Democratic Republic of São Tomé and Príncipe and the IMF
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São Tomé and Príncipe To Receive US$200 Million in Debt-Service Relief
The IMF and World Bank Support Debt Relief for São Tomé and Príncipe
Under the Enhanced HIPC Initiative
The International Monetary Fund (IMF) and the World Bank Group's International Development Association (IDA) agreed to support a comprehensive debt reduction package for São Tomé and Príncipe under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative). Total debt-service relief for São Tomé and Príncipe is worth about US$200 million in nominal terms. This is equivalent to US$97 million in end-1999 net present value (NPV) terms,1 or a reduction of 83 percent of São Tomé and Príncipe's total NPV of debt outstanding at end-1999 after the full use of traditional debt relief mechanisms.2
With the highest debt ratios of the HIPCs, the overall impact of debt relief under the Initiative will be substantial for São Tomé and Príncipe. Nominal debt-relief savings over the next 20 years are expected to total US$131 million, or approximately US$6.5 million annually. From 2001 to 2007, this debt relief will be equivalent to some 9 percent of São Tomé and Príncipe's annual GDP. The ratio of debt service to exports of goods and services will fall to 7 percent during 1999-2009 from 24 percent in 1999. Similarly, debt service as a percentage of government revenue will be reduced to an average of 12 percent during 1999-2009 from 44 percent in 1999. The ratio of the total NPV of debt to exports will fall to146 percent by 2003 from 1,395 percent in 1999 and average 148 percent between 2004 and 2010. This reduction in debt-service payments will free resources that should fund priority expenditures on education, health, poverty reduction, basic infrastructure, and improved governance in São Tomé and Príncipe.
Multilateral creditors will provide 70 percent of the enhanced HIPC Initiative assistance, while bilateral creditors will provide 30 percent. Assistance from IDA amounts to approximately US$46 million in debt-relief savings, or US$24 million in end-1999 NPV terms, to be delivered from January 1, 2001 to November, 2024. During the interim period, IDA will provide 90 percent debt-service relief and utilize donor resources from the HIPC Trust Fund to cover the remaining 10 percent of the debt service due, so that from the decision point to the completion point, no debt-service payments will be due on IDA credits disbursed and outstanding as of end-1999. From the completion point onward, IDA will reduce debt service falling due by 90 percent. The IMF will not provide assistance to São Tomé and Príncipe under the enhanced HIPC Initiative, as the Fund had no outstanding credits to São Tomé and Príncipe at end-1999.
São Tomé and Príncipe will reach its completion point under the enhanced HIPC Initiative and receive the full amount of debt-relief assistance from all its creditors once it takes a number of key agreed actions to strengthen its prospects for economic growth and poverty reduction. These include the satisfactory implementation of its full Poverty Reduction Strategy Paper (PRSP), which will be developed in a broad consultative process involving civil society.
1. São Tomé and Príncipe's track record
Since 1998, São Tomé and Príncipe has made substantial progress in implementing an agenda of economic reforms that has focused on fiscal consolidation and tight monetary policy in the context of a flexible, market-based exchange rate regime. Real GDP growth increased from 1 percent in 1997 to 2.5 percent annually between 1998 and 1999, while the 12-month consumer price inflation rate fell from over 80 percent at end-1997 to 13 percent at end-1999. Fiscal discipline has improved, with the primary budget balance moving from a deficit of over 2 percent of GDP in 1997 to a surplus of 1.3 percent of GDP in 1999. Progress has also been made in structural terms: the government has implemented a broad set of reforms that includes the elimination of price controls and the liberalization of the exchange and trade systems.
São Tomé and Príncipe's track record of policy performance in 2000 under the PRGF-supported program is broadly satisfactory. Most of the quantitative and structural performance criteria and benchmarks were met through September 2000, and further progress is anticipated.
2. Reforms to be implemented before the completion point
The full debt relief envisioned for São Tomé and Príncipe under the enhanced HIPC Initiative will be delivered when the following conditions have been met, as part of an overall satisfactory effort to produce sustainable growth and poverty reduction:
- PRSP: Completion and at least one year's satisfactory implementation of a full PRSP;
- Macroeconomic measures: Continued maintenance of a stable macroeconomic environment, as evidenced by the satisfactory implementation of the medium-term program supported by the IMF under the Poverty Reduction and Growth Facility (PRGF);
- Governance and public expenditure management: Substantial progress in strengthening public expenditure management and implementing a control and monitoring mechanism to ensure efficient and transparent use of enhanced HIPC Initiative assistance; and
- Social sector initiatives: Implementation of an ambitious education and health care strategy. This includes the construction and equipment of 40 new primary school classrooms and 15 secondary school classrooms; the recruitment and training of 120 new primary school teachers; the construction and equipment of eight new primary health care centers; a significant increase in child immunization rates to 85 percent; and a substantial reduction in child morbidity as a result of a program to fight malaria.
3. Enhanced HIPC Initiative Background
The HIPC Initiative was launched by the World Bank and the IMF in 1996 as the first comprehensive effort to eliminate unsustainable debt in the world's poorest, most heavily indebted countries. In October 1999, the international community agreed to make the Initiative broader, deeper and faster by increasing the number of eligible countries, raising the amount of debt relief each eligible country may receive, and speeding up its delivery. The enhanced Initiative aims at reducing the net present value of debt at the decision point to a maximum of 150 percent of exports and 250 percent of government revenue, and is provided on top of traditional debt relief mechanisms.
Eligible countries may qualify for debt relief in two stages. In the first stage, a debtor country must demonstrate the capacity to use prudently the assistance granted by establishing a satisfactory policy and performance track record, normally of three years' duration, under IMF- and IDA-supported programs. In the second stage, after reaching the decision point under the enhanced Initiative, the debtor country must implement a full-fledged poverty reduction strategy, which has been prepared with the broad participation of civil society, and an agreed set of measures aimed at enhancing economic growth. During this stage, the IMF and IDA provide interim debt relief, provided that the country stays on track with its IMF-and IDA-supported programs. At the end of this stage, when the floating completion point has been reached, the IMF and IDA provide the remainder of the committed debt relief, while Paris Club creditors enter into a highly concessional stock-of-debt operation with the debtor country in order top provide their share of relief. Other multilateral and bilateral creditors are expected to contribute to the debt relief process on comparable terms, and in a fashion commensurate with their overall exposure to the debtor country.
Some three-dozen countries are expected to qualify for assistance under the enhanced HIPC Initiative, of which 29 are sub-Saharan African countries and 4 are in Latin America. Including São Tomé and Príncipe, 16 countries have now reached their decision points under the enhanced framework (Benin, Bolivia, Burkina Faso, Cameroon, The Gambia, Guinea-Bissau, Guyana, Honduras, Mali, Mauritania, Mozambique, Senegal, Tanzania, Uganda, and Zambia), with total committed assistance estimated at over US$24 billion, representing an average stock-of-debt reduction of about 45 percent on top of traditional debt relief mechanisms.
For more information on HIPC, visit:
1The Net Present Value of debt is the discounted sum (at the market interest rate) of all future debt-service obligations (interest and principal) on existing debt. Whenever the interest rate on a loan is lower than the market rate, the NPV of this debt is smaller than its face value. The difference between the NPV and the face value of a loan represents a concessional grant.
2 Traditional debt-relief mechanisms involve a stock of debt operation from the Paris Club of official bilateral creditors on Naples terms (with a 67 percent reduction in the NPV of outstanding eligible debt) and at least comparable action by other bilateral creditors.
IMF EXTERNAL RELATIONS DEPARTMENT