Reforms for stability
Suriname’s finance minister Gillmore Hoefdraad tells GlobalMarkets that reforms are under way to bring structural improvements to the resource-rich economy
What comfort can you provide to bond investors concerned about the upward revision, in April, of the fiscal deficit forecast?
The deficit has not improved as fast as expected mainly due to the retroactive payments resulting from the 2017 healthcare reform and the retroactive element of wage increases.
These additional payments expire in the coming months and the outlook is positive: we estimate that Newmont will begin to pay substantially higher income tax on the Merian mine during 2020; Iamgold will soon be extracting ore from its Saramacca concession, which should increase its profits and the government’s tax revenue; while Newmont is preparing two new mines.
Importantly, the government will acquire the Afokaba dam from [mining company] Alcoa before December 31, 2019. The immediate effect will be that the profits Alcoa has been generating by selling electricity will end up in the hands of the government, helping to gradually reduce the cost of energy subsidies. Subsidies were around 5% of GDP in 2018 and account for around two thirds of the fiscal deficit. We will also implement a value-added tax.
What other impacts will the Afobaka dam transfer have?
The transfer is a key and initial element in a broader five-year electricity reform. Under the reform, all generation assets will come under centralised ownership and management, allowing for efficiency gains. A five-year tariff adjustment process will eliminate subsidies at the consumer level, which will also reduce electricity consumption as users adjust to market-orientated prices.
Will this transfer require additional financing?
Yes, we will seek financing to purchase the dam and place the electricity reform on a secure financial footing. Given the costs of subsidies and the inherent inefficiencies of the system, this financing will provide a significant return on investment for Suriname.
What is the status of the VAT reform?
In collaboration with the IADB and IMF, we are working on VAT reform to be implemented in 2021. The law is almost ready to be presented to Parliament, while the IT system is in place and being integrated with central Integrated Financial Management Information Systems (IFMIS). The implementation plan foresees that, during 2020, regulations will be issued and stakeholder education meetings will take place. Overall, we will institute a VAT rate, threshold, and exemption levels that will increase net revenue by 2% of GDP.
Some analysts are worried spending will go over budget in the run-up to elections. How do you plan to control this?
There are clear differences between 2019 and any previous pre-election year. Our IFMIS allows for faster and more granular expenditure control. The results are clearly visible, as expenditure has not expanded in real terms in 2019 and we plan to keep it that way. Additionally, the 2020 budget recently discussed in Parliament is almost identical in nominal terms to 2019’s and has no additional expenditure items.
There are concerns that the Surinamese dollar may be allowed to depreciate after the 2020 elections. Are these justified?
Given the history of post-election devaluations, this is understandable. To a certain extent, such pre-election depreciation fears are self-fulfilling: the more people fear a devaluation, the more the exchange rate depreciates in the spot market. Let’s be clear that the authorities cannot devalue the currency, as it is already floating. The spot rate is a clear reflection of the foreign exchange rate market. This spot rate is being negatively affected by the usual pre-election jitters and the pernicious effects of the unlawful cash seizure by the Dutch authorities. Both will end soon. Furthermore, international reserves continue to build consistently, and foreign direct investment has a strong present and future.
What measures are being taken to ensure markets have up to date data about Suriname?
Our provision of information has improved leaps and bounds in five years and analysts and investors must only browse the internet to obtain the latest data sets. The Central Bank now provides monthly data on monetary and financial developments, while fiscal data are now largely presented on a GFS basis on the Ministry’s website. The IMF has certified that Suriname’s data provision is now consistent with the General Data Dissemination Standards. Authorities also hold regular investor presentations and are available for phone calls and on-site visits.
What does Suriname need to do to make the most of a potential major offshore oil find?
In 2019, Suriname’s Savings and Stability Fund became operational, and we are now defining the exact mechanism of transfer, following the Santiago Principles so it meets world-class standards. Thus Suriname is prepared to properly manage any windfall that would follow a major offshore oil find.
The country is well prepared to absorb higher investments in the extractive industries, with a century-old tradition of working cooperatively and amicably with foreign investors. Our domestic industry and commerce has also extensive experience providing ancillary services to large investors. Finally, the peaceful, diverse, friendly, and well-educated Surinamese society has always welcomed and integrated foreign nationals.
Are there plans to dredge the river to increase local benefits of any oil discovery?
Dredging the river is imminent; we signed a project loan agreement in September 2019 to dredge the river and it should begin in the coming months.
What work is underway to diversify the economy away from a reliance on natural resources and bring greater dynamism to the private sector?
Diversifying an economy that is highly competitive in extractive industries is a challenge but is an important objective. Our investment promotion agency Investsur is active in attracting investment in agriculture and tourism, while we are working with the World Bank and IADB to improve the competitive environment, specifically in the ease of doing business.