(Jointly with IDB)
January 27- February 9 1998)
Statements of Findings
This statement present the mission's assessment of recent economic developments in Suriname, a summary of the discussions of the authorities' policies and the outlook for 1998, ans a set of preliminary policy recommendations. We would welcome your comments on this statement to ensure that it accurately reflects your views, and are ready to discuss the recommendations at your convenience.
Introduction.
1. In the past two weeks the mission met with the Minister of Finance, the president of the Central Bank (CbvS), the Minister of Planning and Development Cooperation (PLOS), The Minister of Trade and Industry (NI), the Directors of the Ministry of Natural Resources (NH), the Director of the Tax Office, the Electricity Company (EBS), the State Oil Company, the Bauxite Institute, the two bauxite companies, the Bankers' Association, and the Suriname Business Association (VSB), in addition to numerous meetings with officials and technicians of the Ministry of Finance, CBvS, the Bureau of Statistics (ABS), and various other public entities. We are grateful for the cooperation and assistance we received, but special words of thanks must go to Mrs Khedoe-Bharos and her staff in Finance for their untiring help invariably offered in good cheer, and to Mr. Gersie and his team in the Bank for spending long hours dealing with our requests for data.
2. We have put together a picture of the fiscal/monetary/balance of payments outcome based on the available information for 1997, an outlook for 1998 on current policies and set of policy recommendations in the form of an alternative or "program scenario" to address the problems we detect. We must tell you candidly that the current macroeconomic situation, and associated pressures on the government budget, carries serious risks and threatens to undermine further Suriname's impressive achievement in reducing inflation in 1995 and 1996. As you know, the mission that visited in December 1996 and the Article IV consultation mission in March 1997 highlighted the emerging imbalances in the economy and the need for corrective actions.
3. In this connection, the Management of the IMF has asked me to urge you to strongly reconsider the suggestions made by the December 1996 and March 1997 missions. It would be most helpful if the Surinamese authorities could provide a clear commitment to a set of reforms that could provide the basis for our further cooperation with Suriname, including technical assistance. May I add a few considerations which I feel may be helpful. Following its return to headquarters, the March 1997 mission prepared the Staff Report for the 1997 Article IV consultation with Suriname (issued May 14, 1997), which was discussed by the Fund's Executive Board on June 4. The acting chairman's Summing Up of that discussion (SUR/97/58, June 11, 1997) gives a very clear indication of the concern with which the Board of Directors regards Suriname's situation and policies. A copy of this document is attached.
Recent Economic Developments
4. Fiscal Developments. The government effected important adjustments in the rates and fees of non tax revenue in 1997 (which had been eroded by hyperinflation) and made strong administrative efforts to raise tax collections. Also, efforts were made to contain purchases of goods and services as well as payments of subsidies and transfers, though the decision to go ahead with the construction of the two new bridges (over the Suriname and Coppename rivers) meant sizable additional outlays (Sf 8 billion). Overall, however, fiscal developments in 1997 were dominated by the 50% increase in salaries (including allowances) and pensions granted to government employees and retirees, effective March 1, which was followed by a one-off bonus payment in December and salary increases for groups of so-called strategic employees. The adoption of the new turn-over tax was delayed from July 1, 1997 to February 1, 1998, while the approved rates (7 percent on the goods and 5 percent on services) are much lower than those envisaged originally (15 percent and 10 percent respectively) and exemptions are wide ranging. Furthermore, the increase in excise taxes and gasoline taxation proposed in the 1997 budget were not approved, and the increase in electricity tariffs announced for August 1997 was rescinded in the face of protests.
5. All in all, the mission estimates that the current operations of the Central Government (gewone en buitengewone dienst), including "self-financed" capital projects, showed a cash deficit on the Suriname budget definition of some Sf. 2.2 billion (0.8 percent of GDP) in 1997, following a deficit of Sf 2.3 billion (1 percent of GDP) in 1996. In addition, as the government stopped playing the fuel and client subsidies to the electricity company (EBS) in April 1997, while electricity tariffs were not adjusted until January 15 1998, the EBS incurred an operational deficit of some Sf 1.7 billion (not including the Suralco subsidy of Sf 3.6 billion), which was financed by a Sf 1.3 billion loan from the Agricultural Bank (LBB) and a small accumulation of arrears. The Central Government's cash deficit in 1997 would have been larger if substantial amounts of payments had not been deferred until 1998, as was done with the government paychecks for December 1997 in the amount of about Sf 3 billion. On the IMF definition (Government Finance Statistics Manual), which puts all financing (disbursements and repayments) below the line, the consolidated fiscal balance shifted from a small surplus (Sf 1 billion) or ½ percent of GDP) in 1996 to a deficit of at least Sf 11 billion. The deficit may have been even higher, depending on wether other large payments were deferred to 1998 and on the extent of the quasi-fiscal operations of the central bank. (Data on fiscal operations in the IMF format are shown in the attached tables 1 and 2. Table 3 shows the data using the Ministry's of Finance Definition)
6. The Government's deficit was financed through a drawdown of its deposits balances at the Central bank (Sf 5.6 billion), through the accumulation of arrears (Sf 3.1 billion), and with foreign borrowing (Sf 2 billion) net. Total government and government-guaranteed external debt (excluding the reserve liabilities and other external debt of the CbvS) reached US$187 million at the end-1997, up from US$178 million at end-1996. In addition, a number of parastatels have sizable external debts and/or are gearing up to borrow abroad in connection with far-reaching investment programs. For example, TELESUR, expects to borrow some $25 million over the next few years and Staatsolie is seeking to borrow $20 million abroad to help finance its production expansion program. The rapid build-up in external debt should be assessed carefully in the light of Suriname's debt servicing capacity.
7. The government's direct recourse to the CbvS contributed to an increase of some Sf 22 billion in the net domestic credit of the CbvS during 1997, equivalent to 28% of its liabilities to the private sector at the beginning of that year. However, the bulk of that credit expansion (some Sf 14 billion) was in the net liabilities of the CbvS to the Banks and reflected the on-lending to the state banks of funds borrowed from the Hamilton bank (Us$18.5 million as of end 1997). Currency in circulation grew rapidly during 1997, by 17%. Total money and quasi-money grew by an estimated 20 percent during the year, down from 38% during 1997, but still some 1.5 percent in "real" terms. Boosted in part by loans to agriculture under the on-lending arrangement, credit to the private sector grew by about 40%, much less than during 1996, but still a very large increase in real terms (20 percent). All in all, these data (shown in table 4) point to a very extraordinary credit stance in 1997, supported by foreign borrowing and facilitated late in the year by the "administered" decline in interest rates (see below).
8. Reflecting the expansionary fiscal and monetary stance, inflation accelerated, rising from 1 percent during 1996 (December-December) to 16 percent during 1997, or form a slight decline in 1996 on a year-on-year basis to 7 percent in 1997. Merchandise imports grew very rapidly (by US$80 million or 19 percent), in part spurred by a large rise in inventories in anticipation of the sales tax, while exports were up by more than US$ 100 million. The latter increase, however, appears to be "statistical", i.e. related to improves reporting, as evidenced by the behavior of major exports which were up by only US$ 10 million. The increase in the trade balance was offset by a reduction in official transfers that stemmed from the decline in assistance under the development cooperation program with the Netherlands. Accordingly, the surplus on the current account of the balance of payments (as measured by the fund) declined slightly in 1997, to about US$ 5 million. (As measured by the CBvS, there was a deficit of about US$ 90 million in 1997). The pace of economic activity appears to have slowed down somewhat in 1997. The mission estimates that real GDP grew by 5 ½ percent, down from 6 3/4 percent in 1996, reflecting a sharp deceleration in the secondary sector. (Table 5 shows the balance of payments, and inflation and output data are shown in Table 6).
9. The exchange rate in the parallel market, which had been at about Sf 420 per US dollar for most of the year ended in May 1997, come under pressure in the summer of 1997, rising to more than Sf 500 per US dollar. Intervention by the central bank - at a rate of Sf 420 per U.S. dollar rather than the usual sf 406- helped to bring the parallel rate down again. Nevertheless, the Suriname guilder has appreciated sharply in real effective terms, by an estimated 25 percent during the 12 months ended in December 1997 (or 11 percent annual average). Also, at the current level of about Sf 445-450 per U.S.dollar, the spread with the official rate is well above the upper end of the 5-7 ½ percent range that the CBvS has targeted as acceptable. Furthermore, the mission understands that the banks and cambios are experiencing a shortage of foreign exchange and that when the central bank intervenes it does so with allocation directives (Specifying maximum amounts and preferred clients). Such practices are likely to lead to costly distortions.
10. The overall balance of payments showed a surplus of just over US$31 million in 1997, as the government and Central Bank borrowed heavily abroad and investment by the bauxite companies remained strong. As measured by the CBvS, Suriname's net international reserves increased by US$ 31 million, but the mission would argue that this figure does not adequately reflect what happened to the reserve position last year. The revolving nature of the Hamilton Bank loans dictates that the amounts outstanding be treated as reserve liabilities of the monetary authority rather than a "miscellaneous" liability or long-term foreign liability. This would reduce the reserve again to US$ 13 million. Also, even in the absence of an adjustment to the reserve liabilities, one has to consist that any foreign exchange deposits which the CBvS may hold at Hamilton Bank and any gold that may have been pledged (collateralized) or lent should not be treated as liquid foreign exchange reserves.
11. In the area of structural reforms, several government initiatives discussed at the time of the Article IV consultation have been delayed. these include streamlining the size of the civil service, privatization and improved management of the civil service pension fund. Another major concern is the reintroduction of price controls over a wide range of goods, which is distortionary and could thwart the efforts to reduce the size of the informal economy. However, the authorities are to be commended for their actions to eliminate subsidies on electricity and water and tackle the problem of loss-making state enterprises such as Marienburg.
Current Policies and Prospects
12. The adoption of the turnover tax effective February 1 is a positive step that can form the basis for a return to fiscal stability. However, from the discussions we have had, it appears to the mission that the expenditure budget for 1998 is being set once again on an expansionary course, with another, though much smaller wage increase and an ambitious regional development program, as well as construction of public housing and of the two bridges. Thus, without decisive action to contain outlays, the budget deficit is likely to widen sharply this year rather than decline. Should credit continue to expand at its current rate and with the one-time price increases associated with the new electricity tariffs and the sales tax inflation is expected to increase. Even assuming no further depreciation of the parallel exchange rate, the mission has projected, conservatively, that inflation will average 20 percent in 1998, consistent with a 12-month increase of 25 percent by the end of the year. However, this projection is highly sensitive to the exchange rate assumption, i.e., to the confidence factor, as any further depreciation of the guilder in the parallel market triggered by the widening fiscal deficit and pressure on the foreign reserves could very easily raise inflation further. Real GDP growth is projected to slow down markedly in 1998, to about 2 percent, reflecting a further sharp decline in agricultural output, owing in large part to a 40 percent reduction in the area under rice cultivation, as well as a large decline in value added in the secondary sector caused by lower manufacturing production (the latter has faced enhanced regional competition from within CARICOM), and a reduction in private construction activity.
13. Turning to the fiscal revenue and expenditure estimates for 1998, the mission has put the estimated yield of the turnover tax at Sf 16 billion, scaled down from the official estimate of Sf 20 billion due to the announced increase in exemptions from 40 to 50 (and the apparently wide net of the exemptions as evidenced from the newspaper notifications issued by the Directorate of the Indirect Taxes) and to the anti participation effect (imports were high around the turn of the year). The growth of direct tax receipts is held back by the bauxite sector were prices are expected to decline. The mission commended the government's efforts to improve the collection of non tax revenues. Nothing also the full year impact of the 1997 measures, receipts from this source are projected to rise by some 27 percent to Sf 13 ½ billion (on the IMF definition, which excludes external loans and privatization proceeds). On the expenditure side, the projections allow for the increase of Sf 4 billion in wages and salaries currently contemplated by the authorities for the final amendment to the 1998 budget (which is equivalent to an adjustment for projected inflation of 15 percent in the wage component only). Expenditures on goods and services have been raised by Sf 15 billion for the purchase of boats/helicopters from Spain (financed by the loans from Banco Santander and Banco Exterior de Espana), that will be used to establish the effective patrolling of Suriname's territorial waters. Subsidies and transfers were reduced by Sf 1.8 billion, most of it reflecting the elimination of the operational deficit of EBS as a result of the new tariffs (and leaving only the SURALCO subsidy, which is to be eliminated in a second round of tariff adjustments some way down the road). Finally, capital outlays were raised by Sf 21 billion for housing (SF 5 billion), the bridges (Sf 2,5 billion) and regional development and related outlays (Sf 13 billion). All together, the Sf 135 billion of total budget outlays (gewone plus buitengewone dienst) projected by the mission still is some Sf 20 billion below the likely total in the final amendment to the 1998 budget. As of now the latter does not include expenditures financed by the loans from China. In addition, as is customary in Suriname practice, the draft budget figures are "inflated" as they represent allocations or authorizations rather than projections of what actually will be spent (realizations).
14. The result would be a 1998 budget deficit of Sf 12 billion on the definition used in the Suriname budget (cash basis). On the IMF definition, the deficit in 1998 is projected at more than Sf 25 billion (8 percent of GDP), of which more than half (Sf 14 billion or US$ 35 million) would be financed from external loans. Either way, the domestic financing requirement, i.e., credit extension by the CBvS, is Sf 12 billion or 3 ½ percent of projected GDP. Such an outcome has a serious risk of leading to an inflationary spiral and depreciation of the currency.
15. In the monetary area, the CBvS has pursued an active policy of bringing about lower interest rates, both by attempting to apply moral suasion to the banks and by borrowing abroad for on-lending to the agriculture and industry sectors through the banks. The mission remains of the view that this relaxation was premature, in light of the widening budget deficit in 1997 and the sharp widening in store for 1998. Also, even more so than in March last year, the mission cannot endorse the quasi-fiscal on-lending operations conducted by the CBvS. First, to the extent there is a role for such operations, they should be financed by concessional medium-term/long- term loans and they should be conducted outside the Central Bank through a fully separate investment fund or development bank, with any subsidy element reflected clearly in the government budget. Secondly, the small state banks through which the funds are channeled are known to be week institutions that lack the capacity to make adequate assessments of borrowers' credit risks and have insufficient capital bases to face loan defaults. The small margin (2 percent) on the loans is not enough to cover credit risk ans it is possible that the CBvS may eventually end-up bearing these losses as well as the exchange risk it already carries. The mission also was concerned to learn that some Sf 5 billion in assets of the civil service pension fund (Pensioenfonds Suriname), deposited in the CBvS, possibly are being on-lent in the same way.
16. The mission's monetary projections contemplate a marked slowdown in the growth of money and quasi-money in 1998 to almost no increase in real terms. The very rapid growth in the broad money stock during the past few years for the most past has reflected remonetirization in the aftermath of the hyperinflation which had led to a severe depletion in the public's real money holdings. Since by now this stock has been largely rebuilt, "normal" rates of money growth are expected in future, in line with the underlying growth of the economy. Accordingly, given the government's rising demand for domestic financing and the central bank's continued on-lending operations, the official net international reserves are projected to decline by at least US$ 25 million during 1998. The growth of credit to the private sector would slow down further, but still is projected at 10 percent in real terms, in part because of the increased lending by state banks of funds on-lent to them by the government and the CBvS.
17. Turning to the balance of payments outlook, the growth of imports is expected to remain brisk in 1998, owing to the government's purchase of coast guard equipment under the loans from Spain and to government investment expenditures pertaining to the bridges and housing projects, as well as to foreign direct investment. The value of exports, on the other hand, is projected to decline, reflecting a sharp reduction in the volume of rice exports (owing to a 40 percent reduction in production) and an anticipated decline in the terms of trade (owing in large part to the expected declines of 3 percent in aluminum and 14 percent in oil export prices). With a further decline in official transfers, due to the slowdown in the execution of the development cooperation program with the Netherlands, the balance on current account is projected to shift to a deficit of close to US$ 100 million. While the capital account is projected to remain in surplus, mostly because of the heavy external borrowing by the public sector, the expected result is a reduction in net international reserves of at least US$ 25 million, as noted earlier. Containing the spread between the parallel exchange rate and the fixed official exchange rate in the face of these developments would necessitate increased central bank intervention, resulting in further reserve losses, which will prove unsustainable over the medium term. Moreover, maintenance of an overvalued exchange rate can only be expected to result in a further weakening of the trade balance, due to a further erosion of external competitiveness.
Policy Recommendations
18. The key to ensuring internal and external stability in the Suriname economy is to reduce the size of the fiscal deficit to a sustainable level (as defined below) and avoid use of central bank financing of the budget deficit, defined to include all quasi-fiscal operations of the government. In other words, the budget deficit should be no larger than what can be financed by concessional foreign borrowing -bearing in mind that such foreign borrowing should not exceed what can be sustained over time in terms of the country's debt servicing capacity- less the amount deemed necessary to eliminate the govenment's external arrears over a reasonable period of time and reduce its domestic indebtedness. Further, the central bank is urged to cease all on-lending operations and associated foreign borrowing. As noted above, if the production sectors need to be helped, this should be done trough other agencies and by means of other types of financing, with any transfer element clearly reflected in the budget. The central bank, as a monetary institution, should limit itself to its traditional role of maintaining confidence through stability of domestic prices and the exchange rate. In turn sound public finances and confidence in the value of the guilder would facilitate the lowering of domestic interest rates which the government is seeking.
19. In the area of fiscal policy, the mission's recommendations for 1998 are to:
20. As regards money and credit policy, the mission's recommendation for 1998 is to bring it in line with the fiscal program by restraining the expansion of CBvS credit to the amount consistent with avoiding any loss of its foreign reserves. This would involve:
21. With regard to the exchange rate and exchange system, the mission is concerned about the depreciation of the parallel exchange rate (in the cambio and black markets) and central bank intervention in the parallel market in an apparent effort to contain it from depreciating further. These developments, together with the weakening of the external current account and the sharp real appreciation of the guilder during 1996-97, point to an overvaluation of the guilder in the official market. Assessing the degree of overvaluation is difficult because part of the depreciation of the parallel rate must reflect the political uncertainty about the government's economic policies. The mission believes that the exchange market should be unified, and the surrender requirements for foreign exchange earnings eliminated, in the context of an economic adjustment program for the period 1998-2000.
However, such action requires support from sound fiscal and monetary conditions which still are to be put in place. As that is done in the course of 1998, the spread between the parallel and official exchange rates may well decline, facilitating the task of unification. Conversely, it should be stressed that any further widening of the spread will compound severely the difficulty of the required adjustment and render the production of exports subject to surrender requirements more unprofitable.
22. The mission is of the view that the prevalence of economic uncertainty within the private sector poses risks to the adjustment effort that is called for and to the achievement of sustained economic growth in Suriname. There is no substitute for openness on the part of the government and the central bank about their objectives and policies and about the actual economic situation and outlook. In this connection, the mission welcomes the release of the condensed balance sheet of the CBvS, and suggests that consideration be given to providing additional detail on the items "miscellaneous assets" and "miscellaneous liabilities", which have grown very rapidly since the end of 1996. The authorities are advised to resume reporting the monthly data on the central government's realized revenues and expenditures, domestic and foreign borrowing proceeds and amortization payments, and domestic and external debt, as was done until the end of 1995 through the Flash Report (see below).
23. The mission concerned about certain institutional weakness which it has detected, including in particular a deterioration in the ready availability of data in both the Ministery of Finance and the CBvS. Fiscal analysis, monitoring and control are hampered by the absence of expenditure data by economic category or function. The mission recommends that action be taken promptly to ensure the early resumption of compiling the Flash Report, whether in the Economic Affairs section or the Central Bookkeeping unit. Equally important, a (small) coordinating unit should be assembled to establish monthly or quarterly budget performance targets, monitor the execution of the budget, and advise the Minister on any action needed to ensure adherence to the targets; it should be chaired by a senior staff person with authority to obtain all necessary information from the CBvS and the ministries and include the chiefs of key departments like economic affairs, bookkeeping, budget, and treasury.
24. Finally, to provide a quantitative basis for its policy recommendations, the mission has created a "program scenario" or "active" projection for 1998 which is presented in the final column of Tables 1 through 6. This scenario targets a small cash surplus for the central government of Sf 3 billion, to attained by cutting Sf 7 billion from the budgeted amount for regional development and related outlays (i.e. reducing it from Sf 13 billion to Sf 6 billion).
cutting a further Sf 1,5 billion from subsidies and transfers; reducing the exemptions to the turnover tax from 50 to 30 (and narrowing their scope) to ensure attainment of the sought for yield of Sf 20 billion (an SF 4 billion gain relative to the mission's "passive" projection); and effecting Sf 2 billion in sales of government shares in mixed ownership enterprises. The surplus can be used to amortize government debt (including arrears) and built fiscal reserves the latter is especially important in light of the need to provision against possible losses from the CBvS's on-lending operations with Hamilton Bank loan proceeds and the government pension fund deposits. Absent any financing requirement from the government and refraining from further (unwinding the) on-lending operations, the CBvS can limit the expansion of its net domestic assets to Sf 3 billion (compared to Sf 20 billion in the passive projection) and ensure a small gain in its net foreign reserves. The application of fiscal and monetary restraint will slow down the growth of imports, thereby ensuring a smaller current account deficit, strengthen the guilder in the parallel market, and help contain the rate of inflation (perhaps to 15 percent on a 12 month basis).
Concluding Remarks
25. Mr. Minister, this has been a lengthy statement, warranted by the importance of the economic policy decisions that need to be made and the importance which the Fund attaches to a successful completion of Suriname's effort to achieve stabilization and economic growth. The task before the Suriname authorities may loom difficult but, as noted above, the size of the actual fiscal adjustment required is not large. The program we have outlined will put Suriname's economy on a sound footing and permit the liberalization of the economy, and of the exchange system in particular, that will allow Suriname sustained access to foreign direct and portfolio investment. Continuing on the present expansionary course is bound to destabilize the economy through widening fiscal deficits, unsustainable foreign borrowing, excessive credit expansion by the CBvS and depletion of the foreign reserves. Under these conditions, economic activities may be subjected again to regulations and controls that would deter foreign investors and give new fuel to the parallel economy. If this were to occur, Suriname could face further depreciation of the parallel exchange rate and accelerating inflation of prices and wages, with adverse effects on all segments of the country's population.
Attachments
Frits van Beek (Head of Mission)
Graeme Justice
Sukhdev Shah
Ruby Randall
Dougal Martin (IDB)
Anthony Grimes (MAE consultant)