Democratic Republic of São Tomé and Príncipe: Staff Report for the 2018 Article IV Consultation, Fifth Review Under the Extended Credit Facility, Request for Waivers for Nonobservance of Performance Criteria and Financing Assurances Review—Informational Annex
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International Monetary Fund. African Dept.
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2018 Article IV Consultation, Fifth Review Under the Extended Credit Facility Arrangement, Request for Waivers for Nonobservance of Performance Criteria, and Financing Assurances Review

Abstract

2018 Article IV Consultation, Fifth Review Under the Extended Credit Facility Arrangement, Request for Waivers for Nonobservance of Performance Criteria, and Financing Assurances Review

Relations with the Fund

(As of May 31, 2018)

Membership Status

Joined: September 30, 1977; Article XIV

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Latest Financial Arrangements:

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Formerly PRGF.

Projected Payments to Fund 1

(SDR Million; based on existing use of resources and present holdings of SDRs):

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Implementation of HIPC Initiative:

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Assistance committed under the original framework is expressed in net present value (NPV) terms at the completion point, and assistance committed under the enhanced framework is expressed in NPV terms at the decision point. Hence these two amounts cannot be added.

Under the enhanced framework, an additional disbursement is made corresponding to interest income earned on the amount of HIPC assistance committed but not disbursed.

Implementation of Multilateral Debt Relief Initiative (MDRI):

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The MDRI provides 100 percent debt relief to eligible member countries that qualified for the assistance. Grant assistance from the MDRI Trust and HIPC resources provide debt relief to cover the full stock of debt owed to the Fund as of end-2004 that remains outstanding at the time the member qualifies for such debt relief.

Safeguards Assessments:

Safeguards assessments were conducted in 2009, 2013, and 2015. Severe capacity constraints have contributed to a weak safeguards framework at the BCSTP. External audits conducted by a reputable audit firm have served as a critical safeguard. Key areas in need of strengthening are financial reporting practices, independent oversight on audit and control mechanisms, and the BCSTP’s legal framework. While the BCSTP has drafted and approved a new Audit Board Charter, implementation has been slow and independent oversight is still lacking. The drafting of legal reforms is still ongoing and institutional development will be needed to strengthen capacity, especially in the areas of internal audit and financial reporting.

Exchange Arrangements:

The de jure and de facto exchange rate arrangement is a conventional peg against the euro. São Tomé and Príncipe has pegged the dobra to the euro since January 2010, initially at a rate of dobra 24,500 per euro; however, it redenominated the currency by removing three zeros in January 2018. The organic law of the BCSTP authorizes it to make decisions regarding exchange rate policy. The commission on foreign exchange sales by banks cannot be higher than 2 percent for the euro, while the spread for other currencies cannot exceed 4 percent. Purchases of euro by banks must be done at the rate published by the BCSTP and no commissions are allowed. The BCSTP finances current international transactions at the official exchange rate and only after verification of the documentation establishing the bona fide nature of the bank’s request. Access to foreign exchange is limited to banks having a net open position in the transaction currency of less than 12 percent of qualified capital, a net open position in total foreign currency less than 25 percent of qualified capital, and which are in compliance with the solvency and liquidity ratios set by the central bank, as well as minimum capital requirement. Banks are allowed to have a direct access to the central bank’s facilities regardless of the above conditions if the foreign exchange is to be used for importation of goods in periods of crisis or for the importation of fuel. The central bank charges 1.5 percent commission on sales of euro and a 0.5 percent commission on purchases of euro. The buying rate is mainly indicative because the BCSTP rarely makes purchases.

São Tomé and Príncipe continues to avail itself of the transitional arrangements under Article XIV, but it does not maintain restrictions under Article XIV. However, it maintains one previously identified and one newly identified restriction subject to Fund approval under Article VIII. The previously identified exchange restriction regarding limitations on the transferability of net income from investment arises from Article 3(g) and Article 18 of the Investment Code (Law No. 19/2016). The restriction results from the requirement that taxes and other obligations to the government have to be paid/fulfilled as a condition for transfer, to the extent the requirement includes the payment of taxes and the fulfillment of obligations unrelated to the net income to be transferred. In the context of the 2018 Article IV Consultation, staff found that São Tomé and Príncipe maintains an additional exchange restriction that is subject to Fund approval under Article VIII. This exchange restriction arises from limitations on the availability of foreign exchange through rationing of foreign exchange by BCSTP. This exchange restriction also gives rise to a multiple currency practice as the rationing has channeled bona fide current transactions to the parallel market where the exchange rate is at a spread of more than 2 percent from the exchange rate in the formal market.

Article IV Consultation:

São Tomé and Príncipe is currently under a 24-month consultation cycle. The Executive Board concluded the last Article IV consultation on June 10, 2016.

Financial Sector Assessment Program (FSAP), Reports on Observance of Standards and Codes (ROSCs), and Offshore Financial Center (OFC) Assessments:

None.

Resident Representative:

The Fund has not had a Resident Representative office in São Tomé and Príncipe since October 2006.

Technical Assistance 2013–18:

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Relations with the World Bank Group

Joint Managerial Action Plan (JMAP) for São Tomé and Príncipe

(As of May 11, 2018)

The IMF and World Bank São Tomé and Príncipe teams held regular meetings to discuss their respective work programs and macro critical structural reforms for São Tomé and Príncipe. The two institutions’ teams met in the context of the supervision for the current ECF-supported program that discusses policies and financing during the prospective program period 2015–18.

The World Bank’s work program is guided by a Country Partnership Framework (CPF) for the fiscal years 2014 to 2018, approved in FY14, that focuses on supporting growth and job creation through two broad themes: macroeconomic stability and national competitiveness, and reducing vulnerability and strengthening human capacity. Gender, partnership, and capacity building are elements that cut across all the proposed engagements. A two-year extension of the current CPF is being sought to incorporate the results of the Performance and Learning Review. A new household survey and a Country Economic Memorandum will be available in FY 19, which will inform the Systematic Country Diagnosis (SCD) and the new CPF. A Debt Management and Performance Assessment (DeMPA) report was completed in November 2016.

The IMF’s work program included the Executive Board’s consideration of the second review under the ECF-supported program in December 2016, a staff visit in July 2017, and a review mission in September 2017 to supervise the ECF-supported program, and assistance with capacity development in the areas of public financial management, revenue administration, and banking supervision.

The Bank and the Fund are providing complementary support to help São Tomé and Príncipe strengthen public financial management and make progress towards debt sustainability. Regarding the latter, the teams prepared a Joint IMF-World Bank Debt Sustainability Analysis (DSA) update in 2017 to accompany the ECF-supported program review to the Board in December 2017.

Work Program for Period 2018–19

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Relations with the African Development Bank Group

(As of May 18, 2018)

The Bank Group commenced lending operations in São Tomé and Príncipe in 1978. To date, the Bank approved loans and grants, amounting to a cumulative commitment of about UA 135 million (US$191 million).

As of May 2018, the Bank’s active portfolio in São Tomé and Príncipe (STP) consisted of six operations, amounting to roughly UA 25 million (US$35 million). These are: Infrastructure Rehabilitation for Food Security (PRIASA II); the Public Finance Management Project (PAGEF); the National Planning Scheme study; and the Payment System (Table 1). The portfolio is relatively young. The average age of the portfolio is 3.4 years and the cumulative disbursement rate is 34 percent after the closure of two projects (i.e., PRIASA I with a disbursement rate of 100 percent, National Program for Drinking Water Supply and Rural Sanitation with 85 percent disbursement rate, and Trade Facilitation with 86 percent disbursement rate). In terms of sectoral distribution, the agriculture and fisheries sector dominates the portfolio with 57 percent, followed by the multi-sector operations with 37 percent and finance with 6 percent. There is no ongoing private sector or multinational projects. The portfolio is largely funded by African Development Fund loan (82 percent), followed by the Global Environmental Fund (GEF) (10 percent), the Transition Support Facility (TSF) (8 percent), and the African Trade Facilitation Fund (1.5 percent). The Bank also conducted analytical work focused in the areas of energy, agriculture, public financial management, and the private sector development strategy 2015–24.

Table 1.

AfDB Ongoing Projects

(Millions of UA)

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The AfDB current involvement in STP is guided by the Country Strategy Paper (CSP) 2012–16, approved in July 2012. The strategy was focused on two pillars: Pillar I– Strengthening Governance; and Pillar II–Promotion of Agriculture Infrastructure. The CSP’s main objective was to prepare the authorities for the forthcoming oil production era and the associated challenges and risks to the country’s socio-economic development, as well as to help the government address the issue of food security. In addition, the Bank has finalized its new CSP 2018-2022 for the country scheduled for Board approval on June 6, 2018. The objective of the CSP is to support STP’s economic transformation, expand its production base, with a focus on the key High 5 priority area of agriculture, and improve the quality of life of the population. Bank support will focus on putting in place an enabling environment for agri-business and value chains development through investments in agriculture-supporting infrastructure and in key complementary sectors of energy and water infrastructure. Support will also focus on capacity building of key public-sector institutions for the formulation and effective implementation of macroeconomic and public financial management reforms, with a view towards improving the prioritization, allocation and use of public resources. In this context, two pillars were identified: Pillar I – supporting agriculture value chains development, and Pillar II – improving the quality of life of the population through strengthened economic and financial management. Both pillars are consistent with the authorities’ priorities as well as with the AfDB’s priorities outlined in the 2013–22 strategy, and the High 5 agenda.

As part of its strategy and knowledge products, the AfDB also envisages to undertake the following economic and sector work: (i) governance profile (an update); (ii) agriculture statistics strategy; (iii) study on the constraints and potentials of blue economy; and (iv) preparation of a gender strategy 2019-2023. These studies will inform the preparation of future projects and provide support to the government’s policy reform efforts. Meanwhile, the fragility assessment, and the national strategy for youth employment and human capital studies have already been completed.

STP reached the Highly-Indebted Poor Countries (HIPC) decision and completion points in 2000 and 2007, respectively. As a result, in March 2007, the country achieved the completion point and benefited from debt relief under HIPC and Multilateral Debt Relief Initiative (MDRI), amounting to US$327 million. About 73 percent of the debt relief was made by multilateral institutions—of which, 40 percent from the African Development Bank, 29 percent from the World Bank, and 27 percent from bilateral partners (11 percent from Paris Club countries and 16 percent from non-Paris Club countries)1. The country’s outstanding debt to the AfDB is projected to reach US$0.11 million by the end of 2017.

Statistical Issues

(As of June 28, 2018)

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Democratic Republic of São Tomé and Príncipe: Table of Common Indicators Required for Surveillance

(As of June 28, 2018)

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Includes reserve asset pledged or otherwise encumbered as well as net derivative positions.

Central bank’s reference rate.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra-budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); not available (NA).

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When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

1

Data from the Government.

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Democratic Republic of São Tomé and Princípe: 2018 Article IV Consultation, Fifth Review Under the Extended Credit Facility Arrangement, Request for Waivers for Nonobservance of Performance Criteria, and Financing Assurances Review
Author:
International Monetary Fund. African Dept.