IMF Mission for the 2011 Article IV Consultation with Suriname Concluding Statement
IMF News, February 17, 2011
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- Published: February 17, 2011
I. Background and Near-Term Outlook
- Growth
- Estimated growth rose from 3 percent in 2009 to 4.5 percent in 2010.
- Mission expects growth to pick up further in 2011, to about 5 percent, supported by 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.
- Currency depreciated in the parallel market during 2010 reflecting election-cycle uncertainties and increased spending, including higher civil service wages.
- Public finances
- Fiscal deficit estimated to have widened from 3 percent of GDP in 2009 to 3½ percent in 2010.
- Revenue declined mainly due to lower dividend payments (nontax payments) from Staatsolie; grants declined as Netherlands Treaty Fund disbursements ended; tax revenue held steady (lower SURALCO payments offset by higher commercial gold receipts).
- Expenditures elevated; second phase of civil service wage reform (FISO-2) partially implemented in July 2010 and completed in January 2011; surge in spending on goods and services in H1 2010 partly financed by domestic payment arrears estimated at about 1 percent of GDP.
- Capital expenditure declined reflecting lower non-grant-financed projects.
- Public debt rose from 18 percent of GDP in 2008 to about 21½ percent in 2010.
- Legal limit for domestic debt raised from 15 percent of GDP to 25 percent; foreign debt ceiling lowered from 45 percent of GDP to 35 percent.
- External debt arrears with the U.S. government estimated at US$32 million, or 0.9 percent of GDP; discussions underway with the United States.
- Balance of payments
- External current account estimated to have improved to a surplus of about 1½ percent of GDP in 2010.
- Mineral exports increased substantially (alumina, gold, oil); SURALCO imported bauxite from Brazil to bolster alumina production.
- Gross international reserves rose by US$22 million in 2010 to US$785 million at year-end (or 4½ months of imports).
- Monetary conditions
- Twelve-month private sector credit growth slowed and reached 10½ percent at end-2010.
- Broad money growth fell from a 29 percent peak in February 2010 to 11 percent at end-2010 after policy tightening.
- Excess reserves at the central bank moderated as banks lent to the government and provided bridge loans to private firms.
II. Recent Policy Actions
- Exchange rate and reserves
- On January 20, the authorities devalued the official exchange rate by 20 percent vis-à-vis the US dollar, bringing the official rate broadly in line with the parallel market.
- In December, reserve requirements on foreign currency deposits were raised from 33 percent to 40 percent.
- Post-actions, the Suriname dollar reportedly trades in the parallel market at a discount of less than 2 percent.
- Fuel and inflation
- On January 20, authorities raised the fuel tax; combined with devaluation, pump price rose by 35-40 percent and government take per liter increased by about 70 percent.
- Government take projected to grow by ¾ percent of GDP on an annualized basis.
- Mission projects average inflation in 2011 could rise to about 16 percent due to devaluation, fuel adjustment, other consumption tax increases, and higher world food prices.
III. Policy Recommendations
- Overarching guidance
- Tighten fiscal and, if needed, monetary policies to avoid second-round inflation effects and support the new exchange rate.
- Private sector and labor should agree on moderate, forward-looking wage increases to avoid spiraling inflation and competitiveness loss.
- Pursue a balanced medium-to-long term approach between saving surplus mineral revenues and investing in human capital and productive infrastructure to diversify the economy and support sustainable non-mineral growth.
- Fiscal policy: stance and measures
- Devaluation has a net positive fiscal impact estimated at about 1½ percent of projected 2011 GDP (higher revenues offset higher import and external interest costs).
- Authorities proposed revenue measures: widening the sales tax base and increasing its rate; higher excise taxes on alcohol and tobacco; increase in presumptive tax on casinos; reactivation of motor vehicle tax; general tax credit and fuel subsidy for bus/boat operators and bakeries; registration and presumptive taxation of informal gold sector.
- Mission supports revenue measures but urges intensified efforts to rein in spending on goods and services and prudent expansion of capital spending.
- Specific advice:
- Pace withdrawal of fiscal stimulus by phasing in motor vehicle registration tax over 3-4 years, starting in 2012.
- Intensify efforts to ensure informal gold sector pays taxes.
- Limit spending on goods and services, while clearing all domestic arrears in 2011 (arrears are estimated at about SRD 100 million).
- Continue strengthening indirect tax administration by introducing a VAT system in late-2012 or early-2013.
- Improve management of key public utility companies to regularize payments and ensure commercial operations.
- Design and implement targeted social support programs, possibly with IADB assistance; consider better targeting the proposed general tax credit.
- Target for 2011 fiscal deficit: about 2 percent of GDP (an improvement of about 1½ percent of GDP over 2010).
- This would largely eliminate need for central bank financing, allow repayment of domestic arrears, and provide room for banks to expand private sector credit.
- Medium-term objective: reduce the non-mineral fiscal deficit by 4-5 percentage points of GDP to revert to a small surplus once resource-project revenues materialize over the next 3-4 years.
- Mission encourages a national dialogue to build consensus on institutions to save and manage resource revenues; welcomes capacity-strengthening efforts with IADB and CARTAC assistance.
- Civil service reform
- Authorities implemented second phase of FISO-2 in January 2011; mission concerned that large civil service wage bill expansion over 24 months could push up private-sector wages and undermine devaluation benefits.
- Capital projects
- Mission supports infrastructure and large energy/mining investments (new refinery, new bauxite and gold mines) but advises pacing projects to match implementation capacity and financing through affordable foreign loans or grants to protect debt service capacity.
- Monetary and exchange rate policies
- Mission welcomes unification of official and market exchange rates and elimination of multiple currency practices; devaluation broadly corrected end-2010 overvaluation.
- Encourage move toward a more market-determined exchange rate regime over the medium term.
- Short-term: may need tighter monetary conditions to prevent entrenchment of inflation expectations; central bank considering sale of government paper to mop up liquidity and should be prepared to temporarily raise reserve requirements on local currency deposits if needed.
- Medium-term: central bank should strengthen capacity to conduct open market operations as its main monetary policy tool.
- Financial sector policies
- Banks generally well funded; banking-sector NPL ratio stabilized at 7.9 percent at end-2010 with higher NPLs at three small state-owned banks.
- Mission welcomes IADB-assisted efforts to strengthen supervision and state-owned banks’ management.
- CLICO (Suriname) acquisition by Self Reliance Insurance completed; government loan of 0.4 percent of GDP facilitated rescheduling of annuity liabilities at a lower interest rate.
- Structural issues and business climate
- Authorities plan to restart negotiations on large commercial gold and bauxite operations in Eastern Suriname and aim to enhance Suriname’s share in exploitation contracts; mission advises careful viability assessment and alignment with long-term diversification and environmental sustainability.
- Business environment improvements noted: time to register a limited liability company reportedly reduced from 500 days to less than a month; mission encourages legislative review to remove unnecessary bureaucratic hurdles.
- Surveillance and follow-up
- Mission recommends next Article IV consultation on the standard 12-month cycle.
- Suggests a short staff visit in about 6-7 months to continue policy dialogue.
IMF Mission for the 2011 Article IV Consultation with Suriname Concluding Statement (Paramaribo, February 17, 2011)