Page last updated at 11:47 GMT, Wednesday, 29 July 2009 12:47 UK

Portugal signs Sao Tome euro deal

By Alison Roberts
BBC News, Lisbon

Map of Sao Tome and Principe

The island state of Sao Tome and Principe has signed a loan deal with former colonial power Portugal aimed at anchoring the currency to the euro.

One of Africa's poorest countries, it has significant but as yet unexploited oil reserves.

Officials from the two countries have spent a year working on the accord, which is aimed at securing economic stability for the archipelago.

Portugal signed a similar deal 10 years ago with another ex-colony, Cape Verde.

Sao Tome's leaders say linking its currency, the dobra, to the euro is a guarantee of stability for foreign investors and a key element of the country's economic strategy.

Portugal, which once ruled Sao Tome and which has received many of its citizens as immigrants, is providing loans to its government in return for fiscal and monetary policy commitments.

The accord is no panacea, officials acknowledged, but should act as a lever for development.

A similar accord a decade ago between Portugal and Cape Verde helped that island nation shed its status as one of the world's least-developed countries, and later secure a special partnership with the EU.

Sao Tome, where the economy is dominated by cocoa farming and remittances from emigrants, is considerably poorer than Cape Verde.

But its territorial waters hide significant oil reserves that are just starting to be explored.

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