The COVID-19 pandemic is expected to cause a sharp real economic contraction of 6.5 percent in 2020 and raise large health and social needs; Program performance under the Extended Credit Facility (ECF) had a good start, but progress has been hampered by the pandemic and some policy slippages prior to the crisis; The IMF mission reached a staff-level agreement on measures needed to alleviate the crisis this year, support a speedy recovery, and maintain macroeconomic and financial stability over the medium term.

A staff team from the International Monetary Fund (IMF), led by Xiangming Li, held a virtual mission during June 15 – June 30, 2020 for the first review of São Tomé and Príncipe’s economic program supported by the IMF ECF arrangement. [1] At the end of the mission, Ms. Li issued the following statement:

“The IMF team and the authorities of São Tomé and Príncipe reached a staff level agreement on measures for the completion of the first review under the ECF arrangement and augmentation of the program subject to approval by the IMF Executive Board. The IMF Executive Board is tentatively scheduled to consider this first ECF review in late July 2020.

“The authorities of São Tomé and Príncipe have developed an appropriate plan to address the COVID-19 crisis. They have worked with international development partners to contain the local outbreak and provided assistance to vulnerable households, laid-off workers and businesses. A small solidarity contribution was collected from workers who were relatively unaffected to help finance the costs.

“This program review focused on meeting the country’s immediate needs and discussed measures to facilitate quick recovery. In this context, the fiscal deficit target for 2020 has been revised to accommodate higher health spending and provide social support to the vulnerable population, laid-off workers, and hard-hit enterprises in the tourism sector. This disbursement is also increased to totaling about US$4.5 million to meet the immediate need.

“To lay the foundation for recovery, the structural reform agenda focused on continued reform of the utility company, EMAE, to improve the country’s energy security and reduce debt vulnerability. To support much needed social and investment spending, the mission advised the authorities to complete the preparation for the transition to a VAT in 2021. To support the recovery of the tourism sector, the mission advised the authorities to develop a plan to remove the country from the EU Air Safety List of banned operators.

“The COVID-19 pandemic is expected to cause the economy to contract sharply by 6.5 percent this year. This is after the growth rate declined to 1.3 percent in 2019 due to delays in externally-financed projects. The tourism sector is expected to recover partially in 2021, when GDP is projected to grow by 3 percent. The uncertain outlook of the pandemic means there are significant near-term risks.

“Program performance had a good start, as end-December 2019 performance criteria were met. However, further progress has been hampered by the pandemic and some policy slippages.

“The mission welcomed the authorities’ commitment to fiscal consolidation and structural reforms after the crisis, which are critical for reducing balance of payment pressures and debt vulnerability. The recent publication of signed public contracts and monthly COVID-related spending is welcome. The authorities should ensure that all contracts and monthly COVID spending be published in a timely manner and in its entirety including annexes.

“Banking supervision needs to be strengthened and continued efforts to reduce the large stock of nonperforming loans will be essential for banks to provide much needed financing to support economic recovery. In this context, it is encouraging that arbitration tribunals for these loans are expected to be operational by the end of 2020.

“The mission also welcomed the authorities’ plans to improve the business environment, promote gender equality, and adapt to climate change. These reforms could expedite the recover and promote sustainable and inclusive growth over the medium term.”

During the virtual mission, the IMF team met with Minister of Planning, Finance, and the Blue Economy Osvaldo Vaz; Minister of Foreign Affairs Elsa Pinto; Minister of Public Works and Infrastructure Osvaldo Abreu; Minister of Labor, Solidarity, Family, and Professional Training Adlander de Matos; Minister of Health Edgar Neves; Minister of Justice Ivete Correia; Minister of Agriculture Francisco Ramos; Governor of the Central Bank Américo Soares De Barros; senior government officials, representatives of the private sector, including banks, and the international donor community. The team extends its appreciation to the authorities and all participants for their support and cooperation.

[1] The ECF is a lending arrangement that provides sustained engagement over the medium to long term in case of protracted balance of payments problems.