Significant progress was made in the discussions with the government on the economic policies and reforms that could be supported by a new IMF arrangement; São Tomé and Príncipe's economy is facing serious challenges and experiencing strong imbalances and sluggish growth. Improving the business environment to promote economic activities is critical; it is important to bring the large debt and arrears under control through debt restructuring, fiscal consolidation, and comprehensive structural reforms–particularly in the energy sector–while protecting the vulnerable population.

A staff team from the International Monetary Fund (IMF) led by Xiangming Li visited São Tomé and Príncipe during July 24 – August 6, 2019 to discuss a new program that can be supported by an IMF Extended Credit Facility (ECF) arrangement.[1] At the end of the visit, Ms. Li issued the following statement:

"The government and the staff team made significant progress in the discussions of economic policies and reforms that could be supported by a new IMF arrangement. The discussion will continue, including through telecommunication. Reducing debt vulnerability, restoring fiscal sustainability, and enhancing macro stability are essential for supporting inclusive and robust growth.

"The economy faces pressing challenges. In 2018, growth slid to 2.7 percent reflecting declining foreign inflows, energy shortages, and political uncertainty; higher prices for fuel and fish and vegetables drove inflation to 9 percent; and international reserves declined by $16 million. Economic activities continued to be sluggish in 2019, though reserves and inflation improved slightly.

"Public debt has been rising steadily over the past decade and reached a level that significantly elevates the country's vulnerability. This is due to continued large losses incurred by the state-owned utility company (EMAE), which rose by more than $9 million during the first semester of 2019. A significant amount of the debt is due to past fuel price subsidies and arrears owed by the central government to suppliers. Based on data that became available in early 2019, overspending in 2018–including on wages–raised the domestic primary deficit including borrowing by autonomous public entities to over 5 percent of GDP, far exceeding the 2018 target of close to 1 percent of GDP.

"Decisive measures are needed to rein in the debt. The arrears owed by EMAE to its fuel supplier, ENCO, need to be formalized, with the value reduced or repayment period phased over a long period of time, while EMAE needs to become commercially viable to ensure the country's energy safety. EMAE currently only pays a fraction of its imported oil supply. The fuel price should cover import costs to avoid fuel subsides.

"The government has committed to closing the sizeable gap between revenues and expenditures by containing fiscal spending; reducing public sector energy consumption; stepping up tax collection; and introducing a new value-added tax (VAT), to broaden the tax base equitably, joining over 150 countries worldwide with a VAT. Currently, the tax-revenue-to-GDP is only 12.5 percent and remains well below the regional average. The government is further committed to minimizing the impact on low-income households and protecting the most vulnerable with the support of the World Bank.

" Addressing financial stability and inclusion will also contribute to economic growth and higher international reserves. To this end, the authorities are working to develop a new payment system, which is crucial for boosting tourism and foreign exchange receipts. However, funding constraints for developing and implementing this system remain. Monetary policy will also play a role in promoting savings in domestic currency and reducing domestic demand. Fostering financial inclusion will be accomplished by removing structural bottlenecks in conjunction with implementing a new national strategy that is to be completed by the end of 2019. Meanwhile, financial sector supervision will be strengthened to safeguard stability.

"Over the medium term, raising private-sector-led inclusive and sustainable economic growth through comprehensive structural reforms is essential. In particular, the government is committed to publishing a clearly-codified procedure for the approval of investment to improve transparency and facilitate investment. Promoting tourism is a key component of the medium-term growth strategy, and the country expects to open a new tourism school with the support of the World Bank at the end of 2019. Additionally, plans for supporting local fisheries and eco-agriculture will not only help these industries but also develop the local supply chain to the tourism industry.

"Women's economic empowerment and financial inclusion remain key issues for the government, and work continues on the drafting of a new national action plan. The authorities, in coordination with the IMF and UN, and with support from the High Commission of Canada, convened an international conference on July 31 to discuss gender equality and commemorate the International Day of the African Woman.

"The mission met with President Evaristo Carvalho; Prime Minister Jorge Bom Jesus; President of the National Assembly Delfim Neves; Minister of Planning, Finance, and the Blue Economy Osvaldo Vaz; Minister of Foreign Affairs Elsa Pinto; Minister of Infrastructure Osvaldo Abreu; Governor of the Central Bank Américo Soares De Barros; the Parliamentary Economic and Financial Affairs Committee; Attorney General Frederique Samba; Former Presidents Manuel Pinto da Costa, Miguel Trovoada, and Fradique de Menezes; other government officials; representatives of the private sector including banks; and development partners.

"The mission expresses its deep appreciation to the authorities for their cooperation, hospitality, and policy dialogue. It looks forward to active and continued dialogue in the future."

Distributed by APO Group on behalf of International Monetary Fund (IMF).