The COVID-19 pandemic is having a severe impact on São Tomé and Príncipe’s economy, exacerbating fiscal and external imbalances. Tourism activities and external remittances dropped sharply, while lockdown measures further deepened the recession. The authorities’ swift actions and unprecedented international financial support are helping the country weather the emergency. The economy began to reopen in the fall, but the outlook for 2021 remains challenging and subject to significant uncertainty.
Lam Nguyen, Mika Saito, and Shirin Nikaein Towfighian
This paper explores the causes and consequences of fiscal dominance over monetary policy in Sub-Saharan Africa (SSA). Fiscal dominance has always been a pressing problem as it can contribute to inflation and macroeconomic instability, and increasingly so as fiscal deficits and public debt are rising in many SSA countries. We find that legal limits and availability of alternative financing options play an important role in determining the extent to which government deficits tend to be financed by the central bank. We also find economically significant effects of central bank lending to government on the exchange rate and inflation.