Suriname: Concluding Statement of the 2016 Article IV Mission

IMF News, November 17, 2016

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Published: November 17, 2016

Context and outlook

Suriname is in an economic crisis triggered by a significant commodity terms of trade shock and exacerbated by inadequate buffers and an insufficient policy response.
Causes and recent developments:
- Drop in international gold and oil prices and cessation of alumina production led to large fiscal and current account deficits and a deep recession in 2015.
- Fiscal policy loosened during an election cycle; limited fiscal savings and few financing options led the government to resort to central bank financing of the budget deficit.
- Liquidity injection pressured the currency peg; currency market intervention and the trade shock caused a rundown of international reserves to precariously low levels.
Policy adjustment and external support:
- Authorities launched an ambitious adjustment plan in late 2015 and received international support, including a 24-month Stand-By Arrangement with the IMF of US$478 million approved in May 2016, plus commitments from the Caribbean Development Bank, Inter-American Development Bank, and World Bank.
- Government actions in late 2015: cut the budget deficit from more than 13 percent of GDP (annualized) during January–July 2015 to below 4 percent of GDP during August–December 2015; began phasing out electricity tariff subsidies; floated the exchange rate; envisaged VAT introduction by January 2018 and higher fuel taxes; aimed to increase targeted support for the most vulnerable.
Deterioration and policy slippage by mid-2016:
- Fiscal deficit brought below 6 percent of GDP (annualized) but decisions to freeze fuel pump prices in nominal terms and partially reverse electricity price increases reduced public sector resources by an estimated 0.8 percent of annual GDP per month.
- Priority spending, including social transfers, undershot envisaged levels.
- Limited action to raise interest rates from deeply negative (inflation-adjusted) levels prompted moves out of local currency assets, bouts of exchange rate depreciation, and rapid increases in consumer prices; inflation reached 77 percent in September 2016.
Outlook and projections:
- GDP contraction of 9 percent projected for 2016, following a 2.7 percent contraction in 2015.
- Inflation projected to be 60 percent at end-2016 and to decline in 2017.
- External current account deficit projected at below 4 percent of GDP in 2016; current account surplus of about 2 percent of GDP expected in 2017 due to exports from the new Newmont Merian gold mine (opened in October).
- Budget deficit projected at about 6 percent of GDP in 2016.
- Debt-to-GDP ratio projected to reach near 70 percent of 2016 GDP, including the recent takeover of state owned enterprise debt financed by a US$550 million government bond sold to external investors, and bilateral concessional loans.
Risks:
- Without significant policy adjustment, risks include deepening instability, sharp exchange rate depreciation, accelerating inflation, limited financing to cover essential government spending, and risk of resorting to central bank financing of the budget.

Fiscal policy and public financial management (recommendations)

Overall objective:
- Put fiscal position on a sustainable path; primary budget balance should move to a modest surplus by 2018 to place the debt-to-GDP ratio on a downward path.
Recommended measures:
- Raise fuel taxes
- Continue monthly fuel price increases to reinstate fuel taxes and allow international prices and exchange rate movements to be reflected in domestic prices.
- November 1 decision to raise fuel taxes by SRD 0.25 per liter is a positive step; more will be needed as pump prices remain at about 60 percent of their full-tax levels.
- Raise electricity prices
- Electricity tariffs cover one-third of cost recovery levels.
- Implement periodic tariff increases and fully eliminate electricity subsidies by end-2017.
- Structure tariff increases in a socially progressive manner (smaller increases for smaller-quantity consumers) and accompany with targeted social transfers.
- Undertake an external audit of the electricity company’s finances as a first step to achieve efficiency savings and reduce production costs.
- Improve the social safety net
- Redirect resources to the most disadvantaged through conditional cash transfers.
- Strengthen social safety net in collaboration with multilateral partners to improve targeting of social benefits.
- Contain the wage bill
- Refrain from large wage increases and reexamine public sector employment levels.
- Conduct a functional review to identify overlap across ministries, prioritize government functions, and carry out a census of public employees to identify ghost workers and double-dippers.
- Bringing government employment into line with regional comparators would provide space for public workers to recoup some real wage losses from 2015–16.
- VAT introduction
- Implement a broad-based VAT in 2018 as an urgent priority given recent revenue weakness.
- Circulate a White Paper outlining VAT objectives and a draft VAT law for stakeholder review, incorporating views from technical specialists from multilateral agencies.
Institutional reforms to bolster fiscal discipline:
- Base budget plans on realistic revenue and financing projections guided by a medium-term anchor for the non-mineral fiscal balance.
- Strengthen controls over expenditure commitments to avoid arrears.
- Expand domestic non-monetary financing via Treasury bill auctions—success requires close cooperation between the ministry of finance and the central bank and allowing rates to be fully market determined.
- Progress toward establishing a Saving and Stabilization Fund to build buffers and insulate the budget from mineral revenue volatility.

Monetary policy and financial sector recommendations

Monetary policy and inflation:
- Central Bank of Suriname (CBvS) should adopt a more active approach to reduce inflation to single digits.
- Given strong pass-through from the exchange rate to prices, achieve inflation goal by slowing currency depreciation and restoring confidence in local currency assets.
- Essential to raise interest rates to positive levels in (ex-ante) inflation-adjusted terms—this requires a significant increase in nominal rates and proactive communications that there will be scope to reduce nominal rates once inflation trends downward.
- CBvS should initiate regular open market operations as soon as possible to manage domestic liquidity.
- Maintain exchange rate flexibility and phase out central bank sales of foreign exchange to large importers to help rebuild international reserves.
Banking sector contingency planning:
- Strengthen the bank contingency planning framework—recession and currency depreciation have weakened bank, corporate, and household balance sheets.
- Adopt bank resolution framework and emergency liquidity assistance framework expeditiously to allow quick CBvS action and, if necessary, resolution of insolvent banks.
- Design clear modalities for providing emergency liquidity assistance to illiquid but solvent banks against good collateral and at penalty interest rates.
- Contingency planning should strengthen inter-agency cooperation and identify gaps in crisis prevention and management.

Structural and supply-side reforms

Objective: create foundation for return to solid, inclusive growth once macro stability is restored.
Priority reforms:
- Enhance transparency and strengthen investor protection to promote private investment and diversify the mineral-dependent economy.
- Improve governance in procurement (publication of tenders and contract awards), tackle corruption, and strengthen oversight of state-owned enterprises.
- Improve agricultural competitiveness and increase value added:
- Work with multilateral agencies to implement international best practice; increase access to credit for small- and medium-sized farmers; promote local production to reduce import dependence.
- Increase investment in human capital:
- Improve quality, efficiency, and access to education and health care.
- Expand access to high quality education; revise curriculum to better match labor market demands; enhance teacher training and coaching; renovate schools and teacher training centers.
- Reorient the health system toward primary health care and prevention, given the epidemiological profile (in particular, high incidence of diabetes).
- Promote medium-term job growth:
- Increase labor market flexibility supported by a well-targeted social safety net.
- Suriname’s employment protection regulations are among the most stringent in the world, which discourages job creation and encourages informal sector employment.
- Strengthen AML/CFT regime:
- Ensure robust AML/CFT regime and effective implementation of recent legislative measures to strengthen financial integrity, maintain financial connectedness, and mitigate risks of losing corresponding banking relationships.
- CFATF recognized Suriname’s significant progress; authorities encouraged to continue reforms to align with international standards and ensure exit from CFATF review process by May 2017.

Key statistics and projections (as reported)

Stand-By Arrangement with the IMF: US$478 million (24-month, approved May 2016).
Fuel tax increase: SRD 0.25 per liter (November 1 decision).
Pump prices at about 60 percent of full-tax levels.
Electricity tariffs cover one-third of cost recovery levels.
Fiscal deficit: more than 13 percent of GDP (annualized) during January–July 2015; below 4 percent of GDP during August–December 2015; below 6 percent of GDP (annualized) by mid-2016; projected about 6 percent of GDP in 2016.
Inflation: reached 77 percent in September 2016; projected 60 percent at end-2016.
GDP growth: contraction of 2.7 percent in 2015; projected contraction of 9 percent in 2016.
External current account: projected below 4 percent of GDP deficit in 2016; current account surplus of about 2 percent of GDP expected in 2017.
Debt-to-GDP ratio: projected to reach near 70 percent of 2016 GDP (including takeover of SOE debt financed by a US$550 million government bond sold to external investors, and bilateral concessional loans).
Newmont Merian gold mine opened in October (supports activity; contributes to expected 2017 current account surplus).

The mission is grateful to the authorities and to other counterparts for constructive discussions and for their hospitality.

Source: IMF — Suriname: Concluding Statement of the 2016 Article IV Mission (November 17, 2016).