Our Sao Tomean authorities would like to express their appreciation for the Fund’s continued support and constructive policy dialogue including during the consultations held in Sao Tome and in Washington DC in September 2011.
Sao Tome and Principe is recovering from the impact of the global economic and financial crisis which led to a sharp decline of Foreign Direct Investment (FDI), and increased imported inflation pressures. As reflected in the well written and balanced staff report, the authorities vigorously responded to mitigate the impact of the crisis, preserve macroeconomic stability, while making inroads in achieving their growth and development objectives.
Driven by the construction, tourism and agriculture sectors, real GDP growth for 2011 is projected at 5 percent. Inflation continued its declining trend at 13.2 percent rate in October 2011 after reaching a peak of 37 percent in 2008. Nonetheless, the pass through of international petroleum prices heightened domestic prices fluctuations.
The authorities’ policies aimed not only at mitigating the impact of the immediate crisis, but also at realizing their medium term growth and poverty reduction objectives, in line with their ECF-supported program. As noted by staff, the program performance criteria have been substantially implemented, albeit with some delays. The authorities are in the process of finalizing the updating of the poverty reduction strategy paper (PRSP), which is required for the ECF program reviews to be completed.
Fiscal Consolidation and Macroeconomic Stability
The authorities pursued a prudent fiscal stance, intensifying their fiscal consolidation efforts, with the view to preserving macroeconomic stability, and safeguarding the exchange rate peg. Fiscal performance in 2011 has been strong owing to higher than projected revenues and tighter expenditure controls.
Looking forward, the 2012 budget aims to lower further the primary deficit to 3.2 percent of GDP, in line with the authorities’ medium-term objectives. In this regard, greater revenue mobilization efforts are planned, including stepped up tax collections activities, and customs and tax administration efficiency gains. The authorities will take steps to break the cycle of cross-arrears due to public utilities. These include a close monitoring of payments by local municipalities to public utilities and adequately provisioning for the payment of utility bills.
As regards spending, the authorities will seek to control the wage bill in real terms, and to reallocate expenditures towards priority sectors. The authorities will also strive to improve public financial management, particularly through enhanced monitoring and increased transparency in budget execution.
Enhancing monetary policy and financial stability
In order to promote the development of the financial system, and protect it from the spillovers of the global financial crisis, the authorities are strengthening the regulatory and supervisory framework, and monetary policy management.
With respect to monetary policy management, the authorities will focus on improving liquidity management, with Fund technical assistance. The authorities are closely monitoring inflation development as well. Their fiscal and monetary policy tightening and the recently adopted peg helped significantly reduce inflationary pressures. However, the narrow economic basis, supply bottlenecks, as well as import price fluctuations-notably of petroleum and basic commodities prices-continued to drive the inflation outlook. Although second round effects from the recent spike in prices were not observed, as noted by staff, the authorities are undertaking steps to reduce supply side constraints, and stand ready to further tighten monetary policy as needed.
Banking regulation and supervision will be further strengthened through increased banks’ capital requirement, and by stepping up onsite inspections of banks. The authorities are also taking steps to enhance the resilience of the banking sector’s balance sheets to exchange rate fluctuations, by taking measures to reduce the dollarization of the financial system, and requiring commercial banks to hold reserve requirements in Dobra, the local currency.
The authorities are committed to ensuring that Sao Tome and Principe’s financial system is in compliance with international standards such as the FATF’s AML/CFT. Amongst the actions taken, they amended the AML/CFT laws, and established a Financial Intelligence Unit, in line with the FATF’s recommendations. As recognized by the FATF’s assessment, the authorities are fully committed at the highest level to implement the action plan agreed upon, with the view to addressing the remaining deficiencies. They have also requested Fund’s technical assistance for that purpose. In light of the progress made to date, and efforts to further strengthen compliance, they are seeking the removal of Sao Tome and Principe from the list of non-cooperating jurisdictions.
Strengthening Sao Tome and Principe’s External Position
The Debt Sustainability Analysis finds that Sao Tome and Principe remains at high risk of debt distress due to a narrow export base, and uncertainties as to the oil production prospects. In order to preserve external debt sustainability, the authorities are committed to seek grants and highly concessional financing of their public investments. They are also strengthening their debt management capacities and intend to pursue a prudent borrowing strategy.
To expand their export base, the authorities are moving forward with the exploitation of their hydrocarbon resources, including through the allocation of development licensing in the Joint Development Zone with Nigeria. They will also promote non-oil sectors, particularly Tourism and Agriculture in order to diversify their economy.
The authorities are determined to preserve Sao Tome and Principe’s international competitiveness in the context of the peg to the Euro, which recently experienced renewed market stress on account of the sovereign debt crisis. They are determined to reduce over time the inflation differential with the euro area, and will continue to improve the investment climate including through reforms in the energy sector and infrastructure investments.
Medium Growth and Poverty Reduction Strategy
As mentioned above the authorities are in the process of finalizing their National Poverty Reduction Strategy (NPRS), which will guide their reform agenda going forward. The finalization of the NPRS, which is required before the conclusion of the ECF program’s reviews, was delayed due to capacity constrains and the need to ensure broad-based ownership of the new strategy.
The NPRS will benefit from the recent update of the poverty profile. Key pillars of the strategy will include: i) the reform of public institutions, and the promotion of good governance, ii) a broad-based economic growth, iii) human resources development, and iv) improved access to basic services.
The authorities will actively promote the role of the private sector in fostering a diverse and resilient economy. They have deployed sustained efforts to enhance the investment climate, including the establishment of a “one-stop” window to assist investors, and to streamline business regulations. These efforts were recognized in the World Bank’s 2012 Doing Business Survey which ranked Sao Tome and Principe among the top performers.
Going forward, the authorities will pursue additional reforms, building on the gains achieved so far, including by overhauling the countries’ infrastructure, notably the port and airport, and by reforming the energy sector.