In a decisive move to help one of Africa’s smallest economies weather fiscal challenges and transition toward a more sustainable future, the African Development Bank Group (AfDB) has approved a $7.9 million grant to support São Tomé and Príncipe’s economic recovery. The funding, awarded under the Transitional Support Facility, comes as part of the country’s second phase of its Fiscal Sustainability and Economic Resilience Support Program, building on an earlier commitment of $5.3 million approved on December 1, 2023. With the total financing now reaching $13.2 million, the grant aims to strengthen revenue mobilization, reform public expenditure, and set the stage for critical reforms in the energy sector.

Strengthening Economic Resilience Through Fiscal Reforms

São Tomé and Príncipe, a small island nation in the Gulf of Guinea, has long faced the challenges of limited economic diversification and reliance on a narrow range of exports. The current grant is designed to help address some of these challenges by improving the country’s revenue and public expenditure systems. With a focus on enhancing fiscal sustainability, the programme is expected to boost the nation’s capacity to generate revenue, improve its public financial management, and ultimately create a more resilient economic framework.

The budgetary support operation comes at a critical juncture. The country has struggled with insufficient energy supply due to outdated fossil fuel-based electricity generation equipment and the ongoing financial difficulties of its state-owned utility. These issues have hindered economic growth and have placed significant pressure on the government’s ability to finance public services. By targeting these systemic issues, the AfDB’s support is not only aimed at addressing immediate fiscal gaps but also at laying the foundation for longer-term structural reforms.

Aligning with National and Regional Development Strategies

The grant is closely aligned with São Tomé and Príncipe’s Strategy Paper 2024–2029, reflecting the government’s vision for sustainable development over the next five years. This strategy is part of a broader regional framework, which includes the AfDB’s Ten-Year Strategy for 2024–2033 and the institution’s High 5s development priorities. Among these priorities, the goals to “Improve the Quality of Life of the People of Africa” and “Light up Africa” are particularly pertinent to São Tomé and Príncipe’s current needs.

The “Improve the Quality of Life” goal emphasizes social inclusion and poverty reduction, which are crucial for small economies facing vulnerabilities from external shocks. In parallel, the “Light up Africa” initiative underscores the need for reliable and sustainable energy—a sector where São Tomé and Príncipe have encountered persistent challenges. By integrating energy sector reforms with broader fiscal and economic strategies, the programme aims to create a virtuous cycle of growth, improved public services, and enhanced private sector activity.

Addressing the Energy Sector Challenges

A central impediment to São Tomé and Príncipe’s recovery has been its energy supply. The country’s power generation infrastructure is dominated by worn-out fossil fuel-based plants, and the state-owned utility has struggled to remain financially viable. This has led to frequent power outages and a heavy reliance on imported fuel, which strains the nation’s limited foreign exchange reserves.

The AfDB grant is expected to support a transition toward more sustainable energy solutions. By improving energy sector governance and supporting reforms that facilitate the shift to renewable energy, the programme aims to stabilize the power supply, lower energy costs, and reduce the environmental impact of power generation. These reforms are essential not only for meeting the immediate needs of the economy but also for fostering a vibrant private sector that can drive future growth.

Leila Mokaddem, AfDB’s Director General for Southern Africa, highlighted the importance of this integrated approach. “This budgetary support operation has come at a critical juncture to support economic recovery through revenue and public expenditure reforms while, at the same time, setting the foundations for sustainable energy sector reforms critical for a strong and vibrant private sector,” she said. Mokaddem’s remarks underline the AfDB’s commitment to ensuring that its support goes beyond short-term fixes and addresses the underlying structural challenges that have hampered the country’s progress.

Boosting Foreign Exchange Reserves and Closing Financing Gaps

In addition to addressing fiscal and energy challenges, the grant is poised to have a direct impact on São Tomé and Príncipe’s balance of payments. Pietro Toigo, the AfDB Country Manager for Angola and São Tomé and Príncipe, explained that the budgetary support will help close the financing gap faced by the country. With foreign exchange reserves at critically low levels, the additional funding will provide the government with the breathing room needed to undertake essential reforms and stabilize the economy.

The infusion of funds is expected to boost investor confidence, enabling the government to access additional financing on better terms. This, in turn, will facilitate further investments in infrastructure, public services, and private sector development. As the nation works to implement the recommendations of its Fiscal Sustainability and Economic Resilience Support Program, the grant serves as a catalyst for broader economic reforms that can spur sustainable development and growth.

Human Impact and the Road to Inclusive Growth

While the technical aspects of fiscal and energy reforms are crucial, the human impact of these initiatives is equally important. São Tomé and Príncipe is home to a young and growing population that has long been affected by the volatility of the national economy. By improving public financial management and ensuring a more stable energy supply, the reforms are expected to enhance the quality of life for everyday citizens.

Improved revenue systems will allow the government to invest more in essential services such as healthcare, education, and social protection. These investments are vital for reducing poverty and promoting inclusive growth. Moreover, by stabilizing the energy sector and reducing reliance on expensive fossil fuels, the reforms can help lower household energy costs—a benefit that will be felt by families across the country.

The AfDB’s approach to supporting São Tomé and Príncipe is rooted in a deep understanding of the country’s socio-economic realities. Rather than simply providing a financial lifeline, the Bank’s support is designed to empower the nation to build a more resilient and self-sustaining economy. By strengthening public institutions and promoting transparency in financial management, the programme aims to foster an environment where sustainable development can thrive.

Regional Implications and the Role of AfDB in Africa’s Development

The approval of this grant is not an isolated event but part of the broader efforts by the AfDB to drive development across the continent. In recent years, the Bank has ramped up its support for countries facing economic challenges, particularly in regions where energy infrastructure and fiscal management remain significant obstacles to growth. The High 5s—an initiative aimed at accelerating Africa’s transformation—serve as a guiding framework for many of these interventions.

The grant to São Tomé and Príncipe reflects the AfDB’s commitment to addressing some of the most pressing issues facing African economies today. By focusing on fiscal sustainability, energy sector reform, and inclusive growth, the Bank is helping to build the foundations for long-term prosperity across the continent. The lessons learned from São Tomé and Príncipe’s experience are expected to inform similar initiatives in other countries, creating a ripple effect that could significantly enhance regional economic stability.

The emphasis on sustainable energy, in particular, is critical. Many African countries are grappling with the dual challenges of energy poverty and environmental degradation. The AfDB’s support for renewable energy initiatives is part of a broader strategy to “light up Africa” by making clean, reliable energy accessible to all. In this context, the reforms in São Tomé and Príncipe can serve as a model for other nations seeking to transition away from outdated fossil fuel technologies and toward greener alternatives.

Challenges Ahead: Implementing Reforms in a Complex Environment

Despite the promise of the grant and the ambitious scope of the reforms, São Tomé and Príncipe faces significant challenges in implementing these changes. Like many small economies, the nation has limited administrative capacity, and public institutions are often strained by years of underinvestment and political instability. Effective implementation will require not only financial resources but also strong governance and technical expertise.

The AfDB’s support package is designed to address these challenges through a combination of budgetary assistance, policy advice, and capacity-building initiatives. The Bank has a long history of working closely with governments to implement complex reforms, and its involvement in São Tomé and Príncipe is expected to bring much-needed technical know-how and institutional support. However, the success of the programme will depend on the government’s ability to absorb and effectively utilise the funds, as well as on its commitment to making the necessary structural changes.

Another potential hurdle is the need to balance short-term fiscal pressures with long-term reform objectives. While the grant provides a critical boost to the nation’s finances, it is only one part of a broader strategy to build economic resilience. Continued support from both domestic stakeholders and international partners will be essential to ensure that the reforms take root and deliver lasting benefits. Policymakers will need to navigate a complex landscape of political, social, and economic factors, ensuring that the reforms are both technically sound and broadly supported by the public.

The Promise of a Brighter Future

For the people of São Tomé and Príncipe, the approval of the $7.9 million grant represents a tangible step toward a more secure and prosperous future. By addressing the twin challenges of fiscal instability and unreliable energy supply, the reforms are expected to create an environment where businesses can thrive and public services can be delivered more efficiently. In turn, this will help to attract further investment, stimulate job creation, and improve overall living standards.

The focus on sustainable energy is particularly significant. As the country works to replace its outdated fossil fuel infrastructure with cleaner, more efficient technologies, it is also taking an important step toward environmental sustainability. Renewable energy solutions not only reduce greenhouse gas emissions but also lower operating costs over the long term—a benefit that will be felt across the economy. For a nation that has long struggled with the high costs and inefficiencies of fossil fuel-based power generation, this transition represents a major opportunity for transformation.

The social dimensions of the programme are equally important. Improved public financial management and increased investment in essential services such as healthcare and education can help to address longstanding inequalities and create a more inclusive society. For many citizens, these reforms offer hope that the economic recovery will translate into real improvements in daily life. By focusing on both economic and social outcomes, the AfDB’s support package embodies a holistic approach to development—one that recognizes the interdependence of fiscal stability, energy security, and human well-being.

A Collaborative Effort for Sustainable Development

The successful implementation of these reforms will require close collaboration between the government of São Tomé and Príncipe, the African Development Bank, and other key stakeholders. Regular dialogue, transparent monitoring, and a shared commitment to the country’s long-term vision will be essential to overcoming the challenges ahead. The AfDB has already signaled its readiness to provide ongoing policy and advisory support, ensuring that the nation is not left to navigate these complex reforms on its own.

As part of the broader Fiscal Sustainability and Economic Resilience Support Program, the grant forms an integral part of a multi-phase strategy designed to promote economic stability and growth. The first phase of the programme laid the groundwork by providing initial financial support and setting out the key reform priorities. With the approval of the second phase, São Tomé and Príncipe now has a more robust financial base from which to launch further reforms and attract additional investment.

The programme’s alignment with both national and regional development strategies underscores the importance of coordinated action in achieving sustainable development. By linking fiscal reforms with energy sector improvements and broader economic objectives, the initiative represents a comprehensive approach to addressing the multifaceted challenges faced by the country. This integrated strategy is critical for ensuring that the benefits of the reforms are both deep and lasting.

Conclusion: A Step Toward a Resilient and Inclusive Economy

The African Development Bank Group’s approval of the $7.9 million grant is a watershed moment for São Tomé and Príncipe. By targeting key structural challenges—namely, fiscal instability and an unreliable energy supply—the support package lays the foundation for a more resilient and inclusive economy. As the nation embarks on this ambitious reform agenda, the collaborative efforts of government, international partners, and local stakeholders will be essential in turning challenges into opportunities.

In an era marked by economic uncertainty and rapid global change, the grant provides not only financial relief but also a renewed sense of purpose and direction. For the people of São Tomé and Príncipe, it represents hope for a future where sound economic policies and sustainable energy solutions pave the way for prosperity and improved quality of life. As the reforms take root, the nation is poised to emerge stronger—better equipped to meet the challenges of today and to seize the opportunities of tomorrow.

This transformative initiative stands as a testament to the power of strategic international cooperation and the enduring commitment of institutions like the African Development Bank to foster sustainable development across the continent. With a clear vision and a robust support framework in place, São Tomé and Príncipe is set on a path toward recovery and long-term growth, one that could serve as an inspiring model for other small economies facing similar challenges.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

1st April, 2025