The World Bank in Sao Tome and Principe

The Republic of Sao Tome and Principe (STP) is an archipelago 350 km off the west coast of Africa in the Gulf of Guinea, composed of six districts and the Autonomous Region of Príncipe (Região Autónoma do Príncipe). A Portuguese-speaking country, it has a population of about 225,000 (2021). Classified as lower-middle-income, it is a small island state with a fragile economy highly vulnerable to exogenous shocks.

Political Context

Sao Tome and Principe has been a multiparty, semi-presidential, democratic system since its independence been a model of the democratic transition of power in Central Africa. The government is led by the Independent Democratic Action (ADI) party, which won the last election in September 2022, securing 30 of 55 seats.  

The resulting National Assembly is composed of four political parties, namely ADI with 30 seats, MLSTP-PSD (which governed the country in the previous legislature) with 18 seats, MCI-PUN with five seats, and BASTA with two seats.

Economy

Sao Tome and Principe is a small, two-island, lower-middle-income country of approximately 960 square km. Despite its size and remote location, it has a significant untapped natural wealth, including pristine rainforests with a rich and unique biodiversity, which is favorable for nature-based tourism. The country has a young and increasingly educated population. About half of STP’s 225,000 people are under 18 years old, with a secondary school enrollment rate of 89%.

The country faces structural challenges typical of small, remote countries. Its small size and low population limit the development of large-scale economic activities, resulting in a small and undiversified productive base. Its remoteness and insularity increase trade costs and make it more vulnerable to terms-of-trade and climate shocks. Despite a GDP per capita of about $2,400, the country faces significant socio-economic vulnerability due to elevated poverty (15.6% poverty rate at $2.15 per day), income inequality (Gini index of 40.7), and a lack of employment opportunities.

The business environment is hampered by underdeveloped infrastructure, particularly costly, unreliable electricity, and fragile institutions. Public finances are strained by the high cost of providing public services due to a lack of scale in the provision of public goods, compounded by low domestic revenue mobilization and declining external financing. The country's development has been driven by externally financed public expenditure. To grow sustainably, STP needs to promote a private sector-led growth model focused on improving human capital, infrastructure, and the business environment to unleash its potential for tourism and high-quality, niche agricultural production.

Economic activity is expected to expand in 2023 by a modest 0.5%, recurrent electricity supply constraints, high commodity prices (food and fuel), and subdued domestic demand. Inflation reached 25.3% year-on-year in June 2023, largely reflecting pressure on the price of imported goods (including fuel, food, and fertilizer), coupled with fuel price adjustments in February and May 2023. The overall fiscal balance is expected to slightly improve in 2023.

On the revenue side, domestic tax collection is projected to expand due to the introduction of Value Added Tax (VAT) in June 2023 at a standard rate of 15% (half for basic goods). Moreover, total revenue in 2023 will be supported by the resumption of external grant disbursements.

On the expenditure side, the government’s outlays will be controlled by a front-loaded fiscal adjustment under an incoming IMF program. As a result, the non-oil domestic primary deficit is expected to reduce significantly by 3.7 percentage points in 2023.

The current account deficit (CAD), excluding grants, will remain undermined by the higher costs of imported food, fuel, and fertilizers, which more than offset agricultural and tourism receipts.

Net international reserves fell to a negative level in April 2023 before being replenished by a $30 million currency swap agreement with Afreximbank.

Growth is expected to rebound to 2.4% in 2024 and reach nearly 3.3% by 2025, supported by higher tourism arrivals, a strong agricultural sector, and the expansion of infrastructure development projects. The economic outlook is subject to considerable uncertainty and downside risks.

Delays in the implementation of urgent reforms could further undermine the government's fiscal position and foreign exchange reserves. The reduced availability of external financing, continued disruption of global supply chains, and climate-related events, could weaken STP's prospects for growth and further exacerbate poverty.

Last Updated: Sep 15, 2023

The World Bank Group’s (WBG) latest Country Partnership Strategy (CPS) – FY2014-18 for STP is aligned with the country’s second Poverty Reduction Strategy (PRSP-II). The strategy has two pillars of engagement: supporting macroeconomic stability and national competitiveness, and reducing vulnerability and strengthening human capacity.  

The current portfolio, funded by the International Development Association (IDA), has eight projects, with a total net commitment of $153 million. There are also trust funds that finance activities to improve power sector efficiency, the financial sector, social protection systems, business climate,  transparency of extractive industries, and adaptation to climate change.

Last Updated: Sep 15, 2023

To support financial stability, Institutional Capacity Building Project financed an asset quality review of the banks in STP. As of December 2022, all four commercial banks licensed by the central bank had complied with capital and provisioning requirements, having corrected the deficiencies identified in the asset quality review. The aggregate non-performing loan ratio of the banking sector substantially reduced in 2022 (from 29 to 8% of gross loans), following write-offs of impaired loans. The project has also financed necessary investments in a new IT system and in building the capacity of the tax authorities to manage the VAT system introduced in mid-2023.

Increasing reliable access to electricity - Sustainable power generation has been one of the chief challenges of STP. Through $28 million in financing from IDA, the STP Power Sector Recovery Project aims to increase the generation of renewable energy and improve the reliability of the electricity supply.

The preparatory phases of the project related to the rehabilitation of the Contador Hydroelectric Plant and network and metering improvements are nearing completion. Several major studies have now been concluded, including the design study of the Contador Hydropower Plant’s rehabilitation, which looked at innovative solutions to increase the capacity and availability of electricity services, as well as a Least Cost Power Development Plan (LCPDP). Studies have shown the need for additional financing to make the plant more sustainable and keep it in line with STP’s current and future needs for electricity.  

Helping coastal communities fight climate change - A wide range of adaptation options, which include protection, accommodation, and relocation, were implemented to reduce exposure to flooding in 12 coastal communities. The West Africa Coastal Areas Resilience Investment Project (WACA) also benefits six other countries in the region. In communities where the work is more advanced, there is a greater climate of security. Since the completion of construction in those communities, households that used to be affected by floods during heavy rains or storms report that their houses and property (including  animals, canoes, and stocks of wood) are now protected, with flooding making less impact and floods lasting for a shorter  time.

Strengthening health systems and combatting COVID-19 - The Social Protection COVID-19 Response and Recovery Project supported Sao Tome and Principe’s efforts to prevent, detect, and respond to the threat posed by COVID-19 and to strengthen national systems for public health preparedness by providing support in the following areas:

• supporting the government’s goal to vaccinate 70% of the country’s population free of cost.
• Strengthening multi-sector, national institutions, platforms for policy development, and the coordination of prevention and preparedness, including the One Health approach.
• As of January 2023, the country had vaccinated 89.5% of its target population (from the age of 12) with at least one dose, and 73.2% with two doses of the COVID-19 vaccines.

The Social Protection COVID-19 Response and Recovery Project focused on (i) strengthening the operational capabilities of the government to deliver social protection programs; (ii) supporting the Vulnerable Family Program (VFP)-COVID-19 for six months to mitigate the effects of COVID-19 (covering 16,000 households); and (iii) supporting the scale-up of the regular VFP to provide expanded support to 4,500 poor households. The VFP is a conditional cash transfer program targeting poor households, mainly those headed by women, that  have at least one child below the age of 18 attending school. The project completed the last cash transfer payment to beneficiaries on November 18, 2022.

Transport Sector Development and Coastal Protection – The Transport Development and Coastal Protection Project’s road rehabilitation component, linking Sao Tome to the City of Neves, is at 50% completion. Work includes building new drainage and improving old in selected areas and small-scale interventions to improve the resilience of the road network, based on an analysis of  where most accidents occur.

The World Bank supports statistical capacity-building activities in STP through the components of three projects, worth a total of over $7.5 million: the STP Institutional Capacity Building Project (PRCI, approved in 2018 and closing in late 2024); the Digital Sao Tome and Principe Project (approved in 2022); and the Southern African Development Community Regional Statistical Project (SADC, approved in 2023).

Key outputs from the PRCI project include: the 2018 household survey and resulting poverty and welfare measurements; the 2020 Enterprise Census; a renovation of the National Institute of Statistics’ headquarters and improvements in communication and information technologies; significant investments in staff capacity,  including encouraging the acquisition of degrees in statistics and demography; and improvements to the national accounts’ methodology.

Last Updated: Sep 15, 2023

Sao Tome and Principe is highly aid-dependent but, given its size and insularity, has a limited donor presence. The World Bank, African Development Bank, European Commission, International Monetary Fund, and United Nations agencies work closely in the country and have strengthened their coordination mechanisms in support of the Paris Declaration and the Busan agenda in the country.

Last Updated: Sep 15, 2023