Press Release No. 08/143

Press Release: IMF Executive Board Completes Sixth Review under PRGF Arrangement for São Tomé and Príncipe’s and Approves US$680,000 Disbursement

June 19, 2008

The Executive Board of the International Monetary Fund (IMF) has completed the sixth review of the Democratic Republic of São Tomé and Príncipe's economic performance under a three-year Poverty Reduction and Growth Facility (PRGF) arrangement. The completion of the review allows for a disbursement of an amount equivalent to SDR 423,000 (about US$680,000), which would bring total disbursements under the arrangement to SDR 2.96 million (about US$4.77 million).

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$4.77 million) to support the government's economic program for 2005-2008.

In completing the review, the Executive Board approved waivers of the nonobservance of the quantitative performance criteria for end-December 2007 related to the domestic primary fiscal deficit and net credit to the government, and a structural performance criterion for end-December 2007 related to public financial management, based on the authorities' policy commitments and remedial actions.

Following the Executive Board's discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, stated:

"São Tomé and Príncipe's growth performance under the PRGF-supported program has been robust and progress has been made in reducing fiscal imbalances and the public debt burden. However, these favorable developments have been accompanied by accelerating inflation. An expenditure overrun and the lack of effective control of base money have added to the pressures on inflation and depreciation of the currency.

"The authorities are committed to strengthening fiscal discipline and liquidity management to lower inflation and restore financial stability. Their 2008 fiscal program is designed to reduce the domestic primary deficit, introduce direct taxation reform, and provide resources to mitigate the impact of high food and fuel prices on the poor. In addition to fiscal adjustment, the authorities need to implement a proactive monetary policy in order to effectively curb liquidity growth. It is important that the authorities support a tight monetary policy with fiscal restraint, if necessary by further reducing nonessential domestic primary spending to safeguard the program's international reserve targets.

"Over the medium term, the authorities face the challenge of maintaining fiscal and debt sustainability. With uncertain oil prospects, the authorities will need to continue fiscal consolidation beyond 2008, strengthen debt management, and rely on non-debt-creating inflows and other concessional external financing.

"Furthermore, it is crucial that the authorities accelerate structural reforms in order to develop the economy's production and export base and reduce its vulnerability to external shocks. In particular, advancing financial sector reform and improving the investment climate should be given high priority.

"The authorities are committed to deepening foreign exchange market reform. They intend to make efforts to eliminate all remaining restrictions, with the aim of accepting the obligations under Article VIII of the Fund's Articles of Agreement," Mr. Portugal said.

The PRGF is the IMF's concessional facility for low-income countries. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.