1. On behalf of our Surinamese authorities, we would like to thank staff for a candid report. Staff has provided useful and timely policy advice to the Minister of Finance and to the Governor of the CBvS and its suggestions continue to serve as valuable inputs in the decision making process. We take this opportunity to also thank management for technical support given to Suriname, particularly in improving the reporting of data to the Central Bank.

2. The coalition government, which was confirmed for a second term in the 2005 elections, has established a track record of good macroeconomic management. Salient features include enhanced confidence, sustained growth, and a stable exchange rate. Recognizing the strengthened macroeconomic framework, last November Standard and Poor’s revised to positive its outlook for Suriname (while keeping its rating at B-). The authorities’ commitment to maintaining stability and promoting growth is steadfast and the reelection of the coalition government should renew opportunities to carry forward structural reforms. The coalition government has repeatedly shown its determination to undertake difficult measures and it strongly believes that successful outcomes are achieved only with adequate timing of reforms and the appropriate level of social and political consensus. It has resisted yielding to pressures calling for salary adjustments both during the period preceding the elections and following the adjustment in fuel prices.

3. In 2005, growth reached 5 percent, propelled by a buoyant mining sector. Favorable prices in the alumina and gold markets and continued FDI inflows allowed for the strengthening of NIRs and the reduction of external debt. As a result of prudent fiscal management and increased petroleum revenues following the authorities’ decision to increase the retail prices of fuel, the fiscal deficit declined from 2.9 percent of GDP in 2004 to 1 percent of GDP in 2005. The current account deficit tripled mostly as a result of a spike in capital goods imports associated with large investment projects financed by FDI. The latter increased by 29 percent in 2005, reaching 13.8 percent of GDP. The increase in fuel prices had a significant impact on inflation, which increased from 9 percent in 2004 to 15.8 percent in 2005. With the tightening of fiscal policy reinforced by a prudent monetary policy stance, inflation pressures should remain contained in 2006. In fact, there are preliminary indications that second round effects of the petroleum price adjustments have been limited.

4. The financial sector is robust. Capital adequacy ratios in the banking sector have increased and financial dollarization has been checked following the gradual increase of reserve requirements on foreign currency liabilities and the consolidation of prudent monetary and fiscal policies. Efforts to strengthen bank supervision and increase the efficiency in the conduct of monetary policy will need to be carefully phased in and prioritized in light of the limited availability of human resources and the incipient state of policy instruments at the disposal of the CBvS. The monetary authorities are seeking assistance from the IMF to strengthen supervision and further develop the Treasury bill market.

5. Our authorities believe that the exchange rate system in place has served the country well and that the official central bank rate provides economic agents with a trustworthy and stable indicator of the evolution of the foreign exchange market. Since the spread between the market and official rate has generally remained under 2 percent, they do not believe that the publication of the official exchange rate creates disturbances in the foreign exchange market. As a result, the CBvS has no immediate plans to adopt the free bank/cambios rates as the official exchange rate. Nevertheless, they would welcome technical assistance to draft a more liberal foreign exchange legislation.

6. Suriname is committed to regularizing its obligations to bilateral creditors. It has recently eliminated arrears with Japan and is pursuing discussions with Brazil and Italy. The establishment of the Suriname Debt Management Office (SDMO) has enhanced the capacity of the government to manage its debt.

7. In spite of the political complexities it entails, in September 2005 the authorities decided - as they had announced last year - to adjust by a factor of around two the prices of petroleum products in order to strengthen the fiscal position and to allow for a more efficient allocation of resources. Subsequently, an increase in electricity tariffs was adopted in order to allow the electric company (EBS) to cover the additional costs of fuel. In order to further reduce the vulnerability of the public finances to the variation in international oil prices, a flexible pricing and a new taxation mechanism were also adopted. Price ceilings are now fixed every month based on monthly averages of oil import costs plus taxation, which has been transformed into a unique specific tax denominated in US dollars.

8. There is general consensus among all political forces on the need to undertake a civil service reform. In order to achieve a successful and durable outcome, the Government is of the view that the process of civil service reform has to be inscribed in the larger framework of the Public Sector Reform (PSR), for which an implementation unit has been created within the Ministry of Finance. This unit is presently coordinating the creation of the roadmap for the PSR due to be presented to the Government within the next three months.

9. The privatization of key SOEs is also an important priority. The negotiation for the sale of the Bruynzeel Suriname Timber Company (BSH) is being led by a cluster of ministries and is at an advanced stage. The privatization process of the SML is also well advanced and the government expects to conclude negotiations within the next six months.

10. Another key reform concerns the restructuring of the tax administration. With assistance from the IADB and CARTAC and drawing on the Jamaican experience, the Ministry of Finance is working on the creation of a new Tax Authority. The model being envisaged is one in which the revenue authority could be lifted out of the civil service in order to attract well-trained and experienced experts with competitive salaries and benefits. The hiring of new staff will have to be accompanied by training, the creation of new infrastructure, and the upgrading of information technology. The implementation process is estimated to take approximately two years.

11. A comprehensive review of the tax regime was completed in April 2005 with the assistance of the IADB and CARTAC. The implementation of recommended reforms will require substantial technical support, including for the review of tax and customs legislation and the introduction of a broad-based VAT. Also, technical assistance is being requested from the IADB and CARTAC to strengthen budgetary policy and public financial management. Additional assistance is needed to perform a needs assessment for improving financial management and communication among government institutions.

12. Suriname is vulnerable to external shocks on account of its high degree of openness (imports plus exports reached more than 150 percent of GDP in 2005) and high level of export concentration. Reforms currently under study to strengthen the economy’s resilience to external shocks are geared towards facilitating an efficient and sustainable use of natural resources and promoting diversification by enhancing private sector competitiveness. The creation of a revenue stabilization fund as a means to ensure continued and stable increases in fiscal revenues and avoid exchange rate volatility is currently under discussion within the Government. A new investment law and revisions to the income tax law through the formulation of a new “umbrella law” to promote private investment have been drafted and are expected to be presented to the Council of Ministers within the next month. Also, a new law on withholding taxes on interest, royalties, and similar payments is to be presented to the Cabinet. The drafting of these pieces of legislation has been undertaken with active participation of the private sector.

13. Under the leadership of the Ministry of Finance, a committee is working with the private sector to improve the investment climate. A law on the Suriname Business Forum has been drafted with the involvement of the private sector and the Ministries of Trade and Industry, of Planning, and of Finance. The draft law is currently with the State Council and is expected to be sent to the National Assembly for approval very soon.

14. Growth is projected to remain strong in 2006 and beyond, fueled by the expansion of mining activities as well as alumina and oil production. Two recent undertakings are noteworthy. First, the exploration and production agreement signed with Occidental Petroleum in October of 2005. The company will invest about $350 million in exploration and possible production of crude oil and Suriname will earn 6.25 percent in royalties from gross production and 36 percent in income taxes. Negotiations have also been initiated with BHP Biliton and Suralco for the mining and processing of bauxite into alumina in the Bakhuys area.

15. The official launching in January 2006 of the Caribbean Single Market Economy (CSME) and the phasing out of preferences for exports of rice and banana to the EU pose new challenges for the public and private sectors. To face these challenges, the government believes that improving the business climate, including the legal environment, is crucial. In December 2005, it obtained from the IADB a $4 million loan to strengthen the country’s technical and institutional capacity to formulate, negotiate, and implement trade policy and related agreements. As part of the preparations for the loan, the IADB assisted the government in reviewing the draft law establishing the Bureau of Standards. The latter was approved by the National Assembly last week. The IADB is also assisting the Government in defining a trade strategy as a basis for future activities under the loan program. The CSME has the potential to create new markets for Surinamese products and attract advanced technology, know-how and capital.

16. Our authorities are fully cognizant of the limitations of the statistical base, as this weakens their ability to monitor adequately the evolution of key macro economic indicators and to evaluate effectively the policies being implemented. Several factors hinder the production of reliable statistics. The poor flow of information within and across governmental entities, lack of trained human resources, and the reluctance of certain sectors to participate in surveys are important limiting hurdles. The CBvS Act of May 2005, which includes provisions relative to the compulsory reporting of statistical information to the Central Bank, should enhance its ability to produce timely BOP accounts. The authorities are appreciative of the valuable assistance the Fund has been providing both through the Statistics Department and through training by the IMF Institute. Nevertheless, as staff underscores, several shortcomings remain, particularly in the production of data on real sector activity, exports of services and capital inflows. Additional help in this area is being sought from the Netherlands, the IADB, and CARTAC.