Statement by the IMF Staff Representative March 6, 2006

São Tomé and Príncipe pursued economic reforms and tried to reduce poverty amidst macroeconomic imbalances under the Poverty Reduction and Growth Facility (PRGF) program. Executive Directors supported the authorities’ decision to sustain the process of fiscal consolidation, and stressed the need for implementing a good budget and public expenditure management system. They commended the monetary and financial stances and the central bank’s international reserve position; welcomed the authorities' commitment to improve coverage, timeliness, and periodicity of basic macroeconomic statistics; and emphasized to accelerate structural reforms and achieve full transparency in oil revenue management.

Abstract

São Tomé and Príncipe pursued economic reforms and tried to reduce poverty amidst macroeconomic imbalances under the Poverty Reduction and Growth Facility (PRGF) program. Executive Directors supported the authorities’ decision to sustain the process of fiscal consolidation, and stressed the need for implementing a good budget and public expenditure management system. They commended the monetary and financial stances and the central bank’s international reserve position; welcomed the authorities' commitment to improve coverage, timeliness, and periodicity of basic macroeconomic statistics; and emphasized to accelerate structural reforms and achieve full transparency in oil revenue management.

The following information has become available since the issuance of the staff report for the 2005 Article IV consultation and First Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility. The thrust of the staff appraisal remains unchanged.

1. Recent developments under the program

  • Based on preliminary information, all quantitative performance criteria for end-December 2005 appear to have been met. The monthly inflation rate for January 2006 (2.7 percent) continued to be relatively high reflecting seasonal factors and the pass-through of the rather large depreciation of the dobra during the last quarter of 2005. However, the exchange rate was stable in January and February 2006.

  • On the fiscal side, revenue was slightly below the program target on account of delays in payment of fishing licenses granted to the European Union, while current domestic primary expenditure was lower than programmed resulting in a smaller domestic primary deficit than under the program. All domestic payment arrears incurred in late 2005 were eliminated in the first two weeks of 2006.

2. Oil sector developments

  • Exploratory drillings: Chevron-Texaco, the designated operator for Block 1 in the Joint Development Zone administered with Nigeria, started exploratory drilling operations on January 14, 2006. The offshore drilling is estimated to last 40–60 days. Chevron-Texaco has indicated that, if significant amounts of crude are discovered, commercial production could begin in 2010.

  • Licensing round of oil Blocks 2-6: The Sãotomean authorities have informed the staff about the outcome of the Joint Ministerial Committee (JMC) meeting held in Abuja in early February 2006.

    • The Sãotomean delegation raised the concerns noted in the report from the Attorney General’s Office of São Tomé and Príncipe about lack of transparency and irregularities in the bidding process of Blocks 2-6, which were mentioned in paragraph 14 of EBS/06/23.

    • The Nigerian delegation indicated that they would reply in writing to the Attorney General’s report, while noting that they disagreed with the report’s conclusions.

    • The Sãotomean authorities stated that they intend to strengthen transparency of oil sector transactions at three different levels: first, the government will support the country’s Attorney General’s Office in conducting further investigations and needed legal actions; second, the Sãotomean delegates at the JMC will propose that the Attorney General’s recommendations regarding the implementation of international standards be applied to future oil bidding rounds; and third, São Tomé and Príncipe will work towards the implementation of Extractive Industries Transparency Initiative (EITI) principles, as stated in the Abuja Declaration.

  • Status of Production Sharing Agreements (PSAs): The signature of the PSAs on Blocks 3 and 4, between the Joint Development Agency and the designated oil consortiums, is expected during the coming weeks. The signature of PSAs for other blocks is expected in the next 2-3 months.

3. Poverty Reduction Strategy Paper (PRSP): The Sãotomean authorities submitted the first PRSP annual progress report to the Fund and the World Bank on February 24, 2006. The preparation of the PRSP annual progress report—which is currently being translated into English—and the related joint staff advisory note (JSAN) constitute a floating completion point trigger as specified in the HIPC Decision Point document of December 2000 (EBS/00/254). The JSAN will be circulated to the Board in conjunction with the staff report for the Second Review under the existing PRGF arrangement in June/July 2006. It is expected that the HIPC Completion Point document would also be circulated to the Board at that time, provided that all floating completion point triggers are met. The mission on the Second Review under the PRGF arrangement is scheduled for early-May, once a new government is in place, following the Parliamentary elections in late-March 2006.