By September last year, inflation reached 77% in Suriname and GDP was expected to contract 9% in 2016 as the country grappled with an economic crisis and the International Monetary Fund (IMF) says drastic measures will have to be taken this year.
In a statement on January 24, 2017 about its December 19, 2016 Article IV consultation with neighbouring Suriname, the IMF said that while the authorities launched an ambitious adjustment plan in late 2015, by mid-2016, progress on a number of policy items stalled
It said that Suriname is in an economic crisis triggered by the drop in international gold and oil prices and the cessation of alumina production. This resulted in large fiscal and current account deficits and the beginning 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 IMF stated.
Responding to the recession in late 2015, the IMF noted that the Suriname government lowered the budget deficit by cutting back on spending, began phasing out electricity subsidies, and curbed monetary financing. To enable the adjustment and the rebuilding of foreign reserves, the IMF said that the authorities floated the exchange rate in March 2016 which, along with the tight fiscal stance, lowered the current account deficit. These 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 IMF statement said.
It warned that the economic outlook remains challenging. It said that for 2016, a GDP contraction of 9 percent is projected, following a 2.7 percent decline in 2015. In October, the Newmont Merian gold mine opened and as a result, the IMF said that the recession is expected to ease this year. Inflation is projected to be 60 percent at end-2016 and to decline this year.
In its assessment, the Executive Directors of the IMF 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”, the IMF statement added.
The Directors welcomed the authorities’ intentions to end energy subsidies in 2017, fully reinstate fuel taxes, and institute 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”, the IMF statement added.
Directors were of the view that the central bank should adopt a more active approach to lowering inflation and called for the prompt initiation of open market operations and raising of interest rates to positive levels in real terms to slow the pace of currency depreciation and restore confidence in the local currency.
The Directors said that they welcomed the authorities’ commitment to preserving exchange rate flexibility, which they saw as vital for restoring 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 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”, the IMF statement added.
