Public Information Notice: IMF Concludes Article IV Consultation with Suriname
August 19, 1999
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On June 30, 1999, the Executive Board concluded the Article IV consultation with Suriname.1
Background
After more than a decade of falling per capita incomes and high inflation, Suriname enjoyed a brief interlude of comparative financial stability and high growth in the mid-1990s, as a result of buoyant export prices and efforts to tighten the fiscal stance. The budget achieved modest surpluses in 1995 and 1996 and the annual rate of inflation fell from 587 percent in 1994 to zero in 1996.
Since 1996, there has been a significant relaxation in the fiscal stance, mainly because of problems with expenditure control, and excessive wage and salary increases in particular. The budget deficit rose to 11 percent of GDP in 1998, swinging from surplus of 2 percent in 1996, and was financed mainly by banking system credit. The loose stance of fiscal and monetary policies led to a rapid widening of the spread between the official (fixed) exchange rate and the parallel market rate in the course of 1998.
The rate of growth of real GDP declined from over 10 percent in 1997 to 4 percent in 1998, mainly because of the slowdown in the growth of the service sector and lackluster performance in agriculture and manufacturing. Domestic demand grew strongly, however, which, together with weak export performance and the depressed state of international commodity markets, led to a large increase in the deficit of the external current account. Inflation revived in 1998 (with the 12-month rate of increase in the CPI reaching 22 percent in December 1998) as a result of the strongly expansionary shift in the fiscal policy stance and accommodating monetary policy.
The authorities devalued the official exchange rate by about 43 percent on January 1, 1999 in order to eliminate the large gap that had opened up between the official and parallel market rates. However, a gap immediately reemerged between the official and the unofficial market rates, which has since widened further to 75 percent, despite the depreciation in the official rate of 18 percent that has taken place in the first six months of 1999. Partly as a result of the January devaluation, the consumer price index rose 72 percent in the first five months of 1999.
Executive Board Assessment
Directors regretted the serious deterioration in financial conditions that had taken place since 1997, and the further deterioration in 1999, following a brief period when it seemed that the government's efforts to regain control of the budget, aided by a benign international environment, might have brought to an end more than a decade of financial instability and established the financial conditions for sustained economic growth.
Directors were particularly concerned about the loosening of the stance of fiscal policy that had taken place in 1997-98, noting that the overall balance of the central government had swung from a surplus of 2 percent of GDP in 1996, to a deficit of 11 percent in 1998, which has been financed mainly by credit from the banking system. Although they acknowledged the very difficult political situation, and welcomed the measures announced in March 1999, Directors agreed that the fiscal stance remained too loose. To tighten the fiscal stance adequately, it was essential that the recent revenue measures be complemented by much tighter control over expenditures, and in particular the civil service wage bill. Directors urged the authorities to revise the budget as necessary to reflect the most recent developments in prices and the exchange rate, and to monitor its execution carefully. This effort required that some basic improvements be made in the finance ministry's management information systems. In spite of the difficulties experienced in the first half of the year, a serious effort to restore fiscal discipline in 1999 could, as the staff's projections showed, greatly improve Suriname's medium-term prospects. These prospects would also be improved by measures to address some of the structural impediments to export growth.Directors agreed that monetary policy was seriously constrained by the demands of the budget for financing from the banking system. Nonetheless, it appeared that the government was having some difficulty controlling the growth of lending to the private sector. The proposed introduction of a proportional reserve requirement system had the potential to improve the central bank's control of credit, but was not a panacea for actions to tackle the source of monetary expansion at its roots. In this connection, Directors emphasized the importance of adopting a more flexible interest rate policy. Directors commended the authorities for their efforts to reform the existing legal framework for the financial system, which was an important first step in improving prudential and supervisory standards. They also encouraged the authorities not to revive on-lending by the central bank, and, more generally, to ensure that the central bank concentrated on its core duties.
Directors commended the authorities for the devaluation of the official rate of the Surinamese guilder at the beginning of the year, noting that the new exchange rate regime was somewhat more flexible than its predecessor. They emphasized, however, that the very large gap that has since developed between the official and unofficial rates was a sign of serious disequilibrium, and that further adjustment of the exchange rate was needed. All agreed that whatever the precise character of the exchange rate regime that was then adopted, it had to be adequately supported by fiscal and monetary policy. Directors commended the authorities for the steps they had taken to simplify their trading regime, but noted that further deregulation of the current licensing system would be necessary to minimize the transactions costs of trade.
Directors expressed concern regarding the serious weaknesses of economic and financial statistics in Suriname, which they believed must be contributing to the country's economic problems. Work to improve the fiscal and monetary accounts should commence immediately, but improvements in other areas were urgently needed as well.
Directors urged the authorities to unify the exchange rate used for treasury transactions with the official rate as soon as possible, as the special rate for treasury transactions had led to a multiple currency practice, which could not be approved under Article VIII.
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