Statement at the Conclusion of an IMF Mission to the Democratic Republic of São Tomé and PríncipePress Release No. 10/208
May 21, 2010
A team from the International Monetary Fund (IMF) visited São Tomé and Príncipe (STP) during May 7-20, 2010 to conduct the 2010 Article IV Consultation discussions1 and the second review of performance under the three-year Extended Credit Facility (ECF) arrangement2 approved by the IMF’s Executive Board in March 2009. The team met with Honorable Prime Minister Rafael Branco, and held discussions with Minister of Planning and Finance Angela Santiago, Central Bank of São Tomé and Príncipe (BCSTP) Governor Luis de Sousa, other senior officials of the government and the BCSTP, members of the Economic and Finance Committee of the National Assembly, and representatives of commercial banks, the business community, and São Tomé and Príncipe’s development partners.
At the conclusion of the visit, Tsidi Tsikata, Mission Chief for São Tomé and Príncipe, issued the following statement in São Tomé:
“Growth slowed to about 4 percent in 2009 after averaging more than 6 percent during the preceding five years. The slowdown was due to a significant decline in foreign direct investment (FDI) and official grants which adversely affected the pace of construction and trade activities. The global financial and economic crisis has dampened São Tomé and Príncipe’s prospects for a quick return to a high growth path. In particular, FDI is unlikely to see a strong rebound in the near-term. Inflation has continued to decline steadily, with the year-on-year rate falling from the peak of 37 percent in July 2008 to 13 percent in April 2010. Non-food inflation has been much lower, reaching 4.5 percent in April 2010. The recent successful introduction of the exchange rate peg to the Euro—the currency of STP’s most important trading partners—bodes well for further progress in lowering inflation and interest rates in the country and thus boosting economic activity.
“The government and the IMF team discussed policies for strengthening fiscal performance in order to maintain macroeconomic stability and support the exchange rate peg. Over the last few years, the government has drawn on National Oil Account balances and privatization proceeds to boost expenditures, including on public investment projects. Last year, the government drew on these resources to compensate for weaker-than-expected tax revenues and shortfalls in external grants. However, the government acknowledged the need for policies to achieve a more sustainable fiscal position and highlighted measures underway to improve revenue administration and public expenditure management. The IMF team suggested that the authorities implement measures to address a recurring problem of arrears accumulation between the Treasury, the water and electricity corporation (EMAE), and the petroleum importing company (ENCO), including mechanisms to automatically adjustment fuel prices and utility tariffs. This would allow the government to better target its budgetary resources for social protection programs.
“Notwithstanding the substantial debt relief it has received from its bilateral and multilateral partners, STP remains at high risk of falling back into debt distress because of its limited export and production base. The IMF mission welcomed the government’s commitment to avoid commercial borrowing and instead rely on external grants and highly concessional loans to finance its development programs. The government highlighted several reforms underway to improve the investment climate which should help attract foreign direct investment and facilitate private sector-led growth.
“Most of the targets for 2009 under the IMF-supported program were met. However, the budget deficit target was exceeded due to revenue shortfalls and spending to clear the government’s arrears to EMAE. Weak revenue performance continued in the first quarter of 2010 and was the main factor behind the deficit for that period also exceeding the program target. The government and the IMF team agreed to continue discussions on the ECF second review while monitoring fiscal performance in the second quarter of 2010.
“The team expresses its gratitude to the authorities for their hospitality and for the constructive spirit in which discussions were held. The Executive Board of the IMF is expected to discuss the report of the mission in late-July 2010.”
1 Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members. 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 a summary is transmitted to the country’s authorities.
2 The Extended Credit Facility (ECF) has replaced the Poverty Reduction and Growth Facility (PRGF) as the IMF’s main tool for medium-term financial support to low-income countries. It provides for a higher level of access to financing, more concessional terms, enhanced flexibility in program design, and more focused, streamlined conditionality. Financing under ECF currently carries a zero interest rate, with a grace period of 5 ½ years, and a final maturity of 10 years. The IMF reviews the level of interest rates for all concessional facilities every two years.