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São Tomé e Principe - Economy

STP is Africa’s smallest economy, with a GDP estimated at US$254m in 2011. STP benefitted from oil signature bonuses in recent years – a bonus of US$ 49.0m was received in 2005 and 29m in 2007; another bonus of US$ 26.0m was expected in 2012. São Tomé and Príncipe’s economy continued to perform well in 2016 despite some challenges. Since 2003 STP had received US$57.8 million in signature bonuses for oil exploration17 (about US$53 million from the Joint Development Zone and about US$5 million from the Exclusive Economic Zone), equivalent to 19 percent of 2013 GDP.

The islands import close to 90 percent of their food needs; consequently, the lack of foreign exchange routinely results in shortages. For both exports and imports, the islands are dependent on external prices. GDP growth for 2016 was estimated at 4 percent, somewhat lower than the projected 5 percent under the program. This mainly reflected delays in external financing ahead of the presidential elections that were held in July 2016 (and the run-off in August 2016) which impacted negatively on the execution of externally-financed investment projects, supply constraints resulting from ongoing pressures on foreign exchange supply, and lackluster credit growth. Prospects for near-term growth remain favorable as the government steps up efforts to address the ongoing supply constraints that have impacted imports of capital and intermediate goods.

Oil

The economy was set to change dramatically as it entered the ranks of oil producers. The EEZ around Sao Tome and Principe is believed to host around 11 billion barrels of crude oil. São Tomé e Principe is located in the resource-rich Gulf of Guinea but as of 2016 had yet to discover any commercially viable oil. The country entered into oil exploration agreements in 1997, large-scale oil production was expected to come on stream in 2016, but that did not happen. São Tomé and Príncipe’s economy has been resilient even after prospects for commercial oil production, which dominated the political and economic narrative until end-2013, became uncertain with the withdrawal of a large oil company from exploration in the Joint Development Zone shared with Nigeria.

The oil fields are to be developed jointly with Nigeria in a Joint Development Zone (JDZ) and managed by a Joint Development Authority (JDA) under an agreement between the two countries signed in 2001 that settled a long-standing maritime boundary dispute. Under the agreement, Nigeria will take 60% of the profits and São Tomé 40%. Oil licensing has been controversial. Certain companies (Exxon Mobil and ERHC) were given preferential rights several years ago. The government had since renegotiated more favorable terms to other companies but alleged irregularities in the adjudication process for awarding the licences delayed the final award of the blocks. After a lengthy series of negotiations, in April 2003 the joint development zone (JDZ) was opened for bids by international oil firms. The JDZ was divided into 9 blocks; the winning bids for block one, Chevron, ExxonMobil, and the Norwegian firm Equity Energy, were announced in April 2004, with Sao Tome to take in 40% of the $123 million bid, and Nigeria the other 60%. Blocks 2 through 6 were allocated in June 2005. Nigeria and Sao Tome signed production sharing contracts with the winning bidders in November 2005. Chevron became the first firm to start exploratory drilling in January 2006.

Several blocs were awarded in April 2004 and May 2005 after prolonged licensing rounds. The country received its first signature bonus in July 2005 from the licensing of Block 1. Chevron, the operator of Block 1, announced in March that an oil discovery it had made in 2006 would not be commerically exploitable. In order to cope with the huge impact of oil receipts, the government adopted an Oil Revenue Management Law in late 2004 to ensure that oil revenue is managed transparently and efficiently. The Law also provides for a government Trust Fund.

The National Petroleum Agency (Agencia Nacional do Petróleo, ANP-STP) informed the public 04 May 2011 that the Government of SaoTome and Principe awarded Block 3 to the ORANTO PETROLEUM. This Block covers an area of 4,228 km2 and is situated in zone A of the Exclusive Economic Zone. ORANTO PETROLEUM is an independent Nigerian company with operations since 1991 and the company is an active operator in fourteen Blocks in West Africa and Gulf of Guinea.

Total withdrew from Block 1 of the joint area in August 2013. It had previously been abandoned by US group Chevron in 2010, with the same argument that commercially viable oil did not exist. ão Tomé and Prínciple and Nigeria have found an estimated amount of nearly 100 million barrels of commercially viable oil in Bloc 1 of the joint area, the head of the Joint Exploration Authority told Macauhub 02 July 2014.

STP’s oil wealth would not only represent unprecedented opportunities for the country but also involves major risks and challenges: major opportunities, because the expected massive inflow of oil revenue had the potential to substantially reduce poverty and to sustainably transform STP into an upper middle income country over a decade; major risks and challenges, given the country’s weak strategic, legal and regulatory frameworks as well as insufficient capacity of the public administration, notably with regard to the transparent management and effective and efficient utilization of public financial resources.

Cocoa

The dominant crop on Sao Tome is cocoa, representing about 95% of exports. Other export crops include copra (a coconut product), palm kernels, and coffee. The economy of this micro-state was still dominated by the export of cocoa which represented 95% of exports by value as of 2010. Production of coffee peaked in 1898 at 2,500 tons but had practically disappeared at independence (45 tons). Cocoa was first introduced in 1850. Production peaked in 1913 at 36,500 tons, representing 12 percent of world production, but declined steadily until the pre-independence years, reaching an annual plateau of about 10,000 tons, with a cultivated area of 20,000 ha. This decline is attributed mainly to emigration to Brazil, where conditions for larger scale plantations were more favorable, of Sao Tomeans and Portuguese who were cultivating marginal lands.

The cocoa plantations, nationalised at independence, have since been re-privatised as part of economic reforms introduced in the late 1980s. Since the 1800s, plantation agriculture dominated the economy of Sao Tome and Principe. At the time of independence, Portuguese-owned plantations occupied 90% of the cultivated area. After independence, control of these plantations passed to various state-owned agricultural enterprises, which have since been privatized.

The State Enterprises [SEs] were created at the time of independence to manage the plantations abandoned by the Portuguese. These enterprises had a variety of problems which caused the alarming decline in cocoa output and productivity. Foremost among these problems were weak management and lack of qualified manpower together with a system of remuneration to management and labor that failed to provide incentives. Other important problems were: a) insufficient autonomy within a centralized bureaucratic system which does not encourage initiative; b) poor allocation of labor between direct production and support activities; c) poor work discipline and absenteeism; d) difficult to quantify, but sizeable cuts in real wages since 1981; and e) financial constraints within the enterprises.

Other Sectors

There is virtually no large-scale manufacturing. Small factories process local resources to produce soap, beverages, foodstuffs, and textiles. The economy suffered a chronic shortage of labor, which was not likely to be rectified, given the history of exploitation and oppressive labor practices on the island during the colonial era.

The country inherited a relatively good infrastructure from the colonial administration, especially roads (total network 380 km of which 200 km of paved roads), buildings, electricity and water supply. At the beginning of the 1970s, however, the prospects of independence led the Portuguese corporations to disinvest and not fully maintain their STP assets: most of the infrastructure is today still in much need of repair and maintenance. In the agricultural sector, the soils and the variety of micro-climates render possible the cultivation of almost all tropical products. Arable land totals 40,000 hectares and a significant unexploited potential exists in fisheries and forestry.

Full understanding of STP's economic performance since independence was hindered by a poor data base and frequently changing accounting practices. However, estimates by Bank and Fund missions showed that GDP per capita rose to about $480 in 1980, mainly because of strong prices for cocoa and copra, but fell to $237 (in constant 1980 prices) by 1983, due to a sharp decline in cocoa output and prices. Cocoa production fell from 10,000 tpa in the last years before independence, to about 6,000 tpa right after independence and about 3,500 tons in 1983.

With export crops the focus of agricultural production, domestic food-crops are inadequate to meet local consumption, resulting in the need for food imports. Foreign donors are financing projects to expand food production, which now includes bananas, beans, cinnamon, and pepper. Cultivated land amounts to 484 sq. kilometers of the country’s roughly 1,000 sq. kilometers, even though agriculture accounted for only 14% of GDP in 2009.

Other than agriculture, the main economic activities center on fishing and a small industrial sector engaged in light construction, processing local agricultural products, and producing a few basic consumer goods such as clothing, soap, beer, and palm oil. The scenic islands have potential for tourism, and the government is attempting to improve its rudimentary tourist industry infrastructure. The government sector accounts for about 11% of employment.

Following independence, the country had a centrally directed economy with most means of production owned and controlled by the state. The original constitution guaranteed a 'mixed economy' with privately owned cooperatives combined with publicly owned property and means of production. Since independence, most of the agricultural land was nationalized and the large agricultural and industrial enterprises are owned and managed by the State through a number of State Enterprises (SEs). Economic activities were centrally planned and administered, with the Ministry of Planning being responsible for public finance, central and commercial banking, foreign exchange management and the financial control of the 42 SEs. Prices, wages and salaries were administered by the Government. Centralization was partly a consequence of the size of the country, of an acute shortage of qualified personnel which followed the departure of the Portuguese and many of the Cape Verdeans in 1975, and of the very small number of independent farmers resulting from colonial policies which discouraged subsistence farming.

However, in the 1980s and 1990s, the economy of Sao Tome encountered major difficulties. Efforts to redistribute plantation land resulted in decreased cocoa production while at the same time the international price of cocoa slumped. Economic growth stagnated, and cocoa exports dropped in both value and volume creating large balance-of-payments deficits.

In response to the economic downturn, the government undertook a series of far-reaching economic reforms. In 1987, the government implemented an International Monetary Fund (IMF) structural adjustment program and invited greater private participation in management of the state corporations (parastatals), as well as in the agricultural, commercial, banking, and tourism sectors. The focus of economic reform since the early 1990s has been widespread privatization, especially of the state-run agricultural and industrial sectors.

The Sao Tomean Government has traditionally relied on foreign assistance from various donors, including the UN Development Program (UNDP), the World Bank, the European Union (EU), Portugal, Taiwan, and the African Development Bank (AFDB). Sao Tome qualified for debt relief when it reached decision point under the IMF's Heavily Indebted Poor Countries Initiative (HIPC) in December 2000, but it went off track on its poverty reduction program in early 2001. After 4 years and satisfactory performance on an interim staff-monitored program, the IMF approved a 3-year $4.3 million Poverty Reduction and Growth Facility (PRGF) program for Sao Tome in September 2005. The ambitious program aimed to reduce inflation to a single-digit number, address the country's macroeconomic imbalances, and substantially reduce poverty. Another 3-year PRGF arrangement was approved in March 2009.

Portugal remains one of Sao Tome's major trading partners, particularly as a source of imports. Food, manufactured articles, machinery, and transportation equipment are imported primarily from the EU via Portugal.

As a small open economy STP is sensitive to the external environment. The main risk was that the European sovereign debt crisis could threaten external aid flows and tourism revenues. In addition, changes in global fuel and food prices would impact STP. Mitigation efforts included reforming public financial management and enhancing expenditure controls, and the government had made considerable progress in improving fiscal balances and increasing available resources to counter external shocks.