Democratic Republic Of São Tomé and Princípe: Third Review of the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, and Request for Waiver of Performance Criteria, and Modification and Deletion of Performance Criteria—Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Democratic Republic of São Tomé and Príncipe
Author: International Monetary Fund
Publication Date:
08 Mar 2007
eISBN:
9781451835120
Language:
English
Keywords:
ISCR; CR; Propoor spending; government; nonessential spending; spending; Three-Year PRGF arrangement; debt service; tax authorities; government use; program support; government of Angola; Oil
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This paper discusses key findings of the Third Review Under the Poverty Reduction and Growth Facility for São Tomé and Príncipe. Structural reforms are progressing. Five of six structural benchmarks through September 2006 were met. The authorities strengthened public financial management (PFM) and laid the basis for tax reform and actions against money laundering. The 2007 agenda includes implementing a pilot PFM system and strengthening the environment for private sector activity. The draft 2007 budget shows significant consolidation efforts, given less favorable prospects for oil bonuses and the need to increase pro-poor spending.

Abstract

This paper discusses key findings of the Third Review Under the Poverty Reduction and Growth Facility for São Tomé and Príncipe. Structural reforms are progressing. Five of six structural benchmarks through September 2006 were met. The authorities strengthened public financial management (PFM) and laid the basis for tax reform and actions against money laundering. The 2007 agenda includes implementing a pilot PFM system and strengthening the environment for private sector activity. The draft 2007 budget shows significant consolidation efforts, given less favorable prospects for oil bonuses and the need to increase pro-poor spending.

I. Background

1. The main goals of Sâo Tomé and Príncipe are to achieve the HIPC completion point early in 2007 and successfully bridge the transition to the oil era. Discussions with the authorities focused on reaching the HIPC milestone by assuring macroeconomic stability and performing well on the PRGF program. This would allow for higher propoor spending and progress toward the MDGs. Debt relief resources, combined with gradual use of oil signature bonuses, should support economic growth until oil production begins around 2012. However, further drilling is needed to confirm the existence of commercial oil reserves. The authorities agreed that building strong institutions will help ensure efficient and transparent use of debt relief and oil resources.

2. This year’s local, parliamentary, and presidential elections have strengthened democratic institutions. President de Menezes and his coalition won all three elections. The peaceful election process and outcome have enhanced political stability, but the government still lacks a majority in the National Assembly. However, parliamentary activity has been buoyant with adoption of several critical reforms.

A01txfig01

Real GDP and Import Volumes of Investment Goods and Petroleum Products Import, 2001–06

(Annual percent change)

Citation: IMF Staff Country Reports 2007, 102; 10.5089/9781451835120.002.A001

A01txfig02

Inflation, January 2004–October 2006

(Annual percentage change)

Citation: IMF Staff Country Reports 2007, 102; 10.5089/9781451835120.002.A001

II. Broadly Satisfactory Performance and strengthened economic activity

3. Economic activity picked up in 2006 but inflation flared up temporarily. Real GDP growth should reach 8 percent, reflecting buoyant construction activity and strong growth in services, especially tourism. The 12-month inflation rate rose from 17 percent in 2005 to 26 percent at end-August, but has since decelerated and headed down to 24 percent by November. The rise was due to both temporary exogenous factors and expansionary domestic policies (MEFP, ¶3).

4. Financial performance was disappointing in the first half of 2006, mainly because of expenditure overruns related to the elections and unforeseen needs (LOI, ¶ 3. MEFP, ¶ 5). As a result, five interrelated fiscal and monetary performance criteria (PCs) for end-June were missed (Table 8), the two fiscal ones with small margins, but the three monetary ones with large margins, mainly because of delays in oil bonuses;1 correcting for these delays, the monetary PCs are missed with a small margin.

Table 1.

São Tomé and Príncipe: Selected Economic Indicators, 2003–10

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

For 2006, through November.

Percent of broad money at beginning of period.

Includes government deposits from oil signature bonuses in the National Oil Account at the BCSTP.

Government revenue includes HIPC and MDRI debt relief.

Assumes that the completion point under the enhanced HIPC Initiative is in the first quarter of 2007.

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.

Percent of three-year moving average of exports of goods and nonfactor services.

Percent of government revenue including grants and excluding oil signature bonuses.

Percent of current year exports of goods and nonfactor services.

Includes payments to the IMF and settlement of arrears.

Gross reserves exclude the National Oil Account and guarantee deposits placed at the BCSTP by financial institutions waiting for operating licenses; imports exclude oil sector-related imports of capital goods and services.

Table 2.

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

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

Assumes HIPC completion point in the first quarter of 2007.

Includes MDRI relief as a stock of debt reduction for the IMF in the first quarter and for IDA and AfDB in the second quarter of 2007.

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 bilateral creditors, pending reconciliation of debt records.

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 2–4 in JDZ.

For 2007, includes IDA and AfDB MDRI relief as a stock of debt reduction.

For 2005, reflects impact of Paris Club rescheduling in the last quarter of 2005. For 2007, assumes rescheduling agreement with non-Paris Club bilateral creditors for current maturities and stock of arrears.

For 2007, includes IMF MDRI relief as a stock of debt reduction.

Excluding the 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.

Table 3.

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

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

Assumes HIPC completion point in the first quarter of 2007.

Includes MDRI relief as a stock of debt reduction for the IMF in the first quarter, and for IDA and AfDB in the second quarter of 2007.

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 bilateral creditors, pending reconciliation of debt records.

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 2—4 in JDZ.

For 2007, includes IDA and AfDB MDRI relief as a stock of debt reduction.

For 2005, reflects impact of Paris Club rescheduling in the last quarter of 2005. For 2007, assumes rescheduling agreement with non Paris Club bilateral creditors for current maturities and stock of arrears.

For 2007, includes IMF MDRI relief as a stock of debt reduction.

Excluding the 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.