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


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