Country Economic Memorandum for Sao Tome and Principe - Background Note 2 : Is it Sustainable for Sao Tome and Príncipe to Have a Large Current Account Deficit and a Fixed Exchange Rate?

Is it sustainable for São Tomé and Príncipe to have a large current account deficit and a fixed exchange rate peg? Sao Tomé and Príncipe (STP) pegs its currency, the dobra, to the euro and has both persistent current account deficits and a persiste...

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Main Authors:	Arteta, Carlos, Kirby, Patrick
Format:	Report
Language:	English
Published:	World Bank, Washington, DC 2019
Subjects:	CURRENT ACCOUNT DEFICIT FIXED EXCHANGE RATE TRADE BALANCE CAPITAL INFLOWS
Online Access:	http://documents.worldbank.org/curated/en/751241562907012780/Country-Economic-Memorandum-Background-Note-2-Economic-Growth-and-Volatility-Is-it-Sustainable-for-Sao-Tome-and-Príncipe-to-have-a-Large-Current-Account-Deficitand-a-Fixed-Exchange-Rate http://hdl.handle.net/10986/32141

id	okr-10986-32141
recordtype	oai_dc
spelling	okr-10986-321412021-05-25T09:26:19Z Country Economic Memorandum for Sao Tome and Principe - Background Note 2 : Is it Sustainable for Sao Tome and Príncipe to Have a Large Current Account Deficit and a Fixed Exchange Rate? Arteta, Carlos Kirby, Patrick CURRENT ACCOUNT DEFICIT FIXED EXCHANGE RATE TRADE BALANCE CAPITAL INFLOWS Is it sustainable for São Tomé and Príncipe to have a large current account deficit and a fixed exchange rate peg? Sao Tomé and Príncipe (STP) pegs its currency, the dobra, to the euro and has both persistent current account deficits and a persistent inflation differential with the Euro Area. In other countries, these characteristics have proved to be unsustainable over time, as rising debt and a worsening trade imbalance leads to the abandonment of the peg. This note examines whether this might be the case in STP, and finds that, despite some vulnerabilities, there does not appear to be an immediate threat to the peg, as the country’s current account deficits seem to be determined not by its trade balance but by its capital balance, which is largely sustained by inflows of aid and remittances. This background note has four sections: the first examines the general theoretical conditions for the sustainability of exchange rate pegs, the second assesses whether these conditions exist or are relevant for STP, a small, open economy with a small financial sector, and the third provides analysis of the drivers of the country’s current account deficit. Policymakers could mitigate risks to the peg by broadening the country’s revenue base, developing a domestic debt market, and diversifying exports. 2019-07-29T21:21:24Z 2019-07-29T21:21:24Z 2019-06-26 Report http://documents.worldbank.org/curated/en/751241562907012780/Country-Economic-Memorandum-Background-Note-2-Economic-Growth-and-Volatility-Is-it-Sustainable-for-Sao-Tome-and-Príncipe-to-have-a-Large-Current-Account-Deficitand-a-Fixed-Exchange-Rate http://hdl.handle.net/10986/32141 English CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Economic & Sector Work :: Country Economic Memorandum Economic & Sector Work Africa Sao Tome and Principe
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English
topic	CURRENT ACCOUNT DEFICIT FIXED EXCHANGE RATE TRADE BALANCE CAPITAL INFLOWS
spellingShingle	CURRENT ACCOUNT DEFICIT FIXED EXCHANGE RATE TRADE BALANCE CAPITAL INFLOWS Arteta, Carlos Kirby, Patrick Country Economic Memorandum for Sao Tome and Principe - Background Note 2 : Is it Sustainable for Sao Tome and Príncipe to Have a Large Current Account Deficit and a Fixed Exchange Rate?
geographic_facet	Africa Sao Tome and Principe
description	Is it sustainable for São Tomé and Príncipe to have a large current account deficit and a fixed exchange rate peg? Sao Tomé and Príncipe (STP) pegs its currency, the dobra, to the euro and has both persistent current account deficits and a persistent inflation differential with the Euro Area. In other countries, these characteristics have proved to be unsustainable over time, as rising debt and a worsening trade imbalance leads to the abandonment of the peg. This note examines whether this might be the case in STP, and finds that, despite some vulnerabilities, there does not appear to be an immediate threat to the peg, as the country’s current account deficits seem to be determined not by its trade balance but by its capital balance, which is largely sustained by inflows of aid and remittances. This background note has four sections: the first examines the general theoretical conditions for the sustainability of exchange rate pegs, the second assesses whether these conditions exist or are relevant for STP, a small, open economy with a small financial sector, and the third provides analysis of the drivers of the country’s current account deficit. Policymakers could mitigate risks to the peg by broadening the country’s revenue base, developing a domestic debt market, and diversifying exports.
format	Report
author	Arteta, Carlos Kirby, Patrick
author_facet	Arteta, Carlos Kirby, Patrick
author_sort	Arteta, Carlos
title	Country Economic Memorandum for Sao Tome and Principe - Background Note 2 : Is it Sustainable for Sao Tome and Príncipe to Have a Large Current Account Deficit and a Fixed Exchange Rate?
title_short	Country Economic Memorandum for Sao Tome and Principe - Background Note 2 : Is it Sustainable for Sao Tome and Príncipe to Have a Large Current Account Deficit and a Fixed Exchange Rate?
title_full	Country Economic Memorandum for Sao Tome and Principe - Background Note 2 : Is it Sustainable for Sao Tome and Príncipe to Have a Large Current Account Deficit and a Fixed Exchange Rate?
title_fullStr	Country Economic Memorandum for Sao Tome and Principe - Background Note 2 : Is it Sustainable for Sao Tome and Príncipe to Have a Large Current Account Deficit and a Fixed Exchange Rate?
title_full_unstemmed	Country Economic Memorandum for Sao Tome and Principe - Background Note 2 : Is it Sustainable for Sao Tome and Príncipe to Have a Large Current Account Deficit and a Fixed Exchange Rate?
title_sort	country economic memorandum for sao tome and principe - background note 2 : is it sustainable for sao tome and príncipe to have a large current account deficit and a fixed exchange rate?
publisher	World Bank, Washington, DC
publishDate	2019
url	http://documents.worldbank.org/curated/en/751241562907012780/Country-Economic-Memorandum-Background-Note-2-Economic-Growth-and-Volatility-Is-it-Sustainable-for-Sao-Tome-and-Príncipe-to-have-a-Large-Current-Account-Deficitand-a-Fixed-Exchange-Rate http://hdl.handle.net/10986/32141
_version_	1764475865367838720

Country Economic Memorandum for Sao Tome and Principe - Background Note 2 : Is it Sustainable for Sao Tome and Príncipe to Have a Large Current Account Deficit and a Fixed Exchange Rate?

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