The Surinamese economic crises of 2016: Causes, measures and alternatives from a macro- and micro economic policy based perspective

1. Course: Economics for Managers
Lecturer: Dr. Aad van Mourik
Intake: 12
Group number: 3
Studentnumbers: SRFHR1216036 - SRFHR1216011 - SRFHR1216003
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2. 2
The Surinamese economic crises of 2016:
Causes, measures and alternatives from a macro- and micro
economic policy based perspective
(1) The great art to make a nation happy, and what we call flourishing,
consists in giving everybody an opportunity of being employed; which to
compass, let a Government's first care be to promote as great a variety of
Manufactures, Arts and Handicrafts as human wit can invent... Potosi

3. 3
Brief Table of Contents 3
Preface 4
Section 1 Introduction SRFHR1216036 - SRFHR1216011 - SRFHR1216003 5
 Causes of economic crises
Section 2 Analysis of Causes SRFHR1216036 - SRFHR1216011 - SRFHR1216003 6
 Supply and Demand Diagrams
Section 3 Economic Policy SRFHR1216036 - SRFHR1216011 - SRFHR1216003 8
 Measures
 Alternatives
 Status Quo
 Supply and Demand modeling
Section 4 Monetary Policy SRFHR1216036 - SRFHR1216011 - SRFHR1216003 9
 Measures
 Alternatives
 Status Quo
 Supply and Demand modeling
Resources 10

4. 4
Preface
The Republic of Suriname was declared independent from the Netherlands on November the
25th
of 1975 and successive governments have since been struggling to get the economy
growing sustainably. A population of approximately 500.000, a per capita GDP of USD
10.964,- (X1)) and real GDP growth of 5% created a foreign exchange reserve surplus of USD
1.6 billion in 2014. With these numbers the Surinamese economic model was fast on its way
to be a best practice for the Caribbean region. However, the steep fall of international
commodity prices in the gold and oil industry and an increase in government spending could
be seen as the triggers for the current budget deficit. Monetary authorities devaluated the local
currency in 2015 by 20% and a domino effect of inflation occurred. Ultimately the government
requested the assistance of the IMF to mitigate the effects of scarce foreign exchange reserves
for necessary imports and recharge the economy to become sustainable in the long term.
In this paper we list the assumed causes and effects, measures and alternatives for the
Surinamese economic crises of 2016 from a macro- and micro economic point of view.

5. 5
Section 1 Contents
Introduction
Causes of economic crises
We have identified the following causes of the economic crises:
Cause 1; Low commodity prices which lead to decreased export revenues (budget deficit/
Decreased Aggregate Demand)
The Surinamese economy is heavenly dependent on the export revenues from commodities like
gold and crude oil based on the fact that they account for “90% of total export earnings and
35% of government revenues”(2). These prices have decreased sharply which resulted in
disequilibrium in the budget.
Cause 2; increased government spending which lead to decreased reserves (budget deficit/
Decreased Aggregate Supply)
The government has increased spending (e.g. civil servant wages, social welfare program) from
2009 to 2015 and this lead to year on year deficits ranging from 27,6% of GDP to 45,7% of
GDP (3).
Cause 3; Increased government investments which lead to decreased reserves (budget deficit/
Decreased Aggregate Supply)
The government has increased investments in the gold (USD 250 mln worth of shares in
Surgold) and petroleum industry from 2009 to 2015 and this contributed also to the budget
deficit
Cause 4; Low agriculture exports which lead to decreased export income (trade deficit/
Decreased Aggregate Supply)
Decreased incomes from e.g. the agriculture firms exports has created a shortage in foreign
currency which have been the case from 2010 up to 2015 from USD 3,923 to USD 2,927 per
inhabitant per annum (4)
Cause 5; High import of goods which lead to low reserves on foreign currency reserves (trade
deficit/Increase Aggregate Demand)
Increased import of goods puts enormous pressure on foreign currency reserves which have
been the case from 2010 up to 2015 from USD 3,119 to USD 4,787 per inhabitant per annum
(5)

6. 6
Section 2 Contents
Analysis of Causes
Aggregate Supply and Aggregate Demand Diagrams illustrating the aforementioned causes
of the economic crises
AS
AD2
II1
II2
Y2 Y1
National Output
Inflation
AD1
Cause I
AS1
II2
II1
Y2 Y1
National Output
Inflation
AD
Cause II
AS1
II2
II1
Y2 Y1
National Output
Inflation
AD
Cause III
A reduction in aggregate
demand leads to a
deflationary recession. Low
commodity prices will
decrease the export revenues.
A decrease in supply leads to
an inflationary recession. If
government spending
increases, reserves (national
output) will decrease.
A reduction in aggregate supply
will lead to a reduction in
national output and an increase
in the rate of inflation.

7. 7
AS1
II2
II1
Y2 Y1
National Output
Inflation
AD
Cause IV
AS
AD1
II2
II1
Y1 Y2
National Output
Inflation
AD2
Cause V
A reduction in aggregate
supply leads to an
inflationary recession.
Income decreased because of
decrease in export.
An increase in aggregate
demand leads to an
inflationary boom. Import of
good increase the national
output which leads to low
reserves of foreign currency.

8. 8
Section 3 Contents
Economic Policy
We state here that we disagree with maintenance of the status quo.
Based on the aforementioned identified causes we propose the following Economic Policy
Measures/Alternatives.
1. Taxation:
Increased effective tax policy would increase government internal revenue
2. Balanced Budget:
Bringing the budget to an equilibrium between spending and income and leading to a
surplus on income
3. Money Supply:
Rationalizing the government procurement system will control the money supply to
mitigate one of the causes of inflation
4. Labor Market:
Stimulating the private sector (e.g. Micro, Small & Medium Enterprizes) with
investment incentives will create or expand businesses which will create new jobs
Supply and Demand modeling
Economic Policy Measures/Alternatives have as objective to bring around positive sustainable
changes to the current economic crises. This can be achieved by implementing the above
mentioned four.
In short; Government should Increase National Output by Decreasing Aggregate Demand and
Increase Aggregate Supply.
Government should be cautious that unbalanced and strict implementation of the above four
could have negative externalities on
the Supply-side policies. For
example an increased taxation might
result in prices rising which will
drive inflation up. Increased tax
revenues should not be merely used
for governments budgets to reflect a
surplus, but tax cuts can incentivize
higher production output and profits
both from the workers and
companies perspective. Profits
stimulate investments in research,
development and innovation. Tax
income should also be used to invest
in education so the countries workforce can be more productive in terms of skilled outputs.
AS1
AS2
AD
An increase in aggregate supply
II1
II2
Inflation
Y1 Y2 National Output

9. 9
Section 4 Contents
Monetary Policy:
We state here that we disagree with maintenance of the status quo.
Based on the aforementioned identified causes we propose the following Monetary Policy
Measures/Alternatives.
1. Open Market Operations:
Central Bank can issue government securities
2. Discount Rates
Central Bank can raise commercial banks inter banking loan rates to control inflation
3. Reserve Requirements
Central Bank can raise reserve requirements rates for commercial banks to control
inflation
4. Interest Rates
Central Bank can raise interest rates to control inflation
Supply and Demand modeling
Monetary Policy Measures/Alternatives have as objective to bring around positive sustainable
changes to the current economic crises. This can be achieved by implementing the above
mentioned four.
In short; Central Bank should Decrease Inflation by Decreasing Aggregate Demand and
Increase Aggregate Supply.
The Central Bank should be
cautious that unbalanced and
strict implementation of the
above four could have negative
side effects. Increased
Discount Rates, Reserve
Requirements and Interest
Rates can decrease consumer
spending which will lower the
quantity of demand and result
in lower company sales. If
companies do not make profits
they cannot re-invest in
research, development and innovation which lead to new job creation, at the same time
increases their output, decreases their resources and thus limits the growth of the economy
production possibility frontier.
AS
AD1
AD2
A decrease in aggregate demand
Y2 Y1 National Output
II1
II2
Inflation

10. 10
Resources
(1) Author, John Maynard Keynes. (1935, page 224 ). The General Theory of Employment,
Interest and Money: Retrieved from
http://cas.umkc.edu/economics/people/facultypages/kregel/courses/econ645/winter2011/gene
raltheory.pdf
(2) Islamic Development Group; INTERIM MEMBER COUNTRY PARTNERSHIP
STRATEGY FOR SURINAME 2014 – 2015, page 5). Retrieved from
http://www.isdb.org/irj/go/km/docs/documents/IDBDevelopments/Internet/English/IDB/CM/
Publications/Parnership_Strategies/Suriname_MCPS2014-15.pdf
(3) HET STABILISATIE- EN HERSTELPLAN 2016-2018; Van crisisbeheersing naar
transformatie van de economie, table 7a + 7b) . Retrieved from
http://www.dna.sr/media/133661/Stabilistatie_en_Herstelplan_2016_2018.pdf
(4) HET STABILISATIE- EN HERSTELPLAN 2016-2018; Van crisisbeheersing naar
transformatie van de economie, page 5). Retrieved from
http://www.dna.sr/media/133661/Stabilistatie_en_Herstelplan_2016_2018.pdf
(5) HET STABILISATIE- EN HERSTELPLAN 2016-2018; Van crisisbeheersing naar
transformatie van de economie, page 5). Retrieved from
http://www.dna.sr/media/133661/Stabilistatie_en_Herstelplan_2016_2018.pdf
Letter of Intent, Memorandum of Economic and Financial Policies, and Technical
Memorandum of Understanding between Suriname and IMF. Retrieved from
http://www.imf.org/External/NP/LOI/2016/SUR/051116.pdf
Caribbean Development Bank; Country Strategy Paper Republic of Suriname 2014-2018.
Retrieved from
http://www.caribank.org/uploads/2014/12/BD53_14_CSP_Suriname_FINAL.pdf
Caribbean Development Bank; Country Strategy Paper Jamaica 2014-2016 Retrieved from
http://www.caribank.org/wp-content/uploads/2016/03/BD23_14_CSP_Jamaica_2014-
16_FINAL.pdf
Caribbean Development Bank; Country Strategy Paper Guyana 2013-2017 Retrieved from
http://www.caribank.org/wp-content/uploads/2016/03/BD13_13_CSP_Guyana-2013-
2017_FINALwithCORR.pdf
Caribbean Development Bank; Country Strategy Paper Grenada 2014-2018 Retrieved from
http://www.caribank.org/wp-content/uploads/2016/03/BD44_14_CSP_Grenada_2014-
18_FINAL.pdf
Caribbean Development Bank; Country Strategy Paper Barbados 2015-2018 Retrieved from
http://www.caribank.org/uploads/2015/01/BD91_14-Bdos-CSP_FINAL.pdf