Abstract
On behalf of our Surinamese authorities, we thank staff for the extensive and constructive policy dialogue and for the comprehensive report supporting the request for an Extended Arrangement under the Extended Fund Facility (EFF). We are particularly grateful to Mr. Alichi, mission chief until October, and Mr. Ding, mission chief since then, and their dedicated team for the diligence and perseverance to finally bring this program request to the Executive Board. The new Administration that took office in July 2020 was confronted with a severe economic downturn resulting from the combination of economic mismanagement by the previous Administration and a rapidly deteriorating situation due to the COVID-19 pandemic, as economic activity in many sectors came to a halt. As the pandemic worsened worldwide, a sharp fall in global demand caused Suriname’s exports and tourist arrivals to plummet by more than 50 percent. Before the new Administration took office, the overall fiscal deficit reached 21 percent of GDP and the debt- to-GDP ratio peaked at 160 percent, one of the highest among emerging markets and developing economies.
On behalf of our Surinamese authorities, we thank staff for the extensive and constructive policy dialogue and for the comprehensive report supporting the request for an Extended Arrangement under the Extended Fund Facility (EFF). We are particularly grateful to Mr. Alichi, mission chief until October, and Mr. Ding, mission chief since then, and their dedicated team for the diligence and perseverance to finally bring this program request to the Executive Board. The new Administration that took office in July 2020 was confronted with a severe economic downturn resulting from the combination of economic mismanagement by the previous Administration and a rapidly deteriorating situation due to the COVID-19 pandemic, as economic activity in many sectors came to a halt. As the pandemic worsened worldwide, a sharp fall in global demand caused Suriname’s exports and tourist arrivals to plummet by more than 50 percent. Before the new Administration took office, the overall fiscal deficit reached 21 percent of GDP and the debt- to-GDP ratio peaked at 160 percent, one of the highest among emerging markets and developing economies.
Reinstating sound macroeconomic management
Even before the pandemic, the economic situation in Suriname was under distress and heading towards collapse due to economic mismanagement, weak institutions, and a rapidly increasing and unsustainable debt burden. The new Administration took office in the second semester last year and soon thereafter reached out to the IMF to engage staff in discussions to establish the basis for a strong Fund-supported adjustment and reform program to restore macroeconomic stability and bring the economy back to a path of sustainable and inclusive growth.
The authorities designed and started to implement a home-grown Recovery Plan (RP), which was approved by parliament in June 2021. Swiftly after taking office, the new Administration introduced measures to reverse the rapid economic downturn and mitigate its negative impact on vulnerable households. The comprehensive programmatic approach was discussed with Fund staff and presented to other IFIs to seek financial and technical support. A robust set of macroeconomic and structural reform measures was devised to curb the fiscal deterioration, restore debt sustainability, bring inflation down, build buffers, stabilize the economy, and create the conditions for strong, sustainable, and inclusive growth.
In addition, on September 15, 2021, the Government of Suriname established a Special Tripartite Consultation to engage in meaningful discussions with the main labor unions and employers’ organizations. The goal was to reach a formal agreement (Tripartite Agreement of Social Contract) to create a stable financial-economic environment and conditions for economic recovery in a way consistent with the RP and the EFF arrangement. The Tripartite Consultation also provides a forum for ongoing discussions on the country’s social and economic situation. The Social Contract demonstrates that the Government is fully aware of the circumstances and has been able to gain enough trust from important stakeholders to continue its reform policies.
This programmatic approach – translated in a comprehensive set of quantitative targets, structural benchmarks, and indicative targets – was the basis of the staff-level agreement (SLA) reached on April 29, 2021. Since then, the Administration reached out to local organizations (e.g., trade unions and businesses’ associations) and experts (e.g., Association of Economists) to build broad consensus around the program. In addition, the World Bank, the Inter-American Development Bank (IDB), and the Caribbean Development Bank were approached to join the comprehensive framework led by the authorities and supported by the Fund. We take positive note of the IFIs’ confidence that this set of measures, in conjunction with substantial restructuring of the external public debt, will steer the economy towards macroeconomic stability and debt sustainability. In any event, the Government stands ready to deploy well-crafted contingency measures to compensate for possible shortcomings.
Important steps have already been taken to foster prudent and transparent management and eliminate distortive, unsound practices. Overhauling an economy that is in disarray is not trivial nor costless in economic, social, and political terms. The authorities have allowed the exchange rate to move freely, started conducting weekly auctions of central bank term deposits, substantially reduced the level of domestic payments arrears, interrupted retroactive payments on wages and the continuation of tax credits, among other measures. The Administration has worked diligently and consulted extensively to bring all stakeholders on board, overcoming resistance to specific measures which entailed short-term costs. Despite the very challenging environment, the Administration has remained steadfastly committed to promote the needed adjustment and reforms and has shown strong ownership of the measures included in the RP.
Fiscal Policy
Since August 2020, the Ministry of Finance and Planning (MFP) has undertaken effective fiscal consolidation. FY2019 was a pre-election year marked by an extraordinarily high overall fiscal deficit (21 percent of GDP). Even before inauguration, the newly elected Administration was confronted with a strongly misaligned budget combined with a rapidly deteriorating situation due to COVID-19 that led to a sharp fall in economic activity. The new Administration immediately took drastic measures to rein in the primary fiscal deficit as soon as they were in the driver’s seat. They also reached out to creditors to start good faith negotiations for the restructuring of Suriname’s public external debt.
Restoring fiscal sustainability is the main fiscal policy objective. The quick reversal of the primary fiscal balance from deficits to surpluses will be crucial to unleash a favorable debt dynamic moving forward. During the program, the primary fiscal balance will improve continuously to surpluses ranging from 3.5 percent of GDP to 4.5 percent of GDP from 2023 onwards – more than sufficient to cover projected interest expenditures. This strong fiscal stance will contribute to putting public debt on a clear downward path throughout the program period and beyond. Nonetheless, given Suriname’s extremely high debt levels, obligations to private and official external creditors must also be restructured to enhance resilience to shocks and ensure public debt sustainability within the projection period.
Bold actions to lower expenditures and increase revenues led to a turnaround in the public finances already in 2021 and laid the foundations for further fiscal consolidation. Among these measures, the following should be emphasized:
• Doubling electricity tariffs and phasing-out subsidies to the electricity company. In September 2020, electricity tariffs in Suriname were among the lowest in the world. The Government took the politically difficult decision to double tariffs last July, with a further 25 percent increase projected for 2022 and subsequent adjustments to reach cost recovery levels by 2024. By eliminating direct and indirect subsidies, ample space will be created for targeted subsidies to protect vulnerable groups against further erosion of disposable income. At the same time, institutional reforms should increase efficiency and lower generation and transmission costs.
• Upgrading the Treasury Department to enhance its scope beyond cash management and with a view to establish a Treasury Single Account. The Cash Management Department, with many treasury responsibilities, has been established prior to the SLA and is in the process of streamlining all treasury functions into a Treasury Single Account with technical assistance from the Fund.
• Introducing a Solidarity Levy of 10 percent on the highest public and private sector wages. This temporary measure, that will lapse in January 2022, was an emergency action taken by the new Administration to generate additional revenue to address the downward spiraling fiscal situation.
• Initiating a gradual reduction of fuel subsidies, which have traditionally been used to curb price pressures, given its high inflation pass-through. With the increase in global fuel prices, there is no fiscal space to accommodate these regressive subsidies. The Government is currently phasing out these untargeted subsidies, while exploring ways to support vulnerable groups through targeted public transportation subsidies.
• Engaging in good faith negotiations with all creditors, private and official, to limit the enormous pressures from debt obligations and presenting proposals for debt restructuring consistent with debt sustainability requirements. The dialogue with creditors resulted in a temporary stand-still of debt and interest payments, creating temporary fiscal space for the Government to address some dire and urgent economic, social and health needs aggravated by the pandemic. Further negotiations with all creditors are ongoing and will adhere closely to the debt restructuring parameters under the Fund-supported program.
• Reprofiling local debt to banks, domestic suppliers, contractors, and others. A strong effort to cope with the domestic debt overhang resulted in payments and agreements in “good faith.” This approach was validated by several construction businesses restarting public works that were halted due to large domestic payments arrears and high debt. Negotiations are still ongoing to reach a final settlement.
• Protecting the most vulnerable by increasing old age pensions, child support, and support to vulnerable households. Starting in late 2020 through 2021, social benefits increased significantly. We are committed to maintaining social spending above 5 percent of GDP per year. However, since inflation continues to be elevated, the authorities remain attentive to the impact on the well-being of the most vulnerable and will adjust social benefits in a fiscally responsible manner.
This wide array of fiscal measures has allowed for a dramatic budget overhaul. The authorities now expect the primary fiscal balance to reach a surplus of 2.6 percent of GDP in 2021 (instead of the projected deficit of 1.3 percent of GDP). Moreover, the ongoing reforms will significantly mitigate the dependence of fiscal revenues on commodity prices. Diversification of tax and non-tax sources of revenue will also benefit from the modernization of the Tax and Customs administration, supported by Fund, CARTAC, and IDB technical assistance. The authorities express their appreciation to the technical assistance that has been provided and welcome further support in those areas.
The Government has settled a substantial amount of domestic arrears and other obligations. Accumulated arrears, dating back to 2018, reached SRD 1.3 billion. In September 2021, the Government started to pay a significant amount of these arrears. Approximately SRD 400 million was paid to domestic creditors. In addition, SRD 411 million was paid to the Central Bank as part of the outstanding interest payments on the Government’s Legacy Debt with the Central Bank. The Government also settled a (mid-2020) SRD 400 million loan from commercial banks that was used to pay civil servants’ salaries during the transition to the new Administration.
The authorities will continue to pursue its ambitious fiscal consolidation strategy to restore a path of strong, sustainable, and inclusive growth, while mitigating the immediate social costs, especially on the most vulnerable. The combined impact of exchange rate devaluation, sales tax increase, and electricity tariff and fuel price hikes has resulted in inflation rising from 35 percent in 2020 to around 60 percent in 2021. The authorities understand that the only way to sustainably increase disposable income is to curb inflation and restore fiscal sustainability. The Social Contract provides a clear understanding to balance the efforts in achieving fiscal sustainability with securing existing social investments and creating additional safety nets, while trying to restore real wages. The authorities are fully convinced that they are on the right track to deliver a better future to the Surinamese people.
External balance and international reserves
Through mid-2021, international reserves dropped to critically low levels, jeopardizing continued confidence in the stability of the exchange rate. Previous attempts to defend an overvalued currency contributed to the low levels of international reserves. As the preparations for the operationalization of the reserve money targeting regime were well underway, and after two devaluations in March and May 2021, the monetary authorities adopted a flexible exchange arrangement on June 7, 2021, which is consistent with and required under the new monetary regime. In July, the Central Bank implemented the new monetary policy framework, with weekly multiple-pricing auctions of Central Bank term deposits. Subsequently, the new reserve money targeting regime was implemented with term deposits sterilizing around SRD 2.6 billion. The realignment of the exchange rate, term deposit auctions in combination with strong fiscal measures curbed domestic demand significantly and contributed to the absence of exchange rate spikes.
The decision to float the exchange rate was driven also by the understanding that it could work as a shock absorber and help the country rebuild buffers. With a low level of international reserves, the Central Bank could not continue resorting to foreign exchange interventions to manage the exchange rate. With the financial support from the Fund, and the pledges by the IDB, the World Bank, and the Caribbean Development Bank, international reserves are expected to strengthen to adequate levels. Mean while, the current account balance in 2021 should present a more modest surplus of around 4 percent of GDP, as compared to 2020, when the 9 percent of GDP surplus was mainly driven by import compression and subdued economic activity from the lockdown measures to deal with the pandemic.
Monetary and financial polices
Monetary policy will continue to focus on domestic price stability. With the introduction of a reserve money targeting regime, the Central Bank switched the nominal monetary anchor after decades of using the nominal exchange rate for that purpose. Operationalization of this regime is through open market operations, whereby term deposits are offered by the Central Bank to commercial banks as short-term investment vehicles to attract excess liquidity and as such mitigate demand, therefore reducing pressures on the exchange rate and domestic prices while maintaining flexibility in the foreign exchange market. At the same time, the Central Bank Act has been revised comprehensively to guarantee its operational independence.
The MFP and the Central Bank have signed a memorandum of understanding (MoU) to stop monetary financing of budget deficits. The authorities made clear from the onset that monetary financing should be discontinued and gradually shifted away from that practice. While the authorities discussed extensively with Fund staff the possibility of excluding COVID-19 emergency financing from this MoU, they agreed that within the EFF- supported program there would be enough funding to cover this and other emergency needs. By end-January 2022, the National Assembly will pass amendments to the Central Bank Act to permanently prohibit monetary financing of the government and improve the governance structure of the Central Bank.
The Central Bank has taken major steps to strengthen its regulatory and supervisory framework and support financial stability. Several legislative initiatives are in the pipeline to be sent to parliament for approval. The revised Banking and Credit Supervision Act and the Credit Institutions Resolution Act are cases in point. At the same time, a new Financial Stability Committee will become operational in January 2022. To further support financial stability, the Central Bank is conducting an asset quality review (AQR) of all banks, starting with the two largest banks in the third quarter and finalizing the remaining banks in the fourth quarter of 2022. The Central Bank will also join the Government in designing a recapitalization plan to strengthen the Central Bank’s capital and its capacity to function independently.
Structural reforms, governance, and institutional strengthening
The authorities are strongly committed to continue implementing broad and deep structural reforms. Many of the measures in the RP and Multi-Annual Development Program aim at enhancing the business climate and improving the ease-of-doing-business. Besides cutting “red tape” to increase access to permits, the Government is working on measures to facilitate access to bank credit and alternative forms of financing. The authorities established a new Investment and Export Promotion Agency (FDI Suriname) to attract foreign direct investment (FDI) with high spin-off potential and ability to trigger the creation of linkages to support industrial development in Suriname. Also high on the Government’s agenda is the implementation of the Public-Private Partnership policy to facilitate privatization and foster job creation.
The Administration is committed to enhancing the existing framework and creating new institutions to strengthen governance. The Government plans to follow-up on the Extractive Industries Transparency Initiative (EITI)’s recommendations to reform the mining law, especially on aspects that deal with mining titles and establishing the obligation for companies to disclose beneficial ownership.
Important progress has already been achieved in improving the AML/CFT regime. Suriname is not on the Financial Action Task Force (FAFT)’s list of countries that have been identified as having strategic AML/CFT deficiencies. The National Risk Assessment was conducted, finalized, and presented by the taskforce to the authorities. Suriname was commended for demonstrating its commitment to the international community and taking ownership in strengthening the country’s AML/CFT frameworks. In addition, a critical step for Suriname’s ratification of the United Nations Convention Against Corruption (UNCAC) was taken with the approval by the National Assembly. The ratification will be completed very shortly.
Conclusion
The authorities are fully committed to the IMF-supported program and confident that Fund support through the three-year Extended Arrangement will help restore macroeconomic and financial stability, debt sustainability, and improve the living standards of the Surinamese people over the medium term. The authorities are also strongly committed to maintaining social cohesion and protecting society’s most vulnerable. Finally, the authorities wish to express their gratitude for the financing assurances provided by the official creditors and reaffirm their commitment to proceed with swift, good-faith negotiations with all creditors to regain debt sustainability in line with the program parameters.