Democratic Republic of Sao Tome and Principe: 2013 Article IV Consultation and Second Review Under the Extended Credit Facility Arrangement; Staff Report; Informational Annex; Debt Sustainability Analysis; Press Release on the Executive Board Discussion; A (Electronic book text)

EXECUTIVE SUMMARY Context. The coalition government that came into office on December 12, 2012, remains fully committed to the pursuit of sound policies that are helping to consolidate macroeconomic stability, despite a challenging external environment and more uncertain oil prospects. Program performance. Overall, program performance has been satisfactory. All continuous and end-June 2013 quantitative performance criteria were met, and one of two end-June 2013 structural benchmarks was met while the other one will be met with a delay. However, more time will be needed to devise a plan to clear cross-arrears (the end-September 2013 structural benchmark was missed). The quantitative indicative target on pro-poor spending was met, but the other two indicative targets were not. Macroeconomic and key structural policies. The authorities' macroeconomic policy framework for 2014 and beyond reaffirms their commitment to fiscal prudence in support of the exchange rate peg to the euro and debt sustainability, and to the pursuit of sound financial policies. The authorities are committed to a 2014 domestic primary deficit target of 3.0 percent of GDP, in line with projected non-debt-creating financing, and to a further tightening of the fiscal stance by 2017, given more uncertain oil prospects. To meet the fiscal targets and create additional space for priority infrastructure and pro-poor spending, the authorities will strengthen revenue collections, including by modernizing the tax and customs administrations and broadening the tax base, and will contain non-priority spending. The central bank has increased its vigilance over the financial sector through off- and on-site inspections of commercial banks, and is reinforcing compliance with regulatory and prudential requirements. It will work with commercial banks to enhance the banking system's efficiency, profitability, and resilience. The authorities are striving to strengthen external competitiveness and reduce external vulnerabilities through improvements in the business climate and various productivity-enhancing measures.