SAO TOME AND PRINCIPE Economic Update Reforming State-Owned Enterprises FOR HIGHER PRIVATE SECTOR-LED GROWTH AND JOB CREATION 1st EDITION SAO TOME AND PRINCIPE Economic Update Reforming State-Owned Enterprises FOR HIGHER PRIVATE SECTOR-LED GROWTH AND JOB CREATION 1st EDITION © 2025 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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Cover design, interior design and typesetting: Piotr Ruczynski, London, United Kingdom, prucz.co.uk Contents v Acknowledgments vii Abbreviations and Acronyms 1 Overview 5 CHAPTER 1 The State of the Economy 6 Recent Developments 11 Economic Outlook and Risks 15 CHAPTER 2 Reforming State-Owned Enterprises for Higher Private Sector-Led Growth and Job Creation 16 Overview of the State-Owned Enterprise Landscape in São Tomé and Príncipe 17 The Role of SOEs in São Tomé and Príncipe’s Economy 18 Financial and Operational Performance of the SOE Sector 20 Fiscal Risks from SOEs 21 Recent Efforts to Reform the SOE Sector 23 Challenges in SOE Governance 24 Selected Policy Recommendations 26 References Boxes 6 BOX 1.1 EMAE’s financial situation and its 22 BOX 2.1 The Importance of Performance implications for fiscal sustainability Management Figures 6 FIGURE 1.1 Annual real GDP growth, 2003 – 24 11 FIGURE 1.10 Central government’s overall and 7 FIGURE 1.2 International arrivals to São Tomé primary fiscal balance and Príncipe 11 FIGURE 1.11 Annual GDP and GDP 7 FIGURE 1.3 São Tomé and Príncipe’s GDP per capita growth per capita relative to Sub-Saharan Africa (left) 12 FIGURE 1.12 Domestic primary balance and SIDS (right) average (commitment basis) 8 FIGURE 1.4 Employment rate: total, male, 17 FIGURE 2.1 SOE domestic revenue-to-GDP ratio, female, and youth against comparators in 2019 8 FIGURE 1.5 Headline inflation 19 FIGURE 2.2 Fiscal risk from loss making EMAE 8 FIGURE 1.6 CPI inflation and contributions from 20 FIGURE 2.3 Balance Owed by SOEs to the food prices Government in 2023 9 FIGURE 1.7 Current account and its components 21 FIGURE 2.4 Balancing SOE Reform Options 9 FIGURE 1.8 International reserves and fuel imports 24 FIGURE 2.5 Steps for Effective Performance 10 FIGURE 1.9 Credit to the economy (excluding Management System central government) Tables 13 TABLE 1.1 Economic trends and forecasts, 19 TABLE 2.3 Financial Performance of SOE Portfolio 2021 to 2027 24 TABLE 2.4 Policy Recommendations for Improving 16 TABLE 2.1 SOEs in São Tomé and Príncipe (2023) SOE Corporate Governance 18 TABLE 2.2 SOE Portfolio Profitability Ratios The cutoff date for the data and analysis in this report is June 13, 2025. v Acknowledgments The São Tomé and Príncipe Economic Update series aim at: providing rigorous and timely analysis to São Tomé and Príncipe’s stakeholders in government, academia, media, international partners, and the wider population in- terested in the country’s future economic development; connecting São Tomé and Príncipe with global and regional developments to help benchmark the country against international trends and relevant peer countries; providing a platform to facilitate knowledge-sharing of the World Bank’s various analytical and lending activities in São Tomé and Príncipe, as well as those produced globally; and generating a community of economic stakeholders which the World Bank can engage with and support in their own efforts to analyze economic developments in São Tomé and Príncipe and formulate and discuss economic policies. This Economic Update was prepared by a multidisciplinary team led by Bénédicte Baduel (Senior Country Economist) under the guidance of Chadi Bou Habib (Lead Economist). Chapter 1 was prepared by Joaquin Marandino (Consultant). Chapter 2 was prepared by Djeniffer Melo (Economist) and Belisario Dos Santos (Senior Public Sector Specialist) with guidance from Ruxandra Burdescu (Lead Public Sector Specialist). Wilson Piassa (External Affairs Associate) provided communication and dissemination support. Amada Rodrigues (Program Assistant) and Cynthia Tiny (Team Assistant) provided administrative and logistical support. Alexandra Soininen (Consultant) provided editorial support. The report was prepared under the overall guidance and supervision of Albert Zeufack (Country Director), Juan Carlos Alvarez (Country Manager), Hassan Zaman (Regional Director), Abha Prasad (Practice Manager), and Omowunmi Ladipo (Practice Manager). The team thanks Jean-Pascal Nganou (Program Leader) and Aghassi Mkrtchyan (Lead Economist and Program Leader), for helpful comments and suggestions; as well as the staff from the Ministry of Economy and Finances for their constructive engagement during the preparation of the report. Some sections of this report have been drafted with the support of World Bank Group approved AI technology. The World Bank Group confirms that relevant sections have been reviewed for accuracy and validity. vii Abbreviations and Acronyms AFAP Agência Fiduciária de Administração de Projectos AGER Autoridade Geral de Regulação BCSTP Banco Central de São Tomé e Príncipe BISTP Banco International de São Tomé e Príncipe CD Certificates of Deposits CPI Consumer Price Index CST Companhia Santomense de Telecomunicações GDP Gross Domestic Product ECF Extended Credit Facility EMAE Empresa Nacional de Água e Electricidade ENAPORT Empresa Nacional de Portos ENASA Empresa Nacional de Aeroporto ENCO Empresa Nacional de Combustíveis e Óleos ILO International Labour Organization IMF International Monetary Fund ODA Official Development Assistance OECD Organization for Economic Co-operation and Development SIDS Small Island Developing States SOE State-Owned Enterprise SSA Sub-Saharan Africa US United States VAT Value Added Tax WB World Bank 1 Overview The São Tomé and Príncipe Economic Update provides growth is projected to reach 2.9 percent in 2025 and a comprehensive analysis of the country’s economic average 3.8 percent over 2025 – 2027. Yet, more broadly, performance, challenges, and prospects. The report is di- São Tomé and Príncipe’s growth model, driven by ex- vided into two chapters: Chapter 1, which focuses on the ternally financed public investment, is challenged by state of the economy, and Chapter 2, which examines the the decline in official development assistance inflows role and performance of state-owned enterprises (SOEs) and the country’s situation remains fragile, due to struc- in contributing to economic growth and job creation. tural challenges, some of them typical of small islands developing states. Chapter 1: São Tomé and Príncipe must tackle structural con- The State of the Economy straints to enable inclusive and sustainable growth. Comprehensive reforms are essential for fostering pri- In 2024, São Tomé and Príncipe’s economy showed vate sector growth and job creation. These include in- signs of recovery from the severe energy crisis that lim- vesting in key physical and digital connectivity and im- ited activity and translated in growth reaching only proving reliable access to public services. In this context, 0.4 percent in 2023. Real Gross Domestic Product (GDP) a critical challenge is to tackle the poor operational and growth is estimated at 1.1 percent in 2024. However, the financial performance of SOEs. country has faced a declining growth trend over the past two decades, averaging just 1.3 percent annually from SOEs play a crucial role in São Tomé and Príncipe’s 2019 to 2024 due to multiple shocks. The labor market economy. The governance of SOEs critically affects the remains small and weak, pushing many young people country’s economic stability and growth outlook. Ef- to search for opportunities abroad. External and fiscal ficient and well-managed SOEs can drive economic de- balances started to recover in 2024. In 2023, the end of velopment by providing essential services, creating jobs, a preferential agreement to import diesel on credit led and attracting investment. Conversely, poorly managed to a sudden increase in the value of fuel imports trigger- SOEs can drain public resources, stifle growth, and exac- ing balance of payment and fiscal stress. erbate fiscal challenges. Economic growth is projected to increase in the com- The energy sector, dominated by Empresa Nacional ing years; however, significant risks remain. São Tomé de Água e Electricidade (EMAE), is a prime example and Príncipe’s economic growth is projected to acceler- of the macroeconomic importance of SOEs. Reliable ate as reforms, especially in the energy sector, strength- and affordable electricity is crucial for economic growth en macroeconomic stability and drive structural chang- and productivity across all sectors. Yet, EMAE’s inefficien- es. Tourism services exports are projected to be a key cies and financial issues have added to public debt and source of growth, jobs, and foreign exchange. Real GDP slowed economic progress. 2  |  Reforming State-Owned Enterprises for Higher Private Sector-Led Growth and Job Creation Addressing these challenges through comprehensive ed losses, an increase from 2022. The biggest contrib- reforms can unlock the potential of SOEs to contrib- utor to these losses is EMAE. The losses pose a contin- ute positively to São Tomé and Príncipe’s econom- uous drain on the government budget and stifle the ic growth and stability. This is the focus of Chapter 2. country’s growth potential. While reform efforts are underway, progress is slow, re- Chapter 2: quiring stronger political will and comprehensive poli- Reforming State-Owned Enterprises for Higher cy recommendations to improve governance, transpar- Private Sector-Led Growth and Job Creation ency, and financial discipline. Reforms should strengthen the legal and regulatory framework governing SOEs, and SOEs have been crucial to São Tomé and Príncipe’s de- ensure a clear separation between the roles of the state as velopment since its independence in 1975. They are regulator, owner, and policymaker. Also, reforms should crucial for providing services to citizens and firms and improve performance monitoring and support sound have the potential to drive economic growth by balanc- fiscal discipline and oversight. Reforms should enhance ing commercial and public policy objectives. The SOE sec- transparency with systematic disclosures and improve tor in São Tomé and Príncipe consists of ten companies corporate governance frameworks. where the state owns more than ten percent, including four sole proprietorships in key services. In conclusion, the report highlights the need for ur- gent and in-depth reforms within the SOE sector to im- Operational inefficiencies, weak governance, and prove their efficiency and reduce their fiscal burden. mismanagement have led to unreliable service de- These reforms are essential for attracting foreign invest- livery and financial instability, weighing on public ment, reducing corruption, and enhancing the overall finances and economic growth. The financial per- performance and profitability of SOEs. By implementing formance of SOEs varies, but on aggregate, the portfo- these reforms, São Tomé and Príncipe can achieve high- lio has accumulated significant losses and liabilities er and more inclusive growth, where SOEs play a crucial over the years. In 2023, 64 percent of the SOEs report- enabling role. 5 CHAPTER 1 The State of the Economy Main messages • In 2024, São Tomé and Príncipe’s economy showed signs of recovery from the severe energy crisis that limited growth in 2023. Real GDP growth is estimated at 1.1 percent in 2024. However, the country has experienced a declining growth trend over the past two decades, with various global and domestic shocks further reducing growth to an aver- age of 1.3 percent from 2019 to 2024. The labor market remains small and weak, push- ing many young people to search for opportunities abroad. Inflation started to decline in 2024, though from a high base driven by multiple shocks since 2020. External and fis- cal balances started to improve in 2024. The current account deficit decreased, and in- ternational reserves began to recover. The fiscal deficit decreased for two years in a row but off-budget oil purchases from the government and contingent liabilities from SOEs continue to put pressure on public finances. • Economic growth is expected to pick up over the coming years, but downward risks are elevated. Economic growth in São Tomé and Príncipe is expected to rise as energy sector reforms improve macroeconomic stability and promote structural change. Tourism services exports are projected to be a key source of growth, jobs, and foreign exchange. Real GDP growth is projected to reach 2.9 percent in 2025 and average 3.8 percent over 2026 – 2027. Inflationary pressures are expected to ease, as reforms unlock production bottlenecks and monetary policy remains tight. On the fiscal side, the government aims to reach a domestic primary surplus of 3.4 percent of GDP by 2027 and debt is project- ed to decline gradually and remain sustainable, despite significant contingent liabilities. Several risks could threaten São Tomé and Príncipe’s economic growth, such as slow en- ergy reforms, fluctuating donor support, and vulnerability to natural disasters. • São Tomé and Príncipe needs to address structural constraints to achieve higher and more inclusive growth. São Tomé and Príncipe’s economy is fragile and face challenges typical to small island developing states. It lacks diversification and is highly vulnerable to external shocks. Declining official development assistance challenges the growth model reliant on external public investments. The country struggles with inadequate infrastruc- ture, including poor physical and digital infrastructure and unreliable access to key ser- vices such as electricity and water. São Tomé and Príncipe needs to implement broad- based reforms to support private sector development and job creation. 6  |  Reforming State-Owned Enterprises for Higher Private Sector-Led Growth and Job Creation Recent Developments Unreliable and expensive electricity has hindered eco- nomic growth in recent years. EMAE, the electricity and Economic Activity water SOE, operates inefficient and costly diesel-powered electricity plants. It is financially weak and has been ac- In 2024, São Tomé and Príncipe’s economy cumulating arrears to Empresa Nacional de Combustíveis e began to recover from the severe energy crisis Óleos (ENCO), the domestic fuel supplier, which were esti- that affected economic growth in 2023. mated at 23 percent of GDP in 2024. In turn, ENCO, primar- ily owned by Sonangol and partially by the Santomean São Tomé and Príncipe’s economy has slowed down government,1 accumulated arrears to Sonangol, which over the past two decades. From 2004 to 2008, the led to the loss of its preferential agreement to purchase economy expanded steadily, with an average annual fuel on credit, affecting fuel supply and pricing in the GDP growth of 6.3 percent (Figure 1.1). However, the glob- country. This change forced São Tomé and Príncipe to al financial crisis caused growth to drop to an average make upfront payments in foreign currency for diesel im- of 3.5 percent from 2009 to 2018. More recently, various ports, leading to a balance of payment shock. The sud- challenges like the COVID-19 pandemic (which severely den increase in import costs resulted in fuel shortages impacted tourism), global geopolitical turmoil (which and severe power outages, while the government took escalated fuel and food import costs), flooding, and an over two thirds of the country’s fuel purchases (see Box energy crisis further reduced growth to an average of 1.1). Consequently, real GDP growth was only 0.4 percent 1.3 percent per year from 2019 to 2024. in 2023, following a slight 0.2 percent growth in 2022. FIGURE 1.1 Annual real GDP growth, 2003 – 24 BOX 1.1 EMAE’s financial situation Percentage change and its implications for fiscal sustainability 10 The Water and Electricity Company (EMAE) in São Tomé and Príncipe, created in 1979, is the national utility com- 8 pany responsible for the generation, transmission, and dis- tribution of electricity and water. Most of electricity genera- 6 tion comes from low-efficiency diesel generators, which are expensive and rely on imported fuel. From 2013 to 2024, 4 the country spent an average of US$39 million a year on fuel imports, equivalent to over half of its international re- 2 serves and peaking at a critical 97 percent in 2023, after ENCO lost its preferential agreement with Sonangol. This heavy reliance on imported fuel is costly and financially 0 unsustainable, causing EMAE to struggle with payments to 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 24 ENCO and, in turn, ENCO to accumulate debt to Sonangol. 20 EMAE’s financial troubles have increased fiscal risks for Real GDP growth Average 2003–08 the government, with its debt to ENCO estimated at 23 per- Average 2009–18 Average 2019–24 cent of GDP in 2024. In addition, although electrification has progressed towards universal access, consumption is Source: National Institute of Statistics. hindered by the weak generation capacity, with an average capacity around 17 MW for a peak demand estimated at This slowdown also reflects a decline in official devel- approximately 21 MW in 2023. As a result of its expensive opment assistance (ODA). The economy relies heavily generation matrix, production costs are the third highest among Sub-Saharan countries at US$0.34 per kWh (World on external funding for public investment in infrastruc- Bank, 2023) and not covered by tariffs, even though they ture like roads, schools, and hospitals. Total investment are relatively higher, at US$0.22 per kWh. EMAE’s opera- has dropped from an average of 42.2 percent of GDP in tions are hindered by high technical losses, estimated at 2004 – 08 to 24.3 percent in 2019 – 23, as net ODA decreased 37 percent, and a weak collection bill. from 24 percent to 14 percent of GDP over the same period. 1 The Empresa Nacional de Combustiveis e Oleo (ENCO) is a privately registered Santomean company. Sonangol, the Angola oil SOE, holds majority ownership, while the government of São Tomé and Príncipe holds a minority share of 16 percent. Chapter 1   The State of the Economy  |  7 In 2024, the economy grew by 1.1 percent, supported growing number of young individuals entering the work- by tourism and improved electricity supply. Electricity force each year. Consequently, nearly half of the youth generation increased, following a Power Purchase are neither working nor studying, which drives emigra- Agreement with a Turkish company, FB Group, in late tion. About 18 percent of the population lived abroad 2023. This deal included adding new diesel generators in 2021, and in 2023 alone, 24,156 Santomeans (over 10 (already operational), LNG-diesel dual generators, and percent of the population) travelled out of the country solar panels. Tourism also boosted growth, with 37 per- (Kroll and Monsalve 2025). cent more international visitors from June to November 2024 compared to the same period in 2023 (Figure 1.2). Weak job creation and economic growth hinder im- However, limited availability of foreign currency and provements in living conditions. Given the low eco- government spending cuts continued to constrain eco- nomic growth over 2020 – 23, São Tomé and Príncipe’s nomic activity. As a result, GDP per capita dropped by income per capita declined compared to SSA and other 1.1 percent in 2024. small island developing states (SIDS) (Figure 1.3). In 2023, GDP per capita had returned to its 2017 level, and 15.8 per- FIGURE 1.2 International arrivals to São Tomé cent of the population was estimated to be living in pov- and Príncipe erty,2 broadly unchanged from a decade ago. Number of visitors, million FIGURE 1.3 São Tomé and Príncipe’s GDP per capita 8 relative to Sub-Saharan Africa (left) and SIDS 7 (right) averages Constant 2021 international US dollars 6 1.40 0.48 5 1.36 0.46 4 3 1.32 0.44 2 1.28 0.42 1 1.24 0.40 0 1.20 0.38 3 3 3 3 3 3 4 4 4 4 4 4 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 06 07 08 09 10 11 06 07 08 09 10 11 Source: General Directorate of Tourism and Hospitality. 1.16 0.36 20 3 20 6 20 9 20 2 20 5 20 8 21 20 3 20 6 20 9 20 2 20 5 20 8 21 0 0 0 1 1 1 0 0 0 1 1 1 20 20 Labor Market Source: World Development Indicators. A small and weak labor market pushes This trend persisted in 2024. According to recent Inter- Santomeans, especially young people, national Labour Organization (ILO) estimates, the em- to search for opportunities abroad. ployment rate for people aged 15 and above was 21.4 percent in 2024 (Figure 1.4). This rate is remarkably low Most workers are employed in low-productivity sec- compared to the SSA average of 65.9 percent, highlight- tors like agriculture and small-scale retail. The small ing the country’s limited job opportunities, especially private sector is unable to provide enough jobs for the for women and youth. 2 Using the international poverty line at US$2.15 a day (2017 Purchasing Power Parity). 8  |  Reforming State-Owned Enterprises for Higher Private Sector-Led Growth and Job Creation FIGURE 1.4 Employment rate: total, male, female, In 2024, inflation started to decrease but was still af- and youth fected by rising international food prices. Overall, an- Percent of population nual inflation averaged 14.5 percent for the year, which was much lower than in 2023. From April to October, in- 23 flation dropped from 19.2 to 11.4 percent on an annual 22 basis, mainly because the prices of food and non-alco- holic beverages slowed down as the availability of foreign 21 currency improved, fuel supply increased, and interna- tional food prices declined. However, after October, in- 20 flation stagnated as food inflation went up again due to 19 imported food prices, driven by rising global commod- ity prices (Figure 1.6). By early 2025, inflation fell again 18 to 10 percent in March as global food prices dropped in November – March. 15 16 17 18 19 20 21 22 23 24 20 20 20 20 20 20 20 20 20 20 Total Female Male Youth FIGURE 1.6 CPI inflation and contributions Source: ILO. from food prices Y-o-y percentage change 20 Prices 16 Inflation started to decline in 2024, 12 though from a high base. 8 Since 2020, several factors have caused inflation to 4 rise. These include global supply chain disruptions from the COVID-19 pandemic, geopolitical turmoil, and chang- 0 es in domestic fuel prices. In 2023, even with tight mon- 02 024 03 024 04 024 05 024 06 024 07 024 08 024 09 024 10 024 11 024 12 024 01 024 02 025 03 025 5 02 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 etary and fiscal policies, inflation averaged 21.4 percent 01 (Figure 1.5). The shortage of foreign currency affected Imported food Local food Others food imports, leading to higher demand for locally pro- duced food and raising local prices. Source: National Institute of Statistics; IMF and World Bank. FIGURE 1.5 Headline inflation Y-o-y percentage change External Sector 28 After the balance of payments shock in 2023, 24 the external sector started showing signs of recovery in 2024. 20 16 São Tomé and Príncipe faces trade deficits due to low exports and high import dependence. From 2010 to 12 2023, the trade-in-goods deficit averaged 35 percent of 8 GDP, mostly covered by ODA, making the country vulner- 4 able to external shocks. Exports are mainly agricultural products, especially cocoa, which are closely tied to glob- 0 0 1 1 1 2 2 3 3 3 4 4 5 02 02 02 02 02 02 02 02 02 02 02 02 02 al prices, making them prone to volatility. Production re- /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 03 08 01 06 11 04 09 02 07 12 05 10 03 mains small, given São Tomé and Príncipe’s small size. Source: National Institute of Statistics. However, the rapid growth in travel services has enabled Chapter 1   The State of the Economy  |  9 São Tomé and Príncipe to become a net exporter of ser- cultural sector faces poor transportation infrastructure vices since 2015. Between 2019 and 2023, services exports and storage facilities. In the 2018 World Bank’s Logistics averaged 13 percent of GDP, compared to 4 percent of GDP Performance Index, the latest available for São Tomé and for merchandise exports. Príncipe, the country ranked 106th out of 160 countries in trade and transport infrastructure quality (e.g., ports, rail- The heavy reliance on fuel imports reached a critical roads, roads, information technology). Industrial capaci- point in 2023. The loss of the preferential agreement ty is low, with just 2.6 percent of value added in 2023 com- between ENCO and Sonangol to purchase fuel on cred- ing from industry, limiting its ability to diversify exports. it triggered a balance of payments crisis, in addition to In services, São Tomé and Príncipe has become a net ex- the energy crisis. In 2023, the value of fuel imports rose porter since 2015, thanks to tourism, which accounted for by US$13 million (1.9 percent of GDP). The central bank 65 percent of total services exports in the first three quar- (BCSTP) lost over a quarter of its gross international re- ters of 2024. However, infrastructure limitations, coupled serves that year. with the limited international flight connectivity, hinder the country’s ability to attract more tourists. In 2024, cocoa prices and tourism exports rose while fuel imports fell, reducing the current account deficit After a sharp decline, international reserves began to significantly. The deficit is estimated at 1.9 percent of recover at the end of 2024. Gross international reserves GDP in 2024, down from 12.3 percent in 2023 (Figure 1.7). declined from US$84 million in 2021 to US$64 million Goods exports remained broadly stable, as increased co- in 2024 on average. Net international reserves, which coa exports offset the decline in re-exports, while service exclude the central bank’s short-term foreign liabilities, exports rose, reflecting strong performance in the tourism almost ran out, dropping from US$42 million in 2020 sector. Imports decreased, driven by a reduction in fuel to US$ 0.8 million in 2024 on average. This was main- imports. Additionally, higher official grant transfers con- ly due to reduced external grants and the increase in the tributed to the reduction in the current account deficit. fuel imports bill. After reaching a low of US$52 million in March 2024, gross reserves recovered to US$78 mil- FIGURE 1.7 Current account and its components lion by year-end and rose to US$92 million by February 2025. (Figure 1.8). Percent of GDP 20 FIGURE 1.8 International reserves and fuel imports 10 US$, million 100 0 −1.9 90 −10 80 −12.3 70 −20 60 −30 50 2023 2024 40 Primary and secondary incomes Services balance Goods balance Current account 4 4 4 4 4 4 5 5 02 02 02 02 02 02 02 02 /2 /2 /2 /2 /2 /2 /2 /2 01 03 05 07 09 11 01 03 Source: Central Bank of São Tomé and Príncipe; World Bank estimates. Fuel imports (12-month rolling sum) Despite progress, São Tomé and Príncipe export po- Gross international reserves tential is still constrained. The economy relies heavily Source: Central Bank of São Tomé and Príncipe. on agriculture, particularly cocoa and palm oil, which Note: Under the IMF’s definition of gross international reserves — outlined in the made up 97 percent of goods exported in 2024. In addi- Technical Memorandum of Understanding (TMU) for the ECF program — all assets that are not fully convertible, readily available, nor controlled by the central bank tion to the country’s remote location that increases trans- are excluded. As of March 2025, the IMF estimated gross international reserves at portation costs and hinders competitiveness, the agri- US$62 million. 10  |  Reforming State-Owned Enterprises for Higher Private Sector-Led Growth and Job Creation Monetary Policy and the Financial Sector though it contracted slightly in March (Figure 1.9). This improvement was driven by credit to the non-financial The authorities remain committed to the public sector and the private sector. currency peg, which has helped anchor inflation expectations in the past. FIGURE 1.9 Credit to the economy (excluding central government) São Tomé and Príncipe’s exchange rate system has Nominal and inflation-adjusted y-o-y growth played an important role in anchoring inflation ex- 20 pectations. Since 2010, the domestic currency, the do- bra, has been pegged to the euro at 24.5 dobras per eu- 10 ro. This has provided economic stability and certainty, 0 especially since the country exports mostly agricultural products to Europe. The economy’s small size, high ex- −10 change rate pass-through, and limited capacity for com- −20 plex exchange rate policies justify maintaining the peg. Since its implementation, inflation dropped from 17.4 −30 percent in 2011 to 3.5 percent in 2017. −40 −50 However, the rise in inflation since end-2021 is a vul- nerability for the exchange rate regime. Rising inflation −60 has appreciated the real exchange rate relative to trade 9 0 0 1 01 21 06 22 11 22 04 22 09 23 02 23 07 24 12 24 4 01 02 02 02 02 0 0 0 0 0 0 0 0 partners, which makes imports relatively cheaper, widens /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 12 05 10 03 08 the trade deficit, and puts pressure on reserves. To tackle high inflation, the central bank reduced banks’ excess li- Nominal growth Real growth quidity in local currency below 200 million dobras by is- Source: Central Bank of São Tomé and Príncipe suing 1-month and 3-month Certificates of Deposits (CDs). The authorities also took measures to rebuild reserves Fiscal Policy after the balance of payment shock in 2023. They have implemented temporary restrictions to protect reserves The fiscal deficit in 2023 reflected lower and the external sector in the short term. These include external grants despite consolidation efforts, limitations on the transfer of net investment income and but a rebound in grants and tighter expenditure export repatriation and surrender requirements, mandat- controls helped achieve a surplus in 2024. ing commercial banks to surrender 25 percent of their for- eign exchange receipts to the central bank. Furthermore, In 2023, the government introduced various revenue BCSTP amended its exchange rate coverage regulation by measures and spending restraint. On the revenue side, removing the waiver that mandated it to provide for- a Value Added Tax (VAT) and taxes on alcohol, tobacco, eign exchange for fuel imports. All these measures have and other products were introduced, along with a new strengthened the central bank’s foreign exchange posi- personal income tax bracket. On the expenditure side, tion and contributed to reserve accumulation. the government increased gasoline and diesel prices in February, eliminating subsidies, and contained the wage With the economic outlook appearing less uncertain, bill below budgeted funds (Government of São Tomé and credit is starting to recover. Credit to residents (exclud- Príncipe 2025). These actions helped increase tax reve- ing the central government) dropped from 40 percent of nue and reduce current spending. As a result, the fiscal GDP in 2012 to 7.4 percent in 2023. In real terms, although balance, excluding grants and externally financed capi- credit has decreased since January 2020, the reduction in tal expenditure, improved by 1.1 percent of GDP. However, 2024 was only 5 percent, much smaller than the 37 per- because grant funding declined, the overall balance re- cent drop in 2023. In February 2025, credit grew in real mained broadly unchanged, and the primary deficit only terms on an annual basis for the first time since late 2019, fell by 0.3 percent of GDP (Figure 1.10). Chapter 1   The State of the Economy  |  11 FIGURE 1.10 Central government’s overall and primary at the end of 2024. In addition, contingent liabilities to- fiscal balance taled 31.7 percent of GDP, largely driven by EMAE’s debt to Percent of GDP ENCO, which alone accounted for 23.1 percent of GDP. The government’s oil purchases for EMAE have translated in 2 EMAE accumulating obligations towards the state, increas- 1 ing from 1.7 percent to GDP in 2023 to 6.3 percent of GDP 0 in 2024. These obligations are not reflected in the budget, −1 adding to fiscal pressures. The repayment framework for EMAE’s debt remains unclear, though it may involve off- −2 setting through electricity bill claims on the public sector. −3 −4 −5 2019 2020 2021 2022 2023 2024 Economic Outlook and Risks Overall Primary Energy sector reforms, tourism exports, and a recover- Source: Ministry of Finance; World Bank estimates. ing agricultural sector are expected to sustain econom- ic growth in the medium term. São Tomé and Príncipe’s The fiscal balance turned into a surplus in 2024 thanks economic growth is expected to accelerate as reforms bol- to recovering grants and further spending control. ster macroeconomic stability and drive structural change, Even though tax revenue fell, higher non-tax revenue and the country recovers from years of subdued economic and grants boosted total revenue by 3.8 percent of GDP. growth. Real GDP growth is projected to reach 2.9 percent Spending control measures, especially in wages, reduced in 2025 and average 4.3 percent over 2026 – 27 (Table 1.1). current expenses by 1.5 percent of GDP. As a result, the These growth rates, the highest since 2018, would lead primary balance improved from negative 1.4 to positive to positive GDP per capita growth for the first time since 1.6 percent of GDP, and the overall balance from negative the COVID-19 pandemic (Figure 1.11). The recovery is ex- 2.1 to positive 0.9 percent of GDP. Considering changes pected to be driven by agricultural exports facilitated by in domestic arrears, the overall fiscal balance improved better access to inputs, especially fertilizers, resumed in- from negative 2.8 to positive 0.6 percent of GDP between frastructure investments, increased tourism, and energy 2023 and 2024. sector reforms. Domestic revenue mobilization in São Tomé and Prínc- FIGURE 1.11 Annual GDP and GDP per capita growth ipe is still weak, failing to meet substantial develop- Percentage change ment needs, and leaving the budget exposed to volatile 6 external grants. Introducing VAT was a significant step to enhance domestic revenue, as it can help increase tax col- 5 lection. However, public finances are still heavily reliant 4 on external grants and loans. In 2024, domestic revenue 3 (excluding grants) was 14.7 percent of GDP, much lower 2 than the total spending of 23.2 percent of GDP. Grants still 1 accounted for 9.1 percent of GDP in 2024, despite their de- 0 clining share. Most tax revenue comes from indirect tax- −1 es like consumption and import taxes, which are easier −2 to administrate and enforce than direct taxes, especially −3 given São Tomé and Príncipe’s weak tax administration. 18 19 20 21 22 23 24 25 26 27 20 20 20 20 20 20 20 20 20 20 São Tomé and Príncipe’s government debt has de- GDP growth GDP per capita growth creased but contingent liabilities remain a challenge. Government debt was estimated at 45.7 percent of GDP Source: Ministry of Economy and Finance; World Bank estimates. 12  |  Reforming State-Owned Enterprises for Higher Private Sector-Led Growth and Job Creation In December 2024, São Tomé and Príncipe signed a km2, and the large-scale fish export potential remains new IMF program, which supports policy reforms to re- largely untapped. Investments in the fisheries value chain store macroeconomic stability and boost growth. The can enhance exports, create jobs, and integrate with tour- 40-month Extended Credit Facility (ECF) provides about ism, thereby fostering economic growth. US$24 million over three years. The program aims to re- store fiscal sustainability and reduce debt vulnerabilities, Inflation is expected to ease as reforms address pro- fill the external financing gap and strengthen reserves, duction bottlenecks and monetary policy remains tight. manage fiscal risks from loss-making SOEs, maintain a Annual inflation is projected to average 9.7 percent in tight monetary policy, and accelerate structural reforms, 2025 and then stabilize around 5 percent, primarily due especially in the energy sector (IMF 2025). to higher expected electricity provision, which would ease production bottlenecks domestically. The BCSTP is plan- However, challenges persist in achieving higher and ning to maintain a tight monetary policy through the issu- more inclusive growth. As a small island nation with a ance of CDs, and will begin issuing 6-month and 12-month limited domestic market, São Tomé and Príncipe’s econ- CDs (Government of São Tomé and Príncipe 2025). omy lacks diversification and is highly vulnerable to ex- ternal shocks. The country has inadequate infrastructure, Fiscal balances are expected to improve significantly in physical and digital, and unreliable electricity and water the medium term. The domestic primary fiscal balance, services, which makes doing business expensive and dif- which excludes grants and externally financed capital ex- ficult, especially for micro, small and medium size enter- penditure, is projected to gradually increase to 3.4 per- prises. Attracting foreign investment remains challeng- cent of GDP. This ambitious target relies on the govern- ing. Entry barriers, inefficiencies, and weak governance ment implementing an adjustment program, supported hinder progress. Additionally, lack of access to finance by the IMF program (Figure 1.12). Key measures include and skilled workers are ongoing constraints. developing a plan to increase domestic revenue, con- taining the wage bill, and reforming public administra- Reforms to overcome these constraints could unlock tion, while preserving social spending (Government of significant growth in São Tomé and Príncipe, especially São Tomé and Príncipe 2025). In addition, structural re- in tourism, fishing, and agriculture, where the country forms in the energy sector are expected to reduce diesel has comparative advantages. These sectors benefit from imports, lowering government financing needs (see chap- natural endowments, have been key for economic growth ter 2 for a more detailed discussion). and job creation, and have shown dynamism in recent years. Tourism can drive comprehensive reforms in the FIGURE 1.12 Domestic primary balance business environment, basic services, energy, digital and (commitment basis) transport. It can also stimulate demand for local prod- Percent of GDP ucts and services by enhancing local sourcing, particular- 20 ly for organic produce, and serve to market-test potential export products. In agriculture, pepper, cocoa, choco- 15 late, and local horticulture have the highest market and profit growth potential (World Bank 2019). In particular, 10 the pepper industry holds significant promise due to the country’s unique climate, rich volcanic soils, and grow- 5 ing global demand for high-quality spices. While cocoa, pepper, and coffee have traditionally been exported raw, 0 small chocolate factories and cooperatives are also show- ing success. The fisheries sector already supports, directly −5 2024 2025 2026 2027 or indirectly, about 15 percent of São Tomé and Príncipe’s workforce and accounts for approximately 13 percent of Revenue Primary expenditure Primary balance GDP, mainly through traditional fisheries and artisanal Source: World Bank estimates wholesale and processing. Nonetheless, São Tomé and Note: Domestic primary balance excludes grants and externally financed capital Príncipe has a vast exclusive economic zone of 160,000 expenditure. Chapter 1   The State of the Economy  |  13 São Tomé and Príncipe’s public debt is assessed to be Risks are elevated and could hinder São Tomé and sustainable but vulnerable to economic shocks. Projected Príncipe’s economic stability. Delays in energy sector government debt is set to decline from 41.9 percent of GDP reforms may worsen inefficiencies and increase depend- in 2024 to 28.1 percent by 2027. This improvement depends ency on costly fuel imports, potentially leading to ener- on the authorities’ commitment to fiscal targets, energy sec- gy shortages and rising external financing needs. A de- tor reforms, and limiting external borrowing to concession- crease in donor support may limit project funding and al loans. Increasing exports and reducing fuel imports will hinder fiscal targets. Commodity price volatility, particu- also help lower public debt by reducing the need for ex- larly in cocoa, could deteriorate the trade balance and fis- ternal financing. However, EMAE’s debt and arrears to ENCO cal revenues. Natural disasters, like floods and droughts, are projected to remain high at 22.2 percent of GDP by 2027. pose a threat, causing significant economic damage and straining public resources. Regarding the import tariffs External financing needs are expected to decrease, pro- announced, São Tomé and Príncipe has limited direct vided imports decline, driven by fuel imports. Even trade with the United States (US), as exports represent on- though the trade deficit is expected to shrink, the cur- ly 3.7 percent of the total and 0.2 percent of GDP. Howev- rent account deficit is projected to widen from 1.9 per- er, the country could be indirectly affected by new tariffs cent to 3.7 percent of GDP over 2024 – 27, primarily be- impacting on the European Union, its main trade part- cause of lower grants. Energy sector reforms are crucial ner, or through adjustments in the prices of the com- to reducing fuel imports. modities it exports. TABLE 1.1 Economic trends and forecasts, 2021 to 2027   2021 2022 2023 2024e 2025f 2026f 2027f National accounts and prices (annual percentage change) Real GDP growth, at constant market prices 1.9 0.2 0.4 1.1 2.9 4.7 3.9 Real GDP per capita growth -0.2 -1.8 -1.6 -0.9 0.9 2.7 1.9 Inflation (consumer price index) 8.2 18.0 21.2 14.4 9.7 7.0 5.6 Labor market and Poverty Unemployment rate (%) 9.6 9.0 9.1 8.0 8.4 9.3 9.8 Poverty rate (international line) 15.4 15.6 15.7 15.8 15.7 15.5 15.3 Balance of payments (% of GDP) Current account balance (% of GDP) -19.2 -14.7 -12.6 -1.9 -4.0 -3.7 -3.6 Net foreign direct investment (% of GDP) 3.9 23.9 3.0 7.1 7.0 6.9 6.9 Fiscal accounts (% of GDP) General government balancea -3.9 -1.1 -0.1 0.9 1.3 2.4 3.7 Primary balance -3.7 -0.6 0.6 1.6 2.4 3.0 4.3 Revenue and grants 19.8 27.5 22.2 25.6 27.7 22.1 22.5 Expenditure 23.7 28.6 22.3 24.7 26.4 19.7 18.8 Of which: interest payments 0.2 0.5 0.7 0.7 1.1 0.6 0.6 Debt (% of GDP) 77.8 55.1 44.0 41.9 35.5 32.1 28.1 Source: World Bank; World Bank estimates. Notes: e = estimate, f = forecast. a. From 2024, the fiscal numbers reflect the oil purchases by the government and their repayment, which are not reflected in the authorities’ budget numbers. 15 CHAPTER 2 Reforming State-Owned Enterprises for Higher Private Sector-Led Growth and Job Creation Main messages • SOEs have been crucial to São Tomé and Príncipe’s development since its independ- ence in 1975. They are crucial for providing services to citizens and firms and have the potential to drive economic growth by balancing commercial and public policy objectives. Currently, the SOE sector comprises ten companies where the state has a participation of over 10 percent. The state is the sole owner of four SOEs considered critical for the na- tion’s development including electricity and water (production/treatment, transmission and distribution), ports and airports management, and postal services. The total assets of SOEs amounted to 94 percent of GDP in 2023. They also accounted for about 9 per- cent of total formal employment and 14 percent of public sector employment • Operational inefficiencies, mismanagement, and weak governance led to unreliable service delivery and financial stress, weighing on public finances and growth. The fi- nancial performance of SOEs varies, but on aggregate, they have accumulated signifi- cant losses and liabilities over the years. In 2023, about two thirds of the SOEs report- ed losses, an increase from 2022. The biggest contributor to these losses is EMAE, the electricity and water company, which has been a pattern for decades. The losses weigh on public finances, absorbing resources that could be used to finance development prior- ities such as infrastructure or education, and ultimately hinder São Tomé and Príncipe’s growth potential. • Reforms are progressing slowly and require strong political will and comprehensive policy measures to improve governance, transparency, and fiscal discipline. Reforms should strengthen the legal and regulatory framework of SOEs, ensure a clear separa- tion between the roles of the state as a regulator, owner and policy maker, and improve performance monitoring. They should also support sound fiscal discipline and oversight, promote transparency through more systematic and timely disclosures, and support a more robust corporate governance. 16  |  Reforming State-Owned Enterprises for Higher Private Sector-Led Growth and Job Creation Overview of the State-Owned The state is the sole owner of four major SOEs consid- Enterprise Landscape in São ered critical for the nation’s development. The Empresa Nacional de Água e Electricidade (EMAE) is responsible Tomé and Príncipe for electricity generation, transmission, and distribution, as well as water supply and sanitation services. Similarly, SOEs have played a pivotal role in São Tomé and Prínci- the Empresa Nacional de Portos (ENAPORT) manages the pe since the country gained independence in 1975. SOEs regulation and operations of ports, while the Empresa are crucial for providing services to citizens and firms and Nacional de Aeroporto (ENASA) oversees the operation of have the potential to drive economic growth by balanc- the international airport. Correios is responsible for post- ing commercial and public policy objectives. Additional- al services. Additionally, the state holds significant stakes ly, the private sector, including small and medium-sized in companies within strategic sectors such as telecommu- enterprises, remains heavily dependent on the services nications, through the Empresa de Telecomunicações de and infrastructure provided by these SOEs. São Tomé e Príncipe (CSTP), financial services through its largest commercial bank, the Banco International de The country initially adopted a central planning mod- São Tomé e Príncipe (BISTP), fuel supply with Empresa el, creating numerous SOEs to provide essential servic- Nacional de Combustíveis e Óleos (ENCO), and air trans- es and stimulate economic development. During the portation, with STP Airways (Table 2.1). 1970s and 1980s, the government nationalized key indus- tries and established SOEs to control strategic sectors such Like in other small island developing states (SIDS), SOEs as agriculture, industry, commerce, and essential services in São Tomé and Príncipe face a range of unique chal- like electricity, water, transportation, and telecommuni- lenges that impact the country’s growth and develop- cations. The 1990s saw a shift towards privatization and ment. Issues such as mismanagement, corruption, and in- market liberalization, particularly in the agriculture sec- efficiency have hindered SOEs in many countries, and São tor and competitive industries such as telecommunica- Tomé and Príncipe is no exception. Low tariffs, technical tions, financial services, and oil and gas. and financial losses, and overstaffing are common prob- lems with adverse impacts on the economy. Weak gov- Currently, the SOE sector comprises ten companies ernance, a small market, limited economies of scale, and where the state has participation over ten percent.3 external shocks hinder the performance of SOEs. These TABLE 2.1 SOEs in São Tomé and Príncipe (2023) Year State Holding Assets Employee State-Owned Enterprise Sector Established (Percent) (Db, thousand) (No.) Empresa Nacional de Água e Electricidade (EMAE) Electricity and Water 1979 100 2,205,406 484 Empresa Nacional de Portos (ENAPORT) Port Authority 1989 100 63,824 153 Empresa Nacional de Aeroporto (ENASA) Airport Management 1987 100 217,380 266 Empresa de Correios (CORREIOS) Postal Services 1982 100 7,093 23 Companhia Sãotomense de Telecomunicações (CST) Telecommunication 1989 49 705,986 72 Banco Internacional de São Tomé e Príncipe (BISTP) Commercial Banking 1993 48 3,170,012 138 Transportes Aéreos de São Tomé e Príncipe (STP Airways) Air Transport 2008 38 59,994 91 Empresa Nacional de Combustíveis e Óleos (ENCO) Oil and Gas 1997 16 7,091,111 39 Agripalma Agricurlture 2009 12 761,293 804 GTI Switch Digital Payments 2016 12 3,061 — Source: AFAP 2023. 3 There are three SOEs excluded from this report due to lack of data: EMPHARMA, Cunha Gomes, and STP — Cabo, S.A.R.L. Chapter 2  Reforming State-Owned Enterprises for Higher Private Sector-Led Growth and Job Creation  |  17 factors complicate the business environment and create Limited private sector opportunities and a small mar- severe fiscal pressures on the state. Longstanding efforts ket size have led to greater reliance on the public sec- to strengthen SOEs’ efficiency, management, and account- tor and SOEs for essential services and jobs. SOEs ac- ability have has limited success. SOEs deficiencies led to count for about 9 percent of total formal employment a substantial deficit in infrastructure services, which is a and 14 percent of public sector employment, with about major impediment to inclusive economic development. 2,070 employees in 2023.4 Among the SOEs with 100 per- cent state participation, EMAE and ENASA are the biggest ones, in terms of employment. The Role of SOEs in São Tomé SOEs’ operational capacity is low, and their manage- and Príncipe’s Economy ment practices are weak, and this situation persists due to their monopolistic nature. The deficits accumulated Over the years, SOEs have become integral to the coun- by SOEs divert resources from the budget that could be try’s infrastructure and economic activities, despite allocated to priority investments, such as in infrastruc- facing numerous challenges related to efficiency and ture or education. Poor maintenance undermines the financial performance. SOEs in São Tomé and Príncipe long-term benefits of SOE investments. The situation is are crucial for the functioning of the economy and the particularly concerning in the electricity and water sec- provision of public services, and they contribute to the tors, where the low quality of service delivery limits pri- country’s GDP and employment. They are also key play- vate sector activities, the well-being of Santomeans and ers in large cross-border infrastructure projects, which hampers the country’s long-term growth. are essential for regional integration, particularly in the transport sector. In 2019, revenues from SOEs averaged 26 EMAE dominates the energy sector but struggles with percent of GDP, compared to 20 percent in comparator inefficiencies, leading to unreliable and expensive elec- countries (Figure 2.1, World Bank 2023). Total SOEs’ as- tricity. The electricity public service provision is ham- sets amounted to 94 percent of GDP in 2023, down from pered by insufficient capacity, frequent supply interrup- 110 percent in 2022. tions, and high costs. With an available capacity of 17 MW against a peak demand of 21 MW in 2023. As a result of ex- FIGURE 2.1 SOE domestic revenue-to-GDP ratio, against pensive generation, production costs are the third highest comparators in 2019 among Sub-Saharan countries at US$0.34 per kWh (World Percent Bank 2023) and not covered by tariffs, even though they are relatively high, at US$0.22 per kWh. Frequent outag- Sao Tome and Principe es also forced businesses to rely on costly and environ- Angola mentally harmful private diesel generators. The power Cabo Verde outages coupled with poor infrastructure maintenance Cameroon led to severe energy crises in 2018, 2021, and 2023 when Comoros power supply was reduced by up to 75 percent, which Madagascar caused citizen dissatisfaction and social unrest, as well Malawi as slowdowns in economic growth. Reliable electricity is Mauritania crucial for GDP growth and productivity. Efforts to diver- Mauritius sify the energy matrix include investments in renewable Namibia projects like solar and hydroelectric power. Seychelles 0 10 20 30 40 50 60 The reliance on inefficient thermal generation using imported diesel burdens public finances. Contingent Average Median liabilities for the government from EMAE’s debt to ENCO Source: World Bank 2023. are estimated at 23.1 percent of GDP in 2024. In addition, 4 Ibid. 18  |  Reforming State-Owned Enterprises for Higher Private Sector-Led Growth and Job Creation after the end of the preferential agreement to purchase fuel on credit between ENCO and its parent company So- Financial and Operational nangol, the government has taken over the direct pur- Performance of the SOE Sector chase of two thirds of the country’s fuel needs, exacer- bating liquidity challenges. The financial performance of SOEs varies, but on ag- gregate the portfolio has accumulated significant loss- EMAE is also responsible for water supply, which has es and liabilities over the years. In 2023, 64 percent of improved but remains inadequate, particularly in ru- SOEs reported losses, an increase of four percentage points ral areas. EMAE manages 15 systems in São Tomé and one from 2022 (AFAP 2023). The portfolio showed negative system in Príncipe Island (Ministério da Economia e results across key profitability ratios (Table 2.2). Overall, Finanças 2025). While São Tomé and Príncipe has abun- while losses narrowed by 5 percentage points in 2023, they dant water resources and access to drinking water is al- remained at negative 16 percent. EMAE is the largest con- most universal, only 36.3 percent of the population has tributor to these losses, a trend persisting for decades. The access to safely managed water (JMP 2025). The water losses pose a continued drain on the government budget sector suffers from inadequate and aging infrastructure, and ultimately stifle the growth potential of the country. technical losses, and needs investments in the distribu- tion networks and treatment plants. On average, over 50 TABLE 2.2 SOE Portfolio Profitability Ratios percent of the water produced is being physically lost, Profitability Ratio 2022 2023 leading to commercial losses. Additionally, water and Operating Margin -19% -14% sanitation networks do not reach most rural areas. This disparity can be partially attributed to the fact that most Net Profit Margin -21% -16% of the infrastructure was installed over four decades ago during colonial times and needs rehabilitation. To ensure Return on Assets (ROA) -6% -4% water security and enhance quality of life, significant in- Return on Equity (ROE) -88% -41% vestments are needed in water supply and sanitation in- frastructure. Efficient performance and management of Sources: AFAP 2023. these systems are also crucial. All four SOEs where the state is the sole shareholder São Tomé’s port and airports are vital for econom- continue to underperform except for ENASA (Table 2.3). ic growth, facilitating passenger and cargo transport. Because of their dominance in key sectors, the perfor- ENAPORT and ENASA oversee the ports and airports, while mance of these SOEs has high economic, financial, and STP Airways handles air transportation. The port’s city opportunity costs for the wider economy. These SOEs are center location limits accessibility and expansion. Addi- thinly capitalized, unable to finance themselves, and rely tionally, the airport’s failure to meet international safety heavily on the state or international donors for financ- standards prevents direct shipments to Europe. This re- ing their investments. Their financial instability poses a sults in comparatively high trade costs, which weigh on major risk to the sustainability of public finances. A key private sector development and raises the cost of import- challenge for the four strategic SOEs is oversight by mul- ed goods. The island of Príncipe faces double isolation tiple ministries, complicating policy coordination. due to a lack of affordable and reliable air and maritime connections with São Tomé. These connectivity gaps also Companies where the state is a minority sharehold- limit tourism sector growth, which is vital for the coun- er, such as BISTP and the Companhia Santomense de try’s development. The tourism sector accounted for 14 Telecomunicações (CST), have performed relatively bet- percent of GDP and 13.2 percent of employment in 2023. ter. For example, BISTP reported net profits of Dobras 72.6 Yet, with about 26 arrivals per 1,000 people, São Tomé million in 2023 and Dobras 95.1 million in 2022, a signif- and Príncipe falls well below peers like Mauritius or the icant improvement from Dobras 35.6 million in 2020. Its Seychelles, with 997 and 332 arrivals per 1,000 people re- audited balance sheet indicates a strong equity position, spectively. Targeted investments and policy reforms can and it appears to be operating under relatively normal help mitigate these challenges despite São Tomé and conditions. STP Airways, on the other hand, has reported Príncipe’s size and geographic constraints. losses since 2022, indicating potential operational chal- Chapter 2  Reforming State-Owned Enterprises for Higher Private Sector-Led Growth and Job Creation  |  19 TABLE 2.3 Financial Performance of SOE Portfolio SOE Portfolio (Total) EMAE ENAPORT ENASA Correios Db, thousand 2023 YtY 2023 YtY 2023 YtY 2023 YtY 2023 YtY Revenues 3,395,953 (7%) 390,485 6% 114,782 19% 103,738 21% 1,734 (18%) EBIT (488,078) 31% (655,753) 19% (21,658) 30% 8,876 235% (1,646) (7%) Net Profit (559,538) 27% (657,359) 19% (25,359) 24% 3,475 287% (1,646) (7%) Assets 14,601,730 5% 2,205,406 (1%) 63,824 4% 217,380 1% 7,093 (5%) Liabilities 15,971,491 8% 4,752,641 11% 165,013 20% 208,680 1% 46,714 3% Equity (1,369,761) (56%) (2,547,235) (24%) (101,189) (33%) 8,701 5% (39,621) (4%) Source: AFAP 2023. lenges. The difference between the performance of com- FIGURE 2.2 Fiscal risk from loss making EMAE panies with minority state shareholding and fully state- Percent of GDP owned companies may be attributed to the presence of 100 professional management appointed by private share- holders. Additionally, the public service obligations re- quired of minority SOEs are not as extensive as those of 80 fully state-owned, especially when the latter are used as tools for employment beyond their operational needs, 60 which can lead to overstaffing and inefficiencies. 40 Despite relatively high electricity tariffs, EMAE is cur- rently insolvent, as its liabilities exceed its assets, and 20 has become a considerable burden on the government’s finances. EMAE’s heavy losses undermine the proper func- tioning of the energy sector and represent a significant risk 0 2017 2018 2019 2020 2021 2022 for public finances as contingent liabilities from EMAE’s Public debt Of which EMAE's debt to ENCO unpaid obligations to ENCO would add about 23 percent of GDP to public debt if they materialized (Figure 2.2). In Source: Ministry of Economy and Finance of São Tomé and Príncipe. addition, as a result of EMAE’s debt to ENCO, ENCO has ac- cumulated external debt and arrears to its main share- below the cost of producing electricity, as well as techni- holder, Angola’s Sonangol, estimated at US$256.7 million cal and commercial losses as high as 24 percent in 2022. in 2023 (31.4 percent of GDP). A recent assessment of the High commercial losses stem from electricity theft driv- credit risk of EMAE (Ministry of Economy and Finances en by public mistrust and perceived billing unfairness. 2025) rated EMAE as “in distress”, driven by its overdue The government has been providing capital transfers on payments to ENCO, resulting from the supply of fuels, and a regular basis to cover the systematic operating losses to the government, which in 2024 started making pay- and keep the company operational in supplying electric- ments to ENCO for new fuel supplies on behalf of EMAE. ity and water services throughout the country. However, Governance and management, rentability, liquidity and at the same time, public sector consumers account for ap- solvency risks were also rated as high. proximately 45 percent of EMAE’s uncollected bill, which contributes to the company’s financial difficulties (EMAE The existing debt among SOEs illustrates their inter- 2022). The persistent accumulation of arrears from the connected financial risks, particularly in the energy government to EMAE and ENCO, from EMAE to ENCO, and sector, where one entity’s instability can affect anoth- from ENCO to Sonangol is a vicious cycle that compro- er. The challenges in the energy sector are a result of a mises the proper functioning of the entire sector and the combination of factors, including electricity tariffs set economy (IMF 2022). 20  |  Reforming State-Owned Enterprises for Higher Private Sector-Led Growth and Job Creation ENAPORT and Correios are also in a very fragile finan- ENASA is the only fully-state owned company in the cial situation and require significant investments to re- country that has shown some improvement in recent store their operational capacity. These SOEs report low years. However, uncertainties around the financing of asset and equity amounts, which reflects low investments the international airport concession signed last year af- over recent years. Correios, a small postal service operator, ter the President rejected the sharp increase in airport is severely under-equipped, faces low demand, and has taxes early 2025 presents potential contingent liability limited growth prospects. In São Tomé and Príncipe’s in- risks for the government. sular context, Correios’ modest logistics and distribution network plays a role in ensuring the delivery of good and services to remote areas. Regarding ENAPORT, the regula- tory environment has not been favorable to its financial Fiscal Risks from SOEs profile. The regulations on port tariffs date back to 1989, through which the then Government established the list Fiscal stability is undermined by the substantial debt of tariffs for the services provided by the entity. There is held by insolvent SOEs, quasi-fiscal operations,5 and no independent regulatory agency, and the tariffs have undisclosed transactions between SOEs and the gov- remained stable for years, at a level insufficient to recov- ernment. Fiscal fragility worsens due to poor cost re- er the company’s operational costs, which has led to con- covery in SOEs, inflexible operating costs, and a heavy secutive losses and the generation of negative equity. The reliance on external support. This overreliance on in- company rarely receives direct subsidies from the Govern- ternational resources, especially for capital expendi- ment to compensate for its losses due to low tariffs. On tures, reduces the predictability of public investment the other hand, investments are made directly by the gov- and hinders the implementation of long-term develop- ernment. The credit risk analysis of the SOE, published in ment strategies. Additionally, climate change and oth- the 2025 Fiscal Risks Report (Ministry of Economy and er external shocks further increase the fiscal risks asso- Finances 2025) assessed ENAPORT as being at an “elevat- ciated with SOEs. ed risk”, driven by its vulnerable financial profile, regu- latory and market environment that is not conducive to The government’s financial support to SOEs through sustainably improving their finances, governance chal- transfers (grants and subsidies) is predominantly di- lenges, sectoral risks, and vulnerability to external shocks. rected towards the energy sector. In 2023, EMAE and ENCO FIGURE 2.3 Balance Owed by SOEs to the Government in 2023 Db, million Empresa Nacional de Combustíveis e Óleos (ENCO) Empresa Nacional de Água e Electricidade (EMAE) Empresa Nacional de Portos (ENAPORT) Empresa Nacional de Aeroporto (ENASA) Transportes Aéreos de São Tomé e Príncipe (STP Airways) Empresa de Correios (CORREIOS) Banco Internacional de São Tomé e Príncipe (BISTP) Companhia Sãotomense de Telecomunicações (CST) 0 50 100 150 200 250 300 350 400 450 500 2022 2023 Source: AFAP 2023. 5 Quasi-Fiscal Activities are operations that are undertaken by an SOE in pursuit of a public policy objective and that is not strictly commercial in nature. For example, ENCO had accumulate losses in the past because of below-market administrated prices for fuel. Quasi-Fiscal Activities weaken SOEs’ performance and accountability, increase the likelihood of fiscal risks materializing and reduce fiscal transparency (IMF 2022). Chapter 2  Reforming State-Owned Enterprises for Higher Private Sector-Led Growth and Job Creation  |  21 accounted for 87 percent of the total Db 850.3 million bal- projects and improve the electricity and water distribu- ance owed by SOEs to the state, which equates to rough- tion network, but much more is needed. ly 6 percent of GDP. In addition, the direct purchase of fuel imports by the government, not accounted for in the FIGURE 2.4 Balancing SOE Reform Options budget and with an unclear repayment arrangement with SOE reform is often associated with wider rebalancing EMAE weakens public financial management and gener- ates liquidity pressures on the fiscal side. Routine capital More Objectives Less Commercial, of Ownership Commercial, injections into insolvent companies have become typ- Less Policy More Policy ical, intended to cover ongoing deficits and ensure ser- More Formal, vice provision. However, this goal remains unmet due Less Frequent to unresolved constraints. Mixed; Commercially oriented The main sources of revenues transferred from SOEs to Reformed for social purposes; the state are dividends and the loss-making compa- SOEs Regulators nies rarely pay taxes. Only BISTP, CST and ENCO distrib- Political Interactions ute dividends regularly. In 2023, the state received STD Pre-reform Departments; 44.2 million in dividends from BISTP and CST, represent- SOEs Core Ministries ing a 47 percent increase from 2022. Less Formal, More Frequent Recent Efforts to Reform Source: Brumby 2025 the SOE Sector For years, electricity and water tariffs were fixed below The government is exploring ways to enhance SOE gov- levels needed to cover EMAE’s operational costs. Con- ernance, attract investment, and modernize critical in- sequently, the company accumulated losses over time, frastructure. Ongoing and upcoming reforms by the gov- causing its net worth to become negative. There are no ernment, with support from its development partners, direct government subsidies to cover operational costs, aim to address the various operational and structural only for investments and annual amortization expenses. challenges. These efforts aim to diversify the economy To update electricity tariffs, in 2024, the General Regu- and improve the quality of life of Santomeans popula- latory Authority (AGER), a multisector entity responsible tion, which requires reforms in the public sector and in- for overseeing and regulating the electricity, water, tele- vestments in new management models and public-pri- communications and postal services, proposed a mecha- vate partnerships. Key priorities include strengthening nism of gradual increases to be implemented from 2025 the capacity of the Treasury to monitor the SOE sector, to 2029. The approved proposal sets a clear rule for tariff improving transparency and disclosure, and reassessing increases of about 20 percent annually during this peri- the rationale for state ownership of certain economic ac- od. The first 20 percent increase was enacted in January tivities (Figure 2.4). 2025. Tariff increases are essential for EMAE to restore its finances and eventually achieve positive results. The government has begun energy sector reforms, but implementation is slow. The reform includes shifting The recently approved IMF Extended Credit Facility, the energy mix to sustainable sources like hydropower along with ongoing support from the World Bank, tar- and solar, improving EMAE’s operations, and adjusting gets key structural reforms in the energy sector. A World fuel prices to reduce losses for ENCO. There are also plans Bank-supported plan aims to help EMAE achieve full cost to improve EMAE’s financial sustainability by charging recovery by gradually reducing losses and costs, improv- more for its services and implementing more transpar- ing bill collections, and increasing tariffs until they cover ent and efficient management strategies. To achieve this the cost of production. To achieve this, the government goal, the government has been involved in partnerships has started (i) enforcing the law against electricity theft with foreign investors to implement renewable energy to reduce non-technical losses; (ii) gradually installing 22  |  Reforming State-Owned Enterprises for Higher Private Sector-Led Growth and Job Creation prepaid electricity meters and rescinding the decree law Since São Tomé and Príncipe ranks low in global digi- that prevents EMAE from cutting service to non-paying tal development indices, modernization of the telecom- institutional clients to increase bill collection rates; and munications network, including internet access and the (iii) replacing incandescent lightbulbs with LED ones expansion of mobile phone coverage throughout the nationwide and raising import duties on incandescent country, is crucial. lamps (IMF 2025). Additionally, to enhance transparency, there are plans to publish EMAE’s key performance indica- There is a need for urgent and much deeper reforms tors quarterly. It is expected that by the end of December within SOEs to improve their transparency, efficiency, 2025, with donor support, the authorities will prepare a and governance. These reforms should be aimed at at- time-bound restructuring plan for EMAE to achieve finan- tracting foreign investment, reducing corruption and by cial viability. The plan will cover financial, operational, extension, improving operations and profitability of the organizational, and workforce restructuring, including SOEs. These reforms could focus on the revision of the le- strengthening management and governance practices. gal and institutional frameworks of some SOEs, includ- ing restructuring some of them, notably the power util- Some reforms are being undertaken in the transpor- ity, and reforming financial reporting and governance tation sector, but São Tomé and Príncipe’s small mar- mandates for all SOEs (Box 2.1). ket, isolation and fragmented territory remain a chal- lenge. In the transportation sector, on-going reforms BOX 2.1 The Importance of Performance Manage- have focused on improving road, maritime and air infra- ment structure, which have suffered from chronic poor main- tenance. There are plans to restructure the Port of São The presence of SOEs worldwide has grown in the last dec- Tomé with the aim of improving its operating capacity ade. SOEs now account for over one-fifth of the world’s and increasing efficiency. This is essential for increasing largest enterprises operating in more and more sectors. the country’s access to global markets, as well as reduc- Governments exercising ownership on SOEs remain ac- ing the cost of tourism and other industries. Efforts to countable to stakeholders; they are increasingly forced enhance port efficiency may face geographic limitations, to act as informed owners while aligning financial and non-commercial/public policy objectives. including shallowness, small hinterland, and limited expansion space. This hinders São Tomé and Príncipe’s Owners’ expectations for public policy goals have expand- connection to main shipping line networks. Other chal- ed beyond economic and social equity, and job creation to safety, environmental protection (including reducing lenges that prevent the country’s integration into glob- climate footprint), digitization, innovation, contribution to al maritime supply chains include lack of infrastructure local development, ethical management and support for for food import and exports and the absence of a mari- small and medium enterprises through procurement pro- time single window. cesses. However, public policy goals continue to create quasi-fiscal activities as SOEs are asked to undertake un- Digitalization may alleviate physical connectivity con- profitable services (often without adequate compensation from the government) or to help manage crises including straints, positioning the information technology and the pandemics from their own resources. The mix of con- telecommunications sector as vital for the islands’ fu- flicting financial and public policy objectives should require ture growth. The telecommunications sector has been that governments ensure adequate funding for the fulfill- increasingly open to competition in recent years, with a ment of public policy obligations (quasi-fiscals) for the ben- private company entering the market, but the government efit of the nation at large. continues to play an important regulatory role. The reg- Governments as owners are expected to monitor and eval- ulator, AGER, cannot fully exercise its regulatory role due uate performance against carefully selected and weighted to its dependence on the Ministry of Infrastructure and key performance indicators for each SOE and share the results transparently with the public. pressures from operators. CST is undergoing a restructur- ing process with the objective of improving the quality In recent years, new instruments on ownership and risk of service and increasing its profitability. However, meas- have been introduced, given various interests of the state. ures to ensure competition and innovation are at risk of Source: Brumby 2025. reversal given the state’s significant shareholding in CST. Chapter 2  Reforming State-Owned Enterprises for Higher Private Sector-Led Growth and Job Creation  |  23 Challenges ly acute at STP Airways, EMAE and ENAPORT. The study in SOE Governance also found that some SOEs lack external audits and risk management policies. Some companies provide finan- cial and operational reports, but transparency about fi- SOE ownership and accountability mechanisms are in- nancial risks and growth plans is still lacking. effective due to fragmentation despite established prin- ciples. The SOE framework law, Decree-law no. 22/2011, Some efforts to improve the governance of SOEs are on- incorporates several concepts of modern corporate gov- going, with the government taking steps to enhance ernance including timely financial reporting and public transparency and accountability, but much more is disclosure, financial internal and external controls, op- needed. The World Bank is supporting improvement erational and financial autonomy, and management re- in SOE governance through the “São Tomé and Príncipe: porting. The law also sets a broad principle that SOEs are Institutional Capacity Building Project (P162129)”. Part subject by default to commercial law. However, owner- of this effort is to ensure SOE financial statements and au- ship and accountability mechanisms for SOEs are frag- dits are made publicly available. However, there is still a mented and ineffective. The Treasury is tasked with mon- need for comprehensive reforms to address the underly- itoring only the fully-owned SOEs, leaving out companies ing issues. Strengthening the capacity of the Treasury to where the state has a minority but still significant stake. monitor the SOE sector is a high priority. This includes Another gap in the current governance framework is the building the capacity of Treasury staff, implementing an absence of independent boards of directors, which un- IT system for timely monitoring and reporting, and de- dermines the enterprises’ operational autonomy as the veloping a database of SOE financial key performance in- Cabinet ultimately decides on critical issues. In addi- dicators. Regular interaction with executive management tion, in terms of transparency and disclosure, because and summarizing key financial data into reports for the the 2011 SOE law does not provide for mandatory inde- government are also essential steps. Ongoing efforts to pendent audits of the SOEs’ annual financial statements, enhance transparency and implementing robust control they are not carried out in practice. In 2023, only half of mechanisms will help mitigate fiscal risks and improve the ten SOEs submitted audited financial statements. Fi- the overall performance of SOEs. nally, sectoral policy, investment and financing programs, the appointment of executives and members of the Fis- In addition to improving monitoring and transparen- cal Council, are exclusively within the competence of the cy, the government needs to reassess its shareholder Government. These aspects leave SOEs exposed to some strategy. According to the OECD Guidelines on Corporate form of political interference. Governance of SOEs, it is recommended that governments justify their reasons for state ownership and subject these SOEs lack performance monitoring systems and have to recurrent review. Notably, the government should eval- minimal managerial accountability. SOE management uate market competition and the sector’s attractiveness teams have limited operational autonomy. They face to private investment. constraints such as selling prices set below recovery levels without compensation, employment laws that A robust corporate governance system offers numer- do not fit business needs, and strict procurement con- ous benefits, including better access to external finance, trols, all decided by the government and subject to po- leading to larger investments, higher growth, and in- litical interference. Currently, SOE reporting is irregular creased employment (Figure 2.5). It also results in lower and inconsistent. capital costs, improved operational performance through efficient management, and reduced risk of corporate cri- Adequate internal controls are also an area that re- ses. Collectively, these benefits enhance the efficiency of quires significant strengthening. A recent study showed SOEs and of the overall economy, promote competitive that only BISTP, CST and ENCO demonstrate organized fi- and transparent transactions, optimize resource alloca- nancial management (AFAP 2025). The reliance on out- tion, and encourage public and private investment in crit- dated software and manual processes is detrimental to ical sectors, contributing to higher growth and job crea- the companies’ financial performance, and is especial- tion, and better macroeconomic balances. 24  |  Reforming State-Owned Enterprises for Higher Private Sector-Led Growth and Job Creation FIGURE 2.5 Steps for Effective Performance Management System STEP ONE STEP TWO STEP THREE Review if the existing Corporate Governance Revise the objectives of each SOE in Redesign a full Performance Management structure is exerting adequate and active monopolistic infra and competitive non-infra (with evaluation, information and incentive Ownership and Oversight on SOEs and make sectors and translate the objectives for each systems) and report results accurately, the adjustments needed. into clear performance expectations. transparently, timely and widely. Source: Brumby 2025. Selected Policy The government aims to enhance SOE efficiency, im- prove service delivery, and lessen reliance on the Recommendations state budget through reforms. The reforms also seek to promote greater transparency in the management The government of São Tomé and Príncipe has recog- of SOEs, reduce corruption, and ensure efficient use of nized the need for in-depth reforms in the SOE sector, public resources. This includes greater autonomy for but implementation is still lagging. Recent reform ef- the companies, but also greater responsibility regard- forts recognize the need to restructure or privatize SOEs ing their profitability and contribution to the coun- that are accumulating substantial debt and are unable try’s development. to sustain themselves financially without state support. This process has been slow and difficult, as it faces polit- By implementing various short- and medium-term pol- ical and social resistance since many of these companies icy recommendations, São Tomé and Príncipe can im- are seen as important employers and providers of essen- prove the governance, operational, and financial per- tial services. In fact, privatization may not be the imme- formance of its SOEs. Key priority reforms are presented diate answer for a small island economy with a limit- in Table 2.4. Implementing them and ensuring their con- ed market since the SOEs deliver services that the private tinuity will require strong political will. This, in turn, will sector would not provide or would offer under different drive economic development and achieve positive de- commercial terms. velopment results in the context of a small island state. TABLE 2.4 Policy Recommendations for Improving SOE Corporate Governance Corporate Governance Dimensions Short- to Medium-Term Recommendations Strengthen legal and • Improve legal framework to consider: (i) separation of SOEs’ commercial activities from non-commercial public service ob- regulatory framework ligations; and (ii) creating criteria for establishing new SOEs and dissolving existing ones. • Enhance Treasury’s legal mandate to oversee SOEs and empower it to regularly collect financial information from SOEs on a timely and standardized manner. Ownership • Ensure a clear separation between the roles of the state as regulator, owner and policymaker. arrangements • Articulate a formal ownership policy including the minority stakes, the purpose and justification of SOEs, operation crite- ria, and disclosure practices. • Develop a “shareholder strategy” including the reassessment of the need to maintain a minority stake in companies, op- portunities for divestments, a framework for the use of public-private partnerships. Performance • Develop a basic scheme for monitoring the SOE portfolio. monitoring • Ownership unit actively monitors fiscal risks from SOEs: develops definition of fiscal risks for SOEs, establishes mandatory flow of information from SOEs, requests SOEs to disclose their contingent liabilities. • Ownership unit creates and maintains a database of SOE on key financial and operational aspects; and establishes regu- lar reporting arrangements with SOEs. • Replace SOE performance targets with performance agreements. Chapter 2  Reforming State-Owned Enterprises for Higher Private Sector-Led Growth and Job Creation  |  25 Corporate Governance Dimensions Short- to Medium-Term Recommendations Fiscal discipline and • Ensure the timely completion and submission of SOE audited financial statement to the ownership unit. oversight • Keep social tariffs only if they effectively target the poor. • Agree on a list of public services to be provided by each SOE, agree on a methodology to cost these services, set a credible payment schedule to reimburse the SOEs. • Take urgent decisions in terms of productive investments based on recent studies on SOE investment needs to restore nor- mal operating conditions. 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