afrol News, 25 July - São Tomé and Príncipe still facing major challenges to maintain economic sustainability, despite progress made in reducing fiscal imbalances and public debt burden, IMF has said.

At conclusion of IMF Executive consultation with democratic Republic of São Tomé and Príncipe recently, the body concluded that favorable developments have been accompanied by accelerating inflation. "While surging international prices of food and fuels have contributed to recent higher inflation, public expenditure overruns and weak control of base money growth have also played a role in increasing the pressures on prices and currency depreciation," IMF assessment report noted.

IMF points at amongst others challenges to develop São Tomé and Príncipe's economic production and export base through a deepening of structural reforms. The body further said these policies would be of particularly importance 'in view of still unclear prospects for oil revenue and economy's continuing vulnerability to external shocks'.

In regarding posing challenges, IMF directors have underscored need by São Tomé and Príncipe to continue fiscal adjustment as well as strengthening expenditure control in order to lower inflation and restore financial stability.

IMF further says while it supported government's 2008 fiscal program that aims to reduce domestic primary deficit relative to GDP, introduce direct taxation reform, and provide additional fiscal space to mitigate impact of rising food and fuel prices on poor, it however encouraged authorities to avoid generalised price subsidies and to instead implement targeted assistance to most vulnerable segments of the population.

São Tomé and Príncipe a small, open, low-income economy with a very narrow production and export base embarked on economic adjustment and reform supported by IMF Poverty Reduction and Growth Facility since August 2005. However, in 2007 country experienced high inflation reflecting surging food and oil prices, as well as a budgetary expenditure overrun. This was despite São Tomé and Príncipe benefiting from debt relief under Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI), which even saw country growing at an estimated real GDP of six percent, led also by activities financed by an inflow of Foreign Direct Investment.

The country's main export commodity is cocoa but a once-dominant agriculture sector has declined over last three decades. Tourism is relatively small and brings in little net foreign exchange because it relies heavily on imported goods and services. In recent years, public finances have been supported by large oil signature bonuses, but exploratory drilling for oil has not yet confirmed existence of commercially extractable reserves.

By staff writer

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