São Tomé and Príncipe: IMF Executive Board Approves New U.S.$18.2 Million Extended Credit Facility Arrangement for the Democratic Republic of São Tomé and Príncipe

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On October 2, 2019 the Executive Board of the International Monetary Fund (IMF) approved a new 40-month arrangement under the Extended Credit Facility (ECF) for São Tomé and Príncipe in the amount of SDR 13.32 million (about US$18.2 million) in support of the country's economic and structural reforms.[1] It will enable an immediate disbursement of about SDR 1.9 million (about US$2.6 million). The remaining amount will be phased over the duration of the arrangement, subject to semi-annual reviews.

The ECF arrangement aims to support the authorities' economic reforms, macroeconomic stability, and private-sector led inclusive growth. It also seeks to alleviate balance of payments pressures and restore fiscal and external sustainability over the medium term.

Following the Executive Board's decision, Mr. Mitsuhiro Furusawa, Deputy Managing Director and Acting Chair, issued the following statement:

"The ECF arrangement supports the authorities' economic reforms to restore macroeconomic stability, reduce debt vulnerability, and alleviate balance of payment pressures to provide the foundation for strong economic growth. It could also help catalyze additional development support.

"The government plans to undertake sustained fiscal consolidation and reforms to reduce debt vulnerability. To this end, the authorities aim to broaden the tax base and ensure equitable tax burden-sharing, including by introducing a value-added tax and strengthening tax administration. Public expenditure will be restrained, made more efficient, and prioritized to protect essential social services. They are also committed to borrowing only at concessional terms and at a measured pace and to enhance debt management capacity.

"Monetary policy will be tightened to encourage savings, ease demand for foreign exchange, and contain inflation. A new payment system allowing credit card transactions is being developed, which will stimulate tourism and raise foreign exchange receipts. Financial sector supervision will be strengthened.

"Comprehensive structural reforms will also be pivotal in promoting private-sector led inclusive growth and safeguarding macroeconomic stability. Key reforms include implementing the Tourism Development Strategy, publishing a codified procedure for the approval of private investments, rehabilitating the energy sector including EMAE, and promoting women's economic empowerment and financial inclusion. The IMF program is complemented by a World Bank social protection program of $10 million to protect the most vulnerable households."

Recent Economic Developments

São Tomé and Príncipe is a fragile, small island-state with limited resources and capacity. The economy has a very narrow production base and depends heavily on imports and foreign aid. Exports of goods amount to only four percent of GDP. While offshore oil exploration continues, no commercial production is expected in the near term. Tourism, agriculture, and fisheries have potential for growth but require better infrastructure and private-led investment. While tourism grew significantly in recent years, local value-added of the sector is very low due to high import content.

São Tomé and Príncipe faces pressing constraints. In 2018, lower external inflows, election-related disruptions, higher fiscal spending, and severe power outages contributed to a fall in real growth to 2.7 percent from 3.9 percent in 2017 and a sharp decline in gross international reserves by $16.3 million (1.5 months of imports). Higher international oil prices and shortages of local produce led to an increase in inflation to 9.0 percent, up from 7.7 percent at end-2017. Preliminary data suggest economic activity remained sluggish in the first half of 2019, and fuel and power shortages weighed on the economy.

The fiscal position deteriorated significantly in 2018. Unbudgeted increases in personnel and capital spending and failure to cut utility consumption as planned contributed to overspending of almost 3.5 percent of GDP. Consequently, the domestic primary deficit reached 4.1 percent of GDP, 2.8 percent of GDP above the target. Furthermore, some government entities were allowed to spend off-budget, effectively loosening the fiscal stance further and raising the public debt by close to 1 percentage point of GDP. Meanwhile, EMAE accumulated arrears to its fuel supplier of close to $16 million (more than 3.5 percent of GDP), and total public debt rose to over 95 percent of GDP at end-2018.

A new coalition government took office in December 2018 following parliamentary elections. The government's reform program seeks to restore macroeconomic stability and unlock growth potential.

Program Summary

The 40-month program seeks to restore macroeconomic stability, bring the debt down to a sustainable path, and unlock growth potential. Fiscal consolidation supported by debt restructuring and monetary tightening will address pressure on foreign reserves and restore fiscal and external sustainability over the medium term. Structural reforms aim to mobilize revenue, enhance control over public spending, reduce contingent liabilities from SOEs, improve financial stability, and promote inclusive growth to reduce poverty, including through empowering women economically. A floor on pro-poor spending, along with a World Bank social protection program, will protect the most vulnerable. The Fund-supported program will also play a catalytic role and provide positive signals to stakeholders.

[1] The ECF program is a lending arrangement that provides sustained program engagement over the medium to long term in case of protracted balance of payments problems.

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