This Selected Issues paper describes the revenue instability and its consequences for Suriname. It explores some options for policy rules that could be considered in the case of Suriname. The paper analyzes inflation in Suriname from its historical and international perspectives, reviews the monetary policy instruments and the institutional framework, and describes the exchange rate regime and its main developments. The paper also analyzes the type of macroeconomic shocks and the domestic transmission mechanism for Suriname.

Abstract

This Selected Issues paper describes the revenue instability and its consequences for Suriname. It explores some options for policy rules that could be considered in the case of Suriname. The paper analyzes inflation in Suriname from its historical and international perspectives, reviews the monetary policy instruments and the institutional framework, and describes the exchange rate regime and its main developments. The paper also analyzes the type of macroeconomic shocks and the domestic transmission mechanism for Suriname.

II. Monetary Policy and the Exchange Rate Regime1

A. Introduction

1. This chapter analyzes inflation in Suriname from its historical and international perspectives (Section B), reviews the monetary policy instruments and the institutional framework (Section C), describes the exchange rate regime and its main developments (Section D), analyzes the type of macroeconomic shocks and the domestic transmission mechanism (Section E), and concludes (Section F).

B. Inflation in Suriname

2. Suriname has suffered two episodes of extremely high inflation during the 1990s, accompanied by a sharp depreciation of the exchange rate. The average annual inflation rate in Suriname increased from 14 percent during the 1980s to 83 percent during 1991–2003, and the number of months for which the 12-month inflation rate in Suriname exceeded 40 percent rose from 21 months during the 1980s to 87 months during the 1990s. This was in marked contrast to the general trend of reduced inflation in Latin America during the 1990s, and by this latter measure, Suriname’s inflation performance was the worst in the region. The official exchange rate depreciated by 25 percent during the 1980s and 43 percent during 1991–2003, again in contrast to the trend toward greater exchange rate stability in Latin America during the 1990s.

uA02fig01

Money, Inflation, and Depreciation, 1991–2003

(In annual percentage change)

Citation: IMF Staff Country Reports 2005, 142; 10.5089/9781451835267.002.A002

Sources: Surinamese authorities; and Fund staff estimates.1/ Calculated based on black market rate (SRD per U.S. dollar), annual average.

Inflation and Exchange Rate Depreciation in Selected Latin America and Caribbean Countries

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Sources: International Financial Statistics; Central Bank of Suriname.

Annual percentage change in the value of national currency unit per U.S. dollar.

Simple unweighted average is taken for: Argentina, Bolivia, Brazil, Chile, Columbia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Grenada, Guatemala, Guyana, Honduras, Jamaica, Mexico, Nicaragua, Paraguay, Peru, Suriname, Uruguay, and Venezuela.

uA02fig02

Frequency of High Inflation in the 1980s

(Number of months for which the 12-month inflation rate exceeded 40 percent)

Citation: IMF Staff Country Reports 2005, 142; 10.5089/9781451835267.002.A002

Source: Reinhart and Rogoff (2002).
uA02fig03

Frequency of High Inflation in the 1990s

(Number of months for which the 12-month inflation rate exceeded 40 percent)

Citation: IMF Staff Country Reports 2005, 142; 10.5089/9781451835267.002.A002

Source: Reinhart and Rogoff (2002).

3. In each episode of high inflation, broad money growth rose with a lag. An econometric analysis also suggests that the causality runs from exchange rate or inflation to money growth. 2 This is consistent with a hypothesis that the monetary authorities accommodate inflation expectations that have already been reflected in the exchange rate and the price level.

4. Suriname has regained a measure of price and exchange rate stability since 2003.3 With the introduction of tighter fiscal and monetary policy stances in late 2002, inflation eased significantly from early 2003, with the 12-month inflation rate reaching single digits in March 2004. Concomitantly, the exchange rate has also stabilized.

C. Institutional Framework and Instruments of Monetary Policy

Institutional framework

5. Monetary policy is governed by the Central Bank of Suriname Act.4 The law defines the purpose of the Central Bank of Suriname (CBvS) as promoting the stability of the Surinamese currency and achieving “balanced socio-economic development.” In pursuit of these goals, the CBvS is required to conduct monetary policy to achieve a low and stable rate of inflation. While not mentioned explicitly in the Central Bank Act, developments in the foreign exchange market are an important factor in the formulation and implementation of monetary policy given the sensitivity of domestic prices to exchange rate movements.

6. However, the CBvS lacks independence to conduct monetary policy. A statutory cumulative ceiling for the central bank financing of the government deficit—set at 10 percent of budgeted revenues for a fiscal year—has been in place since 1986. However, the CBvS has often been required to issue reserve money to finance the government budget well in excess of the statutory limits or levels consistent with low inflation. A new Central Bank Act that is awaiting parliamentary approval would strengthen the central bank president’s authority to limit financing in excess of the lending limit and establish penalties for central bank officials found in dereliction of their duties.

Monetary policy instruments

7. Suriname is in the early stages of money market development. The CBvS relies on reserve requirements and moral suasion as its principal instruments to conduct monetary policy and has not adopted a formal, pre-announced operational framework or target for monetary policy.

8. Prior to May 2001, monetary policy was conducted mainly through monthly adjustments to credit ceilings. Ceilings were placed on incremental domestic and foreign currency lending by commercial banks. These ceilings were established annually by formulas that were based on the composition of individual banks’ nonsight deposit liabilities as follows: (i) 90 percent of the increase in savings deposits; (ii) 75 percent of the increase in time deposits with a maturity of less than one year; and (iii) 100 percent of the increase in time deposits with a maturity of one year and over. However, these ceiling were not strictly observed and there were no penalties for a breach of the ceilings.

9. The CBvS instituted reserve requirements in May 2001. A single unremunerated reserve requirement on domestic currency deposits of 27.5 percent was set initially and then was raised to 35 percent in August 2002. As the exchange rate stabilized and inflation fell to single digits, the reserve requirement was lowered gradually to 30 percent in 2004.

10. The reserve requirement scheme has two significant distortions:

  • Foreign currency intermediation is favored. Reserve requirements were not imposed on foreign currency deposits until the CBvS imposed a 17.5 percent requirement on February 12, 2003. With a view to eliminating the gap between the treatment of domestic and foreign currency deposits, the CBvS gradually lowered reserve requirements on domestic currency deposits, which reached 30 percent in October 2004, while reserve requirements on foreign currency deposits were increased from 17.5 percent to 22.5 percent in November 2004 and to 33⅓ percent in February 2005. However, the required reserves for foreign currency deposits are remunerated and can be held abroad at correspondent accounts of commercial banks, while required reserves for domestic deposits are unremunerated.

  • Reserve requirements are used to promote the housing sector. On February 12, 2004, the CBvS allowed commercial banks to use up to 7 percentage points of the reserve requirements to finance low-interest mortgages. Commercial banks have used this option to cover about 3½ percentage points of the reserve requirements through December 2004, reducing the effective reserve ratio on domestic deposits to 26½ percent.

Reserve Requirements on Domestic and Foreign Currency Deposits

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Source: Central Bank of Suriname.

11. There has been limited use of alternative instruments to conduct monetary policy. In March 1995, the central bank issued certificates denominated in gold to cope with exchange rate instability. These certificates were redeemable on demand, indexed to the international price of gold, and paid interest of 5 percent per year. The attractiveness of these certificates was limited because their value was converted into local currency at the official exchange rate, which at times was substantially more appreciated than the parallel market rate. The central bank is also authorized to use other instruments, including rediscount and overdraft facilities, open market operations in treasury bills, and liquidity ratios, but these have not been used.

Financial system

12. The total assets of the banking system are equivalent to 80 percent of GDP, with commercial banks holding about 70 percent of the total assets of the financial system. The rest of the financial system consists of 31 pension funds, 10 insurance companies, and 16 credit unions, which are all under the supervision of the central bank. There are also 21 foreign exchange houses (cambios), most of which operate import businesses and which use most foreign exchange that they purchase for their own import requirements. Financial data on cambios are unavailable.

Financial System Assets

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Sources: Central Bank of Suriname, Supervision Department; and Fund staff estimates.

13. The banking system is highly concentrated. There are eight commercial banks and the three largest banks account for 84 percent of total assets as of end-September 2004. Of these banks, one is a fully-owned subsidiary of an international bank and the other two have partial government participation. Three small banks are state-owned and specialize in sectoral lending with a social objective. In addition, there is a state development bank, which does not take deposits from the public, and a very small privately owned full-service bank, whose deposits are insured by the government of Suriname. 5 The balance sheets of the largest banks appear relatively strong, while there are yet unresolved difficulties at the three small state-owned banks (see Statistical Appendix Table 25). There is no deposit insurance system. Reflecting the lack of competition and depth in the banking system, there is only a narrow market for government and other securities.

Market Share of Commercial Banks

(In percent of total)

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Source: Central Bank of Suriname, Supervision Department; and Fund staff estimates.

14. Legislation was enacted in 2003 with a view to implementing the Basel Core Principles for effective bank supervision. The new banking supervision act in January 2003 enhanced the supervisory powers of the central bank and—in line with the legislation’s provisions—the central bank issued five new prudential regulations. These included regulations covering: (i) capital adequacy (minimum capital requirement of SRD4.5 million and risk weighted capital ratio of 8 percent); (ii) classification of loans and provisioning (adoption of credit policy and minimum accounting standards for outstanding loans); (iii) large exposures (limit on single large exposure and related parties of 25 percent of the bank’s capital, and aggregate exposure to capital of up to 600 percent of the bank’s capital); (iv) insider lending (limit of 25 percent of capital to single insider and 100 percent for aggregate loans to insiders); and (v) investment limits (limit of 100 percent of the capital base on bank’s direct and indirect investment). However, implementation has been difficult due to delays in data reporting and lack of staff.

D. Exchange Rate Regime and Developments

15. The foreign exchange system comprises the official market, the commercial bank/cambio market, and a black market. The official exchange rate is pegged to the U.S. dollar at a rate announced by the CBvS and is mainly used for the partial surrender of foreign exchange proceeds from mineral exports and for government transactions. 6 Other legal private sector transactions are carried out through the commercial bank/cambio market. The black market has been important at times when the CBvS restricted transactions in the bank/cambio market, e.g., through the imposition of floors or ceilings for the exchange rate. 7

16. Suriname’s exchange rate regime can be characterized as a de facto managed float. While the official rate is pegged to the U.S. dollar, it has been adjusted at intervals to eliminate the spread with the bank/cambio or the black market rates. While there have been times when the stability of the exchange rate and the presence of an official rate could lend themselves to a perception of a currency peg, this has only rarely been an intended policy outcome. The CBvS has at times attempted to dampen inflation expectations through restrictions on the commercial bank/cambio rate and the use of multiple currency practices, leading at times to sizeable spreads between various exchange rates. 8

uA02fig04

Exchange Rates, 1994-2004

(Surinamese dollars per U.S. dollar)

Citation: IMF Staff Country Reports 2005, 142; 10.5089/9781451835267.002.A002

Source: Central Bank of Suriname.

17. The exchange rate has stabilized in recent years and the authorities have moved toward unifying the exchange rate regime. Stabilization policies since late 2002 helped to reduce the pressures on the currency and with the elimination of restrictions on the bank/cambio rate in mid-2003, the black market rate has become unimportant. In January 2004, the CBvS introduced the Suriname dollar (SRD) to replace the Suriname guilder at a rate of 1:1,000. At the same time, the CBvS devalued the official exchange rate by around 4 percent to SRD2.735 per U.S. dollar, reducing further the spread with the parallel rate to less than 21/2 percent. However, while spreads have remained relatively narrow, multiple currency practices persist.

uA02fig05

Exchange Rates, 2002-2004

(Surinamese dollars per U.S. dollar)

Citation: IMF Staff Country Reports 2005, 142; 10.5089/9781451835267.002.A002

Source: Central Bank of Suriname.

E. Macroeconomic Shocks and Transmission Mechanism

18. Suriname is highly vulnerable to external shocks. The vulnerability is related to Suriname’s trade openness and export concentration, and the volatility of international commodity prices. The ratio of imports to GDP exceeds 50 percent, while alumina and gold comprise more than two-thirds of exports. The export concentration and the sharp changes in the international price of alumina have led to volatile terms of trade. In addition, the pass- through from the exchange rate to the domestic price level is high owing to the high import content of investment and consumption and the high degree of dollarization (see chapter on dollarization).

19. However, the experience among other countries in the region illustrates that Suriname’s exposure to external shocks does not preclude price stability. In fact, Suriname’s openness and terms of trade volatility are only slightly above the Latin American average. During the 1990s, high inflation (with an annual inflation rate more than 40 percent) was more frequent in Suriname than in countries with high openness (such as the Dominican Republic, Nicaragua, Honduras, Paraguay, and Costa Rica) or in countries with highly volatile terms of trade (such as Chile, El Salvador, Nicaragua, and Venezuela).

uA02fig06

Terms of Trade Volatility and Frequency of High Inflation

Citation: IMF Staff Country Reports 2005, 142; 10.5089/9781451835267.002.A002

Sources: World Bank; and Reinhart and Rogoff (2002).
uA02fig07

Openness and Frequency of High Inflation

Citation: IMF Staff Country Reports 2005, 142; 10.5089/9781451835267.002.A002

Sources: IMF, World Economic Outlook; and Reinhart and Rogoff (2002).

20. The effect of external shocks in Suriname appear to have been amplified by inadequate policy responses. A decline in world alumina prices preceded each of three high-inflation episodes in the last two decades. With fiscal revenue relying heavily on the bauxite sector, a sharp decline in the alumina price led to revenue shortfalls, and—in the absence of offsetting fiscal policies—the resulting fiscal deficits were immediately monetized, leading to inflation and exchange rate depreciation. 9 The decline in the alumina prices also tightened the supply of foreign exchange in the economy, further contributing to pressure on the exchange rate.

uA02fig08

Alumina Price, Inflation, and Fiscal Deficits, 1990-2003

Citation: IMF Staff Country Reports 2005, 142; 10.5089/9781451835267.002.A002

Sources: U.S. Geological Survey; Surinamese authorities; and Fund staff estimates.

F. Conclusion

21. Monetary policy discipline has strengthened in recent years. During the 1990s, external shocks were amplified due to a lack of an effective nominal anchor, monetary policy instruments, and central bank independence, which led to unchecked central bank financing of fiscal deficits. However, fiscal and monetary policy tightening has helped reduce inflation and stabilized the exchange rate since 2003.

22. The institutional framework has improved. Bank supervision has been strengthened and the distortion in the reserve requirement system that favors foreign currency intermediation is being redressed. In addition, a plan to enhance the central bank authority to limit fiscal financing is awaiting parliamentary approval.

1

Prepared by Mazahiro Nozaki and Mariana Torres. The chapter benefited from assistance from MFD within a pilot project to increase the coverage of financial sector issues in the framework of IMF Article IV surveillance.

2

See Selected Issues chapter “Civil Service Reform: Background and Issues” in Country Report No. 03/357 (November 19, 2003).

3

After stabilization efforts were undertaken, the CBvS introduced the Suriname dollar (SRD) at a rate of Sf1,000 per SRD on January 1, 2004.

4

The act was promulgated in 1956 and amended by Decree No. 94 on September 19, 1983.

5

The system is highly dollarized. See chapter on dollarization.

6

Foreign exchange proceeds equivalent to the amount of local expenditures required for mining operations must be surrendered to the CBvS.

7

There are also special exchange rates for infant formula and milk powder imports.

8

According to the classification by Reinhart and Rogoff (“The Modern History of Exchange Rate Arrangements: A Reinterpretation,” NBER Working Paper No. 8963, June 2002), which focuses on information from the black market rate to determine de facto exchange rate regime, Suriname’s exchange rate regime can be characterized as either a managed or a free float during most of the last two decades.

9

Bauxite is a raw material for alumina. In 2002 and 2003, revenue from gold and bauxite operations amounted to about one fifth of total tax revenue.

Suriname: Selected Issues
Author: International Monetary Fund
  • View in gallery

    Money, Inflation, and Depreciation, 1991–2003

    (In annual percentage change)

  • View in gallery

    Frequency of High Inflation in the 1980s

    (Number of months for which the 12-month inflation rate exceeded 40 percent)

  • View in gallery

    Frequency of High Inflation in the 1990s

    (Number of months for which the 12-month inflation rate exceeded 40 percent)

  • View in gallery

    Exchange Rates, 1994-2004

    (Surinamese dollars per U.S. dollar)

  • View in gallery

    Exchange Rates, 2002-2004

    (Surinamese dollars per U.S. dollar)

  • View in gallery

    Terms of Trade Volatility and Frequency of High Inflation

  • View in gallery

    Openness and Frequency of High Inflation

  • View in gallery

    Alumina Price, Inflation, and Fiscal Deficits, 1990-2003