## cr18251 - 3.81 million (about US$5.3 million) ## Source details **Canonical URL:** [cr18251 - 3.81 million (about US$5.3 million)](https://www.imf.org/-/media/files/publications/cr/2018/cr18251.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18251.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18251.pdf.json) --- ### Fund support and recent decisions - “3.81 million (about US$5.3 million).” - The ECF arrangement was approved on July 13, 2015, in the amount of SDR 4.44 million (about US$6.2 million or 60 percent of the country’s quota at the time of approval). - The Executive Board concluded the 2018 Article IV consultation with São Tomé and Príncipe on July 23, 2018; a press release will be issued separately. - Staff supports the sixth disbursement in the amount of SDR 634,285. ### Macroeconomic developments and outlook - Growth and inflation - Growth in 2017 is estimated at about 4 percent; growth expected at 4 percent in 2018 and to accelerate to 5 percent in the medium term as new externally-financed projects get underway. - Inflation spiked to 7.7 percent at end 2017; inflation is expected to moderate to 6 percent in 2018 and fall below 5 percent in the medium term. - External and reserves - Gross international reserves fell by US$4.6 million to US$51 million (4.2 months of import cover). - Net international reserves declined by US$6.1 million to $44 million; at end-March 2018 NIR rose by $2 million to $46 million. - Current account and external inflows - Current account deficit widened, projected at -8.2 percent of GDP in 2018 (prel.), driven by imports of oil-related investment goods (up by 67.3 percent) largely financed by oil-related FDI. - Net official transfers fell from 13.7 percent of GDP in 2016 to 10.6 percent of GDP in 2017. ### Fiscal performance, measures, and outlook - 2017 fiscal outcomes and measures - Fiscal consolidation continued but tax revenues underperformed; revenue outturn was 0.9 percent of GDP lower than anticipated. - Total discretionary expenditure was cut by almost 2 percent of GDP relative to 2016. - Domestic Primary Balance (DPD) reduced by 1¾ percent of GDP relative to 2016 but the DPD performance criterion was missed by ½ percent of GDP. - 2018 fiscal stance and measures - End-December 2018 DPD target set at 1.3 percent of GDP (revised up from 1 percent in the fourth review). - Revenue and expenditure measures to offset 2018 shortfall (impact in percent of GDP): - Total revenue gains: 0.5 (Collection of tax arrears: 0.5) - Total domestic expenditure cuts: 1.1 (Cuts in goods and services: 0.4; Cuts in transfers adopted in 2017: 0.5; Cuts in capex: 0.2) - Total savings: 1.6 - Prior actions for the fifth review include collecting close to ½ percent of GDP in tax arrears from Rosema and other firms and issuing a resolution to limit budgetary expenditure in line with the program. - Government intends concessional borrowing to be kept below 4 percent of GDP per year and to eschew non-concessional loans. ### Program performance and compliance - Overall program performance described as uneven. - Performance criteria and compliance (end-2017) - Three out of five end-2017 performance criteria (PCs) were missed. - Domestic primary deficit (DPD) PC missed by ½ percent of GDP though DPD reduced by 1¾ percent of GDP relative to 2016. - Net international reserves (NIR) PC missed mainly because of lower-than-expected external support. - Continuous PC prohibiting introduction or intensification of exchange restrictions was inadvertently missed due to adoption of foreign exchange regulation NAP 05/2017 (effective March 1, 2017). - Two other PCs on external arrears and external borrowing were met. - Staff recommendation - Complete the fifth review, modify indicative targets and structural benchmarks through the rest of 2018, and grant waivers for nonobservance of PCs based on prior actions and corrective measures. ### Executive Board assessment and Directors’ views (summary) - Directors welcomed progress on fiscal consolidation and structural reforms and the favorable medium-term outlook but noted uneven program performance and persistent downside risks. - Key Director recommendations and views: - Continue fiscal consolidation to improve the fiscal position and reduce public debt. - Steadfast implementation of revenue-enhancing measures, including collection of tax arrears and introduction of the VAT in 2019. - Eschew non-concessional loans and limit external concessional borrowing; strengthen debt management capacity and finalize the medium-term debt management strategy. - Reform state-owned enterprises, particularly the electricity and water supply company (EMAE), to reduce fiscal risks and oil import dependence. - Continue implementing strategy to reduce NPLs, including legal reforms to assist loan recovery; implement remaining safeguards assessment recommendations without delay. - Focus structural reforms and high-return infrastructure projects to promote inclusive growth and support tourism. ### Financial sector developments and risks - Key indicators and events - Credit to the economy growth: 2015: 5.4; 2016: 6.6; 2017: 3.4; 2018 (prel.): 2.5. - Overall NPL ratio fell by 2.2 percentage points to 24.9 percent at end-2017 from end-2016; provisioning coverage in excess of 80 percent of NPLs. - System-wide capital adequacy ratio improved to 33.6 percent of risk-weighted assets. - Default rate among new and restructured loans issued since end-2016 doubled to 6.7 percent. - Banco Privado intervened and put up for sale in February 2018; BCSTP decided in mid-June to close the bank and transfer its portfolio. - Liquidation of Banco Equador pending court approval. - Policy and supervisory actions - NPL reduction strategy being implemented; BCSTP agreed to require banks to write off loans past-due for a certain period and seeking start-up funding for arbitration centers to facilitate out-of-court settlements. - Asset quality review (AQR) delayed; inception report expected by end-September 2018 and final AQR results expected by mid-2019. - BCSTP upgraded credit registry and is implementing IFRS over a three-year period; payment systems upgrade underway. ### Debt status, DSA findings, and policy implications - Debt classification and stocks (end-2017) - Country classified as in debt distress because of long-standing external arrears. - Total PPG debt: 267.6 million USD; Share of GDP: 64.4% - Total PPG external debt: 189.8 million USD; Share of GDP: 45.7% - Domestic arrears: 60.3 million USD; 14.5% of GDP (ENCO: 38.5 million USD) - DSA outcomes - Updated DSA shows improved outlook and debt sustainable in the medium term under the baseline scenario; PV of PPG external debt-to-GDP stays below threshold for high risk of debt distress. - Ratios of PV of PPG external debt to exports and to revenue still exceed thresholds under baseline early in projections but decline over time. - Policy implications from DSA - Continue fiscal consolidation; eschew non-concessional loans; limit external concessional borrowing; expand the export base. - Authorities actively seeking debt rescheduling agreements with Angola, Brazil, and Equatorial Guinea; agreement with Brazil reached but pending ratification by the Brazilian Senate. ### Structural reforms, SOEs, and EMAE - SOE and EMAE issues - EMAE’s arrears to ENCO increased by US$16.6 million (4¼ percent of GDP) in 2017 to reach US$77 million. - EMAE likely to remain loss-making until medium-term investment projects lower operational costs. - Immediate containment measures at EMAE implemented (not replacing retired staff; disconnecting customers missing three payments; arrears payment plans). - Pre-audit of all SOEs by an international firm under World Bank support is underway. - Fiscal risks and arrears - Total gross value of domestic arrears reached about 60 percent of GDP (unconsolidated): 14 percent of GDP owed by the government; 3 percent of GDP owed to the government. - Government committed to prioritize arrears clearance if additional resources materialize. ### VAT introduction and revenue mobilization - VAT design and impact (Box 3) - IMF TA recommends a consumption-type VAT under the destination principle, invoice-credit method, single positive VAT rate of 15 percent, and a threshold of US$24,000 annual turnover. - Estimated revenue gain: 2.1 percent of GDP over the medium term. - Mitigating measures proposed: review import tariff structure and/or exempt a limited list of basic food items. - Implementation requirements and TA support - IMF TA under the Revenue Mobilization Trust Fund began in August 2017; activities include VAT legislation completion, IT system development monitoring, recruiting/training 25 new officials, and public education. - Preparatory steps for VAT targeted for early 2019 (finalize VAT law; hire/train staff; adopt IT system; adopt organizational structure). ### Reserve adequacy and exchange regime - Reserve metrics and buffers - GIR at end-2017: 4.2 months of prospective imports; GIR corresponded to 39 percent of broad money at end-2017. - IMF ARA (LIC) metric suggests optimal reserves of 3.8 months of imports. - Extra reserve buffers: exceptional access to a USD 12 million deposit at the National Oil Account (NOA) and EUR 25 million contingent credit line from Portugal if reserves fall below 3 months of imports. - Exchange rate and FX restrictions - De facto fixed peg to the euro since 2010; redenomination effective January 1, 2018 with new rate 24.50 new dobras per euro. - BCSTP foreign exchange regulation NAP 05/2017 (effective March 1, 2017) tightened FX coverage and inadvertently breached the continuous PC against intensification of exchange restrictions. - Authorities requested waivers and approval to retain measures giving rise to exchange restrictions and a multiple currency practice under Article VIII for up to twelve months because they are temporary and needed for balance of payments reasons. ### Data, statistics, and program monitoring - Data adequacy and improvements - Further efforts needed though data broadly adequate for surveillance; capacity constraints limit statistical development. - National accounts rebased to 2008 but already outdated; authorities plan updates and to leverage VAT implementation to develop foundational GDP data. - CPI (base 2014) covers the capital city; monthly CPI to be provided within one month after each month. - Reporting requirements (selection) - Fiscal data: within six weeks after the end of each month or quarter. - BCSTP monetary accounts: within three weeks from the end of each month. - Monthly external debt amortization and interest by creditor: within two months after the end of each month. - Daily exchange rates, interest rates, liquidity tables to be posted on BCSTP website. ### Risks, scenarios, and corrective measures - Downside risks - Fiscal slippages ahead of legislative elections, delayed bank resolution, continued high NPLs, and delays in donor disbursements. - Weak growth in key advanced economies, particularly Portugal, damping exports (notably tourism). - Upside risks - Faster implementation of large externally-financed projects could spur growth; lower international energy prices could reduce imports. - Corrective actions and conditionalities - Staff recommends waivers for nonobservance of PCs on the floor on the DPD, ceiling on changes in NCG, floor on NIR, and the continuous PC on exchange restrictions based on corrective measures and prior actions. - Completion of the fifth review conditional on three prior actions: collecting tax arrears from Rosema, collecting tax liabilities accumulated in 2018 from large taxpayers, and issuing a resolution to limit budgetary expenditure in line with the program. - Staff supports establishment and modification of indicative targets and structural benchmarks for end-September through end-December 2018 and completion of the financing assurances review. ### Selected key statistics (actuals and projections from Table 1, 2015–20, selected) - GDP at constant prices (annual change): - 2015: 3.8 - 2016: 4.2 - 2017: 4.0 - Consumer prices (end of period): - 2015: 4.0 - 2016: 5.1 - 2017: 6.0 - end-2017 spike reported as 7.7 percent - Credit to the economy (annual change): - 2015: 5.4 - 2016: 6.6 - 2017: 3.4 - 2018 (prel.): 2.5 - Total revenue, grants, and oil signature bonuses (percent of GDP): - 2015: 28.2 - 2016: 27.6 - 2017: 24.6 - 2018 (4th Rev Prel.): 23.8 - Overall balance (commitment basis) (percent of GDP): - 2015: -6.3 - 2016: -4.2 - 2017: -4.9 - 2018 (prel.): -2.6 - Current account balance (percent of GDP) including official transfers: - 2015: -13.0 - 2016: -6.5 - 2017: -12.2 - 2018 (prel.): -8.2 - PV of external debt (percent of GDP): - 2015: 39.7 - 2016: 31.5 - 2017: 30.5 - 2018 (prel.): 28.4 - Gross international reserves (Millions of U.S. dollars): - 2015: 61.9 - 2016: 55.9 - 2017: 58.7 - 2018 (prel.): 51.3 - Exports of goods and nonfactor services (US$ millions): - 2015: 89.9 - 2016: 96.5 - 2017: 99.2 - 2018 (prel.): 105.8 - Gross Domestic Product (Millions of U.S. dollars): - 2015: 315.5 - 2016: 354.2 - 2017: 375.0 - 2018 (prel.): 392.5 - Per capita (in U.S. dollars): - 2015: 1,556 - 2016: 1,706 - 2017: 1,764 - 2018 (prel.): 1,847 ### Staff appraisal summary and next steps - Staff finds progress on fiscal consolidation and structural reforms but stresses the need for continued reforms, revenue mobilization, containment of contingent liabilities (notably EMAE), and careful borrowing on concessional terms. - Staff recommends completion of the fifth review, waivers for missed PCs based on corrective measures, modification of indicative targets and structural benchmarks for end-September through end-December 2018, and the financing assurances review. - Staff recommendation: next Article IV Consultation to be held on the 24-month cycle. *International Monetary Fund. Staff Report for the 2018 Article IV Consultation, Fifth Review Under the Extended Credit Facility, Request for Waivers for Nonobservance of Performance Criteria, and Financing Assurances Review (July 9, 2018).* ### 3.81 million (about US$5.3 million). ### cr18251 - 3.81 million (about US$5.3 million) ### Fund support and recent decisions - “3.81 million (about US$5.3 million).” - The ECF arrangement was approved on July 13, 2015, in the amount of SDR 4.44 million (about US$6.2 million or 60 percent of the country’s quota at the time of approval). - The Executive Board concluded the 2018 Article IV consultation with São Tomé and Príncipe on July 23, 2018; a press release will be issued separately. ### Macroeconomic developments and outlook - GDP growth - Growth in 2017 is estimated at about 4 percent, similar to the previous two years. - Growth is expected to remain at 4 percent in 2018 and to accelerate to 5 percent in the medium term as new externally-financed projects get underway. - Inflation - Inflation spiked to 7.7 percent at end 2017, caused by unfavorable weather conditions and an increase in import taxes on selective goods. - Inflation is expected to moderate to 6 percent in 2018. - Fiscal and external accounts - Fiscal consolidation continued albeit at a slower pace than expected; tax revenues continued to fall below expectations. - The current account deficit widened, mainly driven by imports financed by foreign investment related to deep-sea oil exploration. - Financial sector and credit - Banks were adequately capitalized and provisioned, but elevated non-performing loans (NPLs) constrained bank lending growth, which remained sluggish at 2.5 percent. - Risks and upside - Downside risks: fiscal slippages ahead of legislative elections, delayed bank resolution and continued high NPLs, and delays in donor disbursements. - Upside: faster implementation of large externally-financed projects could spur growth. ### Program performance and compliance - Performance under the program was mixed. - Three out of five end-2017 performance criteria (PCs) were missed. - The domestic primary deficit (DPD) PC was missed by ½ percent of GDP. - The DPD was still reduced by 1¾ percent of GDP relative to 2016. - Net international reserves fell below the target mainly because of lower-than-expected external support. - The continuous PC prohibiting the introduction or intensification of exchange restrictions was inadvertently missed. - Staff recommendation - Complete the fifth review, modify indicative targets and structural benchmarks through the rest of 2018, and grant waivers for nonobservance of PCs based on prior actions and corrective measures. ### Executive Board assessment (summary of Directors’ views) - Directors welcomed progress on fiscal consolidation and structural reforms and the favorable medium-term outlook. - Directors noted uneven program performance and persistent downside risks. - Key Director recommendations and views: - Continue fiscal consolidation to improve the fiscal position and reduce public debt. - Steadfast implementation of revenue-enhancing measures to address tax revenue underperformance, including collection of tax arrears and introduction of the VAT in 2019. - Eschew non-concessional loans and limit external concessional borrowing; strengthen debt management capacity and finalize the medium-term debt management strategy. - Reform state-owned enterprises, particularly the electricity and water supply company (EMAE), to reduce fiscal risks, oil import dependence, and improve electricity provision. - Continue implementing strategy to reduce NPLs, including legal reforms to assist loan recovery; implement remaining safeguards assessment recommendations without delay. - Focus structural reforms and high-return infrastructure projects to promote inclusive growth and support tourism. ### Policy recommendations and priorities (staff and authorities) - Short-term priorities - Enhance tax arrears collection and restrain spending to available resources to safeguard fiscal targets and avoid new domestic arrears. - Step up preparation for transition to a VAT in 2019 to increase revenue mobilization. - Improve monitoring of disbursement of foreign-financed projects. - Borrow only on concessional terms and at a measured pace. - Continue strategy to reduce nonperforming loans and strengthen risk-based supervision. - Structural and medium-term priorities - Continue reform of EMAE to contain losses and associated fiscal risks. - Expedite structural reforms and project implementation to unlock growth potential and avoid delays in inflows of external support. - Implement tourism development strategy to promote poverty-reducing growth. - Reduce the debt level over the medium term through continued fiscal consolidation and measured concessional borrowing. ### Selected key statistics (actuals and projections from Table 1, 2015–20) - GDP at constant prices (annual change) - 2015: 3.8 - 2016: 4.2 - 2017: 4.0 - Consumer prices (end of period) - 2015: 4.0 - 2016: 5.1 - 2017: 6.0 - end-2017 spike reported as 7.7 percent - Credit to the economy (annual change) - 2015: 5.4 - 2016: 6.6 - 2017: 3.4 - 2018 (prel.): 2.5 - Total revenue, grants, and oil signature bonuses (percent of GDP) - 2015: 28.2 - 2016: 27.6 - 2017: 24.6 - 2018 (4th Rev Prel.): 23.8 - Overall balance (commitment basis) (percent of GDP) - 2015: -6.3 - 2016: -4.2 - 2017: -4.9 - 2018 (prel.): -2.6 - Current account balance (percent of GDP) including official transfers - 2015: -13.0 - 2016: -6.5 - 2017: -12.2 - 2018 (prel.): -8.2 - PV of external debt (percent of GDP) - 2015: 39.7 - 2016: 31.5 - 2017: 30.5 - 2018 (prel.): 28.4 - Gross international reserves (Millions of U.S. dollars) - 2015: 61.9 - 2016: 55.9 - 2017: 58.7 - 2018 (prel.): 51.3 - Exports of goods and nonfactor services (US$ millions) - 2015: 89.9 - 2016: 96.5 - 2017: 99.2 - 2018 (prel.): 105.8 - Gross Domestic Product (Millions of U.S. dollars) - 2015: 315.5 - 2016: 354.2 - 2017: 375.0 - 2018 (prel.): 392.5 - Per capita (in U.S. dollars) - 2015: 1,556 - 2016: 1,706 - 2017: 1,764 - 2018 (prel.): 1,847 ### Staff appraisal summary and next steps - Staff finds progress on fiscal consolidation and structural reforms but stresses the need for continued reforms, revenue mobilization, containment of contingent liabilities (notably EMAE), and careful borrowing on concessional terms. - Expectation: the next Article IV consultation will be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements. *International Monetary Fund. Staff Report for the 2018 Article IV Consultation, Fifth Review Under the Extended Credit Facility, Request for Waivers for Nonobservance of Performance Criteria, and Financing Assurances Review (July 9, 2018).* ### 8. Indicators of Capacity to Repay the Fund, 2018–32____________________________________________ 33 ### 8. Indicators of Capacity to Repay the Fund, 2018–32____________________________________________ 33 ### Context: Reform to Accelerate Growth - São Tomé and Príncipe is described as a fragile, small, remote island-state with limited resources and capacity, an economy based mainly on subsistence agriculture and fisheries, and heavy reliance on foreign grants that "exceeded 10 percent of GDP in recent years." - Main exports and sectors: - Exports mainly cocoa; nascent tourism industry. - Imports include manufacturing products and food products such as rice, wheat, and many vegetables. - Oil prospects and legacy: - High hopes for commercial oil production receded in 2013 due to prohibitive extraction costs from the deep sea, leaving "a legacy of high public debt and a vulnerable banking sector." - Note: "There are still oil exploration activities outside the Joint Development Zone but no confirmation of commercial quantities yet." - Constraints on social development and governance: - Weak revenues limit social development programs and contribute to accumulation of government arrears to suppliers. - Past poor governance created loss-making state-owned enterprises (SOEs) and system-wide cross-arrears. - Capacity building and TA priorities: - Authorities emphasize need for hands-on technical assistance (TA), particularly long-term resident experts, as highlighted in the medium-term capacity development strategy (Annex I). - TA priorities include revenue administration (notably implementing VAT), public financial management (PFM) to improve budget preparation and execution, and banking regulation and supervision. - Sustained support from bilateral and multilateral development partners is deemed essential. ### Implementation Status of 2016 Article IV Recommendations (Box 1) - Fiscal recommendations: - "Anchor medium-term fiscal policy on bringing debt to a downward trajectory toward a moderate risk of debt distress." — Partially achieved. "Central government debt has declined by 8 percent of GDP and the debt outlook has improved. However, some external arrears have not yet been resolved." - "Reduce the domestic primary deficit (DPD) through boosting tax revenues and containing discretionary expenditure." — Partially achieved. "The DPD has declined through prudent expenditure. However, tax revenue continues to underperform and remains practically unchanged relative to GDP." - Monetary recommendations: - "Further refine the liquidity forecasting and management tools..." — Ongoing. "The BCSTP, in coordination with the Treasury, has made improvements in liquidity forecasting. Recent amendments to the regulations allow the government to issue T-Bills, for which the maturity can bridge years." - Financial sector recommendations: - Tackle large stock and rapid growth of non-performing loans (NPLs) — Ongoing. "The NPL reduction strategy is currently being implemented by the BCSTP..." - Enforce capital requirements; conduct asset quality reviews — Ongoing. "Previously-undercapitalized banks have either raised their capital or been forced to exit the market." - Further develop the Treasury Bills market — Ongoing. "Plans are underway to allow for longer-term instruments (for which legislation is already drafted), and a secondary market over time." - Promote financial inclusion and literacy — Ongoing. "The coverage and usefulness of the credit registry system have continued to improve." - External and structural recommendations: - Build additional reserves buffer — Not yet achieved. "Gross international reserves to decline by $4.6 million between end-2016 and end-2017." - Address moderately over-valued REER and low competitiveness through diversification and tourism focus — Ongoing. "A tourism development strategy ... was launched in January 2018. A grant-financed airport expansion and road rehabilitation are likely to begin in late 2018 or early 2019." - Support traditional sectors (agriculture and fisheries) — Ongoing. Work with China and other partners on sustainable and resilient agriculture and fisheries; grant land rights to farmers. (Source: IMF staff assessment.) ### Recent Economic Developments (2016–2018) - Growth and inflation: - Real GDP growth slowed from "4.2 percent in 2016 to 3.9 percent in 2017." - Over the last three years, GDP grew by "4 percent annually." - Inflation averaged "5.5 percent" over the last three years; annual inflation "spiked to 7.7 percent at end-2017." - Annualized seasonally-adjusted monthly inflation decelerated from "11 percent in December 2017 to 0 percent by April 2018." - Current account and trade: - Current account deficit projected to have widened to "8.2 percent of GDP," driven by imports of oil-related investment goods (up by "67.3 percent"), largely financed by oil-related FDI. - External inflows and reserves: - Net official transfers fell from "13.7 percent of GDP in 2016 to 10.6 percent of GDP in 2017." - Gross international reserves (GIR), marked to market, fell by "US$4.6 million to US$51 million (or 4.2 months of import cover)." - Net international reserves (NIR) declined by "US$6.1 million to $44 million." At end-March 2018, NIR rose by "$2 million to $46 million." - Reserves level missed the unadjusted indicative target of "$52 million"; accumulation exceeded the projection of "$1 million." - Foreign exchange measures: - Authorities intensified an existing exchange restriction by implementing a new regulation (NAP 05/2017) on "March 1, 2017," which inadvertently breached a continuous performance criterion prohibiting intensification of exchange restrictions. - Fiscal measures and outcomes in 2017: - Tax measures included a new consumption tax on imported alcoholic beverages, higher duties on selected imported commodities, and collection of tax arrears from large taxpayers. - Revenue outturn was "0.9 percent of GDP lower than anticipated." - Total discretionary expenditure was cut by "almost 2 percent of GDP relative to 2016." - The Domestic Primary Balance (DPD) exceeded the target by "½ percent of GDP." - Q1 2018 preliminary fiscal data: - Continued revenue underperformance; delayed tax payments (notably "½ percent of GDP in import taxes due by ENCO as of May"). - End-March fiscal indicative targets for the DPD, tax revenue and new domestic arrears were missed by "about 0.3, 0.5 and 0.07 percent of GDP, respectively." - Indicative target on the change in net bank credit to the central government was met. ### Public Debt and Fiscal Statistics - PPG debt and trends: - External debt decreased from "52.5 percent of GDP in 2016 to 45.7 percent of GDP in 2017," reflecting growth, exchange rate movements, and little new borrowing ("0.5 percent of GDP"). - Total debt declined from "67.6 percent of GDP in 2016 to 64.4 percent of GDP in 2017." - Government accumulated small domestic arrears to suppliers ("0.1 percent of GDP") and failed to clear previous arrears as programmed ("0.1 percent of GDP"). - EU budget support grant reduced by "€1 million (0.3 percent of GDP) in 2017" due to slow PFM reform. - Key fiscal table figures (Text Table 1. Fiscal Performance 2017, in percent of GDP): - Total domestic revenue: "14.4" (Actual); "14.5" (4th rev.); "13.8" (Prel.) - Total domestic revenue (ex oil): "13.5"; "14.2"; "13.2" - Tax revenue: "12.1"; "13.0"; "12.1" - Import taxes: "4.7"; "4.9"; "4.6" - Consumption taxes: "1.2"; "1.7"; "1.6" - Profit taxes: "1.3"; "1.9"; "1.7" - Personal income taxes: "3.4"; "3.0"; "2.9" - Other taxes: "1.5"; "1.4"; "1.4" - Nontax revenue: "2.3"; "1.5"; "1.6" - Of which: oil revenue: "0.9"; "0.4"; "0.6" - Total domestic expenditure: "17.9"; "16.7"; "15.9" - Primary domestic expenditure: "17.5"; "16.0"; "15.4" - Current expenditure: "17.0"; "16.2"; "15.1" - Personnel costs: "8.7"; "8.5"; "8.0" - Goods and services: "3.2"; "2.7"; "3.0" - Interest payments: "0.4"; "0.7"; "0.5" - Transfers: "3.6"; "3.4"; "2.7" - Other expenditures: "1.1"; "0.9"; "0.9" - Treasury-funded capital expend.: "0.6"; "0.3"; "0.7" - HIPC-related capital expenditure: "0.2"; "0.2"; "0.2" - Domestic Primary Balance: "-4.0"; "-1.8"; "-2.3" ### Financial Sector Developments and Risks - Financial soundness indicators (FSIs): - Regulatory capital to risk-weighted assets: all banks "greater or equal to 10 percent" since August 2016 exit of Banco Equador. - Overall NPL ratio fell by "2.2 percentage points to 24.9 percent at end-2017 from end-2016." - System-wide capital adequacy ratio improved to "33.6 percent of risk-weighted assets" as banks shifted resources into government paper. - Provisioning coverage of NPLs in excess of "80 percent of NPLs." - Sensitivity analyses: system-wide capital adequacy would become insufficient only if NPL ratio increased by another "22 percentage points (to 47 percent)." - Default rate among new and restructured loans issued since end-2016 doubled to "6.7 percent." - Bank-specific events and vulnerabilities: - Banco Privado was intervened and put up for sale in February 2018 after large loan losses and undercapitalization; BCSTP decided in mid-June to close the bank and transfer its portfolio to other institutions. - Liquidation of Banco Equador pending court approval despite liquidator assuming position in October 2017. - Sensitivity analyses of individual banks show one bank could have insufficient capital should its NPLs increase by "5½ percentage points." - Most banks remain loss-making due to high operational costs, including energy. - Credit and liquidity: - Credit to the economy growth slowed to "2.5 percent in 2017" from "6.6 percent in 2016." - Average liquidity ratio declined from "58 to 50 percent" but remains high. - Banks invested excess liquidity in Treasury Bills; issuances were over-subscribed. - New SME facility (IFC-funded) at a large bank slow to generate credit. ### Central Bank and Currency - Redenomination: - Central bank redenominated the local currency on "January 1, 2018," removing three zeros; new rate "24.50 new dobras per euro," maintaining the peg implemented in 2010. - Anecdotal information and data suggest the redenomination went smoothly with negligible impact on inflation. - Foreign exchange pressures: - Increased FX shortages linked to decline in external inflows and spillovers from neighboring countries; authorities tightened foreign exchange regulations (NAP 05/2017). ### Program Performance (End-2017) - Overall performance: described as uneven. - Performance criteria (PCs) and indicative targets: - PCs on the DPD and net bank financing of the central government (NCG) were missed by "½ percent of GDP," due to revenue shortfall and higher spending in health and education. - Reduction in the DPD in 2017 was "still a substantial 1.7 percent of GDP." - PC on net international reserves (NIR) was missed partly because of a one-off large shortfall of external financing from international financial institutions. - Two other PCs on external arrears and external borrowing were met. - Continuous PC prohibiting introduction or intensification of exchange restrictions was inadvertently breached. - Fiscal ITs on tax revenue and new domestic arrears were missed by "about 0.5 and 0.07 percent of GDP, respectively," while the pro-poor spending target was met. - Corrective measures: - Corrective measures to address tax revenue under-performance have been introduced (referenced as ¶19-21 and MEFP ¶20-22). *Source: IMF staff assessment.* ### 13. The BCSTP adopted a foreign exchange regulation (NAP 05/2017), effective March 1, ### 13. The BCSTP adopted a foreign exchange regulation (NAP 05/2017), effective March 1, ### Foreign exchange regulation and program conditionality - The BCSTP adopted a foreign exchange regulation (NAP 05/2017), effective March 1, 2017, which further tightened an existing foreign exchange restriction that predates the ECF arrangement. - Market participants—both banks and importers—reported long-standing difficulties meeting foreign currency demand, which were further intensified with the adoption of the March 2017 regulation. - Fund staff received a copy of the regulation during the June 2018 staff visit and determined that it intensified limitations on access to foreign exchange. - The continuous PC against the intensification of exchange restrictions had not been observed at the time of the completion of the third and fourth reviews under the ECF arrangement last December. - This was not considered misreporting because the authorities informed Fund staff when discussing the third review that they had tightened the foreign exchange regulation; staff should have followed up to obtain a copy of the regulation to assess consistency with the PC. ### Structural reforms and benchmarks - Progress reported: - A draft Public-Private Partnership (PPP) law was submitted to the National Assembly on October 30, 2017, and has been approved. - Measures to contain financial losses at EMAE in the near term have been implemented (MEFP ¶22), meeting end-December 2017 structural benchmarks. - End-June 2018 structural benchmarks met (MEFP Table 4): a VAT law was submitted to parliament on May 24, and a Tourism Development Strategy was launched in January 2018. - Delays: - End-June benchmark to adopt a financial management plan and least cost energy-production plan for EMAE delayed because of longer-than-expected procurement processes (¶33, ¶42, MEFP ¶15, and MEFP ¶29). - End-June benchmark to complete an independent detailed asset quality review of banks was delayed for the same reason. ### Economic outlook and inflation - Growth forecasts: - Economy forecast to grow by 4 percent in 2018. - Growth expected to accelerate to 5 percent in the medium term as new externally-financed projects get underway (airport expansion, road construction and restoration, rehabilitation of the electricity system). - Inflation: - Expected to moderate to 6 percent in 2018 as one-off supply and tax effects in 2017 subside. - Expected to fall below 5 percent in the medium term. - Structural reforms coupled with faster growth are expected to increase employment and reduce poverty. ### Risks (summary from Box 2) - Downside risks include: - Pre-election pressures that could delay structural reforms, impede revenue mobilization (particularly tax arrears collection from large taxpayers), and raise extra-budgetary spending. - Delayed reforms of EMAE leading to continued large losses and increased fiscal burden. - Prolonged bank resolution and continued high NPLs stalling credit expansion, particularly to small enterprises. - Delays in donor disbursements undermining growth prospects and reserves accumulation. - Weak growth in key advanced economies, particularly Portugal, damping exports (notably tourism). - Upside risks: - Faster implementation of large externally-financed projects could spur growth. - Lower international energy prices could reduce imports. ### Debt status and Debt Sustainability Analysis (DSA) - Country classification: in debt distress because of long-standing external arrears. - DSA findings: - Updated DSA shows improved outlook and debt sustainable in the medium term. - Government sought debt rescheduling agreements with Angola, Brazil, and Equatorial Guinea. - Agreement with Brazil reached but pending ratification by the Brazilian Senate. - Waiting for responses from Angola and Equatorial Guinea, and from Nigeria on a disputed loan. - External and PPG debt declined in 2017; trend expected to continue. - Under the baseline scenario: - The present value (PV) of PPG external debt-to-GDP ratio stays below the threshold for high risk of debt distress during the entire projection period. - Ratios of the PV of PPG external debt to exports and to revenue still exceed thresholds under the baseline scenario, though both decline over time to be below the thresholds. - Policy implications from the DSA: - Continue fiscal consolidation. - Eschew non-concessional loans. - Limit external concessional borrowing. - Expand the export base. - If policies follow the program and growth continues, staff assesses debt sustainable in the medium term, with all indicators eventually falling below thresholds in the baseline scenario. ### Authorities’ views - Broad agreement with staff on medium-term outlook and risks; more optimistic on near-term growth prospects due to planned infrastructure projects. - Authorities concurred that without policy actions, public debt dynamics and fiscal liabilities from large losses of EMAE are unsustainable. - Reiterated commitment to the program and structural reform agenda, including adopting a VAT and implementing sectoral development plans. - Noted delays in reforms partly reflect lengthy procedures of development partners. - Actively seeking debt rescheduling agreements with Angola, Brazil, and Equatorial Guinea through correspondence and high-level meetings. ### Policy discussions — fiscal consolidation, revenue measures, and targets - Immediate priorities discussed: - Offset revenue shortfall to achieve 2018 fiscal targets. - Transition to a VAT regime in 2019. - Reforms of EMAE. - Boost international reserves to protect the peg. - Safeguard financial sector stability amid persistently high NPLs. - Promote private sector-led growth, particularly tourism. - Revenue and expenditure measures to offset 2018 shortfall (Text Table 2, impact in percent of GDP): - Total revenue gains: 0.5 - Collection of tax arrears: 0.5 - Total domestic expenditure cuts: 1.1 - Cuts in goods and services: 0.4 - Cuts in transfers adopted in 2017: 0.5 - Cuts in capex: 0.2 - Total savings: 1.6 - Sources: Ministry of Finance and IMF staff estimates. - Context for revenue shortfall: - Under unchanged policies, factors causing a 2018 revenue shortfall of about 1.8 percent of GDP relative to the previous review included: - Drop of imports due to the hike in duty on imports in 2017. - Weak tax performance in the first quarter of 2018 and lower collection of tax arrears. - Cancellation in January 2018 of the earlier decision to suspend the deductible of the personal income tax (PIT) in the tax law. - Prior and subsequent actions: - As a prior action for the fifth review, the government will collect close to ½ percent of GDP in tax arrears plus applicable penalties owed by Rosema and other firms (largely consumption tax on sales and PIT withheld). - Government will endeavor to collect tax arrears from other large taxpayers, including ENASA (airport authority). - Government committed as a prior action to collect current taxes of about 0.7 percent of GDP before end-June from some large taxpayers behind on payments in Q2 2018 (MEFP ¶20). - Preliminary fiscal data indicate a DPD of about 1.4 percent of GDP at end-May; combined gains from collecting tax arrears and late payments of close to 1.1 percent of GDP expected to bring the DPD below the end-June target of 95 million new dobras (1 percent of GDP). - Government will monitor monthly the top ten large taxpayers’ payments against their projected taxes due (new end-November 2018 structural benchmark). - Minister of Finance issued a resolution to limit budgetary expenditure in line with the program, meeting a prior action for the completion of the review. - Medium-term fiscal stance and borrowing: - End-December 2018 DPD target set at 1.3 percent of GDP (slightly higher than the 1 percent targeted in the fourth review; below 1.8 percent of GDP target for last year). - Government intends to generate savings of about 1.1 percent of GDP in primary domestic expenditures via maintaining cuts in transfers and personnel costs introduced in 2017 and reducing consumption of electricity, water, and fuel by public agencies (MEFP ¶22). - Nominal public wage bill to grow below the rate of GDP growth by keeping wages largely unchanged to free resources for new hiring in priority sectors. - Domestically-financed capital expenditure to be slightly reduced from 2017. - Precautionary hold-back of expenditure to match available resources given revenue uncertainty. - Over the medium term, continue reducing debt and aid dependency: - DPD maintained close to 1 percent of GDP. - New external borrowing will eschew non-concessional loans. - Concessional borrowing to be kept below 4 percent of GDP per year. ### Arrears, SOEs, and fiscal risks - EMAE and SOE performance: - EMAE’s arrears to ENCO increased by US$16.6 million (4¼ percent of GDP) in 2017 to reach US$77 million, despite measures to contain costs and collect unpaid bills. - EMAE likely to remain loss-making until medium-term investment projects lower operational costs. - Reform projects advancing: rehabilitation of the energy grid, installation of meters, Financial Management Improvement Plan (FMIP), and Least Cost Development Plan (LCDP). - Port and airport operators agreed on plans with government to gradually clear large tax arrears; timely implementation hinges on containing costs (including staff costs) and collecting dues. - Ongoing pre-audit of all SOEs by an international firm (supported by the World Bank). - Total gross value of domestic arrears reached about 60 percent of GDP (unconsolidated): - 14 percent of GDP owed by the government. - 3 percent of GDP owed to the government. ### Revenue mobilization and VAT transition - Need for revenue mobilization: - Tax revenues have relied heavily on customs, making revenues vulnerable to import volatility and low tax compliance. - VAT transition: - Preparations ongoing to introduce a VAT regime in early 2019, expected to gain 2.1 percent of GDP in revenue over the medium term (Box 3, MEFP ¶25). - Preparations include alignment of tax regulations on VAT and other taxes, including recent hikes in import duty. - Tax administration improvements: - Implement more systematic inspection of large taxpayers and wider computer-based surveillance of taxpayers (in line with IMF TA). - Authorities will start monitoring large taxpayers’ tax payments against estimated tax due while establishing a dedicated large taxpayers’ unit (MEFP ¶25). - Plans to strengthen revenue forecasts and budget control, improve project coordination and management, and strengthen financial programming consistency in budget preparation. - Controls of spending on energy and telecommunications devised in coordination with suppliers. - Government committed to effectively apply the automatic fuel price adjustment mechanism and has raised prices in June to reflect recent international oil price increases. _Italic: IMF staff assessment and reporting as presented in the source content._ ### 26. The government is implementing some of the main recommendations of the Debt ### 26. The government is implementing some of the main recommendations of the Debt ### Authorities’ Views (debt management and arrears) - Authorities agreed with staff’s assessments and measures proposed. - Begun procedures to collect tax arrears owed by Rosema and expected to collect all the arrears by end-June 2018. - Discussing with Ghana’s government to help recuperate fees owed to ENASA and hence to the Treasury. - Committed to contain discretionary spending and to use any additional resources available to clear the arrears by the state. - Noted that preparations for the adoption of the VAT have taken longer than expected, reflecting caution to ensure a smooth transition and avoid large backlogs in VAT refunds. - Attributed some delays in reforms, including regarding EMAE, to delays in technical and financial assistance from development partners. - Broadly agreed with staff’s recommendation to identify further short-term measures to improve SOEs’ operational performance, notably in reducing staff costs and accelerating arrears collection. - Training officials on debt management, including T-Bill issuance (MEFP ¶42). - Developing the medium-term debt management strategy and establishing a debt database. ### B. Boost International Reserves Buffers - Monetary policy anchored by the peg to the euro (peg introduced in 2010). - Inflation reduced from pre-peg double digits to around 6 percent. - Banks continue to hold large excess reserves and the interbank market remains dormant; monetary transmission is muted (limited lending-rate response to BCSTP reference rate reduction in June 2017). - Efforts being made to strengthen the monetary policy toolkit (MEFP ¶33). - Sound fiscal policies and structural reforms to boost exports, reduce energy imports, and improve implementation of externally funded projects are the most important tools for supporting reserves and the peg. - External Balance Assessment (EBA) suggests the external position is moderately weaker than fundamentals and desirable policies indicate, implying a moderately overvalued real effective exchange rate (REER) (Annex II). - External imbalance underscores the need to: - Strengthen competitiveness. - Diversify the economy. - Reduce reliance on oil imports via electricity sector reforms. - Improve efficiency of implementing externally funded projects to avoid disbursement delays. - Treasury actions: - Publish quarterly reports on progress of externally financed projects. - Revise projected external disbursements in cooperation with the central bank, including both project and budgetary grants and loans (MEFP ¶32), to increase aid transparency and facilitate macroeconomic management. - Continued fiscal consolidation will help build a higher reserves buffer in the near term. - Efforts to upgrade monetary management infrastructure, including the securities’ market: - BCSTP drafted revised regulations to introduce a secondary market and longer-term instruments. - Central bank enforced publication of banks’ financial statements to increase transparency and promote interbank activity. - Authorities’ Views: - Agreed the peg serves the country well and recognized the need to address external sector imbalances. - Central bank committed to monitor inflation changes and to tighten monetary policy if necessary. - Concurred that diversifying the economy and reducing dependence on imports for basic needs would strengthen competitiveness and the external balance. - Government developing hydro capacity and exploring options of solar and natural gas power plants to diminish dependence on oil imports and demand for foreign exchange reserves. ### C. Safeguard Financial Stability - NPL resolution progressing slowly; stringent bank supervision by the BCSTP strengthened asset classifications. - BCSTP agreed with recommendation to require banks to write off loans past-due for a certain period, given slim recovery prospects through the judicial system. - Authorities seeking start-up funding for new arbitration centers to facilitate out-of-court settlement. - Asset quality review (AQR) delayed: - Supported by the World Bank. - International selection process for consultants started in October 2017 and took longer than expected. - Inception report expected by end-September 2018. - Draft report expected by end-October 2018. - Final AQR results expected by mid-2019. - BCSTP will liaise with banks to facilitate swift evaluation and intends to leverage AQR findings for planned overhaul of prudential regulation. - Financial sector infrastructure and regulation upgrades: - BCSTP upgraded its credit registry (MEFP ¶9). - Payment systems infrastructure upgrade underway with World Bank and AfDB support. - World Bank assisting to develop a resolutions manual. - International accounting standards (IFRS) being implemented over a three-year period. - Macroprudential policy in its infancy; credit registry offers proxy for borrowers’ debt-to-income ratio that could be used. - Implementation delay for some recommendations of the last safeguards assessment (¶48 and MEFP ¶30). - Financial inclusion: - Indicators compare favorably with regional peers but development has stagnated. - Numbers of ATMs and depositors per adult are the highest among SSA LICs, whereas domestic credit relative to GDP is below average (Text Figure 2). - Ratios have not improved in recent years. - Banks disincentivized to install new ATMs since regulation prevents charging clients for ATM usage. - SME access to finance hindered by rampant credit risk, shortage of eligible collateral, and high informality, though some banks assist clients to become creditworthy (e.g., forming cooperatives, promoting young entrepreneurs). - Authorities’ Views: - BCSTP staff pointed to a recent survey to inform the financial inclusion strategy. - BCSTP drafted a microfinance law and a payment systems law addressing microfinance lending and mobile banking legal voids. - Promoting financial literacy via the media. - BCSTP prioritized higher bankarization over allowing banks to recover ATM operation costs, even partially, as suggested by the mission. ### D. Accelerate Growth-Enhancing Projects and Structural Reforms - Structural impediments limit growth and keep poverty and unemployment high, particularly among women and youth. - Long-run growth averaged 4 percent. - Unemployment rate moved from 13.9 percent in 2008 to 13.0 percent in 2015; in 2015, of the unemployed, around 60 percent were women and almost 85 percent were below 35 years of age. - Poverty and unemployment, particularly among youth, threaten social cohesion and economic growth potential. - Main expected growth drivers: tourism and agriculture (Box 4). - Structural reforms needed to facilitate growth in these sectors. - Ongoing judicial reforms (enforcing contracts, registering property, resolving insolvency) will improve the business environment. - Development partner assistance: - Tourism development strategy with World Bank support adopted. - Private sector strategy (2015–24) prepared with AfDB being implemented. - National Development Plan (NDP 2017-2021) prepared to operationalize long-term development agenda. - Climate vulnerability: - Dual-island state vulnerable to climatic changes; recent coastal erosion and weather-related price shocks highlight need to strengthen resilience. - Initiatives underway to mitigate climate change impact. - Environmental work with NGOs on national sanitation plan and sustainable biodiversity (focus on Príncipe Island). - Challenges: limited capacity; not-well-organized associations and cooperatives; low environmental awareness among residents. - Gender outcomes: - Female education and reproductive health exceed SSA region averages; however, women’s participation in formal economy and representation in government fall below regional average. - São Tomé and Príncipe fares better than SSA in the Gender Inequality Index, expected years of schooling ratio (EYS), maternal mortality rate (MMR), and adolescent birth rate. - EYS and MMR are also better than the world average. - Share of female legislators, senior officials and managers, and share of female seats in parliament are lower than SSA averages by 5.4 and 3.1 percentage points, respectively. - Legal system guarantees equal rights, but entrenched social norms and domestic violence against women create gender gaps, particularly in rural areas. - Authorities’ Views: - Agreed structural reforms are key to strong and sustained growth. - Registering property, granting farmers land rights, and establishing accurate property records would help reduce credit risk. - Recent reforms to rationalize court fees and strengthen insolvency legislation expected to reduce legal costs and increase access to justice. - Private sector noted judicial inefficiencies that create delays and increase business costs. - Authorities highlighted progressive laws for equal rights and work with development partners (EU, UN) to promote gender equality. ### Program Issues, Safeguards, and Risks - Staff proposes adjusting program indicative targets for 2018 in line with policy discussions (MEFP Table 3). - DPD target for end-September is revised up in line with an upward revision in the end-December target from 1 to 1.3 percent of GDP (¶21). - NIR targets for end-December are revised down by US$4 million, following the US$7 million shortfall relative to the unadjusted target at end-2017, to allow a measured rebuilding of reserves. - These targets are consistent with rebuilding NIR closer to the end-2016 level and the associated GIR reserves cover to 4.6 months of imports by end-2018, above the optimal GIR of 3.8 months of imports as indicated by the IMF low-income country reserve metric. - Given delays in contracting an auditing firm, staff proposes changing the benchmark of completing the AQR to requiring the external consultant to prepare an inception report by end-September 2018. - Adoption of the financial management plan and least cost energy-production plan for EMAE proposed for rephasing to end-September 2018. - Completing the fifth review is conditional on three prior actions (MEFP Table 4): - Collecting tax arrears from Rosema. - Collecting tax liabilities accumulated in 2018 from large taxpayers. - Issuing a resolution to limit budgetary expenditure in line with the program. - Authorities requested waivers for nonobservance of three periodic PCs—DPD, NCG, and NIR—and one continuous PC prohibiting imposition or intensification of exchange restrictions: - DPD and NCG waiver requests based on corrective measures to ensure continued fiscal consolidation (¶19-21). - End-2017 NIR waiver request based on corrective measures to bolster the balance of payments, including fiscal consolidation, continued electricity sector reform to reduce oil import demand, and appointment of the Treasury to coordinate externally financed projects to avoid disbursement delays. - Authorities committed to eliminate foreign exchange restrictions over time once balance of payment pressures have eased. - Authorities requesting approval to retain measures that give rise to exchange restrictions and a multiple currency practice under Article VIII, Sections 2(a) and 3: - Exchange restriction under Articles 3(g) and 18 of the Investment Code of 2016 due to limitations on transferability of net income from investments. - Exchange restriction from limitations on availability of foreign exchange for payments of current international transactions due to BCSTP rationing of foreign exchange. - The latter has resulted in channeling transactions to the parallel market where the exchange rate is at a spread of more than 2 percent from the formal market rate. - Requested approval of these measures for a period of twelve months because they are temporary, non-discriminatory and needed for balance of payments reasons. - Program risks: - Downside risks include potential pressure on spending ahead of legislative elections in October 2018. - Weak capacity could constrain program implementation and delay external financing. - Country’s capacity to repay the Fund is adequate (Table 8). - Requisite financing assurances exist and the program is fully financed. - External repayments under the ECF-supported program will remain below 0.3 percent of exports of goods and services during the program period, and peak at 0.8 percent of exports of goods and services in 2024. - Due to São Tomé and Príncipe’s imposition of exchange controls, there are non-sovereign external payment arrears and a financing assurances review must be completed by the Executive Board. - Outstanding safeguards recommendations: - Strengthening the BCSTP law was put on hold pending alignment with the financial institutions law; enactment now expected during 2018. - BCSTP entered into agreement with the Central Bank of Brazil for technical assistance on IFRS implementation and scoping work has begun. - Audit Board Regulations were revised in line with Fund advice, but Audit Board has not significantly changed oversight modalities pending change in composition as envisaged in amendments to the BCSTP law. - BCSTP has not made much progress in strengthening internal audit. *Source: cr18251 - 26. The government is implementing some of the main recommendations of the Debt (PDF).* ### 49. Further efforts are needed to improve the economic data, although they are broadly ### cr18251 - 49. Further efforts are needed to improve the economic data, although they are broadly ### Data and statistical development - Further efforts are needed to improve the economic data, although they are broadly adequate for surveillance. - Data provision and development are constrained by a lack of capacity. - The authorities have published the rebased (2008 base year) national account series (in satisfaction of an end-2015 structural benchmark), but this is already outdated and needs a new update. - Authorities plan to enhance leading indicators of economic activities, including data on tourism activity, while continuing to strengthen other critical macroeconomic statistics. - Authorities should leverage VAT implementation to develop foundational data for national account statistics. - VAT data are identified as a key source for compiling contemporary estimates of GDP (i.e., quarterly data); implementation plans should provide for data collection for statistical purposes to support GDP compilation. ### Exchange restrictions and exchange rate arrangement - São Tomé and Príncipe continues to avail itself of the transitional arrangements under Article XIV, but does not maintain restrictions under Article XIV. - It maintains two exchange restrictions subject to Fund approval under Article VIII (¶45). - Authorities are committed to removing the existing exchange restrictions over time and continue to make efforts to facilitate the private sector to settle arrears to external private creditors, stemming from the past imposition of exchange controls. - The country’s exchange rate arrangement is, since 2010, a de facto fixed peg to the euro. ### Staff appraisal — macroeconomic stability and growth - Macroeconomic stability has been strengthened, but more efforts are needed. - The economy grew steadily at 4 percent in recent years, but acceleration is needed to reduce poverty in light of the young population. - The spike in inflation in 2017 appears to have begun to wane as one-off effects subside. - Fiscal consolidation and expected foreign inflows should buttress international reserves. - Vigilance is needed to safeguard the exchange rate peg. ### Staff appraisal — fiscal policy and tax measures - Staff commends the authorities’ resolve to continue fiscal consolidation to improve the fiscal position and reduce public debt. - Continued underperformance of tax revenue calls for steadfast implementation of identified revenue-enhancing measures, including the collection of tax arrears from large private companies and SOEs in the near term. - Preparation for the adoption of VAT next year should be accelerated, particularly harmonization of the VAT with the rest of the tax system. - Cuts in discretionary expenditure are appropriate. - Commitment to prioritize arrears clearance if additional resources materialize and the planned introduction of the oil surcharge to help pay down the debt from past oil subsidies are welcome. ### Staff appraisal — debt strategy and external financing - Continued reliance on grants and concessional loans for external financing while strengthening debt management capacity is central to the debt reduction strategy. - Authorities decided to eschew non-concessional loans, including for large infrastructural projects, and to limit external concessional borrowing to less than 4 percent of GDP per year. - Work should continue to implement recommendations under the DeMPA and finalize the medium-term debt management strategy. - Continued efforts are needed to resolve external arrears and disputed debt with creditors. ### Staff appraisal — utility reform and fiscal risks - Reforming the utility company, EMAE, is a priority. - The high cost of energy is hindering growth and prolonged delays in reforming the energy sector pose a serious fiscal risk. - Authorities are encouraged to work with development partners to accelerate implementation of reforms and increase the cost effectiveness of electricity generation, which will also help reduce oil imports and the external imbalance. - A pre-audit of all SOEs, including EMAE, by an international firm with the support of the World Bank will help to improve the commercial viability of SOEs and reduce fiscal risk. ### Staff appraisal — banking sector and legal reforms - Strengthened banking supervision is welcome, though vigilance continues to be essential. - Authorities have strengthened asset classifications and upgraded laws and financial sector infrastructure, including the microfinance law and the credit registry. - The long-delayed AQR should enable further strengthening of prudential regulation. - Concerted efforts to reform the legal system to assist loan recovery will be crucial for lowering the NPL ratio and for the banking sector to support economic growth. - Authorities have progressed towards establishing arbitration centers to facilitate out-of-court settlements, but more efforts are needed to make them operational. - Recommendations of the last safeguards assessment should be implemented without further delay. ### Staff appraisal — external position and reserves - The external position is assessed to be moderately weaker than warranted by fundamentals and desirable policies, and loss of foreign reserves last year calls for vigilance. - The central bank’s commitment to develop monetary policy tools to support reserves accumulation is welcome. - Continued fiscal consolidation and structural reforms are essential to strengthen the external position and improve competitiveness. - Improvement of the electricity system to reduce oil imports will help reduce the current account deficit. - Better implementation of externally funded projects to facilitate timely disbursements will also buttress reserves accumulation. ### Staff appraisal — structural reforms and infrastructure - Structural reforms are essential for promoting inclusive growth and reducing poverty. - The recently adopted tourism development strategy could provide good foundations for promoting this key sector and for opening opportunities to a young population. - More efforts are needed to speed up implementation of infrastructure projects, including road rehabilitation, airport expansion, and water and sanitation, to support tourism and other key sectors such as agriculture and fisheries. ### Program review, waivers, and financing - Staff recommends the completion of the fifth review under the ECF arrangement. - Authorities have taken corrective measures to keep the program on track following the slippages last year, and economic policies for 2018 are consistent with the program’s objectives. - Staff recommends waivers for the nonobservance of the PCs on: - the floor on the domestic primary balance, - the ceiling on changes in net bank credit to the central government, - the floor on net international reserves, and - the continuous PC on not introducing or intensifying exchange restrictions, based on corrective measures committed by the authorities (¶19-21 and ¶28-30) and because the program can still be successfully implemented despite these slippages. - Staff supports the establishment and modification of indicative targets and structural benchmarks for end-September through end-December 2018, as well as the completion of the financing assurances review. - Staff supports the sixth disbursement in the amount of SDR 634,285. *International Monetary Fund — Selected excerpts from staff report and staff appraisal in cr18251* ### 59. Staff recommends that the next Article IV Consultation for São Tomé and Príncipe be ### Staff recommends that the next Article IV Consultation for São Tomé and Príncipe be held on the 24-month cycle. ### Recommendation - Staff recommendation: next Article IV Consultation to be held on the 24-month cycle. ### National income and prices (selected) - GDP at constant prices (annual change): 3.8; 4.2; 4.0; 3.9; 5.0; 4.0; 5.5; 4.5; 5.0 - GDP deflator (annual change): 4.2; 8.1; 2.7; 4.7; 3.5; 3.9; 4.0; 6.2; 5.0 - Consumer prices, end of period: 4.0; 5.1; 6.0; 7.7; 5.0; 6.0; 4.5; 5.0; 4.0 - Consumer prices, period average: 5.3; 5.4; 5.6; 5.7; 5.5; 6.8; 4.7; 5.5; 4.5 ### Monetary and credit aggregates (selected) - Base money (annual percent change): 37.5; 5.0; 1.5; -9.6; 5.1; 9.3; 3.5; 5.3; 5.0 - Broad money (M3) (annual percent change): 13.1; -4.8; -0.2; -0.4; 8.7; 12.6; 9.7; 10.9; 10.3 - Credit to the economy (annual percent change): 5.4; 6.6; 3.4; 2.5; 5.8; 5.8; 9.2; 10.2; 9.7 - Velocity (GDP to broad money; end of period): 2.5; 2.9; 3.1; 3.2; 3.1; 3.1; 3.1; 3.1; 3.1 - Real effective exchange rate (period average, depreciation = -): 1.8; 5.6; ...; -0.6; ...; ...; ...; ...; ... ### Central bank summary (selected) - Base money (millions of new dobra): 1,562; 1,640; 1,665; 1,484; 1,750; 1,621; 1,811; 1,707; 1,791 - Official foreign reserves (claims on nonresidents, BCSTP; millions of new dobra): 1,864; 1,752; 1,724; 1,442; 1,744; 1,588; 1,766; 1,625; 1,633 - Gross international reserves (US$ millions, excl. NOA and commercial banks' FX deposits): 61.9; 55.9; 58.7; 51.3; 64.4; 58.2; 67.1; 62.2; 64.8 - Net international reserves (US$ millions): 56.5; 49.7; 51.5; 43.6; 55.8; 49.3; 58.9; 53.7; 56.5 - National Oil Account (US$ millions): 10.3; 11.5; 11.7; 11.3; 10.6; 11.4; 9.0; 11.4; 9.1 ### Financial sector indicators (selected) - Regulatory capital to risk-weighted assets (percent): 20.3; 22.7; 22.6; 24.1; 27.8; 33.6; 34.9 (Dec. 2013–Mar. 2018 series) - Percentage of banks with regulatory capital >= 10 percent: 87.5; 75.0; 75.0; 85.7; 100.0; 100.0; 100.0 - Nonperforming loans/credit (IFRS definition, percent): 15.4; 16.9; 19.1; 29.8; 27.0; 24.9; 25.4 - Provisions as percent of past-due loans (percent): 15.4; 6.3; 45.1; 68.7; 71.2; 80.0; 80.8 - Return on assets: -0.8; -2.1; -3.2; -5.2; 0.0; -0.6; 0.4 - Liquid assets/total assets (percent): 37.8; 40.8; 45.8; 52.0; 54.0; 49.7; 50.8 - Loan/deposits (percent): 101.7; 85.8; 69.6; 63.5; 63.5; 59.7; 57.3 ### Fiscal operations and public finance (central government) - Total revenue, grants, and oil signature bonuses (percent of GDP): 28.2; 27.6; 24.6; 23.8; 28.3; 27.5; 28.2; 25.7; 26.0 - Tax revenue (percent of GDP): 14.4; 12.1; 13.0; 12.1; 13.4; 11.8; 13.7; 12.5; 12.9 - Grants (percent of GDP): 11.5; 13.2; 10.1; 10.1; 13.3; 12.8; 12.9; 12.2; 12.2 - Total expenditure and net lending (percent of GDP): 34.5; 31.8; 29.5; 26.4; 30.8; 27.3; 31.1; 29.2; 28.9 - Domestic primary balance (percent of GDP, excludes oil related revenues, grants, interest earned, scheduled interest payments, and foreign-financed capital outlay): -3.0; -4.0; -1.8; -2.3; -1.0; -1.3; -1.0; -1.2; -1.2 - Overall balance (commitment basis, percent of GDP): -6.3; -4.2; -4.9; -2.6; -2.4; 0.3; -2.7; -3.5; -2.9 - Overall fiscal balance (cash basis, percent of GDP): -7.5; -0.4; -5.1; -2.5; -2.8; -0.4; -3.5; -4.4; -3.7 - Total revenue and grants (millions of new dobra): 1,965; 2,168; 2,042; 2,203; 2,425; 2,655; 2,372; 2,788; 2,626 ### External sector and balance of payments (selected) - Exports of goods and non-factor services (US$ millions): 89.9; 96.5; 99.2; 105.8; 106.7; 111.5; 114.5; 122.8; 133.2 - Imports of goods and non-factor services (annual change percent in table header): -18.2; -0.2; 8.4; 2.9; 5.6; 13.1; 6.5; 13.8; 5.4 (annual change series) - Trade balance (US$ millions): -107.6; -105.5; -115.1; -112.1; -127.1; -141.3; -136.0; -164.3; -176.4 - Current account balance (percent of GDP) including official transfers: -13.0; -6.5; -12.2; -8.2; -7.2; -6.8; -7.0; -9.8; -8.6 - Current account balance (percent of GDP) excluding official transfers: -25.7; -20.2; -22.3; -18.8; -20.5; -20.0; -19.9; -22.0; -20.8 - Capital and financial account balance (US$ millions): 57.2; -13.4; 44.7; 31.9; 33.1; 36.9; 28.8; 56.0; 51.9 - Foreign Direct Investment (US$ millions): 25.8; 20.7; 42.9; 41.4; 11.2; 50.0; 12.4; 59.9; 66.3 - Oil signature bonuses (US$ millions): 2.4; 3.3; 0.0; 2.3; 0.0; 10.0; 0.0; 1.0; 1.1 - Gross international reserves (US$ millions, table 6a): 61.9; 55.9; 58.7; 51.3; 64.4; 58.2; 67.1; 62.2; 64.8 - Months of imports of goods and nonfactor services (reserves): 5.3; 5.1; 4.0; 4.2; 4.2; 4.4; 4.1; 4.5; 4.6 ### External financing, debt service, and capacity to repay the Fund (selected) - PV of external debt (percent of GDP) (Table 1): 39.7; 31.5; 30.5; 28.4; 31.2; 26.9; 30.7; 26.9; 26.8 - External debt service (percent of exports): 3.8; 3.3; 4.7; 3.1; 4.7; 4.6; 5.5; 5.3; 5.0 - Total Fund obligations based on existing and prospective credit (millions of SDRs): 0.22; 0.40; 0.33; 0.48; 0.67; 0.82; 0.96; 0.96; 0.77; 0.58; 0.32; 0.07; 0.07; 0.07; 0.07 (2018–2032) - Outstanding Fund credit (millions of SDRs): 5.6; 5.3; 5.0; 4.6; 4.0; 3.2; 2.4; 1.5; 0.8; 0.3; 0.0; 0.0; 0.0; 0.0; 0.0 (2018–2032) - Total obligations based on existing and prospective credit (millions of U.S. dollars): 0.32; 0.57; 0.48; 0.69; 0.97; 1.19; 1.40; 1.40; 1.12; 0.84; 0.47; 0.10; 0.10; 0.10; 0.10 (2018–2032) - Total obligations as percent of exports of goods and services: 0.28; 0.47; 0.36; 0.49; 0.64; 0.73; 0.81; 0.77; 0.58; 0.42; 0.22; 0.04; 0.04; 0.04; 0.04 ### IMF program and disbursements (selected) - Schedule of disbursements under Extended ECF Arrangement, SDR amounts and percent of quota per disbursement: - 07/13/15: 634,285 SDR (4.29 percent of quota) - 06/10/16: 634,285 SDR (4.29 percent of quota) - 12/09/16: 634,285 SDR (4.29 percent of quota) - 12/11/17: 634,285 SDR (4.29 percent of quota) - 12/11/17: 634,285 SDR (4.29 percent of quota) - 04/15/18: 634,285 SDR (4.29 percent of quota) - 10/15/18: 634,290 SDR (4.29 percent of quota) - Total: 4,440,000 SDR (30 percent of quota) *Sources: São Tomé and Príncipe authorities' data and IMF staff estimates and projections.* ### Box 3. Introduction of the VAT ### Box 3. Introduction of the VAT ### Background and current tax structure - Tax revenue in São Tomé and Príncipe relies heavily on import duties and at about 13 percent of GDP it is insufficient to meet the country’s growth and development goals. - Until 2016, the consumption tax was levied solely on locally produced beer and the provision of services. - In 2016, Decree Law 13-2016 introduced taxation of imported liquor, alcoholic beverages and tobacco products. - All other imported goods, which make up the vast majority of goods consumed in the country, are still only taxable under import duties. ### IMF technical assistance recommendation: VAT design - Adopt a consumption-type VAT under the destination principle, charged by the invoice-credit method, to replace the consumption tax and, partially, the real estate transfer tax (SISA) and the stamp duty. - To avoid cascading and enhance production efficiency: - Refunds would be provided immediately for exporters. - For other taxpayers, refunds would be provided after 4 months of carrying forward. - Adopt a VAT threshold of US$24,000 of annual turnover. - Taxpayers below the threshold would pay a 7 percent presumptive tax based on gross income. - Micro-enterprises (with annual turnover below US$2,400) would pay a fixed annual or semi-annual tax. ### Revenue impact and complementary taxes - It is estimated that the VAT system would raise tax revenues by 2.1 percent of GDP over the medium term, assuming a single positive VAT rate of 15 percent. - Additional revenue to be supplemented by excise taxes on alcoholic beverages, tobacco, oil products, and motor vehicles. ### Mitigating distributional and price effects - To mitigate the price increase upon VAT introduction and its effect on low-income households, the IMF mission proposed: - Review the import tariff structure on products such as food, raw materials and capital goods; and/or - Exempt from VAT a limited list of basic food items (vegetables, plants, roots, consumables and fish), which have large weights in the price index and in the budget of low-income households. ### Implementation requirements and IMF support - Successful introduction requires a combination of policy, legal and administration reforms. - IMF technical assistance under the Revenue Mobilization Trust Fund began in August 2017 focused on: - (i) completing the appropriate VAT legislation (including other related regulations), - (ii) monitoring the development of the new IT system (supported by the AfDB), - (iii) recruiting and training 25 new officials for administration of the new tax (supported partially by the World Bank), - (iv) enhancing physical infrastructure and logistics, - (v) implementing a new organizational structure, - (vi) defining education and communication strategies. - The project has been assisting the authorities to complete all VAT preconditions with the help of a peripatetic resident expert and it will continue monitoring the completion of other VAT-related milestones in a timely manner. ### Medium-term administrative and structural needs - Additional structural changes in the Tax Directorate are needed in the medium term to properly manage the VAT, especially regarding: - paper-based and bureaucratic processes; and - lack of compliance risk management practices. *International Monetary Fund. Box title: "Box 3. Introduction of the VAT".* ### 7. São Tomé and Príncipe needs to build strong international reserve buffers given the ### 7. São Tomé and Príncipe needs to build strong international reserve buffers given the persistence and magnitude of shocks it faces as a small and fragile LIC with a pegged exchange rate regime ### A. Reserve adequacy — findings and metrics - 2017 gross international reserves (GIR) assessment - GIR corresponded to 4.2 months of prospective imports at end-2017. - GIR corresponded to 39 percent of the broad money measure at end-2017. - These values are above the standard metrics of 3 months of imports and 20 percent of broad money coverage. - IMF LIC / ARA metric - The IMF LIC reserve metric (ARA metric for credit-constrained countries) suggests the optimal reserves metric for São Tomé and Príncipe is of 3.8 months of imports. - The ARA metric balances the benefits of holding reserves against opportunity costs and incorporates country specificities, such as being a small state and having a fixed exchange rate peg. - Extra reserve buffers available - Exceptional access to a USD 12 million deposit at the National Oil Account (NOA). - EUR 25 million contingent credit line from Portugal, available in case reserves fall below 3 months of imports. ### B. Annex Table 2 — time-series reserve indicators (2010–2017) - GIR (months of prospective imports): 2010: 4.5; 2011: 4.8; 2012: 3.8; 2013: 3.4; 2014: 4.8; 2015: 5.3; 2016: 5.1; 2017: 4.2 - GIR (% of broad money): 2010: 52; 2011: 48; 2012: 43; 2013: 47; 2014: 46; 2015: 49; 2016: 49; 2017: 39 - GIR (% of debt service): 2010: 2,429; 2011: 1,686; 2012: 1,816; 2013: 1,220; 2014: 1,716; 2015: 1,789; 2016: 1,751; 2017: 1,582 - GIR (% of PPG ext. debt): 2010: 5; 2011: 13; 2012: 9; 2013: 34; 2014: 41; 2015: 34; 2016: 32; 2017: 23 - GIR (USD m): 2010: 39; 2011: 40; 2012: 44; 2013: 57; 2014: 57; 2015: 62; 2016: 56; 2017: 51 - GDP (USD m): 2010: 197; 2011: 233; 2012: 253; 2013: 303; 2014: 349; 2015: 316; 2016: 354; 2017: 393 ### C. External position, valuation, and suggested policy stance - Staff assessment of 2017 external position - Current account (CA) gap: between -1 and -2 percent of GDP. - Real effective exchange rate (REER): assessed to be overvalued by 5 to 10 percent. - Scenario-specific estimates: - Using the CA model and Scenario 2 of the ES approach → overvaluation would be around 5 percent. - Using the CA model and Scenario 3 of the ES approach → overvaluation would be around 7½ percent. - Policy implications and recommendations - Strong policies will help strengthen the external position. - The peg has promoted disinflation and reduced exchange rate volatility; to support the peg and strengthen the external position it is important to: - Ensure a sound fiscal position. - Advance structural reforms. - Key structural reforms highlighted: - Envisaged diversification strategy (to lead to higher exports). - Reform of the electricity company (to lead to lower oil imports). ### D. Non-price competitiveness and structural reform priorities - Doing Business 2018 comparative performance (relative to SSA) - Outperforming in: “protecting minority investors,” “getting electricity,” and “trade across borders.” - Underperforming in: “resolving solvency,” “enforcing contracts,” and “getting credit.” - Notable indicators and reforms - Improvement in “starting a business” by eliminating the minimum capital requirement for business entities with no need to obtain commercial license. - Improvement in “trade across borders” by reducing border compliance time after implementing an electronic trade single-window. - Deterioration in “enforcing contracts”: it takes 1,185 days to enforce a contract in São Tomé and Príncipe while the SSA average is 657 days. - Planned judicial-sector reform aims to improve contract enforcement outcomes. ### E. Program performance, macroeconomic developments, and vulnerabilities - Recent macroeconomic developments (selected) - Real GDP growth: 2017 growth slowed to 3.9 percent from 4.2 percent in 2016. - Inflation: year-on-year inflation accelerated from 3.5 percent in May 2017 to 7.7 percent at end-2017. - Current account: worsened in 2017 due to contraction in grants and increased oil and investment imports. - Reserves change: gross international reserves at market value declined by $4.6 million to $51 million (4.2 months of imports). - Fiscal and program performance (end-2017) - Program performance was uneven: three out of five performance criteria (PCs) were missed. - The PC on the domestic primary balance and net bank financing of the central government (NCG) were missed by ½ percent of GDP. - The PC on net international reserves (NIR) was missed mainly because of lower external support. - Two other PCs—on external payment arrears and borrowing on non-concessional terms—were met. - The continuous PC prohibiting introducing or intensifying exchange restrictions was inadvertently missed. - Fiscal indicative targets (ITs) on tax revenue and new domestic arrears were missed (new domestic arrears missed marginally). - The pro-poor spending target was met. - Fiscal and arrears developments - Revenue measures raised revenue by less than 0.1 percent of GDP in 2017. - A revenue shortfall of about 0.9 percent of GDP relative to expectations, partly offset by under-execution on transfers and personnel. - Increased spending on health and education by about ½ percent of GDP more than anticipated. - Accumulated small new domestic arrears of 6 million new dobras; inability to clear assumed arrears of 36 million new dobras in revised budget. - Total public and publicly guaranteed debt declined from 67.6 percent of GDP in 2016 to 56.6 percent of GDP in 2017 (factors include euro-dollar exchange rate appreciation, accelerated debt payment to ENCO, low external disbursements, and nominal GDP growth). - Financial sector developments - Credit growth stalled in 2017; banks increased holdings of Treasury Bills (T-bills) which rose to 9 percent of total assets from 2 percent in 2016. - Banks’ return on assets (ROA) turned negative to -0.7 percent on average in 2017; two-thirds of banks posted losses. - Banks increased fee income by 20 percent in 2017; cost-to-income ratio (before loan loss provisioning) at 75 percent. - Non-performing loans (NPLs): NPL ratio improved by 2 percentage points to 25 percent; default rate among loans contracted or restructured since end-2016 rose to 6.7 percent. - Provisions coverage of NPLs rose to 88 percent. - Liquidity ratio fell from 54 to 50 percent; average capital adequacy ratio increased from 28 to 33 percent. - BCSTP interventions: intervention in Banco Privado (BPSTP) in early 2018 with decision to close and transfer portfolio; liquidation of Banco Equador pending court approval. - Monetary and prudential actions - BCSTP upgraded its credit registry (CRC) to provide real-time borrower information. - BCSTP remains committed to safeguarding financial sector stability and supporting sustainable credit growth via NPL Reduction Strategy and Financial Sector Development Implementation Plan (FSDIP). *Source: IMF staff report (chapter 7 and accompanying annexes and MEFP summaries) contained in the provided content unit.* ### 14. The end-2017 structural reform agenda progressed according to plans (Table 2). A draft ### The end-2017 structural reform agenda progressed according to plans ### Structural reforms progress and benchmarks - A draft Public-Private Partnership (PPP) law was submitted to the National Assembly in October 2017 and promulgated in March 2018. - Immediate measures to contain EMAE financial losses—mostly through improving collection—have been implemented. - A VAT law, drafted with IMF support, was submitted to parliament on May 24, meeting an end-June structural benchmark. - The strategy for tourism development was launched in January 2018 with World Bank support and forms the core of the planned export diversification strategy. - Delays occurred in adoption of the financial management plan, the least cost energy-production plan for EMAE, and commencement of an asset quality review (AQR) due to procurement steps. Proposal: revise the AQR benchmark to require delivery of an inception report from the external consultant in lieu of completion of the AQR, and rephase both benchmarks to end-September 2018. - Additional enacted or submitted laws to prepare for VAT and modernize financial services: - Law requiring companies to issue fiscal invoices (to prepare for VAT). - Draft microfinance law submitted to parliament (with World Bank support). - New National Payment Systems Law submitted to parliament (agent banking, mobile money, electronic payments). ### Economic outlook and risks - Growth and inflation projections: - Real GDP growth expected to stay at around 4 percent in 2018 and average around 5 percent in the medium term. - Annual inflation expected to recede to only 6 percent in 2018; medium-term inflation likely to average below 5 percent. - Growth drivers: - Supported by externally-financed projects in construction, agriculture, and tourism. - Key infrastructure projects include a grant-financed airport expansion and road rehabilitation (part of the latter started in early 2018). - Downside risks: - Upcoming legislative elections in October 2018 could disrupt policy implementation and investment. - Uncertainties in external financing, infrastructure and service constraints, limited implementation capacity, and continued high NPLs may stall private sector lending and growth. - Upside potential: - Heightened interest from oil prospectors in acquiring exploration rights could boost external inflows through signing bonuses, exploration activities, and social projects. ### Policy objectives for 2018 — Overview - Main priorities: consolidate macroeconomic stability, strengthen the financial sector, advance monetary reforms, and remove structural bottlenecks to higher, sustained, and inclusive growth. ### A. Fiscal policy — actions, measures, and targets - 2017 deficit reduced; government committed to meet fiscal targets in 2018. - Noted revenue impacts: - Higher duty on selected products (effective July 2017) reduced import volume and will dampen revenues by about 1.4 percent of GDP relative to the initial budget. - Rescinding suspension of the PIT deductible lowered revenue by an additional 0.2 percent of GDP. - Collection from large taxpayers (prior action and monitoring): - As a prior action, the government will collect tax liabilities accumulated in 2018, amounting to over 60 million new dobras, from large taxpayers (ENAPORT, BCSTP, INAC, ENCO). - Monitoring commitment: share with IMF staff two weeks after each month monitoring tables of tax payments by top ten taxpayers against their projected taxes due during June-October 2018 (newly proposed end-November 2018 structural benchmark). - Tax arrears and collection targets: - Taxpayers owe over 300 million new dobras in tax arrears to the state. - Rosema owes about 42 million new dobras (consumption tax on sales and income tax on employees’ salaries). - ENASA owes 62 million new dobras (legacy arrears prior to 2014). - Government has already collected 12 million new dobras from Rosema. - As a prior action for the fifth review, the government will collect an additional 29 million new dobras from Rosema and 9 million new dobras from other large taxpayers. - ENASA’s clients owe about 38 million new dobras (airport services and airport tax withheld); ENASA’s arrears clearance will be accelerated by at least 10 million new dobras recovered. - Fiscal consolidation and expenditure limits: - Total revenue gain from new fiscal measures: 43 (Millions of new dobras) - Collection of tax arrears: 43 - Total domestic expenditure cuts: 130 - Cuts in transfers and personnel costs: 79 - Savings on goods and services: 36 - Cuts in capex: 15 - Total savings: 173 - DPD target and grants assumption: - DPD target set at 1.3 percent of GDP for end-September and end-December. - Assumes budget support grants in 2018 of $6 million from the World Bank and €3 million from the EU, and no privatization proceeds. - Wage and arrears plans: - Nominal public wage bill will grow below GDP growth; new hiring for priority needs costing about 0.2 percent of GDP. - Portion of budget grants and domestic borrowing (65 million new dobras) will be used to pay down arrears. - A surcharge will be introduced in 2019 over the price of oil products to pay debt to ENCO, set to raise about $2.7 to 3 million per year. - Treasury has begun preparing monthly liquidity projections to guide liquidity management and T-bill issuance. - Domestic payables/arrests (stocks, 2016–18 excerpted): - Treasury to EMAE (STD m): 2016 55.1; 2017 54.2; 2018 0.0 - Treasury to CST (STD m): 2016 98.6; 2017 119.6; 2018 107.5 - Treasury to other suppliers (STD m): 2016 288.9; 2017 276.5; 2018 263.5 - Treasury to ENCO (USD m): 2016 43.9; 2017 38.5; 2018 35.5 - EMAE to ENCO (USD m): 2016 60.4; 2017 77.0 ... - SOE fiscal risks and EMAE actions: - EMAE’s arrears to ENCO increased by $16.6 million (4¼ percent of GDP) in 2017 to reach $77 million. - Immediate containment measures: not replacing retired staff; disconnecting customers missing three payments; developing arrears payment plans with large debtors; communication campaign to change non-payment culture; improved customer services (shorter installation times, easier bill payment). - Medium-term reforms: Financial Management Improvement Plan (FMIP) and Least Cost Development Plan (LCDP); pre-audit of all SOEs by an international firm under World Bank auspices; preparations for energy grid rehabilitation and large-scale meter installation. - VAT implementation (planned for 2019) and preparatory steps: - Finalize VAT law and approval by Parliament. - Hire and train 25 new employees. - Draft VAT implementation regulations and harmonize laws. - Provide adequate space, furniture, and computers to all staff by June 2018. - Adopt clear organizational structure for tax administration by June 2018. - Adopt modern computer information system with key functionalities by July 2018. - Implement customer services area and continued taxpayer education. - Implement more systematic inspection of large taxpayers and wider surveillance via computer-based selection and improved risk management (per IMF TA recommendations). - Public financial management improvements: - With AfDB support, improve SAFEe electronic information management system and extend access to the general inspection finance entity and Court of Public Accounts. - Submitted state accounts for 2015; accelerate submission of 2016 accounts to Court of Auditors by July 2018. - Move to a centralized framework for monitoring and evaluating projects; prioritize capital projects; adopt public investment management assessment framework and medium-term fiscal and expenditure frameworks. - Implement IMF TA recommendations on revenue forecasting, coherence of financial programming, and limiting arrears accumulation. - Additional fiscal measures: - Commit to apply the automatic fuel price adjustment mechanism as international oil prices increase. - Instructions to EMAE to control unbudgeted spending on electricity and water. ### B. Financial sector policy — measures and sequencing - BCSTP supervisory actions and NPL strategy: - Reduce banking sector vulnerabilities through frequent monitoring and enhanced supervision. - Address elevated NPLs by stepping up recoveries and write-offs, enforcing collateral guidelines, and overseeing credit risk management and lending policies. - Monitor resolution of Banco Equador and spearhead transfer of BPSTP’s bank book to viable commercial banks. - Asset Quality Review (AQR) status and timeline: - Preparations for the AQR (structural benchmark, end-June 2018) advanced though delayed. - External consultant expected to sign the contract in July 2018 after procurement and negotiation. - Consultant required to prepare an inception report by end-September 2018 (revised structural benchmark) and a draft report by end-October 2018. - Full AQR report expected by mid-2019; findings to inform loan classification updates and prudential regulations with AFC support. - Safeguards and legal framework: - Revision to Central Bank (Organic) law put on hold pending revision of the financial institutions law; aim to have both laws approved by end-2018. - BCSTP Audit Board Regulations revised and approved in March 2017. - Staffing and space constraints have delayed additions to Internal Audit Department; new central bank headquarters expected by end-2018 to allow recruitment. - BDO conducted central bank audit field work and submitted a draft report. - BCSTP signed cooperation agreement with Central Bank of Brazil in November 2017 to support IFRS implementation over three years. - Banks will provision according to their expected loss calculations; CRC tool will help validate rates against default history. - Brazilian team visited in April 2018 to begin IFRS module work; additional TA in May supported CRC modernization. - Medium-term financial sector initiatives: - Developing a movable collateral registry (World Bank support, aligned with FSDIP). - Developing a corporate balance sheet repository (cooperation with Bank of Portugal and World Bank financial support). - Upgrading payment systems infrastructure with World Bank and AfDB support. - AFC TA in May 2018 to modernize prudential regulations on internal control (11/2007) and align with corporate governance regulation (17/2017). ### C. Monetary policy — reserves and monetary-tool actions - Rebuilding reserves buffer: - Continued fiscal consolidation expected to help control inflation and build reserves. - Central bank to monitor inflation and develop monetary policy tools given structural factors (high credit risk index, enforcement bottlenecks). - Project coordination and disbursement management: - Ministry of Finance to require Treasury to act as project coordinator to improve implementation rate of externally-funded projects and avoid disbursement delays. - Treasury to publish quarterly reports on progress of externally financed projects and revise projected external disbursements in cooperation with central bank (project and budgetary grants and loans). - Medium-term reserve-generating measures: - Diversify economy (tourism, agriculture, fisheries) and electricity sector reform to generate and save reserves. - Sale of exploration rights expected to generate foreign exchange through associated social programs; signing bonuses not counted toward program reserves target. - Recent sale of two exploration blocks will add US$10 million oil signature bonus to the National Oil Account. *Source: cr18251 - 14. The end-2017 structural reform agenda progressed according to plans (PDF chapter).* ### 33. The government is making good efforts to develop monetary instruments. Recent ### 33. The government is making good efforts to develop monetary instruments. Recent ### Monetary instruments and domestic debt market - Recent amendments to the regulations (16/2017) allow the government to issue Treasury Bills, for which the maturity can bridge years. - Based on this legislative amendment, the government successfully issued new bills in the second half of 2017 to manage the non-disbursement of World Bank funds as well as the shortfall and delay in EU assistance. - Plans underway to further develop the securities market to allow for longer-term instruments, for which legislation is already drafted, and a secondary market over time. - Interest in the domestic debt market remains strong: - Each of the three issuances in 2017 were oversubscribed by an average of 60 percent. - Commercial banks continue to submit bids only at the ceiling of the variable rate, so allocations are done on a proportional basis. ### Liquidity forecasting and monetary operations - The BCSTP, in coordination with the Treasury, has made some improvement in liquidity forecasting through: - Better coordination and information sharing with commercial banks, the Treasury, and central bank departments. - The BCSTP Markets Department now generally receives better and timely information. - Past problems in liquidity management were driven by asymmetric information and reporting delays; reporting today is more reliable, though forecasting errors still occur due to one-off unexpected operations. - The central bank redenominated the domestic currency, effective January 1, 2018: - The BCSTP kept the exchange peg unchanged and eliminated three zeros from the dobra and issued new notes and coins. - The redenominated exchange rate is 24.50 new dobras for 1 euro. - Post-redenomination inflation is in line with year-on-year figures; public awareness campaign helped avoid negative inflation impacts. ### Exchange restrictions and balance of payments context - As a microstate and fragile economy, São Tomé and Príncipe faces wide fluctuations in foreign inflows and frequent foreign exchange shortages. - Net official transfers fell from 13.7 percent of GDP in 2016 to 10.6 percent of GDP in 2017. - A foreign exchange regulation (NAP 05/2017) was introduced on March 1, 2017 to ensure import transactions of a bona fide nature are covered by the central bank while avoiding pressure on international reserves. - The regulation limits BCSTP foreign exchange coverage to payments of imported goods already delivered. - Excludes coverage for payments for imports of services, invisible transactions, advance payments for goods, and import payments for goods based on invoices dated later than 6 months from the date of the foreign exchange coverage request. - Clarifies that foreign exchange from the BCSTP would not be provided for banks’ own proprietary current international transactions. - These measures were needed to meet balance of payments needs but caused private external payment arrears for current international transactions. - Authorities are committed to eventually remove exchange measures that limit availability of foreign exchange for current international transactions and are taking steps to improve the balance of payments via: - Implementing structural reforms to promote private-sector led growth (tourism and agro-business). - Reducing energy imports by revamping the electricity sector with World Bank and European Investment Bank support. - Pursuing fiscal consolidation to address domestic demand. - Expected outcome: strengthening of the balance of payments over the medium term to allow easing of exchange restrictions. ### External debt, arrears, and debt-management reforms - The country is classified as being in debt distress, though the Debt Sustainability Analysis (DSA) shows an improved outlook: - Under the baseline, the present value of public and publicly-guaranteed external debt to GDP no longer exceeds its threshold compared with the previous DSA. - Ratios to exports and to revenue still exceed thresholds early in the projection period but decline over time with prudent policies. - Government policy commitments: - Continue fiscal consolidation and diversify the economy and expand the export base. - Limit concessional borrowing to about 4 percent of GDP in the medium term and eschew non-concessional loans. - Outstanding arrears with external creditors remain unresolved: - Government sought debt rescheduling with Angola, Brazil, and Equatorial Guinea. - An agreement with the Brazilian government was reached, pending ratification by the Brazilian Senate. - Waiting for responses from other countries and from Nigeria on a disputed loan. - Debt management improvements underway: - Implementing recommendations of the Debt Management Performance Assessment (DeMPA) completed November 2016. - Draft medium-term debt management strategy prepared and under discussion. - World Bank-supported establishment of a debt database to improve debt service projections, risk analyses, and reporting. - Training of officials on debt management, including T-Bill issuance, planned to start in 2018 with World Bank and AfDB support. - Government will develop and publish an annual schedule of T-Bill issuance aligned with cash flow forecasts and borrowing plans. ### Borrowing Plan 2018–20 (Millions of U.S. dollars) - New public debt contracted or guaranteed — Volume 1/Present value 1/: - Sources of debt financing: 17.9 / 11.6 - Concessional debt (of which 2/): 17.9 / 11.6 - Non-concessional debt (of which 2/): 0.0 / 0.0 - Semi-concessional debt 3/: 0.0 / 0.0 - Commercial terms 4/: 0.0 / 0.0 - Uses of debt financing: 17.9 / 11.6 - Indicative projections: - 2019: 19.9 / 12.9 - 2020: 21.8 / 14.2 - Notes: - 1/ Contracting and guaranteeing of new debt. Present value calculated using individual loan terms and applying the 5 percent program discount rate. - 2/ Debt with a grant element that exceeds a minimum threshold of 35 percent. - 3/ Debt with a positive grant element below the minimum grant element. - 4/ Debt without a positive grant element; for commercial debt, present value defined as nominal/face value. ### Specific financing and projects - Government secured a grant from China to complement a Kuwaiti loan in financing the Dr. Ayres Menezes Hospital. - The financing package will have a grant element of well above the 35 percent threshold required under the program, although the Kuwaiti loan itself has a grant element of 34 percent. ### Structural reforms: development planning, business climate, capacity development - Development planning: - National Development Plan (NDP) for 2017-2021 passed; priorities include quality education and a functioning judicial system. - Gender gap: estimated gross national income per capita for women was less than half of that for men in 2015. - Environmental efforts include national sanitation plan and sustainable biodiversity initiatives (focus on Príncipe). - Challenges: limited capacity in sectoral ministries; not-well-organized associations and cooperatives; low environmental awareness among local residents. - Business climate: - Structural reforms prioritize export diversification and cost competitiveness. - Adopted a tourism development strategy as a core element of export diversification (end-June 2018 structural benchmark). - Plans to address unreliable and costly electricity supply, including reforming EMAE, eliminating cross-subsidies, and moving to full cost recovery of electricity tariffs. - Authorities committed to revise the Investment Code (12/2016) and its regulations on foreign exchange cover (05/2017) to remove remaining exchange restrictions and multiple currency practice over time. - Capacity development: - Priority areas: domestic revenue mobilization; public financial management; public investment management; public debt management; financial sector regulation and supervision. - Weak domestic capacity has slowed TA implementation and delayed external project-related disbursements. - Government will continue working with IMF and development partners and welcomes increased hands-on follow-up support on TA implementation. ### Statistics and program monitoring - Statistics: - IMF TA received to improve balance of payments statistics and extend coverage of the international investment position; BCSTP is implementing recommended actions. - Following national accounts rebasing to 2008 and a new CPI with 2014 base year, INE plans to publish analytical back series and develop demand-side GDP components and quarterly GDP, including leading indicators. - Program monitoring: - Performance criteria (PCs), indicative targets (ITs), prior actions, and structural benchmarks for end-June 2018 are detailed in program tables. - Sixth review expected to be completed on or after October 15, 2018. - Selected 2017 performance table highlights (Millions of new dobra, cumulative from beginning of year): - Floor on domestic primary balance: -173 / -145 / -152 ... -192 (Not met) - Ceiling on changes in net bank financing of the central government: 0 / 142 / 66 / 184 / 229 (Not met) - Floor on net international reserves of the central bank (US$ millions): 50 / 46 / 51 / 48 / 44 (Not met) - Ceiling on accumulation of central government's new external payment arrears (US$ millions): 0 / 0 / 0 ... 0 (Met) - Ceiling on contracting or guaranteeing of new nonconcessional external debt (US$ millions): 0 / 0 / 0 ... 0 (Met) - Indicative target — Ceiling on change of central government's new domestic arrears: 0 / 4 / 10 ... 6 (Not met) - Floor on pro-poor expenditures: 417 / 395 / 501 ... 551 (Met) - Floor on tax revenue: 817 / 738 / 1,066 ... 1,036 (Not met) - Memorandum item — Ceiling on dobra base money (stock): 1,290 / 1,388 / 1,504 / 1,337 *Source: cr18251.* ### introduction of VAT ### introduction of VAT ### Program actions and implementation status - Adopt financial management plan and least cost energy-production plan for EMAE: - Proposed rephasing to end-September 2018 (originally End-June 2018). Objective: To contain fiscal risk. Support: With World Bank support. Status: Not met (original); newly rephased to End-September 2018. - Submit monthly monitoring table of tax payments by top 10 taxpayers during June–October 2018: - Target: End-November 2018. Objective: To mobilize domestic revenue. Support: No TA involved. - Complete an independent detailed asset quality review of banks: - Proposed rephasing and replacement: require the external consultant to complete an inception report. Original target End-June 2018; newly proposed target End-September 2018. Objective: To support financial sector stability and growth. Support: With World Bank support. Status: Not met (original); newly proposed task. - Develop and submit to the National Assembly a National Export Diversification Strategy document: - Target: End-June 2018. Objective: To promote economic diversification and employment opportunities. Support: With World Bank support. Status: Met. ### Data provision and exchange rates - Program exchange rate for 2018: - 20.299 new dobras per U.S. dollar - 24.5 new dobras per euro - 29.236 new dobras per SDR - Data submission lags to Fund staff: - Net international reserves of BCSTP: no more than four weeks - Other data: no more than six weeks - Authorities will transmit promptly any data revisions. ### Definitions (selected) - External and domestic: defined on a residency basis. - Central government: comprises all governmental departments, offices, establishments, and other bodies that are agencies or instruments of the central authority of São Tomé and Príncipe; does not include state-owned enterprises. - Debt: defined per paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements (Decision No. 15688, Dec. 5, 2014). - Government domestic revenue (excluding oil revenue): all tax and non-tax revenue of the government (in domestic and foreign currencies) excluding (1) foreign grants, (2) receipts from local sale of in-kind grants, and (3) gross inflows on account of oil signature bonus receipts and accrued interest on the National Oil Account (NOA). Revenue measured on a cash basis as reported by the Directorate of Budget and the Directorate of Treasury in the MOF. - Domestic primary expenditure: all government spending on a commitment basis (base compromisso) excluding (1) capital expenditure financed with external concessional loans and project grants and (2) scheduled interest payments. ### Official external program support (selected figures) - World Bank: 2017 = 0.0; 2018 = 3.0; H1 2018 = 6.0 million US dollars - European Union: 2017 = 4.5; 2018 = 1.5; H1 2018 = 3.3 million euros - IMF ECF program: 2017 = 1.3; 2018 = 0.6; H1 2018 = 1.3 million SDR ### Performance criteria (summary) - Floor on domestic primary balance: - Defined as government domestic revenue (excluding oil revenue) minus domestic primary expenditure. - Reference: end-2016 domestic primary balance = -314 million new dobras. - 2016 breakdown (millions of new dobras): - Total revenue (=1+2): 1130 - Government Domestic Revenue (=I-2.1): 1056 - Tax revenue: 949 - Nontax revenue: 181 - Of which: oil revenue: 74 - Total Domestic expenditure (=4+5+6): 1403 - Domestic primary expenditure (=I-4.2): 1370 - Current expenditure: 1334 - Personnel costs: 684 - Interest due: 34 - Goods and services: 249 - Transfers: 282 - Other current expenditure: 84 - Domestic capital expenditure: 50 - Financed by the Treasury: 50 - Financed by privatization proceeds: 0 - HIPC Initiative-related social expenditure: 19 - Domestic primary balance (= I.A - II.A): -314 - Ceiling on changes in net bank financing of the central government (NCG): - NCG = stock of outstanding claims on the central government held by BCSTP and ODCs minus government deposits with BCSTP and ODCs. - Excludes NOA balance, deposits from project grants and loans, contingent liabilities, and social security operations. - All FX accounts converted at program exchange rate. - Reference: end-2016 outstanding net bank financing of the central government (excluding NOA) = 224 million new dobras. - Net banking financing (millions of new dobras): - Net credit to government by the BCSTP (=I.1-I.2): 221 (2016) - BCSTP credit, including use of IMF resources: 446 - Government deposits with the BCSTP (excluding NOA): 225 - Treasury dobra-denominated accounts: 14 - Treasury foreign currency-denominated accounts: 129 - Counterpart deposits: 82 - Net credit to government by ODCs: 4 - ODC’s credit to the government: 4 - Government deposits with ODCs (including counterpart funds): 0 - Net bank financing of the government (excluding NOA) (=I-II): 117 (2015), 224 (2016) - Changes during 2016 in NCG: 107 - Floor on net international reserves (NIR) of the BCSTP: - NIR = short-term tradable foreign assets of BCSTP minus short-term external liabilities, including IMF liabilities. - Excludes pledged or encumbered external assets, NOA at BCSTP, banks’ deposits related to capital or licensing requirements, and banks’ reserves denominated in foreign currency. - Securities whose market value differs by over 20 percent from original nominal issue price assessed at market value. - All values converted to U.S. dollars at actual mid-point market exchange rates prevailing at the test date. - Reference: end-2016 NIR = 1,188 million new dobras (or $50.7 million, using exchange rate of 23.438 new dobras per U.S. dollar). - International reserves (End-2016, millions of new dobras): - Gross international reserves: 1481 - Cash: 16 - Demand deposits: 407 - Term deposits (incl. banks’ deposits in foreign currency): 188 - Securities other than shares: 840 - Portuguese Treasury Bond I: 234 - Portuguese Treasury Bond II: 248 - Rede Ferroviaria Nacional bonds: 126 - US Treasury Bill I: 116 - US Treasury Bill II: 117 - Accrued interest on securities: 15 - Reserve position in the Fund: 0 - SDR holdings: 15 - Foreign exchange liability: 293 - Short-term bilateral liabilities: 23 - Liabilities to the IMF: 121 - Banks’ reserves denominated in foreign currency: 149 - Banks’ guaranteed deposits denominated in foreign currency: 0 - Net international reserves (NIR) (=I - II): 1188 - Net other foreign assets: 169 - Other foreign assets: 392 - Medium and long-term liabilities (including SDR allocation): 223 - Net foreign assets (III+IV): 1357 - Memorandum item: National Oil Account (NOA): 271 - Ceiling on contracting or guaranteeing of new nonconcessional external debt: - Continuous performance criterion covering new external debt of any maturity (excluding normal import and supplier credits). - Nonconcessional defined as grant element < 35 percent. Discount rate for NPV = 5 percent. - Loans effective on signature date unless contract specifies effect upon parliamentary ratification; for program monitoring, treated effective on first disbursement if earlier. - Precautionary line of credit from Portugal: unpaid balances outstanding during the first three quarters of a calendar year excluded from the ceiling; outstanding balances at year-end included. - Excludes IMF facilities; rescheduled or restructured debt excluded. - Government must consult IMF staff before contracting or guaranteeing new medium– or long–term debt obligations. - Ceiling on accumulation of new external payment arrears: - Continuous performance criterion. New external payment arrears = external debt service obligations (principal and interest) unpaid when due, subject to grace periods. - Excludes arrears resulting from debt service for which a clearance framework has been agreed or for which the government is actively seeking rescheduling. ### Indicative targets and pro-poor spending - Ceiling on change of central government’s new domestic arrears: - Defined as difference between expenditure on a commitment basis and cash payments (amounts past due after 40 days and unpaid). - Pro-poor expenditure within domestic primary expenditure: - Floor on government outlays recorded in the budget that have a direct effect on reducing poverty (current and capital outlays) as agreed with IMF and World Bank staffs. - Pro-poor current spending: specified by budget codes and economic classifications (selected codes and sectoral coverage listed in the source, e.g., 310000 Personnel Expenses; 331120 Fuels and Lubricants; 332130 Health services; 352200 Transfers to non-profit institutions (private); 353100 Unemployment Fund). - Pro-poor treasury-funded capital spending: projects directly impacting poverty alleviation in education, health, social safety nets, agriculture and fisheries, rural development, youth and sports, potable water provision, and electrification. - Floor on tax revenue: - Includes direct and indirect taxes, recovery of tax arrears, and additional collection efforts. ### Memorandum items and fiscal/monetary classifications - New concessional external debt: - Defined as debt with grant element of at least 35 percent. - Net external debt service payments by the central government: - Defined as debt service due less accumulation of any new external payment arrears. - Official external program support: - Budget support grants and loans, including disbursements from the IMF under the ECF arrangement and in-kind aid when products are sold and receipts are earmarked for a budgeted spending item, and other exceptional financing by foreign official entities incorporated into the budget. - Treasury-funded capital expenditure: - Classified as part of domestic primary expenditure; covers public investment projects not directly financed by project grants and concessional loans or that require partial government co-financing; includes new construction, rehabilitation, and maintenance. Wages, salaries, and purchase of goods and services related to projects are not classified as capital expenditure. - Ceiling on base money: - Sum of currency issued (currency outside depository corporations and cash in vaults) and banks reserves denominated in new dobras. Bank reserves refer to reserves of commercial banks (in new dobras) held with the central bank and include reserves in excess of reserve requirements. ### Use of adjusters - Domestic primary balance adjuster: - Floor on domestic primary balance will be adjusted downward if government receives more than projected budget support grants (excluding portion of additional EU grant used to finance capital expenditure on water and sanitation) and privatization receipts in 2017 and 2018. - Adjuster caps: - 77.7 million dobras (about 1 percent of 2016 GDP) for 2017 - 38.8 million new dobras for the first semester of 2018 - Projected privatization proceeds: 0 in 2017 and 2018. - For end-2018, if collection of tax arrears from Rosema does not materialize, the floor on the domestic primary balance will be adjusted downward (in absolute value) by the market value of Rosema’s assets that the government seizes. *Source: cr18251 - introduction of VAT.* ### 23. The performance criteria on net bank financing of the central government and net ### 23. The performance criteria on net bank financing of the central government and net ### Adjusters on performance criteria - The performance criteria on net bank financing of the central government (NCG) and net international reserves (NIR) of the central bank will be subject to adjusters based on cumulative deviations calculated from end-December 2016 or end-December 2017, as appropriate (MEFP Attachment I, Table 3). - Adjusters on ceilings on changes in net bank financing of the central government (NCG): - Quarterly differences between actual and projected receipts of: - budget transfers from the NOA, - budgetary support grant, - net external debt service payments, and - domestic arrears will be converted to new dobras at the program exchange rate and aggregated from end-December 2016 or end-December 2017, as appropriate, to the test date. - The ceilings will be adjusted: - (i) downward (upward) by cumulative deviations downward (upward) of actual from projected net external debt service payments (exclude HPIC), - (ii) downward (upward) by deviation upward (downward) in budget transfers from the NOA, - (iii) downward by deviation upward of budgetary support grants in excess of 77.7 million new dobras and upward for the full deviation downward of budgetary support grants, - (iv) downward by deviation upward of domestic arrears. - The combined application of all adjusters at any test date is capped at the equivalent of US$3 million at the program exchange rate. - Adjusters for the floor on net international reserves (NIR) of the BCSTP: - Quarterly differences between actual and projected receipts of: - budget transfers from the NOA, - official external program support, - net external debt service payments, and - domestic arrears in new dobras will be converted to U.S. dollars at the program exchange rate and aggregated from end-December 2016 or end-December 2017, as appropriate, to the test date. - The floor will be adjusted upward (downward): - (i) by the cumulative deviation downward (upward) of actual from projected net external debt service payments of the central government, - (ii) by deviations upward (downward) for budget transfers from the NOA, and - (iii) by deviations upward (downward) of official external program support. - Budget support loans in 2017 and 2018 are projected to be 0. - The combined application of all adjusters at any test date is capped at the equivalent of US$3 million at the program exchange rate. ### Data reporting requirements for program monitoring - General timing: - Fiscal data: within six weeks after the end of each month or quarter, except the public investment program (PIP) which will be provided three months after each quarter. - Monetary accounts of the BCSTP: within three weeks from the end of each month. - Other monetary data: within six weeks after the end of each month for monthly data; within two months after the end of each quarter for quarterly data; within two months after the end of the year for annual data. - External debt monthly data: within two months after the end of each month. - National Institute of Statistics CPI: within one month after the end of each month. - Customs Directorate monthly imports and petroleum shipment data: within two months after the end of each month. - Fiscal Data (Directorate of Treasury and Directorate of Budget at the MOF): - Monthly data on central government operations for revenues, expenditure, and financing, including detailed description of net earmarked resources (recursos consignados), on commitment (compromisso) and cash payments (caixa); - Monthly data on net credit to the government by the BCSTP, recorded account by account in a format fully compatible with the monetary accounts of the BCSTP; - Monthly detailed data on tax and nontax revenues; - Monthly detailed data on domestically financed capital expenditure on commitment (compromisso) and cash payments (caixa); - Monthly data on domestic arrears by type and by creditor; - Quarterly data on implicit arrears to ENCO on account of fuel retail prices eventually not covering import costs, distribution margins and applicable taxes; - Quarterly data on EMAE’s arrears to ENCO; - Monthly data on official external program support (non-project); - Quarterly data on the execution of the public investment program (PIP) by project and sources of financing; - Quarterly data on the execution of Treasury-funded capital expenditure by project type, amount, timetable of execution, and progress of execution; - Quarterly data on project grant and loan disbursement (HIPC and non-HIPC); - Quarterly data on bilateral HIPC debt relief; - Quarterly information on the latest outstanding petroleum price structures and submission of new pricing structures (within a week of becoming available); - Quarterly pro-poor expenditure. - Monetary Data (BCSTP): - Daily data on exchange rates, to be posted on the central bank’s web site; - Daily data on interest rates, to be posted on the central bank’s web site; - Daily liquidity management table, including base money (in new dobras) and currency in circulation, to be posted on the central bank’s web site; - Daily net international reserve position, to be posted on the central bank’s web site; - Monthly balance sheet data of BCSTP (in IMF report form 1SR, with requested memorandum items); - Monthly consolidated balance sheet data of other depository corporations (in IMF report form 2SR); - Monthly consolidated depository corporations survey (in IMF survey 3SG); - Monthly central bank foreign exchange balance (Orçamento cambial); - Quarterly table on bank prudential ratios and financial soundness indicators; - Quarterly data on the BCSTP’s financial position (profit and loss statement, deficit, budget execution, etc.). - External Debt Data (Directorate of Treasury at the MOF): - Monthly data on amortization and interest on external debt by creditor; paid, scheduled, in arrears, and subject to debt relief or rescheduled; - Quarterly data on disbursements for foreign-financed projects and program support loans; - Annual data on future borrowing plans. - National Accounts and Trade Statistics: - Monthly consumer price index data, provided by the National Institute of Statistics within one month after the end of each month; - Monthly data on imports (value of imports, import taxes collected, and arrears) and commodity export values, provided by the Customs Directorate at the MOF, within two months after the end of each month; - Monthly data on petroleum shipments and consumption (volumes and c.i.f. prices, by product), provided by the Customs Directorate. ### Relations with the Fund, financing and debt-relief specifics - Membership and quotas: - Quota: 14.80 - General Resources Account: SDR Million % Quota — 14.80 100.00 - Fund holdings of currency: 14.80 100.02 - Reserve tranche position: 0.00 0.00 - Net cumulative allocation (SDR Department): 7.10 100.00 - Holdings: 0.14 1.94 - Outstanding Purchases and Loans: - ECF Arrangements: 4.51 30.46 - Latest Financial Arrangements (dates and amounts): - ECF 07/13/2015 to 12/31/2018 — Amount Approved (SDR Million) 4.44 — Amount Drawn (SDR Million) 3.17 - ECF 07/20/2012 to 07/13/2015 — Amount Approved (SDR Million) 2.59 — Amount Drawn (SDR Million) 1.11 - ECF 03/02/2009 to 03/01/2012 — Amount Approved (SDR Million) 2.59 — Amount Drawn (SDR Million) 0.74 - Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Forthcoming principal and charges/interest by year: - 2018 Principal 0.19; Charges/Interest 0.03; Total 0.22 - 2019 Principal 0.33; Charges/Interest 0.07; Total 0.40 - 2020 Principal 0.26; Charges/Interest 0.07; Total 0.32 - 2021 Principal 0.41; Charges/Interest 0.07; Total 0.48 - 2022 Principal 0.60; Charges/Interest 0.07; Total 0.67 ### HIPC and MDRI implementation details - Implementation of HIPC Initiative — Enhanced Framework: - Decision point date December 2000 - Assistance committed by all creditors (US$ million) 124.30 - Of which: IMF assistance (US$ million) 1.24 - (SDR equivalent in millions) 0.82 - Completion point date March 2007 - Disbursement of IMF assistance (SDR Million): - Assistance disbursed to the member 0.82 - Completion point balance 0.82 - Additional disbursement of interest income 0.04 - Total disbursements 0.87 - Implementation of Multilateral Debt Relief Initiative (MDRI): - MDRI-eligible debt (SDR Million) 1.43 - Financed by: MDRI Trust 1.05; Remaining HIPC resources 0.38 - Debt Relief by Facility (SDR Million): - December 2007 delivery: PRGT 0.38 (Total 0.38) - March 2007 delivery: PRGT 1.05 (Total 1.05) ### Safeguards and exchange arrangements - Safeguards assessments: - Conducted in 2009, 2013, and 2015. - Severe capacity constraints have contributed to a weak safeguards framework at the BCSTP. - External audits conducted by a reputable audit firm have served as a critical safeguard. - Key areas in need of strengthening: financial reporting practices, independent oversight on audit and control mechanisms, and the BCSTP’s legal framework. - A new Audit Board Charter has been drafted and approved, but implementation has been slow and independent oversight is still lacking. - Drafting of legal reforms is still ongoing and institutional development will be needed to strengthen capacity, especially in the areas of internal audit and financial reporting. - Exchange arrangements: - The de jure and de facto exchange rate arrangement is a conventional peg against the euro. - São Tomé and Príncipe has pegged the dobra to the euro since January 2010, initially at a rate of dobra 24,500 per euro; however, it redenominated the currency by removing three zeros in January *Source: cr18251 - 23. The performance criteria on net bank financing of the central government and net* ### 2018. The organic law of the BCSTP authorizes it to make decisions regarding exchange rate policy. ### cr18251 - 2018. The organic law of the BCSTP authorizes it to make decisions regarding exchange rate policy. ### Exchange rate policy and central bank practices - The organic law of the BCSTP authorizes it to make decisions regarding exchange rate policy. - Commission caps and spreads: - Commission on foreign exchange sales by banks cannot be higher than 2 percent for the euro. - The spread for other currencies cannot exceed 4 percent. - The central bank charges 1.5 percent commission on sales of euro and a 0.5 percent commission on purchases of euro. - Purchases of euro by banks: - Must be done at the rate published by the BCSTP. - No commissions are allowed on bank purchases of euro. - BCSTP purchasing behavior: - The buying rate is mainly indicative because the BCSTP rarely makes purchases. - Financing of current international transactions: - The BCSTP finances current international transactions at the official exchange rate and only after verification of the documentation establishing the bona fide nature of the bank’s request. ### Access to foreign exchange by banks and exceptional access - Eligibility limits for banks to access foreign exchange: - Net open position in the transaction currency of less than 12 percent of qualified capital. - Net open position in total foreign currency less than 25 percent of qualified capital. - Banks must be in compliance with the solvency and liquidity ratios set by the central bank, as well as minimum capital requirement. - Exceptional direct access: - Banks are allowed direct access to the central bank’s facilities regardless of the above conditions if the foreign exchange is to be used for importation of goods in periods of crisis or for the importation of fuel. ### Exchange restrictions, multiple currency practice, and Fund Articles - Article XIV and Article VIII status: - São Tomé and Príncipe continues to avail itself of the transitional arrangements under Article XIV, but it does not maintain restrictions under Article XIV. - It maintains one previously identified and one newly identified restriction subject to Fund approval under Article VIII. - Previously identified restriction: - Arises from Article 3(g) and Article 18 of the Investment Code (Law No. 19/2016). - Restriction results from requirement that taxes and other obligations to the government have to be paid/fulfilled as a condition for transfer, to the extent the requirement includes the payment of taxes and the fulfillment of obligations unrelated to the net income to be transferred. - Newly identified restriction (2018 Article IV context): - Arises from limitations on the availability of foreign exchange through rationing of foreign exchange by BCSTP. - This restriction gives rise to a multiple currency practice as the rationing has channeled bona fide current transactions to the parallel market where the exchange rate is at a spread of more than 2 percent from the exchange rate in the formal market. ### Article IV Consultation and program status - Consultation cycle and dates: - São Tomé and Príncipe is currently under a 24-month consultation cycle. - The Executive Board concluded the last Article IV consultation on June 10, 2016. - Resident representative: - The Fund has not had a Resident Representative office in São Tomé and Príncipe since October 2006. ### Technical assistance, capacity development, and cooperation - Technical assistance highlights (2013–18): - Multiple missions and training workshops covered VAT preparation, debt management, banking regulation and supervision, government finance statistics (GFS), customs administration, BoP statistics, price statistics, national accounts, public debt management, bank resolution and liquidation, VAT tax law follow-up, budget execution and control, revenue administration, arrears management, and liquidity management. - Specific mission examples include: - FAD mission on preparation for VAT (June 2018). - AFRITAC training workshop on debt management (May 2018). - AFRITAC mission on banking regulation and supervision (May 2018). - AFRITAC mission on GFS (April 2018). - STA mission on BoP statistics (February 2018). - MCM mission on bank resolution and liquidation (November 2017). - FAD mission on arrears management (April 2016). - STA mission on national accounts statistics (November 2015; September 2014; April 2014). - STP joined the AFRITAC Central project in 2017 with plans to develop GFS; two TA missions have taken place and another two are planned. ### Relations with the World Bank and AfDB; program coordination - IMF–World Bank cooperation: - Regular meetings to discuss macro critical structural reforms and supervision of the ECF-supported program for 2015–18. - Joint IMF-World Bank Debt Sustainability Analysis (DSA) update prepared in 2017 to accompany ECF-supported program review. - World Bank program (CPF FY2014–2018 and extensions): - Focus on macroeconomic stability and national competitiveness, and reducing vulnerability and strengthening human capacity. - Planned products include a new household survey and a Country Economic Memorandum to be available in FY 19. - African Development Bank engagement: - Cumulative commitments of about UA 135 million (US$191 million) since 1978. - Active portfolio as of May 2018: roughly UA 25 million (US$35 million) across six operations; average age 3.4 years; cumulative disbursement rate 34 percent after closure of two projects. - Sectoral distribution: agriculture and fisheries 57 percent; multi-sector 37 percent; finance 6 percent. - Portfolio funding composition: African Development Fund loan 82 percent; Global Environmental Fund (GEF) 10 percent; Transition Support Facility (TSF) 8 percent; African Trade Facilitation Fund 1.5 percent. - AfDB Country Strategy Paper 2012–16 focused on Pillar I–Strengthening Governance and Pillar II–Promotion of Agriculture Infrastructure; new CSP 2018–2022 scheduled for Board approval on June 6, 2018. ### Statistical issues and data adequacy - Overall assessment: - Data provision has some shortcomings but is broadly adequate for surveillance. - Serious financial, human, and technological resource constraints have delayed statistical system strengthening. - National accounts: - Annual GDP time series compiled with base year 2008 and inadequate source data; latest estimate for calendar year 2016. - Quarterly GDP estimates are not compiled. - Authorities expect to issue a revised time series by the end of 2018. - Consumer Price Index: - New CPI (base: 2014 = 100) disseminated from January 2016; covers capital city only. - CPI re-referencing and diagnostics performed with AFRISTAT and a TA mission in FY2018. - Government Finance Statistics: - Detailed revenue and expenditure data compiled and reported to AFR. - Main weaknesses: monitoring of expenditures on donor-financed projects and recording of financing operations and stocks. - Migration path towards GFSM 2014 adoption identified; compilation of GFS for budgetary central government for one fiscal year in accordance with GFSM 2014 assisted. - Monetary and Financial Statistics: - Monthly reporting resumed to STA; BCSTP monthly trial balance sheet broadly adequate to compile monetary statistics in line with the MFSMCG. - New plan of accounts for ODCs introduced January 2010; some banks reporting inconsistently to BCSTP prompted corrective work. - Central bank produces a quarterly FSI table; MCM TA missions improved coverage and data quality. - STA requested regular FSI submissions but BCSTP did not respond. - External Sector Statistics: - BCSTP compiles quarterly BOP and IIP statistics consistent with BPM6; series converted starting 1997-Q1 (BOP) and 2013-Q4 (IIP). - Data submission to STA is regular but with more than two-quarters lag relative to best practices. - Low survey response rates and large net errors and omissions persist; lack of good quality oil trade statistics could explain two thirds of net errors and omissions in the BOP. - The February 2018 TA mission recommended improved survey response, better granularity and coverage of goods account, constrained staff resources addressed, and direct access by compilers to oil trade data. - Data dissemination frameworks: - São Tomé and Príncipe is a participant in the Fund’s enhanced General Data Dissemination System (eGDDS), but has not implemented the National Summary Data Page. ### Debt sustainability assessment (DSA) findings and implications - DSA classification and change: - São Tomé and Príncipe is classified as being in debt distress according to the joint World Bank–IMF low-income country DSA. - This assessment changed from the previous DSA (December 2017) which had concluded high risk of external debt distress. - Reasons for change: - Prolonged negotiations on rescheduling external arrears contributed to the change. - Debt ratios improved since the previous DSA due to lower-than-expected loan disbursements in 2017, an appreciation of the euro vis-à-vis the U.S. dollar, and higher-than-expected GDP deflator growth. - Specific ratio outcomes: - The ratio of the present value of public and publicly-guaranteed (PPG) external debt to GDP no longer exceeds its threshold under the baseline scenario. - Debt service ratios stay below their respective thresholds under almost all scenarios. - Ratios of the present value of debt to exports and to revenue still exceed their respective thresholds under the baseline scenario early in the projection period, though they decline over time. - Policy implications: - Importance of lowering all PPG external debt indicators below their thresholds by: - Continuing fiscal consolidation. - Eschewing non-concessional loans. - Promoting growth. - Expanding the export base. *Prepared by International Monetary Fund and International Development Association staffs in collaboration with the authorities of São Tomé and Príncipe.* ### 1. This debt sustainability analysis (DSA) updates the DSA for São Tomé and Príncipe that ### Debt Sustainability Analysis (DSA) update — São Tomé and Príncipe ### Summary findings - The DSA updates the DSA completed on December 11, 2017 (IMF Country Report No. 17/382), which had concluded São Tomé and Príncipe stood at high risk of debt distress. - Current classification: in debt distress (changed because post-HIPC sovereign arrears to Angola, Brazil, and Equatorial Guinea, totaling around 2.8 percent of GDP, remain unresolved). - Absent these arrears, the country would be classified at high risk of debt distress due to threshold breaches under the baseline scenario. ### Public and external debt stocks (end-2017) - Total PPG debt: 267.6 million USD; Share of GDP: 64.4% - Total PPG external debt: 189.8 million USD; Share of GDP: 45.7% - Multilateral creditors total: 45.3 million USD; Share of GDP: 10.9% - IDA: 11.9 million USD; 2.9% - BADEA: 12.0 million USD; 2.9% - FIDA: 5.8 million USD; 1.4% - AfDB: 6.9 million USD; 1.7% - IMF: 6.7 million USD; 1.6% - OPEC: 2.0 million USD; 0.5% - Bilateral creditors total: 131.9 million USD; Share of GDP: 31.7% - Portugal: 59.6 million USD; 14.3% - Angola: 55.6 million USD; 13.4% - China (commercial debt guaranteed by the government): 10.0 million USD; 2.4% - Brazil (commercial debt guaranteed by the government): 4.3 million USD; 1.0% - Equatorial Guinea: 1.7 million USD; 0.4% - Belgium: 0.8 million USD; 0.2% - External suppliers' debt: 12.5 million USD; 3.0% - Domestic debt: 77.8 million USD; Share of GDP: 18.7% - Domestic arrears: 60.3 million USD; 14.5% - ENCO (oil importing company): 38.5 million USD; 9.3% - CST (telecom): 5.8 million USD; 1.4% - EMAE (water and electricity): 2.6 million USD; 0.6% - Other suppliers: 13.4 million USD; 3.2% - Domestic debt (other): 17.5 million USD; 4.2% - Memorandum items: - Pre-HIPC legacy arrears: 54.9 million USD; 13.2% of GDP (excluded from DSA on assumption of debt forgiveness) - Italy: 24.3 million USD; 5.8% - Angola: 30.6 million USD; 7.4% - Arrears from EMAE to ENCO: 66.6 million USD; 16.0% ### Arrears and disputed debt (as of end-December 2017) - Post-HIPC bilateral arrears (included in DSA): Angola 4.8 million USD; Brazil 4.3 million USD; Equatorial Guinea 1.7 million USD; total 10.8 million USD; equal to 2.8 percent of GDP. - Pre-HIPC legacy arrears (not included in DSA): total 54.9 million USD (14.0 percent of GDP); relief secured in 2017 from China of 18.4 million USD. - Disputed debt (not included in DSA): loan from Nigeria of 30 million USD; equal to 7.6 percent of GDP; excluded because no signed contract with repayment conditions exists and authorities consider it repayable only if oil revenues materialize. - Domestic arrears (included in DSA): total 60.3 million USD; equal to 14.5 percent of GDP. Government has a domestic arrears clearance plan. ### Loan disbursement profile and projections - 2018 budget foresees 11.0 million USD in loan disbursements; equal to 2.4 percent of GDP. A large share expected from AfDB. - Already contracted but undisbursed debt from 2017 projected to be disbursed in 2019-21. - Text Table (disbursements, selected items, millions USD and percent of GDP): - Sum of disbursements: 11.3 (2016), 20.9 (Proj. 2017), 8.8 (2017), 11.0 (Proj. 2018), 53.6 (Proj. 2019-21) - Percent of GDP: 3.2 (2016), 5.3 (Proj. 2017), 1.9 (2017), 2.4 (Proj. 2018), 3.1 (Proj. 2019-21) - Notable creditor entries (millions USD): Kuwait 1.7 (Proj. 2017 and 2019-21), AfDB 0.9 (2016), 7.6 (Proj. 2017), 2.2 (2017), 4.5 (Proj. 2018), 13.4 (Proj. 2019-21), Portugal 2.7 (2016), 2.2 (Proj. 2017), 0.0 (2017 and 2018), 6.8 (Proj. 2019-21), Angola 4.5 (2016, Proj. 2017, 2017), 0.0 (Proj. 2018, Proj. 2019-21), IMF 1.8 (2016, Proj. 2017, 2017, Proj. 2018), 0.0 (Proj. 2019-21). ### Macroeconomic assumptions (changes and key values) - Long-run real GDP growth lowered from 5.4 percent to 4.9 percent due to uncertainty about implementation of large projects. - GDP deflator raised in line with recently released deflator series. - FDI and the current account deficit raised reflecting heightened interest in oil exploration (oil signature bonus and tender announcements). - Selected historical and forecast values (as presented): - Real GDP growth (percent): Last 4 years 4.3; 2017 DSA 4.8; 2018 DSA 4.6; 2017-37 5.4; 2018-38 4.9 - Inflation (percent average): 13.2; 11.9; 5.8; 3.4; 3.4 - GDP deflator (percent): 5.6; 5.8; 2.4; 2.2; 2.9 - Domestic primary balance (percent of GDP): -4.5; -3.9; -3.1; -1.3; -1.0 - Primary balance (percent of GDP): -9.3; -8.7; -5.5; -2.4; -1.6 - Grants (percent of GDP): 17.3; 16.7; 11.8; 7.6; 7.4 - New borrowing (percent of GDP): 7.6; 7.5; 5.5; 2.3; 2.3 - FDI (percent of GDP): 15.7; 13.0; 7.8; 3.8; 11.9 - USD export growth (percent): 21.9; 24.6; 24.3; 6.6; 6.2 - USD import growth (percent): 9.6; 10.3; 3.3; 5.5; 6.3 - Current account balance, excluding grants (percent of GDP): -38.7; -36.3; -24.2; -13.2; -17.1 - Current account balance, including grants (percent of GDP): -21.4; -19.6; -12.4; -5.6; -9.7 ### External debt sustainability (baseline and stress) - Under the baseline scenario: - PV of debt-to-exports and PV of debt-to-revenue breach their indicative thresholds. - Debt service ratios remain below their thresholds under almost all scenarios. - PV of PPG debt-to-GDP no longer breaches its threshold (improvement from previous DSA). - Improvement drivers: lower-than-expected disbursements in 2017, euro appreciation vis-à-vis the U.S. dollar, and higher-than-expected GDP deflator growth. - Under extreme shock stress tests: - All external debt stock indicators breach their respective thresholds early in the projection period, though with a declining trend. - Export-based indicators are most sensitive to export shocks. - Remaining indicators are most sensitive to a one-time 30-percent depreciation shock. - Implication: need to diversify the export base and maintain credibility of the exchange rate peg. ### Public debt sustainability - The PV of total public debt-to-GDP ratio no longer breaches the benchmark under: - Baseline scenario (improvement driven by factors above). - Fixed primary balance scenario (improvement because a primary surplus of 0.6 percent of GDP is expected for 2018 versus a primary deficit of 1.0 percent of GDP in 2017, aided by a signing bonus for oil exploration). - Historical scenario: public debt dynamics appear unsustainable (as in previous DSA). - Sensitivities: - PV of debt-to-revenue ratio most sensitive to a deterioration of one standard deviation in the historical primary deficit. - Other indicators most sensitive to a one-time 30-percent depreciation. ### Debt distress qualification and risks - Classification updated to: in debt distress (post-HIPC sovereign arrears not regularized). - Aggravating factors: - Large part of domestic arrears to ENCO denominated in U.S. dollars; ENCO is majority foreign-owned. - Considerable contingent liabilities from state-owned electricity enterprise EMAE (not considered in this DSA, which focuses on the central government). - The World Bank is providing technical assistance to improve debt and SOE management. ### Policy recommendations and priorities - Continue fiscal consolidation. - Eschew non-concessional loans. - Promote growth and expand the export base to reduce vulnerability to shocks. - Prudence in contracting new debt. - Continue efforts to regularize post-HIPC arrears and seek rescheduling agreements with bilateral creditors. *Source: Country authorities and IMF staff estimates* ### 14. Authorities’ views: In response to the staff’s presentation of this analysis in March-April ### 14. Authorities’ views: In response to the staff’s presentation of this analysis in March-April 2018 ### Authorities’ reaction and commitments - Authorities broadly agreed with the assessment and understood that the main reason for being classified as being in debt distress is the existence of long-standing external arrears. - Commitments reiterated by the authorities: - To borrow at a measured pace. - To strive for debt sustainability. - To actively seek restructuring of the current arrears. - To limit concessional borrowing and strengthen debt management capacity (draft medium-term debt management strategy; detailed debt database; training; annual T-Bill issuance schedule aligned with cash flow forecasts and borrowing plans). - Specific external-arrears progress: reached an agreement with Brazil that is awaiting legislative approval from Brazilian lawmakers. ### Macroeconomic developments and outlook (selected figures and projections) - Real GDP growth: - 2017: 3.9 percent (down from 4.2 percent in 2016). - Authorities/staff outlook: pick up modestly from about 4 percent in 2018 to around 5 percent in the medium term. - Inflation: - End-2017: 7.7 percent. - Outlook: expected to decline in 2018 and remain below 5 percent in the medium term. - External position and reserves: - Staff assessment: external position is moderately weaker than fundamentals and desirable policies indicate; strong reserve buffers are necessary against shocks. - Central bank actions: amended regulatory framework to allow issuance of Treasury Bills and support securities market development. ### Debt and fiscal indicators (selected exact figures from the DSA tables) - External debt (nominal, percent of GDP): - 2015: 62.8 - 2018: 42.1 - 2023: 29.9 - 2038: 24.1 - PV of external debt (in percent of exports): - 2018: 105.6 - 2023: 115.9 - 2038: 93.1 - PV of PPG external debt (in percent of government revenues): - 2018: 219.3 - 2023: 166.4 - 2038: 88.1 - Debt service ratios: - Debt service-to-exports ratio (in percent) projections include: 2018: 4.7; 2023: 6.4; 2028: 7.8 (table entries show a series of values including 4.7, 5.7, 5.8, 5.8, 5.8, 5.9, 6.4, 7.8). - PPG debt service-to-revenue ratio (in percent) examples: 2018: 8.1; 2023: 7.7. - Key macro assumptions (selected): - Growth of exports of G&S (US dollar terms, in percent): 2018: 24.6; medium-term projections include 5.6, 5.6, 5.6 in later years shown. - Grant element of new public sector borrowing (in percent): 34.9 (assumed in projections for multiple years). - Government revenues (excluding grants, percent of GDP) examples: 2018: 13.8; 2023: 17.0; 2028: 20.0. - Nominal GDP (Millions of U.S. dollars): 2018: 466.1; 2023: 1049.6; 2028: 1956.3. - Gross workers' remittances (Millions of U.S. dollars): 2018: 19.1; 2023: 39.5; 2028: 86.5. ### DSA stress tests and sensitivity analysis (high-level findings) - Stress tests presented in figures and tables show alternative scenarios and bound tests for 2018–38 including: - Historical scenario and most extreme shocks (e.g., one-time 30-percent nominal depreciation; one standard deviation decrease in export value growth). - Sensitivity analyses A1–A2 (key variables at historical averages; less favorable loan terms) and bound tests B1–B6 (real GDP growth shock, export growth shock, US$ GDP deflator shock, net non-debt creating flows shock, combination shocks, one-time 30 percent depreciation). - Representative sensitivity outcomes (selected values preserved): - PV of debt-to-GDP ratio (percent): Baseline 2018: 36; A1 (historical averages) 2023: 51; A1 2038: 65 (Table 4 entries: Baseline and scenario values shown across 2018–2038). - PV of debt-to-revenue ratio (percent): Baseline 2018: 137; A1 2038: 258 (Table 4 entries). - Debt service-to-revenue ratio (percent): Baseline 2018: 4; B4 (one-time 30 percent real depreciation) 2019: 6; B4 2023: 9 (Table 4 entries show scenario comparisons). ### Policy measures and authorities’ priorities - Fiscal policy and revenue mobilization: - Collect tax arrears from large taxpayers (example: fiscal and legal procedures initiated against Rosema to resolve tax arrears). - Preparatory work for introduction of VAT in 2019: secure VAT Law approval, harmonize tax laws, provide space/equipment, hire/train personnel. - Implement a computer-based monitoring system for large taxpayers (per Fund TA recommendation). - Maintain fiscal discipline: streamline transfers and personnel costs, cap utility consumption of public agencies (including EMAE), contain domestically-financed capital expenditure, freeze real wage growth. - Continue prioritizing clearance of arrears to suppliers if additional resources available. - Public enterprise reforms and contingent liabilities: - Ongoing reforms at EMAE to revamp operational efficiency; expect EMAE to continue making losses in the medium term. - Authorities agree that additional short-term measures to contain SOE costs are critical to address domestic cross arrears. - Debt management: - Continue negotiations with external creditors on arrears; implement DeMPA recommendations (medium-term debt strategy, debt database, training). - Financial sector and stability: - Strengthen banking supervision; requirement to improve write-offs and recoveries; enforce collateral guidelines; improve oversight of credit risk management. - Upgrade credit registry, payment system infrastructure and laws, and microfinance legal framework with development partner support. - Prepare and complete asset quality review (AQR) of the banking system; full AQR report expected by mid-2019. - Structural and growth-enhancing reforms: - Implement National Development Plan (NDP) 2017-2021; accelerate infrastructure projects (airport expansion, energy grid rehabilitation, coastal requalification). - Address judicial system inefficiencies to reduce legal delays and costs. - Reduce oil dependence by exploring renewable energy, boosting exports, and improving implementation of externally funded projects. - Capacity development preferences: - Authorities prefer assignment of resident and Portuguese-speaking experts for Fund capacity building initiatives. *Source: Statement by Mr. Daouda Sembene, Executive Director, and Mr. Kelvio Carvalho da Silveira, Advisor, on Democratic Republic of São Tomé and Príncipe, July 23, 2018; accompanying IMF staff estimates, projections, Debt Sustainability Analysis tables and figures.* ### Conclusion ### Conclusion ### Context and authorities’ commitment - Against a challenging backdrop, the Sao Tomean authorities reiterate their strong commitment to the implementation of their ECF-supported program. - Continued engagement and timely delivery of technical and financial assistance from development partners will be critical to safeguarding macroeconomic stability and making headways toward inclusive growth and poverty reduction. ### Role of the Fund and development partners - In particular, Fund’s continued support and catalytic role will be key in achieving these objectives. - Continued engagement and timely delivery of technical and financial assistance from development partners are emphasized as critical. ### Requests and recommendations to Directors - The staff would appreciate Directors’ support for the completion of the fifth ECF Review. - Support is requested for the authorities’ requests for the approval of waivers for the nonobservance of program targets and the continuous PC related to exchange restrictions. *cr18251 - Conclusion* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18251.pdf_