São Tomé and Príncipe: Staff Report for the 2003 Article IV Consultation

Sao Tome and Principe stands at the threshold of the oil era. The government’s objective of stabilizing the non-oil primary fiscal deficit over the medium term is appropriate. Executive Directors support the government’s approach to monetary policy, which is consistent with the flexible exchange regime and focuses on limiting inflation and enhancing credit access for entrepreneurs. Sao Tome and Principe's flexible exchange rate regime remains appropriate. Sao Tome and Principe's statistical framework suffers from serious weaknesses, and institutional capacity needs to be enhanced.

Abstract

Sao Tome and Principe stands at the threshold of the oil era. The government’s objective of stabilizing the non-oil primary fiscal deficit over the medium term is appropriate. Executive Directors support the government’s approach to monetary policy, which is consistent with the flexible exchange regime and focuses on limiting inflation and enhancing credit access for entrepreneurs. Sao Tome and Principe's flexible exchange rate regime remains appropriate. Sao Tome and Principe's statistical framework suffers from serious weaknesses, and institutional capacity needs to be enhanced.

I. Introduction

1. Discussions focused on Article IV consultation issues and a medium-term program that could be supported by a new three-year Poverty Reduction and Growth Facility (PRGF) arrangement. However, the authorities explained that in the wake of the July 2003 coup d’état they could not yet define their medium-term macroeconomic policies under a PRGF-supported program. The coup d’état delayed concluding the 2003 Article IV consultation discussions and significantly increased political and social pressure in the country. The government needed to continue to build a consensus before committing itself to specific financial policies that could form the basis of a PRGF-supported program. In particular, (i) salary negotiations with unions were still ongoing; (ii) the amount of oil signature bonuses was not yet certain; and (iii) crucial legislation determining the quantity and quality of spending financed with oil sector resources had not yet been negotiated with the National Assembly.

2. In concluding the 2001 Article IV consultation, Executive Directors regretted that the PRGF-supported program (April 28, 2000-April 27, 2003) had gone off track after one year.1 They welcomed, however, the authorities’ commitment to take strong corrective measures under the staff-monitored program (SMP) and to reestablish a track record of good policy implementation. Directors urged the authorities to enhance their public expenditure control mechanisms and make the management of the emerging oil sector more transparent, particularly given the possible onset of sizable oil-related compensation payments.

3. The upcoming oil era in São Tomé and Príncipe has created a tense political atmosphere. This tension led to the coup d’état of July 16, 2003, ending a week later with a negotiated settlement that allowed the return of elected President de Menezes and his Prime Minister.2 The government is now composed primarily of members of the Prime Minister’s party (holding the most seats in the National Assembly); the other parties included in the previous goverment of national unity are now in opposition. The coup and related events have not affected the commitment of the Prime Minister and her government to the economic policies in place prior to the coup d’état, but agreements on the conduct of economic policy have to be forged with the country’s stakeholders.

II. Background

A. Recent Economic Developments

4. São Tomé and Príncipe is the smallest African country in terms of GDP.3 While its social indicators compare favorably with the averages for sub-Saharan Africa, its institutional and human capacity are in great need of development. The country’s economy has traditionally been dependent on the cocoa sector, which was in state hands until the early 1990s; as a result, the private sector is weak, with little diversification.

5. Following a decade of very large macroeconomic imbalances, the government has pursued since 1998 economic and financial policies that have helped raise real GDP growth, lower inflation, reduce the primary budget deficit, and push forward key structural reforms. Dependence on cocoa has been reduced as tourism and construction have increased their contributions to economic growth. The external current account, however, has remained chronically dependent on donor financing. A three-year PRGF arrangement adopted in 2000 veered off track, in large part because of parliamentary elections and associated fiscal slippages. Structural reforms were delayed, and governance problems arose in the emerging oil sector.

B. Performance during 2002-03

6. In 2002, the authorities adopted a new set of policies in the context of an SMP (EBS/02/3; 01/11/02). The government addressed some of the long-standing issues raised by Directors during the 2001 Article IV consultation, notably by improving their public expenditure control and monitoring mechanisms, including the HIPC account. The authorities also increased transparency in the oil sector by renegotiating contracts with a view to enhancing the benefits to the country.

7. São Tomé and Príncipe established a track record of broadly satisfactory policy implementation under the SMP for 2002. Five out of nine quantitative benchmarks were observed; of the remaining four, three of these were missed solely because of the nondisbursement of a World Bank program loan (Table 1).4 Also, four out of six structural benchmarks were observed (Table 2); of the remaining two, the audit of government contracts was published in July 2003, while utility tariffs have not been adjusted (see below).

Table 1.

São Tomé and Príncipe: Quantitative Benchmarks for the Staff-Monitored Program (SMP) for End-December 2002 1/

(In billions of dobras, unless otherwise specified)

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

For footnotes, see page 36 of EBS/02/186 (11/4/02).

Table 2.

São Tomé and Príncipe: Prior Actions and Structural Benchmarks Under the Staff-Monitored Program for 2002

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8. Regarding macroeconomic performance in 2002, real GDP grew by 4 percent (near the 5 percent projected under the SMP) and the 12-month inflation rate was 9 percent as envisaged (Table 3 and Figure 1). Prudent fiscal policy resulted in a lower-than-targeted primary fiscal deficit (Table 4). Broad money (M3) expanded somewhat faster than projected, reflecting higher growth in net domestic assets (NDA) and lower growth in net foreign assets (NFA), both primarily related to the shortfall in program loans (Table 5). To help meet the authorities’ inflation target, the central bank kept its reference interest rate positive in real terms; with increasing confidence, as the authorities addressed bank supervision issues, demand for money increased. The external current account deficit (excluding official transfers) was lower than targeted (Table 6), reflecting an improvement in the terms of trade from an increase in world cocoa prices and a cumulative 12 percent depreciation in 2001-02 of the real effective exchange rate (Figure 2). The overall balance of payments, however, showed a deficit rather than the targeted surplus, primarily owing to the shortfall in nonproject loans mentioned above.5

Table 3.

São Tomé and Príncipe: Selected Economic Indicators, 2001-08

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Sources: São Tomé and Príncipe authorities; and staff estimates and projections.

For 2003, data as of October.

In percent of broad money at beginning of period.

Excluding oil revenue, grants, interest earned, scheduled interest payments, and foreign-financed capital outlays.

Excluding c.i.f. imports of oil sector-related goods and services, and oil sector profit remittances.

Including arrears to Italy on a loan that remains in dispute.

Assumes that the completion point under the enhanced HIPC Initiative is reached at end-December 2005.

In percent of exports of goods and nonfactor services, calculated as a three-year backward-looking average (e.g., average over 2001-03 for exports in 2003).

In percent of government revenue.

Figure 1.
Figure 1.

São Tomé and Príncipe: Economic and Financial Indicators, 1999-2008

Citation: IMF Staff Country Reports 2004, 108; 10.5089/9781451835045.002.A001

Sources: São Tomé and Príncipe authorities; and staff estimates and projections.1/ Primary balance includes HIPC Initiative-financed expenditure.2/ Period averages.3/ In percent of beginning -period M3.
Table 4.

São Tomé and Príncipe: Financial Operations of the Central Government, 2001-08

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Sources: Sãp Terns’ and Príncipe authorities; and staff estimates and projections.

Severance packages totaling Db 8,000 million were financed by a Structural Adjustment Facility grant from the European Union in 2001-02.

Includes HIPC Initiative-related social expenditure.

Excluding oil revenue, grants, interest earned and scheduled interest payments, and foreign-financed capital outlays.

Not taking into account HIPC Initiative interim assistance.

Table 5.

São Tomé and Príncipe: Monetary Survey, 2001-04

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Sources: São Tomé and Príncipe authorities; and staff estimates and projections.
Table 6.

São Tomé and Príncipe: Balance of Payments, 2001-08

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

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Sources: São Tamé and Príncipe authorities; and staff estimates and projections.

Excluding oil exports, c.i.f. imports of oil sector-related goods and services, and oil sector profit remittances.

Oil signature bonuses expected in 2004 will mostly be deposited in the oil reserve fund.

Until 2003, total amount of reschedulable arrears accumulated with bilateral creditors, pending a possible new Paris Club rescheduling agreement. For 2004, assumes a new Paris Club rescheduling agreement.

In percent of exports of goods and nonfactor services, calculated as a three-year backward-looking average (e.g., average over 2001-03 for exports in 2003).

Includes amortization to me IMF; excludes arrears.

Includes obligations to the IMF.

Excludes HIPC interim assistance.