- As expected oil revenues for São Tomé and Príncipe are failing to materialise, debts accumulated to produce oil facilities are starting to threaten the economy. The IMF today promised a limited financial aid to the archipelago.
Authorities in São Tomé and Príncipe face a challenge of maintaining fiscal and debt sustainability, despite progress that has been realised in the country's economic performance in the past year, according to the International Monetary Fund (IMF).
"With uncertain oil prospects, authorities will need to continue fiscal consolidation beyond 2008, strengthen debt management, and rely on non-debt-creating inflows and other concessional external financing," the IMF observed in a review at completion of a three-year poverty reduction and growth programme with São Tomé and Príncipe.
The completion of the review also saw IMF's executive board approve for disbursement of US$ 680,000, which would bring total disbursements under the arrangement to US$ 4.77 million.
IMF however pointed out that the country would need to focus seriously on reforms that will cushion São Tomé and Príncipe's vulnerability to external shocks. "Furthermore, it is crucial that authorities accelerate structural reforms in order to develop the economy's production and export base and reduce its vulnerability to external shocks. In particular, advancing financial sector reform and improving the investment climate should be given high priority," said IMF's Deputy Managing Director Murilo Portugal in a statement.
He said the review has shown that authorities were committed to strengthening fiscal discipline and liquidity management to lower inflation and restore financial stability.
According to the IMF deputy chair, São Tomé and Príncipe's 2008 fiscal programme is designed to reduce domestic primary deficit, introduce direct taxation reform, and provide resources to mitigate impact of high food and fuel prices on the poor.
Mr Portugal stressed that in addition to fiscal adjustment, authorities need to implement a proactive monetary policy in order to effectively curb liquidity growth, adding it was also important that authorities support a tight monetary policy with fiscal restraint, by further reducing nonessential domestic primary spending to safeguard international reserve targets.
As a way of contributing to restore debt sustainability of São Tomé and Príncipe, Paris Club creditors in 1999 decided to write off US$ 23.9 million, representing the Paris Club's share of the effort in the framework of the enhanced HIPC Initiative, thus reducing to US$ 0.6 million in nominal terms the debt owed to the club.
The club creditors also committed on a bilateral basis to grant additional debt relief to the country, leading to a full cancellation of São Tomé and Príncipe debt towards them.
São Tomé and Príncipe officials have been praised for their commitment to allocate resources freed by debt cancellation to priority areas identified in the country's poverty reduction strategy.
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