São Tomé and Príncipe: Recent Economic Developments and Selected Issues

São Tomé and Príncipe is a small, island country with some 138,000 inhabitants; its resources are limited, and its GDP per capita is estimated at about US$295 (1998). The economy is heavily dependent on cocoa, which accounts for 96 percent of export goods. The country has liberalized the economy and reduced the role of government in productive activities in the 1990s. The government has successfully implemented a staff-monitored program in 1998–99 that has turned around the primary budget balance from a deficit to a surplus, reduced inflation, and has helped improve real GDP growth.


São Tomé and Príncipe is a small, island country with some 138,000 inhabitants; its resources are limited, and its GDP per capita is estimated at about US$295 (1998). The economy is heavily dependent on cocoa, which accounts for 96 percent of export goods. The country has liberalized the economy and reduced the role of government in productive activities in the 1990s. The government has successfully implemented a staff-monitored program in 1998–99 that has turned around the primary budget balance from a deficit to a surplus, reduced inflation, and has helped improve real GDP growth.

II. Evaluation of Customs Tariff Reform12

A. Introduction

55. São Tomé and Príncipe has engaged recently in a wide-ranging trade liberalization program, including the following:

  • the elimination of remaining restrictions on current account transactions, with the adoption of a new law liberalizing current transactions in August 3, 1999.

  • the effective elimination of nontariff barriers (NTBs),13 including the reduction to zero of the export surrender requirement in 1998, the abolition of the practice of preferential allocation of foreign exchange to a basket of basic necessities, the elimination of the requirement for a letter of credit for import transactions, and the removal of import licensing requirements for airplanes, ships, and jewelry; and

  • the elimination of multiple currency practices and the reduction of the spread between the official and the black market exchange rate to less than 1.5 percent on a daily basis.

56. In 1999, São Tomé and Príncipe also embarked on a process of reforming management procedures at customs by hiring better-qualified technicians, replacing the longtime director, advancing a proposal to strengthen the regulations dealing with contentious items,14 and renewing the commitment to full implementation of the computerized customs system (SYDONIA).15

57. With regards to trade policy, the government has also prepared a customs tariff reform in order to simplify the tariff structure and increase transparency and the rate of compliance; and to lower the effective protection rate. Attainment of these objectives would help reduce the incentive for rent-seeking activities and safeguard regional competitiveness, particularly in light of current proposals from the Central African Economic and Monetary Community (CEMAC) and WAEMU members to follow up on their 1994 efforts with a second round of trade reforms.

58. This chapter attempts to evaluate the proposal for tariff reform and, specifically, to quantify its likely revenue impacts. The next section discusses the tariff regime in the neighboring CEMAC and WAEMU zones; the third section describes the current trade tax regime; the fourth section describes the data set gathered for this exercise; and the fifth section evaluates the quantitative impact on revenue of the new tariff regime and concludes.

B. Regional Comparison

59. Significant efforts have been made to liberalize trade in the West Africa region since the devaluation of the CFA franc in January 1994. Table 1 provides some indicators of the trade regime for São Tomé and Príncipe and a sample of countries in the region. The trade restrictiveness ranking refers to the classification scheme for overall trade restrictiveness described in Sharer and others (1998). Given the geographical proximity, it is also useful to briefly discuss the current tariff regime for both the CEMAC and the WAEMU regions.

Table 1.

Sub-Sabaran Africa Selected Countries: Trade Restrictiveness Measure, 1998-99

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Sources: Sharer and others (1998); and staff calculations.

In Cameroon, an export tax of 10 percent is levied on coffee, cocoa, cotton, rubber, sugar, palm oil, and medicinal plants; a specific tax CFAF 4,000 a ton is levied on bananas. An export tax of 17.5 percent is applied to timber, and a rate of 12.5 percent is applied to processed woods.

In Gabon, export taxes are levied on mining products (0.5 percent) and forest products (5 percent to 11 percent).

In Ghana, exporters are generally allowed to retain up to 35 percent of their export proceeds in foreign exchange accounts. However, the retention ratio is 60 percent for Ashanti Gold Mining Company, 20 percent for log exporters, and 2 percent for the Cocoa Board. The retention ratio for nontraditional exports is 100 percent, and proceeds are generally channeled through banks other than the Bank of Ghana.

In Nigeria, all oil exploration and oil-producing companies, as well as oil services companies, must sell their foreign exchange earnings to the Central Bank-of Nigeria at the prevailing autonomous foreign exchange market (AFEM) rate. Non-oil exporters are permitted to sell their export proceeds to authorized dealer banks at AFEM rates.

60. In the CEMAC region (comprising Cameroon, Chad, Central African Republic, Equatorial Guinea, Gabon, and the Republic of the Congo), the trade regime was significantly liberalized in August 1994 with the reduction of the number, levels, and dispersion of customs tariffs; the revised structure had only four rates, with the maximum set at 30 percent (see table below). At the same time, all quantitative restrictions were eliminated, and multiple rates of indirect domestic taxation were replaced by a simplified turnover tax (in anticipation of the introduction of a value-added tax system).16 As a result, the index of trade policy restrictiveness for these countries in 1999 is estimated at 4 (on a scale of 1 to 10, with 10 being the most restrictive), compared with an average of 5.4 for Africa.

61. After me ratification of the CEMAC treaty at the Malabo Summit in June 1999, an effort to deepen the reforms of 1994 was initiated. The current proposal would reduce the number of tariff bands to three in 2000 by grouping the two lowest-taxed categories, as indicated in the following table, and reduce distortions by systematically reclassifying goods as a function of their economic nature. Overall, the proposal would reduce the average tariff17 from 18 percent to approximately 11 percent (reducing the standard deviation from 9.6 percent to 3.2 percent).

CEMAC: Customs Tariff Structure, 1994 and 2000

(In percent)

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Source: IMF (1999).

Including raw materials and investment goods.

62. On account of social concerns, exemptions would be maintained for essential goods, such as pharmaceutical drugs and medical instruments, but eliminated for other goods (including consumption, intermediate, and investment goods) that were exempt under the 1994 scheme. It is assumed that possible shortfalls in fiscal revenue can be offset by an increase in the effective recovery rate: first, from a decrease in the rate of fraud, given the reduced incentives for evasion; and, second from a stricter application of the regulations by customs management. 18 All quantitative restrictions are to be eliminated by the year 2000.

63. In the WAEMU region (comprising Bénin, Burkina Faso, Côte d’lvoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo), a new tariff regime was introduced on January 1, 2000. The following table presents the classification scheme for both the old (1999) and the revised system (2000).

WAEMU: Customs Tariff Structure, 1999-2000

(In percent)

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Source: WAEMU.

64. The old system was in effect solely for the year 1999 as a transition to the revised scheme. Two other permanent taxes are collected at customs, the statistical tax (redevance statistique) and the community solidarity levy (prélèvement communautaire de solidaritè), both at a rate of 1 percent. In addition, two other transitory taxes are imposed: the sliding- scale protection tax (taxes dégressive de protection), which will range from 7.5 percent to 15 percent in 2000 and will be eliminated, progressively, by end-2002; and the import surtax (taxe conjoncturelle à l’importation), set at 10 percent.

C. Current Trade Tax Regime in São Tomé and Príncipe

65. At present, the customs administration in São Tomé and Príncipe collects four types of taxes levied on imported goods:

  • transaction tax (Contribuição Indústrial Variável), uniformly set at 8 percent;

  • import duty (Direitos De Importação), a mix of ad valorem and specific rates ranging from 0 percent (basic foodstuffs and pharmaceuticals) to 6-50 percent (alcoholic beverages) and 10-66 percent (petroleum products);

  • customs duty (Emolumentos Gerais Aduaneiros), uniformly set at 3.5 percent; and

  • consumption excise tax (Imposto Sobre o Consumo), ranging from 0 percent (books, basic foodstuffs, construction materials, and pharmaceuticals), to 40-130 percent (alcoholic beverages), 4-53 percent (petroleum products), and 100-250 percent (tobacco), this tax is cascading in nature as it is levied on the after-tax value (taking into account the first three trade taxes) of imports.

66. As a result of the 1998-99 round of liberalization, São Tomé and Príncipe is now characterized as open (compared with its original ranking of restrictive) with respect to NTBs, but the existing duty structure is still characterized as restrictive, owing to the high average tariff rate (in excess of 27 percent).19 Additionally, two other characteristics of the current regime tend to be considered as restrictive: a large number of duty rates-(over 100), and a high degree of dispersion (from 0 to 75 percent).20 Overall, the trade tariff regime in São Tomé and Príncipe is ranked as moderate, with an overall score of 5 on the trade policy restrictiveness scale, down from a score of 10 (out of 10) at end-1997. This compares with rankings in the range of 3-4 for the CEMAC countries, which have recently greatly simplified the duty structure and reduced the import duty rates.

D. Data

67. The data used to analyze the proposed tariff reform include fiscal data on the level of import and consumption taxes, balance of payments data on the level of imports, customs data on exemptions granted in 1998 and the first semester of 1999, and a customs data set of detailed transactions for 1997. The latter set excludes (on criteria chosen by the local consultant) transactions on essential goods and petroleum products, as well as any transactions with a discrepancy between the tax owed and the tax ultimately paid. In other words, the detailed data set excludes transactions on which arithmetic or recording errors were (perhaps inadvertently) made and not subsequently corrected, and also transactions subject to total or partial exemptions.

68. Table 2 contains a summary of the data on detailed transactions organized according to the proposed new classification scheme: category 1, with a proposed import duty rate of 5 percent; category 2, with a 10 percent rate; and category 3, with a rate of 20 percent. Noteworthy is the effect of the relatively high rates currently imposed on alcoholic beverages: omitting the latter reduces the declared value of category 3 items by 88 percent and collections for category 3 by 92 percent. Table 3 suggests that the detailed transactions data represent some 8 percent of total imports in 1997 but close to 30 percent of import and consumption taxes21 collected, evidence that some agents or sectors pay significantly higher rates of taxes than the rest of the economy or even their direct competitors22

Table 2.

São Tomé and Príncipe: Detailed Customs Transactions Data, 1997

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Source: São Tomé and Príncipe authorities.

The division into categories reflects the proposed new import duty structure: 5 percent for category 1; 10 percent for category 2; and 20 percent for category 3. Includes only transactions for which taxes due equaled taxes collected and, in any case, excludes transactions on petroleum products and basic foodstuffs.

Consumption tax is imposed on the after-tax valuation, taking into account the first three sets of taxes collected at customs.

Category 3, excluding alcoholic beverages.

Table 3.

São Tomé and Príncipe: Data Coverage for 1997 Detailed Customs Transactions

(In millions of dobras, unless otherwise specified)

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Source: São Tomé and Príncipe authorities.

Receipts due to the four taxes collected at customs; from budget execution data.

69. There is considerable evidence of significant levels of customs exemptions, and, although some of these have been negotiated bilaterally in the context of the investment code, the data available suggest that the government itself is the single largest beneficiary, with approximately 50 percent of exemptions accruing to the public sector.23 Fiscal losses from exemptions represented close to 90 percent of taxes actually collected at customs for 1998 and the first semester of 1999 (Table 4). Along with the considerable evidence of significant amounts of tax evasion that the very low collection rates shown in Table 3 suggest, there is also evidence of a considerable degree of underinvoicing. A comparison of the declared value in the detailed transaction data set (likely the upper range of the actual declared values) with an export unit price published by the National Institute of Statistics of Portugal suggests underinvoicing, on average, of some 85 percent (likely an understatement) of the unit price.

Table 4.

São Tomé and Príncipe: Value of Exemptions Granted at Customs, 1998-99

(In millions of dobras, unless otherwise specified)

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Source: São Tomé and Príncipe authorities.

The increase in the exemption rate in the first semester of 1999, along with the increase in the collection rate, is likely to have been predominantly a result of improved administrative procedures implemented in 1999.

In percent of imports of goods.

70. As suggested by Pritchett and Sethi (1994) for Kenya, Pakistan, and Jamaica, higher tariff rates increase tariff revenue in ever-decreasing amounts (and may even result in an absolute decrease); more specifically, the relationship between the collected rate and the official rate tends to be nonlinear, so that a 10 percent increase at higher rates results in a much smaller increase in the collection rate than a similar increase at lower rates. The explanation must be that higher rates (and wider dispersion) significantly increase the marginal return to evasion, underinvoicing, and exemption-seeking activities, efforts likely aided by weaknesses in customs administration. Pritchett and Sethi (1994) suggest the following relationship on tax efficiency rates (the ratio of the rate of collection with respect to the statutory rate):

Efficiency Rates

(In percent)

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71. This hypothesis is broadly consistent with the 8.1 percent rate of collection on import duties shown in Table 3, which is equivalent to an efficiency rate of approximately 23 percent, given that (1) only 15 percent of the transactions recorded in the detailed data set attract an import duty rate less than 20 percent, and (2) 75 percent of the transactions attract a combined tariff and sales tax rate in excess of 30 percent.24

E. Tariff Reform and the Impact on Fiscal Revenue

72. The new customs taxation scheme would replace the existing regime of trade taxes with an import duty comprising only three rates: 5, 10, and 20 percent. Given the relatively high rates of taxes paid on alcoholic beverages and petroleum products, the authorities intend to make the proposed changes revenue neutral for these products by applying the appropriate level of specific consumption taxes. At present, basic foodstuffs and pharmaceuticals are charged only the 3.5 percent customs duty rate (Emolumentos Gerais Aduaneiros), but, under the new scheme, these products would attract the minimum import duty rate of 5 percent. Weighted by the number of items in each of the three categories (according to the four-digit Harmonized Commodity Description and Coding System), the average import duty in São Tomé and Príncipe will now be 10.3 percent. The following table summarizes the proposed regime.

São Tomé and Príncipe: Customs Duty Structure, 2000

(In percent)

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Source: The São Tomé and Príncipe authorities.

73. The sales tax, which, given the high degree of import penetration and the high level of informality in the domestic production sector, has an impact broadly similar to that of a general value-added tax (VAT), would also continue to be collected at customs. Two scenarios are evaluated for the structure of the sales tax: (1) the status quo, and (2) the use of four rates: 0,5,10, and 15 percent. For the latter case, the zero rate would be reserved for basic foodstuffs and pharmaceuticals; the 5 percent rate would be applied to other products that currently attract a sales tax rate of 5 or less percent; the 10 percent rate would be applied to products currently taxed at between 5 percent and 10 percent; and the 15 percent rate would be applied to all other products. In addition, the 5 percent sales tax would be applied to domestic services, such as hotels and restaurants.25

74. The consumption taxes to be applied to specific products, including the motor vehicle tax (Imposto sobre Veículos), will be set as follows:

São Tomé and Príncipe: Customs Duty Structure and Consumption Taxes

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Source: São Tomé and Príncipe authorities.

At present, official imports of tobacco are negligible (despite the wide availability of tobacco products).

At present, the motor vehicle tax is a specific tax determined as a function of the size and age of the vehicle. Although this tax is reviewed annually, the current tax levels are relatively low; for example, a vehicle over 1,900 cubic centimeters and less than 6 years old attracts a tax of Db 6,000 (the equivalent of less than one U.S. dollar).

75. Table 5 displays the projected impact of these changes on customs revenue for 1997 and the first semester of 1999. These initial calculations assume revenue neutrality for alcoholic beverages and fuels, do not take account of the effect of extending the current sales tax to domestic services, and do not include any behavioral assumptions: in particular, we assume no change in the rate of evasion or underinvoicing,26 no change in the level of imports (i.e., no elasticity-type effects owing to price changes), no change in the level and extent of exemptions, and a constant rate of collection (or level of efficiency at customs).

Table 5.

São Tomé and Príncipe: Projected Impact of Reforms on Customs Revenue, 1997-99

(In millions of dobras, unless otherwise specified)

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Sources: São Tomé and Príncipe authorities; and staff calculations.

Assuming revenue neutrality for petroleum-related receipts.

The 3 percent improvement in effective collection rates noted in Table 4; assumed to be fully incorporated in 1999 (actual) data.

Observed after the privatization of ENCO in 1998; assumed to be fully incorporated in 1999 (actual) data.

76. Our estimates indicate that, as a worst-case scenario (that is, assuming no further improvement in the rate of compliance or strengthening of customs management), a loss of fiscal revenue on the order of 10 percent can be expected. In the circumstances, it is quite likely that measures envisaged by customs management to strengthen administration and intensify collection should recoup these potential losses, and, with the current economic recovery holding, collections on import taxes are projected to increase in 2000 over the 1999 outcome.

77. In conclusion, the proposed tariff reform should enhance the degree of transparency in customs procedures and begin reducing the effective rate of protection under which the São Tomé and Príncipe economy has been developing. At the same time, the risks that the reform will cause to fiscal revenue losses are very limited.

78. The next stage of reform should envisage a further reduction in the level of import taxes; a reclassification of goods as a function of their economic nature (along the lines of the proposed CEMAC scheme); and an extension of the embryonic general sales tax (possibly moving toward a VAT system) in order to reduce further the treasury’s dependence on trade taxes.

79. In addition, to rationalize procedures at customs and facilitate data gathering, it is recommended that customs use treasury checks (chèques du Trésor) for the (exempt) imports of foreign-financed project goods. São Tomé and Príncipe should also consider joining the World Customs Organization (WCO) and the World Trade Organization (WTO) in order to benefit from the expertise available, as well as from the documentation, regulations, and staff training. Joining the WCO will allow São Tomé and Príncipe to endorse the International Convention on the Harmonized Commodity Description and Coding System, designed to harmonize customs and trade procedures and to facilitate data sharing,27 joining the WTO will grant it access to that organization’s dispute resolution mechanism.


  • Sharer, Robert, and others, 1998, Trade Liberalization in IMF-Supported Programs, World Economic and Financial Surveys (Washington; International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • IMF, 1998b, Exchange Arrangements and Exchange Restrictions, Annual Report 1998.

  • IMF, 1998c, São Tomé and Príncipe: Statistical Appendix, IMF Staff Country Report No. 98/83.

  • IMF, 1999, CEMAC: Examen de la Réforme Tarifaire, mimeo.

  • Pritchet, Lant and Sethí, Greta, 1994, Tariff Rates, Tariff Revenue, and Tariff Reform: Some New Facts, World Bank Economic Review, Vol. 8 (January) pp.116.

    • Search Google Scholar
    • Export Citation
  • WAEMU (www.izf.net. 1999), Tableau des Droits et Taxes en Afrique de I’Ouest.


Prepared by Carlos Leite.


São Tomé and Príncipe has never relied extensively on quantitative restrictions and there is none in existence. São Tomé and Príncipe does retain some monopoly practices, namely in water and power utility, the importing and distribution of oil products, telecommunications, and air transportation, although the companies involved in these sectors have been partially privatized, with the exception of the water and power utility.


The proposal, which empowers customs to impose penalties and sanctions without first obtaining a court order (although retaining the right of appeal on the part of the customer) and updates the size and nature of penalties (some of which were originally set in absolute terms in the 1940s) was originally presented to parliament with the 1999 budget; however, it was rejected on a technicality. A similar proposal will again be presented to parliament as part of the bill presenting the reform of customs duty rates.


With technical assistance from France and the European Union, São Tomé and Príncipe also intends, in 2000, to improve its training program, draft and implement a plan of action to assess recent measures and improve management practices, strengthen the information and planning systems, and modernize customs regulations.


At present, CEMAC legislation allows the collection of a turnover tax (TCA) ranging from 0 to 18 percent, an excise tax (droit d’accise), and a temporary surtax (surtaxe temporaire) with a maximum of 30 percent.


On the basis of the articles contained in the harmonized classification system published in 1996 by the World Customs Organization.


Current recovery rates are estimated to vary from a low of 2-3 percent for Equatorial Guinea to a high of 11—13 percent for Gabon.


Table 1 includes the details for the computation of São Tomé and Príncipe scores.


Even excluding the consumption tax, which ranges from 0 to 130 percent.


Excluding petroleum products, basic foodstuffs, and investment goods, both in the detailed transactions data and in the total imports and source of fiscal revenue.


Some hotels, for example, have successfully negotiated a 50 percent reduction in the duties and taxes payable on imported wines, whereas their competitors continue to be subject to the full rates.


The authorities are preparing a census of all exemptions, and they intend to more closely monitor quantity limits and expiry dates.


Assuming that efficiency rates are rate specific instead of good specific would allow us to use the expected efficiency rate to estimate the possible effect on tax collections.


Application of the sales tax to domestic services would help ensure consistency with the World Trade Organization and would also represent a first step toward a full credit-based VAT system, the immediate implementation of which is difficult, given the limited administrative capacity and training currently available.


In addition to generally strengthening management and improving the training available to the staff, the authorities are working closely with the chamber of commerce to increase the rate of compliance with customs law. In particular, customs management has elaborated a plan to closely monitor invoicing practices through periodic updating of Portugal’s unit export prices, a practice that addresses the key issue of underinvoicing.


São Tomé and Príncipe is one of the few countries worldwide yet to accede to these two international organizations.