February 1, 2010
On behalf of our Surinamese authorities, we thank staff for the quality of the dialogue with the authorities and for the candid report.
Suriname’s economy has performed relatively well despite spill over effects from the global financial and economic crisis. Following several years of robust economic activity, the economy slowed in 2009 on account of falling commodity prices - oil and alumina - and lower alumina output. GDP growth is estimated at 2.5 percent (1.4 percent in per capita terms). At the same time, inflationary pressures eased considerably, with the average CPI rate falling from 14.6 percent in 2008 to -0.1 percent in 2009. This sharp deceleration was mainly due to the reversal in the trend of rapidly rising international food and fuel prices, and to a lesser extent to declining domestic demand as credit to the private sector moderated. Short-term variations of the inflation rate are dominated by changes in food and fuel prices given the large weight of these items in the CPI, as is usually the case in developing countries. Inflation ended the year well below staff’s expectations. The staff report, dated December 29, projected the end-of-year CPI inflation to reach 5.7 percent. One month later, we learn that the end result was only 1.3 percent due to lower than expected food and fuel prices. On the other hand, the external current account weakened considerably reflecting lower volumes of alumina export and falling international commodity prices. Despite the deterioration in the current account, international reserves strengthened thanks to the SDR allocation. The fiscal balance also registered a deficit partly because the authorities adopted an expansionary fiscal policy. Total public debt remained, however, under 20 percent of GDP, and is mostly domestic.
Prudent macroeconomic management and surpluses in the external and fiscal accounts in previous years enabled Suriname to weather the international crisis. Economic results up to 2008 were remarkable, as can be seen from the data provided in the staff report. Suriname’s current account surpluses, for instance, reached 7.5 percent of GDP in 2006-2007 and 3.9 percent of GDP in 2008. International reserves have increased continuously since 2005, in absolute terms and as a proportion of imports. The international reserve coverage of the banking system (the ratio of gross reserves plus bank holdings of liquid external assets to foreign currency deposits at banks) rose sharply, from 87 percent in 2005 to 153 percent in 2009. Moreover, Suriname maintains extensive capital controls to protect the economy from the volatility of capital flows.
The fiscal accounts were also strong. The central government had overall surpluses averaging almost 2 percent of GDP in 2006-2008. Public debt fell from more than 40 percent of GDP in 2003 to less than 18 percent in 2008. Suriname’s debt ratio is one of the lowest in the region, as mentioned by staff. Furthermore, since a significant share of the debt is in concessional terms, the government’s interest bill is modest, around 1 percent of GDP.
These circumstances provided space for countercyclical fiscal policy in 2009. Staff expects the fiscal gap to widen further in 2010 due to the erosion in revenue from the bauxite industry and increased spending on goods and services. However, the deficit should narrow over the medium term as fiscal consolidation measures are adopted. Given the present challenging circumstances, the authorities have to decide how to proceed with the second stage of the civil service wage reform. The President of the Republic is now leading discussions on this issue. Further, the authorities have put on hold plans to reduce the corporate tax.
Suriname continued to demonstrate commitment to debt sustainability with a debt reduction policy aimed at creating opportunities for future development financing on favourable terms. To safeguard against the growth in debt levels, the authorities have ensured that most of the foreign loans contracted for large public investment projects will continue to be on concessional terms with low interest payments obligations going forward.
Arrears on public debt have declined substantially, from as much as 7.9 percent of GDP in 2005 to 1.3 percent of GDP in 2009. Following the settlement of arrears to Brazil of US$118 million (including a write-off of US$ 44 million) in August 2009, the United States is now the only outstanding bilateral creditor to be settled. The arrears with the United States will be eliminated once a decision can be reached with respect to the treatment of the penalties. The Surinamese government would like the United States to show the same flexibility that other creditors have shown. It is willing to pay principal and interest in full, but has asked penalties to be waived, in line with arrangements it has already reached with other creditors.
Over the medium term, Suriname will focus on growth and macroeconomic stability while maintaining fiscal prudence. In spite of the risks, the growth outlook is favourable given government initiatives to boost output in the mining and non-mining sectors in the medium to long-term. To enhance the longevity of the bauxite industry, the government has established its own mining company, Alumsur, and is considering acquiring shares in the Paranam refinery. Further, the government plans to set up an integrated bauxite industry in the western region of Suriname where significant bauxite reserves have been found. In the oil industry, the state-owned oil company, Staatsolie, has allocated approximately US$970 million towards increasing exploration activity, expanding the refinery and augmenting the capacity of the power plant over the period 2008 to 2012. Meanwhile, given the favourable international price of gold, exploration activity has stepped up both in the formal and informal sectors. Preliminary explorations by the gold mining company, Newmont, in the eastern part of the country have yielded promising results.
Initiatives are also ongoing in agriculture, construction and tourism to boost output in these areas. Tourism has been a source of some diversification of the economy. A number of new hotels and facilities have been built in recent times, while a number of other facilities are being completed. The eco-tourism facilities of Fuungu-Island have been upgraded to international standards. In addition, the government continues to invest in upgrading and expanding the physical infrastructure of the country in support of its growth objectives.
The stance of monetary policy remained appropriate in 2009 and looking ahead the authorities are prepared to tighten monetary policy as circumstances warrant. The current exchange rate regime has served the country of Suriname well. The authorities note the merit in Staffs suggestion that the official and commercial foreign exchange markets be unified but do not believe that now is the appropriate time for this, particularly with elections due in May 2010, and prefer a more gradual approach. It should be noted that the difference between the two rates has been small in recent years. The other minor multiple currency practice arises from the existence of a special rate for imports of baby milk.
Although there has been some weakening in asset quality and profitability, the financial system remained adequately capitalized in 2009. Nonetheless, the undercapitalization of the two small state-owned banks remains a concern and the authorities have indicated that steps will be taken to recapitalize them soon. Dollarization is a source of weakness, but the share of foreign currency deposits and loans is gradually declining. In recent years, in order to discourage lending in foreign currency, reserve requirements on foreign currency deposits have been more than twice as high as effective reserve requirements on national currency deposits. Measures are also being taken to strengthen the supervision of the financial sector. Currently, a draft Financial Institutions Act and Foreign Exchange Act are under review, while an Act on Insurance Companies is being prepared. In addition, an agreement has been reached between a local insurance company, The Self Reliance Insurance Company, and CL International (Trinidad), allowing Self Reliance to acquire the shares of CLICO Suriname. The government has expressed its willingness to lend financial support to the Self Reliance Company if this becomes necessary. The authorities have requested that a Financial Sector Assessment Program (FSAP) be undertaken to assess the health of the financial sector in Suriname.
A number of structural reforms are in train. The government has earmarked a number of public companies for restructuring and presently work is ongoing towards privatization of the banana company and restructuring of the rice company. Technical assistance from CARTAC has also been requested towards improving the efficacy and administration of indirect taxes.