Cape Verde
Recent Economic Developments

This paper describes economic developments in Cape Verde during 1990–96. After a noticeable slowdown during 1989–91, the Cape Verdean economy rebounded in 1992 and continued to expand in 1993–95, prompted by a sustained increase in public spending and the positive effects of a liberalization of economic activities. Real GDP growth averaged 4 percent during 1992–95, but domestic, economic, and financial developments were characterized by increasing imbalances. Total government expenditure increased rapidly, reaching on average 60.1 percent of GDP in 1994–95, far outpacing any growth in domestic revenues and external grants.

Abstract

This paper describes economic developments in Cape Verde during 1990–96. After a noticeable slowdown during 1989–91, the Cape Verdean economy rebounded in 1992 and continued to expand in 1993–95, prompted by a sustained increase in public spending and the positive effects of a liberalization of economic activities. Real GDP growth averaged 4 percent during 1992–95, but domestic, economic, and financial developments were characterized by increasing imbalances. Total government expenditure increased rapidly, reaching on average 60.1 percent of GDP in 1994–95, far outpacing any growth in domestic revenues and external grants.

Cape Verde: Basic Data, 1991–95

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Sources: Data provided by the Cape Verdean authorities; and Fund staff estimates.

Estimates after 1992.

Excluding public enterprise transfers.

Change as percent of broad money stock at end of previous period.

Includes credit to central and local government.

Ratio of GDP to broad money stock at end of period.

Including arrears.

I. Recent Economic Developments

1. Background

Cape Verde is an archipelago of 15 volcanic islands located some 620 kilometers off the westernmost coast of Africa. Nine of the islands are populated by some 390,000 residents; however, it is estimated that almost twice as many Cape Verdean emigrants live abroad, in the United States, the Netherlands, France, Portugal, and Italy. The emigrants’ close ties with the homeland are evidenced by significant remittances, which averaged some 20 percent of GDP during the period 1992-95.

Cape Verde faces severe development constraints: a Sahelian climate, few natural resources, and costly internal communications. Agriculture represents 11 percent of GDP, is highly vulnerable to the vagaries of the climate, and in the best years provides some 20 percent of the local population food requirements; most of the food deficit has been traditionally covered by aid from foreign donors. Cape Verde’s surrounding territorial waters are unsuitable for large-scale commercial fishing because of the absence of a significant continental shelf. Manufacturing production, primarily constituted by food processing and energy generation for domestic consumption and more recently by apparel processing for export, has risen to represent some 9.9 percent of GDP. Civil construction and services constitute over three fourths of GDP. The strategic location of the country, at the intersection of the routes between South Africa and Europe, South Africa and North America, South America and Europe, gives Cape Verde an advantage for international sea and air transport services, which, together with workers’ remittances, constitute the major source of export earnings.

At independence in 1975, the Government of Cape Verde adopted a centrally planned development strategy and followed mostly prudent policies that did not hamper external competitiveness. In 1991, the market-oriented Movement for Democracy won the first multiparty legislative and presidential elections, and the economic strategy changed markedly. The new Government’s 1992-95 economic program sought to raise the rate of economic growth by reducing the size of the public sector, encouraging the development of private sector activity, and opening up the economy to take advantage of the potential for rapid export growth. In the event, this policy resulted in widening financial imbalances. 1/

2. Overall developments

After a noticeable slowdown during 1989-91, the Cape Verdean economy rebounded in 1992 and continued to expand in 1993-95, prompted by a sustained increase in public spending and the positive effects of a liberalization of economic activities (Charts 1 and 2). Real GDP growth averaged 4.0 percent during 1992-95, but domestic, economic, and financial developments were characterized by increasing imbalances. Total government expenditure increased rapidly, reaching on average 60.1 percent of GDP in 1994-95, far outpacing any growth in domestic revenues and external grants. The overall public deficit increased from 8.9 percent of GDP in 1991 to an average 15.2 percent of GDP in 1994-95 and was financed with substantial domestic and external debt borrowing.

CAPE VERDE: REAL SECTOR DEVELOPMENTS, 1991–95

Chart 1.
Chart 1.

GDP GROWTH

Citation: IMF Staff Country Reports 1996, 103; 10.5089/9781451809237.002.A001

CAPE VERDE: REAL SECTOR DEVELOPMENTS, 1991–95

Chart 2.
Chart 2.

DOMESTIC EXPENDITURE

Citation: IMF Staff Country Reports 1996, 103; 10.5089/9781451809237.002.A001

The reform of the financial sector introduced elements of competitiveness in the banking sector, and with the introduction of treasury securities, improved the profitability of the banking system. Monetary policy was however primarily geared to meeting the financing requirements of the Government. The growth of public sector expenditure was much faster than that of overall GDP. Private consumption remained broadly constant as a share of GDP and increased somewhat per capita, but private investments declined markedly (Table 1). As a result of these developments, the external resource gap widened from 30.9 percent of GDP in 1991 to 48.2 percent in 1995.

Table 1.

Cape Verde: Sources and Uses of Resources, 1991–95

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Sources: Cape Verdean authorities; and Fund staff estimates.

Strong aggregate demand pressure and the liberalization of most merchandise transactions during 1991-92, resulted in a considerable deterioration of the external situation of the country. Given the small open economy nature of Cape Verde, the authorities chose to maintain a nominal exchange rate peg for controlling inflation. However, the combination of a pegged exchange rate and fiscal laxity resulted in a massive surge in import demand that far outpaced the increase in exports, service income, and transfers. The current account deficit widened from 2.7 percent of GDP in 1991 to 14.2 percent in 1994 and 1995. Sizable increases in project grants, net direct investments, and net loan disbursements were not sufficient to prevent a large drawdown of foreign exchange reserves. Gross domestic savings, which were already negative, declined from -2.0 percent of GDP in 1991 to -12.3 percent of GDP in 1995. National savings also declined, but remained strongly positive, reflecting the large and rising level of unrequited transfers.

3. Real sector developments

a. Gross domestic product

During the period 1992-95, the real GDP growth rate averaged some 4.0 percent, enhanced by a sustained increase in the public investment program and by positive effects of structural reforms initiated in 1992 (Tables 2-3, and Chart 2). 1/ Official data for 1992 and preliminary sectoral data for 1993-95 from primary production, industry and energy, commerce, construction, housing and public services point to a steady recovery of growth performance (Tables 4-7). In this period, the real growth rate was led primarily by a sustained increase in the public investment program, which promoted growth in transport and communication, as well as energy and construction. 2/ The liberalization of most imports in 1992 [see Section 3c(i)] contributed to an even faster growth in commerce, the largest sector of the economy. The reform of the Institute for Housing Development (Instituto de Fomento de Habitação - IFH) into a specialized financial agency prompted a housing boom in 1992-93, which was accompanied by a parallel demand for mortgages. Agriculture production, however, continued to fall: the negative trend of 1990-91 persisted in 1992, a partial recovery followed in 1993, but a severe drought in 1994 reduced most crop yields to their lowest recorded levels, and a partial recovery followed in 1995.

Table 2.

Cape Verde: Gross Domestic Product by Major Sector at Current Prices, 1991–95

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Sources: General Directorate of Statistics (DGE), Ministry of Economic Coordination; and Fund staff estimates.
Table 3.

Cape Verde: Gross Domestic Product by Major Sector at Constant 1980 Prices, 1991–95

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Sources: General Directorate of Statistics (DGE), Ministry of Economic Coordination; and Fund staff estimates.
Table 4.

Cape Verde: Production in Agriculture, Livestock, and Fishing, 1991–95

(In metric tons)

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Source: National Commission for the Assessment of the Agricultural Year.
Table 5.

Cape Verde: Industrial Production, 1991–95

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Sources: Boletím Trimestral de Estatística; General Directorate of Statistics (DGE), Ministry of Economic Coordination, and General Directorate of Fishing (DGP), Ministry of Fisheries, Agriculture, and Rural Development.
Table 6.

Cape Verde: Production and Consumption of Electricity and Water, 1991–95

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Source: Data provided by ELECTRA.
Table 7.

Cape Verde: Consumption of Petroleum Products, 1991–95

(In metric tons)

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Source: Data provided by the Cape Verdean authorities, ENACOL, and Shell Oil Company of Cape Verde.

CAPE VERDE: REAL SECTOR DEVELOPMENTS, 1991–95

Chart 3.
Chart 3.

GDP BY SECTOR

Citation: IMF Staff Country Reports 1996, 103; 10.5089/9781451809237.002.A001

b. Prices

Inflation, measured by the consumer price index (CPI) of the Central Bank of Cape Verde (Banco de Cabo Verde - BCV) averaged some 7.2 percent in the period 1992-95, a relatively positive result in light of the poor agriculture outturns of the later years (Table 9). 3/ This is explained to a large extent by the trade liberalization of 1992-93 in the context of a broadly stable nominal exchange rate. 4/ After three years (1992-94) of moderate and steadily decelerating inflation, exogenous shocks and weak financial policies contributed to a rise in inflation from 3.5 percent in 1994 to 8.4 percent in 1995. The upsurge of CPI in 1995, measured by the General Directorate of Statistics (Direcção Geral de Estatistica - DGE) (Table 10), 1/ is primarily ascribed to a combination of the poor 1994 domestic crop and the higher international price of food imports. Prices increased further in 1996, when the administratively set prices of the most relevant food staples were revised (corn, rice, sugar, edible oil), the price of cement was liberalized, and import quotas on 26 products were introduced (Decrees 3-8/96 of March 1, 1996).

Table 8.

Cape Verde: Public Investment Expenditure, 1991–95

(In millions of Cape Verde escudos)

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Sources: General Directorate of Planning (DGP), Ministry of Economic Coordination; and Fund staff estimates.

Estimated as a residual.

Table 9.

Cape Verde: Consumer Price Flash Index, 1991–96

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Source: Bank of Cape Verde.

First five months of 1996 over corresponding 1995 period.

Accumulated in the first five months of 1996.

Table 10.

Cape Verde: Consumer Price Index, 1992–96 1/

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Source: General Directorate of Statistics (DGE), Ministry of Economic Coordination.

Monthly data available from January 1992.

First four months of 1996 over corresponding 1995 period.

Accumulated in the first four months of 1996.

c. Employment and wages

Unemployment remained stable, at about 25 percent of the active labor force during the period 1992-95. In the private sector, wages remained constant in real terms, but the differential with the much higher wages in the public sector continued to constitute an element of tension during contract renewals.

Based on the census of 1990, published by the Ministry of Labor, Youth and Social Promotion in February 1996, the economically active population was 122,000, or 53 percent of the resident population above the age of 10. Of these, 91,000 were employed, almost equally distributed between the primary, secondary, and tertiary sectors. The unemployed constituted just about 25 percent of the active labor force; more than two thirds of them were seekers of first-time employment.

Employment statistics for later years cover only the two islands (São Tiago and São Vicente) on which the main urban centers are located. In 1994, unemployment in Praia had reached 33 percent, compared with 22 percent in 1990, while in São Vicente it had reached 43 percent, compared with 35 percent four years earlier. 2/

As part of the appraisal of the Public Sector Reform and Capacity Building Project, in August 1993, the authorities documented 10,900 civil servants directly employed in Public Administration. However, the number of civil servants increased to 11,900 in 1995 (Table 11), as the authorities delayed the implementation of the civil service retrenchment program, which was a component of the public sector reform supported by a World Bank credit.

Table 11.

Cape Verde: Civil Service Employment by Administrative Unit, 1992–95

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Sources: General Directorate of Public Administration (DGAP), Ministry of Civil Service and Parliamentary Affairs.

Includes fixed-term, provisional, and other contractual staff.

August 1993 was the reference month for the civil service survey underlying the Voluntary Departure Program (PAV). Inconsistencies in the survey report data suggest that the total number of staff might be undereported by as many as 1,000 staff.

Until 1993, rural development was part of the Ministry of the Sea.

Includes the former Ministry of Finance and Planning.

Estimated as a residual.

According to the Bureau for the Restructuring of the State Enterprise Sector (Gabinete de Apoio à Reestruturação do Sector Empresarial do Estado GARSEE), the number of employees of public and mixed public enterprises was estimated to be about 6,000 in 1995, down from 6,400 in 1990.

Public sector salaries increased in real terms during the period 1991-94, before declining somewhat in 1995 (Table 12). Private sector salaries did not rise in tandem with public sector salaries and therefore the differential between salaries in the two sectors constituted an element of friction during private sector contract negotiations (Table 13). Based on the 1990 census, the average salary in the public administration and in public enterprises was some 20-30 percent higher than the average salary paid in private corporations. This disparity widened further in 1990-92 and this gap was maintained during 1992-94, when private sector salaries, particularly in the liberalized sectors, increased in line with inflation (Chart 4). Also notable was the widening wedge between top and bottom salary levels in the public administration, where the ratio between highly qualified and unskilled workers’ salaries grew from 3.5 in 1991 to 4.5 in 1995; comparable ratios in the private sector remained more or less unchanged in the tradable sector and decreased in the nontradable sector. 1/

Table 12.

Cape Verde: Basic Monthly Salaries of the Civil Service by Grade, 1991–95

(In Cape Verde escudos)

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Source: Data provided by the Cape Verdean authorities.

A wage increase of about 17 percent was granted in 1991 (Law Decree No. 101/III/90).

In 1992, a wage adjustment took place according to the civil service plan on positions, career, and salaries (Law Decree No. 86/92).

In 1993, salaries were increased to compensate for income taxation of civil servants.

As of September 1994; includes 5 percent salary increase (Law Decree No. 8/94).

As of January 1995; includes 5 percent salary increase (Law Decree No. 5/95).

Table 13.

Cape Verde: Average Daily Salary by Occupation, 1991–95

(In Cape Verde escudos)

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Sources: General Directorate of Labor and Employment (DGTE), Ministry of Justice and Labor.