My Cape Verdian authorities thank the Fund for the ongoing support to the country. In particular, they thank Staff for the continuous and helpful advice provided under the PRGF arrangement. Cape Verde remains committed to the implementation of its comprehensive program of economic and structural reforms. The economic performance in 2002 was broadly satisfactory and all quantitative and structural performance criteria for end-December 2002 and end-January 2003 respectively were met. My authorities have made significant efforts towards maintaining macroeconomic stability under the first-year PRGF-supported program in 2002. In addition, estimates of the performance for early 2003 are satisfactory. My authorities are also working on the Poverty Reduction Strategy Paper (PRSP). Already, major accomplishments have been made to ensure a comprehensive understanding of the nature, source and scope of poverty and the prioritization of expenditures aimed at curbing it. These achievements include the completion of an household income and expenditure survey in 2001, an housing census in 2000, and general and sectoral public expenditure reviews.
Recent Performance and Medium-Term Outlook
Economic performance in 2002 was broadly consistent with the program’s objectives. Real GDP grew at 4.5 percent with the inflation rate declining to 3.0 percent. The vigorous tax collection resulted in an increase in domestic revenues. However, the increase in recurrent outlays due to higher spending in the priority sectors of education and human capacity in the tax administration led to a larger-than-expected fiscal deficit excluding grants. External current account deficit rose due to increased imports of capital goods to respond to larger private domestic investment.
The medium-term outlook exhibits a robust annual real GDP growth around 5.0 percent during the period 2003-2005 while inflation is expected to remain below 3.0 percent. Furthermore, my authorities strongly believe that a 7.0 percent growth rate is attainable within this period, thanks to the current buoyancy in private investment and the government’s strategy to attract foreign direct investment. While there exists risks of adverse shocks due to the current appreciation of the euro against the U.S. dollar, terms of trade are expected to recover in 2004 and 2005, leaving scope for improvement in the current account. The public debt burden will continue to ease in terms of stock outstanding as well as service. This will free resources to strengthen poverty reduction.
On the structural front, the single performance criterion for the current PRGF review, the automatic petroleum pricing mechanism was met on January 1, 2003. In addition, my authorities have engaged in loss-reducing measures to improve the financial positions of two major companies, the electricity and water monopoly Electra and the TACV. Moreover, the Cape Verdian government has liquidated two large loss-making public enterprises, the municipal transportation company TRANSCOR, and the commodity import and distribution company EMPA. However, progress with structural reforms in 2002 was counterbalanced by delays encountered in the implementation of the value-added tax (VAT) law, owing to legislative constraints and technical postponements in donor disbursements. Nevertheless, the law has been unanimously approved by the National Assembly in June 2002 along with the customs tariff reform, and my authorities are strongly committed to their implementation effective from January 1, 2004 and their inclusion in the 2004 budget.
The Program for 2003
Cape Verde’s 2003 macroeconomic framework is based on a realistic scenario of 5.0 percent growth in real GDP, end-period inflation of 2.2 percent and a moderate increase in gross international reserves to a level equivalent to 2.1 months of imports. Accordingly, my authorities are committed to carry out policies that are consistent with the objectives of the PRGF arrangement and conducive to the successful implementation of a sustainable plan of poverty reduction.
My authorities will pursue fiscal consolidation. On the one hand, they intend to increase expenditures on priority social areas, education and health. On the other hand, there are good reasons to believe that government will generate more revenue in 2003 given the continued increase in the collection of tax arrears, the buoyancy of trade taxes and the elimination of the excise exemption for the minority government-owned company Electra. As in 2002, the deficit will be fully financed from net external flows and my authorities will be able to reduce further the net domestic indebtedness.
An increase in recurrent expenditures will reflect the rise in priority outlays commenced in 2002 and that is part of the government’s strategy to improve human capacity, reinforce national police and reduce poverty. The projected increase in transfers and subsidies is due to the fact that more than one fifth of the anticipated increase comes from a contingent provision for a temporary subsidy to Electra. While fully acknowledging the concerns of Staff, my authorities have made clear that this subsidy will be paid only if the external audit of Electra conducted with donor assistance indicates that it is necessary and only if the company’s management implements internal reforms aimed at improving revenue and cost effectiveness, while restructuring the company’s debt.
Monetary and Financial Sector Policy
The Bank of Cape Verde (BCV) will pursue a monetary stance consistent with an increase in international reserves. This increase will be modest due to the authorities’ higher concern for priority outlays and debt repayment. Nevertheless, the international reserves coverage for 2003 will remain at the same level as that for 2002 and a further buildup would begin thereafter.
As regard the financial sector, the BCV has already achieved remarkable progress in the implementation of the 2003 plan to strengthen its operational and supervision responsibilities. On-site inspections of two offshore banks and computerized off-site inspections of domestic banks have been completed. The latter will be subject to on-site inspections in the course of this year. Furthermore, the Cape Verdian central bank has implemented all recommendations of the IMF’s safeguards assessment report with the exception of one action, which is the bringing of the BCV’s internal audit procedures in line with the International Accounting Standards. The BCV has requested Fund technical assistance to meet this standard in 2003.
The fixed-exchange rate regime in place in Cape Verde requires the structural enhancement of external competitiveness and the attractiveness of foreign investment if a sustainable current account balance were to be achieved. Accordingly, my authorities are developing basic infrastructure such as energy, water, roads and telecommunications. Financed by the World Bank, the government’s growth and competitiveness project for the 2003-2007 period focus on improving the investment climate through tax reform, the elimination of investment-impeding administrative constraints, legal reform, private sector capacity building and financial sector development. In addition, my authorities are developing export-oriented industrial parks and developing tourism facilities. Furthermore, Cape Verde will take full advantage of the African Growth and Opportunity Act (AGO A) by accessing U.S. textile markets, and the anticipated end of the European Union embargo on the country’s seafood products.
As regard external arrears, the government has reached agreements on their clearance with all its creditors with the exception of Russia and Spain’s Instiruto Crédito Oficial which whom there are ongoing discussions.
Apart from the structural reforms mentioned above, my authorities are devoted to the continuation of reforms necessary to consolidate policies consistent with the PRGF objectives. The government will pursue the loss-reducing restructuring or privatization of the utilities company and public enterprises; reform the regulatory environment towards the facilitation of the private sector development; and tackle pension reform with donor assistance.
With respect to actions aimed at alleviating the loss in public enterprises, the government stands ready to do its part by clearing all its arrears to Electra and continuing to pay all its bills to the company. In addition, they are committed to move rapidly to establish a regulatory agency to oversee an automatic and transparent tariff adjustment mechanism. This multisector regulatory agency which will be established and staffed in September 2003 will also implement the new oil price adjustment mechanism.
Concerning privatization, my authorities will push ahead with preparation to privatize the airline company TACV, the public fish-freezing company INTERBASE and the ship repair CABNAVE/CABMAR.
Statistical Issues and Capacity Building
My authorities are taking steps to bring Cape Verde’s statistical framework in compliance with the General Data Dissemination System (GDDS). In addition, the central bank and the National Institute of Statistics (INE) publish a wide range of economic, financial, business confidence and social data on the worldwide website. Further actions will be taken, including the publication of national accounts and better integration of data and coordination between line ministries and the INE to monitor the implementation of the upcoming PRSP.
My authorities have put in place databases in the areas of real sector, government finance, money and banking, balance of payments and external debt. These accomplishments in the statistical area have been possible with the help of multilateral assistance. In this respect, my authorities need further technical assistance and financial support that will improve transparency and the analysis of the macroeconomic linkages to a good management of public finances and the continuation of sound macroeconomic policies that will set the path for sustainable growth and poverty reduction.