Democratic Republic of Sao Tome and Principe
Staff Report for the 2011 Article IV Consultation.
Author:
International Monetary Fund
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Publication Date:
08 Feb 2012
eISBN:
9781463939076
Language:
English
Keywords:
ISCR; CR; exchange rate; price; central bank; broad money; foreign currency; debt relief; current account; commercial bank; utility bill; Commercial banks; Oil; Global
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São Tomé & Príncipe remains at high risk of debt distress, although it has received substantial debt relief. The increases in world food and fuel prices have rekindled domestic inflation pressures. Inflation has declined substantially since 2008, but remains at double-digit levels. A tightening of fiscal and monetary policies in 2008 followed by a decline in world food and oil prices helped lower year-over-year inflation from a peak of 37 percent in July 2008 to 11.5 percent in June 2010.

Abstract

São Tomé & Príncipe remains at high risk of debt distress, although it has received substantial debt relief. The increases in world food and fuel prices have rekindled domestic inflation pressures. Inflation has declined substantially since 2008, but remains at double-digit levels. A tightening of fiscal and monetary policies in 2008 followed by a decline in world food and oil prices helped lower year-over-year inflation from a peak of 37 percent in July 2008 to 11.5 percent in June 2010.

CONTEXT: GRADUAL RECOVERY, INFLATION PRESSURES, AND HIGH RISK OF DEBT DISTRESS

1. After a marked slowdown in 2009, a gradual recovery in growth is underway in São Tomé and Príncipe. From the early 2000s, the prospect of finding oil attracted foreign direct investment (FDI) and boosted growth. After averaging an annual rate of over 6 percent during 2005–08, real GDP growth slowed to 4 percent in 2009, reflecting the impact of the global crisis on externally-financed investment projects (Figure 1). Envisaged large-scale projects such as a deep water port and a hotel were postponed because of funding difficulties. However, other projects are proceeding, including rehabilitation works at the port and airport (with funding from Angola). The recovery is led by the construction, tourism, and agriculture sectors.

Figure 1.
Figure 1.

São Tomé and Príncipe: Recent Macroeconomic Developments

Citation: IMF Staff Country Reports 2012, 034; 10.5089/9781463939076.002.A001

Sources: Data provided by the authorities and Fund staff estimates.

2. Recent increases in world food and fuel prices have rekindled domestic inflation pressures. Inflation has declined substantially since 2008, but remains at double-digit levels (Figure 1). A tightening of fiscal and monetary policies in 2008 followed by a decline in world food and oil prices helped lower year-on-year inflation from a peak of 37 percent in July 2008 to 11.5 percent in June 2010. This downward trend was reversed in the second half of 2010 by a combination of drought, spending by political parties ahead of elections and an upturn in international food prices. Adjustment in the domestic retail prices of petroleum products in March 2011 kept upward pressure on prices.1

Year-on-year inflation reached 17 percent in July before retreating to 13.2 percent in October.

3. The authorities adopted a fixed exchange rate regime—a conventional peg to the euro—in January 2010 with the aim of anchoring inflation expectations and boosting investment and growth. An agreement with Portugal that provides for a credit line (if needed) and São Tomé & Príncipe’s ECF-supported program have provided a framework for implementing policies to maintain the credibility of the peg.

4. São Tomé & Príncipe remains at high risk of debt distress, although it has received substantial debt relief. São Tomé & Príncipe reached the HIPC completion point in March 2007 and benefitted from HIPC and MDRI relief, which reduced the country’s external debt by 70 percent. However, the debt burden remains heavy especially in relation to exports. A narrow export base and a high dependence on imports render the country vulnerable to external shocks. External sustainability requires restraints on external borrowing and reforms to expand exports and boost growth.

5. The authorities expect oil production to start in 2015 in the Joint Development Zone (JDZ) shared with Nigeria (Box 1). Production is expected in Block 1 of the JDZ which was recently acquired by the French company Total which is extracting oil from an adjacent field located in Nigerian territory. Activity in São Tomé & Príncipe’s Exclusive Economic Zone (EEZ) is at an earlier stage of development. Thus far, the country has received signature bonuses amounting to US$49 million (43 percent of GDP) in 2005 and US$29 million (20 percent of GDP) in 2007, and expects to receive a further US$26 million (about 9 percent of GDP) in 2012.

Prospecting for Oil: Legal Framework and Activities to Date

For the purposes of oil and gas exploration, the authorities have divided the country (including its international waters) into two zones: a Joint Development Zone (JDZ) covering a maritime area claimed by São Tomé & Príncipe and Nigeria, and an Exclusive Economic Zone (EEZ) controlled entirely by São Tomé & Príncipe. An agreement signed in 2001 between the two countries established the JDZ and provides for the joint exploration for hydrocarbons and for their development, with the countries sharing the associated costs and revenues; Nigeria has a 60 percent share and São Tomé & Príncipe 40 percent.

The Fundamental Law on Petroleum Operations (2009) is the principal legislation that guides the granting of licenses for the exploration and extraction of oil in São Tomé & Príncipe. Another key piece of legislation is the Oil Revenue Law (2004) which guides the management of oil revenues. It established the National Oil Account (NOA) into which all oil-related revenues (including signature bonuses) should be deposited. It also sets limits on how much can be withdrawn from the NOA each year to fund the government budget.

Until oil production starts, annual withdrawals from the NOA for the budget are limited to 20 percent of the balance at the end of the preceding year. Once oil production starts, the bulk of current revenues are to be transferred into a sub-account of the NOA—the Permanent Fund of São Tomé & Príncipe. Resources in the Permanent Fund are to be invested with a view to generating a permanent income stream for the NOA.

Thus far, there have been two licensing rounds of blocks in the JDZ and one round in the EEZ. Nine blocks were offered in the JDZ out of which six have been allocated to successful bidders, and product sharing contracts have been agreed with respect to five. In the EEZ, pre-emption awards of four blocks were made to two companies ahead of the launch of the first licensing round in 2010. Seven blocks were offered for bids in the EEZ of which one has been allocated to the sole successful bidder.

6. A new Prime Minister and a new President took office in 2010 and 2011, respectively. A new government led by Prime Minister Patrice Trovoada was sworn into office in August 2010, following parliamentary elections in which his party, which had been in opposition before the elections, won 26 out of the 55 seats. Mr. Manuel Pinto da Costa, the first President after independence (he ruled from 1975 to 1991), won the Presidential election and was inaugurated in September 2011.

7. Implementation of the main recommendations of the last Article IV consultation has been uneven (Box 2). Executive Directors underscored the need for fiscal adjustment to lower inflation and restore financial stability, and they called for reforms to improve the investment climate in order to achieve sustained private-sector led growth.

São Tomé and Príncipe: Main Recommendations of the 2008 Article IV Consultation

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8. Performance under the ECF-supported program has been mixed. The Executive Board approved a new three-year ECF arrangement with São Tomé & Príncipe in March 2009. The first review was completed in February 2010. Completion of subsequent reviews has been held up by a combination of slippages against program targets (late-2009 and early 2010) and delay in completing a new National Poverty Reduction Strategy (NPRS). There has been significant progress in implementing structural reforms under the program, although many measures took longer to implement than programmed such as the establishment of a credit reference bureau. Reforms have also strengthened public financial management (especially accounting and treasury functions) and banking supervision capacity in the central bank. However, adoption of an automatic adjustment mechanism for prices of petroleum products has not yet been implemented because of the authorities’ concern about potential adverse social effects from removing the implicit subsidies on these products. The authorities expect to complete the new NPRS in early 2012.

9. Staff’s updated medium-term macroeconomic outlook indicates lower growth, wider current account deficits and a more gradual disinflation path than presented in the last staff report (text table). The pace of the recovery in growth and the evolution of the current account deficit reflect the revised outlook for externally financed public and private investments, including expected disbursements from official concessional loans from Angola, Portugal, Nigeria, and Equatorial Guinea. FDI-financed projects include construction of a fuel terminal, and rehabilitation of the port and airport. The outlook for inflation reflects a projected decline in nonfuel commodity prices over the medium term. The pace of the recovery is subject to downside risks stemming from the ongoing financial difficulties in Europe. A protracted recession in Europe (especially in Portugal) will likely dampen growth in São Tomé & Príncipe through the aid, FDI, tourism and remittances channels.

Sao Tome and Principe - Selected Economic Indicators, 2010-16

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Sources: Authorities and Staff estimates.

FISCAL CONSOLIDATION AND MACROECONOMIC STABILITY

10. With the adoption of a fixed exchange rate regime, fiscal policy has become the authorities’ principal instrument for achieving sustainable macroeconomic balances. After a slippage in 2009, fiscal performance improved in 2010 and 2011 (Figure 2). Following a sharp widening in 2009—mainly due to an increase in Treasury-financed capital expenditure—the domestic primary deficit narrowed in 2010 on account of increased revenues. Tax revenues rose by 2 percentage points of GDP, thanks mainly to the payment of fuel tax arrears by the fuel importing company (ENCO). On the spending side, the government contained domestic primary expenditure by curtailing spending on Treasury-financed development projects and on goods and services. In 2011, the domestic primary deficit is estimated to have narrowed further on account of continued expenditure restraint.

Figure 2.
Figure 2.

São Tomé and Príncipe: Fiscal Indicators 2005–11

Citation: IMF Staff Country Reports 2012, 034; 10.5089/9781463939076.002.A001

Sources: Data provided by the authorities and Fund staff estimates.

11. The overall budget deficit has fluctuated widely, reflecting volatility in project grants. Over the last three years, facing shortfalls in project grants, the authorities resorted to external concessional loans to finance part of the public investment program.

12. Recent reforms have sought to boost tax revenues. Specific measures included a more progressive personal income tax structure (2009), a simplification of the corporate tax from multiple rates with a top marginal rate of 45 percent to a single rate of 25 percent (2010), withholding of taxes on service providers (2009), and strengthening tax administration (e.g., increased audits and stepped up collection of tax arrears). The authorities argued that the recent changes in direct taxes and their efforts to strengthen revenue administration should be given more time before their impact is assessed. At the same time they indicated their determination to continue strengthening revenue administration in both the tax and customs departments.

São Tomé and Príncipe: Tax Revenue Ratios

(percent of GDP)

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Indirect taxes are adjusted to allocate fuel taxes in 2009 and 2010 to year in which they were due.

13. Cross-arrears between the government, the state-owned water and electricity corporation (EMAE) and ENCO remain a problem. During 2009 and 2010, the government cleared its arrears to EMAE. This helped EMAE to reduce its outstanding debt to ENCO for fuel supplies, and enabled ENCO to settle its arrears on fuel taxes to the Treasury. However, in the first half of 2011, regional and local governments accumulated 1.4 percent of GDP in unpaid bills to EMAE in spite of increased provisions for such payments in the 2011 budget. In turn, EMAE’s debt to ENCO for unpaid fuel bills amounted to 4.7 percent of GDP at end-June 2011. ENCO also accumulated fuel tax arrears to the state in the first half of 2011 amounting to 0.3 percent of GDP. This is roughly equivalent to ENCO’s accumulated net losses arising from the difference between the administered retail prices of petroleum products and the “real” prices (reflecting import costs, taxes and distribution margins).

14. Staff urged the authorities to ensure that regional and local governments clear their arrears to EMAE in the second half of 2011. Staff suggested that portions of transfers from the central government to municipalities be redirected to settle the outstanding utility bills. Failure to enforce a hard budget constraint on the regional and local authorities will likely lead to lower-than-expected fuel tax revenues and a larger-than-planned domestic primary deficit for 2011. Staff also urged the authorities to make realistic provisions for utility bills in the 2012 budget.

15. Discussion of the 2012 budget was cast in the government’s medium-term objective of stabilizing the domestic primary deficit at 2–3 percent of GDP. This level of the deficit can be financed through non-debt-creating means such as withdrawals from the NOA and budget support grants. Over the medium term, the government aims to mobilize enough domestic revenues to at least cover recurrent expenditures.

16. The 2012 budget submitted to the national assembly aims to lower the domestic primary deficit to 3.2 percent of GDP. This would be achieved by sustained efforts to mobilize more domestic revenues by enforcing compliance with the tax laws and improving efficiency in customs and tax administration. The government plans to control spending by keeping the wage bill fixed in real terms and prioritizing spending on other goods and services and on transfers to keep domestic primary expenditures in line with available resources. The government indicated that it would continue PFM reforms, with emphases on better monitoring and reporting on budget execution and publication of government accounts. The deficit for 2012 is in line with available non-debt-creating financing, including expected budget support grants from the World Bank and Gabon.

17. Staff advised the government to implement measures to make revenues from import duties and fuel taxes more robust. Noting the large role of Ministerial discretion in the granting of exemptions from import duties, staff urged the government to become less generous in granting these exemptions. The authorities said they would undertake a thorough review of exemptions. On fuel taxes, staff noted that more frequent adjustment of retail prices in line with movements in world prices would lower the risk of fuel tax arrears. The government informed staff that it is consulting ENCO with a view to define a plan of action to promote more flexibility in the pricing of petroleum products and thus lower burdensome implicit subsidies.

18. The authorities have adopted a medium-term strategy for making EMAE commercially viable. The strategy is informed by a study by the World Bank and IFC and has the following key elements: (i) strengthening management (including the option of private sector participation); (ii) enhancing bill collection (e.g., through installation of pre-paid meters); (iii) phased investments in production, transmission and distribution; and (iv) bringing tariffs gradually in line with costs. The authorities stressed that that the investment component is critical for addressing technical inefficiencies that have led to huge losses (equivalent to about 30 percent of power generated) during the generation and transmission process. The cost of implementing the strategy is estimated at about US$20 million over the medium term.

ENHANCING MONETARY MANAGEMENT AND FINANCIAL STABILITY

19. Against a backdrop of limited scope for monetary policy and rapid credit growth, the authorities are taking steps to strengthen monetary management and the supervision of banks. With technical assistance from the Fund, the central bank has adopted a liquidity management framework to improve its monitoring and forecasting of liquidity conditions. The BCSTP is also closely monitoring financial soundness indicators to better supervise banks.

20. São Tomé & Príncipe’s financial system is underdeveloped and highly dollarized.2 It is dominated by the banking system, which comprises the central bank, one large commercial bank, and six small banks. Foreign currency deposits make up 60 percent of the broad money stock while about 70 percent of loans extended by the commercial banks to the private sector are denominated in foreign currencies (Figure 3).

Figure 3.
Figure 3.

São Tomé and Príncipe: Money and Credit Developments

Citation: IMF Staff Country Reports 2012, 034; 10.5089/9781463939076.002.A001

Sources: Data provided by the authorities and Fund staff estimates.

21. The central bank is taking measures to de-dollarize the financial system. The BCSTP has phased out its role in clearing foreign currency checks, and changed the regulations regarding commercial banks’ reserve requirements. Effective March 2010, the BCSTP required commercial banks to hold all reserve requirements in dobra, including those related to foreign currency deposits. In response to difficulties most banks had in meeting the new requirement, the BCSTP lowered the reserve requirements from 24.5 percent to 18 percent for dobra deposits and to 21 percent for foreign currency deposits. Banks are also now allowed to hold reserve requirements in foreign currency for up to 10 percent of foreign currency deposits.

22. Growth in broad money in the last few years has been driven by credit to the private sector. Credit growth raised the loan/deposit ratio from 70 percent in December 2008 to 120 percent in June 2011. As sources of domestic funding began to dry up, commercial banks started using nonresident foreign currency deposits to fund new loans. There has been a deceleration in credit expansion in 2011 which has translated into slower growth in broad money. The authorities noted that the automatic deposit of salaries of civil servants into bank accounts (from April 2009), increased capital requirements and lower reserve requirements allowed banks to increase their lending. They saw credit growth as a sign of deepening financial intermediation, and noted that banks are reporting a significant decline in nonperforming loans from almost 45 percent of gross loans in 2006 to about 10 percent in mid-2011. However, they concurred with staff on the need to strengthen supervision, including enforcing compliance with the reserve requirements.

23. The pace of disinflation since the introduction of the peg has been slower than expected. The mission found no evidence of second round effects in 2010 and 2011 associated with rising world food and fuel prices. Given São Tomé & Príncipe’s heavy reliance on imports—including for food and other consumer goods—staff agreed with the authorities that import costs are a major driver of domestic price developments. The authorities added that limited capacity and frequent breakdowns of machinery at the port have hindered the steady flow of consumer goods imports, resulting in periodic shortages. They noted that given the heavy weight of food in the CPI basket (about 70 percent), increased domestic production of food offered the best hope of curtailing headline inflation in the long run.

24. The BCSTP is taking steps to strengthen the regulation and supervision of banks. Most banks are not making profits, but their shareholders have been willing to cover their losses and augment their capital. The shareholders—mainly from Angola, Nigerian, and Cameroon—appear willing to accept the losses as the cost of maintaining a foothold in São Tomé & Príncipe in anticipation of a coming oil boom. All banks have now complied with new minimum capital requirements introduced in 2010 (Euros 3 million or US$5 million for commercial banks, and US$7 million or the Euro equivalent for investment banks). The BCSTP took over management of a commercial bank in 2010 due to the bank’s failure to comply with the new minimum capital requirements and weaknesses in its management. The bank was returned to its shareholders after meeting the minimum capital requirement and changing the management. The BCSTP has asked all commercial banks to submit new business plans for their operations in São Tomé & Príncipe by end-December 2011. The central bank plans to assess how realistic the business plans are. In view of the risks to financial stability posed by rapid credit growth and by the country’s vulnerability to economic and financial stress in Europe, staff welcomed the BCSTP’s plans to complete on-site inspections of all the existing seven commercial banks by end-2012; so far, it has completed inspections of three banks.

25. São Tomé & Príncipe has been placed on a list of non-cooperating countries by the Financial Action Task Force on Money Laundering (FATF). Although São Tomé & Príncipe amended its Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) law in 2010 in line with the recommendations of the FATF, and has established a Financial Intelligence Unit to oversee implementation of the law, the FATF decided that São Tomé & Príncipe has not made enough progress in monitoring money laundering activities in the country. The authorities are seeking assistance from various partners to help them get off the list. The Fund has agreed to provide technical assistance in early 2012, subject to the approval of the Steering Committee of the AML/CFT Topical Trust Fund.

TOWARD A SUSTAINABLE EXTERNAL POSITION

A. External Debt Sustainability

26. An updated joint Fund-World Bank DSA indicates that São Tomé & Príncipe remains at high risk of debt distress. Assistance under the HIPC Initiative and MDRI reduced the burden of the country’s external debt substantially. However, a narrow export base, a high dependence on imports, and a heavy reliance on external financing render it highly vulnerable to external shocks. In the baseline scenario, the outlook improves after oil production starts in 2015. Because of uncertainty about oil prospects, the DSA includes an alternative no-oil scenario. Under this scenario, debt levels breach the NPV of debt-to export threshold significantly throughout the projection period. A sizeable additional fiscal adjustment (2 percent of GDP) and lower external borrowing during 2013–15 would be required to achieve a sustainable debt/GDP path. The fiscal adjustment is to be achieved by reducing Treasury-financed capital expenditures in 2013-14 and by expenditure restraint in 2014-15. This results in slightly lower growth than in the baseline. In order to mitigate the risk of debt distress the staffs recommended that the authorities rely mainly on grants to finance the country’s development program, accelerate reforms to improve policy and institutional performance (including debt management), and continue reducing the cost of doing business to enhance the prospects for sustaining high non-oil growth.

27. The authorities were in broad agreement with the assumptions and recommendations of the DSA. They reiterated their commitment to rely mostly on grants to finance the public investment program (PIP). However, they stressed that supporting growth and diversification required mobilizing sufficient resources to implement the PIP, and that to the extent that grant financing is insufficient, some borrowing may be inevitable. They indicated that any borrowing would be on highly concessional terms, with a grant element of at least 50 percent.

B. Exchange Rate Assessment and International Competitiveness

28. Without oil, São Tomé & Príncipe’s current account is unsustainable and staff assesses the real exchange rate to be somewhat overvalued. In the last few years, FDI, oil signature bonuses, and concessional loans have helped finance a large increase in the current account deficit. These inflows have financed higher imports of both investment and consumer goods. Some FDI has helped boost cocoa output and exports, but from a very small base. The evolution of the real exchange rate over the last two decades shows a sharp real depreciation in the first half of the 1990s followed by mild fluctuations without a clear trend, offering no clear indication of a competitiveness problem associated with the real exchange rate. CGER-type estimates of real exchange rate misalignment produce results that range from 37 percent overvaluation to 20 percent undervaluation (Appendix I). On balance, while quantitative estimates are inconclusive, continuing high inflation in São Tomé & Príncipe compared to the euro area will lead to over-valuation of the real exchange rate and loss of international competitiveness,

29. The authorities have made substantial improvements in the investment climate. The World Bank’s 2012 Doing Business Survey (published in October 2011) ranked São Tomé & Príncipe among the top reformers in the past year. The areas that improved the most were “starting a business” and “paying taxes” in which São Tomé & Príncipe moved up the rankings by 73 and 24 places, respectively. São Tomé & Príncipe’s overall ranking improved from 174 to 163 out of 183 countries. The authorities made starting a business easier by establishing a one-stop-shop for investors and eliminating a raft of licensing and minimum capital requirements for starting a wide range of businesses. Other specific measures included reducing the time required to process building permit applications and lowering property transfer taxes. The authorities highlighted the above improvements in the discussions, but also recognized that there is room to further improve the investment climate, including upgrading the country’s physical infrastructure (e.g., port, airport, roads) and reforming the energy sector.

uA01fig03

São Tomé & Príncipe: Assessment of REER, 1990-2010

Citation: IMF Staff Country Reports 2012, 034; 10.5089/9781463939076.002.A001

uA01fig04

Sao Tome and Principe: Doing Business Indicators

Citation: IMF Staff Country Reports 2012, 034; 10.5089/9781463939076.002.A001

Source: World Bank 2012 Doing Business Report.
uA01fig05

Sao Tome and Principe and Comparator Countries: Rank on Ease of Doing Business

Citation: IMF Staff Country Reports 2012, 034; 10.5089/9781463939076.002.A001

Source: World Bank Doing Business database.
Figure 4.
Figure 4.

São Tomé and Príncipe: External Sector 2005–11

Citation: IMF Staff Country Reports 2012, 034; 10.5089/9781463939076.002.A001

Sources: Data provided by the authorities and Fund staff estimates.

POVERTY REDUCTION, DATA, AND CAPACITY ISSUES

30. The government expects to publish a new National Poverty Reduction Strategy (NPRS) in early 2012. The new strategy will replace the Poverty Reduction Strategy Paper formulated in 2002, which was updated in 2005 with a three-year Priority Action Program (PAP, 2006-08). An assessment of PAP implementation attributed the low rate of execution of envisaged projects to political instability (i.e., frequent changes in government and re-organizations of ministries), lower-than-expected levels of external aid, and a lack of ownership of the evaluation and monitoring framework by sector ministries.3 The authorities indicated that they want the new strategy to be fully owned by a broad range of stakeholders.

31. The main objectives of new NPRS are expected to be similar to those of the old PRSP. The authorities emphasized the following key elements:

  • Maintaining macroeconomic stability while increasing investment in infrastructure in order to sustain accelerated and broad-based economic growth.

  • Promoting agriculture, fisheries and tourism as the leading sectors for growth, employment creation and poverty reduction.

  • Improving the population’s access to basic social services, including education and health.

  • Combating corruption and improving the governance of public institutions.

  • Addressing issues of food security, adaption to climate change, and vulnerabilities to natural disasters.

32. The NPRS will update São Tomé & Príncipe’s poverty profile. A household survey in 2001 estimated the incidence of poverty in São Tomé & Príncipe at 54 percent. The authorities noted that they have recently secured technical assistance from the UNDP for analyzing the results of a household survey that was completed in 2010, and that this work will form the basis for updating the country’s poverty profile.

33. Progress toward achieving the Millennium Development Goals has been mixed (Table 10). São Tomé & Príncipe is advancing toward meeting the targets on universal primary education, infant mortality, and eradication of Malaria by 2015. The authorities also expect significant progress in combating HIV/AIDs and in achieving gender equality. However, it is unlikely that the goal of eradicating poverty and hunger will be met.

Table 1.

São Tomé and Príncipe: Selected Economic Indicators, 2007–16

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

Central bank (BCSTP) mid-point rate.

Includes HIPC and MDRI debt relief.

Excludes oil related revenues, 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 deposits 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 new allocation of 6.5 million SDR.

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

For 2012, based on the assumption that dispute will be settled to allow disbursement of bonuses for Block 6.

Table 2.

São Tomé and Príncipe: Financial Operations of the Central Government, 2007–16

(Billion dobra)

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

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

Exclude oil related revenues, grants, interest earned, scheduled interest payments, and foreign-financed capital outlays.

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 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.

For 2012, based on the assumption that dispute will be settled to allow disbursement of bonuses for Block 6.

Table 3.

São Tomé and Príncipe: Financial Operations of the Central Government, 2007–16

(Percent of GDP)

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

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

Exclude oil related revenues, grants, interest earned, scheduled interest payments, and foreign-financed capital outlays.

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 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.

For 2012, based on the assumption that dispute will be settled to allow disbursement of bonuses for Block 6.

Table 4.

São Tomé and Príncipe: Summary Accounts of the Central Bank, 2007–16

(Billion dobra)

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

For 2009, includes new allocation of 6.5 million SDR.

Table 5.

São Tomé and Príncipe: Depository Corporations Survey, 2007–16

(Billion dobra)

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

Revised commercial banks monetary data beginning in Jan. 2010 is not comparable with historical series.

Table 6.

São Tomé and Príncipe: Balance of Payments, 2007–16

(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.

For 2012, based on the assumption that dispute will be settled to allow disbursement of bonuses for Block 6.

For 2009, includes new allocation of 6.5 million SDR.

In percent of exports of goods and nonfactor services.

Gross reserves exclude the National Oil Account and commercial banks’ foreign currency deposits 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: Balance of Payments, 2007–16

(Percent of GDP)

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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.

For 2012, based on the assumption that dispute will be settled to allow disbursement of bonuses for Block 6.

For 2009, includes new allocation of 6.5 million SDR.

In percent of exports of goods and nonfactor services.

Gross reserves exclude the National Oil Account and commercial banks’ foreign currency deposits 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, 2007–16

(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 new allocation of 6.5 million SDR.

For 2012, based on the assumption that dispute will be settled to allow disbursement of bonuses for Block 6.

Includes revenue from Nigeria oil program.

Includes projected disbursements under the new ECF.

Table 9.

São Tomé and Príncipe: Financial Soundness Indicators for the Banking Sector, 2007–11

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Source: São Tomé and Príncipe authorities
Table 10.

São Tomé & Príncipe: Millenium Development Goals

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Source: World Bank Development Indicators.

Correspond to 1991

Correspond to 1992

Correspond to 1997

Correspond to 1999

Correspond to 2001

Correspond to 2002

Correspond to 2004

Correspond to 2007

Correspond to 2008

Correspond to 2009

34. São Tomé & Príncipe’s capacity for macroeconomic management remains low. The authorities are receiving help from several partners to strengthen public financial management (World Bank, IMF), tax and customs administration (USA), banking supervision (IMF), macro-fiscal analysis (Portugal), central bank liquidity management (IMF) and statistics (IMF). Technical assistance from the Fund in FY2012 will include support for capacity building in the areas of revenue administration, AML/CFT, government finance statistics, and balance of payments statistics.

35. The data provided to staff are broadly adequate for surveillance. However, national accounts and external sector statistics are very weak.

STAFF APPRAISAL

36. Increased external financing from regional sources has helped São Tomé & Príncipe’s recovery from the impact of the 2008 global financial crisis. In particular, investments in the port and airport by Sonangol have partially made up for projects that have been postponed on account of funding difficulties faced by investors from Europe. Also, concessional loans and grants from neighboring countries have helped the authorities implement their public investment program. Nevertheless, because of continuing strong trade and investment links with Europe, São Tomé & Príncipe’s recovery is subject to downside risks stemming from the ongoing financial and economic difficulties in Europe.

37. Staff welcomes the authorities’ 2012 budget proposals which build on progress made in 2010 and 2011 in fiscal consolidation. Fiscal consolidation to be achieved by restraining lower priority discretionary spending while continuing the efforts to boost domestic revenue. Over the medium term, staff recommends measures to enhance domestic revenues and to break the cycle of domestic cross arrears. Reduction in exemptions from customs duties and adoption of an automatic price adjustment mechanism to pass through changes in world fuel prices to retail prices would contribute to more robust revenues. Breaking the cycle of cross arrears will require realistic budgeting for the government’s utility bills, imposing a hard budget constraint on regional and local governments, as well as reforms to make EMAE a commercially viable entity.

38. The authorities need to maintain very prudent external borrowing policies to mitigate the high risk of debt distress. The authorities have accumulated substantial new external debt in the last few years to make up for lower-than-expected project grants. Staff advised the government to slow down the pace of new borrowing and instead rely mainly on grants for financing the public investment program. If the government must borrow, new loans should be on highly concessional terms; adherence to a grant element of at least 50 percent for new loans—a commitment by the authorities under the ECF-supported program—would help mitigate the risk of debt distress.

39. Continued rapid credit growth and vulnerability to economic and financial stress in Europe pose risks to international reserves and financial stability. This calls for heightened vigilance by the BCSTP. Staff welcomes the central bank’s commitment to strengthening monetary management and banking supervision.

40. The authorities are to be commended for improving the investment climate. Staff welcomes the progress achieved in improving the legal framework—including making it easier to start a business, dealing with construction permits, and registering property—and the steps taken to upgrade the port and airport. Further progress is needed to improve basic infrastructure and to assure reliable energy supply in order to boost growth in output and exports.

41. It is proposed that the next Article IV Consultation with São Tomé & Príncipe takes place within 24 months, subject to the decision on consultation cycles (Decision No. 14747-(10/96), September 28, 2010).

Appendix I. São Tomé and Príncipe: Exchange Rate Assessment Using CGER Methodologies

This Appendix1 presents the results of assessments of São Tomé and Príncipe’s exchange rate, based on the IMF’s Consultative Group on Exchange Rate Issues (CGER) methodologies. CGER applies three approaches—macroeconomic balance, external sustainability, and equilibrium real exchange rate. The assessments focus on the pre-oil era, using 2014 as the medium-term reference period. Oil production—projected to begin in 2015—is expected to support a large improvement in the current account balance and a sustainable debt trajectory (see DSA).

In summary, the various approaches deliver a range of results from 13–37 percent overvaluation to a 20 percent undervaluation. Macroeconomic balance approach. In this approach, an equilibrium current account balance (“norm”) is estimated by relating the current account balance to macroeconomic fundamentals. Typical fundamentals include fiscal balance, output growth, real income, oil balance, demographics, trade openness and productivity. Applying coefficients estimated by CGER from two studies of low-and middle-income countries yields current account norms for São Tomé & Príncipe of -12.6 and -15.7 percent of GDP. This compares with an underlying current account balance in São Tomé & Príncipe (based on the projected current account balance in 2014 under the baseline) of -39 percent of GDP. The elasticity of the current account balance relative to the REER is assumed to be -1.05 drawing on Tokarick (2010).2 Thus, this approach implies a real exchange rate overvaluation of 22–25 percent.

Table 1.

Selected Indicators of Real Effective Exchange rate Assessment

(in percent of GDP, unless otherwise indicated)

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Observed CA in 2009

Using 2014 CA as the medium-term referecne period.

Using coefficients relating CA to macroeconomic fundamentals estimated by CGER and from samples of low-and middle income countries

“ + ” overvaluation, “- ” undervaluation.

Change in the REER (in percentage) needed to close gap.

REEER derived from the coefficient estimates of the EREER approach from CGER and a recent panel study of non-advanced countries by Aydin (2010)

Macroeconomic Balance Approach

(variables in % of GDP, unless otherwise specified)

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External sustainability approach. This approach calculates the current account balance that would be consistent with a benchmark value for net foreign assets. The resulting sustainable current account balance is calculated at about -4 percent of GDP in 2014. Using the same elasticities as in the macroeconomic balance approach yields a real exchange rate overvaluation of about 37 percent.

Equilibrium Real Exchange Rate Approach. Based on the coefficients estimated by Aydin (2010) for Low to Medium-Income Countries, this approach yields a 20 percent undervaluation when foreign aid is included as an explanatory variable. Excluding foreign aid (which is statistically not significant) yields an overvaluation of about 15 percent.

São Tome and Principe: Equilibrium real exchange rate approach

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1

Prices of gasoline, diesel, and kerosene were increased by 18 percent, 19 percent, and 33 percent, respectively. The new prices still fall short of the tax-inclusive break-even prices by 20 percent for gasoline, 12 percent for diesel, and 40 percent for kerosene.

2

The dominant foreign currencies in use are the US dollar and the euro.

3

See 2008 Annual Progress Report on PRSP Implementation.

1

Prepared by Jamal Omar, Toomas Orav, and Alfredo Torrez.

2

Tokarick, S. 2010. “A Method For Calculating Export Supply and Import Demand Elasticities”, IMF Working Paper No. 10/180.

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Cover IMF Staff Country Reports
Democratic Republic of São Tomé and Princípe: Staff Report for the 2011 Article IV Consultation.
Author:
International Monetary Fund
Volume/Issue:
Volume 2012: Issue 034
Publisher:
International Monetary Fund
ISBN:
9781463939076
ISSN:
1934-7685
Pages:
67
DOI:
https://doi.org/10.5089/9781463939076.002
Figure 1.

São Tomé and Príncipe: Recent Macroeconomic Developments
Figure 2.

São Tomé and Príncipe: Fiscal Indicators 2005–11
Figure 3.

São Tomé and Príncipe: Money and Credit Developments

São Tomé & Príncipe: Assessment of REER, 1990-2010

Sao Tome and Principe: Doing Business Indicators

Sao Tome and Principe and Comparator Countries: Rank on Ease of Doing Business
Figure 4.

São Tomé and Príncipe: External Sector 2005–11