Public Information Notice: IMF Executive Board Concludes the 2008 Article IV Consultation with the Democratic Republic of São Tomé and Príncipe

July 24, 2008

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. 08/89
July 24, 2008

On June 18, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Democratic Republic of São Tomé and Príncipe.1


São Tomé and Príncipe is a small, open, low-income economy with a very narrow production and export base. The country's main export commodity is cocoa but the once-dominant agriculture sector has declined over the last three decades. Tourism is relatively small and brings in little net foreign exchange because it relies heavily on imported goods and services. In recent years, public finances have been supported by large oil signature bonuses, but exploratory drilling for oil has not yet confirmed the existence of commercially extractable reserves.

The authorities have embarked on economic adjustment and reform supported by the Fund's Poverty Reduction and Growth Facility since August 2005. Growth has been robust and progress has been made in reducing fiscal imbalances and the pubic debt burden. São Tomé and Príncipe reached the completion point under the enhanced HIPC Initiative in March 2007 and has benefited from debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI).

In 2007 real GDP grew at an estimated 6 percent, led by activities in construction and services, financed by an inflow of Foreign Direct Investment (FDI). However, spillover from these projects to local employment and income is still limited because of the high import content of these projects. Annual inflation rose from 14 percent in mid-2007 to 28 percent by the end of the year, reflecting surging food and oil prices, as well as a budgetary expenditure overrun, which put pressure on base money growth and currency depreciation. The domestic primary deficit was larger than programmed in 2007, despite higher revenue. This was due to a large increase in current spending, partly to cover the rising utility costs of households. Implementation of monetary policy was complicated by volatile capital inflows and did not adequately control the growth of base money. The central bank's sterilization of budgetary use of oil bonuses fell short of what was needed to mop up excess liquidity.

Against the backdrop of rising food and fuel prices, the authorities are taking steps to strengthen policy implementation and restore financial stability. The National Assembly recently approved the 2008 budget, which envisages a reduction in the domestic primary fiscal deficit, while providing funding to mitigate the impact of the high prices for food and fuel on the poor. A more active monetary policy slowed base money growth and currency depreciation in the first quarter of 2008.

Executive Board Assessment

Executive Directors noted that São Tomé and Príncipe's growth performance under the PRGF-supported program has been robust and progress has been made in reducing fiscal imbalances and the public debt burden. However, these favorable developments have been accompanied by accelerating inflation. While surging international prices of food and fuels have contributed to recent higher inflation, public expenditure overruns and weak control of base money growth have also played a role in increasing the pressures on prices and currency depreciation.

Against this background, Directors noted that the main challenges facing the authorities over the medium term are to maintain fiscal sustainability and to develop the economy's production and export base through a deepening of structural reforms. These policies would be particularly important in view of the still unclear prospects for oil revenue and the economy's continuing vulnerability to external shocks.

Directors underscored the need to continue fiscal adjustment and strengthen expenditure control so as to lower inflation and restore financial stability. They supported the authorities' 2008 fiscal program that aims to reduce the domestic primary deficit relative to GDP, introduce direct taxation reform, and provide additional fiscal space to mitigate the impact of rising food and fuel prices on the poor. Directors encouraged the authorities to avoid generalized price subsidies and instead implement targeted assistance to the most vulnerable segments of the population.

Directors supported the efforts of the central bank to improve liquidity management. More active use of foreign exchange auctions to sterilize promptly the budgetary use of oil bonuses and donor funding would help slow base money growth. Directors also emphasized the critical role of fiscal policy in supporting monetary tightening and helping safeguard international reserves.

Directors agreed that maintaining fiscal sustainability in the medium-term will call for enhancing the growth orientation of the budget and bringing recurrent spending—particularly on personnel costs—in line with domestic revenue and available foreign budgetary support. Moreover, to maintain debt sustainability, Directors emphasized the importance of continued efforts by the authorities to strengthen debt management and rely on non-debt-creating inflows and other concessional external financing.

Directors emphasized the need for accelerated structural reform in order to achieve sustained private sector-led growth. In particular, they called on the authorities to significantly improve the investment climate by reducing regulatory impediments to investing and doing business in São Tomé and Príncipe, upgrading infrastructure, and attracting private investment to key economic sectors, especially agriculture. Directors welcomed the progress that the authorities have made in putting in place the legal framework for anti-money laundering and combating the financing of terrorism. Advancing financial sector reform will be crucial to support private sector development. Directors also encouraged the authorities to build on the progress under the Extractive Industries Transparency Initiative, which would further improve the management of oil-related resources.

Directors noted the staff's assessment that the exchange rate in real effective terms does not show a significant misalignment from its equilibrium level. They underscored the importance of deepening foreign exchange market reform. Pressing ahead with measures designed to remove all remaining exchange restrictions would improve the functioning of the foreign exchange market and enable the authorities to accept the obligations under Article VIII of the Fund's Articles of Agreement. Directors supported the authorities' intention to reconsider São Tomé and Príncipe's monetary and exchange arrangements, and noted some possible benefits and limitations of alternative exchange rate regimes. They emphasized, however, that fiscal discipline and prudent debt management are the main prerequisites for any sustainable exchange rate regime.

São Tomé and Príncipe: Selected Economic Indicators, 2005-2008
  2005 2006 2007 2008




Est. Proj.
(Annual percentage changes, unless otherwise specified)

National income and prices


GDP at constant prices

5.7 6.7 6.0 6.0

Consumer prices (end of period)

17.2 24.6 27.6 13.0

Consumer prices Period average

16.3 23.1 18.5 19.4

External trade


Exports, f.o.b.

22.6 -1.4 1.9 2.8

Imports, c.i.f.

15.7 65.9 -6.0 13.8

Exchange rate (dobras per US$; end of period) 1

11,748 12,945 14,220 ...

Real effective exchange rate (depreciation = -)

6.5 2.9 4.9 ...

Money and credit (end of period)


Base money 2

76.6 32.0 50.0 7.7

Broad money (M3)

45.9 39.3 36.4 21.0

Velocity (GDP to average broad money)

3.3 3.0 3.1 3.1

Central bank reference interest rate (percent)

18.2 28.0 28.0 ...

Bank lending rate (percent)

29.8 29.3 32.4 ...

Bank deposit rate (percent)

11.5 10.8 12.8 ...
  (in percent of GDP, unless otherwise specified)

Government finance


Total revenue, grants, and oil signature bonuses 3

81.0 37.1 160.3 73.6

Of which: tax revenue

15.0 17.4 16.3 15.3

nontax revenue

2.3 3.7 2.8 1.8

oil signature bonuses

46.8 0.0 21.1 16.3

Total expenditure and net lending

44.0 51.0 40.0 31.9

Of which: personnel costs

8.6 8.7 8.9 8.6

nonwage noninterest current expenditure

14.8 16.5 15.6 9.1

capital and HIPC-related social spending

17.8 22.3 14.2 12.8

Domestic primary balance 4

-10.1 -8.5 -8.1 -5.2

External sector


Current account balance, including official transfers

-10.3 -41.3 -30.2 -31.0

Current account balance, excluding official transfers

-39.5 -66.3 -52.1 -51.5

NPV of external debt

171.1 161.2 15.9 7.9

External debt service (in percent of exports) 5


Before HIPC and MDRI debt relief

75.6 70.0 83.2 60.0

After HIPC and MDRI debt relief

62.1 35.9 27.8 4.2

Gross foreign reserves, in millions of U.S. dollars 6

26.6 33.3 38.0 31.8

in months of imports of goods and nonfactor services

4 4 5 4

National Oil Account (in millions of U.S. dollars) 7

23.5 8.6 14.9 39.5

Memorandum Items


GDP (in billions of dobras)

1,202 1,536 1,959 2,409

GDP (in millions of U.S. dollars)

115 124 145 160

Sources: São Tomé and Príncipe authorities and IMF staff estimates and projections.
1 Central bank (BCSTP) buying rate.
2 In 2008, projected base money growth reflects the high level of base money at the end of 2007, which was significantly reduced in early 2008 through the BCSTP's foreign exchange sales.
3 Includes HIPC and MDRI debt relief.
4 Excluding oil revenue, grants, interest payments, and foreign-financed scholarships and capital outlays.
5 In percent of exports of goods and nonfactor services. The difference between debt service before and after HIPC relief is larger than debt service saving in cash terms because this table is on an accrual basis.
6 Excluding the National Oil Account and guarantee deposits at the BCSTP by financial institutions' waiting for operating licenses.
7 For 2008, assumes receipt of oil signature bonuses for Blocks 5 and 6 (US$ 26 million).

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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