Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with São Tomé and Príncipe

March 29, 2006

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

Public Information Notice (PIN) No. 06/36
March 29, 2006

On March 6, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with São Tomé and Príncipe.1


Following a decade of large macroeconomic imbalances and state intervention in the economy, the Sãotomean authorities have pursued economic reforms since 1998 that have helped increase real GDP growth, lower inflation, and push forward key structural reforms. Financial aid from international donors increased substantially in support of these reforms. At the same time, a successful implementation of a Staff Monitored Program in 1999 led to the approval of a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) in April 2000. São Tomé and Príncipe reached the Decision point under the Heavily Indebted Poor Countries (HIPC) Initiative in late December 2000.

However, fiscal performance has been uneven over the years, reflecting expenditure pressures arising from the domestic political cycle and anticipated large oil signature bonuses. In 2001, as presidential elections approached, the government failed to meet a number of fiscal and monetary targets under the Fund-supported program. Fiscal management improved in 2002, but it deteriorated again in 2003 as the government raised social spending significantly. In 2004, the fiscal position deteriorated even further as the government increased expenditures to unsustainable levels in anticipation of a large oil signature bonus, which was only realized in July 2005. The fiscal gaps were financed mainly through external borrowing, central bank financing, and the accumulation of arrears. The current PRGF arrangement, approved by the Executive Board on August 1, 2005, seeks to support the government's efforts to address macroeconomic imbalances, deepen structural reforms, and set the conditions for sustained economic growth and poverty alleviation.

In 2005, economic growth remained strong, although inflation picked up against the background of a sharp increase in international oil prices that were passed through to domestic consumers. Fiscal consolidation advanced in line with the program, and the fiscal targets for end-2005 are likely to have been met. Broad money grew rapidly on account of resilient economic growth and an increase in the central bank's Net International Reserve position. The managed floating exchange rate regime has served the country well, allowing the authorities to address the volatility of external inflows and cushion exogenous shocks. The import coverage of reserves remains above 3.5 months of imports of goods and services.

Prospects for 2006 remain favorable, with an expectation of strong growth, lower inflation, and a relatively favorable external position. In the fiscal area, the 2006 program seeks to consolidate the measures launched in 2005, including efforts to address tax arrears and overhaul customs administration procedures. A better control of the growth of current expenditure will help to change the composition of government spending in favor of pro-poor expenditure. Monetary policy will be consistent with a deceleration of inflation. To foster private sector growth in the non-oil economy, structural reform efforts will continue, including actions to address the financial position of the water and electricity company (EMAE).

Executive Board Assessment

Executive Directors welcomed the commitment of the Sãotomean authorities to continue addressing macroeconomic imbalances, while strengthening the conditions for sustained economic growth and poverty reduction. Over the medium term, a main challenge will be to develop strong institutions to secure a transparent management of oil revenue and to secure a proper execution of the government's Poverty Reduction Strategy Paper (PRSP) that would strengthen growth in the non-oil economy and support the attainment of the Millennium Development Goals (MDGs). Lasting and enhanced donor support to finance the PRSP will be vital in this regard.

Directors commended the satisfactory performance under the PRGF-supported program. In particular, they welcomed the authorities' decision to sustain the process of fiscal consolidation. They commended the government's efforts to increase tax revenue and reduce wasteful expenditure, while increasing the share of pro-poor expenditure in line with the PRSP. Fiscal consolidation will also be supported by a modernized budget and public expenditure management system (SIGFE), and the reform of the auditing practices of the general government and public enterprise financial operations.

Directors observed that the monetary policy stance remained broadly adequate, supporting the achievement of the authorities' inflation target and safeguarding the central bank's international reserve position. Directors encouraged the authorities to continue the judicious mix between foreign exchange sales and the issuance of liquidity-absorbing instruments. They welcomed the authorities' commitment to keep the central bank reference rate above the inflation rate and to improve the coordination of fiscal and monetary policies to better forecast liquidity. Directors supported continued technical assistance by the Fund in the area of indirect monetary policy management.

Directors considered that São Tomé and Príncipe's managed floating exchange rate system remains appropriate, allowing the authorities to address the volatility of external inflows and cushion exogenous shocks. In this context, Directors commended the authorities for improving the foreign exchange auction system to strengthen the price setting mechanism.

Directors welcomed the improvements in banking sector supervision and underscored the need for effective implementation of the measures regarding the licensing of new banks and the development of on-site and off-site prudential indicators. Directors underscored the importance of decisive action with respect to weak banks, including possible recapitalization or closure, which would play a critical role in developing a sound domestic banking system.

Directors noted that São Tomé and Príncipe has a relatively open trade regime and welcomed the termination in 2005 of the only remaining nontariff barrier protecting the domestic telecommunications company from competition.

Directors urged the authorities to accelerate structural reforms and achieve full transparency in oil revenue management. In this respect, they emphasized the need to implement during 2006 the action plan to improve the finances of the water and electricity company and complete the feasibility studies of the airport and seaport authorities. To improve the business climate, Directors recommended to eliminate administrative barriers for start-up businesses, establish tribunals of arbitration, and approve new codes for personal and corporate income taxation. They stressed that the publication of the Production Sharing Agreement signed between the Joint Development Agency and the selected oil operators and the participation in the Extractive Industries Transparency Initiative would be key elements toward securing accountability and good governance in the nascent oil sector.

Directors encouraged the authorities to improve the coverage, timeliness, and periodicity of basic economic statistics.

Directors welcomed the authorities' stated intention to accept the obligations of Article VIII, Sections 2 (a), 3 and 4 in the near future and looked forward to the staff's findings in the ongoing review of the exchange system, expected for the next review under the PRGF arrangement.

São Tome and Principe: Selected Economic Indicators

  2003 2004 2005 2006
      Est. Proj.

  (Annual percentage changes)

Real GDP

4.0 3.8 3.8 4.5

Consumer Prices (end of period)

10.2 15.2 17.0 13.0

Consumer Prices (annual average)

9.6 12.8 16.2 14.8

Real effective exchange rate 1/

-10.0 -1.9 4.4 ...

Terms of trade

-10.1 -18.8 -5.2 -4.0
  (In percent of GDP)

Gross domestic investment

36.1 35.2 36.0 42.2

Gross domestic savings

15.4 16.7 4.3 14.2

Public savings

13.4 6.8 11.6 15.5
  (In millions of US$, unless otherwise specified)

Exports (f.o.b.)

6.6 3.5 3.8 4.0

Imports (f.o.b.)

33.6 36.0 42.1 44.0

Current account balance 2/

-33.5 -37.9 -41.6 -42.5

Current account balance (in percent of GDP) 2/

-56.7 -58.9 -59.2 -59.8

Gross official reserves 3/

4.8 3.5 3.7 3.5

Overall balance 4/

1.9 -5.0 26.6 21.1

Net present value of total debt 5/

463.5 500.7 499.5 315.5
  (In percent of GDP, unless otherwise specified)

Total revenue and grants 4/

58.1 60.6 129.7 139.4

Total expenditure

75.1 87.2 72.8 79.7

Non-interest current expenditure

28.4 41.7 38.0 38.3

Overall fiscal balance,

excluding grants 4/

-49.5 -58.8 32.3 30.6

Overall fiscal balance,

including grants 4/

-17.0 -26.6 56.9 59.6

Budget grants

32.5 32.2 24.6 29.0

Change in broad money (in percent)

41.8 7.4 26.1 16.1

Interest rate (in percent) 6/

10.6 10.6 12.5 ...

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/ Includes oil signature bonuses in 2005 and 2006.
5/ 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).
6/ Commercial bank deposit rate (90-180 days), 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.


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