Democratic Republic of São Tomé and Príncipe: Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility—Staff Report; and Press Release on the Executive Board Consideration
Author: International Monetary Fund
Publication Date:
09 Nov 2006
eISBN:
9781451835113
Language:
English
Keywords:
ISCR; CR; Three-Year PRGF arrangement; completion of the review; amount equivalent to SDR; monetary policy; incumbent government party; government bill; reserve fund; fiscal policy; Sãotomean authorities
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In 2005, the overall macroeconomic performance was broadly satisfactory, notwithstanding an increase in inflation. All performance criteria were met. Structural reforms advanced, and delays in preparing feasibility studies for restructuring the airport and seaport authorities are being addressed. Economic performance in 2005 was broadly satisfactory, although inflation accelerated. The fiscal program is designed to protect pro-poor spending. The program assumes a broadly stable velocity of circulation of money. The macroeconomic outlook and the program are subject to risks.

Abstract

In 2005, the overall macroeconomic performance was broadly satisfactory, notwithstanding an increase in inflation. All performance criteria were met. Structural reforms advanced, and delays in preparing feasibility studies for restructuring the airport and seaport authorities are being addressed. Economic performance in 2005 was broadly satisfactory, although inflation accelerated. The fiscal program is designed to protect pro-poor spending. The program assumes a broadly stable velocity of circulation of money. The macroeconomic outlook and the program are subject to risks.

I. Recent Developments and Performance

1. Democratic legislative elections took place on March 26, 2006. The incumbent government party (MLSTP) was replaced by a coalition that supports President de Menezes (MDFM-PCD). The latter formed a minority government whose four-year program was approved by the National Assembly on June 1. The new government has emphasized its intention to: (i) maintain macroeconomic stability, (ii) fulfill the trigger points to reach the HIPC completion point that will in turn free resources for pro-poor spending, and (iii) work toward an effective management of prospective oil revenues. The opposition has expressed its support for the government’s agenda. Presidential elections are scheduled for July 30, to be followed by regional and local elections on August 27, 2006.

2. Economic performance in 2005 was broadly satisfactory, although inflation accelerated (Table 1). Real GDP increased by 3.8 percent with the launch of large private hotel construction projects and a strong growth in oil-related services (MEFP, para. 2). The annual inflation rate increased from 15.2 percent in 2004 to 17.2 percent in 2005. The acceleration reflected mainly the spike in domestic fuel prices and electricity tariffs and the pass-through of the dobra depreciation late in 2005 (MEFP, para. 3). The real effective exchange rate appreciation which occurred during the first three quarters of 2005 was reversed in the last quarter of 2005 (Figure 1).

Table 1.

São Tomé and Príncipe: Selected Economic Indicators, 2004-10

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

In percent of broad money at beginning of period.

For 2005-07 includes government deposits in the National Oil Account at the BCSTP from actual and prospective oil signature bonuses. CR/05/323 excluded those deposits.

For 2006, corresponds to end-May.

For 2006, the difference between CR/06/349 and current program projections is due to higher investment-related imports of goods and services resulting from the drilling operations of Block 1 and private sector foreign investment in the tourist sector.

Government revenue includes HIPC debt relief.

Assumes that the completion point under the enhanced HIPC Initiative is in 2006. For 2007, includes IDA’s and AfDF’s MDRI relief as a stock of debt reduction.

Oil Signature Bonuses for Blocks 5 and 6 in JDZ, totaling US$26.1 million, originally assumed for 2006, are now projected for 2007.

Excluding oil revenue, grants, interest earned and scheduled interest payments, foreign-financed scholarships, and foreign-financed capital outlays. For 2004, it also excludes transfers to the JDA, which were repaid in 2005 with proceeds from the oil signature bonus from Block 1.

In percent of exports of goods and nonfactor services. Assumes HIPC completion point in 2006 and includes MDRI debt relief.

In percent of government revenue including grants and excluding grants and oil signature bonuses. Assumes HIPC completion point in 2006 and includes MDRI debt relief.

In percent of current year exports of goods and nonfactor services. For 2006-07, MDRI results in an increase in scheduled debt service that is financed by grants.

Assumes HIPC completion point in 2006.

Excluding the National Oil Account and guarantee deposits placed at the central bank by financial institutions pending operating licenses.

Includes projected interest income.

Figure 1.
Figure 1.

São Tomé and Príncipe: Effective Exchange Rates, January 2000–March 2006 1

(Index; 2000 = 100)

Citation: IMF Staff Country Reports 2006, 400; 10.5089/9781451835113.002.A001

Source: Information Notice System.1An increase in the index corresponds to an appreciation of the effective exchange rate.
uA01fig02

Inflation, Exchange Rate and Currency Issued, Jan. 2004–May 2006

(Annual percentage change)

Citation: IMF Staff Country Reports 2006, 400; 10.5089/9781451835113.002.A001

3. The external current account deficit increased in 2005 as a result of a larger than expected trade deficit. While cocoa exports remained stagnant, commodity imports rose significantly due to a sharp increase in the country’s oil bill. However, net capital inflows were higher than expected, including the transfer into the budget from the US$49.2 million oil signature bonus receipt on Block 1 of the Joint Development Zone (JDZ) in July. Also, foreign direct investment was higher than envisaged due to the initiation of several hotel construction projects and the launching of drilling operations by Chevron-Texaco in Block 1, which marked a milestone in the development of the domestic oil sector. As a result, net international reserves (NIR) were higher than programmed, with the import coverage of reserves reaching 4.4 months of non-oil imports of goods and nonfactor services. External arrears were eliminated in the context of a new multilateral debt rescheduling on Cologne terms reached with Paris Club creditors in September 2005.

4. All quantitative performance criteria for December 2005 were met (MEFP, paras. 4 and 5, and Table I.1):

  • On the fiscal front, the domestic primary deficit was smaller than programmed, declining by more than 4 percentage points to 16.3 percent of GDP in 2005. Revenue was slightly below target because of delays in payment of fees for fishing licenses granted to the European Union. However, domestic nonpriority expenditure was lower than envisaged. In addition, all domestic payment arrears incurred in 2005 were eliminated in the first two weeks of 2006.

  • On the monetary front, net credit to the government from the banking system (NCG) and the central bank’s net domestic assets (NDA) were lower than programmed. The NIR target was exceeded by US$6 million.

5. Structural reforms advanced in 2005 and delays in preparing feasibility studies for restructuring the airport and seaport authorities (a structural benchmark for December 2005) are being addressed (MEFP, para. 6). Also, the authorities have asked for Fund technical assistance on the draft legislation criminalizing money laundering and the financing of terrorism (AML/CFT) before it is submitted to the National Assembly (a structural benchmark for September 2005). As noted in the context of the first program review, the government intends to submit the AML/CFT legislation to the National Assembly by end-December 2006, once all related pieces of legislation are in place.1

uA01fig04

Inflation, Jan. 2004–Apr. 2006

(Annual percentage change)

Citation: IMF Staff Country Reports 2006, 400; 10.5089/9781451835113.002.A001

6. In the first four months of 2006, inflation rose further, to 23.8 percent; the fiscal stance was relaxed as the March parliamentary elections approached, and monetary policy remained relatively passive (Tables 2–3; MEFP, paras. 9–13). The acceleration of inflation reflected a lagged effect of the dobra depreciation in late 2005, temporary shortages of food staples, both imported and locally produced, and a more expansionary fiscal stance than initially expected.2 Fiscal slippages resulted from a combination of lagging tax receipts, including delays in the annual transfer of oil resources to the budget, and expenditure overruns due in part to higher energy costs, following the adjustment of gasoline and electricity tariffs, and election-related spending. As discussed below, corrective measures implemented during the second quarter have reversed these slippages. The higher domestic primary deficit was financed through an expansion of net domestic credit from the central bank and borrowing from Angola.3 At the same time, the central bank’s sterilization efforts were too timid to cope with large private capital inflows associated with the legislative elections that put further inflationary pressures on the economy, increased the commercial banks’ net foreign asset position, and weakened their demand for dollars at the central bank’s auction. A more active monetary stance was adopted with delay in the second quarter. On May 19, 2006, the central bank raised its reference interest rate from 18.2 to 24 percent and bank reserve requirements from 24 to 24.5 percent.4 In March, the central bank started to conduct regular single-price (Dutch) foreign exchange auctions, which have recently been strongly oversubscribed. By April 30, 2006, gross international reserves stood above 4 months of non-oil imports of goods and nonfactor services; broadly in line with the program.

Table 2.

São Tomé and Príncipe: Financial Operations of the Central Government, 2004–10

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

The projections assume that São Tomé and Príncipe reaches HIPC completion point in the second half of 2006.

Includes MDRI relief as a stock of debt reduction, in the last quarter of 2006 for the Fund, and in the first quarter of 2007 for IDA and AfDF.

Oil signature bonuses for Blocks 5 and 6 in JDZ, totaling US$26.1 million, originally assumed for 2006, are now projected for 2007.

For 2006, includes US$2 million of the social inclusion project to compensate laid-off workers from the privatization of public agricultural enterprises during the 1990s.

For 2006 refers to a temporary accumulation of technical arrears with non-Paris Club creditors, expected to be settled during the year once ongoing reconciliation of debts is concluded.

Repayment of three US$5 million loans disbursed by Nigeria in 2002–04 is assumed for 2007, upon arrival of oil signature bonuses for Blocks 6 and 7 in JDZ.

For 2007, includes IDA’s and AfDF’s MDRI relief as a stock of debt reduction.

For 2006, includes Fund MDRI relief as a stock of debt reduction.

For 2005—07, net amount is negative due to transfer of oil bonuses, net of drawings, to the National Oil Account. In 2008—2010 positive amount corresponds to drawings from the National Oil Account as indicated in the Oil Revenue Management Law.

For 2005, reflects impact of Paris Club rescheduling in the last quarter of 2005. In 2006 assumes settlement with non-Paris Club creditors.

Excluding oil revenue, grants, interest earned and scheduled interest payments, and foreign-financed scholarships and capital outlays. For 2004, it also excludes transfers to the JDA, which repaid with proceeds from the oil signature bonus of Block 1.

Table 3.

São Tomé and Príncipe: Financial Operations of the Central Government, 2004–10

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

The projections assume that São Tomé and Príncipe reaches HIPC completion point in the second half of 2006.

Includes MDRI relief as a stock of debt reduction, in the last quarter of 2006 for the Fund, and in the first quarter of 2007 for IDA and AfDF.

Oil signature bonuses for Blocks 5 and 6 in JDZ, totaling US$26.1 million, originally assumed for 2006, are now projected for 2007.

For 2006, includes US$2 million of the social inclusion project to compensate laid-off workers from the privatization of public agricultural enterprises during the 1990s.

For 2006 refers to a temporary accumulation of technical arrears with non-Paris Club creditors, expected to be settled during the year once ongoing reconciliation of debts is concluded.

Repayment of three US$5 million loans disbursed by Nigeria in 200-04 is assumed for 2007, upon arrival of oil signature bonuses for Blocks 6 and 7 in JDZ.

For 2007, includes IDA’S and AfDF’s MDRI relief as a stock of debt reduction.

For 2006, includes Fund MDRI relief as a stock of debt reduction.

For 2005–07, net amount is negative due to transfer of oil bonuses, net of drawings, to the National Oil Account. In 2008–2010 positive amount corresponds to drawings from the National Oil Account as indicated in the Oil Revenue Management Law.

For 2005, reflects impact of Paris Club rescheduling in the last quarter of 2005. In 2006 assumes settlement with non-Paris Club creditors.

Excluding oil revenue, grants, interest earned and scheduled interest payments, and foreign-financed scholarships and capital outlays. For 2004, it also excludes transfers to the JDA, which repaid with proceeds from the oil signature bonus of Block 1.

7. Monetary and credit aggregates continued to grow rapidly in early 2006, in part reflecting structural changes in the domestic economy (Tables 4–5 and Box 1). To a considerable extent, the growth of monetary aggregates has reflected an increase in the demand for money related to the development of the nascent oil sector. In addition, the issuance of bank operating licenses to a number of new commercial banks has resulted in large increases in banks’ reserve holdings with the central bank. In this context, the monetary authorities have gradually shifted their attention to currency issued as their major guidepost for gauging excess liquidity, to complement the monetary measures of May 19, 2006. Also, based on recommendations from a recent MFD technical assistance mission, they are implementing a new liquidity management program. Coordination of fiscal and monetary policies has been stepped up, and the central bank is now prepared to issue certificates of deposits (CDs).

Table 4.

São Tomé and Príncipe: Monetary Survey, 2004–06

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

For comparison purposes with the program’s monetary numbers (CR/05/323) balance sheet data for end-December 2005 have been adjusted by removing the government’s National Oil Account (Conta Nacional de Petroleo, CNP) from the definition of central bank net international reserves and net domestic assets. Originally, the CNP was supposed to be held directly by the government in an account with the Federal Reserve in New York.

Includes MDRI assistance from the Fund as a stock of debt reduction totaling SDR1.6 million assumed for the fourth quarter of 2006.