March 1, 2006
SÃO TOMÉ AND PRÍNCIPE
DIAGNOSTIC TRADE INTEGRATION STUDY
TABLE OF CONTENTS
PREFACE
EXECUTIVE SUMMary AND ACTION MATRIX
1.THE ECONOMY OF SÃ0 TOMÉ E PRÍNCIPE
Introduction
Political Background and Recent Developments
The Poverty Reduction Strategy Paper (PRSP) and the Need for a National Consensus on Development Priorities
Recent Economic Developments and the Macroeconomic Framework
The Coming Oil Era
2.The Foreign Trade of São Tomé e Príncipe
Introduction
The Structure of Foreign Trade
Services
The Trade Regime
International Trade Relations and Access to Markets
Accession to the World Trade Organization (WTO)
The Economic Partnership Agreement with the European Union
Other Trade Relations
Negotiating Capacity
Customs Administration and Procedures
3.EXPORT AND POVERTY REDUCTION POTENTIAL FROM RENEWABLE NATURAL RESOURCES AND TOURISM
Introduction
The Rural Sector in STP
Agricultural Production
Cocoa
Non-traditional Food Exports
Fisheries
Tourism
Forests and the Environment
An Action Program
Public Sector
Private Sector
4.IMPEDIMENTS TO TRADE EXPANSION AND DIVERSIFICATION
Introduction
Infrastructure and Finance Services
Electricity and Water
Telecommunications
Internal Transport
Port and Airport Facilities
Finance
The Public-Private Interface
Special Regimes
Governance
Conflict Resolution
The Land Issue
Human Capital
Summary of Recommended Measures
5.THE IMPACT OF TRADE ON POVERTY
Introduction
Poverty in STP
Simulations of the impact of trade shocks on poverty
Impact of worsening terms of trade
Impact of the construction of a deep-water port
Impact of oil money inflows
List of Tables
Table 1. 1: São Tomé and Príncipe: Key Macroeconomic Indicators, 1998-2004
Table 1. 2: São Tomé and Príncipe: Key Macroeconomic Indicators, 2003-2007
Table 2. 1: Composition and Direction of STP's Foreign Trade
Table 2. 2: Share of Main export commodities in total export
Table 2. 3: STP’S Terms of Trade and the Price of Cocoa
Table 2. 4: STP Government Revenues
Table 3. 1: Summary Farm Budget Smallholder (dobros of 1997/month)
Table 3. 2: Number of Foreigners Visiting STP between 1998 and June 2003.
Table 3. 3: Sao Tome and Principe: Production of Main Agricultural Products
Table 3. 4: Sao Tome and Principe: Agricultural Exports
Table 3. 5: Sao Tome and Principe: Crop Mix, 1996
Table 4. 1: Comparative Data for Factor Costs in Selected African Countries
Table 4. 2: São Tomé International Airport Selected Indicators
Table 4. 3: Nominal Bank Deposit and Lending Rates in Selected African Countries
Table 5. 1: Share of Various Income Sources by Income Quintile
Table 5. 2: Descriptive Statistics by Strata
Table 5. 3:Share of Various Expenditures by Consumption Quintile, 2000-01
Table 5. 4: Change of commodity prices and exchange rate from 2001 to 2011
Table 5. 5: Effect on poverty of adverse terms of trade – all exports and cocoa only
Table 5. 6: Effect on poverty of adverse terms of trade decomposed into wage effect and export earnings
Table 5. 7: Effect of a fall in import prices and an increase in export earnings of 5, 10 and 15 %
Table 5. 8: Evolution of the exchange rate and consumer prices
Table 5. 9: Price effect of appreciation on poverty decomposed into wage effect and goods price effect
List of Boxes
Box 1. 1: São Tomé and Principe’s Oil Sector
Box 1. 2: The December 2004 Oil Revenue Management Law (ORML)
Box 2. 1: The process of accession to the WTO
Box 2. 2: STP and the European Union: Generalized System of Preferences, Everything But Arms, and the Cotonou Agreement
Box 2. 3: African Growth and Opportunity (AGOA)
Box 4. 1: Electricity Supply in STP
Box 4. 2: Current Conditions in the Port of São Tomé
Box 4. 3: São Tomé e Príncipe’s Current Tax Regime
Box 4. 4: The 1992 Investment Code
Box 4. 5: STP’s Free Zone Regime
Box 4. 6: Capacity Building in the Justice Sector
Box 4. 7: The Land Question and Foreign Investment in STP
APPENDIX 1: Actual and Predicted Evolution of Export Prices…….……….97
CURRENCY EQUIVALENTS
Currency unit = / São Toméan dobras (Db)US$1.00 = / Db 9,699.40 (period average 2005)
ABBREVIATIONS AND ACRONYMS
ACP / African,Caribbean and Pacific CountiresAGOA / African Growth and Opportunity Act
APHIS / Animal Plant Health Inspection Servioce
BISTP / Banco Internacional de São Tomé et Prïncipe
CEMAC / Central African Economic and Monetary Community
CIAT / Centro de Investigaçao Agronomica e Tecnologica
CNP / Conto Nacional de Petroleo
CST / Companhia Sãotomense de Telecommunicacões
DTIS / Diagnostic Trade Integration Study
EBA / Everything But Arms
ECCAS / Economic Community of Central African States
EMAE / Empresa de Agua e Electricidad
EPA / Economic Partnership Agreement
EU / European Union
FIAS / Foreign Investment Advisory Service
FPA / Fisheries Partnership Agreement
FZA / Free Zone Authority
GATT / General Agreement on Tariffs and Trade
GDP / Gross Domestic Product
GSD / Generalized System of Preferences
HIPC / Highly Indebted Poor Countries
IDA / International Development Association
IFAD / International Fund for Agricultural Development
IFC / International Finance Corporation
IMF / International Monetary Fund
ISP / Instito Superior Politécnico
LDC / Least Developed Countries
NGO / Non-Governmental Organization
OECD / Organisation for Economic Cooperation and Development
ORML / Oil Revenue Management Law
PRGF / Poverty Reduction and Growth Facility
PRSP / Poverty Reduction Strategy Paper
SPS / Sanitary and Phytosanitary Measures
TBT / Technical Barriers to Trade
TEU / Twenty Foot Equivalent Unit
TRIPS / Trade Related Intellectual Property Rights
UNDP / United Nations Development Program
WADCO / West African Development Company
WAEMU / West Africa Economic and Monetary Union
WTO / World Trade Organization
PREFACE
This report was drafted following a visit by a team of foreign and local consultants who worked in São Tomé e Príncipe (STP) during a three week visit in October, 2004. Updates were provided during a subsequent visit by the mission chief in May, 2005. The team was guided by the Ministry of Commerce, Industry and Tourism. The focal person in the Government was Mr. Idalino Lopes Dos Ramos Rita, Director of Commerce.
The study team consisted of Nelson Antonio Abreu de Asunção, Enrique Aldaz-Carroll, Acacio Elba Bomfim, Paulo Brigido do Macedo, Jean-Marie Burgaud, Robert Lacey (chief of mission) and Richard Lacroix. Dorsati Madani (Country Economist for STP, World Bank), and Philip English (Trade Coordinator, West Africa, World Bank) provided inputs to later versions of the report and guided the process. The report draws on background papers and other work of the World Bank, UNDP, the IMF, other United Nations Organizations, and the Earth Institute, University of Columbia.
Thanks are due to the Government officials and the many individuals interviewed by the team in STP as well as in Europe and North America. The UNDP Resident Mission in STP provided welcome logistical support during the main mission as well as helpful comments on a first draft of the report. A subsequent draft benefited from comments from the Integrated Framework partner agencies, a review meeting at the World Bank, a public workshop in Sao Tome and Principe, and from various Government Ministries. Josette Percival provided valuable administrative support throughout the entire exercise, and editorial assistance in documentation preparation.
EXECUTIVE SUMMaryANDACTION MATRIX
- The Integrated Framework (IF) was established under the auspices of the World Trade Organization (WTO) in October 1997, to facilitate the coordination of trade-related technical assistance to least developed countries (LDC), and to promote an integrated approach to assist these countries in enhancing their trade opportunities. In accordance with the requirements of the IF process, this Diagnostic Trade Integration Study (DTIS) for São Tomé e Príncipe (STP) is intended to be a vehicle to analyze constraints to the country’s integration into the global economy, identify the trade-related technical assistance needs to enhance prospects for increased integration, and to incorporate trade issues into the country’s national development strategies including its poverty reduction strategy.
- After this Executive Summary, the DTIS contains an Action Matrix indicating the policy measures, technical assistance and investment projects required to enhance trade. The Matrix is subdivided according to time periods and priorities. The body of the study consists of five chapters. Chapter One introduces STP’s economy against the background of the approaching oil era; Chapter Two discusses STP’s trade relations; Chapter Three examines export potential in the light of the country’s natural resource endowments; Chapter Four analyses the main impediments to investment and export growth and diversification in STP; and Chapter Five reviews the state of poverty in STP, and simulates the impact that falling long term cocoa prices, enhanced trade facilitation, and oil revenues could have on the poor.
- For a small, open economy, export trade is remarkably underdeveloped in STP. While imports are equivalent to 84 percent of GDP, exports equal just over one third of GDP. The gap is financed by foreign grants and loans, mostly on concessionary terms. Low exports reflect STP’s restricted production base. Goods exports are dominated by cocoa, which has been in long term decline for nearly a century. Tourism, although small scale, now earns more foreign exchange than all goods exports put together.
- STP is a poor, least developed country. Over half the population of about 150,000 lives below the poverty line and 15 percent is extremely poor. The majority of the poor, and nearly all the extremely poor, live in rural areas. Since the redistribution of much of the large, formerly Portuguese - and subsequently state-owned - cocoa estates, most agricultural production is carried out by smallholders. Under current production conditions, cocoa does not provide most smallholders with enough income to meet basic needs. Many of them, therefore, also work as wage earning laborers and/or supplement cocoa with other crops or livestock.
- Increasing the very low productivity of existing smallholder production and promoting diversification to higher income yielding crops are, therefore, essential to alleviate poverty in STP. There is convincing evidence that both would be technically feasible for smallholders. Given the very low level of effective local demand, most increased output would need to be exported.
- The priority of smallholder agriculture is fully recognized in STP’s Poverty Reduction Strategy Paper (PRSP), which proposes a comprehensive private sector-led development strategy. It aims at broad based growth founded on product diversification for export. This approach is also supported by the economic analysis carried out in this study which assesses the impact of falling long term cocoa prices, enhanced trade facilitation (through, for example, better trade-related infrastructure), and -- eventually -- oil revenues on the poor.
- In addition to enhanced and diversified agricultural production, STP also has the potential for significant increased earnings from service activities. Of these, the most immediately promising is high value tourism (especially eco-tourism attracted by the Islands’ unique flora and fauna). Later, there could be scope for the provision of goods and services to the oil industry and the development of international transshipment and entrepôt services.
- In the short term, priority should be given to increasing smallholder income from cocoa – which currently employs the overwhelming majority of the working poor -- through improved varieties, production techniques and marketing. There is convincing evidence from both STP and elsewhere that this would be technically feasible. Improved varieties have already been successfully introduced into STP by a few investors, and can be spread to smallholders, together with enhanced production techniques, both through investors relying on out-growers, and through greatly strengthened local extension and research services.
- However, perhaps the largest potential pay-off, at least in the short term, is through better post harvest techniques and marketing. Most smallholders sell raw cocoa beans to traders for a low price and with no value added. The trader carries out the grading, cleaning, fermentation and, most importantly, drying. There is already a major price incentive[1] for transferring the fermentation and drying operations to the village level as is common in cocoa growing areas on the African continent and elsewhere. That this nevertheless hardly ever happens suggests the presence of technical and institutional constraints. These could be addressed by (i) increasing the availability of small scale solar powered cocoa driers[2]; (ii) having the major buyers, in collaboration with the extension services, conduct rural workshops on collection, drying and other post harvest technologies; and (iii) equipping extension workers with simple hand-held scales which would enable the small farmer to verify the veracity of the weights measured by the buyers[3]. Efforts could equally focus on strengthening the marketing power of small producers through grouping of farmers into cooperatives or similar organizations, and through enhancing farmers’ knowledge of the market through regular broadcasting of international and local buying prices and of quantities exported on a rural radio service.
- There are already indications of the potential for diversification to higher-income yielding crops. Despite the limitations of the current infrastructure, a few small operations are able to cultivate high quality coffee, palm oil, tropical flowers, and fruits and vegetables, mostly for the export market. Experience both in these operations and in cocoa shows that a model involving a partnership between private investors and smallholders can be successful. Investors provide smallholders with credit, technical assistance, and – above all – guaranteed access to market. Their own farming operations, except in the initial stages, supply only a portion of the produce exported. As time goes on, they rely increasingly on out-growers. Other models may also be suitable to STP’s environment. Palm oil and cassava meal, all produced by smallholders, have been successfully exported by local traders to the Portuguese ethnic market. Local farmers could form an association to produce for export. While successful elsewhere, this latter kind of operation has not yet developed to any significant extent in STP.
- After agriculture, the activity which provides the greatest potential for poverty reduction in the short to medium term is fishing. The artisan fishing industry is, after cocoa, the most important income source for the poor. It provides principal or supplementary employment to about 18,000 people, including (mostly women) traders, whose annual per capita income was estimated in 2001 to be just over US$160. About 70 percent of the protein consumption of STP’s population comes from fish. However, the sector is underdeveloped and characterized by extremely rudimentary production and marketing techniques. Donor projects, of which there have been several, have had little or no impact.
- In addition to artisan activity, industrial fishing is carried out by foreign (mostly European) fleets in STP’s territorial waters. STP receives an annual compensation for this which is theoretically set at 750,000 euros, but is almost always considerably less than this. There would appear to be scope for negotiating a substantial increase in STP’s revenue from this activity. These receipts could, in turn, be partly earmarked for the development of the local, artisan fishing industry. Funds could also be invested in enhancement of the Navy to enable it to patrol STP’s fishing waters more effectively and to provide a search and rescue service for local fishing vessels.
- Although substantially less than in agriculture and fisheries, the potential contribution of tourism to economic growth and poverty reduction in STP is nevertheless significant. The sector’s current small size, the low occupation rates of existing facilities, and the archipelago’s natural assets, all indicate considerable scope for expansion. This would not, however, take the form of mass “beach” tourism, which would be inconsistent both with STP’s comparative advantage and with sustainable development goals. Rather, the Government’s strategy is to focus primarily on adventure/cultural/eco-tourism, combining this with modest growth in beach resorts.
- No reliable statistics exist of the number of tourists visiting STP. The number of foreign visitors – currently about 10,000 per year -- has almost doubled since 1998. It is informally estimated that about half of these may be holiday tourists. Except for the main hotel in São Tomé city, existing tourist facilities throughout the archipelago are distinctly under-occupied. The Government aims to increase the number of foreign visitors to 25,000 by 2010. The additional 15,000 visitors are expected to create some 1,500 direct and indirect jobs and to double the share of tourism in GDP to about 4.5 percent. Construction would also benefit from the provision of about 350 additional hotel rooms.
- If this, or even a more modest, target is to be achieved, improvements would need to be made in: (a) health conditions and services, especially in reducing the incidence of malaria and of water-borne intestinal infections and establishing adequate emergency care, including evacuation facilities; (b) the quality and cost of air transport to and from STP; (c) training of tourist industry personnel; (d) tourist infrastructure, facilities and sites; and (e) sector regulatory and supervisory capacity especially with regard to environmental protection.
- STP stands on the threshold of the oil era. Oil may increase the country’s per capita income by more than ten fold by the beginning of the third decade of this century. The prospect of this wealth increases rather than diminishes the importance of focusing on enhanced efficiency and diversification in agriculture, fisheries and tourism. This is for at least four reasons. First, oil riches will be temporary, and it is essential that the country be provided with a more solid production base for the long term future. Second, export diversification will make the country less vulnerable to oil price volatility. Third, while developing agriculture, fishing and tourism would build upon STP’s long term comparative advantage, probable upward pressures on the real exchange rate will need to be offset by increased productivity. Fourth, higher agricultural output from smallholders, with concomitant increases in rural living standards, together with modernization of the artisan fishing industry are crucial for reducing poverty in the short-term.