Country Report Sao Tome and Principe October 2008

Outlook for 2009-10

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 crucial 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 subside, owing to moderating oil and food prices on international markets, and inflation is forecast to average 20% in 2009 before declining to 15.5% in 2010. Real GDP growth is forecast to increase only slightly, to 6%, in 2009, owing both to delays in the disbursement of donor funds in view of political turmoil and to the negative impact of high, albeit slowing, inflation on some economic sectors. Growth will again quicken a little, to 6.5%, in 2010 as oil exploration activity increases and inflation slows further.

Political scene

The prime minister, Joaquim Rafael Branco, has made a two-day visit to Angola in order to restore close relations and discuss increasing Angola's investment in Sao Tome.

Economic policy

In its 2008 Article IV Consultation, the IMF noted the country's generally positive performance under the poverty reduction and growth facility (PRGF) arrangement (2005-08). In response to the Fund's concerns over the budget deficit and accelerating inflation, the government has pledged to contain spending and reduce liquidity growth. The government has announced plans to restructure the troubled water and electricity company, Empresa de Agua e Electricidade de Sao Tome e Principe, with a view to its eventual privatisation.

The domestic economy

The London Court of International Arbitration has ruled on a dispute over the rights to Block 4 in the Nigeria-Sao Tome Joint Development Zone (JDZ). An investigation into the suspected misappropriation of millions of US dollars of signature bonus money from the JDZ has intensified, following the arrest of the owner of the Nigerian bank at the centre of the scandal.

Foreign trade and payments

Portugal has granted Sao Tome a debt write-off worth US$35m and a new credit line worth €50m (US$71m), which will finance projects to rehabilitate the country's infrastructure and boost production of basic consumer goods.