São Tomé and Príncipe (STP) are two islands of volcanic origin located off the coast of western Africa. Since the late 1400s, Portugal began settling convicts on São Tomé and Portuguese became the most commonly spoken language. The island successfully established sugar plantations and became extremely significant shortly after in the transshipment of slaves.
São Tomé and Príncipe
Portugal finally recognized the independence of São Tomé and Príncipe after the coup in 1974. In 1995, Príncipe assumed autonomy and established a multiparty democracy in their 1990 constitution.
Today, the islands have a unitary state comprised of roughly 200,000 people. The country is small, leaving it very fragile to economic shifts, and recent studies estimate that 62 percent of the population is impoverished. Urban poverty is also high because of the limited employment opportunities.
Nevertheless, São Tomé and Príncipe performs high on the UNDP Human Development Index. The gross primary school enrollment is at an astounding 110 percent, and access to basic needs continue to improve. For instance, 97 percent of the population has seen an increase in access to water, and 60 percent of the population can access electricity.
Room For Improvement
The government of São Tomé and Príncipe has implemented several tactics to improve the business sector; however, the country still has issues maintaining its recent levels of growth. The challenges they face are predominantly due to:
- The government’s delicate economic situation
- A banking industry with low-performing loans and insufficient capital
- Outside imbalances
Unfortunately, São Tomé and Príncipe has a small island economy. There is no single economic endeavor that has acted as a driver of growth. Agriculture is mainly used to support the economy, but in recent years it has not been able to counteract the rise of imports; government expenditures have become the principal driver in the country’s growth. The government has been investing in oil exploration and yet production isn’t anticipated until sometime after 2020.
Credit Access in São Tomé and Príncipe
Fortunately, São Tomé and Príncipe has seen some progress in credit. The decade before 2013, the small nation saw a growth in loans for construction, consumption and trade. This growth is likely a result of the potential oil production, but the most recent years have not seen this access.
Credit exposure to specific sectors is very dangerous to STP. In 2015, credit given to the construction sector was mostly offered by one bank. The same can be said for the manufacturing and tourism sectors; however, this comes as a great threat for credit access in São Tomé and Príncipe, as concentration in one bank can make banks susceptible to industry-specific shocks.
Banking and Government Sectors
Banks in STP also face the issue of high operating costs — particularly in utilities like electricity and technology infrastructure — which causes credit access in São Tomé and Príncipe to become at risk. Moreover, in 2015, there was an influx in provisions for loan losses, further troubling the banks. Banks have likewise confessed that since 2013, negative earnings have been on the rise.
The government of STP is working to address the imbalances in the economy by improving domestic revenue, controlling spending and implementing improved management. Public officials are also attempting to secure outside financing through grants and loans. They believe that by supporting economic activities, there will be an increase in earnings from exports.
Furthermore, the government is working to implement policy changes believed to progress the credit market. With these policies, access to credit access in São Tomé and Príncipe is projected to improve and will create opportunities for families at the lower end of income distribution.
The World Bank currently works with São Tomé and Príncipe to address their economic issues, and it is believed that the financial sector will greatly improve with increased access to credit in São Tomé and Príncipe. Better-quality credit access and improved energy are the country’s strongest chance to fix their economic problems, and both the agriculture and tourism industries would greatly benefit from better access to loans.
These changes could pull the country, and its most disadvantaged members, out of the fiscal danger zone and on into financial success.
– Stefanie Babb