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.[1]
At the end of the visit, Ms. Li issued the following statement:
“The new government and the mission made significant progress in the
discussions of the economic policies and reforms that could be
supported by a new IMF arrangement. This proposed program aims to
improve internal and external balances through restoring fiscal
sustainability and enhancing macro stability, which are essential for a
conducive environment to boost inclusive and robust growth.
“Progress under a program that expired at end-2018 was limited. Preliminary
data show that central government debt declined by 10 percent of GDP during
2015-18. However, the state-owned utility company, EMAE, accumulated losses
and arrears of an almost equal amount. Consequently, consolidated public
debt, which includes EMAE’s debt, declined by only 2 percent of GDP.
The tax-revenue-to-GDP ratio decreased to 12.5 percent, significantly
below the average of the region (about 16.0 percent).
Meanwhile, some structural reforms advanced, including regularization of
the government’s arrears to ENCO on oil price subsides, establishing an
automatic fuel price mechanism, and developing a Management Improvement
Plan and a Least Cost Production Plan for EMAE. Overall, progress was
limited due to low capacity, delayed implementation of reforms, and policy
slippages, particularly during the election years of 2016 and 2018.
“The economy is currently experiencing strong imbalances. During 2018, the
domestic fiscal deficit widened significantly. This, along with lower
external inflows, contributed to a drop in international reserves by about
$16 million (1.4 months of imports of goods and services). Growth slowed to
below 3 percent of GDP, aggravated by electricity shortages, while
inflation picked up to 9 percent at end-2018, driven by the higher prices
of fuel and locally-produced fish and vegetables.
“The mission welcomes the government’s commitment to placing public
finances on a sustainable footing by closing the large gap between revenue
and expenditure, which is essential to rein in inflation and relieve
pressure on the country’s international reserves. Recognizing the
importance of protecting essential social services such as health,
education, and the social safety net for the poor, as well as the need to
improve and maintain infrastructure to support development, the authorities
plan to prioritize spending carefully given limited resources. Supported by
the World Bank, the authorities are implementing a social program with a
conditional cash transfer component, which is expected to reach 91 percent
of extremely poor households.
“To generate adequate funding for priority spending, they also plan to
broaden the tax base and ensure equitable tax burden-sharing by curtailing
tax evasion. In this context, they plan to introduce a VAT,
which will replace some current taxes and broaden the tax base and will not
affect low-income households significantly.
“The mission discussed with the authorities other measures to enhance
external and financial stability and boost international reserves. A new
payment system allowing credit card payments is being developed, which will
stimulate tourism and raise foreign exchange receipts. The mission
encouraged the authorities to tighten monetary policy to incentivize more
dobra savings and ease the pressure on international reserves. The
government also plans to strengthen banking supervision to enhance
financial stability and remove structural bottlenecks that hinder
efficiency and financial inclusion.
“Over the medium term, comprehensive structural reforms are needed to
unleash the country’s growth potential. In particular, rehabilitating EMAE
to cost recovery over time is key to ensuring the country’s energy safety,
as EMAE currently can only pay a fraction of its imported oil supply. In
addition, reliable, low-cost, and increased supply of electricity is
essential for economic development. To fully capture the potential of
tourism, the government plans to develop fisheries and eco-agriculture to
expand the local supply chain. As part of the effort to meet the Sustainable Development Goals and
support private-led inclusive growth, the government plans to promote
gender equality as well as women’s economic empowerment and financial
inclusion, on which it will host a conference jointly with the IMF and
UN on May 8-9.
With concerted efforts and far-reaching reforms, growth is expected to
accelerate gradually in the medium term.
“During the visit, the mission met with the 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 expresses its deep appreciation to the authorities
for their cooperation and policy dialogue. It looks forward to active and
continued dialogue in the future.”
[1]
The ECF program is a lending arrangement that provides sustained
program engagement over the medium to long term in case of
protracted balance of payments problems. 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 (see
Press Release No. 15/336) and expired in end-2018.
