PRESIDENT VENETIAAN'S OUTLOOK SPEECH ECHOES

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