Press Release No. 14/492

Press Release: IMF Executive Board Concludes 2014 Article IV Consultation with Suriname

October 31, 2014

On October 1, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with Suriname.

Suriname’s macroeconomic conditions weakened in 2013 as gold and oil prices declined. With those prices falling below recent peaks, the large fiscal and external sector exposures to the mineral sector continued their deterioration in 2013, along with a significant decline in international reserves. Thus, the main challenges the authorities are addressing continue to be to strengthening institutions and adjusting policies to reverse the recent deterioration and strengthen external stability.

Growth is estimated at a robust 4 percent in 2013, supported by fiscal relaxation and strong credit growth. In contrast with recent years, however, export volumes declined, subtracting from GDP growth. Gold export volume growth (three-fifths of total export of goods) contracted by 1.3 percent in 2013, down from positive growth of almost 6 percent in 2012, as gold prices declined. Moreover, exports of the other two main commodities continued to be weak—contracting 5 percent for alumina and increasing by 1.3 percent for oil—reflecting persistently low alumina prices and limited oil reserves. Inflation remained low in 2013, averaging 2 percent but has picked up to about 3 percent in May 2014 largely because of higher food and fuel prices.

Following increased reserve requirements in September 2013, bank credit growth to the private sector has declined from its peak of 20 percent (y/y) in October 2013 to 13.4 percent in July 2014. Deposit and credit dollarization have remained broadly stable. Banks are profitable and liquid. Bank capital adequacy remained broadly unchanged at 12.4 percent of risk weighted assets, above the regulatory 8 percent minimum, but well below the regional average of 20 percent. Non-performing loan (NPL) ratios were somewhat high at 5.9 percent in 2013.

However, fiscal deterioration continued in 2013. The overall fiscal balance fell by 2.8 percentage points of GDP to a deficit estimated at 6.8percent of GDP. Much of the deterioration reflected a significant decline in mineral revenues, but fiscal expenditures also increased. Strong fiscal consolidation is being implemented in 2014, and the fiscal deficit is expected to decline to 3.7 percent of GDP this year. Public debt is rising but remains relatively low at about 30 percent of GDP.

The external balance has also declined considerably. The current account balance fell 7.3 percentage points to a deficit of 4 percent of GDP in 2013, primarily reflecting the substantial adverse impact of falling gold prices on exports. In addition, domestic demand pressures manifested in strong goods imports, which offset the beneficial impact of declining imports for large projects on the current account balance. Alongside, international reserves declined to 3.4 months of imports.

Executive Board Assessment²

Executive Directors welcomed Suriname’s robust economic growth and commended the authorities for their recent consolidation efforts to address the widening fiscal and external imbalances, and the progress made on financial sector reform. Noting the challenges posed by the exposure to uncertain commodity prices, Directors called for continued prudent policies and reforms to ensure macroeconomic stability, support diversification, and make growth more inclusive.

Directors welcomed the authorities’ recent expenditure control and tax collection efforts and called for continued resolve in the run up to the 2015 elections. They encouraged the authorities to target a fiscal surplus over the medium term to bolster the external position and help build buffers. Directors underscored that successful fiscal consolidation will require additional measures, supported by a rules-based framework, incorporating a fiscal anchor. They encouraged the authorities to exercise expenditure restraint by phasing out untargeted subsidies, containing the wage bill, and prioritizing spending on goods and services and capital projects while protecting the vulnerable. Timely implementation of the VAT, together with further reform and modernization of the customs and tax structure, will strengthen revenues. Directors also encouraged the authorities to ensure the sustainability of the newly established national pension and health care system.

Directors considered the monetary policy stance to be appropriate but advised the authorities to stand ready to tighten monetary policy, if needed, to safeguard external stability. They encouraged pushing ahead with plans to establish open market operations, which will expand available monetary policy tools. Directors noted that the fixed exchange rate regime remains an appropriate anchor for policymaking for now, but requires a substantial fiscal tightening to support the current level of the currency. They encouraged the authorities to phase out existing multiple currency practices as soon as possible, and to improve data collection on foreign currency lending to better inform regulation.

Directors commended the progress in upgrading financial sector resilience. They looked forward to the implementation of the Financial Sector Assessment Program (FSAP) recommendations, focusing on further improvements in prudential standards, supervision, the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT regime), and continued efforts to bolster the institutional capacity and effectiveness of the central bank. Directors supported plans to establish a credit bureau and deposit insurance, modernize the payment and settlement system, and strengthen the insurance sector regulatory framework.

Directors welcomed the authorities’ focus on improving competitiveness and diversifying the economy. They looked forward to the timely passage of the draft legislation spearheaded by the Competitiveness Unit, which will modernize the business environment. They also saw scope for increased labor market flexibility, supported by a well-targeted social safety net, to foster job creation. Directors advised a cautious approach regarding the planned increases in the minimum wage. Further progress in strengthening the data quality would enable sound policymaking.