IMF approves US$478 million stand-by credit for Suriname
WASHINGTON - The executive board of the International Monetary Fund (IMF) on Friday approved a 24-month stand-by arrangement (SBA) for Suriname, in an amount equivalent to SDR 342 million (about US$478 million or 265 percent of quota), to support the government’s economic reform program.
The Board’s approval of the arrangement enables the immediate disbursement of an amount equivalent to SDR 58 million (about US$81 million).
The home-grown program supported by the arrangement aims to facilitate Suriname’s adjustment to the fall in the prices of major commodity exports, restore confidence, and pave the way to economic recovery. A critical ingredient of the program is fiscal consolidation, to restore fiscal and external current account stability.
The program also includes reforms to the exchange rate and monetary policy framework, to enhance Suriname’s resilience to the current and to possible future shocks, and allow a steady rebuilding of foreign reserves.
It contains a comprehensive set of structural reforms to support private-sector led growth. Crucially, the program includes support measures to protect the most vulnerable during this period of economic adjustment. The program will also catalyze support from other multilateral institutions, including the Caribbean Development Bank, the Inter-American Development Bank (IDB), the Islamic Development Bank, and the World Bank Group, as well as from bilateral creditors.
Following the executive board’s discussion, Mitsuhiro Furusawa, deputy managing director and acting chair of the board, issued the following statement:
“Suriname has been hit hard by the drop in the international prices of its main exports and the closure of the country’s alumina production. Combined with a delayed policy response in the context of an election cycle, these developments have caused substantial fiscal and external current account deficits, a run-down of international reserves and an economic downturn. In the second half of 2015, the authorities started to tighten fiscal policy and prepared a comprehensive reform program to address Suriname’s challenges.
“The main objectives of the authorities’ program are to restore macroeconomic stability and confidence, and to pave the way to economic recovery while protecting the most vulnerable during the adjustment process. Fiscal consolidation is a critical ingredient of this program to reduce imbalances. The authorities’ fiscal reforms include elimination of electricity price subsidies and the introduction of a value added tax. To soften the impact of the adjustment on the poor, the authorities’ agenda emphasizes a strengthening of the social safety net.
“The program aims to rebuild Suriname’s international reserves. The authorites’ decision to move to a market-determined exchange rate will strengthen the economy’s resilience to commodity price shocks. Together with the expected expansion in gold exports and the program’s catalytic effect on external financing, this step will improve the current account balance and contribute to raising reserves to prudent levels.
“To reduce inflation and stabilize expectations, the program includes steps to tighten liquidity conditions. The start of T-bill auctions and the planned roll out of open market operations will support the goal of returning inflation to single digits. The Central Bank of Suriname also needs to stand ready to address rising banking sector risks.
“Implementing the structural reform agenda is essential to ensure a prosperous future for Suriname. To support the recovery and to raise medium-term growth, the authorities’ program includes reforms to improve the business environment. These reforms will promote economic diversification and encourage foreign direct investment. The reforms will be supported by technical assistance from the IMF and other development partners.”
Suriname has been hit hard by the drop in the international prices of its main export commodities, gold and oil, and the closure of the country’s alumina production. In 2011, revenues from the sale of the three commodities accounted for 88 percent of exports and 40 percent of government revenue. The subsequent price declines and the closure of alumina refinery Suralco in late-2015 have cut these revenues and caused substantial fiscal and external current account deficits.
The fiscal deficit reached 8.8 percent of GDP in 2015, compared with a small surplus in 2011, with the bulk of the worsening reflecting the drop in government mineral revenue. The current account has worsened from a surplus of 5.7 percent of GDP in 2011 to a deficit of 15.6 percent of GDP in 2015 due to the drop in mineral exports. Reflecting the fall in net exports and intervention by the Central Bank of Suriname (CBvS), official foreign reserves have declined to perilously low levels.
These negative external developments, combined with the closure of Suralco’s alumina refinery in late 2015, have pushed the economy into a recession, with growth of -2 percent expected in 2016. Consumer price inflation has reached 37 percent in March 2016, up from an average of 4 percent during 2013–15, on the back of the fall in the value of the exchange rate and utility tariff hikes.
Against this background, the Surinamese authorities have embarked on a program to restore macroeconomic stability and confidence, and pave the way to economic recovery, while protecting the most vulnerable during the process of adjustment. To support this program, they have requested IMF financial assistance.
The program includes the following key elements:
Fiscal policy: The large drop in mineral revenues necessitates bold fiscal measures to bring government finances back to a sustainable level. The program targets a reduction of the fiscal deficit from 8.8 percent of GDP in 2015 to less than 1.5 percent of GDP by 2018. The fiscal adjustment is based primarily on phasing out electricity subsidies, wage restraint, an increase in fuel taxes, and, to create an efficient source of non-mineral revenue, introducing a value added tax (VAT).
To support the fiscal adjustment, the program will introduce reforms to strengthen the fiscal policy framework, including a Sovereign Wealth Fund Law to improve mineral revenue management; setting up a procurement department to ensure cost-effectiveness of public sector purchases; and the building of a modern Treasury Department. Technical assistance from both the IMF and the Inter-American Development Bank (IDB) will develop necessary capacity in these areas.
Social protection: To help soften any negative impact of the macroeconomic adjustment on the poor, the program includes measures to strengthen the social safety net, including through increased spending on social cash transfer programs. The prospective increases in electricity prices will be structured so that those who are the biggest consumers will bear more of the adjustment than the small consumers. The program also provides tax breaks to protect taxpayers’ purchasing power.
Monetary and foreign exchange policy: The program envisages strengthening the country’s international reserve position and calibrating monetary policy to return inflation to single digits. The system of foreign currency auctions, and, more recently, the authorization of commercial banks and foreign exchange bureaus to freely determine exchange rates, have facilitated Suriname’s transition to a floating market-determined exchange rate, which will strengthen the economy’s resilience to commodity price shocks.
Structural reforms: The program also includes substantial structural reforms to improve the business environment, support the recovery, and strengthen medium-term growth. The reforms will promote the economy’s diversification and attract foreign direct investment, and will be supported by technical assistance from the IMF, the Caribbean Development Bank, the IDB, the Islamic Development Bank, and the World Bank. Enhancing the productivity and competitiveness of Suriname’s agricultural sector is of particular importance. The program also includes legal reforms to accelerate the process of starting a company, enforcing contracts, promoting competition, protecting investors, registering property, and expanding access to finance.
Suriname, which joined the Fund on April 27, 1978, has a quota of SDR 128.90 million (about US$181.75 million).