Country Economic Memorandum
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Publication
Turning Smallness into Uniqueness: Six Key Challenges to Unlock Sao Tome and Principe Growth’s Potential
(World Bank, Washington, DC, 2019-07-24)Economic growth in Sao Tome and Príncipe (STP) has long been driven by an unsustainable reliance on public expenditures, especially grant- and loan-financed public investment. STP needs to turn its smallness into uniqueness to unlock its growth potential. To accomplish this transformation, this image must be matched by a more balanced growth in which the private sector plays a larger role and with a more effective government. Tourism, agriculture, and fisheries could drive the country’s transition to a more balanced growth pattern. This Country Economic Memorandum (CEM) highlights six key challenges that STP must overcome as it transitions to a more balanced growth pattern and it offers policy recommendations for addressing each challenge. Accomplishing this rebalancing will require STP to address six key challenges at the macroeconomic, structural, and sectoral level. These include: (i) The twin budget and current-account deficits; (ii) Weak trade connectivity by both air and sea; (iii) Credit constraints caused by a high level of non-performing loans and difficulties enforcing commercial contracts; (iv) Uncertainty surrounding property rights and land tenure; (v) Poor-quality infrastructure, especially in the energy and transportation sector; and (vi) The overexploitation of marine resources. -
Publication
Country Economic Memorandum for Sao Tome and Principe - Background Note 6: Stock Take on Business Environment Reform in São Tomé and Príncipe
(World Bank, Washington, DC, 2019-06-26)The importance of a good regulatory and institutional environment for business creation and growth is well established. Good regulations and a level playing field are particularly important to maximize opportunities for private investment in small island states like São Tomé and Príncipe, which tends to be constrained by the lack of economies of scale and distance to markets. Burdensome regulations can hamper the competitiveness of export-oriented sectors, which are essential for São Tomé and Príncipe’s sustainable growth and job creation. Moreover, sectors that depend on natural or cultural assets, such as tourism, require good quality regulations and planning to protect those assets. Improving the regulatory environment is an important factor, together with better skills, connectivity, and infrastructure, to strengthen the competitiveness of São Tomé and Príncipe’s economy. Accurate data on the size and composition of the private sector in Sao Tome and Príncipe is lacking, but existing information shows that it is dominated by microenterprises in commerce and services. The ongoing enterprise survey will provide insights on the characteristics and main challenges of São Tomé and Príncipe’s firms, while an updated business census, which is planned with support from the World Bank, will give a broader view of the private sector. Data from the National Statistics Institute (INE) shows that there are only 14 companies with more than 100 employees, including the utilities and transport sector SOEs, and 80 percent of firms for which data is available have less than five employees. Most firms are concentrated in the commerce, construction, and tourism sectors. While additional analysis will be necessary to identify the factors contributing to the small size and sophistication of SãoTomé and Príncipe’s firms, the regulatory environment may be among them as it affects entry and operating costs, access to finance, and ability to resolve commercial disputes. -
Publication
Country Economic Memorandum for Sao Tome and Principe - Background Note 2: Is it Sustainable for Sao Tome and Príncipe to Have a Large Current Account Deficit and a Fixed Exchange Rate?
(World Bank, Washington, DC, 2019-06-26)Is it sustainable for São Tomé and Príncipe to have a large current account deficit and a fixed exchange rate peg? Sao Tomé and Príncipe (STP) pegs its currency, the dobra, to the euro and has both persistent current account deficits and a persistent inflation differential with the Euro Area. In other countries, these characteristics have proved to be unsustainable over time, as rising debt and a worsening trade imbalance leads to the abandonment of the peg. This note examines whether this might be the case in STP, and finds that, despite some vulnerabilities, there does not appear to be an immediate threat to the peg, as the country’s current account deficits seem to be determined not by its trade balance but by its capital balance, which is largely sustained by inflows of aid and remittances. This background note has four sections: the first examines the general theoretical conditions for the sustainability of exchange rate pegs, the second assesses whether these conditions exist or are relevant for STP, a small, open economy with a small financial sector, and the third provides analysis of the drivers of the country’s current account deficit. Policymakers could mitigate risks to the peg by broadening the country’s revenue base, developing a domestic debt market, and diversifying exports. -
Publication
Country Economic Memorandum for Sao Tome and Principe - Background Note 8: How to Increase the Availability of Financing Needed to Stimulate Private Sector Investment? A Review of the State of and Barriers to Access to Financial Services in São Tomé and Príncipe
(World Bank, Washington, DC, 2019-06-26)This note discusses the current structure of the financial sector in São Tomé and Príncipe (STP) and the main obstacles preventing mobilization and allocation of more resources to private sector investment. Since 2012, credit to the private sector in STP has been declining and is currently below peers. In an economy dominated by informality, banks provide credit to a limited number of borrowers, prioritizing large borrowers. A survey completed in 2017 showed that only 18 percent of micro, small and medium-sized enterprises (MSMEs) reported being registered and having a bank account, of which only 3 percent had access to credit. The same survey showed that only 39 percent of individuals, some of them owners of micro-enterprises registered under their personal name, have access to financial services. The note is divided into four sections. The first provides an overview of STP’s financial sector, analyzing and benchmarking its structure, depth, and soundness. The second section analyzes the landscape of access to financial services (focusing on individuals and MSMEs), while the third describes some of the key limitations of the financial infrastructure in STP that create obstacles to financial sector development and access to finance. Finally, the fourth section concludes with policy recommendations that can help increase access to financial services in STP. -
Publication
Country Economic Memorandum for Sao Tome and Principe - Background Note 14: The Case for Economic Inclusion of Sexual and Gender Minorities in São Tomé and Príncipe
(World Bank, Washington, DC, 2019-06-26)The purpose of this analysis is to provide a snapshot of exclusion based on SOGI in São Tomé and Príncipe (STP) and the opportunities for SOGI inclusion especially in the tourism sector. The main questions for the reader to consider are: Why is the World Bank involved in SOGI? How can STP benefit from SOGI inclusion? What can be done to ensure SOGI inclusion in STP? Finally, the central takeaway from this analysis is that excluding sexual and gender minorities negatively impacts economic development and poverty reduction, whereas including them is beneficial to economic development and poverty reduction. The theoretical argument is that exclusion costs money. Exclusion based on sexual orientation and gender identity often begins as early as the primary school years and continues in the workplace, as well as more broadly in the economy and in society. As a result, sexual and gender minorities face significant stigma that prevents them from realizing their productive potential and limits their ability to contribute to the economy and to society. When anyone is excluded from the labor force based on indelible personal characteristics unrelated to ability, such as sexual orientation or gender identity, both the economy and social cohesion suffer. -
Publication
Country Economic Memorandum for Sao Tome and Principe - Background Note 13: What Do We Know about Gender in São Tomé and Príncipe
(World Bank, Washington, DC, 2019-06-26)The objective of this note is to provide a summary of gender-related statistics and research in São Tomé and Príncipe in the areas of human capital, economic empowerment, and gender-based violence (GBV). The data comes from surveys conducted by the national statistics office and from international databases, such as the Women, Business, and the Law database and the various databases that feed into the World Development Indicators. Whenever possible the note compares the gender situation in STP with peer countries. It also summarizes data and knowledge gaps on gender. STP has made strong progress on gender equality in human capital yet has been unable to translate this into the economic empowerment of women. While its performance on gender-related indicators of human capital are like other middle-income countries, STP’s performance on indicators related to women’s economic empowerment more closely resembles its low-income neighbors. This is partly explained by traditional gender norms, which restrict women’s income generating versus their domestic role and impede their personal safety. -
Publication
Country Economic Memorandum for Sao Tome and Principe - Background Note 1: Economic Growth and Volatility in São Tomé and Príncipe
(World Bank, Washington, DC, 2019-06-26)The purpose of this background note is to give an overview of the literature on output volatility and economic growth, assess output volatility and its impact in São Tomé and Príncipe (STP). This note is organized in four sections, besides this introductory part. The second section reviews the literature on the impact of output volatility on economic growth. The third section discusses different measures of volatility, calculating volatility for STP across different periods, and compares them to peer countries. The last section offers some policy recommendations. Output volatility and its relationship with growth have been a hot topic in economic research literature for a long time. There is significant controversy about how economic volatility1 affects economic growth. Although the link between economic growth and volatility is theoretically ambiguous, a negative impact of economic volatility on output growth dominates the empirical literature. This negative relationship also holds with newer and better datasets, advanced econometrics methodologies, and for specific country groups. There are three mains messages in this note. The first one is that volatility affects growth as supported by the literature review and the econometric estimations carried out in this note. The second one is that STP is a volatile country, although volatility of GDP growth and inflation has declined over time and are in line with peers. On the other hand, STP still faces higher volatility on current account balances and net lending and borrowing than its peers. The third message is that, on average, a fifty percent increase in volatility translates into a 25 percent decrease in GDP per capita growth rates. Finally, policy measures aimed at diversifying exports in terms of goods and markets, reduce the reliance on external finance and fiscal rules can help cushion the volatility and reduce its impact.