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.
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.
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