Press Release No. 09/54

Press Release: IMF Executive Board Approves US$3.8 Million PRGF Arrangement for São Tomé and Príncipe

March 3, 2009

The Executive Board of the International Monetary Fund (IMF) has approved a three-year, SDR 2.59 million (about US$3.8 million) arrangement under the Poverty Reduction and Growth Facility (PRGF) for São Tomé and Príncipe, to support the authorities' economic program. The decision will enable São Tomé and Príncipe to draw the equivalent of SDR 0.37 million (about US$0.54 million) from the IMF immediately.

At the conclusion of the Executive Board's decision, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, made the following statement:

"São Tomé and Príncipe's economic performance has improved in the last year. Real GDP growth has remained robust and international reserves are at a comfortable level. Recent efforts to combat high inflation are welcome.

"The country's prospects remain broadly positive. Prudent macroeconomic policies and continued implementation of structural reforms will be key to addressing downside risks to the outlook, and help achieve the policy objectives supported by the new PRGF program. The authorities' 2009 fiscal program is designed to reduce the domestic primary budget deficit, implement important direct tax reforms, and increase capital spending to support economic activity and the development of the non-oil sector.

"Monetary policy will continue to be proactive in curbing liquidity growth to reduce inflation. It will be important that the authorities coordinate their fiscal and monetary policies in order to safeguard international reserves, while bringing inflation down to single digits. The adoption of a fixed exchange rate regime, by pegging the dobra to the euro, would enhance the prospects for low inflation and deepen ties with key economic partners. The authorities are giving careful consideration to the challenges involved in the move to a new regime, which will require strong fiscal discipline to ensure its sustainability.

"Over the medium term, the authorities face the challenge of maintaining fiscal and debt sustainability. Given uncertain oil prospects, continued fiscal consolidation beyond 2009, strengthened debt management and relying on concessional external financing will be critical. Sustained structural reforms will help develop the economy's production potential and export base and reduce its vulnerability to shocks. Strengthening and deepening the financial sector and improving the investment climate should be given high priority," Mr. Portugal said.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies. These strategies are adopted after an inclusive process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.

ANNEX

Recent Economic Developments

In 2008, the Democratic Republic of São Tomé and Príncipe experienced strong economic growth, driven by foreign direct investment in the construction, commerce, tourism, and services sectors. Real GDP growth is projected to reach about 5.5 percent in 2009 after averaging 6 percent in the previous two years. Higher food and energy costs pushed up consumer price inflation in 2008, reaching 37 percent in June 2008. Inflation has retreated in the second half of 2008, falling back to 24.5 percent in December, thanks to strengthened monetary policy.

Fiscal consolidation continued in 2008, albeit at a slower pace than planned due to the decision to cover part of households' utility bills, which were rising as a result of high oil prices in the last year. The primary fiscal deficit is estimated to reach 6.6 percent of GDP in 2008, down from 8.4 in 2007..

The external current account deficit in 2008 is estimated at 34 percent of GDP, and was more than fully financed by foreign direct investment and external aid. São Tomé and Príncipe's debt outlook remains vulnerable despite relief from the enhanced Heavily Indebted Poor Countries (HIPC) and the Multilateral Debt Relief Initiatives.

Program Summary

The government's medium-term macro-economic program is designed to support growth, significantly reduce inflation, and ensure fiscal and external sustainability.

The macroeconomic framework for 2009-11 aims to achieve:

• Annual real GDP growth of about 6.3 percent.

• Single-digit inflation by the end of the program.

• Sustainable public finances even in an adverse oil scenario.

• Preparing the ground for a possible decision to peg the dobra to the euro within a framework of macro-economic discipline.

To achieve these objectives, medium-term policies include:

• Gradual fiscal adjustment curbing the growth of current expenditure and strengthening tax collections.

• Central bank focus on reducing inflation to low double digits early in the period and to single-digits by the end of the three-year period.

• Structural reforms in the areas of public enterprises, public expenditure management, banking sector regulation, labor regulation and business climate.