Country Report Sao Tome and Principe July 2008

Outlook for 2008-09

The new government formed in June 2008 by the Movimento de Libertacao de Sao Tome e Principe-Partido Social Democrata (MLSTP-PSD), Partido da Convergencia Democratica (PCD), and Movimento Democratico Forcas da Mudanca-Partido Liberal (MDFM/PL) has a majority in the National Assembly but is as fragile as its predecessors, and faces potential internal rifts between its members who have never shared power before. The president, Fradique de Menezes, will remain key to the government's survival, as he is the only political figure with sufficient political clout to maintain the unity of the coalition. Inflationary pressures will persist, owing to rising oil and food prices on international markets, and inflation is forecast to average 30% in 2008 before declining to 22% in 2009. Real GDP growth is forecast to slow to 5.5% in 2008 owing to delays in the disbursement of donor funds and the negative impact of high inflation on some economic sectors. Real GDP growth will rise to 6% in 2009 as macroeconomic and political stability improve.

The political scene

The government of Patrice Trovoada has collapsed after losing a vote of no confidence in the National Assembly. After protracted negotiations between the four main political parties, Rafael Branco, leader of the MLSTP-PSD, has been appointed as the new prime minister, heading a new coalition comprising his party, the MDFM/PL and the PCD.

Economic policy

The IMF has completed its sixth review of Sao Tome's poverty reduction and growth facility (PRGF), reporting improved fiscal and public debt management. However, the Fund has raised concern over rising inflationary pressures and the management of oil revenue. The 2008 budget has been approved: 60% of total spending will be devoted to public investment.

The domestic economy

The national oil distribution company, Empresa Nacional de Combustiveis e Oleos (ENCO), has suspended sales of domestic fuel due to lack of deliveries from Angola. The government and a Dutch company, SCD Aviation, have signed two agreements to modernise Principe airport and to increase air traffic between the archipelago and its regional neighbours. The government has announced a new shareholding structure for the national airline, STP Airways, which is due to re-launch operations in mid-September.

Foreign trade and payments

Political instability has put in jeopardy several debt write-offs and credit lines agreed in recent months.