SAO TOME AND PRINCIPE NEWS

IMF Staff Completes Review Mission to São Tomé and Príncipe Under the Extended Credit Facility

SAO TOME, Dec 19, 2020:: End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. This mission has been a virtual visit. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF's Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.

Washington, DC: A staff team from the International Monetary Fund (IMF), led by Geremia Palomba, held a virtual mission during November 13-23, 2020 to conduct the second review of São Tomé and Príncipe's economic program supported by the IMF Extended Credit Facility (ECF) arrangement [1] . At the end of the mission, Mr. Palomba issued the following statement:

"The IMF team and the authorities of São Tomé and Príncipe have reached a staff level agreement on measures for the completion of the second review under the ECF arrangement subject to approval by the IMF Executive Board. The IMF Executive Board is tentatively scheduled to consider this second ECF review in January 2021.

"The COVID-19 pandemic is having a severe impact on São Tomé and Príncipe's economy. Real GDP is expected to contract by about 6 percent in 2020 due to weak external demand and pandemic-containment measures. As tourism and domestic activities gradually recover, the economy is projected to grow by about 2-3 percent in 2021, before approaching a long-term growth of about 4 percent. However, there are significant risks and uncertainties to this outlook due to the pandemic.

"The ECF review discussions focused on measures to meet the country's immediate health, social and economic needs and support the upcoming recovery. "Program performance under the Extended Credit Facility has remained steady, although the pandemic has hampered progress on key structural reforms. It is important to address the immediate health, social, and economic needs arising from the pandemic while pushing forward with medium-term fiscal and structural reforms to support a strong and inclusive economic recovery.

"The 2021 budget should provide room to expand social spending, while delivering on the authorities' gradual fiscal consolidation plans. Staff welcome the authorities' commitment to introduce the VAT in 2021, while providing additional support to the education sector and the country's young population. Going forward, it is important to continue containing spending dynamics, particularly personnel expenses thorough wage and employment containment policies.

"The financial sector remains broadly sound but risks are rising. With the pandemic likely to put pressure on banks' asset quality, it is important for the central bank of São Tomé and Príncipe (BCSTP) to actively monitor and promptly act on credit risk pressures. The implementation of the recommendations from the 2019 asset quality review is a welcome step. Accelerating the resolution of legacy and fully provisioned non-performing loans would support the system's capacity to provide credit. Legislative reforms to strengthen the central bank's independence and align financial sector regulations to best international standards need to be fast-tracked.

"Stepping-up the implementation of structural reforms to reduce the country's vulnerabilities, improve the business environment, and develop key sectors like tourism is a must to speed up the recovery and lift the long-term-potential of the economy. It is also important to fast-track reforms in the energy sector and for the public utility company EMAE to improve the country's energy supply and reduce public debt vulnerabilities and pressures on international reserves.

The authorities' commitment to take steps to remove the country from the EU air safety blacklist of banned operators would help support the recovery in the tourism sector. Other reforms should focus on improving the business environment, promoting gender equality, and adapting to climate change. "The mission thanks the authorities for the productive and open discussions."