Statement by Laurean W. Rutayisire, Executive Director for the Democratic Republic of São Tomé and Príncipe

This paper discusses key findings of the Fourth Review Under the Poverty Reduction and Growth Facility (PRGF) for the Democratic Republic of São Tomé and Príncipe. All quantitative performance criteria and structural benchmarks for end-December 2006 were met. Progress continues on structural reform, albeit sometimes slower than originally envisaged. The authorities agreed to strengthen policy implementation to bring inflation further down. IMF staff recommends completion of the fourth review based on the country’s performance and policy commitments.


This paper discusses key findings of the Fourth Review Under the Poverty Reduction and Growth Facility (PRGF) for the Democratic Republic of São Tomé and Príncipe. All quantitative performance criteria and structural benchmarks for end-December 2006 were met. Progress continues on structural reform, albeit sometimes slower than originally envisaged. The authorities agreed to strengthen policy implementation to bring inflation further down. IMF staff recommends completion of the fourth review based on the country’s performance and policy commitments.

June 25, 2007

On behalf of my Saotomean authorities, I would like to thank the Board, Management and Staff for their continued support and useful advice to São Tomé and Príncipe. My authorities are particularly thankful for the debt relief provided under the HIPC Initiative and MDRI after reaching the Completion point three months ago.

I. Recent developments

Economic activity in São Tomé and Príncipe has been buoyant in 2006 fueled by high capital inflows. Growth is expected to have reached 7 percent in real terms in 2006. Owing to sound policy implementation, inflation continued to decline from its peak of 26 percent in August 2006 to 17 percent in March 2007.

In the fiscal sector, domestic revenues increased sharply owing to higher fuel import duties and excise taxes resulting from a rise in petroleum prices and a higher volume of imports. Together with continued expenditure restraint, this led to a domestic primary fiscal deficit narrowing to 8.6 percent of GDP in 2006, down from 10.3 percent in 2005 and well below the program target of 9.8 percent. This improved situation, in turn, resulted in a lower use of oil signature bonuses.

Regarding fiscal-related reforms, my authorities started implementing the action plan to recover tax arrears. The recent adoption by the National Assembly (NA) of the tax administration and procedural codes will help strengthen arrears collection. However, the NA has postponed its consideration of draft law to increase the excise tax on services and on some imported goods, including alcoholic beverages and tobacco, as it prefers to consider them in conjunction with the proposed cut in the corporate income tax rate. The implementation of the system of integrated public finance management (SAFE) progresses steadily with the adoption of a new organic budget law in early 2007. The pilot public management system (SAFINHO) was introduced in January 2007 as scheduled following the adoption of the 2007 budget. However, the decree establishing the public accounting plan has been adopted later than programmed due to difficulties in securing timely external assistance.

In the monetary sector, continued tightening by Central Bank of São Tomé and Príncipe (BCSTP) along with fiscal consolidation since mid-2006 resulted in a sharp deceleration of monetary aggregates and decline in inflation. In particular, as increases in the reference interest rate had limited effect on mopping up excessive liquidity and reducing monetary aggregates, the BCSTP resumed sales of foreign exchange since December 2006 with the objective to sterilizing budgetary use of oil bonuses and capital inflows. As a result, base money declined from 117 percent in June 2006 to 15 percent in March 2007 and the spread between official and commercial bank exchange rate narrowed. The lower financing of the budget contributed to maintain the net international reserves (NIR) above the program target for end-December 2006.

Significant progress has been made regarding the strengthening of the central bank’s operations. In particular, the central bank has prepared regulations for implementing the legislation criminalizing money laundering activities and the financing of terrorism (AML/CFT) that was submitted to the NA in October 2006. Once the NA gives final approval of the law, these regulations will be issued, enabling the establishment of a Central Risk Unit within the BCSTP and imposing the “know-your-client” rules. Efforts have been made to improve transparency and communication. Regular meetings gather the Governor of the BCSTP, the banking community and the media, with weekly disclosure of monetary and macroeconomic data on the central bank website. The audited financial statements for 2005 have been also posted and the central bank intends to continue to do so in the future.

On other structural reforms, significant measures have been taken to strengthen governance in the oil sector and reduce the cost of doing business. The NA approved the legislation establishing the Petroleum Oversight Committee for auditing and supervising petroleum receipts and expenditures under the Oil Revenue Management Law (ORML). The ORML Handbook has been prepared and is expected to be published soon. My authorities are also implementing the EITI process, as acknowledged at the third EITI conference in Oslo in October 2006. To improve its implementation, they will integrate overlapping elements of the ORML and EITI. In order to promote private sector-led growth, my authorities have prepared, in consultation with the private sector, a draft legislation that will significantly reduce red tape and other regulatory impediments to starting a business. It is expected that once this legislation is approved, the time needed for starting a business will be reduced from 140 days to less than 3 days.

As regards debt issues, my authorities signed a bilateral agreement with Spain, bringing to three the number of bilateral agreements under the September 2005 Paris Club terms of reference. My authorities remain resolved to ensure debt sustainability. A meeting with Paris Club creditors took place in late May 2007 on completion point of debt relief. To this end, they have put in place a debt recording and management system obtained from the Commonwealth Secretariat (CS-DRMS) since November 2006. The Debt Office within the Ministry of Finance will be assisted by a consultant from the Commonwealth Secretariat in the second half of 2007.

Overall, performance under the program has been satisfactory with all quantitative performance criteria and structural benchmarks for end-December 2006 met. However, the structural performance criterion for end-March 2007 on the public accounting plan was met with delay, as explained above. As this delay is beyond their control, my authorities are requesting a waiver for the non-observance of this performance criterion. In light of their satisfactory performance, my authorities are requesting Board approval for the completion of the fourth review under the PRGF.

II. Financial policies for the remainder of 2007 and beyond

My authorities remain strongly committed to macroeconomic stabilization. Their financial policies for 2007 and beyond aim essentially to further reduce inflation, while maintaining their poverty reduction efforts. To this end, they will maintain their prudent policy stance initiated one year ago, and pursue the implementation of their reform agenda to lay the ground for private sector-led growth.

Fiscal policy

For the remainder of 2007, fiscal policy aims to reduce the domestic primary deficit to 7 percent of GDP, while increasing pro-poor spending, consistent with the PRSP and the Priority Actions Plan for 2006–08. This will be achieved through continued expenditure restraint, as the impact of the envisaged direct tax reform, which aims to reduce distortions, would be largely neutral in 2007. Specifically, the wage bill will be contained at 8.2 percent of GDP (from 8.7 percent projected for 2006). My authorities intend to complete the study of the salary structure and components in June 2007, with the view of devising a new and more realistic one. Likewise, non-wage current expenditure will also be contained by strict application of the budget circulars that require prior authorization by the Minister of Finance for all expenditure commitments. As regards poverty reduction spending, my authorities will continue to strictly monitor the use of HIPC and MDRI resources.

On the revenue side, my authorities will continue to work closely with the NA to ensure a timely approval of the tax reform package. They will also introduce the petroleum pricing and taxation reforms by end-June 2007. These reforms aim to safeguard petroleum tax revenue in percent of GDP. Should there be any delay in the approval of the tax reform package or in the petroleum reforms, my authorities stand ready to further contain as much as possible public spending. To finance the fiscal program, it is envisaged a withdrawal of US$8 million from the National Oil Account (NOA).

In light of the uncertainty regarding future receipts of oil bonuses and the beginning of oil production, my authorities are committed to adjusting the medium-term fiscal and financing strategies if necessary to maintain fiscal sustainability. In particular, receipt of future oil signature bonuses in the course of the year will be deposited in the NOA for future budgetary use, consistent with the (ORML). They stand ready to revise downward oil-related outlays, including its contribution to the Joint Development Authority (JDA).

As regard financial management, my authorities will build on progress under the pilot system SAFINHO to enhance the monitoring and execution of the 2007 budget. With the assistance from Fund FAD and the World Bank, the elements of SAFE will be put in place progressively so that it is fully functional for the 2008 budget.

Monetary, exchange rate and financial sector policies

For 2007, the monetary program aims at further reduction of inflation through strict control of base money growth, in the context of a flexible exchange rate regime. To this end, the BCSTP will continue to use proactively foreign exchange sales along with other monetary instruments, consistent with the NIR target to mop up liquidity. To ensure the effectiveness of the monetary policy, the BCSTP and the Ministry of Finance will strengthen their cooperation through regular meetings of senior officials from both institutions. Such meetings are expected to facilitate information-sharing and improve coordination between both institutions, regarding especially foreign exchange-related fiscal and monetary operations.

The BCSTP will continue to strengthen its operations and its internal management in line with the IMF safeguards assessment conducted in 2004. In particular, the central bank is committed to further developing the foreign exchange market, in order to comply with the obligations of Article VIII, Sections 2 (a), 3, and 4, of the IMF’s Articles of Agreement, as set out in paragraph 18 of their Memorandum of Economic and Financial Policies (MEFP). The central bank will also continue to develop a communication strategy to inform the market on its monetary and exchange rate policies. Regarding safeguards assessment, the BCSTP intends to develop annual audit plans based on a risk analysis of operations and review the role of the Audit Board to fully align its responsibilities with those of an independent audit committee.

Regarding the financial sector reform, the BCSTP intends to further enhance banking supervision, and implement the AML/CFT law. As regards banking supervision, the central bank will issue by end-June 2007 new prudential regulations to strengthen on- and off-site inspections.

Structural reforms

My authorities will continue to implement the EITI process and the institutional framework for the oil revenue management, as provided for in the ORML. They are hopeful that the draft legislation to reduce impediments to start a business, together with the completion of abovementioned reforms in the fiscal, monetary and financial sectors will significantly improve the business climate and will contribute to the development of the private sector.


São Tomé and Príncipe continued to maintain a satisfactory implementation of its economic program supported by the PRGF, thus demonstrating continuous commitment to macroeconomic stabilization and reform. In particular, significant measures have been implemented in key areas such as taxation, public finance management, oil revenue governance, central bank operations and business climate. My authorities remain committed to sound policy implementation. Given uncertainty surrounding oil reserves especially during the current transition period to the oil era, São Tomé and Príncipe still needs external support to make further progress towards its objectives of sustained growth and poverty reduction. I therefore call on the international community to continue providing such support.

Democratic Republic of São Tomé and Príncipe: Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, and Request for Waiver of Performance Criterion: 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