Statement by the IMF Staff Representative January 17, 2007

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.

1. São Tomé and Príncipe has shown a strong commitment to implement the program, the response to financial slippages has overall been adequate, and progress on structural reforms in support of growth and poverty reduction has been strong. Growth in 2006 has been solid, and inflation, after flaring up in the first half of the year, has shown signs of receding. However, São Tomé and Príncipe remains vulnerable to domestic and external shocks.

2. While the financial program performance was unsatisfactory in the first half of 2006, the authorities took remedial measures that have since brought the program broadly back on track. The increased tax collections and containment of expenditures since May have largely offset overruns during the period leading to the elections and the domestic primary deficit target for 2006 should be within reach. However, propoor spending has been below expectations.

3. The primary deficit target for 2007 shows significant efforts to create room for increased propoor spending, while taking into account delays in oil bonus receipts. It will be critical to reduce nonessential spending and continue implementing the tax reform. Propoor spending should be further boosted by prospective HIPC relief and MDRI resources following the completion point.

4. The central bank’s current prudent monetary policies are broadly appropriate to significantly bring down inflation. In this regard, the central bank’s recent efforts to activate its monetary and foreign exchange policy instruments are noteworthy, in particular, the resumption of regular foreign exchange auctions and the issuance of certificates of deposits. It is important that the central bank adhere strictly to its base money and net international reserves targets and move promptly to mop up liquidity as needed.

5. São Tomé and Príncipe’s managed floating exchange rate system has helped cushion against external shocks as the exchange rate remains largely market determined. The central bank should be able to gradually eliminate the remaining exchange restriction and multiple currency practice for external current transactions.

6. Structural reforms have been progressing well, especially with the steps to strengthen public financial management, lay the basis for tax reform, and combat money laundering and the financing of terrorism. Full implementation of the new public financial management system will be essential for monitoring the spending and use of debt relief resources for poverty reduction. Further improvements in the environment for private sector activity are key for sustained growth, and the reforms of the tax system and the energy and financial sectors should be pursued.

Democratic Republic of São Tomé and Príncipe: 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