IMF Staff Completes Visit to São Tomé and Príncipe

Economic prospects are favorable, with growth expected to be around 5 percent in 2017, boosted by anticipated robust activity in the construction sector and tourism industry, and supported by higher inflows of foreign direct investment

  • Economic prospects are favorable, with growth expected to be around 5 percent in 2017
  • Inflation rose to 5.1 percent at end-2016, up from 4 percent in 2015
  • Domestic primary deficit in 2016 was higher than expected

A staff team from the International Monetary Fund (IMF) led by Xiangming Li, visited São Tomé from March 22 to April 5, 2017, to discuss progress of the country’s economic program supported by the IMF’s three-year Extended Credit Facility (ECF) arrangement.[1]

At the end of the visit, Ms. Li issued the following statement:

“São Tomé and Príncipe’s economy is estimated to have grown by 4.1 percent in 2016, driven by strong performance in the manufacturing (food processing) sector and tourism industry. Faster growth was constrained, in part, by delays in external disbursements, which impacted negatively on the execution of externally-financed investment projects. Inflation rose to 5.1 percent at end-2016, up from 4 percent in the previous year, primarily due to one-off factors, such as the change in the CPI basket.

São Tomé and Príncipe’s economy is estimated to have grown by 4.1 percent in 2016, driven by strong performance in the manufacturing (food processing) sector and tourism industry

“Economic prospects are favorable, with growth expected to be around 5 percent in 2017, boosted by anticipated robust activity in the construction sector and tourism industry, and supported by higher inflows of foreign direct investment. Higher oil prices relative to 2016 are expected to keep consumer prices elevated, such that inflation is likely to decelerate  only moderately, to about 4 percent.

“The domestic primary deficit in 2016 was significantly higher than expected, exceeding the program’s target by 2 percent of GDP, driven by a sharp drop of tax revenues from imports and fiscal policy slippages in the run-up to the presidential elections. At the same time domestic arrears, including those incurred by the state-owned utility company EMAE, have increased substantially. Reflecting the same fiscal pressure, domestic credit to the central government was also elevated.

“The authorities have made good progress on structural reforms. The introduction of an automatic fuel price adjustment mechanism in late 2016, with mitigating measures for the poorer segments of the society, and the initiation of a reform plan to make EMAE financially viable were important steps in addressing the longstanding problem of domestic arrears accumulation, which has hampered fiscal consolidation efforts. Reforms for enhancing monetary policy and financial stability—namely, the establishment of an Audit Board for Banco Central de São Tomé e Príncipe that specifies a role similar to a conventional audit committee, and the assessment of banking regulation and supervision—were also completed. In addition, the authorities are taking steps to reform the judiciary system, which are essential for improving the business environment.

“Discussions during the visit focused on corrective measures to address the 2016 fiscal slippage and to recast the 2017 budget to ensure that the 2017 fiscal targets are met. Discussions were also held on strengthening public spending commitment controls that require budget entities to observe the budget envelope and measures to mitigate tax evasion. Good progress has been made, and discussions will continue in coming weeks. In addition, the authorities were encouraged to use privatization proceeds (if any) to reduce arrears and build a reserve fund for contingencies. Expediting the liquidation of Banco Equador and implementing the strategy for reducing nonperforming loans in the banking sector are recommended to minimize fiscal costs and safeguard financial stability. Provided progress is made in implementing the program, an IMF staff visit to conduct the combined third and fourth review could take place in the fall of 2017.

“The team was joined by Mr. David Owen, the Deputy Director of the African Department at the IMF, and met with the Prime Minister of the Democratic Republic of São Tomé and Príncipe H.E. Patrice Trovoada, Minister of Finance, Commerce and the Blue Economy Américo Ramos, Minister of Justice, Public Administration and Human Rights Ilza Vaz, the Governor of the Central Bank of São Tomé and Príncipe Hélio Almeida, the Parliamentary Economic Commission, senior government officials, representatives of the private sector, including banks, professional organizations and the Chamber of Commerce, the international donor community, and student groups.

“The team thanks the authorities for their hospitality and the constructive discussions. The team looks forward to an active and continued dialogue with the aim of maintaining macroeconomic stability and achieving inclusive growth in São Tomé and Príncipe.”

[1]  The ECF is a lending arrangement that provides sustained program engagement over the medium to long term in case of protracted balance of payments problems. The arrangement for São Tomé and Príncipe in the amount of SDR 4.4 million (about US$6.2 million or 60 percent of quota) was approved by the IMF Executive Board on July 13, 2015.

Source: International Monetary Fund (IMF).

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