Figure 1: Real GDP growth (W)

Figures for 2010 are estimates; for 2011 and later are projections.

Table 1: Macroeconomic indicators

Figures for 2010 are estimates; for 2011 and later are projections.

GDP growth is estimated at 4.5% for 2010, slightly better than the 4.0% in 2009 but still lower than the average growth of over 6.2% during 2004-08. The legislative election in August slowed down the economic recovery by holding up ODA disbursements and further delaying pending FDI. ODA, construction, housing and the informal sector sustained economic growth in 2010, boosted by an inflow of electoral related spending, estimated at around USD 10 million. Growth is not expected to return to pre-crisis levels until after the presidential elections planned in 2011. Oil exploration investment, as well as the start of the construction of the deepwater seaport, will underpin growth from 2012 onwards.

The agricultural sector accounts for only 17.1% of GDP but employs over 60% of the active population. The sector is characterised by low overall productivity due to inadequate infrastructure, inexistent public services and a large number of small producers. Consequently, a large share of food, notably rice, needs to be imported.

In 2010, agricultural output was severely affected by a drought lasting eight months. This has strengthened inflation and undermined food security, as domestic supply relies heavily on fragile subsistence farming. Cocoa production, representing 88% of exports, is estimated to have dropped by some 20%. The decline in volume has been somewhat compensated by an increase in the international cocoa price, currently at a 30-year high. Agricultural output from 2011 onwards should gradually increase, reflecting the government’s investments in machinery and fertilisers to boost productivity, as well as increased private sector investment.  

Foreign investors are contributing to the diversification and increase of agricultural output. Malongo, a French company, plans to rehabilitate “Roça Monte Café” in 2011, a former coffee plantation worth USD 3 million. Another French company, growing pepper and vanilla since 2008, plans to export 400 tonnes by 2015. Organically certified cocoa production is gaining momentum, accounting for 400 tonnes out of a total cocoa production of 3 500 tonnes in 2010. It offers a price premium to producers of over six times the price of regular cocoa. Further increasing cocoa production, however, remains strongly constrained by fragmentation of land ownership.

Developing fisheries has great economic potential and could boost employment, income, food security and diversification. Local fishermen are limited to small-scale fishing, while industrial fishing has been embedded in a fishing agreement with the EU that allowed vessels mainly from Spain, Portugal and France to fish in the São Toméan waters. Covering the period from June 2006 to May 2010, the agreement included a financial contribution of EUR 663 000, 50% of which was earmarked to support STP’s fisheries policy. A new agreement is under negotiation. The AfDB and the government will upgrade the existing certification facility to stimulate exports of fish products to the EU, currently limited due to lack of compliance with phytosanitary requirements.

Production of oil and gas in STP’s offshore “Exclusive Economic Zone” (EEZ) could transform its economy. The bidding round due to be concluded in September was extended by 60 days to attract more bidders. Yet only six companies (from Angola, Nigeria, South Africa and STP) placed a bid, and no oil major participated. No commercially viable oil has been found yet. Currently, the most promising oil prospects still emanate from the Nigeria-STP Joint Development Zone (JDZ), an area of overlapping maritime boundary claims. Drilling prospects are still uncertain and have been marred by contractual disagreements about asymmetric profit sharing.

Sinopec, the Chinese national oil company and the dominant player in the JDZ, has found hydrocarbon reserves in exploration blocks 2, 3 and 4, while block 1 is thought to contain gas reserves of around 1 trillion cubic feet. So far, Sinopec hasn’t started production in any of the blocks, casting doubt about the commercial viability of the reserves. Chevron drilled a well in 2006, which did not meet its expectations. In 2010, Total acquired a 45.9% stake in Chevron’s block.

Efforts to promote transparency in STP’s fledgling oil sector have taken a blow with the country’s expulsion from the Extractive Industries Transparency Initiative (EITI) in April 2010. STP’s notable lack of progress towards meeting EITI objectives had prompted the government to request a suspension from the process. The EITI board voted to expel STP, however, concluding that it had not demonstrated exceptional and unforeseeable circumstances outside its control to justify a further extension.

Utilities and construction, driven by the building of tourism infrastructure, housing and road maintenance, make up much of the secondary sector, which represents 17.8% of GDP. The country has only a few companies, most of them engaged in food processing. They include a brewery, a fruit juice company, a palm oil plant, a high-end chocolate factory and half a dozen bakeries. Manufacturing, which accounts for 6.7% of GDP, suffers from the small domestic market, the lack of human capital, high energy costs, and reliance on imported raw materials. The low quality of local production perpetuates the island’s increasing demand for higher quality and more affordable foreign products.

Transport and utilities infrastructure are central to the Government’s ambition to turn the archipelago into a service and tourist hub. As of 2010, however, the main infrastructure works underpinning this vision still had to commence. Principe’s investment projects remained on hold due to the need to build a new offloading crane for the port. Since the existing one broke down in December 2009, development partners are evaluating long-term solutions, but rehabilitation is not expected before mid-2011.

The São Toméan economy is driven by the tertiary sector, which generates over 65% of GDP. It is highly informal and consists mainly of small retail, transport and financial services. The government projects tourism will play an increasing role in the country’s economic development.Tourism has gradually picked up, in pace with increased accommodation capacity, with around 7 000 tourists in 2010. The country’s cultural and architectural legacies are unique assets underlying tourism’s great potential. Structural constraints still need to be addressed, however, including offering lower airfares and providing alternative flying routes to the archipelago.Currently, only two commercial flights connect the island with Europe, keeping airfares artificially high.

Private consumption and public investments drove demand in 2010. Private consumption structurally accounts for the largest share of GDP. In 2010, it was supported by election-related spending. Yet this buying of votes or “Banhos”, estimated at some USD 10 million (or some 5% of GDP), couldn’t compensate entirely for the loss of revenue following the severe drought. Private consumption is projected to gradually increase in the future, due to employment generated by the construction of the deep-water seaport and tourism infrastructure. Additionally, household income should be sustained by the projected gradual increase in agricultural production and export.

Public investment counterbalanced the continued drop in private investment projects triggered by the global economic crisis. Energy and transport infrastructure absorbed the bulk of public investment, while no new large private investment projects were announced, and projected ones were still affected by the global crisis and the political uncertainty related to the elections. The share of public investment is expected to grow much more slowly in 2011 and 2012, however, as FDI is expected to pick up with the construction of the deepwater seaport in 2011. The acceleration of investment in oil exploration activities and tourism infrastructure should underpin private investment from 2012 onwards. Government spending, mainly on basic infrastructure, maintenance and the wage bill, remains a small component of demand and is not projected to increase strongly in the coming years, due to the restrictive fiscal stance. The heavy reliance on external financing, in the form of aid flows and FDI, remains the main risk to STP’s economic outlook.

Figures for 2010 are estimates; for 2011 and later are projections.

In January 2010, the dobra (STD) became pegged to the euro. The peg, backed by a five-year concessional credit line worth EUR 25 million from Portugal, should help maintain monetary stability and raise the credibility of the government’s macroeconomic policy. The peg’s positive impact was already felt through the very low inflation in the first semester. The potential downside of the peg is the risk of overvaluation of the dobra, resulting in a lower purchasing power of revenues in US dollars, mainly ODA flows and future oil signature bonuses. So far the slight depreciation of the euro against the dollar in 2010 has resulted in a depreciation of the dobra against the dollar.

Throughout 2010, monetary policy was dictated by the need to contain inflation, increase the country’s foreign exchange reserves and maintain the peg (set at STD 24 500 to the euro). In the second half of 2010, inflation picked up, however, due to the effect of the drought, strong election spending and the depletion of sugar and rice stocks. Inflation will remain largely determined by world prices for oil and food, which constitute an increasing share of the consumer goods basket, reaching 60% in 2010.

Besides the peg, the Central Bank’s sterilisation efforts also contributed to reducing inflation from 16.7% in 2009 to 11.4% in 2010, although this remained above the 10% target for the year-end. This positive evolution benefited from a lower readjustment of inflationary expectations. The country’s inflation is projected at 7.5% for 2011, to be reduced to 6.7% in 2012. Whether these forecasts materialise will depend upon the government’s ability to deal with volatile international food and oil prices, as well as with future foreign currency inflows from oil signature bonuses in 2011 and FDI in 2012.

Despite sterilisation efforts, foreign currency bank deposits had increased by 37% by August 2010, resulting in a base money growth of about 10% in 2010. This was an improvement over the 21.9% registered in 2009, however. The discount rate has been held stable at 16% to stimulate commercial credit to the economy, and the compulsory reserve requirement has been maintained at 24.5%.

The government is expected to consolidate the economic reforms undertaken during the past two years, improving fiscal performance and safeguarding international reserves and the exchange rate peg. This consolidation should lay the ground for a moderate acceleration of economic growth from 2012 onwards. This increased macroeconomic rigour should help meet inflation targets.

Exports suffered in 2009 due to reduced global demand for coffee and tea. In 2010, between January and September, overall receipts from exports approached USD 186 million, coffee and tea alone contributing close to 48% of export receipts. With minerals, the share reached 67% of total exports, underlying the dependency of exports on primary products. Import bills in 2010 were close to USD 998 million and almost two-thirds of it went to import capital and intermediate goods. The rise in import bills is partly explained by the shift in the direction of trade towards the East African Community and the COMESA free trade area where import barriers have been reduced considerably.

As a result, the current account balance registered an estimated deficit of 6.6% of GDP in 2010 and is projected to hit 9.1% in 2011 before falling again to 6.4% (Table 1). 

A rise in private direct investment bolstered the balance of payments in 2009 helping it achieve a surplus to the tune of USD 139 million that in effect raised the country’s reserve to 6.2 months of imports (up by 1.2 months from the previous year). In 2010, the overall balance of payments was expected to experience a moderate deficit of USD 9.4 million, reducing slightly the reserve position by a small margin from its 2009 level.

Rwanda’s level of debt is one of the lowest in sub-Saharan Africa, partly due to substantial debt relief (which amounted close to USD 1.5 billion in 2005) and the government’s prudent debt management. In 2010, Rwanda’s external debt was less than 5% of GDP while the average for sub-Saharan Africa was close to 23% and that of the EAC 26% and about 30% for Low Income Countries (LIC).

Figures for 2010 are estimates; for 2011 and later are projections.

The private sector in STP is characterised by a small number of firms that specialise in trade, construction and tourism. The World Bank’s Doing Business 2011 report ranks STP 178th out of 183 countries. This ranking reflects the lax regulatory enforcement, inadequate infrastructure and past political unrest. Investment laws and regulations are onerous, and bureaucracy can be cumbersome and prone to corruption. Other deterrents to investment include foreign exchange controls, some restrictions to capital transactions, land ownership issuesand the influence the government maintains on everyday business. Foreign and domestic firms are treated equally under the law.

In 2010, the Chamber of Commerce opened a one-stop shop for entrepreneurs to stimulate and facilitate starting a new business. This major improvement was counterbalanced by the introduction of a minimum capital requirement for limited liability companies.

STP’s financial system is small, underdeveloped and highly dollarised. The financial sector is healthy, with less than 1% of non-performing loans. The largest and oldest commercial bank is the Banco Internacional de São Tomé e Principe (BISTP), a consortium between the STP government, Portugal’s Caixa Geral de Depositos and Angola’s leading deposit bank BAI. BISTP controls two-thirds of the credit and deposit market. The other six commercial banks have so far not been very active.

Domestic credit to the private sector remains limited and expensive, although it is available to both foreign and local investors without discrimination. The market for retail banking is very limited given the average monthly salary of STD 1.5 million, equivalent to EUR 60, and the high entry costs. Consequently, the majority of the population lacks access to formal banking services. Foreign currency deposits account for about 60% of commercial banks’ deposit liabilities, while about 70% of loans to the private sector are denominated in foreign currency.

An international payment system, SPAUT STP, is to be launched in the second quarter of 2011. The system, which will include 20 ATMs and 40 point of sales, will use VISA and is being set up by the Central Bank, Companhia Santomense de Telecomunicações (CST) and a bank syndicate. Insurance companies are gradually increasing their activities on the Archipelago, but overall the nonbank financial sector remains underdeveloped.

The government’s programme seeking to transform the country and diversify its economy is articulated around strengthening i) good governance; ii) economic growth and development; iii)national and social cohesion; and iv) the rule of law. So far, the new government has pledged to continue the reforms in public finance management undertaken by the previous administration. The main change in 2010 has been the transfer of the department of co-operation from the Ministry of Foreign Affairs to the Ministry of Planning and Finance (MPF), in order to highlight the importance of ODA to the budget. The judicial system is currently the weakest link in the STP’s administration as legal enforcement of contracts is close to inexistent.

EMAE, the water and electricity state-owned company, is being reformed with the World Bank’s assistance. Efforts to attract private capital and improve financial viability are meant to prepare the company for future privatisation, along the lines of what was achieved with the telecommunications company. The government has allowed ENCO, the state national oil distribution company, to adjust prices in line with market fluctuations to gradually phase out oil subsidies.

Sonangol, Angola’s state-owned oil company is increasing its presence in the country. The government granted it the concessions to manage the country’s main port in Ana Chavez, as well as the international airport. Sonangol is to upgrade the airport, extending the runway by 300 metres, installing lighting and modernising the terminal building. Talks about Sonangol acquiring a stake in EMAE and ENCO, as well as building a fuel storage in Neves, have been revived, but progress remains slow.

The major investment project has been the rehabilitation of the National highway N° 2, to be concluded by 2011 and worth EUR 24.5 million. Financed with a Portuguese credit line, it will connect the capital with Ribeira Peixe in the country’s poorest District Caué. Meanwhile, construction of the deep-water port proposed by French multinational CMA-CGM was delayed due to the financial crisis. Preliminary development is scheduled to begin in 2011, and the port should be operational by 2014. The project is estimated at USD 570 million. The finalisation of this port should enable STP to become the regional hub for transatlantic shipping, but other similar projects in neighbouring countries risk undermining the economic potential of the port if it is delayed much further.

Access to reliable and affordable energy remains problematic. The recent inauguration of Chinese Taipei’s power plant in Santa Amaro, however, should enable the country to cover its needs by nearly doubling the island’s wattage supply. The remaining challenge resides in building an adequate distribution grid to limit losses, which can go up to 40% of energy production.  Onesolution could be to connect the independent grids used by the former Portuguese plantations with the national distribution grid, thus connecting an additional 25% of the population. Alternative renewable energy solutions are currently being studied, including mini hydro electrical plants and solar energy for rural communities.

The World Bank is pushing for the telecommunication market, currently a monopoly by Companhia Sãotomense de Telecomunicação (CST), to be liberalised to increase efficiency and dynamism. After expanding by 60% in 2009, STP’s mobile phone market grew by another 25% in 2010. With 100 000 mobile subscribers, the market penetration stands at 60%. STP’s connection to a marine fibre optic cable linking Africa’s west coast to Europe, expected in 2012, should drastically improve telecommunications in the country. CST announced the conclusion of the USD 25 million contracts in June 2010. The project will be jointly financed by CST, the World Bank and Portugal Telecom. Once the cable is operational, CST plans to launch third-generation communication services.

The ‘Carta Agricola’, a roadmap for agriculture spanning 2006-15, includes distributing subsidised fertilisers, seeds and machinery to farmers in order to raise productivity. In addition, the government, supported by donors, plans to improve rural infrastructure, improve access to internal and external markets, and develop farmers’ managerial skills with regular targeted courses.

Environmental challenges are closely related to rural poverty. Deforestation is increasing as forest dwellers turn tropical wood into coal or sell it abroad. There is a lack of capacity and staff to preserve the archipelago’s rich and unique endemic fauna and flora. The OBO natural park, the country’s main tourist site, is underfunded and its touristic potential underutilised. There is an urgent need to strengthen its management and maintenance in order to preserve and expand its botanical garden and unique herbarium.