STP Strengthening Growth and Fiscal Policy DPO

closed

The operation in the amount SDR 3.6 million (equivalent to US$5 million) is the first one in a Development Policy Financing (DPF) series of three operations for São Tomé and Príncipe (STP). The previous programmatic series was interrupted due to a breach of the International Development Association (IDA) Non-Concessional Borrowing Policy (NCBP).1 STP has addressed this problem by changing the terms of the loan it contracted with Angola to comply with the NCBP. The previous series, however, could not be resumed since more than 24 months had elapsed after Board approval of the last operation. A stand-alone development policy operation (DPO) was attempted in 2015, but a potential debt arising from a Memorandum of Understanding signed with a Chinese company prevented the World Bank from going forward. This issue has also been satisfactorily resolved. During this period, the country also signed a revised Extended Credit Facility (ECF) with the International Monetary Fund (IMF) in July 2015, which anchors the short-term fiscal consolidation efforts and includes structural benchmarks on financial stability and measures to address the fiscal imbalance coming from the energy sector. The objective of this operation is to help the Government introduce growth-enabling reforms in the financial sector, business environment, and infrastructure; generate fiscal resources and savings; and improve quality of expenditures. A key focus of government policy is to reduce the dependence on government spending and facilitate the development of alternative growth drivers. This operation will help facilitate this shift by supporting policies that are aimed to address the risks to growth both directly and indirectly. The first pillar of the operation focuses on policies aimed to deal with direct risks to growth such as inadequate frameworks for credit operations and unreliable energy supply. The second pillar brings together policies that will indirectly help mitigate risks to growth. For example, by supporting better SOE surveillance, it is expected that the management of the energy company will improve and thus reduce energy cost and increase reliability of supply.