Suriname-2009 Article IV Consultation Concluding Statement of the IMF Mission
November 2, 2009
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 of its two-week visit to Paramaribo, the mission for the 2009 Article IV consultation with Suriname, headed by Mr. Gamal El-Masry, presented the following concluding statement to the authorities:
We would like to thank the authorities for their warm hospitality, excellent cooperation, 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. Reflecting the global slowdown, economic activity is decelerating, and price pressures have eased considerably.
• Growth: Faced with a sharp output decline in the alumina sector, combined with lower alumina and oil prices, economic growth is expected to slow to 2½ percent in 2009, down from an estimated level of 6 percent in 2008. Weaker activity in the alumina sector is being partly offset by stronger performance in the gold (both formal and informal) and construction sectors.
• Prices: Twelve-month inflation is expected to drop to -1 percent in 2009, thanks to lower international prices for food and fuel, and softer domestic demand. While food, energy, and transportation have a large weight in the consumer price index (55 percent) and their prices are rapidly falling, core inflation is also easing.
• Balance of payments: The external current account balance is expected to deteriorate from a surplus of 4 percent of GDP in 2008 to a deficit of 2 percent of GDP in 2009. Lower alumina exports are being partly offset by higher gold exports. In the near term, the current account balance is projected to deteriorate further, before rebounding strongly beginning in 2013, when large bauxite and gold mines in the Eastern Nassau region are expected to come on line, and the expansion of Staatsolie’s refining capacity is completed. In the capital account, a large drawdown from the Netherlands Treaty Fund was used in 2009 to clear longstanding arrears with Brazil. Taking into account the recent SDR allocations (US$125 million), international reserves are projected to rise to the equivalent of 5¼ months of imports in 2009, up from 4¼ months in 2008.
• Monetary conditions: Private credit growth, having peaked at 42 percent (y/y) in July 2008, has since then fallen steadily, to 18 percent in August 2009. Similarly, broad money growth, after cresting at 33 percent in 2008Q1, decelerated to 8 percent in 2009Q1, before picking up to 19 percent in August 2009. Since 2007, the CBvS has kept the effective reserve requirement on domestic currency deposits at 15 percent and that on foreign currency deposits at 33.3 percent.
• Public finances: The underlying fiscal position (i.e., excluding operations in connection with the one-off Brazilian debt repayment) is likely to deteriorate by 3½ percent of GDP in 2009 and a further 1¼ percent of GDP in 2010.
• Revenues: While the authorities have been running comfortable surpluses during 2006–08, owing to rising revenues from strong economic growth, including buoyant mineral sectors, the drop in oil and alumina prices since 2008Q4 is depressing revenues. The revenue situation would be even worse in 2009, if not for exceptionally high dividend receipts from Staatsolie and the Central Bank of Suriname (CBvS).
• Expenditures: The cyclical deterioration in the public finance is amplified by a surge in expenditures resulting from: (i) civil service wage increases initiated in March 2009 (see below); (ii) higher pension and other transfer payments; (iii) the introduction of a mortgage subsidy scheme covering 2009–10; and (iv) large capital projects projected to begin in 2010. There are also potential additional expenditures which may need to be borne by the budget to cover the still unresolved situation surrounding CLICO-Suriname, and other adjustments to pension payments.
• Public debt: In recent years, healthy fiscal surpluses, along with robust economic growth, and the clearance of longstanding arrears with bilateral creditors have helped to lower the debt-to-GDP ratio from 37 percent of GDP in 2005 to a projected 16 percent at end-2009. Following the clearance of US$118 million in Brazilian debt—including a write-off of US$44 million—Suriname now only has remaining bilateral arrears with the United States, estimated at US$31 million (1 percent of GDP). Suriname has offered to pay the principal and interest, while asking the United States to waive the penalties, estimated at about US$15 million.
II. Policy Recommendations
2. With a low public debt level (18 percent of GDP at end-2008), Suriname has some fiscal space to implement countercyclical policies, provided that they are timely, targeted, and temporary. The relaxation of the fiscal stance in 2009 is providing a boost to domestic demand, at a time when the economy is growing below its potential, estimated at 5 percent. Moreover, large capital projects are expected to come online and sustain economic activity in 2010 and beyond. The fiscal accounts are projected to revert back to a surplus starting in 2013, as economic output and commodity prices recover. Over the medium to long term, revenues are likely to enjoy a further permanent boost from a higher level of government participation in the alumina and gold sectors.
3. At the same time, it will be important that fiscal policy be consistent with macroeconomic stability, fiscal sustainability, and the country’s capacity constraints. To this end, the mission advises the authorities to:
• (i) delay the second phase of the wage reform program until the fiscal accounts have stabilized;
• (ii) resist pressures to further boost spending ahead of the May 2010 elections, and keep current spending under control over the medium term;
• (iii) strengthen direct and indirect tax administration, including by drawing on CARTAC assistance in this area; and
• (iv) prudently expand foreign borrowing to finance the government’s expected investments in infrastructure and the mining sectors.
Civil service reform
4. The wage bill is expected to surge by almost 30 percent in 2009. In March 2009, the government started to implement the first phase of a two-step wage reform program, known as FISO-1. From March 2009 to April 2010, double the monthly wage increment will be paid to cover the backdated adjustment due since January 2008. The IMF mission conservatively estimates that the implementation of FISO-1 would raise the wage bill by 29 percent, from SRD 760 million in 2008 to about SRD 980 million in 2009. This is likely to be an under-estimation of the full-year effect under FISO-1, because a number of ministries are still in the process of adjusting their wage structure, and may not complete the process before early 2010.
5. There is a real risk that implementing the second phase of the wage reform program will trigger high inflation. Even as the economy in general, and the budget in particular, are struggling to absorb the large wage increase under FISO-1, plans are well-advanced to implement the second phase of the civil service reform (FISO-2), in early 2010, with effect from January 1, 2009. The objective of FISO-2 is to decompress the civil service wage structure from a ratio of about 1:4 to a ratio of 1:6. This would entail wage adjustments at the top end of the pay scale of up to 45 percent, and across the civil service estimated at about 15 percent on a weighted-average basis. If implemented in full, FISO-1 and FISO-2 would result in a cumulative expansion of the wage bill in excess of SRD 400 million (4½ percent of 2009 GDP)—or more than 50 percent—in the span of just two years. The mission is concerned that such a huge and permanent expansion in the civil service wage bill will quickly drive up wages in the private sector, thereby seriously undermining the economy’s competitiveness; put considerable pressure on the balance of payments; significantly weaken the exchange rate; and ultimately lead to significantly higher inflation.
6. The mission strongly recommends to the authorities to delay the implementation of FISO-2 by at least one year. Given Suriname’s negative experience with near-hyperinflation and economic collapse in the late-1990s—also triggered by massive civil service wage increases starting in 1996 when inflation was still negative—the government, and indeed society at large, cannot be oblivious to such a risk. It is therefore critical for all parties, including the business community, labor, and the opposition, to act with a heightened sense of caution and collective responsibility.
7. The mission wishes to underscore its support for the policy of improving the competitiveness of civil service pay. This would help enhance the recruitment and retention of qualified staff, increase efficiency in the civil service, and reduce corruption. However, this commendable objective must be implemented within a sustainable macroeconomic context. The mission, therefore, encourages the authorities to implement FISO-2 over a period of 3-4 years, starting in, and effective, January 2011. In the same vein, adjusting civil service pensions, while commendable from a social perspective, will also need to be phased in over a reasonable period, so as not to add to inflationary pressures.
8. The government’s capital program should be implemented in a sustainable way and consistent with the country’s absorptive capacity. The mission supports the government’s program of providing and enhancing vital infrastructure, including critical roads and port facilities. There are also large investments in the oil refining and mining sectors that are either underway or expected to begin in the near future. These capital projects will not only sustain economic activity in the years of their construction, but also raise the country’s growth potential in the medium to long term. The authorities should pace these projections in line with the country’s implementation capacity, and seek to finance them through affordable foreign loans or grants, so as not to overly burden the public finances. In this connection, clearing the remaining arrears with the United States could help improve Suriname’s credit ratings and reduce the costs of commercial borrowing.
9. The stance of monetary policy seems to be appropriate. Notwithstanding the sharp decline in inflation, the authorities should maintain the monetary policy stance at this stage, given that private sector credit growth at 18 percent is still quite high, at a time when domestic demand has already been boosted by the large wage awards for civil servants. Over the medium term, the central bank should move toward relying on open market operations as the main monetary policy tool to adjust interest rates. The mission encourages the central bank to seek technical assistance to strengthen its capacity in this area.
Financial sector policies
10. While the banking sector has weathered the global financial crisis rather well, financial dollarization in Suriname bears the risk of heightening vulnerabilities arising from potential currency mismatches. Commercial banks’ profitability has declined, while the NPL ratio for the banking sector as a whole has risen from 7.9 percent at end-2008 to 9.4 percent in June 2009. While banks generally appear well capitalized, individual conditions may vary. The mission encourages the authorities to continue strengthening the supervision of the financial sector. To this end, it advises them to conduct regular stress tests on banks and enforce foreign currency exposure limits to reduce banks’ vulnerabilities to possible currency mismatches in their portfolios. In this connection, the mission would recommend that the authorities consider participating in the joint IMF/World Bank Financial Sector Assessment Program (FSAP).
Exchange rate policy
11. The authorities are encouraged to work toward gradually unifying the official and commercial foreign exchange markets, in order to reduce distortions and increase efficiency. They should use the flexibility provided to them under the de jure managed-float regime to allow the exchange rate to find its equilibrium level. The CBvS could then intervene, as needed, to smooth out fluctuations. The country’s current comfortable reserve position provides a good opportunity for such a move, although the election cycle might bring additional uncertainty in the markets.
Investing in the mining sector
12. The mission supports the authorities’ plan, which enjoys wide public backing, to increase Suriname’s share in the exploitation of its natural resources. The size and form of such an involvement in the bauxite/alumina and gold sectors, including through long-term equity participation, is for the parties to negotiate and agree. Sizeable investments in these sectors, which could be justified in the context of the country’s low public debt ratio, would give Suriname an opportunity to increase its share in the exploitation of the country’s natural resources, and ensure a greater flow of revenue to the government for the benefit of the broad population. This involvement should be undertaken within a long-term comprehensive growth strategy of diversification, and economic and environmental sustainability.
13. The mission recommends that the next Article IV consultation be conducted on the standard 12-month cycle. In the interim, a short staff visit would be useful to continue the policy dialogue.