Country Economic Memorandum
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Publication
Finance for Growth: Micro, Small, and Medium Enterprise Financing
(World Bank, Washington, DC, 2019-12-18)This report provides an overview of the demand and supply side of MSME finance as well as certain aspects of the enabling environment. A detailed analysis of the financial sector infrastructure for MSME financing and the secured transactions framework was outside of the scope of this report but would be a useful complement. Equally useful would be a detailed analysis of bank efficiency, including competition and profitability aspects, and its effect on MSME finance. -
Publication
Serbia’s New Growth Agenda: FDI Spillovers
(World Bank, Washington, DC, 2019-11-28)This note examines the relationship between the presence of foreign firms and total factor productivity (TFP) growth of domestic firms (called ‘FDI, Foreign Direct Investment, spillovers’) in Serbia over the period of 2005-16. The analysis finds evidence of FDI spillovers in Serbia. Domestic firms on average enjoy higher productivity because of the presence of FDI firms in the economy. Moreover, domestic firms that supply to FDI firms or are located in the same industry as FDI firms, enjoy higher productivity. This presumably stems from technology transfer, higher quality standards, or higher competition. However, productivity of domestic firms sourcing from industries with a large share of FDI firms find their productivity reduced, likely due to markups by foreign firms. The effect of FDI on productivity of domestic firms also varies by firm size and industry. Small firms benefit more from spillovers associated with backward linkages (when they supply to an FDI firm) but are worse off with more horizontal FDI (when they compete with FDI firms in the same industry). Firms in high-tech industries benefit more from horizontal and backward FDI spillovers, but firms in low-tech industries experience no effect. Lastly, firms in the transport manufacturing industry do not enjoy any FDI spillover from foreign firms in their industry. -
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 7: What are the Bottlenecks on Land Governance and How to Remove Them to Support Tourism and Agriculture Development?
(World Bank, Washington, DC, 2019-06-26)This note explores land governance-related constraints holding back the growth potential of the agriculture and tourism sectors in the Democratic Republic of São Tomé and Príncipe (STP). The absence of a proper land information system and a weak land governance framework are identified as the major constraints to rural development and tourism. This note provides insights, identifies the most salient weaknesses, and presents recommendations to address these issues. The first section describes the history of land tenure in the country. The second section focuses on the positive impacts that the establishment of a land information system can have for rural development and the tourism sectors and describes the institutions in charge of land management and related legislation. The fourth section identifies the main inefficiencies in land administration affecting economic growth. The final sections outline the activities currently in execution to address such issues and present policy recommendations. -
Publication
Country Economic Memorandum for Sao Tome and Principe - Background Note 11: What is the Potential and Hindrances for the Tourism Sector in Sao Tome and Príncipe?
(World Bank, Washington, DC, 2019-06-26)The purpose of this paper is to empirically evaluate the tourism performance of STP with respect to the main determinants that have been found in the literature. Tourism is clearly a comparative advantage of STP and already an important economic activity, however, STP is far from the characterization of a tourism-dependent small economy. Tourism represents 10.8 percent of GDP and the ratio between international inbound tourists and population is at 14.5 percent. For a summary of how STP relates to other destinations. This puts STP as the twelfth country in terms of size of direct contribution of the tourism sector to GDP and the eighteenth in terms of the ratio between tourists and population. Using data from different sources, this note analyzes STP’s tourism-related characteristics and uses different empirical tools to evaluate them vis-à-vis its peers. Economic literature shows that tourism demand is affected by price and income but also by a host of other factors such as air connectivity, language, and culture among others. First, there is an extensive research agenda on measuring price and income elasticities of tourism, which is specific for different types of tourism destination. Second, there is a myriad of characteristics that are found to be important to the tourism industry, such as remoteness, language, culture, air connectivity, bilateral trade, etc. More recently, there has been many studies emphasizing the role of digital media and digital presence1 as a key determinant of tourist decisions. -
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 4: Update on Oil and Gas Exploration and Production in São Tomé and Príncipe
(World Bank, Washington, DC, 2019-06-26)Sao Tomé and Príncipe is surrounded by oil-producing neighbors, but haven’t found commercially viable oil in its territory so far. São Tomé and Príncipe (STP) is surrounded by major oil producing countries including Nigeria, Equatorial Guinea, and Gabon, but there has not been any commercial oil or gas discoveries in the country’s waters yet. STP is exploring for oil in two different zones under different jurisdiction: the Joint Development Zone (JDZ) with Nigeria, and the Exclusive Economic Zone (EEZ). There are talks as well for a joint exploration zone with Equatorial Guinea. The purpose of this note is to update the status of oil and gas exploration in STP and provide a probability and timeline for eventual discoveries and commercial production. The answers to these questions are key to the country’s long-term development prospects, as it would alter dramatically STP’s development path. -
Publication
Country Economic Memorandum for Sao Tome and Principe - Background Note 10: What are the Obstacles to Agricultural Development in STP? A Review of Current Agriculture Production Structure and Potential
(World Bank, Washington, DC, 2019-06-26)This note presents an analysis of the obstacles and opportunities for STP’s agriculture value chains, assesses the main sector risks, and provides a series of public sector recommendations for increased private sector investment. While the country will remain a net importer of food and agricultural products for the foreseeable future, a series of opportunities exist, some to increase import-substitution, others to expand exports. Given STP’s land constraints and climate variability, importing food will continue to occur in the near to medium-term future to satisfy local demand. However, import-substitution opportunities will continue to offer prospects centered on the feedstuff-livestock chain and the horticultural sector, as well as some additional expansion of the palm oil industry. Export opportunities lie primarily in cocoa products as well as in emerging non-traditional agricultural exports, some strategically linked to tourism, especially eco-tourism already embraced by the government and by high end tourist developments established in the past few years. Analysis of the competitiveness of existing and emerging rural supply chains in STP reveals a series of characteristics that allow to overcome the structural diseconomies of scale of a small island state. These characteristics include among others: (i) high value-to-weight products, (ii) agricultural products that can be taken with tourists, (iii) low perishability and products that can be stored, (iv) climate change resilience; and (v) explore the country’s uniqueness. Value chains that possess some of these key characteristics discerned from the analysis offer private sector opportunities, provided the enabling environment allows them to reach their potential. -
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.