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Suriname: Staff Report for the 2014 Article IV Consultatio

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
October 2014
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Developments, Outlook, and Risks

1. Suriname’s macroeconomic situation continued to deteriorate in 2013 as the long boom in oil and gold prices appeared to come to an end. With gold and oil prices falling below recent peaks, the large fiscal and external sector exposures to the mineral sector, together with inadequate adjustment of domestic (particularly fiscal) policies, led to further fiscal and external sector deterioration in 2013 and a significant decline in international reserves. Thus, the main challenges are to strengthen institutions and adjust policies to reverse the recent deterioration and avoid undermining the stability of the fixed exchange rate.1

Commodity Prices

(index: 2008=100)

2. Growth continued to be robust in 2013, supported by fiscal relaxation and strong credit growth, while inflation remained low. Staff estimates GDP growth of 4 percent (Figures 1 and 2 and Table 1). In contrast with recent years, however, export volumes declined, subtracting from GDP growth. Gold export volume (close to two-thirds of total) contracted by 1½ percent in 2013, down sharply from positive growth of almost 6 percent in 2012, as gold prices declined. Moreover, exports of the other two main commodities continued to be weak—contracting 5 percent for aluminum and increasing by 1¼ percent for oil—reflecting persistently low aluminum prices and limited oil reserves. Inflation remained low in 2013, averaging 2 percent, but has picked up to almost 3 percent in May 2014 largely because of higher food and fuel prices.

Figure 1.Macroeconomic Developments

Sources: National authorities; and IMF staff estimates and projections.

Figure 2.Comparative Regional Economic Developments

Sources: National authorities; World Economic Forum, and IMF staff estimates and projections.

Table 1.Suriname: Selected Economic and Social Indicators
Population (in thousands, 2012)542Unemployment rate (2012)8.5
GDP per capita (current US$, 2012)8,910Adult illiteracy (percent of population
Rank in UNDP Human Development Index (out of 187, 2012)105ages 15 and above, 2008)5.0
Life expectancy at birth (years, 2010)70.3
Sources: Suriname authorities; and IMF staff estimates and projections.

Data for 2011 are at a constant exchange rate of SRD 2.75 per US$ 1.

Includes statistical discrepancy.

Includes central government and government-guaranteed public debt.

Est.Proj.
201120122013201420152016201720182019
(Annual percentage change, unless otherwise indicated)
Real sector
GDP at current prices (SRD billions)14.315.916.617.318.519.821.323.024.7
Real GDP Growth5.34.84.13.13.74.24.65.04.4
GDP deflator12.96.60.31.03.02.72.72.82.9
Consumer prices (end of period)15.34.30.63.73.13.03.02.93.0
Consumer prices (period average)17.75.01.92.63.43.03.03.03.0
Money and credit 1/
Banking system net foreign assets19.317.5−11.34.611.512.58.78.46.8
Broad money11.719.614.110.97.49.49.311.27.4
Private sector credit12.016.718.315.015.013.013.013.013.0
Public sector credit (increase in % of M2)−9.00.59.62.80.94.71.13.03.3
(In percent of GDP, unless otherwise indicated)
Savings and investment
Private sector balance (savings-investment)5.27.42.9−0.8−0.60.23.23.03.5
Public sector balance0.5−4.0−6.8−3.7−3.4−3.2−3.0−2.6−2.5
Savings5.40.6−2.30.10.50.40.20.71.0
Investment4.94.64.53.83.93.73.13.33.5
Foreign savings−5.8−3.43.94.53.93.0−0.2−0.5−1.0
Central government
Revenue and grants27.025.923.824.524.824.323.623.823.9
Total expenditure 2/26.529.930.628.228.227.526.626.426.4
Of which: noninterest current expenditure19.922.925.723.423.322.822.221.921.7
Overall balance0.5−4.0−6.8−3.7−3.4−3.2−3.0−2.6−2.5
Net domestic financing−3.41.83.61.10.32.30.51.51.7
Net external financing2.82.23.22.63.11.02.51.10.7
Central government debt 3/20.422.229.833.837.041.041.140.740.3
Domestic9.510.415.516.015.316.515.916.216.8
External10.811.914.217.821.824.425.324.523.5
External sector
Current account balance5.83.4−3.9−4.5−3.9−3.00.20.51.0
Capital and financial account−1.18.67.75.05.95.10.90.3−0.2
Change in reserves (- increase in US$ millions)−124−180152−23−108−123−72−55−63
Memorandum Items
Terms of trade (percent change)5.61.7−10.5−7.92.52.22.12.12.3
Gross international reserves (US$ millions)8171,0087757989061,0291,1011,1561,219
In months of imports4.44.73.43.84.24.84.84.84.8
Exchange rate (SRD per US$, eop)3.303.303.30
Sources: Suriname authorities; and IMF staff estimates and projections.

Data for 2011 are at a constant exchange rate of SRD 2.75 per US$ 1.

Includes statistical discrepancy.

Includes central government and government-guaranteed public debt.

Sources: Suriname authorities; and IMF staff estimates and projections.

Data for 2011 are at a constant exchange rate of SRD 2.75 per US$ 1.

Includes statistical discrepancy.

Includes central government and government-guaranteed public debt.

Monthly Economic Growth Indicator

(percent)

3. Following monetary tightening, bank credit growth is edging downward (Figures 3 and 4). The central bank increased bank reserve requirements on domestic and foreign currency deposits by 5 percentage points each to 30 and 50 percent respectively in September 2013. Subsequently, credit growth to the private sector has declined from its peak of 20 percent (y/y) in October 2013 to 15 percent in April 2014. Deposit and credit dollarization have remained broadly stable. Banking system profitability declined slightly in 2013, with the return on equity falling 3 percentage points to 21¾ percent. Bank capital adequacy remained broadly unchanged at 12½ percent of risk weighted assets, above the regulatory 10 percent minimum, but well below the regional average of 20 percent. NPL ratios are somewhat high but declined from 6.2 percent in 2012 to 5.9 percent in 2013. Bank liquidity appears adequate, with liquid assets accounting for almost half of total assets and about 87 percent of short-term liabilities.

Figure 3.Money and Credit

Sources: Central Bank of Suriname; and IMF staff estimates and projections.

Figure 4.Financial Soundness Indicators

Source: National authorities.

Inflation

(12-month moving average, y/y)

4. Unsterilized foreign exchange intervention also helped tighten the monetary stance. Central bank sales of foreign exchange to maintain the stability of the fixed exchange rate, lacking adequate tools for sterilization, reduced reserve money and broad money growth alongside the decline in international reserves, with a resulting tightening of domestic financial conditions that supported other measures—particularly the increase in reserve requirements—to contain domestic demand pressures.

Net Foreign Assets

(In millions of USD)

Contribution to Broad Money Growth

(Year-on-year percent change)

5. However, the fiscal deterioration that began in 2012 continued in 2013 (Figure 5 and Table 2). An attempt in March 2013 to limit government spending proved short-lived in the absence of broad political consensus, and the fiscal balance on a cash basis fell by 2 percentage points to a deficit of 6¼ percent of GDP in 2013. In addition, staff’s rough estimates indicate a buildup of arrears of about ½ percent of GDP, and thus the overall deficit for 2013 is estimated at 6¾ percent of GDP. Revenues fell by 2 percent of GDP as taxes, royalties, and dividends from the mineral sector declined. Government expenditure increased by ¾ percent of GDP, but with the official data plagued by shortcomings on classification of non-wage spending it is not fully clear what items drove the increase. The data indicate that a 3¼ percentage point of GDP jump in current spending was mostly offset by a decline in the statistical discrepancy, while capital expenditure stayed broadly flat. Notable increases in current spending were for the wage bill, which increased one percentage point to 9½ percent of GDP as a result of a 10 percent public sector wage hike, and goods and services expenditure (G&S) which also rose one percent of GDP. However, a part of the increase in G&S could be misclassified capital expenditure or could be capturing some of the changes to the statistical discrepancy. Subsidies and transfers rose by ½ percent of GDP while interest payments also increased by ½ percent of GDP.

Table 2.Suriname: Central Government Operations(In percent of GDP)
Est.Proj.
201120122013201420152016201720182019
Revenue27.025.923.824.524.824.323.623.823.9
Taxes18.719.018.818.217.917.618.018.318.3
Direct taxes9.49.910.19.59.28.99.39.69.6
Indirect taxes9.39.08.78.78.78.78.78.78.7
Grants0.80.00.00.00.00.00.00.00.0
Other revenue7.57.05.06.26.96.65.65.65.6
Expenditure 1/26.529.930.628.228.227.526.626.426.4
Expense20.923.927.124.424.323.823.423.122.9
Compensation of employees8.58.39.48.98.98.88.78.68.5
Purchases of goods and services4.06.87.96.66.56.36.05.95.9
Subsidies and transfers7.47.98.48.07.97.77.57.47.3
Interest1.01.01.41.01.01.11.31.21.2
Domestic0.80.81.10.60.60.50.60.60.6
Foreign0.20.20.30.30.40.50.70.70.6
Net acquisition of nonfinancial assets4.94.64.53.83.93.73.13.33.5
Capital expenditure4.94.64.53.83.93.73.13.33.5
Statistical discrepancy0.71.4−1.00.00.00.00.00.00.0
Gross Operating Balance5.40.6−2.30.10.50.40.20.71.0
Overall Balance (Net lending/borrowing)0.5−4.0−6.8−3.7−3.4−3.2−3.0−2.6−2.5
Net financial transactions−0.54.06.83.73.43.23.02.62.5
Net acquisition of financial assets 2/0.00.00.0−1.5−2.0−3.10.00.00.0
Net incurrence of liabilities−0.54.06.85.35.46.43.02.62.5
Domestic−3.41.83.61.10.32.30.51.51.7
Commercial banks−0.40.50.6−0.9−1.80.5−1.00.00.3
Central bank−2.71.02.82.02.01.71.41.41.4
Other domestic−0.30.3−0.40.10.10.10.00.00.0
Foreign2.82.23.24.25.14.12.51.10.7
Amortizations−0.5−1.0−0.4−0.7−0.6−1.5−2.3−3.3−4.7
Disbursements3.33.13.64.85.75.74.84.45.5
Bilateral agencies1.41.90.42.32.61.83.43.13.9
Multilateral agencies1.91.33.31.01.10.71.41.31.6
Other 2/….….….1.52.03.1….….….
Memorandum items:
Gold price (US$ per troy ounce)1,5691,6691,4111,2661,2491,2571,2811,3121,356
Oil Price (US$ per barrel)10410510410410095929189
Output gap (In percent)0.10.60.6−0.3−0.7−0.7−0.5−0.1−0.2
Primary balance1.5−3.0−5.4−2.8−2.3−2.2−1.7−1.3−1.3
Non-mineral balance−9.9−13.3−14.1−10.5−9.7−9.2−9.8−9.6−9.6
Non-mineral structural primary balance−8.9−12.4−12.8−10.4−10.3−9.5−8.5−8.4−8.4
Mineral revenue10.49.37.36.86.45.96.87.07.1
Public debt 3/20.422.229.833.837.041.041.140.740.3
Sources: Suriname authorities; and IMF staff estimates and projections.

Includes statistical discrepancy.

In 2014–2015, the government plans to purchase equities of the two gold mining companies with the proceeds from an international market borrowing.

Includes central government and government-guaranteed public debt.

Sources: Suriname authorities; and IMF staff estimates and projections.

Includes statistical discrepancy.

In 2014–2015, the government plans to purchase equities of the two gold mining companies with the proceeds from an international market borrowing.

Includes central government and government-guaranteed public debt.

Figure 5.Fiscal Indicators

Sources: National authorities; and IMF staff estimates and projections.

Central Government Overall Balance (cash basis)

(percent of GDP, year-to-date)

6. And the external balance also declined considerably (Figure 6 and Table 3). The current account balance fell 7¼ percentage points to a deficit of 4 percent of GDP in 2013, primarily reflecting the substantial adverse impact of falling gold prices on exports.2 In addition, domestic demand pressures manifested in strong goods imports, which offset the beneficial impact of declining imports for large projects on the current account balance. Alongside, international reserves declined to 3½ months of imports. REER appreciation has eroded much of the gains from the 2011 devaluation, and CGER type estimates together with the large fiscal policy gap suggest that the exchange rate may now be quite strong (Box 1).

Figure 6.External Indicators

Sources: National authorities; Information Notice System; and IMF staff estimates and projections.

Table 3a.Suriname: Balance of Payments 1/(In millions of U.S. dollars)
Proj.
201120122013201420152016201720182019
Current account251164−198−238−221−183153275
Trade balance7887012214798156425472547
Exports, f.o.b.246726952394214322172250264628373053
Of which: alumina, gold, and petroleum217824352176192619952018240125782778
Imports, f.o.b.−1679−1993−2174−2096−2119−2095−2221−2365−2506
Services, net−362−419−363−251−290−309−320−331−343
Exports201175179182187191196200204
Imports−563−594−542−433−477−501−516−531−547
Income, net−262−191−122−102−99−100−163−183−206
Credit162727282829303031
Debit−278−219−149−130−127−129−193−214−237
Current transfers, net877367687071737576
Capital and financial account−504173862613293055823−12
Capital account35−70000000
Financial account−854243862613293055823−12
Central government borrowing1211041652152812441597554
Disbursements141149183249316334304304404
Amortization−21−46−18−34−36−91−145−230−350
Foreign direct investment7312113935033040517511080
Portfolio investment6−6−1−83−111−186−2−2−2
Other investment−28420683−222−170−157−274−161−172
Errors and omissions−77−406−341000000
Overall balance124180−15223108123725563
Change in reserves (- = increase)−124−180152−23−108−123−72−55−63
Memorandum items:
Gross international reserves81710087757989061029110111561219
In months of imports of goods and services4.44.73.43.84.24.84.84.84.8
Current account balance (in percent of GDP)5.83.4−3.9−4.5−3.9−3.00.20.51.0
GDP in current US dollars436348265038
Gold price (US$ per troy ounce)1568.61668.81411.11265.81248.91257.31281.11312.41355.9
Oil Price (US$ per barrel)104.0105.0104.1104.199.695.192.390.689.4
Alumina Price (US$ per MT)240120231847180319181989205621192174
External Debt (in percent of GDP)302934394248484643
Sources: Suriname authorities; and IMF staff estimates and projections.

Historical figures correspond to the Balance of Payments revised by the CBvS.

Sources: Suriname authorities; and IMF staff estimates and projections.

Historical figures correspond to the Balance of Payments revised by the CBvS.

Table 3b.Suriname: Balance of Payments 1/(In percent of GDP)
Proj.
201120122013201420152016201720182019
Current account5.83.4−3.9−4.5−3.9−3.00.20.51.0
Trade balance18.114.54.40.91.82.66.66.87.3
Exports, f.o.b.56.555.847.540.839.537.541.040.740.8
Of which: alumina, gold, and petroleum49.950.543.236.735.533.637.237.037.1
Imports, f.o.b.−38.5−41.3−43.1−39.9−37.8−34.9−34.4−34.0−33.5
Services, net−8.3−8.7−7.2−4.8−5.2−5.2−5.0−4.8−4.6
Exports4.63.63.53.53.33.23.02.92.7
Imports−12.9−12.3−10.8−8.3−8.5−8.3−8.0−7.6−7.3
Income, net−6.0−4.0−2.4−1.9−1.8−1.7−2.5−2.6−2.7
Credit0.40.60.50.50.50.50.50.40.4
Debit−6.4−4.5−3.0−2.5−2.3−2.1−3.0−3.1−3.2
Current transfers, net2.01.51.31.31.21.21.11.11.0
Capital and financial account−1.18.67.75.05.95.10.90.3−0.2
Capital account0.8−0.10.00.00.00.00.00.00.0
Financial account−1.98.87.75.05.95.10.90.3−0.2
Central government borrowing2.82.23.34.15.04.12.51.10.7
Disbursements3.23.13.64.75.65.64.74.45.4
Amortization−0.5−0.9−0.4−0.6−0.6−1.5−2.3−3.3−4.7
Foreign direct investment1.72.52.86.75.96.72.71.61.1
Portfolio investment0.1−0.10.0−1.6−2.0−3.10.00.00.0
Other investment−6.54.31.6−4.2−3.0−2.6−4.2−2.3−2.3
Errors and omissions−1.8−8.4−6.80.00.00.00.00.00.0
Overall balance2.83.7−3.00.41.92.01.10.80.8
Change in reserves (- = increase)−2.8−3.73.0−0.4−1.9−2.0−1.1−0.8−0.8
Memorandum items:
Gross international reserves (in millinons of US81710087757989061029110111561219
In months of imports of goods and services4.44.73.43.84.24.84.84.84.8
External Debt (in percent of GDP)30.329.433.738.842.148.247.945.943.2
GDP in current US dollars436348265038
Sources: Suriname authorities; and IMF staff estimates and projections.

Historical figures correspond to the Balance of Payments revised by the CBvS.

Sources: Suriname authorities; and IMF staff estimates and projections.

Historical figures correspond to the Balance of Payments revised by the CBvS.

Current Account: Changes 1/(in percent of GDP)
2012-20132013-Proj 2014
Current Account Balance−7.3−0.6
Exports of Goods and Services−8.4−6.8
o/w Gold−6.1−4.4
o/w Oil−0.6−0.5
o/w Alumina−0.6−1.5
o/w Other Goods−1.0−0.2
o/w Services−0.1−0.1
Imports of Goods and Services−0.35.7
o/w Goods−1.83.2
o/w Services1.62.5
Net Income1.50.5
Net Current Transfers−0.20.0

A positive sign implies an improvement of the current account balance.

A positive sign implies an improvement of the current account balance.

Box 1.Suriname: External Competitiveness

A range of indicators suggest that the exchange rate may now be quite strong:

  • REER appreciation slowed significantly in 2013, but much of the competitiveness gains from the devaluation in January 2011 had already been eroded. Since the devaluation the Surinamese dollar has appreciated about 10 percent in real effective terms, reflecting in part the high inflation experienced in the immediate aftermath of the devaluation, and also the relative strength of the US dollar to which the SRD is pegged. Low inflation in 2013 helped contain further appreciation, but inflation is picking up in 2014.

  • Export shares fell in 2013 reflecting declining gold prices. Nominal export growth has outpaced the Caribbean average of close to 7½ percent, largely due to one commodity, gold, which currently accounts for about 62 percent of exports compared to only 7 percent ten years ago. Consequently, Suriname has almost doubled its share in world exports and more than doubled its share in Caribbean exports. However, declining gold prices have depressed exports recently.

  • CGER-type methodologies suggest that the exchange rate may be somewhat on the strong side. The external sustainability (ES), equilibrium real exchange rate (ERER), and macroeconomic balance (MB) approaches all suggest a moderate overvaluation. The ES approach is adjusted to allow for a buildup of net foreign assets in line with staff’s medium term projections, to reflect the high dependence of Suriname on one exhaustible resource and uncertainty about future gold revenues.

Exchange Rates

(index: 2003=100)

Export Market Shares

(in percent)

1/ Multiplied by 100.

Estimates of Competitiveness Margin Using CGER-type Methodologies(Level relative to equilibrium in percent; minus indicates undervaluation)
Methodology
Macroeconomic balance approach2.4
External sustainability approach9.8
Equilibrium real exchange rate approach7.5
Memorandum items:
Current account balance (percent of GDP)
2013−3.9
20191.0
CA Norm 1/2.1
Source: IMF staff estimates

Macroeconomic balance approach

Source: IMF staff estimates

Macroeconomic balance approach

However, CGER type estimates do not adjust for policy gaps. The large fiscal gap indicates a stronger overvaluation than indicated by the CGER type estimates.

7. The outlook for 2014 is for a modest slowdown in economic activity, reflecting anemic commodity prices and policy tightening. In addition to the higher bank reserve requirements implemented in 2013, substantial fiscal tightening is underway. Recent data indicate a fiscal deficit (cash basis) for January–May of 1¾ percent of annual GDP, about 1¼ percent of GDP lower than for the same period of 2013, together with a substantial reduction in the stock of arrears, and additional measures are also planned for the second half of 2014. Thus, domestic demand pressures are expected to decline this year. Together with WEO forecasts of additional decline in the gold price and flat oil prices, staff’s baseline projection is for GDP growth to decline to 3 percent in 2014. Falling gold prices, reduced aluminum production, and additional imports related to the construction of a new gold mine will also cause the current account deficit to widen to about 4½ percent of GDP in 2014. Inflation is likely to remain contained assuming international food and fuel prices stay subdued and policy settings remain consistent with the continued stability of the exchange rate regime.

8. Over the medium term growth is expected to increase moderately, with the external balance swinging back into surplus as mining operations expand. WEO projections indicate slightly rising gold prices over the medium term, and two large international gold mining projects are expected to start operations over 2017–18, thus boosting production and exports. A new oil refinery will improve the oil trade balance by over 2 percent of GDP from 2015 onward. On this basis, GDP growth is expected to rise to a peak of about 5 percent by 2018, while the current account balance improves to a surplus of about one percent of GDP over the medium term. Upside potential for growth could be harnessed if significant progress were achieved in strengthening structural competitiveness.

9. Risks to the outlook broadly appear tilted downwards:

  • While gold prices have fallen below recent peaks, downside risks still appear to dominate as price levels remain well above long run historical averages. Strengthening U.S. activity and the associated exit from quantitative easing are also likely to dampen investor demand for gold, and moreover, the expected moderation in China’s growth rate is likely to have a dampening impact on a broad range of commodity prices. Moreover, rising global supply could reduce oil prices beyond that projected over the medium term. Given Suriname’s large exposures, declines in gold and oil prices would pressure the fiscal and external positions and potentially delay or cancel planned investments in the mineral sector, dampening the outlook for growth.

    • ➢ In a severe shock scenario where gold prices immediately fall to $1000/ounce, the large gold mining projects are cancelled, and there is no policy response beyond that incorporated in the baseline, GDP growth and the fiscal and external balances fall, and there would be a large decline in international reserves. Incorporating policy tightening to mitigate reserve loss would imply a larger output loss than estimated for the shock scenario.

    • ➢ While an adjustment of the currency under a severe scenario could improve competitiveness and the valuation of foreign currency denominated fiscal revenues, these effects would be short-lived if not supported by policy tightening to minimize price and wage pressures. The banking system weathered the 2011 devaluation well, with NPL ratios rising by only 0.1 percentage point, but that was in the context of rising commodity prices which supported buoyant activity. With falling commodity prices the adverse effects on NPLs and bank capital could be significantly larger (further dampening GDP growth), even though banks’ long net foreign exchange position provides protection from direct exchange rate risk. FSAP stress test results suggest that in a scenario where (i) GDP growth declines one percentage point; (ii) fiscal deterioration causes a sharp increase in arrears that elevates the NPLs of government suppliers; and (iii) the exchange rate is adjusted; NPLs could increase by around 5 percentage points, which would require about 0.7 percent of GDP to bring regulatory capital to the minimum requirement of 10 percent.

  • Inward spillovers from protracted slower growth in advanced or emerging countries are unlikely to have a major impact on Suriname’s economy, provided they only have a limited impact on commodity prices. Growth was robust despite recent global economic weaknesses because commodity prices remained high. Nevertheless, there could be some confidence effects if the medium term global outlook were to worsen substantially.

  • The banking system has limited international links and low domestic levels of leverage, and has been resilient to international financial spillovers. However, if policy settings weaken, the resulting deterioration of the macro-environment could elevate risks to financial stability, further undermining the growth outlook.

  • Fiscal policy implementation risks are also substantial ahead of next year’s elections. Public debt rollover risks are moderate: short term debt constitutes only 16 percent of total debt, and gross financing needs are about 10 percent of GDP in 2014. However, rollover risks are projected to rise over the medium term as the debt-GDP ratio increases, with gross financing need rising to 13 percent of GDP by 2019.

  • Upside risks on the other hand, particularly over a longer horizon, could originate from unexpectedly strong global growth raising commodity prices, geopolitical events that boost gold prices, the discovery of large oil or mining reserves, or structural reforms that promote growth in the non-commodity sector. Notably, several international oil companies are actively exploring the offshore area, and there is a sense of optimism that these efforts will bear fruit.

Table. Suriname: Medium-Term Outlook, 2012-2019(In percent of GDP, unless otherwise indicated)
Est.Proj.
20122013201420152016201720182019
Baseline Scenario
Real GDP growth (annual percentage change)4.84.13.13.74.24.65.04.4
Overall fiscal balance−4.0−6.8−3.7−3.4−3.2−3.0−2.6−2.5
Total public debt22.229.833.837.041.041.140.740.3
External current account balance3.4−3.9−4.5−3.9−3.00.20.51.0
Gross international reserves (in mn USD)1,008.4775.4717.7665.5694.7807.8877.9886.6
Gross international reserves (months of imports)4.73.43.43.13.23.53.63.5
Gold price (US$ per troy ounce)1,668.81,411.11,326.51,343.31,370.41,398.11,437.81,486.7
Shock Scenario1
Real GDP growth (annual percentage change)4.84.12.62.5
Overall fiscal balance−4.0−6.8−5.5−6.0
Total public debt22.229.836.140.8
External current account balance3.4−3.9−5.8−5.2
Gross international reserves (in mn USD)1,008.4775.4400.5257.4
Gross international reserves (months of imports)4.73.42.11.4
Gold price (US$ per troy ounce)1,6691,4111,1461,0001,0001,0001,0001,000

In the shock scenario, staff assumed that the gold price drops to $1000/oz at the end of July 2014, resulting in the cancelation of planned gold mining projects. No additional policy response is assumed.

In the shock scenario, staff assumed that the gold price drops to $1000/oz at the end of July 2014, resulting in the cancelation of planned gold mining projects. No additional policy response is assumed.

10. The authorities were more optimistic about the outlook and balance of risks. They expected medium-term growth to be somewhat higher than projected by staff, given the numerous large projects in train, and they considered the downside risks to gold prices presented by staff to be overstated. Also, they expected that the new oil refinery would sufficiently insulate the external balance and fiscal revenues from any adverse impact of declining oil prices. In addition, they emphasized their commitment to adopting all necessary policy measures to maintain macro stability.

Policy Discussions

There was consensus that strengthening macroeconomic stability and the growth outlook would require substantial policy tightening and a broad range of institutional reforms. Strong fiscal consolidation is needed to achieve sustainability and also contribute to external stability. An appropriate fiscal framework would insulate policy making from commodity price volatility and enable countercyclical policy. Additional credit tightening will be needed if fiscal adjustment proves insufficient to ensure external stability. Implementing plans to develop indirect tools of monetary policy would provide additional instruments for managing domestic demand. FSAP findings indicate that strengthening financial sector stability will require building capital buffers, building a liquidity management framework, and strengthening prudential standards and the intensity of supervision. Legislation is pending to overhaul the business environment and strengthen structural competitiveness.

A. Fiscal Consolidation to Strengthen Sustainability and Macro Stability

11. Suriname has a large long run fiscal sustainability gap, which indicates the need for substantial consolidation (Figure 7).3 While estimates of public mineral wealth are subject to considerable uncertainty (total deposits are unknown, and their long run price outlook is volatile), staff estimates, based on a conservative valuation approach, indicate a fiscal sustainability gap of about 12½ percent of GDP.4 Clearly it is not feasible to attempt such a large adjustment in the near term, as it would open up an untenably large output gap. However, delaying adjustment increases the total amount of measures required for sustainability. Staff estimates of the optimal fiscal path that balances the twin conflicting objectives of closing the sustainability and output gaps suggest that targeting a fiscal surplus of at least 1½ percent of GDP in 2019 would be desirable. This would require an overall medium term adjustment effort estimated at about 8½ percent of GDP, as the effect of declining commodity prices on revenues would also need to be offset. Substantial frontloading of adjustment is advisable to help safeguard external stability, and in light of still-favorable cyclical conditions and the downside risks to the commodity price outlook. Given the scale of the required adjustment effort, both revenue and expenditure measures would be needed.

Figure 7.Suriname: Fiscal Sustainability, 2013-60

(Percent of GDP)

Sources: Authorities data, and Staff calculations.

1/ Baseline incorporates staff medium term baseline projections up to 2019, and assumes no further fiscal adjustment thereafter.

2/ Negative debt reflects the accumulation of assets

12. Against this background, the authorities are implementing strong consolidation in 2014, though there are risks ahead of next year’s election. Expenditure controls and tax collection efforts were strengthened from January. Moreover, the wage bill in the first half of 2014 declined relative to that of 2013, as retroactive payments for wage increases granted in December 2012 ended in mid 2013, and the authorities are committed to moderation in forthcoming wage negotiations. Reforms spearheaded by the Vice President’s office are helping to contain public health expenditures (see paragraph 16). In the second half of 2014, the authorities plan revenue measures including increasing the royalty rate on small scale gold miners, higher taxation of logging concessions, and sales of government land to leaseholders. At the same time, however, a 10 percent increase in government pensions, and a pending increase in hydro electricity costs will increase government spending moderately. Overall, the fiscal deficit is expected to decline by 3 percentage points to 3¾ percent of GDP in 2014. The authorities acknowledged potential implementation risks ahead of next year’s elections, but reiterated their strong commitment to restoring the fiscal position to health.

Contribution to Improvement in Fiscal Balance in 2014 1/
Jan. - MayJun. - Dec.Total
(In percent of GDP)
Total revenue and grants−0.10.80.6
Tax revenue0.3−0.9−0.6
Nontax revenues−0.41.71.2
of which: Informal gold sector royalties0.00.10.1
Land conversion0.00.90.9
Wood concession fee0.00.40.4
Others−0.40.3−0.1
Capital revenues and grants0.00.00.0
Total expenditures (incl. statistical discrepancy)1.30.51.8
Wages0.7−0.20.5
Goods and services0.30.40.7
Transfers0.40.00.4
of which: Health sector0.30.10.3
Interest payment0.10.30.4
Capital expenditure and net lending1.0−0.30.7
Statistical discrepancy−1.20.2−1.0
Paydown of arrears0.60.00.6
Total improvement1.81.33.1
Source: Suriname authorities; and IMF staff estimates and projections.

A positive sign implies an improvement of fiscal balance. Non-wage expenditure classification is provisional and subject to revision.

Source: Suriname authorities; and IMF staff estimates and projections.

A positive sign implies an improvement of fiscal balance. Non-wage expenditure classification is provisional and subject to revision.

13. Moderate additional consolidation beyond 2014 is built into the baseline fiscal projections. Staff projects a further decline in the deficit to 2½ percent of GDP by 2019, supported by continued spending restraint and a pickup in mineral revenues as new mines commence. Alongside, public debt rises to over 40 percent of GDP, partly reflecting the effect of external borrowing to fund the purchase of equity stakes in two international gold mining projects.5

14. However, there was consensus that achieving fiscal sustainability would require more measures over the medium term. Staff noted that the consolidation envisaged under the baseline, while substantial, fell short of the levels that would be desirable for sustainability, and the downside risks to the outlook warrant stronger consolidation. Notably, the 2019 fiscal balance under the baseline is about 4 percent of GDP lower than the 1½ percent of GDP surplus that would be desirable for sustainability. Also, land sales would provide one-off revenues for a few years, but not improve the underlying structural fiscal position. Deeper reforms and strong resolve will be needed to reduce the wage bill and other public spending to more sustainable levels over the medium term. Also, with central bank financing near legal limits and banks reportedly cautious about increasing holdings of public debt, domestic financing constraints could bind in an adverse scenario, potentially leading to another buildup of arrears.6 The authorities indicated that they would be implementing deeper reforms over the medium term with precise details being discussed, but noting that some politically sensitive measures would have to wait until after the elections.

15. On the revenue side, the authorities intend to implement the long-delayed VAT, together with reform of the entire tax structure. A revised draft of the VAT law is being reviewed, with a view to implementation around early 2016. There are also plans to modernize and lower direct tax rates with technical assistance from the IDB. Staff observed that the relatively low ratio of revenue to GDP indicates scope for significant increases in non-mineral revenue. A VAT would provide an efficient new source of revenues, stimulate improvements in tax administration, and improve the resilience of revenues to commodity price shocks. Given the revenue need, the VAT should target increasing revenue by at least 2½ percent of GDP. Ambitious revenue mobilization under the VAT would also create scope for the authorities’ plans to lower direct tax rates, currently higher than regional averages, thus enhancing the business environment. The authorities also indicated renewed momentum on customs administration reform, stalled in 2013 by opposition from the business community. Currently, poor valuation of imports reportedly results in 30–40 percent losses in customs duty. The ASYCUDA World software, including the risk management module, is to be introduced by the end of 2014, together with increased physical inspection of containers. Finally, enhancing tax collection efforts would also help boost revenues, notably in the informal gold mining sector.

Regional Comparison of Tax Rates

(In percent, last updated in July 2014) 1/

CountryPIT (Highest rate)CITVAT/Indirect Tax
Antigua and Barbuda25.025.015.0
Aruba59.028.01.5
Barbados35.025.017.5
Belize25.025 2/12.5
Curaçao49.027.56.0
Dominica35.030.015.0
Guyana33.330-45 3/16.0
Jamaica25.033.3 4/16.5
St. Kitts and NevisN/A33.017.0
St. Lucia30.033.315.0
St. Vincent & the Grenadines32.532.515.0
Suriname38.036.010 5/
Trinidad and Tobago25 6/25.015.0
Simple average34.330.713.2
Source: Deloitte, IBFD, and KPMG.

Data for Antigua and Barbuda, Belize, Jamaica, St. Kitts and Nevis, St. Kucia, and St. Vincent & the Grenadines are as of May 2013.

0.75% to 25% depending on type of income.

30% to 45% depending on type of company.

25% for non-regulated companies.

8% on services.

35% for gas/petrochemical and wholesale companies.

Source: Deloitte, IBFD, and KPMG.

Data for Antigua and Barbuda, Belize, Jamaica, St. Kitts and Nevis, St. Kucia, and St. Vincent & the Grenadines are as of May 2013.

0.75% to 25% depending on type of income.

30% to 45% depending on type of company.

25% for non-regulated companies.

8% on services.

35% for gas/petrochemical and wholesale companies.

16. The authorities emphasized that spending restraint would be a major part of the adjustment effort, while protecting the most vulnerable segments of society. Staff agreed, and observed that while there is room to enhance the efficiency of public capital expenditure, the bulk of expenditure measures should fall on current expenditures other than those for the social safety net. In this regard, public wage moderation would strengthen consolidation efforts and help enhance competitiveness by restraining private sector wage growth in line with productivity. Moreover, the targeting of electricity and water subsidies should be improved, as they are sizable at over 2 percent of GDP and largely benefit the upper-income urban population. A comprehensive database of recipients of social benefits across relevant Ministries would provide a sound basis for upgrading and improving the targeting of the social safety net.7 More generally, all subsidies should be made explicit in the fiscal accounts to improve clarity about the trade-offs in public spending. Efforts to contain spending on goods and services should also be intensified, as G&S has increased much faster than other expenditure categories in recent years.

17. Staff reiterated that the fiscal framework needs improvement in light of the sensitivity to mineral sector developments. A clear fiscal anchor that promotes long run sustainability, based on a target for the non mineral balance (which has the advantages of transparency and relative robustness to political pressures), is needed to support consolidation efforts. Also, medium-term expenditure ceilings consistent with the fiscal anchor would complement efforts to contain expenditure pressures, aid fiscal planning, and strengthen the top-down aspect of the budgeting process. Staff urged the authorities to continue efforts in this area, including the full installation of the Integrated Financial Management Information System, passage of a Public Financial Management (PFM) law that incorporates a fiscal anchor and corresponding expenditure ceilings, and passage of the sovereign wealth fund (SWF) law to help improve revenue management and provide the institutional basis for saving future surpluses from mineral revenues. The authorities were receptive to staff’s recommendations, but were not yet ready to specify a time-bound agenda or specific plans for establishing a fiscal anchor.

18. The establishment of a national health care and pension system commenced in mid 2013 and is to be completed in 2014, but the overall fiscal impact remains uncertain. Public social assistance for health care will now be in the form of paying premiums for private sector provided health insurance (rather than directly paying hospital bills of patients), while pensions will be defined-benefit on a PAYG basis.8 The authorities reiterated their objective to introduce the reforms in a budget-neutral fashion, but also acknowledged that overruns could not be ruled out. Data so far indicates significant savings on health expenditure, as premium payments to cover the young, old, and unemployed segments of the population have been below previous public spending on health care. Enhanced monitoring and benchmarking of hospital billing practices has also reduced costs and intensified competition among hospitals. However aging pressures could present significant risks to sustainability. Health premiums are likely to increase as the share of the aged in the population increases. Moreover, the authorities’ estimates indicate that pension contribution rates would need to rise from 3 percent to 28 percent over the long run to keep the system sustainable. Staff expressed doubts about the sustainability of such a high contribution rate, and suggested that more flexibility should be to be built into pension benefit parameters to allow greater scope to mitigate the effects of aging. The authorities however considered that the projected contribution rates were feasible.

B. Monetary Policy to Safeguard the Fixed Exchange Rate

19. The fixed exchange rate regime remains an appropriate anchor for policy, but substantially tighter fiscal policy settings need to be delivered to support the current level of the currency. There was agreement that given the relatively thin foreign exchange market and substantial capital flows, a fully flexible exchange rate would likely be subject to considerable volatility, with corresponding sizable shocks to competitiveness and confidence that would be difficult to manage given institutional capacity constraints. Staff noted, however, that the burden of substantial macroeconomic adjustment to achieve consistency with the fixed exchange rate regime lies primarily with addressing remaining fiscal imbalances. Moreover, the large exposure of the external position to commodity price swings indicates a need to strengthen institutional capacity to be able to manage a more flexible exchange rate regime in the future.

20. Staff encouraged the authorities to phase out the existing multiple currency practices (MCPs) as soon as practicable. The exchange rate regime gives rise to MCPs arising from (i) the existing spread of more than 2 percent between the buying and the selling rates in the official market for the government’s foreign exchange transactions; and (ii) the potential spread of more than 2 percent between the official rates for government transactions and those in the commercial markets. The authorities responded that any change to the exchange rate regime could potentially be disruptive, and would have to be done at an opportune time.

21. Although the exchange rate regime constrains monetary policy, there is scope to dampen credit growth if needed to enhance external stability. Capital controls in place create some scope for an independent monetary policy. International reserves have been broadly stable in 2014 and are adequate under traditional benchmarks, but they are slightly below levels considered adequate under more stringent risk-weighted benchmarks, indicating need for a more aggressive policy stance. Thus, there was agreement that further steps would be taken to moderate credit if fiscal adjustment proves inadequate to stabilize the external position. Possible short term measures could include further increases in reserve requirements (although they are already high), sales of treasury bills to mop up bank liquidity, intensified bank supervision to enhance compliance with the existing rules and with the new capital rules coming into effect, and intervention in the foreign exchange market. Staff also encouraged the authorities to implement plans to commence regular Treasury bill auctions in Q4 2014, complemented by the other elements needed for open market operations (OMO), including a liquidity monitoring/management framework and standing facilities. This would strongly improve the monetary toolkit.

1 Risk-weighted measure is taken from IMF “Assessing Reserve Adequacy” (February 2011). The measure for fixed exchange rate regimes is 30 percent of short-term debt at remaining maturity + 15 percent of other portfolio liabilities + 10 percent of broad money + 10 percent of exports.

2 Small Island Developing States (SIDS) measure is taken from Nkunde Mwase, “How much should I hold? Reserve Adequacy in Emerging Markets and Small Islands” (WP/12/205), which is defined as 95percent of short-term debt at remaining maturity + 10 percent of broad money + 35 percent of exports.

C. Strengthening Financial Sector Resilience

22. Staff welcomed the authorities’ efforts to strengthen supervision in view of increased macro risks. Nonperforming loans could rise further and capital positions deteriorate in an adverse scenario. Data on house prices is not available, but there may be rising risks in the real estate sector, a particular concern given that banks, insurance companies, and pension funds all have large exposures to mortgages, and a significant portion of mortgages are in foreign currency. Moreover, even non-mortgage loans are reportedly often collateralized by property, further increasing the exposure of the financial sector to real estate. Although loan-to-value (LTV) ratios are reportedly moderate at around 50 percent, the valuation of collateral is subject to substantial uncertainty, raising potential risks. Comprehensive data on exposures to government is not available and would be an important source of non performance in the event fiscal issues are not resolved. Analysis by the FSAP points to other vulnerabilities including the presence of currency mismatches and high sensitivity to credit and concentration risk. In view of these risks, and in line with the recommendations of the accompanying FSAP (Box 2), the authorities are implementing plans to strengthen the macro-prudential framework and improve monitoring of risks, including enhanced data gathering and analysis and the recently established financial stability unit in the central bank.

23. There was agreement that capital buffers need to be strengthened. Capital adequacy ratios for the banking system, at 12½ percent of risk weighted assets, exceed the regulatory minimum of 8 percent, but are well below the regional average of 20 percent, and it would be prudent to increase buffers in light of the macro risks. The FSAP’s stress tests suggest that some banks could become undercapitalized in an adverse scenario. The authorities on July 1 implemented stronger capital, loan classification and provisioning standards (incorporating a more rigorous treatment of real estate collateral), and intend to intensively monitor their implementation, which will require capital planning on the part of banks.

24. Several important reforms are in the pipeline. Draft regulations on corporate governance, risk management, internal audit, and consolidated supervision are well advanced. The Insurance Act, which will finally give the central bank legal powers in the sector and the ability to monitor and address real estate exposure and other risks in the sector, is now before Parliament. Major efforts are underway on credit reporting, development of the payment system, deposit insurance, accounting and auditing, and secured transactions. There is also a need to complete plans to restructure three small state-owned commercial banks and one small nonbank financial institution. In line with the FSAP, the mission encouraged the authorities to prepare a comprehensive plan to coordinate and integrate the various reform initiatives to ensure timely implementation given limited resources.

25. There was consensus that the central bank should continue on its path to modernize and develop its credibility as a financial sector supervisor. This will require developing a strong financial sector strategy and building key supervisory and crisis resolution skills. Changes to its legal framework, including extending its ability to resolve banks, would be made in line with FSAP recommendations.

26. Progress in improving the AML/CFT regime is ongoing. The Caribbean Action Task Force (CFATF) reported in May 15, 2014 the positive efforts aimed at closing the gaps in Suriname’s AML/CFT framework, including the enactment of the State Decree on Indicators of Unusual Transactions. CFATF asked authorities to report back in November on outstanding recommendations, namely legislative actions to criminalize insider trading and market manipulation, and to give effect to international sanctions. On May 20, 2014, the authorities passed the Capital Market Act and the Law on International Sanctions, which the CFATF will assess in the coming months. Staff urged the authorities to address all remaining deficiencies in a timely fashion.

Box 2:Suriname: 2014 FSSA Main Findings and Recommendations

The financial sector remains relatively underdeveloped and shows signs of vulnerability in the face of elevated macro risks. Credit intermediation levels are low, lagging behind countries with a similar economic structure and per capita incomes. Banks are generally profitable and liquid, but profitability has been declining over the last five years. The capital adequacy ratio of the banking sector is above the required minimum (8 percent), although three small banks are undercapitalized. Stress tests suggest vulnerabilities in the banking system owing to high levels of loan concentration and inadequate accounting for nonperforming loans. The central bank has limited tools to conduct monetary policy and monitor/manage system liquidity. Weak data is a pervasive problem in effective risk analysis and supervision; improving data collection and analysis is a high priority for the CBvS.

The authorities are taking steps to strengthen prudential standards and supervision, though significant implementation challenges remain. The new Banking and Credit System Supervision Act took effect in 2011 and the central bank has made progress in improving on-site examination and adopting the CAMELS approach. On July 1 2014, a capital adequacy rule was adopted to raise the minimum capital adequacy ratio to 10 percent and strengthen provisioning requirements. However, a large number of other regulations and guidelines covering liquidity, consolidated supervision, corporate governance, and external audit have been drafted but not yet issued and challenge the authorities’ resources and capacity to implement them. Enforcement of compliance with rules remains an on-going challenge.

Capital buffers and prudential regulation should be improved. Specifically, the new capital adequacy rules should be implemented in a timely fashion and the supervisor should work intensively with banks that need to build up capital to ensure there is no slippage. Small state-owned commercial banks should be restructured and banks’ compliance with loan classification rules should be improved.

A liquidity management framework should be established. As a first step, the operation of T-bill auctions system should be accelerated. The central bank should develop liquidity monitoring standards for banks, and establish a systemic liquidity monitoring and forecasting framework with a contingency plan for emergency liquidity in foreign currency in place.

The central bank should continue to develop its credibility and effectiveness. A coherent financial sector development strategy needs to be developed and communicated with industry and the public. The central bank should also build up its human resources and skill sets to effectively oversee the on-going reforms. Changes to its legal framework including extending its ability to resolve banks are required as well.

Supervision over non-bank financial institutions should be enhanced. In particular, the Insurance Act should be enacted to enhance the central bank’s supervisory authorities. A resolution strategy for pension plans that are unlikely to meet regulatory requirement should be developed.

D. Enhancing Structural Competitiveness

27. There was agreement that enhancing growth prospects would require strengthening the business environment (Figure 8). With commodity prices cooling, a more supportive business environment is needed to boost productivity growth, particularly in the non-mineral sector. While Suriname scores well on some indicators such as airport capacity and import costs the latest World Bank Doing Business Indicators suggest room for improvement in several areas such as starting a business, enforcing contracts, protecting investors, and registering property.9 The Competitiveness Unit in the office of the Vice President has spearheaded the preparation of several pieces of draft legislation that would overhaul the regulatory framework for business—which in some cases is decades out of date. Draft legislation on competition policy, limited liability company formation, and electronic gazettes to reduce company startup costs has been approved by the Council of Ministers and is before Parliament, while others such as those on intellectual property, consumer protection, and electronic transactions are in the pipeline.10 Staff welcomed these efforts and urged early parliamentary passage of the reforms.

Figure 8.Structural Competiveness Indicators

Sources: World Bank, Doing Business Indicators, Utility Companies, International Energy Agency and azworldairport.

28. Staff stressed that promoting job-rich inclusive growth will require taking decisive steps to increase labor market flexibility, supported by a well targeted social safety net. Employment protection regulations are among the most stringent in the world, and the 2012–2013 World Competitiveness Report ranked Suriname 137 out of 144 countries in hiring and firing practices. Such strong employment protection discourages job creation, and may have encouraged the growth of the informal sector, which is reportedly large. At the same time, however, there is no unemployment insurance, and the existing social programs focus on helping the poorest segments of society. Thus, the cost to an individual worker of being dismissed is severe, ensuring that there would be considerable political resistance to efforts to reduce employment protection. The mission therefore recommended that reductions in employment protection should be complemented by establishing well designed unemployment insurance.

E. Other

29. The authorities continue to progress in strengthening macroeconomic data quality. The data are now broadly adequate for surveillance, and welcome progress is being made toward introducing a monthly indicator of economic activity and producing expenditure side GDP estimates. However, there are still quality and coverage gaps, complicating diagnosis. Detailed fiscal outturn data are sometimes not available. There is a need for timely and comprehensive data on social indicators for enabling social policy design to support inclusive growth, which will likely require the allocation of additional resources. Important data such as GDP and labor statistics come with some lag. Staff encouraged the authorities to complete plans to upgrade the statistics law and to further strengthen the statistical system, including by strengthening reporting requirements for surveyed institutions.

Staff Appraisal

30. Suriname has suffered significant external shocks as the commodity super-cycle ends, requiring a strong policy response to maintain macro stability. Recent declines in gold and oil prices, together with insufficient fiscal policy response, led to fiscal and external sector deterioration in 2012–13 and a significant decline in international reserves. Thus, the main challenges are to strengthen institutions and adjust policies to reverse the recent deterioration and avoid undermining the stability of the fixed exchange rate.

31. Given the large fiscal sustainability gap and recent deterioration in macro performance, the authorities’ resolve to implement strong fiscal consolidation is welcome. Targeting a significant fiscal surplus over the medium term would be appropriate to entrench sustainability, bolster the external position, and build up fiscal buffers for countercyclical policy and intergenerational saving. Commendably, the authorities are implementing substantial tightening for 2014, and are committed to additional measures to restore fiscal health over the medium term. However, policy implementation risks are significant ahead of elections in mid-2015, and the uncertainties inherent in elections imply risks to the medium term policy agenda of the authorities.

32. Successful fiscal consolidation will require revenue and expenditure measures beyond those envisaged for 2014, supported by an appropriate fiscal framework. On the revenue side, establishing a revenue enhancing VAT, together with the modernization of customs and the entire tax structure are key for achieving sustainability. In addition, expenditure restraint should be a major part of the adjustment effort, while protecting the most vulnerable segments of society. Efforts in this area should include public wage moderation, improved targeting of electricity and water subsidies, streamlining of spending on goods and services, and prioritization of capital projects. Also, plans to set up a national pension and health care system, while laudable, should be implemented in a fiscally sustainable fashion. Establishing a fiscal anchor consistent with sustainability, supported by medium term expenditure ceilings, would support consolidation efforts.

33. Monetary tightening should be deployed to safeguard the external position if fiscal measures prove inadequate to contain demand pressures. In this context, the authorities should consider the use of available monetary policy instruments, including reserve requirements, sales of treasury bills, and intervention in the foreign exchange market to achieve this objective if needed. Staff encourages the authorities to press ahead with plans to establish open market operations, thus providing additional monetary policy tools to help maintain macroeconomic stability.

34. The fixed exchange rate regime remains an appropriate anchor for policy, but substantially tighter fiscal policy settings need to be delivered to support the current level of the currency. Given the relatively thin foreign exchange market and substantial capital flows, a fully flexible exchange rate would likely be subject to considerable volatility, with corresponding sizable shocks to competitiveness and confidence that would be difficult to manage given institutional capacity constraints. Thus, limiting exchange rate volatility would serve the country well. Staff considers that the burden of substantial macroeconomic adjustment to achieve consistency with the fixed exchange rate regime lies primarily with addressing remaining fiscal imbalances. Moreover, given the large exposure of the external position to commodity price swings, there is a need to strengthen institutional capacity to be able to manage a more flexible exchange rate regime in the future.

35. Article VIII issues. Suriname is an Article VIII member and maintains two MCPs. Staff does not recommend the approval of these MCPs as there is no clear timetable for their removal.

36. The progress being made to upgrade financial sector resilience is welcome. As noted by the FSAP, the financial sector remains relatively underdeveloped and shows signs of vulnerability in the face of elevated macro risks. Stress tests suggest vulnerabilities in the banking system owing to high levels of loan concentration and inadequate accounting for nonperforming loans. The central bank has limited tools to conduct monetary policy and monitor/manage system liquidity. Weak data is a pervasive problem in effective risk analysis and supervision; improving data collection and analysis is a high priority for the central bank. Commendably, stronger capital regulations have been put in place, and a major overhaul of the banking sector legislative and regulatory framework is nearing completion, while the financial sector infrastructure is also to be strengthened by the establishment of a credit bureau, a modern payment and settlement system and a deposit insurance scheme. Similar efforts are being contemplated to strengthen the insurance sector regulatory framework, and there has been significant progress recently in strengthening the AML/CFT regime.

37. It would be important to craft a coherent financial sector development strategy to continue to develop the credibility and effectiveness of the central bank. The central bank should also build up its human resources and skill sets to effectively oversee the on-going reforms. In addition, building a liquidity management framework should be a priority. Changes to its legal framework including extending its ability to resolve banks are required as well.

38. Momentum is increasing on policies to enhance structural competitiveness. Notably, the draft legislation spearheaded by the competitiveness unit, if passed, will modernize the business environment and support stronger growth and economic diversification. Also, labor market flexibility and job-rich inclusive growth could be improved by some relaxation of employment protection regulations together with well designed unemployment insurance.

39. Staff recommends that the next Article IV consultation with Suriname be conducted on the standard 12-month cycle.

Suriname: Risk Assessment Matrix11
Main ThreatsLikelihood of Realization of the ThreatExpected Impact if Threat is RealizedPolicy Response
Sustained drop in gold and oil pricesMediumHigh
Global recovery increases the likelihood of a decline in gold prices as risk aversion falls. Slower growth in China could also dampen commodity prices in general. Large new oil projects may generate global excess capacity, depressing oil prices.Suriname’s economy is highly exposed to gold and oil prices. The main channel of spillovers would be the decline of government revenues and exports, which could prompt pro-cyclical adjustment measures. In a severe shock scenario where gold prices fall to $1000/ounce the adverse impact on the external position could increase in a nonlinear fashion as prices fall below production costs, with substantial declines in international reserves.Fiscal consolidation, supported by monetary tightening if needed to safeguard external stability. Structural reforms to enhance diversification away from the commodity sector would also be necessary.
Growth slowdown in ChinaMediumHigh
Continued buildup and eventual unwinding of excess capacity, eventually resulting in a sharp growth slowdown and large financial and fiscal losses (medium-term).Downward pressures on commodity prices are likely to be significant, causing external and fiscal deterioration and slower growth.See above response in relation to a sustained decline in commodity prices.
Protracted period of slower growth in advanced and emerging countries.HighMedium
Advanced economies:

Lower-than-anticipated potential growth and persistently low inflation due to a failure to fully address legacies of the financial crisis, leading to secular stagnation.

Emerging markets: Maturing of the cycle, misallocation of investment, and incomplete structural reforms leading to prolonged slower growth.
Suriname’s growth outlook could be reduced if the slowdown leads to downward pressure on commodity prices and lower FDI.See above response in relation to a sustained decline in commodity prices. Also, intensifying efforts to enhance competitiveness would help sustain FDI and encourage domestic private investment.
Inadequate implementation of fiscal consolidation.MediumHigh
Political considerations related to elections in 2015 could undermine prospects for implementing tough reforms.The fiscal sustainability gap is large, and the weak outlook for commodity prices suggests intensified risks to external stability in the absence of fiscal consolidation.Strong and frontloaded consolidation, supported by reforms to the fiscal framework.
Credit risk in the banking sectorMediumMedium/High
A continuation of rapid credit growth and the substantial exposure to the real estate sector and government could lead to elevated risks to financial stability if left unaddressed.Capital buffers exceed regulatory levels, but are inadequate in the face of risks and vulnerabilities arising from concentration in lending and challenges in real estate asset pricing. Reported LTV ratios are moderate, but uncertainties with the valuation of collateral are significant. Banks are also under-provisioned.Implementation of draft regulations to enhance capital requirements and provisioning. Also monetary and prudential measures to dampen credit growth, and institutional reforms to strengthen central bank supervisory and crisis resolution powers.
Table 4.Suriname: Summary Accounts of the Banking System
Proj.
201020112012201320142015
(In millions of Surinamese dollars)
Net foreign assets3,0744,4025,1714,5864,7955,345
Net international reserves2,1553,0553,5102,6582,6342,991
Net other foreign assets9191,3481,6611,9282,1622,354
Net domestic assets25132399298847585,4806,337
Net claims on the public sector−54−518−489232469555
Central government (net)208−22917573759802
Rest of the public sector (net)−262−289−506−341−290−247
Credit to the private sector2,8843,4604,0364,7755,4926,316
Net unclassified assets−5324−11517400
Official capital and surplus−264−567−444−424−481−534
Liabilities to the private sector5,5886,8018,1599,34310,43911,335
Broad money5,1376,2557,4858,5379,47110,174
Monetary liabilities1,8391,9252,3922,5462,7843,052
Currency in circulation6696858318669471,068
Demand deposits1,1691,2401,5601,6801,8381,984
Quasi-money (including gold certificates)1,0481,2201,6171,8792,1402,238
Foreign currency deposits2,2513,1113,4764,1124,5464,883
Other liabilities4515456758069681,161
(Percent changes, unless otherwise indicated)
Liabilities to the private sector11.621.720.014.511.78.6
Broad money11.221.819.614.110.97.4
Money16.54.724.26.59.49.6
Quasi-money16.416.432.616.213.94.6
Foreign currency deposits5.138.211.718.310.67.4
Credit to the private sector10.919.916.718.315.015.0
In percent of GDP24.124.325.328.731.734.1
In percent of beginning of period M256.155.353.955.958.062.1
Change in net credit to the public sector (% of beginning of period M2)4.4−7.40.48.42.50.8
Broad money (percent of GDP)42.843.947.051.354.654.9
(Changes as a percent of liabilities of the previous period)
Net foreign assets of the banking sector1.823.811.3−7.22.25.3
Central bank international reserves1.216.16.7−10.4−0.33.4
Other net foreign assets0.67.74.63.32.51.8
Net domestic assets of the banking sector9.8−2.18.721.79.53.3
Credit to the public sector4.9−9.00.59.62.80.9
Credit to the private sector5.710.38.59.17.77.9
Liabilities to the private sector11.621.720.014.511.78.6
Memorandum items:
Deposit dollarization ratio (percent) 1/50.455.852.253.653.353.6
Credit dollarization ratio (percent) 2/36.840.041.639.9
Domestic currency interest rate spread (%)5.65.14.84.8
Foreign currency (US$) interest rate spread (%)6.66.97.06.9
Reserve requirement for domestic deposits (percent) 3/26.026.026.030.0
Reserve requirement for foreign currency deposits (%)33.340.040.050.0
Sources: Central Bank of Suriname; and IMF staff estimates and projections.

Foreign currency deposits in percent of total commercial bank deposits.

Foreign currency credit in percent of total private sector credit by commercial banks.

Excludes commercial bank use of required reserves for mortgage lending.

Sources: Central Bank of Suriname; and IMF staff estimates and projections.

Foreign currency deposits in percent of total commercial bank deposits.

Foreign currency credit in percent of total private sector credit by commercial banks.

Excludes commercial bank use of required reserves for mortgage lending.

Table 5.Suriname: Financial System Structure and Financial Soundness Indicators 1/
20092010201120122013
Number 2/
Banks89999
Large banks33333
Small banks56666
Reporting non-bank financial institutions
Pension funds2828282930
Insurance companies1212121212
Credit unions and cooperatives3029242424
(In percent of total)
Assets100100100100100
Banks74.776.475.676.8
Large banks61.660.559.260.2
Small banks13.116.016.416.6
Pension funds14.514.614.312.9
Insurance companies7.77.78.58.6
Credit unions and cooperatives3.11.31.61.7
Deposits
Banks100100100100100
Large banks82.579.179.079.179.3
Small banks17.520.921.020.920.7
Capital adequacy
Regulatory capital to risk-weighted assets (*)10.711.912.012.812.4
Regulatory Tier I capital to risk-weighted assets (*)9.510.711.011.711.2
Capital (net worth) to assets5.56.26.26.36.3
Asset composition
Sectoral distribution of loans to total loans (*)
Agriculture4.34.33.73.22.9
Manufacturing7.87.78.38.58.0
Commerce26.223.926.329.829.9
Housing construction18.217.916.817.316.8
Other43.546.244.941.142.4
Asset quality
Foreign currency loans to total loans41.237.140.742.240.1
NPLs to gross loans (*)7.97.98.06.25.9
NPLs net of provisions to capital (*)56.650.348.533.736.1
Large exposures to capital (*)93.398.9106.887.7103.5
Earnings and profitability
ROA (*)2.52.11.91.91.7
ROE (*)35.329.127.224.821.8
Interest margin to gross income (*)72.379.777.678.079.1
Noninterest expenses to gross income (*)59.863.462.861.264.6
Personnel expenses to noninterest expenses59.259.958.962.261.4
Trading and fee income to total income31.928.830.726.624.9
Spread between reference loan and deposit rates6.76.76.66.46.6
Liquidity
Liquid assets to total assets (*)44.843.243.347.143.4
Liquid assets to total short-term liabilities (*)75.477.280.188.587.3
FX liabilities to total liabilities54.150.855.752.952.2
Net position in foreign currency to capital 3/33.027.828.929.524.1
Source: Central Bank of Suriname.(*) Included in the “core set” of financial soundness indicators identified by the IMF’s Executive Board.

Indicators refer to banks, which comprise over 70 percent of financial system assets at end-2008.

The three largest banks hold more than 57 percent of total financial system assets.

Net position in foreign currency (total assets minus total liabilities) as a proportion of banks’ shares and other equity.

Source: Central Bank of Suriname.(*) Included in the “core set” of financial soundness indicators identified by the IMF’s Executive Board.

Indicators refer to banks, which comprise over 70 percent of financial system assets at end-2008.

The three largest banks hold more than 57 percent of total financial system assets.

Net position in foreign currency (total assets minus total liabilities) as a proportion of banks’ shares and other equity.

Appendix I. Debt Sustainability Analysis

Suriname’s public debt sustainability risks have risen significantly. Public debt jumped 8 percentage points to 30 percent of GDP in 2013, and is expected to climb further to 40 percent of GDP by 2019. Though this level of debt is still moderate the sharp increase is cause for concern. The deterioration largely reflects the rapid worsening of the primary deficit and the moderate consolidation efforts assumed in staff’s baseline. However, about 6¾ percentage points of the projected increase in debt over the medium term reflects borrowing for the purchase of equity stakes in two large gold mining projects. The debt path is robust to a variety of shocks to growth, interest rates, the exchange rate, and the primary balance, though a combined shock could raise projected debt to around 51 percent of GDP and financing needs to 18 percent of GDP in 2019.

Risks arising from the maturity of public debt are low, as short term debt constitutes a small fraction of total debt. A spike in short term debt in 2013 due to a sharp rise in recourse to the central bank overdraft facility was eliminated in early 2014 by rationalizing government accounts with the central bank, using government deposits to payoff liabilities. Risks arising from the currency composition of debt have risen, and foreign currency denominated debt is now over half of total debt. Importantly, fiscal consolidation will be key to mitigating the risks to the baseline scenario—medium term projections using historical averages for the macroeconomic and fiscal paths indicate a substantial decline in public debt, emphasizing the need to return to the stronger fiscal stance prevailing in the recent past. Moreover, projections using a constant primary balance indicate a further rise in projected debt to over 50 percent of GDP, with elevated financing needs as well.

Gross financing needs rise significantly under the baseline but remain moderate. The DSA indicates that gross financing needs will be 10.1 percent of GDP in 2014—up from an average of 1.6 percent for 2003–2011—and will rise to 13 percent of GDP in 2019, below the 15 percent benchmark. The heat map highlights rising risks in gross financing needs under real interest rate shocks.

The forecast track record shows a degree of pessimism in forecasts of real GDP growth, suggesting some possibility that the public debt path realization could be somewhat lower than staff forecasts, but this effect is unlikely to be significant. In the aftermath of the devaluation in 2011, staff inflation forecasts for 2012–13 were well above the actual, but staff has since lowered its forecasts for inflation over the medium term to correct this error. Average forecast error for the primary balance is close to zero. Given the robustness of the debt path to macro shocks based on historical precedent, any forecast bias is unlikely to be substantial. The projected fiscal adjustment looks realistic in comparison with other countries, and indeed the low percentile rank (81 percent) in the 3-year average level of the CAPB, corresponding to -1.5 percent of GDP, confirms that the country has more room to implement stronger fiscal measures if necessary. External debt rises to a peak in 2016, reflecting government external borrowing to finance the purchase of equity in two gold mining projects. Beyond 2016, however, external debt falls as the current account balance improves, ending at 43 percent of GDP in 2019. Other external borrowing from multilateral sources to support reform and infrastructure projects is projected to remain strong, while external borrowing from the private sector declines over the medium-term as several large projects are completed. Medium-term projections for the balance of payments depend crucially on the outlook for gold prices, as gold constitutes close to two-thirds of exports. With the current outlook for gold prices, the current account is expected to revert to a surplus in 2017 following the completion of large gold-related FDI projects and the completion of Staatsolie’s oil refinery which will substitute for a significant portion of oil imports. Suriname’s external debt ratio is robust to interest and growth shocks, but sensitive to large and permanent current account and exchange rate shocks. The primary source of a large current account shock would be falling gold prices. An exchange rate depreciation would also raise external debt levels substantially. However, the additional risk from the planned market borrowing of government stemming from devaluation alone is limited, because the funds will finance projects related to gold which generate U.S. dollar revenue streams.

Suriname Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario

(in percent of GDP unless otherwise indicated)

Source: IMF staff.

1/ Public sector is defined as central government and includes public guarantees, defined as.

2/ Based on available data.

3/ Long-term bond spread over U.S. bonds.

4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

5/ Derived as [(r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.

7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).

8/ Includes changes in the stock of guarantees, asset changes, and interest revenues (if any). For projections, includes exchange rate changes during the projection period.

9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Suriname Public DSA - Realism of Baseline Assumptions

Source: IMF Staff.

1/ Plotted distribution includes program countries, percentile rank refers to all countries.

2/ Projections made in the spring WEO vintage of the preceding year.

3/ Not applicable for Suriname.

4/ Data cover annual obbervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.

Suriname Public DSA Risk Assessment

Source: IMF staff.

1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are:

200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.

4/ Long-term bond spread over U.S. bonds, an average over the last 3 months, 24-Apr-14 through 23-Jul-14.

5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.

Suriname Public DSA - Composition of Public Debt and Alternative Scenarios

Source: IMF staff.

Suriname Public DSA - Stress Tests

Source: IMF staff.

Table 1.Country: External Debt Sustainability Framework, 2009-2019(In percent of GDP, unless otherwise indicated)
ActualProjections
20092010201120122013201420152016201720182019Debt-stabilizing non-interest current account 6/
1Baseline: External debt11.912.330.329.433.738.842.147.945.943.2−1.7
2Change in external debt−0.20.417.9−0.84.35.13.26.2−0.3−2.1−2.7
3Identified external debt-creating flows (4+8+9)−1.3−6.8−7.5−8.70.0−1.6−1.3−2.3−5.0−4.2−3.9
4Current account deficit, excluding interest payments−3.5−11.5−6.5−4.12.42.71.90.8−3.0−3.1−3.4
5Deficit in balance of goods and services−0.3−11.8−9.8−5.92.83.93.42.6−1.6−2.0−2.7
6Exports43.652.561.159.551.144.342.940.744.143.643.6
7Imports43.240.751.453.653.948.246.343.342.441.640.8
8Net non-debt creating capital inflows (negative)2.75.9−1.7−2.4−2.7−5.1−3.9−3.6−2.7−1.6−1.0
9Automatic debt dynamics 1/−0.5−1.20.7−2.20.30.80.70.60.70.40.6
10Contribution from nominal interest rate0.60.10.70.71.61.82.02.22.72.62.4
11Contribution from real GDP growth−0.3−0.4−0.7−1.3−1.2−1.0−1.4−1.7−2.1−2.2−1.9
12Contribution from price and exchange rate changes 2/−0.7−0.90.7−1.6−0.1
13Residual, incl. change in gross foreign assets (2-3) 3/1.17.225.47.94.36.74.58.44.72.21.2
External debt-to-exports ratio (in percent)27.423.549.549.566.087.698.1118.6108.7105.199.0
Gross external financing need (in billions of US dollars) 4/−0.1−0.5−0.3−0.10.30.40.40.40.20.20.1
in percent of GDP−2.9−11.4−5.8−1.55.810-Year10-Year7.16.55.83.53.11.8
Scenario with key variables at their historical averages 5/38.839.643.643.841.738.8−0.6
HistoricalStandard
Key Macroeconomic Assumptions Underlying BaselineAverageDeviation
Real GDP growth (in percent)3.04.25.34.84.14.91.23.13.74.24.65.04.4
GDP deflator in US dollars (change in percent)6.58.1−5.15.50.37.06.11.03.02.72.72.82.9
Nominal external interest rate (in percent)5.51.35.72.45.63.41.75.55.65.76.15.95.7
Growth of exports (US dollar terms, in percent)−16.735.816.37.6−10.419.427.2−9.63.41.616.46.97.2
Growth of imports (US dollar terms, in percent)−7.66.126.115.44.917.825.1−6.92.60.05.45.85.4
Current account balance, excluding interest payments3.511.56.54.1−2.44.06.9−2.7−1.9−0.83.03.13.4
Net non-debt creating capital inflows−2.7−5.91.72.42.7−2.44.35.13.93.62.71.61.0

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Figure 1.Country: External Debt Sustainability: Bound Tests 1/2/

(External debt in percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent ¼ standard deviation shocks applied to real interest rate, growth rate, and current account balance.

4/ One-time real depreciation of 30 percent occurs in 2014.

Appendix II. Authorities’ Response to Past IMF Policy Recommendations
IMF 2013 Article IV RecommendationsAuthorities’ Response
Fiscal Policy:

(i) Substantial adjustment, requiring both revenue and expenditure measures, is needed to strengthen macroeconomic stability and ensure sustainability. Notably:

  • Tighten public spending. In particular, public wage should be moderated and subsidies should be better targeted. Diversify revenue base including implementation of VAT.



(ii) Establish a sound fiscal framework considering the sensitivity of revenues to mineral sector developments. This should comprise a fiscal anchor consistent with sustainability, medium-term expenditure ceilings, and a Sovereign Wealth Fund (SWF).
(i) The authorities have implemented strong consolidation in 2014, including both revenue and expenditure measures. However, deeper reforms such as VAT and improved targeting of subsidies are to be tackled after the 2015 elections.

(ii) The authorities were receptive to staff’s recommendation of establishing clear fiscal framework, but have not yet taken concrete action to establish a fiscal anchor. The SWF law is currently stalled.
Monetary and Exchange Rate Policy:

(i) Monetary tightening should be deployed to safeguard the external position if fiscal measures prove inadequate to contain demand pressures.

(ii) The monetary authorities should press ahead with efforts to establish indirect instruments of monetary policy.
(i) The central bank tightened monetary policy on September 16. It raised reserve requirements on both domestic and foreign currency deposits by 5 percentage points to 30 percent and 50 percent, respectively, as part of efforts to constrain credit growth and help strengthen macroeconomic stability.

(ii) T-bill auction as a first step to establish indirect monetary policy framework is in progress although the implementation is delayed to Q4 2014 /Q1 2015.
Structural Reforms:

(i) Structural reforms to improve the business environment and increase the efficiency of public utilities will be needed to enhance competitiveness.

(ii) Labor market flexibility could be improved by some relaxation of employment protection regulations.
(i) Legislation is pending to overhaul the business environment. Draft laws on competition policy, limited liability company formation, and electronic publication of the registration of new firms have been approved by the Council of Ministers and are before Parliament. Other important legislation in the pipeline includes laws on intellectual property, consumer protection, and electronic transactions.
Financial Sector:

(i) Plans to substantially reduce state ownership in the banking sector should be carefully designed and managed to ensure a smooth transition.

(ii) Efforts to strengthen financial sector resilience and reduce dollarization should continue.
(i) The authorities are still discussing with the relevant banks on how to divest government shares to reduce potential negative impact on market.

(ii) The authorities passed new capital rules on July 1, 2014 to raise minimum CAR ratio to 10 percent for all banks and require banks to raise provisions by an estimated SRD40 million.

While the de jure exchange rate classification is “floating” the de facto regime is a “stabilized arrangement” because the Surinamese dollar is anchored to the US dollar in a narrow band.

Suriname is highly exposed to gold which accounts for 62 percent of exports and 7 percent of fiscal revenues. Fiscal exposure to oil is also high, as it accounts for 21 percent of revenues.

The fiscal sustainability gap is the total amount of fiscal measures that (if immediately implemented) would assure a non-explosive path for government debt over the long run.

Kanda and Mansilla (IMF WP/14/121) describes the analytical approach underpinning the estimates. Staff’s revised estimates incorporate revisions to the data on mineral revenues. The estimate excludes the impact of aging pressures on fiscal expenditures. Incorporating aging would significantly increase the size of the sustainability gap.

6¾ percentage points of the increase in debt represents expected market borrowing to finance the purchase of equity stakes in two large gold mining ventures.

The legal limit for central bank financing of government deficits is 10 percent of budgeted revenues.

Suriname has a variety of social programs targeting indigent people, disabled people, senior citizens, children & youth. Social assistance is in the form of cash transfers and the provision of goods and services including health care and school supplies. However there is fragmentation of social programs, and targeting could be strengthened.

Financing of health care premiums will involve employer and employee contributions for employed persons, with government paying premiums for the other members of the population. Health insurance coverage would be provided by the private sector in all cases. For those on the government program, the government negotiates a fixed-term group insurance contract with a private provider after a competitive bidding process.

As pointed out in an independent evaluation of the Doing Business survey, care should be exercised when interpreting these indicators given subjective interpretation, limited coverage of business constraints, and a small number of informants which tend to overstate the indicators’ coverage and explanatory power (see www.worldbank.org/ieg/doingbusiness).

All new companies in Suriname are required to announce their formation via paper-based gazette. Because of the high cost and long-waiting time of this process, it is one of the key barriers for start-up of companies. Electronic gazette will allow companies to publish information online and significantly reduce start-up costs.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Nonmutually exclusive risks may interact and materialize jointly.

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