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.

Abstract

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.

IV. Debt Sustainability Analysis36 37

93. This chapter provides an analysis of São Tomé and Príncipe’s prospects for attaining external debt sustainability in the context of 20-year macroeconomic and balance of payments projections. São Tomé and Príncipe’s level of debt-relative to its poor resource endowment and narrow productive base-constitutes a very heavy burden, compared with other heavily indebted poor countries (HIPCs). The projections indicate that, even with the pursuit of sound macroeconomic and structural adjustment policies, together with the support of the donor community and full exploitation of traditional mechanisms for bilateral debt relief, São Tomé and Príncipe’s debt burden will not be brought to a sustainable level through the end of the projection period. However, São Tomé and Príncipe could qualify for the enhanced HIPC Initiative and reach the decision point in early 2003, and thus benefit from more extensive debt-relief operations from bilateral and multilateral creditors. The projections show that the impact of debt relief under the HIPC Initiative from bilateral creditors only would not suffice to achieve external sustainability, because about 60 percent of São Tomé and Príncipe’s debt is due to multilateral creditors. Alternative projections illustrate the dramatic impact of oil production on debt sustainability. Qualification for assistance under the enhanced HIPC Initiative would be justified under the assumptions but would critically depend on the timing of oil extraction and the weight given to medium-term projections of external indebtedness indicators.

A. Structure of External Debt

94. At end-1998, the stock of São Tomé and Príncipe’s external debt totaled an estimated US$293 million, or about 721.3 percent of GDP. Of this amount, US$80.3 million was principal and interest in arrears, including some US$47.7 million in short-term debt arrears and US$7.1 million owed to BADEA, a multilateral lender38. The present value of total external debt amounted to about US$191.4 million, implying an average grant element of 34.6 percent39. The structure and degree of concessionality of São Tomé and Príncipe’s debt are presented in the table below. Fifty-seven percent of medium- and long-term debt was owed to multilateral creditors (including the Fund), with the bulk of the loans coming from the African Development Fund (AfDF) and IDA. The present value of multilateral debt amounted to 698.3 percent of exports of goods and nonfactor services, well above the sustainability thresholds for total external debt. One-third of the bilateral medium- and long-term debt was in arrears. São Tomé and Príncipe has never availed itself of Paris Club debt relief and does not have an agreed cutoff date.

95. São Tomé and Príncipe continues to rely heavily on external assistance and its already high external debt continues to increase. New disbursements, mostly from the AfDF on highly concessional terms, amounted to US$5 million in 1998 and are estimated to have reached about US$9 million in 1999. The authorities’ debt-management strategy has suffered from a weak capacity to select projects based on (socio) economic return and from poor policy coordination among planning directorates in various ministries.

Structure of External Debt, End-1998

(in millions of U.S. dollars, unless otherwise specified)

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In percent of face value, including arrears.

All short-term debt is official bilateral. It includes arrears worth USS 19 million in dispute with Italy.

B. Medium-Term Projections

Baseline assumptions

96. The baseline adjustment scenario is predicated on diversifying the good and service export base and attaining fiscal consolidation, thus gradually reducing domestic absorption to a level more consistent with the country’s income. It assumes annual real GDP growth of 4 percent, implying a per capita growth of 1.7 percent. This growth rate is sustainable if further public investment and structural reforms are made to support the sectors that have started reinvigorating the economy in 1998-99, namely, the emerging food crop, construction, and tourism sectors. Critical conditions for strengthening these sectors are coordinated rural infrastructure and agricultural policies and an administrative and legal environment that promotes private investment, including foreign direct investment. The primary fiscal surplus is projected to rise from 2 percent of GDP in 1999 to 5 percent of GDP in 2002. The international reserves position of the central bank is expected to strengthen in 2000, as most of the exceptional transfers coming from oil exploration contracts should be sterilized.

97. The sharp drop in world cocoa prices in 1999 has been particularly damaging for São Tomé and Príncipe, However, the shock is expected to be temporary, and the sharp drop of the estimated volume of exports for 1999 (14 percent) reflects inventory buildup. As a result, exports are expected to grow by 16.5 percent in 2000 and 4.4 percent per annum on average in 2001 and 2002. Although substantial investment is not expected in that sector in the 2003-10 period, the productivity of plantations coming to full maturity should improve, and growth of cocoa exports is projected at 2.9 percent. Beyond 2010, growth is projected to temper because of increases in fallow land and aging cocoa trees. Other agricultural exports are expected to grow above the GDP rate during the 1998-2002 period (6.6 percent). Because of the rapid diversification in agriculture and enhanced rural infrastructure policies, nontraditional exports of goods are projected to increase by 4,3 percent during 2000-02 and 4.2 percent during 2003-10. External receipts from tourism are estimated to have doubled to US$9 million in 1999 and are projected to keep rising at a 5 percent rate until 2002 on the basis of the expected stepped-up foreign investment in tourism.

98. Total imports are projected to increase from US$39.3 million in 1999 to US$57.0 million in 2002, reflecting the import content of public investment projects and foreign direct investments, as well as the additional investment goods that are expected to be imported for oil-exploration purposes. Beyond 2002, the baseline scenario assumes that no commercial oil field is discovered. Imports would fall to US$49.8 million in 2003 and then increase in U.S. dollar terms at an average assumed rate of 0.5 percent in 2003-10.

99. The current account deficit (excluding official transfers) is projected to widen from 57 percent of GDP in 1999 to 66 percent of GDP in 2002, and then, to progressively narrow to 27 percent of GDP in 2018. Official transfers would increase through 2002, mainly because of disbursements on the special grants from Taiwan Province of China and transfers related to oil concession rights, and to stabilize (in dollar terms) thereafter. The capital account surplus is expected to increase until 2002 because of oil exploration and then promptly fall; it will continue to slowly decline as amortization on the rescheduled debt increases. Given São Tomé and Príncipe’s heavy debt burden and the international context of enhanced debt forgiveness, new borrowing is assumed to be highly concessional: 60 percent of new borrowing is expected to be extended by multilateral creditors, with a grant element of 67 percent, and the remaining 40 percent by official bilateral creditors, with a grant element of 62 percent.

Debt Sustainability Baseline Assumptions, 2000-18

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HIFC eligibility and impact of expected reschedulings

100. The baseline scenario assumes a three-year flow rescheduling on Naples terms (67 percent of net present value (NPV) reduction) from official bilateral creditors on arrears and maturities falling due during 2000-02. For illustrative purposes, a stock-of-debt operations on Naples terms has been assumed in January 2003,40 in order to assess medium-and long-term debt sustainability after full use of traditional mechanisms. The impact of the debt relief in the baseline scenario would amount to a regularization of arrears in 2000, a reduction in scheduled obligations during 2000-02, and progressive improvements in the key indicators of external indebtedness (Table 13). Importantly, however, this scenario calls for cash payments throughout the projection period significantly higher than those that São Tomé and Príncipe has made in recent years, substantially raising the country’s financing requirements. This increase stems from the stream of moratorium interest generated by the regularization of arrears and the amortization profile of the existing stock of multilateral debt. Under the baseline scenario, the ratio of the net present value of public debt to exports would decline from 1,450 percent in 1999 to 794 percent in 2002, 543 percent in 200541, and 330 percent in 2018. Assessed against the sustainability indicator used under the enhanced HIPC Initiative—a ratio of net present value of debt to exports of goods and services of 150 percent—the full use of traditional mechanisms would not be enough to bring the debt burden of São Tomé and Príncipe to a sustainable level.

Table 9.

Long-Term Balance of Payments Projections-Baseline Scenario and Enhanced HIPC Initiative Debt-Relief Operations, 2002-18

(In millions of U.S. dollars, unless otherwise specified)

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Sources: São Tomé and Príncipe authorities, and staff estimates and projection.

Includes amortization to the IMF excludes arrcars

Includes amortization tot the IMF and cash seutement of arrears.

Table 10

Long-Term Debt-Service Projections-Enhanced HIPC Initiative Debt-Relief Operations, 1999-2018

(ln millions of U.S. dollars)

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Sources: São Tomé and Príncipe authorities, and staff estimates and projections.
Table 11

Long-Term Debt-Service Projections—Traditional Debt-Relief Operations, 1999-2018

(In millions of U.S.dollors)

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Source: São Tomé and Príncipe auxiliaries; and staff estimates and projections.