The Preference Towards Official Dollarization in Suriname

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Rijksuniversiteit Groningen Uppsala Universitet

M.Sc. International Financial Management

The Preference Towards Official

Dollarization in Suriname

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Acknowledgments

I would like to express my special thanks to my supervisor Dr. Wim Westerman who gave me the feedback necessary to finish this project. In addition I would like to thank all the respondents, for without their contribution this research project would not have been possible. And last but not least, I would like to thank my family and close friends who have been very supportive during my final months as a student at the Rijksuniversiteit Groningen.

Groningen, February 2013

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Abstract

Abstract

With more and more countries using a foreign currency for trade or as a store of value, whether officially or unofficially, the degree of dollarization is an important indicator of the confidence citizens have in their domestic currency. On the 1st of January 2004, the Suriname dollar was introduced with the goal to win back the confidence of the general public, domestic and foreign investors in the domestic currency, after having experienced high levels of inflation in the 1990's. And even though the macro economic conditions have been improving for the last 5 years, there still remains a high degree of dollarization in Suriname. By conducing informal interviews and sending out surveys to cognoscenti groups in Suriname, this paper explores the level of preference towards official dollarization in the country. The findings of the descriptive statistics indicate that the majority of respondents do prefer a fixed exchange rate regime, but that the degree of fixity is of great importance.

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Chapter 1: Introduction

1.1 Introduction

In recent years, there have been a lot of research studies done on the dollarization phenomenon, where a country decides to abandon its domestic currency in exchange for a stronger foreign currency as its domestic legal tender. The reason for this interest in dollarization is a wide held believe that removing one's domestic currency and accepting a stronger currency, such as the U.S. dollar, as the legal tender would lead to a reduction of inflation and an increase in the county’s credibility. This would result in an increase in investor’s capital flowing to the country, which would aid to the country’s growth and development. The country which will be focused on in this research paper is Suriname. The economy of Suriname is strongly dependent on its export sector. The main exports are minerals such as alumina, bauxite and because of the spike in gold prices in the world market recently, the gold export has also increased significantly. Because of the economy’s strong dependence on these commodity exports, the price volatility in the international market may generate substantial fluctuations in the value of the production and foreign exchange revenues. These fluctuations have a direct effect on the revenues that the government accumulates and also on the country's economy as a whole, since changes in the exchange rate between the Suriname dollar and the U.S. dollar have a direct affect on the prices of goods imported. This affects the import prices and in turn also affects the amount of money spent on goods and services within the country, due to the fact that Suriname also happens to be highly dependent on its import of goods and services from abroad. As a result of these dependencies, volatility in the prices on international markets can make it rather difficult to make any long term development plans, causing disequilibrium in both the balance of payments and the government budget (Dijck, et al., 2002).

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7 | P a g e these before-mentioned sectors is to increase investor’s confidence in the domestic currency, which is rather difficult because of the major events that occurred in the 1990s.

During the 1990s, Suriname experienced two complete cycles of alumina boom to bust and the government policies which came about actually increased the severity of these cycles. This severity occurred, due to the fact that on both of the transition years of 1991 and 1998, the government embarked in highly expansionary fiscal policies, which resulted in high inflations (Dijck, et al., 2000). These periods caused a drop in confidence in the domestic currency, which up till January 2004 was the Surinamese guilder. On the first of January 2004, the Suriname government replaced the Surinamese guilder with the Suriname dollar. It removed three zeros from the currency paper in order to make transactions more manageable and to gain back the confidence in the domestic currency. There had been a lot of discussions on whether or not this change in currency would help improve the country's development in the long run. And the majority seemed to have the same opinion as the authors of the paper “Suriname kiest voor de verkeerde dollar'' [Suriname chooses the wrong dollar], whom imply that the country might have been better off adopting the U.S. dollar instead of creating the Suriname dollar (Jong-A-Pin & Jaan, 2004). Furthermore, the literature on other countries that have adopted the U.S. dollar as their legal tender, such as Ecuador and El Salvador, have shown that these countries have not benefited from dollarizing their economy in the long run, see appendix 2.

1.2 Research Question and Sub Research Questions

Although the Suriname dollar has already been put in place, the point in question that remains is whether the introduction of the U.S. dollar as the country's domestic currency, by way of adopting a new exchange rate regime, is going to be an effective means in improving the country's development in the long run. Accordingly, the research question which is going to be discussed in the course of the present paper reads as follows: How strong is the Preference towards Official Dollarization in Suriname?

This research question shall be answered by answering four sub research questions. The first sub-research question is, what is the current exchange rate regime in Suriname? The second sub-research question is, what is the difference between the fixed, the floating and the official dollarization regime? The third sub- research question is, which factors should be considered and how do these factors influence the choice of an exchange rate regime in Suriname? The fourth sub-research is, what are the recommendations from the cognoscenti groups concerning the choice of an exchange rate regime in Suriname?

1.3 Relevance of the Study

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8 | P a g e studies have also shown that there have only been a few countries that have succeeded in de-dollarizing their economies. This thus might suggest that the high degree of dollarization in Suriname might be persistent and challenging for the policymakers over the medium term (Fritz-Krockow, et al., 2009).

1.4 Methodology

In order to answer the first three sub research questions it was necessary to make use of secondary data. The secondary data used for this research consists of: the literature currently present on the topic of exchange rate regimes, IMF reports, reports by the Ministry of Agriculture Livestock and Fisheries (LVV), presentation material from seminars held on the topic of Suriname economic development, as well as relevant articles on the internet, magazines and newspapers. Since the last sub research question is qualitative in nature, it was necessary to collect primary data in order to answer it. The primary data for this research was collected in two ways: Firstly, through questionnaires which were distributed among the cognoscenti groups in order to obtain their opinion on which exchange rate is most beneficial for Suriname. Besides figuring out their preferences, the secondary goal of the questionnaires was to be able to find out if the younger generation’s preference differed from the preference from the older generation. To ensure the reliability of the primary data collected through the use of questionnaires, the questionnaires were distributed among a group of people who are expected to have the required background knowledge of the topic.

The second way, in which the primary data was collected, was through non-formal personal interviews which were conducted with key informants through Skype calls. The questions asked to the interviewees were based on the ones found in the questionnaire, which is presented in the appendix 2. These questions were emailed to the interviewees in advance, which gave the interviewee the opportunity to be prepared to answer the questions during the interview. Furthermore, the interviewees were given the opportunity to ask for clarifications on questions they did not understand prior to the interview. It should also be noted that the individuals which participated in the interview sections were chosen or assigned by their representing group as being the most qualified to answer the questions which were emailed beforehand, which ensured the reliability of the answers provided by them. Furthermore, the interviewees were allowed to verify the interview reports made right after the interview in order to verify the accuracy of their answers.

1.4.1 The Sample

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9 | P a g e questionnaires, as it was against the rules stipulated in their contracts to give their opinion about the policies of the bank they are working for. Therefore, the final sample for this study has been divided into four groups: the political, the business community, the labour union and the expert/semi-expert group.

1.4.2 Data Collection for the Sample Group

The questionnaires were sent out on the 3rd of November, and the respondents were initially given until the 22nd of December 2012 to complete and return the questionnaires. One issue that came up during the sending of the questionnaires during this period was that certain email addresses ending with the two-letter combination ‘’.sr’’ were returned to my inbox with a ‘’mail delivery failure’’ message. In order to address this issue, I asked local contacts in Suriname to retrieve the alternative email addresses of the respondents in question. After having addressed the email delivery issue, I was sure that all the questionnaires send had been received, as the majority replied that they would have a look at the questions. For the ones who did reply with such a message and whom I wasn’t sure received my questionnaire, were contacted and asked to send a reply indicating that they had received my message. It is also important to note that some the people whom were approached to participate in this study, in total 8, found themselves not qualified enough to fill in the questionnaires themselves and forwarded it to someone else in their organization whom had the background knowledge necessary to answer the questions. In total I send out 82 questionnaires and reminders were sent one week before the deadline in order to increase the response rate. On the day of the deadline there were a total of 43 filled in questionnaires received in my inbox, however, 9 more questionnaires were received after the deadline. These additional questionnaires were included in the research study and did not affect the descriptive analysis as they did not significantly alter the overall preference of the initial sample. It should further be noted that 2 of the questionnaires were removed from the study as they were copy pasted from another respondent. And even though there were 3 other respondents whom based their answers on the views expressed by another particular respondent, whom happens to be an expert in the field of economics, their filled in questionnaires were kept in the sample as they provided additional input in the open questions section. Thus there were a total of 50 filled in questionnaires analyzed in this research study. From these 50 filled in questionnaires, 30 were from the business community group, 6 from the political group and 14 from the expert/semi-expert group. There were in total 5 respondents whom asked for clarifications on certain questions and these were provided to them through email communication.

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10 | P a g e last an hour. However, 2 of the interviews had to be rescheduled due to bad internet connections. These interviews were helpful in forming a better understanding of why the majority the respondents seemed to be favoring one particular exchange rate regime. It should further be noted that one of the initial objectives was to distinguish between the opinions of the younger and older generation, but apparently after evaluating the data, the age difference did not seem to matter and therefore has been excluded from the data analysis. The reason is that there were no significant differences between the two groups, since the majority of the respondents choose the same exchange rate regime based on the three factors.

1.4.3 Limitations

What follows is an overview of the limitations of this research study.

As mentioned previously, the questionnaires that were sent out had a secondary goal of being able to compare the results from the younger versus the older generation. The final collective data that was analyzed proved that this comparison could not be made as the majority of the respondent in the sample choose for the same option.

The second limitation is the lack of knowledge on exchange rate regimes and their consequences. Even though the respondents were given the opportunity to gather information in advance in order to answer the questions presented to them, most of them seem to turn to the same experts, which may have skewed the opinions of the individuals approached.

The third limitation is the lack of available and up to date specific data for the factors and for the various sectors in Suriname. The statistics published by the General Bureau of Statistic in Suriname (ABS) were up until the year 2008, however, a local contact was able to retrieve a document from which the data for the country’s GDP, exports and imports for the year 2007 till 2011, could be retrieved. This document was stamped on the front page by the ABS and has thus been sourced as being from the ABS. Furthermore, for the recent information and data which could not be retrieved from the ABS, I made use of reports published by the IMF.

The fourth limitation is not being able to retrieve the opinion of the research department in the Central Bank of Suriname as was mentioned earlier. They were approached but due to their contracts they were not allowed to state their opinion concerning the bank they were working for.

The fifth limitation is the fact that the interviews have not all been smoothly due to failing internet connections or bad sound quality from some of the interviewee’s causing for repeated interviews which may have made them answer quickly instead of taking their time.

1.5 Structure of Thesis

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11 | P a g e This is then followed by the methodological part of this research (chapter 3), within which the data sample is presented, the analysis of the data is conducted and were comparisons are made with other countries that have adopted the official dollarization regime. This research study ends with a conclusive section (chapter 4), within which the findings are summarized and recommendations for futures research are provided.

Chapter 2: Literature Review

2.1 Historical dollarization studies

Most of the previous studies done on dollarization emphasized more focus on the potential benefits of accepting a stronger foreign currency, such as the U.S. dollar, as the domestic legal tender. The potential benefits that await a country include standard economic benefits that accrue from financial and monetary integration with the anchor country, which in this case would be the U.S. These economic benefits would occur because of the reduction in transactions costs, which in turn reflects an increased usefulness of the money for all its basic functions such as being medium of exchange, unit of account and a store of value. Furthermore, with the domestic currency being replaced by the anchor currency, there are no longer costs involved stemming from currency conversions or from financial activities such as hedging in investment and trade transactions between the partner economies (Cohen, 2000).

As is mentioned in the introduction, all these benefits result from the widely held assumption that removing one's domestic currency and accepting the U.S. dollar as the legal tender in its place, would lead to a reduction of inflation to the level of the anchor or vehicle currency country (Kraft n.d.). It is thus safe to say that countries that choose to dollarize are facilitating, through the financial integration they now have with the United States, the inflow of foreign capital in the form of financial and direct investments, which in turn stimulate growth in the country (Salvatore, 2001). The efficiency gains resulting from the combined benefits previously mentioned could be considerable and beneficial for both sides, namely the dollarizing country and the United States. This ability of a country to abandon its domestic currency in order to adopt the U.S. dollar as its legal tender and as a result lower its inflation rates and at the same time increase its economy's growth, suggests that dollarizing is a very good alternative for countries experiencing high inflation and low economic growth (Cohen, 2000).

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12 | P a g e costs that await countries that dollarize include the country’s monetary authority losing the control it once had over the country’s interest rate and money supply, the loss of seigniorage revenue, which is the revenue coming in from printing the domestic currency. This seigniorage revenue is mainly used for financing the fiscal deficit. Furthermore, dollarization imposes restrictions on the monetary authority’s role as the lender of last resort to the domestic financial system. This lender of last resort function enables central banks to provide loans to commercial banks facing liquidity problems. The central banks do so by assuring the commercial banks that there are deposits available in a bank run situation (Quispe-Agnoli, 2002).

These opposing views suggest that the choice of whether or not to dollarize is a rather difficult and complicated issue. In fact, previous researchers have indicated, that the choice of an exchange rate regime in general is a rather difficult and complicated issue (Yagci, 2001; Markiewicz, 2006; Alesina & Wagner, 2006; Ishfaq, 2010).

2.2 Exchange rate regimes

Every country that has its own currency is faced with the decision as to what type of exchange rate regime to implement and maintain. In the academic literature, the range of exchange rate regime alternatives is often narrowed down to the two most extreme cases, which are the fixed and the floating exchange rate regimes. However, in reality, these two extremes each have a number of sub-categories or classifications, which provides the countries a larger range of alternatives to choose from (Sozovska, 2004). Suriname has experienced a number of different exchange rate arrangements throughout the years, see Appendix 1 for an overview. First it had a fixed exchange rate regime, followed by a multiple exchange rate regime, which consisted of a fixed and floating exchange rates and currently it is announced to have a managed fixed exchange rate regime. All these different exchange rate arrangements were a result of the authorities trying to find the right regime that would help reduce the inflationary expectations that were often built up due to the fiscal and monetary financing needs, in the country (Fritz-Krockow, et al., 2009).

Most of the exchange rate regimes that were put in place did not succeed in lowering these inflationary expectations. On the contrary, the exchange rate arrangements that were introduced and maintained proved to be very costly undertakings, as is evidenced in terms of price distortions on the market, the increasing inequality in the income distribution and decrease in the production of both the country's export products and import substitutes (Fritz-Krockow, et al., 2009).

2.3 Classification System for Exchange Rate Regimes

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13 | P a g e Monetary Fund (IMF, 2006) and it lists all the different exchange rate regime alternatives in existence, ranging from independently floating to dollarization. The exchange rate regimes alternatives contained in this classification system are the following: exchange arrangements with no separate legal tender (Dollarization), currency board arrangements, conventional fixed peg arrangements, pegged exchange rates within horizontal bands, crawling pegs, exchange rates within crawling bands, managed floating with no predetermined path for the exchange rate and the independently floating exchange rate regime (Yagci, 2001, IMF 2006). Furthermore, the website of the IMF (2006) not only provides this list of different exchange rate regime alternatives, but also shows which regime is currently adopted and maintained by which country.

2.3.1 The Classification of Suriname’s current Exchange Rate Regime

According to the IMF website, Suriname's current exchange rate regime is classified as being a ''Other Conventional Fixed Peg Arrangement''. It is important to note here, that this classification by the IMF is based on the country's actual exchange rate regime in practice, as Suriname has officially announced to follow a ''Managed Float Exchange Rate Regime'' (Adhin, 2012). Suriname's current exchange rate regime holds its domestic currency fixed to the US dollar, which is a major trading partner, within a margin of ±1 percent or less. This means that the exchange rate is allowed to fluctuate within a narrow margin of less than ±1 percent around a central rate for at least three months. This fixed regime is maintained by the central bank (CBvS) through direct intervention, the purchase and sales of foreign exchange on the domestic market, or indirect intervention, through the use of interest rate policy and imposition of foreign exchange regulations (IMF, 2006). See also figure 1 below:

2.4 The Scope of the Research

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14 | P a g e provided in this section as to why these three exchange rate regimes are focused on in this study, but the advantages and disadvantages of each will be presented here as well.

2.4.1 The Dollarization Regime

The dollarization exchange rate regime is focused upon, because Suriname has been labeled as one of the most dollarized economies in South America. This label comes about because of the rapid financial dollarization, which refers to deposit and credit dollarization, that Suriname has been experiencing since the 1990s (Adhin, 2011; Adhin 2012).

The deposits of foreign currency, mainly U.S. dollars, in the Central Bank rose significantly as a result of the CBvS eliminating the obligation it imposed on the citizens of Suriname to surrender foreign currency income, to the central bank at the official exchange rate, in the second half of the year 2002. Additionally, the rise in foreign currency deposits was also brought about by the increased earnings coming in from the gold exports. This increase in the exports of gold resulted from the liberalization of the gold market in September 2002 (Adhin, 2012).

Both these before-mentioned events contributed to the rise of the dollarization ratio of bank deposits to 58 percent in 2004, which was a 38 percent rise from the ratio measured in 1996. The years that followed, the average dollarization ratio of bank deposits has had an average of about 55 percent (Fritz-Krockow, et al., 2009; Adhin, 2012).

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Advantages of the dollarization regime:

The first advantage of having a dollarization regime in place is the reduction of administrative costs that the domestic government incurs when producing and maintaining an independent domestic currency. The cost savings that occur from this reduction in transaction costs are very appealing to developing countries (Cohen, 2000).

Secondly, it reduces the transaction costs among trading countries using the same currency, which will lead to an increase in economic integration between these countries. Furthermore, the larger the reduction in transaction costs the stronger the trade links between the trading countries, within the common currency area (Mathilda, 2010).

Thirdly, it brings along political, institutional and financial integration with the United States, thereby establishing a sounder financial sector in the domestic country adopting the US dollar as the domestic currency. These integrations with the US will force the political, institutional and financial institutions in the domestic country to not only improve their efficiency, but also the quality of their services, thereby increasing the countries competitiveness overall. Furthermore, as the adoption of an official dollarization regime is an irreversible change, it signals a permanent commitment to low inflation, fiscal responsibility, and transparency. All of the former are appealing to developing countries that are characterized by price and fiscal instability (Cohen, 2000; Mathilda, 2010).

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16 | P a g e the real interest rates and its volatility (Curutchet, 2001). This reduction in real interest rates and its volatility in turn might result in higher levels of domestic investments and economic growth (Cohen, 2000).

Fifthly, dollarization will eliminate the domestic country’s devaluation risk or currency risk, which might indirectly reduce the country’s default or sovereign risk, insofar as some part of default risk reflects the possibility of future currency crises (Cohen, 2000; Mathilda, 2010).

Lastly, by implementing a dollarization regime, the country in question is able to reduce price uncertainties in the domestic market. This reduction in price uncertainty results in the improvement of the free market price mechanism of supply and demand (Mathilda, 2010).

Disadvantages of the dollarization regime:

Before introducing the first disadvantage it is important to define country’s seigniorage revenue, which is the revenue that a government earns because it has the monopoly of creating the domestic fiat currency. The first disadvantage then, from dollarizing the economy is the loss of this ability to collect seignoirage revenue, as this will now be collected by the U.S. monetary authority. Even if the U.S. monetary authority were to agree, through bilateral agreements, to share the seigniorage revenue with the domestic country that lost this revenue in the process of dollarizing its economy, it’s still a disadvantage as the newly dollarized country is losing part of its seigniorage revenues (Curutchet, 2001).

Secondly, dollarization restricts the central bank’s ability to act as a lender of last resort, by removing its ability to ‘’print money’’. And even though this restriction does not imply that the central bank will completely lose the ability to act as a lender of last resort, it is important for the country to have the political and financial ability to set up this function, once the country decides to dollarize (Curutchet, 2001).

Lastly, the country adopting the dollarization regime loses its monetary independence, which means that the country can no longer use the instruments of monetary policy to adjust to internal and external shocks (Cooley & Quadrini, 2000).

2.4.2 The Fixed Exchange Rate Regime

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Advantages of the fixed exchange rate regime:

As is the case with dollarization there are previous studies done emphasizing the benefits that result from adopting a fixed exchange rate regime. The potential benefits of adopting a fixed exchange rate regime are as follows: Firstly, a country that implements a fixed exchange rate regime is responsible to maintain this fixed rate commitment by making full use of the monetary instruments it has at its disposal, thereby making a commitment towards monetary policy. Secondly, by implementing a fixed exchange rate regime the country reduces the risk of unpredictable exchange rate volatility that are is commonly seen in countries adopting a floating exchange rate regime. A third advantage stemming from the fixed exchange rate regime is that it will help restrain domestic inflation pressures, which may result from either the wage and price setting decision of the private sector or from the excessive government budget deficits. Lastly, a fixed exchange rate regime can provide the country an expectations anchor, thereby making it less difficult for companies to make anticipations regarding future transactions (Latter, 1996; Frankel, 2003; Ishfaq, 2010; Mathilda, 2010).

Disadvantages of the fixed exchange rate regime:

Firstly, a disadvantage of a fixed exchange rate regime is the loss the country's government faces in terms of the control over its own domestic money supply. Secondly, a country with a fixed exchange rate regime is dependent on the monetary policy of the country whose currency it has adopted as its own legal tender, the anchor country. Furthermore, previous researchers claim that if credibility is fragile, consequently in case of crisis, adjustments may be too costly (Latter, 1996; Frankel, 2003; Beker 2006; Ishfaq, 2010; Mathilda, 2010).

2.4.3 The Floating Exchange Rate Regime

The floating exchange rate regime is focused upon, because Suriname closely follows a conventional fixed exchange rate regime although it formally announced to follow a managed floating regime (IMF, 2006; Adhin, 2012). It would be interesting to find out whether Suriname should indeed adopt a floating exchange are regime.

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Advantages of the floating exchange rate regime:

Firstly, a floating exchange rate regime implies that the country has monetary independence, which means that its central bank can respond to downturns in the economy by employing various monetary instruments which it has at its disposal, such as increasing the money supply in the economy, lowering interest rates and depreciating the domestic currency (Frankel, 2003).

Secondly, under a floating exchange rate regime, the exchange rate is an absorption mechanism of external and internal shocks. An automatic correction, of the exchange rate, takes place in the form of the domestic currency being depreciated or appreciated, depending on the altered economic conditions of the domestic economy (Beker, 2006).

Thirdly, with a floating exchange rate regime there is a lower possibility of a currency crisis occurring in the country. There are two reasons for this: first, the opportunities for speculators to make profits at the expense of the central bank are eliminated. Second, the floating exchange rate allows for hedging from currency risks and the elimination of the currency mismatching problem (Latter, 1996; Beker, 2006). Lastly, a country adopting a floating exchange rate regime eliminates the requirement to hold large foreign currency reserves in its central bank as foreign currencies are not necessary as intervention instruments (Beker, 2006).

Disadvantages of the floating exchange rate regime:

Firstly, the flexible exchange rate regime implies the existence of volatility risk. The daily fluctuations that the country’s nominal exchange rate goes through, provides a reminder of the currency risk inherent in flexible regimes. This volatility can make it very difficult for companies to make anticipations regarding future transactions. However, it may be possible in certain instances to use the derivative markets to hedge against such uncertain situations (Latter, 1996; Beker, 2006; Mathilda, 2010).

Secondly, the freedom to operate an independent domestic monetary policy may be abused. The government may for example be tempted into inflationary budgetary and monetary policies, as a result of it not being pressed to prevent a depreciation of the exchange rate (Latter, 1996).

Lastly, it is seldom the case that the foreign currency market operates with perfect efficiency. There is therefore, a possibility of a misalignment of the exchange rate occurring due to deviations from fundamental macroeconomic variables (Beker, 2006; Latter, 1996).

2.5 The Factors influencing the choice

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19 | P a g e economy. Furthermore they include the types of economic shocks facing the economy and the objectives of the policymakers (Karam, 2001).

However, there seems to be difference in opinion among researchers as to which factors are the most important factors to focus on when choosing an exchange rate regime. Some researchers find that the most important factors include inflation, foreign exchange reserves, capital mobility, labour mobility and nominal flexibility, production and export diversification (Beker, 2006). Yet other researchers find the most important factors to include GDP size, openness to trade and financial flows, the stage of the country’s financial development, inflation, the structure of the country’s production and exports, the nature and source of shocks the country faces, policymakers’ preferences for the trade-offs among the main policy objectives; political conditions in the country; and the credibility of its policy makers and institutions (Yagci, 2001).

2.5.1 Factor Choice

For this research paper, I will focus on the factors as presented in the research performed by Beverly Mathilda (2010), a former student at the Rijksuniversity of Groningen, who performed a qualitative research study on the preferences of exchange rate regimes in Curaçao. The reason for doing so is that the results of this research paper, focusing on Suriname, will then be directly comparable with the results found in the research paper focusing on Curaçao. The factors which are focused upon in this research paper are the economic factors, the monetary factors and the political factors. The economic factors include the country’s GDP size, rate of inflation, competitive trade position, degree of openness and the country’s balance of trade. The monetary factors include the constraints imposed by the three exchange rate regimes (dollarization, fixed, floating), the duration of the exchange rate regime, the level of foreign currency reserves in the central bank and the country’s operating exposure. Lastly, the political factors include the government’s policy towards inflation, the vicinity of governmental elections and political stability (Mathilda, 2010).

2.6 Assessment of Exchange Rate Regime choice for Suriname

In this section every factor, which influences the choice for an exchange rate regime, will be assessed and applied to Suriname’s current state in relation to those factors.

2.6.1 The Economic factors

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20 | P a g e The data in table 1 indicate that the real GDP of Suriname has been quite stable over the years and that the inflation rate, which seems to be very volatile, has had no dramatic effect on the GDP growth. Previous research indicates that Suriname’s average annual growth has been around 5 percent between 2003 and 2010. Furthermore, at the bottom of the international recession in 2009, the domestic economy grew by 3 percent, one of the highest growth rates in the region (Adhin, 2011). Nevertheless, when we solely focus on the GDP size of Suriname in comparison to the GDP size of an advanced economy, such as the United States, Suriname would opt for a fixed exchange rate regime as it would face great difficulties in managing a flexible exchange rate regime (Poirson, 2001; Mathilda, 2010).

The second economic factor of interest is the inflation rate and as can be seen form table 1, in 2009 the inflation rates in Suriname fell dramatically as a result of successful stability-oriented policies (Adhin, 2011). However this fall in inflation rates may have been more influenced by the downturn in the world economy as it appears, from the figures in the table that inflation rates rose back to double digits, the following years. And the findings of previous literature suggest that countries with moderate to high inflation rates are less likely to select fixed exchange rates (Collins, 1996; Mathilda, 2010). Thus based on the inflation figures in table 1, Suriname would opt for a flexible exchange rate regime.

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21 | P a g e currency was devaluated, the real exchange rate depreciated, indicating an increase in the country’s competitive position. However, from mid 2011 and onwards, we see that the real exchange rate is appreciating again. Based on the IMF findings, it can be concluded that Suriname, which is experiencing a high exchange rate variability, would benefit from a flexible exchange rate regime. Table 2 presents Suriname’s trade openness figures for the period 2007-2011. These figures are calculated by adding the country’s total exports to the total imports, and dividing their sum by the total GDP for that year.

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22 | P a g e When looking at the openness figures reported in Table 3, we can conclude that Suriname has a very open economy. Indeed when we look the size of both imports and exports as a percentage of the country’s GDP, we see that Surinam has a lot of trade flowing to and from foreign countries. Thus based on the openness of the country alone, Suriname would adopt a fixed exchange rate regime (Mathilda, 2010). According to the literature, a country that cannot influence the world prices of its main exports is classified as being a small country (Mathilda, 2010). Suriname’s major exports are the commodities, alumina, oil and gold. While the bauxite/aluminium sector is facing some problems as a result of the slump in the international prices, both the gold and oil sector in Suriname have been experiencing a steady increase in the last few years. According to figure 4, Suriname’s export in gold has been steadily

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23 | P a g e gold and oil exports of Suriname have been increasing, as can be seen in figure 4, the levels of the country’s total gold and oil exports are too small to influence world prices for these commodities. Therefore, based on the fourth economic factor which is the country’s trade structure, Suriname can be categorized as a small country. Concerning this classification, previous literature indicates that Suriname, in terms of its trade structure, would adopt a fixed exchange rate regime (Mathilda, 2010).

The following observations can be made to sum up the evaluation of Suriname’s economic factors. When only looking at the GDP size of Suriname, which has been stable over the last few years, the literature would conclude that the country would opt for a fixed exchange rate regime. Based on the inflation rate, which has been very high in the last 5 years, except for in 2009, the literature would conclude that Suriname would opt for a flexible exchange rate regime. The analysis of the real exchange rate variability in Suriname indicates that the country would opt for a flexible exchange rate regime. Furthermore, when comparing the country’s economy to other the economy of other countries in South America, we find that Suriname has a very open economy in comparison and it would therefore opt for a fixed exchange rate regime. Lastly, based on Suriname’s structure of trade, the country would opt for a fixed exchange rate. It appears that only 2 of the 5 economic factors analyzed would lead the country to choose a floating exchange rate regime. Thus the assessment, of the economic factors, indicates that Suriname would prefer a fixed exchange rate regime.

2.6.2 The Monetary factors

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24 | P a g e exchange rate on the parallel market which was SRD3.4 = $1 at the time. Furthermore a band of SRD 3.25-3.35 per $1 was established, within which all transactions have to take place. These interventions led to the establishment of a stable market exchange rate within the band as well as the removal of informal foreign exchange transactions ("Macroeconomic report: Suriname," 2012). Since Suriname’s monetary policy is aimed at targeting inflation, we can conclude that the country would opt for a fixed exchange rate regime in order to assure a stable currency and to improve the efficiency of commercial transactions (Adams, 2006).

The second monetary factor is the duration of the exchange rate regime. As mentioned earlier, Suriname’s officially announced exchange rate regime, de jure maintained floating exchange rate regime, differs from its regime in practice, the de facto managed fixed exchange rate regime. This de facto managed fixed exchange rate regime of Suriname does not present a negative impact on the monetary policy of the CBvS, as the exchange rate within this regime can be adjusted to the country’s economic circumstances. The current exchange rate regime, which is classified as a de facto stabilized regime, was introduced in January 2011 and is thus only 2 years old ("IMF Suriname country report," 2011). It is important to note that this new exchange rate regime still behaves as the country’s previous de factor fixed exchange rate regime, with the only difference being that the currency was devalued to a new level on January 2011. Since then the exchange rate has been held fixed to SRD3.35 per US$ instead of SRD2.78 per US$. The results of previous research indicate that long-lived exchange rate regimes are easier to change then regime’s that have existed for only a couple of years (Andreou, 2009; Mathilda, 2010). Furthermore, when looking only at the developing countries, the duration of fixed exchange rate regimes is approximately 20 years and duration of floating regimes is approximately 10 years (Hossain, n.d.). It is however not clear to say whether the exit of Suriname’s exchange rate regime would occur with much ease. If we look at the duration from Suriname’s de jure managed floating regime point of view, we could conclude that the change to another exchange rate regime would occur peacefully. If we look at it from the viewpoint from the de facto fixed exchange rate regime, its current exchange rate regime still appears to be very short-lived and therefore adopting a new exchange rate regime will not go with ease. Even if we do not take into account the devaluation that occurred in 2011, the de facto managed fixed exchange rate regime, introduced in 2004 is only 9 years old and thus still would not enable a peaceful exit.

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25 | P a g e a large flow of imports coming into the country. And since the majority of these transactions take place in foreign currencies, the exchange rate stability in Suriname can only occur by fixing the domestic currency to the U.S. dollar or by adopting the U.S. dollar as its legal tender. According to the literature, Suriname would opt for a fixed exchange rate regime in order to protect the transactions of the domestic companies when dealing with foreign companies.

The fourth monetary factor is the level of reserves in the central bank. According to the previous literature, countries with a low level of reserves tend to adopt a flexible exchange rate regime (Mathilda, 2010; Poirson, 2010). According to The Economist, the central bank has an adequate level of reserves when the reserves in the central bank can cover three months worth of the country’s imports ("Import cover," 2010). And this level of reserves in Suriname has significantly increased in the last few years, thanks to a strong growth in the country’s export and because of tight fiscal and monetary policies ("The economy in Suriname," 2012). Figure 5, shows the gross international reserves of the CBvS. According to the findings of previous literature, we therefore can conclude that Suriname would opt for a fixed exchange rate regime since the central bank reserves in 2012 covers the country’s imports by approximately 4.5 months.

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26 | P a g e country’s domestic companies dealing in foreign transaction. Lastly, when looking at the reserves in the central bank, Suriname would opt for a fixed exchange rate regime.

2.6.3 The Political factors

The first political factor that will be assessed is the political stability. In order to assess the political stability in Suriname, we will look at the ‘’Political Stability and absence of Violence/Terrorisms’’ dimension of governances found in the ‘’Worldwide Governance Indicators Project’’ by the World Bank Group ("Worldwide Governance Indicators", 2013). This governance dimension reflects the likelihood that a country’s government will be destabilized or overthrown by unconstitutional or violent means (De Gobbi & Mwamadzingo, 2012). According to the previous literature, countries with a high degree of stability opt for a fixed exchange rate regime. Table 5 shows the values of political Stability for Suriname and for its neighboring countries for the period 2004 to 2011. It is important to note that the value range for the political stability dimension is between -2.5 (Very Unstable) and 2.5 (Completely Stable) and that higher values indicate a higher degree of political stability (De Gobbi & Mwamadzingo, 2012). As can be seen from the table, Suriname scores better than its neighboring countries on the political stability dimension, except when we compare the values to that of French Guyana.

Table 5: Political Stability in South America

Source: "Worldwide Governance Indicators", 2013

Furthermore, we see that the stability values dropped a bit in the period 2006-2008, but have been improving ever since. Based on the political stability dimension we see that Suriname is reasonably stable politically and therefore will choose a fixed exchange rate regime.

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27 | P a g e system on the other hand is a system in which the party with the most votes has control of the country’s policies (Steinberg & Walter, n.d.). Taking these definitions of the two electoral systems, Suriname has a proportional representation system and according to the previous literature, countries with this type of electoral system produce weaker, less durable governments and would therefore be more likely to adopt a fixed exchange rate regime (Bernhard & Leblang, 1999; Broz & Frieden, n.d.).

The third political factor that will be assessed is the vicinity of elections. According to the previous literature, the governing party(ies) can manipulate the exchange rate regime, in order to produce an economic boom right before the next elections, which would increase their chances of winning that election. For example, in the run-up to an election, politicians might decide to float the domestic currency, which would give them more room to manipulate the monetary policy for to not only achieve short-term electoral gains but also to spur short-term economic growth. After the election, the politicians would then go back to a fixed exchange rate regime as a way to impose discipline on the economy, helping to prevent an inflationary spiral (Bernhard & Leblang, 1999; Mathilda, 2010). Suriname has a track record of nominal exchange rate drop during electoral cycles. In both 2001 and 2011, when the new government parties took office, there have been large currency devaluations followed immediately by the domestic currency being held fixed to the U.S. dollar (Arias, 2012). According to the credibility view, this adoption of a fixed exchange rate regime right after the elections is used as a signal of the government’s commitment to stabilize the economy (Carmignani, et al., 2006). Thus when only taking the vicinity to elections into account, Suriname would adopt a fixed exchange rate regime.

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28 | P a g e by the growth that has been occurring in the private sector of the economy, which is represented by the upward sloping red line in figure 6. The public sector employment has, represented by the upward sloping green line in to figure 6, also been growing but only moderately ("The economy in Suriname," 2012). Looking at table 6, we see that the average real GDP growth in Suriname has been 4% in the period 2008-2011 and that the average unemployment rate for that period has been 8%. According to the literature,

countries that experience lower past GDP growth rates or higher past unemployment rates, tend to opt for a fixed exchange rate regime (Poirson, 2001; Mathilda, 2010). Thus, based on the percentages in table 6 and on the trends observed in figure 6, Suriname would opt for a fixed exchange rate because of its average low real GDP growth rate of 4 % and because of it average high unemployment rate of 8%. The following observations can be made to sum up the evaluation of Suriname’s political factors. Being that Suriname proportional representation system, it would adopt a fixed exchange rate regime. Suriname would also adopt a fixed exchange rate regime when taking into account the exchange rate drop that occurs in the vicinity of elections. When considering the government’s temptation to inflate the country’s GDP, Suriname would also choose a fixed exchange rate regime. Lastly, the political stability in Suriname would lead to a fixed exchange rate regime.

3. Data Analysis

In this section, an analysis is conducted concerning the factors which are relevant for choosing a new exchange rate regime for Suriname. The three factors will be analyzed based on the opinions of representatives from the sample in this study. Refer to the sample description in chapter 1.4.1.

3.1 Analysis of the factors

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29 | P a g e

3.1.1 Analysis of the Economic factors

Table 7 shows that that all the economic factors are considered relevant by the sample group. The most interesting aspect of this table is that, as can be seen from the last column, the majority of the sample group chooses the fixed exchange rate regime based on all the economic factors.

Table 7: Relevance of the Economic Factors

If we look at table 8, where the preferences for the individual economic factors are shown in percentages, we see that the fixed exchange rate regime is the most preferred exchange rate regime, followed by the floating exchange rate regime.

Table 8: Preference for exchange rate regime based on economic factors

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30 | P a g e would predict the country adopting a flexible exchange rate regime, but 84% of the respondent who said that the exchange rate variability is of importance, choose for a fixed exchange rate regime. According to the theory, Suriname would opt for a fixed exchange rate regime if the choice was only based on the country’s degree of openness. This is in line with the respondents answers, since 76% choose for the fixed exchange rate regime. This is also the case when looking at the trade structure of Suriname, as 92% of the respondents choose a fixed exchange rate regime.

When looking at the preferences of the respondents based on the economic factors alone, it is clear that the preferred exchange rate regime is the fixed exchange rate regime. However the degree of fixity also seems to be of importance, because dollarization which is the most fixed regime seems to be the less favored regime choice of all three.

3.1.2 Analysis of the Monetary factors

Table 9 shows that all the monetary factors are considered relevant by the sample group and as can be seen by numbers, all the monetary factors are considered relevant in the choice of which exchange rate regime to choose. As was the case with the economic factors, the majority of the respondents choose for the fixed exchange rate regime when taking the monetary factors into consideration.

Table 9: Relevance of the Monetary Factors

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31 | P a g e Table 10: Preference for exchange rate regime based on the monetary factors

As was discussed earlier, developing countries would have a more difficult time adopting a new exchange rate regime, the longer the current regime has been in place. From the figures we see that most of the respondents look at the duration of Suriname’s current regime from its de factor managed fixed point of view, as this regime is only short lived compared to the approximate 20 years life span, and therefore have chosen for the fixed exchange rate regime, which the country appears to have in practice. When looking at the next factor, the operating exposure, we see that only 6% of the respondents choose for a floating exchange rate regime, as the majority prefers a stable currency. We would expect that the majority would choose the dollarization regime as this would completely eliminate the exchange rate volatility, but according to the figures the majority still does not seem to favor abandoning the SRD in exchange for the U.S. dollar. Lastly, when we look at the reserves in the CBvS, the literature would tell us that the country should opt for a fixed exchange rate regime. And the majority of the respondents seem to agree as 84% choose for a fixed exchange rate regime when solely focusing on the level of reserves in the central bank.

When looking at the preferences of the respondents based on the monetary factors alone, it is clear that the preferred exchange rate regime is the fixed exchange rate regime. As was the case with the economic factors, the degree of fixity also seems to be of importance here, but in this case to lesser extent. Next to the fixed exchange rate regime, the majority of the respondents did choose for the dollarization regime, with the floating exchange rate regime being the less favored regime.

3.1.3 Analysis of the Political factors

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32 | P a g e Table 11: Relevance of the Political Factors

Table 12 shows that next to the fixed exchange rate regime, the majority of the respondents choose for the flexible exchange rate regime with the dollarization regime being the least favored regime option for the country when only taking the political factors into account.

Table 12: Preference for exchange rate regime based on the political factors

According to the literature, Suriname would choose a fixed exchange rate regime when only considering the political stability in the country. And when looking at the percentages in table 12, it appears that 72% of the respondents agree with the literature by choosing for a fixed exchange rate regime. Looking at the country’s electoral system, the literature states that Suriname would choose for flexible exchange rate regime, however the percentages table 12 indicates that the respondents favor a fixed exchange rate regime instead. When looking at the electoral cycle of Suriname, the theory would predict the country to choose for a fixed exchange rate regime, and most of the respondents seem to agree. It is important to note, as mentioned earlier, that the two last mentioned factors, the electoral system and electoral cycle, only a small percentage of the respondents found them to be relevant. Lastly, when considering the government’s temptation to inflate the country’s GDP, it appears that the respondents agree with the literature, which predicts that Suriname would opt for a fixed exchange rate when only considering this political factor.

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33 | P a g e

3.2 Analyses of the subgroup preferences

The three subgroups in this study are the government, the business community and the expert/semi-expert group. The results from each subgroup will be discussed separately.

3.2.1 The Government

Before assessing the results from the representatives of the political group, it is important to note that all the political alliances that received government mandate after the last elections, held in May 2010, were approached to participate in this research study. These political alliances are the Mega Combinatie, Nieuwfront voor Democratie en Ontwikkeling, A-Combinatie and Volksalliantie. These political alliances in total consist of 20 political parties out of which 4 participated in this research. The 4 political parties that participated are Nieuw Suriname (NS), Surinaamse Partij van de Arbeid (SPA), Nationale Partij van Suriname (NPS), Pertjaha Luhur (PL), Vooruitstrevende Hervormingspartij (VHP). The majority of the representatives of these 4 political parties all choose for a fixed exchange rate regime. The two main reasons for favoring a fixed exchange rate regime for Suriname are referred to by the representatives as: -Prudent financial and tax policies have kept the current (managed) fixed regime for years. These policies have kept prices stable on the market, which in turn have made it possible for the political parties with a government mandate to realize their goals.

-The dollarization regime is simply not an option for Suriname. By dollarizing the economy, the country will lose the control it has over its own monetary policy. And since the growth of country is dependent on the financial markets of the commodities being exported, a floating regime is also not seen as favorable. Therefore a fixed regime would be the preferable choice when having to choose among the three exchange rate regimes.

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34 | P a g e Table 13: Preference of the political group based on the economic factors

Table 14: Preference of the political group based on the monetary factors

Table 15: Preference of the political group based on the political factors

According to the percentages in tables 13, 14 and 15, it appears that the majority of the respondents representing the political group find all the economic, monetary and political factors, to be of relevance when choosing an exchange rate regime for the country. Furthermore, based on all three factors, the majority of the political group agrees that fixed exchange rate regime is not only beneficial in terms of achieving their goals but also taking the entire economy of Suriname into account. The following list sums up the major goals of all the representatives of the political group:

-Promoting the socio-economic, political-administrative and the culture-educational development of the Suriname nation.

-Ensuring the political independence and the constitutional sovereignty of the Suriname nation.

-Establishing and ensuring a democratic organization, within which the ruling power is chosen through the votes made by the citizens of Suriname.

-Ensuring and maintaining the rule of law.

-Promoting mutual sustainable international cooperation. -To preserve the country’s living environment.

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35 | P a g e the respondents representing the political group. Furthermore, none of the representatives choose for the dollarization regime, with the reason being that it simply is not a viable option for the country.

3.2.2 The Business Community

The business community in Suriname consists of two main sectors, which are the industry sector and the trade sector. The VSB is an internationally recognized organization which represents the interests of both the trade and the industry sectors in Suriname and the ASFA is an organization which represents the interests of the manufacturing industry. These two organizations take part in the different bodies of government such as the city council (‘Staatsraad’), economic and social council (‘S.E.R.’, which stands for ‘Sociaal Economische Raad’) and the employment advice committee (‘A.A.C., which stands for ‘Arbeid Advies College’). The main goals of these two organizations which together represent the whole trade and industry sector in Suriname are stated by the representatives as follows:

-Provide support to companies to increase not only their productivity but also their export and import activities.

-The creation of opportunities by providing information, organizing training, workshops and missions to potential export markets.

-Developing and communicating strategic plans for the development of the production sector -Optimizing the dialogue and cooperation with the government and other business organizations. -Promoting corporate governance and social responsibility within companies in Suriname. -Increase environmental awareness.

The industry sector can be further subdivided into the following subsectors which are the agricultural sector, the forestry/lumber sector, the mining sector and the manufacturing sector. These subsectors consist of large scale producers that are responsible for the major exports of Suriname thus these are the companies bringing in foreign exchange. Furthermore, there are also small scale producers and manufacturers within these sub sectors that generate foreign exchange on a smaller degree and both the large and small scale producers are in need of foreign exchange in order to import the necessary equipment in order to produce their export products.

The trade sector mainly deals with the import and exporting of goods for the retail and wholesale companies. And just as is the case with the industry sector, the trade sector is also in need of foreign exchange for their international trading activities. For a more detailed overview of the different sectors in Suriname see Appendix 3.

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36 | P a g e the representatives of the business community group based on the economic, monetary and political factors.

Table 16: Preference of the business community group based on the economic factors

Table 17: Preference of the business community group based on the monetary factors

Table 18: Preference of the business community group based on the political factors

From the findings in table 16 through 18, we see that although there are some representatives that find dollarization to be a good option, the majority of the representatives chose for a fixed exchange rate regime. According to the representatives of the business community group, the fixed exchange rate regime is the most beneficial exchange rate regime for the local companies with the main reason being that a fixed regime contributes to more stability, predictability, less corruption and reasonable inflationary control. The representatives of the business community group also made clear that even though dollarization might bring about the benefit of having a stable environment as well, it is not to be adopted as the country’s de facto exchange rate regime, with the main reason being that the exchange rate cannot be adjusted if the country experiences a change in its export competitiveness compared to foreign countries, which would lead to the deterioration of the country’s exports and employment.

3.2.3 The Experts/Semi-Experts Group

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37 | P a g e Economisten van Suriname’ in Suriname. These individuals usually participate in discussions about the Suriname economy and or give advice to policymakers.

Table 19: Preference of the experts/semi-experts group based on the economic factors

Table 20: Preference of the experts/semi-experts group based on the monetary factors

Table 21: Preference of the experts/semi-experts group based on the political factors

When looking through tables 19 to 21, we see that the majority of the respondents representing the expert/semi-expert group find all the factors to be of relevance, except for the electoral system. Furthermore, the figures in the table indicate that the majority also prefers the fixed exchange rate regime as the most favorable, followed by the floating exchange rate regime. The representatives in the expert/semi expert group consider the dollarization regime to be the least favorable with the main reason being that Suriname would loose its independence with regard to its monetary policy. The main arguments of this group’s representatives are as follows:

- The official dollarization regime is completely inadvisable for Suriname because the country would not only lose control over its monetary policy instruments but there would also be the risk of potential monetary mismanagement in Suriname. Furthermore the monetary policy in Suriname would be dependent on the anchor country’s policies which might not be in the best interest of Suriname’s economy.

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38 | P a g e commodities. The fluctuations in the international prices and the resulting exchange rate adjustments could be detrimental to the local currency.

-The fixed exchange rate is the most preferred exchange rate regime, because it does not bring about the issues such as those from the two before mentioned exchange rate regimes. Furthermore, the fixed exchange rate regime also brings about a degree of reliability, particularly for foreign investors.

3.2.4 The Labour Union Group

Before assessing the results from the representatives of the labour union group, it should first be noted that three of the biggest labour union organizations, biggest in regard to the number of members consists of, have been approached to participate in this research study. The three labour union organizations are the C.L.O., the C-47 and the A.V.V. Only the C.L.O. participated, however the representative of the C.L.O stated that the fixed exchange rate regime is the most beneficial exchange rate regime for the working class as it gives it the best opportunities to determine its development course and to provide protection against corruption that occurs with multiple exchange rates on the market. The respondent also argued that dollarization should not be considered an option for Suriname, as it not only make the monetary instruments but also the country and its citizens as a whole, dependent on another country, given the fact that Suriname generally is considered to be an import economy. The trade union organization found all the economic, monetary and political factors to be of relevance except for the operating exposure (monetary factor) and the government’s temptation to inflate (political factor). All the factors did lead the respondent to choose for the fixed exchange rate regime for the reasons mentioned earlier. Furthermore, the representative of the trade union was also asked his preference of an exchange rate regime based on two additional economic factors, which were the unemployment rate and the real wages. Both these additional factors were also considered relevant and again lead to the choice of a fixed exchange rate regime, as was the case in the study of Mathilda (2010) where the trade unions claimed that dollarization is not favorable as they would prefer an exchange rate regime which would not eliminate jobs and that would have a positive effect on the real wages of the country, so too did the representative of the trade union in Suriname argue that dollarization would eliminate a number of jobs in both the financial sector and the business community.

The Preference Towards Official Dollarization in Suriname