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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.