## EXECUTIVE SUMMARY ## Source details **Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16141.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16141.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16141.pdf.json) --- ### Motivation and recent developments - Foreign reserves fell "perilously low" owing to: - the drop in commodity export prices, - the closure of alumina production, - fiscal and external current account deficits, and - central bank intervention. - Authorities began adjusting in the second half of 2015 with fiscal consolidation and, in November, a 21 percent devaluation. - The authorities floated the currency in March 2016, resulting in a further depreciation of about 60 percent. - The authorities have requested a Stand-By Arrangement (SBA) with the Fund to smooth the ongoing adjustment, restore confidence, and pave the way to economic recovery. - Date of staff report excerpt: May 18, 2016. ### Program content and objectives - Proposed 24-month SBA: 265 percent of quota or SDR 342 million. - Program aims: - support Suriname’s adjustment to the fall in commodity export prices, - restore external and fiscal sustainability, - improve fiscal balance by 7.4 percent of GDP to reverse the rise in the government debt-to-GDP ratio, - restore foreign reserves to adequate levels—4 months of imports, - adopt a monetary policy stance calibrated to reduce inflation to single digits, - strengthen foundations for private-sector growth through implementation of a comprehensive set of structural reforms. - Authorities agreed to publication of the staff report. ### Key macroeconomic baseline projections (selected) - Growth: - 2016: -2 percent. - 2017: 2.5 percent. - Medium-term convergence to 3 percent. - Inflation (CPI, 12-month): - Peak at 24 percent at end-2016 (program projection). - 2017: 8.9 percent. - 2018: 6.1 percent. - Medium term: 4 percent. - Current account balance: - 2015: -15.6 percent of GDP. - 2016: -8.7 percent of GDP (expected). - Near zero during 2017–18. - Adjusted international reserves targets: - About US$290 million in 2016. - About US$650 million in 2017. - About US$860 million in 2018. - Program target: raise adjusted international reserves to about 4 months of imports by end-2018. *May 18, 2016 — International Monetary Fund staff report: EXECUTIVE SUMMARY.* --- ### THE CURRENT CONTEXT — External sector and reserves - Export and revenue exposure: - In 2011, revenues from alumina, gold, and oil accounted for 88 percent of exports and 40 percent of government revenue. - Alumina exports: 4.5 percent of GDP in 2015 (previous importance noted). - Net Exports and Fiscal Performance, 2011–15 (percent of GDP): - Current account balance: 2011 = 5.7; 2015 = -15.6; 2011-15 change = -21.2 - Net exports: 2011 = 9.6; 2015 = -16.3; change = -25.9 - Exports: 2011 = 60.3; 2015 = 35.8; change = -24.6 - Mineral exports: 2011 = 53.3; 2015 = 25.1; change = -28.2 - Alumina: 2011 = 11.1; 2015 = 4.5; change = -6.6 - Gold: 2011 = 34.4; 2015 = 17.7; change = -16.7 - Oil: 2011 = 7.8; 2015 = 3.0; change = -4.8 - Imports: 2011 = 50.7; 2015 = 52.0; change = 1.3 - Fiscal balance: 2011 = 0.5; 2015 = -8.8; change = -9.3 - Revenue: 2011 = 26.7; 2015 = 21.0; change = -5.7 - Mineral revenue: 2011 = 10.7; 2015 = 3.1; change = -7.6 - Alumina: 2011 = 0.6; 2015 = 0.1; change = -0.5 - Gold: 2011 = 3.3; 2015 = 0.8; change = -2.5 - Oil: 2011 = 6.8; 2015 = 2.2; change = -4.6 - Expenditure: 2011 = 26.1; 2015 = 29.7; change = 3.6 - Reserve positions (as of 31-Mar-16): - Gross official reserves: US$301.7 million (Official foreign assets: 301.7). - IMF reserve position: 13.0 - IMF SDR: 50.8 - Monetary gold: 53.2 - Investments: 3.0 - Cash and deposits abroad: 181.7 - Adjustments: 300.0 - Foreign currency swaps: 269.4 - Reserve requirements on banks’ foreign currency deposits: 30.6 - Adjusted international reserves: 1.7 - Statement: Gross official reserves declined to US$302 million as of March 31, 2016 (1.7 months of imports), compared with more than US$1 billion in 2012; adjusted international reserves declined to US$1.7 million. --- ### FISCAL DEVELOPMENTS AND CONSOLIDATION (since August 2015) - Fiscal outturns and pressures: - Fiscal deficit: 2015 = 8.8 percent of GDP (up from 7.9 percent in 2014; small surplus in 2011). - Government debt-to-GDP ratio: 43.5 percent in 2015 (more than doubled since 2011). - Bulk (82 percent) of worsening since 2011 reflects drop in government mineral revenue. - Government obtained a large loan from the central bank in September 2015: SRD 2.5 billion (15 percent of GDP), fixed rate of 3.5 percent, 30-year maturity; about SRD 1 billion represents new financing, remainder replaced existing government debt. - Payments to resolve domestic arrears amounted to SRD 666 million (3.8 percent of GDP) in 2015. - Wage bill rose to 8.7 percent of GDP in 2015 (average of previous five years = 8.0 percent); hiring surge ~12 percent increase in central government employees. - Program fiscal target: - Reduce fiscal deficit from 8.8 percent of GDP in 2015 to 1.4 percent of GDP by 2018. - Primary balance path (percent of GDP): - 2015: -7.4 - 2016: -4.4 - 2017: -1.7 - 2018: 0.3 - Primary balance changes: - 2015-16 = 2.9 - 2016-17 = 2.7 - 2017-18 = 2.0 ### Key adjustment measures and quantified fiscal impacts (selected) - Elimination of electricity subsidies: - Expected fiscal deficit impact: -1.1 percent of GDP in 2016 and additional -1.3 percent of GDP in 2017. - Tariff steps and benchmarks: - May 1, 2016 (prior action): average tariff raised to cover 60 percent of cost of electricity production. - September 1, 2016 (structural benchmark): raise to cover 90 percent of cost. - January 1, 2017 (structural benchmark): raise to cover 100 percent of cost. - January 31, 2017 (structural benchmark): Technical Electricity Commission to develop new formula to adjust tariffs regularly. - Protection: progressive tariff structure with smaller adjustments for smaller-quantity consumers. - Fuel taxes: - Solidarity tax increase on gasoline and diesel in September 2015; kerosene tax to be introduced. - Estimated revenue: 0.9 percent of GDP in 2016. - VAT introduction: - Planned by January 1, 2018 (structural benchmark). - Objective: net revenue increase of 2.5 percent of GDP on full-year basis, replacing existing sales tax. - Implementation milestones: end-June 2016 finalize implementation plan; end-August 2016 prepare White Paper and draft VAT Law; end-December 2016 prepare functional specifications for VAT IT systems; end-September 2017 submit VAT Law to National Assembly; January 1, 2018 implement VAT. - Other measures and estimated contributions (policy changes in 2016 total: 3.8 percent of GDP; non-policy factors in 2016: -0.8 percent of GDP, of which mineral revenue: -0.9): - Wage bill restraint: 0.9 - Other primary current expenditure restraint: 1.1 - Electricity subsidy phased elimination: 1.1 - Fuel tax increase: 0.9 - Income tax break: -0.2 - Insurance corporate tax increase: 0.1 - Sales tax increase: 0.1 - Vehicle tax: 0.1 - Capital spending: -0.3 - Social programs spending increase: -0.1 ### Financing and reserve rebuilding (selected figures) - Balance of payments financing gap (staff projections before program financing): - About 13 percent of GDP in 2016. - About 5 percent of GDP in 2017. - CBvS large upcoming foreign exchange sales May–December 2016: - To government for external debt payments: about US$85 million. - To government for capital contributions to new gold mine: US$30 million. - To SOEs and companies for imports of fuel and other essential products: about US$70 million. - To local banks to reverse maturing currency swaps: US$57 million. - To government units: about US$15 million. - Program financing commitments (2016–18): - Proposed Fund disbursement under the SBA: around US$478 million. - Budget support from other IFIs: US$470 million during 2016-18. - Agreement with IDB and World Bank: each to provide US$100 million in budget support in 2016 conditional on satisfactory program performance. - CDB budget support: US$50 million in 2016. - Authorities contracted an 18-month international capital markets loan totaling US$86 million in April 2016. - Program aims: rebuild adjusted international reserves to about 4 months of imports by end-2018. --- ### EXCHANGE RATE, MONETARY POLICY, AND OPERATIONS - Exchange rate actions and outcomes: - Devaluation of 21 percent on November 19, 2015. - Float initiated March 22, 2016 via foreign exchange auctions. - Cumulative official SRD/USD depreciation since October 2015: about 90 percent (21 percent devaluation followed by about 60 percent depreciation, cumulative change about 90 percent). - First auction (March 22): sold US$10 million; official rate depreciated by 27 percent to 5.16 SRD/USD; spread narrowed from 34 percent to about 5 percent. Subsequent auctions sold smaller amounts and published cut-off and weighted average rates; spread averaged 11 percent in last three auctions through May 2. - May 10: CBvS authorized commercial banks and foreign exchange bureaus to freely determine exchange rates (prior action); daily official exchange rate set equal to weighted average of commercial transactions. - Monetary framework and targets: - Objective: reduce inflation to single digits during the program, 4 percent over the medium term. - 2016 target: reserve money growth of about 3 percent, implying reserve money-to-GDP ratio declining to about 11 percent in 2016 (from 14.3 percent in 2015). - Operational target: Net Domestic Assets (NDA). - Tools: OMOs (T-bill and deposit auctions), lending facilities, reserve requirements, liquidity monitoring and forecasting, stop CBvS financing to government (Memorandum of Understanding signed). - Prior actions and structural benchmarks: prepare strategic plan for CBvS financial position (structural benchmark end-December 2016); revise Central Bank Act to prohibit monetary financing by end-December 2016. - T-bill and deposit auctions: - Monthly T-bill auctions launched May 3, 2016; May 3 auction: 3-month yields 23 percent and 12-month yields 18 percent (up from 9 percent). - Government to convert part of SRD 2.5 billion CBvS loan into tradable T-bills to facilitate OMOs by end-June 2016 (structural benchmark). - Deposit auctions and a fixed rate tender with full allotment and maturity of 14 days proposed as short-term liquidity tools. - Reserve and monetary statistics (as of March 31, 2016; program accounting): - NIR of the CBvS: US$0.0 million at program exchange rates (Table 2). - NFA as of March 31, 2016: US$73.0 million. - NDA as of March 31, 2016: SRD 2,263.6 million. - Reserve money: SRD 2,633.1 million (reserve money in local currency: 2,446.3; reserve money in foreign currency: 161.7; gold certificate: 25.1). - Program exchange rate memorandum item: 5.064. --- ### FINANCIAL SECTOR CONDITIONS AND STRESS TESTS - Banking sector indicators (selected): - NPL ratio: 5.9 percent in 2013; 7.5 percent at end-September 2015; 8.4 percent at end-December 2015. - Reported capital adequacy ratio (system): 10.7 percent as of end-2015 (down from 10.8 percent as of end-September 2015); regulatory minimum currently 8.8 percent, increasing to 10 percent in June 2017. - As of end-December 2015, two banks were undercapitalized; one state-owned bank with 2.1 percent of system assets was insolvent. - Recapitalization needed to return capital adequacy ratios for all banks back to 10 percent: 0.26 percent of GDP. - Provisioning: 42.7 percent of NPLs. - Dollarization: 53 percent of bank deposits; 34 percent of credit. - Some banks reliant on central bank liquidity facilities. - Stress test highlights (Box 2 and section figures): - Pre-shock CAR by bank group: All Banks: 10.7; Large Banks: 10.9; Mid-Size Banks: 12.1; Small Banks: 4.7; State Banks: 6.0; Outlier Banks: 26.5; Aggregate: 10.3. - Exchange rate shock to net open position: - Devaluation of SRD by 40 percent → All Banks CAR: 10.0; Mid-Size Banks: 7.0; Small Banks: 0.4; State Banks: 3.2; (Aggregate) 20.6. - Devaluation of SRD by 80 percent → All Banks CAR: 9.2; Mid-Size Banks: 1.2; Small Banks: -3.9; State Banks: 0.3; (Aggregate) 31.2. - Credit risk (NPL increases): - NPLs increase by 50 percent → All Banks CAR: 9.4. - NPLs increase by 100 percent → All Banks CAR: 8.1; Small Banks: -0.3; State Banks: 1.7. - Box 2 conclusions: - The approximately 40 percent depreciation from end-December to end-April could cause 3 additional banks to fall below the forthcoming 10 percent CAR, raising total undercapitalized banks to 5 and total recapitalization need to 0.6 percent of GDP. - A 50 percent NPL increase implies recapitalization costs of 0.4 percent of GDP (on top of preexisting needs); a 100 percent NPL increase implies 0.9 percent of GDP. - Weekly deposit data through end-April show little sign of deposit outflows to date; assumed deposit outflow stress (5% per day for first 3 days, 10% per day for next 2 days) exhausts foreign currency liquidity for one large and two small banks on day 5—these banks could cover shortfall if existing foreign currency swaps with CBvS (US$60 million) were unwound. --- ### DEBT SUSTAINABILITY ANALYSIS (Annex I — selected findings) - Public debt recent developments: - Total gross debt: 43.5 percent of GDP in 2015 (doubling since 2012). - Primary fiscal deficit average: 7.2 percent in 2014-15 (up from 0.3 percent in 2005-2013). - Growth declined: average 1 percent in 2014-15 (vs. 4.5 percent in 2005-2013). - Gross financing needs: averaged 3.5 percent of GDP in 2005–2013; about 9 percent in 2014; about 15 percent in 2015. - Central bank long-term loan in late 2015: SRD 2.5 billion (15 percent of GDP) to central government at 3.5 percent interest, 30-year maturity. - Baseline projections and key numbers: - Real GDP growth assumptions: 0.1 percent in 2015; -2 percent in 2016; recovery toward 3 percent thereafter. - CPI inflation: 37 percent in 2016 (y/y average); decline to single digits during the program; about 4 percent over medium term. - Public debt-to-GDP ratio: peaks at 46 percent in 2016, declines to 36.5 percent by 2021. - External debt-to-GDP: expected to reach 72.5 percent of GDP in 2016 (up from 45.3 percent in 2015) and decline thereafter. - Risks and stress tests (selected): - Conversion of the 30-year CBvS loan reduced short-term rollover risks significantly. - Historical and alternative scenarios show debt remains below 70 percent of GDP under most adverse macro shocks, except large contingent liability shocks. - Contingent liability shock (recapitalization of 10 percent of total bank assets) could raise public debt by 5 percentage points of GDP in 2017. - A further 30 percent real depreciation would cause external debt to exceed 100 percent of GDP in the short run and remain above 75 percent of GDP over the projection period. - External sector assessment (2015 gaps): - IIP: declined from 7 percent of GDP in 2011 to -48 percent of GDP in 2015. - CA actual 2015: -15.6 percent of GDP; CA norm (EBA-lite): -0.8 percent of GDP; CA gap: -14.8 percent of GDP. - REER gap: 69.6 percent in 2015. - Scenarios to stabilize or recover IIP (select): - Scenario 1 (Stabilize net IIP at -47.8 percent of GDP): CA norm -4.8; underlying CA -1.8; CA gap 3.0; REER gap -14.1. - Scenario 2 (Stabilize net IIP at 0 percent of GDP): CA norm -1.7; underlying CA -1.8; CA gap -0.2; REER gap 0.8. - Scenario 3 (IIP = 0 percent of GDP in 2025): CA norm 1.6; underlying CA -1.8; CA gap -3.4; REER gap 15.9. --- ### PROGRAM RISKS, STAFF APPRAISAL, AND POLICY RECOMMENDATIONS - Program risks (summary): - Financial sector implications from floating exchange rate (corporate and bank solvency) given data limitations. - Risk of incomplete delivery of key fiscal measures due to political pressure. - Data reporting quality shortfalls; need to improve monitoring and reporting. - Macroeconomic risks: disorderly exchange rate overshooting; deposit outflows and bank runs; delays in new gold mine completion; other external shocks. - Risks to repayment capacity: - With proposed access of 265 percent of quota, Fund credit outstanding would reach a maximum of 9 percent of GDP and 20 percent of exports of goods and services in 2018. - Payments to the Fund sizeable in 2020–22—reaching almost 15 percent of adjusted foreign reserves in 2021. - Debt vulnerabilities to further currency depreciation and contingent liabilities. - Staff appraisal — key policy recommendations: - Deliver the intended fiscal consolidation (both revenue and expenditure measures) to restore fiscal and external stability; completing phased elimination of electricity subsidies is central. - Pursue prudent wage bill policies to preserve stabilization objectives. - Strengthen social safety nets and target support to protect the most vulnerable (social cash transfer programs targeted to increase by about 0.2 percent of GDP by 2017). - Maintain a market-determined flexible exchange rate; ensure official rate reflects market and narrow spreads via market development and bank participation. - Tighten liquidity conditions near term to stabilize inflation expectations: T-bill auctions, deposit auctions, reserve requirements and OMOs as soon as available. - Strengthen CBvS operational independence and prohibit monetary financing (revise Central Bank Act, structural benchmark end-December 2016). - Strengthen supervision, provisioning, and resolution frameworks; unwind maturing foreign currency swaps with local banks (~US$110 million) as they mature. - Implement structural reforms to diversify the economy, boost competitiveness, and improve business environment (tax, legal, procurement, PFM, VAT, SOE transparency). - Assessment versus no-program: - Without Fund-supported program, risks include fiscal dominance, resort to monetary financing, currency overshooting, banking instability, and destabilizing social consequences. - Staff recommends approval of the requested Stand-By Arrangement. --- ### STRUCTURAL BENCHMARKS, PRIOR ACTIONS, AND PROGRAM MONITORING (selected) - Prior actions (met): - Memorandum of Understanding terminating further CBvS credit to the government (signed April 25, 2016). - Council of Ministers Decision that 2016 supplementary budget will be based on program macro assumptions and measures. - Electricity tariffs raised to cover 60 percent of production cost (May 1, 2016). - CBvS published 2014 audited financial statements and audit opinion. - CBvS authorized commercial banks to determine foreign exchange rates and set daily official exchange rate equal to weighted average of commercial market rates. - Structural benchmarks (selected and timing): - VAT implementation plan and Project Coordination Unit staff assigned: June 30, 2016. - Submit supplementary 2016 budget to National Assembly: June 30, 2016. - T-bill auction system ready for OMOs: end-June 2016. - Reorganize Treasury Department and establish Cash Management Unit: September 30, 2016. - Publish SOE financial reports for 2014 and 2015: December 31, 2016. - Electricity tariffs to cover 90 percent of cost: September 1, 2016; 100 percent by January 1, 2017 with Technical Electricity Commission formula by January 31, 2017. - Submit Procurement Law, SWF law, and PFM law to National Assembly: by June 30, 2017. - Submit VAT Law and finalize regulations: by September 30, 2017; implement VAT: January 1, 2018. - Revise Central Bank Act and prohibit monetary financing: submit to National Assembly by December 31, 2016. - Establish liquidity monitoring and forecasting system; introduce overnight standing facility and deposit auctions by June 30, 2016. - Monitoring and reporting commitments (selected): - Daily/semi-weekly: FX reserve composition and FX cash flow; official and parallel nominal exchange rates; FX transaction volumes by banks and cambios. - Weekly: deposits and liquidity assistance by institution; CBvS purchases and sales of foreign currency; amounts offered/demanded/placed in OMOs. - Monthly (selected): CG operations in GFS format within six weeks; mineral tax and non-tax revenue within four weeks; CPI within four weeks; CBvS balance sheet within two weeks. - Quarterly: balance of payments within 60 days; IIP within two months; FSIs within 60 days. - External audit and data validation requirements for monetary program indicators (NIR, NDA, gross credit to government): audit reports submitted no later than 60 days after each test date. --- ### INTERNATIONAL AND DEVELOPMENT PARTNER SUPPORT - Program financing and partner commitments (selected): - IMF SBA: SDR 342 million (265 percent of quota) ≈ US$478 million. - Budget support from other IFIs: US$470 million during 2016-18 (IDB and World Bank each US$100 million in 2016 conditional on program performance; CDB US$50 million in 2016). - Adjusted international reserves projection trajectory supported by Fund and IFI financing (US$290m in 2016; US$650m in 2017; US$860m in 2018). - Authorities contracted US$86 million 18-month international capital markets loan (April 2016). --- *Source: IMF staff report excerpt and accompanying documents (content unit: _cr16141, May 2016).* ### EXECUTIVE SUMMARY ### _cr16141 - EXECUTIVE SUMMARY ### Motivation - Foreign reserves have fallen perilously low, reflecting: - the drop in commodity export prices, - the closure of alumina production, - fiscal and external current account deficits, and - central bank intervention. - Authorities began adjusting in the second half of 2015 with fiscal consolidation and, in November, a 21 percent devaluation. - The authorities floated the currency in March 2016, resulting in a further depreciation of about 60 percent. - The authorities have requested a Stand-By Arrangement (SBA) with the Fund to smooth the ongoing adjustment, restore confidence, and pave the way to economic recovery. ### Program content - Proposed 24-month SBA: 265 percent of quota or SDR 342 million. - Program aims: - support Suriname’s adjustment to the fall in commodity export prices, - restore external and fiscal sustainability, - improve fiscal balance by 7.4 percent of GDP to reverse the rise in the government debt-to-GDP ratio, - restore foreign reserves to adequate levels—4 months of imports, - adopt a monetary policy stance calibrated to reduce inflation to single digits, - strengthen foundations for private-sector growth through implementation of a comprehensive set of structural reforms. - The authorities have agreed to the publication of the staff report. *May 18, 2016* ### The current context — Nature of the shock - Large commodity export price drops undermined Suriname’s external and fiscal positions. - In 2011, revenues from alumina, gold, and oil accounted for 88 percent of exports and 40 percent of government revenue. - Price declines and the closure of alumina refinery Suralco in late-2015 cut these revenues, caused substantial fiscal and external current account deficits, and pushed the economy into recession. - Suralco’s previous importance: exports of alumina amounted to 4.5 percent of GDP in 2015. ### The current context — Public finances - Fiscal deficit reached 8.8 percent of GDP in 2015, up from 7.9 percent of GDP in 2014 and a small surplus in 2011. - The bulk (82 percent) of the worsening in the fiscal balance since 2011 reflects the drop in government mineral revenue. - Government spending rose, including a 1.1 percentage point of GDP rise in the wage bill reflecting an election-related surge in public sector employment in 2015. - In September 2015, the government obtained a large loan from the central bank: SRD 2.5 billion, 15 percent of GDP, fixed rate of 3.5 percent, 30-year maturity; about SRD 1 billion represents new financing, remainder replaced existing government debt. - The bulk of the new financing was used to pay down a large stock of domestic arrears, significantly increasing local currency liquidity. - Government debt-to-GDP ratio more than doubled since 2011, reaching 43.5 percent in 2015. ### The current context — External sector - Current account balance: surplus of 5.7 percent of GDP in 2011 to deficit of 15.6 percent of GDP in 2015. - Drop in mineral exports accounts for more than the full decline; small offsetting rise in non-mineral exports. - IMF EBA-lite estimates: Suriname’s current account balance norm is about -0.8 percent of GDP; implies REER was substantially overvalued in 2015, on average, by about 70 percent (Box 1). - Net Exports and Fiscal Performance, 2011–15 (percent of GDP): - Current account balance: 2011 = 5.7; 2015 = -15.6; 2011-15 change = -21.2 - Net exports: 2011 = 9.6; 2015 = -16.3; change = -25.9 - Exports: 2011 = 60.3; 2015 = 35.8; change = -24.6 - Mineral exports: 2011 = 53.3; 2015 = 25.1; change = -28.2 - Alumina: 2011 = 11.1; 2015 = 4.5; change = -6.6 - Gold: 2011 = 34.4; 2015 = 17.7; change = -16.7 - Oil: 2011 = 7.8; 2015 = 3.0; change = -4.8 - Imports: 2011 = 50.7; 2015 = 52.0; change = 1.3 - Fiscal balance: 2011 = 0.5; 2015 = -8.8; change = -9.3 - Revenue: 2011 = 26.7; 2015 = 21.0; change = -5.7 - Mineral revenue: 2011 = 10.7; 2015 = 3.1; change = -7.6 - Alumina: 2011 = 0.6; 2015 = 0.1; change = -0.5 - Gold: 2011 = 3.3; 2015 = 0.8; change = -2.5 - Oil: 2011 = 6.8; 2015 = 2.2; change = -4.6 - Expenditure: 2011 = 26.1; 2015 = 29.7; change = 3.6 ### The current context — Foreign reserves - Gross official reserves declined to US$302 million as of March 31, 2016 (1.7 months of imports), compared with more than US$1 billion in 2012. - Adjusted international reserves—which exclude foreign currency swaps and reserve requirements on banks' foreign currency deposits—declined to US$1.7 million. - International Reserves (US$ million, as of 31-Mar-16): - Official foreign assets: 301.7 - IMF reserve position: 13.0 - IMF SDR: 50.8 - Monetary gold: 53.2 - Investments: 3.0 - Cash and deposits abroad: 181.7 - Adjustments: 300.0 - Foreign currency swaps: 269.4 - Reserve requirements on banks’ foreign currency deposits: 30.6 - Adjusted international reserves: 1.7 ### The current context — Exchange rate - Authorities devalued the currency by 21 percent on November 19, 2015. - Exchange rate pressure persisted; spread between parallel and official market rates reached 50 percent in early March. - Authorities intervened in the unofficial market in January-February to temporarily narrow the spread. - On March 22, 2016 the authorities floated the currency based on a system of foreign exchange auctions to ensure convergence of the official exchange rate with the market rate. - Based on auctions, the spread between the official and parallel market rates has narrowed. - Cumulative official SRD/USD exchange rate depreciation since October 2015: about 90 percent (21 percent devaluation followed by about 60 percent depreciation, cumulative change about 90 percent). ### The current context — Monetary conditions - Monetary base (reserve money) fluctuated: - Declined in first half of 2015 due to unsterilized foreign exchange market intervention; contraction peaked at -21.7 percent (year on year) in July 2015. - Rebounded in second half of 2015 after CBvS provided monetary financing via SRD 2.5 billion 30-year loan in September 2015; monetary financing plus about SRD 110 million net lending to commercial banks contributed to a rebound in reserve money by 14.7 percent by end-2015 (year on year). - CBvS measures to contain commercial bank lending: raised required reserve ratios on domestic currency deposits from 30 percent to 35 percent in November, and introduced requirement to deposit 5 percent of deposits at the central bank as part of the new payment system (SNEPS). - In Q1 2016, when the government drew on its deposits at the central bank to finance the budget deficit, reserve money expanded by 4 percent (quarter on quarter). ### The current context — Inflation - CPI (12-month) inflation rose to 37 percent in March, up from an average of 4 percent during 2013-15. - Much of the inflation spike reflects a doubling in “housing and utilities” prices associated with the hike in electricity tariffs in October, 2015. - Month-over-month inflation declined to less than 4 percent in December 2015, reflecting the one-off (price level) nature of the tariff hikes. ### The current context — Financial system - Banking sector risks mounting: - NPL ratio increased from 5.9 percent in 2013 to 7.5 percent at end-September 2015 and 8.4 percent at end-December 2015. - Loan quality expected to worsen due to weakening economy and currency depreciation. - Reported capital adequacy ratio for system as a whole: 10.7 percent as of end-2015, down from 10.8 percent as of end-September 2015; regulatory minimum currently 8.8 percent, increasing to 10 percent in June 2017. - As of end-December 2015, two banks were undercapitalized; one state-owned bank with 2.1 percent of system assets was insolvent. - Recapitalization needed to return capital adequacy ratios for all banks back to 10 percent: 0.26 percent of GDP. - Relatively low provisioning: 42.7 percent of NPLs. - Some banks have relied on central bank liquidity facilities to meet reserve requirements. - Banks' foreign currency positions, while within prudential limits, have weakened recently. ### The Fund-supported program — Program Objectives - Authorities view program as opportunity to minimize social and economic disruptions during adjustment to permanent export commodity price shock, and to pave the way to financial stability and economic recovery. - Overarching goals: - restore fiscal and external sustainability, - rebuild foreign reserves, - enhance economy’s resilience through reforms to monetary and exchange rate framework, - foster economic diversification and improve business environment (MEFP ¶7-8). - SBA framework supports Suriname’s short-term external financing needs and policies to address crisis, restore confidence and growth. - Addresses short-term balance of payment problems, including low international reserves, and provides financing to smooth adjustment. - Current account balance expected to narrow from deficit of 15.6 percent of GDP in 2015 to near zero by end of the SBA. - Fund staff provided technical assistance in foreign exchange policy, monetary operations, and Treasury bills (T-bills) to support move to flexible exchange rate and development of CBvS monetary policy toolkit. - Planned technical assistance to support key fiscal reforms, including introduction of a Value Added Tax (¶12). ### The Fund-supported program — Macroeconomic framework (key features) - Growth recovery: - 2016 growth projected at -2 percent, reflecting fall in commodity export prices, fiscal consolidation, and closure of alumina refinery in late 2015. - 2017 growth expected to recover to 2.5 percent, reflecting opening of the new gold mine. - 2018-19: fiscal consolidation associated with VAT introduction is expected to moderate growth. - Thereafter, growth assumed to converge to medium-term rate of 3 percent. - Disinflation: - CPI (12-month) inflation projected to peak at 24 percent at end-2016, largely reflecting level effect of higher electricity tariffs and exchange rate depreciation. - Inflation expected to decline to 8.9 percent in 2017 and to 6.1 percent by 2018, reflecting tight monetary and fiscal policies, before leveling off at 4 percent over the medium term (MEFP ¶6). - External current account improvement: - Current account balance expected to narrow from -15.6 percent of GDP in 2015 to -8.7 percent of GDP in 2016, and to near zero during 2017–18. - Bulk of adjustment (almost 13 percentage points of GDP) reflects projected rise in exports due to expanded gold output and increases in gold and oil prices (based on April 2016 IMF World Economic Outlook forecasts). - Contraction in imports contributes to adjustment, reflecting downturn, currency depreciation, and end of capital imports associated with construction of the new gold mine. - Disbursements by the Fund and other IFIs expected to be primary financing items, along with FDI projected to average 4.3 percent of GDP in 2016-18. - Both public and private saving expected to increase over the program period; new gold mine expected to increase private saving particularly in 2017. - Improvement in current account balance, disbursements by Fund and other IFIs, and FDI contribute to build-up in foreign reserves to 4 months of imports by end-2018. - Over the medium term, a small current account deficit (less than 2 percent of GDP) is projected, reflecting expected stabilization of gold production. *International Monetary Fund staff report: EXECUTIVE SUMMARY (May 18, 2016).* ### 11. Since August 2015, the authorities have embarked on a path of fiscal consolidation. ### _cr16141 - 11. Since August 2015, the authorities have embarked on a path of fiscal consolidation. ### Fiscal consolidation since August 2015 - Authorities kept authorizations of government purchases below budgetary allocations, contributing to reducing the budget deficit from an annualized 12.5 percent of GDP during January–July to 3.5 percent of GDP during August–December (MEFP ¶9). - The 2015 spending restraint coincided with a concerted effort to clear domestic arrears related to expenditure in 2013–15; payments to resolve these arrears, reflected below the line in the fiscal accounts, amounted to SRD 666 million (3.8 percent of GDP) in 2015. - A highly visible measure was the reduction in electricity tariff subsidies, with a near-doubling in electricity tariffs, on average, in October. - Overall fiscal deficit for 2015 is estimated at 8.8 percent of GDP. - Domestic banks and the non-bank sector reduced their lending to the government, resulting in an increase of direct borrowing from the central bank. ### Program fiscal targets and primary balance anchor - Program target: reduce fiscal deficit from 8.8 percent of GDP in 2015 to 1.4 percent of GDP by 2018 (Table 2 and MEFP ¶11). - Fiscal anchor: primary deficit with targeted consolidation. - Primary fiscal balance path: - Primary balance (2015): -7.4 - Primary balance (2016): -4.4 - Primary balance (2017): -1.7 - Primary balance (2018): 0.3 - Primary balance changes: - Change: 2015-16 = 2.9 - Change: 2016-17 = 2.7 - Change: 2017-18 = 2.0 ### Key components of the adjustment (policy measures and quantitative impacts) - Elimination of electricity subsidies: - Expected to reduce the fiscal deficit by 1.1 percent of GDP in 2016 and an additional 1.3 percent of GDP in 2017. - Tariff steps and benchmarks: - May 1, 2016 (prior action): average tariff raised to cover 60 percent of the cost of electricity production. - September 1, 2016 (structural benchmark): plan to raise average tariff to cover 90 percent of cost. - January 1, 2017 (structural benchmark): plan to raise tariffs to cover 100 percent of cost, eliminating the subsidy. - January 31, 2017 (structural benchmark): Technical Electricity Commission to develop new formula to adjust tariffs regularly. - Protection: progressive tariff structure with smaller adjustments for smaller-quantity consumers. - Elimination of exemption for insurance companies: - Implemented in second half of 2016. - Estimated revenue: 0.1 percent of GDP in 2016 and 0.1 percent of GDP in 2017. - Higher fuel taxes: - Solidarity tax increase on gasoline and diesel in September 2015; kerosene tax to be introduced in the supplementary budget. - Estimated revenue: 0.9 percent of GDP in 2016. - Income tax break: - General allowance increased from SRD 50 to SRD 125 per month for all taxpayers in 2016. - Expected to lower income tax revenue by 0.2 percent of GDP in 2016. - Sales tax adjustment: - Sales tax rates increased by 2 percentage points across taxable goods and services; base broadened in services and luxury goods. - Estimated revenue: 0.1 percent of GDP in 2016 and an additional 0.2 percent of GDP in 2017. - Vehicle tax introduction: - Levied on each vehicle in the second half of 2016, varying by vehicle category. - Estimated revenue: 0.1 percent of GDP in 2016 and an additional 0.1 percent of GDP in 2017 (full-year). - Wage bill restraint: - Wage bill rose to 8.7 percent of GDP in 2015 (above the 8.0 percent of GDP average of previous five years) after a hiring surge (~12 percent increase in central government employees). - Target: reduce wage bill to 7.8 percent of GDP in 2016 by keeping the number of public sector employees unchanged and ensuring wage growth below inflation. - Other primary current expenditure restraint: - Growth of non-social primary current expenditure to be kept below the rate of inflation in 2016. - Expected savings: about 1 percent of GDP. - Supporting social and capital spending: - Social cash transfer programs targeted to increase by about 0.2 percent of GDP by 2017. - Capital spending: restore to above 4 percent of GDP after its decline to 2.5 percent of GDP in 2015. - Procurement department and Procurement Law (structural benchmark end-June 2017) to ensure transparent appraisal and approval of investment projects. - VAT introduction: - Planned by January 1, 2018 (structural benchmark). - Objective: net revenue increase of 2.5 percent of GDP on a full-year basis, replacing existing sales tax. - Implementation steps and structural benchmarks: - End-June 2016: finalize VAT implementation plan and assign staff to Project Coordination Unit. - End-August 2016: prepare White Paper on VAT policy objectives and draft VAT Law with Fund input. - End-December 2016: prepare detailed functional specifications for VAT IT systems. - End-September 2017 (structural benchmark): submit VAT Law to National Assembly and finalize regulations. - Implementation to be supported by CARTAC and the IDB. - Contingency measures: - Authorities stand ready to deploy additional fiscal measures if risks materialize, including streamlining overlapping transfer programs and increasing indirect taxation (including vehicle tax). ### Contribution to fiscal adjustment — component figures (In percent of GDP) - Policy changes in 2016 total: 3.8 - Capital spending: -0.3 - Electricity subsidy phased elimination: 1.1 - Fuel tax increase: 0.9 - Income tax break: -0.2 - Insurance corporate tax increase: 0.1 - Other primary current expenditure restraint: 1.1 - Sales tax increase: 0.1 - Social programs spending increase: -0.1 - Vehicle tax: 0.1 - Wage bill restraint: 0.9 - Non-policy factors in 2016: -0.8 - Of which: mineral revenue: -0.9 - Policy changes in 2017 total: 0.7 - Capital spending: -0.9 - Electricity subsidy phased elimination: 1.3 - Insurance corporate tax increase: 0.1 - Sales tax increase: 0.2 - Reversal of income tax break: 0.1 - Social programs spending increase: -0.1 - Vehicle tax: 0.1 - Non-policy factors in 2017: 2.0 - Of which: mineral revenue: 2.4 - Policy changes in 2018 total: 2.1 - Capital spending: -0.4 - VAT introduction: 2.5 - Non-policy factors in 2018: -0.1 - Of which: mineral revenue: -0.1 ### Non-policy factors and mineral revenue - Non-policy factors primarily reflect shifts in mineral revenues. - In 2017, expanding gold production and projected rises in gold and oil prices contribute 2.4 percent of GDP to the fiscal adjustment via higher mineral government revenue. ### Financing the fiscal deficit and rebuilding reserves - 2016 financing: - Fiscal deficit of 6.4 percent of GDP in 2016 is expected to be fully financed by external borrowing from IFIs and through external commercial borrowing (¶19). - Additional financing needs, including payment of domestic arrears and other debt payments, will be financed by issuing T-bills to domestic banks and non-bank institutions. - Balance of payments financing gap (staff projections before program financing): - About 13 percent of GDP in 2016. - About 5 percent of GDP in 2017. - CBvS large upcoming foreign exchange sales in May–December 2016 include: - To government for external debt payments: about US$85 million. - To government for capital contributions to new gold mine: US$30 million. - To SOEs and companies for imports of fuel and other essential products: about US$70 million. - To local banks to reverse maturing currency swaps: US$57 million. - To government units: about US$15 million. - Program financing commitments (2016–18): - Proposed Fund disbursement under the SBA: around US$478 million. - Budget support from other IFIs: US$470 million during 2016-18. - Agreement with IDB and World Bank: conditional on satisfactory program performance, each to provide US$100 million in budget support in 2016. - CDB budget support: US$50 million in 2016. - Authorities expect similar amounts from IDB and CDB in 2017 conditional on successful implementation. - Authorities contracted an 18-month international capital markets loan totaling US$86 million in April 2016 (first-ever sovereign issue). - Adjusted international reserves projections: - About US$290 million in 2016. - About US$650 million in 2017. - About US$860 million in 2018. - Program target: raise adjusted international reserves to about 4 months of imports by end-2018 and maintain at around this level thereafter. - Reserve adequacy calibration: IMF (2015) and Mwase (2012) imply foreign reserves about 3.5-5.5 months of imports when calibrated for Suriname. ### Debt sustainability and vulnerabilities - Public debt dynamics: - Government debt expected to peak at 46 percent of GDP in 2016, then decline to around 36 percent of GDP by 2021 based on upcoming fiscal consolidation. - Benefits of concessional financing: - Higher reliance on concessional financing, particularly from IFIs, will lengthen debt maturity and reduce gross financing needs and rollover risks. - DSA-identified vulnerabilities include risks from: - (i) weaker-than-projected growth as a result of fiscal adjustment; - (ii) lower-than-projected commodity prices; - (iii) exchange rate risk, given high share of foreign-currency debt; - (iv) higher than projected interest rates; - (v) fiscal slippages, particularly in outer years from consolidation fatigue or implementation delays; - (vi) realization of contingent liabilities in the banking sector, including possible recapitalization of central bank. ### Reforms to strengthen the fiscal policy framework and capacity - Sovereign Wealth Fund (SWF) law: - Drafted with Fund input and to be submitted to National Assembly by end-June 2017 (structural benchmark). - Public Financial Management (PFM) law: - To be presented to National Assembly by end-June 2017 (structural benchmark). - Will introduce medium-term fiscal planning, strengthen budget implementation and controls, and support IFMIS implementation. - Procurement department and Procurement Law: - Procurement department to be established at Ministry of Finance; Procurement Law to be submitted to National Assembly by end-June 2017 (structural benchmark). - Centralize publishing of tenders and contract awards; expand IFMIS to cover procurement, audits, and controls. - Treasury department: - With IDB assistance, Ministry of Finance to build modern Treasury department by end-September 2016. - Assign responsibility for cash management to a trained Cash Management Unit (structural benchmark, end-September 2016). - Revenue administration: - Strengthen efficiency and effectiveness through investment in equipment, personnel, and capacity development. - Identify and contain SOE fiscal risks by identifying all SOEs and publishing their financial reports for 2014 and 2015 by end-December 2016 (structural benchmark). - Continue installing additional IFMIS modules. - Capacity building at Ministry of Finance: - Develop analytical capacity of macroeconomic unit (Financial Programming and Policies group) with IMF and IDB technical assistance and long-term consultants to support multi-year budgets and forecasts. *Source: _cr16141 - 11. Since August 2015, the authorities have embarked on a path of fiscal consolidation.* ### 21. Staff supports the authorities’ decision to move to a market-determined exchange ### 21. Staff supports the authorities’ decision to move to a market-determined exchange rate ### Exchange rate decision and rationale - A flexible exchange rate will facilitate Suriname’s adjustment to the current external shocks, and strengthen the economy’s resilience to future shocks. - Staff judges that the 21 percent devaluation in late November 2015 and the subsequent depreciation of about 60 percent were an important step towards eliminating the exchange rate misalignment. - Rising gold exports will contribute to a significant improvement in the current account balance from 2017 onwards (Table 3), an important factor in determining the degree of exchange rate misalignment (based on EBA-lite). - Staff will reassess the extent to which exchange rate fundamentals were affected by the move to a flexible exchange rate in 2016 once 2016 data for the current account and other variables are available. ### Foreign currency auctions and market operations - CBvS started conducting foreign currency auctions on March 22, 2016 to find the market rate that balances demand and supply and to facilitate development of the foreign exchange market (MEFP ¶19). - First auction (March 22): sold US$10 million; official exchange rate depreciated by 27 percent to 5.16 SRD/USD; spread between official and parallel market rates narrowed from 34 percent to about 5 percent. - Subsequent auction practices to enhance effectiveness: - Sold significantly smaller amounts of foreign reserves than in the first two auctions. - Conducted auctions multiple times per week. - Allowed commercial banks to bid on their own behalf (nostro bids). - Published after each auction the amount sold, the cut-off (marginal) price, and the weighted average rate of successful bids. - Despite these measures, the spread between official and parallel market exchange rates widened, averaging 11 percent in the last three auctions conducted (through May 2). ### Completion of transition to a floating exchange rate - On May 10, CBvS authorized commercial banks and foreign exchange bureaus to freely determine exchange rates (prior action, MEFP ¶21). - Bid and ask exchange rates are now determined by banks and foreign exchange bureaus directly with their customers. - The daily official exchange rate is set equal to a weighted average of these transactions. - Expected outcomes: - Allow banks to compete more effectively in the foreign exchange market and increase volume of foreign currency transactions handled by them. - Significant narrowing in the spread between the official (indicative) exchange rate and the parallel market rate, a crucial indicator of liberalization and achievement of a free float. - Official (indicative) exchange rate used for CBvS foreign currency transactions with government or official bodies is set daily equal to the weighted average of commercial buy and sell spot rates (prior action). ### Measures to support market development and reserve rebuilding - Authorities indicated willingness to support commercial banks’ capacity to trade among themselves (MEFP ¶22): - Set up a transparent foreign currency trading and pricing infrastructure. - Introduce guidelines governing interbank and customer trading. - CBvS should monitor and strengthen compliance of the 60-day repatriation requirement on exporters. - CBvS will intervene in the market to acquire foreign exchange at market rates to rebuild international reserves (MEFP ¶23): - Will work with the market on timing, modality, and volumes to avoid surprises. - Over the medium term, CBvS role limited to smoothing out large fluctuations. - CBvS explained this ultimate goal to the public in a press release published on April 4, 2016. ### Monetary policy framework and targets - Objective: reduce inflation to single digits during the program, and to 4 percent over the medium term. - 2016 target: reserve money growth of about 3 percent, implying reserve money-to-GDP ratio declining to about 11 percent in 2016 (from 14.3 percent in 2015). - CBvS set NDA as its operational target, determined by projection of reserve money and net foreign assets. - Tools and operational measures: - Conduct open market operations (OMOs), including T-bill and deposit auctions; use lending facilities to fine tune liquidity conditions. - Strengthen liquidity monitoring and forecasting framework; close coordination with Ministry of Finance. - Stop CBvS financing of the budget deficit: Ministry of Finance and CBvS signed a Memorandum of Understanding terminating the extension of any further credit to the government (MEFP ¶24 and MEFP Attachment III). - Revise the Central Bank Act to strengthen operational independence, including prohibiting any monetary financing by end-December 2016. - CBvS to prepare a strategic plan of its financial position for review and ongoing monitoring by the Supervisory Board, aiming to strengthen the CBvS balance sheet and protect financial autonomy by end-December 2016 (structural benchmark, MEFP ¶25). ### Specific monetary tightening tools and measures (MEFP ¶26) - Conducting T-bill sales: - Monthly T-bill auctions launched by the Ministry of Finance on May 3, 2016, supported by Fund TA. - T-bill auction on May 3 resulted in 3-month yields of 23 percent and 12-month yields of 18 percent, up from 9 percent. - T-bill auction system nearly ready to be used for OMOs (structural benchmark, end-June 2016) by CBvS. - Government will convert part of a 30-year loan from CBvS (SRD 2.5 billion with a fixed rate of 3.5 percent) into tradable T-bills to strengthen CBvS’s ability to carry out OMOs. - Deposit auctions: - Nearly available to control liquidity in the short term until T-bills are fully available for OMOs. - A fixed rate tender with full allotment and maturity of 14 days would be appropriate. - Raising reserve requirements: - Required reserve ratios already raised to 35 percent on local currency deposits and 50 percent on foreign currency deposits. - Further tightening may be necessary but should consider liquidity-draining effect of foreign exchange auctions and implications for banking sector stability. - Streamlining liquidity management: - Reduce duration of short-term lending from 28 days to 14 days, and phase out extended liquidity support to commercial banks. - Ensure supervisors have a clear view of financial positions of domestic banks relying on CBvS liquidity support. - Introduce an overnight standing facility to replace existing longer-term liquidity facility by end-June 2016 (structural benchmark). ### Financial sector risks and policy actions - Dollarization and exposures: - Widespread dollarization: 53 percent of bank deposits and 34 percent of credit. - Fixed exchange rate may have created currency mismatches and exposures to exchange rate fluctuations, raising risk of balance sheet losses and repercussions for banking sector. - Institutional actions: - CBvS set up a Financial Stability Department to better monitor these risks (MEFP ¶27). - Crisis management framework and capacity to intervene and resolve banks at short notice are limited; CBvS intends to bring banking resolution and contingency planning framework up to international standards and has requested Fund technical assistance. - Strengthening supervision and balance sheets (MEFP ¶28): - Upgraded regulatory and macro-prudential framework with new regulations on capital adequacy, asset classification and provisioning, corporate governance, internal audit, foreign exchange risk, liquidity risk, interest rate risk, large exposures, and open foreign currency positions. - CBvS should closely monitor banks’ liquidity and evolution of non-performing loans, and increase provisioning levels as necessary. - CBvS should unwind foreign currency swaps with local banks worth about US$110 million as these swaps mature to address financial stability concerns and support monetary tightening. ### Structural reforms for diversification and the business environment - Need for diversification due to decline in commodity prices; improve business environment and boost productivity growth, particularly in non-mineral sector. - Ease of doing business: - As of 2015, Suriname ranks 155th out of 189 countries in the overall Ease of Doing Business indicator. - Areas for improvement: starting a business, enforcing contracts, protecting investors, registering property, and access to finance. - Government plans and initiatives (MEFP ¶31–32): - Promote diversification and attract FDI; agriculture accounts for 10 percent of total export earnings and 17 percent of the labor force. - Improve public services related to plant health, animal health, and fishery sustainable management. - Update institutional and legal framework for investor protections and guarantees; eliminate exchange restrictions regarding investment income transfers and controls related to FDI flows. - Work with World Bank to update investment policy framework and with IDB on structural reforms to facilitate diversification. - Submit new legislation to the National Assembly on competition policy, limited liability company formation, electronic gazettes, intellectual property, consumer protection, electronic transactions, and establishing a secured transactions framework. - Procedural reforms to streamline cross-border trade. - AML/CFT: - CFATF issued a public statement in November 2015 on significant strategic deficiencies in Suriname’s AML/CFT regime. - Authorities have taken corrective measures; program includes a structural benchmark on reforms to the legal framework to ensure compliance with international AML/CFT standard (MEFP Table 2). ### Program modalities, financing, and risks - Staff proposes a 24-month stand-by arrangement (SBA) to support adjustment to the commodity export price shock and provide a bridge to 2017–18 when new commodity capacity is expected online. - Adjusted foreign reserves have been depleted; identified financing together with sharp fiscal consolidation and floating exchange rate under the program would be sufficient to rebuild them. - Program includes quarterly reviews. - Access and financing: - Access of 265 percent of quota (SDR 342 million—equivalent to about US$478 million) under a 24 month SBA, phased in eight disbursements. - Intention to make about 30 percent of the total available in the first six months. - Program aims to help adjusted foreign reserves rise to 4 months of imports in 2018 (end of proposed program). - Based on current commitments of development partners, the program is fully financed for 2016–17. - Safeguards: - A first-time safeguards assessment of CBvS is underway. - February safeguards mission found significant risks in governance, central bank legislation, financial reporting, and external audit. - CBvS committed to address findings and implement key recommendations during the program period (see MEFP Table 2). - Program conditionality: - Prior actions include: electricity tariffs raised to 60 percent of cost recovery level; Council of Ministers Decision that 2016 supplementary budget will be based on program macro assumptions and fiscal measures; Memorandum of Understanding terminating extension of further credit to the government; publication of 2014 audited financial statements and audit opinion; CBvS authorization for commercial banks to determine foreign exchange rates and setting daily official (indicative) exchange rate equal to weighted average of commercial market rates. - Fiscal quantitative performance criteria include: a floor on the primary (cash) balance of the central government; a zero ceiling on gross credit to the government by the central bank; and a zero ceiling on non-accumulation of external arrears of the central government. - Indicative targets include: non-accumulation of domestic arrears; a floor on social programs to protect the most vulnerable; a floor on non-mineral revenues; and a zero ceiling on net increase in central government guaranteed debt (MEFP Table 1). - Monetary and reserves quantitative performance criteria include: a ceiling on the cumulative change in net domestic assets of the central bank and a floor on net international reserves (MEFP Table 1). - Monetary structural benchmarks: submission to the National Assembly of a revision to the Central Bank Act strengthening autonomy, governance, accountability, transparency, and limiting extension of credit to the government; establishing a liquidity monitoring and forecasting system based on CBvS and Ministry of Finance liquidity data (MEFP Table 2). - Arrears clearance: - Authorities contacted Chinese authorities to inform intention to resolve a US$17 million external arrear to the Government of China dating to loans made in 1984–1994. - Government plans to resolve remaining domestic arrears of SRD 255 million in 2016 (MEFP ¶10). *Source: _cr16141 - 21. Staff supports the authorities’ decision to move to a market-determined exchange rate* ### 38. Program risks are substantial: ### _cr16141 - 38. Program risks are substantial: ### Program risks - Implications of a floating exchange rate for the financial sector: - The implications of a flexible exchange rate for corporate and bank solvency and financial stability, and potential related fiscal risks, are obscured by data limitations and will require continued vigilance. - Commitment to key fiscal policy measures: - Risk that key reforms to restore fiscal sustainability are not completed during the program due to political pressure. - The expressed commitment of the authorities to the program’s objectives and policy reforms provides comfort, and continued support from the President, the Council of Ministers, and Parliament is crucial. - Data reporting: - The quality of data reporting, including on fiscal data, should be improved. - Staff has insisted that the authorities strengthen the monitoring and reporting of key economic data, and is assisting them in identifying areas in need of technical assistace. - Macroeconomic risks: - Program implementation could be affected by a number of unexpected macroeconomic developments, including: - a disorderly and greater than expected overshooting of the exchange rate, - deposit outflows and bank runs, - delays in the completion of the new gold mine and the arrival of the associated government revenues, - other external risks shown in the Risk Assessment Matrix (Annex II). ### Risks to Suriname’s repayment capacity - Overall risk assessment: - The risks to Suriname’s repayment capacity are high and contingent on sustained successful program implementation. - Fund exposure and macro timing: - Suriname has no outstanding debt to the Fund. - With proposed access of 265 percent of quota, Fund credit outstanding would reach a maximum of 9 percent of GDP and 20 percent of exports of goods and services in 2018. - Payments to the Fund are sizeable in three consecutive years 2020–22—reaching almost 15 percent of adjusted foreign reserves in 2021—while the adjustment is subject to major risks (including lower-than-projected gold and oil prices). - Debt vulnerabilities: - Government debt-to-GDP ratio is projected to decline after peaking in 2016, but is vulnerable to further currency depreciation and contingent liability shocks. - The current account, while balancing in the medium term, is expected to be in a modest deficit over the repayment period. - Policy instrument: - A market-based floating exchange rate is a critical element in allowing the authorities to rebuild foreign reserves to adequate levels and to repay the Fund. ### Staff appraisal and key policy recommendations - Macroeconomic context: - Suriname is facing challenging conditions caused largely by the sharp decline in the international prices of its commodity exports (gold and oil), with substantial external and fiscal deficits and international reserves declined to perilously low levels. - Fiscal consolidation: - The intended fiscal consolidation is central to restoring fiscal and external stability, based on both revenue and expenditure measures underpinned by an appropriate fiscal framework. - The spending restraint that started in late 2015, the start of the phased elimination of electricity tariff subsidies in October 2015, and the fiscal consolidation planned for 2016, will place the public finances on a sustainable path. - The Council of Ministers issuing a Decision stating that the 2016 supplementary budget will be based on the program’s macroeconomic assumptions and measures shows broad political ownership of the program. - Prudent wage bill policies are needed to preserve the stabilization objectives of the program. - It will be crucial to complete the phased elimination of electricity subsidies announced by the authorities last year—a central piece of the fiscal consolidation strategy. - Social protection: - Measures to strengthen the social safety net are needed to help soften any negative impact on the poor, as envisaged in the program. - Authorities should strengthen targeted social support programs to protect the most vulnerable. - Prospective increases in electricity prices should be structured so that the biggest consumers bear more of the adjustment effort than the small consumers. - Exchange rate and monetary policy: - Essential for the CBvS to continue allowing the currency to move flexibly, in line with market conditions. - Foreign exchange auctions introduced in March, and the subsequent authorization of commercial banks to determine exchange rates, have moved Suriname to a flexible and market-determined exchange rate. - Authorities should ensure that the official exchange rate remains market-determined, which should result in increased volume of foreign exchange handled by commercial banks and a narrowing of the gap between commercial and parallel market rates. - To stabilize inflation expectations, the authorities need to tighten liquidity conditions in the near term. - T-bill auctions that started in May should support this goal. - The CBvS has started restraining domestic liquidity by tightening the short-term lending facility; conducting deposit auctions in the near term is needed. - CBvS should stand ready to tighten monetary conditions further based on open market operations as soon as these are available. - Once confidence is restored, there should be scope for reducing interest rates; but the CBvS must be prepared to tighten monetary conditions should reserves decline or the currency depreciate faster. - CBvS needs to be prepared to act decisively should further problems be revealed in the banking system as a result of the structural shift in exchange rate and monetary conditions. - Structural reforms: - Decisive steps needed to improve competitiveness and the business environment. - Program includes substantial structural reforms to promote medium-term growth, diversify the economy, and attract foreign direct investment. - Technical assistance and possible financial support discussed with the IMF, the CDB, the IDB, and the World Bank. - Importance of enhancing productivity and competitiveness in the agricultural sector. - Legal reforms included to accelerate starting a company, enforcing contracts, promoting competition, protecting investors, registering property, and expanding access to finance. ### Assessment of program risks versus no-program scenario - Risks of the program: - Effects of the exchange rate adjustment on corporate and bank balance sheets. - Ownership and implementation of key fiscal measures. - Capacity and associated data reporting quality. - Further external shocks. - Risks of not having a Fund-supported program: - Spending pressures could build in response to exchange rate depreciation and risk triggering a wage-price spiral. - Government could be forced to resort to monetary financing of the deficit. - Without additional foreign currency cushion, the currency could overshoot, threatening banking sector stability. - Social consequences of adjustment without a program could be highly destabilizing. - Political economy: - Program’s success ultimately depends on the government’s willingness to implement politically challenging measures. - Authorities are strongly committed to the program’s goals and the government has a majority in parliament. - Recommendation: - On balance, the Fund-supported program, with its inherent risks, provides a guide for needed policies and charts a course towards stability and economic recovery. - Staff therefore recommends the approval of the requested Stand-By Arrangement. ### External Sector Assessment — key quantitative findings - Net international investment position (IIP): - IIP declined from 7 percent of GDP in 2011 to -48 percent of GDP in 2015. - Main drivers: rapid drop of official foreign exchange reserves (by 15 percentage points of GDP) and significant increase of government external borrowing (by 7 percentage points of GDP), reflecting fall in gold and oil prices and closure of alumina production in late 2015. - Current account and REER gaps (2015): - Current account (CA) actual in 2015: -15.6 (percent of GDP). - CA norm (EBA-lite): -0.8 (percent of GDP). - CA gap: -14.8 (percent of GDP). - Of which: Policy Gap: -9.9 (percent of GDP). - Real Exchange Rate (REER) gap: 69.6 (percent). - Scenarios for stabilizing or recovering IIP: - Scenario 1 (Stabilizing net IIP at -47.8 percent of GDP): - CA norm: -4.8 (percent of GDP) - Underlying CA: -1.8 (percent of GDP) - CA gap: 3.0 (percent of GDP) - REER gap: -14.1 (percent) - Scenario 2 (Stabilizing net IIP at 0 percent of GDP): - CA norm: -1.7 (percent of GDP) - Underlying CA: -1.8 (percent of GDP) - CA gap: -0.2 (percent of GDP) - REER gap: 0.8 (percent) - Scenario 3 (Reaching net IIP at 0 percent of GDP in 2025): - CA norm: 1.6 (percent of GDP) - Underlying CA: -1.8 (percent of GDP) - CA gap: -3.4 (percent of GDP) - REER gap: 15.9 (percent) - Stabilization targets discussed: - A current account balance of -4.8 percent of GDP would stabilize IIP at the 2015 level. - A current account balance of -1.7 percent of GDP would gradually bring the IIP back to its long-term average level. - For the IIP to reach a zero target by 2025, the current account would need to be in a surplus of 1.6 percent of GDP. - Policy prescriptions from assessment: - Fiscal consolidation should aim to bring primary deficits to near zero in the medium term. - The nominal exchange rate needs to reflect market conditions continuously. - Structural reforms to boost productivity and competitiveness; reduce commodity dependence; and strengthen stability of external receipts. ### Bank stress tests and vulnerabilities (selected figures) - Pre-shock capital adequacy ratio (CAR) by bank group: - All Banks: 10.7 - Large Banks: 10.9 - Mid-Size Banks: 12.1 - Small Banks: 4.7 - State Banks: 6.0 - Outlier Banks: 26.5 - (Aggregate) 10.3 - Exchange rate risk — Shock to net open position: - Shock 1: Devaluation of SRD by 40 percent results in CARs: - All Banks: 10.0 - Large Banks: 11.1 - Mid-Size Banks: 7.0 - Small Banks: 0.4 - State Banks: 3.2 - Outlier Banks: 34.8 - (Aggregate) 20.6 - Shock 2: Devaluation of SRD by 80 percent results in CARs: - All Banks: 9.2 - Large Banks: 11.5 - Mid-Size Banks: 1.2 - Small Banks: -3.9 - State Banks: 0.3 - Outlier Banks: 78.2 - (Aggregate) 31.2 - Credit risk — Increase in NPLs: - Baseline NPL increases for shocks: - Shock 3: NPLs increase by 50 percent results in CARs: - All Banks: 9.4 - Large Banks: 9.6 - Mid-Size Banks: 11.1 - Small Banks: 2.3 - State Banks: 3.9 - Outlier Banks: 46.9 - (Aggregate) 10.7 - Shock 4: NPLs increase by 100 percent results in CARs: - All Banks: 8.1 - Large Banks: 8.4 - Mid-Size Banks: 10.1 - Small Banks: -0.3 - State Banks: 1.7 - Outlier Banks: 46.9 - (Aggregate) 21.3 - Indicators of weakness: - Number of Banks with CAR < 10 percent and Percent of Assets of Banks with CAR < 10 percent were used in stress testing (figures tabulated in source). *Source: IMF staff report excerpt, “Program risks are substantial” (content unit: _cr16141 - 38. Program risks are substantial:).* ### Box 2. Banking Sector Stress Tests ### Box 2. Banking Sector Stress Tests ### Resilience to currency depreciation - Stress tests conducted by Fund staff suggest that the banking sector is broadly resilient to currency depreciation, but a number of individual banks are vulnerable. - Tests need to be interpreted cautiously, given data limitations. - Based on available data for end-December 2015, the currency depreciation observed from end-December to end-April (approximately 40 percent) could cause 3 banks to go below the forthcoming (June 2017) minimum capital adequacy ratio (CAR) of 10 percent, assuming no corrective actions by the banks. ### Impact on capital adequacy and recapitalization needs - If 3 banks fall below the 10 percent CAR threshold due to the approximately 40 percent depreciation shock: - Total undercapitalized banks would be 5 (the 2 banks already undercapitalized as of December, plus 3 due to the shock). - Total recapitalization need would rise to 0.6 percent of GDP. - A more severe 80 percent depreciation shock could cause 5 banks to go below the minimum capital requirement, implying a total of 7 undercapitalized banks. ### Asset quality (NPL) shocks - A large depreciation would also hurt bank balance sheets by worsening asset quality. - Illustrative NPL shocks: - A 50 percent increase in NPLs could cause 2 banks to go below the minimum capital requirement. - A 100 percent increase in NPLs could cause 2 banks to go below the minimum capital requirement, with one of the banks becoming insolvent in the latter scenario. - The recapitalization costs of these two NPL shocks, on top of preexisting needs, amount to: - 0.4 percent of GDP (50 percent NPL increase). - 0.9 percent of GDP (100 percent NPL increase). ### Liquidity risks and deposit outflows - Weekly data on bank deposits through end-April show little sign of deposit outflows thus far. - Staff analysis, based on available end-December data, suggests that the banking system is largely resilient to liquidity stress. - Assumed deposit outflow scenario: - Sustained five-day outflow of SRD deposits, and, in a separate scenario, of foreign currency deposits. - Deposit outflows are assumed to be 5 percent per day over the first three days, and 10 percent per day over the next two days. - Results: - Most banks remain liquid in the scenario with local currency deposit outflows. - One large bank and two small-sized banks exhaust their foreign currency liquidity on the fifth day. - The three banks would all be able to cover this foreign currency liquidity shortfall if their existing foreign currency swaps with the CBvS (amounting to US$ 60 million) were unwound. *Source: Box 2. Banking Sector Stress Tests (IMF staff).* ### Annex I. Debt Sustainability Analysis ### Annex I. Debt Sustainability Analysis ### A. Public Sector Debt — Recent developments - Total gross debt reached 43.5 percent of GDP in 2015, doubling since 2012. - The primary fiscal deficit increased from an average of 0.3 percent of GDP in 2005-2013 to an average of 7.2 percent in 2014-15. - Growth declined from an average of 4.5 percent in 2005-2013 to an average of 1 percent in 2014-15. - A 21 percent currency devaluation in 2015, together with weak growth and large fiscal deficits, raised the debt-to-GDP ratio by over 10 percentage points in 2015. - Central government guaranteed debt was about 0.1 percent of GDP at end-2015, including borrowing by an electricity parastatal company. - Gross financing needs: - Averaged 3.5 percent of GDP in 2005–2013. - About 9 percent of GDP in 2014. - About 15 percent of GDP in 2015. - In 2015, principal payments of about 5 percent of GDP were made due to non-rollover of T-bills issued in 2014-2015. - In late 2015 the central bank issued a 30-year long-term loan of SRD 2.5 billion (15 percent of GDP) to central government at an interest rate of 3.5 percent to: consolidate short-term CBvS borrowing; pay off domestic arrears (around SRD 1.2 billion, or 7 percent of GDP); and recapitalize state-owned banks. - The issuance of the long-term loan reduced reliance on short-term debt by 14 percent of GDP and lowered gross financing needs over the projection period. ### A. Public Sector Debt — Baseline scenario - Macroeconomic assumptions: - Real GDP growth: 0.1 percent in 2015; -2 percent in 2016; recovery toward 3 percent thereafter. - CPI inflation: 37 percent in 2016 (year on year, average); decline to single digits during the program; about 4 percent over the medium term. - Primary balance: deficit of 7.4 percent of GDP in 2015; projected to reach a small surplus by end-2018 via multi-year fiscal consolidation (wage restraint, electricity tariff reforms, introduction of a VAT, and other measures) and a rise in mineral revenues from late 2016. - Current account deficit: 15.6 percent of GDP in 2015 narrowing to 1.8 percent by 2021. - Debt projections: - Public debt-to-GDP ratio peaks at 46 percent in 2016, then declines to 36.5 percent by 2021. - The baseline includes an external commercial loan totaling US$86 million secured in April 2016 and government purchase of an equity stake in the gold mine partially financed by this loan. - External debt-to-GDP ratio rises by 6 percentage points with the depreciation associated with transition to a floating exchange rate. - Low effective interest rates—mainly due to concessional IFI loans—and recovery in activity support the downward trajectory of debt. - A greater reliance on concessional financing, catalyzed by the IMF-supported program, is expected to lengthen maturities and reduce gross financing needs and rollover risks. ### A. Public Sector Debt — Risks to the baseline - Fiscal risks: - Programmed fiscal adjustment is sizable: three-year rise in cyclically adjusted primary balance over 2016-2018 is around 9 percent of GDP. - Part of adjustment (2.4 percent of GDP) reflects rise in mineral revenue from the opening of the gold mine in 2017 and higher gold and oil prices. - Budgetary impact of fiscal policy measures over 2016-18 estimated at about 6.5 percent of GDP. - Risk of fiscal slippages, particularly in outer years, from consolidation fatigue or implementation delays. - Macroeconomic risks: - Weaker-than-projected growth from fiscal consolidation. - Lower-than-projected commodity prices reducing revenues and growth. - Higher-than-projected real interest rates if depreciation and inflation transmit into nominal domestic rates. - Distributional risk representation: - Fan charts show baseline debt dynamics with symmetric and asymmetric risk distributions; in the asymmetric scenario (only negative primary balance shocks), the debt ratio is broadly stable rather than declining. - External reliance risk: - High share of public debt held by non-residents is above the upper-risk assessment benchmark of 45 percent of total debt. ### A. Public Sector Debt — Alternative scenarios and stress tests - General findings: - Debt path and gross financing needs remain broadly manageable under various scenarios; debt stays below the 70 percent of GDP benchmark under adverse macro shocks, except for contingent liability shocks. - Conversion of short-term CBvS borrowing into the long-term loan substantially reduced short-term financing needs and rollover risks. - Historical and specific scenarios: - Constant primary balance scenario: primary balance set to -4.4 percent of GDP in the medium term → debt-to-GDP rises to 58 percent by 2021; gross financing increases to 13 percent of GDP. - 20 percent reduction in mineral revenue scenario: primary balance about 1 percent of GDP lower than baseline → debt-to-GDP about 41 percent by 2021 (vs. 36.5 percent baseline); gross financing needs about 7 percent of GDP (vs. 5 percent baseline). - Historical averages scenario: despite relatively high real GDP growth, larger primary deficit increases debt-to-GDP and gross financing needs. - Stress-test sensitivities: - Lower inflation or higher nominal interest rates than baseline could raise debt-to-GDP to as high as 41 percent (about 5 percentage points more than baseline) and gross financing needs to 8 percent of GDP by 2021. - Real exchange rate depreciation and primary fiscal balance shocks adversely affect short-term debt path and gross financing needs. - Contingent liability shock: - A contingent liability shock could raise public debt by 5 percentage points of GDP in 2017; debt would then slowly decline to around 45.5 percent of GDP in the medium term. - Stress-test assumption: recapitalization of 10 percent of total bank assets → additional 5 percent of GDP in non-interest expenditure compared to baseline. - Banking sector is moderately vulnerable to credit and exchange rate risks; data limitations warrant caution. - Additional risks: weak financial position of the CBvS could imply further recapitalization costs and larger budgetary impact (MEFP ¶25). ### B. External Sector Debt - External debt projections: - External debt expected to reach 72.5 percent of GDP in 2016, up from 45.3 percent of GDP in 2015, and to decline thereafter. - Composition of external debt in 2015: - Central government debt: 36 percent share. - Central bank debt: 11 percent share. - Commercial bank debt: 4 percent share. - Debt of other sectors (oil, mining, other companies): 34 percent share. - Intercompany lending: 15 percent share. - Drivers of the 2016 increase: - External borrowing: Including IMF financing, Suriname expected to receive about US$950 million in loans over 2016–2018. - In 2016 alone, expectation of US$336 million in loans, including the US$86 million international capital market loan in April, raising external debt-to-GDP by about 8 percentage points compared to end-2015. - Exchange rate depreciation: 21 percent devaluation in November 2015 followed by further depreciation of about 60 percent since the move to a floating exchange rate; exchange rate impact alone increases external debt-to-GDP by about 10 percent of GDP in 2016. - Medium-term prospects: - External debt-to-GDP expected to decline to around 49 percent of GDP, supported by improved current account balance and renewed FDI inflows. - Current account balance excluding interest payments projected to improve from a deficit of 14.7 percent of GDP in 2015 to a surplus of around 3 percent of GDP in the medium term. - FDI inflows forecast at around 2.7 percent of GDP in the medium term, on average. - Sensitivity to exchange rate shocks: - A further 30 percent real depreciation would cause external debt to exceed 100 percent of GDP in the short-run and remain above 75 percent of GDP over the projection period. - Combined shocks (permanent one-quarter standard deviation to real interest rate, growth rate, and current account balance) would also have significant impact on external debt. ### C. Authorities’ Views *Annex I. Debt Sustainability Analysis* ### 18. The authorities broadly concurred with staff’s views. They agreed with the baseline ### 18. The authorities broadly concurred with staff’s views. They agreed with the baseline ### Authorities’ position and macroeconomic baseline - The authorities broadly concurred with staff’s views. - They agreed with the baseline scenario’s macroeconomic assumptions (including, for example, for real GDP growth and inflation) which underpin the DSA. - The authorities are aware of the risks associated with the increase in external debt in 2016–17. - The authorities agreed that a sizable fiscal adjustment is required to restore fiscal and external sustainability, as well as to reverse the upward trend in public debt. ### Balance of payments exposure - The balance of payments depends crucially on the outlook for gold prices, as gold constitutes close to two-thirds of exports. ### Key debt and macro projections (selected figures from baseline and scenarios) - Nominal gross public debt (in percent of GDP), projections and historical track: 21.5, 29.4, 43.5, 46.2, 44.1, 40.5, 38.1, 37.0, 36.6 (years not individually labeled in excerpt). - Public gross financing needs (in percent of GDP): 3.5, 9.2, 14.8, 12.5, 11.0, 4.9, 5.0, 4.9, 5.2 (years not individually labeled in excerpt). - Real GDP growth (in percent), baseline projections: -2.0, 2.5, 2.3, 2.0, 2.5, 3.0. - Inflation (GDP deflator, in percent), baseline projections: 32.3, 10.4, 10.1, 6.6, 3.6, 4.0. - Primary Balance (in percent of GDP), baseline projections: -4.4, -1.7, 0.3, 0.3, 0.1, 0.1. - Effective interest rate (in percent), baseline projections: 5.8, 4.2, 4.2, 4.1, 4.3, 4.3. - Change in gross public sector debt (cumulative): 0.0, -2.3, 14.1, 2.7, -2.1, -3.6, -2.3, -1.1, -0.4, -6.8. - Identified debt-creating flows (cumulative): -1.1, 7.6, 12.3, -2.2, -2.0, -3.6, -2.0, -0.8, -1.1, -11.8. - Primary (noninterest) revenue and grants (percent of GDP): 23.8, 24.2, 21.0, 20.6, 23.6, 25.8, 25.8, 25.9, 26.0, 147.6 (note: series presented in excerpt). - Primary (noninterest) expenditure (percent of GDP): 24.1, 31.3, 28.3, 25.0, 25.3, 25.5, 25.5, 25.8, 25.9, 152.8 (note: series presented in excerpt). - Automatic debt dynamics contribution (cumulative): -1.4, 0.5, 5.0, -8.0, -3.6, -3.3, -1.7, -0.7, -1.0, -18.3. - Real interest rate contribution (cumulative): -0.7, 1.0, 0.8, -8.6, -2.6, -2.4, -1.0, 0.2, 0.1, -14.4. - Real GDP growth contribution (cumulative): -0.8, -0.6, 0.0, 0.7, -1.0, -0.9, -0.7, -0.9, -1.0, -3.9. - Residual, including asset changes (cumulative): 1.1, -9.9, 1.8, 5.0, -0.1, 0.0, -0.3, -0.3, 0.7, 5.0. ### Stress tests and scenario outcomes (high-level results) - Stress tests conducted include: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Macro-Fiscal Shock; Contingent Liability Shock. - Example baseline and stress-path figures (selected): - Under Primary Balance Shock: Primary balance evolves -4.4, -3.8, -1.8, 0.3, 0.1, 0.1; Effective interest rate: 5.8, 4.0, 4.4, 4.5, 4.5, 4.5. - Under Real GDP Growth Shock: Real GDP growth: -2.0, 0.7, 0.5, 2.0, 2.5, 3.0. - Under Real Interest Rate Shock: Effective interest rate: 5.8, 4.0, 6.4, 7.4, 8.6, 9.6. - Under Combined Shock: Real GDP growth: -2.0, 0.7, 0.5, 2.0, 2.5, 3.0; Effective interest rate: 5.8, 4.8, 6.5, 7.8, 8.9, 9.9. - Under Contingent Liability Shock: Primary balance: -4.4, -6.8, 0.5, 0.3, 0.4, 0.8. - Graphical stress outputs (described): Gross Nominal Public Debt (in percent of GDP and in percent of Revenue) and Public Gross Financing Needs (in percent of GDP) rise under stress scenarios relative to baseline (figures provided in charts). ### External debt dynamics and vulnerabilities - Baseline external debt (in percent of GDP) path and change in external debt (selected series): External debt 29.7, 29.8, 34.9, 38.6, 45.3, 72.4, 70.5, 65.4, 58.4, 53.6, 48.7 (series presented across years). - Change in external debt (selected): 17.4, 0.0, 5.2, 3.7, 6.7, 27.1, -1.9, -5.1, -7.0, -4.8, -4.9. - Identified external debt-creating flows (percent of GDP): -7.6, -9.9, -0.7, 4.3, 10.5, 3.7, -5.9, -4.3, -3.1, -2.8, -2.2. - Current account deficit, excluding interest payments (percent of GDP): -6.0, -3.6, 3.1, 7.2, 14.7, 6.7, -4.5, -3.7, -2.7, -2.1, -1.1. - Deficit in balance of goods and services (percent of GDP): -37.0, -36.0, -27.0, -33.7, -41.7, -50.0, -52.2, -53.6, -57.1, -62.5, -67.7. - Exports (index or percent series in excerpt): 87.7, 88.1, 80.1, 87.0, 93.7, 100.5, 100.7, 98.9, 100.9, 105.2, 109.6. - Imports (series): 50.7, 52.1, 53.1, 53.2, 52.0, 50.6, 48.5, 45.2, 43.7, 42.7, 41.9. - Net non-debt creating capital inflows (negative values denote inflows): -1.8, -3.4, -3.6, -3.1, -5.1, -6.2, -3.7, -2.9, -2.8, -2.6, -2.5. - Automatic debt dynamics (external) contributions (selected): 0.2, -3.0, -0.1, 0.2, 1.0, 3.1, 2.3, 2.3, 2.4, 1.9, 1.5. - External debt-to-exports ratio (in percent): 33.9, 33.8, 43.6, 44.4, 48.4, 72.0, 70.0, 66.2, 57.9, 51.0, 44.4. - Gross external financing need (in billions of US dollars): -0.2, 0.0, 0.3, 0.6, 1.1, 0.8, 0.4, 0.3, 0.4, 0.4, 0.4. ### Realism of baseline and forecast track record (selected diagnostics) - Suriname median forecast errors (2007-2015): - Real GDP Growth forecast error median: -0.75 (Has a percentile rank of 34%). - Primary Balance forecast error median: -2.57 (Has a percentile rank of 13%). - Inflation (Deflator) forecast error median: -1.76 (Has a percentile rank of 4%). - 3-Year Adjustment in Cyclically-Adjusted Primary Balance (CAPB) for Suriname: 2% (percentile rank information indicated). - 3-Year Average Level of CAPB for Suriname: 39% (percentile rank information indicated). ### Risk Assessment Matrix — main threats, likelihood, impacts, and policy responses (selected entries) - Tighter or more volatile global finance conditions - Likelihood of Realization of the Threat: High - Expected Impact if Threat is Realized: Small — Relatively low external debt and reliance on FDI make Suriname’s economy less vulnerable to tighter or more volatile global finance conditions, or to a surge in the US dollar. - Policy Response: Careful external debt management, more borrowing from IFIs, and measures to attract FDI. - Significant slowdown in China and other emerging market economies - Likelihood of Realization of the Threat: Medium - Expected Impact if Threat is Realized: High — Downward pressures on commodity export prices, including oil and gold prices, causing external and fiscal deterioration and slower growth. - Policy Response: Further depreciation and policy tightening, backed by structural reforms to ensure that competitiveness gains are not eroded over the medium term. - Structurally weak growth in key advanced and emerging economies - Likelihood of Realization of the Threat: High/Medium - Expected Impact if Threat is Realized: High — Downward pressures on commodity export prices, including oil and gold prices, causing external and fiscal deterioration and slower growth. - Policy Response: Further depreciation and policy tightening, backed by structural reforms to ensure that competitiveness gains are not eroded over the medium term. - Reduced financial services by global and regional banks (“de-risking”) - Likelihood of Realization of the Threat: Medium - Expected Impact if Threat is Realized: High — Impact on banks and trade could be substantial. - Policy Response: Review the AML/CFT framework to address remaining deficiencies and strengthen enforcement. ### Policy implications and recommendations (synthesized from authorities’ agreement and RAM responses) - Implement a sizable fiscal adjustment to restore fiscal and external sustainability and reverse the upward trend in public debt. - Manage external debt carefully and consider more borrowing from IFIs and measures to attract FDI to mitigate external financing risks. - Prepare for commodity price shocks (notably gold) through policies that preserve competitiveness, including allowing depreciation and tightening policy when needed, and pursuing structural reforms to support medium-term growth. - Strengthen AML/CFT framework and enforcement to reduce risks associated with loss of correspondent banking relationships. *Source: IMF staff estimates and accompanying DSA and Risk Assessment Matrix (as presented in the provided excerpt).* ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent ### Program request and objectives - Government requests a Stand-By Arrangement (SBA) with the IMF for a period of 24 months, in the amount of SDR 342 million (equivalent to 265 percent of quota or about US$478 million). - Objective: stabilize Suriname’s economy, restore fiscal and external stability, rebuild foreign reserves, and set the stage for recovery. - Program pillars: - Returning the public finances to a sustainable path. - Rebuilding international reserves. - Strengthening the monetary and exchange rate policy framework to promote domestic price stability and resilience to external shocks. - Enhance the business environment and medium-term growth through structural reforms. - Commitment to publish the letter on the Ministry of Finance and Central Bank websites and authorize the Fund to publish the letter, its attachments, and the related staff report. ### Recent economic developments (context) - Causes of distress: sharp fall in international prices of alumina, gold, and oil; closure of alumina production in late 2015. - Real GDP: expected to contract by 2 percent in 2016 after little growth in 2015. - Medium-term growth: real GDP growth expected to recover to 2.5 percent in 2017, and further to 3.0 percent over the medium term. - Mineral sector prospects: - New oil refinery likely to double oil refinery production in 2016. - Start of operations at a new gold mine expected to increase gold production by 33 percent by end-2017. - International reserves: - Official international reserves reached US$302 million as of end-March, compared with more than US$1 billion at the end of 2012. - Adjusted international reserves declined to about US$1.7 million (exclude foreign currency swaps and reserve requirement on banks’ foreign currency deposits). - Exchange rate policy: - Devalued exchange rate by 21 percent on November 19, 2015. - In early March, decided to allow the official exchange rate to be fully determined by demand and supply. - CBvS introduced foreign currency auctions on March 22. - Inflation: - CPI (12-month) inflation rose to 37 percent in March, up from an average of 4 percent during 2013-15. - Expect inflation to peak at 24 percent (end of period) in 2016, then return to single digits over the following two years. ### Social protection and mitigation - Program includes measures of social support to protect the most vulnerable during adjustment. - Commitment to increase spending on targeted social support programs administered by the Ministry of Social Affairs. - Spending on social programs expected to increase by about 0.2 percent of GDP by 2017. - Requested technical assistance from the Caribbean Development Bank (CDB) to strengthen social sector protection framework. ### Fiscal policy strategy and targets - Fiscal consolidation underway since August 2015. - Budget deficit dropped from an annualized 12.5 percent of GDP during January-July to 3.5 percent of GDP during August-December (2015). - Arrears clearance: - Payments to resolve domestic arrears amounted to SRD 666 million (3.8 percent of GDP) in 2015. - Government plans to resolve remaining SRD 255 million in 2016. - Contacted Chinese authorities to resolve a US$17 million external arrear to the government of China (loans dating 1984–1994). - Fiscal consolidation targets 2016–18: - Reduce fiscal deficit from 8.8 percent of GDP in 2015 to 1.4 percent of GDP by 2018. - Government debt expected to peak at about 46 percent of GDP in 2016 and then on a declining trajectory. - Targeted primary deficit-to-GDP ratios: 3.0 percent in 2016, 2.7 percent in 2017, and 2.0 percent in 2018, resulting in a primary surplus of 0.3 percent of GDP by 2018. ### Key fiscal measures (2016–2018) - Elimination of electricity subsidies: - Phased elimination initiated October 2015. - Expected fiscal savings: 1.1 percent of GDP in 2016 and an additional 1.3 percent of GDP in 2017. - Tariff changes: - Raised electricity tariffs to cover 60 percent of the cost of electricity production on May 1, 2016 (prior action). - Raise to 90 percent by September 1, 2016 (structural benchmark). - Raise to 100 percent by January 1, 2017 (structural benchmark) to eliminate the subsidy. - Technical Electricity Commission to develop a new formula with Fund input (structural benchmark, January 31, 2017). - Tariff will be progressive to protect lower-quantity consumers. - Higher fuel taxes: - Solidarity tax on gasoline and diesel raised in September 2015; tax on kerosene to be introduced in the supplementary budget. - Expected additional fiscal revenue of 0.9 percent of GDP in 2016. - Higher income taxes on insurance companies: - Redefine profits to include the “reserve” previously exempt; expected to raise 0.1 percent of GDP in 2016 and an additional 0.1 percent of GDP in 2017. - Higher sales taxes: - Increase sales tax rates by 2 percentage points and broaden the base in service and luxury categories. - Estimated revenue: 0.1 percent of GDP in 2016 and an additional 0.2 percent of GDP in 2017. - Income tax break (support 2016 purchasing power): - Increase income tax break from SRD 50 to SRD 125 per month for all taxpayers. - Direct impact: lower income tax revenue by 0.2 percent of GDP in 2016. - Other primary current expenditure restraint: - Maintain growth in non-social primary current expenditure below the rate of inflation in 2016, saving around 1 percent of GDP. - Supporting social and capital spending: - Increase capital spending to above 4 percent of GDP by 2018 (from 2.5 percent of GDP in 2015). - Set up procurement department and submit Procurement Law to the National Assembly (¶13) to enhance capital spending efficiency. - VAT introduction: - Introduce a Value Added Tax (VAT) on January 1, 2018 (structural benchmark), replacing the existing sales tax. - Policy objective: generate a net revenue increase of 2.5 percent of GDP. - Technical assistance from CARTAC and IDB; Steering Committee established. - Structural benchmarks and milestones: - Finalize implementation plan and assign staff to Project Coordination Unit (structural benchmark, end-June, 2016). - Prepare White Paper and draft VAT Law with Fund input (end-August 2016). - Prepare functional specifications for VAT IT systems (structural benchmark, end-December 2016). - Submit VAT Law to the National Assembly and finalize regulations by end-September 2017 (structural benchmark). - Vehicle tax: - Levied on each vehicle in the second half of 2016, varying by category. - Expected revenue: 0.1 percent of GDP in 2016 and an additional 0.1 percent of GDP in 2017. - Wage bill restraint: - 2016 budget limits public sector wage bill to 7.8 percent of GDP (compared with 8.7 percent of GDP in 2015). - Contingency measures: - Stand ready to take additional fiscal measures, such as streamlining overlapping transfers and increasing indirect taxation including vehicle tax. ### Fiscal governance and institutional reforms - Prior action: Council of Ministers Decision on April 28 highlighting macroeconomic assumptions and measures underpinning 2016 supplementary budget. - Supplementary budget to be submitted to the National Assembly by end-June 2016 (structural benchmark). - Reforms to strengthen fiscal framework (structural benchmarks, many by end-June 2017): - Sovereign Wealth Fund (SWF) law: draft to be submitted to National Assembly by end-June 2017. - Public Financial Management (PFM) law: present to National Assembly by end-June 2017. - Procurement department at Ministry of Finance and submission of Procurement Law to National Assembly by end-June 2017. - T-bill issuance through market-based auctions began on May 3. - Treasury department modernization with IDB assistance; establish Cash Management Unit (structural benchmark, end-September 2016). - Revenue administration improvements, including customs compliance, investment in equipment and personnel, and implement property tax by January 2018 to partly replace the wealth tax. - Identify and contain fiscal risks from state-owned enterprises (SOEs): identify all SOEs and publish their financial reports for 2014 and 2015 (structural benchmark, end-December 2016). - Continue installation of additional IFMIS modules. ### Capacity building - Strengthen Ministry of Finance capacity in medium-term budget planning and economic affairs with technical assistance from IMF and IDB and retention of long-term consultants. - Develop analytical capacity of macroeconomic unit (Financial Programming and Policies group) for multi-year budgets. ### International reserves and balance of payments outlook - CBvS objective: raise adjusted international reserves to about 4 months of imports by the end of the SBA, including by conducting foreign exchange purchases as needed. - External gap projections: - Project balance of payments gap of about 13 percent of GDP in 2016 and about 5 percent of GDP in 2017. - Expect substantial reduction in current account deficit from 15.6 percent of GDP in 2015 to near balance in 2017-18. - Anticipated CBvS foreign exchange sales May–December 2016 (large upcoming needs): - To government for external debt payments: about US$85 million. - To government for contributions to capital expenses on new gold mine: US$30 million. - To SOEs and other companies for imports of fuel and other essential products: about US$70 million. - To local banks to reverse maturing currency swaps: US$57 million. - To government units: about US$15 million. - Expected financing: - Proposed Fund disbursement under the SBA would be around US$478 million. - Budget support from other IFIs expected to total US$470 million during 2016-18. - Agreement in principle with IDB and World Bank that, conditional on satisfactory program implementation, each institution would provide US$100 million in budget support. *Letter of Intent, Paramaribo, Suriname, May 11, 2016.* ### 2016. We have agreed with the Caribbean Development Bank (CDB) staff that, conditional on ### _cr16141 - 2016. We have agreed with the Caribbean Development Bank (CDB) staff that, conditional on ### External financing and reserve projections - CDB would provide budget support of US$50 million in 2016, conditional on satisfactory program implementation. - Expectation of a similar amount of budget support from the IDB and CDB in 2017, conditional on successful implementation of the programs supported by the Fund and other IFIs. - Contracted an 18-month loan from international capital markets totaling US$86 million, which contributed to filling balance of payments gaps. - Adjusted international reserves projections: - about US$290 million in 2016 - about US$650 million in 2017 - about US$860 million in 2018 - Policy goal: raise adjusted international reserves—including through purchases of foreign exchange—to 4 months of imports by end-2018 and maintain it broadly at this level thereafter. ### Exchange rate policy and market transition - Government decision to move to a flexible exchange rate to facilitate adjustment to commodity export price shocks. - CBvS focus: support development of the foreign currency market so exchange rate reaches equilibrium through supply and demand, with greater commercial bank involvement. - Foreign currency auctions introduced on March 22, 2016: - First auction sold US$10 million; official exchange rate determined in the auction depreciated by 27 percent; spread between official and parallel market rates narrowed to about 5 percent. - Auction operational adjustments: - Increased frequency and decreased amounts sold per auction. - Updated auction regulations to allow banks to bid on their own behalf. - Since auctions held on April 12, CBvS sold US$0.5-1.0 million per auction, a number of times per week. - After each auction CBvS published amount sold, cut-off price, and weighted average rate of successful bids. - May 10 prior action: CBvS authorized commercial banks and foreign exchange bureaus to freely determine exchange rates; bid and ask exchange rates now determined directly with customers. - Official (indicative) exchange rate for CBvS transactions with government or official bodies set daily equal to the weighted average of commercial buy and sell spot rates (prior action). - Planned infrastructure and market-support steps: - Set up pricing infrastructure (electronic trading platform) to boost transparency and facilitate interbank trading and CBvS participation. - Monitor and strengthen compliance with the 60-day repatriation requirement on exporters. - Role of CBvS over coming weeks: limit to smoothing large fluctuations, later intervene to acquire foreign exchange at market rates to strengthen international reserves, working with market on timing, modality, and volumes; exchange rate to be determined by demand and supply in the interbank foreign exchange market (press release published on April 4, prior action). ### Monetary policy framework and operational reforms - CBvS objective: price stability per the Bank Act; introduce indirect instruments such as open market operations and monetary targets to anchor inflation expectations. - 2016 program targets: - Reserve money growth of about 3 percent in 2016, resulting in a significant decline in the reserve money-to-GDP ratio. - Operational target set as NDA (Net Domestic Assets). - Operational instruments and actions: - Open market operations (OMOs) including T-bill and deposit auctions. - Lending facilities: 14 days lending facility and overnight standing facility to fine tune liquidity. - Stop CBvS financing of the budget deficit: Ministry of Finance and CBvS signed a Memorandum of Understanding terminating extension of any further credit to the government (prior action). - Revise the Central Bank Act to prohibit monetary financing by end-December 2016 (structural benchmark). - Strengthen liquidity monitoring and forecasting (structural benchmark, June 30, 2016). - Coordinate closely with the Ministry of Finance to forecast liquidity. - Inflation projection and fiscal cost coverage: - Inflation expected to decline to single digits during the program, and to stabilize at 4 percent over the medium term. - Government to ensure cost of monetary policy operations is covered starting with the 2016 supplementary budget. - CBvS financial position and governance: - CBvS’s capital position substantially weakened. - Prepare a strategic plan of the CBvS's financial position for review and ongoing monitoring by the Supervisory Board, aiming to strengthen the CBvS balance sheet (structural benchmark, end-December 2016). - Accelerated development of monetary policy toolkit (with Fund technical assistance) and specific instruments: - Conducting T-bill sales: - T-bill auctions by the Ministry of Finance rolled out on May 3. - Government will convert part of a 30-year loan from the CBvS (SRD2.5 billion with a fixed rate of 3.5 percent) into tradable Treasury bills to provide CBvS means to carry out OMOs by end-June 2016. - T-bill sales to finance the budget, including planned payments of remaining domestic arrears in 2016. - Conducting deposit auctions to control liquidity in the short term until T-bills are fully available for OMOs (structural benchmark, end-June 2016). - Raised required reserve ratios on local and foreign currency deposits to 35 and 50 percent, respectively; ready to tighten further if necessary. - Streamline liquidity management, phase out extended liquidity support to commercial banks in current format. - Introduce a 14 days lending facility and an overnight standing facility to replace existing longer-term liquidity facility by end-June 2016 (structural benchmark). ### Financial sector measures and supervision - Dollarization metrics: - 53 percent of bank deposits dollarized - 34 percent of credit dollarized - Risks identified: currency mismatches and exposures to exchange rate fluctuations raising risk of balance sheet losses and banking sector repercussions. - Institutional steps: - Financial Stability Department set up within CBvS. - Plan to bring banking resolution and contingency planning framework up to international standards with Fund technical assistance. - Supervisory and regulatory strengthening: - New regulations introduced on capital adequacy, asset classification and provisioning, corporate governance, internal audit, foreign exchange risk, liquidity risk, interest rate risk, large exposures, and open foreign currency positions—aligned with the 2014 FSAP recommendations. - Strengthen toolkit in bank resolution and supervision; closely monitor banks’ liquidity and non-performing loans; increase provisioning levels as necessary. - Unwind foreign currency swaps with local banks worth about US$110 million as these swaps mature; fully unwinding swaps will help address financial stability concerns and aid monetary tightening. - Transparency and accountability: - Published the 2014 audited financial statements and related audit opinion (prior action). ### Structural reforms and private sector development - Diversification and FDI attraction priorities: - Agriculture: accounts for 10 percent of total export earnings and 17 percent of the labor force; second to mining. - Plans to increase productivity, competitiveness, and access to new international markets for agriculture; improve public services related to plant health, animal health, and fishery sustainable management. - Update institutional and legal framework for investor protections and guarantees; eliminate exchange restrictions regarding investment income transfers and controls related to FDI flows. - Work with World Bank to update investment policy framework and submit a new Investment Law to the National Assembly by end-2017 (structural benchmark). - Submit a Foreign Exchange Law to the National Assembly by end-June 2017 (structural benchmark). - Engagement with development partners: - IDB engaged in preparing structural reforms to transition to a new economic model with a diversified product basket. - IsDB broadening project support to the rice sector and co-financing with CDB operations in the health sector; CDB to provide support to technical vocational education and to small and medium-sized businesses. - Business environment reforms and planned legislation: - Steps to accelerate starting a company, strengthen enforcement of contracts, protect investors, facilitate property registration, trade across borders, and expand access to finance. - Planned legislation to submit to the National Assembly on competition policy, limited liability company formation, electronic gazettes, intellectual property, consumer protection, electronic transactions (structural benchmark, June 2017), and establishing a secured transactions framework. - Procedural reforms to streamline cross-border trade. ### AML/CFT and legal framework updates - CFATF November 2015 assessment: amended AML/CFT regulations by CBvS noted favorably for internal controls, regulation, and wire transfers. - CFATF recommendations addressed include: - Council of Ministers approving a State Decree giving effect to the International Sanctions Act provisions on freezing of terrorist assets (FATF R.6). - Submitting a Law ensuring enforcement of foreign final court sentences to the National Assembly (FATF R.36). - Amending the Financial Intelligence Unit (MOT) Act to enable CBvS to adequately share information with competent authorities (FATF R.9) and enable MOT to request further information from foreign FIUs (FATF R.40). - These amendments were enacted by the National Assembly and entered into force on March 3, 2016. - Expectation: once accepted by the CFATF Plenary meeting in May 2016, sufficient progress to apply for exiting the follow-up process in November 2016. The Ninth Follow-Up Report to be discussed at the CFATF Plenary in May 2016. ### Statistics and data quality commitments - Improvements made to quality and timeliness of monetary, financial, and balance of payments statistics. - Recognized need to improve timeliness and quality for GDP, CPI, and labor statistics. - Commitment to publish social indicators, including the most recent household survey. - Started converting fiscal statistics into the 2001 GFSM format with help of the new IT system. - Improving recording of domestic arrears accumulation and broadening institutional coverage of fiscal statistics to the nonfinancial public sector. - Assurance on program data reliability: - An internationally reputable external audit firm with experience in auditing central banks to provide assurances on Fund-supported program reporting through an objective review of compilation of monetary program data (NIR, NDA and gross credit to government) in compliance with International Standards on Auditing (ISA) and for compliance with the TMU (benchmark, no later than 60 days after each test date). ### Program monitoring, performance criteria, and targets - Program implementation monitoring through prior actions, reviews, quantitative and continuous performance criteria, indicative targets, and structural benchmarks; definitions in the TMU. - Quantitative performance criteria and indicative targets set for end-June, end-September and end-December 2016, and end-March 2017. - Review schedule: first review scheduled for September 2016; subsequent reviews quarterly. - Selected quantitative performance criteria and indicative targets table (as presented): - Fiscal targets - 1. Primary cash balance of central government (floor): 2/-603-940-1,265-100 - 2. Gross credit to the central government by the central bank (ceiling): 3/2,5110000 - 3. Non-accumulation of external arrears (continuous QPC): 0000 - Monetary targets - 4. Net international reserves of the central bank (floor): 4/0.0-9.63083133 - 5. Net domestic assets of the central bank (ceiling): 3/2,264-55-154-213-798 - Indicative targets - 6. Non-accumulation of domestic arrears (continuous IT): 0000 - 7. Social Spending (floor): 2/422633844245 - 8. Non-mineral revenues (floor): 2/1,7583,0274,194794 *International Monetary Fund staff report excerpt for Suriname (2016).* ### 9. Net increase in central government guaranteed debt (ceiling) 3/0000 ### 9. Net increase in central government guaranteed debt (ceiling) 3/0000 ### Memorandum items - Mineral revenues: 2/238345493234 - Reserve money: 3/ 2,633-96-66-5353 - Gross international reserves (millions of U.S. dollar): 302372461538617 - Adjusted international reserves (millions of U.S. dollar): 5/1.773175291341 - Program exchange rate: 5.0645.0645.0645.0645.064 - Notes: - 1/ Targets as defined in the Technical Memorandum of Understanding. - 2/ Cumulative flows from begining of the year. - 3/ Cumulative flows from end-March 2016. - 4/ Cumulative change from end-March 2016, in US$ millions. - 5/ Official reserve assets excluding foreign currency swaps and reserve requirements on banks' foreign currency deposits. ### Table 1 — Quantitative Performance Criteria and Indicative Targets under the SBA, 2016-2017 (summary items) - Stated presentation: (In millions of Suriname dollars, unless otherwise indicated) - Year referenced: 2016 ### Prior Actions (Summary of implementation and macro-criticality) - 1. The CBvS and Ministry of Finance sign a Memorandum of Understanding, with input from the Fund staff, which terminates the extension of any further credit to the government. - Status: Met - Macro-criticality: Critical for strengthening central bank independence and reducing the risk of fiscal dominance. - 2. The Council of Ministers issues Decision announcing that the 2016 supplementary budget will be based on the Fund-supported program’s macroeconomic assumptions and measures. - Status: Met - Macro-criticality: Demonstrates the government's ownership of the Fund-supported program's goals, and its commitment to implementation of its measures. - 3. Electricity tariffs rise to cover 60 percent of the production cost. - Status: Met - Macro-criticality: A central part of the authorities' fiscal consolidation strategy, with a significant fiscal impact. - 4. The CBvS publishes the 2014 audited financial statements and audit opinion. - Status: Met - Macro-criticality: Publication of audited financial statements is a cornerstone of transparency and accountability. - 5. The CBvS authorizes commercial banks to determine foreign exchange rates, and sets the daily official (indicative) exchange rate to equal the weighted average of commercial market rates. - Status: Met - Macro-criticality: Underpins the transition to a floating exchange rate, which facilitates the economy's adjustment to the fall in commodity export prices. ### Structural Benchmarks — Fiscal sector (benchmarks, timing, and rationale) - 1. Develop a detailed, comprehensive, time-bound implementation plan for the VAT with clear accountabilities; and establish and assign staff to the Project Coordination Unit. - Timing: June 30, 2016 - Rationale: Necessary to ensure on-time VAT introduction, which will provide a new source of non-mineral tax revenue. - 2. Submit a supplementary 2016 budget based on the Fund-supported program’s macroeconomic assumptions and measures to the National Assembly. - Timing: June 30, 2016 - Rationale: Strengthens the credibility of the Fund-supported program's deficit reduction strategy. - 3. Prepare a VAT Policy and Administration White Paper and a draft VAT Law, with input from the Fund staff, and submit them to stakeholders for review. - Timing: August 31, 2016 - Rationale: Essential for fostering understanding and support for the VAT among key stakeholders. - 4. Reorganize the Treasury Department to assign the responsibility for cash management activities to a trained and dedicated Cash Management Unit. - Timing: September 30, 2016 - Rationale: Essential for improving cash planning and avoiding arrears. - 5. Electricity tariffs rise to cover 90 percent of the production cost. - Timing: September 1, 2016 - Rationale: A central part of the authorities' fiscal consolidation strategy, with a significant fiscal impact. - 6. Prepare detailed functional specifications for the VAT IT systems (MEFP ¶11). - Timing: December 31, 2016 - Rationale: Critical to ensure the successful implementation and subsequent administration of the VAT. - 7. Identify all SOEs, and publish their financial reports, where available, for 2014 and 2015. - Timing: December 31, 2016 - Rationale: Critical for identifying and contain fiscal risks from SOEs. - 8. Electricity tariffs rise to cover 100 percent of the production cost, and the Technical Electricity Commission develops a new formula, with input from the Fund staff, to regularly adjust electricity - Timing: January 31, 2017 - Rationale: A central part of the authorities' fiscal consolidation strategy, with a significant fiscal impact. - 9. Submit to the National Assembly a new procurement law, with input from the Fund staff. - Timing: June 30, 2017 - Rationale: Central for improving PFM and the quality of public spending. - 10. Submit to the National Assembly a draft Sovereign Wealth Fund law, with input from the Fund staff. - Timing: June 30, 2017 - Rationale: Contributes to long-term fiscal sustainability and limits the volatility of government income from the mineral sector. - 11. Present to the National Assembly a comprehensive Public Financial Management law, with input from the Fund staff. - Timing: June 30, 2017 - Rationale: Critical for improving the budget process and for addressing other PFM shortcomings. - 12. Submit to the National Assembly the VAT law and finalize regulations for the introduction of the VAT, with input from the Fund staff. - Timing: September 30, 2017 - Rationale: Necessary to ensure on-time VAT introduction, which will provide a new source of non-mineral tax revenue. - 13. Implement the VAT. - Timing: January 1, 2018 - Rationale: Will provide a new source of non-mineral tax revenue. ### Structural Benchmarks — Monetary and financial sector (benchmarks, timing, and rationale) - 1. An internationally reputable external audit firm with experience in auditing central banks provides assurances on Fund-supported program reporting through a review of the compilation of monetary program data (NIR, NDA, and net credit to government) for compliance with the TMU. - Timing: No later than 60 days after each test date - Rationale: Critical for ensuring Fund-supported program data reliability, and for calibrating any needed policy adjustments. - 2. Review the AML/CFT legal framework to address deficiencies against the FATF standard. In particular: - (i) The Council of Ministers approves a State Decree giving effect to the International Sanctions Act provisions on freezing of terrorist assets, in line with FATF R.6; - (ii) a Law ensuring the enforcement of foreign final court sentences is submitted to the National Assembly, in line with FATF R.36; and - (iii) the MOT Act is amended to enable the CBvS to adequately share information with relevant competent authorities, in line with FATF R.9, and to enable the MOT to request further information in response to requests from foreign financial intelligence units, in line with FATF R.40. - Timing: May 31, 2016 - Rationale: Important to reduce the risk that AML/CFT issues destabilize the financial system, and, consequently, fiscal and macroeconomic performance. - 3. Establish a liquidity monitoring and forecasting system based on CBvS and Ministry of Finance liquidity data. - Timing: June 30, 2016 - Rationale: Strengthening liquidity management is a key step to facilitate the operation of monetary policy. - 4. Establish CBvS overnight standing facilities, and conduct deposit auctions and T-Bill auctions. - Timing: June 30, 2016 - Rationale: Critical for managing liquidity and for conducting open market operations. - 5. Prepare a strategic plan of the CBvS's financial position, with input from the Fund staff, for review and ongoing monitoring by the Supervisory Board. The plan aims at strengthening the balance sheet to protect the financial autonomy of the CBvS. - Timing: December 31, 2016 - Rationale: Strengthening the CBvS's balance sheet would protect its independence and its ability to conduct monetary policy. - 6. Submit to the National Assembly a revised Central Bank Act, with input from the Fund staff, that strengthens provisions on autonomy, governance, accountability and transparency, and regulates and limits the extension of credit to the government. - Timing: December 31, 2016 - Rationale: Critical for strengthening central bank independence and reducing the risk of fiscal dominance. ### Structural Benchmarks — Real sector (benchmarks and timing) - 1. Present to the National Assembly draft law on competition policy, limited liability company formation, electronic gazettes, intellectual property, consumer protection, and electronic transactions. - Timing: June 30, 2017 - 2. Submit to the National Assembly a new Investment Law. - Timing: June 30, 2017 - 3. Submit to the National Assembly a revised Foreign Exchange Law. - Timing: June 30, 2017 - Rationale: Critical for attracting FDI, for diversifying the economy, and for increasing the economy's resilience to external shocks. ### II. Technical Memorandum of Understanding (TMU) — Key points - The TMU defines understandings between the Surinamese authorities and the IMF staff on QPC and IT, adjusters, and data reporting requirements for the SBA described in the LOI dated May 5, 2016, and the attached MEFP. - Program accounting exchange rates: - U.S. dollar denominated components of the CBvS balance sheet valued at official exchange rate of the Surinamese dollar to the U.S. dollar of 5.064 set by the CBvS as of March 31, 2016. - Cross-rates as of March 31, 2016 for other currencies: - Euro valued at 1.132306 U.S. dollars - Pound Sterling valued at 1.440956 U.S. dollars - Chinese Yuan valued at 0.154423 U.S. dollars - The Special Drawing Right (SDR) valued at [value truncated in source] - For program purposes, all foreign currency-related assets, liabilities, and flows will be evaluated at “program accounting exchange rates” as defined, with the exception of items affecting government fiscal balances, which will be measured at current exchange rates. - The QPC and IT are shown in Table 1 of the MEFP. Prior actions and structural benchmarks are listed in Table 2 of the MEFP. - Standard IMF consultation commitment: consult with the Fund before modifying measures contained in the LOI/MEFP, or adopting new measures that would deviate from the goals of the program, and provide necessary information for program monitoring. *Source: _cr16141 - 9. Net increase in central government guaranteed debt (ceiling) 3/0000* ### 1.408820 U.S. dollars. Official gold holdings were valued at 1,236.25 U.S. dollars per fine ounce. ### _cr16141 - 1.408820 U.S. dollars. Official gold holdings were valued at 1,236.25 U.S. dollars per fine ounce. ### Definitions and scope - Central government (CG): set of institutions and government units currently covered under the state budget. - Fiscal year: calendar year, January 1 to December 31. - Mineral revenue: government tax and non-tax proceeds from Staatsolie Suriname and gold companies, including corporate tax, wage tax (including old age fund contributions), dividend tax, indirect taxes, dividends, royalties and others; royalties from small scale gold mining are included. - Program exchange rate (memorandum item): 5.064. ### Quantitative Performance Criteria — A. Cumulative Floor of the Central Government Primary Cash Balance - Primary cash balance of the CG = CG interest payments minus total net borrowing requirements (NBR). - Net borrowing requirements (NBR) (measured at official (current) exchange rates) equal the sum of: - i. Net CBvS credit to the CG, including changes in the government deposit position at the CBvS. - ii. Net credit from other depository corporations and other financial corporations (includes changes in CG deposits and net issuance of treasury bills, lending, and other CG securities to commercial banks). - iii. Net non-bank credit to the CG (net issuance of Treasury bills and other CG securities to non-banks, and other CG claims and debts vis-à-vis nonbank institutions). - iv. New external loan disbursements net of external loan amortization (excluding the IMF). - v. Net payments of domestic and external arrears. - vi. Privatization receipts received during the relevant period. - Reporting: Data provided to the Fund with a lag no more than six weeks after the end of the month. - Adjusters: - Floor adjusted downward (upward) by the full extent that project loans are more (less) than project loans in Table 3. - Floor adjusted upward (downward) to the full extent of any rise (fall) in mineral revenue above (below) baseline projections in a given quarter. - Mineral revenues — cumulative flows from the beginning of the fiscal year (Millions of SRD): - End June 2016: 238.4 - End September 2016: 345.1 - End December 2016: 492.9 - End March 2017: 233.6 ### Quantitative Performance Criteria — B. Ceiling on Gross Credit to the Government by the Central Bank (CBvS) - Ceiling applies on the change in gross credit to the CG by the CBvS measured from end-March. - Reporting: Data provided to the Fund with a lag no more than two weeks after the end of the month. - Audit: Quarterly data on gross credit to government submitted by the CBvS to the IMF will be audited by CBvS external auditors in accordance with International Standards on Auditing; auditors’ reports submitted to CBvS, with a copy to the IMF, no later than 60 days after each test date. ### Quantitative Performance Criteria — C. Ceiling on Non-Accumulation of External Arrears - Continuous performance criterion: non-accumulation of arrears by the CG to external creditors. - External payments arrears defined as payments (by the CG) not made within 30 days after falling due. - Exclusion: arrears resulting from nonpayment of debt service for which a rescheduling agreement is sought based on good faith negotiations. - Stock of external arrears calculated based on external payment obligations reported by the Ministry of Finance (MoF); data reconciled with relevant creditors and adjusted as necessary. - Reporting: MoF provides final data on stock of external arrears to the IMF with a lag no more than two weeks after the end of the month. ### Quantitative Performance Criteria — D. Floor on Cumulative Change in CBvS Net International Reserves (NIR) - NIR of the CBvS = U.S. dollar value of foreign reserve assets minus foreign reserve liabilities (valued at program exchange rates for monitoring). - Reserve assets include: foreign exchange (cash, deposits, holdings of foreign securities), monetary gold, IMF reserve position, SDR holdings, and IMF SBA disbursements; excludes pledged/encumbered assets, CBvS claims on residents, claims from foreign-exchange derivatives vis-à-vis domestic currency, precious metals other than gold, assets in nonconvertible currencies, illiquid swaps, and assets not readily available for intervention. - Reserve liabilities include: all short-term foreign liabilities of CBvS vis-à-vis nonresidents in convertible currencies with original maturity ≤ 1 year; stock of IMF SBA disbursements outstanding; nominal value of all derivative positions implying sale of foreign currency/reserve assets; all foreign exchange liabilities of CBvS to resident entities excluding liabilities to the CG. - Valuation: foreign assets and liabilities valued at fair value and converted at program exchange rates. - As of March 31, 2016, stock of NIR amounted to US$0.0 million (at program exchange rates). - Reporting: foreign reserves and foreign exchange cash flow data provided twice a week; statistics in Table 2 provided monthly in both official and program exchange rates with lag no more than two weeks after month end. - Audit: Quarterly NIR data audited by CBvS external auditors in accordance with International Standards on Auditing; auditors’ reports submitted no later than 60 days after each test date. - Table 2 — Suriname: International Reserves for Program Monitoring Purposes (US$ million) - Reserve assets: 147.3 - IMF reserve position: 13.0 - IMF SDR: 50.8 - Monetary gold: 53.2 - Foreign currency cash and deposits with foreign banks: 30.3 - Reserve liabilities: 147.3 - Domestic banks' currency swaps: 115.0 - Reserve requirements on foreign currency deposits: 30.6 - Other liabilities: 1.7 - Net international reserves: 0.0 - Source: Central Bank of Suriname and Fund staff calculations. - Table 3 — Suriname: External Program Disbursements (Baseline Projection) — Cumulative flows from beginning of fiscal year (In millions of US$) - External loans from multilaterals for budget support: - End-June 2016: 70 - End-September 2016: 170 - End-December 2016: 250 - End-March 2017: 38 - External loans from international capital markets: - End-June 2016: 86 - End-September 2016: 0 - End-December 2016: 0 - End-March 2017: 0 - External loans for project financing: - End-June 2016: 24 - End-September 2016: 58 - End-December 2016: 95 - End-March 2017: 32 - External loans from official bilateral creditors for budget support: - End-June 2016: 0 - End-September 2016: 0 - End-December 2016: 0 - End-March 2017: 0 - Adjusters for NIR targets: - Adjusted upward (downward) by full amount of cumulative surplus (shortfall) in program loan disbursements from multilateral institutions relative to Table 3 baseline. - Adjusted upward by full amount of cumulative surplus in loans from official bilateral and private creditors (including international capital markets) relative to Table 3 baseline. - Adjusted upward (downward) to the full extent (by 50 percent) of any rise (fall) in mineral revenue above (below) baseline projections in a given quarter. ### Quantitative Performance Criteria — E. Ceiling on Net Domestic Assets (NDA) of the Central Bank of Suriname - NDA = Reserve money (defined below) minus Net Foreign Assets (NFA); items in foreign currencies valued at program exchange rates. - As of March 31, 2016, NDA amounted to SRD 2,263.6 million (Table 4). - Reserve money at program exchange rates defined as: currency in circulation; commercial banks’ deposits in correspondent accounts at the CBvS; statutory cash reserve requirements against prescribed liabilities in SRDs and foreign currency held by commercial banks at the CBvS; other deposits in national and foreign currency; other demand deposits in national and foreign currency; and gold certificates. - NFA at program exchange rates = CBvS claims on nonresidents minus liabilities to nonresidents; NFA amounted to US$ 73.0 million as of March 31, 2016. - Reporting: Data provided to IMF with lag no more than two weeks after month end. - Audit: Quarterly NDA data audited by CBvS external auditors under International Standards on Auditing; auditors’ reports submitted no later than 60 days after each test date. - Adjusters: NDA targets adjusted downward (upward) by the full amount of cumulative surplus (shortfall) in program loan disbursements from multilateral institutions relative to Table 3 baseline; adjusted downward by the full amount of cumulative surplus in loans from official bilateral and private creditors relative to Table 3 baseline. For adjusters, flows valued at program exchange rates. - Table 4 — Suriname: NFA, NDA, and Reserve Money (SRD millions) — March 31, 2016 - Net foreign assets: 369.5 - Foreign assets: 1529.3 - Foreign liabilities: -1159.8 - Net domestic assets: 2263.6 - Net claims on the government: 2384.4 - Claim on the government in local currency: 2511.4 - Liabilities of the government in local currency: 205.0 - Claim on the government in foreign currency: 0.0 - Liabilities of government in foreign currency: -332.0 - Net claims on commercial banks: 115.2 - Claim on commercial banks in local currency: 113.1 - Liabilities of commercial banks in local currency: 0.0 - Claims on commercial banks in foreign currency: 2.1 - Liabilities of commercial banks in foreign currency: 0.0 - Other items net: -236.0 - Reserve money: 2633.1 - Reserve money in local currency: 2446.3 - Reserve money in foreign currency: 161.7 - Gold certificate: 25.1 - Memorandum item: Program exchange rate: 5.064 ### Other continuous performance criteria - During the Stand-By Arrangement, Suriname will not: - (i) impose or intensify restrictions on the making of payments and transfers for current international transactions; - (ii) introduce or modify multiple currency practices; - (iii) conclude bilateral payments agreements inconsistent with Article VIII; - (iv) impose or intensify import restrictions for balance of payments reasons. ### Quantitative Indicative Targets — definitions - Ceiling on net increase in central government guaranteed debt: - Applies to amount of guarantees issued by the CG; official exchange rate applies to all non-SRD denominated debt. - Monitored continuously. Reporting lag: no more than six weeks after end of month. - Ceiling on central government accumulation of domestic arrears: - Domestic arrears = payments to residents determined by contractual obligations of the CG that remain unpaid 90 days after due date (due date per contract, accounting for contractual grace periods). - Includes arrears on domestic CG direct debt, including to suppliers, and all recurrent and capital expenditure commitments. - Monitored continuously. Reporting lag: no more than six weeks after end of month. - Floor on central government social spending: - Social spending = all spending of the Ministry of Social Affairs and Public Housing on social protection programs as articulated in the CG budget for a fiscal year; programs funded by government resources only, include conditional cash transfers. - Reporting lag: no more than six weeks after end of month. - Cumulative floor on central government non-mineral revenue: - Non-mineral revenue = revenue from tax and non-tax collection; excludes revenue from asset sales, grants, and mineral revenue. - Revenue target calculated as cumulative flow from beginning of fiscal year (January 1). - Reporting lag: no more than six weeks after end of month. ### Validation of prior actions and structural benchmarks - Electricity subsidies elimination — Prior Action and Structural Benchmarks: - By end-January 2017, government to establish by administrative ordinance a Technical Electricity Commission (TEC) to review EBS cost-recovery calculations, approve (at least) quarterly tariff adjustments, and review EBS progress on efficiency and investment program; TEC to post cost-recovery calculations, revised average tariff, revised tariff structure, and EBS progress report on EBS website. - Tariff adjustments (validation requirements): - Electricity tariffs raised on May 1 2016 to cover 60 percent of electricity production cost (prior action). - Tariffs further raised to cover 90 percent of cost on September 1, 2016 (structural benchmark). - Tariffs further raised to cover 100 percent of cost on January 1, 2017 (structural benchmark). - Cost calculations based on latest actual monthly EBS data, updated for most recent official exchange rate and latest oil forecasted price from World Economic Outlook. - Beginning April 2017, average tariffs updated at least quarterly according to cost-recovery formula, reviewed jointly by EBS and TEC. - Validation: authorities to share with Fund staff the calculations of EBS cost formula, revised average tariff, and revised tariff structure for the May 1, 2016, September 1, 2016, and January 1, 2017 adjustments. Average electricity tariff calculated as total billing to all EBS electricity customers (excluding Rosebel) divided by total electricity consumption (excluding Rosebel) for the month of tariff calculation. Validation done by comparing average electricity tariff with the benchmark. - Structural benchmark on VAT implementation: - By January 1, 2018, authorities to introduce a Value Added Tax (VAT). - Validation: VAT effective as of January 1, 2018, verified by: - (i) VAT Law approved by National Assembly; - (ii) supporting regulations published; - (iii) projected number of registrants registered to charge VAT; - (iv) refund, business, and export systems established; - (v) institutional framework established to administer the VAT. ### Information requirements and reporting timetable - Daily/Semi-weekly: - Official foreign reserve assets’ composition and foreign exchange cash flow of the CBvS. - Official and parallel nominal exchange rates. - Volumes of foreign exchange transactions (purchases and sales) by banks and cambios. - Weekly: - Deposits and liquidity assistance to institutions, by institution. - CBvS purchases and sales of foreign currency. - Amounts offered, demanded and placed in CBvS open market operations, including rates on offer for each tenor. - CBvS’ balance sheet. - Monthly (selected items and reporting lags): - CG operations (revenues and expenditure) data in GFS format within six weeks of end of month. - CG detailed revenues from tax office by revenue category within six weeks of end of month. - Mineral tax and non-tax revenue of major mineral companies and small gold miners, by revenue item and type of mineral, within four weeks of end of month. - Number of public civil servants and total wage bill by Ministry within six weeks of end of month. - CG authorized spending data by Ministry within four weeks of end of month. - CG subsidies data by Ministry and programs within six weeks of end of month. - CG balance from financing side by sources and by currency within six weeks of end of month. - CG domestic and external debt stock, including by (i) creditor, (ii) currency, (iii) instrument, (iv) direct, and (v) guaranteed within six weeks of end of month. - Amortization and debt payments of CG and government guaranteed debt by creditor, instrument, and currency within six weeks of end of month; name of guaranteed individual/institution for guaranteed debt issuance. - Interest payments on CG and government guaranteed debt by creditor, instrument, and currency within six weeks of end of month. - Stock of CG expenditure arrears, separately including payment of existing arrears and creation of new domestic arrears, within four weeks of end of month. - Stock of CG domestic and external debt arrears, and CBvS external debt arrears, within four weeks of end of month. - CG spending on social protection programs as defined for indicative target on social spending within six weeks of end of month. - Holdings of domestic bonds (SRD-denominated and US$-denominated) by investor, maturity, and currency within six weeks of end of month. - Legal measures affecting CG revenue (tax rates, import tariffs, exemptions) within six weeks of end of month. - Balance sheet of the CBvS within two weeks of end of month. - Summary of monetary survey of the banking system within six weeks of end of month. - Income statement of the CBvS on cash and accrual basis within three weeks of end of month. - Deposits in banking system: demand and term deposits within six weeks after month end; average monthly interest rates on loans and deposits within six weeks after month end; weighted average deposit and loan rates within six weeks after month end. - Monthly balance sheet data of deposit taking institutions as reported to the CBvS within six weeks of end of month. - Data on foreign reserve assets and foreign reserve liabilities for NIR target purposes (Table 2) evaluated at both official and program exchange rates within two weeks of end of month. - Data on NDA, NFA, and reserve money (Table 4) evaluated at both official and program exchange rates within two weeks of end of month. - Consumer price index, including by CPI sub-components, within four weeks after end of month. - Cash flow of EBS showing government transfers to cover gap between average electricity tariff and EBS recovery cost within eight weeks after end of month. - Electricity tariff, total electricity consumption volume, total billing and amount collected (in SRD) by consumption categories and consumption volume within eight weeks after end of month. - Electricity costs including production costs (fuel costs, Staatsolie electricity costs, hydropower costs separately), other operational costs (personnel costs and financing costs), and investment costs within eight weeks after end of month. - EBS committed and executed payments to Staatsolie for fuel and electricity, and to Suralco, within eight weeks after end of month. - Quarterly: - Detailed balance of payments data within 60 days after end of quarter. - Detailed International Investment Position data within two months after end of quarter. - Full set of quarterly Financial Soundness Indicators (FSI) calculated by CBvS within 60 days after end of quarter. - Annual: - Financial statements of EBS within six months of year end. - Nominal GDP and real GDP within eight months of year end. - Labor market statistics (including unemployment rate and labor participation ratio) within twelve months of year end. ### Memorandum of Understanding - Parties: - The REPUBLIC OF SURINAME, represented by the Minister of Finance, Mr. Gillmore Hoefdraad, office at Tamarindelaan 3, Paramaribo, Suriname (“the STATE”). - The CENTRALE BANK VAN SURINAME, established pursuant to article 2 of the Bank Act 1956, registered office Waterkant 16-20, Paramaribo, Suriname, represented by its Governor, Mr. Glenn Gersie, following Board approval (“the BANK”). - Parties enter the Memorandum of Understanding in consideration of the program arrangements and obligations set out in the document. *Source: IMF staff report content as provided in the supplied PDF content unit.* ### 1. The Bank Act 1956 (G.B. 1956 No. 97, prevailing text S.B. 2010 No. 173 ); ### 1. The Bank Act 1956 (G.B. 1956 No. 97, prevailing text S.B. 2010 No. 173 ); ### Memorandum of Understanding — monetary financing (key provisions) - Parties: Ministry of Finance (Republic of Suriname) and Centrale Bank van Suriname (the BANK). - Purpose: Eliminate monetary financing by the BANK of the STATE, other public authorities, and State-owned enterprises, subject to definitions, applicability, exceptions, and change procedures set out below. - Signing: Done in Paramaribo, April 25, 2016. Signed by Gillmore Hoefdraad (Minister of Finance) and Glenn Gersie (Governor of the Centrale Bank van Suriname). ### Article 1 — Definitions - “Monetary financing” means: - (i) any overdraft facility which may result in an overnight debit balance with regard to the net position of the Treasury Single account, or any other type of short or long term credit facility furnished by the BANK funding the obligations, whether denominated in foreign or local currency, of the STATE, regional, local authorities, or the other bodies of the public sector (collectively referred to as “public authorities”), including State-owned enterprises vis-à-vis third parties; - (ii) the issuance of guarantees by the BANK on behalf of the STATE, any public authority or State-owned enterprise; - (iii) the purchase by the BANK of Treasury Bills or other debt instruments issued by any of the aforementioned public authorities or State-owned enterprises directly on the primary market. ### Article 2 — Applicability (commitments and constraints) - Parties agree that as from the date of signing there will be no further monetary financing at any time to the STATE, other public authorities, and State-owned enterprises. - The Memorandum will be in effect until the Bank Act of 1956 has been fully amended to eliminate the possibility of monetary financing/credit to the STATE. - Any purchases of Treasury Bills or other debt instruments issued by the State on the secondary market must not be used to circumvent the limitation of purchases of such debt instruments by the BANK on the primary market. - Servicing of the existing stock of monetary financing, both principal and interest, would, if overdue, be considered new monetary financing. ### Article 3 — Exceptions (forms not covered by the prohibition) - The Article 2, paragraph 1 prohibition will not apply to: - 1. Conversion of the principle of the Loan agreement of September 18, 2015 into Treasury Bills; - 2. Provision of liquidity by the Bank to credit institutions of which the State is the shareholder, provided that this liquidity arrangement sets the same requirements as applicable to private credit institutions, and is executed subject to the provisions within the Banking Act 1956 that aim at maintaining financial stability and carrying out monetary policy. ### Article 4 — Changes - Modifications to this Memorandum shall be made in writing by both parties following prior approval from the Supervisory Board of the BANK. ### Related signed loan/agreements referenced - The Loan agreement of September 18, 2015, between the Ministry of Finance and the BANK. - The forthcoming signing of Letter of Intent to the Managing Director of the IMF. - Relevant national legislation cited: The Bank Act 1956 (G.B. 1956 No. 97, prevailing text S.B. 2010 No. 173) and The State Debt Act (S.B. 2002 No. 27, as last amended by S.B. 2011 No. 5). --- ### IMF informational annex — Fund relations and financial data (selected figures as of dates shown) - Membership Status: Joined: April 27, 1978; Article VIII. - Quota and holdings: - Quota 128.90 (SDR Million) 100.00 percent of Quota. - Fund holdings of currency (Holdings Rate) 119.70 (SDR Million) 92.86. - Reserve Tranche Position 9.20 (SDR Million) 7.14. - SDR Department: - Net cumulative allocation 88.09 (SDR Million) 100.00 percent allocation. - Holdings 36.06 (SDR Million). - 40.94 (value appears in source following holdings). - Outstanding Purchases and Loans: None. - Latest Financial Arrangements: None. - Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Forthcoming (no value shown). - 2016: Principal — (no value shown); Charges/Interest 0.02; Total 0.02. - 2017: Charges/Interest 0.03; Total 0.03. - 2018: Charges/Interest 0.03; Total 0.03. - 2019: Charges/Interest 0.03; Total 0.03. - 2020: Charges/Interest 0.03; Total 0.03. - Implementation of HIPC Initiative: Not Applicable. - Implementation of MDRI: Not Applicable. - Implementation of CCR: Not Applicable. ### Exchange rate arrangements and related facts - National currency: Surinamese dollar (SRD), replaced the Surinamese guilder in January 2004 at a conversion rate of 1,000 guilders per SRD 1. - De jure exchange rate arrangement: classified as floating. - Presidential decree (Resolution and Besluit of 1994) determines exchange rate based on demand and supply of foreign exchange; 2000 amendment mandated Central Bank to establish, at its discretion, maxima and minima rates. - Devaluations and official bands cited: - January 20, 2011: devalued the currency by 20 percent, to SRD 3.3 per U.S. dollar and set a band of SRD 3.25–3.35 per U.S. dollar. - November 2015: devalued the currency by 20 percent, to SRD 4.04 per U.S. dollar and set a band of SRD 3.80–4.20 per U.S. dollar. - March 22 (year not explicitly stated in the excerpt): authorities floated the currency based on a system of foreign exchange auctions aimed at ensuring a convergence of the official exchange rate to the market rate. - Suriname classification: Article VIII member; maintains two multiple currency practices (MCPs) arising from spreads of more than 2 percent between buying and selling rates in the official market for government transactions and possible spreads of more than 2 percent between official and commercial market rates within the established band. - Last Article IV consultation: concluded by the Executive Board on October 1, 2014 (IMF Country Report No. 14/316). Suriname is on the standard 12-month consultation cycle. - Participation in the GDDS: Suriname’s formal participation announced in July 2004. ### Technical Assistance since 2011 (selected missions by IMF department and year) - CARTAC missions (selected): 2011 (insurance supervision; PEFA assessment); early 2012 (fiscal projection and budget preparation); June 2012 and April 2013 (treasury single account and chart of accounts); August 2012 (central treasury management seminar); October 2012 (post VAT implementation support; banking supervision and securities regulation); July 2012–July 2013 and February 2014 (national accounts and expenditure based GDP); January, June, July 2013 (deposit insurance scheme); Oct–Nov 2013 (review of reforms including chart of accounts and IFMIS); November 2013 (capital market development); January 2014 (electronic auditing course); February 2014 (balance of payments assessment); June 2014 (MTEF and budget process; macroeconomic projection frameworks); April, May, June, July 2015 (macroprudential indicators; national account; stress-testing for insurance sector; financial soundness indicators for insurance; enhancement of financial stability analysis). - FAD: February 2011 (revenue administration assessment); August 2012 (public financial management); May 2013 (IFMIS design and implementation). - LEG: August and November 2011 (fiscal law). - MCM (selected): March 2011 (banking system assessment); June 2011 (introduction of indirect monetary instruments); December 2011 (bank resolution); May 2013, July 2013, December 2013, July 2014, September 2015, March 2016, April 2016 (T-bills auction, central bank modernization, payments system modernization, central bank accounting and treasury account rationalization, monetary framework operations, T-bills auction); September 2015 (macro and monetary operations; TA needs assessment); November 2015 (exchange rate policy). - STA: Jan 2012, July 2012, Feb 2014 (national account); March 2014 (BOP and external sector statistics); December 2015 (government finance statistics (GFS)). - Consents and acceptances: Suriname has consented to the Executive Board reform and 2010 quota increase. - Resident Representative: None. ### Relations with major development partners (high-level summaries and figures) - World Bank (as of April 13, 2016): - Country Partnership Strategy (CPS) FY15–19 overarching goal: promote a more sustainable, inclusive, and diversified growth model via (i) private sector development, and (ii) reducing vulnerability to climate change-related floods; cross-cutting theme: improving capacity on poverty and gender data. - Initial IBRD envelope proposed: US$60 million; January 2016 increase to US$100 million in the form of two DPLs of US$50 million each in FY17. - Lending Activities: IBRD has no active lending operations at the present time. IFC and MIGA: no current exposure (IFC previously financed a trade financing line but currently has no exposure). - Technical Assistance: three active trust fund-supported projects (Development of Accounting & Auditing Standards; Competitiveness in agriculture and extractive industries; Paramaribo Flood Risk Management Program) and support to General Bureau of Statistics; IFC advisory support on credit bureau, trade facilitation, customs reform. - Inter-American Development Bank (as of March 15, 2016): - Financing envelope to cover the strategy period estimated at US$486 million. - 2015 loan disbursements totaled US$40.45 million (US$25.45 million related to investment loans, 87 percent of original projections for investment loans). - 2015 approvals included: one investment loan in Education Sector (US$20 million), one IIC private sector loan (US$10 million), and two non-reimbursable technical co-operation projects (US$1.1 million and US$0.28 million). - 2016 pipeline: support in energy, revenue and finance administration, agriculture and urban rehabilitation; financing program includes six loans across “A” and “B” pipelines. - IDB 2016 Lending Program (US$ millions): - “A” Pipeline total: 45 (SU-L1020 Agricultural Competitiveness 15; SU-L1040 Revenue Policy and Administration II (PBL) 10; SU-L1046 Paramaribo Urban Rehabilitation Program 20). - “B” Pipeline total: 80 (SU-L1029 Public Expenditure Management III (PBL) 20; SU-L1030 Financial Sector Strengthening II (PBL) 20; SU-L1032 Modernization of Agricultural Public Services II (PBL) 10; SU-L1036 Support to Institutional & Operational Strengthening of the Energy Sector III (PBL) 30). - Grand Total 125. - Portfolio indicators: - Public and Private Loans in Execution: Numbers 8. - Available balance (US$ million) 83.97. - % Available balance of total portfolio in execution 52.9. - Average age of portfolio (years) 3.1. - Alert/Problem Projects: Number 2; Available balance (US$ million) 20.57. - MIF Operations: Number 3; Available balance (US$ million) 2.37. - TC and Other Investment Grants in Execution: Number 12; Available balance (US$ million) 7.7. - Caribbean Development Bank (as of April 18, 2016): - Suriname became a full member at the 259th Meeting of the Board of Directors on December 12, 2013. - Preferred indicative envelope: US$266.8 million including US$10 million under SDF 8 allocation for Suriname and a grant component of US$3.3 million. - First CDB project launched April 2016: US$21.94 million E‑TVET Project to build eight Practical Instruction Centers and construct/upgrade 101 classrooms and workshops to accommodate over 3,500 students at the Lower Secondary School level. - CSP subject to a mid-term review in the latter half 2016. - Islamic Development Bank (as of April 18, 2016): - Membership: joined IsDB on August 5, 1997; also member of ITFC and ICD. - Interim Member Country Partnership Strategy (MCPS) for 2014–2015 approved September 2013; sovereign-guaranteed lending envelope initially US$65 million, which increased to US$112 Million. - Major projects and approved amounts (selected): - Reforming TVET (approved 2014): US$16 million. - Health System Strengthening (operations approved 2014): US$70 million. - Secondary Education Expansion Project (approved 2015): US$31 million. - Enhancing Rice Production, Reverse Linkage initiative with Malaysia (approved 2015): US$6 million. *Source: _cr16141 - 1. The Bank Act 1956 (G.B. 1956 No. 97, prevailing text S.B. 2010 No. 173 );* ### introduction of new suitable rice varieties with aromatic, high yielding, site-specific, and ### _cr16141 - introduction of new suitable rice varieties with aromatic, high yielding, site-specific, and ### Development interventions and agricultural priorities (excerpt) - Objectives for rice and agriculture: - introduction of new suitable rice varieties with aromatic, high yielding, site-specific, and disease and pest resistant characteristics, together with their breeding programs; - strengthening of soil fertility; - development of integrated water management system in the country. ### IsDB Group engagement and sectoral focus (2016–2019) - Alignment: IsDB Group intervention aligned with GoS priorities and IDB 10-Year Strategy Framework, focusing on growth-oriented sectors and growth inclusiveness. - ITFC action: On April 25, 2016 ITFC and GoS signed a US$30 million financing for strategic energy supply imports. - IDB support areas and sub-sectors: - Infrastructure (Energy, Transport, Water Sanitation, Public Utilities) - Agricultural and Rural development (Livestock including Halal Meat Production, Irrigation & Drainage, Horticulture and Crop development) - Human Development (Healthcare, Social Housing, Institutional Capacity) - Islamic Banking and Finance (Enabling Environment, Islamic Banking) - Trade and Competitiveness (Forex Optimization, Energy Efficiency) - Private Sector Support (Micro Finance) ### Statistical issues — Assessment of data adequacy for surveillance - General findings: - Data provided to the Fund are broadly adequate for surveillance purposes, but have shortcomings reflecting capacity constraints and limited resources. - Central Bank publishes an Advance Release Calendar (ARC) for monetary and external sector statistics and regularly updates the National Summary Data Page (NSDP); timeliness remains an issue for some data (e.g., GDP and labor statistics). - Authorities need to compile social indicators to enable social policy design for inclusive growth. - National accounts: - With CARTAC support, ABS improved production-based GDP quality and coverage and progressed on reconciling national accounts with the Balance of Payments and compiling expenditure-based GDP. - ABS compiled household final consumption expenditure and reconciled imports/exports in expenditure-based GDP estimates with the Balance of Payments for 2012. - ABS compiled GDP by production for 2006–2014 at current and constant 2007 prices. - GDP by expenditure is available for 2010 by main aggregates but at current prices only. - ABS published CPI sub-index component weights as recommended by the 2013 Article IV report. - Government finance statistics: - MoF compiles fiscal data in national definition, which can lead to confusion in GFSM formats. - CBvS has converted main fiscal statistics into 2001 GFSM format and publishes monthly data, but estimates often differ from MoF. - No report available on arrears accumulation in current debt recording system; MoF improving collection of arrears information. - Public finance statistics and public sector debt data are limited to central government; institutional coverage needs broadening to the nonfinancial public sector. - Actual number of public enterprises is difficult to determine; most do not produce timely accounts. - Authorities seeking TA from FAD and CARTAC to improve government finance statistics. - Monetary and financial statistics: - CBvS uses SRFs to report central bank and ODC data monthly; does not report SRF for other financial corporations. - Surveys for central bank and ODCs are disseminated on CBvS website within five weeks of reference month. - Suriname compiles FSIs for the banking system quarterly with a lag of about one quarter; FSIs not reported to STA for dissemination on IMF’s FSI website. - Authorities encouraged to adopt IMF FSI methodology and to start compiling FSIs for insurance companies and other financial institutions. - An STA technical assistance mission on FSI compilation is expected to visit Suriname next year. - External sector: - CBvS made important progress in compiling quarterly balance of payments and IIP statistics using BPM5 to the extent national data permit; authorities plan transition to BPM6. - CBvS reported quarterly IIP for dissemination in IFS and national publications for the first time in 2013. - Authorities reported QEDS to the World Bank in June 2014. - Since 2014, CBvS strengthened compilation and coverage of FDI and quality of services, remittances, and financial account data. - CBvS has full coverage of private sector external debt through the financial system and is broadening coverage of other private external debt. - Continued efforts needed to improve statistics on services (freight, insurance and pension services, financial, other business services), travel (recurrent survey with Suriname Tourism Office), and remittances through non-formal channels (annual household survey by ABS). ### Data standards, reporting, and dissemination - Suriname participates in the GDDS. - Suriname does not report fiscal statistics for inclusion in International Financial Statistics or the Government Financial Statistics Yearbook. ### Table of Common Indicators Required for Surveillance (selected items, as of April 20, 2016) - Exchange Rates: Date of latest observation 4/18/2016; Date received 4/18/2016; Frequency of Data D; Frequency of Reporting D; Frequency of publication D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 3/31/2016; Date received 4/15/2016; Frequency of Data Bi-weekly; Frequency of Reporting Bi-weekly, less than 1-week lag; Frequency of publication M. - Reserve/Base Money: Date of latest observation 3/31/2016; Date received 4/10/2016; Frequency of Data M; Frequency of Reporting Monthly, less than 1-month lag; Frequency of publication M. - Broad Money: Date of latest observation 2/29/2016; Date received 4/20/2016; Frequency of Data M; Frequency of Reporting Monthly, 2 month lag; Frequency of publication M. - Central Bank Balance Sheet: Date of latest observation 3/31/2016; Date received 4/15/2016; Frequency of Data M; Frequency of Reporting Monthly, less than 1-month lag; Frequency of publication M. - Consolidated Balance Sheet of the Banking System: Date of latest observation 2/29/2016; Date received 4/20/2016; Frequency of Data M; Frequency of Reporting Monthly, 2-month lag; Frequency of publication Q. - Interest Rates: Date of latest observation 2/29/2016; Date received 4/20/2016; Frequency of Data M; Frequency of Reporting Monthly, 1-month lag; Frequency of publication M. - Consumer Price Index: Date of latest observation 3/31/2016; Date received 4/15/2016; Frequency of Data M; Frequency of Reporting Monthly, less than 1-month lag; Frequency of publication M. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: Date of latest observation 1/30/2016; Date received 4/5/2016; Frequency of Data M; Frequency of Reporting Monthly, 6-week lag; Frequency of publication M. - Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation 12/31/2015; Date received 4/15/2016; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - External Current Account Balance: Date of latest observation Q4/2015; Date received 3/15/2016; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q. - GDP: Date of latest observation 2014; Date received 8/15/2015; Frequency of Data A; Frequency of Reporting A; Frequency of publication A. - Gross External Debt: Date of latest observation Q4/2015; Date received 4/15/2016; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q. - International Investment Position: Date of latest observation Q4/2015; Date received 3/15/2016; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q. ### Request for Stand-By Arrangement — supplementary information (highlights) - Exchange rate system: - On May 10, 2016, CBvS authorized commercial banks and foreign exchange bureaus to freely determine exchange rates, completing transition to a floating exchange rate system. - Staff assessment: two previous multiple currency practices (MCPs) removed. - Private external creditors arrears: - Information on May 24 indicates a sovereign external arrear of US$12.8 million (0.3 percent of GDP) to a private company in the Netherlands. - Staff assessment: authorities making good-faith efforts to resolve the arrear, in conformity with Fund’s LIA policy; creditor engaged in discussions and had access to non-confidential information about government financial difficulties; creditor given early opportunity to input on restructuring strategies. - Amended Stand-By Arrangement includes a financial assurances review clause applicable while Suriname has outstanding sovereign external payments arrears to private creditors. ### Authorities’ statement — recent developments, assessment, and policy measures (May 27, 2016) - Macroeconomic context and recent developments: - Sharp fall of commodity prices since 2013 and closure of an alumina refinery in 2015 affected public sector revenues, exports, international reserves, employment and private sector activity, producing a significant twin deficit requiring substantial macroeconomic adjustments. - A home-grown stabilization and reform program has been in progress since August 2015; authorities request technical assistance for structural reforms. - Growth outlook remains robust due to ongoing expansion in oil and mining investment: a new oil refinery started operating in late 2015 and will likely double oil refinery production this year and again in 2017; a new gold mine is expected to increase gold production and exports by a third in 2017. - External reserves and exchange rate actions: - International reserves dropped to less than 2 months of exports by end-2015. - Central Bank tightened monetary policy by raising banks’ reserve requirements on foreign and domestic currency deposits to 50 and 35 percent, respectively. - Government devalued the currency by 21 percent in November 2015; shift toward a flexible exchange rate regime in February (year implied 2016). - Fiscal developments and consolidation: - Ministry of Finance implemented substantive fiscal consolidation since August 2015, rapidly reducing arrears and new spending commitments while increasing tax and non-tax revenues. - Fiscal deficit dropped from over 10 percent of GDP between January and July 2015 to around 2 percent of GDP in the last quarter of 2015, despite payment of arrears. - Fiscal anchor: reduction in primary deficit from 7.4 percent to 1.7 percent of GDP over 2015-17. - Current budget target: reduce overall fiscal deficit to 6.4 percent of GDP in 2016. - Fiscal consolidation expected to put public debt as a share of GDP on a downward path by 2017. - Specific fiscal and subsidy measures: - Electricity subsidies: - Electricity tariffs raised in October 2015 by an average of 52 percent, implying a reduction in electricity subsidies by about 1.5 percent of GDP in 2016. - Prior to reforms, implied electricity subsidies covered one-third of operating costs; the largest 10 percent of electricity consumers received 92 percent of all subsidies. - After first phase, largest 10 percent of consumers receives 64 percent of all subsidies. - Second phase of electricity subsidy elimination took place in May 2016, including a shift toward a progressive tariff system. - Government committed to finalize electricity subsidy elimination by December 2016. - Government will establish a Technical Electricity Commission (TEC) to review electricity costs using a cost-plus formula and review plans of electricity company (EBS) to reduce inefficiencies; reforms embedded in two Electricity Acts approved by Parliament. - Fuel taxes: - New tax introduced on gasoline and diesel in September 2015, with an estimated fiscal impact of 0.9 percent of GDP in 2016. - Authorities plan to introduce a tax on kerosene; interim measure: kerosene imports prohibited except for airline industry. - Water subsidies: - Water subsidies were less than 0.1 percent of GDP in 2015. - Government increased water tariffs as of October 2015 and is committed to maintain zero water subsidies going forward. - Wage bill: - Government will limit rise in compensation per employee in 2016 and 2017 to well below expected inflation rate. - Wage bill as a share of GDP is expected to decline by 0.6 percent of GDP by end-2017. - Over medium term, wage bill should be reduced gradually via measures addressing structural problems of government wage bill and employment. - Inspection fee: - The inspection fee for customs clearance—levied on verification activities of imported goods—will be increased (detailed implementation measures described in full report). - Authorities’ commitments: - Modernize regulatory and administrative frameworks while safeguarding social support for the most vulnerable. - Implement growth-enhancing structural policies to avoid backlash against workers and SMEs and to facilitate transition to a larger middle class. - Temporarily raised the tax-exemption bracket in the income tax system to compensate losses in purchasing power. - Agreed with staff on quantitative targets and a calendar of economic reforms; government stands ready to take additional actions as required. *Source: Excerpts from IMF staff report and supplementary materials (April–May 2016).* ### 2016. Revenue is estimated to increase by 0.3 percent of GDP. ### _cr16141 - 2016. Revenue is estimated to increase by 0.3 percent of GDP. ### Tax reform and revenue measures - Revenue is estimated to increase by 0.3 percent of GDP in 2016. - Tax reform objectives and design: - Reform taxation from volatile income taxation to more stable consumption taxation. - Introduce a Value Added Tax (VAT) by end 2017; VAT is intended to be revenue-positive reflecting the shift towards consumption-based taxation. - VAT will replace the current sales tax, whose base has eroded with revenue declining from 4½ percent of GDP in 2005 to 2½ percent of GDP in 2015. - Short-term goal: recover the loss of sales tax revenue over recent years. - VAT design: broad base, single rate, a very small number of exemptions, and a zero rate for exports. - Subsequent reforms: reform of direct tax regime and elimination or modernization of smaller nuisance taxes to improve efficiency and potentially be revenue-positive; these will be implemented after VAT is in place. - Income tax break: - General allowance increased from SRD 50 to SRD 125 per month in 2016. - Result: income tax revenue will decline by 0.2 percent of GDP in 2016. - Sovereign Wealth Fund (SWF) law: - Authorities will resubmit draft SWF law to the National Assembly to improve revenue management through stabilization of mineral revenue and institutionalize saving future surpluses from mining and oil-related revenue. ### Public financial management, expenditure control, and procurement - Public Financial Management (PFM) law: - A new PFM law reflecting best international practices will be presented to the National Assembly to promote a credible fiscal strategy, improve budget preparation, and strengthen medium term fiscal planning with precise revenue and financing projections. - A clear fiscal anchor and corresponding expenditure ceilings will be adopted to support fiscal sustainability. - Integrated Financial Management and Information System (IFMIS): - Introduce a real-time expenditure control system using IFMIS with wider functional scope than the outdated FINIS. - IFMIS functions: budget preparation, payments, cash management, procurement, accounting, Treasury operations, and fiscal reporting and transparency. - Expected outcomes: improved budget implementation, administrative/managerial/control instruments, and accelerated top-down budgeting. - Procurement Department: - Establish a procurement department at the MoF to harmonize central government procurement for cost-effectiveness and control. - Administrative setup to include appropriate IT systems, audits, and controls based on IFMIS. - A draft Procurement Law will be submitted to the National Assembly. - Treasury Department: - Build a modern Treasury Department to combine Treasury functions currently spread across MoF and CBvS. - Treasury Department will advance joint work to improve liquidity forecasting and management. ### Domestic arrears and fiscal consolidation impacts - Domestic arrears and payments: - Identified domestic arrears and unexecuted payments totaling SRD 1.4 billion accumulated since 2013. - Government paid off SRD 660 million between August and December 2015. - Plan to clear the remaining balance in equal amounts in 2016 and 2017 after auditing unjustified spending commitments and excluding ongoing unpaid bills. - IFMIS expected to reduce incidence of unpaid bills via faster, more transparent execution of purchases and procurement. - Social protection and macroeconomic outlook: - Program projections assume monetary and fiscal tightening will weaken economic activity. - Real GDP is expected to contract by 2 percent in 2016, compared to Suriname’s estimated potential growth rate of 3.5 percent. - Combined impact from exchange rate devaluation, electricity price increases and fuel tax hikes raised consumer inflation rate to 25 percent in 2015 and it is expected to reach 24.1 percent in 2016. - Authorities committed to protecting the most vulnerable; will review existing social programs and secure the existing safety net, with savings from this envelope coming only from efficiency gains and improved targeting. ### External balance and international reserves - Current account and reserves projections: - Authorities project improvement in current account from a deficit of 15.6 percent of GDP in 2015 to a surplus of 0.5 percent of GDP in 2017 due to exchange rate devaluation, fiscal consolidation, and expected expansion in mining exports. - Objective: raise and maintain international reserves at 4.2 months of imports by end 2017, including Fund financial support and budget support from the World Bank, IDB, and Caribbean Development Bank. - Rationale: - Raising international reserves to prudent levels is needed to enhance sustainability of the exchange rate regime and provide a stable environment for fiscal measures and reforms. ### Monetary and exchange rate policy actions - Exchange rate regime and monetary policy: - Implement a flexible exchange rate regime given substantial exposure to commodity price shocks and CBvS/financial system capacity for FX market flexibility. - Reforms to strengthen monetary/exchange rate frameworks: develop indirect monetary policy instruments, refocus CBvS operational targets to a quantitative monetary anchor, and advance FX and money markets. - Review Central Bank Act to strengthen operational independence, including eliminating short and long term government financing. - Memorandum of Understanding (MoU): - MoF and CBvS signed a MoU to stop monetary financing of budget deficits. - Liquidity management and market development: - CBvS is developing a new operational framework; currently relies mostly on reserve requirements as main policy instrument. - Treasury bills are being auctioned to improve yield curve and tradability to enable CBvS open market operations. - Government’s long-term loans with CBvS will be converted to Treasury bills to develop public debt market liquidity. - CBvS operations and transparency: - Central government interest payments to CBvS and profit transfers will be reflected transparently in the budget. - CBvS will limit FX transactions aimed at smoothing large exchange rate fluctuations and building international reserves. - CBvS will remove all exemptions from banks’ SRD reserve requirements, except those related to low-income mortgages. ### Financial sector and structural reforms - Financial sector resilience and supervision: - Need to strengthen financial sector supervision given rising macroeconomic risks; non-performing loans are relatively high and should trend lower. - FSAP noted potential rising risks in real estate sector; data constraints limit deeper analysis. - Other vulnerabilities: sensitivity to credit and concentration risks. - Regulatory and macroprudential measures: - CBvS is strengthening frameworks with 14 new regulatory measures on capital adequacy, asset classification and provisioning, corporate governance, internal audit, FX risk, liquidity risk, interest rate risk, large exposures, and open FX positions. - A modern payment system has been phased in; a Financial Stability Department was established in CBvS. - The first Financial Stability Report was published; next report to be issued in the beginning of the second half of 2016. - Additional prioritized reforms: - Reforms underway on credit reporting, deposit insurance, accounting, and auditing. - Authorities will prepare a comprehensive plan to coordinate and integrate initiatives, supported by technical assistance as needed. - Strengthen and extend capacity to manage banking resolutions per FSAP recommendations. - Business environment improvements: - Measures to boost productivity and non-mining sector activity: draft legislation on competition policy, limited liability company formation, and electronic gazettes; strengthen intellectual property, consumer protection, and electronic transactions. - Promote job-rich growth by increasing labor market flexibility supported by a well-targeted social safety net. - AML/CFT progress: - Caribbean Financial Action Task Force (CFATF) assessed amended AML/CFT regulations favorably for internal controls, regulation, and wire transfers. - Remaining legal framework deficiencies addressed by National Assembly-approved legislation in February 2016; authorities expect favorable CFATF Plenary outcome and removal from follow-up list. ### Institutional support and technical assistance - MoF reforms: - MoF embarked on ambitious reforms to modernize administrative and regulatory frameworks to reduce fiscal revenue vulnerability to commodity price shocks. - Authorities acknowledge technical assistance from the Fund’s Fiscal Affairs Department (FAD), CARTAC, and IDB. - Implementation sequencing: - VAT reform to be implemented before reforms of direct taxes and nuisance taxes to ensure fiscal sustainability and reform consistency. ### Conclusion - Authorities request financial support under a two-year Stand-By Arrangement (SBA) amounting to 265 percent of quota. - This would be Suriname’s first program since joining the Fund in April 1978. - Authorities are confident Fund support will help restore macroeconomic and financial stability and improve living standards over the medium term. *Source: _cr16141 - 2016. Revenue is estimated to increase by 0.3 percent of GDP.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16141.pdf_