A. Monetary Policy Framework Before the EFF Arrangement

1. While the Central Bank of Suriname (CBvS) formally switched its nominal anchor from the exchange rate to reserve money in 2016, it took at least 5 years for the reserve money targeting framework to be fully implemented. As a small open economy, Suriname relies on imports for most of its consumption and investment needs. As such, domestic goods prices are highly dependent on forex rate. The prices are flexible with a quick pass through from exchange rate depreciation to inflation, which feeds back to exchange rate through a quick PPP adjustment. High reliance on commodity exports makes both the fiscal and external position of Suriname vulnerable to commodity price volatility and terms of trade shocks. Until December 2021 CBvS continued to intervene to stem depreciation pressures, so the monetary framework was de facto exchange rate based.

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Sources: Ministry of Finance, CBvS and IMF Staff Calculations

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Sources: CBvS and IMF Staff Calculations

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2. COVID-19 shock exacerbated pre-existing vulnerabilities, ultimately resulting in monetary financing of growing fiscal deficits. Contraction in economic activity during COVID and a loss in non-commodity revenue widened fiscal deficits. Suriname was also unable to capitalize on favorable terms of trade in 2020, as gold production remained stagnant despite a sharp increase in commodity prices. Rising oil pr ices in 2021 increased the energy subsidy bill, which coupled with a sharp increase in pre-election capital expenditures in 2020 significantly increased the fiscal deficit. Monetary financing of the fiscal deficits put pressures on exchange rate after the FX inflows had dwindled. A similar trend can be observed in 2015-2016 when monetary financing of fiscal deficits resulted in a high inflation and contraction in the GDP.

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Sources: CBvS and IMF Staff Calculations

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3. A vicious cycle of exchange rate depreciation and high inflation deepened the level of dollarization in the economy. Loose fiscal policy coupled with inability of the central bank to mop up excess liquidity, resulted in exchange rate depreciation and un-anchoring of inflation expectations. High inflation also reduced the confidence in the banking sector and prompted rises in both credit and deposit dollarization. In turn, higher dollarization reduced the monetary policy transmission mechanism, making it even more expensive to mop up liquidity. To understand the relationship between inflation, exchange rate and excess liquidity, inflation (m/m)¹ was regressed on lagged inflation (one month and two months), lagged exchange rate (m/m, one month) and excess liquidity proxied by Reserve money as percentage of GDP (interpolated monthly using inflation). All the covariates were significant in explaining the m/m and y/y inflation in Suriname (text tables).

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Sources: CBvS and IMF Staff calculations

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4. Monetary financing further distorted the balance sheet of the central bank. The claims on the central bank did not earn any interest until they were restructured in 2021. In addition, fiscal financing structurally increased the SRD liquidity compelling the central bank to increase the reserve requirements on SRD deposits. Increase in the already high reserve requirements further increased the intermediation margins and further strained the monetary transmission mechanism.

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^{Table 1.}

OLS Regressions of Inflation on Lagged Explanatory Variables

*p<0.05, **p<0.01, ***p<0.001

^{Table 1.}

OLS Regressions of Inflation on Lagged Explanatory Variables

Year on Year changes in dependent, explanatory variables
		Dependent Variable : CPI (m/m)
	Model 1	Model 2	Model 2	Model 4	Model 5
CPI m/m (t-1)	0.357***	0.281***	0.286***	0.351***	0.227**
	-0.07	-0.08	-0.08	-0.07	-0.08
CPI m/m (t-2)		0.179*			0.151
		-0.08			-0.08
Exchange Rate Dep m/m (t-1)	0.061*	0.062*	0.080**	0.062*	0.079**
	-0.03	-0.02	-0.03	-0.03	-0.03
Exchange Rate Dep m/m (t-2)			0.057*		0.047
			-0.03		-0.03
SRDM0/GDP (t-1)	0.224**	0.181*	0.208**	-0.284	-0.388
	-0.07	-0.07	-0.07	-0.3	-0.29
SRDM0/GDP (t-2)				0.522	0.578*
				-0.3	-0.29
constant	-0.020*	-0.016	-0.018	-0.022*	-0.017
	-0.01	-0.01	-0.01	-0.01	-0.01
R-sqr	0.33	0.352	0.349	0.342	0.379
dfres	158	156	156	157	154
AIC	-807.7	-805.1	-804.5	-808.8	-808
BIC	-795.3	-789.7	-789.1	-793.4	-786.4
*p<0.05, **p<0.01, ***p<0.001
Month on month changes in dependent, explanatory variables
		Dependent Variable		: CPI (y/y)
	Model 1	Model 2	Model 2	Model 4	Model 5
CPI y/y (t-1)	0.906***	1.307***	0.939***	0.903***	1.270***
	-0.02	-0.08	-0.02	-0.02	-0.08
CPI y/y (t-2)		-0.377***			-0.327***
		-0.08			-0.08
Exchange Rate Dep y/y (t-1)	0.054**	0.032	0.126***	0.054**	0.080**
	-0.02	-0.02	-0.03	-0.02	-0.03
Exchange Rate Dep y/y (t-1)			-0.099***		-0.063*
			-0.03		-0.03
SRDM0/GDP (t-1)	0.315*	0.227	0.327**	-0.064	-0.255
	-0.12	-0.12	-0.12	-0.47	-0.43
SRDM0/GDP (t-2)				0.4	0.532
				-0.48	-0.44
constant	-0.033*	-0.022	-0.036*	-0.036*	-0.029
	-0.02	-0.02	-0.02	-0.02	-0.02
R-sqr	0.974	0.978	0.976	0.974	0.979
dfres	147	145	145	146	143
AIC	-624.1	-641	-630.4	-622.8	-644.1
BIC	-612	-625.9	-615.4	-607.7	-623

*p<0.05, **p<0.01, ***p<0.001

View Table

^{Table 1.}

OLS Regressions of Inflation on Lagged Explanatory Variables

Year on Year changes in dependent, explanatory variables
		Dependent Variable : CPI (m/m)
	Model 1	Model 2	Model 2	Model 4	Model 5
CPI m/m (t-1)	0.357***	0.281***	0.286***	0.351***	0.227**
	-0.07	-0.08	-0.08	-0.07	-0.08
CPI m/m (t-2)		0.179*			0.151
		-0.08			-0.08
Exchange Rate Dep m/m (t-1)	0.061*	0.062*	0.080**	0.062*	0.079**
	-0.03	-0.02	-0.03	-0.03	-0.03
Exchange Rate Dep m/m (t-2)			0.057*		0.047
			-0.03		-0.03
SRDM0/GDP (t-1)	0.224**	0.181*	0.208**	-0.284	-0.388
	-0.07	-0.07	-0.07	-0.3	-0.29
SRDM0/GDP (t-2)				0.522	0.578*
				-0.3	-0.29
constant	-0.020*	-0.016	-0.018	-0.022*	-0.017
	-0.01	-0.01	-0.01	-0.01	-0.01
R-sqr	0.33	0.352	0.349	0.342	0.379
dfres	158	156	156	157	154
AIC	-807.7	-805.1	-804.5	-808.8	-808
BIC	-795.3	-789.7	-789.1	-793.4	-786.4
*p<0.05, **p<0.01, ***p<0.001
Month on month changes in dependent, explanatory variables
		Dependent Variable		: CPI (y/y)
	Model 1	Model 2	Model 2	Model 4	Model 5
CPI y/y (t-1)	0.906***	1.307***	0.939***	0.903***	1.270***
	-0.02	-0.08	-0.02	-0.02	-0.08
CPI y/y (t-2)		-0.377***			-0.327***
		-0.08			-0.08
Exchange Rate Dep y/y (t-1)	0.054**	0.032	0.126***	0.054**	0.080**
	-0.02	-0.02	-0.03	-0.02	-0.03
Exchange Rate Dep y/y (t-1)			-0.099***		-0.063*
			-0.03		-0.03
SRDM0/GDP (t-1)	0.315*	0.227	0.327**	-0.064	-0.255
	-0.12	-0.12	-0.12	-0.47	-0.43
SRDM0/GDP (t-2)				0.4	0.532
				-0.48	-0.44
constant	-0.033*	-0.022	-0.036*	-0.036*	-0.029
	-0.02	-0.02	-0.02	-0.02	-0.02
R-sqr	0.974	0.978	0.976	0.974	0.979
dfres	147	145	145	146	143
AIC	-624.1	-641	-630.4	-622.8	-644.1
BIC	-612	-625.9	-615.4	-607.7	-623

*p<0.05, **p<0.01, ***p<0.001

B. Reserve Money Targeting Framework Under the EFF-Supported Arrangement

5. The monetary policy adopted by the central bank since 2021 course corrected the unfavorable impact of past policies. The monetary policy was conducted by the SRD reserve money as an operational target, with the goal to align reserve money path with level consistent with disinflation process. The program included continuous PC on FX interventions, explicitly prohibited monetary financing, and introduced structural conditionality on the enactment of the new Central Bank Act to guarantee its operational independence. The new Central Bank Act of 2022 explicitly prohibits monetary financing of the fiscal deficits, sets the primary objective of the central bank as price stability while also mandating the central bank, without prejudice to its primary objective, to ensure the stability of the financial system. Since December 2021 CBvS has refrained from FX interventions and allowed the exchange rate to be fully market-determined.

6. The Central Bank further expanded its operational toolbox to implement the reserve money target. To conduct monetary policy, certificates of deposit (and gold-indexed certificates), 1- and 5-day emergency and standby lending facilities, interest-bearing term deposit facilities of different tenors and central bank certificates were introduced.

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Sources: CBvS and IMF Staff Calculations

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7. However, the existing toolbox was not sufficient to effectively mop up structural liquidity. The interbank market was not functional as instruments for collateralized lending were not available after the default by the government at end-2022. The government has still not regained domestic market access, forcing CBvS to increase the tenor of its instruments. Interbank market transactions are a few and are limited to cross currency swaps. Credit growth in nominal terms was excessive in 2022, forcing the CBvS to look for a temporary solution – such as temporary 20 percent credit growth caps from March 2023-April 2024.

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Sources: CBvS and IMF Staff Calculations

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8. The targeting of RM was largely successful in bringing down inflation. Inflation currently is 10.5 percent y/y as of September 2024, down from a high of 75 percent in August 2021. Public confidence in the Central Bank is recovering. Monetary transmission through exchange rates has also improved. Interest rates on the monetary policy instruments has also declined (chart).

9. Implementing of RM targeting came at a cost, but the benefits of bringing down inflation far outweigh them. Interest rates on open market operations (OMOs) had to be sufficiently high to attract participation. The instruments used for monetary policy operations also provided an alternate source of income for the banks. Notwithstanding a non-core business income, the profit preserved the equity position of the banks that were still reeling from high NPLs post-crisis and government default on domestic debt and subsequent domestic debt restructuring. Despite the still existing vulnerabilities, the profit from OMOs helped the banks wither the high inflation/high depreciation storm, at the cost of elevated future recap needs for the central bank.

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Sources: CBvS and IMF Staff Calculations

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Aggressive sterilization through interest-bearing central bank instruments eroded the equity position of the CB, increasing the recap needs. Nevertheless, the structurally excess liquidity resulted in the first place from the monetization of central government deficits – an asset that hitherto has not paid any interest to the central bank.

C. Transitioning to the Interest-Based Monetary Framework

10. The reserve money targeting regime was a temporary regime to help stabilize the economy and bring down inflation. Reserve money targeting regime is normally suboptimal when inflation is close to long term average. Furthermore, with the oil inflows, the reserve money is expected to become volatile posing challenges for calibrating the desired reserve money targets.

11. Before the transition to an interestbased monetary framework can take place, various channels of monetary policy transmission need to be strengthened. At this point, credit and deposit rates in SRD do not sufficiently respond to the interest rates on central bank instruments and show volatility in real terms with high inflation. The credit channel is also muted as the term deposit rates have minimal effect on credit growth with a significant lag. Lack of capital markets and lack of assets priced in SRDs also makes the asset price channel muted.

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Sources: CBvS and IMF Staff Calculations

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12. There is a need to develop capital markets for firms raising capital and for institutional investors relying on capital markets for their investment needs. The central bank needs to facilitate stronger intermediation and guard against proliferation of shadow banking. The institutional investors are also subject to weaker central bank supervision and regulatory requirements, giving them an undue advantage over banks. Developing derivate markets would also help weaken the link between volatility in exchange rates and inflation, while enabling exporters and importers to hedge their FX exposures.

13. Transition to the new monetary policy framework would take a few years, requiring a multi-pronged approach (Figure 1). Each step requires significant capacity and institutional development, that for some steps needs to be supported by appropriate legal framework. Most of the steps are not dependent on each other and can be undertaken at the same time. See Annex I for a non-exhaustive list of potential TA needs.

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Prerequisites for a Smooth Transition to a Price Based Monetary Framework

Citation: IMF Staff Country Reports 2025, 012; 10.5089/9798400299124.002.A003

Source: IMF

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Central Bank Independence and Financial Strength

14. Central bank operational and financial independence is the cornerstone of implementing the new regime. The legal framework is already in place with the enactment of the new Central Bank Act (CBA) of 2022. The CBA explicitly states the main objective of the bank to achieve and maintain price stability, while also maintaining the stability of the financial system. The CBA also provides operational independence to the bank with creation of an independent supervisory board and explicitly binds both the management and the supervisory not to take instructions from the government in pursuing its mandate. Central bank governor (President of the Executive board) has a reasonably long term of office (7 years) and the CBA puts forward clear rules covering the circumstances for removal from office. Executive and supervisory boards have also been constituted and fully appointed to for running the operations and to provide an oversight to the operations of the bank.

15. The Central Bank needs strong balance sheet to effectively implement the new framework. In that regard, implementation of the recently finalized central bank recapitalization plan is a priority. To ensure financial independence of the central bank, the central government should service its scheduled payments to the central bank on time. The government should inject further equity to if required to satisfy the central bank act upon publishing annual reports. Until sufficient payments are made, the financial independence of the central bank will remain a major concern in transition to a new monetary policy regime.

Prudent and Predictable Fiscal Policy

16. Operationalizing the Sovereign Wealth Fund and putting in place fiscal rules would avoid excessive fiscal procyclicality with respect to oil. Even though the new CBA has made CB independent, the Fiscal policies in a small economy like Suriname play an important role in efficacy of the monetary policy. The fiscal stance should be consistent with the with the monetary policy stance and there should be resistance to deviating from the fiscal rule, unless it is a situation of national emergency. Second, there should be sufficient fiscal space to respond to shocks in support of monetary policy. Specifically, Suriname is susceptible to terms of trade shocks that propagate very fast. Monetary policy -at times would not be able to absorb all the shocks and would rely on fiscal policy for supporting the monetary policy goals.

Domestic Bond Market Development

17. It is a priority for the central government to promptly reestablish domestic market access. Promptly servicing domestic debt would help reestablish confidence in T-bills and T-bonds. It would also help strengthen the capacity to absorb structural liquidity from the system. MOFP and CBvS should meet regularly to discuss the upcoming auctions and payments on maturing obligations, so as to improve liquidity forecasting and management.

18. Unwinding the short position of the central bank for monetary policy operation purposes would require offsetting decline on the asset side, which would require the government timely servicing the consolidated debt. As the government mops up liquidity through fiscal restraint to service its debt to central bank, the OMO instrument positions can be unwound, with reductions in the reserve requirements can follow later as the central bank balance sheet becomes leaner on the asset side over time. Swift implementation of the treasury single account would also help faster unwinding of the OMO instruments as banks would need liquidity for the deposit withdrawals by the government. In the process, the OMO liabilities would then convert to liabilities to the central government.

Interbank Market Development

19. The financial market also needs to be prepared for the transition. The financial market should be able to evaluate the monetary policy decisions and incorporate them into their lending decisions. Liquidity needs should be fulfilled within the banking system with minimum reliance on Central Bank. This would require development of an interbank market with securities that can be used for collateralized lending. There should be central repository of securities that can be used for collateralized lending for an accurate information on the securities. To strengthen the monetary policy further, steps must be taken to renumerate reserves. Reserves requirements should not be lowered without a careful assessment of the strength of the Central bank balance sheet.

Institutional and Technical Capacity of the Central Bank

20. The structure within the central bank would need to be updated. The information and decision flows within CBvS should be reconfigured and new teams formed to support the monetary policy targets and decisions. This would also require hiring of appropriate people and technical trainings.

Communication Strategy

21. Communication from the Central Bank should be strengthened. It should be noted inflation expectations will now play a bigger role in the conduct of monetary policy, and the monetary policy counter parties in the economy will be carefully observing the actions of the central bank to form expectations. Therefore, transparency and clarity in policy objectives and decision processes is of paramount importance.

Other

22. Improving the quality of national account statistics is of paramount priority. Annual GDP data comes with a 9-month lag, and there is no quarterly GDP, making it harder to assess potential output and where Suriname is in it economic cycle. Likewise, further disaggregation of CPI is needed to assess the behavior of core inflation.