Democratic Republic of São Tomé and Príncipe

This Selected Issues paper examines the drivers of inflation in São Tomé and Príncipe and develops a model for forecasting it. While inflation in São Tomé and Príncipe significantly declined under the peg regime, recent surges in global food and energy prices have exerted substantial upward pressure on inflation. It finds that both supply and demand factors contribute to inflation in the country. Supply-side factors consist of inflation inertia, import food prices, and global or regional crises, whereas factors affecting demand are associated with weakened macroeconomic discipline in the leadup to elections. In order to effectively reduce and manage inflation, a comprehensive policy mix must address both supply and demand factors. On the demand side, it is essential to maintain coherent macroeconomic policies that include ongoing fiscal consolidation and managing public debt levels to create a more stable economic environment. On the supply side, increasing local food production is vital for reducing reliance on imported food. This can be achieved through various initiatives, such as improving the processing of primary agricultural products to add value and reduce waste, thereby making local food more competitive against imports.