Statement by Ngueto Tiraina Yambaye, Alternate Executive Director for the Democratic Republic of São Tomé and Príncipe July 20, 2012

The Democratic Republic of São Tomé and Príncipe shows prudence in maintaining its fiscal stance assisted by the IMF extended credit facility (ECF). The authorities aim to concentrate on maintaining macroeconomic stability even though debt distress owing to a narrow export base and other issues loom as threats. Focus is on strengthening of existing monetary and public finances policies, banking supervision, and anti-money laundering, which will help in reducing poverty. Revenue from oil production is also expected to help achieve the target by 2015.


The Democratic Republic of São Tomé and Príncipe shows prudence in maintaining its fiscal stance assisted by the IMF extended credit facility (ECF). The authorities aim to concentrate on maintaining macroeconomic stability even though debt distress owing to a narrow export base and other issues loom as threats. Focus is on strengthening of existing monetary and public finances policies, banking supervision, and anti-money laundering, which will help in reducing poverty. Revenue from oil production is also expected to help achieve the target by 2015.

Our São Toméan authorities are grateful to Fund Staff for the fruitful discussions held in São Tomé in May 2012. They greatly appreciate the valuable technical and financial assistance, as well as the policy advice they have received in the context of IMF-supported programs. In order to consolidate the progress achieved over the years towards stronger economic growth and macroeconomic stability, they are requesting a new arrangement under the Extended Credit Facility (ECF) to help them shape their policies to support growth and reduce inflation and poverty. The new ECF-supported program is expected to build on recent experience, as highlighted in the Ex-post assessment of longer term program engagement (EPA) in São Tomé and Príncipe. It is designed around the objectives of reducing poverty, promoting good governance, and achieving sustainable and inclusive growth as set forth in the country’s new poverty reduction strategy.

1. Economic Developments and Performance under the recent ECF Arrangement

The economy of São Tomé and Príncipe continues to recover from the impact of an unfavorable global environment. Growth accelerated from 4½ percent in 2010 to 5 percent last year, driven by the growing construction activities and an increase in foreign direct investment and other private capital inflows.

The exchange rate peg to the euro as well as declining international food prices contributed to a declining trend in inflation from an annual average peak of 32 percent in 2008 to 14 percent in 2011. As of April 2012, year-on-year inflation is estimated at 8 percent notably as a result of stable fuel and energy prices.

My authorities persevered in fiscal prudence and continued to make substantial progress as regards fiscal consolidation. The domestic primary deficit improved from 8 percent of GDP in 2009 to 4.1 percent in 2010 and 3 percent in 2011, reflecting the authorities’ efforts to contain non-priority spending and improve tax collections.

In the monetary sector, after accelerating to 25 percent in 2010, growth in broad money declined to 8 percent in 2011, as a result of the deceleration in private sector credit. The authorities continued to take measures to ensure the soundness of the financial sector as illustrated by the requirement for unprofitable banks to raise capital, and for all banks to raise their capital-to-risk ratio above 10 percent. In spite of an increase in non-performing loans, most banks were profitable in 2011.

The external current account deficit improved in 2011 when some investment projects reached their completion stage. This contributed to a slowdown in import growth and partly softened the impact of rising international fuel prices on the trade balance. However, the current account deficit was financed only partially by private sector capital flows, leading to a decrease in net international reserves.

Performance under the recently expired ECF-supported program (2009-2012) has been affected by significant capacity constraints and by the impacts of the global economic crisis. Nevertheless, my authorities consider that significant progress has been made in implementing structural reforms. The government has finalized its new National Poverty Reduction Strategy Paper (NPRSP) which, after broad-based consultations, will be approved by the Cabinet by end-July 2012 and discussed by the National Assembly thereafter. In the financial sector, the credit reference bureau has become operational, providing banks with information necessary to analyze and evaluate the creditworthiness of their customers. The authorities have also approved a new investment code providing equal treatment for domestic and foreign investors, as well as measures to substantially reduce administrative hurdles and the cost of starting a business.

2. Medium term Policy and Reform Agenda

The proposed new ECF-supported program is derived from the priorities of the new NPRSP and the recommendations of the recent EPA. It aims at achieving fiscal, monetary and financial stability, as well as sustainable economic growth and poverty reduction. More specifically, the program is directed at (i) raising annual non-oil real GDP growth to 6 percent over the medium term, (ii) reducing inflation to single digits and to the level of international inflation, and (iii) maintaining a gross international reserve cover of at least 3 months of imports in support of the exchange rate peg.

Fiscal policy

The strategy adopted by my São Toméan authorities remains prudent, and focus on mobilizing domestic revenue to create additional fiscal space for infrastructure and pro-poor spending, while keeping the domestic primary deficit in line with non-debt creating financing. For 2012, the authorities are targeting a domestic primary deficit of 3¼ percent of GDP, consistent with the approved budget and available non-debt creating financing. For 2013 and 2014, the government aims to attain a domestic primary deficit of 3.1 and 3.0 percent of GDP respectively.

To achieve these targets, the authorities will continue to mobilize additional domestic revenue and contain non-priority domestic primary spending. Among the measures envisaged, the government intends to gradually increase the domestic price of fuel products by the end of 2012. This is expected to enable the importing oil company (ENCO) to clear its fuel tax arrears and pay fuel taxes on time. This will also help to resolve the issue of cross-arrears when the government, ENCO, and the electricity and water company (EMAE) reconcile and certify the stock of unpaid bills and unpaid fuel taxes as intended by the authorities.

My authorities also aim to control spending by containing outlays on goods and services and enforcing a strict budget constraint on local and regional governments to avoid budget overruns or a buildup in arrears. They intend to continue protecting priority spending by increasing treasury financed pro-poor and development projects and by relying on available non-debt creating financing from donors as well as drawings from the national oil account (NOA).

On the revenue side, the authorities will pursue their efforts to strengthen public finances and plan to further modernize the customs and tax administrations, and improve public financial management. Regarding the tax administration, a strategy plan is being developed with technical assistance from development partners, to better integrate its essential functions, further modernizing the tax legislation and rationalizing tax exemptions. The plan will also focus on strengthening fiscal operations and increasing revenue, promote the effective use of taxpayer segmentation in the functioning of the tax administration, and improve the education of taxpayers and the working conditions of the tax Directorate. In addition, the government will continue to improve the public finance legislation and upgrade the legal framework for fiscal responsibility to the level of international standards. Regarding customs administration, further modernization measures will be carried by the authorities by end-2012 along the recommendations of the IMF technical assistance mission which is expected later this year.

Monetary and financial sector policies

The agenda of the authorities in the monetary and financial sector aims at achieving three main goals: strengthening monetary management, maintaining financial stability, and improving the credibility of the financial system. Strengthening monetary management will require greater cooperation between the central bank and the finance ministry. In this regard, the two institutions signed a memorandum of understanding in May 2012 to facilitate the flow of information between them. Also, the Central Bank will improve liquidity management by developing a liquidity forecasting model and an accompanying reference manual to guide domestic liquidity management, with technical assistance from the IMF.

Likewise, my authorities continue to give high importance to the effective supervision of the banking sector. The central bank conducted on-site inspections of two commercial banks in 2011, and five more banks are to be inspected during the period 2012-13. The Central Bank also envisages the introduction in 2013 of the new chart of accounts in line with international financial reporting standards, and is determined to have a sound legal and regulatory framework in place by 2014 to deal with problem banks.

Structural reforms

My authorities are aware that São Tomé and Príncipe is vulnerable to external debt distress despite substantial debt relief under the HIPC initiative and the MDRI. The authorities are committed to improve debt management and have assigned to the finance ministry’s External Debt Department a strategic role in this area. An important step in improving the framework for debt management was the approval by the National Assembly in April 2012 of the general principles of a new debt management law which establishes the responsibility and governance structure of the External Debt Department.

The government is also committed to addressing the deficiencies of the AML/CFT framework. It is expected that the National Assembly will approve by end-2012 the necessary amendments to the AML/CFT Law which are being prepared by the authorities with technical assistance from the IMF.

Regarding the business climate, my authorities are determined to consolidate the recent progress made in this area, as indicated in the World Bank’s 2012 Doing Business Survey which ranked the country among the top reformers in 2011. In this vein, the authorities will continue to simplify the regulatory framework and strengthen institutional capacity to promote investment and alleviate the infrastructure deficit in a number of sectors identified in the NPRSP. The authorities have started implementing a number of sectoral strategies in support of economic diversification, notably in the tourism sector, and in the energy sector where their efforts will aim at making the water and electricity company (EMAE) commercially viable.

3. Conclusion

My São Toméan authorities are committed to pursuing sound macroeconomic policies conducive to sustained growth, reduced inflation and poverty, and increased resilience to external shocks. My authorities believe that a new ECF-supported program is essential to help them achieve these objectives. With well-targeted technical assistance, they are determined to implement an ambitious but realistic structural reform agenda to strengthen public finances and the frameworks for monetary and financial policies. As noted in the recent EPA report, a new program would also provide an important signaling effect for donors, and help catalyze international assistance to the country. It is in this light that my São Toméan authorities are seeking Fund support and I would appreciate Directors’ favorable consideration of their request for a new three-year ECF arrangement.