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Democratic Republic of São Tomé and Príncipe

Author(s):
International Monetary Fund
Published Date:
September 2008
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I. Background

1. São Tomé and Príncipe is a small, open, low-income economy, with a very narrow production and export base (Figure 1). The country’s main export commodity is cocoa but the once-dominant agriculture sector has declined over the last three decades. Tourism is relatively small and brings in little net foreign exchange receipts because it relies heavily on imported goods and services. In recent years, public finances have been supported by large oil signature bonuses, but exploratory drilling for oil has not yet confirmed the existence of commercially extractable reserves.

Figure 1.São Tomé and Príncipe: Income and Exports in a Regional Context

Source: World Development Indicators, São Tome and Príncipe authorities, and IMF staff estimates.

2. The authorities have embarked on economic adjustment and reform supported by the Fund under the PRGF since August 2005. Growth has been robust and progress has been made in reducing fiscal imbalances and the pubic debt burden. The country reached the completion point under the enhanced HIPC Initiative in March 2007 and benefited from HIPC/MDRI debt relief. By September 2007, creditors representing over 80 percent of the country’s external debt at the completion point had agreed to deliver HIPC debt relief, enabling the Fund to disburse its share of topping-up assistance.

3. The cabinet has been reshuffled in late 2007 and early 2008. A coalition government took office in February 2008 but suffered recently a vote of no confidence in the National Assembly (NA). Under the constitutional arrangements, the current government remains in power until it is replaced democratically by a new government.

4. In the last Article IV consultation, Directors emphasized the importance of developing solid institutions to secure transparent management of oil revenue, strengthening macroeconomic policies and accelerating structural reforms to broaden the economy’s productive base. Progress has been made in strengthening the management of oil-related resources. The country is now a Candidate State of the Extractive Industries Transparency Initiative (EITI). However, broadening the country’s production and export base remains a challenge.

II. Recent Developments and Performance under the Program

5. Real GDP grew at an estimated 6 percent in 2007 (Figure 2 and Table 1). Growth was led by the construction and services sectors boosted by tourism-related foreign direct investment.1 However, spillover from foreign-funded tourism projects to local employment and income is still limited because of the high import content of these projects. Exports recovered slightly on the back of rising international price of cocoa.

Figure 2.São Tomé and Príncipe: Recent Macroeconomic Developments, 2003–2007

Sources: São Tome and Príncipe authorities; and IMF staff estimates.

1 There is a break in the GDP data series between 2003 and 2004.

Table 1.São Tomé and Príncipe: Selected Economic Indicators, 2005–2013
200520062007200820092010201120122013
CR/08/95Est.CR/08/95Proj.Proj.
(Annual percentage changes, unless otherwise specified)
National income and prices
GDP at constant prices5.76.76.06.06.06.06.06.06.07.58.0
Consumer prices
End of period17.224.619.627.69.513.09.07.06.04.04.0
Period average16.323.119.918.514.119.49.86.55.55.04.0
External trade
Exports, f.o.b. 122.6-1.412.21.97.22.83.92.50.2-0.8-4.0
Imports, c.i.f.15.765.9-4.1-6.015.813.87.58.01.26.88.5
Exchange rate (dobras per US$; end of period) 211,74812,94514,220
Real effective exchange rate (depreciation = -)6.52.94.9
Money and credit (end of period)
Base money 376.632.021.250.017.47.717.016.011.411.811.7
Broad money (M3)45.939.325.236.421.021.022.017.912.512.912.9
Velocity (GDP to average broad money)3.33.03.03.13.03.13.02.92.92.92.9
Central bank reference interest rate (percent)18.228.028.0
Bank lending rate (percent)29.829.332.4
Bank deposit rate (percent)11.510.812.8
(Percent of GDP, unless otherwise specified)
Government finance
Total revenue, grants, and oil signature bonuses 481.037.1164.7160.348.873.626.226.827.227.627.9
Of which: tax revenue15.017.415.216.315.615.315.415.615.816.016.2
nontax revenue2.33.72.82.82.31.81.61.61.61.61.6
grants17.016.0125.6120.114.440.39.19.69.810.010.1
oil signature bonuses46.80.021.221.116.516.30.00.00.00.00.0
Total expenditure and net lending44.051.039.340.037.131.931.030.530.931.030.9
Of which: personnel costs8.68.79.18.98.88.68.38.07.87.57.5
nonwage noninterest current expenditure14.816.511.515.69.19.18.47.87.97.67.6
capital and HIPC-related social expenditures17.822.317.214.217.912.813.113.714.315.115.1
Domestic primary balance 5-10.1-8.5-7.0-8.1-4.8-5.2-4.2-3.2-3.0-2.6-2.4
Overall balance (commitment basis)37.1-13.9125.4120.311.741.8-4.8-3.8-3.6-3.4-3.1
External sector
Current account balance
Including official transfers-10.3-41.3-35.8-30.2-36.6-31.0-31.8-33.2-31.3-31.9-32.0
Excluding official transfers-39.5-66.3-57.5-52.1-59.1-51.5-48.8-50.2-47.4-47.3-47.0
NPV of external debt171.1161.216.015.916.37.98.28.68.89.08.7
External debt service (percent of exports) 6
Before HIPC and MDRI debt relief75.670.059.783.248.960.0
After HIPC and MDRI debt relief62.135.97.527.86.74.25.95.55.44.58.4
Export of goods and services (US$ millions)15.916.115.311.020.114.014.915.715.915.115.0
Gross foreign reserves 7
Months of imports of goods and nonfactor services44454444444
Millions of U.S. dollar26.633.331.738.028.931.832.133.836.539.546.5
National Oil Account (US$ millions) 823.58.616.214.940.039.538.135.531.727.623.6
Memorandum Item
GDP
Billions of dobras1,2021,5361,9521,9592,3612,4092,8373,2283,6314,1004,627
Millions of U.S. dollars115124145145158160173186200220243
Sources: São Tomé and Príncipe authorities and IMF staff estimates and projections.

6. After declining to 14 percent in the first half of the year, annual inflation rose to 28 percent by the end of 2007. This rebound was spurred by surging food and oil prices, upward adjustments of utility tariffs to cover the bulk of the costs, and depreciation of the dobra, particularly against the euro, the main invoicing currency for imports. Excluding food items, inflation was 10 percent (year-on-year) at the end of 2007, compared to 20 percent a year ago (Box 1). In real effective terms, the exchange rate changed little as appreciation in the second half of 2007 largely offset the depreciation early in the year.

7. The domestic primary deficit was larger than programmed in 2007, despite higher revenue (Table 2 and Table I.1). This was on account of a large increase in current spending, especially payments to EMAE, the state-owned utility company, to cover part of the costs to households arising from the utility tariff hike. High current spending also crowded out funding available for domestically financed capital expenditure. The domestic primary deficit, at 1.1 percent of GDP higher than the program target, was financed by a larger-than-projected drawdown of government deposits at the central bank (BCSTP), including from the National Oil Account (NOA).

Table 2.São Tomé and Príncipe: Financial Operations of the Central Government, 2005–2008
2005200620072008
CR/08/95Est.Prog.
(billion dobra)
Total revenue and grants974570321531411773
Total revenue207324351374410
Tax revenue180267296320368
Nontax revenue2757555542
Grants20424724502353970
Project grants152197222168202
Nonproject grants172152183
HIPC Initiative-related grants 1354722132164685
Oil signature bonuses5620413413394
Total expenditure528783766784767
Current expenditure 2314441431506460
Of which: personnel costs103133177174207
interest on external debt due3252302631
goods and services66917411296
transfers8310811714098
Of which: JDA3338414215
other2854335426
Capital expenditure186307277227243
Financed by the Treasury2151292244
Financed by external sources165256248205200
HIPC Initiative-related social expenditure2835585164
Domestic primary balance3-122-131-137-158-125
Overall fiscal balance (commitment basis)445-213244823561006
Net change in arrears (reduction = -)-13421060
External arrears 4-5221000
Domestic arrears-820060
Overall fiscal balance (cash basis)311-192244823621006
Financing-311192-2448-2362-1006
Net external 5-3731-2350-2312-635
Disbursements (projects)1499263729
Program financing (loans)024274730
Net short-term loans00-202-2000
Scheduled amortization 1-93-92-2224-2199-701
Change in arrears (principal) 6-1020-140-1370
Bilateral rescheduling 714401641407
Net domestic-274162-98-50-371
Net bank credit to the government-277162-98-44-371
Banking system credit (excluding National Oil Account) 8-14-23531-23
National Oil Account-263184-104-75-349
Nonbank financing300-60
Financing gap 900000
Memorandum items:
Overall balance (commitment basis, incl. grants, excl. oil bonuses)-117-21320351943612
Domestic primary spending320454473525526
MDRI debt relief (flow in US$ million)001.11.11.2
National Oil Account (US$ million, excl. transfers to budget)23.58.616.214.939.5
Sources: São Tomé and Príncipe authorities; and IMF staff estimates and projections.
Table 2.São Tomé and Príncipe: Financial Operations of the Central Government, 2005–2013
200520062007200820092010201120122013
CR/08/95Est.Prog.Proj.
(Percent of GDP) 1
Total revenue and grants81.037.1164.5160.373.926.226.827.227.627.9
Total revenue17.321.118.019.117.117.017.117.417.617.7
Tax revenue15.017.415.216.315.315.415.615.816.016.2
Nontax revenue2.33.72.82.81.81.61.61.61.61.6
Grants17.016.0125.4120.140.49.19.69.810.010.1
Project grants12.612.811.48.68.48.59.09.29.49.5
Nonproject grants1.50.20.81.13.50.60.60.60.60.6
HIPC Initiative-related grants 22.93.1113.3110.528.50.00.00.00.00.0
Oil signature bonuses46.80.021.221.116.40.00.00.00.00.0
Total expenditure44.051.039.240.032.031.030.530.931.030.9
Current expenditure 326.228.722.125.819.217.916.916.615.915.8
Of which: personnel costs8.68.79.18.98.68.38.07.87.57.5
interest on external debt due2.73.41.61.31.31.21.10.90.80.8
goods and services5.55.93.85.74.03.73.43.43.23.2
transfers6.97.06.07.24.13.73.43.43.43.4
Of which: JDA2.72.52.12.20.60.60.50.50.50.4
other2.33.51.72.81.11.01.01.01.01.0
Capital expenditure15.520.014.211.610.110.410.911.612.312.4
Financed by the Treasury1.73.31.51.11.81.91.92.02.42.4
Financed by external sources13.816.712.710.48.38.59.19.59.910.0
HIPC Initiative-related social expenditure2.32.33.02.62.72.72.72.72.72.7
Domestic primary balance4-10.1-8.5-7.0-8.1-5.2-4.2-3.2-3.0-2.6-2.4
Overall fiscal balance (commitment basis)37.1-13.9125.3120.341.9-4.9-3.8-3.6-3.4-3.1
Net change in arrears (reduction = -)-11.21.40.00.30.00.00.00.00.00.0
External arrears 5-4.31.40.00.00.00.00.00.00.00.0
Domestic arrears-6.80.00.00.30.00.00.00.00.00.0
Overall fiscal balance (cash basis)25.9-12.5125.3120.641.9-4.9-3.8-3.7-3.4-3.1
Financing-25.912.5-125.3-120.6-41.94.83.83.63.43.1
Net external 6-3.12.0-120.2-118.0-26.51.71.61.41.31.2
Disbursements (projects)1.16.41.31.91.21.11.01.00.90.8
Program financing (loans)0.01.61.42.41.31.21.11.00.90.8
Net short-term loans0.00.0-10.3-10.20.00.00.00.00.00.0
Scheduled amortization 2-7.7-6.0-113.8-112.3-29.2-0.6-0.6-0.6-0.5-0.5
Change in arrears (principal) 7-8.50.0-7.2-7.00.00.00.00.00.00.0
Bilateral rescheduling 812.00.08.47.10.30.10.10.10.10.1
Net domestic-22.810.5-5.0-2.6-15.53.12.12.22.01.9
Net bank credit to the government-23.110.5-5.0-2.3-15.53.12.12.22.01.9
Banking system credit (excluding National Oil Account) 9-1.2-1.50.31.6-0.90.80.00.00.00.0
National Oil Account-21.912.0-5.3-3.9-14.52.32.12.22.01.9
Nonbank financing (including earmarked funds and residual)0.20.00.0-0.30.00.00.00.00.00.0
Financing gap 100.00.00.00.00.00.00.00.00.00.0
Memorandum items:
Overall balance (commitment basis, incl. grants, excl. oil bonuses-9.7-13.9104.199.225.5-4.8-3.8-3.6-3.4-3.1
Domestic primary spending26.629.624.226.821.920.920.120.120.019.9
MDRI debt relief (flow in US$ million)001.11.11.21.21.31.51.71.7
National Oil Account (US$ million, excl. transfers to budget)23.58.616.214.939.538.135.531.727.623.6
Sources: São Tomé and Príncipe authorities; and IMF staff estimates and projections.

Box 1.Recent Rise in Inflation: Domestic Policies vs. External Shocks

Headline inflation went up sharply in the second half of 2007. During this period, a 30 percent general wage increase and faster-than-programmed liquidity growth resulted in a significant depreciation of the dobra against the euro and the U.S. dollar. In response to rising international prices, the authorities raised domestic prices of petroleum products (by 14–25 percent) and electricity and water tariffs (by 40–60 percent) in September 2007. Moreover, rising import prices for food items contributed to higher inflation.

Food and Fuel Import Prices

(Index, 2003=100)

Source: World Economic Outlook and staff estimates.

1 Defined as the sum of all receipts in external current account deflated by an index of food (56 percent weight) and fuel (44 percent weight) prices.

Food consumption in São Tomé and Príncipe depends heavily on imports, and food items account for 72 percent of the CPI basket. Retail prices for food increased by 38 percent in 2007.

Staff estimates suggest that of the 3 percent increase in inflation in February 2008, about 1 percent can be attributable to base money growth and exchange rate depreciation, 1.5 percent to food and oil import prices, and the remaining 0.6 percent to other factors.1

Base Money and Exchange Rate

(12-month change, percent)

Sources: IFS and São Tome and Príncipe authorities.

As a result of higher import prices, the country’s external current receipts declined by an estimated 18 percent in real terms in 2007.

1 See the accompanying selected issues paper for more details.

8. Monetary policy implementation was complicated by volatile capital inflows and was not adequate in controlling base money growth (Table 3). The BCSTP’s sterilization of budgetary use of oil bonuses fell short of what was needed to mop up excess liquidity. As a result, net international reserves of the BCSTP were US$6 million above the program target at the end of 2007. The excess liquidity put downward pressure on the exchange rate and the spread between central bank and commercial bank exchange rates widened to over 2 percent.

Table 3.São Tomé and Príncipe: Summary Accounts of the Central Bank, 2006–2008
200620072008
Dec.Dec.Mar.Jun.Sep.Dec.
ActualProg.Prel.Proj.Proj.Proj.Proj.
(Billions of dobras, end of period)
Net foreign assets619.5708.6852.9807.31,245.41,229.71,242.6
Net international reserves528.7656.4737.8684.01,128.71,109.91,119.8
Gross reserves 1,2557.2688.0776.9716.21,161.81,143.81,154.6
Of which: National Oil Account (NOA)111.1232.4212.1221.1577.3600.6624.2
Of which: guarantee deposits15.50.024.924.925.626.226.9
Short-term liabilities 1-28.5-31.6-39.1-32.2-33.1-33.9-34.8
Other foreign assets143.3103.5170.6175.4180.2185.0189.7
Other liabilities 3-52.4-51.2-55.5-52.1-63.6-65.2-66.9
Net domestic assets-341.5-371.7-435.7-415.8-856.2-791.9-793.2
Net domestic credit-121.3-198.7-152.3-142.3-596.8-574.4-574.9
Net credit to government-108.3-208.3-162.5-155.3-609.6-584.5-581.3
Claims 3105.6105.7111.7107.0118.8120.9122.9
Of which: use of SDRs/PRGF Facility64.564.669.365.977.779.881.8
Deposits 2-213.9-314.0-274.2-262.3-728.4-705.3-704.2
Ordinary-33.9-21.5-12.84.9-71.4-23.23.5
Of which: HIPC Initiative resources-12.2-6.7-7.9-7.9-7.9-7.9-7.9
Counterpart funds-22.6-22.6-8.2-8.2-8.2-8.2-8.2
Foreign currency 2-157.4-269.9-253.2-259.0-648.8-674.0-699.5
Of which: NOA 2-111.1-232.4-212.1-221.1-577.3-600.6-624.2
Rediscount to commercial banks2.52.00.92.72.72.11.3
Other claims9.57.69.310.310.28.05.0
Central Bank certificates of deposit-25.00.00.00.00.00.00.0
Other items (net)-220.2-173.0-283.4-273.4-259.4-217.5-218.3
Base money278.0337.0417.1391.6389.2437.8449.4
Currency issued102.7124.5126.2135.2122.0128.7146.2
Bank reserves175.3212.5290.9256.4267.2309.1303.3
Of which: domestic currency64.978.6126.180.179.4109.792.3
Of which: foreign currency110.4133.9164.8176.3187.8199.4210.9
Memorandum items:
Gross international reserves (US$ millions) 1,243.047.954.649.077.374.273.0
Excluding NOA and guarantee deposits33.331.738.032.237.233.531.8
Net international reserves (US$ millions) 240.845.751.946.875.172.070.8
Of which: National Oil Account (US$ millions) 28.616.214.915.138.438.939.5
Net international reserves (US$ millions; excl. NOA)32.329.537.031.736.733.031.3
Of which: Commercial banks reserves in foreign currency8.59.311.612.112.512.913.3
Net international reserves (US$ millions)
Excluding NOA and banks reserves in foreign currency23.720.225.419.624.220.118.0
Base money (annual percent change)32.021.250.026.522.37.77.7
Currency Issued (annual percent change)26.621.222.968.537.533.015.8
Sources: São Tomé and Príncipe authorities and IMF staff estimates and projections.

9. São Tomé and Príncipe has maintained an open trade regime. The tariff reform, which started in 2002, has lowered the simple average tariff rate to 11.7 percent and reduced non-tariff trade barriers. In late 2007, the authorities decided not to sign the European Union Economic Partnership Agreement (EPA), emphasizing the importance of first creating competitive export sectors, particularly in agriculture, and reducing reliance on trade taxes before joining the EPA.

10. Progress continued on structural reforms albeit slower than envisaged. The end-December 2007 structural performance criterion on upgrading the pilot system (SAFINHO) to strengthen budget execution and monitoring was implemented in early 2008 (Table I.2). The 2008 budget, prepared in line with the PRGF-supported program, was approved by the NA in mid-May 2008. The NA also started the process for final approval of the direct taxation reform package consisting of a new corporate income tax code, a personal income tax code, and an urban property tax code. On financial sector reform, the BCSTP issued in early 2008 the new prudential regulations on capital adequacy, internal control and auditing, bank financial reporting, and credit to employees. In late April 2008, the NA gave its final approval to the anti-money laundering (AML/CFT) law, paving the way for an operational AML/CFT regime in São Tomé and Príncipe.

11. Progress has been made in enhancing the transparency of managing current and prospective oil resources. The Oil Revenue Management Law (ORML) was enacted. The law ensures parliamentary authority and supervision over the use of signature bonuses and other oil-related receipts. Under the ORML, the Petroleum Oversight Committee and the Public Registration and Information Office were created, and the ORML Handbook was posted on the official website. The authorities formally declared their adherence to the principles of the EITI and set up a national committee and appointed a national coordinator for implementation. To lay the ground for launching licensing for the Exclusive Economic Zone (EEZ), the National Oil Agency prepared a Petroleum Sector Strategy and related laws, but their adoption has been delayed due to changes in government.

12. Some progress was made to improve the investment climate. In line with the recommendations of the 2005 Diagnostic Trade Integration Study, a new investment code was submitted to the NA, the labor code was revised, and customs procedures were simplified. Arbitration tribunals for business litigation were established in 2006. Legislation to reduce the cost and duration of starting a business were drafted in consultation with the private sector. The restructuring of the electricity sector and the airport and seaport authorities were initiated. Under a reform strategy for EMAE, the electricity and water company, utility tariffs were increased to cover production costs. EMAE also installed prepaid electricity meters to strengthen payment collection.

III. Policy Discussions

A. Lessons from the Past

13. As part of the Article IV consultation discussions, the authorities and staff exchanged views on the key lessons from the country’s recent adjustment experience. They agreed that the policy and reform agenda since 2005 was underpinned by a Poverty Reduction Strategy. While a large number of reforms have been introduced, notably in public resource management and banking supervision, financial policy implementation has not always been consistent. The resulting stop-go pattern of macroeconomic policies created pressures on inflation, compounding the country’s vulnerability to external shocks.

14. To improve macroeconomic management, staff and the authorities agreed on the following priorities:

  • Effective implementation of an appropriate policy mix to achieve a sustainable reduction in inflation. Staff analysis, taking into account relations between fiscal policy, money supply, the exchange rate, and import prices, suggests that a prudent fiscal policy needs to play a central role, supported by a proactive monetary policy. The former is particularly important because of São Tomé and Príncipe’s limited monetary policy instruments for liquidity management and the need to maintain adequate usable reserves (Box 2).

  • Revenue mobilization. São Tomé and Príncipe’s domestic revenue is smaller than its current expenditure. To meet rising demand for developmental and poverty reduction expenditures and to avoid putting undue pressure on limited official reserves, in addition to mobilizing external support, domestic revenue must be increased through a combination of tax policy reform and improvement in tax administration, based on an expanded economy.

  • Developing the supply side of the economy. While real GDP has recently grown at 6-7 percent a year, recorded output growth has not yet translated into broad gains in income and employment. Indeed, the traditional agriculture sector has been shrinking, the emerging tourism sector remains small, and the government has become the largest employer in recent years. Reforms to attract investment therefore will have to be accompanied by public sector reform to make room for private sector development. Better use of available resources, including oil bonuses and donor funding, to boost the country’s growth potential, notably in tourism and agriculture, would help raise living standards and reduce poverty.

B. Medium-Term Outlook and Challenges

15. São Tomé and Príncipe’s medium-term outlook depends critically on the prospects for oil export earnings and revenue. Available information suggests that the outlook for further inflows of oil signature bonuses from Blocks 5 and 6 of the Joint Development Zone (JDZ) and from the EEZ remains uncertain at this time.2 In Blocks 1-4 of the JDZ, where investors have paid their signature bonuses, oil exploration is ongoing but discovering commercially extractable reserves continues to be an uncertain process (Box 3).

Box 2.Policy Mix, Sustainable Disinflation, and Revenue Mobilization 1

Appropriate policy mix. The two recent inflation spikes (mid-2006 and end-2007) were heavily influenced by domestic policies but also affected by external factors. Staff analysis suggests that the increase in excess liquidity during the two episodes can be largely explained by larger-than-projected withdrawals from the government’s deposits at the central bank to finance public spending and by inadequate central bank sterilization.

Although sterilization can be an effective tool to contain liquidity in the short term, continuous selling of foreign exchange to mop up liquidity may not be sustainable. The level of usable net international reserves is rather modest when excluding commercial bank and government deposits at the central bank.

Central Bank Reserves and Useable NIR

(months of imports)

1/ In months of imports of goods and services excluding oil project-related imports in a subsequent year.

To achieve a sustainable reduction in inflation, fiscal policy therefore will need to play a central role, not only in directly reducing domestic demand pressures on prices but also reducing the need for foreign exchange sales by the central bank for sterilization. A prudent fiscal policy, together with a proactive monetary policy, is essential to contain liquidity growth and anchor inflation and depreciation expectations. Fiscal and monetary anchors are important for sustainable disinflation.

Domestic Revenue Mobilization. São Tomé and Príncipe’s small and undiversified economy leaves it with a narrow tax base to depend on. At the same time, its revenue performance has increasingly depended on trade taxes, both custom tariffs and excise duties.

Compared to neighboring countries in sub-Saharan Africa and other island economies around the world, São Tomé and Príncipe’s tax revenue-to-GDP ratio, at 16.3 percent in 2007 is rather low, suggesting room for increasing revenue. Pressing ahead with the direct taxation reform, improving tax and customs administration, and, in due course, introducing the reform of indirect taxation will help broaden the tax base and increase revenue buoyancy to meet the country’s rising expenditure needs.

Domestic Revenue and Expenditure

(average 2001–2006, in percent of GDP)
1 See the accompanying selected issues papers.

Box 3.São Tomé and Príncipe: Status of Oil Exploration

For oil exploration purposes, São Tomé and Príncipe’s territory can be divided into three distinctive geographical zones:

The off-shore Joint Development Zone operated jointly with Nigeria. Oil exploration in the JDZ has started but, as of April 2008, has not yet confirmed the existence of commercially extractable reserves.

The off-shore Exclusive Economic Zone. Preparatory work is under way for launching licensing for oil exploration in the EEZ, which is located in areas with deeper water than the JDZ.

On-shore area includes the island of São Tomé and that of Príncipe. The potential for hydrocarbon discoveries on-shore is considered low and, to date, the authorities have no plans for promoting exploration in this area.

Joint Development Zone: Status of Exploration
Block NoArea (sq. km)Main Investors and OperatorsShare in the Block (percent)DrillingResults
1704Chevron Texaco51Early 2007Found oil, but not commercial reserves.
2692SINOPEC/ERHC/ADDAX65Scheduled for late 2008
3666Anadarko51Proposal made in 2007
4857ADDAX/ERHC60Scheduled for late 2008
51091ICC/OEOC Consortium75Signature bonuses not yet paid to STP
6558Filthim-Huzod85Signature bonuses not yet paid to STP
Sources: National Oil Agency of São Tomé and Príncipe (www.anp-stp.gov.st)

16. To illustrate the down side risks and their implications for macroeconomic policies, staff discussed with the authorities two medium-term scenarios. The baseline scenario assumes that oil signature bonuses for Blocks 5 and 6 are received in 2008 and oil production starts in 2014, as previously projected. Under a worse-case scenario where oil bonuses for Blocks 5 and 6 are delayed indefinitely and there is no oil production, the NOA could be depleted quickly (Figure 3). Moreover, external budgetary support is expected to be limited in the next few years. Under the worse-case scenario, large expenditure compression would be unavoidable, and depletion of official reserves, high inflation, and currency depreciation are also likely.

Figure 3.Medium-term Fiscal Scenarios 1

(percent of GDP)

Source: National authorities, and IMF staff estimates.

1 Baseline scenario assumes oil signature bonuses for Blocks 5 and 6 are received in 2008. Worse case scenario assumes oil bonuses are delayed indefinitely.

17. São Tomé and Príncipe is vulnerable to adverse external developments and has a high risk of debt distress, despite HIPC and MDRI debt relief. The government has not contracted any new debt since reaching the completion point under the HIPC Initiative. However, as indicated in the Debt Sustainability Analysis which has been jointly updated with the World Bank staff (Supplement I), in the event of a large output loss or terms-of-trade deterioration, key debt ratios could exceed the relevant indicative thresholds. Moreover, the risk of debt distress would increase significantly should oil prospects diminish further. Under these circumstances, the authorities agreed that they should rely primarily on non-debt-creating external financing, attracting foreign direct investment and donor grants. They stood ready to reassess their external financing strategies after further oil exploration drillings.

18. There was a consensus that the key challenges facing the authorities include maintaining fiscal sustainability and developing the domestic production and export base. In view of the uncertain oil revenue outlook, staff argued for continued reduction of fiscal imbalances, bringing recurrent outlays, particularly on budgetary personnel costs, in line with available domestic revenue and donor budgetary support. Improving the composition of public expenditure and increasing the efficiency of public investment are also important not only for fiscal sustainability but also for increasing the growth orientation of the budget.

19. The authorities pointed out that the country’s productive base must be developed and broadened to sustain growth and reduce external vulnerability. They noted that São Tomé and Principe has a low saving rate and a very small domestic market. To unlock the country’s growth potential, it is imperative that the investment climate be significantly improved by removing the regulatory impediments to private sector development, upgrading infrastructure, improving access to financing, and developing agriculture and other sectors based on the country’s comparative advantages.

C. Macroeconomic Policies for the Remainder of the Program

20. Against the backdrop of an external shock stemming from rising food and fuel prices, the authorities emphasized their commitment to strengthen policy implementation and restore financial stability. The discussions centered on actions to correct the policy slippages that occurred in the second half of 2007, particularly in expenditure control, liquidity management, and structural reforms. With an additional grant from the World Bank, the discussions also covered the need to support the vulnerable segments of the population.

Fiscal Policy

21. The 2008 budget envisages a reduction of the domestic primary fiscal deficit to 5.2 percent of GDP, from 8.1 percent of GDP in 2007 (MEFP ¶11). The domestic primary deficit for 2008 is higher than the 4.8 percent of GDP originally programmed, to mitigate the impact of high import prices for food and petroleum products. This will be financed by an additional budgetary support grant from the World Bank, part of which will be saved for future use.3 The fiscal program is fully financed by the use of the World Bank grant of $4.5 million (2.8 percent of GDP), a drawdown from the NOA of $3 million (1.9 percent of GDP), and other external budget support of 0.6 percent of GDP.

Financing of the Domestic Primary Deficit(Percent of GDP)
20072008
CR/08/95Est.CR/08/95Proj.
Domestic revenue117.218.717.416.7
Domestic primary spending24.226.822.221.9
Of which: Wages9.17.88.88.6
Transfers to JDA2.12.20.60.6
Other 213.016.812.812.7
Domestic primary balance-7.0-8.1-4.8-5.2
Financing7.08.14.85.2
Use of oil bonuses35.87.01.91.9
Foreign budget support40.00.02.53.5
Other, net51.21.10.4-0.1
Sources: São Tomé and Príncipe authorities; and IMF staff estimates and projections.

22. Fiscal consolidation under the 2008 budget would come mainly from expenditure reform (Figure 4). The full-year effect of the 2007 general wage increase will be felt in 2008. In addition to measures to strengthen expenditure control, the authorities are committed to initiating wage reform, as a first step toward a broader civil service reform strategy, to help contain recurrent spending within the budget envelope (MEFP ¶13). A comprehensive wage study to rationalize the public service salary structure and integrate fringe benefits into the wage bill will be launched with the support of the World Bank.

Figure 4.São Tomé and Príncipe: 2008 Fiscal Program

Sources: São Tome and Príncipe authorities; and IMF staff estimates and projections.

23. To prevent the recurrence of an expenditure overrun, the authorities agreed to tighten control on non-wage current expenditure. Key measures include:

  • Strictly limiting nonessential current spending, particularly on goods and services and transfers not funded by donors (see text table below).

  • Reassessing transfers to the Joint Development Authority to take into account oil revenue prospects and budget constraints.

  • Putting in place a functioning computerized public financial management system to effectively manage expenditure commitments. In addition to upgrading information technology hardware, the authorities intend to make progress in training users at the level of spending entities, and take other steps to elevate SAFINHO to a fully-fledged e SAFE system.

  • Strictly complying with the provisions of the ORML on withdrawals from the National Oil Account.

São Tomé and Príncipe - Indicative Targets(billion dobra, unless indicated otherwise)
End-March, 2008 Actual
TargetsActual
Indicative Targets
Dobra base money 1/215196
Net international reserves (million US $) 1/3238
Primary non-wage current expenditure5349
External payment arrears00
Benchmarks for April 2008
Adopt the 2008 budgetAdopted on May 15, 2008
Adopt the direct taxation lawsPending final NA approval

24. In response to the rising import prices for food and fuel, the fiscal program was modified to provide extra room (about 0.4 percent of GDP) for temporary, targeted assistance to the poor and the most vulnerable (MEFP ¶13). Staff pointed out that implicit general subsidies, such as those made through EMAE in the last quarter of 2007, are neither efficient nor effective in delivering assistance to the most needy. Staff encouraged the authorities to work closely with the World Bank to put in place a scheme, based on income or other criteria, to provide targeted support to the poor. This extra spending, together with the HIPC/MDRI debt relief-supported expenditure programs and efforts to align budgetary allocations with the Priority Action Plan of the Poverty Reduction Strategy Paper (PRSP), is expected to help mitigate the impact of the recent external shocks on the population.

25. On the revenue side, timely implementation of the direct taxation reform package after NA approval is crucial for the 2008 program. Although the reform is expected to be revenue neutral for the first few years of implementation, it will help broaden the tax base, reduce tax distortions, and over time reduce the country’s heavy reliance on taxation on foreign trade (MEFP ¶14). To ensure that revenue collections are improved, the authorities have intensified their effort to strengthen tax and customs administration. In this regard, they are being assisted by the U.S. Millennium Challenge Corporation (MCC) under its Threshold Program, including in auditing tax returns, keeping track of large tax payers, and collecting tax arrears.

Monetary and Exchange Rate Policies

26. The BCSTP is committed to use foreign exchange auctions more actively to reduce base money growth, in the context of a flexible exchange regime (MEFP ¶17). Since extensive use of foreign currencies and weak financial intermediation severely limit the effectiveness of interest rates and other monetary policy instruments, the authorities have to rely on fiscal restraints and foreign exchange sales to control liquidity. Accordingly, the BCSTP held more frequent foreign exchange auctions in March 2008, while maintaining net international reserves (NIR) above the program target. As a result, annual base money growth slowed down from 50 percent at the end of 2007 to 27 percent by the end of March 2008. Depreciation of the dobra also slowed from 6.5 percent against the U.S. dollar in the last quarter of 2007 to 2.6 percent in the first quarter of 2008.

27. To increase the effectiveness of liquidity control, the fiscal and monetary authorities agreed to improve their coordination to ensure timely sterilization of budgetary use of oil bonuses and donor funding (MEFP ¶18). Aside from information-sharing among staff of the Treasury and the BCSTP, the Finance Minister and the BCSTP Governor also intend to meet regularly on the government’s cash outlays and the BCSTP’s liquidity forecast. To enhance the accuracy of liquidity management, the BCSTP has started monitoring the weekly average commercial bank minimum reserve requirement, instead of the monthly average. These steps are expected to strengthen implementation of the monetary program for the remainder of the year, which aims to bring inflation on a downward path, while preserving NIR equivalent to about 4 months of imports.

28. The authorities remain committed to deepening foreign exchange market reform (MEFP ¶19). The recent external shock has complicated the implementation of the reform by worsening supply-demand imbalances in the foreign exchange market. The authorities reiterated their intention, in due time, to remove all multiple currency practices and restrictions (see Informational Annex I), de facto or de jure, and on that basis, to accept the obligations under Article VIII, Sections 2(a), 3, and 4 of the Fund’s Articles of Agreement. In the near term, they will focus on expediting approval by the NA of the new investment code, which contains provisions aiming to remove the exchange restrictions on transferring dividends abroad. The BCSTP will also revise the mechanism for setting the daily central bank exchange rate, after a review of domestic market conditions in 2008, to ensure that the spread between the official and commercial bank exchange rates does not exceed 2 percent.

Structural Reforms

29. For the remainder of the program, the authorities intend to make progress in several areas where significant preparatory work has already been done. These include: (i) putting in place new modules to implement the public accounting system and preparing regulations for the organic budget law (SAFE), as part of the effort to upgrade public financial management; (ii) completing the revision of the commercial code, an important regulatory reform to reduce the cost of doing business in the country (MEFP, ¶21); (iii) adopting the Petroleum Sector Strategy and the related laws before launching the licensing round for the EEZ (MEFP, ¶22).

30. Financial sector reform will continue to focus on strengthening the regulatory framework and the BCSTP’s implementation capacity (MEFP ¶23). There are five banks in São Tomé and Príncipe. Recently, the BCSTP has received a new bank application and two more foreign banks have expressed interest in entering the market. To reduce the risk of money laundering and bank distress, the authorities have given top priority to making the AML/CFT regime operational through issuing and implementing the enabling regulations that the BCSTP already prepared. Moreover, they plan to strengthen the requirements for issuing bank licenses by raising the minimum capital requirement and improving the standards for feasibility studies, among other conditions.

Program Monitoring

31. Indicative targets for selected fiscal and monetary variables are set to facilitate program implementation prior to the expiration of the PRGF arrangement in August 2008 (MEPF, ¶28). These include indicative ceilings on primary nonwage current spending and 12-month dobra base money growth, as well as floors for the BCSTP’s net international reserves for end-March and end-June 2008 (Table I.1). Two structural benchmarks are added to help monitor progress in fiscal structural reform (Table I.2).

IV. Exchange Rate Arrangement and Other Issues

A. Exchange Rate Arrangement and External Stability

32. The exchange rate regime is currently classified as a de facto managed float. The BCSTP has mostly been the sole seller in the official foreign exchange market for the last two years while seldom buying foreign exchange from market participants. Empirical evidence, while limited by the weak database, does not suggest a significant misalignment of the real exchange rate from its equilibrium level. The authorities are making efforts to remove the remaining exchange restrictions.4 In view of the uncertain timeframe of implementation, staff does not recommend Fund approval for maintaining these restrictions. Staff assessment based on the updated DSA (¶16–17) also indicates that sustainability of the country’s external position depends critically on finding commercially extractable oil reserves. If oil prospects do not materialize, i.e., there would be no oil exports and revenue, maintaining external stability will require further economic adjustment, including that of the real exchange rate (Box 4).

33. The authorities expressed interest in reassessing the country’s monetary and exchange rate arrangements. They have commissioned experts from the European Union to conduct a study on this issue. After a seminar held by the mission in October 2007, the authorities noted that São Tomé and Príncipe could benefit from a strongly anchored currency arrangement, including possible membership in a monetary union or an agreement to allow for parity between the dobra and a strong currency. Staff analyzed the pros and cons of various exchange systems, putting together the monetary history of São Tomé and Príncipe and relevant international experience.5 The analysis highlights the benefits under certain conditions of a firmly anchored currency arrangement for a small, open, low-income country, emphasizing that prudent fiscal and debt policies are preconditions for a sustainable regime.

B. Debt Management

34. The authorities are conscious of the need to maintain debt sustainability. They are committed to refraining from new external borrowing, especially on non-concessional terms. To strengthen their debt management and analysis capacity, they have installed the Commonwealth Secretariat debt management system (DS-DRMS) and plan to utilize the system to obtain a debt payment schedule and other information to analyze the country’s debt sustainability.

35. The authorities are seeking full delivery of HIPC relief from the remaining creditors. Having initiated the negotiations, they have concentrated their efforts to conclude debt relief agreements with Angola and Portugal, the two largest remaining creditors.

Box 4.The Equilibrium Exchange Rate and External Competitiveness

A simple empirical approach was used to assess exchange rate developments against equilibrium levels. Due to data weaknesses and lack of high frequency statistics, the model used real per capita GDP and government consumption to assess developments in the REER.

The results show that the REER moved from overvaluation to slight undervaluation in 2000-2001 and the gap between actual REER and its equilibrium level has narrowed in recent years. These developments do not seem to have had an adverse effect on the competitiveness of exports, since export volumes of cocoa—the main export commodity—are small, targeted to niche markets in Europe, and are mostly affected by weather conditions. Tourism is a high value-added sector that attracts relatively wealthy eco-tourists and mainly depends on large FDI inflows. Foreign reserves (excluding the National Oil Account) grew from 4.1 months of imports in 2005 to 4.5 months in 2007.

São Tomé and Príncipe-Assessment of REER, 1986-2007

Source: IMF staff estimates

Institutional indicators suggest a modest improvement in the business environment and competitiveness, although significant weaknesses remain. Cumbersome regulations for opening businesses and rigid rules on hiring and firing employees are the main obstacles to doing business in the country. Moreover, inadequate energy, water, and transport infrastructure continues to hamper São Tomé and Príncipe’s competitiveness.

Ranking on the ease of doing business
20082007Change1
South Africa3529-6
Cape Verde132125-7
Mozambique1341406
ECOWAS149144-6
São Tomé and Príncipe1631696
CEMAC165157-7
Angola167156-11
Source: World bank’s Doing Business database.

Maintaining external stability will require prudent macroeconomic management, continued donor support and private inflows, including FDI, and a significant improvement in export earnings. The large external current account deficit, at about 50 percent of GDP before official transfers, is projected to persist over the medium term. Given the limited external assets, the country’s production and export base must be developed and broadened. If oil prospects do not materialize, maintaining external sustainability will require further economic adjustment, including that of the real exchange rate.

C. Statistics, Capacity Building, and Other Issues

36. Data provision is generally adequate for surveillance purposes, although there are still weaknesses in national accounts, government financial operations statistics, and balance of payments data. The National Institute of Statistics has made significant progress in updating GDP statistics, but the lack of reliable data still hampers analysis in areas such as private sector development and progress toward the Millennium Development Goals. To further improve data quality, staff recommended that within the tight budget constraint, the government provide funding for a new household expenditure survey in order to improve compilation of the consumer price index.

37. On capacity building, the authorities have showed willingness to follow Fund technical advice but their ability to implement remains weak. Noting that São Tomé and Príncipe is not a member of AFRITAC and, therefore, cannot benefit from its technical assistance, the authorities hoped that the extension of AFRITAC currently under consideration will cover the country. The BCSTP welcomed a Fund assessment of their future technical assistance needs, particularly in banking supervision and development.

38. The authorities have submitted to the Fund and the World Bank the second Annual Progress Report of the PRSP. In the Joint Staff Advisory Note (JSAN), the staffs noted that the authorities need to enhance monitoring and evaluation to ensure effective implementation of the PRSP. Moreover, the staffs believe that an update of the PRSP would be warranted when oil prospects are updated in late 2008-early 2009.

V. Staff Appraisal

39. São Tomé and Príncipe’s economic performance under the PRGF-supported program has been mixed. While economic activity remains robust, inflation accelerated in the second half of 2007. The higher inflation reflected surging international prices for food and fuel which represented a severe shock to São Tomé and Príncipe’s external current receipts. However, an expenditure overrun and the lack of effective control of base money growth also fueled inflation and currency depreciation.

40. To lower inflation and restore financial stability, it is important that the authorities significantly strengthen fiscal discipline and liquidity management. In this regard, staff supports the 2008 budget that aims to reduce the domestic primary deficit. The authorities are committed to tightening expenditure control. As the 2008 fiscal program has been modified to provide funding to mitigate the impact of the recent external shock, staff encourages the authorities to refrain from generalized price subsidies and work closely with the World Bank staff to implement direct, targeted assistance to the poor.

41. Timely implementation of the direct taxation reform package is crucial for the 2008 program. The tax reform would help broaden the tax base and reduce tax distortions. Staff encourages the authorities to promptly begin implementation, following approval by the National Assembly, along with continued effort to improve tax and customs administration.

42. Recent progress by the BCSTP in curbing liquidity growth is encouraging. Although base money is an indicative target, it serves as the anchor for the program, playing a central role in restoring price stability. The central bank therefore needs to continue using foreign exchange auctions more actively to bring dobra base money growth to a downward path while observing the NIR floor. In addition, monetary policy needs to be supported by fiscal restraint. In the event that the program’s NIR target is at risk, the government will have to support monetary tightening by further curtailing non-essential domestic primary spending.

43. The main challenges facing the authorities over the medium term are to maintain fiscal sustainability and to develop the economy’s production and export base. In view of the uncertain outlook for oil revenue, fiscal consolidation needs to continue beyond 2008 by increasing growth orientation of the budget and bringing recurrent spending, particularly on personnel costs, in line with domestic revenue and available donor budgetary support. In this regard, the country’s adjustment experience since 2005 provides valuable lessons, particularly in avoiding stop-go patterns of policy implementation. Staff also recommends that the authorities strengthen debt management and rely primarily on concessional financing.

44. Accelerated structural reforms are needed to achieve sustained, private sector-led growth. The authorities are to be commended for obtaining the National Assembly’s final approval of the anti-money laundering legislation. Staff encourages the BCSTP to take other steps to advance financial sector reform, including tightening the requirements for issuing new bank licenses. High priority should be attached to improving the investment climate. The authorities should press ahead with regulatory reform to reduce the cost of investing and doing business and attract foreign investment and donor support to upgrade infrastructure and the key economic sectors, particularly tourism and agriculture. Staff encourages the authorities to make further progress under the EITI to increase the transparency and accountability of oil-related resource management.

45. Staff encourages the authorities to maintain an open exchange system. Efforts need to be made to remove all remaining restrictions in order for the authorities to accept the obligations under Article VIII of the Fund’s Articles of Agreement. Staff welcomes the authorities’ interest in reconsidering the country’s monetary and exchange arrangements. Fiscal discipline and prudent debt management are the main prerequisites for a sustainable exchange rate regime.

46. Staff recommends completion of the sixth review based on the country’s performance and policy commitments. Staff supports the authorities’ request for waivers for the nonobservance of the end-December 2007 quantitative performance criteria related to the domestic primary deficit and net credit to the government and the structural performance criterion on public financial management reform, based on remedial measures (summarized in ¶ 23 and 26) and policy commitments for the remainder of the program.

47. It is proposed that the next Article IV consultation be held in accordance with the decision on consultation cycles approved on July 15, 2002.

Table 4.São Tomé and Príncipe: Monetary Survey, 2006–2008
200620072008
Dec.Dec.Mar.Jun.Sep.Dec.
ActualProg.Proj.
(Billions of dobras; end of period)
Net foreign assets860.0975.81,112.01,558.41,551.01,572.1
Central bank619.5708.6807.31,245.41,229.71,242.6
Commercial banks240.4267.1304.7313.0321.3329.5
Net domestic assets-257.5-221.4-237.1-715.8-642.2-578.4
Net domestic credit238.2214.0493.30.835.2103.5
Net credit to government-115.3-213.3-172.1-626.4-601.3-598.1
Of which: valuation changes-22.4-21.91.4-382.9-390.7-398.7
Claims105.6105.7107.0118.8120.9122.9
Deposits-220.9-319.0-279.1-745.2-722.2-721.0
Budgetary deposits-40.9-26.5-11.9-88.2-40.0-13.3
Counterpart funds-22.6-22.6-8.2-8.2-8.2-8.2
Foreign currency deposits-157.4-269.9-259.0-648.8-674.0-699.5
Of which: National Oil Account-111.1-232.4-221.1-577.3-600.6-624.2
Credit to the economy353.5427.3665.4627.1636.5701.5
Of which: credit in foreign currency260.2290.1518.3488.5495.8546.5
Other items (net)-495.7-435.4-730.4-716.6-677.4-681.9
Broad money (M3)602.5754.4874.8842.6908.8993.7
Local currency253.3325.0333.3321.0346.2378.6
Money225.5293.7304.5293.2316.3345.8
Currency outside banks92.3109.6117.4113.1121.9133.3
Demand deposits133.2184.1187.1180.2194.3212.5
Time deposits27.831.328.927.830.032.8
Foreign currency deposits349.2429.4541.5521.6562.5615.1
(Change in percent of beginning-of-period money stock, unless otherwise specified)
Net foreign assets8.119.2-4.549.848.956.1
Net domestic assets31.26.011.0-47.3-38.3-30.5
Of which: net credit to government32.2-16.30.9-54.4-51.4-51.0
credit to the economy26.412.27.32.63.711.7
Broad money (M3)39.325.26.52.610.621.0
Memorandum items:
Velocity (ratio of GDP to average broad money3.03.03.1
Money multiplier (M3/M0)2.22.22.22.22.12.2
Base money (12-month growth rate)32.021.226.522.37.77.7
Credit to the economy (12-month growth rate)47.620.966.747.611.815.8
M3 (12-month growth rate)39.325.234.029.427.731.7
Sources: São Tomé and Príncipe authorities and IMF staff estimates and projections.
Table 5.São Tomé and Príncipe: Balance of Payments, 2005–2013
200520062007200820092010201120122013
Est.Projections
(Millions of U.S. dollars)
Trade balance-34.8-62.3-58.1-66.9-72.2-78.4-78.4-79.4-85.3
Exports, f.o.b.6.86.76.87.07.37.47.47.57.4
Of which: cocoa3.02.53.53.23.13.03.02.92.8
re-export3.43.92.93.13.23.33.43.53.5
Imports, f.o.b.-41.6-69.0-64.9-73.9-79.4-85.8-85.8-86.8-92.7
Of which: food-14.8-17.0-17.6-19.3-21.0-22.5-22.5-24.3-26.6
petroleum products-9.8-15.0-14.6-18.1-18.4-19.3-19.3-20.4-21.9
Services and income (net)-12.0-21.6-19.6-17.5-14.9-17.9-17.9-18.8-21.8
Exports of nonfactor services9.29.54.27.07.68.38.38.57.7
Of which: travel and tourism 17.36.73.36.06.67.37.37.47.1
Imports of nonfactor services-19.2-33.4-30.0-31.9-31.3-33.8-33.8-34.4-36.4
Factor services (net)-2.02.46.17.58.87.77.77.17.0
Interest due-3.2-3.8-0.7-0.2-0.2-0.1-0.1-0.1-0.1
National Oil Account (NOA) interest earnings0.20.90.71.52.61.41.40.70.4
Private transfers (net)1.51.62.02.22.52.82.83.13.3
Official transfers (net)33.531.031.832.629.431.631.632.433.9
Of which: project grants25.625.528.425.426.828.828.830.432.6
HIPC Initiative-related grants3.23.80.00.00.00.00.00.00.0
Current account balance
Including official transfers-11.8-51.3-43.9-49.6-55.2-61.9-61.9-62.7-70.0
Excluding official transfers-45.3-82.4-75.7-82.2-84.6-93.4-93.4-95.0-103.8
Capital and financial account balance46.346.347.266.853.960.960.961.368.7
Capital transfer 20.00.0162.745.40.00.00.00.00.0
Financial account46.346.3-115.521.453.960.960.961.368.7
Public sector (net)29.7-7.3-148.4-17.92.02.02.02.02.1
Project loans1.34.41.41.91.91.91.91.91.9
Program loans0.00.02.12.02.02.02.02.02.0
Oil signature bonuses49.20.028.626.10.00.00.00.00.0
Amortization-8.9-7.4-178.2-46.3-0.9-0.9-0.9-0.9-0.8
Other investment-11.9-4.3-2.3-1.7-1.0-1.0-1.0-1.0-1.0
Of which: Nigerian and Angolan advances (net)0.02.00.00.00.00.00.00.00.0
transfers to JDA-11.4-3.1-3.1-1.0-1.0-1.0-1.0-1.0-1.0
Private sector (net)16.553.632.939.451.858.858.859.366.5
Direct foreign investment 36.241.824.032.535.839.539.539.741.6
Commercial banks-8.50.8-2.30.00.00.00.00.00.0
Short-term private capital18.811.011.16.916.019.319.319.625.0
Errors and omissions-2.2-6.18.40.00.00.00.00.00.0
Overall balance32.3-11.211.717.3-1.3-1.0-1.0-1.3-1.3
Financing-32.311.2-11.7-17.31.31.01.01.31.3
Change in official reserves, excl. NOA (increase= -)-8.6-6.6-4.76.1-0.2-1.7-1.7-2.7-3.0
Use of Fund resources (net)0.51.2-0.80.70.00.00.00.00.0
Purchases0.61.21.20.70.00.00.00.00.0
Repurchases (incl. MDRI repayment)-0.10.0-2.10.00.00.00.00.00.0
National Oil Account (increase = -)-23.314.9-6.3-24.61.42.62.63.84.1
Change in arrears (net; decrease = -)-14.61.7-10.20.00.00.00.00.00.0
Debt relief13.50.010.40.50.20.20.20.20.2
Memorandum items:(Specified unit)
Current account balance (percent of GDP)
Before official transfers-39.5-66.3-52.1-51.5-48.8-50.2-50.2-47.4-47.3
After official transfers-10.3-41.3-30.2-31.0-31.8-33.2-33.2-31.3-31.9
Debt service ratio (percent of exports) 4
Before HIPC and MDRI relief75.670.083.2
After HIPC and MDRI relief62.135.927.84.25.95.55.55.44.5
Gross reserves 5
Millions of U.S. dollars26.633.338.031.832.133.833.836.539.5
Months of imports of goods and nonfactor services44.25.1444444
Sources: São Tomé and Príncipe authorities; and IMF staff estimates and projections.
Table 6.São Tomé and Príncipe: External Financing Requirements and Sources, 2005–2008(Millions of U.S. dollars)
200520062007

Est.
2008

Proj.
Gross financing requirements-89.5-99.1-273.2-124.0
Current account, excluding official transfers-45.3-82.4-75.7-82.2
Exports, f.o.b.6.86.76.87.0
Imports, f.o.b.-41.6-69.0-64.9-73.9
Services and income (net)-12.0-21.6-19.6-17.5
Private transfers1.51.62.02.2
Financial account-20.9-11.8-182.6-48.0
Scheduled amortization 1-8.9-7.4-178.2-46.3
IMF repayments 2-0.10.0-2.10.0
Other public sector investment (net)-11.9-4.3-2.3-1.7
Change in external reserves (increase = -)-8.6-6.6-4.76.1
Change in arrears (net)-14.61.7-10.20.0
Available funding89.599.1273.2124.0
National Oil Fund (net)25.914.922.31.5
Oil signature bonuses49.20.028.626.1
Saving (accumulation of oil reserve fund = -)-23.314.9-6.3-24.6
Expected disbursements34.835.5198.081.9
Multilateral HIPC interim assistance3.23.80.00.0
Capital transfers 1,20.00.0162.745.4
Grants 330.427.231.832.6
Concessional loans1.34.43.53.9
Project loans1.34.41.41.9
Program loans0.00.02.12.0
Private sector (net)14.447.541.339.4
IMF 40.61.21.20.7
Financing gap13.80.010.40.5
HIPC debt relief (bilateral creditors) 20.20.00.20.5
Reschedualable arrears (bilateral creditors) 513.50.010.20.0
Residual financing gap0.00.00.00.0
Sources: São Tomé and Príncipe authorities; and IMF staff estimates and projections.
Table 7.São Tomé and Príncipe: Financial Soundness Indicators for the Banking Sector, 2003–07 1
20032004200520062007
(in percent)
Capital Adequacy
Regulatory capital to risk-weighted assets
Capital (net worth) to assets21.229.69.619.816.8
Asset quality
Foreign exchange loans to total loans67.472.181.283.282.1
Past-due loans to gross loans 2/26.8
Nonperforming loans
Watch-listed loans
Provision as percent of past-due loans153.952.012.927.753.4
Earnings and profitability
Net profit (before tax)/net income 3/-47.6
Return on assets1.1-4.3-11.3-2.8
Return on equity19.2-10.0-44.2-11.7
Expense (w/amortiz. & provisions)/net income126.6422.6
Interest rate spread (deposit money banks)
Lending rates minus demand deposit rates
Lending rates minus saving deposit rates
Liquidity
Liquid assets/total assets69.044.746.243.536.1
Liquid assets/short term liabilities85.370.069.282.072.8
Loan/deposits32.963.156.577.274.3
Foreign exchange liabilities/total liabilities50.849.750.571.748.7
Sensitivity to market risk
funds227.0116.6
Source: São Tomé and Príncipe authorities; and MCM technical assistance report July 2007.
Table 8.São Tomé and Príncipe: Millennium Development Goals
199019941997200020032004
Goal 1. Eradicate extreme poverty and hunger
Target 1: Halve, between 1990 and 2015, the proportion of people whose income is less than one dollar a day.
1. Population below US$1 a day (percent)............
2. Poverty gap ratio at US$1 a day (percent)............
3. Share of income or consumption held by poorest 20 percent (percent)............
Target 2: Halve, between 1990 and 2015, the proportion of people suffering hunger.
4. Prevalence of child malnutrition (percent of children under 5)......12.9....
5. Population below minimum level of dietary energy consumption (percent)............
Goal 2. Achieve universal primary education
Target 3: Ensure that, by 2015, children will be able to complete a full course of primary schooling.
6. Net primary enrolment ratio (percent of relevant age group)....85.597.1....
7. Percentage of cohort reaching grade 5......61.5....
8. Youth literacy rate (percent age 15–24)............
Goal 3. Promote gender equality and empower women
Target 4: Eliminate gender disparity in primary and secondary education, preferably by 2005, and to all levels of education by 2015.
9. Ratio of girls to boys in primary and secondary education (percent)......92.1....
10. Ratio of young literate females to males (percent ages 15–24)............
11. Share of women employed in the nonagricultural sector (percent)............
12. Proportion of seats held by women in the national parliament (percent)12.0..7.09.09.09.0
Goal 4. Reduce child mortality
Target 5: Reduce by two-thirds, between 1990 and 2015, the under-5 mortality rate.
13. Under-5 mortality rate (per 1,000)118.0118.0..118.0118.0118.0
14. Infant mortality rate (per 1,000 live births)75.075.0..75.075.075.0
15. Immunization against measles (percent of children under 12 months)71.065.060.069.087.087.0
Goal 5. Improve maternal health
Target 6: Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio.
16. Maternal mortality ratio (modelled estimate, per 100,000 live births)............
17. Proportion of births attended by skilled health personnel......58.5..79.8
Goal 6. Combat HIV/AIDS, malaria, and other diseases
Target 7: Halt by 2015, and begin to reverse, the spread of HIV/AIDS.
18. HIV prevalence among females (percent ages 15–24)..........1.3
19. Contraceptive prevalence rate (percent of women ages 15–49)......29.0....
20. Number of children orphaned by HIV/AIDS............
Target 8: Halt by 2015, and begin to reverse, the incidence of malaria and other major diseases.
21. Prevalence of death associated with malaria............
22. Share of population in malaria risk areas using effective prevention and treatment......80.0....
23. Incidence of tuberculosis (per 100,000 people)136.1126.6120.0113.7107.8107.8
24. Tuberculosis cases detected under DOTS (percent)............
Goal 7. Ensure environmental sustainability
Target 9: Integrate the principles of sustainable development into policies and programs. Reverse the loss of environmental resources.
25. Forest area (percent of total land area)28.1....28.1....
26. Nationally protected areas (percent of total land area)............
27. GDP per unit of energy use (PPP $ per kg oil equivalent)............
28. CO2 emissions (metric tons per capita)0.60.60.60.6....
29. Proportion of population using solid fuels............
Target 10: Halve, by 2015, the proportion of people without access to safe drinking water.
30. Access to improved water source (percent of population)........79.0..
Target 11: Achieve by 2020 significant improvement for at least 100 million slum dwellers.1
31. Access to improved sanitation (percent of population)........24.0..
32. Access to secure tenure (percent of population)............
Goal 8. Develop a Global Partnership for Development
Target 16: Develop and implement strategies for productive work for youth.
45. Unemployment rate of population ages 15–24 (total) Female............
Male............
Target 17: Provide access to affordable essential drugs
46. Proportion of population with access to affordable essential drugs.............
Target 18: Make available new technologies, especially information and communications.
47. Fixed line and mobile telephones (per 1,000 people)19.219.831.231.077.677.6
48. Personal computers (per 1,000 people)............
Sources: World Development Indicators database.
Table 9.São Tomé and Príncipe: Schedule of Disbursements under the PRGF Arrangement, 2005-2008 1
SDR MillionsPercent of QuotaDate AvailableDisbursement Conditions
0.4235.7Aug. 2005Board approval of arrangement
0.4235.7Mar. 2006Observance of PCs for end-September 2005 and completion of the first review
0.4235.7Aug. 2006Observance of PCs for end-December 2005 and completion of the second review
0.4235.7Jan. 2007Observance of PCs for end-June 2006 and completion of the third review
0.4235.7Jun. 2007Observance of PCs for end-December 2006 and completion of the fourth review
0.4225.7Dec. 2007Observance of PCs for end-June 2007 and completion of the fifth review
0.4235.7Jun. 2008Observance of PCs for end-December 2007 and completion of the sixth review
Source: IMF.
Table 10.São Tomé and Príncipe: Indicators of Capacity to Repay the Fund, 2007-2013
Projections
2007200820092010201120122013
Fund obligations based on existing credit
(in millions of SDRs)
Principal1.920.000.000.000.000.000.40
Charges and interest0.040.030.030.030.030.030.03
Fund obligations based on existing and prospective credit 1
(in millions of SDRs)
Principal0.000.000.000.000.000.44
Charges and interest0.030.030.030.030.030.03
Total obligations based on existing and prospective credit 1
In millions of SDRs1.950.030.030.030.030.030.47
In millions of U.S. dollars3.070.050.050.050.050.050.76
In percent of exports of goods and services27.930.340.320.300.300.325.07
In percent of debt service 214.394.294.404.484.505.2045.66
In percent of quota26.400.400.410.410.410.416.35
In percent of gross international reserves8.090.150.150.140.130.121.63
Outstanding Fund credit
In millions of SDRs1.62.52.52.52.52.52.0
In millions of U.S. dollars2.63.93.93.93.94.03.3
In percent of exports of goods and services23.227.926.325.024.826.321.9
In percent of debt service 212.0356.8362.5368.9370.5428.1197.2
In percent of quota21.933.433.433.433.433.427.4
In percent of gross international reserves6.712.212.211.610.810.17.1
Memorandum items:
Exports of goods and services (millions of U.S. dollars)11.014.014.915.715.915.115.0
Debt service (millions of U.S. dollars) 221.31.11.11.11.10.91.7
Quota (millions of SDRs)7.47.47.47.47.47.47.4
Gross international reserves (excl. oil account and security deposits by banks, millions of U.S.38323234363946
GDP (millions of U.S. dollars)145160173186200220243
Sources: Sao Tome and Principe authorities; and Fund staff estimates and projections.
Letter of Intent

São Tomé, June 4, 2008

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Mr. Strauss-Kahn:

1. The attached Memorandum of Economic and Financial Policies (MEFP) sets out the objectives and policies that the Government of the Democratic Republic of São Tomé and Príncipe intends to pursue for the remainder of 2008. They are consistent with the Government’s Poverty Reduction Strategy (PRS) and the objectives of the three-year arrangement under the IMF’s Poverty Reduction and Growth Facility (PRGF). Our economic adjustment and reform efforts are being supported by the international community, notably through debt relief under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI).

2. The Government of the Democratic Republic of São Tomé and Príncipe has made progress in economic adjustment and structural reforms over the past year, amid a difficult external economic environment. Economic growth has remained robust. In response to rising international prices for food and fuel, the Government raised the domestic prices for petroleum products, electricity, and water in the second half of 2007 to reduce implicit subsidies. It also intensified efforts to mobilize aid and took steps to strengthen public financial management. However, annual inflation rebounded since mid-2007, reflecting the higher prices of our imports and depreciation of the dobra, especially against the euro, the main invoicing currency for imports. Our domestic primary fiscal deficit was higher than envisaged under the program owing mainly to higher energy prices.

3. To bring inflation to a downward path, we are determined to strengthen policy implementation, particularly in containing domestic primary expenditure and in curtailing liquidity growth. Our policies for the remainder of 2008 aim to consolidate financial stability, ensure sound management of oil-related and debt relief resources, and lay the groundwork for sustained private sector-led growth. Our program envisages a further reduction of the domestic primary fiscal deficit relative to GDP, a strengthening of monetary and exchange rate policies to lower inflation, and an acceleration of structural reforms. These are key conditions for sustained growth, which in turn is key for poverty reduction.

4. In support of our objectives and policies, the Government hereby requests the completion of the sixth review and the disbursement of the seventh loan under the PRGF arrangement in an amount equivalent to SDR 0.423 million (5.7 percent of quota). The Government requests a waiver for the nonobservance of the end-December 2007 performance criteria on net bank credit to the Government and the domestic primary fiscal deficit, based on the corrective measures we are taking. The Government also requests a waiver for the nonobservance of the end-December 2007 structural performance criterion related to upgrading the computerized public financial management system. The intended policy steps were taken in early 2008.

5. The Government will provide the IMF with such information as the IMF may request regarding progress in implementing economic and financial policies and achieving the objectives of the program.

6. The Government believes that the policies and measures set forth in the MEFP are adequate to achieve the objectives of the 2008 program supported by the PRGF arrangement, but will take further measures to that end if deemed necessary. During the implementation of the arrangement, the Government will consult with the Managing Director of the IMF on the adoption of any measures that may be appropriate, at the initiative of the Government or whenever the Managing Director requests such a consultation.

7. The Government intends to make the contents of this Letter of Intent and those of the attached MEFP and Technical Memorandum of Understanding (TMU), as well as the IMF staff report on the sixth PRGF review, available to the public and authorizes the IMF to arrange for them to be posted on the IMF website, subsequent to Executive Board completion of the sixth review.

Yours truly,

s./s./
Mr. Raul António da Costa Cravid Minister of Planning and FinanceMr. Luis Fernando Moreira de Sousa Governor of the Central Bank of São Tomé and Príncipe

Attachments: Memorandum of Economic and Financial Policies Technical Memorandum of Understanding

São Tomé and Príncipe: Memorandum of Economic and Financial Policies

March 26, 2008

I. Introduction

1. This Memorandum of Economic and Financial Policies (MEFP) supplements that of October 20, 2007 and our Letter of Intent dated December 1, 2007. The new coalition Government, which took office in February 2008 with a majority in the National Assembly, is committed to the policies under the PRGF-supported program. This MEFP describes (i) performance under the PRGF arrangement through December 2007, (ii) economic developments in 2007 and early 2008, and (iii) the Government’s economic program for the remainder of this year. The policies set forth in this Memorandum should help achieve the medium-term objectives set out in our PRSP, including efficient use of debt relief resources provided under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). Our Government is committed to creating the conditions for sustained economic growth, which is essential for reducing poverty.

II. Recent Economic Developments and Performance Under the Program

2. Economic activity remained robust in 2007, with real GDP growth estimated at 6 percent. Tourism-related construction, communication, and other services sectors continued to be the main drivers of output growth, boosted by foreign direct investment. Cocoa exports increased on the back of rising world market prices and higher export volume but the traditional agriculture sector remains depressed.

3. Consumer price inflation rebounded to 27.6 percent (year-on-year) at the end of December 2007, after a significant decline in the first half of the year. This acceleration reflected the impact of exogenous factors such as rising import prices for food and fuel and appreciation of the euro, the main invoicing currency for our imports.6 It was also influenced by higher public expenditure and faster than programmed liquidity growth. In addition, the Government sharply raised domestic prices of petroleum products (by 14-25 percent) and electricity and water tariffs (by 40-60 percent) in September 2007, after increases in international oil prices, in order to reduce implicit subsidies. The dobra depreciated against the U.S. dollar and the euro by 10 and 26 percent, respectively, in 2007.

4. Despite higher than projected domestic revenue, the domestic primary fiscal deficit exceeded the performance criterion for end-December 2007 (Table I.1). Domestic revenue recovered in the second half of the year, led by higher income tax receipts, as well as tax arrear collections. However, the domestic revenue gains of about 1.2 percent of GDP vis-à-vis the program target were more than offset by a sharp rise in current spending, especially on utilities, transfers, and medical expenses. A significant part of the utility payments to EMAE, the state-owned electricity and water company, was to mitigate the impact of the sharp utility tariff hike on the population. Higher current spending also contributed to lower funding available for domestically financed capital expenditure. The widening domestic primary deficit, at 8.1 percent of GDP, was financed by a larger-than-projected drawdown of government deposits at the central bank (BCSTP), including from the National Oil Account (NOA). The Government also made efforts to mobilize external financing, which helped in clearing arrears on scholarships and other current outlays.

Table I.1.São Tomé and Príncipe: Performance Criteria and Indicative Targets(Billion of dobras, cumulative from September 2006, unless other wise specified)
200620072008
Sep. 30Jun. 30Dec. 31Mar. 31Jun. 30
Base

(stocks)
Base

(stocks,

excl. NOA)
Perf. Criteria

CR/07/102
ActualPerf. Criteria

CR/07/267
Perf. Criteria

CR/07/267

(with adjustors)
ActualInd. TargetInd. Target
1. Floor on domestic primary balance
(as defined in the TMU; cumulative from beginning of year)-97.0-97.0-137.3-137.3-158.4-22.6-80.0
2. Ceiling on changes in net bank financing of the government
(cumulative from end-September 2006; billions of dobras at program exchange rate) 1,2,3-126.8-20.8-32.4-60.7-33.8-83.2-30.970.8-21.7
3. Ceiling on changes in net domestic assets of the central bank
(cumulative from end-September 2006; billions of dobras at program exchange rate) 1,2,3-289.8-183.8-19.6-86.526.3-23.1-65.052.3-8.4
4. Floor on changes in the net international reserves of the central bank
(cumulative from end-September 2006; US$ millions) 3,441.833.41.94.91.04.510.1-2.12.7
5. Ceiling on central government’s outstanding external payment arrears (stock, US$ millions)50.00.00.00.00.00.00.0
6. Ceiling on the contracting or guaranteeing of new nonconcessional external debt with original maturity of more than one year by the central government or the BCSTP
(cumulative flows from January 2005, € millions) 6,71.60.01.61.61.61.61.6
7. Ceiling on the outstanding stock of external debt with original maturity of up to and including one year owed or guaranteed by the central government or the BCSTP (stock, US$ millions)81.00.01.01.01.01.01.0
Memorandum items:
Base money (ceiling; billions of dobras)9273.2302.5318.2337.0417.1391.6389.2
Currency Issued (ceiling; billions of dobras)94.4105.088.7124.5126.2135.2122.0
Oil signature bonuses including accrued interest on NOA
(US$ millions, cumulative from beginning of year)0.528.816.029.030.90.226.5
Transfer from NOA to the budget (US$ millions, cumulative from beginning of year)8.08.08.010.30.03.0
Net external debt service payments
(cumulative from beginning of the year, billions of dobras at program exchange rate) 10-35.4-211.0-213.2-220.0-229.4-4.2-8.5
Official external program support
(cumulative from beginning of the year, billions of dobras at program exchange rate) 117.80.00.041.862.712.381.3
Sources: São Tomé and Principe authorities; and IMF staff estimates and projections.

5. Base money growth accelerated from 23 percent (year-on-year) in June 2007 to 50 percent by the end of the year. While part of base money growth was due to strong foreign currency flows to the banking system, the excess increase in dobra liquidity reflected the fact that the BCSTP’s sterilization of budgetary use of oil bonuses and donor grants fell short of what was needed to adequately bring down liquidity growth. As a result, base money grew much faster than programmed, while net international reserves exceeded the program target by a large margin.

6. The exchange rate of the dobra remains market-determined. The BCSTP has continued to adjust its exchange rate to market conditions daily by calculating it as the sum of 40 percent of the previous day’s selling rate quoted by commercial banks and 60 percent of its own previous day’s selling rate. The excess liquidity put pressure on the exchange rate and the spread between the reference exchange rate of the central bank and commercial banks exchange rate widened in the second half of 2007 to over 2 percent.

7. Progress on structural reforms has been mixed. The end-December 2007 structural performance criterion on public financial management system was met with delay—the intended policy steps were taken in early 2008 (Table I.2). On structural benchmarks, the 2008 budget was prepared and submitted to the National Assembly (NA) in mid-December 2007. It has since been withdrawn and needs to be resubmitted with an updated public investment program. In early 2008, the BCSTP issued the new regulations on capital adequacy, internal control and auditing, bank financial reporting, and credit to employees. The Oil Revenue Management Law (ORML) handbook was posted on the internet in December 2007. However, the direct taxation reform package (new corporate and personal income tax and urban property tax laws) has not yet been approved pending resubmission by the new Government of the draft income tax law. The NA has not yet given its final approval to the anti-money laundering (AML/CFT) law. The National Oil Agency has prepared a Petroleum Sector Strategy and a set of laws for launching licensing for the Exclusive Economic Zone (EEZ), but their adoption has been delayed.

Table I.2.São Tomé and Príncipe: Structural Performance Criteria and Benchmarks June 2007–December 2008
ActionPerformance Criteria / BenchmarkStatus
June 2007
  • Issue new prudential regulations on credit classification, liquidity, transactions with related parties, and limits on bank net open foreign currency positions.

Performance CriteriaThree regulations (credit classification, liquidity, and transactions with related parties) were issued in August; the regulation on net open foreign currency positions was issued in November 2007.
  • Produce the monthly budget execution report (TOFE) using upgraded SAFINHO.

BenchmarkReports are prepared monthly.
  • Finalize the installation of 3,000 prepaid electricity metering systems.

BenchmarkAbout 1,000 meters installed by September 2007.
September 2007
  • Prepare the 2008 budget in line with the new organic budget law (SAFE) for submission to the National Assembly.

BenchmarkThe 2008 budget is in line with the new SAFE and was submitted to the NA on December 12, 2007.
December 2007
  • Make progress toward the fully integrated computerized public financial management system (eSAFE) by: (i) the issuance of an administrative decree by the Minister of Finance to establish the IT office; and (ii) the issuance of tenders for the procurement of IT equipment for upgrading SAFINHO.

Performance CriteriaIn early 2008, the administrative decree to establish the IT office and the Directorate of Accounting were approved by the Council of Ministers and the tender for the procurement of IT equipment was issued.
  • Adopt Petroleum Sector Strategy to develop the Exclusive Exploration Zone (EEZ).

BenchmarkPetroleum Sector Strategy prepared by the National Petroleum Agency, pending approval by the Council of Ministers.
  • Issue new regulations on capital adequacy, internal control and auditing, bank financial reporting, and credit to employees.

BenchmarkAll new regulations issued in the early 2008.
March 2008
  • Establish a Directorate of Accounting and an IT office. Install IT equipment.

BenchmarkBill passed to establish offices but due to delays in donor funding, the offices are not yet established and the IT equipment not yet purchased.
  • Revise the commercial codes, with external technical assistance, in order to reduce the cost and time of doing business.

BenchmarkExternal technical still ongoing.
  • Adopt the new income tax code, corporate tax code, and urban property tax code.

Benchmark for April 2008Expected in late June.
  • Adopt the 2008 budget in line with the PRGF-supported program.

Benchmark for April 2008Adopted on May 7, 2008 in line with the program.
June 2008
  • Revise the mechanism for setting the daily official exchange rate to keep the spread between the official and commercial banks exchange rates within the permissible range.

  • Prepare regulations under the SAFE law.

  • Put in place new modules to implement the public accounting system and train users.

  • Initiate preparation of an action plan to compile the payment arrears of EMAE and ENAPORT.

8. Implementation of public enterprise reform has been slow. Under a reform strategy for EMAE, utility tariffs were increased to cover production costs. EMAE has also introduced prepaid electricity meters to strengthen payment collection. Nevertheless, EMAE’s facilities need repair and investment, its financial standing remains weak, and its operational efficiency is low. Similarly, ENASA, the airport authority, has difficulties in covering its operating costs, with large arrears on electricity. Overstaffing and other problems led to a bloated cost structure in ENAPPORT, the seaport authority.

III. Economic Policies for the Rest of 2008

9. Against the backdrop of strong negative terms-of-trade shocks, the authorities attach high priority to restoring financial stability. The Government and the central bank of São Tomé and Príncipe are determined to make a concerted effort to strengthen expenditure control and liquidity management prior to the Executive Board consideration of the sixth review.

10. For the rest of 2008, our macroeconomic framework aims to maintain real GDP growth at 6 percent, reduce annual inflation to 13-15 percent by the end of the year, and safeguard international reserves equivalent to 4 months of imports. We will make every effort to speed up structural reforms, which are critically important for addressing our economy’s supply constraints, restoring fiscal sustainability over the medium term, and mobilizing support from the World Bank and other multilateral and bilateral development partners.

A. Fiscal Policy

11. The Government plans to further reduce the domestic primary deficit to 5.2 percent of GDP in 2008, from 8.1 percent in 2007. Fiscal consolidation in the 2008 budget would come mainly from the expenditure side, because the revenue impact of the envisaged direct tax reforms, which aim to reduce distortions, would be largely neutral in 2008. The domestic primary deficit is expected to be financed by the use of IDA Development Policy Operation (DPO) grant of US$4.5 million and a draw-down of up to US$3 million from the National Oil Account (NOA). There should be no recourse to domestic banking system credits (excluding the NOA).

12. In the period immediately ahead, the Ministry of Planning and Finance will significantly tighten expenditure control to prevent the recurrence of an expenditure overrun. Specifically,

  • To put in place a functioning computerized public financial management system (SAFINHO), the Ministry of Planning and Finance will establish a Directorate of Accounting and an IT office by end-March 2007, in addition to procuring and installing IT equipment. We intend to make progress in training users of the upgraded SAFINHO at the level of spending entities in the following months.

  • Strict (quarterly) limits will be set on nonessential current spending, particularly on goods and services and transfers not funded by donors.

  • Withdrawals from the National Oil Account will be in strict compliance with the provisions of the ORML.

13. Other expenditure measures planned for 2008 include:

  • Containing budgetary personnel costs. The full year impact of the 2007 general wage increase will be felt in 2008. The Government will closely monitor all components of the wage bill and strictly limit the payments of bonuses and benefits to ensure that the wage-bill-to-GDP ratio declines from 8.9 percent in 2007 to 8.6 percent in 2008.

  • Public wage reform. As part of its civil service reform strategy to be supported by the World Bank under the DPO, the Government plans to integrate fringe benefits into the wage bill and adopt a revised salary structure, based on a comprehensive wage study, with incentives for public servants, as a first step in its strategy. These reforms are critically important for restoring fiscal sustainability and enhancing the growth orientation of the budget.

  • Adjusting nonwage current spending. Transfers to the Joint Development Authority (JDA) will need to be reassessed, taking into account budget constraints, oil revenue prospects, and the execution of the JDA budget. Discretionary expenditures on goods, services, and other items will have to be restrained to correspond with available resources.

  • Assisting the most vulnerable segments of the population. We plan to achieve this goal through better implementation of HIPC-related expenditure programs and a temporary, targeted scheme for the most vulnerable groups. The latter scheme, to be financed by part of the IDA DPO grant (US$0.5 million), will facilitate adjustment to higher import prices for food and fuel. While aligning allocations with the PRSP priorities set out in the Priority Action Plan for 2006–08, we will improve the monitoring of pro-poor spending.

  • Improving the execution of public investment projects. Increasing infrastructure investment, especially in transportation and the electricity sector, will help address supply bottlenecks and enhance growth potential. We will work closely with our external development partners to accelerate implementation of foreign-funded projects, while ensuring adequate resources for domestically funded investment projects.

14. On the revenue side, the Government will focus on the following measures:

  • Timely adoption and implementation of the new direct taxation laws. The Government has resubmitted the draft income tax law to the NA, aiming to obtain NA approval of the tax reform package by the end of April 2008. The package of legislation includes a reduction in the corporate tax rate from 45 to 25 percent, a move to a progressive personal income tax from the current flat rate of 13 percent, and application of the urban tax code. Timely implementation after NA approval would help broaden the tax base, reduce distortions, and increase revenue buoyancy.

  • Strengthened tax and customs administration. With support from the US Millennium Challenge Corporation (MCC), the tax authorities will step up efforts to audit tax returns, keep track of large tax payers, and compile and collect tax arrears, particularly from large tax payers. To facilitate tax arrear collections, the Government intends to set up tribunals to settle tax disputes.

15. To strengthen the monitoring and execution of the 2008 budget, the Government will further improve the public financial management system. With assistance from multilateral and bilateral donors, efforts will be made to put in place new modules to implement the public accounting system, prepare regulations for the organic budget law (SAFE law), and develop SAFINHO into a fully fledged e SAFE system incorporating all public accounts, including patrimony and debt.

16. Prudent use of donor budgetary support and the remaining oil bonuses is essential for maintaining macroeconomic stability in the next several years. Total grants from IDA under the DPO are expected at US$6 million. As no additional DPO grants are envisaged in the next few years, the Government intends to save part of the grant (US$1.5 million) for future use. In view of the rapidly declining NOA balance, high uncertainty regarding additional oil signature bonuses in 2008, and further delays in oil exploration drilling in Blocks 2 and 4, annual draw-down of the NOA will be strictly limited. The Government is committed to adjusting the medium-term fiscal and financing strategies, including the use of NOA resources if oil production and exports are seriously delayed beyond the previous projection of 2014.

B. Monetary and Exchange Rate Policies

17. We recognize that to return inflation to a downward path, the BCSTP must step up its effort to mop up excessive liquidity and significantly bring dobra base money growth down. Weak financial intermediation and high currency substitution in our economy severely limit the effectiveness of interest rates and other monetary policy instruments. We therefore have to rely on fiscal restraint and foreign exchange sales to control liquidity. The BCSTP will use foreign exchange auctions more actively, consistent with the program’s NIR target, aiming to lower the 12-month growth rate of dobra base money from 50 percent in December 2007 to 35 percent by the end of March 2008 and 25 percent by the end of June 2008. Our monetary program for the rest of 2008 aims to keep base money growth on a declining trend, in order to achieve the program’s objective of reducing inflation.

18. The BCSTP and the Treasury Department of the Ministry of Planning and Finance intend to strengthen their cooperation to ensure that the BCSTP takes timely action to sterilize budgetary use of oil bonuses, donor funds, and HIPC and MDRI savings. Regular information-sharing among the Ministry of Planning and Finance and BCSTP officials will include the Treasury’s cash outlays (in both domestic and foreign currency), which are important for the BCSTP’s liquidity forecast and foreign exchange market operations. To help liquidity forecast, the BCSTP will use the weekly average, rather than the monthly average, in measuring commercial banks’ compliance with the minimum reserve requirements. Because public expenditure is a major component of aggregate demand that also affects domestic prices and the exchange rate, if meeting the program’s NIR target is at risk, the Government will support monetary tightening by curtailing domestic primary expenditures.

19. The BCSTP is committed to deepening foreign exchange market reform. While accepting the obligations under Article VIII, Sections 2(a), 3, and 4, of the IMF’s Articles of Agreement remains our goal, in the near term, the Government will focus on expediting approval by the National Assembly of the new investment code, which contains provisions aiming to remove the exchange restriction on transferring dividends abroad. To remove the remaining multiple currency practices, the BCSTP will consider revising the mechanism for setting the daily official exchange rate, based on a careful review of domestic market conditions. The revised mechanism would ensure that the spread between the official and commercial bank exchange rates will not exceed 2 percent. The BCSTP will continue implementing the current policies of holding regular foreign exchange auctions and progressively expanding the foreign exchange auction market to ensure a fuller and faster market determination of the exchange rate.

20. The BCSTP will continue with its communication strategy of informing the market of its monetary and exchange policies. In addition to the BCSTP regular meetings with the banking community and the media, data on monetary and macroeconomic aggregates will be posted daily on the central bank’s website. The BCSTP will also post yearly audited financial statements. Its budget execution and profit and loss accounts on a cash basis will be reported at least quarterly, as part of the program’s monetary data.

C. Structural Reforms

21. Reducing the cost of investing and doing business in São Tomé and Príncipe is crucial for developing our economy’s productive and export potential. The Government intends to press ahead with the following reforms: (i) with external technical assistance, complete the revision of the commercial codes; (ii) enact and implement the new investment code and the revised labor code. The investment code would provide equal treatment to foreign and domestic investors. Revisions to the labor code would aim to more clearly define hiring and firing rules, remove ambiguities in contractual employment arrangements, and increase labor market flexibility by eliminating regulatory impediments; and (iii) submit and obtain NA approval of the draft legislation, prepared in consultation with the private sector, to reduce red tape and other regulatory impediments to start a business.

22. We will build on our recent progress to further enhance transparency and accountability in managing current and prospective oil resources. The Minister of Natural Resources and Environment issued an order in August 2007 verifying São Tomé and Príncipe’s formal adherence to the Extractive Industries Transparency Initiative (EITI). A national coordinator for implementation of the EITI has also been appointed. More recently, the International Board of the EITI has accepted São Tomé and Príncipe as a Candidate State of the Initiative, in recognition of our serious commitment to transparently manage oil revenues. To make further progress, we will adopt the Petroleum Sector Strategy and submit to the NA the legal framework for the EEZ including the Framework Law On Oil-Related Activities, the Taxation Law, and the Production-Sharing Contract Model. The National Oil Agency will strive to conduct the licensing round for the EEZ transparently and consistent with the ORML and the EITI.

23. Regarding financial sector reform, our top priority is to obtain NA final approval of the AML/CFT law. We are aware that the country would be negatively affected if we do not catch up in this important area. We therefore will work closely with the NA to expedite the legislative process. Once the NA gives final approval to the AML/CFT law, the implementation regulations, which the BCSTP has already prepared, will be issued. In addition, based on a review which has already been undertaken, the BCSTP intends to strengthen the requirements for issuing bank licenses, including by raising the minimum capital requirement. To reduce the risk of bank distress arising from non-performing loans, the BCSTP, with IMF technical assistance, will further strengthen its capacity to enforce banking supervision regulations through training, implementing the new chart of accounts and quarterly financial reporting by banks, and setting up a central credit unit to facilitate credit information sharing among banks.

24. Pressing ahead with reforms in key sectors, such as agriculture, transportation, and energy, is of fundamental importance if living standards are to improve on a sustainable basis. We will continue working closely with the World Bank and other development partners to promote agricultural marketing, commercial fishing, and tourism-related services. We will also address EMAE’s financial and technical weaknesses through tariff and other reforms, increase the productivity of ENAPORT through outsourcing (e.g. cleaning, security guards), and attract investment to upgrade our infrastructure, including the airport runway and seaport.

D. Debt Management

25. The Government is fully aware of the importance of ensuring debt sustainability after HIPC and MDRI debt relief. We will refrain from new external borrowing, particularly on commercial terms, and redouble our efforts to seek full delivery of HIPC debt relief from the remaining official creditors. We have initiated discussions on debt cancellation with Angola and Portugal and will try to conclude these agreements as soon as possible. The Government will further improve debt management by utilizing the Commonwealth Secretariat debt management system (CS-DRMS).

E. Capacity Building

26. São Tomé and Príncipe continues to need international support to build capacity for policy monitoring and implementation. The World Bank is providing support for our public financial management reform. A resident macroeconomic advisor, supported by Portugal, is now working in the Ministry of Planning and Finance. Under the US MCC’s Threshold program, technical advisors are assisting our tax and customs administration and providing advice to help improve the business environment. We have benefited from IMF technical assistance in central banking, public finances, and statistics and will strive to use such assistance more effectively in the future. We welcome a mission from the IMF’s Monetary and Capital Market Department to assess our technical assistance needs and a mission from the Finance Department to conduct a safeguard assessment after the current PRGF arrangement expires in August 2008.

27. We will further improve our economic statistics. Within our very tight budget constraints, we will provide support for a new household expenditure survey in order to improve compilation of the consumer price index. Further progress will also be made to improve budget classification and the consistency between monetary and fiscal data.

F. Program Monitoring

28. To facilitate expenditure control and liquidity management, indicative targets for selected fiscal and monetary variables are set for end-March and end-June 2008 (Table I.1). These include indicative ceilings for primary nonwage current spending, 12-month dobra base money growth, and net international reserves of the BCSTP. The non-accumulation of external payment arrears (as defined in the attached Technical Memorandum of Understanding) is a continuous performance criterion, as are the injunctions against imposing or intensifying restrictions on current payments, introducing new or modifying existing multiple currency practices, concluding bilateral payments agreements that are inconsistent with Article VIII of the Fund’s Articles of Agreement, or imposing new or intensifying existing import restrictions for balance of payments purposes. Two structural benchmarks are added, one on the adoption of the 2008 budget, in line with the PRGF-supported program, and another on approval of the direct taxation reform package for end-April 2008 (see Table I.2).

29. The attached Technical Memorandum of Understanding sets out the modalities of program monitoring. These include definitions of performance criteria and indicative targets; application of adjustors for deviations from programmed amounts of oil signature bonuses, budget support, and net external debt service payments; and data sources and frequency of data reporting.

30. We have recently provided the second Annual Progress Report on the PRSP to the Fund and the World Bank. We welcome the positive assessment of the staff of the two institutions conveyed by the mission and look forward to the Joint Staff Advisory Note. Looking forward, we will enhance monitoring and evaluation to ensure effective and successful implementation of the PRSP and update the PRSP when new information on oil prospects, especially after further oil exploration drilling in the JDZ, becomes available.

Technical Memorandum of Understanding

1. This technical memorandum of understanding (TMU) contains definitions and adjuster mechanisms that are intended to clarify the measurement of variables in Table 1, Quantitative Performance Criteria, PRGF Arrangement, 2006–07, which is attached to the Memorandum of Economic and Financial Policies. Unless otherwise specified, all quantitative performance criteria and benchmarks will be evaluated in terms of cumulative flows from end-September 2006.

I. Provision of Data to the Fund

2. Data with respect to all variables subject to performance criteria and indicative targets will be provided to Fund staff monthly with a lag of no more than four weeks for data on the net domestic assets and net international reserves of the Central Bank of São Tomé and Príncipe (BCSTP) and eight weeks for other data. The authorities will transmit promptly to Fund staff any data revisions. For variables that are relevant for assessing performance against program objectives but are not specifically defined in this memorandum, the authorities will consult with Fund staff as needed on the appropriate way of measuring and reporting. Performance criteria included in the program, as defined below, refer to domestic primary balance of the central government, net bank financing of the central government, net domestic assets and net international reserves of the central bank, external payments arrears, nonconcessional medium and long-term external debt, and short-term external debt.

II. Definitions

3. Government is defined for the purposes of this TMU to comprise the central government, which includes all governmental departments, offices, establishments, and other bodies that are agencies or instruments of the central authority of São Tomé and Príncipe. The central government does not include the operations of state-owned enterprises.

4. Government domestic revenue (excluding oil revenue) comprises all tax and nontax revenue of the government (in domestic and foreign currency), excluding foreign grants, the receipts from the local sale of in-kind grants (e.g., crude oil received from Nigeria, food aid, etc.), and any gross inflows to government on account of oil signature bonus receipts and accrued interest in the National Oil Account (NOA). Revenue will be measured on a cash basis as reported in the table of government financial operations prepared by the Directorate of Budget and the Directorate of Treasury in the Ministry of Planning and Finance.

5. Domestic primary expenditure comprises all government spending assessed on a commitment basis (base compromisso), excluding (i) foreign-financed capital expenditure; (ii) foreign-financed expenditure under the overseas scholarship program that is externally financed; and (iii) scheduled interest payments. Reporting of government domestic expenditure will be based on the state budget execution prepared every month by the Directorate of Budget and the Directorate of Treasury in the Ministry of Planning and Finance.

6. Within domestic primary expenditure, propoor expenditure refers to government outlays recorded in the budget nomenclature that have a direct effect on reducing poverty, as agreed with the IMF and World Bank staffs. These expenditures, which include both current and capital outlays, are defined as follows:

  • a. Propoor current spending: These cover the following ministries and expenditure categories (by budget code) as described in the matrix below:

    Expenditures on fuels and lubricants (combustíveis e lubrificantes) that are effected for administrative purposes are excluded. Likewise, food (alimentação) and clothing and shoes (roupas e calçados) supplied to administrative staff are excluded.

    For 2007 onward, the definition of propoor current spending, defined in the matrix above, will be based on the new budget nomenclature.

  • b. Propoor capital spending: This covers projects that are deemed to have a direct impact on alleviating poverty in the following sectors: education, health, social safety nets, agriculture and fisheries, rural development, planning and finance, youth and sports, provision of potable water, and electrification.

CodeDescription of expenditureMinistry of

Education
Ministry of

Health
Ministry of

Labour
01.00.00Despesa com Pessoalxxx
02.01.05Outros bens duradourosxx
02.02.02Combustiveis e lubrificantesxxx
02.02.04Alimentacaox
02.02.05Medicamentosxx
02.02.06Roupas e clasadosxxx
02.02.09Outros bens nao duradourosxx
02.03.01.01Agua e energiaxxx
02.03.02Conservacao de bensxx
02.03.06Comunicacoesxxx
04.02.01Instituicoes particularesxx
04.03.01Particulares (Junta de Saude)xx
04.04.02Outras transferencias para exteriorx
06.01.00Ensino e formacaox
06.04.01Custos recorrentes de projectosx
06.04.04.02Outros Diversosxx

7. The domestic primary balance is defined as the difference between government domestic revenue and domestic primary expenditure. This balance for end-September 2006 was assessed at DB – 109.6 billion, broken down as follows:

Government domestic revenue:Db 217.3 billion
Less: Government primary expenditure
(as defined in paragraph 5)Db 326.9 billion
Equals: Domestic primary balance:Db – 109.6 billion

8. Domestic arrears are defined as the difference between expenditure on a commitment basis and cash payments (amounts past due and unpaid).

9. The program exchange rate for the purposes of this TMU will be Db 12,548.5 per U.S. dollar. The exchange rate of the dobra against the euro will be 15,952.93 and against the SDR will be 18,526.31.

10. Net bank financing of the central government (NCG) is defined as the stock of all outstanding claims on the government held by the BCSTP, less all deposits held by the central government with the BCSTP, plus the stock of all outstanding claims on the government held by deposit money banks (DMBs),7 less all deposits held by the central government with DMBs as they are reported monthly by the BCSTP to the IMF staff. The National Oil Account (NOA) at the BCSTP is included in 2007 and excluded in 2008. All foreign exchange–denominated accounts will be converted to dobras at the program exchange rate. At end-September 2006, outstanding net bank financing of the government was assessed at Db – 126.8 billion, broken down as follows:

BCSTP credit, including use of IMF resources:Db 105.8 billion
Less: Government deposits with BCSTP:Db 226.3 billion
Of which: National Oil Account (NOA)Db 106.0 billion
Treasury foreign currency–denominated accountsDb 43.9 billion
Treasury local currency–denominated accountsDb 28.7 billion
Account for HIPC relief 8Db 20.3 billion
Account for MDRI relief 9Db 0.0 billion
Counterpart depositsDb 22.6 billion
PRGF disbursement accountDb 4.7 billion
Equals: Net credit to government by the BCSTP:Db – 120.5 billion
Plus: DMBs credit:Db 0.0 billion
Less: Government deposits with DMBs (including counterpart funds):Db 6.3 billion
Equals: Net bank financing of the government:Db 126.8 billion

11. Base money is defined as the sum of currency issued—which consists of currency outside banks and cash in vaults—and bank reserves, at the program exchange rate. Bank reserves refer to reserves of commercial banks held with the central bank and include reserves in excess of the reserve requirements. At end-September 2006 base money was assessed at dobras 273.2 billion, calculated as follows:

Currency issued:Db 94.4 billion
Of which: Cash in vaults:Db 13.7 billion
Currency outside banks:Db 80.7 billion
Plus: Bank reserves:Db 178.7 billion
Of which: In dobrasDb 80.5 billion
In foreign currencyDb 98.2 billion
Equals: Base money:Db 273.2 billion
Of which: In dobrasDb 175.0 billion

12. Net international reserves (NIR) of the BCSTP are defined for program-monitoring purposes as short term-term foreign assets of the BCSTP minus short-term external liabilities. All short-term foreign assets that are not fully convertible external assets readily available to and controlled by the BCSTP (i.e., they are pledged or otherwise encumbered external assets, including but not limited to the HIPC umbrella SDR account and assets used as collateral or guarantees for third-party liabilities) will be excluded from the definition of NIR. The NOA at the BCSTP is included in 2007 and excluded in 2008. All values are to be converted to U.S. dollars at actual market exchange rates prevailing at the test date. At end-September 2006 NIR was assessed at Db 524.6 billion, calculated as follows:

Net international reserves:Db 524.6 billion
Of which: Gross reserves:Db 552.3 billion
Of which: NOADb 106.0 billion
Short-term liabilities:Db –27.6 billion
Plus: Other foreign assets:Db 91.9 billion
Plus: Medium and long-term liabilities:Db –53.6 billion
Equals: Net foreign assets:Db 563.0 billion
Memorandum items:
Net international reserves minus NOA minus
bank foreign currency deposits with the central bankDb 320.4 billion

13. Net domestic assets of the central bank of São Tomé and Príncipe are defined as the difference between base money and net foreign assets of the BCSTP, all at programmed exchange rates. The NOA at the BCSTP is included in 2007 and excluded in 2008. All foreign-denominated accounts will be converted to dobras at the program exchange rate. At end-September 2006, net domestic assets were assessed at dobras –289.8 billion, calculated as follows:

Base money:Db 273.2 billion
Less: Net foreign assets:Db 563.0 billion
Equals: Net domestic assets of the BCSTP:Db – 289.8 billion

14. Treasury deficit of the BCSTP is defined as revenue (excluding unrealized valuation changes) minus costs minus investment.

15. The performance criterion on short-term external debt refers to the outstanding stock of external debt with an original maturity of one year or less (including overdraft positions) and owed or guaranteed by the government or the BCSTP.10 At end-September 2006 the stock of short-term external debt stood at US$16.0 million.11

16. The performance criterion on nonconcessional medium- and long-term external debt refers to the contracting or guaranteeing of external debt with original maturity of more than one year by the government or the BCSTP.1213 Debt rescheduling and restructuring are excluded from the ceilings set on nonconcessional borrowing. Medium- and long-term debt will be reported by the Debt Management Unit of the Ministry of Finance and Planning and (as appropriate) by the BCSTP, measured in US dollars at current exchange rates. The government will consult with IMF staff before contracting obligations if it is uncertain as to whether those obligations are within the performance criterion limits.

17. The non-accumulation of new external payment arrears is a continuous performance criterion. Government external payment arrears are defined as all unpaid external public debt obligations, according to the data established by the Debt Management Unit of the Ministry of Planning and Finance and (as appropriate) by the BCSTP, except for arrears pending rescheduling arrangements. The latter will be considered technical arrears. Debt would be deemed to be in arrears when it has not been paid by the time it is due, unless arrears have been otherwise contractually defined. The performance criterion relating to external arrears does not apply to those pending the signing of bilateral agreements in the context of debt-rescheduling with the Paris Club and other bilateral creditors.

18. Net external debt service payments are defined as debt service due less interim HIPC debt relief (including multilateral and bilateral relief) and the accumulation of any new external payment arrears, including technical arrears.

19. Official external program support is defined as grants and loans, including in-kind aid when the products are sold by the government and receipts are freely usable by the budget, and other exceptional financing provided by foreign official entities and incorporated into the budget. Amounts assumed in the program consistent with this definition are shown in the memorandum item entitled “official external program support” of Table 1.

III. Use of Adjusters

20. Deviations in receipts of oil signature bonuses, including accrued interest on NOA, in official external program support, and in net external debt service payments, from amounts projected for the program (see Table I.1) will trigger adjustments for net bank financing of the central government, net domestic assets of the BCSTP, and net international reserves, as indicated below. These deviations will be calculated cumulatively from end-September 2006 (see Table 1).

21. Ceilings on net bank financing (NCG) of the central government and net domestic assets (NDA) of the BCSTP: Monthly differences between actual and projected receipts of oil signature bonuses, official external program support, and net external debt service payments in foreign exchange will be converted to dobras at the program exchange rate and aggregated from end-September 2006 to the test date. The ceilings will be adjusted downward by the amount of accumulated domestic arrears. For 2007 the ceilings on NCG and NDA will be adjusted downward or upward by cumulative deviations in the same direction of actual from projected net payments in external debt service, and by deviations in the opposite direction in external program support and oil bonuses, including accrued interest on the NOA. The downward adjustment of higher than programmed external program support will not take place to the extent that the additional support is used to accommodate higher capital outlays of the government, up to US$1 million. For 2008, the ceilings will be adjusted downward or upward by cumulative deviations in the same direction of actual from projected net payments in external debt service, and by deviations in the opposite direction in external program support and transfers from the NOA to the budget that exceed US$3 million. The downward adjustment of higher than programmed external program support will not take place to the extent that the additional support is used to accommodate higher capital outlays of the government, up to US$1 million.

22. Floor on net international reserves (NIR) of the BCSTP: The quarterly difference between actual and projected receipts of oil signature bonuses, including accrued interest on NOA; official external program support; and net external debt service payments will be converted to dobras at the program exchange rate and aggregated from end-September 2006 to the test date. For 2007, the floor on NIR will be adjusted upward or downward by the cumulative deviation in the opposite direction in external debt service (including repayments to Nigeria), and by deviations in the same direction for oil bonuses, including accrued interest on NOA. The upward adjustment of higher than programmed external program support will not take place to the extent that the additional support is used to accommodate higher capital outlays of the government, up to US$1 million. For 2008, the floor on NIR will be adjusted upward or downward by the cumulative deviation in the opposite direction in external debt service, and by deviations in the same direction for transfers from the NOA to the budget that exceed US$3 million. The upward adjustment of higher than programmed external program support will not take place to the extent that the additional support is used to accommodate higher capital outlays of the government, up to US$1 million. In addition, the NIR floor will be lowered by the amount that disbursements under the PRGF arrangement are lower than expected.

IV. Data Reporting

23. The following information will be provided to the IMF staff for the purpose of monitoring the program.

i. Fiscal Data

The Directorate of Budget at the Ministry of Planning and Finance will provide to IMF staff, within two months after the end of each month or quarter, except for the public investment program (PIP), which will be provided three months after each quarter:

  • Monthly data on central government operations for revenues, expenditure, and financing, including detailed description of net earmarked resources (recursos consignados)

  • Monthly data on net credit to the government by the BCSTP, recorded account by account in a format fully compatible with the monetary accounts of the BCSTP

  • Monthly detailed data on tax and nontax revenues

  • Monthly detailed data on current and domestically financed capital expenditure on commitment (compromisso) and cash payments (caixa)

  • Monthly data on domestic arrears by type

  • Quarterly data on official external program support (non-project)

  • Quarterly data on the execution of the public investment program (PIP) by project and sources of financing

  • Quarterly data on project grant and loan disbursement (HIPC and non-HIPC)

  • Quarterly data on bilateral HIPC debt relief

  • Quarterly data on project loan disbursements

  • Latest outstanding petroleum price structures and submission of new pricing structures (within a week of any changes)

ii. Monetary Data

The BCSTP will provide to IMF staff, within three weeks from the end of each month, the monetary accounts of the BCSTP; other monetary data will be provided within six weeks after the end of each month for monthly data, within two months after the end of each quarter for quarterly data, and within two months after the end of each year for annual data. Daily data will be provided every week no later than the Wednesday following the end of the week, and weekly data will be provided no later than two weeks after the end of the week. The BCSTP will provide:

  • Daily data on exchange rates, to be posted on the central bank’s web site.

  • Daily data on interest rates, to be posted on the central bank’s web site.

  • Daily liquidity management table, including base money and currency in circulation (see attachment), to be posted on the central bank’s web site.

  • Weekly net international reserve position, to be posted on the central bank’s web site

  • Weekly balance sheet data of BCSTP (in BCSTP and IMF formats)

  • Monthly balance sheet data of BCSTP (in BCSTP and IMF formats)

  • Monthly balance sheet data of individual deposit money banks (in BCSTP and IMF formats)

  • Monthly consolidated balance sheet data of deposit money banks (in BCSTP and IMF formats)

  • Monthly monetary survey (in BCSTP and IMF formats)

  • Monthly central bank foreign exchange balance (Orçamento cambial)

  • Quarterly table on bank prudential ratios and financial soundness indicators

  • Quarterly data on the BCSTP’s financial position (profit and loss statement, treasury deficit, budget execution)

iii. External Debt Data

The Debt Management Unit at the Ministry of Planning and Finance will provide to IMF staff, within two months after the end of each month,

  • Monthly data on amortization and interest on external debt by creditor: scheduled, subject to debt relief or rescheduling, and paid

  • Quarterly data on disbursements for foreign-financed projects and program support loans

iv. National Accounts and Trade Statistics

The following data will be provided to IMF staff:

  • Monthly consumer price index data, provided by the National Institute of Statistics within one month after the end of each month

  • Monthly data on imports (value and import taxes collected and arrears) and commodity export values, provided by Customs within two months after the end of each month

  • Monthly data on petroleum shipments and consumption (volumes and cif prices, by product), provided by Customs.

The building of a hotel complex by Grupo Prestana, a Portuguese company, is underway, with total investment amounting to €35 million.

Unsettled disagreements among the stakeholders of Blocks 5 and 6 have put on hold oil signature bonuses of $26.1 million for the two blocks.

The World Bank is to provide São Tomé and Príncipe with a grant of $6 million under its Public and Natural Resource Management Development Policy (PNRMD), instead of an initially expected $4 million.

See ¶28 and Informational Annex, Appendix I for a description of the exchange system and the remaining exchange restrictions.

See IMF working paper (WP/08/118) for more details of the staff analysis.

Food items account for 72 percent of the basket for the consumer price index. About 80 percent of food consumption in the country depends on imports. All oil products are imported.

Deposit money banks (DMBs) refer to other depository corporations, as defined in the Monetary and Financial Statistics Manual.

Pending the use of HIPC debt relief for propoor spending.

Pending the use of MDRI relief for propoor spending.

The term “debt” is defined in accordance with point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85) August 24, 2000).

This amount includes three nonconcessional loans from Nigeria totaling US$15 million that were previously classified under nonconcessional medium-term external debt. They were reclassified as short-term debt after a joint World Bank-IMF debt sustainability analysis mission in April 2006.

This performance criterion applies not only to debt as defined in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000, but also to commitments contracted or guaranteed for which value has not been received.

The concessionality of loans is assessed according to the reference interest rate by currency published by the Development Assistance Committee of the Organization for Economic Cooperation and Development. For loans of terms of no less than 15 years, the 10-year average of commercial interest reference rates for the currency in which the loan is denominated will be used. For loans of shorter terms, the six-month average will apply. A loan is deemed to be on concessional terms if, on the date of initial disbursement, the ratio of the present value of the loan, calculated on the basis of the reference interest rate, to the nominal value of the loan is less than 50 percent (in other words, a grant element of at least 50 percent). For currencies with no available reference interest rates, the SDR rate will be used. This performance criterion does not apply to Fund resources.

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