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The following item is a Letter of Intent of the government of São Tomé and Príncipe, which describes the policies that São Tomé and Príncipe intends to implement in the context of its request for financial support from the IMF. The document, which is the property of São Tomé and Príncipe, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

 

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São Tomé
December 5, 2000

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

Dear Mr. Köhler:

1. To accelerate real GDP growth and reduce poverty, the authorities of São Tomé and Príncipe have undertaken a program of economic reforms for 2000-02, in support of which the Fund approved on April 28, 2000 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). Despite an unforeseen terms of trade deterioration, substantial progress was made in the implementation of the program during the first ten months of 2000. The government continued to strengthen its monetary and fiscal management and accelerated the implementation of a number of structural measures, including in the area of civil service reform and the drafting of oil legislation. All performance criteria and benchmarks at end-June 2000 were observed, with the exception of the quantitative performance criterion on the primary fiscal surplus, the structural performance criterion on the privatization of large plantations and land ownership (which was implemented with a three-month delay), and the quantitative benchmark on government revenue.

2. This letter, which updates and supplements the memorandum of economic and financial policies dated March 24, 2000, takes stock of program implementation during the first half of 2000 and describes the corrective measures adopted during the third quarter, as well as the specific objectives and measures envisaged for end-2000 and the first half of 2001. In support of the corrective measures that have been implemented and the objectives and measures envisaged, the government requests a waiver for the nonobservance of the two performance criteria. In view of São Tomé and Príncipe's very heavy external public debt burden, the government would also like to receive assistance as soon as possible from the Fund, the World Bank, and the international financial community under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative).

Program implementation during the first three quarters of 2000

3. Program implementation during the first ten months of 2000 was adversely affected by a 1.5 percent deterioration in the terms of trade, compared with an initial projection of an improvement of 11 percent. This terms of trade shock reflected continued weakening in the world prices for cocoa, the country's main export crop, which are 10 percent lower than program projections, and continued increases in the import prices for petroleum products, which are 30 percent higher than projected. Nevertheless, the satisfactory results achieved under the staff-monitored program during 1998-99 were generally confirmed during the first half of 2000. Economic activity continued to recover, owing to a strong pickup in food crop production, construction, and tourism, and real GDP growth is still expected to reach 3 percent in 2000, in line with initial program projections. However, the surge in petroleum prices led to higher-than-programmed inflation—11.5 percent at end-October, on a 12-month basis, compared with 13 percent at end-December 1999. It is now expected that consumer price inflation will decline to 9 percent at end-December 2000 but will remain above the initial program objective of 5 percent. The dobra also depreciated by 17 percent against the U.S. dollar and by 3 percent against the euro during the first ten months of the year, and the external current account deficit (including official transfers) could narrow slightly to 25 percent of GDP in 2000, as initially projected, despite the postponement of petroleum exploration-related investments.

4. In the fiscal area, the nonobservance of the performance criterion on the primary budget surplus stemmed from tax and customs revenue shortfalls, which were themselves due to two reasons: (1) the government's delays in adjusting petroleum retail prices led the petroleum product distribution company (ENCO) to accumulate tax arrears in an amount greater than Db 5 billion on import duties and consumption taxes; and (2) the authorities did not eliminate ad hoc customs exemptions, as envisaged in April 2000, to offset the revenue shortfalls resulting from the implementation of the new customs tariff and the elimination of export taxes.

5. In June 2000, to correct the fiscal slippage registered in the first half of the year, the government (1) eliminated all ad hoc tax and customs exemptions and tightened controls over legal exemptions; (2) introduced, with assistance from customs authorities in partner countries, a system to monitor and control values declared at customs, including a periodic updating of the file of import unit values; and (3) raised petroleum product retail prices to reflect world prices and distribution costs. The government also continued to strictly monitor expenditure commitments, including the wage bill, and centralized all government bank accounts at the treasury. The implementation of these measures enabled ENCO to pay all its tax arrears during July-October, and the quantitative benchmark on total government revenue for end-September 2000 was almost observed. The primary budget surplus also rose to Db 4.4 billion at end-September (compared with a program benchmark of Db 7.1 billion) and Db 4.7 billion at end-October 2000, in spite of spending overruns necessitated by (1) protracted maritime border negotiations with Nigeria, (2) higher costs, explained by price increases, in the government consumption of petroleum products, water, and electricity, and (3) a larger wage bill caused by delays in the implementation of the civil service reform and the downsizing program.

6. Monetary developments during the first nine months of 2000 were characterized by a 14.5 percent expansion in the stock of money and a 5.3 percent increase in credit to the private sector. The central bank maintained the reserve requirement ratio at 22 percent and its reference interest rate at 17 percent, and commercial banks reduced their deposit and lending rates by 5 percentage points to about 19 percent and 33 percent, respectively, at end-September 2000. Net bank credit to the government increased by about 11 percent of beginning-of-year broad money, reflecting the nonmobilization of the oil concession rights projected under the program. Adjusted for this shortfall, the performance criterion at end-June and the benchmark at end-September on net bank credit to the government were observed. The performance criteria and benchmarks on the net domestic assets of the central bank and the net international reserves of the central bank were also observed.

Macroeconomic framework for the last quarter of 2000 and for 2001

7. To achieve the program objectives for end-2000 and during 2001, and especially to contain inflation, the government will pursue prudent fiscal, monetary, and exchange rate policies. It will also implement a range of structural reforms.

8. The fiscal program was also slightly modified to reflect the external environment, the recent Paris Club rescheduling, possible interim assistance under the enhanced HIPC Initiative, and the fiscal impact of maritime border negotiations with Nigeria. The objectives are to narrow the overall fiscal deficit (on a commitment basis and including grants) from 26 percent of GDP in 1999 to 18.2 percent of GDP in 2000, and to 13.0 percent of GDP in 2001; and to increase the primary budget surplus (excluding foreign-financed investments) from 1.3 percent of GDP in 1999 to 2.1 percent of GDP in 2000, and to 2.7 percent of GDP in 2001, excluding the enhanced HIPC Initiative-related spending plan. Including this spending plan, which has been prepared in consultation with Fund and World Bank staffs, the primary budget surplus should be 0.8 percent of GDP in 2001. Before end-December 2000, the government will submit to parliament a draft budget for 2001 that will conform with fiscal data for 2001 indicated in paragraphs 8 through 12. The budget will be based on a continued broadening of the tax base and a containment of spending. All external payments arrears were settled in May 2000 with the Paris Club rescheduling; domestic payments arrears were also cleared at the same time. The government will not accumulate any new external or domestic payments arrears during the program period.

9. Government revenue (excluding grants), given the higher import prices of petroleum products and the recent nominal depreciation of the dobra, is expected to increase by 19 percent in 2000 (to Db 77 billion, or 20.8 percent of GDP), compared with an initially projected increase of 16.5 percent (to Db 75 billion, or 20.4 percent of GDP). For 2001, revenue is projected to increase by 15.6 percent (to 88.8 Db billion, or 21.7 percent of GDP). The authorities are now using the SYDONIA computerized system to determine the base and calculate the amount of customs duties. They will continue to strengthen the tax inspection and audit units of the finance directorate and the customs administration, and to apply the automatic mechanism by which adjustments of petroleum product retail prices reflect import prices and distribution costs, which was agreed with ENCO in 1997. By end-January 2001, the authorities will complete a study on streamlining the domestic indirect taxation system, with a view to simplifying the general sales tax and to broadening its base to cover domestic goods and services (such as hotels, restaurants, and maintenance and repair services) by end-March 2001.

10. In the expenditure area, primary outlays during 2000 are expected to be higher than projected because of overruns on spending on goods and services, owing to maritime border negotiations with Nigeria (which cost US$300,000, or Db 2.5 billion as at end-October), as well as higher energy costs, and a larger wage bill. Primary expenditure would rise to 18.7 percent of GDP in 2000 (compared with an initial projection of 18.1 percent of GDP), and to 21 percent of GDP in 2001.

11. The wage bill will expand to 7.8 percent of GDP in 2000, compared with a limit of 7.3 percent set under the program. The government prepared a report identifying redundant civil servants in April 2000, as planned, and submitted to the National Assembly in October 2000 a draft law governing severance conditions in the civil service. It will implement the organizational and staffing plans for all ministries by end-December 2000. The reduction of the size of the civil service expected from the implementation of the administrative reform program is estimated at about 500 employees, and the severance costs associated with the civil service downsizing at Db 8 billion (US$1 million). These severance costs, for which financing is sought under the European Union structural adjustment facility, have been included in the budget for 2001. By end-December 2000, the single computerized system for civil service management and payroll will be made operational, and the study on the civil service salary scale (aimed at streamlining the wage scale and introducing a compensation and promotion system based on performance evaluation) completed. Under social pressure, including in schools and health centers, the government has agreed to grant a general salary increase starting January 1, 2001, as well as monthly transportation and risk allowances to the 2,500 education and health sector employees. However, given the inflation and budget deficit objectives, the size of these adjustments will be limited, with a view to containing the increase in the wage bill at 6.6 percent in 2001. The implementation of this wage policy will help reduce the wage bill ratio to 7.5 percent of GDP. The second Poverty Reduction and Growth Facility (PRGF)-supported program review will, inter alia, follow up on progress made in the area of civil service reform.

12. The government will aim at increasing spending on education to 15.3 percent of primary expenditure in 2000 (8.5 percent of GDP) and 17.1 percent of primary expenditure in 2001 (9.3 percent of GDP); and spending on health care to 16.2 percent of primary expenditure in 2000 (9 percent of GDP) and 17.3 percent of primary expenditure in 2001 (9.5 percent of GDP). The government has prepared sectoral development strategies for agriculture (October 1999), health (June 2000), and education (June 2000) with technical assistance from the World Bank and the United Nations Development Program (UNDP). It will finalize the strategies for infrastructure maintenance by end-December 2000 and for tourism in June 2001. The government will consult with the Fund and the World Bank by end-February 2001 regarding the overall size and the content of its three-year public investment program (PIP) for 2001-03. This program will give priority to human resource development and infrastructure maintenance. The authorities will also consult with World Bank staff, in the context of a public expenditure review to be completed by end-September 2001, that will, inter alia, cost the health and education sector strategies. In general, the government will continue to hold quarterly meetings on the monitoring of public investments with the participation of the main donors in São Tomé and Príncipe, in order to improve the selection and execution of PIP projects. It will also carry out a detailed study on the execution procedures for public investment expenditure by end-March 2001 and, with donor assistance, conduct an audit through an external independent firm on all government procurement contracts exceeding US$500,000. The audit and study should help improve the procurement system and procedures, develop a mechanism to control and monitor the execution of foreign-financed investment projects, and centralize all project accounts under the financial control of the treasury. The publication of the audit report constitutes a structural benchmark for end-March 2001.

13. The central bank will pursue a prudent monetary policy aimed at lowering the 12-month inflation rate to 9 percent by December 2000 and 5 percent by December 2001. The resumption of the disbursement of nonproject external assistance during the fourth quarter of 2000, the provision of further debt relief, including possible enhanced HIPC Initiative assistance (starting in 2001), and continued improvement in the fiscal management should make it possible to reduce net bank credit to the government by 19.5 percent of the beginning-of-year money supply during 2000 and by a further 12.9 percent during 2001. Credit to the private sector would increase by 8 percent, or 1 percentage point less than the inflation rate, and by 12 percent in 2001. The money supply should increase by 16.8 percent in 2000 and by 10.7 percent in 2001 (in line with the nominal GDP growth rate). The central bank's gross international reserves would increase to US$15.4 million (4.2 months of imports) by end-2000, and to US$19.7 million (4.8 months of imports) by end-2001.

14. The monetary authorities will keep the central bank's reference interest rate above the observed inflation rate during the program period. The government will adopt by end-January 2001 a decree-law authorizing the central bank to issue central bank bills, which banks and other economic agents will be able to acquire and sell at freely negotiated interest rates, and the authorities will organize a domestic money market beginning in April 2001.

15. The central bank will continue to strengthen bank supervision, with a view to ensuring that banks continue to comply with prudential ratios. It has also decided to strengthen its inspection services and establish effective internal control over its operations, with technical assistance from the Fund. In August 2000, the central bank published a certification of its 1999 accounts by an independent, internationally recognized audit firm. The central bank has decided to have its accounts certified every year by independent external auditors.

16. In the exchange rate area, the authorities will make every effort to ensure that their flexible, market-based exchange regime operates effectively, thereby helping to keep the spread between the official exchange rate and the parallel market rate very narrow. In these conditions, the central bank will not attempt to influence commercial bank rates and will limit its intervention in the exchange market strictly to achieving its international reserves target. During June-August 2000, it held public foreign exchange auctions, in which commercial banks declined to participate, and changed the formula for calculating the official exchange rate, which is now determined as the simple average of the rates of commercial banks, exchange bureaus, the parallel market, and foreign exchange sales. With this system, the spread between the official and parallel market rates continued to fluctuate between 1 percent and 2 percent during July-October 2000. The central bank has decided to conduct a study by end-February 2001 to assess the implementation of the foreign exchange sales system and to devise a foreign exchange auction mechanism that would include banks and exchange bureaus.

17. 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. Furthermore, in June 2000, to strengthen the use of the dobra, ENCO, the airport management company (ENASA), and the port management company (ENAPORT) began to issue all their invoices in dobras, with the exception of export transactions with foreign airlines and shipping companies. The water and electric company (EMAE) and the telecommunications company (CST) also introduced general billing in dobras in October 2000.

Structural and sectoral policies

18. In the area of structural measures, the government will adopt a mechanism under which adjustments in water and electricity rates reflect production and distribution costs by end-December 2000. It will also finalize a comprehensive analysis of the telecommunications sector, with assistance from the World Bank, by end-March 2001, with a view to improving the legal and regulatory framework and, eventually, opening the sector to competition. Regarding business promotion, the government will examine the report of the Foreign Investment Advisory Service (FIAS) of the World Bank Group with the goal of developing, by end-June 2001, an action plan to enhance the environment for private sector activity and investment, particularly by strengthening the legal, regulatory, and judicial systems. Having already liberalized trade and reduced the customs tariff, the government intends to conduct an in-depth revision of the investment code by end-March 2001, with a view to eliminating all preferential tax regimes, with the exception of the regime applicable to the free trade area.

19. With regard to public enterprises, the government will pursue the implementation of its new reform and privatization program during 2000-01. In May 2000, the government conducted a study of the various possible alternatives for the future of EMAE (restructuring, leasing, concession arrangement, or full privatization), with assistance from the World Bank. By end-December 2000, it will select one of the options analyzed in the study and will adopt a financial restructuring plan for the company, including the introduction of an appropriate accounting and budgeting system and the strengthening of revenue collection procedures, as well as the establishment of a medium-term investment program and strategy for the company. The government has already had external auditors certify the accounts of the public enterprises ENAPORT and ENASA for 1998 and 1999. In addition, by end-January 2001, it will begin consultations aimed at awarding the auditing of the accounts of EMAE (1995-98) and ENCO (1999) to independent external auditors. In the agricultural sector, the government adopted, in September 2000, a program to privatize large government-owned plantations1 and promulgated a decree-law simplifying real property and land ownership as a corrective measure for the completion of the program review. The new decree-law introduced a perpetual lease that guarantees permanent land-use rights that are transferable to heirs and assignees and will be recorded in the property register.

20. With respect to prospects for petroleum exploration, the government will continue to ensure transparency in the conduct of future operations. It prepared (and parliament adopted) a law on petroleum exploration and production in São Tomé and Príncipe in June 2000, and it will adopt the implementing decrees and administrative orders for this legislation by end-December 2000. The government will continue negotiations with Nigeria, with a view to promoting a joint development zone, and it will keep the Fund and World Bank informed on these negotiations.

21. With donor support, and in consultation with civil society, the government will prepare a progress report in April 2001 on the implementation of the interim poverty reduction strategy paper (interim PRSP), dated April 6, 2000, and a full poverty reduction strategy by end-2001. This strategy should include measures designed, inter alia, to further raise school enrollment and literacy rates, and improve primary health care. In December 2000, the government will establish an interministerial committee to monitor the implementation of its poverty reduction strategy and adopt an administrative budget for the preparation of the PRSP. The strategy calls for larger budget appropriations for the education and health sectors. To ensure effective monitoring of the progress made in reaching social and poverty reduction objectives, an African Development Bank (AfDB)-financed household survey will be launched in January 2001, a social database will be developed in the National Institute of Statistics, and a set of indicators will be prepared by end-June 2001, with support from the World Bank and the UNDP. The authorities will also organize consultations with local communities in December 2000 on the interim PRSP and boost the participatory process for the preparation, with civil society, of the poverty reduction strategy in early 2001.

22. Regarding governance, the government will combat and take strong action against any acts of fraud and corruption that come to its attention. In the case of the fraudulent transfer of foreign exchange assets uncovered in 1994, the official responsible for the operation was removed from his position, tried, and sentenced to prison. As for the treasury bond fraud attempt uncovered by the authorities in February 1999, the government has dismissed and taken legal action against the officials involved. In October 2000, it prepared a second progress report indicating that the matter is still under judicial investigation and awaiting trial. The second PRGF program review will, inter alia, follow up on the handling of this case of fraud. In the judiciary, the government aims at strengthening and modernizing courts and tribunals, training judges, and preparing new legislation and codes in the various areas of criminal, civil, and business law during 2000-02, with assistance from Portugal. In due course, it will make operational the Auditor General's Office and establish an arbitration tribunal for business disputes.

23. The government will intensify efforts to improve the quality and timeliness of its statistical data, provide the Fund with the basic data required for Article IV consultations, and strengthen program monitoring. As indicated above, it will conduct a statistical household survey and prepare a series of social welfare and poverty indicators to be monitored in the context of its poverty reduction strategy. The authorities will continue to ensure that monthly monetary survey data are available within six weeks after the end of the month concerned.

External sector, debt sustainability, and financing assurances

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

25. Overall, the external current account deficit (excluding official transfers) is projected to narrow to US$22.9 million in 2000, or 49 percent of GDP (from 58 percent of GDP in 1999). Taking into account the amortization payments due on external public debt (US$3.6 million), the amount of external payment arrears (US$54.8 million) planned to be cleared, and the target for reserve accumulation (US$4.5 million), the gross external financing requirement would amount to US$85.8 million in 2000. This financing requirement will be fully covered by project-related grants and concessional loans (US$16.7 million), food aid and other grants (US$2.6 million), private capital flows (US$3.7 million), IMF disbursements under the PRGF arrangement (US$2.6 million), the first tranche of the World Bank's public resource management credit (US$3 million), and the rescheduling of debt service (US$57.1 million). In May 2000, the authorities obtained a flow rescheduling from Paris Club creditors on Naples terms, with a 67 percent reduction in the net present value (NPV). The government also secured the financing of its PIP for 2000-02 on the occasion of the donors' meeting organized in Geneva in October 2000, with assistance from the UNDP.

26. Moreover, São Tomé and Príncipe has secured concessional nonproject financing from the AfDB, the European Union, and other multilateral and bilateral donors, and it hopes to reach its decision point in the context of the enhanced HIPC Initiative in the very near term and receive interim debt relief assistance. These additional resources will help cover fully the financing need for 2001. Finally, the authorities will request from Paris Club creditors a topping up to Cologne terms, with a 90 percent reduction in the NPV of debt service, when São Tomé and Príncipe reaches the decision point in the context of the enhanced HIPC Initiative. They will seek comparable treatment from other bilateral creditors. The resources freed through debt relief in the context of the enhanced HIPC Initiative will be used to finance poverty reduction expenditure, including in the priority education and health sectors. To ensure a transparent and effective tracking of these outlays, the government established, in November 2000, a special treasury account at the central bank for the channeling of the interim HIPC Initiative debt relief. In addition, a monitoring committee responsible for ensuring transparency, accountability, and efficiency in the use of these resources will be created by end-January 2001 with donors' participation.

27. To cover its financing needs, the government will continue to seek grants and loans on highly concessional terms only. In this connection, it will neither contract nor guarantee any new nonconcessional external debt (i.e., with a grant element of less than 50 percent, with the exception of Fund resources) with an original maturity of more than one year. Furthermore, the government will neither contract nor guarantee external debt, with an original maturity of up to and including one year. With a view to normalizing its relations with its major external creditors and donors, São Tomé and Príncipe settled all its external payments arrears in 2000 and will remain current on its debt-service obligations during the program period. The government recognizes that the nonaccumulation of new external payments arrears is a continuous performance criterion.

Program monitoring

28. The government believes that the policies described in this letter will enable it to attain the objectives of its program, but it is prepared to take any additional measures that may be necessary to this end. During the period of the 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 to the Fund arising from loans disbursed under the arrangement, the government will consult periodically with the Fund on São Tomé and Príncipe's economic and financial policies, at its own initiative or at the request of the Managing Director.

29. To monitor progress in program implementation, the government has established quantitative performance criteria, benchmarks, and indicators for end-December 2000 and end-March and end-June 2001 (Table 1), as well as structural performance criteria and benchmarks (Table 2). The government will also provide the Fund with the data and information listed in the attached Table 3, on a monthly basis, as well as any information that the Fund may request for the purpose of monitoring progress in the implementation of economic and financial policies and the measures required to achieve the program objectives. During the program period, the government will neither introduce nor expand restrictions on payments or 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 agreements incompatible with Article VIII of the Fund's Articles of Agreement. Lastly, the government will not introduce or expand import restrictions for balance of payments reasons.

30. In any event, the authorities of São Tomé and Príncipe will conduct the second review of the program with the Fund no later than end-March 2001. The third review of the program should also be completed by end-September 2001.

31. The Economic Council, chaired by the Prime Minister and including the Minister of Planning and Finance, the Minister of Economy, the Minister of Infrastructures, Natural Resources and Environment, the Minister of Foreign Affairs and Cooperation, and the Governor of the Central Bank, will continue to coordinate the program.

During the period of the arrangement, we will maintain the customary close policy dialogue with the Fund on the implementation of the program under the SBA.

Sincerely yours,

 
/s/
Adelino Castelo David
Minister of Planning and Finance

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  1. São Tomé and Príncipe: Quantitative Performance Criteria and Benchmarks for the 2000-01 Program
  2. São Tomé and Príncipe : Structural Performance Criteria and Benchmarks for the 2000-01 Program
  3. São Tomé and Príncipe: Data and Information To Be Provided Monthly for the Monitoring of the Program

1The large plantations and enterprises slated for privatization the by government are the following: (1) the coffee plantation (Monte Café); (2) three cocoa plantations (Santa Margarida, Uba Budo, and Sundi); and (3) the palm oil development company (EMOLVE).

 

 

SÃO TOMÉ AND PRÍNCIPE

Technical Memorandum of Understanding on the Three-Year Arrangement Under the Poverty Reduction and Growth Facility

December 5, 2000

1. The purpose of this memorandum is to define the performance criteria and quantitative and structural benchmarks adopted for monitoring the implementation of the program supported by the Fund in the context of the three-year arrangement under the Poverty Reduction and Growth Facility (PRGF). This memorandum also sets out the data-reporting requirements for monitoring the program. The program is outlined in the memorandum of economic and financial policies for 2000, attached to the letter dated March 24, 2000 from the Minister of Planning and Finance to the Managing Director of the International Monetary Fund, and updated in the letter of intent dated December 5, 2000, also signed by the Minister of Planning and Finance. The performance criteria and benchmarks for the program are listed in Tables 1 (quantitative criteria and benchmarks) and 2 (structural criteria and benchmarks) attached to the aforementioned letter of intent dated December 5, 2000. These definitions may need to be revisited during the program reviews.

A. Quantitative Performance Criteria and Benchmarks

2. The quantitative performance criteria are set for the following variables at end-December 2000 and end-June 2001:

(a) a floor on the primary fiscal balance, excluding foreign-financed investments (cumulative from January 1);

(b) a ceiling on changes in net bank credit to the government (cumulative from January 1);

(c) a ceiling on changes in the net domestic assets of the central bank (cumulative from January 1);

(d) a floor on changes in the net international reserves position of the central bank (cumulative from January 1, in millions of U.S. dollars);

(e) a ceiling on the government's stock of external payments arrears (in millions of U.S. dollars);

(f) a ceiling on contracting or guaranteeing by the central government of new nonconcessional debt (with a grant element of less than 50 percent) with original maturity of more than one year (cumulative from January 1, in millions of U.S. dollars); and

(g) a ceiling on changes in outstanding stock of external debt of the central government with original maturity of up to and including one year (cumulative from January 1, in millions of U.S. dollars).

3. The quantitative benchmarks are set for the variables listed in paragraph 2 above at end-March 2001.

4. The quantitative indicators are the following:

(a) a floor on total government revenue (cumulative from January 1); and

(b) a ceiling on government primary spending, excluding foreign-financed investment (cumulative from January 1, on a commitment basis).

5. The primary fiscal balance, excluding foreign-financed investment, is assessed in accordance with the statement prepared every month by the Directorate of Finance of the Ministry of Planning and Finance on government budget execution. In 1999, this balance was assessed at Db 4.327 billion, broken down as follows:

Primary balance, excluding foreign-financed investment 4.327
     Total revenue 64.605
     Less: Primary spending, excluding foreign-financed investment 60.279

6. Changes in net bank credit to the government are assessed according to the monetary survey prepared by the central bank. On June 30, 2000, outstanding net credit to the government was assessed at Db -31.762 billion, broken down as follows:

Net bank credit to the government -31.762
     Central bank advances, including use of IMF resources 45.791
     Commercial bank advances 0.000
     Less: Deposits in the BCSTP 73.936
     Less: Deposits in commercial banks -1.484
     Less: Counterpart funds in commercial banks -2.134

7. Changes in the net domestic assets of the central bank are assessed according to the monetary survey prepared by the central bank. On June 30, 2000, the net domestic assets of the central bank were assessed at Db -35.751 billion, broken down as follows:

Net domestic assets of the central bank -35.751
     Base money 44.375
          Currency in circulation 18.454
          Bank reserves 25.921
Less: Net external assets of the central bank -80.125

8. Changes in the net international reserves position of the central bank are assessed according to the monetary survey prepared by the central bank. Reserves assets are liquid, convertible-currency claims of the central bank on nonresidents that are readily available. Pledged or otherwise encumbered assets, including but not limited to assets used as collateral (or guarantee for third-party external liabilities), are excluded from reserves assets. Reserves liabilities are defined as the short-term liabilities of the central bank owed to nonresidents, including use of Fund resources. On June 30, 2000, the net international reserves of the central bank were assessed at US$9.8 million, broken down as follows:

Net international reserves of the central bank (in millions of U.S. dollars) 9.800
     Gross international reserves of the central bank (in billions of dobras) 90.413
     Less: external liabilities of the central bank (in billions of dobras) -10.288
     Divided by the official exchange rate of the dollar on June 30
     (Db 8,140, buying rate)

9. Under the program, a continuous performance criterion of nonaccumulation of new external payments arrears will apply. The government's external payments arrears are defined as all unpaid external public debt obligations, excluding arrears on external debt service pending the conclusion of debt-rescheduling agreements. Data on external arrears will be estimated according to the central bank's external debt unit. In 1999, the net reduction in external debt-service arrears was estimated at US$2.5 million, and, at end-December 1999, the stock of external debt arrears was estimated at US$54.8 million.

10. Performance criteria debt are: (1) the ceiling on contracting and guaranteeing by the central government of new nonconcessional external debt with original maturity of more than one year,1 and (2) the ceiling on the change in outstanding stock of external debt of the central government with original maturity of up to and including one year.2 The concessionality of loans is assessed according to the currency- specific commercial interest reference (CIRR), published by the Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD). For loans with a maturity of at least 15 years, the 10-year average CIRR should be used. For loans with shorter maturities, the 6-month average CIRR should be used. A loan is deemed to be on concessional terms if, on the initial date of disbursement, the ratio between the present value of the loan, calculated on the basis of the reference interest rate, and the nominal value of the loan is less than 50 percent (in other words, a grant element of at least 50 percent, with the exception of Fund resources). By way of example, the reference interest rates at end-1999 were as follows (6-month average):

(in percent)
U.S. dollar 7.04
Euro 5.47
SDR 5.59

The SDR-related CIRR will be used for currencies for which a specific CIRR is not available. Debt rescheduling and debt reorganization are excluded from the limits on nonconcessional borrowing. The government of São Tomé and Príncipe will consult with the Fund staff before assuming liabilities in circumstances where they are uncertain of whether the instrument in question falls under the performance criterion.

11. Total government revenue is assessed on a cash basis in the table of central government financial operations prepared by the Directorate of Finance. Total revenue for 1999 was estimated at Db 64.605 billion, broken down as follows:

Total revenue 64.605
     Tax revenue (Customs, Directorate of Finance) 54.055
     Nontax revenue 10.551

12. Primary spending (excluding interest payments) by the government, excluding foreign-financed investment, is assessed on a commitment basis. Primary spending, excluding foreign-financed investment for 1999, was estimated at Db 60.279 billion, broken down as follows:

Primary expenditure, excluding foreign-financed investment 0.279
     Current spending (excluding interest payments) 52.914
          Personnel expenditure 25.223
          Goods and services 12.722
          Transfers 6.141
          Staff redeployment 1.209
          Other 7.619
Capital spending financed by treasury 7.365

13. The automatic performance criteria adjustment mechanism mentioned in footnote 2 of Table 1 concerns (1) the ceiling on changes in net banking system credit to the government; (2) the ceiling on changes in net domestic assets of the central bank; and (3) the ceiling on changes in the net international reserves of the central bank. The differences will be assessed by comparison with the data on disbursements for (1) petroleum concessions, (2) program assistance, and (3) fishing royalties, which are shown in a memorandum item at the bottom of Table 1. The ceilings on the primary balance of government financial operations and for total government revenue will also be adjusted to reflect differences vis-à-vis the data for fishing royalties disbursements. If the difference is positive (disbursements greater than estimated), the ceilings will be revised downward and the floor revised upward. If the difference is negative (disbursements lower than estimated), the ceilings will be revised upward and the floor revised downward. Adjustments for negative differences will be limited to Db 20 billion for program assistance (excluding IMF financing and food aid), and to Db 2 billion for fishing royalties.

B. Structural Performance Criteria and Benchmarks

14. The structural performance criteria are the following:

(a) the submission to parliament of a draft budget law for 2001 in accordance with the program, as indicated in paragraph 8; and

(b) the adoption of a new mechanism under which adjustments in public water and electricity rates reflect changes in production and distribution costs, as indicated in paragraph 18 of the letter of intent.

15. The structural benchmarks are the following:

(a) the establishment of a single computerized system for civil service management and payroll, as specified in paragraph 11 of the letter of intent;

(b) the implementation of the mechanism by which adjustments in retail prices of petroleum products reflect import prices and distribution costs, as indicated in paragraph 9 of the letter of intent;

(c) the adoption of a three-year public investment program for 2001-03 in accordance with the program, as specified in paragraph 12 of the letter of intent;

(d) the submission of monthly monetary data within six weeks of the end of each month, as indicated in paragraph 23 of the letter of intent, and

(e) the publication of the report of an external independent firm on the audit of large contracts and bids for the period 1998-2000, as described in paragraph 12 of the letter of intent.

16. The new adjustment mechanism for public water and electricity rates will be brought into operation by decree. The price structure will cover all production and distribution costs as well as the margin of the water and electricity company (EMAE), based on the provisional accounts for 2001. The provisional accounts will balance consumption and resources, without recourse to government subsidies.

17. It is agreed that the unified civil service/payroll computer system will be in place by end-December 2000 and will be tested for three months before the current payroll management system is discontinued.

18. The three-year public investment program (PIP) for 2001-03 will be examined by the IMF and the World Bank. It is agreed that the PIP will be consistent with the macroeconomic framework of the program, and that the priorities will be education and health.

19. It is agreed that the retail prices of petroleum products will be adjusted upon the arrival of each shipment to reflect the import prices and the distribution costs of the petroleum product distribution company (ENCO), using the automatic adjustment mechanism adopted in 1997.

20. Monthly monetary data will be e-mailed to the African Department within six weeks after the end of each month.

C. Program Monitoring

21. Within two weeks after the end of each month, a monthly evaluation report will be prepared by the authorities on the monitoring of program indicators, benchmarks, and performance criteria. This report can be used to assess the progress of program execution.

22. The technical committee in charge of monitoring the program will regularly fax or e?mail the data necessary for program monitoring to the IMF African Department. These data are listed in Table 3 attached to the letter of intent dated December 5, 2000. Details of all new external borrowing, including government guarantees and indicating terms of loans and creditors, will also be provided to Fund staff on a monthly basis within four weeks of the end of each month.

23. The technical monitoring committee will also provide the IMF African Department with any information it deems necessary or that Fund staff may request for program monitoring purposes.


1This performance criterion applies not only to debt as defined in point 9 of the "Guidelines on Performance Criteria with Respect to Foreign Debt", adopted on August 24, 2000, but also to commitments contracted or guaranteed for which value has not been received.
2The term "debt" has the meaning set forth in point 9 of the "Guidelines on Performance Criteria with Respect to Foreign Debt", adopted on August 24, 2000.


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