March 24, 2000

Mr. Stanley Fischer
Acting Managing Director
International Monetary Fund
700 19th Street, N.W.
Washington, D.C. 20431
U.S.A.

Dear Mr. Fischer:

1.  Since early 1998, the São Tomé and Príncipe authorities have been implementing macroeconomic policies and structural adjustment measures as part of a staff-monitored program agreed with the International Monetary Fund. To consolidate the progress achieved, the government has adopted an economic reform program for 2000-02, the objectives of which are described in the interim poverty reduction strategy paper and the matrix of economic policy actions, prepared with the assistance of the staffs of the Fund and the World Bank and sent to you under separate cover.

2.  The attached memorandum of economic and financial policies describes the government's objectives and economic policies for 2000–02, as well as the specific objectives and measures envisaged for the first year of the program, from January 1 to December 31, 2000. In support of these objectives and policies, the government requests a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) in an amount equivalent to SDR 6.657 million (90 percent of quota). The government also plans to seek assistance, in due course, from the Fund, the World Bank, and the international financial community in the context of the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative).

3.  The government believes that the policies set forth in the attached memorandum will enable it to attain the objectives of its program, but it is ready to take further measures that may prove necessary to this end. During the period of the proposed three-year PRGF arrangement, the authorities will consult with the Managing Director of the Fund on the adoption of any measures that may be appropriate, either at their own initiative or at the Managing Director's request. Moreover, following the period of implementation of the arrangement, and as long as São Tomé and Príncipe has outstanding financial obligations toward the Fund arising from loans disbursed under the arrangement, the government will consult with the Fund, from time to time, on São Tomé and Príncipe's economic and financial policies, at its own initiative or at the request of the Managing Director.

4.  The government will communicate to the Fund any information the Fund may request to monitor the progress made in implementing the economic and financial policies and the measures required to achieve the program objectives. In addition, the authorities of São Tomé and Príncipe will conduct with the Fund two semiannual reviews of the program during the first year, to be completed by September 2000 and March 2001, respectively.

Sincerely yours,

Attachment: Memorandum of Economic and Financial Policies for 2000

São Tomé and Príncipe
Memorandum of Economic and Financial Policies for 2000
March 24, 2000

1.  Since early 1998, the government of São Tomé and Príncipe has implemented macroeconomic policies and structural adjustment measures, first under an economic policy framework and subsequently under a staff-monitored program that were agreed with Fund staff. The program aimed at eliminating the government's primary budget deficit, reducing inflation, and improving the prospects for medium-term economic growth. On the whole, the measures and reforms implemented enabled São Tomé and Príncipe to achieve its macroeconomic objectives, particularly as regards fiscal consolidation, containment of inflation, liberalization of the economy, and reduction of the spread between the official exchange rate and the parallel market rate of the dobra. Seven out of the eight quantitative benchmarks were met by end-September and end-December 1999 under the staff-monitored program, the exception being the ceiling on government primary expenditure. Moreover, all structural benchmarks were met through end-December, with the exception of the two related to the adoption of the strategy for the privatization of large government estates and to the preparation of an action plan against poverty. Over this two-year period, the government's efforts were also supported by technical and financial assistance from the World Bank and several other bilateral and multilateral donors and lenders.

2.  Despite the progress made, the country's economic and financial situation remains very difficult. São Tomé and Príncipe's economy and external position are largely dependent on external assistance. The external public debt burden is particularly heavy, per capita income is very low, and structural rigidities continue to hamper economic growth and private sector development. Access to essential social services is limited, and poverty is widespread. In these circumstances, the government is determined to consolidate progress already made during 1998-99, intensify fiscal adjustment efforts, and accelerate structural reforms in the coming years, with a view to diversifying the economy, reducing domestic and external financial imbalances, achieving durable growth, and significantly reducing poverty.

3.  Against this backdrop, the authorities have prepared a matrix of economic policy actions for 2000–02, with assistance from Fund and World Bank staffs, as well as an interim poverty reduction strategy paper that endorse the macroeconomic framework and matrix of policy actions. In support of the program for 2000–02, the government requests a three-year arrangement under the Fund's Poverty Reduction and Growth Facility (PRGF), as well as nonproject assistance from the World Bank, the African Development Bank (AfDB), and other multilateral and bilateral donors and lenders. The government also hopes that São Tomé and Príncipe will, in due course, benefit from the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative).

4.  This memorandum of economic and financial policies describes the objectives and economic policies set by the government for 2000–02, as well as the specific objectives and measures to be implemented in 2000. It also covers external sector developments and program monitoring.

5.  The government's medium-term program for 2000–02 will focus on four main priorities: (a) a prudent fiscal policy, designed to broaden the tax base and assign priority in expenditure allocation to social sectors and infrastructure maintenance; (b) an ambitious social program, with special emphasis on reducing poverty, and improving education and health services; (c) a tight monetary policy to reduce inflation and improve international reserves; and (d) accelerated structural reforms designed to promote private sector development and consolidate the bases for sustainable economic growth. Special emphasis will be placed on good governance.

6.  As indicated in the interim poverty reduction strategy paper, the objectives of the adjustment strategy for 2000–02 are to establish a stable macroeconomic environment conducive to higher growth by (a) reducing inflation to 3 percent before 2001; and (b) limiting the external current account deficit (excluding official transfers) to 66 percent of GDP (or to less than 41 percent after official transfers) in 2002, against the backdrop of new investments in oil exploration. The government will endeavor to (a) intensify the campaign to reduce poverty; (b) promote job creation by the private sector; (c) develop human resources; and (d) enhance protection of the environment. The average annual growth rate of real GDP is expected to be 4 percent in 2001–02, making possible a 1.7 percent annual increase in per capita income. Excluding oil investments, São Tomé and Principe's balance of payments should continue to improve as a result of increased export diversification, notably in agriculture, fisheries, and tourism. Private investment is expected to grow from 14 percent of GDP in 1999 to 31 percent of GDP in 2002 as a result of the expected start-up of oil sector investments; gross national savings are expected to increase from 15 percent of GDP in 1999 to 20 percent of GDP in 2002.

7.  With a view to attaining the objectives of its medium-term adjustment strategy, the government will focus its efforts on the pursuit of a prudent fiscal policy, so as to increase the primary fiscal surplus from 1.3 percent of GDP in 1999 to 5 percent of GDP in 2002, while increasing budgetary allocations to the education and health sectors. The government will also pursue a tight monetary policy designed to reduce inflation and strengthen the central bank's international reserves position, in the context of the market-based exchange rate system currently in place. It will also expand structural reforms, with a view to promoting private sector development, while improving the efficiency of the public sector.

8.  As the economy has been significantly liberalized already, the government will create a legal and regulatory framework geared to the expansion of private investment and the encouragement of private capital investment from abroad, making the private sector the engine of economic growth. In addition, it will strive to improve the operations of the legal system and will continue to implement the public enterprise reform and privatization program.

9.  The government is convinced that the achievement of sustainable economic growth will help reduce poverty. To increase life expectancy and improve quality of life, the government intends to step up the fight against major endemic illnesses, in particular malaria and AIDS, improve access to primary health care services, expand the vaccination of children, increase school attendance and literacy rates, and improve housing, especially for the most disadvantaged populations. Moreover, the government intends to reduce infant mortality and intensify efforts to inform, educate, and communicate in the areas of health and family planning by carrying on a campaign to increase the awareness of women, especially in rural areas.

10.  Within the medium-term strategic framework, the primary macroeconomic objectives for the first year of the program are to (a) reduce the inflation rate to 5 percent in 2000; and (b) limit the external current account deficit (excluding official transfers) to 62 percent of GDP. Real GDP growth in 2000 is projected to reach 3 percent. In the area of government finance, the program aims to increase the primary fiscal surplus to 2.3 percent of GDP in 2000. In order to attain these objectives, a series of measures will be implemented in the course of the year in the fiscal, money, and exchange rate policy areas, the external sector, and the area of structural reform.

11.  The fiscal policy will aim at reducing the fiscal deficit (on a commitment basis, including grants) from 26 percent of GDP in 1999 to 22 percent of GDP in 2000, and at increasing the primary surplus (excluding foreign-financed investments) from 1.3 percent of GDP in 1999 to 2.3 percent of GDP in 2000. The draft budget law for 2000, which was submitted to the National Assembly on February 29, 2000, is in line with these program objectives. It includes a series of measures designed to rationalize the customs tariffs and domestic indirect taxation, broaden the tax base, and control expenditure. The central bank's draft budget, appended to the general government budget, also envisages a surplus of 0.6 percent of GDP, and the draft budget of the water and electricity distribution company (EMAE) calls for a balance in 2000. With the rescheduling of arrears to the Arab Bank for Economic Development in Africa (BADEA) in 1999, all payments arrears to multilateral organizations have been settled, as have all domestic payments arrears. The government will not accumulate any new external or domestic payment arrears during the program period.

12.  As regards revenue (excluding grants), an increase of 16.5 percent in 2000 (to Db 75 billion, or 20.4 percent of GDP) is forecast. The improved revenue figure includes the impact of the new customs tariff adopted at end-December 1999, the elimination of export taxes, and the adjustment of excise taxes on petroleum products, alcoholic beverages, and tobacco starting in February 2000. The new customs tariff has reduced the number of import duty rates to three: 5 percent, 10 percent, and 20 percent. The zero rate has been eliminated, and the 5 percent rate has been applied to all imports previously subject to the zero rate; no other taxes will be levied by customs. By end-September 2000, a study will be undertaken on the rationalization of domestic indirect taxation, with a view to simplifying the general sales tax and applying it to domestic goods and services (such as hotels, restaurants, and maintenance and repair services). The government has also adjusted upward the rates of excise taxes—to 149 percent for petroleum products and 55 percent for alcoholic beverages and tobacco—with a view to ensuring the revenue neutrality of its tax reform effort regarding these products. Simulations based on 1997 revenue show that the introduction of the new rate, the elimination of export duties, and the adjustment of excise taxes could result in revenue losses of approximately Db 4 billion annually (about 1 percent of GDP).

13.  To offset the tax reduction resulting from the implementation of the new customs tariff, the authorities will strengthen the taxation and customs administrations and intensify collection efforts in the course of 2000 through a variety of actions. First, by end-March 2000, they will draw up a list of all tax and duty exemptions. The authorities will subsequently eliminate all ad hoc tax and customs exemptions starting April 1, 2000, strictly monitor legal exemptions, and broaden the taxable base. Second, starting by end-March 2000, the government will introduce, with technical assistance from Portugal, a system to monitor and verify values declared at customs, including a periodic updating of their file of import unit values. Third, the authorities will strengthen the tax audit and control offices in both the finance directorate and the customs administration. Fourth, the authorities will implement an action plan to restructure and strengthen the customs service. Fifth, the authorities will make fully operational the SYDONIA software system for assessing the basis of customs duties and calculating the amount of duty due. Sixth, beginning in March 2000, full power will be given to the customs service and the Ministry of Finance to evaluate the tax bases at customs, assess and collect duties and taxes, and apply penalties where appropriate, through the adoption of an amendment (to Article 180 of the Law of 1944) designed to eliminate the requirement that government departments settle tax disputes through the court system. Seventh, the authorities will make sure that all tax and customs laws and regulations are enforced. Eighth, the authorities will monitor very strictly transfers by public enterprises and government agencies to the budget, in particular by the Food Aid Management Commission (GGA). Implementation of all these measures should enable the government to increase its revenues from 19.3 percent of GDP in 1999 to 20.4 percent of GDP in 2000.

14.  Control over government expenditure, other than interest on the public debt, will be pursued primarily through restraint of the wage bill, which currently absorbs 7.5 percent of GDP. Accordingly, the government will implement a program of administrative reform and reduction in the number of civil servants in the first half of 2000. Taking account of the inflation objective, the size of the civil service, and expected revenue collections, the government will postpone application of the December 1997 law on the civil service regulations and the special provisions governing employees (other than military personnel, security forces, and education and health services), which have proved difficult to implement and very costly. The government also repealed the decree on preliminary reforms and early retirements. It will implement the organizational and staffing plans for all government ministries, starting in March 2000. It will also prepare a report identifying redundant civil servants, and providing the assessment of the civil service downsizing resulting from the implementation of the organizational and staffing plans by end-April 2000, and create a single data processing system for managing the civil service and payroll by end-June 2000. The government will complete by December 2000 a study of the civil service wage scale, with a view to rationalizing the salary scale and introducing a compensation and promotion system based on performance evaluation. Severance pay to employees discharged from the civil service will be equal to the base salary as of December 1999, multiplied by the number of years of seniority in the civil service, as specified by law. An allocation of Db 1 billion has been included in the 2000 budget to cover severance pay for employees laid off under the civil service downsizing program.

15.   To reduce imbalances in civil service salaries, and taking account of social pressures, the authorities decided to grant a selective salary increase averaging Db 80,000 per month, effective January 1, 2000, for 1,100 government employees who had not benefited from the December 1997 law on the civil service regulations and the special provisions governing civil servants. This adjustment will add up to a 7.4 percent increase in the wage bill, approximately the average projected inflation rate for 2000. Implementation of this wage policy will reduce the ratio of government payroll expenditure to GDP from 7.5 percent in 1999 to 7.3 percent in 2000.

16.  Other current expenditure on goods and services should fall from 3.8 percent of GDP in 1999 to 2.9 percent of GDP in 2000, while giving priority to boosting nonwage expenditure for education, health, agriculture, and infrastructure maintenance. Transfer costs will increase from 1.8 percent of GDP in 1999 to 2 percent in 2000, with a view to better covering the needs for scholarships and hospital costs abroad, as well as contributions to multilateral organizations. The government will design its sectoral development strategies with technical assistance from the World Bank and the United Nations Development Program (UNDP). Having completed its work on the agricultural policy (October 1999), it will develop policies for tourism (June 2000), education (June 2000), health (September 2000), and infrastructure maintenance (September 2000). The government has also expanded its programming of public investments by extending the public investment program (PIP) planning horizon to cover a three-year period. Before end-September 2000, it will consult with the IMF and the World Bank regarding the budgetary allocation ceiling and makeup of the PIP for 2001-03, which will give priority to human resource development and infrastructure maintenance. Adoption of the 2001–03 PIP is a structural benchmark of the program for end-September 2000. As part of its general strategy, the government will organize quarterly meetings on the monitoring of public investments, with the participation of the main donors in São Tomé and Príncipe; the first of these meetings is scheduled to take place before end-April 2000. These meetings will contribute to improving the selection of PIP projects and oversight of their implementation; the entire government investment program will be covered, including investment financed by special external grant, counterpart funds, and extraordinary deposits of the proceeds of oil exploration concessions. No project will be executed unless recorded in the budget and the PIP.

17.  The government will raise the budgetary allocation for health and education, and devote adequate resources to poverty reduction, for which a strategy and action plan will be adopted in 2001. Total outlays for education, which were estimated at 14  percent of total primary expenditure in 1999 (7.9 percent of GDP), will be raised to 15.9 percent in 2000 (8.5 percent of GDP). In the health sector, expenditure will stabilize at 15 percent of primary expenditure (9 percent of GDP).

18.  On the basis of its study of the finance directorate in March 1999, the government took steps to improve operations and prepare a staff training and technical assistance program. By end-June 2000, it will make operational the three autonomous administrations responsible, respectively, for domestic taxation, preparation and supervision of budget execution, and management of the treasury and public accounting. All government revenues (including proceeds from oil concessions), as well as external financing (including funds drawn on special grants) and central government deposits have been centralized at the treasury as of January 1, 2000.

19.  In 2000, the central bank will pursue a prudent monetary policy aimed at reducing inflation and increasing gross international reserves to US$17 million, equivalent to 4½ months of imports. Continued improvement in the fiscal situation should make it possible to reduce net bank lending to the government by 27 percent of the end-December 1999 money stock. Credit to the private sector is expected to increase by 4 percent of the end-December 1999 stock of money, reflecting the expected diversification of the economy and the improving rate of financial intermediation. On the whole, however, net domestic assets should decline by 23 percent of the end-December 1999 money stock, given the scheduled strong increase in the government's credit position with the banking system. In 2000, the money supply should increase by 5 percent, consistent with the inflation target.

20.  Having already fully liberalized lending and borrowing rates, the monetary authorities will maintain the central bank's reference interest rate above the inflation rate recorded during the program period, while paying particular attention to reducing the spread between the reference rate and the borrowing rates applied by commercial banks. In this context, the government will implement structural measures aimed at easing proceedings regarding contract enforcement and loan settlements during the second half of 2000, such as a simplification of real property and land ownership, and reforms in the judiciary. The monetary authorities will also create a money market in July 2000, introducing central bank bills that banks and other economic agents will be able to acquire and sell at freely negotiated interest rates. In 2001, the central bank will review the required reserve ratio, currently set at 22 percent, and adjust it in light of observed money market performance.

21.  The central bank will continue strengthening its bank supervision activities, so as to ensure that banks continue to adhere to required prudential ratios, and the government will intensify its efforts to recover loans owed to the national savings and loan institution (CNPC), which is being liquidated. In this connection, debtors who are behind in their payments on loans advanced by the CNPC will be identified publicly, denied access to bank credit,¹ and subject to legal action. The central bank has also decided to strengthen its inspection department and, with the assistance of the IMF, will create a genuine internal audit unit to oversee its operations. Furthermore, the bank will have its accounts verified annually by external auditors.

22.  In the exchange rate area, the authorities will ensure that their flexible, market-based exchange rate system will work effectively. Accordingly, the central bank will not attempt to influence the rate offered by commercial banks and will limit its intervention on the foreign exchange markets to achieving its international reserves target. The government is aware that fiscal discipline and compliance with the targets of net bank credit to the government are prerequisites for a successful monetary and exchange rate policy. Following this policy would help consolidate the gains made in 1998–99 and reduce the spread between the official rate and the parallel market rate below 1 percent.

23.  The authorities adopted new foreign exchange legislation in August 1999 liberalizing São Tomé and Príncipe's current external transactions. Under the circumstances, the government will take all steps required to accept the obligations of Article VIII, Sections 2, 3, and 4 of the Fund's Articles of Agreement as soon as possible. In addition, the authorities will encourage the use of the dobra in transactions among major companies by asking public and semi-public enterprises, such as EMAE, the petroleum distribution company (ENCO), the telecommunications company (CST), the airport management agency (ENASA), and the harbor management agency (ENAPORT), to do all their billing in dobras, with the exception of export transactions with foreign airlines and maritime companies, by end-June 2000.

24.  In consultation with the World Bank, the government will review the structure of water and electricity production and distribution costs, with a view to introducing cost-cutting measures and adopting by end-September 2000 a new mechanism by which adjustments in water and electricity rates reflect changes in production and distribution costs. The government will also conduct an in-depth analysis of the telecommunications sector, with a view to opening it up to competition in due course. In the area of external trade, following the elimination of nontariff barriers in 1999, the authorities have implemented a comprehensive reform of the customs tariff and eliminated export taxes under the 2000 budget (paragraph 12), with technical assistance from the World Bank and France. By end-June 2000, the government will also design an action plan, with technical assistance from the World Bank, to increase private sector business and investment incentives, with an emphasis on strengthening the legal, regulatory, and judicial systems.

25.  With respect to public enterprises, the government will implement its new reform and privatization program in 2000. By end-June 2000, the government will adopt a financial restructuring plan for EMAE, introducing an appropriate accounting and budget system and strengthening revenue collection procedures, together with a medium-term investment strategy and program for the company. In the same time frame, the government will complete a study of the possible alternatives for the future of the company (privatization, awarding a concession arrangement for managing the utility to a private strategic partner, etc.). Lastly, the authorities will have the accounts of the public enterprises (EMAE, ENCO, ENAPORT, and ENASA) certified each year by external auditors. In the agricultural sector, the government has already turned all its large plantations over to private operators under long-term operating leases and redistributed about 40,000 hectares of arable land to 6,000 families engaged in small and medium-sized farming operations. With assistance from the World Bank, by end-June 2000, the government will adopt a privatization program of large agricultural estates, as well as a law simplifying real property and land ownership, thereby increasing incentives to produce and invest.

26.  With respect to prospects for oil exploration, the government will continue to ensure transparency in the conduct of future operations and formalize procedures and operations of the administrative unit responsible for the preparation of its policy in the oil sector, with assistance from the World Bank and Norway. This unit, which is placed in the Office of the Prime Minister, will report on its activities periodically to the Economic Council (and its technical oversight committee), which will henceforth be responsible for coordinating government policy in the oil sector, including conducting negotiations with oil companies. In September 1999, the authorities began discussions with the U.S. company Environment Remediation Holdings Company (ERHC) to review progress made in implementing the memorandum of understanding signed between São Tomé and Príncipe and ERHC in May 1997, and to reassess the role of the U.S. company and the Société des Pétroles de São Tomé et Principe (STPETRO), a joint venture created in 1998 by the government (51 percent) and ERHC (49 percent). In 2000, the government will continue negotiations with ExxonMobil on a production-sharing contract. It will also prepare and submit to parliament a draft law governing petroleum exploration and production in São Tomé and Príncipe by end-June 2000, and adopt the implementing decrees and orders for the new legislation by end-December 2000. The government will consult the Fund and the World Bank with respect to negotiations for oil concession or production-sharing contracts and the drafting of oil legislation.

27.  Achievement of sustainable growth in per capita income will help reduce poverty in São Tomé and Príncipe. Specifically, the distribution of arable land to small-scale farmers and simplification of the regulations governing real property and ownership, together with the elimination of taxes on agricultural exports, should significantly improve the standard of living of rural populations. By contrast, salaried workers in cities will be hurt by the program's structural adjustment measures, including the reform of the civil service and the program for reforming public enterprises. With the help of donors and lenders, and in consultation with civil society, the government will by end-2001 prepare a poverty reduction strategy, to be implemented during the program period. The strategy should include precisely targeted measures designed to further boost school enrollment and literacy rates, improve primary health care, increase women's participation in development activities, slow urban drift, and bring demographic growth under control. The government has already expressed its intention to create or repair 60 classrooms per year for primary schools, especially in rural areas, and 30 classrooms per year for secondary schools. It will recruit and train 90 new teachers yearly and retrain 300 teachers in primary schools; it will also train 30 teachers in secondary schools. In December 2000, the government will establish a committee to oversee its poverty reduction plan, which will call for sufficient budget appropriations for the education and health sectors. In order to ensure effective follow-up of progress made in reaching the targets for social welfare and poverty reduction, a set of indicators will be developed with the help of the AfDB and the UNDP. The authorities will transmit annual figures for these indicators to the Fund and the World Bank.

28.  The government is determined to maintain transparency and good governance throughout this crucial phase, in which the prospects for oil development are taking shape. It will combat and take strong action against any acts of fraud and corruption that come to its attention. In the case of the fraudulent transfers of foreign currency assets uncovered in 1994, the central bank has prepared a detailed report enabling it to establish responsibility and assess the amount of fraudulent transfers. The agents involved in the case have been removed from their positions, and legal action has been taken against them. In addition, the central bank has ordered an independent external audit of its correspondent accounts, the report of which will be completed and published by end-March 2000 as a prior action of the program. As for the attempted fraud in treasury bills uncovered by the authorities in February 1999, the government has dismissed the officials involved and taken legal action against them. It has recently prepared a report showing that the matter is under judicial review and awaiting trial. The first program review will include, inter alia, an assessment of the handling of these two cases of fraud.

29.  Other new measures have also been adopted to strengthen good governance and transparency. For example, the requirement that the central bank and public enterprises have their accounts audited by independent, external auditors, together with the strengthening of internal auditing and inspection of departments of the central bank, will contribute significantly to greater transparency in the management of public affairs. Other measures designed to prevent and combat fraud and corruption more effectively include simplifying both customs tariffs and domestic indirect taxation, and eliminating ad hoc exemptions, along with strengthening the internal audit departments of the finance directorate and customs.

30.  The government will intensify its efforts to improve the quality and timeliness of its statistical data and will supply to the IMF the necessary basic data for Article IV consultations, while strengthening program monitoring and control. With the technical and financial support of the AfDB, the authorities will conduct a households statistical survey, develop a social database in the National Institute of Statistics, and prepare a series of social welfare and poverty indicators to be monitored as part of its poverty reduction policy. In the area of monetary statistics, the authorities will accelerate the distribution of data and make sure that the monthly monetary statement is available six weeks after the end of the month concerned.

31.  In the external sector, the government will pursue its objective of reducing the balance of payments current account deficit by applying the macroeconomic and structural adjustment policies described in this memorandum without imposing restrictions on current transactions.

32.  Overall, the balance of payments current account deficit (excluding official transfers) is projected at US$31 million in 2000, or 62 percent of GDP (compared with 54 percent in 1998 and 57 percent in 1999). Taking into account amortization of the external public debt (US$3.5 million), the amount of external payment arrears (US$57.2 million) and the target for improving the central bank's international reserves position (US$5.8 million), the gross external financing requirement will total US$97.5 million. This financing requirement will be partially covered by grants and concessional project loans (US$19.2 million), food aid (US$1.8 million), proceeds from oil exploration concessions (US$5 million), fishing royalties (US$0.7 million), and flows of private capital, including direct investments in the oil sector (US$6.8 million). In addition, the government intends to use the first-year disbursements for the arrangement it has requested under the PRGF (US$2.6 million) to cover partially this financing need, and to request a rescheduling of its external debt service from Paris Club creditors (US$59.1 million) on Naples terms, with a 67 percent reduction in the net present value of its debt, as soon as the Fund approves the arrangement requested under the PRGF. It will seek comparable treatment from other bilateral creditors. A financing gap of US$2.4 million will remain. São Tomé and Príncipe will seek concessional nonproject financing from the World Bank, AfDB, and other multilateral and bilateral donors to close the gap. In this regard, the government will organize a donors' meeting in São Tomé by end-June 2000 with assistance from the UNDP. It will provide financing assurances for the first year of the program on the occasion of the first review.

33.  With a net present value of 14 times the exports of goods and services in 1999, São Tomé and Príncipe's external public debt is excessively large and will remain unsustainable for many years to come. This being the case, the government will continue to seek grants and loans only on a very concessional terms in order to cover its financing needs. In this connection, it will neither contract nor guarantee any new external nonconcessional borrowing (with a grant element of less than 50 percent) with a maturity exceeding one year. Furthermore, the government will neither contract nor guarantee external borrowing with an initial maturity of less than one year. With a view to normalizing its relations with its major external creditors and donors, São Tomé and Príncipe settled all of its nonreschedulable external payment arrears in 1999, and will remain current on its nonreschedulable external debt-service obligations during the program period. A continuous performance criterion will apply to the nonaccumulation of new nonreschedulable external payments arrears.

34.  To monitor progress in the implementation of the program, the government has set quantitative performance criteria, benchmarks, and indicators for end-March, end-June, end-September, and end-December 2000 (Table 1), as well as structural performance criteria and benchmarks (Table 2). The government will also provide the Fund with statistical data and other information that Fund staff may deem necessary or may request for the purposes of monitoring the program. During the program period, the government will neither introduce new restrictions, nor expand existing restrictions, on payments and transfers in connection with current international transactions without the approval of the Fund. It will neither introduce multiple exchange rate practices, nor enter into any bilateral payments agreement incompatible with Article VIII of the Fund's Articles of Agreement. Lastly, the government will not introduce or expand restrictions on imports for balance of payments reasons.

35.  The government will conduct two reviews of the program with the Fund in order to assess progress made during the first year, the first of these reviews by end-September 2000 and the second by end-March 2001.

36.  The Economic Council, chaired by the Prime Minister and including the Minister of Planning, Finance and Cooperation, the Minister of Economy, the Minister of Infrastructures, Natural Resources, and Environment, and the Governor of the Central Bank, will coordinate the program. The council will continue to be supported by a technical committee responsible for monitoring program implementation. Each week, the technical committee will report on program implementation to the Economic Council, and the Minister of Planning, Finance and Cooperation will report to the Council of Ministers. The Economic Council and its technical committee will also oversee the preparation and implementation of the government's policy for the oil sector, including conducting negotiations with oil companies. In this connection, the head of the administrative unit for oil policy will participate, as needed, in the meetings of the technical committee responsible for program monitoring.