Selected Issues

Abstract

Selected Issues

Spillovers from Abroad1

1. The IMF’s Global Integrated Monetary and Fiscal (GIMF) model provides some insights on the spillovers of a potential global trade war and the tax cuts that were approved last year in the U.S. onto the Surinamese economy. This model is a dynamic general equilibrium model that allows the analysis of monetary and fiscal policies, and their spillover across economies, and is widely used to conduct policy analysis in IMF flagship publications. The 3-economy version of the GIMF used in the simulations has been calibrated to replicate key macroeconomic ratios such as the external openness, the tax collection and composition, fiscal spending patterns, and trade relationships among Suriname, the United States, and an aggregate of rest of Suriname’s trading partners.

2. In the context of the 2018 Article IV consultation, the GIMF was used to answer the following key questions: What are the likely spillovers of a potential global trade war on Suriname? How would a tax reform in the U.S. (along the lines that was approved last year) would affect Suriname?

3. A global trade war would affect every country even if it is not directly targeted by tariffs. Indirect effects like reduced trade volume, supply chain disruptions and lost confidence would damage economic growth everywhere. The GIMF model enables us to quantify how much damage an active trade war could bring to the Surinamese economy.

4. In the model, we have assumed the U.S. and the rest of the world raise tariffs on imports from each other by 10 percentage points. Suriname tariffs vis-a-vis the U.S. or rest of the world—including Suriname’s import tariffs on goods from its trading partners and the trading partners’ tariffs on exports from Suriname—are assumed to be unchanged.

5. The results suggest that there will be substantial effect of this global trade war on the Surinamese economy. The levels of real GDP, imports, exports, consumption and investment will be permanently lower, given that the cost of producing goods globally increases (Figure 1). Government debt as a percent of GDP increases through the medium term, but very gradually returns to its steady state value after the medium term.

Figure 1.
Figure 1.

Suriname: Effects of Global Trade War

Citation: IMF Staff Country Reports 2018, 377; 10.5089/9781484391853.002.A004

Sources: IMF staff calculations using GIMF model.

6. A second exercise assesses the effects of tax cuts, along the lines approved in the U.S. last year on Suriname. The U.S. is Suriname’s largest trading partner. In addition, the Surinamese economy is highly dollarized. As a result, the economic policies and developments in in the U.S. heavily influence Suriname. This exercise involves illustrative deficit enhancing tax cuts in the U.S., which are in line, but not precisely the same as the U.S. tax cuts approved last year (text table). These include permanent corporate tax cuts in the U.S. with a cumulative size of 1.5 percent of GDP, in addition to temporary tax cuts on labor with the peak size of 0.5 percent of GDP.

Simulated Fiscal Policy Changes in the United States

(Changes in percent of GDP, resulting from changes in tax rates)

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7. The results provide the following insights. First, some effects can be substantially different in the short term than in the long term (Figure 2). In the short term, the U.S. will have higher demand for imports from Suriname and the rest of the world to feed through its increased domestic demand, part of which is for investment and capacity building. This boosts Suriname’s exports. Since Suriname’s exports have a high import content, imports also rise. More net exports lead to more income and more consumption and, investment and GDP as well. As the U.S. builds capacity and produces more, its need for imports decrease and further benefits of the U.S. tax cuts on Suriname gradually disappear. In addition, as the temporary labor tax cuts expire their effects in the U.S. and spillovers onto the Surinamese economy disappear too. In sum, the U.S. corporate tax cuts indeed make the U.S. more efficient and lead to permanent increases in economic activity in the U.S. because they reduce distortions at the production level. While these expansions have a lingering effect on economic activity in Suriname, their long-term effect on the Surinamese GDP will be minimal.

Figure 2.
Figure 2.

Suriname: Effects of U.S. Tax Cuts

Citation: IMF Staff Country Reports 2018, 377; 10.5089/9781484391853.002.A004

Sources: IMF staff calculations using GIMF model.

References

  • Kumhof, M., Laxton, D., Muir, D. and Mursula, S. (2010). “The Global Integrated Monetary and Fiscal Model (GIMF) – Theoretical Structure.” IMF Working Paper 10/34 (Washington: International Monetary Fund).

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  • Freedman, C., Kumhof, M., Laxton, D., Muir, D. and Mursula, S. (2009). “Fiscal Stimulus to the Rescue? Short-Run Benefits and Potential Long-Run Costs of Fiscal Deficits Rank.” IMF Working Paper 09/255 (Washington: International Monetary Fund).

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Prepared by Kadir Tanyeri.

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