Selected Issues

Abstract

Selected Issues

Alternatives for a Fiscal Anchor1

The opening of Merian gold mine in 2016 and adding the new Saramacca gold field to Iamgold’s Rosebel gold mine enhanced Suriname’s natural resource wealth. The prospects of new commercially exploitable oil offshore have further boosted Suriname’s potential wealth. To facilitate the management of Suriname’s current and prospective resource income, the authorities established a Savings and Stabilization Fund (SSF) in June 2017. This paper provides an overview of the current fiscal framework and discusses options for adopting a new fiscal anchor that would focus on long-term sustainability taking into account Suriname’s development needs.

A. Introduction

1. The opening of Merian gold mine by Newmont in 2016, adding the Saramacca gold field to IAMGOLD’s production, and the prospects of new commercially exploitable oil offshore, have renewed questions regarding management of natural resource wealth in Suriname. Resource wealth should support sustainable development, avoid boom-bust cycles, and create benefits for future generations. A sound framework would be a prerequisite for avoiding the natural resource curse that affected many resource-rich countries (RRC).

2. An important question is how to allocate revenues from natural resources across current consumption, investment into capital, and financial savings. Despite recent discoveries, the horizon for the currently-proven resources is relatively short, with current gold reserves expected to last until 2034, and oil production tapering off around 2030. The relatively short horizon implies the need for building a stock of financial savings to avoid drastic adjustment after the mineral revenue declines. At the same time, Suriname faces significant infrastructure gaps and development needs, and could improve its potential growth through investing into infrastructure or human capital. To achieve an optimal allocation of resources, Suriname needs a robust fiscal anchor that delivers long-term fiscal sustainability taking into account development needs and policy tradeoffs.

3. This paper explores ways for strengthening the current fiscal framework in Suriname and considers options for a new fiscal anchor. First, the paper provides an overview of mineral natural resources and their importance for the budget. Second, the paper lays out the current framework for fiscal planning and budget execution in Suriname and discusses the analytical underpinnings of modernizing it to make it more robust. The paper also presents estimates of long-term sustainability benchmarks based on the IMF’s policy toolkit for resource-rich developing countries (IMF 2012). Bringing these issues to the forefront would benefit the policy dialogue within Suriname, enrich the discussions with development partners, and lead to better policy outcomes.

B. Overview of Natural Resources in Suriname

4. Suriname’s mineral resource wealth consists of deposits of gold, oil, and bauxite. At present, only gold and oil are extracted after the US-based historical partner Alcoa stopped production of bauxite in 2015.

5. Based on the proven reserves, oil production would last until early 2030s. Proven reserves of oil are 87 million barrels. With the production rate of about 6–6.3 million barrels per year, these reserves would last until the early 2030s and taper off afterwards. At the same time, there is significant potential for discovering oil offshore, and there are exploration activities with a variety of international oil companies. In 2018, two new production sharing contracts were signed with Tullow Oil and Cairn Energy.

Off-shore oil exploration partners

article image
Source: Staatsolie.

6. Gold production in Suriname consists of large-scale industrial production and numerous small-scale operations. The industrial production is carried out by Canada-based Iamgold (Rosebel gold mine, in operation since 2004) and U.S.-based Newmont (Merian gold mine, in operations since October 2016). In September 2018, Iamgold lengthened Rosebel’s life to 2033 with an increase in proven and probable reserves to 5.5 million ounces from the Saramacca gold field (the reported overall inferred mineral resources are significantly higher at 10.3 million ounces, suggesting that the production horizon could be longer).2 Proven and probable reserves in Merian gold mine were 5.3 million ounces at the end of 2017.3 With the average production of 0.5 million ounces per year, the production horizon would be slightly more than 10 years, although it could be also longer due to the presence of inferred mineral resources not included in proven and probable reserves (1.8 million ounces). Small-scale producers include a few well-established mechanized operations (e.g. the public enterprise Grassalco), but also many informal operators which often generate an adverse environmental impact (World Bank, 2016).

uA01fig01

Gold production in 2017

(Millions of troy ounces)

Citation: IMF Staff Country Reports 2018, 377; 10.5089/9781484391853.002.A001

Sources: National Planning Office; lamgold; and Newmont.

7. Commodity revenues are an important contributor to the budget, although they are subject to considerable volatility. Since 2005, commodity revenues—defined as a sum of tax and non-tax revenues related to production of bauxite, gold, and oil—have averaged 7.1 percent of GDP (close to one-third of total fiscal revenues, excluding grants), with oil revenues contributing close to 60 percent of the total commodity revenues. As in many other resource-rich countries, commodity revenues have been subject to significant volatility, ranging from 11¼ of GDP in 2011 to a mere 3¼ percent of GDP in 2016. Commodity revenues have been more volatile than non-commodity revenues.

uA01fig02

Commodity and Non-Commodity Fiscal Revenue

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 377; 10.5089/9781484391853.002.A001

1/ Excluding grants.Sources: Ministry of Finance; and IMF staff estimations.
uA01fig03

Commodity revenues

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 377; 10.5089/9781484391853.002.A001

Sources: Ministry of Finance; and IMF staff estimations.

C. Summary of the Current Fiscal Framework

8. The fiscal framework for fiscal planning and execution in Suriname features several principal elements. It comprises the Debt Act (DA) specifying the debt ceilings and escape clauses, the moratorium on applying monetary financing, the Savings and Stabilization Fund (SSF), and a medium-term fiscal framework (MTFF). The DA limits government indebtedness to 60 percent of GDP, with escape clauses to allow further indebtedness in specified situations. In 2016, the authorities ended monetary financing of the budget through a Memorandum of Understanding (MoU) between the Minister of Finance and the Governor of the CBvS that suspended a provision in the Central Bank Act (CBA) permitting temporary financing of fiscal deficits. The SSF Act sets out rules for accumulating and decumulating financial wealth derived from the sale of natural resources. Both Acts and the MoU constitute a legal framework for the fiscal rules contained in them. The MTFF is the integrated analytical framework for projecting and calibrating the fiscal stance and its sustainability.

Government Debt Act

9. The DA sets a ceiling on government debt of 60 percent GDP, although its February 2017 amendment introduced an escape clause. The DA limited domestic debt to 25 percent of GDP and external debt to 35 percent of GDP.4 The February 2017 amendment to the DA permits temporary suspension of the debt limit when it is exceeded due to a fall in GDP and/or depreciation of the exchange rate. When the debt ceiling of 60 percent of GDP is exceeded, each loan needs to be approved by the National Assembly. In addition, in the first year of this occurrence, the government is authorized to borrow to finance a deficit of up to 6.5 percent of GDP. In the following 4 consecutive years, the government is authorized to borrow to finance a deficit of up to 5 percent of GDP.5 Finally, the public debt can increase with these amounts only if this is included in the budgets as financing for programs and investments.

10. To evaluate compliance with the DA, the debt-to-GDP ratio is computed using the last published GDP data. For amounts denominated in foreign currency, the domestic currency value is calculated based on the exchange rate quoted by the central bank on the last banking day of the calendar year to which the GDP refers (Article 3–3). To illustrate, the debt ratio for 2018 is computed on 2017 GDP.

11. The DA amendment calls for termination of the escape clause once the debt stock has returned to the ceiling of 60 percent. However, it does not specify procedures of how to return to the ceiling of 60 percent and implicitly assumes that it will be the case once growth resumes. The arrangement for addressing a recession longer than 5 years consists of returning the DA to the National Assembly for further deliberation.

Memorandum of Understanding on Non-Monetary Financing

12. In May 2016, the authorities took measures to prevent monetary financing of the fiscal deficit. The Minister of Finance and the Governor of the central bank signed an agreement in May 2016 preventing extension of credit by the CBvS to the government, defined as (i) any overdraft facilities; (ii) the issuance of guarantees by the CBvS on behalf of the state, any public authority or state-owned enterprise; and (iii) the purchase by the CBvS of Treasury Bills or other debt instruments issued by any of the public authorities or state-owned enterprises directly on the primary market.

Savings and Stabilization Fund

13. The Act establishing the SSF was adopted in June 2017, with the stated purpose (Article 3) to: (i) stabilize the assets provided by the public authorities for the financing of expenditures so as to limit the effects of macroeconomic volatility by protecting the level of public revenues during times of lower proceeds from the mining sector; (ii) generate an alternative flow of revenues so as to diversify and, where necessary, supplement public revenues; and, (iii) generate revenues for future generations through savings from the State’s mining revenues.6

14. The rules for accumulating financial wealth are based on the difference between actual and budgeted mining revenues. If an increase in mining revenues is expected, then budgeted mining revenues for the next year are set as the budgeted mineral revenues for the current year increased by the average growth rate of real GDP over the previous 10 years.7 If actual mining revenues in the current year are higher than budgeted, the Ministry of Finance would transfer the excess to the SSF on a quarterly basis. If a decrease in mining revenues is expected, then the budgeted mining revenue for the coming year should be reduced by half of the unweighted average real growth rate over the previous 10 years.

15. The SSF is subject to strict withdrawal rules. To ensure that the SSF starts on a solid footing, no withdrawals are permitted until 2022. In general, withdrawals are permitted when actual mining revenues are less than one quarter of the budgeted revenue for that year.8 In this case, the SSF would provide half of the shortfall subject to the ceilings: (i) 5 percent of SSF assets if assets are below US$100 million; (ii) 10 percent of SSF assets if assets are between US$100 million and US$500 million; (iii) 15 percent of SSF assets if assets are more than US$500 million. The Act further establishes that, on an annual basis, the SSF is expected to transfer one quarter of asset management income to the Treasury within 3 months of approval of the annual budget by the National Assembly.

Medium-Term Fiscal Framework

16. The Medium-Term Fiscal Framework (MTFF) serves as a tool for the annual and multi- annual budget planning, including enveloping the financing needs. The MoF updates the MTFF framework, encompassing the current year and next 5 years, at least twice a year. One update coincides with the next year’s budget preparation, which starts in May and ends in September with the submission of the draft budget to the National Assembly. The MTFF provides the revenue and financing parameters and spending ceilings of the Medium-Term Budget Framework, which translates to directives to the line ministries. The process for analyzing the fiscal policy stance, designing and assessing the needed measures still needs to get entrenched in the many levels and details of public policy-making. This process is just starting albeit with rapid progress.9

17. The Ministry of Finance employs the MTFF for gauging the impact of fiscal developments and measures on fiscal and debt sustainability. The MTFF and the related analysis are based on the government finance statistics (GFS) methodological and data quality framework. This is useful because budget documents are prepared partially in a central bookkeeping fashion and are tabled mostly for authorizing budget spending rather than for policy analysis. Thus, the MTFF serves to analyze both revenues and expenditures, and evaluates financing from a fiscal analytical perspective that is widely used in economic theory and practice.

18. The MTFF contains additional analyses of the non-resource overall and primary balances. Judgement is made on the desired path of reducing the non-resource balances by assessing the financing gap and possible (and desirable) means of closing it. While this has been done in light of the upcoming operations of the SSF, the conceptual trigger stems from the need to assess and monitor the fiscal dynamics of the non-resources sectors of the economy, and design policies considering the available envelope of non-renewable mineral resources.

19. The MTFF parameters are used in the macroeconomic programming exercise for assessing fiscal, real, monetary, and external sector policies in conjunction. The key economic institutions of Suriname produce a Financial Policy Programming report, although the process is relatively new. Recent developments are thus analyzed in a more integrated fashion and scenario analyses are used by policy makers for making policy choices and developing measures. Fiscal policy evaluation makes use of, amongst others, the MTFF tool for calibration and assessing the fiscal stance and outlook.

20. Overall, the current fiscal framework is facing several challenges. The first challenge relates to the consumption-saving choices. Insofar as the SSF leads to savings of a part of mineral revenue by running fiscal surpluses at times when mineral proceeds are high, this would be an important change in the current conduct of fiscal policy. So far, the link between budgeted mineral revenue and expenditure remains unspecified as neither the Debt Act nor the SSF Act limit growth of expenditure, although it is included in the fiscal programming through the MTFF. Prudent programming can be enhanced by institutionalizing fiscal rules on expenditure ceilings. The second challenge is to improve expenditure composition by emphasizing growth-enhancing expenditure over unproductive spending, in particular by strengthening capital investment in priority areas. Expenditure targeting in this fashion would also prevent elevated deficits that could lead to sharp adjustments during negative commodity shocks. The third challenge relates to asset-liability management: The SSF could mandate savings while public debt is increasing due to elevated fiscal deficits. Ideally, the framework should allow paying down expensive debts before accumulating savings. Finally, whereas some parts of the legal framework have been amended to introduce policy flexibility and prudence, the legal framework could be augmented with a clear medium-term fiscal anchor.

D. Options for an Alternative Fiscal Anchor

21. The macro-fiscal framework in Suriname could be strengthened by taking advantage of the latest analytical concepts applied in other resource-rich countries. Recently, fiscal frameworks and policy analysis tools have become better at addressing the challenges of transforming resource wealth into other assets that support sustained development, while also maintaining mechanisms to avoid the boom-bust cycles that stem from volatility in natural resource revenues (IMF 2012). The following questions should be considered when designing a robust fiscal framework:

  • What set of fiscal indicators should be monitored to track the fiscal position and broader resource flows in RRCs?

  • How to design reinforcing and consistent fiscal rules that achieve long-term fiscal sustainability and, at the same time, smooth revenue volatility?

  • How to incorporate the growth- and revenue-enhancing impact of public investment and how to analyze the fiscal and macroeconomic implications of saving/investment scaling-up scenarios?

  • How to measure and project the intertemporal impact of macro-fiscal policies on economic growth and inclusion?

22. The fiscal framework in Suriname needs a credible medium-term anchor. Suriname would benefit from transitioning from the current anchors based on the Debt Act and the SSF Act to setting targets on the non-resource primary balance (NRPB). Focusing on the NRPB rather than on the overall balance has the advantage of filtering out fluctuations in revenue due to swings in international commodity prices and thus providing a better assessment of the underlying stance of fiscal policy.

uA01fig04

Fiscal Indicators

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 377; 10.5089/9781484391853.002.A001

Sources: Ministry of Finance; and IMF staff estimations.

23. The choice of an anchor should consider the length of the resource horizon. In countries with relatively long resource horizons, the focus could be on smoothing out revenue volatility, justifying the use of structural balance fiscal rules. In countries with relatively short resource horizons, the anchor should focus on safeguarding long-term fiscal sustainability, considering the period when resource wealth is exhausted. Given that Suriname’s resource horizon is relatively short, setting an anchor should be guided by assessment of long-term fiscal sustainability.

24. There are several alternative approaches for assessing long-term sustainability benchmarks (IMF 2012): First, the traditional permanent income framework (PIF) allows examining a basic consumption/savings tradeoff and stipulates that the NRPB should be set to the sum of the real return on already accumulated financial wealth and the implicit return on the net present value of future resource revenues. However, PIF is overly simplistic as it does not distinguish between public consumption and investment. The modified permanent income (MPIF) framework takes investment into consideration and incorporates the possibility of scaling up investment in an initial period, relaxing the NRPB accordingly before stabilizing it in the medium term. Yet, it does not include the effects of higher investment on growth. The fiscal sustainability framework (FSF) incorporates the effect of higher public investment on growth and therefore adds a possibility to examine the tradeoff of saving in financial assets versus in public infrastructure.

25. Applying these anchors for Suriname indicates a significant need for further fiscal adjustment that would allow saving a part of natural resource revenues. In order to provide a transition period to reduce the gap between the current NRPB and the long-term sustainability benchmarks, the benchmarks are computed for the period starting in 2024 (Figure 1). Potential NRPB paths during the transition period are illustrated by IMF staff’s baseline and adjustment scenarios prepared in the framework of 2018 Article IV consultation with Suriname. The adjustment scenario envisages improving the NPRB by 6 percent of GDP through introduction of VAT, reducing electricity subsidies, and other measures. Beyond 2023, the following long-term variables are assumed: GDP growth rate of 3 percent, inflation of 3 percent, and real interest rate of 5 percent. The benchmarks are computed assuming a conservative scenario in which commodity revenues taper off by mid-2030s.

  • Permanent income framework (PIF). Under the baseline assumptions, the value of natural resource wealth at 2024—estimated as the present value of mineral resource revenues—is 65 percent of GDP (Figure 1). The long-term NRPB benchmark consistent with maintaining constant value of this wealth is -1¼ percent of GDP, implying an adjustment gap—relative to expected 2018 NRPB of 12¼ percent of GDP—of about 11 percent of GDP.10 Maintaining this NRPB starting from 2024 would be consistent with accumulating financial savings of about 55 percent of GDP by 2034 when revenues would start to taper off.

  • Modified permanent income framework (MPIF). The modified PIF framework illustrates the tradeoff between frontloading of fiscal spending and future adjustment needs: increasing spending by 2 percent of GDP during an illustrative frontloaded spending period (2024–2033) would require maintaining NRPB surpluses of up to 1 percent of GDP during the adjustment period to safeguard the wealth from natural resources. This framework, however, does not consider the effects of spending on GDP growth.

  • The fiscal sustainability framework (FSF). The FSF assumes that higher capital investments would boost growth in non-resource sectors, which in turn would increase non-resource revenues. This reduces the need for adjustment during the adjustment period. The model assumes that adding 2 percent of GDP in capital investments during the frontloaded investment period would increase growth rate from 3 to 3.4 percent of GDP. Nevertheless, the NRPB would need to adjust by 2.6 percent of GDP to about -0.65 percent of GDP during the adjustment period to save part of the commodity revenues for future generations.

Figure 1.
Figure 1.

Suriname: Sustainability Assessment Indicators

Citation: IMF Staff Country Reports 2018, 377; 10.5089/9781484391853.002.A001

Source: IMF staff calculations.
uA01fig05

Commodity Revenues: Outlook

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 377; 10.5089/9781484391853.002.A001

Source: IMF staff projections.

26. Lengthening the production horizon by 10 years would increases policy space but would not eliminate the need for adjustment. To assess sensitivity to the production horizon, the long-term sustainability benchmarks are re-estimated for a scenario where the production of oil and gold is extended by 10 years to mid-2040s (Figure 2). This increases the policy space by about 0.75 percent of GDP: the NRPB in the permanent income framework is a negative 2 percent of GDP. Overall wealth increases to about 100 percent of GDP. The MPIF framework with this longer production horizon suggests a 10-year frontloaded investment period should be followed by adjusting the NRPB to about zero by 2035. In the FSF model, the longer resource horizon implies that long-term fiscal sustainability would be attainable with the NRPB of -1¼ percent of GDP. It should be noted that the results are specific to the assumptions (e.g. real and nominal interest rate, growth, inflation, and the length of the frontloaded investment period).

Figure 2.
Figure 2.

Suriname: Sustainability Assessment Indicators (Longer Production Horizon)

Citation: IMF Staff Country Reports 2018, 377; 10.5089/9781484391853.002.A001

Source: IMF staff calculations.

E. Conclusions and Policy Implications

27. Suriname’s fiscal framework can be strengthened through a fiscal anchor rooted in the non-resource primary balance. Focusing on the NRPB will allow better assessments of the policy stance and reduce procyclicality. Given the relatively short resource horizon in Suriname, the anchor should be guided by long-term sustainability. Illustrative estimations suggest that the permanent income target for non-resource primary deficit consistent with long-term fiscal sustainability should be around 1–2 percent of GDP depending on the length of resource horizon, although frontloading of capital expenditure can be justified if it strengthens growth and non-resource revenues.

28. Given the size of fiscal adjustment required to bring the NRPB in line with the long-term sustainability benchmark, a substantial transition period is needed to implement it. Staff’s adjustment scenario—designed to put public debt on the downward path—closes the current gap by less than half (relative to PIF benchmark), implying that adjustment would need to continue beyond the 5-year horizon. During the transition, it would be important to: (i) re-configure expenditure composition by giving more priority to growth-enhancing expenditure such as public investment, and (ii) assure consistency between fiscal policy and asset and liability management (accumulating savings in SSF while borrowing at high cost should be avoided and costly public debt should be repaid first). This can be taken into consideration during future reviews of the SSF. It will be also instrumental to conduct broad reforms to reduce Suriname’s dependency on public spending (e.g., phasing out inefficient and poorly targeted subsidies) and conduct supply-side reforms (e.g., labor market reforms) to improve the non-mining economy in order to boost non-resource revenue.

29. The framework needs to be further developed and incorporate the country-specific circumstances for the Suriname case. Working on the enhanced fiscal anchor framework is shedding light on areas which will need much attention in the period ahead. Nonetheless, this is seen as an opportunity to enrich the dialogue on policy instruments and the institutional coordination mechanisms in Suriname. The authorities foresee many benefits to institutional capacity to continue analysis of natural resource wealth and how to put this to use for higher economic growth and improved income distribution over time. The authorities’ commitment to transparency is an important part of the framework. The participation in the Extractive Industry Transparency Initiative (EITI) in 2017 was a key step towards increasing transparency.

References

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  • International Monetary Fund. 2012. “Macroeconomic Policy Frameworks for Resource-Rich Developing Countries—Analytical Frameworks and Applications,” IMF Policy Paper (Washington: International Monetary Fund).

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1

Prepared by Joy ten Berge (Suriname Ministry of Finance) and Dmitriy Kovtun (WHD).

2

Press-release by Iamgold on September 23, 2018, available from http://s1.q4cdn.com/766430901/files/doc_news/2018/09/NR-33–18_RGM-Saramacca_EN.pdf

4

The original DA limited domestic debt to 15 percent of GDP and external debt to 45 percent of GDP. The limits were modified in 2011.

5

The authorities’ budget deficit definition includes certain loans and repayments into revenues and expenditures. It differs from the authorities’ MTFF definition that follows closely staff’s fiscal estimates and projections.

6

The SSF Act defines mining revenue as all current and future revenues of the State obtained from the extraction and processing of non-renewable commodities, including but not limited to direct taxes, dividends, and royalties paid by enterprises that have entered into a company-specific mining agreement with the State and that are active in the extraction and processing of gold and associated metals, petroleum, bauxite, and other non-renewable commodities, which were or are denominated in foreign currencies or internationally marketable commodities.

7

Article 4–2 sets the rate at 3 percent, while the remainder of Article 4 implies that the rate is meant to adjust annually to reflect unweighted average real growth percentage of the economy over the last 10 years.

8

Withdrawals are also permitted in the event of a national disaster, which is defined as damage greater than three percent of GDP. Withdrawals in such event are nonetheless subject to the fund’s strict de-accumulation rules.

9

Recent institutional developments with an impact on the fiscal planning and analysis functions are described in the national Multi-Annual Development Plan (MADP) 2016–2020, the MADP 2017–2021, and the IADB’s Program for Fiscal Strengthening to Support Economic Growth (FISEG).

10

The long-term benchmark is computed as a ratio of NRPB to GDP that can be maintained indefinitely under given steady state growth assumptions.

Suriname: Selected Issues
Author: International Monetary Fund. Western Hemisphere Dept.