Press Release No. 07/5

Press Release: IMF Executive Board Completes Third Review of São Tomé and Príncipe's Three - Year PRGF Arrangement and Approves US$600,000 Disbursement

January 17, 2007

The Executive Board of the International Monetary Fund (IMF) has completed the third review of São Tomé and Príncipe's economic performance under a three-year Poverty Reduction and Growth Facility (PRGF) arrangement. The completion of the review enables the release of an amount equivalent to SDR 0.4 million (about US$600,000), which would bring total disbursements under the arrangement to SDR 1.7 million (about US$2.5 million).

In completing the review, the Executive Board approved waivers for the nonobservance of several end-June 2006 performance criteria. The Board also approved the modification or deletion of certain end-December 2006 performance criteria.

The Executive Board approved the three-year arrangement on August 1, 2005 (see Press Release No. 05/187), for a total amount of SDR 2.96 million (about US$4.26 million) to support the government's economic program for 2005-2007.

In commenting on the Executive Board's discussion on São Tomé and Príncipe, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, stated:

"São Tomé and Príncipe has shown a renewed strong commitment to program implementation with an adequate response to financial slippages and strong progress on structural reforms in support of growth and poverty reduction. The remedial measures that the authorities have put in place have brought their program broadly back on track. The increased tax collections and the containment of expenditures have largely offset election-related expenditure overruns. However, pro-poor spending remains below expectations.

"The authorities are committed to putting in place substantive fiscal measures to create room for increased pro-poor spending. For this purpose, they will focus on reducing nonessential spending and implementing the tax reform. Pro-poor spending should be further boosted by prospective HIPC and MDRI debt relief.

"The central bank is making a more proactive use of monetary policy instruments to help reduce inflation. The resumption of regular foreign exchange auctions, the issuance of certificates of deposits, and the commitment to adhering strictly to its base money and net international reserves targets are commendable. It will be important to act promptly to mop up liquidity as needed.

"São Tomé and Príncipe's managed floating exchange rate system has helped cushion against external shocks as the exchange rate remains largely market determined. The central bank will gradually eliminate the remaining exchange restriction and multiple currency practice for external current transactions.

"Structural reforms are progressing well, especially with the steps taken to strengthen public financial management, lay the basis for tax reform, and enhance financial sector supervision. Full implementation of the new public financial management system will enable accurate expenditure monitoring, while further reforms of the tax system and the energy and water sectors, and improvements in the environment for private sector activity will lay the foundation for sustained growth, employment, and poverty alleviation," Mr. Portugal said.