40299 INTERNATIONAL DEVELOPMENT ASSOCIATION AND INTERNATIONAL MONETARY FUND DEMOCRATIC REPUBLIC OF sAo TOME AND PR~NCPE Debt Relief at the Heavily Indebted Poor Countries (HIPC) Initiative Completion Point and Under the MultilateralDebt Relief Initiative (MDRI) Prepared by the Staffs o f the International Monetary Fund and International Development Association Approved by Hartwig Schafer and Danny Leipziger (IDA) Jean A.P. Clement and Scott Brown (IMF) February 26. 2007 Contents Page Executive Summary ................................................................................................................... 4 . Introduction............................................................................................................................. I 6 1 1 . Requirements for Reaching the Completion Point ................................................................ 7 A . Implementation o f the Poverty Reduction Strategy .................................................. 9 B. Macroeconomic Performance in 2001-06 ............................................................... 10 C . Public Expenditure .................................................................................................. 13 D. Governance ............................................................................................................. 16 E. Social Sector Policies .............................................................................................. 21 F. Staff Assessment...................................................................................................... 22 I II. Debt R e l i e f and Debt Sustainability Analysis Update ....................................................... 23 A . Updated Data .......................................................................................................... 23 B. Creditor Participation in the Enhanced H P C Initiative .......................................... 24 C . Debt Sustainability Analysis after H P C Assistance ............................................... 25 D. Considerations for Topping-up H P C Assistance ................................................... 26 E. Debt Relief Under the Multilateral Debt Relief Initiative ....................................... 29 F. Debt Sustainability Analysis Outlook After MDRI, 2007-26 .................................. 31 G. Sensitivity Analysis and Long-Term Debt Sustainability ....................................... 35 2 I V. Conclusions.,...................................................................................................................... 38 V . Issues for Discussion........................................................................................................... 38 Boxes 1. Status o f Floating Completion Point Triggers ....................................................................... 7 2. Performance Under IMF-Supported Programs. 2005-06 .................................................... 13 3. Prospects for O i l Sector Development ................................................................................. 19 4 . Baseline Macroeconomic Assumptions. 2006-26 ............................................................... 32 Text Tables Macroeconomic Indicators. 2001-2006 ................................................................................... 11 Allocation o f Interim HIPC Debt R e l i e f .................................................................................. 15 Number o f Primary School Teachers Hired. 2000/01-2005/06 ............................................... 21 Immunization Rates: Agreed HIPC Goals and Outcomes....................................................... 22 Mortality in Children Under 5 Caused by Malaria: Progress Since 1999................................ 22 Breakdown o f the Increase in the NPV o f Debt-to-Export Ratio as o f end-2005 .................... 27 Alternative Scenarios: Macroeconomic Assumptions ............................................................ 36 Text Figure Governance Indicators for 2005 and 1998 ............................................................................... 17 Figures 1. Implied Debt Service Savings from the MDRI. 2007-27 .................................................... 30 2 . External Public Debt Indicators. 2007-26 ........................................................................... 34 3 . Sensitivity Analysis 2007-26 ............................................................................................... 37 Tables 1. Selected Economic Data. 2004-26 ....................................................................................... 40 2. Balance o f Payments. 2003-10 ............................................................................................. 41 3 . Nominal and Net Present Value o f External Debt at end-December, 1999......................... 42 4. Estimated Assistance at Decision Point (Amended)............................................................ 43 5 . External Public Debt Outstanding at end-December 2005 .................................................. 44 6. Creditor Participation Under the Enhanced HIPC Initiative ............................................... 45 7. Comparison o f Discount Rate and Exchange Rate Assumptions ........................................ 46 8 . Comparison o f N e t Present Value o f External Public Debt Between Decision and Completion Points ............................................................................................................... 47 9. Enhanced HIPC Initiative Assistance Levels and Possible Topping-up at Completion Point ................................................................................................................. 48 10. N e t Present Value o f External Debt, 2005-26 ................................................................... 49 3 11 External Debt Service After Full Implementation o f Debt Relief. 2006-26 ..................... 50 12 External Debt Indicators. 2005-26 .................................................................................... 51 13 Sensitivity Analysis, 2006-26 ............................................................................................ 52 14. Delivery o f IDA Assistance Under the Enhanced HIPC Initiative and the MDRI, 2001-43 .............................................................................................................................. 53 15a. Delivery o f IMF Assistance Under the Enhanced HIPC Initiative and the MDRI. Without Topping Up, 2000-09 ......................................................................................... 54 15b. Delivery o f IMF Assistance Under the Enhanced HIPC Initiative and the MDRI- With Topping Up, 2000-13 .............................................................................................. 55 16. Paris Club Creditors' Delivery o f Debt Relief Under Bilateral Initiatives ........................ 56 17. HIPC Initiative: Status o f Country Cases Considered Under the Initiative, September 26, 2006 ........................................................................................................... 57 Appendixes I. Management o f Public Debt ................................................................................................. 58 A . The Institutional Framework for Debt Management ............................................... 58 B. Assessment o f Debt Management ........................................................................... 58 I I. Debt Sustainability Analysis for Low-Income Country Framework-Update .................... 60 A . Background ............................................................................................................. 60 B. Medium-Term Macroeconomic Framework ........................................................... 61 C . Fiscal Debt Sustainability Analysis ......................................................................... 62 D. External Debt Sustainability Analysis ..................................................................... 62 E. Conclusion............................................................................................................... 63 I II. Education and Health Establishments Built or Refbrbished to Reach the HIPC Completion Point ..................................................................................................................... 71 4 EXECUTIVE SUMMARY 0 I n December 2000 the Executive Directors of the International Development Association (IDA) and the International Monetary Fund (IMF) agreed that S l o Tomb and Principe had met the requirements for reaching the decision point under the enhanced HIPC Initiative. The amount o f debt relief committed at the decision point was US$97 million in year-end 1999 net present value (NPV) terms, equivalent to a reduction o f 83 percent o f S3o Tom6 and Principe’s total NPV o f debt outstanding at the end o f 1999 after full delivery o f traditional debt r e l i e f mechanisms. The staffs o f IDA and the IMF consider that S l o Tome and Principe has met the triggers for reaching the completion point under the enhanced HIPC Initiative. The country promulgated a first PRSP in January 2003, updated i t in January 2005, and presented i t to the Executive Boards o f IDA in April and the IMF in August o f 2005. National authorities have since then implemented i t satisfactorily, as acknowledged by the Joint IDA-IMF staff advisory note on i t s first annual progress report (October 2006). Furthermore, all triggers related to public expenditure management, governance, and the social sectors were met as o f December 3 1,2006, and the country has maintained macroeconomic stability for most o f the interim period. Implementation o f macroeconomic policies improved in 2005-06 under the Poverty Reduction and Growth Facility (PRGF)-supported program approved in August 2005. Following policy slippages during the period leading to the elections in the first half o f 2006, the authorities implemented remedial fiscal and monetary policy measures that have since brought the PRGF-supported program broadly back on track. The debt reconciliation exercise undertaken ahead of the completion point leads to an upward revision of the 1999 NPV of debt from US$117.5 million, estimated at the decision point, to US$119.7 million. This revision would imply an increase in HIPC assistance in NPV terms, from the decision point estimate o f US$97.0 million to US$99.2 million. The implied common reduction factor at the decision point would increase from 82.6 percent to 82.9 percent. Creditors accounting for 85 percent of total HIPC assistance in NPV terms have given satisfactory assurances of their participation in the enhanced HIPC Initiative. All multilateral and Paris Club creditors have confirmed their participation, and the authorities are working toward agreements with all remaining creditors. The staffs observed a substantialworsening o f debt indicators at end-2005 compared with the projections made at the decision point. The updated analysis based on end-2005 data indicates that the NFV o f debt-to-exports ratio at the end o f 2005 after full delivery o f HIPC assistance stood at 299 percent, compared with 140 percent projected at the decision point. 5 0 The staffs are of the view that the deterioration in Silo Tom6 and Principe’s NPV of debt-to-exports ratios constitutes a fundamental change in the country’s economic circumstances due to exogenous factors, and topping up i s therefore justified. Lower-than-projected export receipts largely owing to drought conditions and lower than expected tourism receipts, changes in cross-currency exchange rates, and variations in discount rates were all unambiguously exogenous and outside the control o f the authorities. Staffs therefore recommend that additional assistance o f US$25 million in NPV terms be granted under the enhanced HIPC Initiative to bring Si30 Tome and Principe’s NPV o f debt-to-exports ratio to the 150 percent HIPC threshold after application o f bilateral debt relief beyond HIPC assistance. 0 Upon reaching the completion point under the enhanced HIPC Initiative, Silo Tom6 and Principe will also qualify for additional debt relief under the Multilateral Debt Relief Initiative (MDRI). The amount o f r e l i e f under MDRI depends on the Executive Directors’ approval o f topping-up, given that debt relief under the MDRI would cover all remaining debt service obligations on eligible credit balances to IDA, the IMF, and the African Development Fund (AfDF) after any debt service r e l i e f available under the HIPC Initiative. MDRI debt relief (net o f HIPC assistance) would imply debt service savings on debt owed to IDA, the IMF, and the AfDF o f US$77.1 million without topping-up and US$50.3 million if topping-up i s approved. 0 After HIPC debt relief, topping-up of HIPC assistance, and MDRI debt relief, Silo Tom6 and Principe’s external debt burden indicators will fall significantly. I nthe long run, assuming prudent fiscal policies and the start o f o i l production around 2012, SEo Tom6 and Principe’s external public debt burden indicators are expected to remain below the HIPC threshold. Nevertheless, the accompanying sensitivity analysis shows that if there are large adverse shocks (for instance, lower or no o i l production), SEo Tome and Principe’s external public debt indicators would worsen substantially and, under the most pessimistic scenario, exceed the HIPC thresholds. This underlines the need for continued fiscal prudence, policies to support broad-based growth and export diversification, continued donor support, and prudent debt management (see also Appendix 11). 0 The staffs recommend that the Executive Directors of IDA and the IMF approve the completion point and topping-up for Silo Tom6 and Principe under the enhanced HIPC Initiative. 6 I. INTRODUCTION 1. This paper discusses progress made by S l o Tom6 and Principe under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative and seeks the approval of the Executive Boards of the International Development Association (IDA) and the International Monetary Fund (IMF) for the completion point and topping-up assistance. In the opinion o f the staffs, S5o Tome and Principe has made satisfactory progress in putting in place the completion point triggers, notably implementing i t s Poverty Reduction Strategy Paper (PRSP), setting up mechanisms to ensure efficient and transparent use of HIPC debt relief, increasing transparency and accountability in the management o f public resources, and implementingmeasures in the health and education sectors, while performing broadly well under the current PRGF-supported program. 2. I n December 2000 the Boards of the International Development Association (IDA) and the International Monetary Fund (IMF) agreed that S l o Tom6 and Principe had met the requirements for reaching the decision point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative.' The amount o f debt relief committed then was US$97 million at the end o f 1999 net present value (NPV) terms. Interim assistance under the enhanced HIPC Initiative was granted by several creditors: IDA, the African Development Bank Fund (ADF), the European Union (EU), the Organization o f Petroleum Exporting Countries (OPEC), the International Arab Bank for Economic Development in Africa (BADEA), and the Paris Club creditors (through flow rescheduling on Cologne terms).2 At that time, a set o f triggers was established for S5o Tome and Principe to reach the floating completion point (see the HIPC Decision Point Document, Box 3, p. 29).3 3. This paper i s organized as follows: Section I 1 assesses S l o Tom6 and Principe's performance in meeting the triggers for reaching the floating completion point. Section II I reviews creditor participation, discusses delivery o f debt r e l i e f to S5o Tome and Principe under the enhanced HIPC and MDRI initiatives, examines possible topping-up o f assistance under the enhanced H P C Initiative, and updates the debt sustainability analysis (DSA). Section lV presents conclusions and section V presents issues for discussion. I See httv://www.imf.or~dexternaL"lhivc/2000/stv/stvdv.vdf and httv://siteresources. worldbank.or~/INTDEBTDEPT/DecisionPointDocuments/2025062O/SaoTom~incive-E- DP.vdf, S6o Tom& and Principe-Enhanced Heavily Indebted Poor Countries Initiative-Decision Point Document. The IMF did not commit assistance under the enhanced HIPC Initiative because there was no debt outstanding to the IMF at the decision point. IDA: IDA/R2000-235, December 6,2000; IMF: EBS/00/254, December 5,2000. 7 11. R E Q U I R E M E N T S FOR REACHING THE COMPLETION POINT 4. SPo Tom6 and Principe has made satisfactory progress in meeting the triggers for reaching the completion point (Box 1). As o f December 3 1, 2006, all triggers related to public expenditure management, governance, and the social sectors were met while macroeconomic stability has been broadly maintained since 200 1. Completion point triggers covering the following areas were set out in the decision point document: (i)preparation o f a full poverty reduction strategy paper and satisfactory implementation, as evidenced by a Joint Staff Advisory Note (JSAN) on the country’s first annual progress report; (ii)maintenance o f macroeconomic stability; (iii) strengthening o f public expenditure management and use o f the HIPC Initiative assistance; (iv) satisfactory implementation o f governance measures, including a capacity- building program to manage prospective o i l resources, adoption o f the o i l revenue management law (ORML), and establishment o f the Auditor General’s Office; and (v) satisfactory implementation o f social sector measures, including construction o f new classrooms and health centers or posts, hiring and training o f teachers, increase in the immunization rate for children, and a sharp reduction in the child malaria morbidity rate. This section assesses performance relative to these triggers. I Box 1: Status of Floating Completion Point Triggers I I Trigger Measure I ImplementationStatus I PRSP has been prepared through a participatory Implemented. The full PRSP was submitted in February 2005. process and satisfactorily implemented, as evidenced The J S A N was issued in M a r c h 2005 and presented to the Bank by a J S A N o f the country’s f i r s t annual progress Board in April 2005 and t o the IMF Board in August 2005. report. Implemented. Government submitted its f i r s t PRSP progress n June 2006 and the J S A N was presented to Boards in report i October 2006. Macroeconomic measures There has been continued maintenance o f Implemented. The IMF completed the second review o f the macroeconomic stability, as evidenced by the PRGF-supported program in early August 2006 and the third satisfactory implementation o f the medium-term review o n January 17,2007. program supported by the IMF under the PRGF. sectoral strategies for health and education have I Implemented.Health and education strategies were costed in I 8 been costed in the context o f the development o f a 2001 and in 2004, respectively. medium-tern expenditure framework (MTEF). The control and monitoring mechanism to ensure an Implemented. A special Treasury account was set up at the central efficient and transparent use o f H I P C Initiative bank in 2001. H I P C proceeds were incorporated into the national interim assistance has been satisfactorily budget as part o f the public investment program in health, implemented. education, and other poverty-related expenditures. The original monitoring by committee was replaced by monitoring by the Minister o f Planning and Finance. The Directorate o f Treasury and Patrimony i s preparing quarterly financial and technical reports. Annual reports for a l l years have been done and the 2003 audit (for 2001-02) and the 2006 audit (for 2003-05) were posted o n the Bovemment web site. The programming and execution o f foreign-financed Implemented.All project loans and grants are in the budget and capital expenditure have been placed under the accounted for in the Public Investment Program, and since 2000 control o f the Ministry o f Planning and Finance a l l loan and grant agreements are signed by the Minister o f (MoPF). Planning and Finance. On a l l foreign-financed projects, execution reports (including operational and financial results) are presented regularly to the MoPF. M a n y o f the donors have transferred execution o f their projects to the MoPF. In the other cases, foreign-financed projects are executed independently by donors with physical control and reporting by sectoral ministries to the MoPF. The government i s attempting t o improve o n t h i s control framework by asking that a l l development partners progressively bring their projects into normal budget execution procedures. A capacity-building program to manage o i l resources Implemented. The Oil Revenue Management L a w (ORML) was has been adopted and implemented, and a petroleum approved in December 2004. The IDA i s providing continuing revenue oversight and control committee has been technical support o n institution building. established. Implemented. The National Committee o n Petroleum (NCP) was established in the first h a l f o f 2004 t o supervise strategy and development for the sector. The Oil Revenue Management L a w (ORML), approved in late 2004, established a new oversight committee t o audit and supervise petroleum receipts and expenditures. Regulations related to the ORML were approved by the National Assembly in November 2006. The Auditor General’s Office (Tribunal de Confus) Implemented. The Auditor General Office (Tribunal de Contas) and the Tribunal for Arbitration in business and has been staffed and h c t i o n a l since mid-2003. contract matters have been made operational. Implemented. The l a w that set up the Tribunal for Arbitration was published o n November 2,2006. The tribunal was inaugurated o n December 15.2006. Social sectors At least 4 0 new classrooms in primary schools and Implemented. As o f November 2006, the government had built 15 classrooms in secondary schools have been built 87 classrooms, o f which 63 are primary and 24 secondary. and equipped, and 120 primary school teachers have been recruited, trained, or retrained (compared with Between 2000101 and 2005106, 171 teachers were recruited, and the 1999 base), in accordance with the interim PRSP 75 teachers have been given on-the-job training, which started in and the national education program. 2004. At least eight primary health care centers have been Implemented. 12 health care centers o r posts were built and built and equipped, and the immunization rate for equipped, and seven others were rehabilitated between 1999 and at children has increased (for measles, DPT3- the end o f 2006. diphtheria, tetanus, pertussis-and polio) t o Vaccination o f children for major childhood diseases (DPT3, 9 85 percent (from 69 percent in 1999), in accordance polio, BCG, and measles) has systematically surpassed the 85 with the interim PRSP and the national health percent trigger since 2003. strategy. The child (under 5) morbidity rate caused by malaria Implemented. The antimalaria campaign launched in 2003 in (WHO definition and measurement) has been Principe (education, fiunigation, bed nets) and extended in 2004 to reduced to 60 per 10,000 (from 86 per 10,000 i n the island o f S9o Tome has reduced malaria child morbidity from 1999), in the context o f the program to roll back 86 per 10,000 in 1999 to 60 i n 2004. malaria. A. Implementation of the Poverty Reduction Strategy 5. Silo Tomb and Principe has implemented its full PRSP for at least one year. The full PRSP, adopted by the government in December 2002, was the result o f extensive consultations with domestic and foreign stakeholders that were managed by a steering committee chaired by the Prime Minister and consisting o f representatives o f government and civil society. Numerous workshops were organized for civil society, political parties, and other domestic stakeholders in the six district capitals on the islands o f S%oTome and Principe. 6. The full PRSP of Silo Tomb and Principe i s based on five pillars, with an action plan for its implementation and budget targets for each pillar for the period 2003-05. The five pillars are: (i) reform o f public institutions, capacity building, and promotion o f a policy o f good governance; (ii) accelerated and redistributive growth; (iii)creation o f opportunities to increase and diversify income for the poor; (iv) human resource development and access to basic social services; and (v) adoption o f mechanisms to monitor, assess, and update the strategy. 7. The full PRSP was incorporatedin the 2003-05 budgets but frequent political changes slowed implementation.Macroeconomic slippages in 2003 and 2004, weak implementation capacity, and lack o f resources also delayed the completion point, which was originally scheduled for 2003. In 2004 a Poverty Monitoring Unit (Obsewatorio du Pobrezu) was set up in the Ministry o f Planning and Finance to facilitate progress on the PRSP. The authorities also committed to protecting propoor expenditures in the 2005-07 PRGF- supported program. HIPC funds were largely used for priority sectors: between 2001 and the end o f September 2006: infrastructure (34 percent), health (1 5 percent), and education (38 percent). 8. The 2003-05 budget allocations for health and education sectors exceeded the targets set in the full PRSP despite implementation difficulties:US$19.0 million for education (target: US$7.9 million) and US$16.9 million for health (target: US$l0.5 million). In 2006, the envisaged further increase in education and health spending did not take place because o f financial constraints related to preparations for the elections; spending was roughly constant in real terms. The projected 2007 propoor expenditures constitute 26.0 percent o f GDP. To improve the quality o f spending, a review o f public expenditure on health i s underway. 10 9. The authorities formally submitted the full PRSP to IDA and the IMF in February 2005. The delay in the PRSP submission was related to the government’s effort to strengthen the macroeconomic framework. The full PRSP was enriched by an extensive implementation annex for 2003-05. A JSAN was issued in March 2005. The PRSP was well received by the Boards o f IDA, in April 2005, and the IMF, in August 2005. The JSAN noted that Siio Tom6 and Principe’s PRSP was the result o f an extensive consultative process and set a credible though ambitious policy agenda. The main strengths o f the PRSP are in: (i) providing a poverty diagnostic and a comprehensiveprivate sector-led development strategy; (ii)paying attention to cross-cutting issues, especially governance; and (i ii) identifjmg detailed indicators to monitor progress. To ensure that the strategy becomes fully operational and effective, the JSAN suggested undertaking further poverty diagnostics, analyzing the potential o f a future petroleum economy, costing and prioritizing sectoral strategies, attempting to attract higher private investment and donor support, and enhancing institutional capacity to ensure full implementation and monitoring o f the PRSP. Furthermore, i t noted that PRSP implementation would require progress in structural reforms in a context o f price stability. 10. I n June 2006 the new government provided a copy o f its first annual progress report (APR) to IDA and the IMP. The APR and an accompanying JSAN were distributed to both Boards in October 2006. The JSAN noted that the APR was selective and well- documented and candidly assessed PRSP implementation in 2005. I t concluded that, given the fact that major resources from o i l production are not expected before 2012, the authorities needed to pursue higher, better targeted and effectively used donor support; remain vigilant over macroeconomic stability and debt management; and push ahead with governance and transparency efforts. Improved monitoring and evaluation will be key to capturing the impact o f PRSP implementation. 11. On the basis of the 2006 APR, the staffs consider that the poverty reduction strategy has been implementedaccording to the PRSP through 2005. B. MacroeconomicPerformancein 2001-06 12. S l o Tom6 and Principe has maintained overall macroeconomic stability during most of 2001-06. Since 2001, the country has experienced robust growth and authorities have generally pursued prudent macroeconomic policies, while carrying out economic reforms to support private sector activity. However, policy implementation, particularly o f fiscal policies, has been uneven, in part because o f expenditure pressures arising from the domestic political cycle. Consequently, Siio Tom6 and Principe was not able to reach the completion point in December 2003 as envisaged in the PRGF-supported program approved in 2000. Under the PRGF arrangement approved in August 2005, implementation o f macroeconomic policies and structural reforms was broadly satisfactory. Following policy slippages during the period leading to elections and an upsurge in inflation between mid-2005 4 EBD/06/118, October 17, 2006 and I D A report N o 37319-STP, October 10, 2006. 11 and mid-2006, the authorities implemented remedial measures that have since brought the PRGF-supported program broadly back on track (Box 2). 13. Inflation was brought down to an average of 10 percent in 2001-2003 compared with 35 percent in the 1990s. However, from 2004 to mid-2006 inflation increased because monetary and exchange rate management was complicated by the rapid expansion o f the banking system and large inflows o f foreign currency resulting from the payment o f oil signature bonuses and private capital. The increased liquidity together with supply shocks (mainly affecting o i l and food prices) led to higher inflation. Since June 2006, fiscal tightening combined with more active use o f the central bank's monetary and foreign exchange policy instruments i s bringing down the growth o f monetary aggregate^.^ SHo Tome and Principe: Macroeconomic Indicators, 1994-2006 1994-2000 2001 2002 2003 2004 2005 2006 Average Est. ~~~ ~ Real GDP (annual percentage change) 2.1 4.0 4.1 4.0 3.8 6.0 8.0 Consumer prices (annual percentage change; end of period) 34.6 9.4 8.9 10.2 15.2 17.2 24.6 l/ Consumer prices (annual percentage change; average) 34.8 9.5 9.2 9.6 12.8 16.3 23.1 l / Domestic primary fiscal balance (percent of GDP) -1.9 -12.9 -4.3 -11.7 -20.6 -15.9 -15.3 External current account balance (percent of GDP) Including official transfers -25.5 -27.5 -24.1 -22.7 -23.1 -30.7 -58.6 Excluding official transfers -66.4 -65.3 -51.0 -56.7 -58.8 -62.3 -91.0 Gross international reserves 21 2.7 3.9 3.9 4.8 3.4 4.1 4.4 ~~ Sources: SBo Tome and Principe authorities and IMF staff estimates. 1/ Actual data for 2006. 2/ In months of following year's non-oil imports o f goods and nonfactor services. 14. Structural reforms helped growth performance during 2001-06. Average real GDP growth increased to 5 percent in 2001-2006 compared with 2 percent in 1994-2000. Rapid growth in the public and services sectors more than offset l o w growth in agriculture, where cocoa production stagnated and limited progress was made in introducing new crops. The lifting o f domestic price controls, liberalization o f external trade and the exchange rate system, and privatization o f state enterprises in 2000-03 improved the business climate. More recently, the prospects o f potential o i l resources have boosted private investment and the banking and services sector. Foreign aid supported public investment based on the PRSP. 15. The external current account deficit (including official transfers) averaged 30 percent of GDP in 2001-06. The strong increase in the trade deficit was due to lower cocoa The 12-month growth rate o f base money decelerated substantially to 21 percent in January 2007 from the peak o f 116 percent in July; 12-month inflation declined to 23 percent in January 2007 from i t s peak o f 26.1 percent in August 2006; while monthly inflation has shown a more marked declining trend from i t s peak o f 4.9 percent in March 2006 to 1.7 percent in January 2007. 12 export earnings, rising fuel imports, and a sharp increase in oil- and other investment-related imports (particularly in 2006). The higher trade deficit was partly offset by an improvement in the balance o f nonfactor services as tourism picked up. The external current account deficit was largely financed by concessional lending, direct foreign investment, and debt service relief, and more recently by o i l signature bonuses.6 International reserves (excluding the National O i l Account) averaged 4 months o f imports o f goods and nonfactor services in 2001-06, compared to 2.7 in 1994-2000.7 6 and i s expected The country received an o i l signature bonus amounting to US$49.2 million in 2005 (Block l), to receive US$28.6 million in 2007 (Blocks 2-4). The 2004 O i l Revenue Management Law set up the National O i l Account to assure transparency and accountability in the use o f o i l resources. 13 Box 2. Performance Under IMF-SupportedPrograms, 2000-06 First PRGF-supported program. The IMF Board in April 2000 approved a three-year PRGF arrangement. I t s satisfactory implementation in the first 10 months o f 2000 led to the approval o f the HIPC decision point document in December 2000. All quantitative performance criteria (PCs) and benchmarks for end-June 2000 were observed except for the performance criterion o n the domestic primary balance and the benchmark on government revenue. Most quantitative benchmarks for end-September 2000 were met.’ In the final quarter o f 2000 and the first three quarters o f 200 1, fiscal slippages and continued delays in structural reforms slowed program implementation and pushed the program o f f track. Staff-monitored program (SMP). In January 2002 the authorities requested an SMP to establish a track record for a new PRGF-supported program.2 Despite disappointing implementation in the first h a l f o f the year, prompt corrective policy measures resulted in satisfactory performance for 2002.3 Five o f nine quantitative benchmarks were met, including the key benchmark on the domestic primary b a l a n ~ e Though .~ the SMP was relatively successful, political instability and expenditure pressures in 2003-04 delayed agreement on a second PRGF arrangement. Second PRGF-supported program. In August 2005 the IMF Board approved a three-year PRGF arrangement aiming at correcting macroeconomic imbalances and setting the conditions for sustained gr~wth.~ Performance under the program was satisfactory through December 2005.6” All PCs for end-September and end-December 2005 were met, and the first and second reviews were completed. Structural reforms advanced, although there were delays in meeting some structural benchmarks. In the first half o f 2006, program performance was mixed and inflation flared up, mainly because o f expenditure overruns in the period leading to the elections. Five fiscal and monetary PCs for end-June were missed (the two fiscal-related PCs with small margins, and the three monetary-related PCs with large margins, mainly because o f delays in o i l bonuses). * Since mid-2006, corrective fiscal and monetary policy measures have addressed the fiscal slippage and the increase o f inflation, and the third review was completed. First Review o f the Three-Year Arrangement Under the PRGF and Request for Waiver o f Performance Criteria (EBS/00/253, December 2000). 2001 Article I V and Staff-Monitored Program (EBS/02/3, January 2002). Review o f Performance Under a Staff-Monitored Program (EBS/02/186, November 2002). 2003 Article I V Consultation (EBS/04/69, March 2004). ’Request for Three-Year Arrangement Under the PRGF (EBS/05/109, July 2005). 2005 Article I V Consultation and First Review Under the Three-Year Arrangement Under the PRGF (EBS/06/23, February 2006). 7 Second Review o f the Three-Year Arrangement Under the PRGF (EBS/06/101, July 2006). 8 Third Review o f the Three-Year Arrangement Under the PRGF (EBS/06/175, December 2006). 14 C. Public Expenditure 16. The authorities costed the health strategy in 2001 and the education strategy in 2004. The health strategy for 2001-05 mainly focused on primary health and the strengthening o f human resources and institutional capacity with an estimated budget o f US$24.2 million for the period. The education strategy for the period 2003-13 focused on primary education, universal enrolment at the basic education level, and quality improvement. The PRSP and the background document prepared for the December 2005 Round Table updated the costing o f the updated action plans. It was estimated that the health strategy would require US$27.6 million for 2003-10 and the education strategy US$22.8 million for the same period. The costing was done with a medium to long-term vision, but not yet based on a medium-term expenditure framework (MTEF). Following IDA and IMF advice in 2003, the government decided to reform the budget preparation, execution, and audit process. 17. The authorities have taken several measures to better supervise HIPC-funded expenditures: A special account was opened at the central bank for HIPC resources and related expenditures. These expenditures are budgeted as part o f the Public Investment Program (PIP) and focus o n health, education, infrastructure, and other poverty- related expenditures. The Ministry o f Planning and Finance supervises project implementation.8 HIPC projects are selected, based on PRSP priorities, at the time the budget i s prepared. Execution i s supervised by a committee o f representatives from the Directorate o f Treasury, the Directorate o f Planning, the Ministry o f Public Works, and the relevant sectors. The Ministry o f Public Works also monitors HIPC projects as part o f i t s supervision o f all projects in the budget. The Directorate o f Treasury prepares quarterly financial and technical reports. An annual HIPC execution report i s prepared as part o f the budget execution report which accompanies the budget proposal presented to the National Assembly. * Originally, a committee o f representatives from the central bank, c i v i l society, the Ministry o f Planning and Finance, and other sectors was created t o choose and supervise H I P C projects but in mid-2002 cost concerns l e d to termination o f this arrangement. 15 Allocation o f Interim HIPC Debt Relief (Percent o f total) 200 1 2002 2003 2004 2005 2o06 2001-06 Proj. Health 18 44 28 40 36 33 34 Education 15 16 21 14 18 7 15 Infrastructure 62 34 42 29 31 42 38 Other 5 5 10 18 16 17 13 Source: Sa0 Tornban authorities. 0 The execution o f HIPC expenditures experienced delays owing to budgetary difficulties and limited national capacity. In early 2003, an internal audit o f the use o f HIPC funds for 2001-02 recommended an external audit, which was undertaken later in 2003. The external audit for 2003-05 was done in the first half o f 2006. Both audits were placed on the government’s web site.’ In 2005, an EU-sponsored external audit o f government financial operations (including HIPC expenditures) during 1998-2002 noted the reorientation o f public expenditures toward health and education. The audits and the HIPC Poverty-related Expenditure Tracking Assessments and Action Plans (HIPC-AAPs) noted weaknesses in budget execution and financial control, including use o f old nomenclature, use o f ad hoc practices due to lack o f an integrated system and associated manual o f procedures, outdated procurement procedures, lack o f an accounting plan and an accounting directorate, lack o f a priori internal control and audits. 18. Since 2005 the authorities have launched a comprehensive public finance management reform to modernize the budget process and enhance its transparency. An important component o f this reform responds to the findings o f the audits and HIPC-AAP findings. The reform process is progressing, with complete ownership by the authorities, support by an IDA credit, and participation by other donors. The authorities have already: (i) adopted a new public finance organic law, following international standards, to legalize the new organic structure o f public finance management; (ii) adopted a new modem budgetary nomenclature; ( iii) created an Accounting Directorate within the MoPF (through the new organic law); and (iv) developed an integrated computerized system for budget management within the MoPF, applying i t to the 2007 budget processes to reduce ad hoc practices. This integrated computerized system i s to be adopted for the entire budgetary process (that includes other sectors) during 2007, and i s expected to be functional by January 2008. Furthermore, during 2007, the reforms are to create an accounting plan and accompanying procedural manual that did not exist before. They also include an update o f the procurement law to international standards. 16 19. Finally, the Inspectorate General of Finance (Inspegdo Geral das Finangas, I G F ) has been active in undertaking internal audits of government entities. This directorate reviews both state-owned enterprises and directorates within the Ministry o f Planning and Finance, such as the Directorates o f Taxation and o f Customs, providing audit reports and recommendations to be adopted. News media report on the results o f these audits. Audited entities are to take action to ensure compliance with recommendations. Furthermore, IGF can impose fines, propose a disciplinary process and require punitive measures for infractions. 20. The authorities have complied with the trigger that programming and execution of foreign-financed capital expenditure be under the control o f the Ministry of Planning and Finance. The authorities have put in place a control framework that i s satisfactory to the staffs o f IDA and IMF. The framework ensures that: (i) all project loans and grants are in the budget and accounted for in the PIP, which i s managed by the MoPF; (ii) all loan and grant agreements are signed by the Minister o f Planning and Finance; and ( iii) on all foreign- financed projects, execution reports (including operational and financial results) are presented regularly to the MoPF. Many o f the donors have transferred execution o f their projects to the MoPF. In the other cases foreign-financed projects are executed independently by donors with physical control and reporting by sectoral ministries to the MoPF. The government i s attempting to improve on this control framework by asking that all development partners progressively bring their projects into normal budget execution procedures. D. Governance 21. Overall Silo Tomb and Principe has made significant progress on the governance front. Governance indicators for the country improved between 1998 and 2005. This far- reaching improvement covers not only the budget management areas as discussed above, but also control o f corruption, regulatory quality, and r u l e o f law. The figure below shows progress in these areas between 1998 and 2005. 17 Silo Tom6 and Principe: Governance Indicators, for 2005 and 1998 1/ Voice and accountability Political stability Government effectiveness 0 1998 2005 Regulatoryquality Rule of Law Control o f corruption 0 25 50 75 100 Percentile rank (0-100) Source: IDA website on governance indicators (http://info.worldbank. orglgovernanceikkz2005/sc~country. asp). 11W h i l e other indicators improved, voice and acountability indicator declined slightly between 1998 and 2005. The four democratic and peaceful elections in 2006 will have a positive impact on both the voice and accountability and political stability. 22. The authorities have complied with the trigger to establish a capacity-building program to manage oil resources.In this regard, the National Petroleum Agency (NPA) was created in the first half o f 2004 by decree law no. 5/2004 as a regulatory body with technical expertise to supervise economic activities related to the petroleum industry and to raise public awareness. As o f end-2006, 13 professionals had been hired, with more hiring planned. A program o f training and capacity building has been put into place since early 2005 under the supervision o f the NPA president and an international expert. A first group has undergone this program o f training and capacity building, which is continuing in sector- specific expertise (legal, economic and geological). The NPA has already become the expert agency to which the authorities turn for analysis o f and advice on petroleum issues. I t i s also slated to become the repository for legal and technical information related to the sector. An on-going IDA Technical Assistance Credit has supported the creation o f the NPA and provided capacity building to the agency. 10 10 Based on requests by authorities, IDA in coordination with the authorities and UNDP, sponsored two two-day capacity-building seminars for policy makers, civil society, and the media on the petroleum industry, revenue (continued.. .) 18 23. With respect to the petroleum revenue oversight committee, the government has done the following to comply with the HIPC trigger. First, the National Committee on Petroleum (NCP) was established by decree no. 3 dated June 18,2004 to supervise the strategy and development o f the sector, with the following responsibilities: (i) promote the rational use and valorization o f the potential o i l resources (including revenues); (ii) protect the environment; ( iii) promote investment opportunities for the country; and (iv) and supervise the NPA. Second, the O i l Revenue Management Law (ORML) promulgated in the Diario da Republica Number 13, dated December 30,2004, also established a petroleum revenue oversight committee (article 23 o f the law) and a Public Registration Office (article 18 o f the law). As required by country’s legislation, in November 2006 the National Assembly adopted the organic law regulating the organization and functioning o f the petroleum revenue oversight committee. Promulgation o f this bill i s expected shortly. Furthermore, the National Assembly i s reviewing the draft bill o f the law to regulate the organization and functioning o f the Public Registration Office. Approval and promulgation o f this bill i s expected in the first months o f 2007. The newly created petroleum oversight committee that replaces the NCP, with the assistance o f the newly created Public Registration Office, will help the authorities monitor potential o i l receipts and expenditures and better disseminate information related to the o i l sector. 24. While prospects for petroleumdiscovery and production are still uncertain and the country does not expect to receive any oil production revenues before 2012 at the earliest (Box 3), the authorities have gone beyond the two petroleumgovernance measures agreed to in the HIPC decision point document (discussed above). They moved early and decisively to adopt the Oil Revenue Management Law (ORML) in December 2004 to provide clear rules and oversight for the use o f petroleum funds ahead o f receiving these funds. This law has guided the use and management o f the only signature bonus the country has received so far. The bonus was deposited in the Federal Reserve Bank of N e w York (following article 3 o f the law) and has been used per the rules o f the law and in open discussion with IDA and the IMF. The law permits the withdrawal o f a defined amount o f the signature bonus per year (per article 8 o f the law). This amount has to be approved by the National Assembly as part o f the budget approval process. To ensure proper and transparent use o f funds, the retrieval o f funds from the o i l account requires the signatures o f representatives from four different authorities: the President o f the Republic, the Prime Minister, the Ministry o f Planning and Finance, and the Central Bank. Finally, use o f the signature bonus has been consistent with annual budget laws. 25. I n addition to the ORML, the NationalAssembly created a specialized internal commission (consisting of representativesfrom different political parties) to increase oversight of legal, economic, and revenue management decisions made in the petroleum sector. management practices, and supervision and transparency issues. The UNDP, USAID, Norway, Columbia University, and the nongovernmental organization International Alert have sponsored similar seminars and training t o help build national capacity. 19 26. Furthermore, in 2004, the President of Silo Tom6 and Principe joined the President of Nigeria in declaring the commitment of their countries to the principles of the Extractive Industries Transparency Initiative (EITI). In October 2006, the Nigerian and Silo Tomkan authorities agreed to start developing and implementing the transparency guidelines embodied in the E I T I and the Abuja Declaration for the Joint Development Zone (JDZ). To move this process forward, the Silo Tom6 and Principe authorities have announced their intention to set up a representative national committee to work with Nigeria. Box 3. Prospects for Oil Sector Development I n February 2001, Nigeria and SHo Tomb and Principe signed a treaty for the joint development of petroleum and other resources in the maritime areas contained in their overlapping exclusive economic zones (EEZ), thereby constituting the Joint Development Zone (JDZ). The treaty granted Nigeria 60 percent and S%oTom6 and Principe 40 percent o f the benefits and obligations arising from development activities in the JDZ. The annual cost o f the Joint Development Authority (JDA) was almost US$4 million for SBo Tom6 and Principe in 2004-06. Prospects for oil discovery remain subject to uncertainty. Results announced in M a y 2006 on exploratory drilling in Block 1 o f the JDZ, considered the most promising block, confirmed the existence o f o i l resources in ultra-deep sea. Currently, these resources are considered commercially not viable and n o new exploratory drilling i s expected until 2008. Further drilling in 2008 could improve prospects o f commercial exploitation. If commercially viable petroleum i s found, production will start in 2012 at the earliest. The timeline for prospecting ranges from 2008 to 2014. Depending o n the size o f discovery and rate o f extraction, a well may produce for 15 to 25 years. S l o Tom6 and Principe has so far benefited f r o m two signature bonuses, while sharing in the costs of the JDZ. In 2004, a first round o f bidding held for nine jointly held blocks led to the signing o f a production sharing contract (PSC) for the first and most promising block only, and SBo Tom6 and Principe received US$49 million in signature bonuses. In 2005, a second round o f bidding for blocks 2-6 led to the signing o f PSCs for blocks 2 4 , but SBo Tom6 and Principe’s share o f the signature bonuses (approximately US$28.6 million), already deposited in the JDA in early 2006, has been put on hold pending agreement between S%oTom6 and Principe and Nigeria on the repayment o f US$15 million in short-term loans. The contracting on blocks 5-6 i s uncertain due to lengthy legal issues with one company (EHRC). The related signature bonuses (US$26.1 million) for these blocks may come only in 2008. Until PSCs for these blocks are signed or there are further bidding rounds, budgetary o i l resources are projected to last only until the end o f 2008. Prospects for the Exclusive Economic Zone (EEZ) are generally thought to be less promising than those of the JDZ. Nonetheless, in 2007 the government intends to study their economic viability and develop the legal framework for eventual bidding. 27. With the issuance of decree 15-27 dated June 27,2003, Silo Tom6 and Principe authorities regulated the organization and functioning of the Auditor General’s Office (Tribunal dus Conias), making it operational. The decree gives the Office the following responsibilities: (i) auditing government and public entities and implementation o f some 20 large government contracts; (ii) reviewing and clearing all government contracts for goods and services; (iii) reviewing audits undertakenby the Inspectorate General o f Finance (IGF) o f the Ministry o f Planning and Finance; and (iv) auditing the general accounts o f the State. 28. The Office has hired expert technical and administrative staff and i s actively discharging its responsibilities. I t has: (i) audited government entities such as the Directorate o f Taxation and the implementation o f some large government contracts such as the works undertaken at the new public market and Monte Cafk hospital; (ii) approved or given opinions o n public contracts; and ( iii) reviewed reports o f audits undertaken by the IGF, such as audits o f the central hospital and the Services for C i v i l and Criminal Identification. However, the Office has not been able to audit the General Accounts o f the State (GAS) as the government has not been able to produce these accounts. This i s due to the fact that: (i) the G A S are technically and technologically complex to prepare; and (ii) the Ministry o f Planning and Finance did not have an accounting department and its sub- department o f patrimony lacked the human and technical capacity to properly account for the physical assets o f the State. The government's ongoing public finance management reform, supported by an IDA technical assistance credit, has an action plan that includes production o f GAS accounts." Notwithstanding the delay in auditing the GAS, the staffs o f IDA and IMF consider the trigger pertaining to the Auditor General's Office duly complied with by the SEo Tomb and Principe authorities. 29. The trigger on making the tribunals for arbitration in business and contract matters operationalwas met. The L a w o n Voluntary Arbitration was promulgated in Diario da Repziblica Number 38, dated November 2,2006 (law no. 9/2006). Pursuant to article 36 o f said law and internal regulations, an Arbitration Center was created within the Chamber o f Commerce and i t s director and i t s registrar were appointed accordingly. Due to its recent creation, the Arbitration Center has yet to resolve any cases, but i t i s expected to be busy soon. 30. The authorities have taken further steps to improve overall governance and combat corruption. In 2002, they initiated, with help from the international community, a major modernization o f the legislative system to improve governance and the r u l e o f law. The reforms include personal, commercial, and penal laws, and the training o f legal professionals. In January 2007, the National Assembly approved the latest batch o f laws and decrees to be implemented, including: the Statute for the Public Ministry; the Statute for the Judicial Magistry; the laws for the Criminal Investigation Police; the law o n money laundering; and the Organic L a w for the National Assembly. Also, a constitutional tribunal was created to help guide the role o f different authorities and resolve potential conflicts between the executive, legislative and judicial powers. Finally, the regulatory body to " This action plan also creates the accounting department within the Ministry o f Planning and Finance, strengthens the departments o f treasury and patrimony, and creates an integrated computerized budgetary system (SAFE). One o f the programs o f SAFE i s dedicated to production o f the GAS. 21 supervise telecommunications and utilities was created in 2005. I t i s staffed and functional and i t has received technical assistance from IDA and the Portuguese government. 3 1. There i s notable press freedom, and in M a y 2006 the authorities ratified the United Nations Convention Against Corruption under which S l o Tom6 and Principe undertakes to adopt the legislative and administrative measures required to prevent, investigate, and repress corruption. l2The authorities have referred recent allegations o f Also, in November 2006 a draft anti- corruption to the judicial authorities for in~estigation.'~ money laundering law was submitted to the National Assembly. Finally, the country undertook four national elections (legislative, presidential, local and regional) in 2006 in a peaceful and democratic atmosphere. The elections were considered valid and fair. E. Social Sector Policies 32. I n the education sector, the authorities have exceeded the HIPC trigger by building and equipping 63 rather than 40 primary classrooms and 24 rather than 15 secondary classrooms (Appendix I IITable 1).l4 , 33. The authorities have also exceeded the HIPC trigger to recruit, train, or retrain 120 primary school teachers (compared to the 1999 base). Over the last five years 171 primary school teachers were recruited, and since 2004,75 teachers have received on-the-job training. Number o f Primary School Teachers Hired, 2000/0 1-2005/06 Year 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 Total Teachers 50 39 21 26 8 27 171 hired Source: S l o Tom6 and Principe authorities. l2The Convention has the following objectives: (i) to foster and strengthen measures to prevent and fight corruption more effectively; ( iit o promote, facilitate, and support international cooperation and techmcal ) assistance in the prevention o f and fight against corruption, including asset recovery; and ( iii o foster integrity, t) accountability and the proper management o f public affairs and property. 13 M o s t recently, a new audit report o n the activities o f the Cabinet for the Management o f External Aid was submitted to the legal authorities and resulted in the restructuring o f the Cabinet. l4T o h s h the new classrooms and replace o l d materials in 2001-05, 3,509 single and double desks were acquired. 22 34. I n the health sector, the authorities exceeded the HIPC trigger on building and equipping at least eight primary health care centers o r posts (Appendix I IITable 2). , Since 1999 they have built and equipped 12 centers or posts and rehabilitated another seven. In 2006, a maternity ward was added to the Lobata province health center, and the hospital in Monte Cafk was renovated. 35. The authorities exceeded the HIPC trigger on increasing the immunization rate for children to 85 percent. Immunization Rates: Agreed HIPC Goals and Outcomes (Percent) Type o f 1999 HIPC Results Results Results Results Immunization Base goals 2002 2003 2004 2005 Year DPT3 73.8 85.0 90.9 93.7 95.2 96.8 Polio 70.0 85.0 92.2 94.2 94.9 96.8 BCG 78.8 85.0 103.8 99.6 ... 98.4 Measles 70.0 85.0 84.9 86.7 86.4 88.3 Source: Siio Tom6 and Principe authorities, the W o r l d Health Organization, and IDA. 36. The authorities have also complied with the HIPC trigger of bringing down the malaria mortality rate of children under 5 from 86 per 10,000 in 1999 to 60 per 10,000. The malaria program - which started in late 2003 and included kmigating homes on both islands, education, and distribution o f bed-nets - markedly reduced malaria-related infections, hospitalizations, and deaths. Mortality in Children Under 5 Caused by Malaria: Progress Since 1999 1999 HIPC 2000 2001 2002 2004 2005 goal Mortality in children under 5 caused by 86 60 88 78 107 60 NA malaria (out o f 10,000) Source: S l o Tom6 and Principe authorities and the W o r l d Health Organization. F. Staff Assessment 37. I n the opinion o f the IDA and IMF staffs, S l o Tom6 and Principe has met the requirements for reaching the completion point under the enhanced HIPC Initiative. As 23 noted in the 2006 APR JSAN, the country i s implementingi t s PRSP despite the need for more donor support. All triggers related to public expenditure management, governance, and the social sectors were met as o f 2006. Overall macroeconomic stability was maintained during most o f the interim period o f 2001-06. The causes o f the increase in inflation from mid-2005 to mid-2006 are being addressed by fiscal adjustment and the central bank's more active monetary and foreign exchange policies. RELIEF AND DEBT 111. DEBT SUSTAINABILITY ANALYSISUPDATE A. Updated Data 38. The staffs, in coordination with the authorities, have reviewed the stock of debt as of end-1999 presented in the decision point document (Table 3). As a result o f this exercise, the NPV o f the debt owed to some creditors was revised. The revisions arose from data discrepancies discovered during consultations with creditors after the decision point document was published. The main revisions are as follows: 0 Multilateraldebt. The NPV o f debt to the Arab Bank for Economic Development in Africa (BADEA) was revised upward from US$5.6 million to US$8.2 million. The previous estimates had incorrectly presented the debt owed to BADEA after application o f a rescheduling agreement that provides for part o f the creditor's share o f HIPC assistance. 0 Bilateral debt. The NPV o f debt owed to Angola was revised from US$7.4 million to US$7.0 m i l l i ~ n . ' ~ 0 Commercial debt. A loan from the former Yugoslavia was reclassified as commercial debt (US$1.6 million in NPV terms, US$4.8 million in nominal terms). At the decision point, this loan was reported under official bilateral debt to Yugoslavia but was later bought by a private company, Annandale Associated. The original debt was guaranteed by the National Bank o f Angola, and Annandale Associated i s seeking payment from this bank. The Silo Tom6 and Principe authorities acknowledge that when the Central Bank o f Angola pays Annandale, the debt will then be owed to Angola. Currently the National Bank o f Angola and Annandale are negotiating the amount to be paid outside the courts. 39. After full implementation of traditional relief mechanisms, the revised NPV of debt at end-1999 amounts to US$119.7 million, compared to the decision point estimate of US$117.5 million. A recalculation o f HIPC assistance based on the revised data would result l5The authorities have received Paris Club creditors' statements as o f 2005 and a debt summary from Angola, not a Paris Club creditor. The mission verified bilateral agreements and got information o n contentious debts. Special attention was given to checking consistency with the decision point data. 24 in an increase o f US$2.2 million in NPV terms to US$99.2 million. The implied common reduction factor would increase marginally from 82.6 percent to 82.9 percent (Table 4). B. Status of Creditor Participation in the Enhanced HIPC Initiative 40. Creditors accountingfor 85 percent of the total NPV of enhanced HIPC assistance have given assurances of their participation in the enhanced HIPC Initiative. All multilateral and Paris Club creditors have confirmed their participation, and the authorities are working toward reaching an agreement with all remaining creditors (Table 6). Multilateralcreditors 41, The amount of HIPC assistance from multilateral creditors totals US$70 million in NPV terms, equivalent to 71 percent of total HIPC assistance. IDA, AfDF, BADEA, the EU, and the OPEC Fund have provided interim assistance in the amount o f US$23 million in nominal terms to the end o f 2006.16 The International Fund for Agriculture and Development (FAD) has committed to provide i t s share o f assistance once S5o Tom6 and Principe reaches the completion point. 0 IDA assistance amounts to US$24 million in NPV terms. Given the financial constraints that the country faced at the decision point and the size o f the common reduction factor, which was one o f the highest under the HIPC Initiative, it was proposed that during the interim period (assumed to run from 2000-2003) 100 percent o f S5o Tome and Pn'ncipe's debt service obligations to IDA be Since 2004 IDA has been providing interim assistance through a reduction o f 90 percent o f debt service falling due to IDA. Total debt service savings will amount to US$46 million in nominal terms, o f which US$8 million was delivered by end-2006 (Table 14). AfDF assistance amounts to US$34 million in NPV terms. This r e l i e f i s being provided through an 80 percent reduction o f debt service falling to AfDF. Total debt service savings will amount to US$79 million in nominal terms, o f which US$9 million was delivered by end-2006. 0 IFAD has agreed to deliver i t s share o f relief, amounting to US$3 million in NPV terms, at the completion point by forgiving 100 percent o f debt service l6Since there was no debt outstanding to the IMF when the decision point DSA was prepared, the IMF did not commit assistance under the enhanced HIPC Initiative. 17 During this period, 90 percent o f debt service due was covered by IDA and the remaining 10 percent was covered by bilateral donor resources to the HIPC Trust Fund. 18 On credits disbursed and outstanding as o f end-1999. 25 until the target NPV o f debt relief i s achieved. This could imply total debt service relief o f approximately US$8 million in nominal terms. EU, OPEC, and BADEA assistance would amount to US$9 million in NPV terms. Modalities o f delivery for these creditors are presented in Table 6. Bilateral and commercial creditors 42. Paris Club creditors have agreed in principle to provide their share of assistance under the enhanced HIPC Initiative (US$14.5 million in NPV terms). On September 13,2005, they agreed to grant S3o Tom6 and Principe a flow rescheduling under Cologne terms o n maturities covering the period from M a y 1, 2001, to December 3 1, 2007.’9320Following the agreement with the Paris Club, bilateral agreements were signed with Germany, France, Russia and Spain.21 Some creditors provided additional assistance beyond the HIPC Initiative during that period. 43. Non-Paris Club bilateral creditors are expected to provide treatment comparable to that of the Paris Club, with assistance under the enhanced HIPC Initiative amounting to US$13.4 million in NPV terms, after relief comparable with traditional terms. The authorities are in discussions with Algeria, Angola, and Portugal and are in contact with China.22 There is only one commercial credit, which will eventually become official bilateral credit from Angola (see paragraph 38).23 C. Updated Debt Sustainability Analysis after HIPC Assistance Debt burden indicators at end-2005. 19 Nonofficial development assistance maturities falling due are cancelled for up t o 90 percent. Creditors implement the 90 percent debt reduction using the “debt reduction option”: 90 percent o f the claims treated are cancelled and the rest rescheduled at the appropriate market rate over 23 years, with a 6-year grace period. Official development assistance (ODA) credits are rescheduled, at an interest rate at least as favorable as the original concessional interest rate o n these loans, over 40 years with a 16-year grace period. *’ In 2000 Sgo Tom6 and Principe received a f l o w rescheduling under Naples terms covering April 2000 to April 2003. ” A short-term loan owed t o Italy o f US$18 m i l l i o n i s in arrears. Italy did not participate in the Paris Club rescheduling agreement o f September 2005 because ownership o f the debt i s in dispute between a private exporter and the Italian credit agency. However, if the judgment favors the exporter, Italy will grant the same treatment as other Paris Club creditors at the completion point. 22 At the decision point, Portugal was considered a Paris Club creditor. 23This credit i s expected t o receive assistance under the enhanced H I P C Initiative amounting to US$1.3 m i l l i o n in NPV terms (table 6). 26 44. The DSA included in the decision point document was updated jointly by the authorities and the IDA and IMF staffs, on the basis of end-2005 loan-by-loan debt data from the authorities and updated exchange and interest rates (Table 7). Based on 95 percent reconciliation o f the debt data, 24 S2o Tom6 and Principe’s nominal stock o f external debt reached US$324.6 million at the end o f 2005, compared with US$292.9 million at the end o f 1999 (Tables 3 and 5). O f the total nominal debt at end-2005,62 percent was owed to multilateral creditors. IDA and AfDF accounted for 53 percent o f this total debt. Bilateral creditors accounted for 38 percent o f the total debt and the Paris Club for 14 percent. External debt outlook after HIPC relief 45. The NPV of Silo Tom6 and Principe’s external debt at end-2005, after full delivery of assistance committed under the HIPC Initiative, i s estimated at US$61.7 million, equivalent to 299 percent of exports of goods and services (Table 8). Taking into account bilateral debt r e l i e f beyond the HIPC Initiative, the NPV o f debt would be hrther reduced to US$56.1 million, equivalent to 271 percent o f exports o f goods and services. According to the macroeconomic framework underpinningthe baseline scenario o f the D S A (Box 4 and Appendix I I ) , NPV o f debt-to-export ratio i s projected to remain significantly the above the 150 percent threshold defined in the enhanced HIPC framework until the start o f projected o i l exports in 20 12 and decline below 150 percent only afterward. D. Considerations for Topping-up HIPC Assistance 46. The enhanced HIPC Initiative framework allows for additional debt relief (topping up) at the completion point if exogenous factors led to a fundamental change in the country’s economic circumstances.Additional debt relief at the completion point would be provided by all creditors proportionally to bring the NPV o f debt-to-export ratio down to the HIPC threshold. So far, five countries have received topping-up assistance: Burkina Faso, Ethiopia, Niger, Rwanda, and Malawi. 47. The NPV o f debt-to-exportsratio at end-2005, after full delivery of committed HIPC assistance, increasedto 299 percent compared with the decision point estimate o f 140 percent, mainly due to exogenous factors. This section discusses the factors, mostly exogenous, that contributed to the increase in the debt ratio, and assesses whether they contributed to a fundamental change in S2o Tom6 and Principe’s economic circumstances. 24 This corresponds to fill reconciliation o f multilateral debt and 85 percent o f bilateral debt at the end o f 2005. 27 SHo Tomb and Prhcipe: Breakdown o f the Increase of NPV of Debt-to-Export Ratio as o f end-2005 1/ Percentage Percent of Total Points Increase NPV of debt-to-export ratio (as projected at decision point) 139.7 NPV of debt-to-export ratio (actual) 2/ 298.7 Total increase 159.0 100.0 1. Due to changes in the parameters 55.4 34.8 Of which: due to changes in the discount rates 45.1 28.4 Ofwhich: due to changes in the exchange rates 10.3 6.5 2. Due to unanticipated new borrowing 1.2 4.5 Ofwhich: due to higher than expected disbursements -1 1.2 -7.0 Ofwhich: due to lower concessionality o f the loans 10.9 6.9 Ofwhich: due to other factors 3/ 7.6 4.8 3. Due to changes in export 74.3 46.7 Ofwhich: due to prices 40.6 25.5 Ofwhich: due to volumes 33.7 21.2 5. Other factors 4/ 22.1 13.9 Sources: World Bank and IMF staff estimates. NPV o f debt-to-export ratio after enhanced HIPC assistance. l/ 21 After full delivery as o f end-2005. 3/ Refers to incorrect use, at the decision point, o f US. dollar discount rates and terms ofnew borrowing. 41 Due to revisions in the end-1999 database and changes in the timing and mechanisms o f delivery o f assistance compared to the assumptions in the decision point projections (mainly due to delays in reaching the completion point). 48. Lower-than-projected export receipts accounted for about 47 percent o f the increase in the NPV of debt-to-exports ratio. Export performance has not been as strong as expected because both export prices and volumes turned out much lower than projected at the decision point. The volume shortfall i s explained by overestimating tourism and cocoa volumes. Tourism receipts, which accounted for 80 percent o f total export receipts during 2000-05, have not increased as projected because the number o f tourist arrivals was constrained by a shortage o f hotel room capacity and air transportation. At the same time, export volumes o f cocoa, the main crop, were negatively affected by droughts. 49. The fall in world interest rates played a substantial role in the deterioration of S l o Tom6 and Principe’s debt burden indicators, contributing to almost 30 percent of the total change in the NPV of debt-to-exports ratio. 50. All else remaining equal, a decline in discount rates would be associated with a fundamental deterioration in S l o Tom6 and Principe’s economic circumstancesby reducing its future export earnings. To the extent that a lower interest rate on industrialized countries’ benchmark bonds (used as the discount rate for HIPC calculations) reflects market expectations o f a lower rate o f inflation, the associated lower commodity prices would lower the future export earnings o f S?io Tomb and Principe, thus implying a heavier debt burden. 28 5 1. Unanticipated changes in exchange rates, led to a deterioration of 10 percentage points in S l o Tomb and Principe’s NPV of debt-to-exports ratio. This development was driven by the depreciation o f the US. dollar against the euro and the fact that more than half o f Sao Tome and Principe’s nominal debt at end-2005 was denominated in euros and S D R S . ~ ~ Nonetheless, the impact o f this deterioration was not as important as the other external factors; most o f S5o Tome and Principe’s export receipts are denominated in euros, thus reducing the impact o f the higher debt stock and debt service costs in U.S. dollar terms. 52. Although new borrowing was lower than expected, its concessionalitywas also lower than estimated at the time of the decision point. At the assumed level o f concessionality, the lower amounts o f projected new loans would have reduced the NPV o f debt-to-export ratio by 11 percentage points, but the lower than projected concessionality has increased this ratio by 11 percentage points. For 2000-05 the actual grant element o f all new loans averaged 5 1 percent compared to a projected 67 percent at the decision point.26 53. The staffs are of the view that the increase in the Silo TomC and Principe NPV o f debt-to-exports ratio between decision and completion points was mainly attributable to exogenous factors. Lower exports and changes in discount and exchange rates (as well as incorrect assumptions about discount rates in the new borrowing terms at the decision point) were all outside the control o f the authorities. 54. The staffs are o f the view that S l o Tomb and Principe meets the requirements for topping up under the relevant decisions adopted by the IDA and IMF Boards.27 The staffs therefore recommend that S5o TomC and Principe be granted additional assistance o f US$25 million under the enhanced HIPC Initiative to bring i t s NPV o f debt-to-export ratio from 27 1.5 percent after additional voluntary bilateral debt relief, down to the HIPC threshold o f 150 percent (Table 9). IDA and IMF will grant the additional assistance once other creditors have provided sufficient financing assurances o f their participation. 28 25 Currencies that appreciated substantially against the US. dollar (Table 7). 26 The decision point projections incorrectly used the US. dollar-denominated CIRR to discount all loans regardless o f the currency o f denomination, instead o f using the currency-specific CIRR for each currency, this accounted for an additional 8 percentage points o f the increase in the ratio. 27“TheEnhanced HIPC Initiative-Completion Point Considerations,” (IDASecM200 1-0539/1, August 2 1,2001, and EBS/01/141, August 20,2001). Public Information Notice (PIN) No. 01/100. September 27,2001 on IMF Board discussion on :” The Enhanced HIPC Initiative Completion Point Considerations”, hm://www. imf.org/external/nu/sec/un/2001/uno 1100.htm. 28 In t h i s case, more than 90 percent o f the debt remaining after enhanced HIPC assistance and additional bilateral assistance from Paris Club creditors w i l l be multilateral debt. O f this debt, 75 percent will be held by IDA, IMF and AfDF. 29 E. Debt Relief Under the Multilateral Debt Relief Initiative 55. Subject to Executive Directors approval of the completion point under the enhanced HIPC Initiative, Sgo Tom6 and Principe will qualify for additional MDRI debt relief from IDA, IMF, and AfDF. MDRI debt relief would cover all remaining debt service obligations on eligible credit balances after HIPC debt service relief. Thus, the amount o f MDRIrelief will depend on whether or not topping-up assistance will be approved. If Executive Directors approve topping up, MDRI r e l i e f (net o f HIPC assistance) to SBo Tom6 and Principe would be equivalent to total debt service savings on debt owed to these creditors o f US$50.3 million in nominal terms.29 Without topping-up assistance, MDRI relief (net o f HIPC assistance) would be equivalent to US$77.8 million. Assuming there i s no topping- up Debt relief from IDA. IDA would provide MDRI debt relief by cancelling SBo Tom6 and Principe’s payment obligations on debt disbursed before the end o f 2003 and s t i l l outstanding on March 30, 2007, after application o f the enhanced HIPC Initiative. 30 MDRI relief would provide total debt service savings (net o f HIPC assistance) o f approximately SDR 27.8 million (equivalent to US$36.4 million), implying average debt service savings o f US$1.1 million a year for the next 20 years (Table 14). 31 Including HIPC assistance, total debt service savings from IDA would amount to approximately US$77.4 million over the next 34 years. Debt relief from the IMF. The IMF would provide MDRI debt relief amounting to SDR 1.4 million (or US$2.0 million),32 covering all debt owed to the IMF at the end o f 2004 that i s still outstanding at the completion point.33 The r e l i e f would be financed from the MDRI-ITrust (Table 1Sa). It would imply average debt service savings o f SDR 0.36 million (US$0.51 million) a year for the next four years. 0 Debt relief from AfDF. After HIPC relief at the completion point, the AfDF would cancel Silo Tom6 and Principe’s debt that was disbursed before the end 29 The cutoff date for eligible debt outstanding to I M F and AfDF was end-2004, and for eligible debt to I D A was end-2003. 30 See, International Development Association, “The Multilateral Debt Relief Initiative: Implementation Modalities for IDA,” November, 18, 2005, htto://siteresources.worldbank.org/IDA/Resources/MDRI.pdf. 31 Using the Completion Point SDR/US$ exchange rate (end-2005, 6-month average SDR CIRR). 32 Using the Completion Point SDR/US$ exchange rate (end-2005,6-month average SDR CIRR). 33 As defined in the MDRI-ITrust Instrument. 30 o f 2004.34Total MDRI debt service savings (net o f HIPC assistance) would amount to approximately US$39.4 million, implying annual average savings o f US$1.02 million a year for the next 20 years. MDRI relief, together with HIPC assistance, would imply a total debt service reduction o f approximately U S $ l 10 million. Figure 1. Implied Debt Service Savings fiom MDRI, 2007-27 1/ (Millions of U.S.dollars) 3.5 3.0 W IDA 0 IMF 0 ADF 2.5 2.0 1.5 1.o 0.5 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 Sources: I D A and I M F staff estimates. l / M D R I relief without toppingup o f HIPC assistance. 2/ Last year o f HIPC relief from I D A . Assuming approval of topping-up Debt relief from IDA. IDA’Sassistance under MDRI would provide total debt service savings (net o f HIPC assistance) o f approximately SDR 20.1 million in nominal terms (equivalent to US$28.8 million), 35 implying average debt service savings o f US$0.6 million a year for the next 20 years.36 34 See African Development Fund, “The Multilateral Debt Relief Initiative: ADF Implementation Modalities Paper,” November 28,2005. 35 Using the completion point SDR/US$ exchange rate (end-2005,6-month average S D R CIRR). 36 IDA allocations t o countries receiving MDRI debt relief will be reduced by the amount o f relief t o be provided in that year. (See IDA “The Multilateral Debt Relief Initiative: Implementation Modalities for IDA,” November 18,2005.) Since topping-up would reduce the amount o f MDRI debt relief in each year, the IDA allocation to Sgo Tom6 and Principe would be higher if topping-up were approved. 31 0 Debt relief from the IMF. IMF debt relief under MDRI would amount to SDR 1.43 million (US$2.0 million) in nominal terms, o f which SDR 0.99 million (US$1.4 million) would be financed from the MDRI-ITrust and the remainder from the HIPC umbrella account using topping-up HIPC assistance (Table 15b). Average debt service savings (net o f HIPC assistance) would amount to SDR 0.2 million (US$0.3 million) a year for the next four years. Debt relief from AfDF. AfDF debt relief under MDRI (net o f HIPC assistance) would amount to total debt service savings o f US$20.1 million, implying average debt service savings o f US$0.62 million a year for the next 20 years. F. Debt Sustainability Outlook After MDRI, 2007-26 56. The macroeconomic framework underlying the long-termsustainability outlook has been revised to take into account developments since the decision point (Tables 1 and 2). The framework i s in line with the government's medium-term program, which i s supported by the PRGF arrangement (Box 4). Development o f the o i l sector would sustain economic growth at about 9 percent a year for 2007-15, well above the 4 percent average growth in 2000-05. Based on the projected drilling schedule (see Box 3) Siio Tome and Principe could start exporting o i l in 2012 at the earliest. Development o f the non-oil economy i s expected mainly in the service sector, principally banking and tourism, and secondly in fishery and agriculture. 57. Inflation i s expected to decline gradually to 6 percent by 2010 and over the long term level off at 3 percent, reflecting a balanced budget and the central bank's commitment to control inflation. O n fiscal policy, o i l revenues are assumed to accrue in the . National Oil Account (NOA) and be used to finance the government budget according to a permanent income rule established by the Oil Management Revenue Law. The permanent income generated by the NOA would cover all Siio Tome and Principe's public budget needs in the long term. 58. The external current account deficit i s projected to remain in deficit until 2012, as a result of large imports related to the development of the oil sector and public investment, and revert to a surplus in 2013-22 as a result of oil exports. In the long term, the external current account i s projected to have a small deficit, which i s to be financed by the permanent income generated by the N O A . 32 Box 4. Baseline Macroeconomic Assumptions, 2007-26 Real non-oil GDP growth i s expected to accelerate to 8 percent by 2017 with investments in the service sector and infrastructure in anticipation o f the o i l era and development o f the tourism and fishery sectors. After o i l production starts to decline by 2016, non-oil GDP growth should slow gradually to a sustainable 5 percent in the long term. Oil production o f one well i s assumed to start in 2012. The country’s share in the o i l output o f the Joint Development Zone (JDZ), 35,000 barrels a day, at an average price o f U S 7 0 per barrel on average would yield US$900 million in annual exports (equivalent to 1,300 percent o f 2006 GDP) for 20 years and would require total investment by Sgo Tom6 and Principe o f US$1.2 billion. Preliminary staff estimates indicate that, on the assumption that only one o f the six blocks auctioned in the JDZ with Nigeria i s found to be commercially exploitable, o i l production would s t i l l have a sizeable effect on Sgo Tom6 and Principe’s economic prospects. Inflation i s projected to fall gradually to 6 percent in 2010 and over the long term hold steady at 3 percent, reflecting a balanced budget and the central bank’s commitment to control inflation. Fiscal policy will be supportive o f economic growth and poverty reduction. The domestic primary balance i s expected to continue recording deficits o f some 10 percent o f GDP through 20 12, reflecting large social and infrastructure expenditures. After o i l production starts in 2012, a balanced budget r u l e applies, in which the non-oil deficit equals financing from the National O i l Account (NOA) based on the permanent income hypothesis, with no external or domestic financing. O n the assumption that only one o i l block i s producing, annual budget financing from the NOA i s projected at around U S $ l 9 0 million on average for 2013-26 (equivalent to 15 percent o f GDP on average). The current account deficit (including grants) i s expected to average 88 percent o f GDP for 2007-12 because o f large investment-related imports. Between 20 13 and 2022 the current account i s projected to turn into a surplus as a result o f o i l exports. After 2023 i t i s expected to return to a deficit, which would be financed by the permanent income from the NOA. External borrowing on concessional terms i s assumed to be about US$4 million a year for 2007-1 1, mainly from the African Development Bank and bilateral official creditors. I t i s assumed that IDA will provide only grants. After 20 13 there would be n o new borrowing because the income from o i l exploration allows for a substantial increase in government consumption and investment. 33 Excluding topping-up assistance 59. Full delivery of HIPC and MDRI debt relief at the completion point would reduce Silo Tomb and Principe’s external public debt substantially, from US$196 million at end-2005 to US$23 million in NPV terms at end-2007 (Table 10). After MDFU relief nominal debt service r e l i e f in 2007 would amount to US$8.3 million, o f which US$1.7 million would be f i o m the MDRI (Table 11). 60. Silo Tom6 and Principe’s external public debt i s expected to remain below the enhanced HIPC Initiative threshold throughout the projection period after MDRI debt relief (Table 12). After full delivery o f enhanced HIPC assistance and additional bilateral debt relief, the NPV o f debt-to-export ratio i s projected to remain above the HIPC threshold through 201 1. Once MDRI relief i s considered, this ratio would fall to about 100 percent through the same period and the NPV o f debt-to-GDP ratio and the NPV o f debt-to-revenue ratio would fall to 22 percent and 58 percent respectively by 201 1. After o i l production starts in 2012, all ratios are projected to fall dramatically, to well below the HIPC thresholds, e.g., the NPV o f debt-to-exports ratio i s projected to fall to 5 percent by 2013 and continue to decline thereafter. 61. Debt service i s projected to be relatively constant through 2011 but fall sharply after oil production starts in 2013 (Table 11 and 12). After enhanced HIPC assistance and additional bilateral debt relief, annual debt service would average US$4.5 million through 2015, equivalent to 9 percent o f exports o f goods and services, which i s significantly above the average o f 7.3 percent o f all 28 HIPCs that had reached the decision point at the end o f 2005. After MDRI debt relief, debt service would average only 6 percent o f exports o f goods and services through 2015. Including topping-up assistance 62. Topping-up HIPC assistance and MDRI debt relief would further reduce Silo Tom6 and Principe’s external debt. Total debt would be reduced from US$196 million at end-2005 to US$17.5 million in NPV terms at end-2007 (Table 10). Nominal debt service relief in 2007 is estimated at US$8.8 million, o f which US$1.1 million would be attributable to the MDRI (Table 11). 63. External public debt would remain well below the HIPC thresholds throughout the projection period (Table 12). After the topping-up o f HIPC assistance and MDRI relief, the NPV o f debt-to-exports ratio i s projected to drop to 78 percent at the end o f 2007, slightly increasing to 90 percent by 201 1 but declining sharply to 15 percent by 2012 and averaging only 1 percent o f exports thereafter. The NPV o f debt-to-GDP ratio and the NPV o f debt-to- revenue ratio are projected to follow a similar trend. 64. Debt service i s projectedto remain low. Assuming HIPC topping-up assistance and MDRIrelief, total annual debt service would decrease to US$2.4 million on average during 2007-15, equivalent to an average o f 4 percent o f exports o f goods and services. This ratio is projected to fall steadily thereafter. 34 Figure 2. Silo Tom6 and Principe: External Public Debt Indicators, 2007-26 1/ (Percent) Net Present Value of Debt-to-Exports Ratio 250 - 200 +After Enhanced HIPC assistance d After bilateral debt relief beyond HIPC assistance 150 - * - - I - --- After topping up - - I, - . A f t e r M D R I After MDRI and topping up 100 50 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 20 Debt Service-to-Exports Ratio 18 16 - 14 -After Enhanced HIPC assistance d After bilateral debt relief beyond HIPC assistance 12 Aftertopping up 10 * * AfterMDRI 8 After MDRI and topping up 6 4 2 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Sources: SO0 Tom6 and Principe authorities; and World Bank and IMF staff estimates and projections. 1/ Assumes full delivery o f HIPC assistance and bilateral debt relief beyond HIPC assistance; includes MDRI debt relief. 35 G. Sensitivity Analysis and Long-term Debt Sustainability 65. Si40 Tom6 and Principe’s debt situation could worsen substantially if oil production does not materialize as projected and fiscal policy does not respond accordingly. The principal risk to Silo Tome and Principe’s debt outlook is substantially lower o i l production or no o i l production at all. In such a scenario, maintaining long-term debt sustainability will require continued prudent fiscal and debt management policies and structural reforms to support broad-based growth. The macroeconomic assumptions for the alternative scenarios are summarized in the text table below. The results o f the alternative scenarios are shown in Table 13 and Figure 3. Scenario I:Lower oil exports and revenues 66. This scenario assumes 50 percent lower exports and oil revenue compared with the baseline scenario. Real non-oil GDP growth i s assumed to fall on average to 5 percent a year compared to 7 percent in the baseline. The scenario assumes that to finance the budget the government borrows each year 10 percent o f non-oil GDP (compared to a balanced budget in the baseline scenario), on commercial terms. Given the l o w initial indebtedness and still relatively large exports and revenues from oil, i t will take 20 years for the impact o f this new debt to show up in the debt indicators. The NPV o f debt-to-exports ratio i s projected to remain well below the HIPC threshold o f 150 percent through 2026, while the debt service- to-exports ratio i s projected to increase gradually to over 10 percent and the debt service-to- revenue ratio to 20 percent. The large permanent income receipts from o i l exploration, compared to current fiscal revenues would make i t possible to finance the budget for a long time even if there i s a large shock to o i l production. The additional borrowing requirements would not markedly increase debt stock indicators, although borrowing o n nonconcessional terms would significantly worsen debt service indicators. Scenario 11: N o oil production and current fiscal stance 67. This scenario assumes much lower GDP growth of 3 percent a year compared with the baseline. In the absence o f petroleum revenues, financing needs will increase so that the government can maintain current investment and consumption. The continuing expenditures result in a fast build-up o f new debt. The NPV o f debt-to-exports ratio races upward, reaching 400 percent by 2026, and the debt service-to-exports ratio rises to over 50 percent. This scenario illustrates that if o i l production does not materialize, the current fiscal stance cannot be sustained even with concessional financing. 68. The sensitivity analysis underscores the need for continued prudent fiscal and debt management policies and for structural and governance reforms to support broad- based growth. If o i l production does not materialize or i s substantially lower than expected, debt burden indicators could quickly increase, if there are no corrective adjustment policies. If the government resorts to nonconcessional borrowing, i t could lose fiscal space for investments in infrastructure and poverty-reducing expenditure in the medium and long term. 36 Alternative Scenarios: Macroeconomic Assumptions Baseline Scenario I Scenario I1 50 percent lower oil N o oil production exports Fiscal policy Permanent income r u l e 1/ Annual borrowing o f current fiscal stance; 10 percent o f non-oil domestic primary deficit GDP averaging 4.5 percent of GDP in 2007-26 GDP growth 2/ 7 percent 5 percent 3 percent Exports 2/ US$900 million a year 50 percent lower o i l N o o i l exports exports and revenues Borrowing terms Concessional Less concessional after Concessional N o borrowing after 20 13 2013 External grants N o grants after 2013 N o grants after 20 13 Maintains the current level o f grants Source: IDA and IMF staff estimates. 11 The non-oil deficit equals financing from National Oil Account (NOA) based o n the permanent income hypothesis. 21 Averages for 2012-26. 37 Figure 3. S%oTom6 and Principe: Sensitivity Analysis, 2007-26 1/ (Percent) 450 NPV o f External Debt-to-Exports Ratio 400 - 1 350 c 0 0 - - -Baseline scenario c e 300 0 4 Alternative scenario I # 0 e 250 0 * * * Alternative scenario I I c t c 0 0 0 e # 2oo ' 0 + 50 - -A *- -A- - b - k -A- * - A o & - k w k W k * . _ . a A - . . 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 60 Debt Service-to-ExportsRatio + * 50 e e e -Baseline scenario # - - 4 40 4 4 Alternativescenario1 30 = I Alternative scenario I 20 IO 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Sources: SBo Tom6 and Principe authorities; and World Bank and IMF staff estimates and projections. 1 / Assumes full delivery o f HIPC assistance and bilateral debt relief beyond HIPC assistance; includes MDRI debt relief. 38 IV. CONCLUSIONS 69. I n the opinion of IDA and IMF staffs, S l o Tom6 and Principe has met the requirements established in December 2000 for reaching the completion point under the enhanced HIPC Initiative. All triggers related to public expenditure management, governance, and the social sectors were met as o f end-2006. The poverty reduction strategy i s based on wide-ranging reforms, and the government has recently prepared its first annual PRSP progress report. SBo Tom6 and Principe has made satisfactory progress in establishing mechanisms to ensure efficient and transparent use o f HIPC debt relief, increasing transparency and accountability in the management o f public resources, and implementing measures to improve health and education. Overall macroeconomic stability was maintained during most o f the interim period o f 2001-06, as evidenced by robust growth and broad control o f inflation. Implementation o f macroeconomic policies was broadly satisfactory under the PRGF-supported program approved in August 2005. Since mid-2006 fiscal policy adjustment and the central bank’s more active use o f policy instruments are addressing the recent increase in inflation. 70. S l o TomC and Principe’s debt situation will improve significantly after it receives enhanced HIPC assistance and MDRI debt relief. Assurances o f participation in the enhanced HIPC Initiative have been obtained from creditors representing 85 percent o f the total NPV o f debt. If o i l production materializes, SBo Tom6 and Principe should be able to weather large adverse shocks over the medium term. However, if o i l production does not materialize or i s substantially lower than expected, debt could quickly become unsustainable ifthere are no corrective adjustment policies. This possibility underscores the need for continued prudent fiscal and debt management policies and for structural reforms to support broad-based growth. 71. The staffs of IDA and IMF therefore recommendthat the Executive Directors determine that S l o TomC and Principe has reached the completion point under the enhanced HIPC Initiative and that additional assistance (topping up) beyond that already committed at the decision point in the amount of US$25 million in NPV terms be granted to lower S l o Tom6 and Principe’s NPV o f debt-to-exports ratio at end-2005 to 150 percent. The additional assistance from IDA and IMF would be disbursed when other creditors provide satisfactory assurances o f their participation in this exceptional effort. v. FOR DISCUSSION ISSUES 72. Executive Directors may wish to consider this report in terms o f the following questions: Completion point: D o Directors agree that SBo Tom6 and Principe met all floating triggers for reaching the completion point under the enhanced HIPC Initiative, as established at the decision point? 39 Data revision: D o Directors agree with staffs’ recommendation that the proposed revision in the stock o f debt in NPV terms warrants a revision in the amount o f HIPC assistance? 0 Topping up o f HIPC Initiative assistance: D o Directors agree that the deterioration in S5o Tom6 and Principe’s debt sustainability i s primarily attributable to a hndamental change in i t s economic circumstances due to exogenous factors? If so: (i)D o Directors agree that exceptional additional HIPC Initiative assistance be granted to lower S5o Tom6 and Principe’s NPV o f debt-to-exports ratio to 150 percent? (ii) D o Directors agree that this additional assistance be granted when the Boards decide that other creditors have provided sufficient assurances to participate in this exceptional effort? 0 MDRI:D o IMF Directors agree that S5o Tom6 and Principe qualifies for an amount o f debt relief by the IMF equal to SDRl.43 million? If topping up i s approved, do IMF directors agree that the debt relief will be financed by SDR0.99 million from the MDRI-I Trust and SDR0.44 million from HIPC topping-up assistance disbursed to S5o Tom6 and Principe’s HIPC umbrella subaccount when satisfactory financing assurances are in place? D o Directors agree that the authorities have adequate monitoring mechanisms to ensure that debt relief i s used according to i t s intended purposes? Creditor participation:D o Directors agree that S5o Tom6 and Principe’s creditors have given sufficient assurances to irrevocably commit HIPC Initiative assistance to S5o Tom6 and Principe? Debt sustainability:D o Directors agree with the staff assessment that Stio Tome and Principe’s debt sustainability i s likely to be maintained over the medium and longterm only if o i l discovery and production materializes? D o they share the staff assessment o f the risks that may emerge if the authorities do not actively pursue policies to encourage prudent fiscal and debt management policies? 0 Comparable treatment: D o the Directors agree that S5o Tom6 and Principe should continue to seek debt relief from i t s non-Paris Club creditors within the framework o f the HIPC Initiative and that the staffs should continue to monitor the delivery o f the debt relief from all creditors? 0 d 41 Table 2. SBo Tome and Principe: Balance o f Payments, 2003-10 2003 2004 2005 2006 2007 2008 2009 2010 Est. Proj. (Millions of US. dollars, unless otherwise specified) Current account balance (excluding official transfers) I/ -33.5 -37.8 -44.7 -71.8 -78.2 -86.4 -94.1 .103.3 Ofwhich : non-oil current account balance I/ -33.5 -37.8 -44.9 -57.8 -56.6 -60.4 -64.8 -70.0 Trade balance I/ -27.0 -32.4 -38.2 40.0 -65.9 -71.6 -77.6 -84.7 Ofwhich : non-oil trade balance I/ -38.2 -49.6 -51.1 -54.8 -58.8 -63.5 Exports, f.0.b. 6.6 3.6 3.4 3.2 3.3 3.5 3.6 3.7 Ofwhich : cocoa 6.1 3.2 3.0 3.0 2.9 2.9 3.0 3.0 Imports, f.0.b. 1/ -33.6 -36.0 -41.6 -63.2 -69.3 -75.1 -8 1.2 -88.3 Services and income (net) -8.4 -7.5 -8.0 -13.4 -13.9 -16.5 -18.3 -20.5 Exports of nonfactor services 14.1 16.6 17.7 19.3 20.5 22.0 23.6 25.3 Ofwhich : travel and tourism 10.6 12.8 13.6 14.9 15.9 17.1 18.4 19.8 Imports o f nonfactor services -19.7 -21.0 -22.7 -30.0 -32.6 -37.4 -40.7 -44.5 Factor services (net) -2.8 -3.1 -3.0 -2.7 -1.9 -1.1 -1.2 -1.4 Interest due -2.8 -3.1 -3.2 -3.5 -2.3 -2.1 -2.0 -2.0 Permanent o i l fund interest earnings 0.0 0.0 0.2 0.8 0.4 1.0 0.8 0.7 Private transfers (net) 1.8 2.1 1.5 1.6 1.7 1.7 1.8 1.9 Official transfers (net) 20.1 23.0 22.7 25.6 22.5 24.0 25.5 27.0 Current account balance, including official transfers -13.4 -14.9 -22.1 -46.2 -55.7 -61.4 -68.6 -76.3 Ofwhich : non-oil current account balance I/ -13.4 -14.9 -22.3 -32.2 -34.1 -36.4 -39.3 -43.0 Capital and flnanclal account balance 2.3 1.9 53.1 30.4 62.2 79.6 61.9 71.0 Capital transfer 2/ 0.0 0.0 0.0 0.0 162.7 0.0 0.0 0.0 Financial account 2.3 1.9 53.1 30.4 -100.5 79.6 61.9 71.0 Public sector (net) -0.6 2.5 29.7 -5.6 -149.9 24.7 -1.0 -1.2 Project loans 1.9 3.9 1.3 4.4 1.9 1.9 I .9 1.9 Program loans 0.0 0.0 0.0 0.0 1.5 2.0 2.0 2.0 O i l signature bonuses 3/ 0.0 0.0 49.2 0.0 28.6 26. I 0.0 0.0 Amortization 4/ -7.6 -7.5 -8.9 -5.5 -163.5 -0.9 -0.9 -0.9 Other investment 5.0 6.0 -11.9 -4.5 -18.4 -4.4 -4.0 -4.2 Private sector (net) 2.9 -0.6 23.3 36.0 49.3 54.8 62.8 72.1 Direct foreign invesment 3.4 3.5 5.2 29.4 28.4 30.4 32.4 34.8 Ofwhich : petroleum-related investment 0.0 0.0 0.0 14.8 14.8 16.8 18.8 21.2 Commercial banks -2.0 -1.3 -8.5 4.2 0.0 0.0 -2.5 -1.0 Short-term private capital 1.5 -2.8 26.5 2.4 20.9 24.4 32.9 38.3 E r r o r s and omlsslons 13.1 2.0 1.5 0.0 0.0 0.0 0.0 0.0 Overall balance 1.9 -11.0 32.5 -15.8 6.4 17.2 -6.7 -1.3 Financing -1.9 11.0 -32.5 15.8 -6.4 -17.2 6.7 5.3 Change in net international reserves, excl. N O A (increase -) -5.9 6.0 -8.7 -1.6 -1.9 -2.0 -3.0 -3.5 Use o f Fund resources (net) 5/ 0.0 0.0 0.5 0.7 -0.2 0.6 0.0 0.0 National O i l Account (increase -) 0.0 0.0 -23.3 14.8 -6.0 -24.2 6.9 5.7 Change in medium- and long-term arrears (net; decrease -) 6/ 4.0 5.0 -14.6 1.9 -10.2 0.0 0.0 0.0 Debt relief (HIPC bilateral) 2/ 0.0 0.0 0.2 0.0 1.7 1.6 1.6 1.6 Rescheduling arrears 0.0 0.0 13.3 0.0 10.2 0.0 0.0 0.0 Residual financing gap 0.0 0.0 0.0 0.0 0.0 6.7 1.2 1.5 Memorandum Items: Scheduled external debt service before HIPC and MDRl debt relief 7/ 50.3 52.3 57.2 40.1 38.3 38.5 38.2 37.3 External debt service a ef lr HIPC and MDRI debt r e l i e f 71 E/ 15.4 11.8 48.1 19.0 5.9 5.3 4.9 4.5 Current account balance, incl. official transfers (percent o f GDP) -22.7 -23.1 -30.7 -58.6 -61.6 -63.4 -63.1 -63.4 Current account balance, excl. official transfers (percent o f GDP) -56.7 -58.8 -62.3 -91.0 -86.5 -87.7 -86.6 -85.9 Trade balance (percent o f GDP) -45.6 -50.3 -53.3 -76.0 -72.9 -72.8 -7 1.4 -70.4 Gross reserves (months of following year's imports o f goods and nonfactor services) 91 4.8 3.4 4.1 4.4 4.4 4.3 4.4 4.6 Sources: S l o Tomb and Rincipe authorities, and I M F staff estimates and projections. From 2006, current account deficit increases reflecting higher investment-related imports o f goods and services for Block 1 and foreign investment in the tourism sector. I/ 21 Assumes HIPC Initiative completion point and MDRl debt relief i n 2007. 3/ O i l Signamre Bonuses for Blocks 5 and 6 i n JDZ, totaling USS26.1 million, originally assumed for 2006, are now projected for 2007. 4/ For 2007, assumes HIPC Initiative completion point and delivery of MDRI debt relief by I D A and A t D F as stock o f debt reduction. 51 For 2007, assumes MDRI assistance from the I M F as a stock o f debt reduction totaling SDR 1.6 million. n2005 includes the new Paris Club rescheduling agreement. For 2007, assumes rescheduling agreement with non-Paris Club bilateral creditors for current maturities and stock 6/ I ofarrears. 7/ In percent o f current year exports o f goods and nonfactor services; includes obligations to the IMF. 81 Includes settlement o f arrears. 9/ Gross reserves exclude the National O i l Account and guarantee deposits placed at the central bank b y fmancial institutions pending operating licenses; h p o r t s exclude o i l sector- related imports o f capital goods and services. 42 Table 3. SHo Tomb and Principe: Nominal and Net Present Value of External Debt Outstanding at End-December 1999 11 (Millions of U.S. dollars) N P V o f debt Nominal debt after rescheduling 21 From decision point Revised From decision point Revised Total 294.0 292.9 1117.53 119.7 Multilateral institutions 168.1 168.1 81.9 84.5 IDA 60.9 60.9 28.7 28.1 ADF 88.9 88.8 41.4 41.4 IMF EU 1.2 1.2 1.0 1.o IFAD 6.7 6.7 3.4 3.4 BADEA 8.19 8.2 5.6 8.2 31 OPEC Fund 2.2 2.2 1.8 1.8 Bilateral and commercial 125.9 124.8 35.6 35.2 41 Paris Club 51.8 51.8 17.4 17.4 Belgium 1.o 1.o 0.6 0.6 France 6.8 6.8 3.3 3.3 Germany 13.3 13.3 4.4 4.4 Italy 16.6 16.6 5.5 5.5 Russia 10.9 10.9 0.9 0.9 Spain 3.3 3.3 2.7 2.7 Non-Paris Club official bilateral 69.3 68.2 16.6 16.2 Algeria 1.3 1.3 0.4 0.4 Angola 22.3 21.4 7.4 7.0 Cape Verde 0.2 0.2 0.2 0.2 China 16.7 16.6 2.3 2.3 Portugal 51 28.7 28.7 6.3 6.3 Yugoslavia, former 61 Commercial creditors 4.8 4.8 1.6 1.6 Annandale Associated 61 4.8 4.8 1.6 1.6 Sources: SHo Tom6 and Pnncipe authorities, World Bank and I M F staff estimates. 11Public and publicly guaranteed debt only. 21 Assumes a stock-of-debt operation on Naples terms (67 percent N P V reduction) and at least comparable action b y other official bilateral and commercial creditors. 31 Reflects the NPV o f debt owed to BADEA before the implementation o f the debt rescheduling agreement. 41 Data were revised because beter data became available. 51 A t the decision point, Portugal was classified as a Paris-Club creditor and is now reclassified as a non Pans-Club creditor. 61 This commercial debt was originally a debt to Yugoslavia, which was bought b y Annandale Associated. Table 4. SBo Tome and Principe: Estimated Assistance at Decision Point (Amended) 1/ (Millions o f U.S. dollars in N P V terms at the end o f 1999, unless otherwise indicated) Total Assistance Under the NPV of Debt- to-Exports Criterion 21 Common Reduction NPV of Debt-to- Factor at the Decision Exports-Target Total Bilateral Multilateral Point 31 (Percent) (Millions of US. dollars) (Percent) Assistance at decision point 150 97.0 29.4 67.6 82.6 Assistance revised at decision point 150 99.2 29.2 70.0 82.9 Memorandum items: N P V of debt 4/ ... 118 36 82 N P V o f debt (revised) ... 120 35 84 Three-year average o f exports ... 14 Current-year exports ... 16 ... ... NPV of debt-to-exports 51 ... 861 ... ... Sources: SPo Tom6 and Principe authorities, and World Bank and IMF staff estimates and projections. 11The proportionalburden-sharingapproach i s described in "HIPC Initiative-Estimated Costs and Burden Sharing Approaches" (EBSI971127,7/7197 and IDNSEC M 97-306,717197). 2/ Applies a hypothetical stock-of-debt operation on Naples terms and comparable treatment by other official bilateral creditors at the end o f December 1999. 3/ Each creditor's NPV reduction at the decision point in percent of its exposure at the decision point. 41 Based on latest data available at the decision point aRer full application o f traditional debt relief mechanisms. 51 Uses a three-year average of exports of goods and nonfactor services centered on previous year. 44 Table 5. SEo Tom6 and Principe: External Public Debt Outstanding at end-December 2005 1/ (Millions o f US. dollars) Legal Situation 21 NPV o f Debt 31 Nominal Debt NPV o f Debt After Enhanced After Aditionnal HIPC Bilateral Assistance Total 324.6 240.8 61.1 56.1 Multilateral 200.2 127.9 51.1 51.1 IDA 72.1 44.4 18.8 18.8 ADF 99.8 61.2 20.3 20.3 IMF 3.2 2.8 2.8 2.8 EU 5.2 4.5 4.5 41 4.5 IFAD 8.6 5.3 1.0 1.0 OPEC Fund 7.4 6.4 3.0 3.0 BADEA 3.9 3.3 0.7 0.7 Bilateral and commercial 124.4 112.9 10.6 5.0 Paris Club 45.4 42.3 5.6 51 0.0 51 Belgium 1.1 0.6 France 7.1 5.8 Germany 5.1 5.5 Italy 24.6 24.6 Russia 3.4 2.0 Spain 4.2 3.9 Non-Paris Club oMcial creditors 74.3 65.7 4.5 4.5 Algeria 1.3 1.3 0.1 0.1 Angola 22.3 22.3 2.5 2.5 Cape Verde 0.0 0.0 0.0 0.0 China 16.7 14.0 0.5 0.5 Portugal 34.0 28.2 1.5 1.5 Yugoslavia, former Commercial 4.8 4.8 0.5 0.5 Annandale Associated 4.8 4.8 0.5 0.5 Sources: SPo Tome and Principe authorities, and World Bank and I M F staff estimates 11Figures are based on data as o f the end of 2005. 21 Reflects the external debt situation as o f the end o f 2005, and includes the 2005 Cologne flow. 31 Assumes full delivery o f HIPC assistance as o f the end o f 2005. .O million o f interim relief in end-1999 NPV 41 Based on information provided b y the creditor and confirmed with the authorities, the EU provided a total o f US%] terms, covering its full share o f HIPC assistance. 51 Pans Club creditors deliver their share o f assistance as a group. Actual delivery modalities are defined case b y case 45 Table 6. S i 0 Tome and Principe: Status of Creditor Participation Under Enhanced HIF'C Initiative HIPC Assistance as of the HIPC Assistance as ofthe Decision Point Document CompletionPoint Debt Relief Percentage o f Satisfactory Modalitiesto Debt Relief Percentage o f in NPV T m Total Assistance Reply Deliver Debt Relief in NPV T m Total Assistance (Millions U.S.dollars) (US$ Millions) IDMBRD 23.7 24.4 Yes Interim assistance is equivalentto a 90 percentreduction on Sb Tome 23.8 24.0 and Principe's debt service to IDA. After completionpoint, IDA will provide a cumulativenominal assistance ofUSF45.6 million, as approved at the decisionpoint AfDF 34.2 35.3 Yes Interim assistance was equal to 80.0% debt service reductionamounting 34.3 34.6 to US$ 6.7 million. Remainingassistance, as approved in the decision point document, will be delivered at completionpoint equal to an 80% debt service reductionuntil 2038. IMF rda The IMF did not have exposure 10 Sb Tome as Debt at the time of the DecisionPoint. IFAD 2.8 2.9 Yes Assistance will be delivered at the completionpoint through a 2.8 2.8 reductionofdebt service payments on eligible debt by up to 100 percent until the target in NPV t m i s reached Preliminary estimates show that IFAD's relief could be delivered over 7 years OPEC Fund 1.5 1.5 Yes Interim asistance has beenprovidedthrougha concessional loans which 1.5 1.5 resources are being used to repay debt service on OPEC Fund loans until the resources are exhausted. EU 0.8 0.9 Yes The EU has provideddebt-servicereliefon selected loans during the 0.8 0.8 interimpeiod. Total interim assistance m u n t to USF1.4 million in nominal terms. BADEA 4.6 4.8 Yes A total ofUS162.8 million (in npv terms) in interim assistancehas been 6.8 6.8 providedby BADEA throughareschedulingagreement signed in 1999. After completionpoint the rest of the assistance could be provided througha cancelationofpayments outstanding andi or additionalgrants. Total multilateral 61.6 69.1 70.0 70.6 Paris Club Creditors 14.4 14.8 Yes Interim assistance i s provided throughCologne term flow relief and 14.5 14.6 several ofthe creditors have cancelled 100 percentof flow duringthe interimperiod. The Paris Club creditors will deliver the rest of the relief at the completionpoint. Non-ram Llub Lrfflitors 17 7 IA 1 19P 175 Algeria 03 0.4 No 0.3 0.3 Angola 6.1 6.3 No 5.8 5.8 Cape Verde 0.2 0.2 No 0.2 0.2 China 1.9 2.0 No 1.9 1.9 Portugal 5.2 5.3 No 5.2 5.2 Yugoslavia, former No Commercialcreditors 1.3 1.3 1.3 1.3 Annandale Associated 1.3 1.3 No 1.3 0. I Total bilateral and commercial 19.4 30.3 29.1 19.4 TOTAL 97.0 100.0 99.1 100.0 Sources: SLo Tome and Principe authorities;and World Bank and IMF staff estimates. 46 Table 7. Comparison o f Discount Rate and Exchange Rate Assumptions Discount Rates 1/ 2/ Exchange Rates (Percent per annum) (US. dollar per currency) At Decision At Completion At Decision A t Completion Point Point Point Point end-1999 end-2005 end- 1999 end-2005 Currency United States dollar 7.04 5.08 1.oo 1.oo Special drawing right 5.59 4.30 1.37 1.43 Euro 5.47 3.95 1.oo 1.18 Canadian dollar 6.67 4.69 0.69 0.86 s w i s s franc 4.27 2.76 0.63 0.76 Chinese yuan 5.59 4.30 0.27 0.12 Japanese yen 1.98 1.91 0.01 0.01 Swedish kroner 5.80 4.30 0.12 0.13 Memorandum item: Paris Club cut o f f date: April 1, 1999 Sources: OECD; and IMF, International Financial Statistics. 1/ The discount rates used are the average commercial interest reference rates (CIRRs) for the respective currencies over the six-month period ending in December 2005 for the completion point and in December 1999 for the decision point. 2/ For all euro area currencies, the euro CIRR i s used. For the Kuwaiti dinar, the US. dollar CIRR i s used for completion point calculations (compared to the decision point calculations, when the SDR CIRR was n the beginning o f 2003. For all used), in accordance to the explicit peg o f the dinar to the US. dollar i currencies for which the CIRRs are not available, the SDR discount rate i s used as a proxy. :I' ' m m r4 Y ? ? .. .. ... . . I ' : m o w m ' m m M . ? - -\d v)m 2 3 49 Table 10. SHo Tome and Principe: Net Present Value ofExternalDebt, 2005-2026 li (Mlllloni of U.S.dallsrr, unless othrrmrr Indicated) Actual6 Pmjstions Avwgu 2WS 2006 2W7 2008 2W9 2010 2011 2012 2013 2020 2026 2W6l5 201626 I.After lradluonaldebt-rellef mechanlrnu 2! 1. NPVoftaaldebt(2+6) 173.5 176.2 178.0 178.5 117.9 177.0 176.1 171.3 165.7 125.1 82.8 171.4 117.3 2. N P V o f o u ~ n d i n g d e b t ( 3 + 4 ) 173.5 171.9 169.7 166.8 163.9 160.9 158.0 154.2 150.3 119.3 77.2 158.4 110.9 3. Official bilatual and commmial 45.5 45.7 45.8 45.9 46.1 46.2 462 46.2 46.1 40.4 24.4 45.9 36.8 ParisClvb 32.7 32.7 32 6 32.6 32.5 32.4 32.2 32.0 31.7 25.6 13.0 32.1 22.9 G h t s official bilatual and commucial 12.8 13.0 13 2 13.4 13.6 13.8 14.0 14.2 14.4 14.8 11.4 13.9 14.0 4. Multilateral 127.9 126.2 123.9 120.9 117.8 114.7 111.7 108.0 104.2 78.8 52.8 112.5 74.1 IDA 44.4 4.5 4.5 44.3 44.0 43.6 42.8 41.6 40.3 29.7 17.5 42.2 27.4 IMP 2.8 2.3 1.9 1.4 0.9 0.5 0.4 0.3 0.2 0.0 0.0 0.8 0.0 ADP 61.2 61.3 61.1 60.6 60. I 59.6 58.6 57.5 56.2 45.1 32.7 58.3 42.8 Gthss 19.6 18.1 16.4 14.6 12.8 11.0 9.9 8.7 7.5 4.0 2.7 11.1 3.9 11. After rnhnncrd H I P C saslitsnce 1. N P V oft& debt (2t6j 238.8 243.3 68.0 70.3 71.6 72.8 73.7 71.6 68.8 54.0 43.7 86.8 52.7 N P V o f total debt zRs full delivay 31 61 7 64.7 68.0 70.3 71.6 72.8 73.7 71.6 68.8 54.0 43.7 69.0 52.7 Mvltilatsl l 51.1 49.6 49.0 48.2 47.4 46.6 45.9 45.0 44.2 40.2 32.0 46.1 38.8 Bi1atsl l 10.6 10.9 10.7 10.5 10.2 10.0 9.7 9.5 9.2 7.8 6.2 9.9 7.5 2. NPV ofoublmdingdebt(3+4) 238.8 239.0 59.7 58.7 57.6 56.6 55.6 54.5 53.4 48.1 38.2 73.8 46.3 3. Officul bilateral and commmial 115.6 117.8 10.7 10.5 10.2 10.0 9.7 9.5 9.2 7.8 6.2 20.5 7.5 Pans Club 42.5 43.1 55 5.4 5.3 51 5.0 4.9 4.8 4. I 3.8 8.8 4.0 Gthsafficiai bilalsal andcommscial 73.1 74.7 5.2 5.1 5.0 4.9 4.7 4.6 4.5 3.8 2.4 11.7 3.5 4. Multilateral 123.2 121.2 49.0 48.2 47.4 46.6 45.9 45.0 44.2 40.2 32.0 53.3 38.8 IDA 43.1 43.1 20 5 20.5 20.5 20.4 20.3 20.1 19.9 17.4 13.9 22.4 16.7 IMF 2.8 2.3 1.9 1.4 0.9 0.5 0.4 03 0.2 0.0 0.0 0.8 0.0 ADF 58.3 58.0 19.5 19.9 20.3 20.7 20.9 21.0 21.1 21.8 17.5 24.4 21.1 mu5 19.1 17.8 7.1 6.4 5.7 5.0 4.2 3.6 2,9 1.0 0.6 5.6 I.o 111. After bilnterd debt rdief beyond HIPC assistance 41 1. NPV o f total debt (2%) 196.3 200.3 62 5 64.9 66.3 67.6 68.7 66.7 64.1 49.9 39.9 78.0 48.6 N P V oflolal debt a R r full dclivay 31 56.1 59.1 62.5 64.9 66.3 67.6 68.7 66.7 64.1 49.9 39.9 63.9 48.6 Mulnlorerol 51.1 49.6 49.0 48.2 4 14 46.6 45.9 45.0 44.2 40.2 32.0 46.1 38.8 Btlaaml 50 5.2 5.2 5.1 5.0 4.9 4.7 4.6 4.5 3.8 2.4 4.8 3.5 2. NPVafoulstmdhgdebt(3t4) I96 3 196.0 54.2 53.3 52.3 51.5 50.6 49.6 48.6 44.0 34.4 65.0 42.3 3. Official bilalual and wmmucial 73.1 74.7 5.2 5. 1 5.0 4.9 4.7 4.6 4,s 3.8 2.4 11.7 3.5 P m s Club 0.0 00 0.0 00 00 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 oths official b i l a t s l l and commercul 73.1 74.7 5.2 5.1 5.0 4.9 4.7 4.6 4.5 3.8 2.4 11.7 3.5 4. Multilatsll 123.2 121.2 49.0 48.2 47.4 46.6 45.9 45.0 44.2 40.2 32.0 53.3 38.8 N ~u~ .After raralblc t o e ~ i n amlstance 41 1. NPVoftotlldebt(2ffi) 191.6 195.5 37.2 40.1 42.1 43 9 45.4 43.9 41 9 30.6 29.2 56.6 30.9 NPV o f total debt a R s full dclivav 31 31.0 33.7 31.2 40.1 42.1 43.9 45.4 43.9 41.9 30.6 29.2 40.4 30.9 Mulrlloleml 28.2 26.6 26.1 25.8 25.4 25.1 24.7 24.4 24.0 22.7 22.2 24.9 22.6 Biloleml 2.8 2.9 2.8 2.8 2.7 2.6 26 2.5 24 2. I 1.4 2.6 1.9 2. NPVofautstandhadebt(3t4) 191.6 191.2 28.9 28.5 28.1 27.7 27.3 26.9 26.4 24.7 23.7 43.6 24.5 3. Official bilatazl and commmial 68.4 70.0 2.8 2.8 2.7 2.6 2.6 2.5 24 2. I 1.4 9.3 1.9 4. Multilatual 123.2 121.2 26.1 25.8 25.4 25.1 24.7 24.4 24.0 22.7 22.2 34.3 22.6 IDA 43.1 43.1 10.8 11.0 11.3 11.5 11.7 11.9 12.1 13.8 15.6 14.8 14.1 IMF 2.8 2.3 0.7 0.6 0.4 0.3 0.3 0.3 0.2 0.0 0.0 0.5 0.0 ADF 58.3 58.0 11.2 11.1 11.0 10.9 10.7 10.5 10.3 8.3 6.0 15.4 7.8 othw 19.1 17.8 3.4 3.1 2.7 2.3 20 1.7 1.3 0.6 0.6 3.6 0.1 V. After MDRI arrirtmce and bilsterd debt rdirfbeyonrIHIPC 41 1. NPVoflotaldebt(2t6j 196.3 200.3 23.1 25.8 21.4 28.8 29.8 28.0 25 5 13.6 11.5 43.1 13.7 NPV oftotal debt a R s full delivery 31 18.1 19.6 23.1 25.8 27.4 28.8 29.8 28.0 25s 13.6 11.5 25.1 13,7 Muliiloieml 13.2 10.1 9.6 9.0 8.4 7.8 7.0 6.3 5.6 3.9 3.5 7.3 3.9 B,loierol 5.0 5.2 5.2 5.1 5.0 4.9 4.7 4.6 4.5 3.8 2.4 4.8 3.5 2. NPVofouWndinedebt(3t4) 196.3 196.0 14.8 14.1 13.4 12.7 11.7 11.0 10.1 7.7 6.0 30.2 7.4 3. Officialbilateral and commclcial 73.1 74.7 5.2 5.1 5.0 4.9 4.7 4.6 4.5 3.8 2.4 11.7 3.5 4. Multilatcnl 123.2 121.2 9.6 9.0 8.4 7.8 7.0 6.3 5.6 3.9 3.5 18.4 3.9 IDA 43.1 43.1 1.8 1.9 2.0 2.0 2.1 2.1 2.2 2.6 2.6 6.2 2.6 IMP 2.8 2.3 0.5 0.5 0.5 0.5 0.4 0.3 0.2 0.0 0.0 0.6 0.0 ADF 58.3 58.0 0.2 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 6.0 0.3 GthP) 19.1 17.8 7.1 6.4 5.7 5.0 4.2 3.6 2.9 1.0 0.6 5.6 1.0 VI. After MDRl P(sii1mct and p r r l b l e topplng-up 41 I.NPVoftatlldebt(216) 191.6 195.5 17.5 20.6 22.7 24.6 26.2 24.9 22.6 11.2 11.3 39.2 11.8 N P V o f total debt a R s full dclivay 31 12.5 13.8 17.5 20.6 22.7 24.6 26.2 24.9 22.6 11.2 10.3 21.1 11.7 Mulnloaml 9,s 6.6 6.4 6.2 6.0 5.8 5.6 5.4 4.8 3.3 3.3 5.5 3.4 Bilaarnl 2.8 2.9 2.8 2.8 2.7 2.6 2.6 2.5 2.4 2. I 1.4 2.6 1.9 2. NPVofoutstandingdsbt(3t4) 191.6 191.2 9.3 9.0 8.7 8.4 8. I 7.9 7.2 5,4 5.7 26.3 5.4 3. Officul bilatual and commmial 68.4 70.0 2.8 2.8 2.1 2.6 2.6 2.5 2.4 2. I 2.4 9.3 2.0 Paris Club 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.0 0.0 0. I Gths official bilaleral and commucial 68.4 70.0 2.8 2.8 2.7 2.6 2.6 2.5 2.4 2. I 1.4 9.3 1.9 4, Multilateral 123.2 121.2 6.4 6.2 6.0 5.8 5.6 5.4 4.8 3.3 3.3 16.9 3.4 M e l m r n n d u m ilenu: 6. N P V o f nw bornwing 4.3 8.3 11.6 14.0 16.1 18.1 17.1 15.4 5.9 5.6 13.0 6.4 Official b i l a t s l l 0.0 o ..n .n_ o n ..n n ..o n ..o n ..o n ..o n ..o 0 ..0 0.0 .~ 0.0 Multilateral ... 43 8.3 11.6 14.0 161 18.1 171 15.4 5.9 5.6 13.0 6.4 Sources. S b Tam6 and Rincipe authoritia; and World BanL and IMP staff mbatuand p m j e c t i m I/ R c f m to public and publicly cxterml debt only and is discounted on the bars o f the average wmmucial intscat refercncc rate forthc -live cynency, d m v d o v a thc su-month pmcd prior to the l a t i t date for which actual data are available ( D e c m b s 2WS). U Assume a stoekafdcbt opwtion on Naplsa 1-8 (67 puccnl N P V duction) 1s o f md-2005, and at lcast comparableaction by other official bilateral and commercul creditors. 31NPVoftataldcbtzssvmingthcmtircHIPClnitiativcl~siatvlcenfullydelivardasofcnd-200S. 41 hcluduadditional debt d c f p m v i d d on a vohtnm b u i s by the Paris Club and some wmmercial crditors bcyond the quirmmts ofthc mhancd HIPC framework. 50 Table 11. SBo Tome and Principe: External Debt Service After Full Implementationo f Debt-ReliefMechanisms, 2006-26 (Millions o f U.S.dollars, unless otherwise indicated) F’mjections Annual Averages 2006 2007 2008 2009 2010 2011 2012 2013 2020 2026 200645 2016-26 I. Total debt service 9.1 9.7 10.4 11.0 11.2 11.3 12.1 12.7 11.3 11.6 11.3 11.6 After tradltlonal debt-rellefmecbanisms I 8.9 9.4 10.0 10.0 9.9 9.6 10.4 10.4 10.6 11.4 9.9 10.8 Multilateral 7.0 75 8.1 80 8.0 7.7 8.3 8.2 7.2 7.0 7.9 7.2 IDA 1.8 2.0 2.1 2.2 2.3 2.6 3.1 3.1 3.0 3.1 2.5 3.1 IMP 0.6 0.6 0.6 0.6 0.4 0.1 0. I 0.1 0.0 0.0 0.3 0.0 ADF 2.3 2.5 2.8 2.8 2.8 3.2 3.4 3.4 3.6 36 3.1 3.6 0th 2.4 2.5 2.6 2.5 2.4 1.7 1.6 1.5 0.6 0.3 1.9 0.5 Official bilateral 1.9 1.9 1.9 1.9 2.0 2.0 2.1 2.2 3.4 4.4 2.1 3.7 Paris Club 1.4 1.4 1.5 1.5 1.5 1.5 1.6 1.7 2.6 2.9 16 2.7 Other official bilateral and commercial 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.8 1.5 0.5 1.0 11. Total debt service 4.0 3.5 3.8 4.5 4.6 4.9 5.1 5.7 3.3 5.2 4.8 3.9 Alter enhanced HIPC assistance 3.8 3.2 3.5 3.5 3.3 3.3 3.3 3.4 1.6 5.0 3.4 3.1 Multilateral 3.6 2.6 2.8 2.8 2.7 2.7 2.7 2.7 2.1 4.3 2.8 2.6 IDA 0.4 0.4 0.5 0.5 0.5 07 08 0.8 0.8 3.1 0.6 I.3 IMF 0.6 0.6 0.6 0.6 0.4 0.1 0.1 0. I 0.0 0.0 0.3 0.0 ADP 0.6 0.7 0.8 0.8 0.8 0.9 1.0 1.0 1.1 1.2 0.9 1.2 Othm 2.0 0.9 1.0 1.0 1.0 1.0 0.8 0.8 0.2 0.1 1.0 01 Official bilateral 0.2 0.6 0.7 0.7 0.7 07 0.7 0.7 0.5 0.6 0.6 05 Paris Club 0.2 0.4 0.4 0.4 0.4 0.4 0.4 0.3 0.2 0.2 0.3 02 Other official bilateral and commercial 0.0 0.2 0.3 0.3 0.3 0.3 0.3 0.3 03 04 0.3 0.3 111. Total debt service 3.8 3.1 3.5 4.1 4.3 4.6 4.8 5.4 3.1 5.0 4.5 3.7 After bilateral debt rdlefbtyond HlPC 2 3.6 2.8 3.1 3.1 3.0 3.0 3.0 3.0 1.4 4.7 3.1 2.9 Multilateral 3.6 2.6 2.8 2.8 2.7 2.7 2.7 2.7 2. I 4.3 2.8 2.6 Official bilateral 0.0 0.2 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.4 03 0.3 Paris Club 0.0 0.0 00 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 ~ 0 t h official bilateral and commercial 0.0 0.2 0.3 0.3 03 0.3 0.3 0.3 0.3 0.4 0.3 0.3 N.Total debt servlce 3.8 2.0 1.9 2.6 2.8 3.1 3.4 3.9 1.8 1.5 3.2 1.0 U After posslbletoppping-up of HIPC a~slmance 3.6 1.7 1.6 1.6 1.5 1.5 1.6 1.5 1.2 1.2 1.8 1.2 Multilateral 3.6 1.6 1.4 1.4 1.4 1.4 1.4 1.4 1.0 1.0 1.6 1.0 IDA 0.4 0.3 0.2 0.2 0.2 0.3 0.3 0.3 0.3 0.3 0.3 0.3 IMF 0.6 0.4 0.2 0.2 0.1 0.0 0.0 00 00 0.0 0.2 0.0 ADF 0.6 0.4 0.5 os 0.5 0.6 0.6 0.6 07 0.7 0.6 0.7 others 2.0 0.5 0.5 0.5 0.5 0.5 0.4 0.4 0.1 0.1 06 0.0 Official bilateral 00 0. I 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.2 0. I 0.1 Paris Club 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other official bilateral and commercial 0.0 0. I 0.2 0.2 0.2 0.2 0.2 0.2 0. I 0.2 0.1 0.1 V. Total debt aervlce 3.8 1.4 1.7 1.3 2.6 3.0 3.1 3.7 1.2 1.0 2.9 1.4 After MDRI and bilateral debt rellef beyond HIPC u 3.6 1.1 1.3 1.3 I.3 1.4 1.3 1.3 0.5 0.7 1.5 0.5 Multilateral 3.6 0.9 1.0 1.0 1.0 1.1 1.0 1.0 0.2 0.3 1.2 0.2 IDA 0.4 0.0 00 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.1 0.1 IMF 0.6 0.0 00 0.0 0.0 0. I 0.1 0. I 0.0 0.0 01 0.0 ADF 0.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 Othm 2.0 0.9 1.o 1.0 1.0 1.0 0.8 0.8 0.2 0. I 1.0 0. I Official bilateral 0.0 0.2 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.4 0.3 0.3 Paris Club 0.0 0.0 00 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other official bilateral and commercial 0.0 0.2 0.3 0.3 0.3 0.3 03 0.3 0.3 0.4 03 0.3 VI. Total debt iervlce 3.8 0.9 1.0 1.7 2.0 2.3 2.4 3.4 1.1 0.7 2.4 1.2 Alter MDRI and posslble topping-up U 3.6 0.6 0.7 0.7 0.7 0.7 0.6 1.0 0.4 0.4 1.0 0.3 Multilateral 3.6 0.5 05 0.5 0.5 0.5 0.4 0.8 0.3 0.2 0.9 0.2 Official bilateral 0.0 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0. I 0.2 0. I 0. I Paris Club 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other official bilateral and commercial 0.0 0.1 0.2 0.2 0.2 0.2 02 0.2 0. I 0.2 0. I 0. I Memorandum Items: Debt serviceofnew debt 0.2 0.3 0.4 1.0 1.3 1.6 1.8 2.4 0.7 0.3 1.4 0.8 Multilateral 0.2 0.3 0.4 1.0 L3 1.6 1.8 2.4 0.7 0.3 1.4 0.8 Official bilateral 0.0 0.0 0.0 0.0 0.0 0.0 0.0 00 0.0 0.0 0.0 0.0 Nominal HIPC relief Under the enhanced HIPC initiative 5.1 6.2 6.5 6.5 6.6 6.3 7.0 70 8.0 6.4 6.5 7.7 a Tomb and Rincipe authorities: and World Bank and IMF staff estimates and projections. Sources: S I/Arsums a stock-of-debt operationon Naples t m (67 percent NPV reduction) as of end of 2005, and at least comparable action by other official bilateral and commercial creditom 21 Includesadditionaldebt reliefprovided on a voluntarybasis by the Pans Club and some commmial creditors beyondthe requirements of the enhanced HIPC framework. 51 Table 12. SHo Tome and Principe: External Debt Indicators, 2005-2026 1/ (Percent, unless otherwise indicated) Actuals ROlStiOnS Avoraga 2005 2006 2007 2008 2009 2010 2011 2012 2013 2020 2026 2006-15 201626 After tradltlond debt rellef mecbnnlrm Y NPV ofdcbbto-GDP ratio 242 223 197 181 164 147 132 33 13 II 9 111 10 NPV ofdebt-to-exports ratio 31 41 840 829 792 745 696 649 604 106 29 12 14 448 13 NPV ofdebt-to-revenueratio 51 1,003 758 687 627 562 501 339 148 33 23 28 369 24 Debt smite-to-exports ratio 40 41 41 40 39 36 3 1 1 2 24 I Debt smice-to-revenue ratio 51 39 37 36 35 32 22 II 3 2 4 22 2 After enhanced HIPC uilstance NPV ofdebt-to-GDP ratio 333 308 75 71 66 61 55 14 5 5 4 66 5 NPV ofdebt-to-exparts ratio 3141 1,156 1,145 303 293 280 267 253 44 12 5 8 261 6 NPV ofdebt-to-exports ratio (cxirnngdcbt only) 31 41 1,156 1,125 266 245 226 208 191 34 9 5 7 231 5 NPV ofdebt-to-exports ratio a f l n full delivery 31 41 61 299 305 303 293 280 267 253 44 12 5 8 177 6 NPV ofdebt-to-revenueratio 51 1,381 1,047 263 247 226 206 142 62 14 10 I5 222 II NPV ofdebt-to-revenueratio after full delivery 1 112005 5161 357 278 263 247 226 206 142 62 14 10 I5 145 II Debt serves-to-exportsratio 18 15 I5 16 16 16 1 0 0 1 10 0 Debt service-to-revenueratio 51 17 13 13 14 13 9 4 I I 2 9 1 After bilateral debt rcllrf beyond HIPC ssslatance 71 NPV ofdebt.to-GDP ratio 273 254 69 66 61 56 51 13 5 4 4 58 4 NPV ofdcbt-to-exports ratio 31 41 951 943 278 271 260 248 236 41 II 5 7 230 5 NPV ofdebl-to-exports ratio (cxtsting debt only) 31 41 951 922 241 222 205 189 174 31 9 4 6 200 5 NPV of debt-to-exports ratio afln full delivery 31 41 61 271 278 278 271 260 248 236 41 I1 5 7 163 5 NPV of debt-to-revenueratio 51 1,136 862 241 228 210 192 132 58 13 9 13 195 10 NPV of debt-to-revenueratio a h full delivery i n 2005 Si 61 324 254 241 228 210 192 132 58 13 9 13 134 10 Debt service-to-exportsrino 17 13 14 15 I5 I5 1 0 0 I 9 0 Debt smice-to-rmenne ratio 51 16 12 12 13 12 9 4 I I 2 8 1 After porrlblc toppplng-up of HIPC ssditmce NPV of debt-to-GDP ratio 267 248 41 41 39 37 34 8 3 3 3 46 3 NPV of debt-to-exports ratio 31 41 928 920 166 168 165 161 156 27 7 3 5 178 3 NPV of debt-to-exports ratio (existing debt only) 31 41 928 900 129 119 110 102 94 17 5 2 4 148 3 NPV ofdcbt-to-exports ratio afln full delivery 31 41 61 150 159 166 168 165 161 156 27 7 3 5 101 3 NPV ofdcbt-to-revenueratio 51 1,108 841 144 141 133 124 88 38 8 6 IO I53 7 NPV ofdebt-to-revenueratio a k r full delivery i n 2005 51 61 179 145 144 141 133 124 88 38 8 6 10 83 7 Debt service-to-exportsratio 17 8 8 9 1 0 1 0 I O 0 0 6 0 Debt $mice-to-revenue ratio 51 1 6 8 7 8 8 6 3 1 0 0 6 0 After MDRI and bllateral debt rdler beyoad HIPC NPV ofdebt-to-GDP ratio 273 254 26 26 25 24 22 5 2 I I 39 1 NPV ofdcbt-to-exports mho 3141 951 943 103 107 107 106 102 17 5 I 2 149 1 NPV ofdcbt-to-exports mho (cxahng dcbt only) 31 41 951 922 66 59 52 46 40 7 2 I I 120 1 NPV of debt-to-exports ratio afln full delivery 31 41 61 88 92 103 107 107 106 102 17 5 I 2 64 I NPV of debt-to-revenueratio 51 1,136 862 89 90 86 82 58 24 5 2 4 130 3 NPV ofdebt-lo-revenueratio aRsr full delivery in 2005 51 61 I05 84 89 90 86 82 58 24 5 2 4 52 3 Debt smiceto.exports ratio 1 7 6 7 9 9 1 0 1 0 0 0 6 0 Debt Emice-to-revenueratio 51 1 6 5 6 7 7 6 3 I O 0 5 0 After MDRI and ponlble topplng-up NPV ofdebt-to-GDP ratio 267 248 19 21 21 20 20 5 2 I I 36 I NPV ofdcbbto-exports ratio 31 41 928 920 78 86 89 90 90 I5 4 1 2 138 I NPV ofdebt-to-exports ratio (exuting debt only) 31 41 928 900 41 38 34 31 28 5 I I I 108 I NPV ofdebt-to-exports ratio afln full delivery 31 41 61 61 65 78 86 89 90 90 I5 4 I 2 52 I NPV ofdebt-to-revenueratio 51 1,108 841 68 72 72 70 51 22 4 2 4 120 2 NPV of debt-to-revenueratio a h full delivery 1x1 2005 51 61 72 59 68 72 72 70 51 22 4 2 3 42 2 Debt smice-to.exports ran0 17 4 4 6 7 7 1 0 0 0 5 0 Debt service-to-rcvenueratiio 51 16 3 4 5 6 4 2 1 0 0 4 0 Memorandum item (in millions 0fU.S. dollars): NPV ofdebt afln enhanced HIPC assistance 239 243 68 70 72 73 74 72 69 54 44 87 53 Ofwhich. exisnog debt only 239 239 60 59 58 57 56 55 53 48 38 74 46 Debt service a f l n enhanced HIPC asststance 4 3 4 4 5 5 5 6 3 5 5 4 Dcbt smicc beyond HIPC usislance 4 3 3 4 4 5 5 5 3 5 4 4 GDP 72 79 90 98 109 I20 134 520 1,308 1,158 912 574 1,158 Exports o f goads and services 31 21 23 24 26 27 29 31 426 1,235 913 528 491 878 Exports ofgoods and services 31 41 21 21 22 24 26 27 29 162 564 1,014 576 338 970 Government revenue51 17 23 26 28 32 35 52 116 508 554 300 25 1 525 Sources Sa0 Tome and Rincrpe authorities; and World Bank and IMP staff atimata and projections. 11 All debt indicators refer to public and publicly guaranteeddcbt and arc defined aflcr rcschedulin& u n L s othnwise indicalcd. 21 Refers to public and publicly guaranteed external debt only and usuma 8 staekddcbt opcrition on Napla 1 - (67 percent NPV reduction) as o f end of 2005, and at least comparable action by other allicial bilateral and commercial creditors. 31 Exports o f g d s and non-factor smices as defined i n IMP, Bnionce of Poyments Monuol ,5th edition, 1993. 41 Basedon a three.ycar average of exports ending in the cunent ycar (e.&, expoR average over 2003-2005 for NPV ofdcbt-to-exports ratio in 2005). 51 Revenue i s defined u central governmentrcvcnus excluding grants. 61 Assuming full delivery o f HIPC assistance as ofend-2005. 71 Includes additional debt reliefpmvided on a voluntary basis by the Pans Club and some cnmerc~al creditors beyond the rqvirernents ofthc enhanced HIPC fmcwork. 52 Table 13. SHo Tomb a n d Principe: Sensitivity Analysis, 2006-2026 I/ (Percent, unless otherwise indicated) Projections Annual Averages 2006 2007 2008 2009 2010 2011 2012 2013 2020 2026 2006-15 201C26 Basellne scenario 2 NPV of debt-to-revenue ratio 31 278 89 90 86 82 58 24 5 2 4 72 3 NPV of debt-to-exportsratio 41 305 103 107 107 106 102 17 5 1 2 86 I Debt service-to-exportsratio 41 16.8 5.9 6.7 8.5 9.0 9.7 0.7 0.3 0.1 0.2 5.8 0.1 Memorandumitems (millions 0fU.S. dollars). NPV of debt 65 23 26 27 29 30 28 26 14 12 30 14 Ojwhich: new debt 4 8 12 14 16 18 17 I5 6 6 13 6 Debt service 4 1 2 2 3 3 3 4 I 1 3 I Ojwhich: new debt 0 0 0 1 I 2 2 2 1 0 1 I Exports of goods and services, three-year average 21 22 24 26 27 29 162 564 1,014 576 338 970 Exports of goods and services, annual 23 24 26 27 29 31 426 1,235 913 528 491 878 Revenues 23 26 28 32 35 52 116 508 554 300 251 525 Sensltivlty analysis Alternative scenario I 5 1 NPV of debt-to-revenue ratio 31 278 89 92 90 87 90 51 14 22 65 81 31 NPV of debt-to-exportsratio 41 305 I03 107 107 106 150 58 23 21 52 99 28 Debt service-to-exportsratio 41 17 6 7 9 9 13 2 1 6 14 7 7 Memorandum items (millions o f U.S. dollars): NPV of debt 65 23 26 21 29 44 56 68 1I 4 172 51 126 Ofwhich: new debt 4 8 12 14 16 32 45 58 I06 166 34 118 Debt service 4 I 2 2 3 4 5 7 28 43 5 31 Ojwhich: new debt 0 0 0 1 I 3 4 6 27 42 4 30 Exports of goods and services, three-year average 21 22 24 26 21 29 91 299 534 329 183 515 Exports of goods and services, annual 23 24 26 21 29 31 230 635 485 308 261 47 1 Revenues 23 26 28 31 33 49 Ill 501 529 262 247 498 Alternative scenario I161 NPV of debt-to-revenue ratio 31 278 89 94 94 93 82 95 1I 6 317 453 124 337 NPV of debt-to-exportsratio 41 305 103 I07 107 106 105 116 135 310 399 142 320 Debt service-to-exportsratio 41 17 6 7 9 9 IO IO 13 32 54 11 36 Memorandum item: (millions of U.S.dollars): NPV of debt 65 23 26 27 29 31 36 45 I67 327 41 198 Ofwhich: new debt 4 8 I2 14 16 19 25 35 I59 321 24 I90 Debt service 4 1 2 2 3 3 3 5 19 48 3 25 Ofwhich: new debt 0 0 0 I I 2 2 3 18 47 2 24 Exports of goods and services, three-year average 21 22 24 26 27 29 31 33 54 82 29 59 Exports of goods and services, annual 23 24 26 27 29 31 33 36 58 88 31 63 Revenues 23 26 28 29 31 37 38 39 53 72 33 56 Sources: SBo Tome and Principe authorities; and World Bank and IMF staff estimates and projections. I1 A l l debt indicators refer to public and publicly guaranteeddebt and are defined after rescheduling, unless othenvlse indicated. 21 Baseline includes enhanced HIPC, bilateral debt relief beyond HIPC asssistance, and MDRI 31 Revenues are defined as central government revenues, excluding grants. 41 Exports ofgoods and services as defined in IMF, Balance of Payments Manual, 5th edition, 1993; excludes transit trade. The NPV o f debt-to-exportsratio is based on the average of three consecutive years of exports o f goods and non factor services ending in the current year; the debt-service ratio is based on current export year. 51 Scenario Iassumes a permanent reduction o f 50 percent in oil exports and revenues. 61 Scenario Il assumes no oil production, lower powth, and current fiscal stance. - m ~ - 0 - 0 r c I N - 0 r r o c 0 0 m o m P r r o r - 0 0 0 0 0 - 0 0 0 0 0 0 0 0 0 0 %%%%% 00 01 - I r - 0 r c 0 0 0 0 0 0 0 - - 0 0 0 0 0 0 0 0 0 0 0 0 r - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 - - 0 0 0 0 - 0 r 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 * P O N P O O O W L O r r 0 0 0 0 0 O O O hP1*- 0 0 W m - N (0 0 0 0 - - W W N N O 0 N o o o r - r r m m o h m N 0 01mmmo h m m N O N 0 %%%%? 0 0 mmtn m m m o o %%%gg N O N N - 0 0 0 0 N h ? N r O - h N 0 m m m o o %%%?? LnN 0 0 - o m N m m m o o O N N r O 0 m m m o o 0 0 m m m o p OPLn N r O Ln r ZNN? ; 0 0 0 0 m 0 P N 0 0 mmv) - - 0 - P -m 0 0 0 0 W N - - 0 P P r '0'0 o o o : E 88888 m o d r r o 88888 L n r L n r r o 0 - 0 r r o W r . P .-hLn N N O 0 r f a 0 c" a D 2x5 m 1 m i , , , , , 2 8 0 v) - -z c . k " 9 E 8 .E A V 4 8 3 .- M n 1 ei n 2 I P .- .- d I E 5: E ex P P B 3 B 3 c w 0 Y) .- (i, P .- Y e: U I B 8 P LO E 2 0 3 d 2 B B B a 9 8 .- ,8 i E 2 2 4 n w - z m m m N 0 0 : 4:: 0 0 0 o n o 0 0 0 $ 3 ; 0 0 0 ~ - 0 0 : m 8 0 2 s 0 0 m o o - - N 5 m m F- 0 0 0 0 0 0 0 0 2 4 2 * * s 0 0 ; 8 0 2 2 0 0 I , , I , , , I , , I , , 56 Table 16. Paris Club Creditors' Delivery o f Debt Relief Under BilateralInitiatives Beyondthe HIPC Initiative I/ Countries covered i ODA (n percent) Non-ODA (in percent) Provision of relief Reeutoff Post-cutoff Recutoff Postcutoff Decisionpoint Completion date debt date debt date debt (In percent) point (1) (2) (3) (4) (5) (6) (7) Aushalia HlPCs 100 100 100 100 21 21 21 Austria HlPCs 100 IO0 . Case-bycase, flow Stock Belgium HlPCs 100 100 IO0 100 flow Stock Canada HlPCs 31 .41 .41 100 100 100 flow Stock Denmark HIPCs IO0 100 si 100 100 51 IOOflow Stock France HlPCs 100 100 100 100 flow 61 Stock Finland HlPCs 100 - 71 100 .71 GY - HlPCs 100 100 100 - 81 100 flow Stock Ireland Italy HlPCs 100 100 91 100 100 91 100 flow Stock Japan HlPCs 100 100 100 Stock Netherlands, the HlPCs 100 101 IO0 IO0 90-100flow IO1 Stock 101 Norway HlPCs 1I1 1I1 I21 lU Russia Case-bycase Stock Spain HlPCs 100 Case-bycase 100 Case-byae Stock Sweden HlPCs . 131 100 Stock Switzerland HlPCs 100 100 Case-bywe 100, flow 141 Stock United Kingdom HlPCs 100 100 100 100 IS/ IOOflow 151 Stock United States HlPCs IO0 100 100 100 161 100 flow Stock Source: Paris Club Secretariat. I1 Colums (I) to (7) desmie the additional debtreliefprovided following a specific methodology under bilateralinitiatives and need to be read as a whole for each creditor "HIPCs" stands for eligible countries effectively qualifying for the HIPC process. A "100 percent"mention in the table indicates that the debt reliefprovided In colunm (I), under the enhanced HIPC Initiative framework will be topped up to 100 percent through a bilateralinitiative. 21 Aushalia: postcutoff date non-ODA relief to apply to debts incurredbefore a date to be finalized, tirrdng details for both flow and stock relief are to be finalized. 31 Canada: including Bangladesh. Canada has granted a moratoriumofdebt senice as ofJanuary 2001 on all debt disbursed before end-March 1999 for 13 out of 17 HIPCs with debt senice due to Canada. Eligible countries are Benin, Bolivia, Cameroon, D e n Rep. OfCongo, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Rwanda, Senegal, Tanzania, and Zambia. 100 percent cancellationwill be granted at completionpoint. As ofJuly 2004, Canada has provided completionpoint stock ofdebt cancellationfor Benin, Bolivia, Guyana, Senegal andTanzania. 41 100 percent ofODA claim have aheady been cancelled on HIPCs, with the exception of Myanmar's deb! to Canada. 51 Denmark provides 100 percent cancellationofODA loans and non-ODA credits contacted and disbursed before September 27, 1999. 61 France: cancellationof 100 percent ofdebt senice on pre-cutoffdate commercialclaim on the government as they fall due starting at the decision point Once 'countries have reached their completionpoint, debt reliefon ODA claim on the governmmt will go to a special account and will be used for specific development projects 71 Finland: no post-COD claim. 81 Germany pmposes to cancel all debts incurred before June 20,1999 depending on a consensus within Paris Club creditors. 91 Italy: cancellationof 100 percent of all debts @re-and postsutoff date, ODA and non-ODA) incurred before June 20,1999 (the Cologne Summit). At decision point, cancellationofthe related munts falling due in the interim period. At completion point, cancellationofthe stock ofremaining debt 101 The Netherlands: 100 percent ODA @re-and postcutoff date debt will be cancelled at decisionpoint); for non-ODA: in some particular cases (Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Mali, Mozambique, Nicaragua, Rwanda, Tanzania, Uganda and Zambia), the Netherlands will write off 100 percent of the consolidated amounts on the flow at decisionpoint; all other HlPCs will receive interimrelief up to 90 percent reduction ofthe consolidatedamounts. At completion point, all HIPCs will receive 100 per cent cancellationofthe remaining stock of the precutoff date debt I11 Norway has cancelled all ODA claim. I2 Due to the current World BanMMF methodology for recalculatingdebt reduction needs at HIPC completion point, Norway has postponed the decisions on whether or not to grant 100 percent debt reduction until after the completionpoint 131 Sweden has no ODA claim. 141 Switzerland In principle 100 percent cancellationofRecutoff date non-ODA debt However, Swikerland claim the right at the decision point to forgive only 90 percent in case ofmajor political andior political weaknesses. 151 United Kingdom: "beyond 100 percent"full write-off of all debts of HIP& as of their decisionpoints, and reimbursement at the decision point ofany debt service paid beforethe decision point 161 United States 100 percent postcutoffdate non-ODA heated on debt assumed prior to June 20,1999 (the Cologne Sumnit). Table 17. HIPC Initiative: Status o f Country Cases ConsideredUnder the Initiative, September 26,2006 Target EstimatedTotal NPV of Debt-@ Assistance Levels I/ Percentage Nominal Debt Decision Completion GOV. (Millions of U.S.dollars, present value) Reduction Service Relief Counny Point Point Exports Revenue Bilateraland Multi- World in NPV of (millions of (percent) Total Commercial lateral IMF Bank DebtZi U.S. dollars) Completlon point reached under enhanced framework Benin Jul. 00 Mar. 03 150 265 77 189 24 84 31 460 Bolivia 1,302 425 876 84 194 2,060 originalframework Sep. 97 Sep. 98 225 448 I57 291 29 54 14 760 enhancedframework Feb. 00 Jun. 01 150 854 268 585 55 1411 30 IJOO BurldnaFaso 553 83 469 57 23 1 930 originnlframework Sep. 97 JUI. on 205 229 32 I96 22 91 27 400 enhancedframework Jul. 00 Apr. 02 I50 I95 35 161 22 79 30 300 topping-up Apr. 02 I50 129 16 112 I4 61 24 230 Cameroon Oct 00 Apr. 06 150 1,267 879 322 37 I76 27 4,917 Ethiopia 1,982 637 1,315 60 832 3,275 enhancedframework NOV. ni Apr. 04 I50 1,275 482 763 34 463 47 1,941 lopping-up Apr. 04 150 707 I55 552 26 369 31 1.334 Ghana Feb. 02 Jul. 04 144 250 2,186 1,084 1,102 1I 2 781 56 3,500 Guyana 591 223 367 75 68 1,354 originalframework Dec. 97 May 99 107 280 256 91 I65 35 27 24 634 enhancedfrnmework Nov. 00 Dec-03 150 250 335 132 202 40 41 40 719 Honduras Jul. 00 Mar-05 I10 250 556 215 340 30 98 18 1,000 Madagascar Dec. 00 Oct-04 150 836 474 362 19 252 40 1,900 Malawi 1,057 171 886 45 622 1,628 enhancedframework Dee. 00 Aug-06 150 646 164 482 30 333 44 1,025 topping-up Aug-06 150 411 7 404 I5 289 35 603 Mali 539 169 370 59 185 895 originalframework Sep. 98 Sep. 00 200 121 37 84 14 43 9 220 enhancedframework sep. no Mar. 03 150 41 7 132 285 45 143 29 675 Mauritania Feb. 00 Jun. 02 137 250 622 26 1 361 47 100 50 1,100 Mozambique 2,023 1,270 753 143 443 4,300 originalframework Apr. 98 Jun. 99 200 1.717 1,076 641 125 381 63 3,700 enhancedframework Apr. 00 sep. 01 150 306 I94 112 18 62 27 600 Nicaragua Dec. 00 Jan. 04 150 3,308 2,175 1,134 82 191 73 4,500 Niger 663 235 428 42 240 1,190 enhancedfrnmework Dec. 00 Apr. 04 150 521 21I 309 28 I 70 53 944 topping-up Apr. 04 I50 143 23 119 I4 70 25 246 Rwanda 696 65 63 1 63 383 1,316 enhancedframework Dec. 00 Apr-05 150 452 56 397 44 228 71 839 topping-up Apr-05 150 243 9 235 20 154 53 477 Senegal Jun. 00 Apr. 04 133 250 488 212 276 45 124 19 850 Tanzania Apr. 00 Nov. 01 150 2,026 1,006 1,020 120 695 54 3,000 Uganda 1,003 183 820 I60 517 1,950 originalframework Apr. 97 Apr. 98 202 347 73 2 74 69 I60 20 650 enhancedframework Feb. 00 May 00 150 656 110 546 91 357 37 1,300 Zambia Dee. 00 Apr-05 I50 2,499 1,168 1,331 602 493 63 3,900 Decisionpoint reached under enhanced framework Burundi Aug. 05 Floating 150 826 124 701 28 425 92 1,465 Chad May. 01 Floating 150 170 35 134 18 68 30 260 Congo, DemocraticRep. of Jul. 03 Floating 150 6,3 I 1 3,837 2,474 472 83 1 80 10,389 Congo Rep. of Mar. 06 Floating 250 1,679 1,561 118 8 49 32 2,881 Gambia, The Dec. 00 Floating I50 67 17 49 2 22 27 90 Guinea Dec. 00 Floating 150 545 215 328 31 152 32 800 Guinea-Bissau Dec. 00 Floating 150 416 212 204 12 93 85 790 S b Tom6 and Pdncipe Dec. 00 Floating 150 97 29 68 24 83 200 SierraLeone Mar. 02 Floating 150 600 205 354 123 I22 80 950 Total assistance providedicommitted 35,170 17548 17,783 2,603 31 8,494 61,849 Sources: IMF and World Bank Board decisions, completionpaint documents, decision point documents, preliminaryHIPC documents, and staff calculations. I/Assistance levels are at countries'respective decision or completion points, as applicable. 21 In percent of the net present value of debt at the decision or completion point (as applicable), after the full use of traditionaldebt-relief mechanism. 31 Equivalent to SDR 1,757 million at an SDWSD exchange rate of 0.6749, as of September 26,2006. 58 APPENDIX I Si30 Tomb and Principe-Management of Public Debt The authorities have been working to improve debt management, though capacity i s still limited. The legal framework for debt management i s clear and comprehensive, but the authorities are addressing the following weaknesses: (i) insufficient coordination among government units and reconciliation o f data with creditors to improve debt information; (ii) inadequate recording and reporting o f data; and (iii) too little capacity to analyze debt management and staffing. The government’s debt strategy i s to secure for the budget as much concessional external financing as possible. This appendix describes the institutional framework o f debt management, assesses current procedures, and identifies areas for improvement. A. The InstitutionalFramework for Debt Management 1. The legal basis for debt management i s clear and comprehensive. The Minister o f Planning and Finance chairs the Debt Management Committee, which was created in 1999 and includes representatives from various departments o f the ministry and the central bank. The committee’s major purpose i s to draft and carry out a strategy for debt reduction, establish a clear and consistent borrowing strategy, and coordinate the agencies involved in debt management. 2. The Minister of Planning and Finance i s responsible for contracting and managing external public debt. Among agencies involved in debt management are the Departments o f Planning, Budget, and Treasury, and the Debt Office (all part o f the Ministry of Planning and Finance) and the central bank. Financing needs are identified by the Department o f Planning based on the public investment program (PIP) and the Department o f Budget based on expected financing. The Minister o f Planning and Finance i s responsible for negotiating new loans and signing the contracts, although these hnctions can be delegated to ambassadors or the governor o f the central bank. New contracts are transmitted to the Debt Office for recording. That office prepares a schedule o f debt payments for budgeting purposes and sends debt payment invoices to the treasury for approval and transmission to the central bank. The role and organization o f the Debt Office, created in early 2004, have not been completely specified, which has caused some operational problems. B. Assessment o f Debt Management 3. Better coordination among the government units involved in debt management i s needed to improve the flow and quality of information. The Debt Management Committee needs to do more to facilitate communication between the Treasury Department o f the Ministry o f Planning and Finance, the central bank, and the Debt Office. The lack o f systematic flows o f information-in particular, timely access to information on individual loans-hampers the operations o f the Debt Office and creates delays in recording and servicing debt. Although responsibility has been transferred to the ministry, the central bank i s s t i l l involved in managing external debt; i t conducts quarterly debt data reconciliation in collaboration with the Debt Office. The Debt Office needs procedures to regularly reconcile 59 debt aggregates with creditor statements. Contacts with creditors are by fax and electronic mail and communication i s often incomplete or addressed to the wrong person. 4. The debt management system software i s being updated and debt reporting improved. Because o f technical problems, the authorities stopped using the UN Conference for Trade and Development’s Debt Management and Financial Analysis System (UNCTAD- DMFAS) in 1998 and have used Excel since then. They are currently installing the Commonwealth Secretariat Debt Recording and Management System (CS-DRMS) with financial support f i o m the IDA. In M a y 2006, a Commonwealth Secretariat mission reviewed institutional and technical aspects o f debt management and provided training on CS-DRMS. Getting data into and running the new system will take several months. This process was delayed by technical difficulties, and technical assistance i s planned for early 2007. The CS- D R M S should allow the government to publish public debt data regularly. This would increase the transparency o f debt operations. 5. There i s a need to enhance the capacity for recording data, monitoring debt relief, and analyzing debt sustainability. In addition to the CS-DRMS training in data recording, there i s a need for training in basic debt operations and debt sustainability analysis. At the moment there are not enough staff and resources to carry out basic debt management operations. 60 APPENDIX I 1 SPo Tom6 and Principe: Debt Sustainability Analysis for Low-Income Country Framework 37 1. SPo Tom6 and Principe has a moderate risk o f debt distress after debt relief under the HIPC Initiative and the Multilateral Debt Relief Initiative (MDRI). The results suggest that the attainment o f debt relief at the HIPC completion point and MDRI debt r e l i e f will bring about a substantial improvement in the country’s debt outlook, though debt ratios will continue to be vulnerable to shocks until o i l production starts in 2012.38The debt outlook remains vulnerable even under the baseline scenario, as indicated by a breach o f debt thresholds prior to the production o f oil. The risk o f debt distress increases significantly under a scenario with no o i l production and no fiscal adjustment. Reducing the risk o f debt distress will therefore depend critically on maintaining sound fiscal policy consistent with a prudent borrowing strategy for the medium and long t e r m as well as policies oriented to achieving broad-based long-run economic growth. A. BACKGROUND 2. Silo Tom6 and Principe’s medium- and long-term external debt at the end of 2005 i s estimated at US$325 million in nominal terms, correspondingto a NPV o f debt- to-export ratio of 299 percent. The share o f multilateral debt i s 61 percent, o f which about 88 percent i s owed to the IDA, African Development Bank and IMF. The share o f official bilateral debt is about 37 percent, o f which 38 percent i s owed to Paris Club creditors. The share o f commercial debt i s only 2 percent. S9o Tom6 and Principe i s current with i t s obligations to multilateral creditors and has cleared most o f its arrears with Paris Club creditors as part o f a debt rescheduling agreement on Cologne terms (September 2005). The authorities are currently in the process o f signing bilateral agreements with Paris Club creditors and reconciling debt records with other creditors. 3. The HIPC completion point i s expected to be reached in early 2007. The debt service-to-GDP ratio was about 6.5 percent o f GDP in 2006 and i s expected to be 3.6 percent in 2007 - a result o f both enhanced HIPC and MDRI debt relief. MDRIwill result in substantial debt service savings reflecting the large share o f debt to the IDA, AfDF, and IMF in the country’s total debt. 37 T h i s appendix updates the debt sustainability analysis (DSA) prepared in February 2006 (EBS/06/23). This L I C D S A makes use o f the updated debt data base which was reconciled for the HIPC completion point and also incorporates revised macroeconomic projections. 38 n IDA’SCountry Policy and Institutional Sfo Tom6 and Principe i s currently classified as a “Poor Performer” i Assessment (CPIA) index. Under the joint IDNIMF debt sustainability framework the thresholds are: 30 percent for NPV o f debt-to-GDP ratio, 100 percent for NPV o f debt-to-exports ratio, and 15 percent debt service-to-exports ratio. 61 Ssio Tom6 and Principe: External Public Debt (Millions o f U.S. dollars) 1999 2005 Total 292.9 324.6 Multilateral institutions 168.1 200.2 IDA 60.9 72.1 ADF 88.8 99.8 IMF 0.0 3.2 Other 18.3 25.2 Bilateral and commercial 120.0 119.7 Paris Club 51.8 45.4 Non-Paris Club 68.2 74.3 Commercialcreditors 4.8 4.8 Sources: Silo Tom6 and Principe authorities; World Bank and IMF staff estimates. TERM MACROECONOMIC B. MEDIUM FRAMEWORK 4. The baseline macroeconomic assumptions of the HIPC DSA and the L I C DSA are the same. 39 The baseline scenario assumes HIPC completion point in early 2007 and full MDRI debt relief. GDP growth i s expected to accelerate over the medium-term to 8 percent and then slow gradually to 5 percent in the long term.40 Domestic investment would rise sharply from about 35 percent o f GDP to an average o f 60 percent in the medium term, largely o n account o f o i l sector investment initiatives. The rise in the investment ratio will require continuing reliance o n foreign savings, although national savings are forecast to rise on account o f increased private savings once stability and economic growth become firmly established. 5. Risks to the macro framework arise from a possible weakening of the fiscal consolidationeffort, potential shortfalls in foreign assistance triggered by the expected oil boom, and lower or no oil production. All scenarios assume no domestic public debt (no significant development o f a domestic-based market for government debt i s foreseen) and most o f the scenarios assume external borrowing o n concessional terms. In particular, the 39 See B o x 4 in the HIPC Completion Point Document. 40 The baseline scenario excludes the proposed topping-up o f HIPC relief at completion point. Debt ratios after topping-up o f HIPC r e l i e f and MDRI are presented in an alternative scenario. 62 scenario o f no o i l production assumes no fiscal adjustment, as in the HIPC debt sustainability analysis. This scenario also assumes less concessional terms for external borrowing, reflecting the worsening o f the fiscal stance. DEBT C. FISCAL SUSTAINABILITY ANALYSIS 6. I n the baseline scenario, Si40 TomC and Principe’s debt outlook shows a significant improvement, but remains vulnerable until oil production starts (Table 2 and Figure 1). Both the NPV o f debt-to-GDP and NPV o f debt-to-revenue ratios remain l o w throughout the projection period. The debt service-to-revenue ratio i s projected to remain below 5 percent after 2007, declining sharply once o i l production starts. Topping-up o f HIPC assistance improves all debt ratios, particularly the debt service-to-revenue ratio in the 2007- 12 period(Tab1e 2). 7. The sensitivity analysis shows that the debt indicators are particularly vulnerable to a deceleration in GDP and deterioration of the primary balance before oil production starts. Under the most extreme stress test, which assumes lower real GDP growth and primary deficit (Bound test B 3 in Table 2), S5o TomC and Principe’s NPV o f public debt-to-revenue ratio increases substantially above the baseline scenario from 2007 to 2010, then falls sharply after o i l exports start in 2012 (Figure 1 and Table 2). However, the debt service-to-revenue ratio increases only gradually, as a result o f assuming borrowing on highly concessional terms, remaining below 10 percent throughout the projection period. 8. Under a scenario with no oil production and no fiscal adjustment, the public debt dynamics become explosive (alternative scenario A1 in Table 2, and Figure 1). In this scenario, all debt indicators are projected to increase rapidly. Both the NPV o f debt-to-GDP and the NPV o f debt-to-revenue ratios are projected to increase substantially throughout the projection period, leading to an increasing debt service-to-revenue ratio. DEBT D. EXTERNAL SUSTAINABILITY ANALYSIS 9. The baseline scenario shows favorable external debt dynamics. Debt relief under the HIPC Initiative and MDRI allows the debt ratios to improve substantially, though ratios remain close to the policy-dependent thresholds until oil production starts (Table 4 and Figure 2). The NPV o f debt-to-GDP ratio i s projected to remain below the 30 percent policy-dependent debt-burdenthreshold throughout the projection period. The NPV o f debt- to-exports ratios i s projected to increase gradually from 65 percent in 2006 to 105 percent by 201 1, when i t breachs the policy-dependent threshold, but then to fall sharply after 2012, when o i l production starts. The debt service-to-exports ratio i s projected to decline from 12 percent in 2006 to 7 percent on average during 2007-1 1,before declining sharply once o i l 63 production starts. 41 Topping-up HIPC assistance improves all debt ratios, particularly the debt service-to-exports ratio (Figure 3). 10. The sensitivity analysis shows that in the medium term the debt indicators are particularly vulnerable to a deceleration in GDP and export growth. I nthe most extreme stress test, which assumes a two-year shock to the average growth o f real GDP growth and export, to the GDP deflator denominated in US. dollar, and to the net non-debt-creating flows (Bound test B 5 in Table 4), Sgo Tom6 and Principe’s external debt indicators are projected to increase substantially above the policy-dependent thresholds from 2007 to 2010, then fall sharply after o i l exports start in 2012 (Figure 3 and Table 4). The debt service-to- exports ratio also increases significantly, but remains below the 15 percent threshold and falls after o i l production starts. 11. I n a scenario with no oil production and no fiscal adjustment, external debt vulnerability becomes acute (alternative scenario A1 in Table 4 and Figure 2). I nthis scenario, all debt indicators are projected to increase rapidly. Both the NPV o f debt-to-GDP and the NPV o f debt-to-export ratios are projected to remain above the policy-dependent threshold, leading to an ever increasing debt service-to-export ratio in the absence o f fiscal adjustment . E. CONCLUSION 12. S l o Tom6 and Principe’s risk of debt distress after debt relief under the HIPC Initiative and MDRI will be moderate, but it will remain vulnerable to developments in the oil sector. Despite a significant reduction in the NPV o f debt at the HIPC completion point, Sgo Tom6 and Principe’s public debt will also be vulnerable to shocks to the exchange rate, exports, and foreign grants, at least until o i l production starts in 2012. External debt vulnerability would be further exacerbated in the absence o f sound macroeconomic policies and undue delays in o i l production. These risks underline the need for prudent fiscal and debt management policies, continued reliance on concessional financing, and implementation o f structural reforms essential to support broad-based long term economic growth. 41 The debt ratios of the LIC DSA may differ from the HIPC DSA as they use different methodologies. The LIC uses the same-year exports, while HIPC DSA uses three-year backward average. The LIC DSA uses a fixed 5 percent discount rate, while the HIPC DSA uses currency-specificdiscount rates. Finally, the LIC DSA debt service projections use WE0 exchange rates, while the HIPC DSA uses fixed exchange rates (end-2005). 2 0 Y 1 B e 5 'E I B 5 65 Table 2. S i 0 Tom6 and Principe: Sensitivity Analysis for Key Indicators of Public Debt 2006-26 (Percent) Est. Projections 2006 2007 2008 2009 2010 2011 2012 2013 2016 2026 NPV of Debt-to-GDP Ratio Baseline 25 26 27 28 28 26 7 3 3 6 A. Alternative scenarios A I . No oil production 25 36 41 45 48 50 53 59 81 182 A2. Primary balance i s unchanged fiom 2007 25 26 23 25 26 27 9 6 18 89 A3. Permanently lower GDP growth l / 25 27 28 29 29 28 6 1 2 24 A4. Topping up 25 21 22 24 25 24 7 3 3 6 B. Bound test8 B I . Real GDP growth i s at historicalaverage minus one standard deviationsin 2007-2008 25 30 35 38 41 42 IO 3 7 54 B2. Primary balance is at historicalaverage minus one standarddeviations in 2007-2008 25 42 53 52 51 47 11 3 3 7 B3. Combination of BI-B2 using one half standarddeviation shocks 25 37 44 42 40 36 8 1 1 4 B4.One-time30 percent real depreciationin 2007 25 193 171 153 139 126 32 11 IO 19 B5. I O percent of GDP increasein other debt-creatingflows in 2007 25 34 35 35 34 32 7 1 1 4 NPV of Debt-to-RevenueRatio 21 Baseline 35 45 53 50 52 47 47 39 18 13 A. Alternative scenarios A I , No oil production 35 118 135 147 156 142 158 180 260 604 A2. Primary balance is unchanged fiom 2007 35 45 45 45 49 48 60 75 108 203 A3. Permanently lower GDP growth I/ 35 46 53 51 54 51 39 10 13 55 A4. Topping up 35 35 43 43 46 43 43 37 17 13 B. Bound tests BI. Real GDP growth i s at historicalaverage minus one standarddeviationsin 2007-2008 35 50 65 67 74 74 66 37 44 123 B2. Primary balance is at historicalaverage minus one standarddeviationsin 2007-2008 35 72 103 94 95 86 72 37 19 17 B3. CombinationofB1-B2 using one half standard deviation shocks 35 63 82 73 72 64 48 13 8 9 B4.Cne-time 30 percent real depreciationin 2007 35 332 329 276 262 228 207 147 64 43 B5. I O percent ofGDP increase in other debt-creatingflows in 2007 35 59 67 62 64 58 46 14 9 9 Debt Service-to-RevenuesRatio 21 Baseline 16 6 6 5 5 4 4 3 1 1 A. Alternative scenarios AI. No oil production 16 7 6 8 8 8 8 1 1 1 4 54 A2. Primary balance is unchanged fiom 2007 I 6 6 6 4 4 4 4 5 6 1 5 A3. Permanentlylower GDP growth 11 1 6 6 6 5 5 4 4 3 2 4 A4. Topping up 1 6 5 4 4 4 3 3 3 1 1 B, Bound tests BI. Real GDP growth is at historical average minus one standarddeviationsin 2007-2008 1 6 7 6 6 6 5 5 5 3 9 B2. Primary balance is at historicalaverage minus one standarddeviationsin 2007-2008 1 6 6 9 8 6 6 5 5 2 2 B3. CombinationofB1-B2 using one half standard deviation shocks 1 6 6 8 7 6 5 4 4 2 1 B4. One-time30 percent real depreciationin 2007 1 6 8 8 7 6 6 5 4 2 2 B5. I O percent ofGDP increasein other debt-creatingflows in 2007 1 6 6 7 5 5 4 4 4 1 1 Sources: Sio Tome and Principe authorities; and World Bank and IMF staff estimates and projections. I1Assumes that real GDP growth i s at baseline minus one standard deviation divided by the square root o f 20 (k., the length o f the projection period). 21 Revenues including grants. 66 Fig. 1. SHo Tom6 and Principe: Indicators o f Public Debt, 2006-26 1/ (Percent) 200 - 180 - NPV of debt-to-GDP ratio 160 - - - Baseline 0 0 # --- 0 0 140 No oil production / - 0 Most extreme stress test 0 / 120 0 - 0 0 0 100 0 / - 0 0 80 / / . 0 . c -c 60 _/I- 40 . *-_------ 20 . -1 0 - 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 600 0 NPV of Debt-to-Revenue 0 5 00 0 0 0 400 0 .- 0 .- - / 3 00 0 0 0 4. Baseline --- # 200 No oil production Most extreme stress test 100 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 50 / / 45 Debt service-to-Revenue / / - / 40 / 35 Baseline --- No oil production 30 Most extreme stress test 25 / / / 20 15 10 5 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 Source: W o r l d B a n k and IMF staff projections. 1/ Baseline scenario includes HIPC and MDRI debt relief. 9 2 3 R 3 - 7 Table 4. Silo Tomb and Principe: Sensitivity Analyses for Key Indicators of Public and Pubticly Guaranteed External Debt, 2006-2026 (Percent) Est. Projections 2006 2007 2008 2009 2010 2013 2020 2026 NPV of debt-to-GDP ratio 11 BaseIine 18 21 23 24 24 3 4 6 A. Alternative Scenarios A l . No oil exports 21 18 46 49 51 52 37 101 166 A2. New public sector loans on less favorable t e r n in 2007-26 31 18 21 25 29 30 4 7 IO A3. Topping up 18 15 18 20 21 3 4 6 B. Bound Tests B I . Real GDP growth at historical average minus one standarddeviation in 2007-08 18 30 34 34 34 4 5 7 BZ. Export value growth at historical average minus one standarddeviation in 2007-08 41 18 22 24 25 25 3 4 5 B3. U S dollar GDP deflator at historical average minus one standard deviation in 2007-08 18 36 40 40 40 4 6 7 B4. Net non-debt creating flows at historical average minus one standard deviation in 2007-08 51 18 35 36 36 36 4 4 3 B5. Combination of Bl-B4 using one-half standarddeviation shocks 18 36 40 41 40 5 6 7 B6. One-time30 percent nominal depreciation relative to the baseline in 2007 61 18 29 32 79 77 8 IO 12 NPV o f debt-to-export ratio BaseIine 65 79 89 95 101 3 6 11 A. Alternative Scenarios A I . No oil exports 21 65 173 187 193 198 119 297 452 A2. New public sector loans on less favorable t e r n in 2007-26 31 65 79 95 1I 4 125 4 8 18 A3. Topping up 65 57 69 78 87 3 5 11 B. Bound Tests BI. Real GDP growth at historical average minus one standarddeviation in 2007-08 65 114 116 122 127 12 B2. Export value growth at historical average minus one standarddeviation in 2007-08 41 65 91 111 118 125 12 B3. US dollar GDP deflator at historical average minus one standard deviation in 2007-08 65 138 134 139 144 12 B4. Net non-debt creating flows at historical average minus one standard deviation in 2007-08 51 65 132 140 143 148 5 B5. Combination of BI-B4 using one-half standarddeviation shocks 65 128 145 150 156 13 B6. One-time 30 percent nominal depreciation relative to the baseline in 2007 61 65 110 89 227 230 15 Debt service-to-exports ratio Baseline 17.0 5.9 6.7 8.5 9.0 0.3 0.1 0.2 A. Alternative Scenarios A I . No oil exports 21 17.0 12.6 13.6 17.2 18.2 12.6 22.7 44.6 A2. New public sector loans on less favorable terms in 2007-26 31 17.0 5.7 6.7 8.9 10.1 0.3 0.2 0.5 A3. Topping up 12.2 3.8 4.1 6.2 6.8 0.3 0.1 0.1 B. Bound Tests B1. Real GDP growth at historical average minus one standarddeviation in 2007-08 17.0 6.2 7.0 8.8 9.3 0.3 0.2 0.3 B2. Export value growth at historical average minus one standarddeviation in 2007-08 41 17.0 6.4 8.0 10.3 11.0 0.4 0.2 0.3 B3. US dollar GDP deflator at historical average minus one standard deviation in 2007-08 17.0 6.5 7.2 9.0 9.5 0.3 0.3 0.4 B4. Net non-debt creating flows at historical average minus one standard deviation in 2007-08 51 17.0 5.9 7.3 10.1 10.5 0.3 0.5 0.9 B5. Combination o f B l - B 4 using one-half standarddeviation shocks 17.0 6.2 8.0 10.0 10.6 0.3 0.3 0.5 B6. One-time 30 percent nominaldepreciation relative to the baseline in 2007 61 17.0 8.2 8.4 10.2 10.6 0.3 0.5 0.9 Memorandum item: Grant element assumed on residual financing (Le., financingrequiredabove baseline) 71 53 51 49 47 45 38 33 32 Source: World Bank and IMF staff projections. 11 By the year 2023 real GDP growth slows down significantly due to the projected decline in petroleumproduction. 21 Variables include real GDP growth, growth of GDP deflator (US. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 31 Assumes that the interest rate on new borrowing i s by 2 percentagepoints higher than in the baseline., while grace and maturity periods are the same as in the baselii 41 Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP i s assumed to return to its baseline level after the shock (implicitly assumingan offsetting adjusment in import levels). 51 Includes official and private transfers and FDI. 61 Depreciation i s defined as percentage decline in dolladlocal currency rate, such that i t never exceeds 100 percent. 71 Based on historical level o f concessionality.Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2. Fig. 2. SZo Tom6 and Principe: Indicators o f External Debt, 2006-26 1/ (Percent) 180 - NPV of debt-to-GDP ratio 150 - - --- Baseline 0 0- /' / O M O 120 - No oil exports 0 0 Most extreme stress test rc rc - / / 90 / / rc 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 450 NPV of debt-to-exports ratio . 0. - 400 rc /' 350 Baseline 300 --- No oil exports Most extreme stress test 250 200 150 100 50 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Debt service-to-exports ratio 50 - --- Baseline 40 No oil exports Most extreme stress test 30 -__---- lot --/ 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Source: W o r l d bank and IMF staff projections. 1/ Baseline scenario includes HIPC and MDRI debt relief. 70 Fig. 3. SZo Tom6 and Principe: Indicators o f External Debt, 2006-26 1/ (Percent) NPV of debt-to-GDP ratio 50 - -Baseline 40 - -Topping up 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 140 NPV of debt-to-exports ratio 120 100 80 60 -Topping up 40 20 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 20 Debt service-to-exports ratio 15 -.-. 10 - Baseline -Topping up 5 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Source: W o r l d Bank and IMF staff projections. 1/ Baseline scenario includes HIPC and MDRI debt relief. 71 APPENDIX I11 Education and Health Establishments Built or Refurbishedto Reach the HIPC Completion Point Table 1. Classrooms: List of Locations and Sources of Funds, 2001-September 2006 Schools Classrooms Financing observation Built source Yo Grande 2 HIPC School I teacher residence Abade - Principe 2 HIPC New school Paula Lavres - Principe 2 HIPC Enlargement of school Santo Antonio 2 HIPC Enlargement (secondary) Angolares 2 HIPC Enlargement Boa Entrada 6 HIPC New school Riboque Santana 2 HIPC Enlargement 12 de Julho 2 HIPC Enlargement 0 que del Rei 3 HIPC Enlargement Liceu National 8 HIPC Enlargement (secondary) M o n o Peixe 2 HIPC New school SubTotal HIPC 36 Jose Leal Boucas 2 Taiwan, Province Enlargement of China Capela 2 Taiwan, Province Enlargement of China Batepa 2 Taiwan, Province Enlargement of China Conde 2 Taiwan, Province Enlargement of China Praia Gamboa 3 Taiwan, Province Enlargement of China Ribeira Afonso 2 Taiwan, Province Enlargement of China Santa Geny 2 Taiwan, Province New school of China Esprainha 2 Taiwan, Province New school of China Almas 8 Taiwan, Province New School, 6 classes for 5~ & 6 (secondary) of China 6* grades, 2 classes for 1"-4". 2 (primary) Subtotal: Taiwan, Province 25 o f China Port0 Alegre I 2 I UNICEF I Enlargement 72 OVERALL TOTAL 87 Of which primary 63 Originally (in 2000) primary defined as grades 1-4 Of which secondary 24 Originally (in 2000) secondary defined as grades 5 and above. Sources: Ministry o f Education I Office o f the Minister o f Planning and Finance and the H I P C unit. 1 Highlighted classes are secondary classes. In 2000, when the H I P C conditions were agreed to, primary education consisted o f grades 1-4, and grades 5 and above were considered secondary. Since 2005, when the new education strategy has been implemented, grades 5 and 6 are considered primary and classrooms were built to eventually implement the expanded primary education. In practice, t h i s was just starting in 2005. Per the 2000 HIPC accounting, 24 secondary classes have been built. Districts Work undertaken Observation