## _cr06329

## Source details

**Canonical URL:** [_cr06329](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06329.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06329.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06329.pdf.json)

---

### Chapter structure and purpose
- The selected issues paper comprises three chapters:
  - Chapter I: Reviews historical background and institutional framework for oil sector development in São Tomé and Príncipe, with focus on the Oil Revenue Management Law and transparency challenges, including issues in the bidding process for Blocks 2–6 in the JDZ.
  - Chapter II: Provides a preliminary quantitative analysis of the fiscal impact of oil sector development, applying conservative assumptions and examining a Permanent Income Hypothesis (PIH) fiscal rule adopted in 2004.
  - Chapter III: Presents a statistical analysis of the determinants of inflation (1998–2005) using a vector error-correction model.

### Key geographic and socioeconomic facts
- Area: 1,001 (square kilometers)
- Population (2004): Total 160,600; annual growth rate (in percent) 2.0
- GNI per capita (in U.S. dollars; 2004): 370
- GDP at market prices (in billions of dobras): 42 (2001), 48 (2002), 55 (2003), 62 (2004), 74 (2005 est.)
- Cocoa production (metric tons): 3,652 (2001), 3,462 (2002), 3,820 (2003), 2,500 (2004), 2,900 (2005)
- Consumer price index (percentage change, average): 9.5 (2001), 9.2 (2002), 9.8 (2003), 13.3 (2004), 17.2 (2005)

### Chapter I — Institutional framework for oil sector development: overview and conclusions
- Main findings:
  - A protracted process occurred to establish transparent rules governing government–oil company relations.
  - The Oil Revenue Management Law (ORML) enacted in December 2004 is identified as a pivotal instrument providing strong governance and accountability provisions prior to projected oil production around 2012.
  - Implementation shortfalls remain, notably problems in the bidding process for Blocks 2–6 in the JDZ.
  - Resolute political will by São Tomé and Príncipe and Nigeria is necessary to enforce transparency rules for all oil-related transactions under their joint jurisdiction.
- Geographical zones for hydrocarbon exploration:
  - Off-shore Joint Development Zone (JDZ) operated with Nigeria.
  - Off-shore Exclusive Economic Zone (EEZ).
  - On-shore area (islands of São Tomé and Príncipe).
- JDZ prospects and data:
  - Block 1 lies a few kilometers south of Nigeria’s Akpo field, believed to contain reserves as high as 1.0 to 1.5 billion of oil equivalent barrels.
  - Extensive seismic data for the northern JDZ suggests promising prospects.
  - EEZ prospects: less promising to date though preliminary seismic data indicates some chance.
  - On-shore prospects: considered low; no current plans to promote exploration.

### JDZ establishment and institutional arrangements (summary)
- 1998: EEZ claim filed by São Tomé and Príncipe based on Median Line Principle; contested by Nigeria.
- February 2001: Treaty creating the JDZ for joint development for 45 years (subject to review at year 30).
- Benefit/obligation split under the Treaty: Nigeria 60 percent; São Tomé and Príncipe 40 percent.
- Institutional arrangements:
  - Joint Development Authority (JDA), based in Abuja, manages exploration/exploitation activities in the JDZ.
  - Joint Ministerial Council (JMC), with 2–4 ministers or equivalents from each country, is the ultimate decision-making body; JDA and JMC decisions are taken by consensus.
  - In case of JMC deadlock, disputes are referred to the Heads of State for final resolution.

### ORML, Permanent Fund, and fiscal framework
- ORML features and objectives:
  - Key legislation for open and transparent oil revenue management; devised with international experts.
  - Fiscal framework based on Friedman’s (1957) Permanent Income Hypothesis (PIH): constant government consumption (in real terms) from oil resources, equivalent to interest income on the net present value of oil wealth.
  - Establishment of a Permanent Fund for Future Generations to secure inter-generational equity and guarantee a permanent flow of resources into the budget.
- ORML transparency and oversight provisions:
  - Obligation to make public all oil-related transactions.
  - Prohibition on confidentiality clauses in oil contracts (including PSAs).
  - Establishment of an independent Petroleum Oversight Commission to monitor compliance, including civil society representatives.
  - Two levels of auditing for the Permanent Fund: Auditor General’s Office and a reputable international auditing firm; audits must be public.
  - Guidelines for management and investment of savings from oil proceeds.
- Permanent Fund key features:
  - National Oil Account (NOA) to be opened by the central bank with a (foreign) custodian bank; NOA comprises an Unrestricted Portion and a Permanent Fund (PF) sub-account.
  - Full balance from Unrestricted Portion transferred to PF once a year after fees and annual transfers to the budget.
  - Liens and encumbrances relating to the NOA or oil resources are prohibited (barring oil-backed forward borrowing).
  - Annual funding amount transferred from NOA to the budget each year; pre-production years governed by formulas; post-production transfers based on PIH.
  - Spending should follow Poverty Reduction Strategy priorities; 7 percent of annual funding reserved for Príncipe and 10 percent for local governments.
  - Management and Investment Committee (five members including Minister of Finance and President of the Central Bank) responsible for portfolio; investments domiciled in the country are prohibited; private managers can be hired.

### Licensing, bidding rounds, and implementation challenges
- First bidding round (April 2004):
  - Block 1 awarded with winning bid totaling US$123 million in oil signature bonuses.
  - Awardees: ChevronTexaco (51 percent), ExxonMobil (40 percent), Dangote Energy Equity Resources Limited (9 percent). ChevronTexaco designated operator.
  - PSA signed in May 2005; drilling in Block 1 started in January 2006.
  - Bids for six additional blocks were received but turned down by the JDA due to technical and financial considerations.
- Second bidding round (Blocks 2–6, May 2005):
  - Transparency of auctioning process questioned.
  - Petroleum Affairs Commission and Attorney General found procedures seriously flawed, failed to meet minimum standards, and led to financial losses for São Tomé and Príncipe.
  - Attorney General recommended restructuring JDA bidding procedures and re-examination of ERHC’s preferential rights.
  - ERHC executed preferential rights and was granted interests in all five blocks awarded in this round.
  - PSAs being negotiated with awardees.
  - Authorities intended to raise bidding process issues at the Joint Ministerial Committee meeting scheduled for February 2006.

### Chapter II — Fiscal impact of oil sector development: baseline projections and PIH application
- Policy context:
  - The chapter discusses alternative fiscal rules for oil-producing countries and analyzes advantages of a PIH-based rule for sustainable government consumption and intergenerational equity.
  - São Tomé and Príncipe adopted a PIH-based rule in 2004, the first African country to do so.
- PIH formulation used in ORML:
  - ORML annual funding amount formulation:
    - GC_{t+1} = [F_t + sum_{i=0}^{I} T_{i+t+1} / (1+d)^{i+1}] × d
      - d: discount rate used for annual funding amount (ORML states discount rate cannot be set below 7 percent).
      - ORML caps the long-run rate of return at 5 percent.
  - Authorities chose non-per-capita formulation to avoid back-loading spending on health, education, and infrastructure and to avoid very low initial spending levels.
  - Discrepancy d > r implies initially lower but gradually increasing annual funding as PF builds up.

### Baseline assumptions (staff calculations)
- Key baseline assumptions:
  - Discovery of one commercially-exploitable block in the JDZ with 500 million equivalent barrels of oil in reserves.
    - Equivalent to total production of 70,000 barrels per day for twenty years.
    - São Tomé and Príncipe share: 28,000 barrels/day.
  - Production begins in 2012.
  - Production profile consistent with deep-seawater wells: peaking to approximately 150,000 barrels per day in the third year and declining to depletion after 20 years.
  - Oil price: US$30 per barrel, in constant 2006 U.S. dollars.
  - Baseline discount rate (d): 7 percent.
  - Baseline long-run real rate of return (r): 3 percent.
  - International inflation assumption: 2.5 percent annually (all dollar amounts in constant 2006 U.S. dollars).
  - Non-oil GDP growth assumptions: 6.25% on average for 2006-10 and 8% thereafter.
- Caveat: Exploration drilling of Block 1 had just begun at drafting; no confirmed commercial discoveries. Estimates are speculative and subject to significant uncertainty.

### Baseline quantitative projections (constant 2006 U.S. dollars)
- Timing and magnitudes:
  - Annual funding into the budget would start in 2013.
  - Annual funding would increase rapidly to about US$70 million by 2015.
  - Annual funding would converge to US$91.9 million by 2033.
  - Permanent Fund for Future Generations would reach US$1 billion by 2018.
  - Permanent Fund steady-state level of US$3 billion by 2033.
- Comparative scale note: these figures are high relative to estimated GDP of São Tomé and Príncipe, which is around US$70 million in 2006.
- Selected figures from Text Table II.1 (amounts in millions of 2006 U.S. dollars):
  - 2012: Oil Receipts Total From production In percent of non-oil GDP = 25.9; Annual Funding Amount From annual production = 0.0; From Permanent Fund = 0.0; Permanent Fund balance = 0.0.
  - 2013: Oil Receipts Total = 90.7; Annual Funding Amount From annual production = 13.0; From Permanent Fund = 13.0; Permanent Fund balance = 11.3.
  - 2014: Oil Receipts Total = 306.6; Annual Funding Amount From annual production = 59.0; From Permanent Fund = 59.0; Permanent Fund balance = 47.3.
  - 2015: Oil Receipts Total = 396.1; Annual Funding Amount From annual production = 73.3; From Permanent Fund = 73.3; Permanent Fund balance = 54.4; Annual funding amount as percent of non-oil GDP = 128.2; Permanent Fund (in percent of non-oil GDP) = 95.1.
  - 2016: Oil Receipts Total = 364.6; Annual Funding Amount From annual production = 75.9; From Permanent Fund = 72.0; Permanent Fund balance = 54.4; Annual funding amount as percent of non-oil GDP = 284.7.
  - 2032: Annual Funding Amount = 91.8; Permanent Fund = 3,038.5; Annual funding amount as percent of non-oil GDP = 60.9.
  - 2050: Annual Funding Amount = 91.9; Permanent Fund = 3,063.2; Annual funding amount as percent of non-oil GDP = 15.3.

### Sensitivity analysis: reserves, oil prices, and rates of return
- Reserves sensitivity:
  - Baseline reserves: 500 million barrels (São Tomé share: 40 percent → 200 million barrels equivalent).
  - If reserves are twice baseline:
    - Annual transfers into the budget broadly double to US$183.9 million.
    - Permanent Fund converges to roughly US$6.1 billion.
  - Three blocks of 500 mb each (staggered production): Annual Funding Amount = 295.8; Permanent Fund = 9,860.3 (millions of 2006 U.S. dollars).
- Oil price sensitivity:
  - Baseline oil price: U$30 per barrel.
  - High-price scenario: U$40 per barrel:
    - Annual funding amount increases from US$91.9 million to US$137.0 million.
    - Permanent Fund increases from US$3.0 billion to US$4.5 billion.
  - Point elasticity of annual funding amount with respect to oil prices at baseline: 1.49.
  - WEO cited projections: US$56.50 on average for 2008–11 (implying larger revenue windfall than US$40 scenario).
- Rate of return sensitivity:
  - Point elasticity of annual funding amount with respect to changes in the real rate of return at baseline: 0.74.
  - Example: increasing long-run rate of return from 3 percent to 4 percent → annual funding amount increases from US$91.9 million to roughly US$115 million on perpetuity.
- Production cost sensitivity:
  - Increase in total production costs per barrel from US$7.8 (baseline) to US$11.0 leads to:
    - Annual funding amount = US$77.2 million.
    - Steady-state Permanent Fund = US$2.6 billion.
  - Baseline elasticity of annual funding amount to production costs = -0.41.
- Selected Text Table II.2 snapshots (millions of 2006 U.S. dollars unless otherwise indicated):
  - Oil Prices: US$20 → Annual Funding Amount = 49.9; Permanent Fund = 1,663.7
  - Oil Prices: US$30 (Baseline) → Annual Funding Amount = 91.9; Permanent Fund = 3,063.2
  - Oil Prices: US$40 → Annual Funding Amount = 137.0; Permanent Fund = 4,566.4
  - Real Rate of Return: 1% → Annual Funding Amount = 34.1; Permanent Fund = 3,406.9
  - Real Rate of Return: 3% (Baseline) → Annual Funding Amount = 91.9; Permanent Fund = 3,063.2
  - Real Rate of Return: 5% → Annual Funding Amount = 137.7; Permanent Fund = 2,754.7
  - Discount Rate (d): 3% → Annual Funding Amount = 89.2; Permanent Fund = 2,974.5
  - Discount Rate (d): 5% (Baseline) → Annual Funding Amount = 91.9; Permanent Fund = 3,063.2
  - Discount Rate (d): 12% → Annual Funding Amount = 94.4; Permanent Fund = 3,147.2
  - Production Costs: US$7.8 (Baseline) → Annual Funding Amount = 91.9; Permanent Fund = 3,063.2
  - Production Costs: US$11 → Annual Funding Amount = 77.2; Permanent Fund = 2,574.9
  - Tax Oil: 40% → Annual Funding Amount = 88.0; Permanent Fund = 2,933.0
  - Tax Oil: 50% (Baseline) → Annual Funding Amount = 91.9; Permanent Fund = 3,063.2
  - Tax Oil: 60% → Annual Funding Amount = 96.6; Permanent Fund = 3,219.1
  - Oil Reserves in JDZ (million barrels): 250 → Annual Funding Amount = 45.8; Permanent Fund = 1,527.9
  - Oil Reserves in JDZ (million barrels): 500 (Baseline) → Annual Funding Amount = 91.9; Permanent Fund = 3,063.2
  - Oil Reserves in JDZ (million barrels): 1000 → Annual Funding Amount = 183.9; Permanent Fund = 6,129.8
  - Oil Reserves in JDZ (million barrels): 1500 → Annual Funding Amount = 276.0; Permanent Fund = 9,198.4

### Policy implications from Chapter II
- Use of PIH fiscal rule would ensure fiscal sustainability and intergenerational equity while providing predictable revenue streams.
- Absorptive capacity concerns: annual funding amounts peaking at very high shares of GDP (e.g., 128.2 percent of non-oil GDP in 2015 under baseline) imply risks of rapid spending increases overwhelming institutional and technical capacity.
- If many blocks come online and funding amounts are much larger, a switch to a per capita PIH rule could be considered to mitigate absorptive and social tensions.
- Production cost increases and oil price volatility are key fiscal risk drivers; presence of a royalty in the JDZ Model PSA provides a minimum government take.

### Chapter III — Inflation, 1998–2005: VEC statistical findings
- Data and methodology:
  - Monthly data Jan. 1998–Sep. 2005.
  - Inflation measured by 12-month growth rate of CPI.
  - Money supply (M3) = currency in circulation + dobra-denominated deposits + foreign currency-denominated deposits.
  - RGDP proxied by imported investment goods deflated by CPI (three-month moving average).
  - Exchange rate (ER) = dobra against the U.S. dollar.
  - Vector error-correction (VEC) methodology with 7 lags.
- Unit-root and cointegration:
  - ADF statistics (levels / first differences): lnCPI -1.020 / -5.512 ***; lnM3 0.513 / -12.508 ***; lnER -0.073 / -20.090 ***; lnRGDP -1.923 / -11.675 ***. (*** : 1 percent significance level.)
  - Trace test: reject no cointegration in favor of one cointegrating vector at 1 percent significance.
- Long-run cointegrating relationship (estimated equilibrium):
  - 342.4 lnRGDP - 104.0 lnER + 531.03 lnM3 - 528.0 lnCPI = (constant term and formatting from source).
  - Interpretation: inflation tends to increase with money supply and depreciation of the exchange rate, and decrease with real economic expansion.
- Key empirical findings (restricted VEC model):
  - Inflation is largely explained by depreciation of the exchange rate and, to a lower extent, by growth of broad money with a two-lag adjustment period.
  - Substantial inflation inertia: error-correction term coefficient negative and significant; a 1 percent deviation below equilibrium increases inflation by roughly 0.02 percent in the following month.
  - Relationship between money growth and inflation is weak, consistent with increased money demand related to oil-sector expectations.
  - It takes around two years for a shock to the exchange rate to be fully absorbed by inflation.
- Granger-causality results (selected, Chi2 statistics and significance):
  - lnER -> lnCPI: 22.36 ***
  - lnCPI -> lnER: 15.18 ***
  - lnM3 -> lnCPI: 3.762
  - lnM3 -> lnER: 6.91 **
  - lnER -> lnM3: 20.45 ***
  - lnCPI -> lnRGDP: 25.34 ***
  - lnRGDP -> lnER: 14.24 **
  - lnER -> lnRGDP: 22.47 ***
  - lnRGDP -> lnM3: 8.34 **
  - Interpretation: inflation and exchange rate depreciation Granger-cause each other; money supply does not Granger-cause inflation statistically; monetary aggregates and exchange rate have two-way causality.
- Diagnostics and robustness:
  - Unrestricted VEC explains about 85 percent of actual inflation (conventional R-square).
  - Conventional χ2 test statistic = 215.34 rejects null that all coefficients are zero.
  - Normality concerns remain but eigenvalues lie inside the unit circle; residual autocorrelation hypothesis cannot be rejected.
  - Impulse responses: exchange rate shocks have largest impact on inflation; money shocks produce small, brief and statistically insignificant inflation responses.

### Additional macro- and fiscal statistics (selected tables and indicators)
- Government finance (in billions of dobras):
  - Revenue and grants: 249 (2001), 246 (2002), 321 (2003), 381 (2004), 972 (2005 est.)
  - Current expenditure: 122 (2001), 157 (2002), 183 (2003), 293 (2004), 320 (2005 est.)
  - Capital expenditure: 194 (2001), 140 (2002), 198 (2003), 235 (2004), 193 (2005 est.)
  - Overall fiscal balance (commitment basis): -87 (2001), -80 (2002), -94 (2003), -167 (2004), 427 (2005 est.)
- Monetary survey (end of period, in billions of dobras):
  - Net foreign assets: 220 (2001), 265 (2002), 325 (2003), 298 (2004), 670 (2005 est.)
  - Broad money (M3): 153 (2001), 195 (2002), 276 (2003), 297 (2004), 374 (2005 est.)
- Balance of payments (in millions of U.S. dollars):
  - Exports, f.o.b.: 3.3 (2001), 5.1 (2002), 6.6 (2003), 3.5 (2004), 3.8 (2005)
  - Imports, f.o.b.: -26.2 (2001), -28.4 (2002), -33.6 (2003), -36.0 (2004), -42.1 (2005)
  - Trade balance: -22.9 (2001), -23.3 (2002), -27.0 (2003), -32.5 (2004), -38.3 (2005)
  - Current account deficit, excluding official transfers: -31.2 (2001), -29.2 (2002), -33.5 (2003), -37.9 (2004), -41.6 (2005)
  - Current account deficit, including official transfers: -10.7 (2001), -12.9 (2002), -13.2 (2003), -13.0 (2004), -23.2 (2005)
- Gross foreign reserves (end of period, in millions of U.S. dollars): 15.2 (2001), 17.3 (2002), 23.0 (2003), 18.0 (2004), 20.6 (2005)
- External public debt, medium- and long-term (disbursed and outstanding, in millions of U.S. dollars): 283.9 (2001), 288.5 (2002), 310.4 (2003), 362.3 (2004), 368.7 (2005)

### Taxes, public finance, and other institutional data (selected)
- Individual income tax: flat rate of 13 percent.
- Corporate/profit tax: flat 30 percent on taxable profits; additional 15 percent on taxable profits in excess of Db 12 million.
- Minimum tax brackets (examples): up to Db 80,000 → Db 18,000; above Db 4,000,000 → Db 636,000.
- Import duty structure: three bands 5 percent (basic), 20 percent (luxury), 10 percent (other goods); specific surtaxes for petroleum products and other items (examples: gasoline total 149 percent; diesel 62.9 percent).
- Central government revenue and expenditure (2005 estimates, in billions of dobras):
  - Total revenue and grants: 972.2
  - Tax revenue: 184.0 (Consumption taxes 69.5; Import taxes 40.8)
  - Grants: 184.1; Oil signature bonuses: 61.5
  - Total expenditure and net lending: 545.5
  - Current expenditure: 320.4; Capital expenditure: 193.4
  - Overall fiscal balance (commitment basis) 2005 (Est.): 426.6 (reflects oil signature bonuses in 2005)

*Prepared by Alonso Segura; source: IMF selected issues paper chapters I–III (Introduction and summaries as provided in the content unit).*

### Introduction............................................................................................................

### _cr06329 - Introduction............................................................................................................

### Chapter structure and purpose
- The selected issues paper comprises three chapters:
  - Chapter I: Reviews historical background and institutional framework for oil sector development in São Tomé and Príncipe, with focus on the Oil Revenue Management Law and transparency challenges, including issues in the bidding process for Blocks 2–6 in the JDZ.
  - Chapter II: Provides a preliminary quantitative analysis of the fiscal impact of oil sector development, applying conservative assumptions and examining a Permanent Income Hypothesis (PIH) fiscal rule adopted in 2004.
  - Chapter III: Presents a statistical analysis of the determinants of inflation (1998–2005) using a vector error-correction model.

### Key geographic and socioeconomic facts
- Area: 1,001 (square kilometers)
- Population (2004): Total 160,600; annual growth rate (in percent) 2.0
- GNI per capita (in U.S. dollars; 2004): 370
- GDP at market prices (in billions of dobras): 42 (2001), 48 (2002), 55 (2003), 62 (2004), 74 (2005 est.)
- Cocoa production (metric tons): 3,652 (2001), 3,462 (2002), 3,820 (2003), 2,500 (2004), 2,900 (2005)
- Consumer price index (percentage change, average): 9.5 (2001), 9.2 (2002), 9.8 (2003), 13.3 (2004), 17.2 (2005)

### Chapter I — Institutional framework for oil sector development (overview and conclusions)
- The analysis documents a protracted process to establish transparent rules governing government–oil company relations.
- The Oil Revenue Management Law enacted in December 2004 is identified as a pivotal instrument providing strong governance and accountability provisions prior to projected oil production around 2012.
- Implementation challenges remain, notably:
  - Problems in the bidding process for Blocks 2–6 in the JDZ, indicating implementation shortfalls despite improved legal framework.
  - Need for resolute political will by São Tomé and Príncipe and Nigeria to enforce transparency rules for all oil-related transactions under their joint jurisdiction.

### Geographical division relevant to hydrocarbon exploration
- Three zones for exploration:
  - Off-shore Joint Development Zone (JDZ) operated with Nigeria.
  - Off-shore Exclusive Economic Zone (EEZ).
  - On-shore area (islands of São Tomé and Príncipe).
- JDZ specifics:
  - Block 1 in the JDZ lies a few kilometers south of Nigeria’s Akpo field, which is believed to contain reserves as high as 1.0 to 1.5 billion of oil equivalent barrels.
  - Extensive seismic data for the northern JDZ suggests promising prospects for commercially viable discoveries.
  - EEZ prospects: less promising to date, though preliminary seismic data and neighboring drilling indicate some chance for commercial discoveries.
  - On-shore prospects: considered low; no current plans to promote exploration.

### Box I.1 — Establishment of the Joint Development Zone (JDZ) (summary)
- 1998: São Tomé and Príncipe filed an EEZ claim based on the Median Line Principle under UNCLOS; Nigeria contested the claim.
- February 2001: Nigeria and São Tomé and Príncipe signed a Treaty creating the JDZ for joint development of maritime resources for 45 years (subject to review at year 30).
- Benefit/obligation split under the Treaty: Nigeria 60 percent; São Tomé and Príncipe 40 percent.
- Institutional arrangements:
  - Joint Development Authority (JDA), based in Abuja, manages exploration/exploitation activities in the JDZ.
  - Joint Ministerial Council (JMC), with 2–4 ministers or equivalents from each country, is the ultimate decision-making body; JDA and JMC decisions are taken by consensus.
  - In case of JMC deadlock, disputes are referred to the Heads of State for final resolution.

### Chapter II — Fiscal impact of oil sector development (principal quantitative findings)
- Under very conservative assumptions, expected oil wealth could be significant relative to the size of the economy, enabling:
  - A stable source of financing to the budget beginning in 2013.
  - Financing to the budget that increases rapidly to about US$70 million (at constant 2006 U.S. dollars) by 2015 and to US$91.9 million by 2033.
  - The Permanent Fund for Future Generations growing to:
    - US$1 billion by 2018.
    - A steady-state level of US$3 billion by 2033.
- Comparative scale note: these figures are high relative to estimated GDP of São Tomé and Príncipe, which is around US$70 million in 2006.
- Policy analysis:
  - The chapter discusses alternative fiscal rules for oil-producing countries.
  - It analyzes advantages of a fiscal rule based on the Permanent Income Hypothesis (PIH) framework for sustainable government consumption and intergenerational equity.
  - São Tomé and Príncipe adopted a PIH-based rule in 2004, the first African country to do so.

### Chapter III — Inflation, 1998–2005 (statistical findings)
- Estimated vector error-correction model results:
  - Broad money growth and changes in the exchange rate have an impact on inflation.
  - It takes around two years for a shock to the exchange rate to be fully absorbed by inflation, suggesting backward-looking formation of inflationary expectations.
  - The relationship between money growth and inflation is weak, which is consistent with increased money demand related to expectations about oil-sector growth.
- Empirical components referenced:
  - Inflation (12–month percentage change), Jan. 1998–Sep. 2005.
  - Inflation and money growth, Jan. 1998–Sep. 2005.
  - Impulse response functions and Granger-causality tests.

### Additional selected macro- and fiscal statistics (from summary tables)
- Government finance (in billions of dobras):
  - Revenue and grants: 249 (2001), 246 (2002), 321 (2003), 381 (2004), 972 (2005 est.)
  - Current expenditure: 122 (2001), 157 (2002), 183 (2003), 293 (2004), 320 (2005 est.)
  - Capital expenditure: 194 (2001), 140 (2002), 198 (2003), 235 (2004), 193 (2005 est.)
  - Overall fiscal balance (commitment basis): -87 (2001), -80 (2002), -94 (2003), -167 (2004), 427 (2005 est.)
- Monetary survey (end of period, in billions of dobras):
  - Net foreign assets: 220 (2001), 265 (2002), 325 (2003), 298 (2004), 670 (2005 est.)
  - Broad money: 153 (2001), 195 (2002), 276 (2003), 297 (2004), 374 (2005 est.)
- Balance of payments (in millions of U.S. dollars):
  - Exports, f.o.b.: 3.3 (2001), 5.1 (2002), 6.6 (2003), 3.5 (2004), 3.8 (2005)
  - Imports, f.o.b.: -26.2 (2001), -28.4 (2002), -33.6 (2003), -36.0 (2004), -42.1 (2005)
  - Trade balance: -22.9 (2001), -23.3 (2002), -27.0 (2003), -32.5 (2004), -38.3 (2005)
  - Current account deficit, excluding official transfers: -31.2 (2001), -29.2 (2002), -33.5 (2003), -37.9 (2004), -41.6 (2005)
  - Current account deficit, including official transfers: -10.7 (2001), -12.9 (2002), -13.2 (2003), -13.0 (2004), -23.2 (2005)
- Gross foreign reserves (end of period, in millions of U.S. dollars): 15.2 (2001), 17.3 (2002), 23.0 (2003), 18.0 (2004), 20.6 (2005)
- External public debt, medium- and long-term (disbursed and outstanding, in millions of U.S. dollars): 283.9 (2001), 288.5 (2002), 310.4 (2003), 362.3 (2004), 368.7 (2005)

*Prepared by Alonso Segura; source: IMF selected issues paper chapters I–III (Introduction and summaries as provided in the content unit).*

### 5. Indications of the existence of hydrocarbons in São Tomé and Príncipe date back

### 5. Indications of the existence of hydrocarbons in São Tomé and Príncipe date back

### Historical exploration and early concessions
- Indications of hydrocarbons date to colonial days; in 1974 attempts to sign a Concession Agreement with Ball & Collins were abandoned after independence in 1975.
- Multiple attempts to jumpstart petroleum exploration failed until the mid‑1990s, including a 5-year concession signed with Island Oil Corporation in 1989 that briefly conducted onshore drilling before ending operations.
- May 1997 Memorandum of Agreement with Environmental Remedial Holding Corporation (ERHC) and Procura Financial Consultants (PFC) granted large preferential rights over oil exploration and development, including rights:
  - (i) to perform a full and complete evaluation and feasibility study of the country’s oil, gas, and mineral reserves,
  - (ii) to operate a number of oil fields and concessions,
  - (iii) to establish a joint venture with the government on the creation of a state oil company,
  - (iv) to negotiate the leasing of oil fields to other international oil companies on behalf of the government, and
  - (v) to issue rules and regulations for the development and functioning of the hydrocarbons sector.
- 2003 amendment to the Memorandum curtailed some of ERHC’s rights within the JDZ, but not those pertaining to the EEZ; ERHC retained preferential rights in no less than six blocks within the JDZ and in four blocks in the EEZ, often including generous exemptions over the payment of oil signature bonuses.
- September 1998 Technical Assistance Agreement with Mobil Exploration and Producing Services Inc. (now Exxon Mobil) granted preferential rights:
  - preferential right to acquire up to 40 percent of working interest in one block located in the JDZ (applied to exploration of Block 1),
  - option to acquire up to 25  percent of working interest in two additional blocks in the JDZ.
- February 2001 agreements with PGS-Exploration-UK granted exclusive rights to conduct seismic surveys in the EEZ until concession awards were granted; PGS holds the right to sell the results and holds preferential rights on shared participation in exploration of two blocks in the EEZ.

### Oil sector institutional framework and recent legal developments
- Policy objective: address the “curse” of oil—resource waste, corruption, weak institutions, slow poverty progress, and possible conflict—by creating legal instruments for balanced, transparent, and accountable oil revenue management through open democratic consultation with international experts.
- Six main recent milestones to set transparency, accountability and governance standards:
  - General Law on Petroleum Exploration and Exploitation of August 2000: overall legal framework; states all reserves and reservoirs of liquid and gaseous hydrocarbons belong to the State; petroleum operations to be conducted by the State (directly or through a state-owned company) or by licensed commercial companies; State can only enter into production sharing agreements (PSAs).
  - Treaty on the establishment of the Joint Development of Petroleum and other Resources with Nigeria of February 2001: regulates hydrocarbon operations in the Joint Development Zone (JDZ) and establishes the Joint Development Agency and the Joint Ministerial Committee.
  - Decree Law No.3/2004 of June 2004: creates the National Petroleum Council composed of fifteen members (including the President, the Prime Minister, several other ministers, representatives of civil society, and other individuals designated by the President and the Prime Minister).
  - Law No.5/2004 of June 2004: creates the National Petroleum Agency (ANP) to manage and monitor oil and gas exploration and development in line with National Petroleum Council policies.
  - Abuja Joint Declaration of June 2004: sets transparency guidelines for JDZ operations and pledges adherence to Extractive Industry Transparency Initiative (EITI) principles.
  - Oil Revenue Management Law (ORML) of December 2004: regulates payments, management, use and oversight of oil revenues for the entire national territory (EEZ and JDZ); establishes fiscal rules under which oil proceeds are to be used in the annual budgets.

### Oil Revenue Management Law (ORML) and fiscal framework
- ORML is the key legislation for open and transparent oil revenue management; devised in consultation with international experts.
- Fiscal framework based on Friedman’s (1957) permanent income hypothesis (PIH), implying constant government consumption (in real terms) out of oil resources over time, equivalent to interest income on the net present value of the country’s oil wealth.
- Implementation of PIH provides for establishment of a Permanent Fund for Future Generations to secure inter-generational equity and guarantee a permanent flow of resources into the budget.
- ORML transparency and accountability provisions:
  - obligation to make public all oil-related transactions;
  - prohibition on introducing confidentiality clauses in oil contracts (including PSAs);
  - establishment of an independent oversight board—the Petroleum Oversight Commission—to monitor compliance;
  - two levels of auditing for the Permanent Fund: Auditor General’s Office and a reputable international auditing firm; audits must be made public;
  - guidelines for management and investment of savings from oil proceeds.

### Box I.2 — Permanent Fund for Future Generations – Key Features
- All financial resources owed to the State as oil revenue will be deposited at the National Oil Account (NOA), which is to be opened by the central bank, on behalf of the government, with a (foreign) custodian bank. The NOA will comprise an Unrestricted Portion, in which current oil proceeds will be deposited, and a sub-account named the Permanent Fund (PF), for long-term savings for future generations. The full balance from the unrestricted portion will be transferred to the PF once a year, after fees and annual transfers to the budget have been carried out.
- All types of liens and encumbrances relating to the NOA or any other oil resources, whether existing or future, are prohibited, i.e. effectively barring oil-backed forward borrowing.
- An annual funding amount is to be transferred from the NOA in a single transfer to the budget each year. During the pre-production years, the annual funding amounts will be subject to a set of formulas which take account of the various stages of oil exploration and possible production. Once oil production starts, annual transfers to the budget will be based on a PIH framework, which will preserve the country’s oil wealth and continue to support government spending indefinitely even after oil resources are exhausted.
- Spending of the annual funding amounts should follow the priorities set forth in the country’s Poverty Reduction Strategy. Seven percent of the annual funding amount is reserved for the autonomous region of Príncipe and ten percent for local governments.
- The portfolio management of the resources deposited in the NOA is the responsibility of a Management and Investment Committee, which is composed by five members, including the Minister of Finance and the President of the Central Bank. Investments domiciled in the country are prohibited. Private managers can be hired.
- A Petroleum Oversight Commission is created to ensure the permanent monitoring and auditing of all transactions related to oil revenues and resources. It includes representatives of the civil society.

### Implementation challenges and capacity building
- Administrative bottlenecks remain that could prevent adequate implementation and development of the institutional framework.
- Ongoing World Bank capacity building and technical assistance credit includes a dossier on petroleum to support government capacity building, particularly in the National Petroleum Agency.
- Authorities and the World Bank prepared a handbook for full implementation of the ORML provisions and designed a Petroleum Sector Strategy for the medium and long term, expected to be widely discussed before government adoption, presumably in the course of 2006.

### Licensing of oil fields in the JDZ and bidding rounds
- First bidding round (April 2004) awarded Block 1 with a winning bid totaling US$123 million in oil signature bonuses. Awardees: ChevronTexaco (51 percent operating share), ExxonMobil (40 percent share), and Dangote Energy Equity Resources Limited (9 percent share). ChevronTexaco designated operator. PSA signed in May 2005; drilling exploration in Block 1 started in January 2006. Bids for six additional blocks were received but turned down by the JDA due to technical and financial considerations.
- Second bidding round (Blocks 2–6) completed in May 2005; transparency of the auctioning process was questioned. National Petroleum Council acknowledged deficiencies but indicated national interests had not been harmed. Petroleum Affairs Commission inquiry and National Assembly‑ordered investigation by the Attorney General found procedures seriously flawed, failed to meet minimum acceptable standards, and led to financial losses for São Tomé and Príncipe. The Attorney General recommended restructuring JDA bidding procedures and re-examination of ERHC’s preferential rights. ERHC executed preferential rights and was granted interests in all five blocks awarded in this round. PSAs are being negotiated with awardees.
- Authorities intended to raise bidding process issues at the Joint Ministerial Committee meeting scheduled for February 2006 to agree with Nigeria on a common action plan.

### Fiscal impact assessment — overview and key quantitative findings
- Preliminary quantitative analysis indicates that under very conservative assumptions, expected oil wealth could be significant and enable a stable annual funding amount into the budget and a gradual build up of a Permanent Fund for Future Generations.
- Key quantitative projections (constant 2006 U.S. dollars):
  - Annual funding into the budget would start in 2013.
  - Annual funding would increase rapidly to about US$70 million (at constant 2006 U.S. dollars) by 2015.
  - Annual funding would converge to USS91.9 million by 2033.
  - Permanent Fund for Future Generations would gradually build up, reaching US$1 billion by 2018.
  - Permanent Fund steady state value of US$3 billion by 2033.
- The use of the PIH fiscal rule would ensure fiscal sustainability and intergenerational equity while providing a predictable revenue stream to meet development needs.

*Source: IMF staff text in content unit _cr06329 - 5. Indications of the existence of hydrocarbons in São Tomé and Príncipe date back*

### 4.      A number of fiscal rules have been developed and implemented in oil-producing

### 4.      A number of fiscal rules have been developed and implemented in oil-producing

### Fiscal rules: extremes and intermediates
- Balanced budget rule: spending all annual oil receipts while keeping the government’s overall financial position in balance.
  - Short-run sustainable but would not benefit future generations.
  - Exposes government spending to “boom-bust” cycles tied to international oil markets.
- Bird-in-Hand policy: spend only the interest income accruing from accumulated oil revenues on a consistent basis over time.
  - Largely avoids “boom-bust” spending cycles.
  - May create social tensions by yielding low public spending while oil revenues are being accumulated.
  - High opportunity cost in foregone social and infrastructure spending in early years.
- Other fiscal rules include:
  - Constant expenditure rules.
  - Rules that target a price of oil, saving revenues generated by prices in excess of the threshold.
  - Rules that save a fixed percentage of oil revenues.
- Unspent oil windfalls in these rules can be allocated to:
  - Savings funds.
  - Stabilization funds to smooth annual government spending fluctuations.
- Design considerations:
  - Absorptive capacity constraints at technical, institutional and infrastructure levels.
  - Need for effective public expenditure tracking systems to minimize wasteful spending.

### Permanent Income Hypothesis (PIH) framework for intergenerational equity
- Theoretical basis: Friedman’s (1957) permanent income hypothesis (PIH).
  - Forward-looking agents smooth consumption over time in line with permanent income.
  - With zero population and productivity growth, PIH implies constant government consumption out of oil equal to the annuity present value of expected oil wealth.
  - Expenditures out of oil proceeds are stable, avoiding “boom-bust cycles”.
  - Predictability assists policymakers in avoiding absorptive capacity bottlenecks.
- Formal PIH expression (government consumption out of oil wealth GC at time t+1):
  - GC_{t+1} = [F_t + sum_{i=0}^{I} T_{i+t+1} / (1+r)^{i+1}] × r
    - Variables defined:
      - F_t: value of accumulated oil revenue in the oil fund at end of previous year, in constant prices.
      - T_i: expected oil revenue to the government (net of production costs) in period i, in constant prices.
      - r: expected average real rate of return on oil wealth.
      - I: number of years until oil production ends.
- Per capita PIH modification:
  - Targets constant per capita government consumption out of oil wealth.
  - GC_{t+1} = [F_t + sum_{i=0}^{I} (T_{i+t+1}) / (1+r)^{i+1}] × (r - n)
    - n: annual rate of population growth.
  - Applies when population growth is different from zero.

### Application to São Tomé and Príncipe (ORML and PIH implementation)
- São Tomé and Príncipe’s Oil Revenue Management Law (ORML) of December 2004 uses the PIH framework to develop the Permanent Oil Fund for Future Generations.
  - First country in Africa to apply such a rule.
- PIH formulation in São Tomé and Príncipe:
  - Annual funding amount (government consumption) each year determined by:
    - GC_{t+1} = [F_t + sum_{i=0}^{I} T_{i+t+1} / (1+d)^{i+1}] × d
      - d: discount rate (used in São Tomé formulation for annual funding amount).
  - Authorities chose a non-per-capita formulation because:
    - Per-capita PIH would unduly back-load needed spending on health, education, and infrastructure.
    - Per-capita PIH could yield a level of government spending lower than current levels of donor support.
    - Annual funding could be very low with low real rates of return and marginal hikes in population growth.
  - Discount rate (d) and long-run real rate of return (r) differ:
    - ORML caps the long-run rate of return at 5 percent.
    - ORML states discount rate cannot be set below 7 percent.
    - Discrepancy (d > r) leads to initially lower but gradually increasing annual funding amounts as the Permanent Oil Fund builds up.

### Baseline projections (staff calculations and assumptions)
- Data and methods:
  - Staff calculations based on seismic surveys for the Joint Development Zone (JDZ).
  - Use size of commercial energy reserves and production profiles in adjacent deep-water fields in the Gulf of Guinea as benchmarks.
  - Computation using production sharing agreement (PSA) template developed by the World Bank’s expert group on oil.
  - Baseline PSA parameters calibrated to match sample PSA posted on JDA’s official website.
- Key baseline assumptions:
  - Discovery of one commercially-exploitable block in the JDZ with 500 million equivalent barrels of oil in reserves.
    - Equivalent to total production of 70,000 barrels per day for twenty years.
    - São Tomé and Príncipe share: 28,000 barrels/day.
  - Production begins in 2012.
  - Production profile consistent with deep-seawater wells: peaking to approximately 150,000 barrels per day in the third year and declining to depletion after 20 years.
  - Oil price: US$30 per barrel, in constant 2006 U.S. dollars.
  - Baseline discount rate (d): 7 percent.
  - Baseline long-run real rate of return (r): 3 percent.
  - International inflation assumption: 2.5 percent annually (all dollar amounts in constant 2006 U.S. dollars).
  - Non-oil GDP growth assumptions noted in Text Table II.1 footnote: 6.25% on average for 2006-10 and 8% thereafter.
- Caveat:
  - At drafting, exploration drilling of Block 1 in the JDZ had just begun; no confirmed commercial discoveries.
  - Estimates of oil reserves, production and export receipts are speculative and subject to significant uncertainty and margin of error.

### Baseline quantitative results and key statistics
- Convergence and steady-state outcomes under baseline:
  - Annual funding amount into the budget converges to US$91.9 million.
    - Equivalent to 130 percent of projected 2006 GDP (as stated).
  - Permanent Fund for Future Generations stabilizes slightly above US$3 billion by 2032.
    - Equivalent to 43 times 2006 GDP (as stated).
  - Annual funding amount as ratio to projected GDP peaks at over 50 percent in 2015–16.
  - Annual funding amounts would be substantially higher than current levels of donor support for almost two decades.
- Selected figures from Text Table II.1 (amounts in millions of 2006 U.S. dollars unless otherwise indicated; present value of flows calculated using 7% discount rate):
  - 2012: Oil Receipts Total From production In percent of non-oil GDP = 25.9; Annual Funding Amount From annual production = 0.0; From Permanent Fund = 0.0; Permanent Fund balance = 0.0.
  - 2013: Oil Receipts Total = 90.7; Annual Funding Amount From annual production = 13.0; From Permanent Fund = 13.0; Permanent Fund balance = 11.3.
  - 2014: Oil Receipts Total = 306.6; Annual Funding Amount From annual production = 59.0; From Permanent Fund = 59.0; Permanent Fund balance = 47.3.
  - 2015: Oil Receipts Total = 396.1; Annual Funding Amount From annual production = 73.3; From Permanent Fund = 73.3; Permanent Fund balance = 54.4; Annual funding amount as percent of non-oil GDP = 128.2; Permanent Fund (in percent of non-oil GDP) = 95.1.
  - 2016: Oil Receipts Total = 364.6; Annual Funding Amount From annual production = 75.9; From Permanent Fund = 72.0; Permanent Fund balance = 54.4; Annual funding amount as percent of non-oil GDP = 284.7.
  - 2032: Annual Funding Amount = 91.8; Permanent Fund = 3,038.5; Annual funding amount as percent of non-oil GDP = 60.9.
  - 2050: Annual Funding Amount = 91.9; Permanent Fund = 3,063.2; Annual funding amount as percent of non-oil GDP = 15.3.
- Notes from Text Table II.1:
  - Assumes exploitable oil reserves of 500 million barrels in the JDZ, 40 percent being São Tomé and Príncipe's share.
  - Present value of flows calculated using 7% discount rate.
  - Includes interest accrued at the Unrestricted Portion of the National Oil Account pending the annual drawing or transfer to Permanent Fund.
  - Assumes real return of 3% on Permanent Fund.
  - Assumes non-oil GDP growth rate of 6.25% on average for 2006-10 and 8% thereafter.

### Sensitivity analysis: reserves, oil prices, and rates of return
- Sensitivity to commercial reserves:
  - Baseline: 500 million barrels (São Tomé share: 40 percent → 200 million barrels equivalent share).
  - If reserves are twice baseline:
    - Annual transfers into the budget broadly double to US$183.9 million.
    - Permanent Fund converges to roughly US$6.1 billion.
  - Annual funding amount and Permanent Fund level would continue to increase as new blocks come into production, raising absorptive capacity concerns.
  - Policy alternative if many blocks come online: possibly switch to a per capita PIH rule.
- Sensitivity to oil prices:
  - Baseline oil price: U$30 per barrel (constant 2006 U.S. dollars).
  - High-price scenario: U$40 per barrel (in 2006 prices growing at 2.5 percent annually for long run scenario context).
    - Annual funding amount increases from US$91.9 million to US$137.0 million.
    - Permanent Fund increases from US$3.0 billion to US$4.5 billion.
  - Point elasticity of the annual funding amount with respect to oil prices evaluated at the baseline: 1.49.
  - Comment: WEO projections cited forecast oil prices at US$56.50 on average for 2008–11; under those projections, revenue windfall to São Tomé and Príncipe would be larger than the US$40 scenario.
- Sensitivity to real rate of return:
  - Annual funding amounts equal the real rate of return multiplied by the present value of oil wealth (per equation 3).
  - Point elasticity of the annual funding amount with respect to changes in the real rate of return at the baseline: 0.74.
  - Example: increase long-run rate of return from 3 percent to 4 percent → annual funding amount increases from US$91.9 million to roughly US$115 million on perpetuity.

_Italic: Source: IMF staff estimates and São Tomé and Príncipe authorities as presented in the document._

### 17.      Changes in production costs alter the calculation of the annual funding amounts

### 17.      Changes in production costs alter the calculation of the annual funding amounts

### Effect of changes in production and operating costs on government receipts
- A change in investment and/or operating costs changes the government’s take from:
  - tax oil (levied on profits at a negotiated rate with oil operators), and
  - profit oil (where cost increases reduce the base and the R-Factor used to assess the government’s return).
- Cost increases reduce profits (net of taxes), so the base used to calculate the government’s share declines.
- R-Factor, as defined in the JDZ Model PSA, declines with an increase in the contractor’s accumulated costs.
- Footnote: The JDZ Model PSA also includes a royalty levied on gross revenue which ensures a minimum government take even if production costs balloon.

### Quantified impact of an increase in production costs (staff estimates)
- Increase in total production costs per barrel from US$7.8 per barrel (baseline) to US$11.0 per barrel leads to:
  - Annual funding amount into the budget = US$77.2 million.
  - Steady-state level of the Permanent Fund for Future Generations = US$2.6 billion.
- Baseline elasticity of the annual funding amount into the budget to changes in total production costs = -0.41.
  - Note: This elasticity is less than one third in magnitude of the elasticity assessed for changes in oil prices.
- Industry practice: production costs are less volatile and more predictable than oil prices.
- Sensitivity analysis for other variables, such as the oil tax rate, are summarized in Text Table II.2 (selected figures below).

### Text Table II.2 — Selected sensitivity outcomes (In millions of 2006 U.S. dollars)
- Baseline assumptions noted below.
- Oil Prices (per barrel):
  - US$20 → Annual Funding Amount = 49.9; Permanent Fund (steady-state) = 1,663.7
  - US$30 (Baseline) → Annual Funding Amount = 91.9; Permanent Fund = 3,063.2
  - US$40 → Annual Funding Amount = 137.0; Permanent Fund = 4,566.4
- Real Rate of Return (r):
  - 1% → Annual Funding Amount = 34.1; Permanent Fund = 3,406.9
  - 3% (Baseline) → Annual Funding Amount = 91.9; Permanent Fund = 3,063.2
  - 5% → Annual Funding Amount = 137.7; Permanent Fund = 2,754.7
- Discount Rate (d):
  - 3% → Annual Funding Amount = 89.2; Permanent Fund = 2,974.5
  - 5% (Baseline) → Annual Funding Amount = 91.9; Permanent Fund = 3,063.2
  - 12% → Annual Funding Amount = 94.4; Permanent Fund = 3,147.2
- Production Costs:
  - US$7.8 (Baseline) → Annual Funding Amount = 91.9; Permanent Fund = 3,063.2
  - US$11 → Annual Funding Amount = 77.2; Permanent Fund = 2,574.9
- Tax Oil (share levied on gross revenues net of royalties and production costs):
  - 40% → Annual Funding Amount = 88.0; Permanent Fund = 2,933.0
  - 50% (Baseline) → Annual Funding Amount = 91.9; Permanent Fund = 3,063.2
  - 60% → Annual Funding Amount = 96.6; Permanent Fund = 3,219.1
- Oil Reserves in JDZ (million barrels):
  - 250 → Annual Funding Amount = 45.8; Permanent Fund = 1,527.9
  - 500 (Baseline) → Annual Funding Amount = 91.9; Permanent Fund = 3,063.2
  - 1000 → Annual Funding Amount = 183.9; Permanent Fund = 6,129.8
  - 1500 → Annual Funding Amount = 276.0; Permanent Fund = 9,198.4
  - 3x500 (three blocks of 500 mb each, staggered production) → Annual Funding Amount = 295.8; Permanent Fund = 9,860.3

### Baseline assumptions and model features
- Baseline assumptions cited in Text Table II.2:
  - Oil price = US$30 per barrel
  - Real rate of return (r) = 3%
  - Discount rate (d) = 7%
  - Production costs = US$7.8 per barrel
  - Tax oil = 50%
  - Oil reserves = 500 million barrels
- JDZ Model PSA features (selected, as specified in Annex I):
  - Royalty: schedule by production (MBOPD) with up to 5% on gross revenue.
  - Cost recovery limit: 80% of production after royalty.
  - Taxation: 50% “Tax Oil” levied on gross revenues net of royalties and production costs.
  - Investment allowance: 50% of Tangible capital costs.
  - Profit oil split determined by R-Factor (contractor accumulated receipts/contractor accumulated costs) with contractor share varying from 80% to 25% by R-Factor bands.
  - Ringfencing: Yes.
  - Government participation: No provision for States to take up a working interest.

### Policy and analytical implications drawn from the analysis
- Production cost increases materially reduce the government’s fiscal receipts via reductions in profit oil and R-Factor-driven contractor shares.
- Because elasticity of the annual funding amount to production costs is moderate (−0.41), oil price volatility remains the dominant fiscal risk driver, but production-cost shocks are non-negligible.
- The presence of a royalty on gross revenue in the JDZ Model PSA provides a minimum government take if production costs escalate.
- Sensitivity analysis across oil prices, rates of return, discount rates, tax oil shares, production costs, and reserve size highlights the range of potential annual funding amounts and steady-state Permanent Fund levels under alternative scenarios.

*Source: Fund staff estimates.*

### 10. The weak/unstable relationship either between money growth and inflation or

### 10. The weak/unstable relationship either between money growth and inflation or between money growth and exchange rate depreciation might be explained by increases in money demand stemming from expectations about the domestic oil economy.

### Explanation of observed weak/unstable relationships
- Recent institutional changes:
  - Number of commercial banks increased from one bank in 2003 to six banks in 2005, supporting an increase in the ratio of monetary aggregates to GDP.
- Exchange rate regime features:
  - Rigidities in the managed float during 2003–04 may have prevented the exchange rate from reflecting excesses of money supply over money demand.
  - Introduction of a foreign exchange auction system in late 2004, and its ongoing development, should help improve the formation of exchange rate expectations and better reflect the underlying relationship between money growth and exchange rate depreciation.

### Simple correlations (12-month rates of changes)
- Jan. 1998–Sep. 2005
  - (∆CPI, ∆M1) 0.407
  - (∆CPI, ∆M3) 0.515
  - (∆ER, ∆M1) 0.494
  - (∆ER, ∆M3) 0.630
  - (∆CPI, ∆ER) 0.941
  - (∆CPI, INTR) 0.904
- Jan. 1998–Dec. 2002
  - (∆CPI, ∆M1) 0.430
  - (∆CPI, ∆M3) 0.584
  - (∆ER, ∆M1) 0.522
  - (∆ER, ∆M3) 0.696
  - (∆CPI, ∆ER) 0.946
  - (∆CPI, INTR) 0.919
- Jan. 2003–Dec. 2004
  - (∆CPI, ∆M1) -0.314
  - (∆CPI, ∆M3) -0.606
  - (∆ER, ∆M1) -0.345
  - (∆ER, ∆M3) -0.618
  - (∆CPI, ∆ER) 0.859
  - (∆CPI, INTR) -0.225
- Jan. 2005–Sep. 2005
  - (∆CPI, ∆M1) 0.657
  - (∆CPI, ∆M3) 0.282
  - (dER, dM1) -0.601
  - (dER, dM3) -0.421
  - (∆CPI, ∆ER) -0.585
  - (∆CPI, INTR) -0.020
- Source: Staff estimates.

### VEC methodology and model specification
- Theoretical specification (price level determined by money supply and money demand):
  - CPI = function(M3, M^d(INTR, RGDP, ER)) as in the text formulation.
- Empirical method:
  - Vector error-correction (VEC) methodology with 7 lags.
  - Inflation equation (first differences in logs) specified as in Equation (2) with an error-correction term t CPIECMln derived from the money market long-term equilibrium (Equation (3)).
- Interest rate:
  - The reference interest rate is excluded from the estimated econometric equation because it had been unchanged since 2000 (after discretionary reductions during the disinflation period starting in 1998).
- Data:
  - Monthly data from January 1998 to September 2005.
  - Inflation measured by the 12-month growth rate for the consumer price index (CPI).
  - Money supply (M3) = currency in circulation + dobra-denominated deposits + foreign currency-denominated deposits.
  - RGDP proxied by imported investment goods deflated by CPI, defined as the three-month moving average of this series.
  - Exchange rate (ER) = dobra against the U.S. dollar.
  - Alternative NEER has little explanatory power for inflation in São Tomé and Príncipe.

### Unit-root and cointegration results
- Augmented Dickey-Fuller statistics (In levels / In first differences)
  - lnCPI -1.020 / -5.512 ***
  - lnM3 0.513 / -12.508 ***
  - lnER -0.073 / -20.090 ***
  - lnRGDP -1.923 / -11.675 ***
  - *** : 1 percent significance level.
- Cointegration (trace test)
  - Trace statistics and critical values indicate rejection of no cointegration in favor of one cointegrating vector at the 1 percent significance level (Text Table III.4).

### Long-run cointegrating relationship (estimated equilibrium)
- Estimated equilibrium (Equation (4)):
  - 342.4 lnRGDP - 104.0 lnER + 531.03 lnM3 - 528.0 lnCPI = (constant term and formatting from source)
  - Interpretation: In equilibrium, inflation tends to increase with money supply and depreciation of the exchange rate, and to decrease with real economic expansion.
  - All coefficients have the correct signs.

### Unrestricted and restricted VEC model findings
- Unrestricted VEC model:
  - Fit of the inflation equation is satisfactory.
  - The model explains about 85 percent of actual inflation (conventional R-square).
  - Conventional χ2 test rejects the hypothesis that all coefficients are zero; test statistic is 215.34.
- Restricted VEC model:
  - Constraints on statistically insignificant coefficients produce a more concise specification while retaining the long-run relationship.
  - Main findings from the restricted model:
    - Inflation is largely explained by depreciation of the exchange rate and, to a lower extent, by growth of broad money with a two-lag adjustment period.
    - There exists substantial inflation inertia: the error-correction term enters negatively and significantly, implying that if inflation is 1 percent below its equilibrium level in one month, inflation will increase by roughly 0.02 percent in the following month.
    - High and significant coefficient of lagged inflation underscores inflation inertia.
    - Real GDP variable remains statistically insignificant, possibly due to measurement errors.
  - Stability and diagnostics:
    - Remaining concern about normality, but eigenvalues lie inside the unit circle and exogenous shocks taper off after transition.
    - Hypothesis of no autocorrelation in residuals for any orders cannot be rejected.

### Impulse response analysis
- Impulse response to a one-standard-deviation shock:
  - A shock to the exchange rate has the largest impact on domestic inflation in magnitude.
  - It would take approximately two years for this transitory impact on inflation to be fully absorbed.
  - A shock to nominal money growth briefly leads to an increase in inflation, although this response is very small and statistically insignificant.
  - The small response of inflation to money shocks, along with large increases in money growth observed in 2000–03, may suggest an ongoing step-increase in money demand.

### Granger-causality test results (Text Table III.5)
- Chi2 statistics and significance (null hypothesis: no causality)
  - lnER -> lnCPI: 22.36 ***
    - Degree of freedom 4
  - lnCPI -> lnER: 15.18 ***
    - Degree of freedom 3
  - lnM3 -> lnCPI: 3.762
  - lnCPI -> lnM3: 5.963
  - lnM3 -> lnER: 6.91 **
    - Degree of freedom 2
  - lnER -> lnM3: 20.45 ***
    - Degree of freedom 3
  - lnRGDP -> lnCPI: 4.002
  - lnCPI -> lnRGDP: 25.34 ***
    - Degree of freedom 4
  - lnRGDP -> lnER: 14.24 **
    - Degree of freedom 7
  - lnER -> lnRGDP: 22.47 ***
    - Degree of freedom 5
  - lnRGDP -> lnM3: 8.34 **
    - Degree of freedom 3
  - lnM3 -> lnRGDP: 1.831
- Interpretation:
  - Inflation and exchange rate depreciation Granger-cause each other.
  - Money supply does not Granger-cause inflation (statistically).
  - There is two-way causality between monetary aggregates and the exchange rate; exchange rate movements affect monetary aggregates more strongly.

### Diagnostic and robustness tests (Annex I)
- Diagnostic summary:
  - Adjustment matrix indicates estimated eigenvector is important for all four equations of the unrestricted error-correction model.
  - Weak exogeneity tests suggest that inflation, money supply, exchange depreciation and real GDP are endogenously determined as a unit system; they cannot be treated as “weakly exogenous.”
  - Null hypothesis of no autocorrelation cannot be rejected at the 5 percent significance level:
    - Lagrange-multiplier test statistics: 9.19 at first lag order; 23.79 at second lag order; 23.10 at third lag order. Degree of freedom is 16.
  - Normality tests for the inflation equation:
    - Skewness test statistic 6.248 (smaller than 1 percent critical value drawn from chi-square distribution with degree of freedom 1).
    - Kurtosis test statistic 5.461.
    - Null hypothesis of normality cannot be rejected at the 1 percent significance level.
  - Coefficient on the error-correction term is negative, indicating a relatively slow short-run adjustment toward equilibrium.

*Source: Staff estimates and empirical results as presented in the chapter text.*

### ANNEX                                                                        I

### ANNEX I

### Inflation Error-Correction Model Coefficients
- Dependent variable: ∆lnCPI.
- Unrestricted / Restricted coefficient estimates and standard errors (significance indicated):
  - ECMlnCPI(-1): -0.02150 (Std.Err. 0.0103) **; -0.0158 (Std.Err. 0.0067) **.
  - ∆lnCPI(-1): 0.57240 (Std.Err. 0.1227) ***; 0.55820 (Std.Err. 0.0753) ***.
  - ∆lnCPI(-2): -0.05360 (Std.Err. 0.1385).
  - ∆lnCPI(-3): 0.02870 (Std.Err. 0.1358).
  - ∆lnCPI(-4): -0.03370 (Std.Err. 0.1334).
  - ∆lnCPI(-5): -0.09960 (Std.Err. 0.1359); -0.13540 (Std.Err. 0.0510) ***.
  - ∆lnCPI(-6): -0.05420 (Std.Err. 0.1227).
  - ∆lnCPI(-7): -0.05730 (Std.Err. 0.1083).
  - ∆lnER(-1): -0.07700 (Std.Err. 0.0533); -0.07050 (Std.Err. 0.0314) **.
  - ∆lnER(-2): 0.11630 (Std.Err. 0.0554) **; 0.11360 (Std.Err. 0.0327) ***.
  - ∆lnER(-3): -0.07960 (Std.Err. 0.0562); -0.05700 (Std.Err. 0.0338) *.
  - ∆lnER(-4): 0.01980 (Std.Err. 0.0590).
  - ∆lnER(-5): 0.11480 (Std.Err. 0.0530) **; 0.08190 (Std.Err. 0.0315) ***.
  - ∆lnER(-6): 0.02370 (Std.Err. 0.0560).
  - ∆lnER(-7): 0.03880 (Std.Err. 0.0456).
  - ∆lnM3(-1): 0.01000 (Std.Err. 0.0142).
  - ∆lnM3(-2): 0.01770 (Std.Err. 0.0145); 0.01820 (Std.Err. 0.0104) *.
  - ∆lnM3(-3): -0.00530 (Std.Err. 0.0150).
  - ∆lnM3(-4): -0.00020 (Std.Err. 0.0147).
  - ∆lnM3(-5): -0.01750 (Std.Err. 0.0134).
  - ∆lnM3(-6): -0.01610 (Std.Err. 0.0137); -0.00990 (Std.Err. 0.0094).
  - ∆lnM3(-7): -0.00050 (Std.Err. 0.0127).
  - ∆lnRGDP(-1): 0.00130 (Std.Err. 0.0020).
  - ∆lnRGDP(-2): 0.00160 (Std.Err. 0.0019); 0.00240 (Std.Err. 0.0014) *.
  - ∆lnRGDP(-3): -0.00100 (Std.Err. 0.0019).
  - ∆lnRGDP(-4): 0.00140 (Std.Err. 0.0019).
  - ∆lnRGDP(-5): 0.00280 (Std.Err. 0.0018); 0.00220 (Std.Err. 0.0014).
  - ∆lnRGDP(-6): 0.00130 (Std.Err. 0.0019).
  - ∆lnRGDP(-7): 0.00200 (Std.Err. 0.0019).
  - Constant: 0.00240 (Std.Err. 0.0020); 0.00240 (Std.Err. 0.0013) *.
- Significance legend: * 10% significance level, ** 5% significance level; *** 1% significance level.

### National Accounts — GDP and Expenditure (Current Prices, 2001–04)
- Gross domestic product (in billions of dobras):
  - 2001: 422.0
  - 2002: 486.8
  - 2003: 552.6
  - 2004 (Prel.): 629.3
- Sectoral composition (2004, in billions of dobras and percent of GDP):
  - Primary sector: 102.3 (16.3 percent of GDP)
    - Agriculture: 83.7
    - Fishing: 18.6
  - Secondary sector: 87.5 (13.9 percent)
    - Manufacturing and energy: 26.3
    - Construction: 61.1
  - Tertiary sector: 439.5 (69.8 percent)
    - Commerce and transport: 175.0
    - Public administration: 190.6
    - Financial institutions: 69.4
    - Other services: 4.4
- Expenditure components (2004, in billions of dobras and percent of GDP):
  - Consumption: 768.6 (122.1 percent of GDP)
    - Private: 433.7 (68.9 percent)
    - Public: 334.9 (53.2 percent)
  - Gross fixed capital formation: 221.7 (35.2 percent)
    - Private: 95.0 (15.1 percent)
    - Public: 126.6 (20.1 percent)
  - Gross domestic savings (memorandum): 104.9 (16.7 percent of GDP)
  - Resource balance (2004): -361.0 (Exports 196.5; Imports 557.5)

### Real GDP and Prices (Constant 1991 Prices; 2001–04)
- GDP at 1991 prices (levels, in billions of dobras): 2001: 14.1; 2002: 14.6; 2003: 15.2; 2004 (Est.): 15.8.
- Real GDP annual percentage changes:
  - 2001: 4.0
  - 2002: 4.1
  - 2003: 4.0
  - 2004 (Est.): 3.8
- GDP deflator (annual percentage changes): 2001: 9.8; 2002: 10.8; 2003: 9.2; 2004: 9.7.
- Nominal GDP (annual percentage changes): 2001: 14.2; 2002: 15.4; 2003: 13.5; 2004: 13.9.

### Agriculture and Land Distribution
- Land distribution (total area distributed, hectares, cumulative since 1993):
  - Total area distributed (annual): 2001: 4,435; 2002: 866; 2003: 245; 2004: 223.
  - Total area distributed (cumulative, hectares): 42,441; 43,307; 43,552; 43,775.
  - Number of beneficiary families (annual): 2001: 1,969; 2002: 171; 2003: 32; 2004: 142.
  - Hectares per family (annual average, small and medium farms): 2001: 2.2; 2002: 2.6; 2003: 6.7; 2004: 1.3.
- Production of principal agricultural crops (metric tons, selected items):
  - Cocoa: 2001: 3,652; 2002: 3,462; 2003: 3,820; 2004: 2,500.
  - Bananas: 27,020; 28,620; 29,050; 25,250 (2001–04).
  - Breadfruit: 14,900; 18,400; 18,500; 13,500 (2001–04).

### Energy Production and Petroleum Imports (2001–05)
- Electricity production (thousands of kWh):
  - 2001: 26,467; 2002: 31,208; 2003: 35,889; 2004: 37,243; 2005 Jan–Sept.: 30,135.
  - Hydroelectricity (2005 Jan–Sept.): 3,812; Thermoelectricity (2005 Jan–Sept.): 26,323.
- Electricity consumption (thousands of kWh, 2001–04): 2001: 17,161; 2002: 25,395; 2003: 27,006; 2004: 25,616.
- Imports of petroleum products (thousands of liters):
  - Gasoline volume (2001–05): 5,981; 5,858; 5,355; 6,912; 5,702 (Jan–Sept. 2005).
  - Diesel: 16,357; 13,219; 12,375; 16,459; 14,975 (Jan–Sept. 2005).
  - Kerosene and Jet A-1: 16,230; 6,826; 5,479; 7,640; 7,133 (Jan–Sept. 2005).
- Average retail prices (do bras per liter and U.S. dollars per liter, selected years):
  - Gasoline retail price (do bras per liter): 2001: 6,600; 2002: 6,600; 2003: 7,000; 2004: 10,500; 2005: 12,500.
  - Gasoline (U.S. dollars per liter): 2001: 0.75; 2002: 0.68; 2003: 0.75; 2004: 1.07; 2005: 1.19.
  - Diesel retail price (do bras per liter): 2001: 5,000; 2002: 5,000; 2003: 5,000; 2004: 9,500; 2005: 11,000.
  - Diesel (U.S. dollars per liter): 2001: 0.57; 2002: 0.53; 2003: 0.53; 2004: 0.97; 2005: 1.05.

### Cost Structure of Petroleum Products (selected snapshots)
- Average retail price components by year (percent of c.i.f. and dobras per liter) presented for Gasoline, Diesel, Kerosene, Jet A-1 for 2001–2005, showing:
  - Import costs (c.i.f.) as 100 percent baseline with corresponding dobras per liter each year.
  - Components include import duty, consumption tax, road maintenance tax, airport authority tax, ENCO handling and distribution costs, ENCO wholesale margin, retail margin, residual, resulting average retail price (do bras per liter) across years.

### Consumer Price Index (CPI) — Components and Movements, 2001–05
- CPI index (1996 = 100; end of period):
  - General index: 2001: 364.6; 2002: 397.5; 2003: 437.2; 2004: 503.8; 2005: 590.5.
- CPI component weights and end-of-period indices (selected 2005 levels and weights):
  - Food, beverages, and tobacco (weight 71.9 percent): 2005 end-period index: 507.3.
  - Housing and energy (weight 10.2 percent): 2005 end-period index: 989.2.
  - Public administration and services included in tertiary components noted.
- Monthly general CPI (index, 1996 = 100; selected years):
  - 2001 monthly range: Jan 336.2 to Dec 364.6; annual average 349.6.
  - 2002 monthly range: Jan 368.1 to Dec 397.5; annual average 385.0.
  - 2003 monthly range: Jan 402.8 to Dec 437.2; annual average 422.7.
  - 2004 monthly range: Jan 444.3 to Dec 503.8; annual average 478.9.
  - 2005 monthly range (Jan–Sept): Jan 518.6 to Sept 569.6; Dec 590.5; annual average 561.0.
- Rate of inflation (end of period and annual average):
  - End of period: 2001: 9.4 percent; 2002: 9.0 percent; 2003: 10.0 percent; 2004: 15.2 percent; 2005: 17.2 percent.
  - Annual average: 2001: 9.2 percent; 2002: 10.1 percent; 2003: 9.8 percent; 2004: 13.3 percent; 2005: 17.2 percent.

### Central Government Financial Transactions and Fiscal Accounts (2001–05)
- Central government (In billions of dobras):
  - Total revenue and grants:
    - 2001: 248.8; 2002: 245.6; 2003: 321.0; 2004: 381.2; 2005 (Est.): 972.1.
  - Tax revenue:
    - 2001: 77.2; 2002: 95.0; 2003: 114.2; 2004: 147.3; 2005 (Est.): 184.0.
    - Consumption taxes (2005): 69.5.
    - Import taxes (2005): 40.8.
  - Nontax revenue (2005): 42.6 (includes fishing licenses 8.7; transfers from enterprises 4.2).
  - Grants (2005): 184.1.
  - Oil signature bonuses (2005): 61.5.
- Total expenditure and net lending:
  - 2001: 335.3; 2002: 325.6; 2003: 415.1; 2004: 492.6; 2005 (Est.): 545.5.
  - Current expenditure (2005): 320.4
    - Personnel costs (2005): 103.3
    - Goods and services (2005): 65.5
    - Interest on external debt due (2005): 33.7
    - Transfers (2005): 89.8 (including Joint Development Agency 32.9)
  - Capital expenditure (2005): 193.4
    - Financed by the treasury (2005): 15.1
    - Foreign financed (2005): 178.3
- Overall fiscal balance (commitment basis):
  - 2001: -86.5; 2002: -80.0; 2003: -94.1; 2004: -167.3; 2005 (Est.): 426.6 (note: reflects oil signature bonuses in 2005).
- Change in arrears (net; reduction -):
  - 2001: 3.8; 2002: 48.8; 2003: 28.3; 2004: 41.0; 2005: -145.9.
  - External arrears (net; reduction -): 2001: 3.8; 2002: 14.9; 2003: 9.4; 2004: 13.8; 2005: -52.2.
  - Domestic arrears (net; reduction -): 2001: 0.0; 2002: 34.0; 2003: 18.8; 2004: 27.2; 2005: -93.6.
- Financing (2001–05, selected):
  - Overall financing: 2001: 82.7; 2002: 31.1; 2003: 65.8; 2004: 126.3; 2005 (Est.): -280.8.
  - External (net) financing (2005): -32.1.
  - Domestic (net) financing (2005): -16.1.
  - Oil reserve fund flows (net) (2005): -276.7.
  - Change in arrears (principal) (2005): -100.0.
  - Paris Club Rescheduling (2005): 144.1.

### Central Government Revenue and Expenditure Detailed Breakdowns (2001–05)
- Revenue composition (2005 estimates, in billions of dobras):
  - Total revenue and grants (2005): 972.2.
  - Tax revenue (2005): 184.0
    - Direct taxes: 54.3 (Profit taxes 23.5; Income taxes 27.0)
    - Indirect taxes: 129.7 (Import taxes 40.8; Consumption taxes 69.5; On imported goods 46.4; On domestic goods 7.2)
  - Nontax revenue: 42.6 (Transfers from enterprises 4.2; Fishing royalties 8.7; Other 29.7).
  - Grants: 184.1; Oil signature bonuses: 61.5.
- Expenditure composition (2005 estimates, in billions of dobras):
  - Total expenditure and net lending (2005): 545.5.
  - Current expenditure: 320.4
    - Personnel costs: 103.3 (Wages and salaries 90.4; Local 80.9; Embassies 9.5)
    - Goods and services: 65.5 (Petroleum products 3.1)
    - Interest on external debt due: 33.7
    - Transfers: 89.8 (Public entities 16.1; Joint Development Agency 32.9)
    - Other current expenditures: 26.2
  - Capital expenditure: 193.4 (Financed by the treasury 15.1; External 178.3)
  - HIPC Initiative-financed social expenditure (2005): 31.7.

### Fiscal Indicators and Ratios (2001–05)
- Annual percentage changes (selected):
  - Total revenue and grants growth: 2001: 35.2; 2002: -1.3; 2003: 30.7; 2004: 18.8; 2005: 155.0.
  - Total expenditure growth: 2001: 36.0; 2002: -2.9; 2003: 27.5; 2004: 18.8; 2005: 10.7.
- Shares (as percent of total revenue and grants) 2005:
  - Tax revenue: 18.9 percent of total revenue and grants.
  - Grants: 18.9 percent of total revenue and grants.
  - Oil signature bonuses: 57.8 percent of total revenue and grants (2005).
- Shares (as percent of GDP) 2005:
  - Total revenue and grants: 129.7 percent of GDP.
  - Tax revenue: 24.5 percent of GDP.
  - Total expenditure and net lending: 72.8 percent of GDP.
  - Current expenditure: 42.8 percent of GDP.
  - Capital expenditure: 25.8 percent of GDP.
- Primary overall balance and overall balance (commitment basis) reported:
  - Domestic primary balance (commitment basis) 2001–05: -12.9; -4.3; -11.7; -20.6; -14.0.
  - Overall balance (commitment basis) 2001–05: -20.5; -16.4; -17.0; -26.6; -18.0.

### Public Investment Program (2001–05)
- Total investment (in millions of U.S. dollars):
  - 2001: 20.4; 2002: 18.5; 2003: 26.9; 2004: 28.0; 2005 (Est.): 18.2.
- Sectoral shares (percent of total investment, 2005):
  - Public administration: 32.7 percent.
  - Health: 20.3 percent.
  - Transport and telecommunications: 21.2 percent.
- Financing of investment (2005):
  - Foreign: 77.5 percent (Grants 70.3 percent; Loans 7.1 percent).
  - Domestic: 22.5 percent (HIPC account 2.3 percent; Budget 1.8 percent).

### Monetary Survey and Central Bank Accounts (2001–05)
- Monetary aggregates (end of period, in billions of dobras):
  - Broad money (M3):
    - 2001: 153.5; 2002: 194.8; 2003: 276.2; 2004: 296.5; 2005 (Est.): 373.9.
  - Net foreign assets (2005): 669.8 (central bank 529.1; commercial banks 140.7).
  - Net domestic assets (2005): -295.8.
- Central bank summary accounts (end of period, in billions of dobras):
  - Net foreign assets: 167.9; 194.3; 235.1; 189.3; 529.1 (2001–05).
    - Foreign assets (including Gross Reserves): 192.9; 217.7; 287.1; 246.5; 585.0.
    - Gross Reserves (2005): 526.4.
    - National Oil Account (central bank; 2005): 276.3.
  - Net domestic assets (2005): -375.8.
  - Base money (2005): 153.3 (Currency outside banks 73.2; Reserve deposits 80.1).

### Banking Institutions (2001–05)
- Summary accounts (end of period, in billions of dobras):
  - Net foreign assets: 52.2; 70.5; 89.6; 108.5; 140.7 (2001–05).
  - Net domestic assets: 65.5; 84.9; 130.1; 128.0; 169.7.
  - Deposits (2005): 310.4
    - Deposits in local currency: 146.6
    - Deposits in foreign currency: 163.8
  - Credit to the economy (2005): 235.6.

### Structure of Interest Rates (end of period, percent per year)
- Term deposit rates (selected maturities, end of period):
  - 90-180 days: 2001: 14.0; 2002: 14.0; 2003: 10.6; 2004: 10.6; Sept. 2005: 12.5.
  - 181-365 days: 2001: 15.0; 2002: 15.0; 2003: 10.3; 2004: 10.3; Sept. 2005: 12.8.
- Lending rates (commercial and industrial credits, selected maturities):
  - 90-180 days: 34.0 to 35.0 (2001–Sept. 2005 range).
  - 181-365 days: 36.0 to 32.5 (2001–Sept. 2005 range).
- Central bank reference interest rate: 2001: 15.5; 2002: 15.5; 2003: 14.5; 2004: 14.5; Sept. 2005: 18.2.
- Real interest rate indicators (mem. items):
  - Interest rate for deposits of 181-365 days (in real terms): 5.1; 5.5; 0.3; -4.3; -3.8 (2001–Sept. 2005).
  - Interest rate for commercial and industrial credits of 181-365 days (in real terms): 24.3; 24.8; 18.6; 13.2; 13.0.

### External Sector — Balance of Payments and Trade (2001–05)
- Trade balance (percent of GDP): -22.9; -23.3; -27.0; -32.5; -38.3 (2001–05).
  - Exports f.o.b. (percent of GDP): 3.3; 5.1; 6.6; 3.5; 3.8.
  - Imports f.o.b. (percent of GDP): -26.2; -28.4; -33.6; -36.0; -42.1.
    - Petroleum products as percent of imports: -3.8; -4.3; -4.7; -7.8; -9.9.
- Services and income (net, percent of GDP): -8.9; -6.6; -8.4; -7.5; -5.3.
  - Exports of services (percent of GDP): 12.8; 13.4; 14.1; 16.6; 17.7.
  - Imports of services: -19.0; -17.2; -19.7; -21.0; -20.0.
- Current account balance (excluding official transfers, percent of GDP): -31.2; -29.2; -33.5; -37.9; -41.6.
- Official transfers (net, percent of GDP): 20.6; 16.3; 20.3; 25.0; 18.4.
- Current account balance (including official transfers, percent of GDP): -10.7; -12.9; -13.2; -13.0; -23.2.
- Medium- and long-term capital (net, percent of GDP): 7.1; -0.9; 1.0; 5.1; 49.0 (2005 includes oil signature bonuses).
- Oil signature bonuses (2005): 49.2 (percent of GDP, represented in capital inflows).
- Overall balance (percent of GDP): -1.3; -2.4; 1.9; -5.0; 26.6.
- Memorandum items:
  - Debt-service ratio (before debt relief) (percent): 42.0; 50.7; 50.3; 52.8; 56.7 (2001–05).
  - Current account, before grants (percent of GDP): -65.4; -54.5; -56.7; -58.9; -59.2.
  - Current account (percent of GDP): -22.3; -24.1; -22.3; -20.1; -33.1.

### Composition and Destinations of Trade (2001–05)
- Composition of exports (in millions of U.S. dollars and metric tons):
  - Total exports f.o.b. (millions USD): 2001: 3.3; 2002: 5.1; 2003: 6.6; 2004: 3.5; 2005 Jan–Sept.: 2.5.
  - Cocoa volume (metric tons): 2001: 3,651; 2002: 3,462; 2003: 3,820; 2004: 2,500; 2005 Jan–Sept.: 1,798.
- Composition of imports (f.o.b., millions USD and percent shares):
  - Total imports f.o.b. (millions USD): 26.2; 28.4; 33.6; 36.0; 37.7 (2001–05).
  - Foodstuffs percent of total imports: 30.0; 35.6; 35.7; 34.0; 38.5.
  - Petroleum products percent of total imports: 45.5; 39.7; 40.0; 32.2; 17.5.
  - Investment goods percent: 14.6; 15.1; 13.9; 21.7; 29.0.
- Destination of exports (percent of total exports, selected partners, 2001–05):
  - Netherlands: 47.2; 60.1; 41.6; 55.0; 50.9 (2001–05).
  - Portugal: 16.0; 19.6; 18.5; 16.9; 21.2.
  - Belgium and others vary year to year.
- Origin of imports (c.i.f., percent shares, 2001–05):
  - Portugal: 46.0; 60.0; 60.0; 56.7; 57.9.
  - Angola share increased to 18.1 percent in 2005.
  - Japan share rose to 10.2 percent in 2005.

### Terms of Trade and Price Indices (2001–05)
- Export unit value index (2000=100):
  - 2001: 117.6; 2002: 182.1; 2003: 180.4; 2004: 161.8; 2005: 169.3.
- Import unit value index (2000=100):
  - 2001: 94.3; 2002: 97.7; 2003: 107.7; 2004: 119.1; 2005: 131.4.
- Terms of trade (2000=100):
  - 2001: 124.7; 2002: 186.3; 2003: 167.5; 2004: 135.9; 2005: 128.9.
- Terms of trade annual percentage changes: 24.7; 49.5; -10.1; -18.8; -5.2 (2001–05).

### External Public Debt and Debt Service Indicators (2001–05)
- Disbursed medium- and long-term debt outstanding (millions USD):
  - 2001: 299.1; 2002: 301.3; 2003: 313.6; 2004: 325.1; 2005 (Est.): 316.3.
  - Of which arrears (millions USD): 44.2; 49.1; 53.1; 58.1; 43.5.
- Short-term debt outstanding (2005): 16.0 (includes Nigeria 15.0; Angola 1.0).
- Total external debt outstanding (millions USD): 299.1; 306.3; 323.6; 341.1; 368.7 (2001–05).
- Debt service due on medium- and long-term debt (millions USD): 2001: 6.7; 2002: 9.3; 2003: 10.4; 2004: 10.6; 2005: 12.0.
  - Interest: 2.7; 2.8; 2.8; 3.1; 3.2 (2001–05).
  - Amortization: 4.1; 6.5; 7.6; 7.5; 8.9 (2001–05).
- Debt relief, cash settlements and net present value:
  - Debt relief (2005): 16.7 (millions USD).
  - Cash settlements (2005): 14.6 (millions USD).
  - Net present value of external debt (millions USD): 481.6; 467.3; 463.5; 500.7; 499.5 (2001–05).
- Total external debt outstanding including arrears (end of period, millions USD): 626.8; 571.9; 547.3; 530.2; 524.5.

### Outstanding External Medium- and Long-Term Public Debt by Creditor (2001–05)
- Total outstanding (millions USD): 299.1; 301.3; 313.6; 325.1; 316.3.
- Multilateral creditors (2005): 199.9 (World Bank 74.9; African Development Bank Group 98.8; Arab Bank for Economic Development in Africa 10.6; Other 12.9).
- Official bilateral creditors (2005): 116.4 (includes arrears 43.5).
  - Portugal (2005): 21.2; France 5.7; Germany 13.3; Russian Federation 10.9; Angola 21.4; Other 44.0.

### Exchange Rates (2001–2005; dobras per U.S. dollar, period averages)
- Official exchange rate (period average, dobras per U.S. dollar):
  - 2001: 8,842.2; 2002: 9,089.3; 2003: 9,347.6; 2004: 9,779.9; 2005: 10,522.8.
- Bureau de change and commercial bank rates are reported alongside parallel market rates and differentials; quarterly indices and real effective exchange rate (2000=100) provided.
- Real Effective Index (2001–2005):
  - 2001: 99.4; 2002: 96.4; 2003: 87.5; 2004: 84.8; 2005: 90.0.

_Italic: Source — _cr06329 - ANNEX I (São Tomé and Príncipe data tables, IMF staff and authorities)._

### ANNEX I

### ANNEX I

### Taxes on income, profit, and capital gains
- Individual income tax (Imposto sobre salários) (Decree-Law 11/93 of February 25, 1993; Decree-Law 64/97 of November 3, 1997)
  - Nature: Levied on all domestically earned income, in cash and in kind. Withheld at source and payable within the first eight days of the month after the income was earned. Levied on all individuals, including nonresidents who earn income in the country.
  - Exemptions/deductions:
    - Earned annual income up to Db 480,000, after Db 5,000 monthly deductible.
    - Salary supplements up to 10 percent of the fixed monthly salary.
    - Expense allowances and per diem and representation allowances up to the limits set for government employees.
    - Income of clergy from the exercise of their spiritual functions.
    - Foreign personnel of diplomatic and consular missions or in the service of international or foreign organizations.
    - Certain moving expenses.
  - Rate:
    - Flat rate of 13 percent.
- Corporate/profit tax (Imposto sobre o rendimento) (Decree-Law 9/93 of March 5, 1993; Decree-Law 84/93 of December 31, 1993; Decree-Law 46/93 of August 10, 1993; Decree-Law 58/95 of December 31, 1995; Decree-Law 40/96 of October 29, 1996)
  - Nature: Levied on all domestic income from any commercial, industrial, service, or agricultural business or independent profession, even if occasional or temporary.
  - Exemptions/deductions:
    - Profits from investment or dividends from mutual aid societies and nonprofit cooperatives.
    - Fifty percent of profits from agricultural activities.
    - Special exemptions granted in the context of the investment code.
  - Rates:
    - For commercial, industrial, service, and agricultural businesses: flat 30 percent rate on taxable profits; additional 15 percent rate on taxable profits in excess of Db 12 million.
    - For independent professionals: a five-bracket schedule applies to taxable profits:
      - progressive rates from 5 percent to 30 percent on taxable profits of Db 60,000 to Db 3,000,000; and
      - a flat rate of 30 percent on taxable profits above Db 3,000,000, plus a 15 percent surcharge on the portion of taxable profits in excess of Db 3,000,000.
- Minimum tax (Valor minimo) (Decree-Law 58/95 of December 31, 1995)
  - Nature: Payable during the first half of the year by all commercial, industrial, and artisanal businesses, as well as by self-employed professionals. Deductible from tax on profits.
  - Exemptions/deductions: None.
  - Rates: Six progressive tax brackets:
    - up to Db 80,000: Db 18,000;
    - up to Db 400,000: Db 42,000;
    - up to Db 1,200,000: Db 105,000;
    - up to Db 2,000,000: Db 212,000;
    - up to Db 4,000,000: Db 424,000; and
    - above 4,000,000: Db 636,000.
- Tax on income by taxis (Imposto sobre o rendimento dos taxistas) (Decree-Law 36/00 of May 16, 2000)
  - Nature: Levied on income from taxi services.
  - Exemptions/deductions: None.
  - Rates: Fixed rates depending on location and vehicle tonnage.

### Taxes on property
- Urban property tax (Contribuição predial urbana) (Legislative Act 450 of September 8, 1954; Decree-Law 57/81 of November 28, 1981; Decree-Law 16/93 of March 5, 1993; Decree-Law 45/93 of August 10, 1993; Decree-Law 84/93 of December 31, 1993; Decree-Law 40/96 of October 29, 1996)
  - Nature: Levied on all urban property, including permanent buildings intended for housing, commercial, or industrial purposes other than exploitation of land, and the land on which the buildings are located; and for construction when declared as such by the owner or if covered under the law.
  - Exemptions/deductions:
    - Government properties.
    - For two years, permanent buildings for use as dwellings by owners or their families, including buildings replacing demolished buildings, provided the construction period does not exceed 24 months.
    - Owners of property whose total income does not exceed Db 2,000 per day.
    - All property owned by religious entities pursuant to their purposes.
  - Rates:
    - Fifteen percent on registered value corrected according to factors:
      - factor of 8 for property registered before December 31, 1970;
      - factor of 4 for property registered between January 1, 1971 and December 31, 1980;
      - factor of 2 for property registered between January 1, 1981 and December 31, 1990;
      - factor of 1.5 for property registered between January 1, 1991 and April 30, 1993; and
      - factor of 1 for property registered after May 1, 1993.
- Motor vehicle tax (Imposto sobre veículos) (Decree-Law 13/93 of March 5, 1993; Decree-Law of December 31, 1993)
  - Nature: Levied on motor vehicles equipped with engines larger than 50cc, either registered in the country or starting 180 days from entry into the country, that circulate or are parked in public thoroughfares or places.
  - Exemptions/deductions:
    - The government and any of its agencies, organizations, or services, except state-owned and mixed enterprises.
    - Citizens of countries giving reciprocal treatment.
    - Personnel of diplomatic and consular missions, pursuant to agreements.
    - International or foreign organizations, pursuant to agreements.
    - Driver-training vehicles.
    - Duly registered rental vehicles.
    - Duly registered boats used in artisanal fishing.
    - New vehicles purchased after October 31, 1997.
    - Farm tractors.
    - Motorcycles used for transporting freight.
  - Rates: Renewed annually; vary by engine size and age:
    - vehicles 50–500 cc: Db 500 if less than 6 years old, and Db 1,000 if more than 6 years old;
    - vehicles 501–1,300 cc: Db 2,500 if less than 6 years old and Db 4,000 if more than 6 years old;
    - vehicles 1,301–1,900 cc: Db 4,000 if less than 6 years old and Db 6,000 if more than 6 years old; and
    - vehicles over 1,900 cc: Db 6,000 if less than 6 years old and Db 10,000 if more than 6 years old.
  - Recreational boats:
    - for recreational boats up to 25 hp, Db 500 if up to 6 years old, and Db 1,000 if more than 6 years old; and
    - for each 10 hp or fraction over 25 hp, additional tariffs of Db 500 for boats up to 6 years old and Db 1,000 for boats more than 6 years old.

### Domestic taxes on goods and services
- Excise tax (Imposto sobre o consumo) (Decree-Law 20/76 of April 26, 1976; Decree-Law 14/93 of March 5, 1993; Decree-Law 1/2000 of February 1, 2000; Decree-Law 35/2000 of May 15, 2000; and Decree-Law 8/2005 and Decree-Law 9/2005 of July 28, 2005)
  - Nature: Levied on the value of a limited number of manufactured goods listed in the schedules annexed to Decree-Law 1/00 of February 1, 2000 with valuation methods:
    - factory gate selling price for locally produced goods not distributed by an associated or subsidiary enterprise;
    - distributor’s selling price less 20 percent if the producer is associated with the distributor or the subsidiary enterprise;
    - if the producer sells directly to consumers, the factory gate price cannot be less than the price charged to the consumer less 20 percent for excise purposes.
  - Exemptions/deductions:
    - Locally produced goods exported directly by the industrial establishment.
    - Alcohol needed in industrial processes.
    - Gasoline for vehicles of diplomats, subject to reciprocity, and of officials of international organizations.
    - Gasoline for aviation equipment in public use.
    - Medical or medical-related services.
  - Rates (as listed in the schedules annexed to Decree-Law 1/2000 and modified by Decree-Laws 8/2005 and 9/2005):
    - Products — Rates (In percent):
      - Petroleum products: 42–149
      - Motor vehicles: 10–35
      - Alcoholic drinks: 25–55
        - spirits: 55
        - beer: 25
      - Tobacco: 55
      - Services: 5
  - Administration: The tax is payable by the producer. The excise tax also applies to the provision of services.

### Taxes on international trade and transactions
- Import duty (Direitos de importação) (Decree-Law 1/00 of February 1, 2000; and Decree-Law 31/2005 of December 21, 2005)
  - Nature: Levied on customs value of imports determined on assumptions including delivery at port of entry, c.i.f. price, buyer pays applicable duty and other taxes excluded from base price, inclusion of royalties in base price where applicable.
  - Exemptions/deductions:
    - Goods imported by official agencies as specified in Decree 41024 of March 23, 1957 (examples: aircraft and aircraft engines for civil aviation; equipment, machinery, and accessories for public service; fixed plant and rolling stock for railroads; electrical equipment for postal, telegraph, and telephone stations; construction materials, electrical equipment, and machinery for water, electricity distribution, or sewer systems; goods required for country’s development and equipping of ports).
    - Fertilizers and seeds imported by agricultural agencies.
    - Decree-Law 31/2005 establishes private enterprises cannot be exempted from import duties; if private enterprises receive a fiscal benefit, they will be subject to 5 percent rate.
    - All raw material or inputs for industry or agriculture are subject to 5 percent rate.
  - Rates:
    - Three rate bands:
      - 5 percent on basic goods;
      - 20 percent on luxury goods; and
      - 10 percent on all other goods.
    - Majority of investment goods taxed at 10 percent, although some taxed at 20 percent.
    - Surtaxes apply to a variety of goods.
    - Specific examples with surtaxes:
      - Petroleum products:
        - gasoline: 149 percent (5 percent + 144 percent surtax)
        - kerosene: 9.4 percent (5 percent + 4.4 percent surtax)
        - jet fuel: 322 percent (5 percent + 317 percent surtax)
        - diesel: 62.9 percent (5 percent + 57.9 percent surtax)
      - Alcoholic beverages:
        - beer: 61 percent (20 percent + 41 percent surtax)
        - wine: 45 percent (20 percent + 25 percent surtax)
        - spirits: 75 percent (20 percent + 55 percent surtax)
      - Cigarettes: 65 percent (20 percent plus 55 percent surtax)
      - Vehicles: 10 to 20 percent (plus 0 to 20 percent surtax, depending on the age of the vehicle).
    - Specific duties levied on weight are calculated on the basis of gross, net, or actual weight as stated in the tariff and regulations.
- Lighthouse user fee (Imposto de farolagem) (Legislative Act 25 of December 24, 1933)
  - Nature: Levied on all ships entering domestic harbors to defray costs of lighthouses, lighted beacons, and light buoys.
  - Exemptions/deductions: None.
  - Rates: Range from Db 150 to Db 650 per ship, depending on the nationality of ship and the time of day.
  - Administration: Administered by the National Port Enterprise (ENAPORT) and is earmarked for harbor operations.
- Harbor tax (Taxas de porto) (Decree-Law 22/89 of December 19, 1989)
  - Nature: Levied for the use of port facilities, and on materiel procured from the port authorities.
  - Exemptions/deductions:
    - Scientific missions, domestic ships, and fishing boats pay 50 percent of the tax.
    - Exempt equipment: government and military boats; merchandise in transit; merchandise shipped between domestic harbors; passengers’ luggage; mail.
    - Exemptions also granted by ENAPORT on a case-by-case basis.
  - Rates:
    - Most rates are specific tariffs varying with weight, volume, quantity of merchandise, type of service, and time of utilization.
    - For materiel procured from the port authorities: tax of 1 percent of the c.i.f. value applies, plus an additional tax of 30 percent.

### Other taxes
- Inheritance and gift tax (Imposto sobre as successões e doações) (Decree 22 of June 22, 1988; Decree-Law 42/93 of August 10, 1993)
  - Nature: Levied on all conveyance of tangible property, real estate, value, or title. Payable by the recipient. Tax base is value of the conveyed goods or property, after deduction of transferor’s debts and other costs set forth in regulations.
  - Exemptions/deductions:
    - Transfers of less than Db 5,000.
    - Gratuitous conveyance of tangible or real estate to descendants or to nonprofit organizations.
  - Rates: Progressive rates between 7 percent and 25 percent, based on value and degree of kinship.
- Real estate transfer tax (Sisa sobre a transmissão de imobiliários por título oneroso) (Decree 22 of June 22, 1988; Decree-Law 42/93 of August 10, 1993)
  - Nature: Levied on all onerous conveyances of real estate and payable by the purchaser. Taxable transactions include sale or bartering of real estate (subject to prior authorization), acquisitions of shares in certain companies that result in control changes, purchases of land from freeholders, and redemptions of property seized in tax enforcement proceedings.
  - Exemptions/deductions:
    - The state, nonprofit organizations, and recipients of real estate who are descendants, ascendants, husbands, wives, brothers or sisters, for property valued at less than Db 30,000.
    - Not applicable to new buildings.
  - Tax base: value of the conveyance or the assessed income from the property as shown in real estate register, whichever is higher; may be determined through direct assessment.
  - Rates by property type:
    - Rural property: 10 percent
    - Urban property: 10 percent
    - Barter deeds: 5 percent
- Stamp tax (Imposto do selo) (Decree-Law 12/76 of April 19, 1976 and annexed schedule; Decree-Law 40/88 of December 20, 1988; Decree-Law 15/93 of March 5, 1993; Decree-Law 81/93 of December 31, 1993; Decree-Law 12/96 of April 19, 1996; and Decree-Law 7/2005)
  - Nature: Levied in forms including revenue stamps (selos fiscais), stamped forms (papel selado), stamped bills (letras seladas), revenue stamps (selos de verba), collection advice stamps, customs stamps, check stamps, pharmaceutical stamps, and miscellaneous stamps.
  - Exemptions/deductions: The state, religious institutions, and some items in the schedule annexed to the regulations. Transfers of foreign currency from abroad.
  - Examples of rates:
    - stamped forms, Db 500;
    - revenue stamps, Db 1,500;
    - stamped bills, Db 1 to Db 500;
    - check stamps, Db 3 for local payment and Db 15 for payment abroad.
  - Administration: Levied upon assessment and payment, when due on acts and contracts subject to it, and when products subject to it are exhibited or sold.
- Special tax (Imposto especial) (Decree-Law 22793 of June 30, 1933)
  - Nature: Surtax on the total amount of the following taxes, fees, and other government revenues: import tax; rural property tax; justice, port, and customs duties; enforced collection proceeds; and tax violation proceeds.
  - Exemptions/deductions: None.
  - Rate: Single rate of 20 percent.
- Service stamp tax (Imposto de selo de assistência) (Decree-Law 44/T/75 of June 6, 1975; Decree-Law 11/86 of March 31, 1986)
  - Nature: Tax on customs clearance and receipts, licenses, and certificates.
  - Exemptions/deductions: Same as stamp tax.
  - Rates:
    - For customs clearance and receipts, specific tax for values below Db10,000, ranging from Db 2 to Db 10; and an ad valorem rate of 0.15 percent for values above Db 10,000.
    - Specific rates of Db 100,000 for certificates; for licenses for 25 identified activities, rates range from Db 100,000 to Db 500,000.
- Military tax (Decree 17695 of December 1929; Decree 29 115 of November 12, 1938; Decree 32745 of April 10, 1943; Decree-Law 86/93 of December 31, 1993)
  - Nature: Payable by all nationals exempt from military service.
  - Exemptions/deductions: Disabled nationals; students until end of studies; anyone currently part of military or paramilitary services, or who served in the army for at least five years.
  - Rates: Db 750 or Db 1,000, depending on income level.
- Justice tax (Decree-Law 18/87 of August 31, 1987)
  - Nature: Due on the settlement value in legal cases.
  - Rate: Flat rate of 10 percent.

*Source: São Tomé and Príncipe authorities.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06329.pdf_