Foreign reserves have fallen perilously low, reflecting the drop in commodity export prices, the closure of alumina production, fiscal and external current account deficits, and central bank intervention. The authorities began adjusting to the shock in the second half of 2015 with fiscal consolidation and, in November, a 21 percent devaluation. They floated the currency in March 2016, which has resulted in a further depreciation of about 60 percent. The authorities have requested a Stand-By Arrangement (SBA) with the Fund to smooth the ongoing adjustment, restore confidence, and pave the way to economic recovery.

Abstract

Foreign reserves have fallen perilously low, reflecting the drop in commodity export prices, the closure of alumina production, fiscal and external current account deficits, and central bank intervention. The authorities began adjusting to the shock in the second half of 2015 with fiscal consolidation and, in November, a 21 percent devaluation. They floated the currency in March 2016, which has resulted in a further depreciation of about 60 percent. The authorities have requested a Stand-By Arrangement (SBA) with the Fund to smooth the ongoing adjustment, restore confidence, and pave the way to economic recovery.

The Current Context

1. Nature of the shock. Large commodity export price drops have undermined Suriname’s external and fiscal positions. Suriname’s economic performance has depended strongly on the production of alumina, gold, and oil, whose prices have fallen, with only a limited rebound expected over the medium term. In 2011, revenues from the sale of the three commodities accounted for 88 percent of exports and 40 percent of government revenue. The subsequent price declines and the closure of alumina refinery Suralco in late-2015 have cut these revenues, caused substantial fiscal and external current account deficits, and pushed the economy into recession.1

A01ufig1

Commodity Export Prices

(US$; 2011 = 100)

Citation: IMF Staff Country Reports 2016, 141; 10.5089/9781484377031.002.A001

Net Exports and Fiscal Performance, 2011–15

(In percent of GDP)

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Sources: National authorities; IMF, World Economic Outlook; and Fund staff estimates.

2. Public finances. The fiscal deficit reached 8.8 percent of GDP in 2015, up from 7.9 percent of GDP in 2014 and a small surplus in 2011, before the fall in commodity prices. The bulk (82 percent) of the worsening in the fiscal balance since 2011 reflects the drop in government mineral revenue.2 The remainder results from a rise in government spending, including a 1.1 percentage point of GDP rise in the wage bill reflecting an election-related surge in public sector employment in 2015. Faced with limited domestic private financing in 2015, the authorities turned to the central bank: in September, the government obtained a large loan from the central bank (SRD 2.5 billion, 15 percent of GDP), with a fixed rate of 3.5 percent and a 30-year maturity.3 Of this, about SRD 1 billion represents new financing, while the remainder replaced existing government debt, substantially lengthening its maturity and lowering the average interest rate. The bulk of the new financing was used to pay down a large stock of domestic arrears (MEFP ¶10), and this repayment significantly increased local currency liquidity in the system. The government debt-to-GDP ratio, while still low, has more than doubled since 2011, reaching 43.5 percent in 2015.

3. External sector. Suriname’s current account has worsened sharply in recent years, from a surplus of 5.7 percent of GDP in 2011 to a deficit of 15.6 percent of GDP in 2015, with the drop in mineral exports accounting for more than the full decline (there was a small offsetting rise in non-mineral exports). Suriname’s current account deficit in 2015 is estimated to have been substantially larger than, and its real effective exchange rate (REER) substantially overvalued compared with, estimated equilibrium levels. Based on the IMF’s EBA-lite modeling approach, staff estimates that Suriname’s current account balance norm is about −0.8 percent of GDP, which is significantly tighter than the 2015 level of −15.6 percent of GDP, and implies that the REER was substantially overvalued in 2015, on average, by about 70 percent (Box 1).

4. Foreign reserves. Reflecting the fall in net exports and intervention by the Central Bank of Suriname (CBvS) to support the currency, gross official reserves have declined to US$302 million as of March 31, 2016 (1.7 months of imports), compared with more than US$1 billion in 2012. Adjusted international reserves—which exclude foreign currency swaps and reserve requirements on banks’ foreign currency deposits—have declined to US$1.7 million.

International Reserves

(US$ million, unless otherwise specified)

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Source: Central Bank of Suriname and Fund staff calculations.

5. Exchange rate. Faced with the run-down of foreign reserves, the authorities devalued the currency by 21 percent on November 19, 2015. Exchange rate pressure persisted after the devaluation, with the spread between the parallel and official market rates reaching 50 percent in early March. The authorities achieved a temporary narrowing in the spread by intervening in the unofficial market in January-February. On March 22, 2016 the authorities floated the currency based on a system of foreign exchange auctions aimed at ensuring a convergence of the official exchange rate with the market rate. Based on the auctions, the spread between the official and parallel market rates has narrowed, and the authorities have since taken further steps to allow the official rate to respond to changing market conditions, as discussed in what follows (¶22-23). Overall, in cumulative terms, the official SRD/USD exchange rate has depreciated by some 90 percent since October 2015, a depreciation that is comparable to that of a number of other commodity exporters in the region.4

A01ufig2

Official and Parallel Market Exchange Rates

(SRD/USD)

Citation: IMF Staff Country Reports 2016, 141; 10.5089/9781484377031.002.A001

A01ufig3

Exchange Rates in Selected Economies

(LCU/USD; 100= January 2014)

Citation: IMF Staff Country Reports 2016, 141; 10.5089/9781484377031.002.A001

6. Monetary conditions. The monetary base (reserve money) has fluctuated in recent months. It declined in the first half of 2015 due to unsterilized foreign exchange market intervention, with the contraction peaking at −21.7 percent (year on year) in July 2015. This contraction was partly reversed in the second half of 2015, after the CBvS provided monetary financing for government operations based on the issuance of a 30-year loan of SRD 2.5 billion (15 percent of GDP) in September 2015, of which about SRD 1 billion represented new financing. The monetary financing together with about SRD 110 million in net lending to commercial banks contributed to a rebound in reserve money by 14.7 percent by end-2015 (year on year). The CBvS has since contained commercial bank lending by raising required reserve ratios on domestic currency deposits from 30 percent to 35 percent in November, and by introducing a requirement to deposit 5 percent of deposits at the central bank as part of the new payment system (SNEPS). In the first quarter of 2016, when the government drew on its deposits at the central bank to finance the budget deficit, reserve money expanded by 4 percent (quarter on quarter).

7. Inflation. Consumer prices have increased on the back of the devaluation and utility tariff hikes. CPI (12-month) inflation rose to 37 percent in March, up from an average of 4 percent during 2013-15. Much of the inflation spike reflects a doubling in “housing and utilities” prices associated with the hike in electricity tariffs in October, 2015. Month-over-month inflation declined to less than 4 percent in December 2015, reflecting the one-off (price level) nature of the tariff hikes.

8. Financial system. Banking sector risks are mounting. The average ratio of non-performing loans (NPL) to gross loans increased from 5.9 percent in 2013 to 7.5 percent at end-September 2015 and 8.4 percent at end-December 2015. Loan quality is expected to worsen further on the back of the weakening economy and currency depreciation. The reported capital adequacy ratio for the system as a whole was at 10.7 percent as of end-2015, down from 10.8 percent as of end-September 2015, but still well above the regulatory minimum (currently at 8.8 percent but increasing to 10 percent in June 2017). As of end-December 2015, two banks were undercapitalized with one of them—a state-owned bank with 2.1 percent of system assets—insolvent. The recapitalization needed to return capital adequacy ratios for all banks back to 10 percent amounted to 0.26 percent of GDP. Relatively low provisioning (42.7 percent of NPLs) suggests that further adjustments to capital are warranted, and, as discussed in Box 2, the recent sharp drop in the value of the currency may have eroded loan quality further. A number of banks have been relying on central bank liquidity facilities to meet their reserve requirements. Banks’ foreign currency positions, while within prudential limits, have weakened recently.

The Fund-Supported Program

A. Program Objectives

9. The authorities see the program as an opportunity to minimize social and economic disruptions during the economy’s adjustment to the permanent export commodity price shock, and to pave the way to financial stability and economic recovery. The program’s overarching goals are to restore fiscal and external sustainability, to rebuild foreign reserves, and to enhance the economy’s resilience to shocks through reforms to the monetary and exchange rate framework, and through measures to foster economic diversification and an improved business environment (MEFP ¶7–8). The SBA framework supports Suriname’s short-term external financing needs and the authorities’ policies designed to address the crisis and to restore confidence and growth. It addresses short-term balance of payment problems, including low international reserves, and provides financing to smooth the economy’s adjustment to the external shock. The current account balance is expected to narrow from a deficit of 15.6 percent of GDP in 2015 to near zero by the end of the SBA. The Fund staff has provided considerable technical assistance in the months leading up to the SBA, and will continue to help to develop capacity, in coordination with other technical assistance providers. Recent Fund technical assistance in the areas of foreign exchange policy, monetary operations, and Treasury bills (T-bills) has, in particular, supported Suriname’s move to a flexible exchange rate, and the development of the CBvS’s monetary policy toolkit. Planned technical assistance to support the program’s key fiscal reforms, including the introduction of a Value Added Tax (¶12) will also be crucial for the program’s success.

10. The program’s macroeconomic framework, which reflects the authorities’ measures, has the following key features (Table 1):

  • Growth recovery. Economic growth in 2016 is projected at −2 percent, reflecting the fall in commodity export prices, fiscal consolidation, and the closure of the alumina refinery in late 2015. In 2017, however, growth is expected to recover to 2.5 percent, reflecting the opening of the new gold mine. In 2018-19, fiscal consolidation associated with VAT introduction is expected to moderate growth. Thereafter, supported by structural reforms included in the program, growth is assumed to converge to a medium-term rate of 3 percent, which is in line with Suriname’s long-term historical average but well below the 5 percent average growth observed during the recent commodity boom.

  • Disinflation. Consumer price inflation (12-month) is projected to peak at 24 percent at end-2016, largely reflecting the level effect of higher electricity tariffs discussed in ¶12, and exchange rate depreciation. Inflation is expected to decline to 8.9 percent in 2017 and to 6.1 percent by 2018, reflecting tight monetary and fiscal policies, before leveling off at 4 percent over the medium term (MEFP ¶6).

  • External current account improvement. The current account balance is expected to narrow from −15.6 percent of GDP in 2015 to −8.7 percent of GDP in 2016, and to near zero during 2017–18. The bulk of this adjustment (almost 13 percentage points of GDP) reflects the projected rise in exports on the back of expanded gold output, as well as an increase in gold and oil prices, based on forecasts published in the April 2016 IMF World Economic Outlook. A contraction in imports also contributes to the adjustment, reflecting the economic downturn, currency depreciation, and the end of capital imports associated with the construction of the new gold mine. Disbursements by the Fund and other international financial institutions (IFIs) are expected to be the primary financing items, along with FDI, which is projected to average 4.3 percent of GDP in 2016-18. Both public and private saving are expected to increase over the program period, although the new gold mine is expected to increase private saving by more, particularly in 2017. The improvement in the current account balance, the disbursements by the Fund and other IFIs, and FDI contribute to the build-up in foreign reserves to 4 months of imports by end-2018. Over the medium term, a small current account deficit (of less than 2 percent of GDP) is projected, reflecting the expected stabilization of gold production.

Table 1.

Suriname: Selected Economic and Social Indicators

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Sources: Suriname authorities; and Fund staff estimates and projections.

Includes statistical discrepancy.

Official reserve assets excluding foreign currency swaps and reserve requirements on banks’ foreign currency deposits.

Based on IMF, 2015 “Assessing Reserve Adequacy”.

Based on N. Mwase, 2012 “How much should I hold? Reserve Adequacy in Emerging Markets and Small Islands” (SIDS).

B. Restoring Fiscal Sustainability

11. Since August 2015, the authorities have embarked on a path of fiscal consolidation. They have kept authorizations of government purchases below budgetary allocations, which has contributed to reducing the budget deficit from an annualized 12.5 percent of GDP during January–July to 3.5 percent of GDP during August-December (MEFP ¶9). This adjustment does not reflect seasonal factors: on average, over the past 6 years, the budget deficit has worsened rather than improved in the second half of the year. Spending restraint in 2015 coincided with a concerted effort to clear domestic arrears related to expenditure in 2013–15. Payments to resolve these arrears, reflected below the line in the fiscal accounts, amounted to SRD 666 million (3.8 percent of GDP) in 2015. A highly visible fiscal consolidation measure has been the reduction in electricity tariff subsidies, with a near-doubling in electricity tariffs, on average, in October. Overall, the fiscal deficit for 2015 is estimated at 8.8 percent of GDP. Domestic banks and the non-bank sector reduced their lending to the government, resulting in the increase of direct borrowing from the central bank already mentioned.

A01ufig4

Fiscal Deficit

(In percent of GDP; annualized)

Citation: IMF Staff Country Reports 2016, 141; 10.5089/9781484377031.002.A001

1/ Chart reports median and interquartile range.

12. The program targets a reduction of the fiscal deficit from 8.8 percent of GDP in 2015 to 1.4 percent of GDP by 2018 (Table 2 and MEFP ¶11). The proposed fiscal anchor for the program is the primary deficit, with a targeted reduction supported by clear fiscal consolidation measures. The primary fiscal balance would improve from a deficit of 7.4 percent of GDP in 2015 to a surplus of 0.3 percent of GDP in 2018. The adjustment is based on the following key components (see Text Table):

  • Elimination of electricity subsidies. The authorities’ phased elimination of electricity subsidies, announced by the President and begun in October 2015, is expected to reduce the fiscal deficit by 1.1 percent of GDP in 2016 and an additional 1.3 percent of GDP in 2017. To achieve these savings, the authorities raised electricity tariffs to cover 60 percent of the cost of electricity production on May 1, 2016 (prior action). They plan to raise the average tariff further to cover 90 percent of the cost of electricity production on September 1, 2016 (structural benchmark). On January 1, 2017, they plan to raise tariffs to cover 100 percent of the cost, which will result in the elimination of the subsidy (structural benchmark). Thereafter, the Technical Electricity Commission will develop a new formula, with input from the Fund staff, to regularly adjust electricity tariffs in line with the cost formula by January 31, 2017 (structural benchmark). To protect lower-income households from the impact of the tariff adjustment, the government has structured the electricity tariff in a progressive manner—with smaller tariff adjustments for smaller-quantity consumers.

  • Elimination of exemption for insurance companies. The exemption in income taxation that Surinamese-owned insurance companies enjoy over foreign owned insurance companies will be eliminated. This measure, to be implemented in the second half of 2016, is estimated to raise 0.1 percent of GDP additional revenue in 2016, and an additional 0.1 percent of GDP in 2017.

  • Higher fuel taxes. The authorities raised taxes on gasoline and diesel sales (the Solidarity tax) in September 2015, and will introduce a tax on kerosene in the supplementary budget. These fuel tax measures together are estimated to generate additional fiscal revenue of 0.9 percent of GDP in 2016.

  • Income tax break. To support the purchasing power of taxpayers in 2016, the authorities have decided to increase the general allowance in the income tax from the current level of SRD 50 to SRD 125 per month for all taxpayers. The measure is expected to lower income tax revenue by 0.2 percent of GDP in 2016.

  • Non-policy factors. Non-policy factors contributing to the adjustment primarily reflect shifts in mineral revenues. In 2017, on the back of expanding gold production and the projected rise gold and oil prices, a rise in mineral government revenue contributes 2.4 percent of GDP to the fiscal adjustment.

  • Other primary current expenditure restraint. The authorities will maintain the growth of non-social primary current expenditure (mainly goods and services and transfers to state-owned enterprises, SOEs) below the rate of inflation in 2016. This will result in saving of about 1 percent of GDP.

  • Sales tax adjustment. The authorities decided to increase sales tax rates by 2 percentage points for all the taxable goods and service categories, and to broaden the base in the service and luxury goods categories. These adjustments are estimated to raise government revenue by 0.1 percent of GDP in 2016 and by an additional 0.2 percent of GDP in 2017.

  • Supporting social and capital spending. The program supports spending on social cash transfer programs for the most vulnerable coordinated by the Ministry of Social Affairs, which provide financial assistance to lower-income households, the disabled, the elderly, and also include child allowances. Spending on such programs is expected to increase by about 0.2 percent of GDP by 2017. The authorities have requested technical assistance from the Caribbean Development Bank (CDB) in the area of strengthening the social sector protection framework, and enhancing the country poverty assessment. Planned steps include conducting a feasibility study for the implementation of the Bridge/Puente Program for families to social services; developing more effective targeting mechanisms; assessing constraints acting as barriers to women accessing the labor market and the drafting of a strategic approach to overcoming these challenges; and an assessment of the possible impact of the envisaged implementation of the VAT on vulnerable segments of the population, including poor households and women. The authorities’ program also foresees restoring capital spending to above 4 percent of GDP following its decline to 2.5 percent of GDP in 2015. In this regard, setting up a procurement department and a submitting a Procurement Law to the National Assembly (MEFP ¶13, structural benchmark end-June 2017) will be essential for ensuring a transparent process related to the appraisal, selection, and approval of investment projects, and for enhancing the efficiency of capital spending.

  • VAT introduction. The authorities plan to introduce a Value Added Tax (VAT) by January 1, 2018 (structural benchmark) to provide an efficient new source of non-mineral revenue. The authorities’ objective is to achieve a net revenue increase of 2.5 percent of GDP on a full-year basis by introducing the VAT, which would replace the existing sales tax. VAT implementation by January 1, 2018 is feasible, but requires intensive preparations supported by technical assistance from Caribbean Technical Assistance Center (CARTAC) and the Inter-American Development Bank (IDB). Key steps of this reform have been identified as structural benchmarks (MEFP Table 2) including: finalizing a detailed, comprehensive, time-bound implementation plan for the VAT with clear accountabilities, and setting up and assigning staff to the Project Coordination Unit (end-June, 2016); preparing a White Paper on the VAT policy objectives, and a draft VAT Law, with input from the Fund staff, and submitting them to stakeholders for review (end-August 2016); preparing detailed functional specifications for the VAT IT systems, including specifications for registration, filing (and e-filing), payment (and e-payment), stop-filing control, taxpayer current accounts, support to arrears collection, audit, and appeals (end-December 2016); submitting the VAT Law to the National Assembly, and finalizing regulations, by end-September 2017 (structural benchmark).

  • Vehicle tax introduction. This tax will be levied on each vehicle in Suriname in the second half of 2016, and will vary depending on the category of the vehicle. The measure is estimated to raise revenues by 0.1 percent of GDP in 2016, and by an additional 0.1 percent of GDP in 2017, when it is implemented on a full-year basis.

  • Wage bill restraint. Reducing the public sector wage bill is needed following its rise to 8.7 percent of GDP in 2015, well above the 8.0 percent of GDP average of the previous five years, on the back of an election-related hiring surge during which the number of central government employees increased by about 12 percent. The program targets a reduction in the wage bill to 7.8 percent of GDP in 2016, achieved by keeping unchanged the number of public sector employees, while also ensuring that wage growth remains below the rate of inflation.

  • Contingency measures. Since a number of factors create risks to the fiscal path, the authorities stand ready to deploy additional fiscal measures if these risks materialize. Such measures could include streamlining overlapping transfer programs to generate savings while achieving better targeting to protect the poor, based on the technical assistance already mentioned; and increasing indirect taxation, including by increasing the vehicle tax.

Table 2.

Suriname: Central Government Operations

(In millions of SRD; cumulative from the start of the year)

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Sources: Suriname authorities; and Fund staff estimates and projections.

Includes statistical discrepancy.

Estimated of SRD1.2 million arrears accumulation since 2013.

Contribution to Fiscal Adjustment

(In percent of GDP)

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13. Over the program period, the fiscal deficit is projected to be mostly financed by budget support from IFIs. In 2016, the fiscal deficit of 6.4 percent of GDP is expected to be fully financed by external borrowing from IFIs and through external commercial borrowing (¶19). Additional financing needs, including for the payment of domestic arrears and other debt payments, will also be financed by issuing T-bills to domestic banks and non-bank institutions.

14. Staff’s bottom-line assessment is that public debt is sustainable although vulnerabilities to particular macroeconomic shocks exist. Government debt has increased substantially over the last few years, reflecting weak real GDP growth and large fiscal deficits. Based on the upcoming fiscal consolidation, government debt is expected to peak at 46 percent of GDP in 2016, and to decline thereafter, reaching around 36 percent of GDP by 2021. A higher reliance on more concessional sources of financing, particularly from IFIs, will help to reduce gross financing needs and rollover risks by lengthening the debt maturity. The debt sustainability analysis (DSA) reported in Annex I highlights vulnerabilities to various scenarios including (i) weaker-than-projected growth as a result of fiscal adjustment; (ii) lower-than-projected commodity prices; (iii) exchange rate risk, given the high share of foreign-currency debt; (iv) higher than projected interest rates; (v) fiscal slippages, in particular in the outer years, due to consolidation fatigue or implementation delays; and (vi) the realization of contingent liabilities in the banking sector, including possible recapitalization of central bank.

15. A supplementary budget based on the program’s macroeconomic assumptions and fiscal measures is now under preparation. To signal commitment to the fiscal strategy and support the process of budget preparation, the Council of Ministers issued a Decision on April 28 that highlights the macroeconomic assumptions and measures underpinning the 2016 supplementary budget (MEFP ¶12). The supplementary budget will be submitted to the National Assembly by end-June 2016, and the authorities will seek its approval before the first review of the program.

16. To support the fiscal adjustment, the government will introduce the following reforms to strengthen the fiscal policy framework (MEFP ¶13):

  • Sovereign Wealth Fund (SWF) law. To help improve revenue management through a stabilization of mineral revenue flowing to the government and provide the institutional basis for saving future surpluses from mineral revenues, authorities are drafting a SWF law, with input from the Fund staff, which they will submit to the National Assembly by end-June 2017 (structural benchmark).

  • Public Financial Management (PFM) law. A new PFM law, with input from the Fund staff, will be presented to the National Assembly by end-June 2017 (structural benchmark). The new law will improve the annual budget preparation process and help to strengthen budgetary discipline. Medium-term fiscal planning will be introduced based on realistic projections for revenue and financing. Budget implementation will be strengthened by the improved administrative, managerial, and control mechanisms, with the Integrated Financial Management Information System (IFMIS) being implemented, while strengthening top-down budgeting.

  • Procurement department. A procurement department will be established at the Ministry of Finance to monitor the procurement procedures of the central government and ensure cost-effectiveness and control. The process of strengthening the procurement process will include centralizing the publishing of tenders and contract awards, and expanding IFMIS to cover procurement, audits, and controls. To support these efforts, authorities will submit a Procurement Law to the National Assembly by end-June 2017 (structural benchmark). The goods and services that will be part of the procurement system will be quantified and qualified in a way to prevent delays in budget execution.

  • Treasury department. With the assistance of the IDB, the Ministry of Finance will build a modern Treasury department to combine the treasury functions currently being carried out by various departments of the Ministry of Finance and the CBvS by end-September 2016. The Treasury department will also help advance the work of the Ministry of Finance and the CBvS to improve liquidity forecasting, debt management, and cash planning and payment capacity. In particular, the authorities will assign the responsibility for cash management activities to a trained and dedicated Cash Management Unit (structural benchmark, end-September 2016).

  • Revenue administration. To improve revenue administration, the authorities will take decisive steps to strengthen the efficiency and effectiveness of the administration’s operations through significant investment in equipment, personnel, and capacity development. These improvements are important, as the current capacity of the administration poses a major risk for VAT introduction and a property tax (to replace the wealth tax) in January 2018.

Additional steps planned by the authorities include identifying and containing fiscal risks associated with SOEs by identifying all SOEs and publishing their financial reports, where available, for 2014 and 2015, by end-December 2016 (structural benchmark), and, to improve fiscal management, by continuing to install additional modules of IFMIS.

17. The authorities also plan to strengthen capacity at the Ministry of Finance in the areas of medium-term budget planning and economic affairs. Based on technical assistance provided by the IMF and the IDB, including through the retention of long-term consultants, the authorities will develop the analytical capacity of the macroeconomic unit (Financial Programming and Policies group) to carry out macroeconomic forecast and economic analysis needed for preparing multi-year budgets.

C. Rebuilding Foreign Reserves

18. Rebuilding foreign reserves to prudent levels is a critical objective of the program. An adequate reserves cushion will be important to restore confidence in the Surinamese dollar (SRD) and to preserve economic and financial stability. The program aims to raise adjusted international reserves to about 4 months of imports by the end of the SBA, including by conducting foreign exchange purchases as needed (MEFP ¶15).

A01ufig5

Gross International Reserves

(In months of imports)

Citation: IMF Staff Country Reports 2016, 141; 10.5089/9781484377031.002.A001

1/ Official reserve assets excluding the PBOC swap, domestic banks’ swap, and reserve requirements on banks’ foreign currency deposits.2/ Based on IMF “Assessing Reserve Adequacy” (2015).3/ Based on “How much should I hold? Reserve Adequacy in Emerging Markets and

19. Program financing, together with fiscal adjustment and an expected improvement in the external current account, will allow Suriname to build up international reserves to prudent levels. Staff expects a substantial improvement in the current account from −15.6 percent of GDP in 2015 to near balance in 2017-18, on the back of a flexible exchange rate, fiscal consolidation, the projected expansion in mineral exports, and more favorable international prices for oil and gold:

  • Staff projects a balance of payments’ financing gap of about 13 percent of GDP in 2016 and about 5 percent of GDP in 2017 before program financing.

  • The CBvS is facing large upcoming sales of foreign exchange in May-December of 2016, including (i) to the government to honor external debt payments (about US$85 million); (ii) to the government to cover contributions to capital expenses on the new gold mine (US$30 million); (iii) to SOEs and other companies for imports of fuel and other essential products (about US$70 million); (iv) to local banks to reverse the maturing currency swaps (US$57 million); and (v) to government units (about US$15 million).

  • The projected balance of payments gaps will be financed by the proposed Fund disbursement under the SBA (around US$478 million) and budget support provided by the other IFIs (US$470 million) during 2016-18. The authorities have agreed with the IDB and the World Bank that, conditional on satisfactory program performance, they would each provide US$100 million in budget support in 2016, while the CDB would provide budget support of US$50 million in 2016. They expect a similar amount of budget support from the IDB and CDB in 2017, conditional on successful implementation of the programs supported by the Fund and other IFIs. The authorities contracted an 18-month loan from international capital markets totaling US$86 million in April 2016, which constituted the first-ever sovereign issue of the government of Suriname, and contributed to filling in the balance of payments gaps.

20. Based on these considerations, staff projects that adjusted international reserves will increase to about US$290 million in 2016, to about US$650 million in 2017, and to about US$860 million in 2018. The program target is to raise the level of adjusted international reserves—including through purchases of foreign exchange—to 4 months of imports by end-2018 and to maintain it at around this level thereafter. This objective is inside the range of reserve adequacy metrics of IMF (2015) and Mwase (2012), which, when calibrated for Suriname, imply foreign reserves about 3.5-5.5 months of imports.5

D. Exchange Rate, Monetary, and Financial Sector Policies for Increasing Resilience

Exchange Rate Policy

21. Staff supports the authorities’ decision to move to a market-determined exchange rate. A flexible exchange rate will facilitate Suriname’s adjustment to the current external shocks, and strengthen the economy’s resilience to future shocks. Staff judges that the 21 percent devaluation in late November 2015 and the subsequent depreciation of about 60 percent were an important step towards eliminating the exchange rate misalignment already mentioned.6 In addition, rising gold exports will contribute to a significant improvement in the current account balance from 2017 onwards (Table 3), which is an important factor in determining the degree of exchange rate misalignment (based on EBA-lite).

Table 3.

Suriname: Balance of Payments 1/

(In millions of U.S. dollars)

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Sources: Suriname authorities; and Fund staff estimates and projections.

Historical figures correspond to the Balance of Payments revised by the CBvS.

Official reserve assets excluding foreign currency swaps and reserve requirements on banks’ foreign currency deposits.

Includes both private and public sector debt.