Democratic Republic of São Tomé and Príncipe
Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility: Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Democratic Republic of São Tomé and Príncipe
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International Monetary Fund
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Publication Date:
01 Apr 2009
eISBN:
9781451835199
Language:
English
Keywords:
ISCR; CR; government; PRGF loan; PRGF program; deficit; Sãotoménean authorities; debt service; authorities intention; policy commitment; government finance; International reserves; Oil; Debt relief; Arrears; Global
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This paper discusses a request from the Democratic Republic of São Tomé and Príncipe for a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF). The economic outlook for 2009 is broadly favorable, but subject to significant risks. The program spans a period including major elections; the authorities’ ability to meet fiscal objectives and implement monetary policy will be key to the success of the program. IMF staff recommends approval of the new PRGF arrangement based on the country’s policy commitments.

Abstract

This paper discusses a request from the Democratic Republic of São Tomé and Príncipe for a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF). The economic outlook for 2009 is broadly favorable, but subject to significant risks. The program spans a period including major elections; the authorities’ ability to meet fiscal objectives and implement monetary policy will be key to the success of the program. IMF staff recommends approval of the new PRGF arrangement based on the country’s policy commitments.

I. Background

1. São Tomé and Príncipe has a narrow production and export base. The country's exports, mostly cocoa, are modest; tourism, while growing, is still small. The large external current account deficit has been financed by official transfers, FDI, and oil signature bonuses. The incidence of poverty is high.

2. São Tomé and Príncipe had a good performance under the last PRGF-supported program, completed in July 2008, but continues to face important challenges. In the final program review, Executive Directors noted that maintaining economic stability over the medium term, particularly in view of the uncertain future oil prospects, would require strong fiscal and monetary policy and accelerated structural reforms. These recommendations gain force with the authorities' plans to adopt a fixed exchange rate regime with support from Portugal in the near future.

3. A coalition led by a main political party (MLSTP-PSD) formed a new government in June 2008. Regional elections are due in 2009, parliamentary elections in 2010, and presidential elections in 2011.

4. In the attached Letter of Intent (LOI) and Memorandum of Economic and Financial Policies (MEFP), the Sãotoménean authorities request a three-year arrangement under the PRGF. The new arrangement would help the authorities formulate, implement, and monitor macroeconomic policies, while playing an important catalytic role for donor support.1 The proposed access would help maintain usable gross international reserves at no less than 4 months of imports.

II. Recent Developments

5. Real GDP growth is estimated at 6 percent in 2007, and is expected to be about the same in 2008. Boosted by FDI, activities in construction, commerce, services, and tourism have been the main drivers of economic growth (Figure 1).

Figure 1.
Figure 1.

São Tomé and Príncipe: Recent Macroeconomic Developments

Citation: IMF Staff Country Reports 2009, 106; 10.5089/9781451835199.002.A001

Sources: São Tome and Príncipe authorities and IMF staff estimates.1 There is a break in the GDP data series between 2003 and 2004.

6. External inflows (both private and official) have financed the current account deficits. Exports of goods and services recovered somewhat in 2008 largely due to rising tourism receipts. Imports continued to grow, reflecting demand for investment goods and high international prices of food and fuel. The external current account deficit is estimated at 34 percent of GDP in 2008—fully financed by foreign aid and FDI.

7. Inflation was high in 2007–08, reflecting rising international prices of food and fuel and the depreciation of the dobra; but it started to retreat in the second half of 2008.2 In 2007, inflation reflected in part un-sterilized liquidity growth arising from the use of National Oil Account (NOA) balances to finance the fiscal deficit. Also, during 2007 and 2008, the authorities raised utility and fuel tariffs to bring them closer to world prices. Domestic fuel prices were significantly higher than international prices at end-2008. In 2008, the authorities tightened monetary policy to stabilize the exchange rate and reduce inflation, which closed 2008 at 25 percent, down from its 37 percent peak in June.

uA01fig01

Sao Tome and Principe - General Inflation, Food, and Energy

Citation: IMF Staff Country Reports 2009, 106; 10.5089/9781451835199.002.A001

8. Fiscal consolidation continued, but performance was weaker than programmed (Figure 2). The domestic primary deficit reached 8.4 percent of GDP in 2007, reflecting overruns in current spending, including a 30 percent public wage increase and spending to cover part of households' utility bills. The primary fiscal deficit was programmed to fall to 5.8 percent of GDP in 2008, but data through September suggest that it was 6.6 percent of GDP. The deficit was mainly financed by a drawdown from the NOA of $3 million and World Bank direct budget support.

Figure 2.
Figure 2.

São Tomé and Príncipe: Evolution of Fiscal Performance

Citation: IMF Staff Country Reports 2009, 106; 10.5089/9781451835199.002.A001

Sources: National authorities and IMF estimates.1/ Transfers to the Joint Development Agency (JDA), at 2.2 percent of GDP, are included in “other” expenditure.

9. Government cash management has been complicated by domestic payment arrears. Domestic payment arrears approached 118 billion dobra (4½ percent of GDP) by September 2008, mainly due to a shortfall in domestic revenue and higher than planned utility and scholarship bills. The government fell behind in payments to EMAE, the utility company, which accumulated payables to ENCO, the fuel distributor. ENCO, in its turn, had tax arrears (75 billion dobra by September 2008) and a large debt to Sonangol, Angola's oil exporting company, which recently became ENCO's majority shareholder. In December, ENCO cleared most of its tax arrears (70 billion dobra), and the government cleared its arrears to EMAE (86 billion dobra).

10. Monetary policy was tightened in 2008. In 2007, the central bank (BCSTP) did not sell enough foreign exchange to retire the liquidity released by the drawdown of the NOA. Thus, net international reserves of the BCSTP were $6 million above target by end-2007, while base money grew by 50 percent, contributing to depreciation of the dobra. In 2008, however, the BCSTP strengthened liquidity control through more extensive foreign exchange sales and increased coordination with the Ministry of Finance.3 This helped reduce annual base money growth to 18.9 percent by December 2008, and broadly stabilized the exchange rate against the U.S. dollar throughout the year.4

Table 1.

Sao Tome and Principe - Selected Economic Indicators, 2004-2008

article image
Sources: Authorities and Staff estimates.

11. The financial sector has expanded in the last several years, prompting efforts to enhance supervision.The number of banks operating in STP rose from one in 2002 to nine by mid-2008, while bank credit to the economy expanded from around 5 percent of GDP to over 25 percent. Eurorization of the banking system also advanced from 50 percent of total deposits and credit in 2002 to over 70 percent in 2007 (Figure 3). The impact of the global financial crisis has been minimal so far.5 The central bank has focused reform efforts on capital adequacy, credit classification, limits on net open foreign currency positions, and bolstering its own supervisory capacity after early off-site inspections raised some concerns about some small banks.

Figure 3.
Figure 3.

Indicators of Financial Development, 2001-2008

Citation: IMF Staff Country Reports 2009, 106; 10.5089/9781451835199.002.A001

12. Structural reforms slowed during 2007 and early 2008, though some measures were recently implemented. After some delays, a new investment code and the direct tax reform package were approved by the National Assembly (NA) in late 2008. Some progress was made in public financial management, with the completion of the bidding process for IT equipment and the initiation of the bidding process for SAFE software—the authorities aim to prepare the 2010 budget under the new system. The NA approved a new AML/CFT law in May 2008, but the government is working with its development partners to further improve the law. In September 2008, the government sold a controlling stake in ENCO for a net $21 million.

13. Progress to improve the investment climate was uneven. The new investment code aims to reduce the time to approve investment projects and create a level-playing field for foreign and domestic investors. Although some reforms were undertaken at EMAE, continued collection problems have resulted in frequent power cuts. Other state-owned companies providing key services, such as ENASA (airport) and ENAPORT (seaport), also suffer from financial problems and sub-par service.

III. The New PRGF Policy Framework

A. Medium Term Framework

14. The new PRGF arrangement aims to support the authorities' efforts to achieve macroeconomic stability and foster economic growth. The program's objectives are aligned to the government's development objectives and strategic focus on infrastructure, and are consistent with the Poverty Reduction Strategy, completed in 2005.6 The main pillars of the program are (MEFP ¶ 11):

  • Improving fiscal sustainability and public financial management in the face of a more adverse external environment and uncertain oil prospects. In particular, the program aims to gradually reduce the fiscal deficit to about 3 percent of GDP, while ensuring that public investment is protected. The government will not resort to monetary financing of its deficit.

  • Reducing inflation to low double digits early in the program and to single digits by its end, including by implementing an active monetary policy that uses foreign exchange auctions, subject to preserving an adequate level of external reserves.7

  • Maintaining financial stability by enhancing and exercising the central bank's supervisory and regulatory powers.

  • Continuing structural reforms aimed at stimulating private investment to develop the country's productive and export base.

15. Strong implementation of the program will also help São Tomé and Príncipe successfully move to a fixed exchange rate system, if that is its final choice.8 The government has begun formal discussions on an exchange rate agreement with Portugal along the lines ofthat in force between Portugal and Cape Verde (Box 1). Under such an agreement, São Tomé and Príncipe would peg its dobra to the euro, possibly starting in 2010, and Portugal would provide support to the peg with a credit line. Staff is of the view that a successful peg to the euro would help deliver low inflation and deepen integration with Portugal, São Tomé and Príncipe's main economic partner. However, strict macroeconomic discipline will be necessary for the success of a more rigid exchange arrangement—a point on which the authorities agreed.

Cape Verde's Agreement with Portugal

In July 1998, Cape Verde pegged its currency to the Portuguese escudo (later the euro), supported by a Foreign Exchange Cooperation Agreement with Portugal.

Under the Agreement, Cape Verde committed to a program of macroeconomic adjustment (guided by the targets of the Maastricht treaty), greater openness, and the modernization of its economy. The Portuguese government would in turn guarantee the convertibility of Cape Verde's currency and make available a precautionary credit line with a limit of 9 billion escudos (€45 million), which could be used to finance imports and external debt service.

The Agreement established a bi-national Committee, whose Macroeconomic Monitoring Unit verifies compliance with the macroeconomic program, drawing attention to potential problems and suggesting corrective measures. The Committee reports annually to both governments, and can recommend the suspension of the credit line if it judges that commitments are in breach.

In 2008, Cape Verde celebrated the 10th anniversary of its Agreement with Portugal.

16. Over the medium-term, economic growth is expected to continue around its current trend, while inflation should fall to single digits with firm policy implementation. Annual real GDP growth is projected to average 7.3 percent over the period 2010–13, up from 5 ½ projected for 2009, mainly led by FDI and public investment, both treasury- and donor-financed.9 The authorities have reached agreements with foreign investors on several large projects, including a deep-water seaport. Preparation for the larger projects is expected to begin in 2009 and physical work in 2010. These activities, though subject to risks, are expected to offset some of the adverse effects of the global crisis on economic growth. The projected growth rates should enable the country to improve social indicators and make progress toward achieving the Millennium Development Goals. At the same time, strengthened macroeconomic policy implementation should help reduce inflation to around 5 percent by 2013.

B. Policies for 2009

17. The macroeconomic framework envisages real GDP growth of 5.5 percent in 2009, supported by FDI in construction, commerce, and tourism. In addition, the authorities also have a large investment program to reinvigorate agriculture and tourism and improve the country's infrastructure.

18. The current account deficit is expected to widen in 2009, reflecting increased imports related to domestically and foreign-financed investment projects. The gain in export value seen in 2008 is expected to be reversed with a fall in oil re-exports. Imports are expected to increase by about 40 percent, reflecting strong public investment and continued FDI. The reduction in oil prices will mitigate this trend, although a lower oil import bill may be partially offset by higher profit repatriation by ENCO's new majority shareholder if domestic fuel prices remain high. The program envisages maintaining usable gross international reserves at no less than 4 months of imports.10

Fiscal Sustainability and Expenditure Management

19. Gradual fiscal adjustment aims to ensure a stable macroeconomic environment (MEFP ¶11). The program targets a baseline domestic primary fiscal deficit of 4 ½ percent of GDP in 2009 (Box 2). The deficit will be financed mainly by a drawdown of $2.4 million from the NOA, carry-over and new direct budget support from the World Bank and other donors, and use of privatization proceeds. The program also permits an increase in the deficit by up to 0.5 percentage points of GDP if additional budget support is secured.

Highlights of the 2009 Fiscal Plans

  • The fiscal component of the program, based on the budget approved in December 2008, envisages a baseline domestic primary deficit of 4 ½ percent of GDP (see table).

  • Several exceptional or one-off revenues are expected, including payment of overdue fees by oil companies and fees from two new investment projects (deep-water port and terminal link). No oil signature bonuses are expected in 2009.

  • The wage bill grows by 24.5 percent (about 5.5 percent in real terms).

  • The government intends to clear all arrears to its foreign scholarship program.

  • A large increase in treasury-funded capital projects, taking advantage of available privatization proceeds.

  • New budget support from the World Bank for $2 million is assumed.

  • Project grants that support donor-funded capital expenditure (concepts which are excluded from the domestic primary balance under the program) are 200 percent larger than in 2008, including grants from Portugal, Nigeria, and Angola.

STP - Selected Central Government Budget Items, 2008-2009

(in percent of GDP, unless otherwise indicated)

article image

One-off exceptional revenue is revenue from past tax dues from companies that did the seismic studies at the Joint Development Zone and one-off payments from large investment projects expected

Monitorable under IMF programs as a performance criterion.

20. Most of the fiscal adjustment is expected from curbing the growth in current expenditure. The authorities agreed to implement measures to control expenditures and improve budget execution (LOI, and MEFP ¶19 & 21), and to keep the wage bill constant in percent of GDP in 2009. The latter implies a significant nominal increase motivated by the authorities' three-year plan to decompress the compensation structure. The authorities also intend to conduct a study on civil service compensation to incorporate fringe benefits into the wage bill. Also, the lower world oil prices should result in a lower utility bill for the government, reducing spending on goods and services. To this end, the government intends to ensure that domestic fuel prices are updated regularly (structural benchmark).

21. To support the government's plans to improve infrastructure, the program features a substantial increase in treasury-funded capital expenditure (LOI). Using some of the proceeds from the privatization of ENCO, the 2009 fiscal program includes a large appropriation for capital projects (MEFP Table C).11 Taking into account implementation capacity, the program targets treasury-funded capital expenditure of 2.8 percent of GDP. If execution exceeds that baseline, additional use of privatization proceeds of up to 2 percent of GDP ($4 million) is allowed. If execution falls short of the baseline, the government will save the unused resources to ensure the funding of unfinished projects after 2009. With help from the World Bank, staff will monitor the budgetary execution of these projects (MEFP ¶18).

22. Revenues in 2009 will reflect recent tax reforms. The newly approved tax law changes are expected to be revenue neutral in the first two years. Tax collection, enforcement, and compliance are expected to improve over time. The government agreed that the availability of one-off revenues in 2009 should not lead to permanently higher expenditure obligations (MEFP ¶l9).

23. On the structural side, strengthening public financial management (PFM) and implementing revenue reforms are program priorities. The reform process will focus on:

  • Improving the budget financial management system (SAFINHO) to enhance budget execution and monitoring (MEFP ¶ 20 and Table B). These measures are key for preventing domestic arrears and ensuring effective delivery of public expenditure, and are in line with FAD technical assistance and the World Bank's PFM program.

  • Phasing out the subsidy on utility payments and resolving the arrears among EMAE, ENCO, and the government. Stemming the flow of new arrears requires public enterprise reform, including improving the financial standing of EMAE to enable it to pay back its debt to ENCO. Staff encouraged the authorities to negotiate with EMAE and ENCO a settlement of any remaining inter-enterprise and tax arrears.

  • Strengthening tax and customs administration, including through auditing tax returns, collecting tax arrears,12 and improving enforcement and collection, supported by the Millennium Challenge Corporation.

Monetary Policy and Financial Sector Reforms

24. Under the existing monetary and exchange rate framework, monetary policy will continue to rely on foreign exchange auctions to manage domestic liquidity. The monetary program aims to reduce inflation to 16 percent by end-2009, while keeping NIR at or above 4 months of imports. Staff agreed with the authorities that the BCSTP will need to continue using foreign exchange auctions to control liquidity (MEFP ¶24 & 25).13 Continued coordination between the central bank and the Ministry of Finance will be necessary.

25. Financial sector reforms initiated under the previous program will continue. In the short-term, improvements to ensure soundness of the banking system and further enhance the supervisory capacity of the BCSTP will dominate (MEFP ¶28). In line with the recommendations of recent technical assistance from MCM on banking supervision, the focus will be on completing the first round of off-site bank inspections and starting on-site inspections (structural benchmark). The BCSTP also intends to strengthen its capacity to enforce banking regulations including through training. By end-2009 a credit registry will be set up to help banks assess and manage risk (structural benchmark).

Structural reforms

26. Achieving sustained growth in the non-oil sectors will require structural reforms that facilitate private sector activity (MEFP ¶29 & 31). Staff agreed with the authorities on the following additional measures (structural benchmarks) to boost investment and reduce the cost of doing business: (i) revise the labor code; (ii) create a one-stop window; and (iii) modernize the commercial code.

External Debt

27. All new external debt will be contracted on concessional terms (MEFP ¶32). São Tomé and Príncipe reached the HIPC Initiative completion point in March 2007 and benefited from HIPC/MDRI debt relief.14 The authorities plan to seek full debt-relief delivery from their remaining creditors (mainly Angola and the Arab Bank for Economic Development in Africa). They intend to maintain debt sustainability and are committed to refraining from new non-concessional borrowing. They also plan to put in place a framework law for public debt to improve debt management (structural benchmark).

28. Despite HIPC and MDRI debt relief, the debt outlook remains vulnerable. In the event of a large output loss or terms of trade deterioration, key debt ratios could exceed the relevant indicative thresholds. The risk of debt distress would increase significantly should oil prospects diminish (www.imf.org).15

C. Program Risks

29. The main near-term risks to the growth outlook are external. Although the impact of the global financial crisis has been minimal so far, the crisis raises the risks of tighter credit conditions and weaker demand for foreign firms planning to invest in São Tomé and Príncipe. Weaker partner-country growth could affect tourism, while lower donor support and implementation constraints are risks to public investment. In an alternative low-growth scenario the fiscal deficit would widen, calling for additional external support (Figure 4).

Figure 4.
Figure 4.

Sao Tome and Principe - Alternative Scenario 1/

Citation: IMF Staff Country Reports 2009, 106; 10.5089/9781451835199.002.A001

Source: Authorities and IMF staff.1/ The baseline scenario assumes that oil signature bonuses for Blocks 5 and 6 are received in 2010 and that downside external risks are contained. The alternative scenario assumes oil bonuses are delayed indefinitely and that downside external risks are significant. Financing needs are assumed to be covered by the gradual use of privatization proceeds, which, as a result, will be exhausted by the end of 2013.

30. The longer-term outlook remains dependent on uncertain oil prospects, which have become more precarious with the decline in oil prices. The balance of the National Oil Account is low ($12 million in November 2008), and overdue oil bonuses may not arrive as expected in 2010 (Figure 4).16 Exploratory drilling so far has not confirmed the existence of commercially extractable oil reserves, and new drilling, scheduled for late 2009, may be further delayed as a result of weak oil prices.17 Medium-term fiscal plans would need to be reassessed should oil prospects fail to improve within the program period.

31. The main domestic risk stems from local, legislative, and presidential elections - scheduled for 2009, 2010, and 2011, respectively—which could cause fiscal discipline to relax.

IV. Program Monitoring, Financing Needs, and Capacity to Repay the Fund

32. Data provision is adequate for program monitoring, although there remain weaknesses in national accounts, government financial operations' statistics, and balance of payments data. The Fund continues to provide technical assistance to improve the quality of statistics and to help strengthen capacity for economic management.

33. The prior actions for the program (Table C) were met in December 2008 and February 2009, and Executive Board consideration of the first review of the new PRGF arrangement is expected in October 2009. The quantitative performance criteria for end-June 2009 and end-December 2009, as well as the structural performance criterion and benchmarks for 2009, are detailed in Tables A and B of the MEFP. Semi-annual program reviews are envisaged.

34. São Tomé and Príncipe's external financing needs in 2009 amount to $187.6 million, expected to be covered mainly with official grants and concessional loans (Table 7). The proposed access under the new PRGF-supported program is 35 percent of quota, equivalent to SDR 2.59 million, distributed in seven equal tranches (Table 9).

Table 1.

São Tomé and Príncipe: Selected Economic Indicators, 2006–13

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

Central bank (BCSTP) buying rate.

Projected base money growth for 2008 reflects the high level of base money at the end of 2007, which was significantly reduced in subsequent months through the BCSTP's foreign exchange sales.

Includes HIPC and MDRI debt relief.

A new definition is adopted from 2008, retroactively, to exclude oil revenue, grants, interest earned, scheduled interest payments, and foreign-financed capital outlay.

In percent of exports of goods and nonfactor services. Includes HIPC and MDRI debt relief.

Gross reserves exclude the National Oil Account and commercial banks' foreign currency deposit at the BCSTP in order to meet the reserve requirement for their foreign currency deposits or as application deposits for new licensing.

For 2008, includes the proceeds from the privatization of the government's share in the fuel distribution company (ENCO) of $32 million. Of this, $10 million were used to pay back some of ENCO's debt to Sonangol, $0.96 million were used to audit the transaction and $21.4 million were put in the central bank to boost reserves.

Imports of goods and nonfactor services excluding imports of investment goods and technical assistance.

For 2010, based on the assumption that dispute will be settled to allow disbursement of bonuses for Blocks 5 and 6 ($26 million).

Table 2.

São Tomé and Príncipe: Financial Operations of the Central Government, 2006–09

(Billion dobra)

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

Includes revenue from Nigeria's oil program - Arcadia.

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

A new definition is adopted from 2008, retroactively, to exclude oil revenue, grants, interest earned, scheduled interest payments, and foreign-financed capital outlay.

For 2006, refers to a temporary accumulation of technical arrears with bilateral creditors, which was pending reconciliation of debt records.

For 2008, includes the proceeds from the privatization of the government's share in the fuel distribution company (ENCO) of $32 million. Of this, $10 million were used to pay back some of ENCO's debt to Sonangol, $0.96 million were used to audit the transaction and $21.4 million were put in the central bank to boost reserves.

Table 3.

São Tomé and Príncipe: Financial Operations of the Central Government, 2006–13

(In percent of GDP)

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

Based on 2001 census and survey-based GDP series.

Includes revenue from Nigeria's oil program - Arcadia.

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

A new definition is adopted from 2008, retroactively, to exclude oil revenue, grants, interest earned, scheduled interest payments, and foreign-financed capital outlay.

For 2006, refers to a temporary accumulation of technical arrears with bilateral creditors, which was pending reconciliation of debt records.

For 2008, includes the proceeds from the privatization of the government's share in the fuel distribution company (ENCO) of $32 million. Of this, $10 million were used to pay back some of ENCO's debt to Sonangol, $0.96 million were used to audit the transaction and $21.4 million were put in the central bank to boost reserves.

Table 4.

São Tomé and Príncipe: Summary Accounts of the Central Bank, 2006–09

(million dobra)

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

Includes guarantee deposits by prospective financial institutions waiting for operating licenses.

Includes prospective disbursements under new PRGF arrangement.

Excluding NOA and banks' reserves in foreign currencies.

Imports of goods and nonfactor services excluding investment goods and technical assistance of the year.

Table 5.

São Tomé and Príncipe: Monetary Survey, 2006–09

(million dobra)

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Sources: São Tomé and Príncipe authorities and IMF staff estimates and projections.
Table 6.

São Tomé and Príncipe: Balance of Payments, 2006–13

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

Following the closure of the national airline, tourism receipts fell in 2006 and 2007. The airline was privatized in 2007.

Include HIPC and MDRI debt relief delivered at the completion point in 2007.

From 2006, FDI in the hotel sector increases.

In percent of exports of goods and nonfactor services.

Gross reserves exclude the National Oil Account and commercial banks' foreign currency deposit at the BCSTP in order to meet the reserve requirement for their foreign currency deposits or as application deposits for new licensing.

For 2008, includes the proceeds from the privatization of the government's share in the fuel distribution company (ENCO) of $32 million. Of this, $10 million were used to pay back some of ENCO's debt to Sonangol, $0.96 million were used to audit the transaction and $21.4 million were put in the central bank to boost reserves.

Imports of goods and nonfactor services excluding imports of investment goods and technical assistance.

Table 7.

São Tomé and Príncipe: External Financing Requirements and Sources, 2006–13

(Millions of U.S. dollars)

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

Include HIPC and MDRI debt relief delivered at the completion point in 2007.

Include MDRI assistance from the IMF as a stock of debt reduction.

Include aid in kind received from Nigeria (Arcadia oil).

Include projected disbursements under the new PRGF.

Table 8.

São Tomé and Príncipe: Financial Soundness Indicators for the Banking Sector, 2005–081/

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Source: São Tomé and Príncipe authorities and MCM technical assistance report November 2008.

Preliminary data as of June 2008. The BCSTP is still in the process of finalizing the financial soundness indicators.

Updated from the data in the technical assistance report based on the information by the BCSTP. The latest data is as of September 2008.

Not comparable across years due to the change of the definition of past-due loans. The BCSTP is currently in the process of making them comparable.

Table 9.

São Tomé and Príncipe: Schedule of Disbursements Under the PRGF Arrangement, 2009-11

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Source: IMF
Table 10:

Sao Tome and Principe: Indicators of Capacity to Repay the Fund, 2008–13

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Sources: Sao Tome and Principe authorities; and Fund staff estimates and projections.

Assumes disbursement of SDR 0.74 million in 2009 under new three-year PRGF arrangement.

After HIPC and MDRI debt relief. Including IMF repurchases and repayments in total debt service.

35. Given the strong adjustment envisaged under the program, the country can be expected to meet its future obligations to the Fund. By the end of the new arrangement, São Tomé and Príncipe's outstanding aggregate use of Fund resources would be equivalent to 68 percent of quota, totaling SDR 5.1 million. The authorities agreed to receive a Fund safeguard assessment mission in 2009.

V. Staff Appraisal

36. The economic outlook is broadly favorable, but success will hinge on the authorities' ability to strengthen fiscal and monetary policy implementation in the face of significant risks. Fund engagement is important to underpin performance and resist expenditure pressures, especially given the heavy electoral calendar during the program period.

37. Strong fiscal policy implementation is needed to achieve stability. The authorities are aware of the impact that fiscal deficits have had on inflation in recent years, and know that monetary policy alone cannot shoulder the burden of reducing inflation, given the need to preserve an adequate level of international reserves. Moreover, the country remains vulnerable to debt distress, especially in a no-oil scenario. Thus, the domestic primary fiscal deficit should continue on a consolidation trajectory.

38. The drive to increase treasury-funded capital spending financed with privatization proceeds is welcome. In the short run, it will help support economic activity. In the longer term, it will help address infrastructure deficiencies which hamper non-oil growth. The authorities will need to carefully control this spending to ensure value for money.

39. Staff welcome the recent progress in fiscal structural reforms and encourage steadfast implementation. Especially important are efforts to strengthen tax administration and collect tax arrears, along with putting in place a fully-functioning computerized public financial management system. Phasing out the current implicit subsidy on utility payments and preventing the emergence of new arrears would help reduce rigidities in the budget structure and improve macroeconomic management.

40. The central bank must continue using exchange rate auctions to control domestic liquidity, subject to the condition of keeping adequate reserve coverage. The actions taken by the BCSTP to control liquidity in 2008 send a positive signal of the authorities' commitment to reduce inflation. Continued close coordination between the BCSTP and the Ministry of Finance is needed to ensure timely sterilization and effective liquidity control. However, to limit the associated impact on foreign reserves, ongoing fiscal discipline is essential. The government agreed to stand ready to reduce expenditure commitments, if necessary, to help meet the program's NIR target.

41. The recent improvements in the central bank's regulatory and supervision functions are welcomed and should continue. With the support of its development partners, the central bank should persevere in this area, both for the stability and development of the financial sector.

42. The authorities intention to peg the dobra to the euro is well justified, but raises the stakes for macroeconomic management. A peg to the euro can help deliver low inflation and deepen integration with the country's main economic partners. However, strict fiscal discipline will be necessary for the sustainability of a fixed exchange rate.

43. Sustaining growth and reducing poverty in the medium term will require moving ahead with priority structural reforms. These include developing the financial sector and implementing regulatory reforms to remove the impediments to private sector development. Upgrading the country's infrastructure can help develop the supply side of the economy over the medium term, improve growth prospects, and reduce poverty.

44. Medium term economic prospects are good, but important risks exist. The main challenge facing the authorities in the next few years is to ensure macroeconomic stability by strengthening policy implementation. This becomes all the more important given the uncertain oil revenue prospects.

45. Based on the authorities' policy commitments, staff recommends approval of the authorities' request for a new PRGF-supported arrangement. The country continues to need close Fund engagement in formulating, implementing, and monitoring macroeconomic policies. As in the past, the new PRGF would also provide an important catalytic role for continued external donor financing and support.

Appendix I—Letter of Intent

São Tomé, February 6, 2009

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Mr. Strauss-Kahn:

1. São Tomé and Príncipe reached the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative in March 2007 and satisfactorily completed its last three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) in June 2008. In 2007, São Tomé and Príncipe received debt relief from the IMF under the Multilateral Debt Relief Initiative (MDRI). São Tomé and Príncipe has also received considerable technical assistance from the IMF, which we have incorporated into our medium-term economic program.

2. The new government of the Democratic Republic of São Tomé and Príncipe has put forward a program of action with three main priorities:

  • Promotion of food security through the implementation of programs that help increase domestic production of basic staples, reducing external dependence;

  • Improving basic infrastructure and mitigating power supply problems;

  • Promoting tourism as an engine of growth of economic activity

3. The choice of the first two of these areas reflects the fact that a large proportion of our population earn a living in small scale agriculture and fishing, and that enabling them to increase their productivity and to bring their products to market will not only help them, but will benefit the population at large, which has suffered as a result of the high prices and frequent scarcity of imported foodstuffs. Addressing these two areas will also improve the conditions for the development of our country's tourism potential while contributing to macroeconomic stability.

4. Our program is built on the premise that macroeconomic stability is a necessary condition for achieving durable gains in those three priority areas and for our broader objectives of development and poverty reduction. Our country has seen robust economic growth in the last few years, and the government strives to make progress in economic stability and structural reforms in a difficult external economic environment. Still, important challenges persist, including reducing inflation, implementing a fiscal policy that takes into account the uncertainty that surrounds the oil sector, and further strengthening institutions.

5. Following discussions in São Tomé between the government and Fund staff in November 2008, understandings ad referendum were reached on targets for policies that could form the basis for a Fund-supported economic program for 2009-2011. The government has presented its strategy in a Memorandum of Economic and Financial Policies (MEFP), and committed itself to a set of structural and quantitative performance criteria for 2009 (Tables A and B). Two prior actions will be met before the new PRGF-agreement is discussed at the IMF's Executive Board (Table B).

6. The key components of the 2009–11 program are:

  • A macroeconomic framework for price stabilization and sustained high growth;

  • Steady, gradual fiscal adjustment, curbing the growth of current expenditure and strengthening tax collections, while allowing increases in pro-poor and priority capital spending;

  • Gradual use of the balances in the government's National Oil Account and of the proceeds from privatization operations, and;

  • Structural reform in the areas of public enterprises, public expenditure management, banking sector prudential regulation, labor regulations, and business climate.

7. To support these objectives and policies São Tomé and Príncipe hereby requests a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF), covering the period March 2009-December 2011, in a total amount equivalent to SDR 2.59 million (35 percent of quota), to be provided in seven equal semi-annual disbursements.

8. The Government believes that the policies set forth in the attached MEFP are adequate to achieve the objectives of its program, but it will take additional measures if needed. São Tomé and Príncipe will consult with the Fund on the adoption of these measures, and in advance of the revisions to the policies contained in the MEFP, following the Fund's policies on such consultation. São Tomé and Príncipe will provide the Fund with the necessary data for monitoring purposes on a timely basis. During the program period, the government will not introduce or intensify any exchange rate restrictions or multiple currency practice that are inconsistent with Article VIII of the Fund's Articles of Agreement, or introduce or intensify import restrictions for balance of payments purposes.

9. We propose that the Fund carry out the reviews under the 2009 program in July, 2009 and March, 2010, based, respectively, on the observance of end-June 2009 and end-December, 2009 quantitative performance criteria, and a structural performance criterion for end-September 2009, as established in Tables A, B, and C of the attached memorandum. Subsequent reviews would be based on end-June and end-December targets that will be determined in due course.

10. The government intends to divulge the contents of this Letter of Intent, those of the attached MEFP and Technical Memorandum of Understanding (TMU), and the IMF staff report on the request for a three-year PRGF, and authorizes the IMF to arrange for them to be posted on the IMF website, subsequent to Executive Board approval of the arrangement.

Yours truly,

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Attachments: Memorandum of Economic and Financial Policies

Technical Memorandum of Understanding

Appendix I—Attachment I: São Tomé and Príncipe: Memorandum of Economic and Financial Policies: February 6, 2009

I. Introduction

1. The Government of São Tomé and Príncipe has embarked on a medium-term program for poverty reduction and growth that can be supported by the International Monetary Fund. The program's three priority areas are increasing food security through programs that boost domestic food production, improving basic infrastructure, and promoting tourism as an engine of growth, as explained in the Programa do XIII Governo, while continuing to ensure macroeconomic stability, which is a necessary condition for the pursuit of our main priorities in a sustainable way. To achieve these objectives, the program will implement rigorous financial policies, an ambitious program of investment (part of which is set out in Table C—a prior action) in key infrastructure areas, and well targeted structural reforms, while safeguarding pro-poor and priority capital spending.

II. Recent Economic Developments

2. Economic activity remained robust in 2007, with real GDP growth estimated at 6 percent. Tourism-related construction, communication, commerce, and other services sectors continued to be the main drivers of output growth, boosted by foreign direct investment. Cocoa exports increased on the back of rising world market prices and higher export volume but the traditional agriculture sector remains depressed. During 2008, we concluded debt reduction agreements with France, Portugal, and Spain, and with the International Fund for Agricultural Development and the European Investment Bank.

3. Consumer price inflation reached 27.6 percent in 2007 and 37 percent (year-on-year) at the end of June 2008, declining to 30.2 percent in October 2008. These high readings reflect in part high world prices for food and fuel. In fact, the government raised electricity and water tariffs (by 40-60 percent) and the domestic retail prices of petroleum products (by 14-25 percent) in September 2007; prices of fuels were raised again in July 2008 (by 9-18 percent). Occasional episodes of scarcity of certain goods due to failures in the commercialization chain have further complicated the evolution of prices. In addition, faster-than-programmed liquidity growth in 2007 contributed to the depreciation of the dobra, which fell 26 percent against the euro, the main import currency, in 2007, giving a further boost to inflation. In 2008, however, liquidity control improved, contributing to a more stable exchange rate, while import prices have moderated. As a result of the retreat of world oil prices, as of October 2008, most domestic fuel prices were broadly in line with international prices.

4. Despite some slippages in the past few years, the government has made progress in fiscal consolidation. The primary domestic deficit is programmed to fall from nearly 11 percent of GDP in 2005–2006 and 8.5 percent in 2007 to about 6.6 percent in 2008. In the first half of 2008, the deficit was on course to fall as planned on a commitment basis; but domestic expenditure arrears emerged due to a shortfall in domestic revenue, delays in the approval of the budget, and some reallocation of resources. Domestic revenues have been broadly stable as a ratio to GDP in the past few years, with an increasing weight of indirect taxes (excises and import duties); even so, tax arrears have accumulated. Meanwhile, government expenditure has gradually fallen as a percent of GDP, although spending on salaries and goods and services was nearly 3/4 of domestic revenue in 2008 and current spending continues to exceed domestic revenue.

5. The stock of resources available to finance the domestic primary deficits is now lower than we had anticipated a year ago. Large oil signature bonuses in 2005 and 2007 replenished the National Oil Account (NOA), and the World Bank provided a large budget grant in 2008; we have used the bulk of these resources in the last few years as planned. However, an expected payment of $26 million for blocks 5 and 6 of the Joint Development Zone (JDZ) did not materialize in 2008, and is not expected in the foreseeable future. Although we received $21 million in privatization proceeds in 2008, these are smaller than the shortfall in signature bonuses, and should not finance current expenditures. This leaves the government in a more difficult position at the end of 2008 than it had been anticipated a year ago, when it had been projected that the NOA would climb to $38 million this year; instead, the NOA stood at $12 million in October 2008. At the same time, future oil revenues remain as distant as ever: exploratory drilling in blocks 2 and 4 of the JDZ is now expected to take place in the second half of 2009, further pushing back the eventual date for initiation of production to 2015 or 2016, if the existence of commercially viable reserves were to be confirmed.

6. In 2008 the Central Bank (BCSTP) has worked actively to control liquidity through the sale of foreign exchange, a task made possible by the close coordination between the Ministry of Planning and Finance and the bank. While maintaining the usable net international reserves above 3 months of imports, the BCSTP sold $8.1 million in eleven foreign exchange auctions in the first ten months of 2008, helping reduce annual base money growth to 16.5 percent in October 2008. This has curbed the depreciation of the dobra against both the U.S. dollar and the euro in the second and third quarters of the year, which is expected to contribute to moderating inflation in the months ahead.

7. The exchange rate of the dobra remains market-based, although the government is considering a reform of the exchange rate system. The BCSTP intervenes in the exchange rate market with the objective of managing liquidity, while allowing the market to determine the exchange rate. The government has begun conversations with Portugal on a possible exchange rate agreement along the lines ofthat in force between Portugal and Cape Verde. Under such an agreement, São Tomé and Príncipe would peg its dobra to the euro, and Portugal would provide support to that peg with a line of credit, within the context of a jointly agreed program of sustainable macroeconomic policies for São Tomé and Príncipe. The two governments have formed a bi-national commission to conduct technical discussions during the months ahead.

8. Several important structural reforms were implemented recently, but the overall pace of reform needs to be accelerated. In 2008, the National Assembly approved the AML/CFT law, a new investment code, and the direct tax reform package. In the banking sector, the BCSTP issued various prudential regulations and strengthened bank licensing requirements. In addition, the government sold a controlling stake in the national fuel distribution company, ENCO, in September 2008. However, our AML/CFT framework still needs improvement. Besides, frequent government changes have had adverse effects on the implementation of other reforms, and the remaining structural problems are significant.

9. Public enterprise reform remains a challenge. Under a reform strategy for the water and electricity company, EMAE, utility tariffs were increased and, for a small number of customers, prepaid electricity meters were installed to strengthen payment collection. Nevertheless, continued collection problems have resulted in the financial bankruptcy of the company. Also, the water and electricity infrastructure needs repair and investment, and EMAE's operational efficiency remains low. Meanwhile, large arrears in payments among EMAE, ENCO and the government have continued to accumulate. Similarly, ENASA, the airport operator, has difficulties in covering its operating costs, while ENAPORT, the seaport managing company, suffers from excessive costs and low efficiency.

III. Medium-Term Economic Policy Framework (2009-2011)

10. In order to pursue the development objectives outlined in the Programa do XIII Governo, the strategy to be followed will emphasize developing productive capacity in agriculture, with a special emphasis on the provision of material and technical support for small producers; rehabilitating and building key infrastructure, especially in electricity generation, transportation and communications; and creating conditions for the development of private business, especially in the tourism sector. The government is seeking support for this strategy from its development partners and engaging with reputable private firms to help implement it. To create a suitable environment for its overall strategy, the government is committed to implement policies that foster macroeconomic stability. Early in 2009, the government will present its strategy in fuller detail, in the form of a new Strategic Plan for National Development.

11. The macroeconomic goals for the next three years are the following: (i) an average rate of GDP growth of 6.3 percent over 2009-2011; (ii) gradually reducing inflation to single digits; (iii) increasing the tax base and strengthening domestic revenue collection; (iv) improving the management and effectiveness of public expenditure; (v) continuing the process of fiscal consolidation to ensure the sustainability of public finances even in an adverse oil scenario; (vi) maintaining international reserves at a level sufficient to cover 4 months of imports; (vii) preserving banking system stability and strengthening the ability of the banking system to support the development of the real sector; and (viii) facilitating a smooth transition toward a new exchange rate regime.

12. The acceleration of real economic growth is expected to come largely from construction, fueled by the public infrastructure program and foreign direct investment, in particular by the start of the work on the new deep seaport, which is expected for 2010. We also expect to see improvements in production in the agricultural sector as a result of government interventions in support of small farmers. Tourism will continue to contribute to economic activity now that a major hotel chain has expanded its capacity in São Tomé and Príncipe and additional flights to the country are in operation, resulting in a reduction of ticket prices. In order to foster a sustained dynamic performance by the real economy, the government will strengthen its own investment program and implement reforms aimed at stimulating private investment, including by modernizing the labor and commercial regulatory frameworks.

13. Fiscal consolidation will continue over the medium term. We aim to reduce the primary domestic deficit from 6.6 percent of GDP in 2008 to about 3.3 percent by the end of the program period in 2011, with the goal of stabilizing it below 3.0 percent by 2013. We will redouble our efforts to mobilize domestic revenues by widening the tax base and increasing tax compliance in order to create fiscal space for necessary public expenditure. We will also follow through on the implantation of the SAFE, which will help the government improve the management of public resources. We will also prioritize spending that directly supports the attainment of the three strategic priorities of the government program; in particular, we will ensure that maintenance and other capital expenditures are not crowded out by current expenditure. Over the next three years we will put into effect law 5/97, which mandates full transparency in the reporting and budgeting of the compensation of public servants and a decompressed salary structure, by granting salary increases in line with the growth in real productivity. The government will also continue advancing in the restructuring of the public enterprise sector and the elimination of inter-enterprise arrears. In pursuing its fiscal goals, government policies will be guided by the principles of avoiding nonconcessional and monetary financing of fiscal deficits. In addition, the government will study the possibility of using an approach towards proceeds from privatization operations similar to the approach we use in the case of oil revenues, given the strong similarities between these two sources of financing and the proven worthiness of our Oil Revenue Management Law. Under such an approach, a dobra-denominated account could be created at the BCSTP where proceeds from the sale of ENCO shares, and other privatization operations that may take place in the future, would be deposited, and starting in 2010, one fifth of the starting balance ofthat account each year would be available to finance the domestic primary deficit.

14. Monetary policy will target a reduction in inflation to low double digits early in the program period and to single digits by its end. For as long as the current monetary and exchange rate framework remains in effect, the BCSTP will continue to use foreign exchange auctions to control liquidity and moderate currency depreciation. The central bank will also continue strengthening banking sector supervision and is committed to take the necessary steps to reduce the risk of distress in the banking system, which has been expanding rapidly. The framework for banking regulation will be further improved by 2010; other reforms, such as the establishment of a Bureau of Credit registry (structural benchmark for end-December) and the introduction of a network of automatic teller machines and debit cards, will tend to improve the productivity of the banking system and its ability to support the functioning of the real economy.

15. The government is studying the possible modification of the country's exchange rate regime, for which it is discussing an agreement with Portugal. It expects the joint technical work with the Portuguese authorities to be concluded during the course of 2009, and to make a final decision once this preliminary work is concluded. The government is aware of the need for the strictest discipline in the conduct of fiscal policy for the viability of a fixed exchange rate. The decision on a new regime will be made only after the most careful consideration has been given to these issues and to the design of a transition strategy. The timeline just outlined also allows the BCSTP to make headway in the current disinflation process in advance of the possible pegging of the exchange rate.

16. External inflows (both private and official) are expected to continue to finance the current account deficits, which are projected to remain sizable during 2009-11, reflecting still high import prices and strong demand for FDI-related imports. However, the macroeconomic outlook for São Tomé and Príncipe is not immune to the risks from the ongoing global crisis. Of particular note are risks to the financing available to foreign investors interested in São Tomé and Príncipe, risks to the flow of resources from development partners, and risks from the still high prices of food imports. The focused implementation of our program will help reduce the country's vulnerability to those risks.

IV. Macroeconomic Policies for 2009

17. For 2009, our macroeconomic framework aims for a real GDP growth of at least 5.5 percent, reduce annual inflation to 16 percent by the end of the year, and keep international reserves at no less than 4 months of imports. We will make every effort to speed up structural reforms, which are critically important for addressing our economy's supply constraints, restore fiscal sustainability over the medium term, and mobilize support from the World Bank and other multilateral and bilateral development partners.

A. Fiscal Policy

18. The Government plans to further reduce the domestic primary deficit to 4.5 percent of GDP in 2009, from 6.6 percent in 2008. Fiscal consolidation in the 2009 budget would come mainly from the containment of current expenditure growth, because the recently approved direct tax reforms would be largely neutral, while other revenues in 2009 are of moderate size and/or nonrecurring. The domestic primary deficit is expected to be financed by the remainder of the IDA Development Policy Operation (DPO) grant ($1.5 million), a draw-down of $2.4 million from the National Oil Account (NOA), and a drawdown of other government balances with origin in the privatization of ENCO for an amount of about $4 million. The government is seeking additional budget support from its development partners; if such support is obtained, the primary deficit may increase by the equivalent of up to 0.5 percent of GDP. To avoid financing consumption with the liquidation of assets, government capital expenditure will be no smaller than the drawdown of privatization related resources. If the execution of the priority treasury funded capital projects listed in Table C of this MEFP is faster (slower) than in our baseline projection, the primary deficit limit will be adjusted upward (downward) by up to 62 billion dobras, as explained in the attached Technical Memorandum of Understanding. The additional capital spending would be financed with resources from privatization operations. During the two reviews of the program in 2009, the Government and Fund staff, with help from the World Bank, will monitor the execution of capital spending under this provision, and will make adjustments if it is needed to ensure macroeconomic stability. There will be no recourse to domestic banking system credits.

19. On the revenue side, the Government will focus on the following actions:

  • Strengthening tax and customs administration. The tax authorities will step up efforts to audit tax returns, keep track of large tax payers, and compile and collect tax arrears, particularly from large tax payers, all with support from the Portuguese authorities and the U.S. Millennium Challenge Corporation (MCC). To facilitate tax arrears collections, the Government intends to set up a tribunal to settle tax disputes by 2011.

  • The government will reform the tax legal framework to grant the tax authority power to accept limited debt deferrals—allowing tax obligations to be paid in installments (structural benchmark for end-September, 2009). This change will help prevent the accumulation of chronic, un-payable tax arrears. As an interim measure to deal with existing arrears, and for a limited time, the Government may introduce a temporary phased payment facility for taxpayers who come forward to regularize their tax debts. A regulation will establish the cases in which the taxpayer may benefit from a partial pardon of some overdue taxes, late interest and fines.

  • In addition, the government will receive some one-time payments from oil firms, via the JDA, and from the new concessionaires in the seaport and airport projects. The government will be careful to ensure that the availability of these temporary resources does not lead to the creation of permanent expenditure obligations.

20. In the period ahead, the Ministry of Planning and Finance will strengthen expenditure management in order to prevent the recurrence of expenditure overruns. We will follow through on the implementation of the computerized public financial management system (SAFE/SAFINHO). Specifically, the Ministry of Planning and Finance will procure and install IT equipment and software (structural performance criterion for end-September, 2009) and establish a Directorate of Accounting and an IT office (structural benchmark for end-September, 2009). We intend to make progress in training users of the system at the level of spending entities in the following months.

21. Other expenditure measures planned for 2009 include:

  • Public wage reform. As part of its civil service reform strategy and to increase transparency, the Government has the intention over the next three years to (i) integrate expenditures in goods and services that directly support civil servants into the fringe benefits account; (ii) incorporate into the salary some elements of the compensation package which have so far been excluded; and (iii) decompress the salary structure. The steps in this area aim to make fully effective law 5/97. A comprehensive wage study will be carried out in 2009, which will allow the introduction of a revised government salary structure with incentives for productivity in subsequent years.

  • Personnel costs. The 2009 budget acknowledges the need to update the compensation package for public servants. The increases in salary and benefits will permit total real remunerations to rise broadly in line with productivity growth in 2009. This is sufficient to ensure the recovery of the purchasing power of civil servants' compensation packages, while maintaining the same level of the wage bill and fringe benefits in the central government as a percent of GDP relative to 2008 (8.6 percent of GDP).

  • Adjusting non-wage current spending. Discretionary expenditures on goods, services, and other items, especially outside those priority areas, will be restrained as needed to stay within available resources.

  • Assisting the most vulnerable segments of the population. We plan to achieve this goal by strengthening implementation of HIPC-related expenditure programs and selected targeted schemes, such as the school meals program. The latter is key to help the population cope with high import prices for food. Our work to improve our public financial management will also help monitor pro-poor spending more effectively.

  • Improving the execution of public investment projects. Increasing infrastructure investment, especially in transportation and the electricity sector, will help address supply bottlenecks and enhance growth potential. We will work closely with our external development partners to accelerate implementation of foreign-funded projects, while ensuring adequate resources for Treasury funded investment projects and maintenance.

  • If the revenues and budget support which are still to be verified do materialize, the government will allow selected current expenditure to rise.

22. To strengthen the monitoring and execution of the 2009 budget, the Government will further improve the public financial management system. With assistance from multilateral and bilateral donors, efforts will be made to put in place new modules to implement the public accounting system, prepare regulations for the organic budget law (SAFE law), and develop SAFINHO into a fully fledged e SAFE system incorporating all public accounts, including patrimony and debt. The government will make every effort to avoid the emergence of payments arrears in 2009.

23. The Government will review with the Fund the medium-term fiscal and financing strategy, including the use of NOA resources, after the information from the exploratory drilling in mid/late 2009 becomes available. If prospects for oil production and exports were to deteriorate significantly relative to current expectations of a start of production by 2015/16, the fiscal program will be revised.

B. Monetary, Financial, and Exchange Rate Policies

24. Under the current monetary and exchange rate framework, to keep inflation on a downward path, the BCSTP must sustain its effort to retire excessive liquidity, thus controlling dobra base money growth. Our monetary program for 2009 aims to keep base money growth in line with the program's objective of reducing inflation to 16 percent by year end and with the projected increase in demand for real monetary balances. Weak financial intermediation and high currency substitution in our economy severely limit the effectiveness of interest rates and other monetary policy instruments. We therefore have to rely primarily on fiscal restraint and foreign exchange sales to control liquidity. Therefore, the BCSTP will continue to use foreign exchange auctions actively, taking care of maintaining at all times a strong level of reserves. Nevertheless, at some points during the year, it may be necessary for the BCSTP to temporarily provide dobra liquidity to the banking system and to buy back foreign exchange; in those cases the BCSTP may conduct reverse foreign currency auctions and / or make credit available to banks.

25. The BCSTP and the Treasury Department of the Ministry of Planning and Finance will continue their close cooperation, which in 2008 helped ensure that the BCSTP could take timely action to offset the monetary impact of budget-based operations. Regular information-sharing among the Ministry of Planning and Finance and BCSTP officials will include the Treasury's cash outlays (in both domestic and foreign currency), which are important for the BCSTP's liquidity forecast and foreign exchange market operations. Public expenditure is a major determinant of base money creation and the BCSTP does not have instruments to conduct open market operations, other than foreign exchange auctions; therefore, the Government will stand ready to reduce its own spending if this were to be necessary to meet the program's NIR target. This would in a first instance involve the selected expenditure items referred to in the last bullet of paragraph 21.

26. The BCSTP is committed to deepening foreign exchange market reform. Accepting the obligations under Article VIII, Sections 2(a), 3, and 4, of the IMF's Articles of Agreement remains our goal over the medium term. To eliminate the remaining multiple currency practice, the BCSTP will review possible measures to ensure that the various exchange rates in Sao Tome and Principe remain within the two percent for spot transactions, including a new mechanism for setting the daily official exchange rate, based on a careful review of domestic market conditions. During the program period, we intend to take measures, within our possibilities, to eliminate the exchange restriction, arising from the new investment law, regarding the transferability of net income from investment, and we also intend to discuss with staff measures to eliminate the multiple currency practice and put in place a time-table for its removal.

27. The BCSTP will continue with its communication strategy of informing the market of its monetary and exchange policies. In addition to the BCSTP regular meetings with the banking community and the media, data on monetary and macroeconomic aggregates will be posted daily on the central bank's website without delay. The BCSTP will also post yearly audited financial statements. Its budget execution and profit and loss accounts on a cash basis will be reported at least quarterly, as part of the program's monetary data.

28. We intend promptly to implement the recently approved AML/CFT law and to improve it further with the help of our development partners, and to continue to strengthen supervision. The BCSTP has introduced stricter requirements for issuing bank licenses, including a higher minimum capital requirement, has implemented various prudential regulations, and started off-site inspections. The BCSTP will complete the first round of off-site inspections and finalize the first Financial Conditions Quarterly Report in March 2009. The central bank will also start on-site bank inspections (structural benchmark for end-March 2009) and complete the first round for all banks by end-2009. To reduce the risk of bank distress arising from non-performing loans, the BCSTP, with IMF technical assistance, will further strengthen its capacity to enforce banking supervision regulations through training, implementing the new chart of accounts and quarterly financial reporting by banks, and setting up a Bureau of Credit Registry (structural benchmark for end-December, 2009) to facilitate credit information sharing among banks. The BCSTP plans to prepare a framework to facilitate mergers and acquisitions among banks by 2010.

C. Structural Reforms

29. Reducing the cost of investing and doing business in São Tomé and Príncipe is crucial for developing our economy's productive and export potential. The Government intends to press ahead with the following reforms: (i) enact and implement a revised labor code (structural benchmark for end-June, 2009); (ii) submit draft legislation, prepared in consultation with the private sector, to create the “one-stop window” - “guichet unico”-(structural benchmark for end-September, 2009), reduce red tape and other regulatory impediments to start a business ; and (iii) with external technical assistance, complete the revision of the commercial codes (structural benchmark for end-December, 2009). Revisions to the labor code would aim more clearly to define hiring and firing rules, remove ambiguities in contractual employment arrangements, and increase labor market flexibility by eliminating regulatory impediments.

30. We will build on our recent progress to further enhance transparency and accountability in managing current and prospective oil resources. The Minister of Natural Resources and Environment issued an order in August 2007 verifying São Tomé and Príncipe's formal adherence to the Extractive Industries Transparency Initiative (EITI). A national coordinator for implementation of the EITI has also been appointed. More recently, the International Board of the EITI has accepted São Tomé and Príncipe as a Candidate State of the Initiative, in recognition of our serious commitment to transparently manage oil revenues. To make further progress, we will adopt the Petroleum Sector Strategy and submit to the NA the legal framework for the EEZ including the Framework Law On Oil-Related Activities, the Taxation Law, and the Production-Sharing Contract Model. The National Oil Agency will strive to conduct the licensing round for the EEZ transparently and consistent with the ORML and the EITI.

31. Pressing ahead with reforms in key sectors, such as agriculture, transportation, and energy, is of fundamental importance if living standards are to improve on a sustainable basis. We will continue working closely with our development partners to promote agricultural marketing, commercial fishing, and tourism-related services. The government will put into effect the automatic mechanism to update fuel prices on a monthly basis (structural benchmark for end-June) in line with the variation of world prices and the exchange rate of the dobra. We will also address EMAE's financial and technical weaknesses through tariff and other reforms, increase the productivity of ENASA and ENAPORT through outsourcing (e.g. cleaning, security guards), and continue our work to attract investment to upgrade our infrastructure, as we have done in the case of the seaport.

D. Debt Management

32. The Government is fully aware of the importance of ensuring debt sustainability after HIPC and MDRI debt relief. We will refrain from new external borrowing on commercial terms, and redouble our efforts to seek full delivery of HIPC debt relief from the remaining official creditors. We have initiated discussions on debt cancellation with Angola and the Arab Bank for Economic Development in Africa (BADEA) and will try to conclude these agreements as soon as possible. We plan to introduce the Framework Law for Public Debt; a first draft is expected by end-September 2009 (structural benchmark), and a definitive draft will be submitted to the National Assembly in December 2009.

E. Capacity Building

33. São Tomé and Príncipe continues to need external support to build capacity for policy monitoring and implementation. Our bilateral and multilateral development partners are providing support for our public financial management reform, as well as for strengthening tax and customs administration and macroeconomic analysis at the Ministry of Planning and Finance. We are also benefiting from advice on how to improve the business environment. We will welcome additional support from the IMF in the areas of banking supervision, public finances, and statistics. To facilitate the completion of the updated safeguards assessment before the first review under the arrangement, we will provide all the necessary information and will welcome a safeguards assessment mission as deemed necessary in 2009. We will also welcome a mission from the IMF's Legal Department for enhancing our AML/CFT framework.

34. We will further improve our economic statistics. With support from our development partners, we will revise our national income and product statistics. Further progress will also be made to improve budget classification and the consistency between monetary and fiscal data.

F. Program Monitoring

35. To facilitate expenditure control and liquidity management, performance criteria and indicative targets for selected fiscal and monetary variables are set for 2009 (Table A). These include indicative ceilings for dobra base money. The non-accumulation of external payment arrears (as defined in the attached Technical Memorandum of Understanding) is a continuous performance criterion, as are the injunctions against imposing or intensifying restrictions on current payments, introducing new or modifying existing multiple currency practices, concluding bilateral payments agreements that are inconsistent with Article VIII of the Fund's Articles of Agreement, or imposing new or intensifying existing import restrictions for balance of payments purposes. A number of structural benchmarks and performance criterion are detailed in Table B.

Table A.

São Tomé and Príncipe: Performance Criteria and Indicative Targets for 2009

(Billions of dobras, cumulative from beginning of year, unless otherwise specified)

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Sources: São T omí ana Principe authorities; and IMF staff estimates and projections.

The ceiling will be adjusted downward or upward according to definitions in the TMU.

The ceiling will be adjusted downward by the amount of accumulated domestic arrears.

Excluding the National Oil Account (NOA) at the Central Bank .

The floor on net usable international reserves will be adjusted upward or downward according to definitions in the TMU.

This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (August 24, 2000), but also to commitments contracted or guaranteed for which value has not been receive

Only applies to debt with a grant element of less than 50 percent (defined as non-concessional for least developed countries).

Debt is defined as in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (August 24 2000).

BCSTP targets the dobra component of base money, rather than total base money, since the latter includes a large, volatile foreign currency component.

Official external program support, as defined in the TMU, valued at the program exchange rate .

Table B.

São Tomé and Príncipe: Prior Actions and Structural Performance Criteria and Benchmarks for 2009

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Table C.

São Tomé and Príncipe - Implementation Plan of the Government's Investment Program, 2009 1,2,3

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This matrix corresponds to the 2009 government plan for investment on roads, bridges, schools, water, and power, to be financed using 2008 privatization proceeds. It includes spending on new construction, rehabilitation, and maintenance.

This matrix is updated on a quarterly basis and will be reported to the IMF as part of the statistical requirements of the PRGF-supported program.

Expenditure on wages and salaries and the purchase of goods and services related to the projects will not be classified as capital expenditures.

These amounts (in millions of dobras) are indicative, since final figures will be contingent on the results of the procurement process (which follows international best practices, having been designed with World Bank and ADB support).

Due to the special political statute of Prínicipe, projects in the island (otherwise of the same nature as those in São Tomé island) are identified separately.

36. The attached Technical Memorandum of Understanding sets out the modalities of program monitoring. These include definitions of performance criteria and indicative targets; application of adjustors for deviations from programmed budget support, and net external debt service payments; and data sources and frequency of data reporting.

37. We will update our PRSP in line with the new Strategic Plan for National Development now under preparation, and also when new information on oil prospects becomes available, especially after information from further oil exploratory drilling in the JDZ.

Appendix I—Attachment II: São Tomé and Príncipe: Technical Memorandum of Understanding

1. This technical memorandum of understanding (TMU) contains definitions and adjuster mechanisms that clarify the measurement of variables in Table A, Quantitative Performance Criteria, and Indicative Targets under the PRGF arrangement for 2009-11, which is attached to the Memorandum of Economic and Financial Policies. Unless otherwise specified, all quantitative performance criteria and benchmarks will be evaluated in terms of cumulative flows from the beginning of each calendar year.

I. Provision of Data to the Fund

2. Data with respect to all variables subject to performance criteria and indicative targets will be provided to Fund staff monthly with a lag of no more than four weeks for data on the net domestic assets and net international reserves of the Central Bank of São Tomé and Príncipe (BCSTP) and eight weeks for other data. The authorities will transmit promptly to Fund staff any data revisions. For variables that are relevant for assessing performance against program objectives but are not specifically defined in this memorandum, the authorities will consult with Fund staff as needed on the appropriate way of measuring and reporting. Performance criteria included in the program, as defined below, refer to the primary balance and net bank financing of the central government, net domestic assets and net usable international reserves of the central bank, external payments arrears, new nonconcessional short-term and medium- and long-term external debt owed or guaranteed by the central government and/or the central bank.

II. Definitions

3. Government is defined for the purposes of this TMU to comprise the central government, which includes all governmental departments, offices, establishments, and other bodies that are agencies or instruments of the central authority of São Tomé and Príncipe. The central government does not include the operations of state-owned enterprises.

4. Government domestic revenue (excluding oil revenue) comprises all tax and non-tax revenue of the government (in domestic and foreign currency), excluding foreign grants, the receipts from the local sale of in-kind grants (e.g., crude oil received from Nigeria, food aid, etc.), and any gross inflows to the government on account of oil signature bonus receipts and accrued interest on the National Oil Account (NOA). Revenue will be measured on a cash basis as reported in the table of government financial operations prepared by the Directorate of Budget and the Directorate of Treasury in the Ministry of Planning and Finance.

5. Domestic primary expenditure comprises all government spending assessed on a commitment basis (base compromisso), excluding capital expenditure financed with external concessional loans and grants and scheduled interest payments. Reporting of government domestic expenditure will be based on the state budget execution prepared every month by the Directorate of Budget and the Directorate of Treasury in the Ministry of Planning and Finance.

6. Within domestic primary expenditure, pro-poor expenditure refers to government outlays recorded in the new budget nomenclature that have a direct effect on reducing poverty, as agreed with the IMF and World Bank staffs. These expenditures, which include both current and capital outlays, are defined as follows:

  • a. Pro-poor current spending: These cover the following ministries and expenditure categories (by budget code) as described in the matrix below:

  • b. Pro-poor treasury-funded capital spending: This covers projects that are deemed to have a direct impact on alleviating poverty in the following sectors: education, health, social safety nets, agriculture and fisheries, rural development, youth and sports, provision of potable water, and electrification.

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* Expenditures on fuels and lubricants (combust í veis e lubrificantes) that are effected for administrative purposes are excluded. Likewise, food (alimentação) and clothing and shoes (roupas e calçados) supplied to administrative staff are excluded.

7. Treasury-funded capital expenditure: This is classified as part of domestic primary expenditure and covers projects that are not directly financed by grants and concessional loans. For 2009, the projects that comprise total potential expenditure under this category fall in two groups: (i) a group of projects worth 29 billion dobras to be financed with traditional sources of funds, and (ii) a group worth up to 124 billion dobras to be financed by drawing down the proceeds from the privatization of ENCO. The privatization-financed projects comprising the second group are listed individually in Table C of the MEFP, which is exhaustive. The baseline projection in the program is that the projects in the second group will be executed by 50 percent in 2009. Treasury-funded capital spending will correspond to items of the type indicated in the following matrix, which was agreed with the IMF staff:

Sao Tome and Principe - Definition of Treasury Funded Capital Expenditure, 20091, 2, 3

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This matrix corresponds to the 2009 government plan for investment on roads, bridges, schools, water, and power. It includes spending on new construction, rehabilitation, and maintenance.

This matrix will be updated on a yearly basis in line with the government's new investment plans.

Expenditure on wages and salaries and the purchase of goods and services related to the projects will not be classified as capital expenditure.

8. The domestic primary balance is defined as the difference between government domestic revenue and domestic primary expenditure. For reference, this balance for end–December 2008 is projected at –169 billion dobra, broken down as follows:

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9. Domestic arrears are defined as the difference between expenditure on a commitment basis and cash payments (amounts past due after 40 days and unpaid).

10. The program exchange rate for the purposes of this TMU will be 15,897 dobra per U.S. dollar. The exchange rate of the dobra against the euro will be 21,783 dobra per euro and against the SDR will be 24,411 dobra per SDR for 2009.

11. Net bank financing of the central government (NCG) is defined as the stock of all outstanding claims on the government held by the BCSTP and by deposit money banks (DMBs),18 less all deposits held by the central government with the BCSTP and with DMBs, as they are reported monthly by the BCSTP to the IMF staff. Although the balance of the National Oil Account (NOA) is not included in NCG, the annual flow from the balance of the NOA to the government's budget is included. All foreign exchange-denominated accounts will be converted to dobras at the program exchange rate. For reference, at end-December 2008, outstanding net bank financing of the government excluding NOA is projected to be at -295 billion dobra, broken down as follows:

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12. Dobra base money is defined as the sum of currency issued—which consists of currency outside banks and cash in vaults—and bank reserves denominated in dobra. Bank reserves refer to reserves of commercial banks - in dobra - held with the central bank and include reserves in excess of the reserve requirements. For reference, at end-December 2008 dobra base money is projected to be at 283 billion dobra, calculated as follows:

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13. Net usable international reserves (usable NIR) of the BCSTP are defined for program-monitoring purposes as short-term foreign assets of the BCSTP minus short-term external liabilities including liabilities to the IMF. All short-term foreign assets that are not fully convertible external assets nor readily available to and controlled by the BCSTP (i.e., they are pledged or otherwise encumbered external assets, including but not limited to the HIPC umbrella SDR account and assets used as collateral or guarantees for third-party liabilities) will be excluded from the definition of usable NIR. The balance of the NOA at the BCSTP is also excluded but the annual flow from the NOA to the budget is included. Bank reserves denominated in foreign currency are also excluded. From this, usable NIR is reached. All values are to be converted to U.S. dollars at actual market exchange rates prevailing at the test date. For reference, at end-December 2008 usable NIR is projected to be at 617 billion dobra, calculated as follows:

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14. Net domestic assets (NDA) of the central bank of São Tomé and Príncipe are defined as the difference between base money and net foreign assets of the BCSTP, all at program exchange rates. The balance of the NOA at the BCSTP is also excluded but the annual flow from the NOA to the budget is included. All foreign-denominated accounts will be converted to dobras at the program exchange rate. For reference, at end-December 2008, net domestic assets are projected to be at 708 billion dobra, calculated as follows:

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15. The performance criterion on short-term external debt refers to the outstanding stock of external debt with an original maturity of one year or less (including overdraft positions) owed or guaranteed by the government and/or the BCSTP.19 For reference, at end-December 2008 the stock of short-term external debt is projected to be zero.

16. The performance criterion on nonconcessional medium- and long-term external debt is a continuous performance criterion that refers to the contracting or guaranteeing of new external debt with original maturity of more than one year by the government and/or the BCSTP.20 21 Debt rescheduling and restructuring are excluded from the ceilings set on nonconcessional borrowing. Medium- and long-term debt will be reported by the Debt Management Department of the Ministry of Finance and Planning and (as appropriate) by the BCSTP, measured in US dollars at the prevailing exchange rates. The government should consult with IMF staff before contracting new debt obligations.

17. The non-accumulation of new external payment arrears is a continuous performance criterion. Government external payment arrears are defined as all unpaid external public debt obligations, according to the data established by the Debt Management Department and (as appropriate) by the BCSTP, except for arrears pending rescheduling arrangements. The latter are considered as technical arrears. Debt would be deemed to be in arrears when it has not been paid by the time it is due, unless arrears have otherwise been contractually defined. The performance criterion relating to external arrears does not apply to those arrears pending the signing of bilateral agreements in the context of debt-rescheduling with the Paris Club and other bilateral creditors.

18. Net external debt service payments are defined as debt service due less the accumulation of any new external payment arrears, including technical arrears.

19. Official external program support is defined as grants and loans, including in-kind aid when the products are sold by the government and receipts are earmarked for a budgeted spending item, and other exceptional financing provided by foreign official entities and incorporated into the budget. Amounts assumed in the program consistent with this definition are shown in Table A of the MEFP as a memorandum item entitled “official external program support”.

III. Use of Adjusters

20. The Performance Criterion on the domestic primary deficit will have two adjusters. Firstly, the limit on the domestic primary deficit will be adjusted upward (downward) if the combined execution level of the programs comprising the privatization-financed part of Treasury-funded capital expenditure exceeds (underperforms) programmed baseline levels (see paragraph 7); this adjustment will be capped at 62 billion dobras for the year as a whole. Secondly, the limit on the domestic primary deficit will be adjusted upward if the government finds budget support for 2009 in addition to that described in paragraph 18 of the MEFP; this adjuster will be capped at 16 billion dobras for the year as a whole.

21. Adjustors for the Performance Criteria on net bank financing of the central government, net domestic assets of the BCSTP, and net usable international reserves will be set. Deviations from amounts projected in the program for budget transfer from the NOA, the privatization-financed component of Treasury-funded capital expenditure, official external program support, net external debt service payments, and domestic arrears will trigger adjustments on the above-mentioned performance criteria. These deviations will be calculated cumulatively from end-December 2008 (see Table A). The following is an explanation of these adjustments:

  • Adjustors on ceilings on changes in net bank financing of the central government (NCG) and net domestic assets (NDA) of the BCSTP: Quarterly differences between actual and projected receipts of the budget transfer from the NOA, official external program support, net external debt service payments, and Fund's disbursements under the PRGF arrangement, in foreign exchange will be converted to dobras at the program exchange rate and aggregated from end-December 2008 to the test date. The ceilings will be adjusted downward by the amount of accumulated domestic arrears. The ceilings will be adjusted downward (upward) by cumulative deviations downward (upward) of actual from projected net payments in external debt service, and by deviations upward (downward) in the budget transfers from the NOA, external program support, and the Fund's disbursements under the PRGF arrangement. The ceilings will be adjusted upward (downward) by cumulative deviations upward (downward) relative to the baseline projection for execution of the privatization-financed component of Treasury-funded capital expenditure, by up to 62 billion dobras for the year as a whole.

  • Adjustors for the floor on changes in net usable international reserves (usable NIR) of the BCSTP: Quarterly differences between actual and projected receipts of the budget transfer from the NOA, official external support, and net external debt service payments, will be converted to dobras at the program exchange rate and aggregated from end-December 2008 to the test date. The ceilings will be adjusted upward by the amount of accumulated domestic arrears. The floor will be adjusted upward (downward) by the cumulative deviation downward (upward) in external debt service and by deviations upward (downward) for the budget transfer from the NOA, and official external support. The ceilings will be adjusted downward (upward) by cumulative deviations upward (downward) relative to the baseline projection for execution of the privatization-financed component of Treasury-funded capital expenditure, by up to the equivalent of 62 billion dobras for the year as a whole. The combined application of all adjusters at the December test date is capped in such a way that the adjusted floor does not fall short of the equivalent of 4 months of imports in 2009.

IV. Data Reporting

22. The following information will be provided to the IMF staff for the purpose of monitoring the program.

i. Fiscal Data: The Directorate of Budget at the Ministry of Planning and Finance will provide the following information to IMF staff, within two months after the end of each month or quarter, except for the public investment program (PIP), which will be provided three months after each quarter:

  • Monthly data on central government operations for revenues, expenditure, and financing, including detailed description of net earmarked resources (recursos consignados), on commitment (compromisso) and cash payments (caixa);

  • Monthly data on net credit to the government by the BCSTP, recorded account by account in a format fully compatible with the monetary accounts of the BCSTP;

  • Monthly detailed data on tax and nontax revenues;

  • Monthly detailed data on domestically financed capital expenditure on commitment (compromisso) and cash payments (caixa);

  • Monthly data on domestic arrears by type;

  • Monthly data on official external program support (non-project);

  • Quarterly data on the execution of the public investment program (PIP) by project and sources of financing;

  • Quarterly data on the execution of Treasury-funded capital expenditure by project type, amount, timetable of execution, and progress of execution (see Table C);

  • Quarterly data on project grant and loan disbursement (HIPC and non-HIPC);

  • Quarterly data on bilateral HIPC debt relief;

  • Latest outstanding petroleum price structures and submission of new pricing structures (within a week of any changes).

ii. Monetary Data: The BCSTP will provide the IMF staff, within three weeks from the end of each month, the monetary accounts of the BCSTP. Other monetary data will be provided within six weeks after the end of each month for monthly data, within two months after the end of each quarter for quarterly data, and within two months after the end of each year for annual data. Weekly data will be provided no later than two weeks after the end of the week. The BCSTP will provide the following information to IMF staff:

  • Daily data on exchange rates, to be posted on the central bank's web site;

  • Daily data on interest rates, to be posted on the central bank's web site;

  • Daily liquidity management table, including base money and currency in circulation, to be posted on the central bank's web site;

  • Daily net usable international reserve position, to be posted on the central bank's web site;

  • Monthly balance sheet data of BCSTP (in BCSTP and IMF formats);

  • Monthly balance sheet data of individual deposit money banks (in BCSTP and IMF formats);

  • Monthly consolidated balance sheet data of deposit money banks (in BCSTP and IMF formats);

  • Monthly consolidated monetary survey (in BCSTP and IMF formats);

  • Monthly central bank foreign exchange balance (Orçamento cambial);

  • Quarterly table on bank prudential ratios and financial soundness indicators;

  • Quarterly data on the BCSTP's financial position (profit and loss statement, deficit, budget execution, etc.).

iii. External Debt Data: The Debt Management Unit at the Ministry of Planning and Finance will provide the IMF staff, within two months after the end of each month the following information:

  • Monthly data on amortization and interest on external debt by creditor: paid, scheduled, and subject to debt relief or rescheduled;

  • Quarterly data on disbursements for foreign-financed projects and program support loans.

iv. National Accounts and Trade Statistics: The following data will be provided to IMF staff:

  • Monthly consumer price index data, provided by the National Institute of Statistics within one month after the end of each month;

  • Monthly data on imports (value of imports, import taxes collected, and arrears) and commodity export values, provided by the Customs Directorate at the Ministry of Planning and Finance, within two months after the end of each month;

  • Monthly data on petroleum shipments and consumption (volumes and c.i.f. prices, by product), provided by the Customs Directorate.
1

A stability-oriented policy framework will be part of the bi-national agreement with Portugal to underpin a new exchange rate regime for São Tomé and Príncipe.

2

Food items account for 72 percent of the CPI basket, and many of them are imported. Oil products are imported, and oil prices significantly influence the retail prices of all imported consumer goods.

3

While maintaining the usable net international reserves above 4 months of imports, the BCSTP sold $10 million in 2008, against $2 million in 2007.

4

The REER sappreciated by about 20 percent, largely reflecting inflation differentials.

5

The banking system is dominated by one bank (BISTP) whose main shareholder is a Portuguese government-owned bank, which remains solid.

6

A recent JSAN of the second annual progress report of the PRSP recommended that the authorities revise their PRSP in the near future to reflect recent developments and changes in oil prospects. See IMF CR/08/155.

7

If São Tomé and Príncipe goes ahead with the peg, its monetary policy will be geared to guaranteeing the chosen parity, and central bank operational targets and procedures will need to be revised.

8

Staff discussed the Fund's proposed new exchange rate classification system. The authorities are comfortable with their current system being classified as “stabilized.”

9

Some FDI operations can tap already negotiated credit lines from partner-country governments.

10

Usable reserves exclude the National Oil Account, banks' foreign currency reserves, and foreign currency deposits at the central bank for new bank licensing.

11

This approach is in line with that recommended in the papers on Public Investment and Fiscal Policy endorsed by the Executive Board in 2004.

12

The stock of tax arrears reached 132 billion dobras by September 2008 - 35 percent of 2008 tax revenues. The government is considering a partial tax amnesty to help taxpayers who need to regularize their situation.

13

If needed, BCSTP may conduct reverse auctions to offset certain large direct foreign exchange purchases that could drain liquidity from the market.

14

By September 2007, over 80 percent of the country's creditors had agreed to deliver HIPC relief, enabling the Fund to disburse its share of topping-up assistance.

15

The main conclusions are mostly unchanged from the previous DSA (IMF Country Report 07/173). Larger projected public investment is reflected in higher public debt, while supporting the growth projections.

16

Unsettled disagreements between the stakeholders of Blocks 5 and 6 and the Joint Development Authority have put on hold oil signature bonuses of $26.1 million for the two blocks since early 2008.

17

Foreign investors in Blocks 2 and 4 are scheduled to start drilling in late 2009, further pushing back the date for initiating production to 2015 or 2016, if commercial viable oil reserves were confirmed.

18

Deposit money banks (DMBs) refer to other depository corporations, as defined in the Monetary and Financial Statistics Manual.

19

The term “debt” is defined in accordance with point 9 of the IMF Guidelines on Performance Criteria with Respect to Foreign Debt (IMF Decision No. 12274-(00/85), August 24, 2000).

20

This performance criterion applies not only to debt as defined in point 9 of the IMF Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000, but also to commitments contracted or guaranteed for which value has not been received.

21

The concessionality of loans is assessed according to the reference interest rate by currency published, by the Development Assistance Committee of the Organization for Economic Cooperation and Development. For loans of terms of no less than 15 years, the 10-year average of commercial interest reference rates for the currency in which the loan is denominated will be used. For loans of shorter terms, the six-month average will apply. For least developed countries such as São Tomé and Príncipe, a loan is deemed to be on concessional terms if, on the date of initial disbursement, the ratio of the present value of the loan, calculated on the basis of the reference interest rate, to the nominal value of the loan is less than 50 percent (in other words, a grant element of at least 50 percent). For currencies with no available reference interest rates, the SDR rate will be used. This performance criterion does not apply to IMF resources.

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Cover IMF Staff Country Reports
Democratic Republic of São Tomé and Príncipe: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility: Staff Report; Staff Supplement; 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
Volume/Issue:
Volume 2009: Issue 106
Publisher:
International Monetary Fund
ISBN:
9781451835199
ISSN:
1934-7685
Pages:
91
DOI:
https://doi.org/10.5089/9781451835199.002
Figure 1.

São Tomé and Príncipe: Recent Macroeconomic Developments

Sao Tome and Principe - General Inflation, Food, and Energy
Figure 2.

São Tomé and Príncipe: Evolution of Fiscal Performance
Figure 3.

Indicators of Financial Development, 2001-2008
Figure 4.

Sao Tome and Principe - Alternative Scenario 1/