## Executive Summary — 1stpea2021001 ## Source details **Canonical URL:** [Executive Summary — 1stpea2021001](https://www.imf.org/-/media/files/publications/cr/2021/english/1stpea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1stpea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1stpea2021001.pdf.json) --- ### Context and immediate response - COVID-19 severely impacted São Tomé and Príncipe’s economy, hitting tourism, transportation, and remittances; lockdowns deepened the recession. - Authorities’ response and international support: - Health, social, and business support measures costing about 3 percent of GDP. - Central bank increased liquidity provision under the currency peg. - IMF emergency financial assistance of about US$12 million (3 percent of GDP) in April 2020. - First review under the 2019 ECF completed July 2020 with augmentation; DSSI and CCRT provided additional temporary relief. - External support expected to finance about 11 percent of GDP in budget needs and 17 percent of GDP of BOP needs. ### Impact of COVID-19 and incipient recovery — key findings - Real GDP: - 2019 growth: 1.3 percent. - 2020 expected contraction: about 6½ percent (listed elsewhere as -6.5 percent). - Inflation: - Headline inflation rose to 10.8 percent in September 2020 (7.7 percent in 2019). - Current account: - Projected current account deficit: 17 percent of GDP by end-2020 (12.5 percent in 2019). - Reserves: - Gross international reserves were US$64 million in September 2020; expected to stabilize at around 5.1 months of projected imports (about 65 percent of reserve money) by end-year. - Fiscal response package (Percent of GDP): - Health expenditure 1.5; Expanded social programs 0.8; Unemployment benefits in the formal sector 0.1; Support to unemployed in the informal sector 0.2; Contribution to workers' salaries 0.5; Total 3.1. - Public finances: - Domestic primary deficit (DPD) end-June 2020: widened to 2.6 percent of GDP; projected to reach 5.3 percent of GDP by end-2020 (1.8 percent in 2019). - Drivers: pandemic-related spending of about 3½ percent of GDP for 2020 and unbudgeted personnel cost increases (1 percent of GDP on an annual basis). - Public debt: - Public debt expected to increase to about 103½ percent of GDP, reflecting GDP drop and EMAE losses. - Banking sector: - Credit growth to private sector decelerated to about 0.1 percent by September 2020 (5 percent at end-2019). - Non-performing loans (NPLs) rose to about 34 percent of total loans by end-September 2020 (26¾ percent in December 2019). - Recapitalization plans addressing 2019 AQR capital shortcomings were completed. ### Program performance and structural benchmarks - End-June fiscal targets missed: domestic primary balance breached performance criterion by DB134 million largely due to pandemic spending and wage overspending. - Net international reserves and net bank financing outperformed end-June targets due to large external financing inflows. - Despite pandemic, authorities on track to meet revised end-2020 quantitative program targets set at the first review. - Structural benchmarks — summary of status (selected): - Retail fuel prices kept unchanged — Met. - COVID-19 related spending reports published until August 2020 — published though with delays. - Publication of public procurement contracts (including beneficial ownership) completed until June; beneficial ownership information required by November 15, 2020 — Not met. - VAT IT system and EMAE reforms — Not met. - Draft central bank organic law finalized but not yet presented to parliament. - Draft Financial Institutions Law progressing; expected early 2021. - Recommendation: - Staff recommends completion of the second review and approval of the request for a waiver given exceptional pandemic circumstances and authorities’ actions. *Source: Executive Summary, 1stpea2021001* --- ### Outlook and risks (baseline projections and key risks) - Growth (conditional on gradual global recovery and lifting of measures): - 2021: about 3 percent. - 2022: peak at 5 percent. - Medium term: stabilize around 4-4½ percent. - Inflation: - Would pick up in 2021 with adoption of the VAT, then taper anchored by the currency peg. - Fiscal trajectory: - With gradual consolidation and declining pandemic spending, primary fiscal deficit would broadly balance over time and public debt would decline reflecting a positive growth-interest rate differential. - External buffers: - Fiscal adjustment and gradual tourism increase would strengthen current account balance and international reserves over time. - Key risks (downside): - Pandemic resurgence, slower global recovery, delays in reform implementation, less than expected donor grants. - Upside: - Rapid structural reforms in energy sector and infrastructure (e.g., airport expansion, road rehabilitation) could trigger stronger medium-term growth. --- ### Debt Sustainability and External Arrears ### Overall assessment - Under program baseline, PV of total public and publicly guaranteed (PPG) debt projected to decline below DSA thresholds only in 2025. - Public debt assessed sustainable but subject to large significant risks; downward PV trajectory depends on authorities’ commitment to: - continue fiscal consolidation; - implement planned energy sector reforms (including EMAE); - borrow externally only on concessional terms and at a measured pace. - Post-HIPC sovereign arrears with bilateral creditors and arrears with private creditors place the country in debt distress. - Outstanding external arrears regularization efforts: - Authorities engaged with Angola, Brazil, and Equatorial Guinea to regularize outstanding external arrears (2.6 percent of GDP). ### Key projections and indicators (program baseline, percent of GDP unless specified) - Public Debt (Total public and publicly guaranteed debt as defined in DSA, which includes EMAE's debt): 81 84 96 98 105 103 105 102 97 92 86 79 (values as presented in table). - NPV Public Debt: 47.4 46.5 43.4 40.8 38.1 34.6 (values as presented in table). - Overall Fiscal balance (commitment basis): -4.2 -2.7 -1.9 -0.1 -4.6 1.5 -3.7 -3.9 -1.2 -0.8 -0.5 -0.5. - Total revenue, grants, and oil signature bonuses: 28.2 24.9 24.1 22.5 24.6 28.2 22.7 21.5 24.4 24.4 24.2 24.0. - Total expenditure and net lending: 32.4 27.6 26.0 22.5 29.2 26.7 26.4 25.4 25.6 25.2 24.7 24.4. - Domestic primary balance: -4.1 -2.4 -4.2 -1.8 -6.3 -5.3 -3.9 -3.9 -1.2 -0.6 -0.3 -0.1. - Current account balance including official transfers: -6.1 -13.2 -12.3 -12.5 -17.0 -17.5 -11.9 -14.9 -9.2 -8.4 -8.2 -8.0. - Current account balance excluding official transfers: -20.0 -24.3 -21.0 -19.0 -26.3 -28.7 -18.6 -18.7 -15.0 -14.2 -13.6 -12.9. - Gross international reserves (Months of imports): 4.9 4.2 3.0 3.8 6.0 5.1 5.6 5.0 5.2 5.1 5.1 5.0. - GDP at constant prices (Annual percentage change): 4.2 3.0 3.0 1.3 -6.5 -6.5 3.0 3.0 5.0 4.2 4.5 4.5. - Credit to the private sector (Annual percentage change): 6.6 2.5 -1.6 3.2 0.1 1.1 2.7 4.6 5.6 5.2. ### DSA and stress-test highlights - Country remains in debt distress due to prolonged unsettled external arrears. - PV of total PPG debt projected to breach the 35 percent of GDP benchmark through 2025 before declining (after accounting for concessional terms). - Extreme stress tests (exports shock and combined contingent liability shock including ENCO’s arrears to Sonangol) cause solvency breaches though key ratios recover over time under baseline assumptions. - Policy implication: develop EMAE arrears clearance plan and promote exports; avoid non-concessional borrowing. --- ### Energy Sector Reforms — Annex I (EMAE) ### Objectives and targets - Reduce average cost of energy produced from 0.25 to 0.14 USD/kWh by 2024. - Increase renewable sources’ share from 5 to 45% by 2024. - Reduce losses (commercial + technical) from 33 to 23% by June 2022. - Raise collection rates from 85 to 95% by June 2022. - Rehabilitate and expand Contador HPP to 3.2 MW (target by June 2022 / end-2021 noted in various places). ### Key actions and timelines (selected) - Implement LCDP and MIP; develop 8.8 MW of dual-fueled thermal units and about 2 MW photovoltaic. - Status: Delayed; preparing bidding documents to be launched in 2021; multiple unsolicited proposals not aligned with LCDP parameters. - LED program: - LED rollout: June 2021; tender concluded November 2020; contract expected to be signed by end-2020 / January 2021. - Target: Reduce peak (overall) electricity consumption by 10% (15%) within 12 months. - Metering program (EIB and World Bank support): - Install 200 high tension, 3000 large consumption, and 16,000 residential meters (large and high tension meters: June 2021; residential meters: end-2021). - Status: Delayed; consultant produced bidding documents; capacity constraints at EMAE causing delays. - Management Improvement Plan (MIP) and governance: - Appoint Project Director and Project Manager for Loss Reduction Plan; select management consultancy firm; reorganize HR and appoint Directors and Managers (various Aug–Oct 2020 actions delayed or partially achieved). - Tariff reform and regulatory strengthening: - Implement new tariff structure and approve decree Mar.–Dec. 2021; target cost-reflective tariff by 2024. - WB concluded tariff analysis; reform led by regulator AGER; status: Delayed. ### Structural benchmarks and actions (selected) - Develop terms of reference of the new executive management team for EMAE — End-December 2020. - Government establishes mechanism with EMAE to cap consumption and ensure payment by public entities — End-November 2020. - Complete the LED program — End-June 2021. - Implement meter program and install diesel meters at power plants — End-June 2021. - Issue decree covering tariff and timeline to achieve full cost-recovery structure — End-2021. --- ### Banking Sector, BCSTP, and Financial Stability ### Pandemic-era measures and liquidity management - BCSTP actions in April 2020: - Reduced reserve requirements (domestic currency from 18 to 14 percent; foreign currency from 21 to 17 percent). - Lowered discount rate for BCSTP liquidity facility from 11 to 9.5 percent. - Suspended issuance of certificates of deposit (CDs) initially; later on November 17, 2020, auctioned CDs totaling Db 100 million (oversubscribed). - Encouraged six-month moratorium on loan repayments for non-delinquent borrowers; moratorium extended through December 2020. - In collaboration with AfDB, created a US$3 million credit line for SME lending. ### Asset quality, capital, and liquidity indicators (selected) - NPLs/NPL ratios: - NPLs rose to about 34 percent (34.2 percent) of total loans by end-September 2020 (26.5 percent at end-March 2020). - System NPL ratio increased by approximately 8 percentage points since March 2020. - Capital and liquidity: - Regulatory capital to risk-weighted assets: series show 27.8, 33.6, 30.7, 28.9, 31.5, then 19.7 by Sep. 2020. - Capital (net worth) to assets: series ranged down to 17.7. - Liquid assets/total assets: series include 54.0, 49.7, 50.1, 41.9, 43.7, 44.0, 40.1, 46.7. - Credit to private sector: private sector credit growth declined to 0.1 percent by Sep. 2020 and shows low/negative growth in 2020. ### Supervisory and resolution reforms - AQR implementation: - Loan reclassification, additional provisioning, and recapitalization recommendations from 2019 AQR fully addressed. - Stress testing and contingency planning: - BCSTP to conduct stress tests with IMF assistance in early 2021 (structural benchmark). - Based on stress tests, banks to develop contingency plans and remedial measures by June 2021 (based on March stress tests). - NPL resolution and legal framework: - Judicial reforms progressing: arbitration tribunals and out-of-court settlements; arbitration courts to be operational by June 2021. - BCSTP to issue regulation in early 2021 to support rapid write-offs of long-defaulted and fully provisioned loans. - Bank liquidations and administration: - Banco Equador liquidation to be completed in early 2021; liquidation costs to date 0.3 percent of GDP. - Banco Privado likely to be sold; if not by June 2021, assets turned over to court. - One small bank (about 1 percent of GDP) placed under BCSTP temporary administration in November 2020; another small bank placed under administration (Energy Bank) with withdrawals capped and report due mid-January 2021. ### BCSTP governance, safeguards, and capacity building - Safeguards and governance actions: - Submission to parliament of revised organic law expected by February 2021 (end-2020 structural benchmark). - Draft financial institutions law to be submitted by end-March 2021. - Finalization of external audit of 2019 financial statements delayed; expected conclusion end-January 2021. - IMF technical assistance to implement IFRS and develop banking supervision manual (targeted completion March 2021). - Payment systems and financial inclusion: - New payment system capable of processing international credit cards scheduled early 2021 (equipment delays pushed to January 2021 in some notes). - Bureau for financial inclusion established; national strategy on financial inclusion to be completed by end-2020/early 2021. - Moveable collateral registry legal framework drafted with World Bank support; registry expected operational in 2022. --- ### Fiscal Policy, Public Financial Management, and VAT ### 2020–2021 fiscal picture and targets - 2020: - DPD projected to reach 5.3 percent of GDP by end-2020 (1.8 percent in 2019) in one summary; elsewhere end-2020 DPD estimated about 4 percent of GDP (preliminary) — source contains both figures in different contexts. - COVID-19 fiscal response approximately 3.1 percent of GDP. - 2021 baseline targets: - DPD expected to decline to 3.9 percent of GDP. - Overall fiscal balance would widen compared to 2020 (by about 5½ percent of GDP) due to sharp decline in budget grants. - Government gross financing needs would reach 6 percent of GDP. - Domestic borrowing and IMF indirect budget support to contribute to finance the budget. ### Immediate and medium-term fiscal measures - Key 2021 measures: - Introduce VAT in the second half of 2021 (structural benchmark); VAT introduction expected to strengthen domestic tax revenues by approximately 2 percent of GDP cumulatively by 2023. - Wage and employment containment policies to gradually reduce the wage bill; aim to approach close to 10 percent of GDP by 2023 through attrition and suspension of inflation adjustments. - Reduce pandemic-related spending as the pandemic subsides. - If revenues fall short, consider further revenue mobilization and expenditure rationalization, including reprioritization of capital expenditure and revisions to the temporary solidarity tax. - VAT preparatory actions: - VAT law approved last October; selection of company to design IT system expected by January 2021; IT system operational before July 2021. - Preparatory steps include VAT regulations, refund procedures, taxpayer centers, training, and bank agreements to receive VAT payments. - Structural benchmark: issue terms of reference and timeline for contracted consultant to implement IT system — End-September 2020 — Not met. ### Public financial management reforms and transparency - Measures to strengthen PFM: - Strengthen macro-fiscal projections manual and publish a three-year medium-term fiscal framework with the annual budget. - Centralize public borrowing and publish medium-term debt management strategy. - Pilot a commitment ceiling mechanism in 2021 across selected ministries. - Publish monthly COVID-19-related spending reports and procurement contracts; perform ex post audit of 2020 COVID-19-related spending in 2021. - Strengthen capacity to collect beneficial owner information; modernize procurement legislative framework (e-procurement, beneficial ownership, complaint mechanism). - Procurement and transparency status: - Public procurement contracts up to June 2020 and monthly COVID-19 spending reports up to August 2020 published; beneficial ownership publication requirement Not met for November 15, 2020. - Executive order requiring all spending agencies to send signed procurement contracts to COSSIL as condition for Treasury payments. - Auditor General to audit and publish 2020 COVID-19-related spending by October 2021. ### Budget ceilings (Aggregate Budget Spending Ceilings, 2021, millions of new dobras) - Total domestic primary expenditure 2059. - Total primary current expenditure 1871: - Personnel costs 1070. - Goods and services 260. - Transfers 348. - Other 192. - Treasury-financed capital expenditure 29. - HIPC-related social expenditure 23. - Treasury-financed COVID-related spending 136: - o/w temporary contracts for social distancing in schools 54. --- ### Technical Memorandum of Understanding (TMU) — Program monitoring highlights ### Definitions and program exchange rate - Program exchange rate (end-2018 mid-point rates): - 21.6925 new dobras per U.S. dollar. - 24.5 new dobras per euro. - 29.17221 new dobras per SDR. - 30.1865 new dobras per UA. ### Quantitative performance criteria and reporting - Primary performance criteria: - Floor on domestic primary balance. - Ceiling on changes in net bank financing of the central government. - Floor on net international reserves (NIR) of BCSTP. - Ceiling on central government's outstanding external payment arrears. - Ceiling on contracting/guaranteeing new non-concessional external debt. - Reporting lags and data provision: - NIR data lag: no more than four weeks. - Other data lag: six weeks. - Monthly fiscal data to IMF within three weeks after end of each month (various detailed reporting requirements specified). - Adjusters: - DPD adjuster for shortfalls/excesses in budgetary grants and privatization receipts (caps: downward adjustment capped at 25 million new dobras for 2020 and first semester 2021; upward adjustment capped at 50 million new dobras in 2020). - NCG and NIR ceilings subject to adjusters tied to deviations in NOA transfers, budget support grants, net external debt service payments, and domestic arrears (combined application caps: US$5 million for NCG; US$10 million for NIR). --- ### Statistics, Data, and Capacity Development ### Data dissemination and statistical weaknesses - Participation in enhanced GDDS; NSDP operational since May 7, 2019 via SDMX. - CPI coverage limited historically (CPI in 2010 covers only the capital city). - GFS and MFS improvements through AFRITAC Central and STA missions; issues remain in monitoring donor-financed project execution and financing operations. - Balance of payments and IIP compiled quarterly consistent with BPM6; timeliness and coverage require improvement. - Table of Common Indicators Required for Surveillance (as of November 30, 2020) includes recent observations with varying frequency and timeliness; selected items have lags (e.g., IIP Q3 2019 / Jan 2020). ### DSA and statistical inputs - Joint Bank-Fund DSA dated December 23, 2020: - Risk of external debt distress: In debt distress. - Overall risk of debt distress: In debt distress. - Composite Index classifies country as having weak debt-carrying capacity. - Public debt and arrears: - Total PPG debt (incl. EMAE arrears to ENCO) end-2019: 408.9 million USD — 97.7% of GDP. - EMAE’s arrears to ENCO: 110.5 million USD (End-2019) — 26.4% of GDP. - Post-HIPC bilateral arrears: US$10.7 million — 2.3% of 2019 GDP (Angola US$4.8m; Brazil US$4.3m; Equatorial Guinea US$1.7m). - Domestic arrears: US$33.6 million — 9.1% of GDP. --- ### Staff Appraisal and Policy Recommendations — Selected priorities ### Fiscal and debt recommendations - Bring primary deficit close to balance over time; continue fiscal consolidation. - Introduce VAT in 2021 and strengthen tax administration. - Contain spending dynamics, particularly personnel expenses (wage and employment containment policies). - Continue to borrow moderately and prioritize grants and highly concessional loans; consider further debt relief if downside risks materialize. ### Energy and structural reforms - Accelerate EMAE reforms (MIP and LCDP), meter installations, loss reduction, collection improvements, tariff reform, and limit authorization of projects not aligned with LCDP. - Develop and implement arrears clearance plan for EMAE. - Prioritize infrastructure (airport, roads, port) and tourism facilitation (remove EU Air Safety List designation). ### Financial sector and BCSTP - Continue active liquidity management to support the peg; implement plan to reduce excess liquidity (developed by January 2021). - Perform stress tests (March 2021) and require contingency plans and remedial measures by June 2021. - Issue regulations to accelerate write-offs of long-defaulted, fully provisioned loans (expected by March 2021). - Strengthen BCSTP governance, finalize organic law and financial institutions law, finalize 2019 audit, and implement remaining safeguards recommendations. ### Transparency, PFM, and procurement - Continue publishing procurement contracts, adjudication notices, beneficial ownership and monthly COVID-19 spending reports; conduct ex-post audit of COVID-19 related spending. - Pilot and expand commitment ceiling mechanism; centralize public borrowing and publish medium-term debt management strategy. *Source: IMF staff report excerpts as provided in the supplied content unit, 1stpea2021001.* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - The COVID-19 pandemic is having a severe impact on São Tomé and Príncipe’s economy, exacerbating fiscal and external imbalances. - Tourism activities and external remittances dropped sharply, and lockdown measures further deepened the recession. - Authorities implemented health, social, and business support measures at a total cost of about 3 percent of GDP. - The central bank increased liquidity provision to the banking sector in the context of the currency peg. - Unprecedented international financial support helped finance large external and budget financing needs; in April 2020 the country received IMF emergency financial assistance of about US$12 million (3 percent of GDP). - In July 2020 the first review under the 2019 Extended Credit Facility (ECF) was completed together with an augmentation of the program; the DSSI and the Fund’s CCRT provided additional temporary relief. - External support is expected to finance about 11 percent of GDP in budget needs and 17 percent of GDP of BOP needs. - The authorities’ swift actions and international support helped weather the emergency; the economy began to reopen in the fall, but the outlook for 2021 remains challenging and subject to significant uncertainty. ### Impact of COVID-19 and an Incipient Recovery Findings - Real GDP: After growth of 1.3 percent in 2019, real GDP in 2020 is expected to contract by about 6½ percent. - Sectoral impact: Key sectors—tourism, transportation and trade—came to a near halt in early 2020. - Inflation: Headline inflation rose to 10.8 percent in September 2020 (7.7 percent in 2019), driven by high food prices. - Current account: The current account deficit is projected to reach 17 percent of GDP by end-2020 (12.5 percent in 2019). - Reserves: Gross international reserves were US$64 million in September 2020 and are expected to stabilize at around 5.1 months of projected imports (about 65 percent of reserve money) by end-year. - Fiscal response: COVID-19 fiscal response package (Percent of GDP): Health expenditure 1.5; Expanded social programs 0.8; Unemployment benefits in the formal sector 0.1; Support to unemployed in the informal sector 0.2; Contribution to workers' salaries 0.5; Total 3.1. - Public finances: The domestic primary deficit (DPD) at end-June 2020 widened to 2.6 percent of GDP (missing the program target set prior to the pandemic) and is projected to reach 5.3 percent of GDP by end-2020 (1.8 percent in 2019), meeting the revised end-year program target that accounts for pandemic-related spending. - Drivers of the deficit: Pandemic-related spending of about 3½ percent of GDP for 2020 and unbudgeted increases in personnel costs early in the year (1 percent of GDP on an annual basis). - Public debt: Public debt is expected to increase to about 103½ percent of GDP, owing largely to the drop in GDP and continued losses at the state-owned utility company EMAE. Banking sector effects - Credit growth to the private sector decelerated and reached about 0.1 percent by September 2020 (5 percent at end 2019). - Non-performing loans (NPLs) rose to about 34 percent of total loans by end-September 2020 (26¾ percent in December 2019). - Recapitalization plans for selected banks to address capital shortcomings identified under the 2019 asset quality review (AQR) were completed. ### Program Performance - End-June fiscal targets were missed: domestic primary balance breached the performance criterion by DB134 million largely due to pandemic-related spending and wage overspending. - The indicative target on revenues was missed due to the pandemic, although arrears clearance proceeded as planned. - Net international reserves and net bank financing outperformed end-June targets, reflecting large external financing inflows. - Despite the pandemic, authorities are on track to meet revised end-2020 quantitative program targets set at the first review. - Structural benchmarks: Progress is uneven and several SBs were delayed or not met: - Retail fuel prices were kept unchanged (Met). - COVID-19 related spending reports were published until August 2020, though with some delays. - Publication of public procurement contracts (including beneficial ownership information) was only completed until June and beneficial ownership information required by the SB of November 15, 2020 was Not met. - Benchmarks on the VAT IT system and EMAE reforms (improving management and modernizing information systems) were Not met. - A draft of the central bank organic law was finalized but not yet presented to parliament. - Drafting of the Financial Institutions Law is progressing and should be concluded in early 2021. - Program recommendation: In light of exceptional pandemic circumstances and authorities' strong actions to meet end-2020 program targets and commitments going forward, staff recommends completion of the second review and approval of the request for a waiver. ### Outlook and Risks Baseline projections (conditional) - Growth: Assuming a gradual global recovery and lifting of domestic containment measures in early 2021, real GDP growth is expected to rebound to about 3 percent in 2021, peak at 5 percent in 2022, and stabilize at around 4-4½ percent over the medium term. - Inflation: Inflation would pick up in 2021 with the adoption of the VAT, before tapering off anchored by the currency peg. - Fiscal trajectory: With gradual fiscal consolidation and declining pandemic-related spending, the primary fiscal deficit would broadly balance over time and public debt would decline, reflecting a positive growth-interest rate differential. - External buffers: Fiscal adjustment and a gradual increase in tourism receipts would strengthen the current account balance and international reserves over time. Key risks - The outlook is highly dependent on the pandemic subsiding, continued fiscal adjustment, and implementation of structural reforms. - Pandemic resurgence, slower global recovery, or delays in reform implementation would materially worsen projections for growth, fiscal balances, debt dynamics, and external positions. ### Policy Discussions (focus areas) - Addressing social priorities while gradually resuming fiscal consolidation and reducing debt vulnerability. - Easing external account pressures and safeguarding financial stability amid the peg. - Boosting more inclusive and sustainable growth through structural reforms. - Specific programmatic policy actions and structural benchmarks prioritized in 2020 included: - Management Improvement Plan and Least Cost Development Plan for EMAE: Continuous — Not met. - Issue terms of reference and timeline for contracted consultant to implement IT system needed for introducing the VAT: End-September 2020 — Not met. - Maintain current fuel retail prices as long as costs remain below prices, and raise prices if costs increase consistent with automatic fuel price adjustment mechanism: Continuous — Met. - Publish on the Ministry of Finance website adjudication notices of public procurement contracts, all signed public procurement contracts above the threshold, ex-post validation of delivery within two weeks, and monthly COVID-19 related expenditure reports within a 45-day lag: End-August 2020 — Not met. - Publish beneficial ownership information of companies receiving public procurement contracts: November 15, 2020 — Not met. - Submit amended BCSTP Law to strengthen autonomy and governance of BCSTP and a revised financial institutions law to Parliament (in consultation with IMF staff): End-2020 — Not met. - Develop a plan to remove the country from the European Union's Air Safety blacklist: End-2020 — Not met. *Source: Executive Summary, 1stpea2021001 - EXECUTIVE SUMMARY* ### 10. Although public debt remains sustainable, long-standing external arrears place the ### 10. Although public debt remains sustainable, long-standing external arrears place the ### Debt sustainability and external arrears - Under the program baseline, the present value (PV) of total public and publicly guaranteed (PPG) debt is projected to decline below the debt sustainability analysis (DSA) thresholds only in 2025. - Public debt is assessed to be sustainable, although subject to large significant risks, as the debt PV remains on a downward trajectory amid the authorities’ commitment to: - continue fiscal consolidation; - implement planned energy sector reforms (including EMAE); - borrow externally only on concessional terms and at a measured pace. - Post-HIPC sovereign arrears with bilateral creditors, in addition to arrears with private creditors, place the country in debt distress. - Authorities are actively engaged with Angola, Brazil, and Equatorial Guinea to regularize outstanding external arrears (2.6 percent of GDP). - Authorities continue to make good faith efforts to reach a collaborative agreement regarding external arrears owed by São Tomé and Príncipe to private creditors. ### Key projections and indicators (program baseline, percent of GDP unless otherwise specified) - Public Debt (Total public and publicly guaranteed debt as defined in DSA, which includes EMAE's debt): 81 84 96 98 105 103 105 102 97 92 86 79 (values as presented in table) - NPV Public Debt: 47.4 46.5 43.4 40.8 38.1 34.6 (values as presented in table) - Overall Fiscal balance (commitment basis): -4.2 -2.7 -1.9 -0.1 -4.6 1.5 -3.7 -3.9 -1.2 -0.8 -0.5 -0.5 - Total revenue, grants, and oil signature bonuses: 28.2 24.9 24.1 22.5 24.6 28.2 22.7 21.5 24.4 24.4 24.2 24.0 - Total expenditure and net lending: 32.4 27.6 26.0 22.5 29.2 26.7 26.4 25.4 25.6 25.2 24.7 24.4 - Domestic primary balance: -4.1 -2.4 -4.2 -1.8 -6.3 -5.3 -3.9 -3.9 -1.2 -0.6 -0.3 -0.1 - Current account balance including official transfers: -6.1 -13.2 -12.3 -12.5 -17.0 -17.5 -11.9 -14.9 -9.2 -8.4 -8.2 -8.0 - Current account balance excluding official transfers: -20.0 -24.3 -21.0 -19.0 -26.3 -28.7 -18.6 -18.7 -15.0 -14.2 -13.6 -12.9 - Gross international reserves (Months of imports): 4.9 4.2 3.0 3.8 6.0 5.1 5.6 5.0 5.2 5.1 5.1 5.0 - GDP at constant prices (Annual percentage change) — table entries: 4.2 3.0 3.0 1.3 -6.5 -6.5 3.0 3.0 5.0 4.2 4.5 4.5 - Credit to the private sector (Annual percentage change) — table entries: 6.6 2.5 -1.6 3.2 0.1 1.1 2.7 4.6 5.6 5.2 - Note: Sources: Authorities and IMF staff calculations. Footnotes in table specify exclusions and definitions. ### Outlook, uncertainty, and risks - The outlook is subject to significant uncertainty and downside risks: - A deeper and prolonged duration of the pandemic could further deteriorate the outlook, delay the recovery and create additional external and budget financing pressures. - The outlook critically depends on the government’s ability to deliver on its medium-term fiscal adjustment plans and for pandemic-related spending to decline over time. - If adjustment plans are not fully implemented: - the fiscal deficit would remain large and financing pressures would intensify, adversely affecting external accounts; - delayed reforms in the energy sector could raise arrears, hindering external buffers. - Less than expected grant support from donors would negatively affect the economic recovery and weaken fiscal and external positions. - On the upside, rapid progress on structural reforms in the energy sector and in development of key infrastructure (e.g., airport expansion, road rehabilitation) could trigger stronger medium-term growth. ### Policy discussions and priorities - Main discussion areas: - Implementing a fiscal strategy to address social needs while gradually restoring fiscal sustainability, and accelerating energy sector reforms to reduce fiscal and external vulnerabilities. - Developing monetary policy tools to support the peg, and advancing financial sector reforms to safeguard financial stability. - Unlocking growth potential by fostering the tourism sector and improving the business environment. A. Supporting the Recovery and Restoring Fiscal Sustainability - Implementation of the 2019 tax policy package has created some fiscal space: - Better than expected revenue (about 1½ percent of GDP) would contain the 2020 DPD to around 5⅓ percent of GDP (6.3 percent of GDP under the program). - The 2020 revenue windfall is projected to be about 1½ percent of GDP; about two thirds of the windfall is expected to be permanent. - 2021 budget and fiscal targets: - DPD expected to decline to 3.9 percent of GDP, 1½ percent of GDP lower than in 2020. - With a sharp decline in budget grants, the overall fiscal balance would widen compared to 2020 (by about 5½ percent of GDP) and government gross financing needs would reach 6 percent of GDP. - Domestic borrowing and IMF indirect budget support would contribute to finance the budget; public debt-to-GDP ratio broadly stable in 2021 before declining as consolidation proceeds. - Immediate measures critical to deliver 2021 targets: - Introduce the VAT in the second half of 2021 (structural benchmark), key to strengthening domestic tax revenues (approximately 2 percent of GDP cumulatively by 2023). - Wage and employment containment policies to gradually reduce the wage bill (tight employment and limited salary increases over the next few years). - As pandemic subsides, reduce pandemic-related spending. - If revenues fall short, consider further revenue mobilization and expenditure rationalization, including reprioritization of capital expenditure and revisions to the temporary solidarity tax (MEFP ¶16). - Public financial management, governance, and revenue administration reforms: - Strengthen macro-fiscal projections manual and publish a three-year medium-term fiscal framework with the annual budget. - Centralize public borrowing and publish medium-term debt management strategy. - Pilot a commitment ceiling mechanism in 2021 to manage expenditures at the commitment stage across multiple ministries. - Publish monthly COVID-19-related spending reports and procurement contracts, perform an ex post audit of 2020 COVID-19-related spending in 2021. - Strengthen capacity to collect beneficial owner information and modernize procurement legislative framework (e-procurement, beneficial ownership, complaint mechanism). - Strengthen tax administration by reorganizing the tax directorate, adopting modern compliance risk management practices, and overhauling the tax administration performance monitoring framework. B. Energy sector reforms (EMAE) — reducing fiscal and external vulnerabilities - EMAE (Empresa de Água e Electricidade) provides essential services but has accumulated large losses and contingent liabilities despite relatively high electricity tariffs. - In 2019, EMAE accumulated close to US$17 million (4 percent of GDP) in new arrears to its suppliers. - As of June 2020, EMAE’s arrears to ENCO amounted to US$117 million (28 percent of GDP). - Authorities, with World Bank assistance, developed: - a Management Improvement Plan (MIP) to reduce grid losses and raise collection rates; - a Least Cost Development Plan (LCDP) to reduce average cost of energy by increasing renewable share. - Progress on short-term actions to reduce energy losses and improve management has been limited and some reforms delayed due to capacity constraints and unsolicited proposals not aligned with LCDP. - To recover momentum: - A high-level steering committee chaired by the Prime Minister will oversee reform progress (MEFP ¶43). - Short-term actions with World Bank support include installation of new meters and a LED bulbs program to contain electricity demand (MEFP ¶45). - Authorities have taken actions to ensure timely payment from public entities, including suspending power provision for nonpayment. - To ensure cost-recovery, it is critical to reform the current tariff structure and modify the production mix away from thermo electrical production (Annex III). C. Contingent plans and debt-carrying capacity - Uncertain macroeconomic conditions and a weakening in debt-carrying capacity increase risks to public debt sustainability. - If downside risks materialize and debt sustainability deteriorates further, authorities should be ready to: - recalibrate fiscal efforts; - improve the financing mix toward more grants and highly concessional borrowing; - seek further debt relief (MEFP ¶15). B. Supporting the Peg and Safeguarding Financial Stability - Central bank actions during the pandemic: - In April 2020, the Central Bank of São Tomé and Príncipe (BCSTP) reduced reserve requirements, lowered the discount rate for the BCSTP’s liquidity facility (MEFP ¶22), and suspended plans to issue certificates of deposit (CD) to control excess liquidity. - Encouraged banks to offer a six-month moratorium on loan repayments for non-delinquent borrowers affected by the pandemic (MEFP ¶28). - Maintained loan reporting, classification, and provisioning standards; policy rate left unchanged. - In collaboration with AfDB, created a credit line for banks to provide lending to SMEs affected by the pandemic (US$3 million, with possibility of additional funding). - Banking sector vulnerabilities: - Banking sector assets about 65 percent of GDP; remains well capitalized and liquidity indicators improved. - Nonperforming loans (NPLs) increased to 34.2 percent of total loans at end-September 2020 (26.5 percent at end-March 2020). - Loan reclassification and recapitalization recommendations from the 2019 AQR have been fully addressed. - BCSTP policy recommendations: - Continue actively managing liquidity in the banking sector and maintain appropriate monetary policy stance to support the peg and recovery. - Ensure banking system access to liquidity if needs arise. - Contain excess liquidity (which climbed to almost US$48 million in September 2020) to support the peg. - In November 2020, BCSTP began issuing CDs to help control excess liquidity (structural benchmark). - Develop an action plan to gradually reduce excess liquidity throughout 2021; roll-over existing CDs and stand ready to use other tools, including adjusting reserve and liquidity requirements and issuing additional CDs (MEFP ¶23). *IMF staff report excerpt.* ### 21. With the difficult economic environment, it is important to enhance the BCSTP’s ### 1stpea2021001 - 21. With the difficult economic environment, it is important to enhance the BCSTP’s ### Banking-sector stability and supervisory capacity - Pandemic pressures: - Pandemic likely to put further pressure on banks’ asset quality. - Loan payment moratorium extended to December 2020. - Authorities intend to introduce a formal dividend payout moratorium in 2021 to preserve capitalization in the system. - Stress testing and contingency planning: - Early in 2021, the BCSTP will conduct, with IMF assistance, stress tests to identify possible credit risk pressures due to the fallout from the pandemic (structural benchmark) (MEFP ¶29). - Based on results of stress tests, BCSTP should require banks to develop contingency plans and identify remedial measures as needed to ensure banks remain adequately capitalized. - IMF will provide assistance to further develop the BCSTP’s stress testing capacity to identify credit risk pressures and possible recapitalization needs. - Supervisory tools and manuals: - With IMF technical assistance, the BCSTP has adopted a bank rating model for on-and off-site supervision. - A banking supervision manual should be completed to provide guidance for processing off-site and on-site supervision (MEFP ¶31). - Recent supervisory actions: - One small bank (assets about 1 percent of GDP), with pre-existing capitalization issues, faced liquidity constraints and was placed under BCSTP temporary administration in November 2020. Following evaluation, if not viable, BCSTP will place the bank in liquidation (MEFP ¶33). ### Non-performing loans (NPLs), legacy resolution, and bank liquidations - Legacy NPLs: - High level of NPLs partly due to legacy NPLs that banks remain unwilling to write off even though long-defaulted loans are fully provisioned for. - Resolution requires completing ongoing judicial reforms and forceful supervisory actions. - Progress achieved: improving judicial loan enforcement process and establishing arbitration tribunals for out-of-court settlement; completing reforms requires making the arbitration court fully operational, including by appointing arbitration referees. - Regulatory actions to accelerate write-offs: - BCSTP should issue in early 2021 new regulations to support banks’ rapid write-offs of long-defaulted and fully provisioned loans (MEFP ¶32). - Bank liquidation status: - Two small banks (15] percent of banking system assets) were placed in liquidation in 2016 (Banco Equador) and 2018 (Banco Privado). - For Banco Equador, reporting requirements and planned asset sales have been delayed; authorities will turn over Banco Equador’s assets to the court system and complete the liquidation in early 2021. - Banco Privado is likely to be sold to a group of investors after the pandemic subsides; if sale not concluded, BCSTP plans to turn remaining assets over to the court system. - Pandemic has contributed to putting pressure on another small bank. ### BCSTP governance, safeguards, and remaining reforms - Safeguards assessment and delays: - 2019 assessment identified actions to strengthen BCSTP independence, internal controls, and oversight, but progress has been limited. - Submission to parliament of the revised organic law to strengthen autonomy and governance framework of the BCSTP is now expected to occur by February 2021 (end-2020 structural benchmark) (MEFP ¶27). - Revisions to the financial institutions law to ensure compliance with international regulatory and supervision standards have been delayed due to limited capacity (structural benchmark) (MEFP ¶27). - Outstanding recommendations and processes: - Recommendations on building internal audit capacity, reducing concentration risk of reserve investments, improving currency operations and adopting International Financial Reporting Standards (IFRS) remain outstanding. - Finalization of the external audit of the 2019 financial statements has been significantly delayed beyond the three-month statutory deadline; BCSTP only expects this process to be concluded at end-January 2021. - BCSTP has developed general compliance reports and plans to resume technical assistance virtually in the first quarter of 2021 towards implementing IFRS standards. - International commitments: - Authorities committed to preserving membership in the Inter-Governmental Action Group against Money Laundering in West Africa (GIABA). ### Financial inclusion, payment systems, and access to credit - Payment system and inclusion actions: - Current payment system is outdated. - Introduction of a new payment system capable of processing international credit cards is scheduled for early 2021. - A bureau for financial inclusion was recently established at the BCSTP. - A working group tasked with finalizing a national strategy on financial inclusion aims to complete its work by the end of 2020. - With World Bank support, legal framework for a moveable collateral registry is being drafted (MEFP ¶34). - Credit access: - Access to credit, particularly for SMEs, is limited compared to other countries, negatively affecting productive activities. ### Structural reforms for sustainable and inclusive growth - Growth constraints: - Weak governance, structural impediments to business, and untapped opportunities in the tourism sector hamper growth. - About 67 percent of the population living below the national poverty line. - Approximately 60 percent of the unemployed are under the age of 34. - Authorities’ development strategies: - 2017-2021 Poverty Reduction and Growth Strategy; plans to update. - 2020-24 National Development Plan focuses on improving governance, reducing inequality and poverty, facilitating private investment, and enhancing human capital. - Prioritized reforms: - Short- and medium-term reforms needed include: - Strengthen government effectiveness and improve business environment (e.g., electricity costs; investors rights, contract enforcement, public procurement, infrastructures). - Foster gender equality to support inclusive recovery (e.g., financial inclusion). - Strengthen resilience to climate change (e.g., early warning systems, agriculture sector resilience). - Facilitate development of the tourism sector (e.g., investment and licensing procedures, training, airport, road rehabilitation, and port; EU’s Air Safety List). - Critical short-term actions: - Remove the country from the EU Air Safety List to support trade and tourism (structural benchmark). - Continue expanding social safety nets and the gender budgeting pilot (MEFP ¶39). - Speed up reforms to the energy sector to ensure a reliable, low-cost supply of electricity (MEFP ¶43-45). - Staff welcomes authorities’ commitment to introduce the VAT in 2021. ### Program modalities, financing, and risks - Waiver and program conditionality: - Authorities requested a waiver of nonobservance for the end-June 2020 DPD target; staff supports the waiver because deviations were caused by the pandemic and authorities have taken actions to get the program back on track. - Modifications and extension of program conditionality are proposed: QPCs (for DPD, government’s bank financing, international reserves) modified for end-June, new QPCs proposed for end-December 2021. - New structural benchmarks introduced on: implementing the VAT in 2021; operationalizing BCSTP’s liquidity management toolkit to reduce excess liquidity; performing stress tests of the banking sector; reforming the energy sector. - Prior actions: submission to parliament of a 2021 budget in line with program understandings and publication of information about available public procurement contracts. - Financing and repayment metrics: - Program is fully financed; firm commitments for financing over the next 12 months and good prospects thereafter, including budget support grants from the World Bank and concessional loan disbursements from AFDB. - With recently approved RCF disbursement and the ECF access augmentation, repayments to the IMF will remain below 0.8 percent of exports of goods and services during the program period and peak at 4.0 percent of exports of goods and services in 2028. - Repayments to the IMF as a share of GDP peak in 2027 at 0.8 percent. - Repayments to the IMF as a share of total debt service in 2028 peak at 70.7 percent. - Repayments to the IMF as a share of gross international reserves in 2028 peak at 10.1 percent. - Exchange restrictions and Article VIII: - São Tomé and Príncipe currently has measures that give rise to exchange restrictions and a multiple currency practice under Article VIII. - IMF Executive Board granted temporary approval of these measures in October 2019 for 12 months; authorities have requested an additional one-year extension. - Staff supports the request given (a) measures are imposed for BOP reasons, necessary and temporary, and (b) multiple currency practice measure is imposed for BOP reasons, temporary, and non-discriminatory. - Contingent liabilities and buffers: - Program subject to downside risks including contingent liabilities from the public company EMAE, the fuel supplier ENCO, and commercial banks. - Upside buffers: savings in the National Oil Account (4 percent of GDP) and the unused credit line with Portugal (6 percent of GDP). - Sovereign arrears and financing assurances: - Due to external payment arrears, a financing assurances review must be completed by the Executive Board; staff supports completion. ### Staff appraisal and policy recommendations - Economic impact and immediate response: - COVID-19 has caused a deep recession, deteriorated external balances, and raised fiscal financing needs amid widespread poverty and already high public debt. - Authorities’ actions and international financial support have enhanced health services, provided assistance to vulnerable households and laid-off workers, and maintained ample liquidity in the financial system. - External and budget financing needs expected to be fully covered by IMF disbursements under the RCF and augmented ECF, and by budgetary grants from other partners. - Debt sustainability and fiscal path: - Public debt has risen from already high levels; the country’s capacity to carry debt has been recently downgraded, heightening debt sustainability risks. - Staff recommends policies to bring the primary deficit close to a balance over time. - Reducing the debt burden requires continuing to borrow moderately and seeking grants and highly concessional loans. - Critical fiscal measures: introduce VAT in 2021; contain spending dynamics, particularly personnel expenses through wage and employment containment policies. - Structural priorities reiterated: - Continue judicial and supervisory reforms to resolve legacy NPLs. - Strengthen BCSTP safeguards and governance. - Deepen financial inclusion and modernize payment systems. - Accelerate energy sector reforms to lower costs and reduce debt accumulation. *Source: IMF staff report excerpts as provided in the supplied content unit.* ### 40. Improving public financial management processes, and fiscal governance and ### 1stpea2021001 - 40. Improving public financial management processes, and fiscal governance and ### Public financial management, fiscal governance, and transparency - Publishing of public procurement contracts and ownership information of companies receiving these contracts is a welcome development. - Monthly reports of COVID-19 related spending have been published and are welcome developments. - Recommendations: - Continue these transparency efforts over time and include beneficial owners. - Conduct ex-post audits of COVID-19 related spending to further improve fiscal transparency. - Develop a medium-term fiscal framework. - Strengthen expenditure controls, including by piloting a commitment ceiling mechanism to support the authorities’ fiscal adjustment strategy. ### Energy sector reforms and EMAE - Findings: - Reforms of the energy sector and the publicly owned utility company EMAE are needed to preserve debt sustainability and support growth. - EMAE has been accumulating significant arrears over time and progress on the government’s reform plan for the company has so far been limited. - Institutional response: - A recently established steering committee, chaired by the Prime Minister, should help reinvigorate reform momentum. - Policy priorities: - Reform the current tariff structure. - Modify the production mix away from thermo electrical production. - Expected outcomes: reduce pressures on public debt and foreign exchange reserves; provide lower-cost and reliable electricity to unlock development and growth potential. ### BCSTP liquidity management to support the peg and recovery - Current situation: - Excess liquidity has been booming recently. - Recommended actions for the BCSTP: - Develop and implement a plan for gradually reducing excess liquidity from the current peak. - Include measures such as rolling over certificate of deposits (CDs), standing ready to adjust reserve and liquidity requirements, and issuing additional CDs as needed. ### Financial sector risk management, supervision, and legacy NPLs - Required improvements: - Enhance BCSTP’s capacity to manage risks and vulnerabilities in the financial sector and strengthen sector oversight. - Implement regular stress testing to identify early possible credit risk pressures due to the fallout from the COVID-19 pandemic. - Mandate contingency plans and remedial measures to ensure that banks remain adequately capitalized. - Complete efforts to address legacy NPLs through the regulatory framework. - Complete the remaining safeguards recommendations without further delay. ### Structural reforms, tourism, and supporting investment and growth - Short-term measures: - Recent upgrade of the national payments system, capable of accepting international credit cards, is expected to help boost tourism revenue and financial inclusion. - Taking action to remove the country from the EU Air Safety List could help the economic recovery by stimulating trade and tourism. - Medium- to long-term measures: - Implement planned infrastructure projects, including road rehabilitation and airport and port expansions, to remove key development bottlenecks and support sectors such as tourism and agriculture. - Continue efforts to promote gender equality and adapt to climate change to support medium-term growth. *Excerpt from the provided PDF content (paragraphs 40–44).* ### 45. Staff supports the authorities’ request for completion of the second review of the ### 1stpea2021001 - 45. Staff supports the authorities’ request for completion of the second review of the ### Staff recommendation and IMF actions - Staff supports the authorities’ request for completion of the second review of the program under the ECF and waiver of non-observance. - Staff supports the authorities’ request for a one-year extension of the temporary approval for the retention of measures resulting in exchange restrictions and a multiple currency practice subject to IMF jurisdiction under Article VIII, Sections 2(a) and 3 for the reasons set forth in paragraph 32. ### Macroeconomic impact of the COVID-19 pandemic - Growth and inflation - Real GDP: sharp deceleration in 2019 followed by recession in 2020 (Figure 1 narrative). - Consumer prices (End of period): 5.1, 7.7, 9.0, 7.7, 8.0, 10.2, 8.0, 10.1, 6.2, 5.0, 5.0, 5.0 (as reported in Table 1 period series). - Consumer prices (Period Average): 5.4, 5.7, 7.9, 7.7, 7.9, 9.8, 8.0, 10.6, 8.1, 5.8, 5.2, 5.0. - External sector and reserves - Current account balance (including official transfers, percent of GDP): -6.1, -13.2, -12.3, -12.5, -17.0, -17.5, -11.9, -14.9, -9.2, -8.4, -8.2, -8.0 (Table 1). - Gross international reserves (Millions of U.S. dollars): 55.9, 51.4, 35.1, 40.4, 54.1, 54.7, 58.8, 58.1, 64.9, 68.6, 71.8, 73.3, 73.3, 73.3, 69.8, 68.4, 67.4, 66.3, 65.5, 64.5, 63.6 (where reported across tables). - Months of imports of goods and nonfactor services: 4.9, 4.2, 3.0, 3.3, 3.8, 6.0, 5.1, 5.6, 5.0, 5.2, 5.1, 5.1, 5.0 (Table 4 and Table 1 series). - Fiscal developments - Total revenue, grants, and oil signature bonuses (percent of GDP): 28.2, 24.9, 24.1, 22.5, 24.6, 28.2, 22.7, 21.5, 24.4, 24.4, 24.2, 24.0 (Table 1). - Total expenditure and net lending (percent of GDP): 32.4, 27.6, 26.0, 22.5, 29.2, 26.7, 26.4, 25.4, 25.6, 25.2, 24.7, 24.4. - Domestic primary balance (percent of GDP): -4.1, -2.4, -4.2, -1.8, -6.3, -5.3, -3.9, -3.9, -1.2, -0.6, -0.3, -0.1. ### Banking sector stress and financial stability risks - Asset quality and credit - Nonperforming loans/total credit (IFRS definition): 27.0, 24.9, 24.6, 24.9, and rising to 34.2 by Sep. 2020 (Table 6 series). - Past-due loans to gross loans: 30.7, 27.6, 26.9, 29.4, and rising to 36.9 by Sep. 2020. - Watch-listed loans: 3.7, 2.8, 2.3, 4.5, with intra-2020 volatility (Table 6). - Private sector credit growth: decline during the pandemic (figure narrative; series show negative/low growth). - Capital, liquidity, and exposures - Regulatory capital to risk-weighted assets (percent): 27.8, 33.6, 30.7, 28.9, 31.5, then 19.7 by Sep. 2020 (Table 6). - Capital (net worth) to assets: 22.5, 24.0, 20.8, 20.5, 19.5, 19.0, 18.4, 17.7 (Table 6). - Liquid assets/total assets: 54.0, 49.7, 50.1, 41.9, 43.7, 44.0, 40.1, 46.7 (Table 6). - Banks’ exposure to government increasing; government securities and claims represent a rising share of banks' assets (figure narrative and series). - Financial access and inclusion - Number of depositors with commercial banks (per 1,000 adults): STP compares well against SSA average and SSA Max (figure narrative and series). - Number of household borrowers from commercial banks (per 1,000 adults): low levels and declining recently (figure narrative). ### Medium-term projections and scenarios (macroeconomic outlook) - Real GDP growth (selected projections and scenarios shown in Figure 3 narrative) - Reported GDP series and projections in Table 1: 4.2, 3.9, 3.0, 1.3, -6.5, -6.5, 3.0, 3.0, 5.0, 4.2, 4.5, 4.5 (2016–25 series). - External and fiscal outlook under ECF scenarios (Figure 3) - Exports of goods and services (US$ millions): 96.2, 45.5, 50.5, 69.7, 79.7, 116.3, 127.6, 137.7, 148.5 (Table 1 and figure narrative across years). - Public Debt incl. arrears to ENCO (Percent of GDP): series indicate increase through pandemic then declining under reform projections (Figure 3 narrative; Table 1 public debt series: 80.9, 84.3, 96.2, 97.7, 105.2, 103.5, 105.1, 101.7, 96.8, 91.7, 85.9, 79.4). - International reserves (months of import) projected to rebuild with policy adjustment (Figure 3 narrative; Table 1 months series reported). ### Energy sector: unsustainable structure and fiscal-fiscal linkages - High tariffs and dependence on thermal generation - Electricity tariff (2014 USD cents per KWh): STP tariff is above many peers; SSA average (exc. Liberia): 16 (figure annotation). - Energy generation by source shows major dependence on thermal generation (Figure 4 narratives and charts). - Operational and financial performance of EMAE - EMAE’s financial indicators (million Dobras) show weak current ratio and negative net worth dynamics across 2017–Jun-20 (Figure 4). - Losses and high technical and commercial losses: losses in percent of power supplied rank among the highest in the region (Figure 4). - Cost recovery and sector sustainability - Despite high tariffs, total losses and inefficient generation prevent cost recovery (figure narrative). - EMAE's debt to ENCO forms a material part of public debt: EMAE's debt to ENCO (percent of GDP) series and Table 1: EMAE's debt to ENCO listed as 16.1, 19.3, 23.3, 26.4, 32.7, 31.8, 34.4, 33.1, 33.1, 32.4, 30.9, 29.4 (part of public debt breakout). ### Structural impediments to sustainable and inclusive growth - Growth and productivity constraints - GDP growth trend: downward over past decade and a half (Figure 5 narrative; Real GDP growth series available). - GDP per capita and 3-year average growth show weak performance relative to peers (Figure 5). - Business environment and institutions - Limited institutional protection of investors (Institutional Protection of Investors index and related indicators shown in Figure 5). - Long time required to enforce contracts: Times required (Days) significantly higher than peers (Figure 5). - Human capital and service delivery - Trained teachers (percent of total teachers): primary and secondary shares lower than peer averages (Figure 5). - Progress in electricity access noted as a positive trend (Figure 5). ### Key fiscal and monetary figures (selected from tables) - GDP (Millions of new dobra): 7,698; 8,154; 8,619; 9,230; 8,933; 8,976; 9,477; 9,615; 10,449; 11,269; 12,188; 13,182 (Table 1 memorandum). - GDP (Millions of U.S. dollars): 347.5; 375.8; 415.6; 421.8; 398.4; 418.8; 426.1; 482.6; 529.7; 574.1; 622.0; 673.3. - Total revenue (Millions of new dobra, Table 2a): 1130; 1174; 1365; 1468; 1369; 1526; 1522; 1702; 1942; 2093; 2294; 2513 (series across years shown). - Total expenditure (Millions of new dobra, Table 2a): 2494; 2253; 2243; 2079; 2608; 2399; 2502; 2446; 2679; 2840; 3013; 3219 (series shown). - Base money (M0, Table 4): 1,640; 1,484; 1,496; 1,488; 1,385; 1,321; 1,698; 1,402; 1,586; 1,607; 1,677; 1,694; 1,712. - Broad money (M3, Table 5): 2,691; 2,681; 3,066; 3,065; 2,998; 2,981; 3,032; 3,162; 3,248; 3,530; 3,807 (selected series). ### IMF financing and Fund capacity indicators - Outstanding Fund credit (Millions of SDRs): 18.6; 24.0; 27.2; 26.4; 25.7; 23.6; 19.8; 15.2; 10.3; 5.6; 2.1; 0.6; 0.0 (Table 8 series). - Total obligations based on existing and prospective credit (Millions of U.S. dollars): 0.00; 0.44; 0.85; 1.06; 1.08; 2.88; 5.38; 6.46; 6.90; 6.73; 4.91; 2.15; 0.82; 0.01; 0.00. - Net Use of Fund Credit (millions of SDRs) series: 9.0; 5.4; 3.2; -0.8; -0.8; -2.0; -3.8; -4.6; -4.9; -4.8; -3.5; -1.5; -0.6; 0.0; 0.0. _Italic: Sources: São Tomé and Príncipe authorities' data and IMF staff estimates and projections (content drawn from the provided IMF PDF excerpt)._ ### Annex I. Reform Agenda for the Energy Sector ### Annex I. Reform Agenda for the Energy Sector ### Reduce cost of electricity generation and change the generation mix towards renewable sources - Rehabilitate and expand the capacity of the only operating hydropower plant on the island, Contador HPP, by June 2022 to 3.2 MW. - Implement the Least Cost Development Plan (LCDP) comprising: - Develop 8.8 MW of dual-fueled thermal units (HFO or LNG). - Develop about 2 MW of a photovoltaic solar plant. - Mobilize partnerships to study and developed existing hydropower potential. - Time horizon: Medium-term. - Status notes: - Delayed. Preparing bidding documents to be launched in 2021. - Delayed. Government has received multiple unsolicited proposals not aligned with LCDP parameters (projects with overcapacity and over costed). - Targets: - Reduce average cost of energy produced from 0.25 to 0.14 USD/kWh by 2024. - Increase renewable sources’ share from 5 to 45% by 2024. ### Reduce peak electricity demand and lower overall electricity consumption - Actions: - Roll out LED program to replace incandescent/fluorescent with LED lightbulbs. - Pass a law that bans the importation of incandescent/fluorescent lamps. - Timing: - LED rollout: June 2021. - Import ban law: June 2022. - Status: - Partially achieved. The tender was concluded in November 2020, and the contract is expected to be signed by end-2020. - Draft law was prepared by consultant and submitted to MoF. - Targets: - Reduce peak (overall) electricity consumption by 10% (15%) within 12 months. ### Improve management of electricity distribution by the state-owned corporation EMAE to reduce losses and improve collection rates - Management Improvement Plan (MIP) actions: - Prepare bidding documents for procuring management information system (MIP). - Work with HR consultant on organizational restructuring of EMAE and on preparing job descriptions for Directors and Managers. - Conduct selection process for Directors and Managers. - Appoint Project Director for MIP. - Appoint Project Manager for Loss Reduction Plan (LRP). - Select management consultancy firm to support EMAE in implementation of MIP. - Develop arrears clearance plans with consumers. Continue to disconnect non-paying customers. - Cap consumption and ensure timely bills payment by public entities. - Metering program (supported by EIB and World Bank): - Complete the installation of 200 high tension, 3000 large consumption, and 16,000 residential meters. - Timing and sequencing (as in source): - Medium-term: - Prepare bidding documents: August 2020. - HR consultancy work: Aug. to Oct. 2020. - Selection process for Directors and Managers: Aug. to Oct. 2020. - Appoint Project Director for MIP: August 2020. - Appoint Project Manager for LRP: August 2020. - Select management consultancy firm: October 2020. - Develop arrears clearance plans: To continue after crisis subsides. - Continue to disconnect non-paying customers: November 2020. - Meter installations: - Large and high tension meters: June 2021. - Residential meters: June 2021 (end-2021 for residential meters). - Status and implementation issues: - Delayed. Consultant produced bidding documents. Capacity constraints at EMAE have delayed technical review. - Delayed. HR consultancy firm deviated from the objective by designing an unbundling reform agenda for EMAE. WB will work with HR consultant to get back on track. - Delayed. Finalizing bidding documents; the tender to be launched early-2021. - Partially achieved. The tender is expected to be concluded by end-November 2020, and the contract is expected to be signed in January 2021. - Targets: - Reduce losses (commercial and technical) from 33 to 23% by June 2022. - Raise collection rates from 85 to 95% by June 2022. ### Reform tariff structure and strengthen regulatory framework - Actions: - Implement a new tariff structure based on an actual estimate of the costs of services for each costumer tranche. - Approve a decree to adjust tariffs considering: - Tariff structure definition; - Costumer category definition; - Social tariffs adjustments; - Agreed upon conditions and a timeline to achieve full cost-recovery. - Timing: - Mar. to Dec. 2021 for both implementation of new tariff structure and approval of decree. - Status: - WB concluded the tariff analysis and advised on an in-depth tariff reform to led by the regulator AGER. - Delayed. - Target: - Gradually achieve a cost-reflective tariff structure by 2024. *Source: Annex I. Reform Agenda for the Energy Sector, 1stpea2021001* ### 10. The outlook is subject to significant risks. A prolonged pandemic or delays in accessing ### 1stpea2021001 - 10. The outlook is subject to significant risks. A prolonged pandemic or delays in accessing ### Risks, upside, and strategic commitment - Significant downside risks: a prolonged pandemic or delays in accessing vaccines would weigh on the economic recovery, strain the health system, create additional external and budget financing pressures, and delay reform efforts. - Upside potential: rapid progress on structural reforms of the energy sector and in key infrastructures (e.g., airport expansion, road rehabilitation) could trigger stronger medium-term growth. - Dependence on external support: the outlook also depends on sustained grant support from external donors to maintain debt sustainability and provide needed financial resources. - Government commitment: preserve achievements to date and implement policies agreed under the program while addressing pandemic challenges, focused on preserving fiscal sustainability, safeguarding financial stability, and accelerating energy-sector reforms to support growth and external vulnerabilities. ### Policy objectives for 2020–2022 - Core objectives: - i) Address pressing social needs linked to the pandemic and continue gradual fiscal consolidation to preserve debt sustainability and build external buffers (¶12-20). - ii) Maintain high fiscal transparency and accountability standards, including for COVID-related spending (¶21). - iii) Develop monetary policy tools and maintain a monetary policy stance that supports the peg (¶22-27). - iv) Safeguard financial stability (¶28-35). - v) Unlock growth potential by reforming the energy sector, fostering tourism, promoting gender equality, and adapting to climate change (¶36-46). ### Fiscal policy priorities and targets - Short-term priority: protect the population from the pandemic and support the economy while implementing a medium-term fiscal consolidation strategy (¶12). - 2020 DPD outcome: - End-2020 DPD expected to be around 5 percent of GDP, 1⅓ percent of GDP lower than under the program target, reflecting revenue windfalls from the 2019 tax policy package. - Overall deficit expected to be largely financed through donor grants (¶13). - 2021 target: - Committed to delivering on the 2021 DPD target of 3.9 percent of GDP as planned under the first review of the ECF program (¶14). - Revenue windfalls from late-2019 tax policy measures and planned VAT introduction expected to raise tax revenue above original program projections; revenue gains to finance priority developmental needs, especially hiring teachers. - COVID-19 related expenditures to continue in 2021 and expected to be phased out by end-2021 as the health crisis subsides (¶14). - Medium-term goal: - Approach a balanced DPD position by 2024 through wage and employment policies to gradually reduce personnel costs (as a share of GDP), keep other current expenses under control, and cap external borrowing to concessional loans only (¶15). - Stand ready to take contingency measures if downside risks materialize, including recalibrating fiscal efforts and improving the financing mix (¶15). ### Fiscal actions and measures (selected) - 2021 fiscal year: - Submit to parliament a 2021 budget proposal targeting a domestic primary deficit of Db 379 million, 3.9 percent of GDP, with spending ceilings for domestic primary spending as detailed below, including ceilings on temporary contracts for teachers to allow social distancing in schools (¶16). - Extend the solidarity contribution to end-2021 (¶16). - Introduce the VAT at a 15 percent rate by July 2021 (structural benchmark) (¶16). - Keep retail fuel prices unchanged, if oil prices remain low, in 2021 and over the foreseeable future to generate revenue from the differential with international oil prices (¶16). - Fiscal year 2022 and following years: - Reduce the wage bill to close to 10 percent of GDP by continuing over fiscal years 2022-23 current policies of suspending inflation adjustments, limit new hiring to maintain total number of civil servants broadly unchanged through attrition rules and public administration reform; provide IMF with quarterly updates on total number of civil servants by main functional sectors, including education, health, and defense (¶16). - Keep transfers and other current expenditures (including the despesas consignadas dos servicos de cobrança) constant in nominal terms in 2022 and contain increases broadly in line with GDP growth thereafter; government will not approve borrowing by public entities to offset lower transfers from Treasury (¶16). - Continue efforts to reduce electricity and water consumption at public institutions, including instructing EMAE to cut off supply to public entities classified as non-essential in case they miss payments (¶16). ### São Tomé and Príncipe: Aggregate Budget Spending Ceilings, 2021 (millions of new dobras) - Total domestic primary expenditure 2059 - Total primary current expenditure 1871 - Personnel costs 1070 - Goods and services 260 - Transfers 348 - Other 192 - Treasury-financed capital expenditure 29 - HIPC-related social expenditure 23 - Treasury-financed COVID-related spending 136 - o/w temporary contracts for social distancing in schools 54 ### VAT introduction and tax administration strengthening - VAT preparations: - VAT law approved last October; COVID delayed launch; expect selection of company to design IT system completed by January 2021 and IT system operational before July 2021 (¶17). - Preparatory steps: developing VAT regulations and refund procedures, harmonizing VAT with other taxes, reforming excise taxes, education campaign, procuring space and equipment for new staff, setting up four taxpayer centers, training local tax administrators including those from Principe, and finalizing agreements with banks to receive VAT payments (¶17). - Tax administration reforms: - Implement IMF recommendations: reorganization of Direção dos Impostos (DI) for improved management and strategic planning focused on tax compliance; adoption of modern compliance risk management practices including third-party information-based audit programs; overhaul of current performance monitoring framework including key performance indicators and a rewards program (¶18). - Pending partners’ resources, intend to undergo a comprehensive tax administration diagnostic assessment (TADAT) before end-2022 (¶18). - Tax collection and monitoring: - Starting January 2021, prepare and share with the IMF monthly reports on tax payments and outstanding tax arrears; fully apply existing legal and administrative procedures to ensure payments (¶19). - Improve DI access to third-party data and strengthen analytical capacities of E-invoice data to control registration, declaration, payment, and reporting of tax obligations; continue staff training to enhance auditors’ skills focusing on telecommunication, banking, and insurance sectors (¶19). - Launch a recovery program in the first quarter of 2021 to recover tax obligations from large taxpayers that suspended payments during the crisis (¶19). ### Public financial management reforms and arrears prevention - Planned reforms to strengthen public financial management and avoid accumulation of new domestic arrears (¶20): 1) Improving macro-fiscal framework projections (revenues and expenditures): developed a methodological manual with IMF assistance; prepared medium-term fiscal framework (MTFF) projections for a three-year period to be incorporated in budget documents starting with the 2021 budget. 2) Strengthening cash management and Treasury capacities: Treasury and BCSTP developed an annual schedule of T-bill issuance for 2021 (to be published in January 2021) and monthly financing plans to guide issuance consistent with the annual budget and cash flow. 3) Strengthening expenditure control, preventing arrears, and updating arrears clearance plan: Treasury will be the sole central government entity allowed to contract loans; government defined a payment plan to gradually clear stock of domestic arrears; start a commitment ceiling mechanism in 2021 as a pilot in selected spending ministries (excluding education, health, defense, and justice) with quarterly commitment ceilings; pilot to be expanded to all line ministries and spending agencies in 2022. 4) Enhancing fiscal reporting and consistency of above- and below-the-line fiscal data: continue to provide the IMF with monthly TOFE by the 21st of the following month; continue efforts to reconcile financing data with BCSTP at least quarterly. 5) Enhancing enforcement of procurement laws to improve efficiency of public expenditure and reduce corruption vulnerabilities: with World Bank support, update the 2009 procurement law to include e-procurement, sustainability/environmental/social/hygiene issues, framework contracts, and complaint mechanism. ### Fiscal transparency commitments - Published items as of November 2020: - Public procurement contracts up to June 2020 and monthly COVID-19 spending reports up to August 2020 on the Ministry of Finance website; published owner information for companies that received public procurement contracts (¶21). - Commitments to publish: - (i) adjudication notices of public procurement contracts as required by Procurement Law (no. 8/2009, articles 29-2, 44-1, and 70-1); - (ii) all signed public procurement contracts above the threshold for requiring prior authorization from the Court of Accounts as per the Organic Law (no. 11/2019); - (iii) ownership information of companies receiving procurement contracts; - (iv) ex-post validation of delivery of the contracts—all (i) to (iv) to be published within two weeks after documents become available; - (v) monthly COVID-19 related expenditure reports with a 45-day lag (structural benchmarks for end-August and end-November) (¶21). - Operational constraints and remedies: - No integrated system; documents collected manually causing operational difficulties for procurement agency COSSIL to access contracts timely. - Executive order requiring all spending agencies to send signed procurement contracts to COSSIL as a necessary condition for Treasury payments. - Request for technical assistance to overcome constraints in collecting and publishing beneficial owner information. - Working with World Bank to develop a webpage for COSSIL to expedite publication of procurement documents. - Auditor General to audit and publish the 2020 COVID-19-related spending by October 2021 (¶21). ### Monetary policy, foreign exchange reserves, and safeguards - Early pandemic monetary responses: - BCSTP lowered minimum reserve requirements for domestic currency from 18 to 14 percent and for foreign currency from 21 to 17 percent and lowered the discount rate of the BCSTP liquidity facility from 11 to 9.5 percent in early April (¶22). - Liquidity management and instruments: - Upgraded liquidity forecasting framework to three months (from one month) with IMF technical assistance (¶23). - On November 17, 2020, BCSTP auctioned certificates of deposit (CDs) totaling Db 100 million to help control excess liquidity (structural benchmark); auction was oversubscribed (¶23). - Issuance of CDs delayed earlier to guarantee adequate banking-system liquidity during the pandemic; system-wide liquidity has continued rising due in part to increasing external flows to finance the fiscal deficit (¶23). - Excess liquidity has not undermined the peg so far and is expected to decline gradually; BCSTP will develop an action plan by January 2021 to gradually reduce excess liquidity during 2021 to avoid undue pressures on the peg (structural benchmark) (¶23). - In 2021, BCSTP will roll-over its existing CDs and stands ready to use other tools, including adjusting reserve requirements and issuing additional CDs; continue to work with IMF technical assistance to refine the CD mechanism and develop a policy rate framework reflecting market and risk conditions; aim to develop a domestic debt market over the medium term (¶23). - Coordination of monetary and fiscal policies: - Resumed regular meetings of the Committee for Public Debt in August 2020 to improve coordination; Treasury to publish an annual schedule of T-bill issuances for 2021 in January 2021 aligning borrowing with cash flow (¶24). - Continue efforts to reconcile at least quarterly monetary and treasury data on fiscal financing in 2021 (¶24). - Reserve and peg strategy: - Fiscal consolidation and planned structural reforms expected to boost international reserves and underpin the peg to the euro. - Pressures on international reserves partly driven by strong domestic demand and foreign currency needs from the energy sector; reforms to reduce electricity provision losses and modify production mix will significantly reduce foreign currency demand (¶25). - Other reforms to expand economic and export bases (e.g., tourism, agriculture, fisheries) will improve the balance of payments. - Requested an extension of the measures that gave rise to exchange restrictions and a multiple currency practice under IMF Article VIII while policies are being implemented (¶25). *Source: 1stpea2021001 - Chapter 10 text as provided.* ### 26. As noted in the Letter of Intent, we will not introduce regulations and practices that ### 1stpea2021001 - 26. As noted in the Letter of Intent, we will not introduce regulations and practices that ### Commitment on exchange regulations and IMF consultation - "We will not introduce regulations and practices that could lead to the introduction of new and intensification/modification of existing exchange restrictions/multiple current practice." - "We will consult the IMF when revising relevant regulations or laws." - The IMF Executive Board granted temporary approval of exchange restrictions and a multiple currency practice for 12 months; the one-year approval expired in October 2020 and an extension for another year has been requested. - The exchange measures referenced include: - an exchange restriction arising under Articles 3(g) and 18 of the Investment Code of 2016 due to limitations on the transferability of net income from investments; and - an exchange restriction arising from limitations on the availability of foreign exchange for payments of current international transactions, due to the rationing of foreign exchange by BCSTP (giving rise to a multiple currency practice with a parallel market spread of more than two percent). ### Central Bank (BCSTP) governance, transparency, and safeguards - Commitments: - Enhance BCSTP independence, internal controls, and oversight capacity. - Continue publishing statistics and reports, including the annual schedule of treasury bill issuances on the BCSTP website. - Implement remaining recommendations from the last safeguards assessment; several recommendations already completed. - Specific actions and timelines: - 2019 BCSTP financial statements: preliminary audit report to be shared with the IMF by January 2021; audit expected to be completed in January 2021 and published on the BCSTP’s website immediately following auditors’ review. - IFRS implementation plan: technical assistance with the Bank of Brazil began in early 2020 and will continue through virtual meetings in the first quarter of 2021. - Organic law revision to enhance BCSTP independence: new draft incorporating IMF technical assistance recommendations on the audit committee approved by the BCSTP Board; government plans to submit it to parliament by early February 2021 (structural benchmark). - Draft financial institutions law (aligned with Basel Core Principles and FATF standards), including IMF technical assistance suggestions, to be submitted to parliament by end-March 2021 (structural benchmark). - Preserve membership in GIABA and stay current on membership contributions to avoid FATF public listing and potential loss of correspondent banking relationships. - Continue sharing quarterly general compliance reports prepared for the BCSTP Board with the IMF, and an updated implementation timeline for remaining safeguards recommendations. - Remaining safeguards recommendations include: requiring perforation of currency notes earmarked for destruction, depositing foreign exchange reserves only in investment-grade banks when possible, and reducing concentration risk of investments. ### Financial sector policy response to COVID-19 and supervisory measures - Pandemic response measures: - April 2020: six-month moratorium on debt payments for non-delinquent borrowers experiencing distress related to COVID-19. - BCSTP encouraged banks not to distribute dividends during 2020 to safeguard capital and lending capacity. - Loan reporting, classification, and provisioning standards maintained; restructured loans classified accordingly; forbearance measures limited to crisis period. - Extended loan payment moratorium through end-December 2020. - Intend to introduce a formal dividend payout moratorium in 2021. - Asset quality and stress testing: - Since March 2020, system NPL ratio increased by approximately 8 percentage points (driven primarily by banks’ prudential reclassification and provisioning under moratorium). - March 2021: plan to conduct stress tests with input from the IMF to identify credit risk pressures from COVID-19 fallout. - By June 2021: based on March stress tests, BCSTP will require banks to develop contingency plans and identify remedial measures to ensure adequate capitalization. - Work with IMF staff to refine stress testing methodology. - AQR and recapitalization: - Completed implementation of AQR recommendations; loan reclassification, additional provisioning requirements, and recapitalization needs identified by the AQR have been fully addressed. - Banks needing to increase capital have largely done so through retainment of profits. - One bank that did not recapitalize is under temporary administration of the BCSTP. - Once the pandemic subsides, another AQR will be performed to identify further needs. ### Supervision, credit registry, and NPL resolution - Supervisory capacity strengthening: - Adopted a bank rating model for on- and off-site supervision with IMF technical assistance. - Final draft of a banking supervision manual planned to be completed by March 2021. - Improved credit registry with a new platform collecting additional loan and debtor information. - Developing, with World Bank support, software to analyze credit registry trends to spot emerging loan deterioration in real time. - Accelerating resolution of legacy NPLs: - Delayed draft regulation on more rapid write-offs expected to be finalized by March 2021; will be sent to the IMF for comments. - After IMF comments, the NAP will be finalized within one month; banks will be required to comply within three months. - Judiciary reforms: arbitration tribunals for out-of-court settlement; regulations for arbitration court on ethics code for judges, selection and appointment of judges, and costs/preparations approved by parliament and will soon be signed into law. - Funding will be allocated to appoint arbitration referees, secure a location, and refresh training (including virtual trainings); arbitration courts anticipated to be fully operational by June 2021. ### Bank liquidations, administration, and resolutions - Banco Equador: - Liquidation process initiated because of insolvency; to be closed by January 2021. - Working group established in July (BCSTP, Ministry of Justice, liquidator’s office). - Efforts: calls to small depositors to claim outstanding claims; attempted sale of real estate and fixed assets (estimated at Dobra 92 million) unsuccessful; facilitated loan resolution previously estimated at Dobra 9 million offering discounts. - Liquidator to submit final report to BCSTP by January 2021 and take necessary actions to close liquidation by January 2021, including turning over remaining assets to court for collection. - Liquidation cost to date stands at 0.3 percent of GDP, most related to payments to small depositors. - BCSTP has calculated exposure and made appropriate provisions in December 2020, including to cover possible legal claims from depositors. - Banco Privado (BPSTP): - License lost due to non-compliance with BCSTP directives and not insolvency; presents low risks. - Payments to small depositors covered using the bank’s liquid assets; BCSTP has no exposure. - Potential investors expressed interest; if no sale concluded by June 2021, BCSTP will turn remaining assets over to the court system. - Net asset value was positive at intervention; no expected losses in the resolution process. - Energy Bank: - Assets about 1 percent of GDP; placed under BCSTP administration in November 2020 due to repeated failure to comply with liquidity and capital requirements. - Customers allowed to withdraw deposits up to 50,000 dobras, financed largely through BCSTP loans to limit contagion risk. - Provisional administrative team evaluating assets and liabilities; report to BCSTP Board by mid-January. - If found not viable after evaluation, BCSTP will immediately put the bank in liquidation. ### Financial inclusion, SME finance, and payments system reform - SME and collateral initiatives: - Government created a credit line of US$3 million (with possibility of mobilizing additional resources) to finance SME projects approved by the national investment agency. - With World Bank assistance, creating legal framework for a centralized collateral registry to allow SMEs to pledge movable collateral; drafting law to be submitted to parliament by early next year. - Software development under way; World Bank pledged financing; registry expected to be fully operational in 2022. - Financial inclusion: - Multidisciplinary working group on financial inclusion established by decree in October 2020; secretariat provided by BCSTP Bureau of Financial Inclusion. - Draft national financial inclusion strategy focused on reducing gender gaps, increasing access to digital financial technologies, and improving consumer protection and literacy to be completed by January or February 2021 and submitted for approval to the National Council on Financial Inclusion. - BCSTP, through Bureau of Financial Inclusion, will develop financial literacy programs delivered through an action plan for the period 2021-25. - Payments system: - As part of the Financial Sector Development Implementation Plan (FSDIP), payments system upgrade to allow international credit cards is underway to improve security of payments and boost tourism and foreign exchange reserves. - Equipment delays pushed launch of the new payment system to January 2021. ### External sector and debt management - Borrowing policy and targets: - Given high debt level, the government will continue to borrow cautiously and only at concessional terms. - Continued EMAE reform will reduce fiscal liabilities. - Measures aim to ensure the present value of external debt to GDP ratio falls below the high-risk debt distress threshold by 2024. - Strive to keep external debt disbursements below 2 percent of GDP and limit contracting of new loans to 3 percent of GDP; parameters to be adjusted according to debt vulnerability developments. - Continue active engagement with bilateral creditors to regularize post-HIPC arrears. - Debt management strengthening: - Published a medium-term debt management strategy following DeMPA recommendations. - With World Bank support, creating a debt database to improve debt service projections, risk analyses, and detailed debt stock reporting; public debt strategy to be updated once database ready. ### Structural reforms and gender equality actions - Gender equality and NSGEE 2019–2026 implementation: - Review legislation to address gender disparities, including potential mandatory quota on female representation in parliament. - Launched pilot initiative on gender-responsive budgeting in the Ministry of Infrastructure in the 2021 budget circular focusing on improving sanitation facilities in schools; intention to expand the pilot with IMF staff coordination. - In 2021, the Gender Institute will launch awareness campaigns on gender equality and incorporate it in the school curriculum. - Ministry of Finance to start submitting in June 2021 data on average annual wages by gender and share of managerial-level positions held by women to the Gender Institute and publish these data on a governmental website. - Gender Institute to coordinate with development partners such as EU and World Bank to ensure large projects incorporate women’s views and include gender-based analysis. - BCSTP’s National Financial Inclusion Strategy targets women; Bureau of Financial Inclusion to develop financial literacy programs through a specific action plan for 2021-25. *Source: IMF content unit 1stpea2021001.* ### 40. We will continue our efforts to strengthen the country’s resilience to climate change ### 1stpea2021001 - 40. We will continue our efforts to strengthen the country’s resilience to climate change ### Climate resilience and natural-resource protection - Impact described: rising temperatures and sea level, coastal erosion, and changing precipitation patterns harming agriculture, fisheries, and tourism. - Externally-financed projects (put on hold in 2020 due to the epidemic; work expected to largely resume in 2021): - West Africa Costal Areas Management Program (WACA) supported by the World Bank to increase resilience of Western African coast. - Installation of an early warning system supported by UNDP. - Improved sanitation facilities supported by the EU and UNICEF. - COMPRAN project supported by FIDA to strengthen the agricultural sector. - Domestic capacity-building measures: - Training, public awareness campaigns, and education to improve local capacity to protect the environment. ### Business climate and tourism recovery measures - Rationale: Improving the business environment and supporting tourism is critical for recovery and sustainable growth. - Specific actions and timelines: - Develop by March 2021 a plan for removing the country from the European Union's Air Safety blacklist (structural benchmark). - Publish a clearly codified procedure for the approval of investment, including access to land, to facilitate investment in tourism by March 2021. - Integrate tourism licensing requests in the GUEnet portal; IT platform developed with World Bank support and validation to be completed by March 2021. - Reform the National Tourism Administration; Cabinet approved draft law setting up the National Board for Tourism. - Issue “clean and safe” certificates for hotels and other entities and provide sector training as part of COVID-19 recovery. - Establish a tourism training school with World Bank support; a decree law establishing the school prepared and to be issued in early 2021. - Improve tourism data: - Publish quarterly tourist arrival data within two months from the end of the quarter (agreement among Border Control, BCSTP, Tourism, INE). - Expand annual BCSTP tourist survey on expenses to include overall visits and experience satisfaction by June 2021; publish results within three months of collecting all data. - Revise the labor law to encourage investment while providing adequate worker protection and improve judicial efficiency to better protect creditor rights. ### Payments system and transportation cost actions - Payments system: - Development of a payments system capable of processing international credit cards to be completed in early 2021. - Tender for second phase launched end-June 2020 with AfDB support; project (mobile financial services and digital banking capability) expected to be complete in about 2 years. - Transportation/port: - Aim to improve the port of Principe to reduce import costs (currently on average 20 percent higher than in São Tomé) and ensure steady supply of goods. ### Energy sector reform — governance and strategy - High-level steering committee established, chaired by the Prime Minister, including external partners such as the World Bank; committee to hold biannual meetings. - Strategy centers on implementing the Least Cost Development Plan (LCDP) and Management Improvement Plan (MIP) and achieving full cost recovery at EMAE. - Recent operational progress at EMAE: - Installed more than 6000 meters. - Tightened supply cut-off criterion from three to two missed payments. - Negotiating online bill payment options with banks and planning collection centers outside the capital. - Loss reduction office staffed but not yet equipped. - Contingency plan developed to maintain and inspect aging equipment during COVID-19. ### Energy sector reform — Objectives, targets, and actions Objective 1: Reduce cost of electricity generation and shift to renewables - Targets: - Reduce average cost of energy produced from 0.25 to 0.14 USD/kWh by 2024. - Increase renewable sources’ share from 5 percent to 45 percent by 2024. - Key actions: - Rehabilitate and expand Contador HPP to 3.2 MW by end-2021. - Identify resources for development of the recently approved LLCDP prioritizing an 8.8 MW dual-fueled thermal unit (HFO or LNG) and about 2MW of photovoltaic solar plant. - Mobilize partnerships to study and develop existing hydropower potential. - Policy constraint: Will not finance nor authorize production projects that do not respect LCDP parameters. Objective 2: Reduce electricity consumption - Target: - Reduce electricity consumption by 15 percent within 12 months. - Key actions and timelines: - LED replacement program to replace incandescent/fluorescent bulbs with LED bulbs within nine months, with $2 million in World Bank funding; expected completion by end-June 2021. Tender concluded in November 2020; contract expected to be signed by January 2021. - Pass a law to ban importation of incandescent/fluorescent lamps by June 2022; draft law under review. Government to conduct outreach to stakeholders and assist access to LED suppliers. Objective 3: Improve EMAE distribution management to reduce losses and improve collections - Targets: - Reduce losses (commercial and technical) by 4 (additional 6) percentage points and improve collection rate by 8 (additional 2) percentage points by June 2021 (June 2022) to lower losses below 20 percent and raise the collection rate to 95 percent by June 2022. - Management and operational actions: - Implement new organizational structure in EMAE Commercial Directorate; redefine Finance Directorate and Management support functions. - Prepare bidding documents for procuring Management Information Systems (MIS) — January 2021. - HR consultant to propose organizational restructuring and new job descriptions; shortlist for level 1 directors expected February 2021 and for level 2 directors expected April 2021. - Select a management consultancy firm to support MIP implementation by March 2021 when new director team is recruited. - Adopt modern billing practices, procure and install state-of-the-art MIS, and link cost of services to payment through tariff reform. - Develop arrears clearance plans and disconnect non-paying customers as pandemic subsides; use enforcement tools (e.g., seizing bank accounts) where appropriate. - Government-EMAE mechanism to cap consumption and ensure timely bill payment by public entities (November 2020) including cutting services to non-essential facilities, deducting from budget allocation, and direct payments from Treasury to EMAE. - Loss-reduction office to continue communications campaign for social acceptance and behavioral change to strengthen payment discipline and reduce electricity theft. - Meter program supported by EIB and World Bank: - 200 high tension meters to be installed in distribution plants by June 2021. - 3000 consumption meters for large clients installed by June 2021. - 16,000 residential meters for small clients installed by end-2021. - Reducing diesel theft and losses: - Install diesel meters at power plants by June 2021. - Ensure losses fall below five percent of the volume supplied for energy generation. Objective 4: Reform tariff structure and strengthen regulatory framework - Target: - Gradually achieve a cost-reflective tariff structure by 2024. - Key actions: - Issue a decree covering: (i) tariff structure definition, (ii) customer category definition, (iii) social tariffs adjustments, and (iv) agreed conditions and a broad timeline to achieve full cost-recovery structure. Draft decree to be submitted to government by end-March 2021 for approval within a month. - Implement first tariff increase once meters are in place by December 2021 for large consumers. ### Energy sector indicators and timeline (selected numeric targets) - Table A. Energy Sector Indicators and Targets (in percent) - Reducing loss (commercial + technical): Baseline 34; Dec-19 33; June-21 29; June-22 23. - Raising bill collection rate to: Baseline 89; Dec-19 85; June-21 93; June-22 95. - Reduce diesel loss to: Baseline 10; Dec-19 6.3; June-21 5. - Table B. Expected Key Actions and Timeline, 2020-2021 (Structural Benchmarks) - Develop terms of reference of the new executive management team of EMAE for implementing reform measures — End-December 2020. - Government establishes a mechanism with EMAE to cap consumption and ensure timely bill payment by public entities — End-November 2020. - Complete the LED program — End-June 2021. - Continue to develop arrears clearance plan with non-public customers — To continue after crisis subsides. - Implement the meter program supported by EIB and World Bank, including completing installation of 3000 consumption meters for large clients, and install diesel meters at power plants — End-June 2021. - Issue a decree covering tariff and related definitions and timeline to achieve full cost-recovery structure — End-2021. ### Improving economic statistics - Continued implementation of enhanced General Data Dissemination System (e-GDDS) following IMF mission in March 2019. - Began submitting data essential for surveillance through a National Summary Data Page (NSDP) on May 7, 2019 using SDMX for machine-to-machine data transfer. - Plans to redouble efforts to adhere to publication commitments despite 2020 delays. - Plans to improve balance of payments statistics, including recording imports related to petroleum exploration FDI and refining estimation of tourist receipts. ### Capacity development - Continued emphasis on hands-on technical assistance and on-the-job training due to limited staff capacity. - Plan to complement short-term technical assistance with long-term or peripatetic experts and Portuguese-speaking experts to facilitate knowledge transfer. - Medium-term capacity development strategy updated with IMF staff to include: - Revenue administration (notably implementing the VAT). - PFM reforms to improve budget preparation and execution. - Banking regulation and supervision. - Strengthening accuracy of balance of payment statistics. ### Program monitoring - Program monitored semi-annually through quantitative and/or continuous performance criteria and indicative targets and structural benchmarks. - Quantitative targets set for end-June and end-December 2021; end-March 2021 and end-September 2021 are indicative targets. - Review schedule: - Third review on or after May 15, 2021. - Fourth review on or after September 15, 2021. - Fifth review on or after April 15, 2022. *Source: 1stpea2021001 - 40. We will continue our efforts to strengthen the country’s resilience to climate change (IMF PDF).* ### 1. This Technical Memorandum of Understanding (TMU) contains definitions and ### Technical Memorandum of Understanding (TMU) — Definitions and Adjuster Mechanisms ### Scope and Evaluation - TMU contains definitions and adjuster mechanisms that clarify measurement of quantitative performance criteria and indicative targets in Table 3 attached to the Memorandum of Economic and Financial Policies for 2019-23. - Unless otherwise specified, all quantitative performance criteria and indicative targets will be evaluated in terms of cumulative flows from the beginning of each calendar year. ### Program Exchange Rate - Program exchange rate (rates at end-2018, mid-point exchange rates published on the BCSTP’s webpage for the last day of 2018): - 21.6925 new dobras per U.S. dollar - 24.5 new dobras per euro - 29.17221 new dobras per SDR - 30.1865 new dobras per UA ### Provision of Data to the Fund - Data frequency: as described in ¶26 (frequency specified elsewhere in the program). - Data lag: - No more than four weeks for data on net international reserves (NIR) of the Central Bank of São Tomé and Príncipe (BCSTP). - Six weeks for other data. - Authorities will transmit promptly any data revisions. - For variables relevant for assessing program performance but not defined in this memorandum, authorities will consult with Fund staff. - Performance criteria included in the program (defined below) are: - (i) floor on domestic primary balance; - (ii) ceiling on changes in net bank financing of the central government; - (iii) floor on net international reserves of the central bank; - (iv) ceiling on central government’s outstanding external payments arrears; - (v) ceiling on the contracting or guaranteeing of new non-concessional external debt by the central government or the BCSTP. ### Definitions - Residency basis: external and domestic are 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; excludes operations of state-owned enterprises. - Debt: defined as in paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements (Decision No. 15688 of the Executive Board, Dec. 5, 2014). Quotation preserved exactly: “Debt will be understood to mean a current, i.e., not contingent, liability, created under a contractual agreement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract.” - Government domestic revenue (including oil tax surcharge and excluding oil revenue): - Comprises all tax and non-tax revenue of the government (in domestic and foreign currencies), excluding: - (1) foreign grants, - (2) receipts from the local sale of in-kind grants (e.g., crude oil received from Nigeria, food aid, etc.), - (3) any gross inflows to the government on account of oil signature bonus receipts and accrued interest on the National Oil Account (NOA). - Revenue measured on a cash basis as reported in the table of government financial operations prepared by the Directorate of Budget and the Directorate of Treasury in the Ministry of Finance, Commerce and the Blue Economy (MOF). - Domestic primary expenditure: - Comprises all government spending assessed on a commitment basis (base compromisso), excluding: - (1) capital expenditure financed with external concessional loans and project grants, - (2) the cost assumed by the budget to pay off small depositors following the liquidation of Banco Equador, - (3) scheduled interest payments. - Reporting based on state budget execution prepared every month by the Directorate of Budget and the Directorate of Treasury in the MOF. - All capital expenditures financed by budget support grants (including EU’s) are treated as part of domestic primary spending, with no exception. ### Performance Criteria - Floor on domestic primary balance: - Defined as the difference between government domestic revenue (including oil tax surcharge and excluding oil revenue) and domestic primary expenditure. - Planned payment of (price differential) debt to ENCO (¶22) are deducted from the oil surcharge revenue. - MoF will not approve borrowing by any public entity in the central government other than Treasury (MEFP ¶14, 17). Borrowing by any public entity other than Treasury recorded in the monetary survey as loans to the central government will be added as additional expenditure to the domestic primary deficit (DPD). - Reference domestic primary balance (end-2019 based on hypothetical outturns): -173.7 million new dobras, breakdown provided below. - Ceiling on changes in net bank financing of the central government (NCG): - Refers to increase (decrease) of net bank financing of the central government: stock of all outstanding claims on the central government held by the BCSTP and by other depository corporations (ODCs), less stock of all deposits held by the central government with the BCSTP and with ODCs, plus the increase, if any (with MoF approval) of ODC’s credit to public entities. - Excludes balance of the National Oil Account (NOA) at the BCSTP, deposits from project grants and project loans, contingent liabilities, and social security operations. - All foreign exchange-denominated accounts converted to new dobras at program exchange rate. - Relevant data reported monthly by the BCSTP to IMF staff. - Reference figures: - At end-2018, outstanding net bank financing of the central government (excluding NOA) was 436 million new dobras. - Change in net bank financing during 2018 was 102 million new dobras. - São Tomé and Príncipe: Net Bank Financing (millions of new dobras) - 2017 / 2018 - I Net credit to government by the BCSTP (=I.1-I.2): 93 / 231 - I.1 BCSTP credit, including use of IMF resources: 260 / 310 - I.2 Government deposits with the BCSTP (excluding NOA): 167 / 79 - Treasury dobra-denominated accounts: 23 / 7 - Treasury foreign currency-denominated accounts: 84 / 7 - Counterpart deposits: 60 / 65 - II Net credit to government by ODCs: 427 / 667 - II.1 ODC’s credit to the government: 427 / 667 - II.2 Central government deposits with ODCs: 1 / 0 - III Net bank financing of the government (excluding NOA) (=I-II): 334 / 436 - IV Changes during 2018 in net bank financing of the central government (NCG): 102 - Note: 1 No deposits in ODCs that were under the central government (Treasury) control in 2017 and 2018. - Floor on net international reserves (NIR) of the BCSTP: - NIR defined for program-monitoring as short-term (original maturities of one year or less), tradable foreign assets of the BCSTP minus short-term external liabilities, and all liabilities to the IMF. - Excludes all short-term foreign assets that are not fully convertible external assets nor readily available to and controlled by the BCSTP (e.g., pledged or encumbered assets, HIPC umbrella SDR account, assets used as collateral or guarantees). - Securities whose market value on the last day of the year differs by over 20 percent from original nominal issue price will be assessed at market value as reported by the BCSTP’s Markets Department. - Excludes balance of (1) NOA at the BCSTP, (2) banks’ deposits related to capital or licensing requirements, and (3) banks’ reserves denominated in foreign currency. - All values converted to U.S. dollars at actual mid-point market exchange rates prevailing at the test date. - Reference figures (Dec-19): - I Gross international reserves1: 1034 - Cash: 23 - Demand deposits: 695 - Term deposits (excl. National Oil Account): 77 - Securities other than shares: 219 - US Treasury Bill I: 109 - US Treasury Bill II: 110 - Accrued interest on securities: 2 - Reserve position in the Fund: 0 - SDR holdings: 18 - II Foreign exchange liability: 350 - Short-term bilateral liabilities: 22 - Liabilities to the IMF: 197 - Banks’ reserves denominated in foreign currency: 131 - Banks’ guaranteed deposits denominated in foreign currency: 0 - III Net international reserves (NIR) (=I - II): 684 - IV Net other foreign assets: 277 - Other foreign assets: 492 - Medium and long-term liabilities (including SDR allocation): 215 - V Net foreign assets (III+IV): 960 - Memorandum item: National Oil Account (NOA): 412 - Footnote preserved: 1 For program monitoring, banks’ deposits are excluded. - Additional conversion: at end-2019 NIR was 684 million new dobras (or $31 million, using the exchange rate of 21.6925 new dobras per U.S. dollar). - Ceiling on contracting or guaranteeing of new non-concessional external debt by the central government or the BCSTP: - Continuous performance criterion covering contracting or guaranteeing of new external debt of any maturity (including overdraft positions but excluding short-term import-related and supplier credits) by central government and/or BCSTP. - Debt considered non-concessional if grant element < 35 percent. - Grant element = (nominal value - net present value) / nominal value (expressed as a percentage). - Net present value calculated by discounting the stream of debt service payments at the time of contracting using a discount rate of 5 percent. - For program purposes, debt is considered contracted on signature date unless contract specifies effective upon parliamentary ratification, in which case contracted upon ratification. - Does not apply to IMF resources. - Debt being rescheduled or restructured is excluded from this ceiling to the extent used for debt management operations that improve overall public debt profile. - Medium- and long-term debt will be reported by the Debt Management Department of MOF, measured in U.S. dollars at prevailing exchange rates published by BCSTP. - Government should consult IMF staff before contracting or guaranteeing new debt obligations. - Ceiling on accumulation of central government’s new external payment arrears: - Continuous performance criterion. - New central government external payment arrears: external debt service obligations (principal and interest) not paid when due as specified in contractual agreement, subject to any applicable grace period. - Does not apply to arrears resulting from nonpayment for which a clearance framework was signed before the relevant payment comes due or for which government sought rescheduling or restructuring as of March 2019. ### Indicative Targets - 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). - Floor on pro-poor expenditure (within domestic primary expenditure): - Floor on government outlays recorded in the budget that have a direct effect on reducing poverty, as agreed with IMF and World Bank staffs. - Includes both current and capital outlays. - Pro-poor current spending: covers specified functional classifications and expenditure categories (by budget code) across sectors including Education, Health, Social Security and Assistance, Housing and Community Services, Culture and Sport, Fuel and Energy, Agriculture and Fisheries (matrix of codes provided in source). - Note: Expenditures on fuels and lubricants (combustíveis e lubrificantes) that are affected for administrative purposes are excluded. Food (alimentação) and clothing and shoes (roupas e calçados) supplied to administrative staff are excluded. - Pro-poor treasury-funded capital spending: projects with direct impact on alleviating poverty in sectors: education, health, social safety nets, agriculture and fisheries, rural development, youth and sports, provision of potable water, and electrification. - Floor on tax revenue: - Set on tax revenue including direct and indirect taxes as well as recovery of tax arrears and additional collection efforts. - New concessional external debt contracted or guaranteed by central government or BCSTP: - Measures such debt with a grant element of at least 35 percent. - Limits on this debt are cumulative from the end of the previous calendar year. ### Memorandum Items - Net external debt service payments by the central government: - Defined as debt service due less accumulation of any new external payment arrears (as defined under the relevant performance criterion). - Official external program support: - Defined as budget support grants and budget support loans, including disbursements from the IMF under the ECF and RCF arrangement, and other exceptional financing provided by foreign official entities and incorporated into the budget. - Budget support grants include in-kind aid when products are sold by the government and receipts are used to finance a budgeted spending item. - Reference projected budgetary support grants table (selected entries preserved): - World Bank: 0.00 / 10.00 / 0 million US dollars (2020 H1 / 2020 / 2021 H1 — table context in source) - European Union: 3.00 / 0.00 / 5.25 / 12.50 million euros (table formatting preserved as in source) - African Development Bank: 2 / 0 million UA (table formatting preserved as in source) - IMF ECF program: 1.90 / 9.03 / 3.38 / 9.03 / 3.8 / 0.0 million SDR (table formatting preserved as in source) - Treasury-funded capital expenditure: - Part of domestic primary expenditure; covers public investment projects not directly financed by project grants and concessional project loans. - Includes government co-financing of capital projects financed mainly by project grants and loans; includes spending on new construction, rehabilitation, and maintenance. - Expenditure on wages and salaries and purchase of goods and services related to the projects will not be classified as capital expenditure. - Ceiling on base money: - Sum of currency issued (currency outside depository corporations and cash in vaults) and bank reserves denominated in new dobras. - Bank reserves: reserves of commercial banks (in new dobras) held with the central bank and include reserves in excess of reserve requirements. - Planned payment of debt to ENCO: - Targeted amount to be deducted from the oil surcharge to pay back debt to ENCO during the year as discussed in paragraph 9. - Higher than planned payments are not excluded from the revenue and will be included in domestic debt service. - Planned annual payment: D0, D32 million in 2019 and 2020, respectively, half of which will be paid during the first semester. - Arrear clearance: - Measured as changes in the stock of government arrears to domestic suppliers as defined in paragraph 15. ### Use of Adjusters - Domestic primary balance performance criterion has one adjuster: - Floor on domestic primary balance will be adjusted upward for shortfall of budgetary grants and downward if government receives more than projected budget support grants and privatization receipts in 2020 and 2021. - Downward adjustment will be capped at 25 million new dobras for 2020 and 25 million new dobras for the first semester of 2021. - Upward adjustment will be capped at 50 million new dobras in 2020. - For program purpose, projected privatization proceeds are 0 in 2020 and 2021. *Source: Technical Memorandum of Understanding (TMU) content unit.* ### 25. The performance criteria on net bank financing of the central government and net ### 25. 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 deviations calculated cumulatively from end-December 2019 or end-December 2020, 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, budget support grants, net external debt service payments, and domestic arrears will be converted to new dobras at the program exchange rate and aggregated from end-December 2019 or end-December 2020, as appropriate, to the test date. - The ceilings will be adjusted as follows: - (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 budget support grants in excess of 25 and 25 million new dobras in 2020 and the first semester of 2021 respectively; upward by deviation downward of budget support grants in excess of at 50 million new dobras. - (iv) downward (upward) by deviation upward (downward) of domestic arrears. - The combined application of all adjusters at any test date is capped at the equivalent of US$5 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, budget support grants and loans, 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 2019 or end-December 2020, 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 budget support grants and loans. Budget support loans in 2020 and 2021 are projected to be 0. - The combined application of all adjusters at any test date is capped at the equivalent of US$10 million at the program exchange rate. - Grants and related expenditures to cover the cost of the elections will be excluded from the measurements of the domestic primary deficit. ### Data reporting — Fiscal data (MOF) - Timing: Information to IMF staff within three weeks after the end of each month or quarter, except the public investment program (PIP), which will be provided three months after each quarter. - Required monthly and quarterly fiscal data to be provided by the 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. ### Data reporting — Monetary data (BCSTP) - Timing: Monetary accounts of the BCSTP within three weeks from the end of each month; other monthly data within six weeks after the end of each month; quarterly data within two months after the end of each quarter; annual data within two months after the end of the year. - Data to be provided by the BCSTP to IMF staff: - Daily data on exchange rates, to be posted on the central bank’s website; - Daily data on interest rates, to be posted on the central bank’s website; - Daily liquidity management table, including base money (in new dobras) and currency in circulation, to be posted on the central bank’s website; - Daily net international reserve position, to be posted on the central bank’s website; - 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 monetary aggregates (in IMF report form 5SR); - Monthly BCSTP and market interest rates (in IMF report form 6SR); - Monthly NOA flows data; - 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.). ### Data reporting — External debt data (MOF) - Timing: Directorate of Treasury at the MOF will provide the IMF staff, within two months after the end of each month, the following: - 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. ### Data reporting — National accounts and trade statistics - Provided data and timing: - 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. *Source: 1stpea2021001 - 25. The performance criteria on net bank financing of the central government and net* ### 2010. Due to financial constraints, the CPI only covers the capital city. An STA technical assistance ### 1stpea2021001 - 2010. Due to financial constraints, the CPI only covers the capital city. An STA technical assistance ### Statistical compilation and technical assistance - Consumer Price Index (CPI) - CPI in 2010 covers only the capital city due to financial constraints. - An STA technical assistance mission in fiscal year 2018: - reviewed the re-referenced index; - performed diagnostics on the entire series; - linked the pre- and post-rebased series to produce an analytical series for the IMF database and statistical purposes; - considered INE’s plans for further CPI updates upon completion of the new HES (underway with World Bank support). - Government Finance Statistics (GFS) - Detailed revenue and expenditure data compiled and reported to AFR. - Main weaknesses: - (i) monitoring of expenditures on projects financed by donors; - (ii) financing operations (recording of financing operations and stocks). - All project loans (financed by donors) are programmed in the budget, but some are executed independently. - Government requested development partners’ assistance to record all external financing in the budget. - Expected improvement in recording financing operations and stocks with improved debt data management capacity. - The 2010–16 government accounts finalized and submitted to the Court of Audit; authorities working on the 2017 government account. - STP joined AFRITAC Central project in 2017 to develop GFS. - TA missions in 2017 and 2018: identified GFS compilation priorities and suggested migration path toward GFSM 2014; assisted Ministry of Finance to compile GFS for the budgetary central government for one fiscal year in accordance with GFSM 2014. - March 2019 TA supported ongoing capacity development to implement GFSM 2014 framework. - AFRITAC Central workshop in 2019 focused on: selection of TOFE data sources; procedures for producing GFS from government entities’ trial balances and financial statements; transmission of GFS and public sector debt statistics to STA. - Monetary and Financial Statistics (MFS) - STA missions: December 2004, April/May 2006, June 2007, September 2010. - Accuracy and timeliness of monetary data in SRF improved significantly. - BCSTP reports monthly data to STA for central bank and other depository corporations (ODCs) regularly, with some delays for ODCs. - BCSTP monthly trial balance broadly adequate to compile monetary statistics in line with the Monetary and Financial Statistics Manual and Compilation Guide (MFSMCG). - Central bank collecting insurance company data; asset sizes of insurance companies currently too small to warrant inclusion in monetary statistics. - Central bank produces a quarterly FSI table; MCM TA missions expanded coverage and improved quality. - TA missions in December 2018, May 2019, November 2019 (AFRITAC Central, AFC) supported implementation of risk-based banking supervision; AFC plans to fund two banking regulation and supervision missions to BCSTP each fiscal year. - BCSTP reports some indicators to the Financial Access Survey (FAS), including commercial bank branches per 100,000 adults and ATMs per 100,000 adults (UN SDG Target 8.10 indicators). - External Sector Statistics (ESS) - BCSTP compiles quarterly balance of payments and IIP statistics consistent with BPM6. - Data submission to STA is regular, but timeliness should be improved (lags exceed two quarters). - Further work needed to improve coverage, reliability, level of detail. - Low response rates to nonfinancial sector surveys; net errors and omissions remain very large. - BCSTP evaluating alternative data collection methods until survey response rates improve. - Direct access by compilers to oil trade data essential to improve ESS quality. - Need to improve procedures for compiling consistent travel data and data on direct investment related to oil exploration in São Tomé and Príncipe territory. - Further work needed to improve compilation and consistency of financial transactions and IIP statistics. - February 2018 TA mission found challenges: low survey response rate, limited granularity and coverage of goods account, constrained staff resources. ### Data standards and dissemination - São Tomé and Príncipe participates in the Fund’s enhanced General Data Dissemination System (eGDDS). - Published critical economic data for surveillance on the National Summary Data Page since May 2019. - Table of Common Indicators Required for Surveillance (As of November 30, 2020) — selected entries (Date of Last Actual Observation / Date Received / Frequency of Data / Frequency of Reporting / Frequency of Publication): - Exchange rates: Nov 2020 / Nov 2020 / M / M / M - International reserve assets and reserve liabilities of the monetary authorities: Nov 2020 / Nov 2020 / M / M / M - International investment position: Q3 2019 / Jan 2020 / Q / Q / Q - Reserve/base money: Sep 2020 / Oct 2020 / M / M / M - Broad money: Sep 2020 / Oct 2020 / M / M / M - Central bank balance sheet: Sep 2020 / Oct 2020 / M / M / M - Consolidated balance sheet of the banking system: Sep 2020 / Oct 2020 / M / M / M - Interest rates: July 2020 / Aug 2020 / M / M / M - Consumer Price Index: Sep 2020 / Oct 2020 / M / M / M - Revenue, expenditure, balance and composition of financing – general government: Oct 2020 / Nov 2020 / M / M / M - Stocks of central government and central government-guaranteed debt: Q2 2020 / Oct 2020 / M / Q / Q - External current account balance: Q2 2020 / Oct 2020 / Q / Q / Q - Exports and imports of goods: Q2 2020 / Oct 2020 / Q / Q / Q - GDP/GNP: 2019 / Mar 2020 / A / A / A - Gross external debt: Q2 2020 / Oct 2020 / M / Q / Q ### Debt sustainability assessment and key findings - Joint Bank-Fund Debt Sustainability Analysis (DSA) — dated December 23, 2020. - Risk ratings: - Risk of external debt distress: In debt distress - Overall risk of debt distress: In debt distress - Granularity in the risk rating: Sustainable - Application of judgement: No - Principal findings: - Country remains in debt distress due to prolonged unsettled external arrears. - Large domestic arrears of the loss-making state-owned utility company (EMAE) highlight severe public sector liquidity constraints. - Staff assesses the country has capacity to repay external arrears over time, indicated by relatively low external debt ratios. - Present value (PV) of external PPG debt-to-GDP and debt-to-exports ratios breach thresholds in 2020 and 2021 due to COVID-19 shock; all other external PPG debt burden indicators remain below thresholds throughout the projection horizon in the baseline scenario. - PV of total PPG debt (after accounting for concessional terms of EMAE’s and central government debt and arrears to fuel supplier ENCO) is projected to breach the benchmark associated with a weak debt-carrying capacity (35 percent of GDP) through 2025. - Downward trajectory of PV of total PPG debt rests on authorities’ commitment to implement EMAE’s planned reforms and borrow externally only on concessional terms at a measured pace. - Likelihood of contingent liabilities materializing, particularly ENCO’s arrears to Sonangol, remains low. ### Public debt coverage, contingent liabilities, and arrears - Public debt coverage for the DSA: - PPG debt includes central government’s and EMAE’s debt. - EMAE accumulated arrears to ENCO totaling over 26 percent of GDP at end-2019. - Three SOEs (ENAPORT, ENASA, Correios) not included due to lack of reliable data; potential liabilities from these SOEs included in contingent liability stress test assuming default value of 2 percent of GDP. - Contingent liabilities from financial markets set at default value of 5 percent of GDP. - Contingent liability stress test includes disputed debt of $30 million from Nigeria. - For external DSA, contingent liability shock includes ENCO’s external arrears to Sonangol, estimated $205 million (around 51 percent of GDP) at end-2019, and estimated fines of $12.4 million (around 3 percent of GDP) imposed by the Permanent Court of Arbitration. - Background on debt dynamics (selected figures) - Total PPG debt increased by around 14 percent of GDP in 2019 relative to 2015 to around 98 percent of GDP. - Central government debt increased by close to 2.5 percent of GDP over the same period; remaining increase due to debt accumulated outside central government. - PPG debt includes EMAE arrears to ENCO, which rose to around $115 million in 2019 from $43 million in 2015. - Expansion of electricity distribution network and associated large losses are key drivers of PPG debt rise. - Contingent liabilities’ stress test coverage (defaults and deviations) - Other elements of general government not captured in central government: default 0 percent of GDP; deviations include disputed Nigeria loan (US$30 million) and ENCO’s arrears to Sonangol (US$49.1 million) and PCA fine (US$3.0 million) in external DSA. - SoE debt (guaranteed and not guaranteed): default 2 percent of GDP (applied). - PPP: default 35 percent of PPP stock; applied 0 (pre-HIPC PPP excluded). - Financial market contingent liabilities: default 5 percent of GDP (applied). - Total (2+3+4+5): 14.1 percent of GDP for public DSA, and 66.2 percent of GDP for external DSA. - Arrears - Post-HIPC bilateral arrears total $10.7 million, or 2.3 percent of 2019 GDP: Angola (US$4.8 million), Brazil (US$4.3 million), Equatorial Guinea (US$1.7 million). - Arrears to Brazil rescheduled as per the DSSI initiative. - Domestic arrears total US$33.6 million (9.1 percent of GDP): CST (US$6.6 million), EMAE (US$5 million), other private suppliers (US$22 million). - ENCO-related items: - ENCO (oil importing company; regularized arrears) listed as 48.4 million USD (End 2015) and 37.4 million USD (End 2019) in PPG debt stock table entries (share of GDP figures provided in table). - Arrears from EMAE to ENCO: 43.4 million USD (End 2015) and 110.5 million USD (End 2019) — 13.8% and 26.4% of GDP respectively. - Pre-HIPC legacy arrears: US$54.9 million (13.1% of GDP) — excluded from the DSA on assumption of expected forgiveness. - Disputed debt: Nigeria loan of US$30 million excluded from debt stock due to no signed contract; included in contingent liability stress tests for both public and external DSA. - PPG Debt stock snapshot (selected table entries, as of end-2019) - Total PPG debt (incl. EMAE's arrears to ENCO, but excl. gov's arrears to EMAE): 408.9 million USD — 97.7% of GDP. - Central government direct and guaranteed debt (excl. EMAE's arrears to ENCO, but incl. gov's arrears to EMAE): 303.3 million USD — 72.4% of GDP. - Total PPG external debt: 191.2 million USD — 45.7% of GDP. - Multilateral creditors total: 54.2 million USD — 13.0% of GDP. - IDA: 11.6 million USD — 2.8% of GDP. - BADEA: 11.8 million USD — 2.8% of GDP. - FIDA: 5.0 million USD — 1.2% of GDP. - AfDB: 15.4 million USD — 3.7% of GDP. - IMF: 9.0 million USD — 2.2% of GDP. - Bilateral creditors total: 125.1 million USD — 29.9% of GDP. - Portugal: 55.9 million USD — 13.3% of GDP. - Angola: 52.5 million USD — 12.5% of GDP. - China: 10.0 million USD — 2.4% of GDP. - Brazil: 4.3 million USD — 1.0% of GDP. - Equatorial Guinea: 1.7 million USD — 0.4% of GDP. - Government arrears to external suppliers: 11.6 million USD — 2.8% of GDP. - Domestic debt: 112.1 million USD — 26.8% of GDP. - Central Government T-bills: 29.6 million USD — 7.1% of GDP. - Credit of ODC to Central Government (excl. T-bills): 1.4 million USD — 2.7% of GDP (table shows 0.4 to 1.4 entries; preserved as in source). - Memorandum items: - Pre-HIPC legacy arrears: 54.9 million USD — 13.1% of GDP. - Nigeria Loan (disputed): 30.0 million USD — 7.2% of GDP. - Text Table 4: Arrears and disputed debt treatment (end-2019) - Pre-HIPC legacy arrears (13 percent of GDP): US$54.9 million — not included in DSA on assumption of expected forgiveness. - Post-HIPC bilateral arrears (2.5 percent of GDP): US$10.7 million — included in baseline scenario. - Domestic arrears (9.1 percent of GDP): US$33.6 million — included in baseline scenario. - Disputed debt (7.1 percent of GDP): Nigeria loan US$30 million — included in contingent liability stress tests for public and external DSA. *Sources: IMF and World Bank staff.* ### 4. The COVID-19 shock is causing an economic recession in 2020, with the economy ### 4. The COVID-19 shock is causing an economic recession in 2020, with the economy ### Economic outlook and macroeconomic assumptions - Real GDP in 2020 is projected to decline by 6.5 percent, compared with pre-crisis projections of a 3.5 percent increase. - The dollar GDP trajectory has been changed to reflect revised exchange rate projections. - Average real growth and inflation are both revised down to 3.9 percent and 4 percent, respectively (compared with 4.3 percent and 4 percent in the September 2019 DSA), throughout the 2020-40 projection horizon. - The domestic primary budget deficit now averages 1 percent of GDP through the projection horizon compared with 1.3 percent in the previous DSA. - Real GDP is expected to return to pre-pandemic levels in 2022 with the implementation of long-delayed construction projects and a recovery in tourism and global demand. ### Country classification and debt-carrying capacity - The debt-carrying capacity is captured by a Composite Index (CI) introduced in 2019 that reflects macroeconomic variables, such as real GDP growth, remittances, reserves, and world growth in addition to the previously used CPIA. - The CI currently classifies São Tomé and Príncipe as a country with weak debt-carrying capacity (Text table 6). - Applicable thresholds under the weak classification: - PV of PPG external debt relative to GDP: 30 percent (compared with 40 percent when assessed as medium). - PV of PPG external debt relative to exports: 140 percent (compared with 180 percent when assessed as medium). - PPG external debt service to exports threshold: 10 percent (compared with 15 percent earlier). - PPG external debt service to revenue threshold: 14 percent (compared with 18 percent earlier). - PV of total PPG debt threshold: 35 percent of GDP (compared with 55 percent used in the August 2020 DSA). - Note: The composite index on debt-carrying capacity is periodically updated; the August 2020 DSA assessed the country’s capacity as medium. The change from medium to weak implies lower debt sustainability thresholds for key debt indicators. ### External debt sustainability (DSA baseline and stress tests) - Baseline findings: - Total external PPG debt is sustainable under the program baseline. - External PPG debt stock and debt service ratios remain below DSA threshold values throughout the projection horizon, except: - One-time breach of the debt-to-GDP ratio in 2020. - Temporary breach of the debt-to-exports ratio in 2020 and 2021. - The PV of PPG external debt-to-GDP ratio remains below the threshold of 30 percent from 2021 onwards. - The PV of PPG external debt-to-exports ratio remains around 21-51percentage points below the threshold of 140 percent from 2022 onward. - Solvency indicators improve over time due to fiscal consolidation, cautious external borrowing, economic growth, and an improved current account balance. - Liquidity indicators (debt service-to-exports and debt service-to-revenue) remain below thresholds of 10 and 14 percent, respectively, and improve over time reflecting higher exports and revenues. - Stress-test findings: - Under the most extreme shock scenario, solvency indicators breach their threshold values while liquidity indicators remain below thresholds. - The extreme scenario shocks include: - An exports shock. - A combined contingent liability shock that includes: - Potential repayment of the Nigeria loan (7.1 percent of GDP). - Payment of Permanent Court of Arbitration fine (3 percent of GDP). - ENCO’s arrears to Sonangol (49.1 percent of GDP) which may ultimately fall on the government. - The standard assumption of a financial market bailout. - The PV of debt-to-GDP ratio and PV of debt-to-exports ratio breach respective thresholds throughout either all or most of the projection horizon but decline over time. - ENCO’s external arrears to Sonangol (49.1 out of 66.2 percent of GDP) represent the primary contingent liability in this extreme shock scenario. - The Sonangol shock (49.1 percent of GDP) is calibrated to capture the maximum amount of liabilities that would be assumed by the government should the contingency materialize; the payment terms are assumed to have a grant element of about 37 percent, broadly consistent with the concessionality of PPG external debt. - Policy implication: - Importance of developing a clearance plan for EMAE’s arrears to ENCO, and promoting strong export growth. ### Public debt sustainability - Baseline findings: - Total PPG debt is deemed sustainable under the baseline scenario. - After accounting for the concessional terms of EMAE’s and central government’s debt to ENCO (grant element over 80 percent), the PV of PPG debt is projected to breach the DSA threshold of 35 percent through 2025 before gradually declining to around 27 percent of GDP by 2030. - The downward trajectory depends on authorities’ commitment to continue fiscal consolidation, implement EMAE’s planned reforms, and borrow externally only on concessional terms at a measured pace. - Public debt sustainability is preserved but now subject to larger risks. - Risks and required actions: - Should downside risks materialize and lead to further deterioration relative to staff’s baseline, additional fiscal efforts, an improved financing mix (geared toward more grants and highly concessional borrowing), and/or further debt relief would be needed to safeguard debt sustainability. - All three total PPG debt ratios (PV of debt-to-GDP, PV of debt-to-revenue, and debt service-to-revenue) are sensitive to a primary balance shock; under such a shock these ratios rise in the near term before declining in the medium-to-long term. - EMAE’s arrears to ENCO are denominated in foreign currency; the country’s debt is subject to currency risk, even though such arrears are treated as domestic debt under the residency-based definition. ### Debt distress qualification and conclusions - São Tomé and Príncipe remains in debt distress as in the previous DSA because regularization of post-HIPC sovereign arrears (to Angola, Brazil, and Equatorial Guinea) is still ongoing. - Presence of significant arrears of EMAE to its supplier reflects severe liquidity constraints in the public sector. - Staff assessment: São Tomé and Príncipe has the capacity to repay these arrears over time provided: - Implementation of reforms to the loss-making state-owned enterprise EMAE. - Continued external borrowing at concessional terms. - The country continues to actively seek rescheduling agreements with creditors. - Despite the downgrade to weak debt-carrying capacity and the in-debt-distress rating: - PPG external and total debt remain sustainable under the baseline. - Weak debt carrying capacity implies lower debt burden indicator thresholds and some temporary threshold breaches. - The PV of external debt-to-GDP remains below its thresholds from 2021 through the projection horizon. - The PV of discounted PPG debt-to-GDP remains below its threshold from 2025 through the projection horizon. - Baseline is subject to substantial external risks; stress tests indicate particular vulnerability to shocks to exports, the fiscal primary balance, and combined contingent liabilities. - An extreme stress test accounting for ENCO’s significant external arrears to Sonangol reveals high near-term risks, although key external debt ratios recover below thresholds in the medium term; the strong diplomatic tie between São Tomé and Príncipe and Angola could be a potential mitigating factor. *Source: 1stpea2021001 - 4. The COVID-19 shock is causing an economic recession in 2020, with the economy* ### 13. Overall, the DSA highlights the importance of continuing to reform the loss-making ### 1stpea2021001 - 13. Overall, the DSA highlights the importance of continuing to reform the loss-making ### DSA main findings and vulnerabilities - The DSA highlights the importance of continuing to reform the loss-making enterprise EMAE and progressing with other structural reforms to ensure debt sustainability. - Authorities are aware of implications for debt sustainability due to the downgrade in debt-carrying capacity and remain committed to activating contingencies on the fiscal front should the need arise. - To mitigate fiscal risks the country needs to continue with policies including deepening and prioritizing EMAE reforms, continuing fiscal consolidation and revenue mobilization, eschewing non-concessional loans, improving the business environment to attract non-debt flows, strengthening macroeconomic policies to support the exchange rate peg, and promoting tourism and private sector-led growth. - Financing of large projects in the near and medium terms should be through non-debt generating means, including through grants. ### Debt contracting and financing parameters (explicit limits) - Contracting of new concessional loans should be limited to 3 percent of GDP. - External debt disbursements should not exceed 2 percent of GDP per annum. - These parameters can be adjusted according to debt developments and relaxed as debt vulnerability decreases. - Non-concessional loans should be eschewed. ### Quantitative indicators and projections (selected exact figures preserved) - External debt (nominal) (percent of GDP): 2018: 47.7; 2019: 45.7; 2020: 56.2; 2021: 53.4; 2022: 50.6; 2023: 47.7; 2024: 44.7; 2025: 42.0; 2030: 31.4; 2040: 27.7. - Change in external debt (percent of GDP): 2018: -0.5; 2019: -2.0; 2020: 10.5; 2021: -2.8; 2022: -2.8; 2023: -2.9; 2024: -3.0; 2025: -2.6; 2030: -1.5; 2040: 0.2. - Identified net debt-creating flows (percent of GDP): 2018: 2.6; 2019: 4.7; 2020: 13.9; 2021: 6.1; 2022: -0.8; 2023: -0.8; 2024: -1.2; 2025: -1.5; 2030: -1.1; 2040: 0.5. - Non-interest current account deficit (percent of GDP): 2018: 12.1; 2019: 11.9; 2020: 17.6; 2021: 14.6; 2022: 8.6; 2023: 7.8; 2024: 7.6; 2025: 7.5; 2030: 7.8; 2040: 7.6. - Exports (percent of GDP): 2018: 23.6; 2019: 22.8; 2020: 12.1; 2021: 16.5; 2022: 22.0; 2023: 22.2; 2024: 22.1; 2025: 22.0; 2030: 18.9; 2040: 16.9. - Net current transfers (negative = inflow) (percent of GDP): 2018: -12.6; 2019: -10.3; 2020: -13.1; 2021: -7.0; 2022: -9.4; 2023: -9.4; 2024: -9.0; 2025: -8.4; 2030: -6.8; 2040: -6.6. - Net FDI (negative = inflow) (percent of GDP): 2018: -5.1; 2019: -7.1; 2020: -6.7; 2021: -7.4; 2022: -7.6; 2023: -7.2; 2024: -7.4; 2025: -7.6; 2030: -7.8; 2040: -6.3. - Endogenous debt dynamics (percent of GDP): 2018: -4.4; 2019: -0.1; 2020: 2.9; 2021: -1.2; 2022: -1.8; 2023: -1.4; 2024: -1.4; 2025: -1.4; 2030: -1.0; 2040: -0.8. - Residual (percent of GDP): 2018: -3.1; 2019: -6.6; 2020: -3.3; 2021: -8.9; 2022: -1.9; 2023: -2.1; 2024: -1.8; 2025: -1.2; 2030: -0.5; 2040: -0.3. - PV of PPG external debt-to-GDP ratio (percent): 2021: 27.2; 2022: 32.2; 2023: 30.1; 2024: 29.0; 2025: 27.8; 2030: 19.1; 2040: 16.3. - PV of PPG external debt-to-exports ratio (percent): 2021: 119.4; 2022: 267.1; 2023: 182.4; 2024: 132.2; 2025: 125.1; 2030: 101.4; 2040: 96.6. - PPG debt service-to-exports ratio (percent): 2018: 2.6; 2019: 4.5; 2020: 4.2; 2021: 7.2; 2022: 8.0; 2023: 7.3; 2024: 8.8; 2025: 7.5; 2030: 8.1; 2040: 5.6. - PPG debt service-to-revenue ratio (percent): 2018: 3.7; 2019: 5.6; 2020: 2.5; 2021: 5.6; 2022: 7.9; 2023: 7.1; 2024: 8.3; 2025: 7.0; 2030: 6.0; 2040: 3.1. - Gross external financing need (Million of U.S. dollars): 2018: 31.8; 2019: 24.6; 2020: 48.0; 2021: 40.8; 2022: 14.5; 2023: 12.6; 2024: 13.2; 2025: 10.9; 2030: 15.3; 2040: 44.8. ### Fiscal and macroeconomic assumptions (selected exact figures) - Real GDP growth (percent): 2018: 3.0; 2019: 1.3; 2020: -6.5; 2021: 3.0; 2022: 5.0; 2023: 4.2; 2024: 4.5; 2025: 4.5; 2030: 4.5; 2040: 4.5. - GDP deflator in US dollar terms (change in percent): 2018: 7.3; 2019: 0.2; 2020: 6.2; 2021: 11.9; 2022: 4.5; 2023: 4.0; 2024: 3.7; 2025: 3.6; 2030: 4.0; 2040: 2.0. - Effective interest rate (percent): 2018: 0.4; 2019: 1.2; 2020: -0.2; 2021: 0.6; 2022: 1.2; 2023: 1.2; 2024: 1.3; 2025: 1.0; 2030: 1.2; 2040: 1.5. - Growth of exports of G&S (US dollar terms, percent): 2018: 13.9; 2019: -1.9; 2020: -47.5; 2021: 58.0; 2022: 45.9; 2023: 9.7; 2024: 8.0; 2025: 7.8; 2030: 5.7; 2040: 5.5. - Government revenues (excluding grants, percent of GDP): 2018: 16.8; 2019: 18.5; 2020: 20.5; 2021: 21.3; 2022: 22.2; 2023: 22.9; 2024: 23.3; 2025: 23.7; 2030: 25.5; 2040: 30.8. - Aid flows (Million of US dollars): 2018: 40.5; 2019: 31.1; 2020: 64.5; 2021: 23.7; 2022: 36.3; 2023: 33.6; 2024: 33.7; 2025: 32.9; 2030: 34.2; 2040: 60.9. - Grant-equivalent financing (percent of GDP): 2021: 13.5; 2022: 4.9; 2023: 6.9; 2024: 6.5; 2025: 6.1; 2030: 4.0; 2040: 3.7. - Grant-equivalent financing (percent of external financing): 2021: 77.4; 2022: 71.1; 2023: 78.1; 2024: 83.3; 2025: 82.3; 2030: 75.2; 2040: 74.0. - Nominal GDP (Million of US dollars): 2018: 416; 2019: 422; 2020: 419; 2021: 483; 2022: 530; 2023: 574; 2024: 622; 2025: 673; 2030: 1,039; 2040: 2,005. ### Public sector debt and fiscal balance (selected exact figures) - Public sector debt (percent of GDP): 2018: 96.2; 2019: 97.7; 2020: 103.5; 2021: 101.7; 2022: 96.8; 2023: 91.7; 2024: 85.9; 2025: 79.4; 2030: 56.5; 2040: 51.3. - Change in public sector debt (percent of GDP): 2018: 11.9; 2019: 1.5; 2020: 5.8; 2021: -1.8; 2022: -4.9; 2023: -5.1; 2024: -5.8; 2025: -6.5; 2030: -3.0; 2040: 5.0. - Identified debt-creating flows (percent of GDP): 2018: 6.0; 2019: -0.6; 2020: -0.7; 2021: -1.0; 2022: -4.2; 2023: -4.5; 2024: -5.3; 2025: -6.2; 2030: -3.1; 2040: 4.6. - Primary deficit (percent of GDP): 2018: 8.0; 2019: 4.1; 2020: 3.0; 2021: 7.9; 2022: 4.1; 2023: 2.4; 2024: 1.3; 2025: 0.2; 2030: 1.3; 2040: 7.1. - Revenue and grants (percent of GDP): 2018: 25.2; 2019: 25.0; 2020: 31.7; 2021: 25.1; 2022: 28.1; 2023: 28.7; 2024: 28.8; 2025: 28.6; 2030: 28.8; 2040: 33.8. - Primary (noninterest) expenditure (percent of GDP): 2018: 33.2; 2019: 29.1; 2020: 34.7; 2021: 32.9; 2022: 32.2; 2023: 31.1; 2024: 30.1; 2025: 28.8; 2030: 30.1; 2040: 40.9. - PV of public debt-to-GDP ratio (percent): 2025: 79.4; 2026: 77.8; 2027: 78.3; 2028: 75.1; 2029: 71.8; 2030: 62.5; 2040: 44.2. - Gross financing need (percent of GDP): 2018: 8.5; 2019: 5.1; 2020: 23.6; 2021: 17.4; 2022: 14.2; 2023: 11.0; 2024: 9.1; 2025: 6.9; 2030: 5.8; 2040: 15.2. ### Stress tests, shocks, and realism tools (high-level) - Stress tests include scenarios such as Combined contingent liabilities, Natural disasters, and historical and tailored tests. The most extreme stress test is defined as the test that yields the highest ratio in or before 2030. - Realism tools show contributions to real GDP growth from public and private investment and possible growth paths under different fiscal multipliers (Multiplier = 0.2, 0.4, 0.6, 0.8). - Sensitivity and bound tests present breaches of thresholds for indicators such as PV of debt-to-GDP, PV of debt-to-exports, debt service-to-exports, and debt service-to-revenue under alternative scenarios and tailored tests. *Source: IMF staff estimates and projections as presented in the DSA material for the Democratic Republic of São Tomé and Príncipe.* ### 1. The prior action on publication of procurement contracts, adjudication notices ### 1. The prior action on publication of procurement contracts, adjudication notices and ex-post validation of delivery reports ### Prior actions and transparency updates - The prior action on publication of procurement contracts, adjudication notices and ex-post validation of delivery reports has been met. On January 25, 2020, the full set of information required under the prior action was made available on the Ministry’s website. - The authorities have continued publishing monthly COVID-19 related expenditure, now available up to December 2020. - The prior action on the 2021 budget has been met. The domestic primary balance under the 2021 budget, approved by parliament, is in line with the program target. - The 2021 budget contains reallocations: higher personnel expenses (by 0.3 percent of GDP) and lower domestically financed emergency COVID-19-related allocations (by a similar amount). - The authorities do not expect the reductions in COVID-19 related expenditure to reduce pro-poor spending nor to undermine the achievement of the program’s indicative floor on such spending. - The higher personnel expenditures may require additional policy actions to meet the authorities’ MEFP commitment to gradually reduce the civil service wage bill to close to 10 percent by 2023. Staff will continue to follow up on this issue during the remainder of the program. ### Financial assurances - Angola and Equatorial Guinea, with which São Tomé and Príncipe has external payment arrears, have provided consent to the completion of the Second ECF Review. ### Update on new developments (end-2020 preliminary outturns) - Preliminary end-December outturns indicate the authorities are on track to meet key end-year program targets for the subsequent review: - 2020 domestic primary deficit estimated at about 4 percent of GDP (program target 6.3 percent of GDP). - International reserves at end-December were US$37 million (program floor US$25 million). - In February, the authorities reported preliminary 2020 GDP estimates that indicated positive real GDP growth; staff will verify this and other information for the subsequent review. *Statement by Mr. Andrianarivelo Executive Director for the Democratic Republic of São Tomé and Príncipe and Mr. Carvalho da Silveira, Advisor to the Executive Director on Democratic Republic of São Tomé and Príncipe — February 26, 2021* ### Recent developments (authorities’ summary) - Pandemic and health measures: - Second surge in January 2021 prompted extension of the state of calamity for Sao Tome to February 15, 2021 and reinstatement/extension of the state of emergency for Principe to February 20, 2021, with additional prevention and containment measures. - As of February 23, 2021, total COVID-19 cases recorded stood at 1655, of which 1271 recovered and 26 died. - World Bank support for immunization plan and vaccine purchase/distribution aligned with COVAX. The first phase of the vaccine rollout will cover 20 percent of the population and is planned to start in April 2021. - 2020 macroeconomic and fiscal outturns (authorities’ estimates): - Real GDP expected to drop to -6.5 percent in 2020 from 1.3 percent in 2019 due to disruptions in tourism, services, global supply chains and project delays. - Fiscal deficit expected to increase from 1.8 percent of GDP in 2019 to about 4 percent at year-end 2020. - Inflation increased to about 10 percent in 2020 and should decline gradually over time. - Current account deficit anticipated to expand to 17.5 percent in 2020, driven by lower external demand and a drop in remittances. - Credit growth to the private sector slowed. ### Outlook and risks - Authorities’ growth projections: - Real GDP growth expected to rebound to 3 percent in 2021 and firm up at around 4.5 percent over the medium-term as tourism recovers and infrastructure projects materialize. - Main downside risks: - Delays to vaccination, a more protracted pandemic, difficulties controlling new virus outbreaks, setbacks to fiscal adjustment, and setbacks to energy sector reforms. - Authorities reaffirm commitment to implement reform agenda and take additional steps should downside risks materialize. ### Performance under the ECF program - Implementation in 2020: - All end-June 2020 performance criteria (PCs) and Indicative Targets (ITs) were met, except the ones on the domestic primary balance and floor on revenues (set prior to the pandemic). - Preliminary data indicates end-December 2020 PCs are firmly on track; authorities expect to outperform the domestic primary deficit. - Structural benchmarks: - Progress limited due to Covid-19 disruptions and capacity constraints affecting VAT IT system implementation and EMAE reforms. - Achievements include retaining fuel prices to support revenue, publishing Covid-19 spending reports and public procurement contracts (including beneficiary ownership information) albeit with delays, and completion of the draft central bank Organic Law pending submission to Parliament in February 2021. - Advances made in finalizing the Financial Institutions Law. ### Fiscal policy stance and measures (policy response for 2021 and beyond) - Short-term priorities: - Mitigate social and economic impacts of the pandemic, gradually resume fiscal consolidation, and set the stage for a quick recovery while preserving medium-term macroeconomic and debt sustainability. - 2020 measures and outcomes: - Forceful measures taken to achieve 2020 fiscal targets. Preliminary data indicates the 2020 domestic fiscal deficit (DPD) will reach about 4 percent of GDP, about 2.3 percent lower the program target. This reflects strong revenue windfall from 2019 tax measures and expenditure rationalization efforts. - Steps to accommodate spending for long-overdue military promotions and hiring health and education personnel. - 2021 budget and revenue measures: - Parliament approved the 2021 budget with a DPD of 3.9 percent of GDP on January 14th. - Authorities expect revenue overperformance due to the solidarity contribution; VAT implementation starting mid-July 2021; and tax policies introduced in 2019. - Fuel price at the pump will remain unaltered to reduce existing fuel subsidy debt. - Grants and concessional loans anticipated from development partners (World Bank, European Union, African Development Bank). - Control over expenditures to be maintained; COVID-19 spending to be rolled back when conditions allow but maintained in near-term to meet increased health and education demand, with some reallocation. - Pro-poor spending will be maintained in line with the program. - Transparency and procurement: - Government commits to continue publishing information on public procurement contracts and monthly Covid-19 related expenses. - Operational constraints and lack of integrated systems caused delays; World Bank technical assistance is being provided to strengthen procurement management and transparency. - Executive order issued by the Ministry of Finance requires all spending agencies to share contract information with the procurement agency (COSSIL) before Treasury approves payment. - Medium-term fiscal actions: - (i) Forcefully monitor and recover tax payment by large taxpayers; - (ii) Lower the wage bill by limiting new hiring and halting inflation adjustments; - (iii) Maintain transfers constant in nominal terms; - (iv) Strengthen tax administration and public financial management (PFM) in line with IMF recommendations. - Debt management: - Authorities took note of the latest Debt Sustainability Analysis (DSA) indicating external debt is sustainable despite an in-debt distress rating and deterioration of debt-carrying capacity. - Commit to accelerating energy sector reforms and continuing fiscal consolidation to preserve debt sustainability. - Continue prudent debt management and engagement with remaining creditors to regularize arrears and restructure outstanding debt. - Requested an extension of the G20 Debt Service Suspension Initiative due to continued liquidity pressure. ### Monetary, exchange rate, and financial sector policies - Monetary and exchange rate policy: - Coordination between fiscal and monetary policies remains essential to mitigate crisis impact, boost international reserves and safeguard the peg to the euro. - BCSTP will closely oversee system-wide liquidity and stands ready to tighten monetary policy to protect the peg. - Efforts to enhance the monetary policy framework and liquidity management are progressing with IMF TA; a plan is being developed to gradually reduce excess liquidity. - Committee for Public Debt meetings restarted; work underway to regularly disseminate annual T-Bills issuance schedule aligned with cash flow forecasts and borrowing plans. - Authorities committed to implement Safeguard Assessment recommendations to improve BCSTP independence and transparency; draft organic law and Financial Institutions Law scheduled for submission to Parliament in February and March 2020, respectively. - Financial sector measures and NPLs resolution: - BCSTP created a credit line to support SMEs in affected sectors with AfDB assistance. - Banking sector remains relatively well capitalized but asset quality has weakened with increasing NPLs. - Steps taken to implement asset quality review recommendations related to loan classification and recapitalizations. - BCSTP plans regulation to allow faster write-offs and strengthened judicial loan enforcement; arbitration tribunal for out-of-court settlement expected by June 2021. - Pandemic-related delays in resolution of Banco Equador and Banco Privado; authorities plan to relinquish remaining assets of both banks to the court system if investor attraction fails. - Another small bank placed under temporary administration pending full evaluation. ### Structural reforms and capacity development - Structural reform priorities: - Continue reforms under the National Sustainable Development Plan 2020-2024 to boost growth potential, competitiveness, job creation, investment, and resilience. - Key infrastructure projects expected in 2021: airport modernization, construction of social housing, and rehabilitation of 27km of roads. - Financial sector infrastructure upgrades: legal framework for a collateral registry to help SMEs access financing; new payment system for international credit cards expected operational in February 2021. - Initiatives supported by development partners to enforce legislation and close gender gaps, improve climate resilience, address labor law and judicial system inefficiencies. - Plan to remove the country from the European Union’s Air Safety blacklist by March 2021. - EMAE and energy sector reforms: - Authorities concur on high importance of EMAE and energy sector reforms to ensure public debt sustainability, in line with Least Cost Production Plans and Management Improvement Plan. - Limited progress to date; a newly instated steering committee chaired by the Prime Minister will support decisive reform implementation. - Capacity development and IMF engagement: - Capacity development from partners has been instrumental; authorities reiterate interest in reopening the resident representative office in Sao Tome to deepen engagement and support program implementation. ### Conclusion and requests - Authorities reiterate commitment to implementing the ECF-supported program to mitigate pandemic impact, safeguard macroeconomic stability and support recovery. - Requests to the Executive Board: - Support for completion of the second review under the ECF and approval of the waiver for nonobservance of performance criterion. - One-year extension of the temporary approval for retention of measures resulting in exchange restrictions and a multiple currency practice subject to IMF jurisdiction under Article VIII, Sections 2(a) and 3. *Source: 1stpea2021001 - 1. The prior action on publication of procurement contracts, adjudication notices and ex-post validation of delivery reports (PDF).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1stpea2021001.pdf_