IMF Executive Board Completes Second ECF Review for São Tomé and Príncipe, and Approves US$0.9 Million Disbursement

Growth in the first half of the year was subdued, as the stronger stimulus expected from a timely execution of public investment projects failed to materialize because of the delayed disbursements of external financing. There was also a large fiscal slippage in the first half of the year ahead of the presidential elections. Two end-June program performance criteria and a structural benchmark (SB) were missed, but the targets for the year remain attainable.

Abstract

Growth in the first half of the year was subdued, as the stronger stimulus expected from a timely execution of public investment projects failed to materialize because of the delayed disbursements of external financing. There was also a large fiscal slippage in the first half of the year ahead of the presidential elections. Two end-June program performance criteria and a structural benchmark (SB) were missed, but the targets for the year remain attainable.

The Executive Board of the International Monetary Fund (IMF) today completed the second review of São Tomé and Príncipe’s economic program, supported by an Extended Credit Facility (ECF) 1 arrangement. Completion of the review enables the immediate disbursement of SDR 634,285 (about US$0.9 million), bringing total disbursements under the arrangement to SDR 1.9 million (about US$2.6 million).

The Executive Board also approved the authorities’ request for waiver for nonobservance of the end June 2016 performance criteria on the domestic primary deficit and net international reserves, based on corrective measures introduced by the authorities. In addition, the Board also approved modification of the end-December target on net international reserves and approved new program targets for 2017.

São Tomé and Príncipe’s three-year ECF arrangement for SDR 4.44 million (about US$6.2 million or 60 percent of quota at the time of approval of the arrangement), aims to support the government’s economic reform program for stronger and more inclusive growth, was approved on July 13, 2015 (see Press Release No. 15/336).

Following the Executive Board’s discussion of the review, Mr. Mitsuhiro Furusawa, Acting Chair and Deputy Managing Director, made the following statement:

“São Tomé and Príncipe’s growth has been subdued, though still positive, reflecting delayed external financing that affected spending on key growth-enhancing capital projects. While the macroeconomic outlook is positive, fiscal and debt sustainability concerns remain critical to maintain a careful balance between growth-enhancing spending and macroeconomic stability.

“Recent performance under the ECF-supported program has been mixed. While the structural reform agenda is broadly on track, except for the delayed implementation of the automatic fuel price adjustment mechanism, there were some slippages due to delayed disbursement of external financing which resulted in missing both the domestic primary balance and net international reserves performance criteria for end-June 2016. However, the authorities took corrective measures to keep the end-2016 fiscal program on track.

“The introduction of the automatic fuel price adjustment mechanism at the end of November 2016 should help tackle the longstanding problems of arrears and prevent the accumulation of new domestic arrears and support the authorities’ fiscal consolidation efforts. In addition, the planned energy-sector reforms to reduce cost and enhance efficiency are crucial to further strengthen public finances and encourage private sector participation.

“Banking sector vulnerabilities continue to remain a source of concern. It is important that the authorities follow through with the implementation of the strategy to reduce the large stock of non-performing loans, backed by a comprehensive asset quality review. The authorities should also push ahead with measures to reform debt enforcement and insolvency regimes, out-of-court workouts, and improve operational capacity of banks. In the process of liquidating Banco Equador, it is important that attention is paid to safeguard financial stability and minimize costs to the budget.

“Continued commitment to the authorities’ structural reform agenda, which prioritizes export diversification and cost competitiveness, is important to support growth and external stability.”

1

The ECF is a lending arrangement that provides sustained program engagement over the medium to long term in case of protracted balance of payments problems.