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Cabo Verde: Staff Report for the 2019 Article IV Consultation and Request for an Eighteen-month Policy Coordination Instrument—Press Release; Staff Report; and Statement by the Executive Director for Cabo Verde

Author(s):
International Monetary Fund. African Dept.
Published Date:
July 2019
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Context

1. Cabo Verde made impressive strides in macroeconomic stability through 2008, when the global financial crisis started to unfold. Thanks to high growth in tourism, public investment scaling up, sustained private investment financed with foreign direct investment (FDI), and structural reforms, real GDP growth rose rapidly, averaging 6.2 percent between 1990–2000; and close to 6.8 percent during 2001–2008. This performance allowed the country to more than double its per capita income and to graduate to middle-income status in 2007 (Text Figure 1). Living standards improved and poverty declined. The macroeconomic situation deteriorated during 2009–15, partly due to a decline in tourism and FDI flows. During that period, real GDP growth averaged 1.1 percent; budget financing needs rose from 1.6 percent of GDP in 2008 to 7.8 percent of GDP in 2015; and public debt more than doubled, exceeding 120 percent of GDP in 2015 (Text Figure 2).

Text Figure 1.GDP Growth and GDP per Capita

Source: Cabo Verdean authorities.

Text Figure 2.Debt Stock, Debt Service and Financing Needs

(Percent of GDP)

Source: Cabo Verdean authorities.

2. There has been an improvement in the last three years, though significant vulnerabilities remain. Growth has recovered, and there has been a steady improvement in the fiscal and external positions (Figures 1 and 2). However, high and inclusive growth has remained constrained by the lack of diversification, low connectivity between the islands, high transaction costs, limited economies of scale, vulnerability to natural disasters and other exogenous shocks, and limited access to finance. In addition, weak financial situation in key State-Owned Enterprises (SOEs) have led to a build-up of liabilities, weighing heavily of budgetary resources and public debt.

3. The authorities have requested an eighteen-month PCI to enhance macroeconomic stability and underpin their reform agenda. The PCI will support their efforts to address the above-mentioned challenges as they implement reforms planned in their Strategic Plan for Sustainable Development (PEDS) for 2017–21.

4. There has been progress in the implementation of past IMF policy recommendations (Box 1). In addition, some measures recommended during the 2018 Article IV Consultation and the 2009 Financial Sector Assessment Program (FSAP) are part of reform targets under the PCI.

5. The political and social situation is stable. The ruling party (Movimento para a Democracia – MpD) won the parliamentary and presidential elections in 2016. The next elections will take place in 2020 at the municipal level, while legislative and presidential elections are scheduled for 2021.

Box 1.Status of the 2018 Article IV Consultation Main Recommendations

Policy AreaKey RecommendationsStatus
Fiscal Policy and Debt SustainabilityIncrease the VAT rate from 15 percent to 17 percent and restrain expenditures.

Limit issuance of debt guarantees to contain fiscal risks.
The authorities continued to focus on tax administration measures and expenditures restraint.

The law on public debt adopted in November 2018 includes an article requiring parliamentary approval for the issuance of loan guarantees.
Monetary PolicyTighten monetary policy in case of pressures on reserves.

Narrow the overnight interest rate corridor to a maximum of 150–200 basis points and establish a symmetrical interest rate corridor to strengthen the monetary policy transmission mechanism.
The monetary policy stance remained unchanged in 2018 as price pressures were low and reserves were assessed as adequate.

In June 2019, the Central bank (Banco de Cabo Verde-BCV) reduced the corridor to 150 basis points.
Financial SectorGive priority to the resolution of legacy non- performing loans (NPLs). Avoid further forbearance of requirements to write off irrecoverable loans. Provide guidance on loans restructuring, collateral valuation and asset classification. Create a central registry of movable collateral.The BCV has been working with banks on the resolution of legacy NPLs.

The creation of a central registry for movable collateral is a reform target under the PCI.
Correspondent Banking RelationshipsImprove the AML/CFT framework. Implement the FATCA and the tax good governance standards agreed with the EU.The authorities increased the corporate tax rate on off-shore banks.
Structural ReformsRestructure the three loss-making State-Owned Enterprises (SOEs): the airline (TACV), housing (IFH), and power (Electra) companies. Integrate SOEs into the budget preparation processes. Create mechanisms to detect deviations from planned performance to inform timely corrective actions.The social housing program managed by IFH was restructured at end-2018; TACV was privatized in March 2019; and ELECTRA is slated for privatization in 2020.

The authorities plan to take measures in 2019–20 to strengthen the monitoring of SOEs’ financial situation, while accelerating the privatization program. Enhanced monitoring of SOEs’ performance is part of reform targets under the PCI.

Recent Economic Developments

6. Growth momentum continues, and inflation remains low (Figure 1, Table 1). Real GDP expanded from 4 percent in 2017 to 5.5 percent in 2018, driven by strong domestic demand, notably private investment. On the supply side, the main contributors to growth were the industry and services sectors. Inflation rose from 0.3 percent at end-December 2017 to 1 percent at end-December 2018 (y/y) reflecting higher fuel prices, and the impact of the drought that affected Cabo Verde for a second consecutive year, as shown by the contraction in the agriculture sector (Text Figure 3).

Text Figure 3.Contributions to growth

(Year-on-year percent change)

Source: Cabo Verdean authorities.

7. The external position improved thanks to strong export performance (Figure 2, Table 2). The current account deficit narrowed to 4.5 percent of GDP in 2018 (6.6 percent of GDP in 2017) on the back of increased export receipts in the tourism and fishery sectors; higher remittances, and a deceleration in imports demand. Although in decline compared with 2017, FDI remained important, covering the largest share of the current account deficit. Gross international reserves rose to €531 million at end-2018, equivalent to 5.1 months of prospective imports of goods and services.

8. The external stability assessment shows that Cabo Verde’s external position has strengthened, though remaining weaker than suggested by medium-term fundamentals and desirable policy settings, while reserve adequacy remains strong (Annex I). Given the large negative net international investment position (NIIP), Staff puts special emphasis on the external sustainability approach which points to a large overvaluation, suggesting that in 2018 Cabo Verde’s external position was weaker than implied by medium-term fundamentals and desirable policy settings. At the same time, the current account (CA) and the Real Effective Exchange Rate (REER)– based approaches suggest moderate to large undervaluation. Regarding gross international reserves, Staff’s assessment using the Fund LIC/MIC framework suggests an optimal level of reserves of 3.6 months of prospective imports of goods and services—compared to actual and prospective levels slightly higher than 5 months (Table 2).

9. The fiscal position improved slightly in 2018 and financial support to SOEs increased (Figure 3; Tables 1,3a, 3b). The overall budget deficit declined from 3 percent of GDP in 2017 to 2.8 percent of GDP as revenue (excluding grants) rose by almost 2 percentage points of GDP, to 26.7 percent of GDP reflecting strong economic activity, continued tax administration reforms and enhanced collection of tax arrears. Expenditures stood at 30.9 percent of GDP, slightly below the 2017 level because capital outlays were under-executed. Support from the budget to SOEs rose to 2.1 percent of GDP (0.7 percent of GDP in 2017) reflecting increased transfers to the airline company (TACV) for restructuring and preparation for its privatization. The latter took place in March 2019, when 51 percent of TACV’s shares was sold to a private investor.

10. Credit growth decelerated (Figure 4, Table 4). Following a strong expansion in 2017 (7 percent y/y) credit to the economy grew by 3.1 percent in 2018, in line with historical trends. The deceleration was mostly due to the repayment of an important loan by a hotel operator. Trade and tourism-related activities received the largest share of bank financing. The relatively low level of credit to the private sector reflects both tight lending standards and banks’ risk aversion in view of the high level of non-performing loans (Box 2). The central bank’s prime rate was kept unchanged at 1.5 percent for the second consecutive year, while banks’ lending rates rose, and deposits rates declined, by less than 50 basis points. In June 2019, the BCV reduced the interest rate of the overnight lending facility from 4.5 percent to 3 percent to improve the effectiveness of the monetary policy transmission mechanism, in line with understandings under the PCI.

Box 2.Non-Performing Loans (NPLs) Issues

The 2008 global financial crisis led to a significant increase in NPLs in the Cabo Verdean banking system. Following the crisis, the ratio of NPLs to total loans increased significantly, reaching 18.7 percent at end-December 2014 (Figure 1). The corporate sector accounts for about 70 percent of the stock, mostly in tourism, transport, commerce and construction. The household sector accounts for the remainder, notably for mortgages

Figure 1.Total Non Performing Loans (NPLs)

(Percent)

Source: Cabo Verdean authorities.

NPLs have declined somewhat in the last two years. They stood at 12.8 percent of total loans at end-December 2018 (14.5 percent of total loans at end-2017). Roughly 60 percent of the stock of NPLS is from legacy loans related to real estate development projects during 2006–08. The pace of resolution of these loans has been slow so far, mostly because of lengthy foreclosure processes and underdeveloped markets for distressed real estate assets. Banks have recently enhanced their recovery efforts and worked with the judicial system to recover some collaterals.

The banking system’s capacity to absorb losses has strengthened. Profitability, as measured by return on equity improved in recent years (Figure 2); the level of provisioning as well as the capital adequacy ratio are high. Consequently, with variations across the system, banks can absorb losses stemming from legacy NPLs without significantly harming their balance sheets. An analysis conducted by Fund staff and BCV shows that write-offs of all legacy loans would reduce the capital adequacy ratio of the banking system by 1.1 percentage points, to around 15.1 percent.

Figure 2.Earnings and Profitability of Banks

(Percent)

Source: Cabo Verdean authorities.

The BCV has taken an active role in addressing the resolution of NPLs. It conducted an asset quality review of the largest banks, with the aim of assessing their provisioning and NPLs disclosure practices. The BCV also standardized procedures across banks, mandated banks to adopt stringent International Financial Reporting Standards (IFRS) compliant definitions and developed a credit impairment index to encourage transparency on NPLs. To enforce provisioning standards, the BCV also carries out post-balance sheet submission adjustments.

11. Financial stability indicators have improved (Table 5). They point to an adequately capitalized financial sector; and despite still weak asset quality, banks’ profitability has improved. NPLs have declined, reflecting concerted efforts to tackle them, though they remained high at 12.2 percent of total loans at end-December 2018.

12. Cabo Verde’s risk of external and overall debt distress is assessed as high. The stock of public debt has been trending downwards in the last three years, partly reflecting improvement in the fiscal position and robust growth (Table 1). At end-2018, it stood at 123.9 percent of GDP. The joint IMF/World Bank debt sustainability analysis (DSA) assesses Cabo Verde’s risk of external and overall debt distress as “high”, unchanged from the 2018 DSA.

13. Cabo Verde’s economic performance compared with peers Small Middle-Income Countries (SMICs), varies across sectors (Figure 5). In 2018, Cabo Verde recorded stronger growth, lower inflation and a better external position than comparator SMICs. However, the fiscal position was weaker and public debt much higher than peers.

Outlook and Risks

14. The medium-term outlook is positive, contingent upon implementation of far-reaching structural reforms and favorable external environment. Real GDP growth is projected at 5 percent in 2019 and over the medium term, driven by sustained growth in the tourism and industry sectors, as well as increased activity in the transportation sector. The latter would be supported by the privatization of the airline company and the granting of a concession to a private operator for maritime transportation in early 2019, which are expected to improve connectivity between the islands and boost tourism. Economic activity would also benefit from the projected increase in private investments, planned infrastructure projects, notably the construction of the Maio island port, and enhanced investor confidence resulting from the implementation of structural reforms. These factors would overcompensate the potential adverse impact of fiscal consolidation on growth. Inflation is projected at 1 percent for 2019, and below 2 percent in the medium term, consistent with the average in the Euro area.

15. The external position is projected to strengthen. Continued good performance in tourism receipts and in remittances is expected to more than offset strong imports demand and help reduce the current account deficit from 4.5 percent of GDP in 2018 to 3.6 percent of GDP by 2024. With continued high inflows of FDI and remittances, gross international reserves would average 5.3 months of prospective imports of goods and services during 2019–24.

16. There are important risks to the outlook, with the balance tilted to the downside because of Cabo Verde’s vulnerability to exogenous shocks (Box 3). On the downside, worse than expected external conditions, particularly economic slowdown in the Euro area and Brexit would impact tourism flows, and a sharp tightening of global financial conditions would affect growth and the external position. Downside risks also emanate from potential weather-related shocks. Domestically, weakening of fiscal consolidation efforts and delays in structural reforms implementation, particularly for SOEs restructuring would adversely affect the outlook. The main upside risks relate to stronger performance in tourism (Box 4), increased FDI-driven investments in relation with the implementation of the PEDS, continued successful restructuring of SOEs, and faster progress in other growth-enhancing structural reforms.

Authorities’ Views

17. The authorities agreed with Staff’s assessment of Cabo Verde’s medium-term outlook and risks. While stressing that the economy’s growth potential is high as illustrated by the estimated output expansion in the last quarter of 2018 (7.6 percent, y/y), they agreed with Staff’s cautious projections for 2019 and the medium term. On the external position, the BCV viewed the projected gross international reserves in months of prospective imports of goods and services as an upper limit in view of external downside risks, notably the potential impact of Brexit on tourism receipts, and the weakening global economic growth.

Box 3.Risk Assessment Matrix1

(Scale – high, medium, or low)
Source of RisksRelative Likelihood2Impact if RealizedPolicy Response
Weaker-than-expected global growthHigh

In the near term, weak foreign demand makes euro area businesses delay investment, while faltering confidence reduces private consumption. Adverse financial market reaction to debt sustainability concerns further dampens growth. A disorderly Brexit could cause market disruption with negative spillovers.
Medium/High

Prolonged stagnation in Europe would depress exports (especially tourism), remittances, and FDI. This would have a significant impact on economic growth, external sustainability, and foreign reserves.
Accelerate structural reforms to increase productivity and improve the business environment and enhance resilience to shocks.
Large swings in energy pricesMedium

In the near term, uncertainty surrounding the shocks translates into elevated price volatility, complicating economic management and adversely affecting investment in the energy sector.
Medium/High

Higher oil prices would harm growth and contribute to higher inflation. Household and corporate incomes may also be affected by shocks to oil prices.
Implement a credible fiscal consolidation plan to build fiscal buffers. Accelerate structural reforms to increase growth potential.
Sharp tightening of global financial conditionsLow/Medium

harp tightening of global financial conditions causes higher debt service and refinancing risks, stress on leveraged firms, households, and vulnerable sovereigns, capital account pressures and a broad-based downturn. This could be caused by sustained rise in risk premium in reaction to concerns about debt levels in some euro area countries; a disorderly Brexit; or idiosyncratic policy missteps in large emerging markets.
Medium

Higher interest rate in the US and Europe may reduce the flow of migrant deposits to Cabo Verde. Cabo Verde’s tourism and real estate sectors depend on FDI. Financial market volatility would hamper investment in Cabo Verde.
Stand ready to tighten monetary policy. Accelerate reforms to increase productivity and improve the business environment.
Rising protectionism and retreat from multilateralismHigh

Rising protectionism threatens the global trade system, regional integration, labor mobility, global and regional policy and regulatory collaboration. In the short run, increased uncertainty about growth triggered by escalating trade tension leads to increased financial market volatility.
Medium

Financial market volatility would affect the predictability of financial flows and deter investment.
Accelerate structural reforms to increase productivity and improve the business environment.
Flickering fiscal consolidation and SOEs restructuring effortsMedium/High

Political pressures lead to less ambitious fiscal consolidation efforts and delayed implementation of SOEs reforms.
High

Slower fiscal consolidation would undermine perception of macroeconomic stability, reduce capital inflows and weaken confidence in the peg. Higher public sector financing needs that may result from this would crowd out private investment, resulting in lower growth.
Reduce current spending and postpone or cancel non-priority infrastructure projects. Reinvigorate the SOEs reform plans.
Delays in implementing measures to increase productivityMedium

Political pressures delay implementation of needed structural reforms.
Medium

Delays in advancing the structural reform agenda would hinder competitiveness, potential GDP growth and employment.
Accelerate structural reforms to improve growth potential.
Weather related shocksMedium

Weather related shocks such as drought and hurricanes could translate into higher food prices and lower activity in the agricultural and tourism sectors.
Medium/High

Prolonged drought would undermine agricultural production with negative impact on GDP growth.
Diversify the economy and accelerate structural reforms to improve growth potential.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path—the scenario most likely to materialize in the view of the Staff. The RAM reflects Staff’s views on the source of risks and overall level of concerns as of the time of the discussion with the authorities. The relative likelihood of risks listed is the Staff’s subjective assessment of the risks surrounding this baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects Staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. Short term and medium term are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.”

In case the baseline does not materialize.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path—the scenario most likely to materialize in the view of the Staff. The RAM reflects Staff’s views on the source of risks and overall level of concerns as of the time of the discussion with the authorities. The relative likelihood of risks listed is the Staff’s subjective assessment of the risks surrounding this baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects Staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. Short term and medium term are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.”

In case the baseline does not materialize.

Box 4.The Tourism Sector – Background and Growth Prospects

Background

Cabo Verde is a tourism-based economy. The sector has witnessed impressive and sustained growth for more than a decade (Figure 1). Between 2000 and 2017, the number of tourist arrivals grew, on average, by 11 percent a year. The market is dominated by tourists from Europe, and therefore, was negatively affected by the 2008 financial crisis and its repercussions. It has since recovered, performing better than most peers (Figure 2). The accommodation capacity is about 12,000 rooms; and the average stay per tourist is about a week.

Figure 1.Tourism Arrivals and Occupancy Rate

Source: Cabo Verdean authorities.

Figure 2.Cumulative growth in tourist arrivals, 2010–2017

Sources: World Tourism Organization, Compendium of Tourism Statistics dataset; and IMF staff calculations.

Economic Impact

Tourism-related activities are estimated to account for about 25 percent of GDP, and some 50 percent of exports of goods and services (Figure 3). The direct contribution of the tourism industry to employment is concentrated in the hotel sector because of the “All-inclusive” model that dominates tourism in Cabo Verde. Spillovers on services typically associated with tourism for travel, restaurants, and transportation with local content; and linkages with non-tourism activities have remained limited.

Figure 3.Export and Toursim Receipts

Sources: Cabo Verdean authorities.

Constraints

The tourism sector is highly undiversified, making it vulnerable to exogenous shocks. Key impediments to growth and diversification include: (i) the industry’s dependence on big hotel chains; (ii) concentration: although there is potential in all ten islands, tourism activities are concentrated in Sal and Boa Vista; (iii) lack of diversification: most tourists are from Europe —and 25 percent from the United Kingdom; (iv) about 70 percent of tourism activities, in terms of travel, are organized by two Tour operators in Europe and; (v) Cabo Verde offers predominantly a single tourism product (“sun, sea, and sand”), which may impact attractiveness.

Growth Potential

There is significant growth potential in the tourism industry. Despite the constraints mentioned above, demand is higher than supply for existing accommodations. There is an important pipeline of FDI in the sector, and the recent privatization of TACV is expected to boost tourism activities as the new company will be operating out of a hub in Sal island. The authorities are also planning to develop the cruise ship market with a terminal in São Vicente island. Their decision to waive visa requirements for travelers from the EU staying in Cabo Verde for up to 30 days, as well as the expected improvement in inter-island connections are important upside risks for the outlook in the tourism industry.

Policy Discussions

Cabo Verde is facing the twin challenge of raising sustainable and inclusive growth and reducing high public debt in an environment of high vulnerability to natural disasters and other exogenous shocks. Consequently, Article IV Consultation and program discussions focused on: (i) restoring fiscal and debt sustainability; (ii) restructuring SOEs; (iii) enhancing the monetary policy framework and continuing to build reserves; (iv) fostering the financial system stability; and (v) advancing growth-enhancing structural reforms.

A. Restoring Fiscal and Debt Sustainability

18. The medium-term fiscal framework supports the decline in debt-to-GDP ratio needed to restore debt sustainability. The revised budget projections for 2019 target a primary surplus of 0.7 percent of GDP mostly predicated on strong improvement in tax and non-tax revenue, as well as increased grants, creating fiscal space for spending and SOEs restructuring costs. The fiscal strategy is built on improvement in the primary balance (fiscal anchor) that would reduce public debt below 100 percent of GDP over the medium term (Text Table 1).

  • The expected revenue performance reflects permanent and one-off measures introduced in the 2019 budget with an estimated impact of 3.6 percent of GDP. Key permanent measures – with 1.6 percent of GDP revenue impact – include the introduction of an airport and maritime security fees and the increase in the corporate income tax rate for off-shore banks from 2.5 percent to 10 percent. One-off measures (2 percent of GDP) comprise the sale of nonfinancial assets and the recovery of tax arrears (PS ¶15; Text Table 2).
  • Expenditures are projected to increase by 3 percentage points of GDP compared with 2018, due to: (i) budgeted adjustments in the salary scale resulting from the implementation of re-grading and career adjustment in the civil service, as well as recruitments in the education, health, and security sectors; (ii) higher spending in goods and services; and (iii) a catch-up in capital outlays. In keeping with prudent expenditure management, the 2019 budget identified contingency spending to the tune of 1.8 percent of GDP. This, together with the legal instrument allowing expenditure freeze in case of a shortfall in budgetary resources will help in achieving fiscal targets (PS ¶15).
  • Financing needs are expected to increase from 3.8 percent of GDP in 2018 to 6.5 percent of GDP in 2019 driven by net other liabilities (NOL) which are projected to grow from 1 percent of GDP in 2018 to 4.3 percent of GDP in 2019 due to higher outflows covering: onlending to SOEs for investment (1.5 percent of GDP), short-term financing to municipalities (1 percent of GDP), and TACV restructuring cost (1.9 percent of GDP). The increase in NOL also reflects the base effect compared with 2018 inflows that capture one-off repayments of previous onlending operations related to the social housing program, totaling 1.8 percent of GDP. Correcting for this amount brings financing needs in 2018 to 5.6 percent of GDP. 1
  • Over the medium term, tax and nontax revenue are conservatively projected to stabilize around 28 percent of GDP reflecting full-year impact of permanent measures introduced in 2019, continued tax administration reforms, notably enhanced monitoring of taxpayers’ accounts and increased computerization of tax and customs services (PS ¶17).
  • The medium-term expenditure framework will continue to be built on prudent expenditure management, backed by the continued budgeting of contingency outlays (PS ¶18–22). Expenditures are projected to decline below 30 percent of GDP in 2022 and going forward, mostly thanks to a prudent wage policy aimed at containing and limiting new recruitments as well as salary increases; tighter control of non-priority current spending, including through the setting up of performing Information Technology and improved procurement systems; and more efficient management of capital spending. This would help increase the primary surplus to 1 percent of GDP in 2020, and 1.2 percent of GDP during 2021–24, contributing to a decline in financing needs from 3.7 percent of GDP in 2020 to 1 percent of GDP in 2024. The medium term expenditure framework will continue to be built on identification of contingency spending. Reduced financing needs would also be supported by declining net other liabilities, in line with the expected progress in SOEs reforms that would significantly curtail onlending operations and eliminate transfers to SOEs for capitalization by 2022.
  • On this basis, by 2023, public debt would be below 100 percent of GDP as targeted by the authorities. Furthermore, DSA results show that while the risk of external and total debt distress is high, the present value (PV) of public and publicly-guaranteed (PPG) external debt-to-GDP ratio would fall below the 55 percent threshold from 2023 onwards; and the PV of total PPG debt-to-GDP ratio would decline to 75.4 percent by 2024, and below the 70 percent benchmark by 2026. Consequently, the risk of external and overall debt distress would improve from high to moderate as these debt indicators fall below their respective thresholds.
  • The budget is fully financed through the medium term. Domestic financing is projected well-below the annual ceiling of 3 percent of GDP per year set by Cabo Verde legislation thanks to external financing from the African Development Bank and the World Bank, as well as loans and grants from other external sources. The authorities’ plan to lengthen the maturity of government securities will help improve domestic debt profile and reduce its cost.
Text Table 1:Medium Term Fiscal Indicators, 2018–24(Percent of GDP)
2018201920202021202220232024
Total revenue28.131.730.428.928.828.828.8
Tax Revenue21.921.821.922.522.823.023.3
of which: Income taxes6.66.76.56.76.76.87.0
VAT10.710.410.711.011.111.211.3
Other revenue4.87.16.55.55.24.94.7
Grants1.42.81.90.90.80.80.8
Total expenditure30.933.931.830.129.829.729.6
Current expenditure26.528.827.526.626.125.725.6
of which: Compensation of employees10.611.711.210.710.410.210.2
Interest2.52.82.42.32.22.12.0
Net acquisition of nonfinancial assets4.45.14.33.43.73.94.0
Overall balance-2.8-2.2-1.5-1.2-1.0-0.9-0.8
Primary balance-0.30.71.01.21.21.21.2
Net other liabilities-1.0-4.3-2.2-0.9-0.2-0.2-0.2
Of which: Onlending1.1-2.5-1.6-0.5-0.2-0.2-0.2
Capitalization-2.1-1.9-0.6-0.50.00.00.0
Financing needs 13.86.53.72.11.31.11.0
Total financing2.86.53.72.11.31.11.0
Public debt123.9121.4116.8111.0104.698.592.7
PV of PPG external debt (risk threshold: 55%)61.964.062.460.156.854.051.0
PV of total debt (benchmark: 70%)97.295.892.788.884.379.775.4
Sources: Cabo Verdean authorities and IMF staff projections.

Defined as overall balance plus net other liabilities.

Sources: Cabo Verdean authorities and IMF staff projections.

Defined as overall balance plus net other liabilities.

Text Table 2:The 2019 Budget Revenue Measures
2019 Budget MeasuresEstimated Revenue Impact (Percent of GDP)
Permanent measures:
Airport security fee1.0
Maritime security fee0.2
Contribution from operators to the Innovation Fund0.1
Registration fees and notary fees0.2
Special consumption excise tax0.1
One-off measures:
Sale of non-financial assets0.8
Arrears collection1.2
Total3.6
Source: Cabo Verdean authorities.
Source: Cabo Verdean authorities.

19. The authorities’ commitment to advancing fiscal reforms to put public finances on a stronger footing is commendable (PS Box 1). Staff welcomed the improvement in revenue mobilization envisioned in the medium-term fiscal framework and stressed the need for effective implementation of measures aimed at improving tax compliance and enhancing efficiency gains in tax administration. Building on technical assistance (TA) from the IMF Fiscal Affairs Department (FAD), Staff called for a revamping of exemptions on the value-added tax, customs duties and excises (Reform Target), estimated to generate revenue losses of about 2 percent of GDP. On expenditures, Staff recommended a prudent wage policy following the adjustments made in 2019, and enhanced management and prioritization of capital outlays to safeguard the projected decline in total expenditures as share of GDP. Staff stressed that these actions will help achieve the fiscal targets under the PCI while providing fiscal space for increased priority spending.

Authorities’ Views

20. The authorities agreed with Staff’s assessment and recommendations. On the revenue side, they indicated that efforts will focus on enhancing revenue administration, modernizing tax payments processes to combat tax evasion and broaden the tax base, and selling government properties. While agreeing to review and revamp tax exemptions, the authorities called for caution because of potential impact on activities in the tourism sector, which is the main beneficiary of exemptions and still largely undiversified. They reaffirmed commitment to bring the stock of public debt below 100 percent of GDP over the medium term, as reflected in the medium-term macroeconomic framework through continued fiscal consolidation efforts, prudent borrowing policies and growth-enhancing reforms.

B. Monetary Policy

21. The current fiscal and monetary policy mix is appropriate for safeguarding the peg to the euro and building foreign reserves. Given low inflation and adequate international reserves, a change in the monetary policy stance is not warranted at this stage. As in the past, Staff advised that the BCV remains vigilant for any sign of increasing inflationary pressures, monitors closely interest rates developments in the Euro area, and adapts the monetary policy stance as warranted. Staff also called for continued accumulation of international reserves over and above the level determined as adequate through the IMF External Sector Assessment Tool to preserve external buffers and guard against vulnerabilities. Staff noted that the projected fiscal consolidation and improvement in the external position would help preserve the peg and achieve the minimum reserve accumulation targeted under the PCI.

22. Monetary policy reforms should focus on improving liquidity management and strengthening the monetary policy transmission mechanism. The latter is hampered by very low turnover in the interbank market, excess liquidity in the banking system, and the limited development of the government securities market. Measures taken by the BCV in 2017 to improve the monetary policy transmission mechanism included: the re-linking of the rate of the Monetary Regularization Securities (TRM)—the BCV’s main long-term sterilization instrument—to the policy rate by issuing the TRMs through fixed rate tenders instead of variable rate tenders; and improved communication to provide clearer guidance on the monetary policy orientation (PS ¶26). Staff argued that additional measures are needed in this area and recommended a reduction in the overnight interest rate corridor to a maximum of 150–200 basis points (Reform Target, met in June 2019 ahead of schedule), the setting up of a symmetric interest rate corridor with overnight rates linked directly to the policy rate, and the publication of minutes of the Monetary Policy Committee meetings (Reform Target). Staff also urged the BCV to strengthen near-term forecasting capacity, and to improve monetary policy analysis through the introduction of new economic indicators.

C. Financial Sector Issues

23. The financial system is stable and adequately capitalized but profitability and asset quality remain weak (Figure 4; Table 5; Box 2). Regulatory capital is comfortable at more than 18 percent of risk-weighted assets, and there are no weak banks posing systemic risks. However, the system is overly liquid, partly due to the high level of emigrants’ deposits (about 37 percent of total deposits at end-2018). This, together with still high NPLs and low credit growth negatively impact banks’ profitability despite high lending interest rates. Staff welcomed steps taken to reduce NPLs, including enhanced recovery by banks and sale of assets held as collateral.

24. The BCV needs to continue strengthening financial regulation and supervision. There has been progress in implementing the recommendations of the 2009 FSAP, notably on banking supervision and the legal and regulatory framework (Table 6). Staff stressed that the few remaining recommendations were still relevant and called for their implementation. The enactment of basic banking and financial institutions laws is a crucial step in enhancing the BCV’s ability to strengthen supervision and implement important regulatory reforms. Staff advised that the BCV strengthens banks’ lending standards and risk management practices through enhanced surveillance; and accelerates ongoing work on a Credit Information System that will facilitate banks’ assessment of risks and customer’s creditworthiness (Reform Target). Staff urged the BCV to expedite the setting up of a central registry of mobile collateral (Reform Target) that will contribute to facilitating access to finance (PS ¶29–30).

25. Preserving correspondent banking relationships (CBRs) remains a challenge. Cabo Verde has been able to maintain CBRs, although the situation varies across banks. Given the country’s dependence on migrant remittances and deposits, Staff called for improved compliance with international transparency requirements to prevent further loss of CBRs. In the event, priority should be given to the implementation of Foreign Account Tax Compliance Act (FATCA) and Financial Action Task Force (FATF) compliance requirements (PS ¶30).

Authorities’ Views

26. The BCV concurred with Staff’s assessment and policy recommendations. Regarding the monetary policy transmission mechanism and excess liquidity in the banking system, the BCV expects some improvement through measures introduced in 2018 and 2019, and training provided to its staff. The authorities also remain concerned about the possible loss of CBRs and its adverse impact on the transfer of remittances and deposit inflows, especially those denominated in US dollars. They were of the view that their strong AML/CFT framework and commitments under the PCI would help strengthen their credibility and mitigate risks of CBRs loss.

D. Public Enterprises Reforms

27. Public enterprises’ financial difficulties are weighing heavily on public finances. Support to loss-making SOEs has been a major contributor to budget’s financing needs and to the accumulation of public and publicly-guaranteed debt. Fiscal risks have remained concentrated in three SOEs: the airline (former TACV), the housing and real estate (IFH), and the electricity and water (ELECTRA) companies, which account for the largest share of SOEs’ liabilities (PS ¶31; Box 5). At end-2018, six key SOEs received about 0.8 percent of GDP to finance their investment projects, and TACV was granted 2.1 percent of GDP for capitalization. The privatization of TACV in March 2019, and the authorities’ plan to sell the remaining 49 percent of shares to employees and other private investors by end-2019 will help reduce fiscal risks.

28. The authorities intend to accelerate SOEs reforms to support growth as well as fiscal and debt sustainability. Following the restructuring of the social housing program managed by IFH in late 2018 and the privatization of TACV, the authorities plan to privatize five additional SOEs, including the power company in 2020 (PS ¶33; PS Box 1). On this basis, financial support to SOEs will be eliminated by 2022 as indicated above—an important building-block of the PCI. Staff took the view that in the interim, it was critical to enhance fiscal reporting for the six largest SOEs by compiling financial information on their cash flow performance for fiscal year 2019 (Reform Target), and to carry out quarterly monitoring of their performance against their approved budgets, starting at end-December 2019 (Reform Target). To enhance the oversight of SOEs and improve the management of government properties, the authorities plan to set up an asset management company by the end-2019.

Box 5.Public Enterprises Sector – Issues and Reforms

Background

Cabo Verde has 23 State-Owned Enterprises (SOEs) in operation in various areas, including transportation (air and maritime), utilities, housing and pharmaceutical. Many SOEs have been facing important performance challenges over many years, and therefore, budget support to their operations has been a major contributor to the rapid accumulation of public and publicly-guaranteed debt. Through 2018, fiscal risks were concentrated in the airline (TACV), the real estate and housing (IFH), and the electricity and water (ELECTRA) companies, which account for the largest share of SOEs’ total liabilities (Figure 1). Support from the budget covered onlending, notably for investment projects, capitalization for the airline company, and various subsidies and transfers (Table 1).

Figure 1.Key SOEs’ Liabilities (2018)

Source: Cabo Verdean authorities.

Table 1.Government Support to Key SOEs 1/(Millions of Cabo Verde escudos)
On-Lending 2/CapitalizationSubsidies/Transfers/Other expenditure from Budget
Name of SOESectorShare201420152016201720182014201520162017201820142015201620172018
ASAAirport100%000000000000000
ENAPORPort100%3,4363,2712,9982,7082,4660000000000
ELECTRAEnergy/Water78%3,7599,3789,37812,33913,212000000001200
TACVAir Transport100%0000001,5631,4711,0783,9430004970
IFHReal Estate100%12,09614,42716,06613,0729,800000000003000
EMPROFACPharmaceutical100%000000000000000
Total19,29127,07628,44228,11925,47801,5631,4711,0783,9430009170
In percent of GDP13.919.319.418.415.80.01.11.00.72.40.00.00.00.60.0
Source: Cabo Verdean authorities.

Only representing the big 6 SOEs in Cabo Verde.

Onlending to SOEs are mostly for public investment execution (gross disbursement).

Source: Cabo Verdean authorities.

Only representing the big 6 SOEs in Cabo Verde.

Onlending to SOEs are mostly for public investment execution (gross disbursement).

Structural Reforms

The authorities’ efforts to restructure SOEs were accelerated in 2017 through the implementation of a reform program covering 23 companies. The program aimed to eliminate support from the budget to loss-making SOEs over time. Key steps included: (i) the sale of majority shares in TACV to a strategic partner; this operation was concluded in March 2019 with the sale of 51 percent of the company’s shares to a subsidiary of Icelandair, with costs for the government budget in terms of equity (1.3 percent of GDP), and debt service obligations; (ii) the introduction of greater private sector participation in maritime inter-island transportation; (iii) the restructuring of ELECTRA to reduce its high commercial losses and prepare the company for privatization; and (iv) the restructuring of the housing program managed by the IFH to minimize losses and increase transparency. This operation was completed at end-2018. The World Bank is supporting SOEs reforms with a Development Policy Credit of US$40 million under the First State-Owned Enterprises Reform and Fiscal Management Development Policy Financing Operation approved by the World Bank Executive Board on June 5, 2019.

Authorities’ Views

29. The authorities indicated that they will continue to give high priority to eliminating fiscal risks generated by loss-making SOEs. They stated that the planned acceleration of the restructuring and privatization during 2019–21 will help achieve this objective. However, they caution that these reforms are complex, dependent on market conditions beyond their control, and thus might take longer than expected. Consequently, while agreeing with the objective that capitalization funding to loss-making SOEs be eliminated by 2022, they stressed that this might prove overly ambitious. They agreed with Staff, however, that PCI reviews and collaboration with the World Bank will provide an opportunity to assess progress and make the needed adjustments.

E. Other Structural Reforms

30. Addressing impediments to private sector-led growth should remain at the center of structural reforms. Staff called for measures to improve the business environment and to ease access to finance, notably through the implementation of financial education program for Small-and-Medium Sized Enterprises (SMEs), and by expanding vocational training and certification. In the event, Staff welcomed the authorities’ plan to implement reforms in vocational schools with support from donors; the study underway at the national statistics institute to assess the integration of students in the labor market and other measures planned by the authorities for 2019–21 to create a business-friendly environment (PS ¶34–35; PS Box 1).

Authorities’ Views

31. The authorities indicated that reforms to improve the business environment and attract more private sector investment will be accelerated through the implementation of the PEDS, as these are the cornerstone of sustained and inclusive growth that creates opportunities for all, across all the islands.

Program Objectives and Modalities

The eighteen-month PCI program seeks to enhance macroeconomic stability. Fiscal consolidation combined with decisive SOEs reforms will support medium-term fiscal and debt sustainability as well as a stronger external position. The fiscal adjustment will be anchored by improvement in the primary balance that would reduce public debt below 100 percent of GDP in the medium term. The authorities’ policy commitments under the PCI for 2019–21 are detailed in the Program Statement (Appendices I-III).

32. Policies and reforms discussed above and detailed in the authorities’ Program Statement (PS) will underpin the PCI. During the first year, the program targets a fiscal adjustment of 1.3 percent of GDP and sets a ceiling on net other liabilities (NOL) that cover onlending and capitalization operations (see ¶17). Targeting NOL provides some flexibility on the allocation of resources between the cost of SOEs restructuring, onlending to municipalities and to SOEs to finance investment. The program also targets a stock of net international reserve of €566 million at end-September 2020 (PS Table 1). Programmed reform targets are focused on enhancing revenue mobilization and expenditure management, improving monitoring of SOEs performance to secure the elimination of the financial support from the budget over the medium term, enhancing monetary policy transmission mechanism, and improving access to finance (PS Table 2). Other structural reforms envisioned by the authorities for 2019–21 are presented in Box 1 in the PS.

33. The program will be monitored through semi-annual reviews, with quantitative targets on tax revenue, the primary balance of the central government, net other liabilities of the central government, non-accumulation of domestic payments arrears (continuous), non-accumulation of external arrears (continuous), new concessional external debt of the central government, zero ceiling on new non-concessional external debt, and net international reserves; and non-quantitative continuous targets (Table 7; PS Table 1).

34. Financing assurances. The program is fully financed for the first year through government securities and net external financing from the World Bank and the African Development Bank; and there are reasonable financing assurances for the second year (Text Table 3). Financial support from the World Bank and the African Development Bank is projected at US$240 million for 2019–2024.

Text Table 3:Cabo Verde: External Borrowing, 2019–20(Millions of Cabo Verde Escudos)
Creditors20192020
Multilateral:10,8788 ,039
World Bank7 ,1243 ,463
African Development Bank3 ,7543 ,514
Other-1 ,062
Bilateral:4,2574 ,241
Paris Club3 ,9163 ,097
Non-Paris Club3 411 ,144
Total1 5,1351 2,280
Source: Cabo Verdean authorities.
Source: Cabo Verdean authorities.

35. Cabo Verde has a good track record of implementing IMF policy advice (see Box 1). The authorities have shown good traction with IMF policy advice in the context of Surveillance, and under the most recent Fund-supported program. The latter was a Policy Support Instrument (PSI, 2010–12) that helped advance structural reforms in the fiscal and monetary policy areas.

36. Risks to program implementation largely stem from exposure to various shocks. As discussed above (¶16, Box 3), the medium-term outlook is subject to risks that are also relevant for performance under the PCI.

Staff Appraisal

37. Economic performance continues to improve with strong growth and low inflation, and the outlook is favorable despite risks. The economic recovery that started in 2016 is taking hold, with growth increasing from 1 percent in 2015 to an average of 4.7 percent during 2016–18. The recovery has benefitted from continued good performance in tourism-related activities, strong growth in the industry sector, and private investment. Inflation has remained benign despite an increase in 2018, and the external position has improved, with gross international reserves remaining comfortably above 5 months of prospective imports of goods and services. Key downside risks related to, among others, economic slowdown in the Euro area, Brexit, potential weather-related shocks, weakening in fiscal consolidation efforts and delays in structural reforms, can be mitigated by a robust PCI implementation. Stronger performance in tourism and higher FDI-driven investments in relation with the implementation of the PEDS are the main upside risks.

38. The fiscal position has strengthened, with lingering vulnerabilities. Tax administration measures implemented in the last three years, as well as expenditure control, have been instrumental in putting public finances on a stronger footing, and securing a declining trend in public debt as a share of GDP. To shore up these gains and build fiscal buffers, it is essential to improve revenue mobilization further through measures to combat tax evasion and broaden the tax base, enhance audits to contain the accumulation of tax arrears, and streamline exemptions, notably on the VAT, customs duties and excises. Continued expenditure restraint will remain necessary to safeguard the achievement of medium-term fiscal targets. In addition, and consistent with programmed public enterprises reforms, a sustained reduction, and elimination over time, of transfers from the budget to loss-making SOEs is needed to reduce financing needs and support medium-term fiscal and debt sustainability. This is also essential to eliminate fiscal risks generated by SOEs and increase fiscal space for priority spending.

39. The risk of external and overall debt distress is assessed as high. Although on a declining trend, the debt-to-GDP ratio is elevated, and the risk of external and overall debt distress remains high, unchanged compared with the 2018 DSA. However, the medium-to-long-term outlook has improved compared with the macroeconomic framework underlying the 2018 DSA, mainly on the back of higher growth, and lower fiscal and current account deficits, improving prospects for better debt dynamics. To this effect, Staff encourages the authorities to sustain fiscal consolidation efforts to achieve the projected reduction in the debt-to-GDP ratio below 100 percent by 2023. Staff also stresses that prudent borrowing policies, relying on concessional financing as well as enhanced debt management strategy, are essential to bringing public debt to sustainable levels.

40. The monetary policy stance has been appropriate and consistent with the objective of protecting the peg and price stability. Staff agrees with the authorities that in the current environment of low inflation and adequate level of reserves, a change in the monetary policy stance is not warranted. Nonetheless, Staff encourages the BCV to remain vigilant and monitor developments in the global economy, particularly in the Euro area, and stand ready to change the monetary policy stance if warranted. The BCV will also need to take further actions to strengthen the monetary policy transmission mechanism, notably by enhancing communication on its policy direction through the publication of the minutes of the Monetary Policy Committee. The external sector is weaker than suggested by medium-term fundamentals and desirable policy settings while reserve buffers exceed the optimal level of 3.6 months of prospective imports of goods and services.

41. Staff welcomes the improvement in financial stability indicators. The financial sector remains stable and banks’ profitability increased, although asset quality continues to be weak, calling for decisive measures to reduce the high level of NPLs. Staff encourages the BCV to continue enhancing banking supervision, to advance the preparation of a credit information system to facilitate bank’s assessment of creditworthiness, and to work with banks on the recovery of collaterals, particularly in the case of legacy loans that make up the largest share of NPLs.

42. Progress in the implementation of reforms to sustain high and inclusive growth remains critical. In this context, it is essential to advance reforms in the public enterprises sector, particularly in the key sectors of energy and transportation to reduce transaction costs and improve the business environment. Recognizing that these reforms, including privatization of SOEs, require time to be brought to fruition, Staff recommends enhanced monitoring of the financial situation of key SOEs through the compilation of information on their cash flow and quarterly review of their performance. Staff also encourages the authorities to support the development of SMEs by facilitating access to finance, notably by setting up a central registry for mobile collateral, increasing financial literacy through training, and building skills through the expansion of access to vocational schools, as targeted under the PEDS.

43. Staff supports the authorities’ request for a PCI. The PCI represents the appropriate instrument for IMF support to Cabo Verde’s reform efforts under the PEDS given that the country does not face present, potential, or prospective balance of payments needs, and is not seeking IMF financial support. In addition, good performance under the PCI would play an important signaling role for the authorities’ commitment to sound policies and reforms and help anchor confidence.

44. Staff proposes that the next Article IV consultation be held on a 24-month cycle.

Figure 1.Cabo Verde: Recent Economic Developments

Sources: Cabo Verdean authorities; and IMF staff estimates.

Figure 2.Cabo Verde: External Sector Developments

Source: Cabo Verdean authorities; and IMF estimates.

Figure 3.Cabo Verde: Fiscal Sector Developments

Source: Cabo Verdean authorities; and IMF staff estimates.

Figure 4.Cabo Verde: Monetary Developments

Sources: Cabo Verdean authorities; IMF staff estimates.

Figure 5.Cabo Verde’s Performance Compared to Small Middle-Income Countries1

Sources: Cabo Verdean authorities; IMF, World Economic Outlook; and IMF staff estimates.

1 Belize, Lesotho, Mauritius, Seychelles, Eswatini, and Vanuatu.

Table 1.Cabo Verde: Selected Economic Indicators, 2015–24
2015201620172018201920202021202220232024
Prel.Proj.
Annual percent change)
National accounts and prices 1/
Real GDP1.04.74.05.55.05.05.05.05.05.0
GDP deflator1.7-0.20.51.41.51.61.61.81.81.8
Consumer price index (annual average)0.1-1.40.81.31.21.61.61.81.81.8
Consumer price index (end of period)-0.5-0.30.31.01.01.61.61.81.81.8
External sector
Exports of goods and services-11.69.511.513.38.910.011.211.211.211.2
Of which: tourism2.06.914.53.58.19.811.211.411.411.4
Imports of goods and services-12.310.317.28.08.78.78.78.78.78.7
Change in percent of broad money, 12 months earlier)
Money and credit
Net foreign assets4.06.11.3-2.12.02.82.42.63.33.1
Net domestic assets2.32.35.23.55.03.53.63.83.13.3
Net claims on the central government-0.22.51.54.30.60.20.20.40.10.2
Credit to the economy1.82.44.41.93.03.33.43.53.63.6
Broad money (M2)6.28.46.51.47.06.36.06.46.46.4
Percent of GDP, unless otherwise indicated)
Savings and investment
Domestic savings35.633.231.732.332.732.833.434.234.735.4
Government0.7-0.70.81.82.32.32.73.23.63.7
Private34.934.030.930.430.530.630.631.031.131.7
National investment38.737.138.336.736.936.937.438.138.339.0
Government5.63.45.74.45.14.33.43.73.94.0
Private33.233.832.632.331.832.634.034.334.435.0
Savings-investment balance-3.2-3.9-6.6-4.5-4.2-4.1-4.1-3.9-3.6-3.6
Government-4.9-4.1-4.9-2.6-2.8-2.0-0.7-0.5-0.4-0.3
Private1.70.2-1.7-1.9-1.3-2.0-3.4-3.3-3.3-3.3
External sector
External current account (including official transfers)-3.2-3.9-6.6-4.5-4.2-4.1-4.1-3.9-3.6-3.6
External current account (excluding official transfers)-6.6-6.6-10.3-7.2-7.5-7.1-6.0-5.6-5.2-5.1
Overall balance of payments2.25.5-0.90.53.62.62.82.93.12.9
Gross international reserves (months of prospective imports of goods and services)6.06.15.55.15.35.35.35.35.45.4
Government finance
Revenue26.926.628.628.131.730.428.928.828.828.8
Tax and nontax revenue24.423.924.926.728.928.528.027.928.028.0
Grants2.52.73.71.42.81.90.90.80.80.8
Expenditure31.429.631.530.933.931.830.129.829.729.6
Primary balance-2.0-0.5-0.4-0.30.71.01.21.21.21.2
Overall balance (incl. grants)-4.6-3.0-3.0-2.8-2.2-1.5-1.2-1.0-0.9-0.8
Net other liabilities (incl. onlending)-3.2-3.4-0.4-1.0-4.3-2.2-0.9-0.2-0.2-0.2
Total financing (incl. onlending and capitalization)7.85.64.03.86.53.72.11.31.11.0
Net domestic credit1.22.90.21.41.00.40.40.70.10.4
Net external financing6.72.74.01.55.53.31.70.61.00.6
Public debt stock and service
Total nominal government debt126.6128.4127.0123.9121.4116.8111.0104.698.592.7
External government debt97.796.794.991.089.386.382.177.072.768.2
Domestic government debt29.031.732.132.932.130.528.927.625.924.6
External debt service (percent of exports of goods and services)6.46.06.35.87.66.87.47.97.46.8
Present value of PPG external debt
Percent of GDP (risk threshold: 55%)61.964.062.460.156.854.051.0
Percent of exports (risk threshold: 240%)126.6128.2121.4112.2101.993.284.6
Present value of total debt
Percent of GDP (benchmark: 70%)97.295.892.788.884.379.775.4
Memorandum items:
Nominal GDP (billions of Cabo Verde escudos)158.7165.8173.4185.6197.8211.1225.3240.9257.5275.2
Gross international reserves (€ millions, end of period)453.3536.2522.7531.1596.6645.8704.1767.2838.7911.3
Sources: Cabo Verdean authorities; and IMF staff estimates and projections.

The Cabo Verdean exchange rate has been pegged to the Euro since 1999, at a rate of 110.265 CVE/€.

Sources: Cabo Verdean authorities; and IMF staff estimates and projections.

The Cabo Verdean exchange rate has been pegged to the Euro since 1999, at a rate of 110.265 CVE/€.

Table 2.Cabo Verde: Balance of Payments, 2015–24(Millions of Euros; unless otherwise indicated)
2015201620172018201920202021202220232024
Prel.Proj.
Current account-46-59-104-75-75-78-83-84-85-90
Trade balance-427-481-583-582-636-696-761-832-909-993
Exports, f.o.b.135141167232253276301328358391
Imports, f.o.b.5616227508148899721062116012671383
Consumer goods216244270278303327357389426471
Intermediate goods128151156158176192210228250275
Capital goods778613199111123132142156168
Others (including fuel)141141192279299329363401434470
Fuel69526982778083869094
Services (net)205232253265293335393459534620
Receipt4605105595916427097948899961115
Of which: tourism297318364376407447497553616687
Payment255279306326349374401430461495
Primary Income (net)-53-54-54-37-54-65-67-76-83-102
Of which: interest on public debt-16-15-16-17-18-18-19-20-20-21
Secondary Income (net)229244280279322348351365373385
General Government49405946605838373637
Other Sectors180204221233262290313328337349
Of which: remittances169148158172187212236250266278
Capital account171114132299111211
Of which: Grants16101211207891011
Financial account 1/-125-48-112-101-53-69-74-74-73-79
Foreign direct investment-101-107-87-68-72-105-136-147-156-173
Portfolio investment32383736393734191919
Other investment-88-62-49-79-86-51-30-9-73
Net acquisition of financial assets-3-2653-57-27-9-13-14-3-3
Net incurrence of liabilities853610221584317-54-5
Monetary authority0020000000
Central government96406324876235132315
Disbursements119649256137111979010396
Amortization-23-24-29-32-51-49-62-77-80-81
Exceptional financing0000000000
Commercial banks-250-44545555
Non-bank flows-22-541-7-34-23-23-23-23-25
Reserve assets (+ accumulation)3283-138654958637273
Errors and omissions 2/-960-23-39000000
Overall balance3283-138654958637273
Memorandum items:
Current account (incl. official transfers, percent of GDP)-3.2-3.9-6.6-4.5-4.2-4.1-4.1-3.9-3.6-3.6
Current account (excl. official transfers, percent of GDP)-6.6-6.6-10.3-7.2-7.5-7.1-6.0-5.6-5.2-5.1
Overall balance (percent of GDP)2.25.5-0.90.53.62.62.82.93.12.9
Gross international reserves453536523531597646704767839911
Months of current year’s imports of goods and services6.77.15.95.65.85.85.85.85.85.8
Months of next year’s imports of goods and services6.06.15.55.15.35.35.35.35.45.4
External public debt1406145314921531160216531677168316971701
External aid (grants and loans, percent of GDP)12.77.610.46.712.19.27.06.26.45.8
Nominal GDP1439150315721683179419142043218523352495
Sources: Bank of Cabo Verde; and IMF staff estimates and projections.

Including international reserves and exceptional financing.

Including banks’ delays on trade credit reporting.

Sources: Bank of Cabo Verde; and IMF staff estimates and projections.

Including international reserves and exceptional financing.

Including banks’ delays on trade credit reporting.

Table 3a.Cabo Verde: Statement of Operations of the Central Government, 2015–241(Millions of Cabo Verde Escudos)
2015201620172018201920202021202220232024
Prel.Proj.
Revenue42,67844,10749,50552,09762,65064,13365,12269,32574,05079,275
Tax30,51632,27535,84240,65743,12646,29850,77954,91259,32664,182
Taxes on income and profit9,66910,05011,29212,25313,16913,65615,09116,18717,61719,139
Taxes on goods and services14,04714,92516,77719,88720,66022,57624,74526,85128,82631,061
Taxes on international trade6,0826,8137,2247,7338,4669,1999,99810,87211,81512,842
Other taxes7194885497848308679451,0011,0671,140
Grants3,9584,5076,3892,5755,4794,0701,9881,9881,9882,125
Of which: Project Grants1,8841,0741,9063851,9678038681,0081,1221,216
Other revenue8,2037,3257,2738,86514,04513,76512,35512,42512,73512,968
Fees and penalties404679498433297295314322329335
Property Income1,0221,0839761,8284,8084,5082,6062,5772,6572,705
Sale of Goods and Services4,6525,0425,1895,7327,8967,9568,4488,5298,7438,901
Other (inc. social contributions)2,1255226108731,0451,0059879971,0071,028
Expenditure49,90749,13954,65057,30166,97267,19767,77071,84976,38881,502
Current expenditure41,06843,56744,76049,16256,87458,08360,02762,81866,27270,496
Compensation of employees17,53018,36518,89119,74123,20723,68024,20625,05826,18927,988
Use of goods and services7,4337,5636,9617,4159,2179,77510,72010,93511,66512,466
Interest4,1344,2234,5234,7265,6375,1585,2625,3455,4235,499
Domestic2,3742,4552,6842,8113,4063,0253,0213,0353,0763,103
External1,7241,7481,7901,8222,1282,0362,1442,2052,2422,291
Other Charges372050931029797105105105
Subsidies161167124153579588588598619630
Current transfers4,7554,8956,0016,2835,6826,9646,6727,1757,6288,152
Social benefits4,7355,1655,5416,2376,9637,4298,0508,8699,42110,068
Other expense (incl. capital transfer)2,3203,1892,7184,6065,5894,4884,5294,8375,3275,693
Net acquisition of nonfinancial assets8,8395,5729,8908,14010,0989,1147,7439,03110,11611,006
Purchase of assets9,1225,61010,0598,19411,09410,0668,1949,47010,58711,477
Foreign financed6,0163,2857,7825,6897,7856,9515,4226,3017,0137,598
Domestically financed3,1062,3252,2772,5053,3093,1152,7723,1693,5743,880
Sales of assets ( – )-284-38-168-54-996-952-451-439-471-471
Primary balance-3,095-808-622-4781,3152,0932,6142,8213,0853,272
Overall balance-7,229-5,031-5,145-5,204-4,322-3,065-2,648-2,524-2,338-2,227
Net other liabilities-5,092-5,694-615-1,903-8,511-4,674-2,137-500-430-474
Onlending to SOEs for investment purpose-3,928-4,526-4,098-1,541-2,992-2,152-1,226-644-643-687
Other onlending (net)2733134,5653,606-1,872-1,293145144212212
Disbursement0000-2,057-1,4370000
Repayment2733134,5653,606185145145144212212
Capitalization-1,457-1,508-1,157-3,968-3,667-1,229-1,056000
Other21287502000000
Financing needs12,32110,7255,7607,10712,8337,7384,7853,0242,7682,701
Total financing12,4519,2247,1975,23912,8337,7384,7853,0242,7682,701
Net domestic financing1,8724,7702732,5172,0298518781,5672831,096
Banking system (net)-3744,3862,7652,5351,014425439783141548
Non Bank (net)3,3032,2372926851,014425439783141548
Other-1,057-1,853-2,783-703000000
Net external financing10,5794,4546,9242,72310,8046,8883,9071,4572,4861,605
Disbursement13,0117,06810,1376,20215,13512,28010,7309,91011,32610,588
Budget Loans2,65202,2052,2056,0853,1163,3453,1463,1463,519
Project and Program Loans6,4302,5423,8342,4566,0587,0126,1606,1207,5376,382
Loans to on lend to SOEs 2/3,9284,5264,0981,5412,9922,1521,226644643687
Amortization2,4322,63213 ,3,4794,3315,3926,8238,4538,8408,983
Net errors and omissions (+ overfinancing)130-1,5011,437-1,868000000
Memorandum items:
Social Spending 3/10,2959,20514,15114,00814,42315,39116,42717,56618,77220,061
Total Public Investment13,05110,13614,1569,73514,08612,2189,42010,11411,23012,164
of which: public investment done by SOEs3,9284,5264,0981,5412,9922,1521,226644643687
Sources: Cabo Verdean authorities and IMF staff estimates and projections.

Includes budgetary central government (BCG) and extra budgetary central government (ECG), but excludes social security funds.

On lend to SOEs for public investment execution.

Covering health, education, and social protection sectors, excluding compensation of employees.

Sources: Cabo Verdean authorities and IMF staff estimates and projections.

Includes budgetary central government (BCG) and extra budgetary central government (ECG), but excludes social security funds.

On lend to SOEs for public investment execution.

Covering health, education, and social protection sectors, excluding compensation of employees.

Table 3b.Cabo Verde: Statement of Operations of the Central Government, 2015–241(Percent of GDP)
2015201620172018201920202021202220232024
Prel.Proj.
Revenue26.926.628.628.131.730.428.928.828.828.8
Taxes19.219.520.721.921.821.922.522.823.023.3
Taxes on income and profit6.16.16.56.66.76.56.76.76.87.0
Taxes on goods and services8.99.09.710.710.410.711.011.111.211.3
Taxes on international trade3.84.14.24.24.34.44.44.54.64.7
Other taxes0.50.30.30.40.40.40.40.40.40.4
Grants2.52.73.71.42.81.90.90.80.80.8
Other revenue5.24.44.24.87.16.55.55.24.94.7
Fees and penalties0.30.40.30.20.20.10.10.10.10.1
Property Income0.60.70.61.02.42.11.21.11.01.0
Sale of Goods and Services2.93.03.03.14.03.83.73.53.43.2
Other (inc. social contributions)1.30.30.40.50.50.50.40.40.40.4
Expenditure31.429.631.530.933.931.830.129.829.729.6
Current expenditure25.926.325.826.528.827.526.626.125.725.6
Compensation of employees11.011.110.910.611.711.210.710.410.210.2
Use of goods and services4.74.64.04.04.74.64.84.54.54.5
Interest2.62.52.62.52.82.42.32.22.12.0
Domestic1.51.51.51.51.71.41.31.31.21.1
External1.11.11.01.01.11.01.00.90.90.8
Other Charges0.00.00.00.10.10.00.00.00.00.0
Subsidies0.10.10.10.10.30.30.30.20.20.2
Current transfers3.03.03.53.42.93.33.03.03.03.0
Social benefits3.03.13.23.43.53.53.63.73.73.7
Other expense (incl. capital transfer)1.51.91.62.52.82.12.02.02.12.1
Net acquisition of nonfinancial assets5.63.45.74.45.14.33.43.73.94.0
Purchase of assets5.73.45.84.45.64.83.63.94.14.2
Foreign financed3.82.04.53.13.93.32.42.62.72.8
Domestically financed2.01.41.31.31.71.51.21.31.41.4
Sales of assets ( – )-0.20.0-0.10.0-0.5-0.5-0.2-0.2-0.2-0.2
Primary balance-2.0-0.5-0.4-0.30.71.01.21.21.21.2
Overall balance-4.6-3.0-3.0-2.8-2.2-1.5-1.2-1.0-0.9-0.8
Net other liabilities-3.2-3.4-0.4-1.0-4.3-2.2-0.9-0.2-0.2-0.2
Onlending to SOEs for investment purpose-2.5-2.7-2.4-0.8-1.5-1.0-0.5-0.3-0.2-0.2
Other onlending (net)0.20.22.61.9-0.9-0.60.10.10.10.1
Disbursement0.00.00.00.0-1.0-0.70.00.00.00.0
Repayment0.20.22.61.90.10.10.10.10.10.1
Capitalization-0.9-0.9-0.7-2.1-1.9-0.6-0.50.00.00.0
Other0.00.00.00.00.00.00.00.00.00.0
Financing Needs7.86.53.33.86.53.72.11.31.11.0
Total financing7.85.64.22.86.53.72.11.31.11.0
Net domestic financing1.22.90.21.41.00.40.40.70.10.4
Banking system (net)-0.22.61.61.40.50.20.20.30.10.2
Non Bank (net)2.11.30.20.40.50.20.20.30.10.2
Other-0.7-1.1-1.6-0.40.00.00.00.00.00.0
Net external financing6.72.74.01.55.53.31.70.61.00.6
Disbursement8.24.35.83.37.75.84.84.14.43.8
Budget Loans1.70.01.31.23.11.51.51.31.21.3
Project and Program Loans4.11.52.21.33.13.32.72.52.92.3
Loans to on lend to SOEs 2/2.52.72.40.81.51.00.50.30.20.2
Amortization1.51.61.91.92.22.63.03.53.43.3
Net errors and omissions (+ overfinancing)0.1-0.90.8-1.00.00.00.00.00.00.0
Memorandum items:
Social Spending 3/6.55.68.27.57.37.37.37.37.37.3
Total Public Investment8.26.18.25.27.15.84.24.24.44.4
of which: public investment done by SOEs2.52.72.40.81.51.00.50.30.20.2
GDP at current market prices (billions of CVEsc)158.7165.8173.4185.6197.8211.1225.3240.9257.5275.2
Sources: Cabo Verdean authorities and IMF staff estimates and projections.

Includes budgetary central government (BCG) and extra budgetary central government (ECG), but excludes social security funds.

On lend to SOEs for public investment execution.

Covering health, education, and social protection sectors, excluding compensation of employees.

Sources: Cabo Verdean authorities and IMF staff estimates and projections.

Includes budgetary central government (BCG) and extra budgetary central government (ECG), but excludes social security funds.

On lend to SOEs for public investment execution.

Covering health, education, and social protection sectors, excluding compensation of employees.

Table 4.Cabo Verde: Monetary Survey, 2015–24(Millions of Cabo Verde escudos, unless otherwise indicated)
2015201620172018201920202021202220232024
Prel.Proj.
Net foreign assets48,46358,01860,22756,39660,07665,53670,53076,20383,95091,806
Foreign assets75,88085,39086,73083,53387,67893,53199,056105,272113,571121,993
Of which: gross international reserves49,97959,65857,33058,64965,78071,21477,63284,59892,484100,484
Foreign liabilities-27,417-27,371-26,519-27,233-27,698-28,091-28,623-29,165-29,718-30,283
Net domestic assets108,466112,024120,878127,234136,456143,291150,789159,174166,455174,724
Net domestic credit133,1961 37,724145,938156,614162,715169,682177,366186,039194,748204,550
Net claims on general government (net)31,50232,26233,06840,28440,83241,40041,99742,96043,29544,055
Investment in TCMFs 1/11,63611,14311,05311,07011,07011,07011,07011,07011,07011,070
Net claims on the central government18,34322,33424,81832,65933,67434,09934,53835,32235,46336,011
Credit to central government29,29933,26835,92046,86647,88148,30648,74549,52949,67050,218
Deposits of central government-10,956-10,934-11,102-14,207-14,207-14,207-14,207-14,207-14,207-14,207
Of which: project deposits-47-47-47-56-56-56-56-56-56-56
Net claims on local government and other agencies 2/1,524-1,216-1,938-3,446-3,913-3,769-3,612-3,432-3,238-3,027
Credit to the economy101,694105,463112,869116,330121,884128,281135,370143,079151,453160,495
Other items (net)-24,730-25,700-25,060-29,380-26,259-26,391-26,577-26,865-28,293-29,826
Broad money (M2)156,929170,043181,105183,630196,532208,827221,319235,377250,404266,530
Narrow money (M1)62,41370,27581,95386,80692,90598,717104,622111,268118,371125,994
Currency outside banks8,9679,2079,3429,57110,24310,88411,53512,26813,05113,891
Demand deposits53,44661,06772,61277,23582,66287,83393,08799,000105,320112,103
Quasi-money90,48493,39493,39491,86298,316104,466110,715117,748125,265133,332
Foreign currency deposits4,0324,7015,7584,9635,3125,6445,9826,3626,7687,203
(Change in percent of broad money, 12 months earlier)
Net foreign assets4.06.11.3-2.12.02.82.42.63.33.1
Net domestic assets2.32.35.23.55.03.53.63.83.13.3
Net domestic credit1.82.94.85.93.33.53.73.93.73.9
Net claims on the central government-0.22.51.54.30.60.20.20.40.10.2
Credit to the economy1.82.44.41.93.03.33.43.53.63.6
Other items (net)0.5-0.60.4-2.41.7-0.1-0.1-0.1-0.6-0.6
Broad money (M2)6.28.46.51.47.06.36.06.46.46.4
Memorandum items:
Emigrant deposits56,94360,71163,25163,86968,15472,41876,75081,62586,83692,428
Emigrant deposits/total deposits (percent)38.537.736.836.736.636.636.636.636.636.6
Excess reserves/total deposits (percent)6.19.911.113.4
Money multiplier (M2/M0)3.43.03.23.23.33.33.33.33.33.3
Money velocity (Nominal GDP/M2)1.01.01.01.01.01.01.01.01.01.0
Credit to the economy (percent change) 3/2.73.77.03.14.85.25.55.75.96.0
Broad money (M2 in percent of GDP)98.9102.6104.599.099.498.998.297.797.396.9
Sources: Bank of Cabo Verde; and IMF staff estimates and projections.

TCMFs (Títulos Consolidados de Mobilização Financeira) are government bonds in escudos maturing in 2018 and backed by a trust fund managed by the Banco de Portugal.

Includes Cabo Verde’s National Pension Institute (INPS).

Percent change, year over year.

Sources: Bank of Cabo Verde; and IMF staff estimates and projections.

TCMFs (Títulos Consolidados de Mobilização Financeira) are government bonds in escudos maturing in 2018 and backed by a trust fund managed by the Banco de Portugal.

Includes Cabo Verde’s National Pension Institute (INPS).

Percent change, year over year.

Table 5.Cabo Verde: Financial Soundness Indicators of the Banking Sector, 2010–18(End-year; percent unless otherwise indicated)
201020112012201320142015201620172018
Capital adequacy
Regulatory capital to risk-weighted assets12.815.214.215.115.616.217.117.318.0
Regulatory Tier 1 capital to risk-weighted assets13.015.913.913.714.415.015.916.417.8
Asset quality 1/
Nonperforming loans to total loans8.411.814.116.418.716.515.614.512.8
Nonperforming loans net of provisions to capital17.140.247.953.562.849.442.535.027.8
Provisions to nonperforming loans73.157.053.751.648.854.458.564.171.0
Earnings and profitability
Return on assets0.70.40.20.30.20.40.30.41.0
Return on equity9.15.62.73.53.14.84.26.413.2
Interest margin to gross income76.176.275.575.371.873.176.777.080.4
Noninterest expenses to gross income67.068.576.578.172.575.866.460.256.0
Liquidity 2/
Liquid assets to total assets8.17.115.022.130.330.323.722.121.4
Liquid assets to short-term liabilities10.59.721.129.037.337.028.626.625.5
Additional indicators
Government deposits over total deposits9.57.69.711.413.512.614.615.818.3
Emigrant deposits over total deposits37.438.939.337.938.038.537.736.836.7
Emigrant deposits over total assets27.227.026.525.426.727.326.826.225.6
Demand deposits over total deposits43.843.442.045.543.242.844.048.350.5
Total credit over total deposits79.185.979.067.461.559.555.655.855.3
Personnel cost over cost of operations49.049.950.148.454.856.658.858.358.4
Source: Bank of Cabo Verde.

Based on IFRS definition.

Liquid assets include cash in vault and marketable securities. Short-term liabilities include demand deposits.

Source: Bank of Cabo Verde.

Based on IFRS definition.

Liquid assets include cash in vault and marketable securities. Short-term liabilities include demand deposits.

Table 6.Cabo Verde: Implementation Status of the Recommendations of the 2009 FSAP
RecommendationTimeframeStatus
Financial Sector Soundness, Supervision and Regulation
Reducing vulnerabilities in domestic banks
  • Encourage banks to raise capital above the regulatory minimum and strictly avoid forbearance in case of even temporary shortfalls
  • Further enhance the framework for financial soundness analysis
  • Enhance credit risk assessment framework
Short term

Short term

Short term
Done

Done

Done
Mitigating risks in the offshore sector
  • Determine whether to wind down IFI sector or reform it to conform to international standards of regulation, supervision and integrity
  • If reform is chosen, implement international standards of regulation, strengthen supervisory powers, and adopt stricter licensing standards
Short term

Short term
Done

Done
Enhancing banking supervision
  • Improve supervision of onshore and offshore banks
  • Improve the legislative and regulatory framework for supervision
Short term

Short term
Done

Done
Establishing a crisis management framework
  • Create well-defined guidelines for the management of problem financial institutions and financial crises
  • Review law and develop implementing regulations outlining lender of last resort arrangements
  • Assess desirability of instituting system of deposit insurance, taking into account costs, benefits, and structure of the financial system
Short term

Short to medium

term medium term
Done

Done

Done
Issues in Systemic Liquidity and Monetary Management
Enhancing the framework for monetary operations
  • Streamline monetary operations decision making process
  • Use predetermined long-term intervention program to implement program targets and short-term operations to manage daily liquidity conditions at banks.
  • Release Board monetary meeting minutes with a lag
  • Use t-bills for monetary operations as much as possible
  • Improve coordination of monetary and fiscal operations between BCV and the Treasury
  • Harmonize tax treatment of BCV securities and treasuries
Medium term

Short term

Medium term

Medium term

Short term.

Short term
Done

Done

In process

In process

Done

In process
Developing the money market
  • More actively manage bank liquidity through daily auctions
  • Apply less punitive and symmetric rates to standing facilities
  • Allow wider secondary market trading in BCV securities
  • Use repos to implement all of BCV’s short-term interventions (standing facilities and auctions)
Short term

Medium term

Short term

Medium term
In process

Done

In process

In process
Challenges for the Development of the Financial Sector
Access to Finance
  • Promote technical assistance to SME’s to implement proper accounting systems to facilitate lending decisions
  • Implement a more comprehensive credit reporting system
  • Do not allow deposit-taking by microfinance institutions
Short term

Short term

Short term
In process

In process

In process
Pension and insurance
  • Strengthen the governance and transparency of the INPS
  • Evaluate additional parametric reforms to the INPS to ensure long-term viability
  • Evaluate the costs, benefits, and risks of allowing INPS to place part of its assets abroad
  • Consider tax deferral of contributions and investment gains in occupational and employer contributions as expenses for purposes of corporate and personal income tax
  • Modernize the legal and regulatory framework for insurance
Short term

Medium term

Short term

Medium term

Medium term
Done

Done

In process

Not initiated

Done
Legal and judicial issues
  • Finish the process of replacing the Code of Civil Procedure
  • Implement further steps to promote mediation
  • Promote improved corporate governance practices that impact firms’ ability to obtain credit
  • Draw lessons from experience of other countries in replacing the bankruptcy code
Short term

Short term

Short to medium term

Medium term
In process

In process

In process

In process
Source: IMF Article IV, March 2014. Updated by IMF staff in March 2019.
Source: IMF Article IV, March 2014. Updated by IMF staff in March 2019.
Table 7.Cabo Verde—Schedule of Reviews Under the PCI, 2019–21
Program ReviewTest DateReview Date
Board discussion of the PCI requestJuly 15, 2019
First ReviewSeptember 30, 2019March 1, 2020
Second ReviewMarch 31, 2020September 2, 2020
Third ReviewSeptember 30, 2020January 15, 2021
Annex I. External Stability Assessment

Cabo Verde’s external position in 2018 was assessed to be weaker than suggested by fundamentals and desirable policy settings based on the external sustainability approach, which points to a large overvaluation. The net international investment position remains a vulnerability. However, its risks are mitigated by the nature of Cabo Verde’s external liabilities, which are mainly composed of FDI and long-term maturity debt. Reserve adequacy is satisfactory—the assessment using the LIC/MIC framework suggests an optimal level of reserves of 3.6 months of prospective imports of goods and services—compared to an actual and prospective level exceeding 5 months. Although the business environment has improved in recent years, continued structural reforms remain critical to address non-price competitiveness factors.

Current Account

1. Background. The current account deficit narrowed to 4.5 percent of GDP in 2018, after averaging 9.4 percent of GDP in 2003–17, mostly reflecting strong export performance, increased remittances, and a deceleration in imports demand (Text Figure 1). Financial inflows remained important, covering the largest share of the current account deficit. Projections for 2019 and the medium term point to continued increase in exports of goods, tourism receipts and remittances that would outpace the projected growth in imports. As a result, the current account deficit would narrow to 4.2 percent of GDP in 2019, and 3.6 percent of GDP over the medium term.

Text Figure 1.Cabo Verde: Balance of Payments, 2008–24

(Percent of GDP)

Sources: Cabo Verdean authorities; and IMF Staff calculations.

2. Assessment. The EBA-lite methodology based on the current account (CA) model is based on a panel regression of the current account which generates an estimated “norm” consistent with medium-term fundamentals and desirable policies. Using the CA model shows that the cyclically-adjusted current account balance is estimated at -6.4 percent of GDP in 2018, while the multilaterally consistent cyclically-adjusted current account norm is -9.0 percent of GDP (Text Table 1). This suggests a current account gap of 2.6 percent of GDP. Using the estimated current account elasticities, this implies an undervaluation of the Real Effective Exchange Rate (REER) of about 6 percent. However, the CA model has limitations in analyzing tourism-based economies and does not fully capture Cabo Verde’s need to save externally to guard against the country’s exposure to natural disasters. As such, Staff finds that the EBA-lite estimated CA norm assumes a wider CA deficit than is appropriate for Cabo Verde’s circumstances.

Real Effective Exchange Rate

3. Background. The REER has been relatively stable over the past decade. In 2018, it appreciated by about 0.9 percent relative to 2017 while remaining broadly in line with the average for the past five years.

4. Assessment. The EBA-lite methodology based on the REER model is based on a panel regression of the real effective exchange rate which generates an estimated “norm” consistent with medium-term fundamentals and desirable policies. The REER model suggests an undervaluation of the REER, of about 19 percent, much higher than suggested under the current account model-based assessment (Text Table 1).

Text Table 1.Cabo Verde: Results of EBA-lite Assessment
CA ApproachREER Approach
CA-Actual-4.5%Ln(REER) Actual4.58
Cyclical Contributions (from model)1.9%Ln(REER) Fitted4.80
Cyclically adjusted CA-6.4%Ln(REER) Norm4.77
CA-Norm-7.6%Residual-0.22
Cyclically adjusted CA Norm-9.6%REER Gap-18.8%
Multilaterally Consistent Cyclically adjusted CA Norm-9.0%Policy Gap3.6%
CA-Gap of/which Policy gap2.6% -2.3%Natural Disasters and Conflicts-0.1%
Elasticity-0.4
REER Gap-6.4%
CA-Fitted-9.9%
Residual0.1
Natural Disasters and Conflicts0.0%
Source: IMF Staff estimates.
Source: IMF Staff estimates.

Capital and Financial Flows

5. Background. Although declining in 2018, capital flows remain high, driven by foreign direct investment. The net capital and financial account balance stood at 5.2 percent of GDP in 2018, following a sharp increase in 2017 to 6.2 percent of GDP (2.5 percent of GDP in 2016).

6. Assessment. Net capital and financial flows are expected to be sustained over the medium term, which, combined with the projected improvement in the external current account would result in sustained overall balance of payments surpluses.

Reserve Adequacy

7. Background. Following a sharp increase in 2016 (€83 million), gross international reserves dropped in 2017, and grew by €8 million in 2018, bringing the stock to €531 million at end-December 2018, equivalent to 5.1 months of prospective imports of goods and services.

8. Assessment. Results from the Fund’s LIC/MIC framework suggests that the optimal level of reserves for Cabo Verde is about 3.6 months of prospective imports of goods and services. However, as noted in the previous assessment (Country Report No. 18/104), fragilities arising from the economy’s small size, lack of export diversification, and vulnerability to exogenous shocks call for a higher level of reserves of about five months of imports in line with Staff’s medium-term projections.

External Balance Sheet

9. Background. Cabo Verde’s net international investment position (NIIP, excluding short-term migrants’ deposits) improved from -150 percent of GDP in 2017 to -131 percent of GDP in 2018. Nonetheless, this large negative position is an important source of external vulnerability. In 2018, gross foreign assets and liabilities stood at 71 percent of GDP and 201 percent of GDP, respectively.

10. Assessment. The external sustainability approach (ES) calculates the REER adjustment required to satisfy the inter-temporal budget constraint as a measure of the external adjustment required to restore external sustainability. The ES approach suggests that the projected current account is weaker than the level required to stabilize the NIIP at its end-2018 level, implying a REER overvaluation of about 17 percent. This is due to the large stock of liabilities, and a smaller rate of return on assets compared to the cost of liabilities, which results in a net drain of income via the primary income balance.

Non-Price Competitiveness

11. Background. While Cabo Verde’s business environment has improved in recent years, competitiveness could be strengthened further in several areas relative to peers. According to the World Economic Forum (WEF)1, Cabo Verde’s overall score for global competitiveness in 2018 was 50.2 compared with an average of 52.8 for Sub-Saharan Africa Small Middle-Income Countries (SSA SMICs). Cabo Verde does better in adoption of Information and Communication Technology (ICT) and health. However, there is considerable room for improvement in macroeconomic stability, business dynamism and innovation capacity (Text Table 2). Similarly, the World Bank’s Doing Business Indicators2 show that compared to peers, Cabo Verde lags in relation with the ease of doing business indicators. In 2019, Cabo Verde scores better in the areas of starting a business, dealing with construction permits, registering property and enforcing contracts, in comparison to SSA and SSA SMICs averages.

Text Table 2.Cabo Verde: Global Competitiveness Index by Subcategories, 2018(Score 0 to 100)
Cabo VerdeSSA SMICs 1
Overall score50.252.8
Enabling environment component55.858.4
Institutions51.554.5
Infrastructure54.757.2
ICT adoption48.142.7
Macroeconomic stability68.979.2
Human capital component62.850.0
Health75.650.2
Skills53.356.6
Markets components46.251.8
Product market52.856.3
Labour market57.661.3
Financial system57.359.5
Market size17.130.0
Innovation ecosystem component32.743.4
Business dynamism44.054.6
Innovation capability21.432.2
Sources: World Economic Forum; and IMF staff estimates.Note: 1 List of SSA SMICs include Botswana, Eswatini, Lesotho, Mauritius, Namibia, Seychelles.
Sources: World Economic Forum; and IMF staff estimates.Note: 1 List of SSA SMICs include Botswana, Eswatini, Lesotho, Mauritius, Namibia, Seychelles.

12. Assessment. Despite the abovementioned strides, decisive structural reforms aimed at improving the business environment and attracting private investors remain critical to bolster competitiveness. Key areas in need of improvement include power supply, access to finance, protecting minority investors, paying taxes and trading across borders (Text Figure 3). In terms of tourism competitiveness, Cabo Verde is a top performer in sub-Sharan Africa (Box 1).

Text Figure 3.Cabo Verde: Ease of Doing Business, 2019

Sources: World Bank, Doing Business Database; and World Economic Forum.

Note: Score is between 0 and 100.

SSA SMICs include Botswana, Eswatini, Lesotho, Mauritius, Namibia and Seychelles.

Box 1.Tourism Sector Competitiveness

Cabo Verde is a tourism-based economy. The sector has witnessed impressive, sustained growth for more than a decade. Between 2000 and 2017, the annual average growth rate in the number of tourists entering the country was 11 percent. Most tourists originate from Europe; hence, the industry was negatively affected by the 2008 financial crisis. It has since recovered, particularly compared to other tourism dependent small-states.

Cabo Verde is a top performer in SSA on indicators of travel and tourism competitiveness. Nevertheless, the country needs to improve on cultural and business travel, international openness and ground and transport infrastructure to fully compete with other destinations outside SSA. The recent privatization of the airline company (March 2019) is expected to enhance growth prospects in the sector.

Share in global tourist arrivals

(Index, 1995 = 100)

Note: There is no data for 2016 and 2017 for St. Kitts and Nevis.

There is no data for 2017 for São Tomé and Príncipe, Dominica and Bahamas.

Source: World Tourism Organization , Compendium of Tourism Statistics dataset.

Cumulative growth in tourist arrivals, 2010–2017

Overall Assessment and Recommendations

13. Staff assessment of the external position in 2018 found mixed results. The external sustainability approach points to an overvaluation of about 17 percent to stabilize the NIIP at its end-2018 level. On the other hand, the EBA-lite methodology based on the current account model and the REER model point to an undervaluation of the real effective exchange rate in the range of 6 to 19 percent. Given the existing large external liabilities for Cabo Verde, Staff’s policy recommendations are underpinned by the results derived from the external sustainability approach.

14. Sustained fiscal consolidation and structural reforms are needed to improve the external position. The fiscal adjustment envisioned under the PCI (discussed in the main report) is expected to help reduce external liabilities and thereby support medium-term external sustainability. Continued implementation of structural reforms is also needed to reduce transaction costs, increase labor market flexibility, boost productivity, and support private sector development. Although the current level of reserves is adequate in relation with estimates derived from the IMF LIC/MIC framework, building strong external buffers is critical in view of existing vulnerabilities and the need to protect the peg.

Policy Coordination Instrument

Attached hereto is a Program Statement dated June 21, 2019 from the Vice-Prime-Minister and Minister of Finance of Cabo Verde and the Governor of the Banco de Cabo Verde (the “Program Statement”) with its attached Technical Memorandum of Understanding (“TMU”) requesting from the International Monetary Fund (the “Fund”) a Policy Coordination Instrument (the “Instrument”), and setting forth:

  • a. The objectives and economic and financial policies (the “Program”) that the authorities of Cabo Verde intend to pursue during the period of the Instrument;
  • b. The policies and measures that the authorities of Cabo Verde intend to pursue during the first year of the Instrument, including a quantified macroeconomic framework for the first 12 months under the Instrument; and
  • c. Understandings of Cabo Verde with the Fund regarding reviews that will be made of progress in realizing the objectives of the Program.

To support these objectives and policies, the Fund approves this Instrument for a period of 18 months starting from the date of approval of the Instrument, in accordance with the following provisions, and subject to the requirements of Decision No. 16230-(17/62), adopted July 14, 2017, on Policy Coordination Instruments (“PCI Decision”):

  • 1. Review Schedule. Cabo Verde’s implementation of the Program will be assessed by the Fund through reviews, which are scheduled to be conducted by March 1, 2020, September 2, 2020, and January 15, 2021, subject to paragraphs 7(b) and (c) of the PCI Decision.
  • 2. Establishing Targets. Completion of each review will be subject to Quantitative Targets or Reform Targets, or both, where established, having been set for the shorter of (a) the next two scheduled reviews, or (b) the remaining period of the Instrument.
  • 3. Completing Reviews. A review will be completed only if the Fund is satisfied that the Program is on track to achieve its objectives, based on relevant factors such as Cabo Verde’s observance of Quantitative Targets, Standard Continuous Targets, and Reform Targets as set forth in Tables 1 and 2 attached to the Program Statement and as further specified in the TMU, and its policy understandings for the future.
  • 4. Provision of Information. In accordance with the Program Statement, Cabo Verde will provide the Fund with such information as the Fund requests in connection with the progress of Cabo Verde in implementing the policies and reaching the objectives of the Program.
  • 5. Consultation. In accordance with the Program Statement, during the period of this Instrument, Cabo Verde will consult with the Fund on the adoption of any measures that may be appropriate at the initiative of Cabo Verde or whenever the Managing Director of the Fund requests such a consultation. These consultations may include correspondence and visits of officials of the Fund to Cabo Verde, or representatives of Cabo Verde to the Fund.
Appendix I. Program Statement

Praia, June 21, 2019

Christine Lagarde

Managing Director

International Monetary Fund

Washington, D.C., 20431

U.S.A

Dear Ms. Lagarde,

The government of the Republic of Cabo Verde embarked in 2016 on an ambitious reform program to reduce the country’s vulnerabilities and improve prospects for sustainable inclusive and private sector-led growth. The progress achieved thus far has been considerable, as evidenced by the substantial acceleration in economic growth recorded since 2016. To consolidate these results, the government requests the International Monetary Fund’s (IMF) approval and support for the implementation of a macroeconomic and structural reforms program supported by the Policy Coordination Instrument (PCI) for the period July 2019–January 2021. The attached Program Statement (PS) outlines the program’s objectives and presents the economic and financial policies that the government and the central bank of Cabo Verde intend to implement to reach those objectives.

The program will provide a sound framework for the implementation of reforms set forth in the government’s Sustainable Development Strategy 2017–2021 (PEDS), which seeks to develop inclusive tourism, benefitting all the islands; transform Cabo Verde into an air transport hub and an international business center; create an international finance platform; develop a digital platform for technological innovation; expand maritime services; and support investment opportunities developed locally or by the diaspora. The PEDS has received support from Cabo Verde’s development partners through financial pledges.

The program will focus on strengthening fiscal and public debt sustainability; continuously modernizing the monetary policy framework, strengthening the resilience of the financial system, improving the business environment, advancing public enterprises sector reforms, setting up mechanisms to protect the most vulnerable portions of the population, and broadening the foundation for improved resilience to climate change, natural disasters and other exogenous shocks.

The implementation of the program will be monitored through quantitative targets, standard continuous targets, and reform targets, as described in this PS and in the attached Technical Memorandum of Understanding (TMU). There will be semi-annual reviews of the program by the IMF to assess progress in reforms implementation.

We believe that the policies set forth in this PS are adequate to achieve the objectives of the PCI-supported program. Nonetheless, we stand ready to take any additional measures that may prove necessary to reach the expected results. We will provide the IMF with all information requested to assess progress in the implementation of the program.

Given the needed program ownership, we wish to make this letter available to the public, along with the Program Statement and the Technical Memorandum of Understanding, as well as the Staff Report for the 2019 Article IV Consultation and the Request for a program under the Policy Coordination Instrument. Therefore, we authorize the publication of these documents and their posting on the IMF’s official webpage, subject to approval by the IMF Executive Board. We will also post these documents, including the Portuguese versions, on the government official webpage.

Sincerely,

/s//s/
Olavo CorreiaJoão Serra
Vice-Prime-Minister andGovernor of the
Minister of FinanceBanco de Cabo Verde

Attachment: Technical Memorandum of Understanding

Appendix II. Program Statement for the Period July 2019–January 2021

Background

1. Cabo Verde made significant strides in economic development in the past few decades, despite constraints caused by the 2008 global financial crisis. Real GDP rose by about 6 percent on average during 1990–2000, and by close to 4.2 percent during the period 2001–2015. After growth softened during the first half of the decade, the economy improved its growth performance during the period 2016–2018, when the GDP grew by 4.7 percent on average. Economic activity in Cabo Verde in recent years has been driven by a significant increase in tourism activities, the scaling-up of public investment to address infrastructure gaps, high private investment financed with Foreign Direct Investment (FDI), and structural reforms aimed at increasing the private sector’s role in productive activities. It allowed the country to more than double its per capita income and to graduate to middle-income status in 2007 and helped improve living standards and reduce poverty.

2. Economic performance improved in recent years thanks to the implementation of sound policies, a better external environment, and progress in some reforms. However, important challenges and vulnerabilities remain. Despite the considerable improvement over the period 2016–18, economic growth remains far below potential, and constrained by structural factors, particularly: lack of diversification in the economy and regional equity; weak business environment; poor connectivity between the islands, lack of skilled labor and the attendant constraints to factor productivity; high transaction costs; and limited access to finance.

3. While the fiscal position has improved in recent years there are important risks. Vulnerabilities generated by the narrow tax base, financial support to loss-making State-Owned Enterprises (SOEs), and low efficiency in capital expenditure management have been constraining fiscal space and making it difficult to lock in recent gains in fiscal consolidation and put public debt on a downward trend at a desirable pace.

4. Public debt increased significantly in the last decade. The rapid growth in debt reflects the scaling-up of investment in infrastructure, support from the budget to SOEs under onlending, capitalization and guarantees to their external borrowing. The stock of public and publicly-guaranteed debt rose from 57 percent of GDP in 2008 to 128.4 percent of GDP at end-2016. Over the past two years, however, public debt declined, standing at 123.9 percent at end-2018. Despite this progress, the most recent debt sustainability analysis carried out by the IMF and World Bank Staff indicates that Cabo Verde is at high risk of external and overall debt distress.

A. Recent Economic Developments and Outlook

5. Economic activity remained strong in 2018 and inflation subdued. The real GDP growth is estimated at 5.5 percent, up from 4 percent in 2017. In the last quarter of 2018, GDP grew by 7.6 percent compared with the same period of the previous year. Sustained activity in the industry and tourism sectors more than compensated for the impact of the drought on agricultural output. Although on the rise compared with previous years, inflation remained low. It rose to 1 percent at end-December 2018 (0.3 percent at end-2017), due to higher food and fuel prices.

6. Developments in the monetary and financial sector were also positive. Credit to the economy grew by 3.1 percent in 2018. The deceleration compared with 2017 was mostly due to a repayment of loans by a major operator in the tourism sector. The sectoral distribution shows that the largest share of credit was extended to trade, restaurant and hotel sectors. In 2018, migrant deposits rose compared with 2017, reflecting continued interest rate premia with the European Union and the United States. They stood at 36.7 percent of total deposits, equivalent to 35 percent of GDP. Migrants deposits remain an important contributor to the excess liquidity in the banking system.

7. There were changes in some interest rates. After a 200-basis points reduction in 2017, the central bank (Banco de Cabo Verde – BCV) maintained the prime rate at 1.5 percent. Interest rates on deposits, including emigrants’ deposits declined to 1.6 percent at end-December (1.9 percent at end-2017), while lending rates increased from 9.3 percent in 2017 to 9.6 percent in 2018. In June 2019, the BCV reduced the interest rate of the overnight lending facility to 3.0 percent from 4.5 percent to improve the effectiveness of the monetary policy transmission mechanism.

8. Government efforts to strengthen public finances continued in 2018. Administrative measures put in place to strengthen revenue mobilization included: strengthening of the administrative and decision-making capacity of the tax administration; enhanced auditing to combat tax avoidance and evasion; promotion of the formalization of the economy and; improved collection of new revenues. These actions, combined with strong economic activity helped raise tax and nontax revenue to 26.7 percent of GDP, up from 24.9 percent of GDP in 2017. On the expenditure side, wages and salaries increased by 4.4 percent because of the updating of salary and career plans (PCCS) for specialized personnel in the civil service. Spending on goods and services rose by 6.5 percent, partly due to the purchase of medications for hospitals and security equipment. As for spending on transfers and subsidies, there was an increase of 4.7 percent and 23.4 percent, respectively because of a rise in transfers to municipalities resulting from the increase in financial fund for municipalities (FFM), payment of quota subscriptions to international organizations, and an increase in subsidies for Small-and-Medium Sized Enterprises. The increase also reflects the financing of the program to mitigate the effects of the drought that affected the country over the past two years. On capital expenditure, the execution was lower-than-budgeted, due to delays in disbursements for externally-financed projects, leading to a modest nominal increase in total expenditure. As a result, the primary deficit went from about CVE 0.6 billion (0.4 percent of GDP), to CVE 0.48 billion (0.3 percent of GDP). However, net other liabilities, including onlending as well as capitalization in favor of public enterprises facing financial difficulties which include net onlending, capitalization, and other net liabilities rose from CVE 0.6 billion in 2017 (0.4 percent of GDP) to CVE 1.9 billion (1 percent of GDP) because of support to SOEs as explained below. Consequently, financing needs reached CVE 7.1 billion (3.8 percent of GDP). They were covered with domestic and external borrowing in about the same proportion.

9. The government extended further financial support to SOEs in 2018. Total budget support to loss-making SOEs amounted to about CVE 4 billion, equivalent to 2.1 percent of GDP, a substantial increase compared with 2017, partly related to the cost of disruption in TACV’s activities and the need to complete the restructuring of the enterprise and its consequent privatization.

10. The external position strengthened. The current account deficit improved from 6.6 percent of GDP in 2017 to 4.5 percent of GDP in 2018 reflecting continued strong exports performance, notably for tourism receipts and fish exports following the signing of the agreement granting Cabo Verde access to the EU market. Increased remittances and a deceleration in imports also contributed to the narrowing of the current account in 2018. The deficit was financed mainly by FDI flows. Gross international reserves rose from €523 million in 2017 (5.5 months of next year’s imports of goods and services) to €531 million in 2018 (5.1 months of next year’s imports).

11. Structural reforms advanced in various areas in 2018 as presented below.

  • Introduction of corporate income tax rate of 2.5 percent for off-shore banks (January)
  • Enactment of the law on the liberalization of capital flows (July).
  • Preparation of a report to reform the insurance sector (May).
  • Enactment of three legislative instruments on the legal regime of the new payment system, payment institutions, and electronic currency (November).

B. Economic Policies and Structural Reforms under the Program

12. The government expects that policies and reforms under its economic program, which are set out in the PEDS, and supported by the PCI, will help improve Cabo Verde’s medium-term prospects (Box 1). Building on recent progress, real GDP growth is projected to move from an average of 3.8 percent during 2015–18 to about 5 percent on average in the medium term. It is expected that a successful implementation of key programs under the PEDS, and structural reforms, particularly in the public enterprises sector, would raise growth potential for Cabo Verde. Inflation is projected at 1.7 percent on average; and the external current account deficit is projected to improve to 4.2 percent in 2019, and 3.9 percent on average over the medium term. The expected improvement will be supported by the anticipated fiscal consolidation, continued dynamism in tourism activities, higher remittances, and higher transport services. The later are projected to contribute favorably to the improvement in the current account as measures under the PEDS materialize, notably the plan to turn Cabo Verde into an air transport hub in the Atlantic. The anticipated improvement in inter-island maritime connectivity will also help boost transport and tourism receipts. The external current account deficit will continue to be financed with FDI. Under these assumptions, gross international reserves are forecast to average about 5.3 months of prospective imports over the medium-term.

Box 1.Key Reforms Planned by the Government, 2019–21

The reform targets under the PCI are part of the broader reform agenda being implemented by the government to enhance macroeconomic stability and improve medium-term growth prospects. Key reforms planned for 2019 – 2021 (excluding reform targets under the PCI, presented in Table 2) are presented below.

Budgetary Reform:

  • Roll out the tax arbitration center (2nd half of 2019)
  • Introduce electronic billing (June 2020)
  • Introduce the SAF-T (Standard Audit File for Tax Purposes) to complement the electronic billing system (December 2020)
  • Set up a One-Stop Facility for foreign trade (December 2021)
  • Expand the Integrated System for Tax Security and Efficiency to include other taxes apart from VAT and income tax withholding at source (2nd half of 2019)
  • Introduce a VAT monitoring plan (2nd half of 2019)
  • Introduce the second stage of the registered taxpayer base (2nd half of 2019)
  • Submission of fiscal policy reform agenda and action plan to combat tax avoidance and evasion (December 2019)
  • Approval of the new customs tariff by the government (December 2020)
  • Adoption of the plan for public acquisitions, E-procurement and public purchasing (December 2019)
  • Integrated debt management system (December 2020)
  • Introduction and launch of PAYLOG System (December 2019)
  • Approval of law on budget principles (2nd half of 2019)
  • Creation of national council on government finance (December 2019)
  • Creation of enterprise to manage State real estate holdings (December 2019)

Reform of Digital Governance and Dematerialization

  • Action plan for digital governance (December 2019)
  • Plan to strengthen regulatory capacity (continuous)

SOEs Reforms

  • Design and implementation of platform for monitoring the public enterprise sector, generating larger amounts of more accurate data on enterprises in the public enterprise sector, to facilitate access by portfolio managers and the various stakeholders that interact with the sector (December 2020)
  • Accelerate SOEs privatization process. The government has a clear agenda for privatizing enterprises in the transportation sector (TACV and maritime transportation), the pharmaceutical sector (Inpharma and Emprofac), energy and water (Electra), and for establishing concession arrangements for enterprises operating in the ports sector (Enapor) and airports sector (ASA and CV Handling). The government is committed to finalizing all the measures related to the SOEs reforms that are under its direct purview. The timeline related to the privatization process are as follows: TACV -completion of the sale of 49 percent shares by end-2019, establishment of concession arrangement for maritime transportation (completed), privatization of Electra (March 2020), privatization of EMPROFAC (December 2019), sale of INPHARMA (December 2019), licensing of port services (May 2020), establishment of concession arrangement for airport services (December 2019), privatization of CV Handling (December 2019).
  • Creation of PARPública – Enterprise for the Management of State Investments (December 2019)

Monetary and Foreign Exchange reforms

  • Promote effective regulation and supervision of financial transactions with the rest of the world, to derive greater benefit from foreign exchange liberalization (continuous).

Financial Sector Reforms

  • Action Plan for Development of the Financial System (December 2019)
  • Approval of the BCV Organic Law (December 2019)

Improving the Business Climate and Diversifying the Economy

  • Approval of agenda for promoting MSMEs and diversifying the economy (December 2019)
  • Publication of the agenda for improving the business climate (continuous)

13. This medium-term outlook is subject to risks. On the downside, worse than expected external conditions, including weak global growth, sharp tightening of global financial conditions, and the potential impact of Brexit are important risks with impact on growth prospects and on the external position. Domestically, downside risks are related to high vulnerability to natural disasters particularly drought, which has affected agriculture production over the last two years. Upside risks relate to tourism performance, implementation of growth enhancing structural reforms, and increased FDI-driven investments in relation with programs under the PEDS. Growth in the tourism sector could be above forecast due to a successful restructuring of the domestic airline as well as interisland maritime transport and improved domestic infrastructure.

14. The PEDS presents the government’s vision for Cabo Verde’s sustainable development. As such, it will underpin policies and reform implementation for the medium-term. Its main objectives are: (1) transforming the country into a hub for the delivery of air and maritime transportation services; (2) ensuring social inclusion and reducing poverty and regional and social asymmetries; and (3) strengthening sovereignty, valuing democracy and focusing diplomacy on the country’s development challenges. External dependence, unemployment, poverty, and inequality; as well as natural vulnerabilities, lack of mineral resources, small dimension, geographic dispersion, and reduced population are key structural vulnerabilities for Cabo Verde.

C. Fiscal Policy and Reforms

15. Further improvement in the fiscal position is expected in 2019. Total revenue is expected to reach CVE 62.7 billion (31.7 percent of GDP), up from CVE 52 billion in 2018 (28.1 percent of GDP). The increase reflects the impact of the expected continued strong economic growth, further efforts to collect tax arrears, administrative efficiency gains through greater reinforcement of inspection, increased technological, human and material resources, the setting up of a tax return alert system to taxpayers; and revenue from: airport security fee; maritime security fee; innovation Fund fee; registration and notary services fees; special consumption excise tax; increase in the corporate income tax rate for off-shore banks from 2.5 percent to 10 percent; and sale of nonfinancial assets. The improvement in tax revenue is expected to come from the good performance of income taxes and from VAT. On the expenditure side, wages and salaries are projected to increase by 17.6 percent compared with 2018, reflecting the continued implementation of the re-grading and career adjustment program for teachers and nurses. Non-interest current expenditures are budgeted to increase by 15.3 percent, while capital outlays increased, partly reflecting the low execution rate in 2018, compared with 2017. Taking into account potential risks to revenue mobilization, the budget identified expenditure contingency measures for both current and capital expenditure totaling some CVE 3.6 billion. Based on the above, the primary balance will move from a deficit of CVE 0.48 billion in 2018 to a surplus of CVE 1.3 billion in 2019. With the budgeted transfers to SOEs and municipalities amounting to CVE 8.5 billion for onlending and capitalization, financing needs are projected at CVE 12.8 billion, equivalent to 6.5 percent of GDP; of which 5 ½ percent would be financed externally. Measures will be taken to enhance the monitoring of budget execution; and if the midyear outturn points to a shortfall in budgetary resources, expenditures commitments will be curtailed in line with Cabo Verde legislation, to safeguard the achievement of fiscal objectives, by reducing by 20 percent expenditure on non-financial assets.

16. For 2020 and beyond, fiscal consolidation efforts will aim to preserve gains made in recent years, and to bring the debt-to-GDP ratio below 100 percent in the medium-term. The primary balance is projected to improve from a deficit of 0.3 percent of GDP in 2018 to a surplus of 1.2 percent of GDP in 2024. Financing needs would decline from 3.8 percent of GDP in 2018 to 1 percent of GDP in 2024, thus reducing the stock of nominal public debt from 123.9 percent of GDP in 2018 to 92.7 percent of GDP in 2024. To reach this objective, measures will be taken to enhance the budget’s financing capacity and improve expenditure management.

D. Revenue Mobilization

17. On the revenue side, reform measures will aim to broaden the tax base and enhance efficiency gains in tax administration. Hence, steps will be taken to streamline exemptions on the value-added tax, on import duties and on excises by end-June 2020 to broaden the tax base and improve revenue mobilization, building on recommendations from the technical assistance provided by the IMF Fiscal Affairs Department (Reform Target). In this context, a review report of exemptions will be completed by end-December 2019 (Reform Target) with the aim of identifying their potential revenue impact and defining streamlining actions. Measures will also be taken to strengthen the collection of tax arrears to reduce the current stock and prevent further accumulation. They notably include: automating the administrative processes related to the collection, tax credit management and enforced collection. For this purpose, steps will be taken to allow the consolidation of the integrated system for fiscal management (SISEF) and its broadening to include other categories of tax; and the entry onstream of the automated supervision of contributors’ account. The goal of these measures will be to act efficiently in sectors and segments that tend to be beyond the control and remit of the Treasury, which will therefore help broaden the base and scope for tax collection. The following specific measures will also be taken in 2020–21:

  • Clarify fiscal rules, review and simplify the reporting templates for accounting and tax-related report forms.
  • Promotion of early review of accounts, and timely refunding of VAT credit.
  • Roll out the Tax Arbitration Center as an alternative option for resolving disputes between the tax administration and the taxpayer, which will result in faster turnaround processing of cases.
  • Expand the network of the Double Taxation Convention.
  • Strengthen environmental and health-related taxation.
  • Reform and computerization of customs services and taxes and duties, with the introduction of electronic billing and the restructuring and upgrade of the revenue administration.

E. Expenditures Management and Reforms

18. On the expenditure side, priority will be given to increasing efficiency in capital expenditure management and restraining nonpriority current spending. Consequently, for the period 2020–24, expenditure on goods and services will be reduced to about 4.5 percent of GDP compared with 2019; capital expenditure will be kept at about 4 percent of GDP on average; and the wage bill will be contained at about 10.5 percent of GDP. Expenditure appropriations in the budget will continue to take into account risks related to resources mobilization, and therefore, identify contingent expenditure.

19. Increasing efficiency in public investment management requires the adoption of systems that would help improve the allocation of public resources and enhance the quality of public investment projects. This would be based on; (i) standardized criteria for the evaluation, and the use of procedure manuals for key sectors to benchmark capital projects and guide the ex-ante selection of projects and programming of public investment expenditures; (ii) incorporation of Information Technology (IT) tools to monitor and evaluate investments throughout the project cycle. Progress will be achieved through the effective and permanent implementation of the National Investment System (SNI), aimed at improving the quality of public investment.

20. To restrain expenditure, the authorities will develop an IT system that will facilitate the monitoring and control of public expenditure at the time of execution, or even at the tendering stage. Furthermore, steps will be taken to re-evaluate the autonomous agencies of the government with a view to proposing mergers, closings, or downsizing. Other expenditure control measures will cover the rationalization of the fleet of government vehicles, the effective limiting of recruitment in the central public administration, and the implementation of the Annual Plan for Purchasing/Contracting and E-Procurement In addition, after settling outstanding items with the specialized career streams in the civil service (general government), which resulted in the increase in the wage bill during the last two years, the wage bill policy will focus on containment, limiting recruitment and salary adjustments. These measures reflect the need for a structural reduction in expenditure, which, together with the efficient delivery of high-quality services to the public, are key objectives of the government This requires a civil service administration of high calibre and well prepared. Reforms actions in this area will focus on resizing, reforming, and restructuring of the civil service to put in place a public administration that is competitive and skilled, in line with private sector performance. Other expenditure reform measures will include: (i) the restructuring of the integrated system of budget and financial management (SIGOF), designed to enhance the transparency of public expenditure, by bringing the system in line with new technologies, improving the system’s security and interoperability, while optimizing it by enabling greater transparency, quality, and controls; and (ii) the computerization and modernization of services provided by embassies and Consular posts.

21. Support from the budget to SOEs (capitalization) will be kept down thanks to progress in public sector reforms (see below), and the privatization process for public enterprises, currently underway. This support is expected to be eliminated by 2022, as the restructuring process for SOEs is scheduled to the completed by 2021.

22. To enhance expenditure execution further and avoid domestic payment arrears accumulation, the PAYLOG system will be implemented. The new system will help ensure compliance with the new requirement that suppliers are paid within a maximum period of 45 days. This will also improve business confidence.

F. Financing

23. Net domestic financing will be maintained below the annual limit of 3 percent of GDP. Consistent with programmed fiscal objectives, it will decline from 1.4 percent of GDP in 2018 to 0.4 percent of GDP in 2024

24. Consistent with its debt management strategy, the government will adhere to the zero limit of non-concessional borrowing under the PCI program to cover the budget’s financing needs; and will continue to lengthen the maturity of securities. Debt management policy will aim to support medium term debt sustainability, guided by the following objectives: Set the annual limit as well as the type of debt to be contracted.

  • Identify and analyse debt limits and debt sustainability indicators to guide borrowing policies.
  • Minimize the cost of the portfolio as well as of new loans to be contracted.
  • Minimize the portfolio risk associated with public debt.
  • Establish rules to govern the contracting of new loans.
  • Establish institutional coordination mechanisms for the management of public debt • Harmonize debt management procedures and mechanisms.

G. Monetary Policy

25. Monetary policy will aim to support price stability and to protect the peg. Current projections indicate that inflationary pressures will be low in 2019, and that international reserves will remain at an adequate level. Under the circumstances, the BCV intends to maintain the current monetary policy stance, while remaining vigilant, and continuing to monitor relevant economic and financial developments domestically and in the Euro area to take any corrective measures as warranted. To protect the credibility of the exchange rate regime, the BCV will target a level of net international reserves that would cover 30 percent of broad money.

26. The BCV will continue to enhance liquidity management and improve the monetary policy transmission mechanism. To this end, it will continue to implement the set of measures introduced in late 2017, including the linking of the Monetary Regularization Securities (TRM) rate to the policy rate by issuing the TRMs through fixed rate tenders instead of variable rate tenders, and improve communication on monetary policy orientation. In June 2019, the BCV reduced the overnight interest rate corridor to a maximum of 150 basis points as committed under the program and well ahead of the originally scheduled date. In addition, the BCV will take the following actions:

  • Release the minutes of the Monetary Policy Committee Meetings to help improve the communication on monetary policy direction (Reform Target). The minutes will be released at least one month after each meeting, starting at end-July 2019.
  • Improve monetary policy analysis through the introduction of new economic indicators, such as composite index of economic activity, and enhance near-term forecasting capacity.
  • Establish a symmetric interest rate corridor with overnight rates linked directly to the policy rate.

27. The government will implement measures to strengthen the independence of the central bank. In this direction, a new BCV organic law was drafted with the aim of strengthening the operational independence of the central bank. The government intends to submit the draft law to parliament in December 2019.

28. The BCV attaches great importance to the development and modernization of the payment system, in all aspects, including technological innovation, regulatory, best practices and supervision, given its importance for the economy, financial inclusion and competitiveness. Consequently, in November 2018, three legal regimes were adopted, providing the basis for the functioning of the payment system, aimed at covering electronic currency, and paving the way for new business opportunities. It is expected to enhance efficiency for the market and may reduce the costs of domestic and international payment services. The laws include: (i) legal framework of the Cabo Verdean payment system, which consists of developing rules and principles applied to all components of the payment system, governing the mains aspects of the functioning of the system; (ii) legal framework of the payment system and electronic currency issue, governing the payment, distribution and reimbursement in electronic currency by the legally authorized entities; and (iii) the framework for payment and electronic currency institutions. Additional actions in areas mentioned above will be taken 2019–2020 to ensure that the payment system is fully modernized.

H. Financial Sector Reforms

29. The financial system is sound, although the high level of nonperforming loans (NPLs) remain a source of concern. Financial stability indicators show that the financial system is stable and adequately capitalized, and that banks are profitable. NPLs declined in 2018, standing at 12.8 percent of total loans at end-year, down from 14.5 percent of total loans at end-2017. This notwithstanding, they remain elevated, and efforts to address legacy loans, that account for about 60 percent of NPLs will be intensified.

30. Financial sector reforms will be accelerated in 2019–20. They will aim to deepen financial intermediation, support financial inclusion, and enhance banking supervision. In this context, the BCV will advance the implementation of recommendations from the 2013 and 2015 asset quality review as well as pending recommendations from the 2009 Financial Sector Assessment Program (FSAP). The government and BCV will also take the following actions:

  • Revamp the credit information system by end-December 2020 (Reform Target). Key measures under this reform will cover the completion of the procurement and the development of the relevant software system.
  • Create a functional central registry of mobile collateral by end-December 2020 (Reform Target).
  • Strengthen bank’s lending standards and risk management practices through enhanced supervision.
  • Adopt centralized official balance sheets to support risk-based supervision.
  • Improve the AML/CFT framework and bring it in line with FATCA standards to limit further loss of correspondent banking relationships.
  • Ensure the proper functioning of the Financial Stability Committee. This includes the appointment of the Committee’s participants and the establishment of an operating regulation and quarterly meetings.
  • Ensure the functioning of the National Commission for Development of the Financial System. For the effective operation of the Commission, the following actions will be taken: the appointment of the Commission’s members, the holding of periodic meetings, the definition of operating regulations, the adoption by the Council of Ministers, of the Action Plan for the development of the financial system.
  • Implement the main recommendations of the report on access to financing for SMEs, dated February 2015. Priority actions will include: strengthening the public credit information systems, Continued training efforts to increase staffing and capacity of the banking supervision department, strengthening BCV’s capacity to carry out effective bank supervision by hiring additional staff with relevant expertise.
  • Continue negotiations to secure new correspondent banks.
  • Implement the measures specified by the EU, to keep the country off the gray list, in the sense of reducing the risk associated with the country. Key measures will include: becoming a member of the Global Forum and/or to have a satisfactory rating; signing and ratifying the OECD Multilateral Convention on Mutual Administrative Assistance (MAC) or putting in place a network of agreements covering all EU Member States, amending or abolishing the harmful tax regimes, becoming member of the Inclusive Framework or implementing the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) minimum standard.
  • Establish a national commission as recommended by the National Plan for Evaluation of AML/CFT Risk.
  • Implement the recommendations made in the assessment by the EU in the Global Action on Cybercrime Extended about combatting cybercrimes.

I. Public Enterprises Reforms

31. Cabo Verde’s SOEs deliver services in key economic areas. There are 23 SOEs operating in air and maritime transportation, energy and water, real estate, pharmaceutical and management of ports and airports. Although performance varies, some SOEs have been making losses in the last several years, thus accumulating liabilities and requiring continuous financial support from the budget for borrowing, debt service, and capitalization. At end-2018, SOEs’ stock of debt stood at CVE 98.7 billion, equivalent to 53.2 percent of GDP, with government guaranteed debt totaling CVE 13.2 billion (7 percent of GDP); and their domestic liabilities amounted to 49 percent of GDP. Over the four year period (2014–17), cumulative support from the budget to SOEs, covering transfers, on-lending, capitalization, and subsidies amounted to CVE 108.2 billion, equivalent to 62.4 percent of GDP. Over half of this amount is related to the loan contracted by the government, and on-lent to the real estate company (IFH), to finance social the housing program (see below).

32. In recent years, the government implemented reform measures in the public enterprises sector. For three SOEs facing financial difficulties, the following actions were put in place:

  • The airline company, Transportes Aéreos de Cabo Verde (TACV), in August 2017, all domestic routes were transferred to a new airline company, Binter Cabo Verde, with 30 percent State’s participation. For international routes, a one-year management contract was signed with Icelandair (October 2017) to operate and prepare TACV for privatization. The company was privatized in March 2019 with the sale of 51 percent of TACV capital to a subsidiary of Icelandair, and the creation of a new company: Cabo Verde Airline (CVA).
  • The housing company, Imobiliária, Fundiária e Habitat, S.A (IFH). In 2011, the government contracted an external loan to build social housing units to be sold below market prices and/or rented. The management of this program Casa Para Todos (“Housing for All”) was carried out by IFH. Given the program’s underperformance, it was restructured in 2017 into three groups: class A units (low income) were transferred to municipal governments and the central government; class B and C units (middle to high income) were to be sold at market price. The program’s performance improved in 2018 with units’ sales above expectations.
  • The power and water company (Electra). The company’s Board of Directors was given mandate to improve its efficiency levels and prepare it for privatization. A revenue protection program was put in place to reduce high commercial losses. In 2016, the company recorded distribution and transmission losses of 27 percent of GDP, which, although in decline from 29 percent in 2015 was still high. In addition, a restructuring process was initiated to unbundle water and energy operations. In 2017/18 the financial situation of Electra improved, eliminating the risk to the government budget.

33. The government remains committed to reducing the size of the public enterprise sector. The reform agenda for 2019–20 focuses on the measures below, aimed at eliminating financial support from the budget to loss-making SOEs.

  • The completion of the concession for maritime transportation to the private sector, with 51 percent stake in the capital held by a foreign investor, and with 49 percent held by domestic investors.
  • The sale of the remaining 49 percent of the State’s stake in CVA, mostly through the Stock Exchange.
  • Further privatization of enterprises in the pharmaceutical sector (Inpharma and Emprofac) and power and water (Electra).
  • Establishment of concession arrangements for companies operating in the ports sector (Enapor) and airports sector (ASA and CV Handling), with separate treatment of the management of the air space (FIR Oceânica), which will continue under state control.
  • Further restructuring of the housing program managed by IFH.

J. Other Structural Reforms

34. The government intends to accelerate other reforms aimed at improving the business environment to support growth. Consistent with the PEDS, priority will be given to measures that help to continue attracting FDI and to reduce transaction costs. Therefore, actions will be taken to increase efficiency in public administration, notably by decentralizing the decision-making process and cutting red tape, to improve telecommunications, transport, to reform the health sector and to adapt the education system to labor market needs. Cabo Verde is facing important challenges, including the need to create jobs and income for the population, which will only be feasible through higher and inclusive economic growth. Making the economy grow in a robust and sustained way and creating quality jobs call for efforts to reinvigorate the private sector and attract FDI. Improvement in the business climate and economic freedom of the country, including focus on an efficient and business-friendly government, as well as ready access to credit by the private sector, stand out as prerequisites for meeting these objectives.

35. Domestic economic performance should be viewed from the perspective of showcasing Cabo Verde’s strategic location. In promoting private sector dynamism and growth, the main challenges facing the country should be taken into account, namely, (i) the need for Cabo Verde to take its place within the global economy to strengthen its own economy; and (ii) the need to overcome regional asymmetries and foster sustainable growth. Cabo Verde’s geo-economic location requires efforts to build a country that can be counted on, with minimal transaction costs, so that it can become more attractive to investors. To improve the business climate, measures will be put in place to:

  • Facilitate access to finance, notably through a sharing of risks with the private sector.
  • Expedite procedures for setting up businesses, particularly with respect to digital entry and indexing in the Commercial Register.
  • Improve the process for getting construction licenses and electricity and water to reduce the numbers of procedures and lower the associated costs.
  • Protect minority investors, based on a new Code of Commercial Companies and regulations needed to expedite the Competitiveness Agenda.
  • Improve the payment of taxes by rolling out the One-Stop Facility for Payment (online payment of taxes).
  • Expedite procedures for resolution of insolvency, through more effective practices.
  • Operationalize the Service Center Platform.
  • Upgrade the “Portal Di Nos Ilha” Platform and the “Participa” Platform.
  • Implement the One-Stop Shop in all municipalities.
  • Institutionalize the One-stop shop for government services.
  • Improve and modernize the quality of public services.

K. Digital Governance and Dematerialization

36. The government will focus on implementing an electronic procurement system to enhance the transparency and reliability of the Domestic Public Contracting System. The new system will be equipped with legal and operating instruments and will benefit from investment in personnel training. In addition, the government will rely on the enhanced availability of information in public procurement. The expected improvement will reflect efforts by the regulatory body (the Regulatory Authority for Public Procurement) and will benefit participants in the system at all levels – the planning of purchases, the conduct of procedures organized by the entities awarding contracts, and the evaluation of tenders submitted by businesses. The key objectives are to ensure the proper management of public resources, ethical behavior as well as sound market competition, to prevent and combat corruption. The Public e-Procurement System is a technological tool that will enable the government to execute procurement operations electronically, with an immediate and significant reduction in costs while reinvigorating the local and national economy. The implementation of the new system will set a more rational and transparent approach to the management of government finances, integrating public procurement needs of centralized and decentralized services, and therefore allowing a higher degree of planning and control of budget execution.

L. Program Monitoring

37. Program targets. Progress in the implementation of policies and reforms under the program will be monitored through quantitative targets and standard continuous targets (Table 1), as well as reform targets (Table 2). The latter are defined in the Technical Memorandum of Understanding attached to this Program Statement. Other structural reform measures planned by the government for 2019–21 are detailed in Box 1. The first review is scheduled to be completed by March 1, 2020; the second review by September 2, 2020; and the third and final review by January 15, 2021.

Table 1.Cabo Verde: Quantitative Targets Under the PCI1 (2019–20)
Cumulative Flows from end-Dec, 2018
20192020
end-Juneend-Septemberend-Decemberend-Marchend-Juneend-Septemberend-December
Proj.Quantitative targetsProj.Quantitative targetsProj.Quantitative targetsProj.
Quantitative targetsMillions of Cabo Verde escudos)
Primary balance24568411,3156444191,3882,093
Tax revenue, floor19,96531,36243,12610,47121,96133,64846,298
Net other liabilities, ceiling 33,5756,3458,5118722,3443,6114,674
Nonaccumulation of domestic arrears40.00.00.00.00.00.00.0
Non-accumulation of external payment arrears40.00.00.00.00.00.00.0
Nominal level of new concessional external debt of central government, ceiling3,7849,56315,1351,1224,2108,33012,280
Millions of U.S. dollars)
Nominal level of new nonconcessional external debt of central government, ceiling0.00.00.00.00.00.00.0
(Millions of euros)
Net international reserves, floor2526528597572542566646
Non-quantitative continuous targets
Non-imposition or intensification of restrictions on the making of payments and transfers for current international transactions
Non-introduction or modification of multiple currency practices
Not concluding bilateral payments agreement which are inconsistent with Article VIII
Non-imposition or intensification of import restrictions for balance of payments reasons
Memorandum items:Millions of Cabo Verde escudos)
Social spending5,5508,68514,4233,2526,53411,54315,391
Net onlending1,8773,6474,8646721,8322,6383,444
Capitalization1,6982,6983,6672005129731,229
Program assumptions
Project and budget support grants1,3262,4015,4794449851,7834,070
External debt service3,7655,6486,4591,8573,7145,5717,428
Sales of assets22996000952
Project and budget support loans2,5917,23112,1434512,8836,55310,128

Foreign currency amounts will be converted at current exchange rates.

The ceiling or floor will be adjusted as specified in the TMU.

Net other liabilites includes net onlending, capitalization, and other assets.

Continuous.

Foreign currency amounts will be converted at current exchange rates.

The ceiling or floor will be adjusted as specified in the TMU.

Net other liabilites includes net onlending, capitalization, and other assets.

Continuous.

Table 2.Cabo Verde: Reform Targets for 2019–20 Under the PCI
ActionsTarget DateObjective
Fiscal reforms
  • Complete a review report on exemptions identifying their potential impact and streamlining actions.
  • Streamline exemptions for: (i) the VAT; (ii) import duties, and (iii) excises.
  • Submit to Parliament the budget for 2020 that is in line with commitments under the PCI.
End-December 2019.

End-June 2020.

End-October 2019.
  • Improve tax collection.
  • Improve tax collection.
  • Support fiscal and debt sustainability.
SOEs reforms
  • Implement quarterly monitoring of actual performance of 6 key SOEs against their approved budgets, starting at end-December 2019.
  • Compile financial information on cash flow performance of the 6 largest SOEs for FY2019.
Continuous.

End-July 2019.
  • Improve fiscal reporting and reduce fiscal risk.
  • Improve fiscal reporting and reduce fiscal risk.
Monetary reforms
  • Release the minutes of the Monetary Policy Committee meetings at least one month after each meeting, starting at end-July 2019.
  • Reduce the excessively wide overnight interest rate corridor to a maximum of 150–200 basis points.
Continuous.

End-December 2019; implemented in June 2019.
  • Improve the communication of monetary policy.
  • Improve monetary policy transmission mechanism.
Financial sector reforms
  • Create a functional central registry of mobile collateral.
  • Revamp the credit information system by developing the relevant software system.
End- December 2020.

End-December 2020.
  • Improve access to finance.
  • Improve access to finance.
Attachment I. Technical Memorandum of Understanding

1. This memorandum sets out the understandings between the Cabo Verdean authorities and the IMF staff regarding the definitions of variables included in the quantitative targets and continuous targets set out in the Program Statements (PS), the key assumptions, and the reporting requirement of the Government and the Central Bank of Cabo Verde for the 18 months Policy Coordination Instrument (PCI).

Quantitative and Continuous Targets

A. Floor on the Primary Balance of the Central Government

2. The central government includes all units of budgetary central government. It does not include local government (municipalities), extra-budgetary units, social security funds and public corporations.

3. The central government primary balance is defined as total tax and non-tax revenues and grants minus primary expenditure and covers non-interest government activities as specified in the budget. The central government primary balance will be measured as cumulative flow over the calendar year.

  • Revenues are recorded when the funds are transferred to a government revenue account. Tax revenues are recorded as net of tax refunds.
  • Central government primary expenditure is recorded on a cash basis covers recurrent expenditures and capital expenditure.

4. The floor of primary balance will be adjusted upward adjusted upward (downward) by the surplus (shortfall) in disbursements of grants relative to the baseline projection.

5. For program monitoring, data will be provided to the Fund by the Directorate National of Planning (DNP) of Ministry of Finance monthly with a lag of no more than four weeks from the end of-period.

B. Cumulative Floor on Central Government Tax Revenue

6. Tax revenues refer to revenues from tax collection. It excludes all revenues from asset sales, grants, and non-tax revenues. To gauge the impact of tax policy reforms and improvements in tax administration, the program will have a floor on central government tax revenues. The revenue target is calculated as the cumulative flow from the beginning of the calendar year.

7. For program monitoring, data will be provided to the Fund by the DNP monthly with a lag of no more than four weeks from the end of-period.

C. Ceiling on Net Other Liabilities

8. Net Other Liabilities is defined as the sum of central government deposits, loans to state-owned enterprises (SOEs) and municipalities (onlending), capitalization, and other assets. The ceiling of central government net other liabilities will be measured as cumulative over the calendar year. Deposits are all claims, represented by evidence of deposit, on the deposit-taking corporations (including the central bank). Onlending is defined as domestic and external loans contracted by the central government from another institution and then onlending the proceeds to SOEs. Net onlending is defined as disbursement of these loans minus repayment of previous loans by SOEs to the central government. Capitalization is defined as capital injection or equity participation made by the central government into corporations when some financial support is provided to capitalize or recapitalize these corporations. Other assets comprise of other accounts receivable/payable such as of trade credit and advances and miscellaneous other items due to be paid or received.

9. For program monitoring, data will be provided to the Fund by the DNP of Ministry of Finance monthly with a lag of no more than four weeks from the end of-period.

D. Non-accumulation of Domestic Payments Arrears

10. As part of the program, the government will not accumulate any new domestic payments arrears. This will be monitored through the monthly execution of the cash-flow plan and the corresponding release of budget appropriations. For programming purposes, a domestic payment obligation to suppliers is deemed to be in arrears if it has not been paid within the normal grace period of 60 days (30 days for government salaries and debt service) or such other period either specified by the budget law or contractually agreed with the supplier after the verified delivery of the concerned goods and services, unless the amount or the timing of the payment is subject to good faith negotiations between the government and the creditor.

11. Reporting requirements. The DNP of Ministry of Finance will submit on a quarterly basis a detailed table of the stock of domestic payments arrears, including the accumulation, payment, rescheduling and write-off of domestic payments arrears during the quarter. The data are to be provided within six weeks after the end of the quarter.

E. Ceiling on Nominal Level of New Concessional External Debt of the Central Government

12. External public debt (long-term, medium-term, and short-term) is defined as debt to nonresidents contracted or guaranteed by the central government. The external public debt comprises the external debt of the central government and the external debt of the official sector entities and SOEs guaranteed by the central government.

13. The definition of debt is set out in Point 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements attached to Executive Board Decision No. 15688-(14/107), adopted December 5, 2014.

(a) The term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows;

  • (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements);
  • (ii) suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided; and
  • (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of these guidelines, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair, or maintenance of the property.

(b) Under the definition of debt set out in this paragraph, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

14. Under the program, ceilings on medium and long-term, as well as on short-term, concessional external debt constitute quantitative targets. The coverage of the ceiling on concessional external debt includes budget loans, projects and program loans, and on-lending loans to SOEs in line with the fiscal program. For program purpose, a debt is concessional if it includes a grant element of at least 35 percent, calculated as follows: the grant element of a debt is the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt. The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt.1 For debts with a grant element equal or below zero, the PV will be set equal to the nominal value of the debt. The discount rate used for this purpose is the unified discount rate of 5 percent set forth in Executive Board Decision No. 15248-(13/97). Debt rescheduling, and debt reorganization are excluded from the limits on concessional external debt. New concessional external debt excludes normal short-term (less than one year) import-related financing.

15. Reporting requirements. The government of Cabo Verde will consult with Fund staff before assuming any liabilities in circumstances where they are uncertain whether the instrument in question falls under the quantitative target. Details of all new external debt (including government guarantees), indicating terms of debt and creditors, will be provided on a quarterly basis within six weeks of the end of each quarter.

F. Non-Concessional External Debt Contracted or Guaranteed by the Central Government

16. Under the program, ceilings on medium- and long-term, as well as on short-term, non-concessional external debt constitute quantitative target. The zero ceiling on non-concessional external debt is on a continuous basis. For program purpose, a debt is non-concessional if it includes a grant element of less than 35 percent, calculated as follows: the grant element of a debt is the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt. The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt.1 For debts with a grant element equal or below zero, the PV will be set equal to the nominal value of the debt. The discount rate used for this purpose is the unified discount rate of 5 percent set forth in Executive Board Decision No. 15248-(13/97). Debt rescheduling, and debt reorganization are excluded from the limits on non-concessional external debt. The quantitative target on new non-concessional external debt contracted or guaranteed by the central government, excluding borrowing from the Fund. Non-concessional external debt excludes normal short-term (less than one year) import-related financing. The Portuguese government’s precautionary credit line (the “Portuguese credit line”) in support of the exchange rate peg is also excluded from the definition of non-concessional external debt.

17. Reporting requirements. The government of Cabo Verde will consult with Fund staff before assuming any liabilities in circumstances where they are uncertain whether the instrument in question falls under the quantitative targets. Details of all new external debt (including government guarantees), indicating terms of debt and creditors, will be provided on a quarterly basis within six weeks of the end of each quarter.

G. Net International Reserves of the Central Bank

18. The floor on the stock of net international reserves (NIR) of the BCV constitutes a quantitative target under the program. The NIR of the BCV are defined as gross international reserves of the BCV net of its short-term external reserve liabilities, calculated at the current exchange rates. Gross reserves of the BCV are those that are readily available (i.e., liquid and marketable and free of any pledges or encumbrances), controlled by the BCV and held for the purposes of meeting balance of payments needs and intervening in foreign exchange markets. They include gold, holdings of SDRs, the reserve position at the IMF, holdings of foreign exchange and traveler’s checks, demand and short-term deposits at foreign banks abroad, fixed-term deposits abroad that can be liquidated without penalty, and any holdings of investment-grade securities. Short term external liabilities of the BCV comprise liabilities to nonresidents contracted by the BCV with an original maturity of less than a year, any net off-balance-sheet position of the BCV (futures, forwards, swaps, or options) with either residents and nonresidents, any arrears on principal and interest to external creditors and suppliers, and purchases from the IMF. The program floors for the NIR will be adjusted downward by:

  • the cumulative upward deviations in external debt service relative to program assumptions.
  • the cumulative downward deviations in external financial assistance, and project and budget loans relative to program assumptions. For purposes of calculating the adjusters, these flows will be valued at current exchange rates.

19. Reporting requirements. A table on the NIR prepared by the BCV will be transmitted on weekly basis, with a maximum delay of two weeks.

H. Non-accumulation of External Payments Arrears

20. As part of the program, the government will not accumulate any new external payments arrears. This will be a continuous target under the program. This will be monitored through the monthly execution of the cash-flow plan and the corresponding release of budget appropriations.

21. External payments arrears for program monitoring purposes are defined as the amount of external debt service due and not paid within the contractually agreed period, subject to any applicable grace period, including contractual and late interests. Arrears resulting from the nonpayment of debt service for which a clearance framework has been agreed or a rescheduling agreement is sought are excluded from this definition.

22. Reporting requirements. Data on (i) debt-service payments; and (ii) external arrears accumulation and payments will be transmitted on a quarterly basis by the DNP of Ministry of Finance, within six weeks of the end of each quarter. In addition, the government will inform the Fund staff immediately of any accumulation of external arrears.

I. Memorandum Item: Floor on Central Government Social Spending

23. The indicative floor on social spending of the central government will apply only to expenditures incurred by the central government on the following plans and programs that are intended to have a positive impact on education, health, and social protection, excluding the wages and salaries component.

24. For program monitoring, the data will be measured as cumulative over the fiscal year and it will be reported by the DNP on a quarterly basis, with a lag of no more than six weeks from the end-of-period.

Other Data Requirements

25. Data on exports and imports, including volume and prices and compiled by the Director of Customs and the BCV, will be transmitted on a quarterly basis within five weeks after the end of each quarter. A preliminary quarterly balance of payments, compiled by the BCV, will be forwarded within six weeks after the end of each quarter.

26. The Statement of Other Economic Flows as defined in the IMF Manual GFSM2001 or GFSM2014 relative to holding gains/losses of the previous year with ASA, CVA, Electra, EMPROFAC, ENAPOR, and IFH will be transmitted on an annual basis within three months after the end of the following year (15 months after the closing date).

27. The consolidated balance sheet of ASA, CVA, Electra, EMPROFAC, ENAPOR, and IFH relative to the previous year will be transmitted on an annual basis within three months after the end of the following year (15 months after the closing date).

1

The restructuring in 2018 of the social housing program managed by IFH translated into a second partial repayment of 1.8 percent of GDP, of the loan that financed the program. The first partial repayment took place in 2017 for 2.4 percent of GDP. These repayments contributed to the reduction in budget financing needs for 2017–18.

1

The World Economic Forum’s Global Competitiveness Index combines both official data and survey responses from business executives on several dimensions of competitiveness.

2

Survey-based indicators reflect investor’s perceptions on the business environment. Care should be taken when comparing scores across years since methodology changes can affect the scores.

1

The calculation of concessionality take into account all aspects of the debt agreement, including maturity, grace period, payment schedule, upfront commissions, and management fees.

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