IMF Executive Board Concludes 2016 Article IV Consultation with Suriname

January 24, 2017

On December 19, 2016 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Suriname. [1]

Suriname is in an economic crisis triggered by a significant commodity terms of trade shock and exacerbated by insufficient buffers and policy responses. The drop in international gold and oil prices and the cessation of alumina production resulted in large fiscal and current account deficits and the onset of a deep recession in 2015. During the boom, there was no institutional arrangement to save resources for future price corrections, and implementation of IMF advice on strengthening the policy framework was limited. Suriname has thus had a much sharper recession, steeper exchange rate depreciation, and larger rise in inflation and government debt than most commodity exporters.

The authorities launched an ambitious adjustment plan in late 2015. The government cut the budget deficit by reining in spending, began phasing out electricity subsidies, and curbed monetary financing. To facilitate the adjustment, and to support a rebuilding of foreign reserves, the authorities floated the exchange rate in March 2016 which, together with the tight fiscal stance, reduced the current account deficit. Suriname’s adjustment efforts received support from the international community in the form of a 24-month Stand-By Arrangement (SBA) with the IMF approved in May 2016 as well as financing commitments from other international financial institutions.

By mid-2016, progress on a number of policy items stalled. The government kept the fiscal deficit below 6 percent of GDP (annualized) and implemented a number of planned reforms, including preparing for the introduction of a broad-based VAT. However, the decisions to freeze fuel pump prices and partially reverse the increase in electricity prices led to significant public sector losses. With limited action by the authorities to raise interest rates, there has been a move out of local currency assets, with bouts of exchange rate depreciation and a rapid increase in inflation, which reached 77 percent in September 2016. The first and second reviews of the SBA have not taken place.

The economic outlook remains challenging. For 2016, a GDP contraction of 9 percent is projected, following a 2.7 percent contraction in 2015. In October, the Newmont Merian gold mine opened, which will support economic activity, and the recession is expected to ease in 2017. Inflation is projected to be 60 percent at end-2016 and to decline in 2017. Import compression has narrowed the external current account deficit, which is projected at below 4 percent of GDP in 2016. A current account surplus of about 2 percent of GDP is expected in 2017, on the back of exports from the new gold mine. The budget deficit is projected at about 6 percent of GDP in 2016, with the debt-to-GDP ratio is projected to reach 68 percent, including the recent issuance of an external government bond. [2]

Against this background, the focus of the Article IV Consultation was on strategies to improve the sustainability of the fiscal position, lower inflation, protect the poor from the costs of adjustment, and stimulate private investment and job creation to lay a path toward sustained growth.

Executive Board Assessment [3]

Executive Directors noted that Suriname faces numerous challenges given a severe recession, rising government debt, and high inflation. Directors agreed that ensuring a return to macroeconomic stability and growth will require decisive reforms. In this regard, they called for redoubled efforts to put the fiscal position on a sustainable track, reduce inflation, strengthen the financial sector, and stimulate private investment to foster sustainable and inclusive growth.

Directors emphasized that fiscal consolidation should be at the center of the policy efforts. Achieving a primary surplus by 2018 is needed to put public debt on a downward path and avoid monetary financing. Directors welcomed the authorities’ intentions to eliminate energy subsidies in 2017, fully reinstate fuel taxes, and implement the VAT in 2018. They emphasized the need to refrain from large wage increases, and to launch a broad-based reform of the civil service. Directors called for mitigating the impact of macroeconomic adjustment on the most vulnerable by redirecting resources to the most disadvantaged. To strengthen public sector resilience over the medium term, Directors emphasized the importance of institutional reforms to bolster fiscal discipline. They considered that a clear fiscal anchor together with a sovereign wealth fund would provide an important buffer against volatility in mineral revenue, and that a new public financial management law is needed to improve budget preparation and expenditure control.

Directors considered that the central bank should adopt a more active approach to reducing inflation. They called for prompt initiation of open market operations and raising interest rates to positive levels in real terms to slow the pace of currency depreciation and restore confidence in local currency assets. Directors welcomed the authorities’ commitment to preserving exchange rate flexibility, which they saw as vital for rebuilding international reserves to adequate levels, and called for phasing out the central bank’s role as a distributor of foreign exchange to large importers.

Directors emphasized the urgent need to strengthen the framework for addressing banking sector strains. They underscored the importance of developing a contingency planning framework with clear modalities for providing emergency liquidity assistance, and promptly establishing a Financial Stability Committee to coordinate all aspects related to systemic stability and crisis prevention and management. Directors welcomed the development of a new bank resolution law and called for its expedited adoption, which would empower the central bank to promptly take preventive and corrective measures. Further strengthening the AML/CFT framework was also encouraged.

Directors called for an ambitious agenda of structural reforms to promote diversification of Suriname’s commodity-dependent economy and boost productivity growth. They encouraged reforms to improve the business environment, promote competition, and strengthen governance. Decisive steps to increase labor market flexibility, including investments in education, supported by a well targeted social safety net, would also help to promote job-rich and inclusive growth.

Suriname: Selected Economic Indicators

2013

2014

2015

2016

2017

2018

Proj.

Proj.

Proj.

National income and prices (annual percent change)

Real GDP growth

2.9

0.4

-2.7

-9.0

-0.7

0.9

Nominal GDP growth

3.3

1.8

-3.6

43.9

39.6

22.0

GDP deflator

0.4

1.5

-0.9

58.1

40.6

20.9

Consumer prices (period average)

1.9

3.4

6.9

60.3

38.6

23.3

Consumer prices (end of period)

0.6

3.9

25.0

61.0

30.4

16.1

Money and credit (annual percent change, unless otherwise indicated)

Broad money (constant exchange rate)

14.9

7.8

0.1

4.3

5.4

9.9

Broad money in local currency (percent of GDP)

26.1

27.8

28.8

21.5

17.2

16.9

Reserve money (constant exchange rates)

0.6

-8.8

18.0

4.0

5.2

18.5

Reserve money (percent of GDP)

14.1

12.7

15.6

12.1

9.2

8.9

Private sector credit (constant exchange rate)

17.5

8.1

5.7

-6.7

3.8

5.3

Central government (percent of GDP)

Revenue and grants

25.8

24.1

22.1

13.8

16.3

20.3

Total expenditure 1/

32.9

32.0

31.4

20.0

20.4

22.5

Primary expenditure

31.6

31.1

29.9

18.3

18.0

20.1

Overall balance (net lending/borrowing)

-7.1

-7.9

-9.3

-6.1

-4.1

-2.1

Primary balance

-5.8

-7.0

-7.8

-4.5

-1.7

0.3

Net acquisition of financial assets 2/

0.0

0.0

0.0

10.7

2.9

0.0

Net incurrence of liabilities

7.1

7.9

9.3

16.8

7.0

2.1

Net domestic financing

3.9

6.4

7.6

-3.1

-3.7

1.3

Net external financing

3.3

1.5

1.6

19.9

10.7

0.8

Central government debt (percent of GDP) 3/

31.6

29.0

45.7

67.8

60.7

54.4

Domestic

16.7

13.1

24.1

16.5

10.6

7.9

External

14.9

16.0

21.6

51.2

50.1

46.5

External sector (percent of GDP)

Current account balance

-3.8

-7.9

-16.6

-3.6

2.5

1.1

Capital and financial account

8.3

13.1

15.2

-13.7

-9.7

-3.4

Memorandum items

GDP at current prices (SRD billions)

17.0

17.3

16.7

24.0

33.5

40.8

Terms of trade (percent change)

-10.1

-4.0

0.9

8.8

2.7

-0.3

Gross international reserves (US$ millions)

779

625

330

447

515

417

In months of imports

3.4

2.8

2.1

2.6

2.9

2.3

Adjusted international reserves (US$ millions) 3/

…

…

36

150

256

345

In months of imports

…

…

0.2

0.9

1.4

1.9

Real effective exchange rate

(percent change, + = appreciation)

1.4

2.9

13.1

-14.4

1.2

8.5

Exchange rate (SRD per US$, period average)

3.3

3.3

3.4

…

…

…

Exchange rate (SRD per US$, end of period)

3.3

3.3

4.0

…

…

…

Sources: Suriname authorities; United Nation Development Program, Human Development Index (HDI); World Bank, World Development Indicators; and Fund staff estimates and projections.

1/ Includes statistical discrepancy.

2/ Includes acquisition of a stake in the gold mine and loans to state owned enterprises.

3/ The debt-to-GDP ratio is different when computed using the definition in the Government Debt Act of Suriname.

4/ Official reserve assets excluding foreign currency swaps and reserve requirements on banks' foreign currency deposits.






[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] The debt-to-GDP ratio is different when computed using the definition in the Government Debt Act of Suriname.

[3] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .

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