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PROGRAM INFORMATION DOCUMENT (PID)
CONCEPT STAGE
Report No.: AB6046
Operation Name
Region
Sector
Project ID
Borrower(s)
Implementing Agency
Date PID Prepared
Estimated Date of
Appraisal Authorization
Estimated Date of Board
Approval
Public Resource Management and Governance Reform (PRMG)
Development Policy Operation
AFRICA
General public administration sector (100%).
P123374
DEMOCRATIC REPUBLIC OF SÃO TOMÉ AND PRÍNCIPE
MINISTRY OF FINANCE AND INTERNATIONAL
COOPERATION
Ministry of Finance and International Cooperation
Largo das Alfandegas
São Tomé
October 13, 2010
December 09, 2010
March 31, 2011
1. Key development issues and rationale for Bank involvement
The Democratic Republic of São Tomé and Príncipe (STP) is a small and fragile state and one of the
smallest economies in Africa. The country faces many development challenges due to its small size and
insularity, limited institutional capacity, and aid dependency. STP’s development shortcomings translate
into low productivity and low export levels as well as vulnerability to external shocks. As in other small
island states, STP cannot exploit economies of scale in the provision of infrastructure, services, and
economic activities. All these features translate into: (i) high costs per unit of government and utility
provision services; (ii) limited flexibility of the economy to adapt to shocks due to a non-diversified export
base and a dependence on external financing; and (iii) few opportunities for risk diversification within the
domestic market.
The incidence of poverty remains high and, as of 2001, 54 percent of the population lived in poverty. To
face large poverty, the authorities have been implementing a Poverty Reduction Strategy, as outlined in the
Poverty Reduction Strategy Paper (PRSP), since 2003, with a PRSP Unit made operational in 2005 to
supervise PRSP implementation. A Committee was appointed in 2008 to develop a new Development
Strategy to replace the PRSP, and this strategy is expected to be finalized in 2011, after the poverty profile is
updated. The new Development Strategy will be based on a domestic-led pro-poor growth strategy, and,
given the increased uncertainty in petroleum production revenues at this time the petroleum economy will
not be considered in the new Development Strategy.
For the last five years, the government has pursued prudent macroeconomic policies and implemented
important structural reforms in line with the objectives set out in the IMF’s 2006-2008 Poverty Reduction
and Growth Facility (PRGF) and 2009-2011 Extended Credit Facility (ECF) programs. Between 2001 and
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2009, real GDP growth averaged 6 percent a year and the primary fiscal deficit was steadily reduced from
14.7 of GDP in 2004 to 7.5 percent of GDP in 2008, financed thanks to oil signature bonuses and
privatization receipts.
Considerable progress has been made in public governance and specially in public financial management,
with support of previous Bank operations such as the US$8 million Public and Natural Resource
Management and Development (PNRMD) development policy operation (DPO), approved in 2008, and the
US$5 million Capacity Building Technical Assistance (CBTA) project approved in 2004. This
macroeconomic and governance efforts have paid off, allowing the country to reach the Completion Point
under the Enhanced HIPC Initiative in 2007 and receive debt relief in the amount of US$314 million.
Notwithstanding these achievements, STP remains vulnerable to a variety of shocks. For example, the sharp
rise in international fuel and food prices in 2008 impacted adversely on STP’s economy through inflationary
pressures (costly imports) that affected the poor and vulnerable. The World Food Program (WFP) estimated
an increase in the number of vulnerable people (those for whom food is inadequate or at the limit) that need
its support by 10-15 percent. In addition, the on-going international economic and financial slowdown has
limited the capacity of the Government to consolidate fiscal sustainability through reduced external
financing. Following the international slowdown, a sharp decline in FDI, tourism-related investment,
foreign assistance, and oil signature bonuses that did not materialize slowed down GDP growth to 4 percent
in 2009. This has translated into lower public revenues that the new corporate and personal income tax laws
introduced in 2009, aimed at enhancing compliance, have not been able to compensate with additional
public resources. Despite efforts to contain discretionary current expenditure the domestic non-oil primary
deficit has increased to an estimated 8.2 percent of GDP in 2009.
To cushion the impact of the global slowdown on the poor and vulnerable groups, the government seeks
additional fiscal resources to protect and increase priority spending, which is intended to address the basic
needs of the population and foster productivity. To ensure that fiscal resources are used most effectively to
support long-term growth and achieve policy objectives as defined in the PSRP and the Millennium
Development Goals, the authorities have committed to accelerate reforms in public finance management and
improve the quality of public governance to raise the effectiveness of public expenditure at a time
progressive fiscal consolidation is required.
The proposed Public Resource Management and Governance Reform (PRMG) Grant in the amount of
US$4.3 million (about 2.3 percent of GDP) to STP. The proposed single tranche operation supports the
objectives set out in the Government’s Program that are in line with STP’s poverty reduction strategy, as set
out in the Poverty Reduction Strategy Paper (PRSP), which is in line with the Bank’s Interim Strategy Note
under preparation and the ECF IMF program. The PRMG grant supports the continued progress and
consolidation of reforms supported by the preceding PNRMD DPO and the CBTA project, and helps to
consolidate macroeconomic stability.
2. Proposed objective(s)
The PRMG operation supports critical public finance management reforms to raise public sector
effectiveness at a time that fiscal consolidation limits available resources in line with reforms launched
under previous operations. Uncertainties surrounding the outlook for oil production and the recent adoption
of the peg against the Euro underscore the importance of reversing the recent fiscal deterioration and STP
will accelerate fiscal consolidation to maintain macroeconomic stability and support growth. Improved
public finance management will be critical to raise public sector effectiveness at a time that fiscal
consolidation limits available resources. Specific government objectives supported include: (i) raising the
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transparency and accountability of budget preparation, improving the execution and control of public
financial management, and strengthening the alignment of public expenditures with poverty reduction
activities; and (ii) promoting sustainable economic policies by strengthening the fiscal policy framework
and improving coordination with donors. In addition, this operation will support the Government’s plan to
initiate preparation of a new PRSP. These two areas are expected to have a positive direct impact on STP’s
overall governance and poverty reduction. In particular, the DPO will help raise the level of transparency in
public resource management and reinforce the fiduciary framework through the production of public
accounts and its review by external oversight bodies.
The PRMG objectives broadly coincide with key recommendations of the Public Expenditure Management
and Financial Accountability Review (PEMFAR), the European Union’s Public Expenditure and Financial
Accountability Review (PEFA), the Debt Management Performance Assessment (DeMPA), and the ongoing Country Economic Memorandum (CEM).
3. Preliminary Description
Building upon the achievements and lessons of previous and current projects, the recommendations of the
PEMFAR and the recently completed CEM, and the results achieved under the IMF-ECF, the proposed
operation supports policy reforms identified in the Bank’s ISN (currently under preparation). The ISN will
cover the period between 2011 and 2013 and continues to support areas of previous engagement (i.e.
deepening reforms in social sectors and public sector governance, and supporting macroeconomic stability
and pro-poor growth).
The proposed PRMG operation supports the Government’s Program that is in line with STP’s poverty
reduction strategy, as set out in the Poverty Reduction Strategy Paper (PRSP). Considerable progress has
been made in improving public financial management over the last five years, with substantial support from
two predecessor operations (CBTA and PNRMD). Accelerating reforms in the two areas of focus of this
operation is expected to have large positive impacts not only on growth and poverty but also on governance
across the country. Funds from this operation will help sustain economic growth without undue pressure on
the country’s balance of payments—a critical issue for small states facing large volatilities in revenues and
world prices.
The proposed PRMG DPO is expected to improve the public sector’s capacity to better deliver key services
and support growth. This operation will also support the preparation of a new results-oriented poverty
strategy that incorporates lessons learnt from the previous PRSP implementation, updates the poverty
profile, and provides growth diversification prospects. The focus of a DPO would be on public finance
management (PFM), with the aim to enhance public sector and economic governance, thereby strengthening
the links between public expenditure, fiscal sustainability, and sector strategies. The activities that would be
supported by this operation can also enhance the capacity of the country to better design and implement
medium term strategies by introducing a formal consultative mechanism to coordinate donor assistance. The
PRMG operation would also support the preparation of a new results-oriented poverty strategy that
incorporates lessons learnt from the previous PRSP implementation, updates the poverty profile, and
provides growth diversification prospects. The PRMG operation will be coordinated closely with the IMF
ECF program, and with other donors.
4. Rationale for Bank’s Involvement
The rationale for Bank’s involvement rests on (i) its ability to provide significant resources (US$4.3 million
or 2.3 percent of GDP) to allow the implementation of the 2011 budget in line with the Government’s
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reform program; (ii) its technical contribution to the policy dialogue and the PFM reform in the country
based on the PEMFAR, the DeMPA and the recently completed CEM; (iii) the success of the previous
budget support operation, the PNRMD Policy Grant (which closed in June 2010), and the CBTA project
(which closed in September 2010) that supported PFM reform, PRSP implementation, and governance in
the oil sector; and (iv) the leadership of IDA among the donor community in the country.
5. Environment Aspects
Policy actions supported by the proposed PRMG Grant are not expected to have significant impacts on the
environment, forests, or other natural resources. The specific policies supported under this Grant address
primarily institutional reforms. The focus of the reforms is on transparency and accountability or public
resources, on the efficiency of public expenditures, and on promoting good governance.
6. Tentative Financing
Source:
BORROWER/RECIPIENT
International Development Association (IDA)
Total
($m.)
0
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7. Contact Point
Contact: Mr. Marco Antonio Hernández Oré
Title: Country Economist
Tel: (202) 473-6802
Fax: (202) 473-8466
Email: [email protected]
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