OREANDA-NEWS. The Executive Board of the International Monetary Fund (IMF) today approved a new arrangement under the Extended Credit Facility (ECF) for SDR 4.44 million (about US\\$6.2 million or 60 percent of quota) for the Democratic Republic of S?o Tom? and Pr?ncipe. The approval enables the immediate disbursement of SDR 634,285 (about US\\$887,308).

The new ECF arrangement seeks to underpin the government’s economic reform program which aims to strengthen public finances, reduce balance-of-payments vulnerabilities, and clear large domestic arrears. The program also lays the foundation for stronger, more inclusive growth, and plays a catalytic role for bilateral and multilateral assistance.

At the conclusion of the Executive Board’s discussion, Mr. Mitsuhiro Furusawa, Deputy Managing Director and Acting Chair issued the following statement:

“S?o Tom? and Pr?ncipe’s economy has strengthened in recent years, but high public debt and pervasive poverty continue to present policy challenges. Real GDP growth has picked up; inflation has been low, and international reserves have risen. Medium-term prospects are generally favorable, with stronger growth led by higher tourism-related foreign direct investment and increased donor-financed projects.

“The new Fund-supported program aims to entrench macroeconomic and financial stability and underpins the authorities’ existing poverty reduction strategy. Decisive implementation will be critical to buttress policy credibility and catalyze additional financing.

“The program is anchored on maintaining debt on a sustainable path through continued fiscal consolidation, while creating space for growth-enhancing and social spending. It also seeks to address the longstanding and growing domestic arrears problem.

“The authorities’ monetary policy and the fixed exchange regime have contributed to lowering inflation. Addressing excess liquidity problems in the banking system will further support the disinflation process and the exchange rate arrangement. Strengthening regulatory oversight and better enforcing prudential requirements will help address remaining weaknesses in the banking sector.

“The authorities plan to implement comprehensive structural reforms to improve domestic fuel pricing, diversify and broaden the export base, facilitate access to credit, and promote private-sector led growth.”

Recent economic developments

Macroeconomic performance since 2012 has been positive, with sustained growth and declining inflation, but poverty and debt remain high. GDP growth picked up slightly to 4.5 percent in 2014 driven by an increase in foreign direct investment, the launching of new donor-financed projects, and improved tourism receipts. Supported by the exchange rate peg to the euro, inflation reached a year-end historic low of 6.4 percent at end–2014 and is projected to decline further to 5.2 percent in 2015.

Fiscal consolidation remained a challenge in 2014 as a result of revenue underperformance and expenditure overruns in the run-up to the October 2014 Parliamentary elections. The domestic primary deficit which had improved to 0.8 percent of GDP in 2013 (lower than programmed) increased sharply to 3.4 percent of GDP in 2014. Government domestic arrears also accumulated on a net basis. Growth in monetary aggregates has moderated since 2013 as expected. Bank credit to the private sector, however, has been contracting since 2013 as banks struggle with high non-performing loans and shortage of bankable projects.

The external position has been improving. The current account deficit (excluding transfers) improved by 1.2 percent of GDP in 2014 on the back of strong cocoa exports and improved tourism receipts, and the Central Bank’s international reserves stood at 3.8 months of import cover.

Program Summary

The authorities’ program for 2015–18 remains in line with the 2012 national poverty reduction strategy (PRSP-II) that will be updated in 2016.

The program focuses on maintaining debt on a sustainable path through continued fiscal consolidation, while at the same time creating space for growth-enhancing capital spending. This will include measures to: (i) address the growing domestic arrears problem which has become a drag on fiscal consolidation; (ii) enhance domestic revenue mobilization and improved public financial management to create space for increased capital and social spending; (iii) promote financial sector reforms to improve the sector’s role in facilitating private sector led growth; and (iv) introduce reforms in energy, the agriculture sector, and other targeted reforms designed to improve the business climate and promote private investment to broaden the export base.

Structural reforms will ramp up progressively, over the course of the program, in line with implementation capacity.