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IMF Mission for the 2011 Article IV Consultation with Suriname Concluding Statement
February 17, 2011
Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.
At the end on its two-week visit to Paramaribo, the IMF mission for the 2011 Article IV consultation with Suriname, headed by Mr. Gamal El-Masry, presented the following concluding statement to the authorities:
The mission would like to thank the authorities for their warm hospitality and generous assistance in coordinating our meetings with government officials and representatives of the private sector, labor, the diplomatic community, and the opposition.
I. Background and Near-Term Outlook
1. Economic activity has picked up, even as pressures on prices have increased.
• Growth: Economic growth is estimated to have risen from 3 percent in 2009 to 4.5 percent in 2010, driven by a rebound in prices of Suriname’s main commodity exports (gold, petroleum, and alumina), higher alumina production, and elevated government spending. The mission expects growth to pick up further in 2011, to about 5 percent, supported by continued buoyant commodity prices, and large capital investments in the mineral and energy sectors.
• Prices: Twelve-month inflation topped 10 percent in December 2010, up from 1.3 percent at end-2009, driven by higher food prices and government spending. During 2010, the currency depreciated in the parallel market, reflecting in part uncertainties associated with the election cycle and increased spending, including on higher civil service wages.
• Public finances: Despite robust economic growth, the fiscal deficit is estimated to have widened from 3 percent of GDP in 2009 to 3½ percent in 2010.
Revenue is estimated to have declined, mainly due to lower dividend payments (nontax payments) from Staatsolie, the state-owned oil company (reflecting lower oil prices in 2009). Grants declined, as Netherlands Treaty Fund disbursements come to an end. On the other hand, tax revenue held steady, with lower payments from SURALCO offset by higher receipts from the commercial gold sector.
Expenditures remained at elevated levels. The outgoing government started to implement the second phase of the civil service wage reform (FISO-2) in July 2010, awarding half of the negotiated increase, with the second half provided in January 2011. In addition, spending on goods and services surged in the first half of 2010, financed in part by a large build-up in domestic payment arrears, estimated at about 1 percent of GDP. Capital expenditure declined, reflecting lower non-grant-financed projects.
Public debt rose during 2009-10 from a low level. It is estimated to have grown from 18 percent of GDP in 2008 to about 21½ percent in 2010. The authorities recently raised the legal limit for domestic debt from 15 percent of GDP to 25 percent, while lowering the foreign debt ceiling from 45 percent of GDP to 35 percent. In recent years, the authorities cleared all external debt arrears except for those with the U.S. government. These are estimated at US$32 million, or 0.9 percent of GDP. The authorities are in discussions with the United States on an early resolution of these arrears.
• Balance of payments: The external current account balance is estimated to have improved since 2009, to a surplus of about 1½ percent of GDP in 2010. Mineral exports are thought to have increased substantially, boosted by higher prices for all three main exports (alumina, gold, and oil). Against the backdrop of depleted bauxite production from current mines, the improved outlook in the aluminum sector prompted SURALCO to import bauxite from neighboring Brazil to raise its production and exports of alumina. Gross international reserves rose by US$22 million in 2010, to US$785 million at year-end (or 4½ months of imports).
• Monetary conditions: Money growth has been easing. Twelve-month private sector credit growth has slowed since early 2009, and reached 10½ percent at end-2010. Broad money growth, after peaking at 29 percent in February 2010, fell to 11 percent at end-2010, reflecting a tightening of policies in the last quarter of the year. The level of excess reserves held by commercial banks at the central bank has also moderated, as banks used some of these reserves to lend to the government. They also provided bridge loans to private sector companies that were facing delays in payments for services rendered to the government.
II. Recent Policy Actions
2. On January 20, the authorities devalued the official exchange rate by 20 percent vis-à-vis the US dollar. This operation brought the rate in the official market broadly in line with that in the parallel market. In December, the authorities also raised the reserve requirements on foreign currency deposits from 33 percent to 40 percent. These actions appear to have calmed the foreign exchange market, and the Suriname dollar is reportedly trading against the U.S. dollar in the parallel market at a discount of less than 2 percent.
3. Also on January 20, the authorities raised the fuel tax. This, together with the impact of the devaluation on the import price of fuel, pushed up the pump price by 35-40 percent, and increased the government take per liter of fuel by about 70 percent. On an annualized basis, it is estimated that the government take would grow by ¾ percent of GDP. The mission projects that the devaluation, combined with the fuel price adjustment, other consumption tax increases, and higher world food prices, could raise average inflation in 2011 to about 16 percent.
III. Policy Recommendations
4. Against this background, the main challenge facing the authorities is to ensure that inflation expectations do not become entrenched in the Suriname economy. To that effect, the authorities would be well advised to tighten fiscal and, if need be, monetary policies to avoid second-round effects of the initial jump in inflation, and support the new level of the exchange rate. Likewise, it will be important for private sector employers and employees to agree on moderate and forward-looking wage increases, so as not to stoke a process of spiraling inflation and loss of competitiveness. Over the medium-to-long term, the authorities are encouraged to pursue a balanced approach between saving the surplus mineral revenues for future generations and investing in human capital and productive infrastructure projects to help diversify the economy and support sustainable growth in the non-mineral sector.
Fiscal policy
Fiscal stance
5. The mechanical effect of the recent devaluation would help improve the fiscal balance. Higher government revenues from the large mining companies, customs duties, and sales tax on imports will more than offset the expected increase in expenditures from more expensive government imports and external interest payments. The mission, therefore, estimates a net positive impact of the devaluation on government finances of about 1½ percent of projected 2011 GDP.
6. The authorities have also proposed a number of additional revenue measures. These include a widening of the sales tax base and an increase in its rate, higher excise taxes on alcohol and tobacco products, an increase in the presumptive tax on casinos, and a reactivation of the motor vehicle tax. At the same time, the authorities have proposed a general tax credit and a fuel subsidy for bus and boat operators, as well as bakeries. These measures are expected to be approved by the National Assembly in the coming months, for implementation in the second half of this year. The motor vehicle tax would be rolled out in stages over a few years. The authorities have also embarked on a comprehensive project to register informal gold sector operators and bring them into the tax fold through a well-designed presumptive tax system.
7. While the mission broadly supports the authorities’ plans to raise revenue, it encourages them to intensify their efforts to rein in government spending, particularly on goods and services. In addition, the mission advises the government to expand capital spending prudently, consistent with fiscal sustainability and the country’s implementation capacity. Specifically, the mission advises the authorities to:
• pace the withdrawal of fiscal stimulus from the economy, by phasing in the motor vehicle registration tax over 3-4 years, starting in 2012;
• intensify their efforts to ensure that the informal gold sector pays its fair share of tax to the national coffers;
• limit spending on goods and services, while clearing all domestic arrears in 2011 (arrears are estimated at about SRD 100 million);
• continue their efforts to strengthen indirect tax administration by introducing a VAT system in late-2012 or early-2013;
• improve the management of key public utility companies to regularize their payments obligations and ensure that their operations are conducted on a commercial basis; and
• design and implement social support programs targeted at vulnerable groups, possibly with the assistance of the IADB. To this end, the proposed general tax credit could be better targeted.
8. The mission recommends that the authorities aim for a fiscal deficit in 2011 of about 2 percent of GDP, an improvement of about 1½ percent of GDP over the 2010 level. Given the authorities’ plans to increase foreign borrowing from multilateral agencies to finance capital projects, this lower deficit level would practically eliminate the need for central bank financing of the budget. It would also permit the government to repay domestic arrears, while providing sufficient room for commercial banks to expand credit to the private sector. The tight fiscal and monetary stance would, in turn, help reduce inflation expectations and support the new level of the exchange rate.
9. The mission recommends that, over the medium term, the government aim at reducing the non-mineral fiscal deficit by 4-5 percentage points of GDP. Such an adjustment would allow the fiscal accounts to revert back to a small surplus, once revenues from major resource projects (gold, oil refining, and bauxite) start to materialize over the next 3-4 years. This would be consistent with the government saving mineral revenues in the surplus years for future generations. The mission encourages the authorities to start a national dialogue with social partners, with a view to forming a national consensus on structures and institutions that need to be established over the medium term to save and manage these resources. In this context, the mission welcomes the authorities’ efforts to strengthen their capacity in public finance management with assistance from the IADB and CARTAC.
Civil service reform
10. The new administration has agreed to honor the commitment of the outgoing government and, accordingly, implemented the second phase of FISO-2 in January 2011. The mission is concerned that the large expansion in the civil service wage bill over the past 24 months could drive wages up in the private sector, thereby seriously undermining the gains secured by the recent devaluation. If left unchecked, this could put pressure on the balance of payments, weaken the exchange rate and, ultimately, rekindle inflation.
Capital projects
11. The mission supports the government’s program of providing and enhancing vital infrastructure, including improving utilities, critical roads, and port facilities. In addition, large investments are underway in the energy and mining sectors (such as a new refinery) or are likely to begin in the near future (such as new bauxite and gold mines in Eastern Suriname). The mission expects that these capital projects will boost economic activity in the years ahead. Over the medium-to-long term, they are expected to raise the country’s growth potential. However, the authorities should pace government projects in line with the country’s implementation capacity, and seek to finance them through affordable foreign loans or grants, so as not to unduly burden the country’s debt service capacity.
Monetary and exchange rate policies
12. The mission welcomes the authorities’ actions to unify the official and market exchange rates and to do away with multiple currency practices. The mission estimates that the calculated overvaluation of the currency at end-2010 was broadly corrected through the devaluation in January 2011. This inference is supported by the reduced spread in the parallel foreign exchange market, and the increase in supply of foreign currency that, post devaluation, is being channeled through the banking system. Over the medium term, the mission encourages the authorities to move toward a more market-determined exchange rate regime.
13. There may be a need to tighten monetary conditions in the near term, in an effort to prevent the entrenchment of inflation expectations. As noted, 12-month inflation is expected to rise in the coming months, following the devaluation and higher fuel prices. As the central bank does not conduct open market operations, it is currently considering the sale of government paper to commercial banks, in an effort to mop up liquidity. This is a welcome development. However, the central bank should also be prepared to temporarily raise reserve requirements on local currency deposits, should the scope and timeliness for such operations prove to be inadequate to stabilize the currency and contain inflation expectations. Over the medium term, the central bank should strengthen its capacity to conduct open market operations as its main monetary policy tool to adjust interest rates.
Financial sector policies
14. Banks appear to be generally well funded. The problems surrounding CLICO (Suriname) appear to have been resolved convincingly:
• Commercial banks’ profitability has declined, while the nonperforming loan (NPL) ratio for the banking sector as a whole stabilized at 7.9 percent at end-2010. However, there is a noticeable variation among banks, with the NPL ratios for the three small state-owned banks higher than the average. The mission welcomes the authorities’ efforts, with assistance from the IADB, to strengthen banking supervision and improve the management and financial health of state-owned banks.
• The acquisition of CLICO (Suriname) by a local insurance company, Self Reliance Insurance, appears to have been completed smoothly. This acquisition was facilitated by a government loan (0.4 percent of GDP), allowing the annuity liabilities of CLICO to be rescheduled at a lower interest rate, an approach supported by a large portion of policyholders.
Structural issues
15. The government is scheduled to restart negotiations soon with foreign partners on large commercial gold and bauxite mining operations in Eastern Suriname. The mission notes the authorities’ plan to enhance Suriname’s share in these and future contracts for the exploitation of its natural resources. Suriname’s comfortable foreign reserves and low debt ratio would enable the government to make sizeable investments in the mining sector. This would give Suriname an opportunity to increase its share in the exploitation of the country’s natural resources and ensure a greater flow of government revenue for the benefit of the broad population. That said, the mission advises that such investments be undertaken after careful assessment of their viability and within a long-term comprehensive growth strategy of diversification, and economic and environmental sustainability.
16. The authorities are making commendable efforts to improve the business environment. By streamlining government procedures, it is reported that the time needed to register a limited liability company has been reduced from 500 days to less than a month. The mission welcomes these efforts and encourages the authorities to review the legislative framework to ensure that unnecessary bureaucratic hurdles for the registration and issuance of licenses for bona fide businesses and activities are removed.
17. The mission recommends that the next Article IV consultation be conducted on the standard 12-month cycle. In the interim, it would be useful to have a short staff visit, in about 6-7 months, to continue the policy dialogue.
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