Document of The World Bank
FOR OFFICIAL USE ONLY Public Disclosure Authorized
Report No. 42 157 - STP
INTERNATIONAL DEVELOPMENT ASSOCIATION
PROGRAM DOCUMENT
FOR A PROPOSED Public Disclosure Authorized
PUBLIC AND NATURAL RESOURCE MANAGEMENT
DEVELOPMENT POLICY GRANT
IN THE AMOUNT OF SDR 3.7 MILLION
(US$6 MILLION EQUIVALENT)
TO THE
DEMOCRATIC REPUBLIC OF SA0 TOME AND PRhCIPE Public Disclosure Authorized
May 12,2008
Poverty Reduction and Economic Management 3 Country Department AFCCl Africa Region Public Disclosure Authorized
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. DEMOCRATIC REPUBLIC OF silo TOME AND PR~NCIPE
Government Fiscal Year January 1-December 3 1
Currency Equivalents (Dobra 14,504 per US$ as ofDecember 3 1,2007)
Currency Unit Dobra
Weights and Measures Metric System
ABBREVIATION AND ACRONYMS
AfDB African Development Bank CAS Country Assistance Strategy CEMAC Economic and Monetary Community ofCentral Africa CFAA Country Financial Accountability Assessment CPAR Country Procurement Assessment Report DTIS Diagnostic Trade Integration Study DPO Development Policy Operation ECCAS Economic Community ofCentral African States EEZ Exclusive Economic Zone EITI Extractive Industries Transparency Initiative EPA Economic Partnership Agreement EU European Union FDI Foreign Direct Investment GDP Gross Domestic Product GNP Gross National Product GoSTP Government ofSBo Tom6 and Principe HIPC Heavily Indebted Poor Countries IBRD International Bank for Reconstruction and Development ICR Implementation Completion Report IDA International Development Association IFC International Finance Corporation IFRS International Financial Reporting Standards IGF InspecqBo Geral de Finanqas (General Inspection ofFinances) IMF International Monetary Fund INE National Statistical Institute IFRS International Financial Reporting Standards JDA Joint Development Agency JDZ Joint Development Zone JSAN Joint Staff Assessment Note LDP Letter ofDevelopment Policy MCC Millennium Challenge Corporation MDGs Millennium Development Goals MDRI Multilateral Debt Relief Initiative FOR OFFICIAL USE ONLY
MoE Ministry ofEducation MoPF Ministry of Planning and Finance MTEF Medium-Term Expenditure Framework NOA National Oil Account ORML Oil Revenue Management Law PAP Priority Action Plan PEMFAR Public Expenditure Management and Financial Accountability Review PER Public Expenditure Review PFM Public Finance Management PHRD Policy and Human Resources Development PNRMD Public and Natural Resource Management Development PRGF Poverty Reduction and Growth Facility PRMC Public Resource Management Credit PRSP Poverty Reduction Strategic Paper SDR Special Drawing Rights SOE State Owned Enterprise SSSP Social Sector Support Project STP Democratic Republic of S2o Tom6 and Principe TRTA Trade Related Technical Assistance UNDP United Nations Development Program WTO World Trade Organization
Vice President Country Director Sector Director Sector Manager - Jan Walliser Task Team Leader Rafael Muiioz Moreno
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.
THE DEMOCRATIC REPUBLIC OF sAo TOME AND PR~NCIPE PUBLIC AND NATURAL RESOURCE MANAGEMENT DEVELOPMENT POLICY GRANT
TABLEOF CONTENTS
I. INTRODUCTION...... 1 I1. COUNTRY CONTEXT ...... 2 A . Political Context in S5o Tom6 and Principe...... 2 B. Social Context in Si30 Tome and Principe ...... 3 C . Recent Economic Developments in Si30 Tome and Principe ...... 4 D. Macroeconomic Outlook And Debt Sustainability ...... 9 E. Governance ...... 12 I11. THE GOVERNMENT PROGRAM AND PARTICIPATORY PROCESSES ...... 13 IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ...... 15 A . Link to CAS ...... 15 B. Collaboration with the IMF and other donors ...... 15 C . Relationship with other Bank operations ...... 17 D. Lessons Learned ...... 18 E. Analytical Underpinnings...... 20 V . THE PROPOSED GRANT OPERATION ...... 21 A . Operation Description., ...... 21 B. Policy Areas ...... 24 a . Improving Accountability. Effectiveness and level of Public Resources ...... 25 b. Strengthening Governance in the Oil Sector ...... 30 VI . OPERATION IMPLEMENTATION ...... 33 A . Poverty and Social Impact ...... 33 B. Environmental Aspects ...... 34 C . Implementation, Monitoring And Evaluation...... 35 D. Fiduciary Aspects ...... 35 E. Disbursement ...... 36 F. Risks and Risk Mitigation ...... 36
LIST OF TABLES
Table 1: Summary of Key Social Indicators. 1990-2005 ...... 4 Table 2: Selected Economic Indicators. 2005-2011 ...... 38 Table 3: Financial operations of the Central Government ...... 39 Table 4: Balance of Payments 2005-201 1 (US$ million) ...... 40 Table 5: Summary of Key Objectives. Actions and Outcomes of the Operation., ...... 22 Table 6: National Oil Account and Use of Oil Resources ...... 32
i LISTOF FIGURES
Figure 1: Recent Real GDP Growth and Domestic Primary Deficit. 2003-2007 ...... 5 Figure 2: Inflation Rate and Financial and Capital Account. 2003-2007 ...... 7 Figure 3: Real Exchange Rate and Outstanding Debt ...... 8 Figure 4: Revenue and Current Expenditure Projections ...... 10 Figure 5: Use of Oil signature Bonuses ...... 11
LISTOF BOXES
Box 1: Success in the health sector ...... 4 Box 2: Lessons from other small states ...... 20 Box 3: Prior actions ...... 23 Box 4: How Good Practice Principles on Conditionality are being applied to the Operation .....-24
LISTOF ANNEXES
Annex 1: Macroeconomic Framework ...... 38 Annex 2: Letter ofDevelopment Policy and request of IDA suppport ...... 41 Annex 3: Operation Policy Matrix...... 55 Annex 4: Fund Relations Note...... 59 Annex 5: Country At A Glance ...... 60 Annex 6: Millenium Development Goals ...... 62 Annex 7: Country Map ...... 63
The Grant Operation was prepared by an IDA team consisting ofRafael Mufioz Moreno (Country Economist for S2o Tom6 and Principe. AFTP3). Aissatou Diallo (Finance Officer. LOAFC). Renaud Seligmann (Senior Financial Management Specialist. AFTFM). Eleodoro Mayorga-Alba (Coordinator. COPCO). Antonio Chamuco (Procurement Specialist. AFTPC). Beth Dabak (Operations Analyst. LEGJR) . Janet Dooley (Senior Country Officer. AFCCM). Anna Victoria Gyllerup (Operations Officer. AFTRL). Stephane Legros (Public Health Specialist. WBMD). Gerald0 Martins (Senior Education Specialist. AFTH2). Eduardo Brito (Senior Counsel. LEGAF). Eric Bell (Lead Economist. AFTP3) and Kathryn Hollifield (Country Program Coordinator. AFCCM) have provided advice and guidance to the team. Maude Jean-Baptiste and Paula White (Program Assistant AFTP3) helped prepare the document . The peer reviewers are Edgardo Favaro (PRMED) and Dorsati Madani (AFTP3) .
ii THE DEMOCRATIC REPUBLIC OF sAo TOME AND PR~NCIPE PUBLIC AND NATURAL RESOURCE MANAGEMENT DEVELOPMENT POLICY GRANT GRANT AND PROGRAM SUMMARY Recipient Democratic Republic of Silo Tom6 and Principe. Implementing The Ministry ofPlanning and Finance. Agency Amount SDR 3.7 million (US$6 million equivalent). Terms Grant. Tranching The operation will be disbursed in one single tranche, released upon Board approval in June 2008. Development The proposed Public and Natural Resource Management Development (PNRMD) Objectives and operation is designed to help implement the Government’s economic reform program Description for 2008-2009 that is based on Silo Tom6 and Principe’s Poverty Reduction Strategy Paper (PRSP). It supports policy measures aimed principally at improving the accountability, effectiveness and level of public resources, and at strengthening governance in the oil sector. It will in addition support the authorities’ efforts to initiate the preparation of a new PRSP based on updated information on oil prospects and in depth analysis of growth diversification options. Benefits The main policy actions being supported aim to improve the accountability and transparency ofpublic finances. In particular, the PNRMD operation is expected to: (i) strengthen budget preparation, execution, and control, including enhanced tax legislation and stronger impact of public expenditures on poverty; and (ii)raise the standard of petroleum governance in line with international standards of transparency and competition as well as the Extractive Industries Transparency Initiative (EITI). Risks Five main risks could influence the expected outcomes of the proposed operation: (i) external factors such as increasing international oil prices or shortfalls in donor support could have a deterring impact on economic growth, reduce government resources and affect its ability to conduct its reform program - reserves accumulation and close cooperation with bilateral donors and the IMF reduce this risk; (ii)policy reversals or slippages in structural reforms, notably petroleum sector management, could affect the Government’s ability to maintain a stable macroeconomic environment and focus expenditure on poverty reducing priorities identified in the PRSP - the prior actions assure early implementation of key policies; (iii)weak human, institutional, and managerial capacity could slow down the pace of implementation - this risk is being mitigated by concentrating reforms in a limited number of sectors and heightened technical assistance; (iv) fiduciary risks with regard to the use of public funds remain as internal and external control mechanisms remain weak - this risk is mitigated by the wide scope of public finance management reforms underway; and (v) reforms and the growth momentum may not be sustainable if oil exploitation does not materialize - the authorities agree that additional policy adjustments would be needed in such a case. All these risks are mitigated by the strength of the Government’s ownership and commitment to implement the proposed measures, the Government’s resolve to advance its reform agenda, in particular public finance management, by an active policy dialogue with Bank and Fund staff and the extension of the Bank’s Technical Assistance Capacity Building project and the assistance of a Policy and Human Resources Development (PHRD) grant to prepare the operation. Various donors are providing technical assistance to improve capacity-building and ensure full implementation ofreforms. Project ID P 106468. Number
,.. 111
THE DEMOCRATIC REPUBLIC OF sAo TOME AND PR~NCIPE PUBLIC AND NATURAL RESOURCE MANAGEMENT DEVELOPMENT POLICY GRANT
I. INTRODUCTION
1. SPo Tomb and Principe (STP) is a small, poor Archipelago State. An archipelago of just over 1,000 square kilometers in the Gulf of Guinea, SBo Tom6 and Principe (STP) is one of the smallest economies in Africa with some 166,000 inhabitants and a gross national income (GNI) per capita of USS740. As of 2001, 54 percent of the population lived in poverty, and 15 percent lived in extreme poverty. Oil was discovered in 2006 in the waters STP shares with Nigeria but effective exploitation, if achievable, is not expected until 2014.
2. The country is vulnerable, with little institutional capacity, yet committed to macroeconomic stability and pro-poor growth. S5o Tom6 and Principe faces many development challenges because of its small size and vulnerability to terms of trade and aid dependency. Although a number of social indicators have improved over the past years they remain weak and progress toward achieving the Millennium Development Goals (MDGs) is slow and difficult to measure (Annex 6). To face these challenges, the authorities approved their Poverty Reduction Strategy Paper (PRSP) in 2003 and have been firmly implementing it since then. In addition, they have maintained a fair amount of fiscal and monetary discipline in line with objectives set in the IMF’s Poverty Reduction and Growth Facility (PRGF) 2006-2008. These achievements have allowed the country to reach the Completion Point under the Enhanced HIPC Initiative in March 2007 and to receive additional debt relief (topping-up and Multilateral Debt Relief Initiative, MDRI) in the amount ofUSS3 14 million in nominal terms.
3. There are concerns about fiscal sustainability if oil exploitation does not materialize. Since 2005 the country has received USS77.8 million in oil bonuses from international oil companies for oil exploration in the joint waters shared with Nigeria. Partial use of these funds has helped close the fiscal gap since 2005 but raised social expectations as reflected in the almost doubling of the wage bill between 2002 and 2007. IMF and World Bank staff agree that in the absence ofoil production revenues, there is a high risk ofdebt and fiscal unsustainability once oil bonuses run out. Furthermore, macroeconomic projections show that even if SBo Tom6 and Principe produces oil, it will require substantial external assistance to bridge the interim period until 2014 when oil exploitation might actually begin. Until oil exploitation starts, Bank and the IMF staff have advised the authorities to rein in current expenditures, notably the wage bill, improve the business environment to raise economic growth and diversify the economy, and limit the financing ofthe current account deficit to grant or concessional support.
4. This operation (totaling SDR 3.7 million or 3.8 percent of GDP) supports the implementation of the PRSP in line with CAS objectives and helps consolidate the results achieved under the IMF-PRGF program. Building on the achievements and lessons of previous projects as well as the recently completed Public Expenditure Management and Financial Accountability Review (PEMFAR), the proposed operation will support CAS implementation and the Government Action Plan in line with PRSP objectives. These include (i) improving public expenditure efficiency through better budget preparation, execution, and control in the context of the implementation of PEMFAR recommendations, strengthening tax legislation, and assuring stronger impact of public expenditures on poverty; and (ii)raising the
1 standard of oil revenue management in line with the Extractive Industries Transparency Initiative (EITI). This Government Action Plan is aligned around the PRSP pillars (see paragraph 35).
5. This operation also strengthens institutional capacity to benefit potential oil production and promotes coordination with other donors. Oil-abundant economies tend to perform poorly in regard to long-term growth rates (when compared to non-oil economies). They experience higher levels ofvolatility ofoutput and revenues and, in spite oftheir resource wealth, a large number of them are classified as severely indebted countries. In addition, there is ample evidence that oil-induced growth is hardly pro-poor and that the arrival of significant oil wealth can undermine already weak institutions. The proposed operation will provide critical support and financing necessary to facilitate the continuation of the ongoing reform process, strengthen institutional capacity on PRSP implementation and budget processes, and improve the policy framework in the petroleum sector setting forth best international practices of transparency and accountability particularly in opening the Exclusive Economic Zone to oil exploration. The operation will be implemented in close,collaboration with other donors, especially those involved in Public Finance Management Reform (Portugal, France, European Union, Millennium Challenge Corporation, UNDP and AfDB) to prepare the ground for eventual future joint budget support operations.
11. COUNTRY CONTEXT
A. POLITICAL CONTEXT IN SA0 TOME AND PRiNCIPE
6. SHo TomC and Principe evolved from a Marxist rule regime after independence to a multi-party political system in the 1990s. STP was under Portugal’s rule until 1974 when socialist economic policies were introduced under a single mamist party. Due to economic deterioration during the 1980s and pressure from both the population and Western donors, a democratic constitution was formulated and the first multi-party legislative election was held in January 199 1.
7. Since 1991 the democratic political system has been marked by instability and frequent turnover of Governments’. In addition, there were two brief and bloodless coups in 1995 and in 2003 and members of the elite police force seized the Si50 TomC police headquarters in October and November 2007 demanding payment of a bonus and other benefits. In 2006, legislative, regional and local elections were won by the President’s party, the Movimento Democrhtico das Forqas da Mudanqa (MDFM) which, together with the Partido da ConvergCncia Democratica (PCD), formed a minority government with the support of23 out of the 55 seats in the National Assembly. In July 2006, President Fradique de Menezes was reelected for his second and last tenure.
8. A new government coalition has been formed in February 2008 with a majority in the National Assembly. After a Cabinet reshuffle in November 2007, the minority coalition government submitted the 2008 Budget to the National Assembly in January 2008 but, given its likely failure to obtain the necessary support, the government withdrew it from discussions before the final vote was called. Thereafter, the Prime Minister stepped down and a new government was formed in February 2008, in coalition with an opposition party, the Acqi5o Democratica Independente (ADI). As a result, the new Government now holds a majority in the National
I Since 2001 when the current President was elected, the country has had seven Prime Ministers.
2 Assembly (35 out of the 55 seats), which is expected to facilitate approval of key legislation in the National Assembly.
B. SOCIAL CONTEXT IN SA0 TOME AND PRiNCIPE
9. The 2006 UNDP Human Development Report ranks SHo Tom6 and Principe 123'd out of 177 countries, comparable to oil producing middle income countries in the region such as Gabon (119) and Equatorial Guinea (127). There is a relative paucity of data on poverty with the most recent household survey dating to 2001. This survey showed a deterioration in poverty, with poverty incidence estimated at 54 percent (including 15 percent in extreme poverty), compared to 42 percent recorded in 1990. Sector analysis and administrative data indicate that there has been an improvement since 2001 in health and education indicators that remain above the Sub-Saharan region average (Table 1 and Annex 5).
10. In education, STP received Education for All-Fast Track Initiative endorsement in November 2007 and is pursuing structural reforms aimed at reaching universal primary completion by 2015. It now faces the need to expand secondary education which is being pursued through implementation of sector reforms. In the context of these reforms, public education expenditures have increased to 8.6 percent of GDP in 2006 compared to 2.7 percent of GDP in 2002. Although the official primary net enrollment ratio stood at 97 percent in 2006 (above the Sub-Saharan average of 71 percent), the quality of education is still wanting reflecting the low level ofteachers' qualification and the limited learning time associated with a triple shift regime. STP spends a large proportion of its education budget at the tertiary level, namely through foreign study scholarships. Progress in education has been achieved in the primary completion rate, jointly with a reduction in the repetition rate, which may be associated to some reduction in the triple shift regime.
11. A Multi Indicators Cluster Survey on Mother and Child Health was completed in 2006 providing up-dated data and evidence that health sector reforms are starting to have an impact on maternity and child health outcomes (Table 1). The survey data show considerable success in the area of infant mortality which, now at 61 per 1,000 live births, stands well below the Sub-Saharan average. This has helped maintain the under-five mortality rate at reasonable levels. Maternal mortality rates have also declined substantially. The reasons behind these improvements, in addition to strong government commitment, are successful donor-supported health sector interventions to improve service delivery and an emphasis on preventive care (Box 1). These health sector outcomes are encouraging but efforts will be needed to maintain the path ofreforms and ensure sustainability.
3 Box 1: Success in the health sector
12. These gains notwithstanding public delivery of social services in STP remains constrained by the inability of Government and stakeholders to assess both the degree to which strategies are implemented and their impact. The recently prepared JSAN signaled poor data collection, compilation, interpretation and dissemination and an inadequate evaluation and monitoring system for the MDGs. In addition, the recent PEMFAR highlighted that pro-poor social expenditures have a limited impact due to sector strategies that are not fully consistent with the annual budget allocations and the long-term strategy set in the PRSP.
Table 1: Summary of Key Social Indicators, 1990-2005 Indicators 1990 1995 2000 2001 2002 2003 2004 2005 Education: Net primary school enrollment (%) 85 97 99 98 97 Female enrollment 95 99 98 96 Male enrollment 99 100 98 97 Primary Completion Rate (%) 44 61 60 75 77 Repetition Rate, Primary (% of total enrollment) 26 29 25 23 Health: Life expentancy at birth, years 64.3 49.1 Immunization, DPT (% of children ages 12-23 months) 92 79 82 92 92 94 99 97 Immunization, Measels (% ofchildren ages 12-23 months 71 74 69 88 Infant mortality (per 1,000 live births) 75 75 75 61 102 Under4 mortality rate (per 1,000) 118 118 118 118 Maternal mortality (per 100,000 live births) 124 114 105
c. RECENT ECONOMICDEVELOPMENTS IN SA0 TOME AND PRiNCIPE
13. Improved macroeconomic performance following economic reforms starting in 1999. Emerging from many years ofrelative instability and isolation, STP engaged in a first set of reforms in 1999. These aimed at: (i)pursuing prudent fiscal and monetary policies; (ii) improving the efficiency of public spending; (iii)liberalizing the economy by reforming the import tariff structure, preparing for liberalization of the telecoms sector and privatizing a number of public enterprises; (iv) accelerating reforms by developing new strategies in health and education; and (v) building institutional capacities, especially in the nascent petroleum sector. This first round of reforms was followed by a second round in 2004 in the context of the HIPC
4 facility which has provided the country with a total ofUS$ 3 14 million of debt relief in nominal terms. Oil exploration which started in 1998 gathered momentum in 2001 with the signature of the Joint STP-Nigeria Treaty to exploit petroleum in an area of overlapping maritime boundary claims (see paragraph 82). As a result of these reforms, an improvement in world cocoa prices, and buoyant activity in the tourism and construction sectors, real GDP growth rose from 3 percent to 6.8 percent between 2000 and 2003.
14. Sustained high economic growth. GDP growth, which slowed down to about 4.5 percent in 2004-05 due to political instability and low levels of investment, bounced back to an average of 6.4 percent in 2006 and 2007 (Figure 1 and Table 2 in Annex 1) largely correlated with foreign direct investment (FDI) in construction and tourism in anticipation of potential oil production. The use of oil signature bonuses by the government also helped buoy further economic activity. In this context, the services sector, now accounting for more than half ofGDP, has started to take a significant role in the economy. Tourism has become the most dynamic sector and the primary source of foreign exchange for the country, with more than 40 percent of total exports earnings in 2005-06. Real GDP growth is also correlated with external assistance that financed on average 78 percent of public investments between 2000 and 2005 and is one of the main drivers of domestic investment. It is the agricultural sector that now needs to contribute more to overall growth; it represented only 10.5 percent of GDP in 2005. There is undoubtedly a large potential in the sector which provides livelihood for 30 percent of the active population (2003), mostly informally (Figure l).’
Figure 1: Recent Real GDP Growth and Domestic Primary Deficit, 2003-2007
Real GDP Growth Domestic Primary Fiscal Deficit (Percent) (Percent of GDP)
3-
2-
1-
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
Sources: SZo Tom6 and Principe authorities and IMF staff estimates and projections.
15. Improved fiscal stance but sustainability concerns remain. Fiscal performance (Table 3 in Annex 1) has benefited greatly from the implementation ofrelatively prudent policies, strong revenue collection and use of oil bonuses. Revenue increased from 27.6 percent of GDP in 2000 to 37.1 percent in 2006 due to the introduction of new taxes, rising tax rates, elimination of exceptions, and improved tax collection, including simplification of custom procedures. In addition, the budget received US$37.9 million from the National Oil Account (NOA)3 between
STP is located at the Equator and is known to be well endowed with fertile soil and abundant water resources. The National Oil Account was created after the 2004 Oil Revenue Management Law to deposit all oil revenues. Specific mechanisms are in place to restrict the amount of such revenues that can be used for annual budgetary expenditures. More in paragraphs 84 and 85.
5 2005 and 2007 (see paragraph 85). These budgetary inflows allowed the government to increase expenditures to 5 1 percent of GDP in 2006 with large annual fluctuations to accommodate social demands in a very volatile political environment. Current expenditures increased from 14.7 percent of GDP in 2000 to 28.7 percent in 2006 squeezing investment spending to 20 percent of GDP in 2006 compared with 24.1 percent ofGDP in 2000. The wage bill in particular reached the level of 8.7 percent of GDP in 2006 compared to around 5 percent in 2002, reducing the fiscal space for needed expenditure in goods and services. The year 2007 registered a substantial correction in public finances as oil revenues were buoyed by signature bonuses and current and capital expenditures were reduced -- the latter due mainly to a reduction in foreign grants, which was offset by HIPC resources. Although fiscal discipline has been broadly maintained in the framework ofthe PRGF, the domestic non-oil primary deficit4 for 2007 remains at 8.1 percent of GDP (compared to 10.1 percent in 2005) and raises concerns about overall fiscal sustainability once oil bonuses run out (Figure 1). In September 2007, the Government increased the tariffs for energy and water by 50 percent to compensate the electricity and water and sanitation company (EMAE) for rising oil prices and unchanged tariffs since October 2004.
16. Weak financial situation of State Owned Enterprises. The government undertook a sizeable program of privatization in 2000-01 in an attempt to fully or partially withdraw from economic sectors that were considered best served by private companies. As a result, it remains today the only shareholder of four fully state-owned enterprises considered essential in developing key economic sectors’. These companies are EMAE (Energy and Water and Sanitation), ENASA (Airport services), ENAPORT (Port services), and Correios (Postal services). They jointly employed 527 employees in 2005 or 15 percent of the public sector employment (excluding the military and police force) and generated combined annual revenues close to US$16 million, equal to 14 percent of GDP. The elimination of government subsidies in 2002 coupled with lack of public investment and the obligation to transfer to the Treasury all profits earned have strongly undermined their financial position and in 2005 EMAE and ENASA incurred large losses, while ENAPORT and CORREIOS reported small profits. This in turn has translated into higher contingent liabilities for the Government as the only owner ofthese SOEs.
17. Poor service provision of public utilities. Reduced investment and operation and maintenance expenditures have led to irregular and poor quality service provision and payment arrears to suppliers and the Government. As a result ofthese weaknesses, STP continues to suffer from low levels of electrification (42 percent) and sanitation coverage (25 percent). Tourism the main source of foreign exchange is constrained by poor airport conditions that limit the size of airplanes landing in the country and unreliable and expensive electricity and water that increase the cost incurred by private hotels and restaurants. In addition, port services, the principal gate of entry of imports are expensive and unreliable due to the lack of a deep sea water port, increasing the cost ofimports and hampering export expansion.
18. Difficulties to control inflation. Inflation, which had dropped to less than 10 percent by 2003, reached 27.6 percent at end-December 2007 (Figure 2). While the expansionary fiscal policy and accommodating monetary management over the last three years provide the backdrop to this rising trend, two other factors explain the large spike in prices in 2007: the dollar depreciation and soaring international oil and food prices partially passed through to consumers. Indeed, excluding food and energy prices, inflation amounted to around 10 percent in 2007. The
The domestic non-oil primary deficit excludes oil revenues, grants, interest earned, scheduled interest payments, foreign financed scholarships and foreign financed capital. The government also participates in the capital of a few other enterprises: 51 percent of ENCO (a petroleum importing and distribution company), 49 percent of CST Telecom, 40 percent of Banco International STP, and 30 percent of Air S2o Tomi.
6 remoteness, small size, and fragmented nature of the country (Principe island is 150 kms away from S2o Tome island) are known to be of particular disadvantage notably with a considerable amount ofsupply disruptions and speculation in 2007. The Central Bank is formally committed to maintain a tight monetary policy to counter inflation pressures but is seriously limited by the underdeveloped state of financial intermediation in the country and the need to accumulate foreign reserves especially given the very volatile external environment. At end-2007, net official reserves exceeded the PRGF target by US$5.6 million. Finally, the Central Bank is intensifying efforts to improve its supervision capacity that is still weak due to shortage of skilled staff and limited reliable information.
19. STP’s financial sector suffers from the common weaknesses associated with small states such as narrow market base, costly infrastructure, lack of skilled personnel, etc. As a result interest rates have traditionally been high, currently exceeding 30 percent. An Anti-money Laundering law in line with the UN Global Program of fight against Money Laundering has been passed by the National Assembly in April 17, 2008. This law aims to prevent and combat money laundering, preventing economic and organized crime. It also looks at fostering coordination of agencies in charge of financial supervision, monitoring and control and providing assistance and training of qualified personnel to study the African and international reality for better implementation ofthe legislation.
20. Structural external deficit, dependency on aid flows and vulnerability to terms of trade. Exports of goods and services represented 13 percent of GDP in 2006 with cocoa representing the main traditional export commodity (37 percent of exports of goods). However tourism has surpassed cocoa in terms ofexport earnings, representing 41 percent oftotal export of goods and services in 2006. Imports of goods represented 44 percent of GDP in 2007 and included a broad range of products from food to oil due to insularity and limited domestic production. The current account deficit (excluding official transfers) averaged 37 percent of GDP between 2000 and 2005, financed mainly by official aid flows (around 29 percent of GDP), rising FDI for tourism, construction and oil exploration (5.7 percent of GDP). Since 2005 payments for oil signature bonuses have become an additional source of foreign capital inflows. These inflows have helped increase official reserves to four months of imports (Figure 2). STP’s terms oftrade are extremely sensitive to international price fluctuations, particularly ofcocoa and oil.
Figure 2: Inflation Rate and Financial and Capital Account, 2003-2007
40
35
-Consumer pnce index, 2000=100 (average) 30 -SNon-focd CPI -Base money in dobras (rhs) 25
20
15
10
5
0 Jan-03 Jan-04 Jan-05 Jan-OB Jan.07 2003 2004 2005 2006 2007
Sources: SZo Tome and Principe authorities and IMF staff estimates and projections
7 2 1. Flexible exchange rate has prevented real exchange appreciation The managed-float exchange rate regime has helped to contain the impacts of volatile prices for cocoa and oil. Persistent inflation has depreciated the dobra 60 percent relative to the US dollar since 2001 and prevented persistent real exchange rate appreciation (Figure 3). The government aims at diversifying the economy to foster economic growth with special focus on tourism and agriculture. The plan is to identify the institutional constraints the agricultural sector faces and identify agricultural crops with export potential as well as inputs required to improve productivity in the sector. This will help to develop rural employment (including non-farm employment) and reduce poverty. A hike in agricultural productivity and export promotion should increase overall productivity and facilitate the transition to an oil producing economy with limited impact on the real exchange rate.
22. The Completion Point under the Enhanced HIPC initiative was reached in March 2007 but the risk of debt distress remains high. The successful implementation of its reform program enabled ,990 Tom6 and Principe to reach Completion Point under the Enhanced HIPC Initiative on March 15, 2007 and to receive additional debt relief (topping-up and MDRI) in the amount of US$3 14 million in nominal terms (Figure 3). However the recent Debt Sustainability Analysis for low income countries shows that S9o Tome and Principe’s risk of debt distress will remain high until oil production starts. Despite a significant reduction in the net present value of debt at the HIPC Completion Point, Silo Tom6 and Principe’s public debt (estimated at 15.9 percent of GDP in 2007) will also be vulnerable to shocks to the exchange rate, and volatility of exports and foreign grants, at least until oil production stark6 External debt vulnerability would be further exacerbated in the absence of sound macroeconomic policies and undue delays in oil production. These risks underscore the need for prudent fiscal and debt management policies, continued reliance on concessional financing, and implementation of structural reforms that support broad-based, long-term economic growth and diversification.’ Furthermore, this calls for sustained concessional support in the interim period until oil production.
Figure 3: Real Exchange Rate and Outstanding Debt
120 14,900 400 400
115 14.400 Public Debt 350 (percent of GDP) 350 110 13,900 -Real Effective Exchange Rate 13400 300 300 105 awmDobras per US dollar (rhs) 12,900 250 250 100 12,400
95 11,900 200 200
90 11,400 150 150 10,900 85 10,400 100 100 80 9 900 50 50 75 9 400
70 8900 0 0 Jan-03 Jan-04 Jan-05 Jan-05 Jan-07 2003 2004 2005 2006 2007 Sources: SBo Tom6 and Principe authorities and IMF staff estimates and projections.
Debt servicing however represents only about 6 percent of export earnings. ’ A Debt Management Performance Assessment Tool (DeMPA), a methodology for assessing government debt management performance through a comprehensive set of indicators, was carried out by a World Bank team in February, 2008. The assessment revealed that overall STP meets the minimum requirements set out by the DeMPA only in the fields of evaluation of debt management operations and coordination with monetary policy. For the other indicators the Government does not meet the minimum requirements. Among the different areas for improvement, the report identified the legal framework and the managerial structures as key priorities in a reform program.
8 D. MACROECONOMICOUTLOOK AND DEBTSUSTAINABILITY
23. Macroeconomic objectives. Sgo Tom6 and Principe’s macroeconomic objectives for 2008-2009 have been formulated in collaboration with the IMF under a PRGF program. The main targets for 2008 are to: (i)achieve an annual real GDP growth rate of 6 percent; (ii)limit annual inflation to 13-15 percent by the end of2008; and (iii)maintain gross international reserves above the 4 months of imports threshold. Moreover, the program aims to reduce the domestic non-oil primary deficit to 5.2 percent of GDP in 2008 and 4.2 percent ofGDP by 2009. The GDP growth projection is achievable assuming prudent fiscal policy that adjusts to drawings from the National Oil Account (NOA), appropriate levels of capital expenditure and PRSP implementation, and continued FDI and grant support from foreign donors. Growth would be driven by continued oil exploration, investment in construction, and tourism inflows. Three hotels are currently under construction, one of them scheduled to be completed mid-2008. Supply constraints in the power sector are likely to be reduced with the prospective arrival of foreign investment in the sectora8 These factors would help foster growth in agriculture and the services sectors. In this context, STP’s economic growth in the next few years would keep in line with the levels realized in the last three years. Continued implementation ofprudent monetary policy and budgetary restraint is expected to reduce inflation to 7 percent by end 2009. Key macroeconomic indicators for the medium-term macroeconomic framework are presented in Table 2 in Annex 1.
24. The fiscal framework for 2008 aims to reduce the domestic non-oil primary budget deficit to 5.2 percent ofGDP from 8.1 percent ofGDP in 2007, in particular to adjust to shrinking financing from the NOA (Table 3 in Annex 1). As no new oil bonuses are foreseen after 2008, the authorities have initiated progressive fiscal adjustment in the context ofthe PRGF program, based on the reduction of non-essential current expenditures and the containment of the wage bill (Figure 4). Following adoption ofthe new tax legislation, tax and non-tax revenues are expected to decline slightly in line with a reduction in tax rates (see paragraph 77). Oil signature bonuses also will be reduced to 16.4 percent of GDP in 2008 from 21.1 percent of GDP in 2007 (See paragraph 85) which will be partly offset by non HIPC external grants - these are expected to increase to 11.9 percent of GDP. Government spending is projected to decline to 33.3 percent of GDP following containment in recurrent expenditure by around 6.5 percent of GDP, with the wage bill reduced to 8.6 percent of GDP. Capital expenditures are expected to remain at 11.5 percent of GDP, mainly financed by foreign aid. Expenditures made from the HIPC account that includes the savings realized from debt forgiveness will remain at 2.6 percent of GDP. Taking into account the expected oil signature bonuses and the debt forgiveness to be granted in 2008 the overall fiscal balance (on a commitment basis and including grants) is projected to show a surplus of 40.6 percent of GDP in 2008 which will be used to finance external debt service obligations and restore adequate balances in the NOA.
* A few construction companies have expressed interest in the sector to produce and sell energy to EMAE.
9 Figure 4: Revenue and Current Expenditure Projections
Pro].
30 Fuel-tax
25 t 20
15
10
5
0 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 Sources: S9o Tom6 and Principe authorities and IMF staff estimates and projections.
25. This operation will assure full realization of the 2008 Budget objectives under the PRGF. The domestic non-oil primary budget deficit of 5.2 percent ofGDP in 2008 is expected to be fully financed by a small withdrawal from the NOA, as well as other net external financing including debt relief and funds from this operation. As mentioned in paragraph 24, the sharp decrease in the use of oil bonuses reflects the depletion of the NOA. Consequently, the concessional nature of external assistance is essential to avoid exacerbating the debt situation of STP.
26. External Position. STP’s external targets for 2008 are in line with the commitments under the PRGF. Gross official reserves amounting to US$38 million at end-2007 represent 5.1 months of import coverage. A widening of the current account deficit (excluding grants) from 39.5 percent of GDP in 2005 to 52 percent of GDP in 2008 is expected driven mainly by higher imports for oil exploration and increased prices of petroleum and food imports. Table 4 in Annex 1 shows that this deficit is fully covered by the flows of foreign aid (20 percent of GDP), oil signature bonuses (16 percent of GDP) and foreign direct investment, notably in the construction and tourism sectors as well as oil related exploration (20 percent of GDP). With these macroeconomic projections, STP’s external debt is expected to remain below the 2007 level. Debt servicing is expected to remain at about 6 percent of export earnings in the next few years.
27. Medium-term macroeconomic prospects and the oil scenarios. The medium-term macroeconomic framework assumes that a last bonus payment, for blocks 5 and 6 in the JDZ, of US$ 26.1 million will be disbursed in 2008 (Figure 5). In the absence of any new bonuses in the JDZ andor in the Exclusive Economic Zone, the authorities will have to rely on existing funds in the NOA to breach the period until oil production starts, currently foreseen around 2014. If this bonus is paid, the NOA balance would suffice to breach that interim period assuming US$4 million allocation to the budget in 2009 and 2010 and US$4.5 million thereafter. At this rate, the NOA funds could cover the interim period until oil production starts even until 2019. In case the last bonus payment is not received, the NOA would last until 2012 and would require a flexible interpretation of the OWL9to avoid a large fall in aggregate demand. In that case and to avoid further scaling back investment, the government should start retrenching further current
The ORML foresees that a maximum of 20 percent of the NOA balance at the end of the fiscal year can be allocated to finance the following year’s budget.
10 expenditure in 2009 in line with the fiscal discipline adopted in 2008. In the long run, current fiscal policies are not sustainable if petroleum is not commercially exploited. It is in this context that the STP government aims to diversify its economy and foster domestic growth. If petroleum is commercially exploited, a programmed phase out of foreign grants will be needed to ensure a balanced transition to the potential oil era and avoid a drastic reduction in needed funds to breach the interim period.
Figure 5: Use of Oil signature Bonuses
20 60 Use of oil signature bonuses I Proj, National Oil Account Balance i Proj. I (millions of US dollars) I (e.o.p., millions of US dollars) I I 50 I 16 I I
40 I 12 I Blocks 5 & 6 j 30 bonuses ; a 20
4 10
0 0 2005 2006 2007 2008 2005 2006 2007 2008 Sources: SBo Tome and Principe authorities and IMF staff estimates and projections
28, Impact of international commodity prices. Current trends in international commodity prices affect negatively STP that, due to insularity relies heavily on a large variety of imports, including food," and has a limited range of exports. Recent estimated terms of trade show a negative shock of 9.8 percent ofGDP" in 2007 which implies that at current international prices, an additional US$14 million is required to maintain the 2006 trade balance. The government has taken some measures to mitigate the impact of this price hike on the poor, particularly the impact of the 68 percent water and electricity tariff increase in 2007 motivated by rising fuel prices. Tariffs for poor households'* will receive an implicit subsidy by rising 46 percent (to 0.2 percent ofGDP) the government's utility bill in 2007 to compensate the Energy company for a lower that requested household tariff hike. In 2008, this subsidy is expected to reach US$0.5 million (0.3 percent of GDP).
loYear- on-year food inflation started to accelerate in mid-2007 to reach 36 percent in January 2008.
I' The Term of Trade shock was calculated using price changes of the first two months of the year (i.e. changes between the average of January and February of 2007 and 2008) for 2006 and 2007 volumes in main imports and exports. Fuel and food, the two import goods considered, saw price increases of 68 and 36 percent respectively over the period while cocoa, the export good considered, saw price increases by 23 percent for the same period l2 Households have three tiers of tariffs according to consumption levels (less than 100Kwh; between 100 and 300 Kwh; above 300 Kwh). The latter did not get an (implicit) subsidy. The lowest consumption got the most part of the subsidy, a reduction of 25.6 percent in tariffs compared to the original tariff proposed and the middle consumers got a reduction of 16.7 percent compared to the original tariff propose. Commercial and industrial users did not get a tariff reduction.
11 E. GOVERNANCE
29. Improvement in Governance. A large program of public finance management strengthening is underway (see paragraph 46) including the approval of an Organic Law for Public Finance Management (SAFE law) in 2007. Oil revenue management is deemed to meet international standards of governance with the approval of the Oil Revenue Management Law (ORML) in 2004. Also, additional efforts are underway in the justice and business environment. These successes notwithstanding, STP continues to face key challenges notably with respect to weak domestic accountability, corruption, and uneven implementation and weak coordination of the core reforms.
30. Considerable progress in economic and financial governance. Preparation ofthe 2008 Budget followed closely the stipulations ofthe Organic Law on Public Finance Management that was passed in 2007. The biggest achievement was the introduction ofnew budget codes which for the first time allowed a functional classification of operations. A budget implementation system that links the Directorate of Treasury and Budget has been set up in 2007, strengthening budget control, monitoring, and reporting. These reforms, supported by an IDA-supported Technical Assistance project, should facilitate a better translation of PRSP priorities and sector policies into the budget, and help in the supervision of PRSP implementation (see paragraphs 65 to 75). Reforms ofthe procurement law and procedures as well as internal controls are being prepared in order to improve budget control and enhance public expenditure transparency and effectiveness.
3 1. Significant advances in petroleum revenue governance despite setbacks in 2007. Approval of the Oil Revenue Management Law (ORML) in 2004, was followed by official commitments to implement the EITI and the Abuja Declaration for supervision of the Joint Development Zone (JDZ) shared with Nigeria. In line with these engagements, the National Assembly passed legislation for the set up of the Petroleum Oversight Committee and the Public Registration and Information Office to audit and monitor oil revenue flows and disseminate oil related information. The progress registered however slowed down sharply in 2007 with some signals of disengagement to the transparency agenda on petroleum management. First, the Directors of the National Petroleum Agency were removed which has delayed the work agenda in this sector, particularly the activities for the promotion and preparation of open bidding of the Exclusive Economic Zone (EEZ). Second, the previous government presented to the National Assembly a proposal to modify the existing Oil Revenue Management Law with the view to introducing the option of direct negotiation of petroleum contract^'^. According to this plan, direct negotiations would be possible in exceptional cases in the EEZ for up to a third ofthe EEZ acreage, which would severely compromise the participation and interest of qualified companies in the process and would be in contradiction with the fundamental principles of good governance and transparency which are the foundations ofthe joint Bank and the Government of SBo Tom6 and Principe (GoSTP) collaboration. The National Assembly rejected the proposal in early 2008 and the new government formed in February, 2008 has now re-activated the activities to complete the petroleum sector legal and contractual framework as well as the technical and economic studies for the promotion and bidding of blocks in the Exclusive Economic Zone in 2008 (see paragraph 84).
32. The new government also aims to invigorate the governance agenda within the implementation of the Extractive Industries Transparency Initiative (EITI). Reengaging into the strategy agreed with the Bank with regard to governance in the petroleum sector, the l3The Government’s view at that time was that given the low prospect and high investment risk in the EEZ relative to the JDZ, foreign partners could not be attracted into this STP’s deep offshore zone without more favorable conditions.
12 Government has submitted to the National Assembly the draft National Petroleum Sector Law and approved the Model Contract for production sharing in line with international standards of transparency and competition. Directors of the National Petroleum Agency are being identified. In addition, supported by this operation, the government plans to publish the Handbook of Oil Management Law and adopt the Petroleum Development Strategy in June 2008. The Government aims at producing the first EITI report as part of its commitment to the implementation of the EITI after being accepted as candidate country in February.
33. Improving the justice system. The judicial system faces daunting challenges which the government is addressing through implementation of reforms in a few priority areas. The problems in STP’s justice system include: (i)delays in dispensation ofjustice due to backlogs and an antiquated legal system, including civil and criminal procedure laws which date back to the 19th Century, and as such are unsuited to a global market economy; (ii)insufficient technical capacity and human resources especially to address issues of globalized economic management; (iii)pressures and challenges related to the anticipation of oil exploration and production -- including technological, economic and political issues; (iv) corruption; (v) insufficient dissemination of legal information both within the justice sector and to the public and investors; and (vi) weak administration of justice and registries. The reforms underway which are being supported by the Portuguese government aim at improving the economic and financial legal framework (such as the proposed Criminal Code and Criminal Procedural Code and Anti-Money Laundering Law), as well as capacity building through training and dissemination. The Government also aims to develop commercial arbitration as a more viable alternative to the courts following on the passage of the Voluntary Arbitration Law in 2006. This option is in particular much more appropriate for small economies at low levels of development.
111. THE GOVERNMENT PROGRAM AND PARTICIPATORY PROCESSES
34. The PRSP was adopted in 2003 following an extensive consultative process with stakeholders. The process was managed by a steering committee chaired by the Prime Minister and consisting of representatives of government and civil society. Numerous workshops were organized for civil society, political parties and other stakeholders in the six districts on the island of ,320 Tom6 and on the island of Principe. A PRSP unit was set up in 2004 in the Ministry of Planning and Finance to ensure the implementation and monitoring ofthe PRSP, coordinating all Ministries, private sector and civil society under the overall fkamework of the PRSP. The PRSP was endorsed by the Boards of the World Bank and IMF in April and May 2005, respectively. The delay in the PRSP submission was related to the government’s effort to strengthen the macroeconomic framework. The original full PRSP document was supplemented by an extensive implementation annex for the years 2003-2005. Joint Staff Advisory Notes (JSAN) were presented to the Bank’s Board of Executive Directors in September 2006 and April 2008, emphasizing the need to undertake further poverty diagnostic, cost and prioritize sector strategies, attract private investment and donor support, enhance institutional capacity to ensure full implementation, monitoring and evaluation of the PRSP, as well as macroeconomic and political stability.
35. The poverty strategy sets an ambitious policy agenda with an overall cost of about US$210 million for the first seven years of implementation. It lays out a strategic plan for poverty reduction based on five pillars: (i)reform of public institutions, capacity building, and promotion of good governance; (ii)accelerated and redistributive growth; (iii)creation of opportunities to increase and diversify income for the poor; (iv) human resource development and access to basic social services; and (v) adoption ofmechanisms to monitor, assess and update the
13 strategy. The Government has translated the PRSP into a medium-term reform program called the Priority Action Plan (PAP) 2006-08 focused on: (i)attaining a GDP growth rate of 5 percent starting in 2003; (ii)halving poverty incidence by 2010, and further to 1/3 by 2015; (iii) providing the entire population with access to basic services by 2015 and help improve their quality oflife; (iv) reducing the social and gender gap between districts in SHo Tom6 and between these and the Autonomous Region of Principe, as well as between urban and rural populations; and (v) promoting and building institutional capacity and a policy ofgood governance.
36. Several additional sector strategies have been formulated over the last few years in addition to the PAP. In the framework of the World Bank Technical Assistance Capacity Building project, the government has developed action plans to improve public finance management, develop public accounts and a modem procurement system as well as bring petroleum revenue management in line with the EITI. The authorities also developed a health sector strategy for 2001-05 mainly focused on primary health and the strengthening of human resources and institutional capacity with an estimated budget of US$24.2 million for the period. The education strategy for the period 2003-13 was adopted in 2004 and focused on primary education, universal enrolment at the basic education level, and quality improvement. Finally, the authorities are developing a growth strategy that will help to identify priorities for a revised poverty reduction strategy.
37. The proposed operation is consistent with the government’s implementation of the PRSP and supports its efforts to initiate a new PRSP. The 2008 budget and program (Grandes Opqdes do Plano) was presented to the National Assembly in April 2008. The priorities are to reduce and simplify taxation in order to foster private investment and accelerate economic growth; favor public-private partnerships to improve utility services provision; improve efficiency of the public sector to reduce poverty, and adopt new petroleum legislation in the context of an expected round of bidding in STP’s Exclusive Economic Zone in 2008. As the Government’s Priority Action Plan 2006-08 comes to an end and following the recommendation of the recent Joint Staff Advisory Note (JSAN) on the Poverty Reduction Implementation Report, the authorities have decided to initiate the preparation of a new PRSP. The aim is for the new PRSP to build on the lessons learnt from the implementation of the current PRSP and to incorporate a more realistic assessment of oil prospects. A growth diversification strategy currently being prepared, paying more attention to the productive and economic sectors as well as the small size of the country, will also be formulated for inclusion into the next PRSP. With support from the UNDP, the authorities are already preparing the costing ofpolicies required to reach the Millennium Development Goals (MDGs) in 2015. The Bank will assist in developing the diversification and growth strategy that would also feed into the up-coming Country Economic Memorandum (CEM). These activities are being supported by a Policy and Human Resources Development (PHRD) grant.
38. The recent PEMFAR showed that the share of social expenditures in the total current expenditure has been a steady 30 percent since 2001, showing the long-term government’s commitment to social sectors. In line with this, the 2008 budget allocates 12.2 percent of total expenditure to education, 9.9 percent to health, 7.8 percent to housing and 2.8 to social security representing substantial increases over past years. An important policy and coherence issue is that the budget allocations and programs are not fully aligned with the PRSP. This is due not only to the weak institutional infrastructure in place but also to the fact that expenditures are heavily driven by donor’s financing objectives, not always aligned with Government priorities.
14 IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM
A. LINKTOCAS
39. The DPO supports the Government priorities and are in line with the FY06-FY09 CAS objectives of: (i)supporting the implementation of the PRSP and strengthening the areas where the PRSP needs to be improved, including the macroeconomic and public sector context; and (ii)providing assistance to SHo Tom6 and Principe to ensure that it is sufficiently prepared to maximize the benefits of future oil revenues.
40. The CAS outlines a gradual move to Development Policy Operations (budget support). The CAS states that a series ofDPOs could be envisaged starting in FY07 triggered by sound macroeconomic, public finance and oil management, closely linked to the PRSP Annual Progress Reports and prepared in collaboration with donors. The prerequisites mentioned in the CAS for moving to DPOs are: (i)the need to strengthen the overall strategy outlined in the PRSP, particularly to prepare annual priority action programs; (ii)a medium-term program for strengthening the fiduciary framework to ensure transparency and financial safeguards; and (iii)a need to identify a clear set of monitorable indicators around which future budgetary support operations could be aligned. On (i)the government is already implementing the 2006-2008 Priority Action Plan that details PRSP implementation and has submitted the relevant implementation reports in 2006 and 2007. On (ii)the fiduciary framework is being strengthened, supported by the Bank Technical Assistance Capacity Building project, and key PFM reforms were approved in 2007 (new organic public finance management law, new budget nomenclature, new integratedcomputerizedbudget system). On (iii)the team has presented a set ofindicators to monitor the DPO and will work with the authorities to further strengthen its system to provide time bound relevant indicators. Rather than entering a series of operations under the CAS, this operation recognizes the cumulative reform efforts in various areas over the CAS period.
B. COLLABORATION WITH THE IMF AND OTHER DONORS
41. IMF-Bank Coordination. The programs of the Bank and the Fund have been closely coordinated. The HIPC Completion Point Document was jointly prepared by Bank and Fund staff and completed by the Boards of the two institutions in March 2007. The staffs of IDA and the IMF have coordinated the contents of the DPO and the on-going PRGF program to ensure that these budget-support instruments complement each other. PFM measures supported by the PRGF program are in large part drawn from the Bank’s Technical Assistance project. The reform program underpinning the proposed operation is consistent with the macroeconomic program supported by the PRGF.14
42. Coordination with other donors. The strategic focus, contents, and triggers of the DPO have been presented to staff of the European Union which may provide budgetary assistance in the future. Moreover, Bank staff has consulted closely with other major donors such as AfDB, UNDP, Portugal, France and the Millennium Challenge Corporation (MCC) who are providing technical assistance for budgetary management and other reforms. Portugal has a multi-year project that provides Technical Assistance and Training, both in SHo Tom6 and Principe and in Portugal, encompassing all areas of the MoPF and including a resident macroeconomic advisor. France participated in the preparation of the CFAA. The MCC recently approved a threshold project of US$7.4 million that supports revenue collection (tax and customs compliance) and
l4STP is not a member of IFC and MIGA.
15 improvement in the business envir~nment'~and the EU finances technical assistance on macroeconomic management to the MoPF.
43. European Union. The EU has been implementing with STP its Ninth European Development Fund (2003-07) (EUR 14.8 million). Two projects for a total of EUR 10.8 million are being implemented to rehabilitate and maintain roads, mostly based on local labor and limited use of foreign capital. Self-sustainability of the Maintenance and Rehabilitation Fund by the government, based on a five percent petroleum surtax seems difficult given current budget tightening and world oil market prices. Starting in 2009, the Tenth European Development Fund with EUR 17.1 million covering the period 2008-20 13 will be implemented keeping the focus on the transport sector (EUR 13.3 million). It is yet to be decided whether this will be in the form of an investment or sector budget support operation.
44. AfDB. The objective ofthe 2005-09 assistance strategy ofthe AfDB Group is to support the Government's efforts to implement the PRSP in order to reach the MDGs. The indicative country allocation is US$6.8 million in the form of grants. This strategy will be articulated around two pillars: (i)poverty reduction in rural areas; and (ii)promotion of governance in Public Finance Management. The first pillar helps promote and diversify the country's economic base, especially the agricultural and rural sector, and reinforce operations in the social sectors. Under this pillar, the livestock development support project-phase I1 was approved in May 200616. The second pillar supports macroeconomic reforms and governance through an institutional support project on governance and a technical assistance on the PRSP process. These will help improve public finance management and institutional capacity to prepare the country for the forthcoming oil era. Given the considerable needs for institutional capacity building, the AfDB will finance strategic economic and sector studies such as the Country Governance Profile; the joint study with the World Bank on the integrated fiduciary assessment; a transport sector study; and the insular costs study. Furthermore, the AfDB will finance regional capacity building initiatives, within CEMAC, ECCAS, the African Portuguese-speaking countries and the small island states.
45. UNDP. The objective of the 2007-1 1 strategy of the UNDP is to support the Government at local and central levels to promote human development, gender equality and reduce poverty by two thirds by 2015. The strategy, financed by US$2.5 million of own resources and US$2.8 million ofadditional resources, will focus on three areas: (i)poverty reduction to reach the MDGs and tackle HIV/AIDS; (ii)good governance to the benefit of potential oil revenues; and (iii) environment and energy management for sustainable environment.
Is The MCC threshold program will assist the government to improve tax revenues, strengthening administrative capacity at the Tax and Customs Directorates and foster private sector growth by improving administrative and regulatory business registration procedures. The most expected outcomes are an increase in the number of registered taxpayers, stronger collection of accumulated arrears, streamlined customs procedures and reduced time and cost of reducing businesses. Upon successful completion of the reforms in these areas STP will become eligible for full MCC support. l6The AfDB has three ongoing projects in water and sanitation and hydrous diseases, human resource development and agriculture. Two of these projects have started recently, namely the human resource development project in 2005 (US$5.3 million from the African Development Fund and US0.8 million grant from the Technical Assistance Facility) to improve cross-sectoral capacity-building by providing for training in literacy, information, and community organization, as well as specialized vocational training and the second phase of the livestock development project to help diversify the economy approved in May 2006 (USS5.9 million).
16 c. RELATIONSHIP WITH OTHER BANKOPERATIONS
46. Technical Assistance Capacity Building project. Since 2004, a World Bank Technical Assistance Capacity Building project of US$5 million has supported reforms in public finance management, petroleum management and implementation of the PRSP. This project has assisted in the preparation in 2007 of the Organic Public Finance Management Law that lays the ground for the country’s fiduciary framework and institutional capacity for the management and implementation ofbudget support. The project has supported, among other things, the set up of a Computerized Integrated Financial Management Information System that links the directorate of Budget and the directorate of Treasury in a single budget execution system at the central government level and produces reports to facilitate budget control, monitoring and reporting that can be broken down by functional, economic or administrative classification following the decree on budget codes approved in 2007. The project also supports the reform on procurement, public accounting, financial management, public assets management, payroll management, medium term expenditure framework. The Petroleum management component of the project assisted the authorities in implementing the Oil Management Revenue Law, the set up of the National Petroleum Agency, and related institutions for improved governance in the oil sector.
47. Integrated Framework projects. The DTIS carried out by the World Bank in 2006-07 concluded with a set of recommendations that were translated into two projects financed by the Integrated Framework and implemented by the UNDP. These two projects, detailed below, will assist the Government in improving the business environment:
48. The Technical Assistance to Capacity Building for the Directorate of Commerce Project ($229,180; 18 months of implementation) aims at supporting the further integration of SBo Tom6 and Principe into the international and regional economy by enhancing its capacity to participate in trade related negotiations under the rules based system of the World Trade Organization (WTO). While it is questionable whether SBo Tom6 and Principe should seek full Membership of WTO at the present time, it is clear that negotiations for beneficial agreements in a regional and bilateral context are timely not least due to the coming of the petroleum era when investments and trade in goods and services are likely to increase substantially. SBo Tom6 and Principe needs to be prepared for this situation in order to secure agreements within non- petroleum sectors that will help the country build a long term, economically sustainable future based on the country’s endowments in renewable resources and services. The project focuses on building capacity for trade policy design, strategic decision making and trade negotiation skills through enhancement of human resource capacity and associated trade related technical assistance to the Directorate of Commerce of the Ministry of Economy. Relevant bodies from civil society and the private sector will also receive capacity building assistance with a view to allow their participation in the policy dialogue on a more equal footing.
49. The Technical Assistance to Establish an Enabling Environment for Business Development - One Stop Shop approach Project ($395,255; 3 years ofimplementation) aims at achieving the MDGs through increased private sector participation in the development process. This will be achieved by establishing an appropriate business enabling environment through Trade Related Technical Assistance (TRTA) to local capacity building in the field of trade and investment promotion where a one window approach is suggested. Capacity building within the institutional framework for provision of government regulatory services will also be enhanced through the TRTA. Reviewing and rewriting the Commercial and Investment Codes is the first activity of this project which will have repercussions on other activities such as simplifying the business registration procedures. The activities outlined in this project and the successes achieved will constitute the starting point for the development of other activities relevant to
17 international trade integration in areas such as public private partnerships and investment, to be submitted to the donor community during the future phases ofthe Integrated Framework.
50. A Trust Fund for Statistical Capacity Building Grant of US$160,000 was approved by the World Bank to the Ministry of Planning and Finance in 2006 to support the development of a National Strategy for the Development of Statistics and to strengthen statistical capacity. The implementing agency (Instituto Nacional das Estatisticas) completed an assessment of the national statistical system in 2007. It was carried out through two surveys (from users and producers of statistics) and was validated in a workshop, with the Government and all sectors involved. The conclusions from the report will be used to elaborate the statistics development strategy. An extension of the closing date ofthe trust fund was agreed until November 2009.
51. A PHRD Trust Fund Grant of US$0.6 million was approved in 2006 to assist the Government to prepare the DPO. The main components of the PHRD focus on State Owned Enterprise (SOE) reforms, strengthening treasury management, the development of a medium term expenditure framework, and the preparation of a growth study and related analysis to prepare a new PRSP.
D. LESSONSLEARNED
52. Move to budget support. The CAS analysis of previous Bank achievements in STP suggests budget support as an instrument to assist the country given its small size and limited human capacity. The CAS emphasizes that development policy operations coupled with appropriate capacity building activities should be considered more effective and efficient in delivering Bank’s assistance. Development policy operations also provide more leverage to the small amount ofIDA resources available to the country. The critical issue is to ensure that there is appropriate design and timing of such operations and that they build on the lessons learnt from previous adjustment credits.
53. Lessons learnt from previous budget support operations in the country. The last budget support operation in STP, the Public Resource Management Credit (PRMC) was approved in 2OOO.” The goal of the US$7.5 million project was to support the government’s macroeconomic and structural reform program with respect to: (i)improving domestic resource mobilization and the implementation of a tariff reform; (ii)strengthening public expenditure management; and (iii)advancing public enterprise reform. The project was also expected to assist the government’s regional integration effort. The Implementation Completion Report (ICR) that was completed in 2004 and rated the operation unsatisfactory highlighted that although the objectives were timely and addressed the needs of STP, they were also ambitious and wide ranging and did not appropriately incorporate some of the challenges that afflict small island states. The project was relatively complex and underestimated institutional capacity and political instability. Given these factors, the design of the project (a quick release of two tranches in a short period oftwo and half years and a final floating trance that was not actually disbursed) for such a large reform program was considered not appropriate.
54. Mitigation measures based on CAS analysis and lessons learned from previous budget support operations are: First, the importance of national ownership of the reforms. The main
” A Public Resource Management Technical Assistance Project (US$2.5 million) was approved at the same time to provide technical support to implement the PRSC, carry out studies to help prepare the PRSP and develop the agenda of macroeconomic and sectoral reforms. The ICR in 2004 highlighted that the project could have benefited from a closer definition of project’s objectives with the schedule supported by the PRMC and the development of the PRSP.
18 components of the DPO are derived from the Government’s own reform program. Second, the DPO should not be very ambitious, should be focused, and the project design should be simple. The program being supported focuses on priority policy measures that are challenging but can be implemented in 2008, taking into account institutional capacity. Although the reforms envisaged are a medium-term process that requires sustained effort and strengthened institutional capacity, as described in paragraph 13 the reform program in STP has been going on for the last eight years and it has taken heightened intensity after the elections of 2006. Also, the DPO concentrates on few components with limited conditions and indicators to ease implementation and facilitate supervision and the timing of measures is front loaded. Third, the need to appropriately link the operation with Technical Assistance activities. In this regard, the Technical Assistance capacity building project will continue assisting the government in the reform of Public Finance Management and oil revenue management, coupled with specific support from a PHRD grant to assist the government in the overall preparation of this DPO. Fourth, the increased leverage of donor collaboration, particularly with the IMF, and non-governmental stakeholder participation. Collaboration with the IMF has been very fi-uitful during the implementation of the PRGF and will continue during the implementation of the DPO. Coordination with other donors including civil society will be fostered through regular round tables and meetings that the authorities have started to organize in S5o Tome and Principe, particularly with the EU, UNDP, MCC, Portugal, France, Spain and AfDB.
55. Lessons learnt from Bank-wide analytical work on oil producing economies and small island states. STP has two characteristics that have been fairly well researched at the Bank. The first characteristic is its oil activities which affect economic management and the governance agenda.” The experience shows that oil-abundant economies tend to perform poorly in three wayslg: (a) they present lower long-term growth rates when compared to non-oil economies; (b) their output as well as government revenue experience higher volatility due to fluctuating commodity prices combined with undiversified revenue and export bases; and (c) in spite of their resource wealth, a large number of them are classified as severely indebted countries with high levels ofexternal debt, making them vulnerable to exchange rate fluctuations induced by volatile resource prices. In addition, there is ample evidence that oil-induced growth is hardly pro-poor and that the arrival of significant oil wealth can undermine already weak institutions creating a vicious cycle. The two main areas of focus of the DPO, namely public resource and petroleum sector management, coupled with strong implementation of the PRSP help to reduce these risks. In addition, the analysis to be carried out in the preparation of the new PRSP will also examine STP’s potential benefits from further regional or international integration. 2o
’*http://eitidev, forumone.com/section/abouteiti Karl, T. (1 997), The Paradox of Plenty: Oil Booms and Petro-States, Studies in International Political Economy, 26, University of California Press; IMF (2005), “Oil Market and Development Issues”, Policy Development and Review Department, Washington, DC: International Monetary Fund; and Cameiro, F. (2007), “Development Challenges of Resource-Rich Countries: The Case of Oil Exporters” VI International Colloquium, Macrodynamic Capabilities and Economic Development, University ofBrasilia. STP is a member of the Economic Community of Central African States (ECCAS). In 2004, it signed a commercial cooperation agreement with the Economic and Monetary Community of Central Africa (CEMAC) which established the legal basis for the creation of a free trade area between the group and STP. This could be implemented when the necessity arises, i.e. to facilitate the negotiations of an eventual Economic Partnership Agreement (EPA) with the European Union (EU).
19 56. The second characteristic that has been well researched*l is its small state nature. A summary ofthe conclusions reached on small states applied to STP is presented in Box 2.
Box 2: Lessons from other small states
E. ANALYTICAL UNDERPINNINGS
57. PEMFAR. The Bank finalized in 2007 a Public Expenditure Management and Financial Accountability Review (PEMFAR) that undertook a comprehensive assessment of S2o Tom6 and Principe's public financial management systems and capacities, with the results presented to the authorities in S2o Tom6 in March 2007. The Country Financial Accountability Assessment (CFAA) component of the PEMFAR presented to the Government a set of recommendations to address key weaknesses in public sector management and accelerate reforms in the areas of budget preparation, execution, reporting and control. These recommendations were translated into an action plan to be implemented over the next two years with the assistance ofthe World Bank Technical Assistance Capacity Building project. The recently completed Public Expenditure Review (PER) component of the PEMFAR highlighted the need to improve the environment for infrastructure services provision by strengthening the regulator, corporatizing SOEs, creating a SOEs directorate within the Ministry ofFinance that take stock of contingent liabilities of SOEs and adopting a policy to avoid building up arrears. This should be coupled with sector specific strategies, revision of the efficiency and targeting of current implicit subsidies to SOEs and, eventually, the introduction ofperformance contract system. The priority however is to strengthen
2'http://web.worldbank.org/WBSITE/EXTERNALIPROJECTS/O,,contentMDK:2143 109O-pagePK:4 1367-piPK5 153 3-theSitePK:4094 1,OO.html
20 the data base in all forms or arrears in the SOE sector. The Country Procurement Assessment Report (CPAR) component of the PEMFAR presented a very weak procurement system in the country, due mainly to the absence of a modern procurement law and implementing regulations, lack ofprocurement planning, weak procurement capacity in contracting entities, a narrow private sector, and limited internal and external control mechanisms. The recommendations stemming from this report are being incorporated by the Government in the drafting of the procurement regulations and the action plan for implementation of the procurement reform that is underway.
58. DTIS. The Bank undertook a Diagnostic Trade Integration Study (DTIS) in 2006 that highlighted the need to increase Foreign Direct Investment to diversify the economy out of traditional exports and eventual oil production, increase exports and foster growth. The study noted that the main impediments to trade and investment in STP are not related to the country’s formal trade regime or trade agreements but rather the inadequate business environment and infrastructure. The study also suggested passing new tax laws to simplify tax compliance and eliminate tax discrimination of foreign investment, streamlining the procedures for establishing and operating a business, and improving infrastructure by allowing private participation in SOEs coupled with better regulation.22
V. THE PROPOSED GRANT OPERATION
A. OPERATIONDESCRIPTION
59. Development Objectives. The proposed operation is designed to help implement the Government’s economic reform program during 2008-2009 that is based on the country’s PRSP by supporting policy measures aimed at: (i)improving accountability, effectiveness and the level ofpublic resources; and (ii)strengthening governance in the oil sector. In addition, the DPO will support the government’s plan to initiate preparation of a new PRSP. The CAS proposes to provide financial support through Development Policy Operations in support of PRSP implementation, with a view to preparing the ground for managing future oil revenues into the budget. The three areas being supported by the DPO represent the key sectors in STP’s economy having direct impact on the country’s level of income, poverty and overall governance. The DPO is fully aligned with the PRSP objectives of reforming public institutions, improving capacity, promoting good governance, and accelerating and redistributing growth.
22 The trade system is considered open, with no quantitative restrictions. Since 1998, STP has engaged in wide-ranging trade liberalization such as the liberalization of current account transactions in 1999, the elimination of nontariff barriers, and the liberalization of the exchange rate regime. The obligation to surrender export receipts to the central bank was abolished. The tariff schedule was reformed in 2002 to allow for four bands spanning zero to 20 percent, with some exemptions and surcharges. The government continues to implement a customs tariff reform in order to simplify the tariff structure and increase transparency, compliance, and revenues. It is pursuing gradual elimination of remaining customs exemptions, removing the central government import tariff exemptions in mid-2006. The nontariff barrier linked to monopoly practices relates to imports, and distribution by state-owned enterprises has been removed progressively with a partial privatization process. The last nontariff barrier protecting the domestic telecommunications company expired at the end of 2005.
21 Table 5: Summary of Key Objectives, Actions and Outcomes of the Operation Objectives Policy interventions Results PRSP committee formed and PRSP Launch the preparation of a new PRSP I 1 urocess underwav I Improving Strengthen budget preparation and National budget prepared and managed accountability, execution processes following modem methods and practices effectiveness and Simpler and more equitable corporate Revise tax legislation the level of public and personal income taxes resources SOEs financial status report lays out the Carry out analytical work for State information for preparing a reform Owned Enterprises (SOEs) reform later uroeramY Accelerate implementation of the EITI Publication of the fust EITI report Strengthening Strengthen the legal framework in the governance in the Qualified petroleum companies petroleum sector in preparation for the oil sector. expressing interest in the EEZ bidding granting of concessions in the EEZ
60. Benefits. This operation will raise the level, efficiency and effectiveness of existing public spending to better deliver key services. This will be achieved by supporting government’s policy actions to (i)improve public expenditure efficiency through better budget preparation, execution, and control; (ii)enhance the tax regimes and assure stronger impact of public expenditures on poverty; and (iii)raise the standard of petroleum sector governance in line with international standards of transparency and the Extractive Industries Transparency Initiative (EITI). Ultimately, the main benefits ofthis operation will accrue to all SBo Tomeans in terms of higher incomes, reduced poverty, and higher levels of transparency and political and economic stability.
61. This operation will strengthen key areas that will facilitate the implementation of a new PRSP. This grant will accelerate the implementation ofthe current PRSP and help prepare a new strategy that incorporates lessons learnt from the past experience and includes updated information on petroleum sector and growth diversification prospects. The public finance management focus will first enhance budget preparation and execution processes, thereby strengthening the link between public expenditure, the objectives set forth in the PRSP, and the links between sector strategies and corresponding program budgets. This will enhance the capacity of the country to better design and implement medium term strategies. Second, it will help reinforce the fiduciary framework to produce public accounts and strengthen accountability in public expenditure, procurement and financial management. Lastly, the DPO will help strengthen the analytical base for a more forceful growth strategy consistent with oil sector developments.
62. Prior Actions. The full program of actions to be supported by the proposed operation is set out in the Policy Matrix (Annex 3). The prior actions listed below assure early implementation of policies needed to realize higher levels of transparency and performance in key areas. All along the implementation ofthis operation, the government will need to maintain satisfactory macroeconomic performance. Prior actions already completed by the Government are presented in Box 3.
22 Box 3: Prior actions
63. Good practice principles in conditionality. Box 4 provides information on how good principles on conditionality have been applied in STP. It demonstrates the appropriateness of the reform program, especially given the government’s extensive participation in its design.
23 Box 4: How Good Practice Principles on Conditionality are being applied to the Operation
B. POLICYAREAS
64. This section provides a discussion of Silo Tom6 and Principe’s medium-term reform program around the issues of focus in this DPO, namely (i)improving accountability, efficiency and the level of public resources; and (ii)strengthening governance in the oil sector. These two pillars are part of the implementation agenda of the Government’s PRSP. In addition, the authorities aim to initiate the preparation of a new PRSP based on the lessons learnt from the implementation of the current PRSP and incorporating a well researched growth diversification strategy. The top strategic priorities are the reform of public institutions and promotion of good governance as well as acceleration of redistributive growth. Several of these actions are being jointly supported under the IMF PRGF. Considerable progress has already been realized in these areas over the last few years and the Government’s interest is to accelerate implementation. Each section includes a paragraph that summarizes the expected results, performance and monitoring indicators, and pertinent quantitative benchmarks.
24 a. Improving Accountability, Effectiveness and level of Public Resources
65. The top priority of the government and this operation is to assure continued progress in public finance management. Reform in this area is recognized to be time consuming and challenging for a small country at this level of development and the immediate objective is to ensure that the ongoing process of reform gathers stronger momentum. Budget management reforms are already being implemented with the support ofthe World Bank through the Technical Assistance Capacity Building Project started in 2004. The key objective of this DPO is to help deepen the ongoing reforms in budget management while launching reforms in subsequent phases such as treasury, accounting and procurement. Achievements and forthcoming actions supported by this DPO are presented below.
66. Budget preparation and formulation improved in 2007 with the approval of the Organic Law on Public Finance Management (SAFE law) that replaced the outdated 1986 Public Finance Management Organic Law. The biggest success under the new law is that dual budgeting of current and investment expenditures has been eliminated. This was followed by the adoption of a new budget nomenclature in 2007, allowing a more homogenous and transparent recording of all financial transactions of the State, and facilitating the analysis of budgetary outcomes according to internationally recognized standards. A chart of accounts was approved in September 2007 which will contribute to the production of more reliable government accounts. Still, implementation of these reforms remains a challenge because of lack of consistency between recurrent and investment expenditures that, in practice, still follow parallel budget processes, weak correspondence between the budget and PRSP priorities, and a predominant role of the Ministry of Planning and Budget with limited involvement of sector ministries. Also, the medium-term expenditure fkamework and multi-year sector allocations have not been integrated into the process. Furthermore, the Budget is persistently submitted with delays to the National Assembly which is not in a position to conduct a full review of the draft proposal due to insufficient time lead and few deputies with expertise in budgeting which further delays for budget approval. No supplemental budget is voted during the year. To improve budget presentation, as a prior action to this operation, the Ministry of Planning and Finance has presented the 2008 Budget to the National Assembly in compliance with Article 23 of the Organic Law for Public Finance (SAFE Law 3/2007). This included inter-alia the following additional information:
a) Government Program (Grandes Opq6es do Plano) b) Preliminary execution ofthe 2007 Budget c) A revenue forecast and expenditure limits d) Sources offunds for financing the 2008 Budget e) List ofinstitutions covered in the 2008 Budget f) A proposal of budget allocations for all institutions with administrative and financial autonomy and State Owned Enterprises
67. In order to improve the budget planning process and facilitate the preparation and supervision ofthe up-coming PRSP, the Council of Ministers issued a decree in May 2008 that specified all budget codes that correspond to PRSP priorities in social sectors. These codes will be used to produce quarterly execution reports of pro-poor budget expenditures, facilitating supervision of the financial implementation of the PRSP. Furthermore, the Council of Ministers will issue a decree by September 2008 to adapt the Budget Directorate to the SAFE reform, streamlining and clarifying its roles and functions. With this the Budget Directorate will concentrate on processes of budget preparation and control, as the commitment and liquidation
25 functions are gradually transferred to sector ministries (with payments responsibility remaining with the Treasury). In the medium term, the Government also plans to develop a module for budget preparation within the SAFE-e system with appropriate training of personnel at the Budget Directorate and the Budget and Accounting Departments at the Sector Ministries (DAFs) to take up budget expenditure functions foreseen in the SAFE law.
68. At the Budget execution level, the MoPF introduced in January 2007 a Computerized Integrated Financial Management Information System, allowing information to be available from the Budget Directorate (responsible for approving expenditure commitments and issuing payment orders) and the Treasury (responsible for actual payment and public accounting). However, the scope ofthe system has remained limited to the commitment and payment order sub-phase within the MoPF. As a result it is limited by four main deficiencies: (a) while commitments and liquidation are fully computerized, the payment phase is not as the Central Bank is not linked to the system; (b) the system does not produce public accounts; (c) sector ministries and decentralised bodies are not yet included in the system; and (d) several Directorates of the Ministry ofPlanning and Finance (Debt, Planning, Tax and Customs administration) are also not included. Budgetary procedures pertaining to investment expenditure in particular are cumbersome although the computerized system has improved execution time and control. Limited sector ministries’ involvement in budget execution increases the risk ofpaying for goods and services before they are provided. Current information on the execution of foreign-financed operations is incomplete and recording is delayed. To resolve these issues, the Government aims to expand the existing system to a larger system, SAFE-e, that will be developed locally by a team of local information technology specialists who will help build local capacity and experience in the maintenance of the system. A key element ofthe new enlarged system is that it will be based on a web-based technology and equipment server structure that will reduce maintenance.
69. Accounting system. STP does not keep records in accordance with double-entry accounting principles. Government accounts are managed with the sole objective of respecting budgetary ceilings and available financial resources. This rudimentary form of record keeping undermines the use of accrual techniques and prevents the construction of reliable General Government Accounts, which makes government macroeconomic and financial analyses more difficult and, more importantly, hinders effective internal and external control. The Chart of Accounts approved in September 2007 adopts the double-entry accounting technique in line with international standards. However, the Treasury Directorate does not have an accounting unit and the government’s accounting is limited to the daily recording ofexpenditures and revenues by the Central Bank. In the absence of a double-entry accounting system, it is not possible to howthe government’s financial position with sufficient certainty. Government accounts have yet to integrate externally financed expenditures, controls on physical assets are weak and, despite recent improvements, debt monitoring is deficient. Since no government balance sheet is prepared, the Treasury only provides to the National Assembly and the “Tribunal de C~ntas”~~ information in terms of payments inflows and outflows. Consequently, the closing balances for the previous fiscal year are not carried forward into opening balances for the following fiscal year.
70. This DPO will support the government’s plan to address these big issues. The first step was the issuance by the Council of Ministers of decrees in May 2008 creating a Public Accounting Department and an Information Technology Department in the Ministry of Planning and Finance with appropriate budget and personnel allocations. These personnel will collaborate
23 “Tribunal de Contas” is the Accounting General institution of the Government of STP.
26 in the development of the SAFE-e System, a fully integrated system that will assure that all budgetary, financial and asset operations are recorded in government accounts, thus assuring the production of reliable and consistent information. Effective production of public accounts will await the development of the SAFE-e system by December 2008. Simultaneously, the staff of these two departments will receive training in public accounting and subsequently in the use of the SAFE-e system. In addition, the Council of Ministers will issue a decree creating and staffing (by end-June 2008) an autonomous Directorate of Government Asset Management, with separate functions from the existing Treasury Directorate. Following this, the MoPF will approve an action plan spelling out the strategy for the management of government assets and recruit by September 2008 a firm to carry out two essential tasks: (i)carry out a survey of all government assets in each sector ministry to be completed by April 2009, and (ii)develop a software program by December 2008 for the management ofGovernment Assets.
71. Treasury. The current system of cash management based on monthly appropriations is not fully connected with the resource mobilization schedule. For budgetary programming purposes, the Treasury uses the approved annual budget divided into monthly twelfths, which makes treasury management quite rigid especially as some goods or services contracted are given priority; this causes delays in the payment of the rest of goods and services, which are not registered. The main risk is that the officers authorizing payments do not have the resources required to efficiently execute their budget, which generate either internal arrears or delays in executing public expenditure. The practice of paying for services before they are provided presents serious risks. The current information on the execution of foreign-financed operations is incomplete and requires setting up an information gathering system involving jointly the government and development partners. As a first step in the reform, the Treasury will carry out by September 2008 an inventory ofthe government’s unsettled financial obligations as ofDecember 31,2007.
72. To help avoid the recurrence ofsimilar problems in the future, the plan is to improve cash management at the Treasury by adopting by July 2008 a new methodology for preparing financial programs and cash plans, followed by the adoption of new manuals for Treasury operations by September 2008. This will be followed by a training program of Treasury Directorate personnel on the new operational manual by September 2008 and the adoption of a financial programming module into the SAFE-e system with a link to the Central Bank by March 2009. In addition, a settlement plan for the unsettled financial obligations will be approved by November 2008.
73. SOEs financial supervision. Controls remain weak, both internally and externally, and do not appropriately cover State Owned Enterprises that formally fall under the financial supervision of the Treasury that, in practice, has no capacity for this task. Yet as described in paragraph 16, SOEs represent a serious burden in STP’s economy. In this context, the government’s first action is to start the basic analytical work to fully assess the problems in the sector and possible remedies.24 The InspecqSio Geral de Finanqas (IGF), will carry out by September 2008 a diagnosis study of the accounting procedures and financial status of the four fully owned state enterprises as of December 31, 2007. The Treasury Directorate will be associated to this exercise and shortly afterward will be given the authority to monitor the financial situation of all fully or partially owned state enterprises in STP as part of a new supervision system for State Enterprises that will involve the MoPF and line ministries.
24 Other actions already taken by the GoSTP to improve SOEs financial position include the set up of a pre-paid electricity system by EMAE in 2007 as well as an overall 50 percent increase in water and electricity tariffs in August 2007.
27 74. Procurement. The recently finalized Country Procurement Assessment Review presents a very weak procurement system in STP, due mainly to the absence of a modern procurement law and implementing regulations, lack of procurement planning, weak procurement capacity in contracting entities, a narrow private sector, and limited internal and external control mechanisms. In the context ofthe World Bank Technical Assistance Project considerable amount of analytical work and consultations has already been carried out in preparation of procurement regulation^.^' An international consultant to draft the new procurement regulation and standard bidding documents was recruited in October 2007. A first draft ofthe procurement regulation has been produced end last year. On the basis of comments received by government agencies, a revised draft was prepared in March 2008. The key next steps that will be supported by this Grant are the issuance by the Council of Ministers of the decree on procurement regulation by October 2008, the issuance of a decree to create the Procurement Supervisory Body by November 2008, and the allocation of adequate budget and staff to the Procurement Supervisory Body by December 2008 as well as the design of a training program on procurement for Government procurement officers by February 2009. The impact ofthese reforms is expected to be very high especially as the objective for the country is to have modern procurement procedures aligned with the OEDCDAC methodology and allow the use of the procurement regulation within Bank financing under National Competitive Bidding.
75. Strengthening Payroll Management. The technical process for managing payroll is based on budget items. The collective payment order is issued by the Budget Directorate using special payroll management software, which contains a personnel database. However, databases used by the Budget Directorate and the Ministry of Justice and Public Administration are not reconciled. Payment (mostly in cash) and control of employees is performed by the Financial Management Directorates (DAF) at Sector Ministries, under the responsibility of the Treasury Directorate. The government is developing a plan for merging the payroll database at the Ministry of Planning and Finance and the personnel records database at the Ministry of Justice and Public Administration. In its initial phase, the plan will include a general headcount of government employees and the formulation of a proposal to develop a robust personnel records database at the Ministry ofJustice and Public Administration.
76. Strengthening the tax system. SZo Tom6 and Principe launched a review of its tax legislation in late 2006 to bring it in line with international standards. Following this review efforts are being made to strengthen the two main tax regimes in the country and the Corporate and Personal Income tax codes will be submitted to the National Assembly for approval. The two draft laws have benefited from technical assistance from the IMF and seek to harmonize taxation between enterprises and individuals, improve the rate structure, and strengthen tax assessment. These reforms will help reduce distortions and increase revenue buoyancy over the medium term. Given the importance of these laws for the country the government has expedited their approval in the National Assembly as part of the prior actions for this DPO.
77. Corporate income tax. Traditionally, the Tax Directorate has had difficulty in assessing corporate taxes due to limited institutional capacity and broad informality in STP economy. To simplify compliance procedures, the new Corporate Tax Code presented to the National Assembly in April 2008 distinguishes between major contributors, often subsidiaries of foreign companies, and small and medium size enterprises, also separated between those formally registered and those in the informal sector. The Code aims, on the one hand, to expand the tax base and improve and simplify corporate tax assessment and collection while limiting the
’’ The Organic Public Finance Management Law (SAFE law) includes provisions for procurement. The Government is preparing regulations on procurement to make it operational.
28 associated disincentives for foreign investment, and, on the other hand, to gradually bring small informal firms to the formal sector. The Millennium Challenge Corporation (MCC) and Portuguese technical assistance programs will help the government put in place the remaining implementing regulations in 2008. They will also help to strengthen tax collection by improving cooperation between different government directorates to effectively monitor all sources of corporate income. Finally, the corporate tax rates have been reduced from the current 30- 45 percent to a single rate of 25 percent which is closer to regional levels. This reduction in the number and level of the tax rate is expected to increase the number of contributors as shown by past experience in custom duties in STP.
78. Personal income tax. Currently, only salaries are taxed at a single rate of 13 percent, withheld at source. The tax base is very narrow as informality in the economy is widespread. To address this, the Personal Income Tax Code that has been submitted to the National Assembly in April 2008 applies to all forms of income, therefore reducing economic distortions that penalize the formal sector. Existing distortions will be further reduced with the introduction of progressive tax rates that are more consistent with corporate tax rates. Lastly, it introduces exemptions for payments such as scholarships or social security contributions both of which have strong positive impacts on human development.
79. Urban Tax. Last but not least, the government will also pass a new Urban Tax Law in the first half of 2008. While this is not considered as a prior action at this stage, the new law is expected to improve the overall framework of taxation in STP and eventually increase revenues. The current Urban Property Tax applies a 15 percent tax rate on any urban property with several correction factors depending on the year of property registration that reduces the total amount actually paid. Legislation in the field is cumbersome and difficult to apply as there is no reliable cadastre. Furthermore, companies set up in rural zones are excluded from this tax which may impact on business location. This draft law will address these issues in order to frame a modem urban property tax in line with international standards. The authorities also plan to strengthen the cadastre in order to better supervise compliance ofthe urban tax.
80. Establishing a Tax Tribunal. The National Assembly approved in March 2007 the General Tax Code and the Tax Procedural Code that modernize tax administration procedures and create a specialized Tax Tribunal (Tribunal Tributirio Nacional) for resolving appeals and enforcing collections.26However, the organic law that establishes the Tax Tribunal itself has not yet been enacted, undermining the capacity of the government to actually recover tax arrears. In this context the government is committed to preparing a draft law for National Assembly approval in July 2008 to establish the needed Tribunal. Coordination between the Ministry of Justice and Public Administration and the MoPF will be heightened over the next few months for the preparation of this law. Implementing regulations for the effective operation of the Tax Tribunal will be issued by December 2008. The Tribunal will be given financial and staff resources to carry out its mandate in January 2009. The authorities also plan with MCC and Portuguese support, to strengthen tax and customs administration, including stepping up efforts to audit tax returns and increase tax arrear collection.
8 1. Results. The main expected results in the PFM reform component are (i)an improvement in the efficiency of public expenditure with strengthened links between budget allocations and priorities as defined in the PSRP and (ii)improved transparency and accountability with
26 Currently, it is the Tax Directorate that assesses the merit of all appeals which creates a conflict of interests.
29 strengthened ex-ante and ex-post controls and application of the SAFE law to all public expenditures. These results will be measured by the following indicators: e PRSP committee formed and PRSP process underway. e Increased budget allocation to pro-poor expenditures in the 2009 budget compared to 2008 budget. e Quarterly reports of Treasury financial positions and cash plans including strong analyses offinancial monitoring performance produced. e A comprehensive report on State Enterprises financial status and monitoring systems produced by the IGF and Treasury. e Budget Directorate produces and distributes to the MoPF quarterly reports of budget execution following the adopted nomenclature. e Production ofpilot public accounts for 2008 (April 2009). e 70 percent ofcontracts above US $50,000 follow competitive procedures. e A single database with centralized information on government assets per Ministry is managed at the Department ofAssets Management. e An action plan to merge the payroll and personnel databases is adopted. e Corporate tax rate at ofprofits at 25%. e Progressive income tax rates in place covering all sources ofincome. b. Strengthening Governance in the Oil Sector
82. STP has the potential to become a petroleum producing nation. Nigeria and SBo TomC and Principe signed a Treaty in 2001 to establish a Joint Development Zone (JDZ) in an area of overlapping maritime boundary claims. The treaty set up the Joint Development Agency (JDA) to jointly manage the exploitation of the zone and granted 60 percent to Nigeria and 40 percent to SBo TomC and Principe of the benefits and obligations arising from development activities in the JDZ. In 2004, the JDZ undertook a Licensing Round and a consortium comprising Chevron, Exxon Mobil and the Nigerian company Dangote Energy Equity Resources paid a signature bonus ofUS $123 million for the right to sign a Production Sharing Contract and explore Block 1. In a second licensing round three other blocks were awarded and their licensees have also concluded Production Sharing Contracts: Sinopec (Block 2), Anadarko (Block 3) and Addax (Block 4) are their main operators. In addition to these, there is a contract with ERHC, signed in 1997 giving extensive rights for oil exploration in STP’s offshore waters for a very modest price.” These rights have since been scaled back in two successive rounds of negotiations, but are still considered extremely generous, including pre-emption rights to blocks 2-6 in the JDZ and an exemption from paying any “signature bonus” on its entitlements. As a consequence of this prior rights agreement, STP has foregone US $ 51.8 million in signature bonus for blocks 2-4. SBo TomC and Principe also has its own Exclusive Economic Zone (EEZ) that may have the potential for considerable petroleum discoveries and is developing its legislation and strengthening its technical and economic capacity to launch a first bidding round in 2008.
27 The contract with ERCH included provisions for setting up a joint venture oil company with the government, holding exclusive negotiations on behalf of STP’s government, earning 5 percent royalty interest in government concessions and getting exemptions from any duties and taxes.
30 83. Oil exploration. Results announced in May 2006 on exploratory drilling in Block 1 of the JDZ confirmed the existence of oil resources in ultra-deep sea. However, these resources are considered commercially not viable and no new exploratory drilling is expected until 2008. Further drilling could improve prospects of commercial exploitation but, in any case, should a commercial discovery takes place, production will start in 2014 at the earliest. Depending on the size ofdiscovery and rate of extraction, a well may produce for 15 to 25 years.
84. Importance of governance in the petroleum sector. The petroleum sector is the most important sector in STP economy not only in terms of future exports and economic growth but also in terms of its impact on the broader policy and governance agenda (see paragraph 55). To address the concerns shown by the international experience of oil producers in Africa and other developing countries, the National Assembly approved the Oil Revenue Management Law (ORML) in 2004. The law established an account - the National Oil Account - in which all oil revenues are deposited directly, introducing specific mechanisms to restrict the amount of such revenues that can be used for annual budgetary expenditures. The calculation of this amount is based on: (i)planned future revenues; and (ii)domestic absorption capacity. The finite nature of oil resources is also taken into account, as well as the need to introduce mechanisms that will allow Siio Tom6 and Principe to face the post-petroleum era with minimum economic distress. For that purpose, a reserve sub-account was established - the Permanent Fund of S5o Tom6 and Principe - in which part ofthe oil revenues shall be deposited for future generations, and whose use shall be strictly conditioned, except for the earnings generated from investments ofits funds. To complement the Organic Revenue Management Law, the government set up the National Petroleum Agency (NPA) and the National Assembly established in 2006 the Petroleum Oversight Commission and in 2007 the Public Registration and Information Office to audit and monitor oil revenue flows and disseminate oil related information.
85. Since 2005, the NOA has being operating according to the ORML. Oil signatures bonuses totaling US$77.8 million have been deposited in the NOA since 2005 which in turn have generated US$1.8 million interest earnings (Table 6). Drawings from the account to finance the budget have totaled US$37.9 million until 2007. In addition the NOA has also financed the delayed contributions to the JDA budget in 2005 and repayment of advances to Nigeria in 2007, totaling US$26.8 million. At the end of 2007 the NOA balance was US$14.9 million and was pending of US$26.1 million oil bonuses for Blocks 5 and 6 to be disbursed in 2008. However, legal controversies on these blocks may delay the bonus payment, quickly depleting the NOA. To avoid this and in line with the ORML provisions the expected drawings from the NOA to finance the 2008 budget will be reduced to US$3 million compared to US$8 million in 2007 and US$15.6 million in 2006.
31 Table 6: National Oil Account and Use of Oil Resources
Inflows: Signature Bonuses ’ 49.2 0.0 28.6 26.1 0.0 0.0 0.0 0.0 0.0 0.0 Interest earnings’ 0.2 0.9 0.7 1.5 2.6 1.4 0.7 0.4 0.5 0.9 Others 0.0 0.0 2.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Outflows: Oil-related payments 11.8 0.0 15.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Allocation to the Budget 14.3 15.6 8.0 3.0 4.0 4.0 4.5 4.5 4.5 4.5 Other transfers 0.0 0.0 2.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 National Oil Account balance (end of period) 23.3 8.6 14.9 39.5 38.1 35.5 31.7 27.6 23.6 20.0
Memorandum items: National Oil Account balance at the Central Bank 23.5 8.6 14.9 ...... Cumulative signature bonuses (incl. interest earning: 49.2 49.2 77.8 103.9 103.9 103.9 103.9 103.9 103.9 103.9 Cumulative other Davment 11.8 11.8 26.8 26.8 26.8 26.8 26.8 26.8 26.8 26.8 Cumulative allocahon to the budget 14.3 29.9 37.9 40.9 44.9 48.9 53.4 57.9 62.4 66.9 GDP 115 124 145 160 175 191 207 227 251 1,762 Source: National authorities, and IMF staff estimates and Droiections. ’ Base scenario assuming oil signature bonus for Blocks 5 and 6 is disbursed in 2008 * Assumed LIBOR 6 month rate refers to interest earned at the joint account held in Nigeria before being transferred to NOA Includes delayed contribution to the JDA budget in 2005 and repayment of advances to Nigeria in 2007 (excluding regular contributions to JDA) Projections for 2007 (exceeding the limit set in the Oil Revenue Management Law) and beyond are in line with IMF PRGF
86. Extractive Industries Transparency Initiative implementation. The government has committed to implementing the Extractive Industries Transparency Initiative (EITI). For the operations in the JDZ, the Abuja Declaration on oil supervision signed in 2004 by the Presidents of both countries proposes to align information and accounting practices of the Joint Development Authority (JDA) with best transparency standards. Notwithstanding the progress shown on oil management transparency, the country is still making efforts to fulfill the validation conditions laid out by the EITI International Committee. In this context, the DPO has supported as prior action the adoption by the national EITI committee in February 2008 ofan action plan for the implementation of the EITI, later adopted by the Ministry of Natural Resources and Environment by resolution number 11/2008 on April 23, 2008. Following its completion, STP has been accepted as a candidate country by the International EITI committee.
87. Recent setbacks on petroleum governance. Given the risks of setbacks in the management of the petroleum sector (see paragraph 31) this Grant supports as a prior action the submission by the Ministry ofNatural Resources and Finance to the National Assembly in May 2008 of the draft Petroleum Sector Law (Fundamental Law on Petroleum Operations), and the approval by the Council of Ministers of Decree 11/2008 on April, 30, 2008 assuring the use of a Model Contract for production sharing in oil sector concessions, in line with international standards of transparency and competition. The Government will also publish in June 2008 the Handbook ofOil Management Law and adopt the Petroleum Sector Development Strategy.
88. The key objective for the medium term is to assure strict implementation of best transparency practices under the EITI initiative both nationally and in the joint STP-Nigeria zone. In pursuing this objective, the Joint STP- Nigeria Committee will closely supervise transparency issues pertaining to the Joint Development Zone and the national EITI committee will establish close working relations and cross-representatives between the Petroleum Oversight Commission
32 and the national EITI committee. At the same time the legal and regulatory principles for the bidding ofthe EEZ blocks will also follow competitive and transparent rules.
89. Results. The main expected result in this area is the strengthening of institutions supervising oil revenue management in line with best international standards. This is expected to have a strong impact on both revenue mobilization and overall governance in STP, as the country plans to initiate bidding in its Exclusive Economic Zone in 2008. Furthermore, it will foster transparency in oil management within the JDZ shared with Nigeria in line with EITI practices. The indicators to measure appropriate implementation of these reforms will be: (i)publication of the first EITI report by October 2008; (ii)appropriate number of qualified petroleum companies expressing interest in the EEZ bidding process and; (iii)publication ofthe National Oil Account balances.
VI. OPERATION IMPLEMENTATION
A. POVERTY AND SOCIAL IMPACT
90. The proposed operation is designed to help implement the Government’s economic reform program for 2008-2009 that is based on S5o Tom6 and Principe’s Poverty Reduction Strategy Paper (PRSP). The reforms supported by the operation are expected to have likely and significant poverty and social impacts. Tax reforms are expected to have a positive distributional effect on the poor (see paragraph 92). Strengthened petroleum sector governance will have a positive effect on petroleum revenues and provide a framework for their use that benefits all S5o Tomeans. Public Finance Management reforms are expected to make public expenditure more effective, transparent and in line with pro-poor objectives set in the PRSP. Finally, the revision of the PRSP will revise the poverty reduction goals in line with the new macroeconomic and petroleum framework and will foster a growth strategy that benefits the poor through more stable employment and increasing income.
9 1. Pro-poor public expenditure. Weak Public Financial Management has limited the capacity of the government to prepare, execute and report the national budget which has led to inefficiency, limited control and loss of impact of limited public resources. This grant focuses on improving public finance management in order to enhance public expenditure efficiency to provide services that mainly benefit the poor. Also, Joint World Bank and IMF staff assessments of STP’s PRSP have emphasized the need for the poverty strategy to be more explicit on key priorities and budgetary allocations. In practice, the PRSP has not been used as the main policy reference in the preparation ofthe national budget, a situation further exacerbated by the lack ofa functional classification that appropriately allowed for the recording of pro-poor budget expenditures. To resolve this and facilitate the preparation and supervision of the up-coming PRSP, the DPO will support the Ministry of Planning and Finance plan to issue a decree that maps-out the budget codes to PRSP priorities. These codes will in turn be used to produce quarterly reports of pro-poor budget execution, facilitating supervision of the financial implementation ofthe PRSP.
92. Distributional effect of tax reforms. The new income tax aims at increasing public revenues to keep pace with needed social expenditure that benefits mostly the poor. It will do so by (i)expanding the tax base to include more tax payers, eliminate most of the exemptions and include all sources of income to calculate the tax base, and (ii)introducing progressivity by charging higher tax rates on higher incomes and exempt earners with low incomes. Exemptions to the tax will also include payments to various forms of social security. Accordingly, the burden of
33 the income tax reform will fall mostly on the better-off population and benefit the poorer. With regard to the corporate tax the government aims at reducing the currently high corporate tax rates and simplifying tax compliance to provide an incentive to formality that will promote more broad based economic growth and attract foreign direct investment.
93. Electricity and Water tariff and subsidies. This operation is not expected to have a direct impact on electricity and water tariff and subsidies. The Bank will support the Government to carry out additional analytical work with special focus on the distributional effects of any further tariff increases. Past information shows that impact ofthe 50 percent electricity and water tariff increase in 2007 may have had a large impact on household expenditure.** IMF has agreed on a new tariff structure that raises the Government’s burden ofthe tariff increase to compensate for less that originally requested tariff increase in poorest households.
94. The Government will support further analysis on electricity and water tariff and subsidies and the impact on different stakeholders. After the electricity and water tariff adjustments of August 2007, the government has decided that fwther tariffs increases will take place only after a deeper analysis of their impact. An increase in tariffs could have a substantial impact on poverty among households connected to the network and especially for the poorest with a connection and may not be a socially acceptable option in the short to medium term. For poverty reduction, the planned analysis will examine and evaluate options to minimize the impact on the poor, including the level and structure of tariffs, timing of adjustments, and alternative compensatory or mitigation measures. Also, the Government will evaluate the poverty impact of subsidies to EMAE and hence impact on tariffs, as well as alternative pro-poor public spending. Reforms will be designed on the basis of the above mentioned analysis and appropriate representation ofall stakeholders including public consultations
95. The Government plans to invest in energy and water and sanitation sectors, two key sectors for economic growth and human development. In the energy sector, the medium term objective is to develop public private partnerships to build new thermal and hydroelectric power stations as well as initiate the development ofrenewable energy production. In the meantime the government is prioritizing actions to improve EMAE’s accounting and commercial systems including an in depth review oftechnical and financial inter-linkages between the four main state enterprises. Also, the 2008 Budget provides allocations to rehabilitate energy production equipment to guarantee a minimum of 12 MW additional power generation. In the same way, the government is planning to develop a national strategy together with an action plan for the water and sanitation sector. This will be done in parallel with new investments aimed at extending drinking water to the outskirts of Silo Tome Capital, Agua Clara, Vadje Sum Pinho, Canga/Cruzeiro, Praia Gamboa, Ribeira Peixe and Sundy and Abade in Principe. These plans are being formulated with the view to facilitating discussions with donors for technical and financial assistance.
B. ENVIRONMENTALASPECTS
96. The specific policies supported under the proposed grant address primarily institutional reforms, and are not expected to have likely and significant effects on STP’s environment, forests, and other natural resources. However, there are possible environmental and natural
** For the poorest households with a connection, spending on electricity absorbs more than 5 percent of total spending, which is considered to be slightly above the threshold of affordability in an average country for services such as electricity or water.
34 resource consequences of oil exploration and potential oil extraction. Reforms of part of the institutional settings for oil exploration and exploitation are supported under this operation, but as noted above primarily with a focus on financial transparency and good governance (including EITI). Environmental aspects of oil exploration and potential exploitation have been taken into consideration through parallel technical assistance (including under a Bank-supported technical assistance project) for the design of the oil sector governance framework, and they reflect international best practice.
C. IMPLEMENTATION,MONITORINGAND EVALUATION
97. Implementation ministry. The ministry of Planning and Finance will be responsible for overall implementation of the proposed operation as well as for reporting progress and coordinating actions among other concerned ministries and agencies.
98. Need to improve the monitoring and evaluation system of the country. The Poverty Monitoring Unit in charge of monitoring and evaluating the implementation of the PRSP has limited administrative and technical capacity and lacks sufficient coordination with other stakeholders, such us the Directorate of Planning and the National Statistical Institute (INE). Furthermore, it does not have adequate data on poverty indicators. The government plans to set up the technical and advisory monitoring councils to foster coordination among different institutions and departments, and the INE aims strengthen the information system for MDGs data gathering in 2007, with assistance from AFRISTAT.
99. Program Monitoring. With a weak national monitoring system and a single tranche operation, the review of the program will be largely based on relevant and easy to monitor indicators and the goals of the program. A half-yearly review of the program will be carried out. Most of the components of the program will benefit from the monitoring system in place under the TA project and the IMF PRGF. The operation will also strengthen the monitoring and evaluation system to better monitor PRSP implementation.
D. FIDUCIARYASPECTS
100. Public financial management system. Public financial management issues are covered as part ofthe operation in section V, Improving Accountability, Effectiveness and level ofPublic resources, paragraphs 65 to 8 1. There are solid analytical underpinnings to this operation, including a 2007 PEMFAR. STP's fiduciary framework is adequate overall to receive the proceeds of the grant, particularly in light of the implementation of the PFM reform program already underway which the Government is committed to continuing with support from this operation.
101. Foreign exchange environment. Under the Fund's safeguards assessment policy, the Central Bank of SZo Tom6 and Principe was subject to a full safeguards assessment with respect to the PRGF arrangement approved on August 1, 2005. The assessment, which was completed on August 2, 2004, found vulnerabilities in the area offinancial reporting, internal audit and internal control. Measures to strengthen the control framework and help safeguard Fund resources were agreed with the authorities. Some recommendations have been implemented, including contracting annual external audits, endorsing plans to modernize the Central Bank's internal audit function, and adopting International Financial Reporting Standards (IFRS) as the bank's accounting framework. Although slow progress has been realized in the implementation of IFRS
35 and recent annual audited financial statements have not been publicly available on a timely basis, implementation ofthese recommendations is being monitored by Fund staff.
E. DISBURSEMENT
102. A single-tranche of SDR 3.7 million (US%6 million equivalent) will be disbursed upon grant effectiveness and following the Recipient’s request for withdrawal of proceeds of the grant. The proposed grant will follow the Bank’s standard disbursement procedures for development policy operations. The grant will be disbursed against satisfactory implementation of the development policy program and not tied to any specific purchases. Once the operation is approved by the Board and becomes effective, and following the Recipient’s request for withdrawal ofproceeds ofthe grant, the Bank will disburse the proceeds ofthe grant to a foreign currency account maintained at the Central Bank of SBo Tom6 and Principe and forming part of the official reserves of SBo Tom6 and Principe. The Recipient shall provide confirmation to the Bank that upon deposit ofthe grant into said account, an amount equivalent to the grant proceeds from the Bank has been credited in the Recipient’s budget management system, with an indication of the exchange rate applied, where applicable. The conversion from the foreign currency to the local currency will be based on the prevailing exchange rate on the date that the funds are credited to the budget management system. The Central Bank of Siio Tom6 and Principe will not impose any charges or commissions on the Recipient for these transactions.
103. If the proceeds of the grant are used for ineligible purposes as defined in the Financing Agreement, IDA will require the Recipient to, promptly upon notice from IDA, refund an amount equal to the amount of said payment to IDA. Amounts refunded to the Bank upon such request shall be cancelled. The administration of this grant will be the responsibility of the Ministry of Planning and Finance.
F. RISKS AND RISK MITIGATION
104. The first risk is the economy’s vulnerability to external factors such as increasing international oil prices or shortfall in donor support. This could have a deterring impact on economic growth, reduce government resources and affect its ability to conduct its reform program. The government has shown its commitment to keeping macroeconomic stability by passing through increasing international oil prices to consumers and raising electricity and water tariffs by 40-60 percent in September 2007.
105. The second risk is that the reform program supported by the DPO could falter as a result of policy reversals and/or slippages in key reforms, notably on petroleum governance, which could affect the Government’s ability to maintain a stable macroeconomic environment and focus expenditure on poverty reducing priorities identified in the PRSP. There is a broad consensus among all political parties on the need to advance economic reforms and maintain macroeconomic stability. In fact, very important laws were passed even when the Government party had no absolute majority in the National Assembly. This risk is further mitigated now that the new Government has majority in the National Assembly.
106. The third major risk is weak institutional capacity. Despite some achievements in terms of building up capacity in the National Petroleum Agency and the Ministry of Planning and Finance, major constraints to the implementation of reforms remain due to weak institutional capacity to prepare and implement reforms. The Technical Assistance Capacity Building which has been implemented with success over the last three years as well as the various technical assistance programs from the MCC and bilateral donors help alleviate this deficit.
36 107. The fourth risk is fiduciary. Despite the Government’s continued efforts to reinforce public finance management, some fiduciary risks with regard to the use ofpublic funds remain as internal and external control mechanisms are weak. The DPO contains measures to strengthen control mechanisms and improve accountability through more transparent processes as well as strengthened internal and external controls. Also, the risks associated with enforcement, institutional capacity and weak governance tied up to procurement are mitigated by the focus on procurement reform in design and content ofthe operation.
108. The fifth risk is the derailment of macroeconomic stability if oil exploitation or the payment of the 2008 oil bonus does not materialize or excessive social demands arise if oil exploitation is confirmed. New drillings foreseen in 2008 will provide new information about the potential exploitation of oil in STP as well as on the timing. If these drillings prove to be less successful than expected or the oil bonus outlay expected in 2008 does not materialize the fiscal stance may be affected in the short run. Alternatively, if the drillings are successful an increase in social demands may arise, also straining macroeconomic stability. To anticipate this, the authorities have committed to macroeconomic stability with initial dialogue to prepare a new IMF-PRGF for 2008-10 and have initiated a public information campaign to temper oil expectations.
37 Annex 1: Macroeconomic Framework
Table 2: Selected Economic Indicators, 2005-201 1
2005 2006 2007 2008 2009 2010 201 1 Est. Proj. Proj.
(Annual percentage changes, unless otherwise specified) National income and prices GDP at constant prices 5.7 6.7 6.0 6.0 6.0 6.0 6.0 Consumer prices End of period 17.2 24.6 27.6 13.0 9.0 7.0 6.0 Period average 16.3 23.1 18.5 19.4 9.8 6.5 5.5 External trade Exports, f.0.b. 22.6 -1.4 1.9 2.8 3.9 2.5 0.2 imports, c.i.f. 15.7 65.9 -6.0 15.0 8.0 8.9 1.6 Exchange rate (dobras per US$; end of period) ’ 11,748 12,945 14,220 ...... Real effective exchange rate (depreciation = -) 6.5 2.9 8.8 ...... Money and credit (end of period) Base money 76.6 32.0 50.0 7.7 17.0 16.0 12.5 Broad money (M3) 45.9 39.3 36.4 21.0 22.0 17.9 13.6 Central bank reference interest rate (percent) 18.2 28.0 28.0 ...... Bank lending rate (percent) 29.8 29.3 32.4 ...... Bank deposit rate (pecent) 11.5 10.8 12.8 ......
(Percent of GDP, unless otherwise specified) Government finance Total revenue, grants, and oil signature bonuses 81 .O 37.1 160.3 73.6 26.1 26.5 26.8 Of which: tax revenue 15.0 17.4 16.3 15.3 15.4 15.5 15.7 nontax revenue 2.3 3.7 2.8 1.8 1.6 1.5 1.4 grants 17.0 16.0 120.1 40.3 9,1 9.5 9.7 oil signature bonuses 46.8 0.0 21.1 16.3 0.0 0.0 0.0 Total expenditure and net lending 44.0 51 .O 40.0 33.1 32.0 31.2 31.2 Of which: personnel costs 8.6 8.7 8.9 8.6 8.3 8.0 7.9 nonwage noninterest current expenditure 14.8 16.5 15.6 9.1 8.3 7.6 7.6 capital and HIPC-related social expenditures 17.8 22.3 14.2 14.1 14.2 14.5 14.8 Domestic primary balance’ -10.1 -8.5 -8.1 -5.2 -4.2 -3.2 -3.0 Overall balance (commitment basis) 37.1 -13.9 120.3 40.5 -5.9 -4.7 -4.5 External sector Current account balance including official transfers -10.3 -41.3 -30.2 -31.6 -32.3 -33.7 -31.5 Excluding official transfers -39.5 -66.3 -52.1 -52.0 -49.2 -50.3 -47.4 NPV of external debt 171.1 161.2 15.9 7.9 8.2 8.4 8.6 External debt service (percent of exports) Before HlPC and MDRl debt relief 75.6 70.0 83.2 60.0 60.3 59.3 60.4 After HiPC and MDRi debt relief 62.1 35.9 27.8 4.2 5.9 5.5 5.4 Export of gods and services (US$ millions) 15.9 16.1 11.0 14.0 14.9 15.7 15.9 Gross foreign reserves4 Months of imports of goods and nonfactor services 4.1 4.2 5.1 4.1 3.9 4.0 4.0 Millions of US. dollar 26.6 33.3 38.0 31.8 32.9 34.8 37.4 National Oil Account (US$ miilions) 23.5 8.6 14.9 39.5 38.1 35.5 31.7 Memorandum item GDP Billions of dobras 1,202 1,536 1,959 2,409 2,837 3,228 3,631 Millions of US. dollars 115 124 145 160 175 191 20 7
Sources SBo Tom6 and Principe authonties and IMF staff estimates and projections ’ Central bank (BCSTP) buying rate Includes HlPC and MDRl debt relief and oil signature bonuses. ’ Excluding oil ievenue, grants, interest earned, and scheduled interest payments, and foreign-financedScholarShips and capital ‘Gross resemes exclude the NOA and guarantee deposits placed at the BCSTP by financial institutions waiting for operating licenses
38 Table 3: Financial operations of the Central Government 2005 2006 2007 2008 2009 2010 2011 Est. Proj. Proj. (Percent of GDP) ’ Total revenue and grants 81 .o 37.1 160.3 73.9 26.1 26.5 26.7 Total revenue 17.3 21.1 19.1 17.1 17.0 17.0 17.1 Tax revenue 15.0 17.4 16.3 15.3 15.4 15.5 15.7 Nontax revenue 2.3 3.7 2.8 1.8 1.6 1.5 1.4 Grants 17.0 16.0 120.1 40.4 9.1 9.5 9.7 Project grants 12.6 12.8 8.6 8.4 8.5 9.0 9.2 Nonproject grants 1.5 0.2 1.1 3.5 0.6 0.5 0.5 HiPC Initiative-relatedgrants * 2.9 3.1 110.5 28.5 0.0 0.0 0.0 Oil signature bonuses 46.8 0.0 21.1 16.4 0.0 0.0 0.0 Total expenditure 44.0 51.0 40.0 33.3 32.1 31.3 31.4 Current expenditure’ 26.2 28.7 25.8 19.3 18.0 16.9 16.6 Of which: personnel costs 8.6 8.7 8.9 8.6 8.3 8.0 7.9 interest on external debt due 2.7 3.4 1.3 1.3 1.3 1.2 1.1 goods and services 5.5 5.9 5.7 4.0 3.7 3.4 3.3 transfers 6.9 7.0 7.2 4.1 3.7 3.4 3.5 Of which : JDA 2.7 2.5 2.2 0.6 0.6 0.5 0.5 other 2.3 3.5 2.8 1.2 1.o 0.8 0.8 Capital expenditure 15.5 20.0 11.6 11.5 11.5 11.9 12.2 Financed by the Treasury 1.7 3.3 1.1 1.9 1.9 1.9 1.9 Financed by external sources 13.8 16.7 10.4 9.6 9.6 9.9 10.3 HlPC Initiative-related social exDenditure 2.3 2.3 2.6 2.6 2.6 2.6 2.6
Domestic primary balance -10.1 -8.5 -8.1 -5.2 -4.2 -3.2 -3.0
Overall fiscal balance (commitment basis) 37.1 -13.9 120.3 40.6 -6.0 -4.8 -4.6 Net change in arrears (reduction = -) -1 1.2 1.4 0.3 0.0 0.0 0.0 0.0 External arrears ’ -4.3 1.4 0.0 0.0 0.0 0.0 0.0 Domestic arrears -6.8 0.0 0.3 0.0 0.0 0.0 0.0 Overall fiscal balance (cash basis) 25.9 -12.5 120.6 40.6 -6.0 -4.8 -4.6 Financing -25.9 12.5 -120.6 -40.6 6.0 4.8 4.6 Net external -3.1 2.0 -118.0 -25.1 2.9 2.7 2.5 Disbursements (projects) 1.1 6.4 1.9 1.2 1.1 1.o 0.9 Program financing (loans) 0.0 1.6 2.4 2.5 2.2 2.1 1.9 Net short-term loans 0.0 0.0 -1 0.2 0.0 0.0 0.0 0.0 Scheduled amortization ’ -7.7 -6.0 -112.3 -29.1 -0.5 -0.5 -0.4 Change in arrears (principal) -8.5 0.0 -7.0 0.0 0.0 0.0 0.0 Bilateral rescheduling 12.0 0.0 7.1 0.3 0.1 0.1 0.1 Net domestic -22.8 10.5 -2.6 -15.5 3.1 2.1 2.2 Net bank credit to the government -23.1 10.5 -2.3 -1 5.5 3.1 2.1 2.2 Banking system credit (excluding National Oil Account) e -1.2 -1.5 1.6 -0.9 0.8 0.0 0.0 National Oil Account -21.9 12.0 -3.9 -14.5 2.3 2.1 2.2 Nonbank financing (including earmarked funds and residual) 0.2 0.0 -0.3 0.0 0.0 0.0 0.0 Financing gap 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Memorandum Items: Overall balance (commitment basis, incl. grants, excl. oil bonuses -9.7 -13.9 99.2 24.2 -6.0 -4.8 -4.6 Domestic primary spending 26.6 29.6 26.8 21.9 20.9 19.9 19.8 MDRl debt relief 39 Table 4: Balance of Payments 2005-2011 (US$ million) 2005 2006 2007 2008 2009 2010 2011 Est. Proj. (Millions of US. dollars) Trade balance -34.8 -62.3 -58.1 -67.6 -73.3 .80.3 -81.7 Exports, f.0.b. 6.8 6.7 6.8 7.0 7.3 7.4 7.5 Of which : cocoa 3.0 2.5 3.5 3.2 3.1 3.0 2.9 re-export 3.4 3.9 2.9 3.1 3.2 3.3 Imports. f.0.b. -41.6 -69.0 -64.9 -74.6 -80.6 -87.7 -89.1 Of which : food -14.8 -17.0 -17.6 -19.3 -21.2 -23.1 -25.1 petroleum products -9.8 -15.0 -14.6 -18.1 -18.4 49.3 -20.4 Services and income (net) -12.0 -21.6 -19.6 -17.7 -15.3 -18.5 -19.6 Exports of nonfactor services 9.2 9.5 4.2 7.0 7.6 8.3 8.5 Of which: travel and tourism 7.3 6.7 3.3 6.0 6.6 7.3 7.4 Imports of nonfactor services -19.2 -33.4 -30.0 -32.1 -31.6 .34.4 -35.1 Factor services (net) -2.0 2.4 6.1 7.5 8.8 7.7 7.1 Interest due -3.2 -3.8 -0.7 -0.2 -0.2 -0.1 -0.1 National Oil Account (NOA) interest earnings 0.2 0.9 0.7 1.5 2.6 1.4 0.7 Private transfers (net) 1.5 1.6 2.0 2.2 2.5 2.8 3.1 Official transfers (net) 33.5 31 .O 31.8 32.6 29.6 31.8 32.8 Of which: project grants 25.6 25.5 28.4 25.4 26.9 29.1 31 .O HlPC Initiative-related grants 3.2 3.8 0.0 0.0 0.0 0.0 0.0 Current account balance Including official transfers -1 1.8 -51.3 -43.9 -50.5 -56.5 -64.2 -65.3 Excluding official transfers -45.3 -82.4 -75.7 -83.1 -86.1 -95.9 -98.1 Capital and financial account balance 46.3 46.3 47.2 68.0 56.5 63.8 64.1 Capital transfer ' 0.0 0.0 162.7 45.4 0.0 0.0 0.0 Financial account 46.3 46.3 -115.5 22.6 56.5 63.8 64.1 Public sector (net) 29.7 -7.3 -148.4 -17.9 2.0 2.0 2.0 Project loans 1.3 4.4 1.4 1.9 1.9 1.9 1.9 Program loans 0.0 0.0 2.1 2.0 2.0 2.0 2.0 Oil signature bonuses 49.2 0.0 28.6 26.1 0.0 0.0 0.0 Amortization -8.9 -7.4 -178.2 -46.3 -0.9 -0.9 -0.9 Other investment -1 1.9 -4.3 -2.3 -1.7 -1 .o -1 .o -1 .o Of which : Nigerian and Angolan advances (net) 0.0 2.0 0.0 0.0 0.0 0.0 0.0 transfers to JDA -11.4 -3.1 -3.1 -1.0 -1 .o -1.0 -1 .o Private sector (net) 16.5 53.6 32.9 40.5 54.4 61.8 62.1 Direct foreign investment 6.2 41.8 24.0 32.5 36.0 39.9 40.3 Commercial banks -8.5 0.8 -2.3 0.0 0.0 0.0 0.0 Short-term private capital 18.8 11.0 11.1 8.1 18.4 21.9 21.8 Errors and omissions -2.2 -6.1 8.4 0.0 0.0 0.0 0.0 Overall balance 32.3 -1I .2 11.7 17.5 0.0 -0.4 -1.1 Financing -32.3 11.2 -11.7 -17.5 0.0 0.4 1.1 Change in official reserves, excl. NOA (increase= -) -8.6 -6.6 -4.7 6.1 -1 .o -1.9 -2.6 Use of Fund resources (net) 0.5 1.2 -0.8 0.7 0.0 0.0 0.0 Purchases 0.6 1.2 1.2 0.7 0.0 0.0 Repurchases (incl. MDRl repayment) -0.1 0.0 -2.1 0.0 0.0 0.0 National Oil Account (increase = -) -23.3 14.9 -6.3 -24.6 1.4 2.6 3.8 Debt relief 13.5 0.0 10.4 0.5 0.2 0.2 0.2 Memorandum items: (Unit specified) Current account balance (percent of GDP) Before official transfers -39.5 -66.3 -52.1 -52.0 -49.2 -50.3 -47.4 After official transfers -10.3 -41.3 -30.2 -31.6 -32.3 -33.7 -31.5 Debt service ratio (percent of exports) Before HlPC and MDRl relief 75.6 70.0 83.2 60.0 60.3 59.3 60.4 After HlPC and MDRl relief 62.1 35.9 27.8 4.2 5.9 5.5 5.4 Gross reserves Millions of U.S. dollars 26.6 33.3 38.0 31.8 32.9 34.8 37.4 Months of imports of goods and nonfactor services 4.1 4.2 5.1 4.1 3.9 4.0 4.0 Sources: Sao Tome and Prlncipe authorities and IMF staff estimates and projections. ' Include HlPC and MDRl debt relief delivered at the completion point in 2007. Eased on 2001 census and survey-based GDP series. In percent of exports of goods and nonfactor services. The difference between debt service before and after HlPC relief is larger than debt service saving in cash terms because this table is on an accrual basis. Gross reserves exclude the National Oil Account and guarantee deposits placed at the central bank by financial institutions pending operating licenses; imports exclude oil sector related imports of capital goods and services. 40 Annex 2: Letter of Development Policy and request of IDA support DEMOCRATIC REPULIC OF sAo TO& AND PR~NCIPE POVERTYREDUCTION STRATEGY PAPER(PRSP) I. The Government’s reference document is the Poverty Reduction Strategy Paper (PRSP) adopted in 2003 after an extensive consultative process with stakeholders. Since its adoption, substantial progress has been made in developing the processes and policies to ensure effective implementationof the strategy. A PRSP unit was set up in 2004 in the Ministry of Planning and Finance to coordinate and ensure the implementationand monitoringof the PRSP. Two extensive national progress reports were produced in 2006 and 2007 that were submitted to IDA and IMF Executive Boards and received extensive comments through their Joint Staff Advisory Notes (JSAN). These reports showed that notable progress has been made in social sectors, with considerable improvements in education and health. For example, the 2006 PRSP status report notes remarkably good performance of overall enrolment of both girls and boys at. primary education level, and gains in addressing infant mortality, under-five mortality, and malaria. 2. The Government of the Democratic Republic of SHo Tom6 and Pn‘ncipe also organized in Sa0 Tom6 in December 2006 sector round tables on Governance, Infrastructure and Education to foster the dialogue with international donors on sector policies and mobilize financial and technical assistance to the Priority Action Plan (PAP) of the Government. 3. The PRSP is centered on five principal axes: (i)reform of public institutions, capacity building, and promotion of good governance; (ii) accelerated and redistributive growth; (iii) creation of opportunities to increase and diversify income for the poor; (iv) human resource development and access to basic social services; and (v) adoption of mechanisms to monitor, assess and update the strategy. These goals have been translated into a medium-term reform program (Priority Action Plan) for the period 2006 to 2008 in order to maintain a minimum GDP growth rate of 5 percent, halve poverty by 2010, and further to 113 by 2015; provide full access to basic services by 2015 and help improve quality of life of the population, reduce social and gender disparities between districts in SiIo Tom6 and between these and the Autonomous Region of F’rlncipe, as well as between urban and mal populations, and promote and build institutional capacity and a policy of good governance. 4. The proposed economic and social reform program for 2008-2010 presented to the National Assembly in April 2008 lies within this PRSP strategy and the medium term strategy of the Government as described in the “Grandes Opgdes do Plano”. It aims at reforming public institutions, strengthening capacity and promoting good governance in a way to accelerate growth in order to create opportunities to increase and diversify income for the poor. It will also aim at improving human resource development and access to basic social services with more efficient provision of public services. The complete set of reforms being supported by this Development Policy Operation is described in the attached policy matrix. 5. Finally, our authorities plan to up-date the PRSP based on recommendations received in the 2007 JSAN and our implementation experience. There are four key needs that will be addressed by the new PRSP. First is the need to raise the level of economic growth and employment creation. Second is the costing of the strategy itself. Third is the update of the poverty profile and establishing a close the strengthening of the monitoring and 1 41 new PRSP will be formulated in a participatory manner and we aim to incorporate a new growth diversification strategy which will take into account updated information on petroleum prospects. The Government is committed to strengthen the reform agenda focusing on removing bottlenecks to growth in the economy, particularly in agriculture, energy, infrastructure and private sector development. The Poverty Observatory within the Ministry of Planning and Finance has been given the official mandate to launch preparation of the second PRSP. MACROECONOMIC AND BUDGETARY FRAMEWORK 6. The assumptions underlying the 2008 budget rely on the 2008 and 2009 economic forecast agreed with the IMF as part of the three-year PRGF arrangement that our Government has successfully implemented between 2006 and 2008. Furthermore, our Government is confident of reaching a new three-year agreement with the IMF in 2008 thus assuring continued assistance and advice from Ih4F staff in the design of sound macroeconomic policies and structural reforms. These will aim not only at accelerating growth and reducing poverty but also at spreading out practices of good governance. 7. The economy performed well between 2005 and 2007, with a GDP growth of around 6 percent, despite the persistent increase in fuel and food prices in world markets. The sectors that have shown strong growth include construction and tourism, mostly fueled by foreign direct investment (FDI). Total investment has been around 35 percent' of GDP these last years with half of it canied out by the private sector. We aim to maintain this growth momentum in the coming years due to: (i)continued foreign investment in construction, tourism and the petroleum sector, (ii)continued engagement of donors (iii)new sources of growth, particularly in the agriculture sector, that will be promoted, and (iv) the continuation of public finance reforms, which will ensure greater impact of public expenditure especially on infrastructure and human development. 8. The primary fiscal deficit has been reduced from 10.1 percent of GDP in 2005 to 8.1 percent of GDP in 2007 with a further reduction to 5.2 percent of GDP expected in 2008. This has been achieved while preserving pro-poor expenditures in the social sectors and implementing the PRSP. On the revenue front, tax revenue forecasts for 2008 are based on a downward revision of 2007 levels due to a lowering of tax rates for the new personal income and corporate tax laws scheduled for approval by the National Assembly before May 30, 2008. We are confident that these new tau codes will increase the tax base and tax revenues in the coming years as well as foster FDI and private sector development by eliminating key tax inefficiencies. 9. Our Government is aware that realizing fiscal consolidation will also depend on a strengthening of the SOE sector which currently suffers from weak finances. Insufficient investment and operation and maintenance expenditures over the years have led to irregular and poor service delivery and payment arrears to suppliers, which represent contingent liabilities for the Government. Reforms in this sector, planned to start in 2009, will be guided by the findings of a study that will provide an update of estimated direct and indirect subsidies in the sector as well as their poverty and social impact. Our Government will also prepare an action plan to improve governance and supervision capacity in the sector in addition to proposing an appropriate tariff structure that would allow the Electricity and Water and Sanitation Company (EMAE) to break- even. IO. As with other small island economies we have a high dependence on imported goods but we are confident that even at current international price levels we will be able to finance our current account deficit thanks to continued high levels of FDI. Gross international reserves, which rose to the equivalent of 4.7 months of imports of goods and services at end of December 2007, will remain above 4 months equivalent in 2008 despite the spike, in international prices ' In 2006, an additional 13 percent of GDP was invested to carry out petroleum exploration 2 42 and petroleum. These international price increases together with the continued depreciation of the local currency (10 percent in 2007) have exerted upward pressure on inflation, which at end 2007 was 27.6 percent (around 10 percent excluding food and energy prices). We are confident that the inflation rate will come down in 2008, owing primarily to stringent monetary and fiscal policies. 11. These achievements notwithstanding Silo Tom6 and Principe’s economy remains vulnerable due to its high level of debt relative to exports, dependence on foreign aid, and the relatively narrow export base. In this context our Government intends to continue the policy of limiting external borrowing to concessional loans and grants, no accumulation of external arrears, and assuring the most efficient management of petroleum resources. The growth diversification strategy will also aim to reduce import dependency and expand the narrow base in the medium term. STRUCTURAL REFORMS AND PRIOR ACTIONS 12. The prior actions aim to assure an early and forcefbl start in the implementation of the key components of the 2008-09 reform program. They focus primarily on public finance management and petroleum sector governance given their importance in realizing the overarching objectives of our program, i.e. economic growth and poverty reduction as well as governance and institutional enhancements. Reforms in these two sectors, launched several years ago, have already demonstrated positive impacts on economic growth in STP. We plan to continue these reforms over the next few years. 13. IMPROVING ACCOUNTABILITY AND EFFICENCY OF PUBLIC RESOURCES. The prior actions in this area primarily address the problems encountered in the preparation of the budget. They have improved transparency in the preparation and presentation of the Budget law in line with the Public Finance Management Law (SAFE Law) approved in 2007. Transparency is ensured through the presentation of extensive documentation that complements the 2008 Budget appropriations. Also, new budget codes in line with international standards approved in February 2007 will facilitate implementation and monitoring of the different components of the 2008 Budget, including pro-poor expenditure, bringing additional accountability to the Government with regard to budget implementation. To improve further our budget management, in particular the reporting of financial operations in a transparent way, we have approved an accounting system for public accounts and established two new departments within the Ministry of Planning and Finance: (i)a Public Accounting Department that will facilitate the preparation of State Accounts in line with international standards starting gradually in 2009; and (ii)an Information Technology Department that will create and maintain a Computerized Integrated Financial Management Information System (SAFE*), allowing budget preparation, execution and production of public accounts in a unified and integrated way. This new information system will build on a locally developed Integrated Financial Management Information System linking the Budget and Treasury Directorates and allowing for implementation and control of the commitment and payment order sub-phases. 14. The Government is continuing the reform of the entire tax and customs legislation initiated in 2006. A new corporate tax code and a new personal income tax code have been drafted with assistance From international donors and have been submitted to the National Assembly for approval. They have been both approved in a first reading by the National Assembly. Both laws will bring tax rates in line with other African countries. We are confident that the initial revenue loss in 2008 will be more than offset by the broadening of the tax base thereafter. More importantly, the new tax laws will enhance progressivity and reduce inefficiencies that hinder private sector development. 15. Preparing a new PRSP. As discussed in paragraph 5, the Government is committed to the formulation and implementation of a new PRSP that will address the 3 43 challenges of STP more adequately. It is in this context that the Council of Ministers has designated the Poverty Observatory (Observat6rio da Pobreza) to initiate the preparationof a new PRSP. The priority for the Poverty Observatory is to prepare by October 2008 an action plan that will spell out the details of activities to be carried out during the preparatory period and their timeframe, as well as a list of the technical assistance needs. The AfDB and UNDP have already committed to assisting us in carrying out some of these activities. We plan to request technical assistance from IDA in the update of the poverty profile and the definition of the growth diversification strategy. 16. STRENGTHENING GOVERNANCE IN THE OIL SECTOR. The Government Of STP has been implementing a multi-year program of governance strengthening in the oil sector over the last five years with assistance from IDA. A major milestone was the approval of the Oil Revenue Management Law by the National Assembly in 2004. The law established a National Oil Account in order to ensure transparent and accountable management of revenues by the National Assembly. Implementation of the law has been buttressed by official commitments to implement the Extractive Industries Transparency Initiative (EITI) and the Abuja Declaration for supervision of the Joint Development Zone that SHo Tom6 and Prlncipe shares with Nigeria. In this context, the National Assembly has already passed legislation setting up the Petroleum Oversight Committee and the Public Registration and Information Office to audit and monitor oil revenue flows and disseminate oil related information. 17. As a continuation of this reform, the Government has submitted new petroleum sector legislation to the National Assembly on May 6,2008 and the Council of Ministers has issued the decree for a model contract on April 30, 2008. This key legislation will allow the Government to initiate the bidding of petroleum blocks in our Exclusive Economic waters by December 31, 2008. In this context of promotion of good governance, our Government is encouraged by our success in being accepted in February ZOO8 as a candidate country into the EITI process. As part of the acceptance process the National EITI Committee has adopted and published a work plan for implementing the EITI, which has already been approved by the International EITI Committee. The first National EITI report is expected to be completed within the next twelve months. , FUTUREACTIONS 18. The Government of the Democratic Republic of SHo Tom6 and Principe is committed to continuing its reforms as described in our medium term strategy for 2008-10 (Grandes Opq8es do Plano ZOOS-IO). The overarching objective of this strategy is to facilitate investment allocations to enhance pro-poor growth especially through improved domestic production of food to alleviate the chronic external deficit. To this end the medium term strategy will focus on the following four components: (i) strengthen the role of the State; (ii) fight poverty and promote sustainable development; (iii)enhance the participation of the State in international relationships; and (iv) improve social communication. 19. Government efficiency and improved governance in managing public and natural resources in line with best international practices of transparency and accountability are at the core of the medium term strategy, as illustrated by the attached matrix. In other words we aim at economic governance quality and financial transparency which guarantee: (i) the efficient use of public funds, (ii)adequate levels of domestic public revenues, (iii) successful and comprehensive execution of the economic and social program, (iv) the beginning of successful and transparent operations in our exclusive economic zone, and (v) the successful implementation of the EITI (see Grandes Opp8es do Plano, page 33). 20. The key next steps to the prior actions are the implementation of a second round of structural reforms over 2008-09 that encompasses not only further reforms in the public finances\ 3 4 44 .. and petroleum sectors but also sectors such as State Enterprises, structure of the State, human resource management, employment, health, education, etc. 21. Our Government is committed to ensuring adequate participation in the preparation of a new PRSP which will provide a diversification strategy to better fight poverty and prepare the country for potential petroleum revenues. The new PRSP will also revise the costing of the strategy to attain the Millennium Development Goals and will up-date the poverty profile. We are confident that a new PRSP built on the lessons learnt from the implementation of the current PRSP and incorporating updated growth, petroleum, poverty and costing information will be concluded by September 30, 2009. The co-ordination and harmonization of the actions of development partners around these priorities will be also pursued for a complete and efficient mobilization of the limited public resources. 22. As regards the medium-term macroeconomic and budgetary framework, we aim to maintain good economic and budgetary performance, increase tax revenues which is indispensable to assure higher levels of development and poverty reduction expenditures, align PRSP priorities closer to the budget, as well as prepare the 2009 Budget based on reliable socio- economic data. Furthermore, we intend to limit foreign borrowing to those on concessional terms. 23. While prior actions in public finance management focus on better preparation and documentation of the budget to improve transparency and accountability, the second rohd of reforms will aim at improving budget execution and control. The most prominent aspects of the reforms will be comprehensive public accounting; recording and management of all Government assets; the mobilization of revenue through the creation of a tax tribunal to improve tax collections; and improved management of public enterprises through the reorganization of the financial relations between the State and the four fully owned State Enterprises. 24. A very important item in our medium term progTam of public finance strengthening is the setting up of a modem procurement system to enhance efficiency of our limited public resources. To this end and with assistance of the World Bank we will cany out the set of actions described in the attached operation policy matrix. This will include in particular approval of a decree on procurement regulation; adoption of standard procurement documents and evaluation reports; creation of a Procurement Supervisory Body with adequate financial allocations and staff included in the 2009 Budget in order to start functioning by January 1, 2009. This will be complemented by the design of a training program on procurement for all Government procurement officers by February 28,2009, which will be subsequently provided to all staff of all institutions dealing with procurement. 25. Our budget preparation system will benefit from the streamlining of the functions of the Budget Directorate by September 30, 2008 which will be followed by training of our accounting and financial personnel in sector ministries to take up budget expenditure functions foreseen in the SAFE law. In parallel, we plan to develop and train our personnel in the use of a new software for budgetary programming including the investment budget in 2009. 26. As a first step in improving financial management, the Ministry of Planning and Finance plans to carry out by September 30,2008 an inventory of Government unsettled financial obligations of the Treasury as of December, 2007 and a settlement plan for these obligations will be formulated by end 2008. Also, our InspecpHo Geral de Finanqas (IGF), jointly with the Treasury, will carry out by September 30, 2008 a diagnosis study of the accounting procedures and financial status as of December 2007 of the four fully owned State Enterprises. Both these analyses will provide our Government with an updated picture of the financial position of the State. Based on these reports, we will approve a new supervision system for State Enterprises. With regard to Treasury operations, we will adopt a new methodology for preparing financial programs and cash plans as well new manuals for Treasury operation that will be subseflt\y+ 5 45 integrated into the SAFE-e system and appropriately linked to the Central Bank. We also aim at improving our payroll management system starting with approval of a plan for merging the payroll database at the Ministry of Planning and Finance and the personnel records database at the Ministry of Justice and Public Administration, including a general headcount of Government employees. This will be a first step towards the reform of our Human Resource Management System. 27. In parallel with these improvements in accounting and monitoringof financial operations, our program includes the establishment of a separate Assets Management Department within the Ministry of Planning and Finance by June 30, 2008. A complete database of State assets by line ministries will be available by April 30, 2009, after the completion of an initial survey scheduled for completion by March 31,2009. 28. In regard to taxation we plan to develop regulations for the implementation of the three tax laws submitted to the National Assembly in April 2008. This will be accompanied by programs to raise the capacity of the Tax and Customs Directorate to supervise and control corporate and income tax implementation as well as the development of a cadastre. We will benefit from MCC and Portuguese assistance in the implementation of these activities over the next three years. 29. The medium term program in the petroleum sector aims to develop the basic legislation for commercial exploitation of our Exclusive Economic Zone, and to ensure management of petroleum revenues consistent with the EITI. Two sector laws were submitted to the National Assembly on May 6,2008. They are: (i) the Fundamental Law on Petroleum Operations; and (ii) the Petroleum Taxation Law. These will be complemented by a Decree from the Council of Ministers, approved on April 30, 2008, assuring the use of a Model Contract for production sharing in oil sector concessions. Both of these laws, as well as the model contract, drafted with assistance of the World Bank, are in line with international standards of transparency and competition and will facilitate the participation of reputable international petroleum companies in the exploration and exploitation of our Exclusive Economic Zone. As a result these laws will expand the scope of our governance effons beyond the limits of oil revenue management to include the management of exploration and exploitation contracts. We also plan to nominate by June 30, 2008 qualified Technical Directors for the National Petroleum Agency to manage a competitive bidding process to awarding exploration Blocks in the Exclusive Economic Zone and publish the Handbook of Oil Management Law and adopt the Petroleum Development Strategy by June 30,2008. 30. To ensure appropriate EITI implementation we will establish close working relations and cross-representatives between the Petroleum Oversight Commission established by the National Assembly in 2006 and the National EITI Committee. At the international level we will approve a joint strategy with the Nigerian ElTI Committee to appropriately supervise transparency issues pertaining to the Joint Development Zone. We will devote our highest efforts to adopt the Terms of Reference for the ElTI report, comprising oil operations in the Joint Development Zone, in the two years period provided by the international EITI Committee. EXPECTEDOUTCOMES 31. Our program of public resource management - financial as well as petroleum - will achieve noticeable improvements in governance in general and in transparency, particularly in the petroleum sector. The most visible outcome of this program is expected to be a strong improvement in public finance management, not only in terms of budget processes or taxation level, but also in terms of expenditure impact. We attach particular importance to the preparation of a new PUPthat will guide our strategy in the coming years and provide the elements for pro- poor growth. At the level of petroleum sector governance, the petroleum sector laws and 6 46 contract as well as the related reforms in the sector will provide the basic elements to successfully initiate the process of exploration in the Exclusive Economic Zone, which could have a very positive impact in terms of public resources and growth. These laws and model contract will facilitate the attraction of quality international companies. Participation in the EITI process will help assure high levels of transparency not only as regards budgetary resources but also in terms of contract negotiation. 32. Responsibility for the implementation, coordination and monitoring of the overall program will rest with the Ministry of Planning and Finance, namely the Budget Directorate, which will be assisted by the various technical Directorates such as Treasury, Planning, Administrative and Financial, etc. Assistance will also be provided by the Ministry of Natural Resources and Environment, the Poverty Observatory and the recently formed National EITI Committee. The reform also foresees the creation of new structures within the Ministry of Planning and Finance, such as a Public Accounting Department, a Procurement Supervisory Body and a Department of Public Assets Management. CONCLUSlON 33. The Government of the Democratic Republic of Slo Tom6 and Principe is seizing this opporhmity to reiterate its commitment to the efficient execution of the program described in the present Development Policy Document for the next 12 months. It is convinced that the efficient and satisfactory execution of this program will contribute towards boosting the national economy onto a healthy and sustainable basis in view of poverty reduction. In the light of the macroeconomic reforms already carried out, the fixed objectives in this program and the results achieved during the previous years which are very encouraging, the Government of the Democratic Republic of So Tome and Principe requests the favorable consideration of its financing request of May 5, 2008 aimed at the approval of a Grant of approximately US$ 6 million for the development of public and natural resource management in line with our PRSP objectives and the provision ofsignificant budgetary support for financing our economy. ,-WE MINISTER, 7 47 r- IP 48 \ "I 49 P 'a 50 ai. I I I f 51 52 REPUBLICADEMOCRATICA MINISTcRIO DO PLAN0 E FINANGAS GABINETE DO MINISTRO (Unidade - Disciplina - Trabalho) To Mr. Robert B. Zoellick President of the World Bank Group 1818 H Street NW WASHINGTON D.C. 20433 USA Sflo Tomb, May 5,2008 Ref. : No.75 OIMPF-GW08 Mr. President, 1. Ihave the pleasure of requesting a Grant of approximately US$6 million from your institution in support of the implementation of our economic and social reform program for 2008-2009 that is based on Siio Tom6 and Principe's Poverty Reduction Strategy Paper (PRSP). This reform program was initiated in 2003 with the approval of the PRSP and its subsequent implementation, as shown in the 2005 and 2006 Annual Progress Reports of the Poverty Reduction Strategy sent to the World Bank and the IMF. Notwithstanding the hardships of the current external environment and the handicaps of small island economies, macroeconomic discipline has been in line with the objectives agreed under the IMF's Poverty Reduction and Growth Facility (PRGF) that we have implemented between 2006 and 2008. Thanks to these and other achievements SHo Tom6 and Principe reached the Completion Pbint under the Enhanced HIPC Initiative in March 2007. 2. The Grant requested by us, in the form of a single tranche support towards the strengthening of public and natural resource management in line with the PRSP objectives, will contribute towards advances in two key areas of the SHo Tome and Principe economy: (i)improved public resource management through better budget processes and enhanced tax legislation in order to raise the level and impact of public expenditures on poverty; and (ii)continued improvements in the standard of petroleum sector governance in line with the Extractive Industries Transparency Initiative (EITI). 3. The funds made available by your institution will provide necessary financbg to support key public expenditures in 2008. The budget targets and priorities for this year have been agreed with the IMF as part of the triennial program supported by the PRGF. Budget presentation and documentation are now in line with the key requirements of the Public Finance Management Law adopted in 2007. This operation will enable us to deepen the reforms in public finance management that are already underway with support 6om the World Bank Technical Assistance Capacity Building Project (TACBP). The key objective of the current program is to develop the institutions and capacities to fully implement the Public Finance Management Law, particularly in relation to the integrated financial system, and strengthen procurement. Three tax laws are also being overhauled to improve public finances and promote investments. 4. As regards petroleum sector governance, our priority is to modernize the legal framework for commercial exploitation of our Exclusive Economic Zone. The petroleum sector is the most important sector of our economy in terms of potential economic growth as well as its impact on the broader governance agenda. In line with our obligations as a candidate country into the EITI since,, /n 53 February 2008 we are committed to producing our first national EITI report. This is the next stage of a series of refoms initiated in 2004 with the adoption of the Oil Revenue Management Law that secured best international practices in oil revenue management and control. 5. Progress already achieved in reformingthe two above mentioned sectors owes much to the World Bank support through the implementation of the TACBP started in 2004. Implementation of the remaining reforms envisaged will be further facilitated by the critical mwof technical assistance to the economic, financial and petroleum management institutions provided by the same project which has been extended until April 2009. These reforms are also being supported by other donors namely the MiHennium Challenge Corporation and Portugal. 6, These measures form an integral part of our economic and social program, The Grant will be disbursed once your institution is satisfied, on the basis of objective documentation, that we have effectively executed the set of prior actions conveying our determination and our commitment to improving public governance and public service delivery. 7. We express our sincere wish that the consideration of this request will meet with a favorable response from the World Bank Group. Yours sincerely, RAUL ANT cIO DA ~OSTACRAWD 54 e U m .I0 U de a g! e U UD 6 U m d L e4 UB cf ;; m 0 .I UU a H p e -2 I K m I Ix Annex 4: Fund Relations Note IMF Executive Board Completes Fifth Review of Sgo Tom6 and Principe's PRGF Arrangement and Approves PRGF and HIPC Topping-Up Assistance Disbursements Press Release No. 07/306 December 2 1,2007 The Executive Board of the International Monetary Fund (IMF) today completed the fifth review of SBo Tom6 and Principe's economic performance under a three-year Poverty Reduction and Growth Facility (PRGF) arrangement and the review of assurances for the disbursement of the Fund's share of topping-up under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. The completion ofthe PRGF review enables the release of an amount equivalent to SDR 422,000 (about US$700,000), which would bring total disbursements under the PRGF arrangement to SDR 2.5 million (about US$4 million). The three-year arrangement was approved on August 1, 2005 (see Press Release No. 05/187), for a total amount of SDR 2.96 million (about US$4.6 million) to support the government's economic program for 2005-08. In completing the review, the Executive Board approved a waiver of the nonobservance of an end-June 2007 structural performance criterion related to the issuance of prudential regulations, based on remedial measures taken by the authorities. In addition, the Executive Board approved the disbursement oftopping-up HIPC assistance of SDR 824,000 (equivalent to US$1.2 million). Together with accrued interest, the total disbursement to SBo Tom6 and Principe amounts to SDR 868,000 (about US$1.4 million). In commenting on the Executive Board's discussion on SBo Tom6 and Principe, Mr. Murilo Portugal, First Deputy Managing Director and Acting Chair, stated: "SBo Tom6 and Principe's recent economic performance has been encouraging. Real GDP growth has remained robust in 2007, inflation fell significantly, the domestic primary fiscal deficit was reduced, and international reserves have exceeded the targets under the PRGF-supported program. "The authorities are committed to consolidate the stabilization gains and safeguard fiscal sustainability. They will continue to strengthen policy implementation and improve public financial management. In particular, it will be necessary to contain personnel costs and non-priority expenditure to make room for increased poverty-related spending while reducing the primary fiscal deficit. The central bank is committed to implementing a proactive monetary policy to manage liquidity growth and counter inflationary pressures stemming from the rising oil import costs. Continued fiscal adjustment will further support the reduction of inflation. "Intensified structural reforms will aim at achieving sustained private sector-led growth and improving the investment climate, in particular by reducing administrative costs and delays in starting a business. The authorities also need to press ahead with plans to reform the financial sector and enhance the institutional framework for transparent management ofoil exploration and receipts. "In view ofthe uncertain oil prospects, it will be important to continue to pursue prudent fiscal and external financing strategies so as to maintain debt sustainability over the medium term. The authorities are committed to strengthening debt management and refraining from external borrowing on nonconcessional terms," Mr. Portugal said. 59 Annex 5: Country At A Glance 9i28iO7 Sao Tomb Sub- Key Development Indicators and Saharan LOW Principe Africa income Age distribution, 2006 (2006) I Male Female Population. mid-year (millions) 0.16 770 2,403 7074 Surface area (thousand sq. km) 1.o 24,265 29,215 6054 1.8 Population growth (%) 2.2 2.3 50-54 Urban population (% of total population) 59 36 30 &M 30.34 GNI (Atlas method, US$ billions) 0.1 648 1,562 GNI per capita (Atlas method, US$) 780 642 650 20-24 GNI per capita (PPP. international $) 2,032 2,698 10-14 0-4 GDP growth (%) 7.0 5.6 6.0 20 10 0 10 20 GDP per capita growth (%) 4.6 3.2 6.1 percent (most recent estimate, ZOOCrZ006) Poverty headcount ratio at $1 a day (PPP, %) 41 Jnder-5 mortality rate (per 1,000) Poverty headcount ratio at $2 a day (PPP, %) 72 Life expectancy at birth (years) 63 47 59 Infant mortality (per 1,000 live births) 75 96 75 Child malnutrition (% of children under 5) 13 29 150 Adult literacy, male (% of ages 15 and older) 92 69 72 Adult literacy, female (% of ages 15 and older) 76 50 50 1w Gross primary enrollment, male (% of age group) 135 96 108 Gross primary enrollment, female (% of age group) 132 86 96 50 Access to an improved water source (% of population) 79 56 75 0 1990 1995 2wO 2005 Access to improved sanitation facilities (% of population) 25 37 38 0 Sao Tomb and Prlncipe OSub-Saharan Africa Net Aid Flows 1980 1900 2000 20088 (US%millions) Net ODA and official aid 4 54 35 32 IGrowth of GDP and GDP per capita (%) Top 3 donors (in 2005): Portugal 16 11 11 France 1 9 4 4 Japan 0 3 1 2 Aid (% of GNI) Aid per capita (US$) 41 464 250 204 Long-Term Economic Trends Consumer prices (annual % change) 42.2 11.0 21.4 GDP implicit deflator (annual % change) 10.7 20.0 1 +GDP -GDP per capita Exchange rate (annual average, local per US$) 34.8 143.3 7,976.2 12,445.4 Terms of trade index (2000 = 100) 106 100 110 1980-90 1900-2000 2000-06 (average annual growth %) Population, mid-year (millions) 0.1 0.1 0.1 0.2 2.1 1.8 2.3 GDP (US$ millions) 76 123 6.7 (% of GDP) Agriculture 19.7 17.0 5.0 Industry 16.9 20.8 7.5 Manufacturing 5.7 6.4 6.7 Services 63.5 62.3 7.2 Household final consumption expenditure General gov't final consumption expenditure Gross capital formation Exports of goods and services Imports of goods and services Gross savings Note: Figures in italics are for years other than those specified. 2006 data are preliminary. .. indicates data are not available a. Aid data are for 2005. Development Economics, Development Data Group (DECDG). 60 Balance of Payments and Trade 2000 2006 Governance Indicators, 2000 and 2006 (US$ millions) Total merchandise exports (fob) 3 3 Total merchandise imports (cif) 25 59 Voice and accountability Net trade in goods and services -28 -79 Politica stability Workers' remittances and compensation of employees (receipts) 0 I Regulatory quality Rule of law Current account balance -27 -90 as a % of GDP -34.7 -73.0 Control of corruption Reserves, including gold 13 35 0 25 50 75 1W 2006 Central Government Finance Country's percentile rank (0-100) 0 2000 higher values Im@y bener ratings (% of GDP) Current revenue (including grants) 13.2 17.5 Source: Kaufmann-Kraav-Mastruzz,.Wolld Bank Tax revenue 11.4 15.1 Current expenditure 18.0 28.9 Technology and Infrastructure 2000 2005 Overall surpluddeficit -36.1 -33.8 Paved roads (% of total) 68.1 Highest marginal tax rate (%) Fixed line and mobile phone Individual subscribers (per 1,000 people) 33 97 Corporate High technology exports (% of manufactured exports) External Debt and Resource Flows Environment (US$ millions) Total debt outstanding and disbursed 322 336 Agricultural land (% of land area) 54 58 Total debt service 4 10 Forest area (% of land area) 28.1 28.1 Debt relief (HIPC. MDRi) 120 Nationally protected areas (% of land area) Total debt (% of GDP) 419.9 298.8 Freshwater resources per capita (cu. meters) 14,055 Total debt service (% of exports) 26.5 60.5 Freshwater withdrawal (% of internal resources) Foreign direct investment (net inflows) 4 7 C02 emissions per capita (mt) 0.63 0.61 Portfoiio equity (net inflows) 0 GDP per unit of energy use (2000 PPP $ per kg of oil equivalent) :omposltlon of total external debt, 2005 Energy use per capita (kg of oil equivalent) (US$ millions) IBRD Total debt outstanding and disbursed 0 0 Disbursements 0 0 Principal repayments 0 0 interest payments 0 0 Otter multi- lateral, 125 S$ millions IDA Total debt outstanding and disbursed 59 76 Disbursements 2 2 Private Sector Development 2000 2006 Total debt service 1 2 Time required to start a business (days) - 144 iFC (fiscal year) Cost to start a business (% of GNI per capita) - 147.2 Total disbursed and outstanding portfolio - - Time required to register property (days) - 62 of which IFC own account - - Disbursements for IFC own account - - Ranked as a major constraint to business Portfolio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account - - n.a. n.a. MlGA Gross exposure - - Stock market capitalization (% of GDP) New guarantees - - Bank capital to asset ratio (%) Note: Figures in italics are for years other than those specified. 2006 data are preliminary. 9/28/07 .. indicates data are not available. -indicates observation is not applicable. Development Economics, Development Data Group (DECDG). 61 Annex 6: Millennium Development Goals Millennium Development Goals Sa”o Tomi and Principe With selected targets to achieve between 1990 and 2015 (estimate closest to date shown, +/- 2 years) Goal 1: halve the rates for $1 a day poverty and malnutrition 1sso ISS5 2000 2005 Poverty headcount ratio at $1 a day (PPP, % of population) Poverty headcount ratio at national poverty line (% of population) Share of income or consumption to the poorest qunitile (%) Prevalence of malnutrition (% of children under 5) 12.9 Goal 2: ensure that children are able to complete primary schooling Primary school enrollment (net, %) 85 97 Primary completion rate (% of relevant age group) 44 77 Secondary school enrollment (gross, %) 39 44 Youth literacy rate (% of people ages 15-24) 94 95 Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (%) 94 100 Women employed in the nonagricultural sector (% of nonagricultural employment) Proportion of seats heid by women in national parliament (%) 12 7 9 7 Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) 118 116 118 118 Infant mortality rate (per 1,000 live births) 75 75 75 75 Measles immunization (proportion of one-year olds immunized, %) 71 74 69 88 Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) Births attended by skilled health staff (% of total) 79 76 Goal 6: halt and begin to reverse the spread of HlVlAiDS and other major diseases Prevalence of HIV (% of population ages 15-49) Contraceptive prevalence (% of women ages 1549) 29 Incidence of tuberculosis (per 100,000 people) 134 124 114 105 Tuberculosis cases detected under DOTS (%) Goal 7: halve the proportion of people without sustainable access to basic needs Access to an imDroved water source (% of DoDuiation) 79 79 79 Access to improved sanitation facilities (% of population) 24 24 25 Forest area (% of total land area) 28.1 28.1 26.1 Nationally protected areas (% of total land area) C02 emissions (metric tons per capita) 0.6 0.6 0.6 0.6 GDP per unit of energy use (constant 2000 PPP $ per kg of oil equivalent) Fixed line and mobile phone subscribers (per 1,000 people) 19 20 33 97 Internet users (per 1,000 people) 0 47 131 Personal computers (per 1,000 people) Youth unemployment (% oftotal labor force ages 15-24) IEducation indicators (%) Measles immunization (%of I-year oids) iCT indicators (per 1,000 people) 150 1 lW1 :sL25 20w 2002 2005 1990 1995 2000 2005 -0-Prirrary net enroiiment ratio OFixed + mobile subscribers -0-Ratio of girls to boys in primary & OSao To& and Principe Nsewnda education OSub-Saharan Africa EJ Internet users Note: Figures in italics are for years other than those specified. .. indicates data are not available. 9/28/07 Development Economics, Development Data Group (DECDG). 62 IBRD 33473 6°30'E 7°00'E 7°30'E Ilhéu Bom Bom Paciênca PAGUÉ Santo AntAntónioónio Maria Coreo Príncipe Peak PRÍNCIPE (948 m) SÃO TOMÉ Ilhéu Bone de Jókei 1°30'N AND 1°30'N PRÍNCIPE Tinhosa Pequena Tinhosa Grande ATLANTIC OCEAN 1°00'N 1°00'N 0 5 10 15 20 Kilometers 0 5 10 15 20 Miles 0°30'N 0°30'N LOBATA Ilhéu das Cabras This map was produced by the Map Design Unit of The World Bank. SÃO TOMÉ The boundaries, colors, denominations and any other information Guadalupe shown on this map do not imply, on the part of The World Bank Neves Group, any judgment on the legal status of any territory, or any SÃO TOMÉ endorsement or acceptance of such boundaries. ÁGUA GRANDE Ponta Diogo Vaz Trindade Santa Catarina LEMBÁ MMÉÉ ZZÓXIÓXI SSãoão TToméomé Peak Santana (2024 m) CANTAGALO SÃO TOMÉ Aqua Izé Ribiera Afonso AND PRÍNCIPE Ilhéu de S. Miguel CAUÉ Ilhéu Gabado São João dos Angolares SELECTED CITIES AND TOWNS Ribiera Peixe DISTRICT CAPITALS Ilhéu Jalé Sete Pedras NATIONAL CAPITAL Porto Alegre 0° Ilhéu das Rolas 0° MAIN ROADS DISTRICT BOUNDARIES INTERNATIONAL BOUNDARIES 6°30'E 7°00'E FEBRUARY 2005