Public Information Notice: IMF Concludes 2003 Article IV Consultation with São Tomé and Príncipe

April 2, 2004

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On March 17, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with São Tomé and Príncipe.1


Following a decade of very large macroeconomic imbalances, the government has pursued since 1998 economic and financial policies that have helped raise real GDP growth, lower inflation, reduce the primary budget deficit, and push forward key structural reforms. Dependence on cocoa has diminished as tourism and construction have contributed more to economic growth. The external current account, however, has remained chronically dependent on donor financing. A three-year Poverty Reduction and Growth Facility arrangement adopted in 2000 veered off track in 2001, in large part because of fiscal slippages associated with parliamentary elections. In 2002, the authorities adopted a new set of policies in the context of a staff-monitored program, under which São Tomé and Príncipe established a broadly satisfactory track record. The government addressed some of the long-standing issues raised by Directors during the 2001 Article IV consultation, notably by improving their public expenditure control and monitoring mechanisms, including the HIPC account. The authorities also increased transparency in the oil sector by renegotiating contracts with a view to enhancing the benefits to the country.2

In 2003, São Tomé and Príncipe's macroeconomic performance remained broadly satisfactory. Real GDP is estimated to be near the 4½ percent growth rate as projected by the authorities, with end-period inflation at 10 percent. The primary fiscal deficit, including HIPC-financed social outlays, amounted to 12 percent of GDP. Broad money grew by 50 percent (including a strong rise in currency in circulation), as a result of marked increase in demand for transaction balances; net foreign assets rose sharply. The external current account deficit is estimated at 45 percent of GDP, reflecting a strong increase in exports and a modest rise in imports. The authorities maintained their flexible exchange rate regime: the real effective exchange rate depreciated by 5 percent during January-October 2003, mitigating the effect on competitiveness of an estimated 11 percent decline in the terms of trade. Overall, structural reforms were implemented broadly in line with expectations: the authorities made operational the Auditor General's Office; and the Banco Commercial do Equador (BCE) was recapitalized with private funds, which could allow its reopening in early 2004. However, the financial situation of the water and electricity state enterprise (EMAE) deteriorated, owing to an accumulation of arrears on electricity bill payments by individuals.

Executive Board Assessment

Executive Directors noted that São Tomé and Príncipe, under a staff-monitored program, had maintained broadly satisfactory macroeconomic performance in 2002, and in 2003, despite a short-lived coup d'état. They noted the progress in improving public expenditure management, a longstanding concern.

Directors observed that in view of the impending significant expansion in oil sector activities and the expected receipt of signature bonuses in 2004 that are likely to be larger than annual GDP, the authorities face the challenge of how to manage this oil wealth against the backdrop of widespread poverty and weak institutions. They underscored the need to adopt policies that are conducive to continued macroeconomic stability, a reduction in poverty and achieving high growth in the non-oil sector. A key element will be the adoption of measures leading to a transparent and efficient use of the oil revenue, including through continued improvement in governance and fiscal management.

Directors welcomed the authorities' intention to preserve oil income for future generations by establishing a transparent and well-managed fund for oil revenues that will stabilize the effect of oil revenues on the economy. However, they also considered important that the authorities achieve the right balance between saving the oil revenue and using it for efficient investments. It will be crucial that the authorities prepare and implement without delay the envisaged legislation for this fund as well as the regulations governing oil revenue-financed spending and the state oil entity. They commended the authorities' interest in participating in the Extractive Industries Transparency Initiative.

Directors endorsed the authorities' 2004 budget proposal and their plan for a three-year rolling expenditure framework. They also approved the authorities' choice of the non-oil primary fiscal deficit as their key indicator of the fiscal stance during the upcoming oil era and their strategy to stabilize this deficit over the medium term and to limit it in the long term to the interest and dividend earnings from the future oil fund's accumulated assets. They urged the authorities to be prudent in using their resources for critical spending on infrastructure, health, and education programs, while cautioning against excessive civil service wage increases. Directors encouraged the authorities to undertake a fiscal ROSC.

Directors supported the authorities' monetary policy stance and efforts to contain inflation, including by making active use of the central bank's reference rate. They considered that the flexible exchange rate regime remains appropriate, and supported the creation of an interbank foreign exchange market. They took note of the authorities' intention to accept soon the obligations under Article VIII, Sections 2(a), 3, and 4, and urged the authorities to rapidly resolve all outstanding issues in this respect.

Directors supported the authorities' focus on enhancing credit access for entrepreneurs and looked forward to continued strengthening of banking supervision. While welcoming the authorities' efforts to draft anti-money laundering legislation, they urged them to present the legislation to the National Assembly at an early date.

Directors cautioned that given recent events in São Tomé and Príncipe, steps to build political consensus are essential to ensure more effective economic policymaking. They stressed that the country faces challenges in enhancing competitiveness and needs to step up the pace of reform. They highlighted the importance of accelerating privatization and diversification to reduce the dependence on cocoa and prevent overdependence on oil. Further they stressed the need to improve governance, the judiciary, bankruptcy law, and the enforcement of property rights. They also encouraged the authorities to undertake meaningful land reform and restructuring of public utility tariffs.

Directors supported the authorities' interest in pursuing another Paris Club debt rescheduling and resuming discussions on a Poverty Reduction and Growth Facility arrangement, and underscored in this regard the importance of sustaining satisfactory macroeconomic performance and implementing oil sector legislation. They looked forward to São Tomé and Príncipe reaching the HIPC Initiative completion point, once all necessary conditions have been met, and welcomed the authorities' efforts toward a Poverty Reduction Strategy Paper with well-prioritized spending and costing. Directors encouraged continued aid flows until oil production comes on stream.

Directors were concerned that, while the authorities are regularly providing the core minimum data to the Fund, substantial improvement in the quality and coverage of data is needed. They welcomed the authorities' intention to seek further technical assistance for this purpose.

São Tome and Principe: Selected Economic Indicators










(Annual percentage changes)

Real GDP





GDP Deflator





Consumer Prices (annual average)





Real effective exchange rate 1/





Terms of trade






(In percent of GDP)

Gross domestic investment





Gross domestic savings





Gross national savings






(In millions of US$, unless otherwise specified)

Exports (f.o.b.)





Imports (f.o.b.)





Current account balance 2/





Gross official reserves 3/





Overall balance





Non-oil current account balance (in percent of GDP) 2/





Net present value of total debt 4/






(In percent of GDP, unless otherwise specified)

Total revenue and grants





Total expenditure





Non-interest current expenditure





Overall fiscal balance, excluding grants





Overall fiscal balance, including grants





Change in broad money (in percent)





Interest rate (in percent) 5/





Sources: Sãotomean authorities; and IMF staff estimates and projections.

1/ (+) = appreciation. For 2003, data are through October.
2/ Excluding official transfers.
3/ In months of following year's non-oil imports of goods and nonfactor services.
4/ In percent of exports of goods and services, calculated as a three-year backward-looking average (e.g., average over 2001-2003 for exports in 2003).
5/ Commercial bank deposit rate, end of period.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.
2 Bids for nine oil blocks from a first bidding round that ended in October 2003 are still being evaluated.


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