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

The 2008 Article IV Consultation with the Democratic Republic of São Tomé and Príncipe and sixth review under the three-year arrangement under the Poverty Reduction and Growth Facility discusses policies and exchange rate arrangement. In recent years, public finances have been supported by large oil signature bonuses, but exploratory drilling for oil has not yet confirmed the existence of commercially extractable reserves. Executive Directors supported the authorities’ intention to reconsider São Tomé and Príncipe’s monetary and exchange arrangements.


The 2008 Article IV Consultation with the Democratic Republic of São Tomé and Príncipe and sixth review under the three-year arrangement under the Poverty Reduction and Growth Facility discusses policies and exchange rate arrangement. In recent years, public finances have been supported by large oil signature bonuses, but exploratory drilling for oil has not yet confirmed the existence of commercially extractable reserves. Executive Directors supported the authorities’ intention to reconsider São Tomé and Príncipe’s monetary and exchange arrangements.

On behalf of my São Tomé and Príncipe 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 grateful to the international community for their continued assistance to São Tomé and Príncipe.

I. Recent Developments

As expected at the time of the fifth review, economic activity has been robust in 2007, with a real GDP growth estimated at 6 percent, mainly driven by tourism-related construction, communication, and other services. Cocoa exports, the main exports, increased owing to both higher international prices and increased export volume.

After declining to 14 percent in June 2007, inflation reaccelerated in the second half of the year to reach 27.6 percent at end-December 2007 and 34 percent in March 2008, due to a combination of factors including higher fuel and food prices, depreciation of the dobra, and higher-than-programmed liquidity growth.

In the fiscal sector, higher income tax receipts and increased tax arrears collection boosted revenue performance over the program objective by 1.2 percent of GDP. Expenditures also increased higher than programmed on account of higher utilities, transfers and medical expenses. A significant part of utility payments to EMAE, the state-owned electricity and water company, was to mitigate the impact of the sharp utility tariff hike (40-60 percent) on the population. It is also worth noting that in light of continued increase in international fuel prices, the prices of domestic petroleum products were also increased by 14-25 percent in order to reduce implicit subsidies. In addition, capital expenditure has been cut in order to accommodate the increase in other expenditure items. Despite the mitigating measures taken, the net effect has been a higher-than-programmed domestic primary deficit, which has been financed by drawdown of government deposits.

The authorities made further progress toward a fully integrated computerized public financial management system (eSAFE) by issuing an administrative decree establishing an IT office and a Directorate of Accounting, and issuing a tender for the procurement of IT equipment for upgrading SAFINHO. They submitted to the Parliament a direct taxation reform that will help broaden the tax base, reduce distortions and increase revenue buoyancy over time. To ensure that revenue collections are improved, the authorities have intensified their effort to strengthen tax and customs administration, with notably the assistance of the U.S. Millennium Challenge Corporation (MCC). The budget for 2008, which is consistent with the program and the Poverty Reduction Strategy, has been approved in May 2008.

In the monetary sector, base money grew much faster than programmed and net international reserves exceeded the program target by a large margin, as result of a partial sterilization of budgetary use of oil bonuses and donor grants, in a context of market-determined exchange rate. In light of the inflation developments, the central bank (BCSTP) has increased its use of foreign exchange sales since March 2008 to mop up excess liquidity. Since then, base money growth decreased from 50 percent in December 2007 to 27 percent in March 2008. On the financial sector reform, the central bank (BCSTP) issued the new regulations on capital adequacy, internal control and auditing, bank financial reporting, and credit to employees. In April 2008, the National Assembly (NA) gave its final approval to the anti-money laundering (AML/CFT) law, paving the way for an operational AML/CFT regime in Sao Tome and Principe.

On structural reforms, the government has prepared and submitted to the National Assembly numerous legislations aimed at reducing the cost of investing and doing business in Sao Tome and Principe, and is awaiting their approval by Parliament. These legislations include a new investment code that will provide equal treatment to foreign and domestic investors, a revised labor code that will increase labor flexibility, and a draft legislation, prepared in consultation with the private sector, to reduce impediments to start a business.

Progress has also been made in the implementation of the institutional framework of the oil sector. To lay ground for launching licensing for the Exclusive Economic Zone (EEZ), the National Oil Agency (NOA) prepared a Petroleum Sector Strategy and related laws -the framework law on oil-related activities, the taxation law, and the production sharing contract model- and submitted them to the National Assembly for approval.

II. Economic Policies for the Rest of 2008

My authorities remain committed to strengthening policy implementation, particularly in containing domestic primary expenditure and in curtailing liquidity growth in order to bring inflation to a downward path. In this regard, policies for the rest of this year will ensure sound management of oil-related and debt relief resources, and lay the groundwork for sustained private sector-led growth. The objectives of the program are to maintain real GDP growth at 6 percent, reduce annual inflation from its current level 34 percent to 13-15 percent by the end of the year, and safeguard international reserves equivalent to 4 months of imports.

Fiscal policy

In the fiscal sector, the objective is to reduce further the domestic primary deficit to 5.2 percent of GDP in 2008, through fiscal consolidation. Specifically, expenditures will be contained through (i) strict quarterly limits on nonessential current spending, particularly on goods and services, (ii) strict controls of personnel cost to ensure that the wage bill-to-GDP ratio does not increase, and (iii) a reassessment of transfer to the Joint Development Authority (JDA), taking into account budget constraints, oil revenue prospects, and the execution of the JDA budget. My authorities intend to assist the most vulnerable segments of the population through better implementation of HIPC-related expenditure program and a temporary, targeted scheme that will facilitate adjustment to higher import prices for food and fuel. They will continue to improve the execution of public investments projects. In particular, they work closely with external development partners to accelerate implementation of foreign-funded projects, while ensuring adequate resources for domestically-funded investment projects. The projected deficit will be financed in part by the use of IDA’s Development Policy Operation (DPO) grant of US$4.5 million and by statutory drawings from the NOA.

Fiscal reforms will essentially continue to focus on strengthening tax and customs management and public expenditure management. In particular, a comprehensive wage study will be undertaken as part of the DPO-supported program with a view to revising the salary structure with improved incentives for civil servants, and thereby avoiding the recourse to ad hoc increases in wages. In order to strengthen the monitoring and execution of the 2008 budget, including the use of debt relief resources, my authorities will continue to upgrade SAFINHO and turn it into a fully fledged eSAFE system incorporating all public accounts, with the assistance from multilateral and bilateral donors.

My authorities are cognizant of the uncertainty regarding future receipts of oil bonuses. Accordingly, they will continue to make good use of donor budgetary assistance and the remaining oil bonuses to maintain fiscal sustainability in the next several years. They stand ready to revise their fiscal program, if the prospects in the oil sector do not materialize as expected.

Monetary, exchange rate and financial policies

The central bank will pursue a tighter monetary policy to complement fiscal consolidation efforts in order to achieve the inflation objective for 2008. The monetary program aims to keep the base money growth on a declining trend. To this end, given the limited effectiveness of interest rates and other monetary policy instruments, the central bank will continue to use foreign exchange sales to mop up liquidity, consistent with the NIR objective. The central bank and the treasury department of the ministry of planning and finance will strengthen their cooperation, through regular information-sharing, to ensure that the BCSTP takes timely action to sterilize budgetary use of oil bonuses, donor funds and HIPC and MDRI savings. To help the liquidity forecast, the BCSTP will use the weekly average, rather than the monthly average, in measuring commercial banks’ compliance with the minimum reserve requirements.

The central bank is committed to deepening foreign exchange market reform and complying with obligations under Article VIII, Sections 2(a), 3, and 4 of the IMF’s Articles of Agreement. In this regard, the new investment code, which foresees, among others, the elimination of exchange restriction on transfer abroad of dividends is yet to be approved by the National Assembly. To remove the remaining multiple currency practices, the BCSTP will consider revising the mechanism for setting the daily official exchange rate, which will ensure that the spread between the official and commercial exchange rates will not exceed 2 percent. The BCSTP will continue implementing the current policies of holding regular foreign exchange auctions and progressively expanding the foreign exchange auction market to ensure a fuller and faster market determination of the exchange rate.

The central bank intends to continue with its communication strategy of informing the market of its monetary and exchange policies through regular meetings with the banking community and the media, and the posting of various monetary data and financial statements on the central bank’s website.

Regarding the financial sector reform, the BCSTP intends to further strengthen the requirements for issuing bank licenses, including by raising the minimum capital requirement. The central bank also intends to enhance its banking supervision. In this regard, with IMF technical assistance, it will further strengthen its capacity to enforce banking supervision regulations through training, implementing the new charts of accounts and quarterly financial reporting by banks and setting up a central credit unit to facilitate information sharing among banks.

Other issues

My authorities remain determined to enhance the investment climate through regulatory reform and upgrading infrastructure. They are hopeful that the completion of abovementioned reforms in the fiscal, monetary and financial sectors and the approval of business-related legislations will significantly improve the business climate and will contribute to the development of the private sector. They will work closely with donors to press ahead with reforms in key areas such agriculture, transportation and energy. They will also proceed with the reform of public enterprises to improve their financial situation.

As regards debt management, my authorities will continue to ensure debt sustainability after HIPC and MDRI debt relief by refraining from new external borrowing, particularly on commercial terms, and redouble their efforts to seek full delivery of HIPC debt relief from the remaining official creditors.

III. Conclusion

Overall, performance under the program in 2007 has been broadly satisfactory, despite that two quantitative performance criteria at end-December 2007 on the fiscal primary balance and net credit to the government have not been observed and the structural performance criterion on public financial management reform was met with delay. In light of the remedial actions taken and the policy commitments for the remainder of the program, my authorities are requesting Board approval for the requested waivers and the completion of the sixth and final review of the PRGF-supported program.

Democratic Republic of São Tomé and Príncipe: 2008 Article IV Consultation and Sixth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, and Request for Waivers of Performance Criteria-Staff Report; Staff Supplement; Public Information Notice and 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