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6

II – ANALYSIS OF THE MACROECONOMIC SITUATION

2.1 Economic Performance in 2006

The economy of São Tomé and Príncipe continues to be heavily dependent on the situation of the international economy, as reflected in the steady deterioration of its terms of trade, mainly as a result of rising oil prices, the sharp appreciation in the currencies of São Tomé and Príncipe’s trading markets, combined with a steady decline in the price of its principal export product, cocoa.

Notwithstanding this market situation, which resulted in a larger trade deficit, economic activity improved somewhat, driven mainly by the services and construction sectors, with GDP growing by more than 6 percent in 2006 which, if sustained, is sufficient for STP to attain the Millennium Development Goals (MDGs). Year-on-year inflation rose to 24.6 percent in 2006, compared with 17.2 percent in 2005, as a result of temporary exogenous factors and fiscal and monetary growth, namely the domestic adjustment in fuel prices, large unforeseen inflows of private capital and the resulting accumulation of foreign exchange deposits, as well as some unplanned fiscal expenditure related to elections.

Figure 1

Consumer Price Index

30%

24.6%

25%

20.6%

21.1%

21.8%

22.8%

20%

16.8%

17.4%

18.3%

19.3%

15%

11.0%

10%

6.5%

4.3%

5.1%

5%

0%

    • 2.7

      %

    • 2.7

      %

3.7%

0.5%

0.7%

0.9%

1.1%

0.4%

0.6%

0.8%

1.5%

Jan

Feb

Mar

Apr

May Jun Jul

Aug

Sep

Oct

Nov

Dec

Cumulative inflation Monthly percentage change

Source: INE, Consumer Price Index

Fiscal performance improved somewhat in 2006. The primary balance derived form the difference between the government’s current revenue and its expenditure remained close to program targets (15.5 percent of GDP).

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