Democratic Republic Of São Tomé and Príncipe: Request for a Three-Year Arrangement Under the Extended Credit Facility and Cancellation of the Current Arrangement Under the Extended Credit Facility
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International Monetary Fund. African Dept.
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Publication Date:
21 Jul 2015
eISBN:
9781498325523
Language:
English
Keywords:
ISCR; CR; government; ECF arrangement; real GDP; government arrears; debt relief; reform agenda; arrears clearance plan; government finance; Arrears; International reserves; Commercial banks; Europe
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EXECUTIVE SUMMARY Context: São Tomé and Príncipe’s economic development is constrained by its insularity, fragility, limited resources, and low capacity as a small island state. The current ECF arrangement is set to expire on July 19, 2015, with four reviews outstanding. Program performance was satisfactory during the first year and half of implementation but went off track in early 2014 upon the contracting of a loan resulting in nonobservance of the performance criterion on non-concessional debt, and expenditure slippages in the run up to national elections further delayed program resumption. In the meantime, the key assumptions of the macroeconomic framework agreed under the current program changed significantly due to a lower probability of commercial oil production. Extended Credit Facility. The São Toméan authorities have requested a three-year arrangement under the ECF in an amount equivalent to SDR 4,440,000 (60 percent of quota) to rebuild buffers and catalyze financing in support of their medium-term economic reform program. The existing program would be cancelled. Main elements of the program. The program seeks to address the high debt vulnerability while also creating the conditions for sustained growth, anchored by the PRSP II. This involves reforms to: • Strengthen domestic revenue mobilization, expenditure rationalization, public debt management, and public financial management to restore fiscal discipline and reduce the risk of debt distress. • Introduce a comprehensive plan to eliminate the stock of arrears and also prevent the accumulation of new arrears. • Enhance the capacity of key government institutions through well-tailored technical assistance (TA). • Enhance financial sector stability through strengthened supervisory, regulatory, crisis management and bank resolution frameworks.

Abstract

EXECUTIVE SUMMARY Context: São Tomé and Príncipe’s economic development is constrained by its insularity, fragility, limited resources, and low capacity as a small island state. The current ECF arrangement is set to expire on July 19, 2015, with four reviews outstanding. Program performance was satisfactory during the first year and half of implementation but went off track in early 2014 upon the contracting of a loan resulting in nonobservance of the performance criterion on non-concessional debt, and expenditure slippages in the run up to national elections further delayed program resumption. In the meantime, the key assumptions of the macroeconomic framework agreed under the current program changed significantly due to a lower probability of commercial oil production. Extended Credit Facility. The São Toméan authorities have requested a three-year arrangement under the ECF in an amount equivalent to SDR 4,440,000 (60 percent of quota) to rebuild buffers and catalyze financing in support of their medium-term economic reform program. The existing program would be cancelled. Main elements of the program. The program seeks to address the high debt vulnerability while also creating the conditions for sustained growth, anchored by the PRSP II. This involves reforms to: • Strengthen domestic revenue mobilization, expenditure rationalization, public debt management, and public financial management to restore fiscal discipline and reduce the risk of debt distress. • Introduce a comprehensive plan to eliminate the stock of arrears and also prevent the accumulation of new arrears. • Enhance the capacity of key government institutions through well-tailored technical assistance (TA). • Enhance financial sector stability through strengthened supervisory, regulatory, crisis management and bank resolution frameworks.

Background

1. The government’s absolute parliamentary majority following the 2014 national elections presents an opportunity to consolidate gains made in reforms over the past decade. On October 12, 2014, the main opposition party (ADI-Independent Democratic Action Party), led by former Prime Minister Patrice Trovoada, won an absolute parliamentary majority and returned to power. This is the first time in over a decade that a government has secured a parliamentary majority to ensure a full four-year term in office. This stability presents a clear opportunity to undertake strong reforms and catalyze donor support.

2. São Tomé and Príncipe’s economic development is constrained by its insularity, fragility, limited resources, and low capacity as a small island state. Its export base is undiversified and consists basically of cocoa and a nascent tourism industry that is yet to be fully tapped. With prospects for oil production now uncertain, following Total Oil Company’s withdrawal from exploration activities in the Joint Development Zone (JDZ) shared with Nigeria, fiscal policy must walk a fine line between entrenching fiscal consolidation to contain debt and eliminate arrears, while also creating space for growth-enhancing spending to tackle successfully the widespread unemployment and the protracted external imbalances (large current account deficits and high indebtedness).

3. Implementation of the 2012 National Poverty Reduction Strategy (PRSP-II) has been a top priority but the poverty rate still remains high at 66 percent. In its recently issued 2012–13 PRSP-II implementation review report, the government acknowledges that the reduction in poverty rates since 2000 has been marginal and that economic growth has fallen well short of the sustained 6 percent annual rates considered minimum to meaningfully improve social conditions. The PRSP-II’s implementation shortcomings are attributed primarily to lack of financial resources, that did not materialize as envisaged, and to government instability. The government is currently working on an updated national development strategy to replace the PRSP-II after it ends in 2016.

Assessment of the Last ECF-Supported Program

4. The ECF arrangement (with an access level of 35 percent of quota) which was approved by the IMF Executive Board on July 20, 2012 is set to expire on July 19, 2015. Program performance was initially satisfactory with the first two reviews completed successfully, but went off-track in March 2014 when the authorities contracted a $40 million (11 percent of GDP) loan from Angola with a grant element well below the 50 percent floor specified under the program. Despite successful renegotiation to bring the loan to near-concessional terms, expenditure slippages in the run up to the national elections further delayed program resumption. In the meantime, key assumptions under the program changed significantly with a lower probability of commercial oil production.

5. Performance under the ECF-supported program in 2014 was mixed (Tables 1 and 2 in attachment I). While the net international reserves target continued to be comfortably met, the adjusted ceiling on change in the net bank credit to central government was not observed, the domestic primary deficit exceeded the end-year program target by 0.3 percentage points of GDP and significant arrears were accumulated on a net basis due to non-payment of energy and communications bills by government agencies.

Table 1.

São Tomé and Príncipe: Selected Economic Indicators, 2012–18

(Annual change in percent, unless otherwise indicated)

article image
Sources: São Tomé and Príncipe authorities and IMF staff estimates and projections. 1 Revised program figures agreed upon during March 2014 mission.

Central Bank (BCSTP) mid-point rate.

Excludes oil related revenues, grants, interest earned, scheduled interest payments, and foreign-financed capital outlay.

In percent of exports of goods and nonfactor services.

Gross international reserves exclude the National Oil Account and commercial banks’ foreign currency deposits at the BCSTP in order to meet reserve requirements and foreign currency deposits of commercial banks used application deposits for new licensing or for meeting capital requirements.

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

Table 2.

São Tomé and Príncipe: Financial Operations of the Central Government, 2012–18

(Billions of dobra)

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

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

6. Structural reform implementation recorded delays. Some key measures were not implemented, in particular the tripartite arrears clearance plan between the Treasury, ENCO, and EMAE, and the implementation of a new Consumer Price Index. Progress was made in the areas of public financial management and external debt management but the SAFEe (Sistema de Administraçáo Financeira do Estado)—the public information management system—could not roll out beyond pilot stages due to technical challenges, capacity limitations, and delayed technical assistance.

7. São Tomé and Príncipe remains dependent on technical assistance. There were a total of 26 technical assistance (TA) missions under the ECF-supported program approved in 2012 (information annex). Significant gains have been made from these well-tailored TAs, mostly in PFM, banking supervision (including the recently passed bank resolution law), and monetary operations. A substantial number of recommendations have been implemented; in particular, the introduction of the interbank money market and a domestic treasury bills market, but limited human resource capacity has slowed down the full implementation of recommendations.

Recent Economic Developments

8. Macroeconomic performance has been good but remains too weak to support poverty reduction (Figure 1 and Table 1). Economic activity picked up slightly to 4.5 percent in 2014 (4.2 percent in 2013). Supported by the exchange rate peg arrangement (which has served São Tomé and Príncipe well), inflation reached year-end historic low of 6.4 percent at end-2014 and is projected to decline further to 5.2 percent in 2015.

Figure 1.
Figure 1.

São Tomé and Príncipe: Recent Macroeconomic Developments

Citation: IMF Staff Country Reports 2015, 196; 10.5089/9781498325523.002.A001

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

9. Fiscal consolidation remained a challenge in 2014 (Figure 2 and Tables 2 and 3). The domestic primary deficit which had improved to 0.8 percent in 2013 (lower than programmed) increased sharply to 3.4 percent of GDP in 2014 as a result of revenue underperformance (non-payment of import duties by ENCO, the main oil importer) and expenditure overruns in the run-up to the general elections in October 2014. Government arrears also accumulated on a net basis despite efforts to clear them.

Figure 2.
Figure 2.

São Tomé and Príncipe: Fiscal Indicators 2008–14

(Percent of GDP)

Citation: IMF Staff Country Reports 2015, 196; 10.5089/9781498325523.002.A001

Sources: Data provided by the authorities and IMF staff estimates.
Table 3.

São Tomé and Príncipe: Financial Operations of the Central Government, 2012–18

(Percent of GDP)

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

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

10. Broad money growth has moderated as expected (Figure 3 and Tables 4 and 5). It is set to slow further to 15 percent in 2015 in line with the expected growth in net foreign assets (NFA). Bank credit to the private sector, however, has been contracting since 2013 as over-indebted businesses and households were not extended further loans and banks struggled with non-performing loans and shortage of bankable projects.

Figure 3.
Figure 3.

São Tomé and Príncipe: Money and Credit Developments, 2008–14

Citation: IMF Staff Country Reports 2015, 196; 10.5089/9781498325523.002.A001

Sources: Data provided by the authorities and IMF staff estimates.
Table 4.

São Tomé and Príncipe: Summary Accounts of the Central Bank, 2012–18

(Billions of dobra)

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

The December 2012 figure reflects a small correction in the recording of IMF loans.

Gross international reserves exclude the National Oil Account and foreign currency deposits of commercial banks used application deposits for new licensing or for meeting capital requirements.

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

Net international reserves exclude the National Oil Account and commercial banks’ foreign currency deposits at the BCSTP in order to meet reserve requirements and foreign currency deposits of commercial banks used application deposits for new licensing or for meeting capital requirements.

Table 5.

São Tomé and Príncipe: Monetary Survey, 2012–18

(Billions of dobra)

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

The December 2012 figure reflects a small correction in the recording of IMF loans.

11. The external position has been improving (Figure 4 and Tables 7 and 8). Notwithstanding the recent depreciation of the Euro, the current account deficit (excluding official transfers) improved by 1.2 percent of GDP to 36.6 percent of GDP in 2014 on the back of strong cocoa exports. The bulk of this deficit was financed by transfers, project loans, and foreign direct investment (FDI). The Central Bank’s international reserves stood at 3.8 months of import cover in 2014, still below the 5 to 6 months of imports deemed adequate for a small commodity exporting economy with fixed exchange rate regime.

Figure 4.
Figure 4.

São Tomé and Príncipe: External Sector Developments, 2008–14

Citation: IMF Staff Country Reports 2015, 196; 10.5089/9781498325523.002.A001

Sources: Data provided by the authorities and IMF staff estimates.
Table 6.

São Tomé and Príncipe: Financial Soundness Indicators, 2012–14

article image
Sources: Data provided by the authorities and IMF staff estimates.

Beginning June 2013, data are based on improved methodology and not strictly comparable with earlier data.

Table 7.

São Tomé and Príncipe: Balance of Payments, 2012–18

(Millions of US Dollars)

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

Includes HIPC debt relief.

In percent of exports of goods and nonfactor services.

Gross international reserves exclude the National Oil Account and commercial banks’ foreign currency deposits at the BCSTP in order to meet reserve requirements and foreign currency deposits of commercial banks used application deposits for new licensing or for meeting capital requirements.

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

Table 8.

São Tomé and Príncipe: Balance of Payments, 2012–18

(Percent of GDP)

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

Includes HIPC debt relief.

In percent of exports of goods and nonfactor services.

Gross international reserves exclude the National Oil Account and commercial banks’ foreign currency deposits at the BCSTP in order to meet reserve requirements and foreign currency deposits of commercial banks used application deposits for new licensing or for meeting capital requirements.

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

12. The first tranche of the Angola loan was fully spent in 2014 and the new government drew on the second tranche in March 2015. The outgoing government spent the first tranche of the Angola loan (US$17 million) on mainly investment projects with about US$4.3 million on current outlays before the 2014 elections. The second tranche of US$23 million, was disbursed in March 2015 tied to the public investment program (MEFP ¶17).

13. The financial system is under some stress as a result of lax lending practices and weaknesses in supervision. Though most banks meet the minimum required risk-weighted capital ratio of 12 percent, the average capital adequacy ratio has been declining due to a string of losses in the sector. Despite excess liquidity in the system, lending activities have been curtailed largely because of elevated lending risks and because banks are saddled with bad loans in their books (NPL rose to 18 percent in 2014), reflecting unsound lending practices and poor risk management.

Policy Discussions

A. Medium-Term Macroeconomic Framework

14. The medium-term macroeconomic framework underpinning the ECF arrangement is consistent with the non-oil scenario of the existing PRSP-II. The government’s reform agenda focuses on maintaining debt on a sustainable path through continued fiscal consolidation, while at the same time creating space for growth-enhancing capital spending. The government’s program also aims to promote macroeconomic and financial stability, including through achieving and sustaining a lower domestic primary deficit to ensure debt remains on a sustainable path, and implementing a comprehensive set of structural measures to diversify and broaden the export base, promote private-sector led growth, and ensure social stability by safeguarding priority spending.

  • Growth prospects for 2016–18 are driven by scaling up of investment in infrastructure, growth in tourism, and agriculture. Accordingly, growth is projected to accelerate to 5.5 percent in 2017. The medium-term growth projection could increase further if all planned growth-enhancing projects are implemented.

  • Inflation is expected to continue to decline and to eventually converge to the Euro area inflation by 2018 in line with the peg and supported by improved central bank liquidity management.

  • The current account deficit would revert to a level slightly higher than 2014 as imports recover over the medium term on account of rising commodity prices and higher donor-financed imports. The reserve coverage however, is expected to improve to 5 months of imports by 2018.

15. Achieving these outcomes will require comprehensive reforms. Specifically to: (i) address the growing domestic arrears problem which has become a drag on fiscal consolidation; (ii) enhance domestic revenue mobilization and improved public financial management to create space for increased capital and social spending; (iii) promote financial sector reforms to improve the sector’s role in facilitating private sector led growth; and (iv) introduce reforms in the agriculture sector and other targeted reforms designed to improve the business climate and promote private investment to broaden the export base.

16. There are near-term risks. Key risks arise from the uncertain prospects in Europe, where another slowdown in economic activity could squeeze trade and reduce demand for São Tomé and Príncipe’s exports, including tourism. Regarding domestic policies, measures will be needed to ensure that fiscal targets are met; while careful implementation of the resolution of non-performing banks (i.e., Banco Equador) will be necessary to safeguard financial sector stability.

B. Fiscal Policy and Debt Sustainability

17. Fiscal adjustment remains critical to maintaining debt on a sustainable path. The updated debt sustainability analysis (DSA) confirms that the risk of debt distress remains high. Any slippages in the fiscal program—allowing the domestic primary deficit to continue at its historical path—would reverse the downward debt trajectory under the baseline. Compared to the last DSA assessment in the 2013 Article IV Consultation staff report, the debt to export ratio indicator, which is the main source of vulnerability, has improved significantly due to better recording of services (travel and tourism) and recent good performance of cocoa production.

18. The approved 2015 budget sets the foundation to anchor debt while creating space for growth-enhancing capital spending. Achieving such balance remains critical to ensure shared-growth and poverty reduction (MEFP ¶ 14–15). A steady decline in the domestic primary deficit1 to 1.5 percent of GDP by 2018, and thereafter stabilizing at around 1.2 percent of GDP, should be consistent with lowering the PV of debt-to-GDP ratio to close to the sustainable threshold by 2020, while at the same time creating some room for scaled-up capital spending and domestic arrears clearance.

  • On the revenue side, the 2015 budget envisages a partial recovery to the 2013 revenue levels through more rigorous tax administration. Decisive measures will be introduced to boost domestic revenue mobilization by 2½ percent of GDP by 2018 (MEFP ¶ 24). The authorities intend to achieve this by addressing the cross-arrears issue with ENCO and start collecting duties on all oil imports (accounting for over 1 percent of GDP annually). A combination of additional measures including a recently concluded tax registration drive (Operation Tax Inclusion) which added 16,000 new taxpayers to the base, and the Tax Maximization Plan (being developed under the BAD’s PAGEF credit operation), are expected to boost tax revenue collection over the medium-term.

  • The authorities intend to finalize plans, over the program period, to introduce a Value Added Tax (VAT) regime and a minimum presumptive taxation with technical assistance from development partners including the Fund (MEFP ¶ 24).

  • On the expenditure side, there is the need to contain relatively high transfers and civil service personnel costs, in particular non-wage remuneration, and bring it down by 0.6 percentage points of GDP to the historical average of 8.5 percent of GDP. Social spending will however, be safeguarded as budget alignment with the government’s PRSP-II remains critical for further progress towards the MDGs. In that context, the authorities are committed to increasing social spending both in 2015 and 2016 (MEFP ¶ 14).

19. The 2015 budget is fully financed and financing prospects for the remainder of the program period are strong. Budget support in the amount of US$10 million has been identified for 2015 in the form of grants (World Bank, EU and counterpart funds from Japan). The authorities, however, stand ready to cut spending in case any commitment fails to materialize. Staff estimates additional grants of about US$30 million could be expected in 2016–18. The planned donors’ conference to be organized in São Tomé in September 2015, in response to the Fund-supported program, would firm up further budget support for 2016–18 to support the government’s public investment and social programs.

Borrowing Policies

20. Given the high debt vulnerabilities, the authorities should continue to meet financing needs primarily through grants and concessional external loans (MEFP ¶ 38). However, with oil production now unlikely for many years, there is a need to explore alternative options to finance the authorities’ public investment program (PIP). The updated DSA suggests that there is room for some concessional borrowing, averaging some 6.6 percent of GDP annually over the three year ECF-supported program.

21. Improvements in the DSA and clearly identified growth-enhancing medium-term investments support a lower concessionality threshold without jeopardizing debt sustainability. In particular, reducing the grant element to the presumed 35 percent and limiting the amount of concessional borrowing does not significantly change the debt dynamics relative to a scenario with a grant element of 50 percent (Text Chart 1). This reduction will continue to anchor debt on a sustainable path and at the same time create space for growth-enhancing spending and make it less onerous for the authorities to contract concessional loans (beyond the multilateral institutions) to support the PIP.

Text Chart 1.
Text Chart 1.

Comparison of Indicators of Public and Publically Guaranteed External Debt Ratios, 50 percent vs. 35 percent Concessionality

Citation: IMF Staff Country Reports 2015, 196; 10.5089/9781498325523.002.A001

Sources: Data provided by the authorities and IMF staff estimates

22. To further strengthen debt and fiscal sustainability, staff called for strengthened debt management capacity. Staff welcomes progress in updating the medium-term debt management strategy which will be approved by cabinet by end-June 2016 (MEFP ¶39). Improving debt management capacity is critical to support the debt reduction objective in the program. Staff will identify clear actions to be monitored as part of the program once the strategy has been approved.

C. Monetary Policy and Financial Stability

23. Managing the excess liquidity to support growth remains the central challenge for the conduct of monetary policy. Banco Central de São Tomé and Príncipe (BCSTP) recognizes that resolving the excess liquidity situation is critical to the maintenance of the conventional peg exchange rate regime and is responding to the challenge. The BCSTP has introduced an interbank money market to formalize liquidity swapping among banks and has also launched an open market operation where newly introduced treasury bills and bonds will be used to mop liquidity (MEFP ¶19). However, BCSTP will have to provide a long-term solution to excess liquidity by addressing the causes of elevated lending risks, in particular, unsound lending practices and poor risk management.

24. The banking sector is under some stress. Though most banks meet the minimum required risk-weighted capital ratio of 12 percent, the average capital adequacy ratio has been declining due to a string of losses in the sector. Despite excess liquidity in the system, lending activities have been curtailed largely because banks are saddled with bad loans, reflecting unsound lending practices and poor risk management.

25. To safeguard financial stability, the BCSTP will strengthen its regulatory oversight and start enforcing prudential requirements to deal with remaining weaknesses in the financial system (MEFP ¶21–22). On-site supervision has been completed for all banks and a new round of inspections is scheduled for this year for the two largest banks; three banks have been given a deadline of end-June this year to raise own capitals above the minimum required to operate a bank in São Tomé and Príncipe. In addition, the BCSTP, in January this year, placed one bank (Banco Equador) under administration, pending resolution, for repeatedly missing the minimum capital requirements. The draft Bank Resolution Law (put together with assistance from MCM and LEG), when passed by the National Assembly, will allow for swift and orderly resolution of banks.

D. Structural Reforms

Strengthening Public Financial Management

26. Adoption of a new information management system—SAFEe—has been the center piece of efforts to modernize and improve PFM (MEFP ¶ 29–30). The pilot stage of implementation has so far covered four ministries but it fell short of the initial objective of consolidating and producing annual budget execution reports. As remaining information processing and security issues are addressed, the government should be able to use the SAFEe to produce final government accounts and extend the SAFEe system to all government ministries and institutions starting with the 2016 budget. In addition to SAFEe’s enhanced monitoring capabilities, tighter expenditure control procedures will have to be undertaken to ensure that non-budgeted expenditure do not take place, in particular, as regards non-wage personnel costs such as overtime and expense allowances that have in the last few years been exceeding annually budgeted amounts.

27. The authorities have also committed to implementing the 2013 PEFA recommendations, moving towards a medium-term fiscal framework, and strengthening debt management (MEFP ¶ 32). The authorities will seek assistance from development partners to develop a comprehensive plan for the implementation of key recommendations from the latest Public Expenditure and Financial Accountability (PEFA) report, including the establishment of a public procurement agency. Based on recommendations from a recent FAD TA mission, the authorities intend to gradually move toward a medium-term fiscal framework in line with existing capacity. Debt management capacity will be strengthened starting with back office functions such as debt monitoring and recording and assessing implications of future borrowings on debt sustainability.

Clearance of Domestic Arrears

28. Unaudited claims from ENCO (due to implicit fuel subsidy) and domestic suppliers put the government’s stock of domestic arrears at about 16 percent of GDP as of end-March 2015, significantly larger than previously known (Box 1). New information became available on ENCO’s (the country’s main fuel importer) claims on government on account of its operating losses as a result of selling petroleum products below full cost recovery since 2010 (13 percent of GDP). In addition, there are outstanding utilities and communications bills (2 percent of GDP) and arrears to domestic suppliers dating back to 2012 (0.7 percent of GDP) which the authorities have started paying off. The government-owned electricity and water producing company (EMAE) has also accumulated arrears from unsettled bills to ENCO estimated at about 12 percent of GDP.

29. The government is committed to addressing this long-standing domestic arrears problem. A ministerial team put together by the government in April 2015 will audit and confirm claims by creditors in the context of developing a comprehensive plan that will clear the outstanding stock of arrears over the coming five years through a combination of cash payments and possible securitization of arrears to ENCO (Prior action, MEFP ¶ 25). About 2.5 percent of GDP of outstanding arrears is currently programmed to be repaid over the program period, with the rest expected to be cleared based on the agreed arrears clearance plan after auditing and negotiations with ENCO and EMAE. The macroframework and debt sustainability would be adjusted at the time of the first review if needed, to reflect the clearance plan after the auditing and negotiation of the stock of arrears. The government is also committed to accelerate arrears clearance as revenue efforts bear fruit.

São Tomé and Príncipe: Domestic Arrears

The bulk of domestic arrears in São Tomé and Príncipe is related to the energy sector, (the electricity and water utility EMAE and the oil importer and distributor ENCO).1 As a result, clearance of these arrears is important for energy supply and more generally for economic activity. There are three main causes for these arrears:

  • (i) The government has not been compensating the oil importer ENCO for the implicit subsidy arising from the difference between retail fuel prices and actual supply costs. Retail fuel prices have been fixed and unchanged by the government since 2010, and until end-2014 were below cost-recovery for all fuel types. Only in March 2015 did the lower international fuel prices restore cost-recovery at the prevailing retail prices. ENCO claims accumulated “price differential” arrears since 2011 is equivalent to 13 percent of GDP.

  • (ii) The state-owned electricity company EMAE has not been paying ENCO for its supply of diesel used for electricity generation. EMAE capacity to repay is hampered by accumulated financial losses, obsolete production and distribution equipments, and illegal usage. As a result, electricity prices, which are also fixed by government, are well below cost-recovery. As of end-March 2015, EMAE’s arrears to ENCO for unpaid oil supplies were the equivalent of 12 percent of GDP.

  • (iii) In the last year, the government has accumulated about 3 percent of GDP of arrears related to unpaid utilities and communications bills and arrears to domestic suppliers. The Government has however, started paying off the arrears to suppliers.

Political concerns with the inflationary effects of higher oil prices and close ties with the oil supplier Angola have allowed the below-cost pricing status quo to prevail for years. Despite the fixed energy prices, Angola’s oil parastatal Sonangol which is a shareholder in both ENCO and EMAE has continued to supply oil products at a loss through ENCO. However, at mid-2014, ENCO stopped paying import duties to cover for its accumulated losses, resulting in domestic revenue underperformance and escalating the arrears problem. The cross-arrears situation has complicated the government’s fiscal consolidation effort.

To address this longstanding arrears problem, the new ECF arrangement envisages, as a prior action, the conclusion of an arrears clearance and prevention plan that was overdue since 2013 under the previous ECF program. The thrust of the plan consists of conducting a comprehensive audit of all domestic arrears (including to creditors other than ENCO) with a view to their securitization and eventual write offs to be agreed with creditors. To prevent the recurrence of oil-related arrears, the plan includes the introduction of an automatic fuel prices adjustment mechanism from 2016 and of a corporate restructuring plan for EMAE to be undertaken with donor support.

1 Both ENCO (Empresa Nacional de Combustiveis e Oleos, S.A.R.L.) and EMAE (Empresa de Água e Electricidade) are mixed capital companies with participation of Angola’s oil Parastatal Sonangol that holds a majority share in ENCO, while in EMAE it is the government that holds the majority share.

30. The recent fall in international oil prices presents an opportunity to address accumulation of unpaid petroleum price subsidies and to establish full cost recovery petroleum products pricing (MEFP ¶ 26). As part of the arrears clearance plan, and to prevent their reoccurrence, the government will adopt an automatic price mechanism by end-June, 2016 (structural benchmark) after receiving technical assistance from the Fund. In the meantime, the government is committed to ensuring that, prices of petroleum products, from now on, do not fall below cost while technical assistance is sought to establish the automatic price adjustment mechanism. The government will assess the social consequences of higher pump prices on the poorest with a view to providing a safety mechanism targeted at the poor and vulnerable.

31. The government has also committed to taking swift actions to reduce inefficiencies at EMAE supported by far-reaching reforms (MEFP ¶ 27–28). A reform plan for EMAE and tariff adjustments which have been under discussion since 2013 would be finalized and considered for implementation in the first review. In addition, the authorities are committed to implementing immediate measures to crack down on illegal tapping of electricity and water by setting up meters to increase revenues and prevent wasteful usage at flat-rates and by replacing old electricity generation equipments to reduce generation costs. The World Bank is assisting to help address structural problems at EMAE to ensure full cost recovery in both the electricity and water tariff structure and in generating cash-flow to finance grid network repairs and upgrades over the medium-term.

Improving the Business Environment for Export Diversification and Private Sector Development

32. The government will introduce more focused structural reforms to diversify exports and boost private sector investment through an improved business climate (MEFP ¶33–34). Key initiatives will include well-targeted improvements to physical infrastructure (sea ports and airports), key legislative and administrative reforms to enhance trade facilitation, strengthen property and investor rights, increase access to credit, and simplify business processes and the payment of taxes. The government will develop and submit to the National Assembly, a national export diversification strategy and action plan, targeting the tourism sector and high-value horticultural production that are recognized as having the greatest potential.

33. The BCSTP will revamp the functioning of the credit reference bureau to ensure efficiency in the assessment and pricing of risks and enhance access to finance by small and medium enterprises (MEFP ¶35). The BCSTP launched the Central de Risco de Crédito (CRC) in 2011 to ensure a sound and comprehensive credit reporting to support the assessment and pricing of risks. However, the credit reporting system is not being fully utilized by banks due to the imperfect coverage and poor data quality. The BCSTP has committed to invest additional resources (both hard and soft infrastructure) to extend the CRC’s coverage and enhance its usage. Going forward, the BCSTP will strictly enforce the requirement that reporting financial institutions provide relevant, accurate, complete, and timely information to the CRC and apply sanctions when breached.

34. These efforts will be complemented by addressing challenges in the judiciary system to enhance enforcement of collateral (MEFP ¶36). Banks are attributing the slow pick up in credit to the private sector to the lack of enforcement of collateral and extensive delays in the judiciary system in dealing with defaults. The BCSTP, with the help of the World Bank, has put together a financial sector development plan (FSDP), which among other things, proposes reforms to the judiciary system, including the option of setting up a commercial court to boost collateral enforcement, training and improvement in working conditions of judges.

Statistics

35. The authorities aim to make progress to strengthen the statistical system. The National Statistics Institute (INE) is taking steps, with the help of TA from the Fund and donors, to improve the CPI and the national accounts. The household survey completed in 2011 will provide the basis for reweighting the CPI components and introducing new goods and services into the basket (which was last updated 20 years ago). New CPI and revised national accounts will be published by end–2015 after the two supporting TA missions are completed (MEFP ¶ 40).

Program Modalities, Safeguards, and Risks

36. The authorities request the cancellation of the ECF arrangement approved by the Executive Board in July 2012 and in support of their revised objectives, the authorities have requested a new ECF-supported program, in the amount of SDR4,440,000 (60 percent of quota). This access level, which is phased in seven equal installments (Table 10), is based on staff’s assessment of the outlook, the projected balance of payments financing needs, including the need to build up reserves to the recommended five to six months of imports for low-income commodity exporters with a conventional peg exchange rate2, 3, and the strength of the policy adjustment in the program. The ECF funding will complement the existing credit line arrangement with Portugal4 to ensure that reserves remain at comfortable levels to back the conventional peg exchange rate regime. The first test date for the program will be end-December 2015, with indicative targets set for end-September 2015.

Table 9.

São Tomé and Príncipe: External Financing Requirements and Sources, 2012–18

(Millions of US Dollars)

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

Includes HIPC debt relief.

Includes revenue from Nigeria oil program.

Table 10.

São Tomé and Príncipe: Proposed Schedule of Disbursements Under the ECF Arrangement, 2015–18

(Annual change in percent, unless otherwise indicated)

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Source: IMF

37. Program conditionality. Quantitative targets are set on the domestic primary balance, net bank financing of the central government, international reserves, contracting and guaranteeing of non-concessional external debt, the outstanding stock of external debt, and external payment arrears (Table 3 in attachment I). Given the high risk of debt distress, the program establishes a zero limit on non-concessional borrowing. The concessionality threshold is 35 percent, a reduction from the 50 percent in the previous program, without adding more stress on the DSA. In addition, contracting of concessional external debt is monitored as a memorandum item to help build debt monitoring capacity. Proposed structural benchmarks are in line with macroeconomic priorities and capacity constraints, focusing on putting in place basic institutions in the areas of tax revenue mobilization, PFM, monetary management, financial stability, business environment, and statistics (Table 4 in attachment I). A prior action to submit to staff a comprehensive plan outlining measures and a timeline to reduce the stock of domestic arrears provides up-front assurance on the commitment to address the longstanding domestic arrears problem.

38. São Tomé and Príncipe has adequate capacity to meet its debt service obligations to the Fund (Table 11). In addition, the updated DSA indicates that even though the risk of debt distress remains high, debt indicators improve over the program period. São Tomé and Príncipe has a good track record of timely payment of external debt obligations, including to the Fund.

Table 11.

São Tomé and Príncipe: Indicators of Capacity to Repay the Fund, 2015–27

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

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

Gross international reserves exclude the National Oil Account and commercial banks’ foreign currency deposits at the BCSTP in order to meet reserve requirements and foreign currency deposits of commercial banks used application deposits for new licensing or for meeting capital requirements.

39. An update of the 2013 safeguard assessment has been initiated and will be completed before the first program review. The previous assessment noted severe capacity constraints faced by the BCSTP, including the lack of independent oversight. External audits conducted by reputable audit firms continued to serve as a critical safeguard, and the assessment recommended strengthened coordination of the audits by senior BCSTP management to ensure prompt remedial actions on audit findings. Other recommendations included strengthening the internal audit function and implementation of formal investment policies. The BCSTP has been taking steps to address these and staff will assess the progress made during the update assessment.

40. The program entails significant economic, institutional and political risks.

  • Fiscal adjustment is critical to maintaining debt on a sustainable path. This highlights the high risk of fiscal policy implementation slippages.

  • A protracted period of slower growth in Europe could significantly depress exports, tourism, and FDI and aid flows.

  • A presidential election in 2016 is expected to be strongly contested. In the past, fiscal consolidation efforts have been undermined during elections.

  • On the upside, there is the possibility that commercially viable oil would be found by one of the small operators still undertaking exploration.

Staff Appraisal

41. São Tomé and Príncipe’s performance under the previous ECF supported program was mixed. While there were important macroeconomic gains in the first year and a half of the program, there were slippages in 2014. Fiscal consolidation effort suffered a setback, with the domestic primary deficit exceeding the end-year program, and new arrears were accumulated on a net basis. Structural reform implementation recorded delays, and some key measures were not implemented, in particular the tripartite arrears clearance plan between the Treasury, ENCO, and EMAE.

42. Staff welcomes the authorities’ commitment to address the identified slippages in the existing ECF-supported program. The government’s 2015 budget, approved by the National Assembly, and the medium-term macroeconomic framework build on recent reform efforts. Forceful and sustained implementation of the program is critical to entrench macroeconomic stability to support sustained broad-based growth and poverty reduction.

43. The government recognizes the importance of enhancing domestic revenue mobilization to support the much-needed growth enhancing spending. Decisive measures will be needed, including a possible introduction of value added tax (VAT) during the program period, to further boost domestic revenue mobilization which has remained a major drag on fiscal consolidation. While the government is appropriately putting in place measures to raise tax revenue mobilization, it should avoid policy slippage and stand ready to take additional measures to ensure the domestic primary deficit remains on track to keep debt on a downward trajectory.

44. In view of São Tomé and Príncipe’s high debt vulnerabilities, the government should continue to meet financing needs through grants and concessional external loans. Staff also supports the assessment that reducing the concessionality threshold from 50 percent applied under the existing ECF-supported program to 35 percent will continue to anchor debt and at the same time make it less onerous to borrow concessionally to support growth-enhancing spending.

45. It is important that the government implements the arrears clearance plan in such a way to maintain fiscal and debt sustainability. The government’s arrears clearance plan provides a strong basis to address the large stock of outstanding domestic arrears and prevent the accumulation of new ones. For the plan to be sustainable, EMAE will have to be reformed to improve efficiency and ensure full cost recovery. Also, the government will have to push ahead with the adoption of an automatic fuel price adjustment mechanism to prevent new accumulation of arrears due to fuel price differentials.

46. The program remains consistent with the PRSP-II. Staff welcomes the government’s commitment to draw on lessons learned under the implementation of the PRSP-II in the design of the new National Strategy Document after the PRSP-II expires in 2016. The new National Strategy Document will underpin the rest of the program period. The 2015 budget and the agreed medium-term macroeconomic framework underscore the government’s commitment to social programs and pro-poor spending.

47. Actions are needed to increase the role of the financial sector to support growth. The greatest challenge for monetary policy implementation is to effectively manage excess liquidity in the banking system, which continues to grow, as banks tighten their credit stance in the wake of rising NPLs. Current efforts by the BCSTP to introduce an inter-bank money market and a domestic treasury bill market should enhance the financial sector’s role to intermediate the excess liquidity in the system to support growth. Resolving the excess liquidity situation is critical to reducing risks to the maintenance of the conventional peg exchange rate regime, which has served São Tomé and Príncipe well.

48. Persistent weaknesses in the banking sector require close vigilance to ensure financial stability. The authorities should ensure that BCSTP has adequate resolution powers to swiftly and orderly resolve problem banks, and in particular, Banco Equador which is currently under administration. To safeguard stability, the BCSTP must strengthen banking supervision and enforce prudential requirements throughout the banking system, including strictly enforcing the required minimum capital-to-risk-weighted asset ratio.

49. Staff supports the authorities request for a three-year arrangement under the ECF, with access level of 60 percent of quota.

Table 12.

São Tomé and Príncipe: Millennium 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 2006

Correspond to 2007

Correspond to 2008

Correspond to 2009

Correspond to 2011

Appendix I. Letter of Intent

São Tomé, June 19, 2015

Ms. Christine Lagarde

Managing Director

International Monetary Fund

700, 19th Street, N.W.

Washington, D.C. 20431

United States

Dear Ms. Lagarde:

1. São Tomé and Príncipe had a peaceful and successful change of government in November 2014, following the general election in October 2014 which was won, with an absolute parliamentary majority, by the main opposition party (ADI-Independent Democratic Action Party), led by former Prime Minister Patrice Trovoada.

2. On July 20, 2012, the Executive Board of the International Monetary Fund (IMF) approved a three-year arrangement under the Extended Credit Facility (ECF) to support the government of São Tomé and Príncipe’s economic reform program to promote sustainable growth and reduce poverty, underpinned by the national poverty reduction strategy (PRSP-II). The program supported under this arrangement went off-track after the completion of the second review in December 2013, on account of the contraction of a loan from Angola with a level of concessionality below the threshold of 50 percent stipulated under the program and the delays in introducing corrective measures due to the general elections in October the same year and the subsequent change of government.

3. The government of São Tomé and Príncipe wishes to cancel the current ECF arrangement, which is due to expire in July 2015. In its place, we request a new three-year ECF arrangement to support our medium-term economic reform program for the period 2015 to 2018. The new ECF arrangement allows the government to design a new program that does not assume prospects of future oil production due to the significant delays and setbacks in oil exploration. It will also afford the new government a clean slate to reestablish credibility in program implementation.

4. To help achieve the objectives of this program, the government requests access of SDR 4,440,000 (60 percent of quota) including first disbursement of SDR634,285 upon approval of the arrangement by the IMF Executive Board. This arrangement will be used to anchor the government’s macroeconomic policies. The half-yearly reviews under the arrangement will serve also to send a clear signal to São Tomé and Príncipe’s development partners regarding the quality of the macroeconomic and financial policies implemented by the government.

5. The attached Memorandum of Economic and Financial Policies (MEFP) describe recent developments in São Tomé and Príncipe’s economy and the progress made in implementing our program in 2013–14. As explained in the MEFP, nearly all the program indicators at end-December 2014 were achieved and many of the measures subject to structural benchmarks were implemented.

6. The MEFP also sets out the economic and financial policies that the São Tomé and Príncipe government intends to implement between now and the end of this year and during the course of the next three years to preserve macroeconomic stability, boost economic growth, improve the management of public finances and the financial system, and facilitate export-oriented private sector development.

7. The MEFP and the Technical Memorandum of Understandings (TMU) present quantitative performance criteria, indicative targets, and structural benchmarks to be used to monitor the implementation of the program. The government believes that the measures and policies described in the attached MEFP are adequate to attain the objectives of this program. It will take any additional measures necessary to that end. It will consult with the IMF on the adoption of such measures prior to any revision of the policies indicated in the attached MEFP, in accordance with the Fund’s policies on such consultation.

8. The government will provide Fund staff with all relevant information mentioned in the Technical Memorandum of Understanding (TMU) concerning progress made under the program. During the program, the government will not introduce or strengthen any exchange restriction, multiple currency practice, or import restrictions for balance of payments purposes, nor will it conclude any bilateral payment agreements in violation of Article VIII of the Fund’s Articles of Agreement.

9. The government of São Tomé and Príncipe authorizes the IMF to make this letter and attached MEFP and TMU, and the IMF staff report and the Debt Sustainability Analysis (DSA) update available to the public, including through the IMF internet website.

Yours truly,

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Attachments:

  1. Memorandum on Economic and Financial Policies.

  2. Technical Memorandum of Understanding.

Attachment I. Memorandum on Economic and Financial Policies for 2015–18

Introduction

1. This memorandum of economic and financial policies outlines the main objectives of the government of São Tomé and Príncipe’s economic reform program for the period July 2015–June 2018, for which the government is seeking support from the International Monetary Fund through a new three-year arrangement under the Extended Credit Facility (ECF). The new ECF arrangement succeeds the one approved by the IMF Executive Board in July 2012. That program went off-track after the completion of the second review in December 2013, on account of the contracting of a loan from Angola with a level of concessionality below the threshold of 50 percent stipulated under the program and the delays in introducing corrective measures due to the general elections in October that same year and the subsequent change of government.

2. The government of São Tomé and Príncipe is committed to pursuing an economic reform program to promote sustainable growth and poverty reduction. The Independent Democratic Action Party led by Mr. Patrice Trovoada won an absolute majority in the 2014 Parliamentary elections. More than half of the population lives below the poverty line, and there is limited access to clean water and electricity, and to services such as education and health care. The lack of basic infrastructure constrains our economic development and limits improvement in living standards. Prospects worsened somewhat over the last years with the dire indebtedness situation and the dwindling chances of discovering commercially viable quantities of oil in our offshore territory.

3. The new government sees a Fund-supported program as an appropriate platform for continued reforms and also to catalyze donor support and participation in São Tomé and Príncipe. The government’s medium-term economic program is rooted in the national poverty reduction strategy paper (PRSP-II) and the new government’s vision statement which seeks to consolidate gains made under the current ECF-supported program with the IMF. In particular, the medium term objectives aims to continue the fiscal consolidation to further anchor debt sustainability but at the same time create enough space to support the much-needed public investment program (PIP) to promote sustained and shared growth and poverty reduction.

4. The medium-term program of the government is designed to assume no future oil production. With the withdrawal of Total Oil Company from the joint development zone in 2013, prospects of oil production in the near future are no longer feasible. Therefore, the government sees this new ECF arrangement as an opportunity to re-design a program with less probability of oil production coming on stream. In response, the government has identified alternative options of creating fiscal space (both domestic and external) to support the identified growth-enhancing spending underpinning the medium-term program.

Recent Economic Developments, Prospects and Performance Under the ECF-Supported Program

5. Macroeconomic performance since 2012 has been positive but has not resulted in the stronger and more diversified economic growth that can decisively improve economic prospects and living standards overall:

  • From 2012 through 2014, real GDP growth averaged 4½ percent, lower than the growth pick-up envisaged under the current ECF arrangement, mainly as a result of the setback to oil production and the challenging external environment, particularly in the main European trading partners. However, economic activity appears to be improving in 2015 driven by a higher than anticipated increase in foreign direct investment that started in 2014, the launching of new donor-financed projects, and improved tourism receipts. Following the adoption of the peg to the euro in January 2010, inflation has fallen significantly from 16 percent to 6.5 percent in March 2015—its lowest 12–month rate in two decades—but still not aligned with inflation in the Euro area.

  • The fiscal consolidation effort has been mixed. The domestic primary deficit which improved to 0.8 percent in 2013, mainly on account of one-off revenues of 1.7 percent of GDP. It increased sharply again to 3.4 percent of GDP in 2014 as a result of revenue underperformance (non-payment of import duties by ENCO, the main oil importer) and expenditure overruns in the run-up to the general elections in October 2014. Government arrears also accumulated on a net basis every year since 2012 despite efforts to clear them.

  • Growth in monetary aggregates continues to decline. On the other hand, after surging in 2010–12, bank credit to the private sector started contracting in 2013 as over-indebted businesses and households were not extended further loans and banks struggled with non-performing loans and shortage of bankable projects.

  • Between 2012–14, the external current account deficit slowly declined to 30.3 percent in line with weak economic activity but the trade deficit remained unchanged at about 37.4 percent of GDP despite encouraging growth in cocoa exports. The Central Bank’s international reserves, standing at 3.8 months of import cover at end-March 2015, have remained at comfortable levels, even though still below what is deemed adequate for a small commodity exporting economy with fixed exchange rate regime.

  • The financial system has been under stress over the last few years following a loose credit stance and weak enforcement of prudential standards during the oil prospects boom years of 2010–12. Non-performing loans have soared to 18 percent in 2014 and the central bank had to intervene in two banks in two years while successive years of loss making have eaten away banking system capital.

6. Program performance. The ECF-supported program of the government was approved on July 20, 2012 (with 35 percent of quota access) and is due to expire on July 19, 2015. All of the 2013 quantitative performance criteria were met; some by large margins, and the first two reviews were concluded as scheduled. But in 2014 there were slippages and delays in program implementation. While the monetary quantitative targets continued to be comfortably met, the domestic primary deficit exceeded the end-year program target by a 0.4 percentage points of GDP mainly due to revenue underperformance and slippages on personnel cost and significant arrears accumulation of energy and communications bills by government agencies. Structural reform implementation recorded delays, and some key measures were not implemented, in particular the tripartite arrears clearance plan between the Treasury, ENCO, and EMAE (Tables 1 and 2).

Table 1.

São Tomé and Príncipe: Performance Criteria and Indicative Targets for 2014

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

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

Performance at the December 2013, June 2014, and December 2014 test dates are assessed on the third, fourth, and fifth reviews respectively.

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

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

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

The term “government” is defined as in ¶ 3 of the TMU, which excludes the operations of state-owned enterprises.

This criterion will be assessed as a continuous performance criterion.

The term “external” is defined in accordance with the residency of the creditor as indicated in point 2 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).

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. For further details on the definition of debt and external arrears refer to the TMU, ¶ 15-17.

Only applies to debt with a grant element of less than 50 percent as defined in point 8 g (i) 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 October 11, 2013). For further details on the definition of concessionality refer to the TMU, Footnote 4.

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). For further details on the definition of debt refer to the TMU, ¶ 15-17.

As defined in the TMU, valued at the program exchange rate.

Table 2.

São Tomé and Príncipe: Structural Benchmarks, 2013–14

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

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7. Program interruption. The contracting in March 2014 of a loan from Angola, at less than 50 percent concessional terms, delayed the conclusion of the third ECF review. The government was able to renegotiate the terms of the loan at near concessional terms (46 percent concessionality) by July 2014. In the meantime, national elections were called in October 2014 and the outgoing government postponed further program discussions until the new government was in office. This resulted in a loss of momentum in policy implementation, which contributed to the decision of the new government to resume program relations with the Fund by requesting a new arrangement instead of continuing with the existing ECF arrangement which is due to expire soon.

8. Prospects for 2015 and beyond. The outlook for 2015 is for a pick-up in economic activity as early trends for agriculture, tourism and foreign-investment-driven construction all look favorable. Some smaller oil companies remain active in exploration, but even if they find commercially viable oil, actual production would take several more years. The current context of low international oil prices further hampers production prospects. As a result, São Tomé and Príncipe’s economic policies and outlook will continue to be constrained by the acute scarcity of budgetary resources.

Medium-Term Macroeconomic Framework

9. In the medium term, economic activity is projected to expand driven by scaled-up investment and expansion in tourism and agriculture. Accordingly, growth is projected at around 5 percent in 2015 and steadily rising to 5.5 percent by 2017. The scaling up of investment in infrastructure is expected to unleash the tourism potential of São Tomé and Príncipe by addressing production of cheaper and reliable energy, upgrading the airports, and providing transportation to link up tourism sites across the country. Better macroeconomic conditions in trade partners’ economy will also contribute to the country’s economic growth. Investments to upgrade port equipments and energy are also expected to yield benefit in agriculture. Against the backdrop of subdued international price pressures, inflation is targeted at 3 percent by 2018 in line with Euro zone inflation. Monetary aggregates’ expansion will be consistent with maintaining the sustainability of the peg. The domestic primary balance will serve as the anchor for fiscal policy and will be targeted to decline to around 1.5 percent of GDP by 2018.

10. The government’s medium-term economic program will be underpinned by an updated PRSP (National Strategy Document). In the foreseeable future, São Tomé and Príncipe will continue to face the challenges of overcoming its insularity, small market size, lack of human capital, and limited tradable resources to generate sustainable and inclusive growth. The existing Poverty Reduction Strategy Paper (PRSP-II), adopted in July 2012, and the economic guidelines of the Program of the Constitutional Government of São Tomé and Príncipe approved by Parliament in December 2014, will serve as reference for the 2015–18 economic and financial policies. The governance, economic and social objectives of the PRSP-II remain valid and priority will continue to be given to its four strategic axes: (i) promoting good governance and public sector reform, (ii) supporting sustainable and inclusive economic growth, (iii) enhancing human capital and extending basic social services, and (iv) reinforcing social cohesion and social protections, particularly for vulnerable groups. Since the PRSP-II only covers the 2012–16, the government intends to produce in 2016 a National Strategy Document through 2018 that will benefit from the recently concluded evaluation exercise of implementation of PRSP-II and, if necessary, from new consultations with stakeholders.

Supporting Macroeconomic Stability Through Fiscal and Debt Sustainability

11. The government remains committed to maintaining fiscal and debt sustainability to support sustainable growth and poverty reduction. With prospects of oil production now very low, fiscal policy will continue to entrench fiscal consolidation to anchor debt sustainability, while at the same time creating space for the much-needed growth-enhancing spending and social priorities. This will require aggressive domestic revenue mobilization and reforms to improve the effectiveness of public spending. Accordingly, the government will aim to reduce the domestic primary fiscal balance to the 1.5 percent target by 2018 while keeping the overall fiscal balance (including project grants, sectoral budgetary support, and capital expenditure financed from external resources) at a level compatible with public debt sustainability.

12. For 2015–18, the key macroeconomic objectives will be to: (i) strengthen domestic revenue mobilization and expenditure rationalization to restore fiscal discipline and reduce the risk of debt distress; (ii) improve the business environment to diversify the economy and boost growth; (iii) maintain financial sector stability; and (iv) enhance the capacity of key government institutions, inter alia, by more actively seeking technical assistance (TA). Achieving these outcomes will require fiscal reforms to enhance domestic revenue mobilization to create space for increased capital spending and improved public financial management, financial sector reforms to improve the sector’s role in facilitating private sector led growth, agricultural sector modernization and other targeted reforms designed to improve the business climate, external competitiveness and promote private investment to broaden the export base.

Fiscal Policy

13. The 2015 budget was designed to restore the thrust of the fiscal stance under the original ECF-supported program by redressing the budgetary slippages incurred in 2014, in particular, poor tax collection, rising personnel costs, and a net increase in arrears.

14. Social spending in 2015 and the medium-term will however, be safeguarded. Budget alignment with the government’s PRSP-II remains critical for further progress towards the MDGs. The government is committed to increasing social spending (indicative target) from the levels of 2014 (Table 3).

Table 3.

São Tomé and Príncipe: Proposed Performance Criteria and Indicative Targets for 2015–16

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

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

Performance at the December 2015 test date is assessed on the first review and the June and December 2016 test dates are assessed on the second and third reviews respectively.

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

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

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

The term “central government” is defined as in ¶ 3 of the TMU, which excludes the operations of state-owned enterprises.

This criterion will be assessed as a continuous performance criterion.

The term “external” is defined in accordance with the residency of the creditor as indicated in point 2 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).

This performance criterion or memo item 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. For further details on the definition of debt and external arrears refer to the TMU, ¶ 4 and 14.

Only applies to debt with a grant element of less than 35 percent as defined in point 8 g (i) 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 October 11, 2013). For further details on the definition of concessionality refer to the TMU, ¶ 20.

Only applies to debt with a grant element of at least 35 percent.

As defined in the TMU, valued at the program exchange rate.

Cumulative from December 2014 and December 2015 respectivelly.

15. In line with these commitments, the government proposes the following medium-term (2015–18) fiscal framework:

  • The domestic primary deficit is targeted at 2.7 percent of GDP (performance criterion) in 2015 and will be reduced to 1.5 percent of GDP by 2018.

  • Tax revenues are targeted at 15 percent of GDP in 2015 and the government will seek to raise them by a cumulative 1.5 percent of GDP to 16½ percent of GDP by 2018. To that effect, and drawing on TA recommendations, the government will take the necessary measures to improve tax administration and mobilize new revenue sources.

  • Personnel costs will be scaled back to their historical average of 8.5 percent of GDP over the program period. For 2015, the government envisages a reduction in personnel costs of 0.3 percentage points of GDP relative to 2014 by foregoing the annual general salary increase and preventing unbudgeted non-wage remunerations, namely on overtime and cost allowances.

  • Spending on goods and services, which has been compressed in recent years to make up for overruns in other expenditure categories, will be capped at 3.2 percent of GDP.

  • Transfers are set to increase by 29 percent in 2015 to address pressing social needs and the decentralization of government functions, but are expected to slow-down over the program period.

  • To boost the development of the domestic treasury bill market, the government plans its first issue of treasury bills in 2015 in an amount to be capped at 75 billion dobra, which could be drawn on to finance the budget in case of delays and/or shortfalls in donor financing. Apart from this contingency, the government will not resort to domestic bank financing other than drawing on its 2015 access level from the National Oil Account.

  • The government has prepared and submitted to the Fund a comprehensive plan (prior action) to clear the longstanding domestic arrears which continues to serve as a drag on fiscal consolidation.

16. Budget support in the amount of US$ 10 million has been identified for 2015 in the form of grants. On the basis of current trends, an additional US$ 30.6 million could be expected in 2016–18. Further budget support for 2016–18 and for stepping up public investment and social programs would be firmed up at a donors’ conference to be co-organized with the UNDP in São Tomé in September 2015.

17. Angola loan. The bulk of first tranche of the Angola loan (US$17 million), disbursed in March 2014, was used to finance public investment projects. About US$4.3 million was however, used as budget support to close shortfalls in donor support. The second tranche of US$17 million was disbursed in March 2015 and earmarked to support the government’s public investment projects.

Monetary Policy and Financial Sector Reforms

18. Monetary policy will continue to be anchored by the dobra peg with the Euro, which has enabled the government to reduce inflation, and maintain a stable exchange rate and a reasonable level of foreign exchange reserves. Broad money growth is projected to moderate only slightly to 14.7 percent in 2015 in line with declining inflation objective under the peg. The BCSTP is seeking to reverse the fall in credit to the private sector by reducing minimum required reserves on local currency deposits to 15 percent for banks with intermediation rate greater than 80 percent.

19. Liquidity management remains a key priority. The BCSTP has introduced an interbank money market and open market operations (OMO) to effectively manage the growing excess liquidity. In addition, a deposit standing facility will be introduced, by end-June 2016, as an interim measure to passively manage excess liquidity in the banking system.

20. The banking sector is under some stress but the government is introducing measures to safeguard financial stability. A sound and more inclusive financial sector is indispensable to keeping São Tomé and Príncipe on the path to sustainable growth. In that context, the government will prepare by end-June 2016, in consultation with the Fund (MCM), an analysis of the causes for the relatively large amount of past due and nonperforming loans (NPLs) on the banks’ balance sheets, and a comprehensive strategy to help banks deal with such NPLs (end-June 2016 structural benchmark).

21. The government has stepped up its enforcement of prudential requirements. On January 27, 2015, the Banco Central de São Tomé e Príncipe (BCSTP) intervened in Angolan-owned Banco Equador that had, since 2013, failed to meet the minimum required risk-weighted capital ratio of 12 percent and saw its NPLs rise to 43 percent in 2014. The bank failed to recapitalize by the April 27, 2015 deadline, and the intervention period was extended till mid-August 2015. In the meantime, the BCSTP, with the help of IMF TA, has drafted a new Bank Resolution Law to be submitted to the National Assembly before end-September 2015 (structural benchmark). In addition three banks have been directed to raise their capitals above the minimum required to operate a bank by end-December 2015. The BCSTP will put in place a comprehensive plan to help banks deal with high NPLs on their balance sheet by end-June 2016 (structural benchmark). Onsite inspections of all banks have been achieved with the completed inspection of the last bank in May 2015.

22. Going forward, the BCSTP will continue to strengthen its oversight of all commercial banks. The BCSTP will take other steps to strengthen banking supervision with a view to detect and deal with any persisting weaknesses in the system. It is our intention to conduct, with the help of IMF, a detailed assessment of banks compliance with Basel Core Principles by end-December 2016 (structural benchmark). Plans are advanced to revise the legal and regulatory frameworks to enhance the mandate of the BCSTP. Revised Central Banking and Financial Institutions Laws will be submitted to the National Assembly by end-December 2015. These laws are expected to comprehensively fill a number of gaps in the existing legislation some of which are partially being filled by generally applicable regulations.

Structural Reforms

23. The government is committed to mobilizing domestic resources to support the much-needed growth enhancing spending. The government’s immediate priority in 2015 is to prevent the tax collection shortfalls verified in 2014 and in the first half of 2015, in particular, the unpaid duties on fuel imports by ENCO (estimated at about 1.2 percent of GDP. With the conclusion of the arrears clearance plan in June 2015, ENCO is expected to resume full payment of customs duties, which should yield the additional 1 percent of GDP in revenues envisaged for 2015 and 2016.

24. In addition, the following measures will be introduced to increase domestic revenue from 2016:

  • The government has concluded the “Operation Taxpayer Inclusion” survey in all of São Tomé’s districts and in the Autonomous Region of Príncipe, yielding 16,000 new taxpayers. The survey is yet to be completed in the autonomous region of Príncipe. As a follow up to the “Operation Taxpayer Inclusion”, the government will be introducing the minimum tax value in the 2016 budget. This will help to broaden the tax base and permanently increase the tax revenue.

  • The government will finalize a tax maximization plan (being developed under the BAD’s PAGEF credit operation) in time to incorporate eventual measures in the 2016 budget.

  • The government has already started discussions to prepare the grounds for the introduction of Value Added Tax (VAT) by unifying the ISCPL and ISCSP taxes. The government is seeking technical assistance from the Fund to help with the design and introduction of the VAT later during the program period.

25. Domestic arrears clearance. As at end-March 2015, claims by ENCO (due to implicit fuel subsidy) and domestic suppliers put the stock of government domestic arrears at 1.352 billion dobra (15.9 percent of GDP). The bulk of these arrears, about 944 billion dobra are claimed by ENCO from the government on account of keeping pump prices below import and distribution costs since 2011. The balance corresponds to 148 billion in outstanding utilities and communications bills and 50 billion owed to other domestic suppliers for debts outstanding since before 2012. The government has however, started paying off arrears to suppliers in line with understandings with the suppliers. There is also an additional claim by ENCO of 842 billion in arrears (12 percent of GDP) owed by state-enterprise EMAE on account of unpaid bunker oil deliveries. As a result, ENCO has since 2014 stopped paying import duties and fuel taxes due to the government. A ministerial team put together by the government has prepared a comprehensive plan (prior action) to address the domestic arrears problem. The team will also audit and confirm these arrears and negotiate to seek concessions from creditors, support from donors, and provide a timetable for clearing arrears accordingly. The government will revise the macroeconomic framework to reflect the outcome of the auditing and negotiation of the stock of arrears at the time of the first review of the program.

26. Removal of fuel price differential and introduction of automatic price adjustment. The recent fall in international oil prices presents a timely opportunity to end the cost-price differential. Starting April 2015, the cost of imported fuel products had fallen sufficiently to restore, at current pump price levels, full cost recovery for the importer and tax collections for the government. With petroleum prices currently aligned with cost, the government is committed to maintaining future prices to be in line with cost recovery while the government designs and establishes an automatic price adjustment mechanism by end-June, 2016 (structural benchmark). The government however, will implement this by assessing the social consequences of higher pump prices on the poorest with a view to providing a safety mechanism targeted at the poor and vulnerable.

27. Reforming EMAE. The government is receiving assistance from the World Bank to address structural problems at EMAE to ensure full cost recovery for electricity and water prices and in generating cash-flow to finance grid network repairs and upgrades. To that effect, the government will introduce a restructuring plan by end-December 2016 (structural benchmark).

28. In the meantime, the government will introduce “quick fix” measures to improve efficiency at EMAE. Overdue measures will be taken to address some of the most pressing problems of EMAE. The government will prepare adequate legislation to address the widespread loss through illegal connections of electricity and water. The government will also support EMAE to install water meters to increase its revenues and prevent wasteful usage at flat-rates.

Strengthening Public Financial Management

29. Public financial management (PFM). Attempts to improve and modernize PFM since 2012 have hinged on the adoption of a new, donor-recommended, information management system—SAFEe—that was custom-designed for São Tomé and Príncipe but has yet to be fully operational. Its pilot stage of implementation has covered four ministries but it fell short of the initial objective of consolidating and producing the 2012 budget execution results. As remaining information processing and security issues are addressed, the government intends to use it to produce the 2013 and 2014 final accounts and to extend the SAFEe system to all remaining government ministries and agencies starting with the 2016 budget.

30. Expenditure control. In addition to SAFEe’s enhanced monitoring capabilities, tighter expenditure control procedures will be introduced to ensure that non-budgeted expenditures do not take place, in particular as regards non-wage personnel costs such as overtime and expense allowances that have in the last few years been exceeding annually budgeted amounts.

31. Medium-term fiscal framework. The government will, by end–2016, take actions to fully implement a move comprehensive medium-term fiscal framework, by consolidating the current framework. Furthermore, if necessary, the government will seek Fund FAD TA and a training workshop, during which key steps for developing such framework will be put in place.

32. Debt Management. The government will continue to strengthen debt management, including by improving reporting and debt service forecasts. Prospective new loans will be carefully assessed in terms of their debt sustainability implications prior to their contracting.

Improving the Business Environment for Export Diversification and Private Sector Development

33. Business environment. The government will seek to boost private sector investment and exports trade by improving the business climate through greater trade facilitation, stronger property and investor rights, easier access to credit, simplified payment of taxes and reduction of administrative bureaucracy in general. The successful setting up in 2011 of a one-stop-shop that reduced costs and paperwork for foreign investors was complemented in 2014 by the launching of another one-stop shop for foreign trade that will support national producers’ efforts in accessing foreign markets.

34. Export diversification. Accelerating and sustaining economic growth in São Tomé and Príncipe at levels that will structurally reduce unemployment and improve social conditions will only be possible by taking advantage of the potential to expand production to export markets. To that effect, the government will develop and submit to the National Assembly, a national export diversification strategy and action plan (end-December 2016 structural benchmark), targeting the tourism sector and high-value horticultural production, that are recognized as having the greatest potential.

35. Revamp the functioning of credit reference bureau. The BCSTP launched the Central de Risco de Crédito (CRC) in 2011 to provide a sound and comprehensive credit reporting to support the assessment and pricing of risks. However, the potential of the CRC has largely been tapped due to the imperfect coverage and data quality. The BCSTP will be investing in additional resources (both human and infrastructure) to extend its coverage and enhance its usage. Going forward, the BCSTP will strictly enforce the requirement that reporting financial institutions provide relevant, accurate, complete, and timely information to the CRC and apply sanctions when breached.

36. Addressing challenges in the judiciary system to enhance enforcement of collateral. The government will prepare an action plan of legal reforms with a view to making the domestic judiciary system more expedite and predictable as regards contracts’ enforcement and execution of guarantees.

Borrowing Options

37. Investment priorities. Despite recent gains with cocoa exports and tourism receipts, São Tomé and Príncipe remains at high risk of debt distress and the government will continue to pursue policies consistent with debt sustainability. The 2012–15 ECF-supported programs maintained a cautious fiscal stance under the assumption that oil revenue over the medium term would come on stream to support social and infrastructure needs. But with oil production now unlikely for many years, there is the need to explore options to create space to support the government public investment program.

38. External borrowing constraints. The government’s 2015–18 programs makes room for some additional concessional borrowing of an average of 6.6 percent of GDP annually over the three year ECF program, at a lower concessionality threshold of 35 percent in line with other LICs. Such reduction appears warranted by the current global low interest rates environment that has narrowed the differential between concessional and non-concessional rates. The Fund staff’s DSA exercise suggests that there is room for the additional borrowing and for reducing the grant element from 50 to 35 percent without significantly changing the debt sustainability dynamics.

39. Strengthening debt management capacity. The government is updating the medium-term debt management strategy which is expected to be submitted to cabinet for approval by end-June 2016. This updated strategy is critical to support the government’s debt reduction objective in the program.

Statistics

40. The government will continue to make progress to strengthen the statistical system. The National Statistics Institute (INE) is taking steps, with the help of TA from the Fund and donors, to improve the CPI and the national accounts. The household survey completed in 2011 will provide the basis for reweighting the CPI components and introducing new goods and services to its basket. By end-December 2015, the government will start monthly compilation of the new CPI and will publish the revised national accounts series (structural benchmarks).

Program Monitoring

41. The program will be evaluated based on quantitative performance criteria and structural benchmarks (Tables 3 and 4 in attachment I), and semi-annual reviews. Definitions of key concepts and indicators, as well as reporting requirements, are set out in the accompanying Technical Memorandum of Understandings (TMU). The first, second, and third reviews are scheduled to be completed on or after April 15, 2016, October 15, 2016, and April 15, 2017 respectively, based on test dates for periodic PCs of end-December 2015, end-June 2016, and end-December 2016 respectively.

Table 4.

São Tomé and Príncipe: Prior Action and Structural Benchmarks Under the Proposed ECF-Supported Program

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Attachment II. Technical Memorandum of Understanding

1. This Technical Memorandum of Understanding (TMU) contains definitions and adjuster mechanisms that clarify the measurement of quantitative performance criteria and indicative targets in Table 3, which are attached to the Memorandum of Economic and Financial Policies for 2015 and 2016. Unless otherwise specified, all quantitative performance criteria and indicative targets will be evaluated in terms of cumulative flows from the beginning of each calendar year.

2. The program exchange rate for the purposes of this TMU1 will be 20,299 dobra per U.S. dollar, 24,500 dobra per euro, and 29,236 dobra per SDR for both 2015 and 2016.

Provision of Data to the Fund

3. Data with respect to all variables subject to performance criteria and indicative targets will be provided to Fund staff on the frequency described below (paragraph 27) with a lag of no more than four weeks for data on net international reserves of the Central Bank of São Tomé and Príncipe (BCSTP) and six 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 are defined below and refer to the floor on domestic primary balance; the ceiling on changes in net bank financing of the central government; the floor on net international reserves of the central bank; the ceiling on central government’s outstanding external payments arrears; the ceiling on the contracting or guaranteeing of new nonconcessional external debt with original maturity of more than one year by the central government or the BCSTP; and the ceiling on the outstanding stock of external debt with original maturity of up to and including one year owed or guaranteed by the central government or the BCSTP.

Definitions

4. For the purposes of this TMU, external and domestic shall be defined on a residency basis.

5. Central 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.

6. 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. Debt will be understood to mean a current, i.e., not contingent, liability, created under a contractual agreement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract.

7. Government domestic revenue (excluding oil revenue) comprises all tax and nontax 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 Finance and Public Administration.

8. 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 Finance and Public Administration.

9. PERFORMANCE CRITERIA

10. Performance criterion on the floor on domestic primary balance. This performance criterion refers to the difference between government domestic revenue (excluding oil revenue) and domestic primary expenditure. For reference, this balance for end-December 2014 was 210 billion dobra, broken down as follows:

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11. Performance criterion on the ceiling on changes in net bank financing of the central government (NCG). This performance criterion measures the increase (decrease) in the stock of all outstanding claims on the central government held by the BCSTP and by other depository corporations (ODCs), less all deposits held by the central government with the BCSTP and with ODCs, 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 dobra at the program exchange rate. For reference, at end-December 2014, outstanding net bank financing of the central government (excluding NOA) was -9 billion dobra, broken down as follows:

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12. Performance criterion on the floor on net international reserves (NIR) of the BCSTP. The NIR of the BCSTP are defined for program-monitoring purposes as short-term (i.e., original maturities of one year or less), tradable 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 NIR. Securities whose market value on the last day of the year differs by over 20 percent from their original nominal issue price will be assessed at their market value as reported by the BCSTP’s Markets Department. The balance of (1) NOA at the BCSTP, (2) banks’ deposits related to capital or licensing requirements, and (3) banks’ reserves denominated in foreign currency are excluded from the program definition of NIR. All values are to be converted to U.S. dollars at the actual mid-point market exchange rates prevailing at the test date. For reference, at end-December 2014 NIR was 999 billion dobra, calculated as follows:

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13. Performance criterion on the ceiling on the outstanding stock of external debt with original maturity of up to and including one year owed or guaranteed by the central government or the BCSTP. This performance criterion refers to the outstanding stock of external debt with an original maturity of one year or less (“short-term debt”) (including overdraft positions but excluding normal import credits) owed or guaranteed by the government and/or the BCSTP. 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 calendar year will be excluded from this ceiling. However, outstanding balances at the end of a given calendar year will be included in the assessment of compliance with this performance criterion. For reference, at end-December 2014 the stock of short-term external debt was zero.

14. Performance criterion on the ceiling on the contracting or guaranteeing of new nonconcessional external debt with original maturity of more than one year by the central government or the BCSTP. This is a continuous performance criterion that refers to the contracting or guaranteeing of new external debt with original maturity of more than one year (“medium- or long-term debt”) by the government and/or the BCSTP. Debt is considered nonconcessional if it includes a grant element less than 35 percent. The grant element is the difference between the nominal value of the loan and its net present value, expressed as a percentage of the nominal value. The net present value of the debt at the date on which it is contracted is calculated by discounting the debt service payments at the time of the contracting of the debt. The discount rate used for this purpose is 5 percent. This performance criterion does not apply to IMF facilities. Debt being rescheduled or restructured is excluded from this ceiling. Medium- and long-term debt will be reported by the Debt Management Department of the Ministry of Finance and Public Administration (as appropriate) by the BCSTP, measured in U.S. dollars at the prevailing exchange rates. The government should consult with IMF staff before contracting or guaranteeing new medium- or long-term debt obligations.

15. Performance criterion on the ceiling on central government’s outstanding external payment arrears. This is a continuous performance criterion. Central government external payment arrears consist of external debt service obligations (principal and interest) that have not been paid at the time they are due, as specified in the contractual agreement, subject to any applicable grace period. This performance criterion does not apply to arrears resulting from the nonpayment of debt service for which a clearance framework has been agreed or for which the government is actively seeking a rescheduling agreement.

Indicative Targets

16. Ceiling on change of central government’s new domestic arrears is set on the difference between expenditure on a commitment basis and cash payments (amounts past due after 40 days and unpaid).

17. Ceiling on dobra base money is set on the sum of currency issued—which consists of currency outside depository corporations and cash in vaults—and banks 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 2014 dobra base money was 971 billion dobra, calculated as follows:

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18. Within domestic primary expenditure, the floor on pro-poor expenditure refers to the floor on 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:

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

  2. 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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Source: Diário da Republica de São Tome e Príncipe No. 21-May 7, 2008, pages 12-13.

Expenditures on fuels and lubricants (combustíveis e lubrificantes) that are affected for administrative purposes are excluded. Likewise, food (alimetitação)and clothing and shoes (roupas e calçados) supplied to administrative staff are excluded.

19. Floor on tax revenue is set on tax revenue that includes direct and indirect taxes as well as recovery of tax arrears and additional collection efforts.

Memorandum Items

20. New concessional external debt contracted or guaranteed with original maturity of more than one year by the central government or the BCSTP measures such debt with a grant element of at least 35 percent.

21. Net external debt service payments by the central government are defined as debt service due less the accumulation of any new external payment arrears, as defined under the performance criterion on the ceiling on central government’s outstanding external payment arrears.

22. Official external program support is defined as grants and loans, including in-kind aid when the products are sold by the government and the receipts are earmarked for a budgeted spending item, and other exceptional financing provided by foreign official entities and incorporated into the budget.

23. Treasury-funded capital expenditure is classified as part of domestic primary expenditure and covers public investment projects that are not directly financed by project grants and concessional loans or that have to be partially co-financed with government resources. It includes 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.

Use of Adjusters

24. The performance criterion on the domestic primary balance will have one adjuster. The limit on the domestic primary balance will be adjusted upward if the government finds budget support and privatization receipts in 2015 and 2016 in addition to that described in the MEFP; this adjuster will be capped at 62 billion dobra (about 1 percent of 2014 GDP) for 2015 and 2016.2

25. The performance criteria on net bank financing of the central government and net international reserves of the central bank will be adjusted in line with deviations from amounts projected in the program for budget transfers 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 2014 or end-December 2015, as appropriate (MEFP, Table 3). The following is an explanation of these adjustments:

  • Adjustors on ceilings on changes in net bank financing of the central government (NCG): Quarterly differences between actual and projected receipts of budget transfers from the NOA, official external program support, net external debt service payments, and domestic arrears will be converted to dobra at the program exchange rate and aggregated from end-December 2014 or end-December 2015, as appropriate, to the test date. The ceilings will be adjusted downward (upward) by cumulative deviations downward (upward) of actual from projected net external debt service payments, and by deviations upward (downward) in budget transfers from the NOA, official external program support, and domestic arrears. The combined application of all adjusters at any test date is capped at the equivalent to US$3 million at the program exchange rate.

  • Adjustors for the floor on net international reserves (NIR) of the BCSTP: Quarterly differences between actual and projected receipts of budget transfers from the NOA, official external program support, net external debt service payments, and domestic arrears in dobra, will be converted to U.S. dollars at the program exchange rate and aggregated from end-December 2014 or end-December 2015, as appropriate, to the test date. The floor will be adjusted upward (downward) by the cumulative deviation downward (upward) of actual from projected net external debt service payments of the central government, and by deviations upward (downward) for budget transfers from the NOA, official external program support, and domestic arrears. The combined application of all adjusters at any test date is capped in such a way that the adjusted floor does not fall short of US$47 million in 2015 and US$59 million in 2016.

Data Reporting

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

  • 1) Fiscal Data: The Directorate of Treasury and Directorate of Budget at the Ministry of Finance and Public Administration will provide the following information to IMF staff, within six weeks 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 and by creditor;

    • Quarterly data on implicit arrears to ENCO on account of fuel retail prices eventually not covering import costs, distribution margins and applicable taxes.

    • Quarterly data on EMAE’s arrears to ENCO.

    • 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;

    • 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 becoming available).

  • 2) 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 the year for annual data. 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 dobra base money and currency in circulation, to be posted on the central bank’s web site;

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

    • Monthly balance sheet data of BCSTP (in IMF report form 1SR, with requested memorandum items);

    • Monthly consolidated balance sheet data of other depository corporations (in IMF report form 2SR);

    • Monthly consolidated depository corporations survey (in IMF survey 3SG);

    • 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.).

  • 3) External Debt Data: The Directorate of Treasury at the Ministry of Finance and Public Administration 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.

    • Annual data on future borrowing plans.

  • 4) National Accounts and Trade Statistics: The following data will be provided to the 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 Finance and Public Administration, 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

Defined as non-oil revenue minus current non-interest expenditure and domestically-financed capital spending.

2

See São Tomé and Príncipe 2013 Article IV Consultation staff report, for analysis on reserve adequacy for low income commodity exporters with conventional peg exchange rate.

3

Dabla-Norris, Era, and others, “Optimal Precautionary Reserves for Low-Income Countries: A Cost Benefit Analysis,” IMF Working Paper 11/249.

4

The agreement with Portugal provides the central bank with additional resources to support the peg if needed, in the form of a credit line of up to €25 million.

1

Data refer to the mid-point exchange rates published on the BCSTP’s webpage for the last day of 2014.

2

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

Other IMF Content

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Cover IMF Staff Country Reports
Democratic Republic of São Tomé and Príncipe: Request for a Three-Year Arrangement Under the Extended Credit Facility and Cancellation of the Current Arrangement Under the Extended Credit Facility
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2015: Issue 196
Publisher:
International Monetary Fund
ISBN:
9781498325523
ISSN:
1934-7685
Pages:
97
DOI:
https://doi.org/10.5089/9781498325523.002
  • Figure 1.
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    Figure 1.

    São Tomé and Príncipe: Recent Macroeconomic Developments

  • Figure 2.
    View in gallery
    Figure 2.

    São Tomé and Príncipe: Fiscal Indicators 2008–14

    (Percent of GDP)

  • Figure 3.
    View in gallery
    Figure 3.

    São Tomé and Príncipe: Money and Credit Developments, 2008–14

  • Figure 4.
    View in gallery
    Figure 4.

    São Tomé and Príncipe: External Sector Developments, 2008–14

  • Text Chart 1.
    View in gallery
    Text Chart 1.

    Comparison of Indicators of Public and Publically Guaranteed External Debt Ratios, 50 percent vs. 35 percent Concessionality

Figure 1.

São Tomé and Príncipe: Recent Macroeconomic Developments
Figure 2.

São Tomé and Príncipe: Fiscal Indicators 2008–14

(Percent of GDP)
Figure 3.

São Tomé and Príncipe: Money and Credit Developments, 2008–14
Figure 4.

São Tomé and Príncipe: External Sector Developments, 2008–14
Text Chart 1.

Comparison of Indicators of Public and Publically Guaranteed External Debt Ratios, 50 percent vs. 35 percent Concessionality