Suriname: Concluding Statement of the 2016 Article IV Mission

November 17, 2016

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. 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, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

Context and Outlook 

1. 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. The drop in international gold and oil prices and the cessation of alumina production resulted in large fiscal and current account deficits and the onset of a deep recession in 2015. Fiscal policy was loosened significantly in the context of an election cycle and, with limited fiscal savings and few financing options, the government resorted to central bank financing of the budget deficit. The resulting injection of liquidity put pressure on the currency peg. This was met with currency market intervention which, together with the trade shock, led to a rundown of international reserves to precariously low levels.

2. The authorities launched an ambitious adjustment plan in late 2015, which subsequently received financial support from the international community. The government reined in spending, cutting 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. The authorities also began to phase out electricity tariff subsidies. To facilitate adjustment to the terms of trade shock, and to support a rebuilding of foreign reserves, the authorities floated the exchange rate, which, together with the tightened fiscal policy, contributed to an improvement in the external current account. Critically, to soften the impact of the macroeconomic adjustment on the poor, the authorities’ program envisaged an increase in targeted support for the most vulnerable. To create additional sources of non-mineral revenue, the government envisaged introducing a value added tax (VAT) by January 2018, and increasing taxes on fuel. Suriname’s adjustment efforts received support from the international community in the form of a 24-month Stand-By Arrangement with the IMF of US$478 million approved in May 2016, as well as financing commitments from the Caribbean Development Bank, Inter-American Development Bank, and World Bank.

3. By mid-2016, however, with a deepening recession and rising social tensions, progress on a number of policy reforms either stalled or was reversed. The government brought the fiscal deficit below 6 percent of GDP (annualized) and implemented a number of planned reforms, including preparations for VAT introduction. However, the decisions to freeze fuel pump prices in nominal terms and partially reverse the increase in electricity prices (despite rising energy costs and a depreciating exchange rate) is reducing available public sector resources by an estimated 0.8 percent of annual GDP per month. Priority spending, including on social transfers, undershot envisaged levels. With limited action by the authorities to raise interest rates from their deeply negative levels (in inflation-adjusted terms), there has been a move out of local currency assets, with bouts of exchange rate depreciation and rapid increases in consumer prices. Inflation reached 77 percent in September 2016.

4. The economic outlook remains challenging. For 2016, a GDP contraction of 9 percent is projected, following a 2.7 percent contraction in 2015. The deep recession reflects a number of factors, including spillovers from the closure of the Suralco alumina plant and the contractionary impact of the fiscal adjustment. In October, the Newmont Merian gold mine opened, which will support economic activity, and the recession is expected to ease in 2017. Inflation is projected to be 60 percent at end-2016 and to decline in 2017. Import compression has narrowed the external current account deficit, which is projected at below 4 percent of GDP in 2016. A current account surplus of about 2 percent of GDP is expected in 2017, on the back of exports from the new gold mine. The budget deficit is projected at about 6 percent of GDP in 2016, with the 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.

5. Ensuring a return to macroeconomic stability and growth requires decisive reforms. Without a significant policy adjustment, Suriname risks deepening instability, with sharp exchange rate depreciation and accelerating inflation. There is limited financing to cover essential government spending—including public wages, pensions, and social support to the most disadvantaged—and the risk of resorting to central bank financing of the budget exists. There are few policies in place to address rising inflation, international reserves are critically low and, owing to the recession and currency depreciation, banks face risks of a further deterioration in credit quality.

Economic Policies

6. Discussions with the authorities focused on strategies to improve the sustainability of the fiscal position, lower inflation, protect the poor from the costs of adjustment, and stimulate private investment and job creation, laying a path toward sustained growth. The fiscal position needs to be put on a sustainable path by raising fuel taxes, phasing out electricity subsidies, keeping tight control of the wage bill, including by reexamining the level of public sector employment, and creating space for priority social and capital expenditures. Higher short-term interest rates are necessary to create demand for local currency assets, slow the pace of currency depreciation, and reduce inflation. This will generate short-term output costs but will allow for a stabilization of the economy. Steps are also needed to foster faster medium-term growth by strengthening the institutional framework and creating an environment conducive to private investment.

7. The primary budget balance should move to a modest surplus by 2018 to put the debt-to-GDP ratio on a downward path . Fiscal adjustment measures should include:
  • Raising fuel taxes. The authorities should continue implementing monthly fuel price increases to reinstate fuel taxes and then allow movements in international prices and the exchange rate to be fully reflected in domestic prices. The November 1 decision to support tax revenues by raising fuel taxes by SRD 0.25 per liter is a good step, and more will be needed, as pump prices remain at about 60 percent of their full-tax levels.

  • Raising electricity prices. Electricity tariffs cover one-third of cost recovery levels. The authorities should implement periodic tariff increases and fully eliminate electricity subsidies by end-2017. Tariff increases should be structured in a socially progressive manner, with smaller increases for smaller-quantity consumers, and accompanied by targeted social transfers. To achieve efficiency savings and reduce production costs, the authorities are planning, as a first step, to undertake an external audit of the electricity company’s finances.

  • Improving the social safety net. The authorities should mitigate the impact of macroeconomic adjustment on the most vulnerable by redirecting resources to the most disadvantaged through the provision of conditional cash transfers. Strengthening the social safety net, in collaboration with multilateral partners, could improve the targeting of social benefits and lay the groundwork for a more effective mitigation of the social consequence of future shocks.

  • Containing the wage bill. The authorities intend to control the share of wages in GDP by refraining from large wage increases. Public employment in Suriname as a share of the working age population is among the highest in the world, and reducing public employment is an important medium-term goal. Such a reform will require a functional review, including to identify overlap across ministries, and to prioritize government functions. There is also a need for a census of public employees to identify ghost workers and double-dippers. Bringing the number of government employees into line with regional comparators would provide space for public workers to recoup some of the loss in their real wages that occurred in 2015–16.

  • VAT introduction. The recent revenue weakness means that efforts toward implementing a broad-based VAT in 2018 are an urgent priority. A White Paper outlining the government’s VAT objectives and a draft VAT law should be expeditiously circulated for stakeholder review and incorporate views from technical specialists from the multilateral agencies.

8. Strengthening public financial resilience over the medium term requires institutional reforms to bolster fiscal discipline. The authorities have expressed their intention to improve public financial management, including by basing budget plans on realistic revenue and financing projections guided by a medium-term anchor for the non-mineral fiscal balance, and by strengthening controls over expenditure commitment to avoid arrears. To provide a non-monetary source of domestic financing, the authorities have launched Treasury bill auctions. Ensuring their success will require close cooperation between the ministry of finance and the central bank, and allowing the rates on these bills to be fully market determined. The authorities are making progress toward establishing a Saving and Stabilization Fund, which would help build buffers over the medium-term and insulate the budget from the volatility of mineral sector revenue.

9. The Central Bank of Suriname (CBvS) should adopt a more active approach to reducing inflation to single digits. Given the significant pass-through from the exchange rate to prices, achieving the authorities’ inflation goal will require slowing the pace of currency depreciation through a restoration of confidence in local currency assets. To do this, it is essential to raise interest rates to positive levels in (ex-ante) inflation-adjusted terms. This will involve a significant increase in nominal rates that should be accompanied by proactive communications efforts to make clear that there will be scope to reduce nominal rates once inflation is trending downward. To operationalize this strategy, the CBvS should initiate, as soon as possible, regular open market operations to manage domestic liquidity. Maintaining exchange rate flexibility and phasing out central bank sales of foreign exchange to large importers will also be vital in rebuilding international reserves.

10. The contingency planning framework for banks should be strengthened. Recession and currency depreciation have weakened bank, corporate, and household balance sheets, and created strains in the banking system. The bank resolution framework and emergency liquidity assistance framework should be adopted expeditiously to allow for quick CBvS action to address weaknesses and, if necessary, resolve insolvent banks. The CBvS should design clear modalities for providing emergency liquidity assistance to illiquid but solvent banks against good collateral and at penalty interest rates. Finally, contingency planning would allow the authorities to prepare for negative outcomes, strengthen inter-agency cooperation, and help identify gaps in the crisis prevention and management toolkit.

11. Supply side reforms will be essential to create the foundations for a return to solid growth. Once the policies to support macroeconomic stability are in place, the challenge will be to raise living standards, create meaningful employment, and foster medium-term growth. While there are multiple structural impediments to strong, sustained and equitable growth, the priorities should include:
  • Enhancing transparency and strengthening investor protection to help promote private investment and facilitate diversification of Suriname’s mineral commodity-dependent economy. It is important to improve governance in procurement, including through the publication of tenders and contract awards, tackle corruption, and strengthen oversight of state-owned enterprises.

  • Steps to improve agricultural competitiveness and increase value added, including by working closely with multilateral agencies to advance implementation of international best practice; increasing access to credit for small- and medium-sized farmers; and promoting local production to reduce import dependence.

  • Increasing investment in human capital through efforts to improve the quality, efficiency, and access to education and health care. Policy priorities include expanding access to high quality education, revising the curriculum to better connect it to today’s labor market demands, enhancing teacher training and coaching, and renovating schools and teacher training centers. Reorienting the health system towards primary health care and prevention is a priority, especially given the epidemiological profile (including, in particular, a high incidence of diabetes).

  • Promoting medium-term job growth by taking decisive steps to 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.

  • Ensuring a robust AML/CFT regime and effective implementation of recent legislative measures to support efforts to strengthen the integrity of the financial system, help to maintain financial connectedness, and mitigate potential risks of losing corresponding banking relationships. While the CFATF recognized Suriname’s significant progress in addressing AML/CFT shortcomings, the authorities were encouraged to continue the reform process to align the AML/CFT regime with international standards in order to ensure Suriname’s exit from CFATF review process by May 2017.

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

IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Raphael Anspach

Phone: +1 202 623-7100Email: MEDIA@IMF.org