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
Author:
International Monetary Fund. African Dept.
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Publication Date:
03 Mar 2021
eISBN:
9781513571089
Language:
English
Keywords:
ISCR; CR; staff appraisal; staff statement; end-December outturn; GDP estimate; Ecf arrangement; financing needs; banking sector; bank financing; government finance; financing gap; IMF disbursement; COVID-19; International reserves
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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 S�o Tom�

Abstract

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 S�o Tom�

Context

1. The COVID-19 pandemic is having a severe impact on São Tomé and Príncipe’s economy, compounding the country’s pre-existing vulnerabilities. As an open, fragile and small island state, the country has been hit hard by a complete halt in international tourism and a sharp drop in foreign remittances, exacerbating external imbalances. A national lockdown to contain the spread of the virus has further curtailed domestic demand. The containment measures and lower external demand have prompted a deep recession, deteriorated external balances, and raised fiscal financing needs, amid widespread poverty and already high public debt.1

2. The authorities’ swift actions and unprecedented international financial support are helping the country weather the emergency. The authorities’ response has focused on improving the capacity of the health care system, expanding existing cash transfer programs to vulnerable households, and supporting businesses (e.g., incentives to retain workers) at a total cost of about 3 percent of GDP. With limited fiscal space, the authorities increased fuel excises, introduced a small solidarity contribution on public servants’ salaries, and reprioritized spending to cover part of the new expenses. Meanwhile, in the context of the currency peg, the central bank increased liquidity provision to the banking sector. Unprecedented financial support from development partners helped finance the country’s large external and budget financing needs. 2 In this context, in April 2020, the country received IMF emergency financial assistance (about US$12 million; 3 percent of GDP), and in July 2020 completed the first review under the 2019 Extended Credit Facility (ECF) arrangement together with an augmentation of the program. The Debt Service Suspension Initiative (DSSI) and the Fund’s Catastrophe and Containment Relief Trust (CCRT) provided some additional temporary relief.3

São Tomé and Príncipe: COVID-19 Fiscal Response Package, 2020

(Percent of GDP)

article image
Sources: Authorities and IMF staff calculations.

3. The pandemic has adversely affected program performance, but the country is on track to meet the revised end-2020 program targets. The end-June fiscal deficit target, set before the pandemic, and some structural benchmarks were missed. This notwithstanding, the authorities made some progress in meeting fiscal transparency standards. Looking ahead, preliminary information suggests that the authorities are on track to meet the end-2020 quantitative performance criteria that were set at the first review and account for the pandemic effect. The pandemic also impacted the country’s capacity to carry debt, which has been downgraded from medium to weak.

Impact of Covid-19 and an Incipient Recovery

4. Containment measures and weak external demand triggered a severe recession in 2020 and deepened external vulnerabilities, but signs of recovery are emerging. (Figure 1; Table 1)

  • Following the deceleration in GDP growth in 2019 (1.3 percent), key sectors such as tourism, transportation and trade came to a near halt in early 2020. With the country reopening to international trade and travel and lockdown measures relaxed in July, the economy has started picking up. 4 Despite signs of an incipient recovery, real GDP in 2020 is expected to contract by about 6½ percent as tourism and service activities will recover only gradually. Notwithstanding the recession, headline inflation rose to 10.8 percent in September (7.7 percent in 2019) driven by high food prices.

  • With the halt in international travel and imports recently recovering, the current account deficit is projected to reach 17 percent of GDP by end-2020 (12.5 percent in 2019). 5 However, gross international reserves have increased (US$64 million in September 2020) and are expected to stabilize at around 5.1 months of projected imports (about 65 percent of reserve money) by end-year, as unprecedented financial support from development partners and disbursements under the IMF’s Rapid Credit Facility (RCF) and ECF financed the country’s external needs.

Figure 1.
Figure 1.

São Tomé and Príncipe: An Economy Hard Hit by the COVID-19 Pandemic

Citation: IMF Staff Country Reports 2021, 051; 10.5089/9781513571089.002.A002

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

5. Pandemic-related expenses and wage overspending have widened the 2020 fiscal deficit (excluding grants) and public debt has risen (Tables 2a-2b). Despite stronger than expected revenue yields from the 2019 tax policy package,6 the domestic primary deficit (DPD) at end-June 2020 widened to 2.6 percent of GDP (missing the program target set prior to the pandemic) and is projected to reach 5.3 percent of GDP by end-2020 (1.8 percent in 2019), meeting the revised end-year program target, which accounted for pandemic-related spending. The deficit largely reflects spending increases associated with the pandemic (3½ percent of GDP for 2020) and unbudgeted increases in personnel costs early in the year (1 percent of GDP on an annual basis). 7 The deficit is largely financed through a temporary increase in donors’ grants. However, public debt is expected to increase to about 103½ percent of GDP, due in large part to the drop in GDP and continued losses at the state-owned utility company EMAE.

São Tomé and Príncipe: Fiscal Performance in 2020

(percent of GDP)

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

The outturn in 2019 was higher than the programed because some autonomous entities were brought into the Treasury’s accounts.

COVID-related spending in 2020:H1 are already included in the other expenditure line items

Excludes oil related revenues and ENCO debt repayment, grants, interest earned, scheduled interest payments, foreign-financed capital outlays,and capitalization of regional organizations per definition in TMU.

6. The deep recession and uncertain macroeconomic conditions have started affecting the banking sector. Credit growth to the private sector began decelerating in March 2020, and reached about 0.1 percent by September 2020 (5 percent at end 2019).8 With ample liquidity, the deceleration was mostly driven by weak demand, coupled with constrained supply, as economic uncertainty rose. The difficult economic juncture has begun affecting banks’ asset quality, and by end-September non-performing loans (NPLs) rose to about 34 percent of total loans (26¾ percent in December 2019). In this context, recapitalization plans for selected banks to address capital shortcomings identified under the 2019 asset quality review (AQR) were completed (Figure 2).

Figure 2.
Figure 2.

São Tomé and Príncipe: Economic Uncertainty Affecting the Banking Sector

Citation: IMF Staff Country Reports 2021, 051; 10.5089/9781513571089.002.A002

Sources: São Tomé and Príncipe authorities, IMF Financial Access Survey, and IMF staff estimates and projections.

São Tomé and Príncipe: Credit to Private Sector

(Percent change)

Citation: IMF Staff Country Reports 2021, 051; 10.5089/9781513571089.002.A002

Source:Authorities and IMF staff calculations.

Program Performance

7. End-June fiscal targets were missed. The domestic primary balance breached the PC target by DB134 million largely due to pandemic-related spending as the original target was set before the pandemic, and wage overspending. Likewise, the indicative target (IT) on revenues was missed due the pandemic, although arrears clearance proceeded as planned. On the positive side, net international reserves and net bank financing outperformed the end-June targets, reflecting large external financing inflows to cope with the pandemic.

São Tomé and Príncipe: Program Implementation End June 2020

(Millions of new Dobra)

article image
Sources: Authorities and IMF staff calculations.

8. Despite the pandemic, the authorities are on track to meet the end-2020 PCs, although progress on structural benchmarks has so far been limited. Preliminary data indicate that the end-December 2020 QPCs are within reach. Progress on structural benchmark (SB) reforms is uneven though. Retail fuel prices were kept unchanged, providing needed revenue, and COVID-19 related spending reports were published until August 2020, although with some delays. However, public procurement contracts, including information about company ownership, were published only until June and information on beneficial ownership was limited (SB November 15, 2020). The benchmarks on the VAT IT system and EMAE reforms, specifically, improving management and modernizing information systems,9 were delayed, and no plan to take the country off the EU Air Safety list has been developed yet. On the positive side, a draft of the central bank organic law has been finalized, but not yet presented to parliament, and the drafting of the Financial Institutions La w is progressing and should be concluded in early 2021.

São Tomé and Príncipe: Structural Benchmark Implementation

(as of December 2020)

article image
Sources: Authorities and IMF staff calculations.

Outlook and Risks

9. The outlook is highly dependent on the pandemic subsiding, and on continued fiscal adjustment and structural reforms implementation. Assuming a gradual global recovery a nd the lifting of domestic containment measures in early 2021, real GDP growth is expected to rebound to about 3 percent in 2021, and peak in 2022 at 5 percent, before stabilizing at around 4–4½ over the medium term. Inflation would pick up in 2021 with the adoption of the VAT, before tapering off anchored by the currency peg. With gradual fiscal consolidation and pandemic-related spending declining, the primary fiscal deficit would broadly balance over time and public debt would decline, reflecting a positive growth-interest rate differential (Annex II).10 Fiscal adjustment and a gradual increase in tourism receipts would contribute to strengthen the current account balance and international reserves buffers over time (Figure 3, Table 3a-3b).

Figure 3.
Figure 3.

São Tomé and Príncipe: Macroeconomic Effects of the COVID-19 Pandemic

Citation: IMF Staff Country Reports 2021, 051; 10.5089/9781513571089.002.A002

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

São Tomé and Príncipe: Medium-Term Macroeconomic Projections (Program Baseline)

(Percent of GDP, unless otherwise specified)

article image
Sources: Authorities and IMF staff calculations.

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

Total public and publicly guaranteed debt as defined in DSA, which includes EMAE’s debt.

Excludes: National Oil Account, commercial banks’ foreign currency deposits at the BCSTP to meet reserve requirements, new licensing, and capital requirements.

Excluding imports of investment goods and technical assistance.

10. Although public debt remains sustainable, long-standing external arrears place the country in debt distress. Under the program baseline, the present value (PV) of total public and publicly guaranteed (PPG) debt is projected to decline below the debt sustainability analysis (DSA) thresholds o nly in 2025.11 However, public debt is assessed to be sustainable, although subject to large significant risks, as the debt PV remains on a downward trajectory amid the authorities’ commitment to continue fiscal consolidation, implement planned energy sector reforms (including EMAE), and borrow externally only on concessional terms and at a measured pace. However, post-HIPC sovereign arrears with bilateral creditors, in addition to arrears with private creditors, place the country in debt distress. The authorities continue to be actively engaged with Angola, Brazil, and Equatorial Guinea to regularize their outstanding external arrears (2.6 percent of GDP).12 Regarding the external arrears owed by São Tomé and Príncipe to private creditors, the authorities continue to make good faith efforts to reach a collaborative agreement.

11. The outlook is subject to significant uncertainty and downside risks. A deeper and prolonged duration of the pandemic could further deteriorate the outlook, delay the recovery and create additional external and budget financing pressures. Moreover, the outlook critically depends on the government’s ability to deliver on its medium-term fiscal adjustment plans and the pandemic-related spending to decline over time. If adjustment plans are not fully implemented, the fiscal deficit would remain large and financing pressures would intensify, adversely affecting external accounts. Delayed reforms in the energy sector could raise arrears, hindering external buffers. Lower than expected grant support from donors would negatively affect economic recovery and weaken the fiscal and external positions. On the upside, rapid progress on structural reforms in the energy sector and in the development of key infrastructure (e.g., airport expansion, road rehabilitation) could trigger stronger medium-term growth.

Policy Discussions

Discussions focused on: (i) implementing a fiscal strategy to address social needs while gradually restoring fiscal sustainability and accelerating energy sector reforms to reduce fiscal and external vulnerabilities; (ii) developing monetary policy tools to support the peg, and advancing financial sector reforms to safeguard financial stability; and, (Hi) unlocking the growth potential of the economy by fostering the tourism sector and a better business environment.

A. Supporting the Recovery and Restoring Fiscal Sustainability

12. The implementation of the 2019 tax policy package has created some fiscal space to address rising development needs, while continuing fiscal consolidation. Containment of spending within budget limits and better than expected revenue (about 1½ percent of GDP) would contain the 2020 DPD to around 5⅓ percent of GDP (6.3 percent of GDP under the program). A large part of the 2020 revenue windfall comes from permanent tax measures included in the 2019 tax policy package.13 This creates fiscal space to more gradually roll back COVID-19 emergency measures in 2021 and address rising social needs.14

13. The 2021 budget marks the return to gradual fiscal consolidation, while providing room to tackle immediate development needs and gradually roll back COVID-19 spending. Under the 2021 budget proposal, the DPD is expected to decline to 3.9 percent of GDP, 1½ percent of GDP lower than in 2020. However, with higher than expected revenues from the 2019 tax package, this DPD target provides room to address rising needs, including: new hiring in the education sector, together with temporary contracts to ensure better social distancing in schools during the pandemic (MEFP 1114), spending pressures from semi-autonomous regions (MEFP¶13), and a more gradual roll back of COVID measures. With a sharp decline in budget grants, the overall fiscal balance would however widen compared to 2020 (by about 5½ percent of GDP) and the government’s gross financing needs would reach 6 percent of GDP. Domestic borrowing and IMF indirect budget support would contribute to finance the budget, with the public debt-to-GDP-ratio remaining broadly stable in 2021, before starting to decline in the following years as the authorities implement their fiscal consolidation strategy.

Sub- Saharan Africa: Education Expenditure

(Percent of GDP, Latest Available Year)

Citation: IMF Staff Country Reports 2021, 051; 10.5089/9781513571089.002.A002

Sources: World Development Indicators, FAD Expenditure Assesment Tool.

14. To deliver on the 2021 fiscal targets and the authorities’ medium-term fiscal consolidation objectives, it is critical to implement a number of immediate measures. The authorities are committed to introduce the VAT in the second half of 2021 (structural benchmark, MEFP 1114), which is key to strengthening domestic tax revenues (approximately 2 percent of GDP cumulatively by 2023) and delivering on the program’s medium-term fiscal targets.15 On the spending side, with personnel costs now on the high side by regional standards, and additional wage pressures in the education sector, the authorities are committed to wage and employment containment policies to gradually reduce the wage bill (as a share of GDP) overtime, including tight employment and limited salary increases over the next few years (MEFP 1115). As the pandemic subsides, a reduction in pandemic-related spending will also contribute to reducing the fiscal deficit. As uncertainty around short-term macroeconomic developments remain high, in the event of lower than expected revenue, further revenue mobilization and expenditure rationalization, including further reprioritization of capital expenditure and revisions to the temporary solidarity tax, should be considered to keep debt on a sustainable path (MEFP 1116).

Sub- Saharan Africa: Tax Revenue, 2018–2019

(Percent of GDP)

Citation: IMF Staff Country Reports 2021, 051; 10.5089/9781513571089.002.A002

Sources: World Economic Outlook.

15. Implementing the authorities’ fiscal strategy requires improving public financial management (PFM), governance and transparency frameworks, and revenue administration. Domestic arrears accumulation and hurdles in containing public spending highlight key shortcomings in PFM and entrenched fiscal governance and transparency issues. The authorities are taking actions to address these challenges and there is room for further improvements. Specifically:

  • To improve fiscal planning, the authorities have recently developed a manual to strengthen their macro-fiscal projections and plan to publish a three-year medium-term fiscal framework, with the annual budget (MEFP ¶20). They have centralized public borrowing, and recently published a medium-term debt management strategy. Moreover, to better control spending, in 2021, they will pilot a commitment ceiling mechanism to manage expenditures at the commitment stage in Revenue gains from the VAT are projected to fully materialize by 2023, one year laterthan previously assumed, as collection efficiency gradually increases over time following the initial VAT introduction. a large number of spending ministries (MEFP ¶20).16 These steps will contribute to improving budget processes and introducing more effective spending controls;

  • To strengthen fiscal transparency and governance, the authorities are publishing monthly COVID-19-related spending reports, and have begun publishing procurement contracts, including owners of companies awarded contracts (MEFP ¶21). They have also taken steps to improve the availability and timing of publication of such information, and will perform an ex post audit of the 2020 COVID-19-related spending during 2021. They are making efforts to strengthen their capacity to collect beneficial owner information, including through technical assistance. To support fiscal transparency, it is also important to modernize the procurement legislative framework to include, for example, e-procurement, beneficial ownership information, and a complaint mechanism.

  • To support revenue collection, it is important to strengthen tax administration. The key priorities are to: (i) reorganize the tax directorate to improve management and strategic planning; (ii) adopt modern compliance risk management practices, including strengthening audit programs; and (iii) overhaul the performance monitoring framework of the tax administration (ME FP ¶18).

16. Reforms of the public energy company EMAE are key to reducing public debt and achieving a more resilient economy.17 EMAE provides essential services and key inputs to production activities. However, the company’s financial position has been steadily accumulating large losses and contingent liabilities for the government, despite relatively high electricity tariffs (Figure 4). 18 With World Bank assistance, the authorities have developed detailed plans to reduce electricity costs, and achieve cost recovery over time by reducing grid and commercial losses (Annex III) (structural benchmark ).19 However, progress on short-term actions to reduce energy losses and improve the company management has lately been limited and other reforms have been often delayed. 20 To recover momentum for the reform agenda, the authorities have established a high-level steering committee, chaired by the Prime Minister, to oversee reform progress (M EFP ¶43). In the short-term, with World Bank support, they expect to complete the installation of new meters and a LED bulbs program to contain electricity demand (MEFP ¶45). Moreover, they have taken actions to ensure timely payment from public entities (a large part of EMAEs’ unpaid bills), including by suspending power provision. Looking ahead, to ensure cost-recovery for the sector, it is critical to reform the current tariff structure and modify the production mix away from thermo electrical production (Annex III).

Figure 4.
Figure 4.

São Tomé and Príncipe: An Unsustainable Energy Sector

Citation: IMF Staff Country Reports 2021, 051; 10.5089/9781513571089.002.A002

Sources: São Tomé and Príncipe authorities; Least Cost Development Plan (LCDP)and Management Improvement Plan (MIP); and IMF staff estimates.

17. Uncertain macroeconomic conditions and the recent weakening in the country’s debt-carrying capacity have contributed to increased risks to public debt sustainability (Annex II). In case downside risks materialize and debt sustainability further deteriorates, the authorities need to stand ready to take measures to preserve debt sustainability, including through recalibrating fiscal efforts, improving the financing mix (toward more grants and highly concessional borrowing), and seeking further debt relief (MEFP ¶15).

B. Supporting the Peg and Safeguarding Financial Stability

18. The central bank has reacted appropriately to contain the immediate macro-financial impact of the pandemic while safeguarding financial stability and the peg. To ensure adequate liquidity, in April 2020, the Central Bank of São Tomé and Príncipe (BCSTP) reduced reserve requirements, lowered the discount rate for the BCSTP’s liquidity facility (MEFP ¶22), and suspended plans to issue certificates of deposit (CD) to control excess liquidity.21 In addition, it encouraged banks to offer a six-month moratorium on loan repayments for non-delinquent borrowers affected by the pandemic (MEFP ¶28). To safeguard financial stability, loan reporting, classification, and provisioning standards were maintained, and the policy rate was left unchanged. With credit to the private sector declining, in September 2020, in collaboration with the African Development Bank (AfDB), the authorities created a credit line for banks to provide lending to small and medium enterprises (SME) affected by the pandemic.22

19. With the pandemic, risks in the banking sector are rising, amid existing vulnerabilities. The banking sector (assets about 65 percent of GDP) remains well capitalized, and liquidity indicators have improved. However, with the pandemic, banks’ asset quality has started deteriorating. Since March 2020, NPLs, already high before the pandemic, have increased to 34.2 percent of total loans at end-September 2020 (26.5 percent at end-March 2020) as some banks started recognizing possible pandemic-related losses. On the positive side, despite the difficult macroeconomic environment, loan reclassification and recapitalization recommendations from the 2019 AQR have been fully addressed, building a stronger basis for the sector.23

20. The BCSTP should continue to actively manage liquidity in the banking sector and maintain an appropriate monetary policy stance to support the peg and the recovery. It will be vital for the BCSTP to continue ensuring that the banking system can access liquidity should needs arise. At the same time, with exceptionally large external support to finance government operations, excess liquidity in September 2020 climbed to almost US$48 million, and it will be therefore important to contain excess liquidity to adequately support the peg. In November 2020, the BCSTP began issuing CDs to help control the rise in excess liquidity (structural benchmark). Moreover, the BCSTP is committed to developing an action plan to gradually reduce excess liquidity below the current level throughout 2021 to avoid undue pressures on the peg. In this context, the BCSTP should roll-over its existing CDs and stand ready to use any other tool, including adjusting reserve and liquidity requirements and issuing additional CDs (MEFP ¶23).

São Tomé and Príncipe: Excess Liquidity

Citation: IMF Staff Country Reports 2021, 051; 10.5089/9781513571089.002.A002

Sources: Authorities and IMF staff calculations.Note: Excess liquidity is defined as liquid assets exceeding liquidity requirements as a share of total deposits.

21. With the difficult economic environment, it is important to enhance the BCSTP’s ability to monitor and manage rising financial risks and preserve financial stability. The pandemic is likely to put further pressure on banks’ asset quality. The BCSTP has already extended the loan payment moratorium (to December 2020) and intends to introduce a formal dividend payout moratorium in 2021 to preserve capitalization in the system. Moreover, early in 2021, the BCSTP will conduct, with IMF assistance, stress tests to identify possible credit risk pressures due to the fallout from the pandemic (structural benchmark) (MEFP ¶29).24 Based on the results of the stress tests, the BCSTP should require banks to develop contingency plans and identify remedial measures as needed to ensure that banks remain adequately capitalized. Meanwhile, efforts to strengthen the BCSTP’s supervisory capacity should be fast tracked. With IMF technical assistance, the BCSTP has adopted a bank rating model for on-and off-site supervision, and a banking supervision manual should be completed to provide guidance for processing off-site and on-site supervision (ME FP ¶31).

22. Stepping up the resolution of legacy non-performing loans will provide the banking system with needed room to support the economy. The high level of NPLs is due in part to legacy NPLs that banks remain unwilling to write off even though the long-defaulted loans are fully provisioned for. The resolution of these loans requires completing ongoing judicial reforms and forceful supervisory actions. Progress has been recently achieved on improving the judicial loan enforcement process and establishing arbitration tribunals for out-of-court settlement. Completing these reforms requires making the arbitration court fully operational, including by appointing arbitration referees. On the supervisory side, the BCSTP should issue in early 2021 new regulations to support banks’ rapid write-offs of long-defaulted and fully provisioned loans (MEFP ¶32).

23. The authorities are committed to close the liquidation processes of two banks during 2021, but the pandemic has contributed to putting pressure on another small bank. The pandemic has frustrated efforts in liquidating two banks (Banco Equador, Banco Privado). Following the unsuccessful attempt to sell assets, the authorities will turn over Banco Equador’s assets to the court system and complete the liquidation in early 2021. In the current circumstances, no sale has materialized for Banco Privado, which lost its license for non-compliance with BCSTP directives and not for insolvency. If the sale is not concluded and no other solution is found over the next months, the BCSTP plans to turn the remaining assets over to the court system. With the pandemic another small bank (assets about 1 percent of GDP), with pre-existing capitalization issues, faced liquidity constraints and was placed under BCSTP temporary administration in November 2020. The BCSTP is evaluating the bank’s assets and liabilities and following the finalization of the evaluation report, if the bank is found not to be viable, the BCSTP will place the bank in liquidation (MEFP ¶33).

24. Following recent delays, renewed efforts are required to continue strengthening the BCSTP’s safeguards framework. The 2019 assessment identified a number of actions to strengthen the BCSTP’s independence, internal controls, and oversight, but progress on implementing these recommendations has so far been limited. 25 The submission to parliament of the revised organic law to strengthen the autonomy and governance framework of the BCSTP is now expected to occur by February 2021 (end-2020 structural benchmark) (MEFP ¶27). 26 However, revisions to the financial institutions law to ensure compliance with international regulatory and supervision standards have been delayed due to limited capacity (structural benchmark) (MEFP ¶27). The authorities are also committed to preserving their membership in the Inter-Governmental Action Group against Money Laundering in West Africa (GIABA). Other recommendations on building internal audit capacity, reducing the concentration risk of reserve investments, improving currency operations and adopting International Financial Reporting Standards (IFRS) also remain outstanding. Further, the finalization of the external audit of the 2019 financial statements has been significantly delayed beyond the three-month statutory deadline, and the BCSTP only expects this process to be concluded at end- January 2021. On the positive side, the BCSTP has developed general compliance reports and plans to resume technical assistance virtually in the first quarter of 2021 towards implementing IFRS standards.

25. Looking forward, deepening financial inclusion and introducing an effective payment system remain key steps to support economic development. The current payment system is outdated. Moreover, access to credit, particularly for SMEs, is limited compared to other countries, negatively affecting productive activities. The authorities have made some progress in addressing these bottlenecks. The introduction of a new payment system, capable of processing international credit cards, is scheduled for early 2021. A bureau for financial inclusion was recently established at the BCSTP. A working group, tasked with finalizing a national strategy on financial inclusion, aims to complete its work by the end of 2020. Moreover, with World Bank support, the legal framework for a moveable collateral registry is being drafted (MEFP ¶34).

C. Enhancing Structural Reforms for Sustainable and Inclusive Growth

26. Weak governance, structural impediments to business, and untapped opportunities in the tourism sector are hampering economic growth prospects. Over the last decade, the country’s growth performance has been decelerating, amid entrenched poverty. As a reflection, governance and ease of business indicators have been structurally low, held back by low government effectiveness and regulatory quality, and weak contract enforcement and institutional protection of investors. In the background, the cost of key production inputs is high (e.g., electricity), hampering competitiveness. Moreover, despite obvious potential, the tourism sector remains relatively underdeveloped (Figure 5). Not surprisingly, poverty is widespread, with about 67 percent of the population living below the national poverty line, and approximately 60 percent of the unemployed are under the age of 34.

Figure 5.
Figure 5.

São Tomé and Príncipe: Structural Impediments to Sustainable and Inclusive Growth

Citation: IMF Staff Country Reports 2021, 051; 10.5089/9781513571089.002.A002

Abbreviations: LMC – Lower-middle income, SSA – Sub-Saharan Africa, SS – Small States (countries with apopulation of under 1.5 million, as classified by the World Bank.Sources: São Toméand Príncipe authorities’ data, World Economic Outlook, and IMF staff estimates and projections.

São Tomé and Príncipe: Real Income Per Capita

(2010=100, PPP International Dollars)

Citation: IMF Staff Country Reports 2021, 051; 10.5089/9781513571089.002.A002

Sources; World Economic: Outlook.

27. Aware of these challenges, the authorities have made boosting sustainable growth and employment the central tenets of their development strategy. They have developed the 2017–2021 Poverty Reduction and Growth Strategy to address widespread poverty, and plan to update this. More recently, the 2020–24 National Development Plan focuses on improving governance, reducing inequality and poverty, facilitating private investment, and enhancing human capital. Under the plan, poverty reduction efforts will focus on continuing to provide basic health care, and social security benefits, and free and universal primary education, along with improving the quality of and completion rates for secondary school.

28. Broad-based structural reforms and policies to develop the tourism sector are needed to boost long-term growth and employment.27 Macroeconomic stability alone is not sufficient to bring new investment and bolster growth. Reforms are needed to: (i) strengthen government effectiveness and improve the business environment (e.g., electricity costs; investors rights, contract enforcement, public procurement, infrastructures); (ii) foster gender equality in support of a more inclusive recovery (e.g., financial inclusion); (iii) strengthen the country’s resilience to climate change (e.g., early warning systems, agriculture sector resilience), and (iv) facilitate the development of the tourism sector (e.g., investment and licensing procedures, training, airport, road rehabilitation, and port; EU’s Air Safety List) (MEFP ¶41). In the short term, it is critical to take actions to remove the country from the EU Air Safety List to support trade and the tourism sector (structural benchmark), continue expanding social safety nets and the gender budgeting pilot to better support more vulnerable groups (MEFP ¶39), and speed up reforms to the energy sector to ensure a reliable, low-cost supply of electricity (MEFP ¶43–45).

Program Modalities, Safeguards, and Risks

29. The authorities are requesting a waiver of nonobservance for the end-June 2020 DPD target. Staff support the waiver because the deviations from the target were caused by the impact of the pandemic on revenue and expenditure necessary to contain the virus, and the authorities have taken actions to ensure the program is back on track by the end of 2020, including the gains from the 2019 tax measures and containing some expenditures below budget limits. In fact, preliminary data indicate that the authorities are likely to overperform the revised end-December 2020 PC set at the time of the first review, and the 2021 budget resumes fiscal consolidation.

30. Modifications and extension of program conditionality are proposed. QPCs (for DPD, government’s bank financing, international reserves) are modified for end-June, and new QPCs are proposed for end-December 2021. Modified goals for all indicative ta r gets (IT) are proposed for end-March and new ITs for end-September 2021 are proposed in line with program and policy objectives discussed above. In light of their macro-criticality new structural benchmarks have been introduced (in part replacing expiring SBs) on: implementing the VAT in 2021, operationalizing the BCSTP’s liquidity management toolkit to reduce excess liquidity, performing stress tests o f the banking sector to gauge the risk posed by the pandemic, and reforming the energy sector. The timing and definition of other unmet SBs has been revised to account for recent progress and capacity constraints. In light of their criticality to successful program implementation and to support fiscal transparency, submission to parliament of a 2021 budget in line with program understandings and publication of information about available public procurement contracts are set as prior actions. The Article IV consultation is expected to take place in 2021.

31. The program is fully financed and São Tomé and Príncipe’s capacity to repay the Fund remains adequate, although subject to heightened risks. There are firm commitments for financing over the next 12 months and good prospects thereafter, including budget support grants from the World Bank and concessional loan disbursements from AFDB (Table 7).28 With the recently approved RCF disbursement and the ECF access augmentation, repayments to the IMF will remain below 0.8 percent of exports of goods and services during the program period and peak at 4.0 percent of exports of goods and services in 2028. Repayments to the IMF as a share of GDP peak in 2027 at 0.8 percent, as a share of total debt service in 2028 at 70.7 percent, and as a share of gross international reserves in 2028 at 10.1 percent.29

32. Exchange restrictions and request for extension of approval.30 São Tomé and Príncipe currently has measures that give rise to exchange restrictions and a multiple currency practice under Article VIII. 31 The IMF Executive Board granted temporary approval of these measures in October 2019 for 12 months. The authorities have requested an additional one-year extension of such measures. Actions taken under the program will help ensure the stability of the peg while supporting the removal of the exchange restrictions, and an extension is needed as these policies are still being implemented. Therefore, staff supports the request by the authorities, given that (a) the measures giving rise to the exchange restrictions are imposed for BOP reasons, necessary and temporary, and (b) the measure giving rise to the multiple currency practice is imposed for BOP reasons, temporary, and non-discriminatory.

33. Sovereign arrears and financing assurances. Prompt Fund support is considered essential for the successful implementation of the member’s adjustment program; and the member is pursuing appropriate policies, is making a good faith effort to facilitate a collaborative agreement between private debtors and their creditors, and a good prospect exists for the removal of exchange controls. Due to São Tomé and Príncipe’s external payment arrears, a financing assurances review must be completed by the Executive Board. Staff supports the completion of the financing assurances review.

34. Poverty reduction and growth strategy (PRGS). The country’s 2017–2021 Poverty Reduction and Growth Strategy, meeting PRGS requirements, was previously issued to the Board.

35. The program is subject to a number of downside risks. In addition to macroeconomic risks, contingent liabilities from the public company EMAE, the fuel supplier ENCO, and commercial banks may generate additional debt and necessitate additional policies to restore debt sustainability.32 On the upside, savings in the National Oil Account (4 percent of GDP) and the unused credit line with Portugal (6 percent of GDP) can help weather temporary shocks.

Staff Appraisal

36. The COVID-19 pandemic is having a severe impact on São Tomé and Príncipe’s economy, exacerbating pre-existing imbalances. A complete halt in international tourism and a sharp drop in foreign remittances have exacerbated external imbalances. Measures to contain the spread of the virus have curtailed domestic demand. Though the outbreak has been broadly brought under control, containment measures and weak external demand have prompted a deep recession, deteriorated external balances, and raised fiscal financing needs, amid widespread poverty and already high public debt.

37. The authorities’ actions and unprecedented international financial support are helping the country weather the emergency, but deep economic challenges remain. With international assistance, the authorities have enhanced health services, and provided assistance to vulnerable households and laid-off workers. They have also maintained ample liquidity in the financial system. The external and budget financing needs created by the epidemic are expected to be fully covered by the IMF disbursements under the RCF and augmented ECF, as well as budgetary grants from other partners. However, while sustainable, public debt has risen from already high levels, and the country’s capacity to carry debt has been recently downgraded, heightening debt sustainability risks. An inefficient energy sector continues to create debt and hinder growth. External balances and buffers remain under pressure. Moreover, over recent years, growth has been insufficient to reduce poverty and meet the needs of a rising and young population.

38. The pandemic has adversely affected program performance in the first part of 2020, but the country is on track to meet the end-year program targets. The end-June 2020 domestic primary deficit (DPD) target (set prior to the pandemic) was missed. However, net international reserves and net bank financing outperformed the end-June targets, reflecting the elevated levels of external financing inflows. Progress on several structural reforms has been delayed by the pandemic; however, with some delay, the authorities have been publishing monthly spending reports on COVID-19 related expenditures, and full public procurement contracts and owners of companies which were awarded the contracts up to June.

39. Addressing immediate social and economic needs while implementing gradual fiscal consolidation is key to supporting the economic recovery and preserving debt sustainability. The 2021 budget is a welcome step toward gradual fiscal consolidation while providing room to address the critical need for hiring teachers and allowing for gradually rolling back other COVID-related spending. Going forward, reducing the debt burden over time and protecting external buffers would require policies to bring the primary deficit close to a balance. In this respect, staff welcome the authorities commitment to introduce the VAT in 2021. Going forward, it is critical to continue containing spending dynamics, particularly personnel expenses through wage and employment containment policies. Debt sustainability also depends on continuing to borrow moderately and seek grants and highly concessional loans.

40. Improving public financial management processes, and fiscal governance and transparency is critical to the success of the authorities’ fiscal consolidation strategy. The publishing of public procurement contracts and ownership information of companies receiving these contracts, and monthly reports of COVID-19 related spending are welcome developments. These efforts should continue over time and include beneficial owners. Ex-post audits of such spending will further improve fiscal transparency. Developing a medium-term fiscal framework and strengthening expenditures controls, including by piloting a commitment ceiling mechanism are also critical steps to delivering on the authorities’ fiscal adjustment strategy.

41. Reforms of the energy sector and the publicly owned utility company EMAE are needed to preserve debt sustainability and supporting growth. EMAE has been accumulating significant arrears over time and progress on the government’s reform plan for the company has so far been limited. The recently established steering committee, chaired by the Prime Minister, should help reinvigorate reform momentum and ensure progress on reforming the current tariff structure and modifying the production mix away from thermo electrical production. Reforming EMAE will reduce pressures on public debt and foreign exchange reserves and provide lower-cost and reliable electricity, a cornerstone to unlocking the country’s development and growth potential.

42. The BCSTP should actively manage liquidity in the banking sector to support the peg and the incipient recovery. With excess liquidity booming recently, the BCSTP should develop and implement a plan for gradually reducing excess liquidity from the current peak, including by rolling over certificate of deposits, standing ready to adjust reserve and liquidity requirements, and issuing additional CDs as needed.

43. With the difficult economic environment, progress is needed to enhance the BCSTP’s capacity to manage risks and vulnerabilities in the financial sector and strengthen the sector oversight. Regular stress testing to identify early on possible credit risk pressures due to the fallout from the COVID-19 pandemic, and mandate contingency plans and remedial measures to ensure that banks remain adequately capitalized should be integral components of the BCSTP’s supervision practices. Moreover, efforts to address legacy NPLs through the regulatory framework should be completed. The remaining safeguards recommendations must also be completed without further delay.

44. Pressing ahead with broad-based structural reforms and policies to develop the tourism sector would facilitate private investment and boost growth and employment. In the short term, the recent upgrade of the national payments system, capable of accepting international credit cards, would help boost tourism revenue and financial inclusion. Moreover, taking action to remove the country from the EU Air Safety List could help the economic recovery by stimulating trade and tourism. Over time, implementing planned infrastructure projects, including road rehabilitation and airport and port expansions, will remove key development bottlenecks and support key sectors such as tourism and agriculture. Continued efforts to promote gender equality and adapt to climate change would also contribute to supporting medium-term growth.

45. Staff supports the authorities’ request for completion of the second review of the program under the ECF and waiver of non-observance. Staff also supports the authorities’ request for a one-year extension of the temporary approval for the retention of measures resulting in exchange restrictions and a multiple currency practice subject to IMF jurisdiction under Article VIII, Sections 2(a) and 3 for the reasons set for in paragraph 32.

Table 1.

São Tomé and Príncipe: Selected Economic Indicators, 2016–25

(Annual change in percent, unless otherwise indicated)

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

Central Bank (BCSTP) mid-point rate.

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

Total public and publicly guaranteed debt as defined in DSA, which includes EMAE’s debt to ENCO (and excludes the government’s arrears to EMAE due to

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, for new licensing, and for meeting capital requirements.

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

Table 2a.

São Tomé and Príncipe: Financial Operations of the Central Government, 2016–25

(Millions of new dobra)

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

Revenue is measured on a cash basis.

’Non-tax revenue’ and ’other current expenditure’ exhibit a hike in 2019 as some autonomous entities were brought into the Treasury’s accounts.

Excludes oil related revenues and a fraction of the oil surcharge for ENCO debt repayment, grants, interest earned, scheduled interest payments, foreign-financed capital outlays, and capitalization of regional organizations per definition in TMU.

Includes loan from Angola in 2016 and 2017.

Includes use of IMF program support.

Does not include the expected budget support grants for 2020 from the WB and AfDB (equalling D224 each), which are shown as filling the financing gap.

Table 2b.

São Tomé and Príncipe: Financial Operations of the Central Government, 2016–25

(In percent of GDP)

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

Revenue is measured on a cash basis.

“Non-tax revenue” and “other current expenditure” exhibit a hike in 2019 as some autonomous entities were brought into the Treasury’s accounts.

Excludes oil related revenues and a fraction of the oil surcharge for ENCO debt repayment, grants, interest earned, scheduled interest payments, foreign-financed capital outlays, and capitalization of regional organizations per definition in TMU.

Includes loan from Angola in 2016 and 2017.

Includes use of IMF program support.

Does not include the expected budget support grants for 2020 from the WB and AfDB (equalling S percent of GDP), which are shown as filling the financing gap.

Table 3a.

São Tomé and Príncipe: Balance of Payments, 2016–25

(Millions of U.S. dollars)

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Sources: São Tomé and Príncipe authorities’ data and IMF staff estimates and prejections.

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, for new licensing, and for meeting capital requirements.

Imports of goods and nonfactor services excluding imports of investment goods and technical assfstar

Table 3b.

São Tomé and Príncipe: Balance of Payments, 2016–25

(In percent of GDP)

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

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, for new licensing, and for meeting capital requirements.

Imports of goods and nonfactor services excluding imports of investment goods and technical as:

Table 4.

São Tomé and Príncipe: Summary Accounts of the Central Bank, 2016–25

(Millions of new dobra)

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

The Central Bank’s short-term liabilities to nonresidents includes the country’s liability to the IMF.

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

Table 5.

São Tomé and Príncipe: Monetary Survey, 2016–23

(Millions of new dobra)

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Sources: São Tomé and Príncipe authorities’ data and IMF staff estimates and projections.
Table 6.

São Tomé and Príncipe: Financial Soundness Indicators, 2016–20201

(Percent, unless otherwise indicated)

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Sources: São Tomé and Príncipe authorities’ data and IMF staff

Excluding Banco Equador (beginning December 2016) and BPSTP (beginning June 2018).

Table 7.

São Tomé and Príncipe: External Financing Requirements and Sources, 2020–24

(Millions of U.S. dollars)

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Sources: São Tomé and Príncipe authorities’ data and IMF staff estimates and projections.
Table 8.

São Tomé and Príncipe: Indicators of Capacity to Repay the Fund, 2020–34

(as of December 3, 2020)

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

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

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

Table 9.

Sao Tomé and Príncipe: Schedule of Disbursements Under ECF Arrangement, 2019–22

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Source: International Monetary Fund.

An RCF disbursement of SDR9.028 million was approved in April 2020.

Overall access and percent of quota were increased by the augmentation of 10 percent.

Annex I. Reform Agenda for the Energy Sector

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Note: HPP = Hydro Power Plant, HFO = Heavy Fuel Oil, LNG = Liquefied Natural Gas, LED = Light Emitting Diode, MoF = Ministry of Finance

Appendix I. Letter of Intent

São Tomé, December 23, 2020

Madame Kristalina Georgieva

Managing Director

International Monetary Fund

700 19th Street N.W.

Washington, D.C. 20431, USA

Dear Managing Director Georgieva:

The government of the Democratic Republic of São Tomé and Príncipe requests the IMF Executive Board to complete the second review of the program supported by the Extended Credit Facility (ECF) arrangement and approve the third disbursement based on performance under end-June 2020 performance criteria (PC).

The COVID-19 pandemic is having a severe impact on São Tomé and Príncipe’s economy, compounding the country’s pre-existing vulnerabilities. Our tourism sector remains at a standstill, and remittances have declined precipitously. The external shock and mitigation measures have prompted a severe recession and created significant external and fiscal financing needs. Though we implemented containment and mitigation measures swiftly, we have had more than 1000 cases of COVID-19 and 17 deaths. With the help of the development community, we have been covering our external and fiscal financing needs, improved the capacity of our health care system, expanded an existing cash transfer program to assist the most vulnerable, and supported businesses in the hard-hit sectors. We began gradually reopening our economy in July, and though there are signs of recovery on the horizon, the resurgence of the epidemic among our trading partners and in STP continues to weigh on our population, the economy, and the external and fiscal accounts.

In this context, we continue to focus on addressing the immediate health, social, and economic needs related to the pandemic, while we remain committed to the medium-term reforms agreed under the program to support a strong and sustainable recovery. Therefore, we would like to request that the IMF Executive Board approve a waiver for the nonobservance of the program target at end-June 2020 on the domestic primary balance. We also request that the Executive Board i) modify the performance criteria for end-June 2021 and indicative targets for end-March 2021 and end-September 2021; and ii) approve the new performance criteria proposed for end-December 2021 for the domestic primary balance, government’s bank financing, and international reserves. We aim to reduce the 2021 fiscal deficit as agreed under the program and retarget COVID-19-related spending to adapt to the new needs. Over time, we will continue to keep other spending, including the public sector wage bill, under control. To support revenue, we will introduce the VAT in 2021. Moreover, we will continue to implement structural reforms supported by the program to lay the groundwork for recovery. These include reforming the energy sector and the state-owned utility company, EMAE, to provide reliable and low-cost energy while reducing debt and foreign exchange vulnerabilities over time. In addition, we are developing a plan to remove the country from the EU air safety blacklist to facilitate the recovery of tourism.

To strengthen fiscal governance and transparency, we have published adjudication notices of public procurement contracts and signed public contracts whose information was available up to June 2020, and documents available from June to August 2020 will be published soon a prior action. We have also compiled and published ownership information of companies receiving these contracts and monthly COVID-19-related spending. We aim to implement all the recommendations of the last safeguards assessment to strengthen central bank management. The central bank is actively managing system-wide liquidity and carefully balancing liquidity needs during the pandemic with appropriately tight monetary policy to protect the peg.

The government remains committed to achieve the policy objectives of the program: fiscal consolidation coupled with enhanced monetary policy tools to support the peg; reforming state-owned enterprises and the energy sector to contain fiscal risks and improve the business environment; promoting greater fiscal transparency and accountability; and strengthening efforts aimed at climate change adaption and gender equality. These objectives are critical for sustainable and more inclusive growth to create jobs and improve living standards in São Tomé and Príncipe. Furthermore, as part of our comprehensive effort to reduce poverty, we have drafted the National Sustainable Development Plan 2020–2024. The plan serves as a roadmap for promoting robust economic growth and job creation and improving the quality of health and social protection programs for all citizens. This will serve as a basis for our next Poverty Reduction and Growth Strategy (PRGS).

The support of the IMF continues to be important as we tackle tremendous challenges in developing our country. We believe that the policies contained in the September 2019 and July 2020 MEFP, along with the attached supplementary MEFP, are adequate to achieve the objectives of the program, and we will take further measures that may become appropriate for this purpose. As these policies are still being implemented, we request an extension of the measures that gave rise to exchange restrictions and a multiple currency practice under IMF Article VIII given that actions taken under the program and our policy commitments will help support the removal of the exchange restrictions, and an extension is needed as these policies are still being implemented and are needed for balance of payments reasons.

We will consult the IMF in advance on the adoption of these measures and revisions to the policies contained in the MEFP, in accordance with IMF policies on such consultations. We will also consult in advance with IMF staff on the terms of possible external borrowing to ensure that such borrowing does not jeopardize debt sustainability and is in line with the IMF’s debt limits policy. Furthermore, we are committed to not (i) imposing or intensifying restrictions on the making of payments and transfers for current international transactions, (ii) imposing or intensifying import restrictions for balance of payments reasons (iii) introducing or modifying multiple currency practices, or (iv) concluding bilateral payment agreements in violation of Article VIII of the Articles of Agreements, which are continuous performance criteria under the ECF arrangement.

In line with its commitment to transparency and accountability, the government authorizes the IMF to publish this letter, its attachments, and related staff report, including placement of these on the IMF website in accordance with IMF procedures, following the IMF Executive Board’s approval of the request.

Sincerely yours,

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Attachments

  • 1. Memorandum of Economic and Financial Policies (MEFP)

  • 2. Technical Memorandum of Understanding (TMU)

Attachment I. Supplementary Memorandum of Economic and Financial Policies for 2020–22

Introduction

1. This supplementary Memorandum of Economic and Financial Policies (MEFP) updates the MEFP approved by the IMF Executive Board on October 2, 2019 and on July 27, 2020. In this MEFP, we review recent developments and performance under the ECF-supported program, assess the economic outlook and risks, and set out our macroeconomic policies for 2021 and beyond, keeping in mind the limitations on implementing new policy measures imposed by the COVID-19 pandemic.

2. São Tomé and Príncipe has made considerable progress under the ECF to preserve fiscal and external sustainability and foster development amid the COVID-19 pandemic. We achieved a significant reduction in the fiscal deficit in 2019, and we expect to overperform on the domestic primary deficit target for end-2020. However , due to the pandemic, the country is facing considerable hurdles. We were not able to meet the end-June fiscal performance criteria (PCs), and actions to fulfill some structural benchmarks had to be delayed.

3. While the pandemic is posing significant health, social, and economic challenges, we remain committed to the objectives of the ECF-supported program. The Rapid Credit Facility (RCF) disbursement and the ECF augmentation approved in 2020, together with support from our development partners, helped us manage our immediate external financial needs in the face of the outbreak. However, we continue to face fiscal and balance of payments pressures, and we expect that the economic, health, and social consequences of the pandemic will remain at the forefront throughout 2021. It is therefore important to mobilize sufficient resources to contain the pandemic, continue assisting the most vulnerable, and support the economy, while maintaining the highest standards of transparency and accountability in public spending.

Recent Economic Developments

4. Weak external demand and COVID-19 containment measures triggered a severe recession in 2020 and created exceptional external and fiscal financing needs.

  • Real GDP is expected to contract by about 6½ percent in 2020 as tourism, trade, and transportation came to a near halt during the year. Despite the contraction, headline inflation is projected to rise to about 10 percent, driven by high food prices, reflecting poor rainfall and fishing outturns.

  • With international tourism coming to a halt since March and the halving of remittances, the current account deficit has sharply deteriorated (about 30 percent of GDP, net of official support), creating immediate external financing needs. Unprecedented financial support from development partners has however supported gross international reserves that, at end-2020 are projected to reach US$55 million (4.7 months of projected imports).1

  • Despite strong revenue yields from the tax policy package introduced in late 2019, pandemic-related spending and wage pressures have widened the 2020 domestic fiscal deficit, and public debt has increased.2 The domestic primary deficit (DPD) at end-June 2020 rose to 2.6 percent of GDP. Higher health expenditures, support to the most vulnerable and the hard-hit sectors of the economy, and an increase in wage expenses reflecting long-overdue promotions of defense personnel and the hiring of new teachers and health staff increased spending. However, as we contain spending within the revised budget spending limits, we expect the 2020 fiscal deficit to be around 5 percent of GDP. Despite significant grant financing, with the recent review of the public debt stock, public debt will increase to about 103½ percent of GDP, largely reflecting a drop in GDP and continued losses at the state-owned utility company EMAE.

5. The recession and uncertain macroeconomic conditions are affecting the banking sector. Banks’ asset quality has deteriorated, with NPLs increasing by approximately 8 percentage points since the beginning of the pandemic (as of September 2020). Amid the recession, credit growth to the private sector began decelerating in March 2020 despite ample liquidity. In this context, a small bank has been placed under BCSTP administration because of repeated failures to comply with capitalization and liquidity requirements.

Program Performance

6. We have made steady progress under the ECF program during 2020. We missed the end-June 2020 DPD target, which was set prior to the pandemic. However, net international reserves and net bank financing outperformed the end-June targets, reflecting large external financing inflows to cope with the pandemic. Moreover, we expect to outperform the end-December 2020 DPD target.

7. The pandemic has delayed some structural reforms. We kept retail fuel prices unchanged to support budget revenue. We implemented the highest fiscal transparency standards, publishing with only minor delays monthly spending reports on COVID-related expenditures and public procurement contracts. Moreover, for these contracts, we have made public the ownership for the companies awarded the contracts. We have finalized the draft BCSTP organic law that we plan to submit to parliament by early February 2021. On the other hand, we have faced delays in revising the financial institutions law, developing the VAT IT system, implementing the EMAE and energy sector reform plan, and defining astrategy to take the country off of the EU air safety blacklist.

Outlook, Risks and Strategy

8. As the pandemic subsides and reforms under the ECF program progress, we foresee a gradual recovery of the economy and improvements in the fiscal and external position. Assuming a gradual global recovery, real GDP is expected to grow by about 3 percent in 2021, before stabilizing to around 4–4½ percent over the medium term. As we implement our fiscal consolidation plans, we expect the primary fiscal deficit to approach a near balance over time, and public debt to be on a declining path. With fiscal adjustment, a recovery in tourism receipts, and reforms in the oil-dependent energy sector, we project the current account balance and international reserves buffers to strengthen.

9. While public debt will decline, the country remains in debt distress due to long standing post-HIPC external arrears that we are trying to regularize. We expect the present value (PV) of total public and publicly guaranteed (PPG) debt to return below the debt sustainability analysis (DSA) thresholds associated with the weak debt-carrying capacity by 2025. We remain actively engaged in discussions with Angola (US$4.8 million), Brazil (US$4.3 million), and Equatorial Guinea (US$1.7 million) to regularize our outstanding external arrears (2.6 percent of GDP). An agreement with the Brazilian government was reached, pending ratification by the Brazilian Senate. More recently, we have continued following up with Angola and Equatorial Guinea. In 2019 we also reached an agreement with the government of Angola and EMAE to pay back arrears to ENCO o n concessional terms, significantly alleviating the debt burden in present value terms.

10. The outlook is subject to significant risks. A prolonged pandemic or delays in accessing vaccines would weigh on the economic recovery, strain our health system, create additional external and budget financing pressures, and delay our reform efforts. The outlook also depends on sustained grant support from external donors to maintain debt sustainability and provide needed financial resources. On the upside, rapid progress on structural reforms of the energy sector and in key infrastructures (e.g., airport expansion, road rehabilitation) could trigger stronger medium-term growth.

11. Against this backdrop, we remain committed to preserving the achievements to date and implementing the policies agreed under the program, while addressing the challenges posed by the pandemic. Our strategy is focused on: preserving fiscal sustainability, safeguarding financial stability, and accelerating reforms in the energy sector to support growth and external vulnerabilities.

Policy Objectives for 2020–2022

Our policy objectives are centered on: i) addressing pressing social needs linked to the pandemic and continuing our gradual fiscal consolidation strategy to preserve debt sustainability and build further external buffers (¶12–20); (ii) maintaining high fiscal transparency and accountability standards, including for COVID-related spending (¶21); (iii) developing monetary policy tools and maintaining a monetary policy stance that supports the peg (¶22–27); (iv) safeguarding financial stability (¶28–35); and (v) unlocking the growth potential of the economy by reforming the energy sector, fostering the tourism sector, promoting gender equality, and adapting to climate change (¶36–46).

A. Fiscal Policy and Transparency

12. Our priority remains to protect our population from the pandemic and supporting the economy, while implementing our medium-term fiscal consolidation strategy. While we began to phase out lockdown measures in July, the resurgence of the epidemic among our trading partners and in STP continues to weigh on our economy and fiscal accounts. Accordingly, we intend to continue social programs to protect the most vulnerable, support the unemployed, maintain incentives for businesses to retain employees, and implement social distancing rules, particularly in schools.

13. We are determined to meet, and possibly overperform, the 2020 domestic primary fiscal (DPD) target. We will maintain expenditures within the 2020 budget limits, allowing for adjustments only in transfers to the autonomous region of Principe and increases in COVID-related spending, if needed. Adjustments in transfers reflect Principe’s longstanding insufficient revenue to cover wages not accounted for in the 2020 budget. Nevertheless, we expect the end-2020 DPD to be around 5 percent of GDP, 1⅓ percent of GDP lower than under the program target, reflecting revenue windfalls from the 2019 tax policy package. The overall deficit is expected to be largely financed through donor grants.

14. We are committed to delivering on the 2021 DPD target of 3.9 percent of GDP as planned under the first review of the ECF program. We project that revenue windfalls from the tax policy measures introduced in late 2019 and the planned introduction of the VAT would raise tax revenue above the original program projections. With a young and growing school population, these revenue gains would be used to finance priority developmental needs, especially hiring teachers in recently built schools. Meanwhile, COVID-19 related expenditures will continue in 2021 and are expected to be phased out by end year as the health crisis subsides.

15. Over the medium term, we will continue implementing policies agreed under the program to approach a balanced DPD position by 2024. To achieve this objective, we intend to adopt wage and employment policies to gradually reduce personnel costs (as a share of GDP) over time and keep other current expenses under control. External borrowing would be capped and restricted to concessional loans only to reduce debt vulnerabilities. Should downside risks materialize, we stand ready to take contingency measures to preserve debt sustainability, including through recalibrating fiscal efforts and improving further the financing mix.

16. To deliver on our policy objectives, we are taking the following actions and measures:

2021 Fiscal Year

  • Submit to parliament a 2021 budget proposal targeting a domestic primary deficit of Db 379 million, 3.9 percent of GDP, with spending ceilings for domestic primary spending as detailed in the table below, including ceilings on temporary contracts for teachers to allow social distancing measures in schools;

  • Extend the solidarity contribution to end-2021;

  • Introduce the VAT at a 15 percent rate by July 2021 (structural benchmark);

  • Keep retail fuel prices unchanged, if oil prices remain low, in 2021 and over the foreseeable future to generate revenue from the differential with international oil prices.

São Tomé and Príncipe: Aggregate Budget Spending Ceilings, 2021

(millions of new dobras)

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Fiscal year 2022 and following years:

  • Reduce the wage bill to close to 10 percent of GDP by continuing over fiscal years 2022–23 current policies of suspending inflation adjustments, and by limiting new hiring to maintain the total number of civil servants broadly unchanged over time through attrition rules and reforming the public administration. We will provide the IMF with quarterly updates on the total number of civil servants by main functional sectors, including education, health, and defense.

  • Keep transfers and other current expenditures (including the despesas consignadas dos servicos de cobrança) constant in nominal terms in 2022 and contain the increase broadly in line with GDP growth thereafter. In this regard, the government will not approve borrowing by public entities to offset lower transfers from Treasury.

  • Continue efforts to reduce electricity and water consumption at public institutions, particularly by setting ceilings and instructing EMAE to cut off supply to public entities classified as non-essential in case they miss payments.

17. Final preparations are under way to introduce the VAT in July 2021. The VAT law was approved last October, but the COVID epidemic has delayed the VAT launch. We now expect the selection of a company to design the IT system to be completed by January 2021 and the IT system to be operational before July 2021. Meanwhile, we have progressed with other preparatory steps, including developing VAT regulations and refund procedures, harmonizing the VAT with other taxes, reforming excise taxes, developing an education campaign, procuring space and equipment for new staff, setting up four taxpayer centers, training local tax administrators including those from Principe, and working to finalize agreements with banks to receive VAT payments.

18. Efforts will resume to implement IMF recommendations on strengthening tax administration. Following IMF assistance, actions include the: (i) reorganization of the Diregao dos Impostos (Dl) to improve management and strategic planning focused on tax compliance; (ii) adoption of modern compliance risk management practices, including audit programs that make use of information from third parties; and (iii) overhaul of the current performance monitoring framework including key performance indicators and a rewards program. Moreover, pending partners’ resources availability, we intend to undergo a comprehensive tax administration diagnostic assessment (TADAT) on our current revenue administration practices before the end of 2022.

19. Tax collection, especially that of large taxpayers, will be closely monitored to ensure timely tax collection. Starting in January 2021, we will prepare and share with the IMF monthly reports on tax payments and outstanding tax arrears. We will fully apply existing legal and administrative procedures to ensure payments are made. In particular, we will improve Diregao dos Impostos (DI)’s access to third-party sources of data, which will allow for cross-checking tax information and increase the analytical capacities of the data captured by E-invoice to strengthen controls on registration, declaration, payment, and reporting of tax obligations. In addition, we will continue staff training to enhance auditors’ skills focusing on the telecommunication, banking, and insurance sectors. Finally, we are committed to recover tax obligations from large taxpayers that suspended their tax payments during the crisis and will launch a recovery program in the first quarter of 2021.

20. The government is committed to continuing strengthening public financial management systems and avoiding the accumulation of new domestic arrears. Specific reforms include:

  • 1) Improving macro-fiscal framework projections (revenues and expenditures). With IMF assistance, we have recently developed a methodological manual to strengthen macro-fiscal forecasting and will gradually implement the manual to strengthen in particular our revenue forecast capacity. Moreover, we have prepared medium-term fiscal framework (MTFF) projections for a three-year period that will be incorporated in budget documents starting with the 2021 budget.

  • 2) Strengthening cash management and internal capacities at the Treasury Department. For this purpose, in coordination with BCSTP, Treasury developed an annual schedule of T-bill issuance for 2021 (to be published in January 2021) and monthly financing plans to guide the issuance of new treasury bills, consistent with the annual budget and the government’s cash flow.

  • 3) Strengthening expenditure control, preventing the accumulation of arrears and updating the arrears clearance plan to cover all domestic arrears. Meticulous work undertaken by Treasury in 2019–20 has showed that significant amounts of arrears to private suppliers are outstanding from the last few years. 3 To prevent accumulation of further arrears, as part of our validation process, we have investigated and identified the causes, nature, and timing of these arrears. We have determined that going forward, Treasury will be the sole public entity in the central government allowed to contract loans. Moreover, the government has defined a payment plan to gradually clear the stock of domestic arrears using available financing resources. Moreover, in 2021 we will start a commitment ceiling mechanism to manage expenditures at the commitment stage in selected spending ministries covering on a pilot basis all spending agencies, with the exclusion of the ministries of education, health, defense, and justice. As part of the pilot, we will elaborate quarterly commitment ceilings to support the commitment control mechanism in pilot ministries. This pilot will be gradually expanded to all line ministries and spending agencies in 2022.

  • 4) Enhancing fiscal reporting and improving the consistency of above and below the line fiscal data. We will continue to provide the IMF with the monthly TOFE (central government financial operation table) by the 21st of the following month. Moreover, during 2021, we will continue our efforts to reconcile the financing data with the BCSTP at least on a quarterly basis and seek assistance if needed.

  • 5) Enhancing the enforcement of procurement laws to improve the efficiency of public expenditure and reduce vulnerabilities to corruption. With support of the World Bank, we are updating the 2009 procurement law, to include e-procurement; sustainability, environmental, social, and hygiene issues; framework contracts; and the complaint mechanism.

21. Strengthening fiscal transparency is a key priority of the government. As of November 2020, we have published on the Ministry of Finance (MOF)’s website public procurement contracts up to June 2020 and monthly COVID-19 spending reports up to August 2020. For companies that received public procurement contracts, which were published on the ministry’s website, we have also published owner information. We are committed to continue enforcing these high transparency standards. Thus, we will publish on the MOF’s website: (i) adjudication notices of public procurement contracts, as required by the Procurement Law (no. 8/2009, articles 29–2, 44–1, and 70–1); (ii) all signed public procurement contracts above the threshold for requiring prior authorization from the Court of Accounts as per the Organic Law (no. 11/2019); 4, 5 (iii) ownership information of companies receiving procurement contracts; and (iv) the ex-post validation of delivery of the contracts—all (i) to (iv) to be published within two weeks after documents become available—and (v) monthly COVID-19 related expenditure reports with a 45-day lag (structural benchmarks for end-August and end-November). Currently we have no integrated system, and all documents are collected manually. Therefore, there are operational difficulties for our procurement agency COSSIL to access in a timely manner contracts signed by the line ministries. To overcome this obstacle in the short run, the Ministry of Finance has issued an executive order requiring all spending agencies to send signed procurements contracts to COSSIL as a necessary condition for the Treasury to go ahead with payment to contractors. We also commit to overcome current constraints in collecting and publishing information about beneficial owners of companies receiving procurement contracts, and to this purpose we have asked for technical assistance. Looking forward, we are working with the World Bank to develop a webpage for the procurement agency COSSIL, which will expedite the publication of procurement documents and facilitate management and transparency over public contracts. Finally, as part of its audit of the government financial accounts, the Auditor General will audit and publish the 2020 COVID-19-related spending by October 2021.

B. Monetary Policy, Foreign Exchange Reserves, and Safeguards

22. The BCSTP responded agilely to changing monetary conditions caused by the pandemic. To ensure adequate liquidity, the central bank lowered the minimum reserve requirements for domestic currency from 18 to 14 percent and for foreign currency from 21 to 17 percent and the discount rate of the BCSTP liquidity facility from 11 to 9.5 percent in early April.

23. We remain committed to improving our monetary policy framework to support the peg, including by strengthening our liquidity management operations. With IMF technical assistance, we have upgraded our liquidity forecasting framework to three months (from one month). As an additional step, on November 17, 2020, the BCSTP auctioned certificates of deposit (CDs), totaling Db 100 million to help control the rise in excess liquidity (structural benchmark). The auction was oversubscribed. The issuance of CDs was delayed from its original program timeline due to the need to guarantee adequate liquidity to the banking system during the pandemic. In recent months, system-wide liquidity has however continued rising, in part due to increasing external flows to finance the fiscal deficit. This excess liquidity has not so far undermined the peg, and we expect excess liquidity to decline gradually over the coming months. However, the BCSTP remains vigilant and will actively monitor liquidity conditions, and by January 2021, it will develop an action plan to gradually reduce excess liquidity from the current level during 2021 to avoid undue pressures on the peg. In this context, in 2021, the BCSTP will roll-over its existing CDs and stands ready to use any other tool, including adjusting reserve requirements and issuing additional CDs to ensure that excess liquidity is gradually reduced (structural benchmark). Moreover, the BCSTP will continue to work with the IMF technical assistance to refine the CD mechanism and, over time, develop a policy rate framework that reflects market and risk conditions. In coordination with the Treasury, we will also aim to develop a domestic debt market over the medium term.

24. To improve monetary policy management, we will continue strengthening the coordination of monetary and fiscal policies. In August 2020, we resumed regular meetings of the Committee for Public Debt tasked with improving coordination between monetary and fiscal authorities. In coordination with the committee, in January 2021, Treasury will publish an annual schedule of T-bill issuances for 2021 aligning borrowing plans with the government’s cash flow. During 2021, we will continue our efforts to reconcile at least quarterly monetary and treasury data on fiscal financing, which has so far been delayed due to staffing constraints.

25. Over time, fiscal consolidation and planned structural reforms will contribute to boosting international reserves and underpinning our peg to the euro. Pressures on international reserves are in part driven by strong domestic demand and foreign currency needs from the energy sector. Hence, continued fiscal consolidation, complemented by appropriately tight monetary policy, will contain demand for imports and encourage more dobra savings. In addition, energy sector reforms to reduce losses in electricity provision and to modify the production mix will significantly reduce the demand for foreign currency. Other reforms aimed at expanding our economic and export bases (e.g., centered around tourism, agriculture, and fisheries) will also improve the balance of payments. These actions will help ensure the stability of the peg while supporting the removal of exchange restrictions. As these policies are still being implemented, we have requested an extension of the measures that gave rise to exchange restrictions and a multiple currency practice under IMF Article VIII.

26. As noted in the Letter of Intent, we will not introduce regulations and practices that could lead to the introduction of new and intensification/modification of existing exchange restrictions/multiple current practice. Therefore, we will consult the IMF when revising relevant regulations or laws.

27. The Central Bank is committed to sound governance and transparency and to enhance its independence, internal controls, and oversight capacity. We will continue publishing regularly statistics and reports such as the annual schedule of treasury bill issuances on the BCSTP website. Moreover, we are taking steps to implement the remaining recommendations from the last safeguards assessment. We have completed several recommendations, and we will implement the following actions:

  • 2019 BCSTP financial statements. We have shared all documents needed to complete the audit of the 2019 financial statements, and we will share with the IMF the preliminary audit report by January 2021. We expect the audit to be completed in January 2021, and it will be published on the BCSTP’s website immediately following the auditors’ review.

  • IFRS implementation plan. We began technical assistance with the Bank of Brazil in early 2020, and we will continue technical assistance through virtual meetings in the first quarter of 2021.

  • To enhance BCSTP independence, we have revised the latest draft of the organic law, which now incorporates IMF technical assistance’s recommendations on the audit committee. The new draft was approved by the BCSTP Board and the government plan to submit it to parliament by early February 2021 (structural benchmark).

  • To align ourselves with best financial regulation and supervision practices (e.g. Basel Core Principles, the Financial Action Task Force (FATF) standards), a draft of the financial institutions law, including IMF technical assistance’s suggestions, will be submitted to parliament by end-March 2021 (structural benchmark). In addition, we will preserve the country’s membership in the Inter-Governmental Action Group against Money Laundering in West Africa (GIABA) by engaging with the GIABA Secretariat and staying current on membership contributions. Losing GIABA membership exposes to public listing by the FATF, which would cause reputational damage and potential loss of correspondent banking relationships.

  • To strengthen transparency, we have provided the IMF with a copy of the third quarter report on general compliance prepared for the BCSTP Board, and we will continue to share these quarterly reports in the future. We have also shared an updated implementation timeline for the remaining safeguards recommendations. These include reports on enhancing regulations and procedures to require perforation of currency notes immediately after they are earmarked for destruction, depositing foreign exchange reserves only in investment-grade banks when possible, and reducing the concentration risk of investments.

C. Financial Sector Policy

28. In response to the pandemic, the BCSTP has taken several actions to safeguard financial stability while supporting credit and economic activity. In April 2020, banks were allowed a six-month moratorium on debt payments for non-delinquent borrowers experiencing distress related to the COVID-19 pandemic. The BCSTP also encouraged banks not to distribute dividends during 2020 to safeguard capital positions and lending capacity. To safeguard financial stability, loan reporting, classification, and provisioning standards have been maintained; restructured loans will be classified accordingly to avoid compromising the information on loan quality; and any loan forbearance measures will be limited to the crisis period. The BCSTP will continue to closely monitor bank performance and enforce all regulations beyond those forborne.

29. The pandemic is adversely affecting banks’ asset quality, and we are committed to take all needed actions to preserve financial stability. Since March 2020, the system NPL ratio has increased by approximately 8 percentage points. This increase was driven primarily by some banks’ prudential approach to reclassifying and provisioning for loans under moratorium. As the pandemic is likely to put further pressure on asset quality, we will take a number of measures to monitor and support financial stability. We have extended the loan payment moratorium through end-December 2020, and we intend to introduce a formal dividend payout moratorium in 2021. Furthermore, by March 2021, we will again conduct stress tests, with input from the IMF, to identify possible credit risk pressures due to the fallout from the COVID-19 pandemic. As part of our commitment to building capacity, we will work with IMF staff to further refine our stress testing methodology. Based on the results of the March stress tests, the BCSTP will require banks to develop contingency plans and identify remedial measures by June 2021 to ensure that banks remain adequately capitalized.

30. Against this backdrop, we have worked with commercial banks to complete the implementation of the AQR recommendations, including recapitalizing banks where needed. Following the issuance of guidelines in 2019, loan reclassification and additional provisioning requirements, as well as recapitalization needs identified by the AQR have been fully addressed. Using a detailed breakdown of the loans identified under the AQR as problematic, the BCSTP has ascertained that each loan has been properly reclassified and provisioned for and that banks with a need to increase capital, as per stress testing, have done so, largely through retainment of profits. One bank which has not done so is now under the temporary administration of the BCSTP (see below). Once the pandemic subsides, we will perform an AQR to identify any further needs.

31. We continue working to strengthen our supervisory capacity and are intensifying off-site monitoring and on-site inspections to identify risks and non-compliance early-on. With IMF technical assistance, we have adopted a bank rating model for on- and off-site supervision, and we plan to complete by March 2021 the final draft of a banking supervision manual, which will provide the BCSTP with adapted guidance for processing off-site and on-site supervision. Moreover, we have improved the existing credit registry, including implementing a new platform collecting additional loan and debtor information. As a next step, we are developing, with World Bank support, the needed software to analyze trends in credit quality as recorded in the credit registry so that we can spot emerging loan deterioration in real time and take prompt corrective action.

32. We are committed to accelerate the resolution of legacy NPLs. This requires supervisory actions and judicial reforms as banks remain unwilling to write off even long-defaulted and fully provisioned loans. On the supervisory side, we have delayed a draft regulation for banks on more rapid write-offs that we now expect to be finalized by March 2021, and once completed, we will send to the IMF for comments. After receiving comments from the IMF, the NAP will be finalized within one month. Banks will subsequently be required to comply within three months. On the judiciary side, we have made some progress in improving the efficiency of the judicial loan enforcement process and establishing arbitration tribunals for out-of-court settlement. Regulations for the arbitration court on: 1) an ethics code for judges, 2) selecting and appointing judges and 3) the costs and preparations for the court, were approved by parliament and will soon be signed into law. We will allocate the funding needed to complete these judiciary reforms, which include appointing arbitration referees, securing a location for the court, and refreshing the training of the referees and administrative staff, including through virtual trainings. With this allocation, we anticipate that the arbitration courts will be fully operational by June 2021.

33. We remain committed to concluding the liquidation of the two banks whose licenses were revoked, while a new small bank has been recently put under the BCSTP administration.

  • We will close the liquidation process of Banco Equador, initiated because of insolvency, by January 2021. We have taken all needed actions to conclude the liquidation process. In July, we established a working group with representatives from the BCSTP, Ministry of Justice, and the liquidator’s office, and made a call to all small depositors with outstanding claims to contact the BCSTP or forfeit their claims. We have unsuccessfully attempted the sale for real estate and fixed assets (estimated at Dobra 92 million) and facilitated loan resolution (previously estimated at Dobra 9 million) offering a discount to debtors. The liquidator will conclude his work and will submit a final report to the BCSTP by January 2021. Based on the report, the liquidator plans to take the necessary actions to close the liquidation by January 2021, including turning over any remaining outstanding assets to the court system for collection. So far, the liquidation cost of Banco Equador stands at 0.3 percent of GDP, most of which is related to the payments to small depositors (see table below). We have calculated the BCSTP exposure to the liquidation, and the BCSTP has made the appropriate provisions in December 2020, including to cover possible legal claims from depositors.

  • Banco Privado (BPSTP) lost its license for non-compliance with BCSTP directives and not for insolvency and presents low risks. Payments to small depositors were covered using the bank’s liquid assets, and the BCSTP has no exposure to this bank. After the license was revoked, potential investors expressed interest, but in the current circumstances no sale has materialized. If the sale of the BPSTP is not concluded and no other solution is found by June 2021, the BCSTP will turn the remaining assets over to the court system. Since the net asset value of BPSTP was positive at the time of intervention, we do not expect to incur any losses in the resolution process.

  • Energy Bank (assets about 1 percent of GDP) was placed under BCSTP administration in November 2020 due to repeated failure to comply with, among others, liquidity and capital requirements. The BCSTP has allowed the bank’s customers to withdraw deposits (up to 50,000 dobras), largely financed through BCSTP loans, to limit contagion risks to the banking system. Meantime, the BCSTP has established a provisionary administrative team that is performing an evaluation of the bank’s assets and liabilities and will submit a report to the BCSTP Board by mid-January. Following the finalization of the evaluation report, if the bank is found not to be viable, the BCSTP will immediately put the bank in liquidation.

São Tomé and Príncipe: Status of Measures Introduced in ECF First Review for Accelerating the Liquidation of Banco Equador

First a multisectoral team will be established by mid-July 2020 to oversee and support the liquidation. (Completed on time.)

Second, the liquidator will launch the tender for the sale of all real estate assets and other fixed assets by end-July 2020. (Delayed. Tender launched in early September 2020 and extended twice with no interested investors.)

Third, the liquidation commission will make a public announcement on media by July 17, 2020 for all remaining small depositors to claim their deposits by end-August 2020 or forfeit their claims, closing this process that started in 2016. (Public announcement made on July 14, 2020; total amount of deposits claimed and paid was approximately Dobra 500,000.)

Fourth, the liquidation commission will prepare a plan by July 25, 2020 to sell the remaining assets, including a schedule for progressive discounts for unsold loan assets at offerings with specified dates. Debtors will be offered the similar discount for paying off their debt. It is expected that by end-August 2020 such a plan will be agreed upon for implementation with creditors, who cannot interfere in the implementation of the plan. The liquidation of the loan assets will commence by end-August 2020. (Plan for discounts on unsold loan assets launched in October 2020.)

Fifth, the liquidator will provide BCSTP a monthly activity report, which will be shared with the IMF and published on the BCSTP website two weeks from the period ending after redacting sensitive or confidential information. The first report will cover activities in July 2020 and will be published in mid- August 2020. (Report provided in November.)

34. We intend to gradually improve access to finance for SMEs, and financial inclusion more generally, and several projects have been initiated. The government has recently created a credit line (US$3 million, with the possibility of mobilizing additional resources) to finance projects by SMEs approved by the national investment agency. Moreover, with World Bank assistance, we are creating the legal framework for the centralized establishment of a collateral registry. The registry would allow SMEs to pledge movable collateral to facilitate access to bank financing. We are drafting the needed law to be submitted to parliament by early next year. Work is under way to develop the software for the registry, and the World Bank has pledged financing for this project. We expect the registry to be fully operational in 2022. To foster financial inclusion, a multidisciplinary working group on financial inclusion was established by decree in October 2020. The working group, whose secretariat is provided by the BCSTP Bureau of Financial Inclusion, is leading the effort on drafting a national financial inclusion strategy that focuses on reducing gender gaps, increasing access to digital financial technologies, and improving consumer protection and literacy. The goal is to complete a draft financial inclusion strategy by January or February 2021, to be submitted for approval to the National Council on Financial Inclusion, the highest body of the working group created in October.

São Tomé and Príncipe: Cash Flows of Banco Equador Liquidation

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35. As part of our medium-term financial sector reforms, we are expediting the implementation of a new payments system, in line with our Financial Sector Development Implementation Plan (FSDIP). Jointly with commercial banks, we are upgrading the payments system to allow for international credit cards. This will not only improve the security of payments but also boost tourism and buttress foreign exchange reserves once the pandemic is under control. Delays in receiving the equipment have pushed the launch of the new payment system to January 2021.

D. External Sector Policies

Exchange Restrictions

36. The IMF Executive Board granted temporary approval of exchange restrictions and a multiple currency practice.6 The one-year approval expired in October 2020. Given the current balance of payment issues and our policy commitments, we have requested extending the approval for another year. Efforts to boost reserves noted above will also support the removal of the restricting measures.

External Debt

37. Given the high debt level, we will continue to borrow cautiously. We will borrow only at concessional terms. Continued EMAE reform (see ¶43–45) will reduce fiscal liabilities. All these measures will ensure the present value of the external debt to GDP ratio falls below the high-risk debt distress threshold by 2024 (see Borrowing Plan table). We will strive to keep external debt disbursements below 2 percent of GDP and limit contracting of new loans to 3 percent of GDP. These parameters will be adjusted according to the development of debt vulnerability. We will also continue to engage actively with bilateral creditors to regularize post-HIPC arrears.

São Tomé and Príncipe: Borrowing Plan 2020

(For Investment, Millions of U.S. dollars)

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Contracting and guaranteeing of new debt. The present value of debt is calculated using the terms of individual loans and applying the 5 percent program discount r ate.

Debt with a grant element that exceeds a minimum threshold of 35 percent.

Deb t with a positive grant element below the minimum grant element.

Debt without a positive grant element. For commercial debt, the present value would be defined as the nominal/face value.

38. The government is implementing measures to strengthen debt management. Following the Debt Management Performance Assessment (DeMPA)’s main recommendations, we have published a medium-term debt management strategy. With support from the World Bank, we are creating a debt database that will improve our capacity to perform debt service projections and risk analyses and report detailed debt information stock. Once the new database is ready, we will update our public debt strategy.

E. The Implementation of Other Structural Reforms

Development Planning

39. While we have relatively progressive legislation on gender equality, there is still a long way to go in terms of enforcing existing legislation and enacting additional legislation and positive discrimination measures to accelerate progress on gender equality. We will review our legislation to address gender disparities, including, for example, a mandatory quota on female representation in parliament. The implementation of the National Strategy for Gender Equality and Equity (NSGEE) 2019 – 2026 constitutes an essential action, and building upon the recommendations outlined in the NSGEE, we launched a pilot initiative on gender-responsive budgeting in the Ministry of Infrastructure in the 2021 budget circular. The initiative focuses on improving sanitation facilities in schools, and we will continue to coordinate with IMF staff to further develop our capacity to conduct gender-responsive budgeting, with the purpose of expanding our gender budgeting pilot. Also under the NSGEE, during 2021 the Gender Institute will launch awareness campaigns on gender equality, including incorporating it in the school curriculum to inform all citizens of their legal rights and opportunities. In an effort to promote transparency, the Ministry of Finance will coordinate with other ministries and start submitting in June 2021 to the Gender Institute data on average annual wages by gender and the share of managerial-level positions held by women and publish these data on a governmental website, such as the Ministry of Finance or Prime Minister’s website. The Gender Institute will coordinate with development partners such as EU and World Bank to ensure large projects, particularly those impacting woman and families directly, such as water and sanitation projects, incorporate women’s views and include gender-based analysis to monitor and evaluate outcomes. As part of the BCTSP’s implementation of the National Financial Inclusion Strategy, which targets women, the BCSTP, through its Bureau of Financial Inclusion, will develop programs to promote financial literacy to be delivered through a specific action plan for the period 2021–25.

40. We will continue our efforts to strengthen the country’s resilience to climate change and protect our natural resources. The impact of climate change primarily reflects in rising temperatures and sea level, costal erosion, and changing precipitation patterns, hurting agriculture, fisheries, and eventually tourism. A number of externally-financed projects that were underway in 2020 to strengthen resilience to climate change were put on hold in the wake of the epidemic. Work is expected to largely resume in 2021. They include the regional West Africa Costal Areas Management Program (WACA) supported by the World Bank to increase resilience of Western African coast, the installation of an early warning system supported by UNDP, improved sanitation facilities supported by the EU and UNICEF, and a recently launched project (COMPRAN) supported by FIDA to strengthen the agricultural sector. At the same time, we will continue to improve our local capacity to protect the environment through training and improved public awareness campaigns and education.

Business Climate to Promote Tourism

41. Improving the business environment and supporting the development of key economic sectors such as tourism is critical to strengthen the recovery and promote sustainable growth. Specific actions include:

  • Develop by March 2021 a plan for removing the country from the European Union’s Air Safety blacklist to facilitate the recovery of the tourism sector and exports (structural benchmark).

  • Publish a clearly codified procedure for the approval of investment, including access to land, to facilitate investment in tourism by March 2021.

  • Integrate tourism licensing requests in the GUEnet portal (online portal for starting a business) to facilitate registration and increase transparency on tourism licensing procedures. With support from the World Bank, we have developed the IT platform and the validation will be completed by March 2021.

  • Reform the National Tourism Administration to improve the sector management. To enhance coordination and planning efforts, the Cabinet has approved a draft law setting up the National Board for Tourism. Moreover, as part of the COVID-19 recovery plan, we have been issuing “clean and safe” certificates for hotels and other entities, and provided training for tourism sector entities.

  • Improve training of workers in the tourism sector, including establishing a school with support from the World Bank. A decree law establishing the school has been prepared and will be issued in early 2021.

  • Improve tourism sector data by: publishing quarterly tourist arrival data (which will be agreed upon by relevant agencies, e.g. Border Control, BCSTP, Tourism, INE) within two months from the end of the quarter; expanding the annual BCSTP tourist survey on expenses to include information about overall visits and experience satisfaction by June 2021, and, publishing results within three months of collecting all data.

  • Take actions to improve the overall business environment, including by revising the labor law to encourage investment while providing adequate protection to workers and improving the efficiency of the judicial system to better protect creditor rights granted under the law.

42. Other near-term actions are under way to improve the payments system and reduce transportation costs. As noted previously, the development of a payments system with the capability of processing international credit cards will be completed in early 2021. Supported by AfDB, the tender for a second phase of the project was launched at end-June 2020. The project, with mobile financial services and digital banking capability, is expected to be complete in about 2 years and will facilitate financial access. In addition, we will aim to improve the port of Principe, which will help reduce the cost of imports (currently on average 20 percent higher than in São Tomé) and ensure a steady supply of goods.

Energy Sector Reform

43. We are committed to reforming the energy sector and have established a high-level steering committee to oversee the implementation of our reform plans. The committee is chaired by the Prime Minister and includes external partners such as the World Bank. The committee will hold biannual meetings to review reform progress and provide guidance.

44. Our strategy is centered on implementing the Least Cost Development (LCDP) and the Management Improvement (MIP) plans and have EMAE achieving full cost recovery. EMAE is currently unable to pay most of its bills for fuel supplies, making the country vulnerable to electricity shortages, hampering our growth potential. Progress has been achieved in some specific areas. Since we approved our plans, EMAE has installed more than 6000 meters and tightened the criterion for supply cut-off from three to two missed payments. EMAE is also negotiating with banks to add online bill payment options, and it plans to open collection centers in other districts outside the capital. We have also staffed the loss reduction office; however, it has yet to be equipped, rendering it non-operational. We also worked on a contingency plan to deal with the COVID-19 crisis and maintain and inspect aging equipment.

45. Going forward, we will take the concrete reform measures, with specified timeframes, listed below for each key strategic objective:

Objective 1: Reduce the cost of electricity generation and change the generation mix towards renewable sources.

Target: Reduce the average cost of energy produced from 0.25 to 0.14 USD/kWh by 2024. Increase renewable sources’ share from 5 percent to 45 percent by 2024.

This will be achieved by implementing the LCDP, including by:

  • Rehabilitating and expanding the capacity of the only operating hydropower plant on the island, Contador HPP, by end-2021 to 3.2 MW to reduce overall generation cost.

  • Identifying resources for the timely development of the recently approved LLCDP that set as a priority the development of an 8.8 MW dual-fueled thermal units heavy fuel oil (HFO) or liquified natural gas (LNG) plant and about 2MW of a photovoltaic solar plant.

  • Mobilizing partnerships to study and develop existing hydropower potential.

We will not finance nor authorize production projects that do not respect the parameters set in the LCDP.

Objective 2: Reduce electricity consumption:

Target: Reduce electricity consumption by 15 percent within 12 months.

  • a. We are rolling out a program to replace incandescent/fluorescent light bulbs with LED bulbs within nine months, with $2 million in funding support from the World Bank, and we expect to complete the program by end-June 2021. The tender was concluded in November 2020, and the contract is expected to be signed by January 2021.

  • b. We will pass a law to ban the importation of incandescent/fluorescent lamps by June 2022. An individual consultant has drafted the law, which is under review by the STP government. The government will also conduct outreach to stakeholders such as light importers, raising awareness and helping them access LED suppliers.

Objective 3: Improve management of electricity distribution by the state-owned corporation EMAE to reduce losses and improve collection rates.

Target: Reduce losses (commercial and technical) by 4 (additional 6) percentage points and improve the collection rate by 8 (additional 2) percentage points by June 2021 (June 2022) to lower losses below 20 percent and raise the collection rate to 95 percent by June 2022.

This will be achieved by implementing the Management Improvement Plan (MIP).

Implementing a new organizational structure at EMAE

To improve the operational efficiency of EMAE, we will implement a new organizational structure in the Commercial Directorate of the company and redefine the functions of the Finance Directorate and Management support units. With the support of a consultant and a specialized human resource firm (already hired), this would require the selection of personnel according to the competences of each position in the new organizational structure. Specific actions include:

  • Preparing bidding documents for procuring management information systems (MIS) January 2021

  • Working with an HR consultant on a proposal for organizational restructuring, new job descriptions for directors and managers reporting to directors (first 2 levels), and the selection process for new management, with the short-list of candidates expected in February 2021 for level 1 directors and in April 2021 for level 2 directors.

  • Selecting a management consultancy firm to support EMAE on the implementation of the MIP by March 2021, when the new director team is recruited.

  • Adopting modern billing practices, procuring and installing a state-of-the-art MIS, and linking cost of services to payment through tariff reform.

  • As the pandemic subsides, continuing to develop arrears clearance plans with consumers, and d is connect non-paying customers. In cases where disconnection is not appropriate, we will use other enforcement tools such as seizing the bank account of the offending company.

  • Government agreeing with EMAE on a mechanism to cap consumption and ensure timely bill payment by public entities, including by cutting services to non-essential facilities, deducting from the budget allocation, and direct payments from Treasury to EMAE (November 2020).

  • The loss-reduction office, in collaboration with the Communications team to continue the campaign to ensure social acceptance of the reforms and behavioral change of customers to strengthen payment discipline and reduce electricity theft.

Implementing the electricity meter program supported by EIB and World Bank

  • 200 high tension meters to be installed in distribution plants to control production, distribution and loss of electricity in the upstream – installed by June 2021.

  • 3000 consumption meters for large clients (hotels, industries, government agencies, embassies, etc..) – installed by June 2021.

  • 16,000 residential meters for small clients (households) – installed by end-2021. Reducing theft of diesel on thermal plants and losses

  • Installing diesel meters to monitor delivery and consumption at power plants – installed by June 2021.

  • Ensuring losses fall below five percent of the volume supplied for energy generation.

Objective 4: Reform tariff structure and strengthen regulatory framework.

Target: Gradually achieve a cost-reflective tariff structure by 2024.

The tariff analysis identified the need for an in-depth tariff reform to be led by the regulator AGER. To gradually achieve a cost-effective tariff structure by 2024, the government will:

  • a. Issue a decree covering: (i) tariff structure definition, (ii) customer category definition, (iii) social tariffs adjustments, and (iv) agreed conditions and a broad timeline to achieve full cost-recovery structure. A draft decree is being reviewed in consultation with the World Bank and will be submitted to the government by end-March 2021 for approval within a month.

  • b. The first tariff increase will be implemented once meters are in place by December 2021 for large consumers.

The tables below summarize targets and expected actions (structural benchmark).

Table A.

São Tomé and Príncipe: Energy Sector Indicators and Targets

(in percent)

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Deterioration in 2019 due to expansion of network in 2018 by the previous government.

No target manageable in the current context for end-2020.

Table B.

São Tomé and Príncipe: Energy Sector: Expected Key Actions and Timeline, 2020–2021

(Structural Benchmark)

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Improving Economic Statistics

46. We are continuing to improve economic data. An IMF mission in March 2019 helped us implement the enhanced General Data Dissemination System (e-GDDS) to foster greater data accessibility and identify priority areas for data quality improvements. We began submitting data essential for surveillance through a National Summary Data Page (NSDP) on May 7, 2019 using the Statistical Data and Metadata Exchange (SDMX) for machine-to-machine data transfer. Though there have been delays this year due to the pandemic, we will redouble our efforts to ensure that we adhere to our schedule of publication commitments (outlined here). We also plan to improve our balance of payment statistics, including recording imports related to petroleum exploration FDI and refining estimation of tourist receipts.

Capacity Development

47. Continued hands-on technical assistance is essential to build capacity. Given limited staff capacity, on-the-job training has been particularly important. Therefore, we will seek to complement short-term technical assistance with that provided by long-term or peripatetic experts, who not only diagnose problems but also support the implementation of the technical assistance recommendations. In addition, we will also request Portuguese speaking experts to simplify interactions, expedite the identification of core issues, and facilitate the transfer of knowledge. We have also discussed and updated with IMF staff our medium-term capacity development strategy, which includes revenue administration—notably, implementing the VAT— PFM reforms to improve budget preparation and execution, banking regulation and supervision, and strengthening the accuracy of balance of payment statistics.

Program Monitoring

48. The program will be monitored on a semi-annual basis, through quantitative and/or continuous performance criteria and indicative targets (Table 3) and structural benchmarks (Table 4). Quantitative targets are set for end-June and end-December 2021, while those for end-March 2021 and end-September 2021 are indicative targets. The third review should be completed on or after May 15, 2021, the fourth review should be completed on or after September 15, 2021, and the fifth review should be completed on or after April 15, 2022.

Table 1.

São Tomé and Príncipe: Performance Criteria and Indicative Targets for 2020

(Millions of new dobras, 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 2019 test date is assessed on the first review.

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

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 H5 of the TMU, which excludes the operations of state-owned

This criterion will be assessed as a continuous performance criterion.

The term ’external’ is defined on the basis of the residency of the creditor per paragraph 5 of the Guidelines on Public Debt Conditionality in Fund Arrangements, adopted by Decision No. 15688 of the Executive Board (Dec. 5, 2014).

This performance criterion or memorandum item applies not only to debt as defined in paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements, adopted by Decision No. 15688 of the Executive Board (Dec. 5, 2014), 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

Only applies to debt with a grant element of less than 35 percent. For further details refer to the TMU, 1112 and 17.

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

As defined in the TMU, valued at the program exchange rate, excludes HI PC-related amortization.

Table 2.

São Tomé and Príncipe: Structural Benchmarks

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Table 3.

São Tomé and Príncipe: Performance Criteria and Indicative Targets for 2020–21

(Millions of new dobras, 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 June 2020 test date is assessed on the second review.

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 K5 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 on the basis of the residency of the creditor per paragraph 5 of the Guidelines on Public Debt Conditionality in Fund

This performance criterion or memorandum item applies not only to debt as defined in paragraph 8 of the Guidelines on Public Debt Conditionality in Fund

Only applies to debt with a grant element of less than 35 percent. For further details refer to the TMU, 1F12 and 17.

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

As defined in the TMU, valued at the program exchange rate, excludes HIPC-related amortization.

Table 4.

São Tomé and Príncipe: Structural Benchmarks 2020–2021

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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 2019–23. 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 the rates at end-2018, specifically 21.6925 new dobras per U.S. dollar, 24.5 new dobras per euro, 29.17221 new dobras per SDR, and 30.1865 new dobras per UA.

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 (¶26) 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, specifically (i) the floor on domestic primary balance; (ii) the ceiling on changes in net bank financing of the central government; (iii) the floor on net international reserves of the central bank; (iv) the ceiling on central government’s outstanding external payments arrears; and (v) the ceiling on the contracting or guaranteeing of new non-concessional external debt 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 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 paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements, adopted by Decision No. 15688 of the Executive Board (Dec. 5, 2014). “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 (including oil tax surcharge and excluding oil revenue) comprises all tax and non-tax 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, Commerce and the Blue Economy (MOF).

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 project grants, (2) the cost assumed by the budget to pay off small depositors following the liquidation of Banco Equador, and (3) 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 MOF. All capital expenditures financed by budget support grants (including EU’s) are treated as part of domestic primary spending, with no exception.

São Tomé and Príncipe: Official External Program Support

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Performance Criteria

9. Performance criterion on the floor on domestic primary balance. This performance criterion refers to the difference between government domestic revenue (including oil tax surcharge and excluding oil revenue) and domestic primary expenditure. Planned payment of (price differential) debt to ENCO (¶22) are deducted from the oil surcharge revenue. To control spending, MoF will not approve borrowing by any public entity in the central government other than Treasury (MEFP ¶14, 17). Accordingly, for the purpose of program monitoring, borrowing by any public entity other than Treasury recorded in the monetary survey as loans to the central government will be added as additional expenditure to the DPD. For reference, the domestic primary balance for end 2019 based on hypothetical outturns would be -173.7 million new dobras, broken down as follows:

São Tomé and Príncipe: Domestic Primary Balance

(2019, millions of new dobras)

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10. Performance criterion on the ceiling on changes in net bank financing of the central government (NCG). This performance criterion refers to the increase (decrease) of net bank financing of the central government, which equals the stock of all outstanding claims on the central government held by the BCSTP and by other depository corporations (ODCs), less the stock of all deposits held by the central government with the BCSTP and with ODCs, plus the increase, if any (with the approval of the ministry of finance) of ODC’s credit to the public entities. The balance of the National Oil Account (NOA), deposits from project grants and project loans, contingent liabilities, and social security operations are not included in NCG. All foreign exchange-denominated accounts will be converted to new dobras at the program exchange rate. The relevant data are reported monthly by the BCSTP to the IMF staff. For reference, at end-2018, outstanding net bank financing of the central government (excluding NOA) was 436 million new dobras, and change in net bank financing was 102 million new dobras as illustrated below.

São Tomé and Príncipe: Net Bank Financing

(millions of new dobras)

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Note: 1 No deposits in ODCs that were under the central government (Treasury) control in 2017 and 2018.

11. 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, as well as all 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 a ccount a nd as s ets us ed 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-2019 NIR was 684 million new dobras (or $31 million, using the exchange rate of 21.6925 new dobras per U.S. dollar), calculated as follows:

São Tomé and Príncipe: International Reserves

(millions of new dobras)

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For program monitoring, banks’ deposits are excluded.

12. Performance criterion on the ceiling on the contracting or guaranteeing of new non-concessional external debt by the central government or the BCSTP. This continuous performance criterion covers the contracting or guaranteeing of new external debt of any maturity (including overdraft positions but excluding short-term import-related and supplier credits) by the central government and/or the BCSTP. Debt is considered non-concessional if it includes a grant element less than 35 percent. The grant element is the difference between the nominal value of the debt 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 stream of debt service payments at the time of the contracting. The discount rate used for this purpose is 5 percent. For program purposes, a debt is considered contracted on the signature date of the contract, unless it is specified in the contract that it becomes effective upon ratification by the parliament. In the latter case, the debt is considered contracted upon ratification by parliament. This performance criterion does not apply to IMF resources. Debt being rescheduled or restructured is excluded from this ceiling to the extent that such non-concessional debt is used for debt management operations that improve the overall public debt profile. Medium- and long-term debt will be reported by the Debt Management Department of the MOF (as appropriate), measured in U.S. dollars at the prevailing exchange rates published by the BCSTP. The government should consult with IMF staff before contracting or guaranteeing new debt obligations.

13. Performance criterion on the ceiling on the accumulation of central government’s new external payment arrears. This is a continuous performance criterion. New 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 signed by the debtor and creditor before the relevant payment comes due or for which the government has sought rescheduling or restructuring as of March 2019.

Indicative Targets

14. 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).

15. 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:

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

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

Expenditures on fuels and lubricants (combustíveise lubrificantes) that are affected for administrative purposes are excluded. Likewise, food (alimentação) and clothing and shoes (roupase calçados ) supplied to administrative staff are excluded.

  • b. 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.

16. 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.

17. New concessional external debt contracted or guaranteed by the central government or the BCSTP measures such debt with a grant element of at least 35 percent, and the limits on this debt are cumulative from the end of the previous calendar year.

Memorandum Items

18. 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.

19. Official external program support is defined as budget support grants and budget support loans, including disbursements from the IMF under the ECF and RCF arrangement, and other exceptional financing provided by foreign official entities and incorporated into the budget. Budget support grants include in-kind aid when the products are sold by the government and the receipts are used to finance a budgeted spending item.

20. Treasury-funded capital expenditure is part of domestic primary expenditure and covers public investment projects that are not directly financed by project grants and concessional project loans. It includes government’s co-financing of capital projects financed mainly by project grants and loans. 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.

21. Ceiling on base money is set on the sum of currency issued—which consists of currency outside depository corporations and cash in vaults—and bank reserves denominated in new dobras . Bank reserves refer to reserves of commercial banks (in new dobras) held with the central bank and include reserves in excess of the reserve requirements.

22. Planned payment of debt to ENCO is the targeted amount to be deducted from the oil surcharge to pay back debt to ENCO during the year as discussed in paragraph 9. Higher than planned payments are not excluded from the revenue and will be included in domestic debt service. The planned annual payment is D0, D32 million in 2019 and 2020, respectively, half of which will be paid during the first semester.

23. Arrear clearance is measured as changes in the stock of government arrears to domestic suppliers as defined in paragraph 15.

Use of Adjusters

24. The performance criterion on the domestic primary balance will have one adjuster. The floor on the domestic primary balance will be adjusted upward for the shortfall of budgetary grants and downward if the government receives more than projected budget support grants and privatization receipts in 2020 and 2021; the adjustment down will be capped at 25 million new dobras (a little over ¼ percent of 2019 GDP) for 2020 and 25 million new dobras for the first semester of 2021.2 The adjustment upward will be capped at 50 million new dobras in 2020. For program purpose, the projected privatization proceeds are 0 in 2020 and 2021.

25. The performance criteria on net bank financing of the central government and net international reserves of the central bank will be subject to the following adjusters based on deviations calculated cumulatively from end-December 2019 or end-December 2020, as appropriate (MEFP Attachment I, Table 3):

  • Adjusters 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, budget support grants, net external debt service payments, and domestic arrears will be converted to new dobras at the program exchange rate and aggregated from end-December 2019 or end-December 2020, as appropriate, to the test date. The ceilings will be adjusted:

    • (i) downward (upward) by cumulative deviations downward (upward) of actual from projected net external debt service payments (exclude HPIC),

    • (ii) downward (upward) by deviation upward (downward) in budget transfers from the NOA,

    • (iii) downward by deviation upward of budget support grants in excess of 25 and 25 million new dobras in 2020 and the first semester of 2021 respectively; upward by deviation downward of budget support grants in excess of at 50 million new dobras.

    • (iv) downward (upward) by deviation upward (downward) of domestic arrears.

    The combined application of all adjusters at any test date is capped at the equivalent of US$5 million at the program exchange rate.

  • Adjusters for the floor on net international reserves (NIR) of the BCSTP: Quarterly differences between actual and projected receipts of budget transfers from the NOA, budget support grants and loans, net external debt service payments, and domestic arrears in new dobras, will be converted to U.S. dollars at the program exchange rate and aggregated from end-December 2019 or end-December 2020, as appropriate, to the test date. The floor will be adjusted upward (downward):

    • (i) by the cumulative deviation downward (upward) of actual from projected net external debt service payments of the central government;

    • (ii) by deviations upward (downward) for budget transfers from the NOA, and

    • (iii) by deviations upward (downward) of budget support grants and loans. Budget support loans in 2020 and 2021 are projected to be 0.

The combined application of all adjusters at any test date is capped at the equivalent of US$10 million at the program exchange rate.

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 MOF will provide the following information to IMF staff, within three 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;

  • Quarterly information on the latest outstanding petroleum price structures and submission of new pricing structures (within a week of becoming available).

  • Quarterly pro-poor expenditure.

  • 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 website;

  • Daily data on interest rates, to be posted on the central bank’s website;

  • Daily liquidity management table, including base money (in new dobras) and currency in circulation, to be posted on the central bank ’s website;

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

  • 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 monetary aggregates (in IMF report form 5SR);

  • Monthly BCSTP and market interest rates (in IMF report form 6SR);

  • Monthly NOA flows data;

  • 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 MOF 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, in arrears, 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 MOF, 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

As of December 2020, the average number of COVID cases has dropped to approximately one per day, and the authorities have started gradually reopening the economy.

2

External support is expected to finance about 11 percent of GDP in budget needs and 17 percent of GDP of BOP needs.

3

The authorities have requested and obtained deferment of debt service from other bilateral official creditors (i.e., Portugal) as per the DSSI initiative, and the authorities will be requesting these countries for further deferment of debt service in 2021, as per a DSSI extension.

4

Preliminary data indicate that imports began recovering in the third quarter of the year.

5

This is likely to result in a weaker external position than implied by medium-term fundamentals and desirable policies (Annex I).

6

The 2019 tax policy package measures included: increasing sales taxes on selected products (e.g. alcoholic beverages and telecommunication services), reducing personal income tax allowances, maintaining retail fuel prices at their high levels, and introducing electronic invoicing. Revenue windfalls largely derive from better than expected performance of excises, including on fuel.

7

The domestic primary balance is defined as the primary balance net of foreign grants and oil-related revenue, and excluding foreign-financed capital projects. COVID-19 spending and unbudgeted wage expenses are reported on annual basis.

8

Given the volatility of credit series, credit growth refers to 12-month averages.

9

See Annex III for detailed information on EMAE reforms.

10

A decline in pandemic-related spending is expected to contribute to fiscal consolidation, particularly in 2022.

11

The DSA includes the concessional terms of the recent restructuring of EMAE’s debt to the country’s fuel supp lier, ENCO. ENCO is a private company owned by Sonangol (77.6 percent of capital), an Angolan state-owned company, with the government owning about 16 percent of the company’s share capital.

12

The arrears to Brazil have been rescheduled as per the DSSI initiative.

13

The 2020 revenue windfall is projected to be about 1½ percent of GDP. About two thirds of the windfalls is expected to be permanent. The remaining part would recede over time as international oil prices rise and the implicit additional excise,from keeping retail prices at their earlier high level, subsides.

14

Spending pressures in the education sectorare rising as social distancing needs entail additional personnel expenses. According to the authorities’ data, the pupil teacher ratio is well above the level recommended by the World Health Organization (WHO) to ensure propersocial distancing.

15

Revenue gains from the VAT are projected to fully materialize by 2023, one year later than previously assumed, as collection efficiency gradually increases over time following the initial VAT introduction.

16

These activities are being implemented with capacity development support from the Fund.

17

The Empresa de Águae Electricidade (EMAE) is a stated-owned company that produces and distributes electricity and manages water services.

18

In 2019, EMAE accumulated close to US$17 million (4 percent of GDP) in new arrears to its suppliers. These arrears largely translate in new external arrears of the oil company ENCO to its parent Angolan company. As of June 2020, EMAE’s arrears to ENCO amounted to US$117 million (28 percent of GDP).

19

The authorities’ reform plans for the energy sector are centered around their Management Improvement Plan (MIP) and Least Cost Development Plan (LCDP). The MIP aims at reducing grid losses and raising collection rates. The LCDP aims at reducing the average cost of energy produced by increasing renewable sources’ share. For details about the MIP and LCDP, see IMF Country Report 20/232.

20

The implementation of the MIP has been delayed because of, among other reasons, capacity constraints at EMAE and the authorities’ internal discussions on possible restructuring of the production, transmission, and distribution frameworks (not supported under the sector reform strategy). Moreover, multiple unsolicited proposals for power plants, not aligned with the LCDP’s parameters, have delayed progress on the LCDP.

21

In early 2020, the BCSTP’s monetary policy committee approved an issuance of three-month certificates of deposit (Db100 million, structural benchmark under the ECF program).

22

The credit line program (US$3 million, with the possibility of additional funding) aims at easing access to credit for SMEs in sectors hard-hit by the pandemic, including agriculture and tourism. To access the credit lines, investment by SMEs must have received the favorable technical opinion of the National Investment Agency.

23

With the support of the World Bank, an asset quality review (AQR) was completed in 2019. The AQR identified the need for some loan reclassification in the banking sector and, consequently, recapitalization needs for some banks. In addition, the AQR recommended the BCSTP strengthen its supervisory capacity, both in terms of training and staffing levels. Two small banks (15] percent of banking system assets) were placed in liquidation in 2016 (Banco Equador) and 2018 (Banco Privado). For Banco Equador, the reporting requirements and planned asset sales have been delayed. Banco Privado is likely to be sold to a group of investors after the pandemic subsides.

24

The IMF will provide assistance to further develop the BCSTP’s stress testing capacity to identify credit risk pressures and possible recapitalization needs.

25

The safeguards assessment’s recommendations focused on strengthening: central bank autonomy, governance structure for the oversight of central bank operations, financial reporting, and the internal audit function.

26

The BCSTP organic law is now one of the few in the world that includes a quota on Board members to promote gender equality.

27

For an analysis of the impact of structural reforms on growth in a panel of counties including low-income and developing countries, see IMF Country Report 19/295.

28

For 2021, financing include budget support grants from the World Bank and the EU.

29

For comparison, Comoros’ total repayments to the IMF as a share of exports of goods and services peak at about 4 percent and as a share of GDP at 0.5 percent.

30

The authorities were granted a one-year extension on the temporary approval for the retention of measures resulting in exchange restrictions and a multiple currency practice subject to IMF jurisdiction under Article VIII, Sections 2(a) and 3 when the program was approved in October 2019.

31

These exchange measures include: (i) an exchange restriction arising under Articles 3(g) and 18 of the Investment Code of 2016 due to limitations on the transferability of net income from investments; and (ii) an exchange restriction arising from limitations on the availability of foreign exchange for payments of current international transactions, due to the rationing of foreign exchange by BCSTP. The latter exchange restriction also gives rise to a multiple currency practice as it has resulted in the channeling of transactions to the parallel market where the exchange rate is at a spread of more than two percent from the exchange rate in the formal market.

32

EMAE buys fuel for thermal generation from ENCO, which imports fuel from Sonangol, a state-owned company of Angola. Further description of the arrears from EMAE to ENCO, and the implications for debt sustainability, are provided in the DSA.

1

International reserves exclude commercial banks’ deposits in foreign currency in the central bank. Given the projected temporary, sharp drop in imports in 2020, the reserve coverage is measured based on pre-crisis (2019) imports.

2

The 2019 tax policy package measures included: increasing sales taxes on selected products (e.g. alcoholic beverages and telecommunication services), reducing personal income tax allowances, maintaining retail fuel prices at their high levels, and introducing electronic invoicing.

3

Arrears were accumulated in recent years as project grants and loans fell below projection, and these arrears were not accounted for in the budget execution and financial statements by the time they were incurred.

4

These include contracts on public work of over dobras 100,000.00 (US$4,500); on acquisition of supply of goods of over dobras 75,000.00; on consultancy services of over dobras 50,000.00; loan contracts of over dobras 1,500,000.00; concession and other contracts with a value greater than dobras 150,000.00.

5

The COVID-19 related contracts will also be published according to the same rule even though Court of Accounts’ Resolution no. 1/2020 establishes that COVID-19 related contracts can be signed by government without prior authorization from the Court, but subject to approval by the Court of Accounts within 30 days of signature.

6

These exchange measures include: (i) an exchange restriction arising under Articles 3(g) and 18 of the Investment Code of 2016 due to limitations on the transferability of net income from investments; and (ii) an exchange restriction arising from limitations on the availability of foreign exchange for payments of current international transactions, due to the rationing of foreign exchange by BCSTP. The latter exchange restriction also gives rise to a multiple currency practice as it has resulted in the channeling of transactions to the parallel market where the exchange rate is at a spread of more than two percent from the exchange rate in the formal market. These measures were approved by the IMF Board in October 2019 for 12 months because they are temporary, non-discriminatory, and needed for balance of payments reasons.

1

Data refer to the mid-point exchange rates published on the BCSTP’s webpage for the last day of 2018.

2

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

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Cover IMF Staff Country Reports
Democratic Republic of São Tomé: 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
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2021: Issue 051
Publisher:
International Monetary Fund
ISBN:
9781513571089
ISSN:
1934-7685
Pages:
118
DOI:
https://doi.org/10.5089/9781513571089.002
  • <sup><xref ref-type="fig" rid="RA02fig01">Figure 1.</xref></sup>
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    Figure 1.

    São Tomé and Príncipe: An Economy Hard Hit by the COVID-19 Pandemic

  • <sup><xref ref-type="fig" rid="RA02fig02">Figure 2.</xref></sup>
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    Figure 2.

    São Tomé and Príncipe: Economic Uncertainty Affecting the Banking Sector

  • View in gallery

    São Tomé and Príncipe: Credit to Private Sector

    (Percent change)

  • <sup><xref ref-type="fig" rid="RA02fig03">Figure 3.</xref></sup>
    View in gallery
    Figure 3.

    São Tomé and Príncipe: Macroeconomic Effects of the COVID-19 Pandemic

  • View in gallery

    Sub- Saharan Africa: Education Expenditure

    (Percent of GDP, Latest Available Year)

  • View in gallery

    Sub- Saharan Africa: Tax Revenue, 2018–2019

    (Percent of GDP)

  • <sup><xref ref-type="fig" rid="RA02fig04">Figure 4.</xref></sup>
    View in gallery
    Figure 4.

    São Tomé and Príncipe: An Unsustainable Energy Sector

  • View in gallery

    São Tomé and Príncipe: Excess Liquidity

  • <sup><xref ref-type="fig" rid="RA02fig05">Figure 5.</xref></sup>
    View in gallery
    Figure 5.

    São Tomé and Príncipe: Structural Impediments to Sustainable and Inclusive Growth

  • View in gallery

    São Tomé and Príncipe: Real Income Per Capita

    (2010=100, PPP International Dollars)

Figure 1.

São Tomé and Príncipe: An Economy Hard Hit by the COVID-19 Pandemic
Figure 2.

São Tomé and Príncipe: Economic Uncertainty Affecting the Banking Sector

São Tomé and Príncipe: Credit to Private Sector

(Percent change)
Figure 3.

São Tomé and Príncipe: Macroeconomic Effects of the COVID-19 Pandemic

Sub- Saharan Africa: Education Expenditure

(Percent of GDP, Latest Available Year)

Sub- Saharan Africa: Tax Revenue, 2018–2019

(Percent of GDP)
Figure 4.

São Tomé and Príncipe: An Unsustainable Energy Sector

São Tomé and Príncipe: Excess Liquidity
Figure 5.

São Tomé and Príncipe: Structural Impediments to Sustainable and Inclusive Growth

São Tomé and Príncipe: Real Income Per Capita

(2010=100, PPP International Dollars)