## _cr14317

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---

### Domestic Demand Equation — purpose and specification
- Purpose: model effects of fiscal and monetary policies and external shocks on demand and output for Suriname, motivated by recent large external shock from declining gold prices and ensuing policy tightening.
- Data and proxy:
  - Domestic demand proxied as nominal GDP (supply-side) minus net exports from BOP data.
- Domestic demand equation (log differences):
  - Δ ln(DD)t = β0 + β1 Δ ln(SPE)t + β2 Δ ln(REV)t + β3 Δ ln(CRE)t + β4 Δ ln(EXP)t + εt
  - Definitions:
    - DD = nominal domestic demand
    - SPE = fiscal expenditures
    - REV = fiscal non-mineral revenue
    - CRE = credit to the private sector
    - EXP = exports of goods and services
  - Rationale: use non-mineral revenues because fiscal mineral revenues are sizable and volatile.
- Import demand equation (log differences):
  - Δ ln(IMP)t = δ0 + δ1 Δ ln(IMP)t-1 + δ2 Δ ln(DD)t + δ3 Δ ln(EXP)t + δ4 Δ ln(NEER)t + μt
  - Definitions:
    - IMP = imports of goods and services
    - IMP(t-1) = lagged imports
    - NEER = nominal effective exchange rate
- Estimation details:
  - Sample/data: data for 1979-2013, with observations for 1993 excluded; domestic demand and import equations estimated on 1983-2013 for reported regressions.
  - Endogeneity treatment: fiscal expenditures, non-mineral revenues, and credit treated as endogenous in the domestic demand equation; exports treated as endogenous in the import equation.
  - Instruments (domestic demand equation): first lags of expenditure, non-mineral revenue, and credit; oil, gold, and food prices; reserve requirement; lagged real GDP.
  - Instruments (import equation): lags of exports; prices of food, gold, and oil; lagged real GDP.
  - Estimation method: Two-stage Least Squares with heteroskedasticity and autocorrelation robust standard errors.

### Domestic Demand — key empirical results (Two-stage Least Squares, Sample: 1983-2013)
- Estimated coefficients (log differences):
  - Fiscal expenditure (t): Coefficient = 0.426; Std. Error = 0.20; t-Statistic = 2.11; Probability = 0.04
  - Nonmineral revenue (t-1): Coefficient = -0.110; Std. Error = 0.02; t-Statistic = -4.45; Probability = 0.00
  - Credit (t): Coefficient = 0.565; Std. Error = 0.124; t-Statistic = 4.56; Probability = 0.00
  - Exports (t-1): Coefficient = 0.318; Std. Error = 0.142; t-Statistic = 2.30; Probability = 0.03
  - Constant: Coefficient = -0.053; Std. Error = 0.03; t-Statistic = -1.67; Probability = 0.11
- Goodness of fit and diagnostics:
  - R-squared = 0.91
  - Adjusted R-squared = 0.90
  - F-statistic = 50.6; Prob(F-statistic) = 0.00
- Interpretations (magnitudes preserved exactly):
  - A 1 percent decrease in spending leads to a 0.43 percent decline in domestic demand (spending coefficient = 0.426).
  - A 1 percent increase in non-mineral revenues reduces domestic demand by 0.11 percent (non-mineral revenue coefficient = -0.110), with the effect lagged one period.
  - A 1 percent negative credit shock leads to about a 0.6 percent fall in demand (credit coefficient = 0.565).
  - A 1 percent negative export shock leads to about a 0.3 percent fall in demand with a lag (exports coefficient = 0.318).
  - Spending multiplier (nominal domestic demand response) is approximately four times larger than the non-mineral revenue multiplier in this specification.
- Caveats:
  - Multipliers refer to nominal domestic demand rather than real output; they will be larger than real output multipliers because they do not net out import leakages and include price effects.
  - Endogeneity addressed via instruments, but simultaneity and measurement issues may persist.

### Import Demand — key empirical results (Two-stage Least Squares, Sample: 1983-2013)
- Estimated coefficients (log differences):
  - Domestic demand (t): Coefficient = 0.227; Std. Error = 0.046; t-Statistic = 4.9; Probability = 0.00
  - Imports (t-1): Coefficient = 0.154; Std. Error = 0.135; t-Statistic = 1.1; Probability = 0.26
  - Exports (t): Coefficient = 0.609; Std. Error = 0.091; t-Statistic = 6.7; Probability = 0.00
  - Nominal effective exchange rate (t): Coefficient = 0.216; Std. Error = 0.130; t-Statistic = 1.7; Probability = 0.11
  - Constant: Coefficient = -0.007; Std. Error = 0.017; t-Statistic = -0.4; Probability = 0.69
- Goodness of fit and diagnostics:
  - R-squared = 0.66
  - Adjusted R-squared = 0.61
  - F-statistic = 6.99; Prob(F-statistic) = 0.00
- Interpretations (magnitudes preserved exactly):
  - A 1 percent increase in exports is associated with a 0.61 percent increase in imports (exports coefficient = 0.609).
  - A 1 percent increase in domestic demand raises imports by 0.23 percent (domestic demand coefficient = 0.227).
  - A 1 percent appreciation of the nominal effective exchange rate is associated with a 0.24 percent increase in imports (NEER coefficient = 0.216).
  - Lagged imports coefficient not statistically significant at conventional levels (Probability = 0.26).
- Implication: strong empirical linkage between exports and imports, consistent with import content of export production in an extractive-dominated economy.

### Interpretation, literature comparison, and policy uses
- Fiscal tightening (lower spending or higher non-mineral revenues) reduces domestic demand—evidence of limited confidence effects in Suriname.
- Spending impacts are more immediate and larger than revenue impacts in nominal demand terms.
- Consistency with IMF guidance and literature:
  - IMF guidance recommends spending multipliers of 0.5 or less and revenue multipliers of half that value (Spilimbergo et al., 2009).
  - Results are broadly consistent with studies cited (Blanchard and Perotti (2002), Barro and Redlick (2009), Guy and Belgrave (2012), Corsetti et al. (2012)), with caveats on nominal vs real definitions.
- Uses for forecasting and policy analysis:
  - Equations used as inputs for medium-term forecasts of economic activity and the external current account for Suriname.
  - Forecast framework incorporates WEO projections of commodity prices, plans of major commodity exporters, fiscal and monetary policy outlook, the estimated equations, and expert judgment.
- Practical policy implications highlighted:
  - Fiscal consolidation via spending cuts has a substantially larger immediate dampening effect on nominal domestic demand than equivalent increases in non-mineral revenue.
  - Credit conditions materially affect domestic demand; negative credit shocks can significantly reduce demand.
  - Export shocks materially transmit to domestic demand and imports; commodity-price volatility should be central in policy assessments.

---

### Business environment and structural competitiveness (recent progress and priorities)
- Recent Doing Business and competitiveness indicators:
  - Suriname moved up by 3 places in the World Bank Doing Business ranking in 2013 and is currently ranked 161 out of 189 countries.
  - 2013–14 Global Competitiveness Report ranked Suriname 106 out of 148 countries.
  - Comparative strengths (ranks cited): macroeconomic environment: 66; quality of health and primary education: 78; infrastructure: 81; institutional quality: 99.
- Legal modernization and reform pipeline:
  - Competitiveness Unit of the Office of the Vice President leading modernization.
  - Council of Ministers approved draft laws on competition policy, limited liability companies, electronic publication of firm registration.
  - Pipeline of 16 draft laws from intellectual property protection to access to finance for SMEs.
- Structural priorities:
  - Strengthen higher education and training to meet demand for business and engineering professionals.
  - Enhance competition in product markets via anti-monopoly policy and streamlined business-start procedures.
  - Improve access to loans and venture capital to enable SMEs.
- Labor market and unemployment:
  - Unemployment trends (Paramaribo and Wanica): 12.3 percent in 2006; about 7 percent in 2012; adding discouraged workers raises unemployment to 10.2 percent (capital and adjacent areas).
  - Nationwide unemployment: 10.3 percent at end-2012; including discouraged workers, national unemployment = 12.8 percent.
  - Public sector accounts for more than 40 percent of total employment.
  - Job creation concentrated in mining and construction; formal extractive sector capital intensive.
- Labor market reform suggestions:
  - Increase labor market flexibility; reduce employment protection while introducing unemployment insurance (declining with duration).
  - Complement with active labor market policies (training and skill matching).
  - New legislation in 2014 extends health and pension benefits nationwide to reduce public–private benefit wedge and potentially encourage private employment and female participation.
- Poverty and inequality (data-limited indicators):
  - 2013 UN Human Development Report (2006 reference): about 8 percent in “multidimensional” poverty at end-2006; about 3 percent in severe poverty (regional averages 13 percent and 5 percent, respectively).
  - Social welfare programs cover about 4 percent of the population; social housing program aims to improve affordability.
  - Authorities considering a minimum wage; staff advised it should not compromise job creation among low-skilled workers.
- Overarching message: modernize legal framework, increase efficiency and competition in product and labor markets, strengthen private-sector job creation, and reduce dependence on extractive sector.

---

### Country Financial Stability Map (CFSM) application to Suriname — method, adjustments, trends
- CFSM maps four broad risks and two conditions: macroeconomic risks, inward spillover risks, credit risks, market and liquidity risks, monetary and financial conditions, and risk appetite.
- Indicator construction:
  - Each broad indicator is an equally-weighted average of normalized sub-indicator rankings (ranked 0 to 10); ranking of 5 corresponds broadly to long-term average.
- Data adjustments for Suriname:
  - Quarterly GDP interpolated where high-frequency indicators unavailable.
  - Added alumina, oil and gold prices as inward spillover indicators.
  - Reserve requirement ratios used as an indicator of monetary policy stance.
  - Corporate loans to GDP used as approximation for corporate debt profiles.
- Data limitations:
  - No housing price index; limited integration with global financial system; limited risk-appetite variables.
- Recent trends (2007Q2–2014Q1):
  - Macroeconomic risks declined until late 2008, then increased significantly thereafter.
  - Commodity price shocks in 2009 coincided with current account surplus sliding from 9.2 percent of GDP to 2.9 percent of GDP.
  - Expansionary fiscal policy increased civil servant wages by 42 percent in nominal terms between 2008 and 2010; inflation rose from 1.3 percent at end-2009 to 10.3 percent at end-2010.
  - Credit risks rising since mid-2011; inward spillover risks picked up in 2013.
  - Market and liquidity risks, risk appetite, and monetary and financial conditions showed flat or declining risks.
- Overall assessment: CFSM indicates macro-financial risks increased in recent years, with plausible results given data and structural constraints.

---

### Credit risks — trends, macro linkages, and monetary/market conditions
- Credit-risk trends and drivers:
  - Credit risks rising since 2010 due to lower bank profitability and weakening fiscal soundness.
  - From 2007 to 2010, credit risk fell mainly because of reductions in NPLs and foreign exchange lending; since 2011 credit risks increased.
  - Reserve requirement ratio (RRR) raised three times since 2011 to curtail credit growth, reducing banks’ profitability.
- Banking sector structure and exposures:
  - Credit-to-GDP ratio: 28½ percent in 2013.
  - Banks’ exposure to corporations, households, and government is high.
  - Suriname’s risk ranking in terms of corporate loans to GDP and public debt to GDP increased from 7 to 10 between 2012Q1 and 2014Q1.
  - Development of non-bank financial institutions offering “shadow-banking” business due to lack of alternative investment channels.
- NPLs and provisioning:
  - NPL ratio declined from 6.2 to 5.9 in 2013.
  - Concerns that NPLs may not be adequately accounted for and some banks may not have adequate provisioning.
- Macro linkages and commodity exposure:
  - Exports of gold, oil, and alumina account for 92 percent of total exports.
  - Mineral revenues (royalties, dividends, corporate taxes) contribute a substantial share of government revenues.
  - Current account registered a deficit of close to 4 percent of GDP for the first time since 2006 as the value of gold exports dropped by 14 percent.
  - Downward shocks to major commodity prices key reason for deterioration in fiscal and external positions; fiscal deterioration also owes to policy slippages.
- Market and liquidity risk indicators:
  - Loan-to-deposit ratio: around 60 percent.
  - Liquid assets to short-term liabilities ratio: around 55 percent.
  - Caveat: part of liquid assets held as required foreign currency reserves abroad and might not be immediately available.
- Monetary and financial conditions:
  - RRR increases (three times since 2011) reduced banks’ lending capacity.
  - Credit growth declined from its peak of 36.8 percent in 2007 to 18 percent in 2013.
  - Unsterilized foreign exchange sales by the central bank have helped contain broad money growth recently.
- Risk appetite and data limitations:
  - No indicators of risk pricing; risk appetite indicator only reflects changes to FDI flows.
  - Stock market underdeveloped; government treasury bills negotiated bilaterally with a fixed interest rate around 9 percent.
  - FDI data problematic; Suriname does not report gross FDI flows to the Fund per direct investment companies agreement.

---

### Fiscal sustainability, pensions, aging pressures — key findings and projections
- Fiscal sustainability gap:
  - Overall fiscal sustainability gap revised down from 14.2 percent to 12.5 percent.
  - Including aging pressures, fiscal sustainability gap projected to be larger than previously forecasted.
- Revisions and macro-fiscal assumptions:
  - Mineral revenue data revised downward by about 1 percent of GDP from 2011 to 2012.
  - The 2012 non-mineral structural primary balance is 1½ percent of GDP better than previously forecasted.
  - The 2013 non-mineral primary structural balance adjusted up by 2½ percent of GDP compared to previous projections.
  - Average nominal GDP growth rate: 9.25 percent (revised up by 0.05 percent).
  - Real discount rate: 5.5 percent.
  - Total commodity revenue outlook (mn, SUR) 1/10,5627,798 (preserved verbatim).
  - Commodity price outlook (simple average 2013–2018, preserved verbatim):
    - Gold (US$ per troy ounce) 1381.21296.1
    - Oil (US$ per barrel) 96.296.5
  - Primary balance improvement from 2013–2018: 0.74 (preserved verbatim).
- Pension system structure and coverage:
  - Three schemes: AOV (universal basic public pension), Civil Service Pension, private pensions.
  - AOV payments delivered to over 47,000 citizens in 2012 (about 90 percent of population over age 60).
  - Only about half of AOV recipients made required 4 percent wage contribution during working years; government paid the rest.
  - As of 2013, MoF paid 65 percent of total AOV pension expense to fill funding gap.
  - Civil Service contributors: public workers contribute 10 percent of salary; government pays 5 percent; beneficiaries receive 70 percent of final salary after 35 years; Civil Service pension is PAYG with a funding gap of 60 percent financed by the government.
- Proposed new government pension plan (public PAYG design for uncovered workers):
  - Projected to cover over 50 percent of workers not currently enrolled in Civil Service or private plans.
  - Contribution sharing: workers and employers share costs equally.
  - Contribution rates expected to start at 3 percent and rise to 28 percent by 2050.
  - Benefit: plans to provide 70 percent of final salary starting at age 60.
  - New pension law under discussion in parliament; full details not yet available.
  - Staff note: PAYG design contrasts with recent trends toward funded systems; high projected contribution path (3 percent to 28 percent by 2050) is higher than average contribution rates of around 20 percent in other advanced and emerging countries.
- Aging-pressure projections and assumptions:
  - Old-age dependency ratio could rise to 45 percent in 2060 under the medium fertility rate scenario.
  - Eligibility rates assumed constant: 14 percent for public civil pension; 90 percent for AOV.
  - Replacement rates in 2013: 60 percent for Civil service pension; 12 percent for AOV.
  - Staff incorporated a 10 percent anticipated pension increase in 2014 and kept replacement rates constant thereafter.
  - Labor-market parameters: participation rate = 55 (kept constant); unemployment rate = 7.6 percent (assumed constant); share of government workers = 42 percent of the formal workforce (kept constant).
  - Informality: 53 percent of formal employment is informal activity.
- Fiscal impact and projections:
  - MoF payments to the Civil Service pension system have risen by 188 percent since 2010 (nominal terms).
  - MoF payments for the universal AOV pension scheme have risen by 213 percent since 2010 (nominal terms).
  - Public pension expenditure poses threat to government spending priorities and fiscal sustainability; inclusion of aging pressures increases projected fiscal sustainability gap.
- Specific pension fiscal projections (AOV and Civil Service to 2060):
  - AOV forecast to add 1½ percent of GDP to fiscal expenditure by 2060.
  - Staff assumes AOV eligibility/coverage ratio kept at 90 percent of total population aged over 60.
  - Wage contributors expected to rise from 50 to 70 percent.
  - Failing to capture informal sector workers would add another one percent of GDP to government spending.
  - Every 10 percent increase in the contribution base could reduce AOV pension pressures by 0.5 percentage points of GDP.
  - Current contribution rate: 4 percent for the AOV.
  - Civil Service pension fund expected to cost an additional 1¾ percent of GDP by 2060.
  - Funding gap MoF will have to cover projected to rise to 75 percent of total civil pension by 2060, up from over 50 percent in 2013.
  - A 10 percent increase in replacement rate will expand government pension expense by 0.3 percent of GDP (assuming other assumptions constant).
  - Aggregate: aging pressure from the current public pension system estimated to worsen the fiscal sustainability gap from current 12½ to 15½ percent.
  - Public pension spending from both civil servant pension plan and AOV forecast to rise by 3¼ percent of GDP by 2060.
- Proposed new private-sector pension plan (staff assumptions and scenarios):
  - Replacement rates appraised in range 40 to 60 percent; private sector wage assumed 70 percent of public sector wage.
  - Assumed policy reduces informal sector employment by half.
  - Assumed 60 percent of private sector workforce and 70 percent of informal sector will join new plan.
  - Under these assumptions, half of population over 60 will be covered by some pension plan by 2040 if launched in 2015.
  - Contribution dynamics:
    - Fund accumulates assets over first 10 years.
    - 60 percent replacement rate scenario produces a revenue shortfall by 2035.
    - 40 percent replacement rate scenario meets payments through 2050.
    - New pension system proposes 28 percent contribution rate from workers; suggested initial rate 3 percent rising to 28 percent by 2050.
    - Staff flag high medium-term contribution rates hard to enforce; risk of political pressure to cover finance gaps.
  - Quantified downside scenarios:
    - Under new pension plan, a 10 percent rise in replacement rates could lead to extra pension spending size of 10 percent of GDP in the new pension system by 2060 (Staff estimate).
    - Under the 40 percent replacement rate scenario, cash flow meets payments through 2050.
    - Under the 60 percent replacement rate scenario, revenue shortfall emerges by 2035.

### Policy recommendations and reform options (G. Fiscal Pension Reforms)
- Increase statutory retirement age in line with rising longevity to contain spending and sustain labor supply.
- Contain growth rate of pension benefits (replacement rate):
  - Staff estimate a 10 percent rise in replacement rates in Civil service and AOV schemes will cost government an additional one percentage point of GDP by 2060.
  - Under the new pension plan, a 10 percent rise in replacement rates could lead to extra pension spending size of 10 percent of GDP by 2060.
- Increase revenue by strengthening contribution base:
  - Broaden contribution base; every 10 percent increase in contribution base could reduce AOV pension pressures by 0.5 percentage points of GDP.
- Increase revenue by adjusting contribution rates and funding mix:
  - Current contribution rates: 4 percent for AOV; 5 percent for public workers in Civil service pension.
  - Consider a mixture of a funded system and PAYG so pre-funding reduces future government burden.
  - Caution: high proposed contribution rates (up to 28 percent) risk enforcement problems, increased informality, and political sustainability concerns.

*Source: IMF country analysis chapter "Modeling Demand Responses to Policies and Shocks: An Application to Suriname" and related IMF staff report content (Domestic Demand and Import Demand equations; business environment; CFSM; credit risks; fiscal sustainability and pensions) as provided in the content unit.*

### 1. Domestic Demand Equation ____________________________________________________________6

### 1. Domestic Demand Equation

### A. Introduction and Purpose
- Modeling effects of fiscal and monetary policies and external shocks on demand and output for Suriname, motivated by recent large external shock from declining gold prices and ensuing policy tightening.
- Empirical focus due to country- and circumstance-specific nature of fiscal and monetary multipliers.

### B. Empirical Strategy and Model Specification
- Data constraints: demand-side GDP not available; domestic demand proxied as nominal GDP (supply-side) minus net exports from BOP data.
- Approach: model domestic demand and imports econometrically; forecast exports using firm-level projections and WEO commodity price projections.
- Domestic demand equation (estimated in log differences):
  - Δ ln(DD)t = β0 + β1 Δ ln(SPE)t + β2 Δ ln(REV)t + β3 Δ ln(CRE)t + β4 Δ ln(EXP)t + εt
  - Variables:
    - DD = nominal domestic demand
    - SPE = fiscal expenditures
    - REV = fiscal non-mineral revenue
    - CRE = credit to the private sector
    - EXP = exports of goods and services
  - Rationale: use non-mineral revenues (not total fiscal revenues) because fiscal mineral revenues are sizable and volatile.
- Import demand equation (estimated in log differences):
  - Δ ln(IMP)t = δ0 + δ1 Δ ln(IMP)t-1 + δ2 Δ ln(DD)t + δ3 Δ ln(EXP)t + δ4 Δ ln(NEER)t + μt
  - Variables:
    - IMP = imports of goods and services
    - IMP(t-1) = lagged imports
    - DD = nominal domestic demand
    - EXP = exports of goods and services
    - NEER = nominal effective exchange rate
- Estimation period: data for 1979-2013, with observations for 1993 excluded.
- Endogeneity concerns: fiscal expenditures, non-mineral revenues, and credit treated as endogenous in domestic demand equation; exports treated as endogenous in import equation.
- Instruments used (domestic demand equation): first lags of expenditure, non-mineral revenue, and credit; oil, gold, and food prices; reserve requirement; lagged real GDP.
- Instruments used (import equation): lags of exports; prices of food, gold, and oil; lagged real GDP.
- Estimation method: Two-stage Least Squares with heteroskedasticity and autocorrelation robust standard errors.

### C. Key Empirical Results — Domestic Demand Equation (Two-stage Least Squares, Sample: 1983-2013)
- Estimated coefficients (all variables in log differences):
  - Fiscal expenditure (t): Coefficient = 0.426; Std. Error = 0.20; t-Statistic = 2.11; Probability = 0.04
  - Nonmineral revenue (t-1): Coefficient = -0.110; Std. Error = 0.02; t-Statistic = -4.45; Probability = 0.00
  - Credit (t): Coefficient = 0.565; Std. Error = 0.124; t-Statistic = 4.56; Probability = 0.00
  - Exports (t-1): Coefficient = 0.318; Std. Error = 0.142; t-Statistic = 2.30; Probability = 0.03
  - Constant: Coefficient = -0.053; Std. Error = 0.03; t-Statistic = -1.67; Probability = 0.11
- Goodness of fit and diagnostics:
  - R-squared = 0.91
  - Adjusted R-squared = 0.90
  - F-statistic = 50.6; Prob(F-statistic) = 0.00
- Interpretations and magnitudes:
  - A 1 percent decrease in spending leads to a 0.43 percent decline in domestic demand (spending coefficient = 0.426).
  - A 1 percent increase in non-mineral revenues reduces domestic demand by 0.11 percent (non-mineral revenue coefficient = -0.110), with the effect lagged one period.
  - A 1 percent negative credit shock leads to about a 0.6 percent fall in demand (credit coefficient = 0.565).
  - A 1 percent negative export shock leads to about a 0.3 percent fall in demand with a lag (exports coefficient = 0.318).
  - Spending multiplier (nominal domestic demand response) is approximately four times larger than the non-mineral revenue multiplier in this specification.
- Caveats:
  - Multipliers are with respect to nominal domestic demand rather than real output; therefore they will be larger than real output multipliers because they do not net out import leakages and include price effects.
  - Endogeneity handled via instruments, but remaining simultaneity and measurement issues may persist.

### D. Key Empirical Results — Import Demand Equation (Two-stage Least Squares, Sample: 1983-2013)
- Estimated coefficients (all variables in log differences):
  - Domestic demand (t): Coefficient = 0.227; Std. Error = 0.046; t-Statistic = 4.9; Probability = 0.00
  - Imports (t-1): Coefficient = 0.154; Std. Error = 0.135; t-Statistic = 1.1; Probability = 0.26
  - Exports (t): Coefficient = 0.609; Std. Error = 0.091; t-Statistic = 6.7; Probability = 0.00
  - Nominal effective exchange rate (t): Coefficient = 0.216; Std. Error = 0.130; t-Statistic = 1.7; Probability = 0.11
  - Constant: Coefficient = -0.007; Std. Error = 0.017; t-Statistic = -0.4; Probability = 0.69
- Goodness of fit and diagnostics:
  - R-squared = 0.66
  - Adjusted R-squared = 0.61
  - F-statistic = 6.99; Prob(F-statistic) = 0.00
- Interpretations and magnitudes:
  - A 1 percent increase in exports is associated with a 0.61 percent increase in imports (exports coefficient = 0.609).
  - A 1 percent increase in domestic demand raises imports by 0.23 percent (domestic demand coefficient = 0.227).
  - A 1 percent appreciation of the nominal effective exchange rate is associated with a 0.24 percent increase in imports (NEER coefficient = 0.216).
  - Lagged imports coefficient not statistically significant at conventional levels (Probability = 0.26).
- Implication: strong empirical linkage between exports and imports, consistent with import content of export production in an extractive-dominated economy.

### E. Interpretation and Comparison with Literature
- Fiscal tightening (lower spending or higher non-mineral revenues) reduces domestic demand—evidence of limited confidence effects in Suriname.
- Spending impacts are more immediate and larger than revenue impacts in nominal demand terms.
- Results broadly consistent with prior empirical findings and IMF guidance for small open economies:
  - IMF guidance: recommends spending multipliers of 0.5 or less and revenue multipliers of half that value (Spilimbergo et al., 2009).
  - Cross-country and country-specific studies cited include Blanchard and Perotti (2002), Barro and Redlick (2009), Guy and Belgrave (2012), Corsetti et al. (2012).
- Differences in definitions and openness imply direct comparability limitations: nominal demand multipliers reported here exceed typical real output multipliers estimated elsewhere.

### F. Policy-Relevant Findings and Uses
- Estimated domestic demand and import equations provide inputs for medium-term forecasts of economic activity and the external current account for Suriname.
- Forecast framework incorporates:
  - WEO projections of commodity prices
  - Plans of major commodity exporters
  - Fiscal and monetary policy outlook
  - Estimated domestic demand and import equations
  - Expert judgment is emphasized as important in finalizing macro projections.
- Practical policy implications:
  - Fiscal consolidation via spending cuts has a substantially larger immediate dampening effect on nominal domestic demand than equivalent increases in non-mineral revenue.
  - Credit conditions materially affect domestic demand; negative credit shocks can significantly reduce demand.
  - Export shocks materially transmit to domestic demand and imports; export-linked volatility (commodity prices) should be central in policy assessments.

*Source: IMF country analysis chapter "Modeling Demand Responses to Policies and Shocks: An Application to Suriname" (Domestic Demand and Import Demand equations, estimation results and interpretation).*

### 2.      Some positive changes in the business environment have already occurred. In 2013,

### _cr14317 - 2.      Some positive changes in the business environment have already occurred. In 2013,

### Business environment: recent progress
- Suriname moved up by 3 places in the World Bank Doing Business ranking in 2013 and is currently ranked 161 out of 189 countries.
- Improvements credited to:
  - Streamlining the process for registering a new company.
  - Simplifying the procedure to transfer property.
- Country is rated in line with regional peers in areas including dealing with construction permits, getting electricity, paying taxes, and macroeconomic stability.

### Legal modernization and reform pipeline
- Efforts focus on modernizing the legal framework for doing business to strengthen the environment for small and medium-sized enterprises and reduce the cost of starting a business.
- The Competitiveness Unit of the Office of the Vice President is leading the modernization effort.
- The Council of Ministers has approved draft laws on:
  - Competition policy,
  - Limited liability companies,
  - Electronic publication of the registration of new firms.
- The pipeline of new legislation encompasses 16 draft laws in areas ranging from protection of intellectual property to access to finance for small and medium-sized enterprises.

### Structural competitiveness: status and priorities
- Transition: Suriname has transitioned from a factor-driven economy into an efficiency-driven economy.
- Income per capita: increased at an average rate of about 6 percent over the last decade.
- World Economic Forum classification and ranks:
  - Classified as an efficiency-driven economy.
  - 2013–14 Global Competitiveness Report ranked Suriname 106 out of 148 countries.
- Comparative strengths (rank positions cited in the source):
  - Macroeconomic environment: 66
  - Quality of health and primary education: 78
  - Infrastructure: 81
  - Institutional quality: 99 (below average)
- Key structural weaknesses (areas where Suriname lags peers): starting a business, registering property, getting credit, protecting investors, enforcing contracts.
- Policy priorities to enhance efficiency:
  - Strengthen higher education and training to meet demand for business and engineering professionals.
  - Enhance competition in product markets by strengthening anti-monopoly policy and streamlining procedures for starting a business.
  - Improve access to loans and venture capital to enable small and medium-sized enterprises.

### Unemployment: trends, composition, and labor market reform suggestions
- Unemployment trends (Paramaribo and Wanica, General Bureau of Statistics):
  - 12.3 percent in 2006 (capital and adjacent areas).
  - About 7 percent in 2012 (capital and adjacent areas).
  - Adding discouraged workers raises unemployment to 10.2 percent (capital and adjacent areas).
- Nationwide unemployment:
  - 10.3 percent at end-2012.
  - Including discouraged workers, the national unemployment rate increases to 12.8 percent.
- Notes on job creation and sectoral composition:
  - Job creation concentrated in mining and construction.
  - Formal extractive sector is capital intensive with moderate impact on job creation.
  - Informal employment in gold-mining sector increased with higher gold prices; lower official labor force participation observed.
  - Labor-intensive sectors (services, agriculture, construction) and government account for the bulk of employment.
  - Growth slowed in agriculture due to increased competition from other Latin American countries.
- Labor market reform recommendations:
  - Increase labor market flexibility to facilitate firm adjustment to shocks and reduce long-term unemployment.
  - Reduce employment protection while introducing unemployment insurance (which could decline with unemployment duration).
  - Complement reforms with active labor market policies (training and skill matching).
- Public vs. private employment benefits:
  - Public sector accounts for more than 40 percent of total employment.
  - New legislation being implemented in 2014 extends health and pension benefits nationwide to reduce the wedge between public and private sector employment benefits, enhance attractiveness of private sector jobs, reduce informal sector activities, and potentially encourage female labor force participation and reduce higher female unemployment.

### Poverty and inequality: limited data, indicative findings
- Data constraints:
  - Conventional income-based poverty and inequality indicators are fairly outdated.
  - A recent household survey did not produce new estimates due to low response rates.
- United Nations indicators (2006 reference; reported in 2013 UN reports):
  - 2013 United Nations Human Development Report indicated about 8 percent of the population lived in “multidimensional” poverty at end-2006 (regional average 13 percent).
  - About 3 percent of the population lived in severe poverty (regional average 5 percent).
  - 2013 United Nations inequality-adjusted human development index estimated that the loss in human development due to inequality in 2006 was broadly in line with the regional average.
- Social programs and policy considerations:
  - Social welfare programs of the Ministry of Social Affairs cover about 4 percent of the population.
  - A social housing program of the Ministry of Public Works aims to improve housing affordability for disadvantaged segments.
  - Authorities are considering a minimum wage; staff advised it should be set at a level that does not compromise job creation among the low-skilled population.

### Conclusion: overarching policy message
- Improving the business climate and structural competitiveness is critical to support diversified and inclusive private sector-led growth.
- Continued focus required on:
  - Modernizing the legal framework to enable entrepreneurs.
  - Increasing efficiency and fostering competition in product and labor markets.
  - Strengthening job creation in the private sector and reducing dependence on the extractive sector.

### Ms. Muffet / Country Financial Stability Map (CFSM): application to Suriname
- Purpose and methodology:
  - The CFSM maps four broad risks and two conditions: macroeconomic risks, inward spillover risks, credit risks, market and liquidity risks, monetary and financial conditions, and risk appetite.
  - Each broad indicator is given a numerical ranking computed as an equally-weighted average of normalized sub-indicator rankings (ranked 0 to 10). A ranking of 5 broadly corresponds to the long-term average (over a 5-year period).
- Data and indicator adjustments for Suriname:
  - Some high-frequency indicators (quarterly) are not available; quarterly GDP was estimated using interpolation.
  - Added alumina, oil and gold prices as indicators of inward spillover risk to reflect commodity vulnerability.
  - Reserve requirement ratios used as an indicator of monetary policy stance because the Central Bank of Suriname has no indirect monetary policy tools.
  - No available data on corporate debt profiles; the ratio of corporate loans to GDP used as an approximation.
- Data limitations affecting CFSM accuracy for Suriname:
  - No housing price index despite large bank and non-bank exposures to the housing sector.
  - Limited integration with the global financial system means typical risk-appetite variables (risk premia, sovereign debt spreads) are not available.
- Recent trend summary (2007Q2–2014Q1):
  - Macroeconomic risks declined until late 2008, then increased significantly thereafter.
  - Commodity price shocks in 2009 (sharp drops in oil and alumina prices) coincided with current account surplus sliding from 9.2 percent of GDP to 2.9 percent of GDP.
  - Domestic policies amplified commodity shocks: expansionary fiscal policy increased civil servant wages by 42 percent in nominal terms between 2008 and 2010, contributing to inflation increasing from 1.3 percent at end-2009 to 10.3 percent at end-2010.
  - Credit risks have been rising since mid-2011.
  - Inward spillover risks picked up in 2013.
  - Indicators for market and liquidity risks, risk appetite, and monetary and financial conditions showed flat or declining risks.
- Overall assessment: the CFSM indicators provide relatively plausible results, indicating macro-financial risks increased in recent years.

*Prepared by IMF staff from the reported chapter content.*

### 3. Credit risks

### _cr14317 - 3. Credit risks

### Credit-risk trends and drivers
- Credit risks have been rising since 2010 due to lower bank profitability and weakening fiscal soundness.
- From 2007 to 2010, credit risk fell mainly because of reductions in NPLs and foreign exchange lending; since 2011 credit risks increased.
- Central bank actions: the reserve requirement ratio (RRR) was raised three times since 2011 to curtail credit growth, which reduced banks’ profitability.
- Banking sector structure and exposures:
  - Financial market dominated by commercial banks; bank lending is the major source of financing.
  - Credit-to-GDP ratio: 28½ percent in 2013.
  - Banks’ exposure to corporations, households, and the government is high.
  - Suriname’s risk ranking in terms of corporate loans to GDP and public debt to GDP increased from 7 to 10 between 2012Q1 and 2014Q1.
  - Development of non-bank financial institutions offering “shadow-banking” business due to lack of alternative investment channels.
- Nonperforming loans (NPLs):
  - NPL ratio declined from 6.2 to 5.9 in 2013.
  - Concerns that NPLs may not be adequately accounted for and some banks may not have adequate provisioning.

### Macro linkages and commodity exposure
- Major commodity dependence:
  - Exports of gold, oil, and alumina account for 92 percent of total exports.
  - Mineral revenues (royalties, dividends, and corporate taxes from the mining sector) contribute a substantial share of government revenues.
- Recent macro developments and risks:
  - Current account registered a deficit of close to 4 percent of GDP for the first time since 2006 as the value of gold exports dropped by 14 percent.
  - Downward shocks to major commodity prices are a key reason for deterioration in fiscal and external positions.
  - Fiscal deterioration also owes much to policy slippages.

### Market and liquidity risk indicators
- Market and liquidity risks are relatively low reflecting generally prudent management:
  - Loan-to-deposit ratio: around 60 percent (relatively conservative).
  - Liquid assets to short-term liabilities ratio: around 55 percent.
  - Caveat: part of liquid assets is held as required foreign currency reserves abroad and might not be immediately available if needed.

### Monetary and financial conditions
- Monetary and financial conditions have generally tightened:
  - Main indicators: RRR, real broad money growth, and credit growth.
  - RRR increases (three times since 2011) reduced banks’ lending capacity.
  - Credit growth declined from its peak of 36.8 percent in 2007 to 18 percent in 2013.
  - Unsterilized foreign exchange sales by the central bank have helped contain broad money growth recently.

### Risk appetite and data limitations
- No indicators of risk pricing; risk appetite indicator only reflects changes to FDI flows.
- Stock market is underdeveloped: an informal exchange with few traded companies and no stock price index.
- Government treasury bills are negotiated bilaterally with a fixed interest rate around 9 percent.
- FDI data are problematic as Suriname does not report gross FDI flows to the Fund according to its agreement with the direct investment companies.

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### Fiscal sustainability and aging pressures — key findings
- Overall fiscal sustainability gap revised:
  - Fiscal sustainability gap revised down from 14.2 percent to 12.5 percent.
  - Once aging pressures are taken into account, the fiscal sustainability gap is projected to be larger than previously forecasted.
- Revisions to mineral revenue and non-mineral balances:
  - Mineral revenue data revised downward by about 1 percent of GDP from 2011 to 2012.
  - The 2012 non-mineral structural primary balance is 1½ percent of GDP better than previously forecasted (IMF, 2013).
  - The 2013 non-mineral primary structural balance is adjusted up by 2½ percent of GDP compared to previous projections.
- Key macro-fiscal assumptions updated:
  - Average nominal GDP growth rate: 9.25 percent (revised up by 0.05 percent).
  - Real discount rate: 5.5 percent (unchanged).
  - Total commodity revenue outlook (mn, SUR) 1/10,5627,798 (table reporting, preserved verbatim).
  - Commodity price outlook in the medium term (simple average from 2013–2018):
    - Gold (US$ per troy ounce) 1381.21296.1 (preserved verbatim).
    - Oil (US$ per barrel) 96.296.5 (preserved verbatim).
  - Primary balance improvement from 2013–2018: 0.74 (preserved verbatim).

### Pension system structure and coverage
- Existing pension schemes:
  - Three schemes: AOV (universal basic public pension), Civil Service Pension, and private pensions.
  - AOV: basic flat rate to all Surinamese over 60 and resident non-citizens with more than 10 years’ contributions.
  - Civil Service Pension: provided to public workers after 35 years of contributions from age 60.
  - Private pensions: 10–15 percent of formal workers enrolled.
- Coverage and contributions:
  - AOV coverage: payments delivered to over 47,000 citizens in 2012 (about 90 percent of population over age 60).
  - Only about half of AOV recipients made the required 4 percent wage contribution during working years; government paid the rest.
  - As of 2013, the Ministry of Finance (MoF) paid 65 percent of the total AOV pension expense to fill the funding gap.
  - Civil Service pension contributors: public workers contribute 10 percent of salary; government (employer) pays 5 percent.
  - Civil Service beneficiaries receive 70 percent of their final salary after 35 years of contribution.
  - Civil Service pension is run as PAYG and has a funding gap of 60 percent financed by the government.

### Proposed new pension plan and projected parameters
- New government pension plan:
  - Proposed to cover those not covered by Civil Service or private pensions; projected to cover over 50 percent of workers not currently enrolled in Civil Service or private plans.
  - Design: Pay-As-You-Go (PAYG).
  - Contribution sharing: workers and employers share costs equally.
  - Contribution rates expected to start at 3 percent and rise to 28 percent by 2050.
  - Benefit: plans to provide 70 percent of the final salary starting at age 60.
  - New pension law under discussion in parliament; full details not yet available.
- Rationale and risks:
  - New PAYG design contrasts with recent trends toward funded systems.
  - Goal includes reducing informality by enrolling informal workers.
  - Projected contribution path (3 percent to 28 percent by 2050) is higher than average contribution rates of around 20 percent in other advanced and emerging countries (cited comparison).

### Aging-pressure projections and assumptions
- Methodology: uses IMF (2011) identity for projecting pension spending; AOV projections use a simpler identity given limited data.
- Main projection assumptions:
  - Old-age dependency ratio: proportion of population over 60 to population of 19–59.
    - Old-age dependency ratio could rise to 45 percent in 2060 under the medium fertility rate scenario.
  - Eligibility rates (assumed constant):
    - 14 percent for public civil pension.
    - 90 percent for the AOV system.
  - Replacement rates:
    - 60 percent for the Civil service pension (in 2013).
    - 12 percent for the AOV (in 2013).
    - Staff incorporated a 10 percent anticipated pension increase in 2014 and kept replacement rates constant thereafter.
  - Labor-market parameters:
    - Participation rate: 55 (kept constant).
    - Unemployment rate: 7.6 percent (assumed constant).
    - Share of government workers: 42 percent of the formal workforce (kept constant).
- Sensitivities:
  - Forecasted public pension spending is sensitive to demographic, macroeconomic, and policy assumptions.
  - Low participation rate and high informality (53 percent of formal employment is informal activity) mean many elderly rely on AOV or family transfers.

### Fiscal impact of pensions
- Rising pension costs and fiscal burden:
  - Public pension expenditure (AOV and Civil Service) has been growing rapidly since 2010.
  - MoF payments to fill funding gap:
    - MoF payments to the Civil Service pension system have risen by 188 percent since 2010 (nominal terms).
    - MoF payments for the universal AOV pension scheme have risen by 213 percent since 2010 (nominal terms).
- Conclusion:
  - Public pension expenditure poses a threat to government spending priorities and fiscal sustainability; inclusion of aging pressures increases the projected fiscal sustainability gap.

*Source: _cr14317 - 3. Credit risks (IMF staff report content provided).*

### 12.      The universal AOV public system is forecast to add 1½ percent of GDP to fiscal

### _cr14317 - 12.      The universal AOV public system is forecast to add 1½ percent of GDP to fiscal

### Fiscal projections for public pensions (AOV and Civil Service)
- AOV (universal public system)
  - Forecast to add 1½ percent of GDP to fiscal expenditure by 2060.
  - Staff assumes eligibility (coverage) ratio will be kept at 90 percent of total population aged over 60.
  - Wage contributors (as percent of total workforce) expected to rise from 50 to 70 percent.
  - Failing to capture informal sector workers would add another one percent of GDP to government spending.
  - AOV pension payments cover approximately 90 percent of old citizens over 60, but only half have fully contributed to the system.
  - Staff estimate that with every 10 percent increase in the contribution base could reduce pension pressures in the AOV by 0.5 percentage points of GDP.
  - Current contribution rate: 4 percent for the AOV.

- Civil Service pension fund
  - Expected to cost the government an additional 1¾ percent of GDP by 2060.
  - Funding gap that the MoF will have to cover projected to rise to 75 percent of total civil pension by 2060, up from over 50 percent in 2013.
  - A 10 percent increase in the replacement rate will expand government pension expense by 0.3 percent of GDP (assuming other assumptions kept constant over the medium term).
  - Current contribution from public workers enrolled in the Civil service pension system: 5 percent.

- Aggregate impact
  - Aging pressure from the current public pension system estimated to worsen the fiscal sustainability gap from the current 12½ to 15½ percent.
  - Public pension spending from both the civil servant pension plan and AOV forecast to rise by 3¼ percent of GDP by 2060.
  - Staff note that increases in replacement rates would exacerbate the finance gap (examples provided above).

### Proposed new private-sector pension plan: assumptions and projections
- Parameters and assumptions used by Staff (due to limited detailed information):
  - Used same dependency ratio and employment rates as for public-sector analysis.
  - Appraised replacement rates to be in the range of 40 to 60 percent.
  - Assumed private sector wage to be 70 percent of those in the public sector.
  - Assumed the new policy will bring down employment in the informal sector by half.
  - Assumed eligibility: any Surinamese over 60 with a minimum of 10 years of contribution history.
  - Time-variant eligibility implies cohorts mature into eligibility: if launched in 2015, current 50s eligible in 2025; current 40s eligible in 2035.
  - Assumed 60 percent of the private sector workforce and 70 percent of informal sector will join the new pension plan.
  - Under these assumptions, half of the total population over 60 (including workers enrolled in the civil public pension scheme) will be covered by some type of pension plan by 2040.

- Contribution and expected balance dynamics
  - Over the first 10 years, the pension fund would accumulate assets (no obligation to pay).
  - A 60 percent replacement rate scenario produces a revenue shortfall by 2035, 20 years after launch.
  - Under the 40 percent replacement rate scenario, cash flow appears to meet needed payments through 2050.
  - The new pension system proposes a 28 percent contribution rate from workers towards their pension.
  - The new pension system also proposes a suggested 3 percent contribution rate to be applied initially to the new private pension system (noted as low).
  - Contribution rate projected to rise from 3 percent to 28 percent by 2050.
  - Staff flag that the suggested high contribution rates in the medium term will be hard to enforce and could undermine credibility and voluntariness.
  - Risk that the government may face political pressure to cover private pension finance gaps if the new plan fails to deliver promised benefits.

- Quantified downside scenarios
  - A 60 percent replacement rate scenario leads to revenue shortfall by 2035.
  - A 40 percent replacement rate scenario meets payments through 2050.
  - Under the new pension plan, a 10 percent rise in replacement rates could lead to extra pension spending size of 10 percent of GDP in the new pension system by 2060 (Staff estimate).
  - The new pension system proposes heavy contributions (28 percent) while promising only 40 percent of final salary as future income stream, creating sustainability and political-risk concerns.

### Risks, contingent liabilities, and coverage dynamics
- Main risks identified
  - High eligibility (coverage) ratios combined with rising dependency ratios could drive large fiscal costs despite modest per-person payments.
  - Failure to incorporate informal sector workers into contribution base materially increases fiscal pressure (quantified above).
  - High proposed contribution rates create enforcement and informality risks; could exacerbate informality as workers seek to avoid higher tax pressures.
  - Time-variant eligibility and long build-up period mean that accumulated assets may nonetheless be insufficient when payouts begin in some scenarios.
  - Proposed volunteer structure with high contributions vs limited replacement may be politically unsustainable.

- Coverage projections
  - If new system launched in 2015 and assumptions hold, half of population over 60 covered by some pension plan by 2040.
  - Projection assumptions: informal sector employment falls by half; 60 percent private sector and 70 percent informal sector participation in new plan.

### Policy recommendations and reform options (G. Fiscal Pension Reforms)
- Four main reform areas identified to prevent widening of fiscal pension funding gap:
  - Increasing statutory retirement age in line with rising longevity
    - Rationale: rising old-age dependency ratio is the main driver of projected spending increases.
    - Expected benefits: contain fiscal spending; sustain higher labor supply; boost real consumption; reduce social problems including poverty among elders; increase tax revenues.
  - Contain the rate of growth of pension benefits (replacement rate)
    - Observation: public pension replacement rates rose from 40 percent in 2010 to 60 percent in 2013 during commodity boom.
    - Quantified impacts:
      - Staff estimate a 10 percent rise in replacement rates in the Civil service and AOV pension schemes will cost the government an additional one percentage point of GDP by 2060.
      - Under the new pension plan, a 10 percent rise in replacement rates could lead to extra pension spending size of 10 percent of GDP by 2060.
  - Increase revenue by strengthening the contribution base
    - Example: AOV coverage is high (90 percent) but only half have fully contributed; broadening the contribution base is required to sustain coverage.
    - Quantified impact: every 10 percent increase in the contribution base could reduce AOV pension pressures by 0.5 percentage points of GDP.
  - Increase revenue by increasing contribution rates and considering funding mix
    - Current contribution rates: 4 percent for AOV; 5 percent for public workers in Civil service pension.
    - Suggested initial rate for new private system is 3 percent, rising to 28 percent by 2050.
    - Concerns: such a rise would be the highest among neighboring countries and could exacerbate informality and enforcement difficulties.
    - Recommendation: consider a mixture of a funded system and PAYG so pre-funding income lessens future government burden.

*SURINAME; INTERNATIONAL MONETARY FUND*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14317.pdf_