Democratic Republic of São Tomé and Príncipe: Staff Report for the 2016 Article IV Consultation, First Review Under the Extended Credit Facility, and Request for Waiver for Nonobservance of Performance Criterion and Modification of Performance Criteria
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International Monetary Fund. African Dept.
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Publication Date:
17 Jun 2016
eISBN:
9781498307444
Language:
English
Keywords:
ISCR; CR; exchange rate; GDP; factor service; debt; clearance plan; return on equity; monetary management; transparency concern; poverty rate; Bank deposits; International reserves; Global
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Context: S�o Tom� and Pr�ncipe's economic development is constrained by its insularity, fragility, limited resources, and low capacity as a small island state. GDP growth has averaged over 4 percent per year since 2012, faster than many small island states. Inflation has also fallen sharply from 28 percent down to about 4 percent, the lowest in the past two decades. These developments notwithstanding, growth has not been sufficiently strong and diversified to meaningfully improve economic prospects and reduce poverty significantly. The poverty rate is high at 66 percent. Focus: Discussions centered on aligning fiscal policy to bring debt to a downward trajectory toward a moderate risk of debt distress; addressing the liquidity overhang to enhance monetary management; improving competitiveness; and safeguarding financial sector stability to support growth. S�o Tom� and Pr�ncipe is participating in the second round pilot of countries to mainstream macro-financial linkages.

Abstract

Context: S�o Tom� and Pr�ncipe's economic development is constrained by its insularity, fragility, limited resources, and low capacity as a small island state. GDP growth has averaged over 4 percent per year since 2012, faster than many small island states. Inflation has also fallen sharply from 28 percent down to about 4 percent, the lowest in the past two decades. These developments notwithstanding, growth has not been sufficiently strong and diversified to meaningfully improve economic prospects and reduce poverty significantly. The poverty rate is high at 66 percent. Focus: Discussions centered on aligning fiscal policy to bring debt to a downward trajectory toward a moderate risk of debt distress; addressing the liquidity overhang to enhance monetary management; improving competitiveness; and safeguarding financial sector stability to support growth. S�o Tom� and Pr�ncipe is participating in the second round pilot of countries to mainstream macro-financial linkages.

Context: a Strategy for Debt Reduction and Inclusive Growth in a Small Island Fragile State

1. São Tomé and Príncipe’s economic development is constrained by its insularity, fragility, limited resources, and low capacity as a small island state (Figure 1). Its export base is undiversified and consists basically of cocoa and a nascent tourism industry that is yet to be fully tapped. Prospects for commercial oil production dominated the government’s political and economic narrative until the end of 2013. However, Total Oil Company subsequently withdrew from exploration in the Joint Development Zone shared with Nigeria.1 The banking sector grew rapidly from expansion in foreign liabilities, in anticipation of intermediating the prospective financial flows from the oil sector. However, profitability remains weak, and loan quality has deteriorated significantly. With prospects for commercial oil production now uncertain, implementation of the government’s infrastructure program, initially planned to be financed by oil revenue, has stalled; the high public debt and weak revenues limit the space for infrastructure spending to overcome constraints to development.

Figure 1.
Figure 1.

São Tomé and Príncipe: Evolving Fragility from Two Lenses

Citation: IMF Staff Country Reports 2016, 174; 10.5089/9781498307444.002.A001

Sources: The Fund for Peace and World Bank.

2. São Tomé and Príncipe has however, made commendable progress toward greater macroeconomic stability. GDP growth has averaged over 4 percent per year since 2012, faster than many small islands states, but not sufficiently strong and diversified to meaningfully improve economic prospects and reduce poverty significantly. The poverty rate is high at 66 percent. Inflation has fallen sharply from 28 percent down to 4 percent, the lowest in the past two decades.

3. Implementation of the 2012 National Poverty Reduction Strategy (PRSP-II) has been a top priority but progress in achieving the Millennium Development Goals (MDGs) was mixed. São Tomé and Príncipe achieved less than half of the MDGs (achieving universal primary education, reducing child mortality and improving maternal health) and came close to achieving two others (combating HIV/AIDS, malaria and other diseases and ensuring environmental sustainability). However, the country did not achieve the goal of eradicating extreme poverty and hunger. In its recently issued 2012–13 PRSP-II implementation review report, the government acknowledges that the reduction in poverty rates since 2000 has been marginal and that economic growth has fallen well short of the sustained 6 percent annual rates considered minimum to meaningfully improve social conditions. The PRSP-II’s implementation shortcomings are attributed primarily to lack of financial resources, and to government instability. The government is currently working on integrating the Sustainable Development Goals (SDGs) into an updated national development strategy that will replace the PRSP-II after it ends in 2016.

4. São Tomé and Príncipe’s Article IV consultation has been delayed at the request of the new government2. The government saw a new program as a priority and an opportunity to re-calibrate their broad policy objectives after the previous ECF arrangement, which was set to expire on July 19, 2015, went off-track with four reviews outstanding. The last Article IV consultation was concluded by the Executive Board on December 16, 2013. There has been some progress toward implementing Fund policy advice (Box 1) such as ongoing strengthening of banking supervision, the approval of a new banking resolution law and the introduction of an interbank market and open market operations underpinned by the issuance of treasury bills for the first time in 2015.

Main Recommendations of the 2013 Article IV Consultation and their Current Status

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Source: IMF staff estimates.

Recent Economic Developments, Outlook and Risks

5. Delayed approval of the 2015 budget hindered performance of key macroeconomic indicators.3 Economic activity slowed as public investment projects were kept on hold due to the late approval of the 2015 budget. In addition, poor rains affected crop yields, particularly, cocoa production. As a result, GDP growth in 2015 is estimated to have fallen below the projected 5 percent by almost 1 percentage point. The end-December 2015 inflation fell below the projected 5 percent, aided by weakened demand and falling international prices of oil and other commodities.

6. Fiscal consolidation efforts have been hampered by tax revenue underperformance and a mismatch between the timing of donor budget support grants and corresponding expenditure. Tax revenue is estimated to have fallen short of the end of year target by about 0.7 percent of GDP, in part due to a lower collection effort of tax arrears and delayed inclusion of the 15,000 new taxpayers registered during the operation tax inclusion project. In addition, ENCO (the oil importing company) continues to accumulate new tax arrears (estimated at 0.3 percent of GDP) in 2015. There was also about 2.2 percent of GDP shortfall in donor budget support grants.4 While the authorities made modest offsetting cuts in expenditure to accommodate domestic revenue underperformance, these were insufficient, resulting in a domestic primary deficit of about 3.0 percent of GDP, higher than the program target of 2.7 percent of GDP.

7. The authorities have begun implementing the domestic arrears clearance plan agreed under the ECF-supported program. The arrears clearance plan proposes clearing government’s outstanding arrears to the utility company (EMAE), general suppliers and to ENCO while also preventing the accumulation of new arrears. In particular, the plan outlines that the government would amortize all arrears to: (i) EMAE in 2015; (ii) general suppliers in five years starting from 2015; and (iii) ENCO over 40 years with no interest charges starting from 2016. These amortizations which add to about 1 percent of GDP on average annually through 2020 and 0.2 percent of GDP thereafter have been incorporated into the program. An automatic fuel price adjusted mechanism is to be introduced by end-June 2016 to prevent the accumulation of new arrears. The plan also proposes clearing EMAE’s arrears to ENCO over 10 years, starting in 2015. The government has already cleared all arrears to EMAE in 2015, 1.2 percent of GDP (0.5 percent of GDP higher than budgeted). EMAE in turn paid the equivalent of 2.6 percent of GDP of its arrears to ENCO. Despite this payment, EMAE’s arrears to ENCO in 2015 increased on net basis by 2.2 percent of GDP, albeit, by less than initially projected under the plan. Going forward, EMAE may face difficulties in making full payments to ENCO, in line with the plan, due to delays in reaching agreement with investors on alternative energy sources over the purchase price of energy. Clearance of government arrears to ENCO will start this year, and are included in the 2016 budget.

8. The external current account deficit fell to 17 percent of GDP, reflecting weak economic activity and contraction in oil imports that more than offset the decline in cocoa exports. Gross international reserves, estimated at US$61 million (4.4 months of import cover) at the end of 2015, remain at comfortable levels.

9. There are signs that the stress in the financial system has intensified. The capital adequacy ratio for the entire banking system fell from 20.3 percent in December 2014 to 15.5 percent at the end of 2015, while capital to risk-weighted assets ratio increased to 24.1 percent from 22.6 percent, following recent capital injections by several banks. Moreover, non-performing loans have increased to a historic high of about 30 percent following the reclassification of overdue overdrafts in Banco Equador’s books as bad loans and a downgrade in a sizeable share of the largest bank’s loan classification to loss.

10. The macroeconomic outlook is favorable in the near term but challenges remain. GDP is projected to grow by 5 percent in 2016 aided by higher and a more timely execution of public investments, recovery in cocoa production and increased foreign direct investment (FDI) in the tourism sector. However, the current slowdown in credit expansion as a result of large and rising NPLs, in particular to small enterprises, is negatively affecting economic activities and the economic growth acceleration prospects. Inflation is expected to remain around 4 percent on the back of falling international prices of food and petroleum products, but still higher than the euro area inflation. Staff’s medium-term projection shows real GDP growth falling short of the authorities’ target of 6 percent; inflation stabilizing at 3 percent; and the current account deficit contracting further.

11. Risks are tilted to the downside (see Box 2). The forthcoming presidential election slated for July 2016, with the risk of extra budgetary spending5, and continued weakness in the banking sector and potential contingent claims on the budget, are the main sources of short-term risks to the outlook. Authorities have however, expressed firm commitment to avoid electoral spending beyond what is budgeted and are working swiftly to address weaknesses in the banking sector including a comprehensive asset quality review and a strategy to address the high and rising NPLs (to be implemented in June 2016). Additional downside risks could arise from weak demand in key advanced and emerging economies, which could dampen FDI and tourism inflows and reduce exports to those economies. Adoption of policies that increase fiscal space would serve as a buffer.

Figure 2.
Figure 2.

São Tomé and Príncipe: Recent Macroeconomic Developments

Citation: IMF Staff Country Reports 2016, 174; 10.5089/9781498307444.002.A001

Sources: São Tomé and Príncipe authorities’ data; and IMF staff estimates and projections.

São Tomé and Príncipe: Risk Assessment Matrix 2016

article image
Source: IMF staff estimates.

Program Performance

12. The program is broadly on track (Table 1 of MEFP attachment I). Although budget execution was challenged due to shortfalls in tax revenue and donor budget support, all but one end-December 2015 performance criteria (PCs) were met. The PC on domestic primary deficit was missed by about 0.3 percent of GDP due mainly to tax revenue underperformance and the absence of corresponding expenditure cuts. The indicative targets on tax revenue (a floor) and on dobra money (ceiling) were missed by 0.7 percent of GDP and 16 percent above target respectively, due mainly to slowdown in economic activities and faster-than-programmed accumulation of net foreign assets and net government deposits respectively. The indicative target on pro-poor spending (floor), on the other hand, was missed marginally (2 percent lower than target) due to oversight difficulties which will be enhanced with the expansion of the electronic information management system (SAFEe) to all ministries and government agencies. Corrective measures to address tax revenue under-performance have been introduced (see ¶ 20 and MEFP ¶ 12 and 13).

Table 1.

São Tomé and Príncipe: Selected Economic Indicators, 2014–19

(Annual change in percent, unless otherwise indicated)

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Sources: São Tomé and Príncipe authorities’ data and IMF staff estimates and projections.

Central Bank (BCSTP) mid-point rate.

Excludes oil related revenues, grants, interest earned, scheduled interest payments, and foreign-financed capital outlay.

Percent of exports of goods and nonfactor services.

Gross international reserves exclude the National Oil Account and commercial banks’ foreign currency deposits at the BCSTP in order to meet reserve requirements and foreign currency deposits of commercial banks used application deposits for new licensing or for meeting capital requirements.

Imports of goods and nonfactor services excluding imports of investment goods and technical assistance.

13. The government has made progress in implementing structural reforms as planned (Table 2 of MEFP attachment I). In particular, the new bank resolution law was submitted to the National Assembly6, and the two structural benchmarks related to improvements in the national accounts and consumer price statistics were also implemented. The policy resolve and commitment demonstrated so far are still needed, especially in an election year, to maintain momentum, and importantly, bring the benefits of reform and sacrifices made thus far to a broader segment of the population.

Table 2.

São Tomé and Príncipe: Financial Operations of the Central Government, 2014–19

(Billions of Dobra)

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Sources: São Tomé and Príncipe authorities’ data and IMF staff estimates and projections.

Exclude oil related revenues, grants, interest earned, scheduled interest payments, and foreign-financed capital outlays.

Policy Discussions

14. Policy discussions focused on addressing critical medium-term challenges. Emphasis was placed on aligning fiscal policy to ensure a decline in the debt trajectory over the medium term while creating space for growth-enhancing and social spending; addressing the liquidity overhang to enhance monetary management; improving competitiveness and setting the stage for higher sustainable and inclusive growth; and enhancing the role of macro-financial linkages to improve financial stability and support economic growth.

A. Staying the Course on Debt Reduction while Improving the Quality of Spending

15. Debt vulnerabilities remain high. The updated debt sustainability analysis (DSA), which reflects lower upfront borrowing and disbursements in 2015, still shows that São Tomé and Príncipe remains at high risk of debt distress, after receiving HIPC debt relief in 2007. With challenges in budget execution in 2015, stronger implementation effort and oversight is required in order to maintain the deficit target path in the program, which is consistent with the available non-debt creating financing—aimed at bringing debt toward a moderate risk of debt distress.

16. São Tomé and Príncipe has outstanding arrears to non-Paris Club creditors—Angola and the People’s Republic of China. These arrears predate the HIPC completion point and amount to US$53 million at end-2015. They are the only debt obligations to these creditors and there is no other debt service falling due on them.

17. In past Fund programs, these arrears have been deemed away, reflecting the HIPC agreement and the best efforts of the São Tomé and Príncipe authorities to resolve the arrears to non-Paris Club creditors. The authorities have approached non-Paris Club creditors in order to negotiate debt relief on comparable terms but no bilateral agreement has been reached so far.

18. The staff assesses that the arrears can continue to be deemed away under the revised lending-into-official arrears policy approved by the Board in December 2015. Under the new policy the arrears can be deemed away if the underlying Paris Club agreement is assessed to be adequately representative, i.e., if Paris Club creditors provide the majority of the financing contributions required from official bilateral creditors. In the case of São Tomé and Príncipe, the Paris Club creditors’ share of required contributions from official bilateral creditors amounted to about 52 percent and hence can be considered representative for the purposes of the new policy. Even though the deadline set out in the Paris Club agreed minutes to conclude bilateral agreements with non-Paris Club creditors has passed, staff assesses that the São Tomé and Príncipe authorities have since continued making best efforts to conclude the agreements with Angola and the People’s Republic of China. As under the old policy, staff will continue to revisit this assessment at each review, to make a judgment about whether the authorities continue to make best efforts to resolve the arrears.

19. The authorities share staff’s recommendation to anchor medium-term fiscal policy on bringing debt to a downward trajectory toward a moderate risk of debt distress. At the heart of achieving this objective is sustained adjustment to the domestic primary deficit (MEFP attachment I ¶ 11). Experience across smaller countries offers support to the policy of reducing debt by reducing the domestic primary deficit through boosting tax revenues and containing discretionary expenditure. Such an effort will require a significant social and political commitment over the course of several years. The authorities confirmed their determination to a medium-term domestic primary deficit of 1–1½ percent of GDP. Consistent with the above, the projected domestic primary deficit target of 2 percent of GDP, in the 2016 budget, is in line with the program. The sharp increase in the overall fiscal deficit in 2016 is due to higher capital spending financed mostly from planned privatization proceeds from government’s shares in the largest bank and the telecom company and from disbursements of already contracted project loans and previously programmed new concessional loans from Kuwait and Turkey. The increase in the overall fiscal deficit, as a result of increased capital spending, does not affect the program debt trajectory. It however, helps to offset the negative impact of the slowdown in tourism and stressed financial sector on growth, thereby maintaining the medium-term growth path originally envisaged under the program. The authorities agreed to staff’s recommendation to stand ready to make timely offsetting cuts in primary domestic expenditure while safeguarding pro-poor spending should the full amount of expected budget support fail to materialize, but noted that given the very rigid expenditure profile, any shortfall in budget support could result in some cuts in social spending.

20. Accelerating improvements in revenue collection should be an integral part of the medium-term fiscal policy strategy (MEFP attachment I ¶ 12). The goal is to increase tax revenue collection to the levels of the peers by 2018. The tax collection effort has been low relative to the recent past and compared to peers. This has been, in part, due to poor collection of tax arrears including from ENCO, and non-collection from new taxpayers identified during the operation tax inclusion. Reversing the current situation and improving the collection require decisive effort to curb fraud and tax evasion through greater, more rigorous, and regular audits, improving the capacity and incentives at the large taxpayer unit, increasing the number of products subject to imposition of minimum custom value, and introducing a number of legislative changes, including lowering the minimum taxable income, raising the minimum presumptive levy charged to individuals and firms, and transferring the execution powers for collection of tax arrears from the fiscal court judge to the tax administration (end-June 2016 structural benchmark).

Text Chart 1.
Text Chart 1.

Tax Revenue

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 174; 10.5089/9781498307444.002.A001

Source: World Economic Outlook Data.

21. The government has delayed the introduction of value added tax (VAT) beyond 2017 (MEFP attachment I ¶ 12). While VAT introduction would significantly widen the tax base and enhance domestic revenue collection, staff welcomes the government’s decision to shift the introduction to 2018 to allow for more comprehensive preparatory work, including the drafting and passing of the VAT law, the tax policy design, introduction of revenue administration structures to support the implementation of VAT, training of staff, and a public education campaign (Box 3). The IMF and other partners (including the AfDB) are providing the necessary assistance. The current program does not yet assume the revenue impact of the introduction of VAT.

22. On the spending side, the authorities are placing emphasis on strengthening public financial management and transparency (MEFP attachment I ¶ 14). The main goal is to ensure efficiency in public expenditure. Although the authorities have taken some initial steps to improve its information management system and data analysis capacities, swift implementation of further measures is critical. Specific measures will include rolling out of SAFEe from the current pilot stage to cover all ministries, autonomous services, other sovereign institutions, regional and local government to strengthen public financial oversight. The authorities are considering enhancing SAFEe with added functionality such as reconciliation of treasury bank accounts, revenue tracking, management of fixed assets and a government contracts registry to facilitate the preparation of more comprehensive general government accounts. In addition, the authorities intend to move towards medium-term fiscal and expenditure frameworks in 2017.

Conditions for Success of Value Added Tax in São Tomé and Príncipe

Broad legislative reform. The introduction of VAT should be conceived as part of a broader reform plan of indirect taxation (introduction of excise consumption tax, revision of the customs tariff). Changes in income tax legislation will be necessary to maintain the coherence in the tax system (for example, harmonization of thresholds subject to the real regime).

With regard to the VAT legislation specifically, the experience of countries that have adopted this tax in recent years points to the following best practices: (i) a broad tax base with a fairly small number of exemptions to ensure good performance of the tax and prevent economic distortions created by tax incentives; (ii) a single rate to simplify the tax system and facilitate administration, reduce compliance costs of taxpayers’ obligations and minimize the risk of evasion; (iii) adoption of a zero rate applied only to exports; and a relatively high application threshold to eliminate incidence on small operators, reduce the number of collectors and facilitate management of the tax by the tax administration. The use of a single threshold for all companies, whatever their legal form, is a good practice.

Preparation of tax administration. Apart from the quality of the VAT law, the successful introduction of the tax depends critically on the capacity of the tax and customs administrations to administer it. The launch of VAT project is not recommended before the tax administration is properly prepared. In the current stage, the tax directorate needs both an organizational restructuring and deep reforms to strengthen the tax administration. There is a need to adopt a functional organization in line with modern tax administrations, where central services are dedicated primarily to supporting task, steering, coordinating, monitoring and evaluating the activities of operational services. The new organization should also include proper segmentation of taxpayers, an internal audit function to prevent moral hazard, and an enhanced tax enforcement function. Beyond organizational restructuring, there is an urgent need to strengthen the tax administration in the following areas: (i) developing human capacity; (ii) improving working conditions and (iii) strengthening fiscal operations, including needs for more dynamic and secured management of a taxpayer database, management of taxpayer files based on risk analysis that reflects strong concentration of revenue in a small number of taxpayers, and reorienting inspection activity towards broadening the tax base and imposing fines on tax evasion, and adopting a computer application with basic functionality such as automatic notification of defaulting taxpayers and the extraction of statistics and support for oversight and improved education of taxpayers and services to users. A premature launch of the VAT would exacerbate the existing obstacles and could lead to failure of the project. In 2016, efforts should be concentrated on measures to strengthen fiscal operations to continue to ensure the mobilization of fiscal resources.

23. The authorities are going ahead with the introduction of an automatic fuel price adjustment mechanism, taking advantage of the current low international crude oil price environment (MEFP attachment I ¶ 13). This will ensure full cost recovery, prevent the accumulation of new domestic arrears to ENCO and reduce pressure on the budget. The government has committed to use the initial positive price differential at the time of the introduction of the automatic fuel price mechanism to partially lower prices at the pump while the rest of the differential will be locked in by raising the surcharge rates on fuel, and using the proceeds to accelerate arrears reduction to ENCO.

24. The government has identified key growth-enhancing infrastructure spending needed to increase growth to around 6 percent—the minimum required to significantly impact poverty. Some of these key projects are: the deepwater port project for which the government has already signed MOUs7 (about US$800 million) with China Harbor Engineering Company to design a PPP with financing from the private sector; the extension of the airport runway in São Tomé; and the development of alternative sources of cheaper energy (other than thermal). Staff welcomes the authorities’ decision to focus on the extension of the airport runway and alternative sources of energy, and only embark on the deepwater port project if a careful and comprehensive feasibility study establishes its economic viability and also if it is entirely private sector financed without government contingent liabilities.

25. A successful implementation of the infrastructure program depends critically on implementing the existing debt framework law and strengthening debt management capacity (MEFP attachment I ¶ 17). This will involve policy actions that include the preparation of a national debt strategy that fixes a ceiling on the overall debt of the non-financial public sector and annual debt policies that fix annual ceilings for each public entity. The government plans to carry out a new debt management performance assessment (DeMPA) by end-December 2016 with the support of development partners. This will highlight areas of focus for improvements. Enhanced capacity for debt management will be anchored on an updated medium-term debt management strategy, a manual of procedures for debt management, a computer-based debt management system and staff training. Also, the government has prepared a comprehensive draft public private partnership (PPP) law and framework to guide the growing expressions of interests for PPPs following the London investors’ conference in October 2015. The PPP law is expected to be finalized by end-September 2016.

26. This should be backed by enhanced investment management capacity (MEFP attachment I ¶ 16). The government’s fairly low project execution ratio suggests a need for improving capacity in project implementation and evaluation and gradually scaling up capital expenditure to ensure that the authorities have adequate time to build their technical expertise. Staff urged the authorities to introduce: (i) a centralized framework for appraising and prioritizing capital expenditure projects and (ii) a public investment management assessment (PIMA) framework and associated implementation plan (end-December 2016). This should help reconcile competing funding demands with available resources while ensuring consistency with the government’s policies and objectives.

27. The authorities agreed with the risks flagged by the updated DSA. There was general recognition of these vulnerabilities and there is an ongoing effort to mitigate them through the range of fiscal reforms discussed above, including efforts at strengthening debt management and improving debt recording and monitoring. The authorities are committed to continuing to prioritize grants and focus on priority projects financed by concessional loans. The authorities have also prepared a borrowing plan (MEFP ¶ 18, MEFP Text Table 1) including sources and uses of the planned financing.

B. Addressing Liquidity Overhang to Enhance Monetary Management

28. The large and growing excess liquidity is undermining the authorities’ effort at monetary management. Excess liquidity was estimated at 24 percent of deposits or about 5 percent of GDP at the end of 2015. It is distributed asymmetrically among banks, with the bulk concentrated in the largest bank, while a couple of banks struggle to meet the minimum required reserve levels. Excess liquidity has built up mainly from net inflows of external resources, and its persistence suggests that involuntary excess liquidity is more than a temporary deviation away from the optimal structure of commercial banks’ balance sheets. While current headline inflation is in line with the authorities’ target of keeping inflation around 4 percent in 2016 and declining further to 3 percent over the medium term, there are risks of elevating underlying inflationary pressures coming from growing excess liquidity which could fuel aggregate demand pressures.

29. Staff underscored the need to further refine the liquidity forecasting and management tools (MEFP attachment I ¶ 18–19). The current forecasting tools allow for improved information gathering and better analysis of the autonomous factors that drive liquidity. However, forecasting errors (though reduced) still hamper an accurate assessment of the liquidity needs of the banking system; further minimizing these errors and determining banks’ needs would inform the timing and quantum of issuance of new treasury bills and bonds in the nascent money market. Moreover, the recently-introduced interbank money market has not generated the required participation by banks due to perceptions of stigma, while the successful introduction of government treasury bills in June 2015 and the doubling of the amount on offer to about 2 percent of GDP this year, though bold, are insufficient to address the liquidity overhang. The implementation of the strategy to address the large and growing NPLs (¶ 38), further development of the financial infrastructure (¶ 37), and reforms to improve the business environment (¶ 41 and 42) will encourage commercial banks to start lending on the margins to reduce involuntary reserves in an environment of positive real interest rates.

30. The BCSTP believes the lack of participation by banks in the interbank money market is only temporary given recent developments in the domestic financial market. The BCSTP is working with banks to address these challenges while at the same time improving the functioning of the government securities market—creating the conditions for longer-term liquidity management—as well as developing the secondary market.

C. Macro-Financial Linkages and Financial Sector Stability

31. Prospects for commercial oil production increased the size of the banking sector significantly. The financial sector is highly-concentrated and characterized by excess liquidity and low profitability (SIP section II). One large bank accounts for about half of the system’s deposits and loans; six small banks account for the other half (Figure 4). Total assets of the banking system increased from 25.9 percent of GDP in 2001 to 86.8 percent of GDP by 2012 before falling to 79.9 percent of GDP in 2015. Foreign currency denominated deposits and loans have been trending downward since the introduction of the peg to the euro in 2010, but remain high and subject to risks of capital flight in the absence of appropriate prudential measures. The number of banks also increased from 1 in 2001 to 7 by 2015, all in anticipation of increased economic activity in relation to commercial oil production.

Figure 3.
Figure 3.

Macro-Financial Linkages in São Tomé and Príncipe

Citation: IMF Staff Country Reports 2016, 174; 10.5089/9781498307444.002.A001

Sources: São Tomé and Príncipe authorities’ data; and IMF staff estimates.
Figure 4.
Figure 4.

São Tomé and Príncipe: Financial Sector Developments

Citation: IMF Staff Country Reports 2016, 174; 10.5089/9781498307444.002.A001

Sources: São Tomé and Príncipe authorities’ data and IMF staff estimates.

32. Indicators of profitability remain weak, amidst high operating cost and weak demand for loans, with only the largest bank remaining profitable while other banks face negative (some highly) returns on assets. Return on equity has also been deteriorating and was estimated at -27 percent in 2015, eroding the capital base of some banks. However, the central bank’s intervention and corrective measures are beginning to yield results. Three out of seven banks have increased their capital to the minimum required level. BCSTP is moving—under the new bank resolution law which provides the necessary legal framework for swift and orderly resolution of banks—to create a transition bank as a first step toward resolving Banco Equador which has been under administration over the past year. The BCSTP has now introduced a regulatory framework on bridge banks, based on the recently passed banking resolution law, to help guide any potential resolution and restructuring of banks, including private sector solutions.

33. The quality of banks’ aggregated loan book deteriorated significantly since the last Article IV in 2013. The asset quality of most banks has been weakening as reflected in increasing NPLs, and presents significant vulnerabilities as well as hindering financial intermediation (Figure 5 and SIP section II). The ratio of NPLs to total loans almost doubled from around 16 percent to about 30 percent. This increase in NPLs was driven by substandard and loss loans, which indicates further deterioration in asset quality. As a result, the BCSTP has demanded increases in provisioning (doubling it in the last year alone). Bank-by-bank NPLs show a worrying picture, with only one bank with an NPL ratio of less than 10 percent. Two banks have NPLs close to 50 percent while the remaining banks have NPLs ranging between 20 and 30 percent, reflecting similar trends in other small financial systems (SIP section IV).8

Figure 5.
Figure 5.

São Tomé and Príncipe: Asset Quality

Citation: IMF Staff Country Reports 2016, 174; 10.5089/9781498307444.002.A001

Sources: São Tomé and Príncipe authorities’ data; and IMF staff estimates and projections.

34. Staff stressed the urgent need for a comprehensive strategy to address the large stock of NPLs in the banking system and the introduction of a contingency plan to deal with potential fiscal risks. The NPL strategy, among other things, should also look at reforming the debt enforcement and insolvency regimes, introducing out-of-court workout that aims at rehabilitating viable debtors, and measures to improve the operational capacity of banks to work out NPLs. This should be backed by a more detailed asset quality review (AQR) involving stocktaking, review of provisioning requirements, in-depth examination of banks’ large exposure, and where necessary, recapitalization of affected banks to reduce the uncertainty currently surrounding the quality of assets carried by banks. This will also require appropriate measures at the bank level (e.g., addressing weak underwriting standards including improvements in credit policies and governance) and beefing up risked-based supervision to minimize spillovers from the banking sector to the rest of the economy. Enhancing both on- and off-site supervision, tightening and enforcing prudential norms are critical to containing credit risk. The authorities are strongly urged to use all legal tools available (including the recently passed banking resolution law), combined with private sector solutions (backed by the new regulation on bridge banks) to address any vulnerabilities identified during the comprehensive AQR, and where necessary, set up a contingency plan in subsequent budgets to address any residual fiscal risk.

35. Linkages between developments in the financial sector and the overall economy are bi-directional (Figure 3 and SIP section II). Continued vigilance over the financial sector is warranted given the adverse impacts of macro-related risks on the financial sector and the negative spillback to the real economy. More recently, the lack of dynamism in the real economy, following the declining prospects for commercial oil production, has constrained credit expansion as banks struggle to find new businesses. This has impacted negatively on banks’ balance sheet and profitability. The BCSTP has had to intervene in 3 banks in the last 3 years, with one bank currently under administration. A potential resolution of the bank under administration, if new shareholders are not identified, could induce a cost of about 4 percent of GDP to the budget. There is also a negative feedback from the current slowdown in credit expansion, in particular to small enterprises, on economic activities and the economic growth acceleration prospects, with already tangible negative impact on domestic revenue mobilization—frustrating the authorities’ drive to raise domestic resources to supplement the financing of the government’s infrastructure project. There is also a negative spillover from the slowdown in domestic capital expenditure implementation (weak public sector demand) on the financial sector—mainly the significant reduction in loan demands from government contractors and the subsequent rising loan default rates (SIP section II).

36. Macro stress tests highlight credit risk as the most relevant given the limited debt instruments, excess liquidity, and currency peg. In addition, large exposure to few borrowers exposes banks to concentration risk. A default of about three large borrowers will lead to a system-wide drop in capital adequacy ratio (CAR) below the minimum required (SIP section II). Overall, the stress test results show that banks in São Tomé and Príncipe are vulnerable to shocks simulated and give some indication that the industry’s overall capitalization could be undermined should these shocks materialize.

37. Access to financial services needs to be broadened to the unbanked segments of the population, including SMEs (SIP section II). Credit delivery to these under-served sectors has been hampered by the lack of collateral, poor enforcement when available and information asymmetry in the banking system. This has made base lending rates sticky downwards and cut off segments of the population from gaining access to financial services. To resolve this problem, reforms are needed to lower operational costs, increase competition, and enhance business practices by SMEs, in particular: (i) improving the coverage and effectiveness of the credit reference bureaus; (ii) streamlining procedures to ensure collateral enforcement, including reforms to the judiciary; and (iii) training SMEs in basic accounting, financial management, and preparation of bankable projects.

38. The BCSTP shared staff’s recommendation to swiftly address weaknesses in the financial system in order to support private sector development and promote financial inclusion. The authorities are moving quickly to produce a comprehensive strategy for the resolution of the large stock of NPLs (structural benchmark June 2016) backed by a detailed AQR. In addition, the authorities have initiated processes (with the help of development partners) to address structural bottlenecks in the economy, including a comprehensive review of the judiciary to restore confidence in contract enforcement by reducing the lengthy court resolution of default cases, backed by a review of the collateral processes.

D. Improving Competitiveness and Setting the Stage for Higher Sustainable and Inclusive Growth

39. Achieving economic diversification and inclusive growth remains a challenge. The broad outlines of the government’s 2030 Transformation Agenda identify the priorities for medium to long-term growth, social cohesion and external credibility, including most notably diversifying the economy, broadening the production base and modernizing the economic and social infrastructure. While the services sector has driven growth historically, São Tomé and Príncipe’s tourism potential is yet to be tapped (MEFP attachment I ¶ 21). The way forward is for São Tomé and Príncipe to focus on high value-added tourism activities, broader diversification of source markets, and more open, competitive air transport connections, including direct links to the neighboring countries in the sub region, Europe, and Brazil (SIP section I). This would require further work on the existing airport to extend the runway to accommodate larger aircrafts, including chartered aircrafts.

40. There should also be targeted efforts to support the traditional sectors (agriculture and fisheries) to boost job creation and reduce poverty. While still accounting for a sizable share of employment, the combined share of agriculture and fisheries in real GDP has been declining and their contribution to growth has been meager—a trend that has to be reversed.

41. Staff assesses the real effective exchange rate (REER) as moderately over-valued in 2015 (Annex I). Addressing this would require further diversifying the economy and exports beyond the traditional sectors through targeted actions to improve the business environment to attract FDI. The low level of competitiveness remains a challenge to economic diversification and inclusive growth. Indicators of doing business are lagging behind the average for sub-Saharan Africa and other small states based on the 2016 World Bank Doing Business survey. While some progress was made in some areas—the indicator measuring starting a business topped the rankings in the region—special attention is needed in the areas where the country ranks in the bottom quarter in the region: getting electricity, registering property, access to credit, protecting minority investors, and paying taxes. Some large infrastructure projects, for example, in electricity generation, the airport, and the existing port, could significantly enhance doing business and make São Tomé and Príncipe one of the preferred tourist destinations in the region. Staff welcomes the authorities’ effort to put together a national export diversification strategy by the end of December 2016.

42. The authorities agreed with staff’s assessment of the level of the exchange rate. They stressed their commitment to the pegged exchange rate regime and the current level of the peg, which has served them well as an effective anchor for inflation. To ensure external competitiveness, they recognize that it needs to be supported by continued tight demand management and structural reforms designed to raise productivity and boost private investment. The authorities also agree with the need for diversification and enhancing the competitiveness of traditional sectors to promote sustained and broad-based and shared growth. For example, in agriculture, the authorities are prioritizing access to credit by small farmers as a way to reclaim lost grounds in cocoa and coffee production, with the goal of, at least, doubling cocoa production and exports by 2020.

Program Issues, Safeguards and Risks

43. The end-December 2015 PC on the domestic primary deficit was missed by a small margin (0.3 percent of GDP) and staff supports corrective measures introduced by the authorities to address this slippage. Staff agrees with the introduction of legislations to lower the minimum taxable income, raise the minimum presumptive levy charged to individuals and firms, and transfer the execution powers for collection of tax arrears from the fiscal court judge to the tax administration unit (¶ 20) aimed at boosting tax collection. Staff also supports corrective measures introduced by the authorities to address the missed indicative targets on the floor of pro-poor spending (¶ 12) and the ceiling on dobra money.

44. Program monitoring. All PCs and indicative targets for the first half of 2016 remain the same as approved by the Executive Board. Staff and the authorities have however, agreed to propose a modification to the PCs on the domestic primary deficit and net international reserves (while staff proposes to modify the two PCs slightly, they remain the same in percent of GDP and in terms of months of imports respectively) and indicative targets on tax revenue and base money in the second half of 2016 to align with the pace of reforms in revenue administration and faster-than-programmed accumulation of net foreign assets and net government deposits in 2015 (Table 3 of MEFP attachment I). Four new structural benchmarks for 2016 have been proposed covering a change in tax administration legislation, a public investment management assessment (PIMA) and the associated implementation plan, VAT law, and establishment of an Audit Board policy at BCSTP (Table 4 of MEFP attachment I). The second review is expected to be completed by December 2016, the third review by June 2017, and the fourth review by December 2017.

Table 3.

São Tomé and Príncipe: Financial Operations of the Central Government, 2014–19

(Percent of GDP)

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Sources: São Tomé and Príncipe authorities’ data and IMF staff estimates and projections.

Exclude oil related revenues, grants, interest earned, scheduled interest payments, and foreign-financed capital outlays.

Table 4.

São Tomé and Príncipe: Summary Accounts of the Central Bank, 2014–19

(Billions of Dobra)

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Sources: São Tomé and Príncipe authorities’ data and IMF staff estimates and projections.

Gross international reserves exclude the National Oil Account and foreign currency deposits of commercial banks used as application deposits for new licensing or for meeting capital requirements.

Imports of goods and nonfactor services excluding imports of investment goods and technical assistance.

Net international reserves exclude the National Oil Account and commercial banks’ foreign currency deposits at the BCSTP in order to meet reserve requirements and foreign currency deposits of commercial banks used as application deposits for new licensing or for meeting capital requirements.

45. The program is fully financed and staff’s assessment of São Tomé and Príncipe’s capacity to repay the Fund remains broadly unchanged from the ECF arrangement request (Table 11). São Tomé and Príncipe’s capacity to repay the Fund remains strong, as obligations remain small relative to exports and reserves.

Table 5.

São Tomé and Príncipe: Monetary Survey, 2014–19

(Billions of Dobra)

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Sources: São Tomé and Príncipe authorities’ data and IMF staff estimates and projections.
Table 6.

São Tomé and Príncipe: Financial Soundness Indicators, 2010–15

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Sources: São Tomé and Príncipe authorities’ data and IMF staff estimates.

Beginning June 2013, data are based on improved methodology and not strictly comparable with earlier data.

Table 7.

São Tomé and Príncipe: Balance of Payments, 2014–19

(Millions of U.S. Dollars)

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Sources: São Tomé and Príncipe authorities’ data and IMF staff estimates and projections.

Includes HIPC debt relief.

Percent of exports of goods and nonfactor services.

Gross international reserves exclude the National Oil Account and commercial banks’ foreign currency deposits at the BCSTP in order to meet reserve requirements and foreign currency deposits of commercial banks used application deposits for new licensing or for meeting capital requirements.

Imports of goods and nonfactor services excluding imports of investment goods and technical assistance.

Table 8.

São Tomé and Príncipe: Balance of Payments, 2014–19

(Percent of GDP)

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Sources: São Tomé and Príncipe authorities’ data and IMF staff estimates and projections.

Includes HIPC debt relief.

Percent of exports of goods and nonfactor services.

Gross international reserves exclude the National Oil Account and commercial banks’ foreign currency deposits at the BCSTP in order to meet reserve requirements and foreign currency deposits of commercial banks used application deposits for new licensing or for meeting capital requirements.

Imports of goods and nonfactor services excluding imports of investment goods and technical assistance.

Table 9.

São Tomé and Príncipe: External Financing Requirements and Sources, 2014–19

(Millions of U.S. Dollars)

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Sources: São Tomé and Príncipe authorities’ data and IMF staff estimates and projections.

Includes HIPC debt relief.

Includes revenue from Nigeria oil program.

Table 10.

São Tomé and Príncipe: Proposed Schedule of Disbursements under the ECF Arrangement, 2015–18

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Source: International Monetary Fund.
Table 11.

São Tomé and Príncipe: Indicators of Capacity to Repay the Fund, 2016–28

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Sources: São Tomé and Príncipe authorities; and IMF staff estimates.

After HIPC and MDRI debt relief. Including IMF repurchases and repayments in total debt service.

Gross international reserves exclude the National Oil Account and commercial banks’ foreign currency deposits at the BCSTP in order to meet reserve requirements and foreign currency deposits of commercial banks used application deposits for new licensing or for meeting capital

46. An updated safeguards assessment, completed in February 2016, found that severe capacity constraints contributed to a weak safeguards framework at the central bank. In particular, independent oversight on audit and control mechanisms was lacking and the BCSTP law needs to be amended to strengthen the autonomy of the central bank. In addition, to strengthen independent oversight on the bank’s operations, the BCSTP should establish an Audit Board Policy that includes roles and responsibilities similar to a conventional audit committee (end-December 2016 structural benchmark), and identify a qualified external expert to assist the Audit Board. Reforms to the BCSTP law, currently underway, should be done in consultation with the Fund.

47. Risks to the program are high. Apart from slower growth than envisaged, financial sector vulnerabilities could become more pressing, risks to reform commitment in a presidential election year could crystallize and weak capacity could constrain program implementation. Continued technical assistance particularly in banking supervision, PFM and tax administration and policy would in part mitigate risks related to capacity.

Other Surveillance Issues

48. Although the provision of economic data has some shortcomings, it is broadly adequate for surveillance. There is ample scope to improve the balance of payments statistics, which are being revised with the help of STA TA. INE has completed the rebasing of the national accounts to 2008 (as opposed to 2001) and a new CPI, reflecting price movements in a broader basket of goods and services and using 2014 (instead of 1996) as the base year. The next steps include improving GDP statistics by developing data on the components of GDP on the demand side, strengthening trade statistics, and extending coverage of the international investment position.

49. Exchange System and Exchange Rate Arrangement. São Tomé and Príncipe continues to avail itself of the transitional arrangements under Article XIV, but does not maintain restrictions under Article XIV. However, it maintains one exchange restriction subject to Fund approval under Article VIII. The authorities should work towards removing the existing exchange restriction, which arises from Article 3 (i) and Article 10.1 (b) of the Investment Code (Law No. 7/2008) regarding limitations on the transferability of net income from investments. The country’s exchange rate arrangement is, since 2010, a de facto fixed peg to the euro. The exchange system is free of multiple currency practices.

Staff Appraisal

50. The strong progress in implementation of structural reforms needs to be maintained to bring the full benefits of reforms to a broader segment of the population. Staff welcomes the authorities’ continued commitment to program implementation and supports the corrective measures introduced to boost domestic revenue mobilization (¶ 20 and 43). Measures are to be introduced by the end of 2016 to ensure proper monitoring of pro-poor spending, i.e., expansion of the electronic information management system (SAFEe) to all ministries and government agencies (¶ 12) and dobra money.

51. Staff also welcomes the authorities’ resolve to maintain the strong medium-term fiscal adjustment to bring down debt toward a moderate risk of debt distress. The continued underperformance of tax revenue calls for steadfast implementation of identified revenue administration measures and introduction of legislations to address weaknesses in collection of tax arrears and to bring on board the identified 15,000 new tax payers to support the medium-term objective of bringing the domestic primary deficit down to 1–1½ percent of GDP. This would have to be complemented by enhancing the growth impact of public investment spending, including structured and centralized investment planning, prioritization, and budgeting, to ensure fiscal policy supports the overriding objective of debt sustainability, by walking a fine line between debt reduction and scaling up of the needed growth-enhancing spending.

52. Strengthening debt management capacity while continuing to rely on grants and concessional loans is at the core of the debt reduction program. Staff welcomes the authorities’ decision to prepare a national debt strategy that fixes a ceiling on the overall debt of the non-financial public sector, updates the medium-term debt management strategy, and prepares guidelines on debt management. The authorities are therefore encouraged to conduct a new debt management performance assessment (DeMPA) to set the basis for the new debt management strategy and also to finalize the draft public private partnership (PPP) law and framework to guide the government’s public investment program given the increased expressions of interests following the successful investor’s conference in London, in October 2015.

53. The timing is right to implement the automatic fuel pricing mechanism as planned. Addressing the high stock of domestic arrears needs to be backed by a comprehensive reform to the government’s fuel subsidy program to prevent future accumulation of arrears. The current low international crude oil price presents the right environment to introduce this key reform to further strengthen the authorities’ fiscal consolidation efforts.

54. Staff welcomes the BCSTP’s efforts at enhancing liquidity management, and also notes that challenges remain. While the liquidity forecasting tool introduced so far allows for improved information gathering and a more accurate analysis of the autonomous factors that drive liquidity, it needs further refining to minimize forecasting errors, due to poor information sharing on treasury spending, to better support BCSTP’s liquidity management operations. Staff strongly recommends that the BCSTP leads the effort to address banks’ transparency concerns and perceived stigma associated with accessing the interbank market in order to boost participation.

55. Vulnerabilities within the financial system need to be swiftly addressed. There is evidence of bi-directional linkages between the financial sector and the real, fiscal, and external sectors of the economy. The lack of dynamism in the real economy has impacted banks’ ability to lend, resulting in large and fast build-up of excess liquidity in the banking system, with a negative feedback loop to the real and fiscal sectors of the economy. These have jointly resulted in a sharp and sustained increase in NPLs and raised the risk of potential cost to the budget should some of the existing weak and unprofitable banks require restructuring. The BCSTP should immediately develop a strategy to address the large stock of NPLs, and where necessary, review provisioning practices and minimum capital requirements to ensure banks are well capitalized. This should be backed by a detailed AQR to reduce the uncertainty currently surrounding the quality of assets carried by banks and further safeguard the stability of the financial system. Once the comprehensive AQR is completed, the BCSTP should use all legal tools available (including private sector solutions) to address any vulnerabilities identified, and if required, set up a contingency plan in subsequent budgets to address any residual fiscal risk.

56. In light of the broadly satisfactory program implementation so far and the authorities’ commitment to maintaining the momentum, staff supports the completion of the first review under the ECF arrangement. Staff recommends a waiver for the nonobservance of the PC on the floor of domestic primary deficit based on corrective measures committed by the authorities (¶ 20 and 43) and also supports the proposed establishment and modification of PCs, indicative targets, structural benchmarks for 2016, and the request to combine the two continuous PCs on non-concessional external borrowing. Staff also supports the second disbursement in the amount of SDR 634,285.

57. It is proposed that the next Article IV Consultation be held on a 24-month cycle, in accordance with the Decision on Article IV Consultation Cycles (Decision No. 14747-(10/96), as amended).

Table 12.

São Tomé and Príncipe: Millennium Development Goals

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Source: World Bank Development Indicators.

Correspond to 1991

Correspond to 1992

Correspond to 1997

Correspond to 1999

Correspond to 2001

Correspond to 2002

Correspond to 2004

Correspond to 2006

Correspond to 2007

Correspond to 2008

Correspond to 2009

Correspond to 2011

Correspond to 2014

Annex I. External Balance Assessment

São Tomé and Príncipe’s external position is moderately weak and vulnerable owing to the country’s narrow export base. Staff analysis suggests that the immediate risks to the external position appear manageable. In particular, the real effective exchange rate is assessed as moderately overvalued on current policy and the international reserves are adequate compared to the traditional and IMF Low Income Country (LIC) reserve metrics, especially when the extra buffers of the balance of the National Oil Account (NOA) and contingent credit line with Portugal are considered. However, medium-term vulnerabilities remain significant and need to be addressed through continued fiscal consolidation and structural reform to support diversification and enhance the competitiveness of the economy.

A. Evolution of the Balance of Payments

1. São Tomé and Príncipe’s external position is moderately weak and vulnerable owing to the country’s narrow export base. The external account balance has been worsening since the HIPC debt relief, reflecting both a trend decrease in the current account and limited capital and financial inflow1. Current account trends have been dominated by the gradual contraction in the trade deficit in line with weaker activities and driven more recently by lower international prices of oil and other commodities. Capital and financial accounts have registered declining surplus and have been dominated by foreign aid, FDI and public sector borrowing. The external debt has increased reflecting a shift in the composition of sources of financing of the current account deficit, with a declining role of FDI and rising share of debt creating flows. Going forward, the external position and the current account are expected to improve, supported by planned fiscal consolidation, further import compression due to lower commodity prices and expected pick up in exports. However, medium-term vulnerabilities remain significant and need to be addressed through continued fiscal consolidation and structural reform to support diversification and enhance competitiveness of the economy.

Annex Figure 1.
Annex Figure 1.

São Tomé and Príncipe: External Sector Development

Citation: IMF Staff Country Reports 2016, 174; 10.5089/9781498307444.002.A001

Sources: São Tomé and Príncipe authorities’ data; and IMF staff estimates.

B. Exchange Rate Assessment

2. São Tomé and Príncipe’s real effective exchange rate (REER) has appreciated considerably since the introduction of the peg to the euro in January 2010. Since then, there has been a gradual disinflation process which has been too slow in closing the inflation differential with trading partners. As a result, the REER exhibits a more pronounced trend appreciation compared to that of countries with similar exports (Figure 2, right chart).

Annex Figure 2.
Annex Figure 2.

São Tomé and Príncipe: Exchange Rate Development

Citation: IMF Staff Country Reports 2016, 174; 10.5089/9781498307444.002.A001

Sources: São Tomé and Príncipe authorities’ data; and IMF staff estimates.

3. EBA-lite model-based indicators of REER suggest that, on current policies, the 2015 level of real effective exchange rate ranges from slightly undervalued to strongly overvalued (Table 1). However, the results should be interpreted with caution given the inherent difficulties in benchmarking external stability for a fragile and small country with severe data limitations like São Tomé and Príncipe.

Annex Table 1.

São Tomé and Príncipe: Real Effective Exchange Rate Assessment, Model Results

(Percent of GDP, unless otherwise indicated)

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Sources: São Tomé and Príncipe authorities’ data and IMF staff estimates

Fitted model of current account based on the EBA-lite methodology.

Deviations of São Tomé and Príncipe’s actual policies from its optimal level and also the average policy misalignment relative to the rest of the world.

Observed current account in 2015.

“ + ” overvaluation, “ - ” undervaluation.

Change in the REER (in percentage) needed to close gap.

Fitted model of REER based on the EBA-lite methodology.

Observed LN(REER) in 2015.

Using 2020 projected current account as the medium-term reference period.

Trade elasticities derived from a panel study of low income countries by Tokarick (WP/10/180), page 31.

  • The EBA-lite current account model relating the current account to policy and non-policy fundamentals predicts a modest overvaluation (Figure 3). The model fits reasonably well. It predicts a current account norm of -8.9 percent of GDP, net of a policy gap of -2 percent of GDP (or the sum of deviations of São Tomé and Príncipe’s actual fiscal balance, change in reserves and private sector credit from their optimal levels and the world’s averages of the same policy variables from their optimal levels). With the observed 2015 current account at -16.7 percent of GDP, it implies a current account gap of -7.9 percent of GDP or a modest overvaluation of the REER of about 7.5 percent assuming an elasticity of current account to REER of -1.05.

  • The EBA-lite EREER model predicts a stronger REER overvaluation (33.4 percent). However, like its predecessor equilibrium real exchange rate approach under CGER methodologies, the Index REER model is not adequate for economies with major structural changes or limited data. The model is not a good fit for São Tomé and Príncipe. It provides an unreliable account of the REER developments over the last 5 years due to difficulties in capturing important structural changes such as the introduction of the peg with euro in 2010 and the subsequent slow disinflation dynamics (see the middle chart of the panel Figure 3). As such, the result should be interpreted with caution.

  • On the other hand, the external sustainability approach shows that the REER is slightly undervalued. Targeting a net IIP at its most recent historical level (-153.2 percent of GDP) entails a current account norm of -13.5 percent which in turn implies an undervaluation of (-6.9 percent) based on an underlying current account of -6.2 percent and an elasticity of current account to REER of -1.05. Reducing the net IIP target to (-127.4 percent of GDP), a level consistent with the current account norm from EBA-lite CA model, results in a slightly less undervalued REER (-4 to -5 percent) or broadly consistent with the fundamentals (see the bottom chart of the panel Figure 3).

Annex Figure 3.
Annex Figure 3.

São Tomé and Príncipe: Exchange Rate Assessment Models Fit

Citation: IMF Staff Country Reports 2016, 174; 10.5089/9781498307444.002.A001

Sources: São Tomé and Príncipe authorities’ data; IMF WEO; and IMF staff estimates.

4. Staff bottom line assessment is that the dobra REER in 2015 is modestly overvalued. The assessment is in line with the EBA-lite CA model prediction, which shows the most reliable fit to São Tomé and Príncipe’s case. The EBA-lite EREER model is not a good fit because of a significant structural change (i.e. dobra peg to the euro since 2010) and limited data while the predictions of the external sustainability approach are less reliable given the inherent difficulties in benchmarking the appropriate level of the net IIP.

5. São Tomé and Príncipe’s pegged exchange rate regime has served the country well by ending the inflation-depreciation cycle. Correcting external imbalance through nominal depreciation is unlikely to deliver a more depreciated REER in the medium term because of the high pass-through to domestic prices. Policies to address external imbalances will have to focus on increasing savings through fiscal consolidation and fostering competitiveness (see section D of this annex).

C. Reserve Adequacy Assessment

6. São Tomé and Príncipe needs to build strong international reserves buffers given the persistence and magnitude of shocks it faces as a small and fragile LIC with a pegged exchange rate regime. Staff assessment relied on the traditional approaches, including the 3-months of import rule and 20 percent of broad money coverage as well as reserve assessment for LICs using the new Fund approach based on the analytical framework that (i) takes into account country specificities and multiple motives for holding reserves and (ii) balances benefits of holding reserves (i.e. prevention and mitigation of external shocks) against the associated opportunity cost while taking the country’s fundamentals into account. The reserve assessment for LICs framework estimates the optimal reserve level for São Tomé and Príncipe at 3.9 months of imports.

7. São Tomé and Príncipe’s 2015 gross international reserves were just at the benchmark level (Figure 4). While gross international reserves coverage was just at the level of the IMF LIC reserve metrics, it was below that of its peers. However, the country has extra reserve buffers in the form of exceptional access to a supplemental US$10 million deposit in the National Oil Account (NOA) and €25 million from a contingent credit line with Portugal, should reserves fall below 3 months of import cover.

Annex Figure 4.
Annex Figure 4.

São Tomé and Príncipe: Reserve Adequacy, 2015

(Months of imports)

Citation: IMF Staff Country Reports 2016, 174; 10.5089/9781498307444.002.A001

Sources: São Tomé and Príncipe authorities data and IMF staff estimates.
Annex Table 2.

São Tomé and Príncipe: Gross International Reserves Coverage Metrics

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Sources: São Tomé and Príncipe authorities’ data; and IMF staff calculations.

D. Non-price Competitiveness Assessment

8. Non-price competitiveness indicators all point to some loss of competitiveness. While São Tomé and Príncipe’s market share for tourism showed a strong rebound in 2014, reversing the decline caused by the crisis in Europe, its market share for cocoa has generally been declining in recent years, signaling loss of competitiveness. The 2016 World Bank’s Doing Business survey also suggests more vigorous reform actions are needed to improve the business environment. It shows only a modest improvement in São Tomé and Príncipe’s overall distance to the top reformers at the frontier over the last six years. The country is lagging relative to the average for sub-Saharan Africa and for small states. Areas with greatest distance to the frontier are getting credit, resolving insolvency, paying taxes, protecting minority investors and enforcing contracts.

Annex Figure 5.
Annex Figure 5.

São Tomé and Príncipe: Indicators of Exports Competitiveness

(Percent share of world’s total)

Citation: IMF Staff Country Reports 2016, 174; 10.5089/9781498307444.002.A001

Sources: UN WTO; FAO; and São Tomé and Príncipe authorities’ data.
Annex Figure 6.
Annex Figure 6.

São Tomé and Príncipe: Doing Business Indicators

Citation: IMF Staff Country Reports 2016, 174; 10.5089/9781498307444.002.A001

Sources: World Bank Doing Business survey and IMF staff estimates.

Appendix I. Letter of Intent

São Tomé, May 18, 2016

Ms. Christine Lagarde

Managing Director

International Monetary Fund

700 19th Street N.W.

Washington, D.C. 20431

USA

Dear Ms. Lagarde:

1. The Democratic Republic of São Tomé and Príncipe has made progress in implementing its economic reform program, supported by an IMF arrangement under the Extended Credit Facility (ECF) since July 2015. Despite the country’s fragility and an uncertain environment, the government’s efforts to strengthen macroeconomic stability, foster sustainable and inclusive growth, and reduce poverty in the context of the second National Poverty Reduction Strategy Paper (PRSP-II) have begun to bear fruit. In general, macroeconomic stability improved, economic growth stabilized, and inflation declined further. However, the economy continues to face significant challenges in terms of rising debt and weak competitiveness, undermining the job creation and poverty reduction efforts. We have stepped-up our engagement with creditors and donors toward reaching a cooperative and meaningful solution for the country’s large infrastructural needs. Our ambitious structural reform agenda—primarily aimed at addressing bottlenecks to higher, sustained, and inclusive growth and strengthening the financial sector—is also being implemented with technical and financial assistance from our international partners.

2. The government believes that measures and policies described in the July 2015 Memorandum of Economic and Financial Policies (MEFP attachment I) remain appropriate for attaining the objectives of our program. The attached supplement to the MEFP discusses performance under the program thus far and updates policies toward meeting these objectives. Our key focus going forward will be to: align fiscal policy to anchor medium-term debt reduction; address the liquidity overhang to enhance monetary management; improve competitiveness; and safeguard financial sector stability to support growth.

3. Recently, the government concluded discussions on the first review under the ECF-supported program with an IMF staff mission, with focus on program implementation through end-December 2015, as well as on measures to be implemented during 2016. Performance under the ECF-supported program has been satisfactory. Although budget execution was challenged due to tax revenue underperformance, all but one of the end-December 2015 performance criteria (PCs) were met. The PC on domestic primary deficit was missed by about 0.3 percent of GDP. The indicative targets on tax revenue (a floor), pro-poor spending (floor), and dobra money (ceiling) were also missed. On the other hand, all of the structural benchmarks were implemented. The government has since introduced corrective measures to address the revenue shortfall and believes these are well-entrenched to prevent future occurrence.

4. The attached MEFP describes government policies for 2016 that would support achieving program objectives under the ECF arrangement. We remain fully committed to achieve the objectives of the program and will take any additional measures necessary to that end. We will consult with the IMF on the adoption of such measures prior to any revision of the policies indicated in the MEFP.

5. In light of the progress in implementing the program, we request the IMF Executive Board to approve the waiver for non-observance of domestic primary deficit performance criteria with test date at end-December 2015, modification of performance criteria on domestic primary deficit and net international reserves, and request for the completion of the first review as well as the second disbursement of SDR 634,285 under this arrangement. Without prejudice to the original intent, we request that the two continuous performance criteria on non-concessional external borrowing be combined into one that establishes a ceiling on the contracting or guaranteeing of new external debt of any maturity (including overdraft positions but excluding normal import credits) by the government and/or the BCSTP.

6. The government will continue to provide Fund staff with all relevant information mentioned in the Technical Memorandum of Understanding (TMU), concerning further progress made under the program. During the program period, the government will not introduce or strengthen any exchange controls, multiple exchange rate practices, or import restrictions for balance of payments purposes, nor will it conclude any bilateral payment agreements in violation of Article VIII of the Fund’s Articles of Agreement.

7. The government agrees to make public this Letter of Intent, along with the attached MEFP and TMU, the debt sustainability analysis (DSA) performed by the IMF and World Bank staff, as well as the entire IMF staff report on the first review and Article IV consultation. We hereby authorize their publication and posting on the IMF website, once the IMF Executive Board approves the completion of the Article IV consultation and the first review under the three-year arrangement under the ECF.

Sincerely yours,

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Attachments:

  1. Memorandum of Economic and Financial Policies.

  2. Technical Memorandum of Understanding.

Attachment I. Memorandum of Economic and Financial Policies for 2016–18

This Memorandum of Economic and Financial Policies (MEFP) updates the one outlined in the ECF-supported program approved by the IMF Executive Board on July 13, 2015. It describes recent macroeconomic developments, implementation of the ECF-supported program, the economic outlook and risks, and macroeconomic policies.

Recent Economic Developments

1. São Tomé and Príncipe continued to make progress towards macroeconomic stability but delayed approval of the 2015 budget slowed down the pace of consolidation. GDP growth for 2015, estimated at 4 percent, fell short of the projected 5 percent due to delayed implementation of public investment projects and poor rains that affected cocoa production. Inflation, on the other hand, was at 4 percent at the end of 2015 (the lowest in the past two decades), reflecting the slowdown in economic activity.

2. The government’s fiscal operations yielded mixed results. Fiscal consolidation efforts have been hampered by tax revenue underperformance. Tax revenue is estimated to have fallen short of the end of year target by about 0.8 percent of GDP, in part due to a lower collection effort of tax arrears and delayed inclusion of the 15,000 new taxpayers registered during the operation tax inclusion project. In addition, ENCO (the oil importing company) continued to accumulate new tax arrears in 2015. While the government made modest offsetting cuts in expenditure, these were insufficient, resulting in a domestic primary deficit of about 3.0 percent of GDP, higher than the program target of 2.7 percent of GDP.

3. Growth in monetary aggregates also decelerated in line with the slowdown in economic activity. Broad money (M3) grew by 13.1 percent at the end of 2015, down from 16.8 percent at the end of the previous year. Similarly, the rate of growth in net foreign assets more than halved to 13.3 percent from 35.3 percent. Net domestic assets increased by 11.7 percent after declining by 45.2 percent in 2014; the turnaround mirrored a small rebound in credit to the economy, largely to households.

4. The financial sector continues to face challenges. The banking system’s capital adequacy ratio (measured as capital to assets ratio) declined from 20.3 percent in December 2014 to 15.5 percent at the end of 2015, while the capital to risk-weighted assets ratio increased to 24.1 percent from 22.6 percent. Non-performing loans (NPLs) also increased to 29.8 percent, following the reclassification of overdue overdrafts in Banco Equador’s books as bad loans and a downgrade in a sizeable share of the largest bank’s loan classification to loss.

5. There was however, an improvement in the balance of payments helped by lower commodity prices. The external current account deficit fell to 16.7 percent of GDP, reflecting weak economic activity and a contraction in oil and other commodity imports that more than offset the decline in exports due to lower cocoa production. The central bank’s gross international reserves, estimated at US$61 million (4.4 months of imports), remain at comfortable levels.

Performance Under the Ecf-Supported Program

6. The program performance through end-December 2015 was satisfactory. All continuous and quantitative performance criteria (PC) were met with the exception of the PC on domestic primary deficit. The PC on domestic primary deficit was missed by about 0.3 percent of GDP on account of lower-than-expected tax revenue following under-recovery of tax arrears and delays in including new taxpayers in the tax base. Nonetheless, the government has introduced corrective measures to aggressively collect tax arrears and to include the new taxpayers in the tax base this year. New legislative instruments to this effect will be submitted to Parliament by end-September 2016. In addition, indicative targets on tax revenue (a floor), pro-poor expenditure (floor) and on dobra money (ceiling) were also missed.

7. Progress continues towards implementation of the structural reform agenda. The government began to execute the domestic arrears clearance plan, which was developed as prior action for approval of the ECF arrangement. Overall, there was a net reduction in domestic arrears to utility companies by 1.2 percent of GDP, 0.4 percent of GDP higher than budgeted, eliminating arrears to the utility company (EMAE). EMAE in turn reduced its arrears to ENCO by 2.6 percent of GDP. However EMAE arrears to ENCO in 2015 increased on net basis (by 2.2 percent of GDP), albeit, by less than initially projected. Clearance of treasury arrears to ENCO will start this year. This has been included in the 2016 budget. The National Assembly passed the bank resolution law (end-September 2015 structural benchmark). This provides the necessary legal framework for the swift and orderly resolution of Banco Equador. To make available more representative statistics for policy evaluation and design, the statistical agency (INE) began to compile the new re-weighted and expanded monthly CPI series, and to publish revised national accounts series through 2013 (both structural benchmarks for end-December 2015).

Economic Outlook and Risks

8. The macroeconomic outlook is favorable in the near term but challenges remain. GDP is projected to grow by 5 percent in 2016, based on higher and timely execution of the public sector investment program, recovery in cocoa production, and improved external conditions (and a consequent improvement in tourism and FDI). Inflation is expected to remain stable at around 4 percent given current forecasts for international food and fuel prices, but still higher than the euro area inflation. The government will have to continue to rely on concessional financing and grants; with difficulty in identifying new budget financing prospects, fiscal tightening will have to continue to ensure that gains from macroeconomic stability are protected.

9. Downside risks weigh on these prospects. Facing high risk of debt distress, the economy remains vulnerable to external shocks, which complicate the conduct of macroeconomic policies and discourage investment with resulting adverse consequences for growth and poverty reduction. The forthcoming presidential election, slated for July 2016, with the risk of extra budgetary spending during the electoral period, and continued weakness in the banking sector pose significant short-term risks to the outlook. However, the government is fully committed to mitigating these near-term risks by maintaining the momentum of fiscal discipline in the run up to the presidential election, and enhancing supervision and oversight of banks. Additional downside risks could arise from weak demand in key advanced and emerging economies, which could dampen FDI and tourism inflows and reduce exports to those economies.

Macroeconomic Policies
A. Staying the Course on Debt Reduction while Improving the Quality of Spending
The Debt Reduction Program and 2016 Fiscal Framework

10. As debt vulnerabilities remain high, the government reaffirms its commitment to fiscal prudence. The 2016 fiscal program, presented in the government’s budget, targets a domestic primary deficit of 2 percent of GDP, which is consistent with the program and in line with the goal of ensuring that the path of debt returns to a downward trajectory toward moderate risk of debt distress over the medium term. The fiscal program for 2016 is fully funded despite a sharp increase in capital spending which would mostly be financed by privatization proceeds from government’s shares in the largest bank and the telecom company (5 percent of GDP), HIPC grants and disbursements of already contracted project loans (4.3 percent of GDP). There are also new concessional loans from Kuwait and Turkey (4.3 percent of GDP) to be used primarily for investments in rural roads and bridges, construction and rehabilitation of schools, improvement of the national health system, including maintenance and equipment of a hospital and health centers. This notwithstanding, the government is committed to frontload fiscal adjustment in 2016 to achieve the domestic primary deficit target that is consistent with the available non-debt creating financing.

The Medium-Term Fiscal Framework

11. The government sees the need, over the medium-term, to ensure that fiscal policy walks a fine line between maintaining fiscal consolidation and creating space for growth-enhancing infrastructure spending. To achieve the above, the government is committed to bring the domestic primary deficit further down to around 1–1½ percent of GDP by 2018 to ensure that debt remains on a downward trajectory, and at the same time create enough space for domestically-financed infrastructure spending to complement donor support. This would imply a significant step-up in domestic revenue mobilization through a combination of tax policies (introduction of VAT), customs and tax administration measures, including greater and more disciplined inspections and audits (to start immediately), integration of Príncipe’s tax delegation, introduction and use of more modern computer information systems with updated taxpayer database (to be implemented by end-June 2017).

Structural Reforms to Strengthen Public Finances

12. Fiscal policy would concentrate on efforts to enhance domestic revenue mobilization and improve the quality of spending. On the revenue side, we would take the necessary steps to increase tax revenue collection to the levels of São Tomé and Príncipe’s peer groups by 2018. Specific actions in 2016 will include:

  • Start the payment of arrears to ENCO, latest by the end-June 2016, as a good-faith measure to address ENCO’s nonpayment of import duties.

  • Introduce more comprehensive and disciplined inspections and audits to curb fraud and tax evasion.

  • Extend tax collection coverage to new taxpayers and aggressively collect tax arrears. To this effect, the government will implement a number of legislative changes, including lowering the minimum taxable income and raising the minimum presumptive levy charged to individuals and firms and transferring the execution powers for collection of tax arrears from the fiscal court judge to the tax administration (end-September 2016 structural benchmark).

  • Introduce structures and measures to support the introduction of VAT to widen the tax base and enhance domestic revenue collection. In particular, the government will submit to the National Assembly a new VAT law by (end-December 2016 structural benchmark).

13. The government is committed to the introduction of the automatic fuel price adjustment mechanism (end-June 2016 structural benchmark). The technical team for petroleum price adjustment is currently reviewing the recommendations from the IMF TA in November 2015, to design a roadmap for implementation of the automatic fuel price adjustment. The technical team has been mandated to work on the following by end March 2016:

  • Specify the pricing formula, including choosing a proper international reference price, raise the surcharge rate on fuel products to lock in an eventual positive price differential, deciding on the frequency of the price adjustment and the width of the price band. This will require the National Assembly authorizing the Minister to be able to make changes in surcharges.

  • Decide on the short-run revenue target for gasoline and diesel.

  • Decide on whether to maintain the pretax subsidy on kerosene, and if maintained, it has to be presented in the budget.

  • An agency/secretariat has to be set up to be responsible for the implementation of the price adjustment mechanism. This agency, among other things will be responsible for monitoring the responsibilities of parties involved in the pricing mechanism and the processes for its regular and transparent application. A request will be sent to the IMF/FAD to help decide on the terms of reference for the creation of this agency.

  • Select a third party to carry out a detailed study on fuel product and margin components.

  • Select targeted mitigating measures that will be introduced in tandem with the new pricing mechanism.

  • Design and launch a public information campaign.

14. On the spending side, strengthening public financial management and transparency will be the focal point for ensuring efficiency in public expenditure. Specific measures will include:

  • Roll out the electronic information management system (SAFEe) from the current pilot stage to cover all ministries, autonomous services, other sovereignty institutions, regional and local government to strengthen public financial oversight.

  • Enhanced SAFEe’s functionality to facilitate the preparation of a more comprehensive and transparent general government accounts by including features such as reconciliation of treasury bank accounts, tracking of revenue, management of fixed assets and registry of government contracts that give rise to new liabilities.

  • Reactivate and ensure a fully operational macro-fiscal unit and implement needed changes in the SAFEe Law (Lei 3/2007) and budget classification decree (decreto 4/2007) by end of March 2017 to support the move towards the introduction of a medium-term fiscal and expenditure frameworks.

15. The government has identified key growth-enhancing infrastructure spending needed to increase real GDP growth to the minimum required target of 6 percent to significantly impact poverty. In particular the government is considering the extension of the airport runway in São Tomé to attract larger aircrafts to boost tourism, and also investment in alternative sources of energy (beyond thermal) to bring down the energy cost compared to its peers. In 2015, the government signed MOUs (about US$800 million) with China Harbor Engineering Company to design a PPP with financing from the private sector to build a deepwater port in São Tomé. The government reiterates its commitment that there will be no fiscal cost and contingent liabilities to be borne by the government in this project. The government will not go ahead with this project if it is not fully financed by the private sector. The government is fully aware and is committed to relying on concessional financing and grants to support key infrastructure projects in order to ensure that debt returns to a downward trajectory over the medium term.

16. To this end, the government is committed to enhancing investment capacity to support growth-enhancing infrastructure spending. The government will introduce a centralized framework for appraising and prioritizing capital expenditure projects in addition to the introduction of a public investment management assessment (PIMA) framework (end-March 2017 structural benchmark).

17. The government is committed to implementing the debt framework law (Lei 1/2013 de 17 de Janeiro de 2013) and to strengthening debt management capacity. In that context, the government will: (i) prepare a national debt strategy, as required by the debt framework law, that will fix a ceiling on the overall debt of the non-financial public sector as well as annual debt policies that fix annual ceilings for each public entity; (ii) update the medium-term debt management strategy; (iii) seek technical assistance to prepare a manual of procedures for debt management and to carry out a new debt management performance assessment (DeMPA) by the end of 2016; and (iv) prepare a comprehensive public private partnership (PPP) law and framework by end-September 2016 to guide the growing expressions of interests for PPPs following the London donors’ conference in October 2015. In addition, the debt office will recover and update the existing debt database in the debt management system (CS-DRMS 2000+) and get the Crown Agent to validate it and provide training to new staff.

18. The government will continue to give priority to concessional financing. Consistent with the IMF’s new policy on debt limits, the government has prepared a borrowing plan (Text Table 1). Under this plan, the government is committed to a prudent borrowing target, for 2016–18, of about US$45.4 million in nominal terms for priority projects.11 This target implies an average annual PV of new external debt of 2.6 percent of GDP. All loans are expected to be on concessional terms, with the bulk to finance infrastructure projects and social spending. The government reserves the right to revise this plan during the next ECF review.

Text Table 1.

Summary Table of Projected External Borrowing Program

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Sources: São Tomé and Príncipe authorities’ data; and IMF staff estimates and projections.
B. Addressing the Liquidity Overhang to Enhance Monetary Management

19. Slowdown in credit growth since 2013 as a result of rising NPLs and lack of bankable projects has resulted in a build-up of excess liquidity in the banking system which is complicating liquidity management. At the moment, it is estimated that the excess liquidity in the banking system topped 5 percent of GDP at the end of 2015. The central bank of São Tomé and Príncipe (BCSTP) has introduced some tools to help with liquidity management. In 2015, the BCSTP introduced an interbank market but unfortunately, this has not taken off due to perceived stigma banks associate to participating in the interbank market. However, we expect it is only temporary given the recent developments in the domestic financial market. The BCSTP is working with the banks to address this challenge. In addition, the government introduced treasury bills which have been well-received by banks and participation has increased with the second issue of the 9-month treasury bills oversubscribed. The BCSTP is working towards developing a treasury bonds market, creating the conditions for longer-term liquidity management, as well as developing the secondary market.

20. Work on developing BCSTP’s monetary liquidity management framework continues. The existing liquidity forecasting tool allows for improved information gathering and more accurate analysis of the autonomous factors that drive liquidity. In 2015 the central bank implemented a new payment methodology for the commercial banks; such that payment orders issued by the Treasury to commercial banks in the period t are now paid in the period t+1 thus enabling the BCSTP to include them in its liquidity forecasting, considerably reducing forecasting errors.

C. Improving Competitiveness and Setting the Stage for Sustainable and Inclusive Growth

21. The government plans to promote private sector-led growth to set the stage for higher sustainable growth and distribute its benefits more widely. The broad outlines of the government’s 2030 Transformation Agenda identify the priorities for medium to long-term growth, social cohesion and external credibility, including diversifying the economy, broadening the production base, and modernizing the economic and social infrastructure. The government is seeking to create conditions conducive to support the traditional sectors, such as agriculture, fisheries, and tourism to boost job creation and reduce poverty.

22. The untapped tourism potential of São Tomé and Príncipe offers much promise. Medium-term structural reforms will focus on high-yielding tourism activities, broader diversification of source markets, and more open, competitive air transport connections. Specific policy initiatives in 2016 will include:

  • Introducing targeted reforms to address the poor performing indicators in the World Bank’s Doing Business survey.

  • Diversifying tourism source markets and supporting open, competitive air transport policy, including allowing direct links to the sub region, Europe, and Brazil.

  • Developing a national export diversification strategy (end-December 2016 structural benchmark).

D. Macro-Financial Linkages and Financial Sector Stability

23. São Tomé and Príncipe’s highly-concentrated banking system is not only challenged with excess liquidity but also low profitability. The largest bank accounts for about half of the system’s deposits and loans, and the remaining six small banks account for the other half. NPLs have almost since 2013 and reached 30 percent of total credit in 2015. Indicators of profitability suggest pervasive weakness, with only the largest bank profitable while other banks face negative (some highly) returns on assets. Return on equity has also been deteriorating and was reported as -27 percent in 2015. Corrective measures by BCSTP are beginning to yield results. As a result of supervision actions, three out of seven banks increased their capital in the last quarter of 2015, to meet the minimum requirement. BCSTP is at the early stage of building adequate crisis management and bank resolution frameworks to deal with risks in the financial system. The new banking resolution law provides the legal framework for a swift and orderly resolution of banks, including Banco Equador. A transition bank is being created with quality assets and liabilities of Banco Equador, and steps are being taken to identify potential buyers and conclude the process within 1 year from the establishment of the transition bank. If a potential buyer is not identified within one year of the establishment of the transition bank, the BCSTP will proceed with the final liquidation of Banco Equador.

24. The BCSTP is putting together a comprehensive strategy to address the large stock of NPLs (end-June 2016 structural benchmark). This would involve stocktaking, provisioning and recapitalizing specific banks if needed. In addition, the BCSTP will conduct detailed asset quality reviews for all banks to reduce the uncertainty surrounding bank assets, and where necessary demand recapitalization of affected banks, bearing in mind an additional objective of consolidation in the banking system.

25. To further safeguard financial stability, the BSCTP will strengthen on-site and off-site banking supervision by increasing the number of direct inspections. This will ensure stricter direct follow-up. A cycle of bank inspections, which began in 2015, was completed, and another cycle commenced in 2016.

26. The BCSTP welcomes São Tomé and Príncipe’s selection as a pilot country for mainstreaming macro-financial linkages as part of the Article IV consultation. BCSTP shares the recommendations of the exercise and is looking forward to implementing the key recommendations. In particular, BCSTP will take the necessary steps to:

  • Implement necessary measures to tackle the large stock and growing NPLs which are beginning to have negative spillback on growth.

  • Strengthen financial sector stability by: requiring that banks with below minimum capital ratios increase their capital base, and conducting regular asset quality reviews to identify problem banks that will require swift corrective measures.

  • Further develop the treasury bills market, while ensuring its consistency with the fiscal sector.

27. While measures of financial inclusion in São Tomé and Príncipe compare well with its regional peers, the impact on poverty reduction and private sector development is unclear. Low financial, documentation and barriers to entry contribute to relatively high access levels. Bank branches are relatively evenly dispersed and minimum requirements are comparatively low, and the number of adults with savings accounts is larger than the regional average. However, important challenges remain in terms of achieving universal inclusion. Specific actions in 2016 include:

  • Improving the coverage and effectiveness of the credit reference bureaus.

  • Streamlining procedures to ensure collateral enforcement, including reforms to the judiciary.

  • Capacity building of SMEs in basic accounting, financial management, and preparation of bankable projects.

Other Program Issues

28. Initiatives to strengthen safeguards and improve transparency have been introduced since 2015. A safeguards assessment mission was conducted by the IMF’s Finance Department in September 2015, which recommended independent oversight of the audit mechanisms, internal controls, and financial reporting. Given capacity constraints, it was also recognized that external audits done by a reputable audit firm continued to serve as a critical safeguard. In order to further strengthen internal controls, several measures were adopted including the restructuring of the internal audit committee and the appointment of a new Director with recognized competences. Furthermore BCSTP is in the process of acquiring new equipments that automatically sort and destroy mutilated bills and thus reduce human intervention in the process. With respect to financial reporting, the BCSTP has sought TA from Brazil and the IMF to migrate statements of accounts to the International Financial Reporting Standards (IFRS), and the work on the revising the organic central bank law is ongoing. In 2016, the BCSTP plans to:

  • Update the Internal Audit Charter and establish a database to monitor and prioritize audit recommendations by end-June 2016.

  • Establish an Audit Board policy (end-December 2016 structural benchmark), similar to an Audit Committee Charter, that specifies roles and responsibilities similar to that of a conventional Audit Committee, which would include oversight of the internal and external audit mechanism.

  • Conduct risk-based audits of high-risk areas, including foreign reserves, currency and vault operations, and banking operations by end-December 2016.

  • Submit the draft central bank law to the National Assembly by end-September 2016 (structural benchmark) to align its legal framework with leading practices for central banks.

Program Monitoring

29. The PCs, ITs, and structural benchmarks for 2016 are presented in Tables 3 and 4. The definitions of quantitative PCs and ITs are provided in the attached Technical Memorandum of Understanding (TMU), which also defines the scope and frequency of data to be reported for program monitoring purposes. The second review is expected to be completed by December 2016, the third review by June 2017, and the fourth review by December 2017.

Table 1.

São Tomé and Príncipe: Performance Criteria and Indicative Targets for 2015

(Billions of Dobra, cumulative from beginning of year, unless otherwise specified)

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Sources: São Tomé and Príncipe authorities’ data and IMF staff estimates and projections.

Performance at the December 2015 test date is assessed on the first review.

The floor will be adjusted upward or downward according to definitions in the TMU.

The ceiling will be adjusted downward or upward according to definitions in the TMU.

Excluding the National Oil Account (NOA) at the Central Bank.

The term “central government” is defined as in ¶ 5 of the TMU, which excludes the operations of state-owned enterprises.

This criterion will be assessed as a continuous performance criterion.

The term “external” is defined in accordance with the residency of the creditor as indicated in point 2 of the IMF Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements adopted by the Decision No. 6230-(79/140) of the Executive Board of the IMF (as amended effective December 1, 2009).

This performance criterion or memo item applies not only to debt as defined in point 9 of the IMF Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements adopted by the Decision No. 6230-(79/140) of the Executive Board of the IMF (as amended effective December 1, 2009) but also to commitments contracted or guaranteed for which value has not been received. For further details on the definition of debt and external arrears refer to the TMU, ¶ 6 and 13.

Only applies to debt with a grant element of less than 35 percent as defined in point 8 g (i) of the IMF Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements adopted by the Decision No 6230-(79/140) of the Executive Board of the IMF (as amended effective October 11, 2013). For further details on the definition of concessionality refer to the TMU, ¶ 12.

Only applies to debt with a grant element of at least 35 percent.

As defined in the TMU, valued at the program exchange rate.

Cumulative from December 2014.

Table 2.

São Tomé and Príncipe: Structural Benchmarks, 2015

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Sources: São Tomé and Príncipe authorities’ data; and IMF staff estimates and projections.
Table 3.

São Tomé and Príncipe: Proposed Performance Criteria and Indicative Targets for 2016–17

(Billions of Dobra, cumulative from beginning of year, unless otherwise specified)

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Sources: São Tomé and Príncipe authorities; and IMF staff estimates and projections.

Performance at the June and December 2016 test dates are assessed on the second and third reviews respectively and performace at the June 2017 is assessed on the fourth review.

The floor will be adjusted upward or downward according to definitions in the TMU.

The ceiling will be adjusted downward or upward according to definitions in the TMU.

Excluding the National Oil Account (NOA) at the Central Bank.

The term “central government” is defined as in ¶ 5 of the TMU, which excludes the operations of state-owned enterprises.

This criterion will be assessed as a continuous performance criterion.

The term “external” is defined on the basis of the residency of the creditor per paragraph 5 of the Guidelines on Public Debt Conditionality in Fund Arrangements, adopted by Decision No. 15688 of the Executive Board (Dec. 5, 2014).

This performance criterion or memorandum item applies not only to debt as defined in paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements, adopted by Decision No. 15688 of the Executive Board (Dec. 5, 2014), but also to commitments contracted or guaranteed for which value has not been received. For further details on the definition of debt and external arrears refer to the TMU, ¶¶ 6 and 13.

Only applies to debt with a grant element of less than 35 percent. For further details refer to the TMU, ¶ 12.

Only applies to debt with a grant element of at least 35 percent.

As defined in the TMU, valued at the program exchange rate.

Cumulative from December 2015 and December 2016 respectivelly.

Table 4.

São Tomé and Príncipe: Structural Benchmarks, 2016

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Sources: São Tomé and Príncipe authorities’ data; and IMF staff estimates and projections.

Newly-proposed structural benchmarks.

Newly-proposed structural benchmarks.

Newly-proposed structural benchmarks.

Newly-proposed structural benchmarks.

Attachment II. Technical Memorandum of Understanding June 2016

1. This Technical Memorandum of Understanding (TMU) contains definitions and adjuster mechanisms that clarify the measurement of quantitative performance criteria and indicative targets in Table 3, which are attached to the Memorandum of Economic and Financial Policies for 2016 and 2017. Unless otherwise specified, all quantitative performance criteria and indicative targets will be evaluated in terms of cumulative flows from the beginning of each calendar year.

2. The program exchange rate for the purposes of this TMU1 will be 20,299 dobra per U.S. dollar, 24,500 dobra per euro, and 29,236 dobra per SDR for both 2016 and 2017.

Provision of Data to the Fund

3. Data with respect to all variables subject to performance criteria and indicative targets will be provided to Fund staff on the frequency described below (paragraph 27) with a lag of no more than four weeks for data on net international reserves of the Central Bank of São Tomé and Príncipe (BCSTP) and six weeks for other data. The authorities will transmit promptly to Fund staff any data revisions. For variables that are relevant for assessing performance against program objectives but are not specifically defined in this memorandum, the authorities will consult with Fund staff as needed on the appropriate way of measuring and reporting. Performance criteria included in the program are defined below and refer to the floor on domestic primary balance; the ceiling on changes in net bank financing of the central government; the floor on net international reserves of the central bank; the ceiling on central government’s outstanding external payments arrears; the ceiling on the contracting or guaranteeing of new non-concessional external debt with original maturity of more than one year by the central government or the BCSTP; and the ceiling on the outstanding stock of external debt with original maturity of up to and including one year owed or guaranteed by the central government or the BCSTP.

Definitions

4. For the purposes of this TMU, external and domestic shall be defined on a residency basis.

5. Central government is defined for the purposes of this TMU to comprise the central government, which includes all governmental departments, offices, establishments, and other bodies that are agencies or instruments of the central authority of São Tomé and Príncipe. The central government does not include the operations of state-owned enterprises.

6. Debt is defined as in paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements, adopted by Decision No. 15688 of the Executive Board (Dec. 5, 2014). Debt will be understood to mean a current, i.e., not contingent, liability, created under a contractual agreement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract.

7. Government domestic revenue (excluding oil revenue) comprises all tax and nontax revenue of the government (in domestic and foreign currencies), excluding: (1) foreign grants, (2) the receipts from the local sale of in-kind grants (e.g., crude oil received from Nigeria, food aid, etc.), and (3) any gross inflows to the government on account of oil signature bonus receipts and accrued interest on the National Oil Account (NOA). Revenue will be measured on a cash basis as reported in the table of government financial operations prepared by the Directorate of Budget and the Directorate of Treasury in the Ministry of Finance and Public Administration.

8. Domestic primary expenditure comprises all government spending assessed on a commitment basis (base compromisso), excluding (1) capital expenditure financed with external concessional loans and grants and (2) scheduled interest payments. Reporting of government domestic expenditure will be based on the state budget execution prepared every month by the Directorate of Budget and the Directorate of Treasury in the Ministry of Finance and Public Administration.

Performance Criteria

9. Performance criterion on the floor on domestic primary balance. This performance criterion refers to the difference between government domestic revenue (excluding oil revenue) and domestic primary expenditure. For reference, this balance for end-December 2015 was -207 billion dobra, broken down as follows:

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10. Performance criterion on the ceiling on changes in net bank financing of the central government (NCG). This performance criterion measures the increase (decrease) in the stock of all outstanding claims on the central government held by the BCSTP and by other depository corporations (ODCs), less all deposits held by the central government with the BCSTP and with ODCs, as they are reported monthly by the BCSTP to the IMF staff. The balance of the National Oil Account (NOA) is not included in NCG. All foreign exchange-denominated accounts will be converted to dobra at the program exchange rate. For reference, at end-December 2015, outstanding net bank financing of the central government (excluding NOA) was -43.2 billion dobra, broken down as follows:

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11. Performance criterion on the floor on net international reserves (NIR) of the BCSTP. The NIR of the BCSTP are defined for program-monitoring purposes as short-term (i.e., original maturities of one year or less), tradable foreign assets of the BCSTP minus short-term external liabilities, including liabilities to the IMF. All short-term foreign assets that are not fully convertible external assets nor readily available to and controlled by the BCSTP (i.e., they are pledged or otherwise encumbered external assets, including but not limited to the HIPC umbrella SDR account and assets used as collateral or guarantees for third-party liabilities) will be excluded from the definition of NIR. Securities whose market value on the last day of the year differs by over 20 percent from their original nominal issue price will be assessed at their market value as reported by the BCSTP’s Markets Department. The balance of (1) NOA at the BCSTP, (2) banks’ deposits related to capital or licensing requirements, and (3) banks’ reserves denominated in foreign currency are excluded from the program definition of NIR. All values are to be converted to U.S. dollars at the actual mid-point market exchange rates prevailing at the test date. For reference, at end-December 2015 NIR was 1,267.4 billion dobra, calculated as follows:

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12. Performance criterion on the ceiling on the contracting or guaranteeing of new nonconcessional external debt by the central government or the BCSTP. This is a continuous performance criterion that refers to the contracting or guaranteeing of new external debt of any maturity (including overdraft positions but excluding normal import and suppliers credits) by the government and/or the BCSTP. Debt is considered nonconcessional if it includes a grant element less than 35 percent. The grant element is the difference between the nominal value of the loan and its net present value, expressed as a percentage of the nominal value. The net present value of the debt at the date on which it is contracted is calculated by discounting the debt service payments at the time of the contracting of the debt. The discount rate used for this purpose is 5 percent. With respect to the precautionary line of credit from Portugal to support the pegging of the dobra to the euro, unpaid balances outstanding during the first three quarters of a given calendar year will be excluded from this ceiling. However, outstanding balances at the end of a given calendar year will be included in the assessment of compliance with this performance criterion. This performance criterion does not apply to IMF facilities. Debt being rescheduled or restructured is excluded from this ceiling. Medium- and long-term debt will be reported by the Debt Management Department of the Ministry of Finance and Public Administration (as appropriate) by the BCSTP, measured in U.S. dollars at the prevailing exchange rates. The government should consult with IMF staff before contracting or guaranteeing new medium- or long-term debt obligations.

13. Performance criterion on the ceiling on central government’s outstanding external payment arrears. This is a continuous performance criterion. Central government external payment arrears consist of external debt service obligations (principal and interest) that have not been paid at the time they are due, as specified in the contractual agreement, subject to any applicable grace period. This performance criterion does not apply to arrears resulting from the nonpayment of debt service for which a clearance framework has been agreed or for which the government is actively seeking a rescheduling agreement.

Indicative Targets

14. Ceiling on change of central government’s new domestic arrears is set on the difference between expenditure on a commitment basis and cash payments (amounts past due after 40 days and unpaid).

15. Ceiling on dobra base money is set on the sum of currency issued—which consists of currency outside depository corporations and cash in vaults—and banks reserves denominated in dobra. Bank reserves refer to reserves of commercial banks (in dobra) held with the central bank and include reserves in excess of the reserve requirements. For reference, at end-December 2015 dobra base money was 1,295.7 billion dobra, calculated as follows:

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16. Within domestic primary expenditure, the floor on pro-poor expenditure refers to the floor on government outlays recorded in the budget that have a direct effect on reducing poverty, as agreed with the IMF and World Bank staffs. These expenditures, which include both current and capital outlays, are defined as follows:

  1. Pro-poor current spending: These cover the following functional classifications and expenditure categories (by budget code) as described in the matrix below:

  2. Pro-poor treasury-funded capital spending: This covers projects that are deemed to have a direct impact on alleviating poverty in the following sectors: education, health, social safety nets, agriculture and fisheries, rural development, youth and sports, provision of potable water, and electrification.

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Source: Diário da Republica de São Tome e Príncipe No. 21 - May 7, 2008, pages 12-13

Expenditures on fuels and lubricants (combustíveis e lubrificantes) that are affected for administrative purposes are excluded. Likewise, food (alimentação)and clothing and shoes (roupas e calçados) supplied to administrative staff are excluded.

17. Floor on tax revenue is set on tax revenue that includes direct and indirect taxes as well as recovery of tax arrears and additional collection efforts.

Memorandum Items

18. New concessional external debt contracted or guaranteed with original maturity of more than one year by the central government or the BCSTP measures such debt with a grant element of at least 35 percent.

19. Net external debt service payments by the central government are defined as debt service due less the accumulation of any new external payment arrears, as defined under the performance criterion on the ceiling on central government’s outstanding external payment arrears.

20. Official external program support is defined as grants and loans, including in-kind aid when the products are sold by the government and the receipts are earmarked for a budgeted spending item, and other exceptional financing provided by foreign official entities and incorporated into the budget.

21. Treasury-funded capital expenditure is classified as part of domestic primary expenditure and covers public investment projects that are not directly financed by project grants and concessional loans or that have to be partially co-financed with government resources. It includes spending on new construction, rehabilitation, and maintenance. Expenditure on wages and salaries and the purchase of goods and services related to the projects will not be classified as capital expenditure.

Use of Adjusters

22. The performance criterion on the domestic primary balance will have one adjuster. The limit on the domestic primary balance will be adjusted upward if the government finds budget support and privatization receipts in 2016 and 2017 in addition to that described in the MEFP; this adjuster will be capped at 70.3 billion dobra (about 1 percent of 2015 GDP) for 2016 and 2017.2

23. The performance criteria on net bank financing of the central government and net international reserves of the central bank will be adjusted in line with deviations from amounts projected in the program for budget transfers from the NOA, official external program support, net external debt service payments, and domestic arrears will trigger adjustments on the above mentioned performance criteria. These deviations will be calculated cumulatively from end-December 2015 or end-December 2016, as appropriate (MEFP attachment I, Table 3). The following is an explanation of these adjustments:

  • Adjusters on ceilings on changes in net bank financing of the central government (NCG): Quarterly differences between actual and projected receipts of budget transfers from the NOA, official external program support, net external debt service payments, and domestic arrears will be converted to dobra at the program exchange rate and aggregated from end-December 2015 or end-December 2016, as appropriate, to the test date. The ceilings will be adjusted downward (upward) by cumulative deviations downward (upward) of actual from projected net external debt service payments, and by deviations upward (downward) in budget transfers from the NOA, official external program support, and domestic arrears. The combined application of all adjusters at any test date is capped at the equivalent to US$3million at the program exchange rate.

  • Adjusters for the floor on net international reserves (NIR) of the BCSTP: Quarterly differences between actual and projected receipts of budget transfers from the NOA, official external program support, net external debt service payments, and domestic arrears in dobra, will be converted to U.S. dollars at the program exchange rate and aggregated from end-December 2015 or end-December 2016, as appropriate, to the test date. The floor will be adjusted upward (downward) by the cumulative deviation downward (upward) of actual from projected net external debt service payments of the central government, and by deviations upward (downward) for budget transfers from the NOA, official external program support, and domestic arrears. The combined application of all adjusters at any test date is capped in such a way that the adjusted floor does not fall short of US$50 million in 2016 and US$52 million in 2017.

Data Reporting

24. The following information will be provided to the IMF staff for the purpose of monitoring the program.

  • 1) Fiscal Data: The Directorate of Treasury and Directorate of Budget at the Ministry of Finance and Public Administration will provide the following information to IMF staff, within six weeks after the end of each month or quarter, except for the public investment program (PIP), which will be provided three months after each quarter:

    • Monthly data on central government operations for revenues, expenditure, and financing, including detailed description of net earmarked resources (recursos consignados), on commitment (compromisso) and cash payments (caixa);

    • Monthly data on net credit to the government by the BCSTP, recorded account by account in a format fully compatible with the monetary accounts of the BCSTP;

    • Monthly detailed data on tax and nontax revenues;

    • Monthly detailed data on domestically financed capital expenditure on commitment (compromisso) and cash payments (caixa);

    • Monthly data on domestic arrears by type and by creditor;

    • Quarterly data on implicit arrears to ENCO on account of fuel retail prices eventually not covering import costs, distribution margins and applicable taxes.

    • Quarterly data on EMAE’s arrears to ENCO.

    • Monthly data on official external program support (non-project);

    • Quarterly data on the execution of the public investment program (PIP) by project and sources of financing;

    • Quarterly data on the execution of Treasury-funded capital expenditure by project type, amount, timetable of execution, and progress of execution;

    • Quarterly data on project grant and loan disbursement (HIPC and non-HIPC);

    • Quarterly data on bilateral HIPC debt relief;

    • Latest outstanding petroleum price structures and submission of new pricing structures (within a week of becoming available).

  • 2) Monetary Data: The BCSTP will provide the IMF staff, within three weeks from the end of each month, the monetary accounts of the BCSTP. Other monetary data will be provided within six weeks after the end of each month for monthly data, within two months after the end of each quarter for quarterly data, and within two months after the end of the year for annual data. The BCSTP will provide the following information to IMF staff:

    • Daily data on exchange rates, to be posted on the central bank’s web site;

    • Daily data on interest rates, to be posted on the central bank’s web site;

    • Daily liquidity management table, including dobra base money and currency in circulation, to be posted on the central bank’s web site;

    • Daily net international reserve position, to be posted on the central bank’s web site;

    • Monthly balance sheet data of BCSTP (in IMF report form 1SR, with requested memorandum items);

    • Monthly consolidated balance sheet data of other depository corporations (in IMF report form 2SR);

    • Monthly consolidated depository corporations survey (in IMF survey 3SG);

    • Monthly central bank foreign exchange balance (Orçamento cambial);

    • Quarterly table on bank prudential ratios and financial soundness indicators;

    • Quarterly data on the BCSTP’s financial position (profit and loss statement, deficit, budget execution, etc.).

  • 3) External Debt Data: The Directorate of Treasury at the Ministry of Finance and Public Administration will provide the IMF staff, within two months after the end of each month the following information:

    • Monthly data on amortization and interest on external debt by creditor; paid, scheduled, and subject to debt relief or rescheduled;

    • Quarterly data on disbursements for foreign-financed projects and program support loans.

    • Annual data on future borrowing plans.

  • 4) National Accounts and Trade Statistics: The following data will be provided to the IMF staff:

    • Monthly consumer price index data, provided by the National Institute of Statistics within one month after the end of each month;

    • Monthly data on imports (value of imports, import taxes collected, and arrears) and commodity export values, provided by the Customs Directorate at the Ministry of Finance and Public Administration, within two months after the end of each month;

    • Monthly data on petroleum shipments and consumption (volumes and c.i.f. prices, by product), provided by the Customs Directorate.
1

There are still oil exploration activities outside the Joint Development Zone but no confirmation of commercial quantities yet.

2

The new government was elected in October 2014 and did not assume office until January 2015.

3

The change in government and late assumption of office by the new government delayed the approval of the 2015 budget. The 2016 budget was however approved on time.

4

World Bank budget support grant for 2015 did not materialize due to delays by the authorities to provide documentation on MOUs signed with China Harbor Engineering on the deepwater port project to assess whether the terms in the MOU are consistent with the ECF-supported program.

5

In the past, fiscal consolidation efforts have been undermined during elections.

6

The law was subsequently passed by the National Assembly and gazetted.

7

Staff’s view, after reviewing the existing MOUs, is that there were no liabilities that are not contingent on further negotiations/agreement by the government, and that the MOUs as they stood, did not breach the PC on nonconcessional borrowing.

8

The domestic arrears is mainly due to the oil importing company and the electricity generating company, and does not significantly affect suppliers nor contribute to the large and rising NPLs.

1

São Tomé and Príncipe’s balance of payments (BOP) statistics have some shortcomings, reflected in the very large Net Errors and Omissions (NEO), especially in recent years (2013–14). The signs of the recent NEOs suggest that on balance, credits (and net incurrence of liabilities) have been underestimated, or debits (and net acquisitions of financial assets) have been overestimated, or a combination of both. This masks the underlying magnitudes of the BOP aggregates.

1

This excludes financing for key infrastructure projects like the extension of the airport runway and selected energy related projects which will be considered separately.

1

Data refer to the mid-point exchange rates published on the BCSTP’s webpage for the last day of 2014.

2

Grants and related expenditures to cover the cost of the elections will be excluded from the measurements of the domestic primary deficit.

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Cover IMF Staff Country Reports
Democratic Republic of São Tomé and Príncipe: 2016 Article IV Consultation, First Review under the Extended Credit Facility, and Request for Waiver for Nonobservance of Performance Criterion and Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Exective Director for the Democratic Republic of São Tomé and Príncipe
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2016: Issue 174
Publisher:
International Monetary Fund
ISBN:
9781498307444
ISSN:
1934-7685
Pages:
106
DOI:
https://doi.org/10.5089/9781498307444.002
  • Figure 1.
    View in gallery
    Figure 1.

    São Tomé and Príncipe: Evolving Fragility from Two Lenses

  • Figure 2.
    View in gallery
    Figure 2.

    São Tomé and Príncipe: Recent Macroeconomic Developments

  • Text Chart 1.
    View in gallery
    Text Chart 1.

    Tax Revenue

    (Percent of GDP)

  • Figure 3.
    View in gallery
    Figure 3.

    Macro-Financial Linkages in São Tomé and Príncipe

  • Figure 4.
    View in gallery
    Figure 4.

    São Tomé and Príncipe: Financial Sector Developments

  • Figure 5.
    View in gallery
    Figure 5.

    São Tomé and Príncipe: Asset Quality

  • Annex Figure 1.
    View in gallery
    Annex Figure 1.

    São Tomé and Príncipe: External Sector Development

  • Annex Figure 2.
    View in gallery
    Annex Figure 2.

    São Tomé and Príncipe: Exchange Rate Development

  • Annex Figure 3.
    View in gallery
    Annex Figure 3.

    São Tomé and Príncipe: Exchange Rate Assessment Models Fit

  • Annex Figure 4.
    View in gallery
    Annex Figure 4.

    São Tomé and Príncipe: Reserve Adequacy, 2015

    (Months of imports)

  • Annex Figure 5.
    View in gallery
    Annex Figure 5.

    São Tomé and Príncipe: Indicators of Exports Competitiveness

    (Percent share of world’s total)

  • Annex Figure 6.
    View in gallery
    Annex Figure 6.

    São Tomé and Príncipe: Doing Business Indicators

Figure 1.

São Tomé and Príncipe: Evolving Fragility from Two Lenses
Figure 2.

São Tomé and Príncipe: Recent Macroeconomic Developments
Text Chart 1.

Tax Revenue

(Percent of GDP)
Figure 3.

Macro-Financial Linkages in São Tomé and Príncipe
Figure 4.

São Tomé and Príncipe: Financial Sector Developments
Figure 5.

São Tomé and Príncipe: Asset Quality
Annex Figure 1.

São Tomé and Príncipe: External Sector Development
Annex Figure 2.

São Tomé and Príncipe: Exchange Rate Development
Annex Figure 3.

São Tomé and Príncipe: Exchange Rate Assessment Models Fit
Annex Figure 4.

São Tomé and Príncipe: Reserve Adequacy, 2015

(Months of imports)
Annex Figure 5.

São Tomé and Príncipe: Indicators of Exports Competitiveness

(Percent share of world’s total)
Annex Figure 6.

São Tomé and Príncipe: Doing Business Indicators