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, and has been a model of 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 by securing 30 of the parliament's 55 seats.
The 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 kilometers. Despite its small size and remoteness, it has a significant untapped natural wealth, including pristine rainforests with rich and unique biodiversity, which is favorable for nature-based tourism. In addition, 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 and 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. In addition, 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 the lack of employment opportunities.
The business environment is hampered by underdeveloped infrastructure, particularly costly and unreliable electricity, and fragile institutions. Public finances are strained by the high cost of public service provision 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 expenditures. 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.
Growth is estimated to have slowed to 0.9% in 2022, constrained by persistent energy shortages coupled with higher food and fuel prices due to the war in Ukraine. Inflation reached 25.5% year-on-year in January 2023, largely reflecting pressure on the price of imported goods (including food), coupled with fuel price adjustments and monetary financing of the fiscal deficit. Fiscal balances are estimated to have deteriorated significantly in 2022. On the revenue side, domestic tax collection was undermined by power outages and delays in the implementation of tax reforms. On the expenditure side, higher spending, mainly driven by the public sector wage bill, election-related overruns, and climate-related emergencies, led to a widening of the non-oil domestic primary deficit to 5.6% of GDP. To contain rising inflationary pressures, the Central Bank tightened monetary policy by raising the benchmark interest rate from 9 to 10% in June 2022 and increasing reserve requirements. Gross international reserves fell sharply to about 1.7 months of next year's imports before being replenished by a 15 million Euro emergency grant from Portugal.
Growth is expected to recover to 2.1% in 2023 and reach nearly 4% by 2025, driven by higher tourism arrivals and the expansion of infrastructure investment. 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. In addition, reduced availability of external financing, continued disruptions in global supply chains, and climate-related events could weaken STP's growth prospects and further exacerbate poverty.
Last Updated: Mar 29, 2023
