Press Release No. 00/33

The International Monetary Fund (IMF) today approved a three-year credit for São Tomé and Príncipe under the Poverty Reduction and Growth Facility (PRGF)¹ equivalent to SDR 6.657 million (about US$8.9 million) to support the government's 2000/02 economic program. The credit will be disbursed in seven semiannual loans, with the first loan, equivalent of SDR 0.951 million (about US$1.3 million) available immediately.

In commenting on the Executive Board discussion on São Tomé and Príncipe, Eduardo Aninat, Deputy Managing Director, made the following statement:

"The authorities of São Tomé and Príncipe are to be commended for the credible record of policy performance in stabilizing the economy in 1998-99 under the staff-monitored program. Tight fiscal and monetary policies in the context of a flexible, market-based exchange rate regime made it possible to turn around the primary fiscal balance from a deficit of 2.2% of GDP in 1997 to a surplus of 1.3% of GDP in 1999, and to reduce inflation from 81% in 1997 to 13% in 1999. The authorities also narrowed the spread between the official exchange rate and the parallel market rate of the currency from 6.5% in 1997 to 1.5% in 1999. In addition, trade and price liberalization policies and the privatization program helped promote private sector initiative, including in food crop exports and tourism expansion, and resulted in an increase in real GDP growth despite a 52% deterioration in the terms of trade during 1999 and a continued fall in cocoa production.

"However, per capita income continues to decline, the debt burden is particularly heavy and not sustainable, and the country continues to depend heavily on external assistance and cocoa growing. São Tomé and Príncipe is one of the poorest country in the world and the authorities are developing a poverty reduction strategy in a broad-based participatory process involving civil society. They have already prepared an interim Poverty Reduction Strategy Paper (PRSP) and the full PRSP is scheduled to be completed by end-2001.

"The program is comprehensive and very demanding given the limited administrative capacity in São Tomé and Príncipe, and successful implementation will require continued determination on the part of the authorities, and the support of labor unions, political parties represented in parliament, and the public at large. Continued external technical assistance will also be essential in this regard. Important aspects of the program include cautious fiscal and wage policies, priority given to education and health spending, civil service reform, public enterprise privatization, the streamlining of business legislation and regulation, strengthened banking supervision, and the enhancement of good governance, accountability, and transparency. São Tomé and Príncipe will need adequate external financing during the period of the program, in the form of concessional debt relief and nonproject support", Aninat said.

ANNEX

Program Summary
Following a decade with very large macroeconomic imbalances and declining real per capita incomes, the government successfully implemented an IMF staff monitored program in 1998/99 that shifted the primary budget deficit to surplus, lowered inflation, and helped improve real GDP growth. Poverty and social indicators worsened, however, and the country's public external debt remained particularly heavy.

The key objectives of the PRGF-supported program include bringing the economy onto a sustainable growth path, reducing poverty, and making progress toward external viability. Within this framework, the macroeconomic objectives for 2000/02 are to reduce inflation to 5% in 2000 and to 3% during 2001/02 on an end-of-year basis, and to contain the external current account deficit (excluding official transfers) at 66% of GDP in 2002. Real GDP growth is projected to increase to 4% by 2002 from 2.5% in 1998/99, allowing per capita income to rise by 1.7% a year. Private investment is expected to exceed 30% of GDP, and the program seeks to raise national savings to 20% of GDP by 2002.

To achieve these objectives, the economic reform efforts are to focus on four key policy components: (a) the pursuit of a prudent fiscal policy aimed at increasing the primary budget surplus, while allocating increased funding to education, and health; (b) the pursuit of an appropriately tight monetary policy to lower inflation and improve international reserves; (c) a deepening of structural reforms to promote private sector development and investment; and (d) the implementation of an ambitious poverty reduction strategy and action plan.

Fiscal policy aims at reducing the overall fiscal deficit to 16% of GDP in 2002 from 26% in 1999, and increasing the primary budget surplus (excluding foreign-financed investment) to 5% of GDP in 2002 from 1.3% in 1999. Government revenue is projected to increase by 22% of GDP in 2002 from 19% in 1999. Domestically financed primary expenditures will be contained to 17% of GDP in 2002.

Structural reforms will aim at reducing the economy's dependence on cocoa exports and encourage private investment. In this regard, price and trade liberalization will be pursued, a comprehensive civil service and retrenchment program will be implemented, as well as a public enterprise reform and privatization program. Transparency, accountability, and good governance will also be enhanced, including in the central bank, budget, and oil exploration operations.

Poverty Reduction Strategy

Given São Tomé and Príncipe's clearly unsustainable debt burden, its widespread poverty, and the remaining structural rigidities that impede economic growth, the authorities have decided to reinforce the progress made in restoring macroeconomic stability and to tackle the country's structural problems as a matter of urgency. An interim Poverty Reduction Strategy Paper (PRSP) has been adopted, and a full PRSP, which is expected to be completed by end- 2001, will be prepared through an open participatory process. A household survey and a poverty analysis will be carried out in 2000 and the results will be used to develop social and poverty monitoring indicators. Immediate actions give priority to restoring adequate public education and health services and include classroom and school rehabilitation, increased immunization of children, improved water and sanitation networks, as well as the launching of information, education, and communication campaigns.

São Tomé and Príncipe joined the IMF on September 30, 1977. It's quota² is equivalent to
SDR 7.40 million. (about US$9.9 million). It has no outstanding use of IMF credit.

São Tomé and Príncipe: Selected Economic Indicators, 1997-2002   1997 1998 1999 2000 2001 2002       Est. Est. Program     (In units indicated) Production               Gross domestic product (in millions of US dollars) 43.9 40.6 47.1 50.0 54.5 58.6 At constant prices (percentage change) 1.0 2.5 2.5 3.0 4.0 4.1 Gross domestic product deflator (percentage change) 100.2 37.1 16.0 7.4 6.3 4.0 Consumer prices (percentage change; end of period) 81.1 20.8 12.6 5.0 3.0 3.0 Consumer prices (percentage change; average) 69.0 42.1 16.3 7.4 4.3 3.0   (Annual percentage change, unless otherwise specified)   External sector               Exports, f.o.b. 8.1 -11.2 -17.3 28.5 21.3 14.4 Imports, c.i.f. -3.2 -12.3 28.5 25.2 17.3 15.7 Exchange rate (in dobras per U.S. dollar; period average) 4,552.5 6,927.4 7,092.6 ... ... ... Exchange rate (in dobras per U.S. dollar; end of period) 6,969.7 6,885.0 7,300.2 ... ... ... Real effective exchange rate -25.0 13.1 12.8 ... ... ... Terms of trade 11.4 14.8 -52.0 10.6 24.9 13.1 Money and credit (end of period)             Net domestic assets 1/ -131.7 17.7 -10.6 -22.8 ... ... Credit to government (net) 1/ -113.4 18.2 -14.3 -27.2 ... ... Credit to the economy 1/ -3.8 14.9 10.5 4.3 ... ... Broad money 94.5 24.5 3.6 5.0 ... ... Velocity (ratio of GDP to average broad money) 3.7 3.5 3.7 ... ... ... Central bank discount rate (in percent; end of period) 55.0 29.5 17.0 ... ... ...   (In percent of GDP, unless otherwise specified) National accounts             Consumption 116.5 107.0 108.5 104.9 97.0 97.7 Gross investment 49.1 35.8 40.0 49.3 59.3 61.2 Public investment 22.1 19.8 26.0 23.3 31.1 30.8 Private investment 27.0 16.0 14.0 26.0 28.2 30.5 Gross domestic savings -16.5 -7.0 -8.5 -4.9 3.0 2.3 Gross national savings 45.5 14.7 14.6 24.0 21.2 20.2 Government budget             Total revenue and grants 43.4 29.1 43.9 46.5 46.2 46.8 Of which: grants 27.8 9.7 24.6 26.2 25.2 25.2 Total expenditure 70.1 59.6 69.8 68.1 64.5 62.5 Of which: noninterest current expenditure 16.6 16.3 15.8 15.6 14.9 13.9 Overall balance (commitment basis) -26.7 -30.5 -25.8 -21.5 -18.2 -15.7 Primary balance (commitment basis) 2/ -2.2 0.7 1.3 2.3 3.4 5.0 External sector             Current account balance (excluding official transfers) -74.8 -53.9 -57.2 -62.1 -64.0 -66.2 Current account balance (including official transfers) -3.6 -21.1 -25.4 -25.2 -38.1 -41.0 Total external debt outstanding 608.5 721.3 636.0 ... ... ... Net present value of total debt 408.4 471.8 420.4 ... ... ... Net present value of total debt 3/ 1,441.9 1,634.6 1,450.1 ... ... ...     Sources: São Tomé and Príncipe authorities; and IMF staff estimates and projections. 1/ In percent of broad money at beginning of period. 2/ Excluding interest obligations, grants, and foreign-financed capital outlays. 3/ In percent of exports of goods and services. 1 On November 22, 1999, the IMF's concessional facility for low-income countries, the Enhanced Structural Adjustment Facility (ESAF), was renamed the Poverty Reduction and Growth Facility (PRGF), and its purposes were redefined. It is intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a poverty reduction strategy paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. At this time for São Tomé and Príncipe, pending the completion of a PRSP, an interim PRSP has been set out by the government, and a participatory process is under way. It is understood that all policy undertakings in the government's statement beyond 2001 are subject to reexamination and modification in line with the strategy that is to be established in the PRSP. Once completed and broadly endorsed by the Executive Boards of the IMF and World Bank, the PRSP will provide the policy framework for future reviews under this PRGF arrangement. PRGF loans carry an interest rate of 0.5% a year and are repayable over 10 years with a 5½-year grace period on principal payments. 2 A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.