The World Bank Second STP COVID-19 Recovery and Resilience Development Policy Operation (P174274) Program Information Document (PID) Concept Stage | Date Prepared/Updated: 16-Jun-2021| Report No: PIDC31942 Page 1 of 7 The World Bank Second STP COVID-19 Recovery and Resilience Development Policy Operation (P174274) BASIC INFORMATION A. Basic Project Data OPS TABLE Country Project ID Project Name Parent Project ID (if any) Sao Tome and Principe P174274 Second STP COVID-19 P168335 Recovery and Resilience Development Policy Operation (P174274) Region Estimated Board Date Practice Area (Lead) Financing Instrument AFRICA EAST Nov 04, 2021 Macroeconomics, Trade Development Policy and Investment Financing Borrower(s) Implementing Agency Government of Sao Tome Ministry of Planning, Finance and Blue Economy and Principe Proposed Development Objective(s) The objective of this operation is to support the government's response to the human and economic impact of the COVID-19 pandemic and economy-wide and sectoral reforms for a stronger recovery. Financing (in US$, Millions) FIN_SUMM_PUB_TBL SUMMARY Total Financing 10.00 DETAILS -NewFin3 Total World Bank Group Financing 10.00 World Bank Lending 10.00 Decision The review did authorize the preparation to continue Page 2 of 7 The World Bank Second STP COVID-19 Recovery and Resilience Development Policy Operation (P174274) B. Introduction and Context Country Context São Tomé and Príncipe is a lower middle-income and small-island country that faces challenges typical of small states. The country consists of two main islands in the Gulf of Guinea with a surface area of 1,001 km2. São Tomé and Príncipe is a multiparty democracy and a unitary state (though the island of Príncipe is recognized as an autonomous region), and its total population is approximately 200,000, with 42.6 percent of the population at or below the age of fourteen. In 2019 the country’s per capita gross national income was estimated at US$4,130 in purchasing power parity (PPP), and its per capita gross domestic product (GDP) at market exchange rates was US$1,947. As of 2019, two-thirds of the population lived in poverty according to national poverty methodology, including 35.4 percent below the global poverty line of US$1.90 (2011 PPP) per person per day. São Tomé and Príncipe’s development challenges are typical of small island nations, including a high fixed cost of public goods limiting effective investments in human development and an undiversified production base. São Tomé and Príncipe has reported 2,345 cases of COVID-19 infection and 45 deaths as of June 1, 2021. The COVID-19 outbreak in São Tomé and Príncipe is among the worst in Africa on a per capita basis (1,172 per 100,000 inhabitants). Thanks to generous external financing, São Tomé and Príncipe’s economy expanded in 2020, despite the impact of COVID- 19. The island nation’s economy was affected by near total decline in tourism, one of the growth drivers of the economy prior to the pandemic. However, according to government statistics, the decline in some economic activities due to the pandemic was more than offset by increased government spending and investment, financed by exceptionally large donor financing during the crisis. Accordingly, São Tomé and Príncipe’s GDP grew by 3.1 percent in 2020, above the rate of 2.2 percent recorded in 2019. Relationship to CPF The proposed operation is aligned with World Bank Group Country Partnership Strategy (Report No. 83144-ST) for São Tomé and Príncipe for FY14-18 and the twin goals of ending extreme poverty and promoting shared prosperity in a sustainable manner. The CPS, which was extended through a 2019 Performance São Tomé and Príncipe and Learning Review (Report No. 112944-STP) until FY20, is built into two pillars: (i) supporting macroeconomic stability and national competitiveness; and (ii) reducing vulnerability and strengthening human capacity. In line with the CPS, the programmatic DPF series supports the Government of São Tomé and Príncipe in mitigating the impact of the COVID-19 crisis on businesses, jobs and the financial sector, while setting the foundations for higher and more sustainable economic growth in the medium and long term. The first pillar of the DPF series focuses on protecting lives and strengthening public health institutions, investing in human capital and empowering youth, and improving effectiveness of social protection. Meanwhile, the second pillar of the DPF focuses on strengthening fiscal resilience and debt management, enhancing financial inclusion and financial sector resilience, preserving and protecting jobs, and improving resilience and governance in infrastructure. C. Proposed Development Objective(s) The objective of this operation is to support the government's response to the human and economic impact of the COVID-19 pandemic and economy-wide and sectoral reforms for a stronger recovery. The programmatic DPF series supports São Tomé and Príncipe’s COVID-19 crisis response and medium-term structural reforms aimed at overcoming the country’s structural development challenges. Several of the prior actions for the first Page 3 of 7 The World Bank Second STP COVID-19 Recovery and Resilience Development Policy Operation (P174274) DPF (P168335, approved by the Board of Directors on December 18, 2020.) were a direct response to the COVID-19 crisis. The financing provided at the end of 2020 by first DPF and by this proposed second operation is essential for São Tomé and Príncipe to meet urgent financing needs and prevent a macroeconomic crisis that could derail years of social and economic progress. This proposed second operation in the programmatic series supports important structural reforms that are priorities for São Tomé and Príncipe’s development, independent of COVID-19, and have become even more urgent due to the crisis. This includes strengthening social protection, increasing domestic revenues, improved banking regulations, improving the operating environment for tourism, and reforms of the energy sector. Key Results In line with the objectives of the programatic series, the key expected results include: an increase in the Proportion of public schools and health care facilities with basic water, sanitation and hygiene services from 53 to 66 percent, a reduction in the dopout rate of girls in secondary school; an increase in the number of beneficiaries covered by social protection programs (programatic pillar 1). For Pillar 2 it is expected that domestic tax revenues as a percent of GDP will increase to 15 percent; São Tomé and Príncipe will publish a borrowing plan; 80 percent of banks will be complient with regulations related to loans classification and provision, capital adequacy and AML/CFT; there will be an increase in coverage of credit registry to 25 percent of the adult population; the number of tourist arrivals will increase; and net fiscal losses in the energy sector will decrease. D. Concept Description The proposed Second COVID-19 Human and Economic Response, Recovery and Resilience Development Policy Financing (DPF) supports São Tomé and Príncipe’s response to the COVID-19 pandemic and a stronger recovery through a multi- sectoral reform program. This proposed operation, in the amount of SDR 7.1 million (equivalent to US$10 million), is the second in a programmatic series of three development policy operations (DPOs). The objective of the operation is to support the Government of São Tomé and Príncipe in its response to the human and economic impact of the COVID-19 pandemic and support economy-wide and sectoral reforms for a stronger and lasting recovery. Following a first DPF (P168335) which focused primarily on supporting São Tomé and Príncipe’s COVID-19 response, this proposed second DPF in the programmatic series addresses key structural reforms that will support inclusive growth and poverty reduction. The proposed operation provides resources to meet financing needs during the ongoing COVID-19 pandemic. It is closely aligned with the International Monetary Fund’s (IMF) ongoing Extended Credit Facility (ECF) in the country and the boarder IDA program in São Tomé and Príncipe. The programmatic DPF series supports São Tomé and Príncipe’s COVID-19 crisis response and medium-term structural reforms aimed at overcoming the country’s structural development challenges. Several of the prior actions for the first DPF (P168335, approved by the Board of Directors on December 18, 2020.) were a direct response to the COVID-19 crisis. The financing provided at the end of 2020 by first DPF and by this proposed second operation is essential for São Tomé and Príncipe to meet urgent financing needs and prevent a macroeconomic crisis that could derail years of social and economic progress. This proposed second operation in the programmatic series supports important structural reforms that are priorities for São Tomé and Príncipe development, independent of COVID-19, and have become even more urgent due to the crisis. This includes strengthening social protection, increasing domestic revenues, improved banking regulations, improving the operating environment for tourism, and reforms of the energy sector. The objective of the programmatic series is to support the government's response to the human and economic impact Page 4 of 7 The World Bank Second STP COVID-19 Recovery and Resilience Development Policy Operation (P174274) of the COVID-19 pandemic and economy-wide and sectoral reforms for a stronger recovery. The programmatic series consists of three DPFs. The first operation1 focused largely on supporting São Tomé and Príncipe’s COVID-19 crisis response. Subsequent operations, including this proposed second DPF, are supporting the recovery from the COVID-10 crisis structural reforms, tackling the country’s long-standing development challenges and improving its resilience to shocks. The programmatic series is organized around two pillars, each including several policy areas: • Pillar 1 has the objective of mitigating the impact of the COVID-19 crisis on lives and livelihoods and strengthening investment in human capital. Policies under this pillar include emergency measures to protect lives and livelihoods through action in public health and social protection. To prepare SÃO TOMÉ AND PR�NCIPE better for future shocks, the programmatic series also supports policies aimed at strengthening resilience to future shocks. Finally, the pillar also includes policies to reduce gender gaps in human capital and agency and improving equal access to education and reproductive health.2 • Pillar 2 has the objective of mitigating the impact of the COVID-19 crisis on businesses and jobs and laying the foundations for higher and sustainable economic growth. Policies under this pillar in this first operation included COVID-19 response measures aimed at ensuring transparent and responsible use of public resources in the crisis response and enabling contactless, digital payments. Structural reforms supported under this pillar aim at overcoming São Tomé and Príncipe’s chronically weak domestic revenue mobilization, debt transparency and the stability and inclusiveness of the financial sector. Finally, they aim at strengthening the connectivity of the island economy to enable growth in tourism and exports and address structural reforms and institutional gaps in the power sector. E. Poverty and Social Impacts, and Environmental, Forests, and Other Natural Resource Aspects Poverty and Social Impacts 1. Overall, policy and institutional changes supported by the proposed DPF are expected to be pro-poor in the medium/long-term. The expansions of cash transfers is expected to have a small though positive impact on reducing poverty in the medium- to long-term. After the end of the temporary expansion of the Vulnerable Families Program (VFP) – created to cushion the welfare impacts of the COVID-19 pandemic in 2021 is expected to be expanded y about 80 percent. The selection of families that will be added to the regular program will follow a combination of geographic and poverty criteria. At STD 600 per month, the transfers are expected to increase the annual per capita income of beneficiary households by an average of 35 percent. The expansion of this program is expected to increase the annual per capita income of households in the bottom 40 percent of the welfare distribution. The temporary expansion of the social protection system, if timed appropriately, can provide an important mechanism to mitigate the impact of the VAT on low income households. The temporary expansion of the cash transfer is expected to be sufficient to offset the poverty impact of the VAT. However, if household incomes continue to suffer from the effects of the pandemic, the transfer is unlikely to offset the impact of both higher food prices related to the VAT and the income loss related to the pandemic. Under this scenario, additional support to families affected by increased food prices could be targeted building on the systems developed for the cash transfer expansion. Additional analysis is being undertaken to estimate the expected impact on the price of basic food items and evaluate mitigation measures that can protect low-income families from suffering shortfalls in consumption as a result of the VAT. Environmental, Forests, and Other Natural Resource Aspects 1 P168335, approved by the board of directors on December 17, 2020. 2 STP is not covered by the World Bank’s Human Capital Index. Page 5 of 7 The World Bank Second STP COVID-19 Recovery and Resilience Development Policy Operation (P174274) Specific policies supported by the DPF series are not expected to have a significant negative effect on São Tomé and Príncipe’s forests, water resources, habitats, or other natural resources. The country has a legal and institutional framework to manage and respond to environmental challenges. The General Directorate of Environment (DGE), under the Ministry of Infrastructure, Natural Resources and Environment (MIRNA), is the central institution responsible for environmental management. It oversees all projects expected to have a potential positive or negative impact on the environment. To the extend that policies are expected to have environmental effects, these are expected to be positive (mostly on the policy area on electricity). Refroms aimed at properly pricing electricty and reducing unnecesary elecricity consumption can be expected to have significant postitive envirnemental impacts including through reduced carbon emissions and air polutions. The transition to more renewable energy, including hydro and solar also underpinns this impact. Environemtnal impact assessments of investments in energy generation and stakeholder consultations at different stages of the project and refrom cycle are critical for the overall sustainability of the energy refrom program. . CONTACT POINT World Bank Cornelius Fleischhaker, Mazen Bouri Senior Economist Borrower/Client/Recipient Government of Sao Tome and Principe Implementing Agencies Ministry of Planning, Finance and Blue Economy Ginesio da Mata Gabinete de Estudos e Políticas Económicas ginesiodamata@yahoo.com.br FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects Page 6 of 7 The World Bank Second STP COVID-19 Recovery and Resilience Development Policy Operation (P174274) APPROVAL Task Team Leader(s): Cornelius Fleischhaker, Mazen Bouri Approved By APPROVALTBL Country Director: Jean-Christophe Carret 27-Jun-2021 Page 7 of 7