Front Matter Page
© 2002 International Monetary Fund
December 27, 2002
IMF Country Report No. 02/270
São Tomé and Príncipe: Review of Performance Under a Staff-Monitored Program
This paper on the Review of Performance Under the Staff Monitored Program for São Tomé and Príncipe: was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on October 31, 2002. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of São Tomé and Príncipe: or the Executive Board of the IMF.
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Front Matter Page
INTERNATIONAL MONETARY FUND
SÃO TOMÉ AND PRÍNCIPE
Review of Performance Under a Staff-Monitored Program
Prepared by African Department
(In consultation with the Legal, Monetary and Exchange Affairs, Policy Development and Review, and Treasurer’s Departments)
Approved by Amor Tahari and Martin Fetherston
October 31, 2002
Contents
Executive Summary
I. Introduction
II. Performance Under the Staff-Monitored Program Through End-June 2002
III. Extension of the Staff-Monitored Program Through End-December 2002
IV. Staff Appraisal
Box
1. Structural Conditionality for 2002
Figures
1. Real and Nominal Effective Exchange Rates, January 1990–June 2002
2. Economic and Financial Indicators 1998-2005
Tables
1. Selected Economic Indicators, 2000-05
2. Balance of Payments, 2000-05
3. Quantitative Benchmarks Under the Staff-Monitored Program, January–June 2002
4. Structural Benchmarks Under the Staff-Monitored Program, January-June 2002
5. Financial Operations of the Central Government, 2001-05
6. Monetary Survey, 2000-02
7. Summary Accounts of the Central Bank, 2000-02
8. Summary Accounts of Banking Institutions, 2000-02
9. Stock of Public External Debt, 2001-05
10. Public External Debt Service, 2001-05
11. Oil Assumptions for the Joint Development Zone and Revenue Payments Accruing to Nigeria, São Tomé and Príncipe, and the ERHC, 2005-24
Appendices
I. Letter of Intent
Table 1. Quantitative Benchmarks for the Staff-Monitored Program for July-December 2002
Table 2. Prior Actions and Structural Benchmarks for the Staff-Monitored Program for July-December 2002
Attachment: Technical Memorandum of Understanding on the Staff-Monitored Program
II. Update of Debt Sustainability Analysis
Box 1. Main Macroeconomic Assumptions, 2002-21
Figure 1. Nominal Stock of Debt and Net Present Value (NPV) of Debt-to-Exports Ratio
Table 1. Discount and Exchange Rate Assumptions (As at end-December 2001)
Table 2. Concessionality of New Loans Contracted Since January 1, 2000
Table 3. Net Present Value of External Debt and Debt Service Due, 2002-21 (Assuming no Further Debt Relief)
Table 4. Net Present Value of External Debt and Debt Service Due, 2002-21 (Assuming a Completion Point Under the Enhanced HIPC Initiative at end-June 2004)
III. Relations with the Fund
IV. Relations with the World Bank Group
Executive Summary
Background
São Tomé and Príncipe’s PRGF-supported program went off track at end-2000 because of fiscal and structural slippages, which were compounded in 2001 by the emergence of oil-sector governance concerns. The authorities requested a staff-monitored program (SMP) for the first half of 2002, but spending overruns reoccurred, and most of the SMP’s benchmarks were missed.
Performance under the SMP through end-June 2002
Program implementation during the first half of 2002 was disappointing, as the key quantitative benchmarks for end-June 2002 were not observed.
Greater-than-expected revenue mobilization was more than offset by spending overruns owing to trade union wage demands, higher energy and utility costs, and spending related to the March 2002 legislative elections. As a result, the primary fiscal deficit (including HIPC Initiative social expenditures) increased to 3.2 percent of GDP in the first half of 2002, compared with a targeted deficit of 1.6 percent of GDP.
Net bank credit to the government expanded by 12 percent of the beginning-of-year money stock during the first half of 2002 (compared with a 5 percent target), as the government drew on its deposits at the central bank to finance its larger-than-targeted deficit. As a result, quantitative benchmarks on net bank credit to the government, the central bank’s net domestic assets, and the central bank’s net international reserves were not observed.
The government pressed ahead with public service reform, but it reversed water and electricity rate increases that were implemented to ensure cost recovery, as a prior action for the SMP.
Extension of the SMP through end-December 2002
The authorities have agreed to extend the SMP through end-December 2002 in order to reestablish a satisfactory track record of policy implementation. The government appointed an internationally reputable firm to audit three large government procurement contracts as a prior action. The extended SMP aims at containing inflation within 9 percent in 2002 and narrowing the external current account deficit to 10 percent of GDP in 2002 from 16 percent of GDP in 2001. Real GDP growth is projected to reach 5 percent in 2002.
The fiscal component of the extended SMP focuses on strong revenue mobilization efforts and strict spending controls. Given the magnitude of the slippages during the first half of 2002, the primary budget deficit (including HIPC Initiative social spending) is to narrow from 10 percent of GDP in 2001 to 5 percent of GDP in 2002, rather than to 3 percent under the original SMP.
Key structural benchmarks under the extended SMP include the following: (i) submission to the National Assembly of a draft budget for 2003 consistent with the medium-term macroeconomic framework; (ii) observance of the automatic price adjustment mechanisms on retail petroleum prices and water and electricity rates; and (iii) increased transparency and accountability in government operations (e.g., publication of reports on audits of government procurement contracts).
Issues stressed in the staff appraisal
The extended SMP is ambitious, but the authorities have reiterated their commitment to implement the macroeconomic and structural policies agreed for the second half of 2002. The SMP provides crucial tests of the authorities’ resolve to continue reforms, including strict adherence to the fiscal policy stance agreed for 2002 and actions to be taken to enhance transparency and accountability in government operations.
The country remains vulnerable to fluctuations in its terms of trade and highly dependent on aid flows. Additionally, administrative capacity is limited, and social pressure and the onset of disbursements of sizable oil-related bonuses may limit the resolve of the authorities to maintain fiscal discipline.
Regarding next steps, the start of discussions of a new PRGF-supported medium-term program would be contingent on the satisfactory implementation of the extended SMP through end-December 2002.