Economic Analysis
Sao Tome and Principe

Sao Tome and Principe

Population 0.2 million
GDP per capita 2,190 US$
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Synthesis

major macro economic indicators

  2019 2020 2021 (e) 2022 (f)
GDP growth (%) 2.2 3.0 2.1 3.0
Inflation (yearly average, %) 7.8 9.9 8.2 7.5
Budget balance (% GDP)* -1.3 -3.7 -1.5 -0.5
Current account balance (% GDP)** -17.5 -12.4 -11.3 7.5
Public debt (% GDP) 99.9 87.4 87.9 86.5

(e): Estimate (f): Forecast *Grants included **Including official transfers

STRENGTHS

  • Prospects for expansion of the tourism sector
  • Support from international donors
  • Strong ties to Portugal and Portuguese-speaking countries (Angola, Brazil)
  • Dobra pegged to the euro

WEAKNESSES

  • Heavily dependent on international public aid
  • Low government revenue: 15% of GDP
  • Economy still dominated by agriculture and fishing
  • Poor business climate
  • Lack of infrastructure and weak legal and regulatory environment constrain the operating environment
  • High export and import costs due to remote island location
  • Underdeveloped and weak banking sector (non-performing loans exceed 25% of the portfolio)
  • High level of public debt

RISK ASSESSMENT

Economic growth driven by a stronger recovery in tourism

Activity was curtailed in 2021 as tourism continued to recuperate, but should accelerate in 2022. The sector, which accounts for 15% of GDP, is expected to see a swifter recovery in 2022 as restrictions are eased and the COVID-19 vaccination rate increases (39% of people had received at least one dose by December 2021 and 23% were fully vaccinated). However, tourism will remain at the mercy of developments in the health situation and is unlikely to return to its pre-pandemic level. Trade, which accounts for more than one-third of the services sector's contribution to GDP, is expected to increase in 2022 as domestic demand picks up, aided by an increase in purchasing power linked to the rise in income in the services sector (70% of GDP and 60% of employment) and more muted inflationary pressures. The dobra’s peg to the euro, coupled with the fact that commodity prices are not expected to rise by as much as they did in 2021, will help to contain imported inflation. Foreign investment and financing, particularly in tourism, should support growth in the secondary sector, which is dominated by construction. The USD 1.3 billion Malanza Free Trade Zone development project could also attract investment. Furthermore, the country is set to receive a grant from the AfDB's African Development Fund worth USD 10.7 million to support small and medium enterprises in tourism and agriculture. The economy will continue to rely heavily on the agricultural sector, which accounts for 20% of GDP and nearly 70% of exports. High cocoa prices (75% of agricultural exports) are expected to boost production and export earnings. 

 

Reducing deficits and international dependence 

The pickup in activity will boost tax revenues, thereby reducing the public deficit. The collection of tax arrears owed by state-owned enterprises will also contribute to the increase. In addition, the government is expected to scale back its support measures for households after halting fiscal consolidation in 2021. Efforts to streamline spending are expected to resume with the goal to reduce administrative costs by 30% as well as a commitment to freeze new hiring and promotions of civil servants. In contrast, introduction of the 15% VAT rate has been postponed and is now scheduled for the last quarter of 2022. The cost of debt, which is mainly concessional, remains low, at less than 4% of the government budget. The country will continue its efforts to clear external arrears, which are equivalent to 2.2% of GDP. A restructuring agreement with Brazil has already been reached.

 
The current account deficit is expected to improve in 2022 on the back of a brisker recovery in the services sector, as increased tourism earnings restore the services surplus. The trade balance will narrow only marginally, since spending on oil imports (20% of imports) and capital goods will offset rising cocoa exports. Current international cooperation will fuel the transfer surplus. The country will continue to rely on support from multilateral and bilateral lenders to finance the current account deficit. It will continue to benefit from IMF assistance under an ECF programme granted in October 2019 (USD 18 million over 40 months). Foreign exchange reserves, representing almost four months of imports, were strengthened by the allocation of special drawing rights by the IMF for USD 20 million in August 2021.

 

Legislative elections in 2022

After being postponed by more than a month amid accusations of fraud, the September 2021 presidential election run-off was won by Carlos Vila Nova of the centre-right Independent Democratic Action (ADI) Party with nearly 58% of the vote. He succeeded Evaristo Carvalho (ADI), who was elected in 2016 but decided not to run for a second term. Pending legislative elections scheduled for October 2022, this election prolongs the power sharing arrangement with the prime minister and leader of the Movement for the Liberation of São Tomé and Príncipe - Social Democratic Party (MLSTP-PSD), Jorge Bom Jesus, who was appointed following the October 2018 legislative elections by the coalition formed by the MLSTP-PSD (23 seats out of 55) and other small parties (PCD-UDD-MDFM), which holds power despite the ADI’s relative majority (25 seats). The previous round of power sharing went smoothly, and collaboration is not expected to be a problem in the lead-up to the legislative elections. The archipelago has a relatively strong democratic record compared with its sub-Saharan African peers. However, with more than one-third of the population living below the international poverty line and unemployment still high (about 15% in 2021), the risk of social unrest cannot be ruled out.

 
Because of its island location, relations with Portuguese-speaking countries (Portugal, Angola, and Brazil) and international organisations remain crucial. Since recognising the One China policy at Taiwan’s expense in 2016, São Tomé and Príncipe has strengthened its ties to China, as illustrated by the increase in funding granted to the archipelago.

 

Last updated: February 2022

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