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IMF Country Report No. 21/51
DEMOCRATIC REPUBLIC OF SÃO TOMÉ AND PRÍNCIPE
SECOND REVIEW UNDER THE EXTENDED CREDIT FACILITY, REQUEST FOR WAIVER FOR NONOBSERVANCE OF PERFORMANCE CRITERION, REQUEST FOR MODIFICATION OF PERFORMANCE CRITERIA, AND FINANCING ASSURANCES REVIEW— PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE DEMOCRATIC REPUBLIC OF SÃO TOMÉ AND PRÍNCIPE
March 2021
In the context of the Second Review under the Extended Credit Facility, Request for Waiver for Nonobservance of Performance Criterion, Request for Modification of Performance Criteria, and Financing Assurances Review, the following documents have been released and are included in this package:
A Press Release including a statement by the Chair of the Executive Board.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on February 26, 2021, following discussions that ended on November 23, 2020, with the officials of the Democratic Republic of São Tomé and Príncipe on economic developments and policies underpinning the IMF arrangement under the Extended Credit Facility. Based on information available at the time of these discussions, the staff report was completed on December 23, 2020.
An Informational Annex prepared by the IMF staff.
A Debt Sustainability Analysis prepared by the staff of the IMF and the World Bank.
A Staff Statement updating information on recent developments.
A Statement by the Executive Director for the Democratic Republic of São Tomé and Príncipe.
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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DEMOCRATIC REPUBLIC OF SÃO TOMÉ AND PRÍNCIPE
SECOND REVIEW UNDER THE EXTENDED CREDIT FACILITY, REQUEST FOR WAIVER FOR NONOBSERVANCE OF PERFORMANCE CRITERION, REQUEST FOR MODIFICATION OF PERFORMANCE CRITERIA, AND FINANCING ASSURANCES REVIEW
December 23, 2020
Executive Summary
Context. The COVID-19 pandemic is having a severe impact on São Tomé and Príncipe’s economy, exacerbating fiscal and external imbalances. Tourism activities and external remittances dropped sharply, while lockdown measures further deepened the recession. The authorities’ swift actions and unprecedented international financial support are helping the country weather the emergency. The economy began to reopen in the fall, but the outlook for 2021 remains challenging and subject to significant uncertainty.
Program performance. The end-June fiscal deficit target, set prior to the pandemic, was missed due to the impact of the pandemic and wage overspending early in the year, and several structural benchmarks have been delayed. However, the country is on track to meet the revised end-2020 quantitative targets. São Tomé and Príncipe’s public debt remains sustainable. The country continues to face debt distress and its capacity to carry debt has recently been downgraded from medium to weak, heightening debt sustainability risks.
Focus of discussions. Discussions focused on addressing social priorities while gradually resuming fiscal consolidation and reducing debt vulnerability, easing external account pressures, safeguarding financial stability, and boosting more inclusive and sustainable growth.
Recommendation. In light of the exceptional circumstances under the pandemic, and the authorities’ strong actions to meet the end-2020 program targets and commitments going forward, staff recommends the completion of the second review and approval of the request for a waiver.
Approved By
David Owen (AFR) and Anna Ilyina (SPR)
Discussions for the second review of the economic program supported by the IMF Extended Credit Facility arrangement took place remotely during November 13–23, 2020. The team comprised Mr. Palomba (head), Mses. Kolovich and Iyer, and Mr. Srour (all AFR), and Mr. Bardella (FAD). Mr. Wezel (MCM) and Mr. Carvalho da Silveira (OED) participated in the discussions. Mses. Synak and Pilouzoue provided research and editorial assistance for the preparation of this report.
Contents
CONTEXT
IMPACT OF COVID-19 AND AN INCIPIENT RECOVERY
PROGRAM PERFORMANCE
OUTLOOK AND RISKS
POLICY DISCUSSIONS
A. Supporting the Recovery and Restoring Fiscal Sustainability
B. Supporting the Peg and Safeguarding Financial Stability
C. Enhancing Structural Reforms for Sustainable and Inclusive Growth
PROGRAM MODALITIES, SAFEGUARDS, AND RISKS
STAFF APPRAISAL
FIGURES
1. An Economy Hard Hit by the COVID-19 Pandemic
2. Economic Uncertainty Affecting the Banking Sector
3. Macroeconomic Effects of the COVID-19 Pandemic
4. An Unsustainable Energy Sector
5. Structural Impediments to Sustainable and Inclusive Growth
TABLES
1. Selected Economic Indicators, 2016–25
2a. Financial Operations of the Central Government, 2016–25 (Millions of new dobra)
2b. Financial Operations of the Central Government, 2016–25 (In percent of GDP)
3a. Balance of Payments, 2016–25 (Millions of U.S. dollars)
3b. Balance of Payments, 2016–25 (In percent of GDP)
4. Summary Accounts of the Central Bank, 2016–25
5. Monetary Survey, 2016–23
6. Financial Soundness Indicators, 2016–2020
7. External Financing Requirements and Sources, 2020–24
8. Indicators of Capacity to Repay the Fund, 2020–34
9. Schedule of Disbursements Under ECF Arrangement, 2019–22
ANNEX
I. Reform Agenda for the Energy Sector
APPENDICES
I. Letter of Intent
Attachment I. Supplementary Memorandum of Economic and Financial Policies for 2020–22
Attachment II. Technical Memorandum of Understanding
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DEMOCRATIC REPUBLIC OF SÃO TOMÉ AND PRÍNCIPE
SECOND REVIEW UNDER THE EXTENDED CREDIT FACILITY, REQUEST FOR WAIVER FOR NONOBSERVANCE OF PERFORMANCE CRITERION, REQUEST FOR MODIFICATION OF PERFORMANCE CRITERIA, AND FINANCING ASSURANCES REVIEW — INFORMATIONAL ANNEX
December 23, 2020
Prepared By
The African Department (in consultation with other departments)
Contents
RELATIONS WITH THE FUND
RELATIONS WITH OTHER INTERNATIONAL FINANCIAL INSTITUTIONS
STATISTICAL ISSUES
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DEMOCRATIC REPUBLIC OF SÃO TOMÉ AND PRÍNCIPE
SECOND REVIEW UNDER THE EXTENDED CREDIT FACILITY ARRANGEMENT, REQUESTS FOR WAIVER FOR NONOBSERVANCE OF PERFORMANCE CRITERION, MODIFICATION OF PERFORMANCE CRITERIA, AND FINANCING ASSURANCES REVIEW — DEBT SUSTAINABILITY ANALYSIS
December 23, 2020
Approved By
David Owen and Anna Ilyina (IMF), and Marcello Estevão (IDA)
Prepared by the staffs of the International Monetary Fund and International Development Association.
São Tomé and Príncipe: Joint Bank-Fund Debt Sustainability Analysis
São Tomé and Príncipe: Joint Bank-Fund Debt Sustainability Analysis
| Risk of external debt distress | In debt distress |
| Overall risk of debt distress | In debt distress |
| Granularity in the risk rating | Sustainable |
| Application of judgement | No |
São Tomé and Príncipe: Joint Bank-Fund Debt Sustainability Analysis
| Risk of external debt distress | In debt distress |
| Overall risk of debt distress | In debt distress |
| Granularity in the risk rating | Sustainable |
| Application of judgement | No |
The country remains in debt distress due to prolonged unsettled external arrears. In addition, the large domestic arrears of the loss-making state-owned utility company (EMAE) highlight the severe liquidity constraints of the public sector. Staff assesses that the country has the capacity to repay the external arrears over time, as indicated by the relatively low external debt ratios. While the present value (PV) of the external public and publicly guaranteed (PPG) debt-to-GDP and debt-to-exports ratio breach their thresholds in 2020 and 2021 due to the COVID-19 shock, all other external PPG debt burden indicators remain below their thresholds throughout the projection horizon in the baseline scenario. 1, 2 The PV of total PPG debt (after accounting for the concessional terms of EMAE’s and central government debt and arrears to the country’s fuel supplier, ENCO) is projected to breach the benchmark associated with a weak debt-carrying capacity (35 percent of GDP) through 2025. As its downward trajectory remains intact, predicated on the authorities’ commitment to implement EMAE’s planned reforms and borrow externally only on concessional terms at a measured pace, public debt sustainability is preserved but now subject to larger risks. The likelihood of contingent liabilities materializing, particularly ENCO’s arrears to its parent company Sonangol (a state-owned company of Angola), remains low.
