Democratic Republic of São Tomé and Príncipe and the IMF
Country's Policy Intentions Documents
Mr. Horst Köhler
Dear Mr. Köhler:
1. The implementation of the program supported by the International Monetary Fund (IMF) under the Poverty Reduction and Growth Facility (PRGF) was marked, during the first three quarters of 2001, by important fiscal and structural slippages, as well as by the rise of governance problems regarding oil sector management. The quantitative performance criteria on the primary fiscal surplus for end-December 2000 and end-June 2001 were not observed, as well as several structural performance critera and benchmarks, notably those regarding the adoption of a rate-adjustment mechanism for water and electricity, the publication of an independent external audit report on the government's large contracts, and the establishment of a single computerized file for civil service and payroll management.
2. To reverse the observed slippages, resolve governance problems, and reestablish the credibility of economic policy implementation, the new government adopted a six-month staff-monitored program, which it is determined to implement in the context of a macroeconomic framework covering 2002. The attached memorandum of economic and financial policies (Attachment I) takes stock of program implementation during 2000 and the first three quarters of 2001; it also describes the prior corrective measures implemented during the fourth quarter of 2001, as well as those planned for the first half of 2002. The government will communicate to the Fund staff any information that the staff may request to monitor progress in the implementation of the economic and financial policies and measures required to achieve the objectives of the staff-monitored program. A technical memorandum of understanding describing the staff-monitored program's quantitative benchmarks is also attached (Attachment II).
3. The government is convinced that the policies described in the attached
memorandum of economic and financial policies will enable it to achieve
the objectives of its program, but it is ready to take any additional
measures that may be necessary toward this end. During the period of the
staff-monitored program, the authorities will consult the Managing Director
on any measures that may be appropriate for adoption, either at their
own initiative or at the request of the Managing Director. In any event,
the authorities of São Tomé and Príncipe will review
the staff-monitored program with the Fund staff no later than end-April
2002. On that occasion, they would like to begin discussions with the
Fund on a medium-term program that could be supported under the Poverty
Reduction and Growth Facility (PRGF).
January 9, 2002
1. The authorities of São Tomé and Príncipe embarked on a program of economic reforms for the period 2000-02, in support of which the International Monetary Fund (IMF), on April 28, 2000, approved a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) in a total amount equivalent to SDR 6.657 million (90 percent of quota). This program was also supported by bilateral and multilateral donors, and São Tomé and Príncipe reached its decision point under the enhanced Initiative for Heavily Indebted Poor Countries (enhanced HIPC Initiative) on December 20, 2000. However, program implementation during the first three quarters of 2001 was marked by important fiscal and structural slippages, as well as by the rise of new governance problems regarding oil sector management.
2. The new government of presidential initiative implemented several measures to reverse the observed slippages, and is determined to take several other actions in 2002 to consolidate the fiscal position, resolve governance problems, and reestablish the credibility of economic policy implementation.
II. Program Implementation During 2000
3. Economic activity continued to recover during 2000 and the first nine months of 2001, owing to an increase in food production, construction, and tourism; real GDP growth is estimated at 3 percent in 2000 and 4 percent in 2001, in line with initial program projections. Despite the sharp upsurge in the prices of petroleum products, inflation declined from the 12.6 percent recorded at end-December 1999 to 9.6 percent at end-December 2000 (on a year-on-year basis) and stabilized at this level during 2001. Also, the dobra depreciated against the U.S. dollar by 17 percent in 2000, and by 5 percent in 2001; the external current account deficit (including official transfers) reached 21 percent of GDP in 2000, compared with an initial projection of 25 percent of GDP, and may have narrowed further to 11 percent of GDP in 2001, reflecting the interim enhanced HIPC Initiative assistance and the signature bonus paid by the Norwegian company, Petroleum Geo-Services (PGS), for the oil exploration and production option agreement.
4. In the fiscal area, the nonobservance of the performance criteria and benchmarks on the primary budget surplus for end-December 2000, end-March, end-June, and end-September 2001 was explained by expenditure overruns, which were themselves attributed to (a) the lengthy negotiations with Nigeria on maritime border issues and the financing of sizable extrabudgetary expenditures, mainly for the commission in charge of petroleum issues; (b) higher costs for the consumption of petroleum products, water and electricity (owing to price increases); (c) an exceptional advance to the water and electricity utility (EMAE) to alleviate the financial difficulties it has encountered because of its failure to adjust tariffs to cover higher fuel costs; (d) a larger wage bill (because of delays in implementing the civil service staff reduction program); and (e) the financing of the presidential election.
5. In the petroleum sector, the government concluded negotiations with Nigeria on the implementation of a joint development zone in February 2001. At the same time, it also signed an agreement for seismic services and an option agreement for petroleum exploration and production with the company PGS. In March, the PGS paid a signature bonus of US$2 million, which allowed the government to finance the extrabudgetary expenditures mentioned in paragraph 4 above. Finally, in May 2001, the government signed a contract with a U.S.-Nigerian company (Environmental Remediation Holdings Company—ERHC) giving the company, inter alia, overriding royalties on petroleum produced in the joint development zone, as well as a percentage of signature bonuses and São Tomé and Príncipe's share of production. The new authorities acknowledge that this contract could divert the government's potential petroleum revenue, and that oil contract negotiations had lacked transparency, thus raising serious governance issues.
6. To correct the fiscal slippage registered in 2000 and the first three quarters of 2001, the government continued to strengthen the administration and collection of tax and customs revenue and to strictly control government expenditure commitments (including the wage bill) during the fourth quarter of 2001. In early December 2001, it requested assistance from the World Bank in the oil sector, including the launching of a cost-benefit analysis of the contract signed with the ERHC in May 2001, as well as a detailed study of the negotiation procedures for government contracts signed in 2001 in the oil sector. At end-December, the government adopted an automatic mechanism for the adjustment of water and electricity prices to production and distribution costs (which it intends to implement during the first quarter of 2002). It also adopted the terms of reference for the consultation of firms of international reputation that are interested in carrying out an external independent audit of three government contracts and tenders of over US$500,000. 1 In addition, the government implemented the civil service reform and retrenchment program, with a view to containing the wage bill, and it established the single computerized system of civil service and payroll management. It also prepared the terms of reference for two studies on, respectively, new civil service statutes and the introduction of a new wage scale. The government finally adopted new tax measures (see para. 11 below).
7. Monetary developments included increases in the money supply of 29 percent in 2000 and 20 percent in 2001, and a rise in credit to the private sector of 5 percent in 2000 and 6 percent in 2001. The central bank maintained required reserves at 22 percent and its reference interest rate at 17 percent, while the commercial banks in September 2000 reduced their deposit rates by 10 points to about 14 percent and their lending rates by 5 points to about 34 percent. With the easing of the inflation rate to 10 percent at end-December 2000, the central bank lowered its reference interest rate by 1.5 percentage points to 15.5 percent on February 5, 2001. Net bank credit to the government increased in 2000 by 10 percent of the beginning-of-the-year stock of money, largely reflecting the failure to mobilize the first tranche of the World Bank public resource management credit, which was not approved by end-December 2000 as expected. Despite the disbursement of this tranche and the payment of oil bonuses, net credit to the government rose again by 5 percent of the beginning-of-the-year stock of money in 2001, while the banking system's net foreign assests rose by 30 percent.
8. The financial situation of one of the two private banks (Banco Comercial do Equador--BCE) deteriorated considerably in 2001. The bank has not respected prudential and liquidity ratios since mid-1999, with growing liquidity problems, a concentration of its credit in a small number of enterprises, and an excessive level of credit linked to stockholders. At the beginning of May 2001, the central bank took over the administration of the BCE, but this intervention was suspended by a decision by the Supreme Court on May 17. Nevertheless, the BCE has since only opened its doors sporadically, as it is insolvent and can no longer carry out its clients' operations. On May 18, 2001, the central bank introduced bankruptcy proceedings against the BCE in court, and at the end of June the central bank suspended the BCE's banking license.
III. Six-Month Staff-Monitored Program and Macroeconomic Framework for 2002
9. The main macroeconomic objectives of the government in the context of the staff-monitored program and the framework of economic policies for 2002 are as follows: (a) to reduce the rate of inflation to 7 percent; and (b) to limit the external current account deficit (including official transfers) to 0.4 percent of GDP. The improvement in the current account balance reflects the continued mobilization of interim enhanced HIPC Initiative assistance. Real GDP growth is projected to be 5 percent in 2002. To reach these objectives and especially to further reduce inflation, the government will pursue prudent fiscal, monetary, and exchange policies. It will also implement a set of structural reforms.
A. Fiscal Policy
10. In the fiscal area, the objectives are to narrow the government's financial operations deficit (on a commitment basis and including grants) from 15 percent of GDP in 2001 to 5 percent of GDP in 2002, and to turn around the primary budget balance (excluding foreign- financed investment and expenditure financed by the resources freed by the enhanced HIPC-Initiative assistance) from a deficit of 3.4 percent of GDP in 2001 to a surplus of 1.7 percent of GDP in 2002. Including the expenditure program funded with resources from the enhanced HIPC Initiative, which will be prepared in consultation with IMF and World Bank staff by end-April 2002, the primary budget deficit should amount to 3.0 percent of GDP in 2002 (compared with a deficit of 7.4 percent of GDP in 2001). By end-April 2002, the government will submit to the National Assembly a draft budget for 2002 consistent with the objectives mentioned above and in line with the other fiscal data described in paras. 10-14. The budget is based on a continued broadening of the tax base and control over the growth of expenditure. All external payment arrears were settled in May 2000 with the Paris Club's rescheduling. Domestic payment arrears were also settled. The government will not accumulate any new domestic or external payment arrears during the period of the staff-monitored program.
11. Government revenue is projected to increase by 15 percent in 2002 (to Db 108 billion in 2002, or 22.5 percent of GDP). In line with the recommendations of a study on streamlining the domestic indirect taxation system, which was completed at end-December 2000, the authorities will simplify the general sales tax and extend it (at the single rate of 2 percent) to domestic goods and services (such as hotels, restaurants, telecommu-nications, water and electricity, and maintenance and repair services) starting at end-April 2002. In February 2001, the government initiated discussions with investors benefiting from legal exemptions, with a view to subjecting all imports to the 5 percent customs tariff. The government will continue to strengthen the tax inspection and audit departments of the tax directorate and the customs administration, and will apply the automatic adjustment mechanism to the retail prices of petroleum products, in order to reflect import prices and distribution costs.
12. Primary expenditure will be contained within 25 percent of GDP in 2002, compared with 30 percent of GDP in 2001. The wage bill will be capped at 8 percent of GDP in 2002 (compared with 8.5 percent of GDP in 2001), given the implementation of the civil service reform and retrenchment program at end-2001. The reduction in civil service staffing stemming from the implementation of the administrative reform program is estimated at about 320 employees. In addition, 158 employees were retrenched from EMAE in December 2001 as part of the restructuring of the utility company. The severance benefits to be paid in connection with the civil service downsizing program and EMAE's personnel retrenchment are estimated at Db 6.7 billion (or US$0.7 million). Out of these benefits, which are being financed under the European Union structural adjustment facility, Db 1.7 billion were paid at end-December 2001. The remainder will be paid during the first quarter of 2002.
13. The government granted an exceptional bonus equivalent to an extra month's salary to all civil servants in December 2001, as well as a general salary increase of 13.5 percent starting April 1, 2002. In light of the reduction in civil service staffing, these wage adjustments will limit wage bill growth to 8 percent in 2002, compared with growth in nominal GDP of 14 percent and an increase in government revenue of 15 percent. The studies on the civil service statutes and the salary scale will be completed by end-March 2002, and the government will introduce the new civil service statutes and the new uniform and simplified wage grid, as well as a compensation and promotion system based on performance appraisals, during the second half of 2002.
14. The government will ensure that spending on education is increased to 16 percent of primary budget expenditure in 2002 (9.6 percent of GDP), and that spending on health care is stabilized at 14 percent of primary expenditure (or 9.1 percent of GDP). The government prepared its sectoral development strategies for agriculture (October 1999) and health (June 2000) with assistance from donors. By end-March 2002, it will also finalize its sectoral strategies for education, infrastructure maintenance, and tourism, and adopt, in consultation with the World Bank, a three-year public investment program (PIP) for 2002-04 that will give priority to human resource development and the infrastructure maintenance sectors. The government will also consult with the World Bank, by end-March 2002, regarding a social development project and a public expenditure review that will evaluate the costs of sectoral strategies in education and health.
15. In general, the government will continue holding quarterly meetings on monitoring public investment, with the participation of the main donors in São Tomé and Príncipe, to improve the selection and monitoring of PIP projects. It will also conduct and publish a detailed study of public investment expenditure execution procedures by end-April 2002. It will publish by end-June 2002 the report on the external independent audit by an internationally recognized firm of three government contracts and tenders of over US$500,000 from the period 1998-2000, with a view to improving government procurement; it will prepare a mechanism to control and monitor the execution of foreign-financed investment projects; and it will place all project accounts under the central financial control of the treasury.
B. Monetary and Exchange Rate Policy
16. The central bank will pursue a prudent monetary policy aimed at reducing inflation to 7 percent by December 2002 (year-on-year basis). The resumption of disbursements of nonproject external assistance, the granting of additional debt relief, including interim assistance under the enhanced HIPC Initiative, and the primary budget surplus should make it possible to reduce net bank credit to the government by 50 percent of the beginning-of-year money stock during 2002. Credit to the private sector should increase by 20 percent and broad money by 12 percent (less than the nominal GDP growth). Gross international reserves of the central bank should increase to US$25 million, or six months of imports, by end-2002.
17. The monetary authorities will keep the central bank's reference interest rate above the observed inflation rate during the program period. By end-March 2002, the government will adopt a decree law authorizing the central bank to issue monetary regulation bills that banks and other economic agents will be able to acquire and sell at freely negotiated interest rates. The authorities will organize a money market beginning at end-June 2002.
18. The central bank will continue to strengthen bank supervision and will survey the banking system, with a view to ensuring smooth financial intermediation, the profitability of the banks, the quality of their lending portfolios, and the continued compliance of the banks with prudential and solvency ratios. The central bank will observe closely the ongoing efforts to reestablish the normal functioning of the BCE through a restructuring and recapitalization by foreign private investors interested in taking a stake in the bank. Failing this, the central bank will organize the liquidation of the BCE by end-April 2002 without further financial support from the central bank or the treasury. The central bank has also decided to strengthen its inspection services and establish effective internal control over its operations, with technical assistance from the Fund. In April 2001, the central bank published for the second consecutive year and posted on its website a report on the audit conducted by an independent, internationally recognized firm, certifying its 2000 accounts. The bank has decided to have its accounts certified every year by external auditors.
19. Regarding the exchange rate, the authorities will make every effort to ensure that their flexible exchange regime, based on signals from the market, operates effectively, thereby allowing them to reduce the gap between the official exchange rate and the parallel market rate to a very low level. In these conditions, the central bank will not attempt to influence the commercial bank rate and will limit its intervention on the exchange markets strictly to reaching its international reserves objective. The gap between the official rate and the parallel market rate continued to remain below 1 percent during the period from July 2000 to September 2001. Also, the central bank will prepare a foreign exchange auction mechanism that will include banks and exchange bureaus, with assistance from the Fund. Finally, the government will take all necessary steps to accept the obligations under Article VIII, Sections 2, 3, and 4 of the Fund's Articles of Agreement as soon as possible.
C. Structural and Sectoral Policies
20. Regarding structural measures, the government will raise water and electricity tariffs by an average of 16 percent by end-March 2002 to eliminate the operational deficit of EMAE. During the program period, it will apply the new mechanism for adjusting water and electricity rates to reflect production and distribution costs, which it adopted in December 2001. Having already liberalized trade and reduced the customs tariff, the government intends to submit to parliament, before end-March 2002, a new law revising fundamentally the investment code, specifically by eliminating all preferential tax regimes, with the exception of the regime applicable to the free trade area. By the same date, the government will complete its statement on telecommunications sector policy, with assistance from the World Bank; it will also approve a legal and regulatory framework for the sector, introduce a regulatory authority, and renegotiate the concession agreement with the Telecommunications Company of São Tomé and Príncipe (CST), with a view to eventually opening the sector to competition. Concerning the business climate, the government will examine the report of the Foreign Investment Advisory Committee (FIAS), part of the World Bank Group, with the goal of developing, by end-March 2002, an action plan to strengthen incentives for private sector activity and investment, particularly by strengthening the legal, regulatory, and judicial systems.
21. With regard to public enterprises, the government will pursue implementation of its reform and privatization program during 2002. In December 2000, the government decided to privatize EMAE and adopted a financial restructuring plan for the company, including the downsizing of the company's personnel (see para. 12 above), the introduction of an appropriate accounting and budgeting system, and the strengthening of revenue collection procedures, as well as a medium-term investment program and strategy. The authorities will begin consultations before end-February 2002 with a view to engaging independent external auditors to audit the accounts of EMAE for the period from 1995 to 1998. The accounts of the petroleum products distribution company (ENCO) up to 1999 have been certified by independent auditors.
22. Regarding the outlook for petroleum exploration, the government will continue to ensure transparency in conducting future operations. It will review the conclusions of the cost-benefit analysis of the contract signed with the ERHC in May 2001, as well as those of the detailed study of the procedures for negotiation of contracts in the petroleum sector, before the end of March 2002; it will ensure greater transparency in the handling of oil operations; and, if needed, it will reopen discussions on the contract signed with the ERHC. The government will also issue the implementing decrees and regulations of the oil sector law by end-March 2002 and request technical assistance from the Fund staff in the area of petroleum sector taxation and from the World Bank in the area of oil resource and contract management. With the support of this technical assistance, the government will implement and make operational by end-June 2002 an administrative unit responsible for the management of petroleum resources; it will also submit a bill to the national assembly that will organize the management of petroleum resources and institute a reserve fund for future generations, as well as a petroleum fund for social development and poverty reduction. The review of the staff-monitored program will examine the cost-benefit analysis and the study on negotiation procedures mentioned above, as well as the actual collection and use of the bonuses paid by oil companies in 2001.
23.With respect to other governance issues, the government will combat and take strong action against any acts of fraud and corruption that come to its attention. As for the attempted treasury bill fraud uncovered by the authorities in February 1999, the government has dismissed and taken legal action against the parties involved; the matter is still under judicial review and pending trial. The review of the staff-monitored program will include, inter alia, an assessment of the handling of this case of fraud. In the judicial arena, the government intends to strengthen and modernize the courts and tribunals, to train magistrates, and to prepare criminal, civil, and business laws and codes by end-2002, with assistance from Portugal. In the long term, it will activate the Auditor General's office and set up an arbitration court for commercial disputes.
24. With the support of the donor community, and in consultation with civil society, the government will, by end-June 2002, prepare a poverty reduction strategy to supplement and update the interim report of April 6, 2000. This strategy is expected to include measures designed, inter alia, to further increase school attendance and literacy rates and improve primary health care. In November 2000, the government established an interministerial committee to monitor its poverty reduction strategy, headed by the Prime Minister and including representatives of civil society, as well as an administrative budget for preparing the poverty reduction strategy paper (PRSP). This strategy should mobilize larger budget appropriations to benefit the education and health sectors. To ensure effective monitoring of the progress in reaching social and poverty reduction objectives, the results of the survey on household living conditions, financed by the African Development Bank (AfDB) and the United Nations Development Program (UNDP), were produced in May 2001, and by end-March 2002 guidelines will be adopted, with the support of the World Bank and UNDP, for the development of a social database, as well as a system of indicators, within the National Statistics Institute. The authorities also reinitiated consultations with decentralized communities in April 2001 on the interim PRSP, as well as on the preparation of the poverty reduction strategy with the participation of civil society. More recently, in October 2001, the authorities created three committees: a committee for consultation among the state, civil society, and private sector, a committee for consultation between the state and donors, and a committee for the preparation of the PRSP, including a permanent secretariat for coordination.
25. The resources freed under the enhanced HIPC Initiative will be used to fund expenditures on poverty reduction, particularly in the priority sectors of education and health. To guarantee a transparent and effective mechanism for controlling and monitoring these expenditures, the government established in November 2000 a special subaccount in the treasurer's department of the central bank to lodge interim assistance under the enhanced HIPC Initiative. Furthermore, a monitoring and control committee responsible for ensuring transparent and effective expenditure of resources provided by the enhanced HIPC Initiative assistance was established in January 2001 with the participation of civil society and donors. The government will publish by end-March 2002 an independent external audit of expenditures during 2001 that were financed by the special HIPC Initiative subaccount of the treasury in the central bank.
26. The government will intensify efforts to improve the quality and timely production of statistical data, it will provide the Fund with the basic data required in connection with Article IV consultations, and it will strengthen program control and monitoring. As indicated above, it conducted a statistical survey of households, and it will prepare a series of social welfare and poverty indicators to be monitored in the context of its poverty reduction policy. The authorities will continue to ensure that the monthly monetary survey is available within four weeks after the end of the month in question.
D. External Sector, Debt Sustainability, and Financing Assurances
27. 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, and without imposing restrictions on current transactions.
28. Overall, the external current account deficit (excluding official transfers) is projected at US$25.7 million in 2002, or 48 percent of GDP (as against 56 percent in 2001). Taking into account the amortization of external public debt (US$6.2 million) and the target for improving the central bank's international reserves position (US$9.0 million), the gross external financing requirement for 2002 rises to US$40.9 million. 2 This financing requirement will be partially covered with grants and concessional project loans (US$20.9 million), food aid and other grants (US$3.2 million), flows of private capital (US$3.0 million), the second tranche of the public resource management credit tranche from the World Bank (US$2.5 million), the first tranche of the structural adjustment credit from the AfDB (US$1.8 million) and the structural adjustment grant from the European Union (US$1.0 million). There will remain a residual financing gap of US$8.5 million that the authorities wish to close by the use of Fund resources (US$1.3 million), the rescheduling of the bilateral debt service (US$3.1 million), and interim assistance from multilateral creditors under the enhanced HIPC Initiative (US$4.2 million), assuming the approval of a new Fund arrangement under the PRGF in 2002. The authorities will complete all bilateral agreements under the Paris Club's May 2000 rescheduling before the end of February and seek comparable treatment from other bilateral creditors.
29. To cover its financing needs, the government will continue to seek grants and loans on highly concessional terms only. In this respect, it will neither contract nor guarantee any new external nonconcessional borrowing (with a grant element of less than 50 percent, excluding Fund resources) having a maturity of more than 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 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 benchmark.
IV. Program Monitoring
30. To ensure the success of the staff-monitored program, the government has taken the following prior actions: (a) the adoption of a mechanism by which water and electricity rates are adjusted to reflect production and distribution costs; (b) the implementation of the civil reform and retrenchment program; and (c) the adoption of the terms of reference for the independent exernal audit of three large government contracts and tenders for the period 1998-2000.
31. To monitor the progress of program implementation, the government has established monthly quantitative benchmarks for the period January-June 2002 (Table 1), as well as structural benchmarks (Table 2). The government will also communicate to the Fund on a monthly basis the data and information listed in the attached Table 3, as well as any information that the Fund may request to monitor progress on 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 current international transactions, without Fund approval; 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; and, lastly, it will not introduce or expand import restrictions for balance of payments reasons.
32. In any event, the authorities of São Tomé and Príncipe will conduct a review of the staff-monitored program with the staff no later than end-April 2002.
33. The Economic Council, chaired by the Prime Minister and including the Minister of Planning and Finance; the Minister of Economy; the Minister of Infrastructure, Natural Resources, and Environment; the Minister of Foreign Affairs and Cooperation; and the Governor of the Central Bank, will continue to coordinate the program.
January 9, 2002
1. The purpose of this memorandum is to describe the quantitative and structural benchmarks adopted for monitoring execution of the staff-monitored program and to establish the list of data and information to be submitted to Fund staff for program monitoring purposes. This staff-monitored program is outlined in the memorandum on economic and financial policies (MEFP) for 2002, attached to the letter of January 9, 2002 from the Minister of Planning and Finance to the Managing Director of the International Monetary Fund. The benchmarks for the staff-monitored program are listed in Tables 1 (quantitative benchmarks) and 2 (structural benchmarks) of the aforementioned MEFP. These definitions may be reexamined in the next review of the staff-monitored program.
A. Quantitative Benchmarks
2. The quantitative benchmarks are based on the following variables at end-March and end-June 2002:
3. The primary balance of government financial operations is defined as the difference between total government revenue and primary spending, excluding foreign-financed investment. It is assessed in light of the state budget execution statement prepared every month by the Directorate of Budget and Directorate of Treasury in the Ministry of Planning and Finance. At end-September 2001, this balance was assessed at Db -17.5 billion, broken down as follows:
4. Total government revenue is assessed on a cash basis in the table of government financial operations prepared by the Directorate of Budget and Directorate of Treasury. Total revenue at end-September 2001 was estimated at Db 70.0 billion, broken down as follows:
5. Primary spending (excluding interest payments) by the government, excluding foreign-financed investment, is assessed on a commitment basis. Primary spending, excepting foreign-financed investment at end-September 2001, was estimated at Db 87.5 billion, broken down as follows:
6. Changes in net banking system credit to the government are assessed according to the monetary survey prepared by the central bank. At end-September 2001, outstanding net credit to the government was assessed at Db -38.2 billion, broken down as follows:
7. Changes in the net domestic assets of the central bank are assessed according to the monetary survey prepared by the central bank. At end-September 2001, the net domestic assets of the central bank were assessed at Db -46.8 billion, broken down as follows:
8. Changes in the net international reserves position of the central bank are assessed according to the monetary survey prepared by the central bank. Reserve assets are central bank liquid assets in convertible foreign currencies held by nonresidents, and which are immediately available. Assets that are pledged or otherwise not available, including (but not limited to) the assets used as collateral (or security for third-party liabilities), are excluded from the reserve assets. Reserve liabilities are defined as short-term central bank claims on nonresidents, including use of Fund resources. At end-September 2001, the net international reserves of the central bank were assessed at US$ 13.6 million, broken down as follows:
9. The nonaccumulation of new external payment arrears is a continuous performance criterion. Government external payment arrears are defined as all unpaid external public debt obligations, according to the data established by the central bank's foreign debt division, with the exception of arrears pending rescheduling arrangements. During the first nine months of 2001, the net reduction in external debt service arrears was estimated at US$16.6 million, and at end-September 2001, the stock of external debt arrears was estimated at zero.
10. The relative benchmarks for external debt are: (a) ceilings on new nonconcessional borrowing contracted or guaranteed by the government with an initial maturity of more than one year, 3 and (b) the ceilings set for changes in the stock of amounts due but not paid on external debt contracted or guaranteed by the government with an initial maturity of less than one year. 4 The concessionality of loans is assessed according to the reference interest rate by currency published by the Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD). For loans of terms of no less than 15 years, the ten-year average of commercial interest reference rates (CIRR) for the currency in which the loan is denominated will be used. For loans of shorter terms, the six-month average will apply. A loan is deemed to be on concessional terms if, on the initial date of disbursement, the ratio of the present value of the loan, calculated on the basis of the reference interest rate, to the nominal value of the loan is less than 50 percent (in other words, a grant element of at least 50 percent, excluding Fund resources). By way of example, the reference interest rates at mid-August 2001 were as follows (six-month average):
For currencies with no available reference interest rates, the SDR rate will be used. Debt reschedulings and restructurings are excluded from the ceilings set on nonconcessional lending. The government of São Tomé and Príncipe will consult with Fund staff before contracting obligations if it is uncertain as to whether said obligations are included in the performance limits.
11. The automatic benchmark adjustment mechanism mentioned in footnote 1 of Table 1 concerns (a) the floor on the primary balance of government financial operations; (b) the floor on total government revenue; (c) the ceiling on changes in net banking system credit to the government; (d) the ceiling on changes in net domestic assets of the central bank; and (e) the floor on changes in the net international reserves of the central bank. Discrepancies will be assessed by comparison with the data on disbursements for (i) government oil revenue, including concession rights and bonuses; and (ii) program assistance, which are shown in a memorandum item at the bottom of Table 1. If a discrepancy is positive (disbursements greater than estimated), the ceilings will be revised downward and the floors revised upward. If a discrepancy is negative (disbursements smaller than estimated), the ceilings will be revised upward and the floor revised downward.
B. Structural Benchmarks
12. The structural benchmarks are as follows:
13. 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 products distribution company (ENCO), using the automatic adjustment mechanism adopted in 1997.
14. Monthly monetary data will be e-mailed to the African Department within four weeks after the end of each month.
C. Program Monitoring
15. Within two weeks after the end of each month, a monthly evaluation report will be prepared on the monitoring of quantitative and structural program benchmarks. This report will be used to assess the progress of program execution.
16. The technical committee charged with monitoring the program will regularly fax or e-mail the data necessary for program monitoring to the IMF African Department. These data are included in the list in Table 3 of the MEFP dated January 9, 2002.
17. 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.
1 The projects are (a) the rehabilitation of a road between Neves and Santa Catarina; (b) the construction of 66 apartments in São Tomé; and (c) the rehabilitation of urban roads and of the drainage and sewage system in São Tomé.
2 São Tomé and Príncipe has no outstanding external payments arrears.
3 This benchmark applies not only to the debts defined in point 9 of the Directives Regarding External Debt Performance Criteria adopted on August 24, 2000, but also to debt contracted or guaranteed that has not yet been disbursed.
4 The term "debt" is defined in accordance with point 9 of the Directives Regarding External Debt Performance Criteria" adopted on August 24, 2000.