiscal deterioration in 1998–99 was the main cause. - Contributing factors: - Gradual erosion in alumina prices during 1996–99 (a limited exogenous shock). - Reduction of Dutch aid during 1997–98. - Sharp increase in central government expenditure in 1996–98. - Monetary and financial mechanics during crises: - Large fiscal deficits financed almost entirely by the central bank, causing rapid increases in overall bank credit and expansion of monetary aggregates. - Sterilization attempts (government bond issuance of about 20 percent of GDP in 1991–92) were ineffective because bonds were acquired by nonbank financial institutions through reductions in deposits held at the central bank; bond issuance did not reduce bank liquidity. - Real interest rates were highly negative (the 6 percent nominal interest on government bonds was highly negative even at issuance). ### Fiscal policy: sources of revenue volatility and recommended reforms - Primary drivers of fiscal instability: mining sector developments and swings in external assistance. - Key policy recommendations: - Establish a nonrenewable resource fund (NRF) to absorb revenue from future large-scale mining projects, reduce public sector vulnerability to commodity-price fluctuations, and secure a more stable long-term revenue stream from extractive industries. - Strengthen fiscal institutions. - Place annual budgets in a medium-term policy framework that relates to nonextractive sectors of the economy. - Public sector structure and pressures: - Government wage bill: 38 percent of total expenditure versus 31 percent regional average (2001–05). - Public sector (including state-owned enterprises) accounts for about 60 percent of formal sector employment. - Around 120 partially or totally state-owned enterprises identified in a 2005 inventory. - Current expenditures, net of interest payments, averaged nearly 25 percent of GDP during 2001–05. - Recommended institutional measures: - Medium-term fiscal framework to limit procyclical spending of windfalls. - Better planning and forecasting capabilities; stronger internal controls. - Integrate NRF operations with budgetary system and medium-term planning. ### Monetary and exchange rate policy: constraints, diagnostics, and reform path - Sources of monetary instability: - Central bank exchange rate losses and quasi-fiscal operations undermined monetary stability. - Dollarization constrains monetary policy effectiveness and contributes to seigniorage losses. - Empirical correlations and findings: - Contemporaneous correlation between year-on-year inflation and money growth is 0.71. - Correlation between money growth and exchange rate depreciation is 0.5. - Granger-causality tests (VAR with three lags, monthly data January 1990–October 2005): inflation and depreciation Granger-cause money growth; current inflation is a good predictor of future money growth. - During near-hyperinflation episodes, inflation peaked at least six months before monetary expansion peaked (almost a year earlier during the first episode). - Recommended pillars for a stability-oriented framework: - Clear separation between money creation and government funding needs. - Implement a more proactive monetary policy to contain cyclical inflationary pressures from commodity sectors. - Develop alternative policy instruments (open market operations, repos, rediscount facilities, overdraft window) to enable active monetary management. - Move first to a unified exchange rate and then, over the longer term, to a more flexible exchange rate regime. ### Dollarization: sources, consequences, and policy implications - Drivers of dollarization: - Response to near-hyperinflation episodes and reserve requirement schemes that favored foreign-currency intermediation. - Consequences: - Loss of seigniorage: seigniorage declined from 6 percent of GDP in 2000 to 0.3 percent in 2003. - Reduced scope for monetary independence and constraints on exchange rate adjustment. - Financial-sector vulnerabilities: liquidity and solvency risks in a dollarized banking system; reduced effectiveness of central bank as lender of last resort for foreign currency liabilities. - Financial and reserve indicators: - International liquid reserve assets of commercial banks decreased from 194 percent of foreign currency deposits in 1996 to 67 percent in 2005. - Total banking system international reserves—including CBvS reserves—still exceed 100 percent of foreign currency deposits. - Foreign currency deposits (millions of U.S. dollars): 50.2, 71.5, 86.7, 107.1, 118.1, 170.6, 194.4, 268.3, 320.2, 360.6 (years as presented in source). - Policy implications: - Manage dollarization-related risks to restore effectiveness of monetary and exchange rate policy and reduce financial sector vulnerabilities. - Strengthen prudential regulations on open positions, net foreign currency positions, and foreign currency lending to unhedged borrowers. ### Exchange rate system: history, distortions, and reform proposals - Historical anchor and multiple-rate period: - Official exchange rate anchor: Sf 1.785 per U.S. dollar (in place since 1971). - Multiple official exchange rates period introduced October 1992; official rate range up to Sf 87 per U.S. dollar; black market rate about Sf 215 per U.S. dollar at end-1993. - Quasi-fiscal costs: CBvS incurred massive losses because its average buying exchange rate was substantially higher than its average selling exchange rate. - Reforms and unifications: - July 1994: authorities unified the official exchange market with a uniform fixed exchange rate; subsequent inability to defend the peg led to bank and intervention rates that were more depreciated. - July 1995: return to a unified exchange system with negligible spread between official and parallel rates. - January 2004: introduction of the Suriname dollar at a rate of 1:1,000 replacing the guilder; devalued official rate by about 4 percent to SRD 2.735 per U.S. dollar. - Mid-2003 to mid-2004: partial then complete elimination of restrictions on the bank-cambio rate; spread between official and bank rate fell to less than 2½ percent. - Assessment and risks: - De facto peg observed: nominal exchange rate rarely adjusted; stability has limited exchange-rate-based signals. - Remaining segmentation: official market accounts for less than 20 percent of foreign exchange transactions while bank-cambio market accounts for more than 80 percent; absence of legal obligation to adjust official rate when persistent spreads emerge creates risk of prolonged large spreads and sectoral subsidies/taxes. - Reform proposals: - Adopt the bank-cambio rate as the official rate to unify markets. - Gradual move toward greater exchange rate flexibility over the long run, accompanied by strengthened financial supervision and prudential frameworks. - In a unified, more flexible market rely on sterilized intervention and market instruments rather than moral suasion. ### Monetary instruments and operational reforms (Box 4.1 highlights) - Current constraints: - Reliance on reserve requirements and moral suasion; absence of a formal preannounced operational framework. - Treasury bills market dominated by commercial banks: almost 90 percent of bills held by commercial banks. - Treasury bills issued under letter of agreement and fully liquid to be sold back to CBvS at discount value plus accrued interest; terms historically fixed (example: 12.5 percent interest equivalent and six-month maturity) and do not reflect liquidity needs. - Proposed instrument reforms: - Implement periodic auctions for treasury bills to allow market-determined yields. - Introduce penalty spreads for sales of treasury bills to CBvS to reduce complete liquidity and stimulate a secondary market. - Replace collateralized loans with repurchase agreements (repos) and set repo-refinancing rate as a spread above the auction rate. - Encourage use of overdraft and rediscount facilities to create an interest-rate corridor and foster interbank liquidity trading. - Lower reserve requirements once market instruments and interbank markets develop. ### Fiscal revenue volatility and Nonrenewable Resource Funds (NRFs) - Revenue volatility sources: bauxite, gold, and oil revenues and swings in external assistance (Dutch grants). - NRF rationale and lessons: - NRFs can stabilize fiscal positions and save extractive-industry wealth for future generations. - Successful NRF characteristics: careful design, strong medium-term fiscal framework, prudent fiscal and monetary stance, integration with the budgetary system, transparency, and professional asset management. - International examples cited: Chile (copper stabilization fund), Norway (State Petroleum Fund), Botswana; failures include PNG and Oman due to rule changes or poor integration with fiscal policy. - Policy guidance for Suriname: - Design NRF consistent with medium-term budget framework; invest assets abroad; maintain transparent rules and professional management. - Use recurring revenue cautiously; avoid procyclical spending of windfalls that negates NRF stabilization. ### Financial system structure, supervision, and risks - Financial depth and concentration: - Total assets of the banking system about 45 percent of GDP in 2006. - Three largest banks accounted for 84 percent of total assets as of end-2006. - Seven commercial banks until September 2005; Surichange Bank started operations as the eighth in September 2005. - Large share of financial system assets held by banks; pension funds, insurance companies, credit unions present but smaller. - Prudential reforms: - Banking supervision act of January 2003 and five prudential regulations (capital adequacy SRD 4.5 million minimum and risk-weighted capital ratio 8 percent; loan classification and provisioning; large exposures limits; insider lending limits; investment limits). - Implementation challenges due to delays in data reporting and lack of staff. - Vulnerabilities: - Weak-performing state banks and high degree of financial dollarization. - No deposit insurance system. - Need for stronger supervision of foreign currency lending and open position limits. ### Sectoral findings: extractive industries and agriculture (selected quantitative indicators) - Bauxite: - Sector contribution: about one-third of GDP post–World War II; fell to about 15 percent of GDP by end of twentieth century. - Direct tax revenues from bauxite industry for 1996–2005 averaged about 4 percent of GDP, or about 14 percent of total fiscal revenue. - Employment: about 1,400 workers, less than 2½ percent of the labor force. - Bakhuys reserves estimated at about 200–700 million tons; potential Bakhuys investment up to US$3 billion for integrated projects. - Oil (Staatsolie indicators selected): - Staatsolie net income (millions of US$): 1992: 12.0; 2002: 23.9; 2003: 28.4; 2004: 35.5; 2005: 67.8; 2006: 98.5. - Crude oil productions (millions of barrels): 2000: 4.5; 2001: 4.7; 2002: 4.5; 2003: 4.3; 2004: 4.1; 2005: 4.4; 2006: 4.8. - Average realized crude oil price (US$ per barrel): 1992: 12.8; 2002: 21.7; 2003: 26.3; 2004: 28.4; 2005: 38.6; 2006: 46.4. - Total sales revenue from oil products (millions of US$): 1992: 20.2; 2002: 104.1; 2003: 114.7; 2004: 117.7; 2005: 173.7; 2006: 240.5. - Sales revenue in percent of GDP: 1992: 4.9; 2002: 10.9; 2003: 11.2; 2004: 10.3; 2005: 12.7; 2006: 15.1. - Gold: - Rosebel mine opened February 2004 with total investment around US$176 million; produced around 274,000 ounces of gold in 2005 (about US$140 million). - Rosebel employment about 1,100 workers; local expenditure around US$30 million in 2004 (3 percent of GDP). - Export revenue from small-scale mining rose from US$24 million in 2002 to around US$160 million in 2005 and projected US$210 million in 2006. - Gold production in 2006: Suriname 9.4 tons, 1.2 percent of Western Hemisphere production of 765.8 tons. - Fiscal revenue from large-scale gold projected to peak at 1 percent of GDP in 2008 absent new discoveries. - Agriculture (rice and bananas selected figures): - Rice: roughly 80–85 percent of agricultural land used for rice cultivation; about one-quarter farmed by smallholders, three-quarters by a dozen large farmers. - Rice export proceeds fell from about US$35 million in the mid-1990s to an average of about US$10 million during 2003–04. - EU Cotonou provisions: allowed exports of 125,000 tons of husked rice and 20,000 tons of broken rice to the EU at about one-third the customs duties applicable to non-ACP countries; plus 35,000 tons via OCTs duty free subject to requirements. - Banana: 1990s average annual exports about 31,000 tons or US$24.5 million. - EU grant support for banana rehabilitation: €21 million (SFA); IDB loan: US$7.3 million. - SBBS 2005 loss: more than US$4 million. - Banana prices and costs (U.S. dollars per box of 40 pounds): 2004 average production costs: 8.73; 2005 average production costs: 8.11; 2004 export price, FOB: 7.06; 2005 export price, FOB: 9.13; 2004 net contribution, FOB: -4.40; 2005 net contribution, FOB: -1.95; 2004 boxes exported (millions): 1.15; 2005 boxes exported (millions): 2.13. ### Recovery, epilogue, and outlook (Chapter 6 highlights) - Recent commodity price boom (up to mid-2008) boosted growth via increased gold production and mineral-sector investment. - Inflation moderated in recent years due to stability-oriented policies, though imported inflation episodes occurred; as of early 2008 inflation had risen to double digits again, partly fueled by a credit boom. - Progress achieved: - Introduction of the Suriname dollar in January 2004. - New banking supervision law passed in 2003 and CBvS prudential regulations aligned with Basel Core Principles. - Central Bank Act amendment in May 2005 strengthened central bank authority and penalties for excess financing. - Gradual unification of the exchange rate market reduced fragmentation. - Remaining challenges: - Revenue volatility from extractives. - Limited monetary policy capacity and need for market-based instruments. - High degree of financial dollarization and weak-performing state banks. - Near-term fiscal challenges: improved budget execution and more comprehensive public sector statistical coverage. - Policy priorities moving forward: - Implement medium-term fiscal framework potentially including a Natural Resource Fund. - Strengthen monetary instruments and develop money and treasury bill markets. - Unify and gradually increase exchange rate flexibility while strengthening prudential supervision. - Advance structural reforms so initial work becomes institutionalized. *Italic: Source — _dp0902_ (Suriname: Toward Stability and Growth), as provided in the supplied content unit.* ### 1. Suriname—Economic conditions. 2. Suriname—Economic conditions— ### Suriname—Economic conditions ### Introduction: recent trajectory and scope - During the 1990s, Suriname experienced exogenous shocks amplified by inadequate macroeconomic policy responses, leading to episodes of near-hyperinflation and highly volatile output growth. - Recent years (work reflects the period up to mid-2008) saw a substantively more positive outlook owing to a favorable external environment and stability-oriented policies of the Venetiaan administration, boosting investment, domestic activity, and employment. - Economic structure remains concentrated in commodity exports—mainly bauxite, oil, and gold—with nontraditional agricultural exports facing significant developmental and export hurdles. - The paper aims to draw policy conclusions to support a medium-term, stability- and growth-oriented framework by reducing revenue volatility, facilitating a more proactive monetary policy, and managing risks associated with a dollarized economy. - Work and opinions reflect the authors’ analysis through mid-2008; the authors: February 2009. ### Volatility and policy responses: overview and comparative assessment - Suriname underperformed in the 1990s relative to the region: high volatility, low growth, and high inflation. - The shocks that affected Suriname were broadly similar to regional shocks; policy responses, not the magnitude of the shocks, were the primary drivers of adverse outcomes. - Key factors undermining performance included: - High volatility of the real effective exchange rate. - Preponderance of highly negative real interest rates. - Fiscal and quasi-fiscal policy choices that amplified shocks. - Governance indicators for Suriname are near the international median and compare favorably to the region; governance is not identified as the leading cause of lower growth. ### The two near-hyperinflation episodes of the 1990s: causes and mechanics - First episode (early 1990s): - Inflation accelerated, reaching almost 600 percent in 1994. - Main causal factors: - High rates of monetary expansion owing to central bank exchange losses. - Massive liquidity injection connected with the official multiple exchange rate system in effect between late 1992 and mid-1994. - Expansionary fiscal policy. - Sequence and fiscal facts: - Central government deficit: 17 percent of GDP in 1991 (from about 6 percent of GDP in 1990), largely driven by increased outlays for wages, social services, and election-related costs. - Only about 1 percent of GDP of the fiscal deterioration in the early 1990s is attributable to declines in bauxite export revenues. - Central government operations improved to about 9 percent of GDP deficit in 1991–93, while central bank quasi-fiscal losses increased from zero in 1990 to about 14 percent of GDP in 1994. - Combined public sector balance: deficit of about 21 percent of GDP in 1994. - Central government net indebtedness to the banking system reached 96 percent of GDP by end-1991. - Government bonds placed in 1991–92 amounted to about 20 percent of GDP; these bonds had a maturity of five years and carried an annual interest rate of 6 percent. - Second episode (1998–99): - Sharp fiscal deterioration in 1998–99 was the main cause. - Contributing factors: - Gradual erosion in alumina prices during 1996–99 (a limited exogenous shock). - Reduction of Dutch aid during 1997–98. - Sharp increase in central government expenditure in 1996–98. - Monetary and financial mechanics during crises: - Large fiscal deficits were financed almost entirely by the central bank, causing rapid increases in overall bank credit and expansion of monetary aggregates. - Attempts to sterilize liquidity (government bond issuance of about 20 percent of GDP in 1991–92) were largely ineffective because bonds were acquired by nonbank financial institutions through reductions in deposits held at the central bank; bond issuance did not reduce bank liquidity. - Real interest rates at the time were highly negative (the 6 percent nominal interest on government bonds was highly negative even at issuance). ### Fiscal policy: sources of revenue volatility and recommended reforms - Fiscal instability largely driven by mining sector developments and swings in external assistance. - Key policy recommendations: - Establish a nonrenewable resource fund (NRF) to absorb revenue from future large-scale mining projects, reduce public sector vulnerability to commodity-price fluctuations, and secure a more stable long-term revenue stream from extractive industries. - Strengthen fiscal institutions. - Place annual budgets in a medium-term policy framework that relates to nonextractive sectors of the economy. ### Monetary and exchange rate policy: constraints and reform path - Monetary instability sources and transmission: - Central bank exchange rate losses and quasi-fiscal operations undermined monetary stability. - Dollarization constrains monetary policy effectiveness and contributes to seigniorage losses. - Recommended pillars for a stability-oriented framework: - Implement a more proactive monetary policy to contain cyclical inflationary pressures from commodity sectors. - Develop alternative policy instruments to enable active monetary management. - Move first to a unified exchange rate and then, over the longer term, to a more flexible exchange rate regime. ### Dollarization: sources, consequences, and policy implications - Dollarization in Suriname: - The paper documents financial dollarization trends and links to inflation, exchange rates, monetary aggregates, seigniorage, and credit to the private sector (figures and tables cited in the source). - Consequences highlighted: - Loss of seigniorage. - Constraints on independent monetary policy. - Effects on development and vulnerabilities of the financial sector. - Policy implications: - Manage dollarization-related risks to restore effectiveness of monetary and exchange rate policy and reduce financial sector vulnerabilities. ### Epilogue and outlook - Recent commodity price boom (up to mid-2008) boosted growth via increased gold production and mineral-sector investment, supporting continued growth prospects. - Inflation moderated in recent years due to stability-oriented policies, though episodes of imported inflation (pass-through from international oil and food prices) occurred. - Key remaining challenges: revenue volatility from extractives, limited monetary policy capacity, and high dollarization. *Authors; February 2009* ### Box 2.1. The Exchange Rate System in the Early 1990s ### Box 2.1. The Exchange Rate System in the Early 1990s ### Exchange rate regime evolution and structure - Suriname had a single official exchange rate until October 1992; that rate was fixed in terms of U.S. dollars from December 1971 to October 1992. - As inflationary pressures accumulated during the 1980s and the early 1990s, the parallel market exchange rate diverged increasingly from the official rate. - In October 1992 the authorities introduced a multiple exchange rate system to support imports with the stated objective of engineering a gradual reduction and eventual elimination of the large spread between the official and black market exchange rates. - The multiple exchange rate regime at times included as many as seven separate exchange rates, some partly determined by market forces. - Official rates ranged from Sf 1.785 per U.S. dollar (in place since 1971) to Sf 87 per U.S. dollar; the black market exchange rate depreciated to about Sf 215 per U.S. dollar at end-1993. - A special exchange rate applied to the tax regime of mining companies beginning mid-January 1993 as part of an investment and taxation agreement. - Under the system the central bank incurred massive losses because its average buying exchange rate (measured in Suriname guilders per U.S. dollar) was substantially higher than its average selling exchange rate. - In July 1994 the authorities unified the official exchange market with a uniform fixed exchange rate managed by the central bank. Over the following 12 months the peg could not be defended: in late 1994 banks were allowed to transact at a "bank" exchange rate substantially more depreciated than the official rate, and in May–June 1995 the central bank introduced an "intervention" exchange rate also more depreciated than the official rate. - Suriname returned to a unified exchange system in July 1995 with all legal transactions at an official exchange rate and a negligible spread between official and parallel exchange rates. ### Monetary conditions, controls, and inflation dynamics (late 1980s–1994) - Extensive exchange controls and controls on prices, employment, investment, and trade and payments were applied while financial policies were lax, producing repressed inflation, large distortions in relative prices, and a widening parallel economy. - Recorded inflation was contained at 30 percent in 1991 amid reports of repressed inflation and movement to parallel markets; recorded inflation rose to about 58 percent in 1992. - Banking system liabilities to the private sector reached almost 130 percent of GDP in 1992, contributing to a liquidity overhang and large accumulation of commercial banks’ unremunerated excess reserves at the central bank. - Interest rates in 1991–92: deposit rates averaged 2.5 percent and lending rates averaged 9.8 percent. - Monetary overhang peaked in 1989 and the lessening of price control enforcement after 1991 facilitated an unwinding of the overhang via price increases during 1992–94. - With increased availability of foreign exchange from auctions of Dutch balance of payments support grants in late 1992, private demand for credit accelerated, capital flight increased, and excess reserves declined in relation to broad money from 30 percent by end-1991 to 23 percent by end-1992. ### Fiscal context, crisis, and stabilization through 1994–1995 - The overall public sector deficit in 1992 (including central bank losses) increased to about 21 percent of GDP—or 42 percent of GDP, excluding grants. - The planned containment of domestic demand under an IMF-supported program in 1992–93 was largely not implemented. - Exchange regime and fiscal reforms halted the crisis in mid-1994: the central government overall balance improved from a deficit of more than 9 percent of GDP in 1993 to a surplus of about 5 percent of GDP in 1994. - Improvement reflected sharp increases in revenue from taxes paid by bauxite companies and higher import duties and fees as a result of applying more market-based exchange rates for tax calculations. - Large losses of the Central Bank of Suriname (CBvS) of about 11–13 percent of GDP in 1993–94 abated only gradually after the mid-1994 unification because contracts had to be carried out at past exchange rates. - In 1995 monetary operations to absorb liquidity included CBvS issuance of gold certificates in March 1995 to set a floor for interest rates and a mid-May intervention involving sharply increased sales of foreign exchange to banks; these actions halted parallel market depreciation and triggered a major rebound in confidence. - International alumina prices increased by about 26 percent in 1995, contributing to a strong recovery in the balance of payments, growing exports and capital inflows, and a large increase in net international reserves that enabled CBvS to sell foreign exchange to the private sector and reduce external arrears. ### The Second Episode of Near-Hyperinflation (1996–1999) - A change in government in 1996 led to a highly destabilizing policy loosening: the new government increased hiring and raised real public sector wages by 66 percent, nearly doubling wage expenditure in relation to GDP. - External grants declined from 17 percent of GDP in 1996 to about 6 percent in 1998, reflecting a decline in aid from the Netherlands. - The CBvS freely financed the rapid increase in the central government deficit; credit to the private sector also grew rapidly, mainly through direct central bank lending to support agriculture and housing. - Inflation began to accelerate in 1997 while the parallel market exchange rate depreciated only modestly due to central bank sales targeting the tradables sector. - In 1998 the government further increased the public wage bill by almost 80 percent (or almost 6 percent of GDP) and increased domestically financed capital expenditure by an additional 6 percent of GDP. - The central bank lowered nominal interest rates despite rising inflationary pressures, producing negative real interest rates while the official exchange rate remained unchanged. - The CBvS introduced a modified crawling-peg regime and sharply devalued the official exchange rate in January 1999, reducing the spread between official and market rates to less than 10 percent; discretionary rules soon widened the spread and confidence was rapidly undermined. - The 1999 adjustment was abrupt and disorderly: the economy contracted by about 5 percent and inflation accelerated to more than 110 percent. - Domestic and external arrears more than tripled during 1999 to about 7 percent of GDP, plus about 3 percent of GDP for overdue bridge payments converted into a loan. - Monetary and exchange rate measures to address imbalances were not fully effective: limits on commercial bank credit appear to have been circumvented via foreign currency loans; reductions in declared commercial bank lending were more than offset by increases in credit to the central government. ### Recovery measures and reforms after 2000 - A new government in August 2000 introduced strong measures to restore macroeconomic stability: in October 2000 the authorities devalued the Suriname guilder by 88 percent and eliminated special exchange regimes for rice exports, petroleum imports, and commercial bank transactions. - They halted all borrowing from the central bank (while securing legislation to allow borrowing from commercial banks), removed most subsidies for foodstuff and petroleum, and increased utility tariffs. - The authorities introduced social safety net measures, including lump-sum increases in civil service wages and pensions. ### Economic performance in regional context and factors - Over 1991–2005 Suriname’s average real GDP growth rate was 2.2 percent, lower than the median for the Caribbean countries (2.7 percent) and lower than Latin America (3.4 percent). - Suriname’s inflation was the second-highest in the region with the average annual inflation rate reaching 73 percent during the period. - The number of months with 12-month inflation exceeding 40 percent rose from 21 months during the 1980s to 87 months during the 1990s. - Terms of trade volatility for Suriname was just above the region’s average and generally below volatility experienced by other commodity exporters in the region (Bolivia, Chile, Ecuador, Guyana, the Netherlands Antilles, Trinidad and Tobago, and Venezuela). - Commodity exporters in the region had higher growth rates than Suriname, benefiting from strong increases in global commodity prices. ### Key quantitative indicators (selected figures from text and tables) - Official exchange rate historic anchor: Sf 1.785 per U.S. dollar (in place since 1971). - Official rate range during multiple rates period: up to Sf 87 per U.S. dollar. - Black market exchange rate: about Sf 215 per U.S. dollar at end-1993. - Banking system liabilities to the private sector: almost 130 percent of GDP in 1992. - Recorded inflation: 30 percent in 1991; about 58 percent in 1992; more than 110 percent in 1999. - Overall public sector deficit in 1992 (including central bank losses): about 21 percent of GDP—or 42 percent of GDP excluding grants. - Central Bank of Suriname losses: about 11–13 percent of GDP in 1993–94. - International alumina prices increased by about 26 percent in 1995. - Public sector wage increases in 1996 government: real wages raised by 66 percent. - Devaluation in October 2000: Suriname guilder devalued by 88 percent. - 1991–2005 average real GDP growth rate for Suriname: 2.2 percent. - Regional comparators: Caribbean median growth 2.7 percent; Latin America growth 3.4 percent. - Average annual inflation rate for Suriname (1991–2005): 73 percent. - Number of months with 12-month inflation >40 percent: 21 months in 1980s; 87 months in 1990s. *Box 2.1. The Exchange Rate System in the Early 1990s, as presented in the source PDF.* ### Chapter 2. Volatility and Policy Responses ### Chapter 2. Volatility and Policy Responses ### Frequency of High Inflation - High inflation episodes are defined as months for which the 12-month inflation exceeded 40 percent. - Reinhart and Rogoff (2002) data are used to document frequency of such episodes across Latin American and Caribbean countries for 1981–90 and 1991–2001. - Suriname experienced more frequent episodes of high inflation during the 1990s than several more open or more volatile–terms-of-trade countries. ### Vulnerability to Exogenous Shocks - Suriname’s openness and terms of trade volatility are only slightly above the Latin American average. - During the 1990s, high inflation was more frequent in Suriname than in countries with higher degrees of openness (examples cited in text: Barbados, Costa Rica, Paraguay, Trinidad and Tobago) or with highly volatile terms of trade (examples cited in text: Chile, El Salvador, Trinidad and Tobago). - Scatter-plot evidence (Figure 2.4) shows an inverse correlation between trade openness and high inflation; countries with high trade openness tended to contain inflationary episodes better. - Specific sectoral growth: Suriname’s exporting mineral sector recorded strong growth of about 6½ percent per year during the 1990s, while the nontradables sector recorded an average annual real growth rate of only 1½ percent. - Comparison with resource-based economies: Suriname was more open and had higher current account deficits than other natural resource exporters, but real GDP growth and terms-of-trade volatility were broadly similar with the comparator group median (Table 2.4). However, broad money growth, average inflation, and volatility of inflation and the exchange rate were significantly higher in Suriname. ### Key Macroeconomic Indicators (selected exact figures from tables) - From Table 2.3, annual average for 1991–2005 for Suriname: - Real GDP Growth: 2.27 - Inflation: 3.21 - Real Effective Exchange Rate: 2.59 - Terms of Trade: 9.7 - From Table 2.4, medians for 1995–2004 (Suriname versus comparator medians shown in table): - GDP at constant prices (annual percentage change): Suriname 2.6; Nonfuel Exporter median 4.1; Primary Exporter median 3.4; Fuel Exporter median 3.1; Caribbean median 3.2 - Broad money (annual percentage change): Suriname 58.3; Nonfuel Exporter median 13.0; Primary Exporter median 16.0; Fuel Exporter median 11.6; Caribbean median 9.0 - External current account (percent of GDP): Suriname -8.7; Nonfuel Exporter median 3.1; Primary Exporter -5.5; Fuel Exporter -5.4; Caribbean -11.9 - Exports of goods and services (percent of GDP): Suriname 68.6; Nonfuel Exporter median 44.7; Primary Exporter 29.4; Fuel Exporter 30.8; Caribbean 48.1 - Consumer price index average for 1995–2004: Suriname 50.6; Nonfuel Exporter 4.1; Primary Exporter 8.3; Fuel Exporter 8.3; Caribbean 2.1 - Consumer price index standard deviation for 1995–2004: Suriname 71.4; Nonfuel Exporter 4.4; Primary Exporter 5.0; Fuel Exporter 4.9; Caribbean 1.9 - Exchange rate (national currency per U.S. dollar) average for 1995–2004: Suriname 47.7; Nonfuel Exporter 4.3; Primary Exporter 8.6; Fuel Exporter 10.1; Caribbean 10.0 - Terms of trade average for 1995–2004: Suriname 5.0; Nonfuel Exporter 9.1; Primary Exporter -0.4; Fuel Exporter -0.5; Caribbean 0.8 - Terms of trade standard deviation for 1995–2004: Suriname 11.9; Nonfuel Exporter 23.7; Primary Exporter 12.4; Fuel Exporter 12.0; Caribbean 7.6 ### Governance - Governance indicators (Kaufmann, Kraay, and Mastruzzi, 2005) place Suriname at or below the median of all countries in the 1990s (median value = 0 in charts). - Compared with other Caribbean countries, Suriname’s ranks were similar except for government effectiveness, regulatory quality, and rule of law. - Suriname ranked around the 30th percentile of the world for regulatory quality. - Detailed indicators and evolution: - Voice and accountability: around the median in 1996; improved almost continuously thereafter. - Political stability: improved after the electoral transition at the end of the 1990s and under the coalition government. - Government effectiveness: scored below average; temporary improvement after government change at end-1990s, indicating need for fundamental civil service and institutional reforms. - Regulatory quality: particularly low, indicating incidence of market-unfriendly policies such as price controls. - Rule of law: consistently improved, particularly since 1999. - Control of corruption: somewhat below the median in the 1990s but improved subsequently. - Conclusion: governance weaknesses exist but are not identified as the primary cause of Suriname’s unfavorable macroeconomic performance in the 1990s. ### Real Effective Exchange Rate (REER) Volatility - REER volatility contributed to Suriname’s underperformance on growth. - Empirical evidence: negative correlation between REER volatility and average real GDP growth in 1981–90 (R2 = 0.41); relationship weakened in 1991–2000 though Suriname’s REER volatility remained among the highest. - REER volatility is measured as the standard deviation of year-on-year growth rates of annual average REER indices; the parallel market rate is used in Suriname (which has substantially lower REER volatility than the official rate). - High REER volatility increases uncertainty about future competitiveness, deterring investment and capital formation. - Sectoral consequence: bauxite mining investment was partially sheltered from REER uncertainty because local wages for bauxite mining and processing were contracted in U.S. dollars and paid out in local currency—contributing to higher growth in the bauxite-mining sector relative to the rest of the economy. - Dollarization is noted as a response to reduce uncertainty (see Chapter 5 for determinants of dollarization). ### Real Interest Rates and Financial Distortions - Episodes of negative real lending rates had multiple adverse effects: - Banks lowered demand and time deposit rates, disincentivizing savings in domestic currency and promoting demonetization and dollarization (see Chapter 5). - Negative real rates implied large implicit subsidies to sectors with bank access, at the expense of sectors relying on more expensive financing, undermining efficient credit allocation and fostering rent-seeking. - Negative returns on deposits encouraged near-banking activities and Ponzi-like schemes; by 1996 total amounts invested in such schemes reached 25 percent of total bank deposits, often causing substantial losses and further credit allocation distortions. - Causes of negative real rates: - Underdeveloped banking system and regulatory controls, including deposit and lending rate ceilings in place until 1993. - Oligopolistic banking structure (three major banks) limited competition and allowed nominal deposit rates to remain sticky. - Moral suasion and government ownership stakes: the government was a major shareholder in four out of eight banks and promoted subsidized lending rates. - Average real lending rate over 1991–2004 in Suriname was –57 percent. - Episodes of excessively high real lending rates (during 1995–96 and 2000) also undermined investment and may have led to credit rationing; credit ceilings imposed by authorities limited deposit use for lending and acted as a tax on the banking system. - Net effect: both negative and excessively high real lending rates contributed to financial disintermediation, distorted credit allocation, and adverse effects on investment and growth. ### Transition to Fiscal Policy Issues: Coping with Fiscal Revenue Volatility - The chapter transitions to analyzing sources of revenue volatility and policy proposals to reduce the impact of exogenous price shocks on the fiscal position. - Main observations and proposals previewed: - Episodes of near-hyperinflation in the 1990s are largely attributable to inadequate policy responses to external shocks and their effects on fiscal revenues. - Revenue shocks in the 1990s were closely linked to bauxite export–related revenue; taxation of imported oil products and gold mining also contributed to revenue volatility. - Policy proposals include establishment of a nonrenewable resource fund (NRF) with assets invested abroad to absorb revenue from future mining projects, strengthening fiscal institutions, and placing annual budgets in a medium-term policy framework—especially for nonextractive sectors. - Public sector structure and fiscal pressures: - Suriname’s government wage bill was 38 percent of total expenditure, above the 31 percent regional average (2001–05). - Including state-owned enterprises, public sector accounts for about 60 percent of formal sector employment; central government employment is concentrated in Paramaribo. - Around 120 partially or totally state-owned enterprises were identified in a 2005 inventory by the Ministry of Trade and Industry; reporting inadequacies and subsidy opacity complicate fiscal assessment. - Current expenditures, net of interest payments, averaged nearly 25 percent of GDP during 2001–05. - Policy implication: improved institutional frameworks (including NRF design, stronger fiscal institutions, and medium-term budgeting) are necessary to reduce public-sector vulnerability to commodity price fluctuations and to stabilize fiscal revenue flows. _Italic: Source — Chapter 2. Volatility and Policy Responses, as provided in the supplied content unit._ ### Chapter 3. Coping With Fiscal Revenue Volatility ### Chapter 3. Coping With Fiscal Revenue Volatility ### Fiscal structure and expenditure pressures - Table 3.1 selected fiscal indicators (Average 2000–05): - Latin America 28.8 30.5 - Argentina 32.9 27.1 - Bolivia 32.7 32.8 - Brazil 49.0 27.7 - Chile 23.2 24.5 - Colombia 32.4 33.7 - Costa Rica 26.5 39.5 - Ecuador 23.7 41.2 - Mexico 24.8 40.5 - Nicaragua 27.5 30.7 - Panama 25.7 21.5 - Paraguay 21.4 42.4 - Peru 19.2 29.1 - Uruguay 31.6 19.9 - Venezuela 32.1 16.1 - The Caribbean 36.5 37.9 - Barbados 44.8... - Belize 31.2... - Dominican Republic 18.0... - Guyana 50.6... - Suriname 37.7 37.9 - LAC Average 30.7 31.0 - Public investment remained relatively low by international standards, with capital expenditures averaging only about 3 percent of GDP during the same period (Table 3.2). - Large current expenditures constrained the level of public investment financeable from domestic sources. - Lack of planning and implementation capacity constrained capital-spending projects despite the apparent availability of external financing. - Chronic public underinvestment created infrastructural bottlenecks that act as a drag on private sector–led growth. - The current administration increased public sector investment without incurring potentially destabilizing levels of external debt (see Table 3.2). ### Suriname central government expenditure (Table 3.2) - Annual series (In percent of GDP): - Total expenditure: 2001 32.0 2002 31.2 2003 27.6 2004 28.6 2005 29.7 2006 28.3 - Current expenditure: 2001 29.2 2002 28.4 2003 24.4 2004 24.9 2005 25.2 2006 24.7 - Wages and salaries: 2001 11.0 2002 13.2 2003 12.2 2004 10.7 2005 10.9 2006 10.3 - Current transfers: 2001 8.3 2002 5.6 2003 4.2 2004 3.5 2005 3.2 2006 3.7 - Interest: 2001 2.2 2002 2.3 2003 2.0 2004 1.7 2005 2.4 2006 1.8 - Goods and services: 2001 7.7 2002 7.2 2003 6.1 2004 9.1 2005 8.7 2006 8.9 - Net lending to public entities: 2001 0.7 2002 0.2 2003 0.3 2004 0.1 2005 0.1 2006 0.2 - Capital expenditures: 2001 2.2 2002 2.6 2003 3.0 2004 3.6 2005 4.4 2006 3.4 - Externally financed: 2001 1.5 2002 1.2 2003 2.8 2004 0.9 2005 3.4 2006 1.7 - Domestically financed: 2001 0.6 2002 1.5 2003 1.1 2004 2.2 2005 1.0 2006 1.6 - Memorandum item: Current expenditure, net of interest: 2001 27.0 2002 26.1 2003 22.4 2004 23.3 2005 22.8 2006 22.9 - Sources: Ministry of Finance; Central Bank of Suriname; Embassy of the Netherlands in Suriname; and Fund staff estimates. ### Civil service and public sector efficiency - Public sector employment has been used as a tool for political consensus building across ethnic groups; this contributed to creation and maintenance of ethnically dominated agencies. - Consequences: - Duplication of government functions across agencies. - Weak coordination between institutions. - High absenteeism and underdeveloped checks and balances. - Civil service wages are low and the wage scale is highly compressed. - Based on 2002 data, the highest civil service salary (requiring a master’s degree) was two and a half times that of the lowest civil service salary (the cleaning staff) (IMF, 2003a). - High absenteeism is attributed to low pay, highly restrictive dismissal rules, lack of oversight, and a culture of tacit acceptance. Dismissals are rare due to the restrictive labor code. - Labor unions and the administration agree a gradual workforce reduction is necessary and can be supported through migration to the private sector. - Required reforms: - Correction of wage compression to attract and retain qualified staff. - Reform of the labor code to address absenteeism. ### Fiscal revenue instability and commodity dependence - Revenue volatility, not just shocks, triggered inadequate policy responses in the 1990s and contributed to near-hyperinflation episodes. - World market price changes for bauxite and oil have caused significant volatility in tax revenues during the past decade. - Revenues from bauxite, gold, and oil have been especially volatile: - Bauxite and alumina: revenue volatility of this major export commodity became the trigger of the near-hyperinflation episodes of the 1990s. - Gold: recently became a significant export commodity and is already adding volatility to the fiscal revenue base. - Oil sector: taxation of the national oil company and taxation of imported gasoline and diesel both add to volatility. - Revenue volatility in the 1990s was related to substantial tax and exchange rate regime changes; grant revenue (almost entirely from Dutch grants) provided a countercyclical element but its suspension and reintroduction added to volatility. - A more stable taxation regime in the current decade has allowed for a more stable noncommodity revenue base, which should be central in medium-term budget planning. ### Nonrenewable Resource Funds (NRFs) and international experience - Rationale: - NRFs can stabilize the fiscal position and ensure a portion of extractive- industry wealth is saved for future generations. - Design must follow international best practices; success varies across countries. - Considerations in use of windfall and recurring revenue: - Windfall revenue can be used for consumption, investment, asset accumulation, or debt repayment. - Essential infrastructure needs may justify spending windfalls, but maintenance requirements persist after windfalls decline. - Spending windfalls is procyclical and negates the macroeconomic stabilization effect of an NRF. - Characteristics of successful NRFs: - Careful design, strong medium-term fiscal framework, prudent fiscal and monetary stance, integration with the budgetary system, transparency of rules, and professional asset management. - International examples: - Chile: copper stabilization fund established in 1985 operates on a reference copper price (historically following the 10-year moving average of global copper prices); transfer rules symmetric around the reference price; fund credited with helping manage fiscal policies in face of commodity price shocks. - Norway: since 1995, operates a petroleum fund that had accumulated external assets of about 114 percent of GDP by 2006; all fiscal revenue from oil transferred to the State Petroleum Fund (SPF); SPF transfers financing to cover the overall fiscal deficit; asset management delegated to a separate central bank unit and professional investment companies. - Botswana: maintained large budget surpluses in the 1990s and deposited substantial mineral revenues with the central bank, which manages external assets in long-term and short-term funds; in 2006 the banking system’s net external assets exceeded monetary liabilities by a factor of three. - Failures and risks: - PNG’s mineral resource stabilization fund was abandoned in 2000 after failing to accumulate external assets and stabilize revenues. - Oman’s state general reserve fund fell short because of frequent rule changes and poor integration with fiscal policy, resulting in procyclical expenditure changes. ### Medium-term budget framework and stronger fiscal institutions - Suriname needs a medium-term fiscal framework to limit incentives for immediate consumption of windfall gains and to provide automatic stabilizers. - The medium-term budget framework should: - Provide annual guidance for the budget process. - Tie annual expenditure plans to policy objectives and stable revenue streams. - Consider the underlying activity and revenue stream from nonextractive industries. - Integrate operations of an NRF, medium-term fiscal management, and annual budget cycles to create synergies in planning and execution. - Institutional requirements: - Better planning and forecasting capabilities. - Close integration between institutions and agencies. - Improved cooperation, data provision, and task delimitation between central government entities. - Strengthened internal controls (building on the State Debt Act and amendments to the Central Bank Act). - Progress to date: - IMF and Inter-American Development Bank (IDB) undertaken a needs assessment in 2006. - IMF-led Caribbean Technical Assistance Center (CARTAC) provided assistance to set up a medium-term budget framework, trained Ministry of Finance staff in revenue-forecasting techniques during 2007, and plans to expand technical assistance to include expenditure-forecasting techniques. ### Monetary and exchange rate policy: diagnosis and recommendations - Inflation performance reflects pervasive monetary financing of fiscal needs and absence of appropriate monetary and exchange rate policies; average inflation was among the highest and most volatile in Latin America and the Caribbean during the 1990s. - Key observations: - Episodes of very high inflation are monetary phenomena; monetary developments in Suriname have been determined by fiscal dominance of monetary policy. - Monetary policy was sometimes an additional impulse to monetary expansion and played an important role during the first near-hyperinflation episode. - Inflationary expectations have an important role in transmission of monetary policy to prices and market exchange rates. - Recommended reforms: - Clear separation between money creation and government funding needs. - Development of market-based monetary policy instruments. - Move toward a unified exchange rate system. - Gradual move toward greater exchange rate flexibility over time as supporting financial institutions and policies are developed. *Source: Chapter 3. Coping With Fiscal Revenue Volatility, _dp0902 - Chapter 3. Coping With Fiscal Revenue Volatility_* ### Chapter 4. Monetary and Exchange Rate Policy ### Chapter 4. Monetary and Exchange Rate Policy ### Institutional Framework - Monetary policy is governed by the Central Bank of Suriname Act. - The law defines the purpose of the Central Bank of Suriname (CBvS) as promoting the stability of the Surinamese currency and achieving “balanced socio-economic development.” - The CBvS is required to conduct monetary policy to achieve a low and stable rate of inflation. - Developments in the foreign exchange market are an important factor in the formulation and implementation of monetary policy, given the sensitivity of domestic prices to exchange rate movements. - A statutory cumulative ceiling for central bank financing of the government deficit has been in place since 1981, set at 10 percent of budgeted revenues for a fiscal year. - Historically, the CBvS often issued reserve money to finance the government budget well in excess of statutory limits or levels consistent with low inflation. - An amendment to the Central Bank Act enacted in May 2005 strengthened the central bank president’s authority to limit financing in excess of the lending limit and establishes severe penalties for central bank officials found in dereliction of their duties. ### Monetary Policy Instruments - Suriname is in the early stages of money market development; the CBvS relies on reserve requirements and moral suasion and has not adopted a formal, preannounced operational framework or target. - Reserve requirements were instituted in 2001; before May 2001 monetary policy relied mainly on monthly adjustments to credit ceilings on incremental domestic and foreign currency lending by commercial banks. - Credit ceiling formulas (histor): (a) 90 percent of the increase in savings deposits, (b) 75 percent of the increase in time deposits with a maturity of less than one year, and (c) 100 percent of the increase in time deposits with a maturity of one year and over. Increases in the bank’s capital and reserves also determined the ceilings. - A single unremunerated reserve requirement on domestic currency deposits of 27.5 percent was introduced in May 2001; reserve requirements on foreign currency deposits were instituted on February 12, 2003. - The reserve requirement on domestic currency deposits was gradually lowered since October 2004 as the exchange rate stabilized and inflation fell to single digits. - One small state-owned bank benefits from lower reserve requirements, to be gradually raised until reaching the uniform ratio for all banks. - The CBvS checks banks’ compliance with reserve requirements on a weekly basis. - Two significant distortions in the reserve requirement scheme: - Foreign currency intermediation is favored: - No reserve requirements on foreign currency deposits until February 12, 2003, when a 17.5 percent requirement was imposed. - To eliminate the gap, CBvS lowered domestic reserve requirements (reached 30 percent in October 2004) while raising foreign currency deposit requirements from 17.5 percent to 22.5 percent in November 2004 and to 33ѿ percent in February 2005. - Required reserves for foreign currency deposits are remunerated and can be held abroad at correspondent accounts of foreign commercial banks; required reserves for domestic deposits are unremunerated. - Authorities extended the range of liquid foreign currency assets that qualify as foreign reserves in January 2006; banks can invest part of reserves in negotiable bonds from issuers with high ratings. - Domestic currency reserve requirements are used to promote the housing sector: - On February 12, 2004, CBvS allowed commercial banks to use up to 7 percent of deposit liabilities (reserve base) to finance low-interest mortgages. - This was gradually raised to 10 percent in January 2007, corresponding to a reduction of the effective reserve requirement to about 17 percent. - Banks used the facility fully by mid-2006 before the facility ceiling was increased. - Limited use of alternative instruments: - In March 1995 the central bank issued gold-denominated certificates redeemable on demand, indexed to the international price of gold, paying interest of 5 percent a year; attractiveness was limited because conversion into local currency used the official exchange rate. - Central bank is authorized to use rediscount facilities, open market operations in treasury bills, and liquidity ratios, but these have not been used. ### The Financial System - Total assets of the banking system amounted to about 45 percent of GDP in 2006, with commercial banks holding about 70 percent of total financial system assets. - The rest of the financial system consists of 31 pension funds, 10 insurance companies, and 29 credit unions, all under central bank supervision. There are also 22 foreign exchange houses (cambios); financial data on cambios are not available. - Banking system concentration: - Seven commercial banks until September 2005; Surichange Bank started operations as the eighth commercial bank in September 2005. - The three largest banks accounted for 84 percent of total assets as of end-2006. - One of the largest banks is a fully owned subsidiary of an international bank; two have partial government participation. - Three small banks are state-owned and specialize in sectoral lending with a social objective; there is a state development bank that does not take deposits from the public; there is a very small privately owned full-service bank. - Government of Suriname insures the savings deposits of one state-owned bank. - Balance sheet conditions: - The largest banks’ balance sheets appear relatively strong, but unresolved difficulties exist at the three small state-owned banks. - There is no deposit insurance system. - Lack of competition and market depth results in a narrow market for government and other securities. - Financial system asset shares (percent of total) — estimates: - Banks: 67.3 (2000), 70.1 (2001), 67.7 (2002), 68.9 (2003), 79.3 (2004), 68.1 (2005), 71.1 (2006) - Large banks: 54.6 (2000), 56.8 (2001), 57.3 (2002), 58.3 (2003), 66.8 (2004), 57.1 (2005), 59.5 (2006) - Small banks: 12.7 (2000), 13.4 (2001), 10.4 (2002), 10.4 (2003), 12.4 (2004), 11.0 (2005), 11.6 (2006) - Pension funds: 25.2 (2000), 21.5 (2001), 23.3 (2002), 21.8 (2003), 10.2 (2004), 21.6 (2005), 18.1 (2006) - Insurance companies: 6.4 (2000), 7.1 (2001), 7.7 (2002), 7.7 (2003), 8.3 (2004), 8.3 (2005), 8.7 (2006) - Credit unions and cooperatives: 1.1 (2000), 1.3 (2001), 1.4 (2002), 1.6 (2003), 2.2 (2004), 2.0 (2005), 2.1 (2006) - Market share of commercial banks (percent of total): - Small banks — total assets: 18.8 (2000), 19.1 (2001), 15.3 (2002), 15.5 (2003), 15.7 (2004), 16.2 (2005), 16.4 (2006) - Small banks — net loans: 31.3 (2000), 26.8 (2001), 20.9 (2002), 21.4 (2003), 21.2 (2004), 19.3 (2005), 17.2 (2006) - Large banks — total assets: 81.2 (2000), 80.9 (2001), 84.7 (2002), 84.5 (2003), 84.3 (2004), 83.8 (2005), 83.6 (2006) - Large banks — net loans: 68.7 (2000), 73.2 (2001), 79.1 (2002), 78.6 (2003), 78.8 (2004), 80.7 (2005), 82.8 (2006) - Supervision and regulation: - New bank supervision regulations enacted in 2003 to help meet Basel Core Principles; banking supervision act of January 2003 enhanced central bank supervisory powers. - Five new prudential regulations include: 1. Capital adequacy: minimum capital requirement of Suriname dollars SRD 4.5 million and risk weighted capital ratio of 8 percent. 2. Classification of loans and provisioning: adoption of credit policy and minimum accounting standards for outstanding loans. 3. Large exposures: limit on single large exposure and related parties of 25 percent of the bank’s capital, and aggregate exposure to capital of up to 600 percent of the bank’s capital. 4. Insider lending: limit of 25 percent of capital to single insider and 100 percent for aggregate loans to insiders. 5. Investment limits: limit of 100 percent of the capital base on bank’s fixed asset investment. - Implementation has been difficult due to delays in data reporting and lack of staff. ### Exchange Rate Regime - The foreign exchange system comprises the official market and the commercial bank–cambio market. - The official exchange rate is announced by the CBvS and used for specific transactions; other legal private sector transactions are carried out through the commercial bank–cambio market. - The official market accounts for less than 20 percent of all foreign exchange transactions. - Supply in the official market comes from donor funds and partial surrender of mineral export proceeds; tax code requires companies to pay tax liabilities in foreign currency if accounting records are maintained in foreign currency; mining companies traditionally purchased local currency needs from the CBvS. - Demand in the official market comes from the government for foreign transactions (notably fuel purchases and debt repayment); the balance accumulates as foreign reserves by the CBvS. - No intermarket transactions between official and commercial markets as the CBvS has not traded foreign exchange with commercial banks in recent years; since July 2007 the CBvS started with currency repos for commercial banks to cover short positions. - Suriname’s exchange rate regime is characterized as a de facto peg: de jure rate is not officially pegged to the U.S. dollar but is rarely adjusted. - The last noticeable temporary exchange rate movement was the depreciation during June 2005; since then the nominal exchange rate vis-à-vis U.S. dollar has remained remarkably stable. - The CBvS does not intervene directly in the bank-cambio market but exerts moral suasion to limit minor fluctuations of the Suriname dollar. ### History of the Exchange Rate Regime - General pattern: exchange rate arrangements over the past 25 years reflect fiscal and monetary developments; monetary financing of fiscal needs led authorities to rely on exchange rate restrictions and multiple exchange rate arrangements which proved costly (quasi-fiscal deficits, price distortions, adverse income distribution, and substitution effects). - 1975–October 1992: - Post-independence fixed rate of Sf 1.785 per U.S. dollar maintained until early 1990s. - Parallel market emerged in 1980s; by September 1992 the parallel rate reached Sf 24 per U.S. dollar, about 13 times the official rate. - October 1992–June 1994: - Multiple official exchange rate regime established in October 1992 with seven rates (three fixed: official rate for debt service and consumer imports; bauxite rate for tax liabilities and local expenses of bauxite companies; tourist rate for exchange sold by tourists; flexible rates including an auction rate, banana rate, rice rate, and another exports rate). - Auction rate used for imports of raw materials, capital goods, and other “productive” inputs; later merged with the official rate in June 1993 and applicability broadened. - Free interbank-market rate introduced with participation of six commercial banks and five cambios; limited source of foreign exchange and moral suasion impeded development. - Multiple exchange rates produced massive quasi-fiscal taxes and subsidies; CBvS incurred losses monetized amounting to 11 percent of GDP in 1993 and 7 percent in 1994. - Multiple official exchange rate regime abandoned in mid-1994. - July 1994–August 2002: - Unified official exchange rate reestablished in July 1994 at Sf 180 per U.S. dollar for importers holding foreign exchange licenses; legal parallel market introduced for commercial banks and cambios; a black market also existed. - CBvS often intervened in the bank-cambio market in 1995 using moral suasion; bank-cambio market had smaller trading volume and reportedly higher buy-sell spreads than the black market. - Period marked by episodes of growing spreads between the official rate and the parallel rate followed by large devaluations in October 1994, January 1999, October 2000, and August 2002. - Episodes of growing spreads associated with a loose fiscal stance (e.g., 1999 and 2000); tighter fiscal policy contributed to lower spreads in 1995, 1996, and 2001. - CBvS reduced exchange rate restrictions: stopped foreign exchange interventions in 1995; eliminated obligation to surrender foreign exchange earnings at the official rate in the second half of 2000; eliminated surrender requirement for all sectors except mining in 2002. - September 2002–present: - Exchange rate stabilized since 2002 and authorities moved toward unifying the exchange rate regime; stabilization policies since late (text ends). *Source: _dp0902 - Chapter 4. Monetary and Exchange Rate Policy.* ### Chapter 4. Monetary and Exchange Rate Policy ### Chapter 4. Monetary and Exchange Rate Policy ### Evolution of exchange rates and recent reforms - January 2004: CBvS introduced the Suriname dollar to replace the Suriname guilder at a rate of 1:1,000. - January 2004: CBvS devalued the official exchange rate by about 4 percent to SRD 2.735 per U.S. dollar, reducing the spread with the parallel rate to less than 2½ percent. - Mid-2003: Partial elimination of restrictions on the bank-cambio rate; mid-2004: complete elimination. - Policy: CBvS adopted maintaining an official exchange rate as a tool to reduce exchange rate fluctuations in the bank-cambios rate; adjusting the official rate to permanent changes in the bank-cambios rate has been “more a matter of principle than practice.” ### Monetary policy transmission mechanism — key findings - Fiscal dominance: monetary instability rooted in fiscal dominance where monetization of fiscal deficits made monetary policy accommodative and central bank balance sheet control weak. - Correlations: - Contemporaneous correlation between year-on-year inflation and money growth is 0.71. - Correlation between money growth and exchange rate depreciation is 0.5. - Expectations channel: - Inflation and exchange rate movements lead to changes in monetary aggregates; prices and exchange rates are forward-looking. - During the two near-hyperinflation episodes, inflation reached its highest level at least six months before monetary expansion peaked (almost a year earlier during the first episode). - Lagged correlation: correlation between money growth and inflation and nominal depreciation is stronger when inflation is lagged by one or two quarters. - Granger-causality tests: empirical tests fail to reject that inflation and depreciation Granger-cause money growth; current inflation is a good predictor of future money growth. - Granger tests detail: VAR with three lags; variables: inflation, money growth, and exchange rate depreciation; monthly data covering January 1990 to October 2005. - Since mid-1990s: forward-looking nature of inflation appears to have increased; using data from 1995 onward IMF (2003a) finds money fails to Granger-cause inflation and nominal depreciations, but this result does not hold with a longer data set starting in 1990. ### Inflation, nominal depreciation, and money growth — observed dynamics - Two near-hyperinflation episodes associated with substantial concurrent monetary expansions. - Evidence that inflation stabilizes before money growth does so in the episodes studied. - Changes in money multiplier: - Near-perfect correlation between base money and broad money until 1996; strong co-movement thereafter with larger movements in the money multiplier. - 1996–97 remonetization: multiplier increased. - Second near-hyperinflation episode: multiplier declined significantly. - Reserve money and broad money series demonstrate close co-movement (Figure references in source). ### Sources of monetary volatility - Net credit to the government: - Most changes in base money reflect movements in net credit to the government. - Greatest contributions to money base volatility were 1991–1994 (up to first quarter 1994) and 1997–2000 — periods of high inflation. - Periods with rapid decreases in inflation (1995–96 and 2001) associated with large declines in net credit to the government. - Unsterilized reserve accumulation: - Unsterilized accumulation of foreign reserves accounts for the entire monetary expansion during 1995. - 1995: inflation fell to 40 percent, although the monetary base grew by 225 percent during that year following accumulation of central bank reserves. - Reasons: central bank decision to accumulate foreign currency and gold to replenish reserves in absence of adequate sterilization instruments; improved terms of trade that automatically increased foreign reserves via official exchange rate market structure. - Accumulation of foreign reserves during commodity price booms has been an important source of growth in the monetary base (examples: 1995–96, 2002, and 2005). - Distortionary exchange rate regime: - Quasi-fiscal losses from multiple-exchange rate regime were an important source of monetary expansion during 1993 and especially 1994. - 1994: monetization of exchange rate losses accounted for the bulk of money base growth; 1994 had the highest inflation level (inflation peaked at almost 600 percent in mid-1994). - Exchange rate controls were the main source of inflation in 1994 and had the opposite effect from what was intended. ### Toward a stability-oriented monetary and exchange rate policy — priorities - Institutional/legal progress: - 2005 amendment to the Central Bank Act strengthens central bank president’s authority to limit government financing in excess of the lending limit (10 percent of budgeted revenues) and establishes severe penalties for central bank officials in dereliction of duties. - Result: fiscal authorities have gradually relied on treasury bills as source of financing. - Recommended reforms to increase monetary policy effectiveness and financial stability: - Encourage development of an interbank liquidity market (money market) and the treasury bill market. - Medium-term: put in place additional policy instruments, especially market-friendly instruments such as open market operations and rediscount facilities. - Advocate adoption of the bank-cambio rate as the official rate and a more gradual and sustained increase in exchange rate flexibility; in a unified and more flexible exchange rate market, rely more heavily on sterilized intervention rather than moral suasion. ### New monetary policy instruments — proposals - Problem: absence of an interest rate channel and lack of adequate instruments undermines monetary policy effectiveness; reliance exclusively on reserve requirements distorts financial intermediation and prevents effective day-to-day liquidity management. - Market development benefits: - Competitive money market and treasury bill market would allow interest rates to reflect macroeconomic and liquidity developments, help assess monetary conditions, and support a functioning yield curve. - Yield curve development would transmit policy-led developments from the money market to treasury bills and longer-term government bonds. - Specific instrument proposals: - Overdraft and rediscount facilities: encourage banks to use CBvS overdraft and rediscount facilities; the interest rate spread between deposit and lending facility would provide a corridor encouraging interbank liquidity trading. - Open-market operations: CBvS should rely on open-market operations to influence liquidity, e.g., repurchase operations (repos) using treasury bills as collateral. If treasury bills insufficient or interbank market too shallow, CBvS could issue its own paper. Note: issuance of gold certificates acted as an open market operation but sale was discontinued in 2001. ### Exchange rate policy — assessment and risks - Progress: elimination of restrictions on the bank-cambio rate in mid-2003 and devaluation of official rate in January 2004 reduced exchange rate distortions and eliminated the black market; spread between official and bank rate fell to less than 2½ percent. - Remaining issues: - System still allows possibility of large spreads because markets are segmented; developments in bank-cambios market need not affect the official rate. - No legal obligation to adjust the official rate when persistent spreads emerge. - CBvS policy to adjust official rate to changes in bank-cambio rate deemed permanent is open to interpretation. - Public scrutiny and political pressure could affect timing and size of adjustments. - Risk of prolonged large spreads that would entail substantial subsidies or taxes on specific sectors. ### Box 4.1 — The domestic treasury bill market (observations and reforms) - Market structure and practices: - Holdings: almost 90 percent of treasury bills are held by commercial banks; remainder held by pension funds, insurance companies, and corporations. - Bills are zero coupon bonds sold at deep discount; market value due at maturity; no formal interest payments though accrued interest often paid at maturity and bills rolled over. - Current terms: a 12.5 percent interest rate and a maturity of six months — terms set by CBvS and unchanged for a long time; terms do not reflect changing liquidity demands and limit interest rates as a signal of conditions. - Terms defined in a letter of agreement between the Ministry of Finance and its counterpart specifying amount, interest rate, and maturity; letter includes provision allowing provider to sell bill to the central bank with no delay and no penalty at discount value plus accrued interest — renders bills extremely liquid and unsuitable as monetary policy instrument. - No formal auctions; CBvS intermediates between Ministry of Finance and financial system by inquiring about demand and coordinating issuance. - Treasury bills can be used as collateral to borrow funds at the central bank at an interest payment set at 14 percent; borrowing window rarely used because banks opt to deliver bills to CBvS without penalty, undermining interbank market development. - Commercial banks have limited interest in intermediating treasury bills to retail customers due to limited availability and complete liquidity of bills. - Reform proposals: - Auctions: CBvS should sell treasury bills at periodic auctions to allow bill value (implicit interest rate) to reflect liquidity needs and relative value of government paper. - Securitization: Treasury bills should be securitized to develop a secondary market, improve marketability to a wider investor base, open the bill market to new participants (including small holders), and allow banks to act as intermediaries for clients. *Chapter 4. Monetary and Exchange Rate Policy* ### Box 4.1 (concluded) ### Box 4.1 (concluded) ### Monetary instruments and operational changes - Discount window: - There should be a penalty interest rate (defined as a spread above the latest auction interest rate) for sales of treasury bills to the CBvS. - The penalty spread would reduce the complete liquidity of treasury bills, change the degree of liquidity of treasury bills, and set the basis for open market operations. - The penalty spread would create an incentive for the development of a secondary market for treasury bills. - Combined with a more market-determined interest rate of treasury bills derived from the auctions, this would render treasury bills somewhat less attractive for commercial banks and create an incentive for banks to begin intermediating them to retail customers. - Repo operations: - The CBvS should replace the current collateralized loans with commercial banks with repurchase agreements (repos). - Market participants would buy or sell treasury bills to the CBvS with an agreement to reverse the transaction at a later point. - On average, the repo-refinancing rate should be set as a spread above the auction rate of treasury bills. - This would further create an instrument of monetary policy. - Reserve requirements: - When these measures are in place, the CBvS could lower current reserve requirements. ### Exchange rate policy: unification and flexibility - Adopt the bank-cambio rate as the official rate: - The authorities should adopt the bank-cambio rate as the official rate. - Adoption of a single exchange rate for all transactions would end Suriname’s multiple currency practices. - It is unlikely that such a move would affect the exchange rate level or the pace of reserve accumulation by the central bank, given the large relative size of the bank-cambio market. - The bank-cambio market accounts for more than 80 percent of all foreign exchange transactions, while the official rate is used solely for the government debt service and tax payments by some companies. - Eliminating the official rate-setting process by the central bank will not be perceived as a lack of market guidance, because the central bank could temporarily continue to use moral suasion to reduce short-term market fluctuations, pending the full establishment of effective market-based policy instruments. - Move toward greater exchange rate flexibility over the long run: - Although the current high degree of exchange rate stability might be appropriate at this stage, over the long run, a more flexible exchange rate would be more appropriate. - There are advantages to a more flexible exchange rate regime for countries like Suriname (see Box 4.2). - Given the challenges associated with exchange rate flexibility, it is important that both the authorities and private agents “learn to float” (see Rogoff and others, 2004). - For the authorities, this requires learning how to conduct monetary policy under flexible exchange rates. - For private agents, this implies managing the risks associated with greater exchange rate flexibility. - Intervention and moral suasion: - In a unified and more flexible exchange rate market, the authorities could intervene but should eventually refrain from moral suasion. - The authorities could intervene in the foreign exchange rate market to change the size or the composition of its balance sheet for the purpose of monetary policy implementation. - The authorities could also intervene in currency markets to limit exchange rate volatility, but they should refrain from targeting an unsustainable exchange rate level through direct or indirect exchange rate intervention. - Within a functioning flexible exchange rate market and with a more proactive monetary policy based on the use of indirect instruments, it will become unnecessary—and even counterproductive—to use moral suasion to limit the role of exchange rates as informative signals on the macroeconomic and monetary stance. - Therefore, although moral suasion to limit short-term volatility in the foreign exchange market might be used during a transition period, it should be discontinued in due course. ### Box 4.2 — Benefits and Challenges of Greater Exchange Rate Flexibility in Suriname - General: There are advantages and disadvantages of greater exchange flexibility and there are no simple prescriptions. - Benefits: - Greater flexibility allows countries to partially insulate against external shocks. - Under flexible exchange rates, the effects of real shocks are partially offset by the adjustment of domestic relative prices brought about by movements in nominal exchange rates. - Broda (2004) finds that shocks to the terms of trade have greater impact in countries with pegs than in countries with floats. This channel is particularly relevant in Suriname because of the relative inflexibility of its domestic labor and product markets. - Challenges / arguments for less flexibility: - Less exchange rate flexibility allows developing countries to use the exchange rate as a monetary anchor. - This requires consistent, sound macroeconomic policies, which in the past have not always been implemented in Suriname. - More recently, with much-improved macroeconomic policies, the nominal anchor provided by the exchange rate policy has been an important factor in Suriname, especially in light of the absence of alternative, adequate monetary policy instruments, and the very low financial sector development. - Dollarization effects: - Rigid exchange rate regimes encourage dollarization. - With stable exchange rates, market participants find incentives to incur foreign currency debt without currency hedging. - The history of successive devaluations in Suriname encourages depositors to accumulate foreign currency assets as it allows for a one-sided bet on the currency. - Conversely, greater flexibility discourages dollarization, as nominal appreciations alert economic agents of the risks from holding dollar assets, while price signals and arbitrage will reduce the need for foreign assets as a hedging instrument. - Prudential prerequisites: - Greater exchange rate flexibility in partially dollarized countries requires a strong prudential framework in the financial sector. - Given the potential currency mismatch of agents’ assets and liabilities, banks need to internalize fully the risks of lending in foreign currency to unhedged borrowers (see Gulde and others, 2004). - The gradual increase in exchange rate flexibility must be accompanied by a strengthening of financial supervision. *Source: SURINAME: TOWARD STABILITY AND GROWTH — Box 4.1 (concluded) and Box 4.2.* ### Chapter 5. Dollarization in Suriname ### Chapter 5. Dollarization in Suriname ### Seigniorage (Box 5.2) - Definition: Seigniorage is usually defined as an increase in the monetary base divided by the price level, specifically St = (Mt − Mt−1)/Pt, where Mt is the monetary base at period t and Pt is the price level at period t. - Decomposition: Let mt = Mt/Pt be real monetary base (real balances). Seigniorage can be decomposed into real seigniorage and the inflation tax: - The first term equals the increase in residents’ real money holdings originating from money demand (real seigniorage). - The second term equals real balances times the inflation rate (inflation tax). - Dynamics in Suriname: - Seigniorage was generated mainly from the inflation tax during 1999–2001, when inflation averaged 66 percent a year. - A pickup in dollarization and a decline in the real demand for the domestic currency during 2001–03 reduced real seigniorage and thus the tax base for future inflation tax. - Seigniorage declined from 6 percent of GDP in 2000 to 0.3 percent in 2003, with an even more pronounced decline in real seigniorage. ### Exchange Rate Flexibility and Monetary Independence - Dollarization reduces the scope for the exchange rate to buffer external shocks: with a flexible exchange rate, changes in the nominal exchange rate can offset adverse external shocks (including declines in world commodity prices) by crowding in external demand; dollarization limits this adjustment because domestic prices are denominated in foreign currency. - Dollarization implies a loss of monetary policy independence: - In a fully dollarized economy the monetary authority cannot influence domestic interest rates or the quantity of money circulating in the economy, limiting the scope for policy action. - Reduced access to seigniorage and countercyclical policy may, however, increase perceived credibility of a commitment to low inflation. ### Dollarization and the Financial System - Financial deepening (1996–2005): - Rising ratio of broad money to GDP largely driven by growth in foreign currency deposits and a similar trend in commercial banks’ assets. - Liquidity and solvency risks unique to dollarized systems: - Liquidity risks: central bank’s reduced capacity to act as lender of last resort given limited access to foreign exchange; crucial that a dollarized banking system holds sufficient international reserve assets to cover deposit liabilities. - Solvency risks: exchange rate changes can affect banks’ balance sheets through currency mismatches or via impact on foreign-currency borrowers with domestic-currency incomes. - Mitigants in Suriname: - Bank supervisors require evidence from bank clients of ability to repay loans in foreign currency. - International reserve coverage trends: - International liquid reserve assets of commercial banks (deposits with correspondent banks abroad plus required minimum reserves on foreign currency deposits) decreased from 194 percent of foreign currency deposits in 1996 to 67 percent in 2005. - Total banking system international reserves—including CBvS reserves—still exceed 100 percent of foreign currency deposits, though with little margin in case of a sustained balance of payments shock. - Memorandum: Foreign currency deposits (in millions of U.S. dollars) by year: 50.2, 71.5, 86.7, 107.1, 118.1, 170.6, 194.4, 268.3, 320.2, 360.6. - Prudential regulation gaps: - Need strengthening of regulations on open positions and net foreign currency positions. - High degree of foreign currency lending to borrowers without foreign currency income increases exposure to exchange rate shocks. - Emphasizes importance of prudential regulations that ensure strong risk analysis for foreign currency lending. ### Lessons from Suriname’s Dollarization - Causes and stabilization: - Dollarization was a response to near-hyperinflation episodes and a reserve requirement scheme that encouraged foreign currency intermediation. - The process stabilized recently due to increased reserve requirements on foreign currency deposits and improved confidence from more stable macroeconomic policies; nevertheless, high dollarization may persist as in other countries’ experiences. - Consequences: - Reduced exchange rate flexibility and seigniorage revenue. - Liberalization of foreign currency banking transactions plus macroeconomic stability contributed to financial deepening. - Dollarization increased vulnerability of the financial system because the central bank cannot serve as lender of last resort for the dollarized component of intermediation. - Foreign currency lending raised the possibility of balance sheet shocks in the private sector and banking system. *Source: Chapter 5. Dollarization in Suriname.* ### Chapter 6. Epilogue ### Chapter 6. Epilogue ### Monetary, exchange rate, and regulatory reforms - Monetary policy has focused on achieving price stability. - Regulatory changes in the exchange rate and the financial systems have strengthened resilience. - The Suriname dollar was successfully introduced in January 2004 to replace the devalued Suriname guilder. - A new banking supervision law was passed in 2003 and the Central Bank of Suriname (CBvS) introduced new prudential regulations, in line with Basel Core Principles. - A number of monetary and exchange rate policy initiatives were adopted in recent years, including the Central Bank Act of 2005 and measures to reduce fragmentation of the foreign exchange market. - The gradual unification of the exchange rate market has contributed to the stability of the monetary system. - Significant scope remains to improve monetary policy, notably through the introduction and use of market-based policy instruments. - Weak-performing state banks and a high degree of financial dollarization continue to pose significant challenges. ### Fiscal framework, structural reform, and technical assistance - Progress toward fiscal, monetary, and exchange rate stabilization has given policymakers an opportunity to prepare additional structural reforms. - An improved medium-term fiscal framework—with a view to shielding the economy from boom and bust cycles of international commodity markets—has been high on the government’s agenda; this potentially could include a Natural Resource Fund. - Near-term remaining fiscal challenges include improved budget execution and more comprehensive statistical data coverage of the public sector. - The authorities continue to make good use of technical assistance to accelerate progress in these areas, including from the IMF’s regional technical assistance center (the Caribbean Technical Assistance Center (CARTAC)). - There is a significant challenge to ensure that initial work on structural reforms becomes part of the institutional fabric of policymaking in Suriname. ### Macroeconomic pressures and outlook - Macroeconomic stability has come under pressure from the worldwide commodity boom. - Although Suriname has been benefiting from world high prices of its primary export commodities, strong economic growth has been accompanied by overheating pressures. - As of early 2008, inflation had risen to double digits again, partly fueled by a credit boom. - A de facto peg of the Suriname dollar to the U.S. dollar—combined with the global weakness of the dollar—has contributed to inflationary pressures. - Addressing these macroeconomic imbalances will be essential for Suriname to conclusively demonstrate that the turbulent economic history of the 1990s is firmly in the past. ### Extractive industries — overview and sectoral findings - The appendix describes main extractive industries—bauxite, gold, and oil—and main agricultural industries. - Bauxite mining and processing remains at the core of the Surinamese economy, providing a continued resource flow to the economy and the state; long-term prospects remain favorable. - Gold mining and oil extraction have become increasingly important; gold mining has a long history but formal large-scale gold mining is a recent development; oil extraction has become one of Suriname’s largest commercial industries since 1980. #### Bauxite - SURALCO (Suriname Aluminum Company, L.L.C.), a subsidiary of Alcoa, has mined and exported bauxite since 1922; large-scale bauxite mining began in the 1940s. - During World War II, Suriname provided 80 percent of the U.S. raw material requirement for aluminum processing. - Suriname’s share in world bauxite production currently accounts for less than 3 percent of the world’s production. - The 1958 Brokopondo agreement with SURALCO granted exploration and exploitation concessions and required construction of a dam (Afobakka), an alumina-refining facility, a road between Afobakka and Paranam, and an aluminum smelter at Paranam; exemptions from customs duties and export duties were granted for 75 years; at expiration in 2033 the power station and artificial lake will be transferred to the government and mines are expected to be depleted. - Alcoa invested more than US$150 million to build the Brokopondo hydropower plant in 1959–64; Brokopondo’s installed capacity is 189 megawatts but has never been reached. - Aluminum production ceased with the closure of the smelter in 1999; the alumina-refining facility Paranam was expanded, increasing capacity to about 2.2 million metric tons per year (expansion completed in February 2005). - SURALCO and BHP made joint investments of around US$200 million to develop Kaaimangrassie and Klaverbad mines in Commewijne; deposits in immediate areas are estimated to contain 75 million tons of bauxite and are expected to last until 2010. - Contribution to the economy: bauxite mining and processing accounted for about one-third of GDP in the post–World War II period; by the end of the twentieth century the sector’s contribution fell to about 15 percent of GDP. - The bauxite sector represents about two-thirds of the total value of exports (foreign exchange inflows); direct tax revenues from the bauxite industry for 1996–2005 averaged about 4 percent of GDP, or about 14 percent of total fiscal revenue. - The sector employs directly about 1,400 workers, less than 2½ percent of the labor force. - Outlook: Bakhuys reserves are estimated at about 200–700 million tons; Bakhuys could require investment of up to US$3 billion for an integrated mining, hydropower, and processing project including an alumina refinery and eventually an aluminum smelter; SURALCO will complete a feasibility study for a 400- to 500-megawatt hydroelectric power facility. #### Oil - The Suriname-Guyana basin potential was estimated at about 15 billion barrels by the U.S. Geological Survey (2001); most of Suriname’s oil reserves are likely to be found offshore. - Staatsolie Maatschappij Suriname, N.V. was established in December 1980 to oversee oil exploration and production. - A commercial oil find was made in the Tambaredjo field in November 1982; oil production increased steadily, reaching levels of around 4-5 million barrels during 2002–05. - In March 2006 Staatsolie started extracting oil from the Calcutta field; proven reserves in the Calcutta field are estimated at about 23 million barrels; annual production rose from 4.4 million barrels in 2005 to 4.8 million barrels in 2006. - Suriname’s oil production is modest by international standards; Trinidad and Tobago extracts about 12 times the oil output of Suriname. - Proven reserves as of 2005 were about one-tenth those of Trinidad and Tobago. - Staatsolie’s refinery processed on average about 2.6 million barrels of crude oil annually during 2004–06; after an overhaul in 2005, a US$300 million expansion is planned to increase processing capacity by 40 percent. - Staatsolie’s foreign exchange earnings in 2006 were around US$240 million (about 92 percent of sales), while local sales amounted to the equivalent of about US$21 million in 2006. - Staatsolie’s historical performance: over the first 25 years it produced 57 million barrels with sales totaling US$1.2 billion; earned about US$470 million in net profits and paid about US$150 million in income taxes while transferring another US$175 million in dividends. - Key oil indicators (selected): - Staatsolie's net income (millions of US$): 1992: 12.0; 2002: 23.9; 2003: 28.4; 2004: 35.5; 2005: 67.8; 2006: 98.5. - Crude oil productions (millions of barrels): 2000: 4.5; 2001: 4.7; 2002: 4.5; 2003: 4.3; 2004: 4.1; 2005: 4.4; 2006: 4.8. - Average realized crude oil price (US$ per barrel): 1992: 12.8; 2002: 21.7; 2003: 26.3; 2004: 28.4; 2005: 38.6; 2006: 46.4. - Total sales revenue from oil products (millions of US$): 1992: 20.2; 2002: 104.1; 2003: 114.7; 2004: 117.7; 2005: 173.7; 2006: 240.5. - In percent of GDP (sales revenue): 1992: 4.9; 2002: 10.9; 2003: 11.2; 2004: 10.3; 2005: 12.7; 2006: 15.1. - Proven reserves (end of year, millions of barrels): 1992: 43.5; 2002: 111.0; 2003: 110.0; 2004: 85.0; 2005: 107.0; 2006: 88.0. - Impact on the economy: in 2006 gross proceeds from crude oil production, refining, and trading totaled US$240 million (15 percent of GDP); Staatsolie’s crude oil deliveries to SURALCO (import-substituting local deliveries) amount to around US$144 million or nearly 15 percent of merchandise exports in 2006. - Outlook: seismic data offshore showed promising results; Staatsolie signed exploration contracts with foreign firms (examples cited in the source). #### Gold - Gold mining has become increasingly important; small-scale gold mining activities became significant in the 1980s, while large-scale gold mining started in 2004. - Gold production in Suriname represented 2½ percent of Western Hemisphere gold production in 2006 (Table A4: Suriname 9.4 tons, 1.2 percent of total Western Hemisphere production of 765.8 tons). - As of January 2005, the government had granted about half a million hectares in concessions for gold exploration, exploitation, and small-scale mining (representing 3½ percent of the total land area), but only 2,000 hectares possess legal concessions for small-scale mining (Table A5). - Most gold is mined without a legal concession or government control; small-scale miners estimated at 10,000–20,000 operating in approximately 20,000 square kilometers in eastern Suriname. - Small-scale operations often use mercury, causing substantial health and environmental damage. - The CBvS started a gold purchase program in July 1994 to buy gold through licensed private companies; purchases peaked in 1999. - In August 2002 the CBvS eliminated direct gold purchases and licensed the private sector; by end-2004 seven licensed brokers were operating; combined with higher international gold prices, exports from small-scale mining rose from US$24 million in 2002 to around US$160 million in 2005 and a projected US$210 million in 2006. - Large-scale mining: the Rosebel mine opened in February 2004 with total investment around US$176 million; produced around 274,000 ounces of gold in 2005 (about US$140 million); employment around 1,100 workers; local expenditure around US$30 million in 2004 (3 percent of GDP); tax and nontax revenue around US$5.4 million in 2004 and US$8.5 million in 2005. - Longevity: a gold mine life span averages between 5 and 15 years; the Rosebel mine is expected to operate for 15 years; export revenue projected to peak and then decline absent new discoveries; fiscal revenue projected to peak at 1 percent of GDP in 2008. ### Agricultural sectors — overview - Agriculture accounts for 9 percent of Suriname’s GDP and cultivated land covers about 58,000 hectares across the northern plains. - Rice is the most important crop, accounting for about 90 percent of agricultural land use, followed by bananas. - The share of agriculture in GDP has declined in recent years, reflecting problems and volatility in rice production over the past decade and a collapse of the banana sector during 2002– (text ends). *Source: _dp0902 - Chapter 6. Epilogue* ### 03. With the recovery in banana production starting in 2004, agricultural out- ### _dp0902 - 03. With the recovery in banana production starting in 2004, agricultural out- ### Rice: structure, shocks, and recovery - Rice farming dominates agricultural activity in Suriname: "roughly 80–85 percent of agricultural land" is used for rice cultivation. - Farm composition: - "about one-quarter is farmed by smallholders" - "three-quarters by a dozen large farmers, including one government enterprise" - Markets: - Rice is sold domestically and exported to the Caribbean and the EU, "where it enjoys preferential access." - Late 1990s macroeconomic policy impacts: - "high nominal interest rates increased operating costs" - exchange regulations forced the industry to pay for imported inputs at the parallel-market exchange rate, while export receipts were surrendered at a substantially appreciated official exchange rate. - These cost pressures, "coupled with a 50 percent drop in export prices during 1995–99," caused a number of operators to exit and rice export proceeds fell from "about US$35 million in the mid-1990s to an average of about US$10 million during 2003–04." - Industry constraints: - remaining rice companies operate with "poor facilities and a weak capital base" - limited vertical organization and integration - poor infrastructure: "roads, irrigation facilities, and shipping and transportation systems," affecting efficiency and product quality - Recent developments: - "The more stable macroeconomic environment has supported recovery efforts in recent years, and recent international rice price increases could give the industry an additional boost." - EU preferential access details: - Under the Cotonou Partnership Agreement (June 2000), Guyana and Suriname could export "125,000 tons of husked rice and 20,000 tons of broken rice to the EU at about one-third the customs duties applicable to non-ACP countries." - In addition, "35,000 tons of rice were allowed to enter the EU duty free via overseas countries and territories (OCTs) of EU countries (subject to minimum value-added requirements in the OCTs)." - Suriname "made extensive use of the OCT provision in the mid-1990s through exports to the Netherlands Antilles and Aruba (both of which are OCTs of the Netherlands)." - Erosion of preferential access to EU: - "the introduction of more stringent safeguard measures by the EU to curtail rice imports via OCTs" led to a significant drop in exports through the Netherlands Antilles and Aruba. - "The EU reduced its general external tariff for rice from €260 per ton to €65 per ton in 2000." ACP countries still benefit from a "65 percent discount on that tariff," but the reduction implied a relative decline in preferential access. - The Everything But Arms (EBA) initiative (adopted March 2001) grants quota-free and duty-free access to some 50 least developed countries; "Neither Suriname nor Guyana qualifies for the EBA initiative." Special transitional arrangements for sugar, bananas, and rice were maintained, but "the banana regime expired in 2006, and the sugar and rice regimes will expire in 2009." - EU assistance to increase competitiveness: - A "€9.5 million grant facility over five years" is being channeled through the rice farmers’ association to support primarily small farmers, providing: - technical assistance to introduce high-quality rice varieties, raise yields, and improve processing and packaging - investment in infrastructure, including irrigation, roads, and transportation systems - mechanisms to facilitate and finance credit facilities for small farmers - Market diversification: - In late 2003 Suriname signed an agreement with Brazil to export rice under a reduced tariff of "4 percent (compared with a regular tariff of 11 percent) for a limited period." - The industry is looking increasingly to the Caribbean market, particularly Jamaica, to which it can export "duty and quota free under Caribbean Community (CARICOM) rules." ### Bananas: collapse, rehabilitation, and ongoing challenges - Industry structure and history: - A state-owned company, Surinaamse Landbouwberdijven N.V. (SURLAND), formed in 1970, "controlled 95 percent of all the land used for banana cultivation," with the balance farmed by smallholders for the local market. - SURLAND exported exclusively to the EU through the Fyffes Group in Ireland under preferential access arrangements. - Collapse in 2002: - Annual banana exports averaged "about 31,000 tons or US$24.5 million during the 1990s." - The Fyffes Group reduced its purchasing price from Suriname by "about 25 percent in late 2000." - "SURLAND declared bankruptcy and closed its operations in April 2002." - Rehabilitation program (2002 onward): - A new company, the Foundation to Save the Suriname Banana Sector (SBBS), assumed SURLAND’s assets and restarted operations; the government assumed SURLAND’s financial liabilities. - EU support: "€21 million in grants from the Special Framework of Assistance (SFA) fund," including technical assistance to double productivity and yields to "about 40 tons per hectare" and to prepare the industry to compete post-preference. - Inter-American Development Bank support: a "US$7.3 million loan to recapitalize the industry, with a view to preparing it for privatization." - SBBS governance and restructuring: overseen by a steering committee including donors and stakeholders; new management hired; "a new pay structure and revised employment regulations" developed; some former SURLAND employees retained temporarily pending privatization. - Rehabilitation outcomes: - Development program actions: acquisition of new machinery, transportation systems, irrigation, planting material; "About 2,370 hectares of land were cleared of old banana plants during 2002–03," replanting started in second half of 2003 with higher-quality varieties. - By end-2005, "production and exports of banana had rebounded and surpassed the average levels of the preceding 10 years." - Export markets: resumed exports to the EU under a new brand "Switie" and sales diversified to include "France, Ireland, Italy, the Netherlands, and the United Kingdom." - Remaining challenges and financial performance: - Despite yields exceeding targeted levels, "the area of banana cultivation is lower than planned, and total output and exports are significantly lagging behind targeted levels by about half." - In 2005 SBBS "operated at a loss of more than US$4 million." - "Absent the current subsidy grant from the EU, significant improvements in productivity and reductions in unit costs will be needed before SBBS can become profitable." ### Price, cost, and quantity indicators (selected figures) - Rice: - Export proceeds fell from "about US$35 million in the mid-1990s to an average of about US$10 million during 2003–04." - EU tariff reduction: from "€260 per ton to €65 per ton in 2000"; ACP countries retain a "65 percent discount on that tariff." - Brazil reduced tariff for Suriname rice exports to "4 percent (compared with a regular tariff of 11 percent)" under an agreement in late 2003. - Allowed EU export volumes under Cotonou for Suriname: "125,000 tons of husked rice and 20,000 tons of broken rice"; plus "35,000 tons" via OCTs duty free (subject to minimum value-added requirements). - Bananas: - 1990s average: "about 31,000 tons or US$24.5 million" annually. - Targeted yield under rehabilitation: "about 40 tons per hectare." - Land cleared in 2002–03: "About 2,370 hectares." - EU grant support: "€21 million" (SFA fund). - IDB loan: "US$7.3 million." - SBBS 2005 loss: "more than US$4 million." - Table A8. Suriname: Banana Prices (In U.S. dollars per box of 40 pounds) - 2004 average production costs: 8.73 - 2005 average production costs: 8.11 - 2004 export price, FOB: 7.06 - 2005 export price, FOB: 9.13 - 2004 cost of EU license: 2.73 - 2005 cost of EU license: 2.97 - 2004 net export price, FOB: 4.33 - 2005 net export price, FOB: 6.16 - 2004 net contribution, FOB: -4.40 - 2005 net contribution, FOB: -1.95 - 2004 boxes exported (millions): 1.15 - 2005 boxes exported (millions): 2.13 ### Policy responses and recommendations implied by the analysis - Improve macroeconomic stability to support agricultural recovery and profitability. - Address infrastructure bottlenecks that affect both rice and banana sectors: - roads, irrigation facilities, shipping and transportation systems. - Strengthen industry organization and vertical integration for rice to improve efficiency and product quality. - Support smallholders through targeted measures: - technical assistance to introduce high-quality varieties and improve processing and packaging - investment in infrastructure - mechanisms to facilitate and finance credit facilities for small farmers - Prepare banana sector for privatization while ensuring recapitalization and productivity improvements to reduce reliance on subsidies. - Diversify export markets to reduce dependence on eroding preferential access to the EU (e.g., CARICOM, Brazil, wider EU market destinations). *Source: Ministry of Agriculture, Animal Husbandry & Fisheries; excerpt from Appendix. Suriname’s Economic Structure (SURINAME: TOWARD STABILITY AND GROWTH).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2009/_dp0902.pdf_