Report to Caribbean Centre for Money and Finance (CCMF)
Summary
The pace of economic activity in Suriname remains steady. Real growth is estimated at 4.4% in 2013, slightly higher than the 3.9% recorded in 2012. Compared to recent years, growth in 2013 was driven to a larger extent by domestic demand rather than exports. Inflation recorded a historical low of 0.6% at end-2013.
However, the fiscal deficit widened considerably, reaching a deficit of 5.1% of GDP at end-September 2013. The worsening was driven by higher expenditure amidst declining mining-related revenue following lower gold and oil prices. Government debt rose sharply from 20% of GDP at end-September 2012 to 28% at end-September 2013, which remains below the national legal debt ceilings (60% of GDP), and relatively low compared to levels prevailing in peer countries in the region. A new Finance Minister was appointed on January 1, 2014, who has effectively begun to curtail expenditure and prioritize project implementation to moderate the fiscal imbalance.
Domestic demand also increased as private sector credit growth accelerated to a pace substantially higher than economic growth, negatively affecting the external current account. The external current account shifted to a deficit in 2013. The Central Bank provided adequate foreign exchange to facilitate trade and maintain confidence in the exchange rate peg, causing a decline in the country’s international reserves. To reign in the fast pace of domestic credit expansion, the Central Bank raised the reserve requirement ratio twice for foreign currency deposits and once for domestic currency deposits in 2013.
Real Sector
Inflation
Inflation declined to 0.6% at the end of December 2013, the lowest rate in 25 years. Lower food and fuel prices were the main contributors. Imported inflation was insignificant as prices of major commodities declined in international markets. Favorable weather conditions also impacted positively on the prices of domestically produced food stuff. The sharp increase in domestic demand in 2013 did not translate into price pressures as ample provisioning of foreign exchange facilitated imports.
Growth
The strongest contribution to real growth in 2013 resulted from wholesale and retail activities following higher imports, and construction reflecting buoyant residential and commercial construction. To a lesser extent, manufacturing, transportation, storage and telecommunication, and public investment in infrastructure (pavement of roads, housing program, etc.) also contributed to growth. Although the mining sectors contributed relatively less to growth, they continue to be the main source for government revenue.
Mining Production and Exports
The production volume of refined oil went up by 16% while crude oil production remained more or less stable. The expansion of the oil refinery is progressing and is targeted to be completed by the end of 2014. Conversely, the gold industry recorded a slight drop of 1% in production, while alumina production declined by 4% in 2013. The gold sector is faced with a larger share of hard rock processing and longer haulage distances between the pits and the mill.
The export value of the mining sectors contracted by 13% in 2013. The export value of the bauxite industry contracted by 4% as a result of lower export volumes and lower export prices. The oil industry recorded a similar drop of 3% due to lower prices and notwithstanding the 1% increase in the export volume. The export value of gold fell by 17%, caused mainly by the large-scale gold mining segment which recorded a drop of 27%. The small-scale segment recorded a drop of 11%. The average export price of gold declined by 16% in 2013.
Public Sector
The authorities faced a significant deterioration in the overall fiscal balance in 2013. Available data till the end of September 2013 show a deficit of 5.1% of GDP. Total revenue fell from 18% of GDP at end-September 2012 to 17% at end-September 2013. Total expenditure rose from 20% of GDP to 22% in the corresponding period. Expenditure in 2013 was affected by the retroactive increase in civil servants wages and salaries at the beginning of 2013 and by a significant increase in capital expenditure following the execution of several investment projects.
The government drew almost equally on the domestic and external market to meet its financing needs in 2013. The external debt-to-GDP-ratio stood at 14% by the end of September 2013, while Suriname’s external debt service, measured to exports of goods and services, was 1.3%. External debt was comprised mostly of multilateral loans from the IADB. Domestic debt amounted to 14% of GDP at the end of September 2013.
Monetary sector
The Central Bank raised the reserve requirement for foreign currency deposit liabilities from 40% to 45% on January 2, 2013 to stem credit growth in foreign currency and to discourage dollarization. The ratio was further increased to 50% on September 18, 2013. This time, the Central Bank also raised the reserve ratio for domestic currency liabilities from 25% to 30%.
A drop in in foreign assets led to a deceleration of broad money growth from 21% in 2012 to 11% in 2013. Contrary to the experience in recent years where increases in foreign assets dominated money growth, domestic credit was the main source of liquidity expansion in 2013. The increase in net credit to the government had the largest impact on domestic money creation, followed by private sector credit.
Growth in credit to the private sector in domestic currency rose from 13% in 2012 to 21%, and was mainly channeled to the trade, construction, and services sectors. Growth in foreign currency credit slowed down from 19% to 13% over the same period
External sector
The external current account shifted from a surplus of US$ 164 million in 2012, equivalent to 3.2% of GDP, to a deficit of US$198 million in 2013, equivalent to 3.7% of GDP. The deterioration was the result of exports of goods falling by 11% and imports of goods growing by 9%. The lower export receipts were caused largely by the mining sectors, specifically gold. Import growth was driven by higher oil consumption, and the purchase of minerals, capital goods, and metal product for the mining sectors. Improvements in the services and income accounts partially compensated for the large deterioration in the goods account.
Services outflows declined by 9% in 2013, mainly due to a decrease in construction services in the mining sector. As the construction of the refinery expansion of the State-owned oil company (Staatsolie) is coming to an end, the related construction services outflows are also falling. The income account registered a decline in outflows of 32% reflecting lower profits of the foreign direct investment companies operating in the mining sectors as a result of lower commodity prices and higher production cost. The net balance on current transfers decreased by 9%, as the growth of outflows (20%) outpaced the growth of inflows (6%). The higher outflows were mainly channeled to Brazil, the Netherlands, the Philippines and Canada, while the growth in inflows originated mainly from the Netherlands and United States of America. The inflow of current transfers was equivalent to 2.9% of GDP in 2013.
The financial account registered a net inflow of capital mainly driven by government loan disbursements and direct investments in the mining sector. However, the inflows were insufficient to finance the deficit on the current account. International reserves declined by 23% to a level of US$775 million at end-2013. The reserves cover 3.4 months of imports of goods and services. If imports of the mining sectors are excluded, as they are being financed by the mining companies themselves, the import coverage expands to 4.5 months.