Cabo Verde: Request for an Arrangement Under the Extended Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Cabo Verde
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International Monetary Fund. African Dept.
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Publication Date:
21 Jul 2022
eISBN:
9798400214998
ISBN:
9798400214998
Language:
English
Keywords:
policy credibility; Cabo Verdean authorities; reform objective; Cabo Verde economy; government finance; Fiscal stance; Debt service; Sub-Saharan Africa; transmission mechanism
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1. The Cabo Verde economy was severely impacted by the COVID-19 pandemic. The country entered the crisis with sound macroeconomic fundamentals, though high debt levels remained a serious vulnerability. In particular, economic growth averaged 5 percent during the pre-pandemic years (2018–19), international reserves were at comfortable levels, and the fiscal deficit and government debt were on a downward trajectory. When the crisis hit, the authorities took policy measures that helped mitigate the impact of the pandemic. Nevertheless, GDP contracted by close to 15 percent in 2020—the largest decline in the country’s post-colonial history and one of the largest in sub-Saharan Africa. While the Omicron variant initially created new challenges, the health environment has improved substantially since January 2022.

Abstract

1. The Cabo Verde economy was severely impacted by the COVID-19 pandemic. The country entered the crisis with sound macroeconomic fundamentals, though high debt levels remained a serious vulnerability. In particular, economic growth averaged 5 percent during the pre-pandemic years (2018–19), international reserves were at comfortable levels, and the fiscal deficit and government debt were on a downward trajectory. When the crisis hit, the authorities took policy measures that helped mitigate the impact of the pandemic. Nevertheless, GDP contracted by close to 15 percent in 2020—the largest decline in the country’s post-colonial history and one of the largest in sub-Saharan Africa. While the Omicron variant initially created new challenges, the health environment has improved substantially since January 2022.

Context

1. The Cabo Verde economy was severely impacted by the COVID-19 pandemic. The country entered the crisis with sound macroeconomic fundamentals, though high debt levels remained a serious vulnerability. In particular, economic growth averaged 5 percent during the pre-pandemic years (2018–19), international reserves were at comfortable levels, and the fiscal deficit and government debt were on a downward trajectory. When the crisis hit, the authorities took policy measures that helped mitigate the impact of the pandemic. Nevertheless, GDP contracted by close to 15 percent in 2020—the largest decline in the country’s post-colonial history and one of the largest in sub-Saharan Africa. While the Omicron variant initially created new challenges, the health environment has improved substantially since January 2022.

2. The nascent economic recovery has been disrupted by the external shock triggered by the war in Ukraine. The shock is leading to higher fuel and food prices and lower demand for tourism. Cabo Verde has very limited policy space to respond to the shock, which is intensifying economic pressures and compounding the scarring from the pandemic shock.

3. Over the medium term, further structural reforms are needed to put the country on a stronger and more inclusive growth trajectory. Within this context, the 2019–2021 Policy Coordination Instrument (PCI) supported the government’s ambitious reform program to rein in public debt and promote the development of the private sector. While the program produced some positive results (Annex I), the pandemic has eroded some of the gains and had a particularly negative impact on the authorities’ efforts to pursue fiscal consolidation and SOE reforms. The Ukraine war is also likely to have an adverse impact on debt vulnerabilities and induce a significant fall in reserves, which in the absence of additional external financing, could impact the stability of the fixed exchange rate regime.

4. Against this backdrop, the authorities have requested a new program to support the implementation of their strategic plan for sustainable development (PEDS). The objective of the authorities’ three-year economic program is to reduce macroeconomic vulnerabilities and create conditions for inclusive growth through a significant reduction in the fiscal deficit and public debt, and improvement in the business environment.

5. Cabo Verde’s political environment is expected to remain stable, with some of the highest scores on governance in Sub-Saharan Africa.1 The pro-business Movimento para Democracia (MpD) won the April 2021 parliamentary elections while the opposition African Party for the Independence of Cabo Verde (PAICV), which ruled Cabo Verde when it was a one-party state, won the October 2021 presidential elections. José Maria Neves was sworn in as the new president of Cabo Verde on November 9, 2021.2

Recent Economic Developments

6. The economic rebound in 2021 was broad-based with economic growth reaching 7 percent (Text Figure 1). The rebound in economic activity was supported by the easing of international travel restrictions, strong private sector credit growth (5.8 percent y/y) and the successful vaccination program. Inflation picked up at 7.6 percent in March 2022 due to higher food, clothing, and transportation costs reflecting the impact of the Ukraine war. The authorities have finalized the rebasing of the national accounts statistics to 2015 from 2007. The published data indicates that the rebased nominal GDP is about 10 percent higher than previous estimates, reflecting a more acurate measure of the services sector (Annex II).

Text Figure 1.
Text Figure 1.

Cabo Verde: Contributions to Growth

(Quarterly, year-on-year percent change)

Citation: IMF Staff Country Reports 2022, 235; 10.5089/9798400214998.002.A001

7. Cabo Verde has one of the fastest COVID-19 vaccine rollouts in sub-Saharan Africa. More than 90 percent of the adult population have received at least one vaccine dose with vaccination rates close to 100 percent in some of the tourism islands (Text Figure 2). The successful COVID-19 vaccination campaign limited the impact of the Omicron variant. The January 2022 surge in COVID-19 cases was short-lived and did not lead to a tightening of restrictions or delay the planned easing of some economic support measures. The average number of daily COVID-19 cases is currently in the single digits compared with about 1,000 cases in December 2021; while total COVID-19 infections stood at 55,886 at end-April 2022, and hospitalizations remain low.

Text Figure 2.
Text Figure 2.

Cabo Verde: Covid-19 Cumulative Daily Cases & SSA Vaccination Rates

Citation: IMF Staff Country Reports 2022, 235; 10.5089/9798400214998.002.A001

Sources: OWID; Johns Hopkins CSSE; and IMF staff calculations.

8. External sector developments in 2021 were favorable. The current account is estimated to have narrowed from 15 percent of GDP in 2020 to 11.3 percent in 2021 on account of a strong recovery in goods exports and higher tourism receipts. Imports of goods and services increased by 10 percent during the same period as the recovery gained traction and supported domestic demand. Gross international reserves increased from €582.4 million in 2020 to €591.3 million in 2021 (about 6.3 months of prospective imports) supported by the SDR allocation (SDR 22.72 million; about 1.5 percent of GDP), and external loan disbursements.

9. The external position in 2021 was substantially stronger than the level implied by fundamentals and desirable policy settings (Annex IV). The high and negative net international investment position is a source of vulnerability, but risks are partly contained by the structure of Cabo Verde’s external liabilities, largely composed of FDI and long-term debt. The reserve adequacy model based on the IMF LIC/MIC framework suggests reserves of about 3.7 months of imports. However, given the small size of Cabo Verde’s economy, the undiversified economic structure and high vulnerability to external shocks, staff recommends reserves in the range of 5 to 5½ months of imports. Cabo Verde’s business environment has improved in recent years, but continued structural reforms remain critical to enhance competitiveness.

10. The financial system has remained resilient. Data for end 2021 suggest that the financial system is highly liquid, profitable, and well capitalized. The banking sector entered the pandemic with strong capital buffers and improving profitability that helped contain risks. Regulatory capital to risk weighted assets (CAR) was 21.1 percent at end-December 2021, well-above the regulatory minimum of 12 percent, while the return on assets was relatively low at 1.5 percent. Non-performing loans (NPLs) declined from 9.5 percent at end 2020 to 7.2 percent of total loans at end December 2021 reflecting the moratorium on loan repayments and write-off of legacy loans.3

11. Fiscal performance improved in 2021. The overall deficit declined to 7.3 percent of GDP and was financed through external disbursements (about 70 percent) and domestic financing (about 30 percent). (Text Table 1). Lower public investment and current expenditure restraint helped achieve the authorities’ budget objectives. Public debt stood at 143 percent of GDP at end-2021.

Text Table 1.

Cabo Verde: Quarterly Fiscal Performance1

(Millions of Cabo Verde Escudos)

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Sources: Cabo Verdean authorities and IMF staff projections.

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

12. The COVID-19 pandemic has made critical SOE reforms more challenging. In particular, the authorities had to postpone the privatization program to 2022, after renationalizing the airline company (CVA) citing misuse of pandemic support. Preliminary estimates suggest that CVA will need about €30 million (1.7 percent of GDP) during 2022–23 to support its operations pending its re-privatization. The sharp increase in international oil prices over the last six months, coupled with sticky electricity tariffs, is also having a negative impact on the financial performance of the electricity company (ELECTRA), which had losses of CVE 1.5 billion (0.8 percent of GDP) in 2021. The company is likely to suffer an additional CVE 1 billion (about 0.5 percent of GDP) of losses in 2022 due to the authorities’ decision to limit tariff adjustments in a context of rising food and fuel prices.

13. The authorities are implementing the governance commitments on crisis-related spending made in the context of the RCF and have also developed a framework for the use of the recent SDR allocation. In this regard, they continue to monitor COVID-related expenditures, including through the publication of key spending data on the website of the Ministry of Finance. In addition, the 2020 audited financial accounts, including COVID-related expenditures, have been submitted to parliament (MEFP, ¶8). The transfer of the SDR resources from Banco de Cabo Verde (BCV) to the government was completed in 2021 and the amount has already been included in public debt. A memorandum of Understanding (MoU) detailing the framework for the use of SDRs was signed between the Ministry of Finance and BCV (MEFP, ¶8).

Macroeconomic Outlook and Risks

14. The near-term outlook has deteriorated due to the war in Ukraine. Real GDP growth has been revised downwards from 6 percent to 4 percent in 2022 as the war in Ukraine is expected to be a drag on tourism. Higher commodity and fuel prices and the weaker prospects for the recovery in the tourism sector are projected to result in a significant widening of the current account deficit (to about 14.1 percent of GDP in 2022) and lower international reserves. Near-term inflation is likely to remain elevated reflecting international oil and food price developments.

15. Medium-term prospects remain broadly positive provided the authorities implement their reform program (Text Table 2). The planned fiscal consolidation, a successful restructuring of the major SOEs, and structural reforms are expected to lead to faster growth of credit to the private sector, boost investor confidence, accelerate medium-term growth, and place public debt on a sustained downward path. Real GDP growth is anticipated to remain robust at about 5½ percent reflecting the continued recovery of the tourism sector toward pre-pandemic levels, including through an increase in hotel room capacity, and the implementation of reforms under the authorities’ strategic plan for sustainable development (PEDS). The current account deficit is projected to narrow to about 4 percent of GDP in the medium term supported by fiscal consolidation, strong tourism performance, and higher remittances reflecting labor market improvements in advanced economies. This will help international reserves recover and stabilize at slightly above 5 months of prospective imports. The primary fiscal balance would improve by about 1 percentage point of GDP per year over the medium-term reflecting revenue mobilization and expenditure restraint. This would contribute to a substantial decline in the stock of public debt from 143 percent of GDP in 2021 to about 110 percent of GDP by 2027. Over the long term, GDP growth is projected at about 4½ percent, broadly in line with potential growth.

Text Table 2.

Cabo Verde: Medium-Term Macroeconomic Indicators2

(Percent of GDP, unless otherwise indicated)

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

Includes prospective ECF disbursments

The medium-term assumptions include the effect of the Fund disbursements that would allow the authorities to maintain a level of reserves in the range of 5 to 5½ months of imports.

Ratio calculated with non-rebased GDP series

Non-rebased nominal GDP

16. However, the medium-term outlook is also subject to substantial risks. The main downside risk relates to the evolution of the pandemic and its impact on the external sector through a possible decline in tourism (Annex III), as well as significant increases in fuel and food prices and tighter financial conditions owing to the Ukraine war. Other external risks include the de-anchoring of inflation expectations in advanced economies and vulnerability to natural disasters (including those associated from climate change). Domestic risks could stem from insufficient progress in fiscal consolidation and SOE reforms, and possible delays in implementing structural reforms to increase productivity and diversify the economy. On the upside, faster than expected global containment of the pandemic could support a faster recovery of tourism and strengthen the pace of the economic recovery.

17. The authorities agreed with staff’s assessment of Cabo Verde’s medium-term outlook and risks (MEFP, ¶12). They stressed uncertainties regarding the impact and duration of the Ukraine war as a significant risk to the medium-term outlook. Within this context, the BCV viewed the projected gross international reserves cover as an important buffer. On the medium term, they stressed that the economy’s growth potential is high, and idle resources remain as the economy returns to pre-pandemic level of output. In that regard, they saw significant upside risk to the medium-term growth projections supported by targeted growth enhancing structural reforms.

The Extended Credit Facility

A. Program Objectives and Policies

18. The objectives of the program are aligned with the government’s medium-term economic development plan (PEDS) and include:

  • Strengthening public finances to preserve public debt sustainability and expand social safety nets.

  • Reduce fiscal risks from public enterprises and improving their financial management and transparency.

  • Modernizing the monetary policy framework and improving the resilience of the financial system.

  • Raising growth potential and building resilience to shocks through structural reforms and economic diversification.

19. Strong ownership, continued support from development partners, and timely implementation of reforms is critical. Cabo Verde has a robust track record of reform implementation, and an impressive tradition of good governance and transparency. The program has a carefully selected set of reforms necessary to achieve the overall objectives of the three-year program. The program will support the authorities’ reform objectives over three years and will bolster policy credibility to help preserve Cabo Verde’s strong relations with the donor community and facilitate continued strong financial support from other donors. The program will seek complementarity with other development partner programs whenever possible, and the implementation of reforms will be supported by IMF technical assistance. Tables 9 and 10 provide an overview of the conditionality under the program.

Table 1.

Cabo Verde: Selected Economic Indicators, 2019–27

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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, 2018–27

(Millions of Euros; unless otherwise indicated)

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

Including international reserves and exceptional financing.

Debt service suspension under the G-20 Initiative.

Including banks’ delays on trade credit reporting.

Table 3a.

Cabo Verde: Statement of Operations of the Central Government, 2018–271

(Millions of Cabo Verde Escudos)

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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.

2/ Higher expenditures on compensation of employees and on goods and services for 2020 partly reflect the broadening of the fiscal coverge. 3/ On lend to SOEs for public investment execution.
Table 3b.

Cabo Verde: Statement of Operations of the Central Government, 2018–271

(Percent of GDP)

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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.

2/ Higher expenditures on compensation of employees and on goods and services for 2020- partly reflect the broadening of the fiscal coverge. 3/ On lend to SOEs for public investment execution.
Table 4.

Cabo Verde: Monetary Survey, 2018–27

(Millions of Cabo Verde escudos, unless otherwise indicated)

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Sources: Bank of Cabo Verde; and IMF staff estimates and projections. 1/ TCMFs (Titulos Consolidados de Mobilizac,ao Financeira] are bonds in CVE, backed by an offshore account managed by Banco de Portugal. They matured in late 201S; and in 2019 the authorities decided to redeem a portion of them and to replace the balance with new bonds. 2/ Includes Cabo Verde’s National Pension Institute (INPS]. 3/ Percent change, year over year.
Table 5.

Cabo Verde: Financial Soundness Indicators of the Banking Sector, 2018–21Q4

(End-year; percent unless otherwise indicated)

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Source: Bank of Cabo Verde.

Based on IAS/IFRS definition

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

Table 6.

Cabo Verde: Indicators of Capacity to Repay the Fund, 2020–35

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Sources: IMF staff estimates and projections.
Table 7.

Cabo Verde: Decomposition of Public Debt and Debt Service by Creditor, 2021–231

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As reported by Country authorities according to their classification of creditors, including by official and commercial, Debt coverage is the same as the D5A.

Multilateral creditors” are simply institutions with more than one official shareholder and may not necessarily align with creditor classification under other IMF policies (e.g. Lending Into Arrer

Debt is collateralized when the creditor has rights over an asset or revenue stream that would allow it, if the borrower defaults on its payment obligations, to rely on the asset or revenue secure repayment of the debt. Collateralization entails a borrower granting liens over specific existing assets or future receivables to a lender as security against repayment of the loan. “unrelated” when it has no relationship to a project financed by the loan. An example would be borrowing to finance the budget deficit, collateralized by oil revenue receipts. See the joint IMF-World Bank note for the G20 “Collateralized Transactions: Key Considerations for Public Lenders and Borrowers” for a discussion of issues raised by collateral.

Indudes other-one off guarantees not included in publicly guaranteed debt (e.g. credit lines) and other explicit contingent liabilities not elsewhere classified (e.g. potential l^gal daims. payments resulting from PPP arrangements).

Table 8.

Cabo Verde: Quantitative Performance Criteria and Indicative Targets Under the ECF, June 2022-June 20231

(Millions of Escudos, unless otherwise indicated)

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

Expressed in local currency and millions unless otherwise indicated. Foreign currency amounts will be converted at current exchange rates.

Stock of reserves in millions of Euros. The ceiling or floor will be adjusted as specified in the TMU.

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

Continuous.

Table 9.

Cabo Verde: Structural Benchmarks Under the ECF for 2022–23

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Table 10.

Cabo Verde: Proposed Schedule of Reviews Under the ECF, 2022–25

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Source: IMF staff estimates. Note: Quota is SDR 23.70 million

B. Strengthening Public Finances to Preserve Public Debt Sustainability

20. Fiscal consolidation to reduce public debt is an important aspect of the government’s economic program. The fiscal strategy is anchored by the objective of reducing the debt-to-GDP ratio from the current 143 percent to below 110 percent by 2027. This is based on a multiyear fiscal consolidation effort to improve the primary fiscal balance from a deficit of 5.1 percent of GDP in 2021 to a surplus of 1 percent of GDP by 2026 (MEFP, ¶14). The adjustment is significant, and initially revenue driven, with limited expenditure reduction in 2022 due to the need to support the economy to mitigate the impact of the Ukraine war.4 This adjustment would be associated with a reduction in the PV of external debt-to-GDP ratio from 60.3 percent in 2021 to 45.9 percent in 2027.

21. The program targets a 1.5 percent of GDP improvement in the primary balance for 2022 to be achieved mainly through higher revenues (Text Table 3; Table 3a and 3b). The primary deficit would decline to 3.6 percent of GDP—about 0.4 percent of GDP lower than in the authorities’ original budget. This reflects the need to mitigate the economic impact of the war in Ukraine and the need for additional spending to support vulnerable groups (MEFP¶15).

  • Revenue mobilization measures are expected to yield about 1 percent of GDP (Text table 3) (MEFP ¶17). These measures include the imposition of a 5 percent import duty on previously exempted imports,5 and an increase in the excise tax on tobacco products (Text Table 3). These tax measures will be supported by efforts to reduce tax arrears on VAT, personal, and corporate income taxes. The completion of the concession for airport management is expected to generate one off revenues of about 1.8 percent of GDP and the airport security tax is expected to yield 0.3 percent of GDP.

  • Expenditure restraint will be achieved through streamlining of non-essential public investment projects, and through prudent policies to contain the growth of the wage bill, transfers, and subsidies (MEFP, ¶19). Fiscal consolidation is designed to protect social spending, with an additional 0.3 percent of GDP allocated to targeted social safety net programs, in part to increase the number of vulnerable households that would receive cash transfers to help cushion the economic impact of the Ukraine war (MEFP, ¶20).

  • These measures will help reduce the overall deficit from 7.3 percent of GDP in 2021 to 6.3 percent in 2022, and the primary balance from 5.1 percent to 3.6 percent.

  • The fiscal position could be negatively affected by the war in Ukraine, including through lower growth, weaker revenue collections and the impact of higher fuel prices on the operations of Cabo Verde Airlines. Should these risks materialize, further expenditure restraint (especially reducing non-priority public investment projects or slowing down their rate of execution) may be needed to maintain a prudent fiscal position in line with program objectives.

Text Table 3.

Cabo Verde: Primary Balance Improvements, 2022

(Staff Projection, Percent of GDP)

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Sources: Cabo Verdean authorities and IMF staff estimates.

22. Medium-term fiscal consolidation will be supported by the implementation of additional fiscal policy measures. Ongoing tax administration reforms, including the implementation of electronic invoicing as well as other reforms to improve compliance will support revenue mobilization and are expected to yield an additional 2 percent of GDP over the medium term (MEFP ¶18). The implementation of the ECOWAS common external tariff—delayed due to the COVID-19 outbreak—is projected to yield about 1 percent of GDP over the medium term. The government will submit to parliament the budget for 2023 that will be in line with commitments under the program (Structural Benchmark (SB), 2nd review).

Text Table 4.

Cabo Verde External Borrowing Program, 2022

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Sources: Cabo Verdean Authorities; IMF Staff calculations

Contracting and guaranteeing of new debt. The present value of debt is calculated using the terms of individual loans and applying the 5 percent program discount rate

Debt with a grant element that exceeds a minimum threshold. This minimum is typically 35 percent, but could be established at a higher level. Some of the loans are packaged with grants, such that the overall financing package meets the 35 percent concessionality threshold

Debt with a positive grant element which does not meet the minimum grant element.

Debt without a positive grant element. For commercial debt, the present value would be defined as the nominal/face value.

23. The program supports a well targeted fiscal structural reform agenda—with revenue mobilization, SOE and public financial management reforms (MEFP ¶22–26). Key measures include putting in place an electronic invoicing system for the VAT that will cover at least 50 percent of taxpayers by end-2022 (SB, 2nd review). The fiscal program also focuses on reducing fiscal risks stemming from public enterprises (Annex V), including through the preparation of quarterly fiscal risk assessment reports (SB, 1st review); as well as quarterly monitoring reports on the SOEs’ budget execution (SB, 2nd review), and improving the consolidated annual SOEs reports (SB, 3rd review). The program will also broaden the coverage and transparency of the government accounts including the compilation and publication of the historical series of government financial statistics for the general government (SB, 3rd review); and the publication of annual budget execution reports for the general government (SB, 3rd review). In addition, the authorities will finalize a business plan for Cabo Verde Airlines to minimize losses and eventually return the company to profitability ahead of its re-privatization.

24. Prudent borrowing policies will focus on moderate external borrowing on concessional terms and containment of domestic borrowing to prevent possible crowding out effects and preserve debt sustainability (Text table 4). In that regard the program includes a zero ceiling on non-concessional borrowing as a performance criterion given the high risk of overall debt distress. The debt sustainability analysis shows that the risk of overall debt distress is high due to high external debt levels (Annex VII and DSA). However, overall public debt is assessed as sustainable given that debt service requirements remain manageable thanks to: (i) the high degree of concessionality of external debt with an average interest rate below 1 percent, (ii) a debt structure based largely on fixed rates and hence providing protection from the ongoing tightening cycles, and (iii) the fixed exchange rate and still adequate reserve levels that neutralize the negative impact of exchange rate trends on debt dynamics that is currently being observed in other countries with flexible rates. Within this context, the present value (PV) of public and publicly guaranteed (PPG) external debt-to-GDP ratio breaches its threshold in 2022 under the baseline (a shorter duration breach than previously expected due to the recent GDP rebasing), and more protractedly under stress test scenarios. Preserving debt sustainability is predicated on the authorities’ commitment to implementing the reforms agenda.

C. Monetary Policy and Financial Stability

25. Monetary policy will continue to prioritize the need to safeguard the peg and strengthen the policy framework (MEFP ¶33). In the near term, the monetary policy stance seems appropriate, carefully balancing the need to support the fledging economic recovery with the importance of protecting the peg. Over the medium term, the BCV should target reserves in the range of 5–5½ months of imports to support the peg given the country’s small size and vulnerability to exogenous shocks.

26. The BCV is gradually unwinding COVID-19 related support. The accommodative monetary and financial measures implemented in 2020 helped to support credit and provided liquidity to households and firms (MEFP ¶10). However, with the end of pandemic-related restrictions, the resumption of economic activity, and considering the high levels of liquidity in the banking system, the authorities have appropriately started unwinding some of these measures. The central bank also confirmed that it will closely monitor reserves and inflation developments and will stand ready to adjust policy settings as required.

27. A preliminary assessment by the central bank suggests that the banking sector is well placed to withstand the effects of the projected increase in non-performing loans (MEFP ¶35). The BCV agreed to carry out a comprehensive study of loan losses and provisions at the expiration of the credit moratorium (end June 2022) (SB, 2nd review), encourage and facilitate prudent restructuring of loans, and proactively provide guidance on the prudential treatment of moratoria and NPL management strategies. In addition, the BCV proposed developing a common framework6 for the resolution of crisis-related NPLs (SB, 2nd review). The central bank will also guide the development of detailed reporting templates for the restructured and rescheduled loans and for monitoring the impact of COVID measures on the asset quality of banks (MEFP ¶35).

28. Steps will also be taken to enhance the effectiveness of the AML/CFT regime (MEFP ¶35). This will be implemented based on the Inter-Governmental Action Group against Money Laundering (GIABA)’s recommendations of the 2019 Mutual Evaluation Report (including the establishment in 2020 of a national AML/CFT committee and strengthening of risk-based supervision, including for designated non-financial businesses and professions). Cabo Verde’s recent exit from the EU list of non-cooperative jurisdictions for tax purposes has helped preserve correspondent banking relationship (CBR).

29. Structural reforms will focus on further strengthening the monetary policy transmission mechanism and enhancing analytical capacity to track developments in the economy (MEFP ¶34–38). To support the development of the money market, a preannounced schedule for TIM (Títulos de Intervenção Monetária—Monetary Intervention Securities (MIS)) and TRM (Títulos de Regularização Monetária—Monetary Regularization Securities (MTS)) auctions will be instituted (SB, 1st review). The auction schedule and related information will be pre-announced on the BCV website. Other reform areas include strengthening the payment systems, introduction of composite indicators of economic activity (SB, 2nd review) and strengthening near-term forecasting, implementation of central bank digital currency, and developing a framework for the provision of emergency liquidity assistance.

30. An updated safeguards assessment of the BCV is substantially complete. Progress has been made in enhancing external audit and financial reporting at the BCV since the 2008 safeguards assessment. However, legal amendments are needed to strengthen the BCV’s decision-making structure, autonomy, and accountability and transparency (SB, 2nd review). The lack of an independent oversight body has impacted the internal audit function’s independence and effectiveness. To further enhance the quality of the financial statements the BCV will seek to adopt International Financial Reporting Standards by FY 2023.

D. Structural Reforms: Supporting Private Sector-Led Growth

31. Structural reforms will aim at improving the business environment, addressing labor market inefficiencies, and increasing access to finance (MEFP ¶39–41). The authorities are developing a new five-year development strategy based on the recently completed long-term development plan (Cabo Verde Ambition 2030). Key priority areas include (i) completing SOE reforms, including through privatization and improving the efficiency of public enterprises; (ii) facilitating access to finance, particularly for small and medium-sized enterprises; and (iii) improving the business environment. Other reforms include climate change adaptation and mitigation measures, including progress towards achieving the 50 percent renewable energy target by 2030. In addition, the development of technology parks will also support efforts to enhance digitalization –another key priority for the government.

32. The program will also emphasize support for vulnerable groups and will seek to strengthen social safety nets. In this regard, additional resources have been allocated for the expansion of the social safety net to help mitigate the impact of higher prices on the most vulnerable groups (MEFP ¶42–43). Staff will also work closely with the World Bank and the African Development Bank (AfDB) to advise the authorities on further reforms to enhance social protection.

Financing and Program Modalities

33. The Extended Credit Facility (ECF) will help address protracted BOP needs stemming from the impact of the pandemic and, more recently, the war in Ukraine. The effect of these shocks on the BOP are projected to persist with tourism expected to return to the pre-pandemic level at the end of the medium term, generating persistent downward pressure on reserves. The ECF arrangement provides financing to bolster reserves, help close the fiscal financing gap and support reforms under the authorities’ development strategy. Reform implementation will also be supported by well-targeted capacity development from the IMF (Annex VI) and other donors.

Text Table 5.

Cabo Verde: Impact of the Ukraine War on the Balance of Payments

(Millions of Euros, unless otherwise indicated)

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Sources: Bank of Cabo Verde; IMF staff projections

34. Funding under the ECF will help close the financing gap and support a financing mix with greater reliance on concessional external financing (Text table 6). In the absence of the Fund program, high levels of domestic financing could lead to crowding out of the private sector, increase debt servicing costs to levels that could compromise medium-term sustainability, and leave the economy with insufficient reserve buffers to manage BOP challenges.7 In this regard, the remaining external financing gap for the 2022 budget will be filled mostly with concessional loans from multilateral institutions including the World Bank, AfDB, and other bilateral partners and a drawdown of the recent SDR allocation (about 1 percent of GDP) (MEFP¶8).

35. Staff considers access of SDR 45.03 million (190 percent of quota; around USD 63.37 million) (Table 10) under the 36-month ECF to be appropriate. The program will provide a policy anchor to the authorities’ fiscal reform plan, including achieving a primary surplus that helps place debt on a sustained downward path, while addressing Cabo Verde’s financing needs associated with the significant increase in the price of imports. The program will also support the gradual economic recovery from the COVID-19 and Ukraine war shock. Access is proposed to be frontloaded (some 95 percent of access in 2022, followed by equal purchases) to help buffer against the headwinds associated with the war in Ukraine, which are expected to be of greater magnitude during the first year of the program.

Text Table 6.

Cabo Verde: Sources of Financing for 2022–25

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Sources: Cabo Verdean authorities and IMF staff projections.

In 2023 net domestic financing includes SDR’s converted to domestic deposits amounting about 0.6 percent of GDP.

36. The 36-month ECF would be used as budget support and cover 2022 through 2025 as the fiscal and balance of payments shocks are of a similar magnitude. A 36-month arrangement is appropriate given the period required to lower debt to more moderate levels and significant scarring from the pandemic and Ukraine war. The financing from the Fund will help keep reserves within the targeted range of 5 to 5½ months of imports in 2022 and over the medium term. This level of reserves would provide sufficient support to the peg in an environment of heightened global risk and uncertainty and enable implementation of a more desirable fiscal adjustment path that would prevent the need for sharper expenditure cuts.

37. Program conditionality, and monitoring.

  • Performance criteria (PC) (Table 8). Program performance will be monitored by the following PCs:8 (i) floor on tax revenues; (ii) floor on primary balance; (iii) ceiling on net other liabilities (on lending and capitalization); (iv) non-accumulation of domestic and external arrears (continuous); (v) 3 percent of GDP annual ceiling on net domestic financing; (vi) ceiling on the PV of new concessional public and publicly guaranteed external debt; (vii) zero ceiling on contracting or guaranteeing non-concessional external debt with maturity of more than one year (continuous); and (viii) floor on gross international reserves. The program will also include a floor on social spending as an indicative target The standard continuous targets will also be part of the PCs.

  • Reviews (Table 10). The program will be monitored through semi-annual reviews. Reviews will include PCs for end-June and end-December, as well as indicative targets for end-March and end-September.

  • Structural benchmarks (SBs). The SBs under the program are calibrated and phased in line with the authorities’ plans and implementation capacity, in collaboration with other development partners.

  • Financing assurances. The program is fully financed for the first 12 months, with good prospects of full financing for the remainder of the arrangement In addition to Fund support, financing in the first year of the ECF will be provided through budget support from development partners and multinational development institutions, including the World Bank and the African Development Bank.

38. Cabo Verde’s capacity to repay the Fund is assessed as adequate and enhanced safeguard rules are applied given the proposed access levels (Table 6, Annex VII). By 2025, Cabo Verde’s Fund credit outstanding will be at 280 percent of quota (above the top quartile of past UCT-quality arrangements for LICs). Credit outstanding during the program would peak at about 3.6 percent of GDP, 10 percent of exports, 13.8 percent of gross international reserves and 14.5 percent of revenue (excluding grants). At the same time, annual repayments to the Fund would peak at 0.6 percent of exports, 0.9 percent of reserves, and almost 6.1 percent of PPG external debt service. Risks are mitigated by the authorities’ strong track record of servicing their debt obligations to the Fund, and policy measures envisaged in the program, including fiscal consolidation. The return of tourists to the country is also likely to generate significant repayment capacity through increased export receipts.

39. Risks to the program are assessed as moderate, conditional on the successful implementation of the reform agenda and a significant reduction of the debt stock going forward. The worsened global outlook and ongoing effects of the spillovers from the Ukraine war on Cabo Verde increase risks to the program. Also, the high risk of overall debt distress remains a concern. Mitigating factors to the worsened outlook are the authorities’ strong track record under the recently completed PCI, and strong program ownership. Nonetheless, risks to the medium-term outlook will be closely monitored as they could impact program performance. However, program reviews and continued dialogue with the authorities will help mitigate these risks.

Staff Appraisal

40. Cabo Verde’s economy is facing significant economic challenges associated with the impacts of the pandemic, as well as the spillover effects of the war in Ukraine. Climate change is also creating additional difficulties after a fourth consecutive drought year. As a result, growth is expected to weaken, inflation will rise substantially, and fiscal and external pressures will intensify. Strong commitment to implement a balanced mix of corrective policies that reduces the risk of overall debt distress, protects vulnerable groups, and supports growth is needed.

41. The government is committed to implementing reforms to reduce vulnerabilities, increase growth and support the most vulnerable. The authorities are requesting support under an Extended Credit Facility (ECF) to help address the BOP gap and fiscal financing needs stemming from the impact of the pandemic and, more recently, the war in Ukraine. The program would also help anchor the authorities’ medium term economic strategy and support the implementation of reforms to achieve sustained growth and poverty reduction.

42. Fiscal consolidation is needed to contain debt vulnerabilities, but it needs to be implemented gradually and taking into account the need to safeguard growth and protect vulnerable groups. In this regard, the primary fiscal deficit would gradually decline during the program and help place public debt on a sustained downward path. The program will also support the fiscal reform agenda, which includes a focus on domestic revenue mobilization and efforts to advance SOE reforms to contain fiscal risks.

43. A steady path of debt reduction is important to increase economic resilience and rebuild buffers. External public debt is at a moderate rate of debt distress, but overall public debt is at high risk of distress due to high levels of domestic borrowing in recent years. The authorities’ plan to bring the primary balance deficit of 5.1 percent of GDP in 2021 to a surplus of about 1 percent of GDP over the medium term will help reduce the risk of overall debt distress.

44. Reinforcing the social safety net will be essential to achieve the authorities’ objective of making growth more inclusive and equitable. The higher allocation of resources for social spending will help mitigate the impact of rising prices on the most vulnerable. In addition, further improvements in the targeting and coverage of existing programs will also increase the efficiency of public spending and support the authorities’ plans to eradicate extreme poverty. These efforts should be combined with a vigorous implementation of the graduation strategy to enhance skills and other labor market policies seeking to generate jobs so that citizens are increasingly less dependent on social support programs.

45. Monetary policy should continue to focus on safeguarding the peg and strengthening the monetary policy framework. This will be needed to maintain reserves in the range of 5 to 5½ months of imports and make progress in enhancing analytical capacity of the central bank. The BCV should continue with the gradual unwinding of the COVID-related moratorium and liquidity support measures given the continued excess liquidity in the banking system. The BCV should also work toward strengthening the AML/CFT component of its prudential supervision.

46. The banking system appears resilient but continuous vigilance will be required to ensure that financial risks are contained. In this regard, the BCV should continue to monitor risks in the banking sector, especially given the fact that the end of the credit moratorium in June 2022, is likely to result in a spike in NPLs and an erosion in banks’ asset quality. The BCV’s intention to carry out a comprehensive study of loan losses and provisions at the expiration of the credit moratorium, facilitate prudent restructuring of loans, and provide guidance on the prudential treatment of moratoria and NPL management strategies would help contain these risks.

47. Raising Cabo Verde’s medium term growth potential will require steadfast implementation of the authorities’ medium term development plan. Completing SOE reforms, including through privatization and improving the efficiency of public enterprises, will support efforts to improve long-term productivity. Steps in climate change adaptation including efforts to reach the goal of 50 percent renewable energy supply by 2030 would also increase the resilience of the economy and help increase growth potential.

48. Staff support the authorities’ request for a 36-month arrangement under the ECF with access equivalent to 190 percent of quota (SDR 45.03 million). This support is based on the balance of payments and fiscal financing needs, the country’s positive track record of reform implementation, as well as the authorities’ policy credibility, and home-grown ownership of their reform program.

Text Table 7.

Cabo Verde: External Financing Gap 2020–25

(Millions of Euros, unless otherwise specified)

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Source: Authorities and IMF staff estimates.

Includes reserves and exceptional financing

Figure 1.
Figure 1.

Cabo Verde: Recent Economic Developments

Citation: IMF Staff Country Reports 2022, 235; 10.5089/9798400214998.002.A001

Sources: Cabo Verdean authorities; and IMF staff estimates.
Figure 2.
Figure 2.

Cabo Verde: External Sector Developments

Citation: IMF Staff Country Reports 2022, 235; 10.5089/9798400214998.002.A001

Sources: Cabo Verdean authorities; and IMF staff estimates.
Figure 3.
Figure 3.

Cabo Verde: Fiscal Sector Developments

Citation: IMF Staff Country Reports 2022, 235; 10.5089/9798400214998.002.A001

Sources: Cabo Verdean authorities; and IMF staff estimates.
Figure 4.
Figure 4.

Cabo Verde: Monetary Developments

Citation: IMF Staff Country Reports 2022, 235; 10.5089/9798400214998.002.A001

Sources: Cabo Verdean authorities; and IMF staff estimates.

Annex I. Performance Under the 2019 Policy Coordination Instrument

1. Cabo Verde completed a three-year Policy Coordination Instrument in March 2021. Macroeconomic performance under the program and prior to the outbreak of the global pandemic was strong. Real GDP growth reached 5.7 percent in 2019 with low and stable inflation. The growth momentum was supported by strong growth in tourism, transport, construction, and other services sectors. The Government’s fiscal position improved with the overall fiscal deficit declining from 3 percent of GDP in 2016 to 1.8 percent of GDP in 2019. Fiscal consolidation, combined with sustained real GDP growth, helped reduce the public debt-to-GDP ratio modestly from 127.8 percent in 2016 to 125 percent in 2019. The external position strengthened substantially, with the current account deficit narrowing from 5.1 percent of GDP in 2016 to 0.4 percent of GDP in 2019, helping increase international reserves from €541 million in 2016 to €666.1 million in 2019.

2. Performance over 2020–21 was challenging due to the effects of the pandemic (see discussion above), though the authorities took decisive action to protect lives and livelihoods. In particular, all quantitative targets were met, except for the floor on tax revenues that was missed in the first and second reviews due to the sharp slowdown in economic activity. The primary balance target was met with a wide margin during the program primarily due to lower execution rate of public investment projects. All non-quantitative continuous targets were met throughout the entire program.

3. Good progress was made in the area of structural reforms with most reform targets under the PCI met ahead of schedule. In the area of fiscal reforms, the government enhanced the monitoring of the financial performance of public enterprises through the compilation of financial information on the cash flow performance and quarterly monitoring of actual performance of the six largest SOEs. Steps were also taken to streamline tax exemptions on customs duties, excises, and VAT to enhance revenue performance. In the area of monetary policy, the BCV strengthened the monetary policy transmission mechanism by narrowing the interest rate corridor, linking the policy rate to key interest rates, and enhancing monetary policy communication. The target on the installation of the software system to revamp the public credit registry was completed under the program, which will support the government’s efforts to promote access to finance.

4. The government’s broader reform agenda under the strategic plan for sustainable development (PEDS) progressed well during the program period. Key measures were introduced during June 2019-January 2021 aimed at (i) improving budgetary processes; (ii) restructuring SOEs to support growth and limit fiscal risks; (iii) improving the business environment; (iv) strengthening the anti-money laundering and combating the financing of terrorism (AML/CFT) framework; and (v) supporting financial sector development.

Annex II. GDP Rebasing

1. In 2021 the National Statistical System (SEN) completed the benchmarking and rebasing of Cabo Verde’s national accounts statistics (GDP). This involved changing the base year from 2007 to 2015 and the updated accounts were published in March 2022. The SEN started collecting data from new sources of information in 2015 that allowed for the shifting of the base year, which included:

  • The General Census of Agriculture (V RGA), allowing an update on the sampling base of agricultural holdings and the agrarian structure.

  • The III Survey on Households Expenses and Income (III IDRF), which allowed for the estimation of household final consumption, and provided data to update the consumer price index (CPI).

  • The II Informal Sector Survey.

  • Other short-term indicators such as: monthly foreign trade price index, quarterly indicator of service sector activity, and tourism prices index.

2. The benchmarking and rebasing led to an upward revision of GDP by 9.6 percent. GDP increased to 173,911 million Cape Verdean escudos (CVE) in 2015—an increase of 15,212 million CVE, compared to the 2007 base. The primary and the secondary sectors shank by -2,721 million CVE (-19.6 percent) and -3,340 million CVE (-11.6 percent), respectively, whereas the tertiary sector increased by 20,743 million CVE (21.6 percent) (Figure 1). As a result, the tertiary sector which accounted for 13.1 percent of the upward revision now represents 67.2 percent of output. The decline in the contributions of the primary (1.7 percent) and secondary sector (2.1 percent), resulted in a decline in their weight in GDP to 6.4 percent and 14.6 percent respectively. The weight of taxes net of subsidies on products stood at 11.8 percent and contributed of 0.3 percent in the rebased GDP.

Figure 1.
Figure 1.

Cabo Verde: 2015 Output – Sector Share and Percent Change

(CVE billions)

Citation: IMF Staff Country Reports 2022, 235; 10.5089/9798400214998.002.A001

3. Final consumer expenditure increased by 7.7 percent relative to the 2007 base and contributed 6.5 percent to the rebased level of GDP. It moved from CVE 133,410 million in the 2007 base to CVE 143,704 million under the 2015 base. However, the weight of final consumer expenditure in GDP decreased from 84.1 percent in the 2007 base to 82.6 percent in the 2015 base.

4. Gross fixed capital formation (GFCF) increased by 0.8 percent and contributed 0.2 percent to the rebased GDP. However, the investment rate declined from 30.2 percent in the 2007 base to 29.1 percent in the 2015 base. Imports declined 2.1 percent and exports increased by 0.4 percent, resulting in an improved external balance which contributed 1.4 percent to the increase in GDP.

Annex III. Risk Assessment Matrix1

(Scale—high, medium, or low)

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In case the baseline does not materialize.

Annex IV. External Sector Assessment

Cabo Verde’s external position in 2021 is assessed as substantially stronger than the level implied by fundamentals and desirable policy settings, which points to an undervaluation of the exchange rate. The high and negative net international investment position is a source of vulnerability, but the risks that it poses are partly contained by the structure of Cabo Verde’s external liabilities, largely composed of FDI and long-term debt. Reserve adequacy is assessed as satisfactory, with actual reserve levels (6.3 months of imports) comfortably above the IMF LIC/MIC framework optimal level (about 3.7 months). Cabo Verde’s business environment has improved in recent years, but continued structural reforms remain critical to enhance competitiveness.

A. Current Account

1. Background. The negative effects of the COVID-19 pandemic resulted in the current account deficit widening from 0.4 per cent in 2019 to 15.0 percent of GDP in 2020 (Text Figure 1). This reflected a large contraction in the exports of goods and services, largely driven by a 69.1 percent decline in tourism receipts. The large contraction in the exports of goods and services growth more than offset the 23.2 percent fall in imports of goods and services. Financial flows covered the largest share of the current account deficit in 2020. The current account deficit is estimated to have narrowed to 11.3 percent of GDP in 2021 (as export growth, tourism and remittances recover) but widens in 2022 as the war in Ukraine reverses the earlier gains. It is, however, projected to narrow and improve to 4.2 percent of GDP by 2027 supported by the expansion of tourism and the implementation of the fiscal consolidation program.

Text Figure 1.
Text Figure 1.

Cabo Verde: Balance of Payments, 2009–26

(Percent of GDP)

Citation: IMF Staff Country Reports 2022, 235; 10.5089/9798400214998.002.A001

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

2. Assessment. The EBA-lite methodology is based on the current account (CA) model from a panel regression of the current account which generates an estimated “norm” consistent with medium-term fundamentals and desirable policies. The CA model shows that the cyclically adjusted current account balance is estimated at -6.0 percent of GDP in 2021 and the multilaterally consistent cyclically adjusted current account norm is -11.3 percent of GDP (Text Table 1). This suggests a current account gap of 5.8 percent of GDP. Using the estimated current account elasticities, this implies an undervaluation of the real effective exchange rate (REER) of about 16.3 percent. Nonetheless, the CA model does not fully capture Cabo Verde’s need to save externally to guard against the country’s vulnerability to natural disasters and is not robust to shocks of the magnitude experienced by Cabo Verde due to the COVID-19 pandemic.

B. Real Effective Exchange Rate

3. Background. Cabo Verde’s REER has been relatively stable over the past decade and depreciated slightly by 1.2 percent in 2021 compared with an appreciation of 1.3 percent in 2020.

4. Assessment. The EBA-lite methodology is based on a REER panel regression model that generates an estimated “norm” consistent with medium-term fundamentals and desirable policies. The REER model suggests an undervaluation of the REER of about 7.3 percent (Text Table 1).

Text Table 1.

Cabo Verde: Results from EBA-lite Assessment

(Percent of GDP)

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Additional cyclical adjustment to account for the temporary impact of the tourism {6.8 percent af GDP).

Cyclically adjusted, including multilateral consistency adjustments.

C. Capital and Financial Flows

5. Background. Private capital flows remained robust in 2021 at levels comparable to those recorded in 2020. The increase in 2021 reflected higher other foreign investments. The net financial account balance declined marginally from 15.3 percent of GDP in 2020 to 11.5 percent in 2021 on account of a slight decrease in net official borrowing.

6. Assessment. Net capital and financial flows are expected to slow down over the medium term and stabilize around 3 percent of GDP. The overall balance of payments is projected to record surpluses starting in 2022 in line with the projected improvement in the current account.

D. Reserve Adequacy

7. Background. The COVID-19 pandemic reversed the gains in gross international reserves recorded in 2019. Gross international reserves declined by €82.2 million to €582.4 million in 2020 as exports receipts and private capital flows declined due to the economic impact of COVID-19. Gross international reserves recovered to €591.3 million in 2021, bringing the coverage of prospective imports of goods and services to 6.3 months of prospective imports. Over the medium term, the coverage of prospective imports of goods and services is projected to remain stable between 5 and 5.2 months.

8. Assessment. The results from the Fund’s LIC/MIC framework suggests that the optimal level of reserves for Cabo Verde is about 3.7 months of prospective cover of imports of goods and services. But the fragilities due to the small size of the economy, lack of export diversification, and vulnerability to exogenous shocks call for a higher level of reserves.1 The staff’s medium-term projections indicate a level of reserves of about 5 months of prospective cover of imports of goods and services, in the medium term.

E. External Balance Sheet

9. Background. Cabo Verde’s net international investment position (NIIP, excluding short-term migrants’ deposits) increased in 2021 to reach -201 percent of GDP. Gross external assets and liabilities stood at 90 percent of GDP and 291 percent of GDP, respectively. This persistently large negative external position is a significant source of external vulnerability.

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 NIIP does not deteriorate in net present value terms. This implies that no change in the REER is needed. However, this definition of sustainability is narrow and does not take into considerations all the vulnerabilities associated with the current level of the NIIP or the composition of the NIIP. Cabo Verde’s high and negative NIIP position is a source of vulnerability particularly given its exposure to external shocks. Therefore, policies to reduce the level indebtedness are important to reduce overall external vulnerability.

F. Non-Price Competitiveness

11. Background. Cabo Verde’s business environment has improved in recent years. However, there are several areas in which competitiveness could be further strengthened. Based on the World Economic Forum index,2 Cabo Verde’s overall score for global competitiveness increased to 50.8 in 2019 because of gains in human capital, particularly for health, labor markets and innovation capability. The country lost ground in ICT adaptation, product market and infrastructure (Text Table 2).

Text Table 2.

Cabo Verde: Global Competitive Indicators, 2019

0–100 (best)

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Sources: World Economic Forum, Global Competitiveness Index.

Negative sign indicates decrease in score.

12. Assessment. Despite the achievements, decisive structural reforms aimed at improving the business environment and attracting private investment remain critical to boost competitiveness in Cabo Verde. Key areas in need of improvement include reliable power supply, access to finance, protecting minority investors, paying taxes and trading across borders.

G. Overall Assessment and Recommendations

13. Results from staff’s assessment of Cabo Verde’s external position in 2021 suggest that the exchange rate might be slightly undervalued. The three methodologies used: the external sustainability approach, the EBA-lite methodology based on the current account model and, the REER model point to an undervaluation of the real effective exchange rate. Nevertheless, the results should be interpreted with care as the degree of undervaluation is relatively modest and the country has large external liabilities that suggest the external position remains highly vulnerable to shocks.

14. Sustained medium-term fiscal consolidation and structural reforms are needed to support improvements in the external position. Fiscal adjustment is expected to help lower external liabilities and 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 assessed as adequate based on results from the application of the IMF LIC/MIC framework, building strong external buffers is critical given existing vulnerabilities, and the need to protect the peg.

Annex V. Public Enterprises Reforms: Progress and Next Steps

1. Cabo Verde has several State-Owned Enterprises (SOEs) that have been facing important challenges in recent years. These SOEs operate in a number of sectors, including transportation, utilities, housing, and pharmaceuticals. Performance challenges over the years have generated a need for government transfers to finance part of their operations. Financial support to SOEs has taken a variety of forms, including onlending, subsidies, and capitalization. This assistance to SOEs has been a major contributor to the rapid accumulation of public debt. Prior to 2018, fiscal risks were concentrated in the national airline (TACV), the real estate and housing company (IFH), and the electricity and water (ELECTRA) companies, which account for the largest share of SOEs’ total liabilities.

2. The government initiated the SOEs reform program in 2018 to restructure these companies and reduce support from the budget. Key steps included: (i) the sale of majority shares in the national airline (TACV) to a strategic partner; (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; (iv) the restructuring of the housing program managed by the IFH to minimize losses and increase transparency; and (v) the privatization of other SOEs.

Figure 1.
Figure 1.

Cabo Verde: Liabilities of SOEs, 2019–2022

(Percent of GDP)

Citation: IMF Staff Country Reports 2022, 235; 10.5089/9798400214998.002.A001

3. Key achievements on the privatization and restructuring fronts include:

  • The privatization of TACV was completed 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. An additional 10 percent of shares was sold to employees and the Cabo Verde diaspora. In July 2021, the authorities reversed the privatization of CVA on the grounds of fiscal irresponsibility on the part of Iceland Air, following the exceptionally high financial uncertainty of the company.

  • Public operation to sell 2.1 percent of the authorized capital that the government holds in ENACOL (oil and gas company), through the Cabo Verde Stock Exchange.

  • The completion of the restructuring of the housing program managed by the housing company (IFH) in 2019 with the transfer of low-income houses (class A) to the municipalities. The granting of the concession for inter-island maritime transportation was also completed.

4. The government also strengthened the monitoring of the six largest SOEs and the governance framework for the SOEs sector, including:

  • The compilation of financial information on cashflow performance of the six largest SOEs and the implementation of quarterly monitoring of actual performance of the six largest SOEs against their approved budgets.

  • The design and implementation of a platform for monitoring the public enterprise sector, generating more and more accurate data on enterprises in the public enterprise sector to facilitate access by portfolio managers and the various stakeholders in the sector.

  • The establishment of PARPÚBLICA as the company managing the state’s corporate investments and IMOPÚBLICA, as the company managing the state’s immovable property.

5. Going forward, the COVID-19 pandemic has weakened the momentum of the reform program, but the government has reasserted its intention to resume the restructuring and privatization of the major SOEs. These reforms are needed to support growth prospects, mitigate fiscal risks, and support debt sustainability. In this regard, the government intends to complete most of the operations in 2022–23. A new business plan is being developed for the national airline to guide its restructuring and the preparation of the company for privatization. The reform program also includes the granting of a concession for airports management (CV Handling) and licensing of port services (ENAPOR); the completion of the privatization of ELECTRA; the sale of the recently acquired state’s shares in Caixa Económica; and the privatization and sale of shares in two companies in the pharmaceutical sector: INPHARMA and EMPROFAC.

6. Financial reporting and governance of the SOEs sector will be further enhanced through the implementation of a number of measures: (i) the adoption of the IMF’s SOE Health Check Tool to streamline, strengthen the SOEs unit’s (UASE) analysis and the assessment of fiscal risks stemming from SOEs; (ii) the provision of consolidated information on financial transactions between the government, individual SOEs and the sector in general, to strengthen transparency and facilitate fiscal risk analysis; (iii) enhancing the current annual reports on contingent liabilities, annual SOE performance and the initiation of the dissemination of quarterly reports on SOEs’ performance, and (iv) adopting and publishing a comprehensive ownership policy to help further improve the ownership and oversight of the portfolio of SOEs.

7. These steps are important to set clear policy objectives guiding the management of each company and help contain fiscal risks. Staff will emphasize the importance of pursuing reform objectives without delay and will note that there are risks that delaying the restructuring process could undermine the implementation of the authorities’ development strategy, compromise fiscal sustainability, and damage the business environment and the authorities’ credibility to pursue robust policies that can help achieve higher and more sustainable growth.

Annex VI. Capacity Development Strategy

1. Capacity Development (CD) priority areas are aligned with the authorities’ reform agenda under their medium-term development strategy (PEDS). Policies under the PEDS aim to raise broad-based growth, enhance the economy’s resilience to shocks and support macroeconomic stability. CD activities focus on strengthening revenue mobilization, increasing efficiency in public expenditure, reducing fiscal risks, strengthening the monetary policy transmission mechanism, and improving the collection and dissemination of macroeconomic and financial statistics. The authorities’ commitment to the implementation of CD recommendations is good, though hampered by limited administrative capacity and staffing constraints. The CD strategy aims to ensure adequate integration of CD recommendations with policy advice in the context of surveillance and program design. It also seeks to avoid the overlap of CD activities through enhanced coordination with IMF CD departments, AFRITAC West 2, and other CD providers.

2. Policy advice and reform targets under the new program build on some of the CD recommendations to support the authorities’ engagement with development partners. The main CD priorities and objectives are summarized in the table below.

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Annex VII. Enhanced Safeguards for Cabo Verde

1. One of the main objectives of Cabo Verde’s request for a Fund-supported program is to reduce debt vulnerabilities, including those stemming from the pandemic and the ongoing Ukraine war. Cabo Verde is assessed to be at a high risk of overall debt distress but moderate risk of external debt distress. The high risk of overall debt distress is largely due to the high stock of debt; however, the debt is on highly concessional terms with low average interest rates of about 1 percent and favorable maturity structure. The high risk of debt distress is due to persistent but progressively smaller breaches of the PV of total debt to GDP ratio during the program period (Annex VII, Figure 1 and 2), however, the deviation from the threshold narrows by a large margin during the program period. Debt vulnerabilities will be reduced under the program, as indicated by the downward path of the PV of total debt to GDP ratio over the course of the program, underpinned by fiscal adjustments (revenue and expenditure measures), and limits on non-concessional debt and, reforms of SOEs along with the prospective economic benefits from the expected recovery of the tourism sector, which is projected expected to support robust medium-term growth. The baseline overall debt-to-GDP indicator remains above the DSA threshold until the late 2020s, reflecting the initial high stock of debt, lingering effects of the pandemic and the effects of the Ukraine war. The external debt service indicators (relative to exports and revenues) are projected to remain comfortably below the DSA thresholds over the medium term and on a persistent downward trajectory during the medium term. To further reduce the stock of public debt, the authorities are in intense discussions with a bilateral creditor (Portugal) that could result in debt relief on a voluntary basis of up to 15 percent of GDP.

2. The size of Cabo Verde’s de facto senior debt plus other multilateral and collateralized debt as a share of total external debt is above 50 percent at program initiation. It is projected to remain broadly stable at about 53 percent over the medium term under the baseline projection (Text Table 1). These ratios are below the mean and median for PRGT programs and indicate a significant buffer of restructurable debt. At program initiation, debt held by International Financial Institutions (IFIs) with global membership —the IMF, World Bank, and AfDB—accounts for 41.6 percent of external debt; adding debt held by other multilaterals and collateralized debt brings the total to 54.2 percent. The combined share of such debt is projected to remain at about 53 percent of external debt by 2025. Total multilateral plus collateralized debt as a share of GDP is projected to decline significantly under the program, from 55 to 44.9 percent.

Text Table 1.

Cabo Verde: Debt Composition 2021–25

(Millions of USD, unless otherwise specified)

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Data should be derived from the Debt Holder Profile table as reported by country authorities (see Table 1 in DLP GN), while the projections should be based on the LIC-DSA analyses.

Teams may decide to aggregate at the level of multilateral for the projection period and decide when to stop filling out the projections, When there are concerns with the quality of projections, teams do not need to provide data for the following four lines: ADB/AfDB/IADB, other multilateral, Paris Club and non-Paris Club; and in cases where the team cannot project WB credit, that may also be left blank.

3. Cabo Verde’s capacity to repay the Fund is assessed to be adequate (Figure 1). By 2025, Cabo Verde’s Fund credit outstanding will be at 280 percent of quota (above the top quartile of past UCT-quality arrangements for LICs). Credit outstanding during the program would peak at about 3.6 percent of GDP, 10 percent of exports, 13.8 of gross international reserves and 14.5 percent of revenue (excluding grants). At the same time, annual repayments to the Fund would peak at 0.6 percent of exports, 0.9 percent of reserves, and almost 6.1 percent of PPG external debt service. Risks are mitigated by the authorities’ strong track record of servicing their debt obligations to the Fund, and policy measures envisaged in the program, including envisaged fiscal consolidation. The return of tourists to the country is also likely to generate significant repayment capacity through increased export receipts.

Figure 1.
Figure 1.

Cabo Verde: Capacity to Repay Indicators Compared to UCT Arrangements for PRGT Countries

(Percent of the indicated variable

Citation: IMF Staff Country Reports 2022, 235; 10.5089/9798400214998.002.A001

Notes:1) T = date of arrangement approval. PPG = public and publicly guaranteed.2) Red lines/bars indicate the CtR indicator for the arrangement of interest.3) The median, interquartile range, and comparator bars reflect all UCT arrangements (including blends) approved for PRGT countries between 2010 and 2020.4) PRGT countries in the control group with multiple arrangements are entered as separate events in the database.

Appendix I. Letter of Intent

Praia June 02, 2022

Madame Kristalina Georgieva

Managing Director

International Monetary Fund

Washington, D.C., 20431

U.S.A

Madame Managing Director:

We would like to thank you and the IMF for your support during the global health crisis. The timely approval of the disbursement under the Rapid Credit Facility in April 2020, and the active role the IMF played in facilitating relief under the G-20 Debt Service Suspension Initiative (DSSI), provided much needed emergency financing to bolster Cabo Verde’s response to the global pandemic. More recently, the new SDR allocation provided additional funding for critical health, education, and infrastructure priorities for the recovery of the economy.

Prior to the global pandemic, considerable achievements under the Government’s ambitious reform agenda reduced our country’s vulnerabilities and improved its prospects for sustainable, inclusive, and private sector-led growth. In fact, economic growth was robust, fiscal deficits and public debt were on a clear downward trend, the external position improved, and international reserves were comfortable.

The global pandemic reversed some of these gains and delayed the implementation of planned reforms as the Government had to focus its attention on fighting the health and economic consequences of the pandemic. Reflecting travel restrictions and other COVID-19 containment measures, activity in the crucial tourism and transportation sectors was significantly affected. The fiscal and external positions weakened due to revenue losses, the need for pandemic-related financial support to businesses and households, and lower tourism receipts. The public debt-to-GDP ratio, which declined steadily until 2019, rose by more than 20 percentage points (to 143 percent in 2020) because of higher fiscal deficits and lower GDP.

In response to the global pandemic, a series of fiscal and monetary policy measures were introduced in Cabo Verde to preserve lives and sustain livelihoods. In addition, one of the most successful vaccination programs in sub-Saharan Africa was launched with over 95 percent of the adult population having received one dose and about 85 percent fully vaccinated having received two doses of the vaccine. These actions have set the stage for the ongoing recovery in economic activity and paved the way for an acceleration of reforms.

However, Cabo Verde’s robust recovery, which started in 2021, is under threat due to the spillover effects of the war in Ukraine. The steep increase in international energy and food prices and weakened growth outlook for the world economy, including the euro area, is expected to affect Cabo Verde’s near-term growth prospects, and weaken our fiscal and external positions. As a result, international reserves will come under pressure and challenge the pegged exchange rate regime that has served the country well.

To maintain economic and financial stability while anchoring the Government’s reforms and cushioning the effects of the war in Ukraine, we request IMF support for the implementation of our economic and structural reform program under the Extended Credit Facility (ECF) for the period June 2022–June 2025 in the amount of SDR 45.03 million (190 percent of quota). The attached memorandum of economic and financial policies (MEFP) and supporting technical memorandum of understanding (TMU) outline the program’s objectives and presents the policies that the Government and the Central Bank of Cabo Verde intend to implement to reach those objectives.

The ECF-supported program will provide a framework for the implementation of reforms set forth in the Government’s Sustainable Development Strategy 2022–2026 (PEDS), which seeks to develop inclusive tourism, benefitting all the islands; transform Cabo Verde into an air transportation hub and international business center; create an international finance platform; develop a digital platform for technological innovation; create a special economic zone for the maritime economy (blue economy); development of wave energy and desalination technologies and support investment opportunities developed locally or by the diaspora.

Our economic and reform program also aims at preserving public debt sustainability and strengthening public finances; modernize, enhance and strengthen the monetary policy framework and maintaining an adequate level of international reserves; enhancing further the resilience of our financial system; accelerating state-owned enterprise reforms; enhancing existing mechanisms to protect the most vulnerable; and broadening the foundations for improved resilience to climate change, natural disasters, and other exogenous shocks.

The implementation of the ECF-supported program will be monitored through performance criteria, indicative targets, and structural benchmarks, as described in the MEFP and TMU. There will be semi-annual reviews of the program by the IMF to assess progress in program implementation. We believe that the policies set forth in the MEFP are adequate to achieve the objectives of the ECF-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.

We stand ready to take additional measures, as appropriate, to achieve the objectives of the program. We will consult with IMF staff before adopting such measures, or in advance of revisions to the policies contained in this MEFP, or before adopting new measures that would deviate from program goals, consistent with IMF policies on such consultations

We authorize the publication of this letter of intent and the attached MEFP and TMU, as well as the forthcoming staff report for the request for a program under the ECF. We will also post these documents, including their Portuguese versions, on the Government’s official webpage.

Sincerely,

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Attachments: Memorandum of Economic and Financial Policies

Technical Memorandum of Understanding

Attachment I. Memorandum of Economic and Financial Policies for 2022–2025

This memorandum sets forth our economic and financial policy commitments to support the request for a 36-month arrangement under the Extended Credit Facility (ECF) of the International Monetary Fund. The program will be geared towards maintaining economic and financial stability reducing vulnerabilities to external shocks, and strengthening the prospects for higher, sustainable, and inclusive growth. The main objectives of the program include: (i) strengthening public finances to increase fiscal space for promoting investment in catalytic sectors, as well as promoting social inclusion and reduce fiscal risks from public enterprises by strengthening their financial management and transparency; (ii) modernization of the monetary policy framework and strengthening the financial system, and (iii) raising growth potential and building resilience to shocks including climate related events.

Background and Recent Economic Developments

1. Cabo Verde has emerged as a strong reformer and is a top performer on governance in Sub-Saharan Africa. Cabo Verde’s strong track record was enhanced during the PCI arrangement which was concluded in 2021. The PCI program which aimed to enhance macroeconomic stability helped support our medium-term objectives for fiscal and debt sustainability as well as a broader reform agenda under our Strategic Plan for Sustainable Development (PEDS). Significant progress was made prior to the COVID-19 pandemic on the reform agenda particularly in improvements of budgetary and regulatory processes, digitalization and enhancement of the business environment.

2. Cabo Verde achieved high rates of economic growth during the pre-pandemic period, fiscal policy was sound, the external position was strong, and inflation was moderate. Led by the fast-growing tourism sector, with the implementation of the PEDS, annual average growth of about 4.7 percent was recorded during the period 2016–2019. Sound fiscal policies, supported by reforms, resulted in a gradual improvement in the fiscal position and debt was placed on a downward path. The balance of payments improved, as FDI into the tourism sector increased, tourism receipts improved, and remittances emerged as a stable source of foreign exchange. As a result, gross official reserves increased to 9.0 months of prospective imports cover by end 2019.

3. This impressive economic performance was adversely impacted by the pandemic which severely weakened economic activity. Output contracted by about 15 percent in 2020, the largest contraction in Cabo Verde’s post-colonial history. Stringent travel restrictions and other COVID-19 containment measures reduced activity in the critical tourism and transportation sectors and generated negative spillovers to other domestic sectors. This was accompanied by a large deterioration in the fiscal account partly due to increased spending in response to the pandemic, form a deficit of 1.7 percent of GDP in 2019 to 9.1 percent of GDP in 2020 and public debt rose to 142.6 percent of GDP in 2020—an increase of over 20 percentage points relative to the previous year—although a very significant share of it is at highly favorable concessional terms. The external current account weakened sharply to a deficit of 15 percent of GDP in 2020, despite the decline in imports and stable remittances, on account of a very steep, unprecedented contraction in tourism receipts.

4. Our strong policy buffers allowed for a swift and comprehensive response to mitigate the impact of the global pandemic through the implementation of a series of fiscal and monetary policy measures. In that regard, our 2020 budget was revised, to expand expenditures on health and social protection programs. The Government also provided support to businesses that were heavily impacted by the pandemic through: loan guarantees amounting to CVE 4 billion; a moratorium on the payment of corporate income tax and the VAT; a temporary reduction in the VAT rate for the tourism sector to 10 percent; and the cancellation of contributions to the pension fund. The central bank also played a major role and implemented measures to maintain liquidity in the banking system and support credit extension while safeguarding financial stability. Key policy measures included: lowering of the policy rate; reduced minimum reserve requirements; lowering of the overnight deposit rate and permanent lending rate; establishment of a long-term financing facility for banks and a targeted moratorium on loan repayments. The fiscal and monetary policy interventions were initially intended to expire at the end of 2020, however, due to the duration of the pandemic, some of the measures were extended to June 2022.

5. Our policy interventions along with a highly successful vaccination program helped mitigate the adverse impact of the pandemic and paved the way for a strong recovery. As a result, economic growth rebounded to 7 percent in 2021. The recovery in output reflected the base effect associated with the re-opening of the economy and improvements in the tourism sector, particularly during the fourth quarter, which was aided by one of the fastest COVID-19 vaccine rollouts in sub-Saharan Africa. About 98 percent of the adult population have received at least one vaccine dose with vaccination rates close to 100 percent in some of the tourism islands, and 84.5 percent are already fully vaccinated. The rebound in economic activity was broad based as all sectors recorded an uptick in activity, with construction rebounding strongly on account of continued FDI into the tourism sector and continued implementation of the public investment program. Inflation accelerated in 2021 to 5.4 percent (y/y) in December due to higher food and energy prices but was below the inflation rate recorded in many countries, including some advanced economies.

6. The external position improved in 2021 as exports rebounded. The external current account deficit is estimated to have narrowed from 15 percent of GDP in 2020 to 11.3 percent of GDP in 2021 as exports increased and recovered from the contraction recorded in 2020. The strong rebound in exports more than offset the 10 percent increase in the imports of goods and services that supported the economic rebound. Gross international reserves increased from €582.4 million in 2020 to €591.3 million in 2021 (about 6.3 months of prospected imports) supported by the SDR allocation, external loan disbursements, and financial flows associated with the recovery in tourism receipts.

7. Fiscal performance in 2021 was better than anticipated. Total revenues decreased by 0.2 percent as the pandemic continued to impact consumption and corporate incomes. However, prudent execution of the public investment program and current expenditure restraint ensured a better-than-projected improvement in the overall fiscal balance. Capital expenditure remained relatively stable at about 2.6 percent of GDP; 3.7 percent of GDP lower than budgeted as the Government focused on the implementation of high priority projects. Current expenditure restraint (mainly on goods and services and wages) reflected in part the start of the unwinding of COVID-19 related expenditures. As a result, the overall fiscal deficit is estimated at 7.3 percent of GDP in 2021 compared to 9.1 percent of GDP in 2020, and about [0.8] percent of GDP below the 2021 budget. The deficit was financed through a combination of external disbursements (about 70 percent) and the domestic financial system (about 30 percent). The stock of public debt stood at 143 percent of GDP at end 2021.

8. The execution of COVID-19 related expenditures has strictly followed the Government’s transparency and accountability practices. The Government has published on a daily basis the execution of COVID-19 related expenditures on the official website of the Ministry of Finance (MOF) (www.mf.gov.cv/web/dnocp). In addition, in line with public financial management guidelines, all expenditures related to fighting the pandemic have been audited by the Court of accounts. We have also prepared a policy paper guiding the use of the recent SDR allocation. A number of projects that represent a substantial part of Cabo Verde’s development plans (Cabo Verde Ambition 2030) have been selected for financing from SDR resources in 2022 and 2023. The projects are in the broad areas of health; agriculture and environment; education and culture; and infrastructure, land use planning, and housing with a total value of CVE 3 billion (about 1.7 percent of GDP). The transfer of the SDR resources from the BCV to the government was completed in 2021 and the amount has already been included in public debt. A memorandum of Understanding (MoU) detailing the framework for the use of the SDRs was signed between the Ministry of Finance and the Banco de Cabo Verde (BCV).

9. Developments in the monetary sector have been positive. Credit to the economy grew by 5.8 percent in 2021. This increase reflected the impact of the moratorium and the emerging growth in credit to the private sector, in particular tourism and construction, as the recovery gained momentum. In 2021, migrant deposits rose compared with 2020, as the Cabo Verdean diaspora has continued to display confidence in the financial system.

10. Monetary policy has been accommodative since the onset of the COVID-19 pandemic. Following the reduction in 2020 in the policy rate to 0.25 percent, minimum reserve requirement to 10 percent, the overnight deposit rate to 0.05 percent, and the permanent lending rending rate to 0.05 percent, the Central Bank of Cabo Verde (BCV) has maintained these rates through to June 2022 in part to help support the recovery. Interest rates on deposits, including migrant deposits, declined to 0.7 percent at end 2021 (1.9 percent at end 2020), while lending rates remained broadly stable at just under 9 percent.

11. The financial system has remained resilient. Data for end 2021 suggest that the financial system is highly liquid, profitable, and well capitalized. The banking sector entered the pandemic with strong capital buffers and improving profitability that helped contain risks. Regulatory capital to risk weighted assets (CAR) was 21.1 percent at end-December 2021, well-above the regulatory minimum of 12 percent; and the return on assets was at 1.5 percent. Non-performing loans (NPLs) declined from 9.5 percent at end 2020 to 7.2 percent of total loans at end December 2021 reflecting the moratorium on loan repayments and write-off of legacy loans.

Macroeconomic Outlook

12. The economy was well poised to sustain the recovery momentum into 2022 but global economic uncertainty due to the war in Ukraine will weigh heavily on the economic outlook. Real GDP growth, which was expected to remain robust at 6 percent in 2022, has been revised downwards to 4 percent. This reflects the effects of the war in Ukraine and related sanctions on Russia, that have resulted in a sharp increase in international energy and food prices, and lowered growth prospects in the world, including in the euro area. These developments are expected to dampen somewhat the recovery in the tourism sector, and higher prices are likely to weaken domestic demand. However, over the medium-term growth is expected to return to robust levels supported by the continued recovery of the tourism sector towards the pre-pandemic levels and an increase in hotel room capacity. In addition, the successful implementation of key programs under the PEDS (2022–2026), and other structural reforms, particularly of the state-owned enterprise (SOE) sector, would raise growth potential for Cabo Verde. Over the long-term, GDP growth is projected at about 4½ percent, broadly in line with potential growth potential. Annual inflation is projected at about 2 percent, on average, after 2023, broadly in line with the euro area average.

13. The primary fiscal balance would improve by about 1 percent of GDP per year during 2023–2026, reflecting both revenue mobilization efforts and expenditure rationalization. The planned fiscal consolidation, a successful restructuring of the major SOEs, and other structural reforms are expected to lead to faster growth of credit to the private sector, boost investor confidence, accelerate medium-term growth, and place public debt on a sustained downward path. The external current account deficit is projected to narrow to about 4.2 percent of GDP in the medium-term supported by fiscal consolidation, strong tourism performance, and higher remittances reflecting labor market improvements in advanced economies. Supported by Fund financing, improved tourism receipts and remittance inflows international reserves will remain at about 5 months of prospective imports.

Economic Policies and Structural Reforms Under the Program

A. Strengthening Public Finances: Preserving Public Debt Sustainability, Expanding Social Safety Nets and Strengthening the Fiscal Framework

14. One of the keystones of our fiscal program is a significant frontloaded adjustment in 2022 followed by a more gradual but sustained consolidation effort over the medium term. This will be instrumental to place public debt on a sustained downward path, preserve debt sustainability and reduce the risk of debt distress. Other components of the strategy include strengthening the fiscal framework, and accelerating reforms in the SOE sector. Overall, these policies would result in an improvement in the primary fiscal balance from a deficit of 5.1 percent of GDP in 2021 to a surplus of about 1 percent of GDP in 2027; the overall fiscal deficit would decline from 7.3 percent of GDP in 2021 to about 1 percent of GDP over the same period. A large component of the adjustment in 2022 is based on the implementation of a carefully selected set of revenue measures. The implementation of the fiscal consolidation plan would be associated with a reduction in public debt levels, with the debt-to-GDP ratio declining from 143 percent in 2021 to 109.6 percent in 2027.

15. The 2022 budget was initially designed to be consistent with a reduction in the primary fiscal deficit from 5.1 percent of GDP in 2021 to 4 percent of GDP in 2022. This adjustment would be achieved through a combination of higher revenue and lower expenditures. However, with the change in the near-term economic outlook and a more conservative assumption on the likely intake from other revenues, the overall projected revenue intake has been revised to 25.4 percent of GDP, still 3 percent of GDP higher than in 2021 but 1.8 percent of GDP below the budgeted amount. Relative to the 2021 outturn, strong gains are expected on taxes on goods and services and on income and profits. Current expenditures, which were budgeted to increase by about 1.3 percent of GDP, are now projected to increase by 0.7 percent of GDP. Wages are projected to decrease while spending on existing social programs will be augmented by 0.3 percent of GDP to help mitigate the impact of higher prices on the most vulnerable. Capital expenditure was budgeted at 5 percent of GDP, about 2.4 percent of GDP above the outcome for 2021, but in line with a stricter prioritization of capital spending and implementation capacity it is now projected to increase to 3.7 percent of GDP. As a result of these changes, the primary fiscal deficit is now projected to improve to 3.6 percent of GDP in 2022.

16. Budgeted financing needs which were initially projected to increase in 2022 have been revised downwards. Budgeted financing needs were initially 2.3 percent of GDP higher than the outturn for 2021 but are now projected to increase by about 1.7 percent of GDP, partly due to weaker revenues and recapitalization of SOEs. Domestic funding under the 2022 budget is higher than the revised projections. The revised domestic financing requirements are above the 3 percent of GDP ceiling in light of the suspension of the fiscal rule in 2022 in line with the escape clause. External financing will be filled mostly with concessional and partially concessional loans, mainly from multilateral institutions, including the World Bank (1.3 percent of GDP), African Development Bank (1 percent of GDP), a drawdown of the recent SDR allocation (0.9 GDP), the resources provided under the ECF program, and official creditors.

B. Revenue Measures

17. We will introduce a set of carefully selected revenue policy and administration measures which is expected to yield about 1 percent of GDP in 2022. Key tax policy measures include (i) the introduction of electronic invoicing which is expected to yield 0.2 percent of GDP; (ii) the imposition of a 5 percent import duty on previously exempted goods such as business furniture and equipment, which should also generate a gain of 0.2 percent of GDP; and (iii) the increase in the excise tax on tobacco by 75 percent, with revenue gains of 0.2 percent of GDP. Furthermore, revenue administration improvements are expected to yield an additional 0.4 percent in revenues, mainly through collection of tax arrears and heightened supervision.

18. In the near- and medium-term, we will continue our efforts to enhance the efficiency of the tax system through revenue administration improvements. We will focus our efforts on the collection of VAT, as well as personal and corporate income tax arrears. These efforts will be based on the complete digitalization of all the revenue administration and collection processes and could potentially result in very significant gains in efficiency. The ongoing initiative towards completion of the electronic invoicing system is due to be completed by end 2023. In this regard, by end 2022 we will have in place an electronic invoicing system covering at least 50 percent of taxpayers for VAT (Structural Benchmark). The integrated safety system which alerts of non-compliance of VAT and income tax was suspended during the pandemic but will now resume and be extended to other taxes. These reforms, including through improved compliance, is expected to yield an additional 2 percent of GDP over the medium term. The implementation of the ECOWAS common external tariff is expected to yield about 1 percent of GDP in additional revenues. The government will submit to parliament the budget for 2023 that will be in line with commitments under the program (Structural Benchmark).

C. Expenditure Policies

19. We will continue to rationalize current expenditure and improve the delivery of investment spending. In the near-term, current spending will remain broadly stable but, over the medium-term, we will continue to seek efficiency gains while reducing spending on wages and interest payments, resulting in a gradual decline in current expenditures as a share of GDP. To support the recovery and the development needs of Cabo Verde, the public investment program is projected to increase as a share of GDP. However, capital expenditure will be strictly prioritized.

20. We will review and streamline social welfare programs to ensure adequate coverage particularly in the context of rising prices which disproportionately affect the most vulnerable. The sharp increase in international energy and food prices which has spilled over to domestic inflation will have a disproportionate impact on the vulnerable. To protect the poor and vulnerable, the Government will augment funding for social programs by 0.2 percent of GDP as a way of decreasing extreme poverty.

21. We recognize that to achieve our medium-term fiscal objectives additional policy measures will be required. As a result, the Government will continue to implement measures to improve revenue mobilization and public expenditure management, as well as continued SOE reforms to maintain medium-term debt sustainability. However, the downward adjustment of expenditure as a share of GDP over the medium term would not be associated with a decline in service delivery as the Government plans to focus its efforts on improving the efficiency of public spending. Our aim is to return to the pre-pandemic levels of spending in the medium term.

D. Fiscal Reforms

22. The Government is committed to improving the efficiency of the public investment framework. Public investment is a key component of our development plan and will play a critical role in supporting the recovery. In line with recent IMF technical assistance (TA) recommendations, we will develop a plan to bring about better projects in the near- to medium-term which would be both feasible and practical. This would involve the following four steps: (i) redefining the existing thresholds to reduce the number of projects qualifying for more detailed appraisal in line with available capacity; (ii) developing and implementing an enhanced pre-screening system (pre-screening+), a single-entry point for all project ideas regardless of size or source of financing; (iii) developing and implementing multi-criteria analysis (MCA) techniques and matrices for prioritization and selection; and (iv) developing and implementing a pre-implementation checklist.

23. We will build on the recent improvements in cash flow management that helped the Ministry of Finance to manage the challenges posed by COVID-19. In recent years, we have developed a Treasury Single Account (TSA) in line with sound international practices, that benefited from our early and successful adoption of a modern financial management information system (SIGOF). Despite the gains that have been achieved, other steps will be taken to enhance cash flow management, including continuing the process of bringing in all central government accounts into the TSA; and institute a cash coordination committee to systematically review forecasts.

24. We will advance plans towards broadening the fiscal coverage to allow for the preparation of accounts at the level of the general government. This includes the compilation and publication of the historical series of government financial statistics for the general government (Structural Benchmark); publication of annual budget execution reports for the general government (Structural Benchmark).

25. We will intensify efforts to reduce SOE related fiscal risks. In this regard, special focus will be placed on reinvigorating SOE reforms, including improving the framework for monitoring the financial performance of SOEs to reduce fiscal risks and thus support medium-term debt sustainability. Quarterly analysis of fiscal risk assessments using the IMF SOE’s health check tool will be prepared, as well as quarterly monitoring report of SOEs’ budget execution (Structural Benchmark). These reforms would also include publication of quarterly consolidated transaction and financial flows between the government and SOEs on an individual and aggregate basis to help identify indirect support from the government to SOEs. Furthermore, the annual SOEs’ report will be improved to include comparison of execution relative to the initial budget projection, evaluation of performance against medium-term plans, and data on government relations (Structural Benchmark).

26. Cabo Verde Airlines (CVA) is a key priority, and the Government intends to complete the reorganization of CVA and resume its privatization efforts. The CVA privatization process, which commenced in 2019, was aborted due to concerns with the strategic partner, which resulted in the Government having to take over ownership of the airline. The Government is in the process of reorganizing the airline and is in negotiations with potential partners. Under the new plan, CVA will start operations with two aircrafts in 2022, with the number of airplanes in operation increasing to three in 2023. The airline will fly to [four international cities] which would be sufficient (based on our projections) to achieve breakeven by March 2023. The Government will provide financing during the reorganization process to cover the projected financing gap in the amount of €30 million (about 1.7 percent of GDP). We will seek Cabinet approval of (i) the least cost structure for CVA; and (ii) the long-term strategy that lays out the options for CVA, in consultation with the World Bank.

E. Public Debt

27. We will continue our efforts to ease Cabo Verde’s public debt burden. We have already reached an agreement with Portugal to continue receiving debt service relief in line with the DSSI treatment during the year 2022, and we will continue conversations with other creditor partners.

28. We will update key aspects of the debt law, institute the guarantee fund, and enhance debt reporting and analysis. The debt legislation will be updated in line with the 2018 review, which provided guidance on the type of analysis and reporting which should be produced; and steps will be taken to clearly identify the required reports. The requirement in the debt management strategy for conducting internal debt sustainability analysis (DSA) will be implemented. Officers in the Ministry of Finance have already received the relevant training and the ministry intends to conduct the first internal DSA by January 2023. This would help inform the 2023 budget. Furthermore, the Government will undertake a review of the laws regulating guarantees. The guarantees law provides for the establishment of a fund to be financed by the beneficiaries of guarantees, which would provide a cushion in the event of noncompliance with the terms of the guarantee. During 2022 this fund will be activated and the regulations for its operations will be established.

F. Macroeconomic Stabilization Fund

29. As part of the broader strategy of strengthening the fiscal framework we will establish a macroeconomic stabilization fund. Cabo Verde is a small open economy and is highly susceptible to external shocks. We have had to contend with an ongoing drought from 2017, the devastating economic impact of the pandemic and the spillover effects from the Ukraine war. These events highlight the need for us to build buffers to help mitigate the effect of external shocks including from the impact of climate change, which usually worsens the fiscal position. The creation of the Macroeconomic Stabilization Fund establishes a platform on which we will start to build buffers to help mitigate the impact of exogenous shocks on the economy and public finances.

30. Cape Verde is highly vulnerable to floods, droughts, earthquakes, and volcanic eruptions, which imposes significant cost on the economy. The average economic damage from natural disasters, particularly floods was estimated to cost US $18 million (I percent of GDP) per year by the World Bank. Higher levels of damages are likely in the future due to the impact of climate change, which would be magnified by the fact that Cabo Verde consist of several islands.

31. The range and magnitude of global shocks has severely impacted Cabo Verde. In that regard we will redouble our efforts to implement reforms to improve our resilience and secure long-term sustainability. In order to achieve this, we will ensure that there is strategic alignment, institutional cooperation, and operational coordination at an intersectoral, multidisciplinary level, by the public entities involved in the process.

G. National Accounts Rebasing

32. The National Statistics Institute (INE) has completed the major task of rebasing the national accounts. With IMF TA, INE has finalized the rebasing of the national accounts statistics to 2015, from 2007. The published data indicate nominal GDP about 10 percent higher than previous estimates, which reflects mainly a more accurate measurement of the services sector. The rebased national accounts will enhance policy making with the availability of a more accurate representation of Cabo Verde’s economy.

H. Monetary Policy and Financial Stability

33. The conventional fixed peg exchange regime continues to provide a stable anchor for monetary policy. Monetary policy will continue to focus on safeguarding the peg and strengthening the monetary policy framework. In the wake of the new external shock due to the war in Ukraine, international reserves are projected to decline sharply in 2022. In the near-term, the BCV will closely monitor economic developments in the euro area and stand ready to take corrective measures, if pressures on reserves become excessive. The BCV was in the process of unwinding the COVID-19 related monetary policy stimulus as the recovery strengthens given continued excess liquidity in the banking system and the recent positive evolution of the pandemic. However, the geopolitical shock warrants a more cautious approach. Over the medium-term, to support the peg, the BCV will target international reserves in the range of 5 to 5½ months of prospective imports.

34. We will continue to take steps to further strengthen the monetary policy transmission mechanism and to enhance our analytical capacity to track developments in the economy. The central bank will take actions to support the development of the money market, including pre-announcing a schedule for auctions of Monetary Intervention Securities (TIMs) and Monetary Regularization Securities (TRMs) (Structural Benchmark). Policy analysis will be reinforced, including through the introduction of composite indicators of economic activity and strengthening near-term forecasting (Structural Benchmark). The central bank will also develop a framework to guide the provision of emergency liquidity assistance. The BCV and the Ministry of Finance have sought World Bank TA to undertake a digital economy assessment and formulate a national fintech strategy, that would set the necessary pillars for the use of financial technologies which embrace innovation and competition, and lower transaction costs.

35. The BCV will closely monitor emerging risks to the banking sector. Available indicators indicate that the banking sector is well placed to withstand the effects of the projected increase in NPLs associated with the end of the credit moratorium in June 2022. However, the BCV will undertake a comprehensive study of loan losses and provisions at the expiration of the credit moratorium in June 2022 (Structural Benchmark), encourage and facilitate prudent restructuring of loans, and proactively provide guidance on the prudential treatment of moratoria and NPLs management strategies and develop a common framework for bank resolution. In addition, it will encourage the development of detailed reporting templates for restructured and rescheduled loans and for monitoring the impact of the COVID-19 related measures on the asset quality of banks. In support of these efforts, the BCV will develop a common framework for the resolution of crisis related NPLs (Structural Benchmark). Recent improvements in the AML/CFT framework, including the establishment of a national AML/CFT committee and Cabo Verde’s recent exit from the EU list of non-cooperative jurisdictions for tax purposes have helped preserve correspondent banking relationships.

36. As part of the Financial Sector Development Plan, our efforts will be focused on the ongoing modernization of the financial system. We will enhance the regulatory and supervisory frameworks with the aim of deepening the financial sector, including to support inclusive and sustainable growth, while preserving financial stability. We remain committed to ensuring a stable and well-capitalized banking system that can continue to support the recovery by effectively monitoring and supervising the health of the financial system. To ensure effectiveness of the supervisory process, we will increase the frequency of stress testing to at least two times a year from 2023. In addition, the stress testing methodology will be revamped to include detailed banking data and cyber security risk assessment. The recent IMF safeguards assessment mission recommended amending the BCV Law to strengthen the decision-making structure, autonomy, accountability and transparency of the central bank. Supported by technical assistance from the IMF we will submit draft amendments to the BCV Law, to the Ministry of Finance which will address the gaps identified (Structural Benchmark).

37. We will accelerate work towards the adaption of Basel II Pillar 1. During the first half of 2023 an evaluation will be undertaken of the implementation of the Basel principles through the BCP Self-Assessment (more details to be provided by BCV).

38. We continue to improve on the accuracy of our monetary and financial sector statistics. Over the past year, we have eliminated discrepancies between the monetary and financial sector survey disseminated by the BCV in its publications and data sent to the IMF, by adopting the methodology of the central bank survey compiled for the IMF, which is based on international statistical standards (IMF’s 2016 Monetary and Financial Statistics Manual and Compilation Guide (MFSMCG)). This new compilation system allows for correcting discrepancies between the other deposit corporations (ODC) survey disseminated by the BCV in its publications and the data sent to the IMF. Further improvements will continue this year with the enhancement of data on credit by economic activity using INE’s economic activity classification.

I. Structural Reforms: Supporting Private Sector-Led Growth

39. Structural reforms will aim to improve the business environment, addressing labor market inefficiencies by revising certain provisions of the labor code, and increasing access to finance. The new five-year strategy (PEDS) is based on the recently completed long-term development plan (Cabo Verde Ambition 2030). Key priority areas include: (i) completing SOE reforms, including through privatization and improving the efficiency of SOEs; (ii) reducing informality, (iii) facilitating access to finance, particularly for small and medium-sized enterprises, and (iv) improving the business environment. In support of our business environment reforms, we will examine possible changes to the labor code with a view to increasing incentives to make the labor market more dynamic. Climate change adaptation and mitigation including achieving the 30 percent renewable energy target by 2026 and 50 percent by 2030, and digitalization including the development of technology parks are also two key priorities of the government (Table 3).

Table 1.

Cabo Verde: Structural Benchmarks for 2022–23 under the ECF

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Table 2.

Cabo Verde: Quantitative Performance Criteria and Indicative Targets under the ECF, June 2022-June 20231

(Millions of Escudos, unless otherwise indicated)

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

Expressed in local currency and millions unless otherwise indicated. Foreign currency amounts will be converted at current exchange rates.

Stock of reserves in millions of Euros. The ceiling or floor will be adjusted as specified in the TMU.

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

Continuous.

Table 3.

Cabo Verde: Other Reforms Under the ECF, 2022–2025

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40. We will continue to make efforts to diversify our economy. Diversification efforts are being pursued through two channels. Firstly, within the main tourism sector we are actively moving towards more integrated resort projects heralded by the presence and emergence of top hotel brands. Secondly, we are actively promoting alternative sectors, such as the blue economy, digital economy, industry integrated into the regional and global value chains, and modernization of the agriculture sector using desalinated water.

41. Legal procedures for businesses will be made easier, through a reduction in waiting time by improving the link between businesses and judicial processes. One area of focus will be on land titling, where issues often arise because of unclear ownership due to incomplete information that can cause delays in investment decisions. In this regard, the government will digitalize the relevant information to facilitate ease of access to all parties, which will facilitate more timely settlement of disputes.

42. The Government will enhance support to vulnerable groups by strengthening social safety nets. Even though Cabo Verde performs very well on social indicators, poverty and unemployment remain high particularly in the rural areas and these trends have worsened due to the pandemic and are likely to be negatively impacted by the rising price level. Social safety nets will be strengthened through improved targeting of social spending. In partnership with our external partners, we will continue to work towards better targeting of social programs and will sign a pact for poverty reduction, with the goal of eliminating extreme poverty by 2026. The government will also take the opportunity during the program period to reform the national social security system to ensure that it evolves in alignment with best practices and the changing needs of the country.

43. In that regard, policies under the program will help safeguard spending on social safety nets and help increase our capacity to expand on these interventions. We have made important investments in the delivery systems for social protection, particularly the social registry and the [RSI] cash transfer program. These gains will be protected during the IMF supported ECF as support for the most vulnerable and helping lift households out of poverty are key objectives of our strategy and will be monitored in part through an indicative target on social spending. Through a program of productive inclusion, the government guarantees empowerment for the most vulnerable families, as well as the transfer of money to some of the most vulnerable families in Cabo Verde. Our method of supporting the most vulnerable through cash transfers is an important and efficient way of investing in the people; contribute towards strengthening their resilience and enhances their human capital in several ways, including through ensuring food security and enabling expenses related to education and health for children in these households, as well as training for inclusion in the job market.

J. Risks and Contingencies

44. The uncertainty about the trajectory of the COVID-19 pandemic and the evolution of the spillover impact of the Ukraine war will continue to weigh on the economic outlook. If COVID-19 developments were to deteriorate or the negative impact of the Ukraine were to worsen compared to our baseline, economic outcomes would worsen. However, we believe that our strong commitment to implementing reforms along with the policies under our Fund-supported ECF program and continued support from development partners provides a strong platform to manage these challenges. However, if the macroeconomic outlook deteriorates, we commit to take additional measures in consultation with the IMF.

K. Financing and Program Monitoring

45. The program will be closely monitored through quantitative performance criteria, indicative targets, and structural benchmarks. The Technical Memorandum of Understanding describes the definitions as well as data provision requirements. The first and second program reviews are scheduled to be completed by November 2022 and May 2023 (based on end-June and end-December 2022 test dates, respectively). Thereafter, the program will continue with monitoring on a semi-annual basis by the IMF Executive Board.

Attachment II. Technical Memorandum of Understanding

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 Memorandum of Economic and Financial Policies (MEFP), the key assumptions, and the reporting requirement of the Government and the Central Bank of Cabo Verde for the three-year Extended Credit Facility (ECF).

Program Exchange Rates

1. Program exchange rates are used for formulating and monitoring quantitative performance criteria. All assets and liabilities denominated in U.S. dollars (USD) will be converted into escudos at a program exchange rate of CVE 98.8 per one USD. Assets and liabilities denominated in SDRs and in foreign currencies not in USD will be converted into USD at the exchange rates reported in the Table 1:

Table 1.

Cabo Verde: Program Exchange Rates

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Source: WEO April period average exchange rates

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), extrabudgetary 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 and covers recurrent expenditures and capital expenditure.

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

Table 2.

Cabo Verde: Grants Projected Under the Program (GIR)

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Source: Cabo Verdean Authorities: IMF Staff estimates

5. For program monitoring, data will be provided to the Fund by the Directorate National of Planning (DNP) of the Ministry of Finance monthly with a lag of no more than six 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 of the Ministry of Finance monthly with a lag of no more than six 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 the Ministry of Finance monthly with a lag of no more than six 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 the 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 the PV of New External Concessional Debt of the Central Government

12. Under the program a ceiling applies to the PV of new external debt, contracted or guaranteed by the public sector with original maturities of one year or more. The ceiling applies to debt contracted or guaranteed for which value has not yet been received, including private debt for which official guarantees have been extended. An adjustor of up to 5 percent of the external debt ceiling set in PV terms applies to this ceiling, in case deviations from the performance criterion on the PV of new external debt are prompted by a change in the financing terms (interest, maturity, grace period, payment schedule, upfront commissions, management fees) of a debt or debts. The adjustor cannot be applied when deviations are prompted by an increase in the nominal amount of total debt contracted or guaranteed.

13. 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.

14. 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.

15. 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.

16. For debts carrying a variable interest rate in the form of a benchmark interest rate plus a fixed spread, the PV of the debt would be calculated using a program reference rate plus the fixed spread (in basis points) specified in the debt contract. The program reference rate for the six-month USD LIBOR is 2.699 percent and will remain fixed for the duration of the program. The spread of six-month Euro LIBOR over six-month USD LIBOR is -168 basis points. The spread of six-month GBP LIBOR over six-month USD LIBOR is -80 basis points. For interest rates on currencies other than Euro, JPY, and GBP, the spread over six-month USD LIBOR is 100 basis points. Where the variable rate is linked to a benchmark interest rate other than the six-month USD LIBOR, a spread reflecting the difference between the benchmark rate and the six-month USD LIBOR (rounded to the nearest 50 bps) will be added. Given the anticipated global transition away from LIBOR, this TMU can be updated to reflect the relevant benchmark replacements (U.S. Secured Overnight Financing Rate (SOFR); U.K. Sterling Overnight Index Average (SONIA); EURIBOR; and Tokyo Overnight Average Rate (TONAR)) prior to the complete phase out, once operationally feasible.

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 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

18. 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 (continuous PC target).

19. 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. Gross International Reserves of the Central Bank

20. The floor on the stock of gross international reserves (GIR) of the BCV constitutes a quantitative target under the program. The GIR of the BCV are defined as gross international reserves of the BCV which include assets 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. The program floors for the GIR 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.

21. Reporting requirements. A table on the GIR prepared by the BCV will be transmitted on a monthly basis, with a maximum delay of four weeks.

Table 3.

Cabo Verde: External Debt Service Projected under the Program (GIR)

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Source: Cabo Verdean Authorities: IMF Staff estimates
Table 4.

Cabo Verde: External Financial Assistance and Project and Budget Loans Projected under the Program

article image
Source: Cabo Verdean Authorities: IMF Staff estimates

H. Non-Accumulation of External Payments Arrears

22. 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.

23. 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.

24. 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 the 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. Floor on Central Government Social Spending

25. The floor on social spending of the central government is an indicative target under the program. This 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.

26. 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 and the Assessment of the Acvievement of Reform Targets

27. 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.

28. 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, 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).

29. The consolidated balance sheet of ASA, 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).

30. Pre-announce a schedule for TIM and TRM auctions reform target. This reform target will be assessed as achieved when the pre-announcements are posted on the central bank website.

31. Introduce a composite indicator of economic activity reform target. This reform target will be assess as achieved when the central bank has released the composite indicator.

32. Carry out a comprehensive study of loan losses and provisions at the expiration of the credit moratorium in June 2022 reform. This reform target will be assessed as achieved when the study is completed and released.

33. Develop a common framework for the resolution of the crisis related NPLs. This reform target will be assessed as achieved when the common framework is complete and released. The common framework is being developed jointly by the BCV and the World Bank.
1

Cabo Verde has a robust democracy with a tradition of peaceful political transitions for nearly four decades. The country continues to score at the top of Africa in measures of governance and transparency.

2

Under Cabo Verde’s semi-parliamentary political system, the prime minister is head of the government, and the president has a more ceremonial role as head of state with veto powers.

3

The Banco de Cabo Verde introduced a moratorium on loan repayment as part of the measures to mitigate the economic impact of the COVID-19 pandemic in April 2020. The moratorium on loan repayment is expected to expire at the end of June 2022.

4

The authorities intend to unwind COVID-19 related spending measures (1.8 percent of GDP in 2021; 1.6 percent of GDP in 2022). Factoring out these and the initial large correction in 2022, the adjustment would be equivalent to about 1 percent of GDP per year between 2023–26.

5

Including business furniture and other equipment.

6

The common framework is being developed jointly by the BCV and the World Bank.

7

The fiscal rule limiting domestic financing to 3 percent of GDP has been suspended by Parliament for 2022.

8

PCs are cumulative from the beginning of the year.

1

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 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.”

1

IMF Country Report No. 19/255.

2

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

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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Cover IMF Staff Country Reports
Cabo Verde: Request for an Arrangement Under the Extended Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Cabo Verde
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2022: Issue 235
Publisher:
International Monetary Fund
ISBN:
9798400214998
ISSN:
1934-7685
Pages:
106
DOI:
https://doi.org/10.5089/9798400214998.002
  • <sup><xref rid="RA001fig01" ref-type="fig">Text Figure 1.</xref></sup>
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    Text Figure 1.

    Cabo Verde: Contributions to Growth

    (Quarterly, year-on-year percent change)

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    Text Figure 2.

    Cabo Verde: Covid-19 Cumulative Daily Cases & SSA Vaccination Rates

  • <sup>Figure 1.</sup>
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    Figure 1.

    Cabo Verde: Recent Economic Developments

  • <sup>Figure 2.</sup>
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    Figure 2.

    Cabo Verde: External Sector Developments

  • <sup>Figure 3.</sup>
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    Figure 3.

    Cabo Verde: Fiscal Sector Developments

  • <sup>Figure 4.</sup>
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    Figure 4.

    Cabo Verde: Monetary Developments

  • <sup><xref rid="RA001fig07" ref-type="fig">Figure 1.</xref></sup>
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    Figure 1.

    Cabo Verde: 2015 Output – Sector Share and Percent Change

    (CVE billions)

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    Text Figure 1.

    Cabo Verde: Balance of Payments, 2009–26

    (Percent of GDP)

  • <sup><xref rid="RA001fig09" ref-type="fig">Figure 1.</xref></sup>
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    Figure 1.

    Cabo Verde: Liabilities of SOEs, 2019–2022

    (Percent of GDP)

  • <sup><xref rid="RA001fig10" ref-type="fig">Figure 1.</xref></sup>
    View in gallery
    Figure 1.

    Cabo Verde: Capacity to Repay Indicators Compared to UCT Arrangements for PRGT Countries

    (Percent of the indicated variable

Text Figure 1.

Cabo Verde: Contributions to Growth

(Quarterly, year-on-year percent change)
Text Figure 2.

Cabo Verde: Covid-19 Cumulative Daily Cases & SSA Vaccination Rates
Figure 1.

Cabo Verde: Recent Economic Developments
Figure 2.

Cabo Verde: External Sector Developments
Figure 3.

Cabo Verde: Fiscal Sector Developments
Figure 4.

Cabo Verde: Monetary Developments
Figure 1.

Cabo Verde: 2015 Output – Sector Share and Percent Change

(CVE billions)
Text Figure 1.

Cabo Verde: Balance of Payments, 2009–26

(Percent of GDP)
Figure 1.

Cabo Verde: Liabilities of SOEs, 2019–2022

(Percent of GDP)
Figure 1.

Cabo Verde: Capacity to Repay Indicators Compared to UCT Arrangements for PRGT Countries

(Percent of the indicated variable