IMF Executive Board Concludes 2011 Article IV Consultation with Democratic Republic of São Tomé and Príncipe

Public Information Notice (PIN) No. 12/6
January 31, 2012

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

On January 23, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with São Tomé and Príncipe.1

Background

São Tomé & Príncipe’s economy is gradually recovering after a marked slowdown in 2009.The slowdown reflected a decline in foreign direct investment as a result of the global financial crisis. Gross domestic product (GDP) growth is estimated to have rebounded to nearly 5 percent in 2011 as externally financed projects helped drive activities in construction, trade, tourism, and agriculture. Growth momentum is expected to increase as exploratory drilling for oil continues. The authorities expect oil production to start in 2015. The recovery is subject to downside risks stemming from the financial and economic difficulties in Europe, which could dampen the prospects for aid, foreign direct investment, and remittances.

Inflation has declined substantially since 2008 but remains at double-digit levels. A tightening of fiscal and monetary policies in 2008 and falling world food prices helped lower year-on-year inflation from a peak of 37 percent in July 2008 to 11½ percent in June 2010. Since then, a reversal in international food prices, increases in the administered retail prices of petroleum products, and other domestic factors have kept inflation in the teens. Inflation is projected to decline in line with expected falls in non-fuel commodity prices over the medium term, supported by the peg to the euro and fiscal consolidation.

The central bank has made good progress in strengthening the regulation and supervision of banks. It has initiated a program of on-site inspections and expects to complete the inspection of all banks by end-2012. All banks have complied with a recent increase in minimum capital requirements. Rapid credit growth and the economy’s vulnerability to economic and financial stress in Europe pose risks to financial stability.

São Tomé & Príncipe remains at a high risk of debt distress, although it has received substantial debt relief. The debt burden remains heavy, especially in relation to export revenues. Improvement in the outlook hinges on the commercial viability of the oil discoveries.

Oil signature bonuses, investment inflows, and concessional loans have financed a large increase in the current account deficit in recent years. Without oil, the deficit is not sustainable. Quantitative assessments of the real exchange rate are inconclusive. However, continuing high domestic inflation will lead to over-valuation of the real exchange rate and loss of international competitiveness.

The authorities have improved the investment climate. The World Bank’s 2012 Doing Business Survey ranked São Tomé & Príncipe among the top reformers in the past year. Major reforms included the elimination of a raft of licensing and minimum capital requirements for starting a wide range of businesses. The authorities are now turning their attention to upgrading the country’s physical infrastructure and reforms in the energy sector to assure more reliable power supply.

Executive Board Assessment

Executive Directors welcomed São Tomé and Príncipe’s gradual recovery from the impact of the 2008 global financial crisis. However, the economy is vulnerable to external shocks and downside risks stemming from the ongoing financial and economic difficulties in Europe.

Directors commended the progress made in fiscal consolidation and saw a need for continued efforts to dampen domestic demand pressures, safeguard international reserves, and protect the exchange rate peg. They welcomed the authorities’ medium-term fiscal objective of stabilizing the domestic primary deficit at a level that can be financed by available non-debt-creating resources. In this regard, Directors encouraged the authorities to further enhance domestic revenues, reduce exemptions from customs duties, and adopt an automatic price adjustment mechanism to pass through changes in world fuel prices to retail prices. Directors also stressed the need to break the cycle of domestic cross arrears by ensuring realistic budgeting for the government’s utility bills, imposing a hard budget constraint on regional and local governments, and making the state-owned water and electricity corporation commercially viable. They supported the steps being taken to ensure that future oil revenues are managed carefully.

Directors noted that despite substantial debt relief, São Tomé and Príncipe remains at high risk of debt distress and urged the authorities to maintain a prudent external borrowing policy, relying mainly on grants to finance the public investment program. Directors stressed that, if new borrowing is needed, it should be on highly concessional terms. They looked forward to the participation in the multilateral debt relief initiatives by remaining creditors.

Directors welcomed the authorities’ commitment to strengthen monetary management and banking supervision. They urged continued vigilance toward risks stemming from rapid credit growth, high dollarization, and economic and financial developments in Europe. They supported ongoing efforts to strengthen the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework.

Directors commended the progress in improving the business and investment climate. They encouraged the authorities to continue their efforts by upgrading infrastructure and assuring a reliable energy supply, in order to boost output and export growth. Directors also urged the authorities to complete the new National Poverty Reduction Strategy as soon as possible.


São Tomé and Príncipe: Selected Economic Indicators, 2007–16
 
  2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
  Actual Est. Projections
 
  (Annual change in percent, unless indicated)

National income and prices

                   

GDP at constant prices

6.0 9.1 4.0 4.5 4.9 5.5 6.0 6.0 24.4 4.6

Consumer prices

                   

End of period

27.6 24.8 16.1 12.9 12.0 6.0 4.0 3.0 3.0 3.0

Period average

18.6 32.0 17.0 13.3 12.4 8.8 5.0 3.5 3.0 3.0

External trade

                   

Exports of goods and nonfactor services

-22.0 49.6 3.1 9.5 10.2 12.3 12.1 12.9 497.8 0.5

Imports of goods and nonfactor services

3.5 25.4 -5.7 22.4 4.4 7.4 10.5 7.9 39.9 8.5

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

14,362 15,228 16,814 18,336

Real effective exchange rate (depreciation = -)

1.3 20.0 -6.3 1.9

Money and credit

                   

Base money

50.0 18.9 22.3 -7.9 -3.5 18.6 15.4 12.2 14.9 10.0

Broad money (M3)

38.1 36.8 8.2 25.1 15.8 14.7 13.5 11.9 15.1 10.0

Credit to the economy

33.9 22.8 39.1 40.0 12.2 9.2 7.6 7.6 11.8 8.2

Velocity (GDP to average broad money)

2.6 2.6 2.8 2.6 2.7 2.8 2.7 2.7 3.0 2.9

Central bank reference interest rate (percent)

28.0 28.0 16.0 15.0

Bank lending rate (percent)

32.4 32.4 29.3 26.8

Bank deposit rate (percent)

12.8 12.8 10.8 12.4

Government finance

(Percent of GDP, unless otherwise indicated)

Total revenue, grants, and oil signature bonuses 2

165.5 45.4 31.2 38.1 30.0 37.1 26.8 26.1 34.9 32.8

Of which: tax revenue

16.4 15.2 14.5 16.6 15.9 16.0 16.0 16.0 14.2 14.3

Nontax revenue

2.8 1.5 2.1 2.2 1.7 1.4 1.4 1.4 1.4 1.5

grants

126.6 28.7 14.6 19.3 12.4 10.9 9.4 8.7 4.9 3.7

oil signature bonuses

19.8 0.0 0.0 0.0 0.0 8.8 0.0 0.0 0.0 0.0

oil revenues

14.3 13.2

Total expenditure and net lending

40.1 31.2 49.8 49.1 47.4 37.3 32.8 31.6 26.5 25.5

Of which: personnel costs

8.9 8.1 7.9 8.3 8.3 8.1 8.0 8.1 7.1 7.2

nonwage noninterest current expenditure

15.7 12.1 11.7 11.1 9.9 9.5 9.6 9.5 8.2 8.0

treasury funded capital expenditures

1.1 1.3 4.0 2.3 1.8 1.9 2.0 2.0 5.6 5.9

donor funded capital expenditures

10.4 6.9 24.5 26.3 25.9 16.5 11.9 10.9 4.8 3.6

Domestic primary balance 3

-8.5 -7.0 -8.0 -4.1 -3.5 -3.3 -3.2 -3.1 -5.9 -5.9

Overall balance (commitment basis)

125.4 14.2 -18.6 -11.0 -17.4 -0.3 -5.9 -5.5 8.4 7.3

External sector

                   

Current account balance

                   

Including official transfers

-38.4 -36.8 -26.9 -30.6 -30.0 -27.8 -28.0 -27.5 -24.6 -28.6

Excluding official transfers

-49.4 -49.4 -42.5 -52.1 -42.8 -39.0 -38.3 -37.0 -28.8 -30.8

PV of external debt

11.8 10.5 18.4 33.7 31.8 31.3 29.8 29.5 23.9 23.1

External debt service (percent of exports) 4

4.6 3.0 8.0 1.5 13.4 14.3 14.0 12.5 2.4 2.0

Export of goods and nonfactor services (US$ millions)

13.4 20.0 20.6 22.6 24.9 27.9 31.3 35.4 211.4 212.5

Gross foreign reserves 5, 6, 7

                   

Months of imports of goods and nonfactor services

3.5 6.6 5.9 4.5 4.4 4.2 4.5 4.9 5.5 5.5

Millions of U.S. dollar

22.5 40.9 43.7 37.9 34.6 34.8 43.7 49.9 69.8 92.6

As proportion of M2 (percent)

97 114 130 120 98 84 83 82 76 73

National Oil Account (US$ millions) 9

14.9 12.1 9.8 7.9 6.3 31.1 25.1 20.2 68.6 115.8

Memorandum Item

                   

GDP

                   

Billions of dobras

1,953 2,696 3,185 3,719 4,376 5,165 5,839 6,508 8,315 8,886

Millions of U.S. dollars

144 183 196 201 254 297 334 369 468 496

Privatization account (million U.S. dollars)

0 21 6 0.7 0 0 0 0 0 0
 

Sources: São Tomé and Príncipe authorities; and IMF staff estimates and projections.

1. Central bank (BCSTP) mid-point rate.

2. Includes HIPC and MDRI debt relief.

3. Excludes oil related revenues, grants, interest earned, scheduled interest payments, and foreign-financed capital outlay.

4. In percent of exports of goods and nonfactor services. Includes HIPC and MDRI debt relief.

5. Gross reserves exclude the National Oil Account and commercial banks' foreign currency deposits at the BCSTP in order to meet the reserve requirement for their foreign currency deposits or as application deposits for new licensing.

6. For 2008, includes the proceeds from the privatization of the government's share in the fuel distribution company (ENCO) of $32 million. Of this, $10 million were used to pay back some of ENCO's debt to Sonangol, $0.96 million were used to audit the transaction and $21.4 million were put in the central bank to boost reserves.

7. For 2009, includes new allocation of 6.5 million SDR.

8. Imports of goods and nonfactor services excluding imports of investment goods and technical assistance.

9. For 2012, based on the assumption that dispute will be settled to allow disbursement of bonuses for Block 6.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.



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