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.

IV. The Gold Mining Sector 1

A. Introduction

1. Gold mining has become increasingly important in the Surinamese economy. While small-scale gold mining activities became significant in the 1980s, large-scale gold mining started only in 2004. This chapter describes the background of the gold sector in Suriname, its regulatory framework and the status of gold mining concessions and illegal mining activities, and issues of fiscal revenue volatility and vulnerabilities arising from the gold mining sector.

B. Background

2. Gold production in Suriname represents a relatively small share of world production. Gold mine production in the Western Hemisphere was approximately 826 metric tons in 2003, representing 35 percent of the world total production. The top three gold producers-United States, Canada, and Peru-accounted for about 71 percent of the total gold production in the region, while Suriname production represented only 1.8 percent of the hemisphere’s total.

Western Hemisphere: Gold Production in 2003

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Source: World Metal Yearbook 2004.

3. Gold mining has a long history in Suriname. Gold deposits in Suriname are located in the Guianas Shield, 2 as part of a metamorphic rock formation that cuts through the Guianas from east to west. Gold deposits occur in primary form (mostly in and around reefs formed through the filling of cracks in the surface stone) and in secondary form (as gold nuggets or dust formed as a result of erosion on hill slopes or in local rivers and creeks). Gold mining started in the Sara creek area in 1876 and later in the Mindrineti and Brownsweg areas. The rich Lawa alluvial deposits were mined extensively since 1885, reaching 1,200 kg per year in 1908. Subsequently, gold production declined when most deposits were exhausted and artisanal mining replaced mechanized commercial operations. In the late 1960s gold mining was virtually non-existent.

4. Informal gold mining in the interior increased rapidly since the 1990s. Gold mining became an important source of income for the population in the interior after the end of the civil war in 1992. 3 In addition, Brazilian gold diggers, who had expertise in hydraulic and small-scale mining operations, migrated to Suriname in response to the increasing scarcity of alluvial ores in the Brazilian Amazon. 4 The high international gold prices in recent years have also made this industry more attractive.

C. Regulatory Framework

5. The main legislation governing the exploration and exploitation of mineral resources in Suriname is the Mining Decree of 1986. The decree authorizes the Geological and Mining Department (GMD) of the Ministry of Natural Resources to grant mining rights and other licenses, and regulate, inspect, and monitor the mining sector. The decree regulates the procedures for granting mining rights, and their scope and duration; and establishes five types of mining titles: (i) reconnaissance rights for up to 200,000 hectares and three years; (ii) exploration rights for up to 40,000 hectares and seven years; (iii) exploitation rights for up to 20,000 hectares and 25 years, with option to extend the duration in the terms agreed between the parties; (iv) small mining rights for alluvial or shallow mining for up to 200 hectares for two years, with option to extend by periods of two years; and (v) rights to exploit building materials for up to 400 hectares for five years, with option to extend by periods of five years.

Suriname: Gold Concessions

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Source: Ministry of Natural Resources, Mining Department.

6. However, most gold is mined without a legal concession or government control. Holders of large-scale mining concessions have subcontracted gold mining operations, allowing informal miners to use their land for a fee, usually 10 percent of the production, but this constitutes only a small part of informal mining operations. As of January 2005, the government had granted about half a million hectares in concessions for gold exploration, exploitation, and small-scale mining, representing 3½ percent of the total land area, but only 2,000 hectares constitute legal concessions for small-scale mining.

7. The government has attracted foreign investment to expand gold production. With the approval of the National Assembly, the government has reached agreements with foreign companies granting them mineral exploitation rights. The agreements provide incentives such as exemptions on import duties on equipment; guarantees regarding the unrestricted right to export gold, to repatriate capital and profits, to convert local currency in foreign currency at market rates, and to hire expatriate employees and contractors; and international arbitration of disputes arising in connection with the projects.

D. Small-Scale Gold Mining

8. Most gold is produced by small-scale artisanal gold mining operations. Suriname officials estimate that there are between 10,000 and 20,000 small-scale miners in an area of approximately 20,000 square kilometers in Eastern Suriname. These miners use rudimentary prospecting and extraction techniques and material, including high-pressure hoses, hydraulic pumps along with bulldozers, excavators, and metal detectors. This often entails the use of mercury to bind and purify the gold, which causes substantial health and environmental damage.

9. The government has virtually no control over the informal gold mining activities in the interior. During the civil war, all but two of the GMD outposts in the interior were closed and have not been reopened since. In the absence of government presence, mining takes place with very limited oversight, or social or environmental protection and control. In addition, the government has received only scant income or foreign exchange from gold exports.

10. Small-scale miners are recruited mainly from the Maroon population from the interior and Brazilian immigrants:

  • After the civil war in 1992, Maroons, who fought the central government during the war, moved into small-scale mining as one of the few possible economic activities in the interior. They maintain that their activity does not require government sanction, claiming the use and occupational rights over traditional land granted to them by peace treaties before Suriname independence, and confirmed by a treaty with the government at the end of the civil war. 5

  • There are also about 6,000–8,000 Brazilian garimpeiros, most of which have no legal residency or work permits in Suriname. Some are employed in the gold fields by Surinamese miners to take advantage of their expertise. The more successful garimpeiros have become independent mining operators or suppliers of mining equipment.

11. Although activities in the informal gold sector are unrecorded, there are indications that the sector’s contribution to the local economy is significant. Government officials estimate that the industry is the second largest employer after the public sector, and that gold production in the informal sector represented around 15 percent of GDP in 1997–2001. The impact of small-scale mining on the economy of the country’s interior and the pervasive lack of a formal and monetized economy have also led to gold assuming functions of money in this region, as goods and services have become denominated and paid for in gold: fuel prices range from 20 to 30 grams of gold per container depending on the location, digger wages are 30 percent of daily gold production, while a female helper earns 70 grams of gold per month.

12. There are spillovers into the formal economy that underscore the substantial expansion of gold mining in the interior:

  • Land transportation and heavy equipment. Imports of trucks and heavy mining equipment account for about 11 percent of imports in 2003. This includes equipment to haul spare parts, fuel, and food supplies, and transport workers to the production areas along the main rivers; and tractors, bulldozers and excavators to carry cargo and passengers along the trails, to clear land, and to build gravel pits in small rivers to wash out gold.

  • Air transportation. Miners charter about 75 percent of local airline flights to transport employees, food, equipment, and spare parts and, in the dry season, fuel.

  • Storage facilities for fuel. Storage and distribution facilities have been established, rebuilt, or enlarged in the interior to facilitate the provision of fuel to gold mining areas. It is estimated that around 15 million liters of diesel fuel and 50,000 liters of lubricant are used in small-scale mining operations

13. Small-scale gold mining operations have led to severe health and environmental consequences. Informal mining operations have been the cause of soil degradation and deforestation, while the construction of gravel pits in streams has led to a high silt content, affecting natural habitats in the rainforest. Mercury used by small-scale miners has led to long-term poisoning and high and persistent concentrations in lakes and streams. 6 Conservation groups have tried with limited success to introduce alternative mining techniques.

14. The central bank began purchasing gold directly in 1994. The CBvS started a gold purchase program in July 1994, buying gold directly that had previously been smuggled to neighboring countries. Through this program, the CBvS increased its gold reserves during the bout of high inflation in August 1994-July 1995, with purchases peaking in 1999. The sales of gold to the CBvS declined in 2001 to 98,000 ounces, reflecting a fall in international gold prices, higher costs for diesel and other inputs, and the introduction of a gold purchase program in Guyana that diverted a substantial part of the Surinamese production.

15. Regulatory changes in 2002 led to a substantial increase in formal gold purchases. In August 2002, the CBvS eliminated its program of direct gold purchases by licensing it to the private sector, thereby avoiding the need to maintain facilities and staff to smelt and purify gold. As of end-2004, there are seven licensed brokers that have established facilities to buy gold from the informal sector, process it to separate out impurities and mercury contamination, and export gold. The CBvS also instituted pricing and taxation changes that increased the attractiveness of selling gold in Suriname, rather than smuggling it to Guyana 7 Combined with the increase in the international price of gold, this resulted in an increase in exports from small-scale mining operations from US$24 million in 2002 to US$128 million in 2003. The large increase in gold exports, combined with anecdotal evidence, point to a reversal of the gold smuggling flow between the two countries.

uA04fig01

Suriname: Recorded Purchases From Small-Scale Mining Operations

Citation: IMF Staff Country Reports 2005, 142; 10.5089/9781451835267.002.A004

E. Large-Scale Gold Mining

16. A large gold mine opened at Rosebel in February 2004. The mine is operated by a subsidiary of a Canadian mining company and is located around 80 km south of Paramaribo in an area covering 17,000 hectares. The concession includes exploration rights throughout 2027. The exploration and feasibility study took about six years and the construction about one year to complete, with total investment of around US$100 million. The new mine processed around 5.1 million tons of material and produced around 252,000 ounces of gold in 2004, or about US$104 million, equivalent to 10 percent of GDP and 12 percent of total exports in 2004. 8

17. The economic impact of the gold mine has been significant. The new mine has provided direct employment since exploration began in 1992 and now employs around 1,100 workers in production and exploration and construction. In addition, local expenditure, including wages, has amounted to around US$30 million in 2004 (3 percent of GDP), while tax and non-tax revenue amounted to around US$5 million. It is expected that corporate income tax and dividends will become payable in 2005 after depreciation of the investment has been completed.

18. Formal large-scale gold mining has growth potential in Suriname. The Suriname Aluminum Company (Suralco) has identified various gold deposits at its bauxite mining concessions and has announced a joint venture for further exploration with a U.S. gold mining company. The Canadian Resource Company (Canarc) is also active on its Sarakreek concession near Benzdorp.

F. Fiscal Revenue and Vulnerability Issues

19. Revenue from large-scale gold mining is particularly short-lived, compared to other mining enterprises. The lifespan of a gold mine averages only about 10 years, much shorter than the productive life span of mines exploiting other minerals. Bauxite mines, for example, can be operated for extremely long periods, leading to a lower volatility in exports and fiscal revenue. The new gold mine in Rosebel is expected to operate for 10 years, and export revenue would increase rapidly in the first few years of operation to about 11 percent of total exports and decline subsequently.

uA04fig02

Average Life Span of Mines 1/

(In years)

Citation: IMF Staff Country Reports 2005, 142; 10.5089/9781451835267.002.A004

1/ The chart shows average mine life span based on estimates by several mining companies.

20. This surge in gold production will pose policy challenges for the authorities. Assuming WEO gold price projections and the mine’s expected production pattern, fiscal revenue is projected to peak at 2 percent of GDP in 2006 and then gradually fall to zero in 2014 by an average of 0.3 percent of GDP annually. In addition, the rapid increase in exports could cause upward pressure on the exchange rate, leading to instability of the real effective exchange rate and undermining competitiveness for non-mining industries. 9

uA04fig03

Large-Scale Gold Mining Exports and Fiscal Revenue

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 142; 10.5089/9781451835267.002.A004

References

  • Gemerts, Glenn, et al (1996), “Small-Scale Mining in Suriname: Problems and Opportunities,” Geological Mining Service of Suriname and OAS Special Mission, Suriname.

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  • The HWO Consultants, N.V. (2000), “Project to Curb Mercury Pollution and Promote Sustainable Mining,” Paramaribo, Suriname.

  • World Bureau of Metal Statistics, “World Metal Statistics Yearbook 2004,” Hertfordshire, United Kingdom.

  • World Trade Organization, “Trade Policy Review on Suriname,WT/TPE/S/135, June 14, 2004.

1

Prepared by Mariana Torres.

2

The shield stretches from the Amazon River in Brazil to the Orinoco River in Venezuela.

3

Most of the population of Suriname lives in the narrow coastal region. The population in the interior mainly consists of Amerindians (around 10,000) and Maroons (around 50,000) which have only limited contact with the formal and urban sectors of the population.

4

The artisan miners in the Guianas have traditionally been referred to as porknockers, while Brazilian gold diggers are called garimpeiros.

5

Treaty for Peace and National Reconciliation and Development dated August 8, 1992.

6

Mercury is used to bind gold and separate it from the dirt by creating a gold-mercury amalgam. Gold is then separated by heating the amalgam. In the process, the mercury evaporates into the air, creating a health hazard for workers and contaminating surface waters.

7

In Guyana, sellers pay a 2 percent fee, based on the value of the gold to the Guyana Gold Board plus a royalty fee from 3 to 5 percent based on the international price of gold. If international gold prices are below US$260 per ounce, the royalty is 3 percent; for prices between US$260 and US$285 per ounce, 4 percent and for prices that exceed US$285 per ounce, 5 percent. This royalty fee is earmarked for the Guyana Geology and Mine Commission. In comparison, Suriname charges royalties of 2.25 percent and extra royalty of 6.5 percent on revenue that exceed and international gold price of US $425 per ounce.

8

The operation uses cyanide in a recirculated process instead of mercury, reducing substantially the environmental impact.

9

Revenue stabilization funds or fiscal rules could be considered. See chapter on fiscal revenue instability.

Suriname: Selected Issues
Author: International Monetary Fund