IMF Executive Board Completes First Review of São Tomé and Príncipe's Three-Year PRGF Arrangement and Approves US$600,000 DisbursementPress Release No. 06/44
March 7, 2006
The Executive Board of the International Monetary Fund (IMF) has completed the first review of São Tomé and Príncipe's economic performance under a three-year Poverty Reduction and Growth Facility (PRGF) arrangement. The completion of the review enables the release of an amount equivalent to SDR 0.4 million (about US$600,000), which would bring total disbursements under the arrangement to SDR 0.8 million (about US$1.2 million).
The Executive Board approved the three-year arrangement on August 1, 2005 (see Press Release No. 05/187), for a total amount of SDR 2.96 million (about US$4.26 million) to support the government's economic program for 2005-2007.
In commenting on the Executive Board's discussion on São Tomé and Príncipe, on March 6, 2006 Mr. Agustín Carstens, Deputy Managing Director and Acting Chair, stated:
"The authorities of São Tomé and Príncipe are committed to continue to address macroeconomic imbalances, while strengthening the conditions for sustained economic growth and poverty alleviation. Over the medium term, a main challenge will be to develop strong institutions to secure a transparent management of oil revenue, while implementing the government's Poverty Reduction Strategy Paper (PRSP) to strengthen growth in the non-oil economy and advance towards attaining the Millennium Development Goals. Donor support also has an important role to play in this process.
"Performance under their PRGF-supported program has been satisfactory. The authorities are to be commended for their intention to sustain the process of fiscal consolidation that started in 2005. Within this strategy, the authorities intend to increase tax revenue, reduce wasteful expenditure, and increase the share of pro-poor expenditure in line with the PRSP. Fiscal consolidation will also be enhanced by the implementation of a fully integrated, budget and public expenditure management system, and the reform of the auditing practices of the general government and public enterprise financial operations.
"The overall stance of monetary policy remains broadly adequate, with the objective to achieve the authorities' inflation target and safeguarding the central bank's international reserve position. To control liquidity, the authorities will continue their judicious mix between foreign exchange sales and the issuance of liquidity absorbing instruments. The authorities are committed to keeping the central bank reference rate above the inflation rate and improving the coordination of fiscal and monetary policies.
"São Tomé and Príncipe's managed floating exchange rate system remains appropriate, as it allows the monetary authorities to address the volatility of external inflows and cushion exogenous shocks. The improvement of the foreign exchange auction system is commendable as it strengthens the price mechanism of the managed floating exchange rate system.
"The efforts to enhance the banking sector supervisory capacity are welcome. Critical in this regard will be effective implementation of the procedures regarding licensing of new banks and the development of on-site and off-site prudential regulation indicators. Decisive action regarding weak banks will be also important to foster the development of an efficient and sound domestic banking system.
"Key challenges for the future are to accelerate structural reforms and achieve full transparency in oil revenue management. Publication of all critical information regarding the management of oil revenue will be important in securing accountability and good governance in the sector. In addition, there is a need for steadfast implementation of the action plan to improve the finances of the water and electricity company and the completion of the feasibility studies of the airport and seaport authorities. Necessary measures to improve the business climate will include the elimination of administrative barriers to start-up businesses, the establishing of tribunals of arbitration, and the approval of new codes for personal and corporate income taxation.
"The authorities' commitment to improve the coverage, timeliness, and periodicity of basic macroeconomic statistics is most welcome," Mr. Carstens said.
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 the Poverty Reduction Strategy Paper (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.