US embassy cable - 05PARAMARIBO788

UNCLAS  PARAMARIBO 000788 
 
SIPDIS 
 
 
DEPT FOR WHA/CAR, EB/IFD/OMA 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ETRD, PREL, NS 
SUBJECT: PRESIDENT VENETIAAN'S OUTLOOK SPEECH ECHOES 
RECOMMENDATIONS OF IMF ARTICLE IV ASSESSMENT TEAM 
 
REFS: A. PARAMARIBO 062 
 
     B. PARAMARIBO 748 
     C. PARAMARIBO 684 
 
1. Summary: President Ronald Venetiaan's annual "government 
outlook" speech before Suriname's National Assembly 
articulated his administration's plans and policies for the 
next five years.  The President projected that his 
government's economic policies will bring about significant 
growth over the course of the government's term. This 
pronouncement followed shortly on the heels of an Article IV 
assessment done by a team of economists from the 
International Monetary Fund (IMF), which resulted in a 
generally positive review. Several of the IMF's 
recommendations were reflected in the President's speech. 
Venetiaan also remarked that globalization posed both 
challenges and risks to a small country like Suriname whose 
borders are open and porous, and that those challenges will 
require greater international cooperation not only for 
economic reasons but to help prevent growing criminal 
activity. End summary. 
 
2. The IMF's overall conclusion following their Article IV 
assessment is that the Surinamese economy is stable and 
showing signs of growth, with inflation dropping. Although 
this is a slightly more optimistic outlook than their last 
report (see reftel A), they made a number of recommendations 
meant to put the economy on less vulnerable footing. The IMF 
team noted that the government of Suriname, now in its post 
election phase, is exhibiting stable management and 
attempting to direct its fiscal and monetary policy 
responsibly. GDP increased approximately 8 percent in 2004, 
with projected growth of 5 percent for 2005 and 4.5 percent 
in 2006. The inflation projection for 2005 is 15 percent, 
but with expectation of a decrease to 8 percent in 2006. One 
of the strongest causes for the inflation increase in 2005 
was the doubling of gas prices in September, which resulted 
in Suriname going from having one of the lowest consumer gas 
prices in the western hemisphere to having some of the 
highest prices in the region (see reftel B). The deficit is 
expected to remain under 5 percent of GDP in 2006 if the 
government keeps spending under control. (Note: the Council 
of Ministers has recently agreed to reduce the price of gas 
on average by 0.50 SRD and begin experimenting with letting 
the price adjust to fair market levels per a recommendation 
by IMF. End note.) 
 
3. For his part, President Venetiaan predicted that his 
government's economic policies would lead to growth in GDP, 
causing per capita income to grow significantly, but 
proffered no target figure.  At present, GDP per capita is 
USD 2,300 and the unemployment rate has dropped to 8 percent 
for 2005. He also cautioned that the government will need to 
pay more attention to bringing about better distribution of 
wealth, further growth of employment opportunities, better 
working conditions, and greater attention to the more 
vulnerable members of society. 
 
4. The President highlighted the stability of Suriname's 
currency in his speech and the availability of adequate 
financing for business investment. He said interest rates 
have stabilized between 8 and 17 percent for commercial 
loans, with the average residential mortgage hovering close 
to 7 percent. The lower mortgage rates are due in part to a 
program whereby the government, using Central Bank reserves, 
makes low interest loans available to low-income homebuyers. 
Venetiaan noted that the Central Bank currently had monetary 
reserves of USD 250 million and noted that inflation has 
been brought under control, in contrast to high levels prior 
to 2000 under the previous government of Jules Wijdenbosch. 
 
5. The IMF team agreed that the exchange rate for the 
Surinamese dollar (SRD) is stable and expected to stay so as 
long as inflation remains under control. The IMF noted that 
besides the Central Bank's official exchange rate (a 
weighted peg consisting of the USD and Euro), a second 
unofficial rate is determined in the many "cambio" or money 
exchange facilities in Suriname. At present, these rates are 
tracking together, but should they diverge by more than 30 
percent, this would be a sign that Central Bank intervention 
is required to stabilize the currency. The IMF recommends 
Suriname move to unify its exchange rate to float in line 
with cambio levels. 
 
6. Regarding the monetary policy of the Central Bank, the 
IMF gave favorable marks to the law that limits and 
penalizes debt exceeding a predetermined percent of GDP (see 
reftel C). Although the Central Bank is in a better position 
to exercise monetary policy, it is not yet totally free of 
 
 
government interference, as evidenced by the practice of 
using a portion of required reserves to finance low-interest 
housing (see reftel A). IMF stated that Suriname needs 
"modern monetary policies" with "monetary anchors" which 
target goals and have the necessary means to obtain them. 
 
7. An item of concern to the IMF economists was the 
vulnerability of the Surinamese economy to exogenous shocks. 
Because one-third of all revenue is derived from the 
bauxite, gold and oil sectors, which consists of four major 
companies and is responsible for 7 to 11 percent of GDP, 
there is a greater than average potential for macroeconomic 
imbalance when the world price for these commodities 
fluctuates. Although the economists did not see an immediate 
problem, mostly because prices for these items are currently 
high, they do see problems in the medium term. They strongly 
recommend that Suriname develop a "revenue stabilization 
fund" which would absorb the revenue from new projects in 
the commodity sector and ensure that the money flows into 
the fund and not the treasury. In this way, Suriname will 
produce a steady income stream allowing for stable fiscal 
policy in out years. 
 
8. Other IMF recommendations were the need to revise the 
investment law and the tax regimes to help bring in more 
foreign direct investment and collect taxes in a fairer and 
more transparent manner. Attempts to improve these areas 
could trigger more technical assistance from both NGOs and 
governments. The IMF economists could not stress strongly 
enough the need for better data collection and management. 
The Statistics bureau is just beginning to collect and 
publish data on the economy but more work is needed to make 
the data useful for planning and projection. 
 
9. In a further reflection of IMF recommendations, the 
President said in his outlook speech that the government 
would need to tap more diverse investment sources in the 
coming years to help finance the development of the country 
(rather than the current heavy reliance on the Netherlands). 
He said that tax revenues will need to be increased through 
improvements in the collection system; fiscal savings will 
need to be realized through greater privatization of several 
government parastatals; and greater direct foreign 
investment will be need to be encouraged. He also said the 
government needs to be more mindful of its international 
credit ratings as a bellwether for foreign direct 
investment. 
 
10. COMMENT: The IMF team's general assessment of the 
Surinamese economy was positive, with a few cautionary flags 
about its reliance on current good fortune in commodity 
prices and structural impediments to growth-generating 
investment.  While it was heartening to hear many of the 
IMF's recommendations for stabilizing and improving 
Suriname's macroeconomic situation reflected in the 
President's speech, it is equally important that rhetoric be 
turned into policy action.  The need for a thoughtful 
conversation about how to safeguard mining revenue for 
Suriname's future development is a concept post has also 
tried to foster, most recently with an OpEd by the 
ambassador in the respected weekly economic affairs section 
of a major daily newspaper, to a good reception in business 
circles. 
 
LEONARD 
 
 
NNNN