Democratic Republic of São Tomé and Príncipe: 2013 Article IV Consultation and Second Review Under the Extended Credit Facility Arrangement; Staff Report; Informational Annex; Debt Sustainability Analysis; Press Release on the Executive Board Discussion;

EXECUTIVE SUMMARYContext. The coalition government that came into office on December 12, 2012,remains fully committed to the pursuit of sound policies that are helping to consolidatemacroeconomic stability, despite a challenging external environment and moreuncertain oil prospects.Program performance. Overall, program performance has been satisfactory. Allcontinuous and end-June 2013 quantitative performance criteria were met, and one oftwo end-June 2013 structural benchmarks was met while the other one will be met witha delay. However, more time will be needed to devise a plan to clear cross-arrears (theend-September 2013 structural benchmark was missed). The quantitative indicativetarget on pro-poor spending was met, but the other two indicative targets were not.Macroeconomic and key structural policies. The authorities' macroeconomic policyframework for 2014 and beyond reaffirms their commitment to fiscal prudence insupport of the exchange rate peg to the euro and debt sustainability, and to the pursuitof sound financial policies. The authorities are committed to a 2014 domestic primarydeficit target of 3.0 percent of GDP, in line with projected non-debt-creating financing,and to a further tightening of the fiscal stance by 2017, given more uncertain oilprospects. To meet the fiscal targets and create additional space for priorityinfrastructure and pro-poor spending, the authorities will strengthen revenuecollections, including by modernizing the tax and customs administrations andbroadening the tax base, and will contain non-priority spending. The central bank hasincreased its vigilance over the financial sector through off- and on-site inspections ofcommercial banks, and is reinforcing compliance with regulatory and prudentialrequirements. It will work with commercial banks to enhance the banking system'sefficiency, profitability, and resilience. The authorities are striving to strengthen externalcompetitiveness and reduce external vulnerabilities through improvements in thebusiness climate and various productivity-enhancing measures.