Press Release No. 12/272

Press Release: IMF Executive Board Approves New US$ 3.9 Million Extended Credit Facility Arrangement for the Democratic Republic of São Tomé and Príncipe

July 23, 2012

On July 20, 2012, the Executive Board of the International Monetary Fund (IMF) approved a new three-year arrangement for the Democratic Republic of São Tomé and Príncipe under the Extended Credit Facility (ECF) in an amount equivalent to SDR 2.59 million (about US$ 3.9 million). The Board’s decision will enable an immediate disbursement equivalent to SDR 0.37 million (about US$ 0.56 million).

The authorities’ program is aimed at maintaining macroeconomic stability and accelerating structural reforms as the economy gears up for the start of oil production in 2015. The program, which builds on the government’s new National Poverty Reduction Strategy Paper, includes a structural reform agenda to strengthen public finances and the frameworks for monetary policy, banking supervision, and anti-money laundering.

Following the Board’s discussion of the Democratic Republic of São Tomé and Príncipe, Min Zhu, Deputy Managing Director and Acting Chair, issued the following statement:

“The authorities of São Tomé and Príncipe are to be commended for their prudent fiscal stance in support of the exchange rate peg, and for maintaining growth and reducing inflation against the backdrop of a challenging global environment.

“Building on these achievements, and anchored by the government’s new National Poverty Reduction Strategy Paper, the ECF-supported program aims at maintaining macroeconomic stability and accelerating structural reforms as the economy gears up for the start of oil production in 2015. Well-targeted IMF technical assistance will support program implementation.

“The program envisages a cautious fiscal stance over the medium term, given continued head winds from the global economy and a high risk of debt distress due to São Tomé and Príncipe’s narrow export base. In this connection, the program’s domestic primary deficit targets are in line with available non-debt creating financing, while additional domestic revenue will be mobilized for priority infrastructure and pro-poor spending.

“The authorities’ structural reform agenda appropriately focuses on strengthening public finances as well as the frameworks for monetary policy, banking supervision, and anti-money laundering. As part of its fiscal reform strategy, the government will take steps to improve the tax and customs administrations and further strengthen public financial management and transparency. The central bank will continue to strengthen monetary management and banking supervision, including by ensuring the soundness of the financial sector’s legal and regulatory framework, and completing as planned the onsite inspection of all commercial banks. To address the deficiencies of the anti-money laundering framework, the authorities are fully committed to amend the anti-money laundering law and strengthen the operations of the ministry of finance’s financial intelligence unit,” M. Zhu added.

Annex

Recent economic developments

São Tomé and Príncipe’s macroeconomic performance has been good despite a challenging international environment:

• Growth reached an estimated 5 percent in 2011.
• Supported by the exchange rate peg, inflation has continued to trend downward, reaching 8.6 percent (year-on-year) in May 2012 (from a peak of 37 percent in July 2008).
• The government has made further progress on fiscal consolidation. Efforts to contain non-priority spending and improve revenue collections contributed to a narrowing of the domestic primary deficit to about 3 percent of GDP in 2011.
• Gross international reserves in 2011 remained practically unchanged at about 4½ months of imports, and the external current account deficit improved slightly. The impact of rising international fuel prices on the trade balance was mitigated by a slowdown in import growth due the completion of some investment projects and a slowdown in credit growth.
• The central bank has continued to make progress on strengthening the financial sector. Banks’ profitability and capital-to-risk weighted assets improved in 2011. However, the share of non-performing loans in total loans deteriorated in the first quarter of 2012 as a result of delays in payments to contractors for large-scale construction projects.

Program Summary

The government’s medium-term economic program supported by the ECF is anchored by the new National Poverty Reduction Strategy Paper. It aims to raise economic growth and reduce poverty by maintaining macroeconomic stability and accelerating structural reforms.

The specific objectives of the government’s program include:

• Raising the rate of non-oil GDP real growth to about 6 percent per year.
• Reducing inflation to low single digits and keeping it broadly in line with international inflation.
• Maintaining a gross international reserves cover of at least 3 months of imports in support of the exchange rate peg.

To help achieve these objectives, the program is based on four main pillars:

• Fiscal policy will target a domestic primary deficit of about 3 percent of GDP, which is in line with available non-debt creating financing.
• The structural reform program in the fiscal area will focus on mobilizing domestic revenue for priority infrastructure and pro-poor spending by improving tax and custom administration, and on strengthening public financial management and transparency.
• The central bank will continue to strengthen monetary management and maintain financial stability by improving liquidity forecasting and banking supervision.
• The anti-money laundering framework will be improved by strengthening its legal basis and the operations of the Ministry of Finance’s Financial Intelligence Unit.