Statement at the Conclusion of an IMF Mission to the Democratic Republic of São Tomé and PríncipePress Release No. 11/328
September 9, 2011
A team from the International Monetary Fund (IMF) visited São Tomé and Príncipe (STP) during August 26–September 8, 2011 to conduct the 2011 Article IV Consultation1 and to continue discussions on the second and third reviews of the economic program supported by the IMF under the Extended Credit Facility (ECF) arrangement2. The mission met Honorable Prime Minister Patrice Trovoada, and held discussions with Minister of Finance and International Cooperation Américo d’Oliveira dos Ramos, Minister of Planning and Development Agostinho dos Santos Fernandes, Minister of Public Works and Natural Resources Carlos Vila Nova, Central Bank of São Tomé and Príncipe (BCSTP) Governor Maria do Carmo Silveira, other senior officials of the government and the BCSTP, members of the Economic and Finance Committee of the National Assembly, and representatives of commercial banks, organized labor, and STP’s development partners.
At the conclusion of the visit, Mr. Tsidi Tsikata, Mission Chief for São Tomé and Príncipe, issued the following statement in São Tomé:
“The gradual recovery in growth that started in 2010 is continuing in 2011. Real GDP growth is estimated at 4 ½ percent in 2010 and is expected to be close to 5 percent in 2011, with construction and trade as the main drivers. After declining steadily from a peak of 37 percent in July 2008 to 11½ percent in June 2010, the annual rate of inflation reversed course due to a combination of an upturn in international food and fuel prices, a shortened rainy season and election-related spending by political parties; it reached 17 percent in May 2011 before falling to 15 percent in July.
The government informed the IMF team that it expects to complete a draft of the new National Poverty Reduction Strategy for STP soon. The strategy, which is being prepared through a participatory process, will guide the country’s relations with its development partners. The government affirmed the importance of macroeconomic stability for attracting investment and highlighted agriculture, fisheries, and tourism as the sectors with the greatest potential for promoting sustained growth and poverty reduction. The IMF mission welcomed recent measures that have enhanced the investment climate, including the elimination of licensing and minimum capital requirements for starting businesses in a broad range of areas.
The mission noted that fiscal performance in the first half of the year has been strong, with tax revenue collection exceeding projected levels. Spending by the central government has stayed in line with the budget, but some regional and local governments are accumulating arrears on their utility bills even though they have received transfers from the central government to pay for these services. The mission urged the government to maintain fiscal discipline in order to achieve the adjustment envisaged in the 2011 budget. The mission and the government discussed measures to achieve further fiscal adjustment in the 2012 budget to safeguard international reserves and the exchange rate peg.
The mission urged the government to tackle the recurring problem of arrears accumulation between the Treasury, the water and electricity corporation (EMAE) and the petroleum importing company (ENCO). This should be done by more realistic budgeting for government utility payments and addressing the structural problems underlying EMAE’s weak financial position—e.g., large losses in the generation and transmission of power, and a tariff structure that yields revenues that do not cover costs. In order to safeguard government revenues and support government expenditure priorities, the mission recommended that the government adopt an automatic mechanism for adjusting the retail prices of petroleum products in line with movements in international prices.
The mission welcomed measures by the BCSTP to improve the health of the banking system, including enforcing an increase in the minimum capital requirement and intervening successfully in a troubled bank. The mission discussed the rapid growth in credit to the private sector in recent years. The BCSTP noted that now that the credit reference bureau has become operational, banks have an additional instrument for assessing credit risk. Nevertheless, the BCSTP indicated that it will monitor credit developments closely with a view to tightening monetary conditions if international reserves come under pressure.
Notwithstanding the substantial debt relief it has received, STP remains at high risk of falling back into debt distress because of its limited export and production base. The IMF mission welcomed the government’s continued commitment to avoid commercial borrowing and instead rely on external grants and highly concessional loans to finance development programs.
Most of the program’s financial targets for 2009 and 2010 were met, including all the targets related to international reserves and external borrowing. However, two fiscal targets were missed. Notable progress has been made in strengthening public financial management and the regulation and supervision of banks, although some specific measures are taking longer-than-expected to be completed. The mission and the authorities expect to conclude discussions on the ECF reviews at the Annual Meetings of the IMF and World Bank to be held in Washington during September 23–25, 2011. IMF Board consideration of the report of the mission could take place in December 2011.”
1 Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and a summary is transmitted to the country’s authorities.
2 The Extended Credit Facility (ECF) has replaced the Poverty Reduction and Growth Facility (PRGF) as the IMF’s main tool for medium-term financial support to low-income countries. It provides for a higher level of access to financing, more concessional terms, enhanced flexibility in program design, and more focused, streamlined conditionality. Financing under ECF currently carries a zero interest rate, with a grace period of 5 ½ years, and a final maturity of 10 years. The IMF reviews the level of interest rates for all concessional facilities every two years.