OREANDA-NEWS. On June 10, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the 2016 Article IV consultation1with the Democratic Republic of São Tomé and Príncipe.

São Tomé and Príncipe’s economy has been resilient even after prospects for commercial oil production, which dominated the political and economic narrative until end-2013, became uncertain with the withdrawal of a large oil company from exploration in the Joint Development Zone shared with Nigeria. São Tomé and Príncipe’s economic performance has been positive, despite a slowdown in growth in 2015. Real GDP in 2015 is estimated to have fallen below the projected 5 percent by almost 1 percentage point, driven by poor rains affecting crop yields, particularly, cocoa production and delayed implementation of public investment projects. Inflation fell below the projected 5 percent, aided by weakened demand and falling international prices of oil and other commodities.

The medium-term outlook is favorable but challenges remain. GDP is projected to grow by 5 percent in 2016—below the authorities’ medium-term sustained target of 6 percent needed to significantly impact poverty—aided by higher public investments, a recovery in cocoa production, and increased foreign direct investment in the tourism sector. The authorities are however, facing macro-financial challenges. Elevated bank lending risks and potential contingent claims on the budget, in an environment marked by rising nonperforming loans (NPLs) and highly indebted households and businesses, will continue to hold private sector credit expansion and the prospects for higher growth. Inflation is expected to remain around 4 percent in 2016, and further stabilize around 3 percent over the medium term, on the back of falling international prices of food and petroleum products. The current account deficit is set to contract further in line with weaker-than-estimated demand and lower-than-expected commodity prices.

Executive Board Assessment

Executive Directors welcomed São Tomé and Príncipe’s progress toward greater macroeconomic stability, marked by sustained growth, declining inflation, and stable international reserves, even after prospects for commercial oil production became uncertain. Directors noted, however, that while some progress has been made, challenges remain and poverty is still high. Against this backdrop, they called for further efforts to enhance the economy’s resilience by strengthening the financial sector, maintaining fiscal discipline, and implementing reforms to support sustainable and inclusive growth.

Directors supported the authorities’ commitment to sustain the fiscal consolidation in order to bring debt toward a moderate risk of debt distress. In this regard, they stressed the importance of boosting tax revenue collection, clearing arrears, strengthening expenditure monitoring and control, and gradually scaling up the infrastructure program, which should be backed by enhanced investment management capacity. Directors also called for strengthening debt management capacity and for continued reliance on grants and concessional financing to mitigate the high risk of debt distress.