The Republic of Sao Tome and Principe is a lower middle income, developing small island state with a fragile economy. It is highly vulnerable to exogenous shocks. An archipelago comprising of two main islands and four islets, Sao Tome and Principe is located in the Gulf of Guinea, 350 km off the west coast of Africa. With a surface area of 1,001 sq. km, this Portuguese speaking country has a population of 197,900 people and a Gross National Income (GNI) per capita of $1,670 in 2014.
Sao Tome and Principe is a multiparty, semi-presidential, democratic system since its independence. The Independent Democratic Action Party (ADI) won an absolute parliamentary majority following the 2014 elections. This presents the first opportunity in over a decade for political stability in the country since the government can have a full four-year term in office. The ruling party currently occupies 148 out of 180 seats in the National Assembly. The next presidential elections will take place in July 2016.
In the 2012-13 Second Poverty Reduction Strategy (PRSP-II) implementation review report, the Government of Sao Tome and Principe acknowledged that the reduction of poverty rates since 2000 has been marginal. Currently it is estimated that 62% of the population is impoverished. Urban poverty is high compared to rural poverty due to limited employment opportunities, notably for youth. On a positive note, Sao Tome and Principe performs higher than the Sub-Saharan Africa average on the UNDP Human Development index, and has made good progress in improving other social indicators. It has a gross primary school enrollment of 110%, a life expectancy of 66 years, a mortality rate of children under five years old of 51 per 1,000 live births, access to an improved water source for 97% of the population, and access to electricity for 60% of the population.
Sao Tome and Principe met the 2015 MDGs on universal primary education, promoting gender equality and empowering women, improving maternal health, and combating HIV/AIDS, TB, malaria and other diseases.
Sao Tome and Principe is a small island economy with no single economic activity that serves as a driver of growth. Historically, agriculture has been a strongly performing sector, with exports of cocoa, coffee, and palm oil increasing in recent years. However, it hasn’t compensated for the growth of imports. Tourism is an important and growing activity, but it isn’t able to support growth on an economy-wide basis. Thus, the main driver of growth in the country is government expenditure. It is estimated that government expenditures amounted to 34.2% of GDP in 2015, of which capital spending accounted for 15.3% of GDP. Oil exploration has been taking place since 2012, however production isn’t expected until after 2020.
Since local production is limited, a large share of domestic spending “leaks” outside of the country in the form of imports. The fact that most of domestic demand is met by imports and that Sao Tome and Principe doesn’t have a large export base explains the structural and recurrent current account deficits the country experiences. Despite the challenges of dealing with a structurally uneven balance of payments, net international reserves have been kept stable at a comfortable level.
The fact that most of the goods consumed in Sao Tome and Principe are imported links domestic price fluctuations to those of international prices, oil prices being the most notable exception since fuel prices are fixed. Risks to inflation from the monetary side were greatly reduced after the country pegged its currency to the Euro. In fact, domestic inflation has been converging to euro area levels.
Fiscal management has historically been an area of difficulty. Low domestic revenue mobilization coupled with weak capacity in public finance management, the importance of government expenditure and the volatility of donor aid has led the country to register budget deficits and payment arrears.
In the foreseeable future, Sao Tome and Principe will continue to face significant challenges to overcome insularity, small market size, vulnerability to natural shocks and climate change, limited human capital, and scarce tradable resources to generate sustainable and inclusive growth and reduce poverty.
The main long-term challenge for Sao Tome and Principe is to move from ambitious plans to feasible actions that will help make the economy more dynamic. More focus could be directed to its existing comparative advantages – tourism and agriculture – rather than trying to create new ones. In the short and medium-term, the most pressing challenges are to avoid negative spill-overs from the banking sector to the economy, to unlock the bottlenecks to credit growth and support measures to improve fiscal accounts on a permanent basis. Finally, the lack of up-to-date poverty data undermines efforts aimed at reducing poverty in Sao Tome and Principe. The latest available household survey data was collected in 2010. A new household budget survey is planned for 2017, and poverty statistics are in the process of being collected.
Government authorities plan to implement an ambitious and comprehensive reform agenda, summarized in the planned 2016-2018 National Strategy Document that builds on the recently completed review of progress made in the implementation of PRSP-II. Priority will continue to be given to: i) promoting good governance, public sector reform, sustainable and inclusive growth; and ii) strengthening human capital, social service delivery, social cohesion, and social protection.
Sao Tome and Principe ranks 76th out of 175 countries in the 2014 Transparency International corruption perceptions index (place is shared with Montenegro). Sao Tome and Principe ranks 166rd out of 189 economies in the 2016 Doing Business report, down three spots from 2015.
Last Updated: Apr 08, 2016