Sao Tome and Principe: Economy remains “robust”, despite oil market uncertainties – IMF

24 March 2008

Washington, USA, 24 March – Economic growth in Sao Tome and Principe remains “robust”, driven by foreign investment in tourism, though “uncertainties” in the development of the oil sector could give rise to budget difficulties, according to the International Monetary Fund (IMF).

In its latest report on the archipelago, released this month, the Washington-based fund said that Sao Tome could see a reduction in the level of revenue from contract bonuses for oil exploration, an important budget component in previous years, for which it would have to look for alternative sources of finance, namely foreign assistance.

“While in recent years oil revenues have met budget shortfalls, the National Oil Account’s remaining balance is low, the prospects for further bonuses in 2008 are uncertain and finding commercially viable petroleum reserves involves a long and unpredictable process,” said the IMF’s report.

The National Oil Account is an open account and maintained by the Central Bank of Sao Tome in a foreign capital bank, in which all revenues related to this activity are received and maintained..

The start of exploration in new petroleum blocks within the Sao Tome-Nigeria Joint Development Zone (JDZ) is expected this year, among these are the blocks attributed to Addax Petroleum and China’s Sinopec, which should invest close to US$73.8 million in the prospecting work.

At a time when the launch of a new bidding round for blocks is expected, this time within Sao Tome’s Exclusive Economic Zone, the IMF said that being within the oilsector is one of the main risks it must take into account in the implementation of its program of support for growth in Sao Tome.

“The authorities [of Sao Tome] and the team [from the IMF] share the vision that the country’s strategies for fiscal and external financing have to be adapted to the uncertain prospects relating to petroleum revenues,” and “as well as the mobilization of foreign assistance, the continuous fiscal adjustment is not only prudent but necessary to ensure the stability of the macro-economy and long term growth,” the report said.

Other identified risks are the lack of capacity to implement the outlined measures and projects and also the “great pressure to raise salaries.”

Last year the state payroll increased by more than nine percent, almost one percentage point higher than expected, while domestic revenue remained below expectations “due in part to an unforeseen reduction in petroleum revenues.”

“The authorities agreed to reduce the rate of salary increase in order to keep the percentage of priority, non-salary expenses at a sustainable level, and contain the pressure on domestic prices. The schedule for structural reform will concentrate on the removal of obstacles to private investment,” it said

As well as the need to balance the public books without oil, Sao Tome faced a “second big challenge” which was that of developing production and export sectors, and to achieve this it needed to create the conditions for private investment and the attraction of foreign capital, said the IMF.

“To attract private investment, the authorities need to carry out regulatory reforms. They plan to adopt laws to greatly reduce the cost and time necessary for the setting up of a business, modernize the country’s commercial law and implement a new investment law and a revision of the labour law,” said the IMF.

As well as reforms in the key sectors of utilities, transport and agriculture, the Sao Tome authorities are also committed to resolving the financial difficulties of public companies such as ENASA (airports) and EMAE (water and energy), in such a way as to modernize them and make them commercially viable.

The report also includes a letter of commitment from the Sao Tome government signed by the ex-Minister of Finance Arlindo de Carvalho, and by the current governor of the Central Bank, Edite Soares.

“Our policies for 2008 aim to consolidate financial stability, guarantee the efficient management of resources relating to oil and foreign assistance, and create the foundations for sustained growth in the private sector. Our program is working towards a new reduction of the primary fiscal deficit in relation to the Gross National Product, combined with the prudent use of petroleum revenues, a strengthening of monetary and exchange policies to bring down inflation, as well as an acceleration of reforms,” wrote the Sao Tome authorities.

Despite the presence of inflationary pressure and the fall in the exchange rate, relating to salary increases and the rise in price of petroleum imports “economic activity remains robust” in the archipelago.

The level of inflation reached in 2007 showed a significant reduction of approximately 14 percent, which represents 12 percentage points less than the year ago period.

“Inflation fell significantly until mid-year, the primary deficit was contained and the central bank’s international liquid reserves exceeded the program’s objective,” said the IMF, which considers the performance of the authorities in achieving the bilaterally established program “encouraging.”

Economic growth should fall slightly this year by 6.0 percent, a rate which should be maintained over the next two or three years, according to projections by the IMF. (macauhub)