Sao Tome and Principe has been a multiparty, semi-presidential, democratic system since its independence, and it has been a model for the democratic transition of power in Central Africa. The Independent Democratic Action (ADI) party, which holds 30 out of 55 parliamentary seats, has been mandated to govern from 2022 to 2026.
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 $2,817, the country faces significant socio-economic vulnerability due to elevated poverty, income inequality (Gini index of 40.7), and a lack of employment opportunities. Up to 45% of the population was living on less than $3.65 per day (2017 PPP), the international poverty line for lower-middle income countries like STP. This includes the 15.7% of the population living on less than $2.15 per day.
The business environment is hampered by underdeveloped infrastructure, particularly costly, unreliable electricity, and fragile institutions, limited connectivity, and high vulnerability to climate shocks. 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, but this growth model has become unsustainable due to the structural decline and volatility of grants. 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.
Recent developments and outlook
Economic activity is estimated to have contracted in 2023 by 0.5% due to the prolonged and aggravated energy crisis, a severe fuel shortage that halted economic activity for two consecutive weeks, and delays in external financing disbursements, partly explained by the longer-than-expected discussions on the upcoming IMF program. The fiscal balance remained in deficit, estimated at -3.6% of GDP in 2023, but it is projected to improve in the medium-term with the resumption of external grant disbursements and the introduction of the Value Added Tax (VAT) in June 2023 at a standard rate of 15% (half for basic goods). Inflationary pressures eased despite the introduction of the VAT, as the Central Bank of STP (BCSTP) tightened liquidity conditions with the resumption of the issuance of certificates of deposit (CDs) in May 2023, coupled with lower global inflation, higher interest rates on T-bills, and subdued domestic demand. As a result, food inflation, disproportionately affecting the poorest, declined from its historical high of 29% in January 2023 to 18.2% in January 2024.
The current account deficit (CAD), excluding grants, remained large in 2023 due to the higher costs of imported food, fuel, and fertilizers, which more than offset agricultural and tourism receipts (main exports in STP). The CAD is, however, projected to slowly improve as the trade deficit narrows with the drop in the cost of commodities (fuel and food), tourism growth, and fiscal consolidation weighing on the twin deficit of fiscal and external balances.
Net international reserves fell to negative levels in 2023 before being replenished by a $30 million currency swap agreement with Afreximbank, of which $12 million was disbursed.
Growth is expected to rebound to 2.5% in 2024 and reach nearly 3.6% by 2026, supported by higher tourism arrivals, a strong agricultural sector, and the expansion of infrastructure development projects and energy reforms.
However, 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 impede poverty reduction.
Last Updated: Apr 03, 2024
