IMF Staff Concludes Program Negotiation Mission to São Tomé and Príncipe

IMF News, April 4, 2019

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A staff team from the International Monetary Fund (IMF) led by Xiangming Li visited São Tomé and Príncipe during March 20-April 4, 2019 for discussions on a new program supported by the IMF’s three-year Extended Credit Facility (ECF) arrangement.
Statement emphasizes that views are those of IMF staff and do not necessarily represent the IMF’s Executive Board.
Significant progress was made in discussions on economic policies and reforms that could be supported by a new IMF arrangement.

Central government debt declined by 10 percent of GDP during 2015-18.
Consolidated public debt, which includes EMAE’s debt, declined by only 2 percent of GDP.
Tax-revenue-to-GDP ratio decreased to 12.5 percent, significantly below the average of the region (about 16.0 percent).
During 2018:
- International reserves dropped by about $16 million (1.4 months of imports of goods and services).
- Growth slowed to below 3 percent of GDP.
- Inflation picked up to 9 percent at end-2018, driven by higher prices of fuel and locally-produced fish and vegetables.
EMAE (state-owned utility) accumulated losses and arrears of an almost equal amount to the central government debt decline.
The recent program for São Tomé and Príncipe (SDR 4.4 million, about US$6.2 million or 60 percent of quota) was approved by the IMF Executive Board on July 13, 2015 and expired end-2018.

2018 saw large deficit spending and a significantly widened domestic fiscal deficit.
Mission welcomes the government’s commitment to placing public finances on a sustainable footing by closing the large gap between revenue and expenditure to rein in inflation and relieve pressure on international reserves.
Authorities plan to prioritize spending carefully to protect essential social services (health, education, and the social safety net for the poor) and to improve and maintain infrastructure.
Supported by the World Bank, authorities are implementing a social program with a conditional cash transfer component expected to reach 91 percent of extremely poor households.
Authorities plan to broaden the tax base and ensure equitable tax burden-sharing by curtailing tax evasion; they plan to introduce a VAT which will replace some current taxes, broaden the tax base, and will not affect low-income households significantly.

Need for comprehensive structural reforms over the medium term to unleash growth potential.
Energy sector:
- Rehabilitating EMAE to cost recovery over time is key to energy security; EMAE currently can only pay a fraction of its imported oil supply.
- Reliable, low-cost, and increased supply of electricity is essential for economic development.
- Developments include a Management Improvement Plan and a Least Cost Production Plan for EMAE.
Tourism and supply chains:
- To fully capture tourism potential, the government plans to develop fisheries and eco-agriculture to expand local supply chains.
Governance and capacity constraints:
- Progress under the prior program was limited due to low capacity, delayed implementation of reforms, and policy slippages, particularly during election years 2016 and 2018.
Social inclusion:
- Government plans to promote gender equality and women’s economic empowerment and financial inclusion; a conference jointly with the IMF and UN is planned for May 8-9.

Measures discussed to enhance external and financial stability and boost international reserves:
- New payment system allowing credit card payments is being developed to stimulate tourism and raise foreign exchange receipts.
- Mission encouraged authorities to tighten monetary policy to incentivize more dobra savings and ease pressure on international reserves.
- Government plans to strengthen banking supervision to enhance financial stability and remove structural bottlenecks that hinder efficiency and financial inclusion.
Recent structural reforms advanced include:
- Regularization of government arrears to ENCO on oil price subsidies.
- Establishing an automatic fuel price mechanism.

The proposed IMF-supported program aims to improve internal and external balances through restoring fiscal sustainability and enhancing macro stability, intended to create conditions for inclusive and robust growth.
Policy recommendations and priorities highlighted by the mission:
- Restore fiscal sustainability by closing large revenue-expenditure gaps.
- Protect essential social services while prioritizing limited resources.
- Broaden the tax base and introduce VAT while protecting low-income households.
- Tighten monetary policy to support reserve accumulation and dobra savings.
- Strengthen banking supervision and financial sector policies to enhance stability and inclusion.
- Implement comprehensive structural reforms in energy and tourism, rehabilitate EMAE towards cost recovery, and develop fisheries and eco-agriculture to expand local supply chains.
With concerted efforts and far-reaching reforms, growth is expected to accelerate gradually in the medium term.

During the visit, the mission met with:
- President Evaristo Carvalho
- Prime Minister Jorge Bom Jesus
- Minister of Planning, Finance, and the Blue Economy Osvaldo Vaz
- Minister of Foreign Affairs Elsa Pinto
- Minister of Infrastructure Osvaldo Abreu
- Governor of the Central Bank Américo Soares De Barros
- President of the National Assembly Delfim Neves
- President of the Príncipe Autonomous Region José Cassandra
- The Parliamentary Economic Commission
- Other government officials, representatives of the private sector including banks, and development partners
The mission expressed deep appreciation to the authorities for their cooperation and policy dialogue and looks forward to active and continued dialogue in the future.

IMF staff statement issued at the end of the March 20-April 4, 2019 mission.