A team from the International Monetary Fund (IMF), led by Ricardo Velloso, visited São Tomé and Príncipe during March 7-20, 2014, to conduct discussions for the third review of the Government's economic and financial program supported by the IMF under a three-year Extended Credit Facility (ECF) arrangement in the amount of SDR 2.59 million (US$ 4.00 million).1 This arrangement was approved by the IMF Executive Board on July 20, 2012 (see Press Release No. 12/272).
The IMF team held discussions with Finance Minister Hélio Almeida, Central Bank Governor Maria do Carmo Silveira, and their respective senior staffs. The team also met with representatives of labor unions, the private sector, and São Tomé and Príncipe's development partners.
At the conclusion of the mission, Mr. Velloso issued the following statement:
"In 2013, the economy grew at a steady pace, inflation fell to single digits, and international reserves remained at comfortable levels. Growth is estimated at 4 percent in 2013 (unchanged from 2012) reflecting limited project financing and foreign direct investment as many of São Tomé and Príncipe's key partners remained financially constrained by the global economic slowdown. Inflation has continued to recede following the adoption of the peg to the euro in January 2010 and maintenance of fiscal discipline since then; it reached 7.1 percent at end-2013 (its lowest end-year rate in two decades). Central Bank's international reserves stood at end-2013 comfortably above 3 months of imports.
"The near-term outlook continues to be affected by challenging global conditions. Economic growth is projected to pick up moderately to 5 percent in 2014, though it will remain constrained by weak external financing prospects for investment projects. Inflation is projected to reach 6 percent by end-2014, as inflation expectations continue to be anchored by a prudent fiscal policy stance and the peg of the dobra to the euro. The Central Bank's international reserves are expected to remain comfortably above 3½ months of imports (the program's new floor).
"Overall program implementation through end-December 2013 was satisfactory. All performance criteria under the ECF-supported program were observed, but structural reforms progressed at an uneven pace.
"The IMF mission discussed with the authorities options to re-energize the structural reform program, bolster the financial system, and reduce debt vulnerabilities. These discussions progressed well and will continue in Washington, D.C. during the 2014 Spring Meetings of the International Monetary Fund and World Bank.
"The IMF mission advised the authorities to continue managing the budget prudently. In the run up to this year's local and parliamentary elections, it will be important to avoid spending overruns typical of previous election cycles.
"The IMF mission stressed that reliance on grant and highly concessional financing remained critical to mitigate São Tomé and Príncipe's high risk of debt distress. It will be important for the authorities to pay close attention to the implications of new large borrowing for debt sustainability.
"The IMF mission noted that improving the banking system's financial soundness remained elusive in 2013. Soundness indicators revealed overall losses, high nonperforming loans, and declining asset ratios. While the banking system as a whole is well capitalized and provisions have increased, the IMF mission advised the Central Bank to monitor the situation closely, including by carrying out planned on-site inspections, and to require shareholders to quickly recapitalize banks as needed."
1 The Extended Credit Facility (ECF) is the IMF's main tool for medium-term financial support to low-income countries. It provides for a higher level of access to financing, more concessional terms, enhanced flexibility in program design, and more focused, streamlined conditionality. Financing under ECF currently carries a zero interest rate, with a grace period of 5½ years, and a final maturity of 10 years.