Press Release: IMF Executive Board Approves US$4.3 Million Three-Year PRGF Arrangement for São Tomé and Príncipe
August 5, 2005
The Executive Board of the International Monetary Fund (IMF) has approved a three-year arrangement for São Tomé and Príncipe under the Poverty Reduction and Growth Facility (PRGF) in an amount of SDR 2.96 million (about US$4.3 million) to support the government's program of economic reform and poverty reduction. Disbursements under this arrangement shall not exceed the equivalent of SDR 1.269 million (about US$1.9 million) until July 31, 2006.
The last PRGF arrangement for São Tomé and Príncipe was approved in April 2000, and went off track in early 2001. A staff-monitored program was put in place for 2002, under which the country established a broadly satisfactory track record. Preliminary discussions on a new PRGF arrangement were held in 2003, but the authorities could not commit to medium-term macroeconomic policies at that time due to the difficult political environment. São Tomé and Príncipe reached the decision point under the enhanced HIPC Initiative in December 2000.
The Executive Board also considered São Tomé and Príncipe's full Poverty Reduction Strategy Paper (PRSP) and the Joint-Staff Advisory Note (JSAN), prepared by the Fund and World Bank Staffs.
In commenting on the Executive Board's discussion on São Tomé and Príncipe, on August 1, 2005 Mr. Agustín Carstens, Deputy Managing Director and Acting Chair, stated:
"The authorities are to be commended for the actions taken to address the relaxation in fiscal policy and rapid credit growth that had led to increased inflation in 2004. The medium term program for 2005-07, which targets significant real GDP growth and a reduction in inflation to single digits, provides a sound basis for the stable macroeconomic environment needed to achieve the ambitious reform agenda set out in the Poverty Reduction Strategy Paper (PRSP). With a transition to oil-producing status in prospect, the decisive implementation of the PRSP would bolster efforts to address the country's macroeconomic imbalances, while substantially reducing poverty and moving forward towards reaching HIPC completion point.
"The new three-year PRGF is embedded in the PRSP, which provides a credible, if highly ambitious, framework for achieving the government's objectives of raising private sector-led growth and reducing poverty. The attainment of these objectives will depend in large part on prioritizing sectoral strategies, while making them fully consistent with the annual fiscal budget and the government's price stability target. The steadfast implementation of economic policies, including the timely execution of a broad range of institutional and structural reforms supported by technical and financial support from development partners, will help mobilize to concessional financing from donors, and strengthen policy credibility.
"Fiscal consolidation, which will require reining in expectations fueled by the prospect of oil riches, while protecting pro-poor spending, remains an essential element of macroeconomic stabilization. New revenue measures incorporated into the 2005 budget, together with prospective reforms of the personal and corporate tax code, reforms in tax administration and debt relief projected under the enhanced HIPC initiative, should make it possible to achieve the spending priorities set out in the PRSP. However, the continuous large increases in the civil service wage bill are a matter of concern. In this regard, the wage increases granted in 2005 should be treated as exceptional and any other ad-hoc wage increases should be avoided in the future.
"Addressing the fragile financial position of the water and electricity company (EMAE), while fostering private investment in the energy sector, is also critical to secure macroeconomic stability. It will be important therefore to implement programmed measures, including steps to eliminate outstanding payment arrears to EMAE.
"The authorities are to be commended on the passage of the Oil Revenue Management Law and the government's decision to participate in the Extractive Industries Transparency Initiative (EITI), which are important steps towards securing transparency and accountability in the management of oil revenue. Efforts to devise a comprehensive structural reform program contained in the PRSP, including in the areas of agriculture, basic education and health services, public expenditure management, and the privatization of state enterprises, are also most welcome," Mr. Carsten said.
Recent Economic Developments
São Tomé and Príncipe is a small economy greatly dependent on external financial assistance and is heavily indebted. Exports of goods and services—primarily tourism and cocoa—are equivalent to a third of GDP, which is about US$60 million (or US$375 GDP per capita). In the early 1990s, oil and natural gas deposits were discovered offshore from São Tomé and Príncipe, but revenues from these deposits—while potentially high—are still uncertain. Oil production is expected to start no earlier than 2012. São Tomé and Príncipe has announced that it will participate in the Extractive Industries Transparency Initiative (EITI)
In 2004, the economy of São Tomé and Príncipe grew at a moderate pace, but inflation increased to 15 percent by year-end, as bank credit to the private sector rose sharply and the government loosened fiscal policy. Also, External payments arrears continued to increase in 2004.
The PRGF-supported program for 2005-07 aims at correcting macroeconomic imbalances and sets the conditions for sustained strong growth. Real GDP is envisaged to slow down in 2005 in response to tight financial policies, but pick up thereafter. Inflation is projected to decline to single-digit levels by 2007. Gross international reserves would be kept at around 3½ months of imports and services. The program includes a major fiscal consolidation effort over the next three years, and the implementation of key structural reforms embodied in the country's Poverty Reduction Strategy Paper.
In 2005, the program envisages a large fiscal adjustment, based on a strong revenue effort and significant spending cuts, while safeguarding spending levels on education and health. Structural reforms are expected in the areas of tax reform, transparency in the management of government revenue, the finances of the water and electricity company, the development of an effective anti-money laundering/combating the financial of terrorism (AML/CFT) regime, and business climate.
The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a PRSP. This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.