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Democratic Republic of São Tomé and Príncipe and the IMF

The IMF's Poverty Reduction and Growth Facility (PRGF) -- A Factsheet

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Press Release No. 05/187
August 5, 2005
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Executive Board Approves US$4.3 Million Three-Year PRGF Arrangement for
São Tomé and Príncipe

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.

ANNEX

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.

Program Summary

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.


Table 1. São Tome and Principe: Selected Economic Indicators, 2002-07


 

2002

2003

2004

2005

2006

2007

         

Prog.

 

 

(Annual percentage changes, unless otherwise specified)

National income and prices

           

GDP at constant prices

4.1

4.0

3.8

3.2

4.5

5.5

Consumer prices (percentage change; end of period)

8.9

10.2

15.2

15.0

12.0

9.4

Consumer prices (percentage change; average)

9.2

9.6

12.8

15.1

13.4

10.6

             

External trade

           

Exports, f.o.b. 1/

37.6

19.4

13.8

6.0

0.2

0.0

Imports, c.i.f.

16.6

17.2

9.0

4.6

6.7

11.3

Exchange rate (in dobras per U.S. dollar; end of period)

9,192

9,456

10,104

...

...

...

Real effective exchange rate (depreciation -)

-5.2

-8.7

-2.7

...

...

...

Terms of trade

52.7

-11.6

-20.3

0.2

0.4

-0.2

             

Money and credit (end of period)

           

Net domestic assets 2/

-0.2

11.0

17.1

3.6

9.0

14.0

Of which: credit to government (net) 2/

-0.2

15.3

6.0

1.8

-11.4

-15.9

credit to the economy 2/

12.1

20.6

34.4

11.3

15.1

14.1

Broad money

26.9

41.8

7.4

12.3

21.9

21.9

Velocity (ratio of non-oil GDP to average broad money)

2.8

2.3

2.2

2.4

2.4

2.3

 

(In percent of GDP, unless otherwise specified)

National accounts

           

Consumption

117.5

116.7

122.0

122.0

121.4

118.1

Gross investment

32.5

36.1

34.5

37.3

40.2

47.7

Public investment

14.5

20.1

19.4

16.4

16.0

15.5

Private investment

18.0

16.0

15.1

21.0

24.3

32.2

Gross domestic savings

-17.5

17.6

12.2

10.6

16.0

16.8

Public savings 3/

12.5

13.8

6.6

84.4

23.2

23.8

Gross national savings

8.0

15.9

7.1

9.2

16.7

18.9

             

Government finance

           

Total revenue, grants and oil signature bonus

50.5

58.1

59.3

127.9

63.9

61.9

Of which: tax revenue

19.5

20.7

23.4

24.1

24.2

24.6

grants

27.2

32.5

30.9

28.2

33.2

31.2

oil signature bonus

...

...

...

71.0

...

...

unidentified revenue measures

...

...

...

...

2.0

1.9

Total expenditure and net lending

66.9

75.1

85.6

76.5

71.2

66.1

Of which: noninterest current expenditure

26.9

28.4

41.7

37.8

33.6

30.2

capital expenditure

28.8

35.8

35.8

29.3

28.9

28.1

Domestic primary balance (commitment basis; incl. HIPC

Initiative spending) 4/

-4.3

-11.7

-20.6

-17.5

-11.9

-7.6

Overall balance (commitment basis; including grants)

-16.4

-17.0

-26.3

51.4

-7.3

-4.1

Overall balance (cash basis; including grants)

-6.4

-11.9

-19.8

27.7

-7.3

-4.1

             

External sector

           

Current account balance (including official transfers)

-24.6

-20.2

-27.3

-28.2

-23.5

-28.7

Current account balance (excluding official transfers)

-54.0

-54.5

-61.5

-60.3

-60.3

-63.1

             

Net present value of total external debt 5/ 6/ 7/

512.7

499.2

449.0

465.3

358.1

375.6

Net present value of total external debt 5/ 6/ 8/

693.2

634.2

550.6

619.7

427.3

440.6

Scheduled external debt service before debt relief 7/

60.8

58.0

50.6

56.7

51.9

49.6

             

Overall balance (in millions of U.S. dollars)

-2.4

1.8

-9.5

19.2

-12.6

-11.8

Gross foreign reserves (in months of following year's

           

non-oil imports of goods and nonfactor services) 9/

3.9

4.5

3.4

3.4

3.5

3.5

Permanent oil fund (in millions of U.S. dollars) 10/

...

...

...

23.1

19.2

15.1


Sources: São Tomé and Príncipe authorities; and IMF Staff estimates and projections.
1/ During 2004-07, includes US$1.4 million per year in re-exports of oil arising from aid in kind received from Nigeria.
2/ In percent of broad money at beginning of period.
3/ Government revenue includes HIPC debt relief. In 2005, reflects receipt of US$49.2 million from oil signature bonus on Block 1.
4/ Excluding oil revenue, grants, interest earned and scheduled interest payments, foreign-financed scholarships, and foreign-financed capital outlays. For 2002-04, it also excludes transfers to the JDA, which are to be repaid with proceeds from the oil signature bonus from Block 1.
5/ Including arrears to Italy on a loan that remains in dispute.
6/ Assumes that the completion point under the enhanced HIPC Initiative is reached in 2006.
7/ In percent of exports of goods and nonfactor services, calculated as a three-year backward-looking average.
8/ In percent of government revenue.
9/ Excluding guarantee deposits placed at the central bank by prospective financial institutions pending operating licenses.
10/ Includes interest income earned on oil fund.



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