US embassy cable - 04PARAMARIBO1

UNCLAS  PARAMARIBO 000001 
 
SIPDIS 
 
 
DEPT FOR WHA/CAR MSEIBEL, FOR EB, AND FOR EPSC: SENRIQUEZ 
 
E.O. 12958: N/A 
TAGS: SENV, ETRD, ECON, EFIN, NS 
SUBJECT: SURINAME INTRODUCES SURINAME DOLLAR TO BOLSTER 
CONFIDENCE IN CURRENCY BUT WILL IT WORK? 
 
REF: PARAMARIBO 520 
 
1. Summary: On January 1, 2004, Suriname will launch its new 
currency, the Surinamese dollar.  The new currency will be 
set at an exchange rate of SR$ 2.80 to one USD, versus Sf 
2,800 to one USD.  According to Central Bank President Andre 
Telting, the introduction of the new currency is meant to 
bolster public confidence in the local currency The GOS has 
enacted a number of measures to curb government spending and 
reduce liquidity, which Telting believes will stabilize the 
exchange rate while at the same time reduce inflation and 
local interest rates.  Still, real economic stability will 
only come when the GOS enacts a program to encourage private 
sector expansion.  End Summary. 
 
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GOS Introduces the Suriname Dollar 
---------------------------------- 
 
2. On January 1, 2004, Suriname will launch its new 
currency, the Surinamese dollar (SR$), removing 3 zeros from 
the exchange rate.  In a lunch hosted by the Paramaribo 
Diplomatic League (PDL) attended by diplomats and 
representatives of NGOs, Central Bank President Andre 
Telting discussed the launch of the new currency and 
answered questions.  Telting told the gathering that the 
introduction of the new currency was meant to bolster the 
Surinamese public's confidence in the local currency which 
had eroded due to 20 years of overspending by the GOS.  The 
Surinamese guilder (Sf) had devalued from Sf 200 to one USD 
in 1990 to a high of Sf 3,600 to one USD in 2002.  Telting 
told the assembled representatives that the GOS had chosen 
to rename the guilder the dollar so that Suriname's currency 
would be more recognizable in the region -- like Guyanese, 
Trinidad and Tobago, and Jamaican dollars. 
 
3. As of January 1, 2004, all amounts set in Surinamese 
guilders will be converted to Surinamese dollars and divided 
by 1,000 so that the SR$ will sell at an exchange rate of 
SR$ 2.8 to one USD, versus the current rate of Sf 2,800 to 
one USD.  To ease the transition for consumers, shopkeepers 
will be required to list prices both in the old currency and 
in the new currency for a period of three months.  Old notes 
can be converted to new notes for a period of up to 6 months 
at commercial banks, after which exchanges will only be 
accepted at the Central Bank (CBvS.) These can take place 
for up to 30 years after an investigation into the origin of 
the notes, in accordance with recently introduced anti-money 
laundering legislation.  The new law provides for all 
existing contracts written in guilders to be payable in 
Surinamese dollars and allows contracts and local prices to 
be set in and payable in either the local currency or a 
foreign currency such as the Euro or the US dollar. 
 
4. The new bank notes will be in denominations of $1, $2.50, 
$5, $10, $20, $50, and $100.  Coins, which have not been 
used in a decade due to hyperinflation in the 1980s and 
1990s, will be accepted back into circulation since the 
coins are already in cents.  The coins are available in 
denominations of 1, 5, 10, 25, 100, and 250 cents.  Those 
coins will retain their nominal value, in what Telting 
called a sort of social dividend for elderly Surinamers who 
may still hold them and who suffered the most from 
Suriname's 20 years of hyperinflation which ravaged life 
savings and rendered pensions worthless.  Telting estimated 
that the cost of minting new coins would exceed the cost of 
reusing the old coins.  New sets have been ordered, he said, 
but only on a small scale.  Telting estimated that the SR$ 1 
million in coins still in circulation would not be a 
disturbance to the money supply because the government would 
not have to pay hard currency to mint new coins, reducing 
the cost of recirculating the coins. 
 
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Government Overspending = Hyperinflation 
---------------------------------------- 
 
5. Telting explained that in the 1980s and 90s, gross 
overspending by the government led to massive devaluation of 
the Surinamese guilder.  Telting explained that the CBvS 
correlated the change in Suriname's exchange rate to the 
rate of inflation and that by stabilizing the exchange rate, 
 
 
the GOS would stabilize inflation.  Suriname, Telting 
continued, is a "small open economy" (i.e., that Suriname 
imports much of its manufactured and commercial goods and, 
therefore, is subject to the vagaries of the world economy) 
with a strong import component.  In 2001, the GOS was able 
to stabilize the exchange rate by reducing government 
spending, but following the 2002 civil servant pay raises 
(which averaged 60 percent), the guilder lost 35 percent of 
its value, while inflation reached 28.1 percent by year's 
end.  Inflation continues to be a problem in 2003 with 
inflation running at 28.6 percent per annum in June 2003, 
the last month for which statistical data was available. 
(Note: The General Statistics Bureau (ABS) burned down in 
June 2003. So far, the ABS has been unable to provide 
economic data.  See Reftel.  End Note) 
 
6. In 2001 the GOS enacted a law that enabled Surinamers to 
hold savings in foreign currencies.  Because of the 
Surinamese guilder's historic instability and its rapid 
devaluation in 2002, Surinamers holdings in US dollars 
exceed the value of their Sf accounts.  Surinamers holding 
on to US dollars has put further pressure on the exchange 
rate since not enough US dollars are available to meet 
market demand, Telting said.  According to Telting, 
Surinamese confidence in the new currency will encourage 
Surinamers to spend their US dollars thus further reducing 
this pressure on the exchange rate. 
 
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Controlling Liquidity Controls Exchange Rate 
-------------------------------------------- 
 
7. Telting explained that the CBvS began implementing a 
program in 2002 to reduce liquidity by raising the 
commercial bank reserve requirement to help stabilize the 
exchange rate.  The CBvS raised its reserve requirement in 
2002 to 27.5% to stop the near free fall in the guilder when 
it shot from Sf 2,200 in June when exchange controls were 
lifted to Sf 3,600 in September.  The CBvS raised the 
reserve requirement again in August 2003 to 35% to even 
further reduce liquidity.  This measure has effectively 
blocked Sf 170 billion ($607,140 USD) for credit operations, 
which in turn has reduced consumer spending in general and 
imports in particular -- since Suriname is heavily dependent 
on imports for most consumer goods.  By reducing liquidity 
over the past year, Telting explained, the GOS successfully 
stabilized the exchange rate at Sf 2,800 effectively 
eliminating the imbalance which gives rise to the parallel 
market.  (Note: The guilder has maintained a sell rate of Sf 
2,700 to one USD on the parallel market since June 2003 
while the official rate is Sf 2,800.  End Note.)  By 
reducing liquidity, the local currency becomes more scarce, 
driving up its value, Telting said.  Telting estimates that 
the August 2003 reserve rate hike would continue to have 
effects into the new year such as reducing inflation and 
local interest rates, which he predicted would slide in the 
first months after introduction of the new currency.  (Note: 
One local commercial bank, the Hakrinbank, recently 
announced it would lower interest rates by 2 percent.  End 
Note.) Telting insisted that by limiting liquidity and 
increasing the reserve rate for commercial banks, the CBvS 
would not need to intervene in the foreign exchange market 
and support the SR$ with hard currency.  Telting also 
maintained that the GOS expects to eventually eliminate 
controls on the foreign exchange rate and go to a floating 
rate once the new currency is stable.  The GOS is currently 
working on an overhaul of foreign exchange laws with the 
assistance of a British consultant, he noted. 
 
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Fiscal Control Measures 
----------------------- 
 
8. To shore up fiscal controls, the government has taken a 
number of measures.  In 2002 it implemented a law to 
restrict GOS spending which penalizes the Minister of 
Finance for overspending with a 10-year sentence and Sf 2 
billion ($715,000 USD) fine.  The GOS is currently drafting 
similar legislation to restrict the CBvS president from 
lending excessively to the GOS.  The CBvS president will 
face similar penalties if he lends more than 10 percent of 
GDP to the GOS.  These measures are designed to 
 
 
institutionalize accountability, to provide a mechanism to 
deter the gross overspending responsible for Suriname's long 
history of hyperinflation, and give further confidence to 
the GOS's ability to maintain a stable exchange rate. 
 
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New Notes Way-Laid 
------------------ 
 
9. On December 1 the CBvS announced that notes in 
denominations of SR$ 5 and higher were delayed.  The SR$ 1 
and 2.50 notes will be available as of January 1, as will 
coins.  According to Embassy sources, the notes printed by a 
Canadian firm needed to be reprinted because the ink ran. 
The Central Bank maintains that it will carry out the 
introduction of the new currency despite this hiccup and 
will continue to use the old currency until replacement 
notes arrive. 
 
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Introduction of New Currency May 
Cause Inflationary Pressures 
-------------------------------- 
 
10. In the past month Surinamers have expressed concern that 
with the introduction of the new currency, shopkeepers will 
be tempted to round up prices from Sf 2,800 to SR$ 3, 
causing additional inflationary pressure.  Surinamers point 
to the high inflation in the Netherlands after it converted 
from Dutch guilders to the Euro and fear that this same 
phenomenon would happen in Suriname.  Diplomats who attended 
the lunch echoed those concerns.  The Indian DCM noted that 
the GOS is unable to monitor shops to ensure that 
shopkeepers don't exploit the introduction of the new 
currency to raise prices to cover the fuel price increases 
earlier this year, as well as past devaluation of the 
currency.  Telting responded that the government would 
encourage the public to report any unusual price hikes. 
 
-------- 
Comment: 
-------- 
 
11. Suriname's adoption of the SR$ is a symbol of its 
efforts to further distance itself from its colonial power, 
the Netherlands.  The adoption of the SR$ is also a strong 
signal of Suriname's commitment to its membership in CARICOM 
and its integration in the Caribbean as a partner in the 
Caribbean Single Market Economy (CSME.) 
 
12.  Comment Continued: The GOS has put together a program 
of fiscal controls which should go a long way toward 
stabilizing the value of the new currency and keeping 
inflation in check -- provided the GOS adheres to these 
measures.  The Indian DCM, a trained economist, told the 
Embassy that in the short run, the new currency and the GOS 
measures to curb government spending will probably provide 
the returns sought.  As a consumerist economy heavily 
dependent on imports, only strong government resolve to 
control inflation and the money supply, while supporting the 
exchange rate with hard currency, can lead to long-run 
stability of the local currency, he maintained. 
 
13. Comment Continued:  Telting's explanation of the 
connection between the exchange rate and inflation appears a 
bit simplistic.  After raising the reserve requirement in 
2002 and again in 2003, the exchange rate has stabilized yet 
inflation persists at 30 percent per annum.  The real 
culprit in Suriname's history of hyperinflation has been the 
GOS's consumptive spending -- particularly on wages.  With 
over 60 percent of the workforce in civil service and 
parastatal jobs, there will be continued pressure on the GOS 
to succumb to the anticipated 2004 round of labor strikes, 
especially in the run up to elections.  Although 2003 was a 
quiet year after the 2002 strikes, there have already been 
rumblings among labor leaders that civil servants should 
expect increases.  Telting, however, maintained that the GOS 
told labor leaders to expect only modest pay hikes -- 5 
percent rather than the 60% average wage increases doled out 
in 2002.  After two years of 30-percent inflation, it is 
likely that workers will want to recoop their lost earning 
power with commensurate wage hikes.  Businesses too have 
 
 
suffered from inflation and can be expected to exploit this 
opportunity to cover their narrowed profit margins. 
 
14. Comment Continued:  The GOS can, in the short run, 
control monetary policy to keep a lid on inflation, but only 
economic expansion will guarantee the long-term economic 
stability that eludes Suriname.  Still, the GOS continues to 
defer the hard issues that will produce a vibrant economy: 
public sector reform and improving investment opportunities 
to attract employers for Suriname's large pool of 
underemployed and unemployed workers.  Until the GOS 
implements an economic policy that encourages expansion of 
the private sector, only sheer political will to stay the 
course with harsh monetary and fiscal policy will ensure 
Suriname's economic --and by extension, its political -- 
stability.  End Comment. 
 
BARNES 
 
 
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