Democratic Republic of São Tomé and Príncipe
First Review Under the Three Year Arrangement Under the Extended Credit Facility Arrangement, and Request for Waivers of Performance Criteria: Staff Report; Staff Supplement; and Press Release on the Executive Board Discussion
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International Monetary Fund
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Publication Date:
27 Apr 2010
eISBN:
9781455203666
Language:
English
Keywords:
ISCR; CR; First Review of São Tomé and Príncipe's ECF arrangement; SDR; São Tomé and Príncipe; growth prospect; net bank financing; headline inflation; tax arrears; Reschedulable arrears; International reserves; Arrears; Imports
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This paper presents the Democratic Republic of São Tomé and Príncipe’s first review under the Three Year Arrangement under the Extended Credit Facility Arrangement. After averaging 6 percent a year over several years, real GDP growth in 2009 is estimated at 4 percent, reflecting a decline in foreign direct investment (FDI), which in part reflected the impact of the global crisis. Growth is expected to rebound in 2010, based on new FDI and increased official external financing.

Abstract

This paper presents the Democratic Republic of São Tomé and Príncipe’s first review under the Three Year Arrangement under the Extended Credit Facility Arrangement. After averaging 6 percent a year over several years, real GDP growth in 2009 is estimated at 4 percent, reflecting a decline in foreign direct investment (FDI), which in part reflected the impact of the global crisis. Growth is expected to rebound in 2010, based on new FDI and increased official external financing.

I. Background

1. The ECF-supported program is designed to help the Government of São Tomé and Príncipe achieve its growth and poverty reduction objectives. The strategy for achieving these objectives as set out in the Progama do XIII Governo entails ensuring macroeconomic stability, improving basic infrastructure, increasing food security, and promoting tourism as an engine of growth. Specific objectives of the ECF-supported program include lowering inflation, achieving fiscal and external sustainability in the face of uncertain oil prospects, and strengthening the capacity of public institutions to mobilize and manage public resources.

2. The dobra is now pegged to the Euro. The authorities signed an agreement with Portugal in July 2009 to support the move from a flexible exchange rate regime to pegging the Dobra to the Euro from the beginning of 2010. Under the agreement, Portugal stands ready to provide support in the form of a credit line of up to 25 million Euros, within the context of a jointly agreed program of sustainable macroeconomic policies linked to São Tomé and Príncipe’s ECF-supported program.

3. Exploration for oil continues. A new round of exploratory drillings in the Joint Development Zone with Nigeria started in August 2009. If commercially viable reserves are confirmed in the near future, initiation of oil production could start in 2015. So far, oil-related revenues have been mainly from signature bonuses received in 2005 and 2007 from the issuance of prospecting licenses. The bonuses were paid into the National Oil Account (NOA) from which a proportion fixed by law is drawn down each year to finance the government budget.

4. São Tomé and Príncipe remains at high risk of debt distress. Although debt relief under the enhanced Heavily Indebted Poor Countries Initiative (HIPC) and Multilateral Debt Relief initiatives reduced the burden of the country’s external debt substantially, a narrow export base and high reliance on external financing makes it highly vulnerable to external shocks. The results from an updated debt sustainability analysis (DSA) are broadly similar to those presented to the Board in the last staff report.1

5. Local and Parliamentary elections are scheduled for February and March 2010, respectively, and a Presidential election is due in 2011.

II. Recent Developments and Performance Under the Program

6. Growth slowed in 2009, reflecting the impact of the global financial crisis. After several years of robust growth averaging 6 percent a year, economic activity slowed in 2009 (Figure 1). Real GDP growth in 2009 is now projected at 4 percent, compared to 5.5 percent envisaged under the original program. A sharp decline in FDI, which in part reflected the impact of the global crisis, took a toll on construction and trade related activities. Also, an envisaged increase in external resources for financing the government’s public investment program fell short of expectations. Tourism continued to grow in response to improved tourism infrastructure, but remains small in relation to the overall economy.

Figure 1.
Figure 1.

Sao Tome and Principe: Recent Macroeconomic Developments

Citation: IMF Staff Country Reports 2010, 100; 10.5089/9781455203666.002.A001

Sources: IMF staff estimates and authorities data.

7. Inflation has declined steadily since mid-2008, mainly reflecting lower world food and oil prices (see Figure 1). On a year-on-year basis, headline inflation fell from a peak of 37 percent in July 2008 to 14.8 percent in October 2009. Food, most of which is imported, accounts for over 70 percent of the consumer price index basket. Nonfood inflation has been below 5 percent since July 2009 (see Figure 1). Tighter fiscal and monetary policies also helped contain inflation.

8. Fiscal performance has improved over the last three years (Figure 2). The domestic primary deficit has fallen substantially, mostly due to a decline in expenditure. Tax revenues have been flat, dominated by import taxes. On the expenditure side, the share of personnel costs has remained around one-third of primary expenditures. The bulk of capital expenditures are financed by external grants and loans. The domestic primary deficits have been financed largely by withdrawals from the NOA and use of privatization proceeds.

Figure 2.
Figure 2.

Sao Tome and Principe: Fiscal Indicators 2004-2009

(in percent of GDP)

Citation: IMF Staff Country Reports 2010, 100; 10.5089/9781455203666.002.A001

Sources: IMF staff estimates and authorities data.* Includes non-interest current expenditure, treasury financed capital expenditure and HIPC Initiative-related social expenditure.

9. The banking system is highly dollarized, weakening the central bank’s control over the monetary aggregates. Foreign currency deposits account for about 60 percent of commercial banks’ deposit liabilities, while about 70 percent of loans to the private sector are denominated in foreign currency (Figure 3). Furthermore, foreign currency deposits of commercial banks make up about half of reserve money. In the last few years, changes in net foreign assets have been the main source of growth in both broad money and reserve money (Figure 3). The Banco Central de São Tomé e Príncipe (BCSTP’s) main instrument for influencing base money (i.e., the dobra component of reserve money) has been foreign exchange purchases and sales. During 2009, following withdrawals from the NOA and the Privatization account to finance government spending, the central bank sold foreign exchange to slow down the growth in base money.

Figure 3.
Figure 3.

Sao Tome and Principe: Money and Credit Developments

Citation: IMF Staff Country Reports 2010, 100; 10.5089/9781455203666.002.A001

Sources: Authorities data and IMF staff estimates.
A01ufig01

Nominal Exchange Rate

Citation: IMF Staff Country Reports 2010, 100; 10.5089/9781455203666.002.A001

10. The focus of the authorities’ management of the exchange rate shifted from the U.S. dollar to the Euro in 2009. In recent years, staff characterized São Tomé and Príncipe’s exchange rate regime as a managed float. For most of 2008, the authorities maintained the Dobra at a stable rate against the U.S. dollar, which translated into a marked appreciation of the Dobra against the Euro. In the first half of 2009, reflecting the decision to peg the Dobra to the Euro, the authorities maintained a stable Dobra/Euro rate. Subsequently, the Dobra depreciated against both currencies.

11. The current account deficit narrowed in 2009 reflecting lower imports of goods and nonfactor services (Table 6). In particular, FDI-related imports fell while exports of goods and services were boosted slightly by increased tourist arrivals. The current account deficit is now projected to fall from 38 percent of GDP in 2008 to 26 percent in 2009; under the original program, the deficit was projected to widen to 43 percent in 2009.

12. Performance against the program’s quantitative financial targets has been mixed. Most of the quantitative targets for the first three quarters of the year were met (Memorandum of Economic and Financial Policies (MEFP), Table A1). However, the performance criteria and indicative targets on the domestic primary fiscal balance and net bank financing of the government were missed because of shortfalls in tax revenues, partly due to the adverse impact of the global crisis on imports and growth. Lower import taxes were responsible for a 30 percent shortfall in total government revenue in the first half of the year. On the expenditure side, current spending was 15 percent below program in the first half of the year on a cash basis, but was accompanied by an accumulation of new domestic arrears on utility bills. These arrears were cleared in August (MEFP ¶5). Capital expenditures fell well short of the programmed level due to significant shortfalls in project grants and loans. However, the Treasury-financed component, which relies mainly on draw downs from privatization proceeds, exceeded the baseline level but remained well below the upper limit under the program.2

13. After a slow start, satisfactory progress was made in implementing structural reforms. The authorities are undertaking a wide range of structural reforms aimed at strengthening revenue mobilization and public financial management, deepening the financial system, and improving the investment climate. Most of the measures slated for the first three quarters of 2009 have been implemented, albeit with some delay in a number of cases (MEFP, Table B1).

III. Medium-term Macroeconomic Framework

14. The main revisions to the medium-term macroeconomic framework include slightly lower growth and inflation paths, a slower pace of fiscal adjustment, and higher levels of gross international reserves.

Sao Tome and Principe—Selected Economic Indicators, 2008–12

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Sources: Authorities and Staff estimates.

15. The authorities expect a rebound in growth from 2010, though not to the levels in the original program. The outlook is based on a projected recovery of the decline in FDI (MEFP ¶14). Specific FDI-financed projects include a deep-water port for which ground was broken in September 2009. This is a US$500 million project, of which about US$100 million (about 50 percent of GDP) is expected to be spent in 2010. The Treasury-financed component of the public investment program is also expected to pick up pace as agents become familiar with the new procurement rules introduced in 2009. Growth prospects will also be helped by reforms aimed at improving the investment climate and lowering credit risk (MEFP ¶37).

16. The pegging of the Dobra to the Euro from the beginning of 2010 should lower inflation expectations. Inflation in recent months has been slightly lower than programmed and the disinflation process should be helped by stabilization of the exchange rate against the most important currency for imports. The authorities understand the importance of fiscal consolidation for the success of the peg (MEFP ¶21) and re-affirmed the government’s commitment not to borrow from the central bank (MEFP ¶29).

17. Although the revised program allows larger domestic primary deficits, fiscal consolidation efforts will continue, underpinned by strengthened domestic revenue collection and improved public expenditure management. The government aims to reduce the primary domestic deficit from 5.9 percent of GDP in 2009 to 3.2 percent in 2012. Revenue mobilization efforts will be geared to widening the tax base and increasing compliance with tax laws. The full implementation of the SAFE will help improve public financial management and address the problem of accumulation of domestic payments arrears. It will also help the government better protect pro-poor expenditures.3

18. Progress towards external sustainability remains a key objective. Current account deficits are projected to remain sizeable, driven by availability of external financing (both private and official). Staff agreed with the authorities that ongoing structural reforms to improve the investment climate and recent and prospective improvements in physical infrastructure are critical for enhancing productivity and boosting São Tomé and Príncipe’s international competitiveness.

19. São Tomé and Príncipe remains at high risk of debt distress. An updated DSA, reflecting the revised macroeconomic framework and new allocation of SDRs, confirms staff’s previous assessment. The ratio of the PV of external public and publicly guaranteed debt to exports and goods and services breaches the sustainability threshold by a wide margin due to the country’s small export base. The Government remains committed to pursuing prudent debt policies (MEFP ¶18). In particular, it will continue to refrain from nonconcessional borrowing and redouble its efforts to seek full delivery of HIPC debt relief from the remaining official creditors—Angola, Russia, and the Arab Bank for Economic Development in Africa (BADEA).

IV. Policy Discussions

A. Fiscal Policy

20. The authorities took actions in the second half of 2009 to boost tax revenues and clear domestic payments arrears. While shortfalls in import taxes were expected to persist throughout the year, performance of other taxes and non-tax revenues were expected to improve as the government recovered tax arrears and received unbudgeted revenue from the installation of a fiber optics cable in Saotomean waters. The tax arrears partly arose from under provision for utility payments in the budget which led to a cycle of government arrears to EMAE, that company’s arrears to ENCO, and the latter’s accumulation of tax arrears (from nontransfer of fuel taxes to the government). The revised program includes more realistic estimates for the government’s utility bills in order to avoid the accumulation of new arrears.

21. In the 2010 budget, the authorities plan to reduce the domestic primary deficit to 4.7 percent of GDP from 5.9 percent in 2009. Fiscal consolidation will come mainly from control over discretionary expenditures outside the priority areas (mainly purchases of goods and services). The government has committed to work with Fund staff to establish indicative targets on pro-poor expenditures under the program in order to better monitor these expenditures and ensure they are protected (MEFP ¶28). Revenues for 2010 have been estimated conservatively in view of a high degree of uncertainty regarding the responsiveness of import revenues to increased FDI-financed imports and also about the overall impact of recent changes in tax laws (Box 1). Import taxes are likely to be inelastic because of investment incentives associated with FDI-related imports. In order to safeguard revenues, staff urged the authorities to bring a greater sense of urgency to expanding the register of tax payers and to the enforcement of tax laws through audits.

22. The authorities acknowledge that fiscal policy will bear the burden of adjustment with the move to a pegged exchange rate. While they believe that the level of international reserves at the launch of the peg was more than adequate, they undertook to tighten fiscal policy if the reserves come under pressure (MEFP ¶21).

Recent Changes in Tax Laws

New corporate and personal income tax laws were introduced in January 2009 but it took several months before they became effective. The main elements of these new laws are:

  • A unified rate of 25 percent for corporate taxes, instead of the previous progressive scheme with a maximum rate of 45 percent.

  • The unified rate for personal income tax was eliminated and, instead, rates ranging from zero (for the exemption threshold) to 20 percent were put in place.

In June, a law was enacted to grant partial relief on tax obligations. It provided for rescheduling of taxes owed, waiving of interest, and reduction in fines.

B. Exchange Rate Assessment and Policy

23. Staff assessed the real exchange rate to be broadly in line with fundamentals. In June 2008, staff estimated that the real exchange rate of the dobra had been undervalued slightly since 2001 but that the gap between the actual and equilibrium levels had almost disappeared in 2007.4 An update of staffs empirical assessment indicates that the gap widened slightly in 2008 (see Figures below), and it is likely to have been maintained in 2009.

A01ufig03

Sao Tome and Principe - Assessment of REER, 1994-2008

Citation: IMF Staff Country Reports 2010, 100; 10.5089/9781455203666.002.A001

A01ufig04

Sao Tome and Principe - Assessment of REER, 1994-2008

Gap (between actual and equilibrium REER, in percent)

Citation: IMF Staff Country Reports 2010, 100; 10.5089/9781455203666.002.A001

24. Staff agreed with the authorities that the prevailing market rate should determine the level at which the Dobra is pegged to the Euro. In the event, the rate was set at Dobra 24,500 per Euro; a rounding up (by 1.6 percent) of the rate prevailing at the end of 2009. The BCSTP accumulated adequate reserves for launching the peg. The IMF’s new allocation of SDR 6.5 millions to Sao Tome and Principe helped boost the international reserves to an estimated US$46.2 million at end-2009 (equivalent to more than six months of expected imports).

Sao Tome and Principe: Foreign Exchange Reserve Adequacy 1

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Usable gross official reserves, which exclude the NOA and banks’ foreign currency deposits at the BCSTP.

Projection.

C. Monetary and Financial Sector Policies

25. As with any hard peg, the authorities will lose monetary policy autonomy with the pegging of the Dobra to the Euro. Effective liquidity management by the BCSTP requires careful coordination with government operations, a significant part of which entails withdrawals from the government’s foreign exchange accounts.

26. The BCSTP is strengthening its supervision of banks. Asset quality and liquidity indicators of banks have declined since end-2008 (Table 9). In particular, the ratio of non-performing loans to total outstanding loans increased to 19 percent in July 2009 from 7.9 percent at end-2008 (MEFP ¶7). As nonperforming loans increased, banks have augmented provisions against doubtful loans. A program of on-site inspections which started in early 2009 is scheduled to cover all the commercial banks by June 2010. Particular attention is being paid to non-performing loans and banks’ credit policies. The BCSTP has also raised the minimum capital requirement of banks and given the existing banks up to end-March 2010 to comply. A key structural reform is the establishment of a Credit Reference Bureau which is now expected by end-March 2010.

D. Capacity Building

27. São Tomé and Príncipe continues to need external support to build capacity for policy formulation and implementation. Bilateral and multilateral partners, including the Fund, are providing support in the areas of public financial management, tax and customs administration, macroeconomic analysis at the Ministry of Planning and Finance, and banking supervision. Strengthening the capacity of the National Statistics Office to produce accurate and timely economic data is also a high priority for the authorities. The authorities requested further Fund technical assistance in the areas of banking supervision, public financial management (including Treasury Single Account), and national accounts. They also requested assistance to strengthen their Anti-Money Laundering and Combating of the Financing of Terrorism framework.

V. Risks to the Program

28. A major risk to the achievement of program objectives is a substantial shortfall in external financing. São Tomé and Príncipe’s growth prospects depend on sustained external financing in the form of aid inflows and foreign direct investment. External shocks that disrupt these flows will slow down growth and reduce government revenues. Such shortfalls may also pose a risk to the viability of the exchange rate peg by putting downward pressure on international reserves. The focused implementation of the government’s economic program will enhance the country’s attractiveness and help reduce its vulnerability to such disruptions.

29. Domestic revenue shortfalls represent an important risk to achievement of the government’s fiscal and external sustainability goals. A strengthening of revenue administration and enforcement of tax laws are needed to safeguard revenues, and over time, reduce dependence on external aid. Furthermore, with the balances in the NOA and the privatization account dwindling, the sources of financing fiscal imbalances are also becoming more limited. The authorities have made important strides in terms of legislation for strengthening domestic revenue mobilization. However, they need to bring a greater sense of urgency to implementation of measures such as expanding the register of tax payers and enforcement of tax laws.

VI. Program Monitoring

30. The authorities are requesting waivers for the nonobservance of two performance criteria (Letter of Intent ¶6). The performance criteria on the domestic primary fiscal balance and on the net bank financing of the government were missed on account of the adverse impact of the global economic crisis on government tax revenues. Revenues began to recover in the second half of the year, as the authorities stepped up their collection efforts on domestic taxes and the recovery of tax arrears.

31. Program targets for 2010 have been updated. There is no change in the fiscal, monetary and external debt variables for which quantitative performance criteria and indicative targets are set (MEFP Tables A1 and A2). Structural conditionality has been streamlined (MEFP Table B2). The structural measures are designed to improve the investment climate (commercial code), underpin fiscal consolidation (broaden the tax base and strengthen public financial management), and preserve the stability of the financial system (minimum capital requirements, introduction of IFRS). The attached Technical Memorandum of Understanding sets out the modalities of program monitoring, including definitions, adjustors for deviations from program assumptions, data sources and frequency of reporting to IMF staff.

32. The authorities have met the prior action for completion of the first review. This entailed the submission to parliament of a budget for 2010 in line with understandings reached with IMF staff on limiting the domestic primary deficit to 4.7 percent of GDP (MEFP ¶39).

33. The adjustment envisaged under the program should help São Tomé and Príncipe meet its future obligations to the Fund. By the end of the current arrangement, São Tomé and Príncipe’s outstanding aggregate use of Fund resources would be equivalent to 68 percent of quota, totaling SDR 5.5 million. The program includes measures to implement key recommendations of the recent Safeguards Assessment mission. The measures are designed to strengthen oversight of the BCSTP’s internal control and audit functions. Also, the BCSTP is preparing an Action Plan to introduce International Financial Reporting Standards over the next three years (MEFP ¶34).

VII. Staff Appraisal

34. The authorities’ commitment to prudent macroeconomic policies remains strong. Given the loss of monetary autonomy that comes with pegging the exchange rate, fiscal policy needs to support the peg to avoid a depletion of international reserves. Staff welcomes the government’s re-affirmation of its intention to refrain from borrowing from the central bank. Also, given that the country remains at high risk of debt distress, staff commends the authorities on their prudent external borrowing policy.

35. Enhanced revenue administration and expenditure restraint are key to fiscal consolidation. In order to safeguard revenues, the government needs to redouble its efforts to expand the register of tax payers and to enforce compliance with tax laws through increased audits. On the expenditure side, the budget needs to include realistic provisions for spending on utilities to break the cycle of arrears accumulation between the Treasury, EMAE and ENCO. At the same time, the government needs to exercise strict control over discretionary spending on non-priority items to achieve its fiscal and external sustainability goals.

36. Structural reforms are needed to achieve sustained, private sector-led growth. Improving the investment climate through regulatory reform and upgrading infrastructure are vital for sustaining private investment. The authorities have already taken many important steps to reduce the cost of investing and doing business in São Tomé and Príncipe. Upgrading the country’s infrastructure will help improve the country’s growth prospects, and reduce poverty.

37. Staff recommends completion of the first review based on the country’s performance and policy commitments. The shortfall in tax revenue that led to the nonobservance of two fiscal performance criteria was due to the global crisis. With little scope to cut expenditures, the authorities’ draw down on privatization receipts to finance the larger than expected deficit was appropriate. Revenues began to recover in the second half of 2009 in response to the authorities’ revenue collection efforts. On the expenditure side, they took measures to contain the accumulation of domestic arrears.

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.

For 2009, the authorities are expecting one-off revenues in the order of 1.1 percent of GDP.

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.

For 2009, includes an additional allocation of 5.5 million SDR.

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, 2006–13

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

For 2009 includes one-off revenues in the order of 1.1 percent of GDP.

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 2007, includes the repayment of three $5 million loans disbursed by Nigeria in 2002–04 upon receipt of oil signature bonuses for Blocks 2–4 in the Joint Development Zone.

For 2005, reflects impact of Paris Club rescheduling in the last quarter of 2005.

For 2007, assumes rescheduling agreement with non-Paris Club bilateral creditors for current maturities and stock of arrears.

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

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

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

For 2009 includes one-off revenues in the order of 1.1 percent of GDP.

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 2007, includes the repayment of three $5 million loans disbursed by Nigeria in 2002–04 upon receipt of oil signature bonuses for Blocks 2–4 in the Joint Development Zone.

For 2005, reflects impact of Paris Club rescheduling in the last quarter of 2005.

For 2007, assumes rescheduling agreement with non-Paris Club bilateral creditors for current maturities and stock of arrears.

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

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, 2006–10

(billion dobra)

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

For 2010, includes an additional allocation of 6.5 million SDR.

Table 5.

São Tomé and Príncipe: Monetary Survey, 2006–10

(billion 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

(Millions of U.S. dollars)

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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.

For 2009, includes an additional allocation of 5.5 million SDR.

From 2006, FDI in the hotel sector increases.

In percent of exports of goods and nonfactor servces.

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 servces excluding imports of investment goods and technical assistance.

Table 7.

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

(Percent of GDP)

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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.

For 2009, includes an additional allocation of 5.5 million SDR.

From 2006, FDI in the hotel sector increases.

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 8.

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.

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

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

For 2009, includes an additional SDR allocation of 5.5 million.

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

Includes projected disbursements under the new ECF.

Table 9.

São Tomé and Príncipe: Financial Soundness Indicators for the Banking Sector, 2005–09 1

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

Preliminary data as of June 2009. The BCSTP is still in the process of finalizing the financial soundness indicators.

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 10.

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

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Source: IMF
Table 11:

São Tomé and Príncipe: Indicators of Capacity to Repay the Fund, 2009–2013

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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 ECF arrangement.

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

Appendix I—Letter of Intent

São Tomé, February 1, 2010

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Mr. Strauss-Kahn:

1. Last March, the Executive Board of the IMF approved São Tomé and Príncipe’s request for a new three-year arrangement under the Extended Credit Facility (ECF). This letter and the attached Memorandum of Economic and Financial Policies (MEFP) report on recent economic developments, performance under the program to date, and the Government’s policies in 2009 and for 2010.

2. Economic activity slowed down in 2009, driven by a decline in foreign direct investment (FDI). The drop off in FDI partly reflects the impact of the global financial and economic crisis. Inflation continued on its downward path, reflecting the decline in world food and fuel prices and a tightening of fiscal and monetary policies.

3. Most of the program’s quantitative targets for the first three quarters of 2009 were met (MEFP, Table A1). However, performance criteria on the domestic primary deficit and on net claims of the banking system on the central government were not met, due to a shortfall in tax revenue associated with lower imports. There was good progress in implementing structural reforms, although some measures took longer to implement than initially expected (MEFP, Table B1).

4. At the beginning of 2010, São Tomé and Príncipe moved from a flexible exchange rate system to a fixed regime under which the Dobra is pegged to the Euro. We expect that the stability of the Dobra against the currency of our most important trading partners will help us achieve and sustain macroeconomic stability and boost investment and growth. The Government is committed to implementing the rigorous fiscal policy required to ensure the viability of the peg, and will continue to refrain from borrowing from the BCSTP. The BCSTP has ample international reserves which were boosted by the IMF’s recent allocation of SDRs to São Tomé and Príncipe. Agreements we have negotiated with Portugal and the ECF-supported program together provide a framework for implementing the policies needed to ensure the success of the peg.

5. Key objectives in the program’s updated medium-term macroeconomic framework include: (i) boosting real GDP growth from 4 percent in 2009 to an average rate of about 6 percent a year; (ii) reducing inflation to low single digit levels; and (iii) making progress toward fiscal and external sustainability.

6. To support these objectives and the related policies spelt out in the MEFP, the Government hereby requests completion of the first review and the second disbursement under the ECF arrangement in an amount equivalent to SDR0.37 million (5 percent of quota). The Government requests waivers for the nonobservance of the two end-June 2009 fiscal performance criteria, which reflected the adverse impact of the global economic crisis on customs revenue. In the second half of the year, revenue collection increased in response to the government actions to improve the collection of domestic taxes and to recover tax arrears. We are taking further actions to make domestic revenues more resilient to shocks over the medium-term. The revised macroeconomic framework agreed with Fund staff reflects these efforts.

7. 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 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.

8. We propose that the Fund carry out the second review under the program in July 2010, based on the observance of end-December 2009 quantitative performance criteria, as established at the time of the approval of the arrangement (Table A1). In addition, we propose that the third and fourth reviews be conducted in November 2010 and March 2011, respectively, based on the observance of end-June 2010, and end-December 2010 quantitative performance criteria, as established in Table A2 of the attached MEFP.

9. The Government intends to make public the contents of this Letter of Intent, those of the attached MEFP and Technical Memorandum of Understanding (TMU), the IMF staff report on the first review, and the updated Debt Sustainability Analysis, and authorizes the IMF to arrange for them to be posted on the IMF website after completion of the first review by the Executive Board.

Yours truly,

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Attachments: Memorandum of Economic and Financial Policies

Technical Memorandum of Understanding

Attachment I: São Tomé and Príncipe: Memorandum of Economic and Financial Policies

1. This Memorandum of Economic and Financial Policies (MEFP) supplements that of February 2009. It first describes recent economic developments, including performance under São Tomé and Príncipe’s program supported by the Extended Credit Facility (ECF) arrangement approved by the IMF Executive Board in March 2009. It then updates the program’s medium-term macroeconomic framework and outlines policies for the remainder of 2009 and for 2010. The program is designed to help achieve sustained growth and poverty reduction as set out in the Programa do XIII Governo. Key elements of the government’s strategy for achieving these objectives include ensuring macroeconomic stability, improving basic infrastructure, increasing food security, and promoting tourism as an engine of growth.

I. Recent Economic Developments

2. Economic activity slowed down in 2009. Compared to 5.5 percent initially projected under the program, real GDP growth is now estimated at about 4 percent in 2009. The slowdown is mainly driven by a decline in foreign direct investment (FDI) which has heavily affected construction and trade-related activities. The drop off in FDI partly reflects the impact of the global financial and economic crisis. However, not all sectors registered slowdowns. In particular, tourism-related activity picked up—albeit from a low base—reflecting the recent improvements in the tourism infrastructure of the country.

3. Inflation is on a downward path, reflecting the decline in world food and fuel prices and a tightening of fiscal and monetary policies. Cumulative inflation in the first nine months of the year was 11.6 percent. On a year-on-year basis, inflation declined to 14.8 percent in October 2009 from a peak of 37 percent in July 2008. The price indices for housing, energy, and food (which comprise 82 percent of the CPI basket) continued to decline steadily from the peaks reached in July 2008. The deceleration in inflation also reflected tighter monetary policy in 2008 which stabilized the exchange rate.

4. The fiscal outturns for 2008 and 2009 were weaker than envisaged at the time the program was formulated. The domestic primary fiscal deficit in 2008 reached 7.4 percent of GDP, compared to an expected 5.8 percent under the program. This was mainly due to overruns in current spending mostly on utilities. This was financed by a budget support grant from the World Bank as well as a larger-than-programmed drawdown of government deposits at the central bank. During the first half of 2009, tax revenues were nearly 30 percent below program. Personal income and corporate tax revenues performed according to program, while taxes on imports fell short significantly, partially reflecting the slowdown in foreign direct investment. Although current expenditures were restrained, there was an accumulation of new domestic arrears, mostly with EMAE (Empresa de Agua y Electricidade), the utility company. On a commitment basis, non-interest current expenditures were about 13 percent lower than programmed. Execution of capital expenditures neared 50 percent of the programmed level between January and July. Within this category, Treasury financed capital expenditures surpassed the level assumed in the program’s baseline by almost 20 percent, but still remained below the maximum level allowed under the program.

5. Payment arrears between the Treasury, EMAE and ENCO (Empresa Nacional de Combustíveis e Oleos, the fuel distributor) were partially cleared between January and August 2009, when the Treasury settled its outstanding debt to EMAE. A down payment on the debt was made towards the end of 2008 when the Treasury paid Db85 billion to EMAE. By June 2009, government agencies had accumulated Db20 billion in new arrears to EMAE under the decentralized system of payments for energy by government agencies. At the same time, ENCO owed Db37.5 billion to the Treasury in taxes on petroleum products. In August, the Treasury settled its arrears to EMAE, while ENCO made a down payment but still owed the Treasury Db24.8 billion.

6. Acceleration in base money growth in the first half of 2009 reflected the central bank’s accumulation of international reserves. Base money growth accelerated from 19 percent (year-on-year) in December 2008 to 44 percent in June 2009, before subsiding to 29 percent in October 2009. The BCSTP’s accumulation of international reserves (beyond program levels) was aimed at achieving a very comfortable level of reserves in preparation for the move to a Euro peg for the dobra. The central bank achieved this by only partially sterilizing the budgetary use of oil bonuses and privatization proceeds. Recent foreign exchange auctions by the central bank contributed to the slowing down in the growth of base money.1 In recognition of the marked decline in the inflation rate, the BCSTP lowered its discount rate from 19 percent to 17 percent in August 2009.

7. The banking system’s accumulation of foreign assets and lending to the private sector have been the main sources of growth in broad money. Year-on-year growth of broad money declined to 33 percent in September 2009 from 35 percent in December 2008, mainly because of lower accumulation of foreign assets than in 2008. Credit to the economy continued to grow strongly and the ratio of non-performing loans to total outstanding loans increased to 19 percent in July 2009 from 7.9 percent at end-2008.

8. The impact of the global crisis on the balance of payments for 2009 has been limited. Lower oil and food prices have reduced the value of imports, while exports of goods and services have been boosted by increased tourist arrivals (responding to the growth in hotel capacity). However, the tourist arrivals in 2009 are somewhat lower than what the government anticipated. Private capital inflows (dominated by foreign direct investment) have fallen significantly compared to 2008—mainly reflecting the completion of a large tourism-related project. However, the decline in FDI has been partially offset by an increase in the level of official grants and loans compared to 2008. The international reserves have increased steadily in preparation for the launch of the Euro peg. The exchange rate of dobra to the Euro remained steady during the first half the year, but depreciated in the second half.

9. In July 2009, the government signed an agreement with Portugal to support pegging the dobra to the Euro from the beginning of 2010. Under the agreement, Portugal stands ready to provide support to the peg with a line of credit, within the context of a jointly agreed program of sustainable macroeconomic policies for São Tomé and Príncipe.

10. Most of the program’s quantitative financial targets for the first three quarters of 2009 were met (Table A1). The targets on net usable international reserves, net domestic assets of the central bank, and external borrowing were all met. However, the two fiscal targets—domestic primary deficit, and net claims of the banking system on the central government—were not met, due to a shortfall in tax revenue.

11. There was good progress in implementing structural reforms, although some measures are taking longer to implement than initially expected (Table B1). New income tax laws, a new procurement law and a decree to facilitate rescheduling of tax obligations have all come into effect. The performance criterion regarding the purchase and installation of IT equipment for SAFE by end-September was partially met. The equipment was purchased on time but installation was completed in November.

12. The Government continues to reform public administration and the public financial management (PFM) system. A number of significant advances have been made in the last two years, including: (i) approval of the new public auction and procurement regulations, with the publication of Law No. 8/2009; (ii) requirement to deposit government revenue in Treasury accounts with the Central Bank; (iii) financial deepening and payment of all civil servant salaries into bank accounts; (v) improvements in the IT system (SAFINHO), which has supported budget and financial execution since 2006; (vi) increase in budget coverage with the inclusion of externally-funded projects; (vii) start of the preparation of a medium-term fiscal framework (MTFF) and a medium-term expenditure framework for road transport; (viii) creation and operation of the Information Technology Department; (ix) establishment of the Accounting Department; (x) start up of decentralization of budget and financial execution for the pilot ministries; and (xi) acquisition of IT equipment, creation of a data center and setup of a communications network to connect the various ministries and allow them to use an integrated financial information management system.

II. Medium-Term Macroeconomic Framework (2010–12)

13. The government expects a strong rebound in 2010 from the slowdown in growth that occurred in 2009. This is based on a projected large increase in private capital inflows (mainly foreign direct investment) and improved implementation of the public investment program. Also, pegging the dobra to the Euro from the beginning of 2010 should have a positive and decisive impact on the ongoing disinflation process.

14. The macroeconomic goals for the next three years are: (i) boosting real GDP growth to an average rate of about 6 percent a year; (ii) reducing inflation to low single digit levels; and (iii) making progress toward fiscal and external sustainability. The acceleration of real economic growth is expected to come largely from construction, fueled by foreign direct investment and the public infrastructure program. For example, ground was broken for the construction of a new deep-water port in September 2009.2 We also expect new foreign investments in the agriculture sector (palm oil and coffee production), and the construction of a new five star hotel. Financial sector reforms will also continue with a view to preserving stability and strengthening the ability of the banking system to support the development of the real sector.

15. Fiscal consolidation. The government aims to reduce the primary domestic deficit from 5.9 percent of GDP in 2009 to about 4.7 percent in 2010, with the goal of stabilizing it below 3.0 percent by 2013. In pursuing its fiscal goals, government will be guided by the principles of avoiding nonconcessional and monetary financing of fiscal deficits. We will redouble our efforts to mobilize domestic revenues by broadening the tax base and increasing tax compliance in order to create fiscal space for necessary public expenditure. We will also follow through on implementing the SAFE project, which will help the government improve the management of public resources.

16. Financial sector reforms. The central bank will continue strengthening banking sector supervision and is committed to take the necessary steps to reduce the risk of distress in the banking system. The central bank will implement the regulation to increase the minimum capital of banks by end-March 2010, as well as regulation on the intervention of financial institutions. A full on-site inspection of all the seven commercial banks will be completed by mid-2010. Other actions to improve the effectiveness of the financial system will involve the implementation of the Credit Reference Bureau to reduce credit risk, and the introduction of a network of automatic teller machines and debit cards to improve the payments system and the productivity of the banking sector.

17. Current account balance. External inflows (both private and official) are expected to continue to finance the current account deficits, which are projected to remain sizable during 2010–12, reflecting strong demand for FDI-related imports.

18. External debt. 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 will try to conclude this agreement as soon as possible. We plan to introduce the Framework Law for Public Debt. A first draft prepared by government officials is being reviewed with assistance from Debt Relief International and the World Bank.

19. Oil prospects. After information from the exploratory drillings that started in 2009 become available, the Government will review with IMF staff the medium-term fiscal and financing strategy, including the use of NOA resources.

20. Risks to our medium-term outlook include exogenous shocks that disrupt external financing from foreign investors or development partners. The focused implementation of our program will enhance our country’s attractiveness and help reduce our vulnerability to those risks. The government is preparing a new Strategic Plan for National Development which will draw on lessons from implementation of the PRSP and from a needs assessment for achieving the MDGs. The main objectives will remain broadly in line with those in the Programa do XIII Governo.

III. Policies for 2010

21. Coping with potential revenue shortfalls and ensuring the success of the new exchange rate regime are the government’s principal challenges. Compared to the projections in the original program, government revenues are now projected to be lower in 2009 and 2010. Thus, we will need additional external financing (on appropriate terms) to safeguard the government’s carefully considered expenditure plans. We recognize that fiscal discipline will become even more important under the pegged exchange rate regime. We will tighten fiscal policy if international reserves come under pressure. However, we believe the level of international reserves accumulated by the BCSTP, which has been boosted by the IMF’s recent allocation of SDRs to São Tomé and Príncipe, provides a strong starting point for the peg. The agreement we have with Portugal and the ECF-supported program together provide a framework for implementing the policies needed to ensure the success of the peg.

A. Fiscal Policy and Related Structural Reforms

22. Uncertain revenue prospects may require some adjustment to discretionary expenditures. We need to make provision to cover the costs—about US$3 million in total—of organizing the local government and parliamentary elections slated for the first quarter of 2010. We are actively seeking donor assistance to cover the costs of the elections, but may have to postpone some approved expenditures if donor funding is not forthcoming.

23. The government plans to reduce the domestic primary deficit from 5.9 percent of GDP in 2009 to 4.7 percent in 2010. Revenues have been estimated conservatively in view of a high degree of uncertainty about the short-term impact of recent changes in income tax laws, and the responsiveness of import revenues to increased FDI-financed imports. Fiscal consolidation in the 2010 budget will come mainly from current expenditures associated with purchases of goods and services. The domestic primary deficit is expected to be financed by draw downs from the National Oil Account (US$2 million) and privatization proceeds (US$4.8 millions). Other discretionary expenditures, especially outside the priority areas, will be restrained as needed to stay within available resources.

24. The government will step up its efforts to strengthen revenue administration in order to broaden the revenue base and enforce compliance with the tax and customs laws. With support from Portugal and the U.S. Millennium Challenge Corporation (MCC), we will work to expand the register of tax payers, conduct more audits and undertake more enforcement operations including the collection of tax arrears. With respect to customs, several measures targeted at improving the efficiency of the collection system are under way. These include the implementation of a new customs code, a new tariff schedule, a new version of ASYCUDA, and related regulations.

25. On the expenditure side, the Ministry of Planning and Finance will strengthen expenditure management in order to prevent the recurrence of expenditure overruns and arrears. The 2010 budget includes realistic provisions for expenditure on utilities in order to address a problem underlying the cycle of arrears accumulation between EMAE, ENCO and the Treasury. At the same time, we are decentralizing the payment of utility bills to agencies. We expect agencies to take responsibility for checking the accuracy of the bills and making prompt payment to EMAE.

26. Comprehensive pay reform will be informed by a study commissioned by the government. Because of the considerable dispersion of fringe benefits across different parts of the public administration, which goes against the spirit of law No. 5/97, the government is carrying out a comprehensive wage study with the support of development partners. The study will result in a revised government salary structure which emphasizes the base salary, with benefits defined according to professional categories and rank.

27. Improving the execution of public investment projects remains a high priority for the government. 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 in order to enhance the country’s growth potential.

28. The government will continue to assist 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. Building on earlier work to identify pro-poor expenditures (see paragraph 6 of the Technical Memorandum of Understanding), we will work with IMF staff to establish indicative targets under the current program to facilitate more effective monitoring of these expenditures.

B. Monetary Policy, Financial Sector and Related Reforms

29. At the beginning of 2010, the BCSTP fixed the Dobra/Euro exchange rate and will ensure the convertibility of the dobra. Two agreements have been signed with Portugal to support the peg. One agreement sets up the economic cooperation framework between Portugal and São Tomé and Príncipe, and the other establishes a precautionary line of credit up to Euro 25 million. The government is aware of the need for strict discipline in the conduct of fiscal policy for the viability of a fixed exchange rate, and will refrain from borrowing from the BCSTP. The introduction of the peg is expected to move inflation on a downward path toward convergence with inflation in the Euro area.

30. Effective monetary management under the fixed exchange rate regime will require close cooperation between the BCSTP and the Ministry of Planning and Finance. The monetary program is geared to supporting the peg. 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 operations.

31. The BCSTP will continue strengthening banking sector supervision. 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.

32. As soon as the amended AML/CFT law is approved, the government plans to implement it with the help of our development partners. The Ministry of Planning and Finance, the Ministry of Justice and the BCSTP will cooperate in the implementation of the law. In the meantime, the government has an action plan to make functional the law in 2010, including the establishment of a Financial Information Unit, within the Ministry of Planning and Finance,

33. The BCSTP will enhance its communication with banks and the general public. In addition to regular meetings with the banking community and the media, the BCSTP will continue posting data on monetary and macroeconomic aggregates on its website. The BCSTP will also continue to post yearly its audited financial statements. Aggregate quarterly data of commercial banks will also be available on the BCSTP website. The audited 2008 accounts have been published on the BCSTP website.

34. The BCSTP will strengthen oversight of its internal controls and audit functions in line with the recommendations of the recent Safeguards Assessment mission from the IMF. Beginning with the audit of the 2009 accounts, the Audit Board of the BCSTP will discuss with the external auditors (at the planning and concluding stages of the audit) the audit approach and audit findings in the areas of internal control and financial reporting. The BCSTP has also prepared an action plan to introduce International Financial Reporting Standards (IFRS) in three stages: (i) a statement of the intent to implement IFRS and a qualitative description of differences with the current reporting standards (i.e., a gap analysis) in the notes to the audited financial statements for 2009 (to be prepared in 2010); (ii) a quantification and disclosure of material differences from IFRS in the 2010 financial statements (to be prepared in 2011); and (iii) publication of IFRS based financial statements for 2011 (to be prepared in 2012).

C. Other Structural Reforms

35. The government has changed the procedure for setting the prices of petroleum products. In order to promote more flexibility in the pricing of petroleum products and avoid the need for potentially burdensome government subsidies, the government has authorized ENCO to adjust domestic prices in line with the evolution of world prices. The guiding principle is to operate a transparent and symmetric system that passes through to consumers both increases and reductions in world prices. To this end, ENCO will be allowed to adjust prices after each shipment it receives based on detailed cost information it provides to the government.

36. The government will seek private investment in EMAE. Due to the technical and financial challenges EMAE has experienced in the last few years, the government intends to adopt a recovery strategy aimed at improving financial viability of this company, maintaining its features as utility service and promoting renewable energies. To that end, it will open up to the private sector, the company’s equity which is 100 percent state owned, just as it did with the telecommunication company some years ago.

37. 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 has already taken several steps to improve the investment climate, including revising the labor, commercial and customs codes. The government has created a “one-stop window” (“guichet unico”) and the central bank is in the process of establishing a credit reference bureau.

D. Capacity Building

38. São Tomé and Príncipe continues to need external support to build capacity for policy formulation and implementation as well as for monitoring economic developments. Our bilateral and multilateral development partners are providing support for our public financial management reforms, as well as for strengthening tax and customs administration and macroeconomic analysis at the Ministry of Planning and Finance. In order to deepen the public financial management reforms, we need assistance to build capacity in all Ministries in order to make use of the new systems being introduced. 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 financial management (in particular on the establishment of a single treasury account), and national accounts statistics. We also request assistance from the IMF to help us strengthen our Anti-Money Laundering framework.

E. Program Monitoring

39. Quantitative program targets for 2010 are contained in Table A2. There is no change in the fiscal, monetary and external debt variables for which quantitative performance criteria and indicative targets are set. Structural conditionality has been streamlined (Table B2). Submission to parliament of a budget for 2010 in line with understandings reached with IMF staff on limiting the size of the domestic primary deficit to 4.7 percent of GDP is a prior action for completing the first review. The attached Technical Memorandum of Understanding sets out the modalities of program monitoring, including definitions, adjustors for deviations from program assumptions, data sources and frequency of reporting to IMF staff.

Table A1.

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 Tomé and Príncipe authorities; and IMF staff estimates and projections.

The June and December test dates are applied on all reviews.

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 received.

With a grant element of less than 50 percent.

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 A2.

São Tomé and Príncipe: Performance Criteria and Indicative Targets for 2010

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

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

The June and December test dates are applied on all reviews.

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 received.

With a grant element of less than 50 percent.

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 B1.

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

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Table B2.

São Tomé and Príncipe: Structural Benchmarks for 2010

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Attachment II São Tomé and Príncipe: Technical Memorandum of Understanding

February 1, 2010

1. This technical memorandum of understanding (TMU) contains definitions and adjuster mechanisms that clarify the measurement of variables in Table A1 and A2, Quantitative Performance Criteria, and Indicative Targets under the ECF 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 currencies), excluding: (1) foreign grants, (2) the receipts from the local sale of in-kind grants (e.g., crude oil received from Nigeria, food aid, etc.), and (3) 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 (1) capital expenditure financed with external concessional loans and grants and (2) 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 budget 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 2010, the projects that comprise total potential expenditure under this category fall in two groups: (i) a group of projects worth 12 billion dobras to be financed with traditional sources of funds, and (ii) a group worth up to 78 billion dobras to be financed by drawing down the proceeds from the privatization of ENCO.1 Treasury-funded capital spending will correspond to the 2010 government plan for investment on roads, bridges, schools, water, and power. It will include spending on new construction, rehabilitation, and maintenance. Expenditure on wages and salaries and the purchase of goods and services related to the projects will not be classified as capital expenditure. The government investment program will be carried out by the Ministries of Public Works, Education, Health and Natural Resources.

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 2009 is projected at -179 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 17,353 dobra per U.S. dollar. The exchange rate of the dobra against the Euro will be 24,066 dobra per Euro and against the SDR will be 26,552dobra per SDR for 2010. The fixed parity between the dobra and the Euro, upon the adoption of peg in 2010, will replace the dobra per U.S. dollar as the program exchange rate.

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),2 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. The balance of the National Oil Account (NOA) is not included in NCG. All foreign exchange-denominated accounts will be converted to dobras at the program exchange rate. For reference, at end–December 2009, outstanding net bank financing of the government excluding NOA is projected to be at–152 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 2009 dobra base money is projected to be at 300 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 (1) NOA at the BCSTP and (2) bank reserves denominated in foreign currency are 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 2009 usable NIR is estimated to be at 637 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. All foreign-denominated accounts will be converted to dobras at the program exchange rate. For reference, at end-December 2009, 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.3 With respect to the precautionary line of credit from Portugal to support the pegging of the Dobra to the Euro, unpaid balances outstanding during the first three quarters of a given year will be excluded from the short-term external debt limit. However, outstanding balances at the end of a given year will be included in the assessment of compliance with the short-term external performance criterion. For reference, at end-December 2009 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.4,5 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 Tables A1 and A2 of the MEFP as a memorandum item labeled “official external program support”.

III. Use of Adjusters

20. The Performance Criterion on the domestic primary deficit will have one adjuster. The limit on the domestic primary deficit will be adjusted upward if the government finds budget support for 2009 and 2010 in addition to that described in the MEFP; this adjuster will be capped at 15 billion dobras (0.5 percent of GDP) for the year as a whole. 6

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, 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 Tables A1 and A2). 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 ECF 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 (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 ECF arrangement.

  • 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 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 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

Country Report No. 09/106, February 2009.

2

The program allows for Treasury-funded capital expenditures to increase by up to Db62 billion (1.9 percent of GDP) over the baseline if the execution of projects turns out to be stronger than assumed in the baseline.

3

See ¶6 of the Technical Memorandum of Understanding for the definition of pro-poor expenditures under the program.

4

The assessment was based on a simple model that used real per capita GDP and government consumption to assess developments in the real exchange rate. See Country Report No. 08/307 (September 19, 2008).

1

Six auctions of foreign exchange were conducted between March and October 2009, involving the use of US$7.4 million.

2

This is a US$500 million project of which about US$100 million (equivalent to 50 percent of GDP) is expected to be spent in 2010. The government’s main contribution to this project is a road from the airport to the site of the new port.

1

For 2009, the privatization-financed projects included in the second group were listed individually in Table C of the 2009 MEFP. The baseline projected that these projects would be executed by 50 percent in 2009.

2

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

3

The term “debt” is defined as in point 9 of the IMF Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements adopted by the Decision No. 6230-(79/140) of the Executive Board of the IMF, as amended effective December 1, 2009.

4

This performance criterion applies not only to debt as defined in point 9 of the IMF Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements adopted by the Decision No. 6230-(79/140) of the Executive Board of the IMF, as amended effective December 1, 2009, but also to commitments contracted or guaranteed for which value has not been received.

5

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 facilities.

6

Grants and related expenditures to cover the cost of the elections will be excluded from the measurement of the domestic primary deficit.

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Cover IMF Staff Country Reports
Democratic Republic of São Tomé and Príncipe: First Review Under the Three Year Arrangement Under the Extended Credit Facility Arrangement, and Request for Waivers of Performance Criteria: Staff Report; Staff Supplement; and Press Release on the Executive Board Discussion
Author:
International Monetary Fund
Volume/Issue:
Volume 2010: Issue 100
Publisher:
International Monetary Fund
ISBN:
9781455203666
ISSN:
1934-7685
Pages:
80
DOI:
https://doi.org/10.5089/9781455203666.002
Figure 1.

Sao Tome and Principe: Recent Macroeconomic Developments
Figure 2.

Sao Tome and Principe: Fiscal Indicators 2004-2009

(in percent of GDP)
Figure 3.

Sao Tome and Principe: Money and Credit Developments

Nominal Exchange Rate

Sao Tome and Principe - Assessment of REER, 1994-2008

Sao Tome and Principe - Assessment of REER, 1994-2008

Gap (between actual and equilibrium REER, in percent)