Statement by the IMF Staff Representative

This paper reviews the request from the São Tomé and Príncipe authorities for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF). In 2004, the economy continued to grow at a moderate pace, but inflation increased to 15 percent by year-end, as bank credit to the private sector rose sharply and the government loosened fiscal policy. The proposed program for 2005–07 aims at correcting macroeconomic imbalances and sets the conditions for sustained strong growth. Real GDP growth is envisaged to slow down in 2005 in response to tight financial policies.

Abstract

This paper reviews the request from the São Tomé and Príncipe authorities for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF). In 2004, the economy continued to grow at a moderate pace, but inflation increased to 15 percent by year-end, as bank credit to the private sector rose sharply and the government loosened fiscal policy. The proposed program for 2005–07 aims at correcting macroeconomic imbalances and sets the conditions for sustained strong growth. Real GDP growth is envisaged to slow down in 2005 in response to tight financial policies.

August 1, 2005

1. This statement reports on information received since the staff report was issued. This information does not alter the thrust of the staff appraisal.

2. The two prior actions for Executive Board consideration of a new PRGF arrangement with São Tomé and Príncipe were met. This included the passage of the 2005 budget consistent with the authorities’ Memorandum of Economic and Financial Policies and the receipt of the oil signature bonus on Block 1 (Staff Report, Table I. 2, page 70).

3. The authorities informed the staff on July 26, 2005, that all structural performance criteria set for end-July 2005 under São Tomé and Príncipe’s request of a three-year arrangement under the Poverty Reduction and Growth Facility were met. This included the submission to the National Assembly of:

(i) a new tax code on personal income-taxation, broadening the tax base and updating the tax rate schedules to provide progressivity to the personal income-tax system;

(ii) a new code on corporate taxation that limits the granting of tax holidays to

new licensed investors to a maximum of three years, with tax reductions only covering up to 75 percent of profit taxes due;

(iii) a new tax procedural code establishing tax tribunals at different levels of government to handle tax issues and disputes, as well as penalties and fines for underpayment, late payment and other tax violations; and

(iv) a new investment code that provides for equal treatment of domestic and foreign investors and is consistent with the new code on corporate taxation.

4. On July 29, 2005, the authorities provided the staff with a timetable for the reduction of outstanding payments arrears to the water and electricity company (EMAE). This is a structural benchmark set for end-July 2005 under the proposed PRGF arrangement.

5. Retail prices for fuel products increased, on average by 22 percent, on July 9, 2005. This is consistent with the government’s policy to fully pass-through increases in world crude oil prices to domestic consumers. In turn, the water and electricity company (EMAE) has requested the government’s authorization to increase electricity tariffs to cover the price increase in diesel, which is extensively used in the production of thermal electricity.

The programmed increase in excise duties on services and domestically-produced beer was implemented on July 29, 2005; i.e., with a two-week delay from originally planned.

São Tomé and Príncipe: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility
Author: International Monetary Fund