On behalf of our Surinamese authorities, we thank staff for this year’s Article IV consultation. While broadly agreeing on many of the key issues detailed in the report, we would like to highlight the progress recently made on the fiscal, monetary and financial frameworks.
After a deep recession in 2015-16, when inflation spiked and fiscal deficit ballooned, the economy has returned to a sounder track. The recovery is broad based and is premised on institutional enhancements and improved fundamentals. GDP growth reached 2.6 percent in 2018, up from 1.8 percent in 2017. Following a peak of over 50 percent in 2016, inflation dropped sharply to 6.8 percent in 2018 and is expected to remain contained within single-digit levels. This positive outcome has been supported by recently developed monetary policy instruments under the new reserve money targeting framework. The authorities remain committed to implementing both revenue and expenditure measures to achieve fiscal stabilization. That said, the primary fiscal deficit declined by about four percentage points of GDP between 2015 and 2018. Going forward, the authorities are committed to implementing additional measures to increase tax revenues and strengthen public sector efficiency.
Fiscal policy and public debt
The Surinamese authorities are committed to fiscal sustainability. The authorities are focused on further enhancing domestic revenue mobilization and on maintaining the strict expenditure policy at all levels of government. In addition, reform of the energy sector will reduce the budgetary transfer of cost subsidies and hence create space for capital investments. This will enable further development of non-mineral domestic sectors and contribute to the improvement of the non-resource fiscal balance. Combined with ongoing economic growth, these initiatives will strengthen fiscal sustainability and increase debt repayment capacity in the medium term.
The fiscal policy framework has been enhanced to magnify the benefits of improving commodity prices and increasing government mining revenues. Revenues improved steadily with recovering prices of Suriname’s main export commodities - gold and oil. Going forward, this virtuous trend is expected to continue with the exploration of new gold mines in 2019 and 2020 and the completion of accelerated depreciation schemes. Increased revenue collection efficiency combined with positive economic growth have resulted in steadily higher revenues from the non-mining sectors since 2017. Furthermore, as a key mechanism to counter commodity cycles, the authorities launched the Savings and Stabilization Fund Suriname (SSFS) and installed its Board of Directors in August 2019. This new sovereign wealth fund will allow windfalls to be syphoned off to be used in the future to stabilize revenue and expenditure in times of high volatility and create a buffer for future generations. The authorities welcome the Fund’s expertise and support to this initiative and are preparing to approach the World Bank Group (WBG) with a request for technical assistance.
The authorities plan to curb electricity tariff subsidies through institutional reforms and the reduction of energy production costs. The authorities are committed to curtail electricity tariff subsidies, which account for almost half of the estimated 2019 overall deficit. To that end, they have taken initial steps to reorganize the sector, revamping the legal framework and establishing cost-effective regulations. The energy cost is anticipated to be reduced with the transfer of the Afobakka hydro-energy dam to the Government, which is scheduled for the end of 2019. Furthermore, the authorities understand that phasing out electricity subsidies in a gradual way is important to avoid new inflationary pressures and social disruption, while at the same time creating fiscal space. We want to underscore the fact that the recent uptick in current account deficit does not have a fiscal origin, but has resulted from an increase in mining related imports for investment purposes. Moving forward, we can expect an improvement in the current account deficit as this effect wanes off.
Recent debt law amendments will help to stabilize fiscal and public debt indicators.
Authorities are decided to make a sensible use of their indebtedness capacity. They are committed to keep medium-term debt levels on a sustainable path and refrain from measures that might undermine this objective. The revised Debt Law allows for debt to exceed the 60 percent of GDP ceiling under certain circumstances, as long as the amount does not surpass the annually approved budget deficits and total debt does not exceed 95 percent of GDP. The new enhanced public financial management feature establishes that the government cannot contract new debt above the 60 percent threshold before approval by the parliament. In addition, the Debt Act now requires a debt sustainability analysis to be presented in conjunction with the submission of the budget to the National Assembly. While ensuring sustainability, the framework allows for concessional loans to help diversify the economy, which ultimately improves the overall fiscal balance. Moreover, reforming the tax system to enhance revenues is a high priority for the authorities. This will include the introduction of new tax laws - the already drafted VAT bill shall be sent to congress next year - and adjustments of existing legislation in order to comply with internationally acceptable standards and procedures. Regrettably, the delays in the implementation plan have been due to technical impediments, given the intrinsic complexity of collecting a value-added tax and the requirements to smoothen the transition from sales tax to VAT. These efforts combined will increase debt repayment capacity.
Institutional capacity strengthening to support transparency, governance and financial accountability is a priority. Extensive technical assistance from the Fund has supported domestic efforts to improve capacity and institutions. In particular, a number of TAs on government finance statistics have been highly useful and resulted in notable progress on this front. Other multilateral assistance also supported the modernization on the fiscal sector. The MoF’ s Fiscal Strengthening to Support Economic Growth (FISEG) program is a case in point. In 2019 the Parliament approved the new Accounting Act, emphasizing accountability and control in the use of public resources, as well as the principle of single audit to ensure an integrated audit program. It also considers international developments by the International Accounting Standard Committee (IASC). The adoption of new rules with regard to the composition, organization and working methods of the Supreme Audit Chamber of Suriname were part of the revised Law on the Supreme Audit Chamber. Furthermore, the MoF presented a new draft act on Procurement to Parliament, for approval.
Monetary and exchange rate policies
Keeping liquidity at a manageable level is a crucial policy priority. To that end, the monetary authorities are diligently monitoring and controlling excess reserves. The Centrale Bank van Suriname (CBvS) successfully switched its nominal anchor from the nominal exchange rate to reserve money. As a result, and underpinned by a more stable exchange rate, inflation has decelerated continuously since 2016 and is now projected to end 2019 at 4.5 percent. The Central Bank has introduced new liquidity management instruments and is committed to further improving the effectiveness of the available monetary instruments. Coordination of monetary and fiscal policies is ensured through the newly formed Monetary and Fiscal Policy Coordination Committee (MFPCC), which encompasses both the MoF and CBvS.
Accumulation of international reserves is geared to avoiding disruptive conditions affecting the domestic currency. In a small and less diversified economy, the central bank has limited possibilities to boost its international reserves, other than buying gold or foreign exchange from a small number of exporters. Accordingly, the increase in international reserves was bolstered by prudent purchases of foreign exchange and gold at the local market, as well as the obligation of commercial banks to place a share of foreign currency required reserves with the Central Bank. Also, outstanding foreign currency swap arrangements were terminated in October 2019 hence eliminating currency risk for the CBvS. Foreign exchange market reform has proceeded alongside other measures to safeguard financial stability and improve financial intermediation, including the newly drafted and enhanced financial legislation.
Improved legislation and close monitoring will increase resilience against FX market misalignments. Underdevelopment of the Surinamese FX markets creates space for disruptions by some dominant market participants. Nevertheless, the Central Bank encourages responsible FX-market behavior with increased monitoring and strengthening of supervision and regulation of cambios (foreign exchange houses).
Financial sector policies
Despite significant challenges, key indicators reveal the banking sector’s resilience under the supervision of the CBvS. Overall, the timely tightening of the regulations and subsequent follow up by the CBvS’ Supervision Directorate have placed banks in a better position to withstand shocks. Banks have proven to be sufficiently liquid with improving capital adequacy ratios. Non-performing loans ratio has declined in Q2 2019 when compared to the previous quarter. The implementation of IFRS 9 is not expected to have a significant impact because of the strict requirements of the current regulations. However, challenges remain with regard to overall profitability. The CBvS is in continuous consultation with banks with a view to improve risk management and efficiency, thereby enhancing profitability across the system.
The CBvS has taken decisive steps to enhance its supervision capacity. The CBvS is aware of the fact that the existing legislation regarding the financial sector needs to be modernized and adapted to international standards. In this regard, a proposal to amend the Bank Act in accordance to the core functions of the CBvS as the guardian of monetary and financial stability has been drafted. The proposed amendments would eliminate articles that make possible monetary financing, introduce new regulations with regard to Islamic banking and electronic payments, and enhance supervision of other financial institutions. In addition, the Act on Banking and Credit System Supervision was adjusted in accordance with international standards and the recommendations of the FATF.
The Bank Resolution Act contains a set of rules that will enable the CBvS to take effective action to curtail risks at the level of individual financial institutions and the financial sector as a whole. New legislation involves rules on electronic transactions (Electronic Payments System Act), the setup of a credit registry office and a deposit insurance scheme. The authorities agree with staff that enhancing the AML/CFT framework is instrumental in mitigating risks regarding the withdrawal of correspondent banking relationships and intend to amend the legislation accordingly. In preparing for the CFATF mutual evaluation in 2021, the authorities are giving the highest priority to the National Risk Assessment (NRA) to identify key areas for improvement, which would result in an action plan with a view to enhance the country’s risk profile.
Medium-term development prospects
A set of policies are being implemented to strengthen the real economy and its foreign exchange earning capacity, with particular attention to economic diversification and infrastructure improvement. The authorities are implementing several measures to improve the business climate, especially for the non-resource sectors, such as the WBG “Suriname Competitiveness and Sector Diversification” program, to be launched in the first quarter of 2020. The highway construction from the airport to the capital city is well underway and will provide Suriname with much improved connectivity. Both projects have been financed with foreign loans and are overseen by technical support and domestically created new expertise. Furthermore, to facilitate investments in sectors like tourism, forestry and agriculture, an infrastructure project to restore important irrigation systems and improve a myriad of waterways was launched in September 2019. Other upcoming infrastructure projects aim to enhance Suriname’s connectedness with the world, including the dredging of the Suriname River and the expansion of the main international airport. With significant infrastructure in-place, Suriname was able to attract investments from a multinational agribusiness corporation to setup large scale production and processing facilities that will boost exports, create jobs and amplify the economy’s foreign exchange earning capacity.
Mining earnings will be used to catalyse development in other sectors. Offshore oil findings would dramatically change the growth outlook, when accounting for upstream and downstream effects. The upcoming oil exploration in neighboring Guyana is expected to provide many opportunities to the people of Suriname. Many Surinamese companies have already established branches in Guyana that support local content and absorptive capacity in both countries. Reforms in the small-scale gold sub-sector should be geared towards the development of cleaner and more costs-efficient methods of mining. Enhancing revenue administration and collection in this subsector will increase mining revenues. The newly established mining institute will be at the center of these reforms.