Sao Tomé & Principe
Troubled economic reform in São Tomé in 2002

afrol News, 6 January - The government of São Tomé and Príncipe was unable to meet its economic aims for 2002, mainly due to the social unrest produced by the wide-ranging reforms. Nonetheless, the island nation is experiencing a stable economic growth while it awaits the coming oil riches.

The International Monetary Fund (IMF) this week published a letter of the government of São Tomé and Principe, describing the economic trends. The letter was sent on 30 September and is signed by then Minister of Planning and Finance, Maria dos Santos Tebús Torres. 

Ms dos Santos admitted "the nonobservance" and "slippages in the execution" of some of the benchmarks in the reform programmes agreed upon with the IMF. In particular, government spending had not been within the foreseen limits. Improved revenue (tax) collection had however made up for some of this.

- Due to the adjustment of water and electricity rates, and the continued expansion of government spending, the end-of-period inflation rate increased to 10.5 percent at end-June 2002, compared with 9.4 percent in 2001, Ms dos Santos writes. 

The increase in water and electricity rates originates in the December 2000 decision to privatise the national water and electricity utility, EMAE. The utility therefore has been ordered to follow a full cost recovery policy, meaning that water and electricity rates shall be based on production and distribution costs. Also government offices are now expected to pay market prices for their supply.

In applying the "automatic mechanism for adjusting water and electricity rates in line with production and distribution costs," the government had raised electricity rates by 16 percent and water rates by 27 percent in January 2002. This however proved difficult to execute in poverty-struck São Tomé. "Under social pressure," as Ms dos Santos writes, EMAE "returned these rates to their December 2001 levels, starting in July 2002." Ms dos Santos however announced another "possible adjustment of rates" within short.

Also another reform met civil society resistance. To limit wage expenses, the government tried to implement a "civil service reform and downsizing program," retrenching 265 civil servants out of about 4,500 and 158 workers out of about 400 at EMAE. 

While São Toméan trade unions grudgingly had accepted the downsizing of civil service, they however demanded their share of the expenses saved. Following labour unrest, government had to grant a general salary increase averaging 17 percent on 1 July 2002. Still, given the downsizing in the civil service, the wage bill was expected to "be limited to 9 percent of GDP in 2002 and 2003, compared with 9.6 percent of GDP in 2001."

In addition to the not expected expenditure on water, electricity and wages, the government experienced higher-than-expected expenditures related to the extraordinary legislative elections last year. 

Ms dos Santos however informed the IMF of remarkable successes in collecting revenues in the first half of 2002. The government had strengthened the tax inspection and audit departments of the tax directorate and the customs administration, thus collecting more taxes than anticipated. There where plans to raise tax revenues even more by improving tax collection and by extending the general sales tax to new sectors (hotels, restaurants, telecommunications, and maintenance and repair services).

The government also announced that the improved revenue was to be allocated in social manners in the years to come. It was planned to raise the spending levels on education from 9 to 12 percent of GDP. Also health care spending was to increase from 11 to 13 percent of GDP. This, together with increased investments in infrastructure, were key elements in governments plan to fight poverty.

According to Ms dos Santos, economic activity had continued to recover during the first half of 2002, "owing to the strong expansion in food production, construction, trade and tourism." Real GDP growth was still projected at 5 percent in 2002, and "should remain at 5 percent per year during the period 2003-05." 

Even stronger economic growth is believed to set in after this period, when the effects of investments in offshore oil production are noted. Already in 2005, the external current account deficit was expected to widen to about 380 percent of GDP (from currently 31 percent), "as a result of imports of goods and services associated with investments in petroleum exploration and development." 

Several contracts for future oil exploration and exploitation are already negotiated, the Ministry of Finance explains. This includes an agreement with the Nigerian government on the special regime area of the Joint Development Zone and contracts with the US company Exxon-Mobil, the Norwegian company PGS and the US company ERHC. 

Sources: Based on IMF, São Toméan govt and afrol archives

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