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IMF Executive Board Concludes 2018 Article IV Consultation with the Democratic Republic of São Tomé and Príncipe

July 27, 2018

On July 23, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Democratic Republic of São Tomé and Príncipe.

GDP growth in 2017 is estimated at about 4 percent, similar to the previous two years. Meanwhile, inflation spiked to 7.7 percent at end 2017, caused by unfavorable weather conditions and an increase in import taxes on selective goods. Fiscal consolidation continued albeit at a slower pace than expected, partly because the authorities increased health and education spending to address urgent needs, including a virus outbreak. Tax revenues continued to fall below expectations, and the authorities partially offset the shortfall by restraining spending. The current account deficit widened, mainly driven by imports financed by foreign investment related to deep-sea oil exploration. While banks were adequately capitalized and provisioned, elevated non-performing loans have constrained bank lending growth, which remained sluggish at 2.5 percent.

The macroeconomic outlook is positive. Growth is expected to remain at 4 percent in 2018 and to accelerate to 5 percent in the medium term as new externally-financed projects—including an airport expansion, road construction and restoration, and the rehabilitation of the electricity system—get underway. Inflation is expected to moderate to 6 percent in 2018. This outlook is contingent on continued fiscal discipline and structural reforms to boost tax revenue, reduce fiscal risks from state-owned utility company EMAE, and reduce the debt burden over time. Risks include fiscal slippages ahead of this year’s legislative election, delayed bank resolution and continued high NPLs, which could further stall credit expansion and, hence, growth. In addition, delays in donor disbursements could undermine growth prospects. On the upside, faster implementation of large externally-financed projects could spur growth.

The authorities remain committed to the economic reform program supported by the ECF-supported arrangement to restore fiscal sustainability and foster private sector-led and inclusive growth. In particular, they are committed to improve revenue collection, especially from large taxpayers, and introduce a VAT in 2019. They will also improve the monitoring of disbursement of foreign financed projects. To balance the need for investment while reducing the debt burden, the authorities will borrow only at concessional terms and at a measured pace. They will also continue to implement the strategy to reduce the stock of nonperforming loans and safeguard financial stability.

Executive Board Assessment [2]

Executive Directors welcomed progress on fiscal consolidation and structural reforms, which has contributed to strengthening macroeconomic stability and the favorable medium-term outlook. Directors noted, however, that program performance has been uneven and downside risks remain. They underscored that continued commitment to structural reforms and prudent fiscal policy is key to maintaining macroeconomic stability and boosting growth to reduce poverty and generate employment for a young population.

Directors welcomed the authorities’ resolve to continue fiscal consolidation to improve the fiscal position and reduce public debt. They underscored the need for steadfast implementation of revenue-enhancing measures to address tax revenue underperformance, including the collection of tax arrears and the introduction of the VAT next year. Directors welcomed the authorities’ commitment to eschew non-concessional loans and limit external concessional borrowing. They encouraged the authorities to strengthen debt management capacity through implementing recommendations under the Debt Management Performance Assessment and finalizing the medium-term debt management strategy.

Directors emphasized the importance of reforming state-owned enterprises, particularly the electricity and water supply company (EMAE). They noted that improving the commercial viability of EMAE will not only reduce fiscal risks, but also strengthen the external position by reducing oil imports, and support growth by improving electricity provision. It will also help boost reserve accumulation, and support the removal of exchange restrictions over the medium term.

Directors welcomed the progress made in strengthening banking supervision. They encouraged the authorities to continue to implement the strategy to reduce the stock of nonperforming loans, including through concerted efforts to reform the legal system to assist loan recovery. The remaining recommendations of the safeguards assessment should be implemented without delay.

Directors highlighted the importance of structural reforms to promote inclusive growth. In this context, they welcomed the recent adoption of the tourism development strategy. Directors encouraged the authorities to focus on high-return infrastructure projects to support tourism and other key sectors of the economy.

It is expected that the next Article IV consultation with the Democratic Republic of São Tomé and Príncipe will be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.

Table 1. São Tomé and Príncipe: Selected Economic Indicators, 2015–20

(Annual change in percent, unless otherwise indicated)

2015

2016

2017

2018

2019

2020

EBS/17/119

EBS/17/119

EBS/17/119

Actual

Actual

4th Rev

Prel.

4th Rev

Proj.

4th Rev

Proj.

Proj.

National income and prices

GDP at constant prices

3.8

4.2

4.0

3.9

5.0

4.0

5.5

4.5

5.0

GDP deflator

4.2

8.1

2.7

4.7

3.5

3.9

4.0

6.2

5.0

Consumer prices

End of period

4.0

5.1

6.0

7.7

5.0

6.0

4.5

5.0

4.0

Period average

5.3

5.4

5.6

5.7

5.5

6.8

4.7

5.5

4.5

External trade

Exports of goods and nonfactor services

1.7

7.4

2.7

9.6

7.6

5.4

7.3

10.1

8.5

Imports of goods and nonfactor services

-18.2

-0.2

8.4

2.9

5.6

13.1

6.5

13.8

5.4

Exchange rate (new dobras per US$; end of period) 1

22

23

...

21

...

...

...

...

...

Real effective exchange rate (period average, depreciation = -)

1.8

5.6

...

-0.6

...

...

...

...

...

Money and credit

Base money

37.5

5.0

1.5

-9.6

5.1

9.3

3.5

5.3

5.0

Broad money (M3)

13.1

-4.8

-0.2

-0.4

8.7

12.6

9.7

10.9

10.3

Credit to the economy

5.4

6.6

3.4

2.5

5.8

5.8

9.2

10.2

9.7

Velocity (GDP to broad money; end of period)

2.5

2.9

3.1

3.2

3.1

3.1

3.1

3.1

3.1

Central bank reference interest rate (percent)

10.0

10.0

...

9.0

...

...

...

...

...

Average bank lending rate (percent)

23.3

19.6

...

19.6

...

...

...

...

...

Average bank deposit rate (percent)

6.9

4.1

...

4.2

...

...

...

...

...

Government finance (in percent of GDP)

Total revenue, grants, and oil signature bonuses

28.2

27.6

24.6

23.8

28.3

27.5

28.2

25.7

26.0

Of which : tax revenue

14.4

12.1

13.0

12.1

13.4

11.8

13.7

12.5

12.9

Nontax revenue

1.5

2.3

1.5

1.6

1.6

2.9

1.6

1.0

1.0

Grants

11.5

13.2

10.1

10.1

13.3

12.8

12.9

12.2

12.2

Total expenditure and net lending

34.5

31.8

29.5

26.4

30.8

27.3

31.1

29.2

28.9

Personnel costs

8.9

8.7

8.5

8.0

8.3

7.7

8.2

7.8

7.9

Interest due

0.8

0.4

0.7

0.5

0.5

0.6

0.7

0.6

0.4

Nonwage noninterest current expenditure

8.6

7.8

7.0

6.6

6.8

5.9

6.8

5.7

5.7

Treasury funded capital expenditures

0.7

0.6

0.3

0.7

0.3

0.1

0.6

0.3

0.4

Donor funded capital expenditures

14.9

13.9

12.8

10.5

14.6

12.8

14.3

14.6

14.1

HIPC Initiative-related capital expenditure

0.6

0.2

0.2

0.2

0.2

0.2

0.7

0.2

0.4

Domestic primary balance 2

-3.0

-4.0

-1.8

-2.3

-1.0

-1.3

-1.0

-1.2

-1.2

Overall balance (commitment basis)

-6.3

-4.2

-4.9

-2.6

-2.4

0.3

-2.7

-3.5

-2.9

External sector

Current account balance (percent of GDP)

Including official transfers

-13.0

-6.5

-12.2

-8.2

-7.2

-6.8

-7.0

-9.8

-8.6

Excluding official transfers

-25.7

-20.2

-22.3

-18.8

-20.5

-20.0

-19.9

-22.0

-20.8

PV of external debt (percent of GDP)

39.7

31.5

30.5

28.4

31.2

26.9

30.7

26.9

26.8

External debt service (percent of exports) 3

3.8

3.3

4.7

3.1

4.7

4.6

5.5

5.3

5.0

Export of goods and non-factor services (US$ millions)

89.9

96.5

99.2

105.8

106.7

111.5

114.5

122.8

133.2

Gross international reserves 4

Millions of U.S. dollars

61.9

55.9

58.7

51.3

64.4

58.2

67.1

62.2

64.8

Months of imports of goods and nonfactor services 5

5.3

5.1

4.0

4.2

4.2

4.4

4.1

4.5

4.6

National Oil Account (US$ millions)

10.3

11.5

11.7

11.3

10.6

11.4

9.0

11.4

9.1

Memorandum Item

Gross Domestic Product

Millions of new dobra

6,970

7,846

8,300

8,535

9,019

9,222

9,891

10,231

11,285

Millions of U.S. dollars

315.5

354.2

375.0

392.5

417.7

466.1

459.8

523.1

583.8

Per capita (in U.S. dollars)

1,556

1,706

1,764

1,847

1,921

2,143

2,068

2,353

2,570

Unemployment rate (percent)

13.0

12.6

12.2

11.7

11.3

10.8

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

1 Central Bank (BCSTP) mid-point rate.

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

3 Percent of exports of goods and nonfactor services.

4 Gross international reserves exclude the National Oil Account and commercial banks' foreign currency deposits at the BCSTP in order to meet reserve requirements, for new licensing, and for meeting capital requirements.

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


[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm

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