ILE COPY. Suriname: Recent Developments and Prospects FOR OFFICIAL USE ONLY. Report No SUR. June 1, Document of the World Bank

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Report No SUR Suriname: Recent Developments and Prospects June 1, 1981 Latin American and the Caribbean Regional Office FOR OFFICIAL USE ONLY Document of the World Bank g ILE COPY This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS Currency Unit: Suriname Guilder Exchange Rate Prior to December 27, 1971 US$1.000 = Sf Sf = US$0.531 Exchange Rate from December 27, 1971 to Present US$ Sf Sf.1.OOQ = US$0.560

3 FOR OFFICIAL USE ONLY SURINAME: RECENT DEVELOPMENTS AND PROSPECTS TABLE OF CONTENTS Page No. MAP COUNTRY DATA PREFACE SUMMARY AND CONCLUSIONS... i - viii I. RECENT DEVELOPMENTS... 1 Population, Employment,and Wages... 1 Production and Investment Public Finance... 4 Credit and Prices Balance of Payments II. BAUXITE SECTOR DEVELOPMENTS AND PROSPECTS... 8 Introduction Background and Past Developments... 8 Sector Prospects (a) Output (b) Exports (c) Revenues (d) Conclusion III. PUBLIC INVESTMENT AND RESOURCE MANAGEMENT Public Investment Public Finance Manpower Price Stability Balance of Payments External Debt and Borrowing Conclusion ANNEX: THE KABALEBO HYDROELECTRIC POWER PROJECT STATISTICAL ANNEX This document has a restricted distribution and may be used by recipients only in the performance of their omcial duties. Its contents may not otherwise be disclosed without World Bank authorization.

4 Text Tables Table No. Page No. 1 Number of Births, Wage Developments, Summary Budget Operations, Sectoral Allocation of Public Investment, Summary Accounts Monetary Svstem, Summary Balance of Payments, Output of Bauxite Sector, Volume, Price and Volume Index of Bauxite Sector Exports, Bauxite Output, Value of Bauxite Sector Exports, Gross Levy Receipts, Public Investment, Public Finance, Balance of Payments,

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6 Page 1 of 2 pages COUNTRY DATA - SURINAME ARE 2/ POPULATION DUNSITY 163,-300 ka mllion (mid- 1980) 2.2 per k3- Rate of Growth: -1.0%(from 1972 to 1980) POPULATION CHARACTERISTICS HEALTH (1977) Crude Birth Rate (per 1,000) Population per physician 1927 Crude Death Rate (per 1,000) Population per hospital bed 163 INCOME DISTRIBUTION (1962) ACCESS TO ELECTRICITY (1964). of national income, liigk3st quintile 42.0 lovest quintile 9.3 x of population 51 NUTRITlON (197 DDIAXION (I197g Calorie intake as % of requirements 118 Adult literacy rate % 80 Per capita protein intake 60 Primary school enrollment GNP PER CAPITA in US $ 2,370 (Atlas) GROSS NATIONAL PRODUCT IN 1978 ANNUAL RATE OF GROWTH (7.. constant prices) US $ Mln. % GNP at Market Prices Gross Domestic lniestment Grogs National Saving Current Account Balance Exports of Goods, NFS Imports of Goods, NFS OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1978 Value Added Labor Force V. A. Per Worker US I ln. Z '000 % US $ % Agriculture , Mining , Other Industry , Services , Total/Average , GOVERNMENT FINANCE (Sf Millions) (% of GDP) Current Receipts Current Expenditure Current Surplus Capital Expenditures a/ The Per Capita GNP estimate is at 1979 market prices, calculated by the same conversion technique as the 1980 World Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. b/ Total labor force; unemployed are allocated to sector of their normal occupation. not available not applicable

7 Page 2 of 2 pages COUNTRY DATA - SRTJ_NAM MONEY, CREDIT and PRICES Aa (Million Sf outstanding end period) Money and Quasi Money Bank Credit to Public Sector Bank Credit to Private Sector Money and Quasi Money as % of GDP General Price Index ( ) Annual percentage changes in: General Price Index Bank credit to Public Sector Bank credit to Private Sector BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE ) US $ Mln 7. (Millions US $) Bauxite Exports of Goods, NYS Alumina lports of Goods, NFS Aluminum Resource Gap (deficit - -) -rt. : Shrimp Rice Net Factor Payments All other coodities Net Transfers Total lqo Balance on Current Account EXTERNAL DEBT. DECEMBER Direct Foreign Investment US $ Mln and Private Capital (net) Net MLT Borrowing Public Debt, incl. guaranteed 28.4 Disbursement' (22.4) (-) (-) Non-Guaranteed Private Debt Amortizatiou L-1_1) (j1) (-6) Total outstanding & Disbursed Subtotal a/ Capital Grants DEBT SERVICE RATIO for 1980 Other Public Capital (net) -0., Other items n.e.i D.7 Change in Reserves Public Debt, incl. guaranteed ( increase) Non-Guaranteed Private Debt 0.5 Gross Reserves (end year) Total outstanding & Disbursed Net Reserves (end year) RATE OF EXCHANGE IBRD/IDA LENDING: Nil Through December US $ 1.00 = Sf = US $ Since December US $ 1.00= Sf = US $0.560 a/ Ratio of Debt Service to Exports of Goods and Non-Factor Services. not available not applicable

8 PREFACE This report is based on the findings of economic mission, comprising Laurens Hoppenbrouwer (mission leader), Alfredo Dammert, Jitendra Sharma, Joshua Levine (Consultant), and Arthur Irausquin (IMF), which visited Suriname in November A draft of the report was discussed with the Government in May The report reviews recent economic developments (Chapter I), discusses the developments and prospects of the important bauxite sector (Chapter II), and explores policy issues for public investment and resource management in the medium and longer term, particularly those that would arise from the implementation of the large scale Kabalebo Hydroelectric Power Project which is scheduled to start in 1982 (Chapter III).

9

10 SUMMARY AND CONCLUSIONS Recent Developments i. The mid-1980 census confirmed that massive emigration to the Netherlands had resulted in a decline of the country's population from 387,500 at the end of 1973 to 352,000 in mid-1980, which is about equal to the size of the population of 12 years ago. Emigration reached particularly large proportions in 1974 and 1975 around the time of independence, and again in 1979 and 1980 in response to economic stagnation and an increasingly uncertain political situation. Obscured by the striking dimensions of the emigration has been a much less obvious but very significant decline in birth rates, from nearly 5% in the 50's to less than 3% in recent years. ii. The large scale emigration caused a decline in the size of the labor force and a sharp drop in the rate of (registered) unemployment from about 15% in 1975 to about 2-4% during Rapid growth in Government employment, from about 25,000 persons in 1972 to about 40,000 in 1978 (representing nearly 40% of total employment) also contributed to a tightening of the labor market which, together with increased labor union activity, resulted in a substantial increase in real wages. In the private sector gross wage cost per employee are estimated to have nearly tripled during to over US$5,000 and in a number of sectors, particularly plantation agriculture, construction and domestic services, employers have resorted to hiring foreign workers, particularly from Guyana, to overcome shortages of unskilled labor. However as emigration was particularly heavy among the educated and the skilled, the country faces a severe shortage of technical and managerial skills, particularly in the public sector. iii. Real GDP seems to have stagnated during Per capita real GDP nevertheless increased by an average 2% p.a., since population decreased. The bauxite sector, which had partly recovered during from a sharp decline in 1975 following the introduction of a levy on bauxite production, stagnated during 1979 and 1980; bauxite output declined, but alumina and aluminum production increased as a larger share of bauxite output was processed domestically. Output of rice, the main crop, increased by 5.3% to 236,000 tons (dry paddy) in 1979, on account of further increases in planted area, cropping intensity and yields, but stagnated in 1980 due to less favorable weather conditions. Production of shrimp, the third major export commodity, declined during A number of other sectors, particularly manufacturing, trade and construction, faced sluggish demand on account of the increased emigration and the decline in investment, which was caused primarily by the uncertain political situation. iv. Following years of negative public savings and a record current account deficit of nearly 3% of GDP in 1977, Government public finances improved substantially. In 1978 the current account showed a small surplus due to a sharp rise in bauxite levy receipts and improved income tax collection and current expenditure control. With the drop in bauxite levy receipts following renegotiations of the levy rate with the bauxite companies the current account again turned into a deficit in 1979, but in 1980 the improvement in public finances continued and the current account again turned into a modest surplus--about 1.5% of GDP--as revenues increased by 15% while

11 expenditure growth was limited to 5% in nominal terms, mainly due to a 7% reduction in the number of civil servants between 1978 and Since development expenditures during were fully financed by foreign inflows (mainly grants from the Netherlands), the Government was able to reduce net claims by the monetary system from Sf 70 million to only Sf 15 million, or 3% of net domestic credit, at the end of v. Development expenditures rose rapidly in the first post independence years to Sf 165 million, or 13% of GDP, in 1977 but subsequently declined by about 50% in real terms to only Sf 112 million, or 6% of GDP in 1980 as the large Western Suriname railroad project, which accounted for about 40% of development expenditures during , neared completion, and as a lack of qualified staff and the general political uncertainty contributed to delays in the implementation of ongoing projects and start up of new projects. Investments in physical infrastructure accounted for more than half of total public investment during , while investments in social infrastructure and the directly productive sectors represented about a quarter and one-fifth of the total respectively. vi. The rate of growth of credit declined sharply during to only 7% p.a. in nominal terms. Credit outstanding to the public sector decreased as a result of improved fiscal performance while the rate of growth of private sector credit declined with stagnating economic activity. Total money supply grew at only 9% p.a. in nominal terms during and time and savings deposits declined by about 4-5% p.a. in real terms as a result of the uncertain situation and the sharply negative real interest rates. The rate inflation reached about 15% both in 1979 and 1980, which, given the degree of the openness of the economy, probably mainly reflected levels of international inflation in those years. vii. Following a record current account deficit of US$81 million, or 11% of GDP in 1977, the balance of payments strengthened considerably during Higher prices for virtually all exported commodities resulted in increases in the value of exports of about 15% p.a. to $575 million in The value of imports increased by only 7-8% p.a. in 1978 and 1979, but by 22% in 1980 to US$500 million; about two-thirds of the absolute increase in imports in that year resulted from a higher fuel bill, which has nearly doubled since 1978 and now accounts for about one-third of total imports. The improvements in the trade balance, which has been positive in every year since 1973 except 1977, contributed to a narrowing of the resource gap and a reduction in the current account deficit, to about 0.5% and 4% of GDP respectively in In 1980, the reduction in the trade surplus contributed to a widening of the resource gap and current account deficit to 4% and 5% of GDP respectively. However, since net capital inflows--primarily development grants from the Netherlands--exceeded the current account deficit during , foreign exchange reserves which had fallen to only 3 months of imports in 1977, increased by about $100 million to about $225 million representing well over four months of imports of goods and NFS at the 1980 level. Bauxite Sector Developments and Prospects viii. The bauxite sector in Suriname accounts for about one-fifth of GDP, four-fifths of merchandise exports and nearly one-third of Government revenues and employs about 6% of the labor force. The medium-and long-term outlook for the economy, particularly for its external viability and for public savings, are therefore critically dependent on the prospects for this Rqptcr- _

12 - iii - ix. Bauxite mining in Suriname began some 60 years ago. By the mid- 1950s, bauxite output had reached about 3.4 million tons, equivalent to about a quarter of total world production, and it continued to increase thereafter to 7.2 million tons in Processing of bauxite on a major scale began in the mid-1960s with the completion of a hydropower plant and the construction of an aluminum smelter and alumina plant by Suralco (a subsidiary of Alcoa) under a joint venture agreement with the Government. At the end of 1974, following similar action by Jamaica, the Government introduced a levy on bauxite production, which amounted to 6% of the realized price of aluminum. The introduction of the levy coincided with a drop in world demand for aluminum by about 25% during on account of the world recession which led to a cut-back in production. Bauxite output declined by one-third between , while the production of aluminum, alumina and calcined bauxite fell in the course of 1975 and 1976 by 30%, 15% and 40% respectively below the record levels reached during Bauxite sector exports nevertheless increased from about $150 million p.a. during to over $200 million p.a. during as the sharp decline in production was more than offset by a doubling of prices between 1973 and During bauxite output was maintained at around 5.0 million tons per annum--about 6% of total world production--,with an increasing share being processed into alumina and aluminum, the production of which gradually recovered to the levels reached in the early 1970s. Despite the stagnation of bauxite output during , the value of bauxite sector exports continued to increase by about 12.5% p.a. to nearly $400 million in 1980 as a result of average price increases of about 10% p.a. and an increase in the share of bauxite processed in Suriname to over two-thirds of total output. With the introduction of the levy in 1974, the sector's contribution to Government revenues increased from about Sf25 million p.a. to an average of Sf65 million p.a. during Despite the stagnation of bauxite output and a reduction in the levy rate in 1979, bauxite taxes continued to increase to about Sf 150 million in 1980 as aluminum prices continued to rise. x. Output of bauxite from the existing mines, which have remaining reserves of about million tons--equivalent to 30 years of production at the present rate of extraction--,is likely to remain at its present level through 1986, but would decline by about 10% thereafter due mainly to the exhaustion of some of the deposits currently exploited by Billiton (a subsidiary of Shell); output of aluminum and calcined bauxite from the existing facilities are likely to remain at about their present level while alumina production would increase by about 5% following the completion of Suralco's ongoing investments in the existing refinery by The main potential for an expansion of bauxite sector output lies in the exploitation and processing of the deposits in Western Suriname with estimated reserves of million tons. The main investment alternative being considered envisages the establishment of a bauxite mine with capacity of 2 million tons per year, and an expansion of the existing alumina and refractory bauxite processing facilities. Project infrastructure has already been partly completed by the Government with the construction of a railroad, and part of the aid Dutch program has been tentatively allocated to additional project related infrastructure. The implementation of existing investment plans would result in additional calcined bauxite and alumina exports valued at $140 million at 1980 prices from 1985 onwards, and the value of total sector exports would grow between 1980 and 1990 by about 3.0% p.a. in constant 1980 prices and nearly 11% in nominal terms to US$1,070 million, while the sector's contribution to Government revenues would increase to about Sf300 million.

13 - iv - xi. In addition to the investments now being considered, it might be possible to expand aluminum smelting capacity in connection with the planned Kabalebo hydropower project. The project would initially have an installed capacity of only 300 MW and an average production of about 1,250 Gwh to meet projected domestic demand (including the substitution of the bauxite companies' fuel based generating capacity) until about the year Its design would, however, allow an expansion by 200 MW at a relatively low cost. Additional average energy production from this expansion would amount to nearly 2,000 Gwh which would be sufficient for a smelter with a capacity of about 100,000 tons p.a., (or nearly double that of the present plant), whose construction would cost about US$500 million (constant 1980 prices), and which would yield gross export earnings of about US$260 million at projected 1990 prices. It may also be possible to use part of the energy during both stages of the project to substitute for fuel used for steam generation for alumina production. Indications are that the cost of power might be sufficiently low to induce investments in new smelting capacity. However, the use of hydropower for smelting and/or steam production raises difficult issues of long-term guaranteed power availability and (relative) pricing of power output for alternative uses, which might be-mutually exclusive. These issues need to be further explored before a judgement can be made on the justification and feasibility of these possibilities. Public Investment and Resource Management xii. Public investments are expected to rise rapidly during the coming years with the construction of the Kabalebo hydroelectric power project consisting of a dam and related infrastructure for the installation of a power plant with an initial capacity of 300 MW, at a total cost of current US$735 million, with the objective of substituting, from 1987 onwards, hydroelectricity for fuel-generated electricity. Investments in the bauxite sector to develop the Western Suriname bauxite deposits would be of a magnitude similar to that of the Kabalebo project. The cost of mining development, related infrastructure and of the expansion of processing facilities would amount to about (constant 1980) US$500 million, but is assumed to be financed largely by the foreign partners, with whom the Government has yet to reach agreement. Apart from the large new investments now being contemplated, a considerable number of development projects initiated since independence with Dutch financial assistance, and presently under execution, remain to be completed. Since it is unlikely that all of these projects have the same priority today as was originally assigned to them, it is recommended that ongoing public investments be carefully reviewed and reevaluated with a view to reducing, if feasible and appropriate, the scope of some projects, and/or extending the implementation period of a number of programs. However, despite such reductions, some US$350 million in current prices may be required to complete on-going public investments. It is further recommended that those projects whose implementation has not yet begun but which have been approved in principle for funding under the Dutch aid program also be reviewed and reevaluated, particularly since the scope for initiating new public sector projects is likely to be limited during , when both the Kabalebo project and the bauxite investments would be under implementation. The Government will, therefore, be faced with a difficult choice of investment priorities. In view of the need for domestic supply response during a period of rapid increases in investments and associated external capital flows it is recommended that other new public investments be almost exclusively limited to projects in productive sectors and to infrastructure projects with short gestation periods which directly support production.

14 xiii. Total financing requirements of the public investment program are estimated at about US$1.8 million of which US$1.1 billion may be available from grant funds remaining under the aid agreement with the Netherlands. On the assumptions that, as presently envisaged in the financing plan, US$450 million in external loans would be contracted for the Kabalebo project and that about US$100 million in concessional funds from sources other than the Netherlands may be available for other projects, "required public savings" to cover the remaining financing gap would amount to only about US$160 million, or 1.3% of GDP during Although the required public savings effort would be very modest, it would nevertheless imply improved domestic resource mobilization considering that there were no net public savings during and that, despite an expansion of bauxite output, bauxite taxes are likely to decline from about 8% of GDP in 1980 to about 5.5%-6.0% by Beyond 1987 the need for improved public savings would become more pronounced as Dutch aid under any new program is likely to remain well below the ievel of 8.5% of CDP during and as bauxite taxes are projected to decline further to about 5.C%-5.5% of GDP during xiv. With a strengthening of tax administration and improvements in the responsiveness of the tax system to changes and prices and incomes, for which recommendations have been made in a recent IMF tax study, it should be feasible to gradually increase non-bauxite taxes from only 15% of GDP in 1980 to at least about 18% by 1987 and 20% by 1990, which would more than compensate for the projected decline in the bauxite tax ratio. In addition to a domestic taxation effort, current expenditure control would be required if public savings are to be increased. On the assumption that the ratio of current expenditures can be maintained at its present level of 24% of GDP, Government savings would amount to Sf 540 million, (2.3% of GDP) during , which, while still modest, would be about US$140 million in excess of the requirements of the investment program, under the present financing assumptions. The Government should, therefore, consider reducing the amount of external borrowing for the Kabalebo project or alternatively to reserve such savings for new investments beyond 1987 when concessional inflows will be sharply reduced. xv. Present investment plans would place heavy demands on the labor market *and exacerbate the existing problems of skill shortages and wage pressures unless measures are taken to alleviate them. The envisaged expansion of the public investment program would require a considerable strengthening of the public sector's capacity to prepare and implement projects. The program to foster, with generous incentives, return migration of qualified Surinamese presently living in the Netherlands should, therefore, be continued and, if possible, expanded. It may moreover, and'in spite of equity considerations, be necessary to raise salaries for middle and higher level Government staff in order that they becoite more competitive with the private sector. Despite successful efforts to attract qualified Surinamese, the Government would also need to rely increasingly on external technical assistance and, possibly, on turnkey approaches in the case of some projects in order to carry out the envisaged investment program. A major effort will also be required to increase the supply of vocational skills, especially those for construction occupations, both in the longer term, through a change in the emphasis of the educational system, and particularly in the short term, through vocational training programs, which should be carried out in close coordination with contractors. To the extent that skills would be in short supply during the periods of peak demand ( ) despite these training

15 -viefforts, which is likely, and in order to meet possible shortages of unskilled labor, Suriname may need to rely on temporary inmigration of labor from countries in the region. xvi. The sharp increase in overall demand resulting from the rise in the level of investments and the associated foreign inflows may exert considerable upwards pressure on the price level. A review of experience during the late 50s and early 60s when the level and composition of investments were similar to those envisaged for the period , shows that a remarkable degree of price stability was achieved by a sharp increase in imports and a significant domestic supply response. To achieve similar results during , a set of fiscal, monetary and credit policies needs to be formulated that aims at stimulating domestic savings and production. In add-'ion to efforts to increase public savings beyond projected levels, private savings could be encouraged by requiring employees to make significant contributions to the existing and planned social security schemes, and, most importantly, by an upward adjustment of interest rates which presently are negative in real terms. The recommended orientation of new public investment projects towards the productive sector could in part take the form of an expansion of the equity base of the development finance institutions which would enable them to attract additional resources to expand lending. Although there would be a need to maintain a strict overall monetary policy, it may be possible to induce a shift in commercial bank lending towards the productive sectors through appropriate discount, reserves and credit guarantee policies and the strengthening of institutional support for medium and small scale enterprises. The required private investment response would, however, only be forthcoming in an environment of political stability and with successful efforts to control excessive rises in wage cost through a combination of policies that would encourage an increase in the supply of labor in the shortterm, particularly through inmigration, and limit labour union activity. xvii. Medium term export prospects are determined largely by developments in the bauxite sector which accounts for four fifths of total exports. On the assumption that production and processing of an additional 2.0 million tons will come on stream in 1985, bauxite sector exports would grow at 4.5% p.a. in real terms and 13% p.a. in nominal terms during , but stagnate thereafter, unless aluminum production is expanded in connection with a future stage of the Kabalebo project. With a projected real growth rate of other exports of about 6% p.a. during , total exports would grow at about 5% p.a. and 13% p.a., in real and nominal terms respectively, from about US$0.5 billion to US$1.2 billion by Thereafter the real growth rate of total exports would, in spite of an increase in the rate of growth of nonbauxite exports to about 8% p.a., sharply *drop as a result of the projected stagnation of bauxite sector exports, but the value of exports would increase to nearly US$1.6 billion by xviii. Imports are projected to rise rapidly from about US$0.5 billion in 1980 to nearly US$1.2 billion by 1984 (with a short term import elasticity of about 3.8), primarily as a result of the increase in the rate and cap'ital intensity of investments. However, with the completion of hydropower and bauxite sector investments and the substitution of most fuel imports for diesel generation by hydropower by 1987, import levels would decline in real terms between 1984 and Thereafter imports would initially grow at a relatively low rate on the assumptions of a modest decline in the rate and capital intensity of investments during and a long term income elasticity of non-fuel imports of just above 1.0. In nonimal terms imports would grow to about US$1.5 billion by 1990.

16 -viixix. The resource gap and current account deficit are projected to widen significantly during , reaching as high as 27% of GDP and 30% of GNP respectively in 1984 before new bauxite sector capacity comes on stream. However, projected levels of capital and grant inflows, would be adequate to finance the entire current account deficit and maintain foreign exchange reserves at prudent levels throughout this period. By about 1987 the resource gap and current account deficit would have narrowed significantly to about 1% of GDP and 5.5% of the GNP respectively as a result of a sharp decline in the level of imports, but thereafter, the projected export and import trends for would lead to a slow increase in the resource gap and a widening the current account deficit. Beyond 1990, a stagnation in bauxite sector export volumes would, even if the rate of growth of other exports could be maintained at 8%, cause a further widening of the resource gap to nearly 4% of GDP by 1995, which points to the need to (i) formulate and pursue consistently a strategy for rapid growth of non-bauxite exports and efficient import substitution; (ii) investigate the possibilities of increasing net bauxite sector exports through the utilization of Kabelebo power in addition to the substitution presently envisaged and (iii) limit external borrowing during the 80s. xx. The development of non-bauxite exports and import substitution is likely to be extremely difficult as the high wage costs levels prevailing in the economy may well hold back investments in those activities. An exchange rate adjustment aimed at reducing real wage levels is unlikely to have the desired effect in the particular circumstances of an open economy with a large mineral sector, with strong labor unions and, in the medium-term, a tight labor market. Other fiscal, monetary and wage policy measures would, therefore, need to be devised as part of strategy to develop the non-bauxite economy. Alternative projections for 1995 show that the resource gap could be reduced or eliminated if the rate of growth of non-bauxite exports could be raised to 10% p.a. beyond 1990 and hydropower substituted for part of the fuel used for steam generation in alumina production, or if power from the second stage of the Kabalebo project, the implementation of which is not now envisaged in the public investment program for , were used to expand aluminum smelting capacity by about 100,000 tons. xxi. Suriname's external debt situation is extremely favorable as the Netherlands forgave all outstanding debts, amounting to about US$250 million at the time of independence in 1975, and as public investment during was largely financed by Dutch grant aid. On the assumption that external funds would be obtained at the levels presently envisaged in the financing plan for the public investment program during , outstanding public debt would rise from less than US$30 million at present to about US$560 million, or 22% of GDP, by the end of 1987 and public debt service payments to about US$50 million or about 4% of gross export earnings in The net public capital inflows that would be required between 1987 and 1990 to finance an increasing resource gap would add about US$450 million to public debt while the debt service ratio would rise further to about 9% by Even though private debt service and profit transfers would also increase beyond following the completion of bauxite sector investments, the projected level of public debt service payments would pose no undue burden throughout the 80ies and early 90ies, particularly since part of the Kabalebo power sales revenues would be in foreign exchange. Thereafter borrowing requirements would rapidly rise and debt service might rapidly reach unmanageable levels unless efforts to prevent a divergence of long term export and import growth

17 - viii - rates are successful and commercial borrowing for the public investment program during is limited. It is, therefore, recommended that, in order to maintain a debt structure that will allow for adequate borrowing capacity for the late 80s and 90s when Dutch aid levels are likely to be lower, no commercial external debts be contracted for public investment projects other than the Kabalebo project during and that commercial borrowing for the Kabalebo project be reduced by at least the amount of public savings which, with a modest effort, could be generated in excess of the minimum requirements. xxii. The prospect of an increasing resource gap and a sharp rise in debt service levels beyond 1987 which, despite an expansion of bauxite output and the substitution of hydropower for fuel-based electricity, might develop, underscores the need for raising the long term overall export growth rate to the level implied in the alternative projections and for taking early steps to increase rapidly domestic savings, beyond projected levels, to prevent undue reliance on external funds, which, on average, are likely to be on harder terms than at present. Failure to do so would create creditworthiness problems by the mid-9oies at the latest and depress the long-run growth rate of the economy due to a limited capacity to purchase necessary imports.

18 1. RECENT DEVELOPMENTS Population, Employment, and Wages 1. The results of the mid-1980 census which have recently become available confirmed that massive emigration to the Netherlands had resulted in a decline of the country's population from 387,500 at the end of 1973 to 352,000 in mid-1980, which is about equal to the size of the population of 12 years ago. The actual 1980 population was about 20% below the level which would have been reached on account of natural growth (2.4% p.a.) during the inter-censal period and some 25-30% below the population forecasts in the country's development plan. 2. Emigration to the Netherlands first became significant around the mid-1960s as a consequence of a sharp drop in employment opportunities following the completion of large scale investrent projects in the bauxite sector. Net emigration in the inter-censal period reached about 18,000 persons, or about a quarter of the natural population increase, thus reducing population growth to about 2.0% p.a. In the inter-censal period 1972 to mid-1980 net emigration, primarily to the Netherlands, amounted to about 95,000 persons, of which more than 50,000 departed in 1974 and 1975 around the time of independence. After dropping significantly during , emigration again reached large proportions in 1979 and 1980 (with a net outflow of about 25,000-30,000 persons) in respo e to economic stagnation and an increasingly uncertain political situation.- It is estimated that at present around 175,000 persons of Surinamese descent are living in the Netherlands, i.e., about half the number living in Suriname. 3. Obscured by the striking dimensions of the emigration has been a much less obvious but very significant change in birth rates. A household survey in 1978 turned up the surprising result that, while children in the age group 15-19, the largest five-year cohort, constituted 16% of the sample surveyed, those in the ages 10-14, 5-9, and 24/ represented progressively smaller shares of 15%, 12% and 11% respectively.- The accuracy of this finding appears to be confirmed by the following data on births which show a dramatic decline in birth rates during the period : Table 1: Number of Births Period Total Births Births per 1, , , , , , Source: Bureau of Statistics 1/ However, following the expiration, in November 1980, of the special treaty, which permitted virtually unrestricted access to the Netherlands, and the subsequent introduction of visa requirements, the level of emigration dropped sharply. 2/ If birth rates were constant, younger age-groups would represent progressively larger shares.

19 -2- Most of this decline is probably due to a greater acceptance of birth control methods but it is likely that emigration has also contributed since t outflow appears to have been relatively heavier in the fertile age groups.- One of the consequences of the declining birth rate has been a sharp drop in the share of population aged 0-14 from 48.Y,, of total population in 1972 to 39.5% in 1980 and in the dependency ratio- from 1.1 to 0.8 over the same period. 4. Prior to 1975, employment growth had not kept pace with the increase in labor force of about 2.5% p.a. during and the rate of unemployment increased to about 15% in However as a result of the large scale emigration, in the mid-1970s, the size of the labor force declined ail (registered) unemployment dropped sharply to about 2-4% during Besides emigration, rapid growth in Government employment, from about 25,000 persons in 1972 to about 40,000 in 1978 (representing nearly 40% of total employment) also contributed to a tightening of the labor market. Wage developments reflected both a tightening of the labor market and increased labor union activity. Real wages rose substantially in all sectors, except Government (Table 2); between 1973 and 1977 real gross wage cost per employee in the Table 2: Wage Developments, Index of wage Gross wage cost in 1977 cost per employee (1973=100) in 1977 Nominal Real (US$) Government ,250 Other Sectors ,700 (Agriculture) (244) (159) (1,120) (Mining) (171) (112) (9,510) (Manufacturing) (272) (178) (3,980) (Construction) (172) (112) (3,030) All Sectors ,530 Source: Bureau of Statistics. 1/ A 1980 household survey showed that year old females represented only 18% of the year age group in the sample compared to 26% of the year age group in the 1964 census. Simarily the number of males was only 5% of the year age group in the sample compared to 12% in the 1964 census. 2/ Ratio of population under 15 and over 65 to those of age 15 thru 64. 3/ Recent Government data indicate that "unregistered" unemployment among Surinamese may be significantly higher, particularly among young workers with general education in the Paramaribo area. These same data indicate however that a significant number of jobs, particularly in "lower quality" types of employment,are occupied by foreign labor (see also Para. 5) and that the total number of labor places in the economy may exceed the Surinamese labor force.

20 - 3- private sector increased by an average of 7.5% p.a.,-/ while real Government wages declined by 4.0% p.a. Preliminary indications are that real wages in the private sector have, at least, not fallen subsequently. In nominal terms, gross wage cost 2? se from an average of US$2,000 per employee in 1973 to over $3,500 in 1977;- in the private sector alone, they are estimated to have nearly tripled during to over US$5,000 per employee. 5. In a number of sectors, particularly plantation agriculture, construction, and domestic services, the unavailability of Surinamese labor, especially for employment in remote regions and in activities with an inferior social status, led to the hiring of foreign workers, particularly from Guyana, whose present number is estimated to be at least 15,000 or about 15% of the total labor force. While shortages of unskilled labor have been largely overcome by the hiring of foreign workers, the country is presently facing a severe shortage of technical and managerial skills since emigration has been particularly significant among the educated and skilled. The shortage is most pressing in the public sector where pay scales at the upper and middle level are well below those of the private sector. Production and Investment 6. Available data indicate that real GDP (at factor cost), after having grown by nearly 5% p.a. during , is likely to have stagnated during with a modest increase of about 1-2% in 1979 and a decline of about 2-3% in Per capita real GDP nevertheless increased by an average 2% p.a., since there was a decrease in population during the same period. The bauxite sector, which had partly recovered during from a sharp decline in 1975 following the introduction of a levy on bauxite production (see para. 15), stagnated during 1979 and Bauxite output declined from 5.2 million tons in 1978 to 4.8 million tons in 1979 and 4.9 million tons in 1980, but a larger share of production was processed domestically; alumina output rose from 1.29 million tons in 1978 to 1.31 million tons in 1979 and 1.38 million tons in 1980, and aluminum production from 51,900 tons in 1978 to 53,700 tons in 1979 and 53,000 tons in Output of rice, the main agricultural crop, increased by 5.3% to 236,000 tons (dry paddy) in 1979, on account of further increases in planted area, cropping intensity and yields, which now have reached 4.0 tons per cropped ha (equivalent to an annual yield of 7.2 tons per ha at the present cropping intensity of 1.8). Less favorable weather conditions in 1980 are believed to have caused a stagnation in output. Production of shrimp, the third major export commodity, declined during A number of other sectors, particularly manufacturing, trade and construction faced sluggish demand on account of the increased emigration and a decline in investment. Government development expenditures dropped sharply from Sf 165 million (13% of GDP) in 1977 to about Sf 110 million (6% of GDP) in 1979 and 1980, while domestic private investment was held back primarily by the uncertain political situation. 1/ During the same period real value added per worker in the private sector and Government remained unchanged, while gross national income (GNY) increased by about 6% p.a. in real terms. 2/ As shown in Table 2, gross wage cost per employee vary widely among sectors, from US$1,120 in 1977 in agriculture, i.e., one-third the average for all sectors, to US$9,500, three times the average, in the bauxite sector. However, even excluding the bauxite sector, which accounts for only 7% of employment, average gross wage cost amounted to over $3,000 in 1977.

21 -4- Public Finance 7. Following years of negative public savings and a record current account deficit of nearly 3% of GDP in 1977, Government public finances improved substantially in 1978 due to a shaijp, rise in bauxite levy receipts which increased by 63% to Sf 104 million - (about 25% of total current revenue) as well as improved collection of income taxes, which increased by 25%, and improved current expenditure control (Table 3). However, in 1979 bauxite levy receipts fell following renegotiations of the levy rate with the bauxite companies (para. 15) and the current account again turned into a deficit, albeit a modest one of less than 1% of GDP. Table 3: Summary Budget Operations, (Sf million) (est) Current Revenue Bauxite levy (net) -a Other Current Expenditures Wages and Salaries Other Current Account Balance Development expenditures Other capital expenditures less revenues Overall deficit Foreign financing (grants and loans) - net Domestic financing - net a/ Excludes bauxite companies' income tax payments. Source: Ministry of Finance. In 1980 the improvement in public finances continued despite modest growth in bauxite levy receipts. Other current revenues increased by 16% due mainly to a 19% increase in income tax receipts which now account for one-third of total current revenue, and current expenditure growth was limited to 5% in nominal 1/ The increase in the net levy reflected both a rise in bauxite output and an increase in aluminum prices between 1976 and 1978.

22 terms reflecting largely a 7% reduction in the number of civil servants between 1978 and 1980 from 40,000 to 37,500. As a result, the current account turned into a modest surplus of Sf 32.0 million--equivalent to nearly 30% of development expenditures, or around 1.5% of GDP. Since development expenditures during were fully financed by foreign inflows (mainly by grants from the Netherlands which represented 90% of net foreign inflows), improved fiscal performance enabled the Government to reduce net claims by the monetary system from Sf 70 million, or 20% of net domestic credit at the end of 1977 to only Sf 15 million, or 3% of net domestic credit at the end of In the years immediately following independence the level of development expenditures increased rapidly to Sf 165 million in However, in subsequent years development expenditures gradually decreased to only Sf 112 million in 1980, representing a real decline by about 50% since This reflected mainly the completion of the large Western Suriname railroad project by at an estimated cost of about Sf 200 million, representing nearly one-third of total development expenditures during , inadequate preparation of new projects due to a lack of qualified staff in the public sector (see para 5 above), and, in 1979 and 1980, delays in implementation of ongoing projects and start up of new projects due to staff constraints and to the general political uncertainty in the country. Available data on the sectoral allocation of public investment indicate that physical infrastructure, including the Western Suriname railroad, accounted for more than half of total public investment during ; investment in social infrastructure represented about a quarter of public investment (with half of the total allocated to housing), while the directly productive sectors accounted for one-fifth of the total (Table 4). Table 4: Sectoral Allocation of Public Investment, / (Sf million) 1980 % of Est Total Productive Sectors Physical Infrastructure (of which W. Suriname railroad) (168.4) (16.1) (15.6) (200.1) (32.2) Social Infrastructure Other Total a/ Mission estimates based on 1980 Annual Plan and Planning Bureau data. Credit and Prices 9. Following a period of monetary expansion, the rate of growth of credit declined sharply during to only 7% p.a. in nominal terms, which represents a real decline of about 15% over the two years. Credit to

23 the public sector which had risen sharply in 1977 to finance a record budget deficit, declined subsequently at an average rate of about 35% p.a. during as a result of improved fiscal performance (para. 7). At the same time the rate of growth of private sector credit declined with stagnating economic activity from 25% p.a. during to 13% p.a. during Total money supply grew at only 9% p.a. in nominal terms during and time and savings deposits by only about 10% p.a., representing a decline by about 4-5% p.a. in real terms, which was probably a reflection of t 1 uncertain situation and the sharply negative real interest rates.- Inflation, as measured by the CPI, reached about 15% both in 1979 and 1980, which, given the degree of the openness of the economy (imports of goods and NFS amount to more than 50% of GDP), probably mainly reflected levels of international inflation in those years. Table 5: Summary Accounts Monetary System, (Sf million) (est.) Net Foreign Assets Net Domestic Assets Net credit public sector Net credit private sector Net other items Total Assets/Liabilities Liabilities to Private Sector Money Quasi-money & other Other Liabilities (net) Source: Central Bank Balance of Payments 10. Following a record current account deficit of US$81 million, or 11% of GDP in 1977, the balance of payments strengthened considerably in 1978 and Higher prices for virtually all exported commodities resulted in increases in the value of exports of 15% and 13% in 1978 and 1979 respectively to $445 million, while the value of imports increased by only 7% and 8% in 1978 and 1979 to $410 million. The improvements in the trade balance, which has been positive in every year since 1973 except 1977, contributed to a narrowing of the resource gap from 7% in 1977 to 2% in 1978 and to less than 0.5% of GDP in The current account deficit, which had been reduced to $46 million, or 5% of GDP in 1978, declined further to $37 million, or less than 4% of GDP in 1979 despite significantly higher bauxite sector profit 1/ The average interest paid by commercial banks in 1980 on time and savings deposits was about 5%. Average lending rates were only 8.5%.

24 - 7 - transfers. Foreign exchange reserves which had fallen to only 3 months of imports in 1977, increased by nearly $70 million during 1978 and 1979 to about $190 million representing well over four months of imports of goods and NFS at the 1979 level. 11. Available data for 1980 indicate the trade balance remained positive but worsened on account of stagnating export volumes and a higher oil import bill. While the value of merchandise exports rose, on account of higher prices, by 16% to $515 million, the value of merchandise imports increased by 22% to $500 million; about two-thirds of the absolute increase in imports was due to a higher fuel bill, which has nearly doubled between 1978 and 1980 and now accounts for about one-third of total merchandise imports. The reduction in the trade surplus and a sharp increase in net non-factor service payments (for a significant part on account of transportation services, including, possibly, passenger fares for the emigrants), contributed to a widening of the resource gap and current account deficit to 4% and 5% of GDP respectively. However, net capital inflows--primarily development grants from the Netherlands and private flows associated with bauxite investments to upgrade processing facilities--were sufficient to both *cover the deficit and permit a further increase in net foreign exchange reserves to $225 million which were maintained at four months of imports of goods and NFS at the 1980 level. Table 6: Summary Balance of Payments, (US$ million) (est.) Exports of Goods & NFS Imports of Goods & NFS Resource Balance (Trade Balance) (-13.9) (11.6) (33.2) (13.4) (Net NFS) (-35.0) (-30.6) (-35.9) (-57.1) Net Factor Services & Transfers Current Account Balance Capital Account Balance (Private) (-11.8) (-4.6) (-17.1) (18.5) (Public) (75.1) (76.1) (80.3) (67.5) Other (net)al Change in reserves (-increase) a/ SDR allocation, errors and omissions, unclassified. Source: Central Bank.

25 - 8 - II. BAUXITE SECTOR DEVELOPMENTS AND PROSPECTS Introduction 12. The bauxite sector in Suriname accounts for about one-fifth of GDP, four-fifths of merchandise exports and nearly one-third of Government revenues and employs about 6% of the labor force. The medium-and long-term outlook for the economy, particularly for its external viability, and for public savings, are therefore critically dependent on the prospects for this sector. Background and Past Developments 13. The bauxite sector is dominated by Suralco, a wholly owned subsidiary of the Aluminum Company of America (Alcoa), which accounts for twothirds of total bauxite production in Suriname and for the total output of calcined bauxite, alumina and aluminum. Billiton, a subsidiary of Shell of the Netherlands, accounts for the remainder of bauxite output and receives about 40% of Suralco's alumina production under a tolling agreement which provided for Billiton's rental of alumina capacity in exchange for its participation in the financing of the alumina refinery. The operations in Suriname are important for both companies. Suralco accounts for 15% of Alcoa's worldwide bauxite production and for all of its calcined abrasive and refractory bauxite production. In the case of the Billiton Group, Suriname presently is the main source of bauxite. The companies operate three mining sites in the eastern part of the country with a combined bauxite output of about 5 million tons p.a., of which nearly two-thirds is further processed in Suralco's facilities. The Grasshopper Aluminum Company (Grassalco), established by the Government in 1971, is not presently involved in production but has explored for bauxite deposits in Western Suriname and has commissioned feasibility studies for their exploration. 14. Bauxite mining in Suriname began some 60 years ago when Suralco opened its first mine at Moengo. Output was vastly expanded in 1941 with the opening of a second Suralco mine at Paranam and the exploitation of the Onverdacht deposits by Billiton. By the mid-1950s, production had reached about 3.4 million tons, equivalent to about a quarter of total world production, and it continued to increase throughout the 1960s and early 1970s, reaching a peak of 7.2 million tons in Processing of bauxite on a major scale began in the mid-1960s with the completion of a hydropower plant at Afobaka and the construction of an aluminum smelter and alumina plant by Suralco under a joiqj venture agreement with the Government (the Brokopondo Agreement of 1958).- By the early 1970s output of processed products had reached about 57,000 tons of aluminum, 1.3 million tons of alumina and 300,000 tons of calcined bauxite. 15. At the end of 1974, following similar action by Jamaica, the Government introduced a levy on 2 Pauxite production, which amounted to 6% of the realized price of aluminum.- However, since the companies were allowed 1/ Earlier, in 1953 and 1962 respectively, Suralco had begun production of calcined abrasive bauxite and calcined refractory bauxite. 2/ US producer listed price % ingot, New York. Given an average conversion factor of 4.1 tons, the levy per ton of bauxite thus amounted to 1.46% of the aluminum price.

26 - 9 - to credit income taxes paid against the gross levy and because of discounts for deposits with higher production costs, the actual net addition to company costs, or the "net" levy, amounted to 60-80% of the gross levy, or about 4% of the rea,lized aluminum price and about 35% of the international bauxite price.- Concerned over the large drop in bauxite production which had occurred since the introduction of the levy (Table 7) and in order to prevent further declines in production by maintaining the companies' interest in continuing their operations in Suriname, the Government agreed to a reduction of the levy in As a consequence, the net levy had by 1980 declined to about % of the international aluminum price (equivalent to about 30% of the international bauxite, price), but still represented about 40% of total bauxite production cost The introduction of the levy coincided with a drop in world demand for aluminum of about 25% during on account of the world recession. This led the al uyinum companies to cut back production, particularly in a number of I.B.A.- countries which had introduced a bauxite levy. In the case of Suriname, bauxite output declined by one-third between (Table 7), while the production of aluminum, alumina' and calcined bauxite fell in the course of 1975 and 1976 by 30%, 15% and 40% respectively below the record levels reached during Bauxite output was subsequently maintained at around 5.0 million tons per annum during about 6% of total world production--,with an increasing share being processed into alumina and aluminum, the production of which gradually recovered to the levels reached in the early 1970s. Table 7: Output of Bauxite Sector, (est) Bauxite (illion tons) Exported Processed Index of output (1974=100) Bauxite Calcined bauxite Alumina Aluminum a/ Excluding calcined bauxite exports. 17. Prior to the introduction of the levy, the sector's contribution to Government revenues, primarily in the form of income taxes, amounted to about Sf 25 million p.a., or 15% of Government revenues. In 1975 net levy payments 1/ Delivered price of Jamaican bauxite to US coast. 2/ Including taxation i.e. the net levy itself added about two-thirds to other production cost (including income taxes). 3/ International Bauxite Association, of which both Jamaica and Suriname are members.

27 coverini,both 1975 and most of the 1974 production, amounted to Sf 126 million- or about 40% of Government current revenues. During net levy receipts remained at an annual level of about Sf. 65 million as aluminui price increases offset declines in bauxite output. With further inprovements in aluminum prices, receipts reached an annual level of nearly Sf 100 million during , representing, on average, nearly a quarter of current revenues; over the same period inypme tax payments by the bauxite companies averaged about Sf 40 million p.a Despite the sharp decline in production and, consequently, export volumes, during , the gross value of bauxite sector exports continued to increase from about $150 million p.a. in to over $200 million p.a. during , as average price increases of 50% in 1974 and 25% in 1975, representing a doubling in two years, more than compensated for a 25% decline in the volume of exports. Although bauxite output stagnated during , the value of bauxite sector exports continued to increase by about 12.5X p.a. to nearly $400 million at present as a result of average price increases of about 10% p.a. over the same period and an increase in the share of bauxi2, processed in Suriname to over two-thirds of total output in Throughout this period the sector's share in total merchandise exports amounted to about 80%. Exports net of imports of fuel and other mining al processing inputs, amount on average to about 65% of gross export valuewhile the sector's net foreign exchange earnings, equivalent to "net" exports less profit remittances and depreciation (about 15% of gross export value) is estimated at about 50% of gross exports. Table 8: Volume, Price and Value Index of Bauxite Sector Exports ( ) 1974=100 Bauxite-/ Alumina Aluminum Total Year Vol. Pri. Val. Vol. Pri. Val. Vol. Pri. Val. Vol. Pri. Val b/ = a/ Includes calcined bauxite. b/ Estimate. 1/ The levy had only been introduced in November 1974 and was made retroactive to January 1. 2/ Excluding taxes on salaries and wages paid by the companies. 3/ About 10% of bauxite processed in Suriname is used for calcined bauxite production and 90% for alumina production. Nearly 10% of the alumiha output is further processed into aluminum. 4/ The estimated import content of 35% of gross export value reflects first round effects only. In the case of bauxite,"net" exports amount to 80% of the gross export value; for calcined bauxite the same ratio is estimated at 50-65%, for alumina at about 55% and for aluminum, which is based on hydropower, about 80%.

28 Sector Prospects (a) Output 19. Suriname's bauxite depo 1 ts were as recent as 1976 estimated at between 800 and 1,000 million tons,- or about four to five tinr the quantity mined during the past 60 years. The high quality deposits- currently in exploitation in the coastal plain of Eastern Suriname have remaining reserves of about million tons which would last at least 30 years at the present rate of extraction of 5.0 million tons p.a. The unexploited smaller deposits of the Nassau Mountains area in Eastern Suriname, with estimated reserves of 14 million tons, for- part of Suralco's existing concessions. The main new deposits whose exploitation is presently being considered are those at the Bakhuis Mountains in Western Surinax, with estimated reserves of million tons of lower quality bauxite Output fromthe existingmines ineasternsurinamewillnotrecover to the levels reached in the early 1970s as a rate of extraction higher than the current one is, in the companies' view, not consistent with an optimal utilization of existing investments in plant capacity. The companies' strategy would also be consistent with the objectives of maximizing sector value added and ensuring long-term exports and Government revenue growth. Mining of the existing deposits is likely to become somewhat less profitable as production cost may increase at a fas 4r rate than bauxite prices due to increasing thickness of the overburden.- Output from the existing mines is nevertheless likely to remain at its present level through 1986, but would decline by about 10% thereafter due mainly to the exhaustion of some of the deposits currently exploited by Billiton. Eastern Suriname deposits would be adequate to maintain output at the projected level until at least about Output of aluminum and calcined bauxite from the existing facilities are likely to remain at about their present level through 1990 while alumina production would increase by about 5% following the completion of Suralco's ongoing investments in the existing refinery by The potential for an expansion of bauxite sector output lies in the exploitation of the Bakhuis deposits in Western Suriname. In order to seek a viable solution to the development of these deposits, the Government and Suralco formed a joint commission in 1979 to undertake prefeasibility studies of various alternatives for the development of the deposits and the processing of the raw material. After Billiton had also joined the co ission, a report was issued in 1980 which concluded that two main alternatives were considered feasible: (a) the establishment of a small bauxite mine in Western Suriname whose output of 430,000 metric tons per year would be substituted for Billiton's 320,000 metric tons of high quality bauxite produced in Eastern Suriname and processed in Suralco's alumina plant, and the establishment of a new calcined refractory bauxite plant to process 320,000 tons of Billit 9y.bauxite, which would result in a doubling of total calcined bauxite output;- 1/ By the Bureau of Mines of the US, Department of Interior. 2/ Over 50% available alumina, 2.5% silica and 1.5% iron. 3/ 45% available alumina, 3% silica and 15-20% iron. 4/ However, part of the production cost increases would be offset by a decrease in the incidence of the bauxite levy which would occur over time if present levy formulas are maintained. (Under present formulas, increases in aluminum prices are not fully reflected in the calculation of the levy.) 5/ Including calcined refractory and abrasive bauxite.

29 and (b) the establishment of a larger bauxite mine (2 million tons per year) and a calcined refractory bauxite plant as well as the expansion of Suralco's existing alumina plant by about 50% to process about 1.5 million tons of Western Suriname bauxite. The construction of a new alumina plant in Western Suriname as envisaged in the Government's Development Plan was discarded under present conditions due to the higher costs of building a new plant vis a vis expanding the existing facilities. 22. The commission suggested that the development of the deposits in Western Suriname and the processing facilities be undertaken jointly by the Government and one or more of the foreign companies presently operating in Suriname. The Government has already invested about $125 million in railroad to transport the bauxite from the mining site to the Corantijn river,- and has, in consultation with the Netherlands Government, allocated Dfl 100 million (US$50 million) of the aid program to additional project related infrastructure. The cost of such additional infrastructure investments and of the mining facilities themselves (assuming a 2.0 million ton capacity) are estimated at about US$ million (constant 1980 US$). Table 9: Bauxite Output, (million tons) a/ Output-/ Case I Case II Case III Exportedk/ Processed Case I Case II Case III a/ Case I assumes no new investments in Western Suriname; Cases II and III assume investments under respectively the first and second alternative discussed in para 21 above. New operations are projected to start in b/ Since the additional bauxite output would be processed, exports of bauxite are the same for each case. 1/ The Government proceeded to construct the railroad even though the tentative agreement for a joint venture with Reynolds Aluminum for the exploitation of the Bakhuis deposits had been abandoned by the foreign partner.

30 (b) Exports 23. The decline in out:put from existing mines beyond will, as noted in para 20 above, not affect the output of processed products. While the volume of bauxite exports would decline to about half their present level, exports of products would actually increase by 6% between Consequently, total bauxite sector exports from the Eastern Suriname operations would decline by only 0.2% p.a. in constant 1980 prices between 1980 and 1990, and grow in nominal terms by 7.5% p.a. from about $400 million in 1980 to nearly $800 million by The implementation of the investments in a small mine in Western Suriname and a refractory plant, as envisaged under the first alternative (Case II) (para 21 above), would result in additional calcined bauxite exports (valued at $25 million at 1980 prices) in which case total sector exports would increase by about 0.4% p.a. in constant 1980 prices between 1980 and 1990 and grow in nominal terms by 8.2% p.a. to nearly $850 million. 24. A significant increase in sector output and exports during the present decade can only be achieved if a larger mine is established in Western Suriname as envisaged under the second alternative (Case III). In that case the production and processing of an additional 2.0 million tons of bauxite would result in calcined bauxite and alumina exports valued at $140 million at 1980 prices from 1985 onwards, and the value of total sector exports in constant 1980 prices would grow by about one-third between 1980 and 1990, or 3% p.a. In nominal terms exports would grow at an average annual rate of nearly 11% to US$1,070 million by Table 10: Value of Bauxite Sector Exports, (US$ million) Growth rate (% p.a.) : Curr Curr a Curr Prices Prices US$ Prices Prices US$ Prices Prices US$ Case I Case II Case III a/ Current value of exports deflated by World Bank index of international dollar inflation. 25. Although an expansion of aluminum smelting capacity is not envisaged in the joint commission report and also not reflected in the foregoing projections, such possibility might be considered in connection with the planned Kabalebo hydropower project (see para. 32 and Annex). The project would initially have an installed capacity of only 300 MW (at an estimated

31 cost 1 gf constant 1980 US$460 million) and an average production of about 1,250 Gwh - to meet projected domestic demand (including the substitution of the bauxite companies' fuel based generating capacity) until about the year Its design would allow an expansion by 200 MW at any time at an additional cost of about (constant 1980) US$150 million. Additional averagl/energy production from this expansion would amount to nearly 2,000 Gwh - which would, if it were to be used exclusively for smelting, be sufficient for a smelter with a capacity of about 100,000 tons p.a., (or nearly double that of the present plant), whose construction would cost about US$500 million (constant 1980 prices). Although such smelter capacity is presently considered too small to justify the construction of a new plant in a new location, it is likely to be 2/sufficient for an expansion of existing facilities in Eastern Suriname.- It would moreover appear that the shortterm marginal cost of power from the second stage might be sufficientlm,low (about 1.5 US cents per Kwh at 1980 prices, excluding operating cost) - to induce investments in new smelting capacity. However, the longer term marginal cost of power supply, based on a possible third stage of the Kabalebo scheme (with an additional capacity and additional average production of 300 MW and more than 2,000 Gwh respectively), which might be a more appropriate energy price to charge to a smelter 3,, would be about 3.0 cents per Kwh at 1980 prices (excluding operating cost) - which possibly would be in excess of the energy price at which a smelter becomes economically feasible. The difficult pricing issues would obviously need to be further explored before a judgement can be made on the justification for new aluminum smelting capacity. An additional 100,000 tons of aluminum exports would generate additional gross export earnings (net of the value of the alumina inputs) of about $US100 million at 1980 prices and US$260 million at projected 1990 prices, which would increase total gross bauxite export earnings by respectively about onethird and one quarter beyond the levels projected for 1990 in Case I and III respectively (Table 10). 26. Besides the substitution of hydropower for the bauxite companies' fuel based generating capacity as presently envisaged in connection with the Kabalebo Project, it may also be possible to use part of the firm or secondary energy during both stages of the project to substitute for fuel used for steam production in the existing alumina plant and/or to produce steam for the possible additional alumina capacity. Such use of Kabalebo power, which would increase the sector's net contribution to export earnings by reducing imported fuel inputs, would, however, require significant conversion investments in the existing plant and would, as in the case of a possible smelter, raise difficult issues of long-term guaranteed power availability and (relative) pricing of power output which need to be further explored before a judgement can be made on its justification and feasibility. (c) Revenues 27. Projections of bauxite sector revenues become extremely difficult since they not only involve assumptions regarding the level of bauxite output and aluminum prices, but also regarding Suriname's ability to capture resource rents. The projections of levy receipts from the existing operations 1/ Of which about two-thirds would be firm, i.e. would be available each year with a high degree of assurance based on statistical hydrological probabilities. Average production equals firm plus average secondary energy 2/ A smaller capacity based on firm energy production (i.e. about 65,000 tons) would probably also be sufficient. 3/ Based on average energy production.

32 in Eastern Suriname in Table 11 below (Case I) assume that present levy formulas are maintained which, as noted before (para. 20), would imply that the Table 11: Gross Levy Receipts, (Sf. million) est. Case I Case III A B C rate would decline over time. The combined effect of the assumed decline in the levy rate, the projected decrease in bauxite output and some improvement in real aluminum prices, would be a decline in the real value of bauxite levy revenues from existing operations by about 2% p.a. during ; in nominal terms revenues would grow by about 5% p.a. from about Sf150 million in 1980 to about Sf240 million by A decline in the real value of bauxite revenues under the stated assumption regarding the levy formula--i.e. no change in the formula and an implicit decline in the rate--can only be prevented if output is expanded as envisaged under the second alternative (Case III). In that case revenues would increase by about 0.5% p.a. in real terms and by nearly 8% in nominal terms to Sf315 million (Table 11 - Case III A). It may, however, be difficult to collect the same levy rate on the new deposits as would be received on the Eastern Suriname deposits soi ce they are of a lower quality and significantly more costly to exploit. - The hypothetical alternative revenue projections which are shown in Table 11 for illustrative purposes, assume, respectively, a 50% reduction in the net levy rate for the new deposits (Case III B) or its elimination (Case III C); in the latter case the Government would only collect income taxes from the new operations. 28. A discussion of the appropriate level of taxation in relation to the absolute and relative profitability of the bauxite companies' operations in Suriname and the perceived risks associated with them would clearly extend beyond the scope of this report. It may suffice to note that the implicit reduction in the levy rate for existing operations (para. 27), which would partly offset expected real increases in production cost (para. 20) and a possible explicit reduction for the new operations to compensate for higher production cost (para. 27), would contribute to maintaining the absolute profitability of the operations in Suriname. Apart from a differentation in the levy rate to reflect the differences in quality and production cost of the various deposits, which is already being applied to some degree in the case of on-going operations (para. 15 above), a further differentation to reflect 1/ Production cost of Bakhuis bauxite, including cost of transportation to the processing facilities and adjusted for lower quality, are estimated to be higher than the average production cost plus net levy for all Eastern Suriname deposits, and about 20-30% higher than the production cost (excl. net levy) of the least profitable parts of the Eastern Suriname deposits, but lower than production cost plus net levy of those deposits.

33 profitability, while maintaining the administrative simplicity of the system, might be introduced by applying higher rates to bauxite ore which is further processed domestically. This would, however, introduce a bias against domestic processing and might, therefore, run counter to the objective of maximizing value added and export earnings. Finally, although changes in the structure in the levy rate to introduce a clearer link between the levy and the level of income (as opposed to output) may be desirable, it might be extremely difficult to measure and verify income. The Government may nevertheless have to address the issue of the relationship between the levy and the level of income (profits) if the U.S. tax administration would disallow the crediting of corporate tax paid by Suralco in Suriname against Alcoa's U.S. income tax on the grounds that although the income tax varies with profit 7 bility, the overall tax liability depends solely on the gross levy. - However, as this matter is currently still under review, it is recommended that any action regarding the structure of the levy be postponed until the issue of tax credits actually arises. It is, moreover suggested that any revision of the levy structure should take due account of the implications for tax administration. (d) Conclusion 29. It is evident that growth in bauxite sector output, revenues and, most importantly, exports, cannot be achieved without the exploitation and processing of the Bakhuis deposits. It is therefore important that Government seek agreement with foreign partners on the implementation of the second alternative envisaged by the Joint Commission (para 21). In addition to undertaking part or all of the required investments in infrastructure, possibly as its input to the joint venture, the Government might be required to provide concessions in terms of a reduction in the rate of the levy for production from the new area (para. 27 above), in view of the higher production cost associated with their exploitation. 30. Following the implementation of the investments presently being considered, the main potential for bauxite sector expansion in the late 1980s and 1990s would lie in an expansion of aluminum smelting on the basis of power from the second stage of the Kabalebo project (para 25). An alternative possibility for increasing the sector's net contribution to the balance of payments would lie in the use of Kabalebo power to substitute for fuel used in generating steam for alumina production (para. 26). It is therefore recommended that studies of the justification and feasibility of both alternatives, which may be mutually exclusive given available hydro-power supplies, be initiated as soon as possible. 1/ As noted in para. 15 above, the gross levy is based on the level of bauxite output and aluminum prices with some adjustment for relative bauxite quality and production cost, and the net levy is computed as the difference between the gross levy and actual income taxes paid.

34 III. PUBLIC INVESTMENT AND RESOURCE MANAGEMENT Public Investment 31. In recent years public investment has declined sharply due to slow project implementation and delays in new project starts resulting largely from an acute shortage of technical and managerial staff in the public sector and an increasingly uncertain political situation. Actual investments during the first five years of the Multi-Year Development Plan ( /1990) amounted to only about 10% of total Plan investments. The Government's program for the remainder of the Plan period, as reflected in the most recent Annual P\en, envisages public investments of about (constant 1980) US$2.5 billion - of which about half is earmarked for the Kabalebo hydropower project and investments in the bauxite sector. The pro*yam's financing requirements would amount to about (current) US$4.3 billion - of which about US$1.1 billion would bsavailable from funds remaining under the aid agreement with the Netherlands - and about US$3.2 billion would need to be generated from other external public sector inflows, public savings and domestic borrowing. 32. The projections for public investments in this report, which cover the period i.e., the implementation period of the large Kabalebo hydropower project--assume that they will remain below planned levels not only due to a lack of financial resources but also, and especially, because of limitation to the public sector's capacity to prepare and implement projects and the economy's overall absorptive capacity. Public investments are nevertheless expected to rise rapidly during the coming years with the implementation of the Kabalebo hydroelectric power project which envisages the construction of a dam and related infrastructure for the installation of a power plant with an initial capacity of 300 MW with the objective of substituting, from 1987 onwards, hydroelectricity for fuel-generated electricity. Project base cost (in 1980 prices), including physical contingencies, have been estimated at US$460 million and total cost, including price contingencies, at current US$675 million, of which about 75% would be in foreign exchange. Total financing requirements to cover project cost and interest during construction would be US$735 million, of which, according to the present financing plan, about US$670 million would need to be obtained from external sources. Details on the project, including the status of preparation, are provided in the Annex to this report. 33. On the assumption that the Government will indeed reach early agreement with foreign partners on the development of the Western Suriname bauxite deposits, investments of a magnitude similar to that of the Kabalebo project would be undertaken in the bauxite sector. The cost of mining development, related infrastructure and of the expansion of processing facilities for calcined refractory bauxite and alumina in Eastern Suriname to process an additional 2.0 million tons of bauxite annually (para. 21 above), is estimated 1/ Mission estimates based on 1980 annual plan with adjustments for underestimation of project cost, price increases during 1980 and slippages. 2/ Mission estimates based on the assumption that plan period would actually extend to / Undisbursed balance converted at the average of the end-1980 and present Dfl./US$ exchange rates.

35 Table 12: PUBLIC INVESTMENT, (US$ million) Total Constant 1980 Prices Kabalebo project Bauxite sector On-going projects Other new projects Total ,217 Price Contingencies Kabalebo project a/ Bauxite sector On-going projects Other new projects Total Current US$ Kabalebo project a/ Bauxite sector On-going projects Other new projects Total financing required ,832 Memo Public Investment As % of GDP b/ a/ Includes interest during construction. b/ By comparison, public investment averaged about 8.5% of GDP during

36 at about (constant 1980) US$500 million. In view of the various constraints to public investment that will be faced by the Government it is assumed, however, that the planned investments would be financed largely by the foreign partners, and that public investment in connection with these projects would be limited to infrastructure and minimal participation in the joint venture, with a combined cost of at most about (constant 1980) US$100 million. 34. Apart from the large new investments now being contemplated, a considerable number of development projects initiated since independence with Dutch financial assistance, and presently under execution, remain to be completed. Available data on these ongoing investments suggest that an amount of about (constant 1980) US$325 million may be required during for this purpose. It is, however, doubtful whether all of these projects have the same priority today as was originally assigned to them and whether it is appropriate to complete all at the scope originally envisaged. It is, therefore, recommended that ongoing public investments be carefully reviewed and reevaluated with a view to reducing, if feasible and appropriate, the scope of some projects, and/or extending the implementation period of a number of programs. Our projections assume that such revisions could result in a reduction in the estimated investment outlays for ongoing projects by about 15% to US$275 million. A particular example of projects and programs with potential for such savings would be those in the social sector, which account for about one-third of the total outlays required to complete ongoing investments, and which originally were designed for a population that was projected to be about 25% larger that it now actually is. It would similarly appear appropriate to review and re-evaluate those projects whose implementation has not yet begun but which have been approved in principle for funding under the Dutch aid program. 35. In view of the large investments now being contemplated, the scope for other new public sector projects is likely to be limited. Total cost of the Kabalebo project, the Government's participation in bauxite sector investments and of on-going projects during would amount to about constant 1980 US$840 million, or nearly 10% GDP, and total financing requirements to about US$1.2 billion (Table 12). During , when both the Kabalebo project and the bauxite investments would be under implementation, public investments (excluding other new projects) and private investments in the bauxite sector (para. 33 above) would together amount to about 27% of GDP while private domestic investment is also likely to rise during the same period as a consequence of the stimulus of the large public and bauxite sector investment programs. The projections assume that relatively few new public investment projects will be initiated during and that outlays would sharply rise thereafter. The Government will, therefore, be faced with a difficult choice of investment priorities. In view of the need for domestic supply response during a period of rapid increases in investments and associated external capital flows, it is recommended that other new public investments be almost exclusively limited to projects in productive sectors and to infrastructure projects with short gestation periods which directly support production. Public Finance 36. Total financing requirements of the public investment program are estimated at about US$1.8 million (Table 12). The financing plan assumes that the funds remaining under the aid agreement with the Netherlands (para 31

37 above) will be disbursed during / and that the Government will be able to obtain the external funds envisaged in the financing plan for the Kabalebo Project as well as an additional US$100 million in concessional funds for other projects from sources other than the Netherlands. Under those assumptions the remaining financing gap would amount to only about US$l1 million (Sf 315 million), and "required public savings" to only US$160 million (Sf 285 million), or 1.3% of GDP during Although the required public savings effort would be very modest, it would nevertheless imply improved domestic resource mobylization considering that there were no net public savings during and that, despite an expansion of bauxite output, taxes from the bauxite sec/tor are likely to decline from about 8% of GDP in 1980 to about 5.5%-6.0% - by Beyond 1987 the need for improved public savings would become more pronounced as Dutch57id under any new program is likely to remain well below the level of 8.5% - of GDP during and as bauxite taxes are projected to decline further to about 5.0%-5.5% - of GDP during There is significant scope for increasing domestic taxation but it would require a reversal of past trends. During ,-70 the buoyancy of nonbauxite taxes with respect to GDP reached only and non-bauxite taxes declined to less than 15% of GDP. It would appear that with a strengthening of tax administration and improvements in the responsiveness of the tax system to changes and prices and 7 ncomes, for which recommendations have been made in a recent IMF tax study -, tbe ratio of non bauxite 8 t/axes to GDP could be gradually raised to about 18% by 1987 and 20% by The increase in the domestic tax ratio would more than compensate for the projected decline in the bauxite tax ratio and total current revenues would rise to about 28% of GDP by 1990 (Table 13.) 1/ The aid agreement envisaged disbursement of the aid funds over a year period ( /90). Disbursement of part of the aid funds (Dfl 300 million) is on the basis of parity with Suriname government savings (i.e., about Sf 250 million equivalent). 2/ Equal to financing gap less Kabalebo project revenue of US$15 million which would be available in 1987 to finance project cost. 3/ The budget showed a surplus only in 1978 and in 1980 (1.7% of GDP). 4/ Based on bauxite revenues projections discussed in para. 27 (Cases III A and B) which assume an implicit decline in the gross levy rate, and, in Case B, an explicit reduction in the net levy rate on production from the new deposits. 5/ On the assumption that the remaining balance of the aid program will be fully disbursed during / Taxes on income and consumption showed a buoyancy of 1.2, but import taxes, which account for more than half of total non-bauxite taxes, showed a buoyancy of only 0.7 (both with respect to GDP and imports) as fuel imports, which were partly tax exempt (bauxite industry) or, in the case of some products, subject to an unchanged specific duty, rose much faster than other imports. 7/ IMF Tax Survey of Suriname dated March 26, / Assuming buoyancies of 1.25 during and 1.3 during respectively.

38 Table 13: PUBLIC FINANCE, / (Sf million) Bauxite taxes b/ Non-bauxite taxes ,220 Non-tax revenue-c/ Total current revenue ,000 1,120 1,235 1,725 Total current expenditures ,020 1,115 1,465 Current account surplus As % of GDP Revenues Expenditures Surplus a/ Central Government. b/ Gross levy receipts. Projections based on Case II B (See para. 27). c/ Projected to remain at around the 1980 level of about 3.5% of GDP.

39 In addition to a domestic taxation effort, current expenditure control would be required if public savings are to be increased. In recent years the Government has been able to reduce current expenditures from 29% of GDP in 1977 to 24% in 1980 primarily as a result of a decline in Government employment (para 7). The Government nevertheless still accounts for about 40% of employment and while it faces severe shortages of technical and managerial staff, there still appears to be significant overstaffing at the lower levels. The projections of current revenues assume that savings to be achieved by further reductions in overall employment in the next few years will at least offset increases in salaries at the middle and higher levels, which may be required to attract technical and managerial staff, as well as increases in maintenance expenditures related to public investments. 40. The projected level of Government savings of Sf 540 million, (2.3% of GDP) during while still modest, would be about Sf 250 million (US$140 million) in excess of the requirements of the investment program, under the present financing assumptions. The Government should, therefore, consider reducing the amount of external borrowing for the Kabalebo project or alternatively to reserve such savings for new investments beyond 1987 when concessional inflows will be sharply reduced. Manpower 41. The lack of manpower at most skill levels-/ is probably the most important constraint which now faces Suriname. As was noted in Chapter I, technical and managerial skills are in short supply and the labor market has tightened despite stagnating economic activity as a result of heavy outmigration. Present investment plans would place heavy demands on the labor market and exacerbate the existing problems of skill shortages and wage pressures unless measures are taken to alleviate them. 42. The envisaged expansion of the public investment program would require a considerable strengthening of the public sectors capacity to prepare and implement projects. The Government is aware of the need for more higher level staff and has with the support of the Government of the Netherlands initiated a program to foster, with generous incentives, including salary supplements, return migration of qualified Surinamese presently living in the Netherlands. This program should be continued and, if possible, expanded. The Government may, moreover, and in spite of equity considerations, need to increase the differentials between the various pay levels and raise salaries for middle and higher level staff on a permanent basis in order that they become more competitive with the private sector. However, even if efforts to attract Surinamese are successful, the Government would need to rely increasingly on external technical assistance and, possibly, on turnkey approaches in the case of some projects in order to carry out the envisaged investment program. 43. A major effort will also be required to increase the supply of vocational skills, especially those for construction occupations. A change in the emphasis of the educational system towards more vocational training, which is overdue, and which is being supported by a UNESCO curriculum devetopment project, would help increase the supply of skills in the longer term but would not meet the immediate and short term needs. The Government is planning a major program of vocational training with the support of ILO but it has not 1/ As noted on Page 2 there could, however, be an oversupply of low level administrative skills.

40 yet been able to attract the required instructors due to the low salaries offered. In addition to providing training for those who are presently unemployed, the supply of vocational skills could probably be increased by providing skill upgrading, especially for workers who are presently underemployed in their Government jobs and who, with training and incentives, may be attracted to construction and other activities. The training effort which the Government is planning should be carried out in close coordination with the contractors and it may even be desirable to assign them most of the responsibility for construction skills training, particularly for equipment operators and maintenance workers, for major projects such as the Kabalebo Project. To the extent that skills would be in short supply during the periods of peak demand ( ) despite these training efforts, which is likely, and in order to meet possible shortages of unskilled labor, Suriname may need to rely on temporary inmigration of labor from countries in the region which is likely to be available given existing wage differentials and the level of unemployment in some of those countries. In view of this prospect a liberal and flexible immigration policy would be in order. The Government is well aware of the manpower problems that are facing the country and hopes that with appeals to the sense of patriotism it can induce large scale remigration from the Netherlands. However, experience elsewhere suggests that as long as differences in income levels and benefits are significant, large scale return migration cannot be expected to occur. Moreover, in view of the decline in employment opportunities that is likely to take place when the size of the investment program is reduced by the mid-80ies, permanent remigration should not be encouraged, except for scarce managerial and technical skills. Price Stability 44. The sharp increase in overall demand resulting from the rise in the level of investments and the associated foreign inflows may exert considerable upwards pressure on the price level. In this respect it may be relevant to briefly review experience during the late 50s and early 60s when the level and composition of investments were similar to those envisaged for the period During the overall investment ratio averaged 36% of GDP, reaching as high as 50% in Investments by Suralco for the construction of a hydropower plant, aluminum smelter and alumina plant (para. 14) accounted for half of total investments, while other private and public investments accounted for respectively two-thirds and one-third of the balance. External capital inflows, of which more than half in the form of direct foreign investments, financed more than two-thirds of total gross investments. The domestic savings ratio declined to 22.5% of GDP and the resource gap sharply increased to an average of 13.5% of GDP reaching as high as 24% in 1964, while the current account deficit averaged 30% and reached nearly 40% of GNP in In spite of the sharp rise in overall demand no significant inflationary pressures developed during this period. Consumer prices, as measured by the CPI, rose by an average of 2.4% p.a. during (with a somewhat higher rate of increase for domestic goods--2.7%--than for imported goods--2.0%--) and the GDP deflator by 2.1% p.a. This compared to le 1 v,pls of international inflation of about 1.5% p.a. during the same period - The remarkable degree of price stability can be attributed largely to the sharp increase in the average import elasticity with respect to GNP to 2.0 during and to significant domestic supply response as real GDP in the non- 1/ Average of U.S.A. and Netherlands price index for finished goods.

41 bauxite sectors grew by 6.4% p.a. To achieve similar results (in terms of domestic price stability relative to international levels) during may, however, be more difficult as the scope for supply response is likely to be more limited, particularly in the face of the labor shortages now being experienced. In addition to allowing relatively free access of foreign labor and goods, it will, therefore, be necessary to formulate a set of fiscal, monetary and credit policies to stimulate domestic savings and production. In addition to efforts to increase public savings beyond the modest levels which are projected in Table 13, private savings could be encouraged by requiring employees to make significant contributions to the existing and planned social security schemes, and most importantly by an upward adjustment of interest rates which presently are negative in real terms (para. 9). The recommended orientation of new public investment projects towards the productive sector (para. 35) could in part take the form of an expansion of the equity base of the National Development Bank and the Agricultural Development Bank which would enable these institutions to attract additional resources to expand lending to the productive sectors. Although there would be a need to maintain a strict overall monetary policy, it may be possible to induce a shift in commercial bank lending towards the productive sectors through appropriate discount, reserves and credit guarantee policies and the strengthening of institutional support for medium and small scale enterprises. The required private investment response would, however, only be forthcoming in an environment of political stability and with successful efforts to control excessive rises in wage cost through a combination of policies that would encourage an increase in the supply of labor in the short-term, particularly through inmigration (para. 43), and limit labor union activity. Balance of Payments 46. Export prospects are as discussed in the previous chapter, determined largely by developments in the bauxite sector which accounts for four fifths of total exports. The projections in Table 14 assume that production and processing about 2.0 million tons Western Suriname bauxite will come on stream in in which case bauxite sector exports would grow at 4.5% p.a. in real terms and 13% p.a. in nominal terms during , but stagnate thereafter, unless aluminum production is expanded in connection with a future stage of the Kabalebo project (para.25). Such 2 yxpansion has not been reflected in the bauxite sector export projections. - Agricultural export performance is likely to be mixed. While rice and palm oil exports would show significant increases based on past and on-going investments, shrimp and banana exports are likely to stagnate or, at best, grow modestly. Exports of fruit and vegetables to the EEC market may increase further but the expected sharp increase in local demand is likely to limit the export potential. Similarly, prospects for exports of wood products are limited in view of the expected increase in domestic construction activity; however, given the forest resource base and the availability of hydropower, possibilities may exist for the longer term for export oriented paper and pulp processing. The 9 yerall real growth rate of other exports has been projected at about 6% p.a. during and at 8% thereafter. Total exports would grow at about 1/ Bauxite Sector Case III as discussed in para. 24 above. 2/ Even if a decision to construct a smelter were taken in the near future, which is unlikely, production would only begin by the late 80s. 3/ This compares to estimated actual compound growth rates of 13% p.a. during (about 8.5% p.a. on least square basis), and a projected long term growth of 6.5% in last year's report.

42 Table 14: BALANCE OF PAYHENTS, (US$ Hillion) REt III Merchandise Exports (a) Bauxite Sector (b) Others Merchandise Importa Trade Balance IZ1 240 Net-NFS Resource Balance Factor Services and Transfers (net) Current Account Balance Private Capital (net) Public Capital (net) a/ bl 145 / 180'/ Other (net) Change in Reserves (- increase) Net Reserves Reserves in Months of Merchandise Imports (excl. NFS) , , Resource Balance as i of GDP El I.S Public Debt Service Ratio as 2 of Merchandise Exports a/ Including grants. b/ Residual, assuming level of reserves will gradually decline to 5 months of merchandise imports by c/ Based on current price series.

43 - 26-5% p.a. in constant 1980 prices during and at about 13% p.a. nominal terms from about US$0.5 billion in 1980 to US$1.2 billion by In spite of an increase in the rate of growth of non-bauxite exports, the real growth rate of total exports would sharply drop thereafter due to the projected stagnation of bauxite exports, but the value of exports would increase to nearly US$1.6 billion by Imports are projected to rise rapidly from about US$0.5 billion in 1980 to nearly US$1.2 billion by 1984 (with an implied short term import elasticity of about 3.8), primarily as a result of the increase in the rate and capital intensity of investments. However, with the completion of hydropower and bauxite sector investments and the substitution of most fuel imports for diesel generation by hydropower by 1987, import levels would decline in real terms between 1984 and Thereafter imports are projected to resume real growth, but the rate would initially (up to 1990) be limited to about 2% p.a. on the assumptions of a modest decline in the rate and capital intensity of investments during and a long term income elasticity of just above 1.0 for non-fuel intermediate and consumption goods imports. In nominal terms imports would grow to about US$1.5 billion by The resource gap and current account deficit are projected to widen significantly during , reaching as high as 27% of GDP and 30% of GNP respectively in 1984 before new bauxite sector capacity comes on stream. However, projected levels of capital inflows, primarily on account of Dutch grants, foreign loans in connection with the Kabalebo project and private investment in the bauxite sector, would be adequate to finance the entire currentlrccount deficit and maintain foreign exchange reserves at prudent levels - throughout this period. By about 1987 the resource gap and current account deficit would have narrowed significantly to about 1% of GDP and 5.5% of the GNP respectively as a result of a sharp decline in the level of imports. The projected export and import trends for (paras. 46 and 47) would lead to a slowly increasing resource gap beyond 1987 which would rise to 2% of GDP by. 1990, while the current account deficit would widen to nearly 6.5% of GDP Although projections beyond 1990 become increasingly uncertain, their discussion here is warranted because of their significance for policy action in the 80s regarding export development, import substitution and external borrowing. As has been stated repeatedly, long term balance of payments prospects depend crucially on bauxite sector developments. Long term projections of bauxite sector exports based on existing investment plans assume a stagnation in export volumes beyond This would imply that even if the rate of growth of other exports could be maintained at 8% and the overall import elasticity limited to 1.0, the real growth rate of exports would still fall below the import growth rate assuming real GDP growth of 3%- 4% p.a. As a result the resource gap would continue to widen and reach nearly 4% of GDP by 1995 (Table 14 Scenario I). The prospects of an increasing resource gap during the 90s point to the need to (i) formulate and pursue 1/ Although reserves would decline to about 4½ months of merchandise imports and only 3½ months of imports plus NFS in , this should be considered sufficient since about a quarter of imports in those years would be on account of capital goods for the Kabalebo project and bauxite sector investments. 2/ It may, however, be noted that the amount of additional gross aluminum exports which would result from an expansion of smelting capacity (para. 25) would be larger than the amount of the projected current account deficit in 1990.

44 consistently a strategy for rapid growth of non-bauxite exports and efficient import substitution; (ii) investigate the possibilities of increasing net bauxite sector exports through the utilization of Kabalebo power in addition to the substitution presently envisaged (para. 25 and 26); and (iii) limit external borrowing during the 80s, as will be discussed in para. 52 below. 50. The development of non-bauxite exports and import substitution is likely to be extremely difficult as the high wage costs levels prevailing in the economy may well hold back investments in those activities. An exchange rate adjustment aimed at reducing real wage levels is unlikely to have the desired effect in the particular circumstances of an open economy with a large mineral sectof with strong labor unions and, in the medium-term, a tight labor market.- Other fiscal, monetary and wage policy measures would, therefore, need to be devised as part of strategy to develop the non-bauxite economy. The projections for 1995 under Scenario II show the implications for the development and level of the resource gap of an increase in the rate of growth of non-bauxite exports to 10% p.a. beyond 1990 and the substitution of hydropower for part of the fuel used for steam generation in alumina production. In that case, the resource gap would slightly increase in absolute terms but decline as a ratio to GDP to about 1.5%. Finally, the alternative Scenario III shows the resource situation which would result by 1995 if power from the second stage of the Kabalebo project, the implementation of which is not now envisaged in the public investment program for , were used to expand aluminum smelting capacity by about 100,000 tons which would generate additiono gross export earnings of nearly US$350 million at projected 1995 prices. - In that case there would be no resource gap by the year External Debt and Borrowing 51. Suriname's external debt situation is extremely favorable as the Netherlands forgave all outstanding debts, amounting to about US$250 million at the time of independence in 1975, and as public investment during was largely financed by Dutch grant aid. Outstanding public debt at the end of 1980 amounted to only US$28 million, the bulk of which has been contracted in 1979 to help finance the Western Suriname railroad project. 52. The Dutch aid agreement of 1975 provided for about Dfl 3.1 billion 3/ in grants over the perigd /90, of which an amount of about Dfl 2.5 billion (US$1.1 billion) - remained undisbursed at the end of / It may also be noted that although inflation in Suriname (11% p.a. during ) exceeded that of its trading partners since the last exchange rate adjustment vis-a-vis the US dollar at the end of 1971, the real exchange rate remained virtually unchanged as the nominal depreciation of the Surinamese currency against a trade-weighted basket of currencies during the same period offset the differentials in inflation. This situation would, however, change if the subsequent appreciation of the U.S. Dollar (and Surinamese Guilder) is maintained. 2/ Under Scenario III it is further assumed that the rate of growth of nonbauxite exports would remain at 8% p.a. during and that there would be no substitution of hydropower for fuel for alumina production during that period. 3/ Inclusive of a Dfl 100 million carry over from the aid program for the Second Five-Year Plan ( ). 4/ Converted at average of end-1980 and present Dfl./US$ exchange rates.

45 The present financing plan for the public investment program during envisages the disbursement of all of these remaining Dutch grants and total external borrowing requirements of about US$545 million, of which about twothirds would be on commercial terms, to be contracted largely in the latter part of the implementation period of the Kabalebo Project ( ) after the concessional contributions for the project have been fully disbursed. As a result, outstanding public debt would rise to about US$560 million, or 22% of GDP, by the end of Debt service payments on account of existing public debts and new debts to be contracted in connection with the public investment program are estimated to reach about US$50 million during 1987, representing about 4% of gross export earnings. On the assumption that net additions to public debt would amount to the net public capital inflows that would be required to maintain reserves at a level of 5 months of merchandise imports by i.e. about US$450 million (Table 14)--,public debt service payments would rise further beyond 1987 to about 9% of export earnings by Even though private debt service and profit transfers would also increase beyond following the completion of bauxite sector investments, the projected level of public debt service payments would pose no undue burden throughout the 80ies and early 90ies, particularly since part of the Kabalebo power sales revenues would be in foreign exchange. Under Scenario I, which would imply rapidly increasing borrowing requirements to meet a widening current account deficit (para. 49), the public debt service ratio would further rise to about 15-20% by 1995, while the ratio of total debt service and factor service payments would probably reach unmanageable levels. Although the debt service ratio would also rise beyond the 1990 level under Scenarios II and III (para. 50), there would, in those cases, be no unmanageable increases in debt service payments, particularly if commercial borrowing for the public investment program during is limited to loans for the Kabalebo project. It is therefore, recommended that no commmercial external debts be contracted for public investment projects other than the Kabalebo project during primarily in order to maintain a debt structure that will allow for adequate borrowing capacity for the late 80s and 90s when Dutch aid levels are likely to be lower. Considering that in addition to contributions to 1 tpe Kabalebo project, nearly US$1.0 billion in concessional financing - would be available for the public investment program, the need for such additional external borrowing on commercial terms would actually not exist unless the investment program is significantly increased beyond the level envisaged which is unlikely given the various constraints. The Government should, as suggested in para. 40 above, moreover consider reducing commercial borrowing for the Kabalebo project by at least the amount of public savings which, with a modest effort, could be generated in excess of the minimum requirements (paras ). Conclusion 53. The prospect of an increasing resource gap and a sharp rise in debt service levels beyond 1987 which despite an expansion of bauxite output and the substitution of hydropower for fuel-based electricity, would develop under the scenario discussed in para. 49 (I), underscores the need for raising the long term overall export growth rate beyond the level implied in that scenario and for taking early steps to increase rapidly domestic savings, beyond the implied levels, to prevent undue reliance on external funds, which, on average, are likely to be on harder terms than at present. Failure to do so would create creditworthiness problems by the mid-90ies at the latest and depress the long-run growth rate of the economy due to a limited capacity to purchase necessary imports. 1/ Of which about US$0.9 billion would be from Dutch aid grants.

46 ANNEX SURINAME - KABALEBO HYDROELECTRIC POWER PROJECT Sector Background 1. Approximately 90% of Suriname's present power capacity of 395 MW belongs to two private aluminum companies, Suralco and Billiton, of which by far the larger is Suralco, a subsidiary of Alcoa. Roughly half of the capacity is the 189 MW Afobaka hydroelectric plant, which was constructed 15 years ago by Suralco. Under the concession agreement for the Afobaka works, Suralco is obligated to deliver a small portion of the plant's output each year to the Government, which in turn sells it to Energie Bedrijven Suriname (EBS), the country's electric utility company. This electricity plus EBS diesel-generated electricity is sold to some 49,000 EBS customers in the Paramaribo area, where roughly one half of the country's total population of approximately 350,000 live. Another 16,000 customers outside the Paramaribo area are served by EBS from several separate diesel plants. 2. Peak demand in the Paramaribo area is 39 MW, excluding that of the industrial self producers. This is covered by EBS's 32 MW of diesel plant and up to 16 MW from Suralco (see Attachment 1). The demand is expected to grow to 60 MW by 1987, and to continue growing thereafter at about 6% per year. One of the country's sector development objectives is to cover this demand and as much as possible (probably around 65 MW in 1987) of the need now being filled by industrial captive thermal generation, with hydropower from the proposed Kabalebo Project in Western Suriname. The substitution of hydroelectricity for electricity which otherwise would have to be generated with imported oil would lead to significant foreign exchange savings after the first few years of the Project during which foreign debt service would approximate the alternative thermal operating expenses. 3. Eventual further exploitation of the country's hydroelectric potential for the production of aluminum is a second objective for the sector. The Governnhent had been considering construction of a smelter and alumina plant to produce aluminum from bauxite deposits near the site of the Project, but the schemes evaluated lacked economic justification. There is, however, the possibility that Suralco might want to use electricity from the Project (inclusive of its future second stage), if it could be obtained at sufficiently low cost, to expand aluminum production in the eastern part of the country and/or to substitute for fuel used for steam generation in the production of alumina. In addition, it might be possible to sell electricity to Guyana for a limited period while Guyana is developing its hydropower potential. The transmission line to Guyana which would be required could continue serving to interconnect the two countries once Guyana begins its own hydropower. 4. A third objective is Surinamization and consolidation of the public supply portion of the sector. EBS is owned 60% by the Government and 40% by OGEM, a Dutch electric utility company. OGEM manages EBS under a management contract, and the senior officials of EBS are staff from OGEM on assignments in Suriname. The Government would like to have the management in Surinamese

47 ANNEX hands, and has announced that it intends to buy out OGEM's 40%. Also, the Government may want eventually to combine EBS with the organization which it intends to establish for the implementation of the proposed Project. Project Origin, Description and Costs 5. The Project was identified as the least-cost solution to Suriname's electricity needs starting in the 1980s through a UNDP-financed hydropower survey and feasibility study done by consultants, Norconsult (Norway) and Electrowatt (Switzerland), in , for which the IBRD was the executing agency. The Project was subsequently designed in detail by the consultants working under a contract with the Government of Suriname. An IBRD project appraisal mission visited Suriname in early 1981 and its report is presently under preparation. 6. The Project consists of a dam and a 300 MW power plant on the Kabalebo River at Devis Falls, a diversion dam on the Lucie River, canals and dikes, a transmission line from Devis Falls to Paramaribo, technical and administrative training, a national network and rural electrification study, a feasibility study of Surinamese-Guyanese interconnection, and a marginal cost tariff study. The plant at Devis Falls is to be constructed so that an additional 200 MW capacity can be installed when needed. Project costs including physical and price contingencies have been estimated at about US$675 million assuming implementation during Approximately 73% of the total is foreign cost. Interest during construction would add at least US$60 million to the estimate, which would bring total financial requirements to US$735 million (see Attachment 2 for detailed Project description and cost estimates). Status of Project Preparation 7. Design and Procurement. Project design is complete except for measures which may be needed to prevent unacceptable environmental effects. Work by consultants, Ilaco (Suriname and Holland) and the Delft Hydraulics Laboratory (Holland), to predict environmental effects of the Project and to determine the need for and probable cost of preventive measures has been completed and the final draft report has been submitted to the Government for review. Specifications and contract documents have been submitted to the IBRD for the parts of the Project which have been designed, and a preliminary review has been made of the civil works and electromechanical equipment portions. 8. During January 1980, advertisements were published inviting contractors to prequalify for bidding on the Project's civil works. Submissions were received from 27 contractors, representing a broad range of nationalities, of which 13 were found to be qualified to undertake both of the Project's civil works contracts together, and an additional 2 to be qualified only for the smaller of the two contracts. Bid invitations for civil works and equipment have, however, not yet been issued pending confirmation of the availability of financing and civil works procurement conditions and revision of equipment tender documents. Proposals for project engineering and administration services through the construction phase are presently being evaluated.

48 ANNEX 9. Project Organization. Responsibility for the Project has thus far been in the Ministry of Development, but the Government has decided to establish a new semi-autonomous organization, the National Electricity Corporation (Nationaal Electriciteits Bedrijf; NEB), to take over the responsibility. A decree authorizing its establishment was published in early 1981 and the Government is expected to decide shortly on the appointment of a Board of Directors and key management staff and on the allocation of budget funds to cover initial administration and engineering expenses of the N.E.B. It is envisaged that external advisors will be employed to assist NEB's management. 10. Discussions with Guyana. The Government of Suriname is aware that the Project is likely to have environmental effects on Guyana and that the envisaged construction of diversion works and use of the waters of the Corantijn, a border river, in a future stage of the Project, would have implications which need to be considered (e.g. the alternative uses of such waters and additional environmental effects). The Government has already decided to redesign the dam intakes with a view to minimizing possible pollution effects. It has furthermore provided the results of the comprehensive environmental effects study (para. 7) to the Government of Guyana. Recently the two Governments have begun discussions on the bilateral matters that will or may arise from the Project and the Government of Suriname hopes that these discussions will lead to their resolution and to a comprehensive agreement prior to Project implementation. 11. Power Sales. The Project is being justified on the basis of a projected peak demand by 1987 of about 125 MW from the Paramaribo public supply system and industrial self producers (para. 2), and on the basis of projected power sales starting in 1987 with about 700 Gwh (of which about 60% to the bauxite companies and 40% to EBS) at a price which is approximately equal to the value of fuel savings achieved. It would, therefore, be necessary to guarantee such level of sales in the form of firm contracts with the bauxite companies and also with the EBS, as long as it is maintained as a separate authority. Such contracts should specify quantities and prices which are sufficient to enable the NEB to cover the cost of power supply and to meet its financial requirements. Because of the complexity of the pricing problem for the substitution electricity, the Government has engaged consultants to provide analytical assistance and advice for its contract negotiations. The consultants have submitted their report to the Government in April 1981 and discussions on power sales contracts are expected to start shortly. In addition to the sale of hydroelectric power for the substitution of thermal generation, additional power from the initial stage of the Project could conceivably be sold to Suralco, for part of the steam production at the existing alumina plant, or to Guyana. 12. Project Finance. The Netherlands and Surinamese authorities have tentatively agreed to allocate an amount of Df 500 million (US$225 million) from the grant aid program to the Kabalebo Project. These funds would be provided by the Government of Suriname to the Project entity as equity capital. As a condition for part of the Dutch grant contribution, the Government of Suriname would provide US$50 million equivalent in local currency, while a further US$15 million in project revenue would be available in 1987 for project cost financing. The IBRD and the Inter-American Development Bank (IDB) have each tentatively programmed loans of US$20 million equivalent, while a major portion of the E.E.C. aid program to

49 Suriname has been allocated to the energy sector, of which about US$45 million equivalent is expected to be available for the Project in the form of grants and loans from the European Development Fund (EDF) and the European Investment Bank (EIB). 13. In addition to the possible contributions identified thus far, some US$360 million in financing would be needed to meet the Project's financing requirements. The Government has brought the Project to the attention of the OPEC Fund and the Venezuelan Investment Fund (VIF) and also hopes to obtain bilateral aid from the countries which win bids for the supply of goods and services for the Project. The tentative financing plan assumes that an amount of about US$135 million can be obtained in suppliers' credits for power and transmission equipment and that the balance, i.e. US$225 million less any funds that may be available from additional Government contributions or from official sources other than those mentioned in para 12 above, would be financed by commercial bank loans. In view of the magnitude of the commercial financing requirements, it may be necessary to pledge the revenues from power sales to the bauxite companies (para. 11) to project related debt service. Project Implementation Schedule 14. The present project schedule envisages start of project construction towards the end of the first half of However, the schedule is based on the assumption that the various preparatory acions (i.e. establishment of the project organization, arrangements with Guyana, contracts for power sales and financing arrangements) will be completed by about the end of 1981 and that bid invitations will be issued around the middle of In view of the complexity of a number of these matters and the delays in procurement pending clarification of financing conditions, there is a possibility that this schedule will slip by a number of months.