## São Tomé and Príncipe’s Poverty Reduction Strategy Paper (PRSP) ## Source details **Canonical URL:** [São Tomé and Príncipe’s Poverty Reduction Strategy Paper (PRSP)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08155.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08155.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08155.pdf.json) --- ### Overview and recent progress - PRSP discussed by IDA Executive Board in April 2005 and by IMF Executive Board in July 2005. - First Annual Progress Report completed in September 2006; second Annual Progress Report received by IDA and IMF in August 2007. - First Annual Progress Report emphasized need for macroeconomic and political stability, continued policy reform, and substantial donor support to achieve most Millennium Development Goals (MDGs) by 2015. - Second Annual Progress Report covers main challenges in promoting growth and reducing poverty and would have benefited from more explicit discussion of progress implementing previous IMF and IDA recommendations, particularly on monitoring/management capacity and institutions to manage prospective oil revenues under the Oil Revenue Management Law (ORML). ### Debt relief, external borrowing, and fiscal space - Completion point under the enhanced Highly Indebted Poor Countries (HIPC) Initiative reached in March 2007; benefits from HIPC and the Multilateral Debt Relief Initiative (MDRI). - Paris Club creditors agreed in May 2007 to cancel all their outstanding claims on the country. - Staff recommendation: continue policy of refraining from new external borrowing on non-concessional terms to ensure external debt sustainability. - Emphasis that debt relief can boost pro-poor spending and remove obstacles to economic growth. ### Macroeconomic performance and medium-term framework - Real GDP grew at an estimated 6.7 percent in 2006, led by public expenditures and foreign investment in construction, commerce, and services. - Real GDP estimated to grow at 6 percent in 2007. - Annual inflation increased to 27.6 percent at the end of 2007, from 24.6 percent in 2006, reflecting higher domestic prices of petroleum products and utilities and currency depreciation. - Only 68 percent of the 2006 Public Investment Plan was actually executed—highlighting limited aid absorption capacity. - Staff recommendations and observations: - Future reports should present a clearly articulated medium-term macroeconomic framework. - Tighten fiscal and monetary policies; prudent monetary policy in a flexible exchange rate regime to reduce inflation. - Strict control of overall budgetary expenditures, particularly the wage bill, to protect pro-poor programs supported by HIPC and MDRI resources. - Discuss public expenditure issues, including changing structure of central government budget and use of oil-related and HIPC/MDRI resources. - Monitor progress on tax base broadening and tax administration improvements to increase the tax-to-GDP ratio. - Adopt a sound debt management strategy to maintain debt sustainability after HIPC and MDRI relief, refraining from new external borrowing on nonconcessional terms. ### Oil prospects and related governance - Exploratory drilling so far has not confirmed commercially extractable oil reserves. - Foreign investors in Blocks 2 and 4 not expected to start drilling before 2009. - Staff recommendations: - Carefully review oil prospects; maintain fiscal discipline and prudent use of oil signature bonuses. - Manage population expectations. - Update PRSP to include new developments in oil prospects and their impact on medium-term macroeconomic strategy. - Step up adherence to Extractive Industries Transparency Initiative (EITI) principles and develop institutions to supervise a potential oil sector, in line with the Oil Revenue Management Law (Law number 8/2004 for Oil Revenue Management). - Finalize petroleum sector legal and contractual framework and complete technical and economic studies on bidding for blocks in the Exclusive Economic Zone early in 2008. ### PRSP pillar: Reform of public institutions, capacity-building, and good governance - Continued efforts in judicial sector, National Assembly, local governments, civil society, and civil service; some priority actions stalled or delayed, partly due to 2006 elections. - Access to justice is limited, particularly outside the capital and for women; staff encourage resumption and acceleration of reforms to control corruption and improve rule of law. - Economic and financial governance improvements: - 2007 budget prepared following new Organic Law on Public Finance Management and decree introducing new budget codes, including a functional classification approved in 2007. - An integrated budget implementation system has been set up to facilitate budget control, monitoring, and reporting. - Planned procurement law and internal control reforms expected to improve budget control and public expenditure effectiveness. - Future reports should discuss PRSP priorities and their associated costs to better align priorities with budget resources. - Institutional actions for oil-sector transparency: Petroleum Oversight Committee and Public Registration and Information Office established by the National Assembly to audit/monitor oil revenue flows and disseminate information. - Sector roundtables (education, infrastructure, governance) held in 2006; staff recommend closer coordination with development partners and presentation of outreach/participatory processes in future PRSP reports. ### PRSP pillar: Broad-based economic growth - Need to create a more conducive business environment to attract private investment and foster growth. - Doing Business indicators: - São Tomé and Príncipe ranks among the bottom 15 countries on the World Bank’s 2008 Ease of Doing Business report. - It takes 144 days to register a business in the country, compared to the regional average of 56 days. - Recommendations and reforms: - Law on voluntary arbitration and an established Arbitration Center should help streamline commercial dispute resolution. - Implement Diagnostic Trade Integration Study recommendations, particularly establishing a “single window” to streamline business licensing. - Set up an export promotion agency to encourage nontraditional exports, particularly in sectors with high poverty. - New investment code submitted to National Assembly to eliminate discriminatory treatment of foreign investment. - Tax reform laws submitted to National Assembly to modernize tax code and procedures and simplify corporate and personal income taxes; speedy approval needed to implement in 2008. - Simplify and speed up tax payment processes and broaden tax base via improved audits and administrative procedures. - Utilities and state-owned enterprises: - Finances of state-owned enterprises remain precarious despite recent domestic price increases; they have accumulated large arrears, leading to lack of investment/maintenance, poor service, high tariffs, and large liabilities for the government. - Staff suggestions: promote public-private partnerships, strengthen regulatory framework, ensure closer coordination between sector ministries and Ministry of Planning and Finance, approve an action plan to redefine state role in utilities (from direct provider to policymaker/supervisor), and avoid government guarantees for PPPs incompatible with debt management strategy. - Rural development: - Renewed efforts and projects in PAP to rehabilitate irrigation and rural infrastructure, diversify agriculture and livestock, support marketing, and improve fish processing. - Adoption of an agriculture and rural sector strategy recommended to focus efforts and identify needed public resources. ### PRSP pillar: Human resource development and access to basic social services - Budget allocations: - Budget appropriations for education, health, and labor ministries reached about 11.0 percent of current expenses in the national budget (Annex 3 of the Report). - Government allocations for health reached 5.0 percent of current expenditure. - Government allocations for education reached 5.9 percent of current expenditure. - Overall public spending in the education sector (including capital expenditures) kept at about 10 percent of total government spending in recent years. - Education: - Commitment to universal completion of primary education by 2015; Education Sector Strategy Paper updated and costed, basis to endorse “Education For All-Fast Track Initiative” (EFA-FTI). - Recurrent spending favors higher education (currently at more than half of the sector’s recurrent spending) mainly for scholarships abroad; alternative strategies for financing higher education suggested to better balance primary/secondary funding. - Recent results (2003 to 2006): - Survival rate from grades 1 to 6 increased from 47 percent to 62 percent. - Transition rate from grades 4 to 5 increased from 60 percent to 72 percent. - Share of students in classes with a triple-shift regimen decreased to 4 percent in 2006, from 30 percent in 2003. - Remaining challenges: - 60 percent of primary school teachers are non-qualified. - Repetition rate at primary is currently 23 percent. - Staff recommend accelerating measures to unify two cycles of primary education and reduce repetition. - Health: - Overall and infant mortality rates have decreased; average birth survival rates have increased in recent years. - Ministry of Health’s budget outlays in 2005 were US$2.6 million—about 8.7 percent of the overall public budget—yet health sector remains highly dependent on external aid. - Intra-sectoral allocations biased toward tertiary health care: 61 percent of budget outlays in 2005; staff recommend realigning toward primary care. - Need to improve and integrate the health information system (HIS) for better monitoring and evaluation. - Disaster risk and climate change: - Staff recommend next PRSP present more information on natural disaster risks and mitigation strategy. - Notable progress: completion of the country’s first National Adaptation Program of Action (NAPA); authorities encouraged to adopt the national adaptation program of action for climate change. ### PRSP pillar: Monitoring and evaluation - Monitoring system headed by the Poverty Monitoring Unit shows little progress; constraints include staff turnover after 2006 elections, limited administrative and technical capacity, and insufficient coordination with Directorate of Planning and National Statistical Institute. - Data on poverty indicators are inadequate and impede MDG monitoring. - Staff recommendations: - Improve monitoring and evaluation system; set up technical and advisory monitoring councils to foster coordination among institutions and departments. - Conclude the National Strategy for the Development of Statistics with specific recommendations for PRSP monitoring and evaluation and implement an action plan. - National Statistical Institute developed a database (DevInfo) with assistance from AFRISTAT to be used as MDG monitoring tool. - New poverty survey planned—results (and previous surveys) should be made public. - Next poverty implementation report should be underpinned by a continuous consultative process led by the Poverty Monitoring Unit. ### As the Priority Action Plan for 2006-08 comes to an end: summary and recommendations - Principal recommendation: - Authorities should take stock of PRSP achievements and update it in view of oil and growth prospects. - A new PRSP should build on lessons learnt from the implementation of the current PRSP. - A more candid description of oil prospects and a growth diversification strategy should be incorporated. - Assessment of the second Annual Progress Report: - Report appropriately selective and focused on main challenges; candidly evaluates progress while conveying authorities’ commitment. - Macroeconomic stability and fiscal policy: - Report’s focus on consolidation of macroeconomic stability is key. - With rising international oil prices and an uncertain oil outlook, authorities should carefully manage population’s expectations about potential oil revenues. - Strengthen public financial management and broaden the tax base to help reduce aid dependency. - Prudent monetary policy in the context of a flexible exchange rate regime must be maintained to bring inflation down. - Emphasize maintaining fiscal discipline (prudent use of oil signature bonuses). - Debt relief and external borrowing: - Continued policy of refraining from new external borrowing on non-concessional terms is needed to ensure external and public debt sustainability. - Private sector development and business environment: - Create a more conducive business environment to attract private investment and foster growth. - Promote private sector participation, strengthen regulatory framework, and reduce costs of investing and doing business through regulatory reform and measures to deepen the financial sector. - Social sectors and MDGs: - Government committed to pursuing MDGs by 2015. - Greater alignment between public expenditure and PRSP objectives needed, particularly in health and education. - Consider alternative strategies to finance primary and secondary education, including the Education for All- Fast Track Initiative, and promote primary health care. - PRSP monitoring, evaluation, and institutional coordination: - Room to improve PRSP monitoring and evaluation system. - Implement an action plan to ensure appropriate data gathering and publication. - Increase coordination among different institutions and departments to better fight poverty. - Recommended update of the PRSP: - Update in line with new developments in oil prospects and a growth diversification agenda is desirable and should build on lessons learnt. *IMF staff summary of São Tomé and Príncipe PRSP and Annual Progress Reports (2006–2007).* ### 1. São Tomé and Príncipe’s Poverty Reduction Strategy Paper (PRSP) was discussed ### São Tomé and Príncipe’s Poverty Reduction Strategy Paper (PRSP) ### Overview and recent progress - PRSP discussed by IDA Executive Board in April 2005 and by IMF Executive Board in July 2005. - First Annual Progress Report completed in September 2006; second Annual Progress Report received by IDA and IMF in August 2007. - First Annual Progress Report emphasized need for macroeconomic and political stability, continued policy reform, and substantial donor support to achieve most Millennium Development Goals (MDGs) by 2015. - Second Annual Progress Report covers main challenges in promoting growth and reducing poverty and would have benefited from more explicit discussion of progress implementing previous IMF and IDA recommendations, particularly on monitoring/management capacity and institutions to manage prospective oil revenues under the Oil Revenue Management Law (ORML). ### Debt relief, external borrowing, and fiscal space - Completion point under the enhanced Highly Indebted Poor Countries (HIPC) Initiative reached in March 2007; benefits from HIPC and the Multilateral Debt Relief Initiative (MDRI). - Paris Club creditors agreed in May 2007 to cancel all their outstanding claims on the country. - Staff recommendation: continue policy of refraining from new external borrowing on non-concessional terms to ensure external debt sustainability. - Emphasis that debt relief can boost pro-poor spending and remove obstacles to economic growth. ### Macroeconomic performance and medium-term framework - Real GDP grew at an estimated 6.7 percent in 2006, led by public expenditures and foreign investment in construction, commerce, and services. - Real GDP estimated to grow at 6 percent in 2007. - Annual inflation increased to 27.6 percent at the end of 2007, from 24.6 percent in 2006, reflecting higher domestic prices of petroleum products and utilities and currency depreciation. - Only 68 percent of the 2006 Public Investment Plan was actually executed—highlighting limited aid absorption capacity. - Staff recommendations and observations: - Future reports should present a clearly articulated medium-term macroeconomic framework. - Tighten fiscal and monetary policies; prudent monetary policy in a flexible exchange rate regime to reduce inflation. - Strict control of overall budgetary expenditures, particularly the wage bill, to protect pro-poor programs supported by HIPC and MDRI resources. - Discuss public expenditure issues, including changing structure of central government budget and use of oil-related and HIPC/MDRI resources. - Monitor progress on tax base broadening and tax administration improvements to increase the tax-to-GDP ratio. - Adopt a sound debt management strategy to maintain debt sustainability after HIPC and MDRI relief, refraining from new external borrowing on nonconcessional terms. ### Oil prospects and related governance - Report acknowledges potential dramatic improvements from prospective oil exploration but staff emphasize uncertainties: - Exploratory drilling so far has not confirmed commercially extractable oil reserves. - Foreign investors in Blocks 2 and 4 not expected to start drilling before 2009. - Staff recommendations: - Carefully review oil prospects; maintain fiscal discipline and prudent use of oil signature bonuses. - Manage population expectations. - Update PRSP to include new developments in oil prospects and their impact on medium-term macroeconomic strategy. - Step up adherence to Extractive Industries Transparency Initiative (EITI) principles and develop institutions to supervise a potential oil sector, in line with the Oil Revenue Management Law (Law number 8/2004 for Oil Revenue Management). - Finalize petroleum sector legal and contractual framework and complete technical and economic studies on bidding for blocks in the Exclusive Economic Zone early in 2008. ### PRSP pillar: Reform of public institutions, capacity-building, and good governance - Continued efforts in judicial sector, National Assembly, local governments, civil society, and civil service; some priority actions stalled or delayed, partly due to 2006 elections. - Access to justice is limited, particularly outside the capital and for women. Staff encourage resumption and acceleration of reforms to control corruption and improve rule of law. - Economic and financial governance improvements: - 2007 budget prepared following new Organic Law on Public Finance Management and decree introducing new budget codes, including a functional classification approved in 2007. - An integrated budget implementation system has been set up to facilitate budget control, monitoring, and reporting. - Planned procurement law and internal control reforms expected to improve budget control and public expenditure effectiveness. - Future reports should discuss PRSP priorities and their associated costs to better align priorities with budget resources. - Institutional actions for oil-sector transparency: Petroleum Oversight Committee and Public Registration and Information Office established by the National Assembly to audit/monitor oil revenue flows and disseminate information. - Sector roundtables (education, infrastructure, governance) held in 2006; staff recommend closer coordination with development partners and presentation of outreach/participatory processes in future PRSP reports. ### PRSP pillar: Broad-based economic growth - Need to create a more conducive business environment to attract private investment and foster growth. - Doing Business indicators: - São Tomé and Príncipe ranks among the bottom 15 countries on the World Bank’s 2008 Ease of Doing Business report. - It takes 144 days to register a business in the country, compared to the regional average of 56 days. - Recommendations and reforms: - Law on voluntary arbitration and an established Arbitration Center should help streamline commercial dispute resolution. - Implement Diagnostic Trade Integration Study recommendations, particularly establishing a “single window” to streamline business licensing. - Set up an export promotion agency to encourage nontraditional exports, particularly in sectors with high poverty. - New investment code submitted to National Assembly to eliminate discriminatory treatment of foreign investment. - Tax reform laws submitted to National Assembly to modernize tax code and procedures and simplify corporate and personal income taxes; speedy approval needed to implement in 2008. - Simplify and speed up tax payment processes and broaden tax base via improved audits and administrative procedures. - Utilities and state-owned enterprises: - Finances of state-owned enterprises remain precarious despite recent domestic price increases; they have accumulated large arrears, leading to lack of investment/maintenance, poor service, high tariffs, and large liabilities for the government. - Staff suggestions: promote public-private partnerships, strengthen regulatory framework, ensure closer coordination between sector ministries and Ministry of Planning and Finance, approve an action plan to redefine state role in utilities (from direct provider to policymaker/supervisor), and avoid government guarantees for PPPs incompatible with debt management strategy. - Rural development: - Renewed efforts and projects in PAP to rehabilitate irrigation and rural infrastructure, diversify agriculture and livestock, support marketing, and improve fish processing. - Adoption of an agriculture and rural sector strategy recommended to focus efforts and identify needed public resources. ### PRSP pillar: Human resource development and access to basic social services - Budget allocations: - Budget appropriations for education, health, and labor ministries reached about 11.0 percent of current expenses in the national budget (Annex 3 of the Report). - Government allocations for health reached 5.0 percent of current expenditure. - Government allocations for education reached 5.9 percent of current expenditure. - Overall public spending in the education sector (including capital expenditures) kept at about 10 percent of total government spending in recent years. - Education: - Commitment to universal completion of primary education by 2015; Education Sector Strategy Paper updated and costed, basis to endorse “Education For All-Fast Track Initiative” (EFA-FTI). - Recurrent spending favors higher education (currently at more than half of the sector’s recurrent spending) mainly for scholarships abroad; alternative strategies for financing higher education suggested to better balance primary/secondary funding. - Recent results (2003 to 2006): - Survival rate from grades 1 to 6 increased from 47 percent to 62 percent. - Transition rate from grades 4 to 5 increased from 60 percent to 72 percent. - Share of students in classes with a triple-shift regimen decreased to 4 percent in 2006, from 30 percent in 2003. - Remaining challenges: - 60 percent of primary school teachers are non-qualified. - Repetition rate at primary is currently 23 percent. - Staff recommend accelerating measures to unify two cycles of primary education and reduce repetition. - Health: - Overall and infant mortality rates have decreased; average birth survival rates have increased in recent years. - Ministry of Health’s budget outlays in 2005 were US$2.6 million—about 8.7 percent of the overall public budget—yet health sector remains highly dependent on external aid. - Intra-sectoral allocations biased toward tertiary health care: 61 percent of budget outlays in 2005; staff recommend realigning toward primary care. - Need to improve and integrate the health information system (HIS) for better monitoring and evaluation. - Disaster risk and climate change: - Staff recommend next PRSP present more information on natural disaster risks and mitigation strategy. - Notable progress: completion of the country’s first National Adaptation Program of Action (NAPA); authorities encouraged to adopt the national adaptation program of action for climate change. ### PRSP pillar: Monitoring and evaluation - Monitoring system headed by the Poverty Monitoring Unit shows little progress; constraints include staff turnover after 2006 elections, limited administrative and technical capacity, and insufficient coordination with Directorate of Planning and National Statistical Institute. - Data on poverty indicators are inadequate and impede MDG monitoring. Staff recommendations: - Improve monitoring and evaluation system; set up technical and advisory monitoring councils to foster coordination among institutions and departments. - Conclude the National Strategy for the Development of Statistics with specific recommendations for PRSP monitoring and evaluation and implement an action plan. - National Statistical Institute developed a database (DevInfo) with assistance from AFRISTAT to be used as MDG monitoring tool. - New poverty survey planned—results (and previous surveys) should be made public. - Next poverty implementation report should be underpinned by a continuous consultative process led by the Poverty Monitoring Unit. *IMF staff summary of São Tomé and Príncipe PRSP and Annual Progress Reports (2006–2007).* ### 25. As the Priority Action Plan for 2006-08 comes to an end, the authorities should ### _cr08155 - 25. As the Priority Action Plan for 2006-08 comes to an end, the authorities should ### Summary and principal recommendation - As the Priority Action Plan for 2006-08 comes to an end, the authorities should consider taking stock of the achievements of the PRSP and update it in view of oil and growth prospects. - A new PRSP should build on the lessons learnt from the implementation of the current PRSP. - A more candid description of oil prospects and a growth diversification strategy should be incorporated. ### Assessment of the second Annual Progress Report - The staffs believe that the second Annual Progress Report is appropriately selective and focused on the main challenges facing the authorities. - It candidly evaluates progress on implementing the PRSP, while conveying the authorities’ commitment to meet its objectives. ### Macroeconomic stability and fiscal policy - The Report’s focus on consolidation of macroeconomic stability is key. - With rising international oil prices and an uncertain oil outlook, the staffs are of the view that the authorities should carefully manage the population’s expectations about potential oil revenues. - Efforts are needed to strengthen public financial management and broaden the tax base to help reduce aid dependency. - To further bring inflation down, a prudent monetary policy in the context of a flexible exchange rate regime must be maintained. - The staffs emphasize the importance of maintaining fiscal discipline (prudent use of oil signature bonuses) and careful management of the population’s expectations. ### Debt relief and external borrowing - Staffs agree with the Report’s emphasis on the importance of debt relief to boost pro-poor spending and remove one of the obstacles to economic growth. - To ensure external and public debt sustainability, continued policy of refraining from new external borrowing on non-concessional terms is needed. ### Oil prospects and exploration - The staffs encourage the authorities to carefully review oil prospects in future reports. - Exploratory drilling so far has not confirmed the existence of commercially extractable oil reserves. - With rising pressures for public expenditures, the staffs emphasize the importance of maintaining fiscal discipline and careful management of the population’s expectations. ### Private sector development and business environment - The staffs agree on the need to create a more conducive business environment that attracts private investment and fosters growth. - Measures to promote private sector participation and strengthen the regulatory framework are important pillars of a strategy to improve public infrastructure under a constrained budget. - While progress was made in some areas, there is room to reduce the costs of investing and doing business through regulatory reform and measures to deepen the financial sector. ### Social sectors and Millennium Development Goals (MDGs) - The government remains committed to pursuing efforts to reach the MDGs by 2015. - The staffs are of the view that more emphasis is need on strengthened implementation of public financial management reforms and greater alignment between public expenditure and PRSP objectives to bring São Tomé and Príncipe closer to achieving the MDGs, particularly in health and education. - While budget resources allocated to education are within the PRSP targets, recurrent spending tends to favor higher education. - Similarly, while improvements in the health sector are encouraging, spending allocations currently favor the more costly tertiary care. - The authorities should consider alternative strategies to finance primary and secondary education, including the Education for All- Fast Track Initiative, as well as to promote primary health care, as emphasized in the PRSP. ### PRSP monitoring, evaluation, and institutional coordination - The staffs are of the view that there is room to improve the PRSP monitoring and evaluation system. - To ensure an effective and successful implementation of the PRSP, the authorities need to enhance monitoring and evaluation by implementing an action plan to ensure appropriate data gathering and publication. - Increased coordination among different institutions and departments remains critical to better fight poverty. ### Recommended update of the PRSP - An update of the PRSP in line with new developments in oil prospects and a growth diversification agenda seems desirable. - The update should build on the lessons learnt in the implementation of the current PRSP. *IMF document number EBD/05/336 and IDA document number 31726-STP.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08155.pdf_