Abstract
In this paper, the economic growth of Suriname is discussed. The fiscal deficit shifted from 2.2 percent to 3.3 percent of GDP during 2009–10. In 2010, CLICO-Suriname was acquired by a local insurance company. The need to rein in current expenditure and avoid development of wage–price inflation and strengthen the social support programs are stressed by the authorities. The introduction of VAT and other systems are discussed. Finally, improvement over the business environment to facilitate the development of the private sector and global economy was encouraged.
On behalf of the Surinamese authorities, we thank the mission chief and his team for very constructive meetings in preparation for this year’s Article IV Consultation. The authorities appreciated the staff report and welcomed many of its recommendations. We also thank Management for the technical assistance that is being provided to Suriname in several areas and emphasize its critical role in fostering capacity building in the public sector.
Suriname, a former Dutch colony in South America, has a multiethnic population that is culturally linked to different parts of the world. The new administration, in office since August 2010, has expressed a strong interest in better integrating Suriname to its neighboring countries and in taking advantage of new opportunities arising in dynamic emerging market and developing countries. In a meeting in Paramaribo, in September 2010, President Bouterse stressed in conversation with us that he had entrusted economic policy to professionals (Governor Hoefdraad and Minister Boedhoe) who had been chosen on the basis of their technical expertise. The governor of the Central Bank is an experienced former IMF staff member.
Outlook
Suriname, with a population of just over half a million people, is blessed with varied natural resources and has experienced high growth rates over the last years. The country has benefited, more than its regional peers, from the ongoing commodity boom, particularly by the rebound in prices of gold, petroleum, and alumina, which are its top export products.
In the medium term, Suriname’s growth potential could rise to a much higher level that the current one. Real GDP rose by 4.5 percent in 2010, up from 3 percent in 2009. The authorities project a 5 percent growth for 2011, and the outlook for the following years is even more favorable as large private and public investments in the mineral and energy sectors mature, pushing up the country’s growth potential.
Suriname faces challenges that are typical of commodity-dependent countries. Increased revenues during periods of commodity price booms have been squandered by inadequate public financial management and the absence of the right checks and balances in the system. The Surinamese authorities are well aware of the need to avoid a repetition of this experience.
Fiscal policy
The new administration inherited a difficult fiscal situation. During 2007-2008, Suriname had benefited from an overall fiscal surplus of 2.2 percent of GDP on average, but this surplus eroded into deficit of 3.3 percent on average in the following two years. Current and capital expenditures increased in the run-up to the May 2010 elections. A shortfall in tax collections from the bauxite/alumina sector also played a part in the shift to a deficit, as mentioned in the staff report. Higher expenditure was partly financed by a build-up of domestic payments arrears (1 percent of GDP), a practice that the new administration wishes to avoid.
The new administration has had to honor the public sector wage increases approved under the previous government. Half of the agreed increment under the second phase of the civil wage reform (FISO-2) was implemented in July 2010, shortly before the new government took office. The other half was made effective January 2011, already under the new administration.
During the meetings with staff, the authorities described several of the measures adopted to compensate for the impact of these wage increases on the budget. On the revenue side, fuel taxes have already been adjusted, to be followed by higher taxes on alcohol and tobacco, an increase in the presumptive tax on casinos, a reactivation of the motor vehicle tax, a widening of the sales tax base and an increase in its rate. Also the authorities have launched a comprehensive project to register informal gold sector operators and bring them into the tax fold through a presumptive tax system.
The staff argues that current spending, especially in goods and services, needs to be contained. The authorities agree, but they also note that part of the current spending is related to a backlog of domestic payment arrears accumulated in late 2009 and early 2010 that they are starting to clear. Both sides agree that bringing the overall deficit to about 2 percent of GDP in 2011 would be a desirable objective.
Monetary, exchange rate, and financial sector policies
The authorities are alert to short-term inflationary pressures, as described in the staff report. They maintain the view that the high inflation in early 2011 reflected primarily the pass-through effect of higher fuel taxes and international oil prices to the domestic market. The fact that the value of the currency in both the official and parallel markets has stabilized since end-January and that the increase in food prices remained relatively small is seen by the authorities as an indication that inflationary pressures are so far under control. The authorities are confident that inflation will gradually decline in 2011. However, as stated in the report, the central bank indicated that, if needed, it would be ready to tighten monetary policy.
The Central Bank of Suriname is keen to develop indirect instruments of monetary policy. They have requested technical assistance from the Fund and from the central banks of Brazil and Colombia in several areas, including liquidity forecasting and the conduct of open market operations.
The decision to devalue the currency by 20 percent against the U.S. dollar brought the official exchange rate in line with the parallel market. The authorities intend to monitor developments closely over the next year or so, while considering further reforms in the exchange rate regime.
The report recognizes that banks are generally well capitalized and profitable. But compliance with prudential norms remains uneven and nonperforming loan ratios high. There is agreement between the authorities and staff on the need to strengthen supervision of the financial sector. There is also convergence on the need to gradually de-dollarize the Surinamese economy. As an input to assess the situation and find solutions, the authorities are very interested in holding a Financial Sector Assessment Program (FSAP) exercise as soon as possible. The FSAP was scheduled only for mid-2012, because of personnel restrictions on the part of the Fund. Our chair believes that greater priority should be given to countries, even small ones that demonstrate an interest in undergoing FSAPs.
Structural issues
The new administration is stepping up investment in infrastructure, to improve transport communication and housing for the Surinamese people. The authorities plan to dedicate more resources towards social welfare, in order to reduce inequalities and eliminate poverty. They are committed to strengthening the well-being and the physical and intellectual capacity of the population by heavily investing in health and education.
In the view of the authorities, a strong private sector, respecting the rules as set out by government, should be the backbone of the Surinamese economy. They are working towards improving the business environment, including through speeding up company registration and licensing processes12.
The Surinamese government is fully aware of the fact that for too long the economy has been relying on the windfalls of high commodity prices for just a limited group of products. Decade after decade Suriname, like other developing countries, has been riding the roller coaster from boom to bust. To overcome this vicious cycle, the authorities attach strategic importance to diversifying the economy. The government’s focus is on expanding agricultural production and exports (particularly rice, fruits, and vegetables) and learning from successful experiences of other developing countries.
The new administration believes that this is the time to improve national institutions and build capacity to guarantee the proper functioning of the economy, based on sound macroeconomic fundamentals. The staffs recommendations on the need to improve the management of key public utility companies are in line with the authorities’ awareness of the need to enhance the efficiency of the public sector.
To assist it in its path towards these objectives, Suriname has the intention to increase foreign borrowing from multilateral agencies, notably the IADB and the World Bank. Engaging with these institutions, with which Suriname has had a very small portfolio, is seen by the authorities as a means of ensuring that the national development process is credible and carefully thought out. In the view of the authorities, incoming FDI and foreign borrowing should be guided towards those projects which will improve Suriname’s real economy and create employment, while preserving the environment.
In a footnote to page 13 of the report, staff mentions that Suriname remains in the lower range of the World Bank’s Doing Business Index. We caution, however, against attaching importance to this classification of countries which is based on a highly questionable methodology.