Feb 2017 Financial News

IMF warns of challenging economic situation for Suriname

Feb 02, 2017

The International Monetary Fund (IMF) says Suriname is in an economic crisis triggered by a significant commodity terms of trade shock and exacerbated by insufficient buffers and policy responses.

The IMF is warning that the economic outlook remains challenging and that for 2016, a gross domestic product (GDP) contraction of nine per cent is projected, following a 2.7 per cent contraction in 2015.

The Washington-based financial institution said that 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.”

It said that the authorities launched an ambitious adjustment plan in late 2015 and that the Desi Bouterse 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 StandBy Arrangement (SBA) with the IMF approved in May 2016 as well as financing commitments from other international financial institutions.

The IMF said that by mid-2016, progress on a number of policy items stalled.

It said the government kept the fiscal deficit below six per cent of GDP and implemented a number of planned reforms, including preparing for the introduction of a broad-based value added tax (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 per cent in September 2016. The first and second reviews of the SBA have not taken place.”

The IMF says Suriname faces numerous challenges given a severe recession, rising government debt, and high inflation and that a return to macroeconomic stability and growth will require decisive reforms.

In this regard, it is calling 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 has emphasised that fiscal consolidation should be at the centre of the policy efforts.

“Achieving a primary surplus by 2018 is needed to put public debt on a downward path and avoid monetary financing,” the IMF said, welcoming the authorities’ intentions to eliminate energy subsidies in 2017, fully reinstate fuel taxes, and implement the VAT in 2018.

The IMF said there is need to refrain from large wage increases, and to launch a broad-based reform of the civil service.

CMC

Source:
Business Guardian, BG7
Thursday February 2, 2017